Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements made in this quarterly report are forward-looking statements that involve
risks and uncertainties. The words believe, expect, project, will, should, could and similar expressions are intended to identify those forward-looking statements. These
forward-looking statements reflect the Companys best judgment based on current information, and although we base these statements on circumstances that we believe to be reasonable when made, there can be no assurance that future events will
not affect the accuracy of such forward-looking information. As such, the forward-looking statements are not guarantees of future performance, and actual results may vary materially from the projected results and expectations discussed in this
report. Factors that might cause the Companys actual results to differ materially from those anticipated in forward-looking statements include, but are not limited to: (1) competitive pressure on sales and pricing, including competition
from imports and substitute materials; (2) U.S. and foreign trade policies affecting steel imports or exports; (3) the sensitivity of the results of our operations to prevailing steel prices and the changes in the supply and cost of raw
materials, including pig iron, iron ore and scrap steel; (4) availability and cost of electricity and natural gas which could negatively affect our cost of steel production or could result in a delay or cancellation of existing or future
drilling within our natural gas working interest drilling programs; (5) critical equipment failures and business interruptions; (6) market demand for steel products, which, in the case of many of our products, is driven by the level of
nonresidential construction activity in the U.S.; (7) impairment in the recorded value of inventory, equity investments, fixed assets, goodwill or other long-lived assets; (8) uncertainties surrounding the global economy, including the
severe economic downturn in construction markets and excess world capacity for steel production; (9) fluctuations in currency conversion rates; (10) significant changes in laws or government regulations affecting environmental compliance,
including legislation and regulations that result in greater regulation of greenhouse gas emissions that could increase our energy costs and our capital expenditures and operating costs or cause one or more of our permits to be revoked or make it
more difficult to obtain permit modifications; (11) the cyclical nature of the steel industry; (12) capital investments and their impact on our performance; and (13) our safety performance.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements included elsewhere in
this report, as well as the audited consolidated financial statements, Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations contained in Nucors Annual Report on
Form 10-K for the year ended December 31, 2015.
Overview
Nucor and its affiliates manufacture steel and steel products. Nucor also produces DRI for use in its steel mills. Through DJJ, the Company
also processes ferrous and nonferrous metals and brokers ferrous and nonferrous metals, pig iron, hot briquetted iron (HBI) and DRI. Most of Nucors operating facilities and customers are located in North America, but Nucor does business
outside of North America as well. Nucors operations include international trading and sales companies that buy and sell steel and steel products manufactured by the Company and others. Nucor is North Americas largest recycler, using
scrap steel as the primary raw material in producing steel and steel products.
Nucor reports its results in three segments: steel
mills, steel products and raw materials. In the steel mills segment, Nucor produces sheet steel (hot-rolled, cold-rolled and galvanized), plate steel, structural steel (wide-flange beams, beam blanks, H-piling and sheet piling) and bar steel
(blooms, billets, concrete reinforcing bar, merchant bar and special bar quality). Nucor manufactures steel principally from scrap steel and scrap steel substitutes using electric arc furnaces, continuous casting and automated rolling mills. The
steel mills segment also includes Nucors equity method investments in Duferdofin Nucor and NuMit, as well as Nucors steel trading businesses and rebar distribution businesses. In the steel products segment, Nucor produces steel joists
and joist girders, steel deck, fabricated concrete reinforcing steel, cold finished steel, steel fasteners, metal building systems, steel grating and expanded metal, and wire and wire mesh. In the raw materials segment, Nucor produces DRI; brokers
ferrous and nonferrous metals, pig iron, HBI and DRI; supplies ferro-alloys; and processes ferrous and nonferrous scrap metal. The raw materials segment also includes certain equity method investments, including our natural gas working interest
drilling programs.
22
The average utilization rates of all operating facilities in the steel mills, steel products
and raw materials segments were approximately 79%, 61% and 62%, respectively, in the first six months of 2016, compared with 69%, 61% and 55%, respectively, in the first six months of 2015.
Results of Operations
Net Sales
- Net sales to external customers by segment for the second quarter and first six months of 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months (13 Weeks) Ended
|
|
|
Six Months (26 Weeks) Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
% Change
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
Steel mills
|
|
$
|
3,016,322
|
|
|
$
|
2,968,644
|
|
|
|
2
|
%
|
|
$
|
5,650,911
|
|
|
$
|
6,021,983
|
|
|
|
-6
|
%
|
Steel products
|
|
|
923,357
|
|
|
|
1,015,646
|
|
|
|
-9
|
%
|
|
|
1,751,733
|
|
|
|
1,937,030
|
|
|
|
-10
|
%
|
Raw materials
|
|
|
306,093
|
|
|
|
373,319
|
|
|
|
-18
|
%
|
|
|
558,704
|
|
|
|
798,036
|
|
|
|
-30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,245,772
|
|
|
$
|
4,357,609
|
|
|
|
-3
|
%
|
|
$
|
7,961,348
|
|
|
$
|
8,757,049
|
|
|
|
-9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales for the second quarter of 2016 decreased 3% from the second quarter of 2015. Average sales price
per ton decreased 9% from $720 in the second quarter of 2015 to $658 in the second quarter of 2016. Total tons shipped to outside customers in the second quarter of 2016 were 6,457,000, a 7% increase from the second quarter of 2015.
Net sales for the first six months of 2016 decreased 9% from the first six months of 2015. Average sales price per ton decreased 16% from
$749 in the first half of 2015 to $632 in the first half of 2016, while total tons shipped to outside customers increased 8% from the first six months of 2015.
In the steel mills segment, production and sales tons were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months (13 Weeks) Ended
|
|
|
Six Months (26 Weeks) Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
% Change
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
Steel production
|
|
|
5,890
|
|
|
|
5,196
|
|
|
|
13
|
%
|
|
|
11,280
|
|
|
|
9,954
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside steel shipments
|
|
|
5,082
|
|
|
|
4,578
|
|
|
|
11
|
%
|
|
|
9,981
|
|
|
|
8,743
|
|
|
|
14
|
%
|
Inside steel shipments
|
|
|
848
|
|
|
|
770
|
|
|
|
10
|
%
|
|
|
1,596
|
|
|
|
1,492
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total steel shipments
|
|
|
5,930
|
|
|
|
5,348
|
|
|
|
11
|
%
|
|
|
11,577
|
|
|
|
10,235
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales for the steel mills segment increased 2% in the second quarter of 2016 from the second quarter of
2015 due to an 11% increase in tons shipped to outside customers, offset by an 8% decrease in the average sales price per ton from $646 in the second quarter of 2015 to $593 in the second quarter of 2016. Our sheet, bar, structural and plate
products experienced lower average selling prices in the second quarter of 2016 as compared to the second quarter of 2015, with the most significant decreases at our structural and plate mills. The 6% decrease in sales for the first half of 2016
compared to the first half of 2015 in the steel mills segment was primarily attributable to the 18% decrease in average sales price per ton from the first half of 2015 to the first half of 2016, offset by a 14% increase outside shipments. The
increase in shipments from both the second quarter and first half of last year was positively impacted by recent declines in import volumes and gains in our share of the domestic steel market.
While challenges remain in the steel market, the 14% increase in net sales for the steel mills segment from the first quarter of 2016
reflects continued improvement in market conditions. Although average steel selling prices declined for all product groups in the second quarter and first half of 2016 compared to the second quarter and first half of 2015, pricing in the second
quarter of 2016 has improved 10% from the first quarter of 2016. Additionally, steel mill shipments to external customers in the second quarter of 2016 increased 4% from the first quarter of 2016. Increased sales volumes in the second quarter of
2016 over the first quarter of 2016 are due to lower inventory levels in the supply chain, mainly at service centers, and decreased levels of imports.
23
Flat-rolled trade cases are having a positive impact as steel imports are down in the first
six
months of this year compared to the same period last year and preliminary duties are in place and being collected. Affirmative final determinations in the antidumping duty and countervailing duty cases of
corrosion-resistant, cold-rolled steel and hot-rolled steel products
were recently announced by the Department of Commerce and the International Trade Commission.
Over the next several weeks, the government will complete
its flat-rolled investigations by issuing final injury determinations on the remaining cold-rolled steel and on the hot-rolled steel cases. Once complete, we
believe
the governments final determinations will address all
dumping and subsidies associated with these cases. Nucor and other domestic steel producers also recently filed trade cases against cut-to-length steel plate imports from 12 countries because of injury that has occurred from unfairly traded
imports in this market. We believe these cases should provide positive results as they work their way through the legal process over the next several months.
Tonnage data for the steel products segment is as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months (13 weeks) Ended
|
|
|
Six Months (26 weeks) Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
% Change
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
Joist sales
|
|
|
95
|
|
|
|
97
|
|
|
|
-2
|
%
|
|
|
193
|
|
|
|
186
|
|
|
|
4
|
%
|
Deck sales
|
|
|
108
|
|
|
|
92
|
|
|
|
17
|
%
|
|
|
209
|
|
|
|
174
|
|
|
|
20
|
%
|
Cold finish sales
|
|
|
110
|
|
|
|
117
|
|
|
|
-6
|
%
|
|
|
229
|
|
|
|
247
|
|
|
|
-7
|
%
|
Fabricated concrete reinforcing steel sales
|
|
|
304
|
|
|
|
324
|
|
|
|
-6
|
%
|
|
|
546
|
|
|
|
586
|
|
|
|
-7
|
%
|
The 9% decrease in the steel products segments sales for the second quarter of 2016 from the second
quarter of 2015 was due to a 2% decrease in volume and a 7% decrease in average sales price per ton from $1,380 to $1,285. The 10% decrease in the steel products segments sales for the first half of 2016 compared to the first half of 2015 was
due to a 2% decrease in volume and an 8% decrease in average sales price per ton, from $1,391 to $1,278. Sales for the steel products segment in the second quarter of 2016 increased from the first quarter of 2016 due to seasonality and the
continuing gradual improvement in nonresidential construction markets.
Sales for the raw materials segment decreased 18% in the
second quarter of 2016 compared with the second quarter of 2015 and decreased 30% in the first half of 2016 compared with the first half of 2015 primarily due to lower average selling prices in DJJs brokerage operations and decreased volumes
in both DJJs brokerage and scrap processing operations. In the second quarter of 2016, approximately 91% of outside sales in the raw materials segment were from the brokerage operations of DJJ and approximately 7% of the outside sales were
from DJJs scrap processing operations (88% and 8%, respectively, in the second quarter of 2015). In the first half of 2016, approximately 89% of outside sales for the raw materials segment were from the brokerage operations of DJJ and
approximately 8% of outside sales were from the scrap processing operations of DJJ (88% and 9%, respectively, in the first half of 2015). The raw materials segment sales for second quarter of 2016 increased 21% from the first quarter of 2016
primarily due to increased pricing.
Gross Margins -
For the second quarter of 2016, Nucor recorded gross margins of $566.3
million (13%), compared with $386.3 million (9%) in the second quarter of 2015. Gross margins in the second quarter of 2016 benefitted from a 7% increase in tons sold to outside customers and lower raw materials costs, partially offset by a 9%
decrease in average sales prices. The gross margins of $566.3 million (13%) in the second quarter of 2016 increased from the gross margins in the first quarter of 2016 of $286.9 million (8%) due to a 5% increase in tons shipped to outside customers
and a 9% increase in average sales prices. The following factors also impacted gross margins:
|
|
|
In the steel mills segment, the average scrap and scrap substitute cost per ton used decreased 14% from $271 in the second quarter of 2015 to $232 in the second quarter of 2016. Metal margins in the second quarter of
2016 decreased from the second quarter 2015 due to lower metal margin per ton at our bar, structural and plate mills. Although metal margin per ton decreased, total metal margin dollars increased in the second quarter of 2016 compared with the
second quarter of 2015 as increased volumes more than offset the metal margin per ton decreases. Additionally, metal margin per ton and total metal margin dollars at our sheet, bar and plate operations in the second quarter of 2016 increased
compared to the first quarter of 2016. Metal margin is the difference between the selling price of steel and the cost of scrap and scrap substitutes.
|
24
Scrap prices are driven by the global supply and demand for scrap and other iron-based raw
materials used to make steel. Scrap prices began 2016 at very low levels, but they rose significantly during the first half of 2016. We expect that scrap prices will begin to level off during the second half of 2016.
Average sheet product pricing and metal margins have increased significantly in the second quarter of 2016. However, since contract
pricing represents approximately 60% of our sheet steel shipments, and a portion of our contract sales are priced on a lagging quarterly basis, we do not believe we have realized the full benefit of the current improved pricing environment for sheet
steel. We therefore expect a further improvement in sheet steel pricing and gross margins in the third quarter of 2016.
|
|
|
Nucors gross margins can be significantly impacted by the application of the LIFO method of accounting. LIFO charges or credits for interim periods are based on managements estimates of both inventory
costs and quantities at year-end. The actual amounts will likely differ from these estimated amounts, and such differences may be significant. Annual charges or credits are largely based on the relative changes in cost and quantities year over year,
primarily within raw material inventory in the steel mills segment. Gross margin was negatively impacted by a LIFO charge of $19.0 million in the second quarter of 2016, compared with a credit of $95.5 million in the second quarter of 2015 and a
charge of $27.5 million in the first quarter of 2016.
|
|
|
|
Steel mill energy costs decreased approximately $5 per ton in the second quarter of 2016 compared with the second quarter of 2015 and decreased approximately $1 per ton from the first quarter of 2016. These decreases
were due to lower electricity and natural gas unit costs and improved productivity resulting from higher steel production volumes.
|
|
|
|
Gross margins in the steel products segment in the second quarter of 2016 improved over the second quarter of 2015 due to lower input costs partially offset by a small decline in volumes. Gross margins in the steel
products segment increased from the first quarter of 2016 due to increased volumes and average selling prices.
|
|
|
|
Gross margins related to DJJs brokerage and scrap processing operations for the second quarter of 2016 increased compared to the second quarter of 2015 due to a significant increase in sales price per ton
within the scrap processing operations, offset by a slight decrease in sales price per ton within the brokerage operations and decreased volumes for both the brokerage and scrap processing operations. DJJs gross margins in the second quarter
of 2016 significantly improved compared to the first quarter of 2016 due to increased selling prices within both the brokerage and scrap processing operations and increased brokerage operations volume. DJJs operations also benefitted from
efficiency improvements resulting from cost reduction initiatives.
|
|
|
|
Our DRI facilities experienced slightly lower gross margins in the second quarter of 2016 compared with the second quarter of 2015 due to market conditions in which depressed levels of pricing for alternative raw
materials in the second quarter of 2016 as compared to the second quarter of 2015 had an adverse effect on the facilities profitability. Gross margins for our DRI facilities in the second quarter of 2016 were significantly improved compared to
the first quarter of 2016 due to lower costs driven by yield improvements as well as the Nucor Steel Louisianas facility being in operation for the entire second quarter. We anticipate continued improvement in operating results for the DRI
facilities in the third quarter of 2016 due to the continued improvement of iron units pricing, lower iron ore costs and continued gains in yield performance.
|
For the first half of 2016, Nucor recorded gross margins of $853.2 million (11%), compared to $674.6 million (8%) in the first half of
2015. The gross margin was positively impacted by an 8% increase in shipments to outside customers which was partially offset by a 16% decrease in average sales price per ton in the first six months of 2016 as compared to the first six months of
2015. Gross margins were also impacted by the following factors:
|
|
|
In the steel mills segment, the average scrap and scrap substitute cost per ton used decreased 28% from $297 in the first half of 2015 to $213 in the first half of 2016. Metal margins decreased from the first half of
2015 compared to the first half of 2016, however, increased volumes more than offset the decrease in metal margin per ton resulting in an overall improvement in total metal margin dollars.
|
25
|
|
|
Gross margins were negatively impacted by a $46.5 million LIFO charge in the first half of 2016 as compared to a $112.0 million LIFO credit in the first half of 2015.
|
|
|
|
Energy costs for the first half of 2016 decreased $7 per ton from the first half of 2015 due to lower electricity and natural gas unit costs and improved productivity resulting from higher steel production volumes.
|
|
|
|
Gross margins in the steel products segment increased in the first half of 2016 over the first half of 2015 due to lower input costs partially offset by a small decline in volumes.
|
|
|
|
Within the raw materials segment, the impact of lower DRI margins due to factors mentioned above negatively impacted the first half of 2016 compared to the first half of 2015.
|
Marketing, Administrative and Other Expenses -
A major component of marketing, administrative and other expenses is profit sharing and
other incentive compensation costs. These costs, which are based upon and fluctuate with Nucors financial performance, increased $22.6 million in the second quarter of 2016 compared to the second quarter of 2015, and increased $27.0 million in
the first half of 2016 compared to the first half of 2015, due to the increased profitability of the Company. Profit sharing and other incentive compensation costs increased $41.7 million in the second quarter of 2016 compared to the first quarter
of 2016 due to the annual RSU and stock option grants that occurred in the second quarter of 2016, and increased profitability of the Company in the second quarter of 2016 compared to the first quarter of 2016.
Equity in Earnings of Unconsolidated Affiliates -
Equity in earnings of unconsolidated affiliates was $6.8 million and $0.7 million in
the second quarter of 2016 and 2015, respectively, and $16.1 million and $0.4 million in the first half of 2016 and 2015, respectively. The increase in equity method investment earnings is due to increased earnings at NuMit during both the second
quarter and the first half of 2016. Additionally, included in equity method investment earnings in the first half of 2016 is a $5.7 million benefit, $5.0 million of which is out-of-period, at Duferdofin Nucor primarily related to a change in the
Italian income tax rate. The out-of-period adjustment is not material to the current period or any previously reported periods.
In
the fourth quarter of 2015, Nucor assessed its equity investment in Duferdofin Nucor for impairment due to the protracted challenging steel market conditions caused by excess global overcapacity, which increased in 2015, and the difficult economic
environment in Europe. After completing its assessment, the Company determined that the carrying amount exceeded its estimated fair value. The impairment condition was considered to be other than temporary and therefore the Company recorded a
$153.0 million impairment charge against the Companys investment in Duferdofin Nucor in the fourth quarter of 2015. Steel market conditions in Europe have continued to be challenging through the second quarter of 2016 and, therefore, it is
reasonably possible that material deviation of future performance from the estimates used in our most recent valuation could result in further impairment of our investment in Duferdofin Nucor. We will continue to monitor for potential triggering
events that could affect the carrying value of our investment in Duferdofin Nucor as a result of future market conditions and any changes in our business strategy.
26
Interest Expense (Income) -
Net interest expense for the second quarter and first half of
2016 and 2015 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months (13 Weeks) Ended
|
|
|
Six Months (26 Weeks) Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
|
|
|
|
Interest expense
|
|
$
|
43,477
|
|
|
$
|
43,150
|
|
|
$
|
90,851
|
|
|
$
|
88,218
|
|
Interest income
|
|
|
(2,993
|
)
|
|
|
(964
|
)
|
|
|
(5,445
|
)
|
|
|
(1,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
40,484
|
|
|
$
|
42,186
|
|
|
$
|
85,406
|
|
|
$
|
86,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense for the second quarter and first half of 2016 increased slightly compared to the
respective prior year periods due to higher average interest rates on our variable rate debt. Interest income for the second quarter and first half of 2016 increased compared to the respective prior year periods due to increased average investment
levels and higher average interest rates on investments.
Earnings Before Income Taxes and Noncontrolling Interests -
Earnings
before income taxes and noncontrolling interests by segment for the second quarter and first half of 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months (13 Weeks) Ended
|
|
|
Six Months (26 Weeks) Ended
|
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
July 2, 2016
|
|
|
July 4, 2015
|
|
|
|
|
|
|
Steel mills
|
|
$
|
530,727
|
|
|
$
|
198,500
|
|
|
$
|
810,562
|
|
|
$
|
415,628
|
|
Steel products
|
|
|
82,946
|
|
|
|
70,636
|
|
|
|
125,313
|
|
|
|
103,094
|
|
Raw materials
|
|
|
(27,181
|
)
|
|
|
(38,104
|
)
|
|
|
(90,553
|
)
|
|
|
(79,601
|
)
|
Corporate/eliminations
|
|
|
(215,608
|
)
|
|
|
(14,810
|
)
|
|
|
(332,912
|
)
|
|
|
(103,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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$
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370,884
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$
|
216,222
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|
|
$
|
512,410
|
|
|
$
|
335,267
|
|
|
|
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|
|
|
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|
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|
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|
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Despite small decreases in metal margins per ton, earnings before income taxes and noncontrolling interests
in the steel mills segment in the second quarter and first half of 2016 improved significantly compared with the respective prior year periods. The increased earnings over the second quarter and first half of last year were due to significantly
higher volumes which improved our energy and other production costs per ton. The improved results of our Duferdofin Nucor and NuMit equity method joint ventures also contributed to the increase in earnings in the second quarter and first half of
2016 over the second quarter and first half of 2015. Overall operating rates at our steel mills increased to 83% in the second quarter of 2016 as compared to 73% in the second quarter of 2015 and increased to 79% in the first half of 2016 as
compared to 69% in the first half of 2015. Automotive markets remain strong and we continue to see gradual demand improvement in nonresidential construction markets.
Earnings before income taxes and noncontrolling interests for the steel mills segment for the second quarter of 2016 significantly
increased from the first quarter of 2016 due to higher sales volume, higher average sales prices and higher metal margin dollars resulting from factors discussed above. Second quarter of 2016 results also benefitted from an improvement in operating
rates of 74% in the first quarter to 83% in the second quarter.
In the steel products segment, earnings before income taxes and
noncontrolling interests in the second quarter and first half of 2016 increased compared to the respective prior year periods. The steel products segment continued to capitalize on the slow but steady growth in nonresidential construction markets.
The performance of our joist, deck, building systems, fastener and rebar operations improved in the first half of 2016 compared to the first half of 2015 and the performance of our deck, building systems, cold finish, fastener and rebar operations
improved in the second quarter of 2016 compared to the second quarter of 2015. As a result of typical seasonality experienced in nonresidential construction markets in the first quarter, earnings before income taxes and noncontrolling interests
increased in the second quarter of 2016 from the first quarter of 2016.
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The raw materials segment in the first half of 2016 as compared with the first half of 2015
was negatively impacted by the previously mentioned depressed pricing levels and shrinking margins at our DRI facilities. DRI margins improved in the second quarter of 2016 compared to the first quarter of 2016, but were still slightly down compared
to the second quarter of 2015. The improved performance of the raw materials segment for the second quarter of 2016 compared to the second quarter of 2015 was attributable to our scrap processing business, which benefitted from improved efficiency
resulting in lower costs.
The increase in losses in Corporate/eliminations in the second quarter and first six months of 2016 as
compared to the second quarter and first six months of 2015 was driven primarily by the change in LIFO from a credit in the prior year periods to a charge in the current year periods, increased profit sharing and incentive compensation costs in the
current year periods as compared to the prior year periods, and greater allowances to eliminate intercompany profit in inventory in the current year periods as compared to the prior year periods.
Noncontrolling Interests -
Noncontrolling interests represent the income attributable to the noncontrolling partners of Nucors
joint ventures, primarily NYS, of which Nucor owns 51%. The decrease in earnings attributable to noncontrolling interests in the second quarter of 2016 as compared to the second quarter of 2015 was primarily attributable to the decreased earnings of
NYS. NYS had a planned twelve-day outage associated with a capital project in the second quarter of 2016 and lower metal margins in the second quarter of 2016 as compared to the second quarter of 2015. The increase in earnings attributable to
noncontrolling interests in the first half of 2016 as compared to the first half of 2015 is mainly the result of higher sales volumes, partially offset by the twelve-day outage mentioned above and lower metal margins in the first half of 2016 as
compared to the first half of 2015. Under the NYS limited partnership agreement, the minimum amount of cash to be distributed each year to the partners is the amount needed by each partner to pay applicable U.S. federal and state income
taxes. In the first half of 2016, the amount of cash distributed to noncontrolling interest holders exceeded the earnings attributable to noncontrolling interests based on mutual agreement of the general partners; however, the cumulative amount
of cash distributed to partners was less than the cumulative net earnings of the partnership.
Provision for Income Taxes -
The effective tax rate for the second quarter of 2016 was 30.3% compared to 26.3% for the second quarter of 2015. We expect the effective tax rate for the full year of 2016 to be approximately 30.2% compared with 30.1% for the full year
of 2015. The increase in the effective tax rate for the second quarter of 2016 as compared to the second quarter of 2015 is primarily due to a $9.3 million benefit related to state tax credits during the second quarter of 2015. The increase in the
effective tax rate is also due to the change in relative proportions of net earnings attributable to noncontrolling interests to total pre-tax earnings between the periods.
We estimate that in the next twelve months our gross unrecognized tax benefits which totaled $47.6 million at July 2, 2016 exclusive of
interest, could decrease by as much as $9.0 million as a result of the expiration of the statute of limitations and closures of examinations, substantially all of which would impact the effective tax rate.
Nucor has substantially concluded U.S. federal income tax matters for years through 2012. The 2013 and 2014 tax years remain open to
examination by the Internal Revenue Service. The Canada Revenue Agency has substantially concluded its examination of the 2012 Canadian returns for Harris Steel Group Inc. and certain related affiliates and is now examining the 2013 Canadian
returns. The 2009 through 2015 tax years remain open to examination by other major taxing jurisdictions to which Nucor is subject (primarily Canada and other state and local jurisdictions).
Net Earnings Attributable to Nucor Stockholders and Return on Equity -
Nucor reported consolidated net earnings of $233.8 million, or
$0.73 per diluted share, in the second quarter of 2016 compared with consolidated net earnings of $124.8 million, or $0.39 per diluted share, in the second quarter of 2015. Net earnings attributable to Nucor stockholders as a percentage of net
sales was 6% and 3% in the second quarter of 2016 and 2015, respectively.
Nucor reported consolidated net earnings of $304.5
million, or $0.95 per diluted share, in the first half of 2016, compared to consolidated net earnings of $192.6 million, or $0.60 per diluted share, in the first
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half of 2015. Net earnings attributable to Nucor stockholders as a percentage of net sales was 4% and 2% in the first half of 2016 and 2015, respectively. Annualized return on average
stockholders equity was 8% and 5% in the first half of 2016 and 2015, respectively.
Outlook -
We expect further strong
improvement in earnings in the third quarter of 2016. Most of the quarter over quarter improvement will be in the steel mills segment, primarily in our sheet mills. The performance of the raw materials segment is expected to improve
significantly in the third quarter of 2016 as compared to the second quarter of 2016 due primarily to improved performance at our DRI facilities. We expect increased profitability for our downstream products segment in the third quarter of 2016
as compared to the second quarter of 2016 due to the gradual improvement in nonresidential construction markets.
Nucors
largest exposure to market risk is via our steel mills and steel products segments. Our largest single customer in the first half of 2016 represented approximately 5% of sales and has consistently paid within terms. In the raw materials
segment, we are exposed to price fluctuations related to the purchase of scrap and scrap substitutes and iron ore. Our exposure to market risk is mitigated by the fact that our steel mills use a significant portion of the products of this
segment.
Liquidity and capital resources
Cash provided by operating activities was $857.0 million in the first half of 2016 compared with $1.2 billion in the first half of 2015. The
primary reason for the change is decreased cash generated from changes in operating assets and operating liabilities of $98.2 million in the first half of 2016 compared with $589.4 million in the first half of 2015. The funding of our working
capital in the first half of 2016 increased over the prior year period due mainly to increases in accounts receivable and inventories, partially offset by increases in accounts payable and salaries, wages and related accruals. Accounts receivable
increased due to a 26% increase in outside sales tons, partially offset by a 3% decrease in average sales price per ton in the second quarter of 2016 from the fourth quarter of 2015. Inventories and accounts payable increased due to the rapid
increase in scrap and scrap substitute costs from year-end 2015 to the end of the second quarter of 2016. The increase in salaries, wages and related accruals as compared to the first half of 2015 is due to greater performance-based bonus accruals
due to the Companys increased profitability during the first six months of 2016 over the same period in the previous year. Partially offsetting the decrease in cash generated from changes in operating assets and operating liabilities was a
$119.2 million increase in net earnings in the first half of 2016 over the first half of 2015.
The current ratio was 3.4 at the
end of the second quarter of 2016 and 4.2 at year-end 2015. The current ratio was negatively impacted by an 81% increase in accounts payable as compared to year end 2015 due to the reasons cited above. The current ratio was positively impacted
by a 14% increase from 2015 in cash and cash equivalents and short-term investments due to the robust amount of cash generated by operations and increased purchases of short-term investments during the first half of 2016. Accounts receivable
and inventories increased 29% and 7%, respectively, since year end 2015 due to the reasons cited above. In the second quarter of 2016, total accounts receivable turned approximately every five weeks and inventories turned approximately every eight
weeks. These ratios compare with accounts receivable turnover every six weeks and inventory turnover every eight weeks in the second quarter of 2015. The accounts receivable turnover calculation was positively impacted by an 8% increase in outside
shipments in the first half of 2016 from the first half of 2015. The accounts receivable turnover calculation for the first half of 2016 is comparable to the turnover rate experienced for the full year 2015.
Cash used in investing activities during the first half of 2016 increased $480.6 million from the prior year period. The largest factor
contributing to the increase in cash used in investing activities was the $438.1 million increase in purchases of investments. Additionally, cash used for capital expenditures increased by $52.1 million over the first half of 2015 due to
NYSs quench and self-tempering expansion and a variety of other capital projects.
Cash used in financing activities
decreased by $93.4 million in the first half of 2016 compared with the prior year period. The majority of this change related to the net change in short-term debt, driven by the first quarter 2015 repayment of approximately $151 million of
commercial paper that was outstanding at year-end 2014. No commercial paper was outstanding at year-end 2015 or at July 2, 2016.
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Nucors conservative financial practices have served us well in the past and are serving
us well today. Our cash and cash equivalents and short-term investments position remained strong at $2.33 billion as of July 2, 2016. Nucors strong cash and cash equivalents and short-term investments position provides many opportunities for
prudent deployment of our capital. We have three approaches to allocating our capital. Nucors highest capital allocation priority is to invest for profitable long-term growth through our multi-pronged strategy of optimizing existing
operations, acquisitions, and greenfield expansions. Our second priority is to provide our shareholders with cash dividends that are consistent with our success in delivering long-term earnings growth. Our third priority is to opportunistically
repurchase our stock when our cash position is strong and attractively priced growth opportunities are limited. In September 2015, Nucors Board of Directors authorized the repurchase of up to $900 million of the Companys common stock.
For the first time since 2008, Nucor repurchased approximately $66.5 million of stock in December 2015 and $5.2 million of stock in February 2016.
During the second quarter of 2016, we amended and extended our undrawn $1.5 billion line of credit to mature in April 2021. We believe our
financial strength is a key strategic advantage among domestic steel producers, particularly during recessionary business cycles. We carry the highest credit ratings of any metals and mining company in North America, with an A- rating from Standard
and Poors and a Baa1 rating from Moodys. Based upon these factors, we expect to continue to have adequate access to the capital markets at a reasonable cost of funds for liquidity purposes when needed. Our credit ratings are dependent,
however, upon a number of factors, both qualitative and quantitative, and are subject to change at any time. The disclosure of our credit ratings is made in order to enhance investors understanding of our sources of liquidity and the impact of
our credit ratings on our cost of funds.
Our credit facility includes only one financial covenant, which is a limit of 60% on the
ratio of funded debt to total capitalization. In addition, the credit facility contains customary non-financial covenants, including a limit on Nucors ability to pledge the Companys assets and a limit on consolidations, mergers and
sales of assets. As of July 2, 2016, our funded debt to total capital ratio was 35%, and we were in compliance with all other non-financial covenants under our credit facility. No borrowings were outstanding under the credit facility as of
July 2, 2016.
In challenging market conditions such as we are experiencing today, our financial strength allows a number of
capital preservation options. Nucors robust capital investment and maintenance practices give us the flexibility to reduce spending by prioritizing our capital projects, potentially rescheduling certain projects, and selectively allocating
capital to investments with the greatest impact on our long-term earnings power. Capital expenditures for 2016 are expected to be approximately $500 million compared to $364.8 million in 2015. The increase in projected 2016 capital expenditures is
primarily due to the investment in attractive growth projects, particularly the expansion of our portfolio to higher value-added applications while maintaining our position as the market leader in many commodity products. Some of these projects
include: NYSs quench and self-tempering project to become the sole North American producer of high-strength, low-alloy beams; adding a heat treat facility at our Memphis, Tennessee SBQ mill to expand our participation in energy, automotive,
heavy equipment, and service center markets; an upgraded finishing end at our Auburn, New York bar mill; expanding Skyline Steel, LLCs structural pipe piling production capability; installing DRI handling equipment at our Gallatin, Kentucky
sheet mill; adding direct quenching capability to our Tuscaloosa, Alabama plate mill to expand its capabilities to include high value, low alloy grades of plate; and expanding the port facility at our Berkeley County, South Carolina sheet and beam
mill.
In June 2016, Nucors Board of Directors declared a quarterly cash dividend on Nucors common stock of $0.375 per
share payable on August 11, 2016 to stockholders of record on June 30, 2016. This dividend is Nucors 173rd consecutive quarterly cash dividend.
Funds provided from operations, cash and cash equivalents, short-term investments and new borrowings under our existing credit facilities
are expected to be adequate to meet future capital expenditure and working capital requirements for existing operations for at least the next 24 months.
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