NUCOR CORP 10-Q Summary: Period Ended June 28, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 28, 2008, and the six-month period ended on the same date. Nucor Corporation is North America's largest recycler and a major manufacturer of steel products. The reporting period was significantly impacted by the acquisition of The David J. Joseph Company (DJJ) on February 29, 2008, for approximately $1.44 billion, which added a raw materials segment to the company's operations. Nucor also completed a public offering of common stock in May 2008 and issued $1.0 billion in long-term debt in June 2008.
Key Financial Metrics
| Metric | Six Months Ended June 28, 2008 | Six Months Ended June 30, 2007 | Three Months Ended June 28, 2008 | Three Months Ended June 30, 2007 |
|---|---|---|---|---|
| Net Sales | $12,064.9 million | $7,937.0 million | $7,090.6 million | $4,168.1 million |
| Net Earnings | $990.5 million | $725.9 million | $580.8 million | $344.9 million |
| Diluted EPS | $3.36 | $2.39 | $1.94 | $1.14 |
| Gross Margin % | 18% | 19% | 17% | 18% |
| Cash and Equivalents | $2,791.9 million | $1,393.9 million (Dec 31, 2007) | - | - |
| Operating Cash Flow | $828.2 million | $737.6 million | - | - |
| Capital Expenditures | $501.7 million | $198.7 million | - | - |
| Total Debt (Short + Long Term) | $3,268.0 million | $2,273.2 million (Dec 31, 2007) | - | - |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 52% year-over-year for the six-month period, driven by a 21% increase in average sales price per ton and a 26% increase in tons shipped to outside customers. The second quarter saw a 70% sales increase.
- Profitability: Net earnings rose 36% for the six-month period and 68% for the quarter. However, gross margin percentages declined slightly (18% vs. 19% for six months) due to rising raw material costs and a record LIFO charge of $283.0 million for the six months (compared to $91.0 million in 2007).
- Acquisitions: The DJJ acquisition contributed $1.16 billion in sales for the six-month period. Additional smaller acquisitions (MRS and AMR) were completed in Q2.
- Cost Pressures: Average scrap and scrap substitute costs increased 44% year-over-year to $396 per ton. Energy costs also rose.
- Capital Structure: The company raised approximately $2.97 billion in net proceeds from a stock offering and debt issuance to fund acquisitions and capital projects. Total debt increased significantly due to the $1.0 billion note issuance in June 2008.
Guidance, Outlook, and Risks
Outlook: Management expects continued strength in sheet, plate, beam, and bar businesses due to solid global demand. The outlook for the third quarter remains positive, though downstream businesses face challenges from rising steel prices. Global steel consumption growth is expected to continue for several years.
Capital Projects: Capital expenditures are projected to exceed $800 million for the full year 2008. Major projects include a potential $2 billion iron-making facility in Louisiana, a new merchant bar mill in Italy (Duferdofin joint venture), and the acquisition of Ambassador Steel Corporation.
Risks and Contingencies:
- Commodity Volatility: Significant exposure to fluctuations in scrap steel, natural gas, and energy prices. Nucor utilizes a surcharge mechanism to pass costs to customers.
- Cyclical Nature: The steel industry is cyclical; margins are sensitive to the global balance of supply and demand.
- Regulatory: Subject to environmental laws and ongoing IRS examinations of 2005 and 2006 tax returns.
- Integration: Ongoing integration of DJJ and other recent acquisitions into internal controls and operations.
Key Investor Verification Points
- LIFO Impact: Verify the magnitude of the $283 million LIFO charge and its effect on reported earnings versus cash flow.
- Acquisition Synergies: Monitor the integration of DJJ and its ability to hedge against scrap price volatility as intended.
- Debt Servicing: Assess the impact of the new $1.0 billion debt issuance on future interest expenses and cash flow.
- Raw Material Costs: Track the trend of scrap prices and the effectiveness of the surcharge mechanism in maintaining margins.
- Capital Allocation: Review the progress and cost overruns of major capital projects, specifically the Louisiana iron-making facility and the Italian joint venture.