Nucor Corporation (NYSE: NUE) — Q2 2019 Form 10-Q
Business context and reporting period
Nucor manufactures steel and steel products, produces direct reduced iron, and processes and brokers scrap and other raw materials. It reports three segments: steel mills, steel products, and raw materials. This unaudited report covers the 13 weeks and 26 weeks ended June 29, 2019, compared with the corresponding periods in 2018.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $5.896B | $6.461B | $11.993B | $12.029B |
| Gross margin | $775.5M (13%) | $1.17B (18%) | $1.67B (14%) | $1.89B (16%) |
| Net earnings attributable to Nucor stockholders | $386.5M | $683.2M | $888.3M | $1.037B |
| Diluted EPS | $1.26 | $2.13 | $2.88 | $3.23 |
| Cash provided by operating activities | Not separately stated | Not separately stated | $1.188B | $870.6M |
Q2 sales fell about 9% year over year, while attributable earnings declined about 43% and diluted EPS about 41%. For the first half, sales were nearly flat, but attributable earnings fell about 14% and diluted EPS about 11%. Q2 average sales price per ton was $877, down 2%; outside shipments declined 7% to 6.724 million tons. First-half average price rose 5% to $889, while outside shipments fell 5% to 13.491 million tons.
Q2 pretax earnings were $534.6M versus $913.7M. First-half pretax earnings were $1.224B versus $1.430B. The filing reports an effective tax rate of 22.9% for Q2 2019, compared with 21.9% in Q2 2018; management expected a full-year 2019 rate of approximately 23%.
Liquidity, debt and cash flows
At June 29, 2019, cash and cash equivalents were $1.432B and short-term investments were $50M. Current assets were $8.467B and current liabilities $2.380B; management reported a 3.6 current ratio, up from 3.1 at year-end 2018. Short- and long-term debt totaled approximately $4.294B, compared with $4.291B at year-end. The company reported a 29% funded-debt-to-total-capital ratio, compliance with its 60% covenant limit, and no borrowings on its $1.5B revolving credit facility. Cash plus short-term investments less reported debt was approximately $2.81B of net debt.
First-half operating cash flow was $1.188B, investing cash outflow $632.4M, and financing cash outflow $523.0M. Capital expenditures were $649.9M, up from $361.5M in the first half of 2018. Cash dividends paid were $246.5M and treasury stock repurchases were $197.5M. Cash and cash equivalents increased $32.9M to $1.432B.
Material changes and management commentary
- Steel mills segment Q2 external sales declined 11% to $3.703B; steel products sales increased 1% to $1.750B; raw materials sales declined 20% to $442.4M. First-half changes were -1%, +6%, and -13%, respectively.
- Management attributed weaker steel-mill results chiefly to lower shipments, reduced utilization, service-center destocking and unusually wet weather. Steel-mill operating rates were 84% in Q2 and 85% in the first half, versus 95% and 93% in the comparable 2018 periods.
- Lower steel prices and volumes pressured margins. Lower scrap costs partly supported steel-mill metal margins, but lower volumes and higher unit conversion costs weighed on results. Tubular products, DRI, and scrap processing also faced margin or volume pressure.
- Pre-operating and start-up costs rose to $20.5M in Q2 and $40.1M for the first half, largely related to mill and expansion projects. First-half marketing, administrative and other expenses included a $33.7M gain on the sale of an equity-method investment.
- Management described end-use demand, including nonresidential construction, as healthy, while noting destocking, order-rate caution and weather-related delays. It considered first-half earnings among the company’s strongest first halves historically.
Outlook, risks and contingencies
For Q3 2019, management expected steel-mills performance below Q2, primarily due to lower flat-rolled and plate prices; raw-materials performance was also expected to decline because of further DRI margin compression. Steel-products profitability was expected to improve, supported by strong nonresidential construction and efficiency initiatives. Management anticipated service-center customers would resume more normal demand-driven purchasing. No EPS or revenue guidance was provided.
Expected 2019 capital expenditures were approximately $1.8B, versus $997.3M in 2018, for projects including galvanizing lines, sheet-mill expansions, micro mills and a new Kentucky plate mill. The plate mill was planned for an estimated 1.2 million tons of annual capacity and expected to be fully operational in 2022. Management said cash, investments, operating funds and available borrowing capacity should meet existing-operation capital and working-capital needs for at least 24 months. It intended to return a minimum of 40% of net earnings to shareholders while maintaining financial strength.
Principal risks include steel-price and demand cycles, imports and trade policy, raw-material and energy costs, global overcapacity, weather and operating interruptions, capital-project execution, currency movements, environmental regulation, safety, and potential impairment of assets or investments. Environmental accrued costs were $17.0M; management did not expect ordinary-course legal matters to have a material adverse effect. Nucor had guaranteed 50% of specified borrowings of Duferdofin Nucor and Nucor-JFE, with no liability recorded for those guarantees. Management also identified potential impairment sensitivity in natural-gas assets and goodwill/intangibles associated with Rebar Fabrication; no interim goodwill impairment trigger was identified in the period.
Most important facts for investors to verify
- Whether steel shipments, utilization and service-center ordering recover as management expected, and whether Q3 prices and margins weaken as forecast.
- Whether DRI, tubular products and scrap-processing margins stabilize, and whether project start-up costs remain elevated.
- Execution, costs and expected returns of the approximately $1.8B 2019 capital program, including the plate mill and other expansions.
- Cash generation after higher capital spending, dividends and buybacks; the filing reported $1.3B remaining under the $2.0B repurchase authorization.
- Potential impairment exposures, environmental estimates, and the company’s contingent obligations under joint-venture guarantees.