Nucor Corporation — Q1 2010 Form 10-Q
Business context and period. This unaudited report covers the 13 weeks ended April 3, 2010. Nucor manufactures steel and steel products and operates steel mills, steel products, and raw materials businesses, primarily in North America.
Financial performance
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net sales | $3.655 billion | $2.654 billion |
| Pretax earnings (loss) | $64.0 million | $(281.7) million |
| Net earnings (loss) attributable to Nucor stockholders | $31.0 million; $0.10 per diluted share | $(189.6) million; $(0.60) per diluted share |
| Gross margin | $212.8 million; 6% | $(124.0) million; (5)% |
| Cash from operating activities | $(3.0) million | $14.1 million |
Sales rose 38% year over year as shipments to outside customers increased 48%; average sales price per ton fell 7%, to $665. The company reported net earnings equal to 0.8% of sales, versus a net loss equal to 7.1% in the prior-year quarter. The 2010 effective tax rate was 35.7%.
- Segments: Steel mills earned $158.5 million before tax, compared with a $226.9 million loss. Steel products recorded a $67.7 million pretax loss, versus a $33.6 million loss. Raw materials earned $32.8 million, versus a $31.5 million loss.
- Balance sheet at April 3: Cash and cash equivalents were $1.660 billion and short-term investments were $340.5 million. Total debt was approximately $3.095 billion, including current maturities and short-term debt. Total equity was $7.509 billion.
- Liquidity: Current assets were $5.462 billion and current liabilities $1.541 billion; the current ratio was 3.5, down from 4.2 at year-end 2009. Cash plus short-term investments totaled approximately $2.0 billion. The $1.3 billion revolving credit facility was undrawn; funded debt to total capitalization was 29%, against a 60% covenant limit.
- Cash and investment activity: Cash declined $357.4 million during the quarter. Investing activities used $253.9 million, including investment purchases, affiliate funding, and an acquisition; financing activities used $105.2 million, including $114.2 million of dividends. Capital expenditures were $54.2 million, down from $126.0 million.
Changes, outlook, and notable items
- Higher shipments and improved steel-mill utilization supported the recovery in gross margin. Steel-mill, steel-products, and raw-materials utilization was approximately 73%, 46%, and 66%, respectively, compared with 45%, 45%, and 44% a year earlier.
- Steel-mill sales increased 58%; steel-products sales decreased 21%, mainly from lower prices; raw-materials sales increased 67%. The 2010 quarter had no inventory write-down to lower of cost or market, compared with a roughly $60 million charge in 2009. A $24 million LIFO charge in 2010 contrasted with a $105 million LIFO credit in 2009; interim LIFO estimates may differ significantly from final amounts.
- Management said operating performance improved through the quarter and expected Q2 results to improve over Q1. Residential and non-residential construction markets, particularly important to downstream businesses, remained weak. Management cited market-share gains, a flexible production base, and financial strength.
- 2010 capital expenditures were projected at $400 million. Management expected operating cash, cash and investments, and available borrowing capacity to meet existing-operation capital and working-capital needs for at least 24 months. The quarterly dividend was $0.36 per share.
- After quarter-end, Nucor acquired a 50% interest in NuMit LLC for approximately $225.5 million. NuMit’s initial investment was Steel Technologies LLC; Nucor also provided a $40 million loan and a $60 million credit line, of which $54 million was immediately drawn.
- Risks and contingencies: Steel prices, scrap and other input costs, energy prices, demand and construction conditions, imports and competition, the economic cycle, foreign exchange, and environmental regulation could affect results. Nucor disclosed antitrust class-action litigation alleging steel-market coordination; it disputed the claims and could not estimate the outcome or exposure. Accrued environmental costs were $37.2 million.
- The company warned that further weakness or underperformance could require goodwill or intangible-asset impairment, particularly for the Buildings Group and Steel Trading. It also said its Duferdofin Nucor equity investment could be impaired if performance or valuation assumptions deteriorate.
Important facts for investors to verify
- Whether the expected Q2 improvement materialized, especially given continuing construction-market weakness.
- Whether higher receivables and inventory convert into operating cash as volumes and input costs change.
- The effects of LIFO estimates, startup costs, and commodity-hedge positions on future margins and earnings.
- Performance and valuation assumptions for Duferdofin Nucor and the identified goodwill-sensitive reporting units.
- Developments in the antitrust litigation and the financial impact, if any, of the NuMit investment and related lending.