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Nucor Corporation Shines in Second Quarter: Key Earnings Takeaways


North American steel volume has declined, but Nucor has grown by adding new products to its mix. Image source: Getty Images.

It's been tough going for North American steelmakers during the past several years. While North American demand for steel is near all-time highs, international competition -- much of it illegal dumping -- has been taking a big bite out of the domestic pie.

This has weighed heavily on the industry, which has seen revenues plummet: 

STLD Revenue (TTM) data by YCharts.

While its competitors have struggled, Nucor Corporation (NYSE: NUE) steadily has held its own, even in this competitive environment, posting steady positive cash flows and profits, even as revenue has slipped. The quarter reported on July 21 was no exception. Actually, it could be an indication that profits are ready to surge at Nucor. 

Here's a closer look at Nucor's second-quarter earnings. 

The numbers

MetricQ3 2016Q3 2015Change
Revenue  $4,245.8  $4,357.6 (2.6%)
Net earnings to Nucor shareholders  $233.8  $124.8 87.3%
Earnings per share  $0.73  $0.39 87.2%

Revenue and net earnings in millions. Source: Nucor Corporation. 

What happened in the quarter

  • Nucor's revenue was down year over year, but sales were up 14% from the first quarter.
  • Volume was up; total tons shipped to outside customers was up 7% from last year.
  • Average per-ton selling prices were down 9% year over year, but were up 9% sequentially. 
  • For the first six months of 2016, revenue was down 9%, but volume was up 8%, while prices per ton were down 16%.
    • Input costs were down in the first half, with scrap costs 28% lower year over year. This has helped drive higher profits. 
  • Lower electricity and natural gas prices have also helped profits. Energy costs per ton were down $5 per ton in the second quarter, and $7 per ton in the first half of 2016. 
  • Nucor finished the quarter with $2.33 billion in cash, equivalents, and short-term investments. That's up from $2 billion at the start of the year, and essentially unchanged since the end of the first quarter. 
    • Nucor's $1.5 billion line of credit is still available and undrawn, giving the steelmaker even more financial flexibility.

What management said

Nucor continues to grow its market share, even in an ultra-competitive environment. CEO John Ferriola:

Nucor's steel mill volume growth in 2016 highlights our success in gaining profitable market share. For the first six months of 2016, our steel mill production increased 13% over the year-ago period. That compared with the U.S. steel industries' decrease of approximately 1% over the same period.

Nucor has been able to grow in large part because of its model as the low-cost leader in the industry. The company's "mini-mills" are more scalable than the mills operated by many of its competitors, allowing Nucor to operate profitably at lower volume levels, and to quickly scale up production at need. The company's recycling efforts also play a big role here. CFO David Frias:

Performance at our raw materials segment also improved in the second quarter compared to the first quarter. David J. Joseph Company scrap brokerage and scrap processing businesses were solidly profitable in the second quarter. The improvements at DJJ's recycling business were threefold. First, scrap pricing improved. Second, utilization and volume flows increased to support our steel mills' increased production. Third, our scrap processing team has done excellent work achieving efficiency improvements and cost reductions throughout their operations.

Looking ahead

A challenging competitive environment and low commodity (scrap and iron) price continue to weigh on revenues across the industry, and Nucor's peers continue to see their volumes shrink. But Nucor is expanding, taking advantage of its ability to profit even in this environment, and adding more products to its mix. These include more structural steel, wider sheet steel, beams for construction, and additional heat-treating and cold-finishing systems to offer more value-added products.

As a result, management expects to see "further strong improvements" in earnings next quarter. This is due to a number of factors including price resets on contracts for sheet steel, which represent approximately 60% of sheet-mill volume, as well as the improved scrap prices that benefited this quarter, as well as overall improvements in operating leverage as volumes increase further. 

While imports continue to weigh on the North American steel industry, Nucor has proven it can thrive in nearly any environment. If further progress is made to reduce imports, Nucor is likely to be one of the biggest beneficiaries. Either way, the numbers don't lie: Nucor continues to be the best-run and most-profitable steelmaker in North America.

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Jason Hall has no position in any stocks mentioned. The Motley Fool recommends Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.