Nucor Corporation — Q1 2020 Form 10-Q
Reporting period: Three months (13 weeks) ended April 4, 2020; comparative period ended March 30, 2019. Nucor manufactures steel and steel products and produces raw materials, principally for North American markets. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $5,624 million | $6,097 million; down 8% |
| Gross margin | $629 million; 11% of sales | $896 million; 15% of sales |
| Earnings before tax and noncontrolling interests | $146 million | $690 million |
| Net earnings attributable to Nucor stockholders | $20 million | $502 million |
| Diluted EPS | $0.07 | $1.63 |
| Operating cash flow | $201 million | $651 million |
| Capital expenditures | $417 million | $289 million |
| Cash and cash equivalents | $1,245 million at April 4 | $1,535 million at December 31, 2019 |
| Short-term investments | $146 million at April 4 | $300 million at December 31, 2019 |
| Total debt and finance lease obligations | Approximately $4,326 million at April 4 | Approximately $4,383 million at December 31, 2019 |
Cash plus short-term investments totaled approximately $1.39 billion. The company reported a 3.5 current ratio and a 29% funded-debt-to-total-capital ratio; its $1.5 billion revolving credit facility was undrawn. Management reported no significant debt maturities until September 2022. The company paid $123 million in cash dividends and repurchased $39 million of shares during the quarter.
Outside shipments totaled 7.187 million tons, up 6%; average selling price per ton fell 13%, to $783. Steel mills utilization was approximately 89%, steel products 73%, and raw materials 73%. Net earnings as a percentage of sales were 0.4%, versus 8.2%; annualized return on average stockholders’ equity was 0.8%, versus 20.2%.
Material changes and notable items
- Steel mills external sales fell 11% to $3,519 million, primarily reflecting an 18% lower average selling price, partly offset by higher shipment volume. Steel products sales rose 4% to $1,727 million as outside tons increased 13%; raw materials sales declined 23% to $378 million.
- Steel products segment pretax earnings increased to $163 million from $77 million. Steel mills pretax earnings declined to $157 million from $689 million; raw materials shifted to a $8 million loss from $53 million of earnings.
- The principal unusual charge was a $250 million noncash impairment of the Duferdofin Nucor equity investment, plus a full reserve of a $37.8 million note receivable. Together, these produced $287.8 million in asset losses. The investment impairment was attributed to deteriorating commercial prospects, exacerbated by COVID-19.
- The effective tax rate was 62.8%, versus 23.0%; the impairment had no corresponding tax benefit. Management estimated a full-year 2020 effective tax rate of approximately 34.3%.
- Foreign currency translation losses were $64.5 million for the quarter. Net interest expense increased to $41 million from $28 million.
Outlook, risks and contingencies
- Management said a second-quarter 2020 loss was likely, expected steel market conditions to bottom in Q2, and then anticipated a return to profitability in the second half of 2020. The filing stresses that the economic outlook and pandemic effects are highly uncertain.
- COVID-19 began affecting operations late in Q1. Nucor remained operating as an essential business, while its Trinidad DRI facility stopped production March 30 and its Louisiana DRI facility temporarily halted production April 2, resuming April 25. Automotive and energy markets were particularly weak; management described nonresidential construction as more resilient and segment backlogs as strong.
- Management cut its 2020 capital expenditure estimate to less than $1.50 billion, from an initial approximately $2.0 billion, by freezing or delaying selected projects. It expected working capital to contract and provide liquidity. The company said existing liquidity and financing sources should cover operating and capital needs for at least 24 months.
- Key risks include pandemic-driven demand, supply-chain or facility disruption; steel price and volume volatility; scrap, energy and other raw-material costs; imports and trade policy; project delays; and potential impairments. The company also disclosed that further Duferdofin impairment is possible and that Nucor has guarantees covering its 50% share of certain joint-venture borrowings.
- Environmental accruals totaled $16.5 million. Nucor Steel Louisiana was negotiating with Louisiana regulators over reported emissions issues; no penalty was finalized, and the company expected a civil penalty likely exceeding $100,000 but not material. Nucor said other ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Q2 losses and the expected second-half recovery materialized, particularly as pandemic impacts evolved across end markets.
- Steel selling prices, metal margins, shipment volumes, utilization, and scrap and energy costs.
- Whether Duferdofin Nucor’s performance, investment value, note collectability, or related guarantee exposure led to further losses.
- Execution and timing of major capital projects under the reduced 2020 capital budget, and the resulting cash requirements.
- Liquidity, debt levels, credit ratings, and the ability to maintain dividends and capital returns during the downturn.
- Developments in the Louisiana environmental matter and any changes in other legal, tax, or impairment contingencies.