Diversified U.S. steel giant Nucor Corp. (NYSE: NUE) is built on a solid financial foundation. That gives it the financial flexibility it needs to not only survive industry downturns, but also use those rough patches in a highly cyclical industry to its advantage. And that's exactly what it's been doing during this downturn, stacking the deck against its steel industry competition.
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Start with the foundation
If you build a house on sand it won't stand the test of time because the earth beneath it will slip away. If you build a house on solid rock, however, it can last for generations. When it comes to corporations, that foundation is the balance sheet. And Nucor is built on very solid ground.
For example, long-term debt makes up only around 25% of the steel maker's capital structure. The company's current ratio, a measure of how well it can pay its near-term bills, is around 2.1 times. Interest expense ate up roughly 8% of operating profit in the second quarter. Compare that to United States Steel Company (NYSE: X), where interest expense was about 17% of operating profit in the second quarter, long-term debt made up roughly 50% of the capital structure, and the current ratio is a solid, but less robust, 1.7. It's not that U.S. Steel is in bad financial shape, but it isn't nearly as well grounded as Nucor.
That has material implications. For example, Nucor easily weathered the deep industry downturn that started after the 2007 to 2009 recession and only just recently started to ease. It lost money in 2009 like most other steel mills, but has been profitable since. U.S. Steel has lost money in seven of the last eight years. AK Steel (NYSE: AKS) has lost money in eight of the last eight years, hampered by long-term debt that makes up more than 100% of the capital structure because of negative shareholder equity... and while the current ratio is a decent 1.75, interest expense ate up around two-thirds of operating profit in the second quarter.
The freedom to move
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Nucor's solid financial foundation is vitally important because it underpins a key tenet of the company's business plan: use downturns to get stronger. You get the best deals when the industry is out of favor. So what has Nucor been doing since the downturn started in 2009?
Nucor built a direct reduced iron ore facility to help ensure it has access to low cost steel for its mills. It acquired steel foundation distributor Skyline Steel, flat rolled steel mill Gallatin Steel, two cold finished bar mills (one in Georgia and one in Ohio), a plate mill in Texas, and three pipe and tube mills to quickly build a new business segment. It also expanded operations at multiple facilities. And it's building a new mill in Canada and another through a joint venture in Mexico. So far this year Nucor has announced plans to upgrade two more mills and agreed to acquire St. Louis Cold Drawn, Inc., which operates mills in Missouri and Mexico that serve the auto industry.
It's been a very busy industry downturn for Nucor! But all of that activity increases the company's scale and positions it to maintain its industry-leading position now that the steel sector is starting to see better days. Just as important, however, it got all of that done without wrecking its balance sheet. So it's both ready for, and capable of, reinvesting in the business for years to come.
No cheating here
The term stacking the deck originated from cards and connotes cheating. But there's no cheating going on here. Nucor is following a simple and very open plan: remain financially disciplined and keep investing for the future, with an emphasis on opportunistic spending during downturns. That plan has left Nucor larger and more diversified than it's ever been because it's been preparing for the upturn since the downturn started.
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