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NUE > SEC Filings for NUE > Form 10-Q on 6-Nov-2013All Recent SEC Filings

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Form 10-Q for NUCOR CORP


6-Nov-2013

Quarterly Report


Item 2. Management's 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 Company's 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 Company's actual results to differ materially from those anticipated in forward-looking statements include, but are not limited to:
(1) the sensitivity of the results of our operations to prevailing steel prices and changes in the supply and cost of raw materials, including pig iron, iron ore and scrap steel; (2) 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; (3) 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.; (4) competitive pressure on sales and pricing, including pressure from imports and substitute materials;
(5) impairment in the recorded value of inventory, equity investments, fixed assets, goodwill or other long-lived assets; (6) uncertainties surrounding the global economy, including the severe economic downturn in construction markets and excess world capacity for steel production; (7) fluctuations in currency conversion rates; (8) U.S. and foreign trade policy affecting steel imports or exports; (9) significant changes in laws or government regulations affecting environmental compliance, including legislation or 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; (10) the cyclical nature of the steel industry; (11) capital investments and acquisitions and their impact on our performance; and (12) 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Nucor's Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

Nucor and its affiliates manufacture steel and steel products. Nucor also produces direct reduced iron ("DRI") for use in its steel mills. Through The David J. Joseph Company and its affiliates ("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 Nucor's operating facilities and customers are located in North America, but increasingly, Nucor is doing business outside of North America as well. Nucor's operations include several international trading and sales companies that buy and sell steel and steel products manufactured by the Company and others. Nucor is North America's 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 and cold-rolled), 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 Nucor's equity method investments in Duferdofin Nucor and NuMit LLC, as well as Nucor's steel trading businesses and rebar distribution businesses that were moved into the segment in the first quarter of 2013. 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 and our natural gas drilling working interests.

In late June 2012, Nucor completed the acquisition of the entire equity interest in Skyline Steel LLC ("Skyline") and its subsidiaries for the cash purchase price of approximately $675.4 million. Skyline is a steel foundation manufacturer and distributor serving the U.S., Canada, Mexico and Caribbean. Its steel products are used in marine construction, bridge and highway construction, heavy civil construction, storm protection, underground commercial parking, and environmental containment projects in the infrastructure and construction industries. Skyline is a significant consumer of H-piling and sheet piling from Nucor-Yamato Steel Company, and is a growing downstream consumer of Nucor's coiled plate and sheet products. Skyline's results since the acquisition date are included in the steel mills segment's results.


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In August 2012, Nucor sold the assets of Nucor Wire Products Pennsylvania, Inc. Nucor continues to produce wire and mesh products at facilities in Utah, Connecticut and our Laurel LEC Operations in Canada.

In October 2012, a subsidiary of Nucor entered into a long-term agreement with Encana Oil & Gas (USA) Inc. (Encana) under which Nucor acquired an undivided 50% working interest in U.S.-based proven natural gas reserves. Nucor's estimated minimum contractual investment is approximately $3.64 billion for the drilling and completion of natural gas wells over the life of the agreement that is projected to span more than 20 years. Natural gas produced by our working interest drilling programs is sold to offset exposure to the volatility of the price of natural gas we use in our steel production and DRI facilities.

Nucor acquired a 50% economic and voting interest in Hunter Ridge in November 2012. Hunter Ridge provides services for the gathering, separation and compression of energy products including natural gas produced by Nucor's working interest drilling program. As of September 28, 2013, Nucor's investment in Hunter Ridge was $132.9 million.

The start-up of operations on our 2,500,000-ton DRI facility in Louisiana could be delayed until the end of the year. Nucor Steel Louisiana was finishing construction of its new DRI plant and preparing to begin production when a storage dome collapsed late in the third quarter. There were no injuries sustained, and there was no environmental impact as a result of the dome collapse.

The average utilization rates of all operating facilities in the steel mills, steel products and raw materials segments were approximately 74%, 58% and 62%, respectively, in the first nine months of 2013 compared with 75%, 61% and 65%, respectively, in the first nine months of 2012.

Results of Operations

Net Sales Net sales to external customers by segment for the third quarter and
first nine months of 2013 and 2012 were as follows (in thousands):



                                                 Three Months (13 Weeks) Ended                                            Nine Months (26 Weeks) Ended
                                September 28, 2013          September 29, 2012         % Change          September 28, 2013         September 29, 2012         % Change
Steel mills                    $           3,435,884       $          3,319,518                4 %      $          9,901,471       $         10,682,810               -7 %
Steel products                               964,153                  1,006,366               -4 %                 2,690,604                  2,840,055               -5 %
Raw materials                                540,899                    475,322               14 %                 1,565,221                  1,455,134                8 %

Net sales                      $           4,940,936       $          4,801,206                3 %      $         14,157,296       $         14,977,999               -5 %

Net sales for the third quarter of 2013 increased 3% over the third quarter of 2012. Average sales price per ton decreased 4% from $832 in the third quarter of 2012 to $801 in the third quarter of 2013, while total tons sold to outside customers increased 7% from the same period last year.


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Net sales for the first nine months of 2013 decreased 5% from the first nine months of 2012. Average sales price per ton decreased 6% from $850 in the first nine months of 2012 to $799 in the first nine months of 2013, while total tons sold to outside customers increased 1% over the same period last year.

In the steel mills segment, production and sales tons were as follows (in thousands):

                                                     Three Months (13 Weeks) Ended                                    Nine Months (39 Weeks) Ended
                                        Sept. 28, 2013          Sept. 29, 2012         % Change          Sept. 28, 2013          Sept. 29, 2012         % Change
Steel production                                  5,202                   4,819                8 %                14,912                  15,139               -1 %

Outside steel shipments                           4,640                   4,313                8 %                13,248                  13,352               -1 %
Inside steel shipments                              719                     730               -2 %                 2,211                   2,128                4 %

Total steel shipments                             5,359                   5,043                6 %                15,459                  15,480                -

Net sales for the steel mills segment increased 4% over the third quarter of 2012 due to an 8% increase in tons sold to outside customers, partially offset by a 4% decrease in the average sales price per ton from $775 to $741. Average selling prices decreased in the third quarter of 2013 as compared to the third quarter of 2012 in all of our steel categories (sheet, bar, plate and structural) due to increased imports and excess capacity.

As compared to the second quarter of 2013, third quarter sheet steel outside shipments improved by 9% as a result of competitor supply disruptions, customer inventory restocking and some market demand improvement. Structural steel outside shipments improved by 18% over the second quarter of 2013 due to Nucor-Yamato Steel Company's ("NYS") higher production following its 17 day planned outage during the second quarter and customer inventory restocking. Demand in nonresidential construction markets is slowly improving but continues to lack sustained momentum. The strongest markets continue to be in manufactured goods, including energy and automotive.

The 7% decrease in sales from the first nine months of 2012 to the first nine months of 2013 in the steel mills segment was attributable to a 7% decrease in the average sales price per ton from $804 to $747, and a 1% decrease in tons sold to outside customers.

Tonnage data for the steel products segment is as follows (in thousands):

                                                     Three Months (13 weeks) Ended                                        Nine Months (39 weeks) Ended
                                       Sept. 28, 2013           Sept. 29, 2012           % Change           Sept. 28, 2013           Sept. 29, 2012          % Change
Joist production                                    86                       78                 10 %                    248                      217                14 %
Deck sales                                          90                       80                 13 %                    242                      221                10 %
Cold finish sales                                  113                      118                 -4 %                    359                      388                -7 %
Fabricated concrete reinforcing
steel sales                                        305                      343                -11 %                    813                      915               -11 %

The 4% decrease in the steel products segment's sales from the third quarter of 2012 was due to a 4% decrease in volume and a slight decrease in average sales price per ton from $1,371 to $1,369. The 5% decrease in the steel products segment's sales for the first nine months of the year was due to a 5% decrease in volume and a 1% decrease in average sales price per ton from $1,384 to $1,374. Sales in the steel products segment remain depressed due to the continued weakness in the nonresidential construction market. Sales of fabricated concrete reinforcing steel decreased in the third quarter and first nine months of 2013 as compared to the third quarter and first nine months of 2012 due to an 11% decrease in volume partially offset by an increase in pricing.


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The sales for the raw materials segment increased 14% over the third quarter of 2012 and 8% over the first nine months of 2012 primarily due to increased volumes at DJJ's recycling and brokerage businesses and at our natural gas drilling working interests. In the third quarter of 2013, approximately 82% of outside sales in the raw materials segment were from the brokerage operations of DJJ and approximately 13% of the outside sales were from the scrap processing facilities (85% and 13%, respectively, in the third quarter of 2012). In the first nine months of 2013, approximately 83% of outside sales for the raw materials segment were from the brokerage operations of DJJ and approximately 13% of outside sales were from the scrap processing facilities (85% and 13%, respectively, in the first nine months of 2012).

Gross Margins For the third quarter of 2013 , Nucor recorded gross margins of $408.5 million (8%), compared to $348.7 million (7%) in the third quarter of 2012. The gross margin was impacted by the 7% increase in tons shipped to outside customers, partially offset by the 4% decrease in average sales price per ton along with the following factors:

In the steel mills segment, the average scrap and scrap substitute cost per ton used decreased 2% from $380 in the third quarter of 2012 to $372 in the third quarter of 2013; however, metal margin per ton also decreased. Despite the decrease in metal margin per ton, total metal margin dollars increased in the third quarter of 2013 compared to the third quarter of 2012 due to the 8% increase in shipments to outside customers in the steel mills segment. Metal margins in the third quarter of 2013 were unchanged from the second quarter of 2013. 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. Scrap prices were relatively flat throughout the third quarter of 2013. As we begin the fourth quarter, we have seen scrap prices remain consistent with the third quarter. We currently expect low volatility in scrap prices in the fourth quarter.

Nucor's gross margins are significantly impacted by the application of the LIFO method of accounting. LIFO charges or credits for interim periods are based on management's current 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 margins were impacted by a LIFO credit of $18.0 million in the third quarter of 2013, compared with a credit of $84.0 million in the third quarter of 2012.

Nucor's gross margins were negatively impacted in the third quarter of 2012 by $28.2 million in inventory related purchase accounting adjustments associated with the acquisition of Skyline.

Energy costs decreased approximately $3 per ton from the third quarter of 2012 due mainly to lower natural gas unit costs and higher production volumes.

Gross margins at our rebar fabrication businesses increased significantly in the third quarter of 2013 as compared to the third quarter of 2012 due to higher average sales prices and the effects of management initiatives that have resulted in lower costs, better selling strategies and improved supplier relationships.


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For the first nine months of 2013, Nucor recorded gross margins of $1.02 billion (7%), compared to $1.13 billion (8%) in the first nine months of 2012. The gross margin was impacted by the following factors:

In the steel mills segment, the average scrap and scrap substitute cost per ton used decreased 10% from $418 in the first nine months of 2012 to $376 in the first nine months of 2013; however, metal margins also decreased as a result of the 6% decrease in average sales price per ton.

Nucor's gross margins in the first nine months of 2012 were negatively impacted by $36.8 million of inventory related purchase accounting adjustments associated with our acquisition of Skyline.

Gross margin was affected by a LIFO credit of $84.0 million in the first nine months of 2012. There was no LIFO charge or credit recorded in the first nine months of 2013.

Gross margins at our rebar fabrication businesses increased significantly in the first nine months of 2013 as compared to the first nine months of 2012 due to the reasons described above.

Gross margins related to DJJ's scrap processing operations decreased significantly during the first nine months of 2013 compared to the first nine months of 2012 due to the continued difficult conditions in the scrap processing industry. Gross margins at DJJ's scrap processing facilities were also impacted by excess shredding capacity and weather-related effects in the first quarter of 2013 that reduced the flow of scrap into our scrap processing operations.

Marketing, Administrative and Other Expenses The 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 Nucor's financial performance, increased $10.3 million in the third quarter of 2013 compared to the third quarter of 2012, and decreased $6.2 million in the first nine months of 2013 compared to the first nine months of 2012. Profit sharing and other incentive compensation costs decreased $3.5 million in the third quarter of 2013 compared to the second quarter of 2013 due to the annual restricted stock unit grant and the stock option grant that occurred in the second quarter of 2013.

The increase in marketing, administrative and other expenses in the first nine months of 2013 as compared to the same period in the prior year is due primarily to the inclusion of Skyline's results for the entire first nine months of 2013 as compared to only being included after its June 2012 acquisition date during the first nine months of 2012.

In the third quarter of 2013, a storage dome collapsed at Nucor Steel Louisiana in St. James Parish. As a result, Nucor recorded a partial write down of assets at the facility, including $7.0 million of inventory and $21.0 million of property, plant and equipment, offset by a $14.0 million insurance receivable that was based on management's estimate of probable insurance recoveries. The net $14.0 million charge on the Nucor Steel Louisiana assets is included in marketing, administrative and other expenses in the condensed consolidated statement of earnings. In the third quarter of 2012, Nucor sold the assets of Nucor Wire Products Pennsylvania, Inc. The resulting loss of $17.6 million is also recorded in marketing, administrative and other expenses.

Equity in (Earnings) Losses of Unconsolidated Affiliates Equity method investment earnings, including amortization expense and other purchase accounting adjustments were $2.3 million and a loss of $2.3 million in the third quarter of 2013 and 2012, respectively, and were earnings of $2.7 million and a loss of $9.1 million in the first nine months of 2013 and 2012, respectively. The increase in the equity method investment earnings is primarily due to a decrease in losses at Duferdofin Nucor, higher equity method earnings at NuMit, and earnings at Hunter Ridge during the first nine months of 2013 (none in the first nine months of 2012).

Impairment of Non-current Assets Nucor incurred a $30.0 million impairment charge in the second quarter of 2012 (none in the third quarter and first nine months of 2013). The entire 2012 charge related to the impairment of Nucor's investment in Duferdofin Nucor.

In the fourth quarter of 2012, Nucor assessed its equity investment in Duferdofin Nucor for impairment. After completing its assessment, the Company determined that the estimated fair value exceeded its carrying amount and that there was no need for further impairment. There has been no


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significant deterioration in near-term financial projections or any other key assumptions since the most recent impairment analysis was performed. However, steel market conditions in Europe have continued to be challenging through the first nine months of 2013, and, therefore, it is reasonably possible that material deviation of future performance compared to the estimates used in our most recent valuation could result in further impairment of our investment in Duferdofin Nucor that could have a material effect on our results.

Interest Expense (Income) Net interest expense for the third quarter and first nine months of 2013 and 2012 was as follows (in thousands):

                                      Three Months (13 Weeks) Ended                   Nine Months (39 Weeks) Ended
                                 Sept. 28, 2013           Sept. 29, 2012         Sept. 28, 2013          Sept. 29, 2012
Interest expense                 $        38,621          $        42,954        $       112,978         $       132,254
Interest income                           (1,154 )                 (2,649 )               (3,792 )                (9,226 )

Interest expense, net            $        37,467          $        40,305        $       109,186         $       123,028

In the third quarter of 2013 gross interest expense decreased 10% from the third quarter of 2012 due to a decrease in average debt outstanding and a decrease in the average interest rate on our debt. Gross interest income decreased due to a decrease in the average interest rate earned on investments combined with decreased average investments.

In the first nine months of 2013, gross interest expense decreased 15% from the first nine months of 2012 due mainly to a decrease in average debt outstanding and a decrease in the average interest rate. Gross interest income decreased due to a decrease in the average interest rate earned on investments combined with decreased average investments.

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 2013 and 2012 were as follows (in thousands):

                              Three Months (13 Weeks) Ended                Nine Months (39 Weeks) Ended
                         Sept. 28, 2013          Sept. 29, 2012       Sept. 28, 2013          Sept. 29, 2012
Steel mills              $       310,591         $       218,367      $       819,951        $        944,598
Steel products                    31,018                 (10,252 )             51,167                 (34,094 )
Raw materials                       (493 )                14,535               13,261                  44,223
Corporate/eliminations           (92,914 )               (30,875 )           (330,517 )              (321,697 )

                         $       248,202         $       191,775      $       553,862        $        633,030

Earnings before income taxes and noncontrolling interests in the steel mills segment for the third quarter of 2013 increased significantly from the third quarter of 2012 due primarily to the higher volume, higher total metal margin dollars and lower per unit energy costs caused by increased production volume. Earnings before income taxes and noncontrolling interests in the steel mills segment in the third quarter of 2013 improved significantly compared with the second quarter of 2013 mainly due to better pricing and volume for sheet steel and increased profitability in structural steel due to NYS's higher outside sales tons following a planned 17 day outage in the second quarter. Earnings before income taxes and noncontrolling interests for the first nine months of 2013 decreased from the first nine months of 2012 due to lower sales prices, lower shipments to external customers, lower metal margins and the $84.0 million LIFO credit in 2012 (none in 2013). Partially offsetting those factors were decreased profit sharing and other incentive compensation costs in the first nine months of 2013, and both the $36.8 million of purchase accounting adjustments related to the Skyline acquisition and the $30.0 million impairment charge related to Duferdofin Nucor that were recorded in the first nine months of 2012. Although conditions are slowly improving from historically low levels, the nonresidential construction market continues to lack sustained momentum. The strongest end markets continue to be in manufactured goods, including energy and automotive.


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Earnings before income taxes and noncontrolling interests in the steel products segment increased in the third quarter and first nine months of 2013 as compared to the third quarter and first nine months of 2012. The steel product's segment loss in the third quarter and first nine months of 2012 was impacted by the $17.6 million loss on the sale of assets of Nucor Wire Products Pennsylvania Inc. Although the average sales price and volume for the segment were lower than last year's third quarter and first nine months, profitability at our joist, deck, cold finish and rebar fabrication operations increased in the third quarter and first nine months of 2013 as compared to the respective periods in the prior year. The largest increase was in our rebar fabrication businesses, which experienced higher average sales prices and the effects of management . . .

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