Nucor Corporation — Q2 2014 Form 10-Q
Business context and period. Nucor manufactures steel and steel products and produces and brokers raw materials. The unaudited quarter ended July 5, 2014 comprised 13 weeks; the six-month period comprised 26 weeks. Comparisons are with the periods ended June 29, 2013, except balance-sheet comparisons, which are with December 31, 2013.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $5.291B | $4.666B | $10.400B | $9.216B |
| Gross margin dollars and rate | $415.9M; 8% | $313.1M; 7% | $793.1M; 8% | $616.3M; 7% |
| Net earnings attributable to Nucor stockholders | $147.0M | $85.1M | $258.1M | $169.9M |
| Diluted EPS | $0.46 | $0.27 | $0.80 | $0.53 |
| Cash provided by operating activities | Not separately presented for quarter | $443.3M | $485.0M |
- Quarterly sales rose 13%, reflecting a 4% increase in average selling price per ton and a 9% increase in shipments to outside customers. First-half sales also increased 13%, with average price up 4% and outside shipments up 9%.
- Quarterly pretax earnings were $241.9M versus $152.3M; first-half pretax earnings were $449.4M versus $305.7M. Q2 net earnings attributable to Nucor equaled about 2.8% of sales, versus 1.8% a year earlier; first-half figures were about 2.5% and 1.8%.
- Segment pretax earnings for Q2: steel mills $368.1M (prior year $237.1M); steel products $42.6M ($32.1M); raw materials loss of $9.6M (prior-year profit $12.2M). First-half figures were $685.9M, $44.3M, and a $1.3M loss, respectively.
- First-half operating cash flow declined $41.6M year over year, principally due to working-capital changes, including higher receivables and inventory. Capital expenditures were $446.8M, compared with $621.3M. Operating cash flow less capital expenditures was approximately negative $3.5M, versus negative $136.3M.
Financial position and liquidity
- At July 5, cash and cash equivalents were $1.068B and short-term investments were $100.0M, totaling $1.168B, down from $1.511B at year-end 2013. Current assets were $6.495B and current liabilities $2.017B; management reported a 3.2 current ratio, versus 3.3 at year-end.
- Total debt, including short-term debt and current maturities, was approximately $4.423B, versus $4.409B at year-end. Approximate net debt (total debt less cash and short-term investments) was $3.255B, up from $2.898B. Funded debt to total capitalization was 36%; the $1.5B revolving credit facility was undrawn and expires in August 2018.
- Management said available funds and borrowing capacity should meet existing-operation capital and working-capital needs for at least 24 months. The company projected 2014 capital expenditures of approximately $600M, compared with $1.2B in 2013.
Changes, outlook, and notable items
- Steel mills benefited from higher volume, prices, and metal margins; steel products improved with recovering nonresidential construction demand, though management characterized markets as still historically weak. Industry utilization rates rose year over year across all three segments.
- The Louisiana direct-reduced-iron plant continued to exceed volume expectations and produce quality material, but had operational losses and start-up costs of $19.4M in Q2 and $40.1M in the first half. A three-week Q2 outage was undertaken to improve yield and conversion costs. Management expected improved Q3 performance and profitable operation by year-end.
- Management expected stronger earnings improvement in Q3, citing improved downstream conditions, no planned Nucor-Yamato Steel outage, favorable sheet and plate pricing trends, and expected DRI improvement. Scrap-price volatility was expected to remain low entering Q3.
- Imports pressured steel pricing: reported year-to-date U.S. steel mill product imports were up 31.8% versus the comparable 2013 period. Energy costs also increased; first-half costs rose about $3 per ton year over year. The first-half LIFO charge was $14.5M, versus $18.0M.
- The effective tax rate was 31.0% in Q2. Management expected a full-year 2014 rate of approximately 32.3%, versus 26.0% in 2013, citing 2014 state tax legislation and a favorable deferred-tax adjustment in Q4 2013.
- A Texas jury awarded $52.0M in damages jointly and severally against Nucor and five co-defendants in an antitrust case; the court entered a $160.8M judgment after trebling and adding costs and attorneys’ fees. Nucor appealed and recorded no reserve, stating affirmation was not probable. The ultimate outcome remains uncertain.
- Other items to monitor include the ongoing antitrust class-action litigation, $20.7M of accrued environmental costs, possible further impairment of the Duferdofin Nucor investment amid weak European steel conditions, and potential additional charges or insurance proceeds related to the 2013 Louisiana storage-dome collapse.
Important facts for investors to verify
- Progress and costs at the Louisiana DRI facility, including whether it reaches profitable performance by year-end.
- Whether Q3 earnings improve as management expected, and whether pricing, shipment volumes, imports, and nonresidential construction demand support the outlook.
- The status and potential financial exposure of the $160.8M MM Steel judgment on appeal; the filing provides no recorded reserve.
- Working-capital demands, cash levels, capital spending, and the resulting change in net debt.
- Potential impairment or other adverse developments in the Duferdofin investment and the Louisiana dome-collapse insurance recovery.