Nucor Corporation — First-Quarter 2014 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. The unaudited quarter comprised 13 weeks ended April 5, 2014; comparison is with the 13 weeks ended March 30, 2013. Results are reported in steel mills, steel products, and raw materials segments.
Financial performance and position
- Revenue: Net sales were $5.108 billion, up 12% year over year. Average sales price per ton rose 3% to $825, and shipments to outside customers increased 8%.
- Earnings and margins: Net earnings attributable to Nucor stockholders were $111.0 million, or $0.35 per diluted share, versus $84.8 million, or $0.26, a year earlier. Earnings before taxes and noncontrolling interests were $207.5 million versus $153.3 million. Gross margin was $377.2 million, reported as 7% of sales in both periods; net earnings were 2% of sales in both periods.
- Segments: Steel mills reported $317.8 million of pretax earnings versus $272.3 million; steel products earned $1.7 million versus an $11.9 million loss; raw materials earned $8.4 million versus $1.5 million. Corporate/eliminations costs were $120.4 million versus $108.5 million.
- Cash flow: Operating cash flow was $149.2 million versus $128.8 million. Capital expenditures were $258.1 million, making operating cash flow less capital expenditures negative $108.8 million. Cash used in investing was $331.5 million and cash used in financing was $145.9 million. Cash and cash equivalents declined $330.7 million during the quarter.
- Liquidity: Cash and cash equivalents plus short-term investments totaled $1.253 billion at quarter-end, and the current ratio was 3.3. The $1.50 billion revolving credit facility was undrawn.
- Debt and capital: Balance-sheet debt was approximately $4.407 billion, including short-term debt, current maturities, and long-term debt. Funded debt to total capitalization was 36%, below the facility’s 60% covenant limit. Estimated fair value of debt was approximately $4.69 billion.
- Other: Dividends declared were $0.37 per share. Return on average stockholders’ equity was 6%, versus 4% a year earlier.
Changes versus the prior-year quarter
- Sales rose across all segments: steel mills 10%, steel products 11%, and raw materials 27%. Steel products’ volume increased 13%, while its average selling price per ton decreased 2%.
- Steel production increased 8% to 5.194 million tons; outside steel shipments increased 6% to 4.600 million tons. Average facility utilization improved in each segment: steel mills 75% versus 72%, steel products 56% versus 51%, and raw materials 66% versus 58%.
- Gross margin dollars increased, but costs included higher scrap and energy costs. Net interest expense rose to $40.7 million from $32.5 million, primarily reflecting higher average debt.
- The effective tax rate increased to 37.5% from 27.8%, including a $12.8 million charge primarily related to New York tax legislation. Management estimated a full-year 2014 rate of approximately 32.6%.
Outlook, commentary, and risks
- Management expected second-quarter 2014 earnings to improve from the first quarter, excluding first-quarter tax and asset-disposal charges. It anticipated improved steel mill and fabricated construction product performance, while warning that imports would continue to pressure steel pricing and margins.
- Management described nonresidential construction demand as showing small but noticeable improvement, while remaining cautiously optimistic. Severe winter weather disrupted construction activity and logistics in the first quarter.
- The Louisiana DRI plant produced 455,000 tons in the quarter, with peak operating rates above 90% of nameplate capacity. Start-up costs were $20.7 million, up from $3.8 million a year earlier.
- Projected 2014 capital expenditures were approximately $600 million, compared with $1.2 billion in 2013. Management said available operating funds, cash, investments, and borrowing capacity should meet capital and working-capital needs for at least 24 months.
- Litigation: A jury returned a $52 million damages verdict against Nucor and five co-defendants in the MM Steel antitrust case; the amount was trebled in a court judgment entered April 29, 2014. Nucor said it would seek to overturn the judgment and recorded no reserve, stating it did not consider affirmation probable. The ultimate outcome and Nucor’s potential share of any payment are uncertain.
- Other exposures: Nucor cited steel prices, raw-material and energy costs, imports and competition, cyclical demand, foreign currency, environmental regulation, and possible impairment risks. European steel conditions remained challenging; management said material deviation from valuation assumptions could result in impairment of its Duferdofin Nucor investment.
- Environmental remediation costs accrued were $21.7 million. Nucor also disclosed other antitrust class-action litigation for which it could not estimate potential exposure.
Important facts for investors to verify
- Track steel pricing, shipment volumes, import pressure, and whether the anticipated second-quarter earnings improvement occurred.
- Assess the DRI plant’s operating performance and start-up costs, and compare actual capital spending with the approximately $600 million 2014 projection.
- Monitor cash generation, working-capital needs, debt levels, and access to the undrawn revolving credit facility.
- Follow the MM Steel judgment and appeal, including any eventual determination of Nucor’s liability; no related reserve was recorded.
- Review the full-year tax-rate estimate and potential impairment sensitivity of the Duferdofin Nucor investment.