Nucor Corporation — Q2 2009 Form 10-Q
Business context and reporting period. Nucor manufactures steel and steel products and operates scrap processing, brokerage and other raw-material businesses. This unaudited filing covers the 13 weeks ended July 4, 2009, and the first 26 weeks of 2009; comparisons are to the corresponding 2008 periods. The filing describes a severe downturn in steel and construction markets.
Financial performance
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Net sales | $2.478 billion | $7.091 billion | $5.132 billion | $12.065 billion |
| Net earnings (loss) attributable to Nucor stockholders | $(133.3) million | $580.8 million | $(323.0) million | $990.5 million |
| Diluted earnings (loss) per share | $(0.43) | $1.94 | $(1.03) | $3.36 |
| Gross margin | $(61.9) million; (2)% | $1.21 billion; 17% | $(185.9) million; (4)% | $2.11 billion; 18% |
| Cash provided by operating activities | Not separately provided for the quarter | $637.1 million | $828.2 million |
Revenue fell 65% year over year in Q2 and 57% in the first half. Q2 average selling price per ton declined 34% and outside-customer shipments declined 47%; first-half average price fell 23% and shipments fell 45%. First-half return on average stockholders’ equity was approximately (8.3)%, versus 30.8% a year earlier. No profit-sharing expense was recorded in the first half because Nucor reported a consolidated net loss.
Balance sheet, cash flow and liquidity
- At July 4, cash and cash equivalents were $2.060 billion and short-term investments were $136.4 million. Current assets were $4.928 billion and current liabilities $949.2 million; management reported a 5.2 current ratio.
- Total debt was approximately $3.098 billion, including $3.086 billion of long-term debt due after one year. Nucor repaid $175 million of notes that matured in January; it reported no other material debt maturities until 2012.
- The $1.3 billion revolving credit facility was undrawn and does not expire until November 2012. Funded debt to total capitalization was 29%, below the facility’s 60% covenant limit; Nucor reported compliance with covenants.
- First-half capital expenditures were $240.4 million, down from $501.7 million. Cash dividends paid were $221.1 million. Cash and cash equivalents decreased by $294.9 million over the first half.
- Management expected operating funds, cash and short-term investments, and available borrowing to cover capital expenditure and working-capital needs for existing operations for at least 24 months.
Material changes and operating factors
- Every reporting segment recorded a pretax loss in Q2. Steel mills’ external sales fell 71% year over year; steel products’ fell 38%; raw materials’ fell 70%.
- First-half utilization averaged 46% at steel mills, 47% at steel products and 42% at raw materials, versus 94%, 75% and 87%, respectively, a year earlier.
- Lower selling prices and shipments sharply compressed margins. Although scrap and scrap-substitute costs declined, metal margins also declined; high-cost pig iron purchased before the late-2008 price collapse weighed on results. Energy cost per ton rose as utilization fell, and start-up costs for new facilities increased.
- Estimated LIFO credits partly offset the margin decline: $125 million in Q2 and $230 million in the first half of 2009, compared with LIFO charges of $214 million and $283 million in the corresponding 2008 periods. Management cautioned that interim LIFO estimates may differ significantly from actual year-end amounts.
- Equity-method investment losses were $21.8 million in Q2 and $59.8 million in the first half, including Nucor’s share of Duferdofin-Nucor inventory write-downs. Its investment in Duferdofin-Nucor was $536.3 million at July 4.
Outlook, risks and contingencies
Management said steel-mill utilization improved monthly during Q2, from 38% in April to 54% in June, and price increases had been announced. It expected Q3 results to improve from Q2, while warning that consuming remaining high-cost pig iron inventory would continue to hurt results. Management viewed the order improvement cautiously, saying it might reflect inventory adjustments and anticipated price increases rather than stronger end demand. It expected a long, slow recovery in real steel demand; downstream steel-products businesses were expected to lag, with non-residential construction remaining depressed.
- Key business risks include steel-price volatility, raw-material and energy costs, weak construction demand, imports and competition, excess global steel capacity, foreign exchange and trade-policy changes, environmental regulation, industry cyclicality, capital investment and safety performance.
- Goodwill testing found no impairment in the Buildings Group or Cold Finish reporting units in Q2. Their estimated fair values exceeded carrying values by $29.3 million and $90.8 million, respectively. Management warned that weaker-than-expected performance or changed assumptions could result in future noncash impairment charges.
- Nucor was a defendant in steel-industry antitrust class actions alleging anticompetitive conduct since 2005. The company said it would defend the claims but could not predict the outcome or estimate potential exposure.
- Accrued environmental costs were $38.8 million at July 4, up from $27.1 million at year-end 2008. Management said other routine contingencies were not expected to have a material effect.
- Nucor reported $126.7 million of derivative liabilities and $81.5 million of after-tax unrealized derivative losses in accumulated other comprehensive income. Commodity prices, including natural gas and metal prices, can affect reported results.
- The supplemental dividend was suspended in Q1. The board declared a quarterly dividend of $0.35 per share, compared with $0.52 in Q2 2008; management expected total 2009 dividends to be approximately $215 million lower.
Important facts for investors to verify
- Whether higher order rates and utilization reflect sustained end-market demand, and how steel prices and shipments develop.
- The remaining earnings impact of high-cost pig iron, raw-material destocking and interim LIFO estimates.
- Liquidity, debt levels, credit ratings and access to the undrawn revolving facility as the downturn continues.
- Developments in goodwill assumptions and the antitrust litigation, including any changes in potential exposure.
- Ongoing losses at Duferdofin-Nucor and other equity-method investments, and their effect on earnings.