Nucor Corporation (NYSE: NUE) — Q1 2021 Form 10-Q
Reporting period: Three months (13 weeks) ended April 3, 2021; comparative period ended April 4, 2020. Financial statements are unaudited. Nucor manufactures steel and steel products, produces direct reduced iron (DRI), and processes and brokers raw materials.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $7.017 billion | $5.624 billion |
| Gross margin | $1.62 billion (23%) | $629.3 million (11%) |
| Earnings before tax and noncontrolling interests | $1.298 billion | $146.3 million |
| Net earnings attributable to Nucor stockholders | $942.4 million | $20.3 million |
| Diluted earnings per share | $3.10 | $0.07 |
| Cash provided by operating activities | $530.4 million | $201.2 million |
| Capital expenditures | $313.5 million | $416.6 million |
- Management called Q1 2021 Nucor’s most profitable quarter to date, with record earnings for each of its three segments.
- Net sales increased 25%; average sales price per ton rose 25% to $978, while outside shipments were slightly lower at 7.176 million tons. Steel mills sales rose 31%, steel products 5%, and raw materials 58%.
- Steel mills earnings before tax rose to $1.315 billion from $156.5 million; steel products earnings increased to $211.8 million from $162.6 million; raw materials earnings were $223.2 million versus a $7.9 million loss.
- Net earnings as a percentage of sales were 13.4%, versus 0.4%. Annualized return on average stockholders’ equity was 33.9%, versus 0.8%.
Liquidity, debt and capital allocation
- At April 3, 2021, cash and cash equivalents were $2.461 billion, short-term investments $402.6 million, and restricted cash $115.3 million; management reported total liquidity of $2.98 billion. The current ratio was 3.5, compared with 3.6 at year-end 2020.
- Book debt, including current maturities and finance lease obligations, was approximately $5.34 billion. The fair value of short- and long-term debt was approximately $5.76 billion. Nucor reported no significant debt maturities until September 2022.
- The $1.5 billion revolving credit facility was undrawn; funded debt to total capital was 31%, against a 60% covenant limit. Nucor reported compliance with covenants and ratings of A- from S&P and Baa1 from Moody’s.
- Operating cash flow rose year over year, but receivables and inventory used $1.321 billion of cash combined, reflecting higher prices and working-capital needs. Cash declined by $178.9 million during the quarter.
- Cash used in financing was $410.7 million, including $301.9 million of treasury-stock purchases and $123.9 million of dividends paid. The quarterly dividend declared was $0.405 per share; approximately $857.5 million remained under the share-repurchase authorization.
- 2021 capital expenditures were estimated at approximately $2.0 billion. Management expected available funds and credit facilities to meet operating, working-capital and capital-spending needs for at least 24 months.
Material changes and notable items
- Improved steel pricing, demand and metal margins drove the earnings surge. Average scrap and scrap-substitute cost increased 38% year over year to $405 per gross ton, and management noted further near-term price volatility.
- Q1 2020 included a $287.8 million asset loss tied to the Duferdofin Nucor equity-method investment, which Nucor exited in Q4 2020. Q1 2021 asset losses were $6.7 million.
- Marketing, administrative and other expenses increased, principally because profit-sharing and incentive compensation costs rose by $136.1 million. Profit-sharing and retirement-savings plan expense was $129.0 million versus $11.6 million.
- The effective tax rate was 23.9%, down from 62.8%; the prior-year rate was elevated by the non-deductible investment impairment charge. Management estimated a full-year 2021 effective tax rate of approximately 23.6%.
- Steel mills utilization was 95%, steel products 74%, and raw materials 79%, compared with 89%, 73%, and 73%, respectively, a year earlier.
Outlook, risks and contingencies
- Management expected Q2 2021 earnings to exceed Q1’s record, primarily on improved steel-mill pricing and margins, especially in sheet and plate. Steel products were expected to remain strong; raw materials profitability was expected to decline due to rising input costs.
- Demand and backlogs were described as strong, with resilient nonresidential construction, recovering automotive demand, and strength in renewable energy, agriculture and heavy equipment. Management also cited semiconductor shortages and severe weather as challenges for automotive production.
- Key risks include steel-price and demand cycles, imports and trade policy, scrap and energy costs, supply-chain and equipment disruptions, environmental requirements, asset impairments, foreign exchange, and COVID-19 effects. Scrap-cost increases may be harder to pass through when demand weakens.
- Environmental liabilities accrued were $14.4 million; estimates are subject to uncertainty. Nucor said ordinary-course litigation was not expected to materially affect results, financial position or cash flows, and disclosed no qualifying environmental proceeding expected to result in sanctions of at least $1 million.
- Potential impairment risks remain for natural-gas assets if prices or reserve and cost assumptions deteriorate, and for certain reporting units if results fall short of projections. No interim goodwill impairment trigger was reported for Rebar Fabrication or Grating.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track steel selling prices and metal margins against rising scrap and other input costs, including whether higher costs can be passed through.
- Compare Q2 results with management’s expectation of a new quarterly earnings record; monitor the steel-mill, steel-products and raw-materials segments separately.
- Assess working-capital conversion and operating cash flow as receivables and inventories expand; compare cash generation with the planned approximately $2.0 billion of 2021 capital expenditures.
- Monitor liquidity, debt, capital returns and the remaining share-repurchase authorization alongside the cyclical earnings peak.
- Review the full filing and subsequent disclosures for changes in demand, project execution, impairment assumptions, environmental matters and other forward-looking risks.