Nucor Corporation — Q3 2009 Form 10-Q
Reporting period: Third quarter and nine months ended October 3, 2009 (13 and 39 weeks, respectively); comparatives are the periods ended September 27, 2008. Unaudited. Nucor manufactures steel and steel products and operates raw-materials businesses, including scrap brokerage and processing.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $3.120 billion | $7.448 billion | $8.252 billion | $19.512 billion |
| Gross margin | $119.2 million (4%) | $1.46 billion (20%) | $(66.7) million (-1%) | $3.57 billion (18%) |
| Net earnings (loss), consolidated | $(5.3) million | $810.8 million | $(323.6) million | $1.981 billion |
| Net earnings (loss) attributable to Nucor stockholders | $(29.5) million; $(0.10) per diluted share | $734.6 million; $2.31 per diluted share | $(352.5) million; $(1.12) per diluted share | $1.725 billion; $5.70 per diluted share |
| Cash provided by operating activities | Not provided as a quarterly figure | $957.9 million | $1.322 billion |
- Q3 average sales price per ton fell 45% year over year to $610; outside shipments fell 24%. For the first nine months, average price fell 32% to $638 and outside shipments fell 38%.
- Q3 sales increased 26% from Q2, driven by a 24% increase in outside shipments and a 1% increase in average selling price per ton.
- At October 3, cash and cash equivalents were $1.958 billion and short-term investments were $263.5 million. Current assets were $5.203 billion and current liabilities $1.313 billion; the reported current ratio was 4.0.
- Total debt was approximately $3.090 billion on the balance sheet, including $3.086 billion of long-term debt and $3.4 million of short-term debt. Funded debt to total capitalization was 29%. The $1.3 billion revolving facility was undrawn; no material debt maturities were expected before 2012.
- Total assets were $12.670 billion and total equity $7.584 billion. Capital expenditures for the first nine months were $316.0 million. Cash dividends paid were $332.1 million.
Material changes and drivers
- Sales and earnings declined sharply amid weak demand, lower steel prices, reduced shipments and substantially lower facility utilization. Average utilization for the first nine months was 53% at steel mills, 49% at steel products and 52% at raw materials, versus 91%, 75% and 89%, respectively, in 2008.
- Steel mills sales fell 60% in Q3 and 63% for the first nine months; steel products sales fell 45% and 36%, respectively; raw materials sales fell 68% and 61%.
- Gross margin was pressured by lower selling prices and volumes, narrower metal margins, and consumption of high-cost pig iron acquired before the late-2008 downturn. Nucor said use of substantially all those high-cost iron units was completed by October 3.
- LIFO accounting provided credits of $120 million in Q3 and $350 million for the first nine months of 2009, compared with charges of $140 million and $423 million in the corresponding 2008 periods. Interim LIFO estimates may differ significantly from year-end amounts.
- Pre-operating and start-up costs were $47.1 million in Q3 and $111.9 million for the first nine months, including costs for several new or developing facilities and projects. Equity-method investment losses were $69.4 million for the first nine months; Duferdofin-Nucor included a $45.8 million inventory write-down.
- Operating cash flow was supported by a $1.113 billion inventory reduction. Cash and cash equivalents declined $397.5 million from year-end 2008. Capital expenditures fell 61% year over year for the first nine months.
Outlook, risks and unusual items
- Management described real demand as showing little improvement and expected a long, slow recovery. Q4 results were expected to benefit from improved raw-material costs but could be hurt by seasonal shutdowns and lower operating volumes, particularly in sheet and bar products. Shorter mill lead times made volume forecasting difficult; demand for fabricated construction products remained very weak and recovery there was expected to lag.
- Management projected 2009 capital expenditures of approximately $400 million, versus $1 billion in 2008, and expected 2009 dividends to be about $215 million lower than in 2008 following suspension of the supplemental dividend. The quarterly dividend was $0.35 per share.
- Management said cash, short-term investments, operating funds and available borrowing capacity should cover expected capital and working-capital needs for at least 24 months. Credit ratings were A from S&P and A1 from Moody’s, both with stable outlooks.
- Key risks include the steel-industry cycle; steel prices and demand, especially non-residential construction; raw-material and energy costs; import competition and trade policy; foreign exchange; environmental regulation; and potential impairment of inventory, fixed assets or goodwill. Approximately 60% of steel and steel-products sales were to commercial, industrial and municipal construction markets.
- Nucor faced U.S. antitrust class-action litigation alleging anti-competitive conduct in steel production and sales; it disputed the claims and said exposure and outcome could not be predicted. Accrued environmental costs were $38.3 million, undiscounted. Management reported no other normal-course contingencies expected to have a material financial-statement effect.
- Goodwill testing in Q2 found no impairment at the Buildings Group or Cold Finish units, but management noted future impairment charges could result if performance or economic conditions worsen; annual testing was planned for Q4. A $12.3 million project cost previously capitalized was expensed in Q3 and was assessed as not material to either period.
Important facts for investors to verify
- Whether demand, selling prices, shipments and utilization improved after the quarter, and how those trends affected Q4 performance.
- Actual year-end LIFO adjustment versus the interim credits, and the extent to which margin improvement reflected inventory-cost effects rather than underlying operating conditions.
- Results of Q4 goodwill impairment testing, especially for Buildings Group and Cold Finish.
- Cash generation, inventory levels, capital spending, dividend policy and compliance with credit-facility covenants as market conditions evolved.
- Developments in the antitrust litigation, environmental obligations and Duferdofin-Nucor’s performance and investment exposure.