Nucor Proves Its Mettle in a Steely Market

When steelmaker Nucor  (NYSE: NUE  ) released earnings this week, the company beat analyst estimates for sales and earnings per share, while key operating statistics remained steady or improved. Despite plenty of foreign competition, the currently languid steel industry will eventually transition from bust to boom. When that happens, Nucor and its excellent management will be primed to capitalize on the shift. Here are seven key takeaways worth knowing about Nucor's earnings.

1. Sales and earnings were solid, if unspectacular
Net sales in the fourth quarter increased 10% to $4.9 billion, and earnings increased 25% to $171 million, partly thanks to some one-time tax benefits. On a per-share basis -- excluding special items -- Nucor earned $0.46, easily outpacing the analyst estimate of $0.40. The increase in sales was driven by steady prices and 10% higher shipments of steel, and margins benefited from increased utilization and some one-time tax savings.

2. Production and shipments increased nicely
Tonnage produced increased 9%, and shipments to outside customers increased 10% to more than 6 million tons. This was the primary driver of increased sales, since prices remained basically flat. More impressively, the company accomplished this higher level of production despite planned outages at plants in South Carolina, Nebraska, and Arkansas. For once, its surplus capacity came in handy.

3. Pricing and scrap costs remained basically flat
Average sales per ton stayed flat with last year's fourth quarter. Scrap costs were $377 per ton, an increase of 1% over the fourth quarter of last year. Since Nucor uses scrap metal as a key input in its production process, this drove a 100-basis-point decrease in the gross margin. But thanks to higher sales and increased utilization, the company improved total pre-tax earnings by nearly 13%.

4. Utilization improving, but still below target levels
Steel plants aren't cheap, and they represent a major fixed cost for Nucor. Thus, making sure those plants get used more often helps the company earn higher margins and profits . Steel mill utilization was 75% in the quarter -- down from 78% in the third quarter, but up from 71% in last year's fourth quarter. That's about average capacity utilization for the domestic steel industry, which faces a flurry of imported steel. But management says the company aims to run at 90% or higher.

5. Balance sheet remains a source of strength
Nucor's financial strength helps set it apart from other steelmakers, allows the company to opportunistically invest during downturns, and lets investors sleep better at night. Based on this quarter's results, the company's balance sheet still looks strong.

At the end of the fourth quarter, Nucor had $1.5 billion in cash and $4.4 billion in debt. That might not seem great, but it's very strong for the steel industry. Nucor is the only North American steel producer that boasts a investment-grade credit rating. Add in the more than $1 billion in operating cash flow that the company produces each year, its open $1.5 billion revolving loan, and no debt maturing before 2017, and the company shouldn't hurt for liquidity, however bad the steel industry gets.

6. Dividend streak continues
Nucor continues its strong dividend payment record. Its declared quarterly payment of $0.37 per share on Feb. 11, 2014, will represent its 41st consecutive year of increasing base cash dividends to shareholders. Today's yield is a respectable 3%, and per the company's track record I'd expect continued increases in the dividend over time, supported by a strong balance sheet and cash generation.  

7. Management is saying the right things
Historically, Nucor has been the best managed steel-company in the world, and after reviewing the earnings call I'm still a believer in management. Executives' comments sound encouraging: they're emphasizing the long term, their awesome people/culture, and a focus on returns on capital.

Foolish takeaway
While its industry remains far from its cyclical peak, Nucor is still a tremendously well-run company. It's got a great culture and great managers, and the company is investing for better times. I don't know when the steel cycle will turn, but I admire the company's ability to continue performing in tough times, while paying investors a 3% dividend to wait for things to get better.

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