Nucor 2013 Annual Report Download - page 39

38
Nucor will continue to monitor operating results within all reporting units throughout the upcoming year in an effort to determine
if events and circumstances warrant further interim impairment testing. Otherwise, all reporting units will again be subject to the
required annual impairment test during our fourth quarter of 2014. Changes in the judgments and estimates underlying our analysis
of goodwill for possible impairment, including expected future operating cash flows and discount rate, could decrease the estimated
fair value of our reporting units in the future and could result in an impairment of goodwill.
EQUITY METHOD INVESTMENTS
Investments in joint ventures in which Nucor shares control over the financial and operating decisions but in which Nucor is not the
primary beneficiary are accounted for under the equity method. Each of the Company’s equity method investments is subject to a
review for impairment if, and when, circumstances indicate that an other-than-temporary decline in value below its carrying amount
may have occurred. Examples of such circumstances include, but are not limited to, a significant deterioration in the earnings
performance or business prospects of the investee; a significant adverse change in the regulatory, economic or technological
environment of the investee; a significant adverse change in the general market condition of either the geographic area or the industry
in which the investee operates; and recurring negative cash flows from operations. If management considers the decline to be other
than temporary, the Company would write down the investment to its estimated fair market value. An other-than-temporary decline in
carrying value is determined to have occurred when, in management’s judgment, a decline in fair value below carrying value is of such
length of time and/or severity that it is considered permanent.
In the event that an impairment review is necessary, we calculate the estimated fair value of our equity method investments using a
probability-weighted multiple scenario income approach. Management’s analysis includes three discounted cash flow scenarios (best
case, base case and recessionary case), which contain forecasted near-term cash flows under each scenario. Generally, (i) the best
case scenario contains estimates of future results ranging from slightly higher than recent operating performance to levels that are
consistent with historical operating and financial performance (i.e., results experienced prior to the onset of the current recessionary
period that began in 2008); (ii) the base case scenario has estimates of future results ranging from generally in line with recent
operating performance to levels that are more conservative than historical operating and financial performance; and (iii) the worst
case scenario has estimates of future results ranging from results relatively consistent with the operating and financial performance
that we are experiencing in the current unprecedented recessionary state of the global steel industry to limited growth resulting only
from slight improvements each year in utilization rates as an acknowledgement of where the industry is at the bottom of the economic
cycle. Management determines the probability that each cash flow scenario will come to fruition based on the specific facts and
circumstances of each of the preceding scenarios, with the base case typically receiving the majority of the weighting.
Key assumptions used to determine the fair value of our equity method investments include: (a) expected cash flow for the five-year
period following the testing date (including market share, sales volumes and prices, costs to produce and estimated capital needs);
(b) an estimated terminal value using a terminal year growth rate determined based on the growth prospects of the reporting
unit; (c) a discount rate based on management’s best estimate of the after-tax weighted average cost of capital; and (d) a probability-
weighted scenario approach by which varying cash flows are assigned to certain scenarios based on the likelihood of occurrence.
While the assumptions that most significantly affect the fair value determination include projected revenues and discount rate, the
assumptions are often interdependent and no single factor predominates in determining the estimated fair value. Management
considers historical and anticipated future results, general economic and market conditions, the impact of planned business and
operational strategies and all available information at the time the fair values of its investments are estimated. Those estimates and
judgments may or may not ultimately prove appropriate.
In the second quarter of 2012, Nucor concluded that a triggering event occurred requiring assessment for impairment of its 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 Nucor’s
updated unfavorable forecast of future operating performance was also a contributing factor. 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
Company’s investment in Duferdofin Nucor in the second quarter of 2012. This charge is included in impairment of non-current assets
in the consolidated statements of earnings.
Although the operating results of Duferdofin Nucor have improved since 2012 and there have been no significant deteriorations in
near-term financial projections or other key assumptions since the last impairment test performed in the fourth quarter of 2012, Nucor
concluded that it was appropriate to reassess its equity investment in Duferdofin Nucor for impairment during the fourth quarter of
2013 due to the protracted challenging steel market conditions in Europe. The updated analysis included expected future cash flow
assumptions that were developed by local management at Duferdofin Nucor and were reviewed in detail by Nucor senior management
using the methodology outlined above. The base case scenario received the majority of the probability weighting, with equal weighting
given to the other two scenarios. After completing its assessment, the Company determined that the estimated fair value exceeded its
carrying amount by a sufficient amount and that there was no need for additional impairment charges.