Nucor Corporation — Q1 2012 Form 10-Q
Business context and period. Nucor manufactures steel and steel products, produces direct reduced iron (DRI), and operates scrap processing and brokerage businesses. This unaudited report covers the 13 weeks ended March 31, 2012; comparisons are with the 13 weeks ended April 2, 2011 unless otherwise noted.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $5.073 billion | $4.834 billion | Up 5% |
| Gross margin | $380.5 million; 7.5% of sales | $423.7 million; 8.8% of sales | Down $43.2 million |
| Earnings before tax and noncontrolling interests | $225.1 million | $266.3 million | Down 15% |
| Net earnings attributable to Nucor stockholders | $145.1 million | $159.8 million | Down 9% |
| Diluted earnings per share | $0.46 | $0.50 | Down $0.04 |
| Cash provided by operations | $207.7 million | $47.5 million | Up $160.2 million |
| Capital expenditures | $167.3 million | $96.0 million | Up 74% |
Net sales benefited from a 6% increase in average selling price per ton, to $857, while outside shipments declined 1%. Steel mills sales rose 5%, steel products sales rose 15%, and raw materials sales fell 9%. Average utilization was 79% for steel mills, 54% for steel products, and 65% for raw materials.
Balance sheet and liquidity at March 31, 2012: Cash and cash equivalents were $1.180 billion and short-term investments were $1.198 billion. Current assets were $6.859 billion against current liabilities of $2.549 billion; management reported a 2.7 current ratio. Debt totaled approximately $4.288 billion, including $650 million due within one year. The $1.5 billion revolving credit facility was undrawn; funded debt to total capitalization was 35%, against a 60% covenant limit. Restricted cash and investments of $586.2 million were primarily designated for the Louisiana DRI project.
Cash and cash equivalents decreased $20.8 million during the quarter. Cash used in investing was $92.4 million and cash used in financing was $138.6 million. Operating cash flow benefited from less cash absorbed by changes in operating assets and liabilities than in the prior-year quarter.
Changes, drivers, and outlook
- Gross margin declined despite higher sales, reflecting higher scrap and scrap-substitute costs, reduced scrap-processing margins amid excess shredding capacity, and product-mix and other effects. The LIFO charge was $14.5 million versus $31.0 million a year earlier.
- Steel mills pretax earnings were $390.3 million versus $402.9 million; higher metal margins and lower energy costs were offset by increased affiliate losses and other items. Steel products remained loss-making at $33.0 million, though the loss narrowed year over year. Raw materials pretax earnings declined to $14.6 million from $60.3 million, mainly due to scrap-processing margin compression.
- Management expected only a modest improvement in Q2 2012 earnings. It cited a flattening in favorable pricing and margin trends, resurgence in imports, and competition from new and restarted domestic sheet capacity. Construction markets remained very challenging; automotive, heavy equipment, energy, and general manufacturing demand was improving.
- Management projected approximately $1.0 billion of 2012 capital expenditures, including about $450 million for the Louisiana DRI facility. Construction of the 2.5-million-ton facility was on schedule for completion and start-up in mid-2013. The filing states existing operations’ capital, working-capital, and liquidity needs are expected to be funded for at least 24 months.
- The board declared a quarterly dividend of $0.365 per share, payable May 11, 2012. The company reported this was its 156th consecutive quarterly cash dividend.
Risks, contingencies, and unusual items
- Key risks include steel pricing and demand, raw-material and energy costs, import competition, global economic conditions and excess capacity, construction-market weakness, foreign exchange, environmental regulation, and potential asset or investment impairments.
- European steel-market conditions remained challenging. Nucor reported no impairment of its Duferdofin Nucor investment, but said near-term performance could change valuation assumptions and potentially result in impairment.
- Nucor had a 50% guarantee of up to €112.5 million of Duferdofin Nucor credit facilities; €106.6 million was outstanding, with Nucor’s guaranteed share stated as €53.3 million ($71.2 million). No liability was recorded for the guarantee.
- Accrued environmental costs were $30.2 million, undiscounted. Nucor was a co-defendant in steel-industry antitrust class actions; it disputed the claims but said it could not predict the outcome or estimate potential exposure.
- The Q1 effective tax rate was 27.4%, favorably affected by a $12.6 million noncash out-of-period tax adjustment. Management estimated a 31.6% full-year 2012 tax rate. The filing said the adjustment did not materially affect current or prior reported periods.
- Freight-cost classification changed in 2012: $14.7 million of 2011 costs was reclassified from marketing, administrative and other expenses to cost of products sold, with no effect on earnings.
- Nucor settled open natural-gas forward contracts in Q1. It expected $31.7 million of net deferred hedge losses to be reclassified into earnings over the following nine months.
Important facts for investors to verify
- Whether steel pricing and margins stabilize or weaken further, particularly amid import and domestic supply competition.
- Whether raw-material segment margins recover from excess shredding capacity and whether European conditions affect Duferdofin Nucor’s carrying value.
- Progress, timing, and costs for the Louisiana DRI project and the company’s approximately $1.0 billion 2012 capital-spending plan.
- Working-capital needs, operating cash generation, and the ability to sustain dividends and capital investment through a cyclical downturn.
- Potential outcomes and exposure from antitrust litigation, environmental obligations, and the Duferdofin guarantee.
- Whether the Q1 tax benefit and LIFO estimates materially affect comparisons in subsequent quarters.