Nucor Corporation — Q3 2012 Form 10-Q
Reporting period: Third quarter (13 weeks) ended September 29, 2012; comparative quarter ended October 1, 2011. Nine-month figures cover 39 weeks. Financial statements are unaudited.
Business context and results
Nucor manufactures and sells steel and steel products, produces direct reduced iron, and operates scrap processing and brokerage businesses. Its reporting segments are steel mills, steel products, and raw materials. In June 2012, Nucor acquired Skyline Steel, included in steel mills results from the acquisition date.
| Metric | Q3 2012 | Q3 2011 | First 9 months 2012 | First 9 months 2011 |
|---|---|---|---|---|
| Net sales | $4.801B | $5.252B | $14.978B | $15.194B |
| Net earnings attributable to Nucor stockholders | $110.3M | $181.5M | $367.7M | $641.1M |
| Diluted EPS | $0.35 | $0.57 | $1.15 | $2.02 |
| Gross margin | $348.7M (7%) | $458.1M (9%) | $1.13B (8%) | $1.53B (10%) |
| Cash provided by operating activities | Not provided for quarter | $1.125B | $683.5M |
Q3 sales declined 9%, while Nucor-attributable earnings fell about 39%. For the first nine months, sales declined 1% and attributable earnings fell about 43%. Q3 average selling price per ton declined 8% to $832, with outside tonnage slightly lower; nine-month average price declined 3% to $850 while outside tons rose 1%. Steel mills earnings before tax decreased 49% in Q3 and 36% year to date. Steel products sales rose 5% in Q3 and 11% year to date, while raw materials sales fell 11% and 10%, respectively.
Financial position, cash flow, and capital
- At September 29, cash and cash equivalents were $1.693B and short-term investments were $430.3M, totaling $2.123B. An additional $414.2M of restricted cash and investments was primarily designated for the Louisiana DRI facility.
- Total debt on the balance sheet was approximately $4.311B, including $930.9M classified as current and $3.380B long-term. Debt fair value was approximately $4.89B. The funded-debt-to-total-capital ratio was 35%; the $1.5B revolving credit facility was undrawn.
- Current assets were $6.622B and current liabilities $2.887B; management reported a current ratio of 2.3, versus 2.8 at year-end 2011. The decline reflected, among other items, investment sales used partly to fund Skyline and increased current debt maturities.
- Nine-month operating cash flow was $1.125B, up 65% year over year. Investing activities used $264.6M and financing activities used $371.3M. Cash and cash equivalents increased $492.6M from year-end 2011.
- Cash-flow-statement capital expenditures were $613.8M for the first nine months; management separately reported capital expenditures of $691.5M, including accrued plant and equipment purchases. Management projected approximately $1.0B of capital expenditures for 2012.
Material changes, outlook, and risks
- Profitability weakened amid lower steel selling prices, import pressure, new domestic supply, economic uncertainty, and pressure on scrap-processing margins. Steel mills’ average scrap and scrap-substitute cost per ton declined 15% in Q3, but the lower input cost did not offset lower selling prices and volume.
- Gross margin included an $84.0M LIFO credit in Q3 and the first nine months of 2012, compared with a $28.0M Q3 charge and a $91.0M nine-month charge in 2011. Management cautioned that interim LIFO estimates may differ materially from year-end results.
- Skyline acquisition-related inventory purchase-accounting adjustments reduced gross margin by $28.2M in Q3 and $36.8M year to date. Nucor also recorded a $30.0M second-quarter impairment of its Duferdofin Nucor investment, with potential for further impairment if performance or valuation assumptions worsen.
- The sale of Nucor Wire Products Pennsylvania assets resulted in a $17.6M Q3 loss. Q3 marketing, administrative and other expenses were higher partly as a result; lower incentive compensation reduced expenses year to date.
- Management expected a further reduction in fourth-quarter 2012 earnings, excluding non-recurring charges. It cited high imports, excess domestic sheet supply, slowing growth, scrap-price volatility, and weak buyer confidence. Manufactured goods markets, including automotive, energy, and heavy equipment, were described as stronger; construction remained very challenging.
- The Louisiana 2.5-million-ton DRI facility was expected to start operations in mid-2013; management noted possible weather and low Mississippi River water-level delays. Nucor-Yamato approved an estimated $115M sheet-piling expansion, expected to be completed in early 2014.
- On October 31, 2012, a subsidiary agreed to acquire a 50% working interest in certain natural gas wells. Nucor expected to invest about $542M over the next three fiscal years and approximately $3.64B over the agreement’s estimated 13-to-22-year term.
- Key risks include steel and raw-material pricing, energy costs and availability, demand and imports, industry cyclicality and excess capacity, foreign exchange, regulation and environmental compliance, acquisition and capital-project execution, and asset impairment. Nucor disclosed antitrust class-action litigation and said it could not predict the outcome or estimate potential exposure. Accrued environmental costs were $29.3M.
Most important facts for investors to verify
- Whether steel pricing, imports, domestic capacity, and end-market demand evolve as assumed in management’s fourth-quarter outlook.
- How much of reported gross margin and future earnings depends on the estimated LIFO credit, and how year-end inventory costs affect that estimate.
- Skyline’s post-acquisition contribution, including purchase-accounting impacts and expected synergies, and the outlook for Duferdofin Nucor impairment.
- Funding, costs, and delivery timing for the DRI facility, planned capital spending, and the natural-gas-well agreement’s substantial long-term investment estimate.
- Near-term debt maturities, liquidity after acquisition spending, and potential exposure from the antitrust litigation and environmental obligations.