Nucor Corporation — Q2 2011 Form 10-Q
Reporting period: Second quarter (13 weeks) and first half (26 weeks) ended July 2, 2011. Unaudited results; comparisons are with the periods ended July 3, 2010 unless stated otherwise. Nucor manufactures steel and steel products, produces direct reduced iron, and operates raw-materials and steel-brokering businesses.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $5.108B | $4.196B | $9.942B | $7.851B |
| Gross margin | $666.2M (13%) | $308.0M (7%) | $1.105B (11%) | $520.8M (7%) |
| Earnings before tax and noncontrolling interests | $477.3M | $155.6M | $743.5M | $219.6M |
| Net earnings attributable to Nucor stockholders | $299.8M | $91.0M | $459.6M | $122.0M |
| Diluted earnings per share | $0.94 | $0.29 | $1.44 | $0.38 |
| Operating cash flow | Not presented separately by quarter | $292.7M | $(293.8)M |
- Q2 sales increased 22%; average selling price per ton rose 21% to $912, while outside-customer shipments increased 1%. For the first half, sales rose 27%, with average price up 21% to $859 and shipments up 5%.
- Steel mills drove the earnings improvement: Q2 segment pretax earnings were $626.8M versus $262.1M. Steel products remained loss-making at $(10.0)M, though improved from $(35.3)M. Raw-materials pretax earnings were $51.9M versus $53.8M.
- Reported net earnings are consolidated; Nucor-stockholder earnings exclude earnings attributable to noncontrolling interests. Q2 net earnings attributable to Nucor were about 6% of sales versus 2% a year earlier; first-half figures were 5% and 2%.
Financial position, cash flow and liquidity
- At July 2, cash and cash equivalents were $1.190B and short-term investments were $1.093B, or $2.282B combined. Restricted cash was $576.6M and designated for construction of the Louisiana DRI facility.
- Current assets were $6.716B and current liabilities $2.003B; the reported current ratio was 3.4, down from 3.9 at year-end 2010. Receivables rose 28% and inventories 43% from year-end, reflecting higher prices, raw-material costs and volumes.
- Long-term debt was $4.280B and short-term debt $14.7M. The company reported a 36% funded-debt-to-total-capital ratio, against a 60% credit-facility limit. Its $1.3B revolving facility was undrawn and expires in November 2012; 79% of long-term debt matures in 2017 or later. Disclosed fair value of long-term debt, including current maturities, was approximately $4.59B.
- First-half investing cash use was $161.4M, including $212.9M of capital expenditures; financing cash use was $269.5M, including $230.6M in dividends and $43.3M in distributions to noncontrolling interests. Cash and cash equivalents declined $135.9M during the half.
- Management projected 2011 capital expenditures of approximately $500M, versus $345.3M in 2010, and said existing operations’ capital and working-capital needs were expected to be funded for at least 24 months.
Material changes and management commentary
- Profitability rebounded substantially year over year as selling prices and metal margins improved. Steel-mill scrap and scrap-substitute cost per ton rose 19% in Q2, but selling prices rose faster; first-half scrap costs rose 26%.
- Q2 LIFO expense was $32M, compared with $67M; first-half LIFO expense was $63M, compared with $91M. New-facility pre-operating and start-up costs were $31.4M in Q2 and $59.3M in the first half, both below prior-year levels.
- Steel-mill utilization was affected by severe-weather-related downtime and power outages in Q2. First-half utilization was approximately 75% for steel mills, 55% for steel products and 74% for raw materials, versus 72%, 52% and 72%, respectively, in 2010.
- The Louisiana DRI project is under construction. Nucor broke ground in March 2011 on a 2.5-million-ton facility and reported construction on schedule for start-up in mid-2013. Its air permit allows two plants with combined annual capacity of 5.5 million tons.
- Management expected Q3 results to be below Q2, citing excess domestic sheet supply and increased imports that were pressuring sheet prices and margins. It said the magnitude of the decline remained uncertain. Demand in automotive, heavy equipment, energy and general manufacturing was improving incrementally; construction markets remained weak but stable and slowly improving.
- The company declared a quarterly dividend of $0.3625 per share, payable August 11, 2011. The filing gives no quantified full-year earnings guidance.
Risks, contingencies and unusual items
- Key risks include steel-price and raw-material volatility, energy costs, cyclical and weak construction demand, imports and competition, global steel overcapacity, asset or investment impairment, foreign exchange, trade policy, environmental regulation and execution of capital projects.
- Nucor is a co-defendant in steel-industry antitrust class actions alleging conduct during 2005–2008. The company contests the claims but said it could not predict the outcome or estimate potential exposure.
- Accrued environmental costs were $33.5M, undiscounted; management noted estimation uncertainty. Management did not believe existing claims or proceedings were likely to have a material adverse effect on consolidated financial statements.
- Nucor guaranteed 50% of certain Duferdofin Nucor credit facilities: its share of the outstanding balance was €52.8M (about $76.4M); no liability was recorded. Management also said Duferdofin’s performance could cause its prior impairment valuation assumptions to change.
- First-half profit-sharing and retirement-savings plan expense rose to $71.1M from $20.9M. The full-year 2011 effective tax rate was expected to be approximately 32%, compared with 22.8% in 2010.
- Natural-gas cash-flow hedges had $36.6M of net deferred losses expected to be reclassified into earnings over the next 12 months at then-prevailing values. Derivative and commodity-price movements may affect reported earnings and margins.
Important facts for investors to verify
- Whether sheet-steel supply, imports and pricing evolve as management anticipated, and the resulting Q3 margin decline.
- Whether improving end-market demand translates into sustained shipment growth and profitability, particularly in steel products and construction-related markets.
- Progress, spending and start-up timing for the Louisiana DRI project, including whether projected 2011 capital expenditures remain on plan.
- Working-capital requirements and cash conversion as receivables and inventories increase; the filing attributes improved operating cash flow partly to earnings and working-capital changes.
- Potential exposure from the antitrust litigation, environmental obligations, Duferdofin guarantee and investment valuation assumptions.
- The reported debt carrying value versus the disclosed debt fair value, and continued compliance with the revolving-credit covenants.