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 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 and related notes
thereto 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;
23
supplies ferro-alloys; processes ferrous and nonferrous scrap metal; and owns natural gas producing wells and leasehold interests in certain mineral leases.
Nucor announced in September that it had agreed to acquire ITC, a leading manufacturer of HSS tubing, for an estimated purchase price of
$435 million. On October 31, 2016, Nucor completed the acquisition of ITC with cash on hand. ITC operates four strategically located, state-of-the-art facilities, two of which are in Illinois and the other two are in Alabama, that produce roughly
600,000 tons annually and employ approximately 335 teammates. This acquisition not only further expands Nucors product portfolio to include the HSS tubing market but the Company also believes it will be an important value-added channel to
market for Nucors hot-rolled sheet steel, as ITCs plants are located in close proximity to Nucors sheet mills in Alabama, Indiana and Kentucky.
Also in September, Nucor announced the planned addition of a Specialty Cold Mill Complex at its Nucor Steel Arkansas division. The
Specialty Cold Mill Complex will expand Nucors capability to produce advanced high-strength, motor lamination, and high-strength low-alloy steel products. The new mill and expanded annealing capacity will cost an estimated $230 million to
build and is expected to be in operation in approximately two years.
On October 1, 2016, Nucor concluded several transactions to
preserve its access to a long-term supply of low cost natural gas resources while maintaining capital flexibility. Nucor purchased 49% of Encana Oil & Gas (USA) Inc.s (Encana) leasehold interest covering approximately 54,000 acres in the
South Piceance Basin, terminated two Carry and Earning (C&E) drilling agreements, and sold its 50% equity interest in Hunter Ridge Energy Services LLC. In the new arrangement, the determination of whether or not to participate and invest in all
future drilling capital investment by one working interest owner is independent of the other working interest owners. As such, Nucor has full discretion on its participation in all future drilling capital investments. Nucor retains its interest
in all existing producing wells it currently owns.
The average utilization rates of all operating facilities in the steel mills,
steel products and raw materials segments were approximately 76%, 63% and 64%, respectively, in the first nine months of 2016, compared with 69%, 64% and 59%, respectively, in the first nine months of 2015.
Results of Operations
Net Sales
Net sales to external customers by segment for the third quarter and first nine months of 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months (13 Weeks) Ended
|
|
|
Nine Months (39 Weeks) Ended
|
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
% Change
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
Steel mills
|
|
$
|
2,960,642
|
|
|
$
|
2,816,441
|
|
|
|
5
|
%
|
|
$
|
8,611,553
|
|
|
$
|
8,838,424
|
|
|
|
-3
|
%
|
Steel products
|
|
|
1,011,602
|
|
|
|
1,081,047
|
|
|
|
-6
|
%
|
|
|
2,763,335
|
|
|
|
3,018,077
|
|
|
|
-8
|
%
|
Raw materials
|
|
|
317,992
|
|
|
|
328,026
|
|
|
|
-3
|
%
|
|
|
876,696
|
|
|
|
1,126,062
|
|
|
|
-22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,290,236
|
|
|
$
|
4,225,514
|
|
|
|
2
|
%
|
|
$
|
12,251,584
|
|
|
$
|
12,982,563
|
|
|
|
-6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales for the third quarter of 2016 increased 2% from the third quarter of 2015. Average sales price
per ton increased 2% from $718 in the third quarter of 2015 to $729 in the third quarter of 2016. Total tons shipped to outside customers in the third quarter of 2016 were 5,889,000, which was flat with the third quarter of 2015.
Net sales for the first nine months of 2016 decreased 6% from the first nine months of 2015. Average sales price per ton decreased 10% from
$739 in the first nine months of 2015 to $662 in the first nine months of 2016, while total tons shipped to outside customers increased 5% from the first nine months of 2015.
24
In the steel mills segment, production and sales tons were as follows (in thousands):
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months (13 Weeks) Ended
|
|
|
Nine Months (39 Weeks) Ended
|
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
% Change
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
Steel production
|
|
|
5,012
|
|
|
|
4,942
|
|
|
|
1
|
%
|
|
|
16,292
|
|
|
|
14,896
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside steel shipments
|
|
|
4,465
|
|
|
|
4,440
|
|
|
|
1
|
%
|
|
|
14,446
|
|
|
|
13,183
|
|
|
|
10
|
%
|
Inside steel shipments
|
|
|
748
|
|
|
|
726
|
|
|
|
3
|
%
|
|
|
2,344
|
|
|
|
2,218
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total steel shipments
|
|
|
5,213
|
|
|
|
5,166
|
|
|
|
1
|
%
|
|
|
16,790
|
|
|
|
15,401
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales for the steel mills segment in the third quarter of 2016 increased 5% from the third quarter of
2015 due to a 5% increase in the average sales price per ton from $635 to $664 and a 1% increase in tons shipped to outside customers. In the third quarter of 2016 as compared to the third quarter of 2015, our bar and structural products experienced
lower average selling prices, our sheet products experienced significantly higher average selling prices and our plate products experienced a slight increase in average selling prices. The 3% decrease in sales for the first nine months of 2016
compared to the first nine months of 2015 in the steel mills segment was attributable to the 11% decrease in average sales price per ton from $669 in the first nine months of 2015 to $596 in the first nine months of 2016, partially offset by a 10%
increase in outside steel shipments during that period. All product groups experienced increased volumes during the first nine months of 2016 over the prior year period.
While tons shipped to outside customers for the steel mills segment in the third quarter of 2016 decreased 12% from the second quarter of
2016, the 12% increase in the third quarter of 2016 in average sales price per ton from the second quarter of 2016 partially offset the volume decrease to result in a net sales decrease of only 2% in the third quarter of 2016 compared to the second
quarter of 2016. The most significant decrease in volumes and increase in average sales price per ton from the second quarter of 2016 to the third quarter of 2016 was in our sheet mills. Demand for cold-rolled and galvanized sheet products remained
robust, while demand for hot-rolled sheet products has weakened since the first half of the year.
The flat-rolled trade cases are
having a positive impact as steel imports are down approximately 20% year over year. Over this past summer, affirmative final determinations were announced in the three flat-rolled antidumping duty and countervailing duty cases involving
corrosion-resistant, cold-rolled and hot-rolled steel products. These final determinations are an important step in returning fair trade to the U.S. flat-rolled steel market. Last month, the Department of Commerce released its preliminary
determinations in the cut-to-length plate investigations involving China and Korea and we expect preliminary determinations in the remaining cases to be announced soon. We expect the plate cases to conclude by mid-2017. In September 2016, we also
filed new trade cases addressing rebar imports from Turkey, Taiwan and Japan.
Tonnage data for the steel products segment is as
follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months (13 Weeks) Ended
|
|
|
Nine Months (39 Weeks) Ended
|
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
% Change
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
Joist sales
|
|
|
129
|
|
|
|
124
|
|
|
|
4
|
%
|
|
|
322
|
|
|
|
310
|
|
|
|
4
|
%
|
Deck sales
|
|
|
123
|
|
|
|
117
|
|
|
|
5
|
%
|
|
|
332
|
|
|
|
291
|
|
|
|
14
|
%
|
Cold finish sales
|
|
|
99
|
|
|
|
107
|
|
|
|
-7
|
%
|
|
|
328
|
|
|
|
354
|
|
|
|
-7
|
%
|
Fabricated concrete reinforcing steel sales
|
|
|
311
|
|
|
|
339
|
|
|
|
-8
|
%
|
|
|
857
|
|
|
|
925
|
|
|
|
-7
|
%
|
25
The 6% decrease in the steel products segments sales for the third quarter of 2016 from
the third quarter of 2015 was due to a 3% decrease in volume and a 4% decrease in average sales price per ton from $1,351 to $1,299. The 8% decrease in the steel products segments sales for the first nine months of this year from last
years first nine months was due to a 2% decrease in volume and a 7% decrease in average sales price per ton from $1,376 to $1,286. Sales for the steel products segment in the third quarter of 2016 increased 10% from the second quarter of 2016.
Net sales for the raw materials segment decreased 3% in the third quarter of 2016 compared with the third quarter of 2015 and
decreased 22% in the first nine months of 2016 compared with the first nine months of 2015. The large decrease in raw material sales for the first nine months of 2016 from the prior year period was primarily due to lower volumes and average selling
prices in DJJs brokerage operations as well as lower volumes in the scrap processing operations. In the third quarter of 2016, approximately 90% of outside sales in the raw materials segment were from DJJs brokerage operations and
approximately 7% of outside sales were from DJJs scrap processing operations (87% and 9%, respectively, in the third quarter of 2015). In the first nine months of 2016, approximately 89% of outside sales for the raw materials segment were from
DJJs brokerage operations and approximately 8% of outside sales were from DJJs scrap processing operations (88% and 9%, respectively, in the first nine months of 2015). The raw materials segment sales for third quarter of 2016 increased
4% from the second quarter of 2016 primarily due to increased pricing in DJJs brokerage operations.
Gross Margins
For
the third quarter of 2016, Nucor recorded gross margins of $624.3 million (15%), compared with $523.8 million (12%) in the third quarter of 2015. Gross margins in the third quarter of 2016 benefitted from a 2% increase in average sales prices and
lower raw materials costs. The gross margins of $624.3 million (15%) in the third quarter of 2016 increased from the gross margins in the second quarter of 2016 of $566.3 million (13%) primarily due to an 11% increase in average sales prices, which
was partially offset by a 9% decrease in tons shipped to outside customers. The following factors also impacted gross margins:
|
|
|
In the steel mills segment, the average scrap and scrap substitute cost per ton used decreased 4% from $262 in the third quarter of 2015 to $252 in the third quarter of 2016. Metal margin per ton and total metal
margin dollars in the third quarter of 2016 increased from the third quarter of 2015 due to the increase in average selling prices and decrease in scrap and scrap substitute costs. Metal margin is the difference between the selling price of steel
and the cost of scrap and scrap substitutes.
|
Scrap prices are driven by the global supply and demand for scrap and
other iron-based raw materials used to make steel. As anticipated, scrap prices leveled off during the third quarter of 2016 after the significant rise during the first half of 2016. We expect scrap prices to increase modestly during the fourth
quarter of 2016.
Average sheet product pricing and metal margins increased significantly in the third quarter of 2016, partially
due to the realization of the improved pricing environment on our contract sales, which are priced on a lagging quarterly basis. We expect these prices to decline in the fourth quarter of 2016 and negatively impact margins in the steel mills
segment.
|
|
|
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 $59.3 million in the third quarter of 2016, compared with a credit of $137.0 million in the third quarter of 2015 and a
charge of $19.0 million in the second quarter of 2016.
|
26
|
|
|
Steel mill energy costs decreased approximately $3 per ton in the third quarter of 2016 compared with the third quarter of 2015 due to lower electricity and natural gas unit costs. Steel mill energy costs increased
approximately $4 per ton in the third quarter of 2016 compared with the second quarter of 2016 due to higher natural gas unit costs and decreased productivity resulting from lower steel production volumes.
|
|
|
|
Gross margins in the steel products segment in the third quarter of 2016 declined relative to the third quarter of 2015 due to decreased average selling prices per ton and decreased volumes. Our joist and deck
operations experienced the largest decrease in gross margins within the steel products segment due to higher steel input costs. Gross margins in the steel products segment also decreased from the second quarter of 2016 due to increased steel input
costs.
|
|
|
|
Our DRI facilities were profitable for the third quarter of 2016. The significant improvement in gross margins of the DRI facilities in the third quarter of 2016 compared with the third quarter of 2015 and the second
quarter of 2016 was due to improved market conditions for raw materials commodities. We anticipate our DRI facilities to return to a loss position due to the impact of lower transfer prices expected in the fourth quarter of 2016.
|
|
|
|
Gross margins related to DJJs brokerage and scrap processing operations for the third quarter of 2016 increased compared to the third quarter of 2015 due to increased volumes for the brokerage operations and a
significant increase in selling prices for the scrap processing operations. DJJs gross margins in the third quarter of 2016 declined compared to the second quarter of 2016 due to decreased volumes within both the brokerage and scrap processing
operations. DJJs operations has also benefitted from efficiency improvements resulting from cost reduction initiatives.
|
For the first nine months of 2016, Nucor recorded gross margins of $1.48 billion (12%), compared to $1.20 billion (9%) in the first nine
months of 2015. Gross margins were impacted by the following factors:
|
|
|
In the steel mills segment, the average scrap and scrap substitute cost per ton used decreased from $285 in the first nine months of 2015 to $225 in the first nine months of 2016. Metal margin per ton for the first
nine months of 2016 decreased compared to the first nine months of 2015. However, increased volumes more than offset the decrease in metal margin per ton, resulting in an overall improvement in total metal margin dollars.
|
|
|
|
Gross margins were negatively impacted by a $105.8 million LIFO charge in the first nine months of 2016 as compared to a $249.0 million LIFO credit in the first nine months of 2015.
|
|
|
|
Energy costs for the first nine months of 2016 decreased $5 per ton from the first nine months of 2015 due to improved productivity from increased production volumes and lower unit costs for electricity and natural
gas.
|
|
|
|
Gross margins in the steel products segment increased in the first nine months of 2016 over the first nine months of 2015. The primary driver of the improved results for the steel products segment over the prior year
was improved margins within our rebar fabrication operations.
|
|
|
|
Within the raw materials segment, DJJs scrap processing operations experienced improved margins due to increased sales prices and decreased input costs during the first nine months of 2016 compared to the first
nine months of 2015. DJJs operations have also benefitted from efficiency improvements resulting from cost reduction initiatives.
|
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 $8.3 million in the third quarter of 2016 compared to the third quarter of 2015, and increased $35.3 million in
the first nine months of 2016 compared to the first nine months of 2015, due to the increased profitability of the Company. Profit
27
sharing and other incentive compensation costs decreased $18.2 million in the third quarter of 2016 compared to the second quarter of 2016 due to the annual RSU and stock option grants that
occurred in the second quarter of 2016, which was partially offset by increased profitability of the Company in the third quarter of 2016 compared to the second quarter of 2016.
Included in marketing, administrative and other expenses in the third quarter of 2016 are charges related to legal settlements of $33.7
million (none in the third quarter of 2015). Also included in marketing, administrative and other expenses in the third quarter of 2016 is a net benefit of $11.1 million related to fair value adjustments to assets in the corporate/eliminations
segment, the majority of which related to the acquisition of the remaining ownership interest in a joint venture. Included in marketing, administrative and other expenses in the third quarter of 2015 was a net $7.7 million charge related to the
write-off of the two remaining storage domes at Nucor Steel Louisiana.
Equity in Earnings of Unconsolidated Affiliates -
Equity in earnings of unconsolidated affiliates was $14.2 million and $0.1 million in the third quarter of 2016 and 2015, respectively, and $30.2 million and $0.6 million in the first nine months of 2016 and 2015, respectively. The
increase in equity method investment earnings is due to increased earnings at NuMit and decreased losses at Duferdofin Nucor during both the third quarter and the first nine months of 2016. Additionally, included in equity method investment earnings
in the first nine months 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 third 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.
Interest Expense (Income) -
Net interest expense for the
third quarter and first nine months of 2016 and 2015 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months (13 Weeks) Ended
|
|
|
Nine Months (39 Weeks) Ended
|
|
|
|
Oct. 1, 2016
|
|
|
Oct. 3, 2015
|
|
|
Oct. 1, 2016
|
|
|
Oct. 3, 2015
|
|
|
|
|
|
|
Interest expense
|
|
$
|
46,519
|
|
|
$
|
46,406
|
|
|
$
|
137,370
|
|
|
$
|
134,624
|
|
Interest income
|
|
|
(3,510
|
)
|
|
|
(1,065
|
)
|
|
|
(8,955
|
)
|
|
|
(2,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
43,009
|
|
|
$
|
45,341
|
|
|
$
|
128,415
|
|
|
$
|
131,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense for the third quarter and first nine months 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 third quarter and first nine months of 2016 increased compared to the respective prior year periods due to increased average
investment levels and higher average interest rates on investments.
28
Earnings Before Income Taxes and Noncontrolling Interests -
Earnings before income taxes
and noncontrolling interests by segment for the third quarter and first nine months of 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months (13 Weeks) Ended
|
|
|
Nine Months (39 Weeks) Ended
|
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
October 1, 2016
|
|
|
October 3, 2015
|
|
|
|
|
|
|
Steel mills
|
|
$
|
593,149
|
|
|
$
|
260,776
|
|
|
$
|
1,403,711
|
|
|
$
|
676,404
|
|
Steel products
|
|
|
72,578
|
|
|
|
96,167
|
|
|
|
197,891
|
|
|
|
199,261
|
|
Raw materials
|
|
|
14,313
|
|
|
|
(43,177
|
)
|
|
|
(76,240
|
)
|
|
|
(122,778
|
)
|
Corporate/eliminations
|
|
|
(253,768
|
)
|
|
|
40,505
|
|
|
|
(586,680
|
)
|
|
|
(63,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
426,272
|
|
|
$
|
354,271
|
|
|
$
|
938,682
|
|
|
$
|
689,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and noncontrolling interests in the steel mills segment in the third quarter
and first nine months of 2016 improved significantly compared with the respective prior year periods. The increase in earnings of the steel mills segment in the third quarter of 2016 compared to the third quarter of 2015 was primarily due to
increased average selling prices and improved metal margin per ton and total metal margin dollars. The increase in the earnings in the first nine months of 2016 compared to the same period last year was primarily due to increased sales volumes and
decreased scrap and scrap substitute costs that resulted in higher metal margin dollars. The higher sales and production volumes in the first nine months of 2016 improved our energy and other production costs per ton as compared to the same period
last year. The improved results of our Duferdofin Nucor and NuMit equity method joint ventures also contributed to the increase in earnings in the third quarter and first nine months of 2016 over the third quarter and first nine months of 2015.
Overall operating rates at our steel mills increased to 71% in the third quarter of 2016 as compared to 69% in the third quarter of 2015 and increased to 76% in the first nine months of 2016 as compared to 69% in the first nine months of 2015.
Energy, heavy equipment and agricultural markets remain weak. The automotive markets remain strong.
In the steel products segment,
earnings before income taxes and noncontrolling interests in the third quarter and first nine months of 2016 decreased compared to the respective prior year periods. The primary driver of the decrease in earnings in the third quarter of 2016 as
compared to the third quarter of 2015 was margin compression resulting from decreased average selling prices and higher steel input costs. The decreased third quarter performance is the primary driver for the small decrease in earnings of the steel
products segment in the first nine months of 2016 as compared to the same period last year. The performance of our joist, deck, building systems, and cold finish operations declined in the third quarter and first nine months of 2016 compared to the
respective prior year periods, partially offset by the improved performance of our rebar fabrication operations in those same periods. We continue to see slow but steady improvement in nonresidential construction markets.
Earnings before income taxes and noncontrolling interests for the raw materials segment increased in the third quarter of 2016 as compared
to the third quarter of 2015 due to the increased profitability of DJJs brokerage and scrap processing operations and the profitable performance of our DRI facilities. The raw materials segments results in the first nine months of 2016
as compared with the first nine months of 2015 were positively impacted by the improved performance of DJJs scrap processing operations and our DRI facilities. The increase in earnings for the raw materials segment in the third quarter of 2016
as compared to the second quarter of 2016 is primarily due to the improved performance of our DRI facilities caused by improved market conditions for raw materials commodities in the third quarter of 2016.
The increase in losses in Corporate/eliminations in the third quarter and first nine months of 2016 as compared to the third quarter and
first nine 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, greater allowances to eliminate intercompany profit in inventory in the current year periods as compared to the prior year periods, and one-time expenses related to legal settlements during the third quarter of
2016.
29
Noncontrolling Interests -
Noncontrolling interests represent the income attributable to
the noncontrolling partners of Nucors joint ventures, primarily Nucor-Yamato Steel Company (NYS), of which Nucor owns 51%. The decrease in earnings attributable to noncontrolling interests in the third quarter of 2016 as compared to the third
quarter of 2015 was primarily attributable to the decreased earnings of NYS, which was due to lower selling prices and metal margins, partially offset by higher sales volumes. The decrease in earnings attributable to noncontrolling interests in the
first nine months of 2016 as compared to the first nine months of 2015 is mainly the result of a planned twelve-day outage associated with a capital project in the second quarter of 2016 and lower metal margins in the first nine months of 2016 as
compared to the first nine months 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 nine months 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 third quarter of 2016 was 30.9% compared to 24.4% for the third quarter of 2015. The expected rate for the full year of 2016 will be approximately 30.1% compared with 30.1% for the full year of 2015. The
increase in the effective tax rate for the third quarter of 2016 as compared to the third quarter of 2015 is primarily due to a $10.2 million favorable non-cash out-of-period adjustment to deferred tax balances during the third quarter of 2015. The
increase in 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 $47.5 million at October 1, 2016 exclusive of
interest, could decrease by as much as $8.8 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 concluded U.S. federal income tax matters for years through 2012. The tax years 2013 through 2015 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 tax years
2009 through 2015 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 $270.0 million, or
$0.84 per diluted share, in the third quarter of 2016 compared with consolidated net earnings of $227.1 million, or $0.71 per diluted share, in the third quarter of 2015. Net earnings attributable to Nucor stockholders as a percentage of net sales
were 6% and 5% in the third quarter of 2016 and 2015, respectively.
Nucor reported consolidated net earnings of $574.6 million, or
$1.79 per diluted share, in the first nine months of 2016, compared to consolidated net earnings of $419.7 million, or $1.30 per diluted share, in the first nine months of 2015. Net earnings attributable to Nucor stockholders as a percentage of net
sales were 5% and 3% in the first nine months of 2016 and 2015, respectively. Annualized return on average stockholders equity was 10% and 7% in the first nine months of 2016 and 2015, respectively.
Outlook -
Earnings in the fourth quarter of 2016 are expected to decrease notably compared with the third quarter of 2016 primarily
due to lower margins in the steel mills segment, with the most significant impact being on the sheet mills. We expect the raw materials segment to return to a loss position due to the impact of lower transfer prices at our DRI facilities in the
fourth quarter. The performance of our steel products segment is expected to decrease due to end of year seasonality that is typical in the fourth quarter.
Nucors largest exposure to market risk is via our steel mills and steel products segments. Our largest single customer in the
first nine months of 2016 represented approximately 4% of sales and has consistently paid within terms. In the raw materials segment, we are exposed to price fluctuations related to the purchase
30
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 $1.17 billion in the first nine months of 2016, a decrease of 33% compared with cash provided by
operating activities of $1.76 billion in the first nine months of 2015. The primary reason for the decrease is cash used by changes in operating assets and operating liabilities of ($101.1) million in the first nine months of 2016 compared with
cash generated from changes in operating assets and operating liabilities of $720.5 million in the first nine months of 2015. The funding of working capital increased from the prior year period due mainly to increases in accounts receivable and
inventories, partially offset by increases in accounts payable; salaries, wages and related accruals; and other operating activities. Accounts receivable increased due to a 15% increase in outside shipments in the third quarter of 2016 from the
fourth quarter of 2015 and an 8% increase in average sales price per ton. Inventories and accounts payable increased due to the rapid increase in scrap and scrap substitutes cost per ton in inventory from year end 2015 to the third quarter of 2016,
as well as a 10% increase in inventory tons on hand from year-end. The increase in salaries, wages and related accruals as compared to the first nine months of 2015 is mainly due to greater performance-based bonus accruals resulting from the
Companys increased profitability during the first nine 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 $145.9
million increase in net earnings and a $102.5 million change in deferred income taxes from the first nine months of 2016 over the first nine months of 2015.
The current ratio was 3.5 at the end of the third quarter of 2016 and 4.2 at year end 2015. The current ratio was negatively impacted by a
63% increase in accounts payable and a 35% increase in salaries, wages and related accruals as compared with year end 2015 for the reasons cited above. The current ratio was positively impacted by a 15% 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 nine months of 2016. Accounts receivable and inventories increased 34% and 9%,
respectively, since year end 2015 due to the reasons cited above. In the third quarter of 2016, 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 third quarter of 2015.
Cash used in
investing activities during the first nine months of 2016 increased $648.3 million from the prior year period. The largest factor contributing to the increase in cash used in investing activities was the $538.1 million increase in purchases of
investments. Additionally, cash used for acquisitions increased by $47.9 million, mainly due to the acquisition of the Nucor Steel Longview plate mill during the third quarter of 2016. Nucors cash used for capital expenditures increased
by $44.3 million over the first nine months of 2015 due to NYSs quench and self-tempering expansion, Nucor Steel Gallatins DRI handling equipment installation and a variety of other capital projects.
Cash used in financing activities decreased by $111.7 million in the first nine months 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 October 1, 2016.
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 $2.35 billion as of October 1, 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
31
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. Nucor holds the highest credit ratings of any steel producer
headquartered in North America, with an A- long-term rating from Standard and Poors and a Baa1 long-term 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 October 1, 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 October 1, 2016.
During the third quarter of 2016,
Nucor concluded several transactions with Encana to preserve its access to a long-term supply of low cost natural gas resources while maintaining capital flexibility. Those transactions included the purchase of 49% of Encanas leasehold
interest in approximately 54,000 acres in the South Piceance Basin and the termination of two C&E agreements that Nucor entered into with Encana in 2010 and 2012. Under the terms of those original C&E agreements, Nucor was contractually
obligated to drill a minimum number of wells per year if natural gas market pricing was above a pre-established threshold. The new arrangement in which Nucor owns an interest in acreage provides the Company with full discretion on its
participation in all future drilling capital investment, as the determination by one working interest owner of whether or not to participate and invest in all future drilling capital investment is independent of the other working interest
owners. As a result, the $4.85 billion of natural gas drilling commitments that were presented in the contractual obligations table in our 2015 Annual Report on Form 10-K have been eliminated. There were no other significant changes to the
contractual commitments table.
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 $635 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. Additionally, Nucor purchased 49% of Encanas leasehold interest in certain mineral leases as discussed above.
32
In September 2016, Nucors Board of Directors declared a quarterly cash dividend on
Nucors common stock of $0.375 per share payable on November 10, 2016 to stockholders of record on September 30, 2016. This dividend is Nucors 174th consecutive quarterly cash dividend.
Funds provided from operations, cash and cash equivalents, short-term investments and new borrowings under our existing credit facility are
expected to be adequate to meet future capital expenditure and working capital requirements for existing operations for at least the next 24 months.