|• FORM 10-Q • FORM OF AWARD AGREEMENT FOR ANNUAL STOCK OPTION GRANTS • COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES • CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 • CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 • CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 • CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE|
Second Quarter 2012
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended June 30, 2012
Commission file number 1-4119
(Exact name of registrant as specified in its charter)
(Registrants 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 days. Yes x 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 shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
317,458,256 shares of common stock were outstanding at June 30, 2012.
June 30, 2012
(In thousands, except per share amounts)
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
During the first quarter of 2012, we began classifying internal fleet and some common carrier costs in cost of products sold in the condensed consolidated statements of earnings. We made this change so that all freight costs will be recorded within the same financial statement line item to allow users of our financial statements to better understand our expense structure. This resulted in the reclassification of $16.8 million of these costs from marketing, administrative, and other expenses to cost of products sold in the quarter ended July 2, 2011 ($31.4 million in the first half of 2011) in order to conform to the current year presentation. This reclassification did not have an impact on net earnings for the current or any prior periods.
Recently Adopted Accounting Pronouncements In December 2011, the FASB issued guidance enhancing disclosure requirements surrounding the nature of an entitys right to offset and related arrangements associated with its financial instruments and derivative instruments. This new guidance requires companies to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to master netting arrangements. The new guidance is effective in January 2013. It is not expected to have a material effect on the financial statements.
In January 2012, Nucor adopted accounting guidance regarding changes to the presentation of comprehensive income in the financial statements. The new accounting guidance requires entities to report components of comprehensive income in either (1) a single continuous statement of comprehensive income or (2) two separate but consecutive statements of net income and other comprehensive income. We have elected to report the components of comprehensive income in two separate but consecutive statements. The adoption of this guidance will impact the presentation of comprehensive income, but will not have an impact on Nucors consolidated financial position, results of operations or cash flows.
Also in January 2012, Nucor adopted accounting guidance that amends the existing requirements for fair value measurement and disclosure. The guidance expands the disclosure requirements around transfers between Level 1 and Level 2 of the fair value hierarchy and around the sensitivity to changes in inputs of fair value measurements categorized in Level 3 of the hierarchy. It also requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed. The guidance also clarifies and expands upon existing requirements for measurement of the fair value of financial assets and liabilities as well as instruments classified in stockholders equity. The adoption of this guidance did not have an impact on the condensed consolidated financial statements.
Inventories valued using the last-in, first-out (LIFO) method of accounting represent approximately 46% of total inventories as of June 30, 2012 (47% as of December 31, 2011). If the first-in, first-out (FIFO) method of accounting had been used, inventories would have been $763.2 million higher at June 30, 2012 and December 31, 2011. Use of the lower of cost or market methodology reduced inventories by $5.1 million at June 30, 2012 ($6.8 million at December 31, 2011).
Skyline is a steel foundation distributor serving the U.S., Canada, Mexico and the Caribbean. Skyline distributes products to service challenging applications including marine construction, bridge and highway construction, heavy civil construction, storm protection, underground commercial parking, and environment containment projects in the infrastructure and construction industries. Skyline is a significant consumer of H-piling and sheet piling from Nucor-Yamato Steel, and it will become a larger downstream consumer of Nucors coiled plate and sheet products.
We have preliminarily allocated the purchase price for Skyline to its individual assets acquired and liabilities assumed. Our valuations are subject to adjustment as additional information is obtained; however, these adjustments are not expected to be material. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed of Skyline as of the date of acquisition (in thousands):
The preliminary purchase price allocation to the identifiable intangible assets is as follows (in thousands, except years):
The goodwill of $143.2 million is primarily attributed to the synergies expected to arise after the acquisition and has been allocated to the steel mills segment (see Note 6). Approximately $126.4 million of the goodwill recognized is expected to be deductible for tax purposes.
Our second quarter 2012 results were negatively impacted by non-cash charges of $8.5 million associated with the Skyline acquisition. These charges include the impact of purchase accounting adjustments and the elimination of profit associated with our steel mills sales to Skyline post-acquisition.
Nucor completed its annual goodwill impairment testing during the fourth quarter of 2011 and concluded that there was no impairment of goodwill for any of its reporting units.
Intangible assets with estimated useful lives of five to 22 years are amortized on a straight-line or accelerated basis and are comprised of the following (in thousands):
Intangible asset amortization expense for the second quarter of 2012 and 2011 was $16.5 million and $17.3 million, respectively, and was $33.1 million and $34.7 million in the first six months of 2012 and 2011, respectively. Annual amortization expense is estimated to be $70.2 million in 2012; $71.7 million in 2013; $69.7 million in 2014; $67.8 million in 2015; and $66.2 million in 2016.
Nucor owns a 50% economic and voting interest in Duferdofin Nucor S.r.l., 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.
Nucors investment in Duferdofin Nucor at June 30, 2012 was $433.1 million ($493.9 million at December 31, 2011). Nucors 50% share of the total net assets of Duferdofin Nucor was $46.9 million at June 30, 2012, resulting in a basis difference of $386.2 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 ($304.0 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 and other purchase accounting adjustments associated with the fair value step-up were $2.8 million and $3.2 million in the second quarter of 2012 and 2011, respectively, and was $5.6 million and $6.1 million in the first six months of 2012 and 2011, respectively.
As of June 30, 2012, Nucor had outstanding notes receivable of 35 million ($44.1 million) from Duferdofin Nucor (30 million at December 31, 2011). The notes receivable bear interest at 2.34% to 3.12% and will reset annually on September 30 to the twelve-month Euro Interbank Offered Rate (Euribor) plus 1% per year. The principal amounts are due on January 31, 2016. Accordingly, the notes receivable were classified in other assets in the condensed consolidated balance sheets as of June 30, 2012.
Nucor has issued a guarantee for its ownership percentage (50%) of Duferdofin Nucors borrowings under Facility A of a Structured Trade Finance Facilities Agreement that matures on October 26, 2013. The maximum amount that Duferdofin Nucor can borrow under Facility A is 112.5 million, and as of June 30, 2012, it had borrowings of 106.6 million outstanding under that facility. 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 the Structured Trade Finance Facilities Agreement. Nucor has not recorded any liability associated with the guarantee.
Nucor has a 50% economic and voting interest in NuMit LLC. NuMit owns 100% of the equity interest in Steel Technologies LLC, an operator of 24 sheet processing facilities located throughout the U.S., 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. The acquisition did not result in a significant amount of goodwill or intangible assets.
The value of Nucors investment in NuMit at June 30, 2012 was $272.2 million ($259.3 million as of December 31, 2011), which is comprised of the purchase price of approximately $221.3 million plus subsequent additional capital contributions and equity method earnings less distributions since acquisition. Nucor also has recorded a $40.0 million note receivable from Steel Technologies LLC that bears interest at 1.37% as of June 30, 2012 and resets quarterly to the three-month London Interbank Offered Rate (LIBOR) plus 90 basis points. The principal amount is due on October 21, 2014. In addition, Nucor has extended a $130.0 million line of credit (of which $87.5 million was outstanding at June 30, 2012) to Steel Technologies. As of June 30, 2012, the amounts outstanding on the line of credit bear interest at 1.87% and mature on April 1, 2013. The note receivable was classified in other assets and the amount outstanding on the line of credit was classified in other current assets in the condensed consolidated balance sheets.
Nucor reviews its equity investments for impairment if and when circumstances indicate that a decline in value below their carrying amounts may have occurred. In the second quarter of 2012, Nucor
concluded that a triggering event had occurred requiring assessment for impairment of the equity investment in Duferdofin Nucor due to the continued declines in the global demand for steel, the escalated economic and political turmoil in Europe and continued operating performance well below budgeted levels through the first half of 2012. Duferdofin Nucors recently updated unfavorable forecast of future operating performance was also a contributing factor. The diminished demand combined with the continued lower than budgeted levels of operating performance has significantly impacted the financial results of Duferdofin Nucor through the first half of 2012. After completing its assessment, Nucor determined that the carrying amount exceeded its estimated fair value and recorded a $30.0 million impairment charge against the Companys investment in Duferdofin Nucor. The assumptions that most significantly affect the fair value determination include projected revenues and the discount rate. Steel market conditions in Europe have continued to be challenging through the second quarter of 2012, and, therefore, it is reasonably possible that based on actual performance in the near term the estimates used in our second quarter valuation could change and result in further impairment of our investment.
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.
The following tables summarize information regarding Nucors derivative instruments (in thousands):
Fair Value of Derivative Instruments
The Effect of Derivative Instruments on the Condensed Consolidated Statements of Earnings
Derivatives Designated as Hedging Instruments
Derivatives Not Designated as Hedging Instruments
During the first quarter of 2012, Nucor settled all of its open natural gas forward purchase contracts that were previously in place. These settlements will affect earnings over the periods specified in the original agreements, none of which expire beyond December 31, 2012. At June 30, 2012, $21.1 million of net deferred losses on cash flow hedges on these contracts included in accumulated other comprehensive income will be reclassified into earnings during the next six months.
Fair value measurements for Nucors cash equivalents, short-term investments and restricted cash and 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 Nucors annual report for the year ended December 31, 2011. Fair value measurements for Nucors 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 $4.85 billion at June 30, 2012 ($4.76 billion at December 31, 2011). The debt fair value estimates are classified under Level 2 because such estimates are based on readily available market prices of our debt at June 30, 2012 and December 31, 2011, or similar debt with the same maturities, rating and interest rates.
Nucor has been named, along with other major steel producers, as a co-defendant in several related antitrust class-action complaints filed by Standard Iron Works and other steel purchasers in the United States District Court for the Northern District of Illinois. The majority of these complaints were filed in September and October of 2008, with two additional complaints being filed in July and December of 2010. Two of these complaints have been voluntarily dismissed and are no longer pending. The plaintiffs allege that from January 2005 through 2008, eight steel manufacturers, including Nucor, engaged in anticompetitive activities with respect to the production and sale of steel. The plaintiffs seek monetary and other relief. Although we believe the plaintiffs claims are without merit and will vigorously defend against them, we cannot at this time predict the outcome of this litigation or estimate the range of Nucors potential exposure.
Other contingent liabilities with respect to product warranties, legal proceedings and other matters arise in the normal course of business. Nucor maintains liability insurance for certain risks that arise that are also subject to certain self-insurance limits. Although the outcome of the claims and proceedings against us cannot be predicted with certainty, we believe that there are no existing claims or proceedings that are likely to have a material adverse effect on the consolidated financial statements.
A summary of activity under Nucors stock option plans for the first six months of 2012 is as follows (in thousands, except year and per share amounts):
For the 2012 stock option grant, the grant date fair value of $11.40 per share was calculated using the Black-Scholes option-pricing model with the following assumptions:
Compensation expense for stock options was $8.9 million and $7.1 million in the second quarter of 2012 and 2011, respectively, and $9.2 million and $7.4 million in the first half of 2012 and 2011,
respectively. As of June 30, 2012, unrecognized compensation expense related to options was $1.1 million, which is expected to be recognized over 0.9 years. The amount of cash received from the exercise of stock options totaled $0.3 million and $6.2 million in the second quarter and first half of 2012, respectively.
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 senior officers vest upon the officers 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 non-employee directors are fully vested on the grant date and are payable to the non-employee director in the form of common stock after the termination of the directors 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 are not retirement-eligible is recognized on a straight-line basis over the vesting period.
Cash dividend equivalents are paid to participants each quarter. Dividend equivalents paid on units expected to vest are recognized as a reduction in retained earnings.
The fair value of the RSUs is determined based on the closing stock price of Nucors common stock on the day before the grant. A summary of Nucors RSU activity for the first six months of 2012 is as follows (shares in thousands):
Compensation expense for RSUs was $20.1 million and $12.2 million in the second quarter of 2012 and 2011, respectively, and $24.9 million and $19.7 million in the first half of 2012 and 2011, respectively. As of June 30, 2012, unrecognized compensation expense related to unvested RSUs was $37.2 million, which is expected to be recognized over a weighted-average period of 2.3 years.
Restricted Stock Awards Nucors Senior Officers Long-Term Incentive Plan (the LTIP) and Annual Incentive Plan (the 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 officers attainment of age fifty-five 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.
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 annual incentive 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 participants attainment of age fifty-five 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 Nucors restricted stock activity under the AIP and LTIP for the first six months of 2012 is as follows (shares in thousands):
Compensation expense for common stock and common stock units awarded under the AIP and 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 Nucors financial performance, exclusive of amounts payable in cash, was $1.4 million and $1.9 million in the second quarter of 2012 and 2011, respectively, and $3.1 million and $4.3 million in the first half of 2012 and 2011, respectively. At June 30, 2012, unrecognized compensation expense related to unvested restricted stock awards was $0.9 million, which is expected to be recognized over a weighted-average period of 1.8 years.
Net interest expense, other income, profit sharing expense, stock-based compensation and changes in the LIFO reserve are shown under Corporate/eliminations. Corporate assets primarily include cash and cash equivalents, short-term investments, restricted cash and investments, allowances to eliminate intercompany profit in inventory, fair value of natural gas hedges, deferred income tax assets, federal income taxes receivable, the LIFO reserve and investments in and advances to affiliates. Certain amounts for prior years have been reclassified to conform to the 2012 presentation.
Nucors results by segment were as follows (in thousands):
Stock options to purchase 0.8 million shares of common stock were excluded from the computation of diluted earnings per common share for the three month period ended June 30, 2012 because their effect would have been anti-dilutive. For the six month period ended June 30, 2012, stock options to purchase 0.4 million shares of common stock on a weighted average basis were also excluded from the computation. No shares were excluded for the comparable 2011 periods.
Certain statements made in this quarterly report are forward-looking statements that involve risks and uncertainties. The words believe, expect, project, will, should, could and similar expressions are intended to identify those forward-looking statements. These forward-looking statements reflect the Companys best judgment based on current information, and although we base these statements on circumstances that we believe to be reasonable when made, there can be no assurance that future events will not affect the accuracy of such forward-looking information. As such, the forward-looking statements are not guarantees of future performance, and actual results may vary materially from the projected results and expectations discussed in this report. Factors that might cause the Companys actual results to differ materially from those anticipated in forward-looking statements include, but are not limited to: (1) 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; (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; (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 Managements Discussion and Analysis of Financial Condition and Results of Operations contained in Nucors Annual Report on Form 10-K for the year ended December 31, 2011.
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 Nucors operating facilities and customers are located in North America, but increasingly, Nucor is doing business outside of North America as well. Nucors 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 Americas largest recycler, using scrap steel as the primary raw material in producing steel and steel products.
Nucor reports its results in three segments: steel mills, steel products and raw materials. In the steel mills segment, Nucor produces sheet steel (hot 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 Nucors equity method investments in Duferdofin Nucor and NuMit LLC. 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.
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 $683.5 million including our most current working capital adjustment estimates. Skyline is now a wholly owned subsidiary of Nucor Corporation and will maintain its main office in Parsippany, New Jersey. It is a steel foundation distributor serving the U.S., Canada, Mexico and the Caribbean. Skyline distributes steel to service challenging applications including marine construction, bridge and highway construction, heavy civil construction, storm protection, underground commercial parking, and environment containment projects in the infrastructure and construction industries. Skylines results since the acquisition date are included in the steel mills segments results.
Construction is progressing on our 2,500,000-ton DRI facility in Louisiana. The majority of the equipment should arrive in 2012, and we believe that we are on schedule for completion of construction and beginning of start-up operations in mid-2013. However, weather and other risks, such as low water levels on the Mississippi river due to drought conditions, could cause future construction delays.
Nucor-Yamato Steel Company, a joint venture between Nucor and Yamato Kogyo Co. Ltd., has approved an estimated $115 million plan to expand the production of hot rolled sheet piling. This project is expected to be completed at Nucors steel mill in Blytheville, Arkansas, in early 2014. The project will add several new sheet piling sections, increasing the single sheet widths by 22% and providing a lighter stronger sheet covering more area at a lower installed cost.
The average utilization rates of all operating facilities in the steel mills, steel products and raw materials segments were approximately 77%, 59% and 67%, respectively, in the first half of 2012 compared with 75%, 55% and 74%, respectively, in the first half of 2011. The decrease in the average utilization rate for the raw materials segment in the first half of 2012 as compared to the first half of 2011 is due to decreased flow of scrap into processing facilities that resulted from significant drops in scrap prices and increased competition for raw materials.
Results of Operations
Net Sales Net sales to external customers by segment for the second quarter and first six months of 2012 and 2011 were as follows (in thousands):
Net sales for the second quarter of 2012 decreased slightly from the second quarter of 2011. Average sales price per ton decreased 6% from $912 in the second quarter of 2011 to $861 in the second quarter of 2012, while total tons sold to outside customers increased 6% from the same period last year.
Net sales for the first six months of 2012 increased 2% over the first six months of 2011 due to the 2% increase in tons sold to outside customers. Average sales price per ton was $859 in both the first six months of 2012 and 2011.
In the steel mills segment, production and sales tons were as follows (in thousands):
Net sales for the steel mills segment decreased 3% from the second quarter of 2011 due to a 9% decrease in the average sales price per ton from $891 to $812, partially offset by a 5% increase in tons sold to outside customers. Although residential and nonresidential construction activity remains weak, demand for the steel mills products continued to improve in the second quarter in several other important markets. These markets include automotive, heavy equipment, energy and general manufacturing.
The 1% increase in sales from the first half of 2011 to the first half of 2012 in the steel mills segment was attributable to the 3% increase in tons sold to outside customers offset by the 2% decrease in average sales price per ton.
Tonnage data for the steel products segment is as follows (in thousands):
The 13% increase in the steel products segments sales from the second quarter of 2011 was due to a 4% increase in average sales price per ton from $1,361 to $1,419 and a 10% increase in volume. The 14% increase in the steel products segments sales for the first half of the year were due to the 7% increase in average sales price per ton from $1,320 to $1,416 and the 7% increase in volume. While both volume and pricing improved over the prior year quarter and first half, sales in the steel products segment remain depressed due to the continued weakness in the nonresidential construction market. Sales of fabricated concrete reinforcing steel increased due to increases in pricing and volume over the second quarter of 2011.
The sales for the raw materials segment decreased 10% from the second quarter of 2011 primarily due to pricing, while the 10% decrease in sales from the first half of 2011 was impacted by both lower pricing and volume. These decreases are due to intensified competition caused by excess shredding capacity in the industry and to the significantly lower scrap pricing experienced in the second quarter of 2012. In the second quarter of 2012, approximately 87% of outside sales in the raw materials segment were from the brokerage operations of DJJ and approximately 11% of the outside sales were from the scrap processing facilities (86% and 13%, respectively, in the second quarter of 2011). In the first half of 2012, approximately 85% of outside sales for the raw materials segment were from the brokerage operations of DJJ and approximately 14% of outside sales were from the scrap processing facilities (86% and 14%, respectively, in the first half of 2011).
The All other category includes the steel trading businesses. The increase in sales in both the second quarter and first half of 2012 is due to increased volumes partially offset by lower prices.
Gross Margins For the second quarter of 2012, Nucor recorded gross margins of $399.9 million (8%), compared to $649.5 million (13%) in the second quarter of 2011. The gross margin was impacted by a 6% decrease in average sales price per ton along with the following factors:
Scrap prices are driven by the global supply and demand for scrap and other iron based raw materials used to make steel. The downward trend in scrap prices, which occurred throughout the second quarter of 2012, appears to have bottomed in early July with a pick-up in scrap export activity and other market factors.
For the first half of 2012, Nucor recorded gross margins of $780.5 million (8%), compared to $1.07 billion (11%) in the first half of 2011. The gross margin was impacted by the following factors:
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 Nucors financial performance, decreased $24.2 million in the second quarter of 2012 compared to the second quarter of 2011, and decreased $30.0 million in the first half of 2012 compared to the first half of 2011 due to the decreased profitability of the Company. Profit sharing and other incentive compensation costs increased $8.1 million in the second quarter of 2012 compared to the first quarter of 2012 due to the annual restricted stock unit grant and the stock option grant that occurred in the second quarter of 2012.
Equity in Losses (Earnings) of Unconsolidated Affiliates Equity method investment losses, including amortization expense and other purchase accounting adjustments, were a loss of $0.2 million and earnings of $1.3 million in the second quarter of 2012 and 2011, respectively, and were losses of $6.8 million and $2.9 million in the first half of 2012 and 2011, respectively. The increase in the equity method investment losses is primarily due to increased losses at Duferdofin Nucor S.r.l., partially offset by slightly higher equity in earnings generated by NuMit LLC. The markets served by Duferdofin Nucor have been negatively affected by the escalated economic and political turmoil in Europe, which resulted in an impairment of Nucors investment in Duferdofin Nucor, as discussed below.
Impairment of Non-current Assets Nucor incurred a $30.0 million impairment charge in the second quarter of 2012 (none in the second quarter and first half of 2011). The entire charge related to the impairment of Nucors investment in Duferdofin Nucor.
Nucor reviews its equity investments for impairment if and when circumstances indicate that a decline in value below its carrying amount may have occurred. In the second quarter of 2012, Nucor concluded that a triggering event had occurred requiring assessment for impairment of the equity investment in Duferdofin Nucor due to the continued declines in the global demand for steel, the escalated economic and political turmoil in Europe, the continued operating performance well below budgeted levels through the first half of 2012. Duferdofin Nucors recently updated unfavorable forecast of future operating performance was also a contributing factor. The diminished demand combined with the continued lower than budgeted levels of operating performance has significantly impacted the financial results of Duferdofin Nucor through the first half of 2012. After completing its assessment, Nucor determined that the carrying amount exceeded its estimated fair value and recorded a $30.0 million impairment charge against the Companys investment in Duferdofin Nucor. Steel market conditions in Europe have continued to be challenging through the second quarter of 2012, and, therefore, it is reasonably possible that based on actual performance in the near term the estimates used in our second quarter valuation could change and result in further impairment of our investment.
Interest Expense (Income) Net interest expense for the second quarter and first half of 2012 and 2011 was as follows (in thousands):
In the second quarter of 2012 gross interest expense decreased 4% from the second quarter of 2011 due to a slight decrease in average debt outstanding and higher capitalized interest. Gross interest income increased in part due to increases in interest income from loans issued to related parties.
In the first half of 2012 gross interest expense decreased 3% from the first half of 2011 due to a slight decrease in average debt outstanding and higher capitalized interest. Gross interest income increased due to increases in average investments outstanding and the average interest rate earned on investments.
Earnings Before Income Taxes and Noncontrolling Interests Earnings before income taxes and noncontrolling interests by segment for the second quarter and first half of 2012 and 2011 were as follows (in thousands):
Earnings before income taxes and noncontrolling interests in the steel mills segment decreased 48% from the second quarter of 2011 and 31% from the first half of 2011. Metal margin dollars decreased from both the second quarter and first half of 2011 resulting from the factors described above. Other factors impacting the profitability of the steel mills segment were the impairment charge related to Duferdofin Nucor, the purchase accounting adjustments related to Skyline, and the slightly increased equity in losses from unconsolidated affiliates. The market conditions that have impacted the steel mills segment include an import surge across most products that began late in 2011 and continued through the first half of 2012, undercutting seasonal pricing momentum that is normally experienced early in the year. In addition, U.S. sheet steel markets have been negatively impacted by new domestic supply that began ramping up production in 2011, while a combination of political and economic uncertainty is beginning to affect steel buyer confidence for all products. Markets such as automotive, heavy equipment, energy and general manufacturing remain improved, primarily benefiting demand for special bar quality, sheet and plate products.
The steel products segment had its first profitable quarter since 2008. Nucors fabricated construction products joist and decking, rebar fabrication, and pre-engineered metal buildings returned to profitability as a result of market share gains, improved pricing, and effective management of costs. Despite the return to profitability, demand in this segment remains depressed due to the continued very
challenging conditions in the nonresidential construction market. Tons shipped to outside customers at both our joist and deck businesses in the second quarter of 2012 increased only 1% from the second quarter of 2011, but sales price per ton increased 13% and 5%, respectively. At our rebar fabrication businesses, shipments to outside customers increased 17% in the second quarter of 2012 from the second quarter of 2011. Volumes of backlog at our rebar fabrication businesses during the second quarter have decreased slightly with the increased shipments during the quarter, but the backlog pricing has increased.
The profitability of our raw materials segment, particularly The David J. Joseph Company, decreased significantly from the second quarter and first half of 2011 primarily due to continued margin compression at the scrap processing operations.
Noncontrolling Interests Noncontrolling interests represent the income attributable to the noncontrolling partners of Nucors joint ventures, primarily Nucor-Yamato Steel Company (NYS) and Barker Steel Company, Inc., of which Nucor owns 51% and 90%, respectively. The increase in noncontrolling interests was primarily attributable to the increased earnings of NYS, which were due to improved cost management and changes in product mix as compared to the second quarter and first half of 2011. 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 six months of 2012, 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 Nucor had an effective tax rate of 35.4% in the second quarter of 2012 compared with 32.6% in the second quarter of 2011. The effective tax rate in the first six months of 2012 was 31.3% compared with 32.4% in the first six months of 2011. The expected rate for the full year of 2012 will be approximately 31.8% compared with 31.2% for the full year of 2011. The increase in the effective tax rate for the second quarter of 2012 is due to the tax impact of recording the Duferdofin Nucor impairment charge fully in the quarter. The effective tax rate for the first six months of 2012 was favorably impacted by a non-cash out-of-period adjustment related to the recognition of a deferred tax asset related to state tax credit carryforwards and the adjustment of tax expense to previously filed returns amounting to $12.6 million in the first quarter of 2012.
We estimate that in the next twelve months our gross uncertain tax positions, exclusive of interest, could decrease by as much as $13.0 million as a result of the expiration of the statute of limitations.
Nucor has concluded U.S. federal income tax matters for years through 2006. The years 2004 and 2007 are open to the extent net operating losses were carried back. The 2008 to 2011 tax years are open to examination by the Internal Revenue Service. In 2011 the Canada Revenue Agency completed an audit examination for the periods 2006 to 2008 for Harris Steel Group Inc. and subsidiaries with immaterial adjustments to the income tax returns. The tax years 2008 through 2011 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 $112.3 million, or $0.35 per diluted share, in the second quarter of 2012 compared to consolidated net earnings of $299.8 million, or $0.94 per diluted share, in the second quarter of 2011. Net earnings attributable to Nucor stockholders as a percentage of net sales were 2% and 6% in the second quarters of 2012 and 2011, respectively.
Nucor reported consolidated net earnings of $257.4 million, or $0.81 per diluted share, in the first half of 2012, compared to consolidated net earnings of $459.6 million, or $1.44 per diluted share, in the first half of 2011. Net earnings attributable to Nucor stockholders as a percentage of net sales were 3% and 5% in the first half of 2012 and 2011, respectively. Return on average stockholders equity was approximately 7% and 13% in the first half of 2012 and 2011, respectively.
Outlook We currently expect to see a modest reduction in earnings exclusive of the impairment and Skyline-related charges for the third quarter of 2012. Continued slow domestic growth, coupled with continued or worsening global economic uncertainty may both become increasing negative factors. We believe that the construction market continues to be very challenging.
We expect third quarter results to benefit from lower scrap costs in transit and in inventory combined with the positive impact on steel mill customer buying patterns if scrap prices stabilize. It is worth noting several positive factors for sheet steel that should drive favorable pricing momentum by the end of the third quarter. The positive factors include recent reductions in sheet steel imports and shuttered and reduced operating rates by newer domestic market entrants. Markets such as automotive, heavy equipment, energy and general manufacturing remain improved, primarily benefiting demand for special bar quality, sheet and plate products.
Nucors largest exposure to market risk is via our steel mills and steel products segments. Our largest single customer in the first half of 2012 represented approximately 5% of sales and consistently pays within terms. In the raw materials segment, we are exposed to price fluctuations related to the purchase of scrap steel 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 $446.5 million in the first half of 2012, an increase of 53% compared with cash provided by operating activities of $292.7 million in the first half of 2011. The increase in cash provided by operating activities was driven primarily by a decrease in cash used in operating activities related to changes in operating assets and liabilities of $310.7 million period over period, partially offset by the $199.7 million decrease in net earnings period over period, which includes the non-cash charge of $30.0 million for impairment of non-current assets. The funding of working capital (primarily inventories and accounts receivable) decreased from the prior year due to the rapid increase in scrap prices and sales price per ton from the year-end of 2010 to the first half of 2011. Scrap prices decreased and average sales price per ton increased more moderately between the year-end of 2011 and the first half of 2012.
The current ratio was 2.4 at the end of the second quarter of 2012 and 2.8 at year-end 2011. Accounts receivable and inventories increased 12% and 21%, respectively, since year-end. The increases in accounts receivable and inventories are due to the acquisition of Skyline, higher sales prices and increased tons shipped to outside customers in the current year as compared to the fourth quarter of 2011. In the second quarter of 2012, total accounts receivable turned approximately monthly and inventories turned approximately every six weeks. These turnover rates are consistent with Nucors historical performance. The current ratio was also impacted by a 58% decrease in short-term investments which were sold primarily to provide funding for the Skyline acquisition. In addition, there was an 18% increase in accounts payable, which is primarily attributable to the acquisition of Skyline, the increase in steel production, and the resulting increase in inventory tons over last years fourth quarter. The ratio was also impacted by a 23% decrease in salaries, wages and related accruals, and a 38% increase in long-term debt due within one year, from year-end 2011. The decrease in salaries, wages and related accruals was largely attributable to the payout of profit sharing and other incentive compensation during the first quarter of 2012, while the increase in long-term debt due within one year is the result of the reclassification to current liabilities of a $250.0 million note payable that is due in June 2013.
Cash used in investing activities increased $105.2 million over the prior year period. Capital expenditures increased $170.6 million in large part due to the construction of our DRI facility in Louisiana. We expect capital spending for this project to increase from about $50 million in 2011 to approximately $500 million in 2012. This increase in capital expenditures was accompanied by an increase in acquisitions of $746.4 million. While Nucor had no acquisitions in the first half of 2011, our DJJ team
acquired three metal recycling companies in the first quarter of 2012, and Nucor closed on the Skyline acquisition for $683.5 million in the second quarter of 2012. These investing activities were partially offset by an increase of $816.9 million in net proceeds received from the sale of investments and restricted investments which were primarily sold in order to fund the acquisitions.
Cash used in financing activities in the first half of 2012 remained flat compared to the first half of 2011 as financing activities were consistent with the prior year period.
Nucors conservative financial practices have served us well in the past and are serving us well today. Our cash and cash equivalents and short-term investments position remains robust at $1.68 billion as of June 30, 2012, and an additional $491.6 million of restricted cash and investments is available for use in the construction of the DRI facility in Louisiana. Our $1.5 billion revolving credit facility is undrawn and does not expire until December 2016, and 79% of our long-term debt matures in 2017 and beyond. We believe our financial strength is a key strategic advantage among domestic steel producers, particularly during recessionary business cycles. We carry the highest credit ratings of any metals and mining company in North America, with an A rating from Standard and Poors and an A2 rating from Moodys.
Based upon these factors, we expect to continue to have adequate access to the capital markets at a reasonable cost of funds for liquidity purposes when needed. Our credit ratings are dependent, however, upon a number of factors, both qualitative and quantitative, and are subject to change at any time. The disclosure of our credit ratings is made in order to enhance investors understanding of our sources of liquidity and the impact of our credit ratings on our cost of funds.
Our credit facility includes only one financial covenant, which is a limit of 60% on the ratio of funded debt to total capitalization. In addition, the credit facility contains customary non-financial covenants, including a limit on Nucors ability to pledge the Companys assets and a limit on consolidations, mergers and sales of assets. As of June 30, 2012, our funded debt to total capital ratio was 35%, and we were in compliance with all other covenants under our credit facility. No borrowings were outstanding under the credit facility as of June 30, 2012.
In challenging market conditions such as we are experiencing today, our financial strength allows a number of capital preservation options. Nucors robust capital investment and maintenance practices give us the flexibility to reduce spending by prioritizing our long list of capital projects, potentially rescheduling certain projects, and selectively allocating capital to investments that will build our long-term earnings power. Capital expenditures increased 80% from $212.9 million during the first half of 2011 to $383.4 million in the first half of 2012. Capital expenditures for 2012 are projected to be approximately $1.00 billion compared to $440.5 million in 2011.
In June 2012, Nucors board of directors declared a quarterly cash dividend on Nucors common stock of $0.365 per share payable on August 10, 2012 to stockholders of record on June 29, 2012. This dividend is Nucors 157th consecutive quarterly cash dividend.
Funds provided from operations, cash and cash equivalents, short-term investments, restricted cash and investments and new borrowings under 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 makes use of interest rate swaps from time to time in order to manage net exposure to interest rate changes. Management does not believe that Nucors exposure to interest rate market risk has significantly changed since December 31, 2011.
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. Nucor utilizes a raw material surcharge as a component of pricing steel to pass through the cost increases of scrap steel and other raw materials. In periods of stable demand for our products, our surcharge mechanism has worked effectively to reduce the normal time lag in passing through higher raw material costs so that we can maintain our gross margins. When demand for and cost of raw materials is lower, however, the surcharge benefits our sales prices to a lesser extent.
Nucor also 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 income (loss) on the condensed consolidated balance sheets and recognized into earnings in the same period as the underlying physical transaction. At June 30, 2012, accumulated other comprehensive income (loss) includes $21.1 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 June 30, 2012, due to an assumed 10% and 25% change in the market price of each of the indicated commodities (in thousands):
Any resulting changes in fair value would be recorded as adjustments to other comprehensive income (loss), net of tax, 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 through its operations in Canada, Europe, Trinidad and Australia. We periodically use derivative contracts to mitigate the risk of currency fluctuations.
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 Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys 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 June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
In addition to the foregoing, in the course of normal compliance evaluation in 2008 at our steel mill in Marion, Ohio, we discovered and self-disclosed to the Ohio Environmental Protection Agency (the Ohio EPA) that the facility had failed to properly permit modifications to its power supply. The Ohio EPA assessed a civil penalty of $466,900 for this violation. We paid $295,520 of this civil penalty in the second quarter of this year. We paid an additional $93,380 during the second quarter to the Ohio EPA to support its clean diesel school bus program, which the Ohio EPA credited against the amount of the civil penalty. The balance of the civil penalty will be satisfied by a $78,000 credit against the penalty for certain testing and ambient air monitoring at the facility that we have committed to perform in the future.
There have been no material changes in Nucors risk factors from those included in Nucors Annual Report on Form 10-K for the year ended December 31, 2011.
Pursuant to the requirements of the Securities Exchange Act of 1934, Nucor Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 8, 2012
List of Exhibits to Form 10-Q June 30, 2012