UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2017
Commission file number 1-4119
NUCOR CORPORATION
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
(704) 366-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 day Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
319,425,944 shares of common stock were outstanding at July 1, 2017.
Nucor Corporation
Form 10-Q
July 1, 2017
Condensed Consolidated Statements of Earnings - Three Months (13 Weeks) and Six Months (26 Weeks) Ended July 1, 2017 and July 2, 2016
Condensed Consolidated Statements of Comprehensive Income - Three Months (13 Weeks) and Six Months (26 Weeks) Ended July 1, 2017 and July 2, 2016
Condensed Consolidated Balance Sheets - July 1, 2017 and December 31, 2016
Condensed Consolidated Statements of Cash Flows - Six Months (26 Weeks) Ended July 1, 2017 and July 2, 2016
Notes to Condensed Consolidated Financial Statements
Item 3
Quantitative and Qualitative Disclosures About Market Risk
Item 4
Controls and Procedures
Item 1
Legal Proceedings
Item 1A
Risk Factors
Item 6
Exhibits
Signatures
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PART I. FINANCIAL INFORMATION
Nucor Corporation Condensed Consolidated Statements of Earnings (Unaudited)
(In thousands, except per share amounts)
Net sales
Costs, expenses and other:
Cost of products sold
Marketing, administrative and other expenses
Equity in earnings of unconsolidated affiliates
Interest expense, net
Earnings before income taxes and noncontrolling interests
Provision for income taxes
Net earnings
Earnings attributable to noncontrolling interests
Net earnings attributable to Nucor stockholders
Net earnings per share:
Basic
Diluted
Average shares outstanding:
Dividends declared per share
See notes to condensed consolidated financial statements.
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Nucor Corporation Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
Other comprehensive income:
Net unrealized (loss) income on hedging derivatives, net of income taxes of $0 and $1,900 for the second quarter of 2017 and 2016, respectively, and ($1,000) and $900 for the first six months of 2017 and 2016, respectively
Reclassification adjustment for loss on settlement of hedging derivatives included in net income, net of income taxes of $0 and $1,900 for the second quarter of 2017 and 2016, respectively, and $300 and $3,600 for the first six months of 2017 and 2016, respectively
Foreign currency translation gain, net of income taxes of $0 for the second quarter of 2017 and 2016, and $0 for the first six months of 2017 and 2016
Comprehensive income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Nucor stockholders
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Nucor Corporation Condensed Consolidated Balance Sheets (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories, net
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Other intangible assets, net
Other assets
Total assets
LIABILITIES
Current liabilities:
Short-term debt
Long-term debt due within one year
Accounts payable
Salaries, wages and related accruals
Accrued expenses and other current liabilities
Total current liabilities
Long-term debt due after one year
Deferred credits and other liabilities
Total liabilities
EQUITY
Nucor stockholders’ equity:
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of income taxes
Treasury stock
Total Nucor stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
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Nucor Corporation Condensed Consolidated Statements of Cash Flows (Unaudited)
Operating activities:
Adjustments:
Depreciation
Amortization
Stock-based compensation
Deferred income taxes
Distributions from affiliates
Changes in assets and liabilities (exclusive of acquisitions and dispositions):
Accounts receivable
Inventories
Federal income taxes
Other operating activities
Cash provided by operating activities
Investing activities:
Capital expenditures
Investment in and advances to affiliates
Disposition of plant and equipment
Acquisitions (net of cash acquired)
Purchases of investments
Proceeds from the sale of investments
Other investing activities
Cash used in investing activities
Financing activities:
Net change in short-term debt
Issuance of common stock
Payment of tax withholdings on certain stock-based compensation
Excess tax benefits from stock-based compensation
Distributions to noncontrolling interests
Cash dividends
Acquisition of treasury stock
Other financing activities
Cash used in financing activities
Effect of exchange rate changes on cash
Decrease in cash and cash equivalents
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of six months
Non-cash investing activity:
Change in accrued plant and equipment purchases
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Nucor Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)
Recently Adopted Accounting Pronouncements – In the first quarter of 2017, Nucor adopted new accounting guidance that amends the accounting for employee share-based payment transactions. This new standard requires income statement recognition of all tax effects, including all excess tax benefits and tax deficiencies, resulting from the settlement of share-based awards in the reporting period in which they occur. The standard also requires that all tax-related cash flows resulting from share-based payments, including the excess tax benefits and tax deficiencies related to the settlement of stock-based awards, be classified as cash flows from operating activities, and that cash paid by directly withholding shares for tax purposes be classified as a financing activity in the statement of cash flows. The standard also allows companies to make an accounting policy election to either estimate the number of awards that are expected to vest, consistent with current guidance, or account for forfeitures as they occur. This new guidance, with the exception of the presentation of cash paid by directly withholding shares for tax purposes on the statement of cash flows, is applied prospectively for the Company beginning on January 1, 2017. The presentation of cash paid by directly withholding shares for tax purposes on the statement of cash flows as a financing activity requires retrospective application beginning January 1, 2017. As a result of the retrospective application of this new guidance, $9.4 million was reclassified from other operating activities to payment of tax withholdings on certain stock-based compensation in the condensed consolidated statement of cash flows for the six months ended July 2, 2016. The adoption of this new guidance did not have a material effect on the Company’s consolidated financial statements. There is no change to our accounting policy with respect to the estimation of awards that are expected to vest.
In January 2017, new guidance was issued regarding the simplification of the test for goodwill impairment. The new guidance eliminates Step 2 from the goodwill impairment test and will require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The new guidance is effective for the Company for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. The Company early adopted this new guidance in the first quarter of 2017. The adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements - In May 2014, new accounting guidance was issued that will supersede nearly all existing accounting guidance related to revenue recognition. The new guidance provides that an entity recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The Financial Accounting Standards Board has also issued a number of updates to this new accounting guidance. The standard is effective for the Company for annual and interim reporting periods beginning after December 15, 2017 and is not expected to have a material effect on the Company’s consolidated financial statements.
In January 2016, new accounting guidance was issued regarding the recognition and measurement of financial assets and financial liabilities. Changes to the current accounting guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the Financial Accounting Standards Board clarified guidance related to the valuation allowance assessment when recognizing deferred tax
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assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities and financial liabilities, is largely unchanged. The standard is effective for the Company for annual and interim reporting periods beginning after December 15, 2017 and is not expected to have a material effect on the Company’s consolidated financial statements.
In February 2016, new accounting guidance was issued regarding the accounting for leases. The new guidance requires all lessees to recognize on the balance sheet right to use assets and lease liabilities for the rights and obligations created by lease arrangements with terms greater than 12 months. The standard is effective for the Company for annual and interim reporting periods beginning after December 15, 2018. The Company is evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements, but we expect that assets and liabilities will increase on the consolidated balance sheet.
In August 2016, new accounting guidance was issued regarding the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The new guidance addresses specific cash flow presentation issues in order to reduce diversity in existing practice. The new guidance is effective for the Company for annual and interim reporting periods beginning after December 15, 2017. The Company is evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.
In October 2016, new accounting guidance was issued regarding intra-entity transfers of assets other than inventory. The new guidance requires that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance is effective for the Company for annual and interim reporting periods beginning after December 15, 2017. The Company is evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.
Prior Year Change in Accounting Principle - In the fourth quarter of 2016, the Company changed its accounting method for valuing its inventories held by the parent company and Nucor-Yamato Steel Company to the first-in, first-out (FIFO) method of accounting from the last-in, first-out (LIFO) method. All inventories held by other subsidiaries of the parent company were previously and continue to be valued using the FIFO method.
The effects of the change in accounting principle from LIFO to FIFO have been retrospectively applied to all periods presented. As a result of the retrospective application of the change in accounting principle, certain financial statement line items in the Company’s condensed consolidated statements of earnings for the three- and six-month periods ended July 2, 2016 and condensed consolidated statement of cash flows (no impact on total cash provided by operating activities) for the six-monthperiod ended July 2, 2016 were adjusted as follows:
Condensed Consolidated Statement of Earnings for the Three Months (13 Weeks) Ended July 2, 2016:
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Condensed Consolidated Statement of Earnings for the Six Months (26 Weeks) Ended July 2, 2016:
Condensed Consolidated Statement of Cash Flows for the Six Months (26 Weeks) Ended July 2, 2016:
Changes in inventories
Changes in deferred income taxes
We have allocated the purchase price for Republic to its individual assets acquired and liabilities assumed. While the purchase price allocation is substantially complete, it is still preliminary and subject to change.
The following table summarizes the fair values of the assets acquired and liabilities assumed of Republic as of the date of acquisition (in thousands):
Cash
Inventory
Property, plant and equipment
Other intangible assets
Total assets acquired
Current liabilities
Total liabilities assumed
Net assets acquired
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The following table summarizes the purchase price allocation to the identifiable intangible assets of Republic as of the date of acquisition (in thousands, except years):
Customer relationships
Trademarks and trade names
The goodwill of $115.6 million is calculated as the excess of the purchase price over the fair values of the assets acquired and liabilities assumed and has been allocated to the steel mills segment (see Note 6). Goodwill recognized for tax purposes was $118.6 million, all of which is deductible for tax purposes.
Other acquisitions, exclusive of purchase price adjustments of acquisitions made and net of cash acquired, totaled $150.8 million in the first six months of 2017 (none in the first six months of 2016). Included in the 2017 amount is the January 9, 2017 acquisition of Southland Tube (Southland). Nucor used cash on hand to acquire Southland for a purchase price of approximately $130 million. Southland is a manufacturer of hollow structural section tubing, which is primarily used in nonresidential construction markets. Southland had shipments of approximately 240,000 tons in 2016 and has one manufacturing facility in Birmingham, Alabama.
Given the natural gas pricing environment, Nucor performed an impairment assessment of its proved producing natural gas well assets in December 2016. One of the main assumptions that most significantly affects the undiscounted cash flows determination is management’s estimate of future natural gas prices. The pricing used in this impairment assessment was developed by management based on projected natural gas market supply and demand dynamics, in conjunction with a review of projections by numerous sources of market data. This analysis was performed on each of Nucor’s three groups of wells, with each group defined by common geographic location. Each of Nucor’s three groups of wells passed the impairment test. One of the groups of wells had estimated undiscounted cash flows that were noticeably closer to its carrying value of $80.8 million as of December 31, 2016. The carrying value of that group of wells was $75.8 million at July 1, 2017. Changes in the natural gas industry or a prolonged low price environment beyond what had already been assumed in the analysis could cause management to revise the natural gas price assumptions, which could possibly result in an impairment of some or all of the groups of proved well assets.
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Balance at December 31, 2016
Acquisitions
Translation
Balance at July 1, 2017
Nucor completed its most recent annual goodwill impairment testing during the fourth quarter of 2016 and concluded that there was no impairment of goodwill for any of its reporting units. There have been no triggering events requiring an interim assessment for impairment since the most recent annual impairment testing date.
Intangible assets with estimated useful lives of 5 to 22 years are amortized on a straight-line or accelerated basis and are comprised of the following (in thousands):
Other
Intangible asset amortization expense in the second quarter of 2017 and 2016 was $23.0 million and $17.5 million, respectively, and was $45.4 million and $35.6 million in the first six months of 2017 and 2016, respectively. Annual amortization expense is estimated to be $90.8 million in 2017; $88.8 million in 2018; $85.9 million in 2019; $83.5 million in 2020; and $82.3 million in 2021.
NUMIT
Nucor has a 50% economic and voting interest in NuMit LLC (NuMit). NuMit owns 100% of the equity interest in Steel Technologies LLC, an operator of 25 sheet processing facilities located throughout the United States, Canada and Mexico. Nucor accounts for the investment in NuMit (on a one-month lag basis) under the equity method, as control and risk of loss are shared equally between the members. Nucor’s investment in NuMit at July 1, 2017 was $302.3 million ($325.1 million at December 31, 2016). Nucor received distributions of $46.9 million and $37.0 million from NuMit during the first six months of 2017 and 2016, respectively.
DUFERDOFIN NUCOR
Nucor owns a 50% economic and voting interest in Duferdofin Nucor S.r.l. (Duferdofin Nucor), an Italian steel manufacturer, and accounts for the investment (on a one-month lag basis) under the equity method, as control and risk of loss are shared equally between the members.
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Nucor’s investment in Duferdofin Nucor at July 1, 2017 was $274.7 million ($256.6 million at December 31, 2016). Nucor’s 50% share of the total net assets of Duferdofin Nucor was $110.3 million at July 1, 2017, resulting in a basis difference of $164.4 million due to the step-up to fair value of certain assets and liabilities attributable to Duferdofin Nucor as well as the identification of goodwill ($88.0 million) and finite-lived intangible assets. This basis difference, excluding the portion attributable to goodwill, is being amortized based on the remaining estimated useful lives of the various underlying net assets, as appropriate. Amortization expense associated with the fair valuestep-up was $2.2 million in the second quarter of 2017 and 2016, and was $4.3 million and $4.4 million in the first six months of 2017 and 2016, respectively.
As of July 1, 2017, Nucor had outstanding notes receivable of €35.0 million ($40.0 million) from Duferdofin Nucor (€35.0 million, or $36.9 million, as of December 31, 2016). The notes receivable bear interest at 0.94% and reset annually on September 30 to the 12-month Euro Interbank Offered Rate (Euribor) plus 1% per year. The principal amounts are due on January 31, 2019. As of July 1, 2017 and December 31, 2016, the notes receivable were classified in other assets in the condensed consolidated balance sheets.
Nucor has issued a guarantee, the fair value of which is immaterial, for its ownership percentage (50%) of Duferdofin Nucor’s borrowings under Facility A of a Structured Trade Finance Facilities Agreement (Facility A). The maximum amount Duferdofin Nucor could have borrowed under Facility A was €122.5 million ($139.9 million) as of July 1, 2017. As of July 1, 2017, there was €115.0 million ($131.4 million) outstanding under that facility (€107.0 million, or $112.7 million, as of December 31, 2016). Facility A was amended in 2015 to extend the maturity date to October 12, 2018. If Duferdofin Nucor fails to pay when due any amounts for which it is obligated under Facility A, Nucor could be required to pay 50% of such amounts pursuant to and in accordance with the terms of its guarantee. Any indebtedness of Duferdofin Nucor to Nucor is effectively subordinated to the indebtedness of Duferdofin Nucor under Facility A. Nucor has not recorded any liability associated with this guarantee.
ALL EQUITY INVESTMENTS
Nucor reviews its equity investments for impairment if and when circumstances indicate that a decline in value below their carrying amounts may have occurred. Nucor last assessed its equity investment in Duferdofin Nucor for impairment in 2015 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 and incurred a partial impairment of its investment. While the operating performance of Duferdofin Nucor showed meaningful improvement in 2016 and the first half of 2017, steel market conditions in Europe have continued to be challenging. 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.
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Nucor recognizes all derivative instruments in the condensed consolidated balance sheets at fair value. Any resulting changes in fair value are recorded as adjustments to other comprehensive income (loss), net of tax, or recognized in net earnings, as appropriate.
At July 1, 2017, natural gas swaps covering approximately 17.6 million MMBTUs (extending through December 2019) were outstanding.
The following tables summarize information regarding Nucor’s derivative instruments (in thousands):
Fair Value of Derivative Instruments
Balance Sheet Location
Asset derivatives designated as hedging instruments:
Commodity contracts
Asset derivatives not designated as hedging instruments:
Foreign exchange contracts
Total asset derivatives
Liability derivatives designated as hedging instruments:
Liability derivatives not designated as hedging instruments:
Total liability derivatives not designated as hedging instruments
Total liability derivatives
The Effect of Derivative Instruments on the Condensed Consolidated Statements of Earnings
Derivatives Designated as Hedging Instruments
Relationships
Derivatives in
Cash Flow
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Derivatives Not Designated as Hedging Instruments
Hedging Instruments
Total
Description
As of July 1, 2017
Assets:
Cash equivalents
Liabilities:
Commodity and foreign exchange contracts
As of December 31, 2016
Fair value measurements for Nucor’s cash equivalents and short-term investments are classified under Level 1 because such measurements are based on quoted market prices in active markets for identical assets. Our short-term investments are held in similar short-term investment instruments as described in Note 4 to the audited consolidated financial statements included in Nucor’s Annual Report on Form 10-K for the year ended December 31, 2016. Fair value measurements for Nucor’s derivatives are classified under Level 2 because such measurements are based on published market prices for similar assets or are estimated based on observable inputs such as interest rates, yield curves, credit risks, spot and future commodity prices, and spot and future exchange rates.
The fair value of short-term and long-term debt, including current maturities, was approximately $4.75 billion at July 1, 2017 ($4.70 billion at December 31, 2016). The debt fair value estimates are
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classified under Level 2 because such estimates are based on readily available market prices of our debt at July 1, 2017 and December 31, 2016, or similar debt with the same maturities, ratings and interest rates.
We are from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. With respect to all such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. We do not believe that any of these proceedings, individually or in the aggregate, would be expected to have a material adverse effect on our results of operations, financial position or cash flows. Nucor maintains liability insurance for certain risks that is subject to certain self-insurance limits.
A summary of activity under Nucor’s stock option plans for the first six months of 2017 is as follows (in thousands, except years and per share amounts):
Number of shares under stock options:
Outstanding at beginning of year
Granted
Exercised
Canceled
Outstanding at July 1, 2017
Stock options exercisable at July 1, 2017
For the 2017 stock option grant, the grant date fair value of $12.61 per share was calculated using the Black-Scholes option-pricing model with the following assumptions:
Exercise price
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life (years)
Stock options granted to employees who are eligible for retirement on the date of grant are expensed immediately since these awards vest upon retirement from the Company. Retirement, for purposes of vesting in these stock options, means termination of employment after satisfying age and years of service requirements. Similarly, stock options granted to employees who will become retirement-eligible prior to the end of the vesting term are expensed over the period through which the employee will become retirement-eligible. Compensation expense for stock options granted to
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employees who will not become retirement-eligible prior to the end of the vesting term is recognized on a straight-line basis over the vesting period. Compensation expense for stock options was $7.2 million and $7.1 million in the second quarter of 2017 and 2016, respectively, and $7.5 million and $7.3 million in the first six months of 2017 and 2016, respectively. As of July 1, 2017, unrecognized compensation expense related to stock options was $2.9 million, which is expected to be recognized over a weighted-average period of 2.4 years.
Restricted Stock Units – Nucor annually grants restricted stock units (RSUs) to key employees, officers and non-employee directors. The RSUs typically vest and are converted to common stock in three equal installments on each of the first three anniversaries of the grant date. A portion of the RSUs awarded to an officer vests upon the officer’s retirement. Retirement, for purposes of vesting in these RSUs only, means termination of employment with approval of the Compensation and Executive Development Committee of the Board of Directors after satisfying age and years of service requirements. RSUs granted to a non-employee director are fully vested on the grant date and are payable to thenon-employee director in the form of common stock after the termination of the director’s service on the Board of Directors.
RSUs granted to employees who are eligible for retirement on the date of grant are expensed immediately, and RSUs granted to employees who will become retirement-eligible prior to the end of the vesting term are expensed over the period through which the employee will become retirement-eligible since these awards vest upon retirement from the Company. Compensation expense for RSUs granted to employees who will not become retirement-eligible prior to the end of the vesting term is recognized on a straight-line basis over the vesting period.
Cash dividend equivalents are paid to holders of RSUs each quarter. Dividend equivalents paid on RSUs expected to vest are recognized as a reduction in retained earnings.
The fair value of an RSU is determined based on the closing stock price of Nucor’s common stock on the date of the grant. A summary of Nucor’s RSU activity for the first six months of 2017 is as follows (shares in thousands):
Restricted stock units:
Unvested at beginning of year
Vested
Unvested at July 1, 2017
Shares reserved for future grants (stock options and RSUs)
Compensation expense for RSUs was $21.1 million and $18.3 million in the second quarter of 2017 and 2016, respectively, and $26.1 million and $23.2 million in the first six months of 2017 and 2016, respectively. As of July 1, 2017, unrecognized compensation expense related to unvested RSUs was $46.3 million, which is expected to be recognized over a weighted-average period of 2.5 years.
Restricted Stock Awards– Nucor’s Senior Officers Long-Term Incentive Plan (LTIP) and Senior Officers Annual Incentive Plan (AIP) authorize the award of shares of common stock to officers subject to certain conditions and restrictions.
The LTIP provides for the award of shares of restricted common stock at the end of each LTIP performance measurement period at no cost to officers if certain financial performance goals are met during the period. One-third of the LTIP restricted stock award vests upon each of the first three anniversaries of the award date or, if earlier, upon the officer’s attainment of age 55 while employed by Nucor. Although participants are entitled to cash dividends and may vote such awarded shares, the sale or transfer of such shares is limited during the restricted period.
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The AIP provides for the payment of annual cash incentive awards. An AIP participant may elect, however, to defer payment of up to one-half of an AIP award. In such event, the deferred AIP award is converted into common stock units and credited with a deferral incentive, in the form of additional common stock units, equal to 25% of the number of common stock units attributable to the deferred AIP award. Common stock units attributable to deferred AIP awards are fully vested. Common stock units credited as a deferral incentive vest upon the AIP participant’s attainment of age 55 while employed by Nucor. Vested common stock units are paid to AIP participants in the form of shares of common stock following their termination of employment with Nucor.
A summary of Nucor’s restricted stock activity under the AIP and the LTIP for the first six months of 2017 is as follows (shares in thousands):
Restricted stock awards and units:
Shares reserved for future grants
Compensation expense for common stock and common stock units awarded under the AIP and the LTIP is recorded over the performance measurement and vesting periods based on the anticipated number and market value of shares of common stock and common stock units to be awarded. Compensation expense for anticipated awards based upon Nucor’s financial performance, exclusive of amounts payable in cash, was $3.2 million and $4.8 million in the second quarter of 2017 and 2016, respectively, and $7.5 million and $7.0 million in the first six months of 2017 and 2016, respectively. As of July 1, 2017, unrecognized compensation expense related to unvested restricted stock awards was $1.6 million, which is expected to be recognized over a weighted-average period of 2.1 years.
Interest expense
Interest income
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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 2016 remain open to examination by other major taxing jurisdictions to which Nucor is subject (primarily Canada and other state and local jurisdictions).
Non-current deferred tax assets included in other assets in the condensed consolidated balance sheets were $0.6 million at July 1, 2017 (none at December 31, 2016). Non-current deferred tax liabilities included in deferred credits and other liabilities in the condensed consolidated balance sheets were $549.7 million at July 1, 2017 ($558.6 million at December 31, 2016).
Stockholders’ equity at December 31, 2016
Total comprehensive income
Stock options
Issuance of stock under award plans, net of forfeitures
Amortization of unearned compensation
Dividends declared
Stockholders’ equity at July 1, 2017
Stockholders’ equity at December 31, 2015
Treasury stock acquired
Stockholders’ equity at July 2, 2016
In September 2015, the Company announced that the Board of Directors had approved a stock repurchase program under which the Company is authorized to repurchase up to $900 million of the Company’s common stock. This $900 million share repurchase program has no stated expiration and replaced any previously authorized repurchase programs. As of July 1, 2017, the Company had $828.3 million remaining available under the program. The Company expects any share repurchases to be made through purchases from time to time in the open market at prevailing market prices, through private transactions or block trades. The timing and amount of any repurchases will depend on market conditions, share price, applicable legal requirements and other factors.
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Accumulated other comprehensive loss at April 1, 2017
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss) into earnings (1)
Net current-period other comprehensive income (loss)
Accumulated other comprehensive loss at July 1, 2017
Accumulated other comprehensive loss at December 31, 2016
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Accumulated other comprehensive loss at April 2, 2016
Amounts reclassified from accumulated other comprehensive income (loss) into earnings (2)
Accumulated other comprehensive loss at July 2, 2016
Accumulated other comprehensive loss at December 31, 2015
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Net interest expense, other income, profit sharing expense and stock-based compensation are shown under Corporate/eliminations. Corporate assets primarily include cash and cash equivalents, short-term investments, allowances to eliminate intercompany profit in inventory, deferred income tax assets, federal and state income taxes receivable and investments in and advances to affiliates. The balance of earnings (loss) before income taxes and noncontrolling interests as of and for the periods ended July 2, 2016 was adjusted due to the change in accounting principle from LIFO to FIFO for certain inventories (see Note 1).
Nucor’s results by segment were as follows (in thousands):
Net sales to external customers:
Steel mills
Steel products
Raw materials
Intercompany sales:
Corporate/eliminations
Earnings (loss) before income taxes and noncontrolling interests:
Segment assets:
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Basic net earnings per share:
Basic net earnings
Earnings allocated to participating securities
Net earnings available to common stockholders
Average shares outstanding
Basic net earnings per share
Diluted net earnings per share:
Diluted net earnings
Diluted average shares outstanding:
Basic shares outstanding
Dilutive effect of stock options and other
Diluted net earnings per share
The following stock options were excluded from the computation of diluted net earnings per share because their effect would have been anti-dilutive (in thousands, except per share amounts):
Anti-dilutive stock options:
Weighted-average shares
Weighted-average exercise price
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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) competitive pressure on sales and pricing, including pressure 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 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 cancelation 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 and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this report, as well as the audited consolidated financial statements and the notes thereto, “Item 1A. Risk Factors” and “Item 7. 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, 2016.
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. Nucor’s operations include 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-rolled, cold-rolled and galvanized), hollow structural section (HSS) tubing, electrical conduit, 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 S.r.l. (Duferdofin Nucor) and NuMit LLC (NuMit), as well as Nucor’s 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 our natural gas drilling operations.
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The average utilization rates of all operating facilities in the steel mills, steel products and raw materials segments were approximately 87%, 62% and 67%, respectively, in the first six months of 2017, compared with 83%, 61% and 62%, respectively, in the first six months of 2016. The steel mills segment’s utilization rate for the first six months of 2016 was revised as part of our updated analysis of steel mill capacity performed in the fourth quarter of 2016. The utilization rates of the steel mills segment for the first six months of 2017 and the first six months of 2016 are calculated using the same steel mill capacity as calculated from that updated analysis.
On January 9, 2017, Nucor used cash on hand to acquire Southland Tube (Southland) for a purchase price of approximately $130 million. Southland is a manufacturer of HSS tubing, which is primarily used in nonresidential construction markets. Southland had shipments of approximately 240,000 tons in 2016 and has one manufacturing facility in Birmingham, Alabama.
Nucor further expanded its value-added product offerings to its customers within the pipe and tube market through the January 20, 2017 acquisition of Republic Conduit (Republic) for a purchase price of $331.6 million. Republic produces steel electrical conduit primarily used to protect and route electrical wiring in various nonresidential structures such as hospitals, office buildings and stadiums. With its two facilities located in Kentucky and Georgia, Republic’s annual shipment volume has averaged 146,000 tons during the past two years.
In March 2017, Nucor announced an investment of $85 million to upgrade the rolling mill at its steel bar mill in Marion, Ohio in order to maintain a cost competitive position by reducing operating costs.
In May 2017, Nucor announced that it is investing an estimated $176 million to build a hot band galvanizing and pickling line at its sheet mill in Ghent, Kentucky. The new galvanizing line will expand Nucor Steel Gallatin’s product capabilities and should have an annual capacity of 500,000 tons. Once the necessary approvals are obtained, it is expected to take two years to construct the galvanizing line and begin operations.
Nucor’s financial results for the first half of 2017 were the strongest first half results the Company has reported since the cyclical peak year of 2008. The results sustained during the past six months are a result of the ongoing execution of our strategy for long-term, profitable growth. In addition, conditions in the overall economy and many of the markets we serve are much improved from the depressed levels in the years that followed the Great Recession. Our business is cyclical and market conditions can change very rapidly, but Nucor’s steady, long-term focus provides for strong financial performance that takes advantage of improved market conditions.
Results of Operations
Net Sales – Net sales to external customers by segment for the second quarter and first six months of 2017 and 2016 were as follows (in thousands):
Net sales for the second quarter of 2017 increased 22% from the second quarter of 2016. Average sales price per ton increased 17% from $658 in the second quarter of 2016 to $767 in the second quarter of 2017. Total tons shipped to outside customers in the second quarter of 2017 were 6,748,000, a 5% increase from the second quarter of 2016.
Net sales for the first six months of 2017 increased 25% from the first six months of 2016. Average sales price per ton increased 19% from $632 in the first half of 2016 to $749 in the first half of 2017, while
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total tons shipped to outside customers in the first half of 2017 were 13,332,000, a 6% increase from the first half of 2016.
In the steel mills segment, sales tons were as follows (in thousands):
Outside steel shipments
Inside steel shipments
Total steel shipments
Net sales for the steel mills segment increased 26% in the second quarter of 2017 from the second quarter of 2016 primarily due to a 20% increase in the average sales price per ton from $593 to $714 and a 5% increase in tons shipped to outside customers. Our sheet, bar and plate products all experienced higher average selling prices in the second quarter and first half of 2017 as compared to the respective prior year periods, with the most significant increases at our sheet and plate mills. Steel mills net sales increased 30% in the first half of 2017 from the first half of 2016 primarily due to a 23% increase in average sales price per ton and a 5% increase in outside shipments. The increase in tons sold to outside customers for the second quarter and first half of 2017 compared to the respective prior year periods is primarily due to the addition of tubular products that occurred during the fourth quarter of 2016 and first quarter of 2017.
Imports continue to negatively impact the U.S. steel industry. Through the first half of 2017, finished steel imports have increased an estimated 15% compared to the same period last year and account for an estimated 27% share of the U.S. market. The industry continues to pursue trade cases to combat unfairly traded imports. Final determinations issued earlier this year against cut-to-length steel plate imports from twelve countries are having a positive impact as steel imports of these products have decreased in the first six months of this year compared to the same period last year. In June, the U.S. International Trade Commission made final injury determinations affirming the Department of Commerce’s antidumping duties in the steel concrete reinforcing bar (rebar) case against Japan and Turkey, as well as final countervailing duties on rebar imports from Turkey. A final decision regarding Taiwan is still pending. In May 2017, the government determined that there is a reasonable indication that the U.S. steel industry is materially injured or threatened with material injury by reason of carbon and certain alloy steel wire rod imports from ten countries. As a result, the government will continue its wire rod antidumping and countervailing duty investigations, and is expected to issue preliminary duty determinations in the coming months.
Tonnage data for the steel products segment was as follows (in thousands):
Joist sales
Deck sales
Cold finish sales
Fabricated concrete reinforcing steel sales
The 5% increase in the steel products segment’s sales for the second quarter of 2017 from the second quarter of 2016 was due to a 4% increase in average sales price per ton from $1,285 to $1,337 and a 1% increase in volume. The 4% increase in the steel products segment’s sales for the first half of 2017 from the first half of 2016 was due to a 3% increase in average sales price per ton from $1,278 to $1,313 and a 2% increase in volume.
Sales for the raw materials segment increased 32% and 46% in the second quarter and first half of 2017, respectively, from comparative prior year periods. The increases are primarily due to significantly higher average selling prices in DJJ’s brokerage operations, and, to a lesser extent, increased volumes in both DJJ’s brokerage and scrap processing operations. In the second quarter of 2017, approximately 88%
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of outside sales for the raw materials segment were from the brokerage operations of DJJ and approximately 10% of outside sales were from DJJ’s scrap processing operations (91% and 7%, respectively, in the second quarter of 2016). In the first half of 2017, approximately 87% of outside sales for the raw materials segment were from the brokerage operations of DJJ and approximately 10% of outside sales were from the scrap processing operations of DJJ (89% and 8%, respectively, in the first half of 2016).
Gross Margins – Nucor recorded gross margins of $709.6 million (14%) for the second quarter of 2017, which was an increase compared with $585.3 million (14%) in the second quarter of 2016:
Scrap prices are driven by the global supply and demand for scrap and other iron-based raw materials used to make steel. Scrap prices increased during the first half of 2017 with prices beginning to level out at the end of the second quarter. We expect scrap prices to be stable as we enter the second half of 2017.
For the first half of 2017, Nucor recorded gross margins of $1.47 billion (15%), which was an increase compared with $900.2 million (11%) in the first half of 2016:
Gross margins in the raw materials segment for the first half of 2017 benefitted from higher gross margins at DJJ’s brokerage and scrap processing operations as a result of improved scrap selling
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prices. The raw materials segment also benefitted from the profitable performance of our DRI facilities due to significantly increased pricing in the first half of 2017 compared to the first half of 2016.
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 Nucor’s financial performance, increased $11.5 million in the second quarter of 2017 compared to the second quarter of 2016, and increased $58.4 million in the first half of 2017 compared to the first half of 2016, due to the increased profitability of the Company. Profit sharing and other incentive compensation costs increased $6.4 million in the second quarter of 2017 compared to the first quarter of 2017 due to the annual restricted stock unit and stock option grants that occurred in the second quarter of 2017.
Equity in Earnings of Unconsolidated Affiliates – Equity in earnings of unconsolidated affiliates was $13.3 million and $6.8 million in the second quarter of 2017 and 2016, respectively, and $22.1 million and $16.1 million in the first half of 2017 and 2016, respectively. The increase in equity method investment earnings was due to increased earnings at NuMit during both the second quarter and the first half of 2017. Additionally, included in equity method investment earnings in the first half of 2016 is a $5.7 million benefit, $5.0 million of which wasout-of-period, at Duferdofin Nucor primarily related to a change in the Italian income tax rate. Theout-of-period adjustment is not material to the current period or any previously reported periods.
Interest Expense (Income) - Net interest expense for the second quarter and first half of 2017 and 2016 was as follows (in thousands):
Interest expense for the second quarter of 2017 increased compared to the second quarter of 2016 due to decreased capitalized interest. Interest expense for the first half of 2017 increased compared to the first half 2016 due to higher average interest rates on our variable rate debt and decreased capitalized interest. Interest income for the second quarter and first half of 2017 was consistent with the respective prior year periods due to higher average interest rates on investments offset by significantly decreased average investment levels.
Earnings Before Income Taxes and Noncontrolling Interests – Earnings before income taxes and noncontrolling interests by segment for the second quarter and first half of 2017 and 2016 were as follows (in thousands):
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Earnings before income taxes and noncontrolling interests for the steel mills segment for the second quarter and first half of 2017 increased compared to the respective prior year periods due to significantly improved metal margins. Higher scrap and scrap substitutes costs and increased energy costs were more than offset by higher average selling prices and some increase in volume in the first half of 2017 compared to the first half of 2016. The steel mills segment continues to gain ground in the automotive markets. Energy markets have improved compared to the depressed conditions experienced in 2016.
In the steel products segment, earnings before income taxes and noncontrolling interests in the second quarter and first half of 2017 decreased compared to the respective prior year periods. The decrease in profitability is due to margin compression resulting from highly competitive markets, particularly for our rebar fabrication operations, and higher steel input costs. The performance of our joist, deck, building systems and rebar fabrication operations declined in the second quarter and first half of 2017 compared to the respective prior year periods. Our cold finish operations improved in the second quarter and first half of 2017 compared to the respective prior year periods.
The profitability of our raw materials segment in the second quarter and first half of 2017 improved compared to the respective prior year periods primarily due to the improved, profitable performance of our DRI facilities, which benefited from improved pricing. Also benefiting the raw material segment’s improved profitability in the second quarter and first half of 2017 was the improved performance of DJJ’s scrap processing and brokerage operations, both of which experienced increased average selling prices and volumes.
Greater losses in corporate/eliminations in the second quarter and first half of 2017 as compared to the respective prior year periods was driven by increased incentive compensation costs, primarily profit sharing, caused by the increased profitability of the Company and higher intercompany eliminations. Intercompany eliminations increased due to increased intercompany sales activity and increased intercompany margins at our steel mills and DRI facilities.
Noncontrolling Interests –Noncontrolling interests represent the income attributable to the noncontrolling partners of Nucor’s joint ventures, primarily Nucor-Yamato Steel Company (NYS), of which Nucor owns 51%. The decrease in earnings attributable to noncontrolling interests in the second quarter of 2017 as compared to the second quarter of 2016 was primarily attributable to the decreased earnings of NYS. NYS had lower metal margins in the second quarter of 2017 as compared to the second quarter of 2016 due to the rapid increase in scrap cost, slightly offset by higher sales volumes. The decrease in earnings attributable to noncontrolling interests in the first half of 2017 as compared to the first half of 2016 is mainly the result of lower metal margins in the first half of 2017 as compared to the first half of 2016. 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 2017 and 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 2017 was 32.7% compared to 30.4% for the second quarter of 2016. We expect that the effective tax rate for the full year of 2017 will be approximately 32.3% compared with 30.7% for the full year of 2016. The increase in the effective tax rate for the second quarter of 2017 as compared to the second quarter of 2016 was primarily 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 12 months our gross unrecognized tax benefits, which totaled $45.9 million at July 1, 2017 exclusive of interest, could decrease by as much as $9.3 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
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certain related affiliates and is now examining the 2013 Canadian returns. The tax years 2009 through 2016 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 $323.0 million, or $1.00 per diluted share, in the second quarter of 2017 compared with consolidated net earnings of $243.6 million, or $0.76 per diluted share, in the second quarter of 2016. Net earnings attributable to Nucor stockholders as a percentage of net sales was 6% in the second quarter of 2017 and 2016.
Nucor reported consolidated net earnings of $679.9 million, or $2.11 per diluted share, in the first half of 2017 compared with consolidated net earnings of $331.2 million, or $1.03 per diluted share, in the first half of 2016. Net earnings attributable to Nucor stockholders as a percentage of net sales was 7% and 4% in the first half of 2017 and 2016, respectively. Annualized return on average stockholders’ equity was 17% and 9% in the first half of 2017 and 2016, respectively.
Outlook –Earnings in the third quarter of 2017 should be in a range similar to the quarterly results of the first half of 2017. Nonresidential construction indicators, such as the Dodge Momentum Index and Architecture Billings Index, continue to suggest that construction activity will remain healthy through the end of the year. We continue to gain ground in the automotive market and expect to continue that trend through the remainder of the year. We are encouraged by improved energy markets compared to the depressed levels of 2015 and 2016.
Nucor’s largest exposure to market risk is via our steel mills and steel products segments. Our largest single customer in the first half of 2017 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 $347.0 million in the first half of 2017 compared with $866.4 million in the first half of 2016. The primary reason for the decrease in cash provided by operating activities is that changes in operating assets and operating liabilities (exclusive of acquisitions) used cash of $797.9 million in the first half of 2017 compared with $60.6 million of cash generated in the first half of 2016. The funding of our working capital in the first half of 2017 increased over the prior year period due mainly to increases in accounts receivable and inventories, partially offset by increases in accounts payable. Accounts receivable increased due to a 16% increase in tons shipped to outside customers in the second quarter of 2017 from the fourth quarter of 2016 and a 13% increase in average sales price per ton. Inventories and accounts payable increased due to the 28% increase in the cost of scrap and scrap substitutes in inventory, as well as the 16% increase in tons of inventory on hand from year-end 2016 to the end of the second quarter of 2017 to support higher operating rates. Partially offsetting the decrease in cash generated from changes in operating assets and operating liabilities was a $325.5 million increase in net earnings over the first half of 2016.
The current ratio was 2.2 at the end of the second quarter of 2017 and 2.7 at year-end2016. The current ratio was negatively impacted by a 45% increase in accounts payable as compared to year-end 2016 due to the reasons cited above. The current ratio was also negatively impacted by a decrease in cash and cash equivalents and short-term investments and an increase in long-term debt due within one year. The $634.6 million decrease in cash and cash equivalents and short-term investments fromyear-end 2016 was primarily due to the funding of working capital, capital expenditures, acquisitions and dividends, partially offset by cash generated from operating activities. Accounts receivable and inventories increased 28% and 34%, respectively, since year-end 2016 due to the reasons cited above. In the second quarters of both 2017 and 2016, total accounts receivable turned approximately every five weeks and inventories turned approximately every nine weeks. The increase in long-term debt due within one year resulted from the reclassification of $500.0 million of debt due in June 2018 fromnon-current to current liabilities.
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Cash used in investing activities during the first half of 2017 was $575.1 million compared to $672.0 million from the prior year period. The primary driver for the decrease in cash used in investing activities was that cash used to purchase investments decreased from $550.0 million in the first half of 2016 to $50.0 million in the first six months of 2017. Cash used for capital expenditures also experienced a small decrease from the first half of the prior year. The decrease in cash used in investing activities was partially offset by a $478.4 million increase in cash used to fund acquisitions, mainly the purchase of Republic and Southland in January 2017.
Cash used in financing activities decreased by $59.0 million in the first half of 2017 compared with the prior year period. The majority of this change related to the net change in short-term debt associated with trade credit arrangements used to finance the business of Nucor Trading S.A.
Nucor’s 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 $1.56 billion as of July 1, 2017. Nucor’s financial strength allows for a consistent approach to capital allocation throughout the business cycle. Nucor’s 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 stockholders 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 2015, Nucor’s Board of Directors authorized the repurchase of up to $900 million of the Company’s common stock.
Nucor has an undrawn $1.5 billion revolving credit facility that does not mature until 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 steel producer headquartered in North America, with an A- long-term rating from Standard and Poor’s and a Baa1 long term rating from Moody’s. 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. Based upon the preceding 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 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 Nucor’s ability to pledge the Company’s assets and a limit on consolidations, mergers and sales of assets. As of July 1, 2017, our funded debt to total capital ratio was 33%, and we were in compliance with all non-financial covenants under our credit facility. No borrowings were outstanding under the credit facility as of July 1, 2017.
Capital expenditures for 2017 are expected to be approximately $500.0 million compared to $617.7 million in 2016. The decrease in projected 2017 capital expenditures is primarily due to the fact that several major expansion projects were completed or near completion by the end of 2016. Those projects include NYS’s quench and self-tempering project to become the sole North American producer of high-strength, low-alloy beams; the heat treat facility addition 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; and the installation of DRI handling equipment near our Gallatin, Kentucky sheet mill. Additionally, in 2016, Nucor purchased 49% of Encana Oil & Gas (USA) Inc.’s leasehold interest covering approximately 54,000 acres in the South Piceance Basin for $165.0 million. The project that we anticipate will have the largest capital expenditures in 2017 is the addition of a cold mill complex at Nucor Steel Arkansas.
In June 2017, Nucor’s Board of Directors declared a quarterly cash dividend on Nucor’s common stock of $0.3775 per share payable on August 11, 2017 to stockholders of record on June 30, 2017. This dividend is Nucor’s 177th consecutive quarterly cash dividend.
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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.
In the ordinary course of business, Nucor is exposed to a variety of market risks. We continually monitor these risks and develop appropriate strategies to manage them.
Interest Rate Risk – Nucor manages interest rate risk by using a combination of variable-rate and fixed-rate debt. Nucor also occasionally makes use of interest rate swaps to manage net exposure to interest rate changes. Management does not believe that Nucor’s exposure to interest rate market risk has significantly changed since December 31, 2016. There were no interest rate swaps outstanding at July 1, 2017.
Commodity Price Risk – In the ordinary course of business, Nucor is exposed to market risk for price fluctuations of raw materials and energy, principally scrap steel, other ferrous and nonferrous metals, alloys and natural gas. We attempt to negotiate the best prices for our raw materials and energy requirements and to obtain prices for our steel products that match market price movements in response to supply and demand. In periods of strong or stable demand for our products, we are more likely to be able to effectively reduce the normal time lag in passing through higher raw material costs so that we can maintain our gross margins. When demand for our products is weaker, this becomes more challenging. Our DRI facilities in Trinidad and Louisiana provide us with flexibility in managing our input costs. DRI is particularly important for operational flexibility when demand for prime scrap increases due to increased domestic steel production.
Natural gas produced by Nucor’s drilling operations is being sold to third parties to offset our exposure to changes in the price of natural gas consumed by our Louisiana DRI facility and our steel mills in the United States. For the six months ended July 1, 2017, the volume of natural gas sold from our drilling operations was approximately 19% of the volume of natural gas purchased for consumption in our domestic steelmaking and DRI facilities.
Nucor also periodically uses derivative financial instruments to hedge a portion of our exposure to price risk related to natural gas purchases used in the production process and to hedge a portion of our scrap, aluminum and copper purchases and sales. Gains and losses from derivatives designated as hedges are deferred in accumulated other comprehensive loss, net of income taxes on the condensed consolidated balance sheets and recognized into earnings in the same period as the underlying physical transaction. At July 1, 2017, accumulated other comprehensive loss included $0.3 million in unrealized net-of-tax losses for the fair value of these derivative instruments. Changes in the fair values of derivatives not designated as hedges are recognized in earnings each period. The following table presents the negative effect on pre-tax earnings of a hypothetical change in the fair value of derivative instruments outstanding at July 1, 2017, due to an assumed 10% and 25% change in the market price of each of the indicated commodities (in thousands):
Commodity Derivative
Natural gas
Aluminum
Copper
Any resulting changes in fair value would be recorded as adjustments to other comprehensive income (loss), net of income taxes, or recognized in net earnings, as appropriate. These hypothetical losses would be partially offset by the benefit of lower prices paid or higher prices received for the physical commodities.
Foreign Currency Risk - Nucor is exposed to foreign currency risk primarily through its operations in Canada, Europe and Trinidad. We periodically use derivative contracts to mitigate the risk of currency fluctuations. Open foreign currency derivative contracts at July 1, 2017 were insignificant.
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Evaluation of Disclosure Controls and Procedures – As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the evaluation date.
Changes in Internal Control Over Financial Reporting – There were no changes in our internal control over financial reporting during the quarter ended July 1, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Nucor is from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. With respect to all such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. We do not believe that any of these proceedings, individually or in the aggregate, would be expected to have a material adverse effect on our results of operations, financial position or cash flows. Nucor maintains liability insurance for certain risks that is subject to certain self-insurance limits.
There have been no material changes in Nucor’s risk factors from those included in “Item 1A. Risk Factors” in Nucor’s Annual Report on Form 10-K for the year ended December 31, 2016.
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ExhibitNo.
Description of Exhibit
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ James D. Frias
Chief Financial Officer, Treasurer
and Executive Vice President
Dated: August 9, 2017
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