Nucor Corporation — Q3 2020 Form 10-Q
Reporting period: 13 weeks ended October 3, 2020; nine-month comparison is for the 39 weeks ended October 3, 2020. Amounts are unaudited. Unless noted, financial figures are in U.S. dollars.
Business context and results
Nucor manufactures steel and steel products and produces and processes raw materials. It reports three segments: steel mills, steel products and raw materials. Management said COVID-19 was the most significant ongoing factor affecting the business.
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Net sales | $4.928 billion | $5.465 billion | $14.880 billion | $17.457 billion |
| Net earnings attributable to Nucor stockholders | $193.4 million | $275.0 million | $322.6 million | $1.163 billion |
| Diluted earnings per share | $0.63 | $0.90 | $1.06 | $3.78 |
| Gross margin | $502.2 million; 10% | $572.5 million; 10% | $1.51 billion; 10% | $2.24 billion; 13% |
| Cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $2.206 billion | $2.120 billion |
Q3 net earnings improved from $108.9 million in Q2 2020. Third-quarter facility utilization was 83% for steel mills, 75% for steel products and 69% for raw materials, up from 68%, 66% and 51%, respectively, in Q2.
Material changes and segment performance
- Year-over-year Q3 sales fell 10%; average selling price per ton declined 7% and outside shipments declined 3%. For the first nine months, sales fell 15%, average price per ton declined 10% and outside shipments declined 5%.
- Q3 steel mills sales declined 12% and pretax earnings fell to $205.2 million from $309.9 million, primarily reflecting lower prices and volumes. Steel products sales declined 5%, but pretax earnings increased to $187.0 million from $170.2 million, supported by rebar fabrication and joist margins. Raw materials sales declined 13%; the segment returned to Q3 pretax earnings of $6.2 million from a $10.6 million loss.
- For the first nine months, steel mills pretax earnings fell to $512.1 million from $1.578 billion; steel products earnings rose to $502.4 million from $363.7 million; and raw materials recorded a $3.1 million loss versus $64.3 million of earnings.
- Nine-month results included $299.5 million of losses on assets, including a $261.6 million impairment of the Duferdofin Nucor investment and a $37.9 million reserve against its note receivable. The Duferdofin impairment was recorded across Q1, Q2 and Q3. Management attributed the deterioration to adverse commercial developments exacerbated by COVID-19.
Cash, debt and liquidity
- At October 3, 2020, cash and cash equivalents were $2.867 billion, short-term investments $412.4 million and restricted cash $131.6 million. Together these totaled $3.410 billion; restricted funds are designated for the Brandenburg, Kentucky plate mill.
- Operating cash flow for the first nine months was $2.206 billion. Capital expenditures were $1.179 billion; the difference was approximately $1.027 billion before other investing and financing items.
- Cash and short-term investments increased substantially from year-end, with management citing debt issuance and operating cash flow. The current ratio was 3.8, versus 3.3 at year-end 2019.
- Balance-sheet debt and finance lease obligations totaled approximately $5.526 billion, including current and long-term amounts, versus approximately $4.383 billion at year-end 2019. Nucor issued $500 million of 2.000% notes due 2025 and $500 million of 2.700% notes due 2030; it also became an obligor on $162.6 million of 40-year variable-rate Green Bonds. The $1.50 billion revolving credit facility was undrawn. Funded debt to total capitalization was 34%, below the 60% covenant limit.
- Cash dividends paid in the first nine months were $368.6 million. The quarterly dividend was $0.4025 per share. Approximately $1.16 billion remained available under the share-repurchase authorization.
Outlook, risks and unusual items
- Management expected Q4 2020 earnings to exceed Q3, primarily due to improved sheet and plate pricing; it also expected higher raw-materials earnings from improved DRI margins. The pandemic and uncertain demand made forecasting difficult.
- Management estimated 2020 capital expenditures at approximately $1.70 billion, revised from an initial $2.00 billion budget. It said investment was being reaccelerated in the Brandenburg plate mill and Gallatin sheet mill expansion. Management expected available liquidity and borrowing capacity to cover operating, working-capital and capital needs for at least 24 months.
- A subsequent state tax-credit certification was expected to provide an approximately $40 million net income-tax benefit in Q4 2020. Management’s estimated full-year effective tax rate was approximately 31.5%, partly reflecting the non-deductible Duferdofin impairment.
- On October 2, Nucor agreed to transfer its 50% Duferdofin interest. Closing was expected in Q4, subject to renegotiation of the joint venture’s borrowing facility, Nucor’s release from its 50% guarantee and other conditions. Nucor said the accounting impact remained under evaluation. Duferdofin had $154.7 million outstanding under the facility at quarter-end; Nucor had not recorded a guarantee liability.
- COVID-19 could affect demand, prices, operations, supply chains, customers and capital-project timing; the ultimate financial impact could not be reasonably estimated. Other stated exposures include steel-price and raw-material volatility, imports and trade policy, energy costs, foreign exchange, environmental regulation, cyclicality and potential asset impairments.
- Nucor disclosed an unresolved Louisiana environmental compliance matter; it expected a civil penalty likely to exceed $100,000 but not to be material. It did not expect other ordinary-course legal proceedings to have a material adverse effect.
Investor verification priorities
- Track whether the expected Q4 pricing and earnings improvement materialized, and how COVID-19 affected demand, pricing and utilization.
- Verify completion and final financial-statement effects of the Duferdofin transfer, including guarantee release, any remaining exposures and foreign-currency losses.
- Assess the sustainability of operating cash flow and liquidity after working-capital reductions, planned capital spending and debt issuance.
- Monitor project costs, schedules and expected returns for the Brandenburg, Gallatin, Arkansas and Frostproof investments.
- Confirm realization and timing of the approximately $40 million tax-credit benefit and monitor effective tax-rate assumptions.
- Review debt maturities, variable-rate exposure, credit ratings and covenant headroom, as well as the environmental matter’s final penalty.