Nucor 2015 Annual Report Download - page 42

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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. 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
reporting units are estimated.
Our fourth quarter 2015 annual goodwill impairment analysis did not result in an impairment charge. Management does not believe that
future impairment of these reporting units is probable. However, the performance of certain businesses that comprise our reporting units
requires continued improvement. An increase of approximately 50 basis points in the discount rate, a critical assumption in which a minor
change can have a significant impact on the estimated fair value, would not result in an impairment charge.
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 2016. 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; missed financial projections; a significant adverse change in the regulatory, tax,
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 long-term.
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
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 which include limited growth resulting only from operational cost
improvements and limited benefits of new higher-value product offerings. 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 six-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, metal margins 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 fourth quarter of 2015, Nucor assessed its equity investment in Duferdofin Nucor for impairment due to the protracted challenging
steel market conditions caused by excess global overcapacity, which increased in 2015, and the difficult economic environment in Europe.
Our assessment was negatively impacted by unfavorable operating performance and deterioration in financial projections due to the
increased global oversupply in 2015. After completing its assessment, Nucor determined that the carrying amount exceeded its estimated
fair value. The impairment condition was considered to be other than temporary, and therefore the Company recorded a $153.0 million
impairment charge against the Company’s investment in Duferdofin Nucor in the fourth quarter of 2015. This charge is included in