Nucor Corporation — Q1 2016 Form 10-Q
Business context and period. Nucor manufactures steel and steel products, produces direct reduced iron, and processes and brokers metals. Results cover the 13 weeks ended April 2, 2016, compared with the 13 weeks ended April 4, 2015. The interim financial statements are unaudited.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $3.716 billion | $4.399 billion | Down 16% |
| Gross margin | $286.9 million; 8% | $288.3 million; 7% | Dollar margin roughly flat |
| Earnings before tax and noncontrolling interests | $141.5 million | $119.0 million | Up 19% |
| Net earnings attributable to Nucor stockholders | $70.8 million | $67.8 million | Up 4% |
| Diluted EPS | $0.22 | $0.21 | Up $0.01 |
| Cash provided by operating activities | $550.9 million | $563.7 million | Down $12.8 million |
- Average sales price per ton fell 23% to $604, while tons shipped to outside customers rose 9% to 6.148 million. The filing attributes pricing pressure partly to high steel imports in 2015 and early 2016.
- Net earnings were 2% of sales, as in Q1 2015. Average steel-mill utilization was 74%, versus 65%; steel-products utilization was 56%, versus 57%; and raw-materials utilization was 60%, versus 43%.
- Segment pretax results: steel mills earned $279.8 million (up from $217.1 million); steel products earned $42.4 million (up from $32.5 million); raw materials lost $63.4 million (versus a $41.5 million loss). Corporate/eliminations were a $117.3 million loss.
Balance sheet, debt and liquidity
- At April 2, 2016, cash and cash equivalents were $2.278 billion and short-term investments were $50.0 million, totaling $2.328 billion. Total debt was approximately $4.374 billion by balance-sheet carrying value; cash and investments therefore amounted to about $2.05 billion less than debt.
- Current assets were $6.006 billion and current liabilities $1.550 billion; the reported current ratio was 3.9, down from 4.2 at year-end 2015.
- Total assets were $14.395 billion, total liabilities $6.617 billion, and total equity $7.778 billion. Funded debt to total capitalization was 36%, against a 60% credit-facility limit. No credit-facility borrowings were outstanding.
- Operating cash flow was supported by earnings, $36.0 million of affiliate distributions, inventory reduction and higher accounts payable; working-capital changes were less favorable than in the prior-year quarter. Capital expenditures were $80.7 million. Cash dividends paid were $120.2 million.
Material changes and management commentary
- Steel-mill sales fell 14% year over year as average selling price per ton dropped 27%, partly offset by higher shipment volumes. Management cited improving volumes, lower import levels, competitor supply curtailments and stronger demand for some value-added sheet products late in the quarter.
- Steel-products sales decreased 10%, mainly reflecting lower average selling prices; raw-materials sales fell 41%, with depressed scrap prices and weaker DJJ brokerage volumes and margins contributing to the segment loss.
- Gross margin included a $27.5 million LIFO charge, compared with a $16.5 million LIFO credit in Q1 2015. Management noted scrap prices had risen entering Q2 and expected further increases in Q2.
- Net earnings included $13.4 million of non-cash out-of-period gains, which management said were not material individually or in aggregate to the current or previously reported periods. These included a favorable tax adjustment and equity-method investment benefits. The Q1 effective tax rate was 26.2%, including a $4.5 million favorable non-cash tax adjustment; management expected a full-year 2016 rate of approximately 29.3%.
Outlook, risks and contingencies
- Management expected Q2 2016 earnings to improve significantly from Q1. It anticipated improved steel-mill performance as announced price increases gained acceptance, while rising scrap costs could temper improvement; seasonal construction demand and better scrap and DRI pricing were expected to support other segments.
- Management expected 2016 capital expenditures of approximately $500 million, compared with $364.8 million in 2015, primarily for growth and higher-value products. It stated that operating cash, cash and investments, and available borrowing capacity should meet capital and working-capital needs for at least 24 months.
- Key risks include steel-price and import competition, raw-material and energy costs, cyclical demand, excess global steel capacity, nonresidential construction conditions, foreign exchange, and possible impairment of investments and long-lived assets.
- Natural-gas well assets remain exposed to prolonged low gas prices; one group’s $84.6 million carrying value was relatively close to estimated undiscounted cash flows. The company also warned of possible further impairment of its Duferdofin Nucor investment after recording a $153.0 million impairment in Q4 2015.
- Nucor is defending an antitrust class-action lawsuit; it believes the claims are without merit but cannot estimate potential exposure and has recorded no reserve. Accrued environmental costs were $20.7 million. The company reported no material changes to its previously disclosed risk factors.
- Subsequent to quarter-end, Nucor amended and extended its undrawn $1.5 billion credit line to April 2021. The quarterly dividend was $0.375 per share, Nucor’s 172nd consecutive quarterly dividend.
Important facts for investors to verify
- Whether steel price increases and shipment trends continued after quarter-end, and how rising scrap costs affected realized metal margins.
- Whether the expected Q2 improvement materialized, especially in raw materials and DRI operations, and whether the full-year tax-rate and capital-expenditure outlook changed.
- How the $13.4 million of out-of-period gains affected comparability, alongside the LIFO charge and the $4.5 million tax adjustment.
- Developments in the Duferdofin Nucor and natural-gas asset impairment assessments, and any material change in the unquantified antitrust exposure.
- Liquidity and capital allocation: cash and investment balances, debt, credit-line availability, capital spending, dividends and share repurchases.