Nucor Corporation — Q3 2013 Form 10-Q
Business context and reporting period. Nucor manufactures steel and steel products and produces and brokers raw materials. Its reportable segments are steel mills, steel products and raw materials. This unaudited filing covers the 13 weeks and 39 weeks ended September 28, 2013; comparisons are with the periods ended September 29, 2012.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $4.941 billion | $4.801 billion | $14.157 billion | $14.978 billion |
| Gross margin | $408.5 million (8%) | $348.7 million (7%) | $1.02 billion (7%) | $1.13 billion (8%) |
| Earnings before tax and noncontrolling interests | $248.2 million | $191.8 million | $553.9 million | $633.0 million |
| Net earnings attributable to Nucor stockholders | $147.6 million | $110.3 million | $317.5 million | $367.7 million |
| Diluted earnings per share | $0.46 | $0.35 | $0.99 | $1.15 |
| Cash provided by operating activities | Not provided for the quarter | $883.6 million | $1.125 billion |
- Third-quarter net sales rose 3%; outside-customer tons sold increased 7%, while average sales price per ton fell 4% to $801. For the first nine months, sales fell 5%; tons rose 1% and average price declined 6% to $799.
- Cash used in investing activities was $547.7 million for the first nine months, including $887.9 million of capital expenditures. Operating cash flow less capital expenditures was approximately negative $4.3 million, versus approximately positive $510.9 million in the prior-year period.
- At September 28, cash and cash equivalents were $1.723 billion and short-term investments were $48.5 million. The current ratio was 3.2, compared with 2.8 at year-end 2012.
- Balance-sheet debt was approximately $4.418 billion: $38.2 million short-term and $4.380 billion long-term. The company reported a 36% funded-debt-to-total-capital ratio, no revolver borrowings, and no long-term debt maturities in the next 12 months. Fair value of debt was approximately $4.62 billion.
Changes versus prior comparable periods
- Q3 earnings attributable to Nucor stockholders increased about 34%, despite lower average selling prices; higher shipment volumes, increased total steel-mill metal margin dollars, and lower energy costs helped results.
- For the first nine months, attributable earnings declined about 14%. Management cited lower selling prices and metal margins, and the absence of the prior-year $84 million LIFO credit. Prior-year results also included a $30 million impairment charge and Skyline acquisition-related inventory adjustments, which partly offset the decline in the comparison.
- Segment pretax earnings for Q3 were $310.6 million in steel mills, $31.0 million in steel products and a loss of $0.5 million in raw materials. Nine-month steel-mill earnings declined to $820.0 million; steel products improved to $51.2 million from a loss, while raw-materials earnings fell to $13.3 million.
- Operating cash flow declined 21% year over year, with working-capital changes, particularly receivables and inventories, weighing on cash generation. Capital expenditures rose 45% to $887.9 million.
Outlook, risks and unusual items
- Management expected stable metal margins but typically lower seasonal Q4 shipping volumes and extended planned outages at three mills. It therefore expected moderately lower Q4 2013 earnings. Scrap prices were expected to show low volatility in Q4.
- The 2.5-million-ton Louisiana DRI facility’s start-up could be delayed until year-end after a storage dome collapsed late in Q3. No injuries or environmental impact were reported. Nucor recorded a $14 million net charge after a $14 million estimated insurance receivable, against $21 million of property and equipment and $7 million of inventory write-downs.
- Management projected approximately $1.1 billion of 2013 capital expenditures and said available operating funds, cash, investments and borrowing capacity should cover existing-operations capital and working-capital needs for at least 24 months. The $1.5 billion revolving credit facility was extended to August 2018 and remained undrawn.
- Nucor issued $500 million of 4.00% notes due 2023 and $500 million of 5.20% notes due 2043. Net proceeds were $991.5 million; management said the issuance refinanced debt maturities and extended the debt maturity profile.
- Other risks include steel-price and raw-material volatility, imports and excess capacity, weak nonresidential construction, energy and foreign-exchange exposure, environmental regulation, and the cyclical steel market. Nucor’s natural-gas working-interest agreement entails an estimated minimum investment of about $3.64 billion over more than 20 years.
- European steel-market weakness could cause further impairment of the Duferdofin Nucor equity investment; management said material deviation from valuation assumptions could result in an impairment. Nucor is also a defendant in U.S. steel antitrust class actions and said it could not estimate potential exposure. Accrued environmental costs were $23.7 million, with estimation uncertainty.
- The effective tax rate was 28.2% in Q3; management estimated a full-year 2013 rate of approximately 29.3%. The Q3 rate benefited partly from tax-reserve reversals following the expiration of a statute of limitations.
Important facts for investors to verify
- Whether the Louisiana DRI facility began operations on the anticipated schedule and whether insurance recoveries covered the dome-collapse losses.
- Whether Q4 planned mill outages and seasonal volume softness affected earnings as management expected.
- Whether sales prices, shipment volumes and metal margins improved, particularly in steel mills and nonresidential construction-related products.
- Whether working-capital needs and elevated capital spending continued to constrain operating cash flow and free cash flow.
- Whether Duferdofin Nucor’s European performance or the antitrust litigation led to impairment, additional charges or a measurable contingency.