Nucor Corporation — Q1 2019 Form 10-Q
Business context and reporting period. The unaudited quarter comprised 13 weeks ended March 30, 2019, compared with the 13 weeks ended March 31, 2018. Nucor manufactures steel and steel products, produces direct reduced iron, and processes and brokers metals. It reports Steel Mills, Steel Products, and Raw Materials segments.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $6.097 billion | $5.568 billion | +9% |
| Gross margin | $895.9 million (15%) | $726.4 million (13%) | Increased |
| Earnings before tax and noncontrolling interests | $689.6 million | $515.9 million | +34% |
| Net earnings attributable to Nucor stockholders | $501.8 million | $354.2 million | +42% |
| Diluted EPS | $1.63 | $1.10 | +48% |
| Cash provided by operating activities | $650.7 million | $127.9 million | Increased |
| Capital expenditures | $288.8 million | $172.2 million | Increased |
Net earnings attributable to stockholders were 8.2% of sales versus 6.4% a year earlier. The effective tax rate was 23.0%, down from 26.3%; the filing attributes much of the comparison to a $21.8 million deferred-tax-asset write-off in Q1 2018. Average selling price per ton rose 13% to $901, while outside shipments fell 3% to 6.767 million tons. Steel Mills sales increased 10%, Steel Products 13%, and Raw Materials sales decreased 5%.
Financial position and liquidity
- At March 30, 2019, cash and cash equivalents were $1.551 billion and short-term investments were $50 million. Total current assets were $8.650 billion; current liabilities were $2.568 billion, for a 3.4 current ratio.
- Short-term debt was $71.4 million and long-term debt was $4.234 billion. Funded debt to total capital was 29%. The $1.5 billion revolving credit facility was undrawn; Nucor reported compliance with its covenants.
- Operating cash flow was $650.7 million; investing activities used $265.6 million and financing activities used $233.2 million. Cash increased $151.9 million during the quarter.
- Operating cash flow improved year over year mainly because working-capital cash use was lower. Capital expenditures, dividends of $123.4 million, and treasury-stock purchases of $72.8 million were significant cash uses.
Material changes and management commentary
- Higher selling prices and improved Steel Mills metal margins supported the increase in earnings; segment pretax earnings rose to $689.4 million from $560.5 million. Steel Products and Raw Materials pretax earnings declined year over year.
- Steel Mills average selling price per ton was 4% lower than Q4 2018. Management cited sheet-customer inventory management and additional domestic capacity as pressures. Average facility utilization declined year over year in Steel Mills (87% versus 92%), Steel Products (67% versus 71%), and Raw Materials (71% versus 74%).
- Q1 results included a $33.7 million gain on sale of an equity-method investment, recorded in marketing, administrative and other expenses. Management’s Q2 earnings comparison excludes this gain.
- Nucor announced a new plate mill in Brandenburg, Kentucky, with estimated annual capacity of 1.2 million tons, approximately 400 employees, and expected operations in 2022. Estimated 2019 capital expenditures were approximately $1.8 billion, compared with $997.3 million in 2018.
Guidance, risks, and contingencies
- Management expected Q2 2019 earnings to be similar to Q1 excluding the investment-sale gain. Steel Mills performance was expected to be broadly consistent, Steel Products profitability to improve seasonally, and Raw Materials profitability to decline due to further DRI margin compression.
- Management described 2019 as another expected robust earnings year and estimated a full-year effective tax rate of approximately 23.1%. It stated that cash, operating funds, and available credit were expected to cover existing-operation working-capital and capital needs for at least 24 months.
- Key risks include steel-price and demand cyclicality, competition and imports, trade policies, scrap and iron-ore costs, energy prices, operational interruptions, foreign exchange, environmental regulation, and impairment of goodwill, investments, inventory, or long-lived assets.
- Goodwill impairment sensitivity remains relevant at Rebar Fabrication: its estimated fair value exceeded carrying value by approximately 8% in the latest annual assessment, which relied on expected operating improvement. The filing also notes natural-gas-asset impairment sensitivity to prices, reserves, and drilling costs.
- Environmental liabilities accrued were $17.7 million. Nucor reported ordinary-course litigation and did not expect proceedings, individually or collectively, to materially adversely affect its results, financial position, or cash flows. It also disclosed guarantees of portions of certain joint-venture borrowings.
Important facts for investors to verify
- Whether higher steel selling prices and margins persist, particularly given lower Q1 shipments, declining Q1-to-Q4 Steel Mills pricing, and market capacity and inventory pressures.
- Whether the Q2 outlook is achieved, especially the expected Steel Products recovery and further Raw Materials/DRI margin compression.
- Progress, timing, and actual spending on the major expansion projects; compare actual 2019 capital expenditures with the approximately $1.8 billion estimate.
- How much of reported earnings and operating cash flow is sustainable apart from the $33.7 million investment-sale gain and working-capital timing effects.
- Developments in Rebar Fabrication and natural-gas asset assumptions that could trigger impairment, and any changes to disclosed joint-venture guarantees or tax examinations.