Nucor Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017 (13 and 39 weeks, respectively); comparative periods ended October 1, 2016. Unaudited results. Nucor manufactures steel and steel products and operates steel mills, steel products, and raw materials segments.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $5.170 billion | $4.290 billion | $15.160 billion | $12.252 billion |
| Net earnings attributable to Nucor | $254.9 million | $305.4 million | $934.8 million | $636.6 million |
| Diluted earnings per share | $0.79 | $0.95 | $2.90 | $1.99 |
| Gross margin | $579 million (11%) | $682 million (16%) | $2.05 billion (14%) | $1.58 billion (13%) |
| Cash provided by operating activities | Not separately reported | Not separately reported | $762.5 million | $1.182 billion |
Q3 average selling price per ton rose 7% to $781 and outside shipments increased 12% to 6.618 million tons. For the first nine months, average price rose 15% to $760 and shipments increased 8% to 19.950 million tons.
At September 30, cash and cash equivalents were $1.576 billion and short-term investments were $50 million. Current assets were $7.501 billion versus current liabilities of $3.555 billion; the reported current ratio was 2.1. Debt carrying value was approximately $4.392 billion, including $1.1 billion due within one year. Nucor also had an undrawn $1.5 billion revolving facility, no borrowings under it, and a 33% funded-debt-to-total-capital ratio. Cash plus short-term investments declined $570 million from year-end 2016.
Nine-month operating cash flow fell about 35% year over year, primarily because working capital consumed more cash, particularly inventories and receivables; higher earnings partly offset this. Investing cash use was $736.5 million, including $543.2 million for acquisitions and $292.3 million of capital expenditures. Financing cash use was $513.5 million, including $364.3 million of dividends and $90.3 million of share repurchases.
Changes and operating performance
- Sales increased 21% in Q3 and 24% year to date. Q3 Nucor-attributable earnings declined about 17%, while nine-month earnings increased about 47%.
- Q3 steel mills pretax earnings declined to $432.7 million from $591.8 million, with lower metal margins—scrap and scrap-substitute costs rose 26% while selling prices rose less. Nine-month steel mills earnings increased to $1.734 billion from $1.403 billion, reflecting stronger first-half margins.
- Steel products pretax earnings declined in both periods amid higher steel input costs and competitive pressure. Raw materials earnings improved year to date, but Q3 was affected by unplanned outages at Nucor Steel Louisiana; production resumed October 3.
- Acquisitions included Southland Tube, Republic Conduit, and St. Louis Cold Drawn. Nucor also announced mill upgrades and planned bar-mill investments, including an estimated $176 million galvanizing and pickling line at Gallatin.
- 2016 comparative results reflect retrospective application of Nucor’s change from LIFO to FIFO inventory accounting for specified inventories. The filing reports the adjusted comparative figures.
Outlook, risks, and unusual items
- Management expected Q4 2017 earnings to be similar to or slightly below Q3, excluding Q3 legal charges and tax benefits. It expected improved raw materials performance from more consistent DRI production and possible downstream margin improvement, offset by expected steel mills weakness, particularly plate, and seasonality.
- Management cited generally stable or improving markets for nonresidential construction, automotive, energy, heavy equipment, and agriculture, while warning that imports remained elevated. Finished steel imports were estimated at 27% of the U.S. market through the first nine months.
- Management expected a 2017 full-year effective tax rate of approximately 31.3%. Q3’s 28.2% rate included a $13.2 million tax benefit related to a return-to-provision estimate change and state tax credits.
- After the preliminary results release, a subsequent-event estimate change led Nucor to record a legal expense of $0.05 per diluted share for matters existing at September 30; the accrual was included in Q3 statements. Management otherwise said ordinary-course legal proceedings were not expected to materially affect results, financial position, or cash flows.
- Key risks include steel-price and import competition, scrap and energy costs, cyclical demand, operating interruptions, foreign currency movements, regulation, and potential impairment of assets or investments. Nucor noted possible further impairment of its Duferdofin Nucor investment if performance or market conditions materially differ from valuation assumptions; it also guarantees 50% of that joint venture’s Facility A borrowings.
- Capital expenditures were projected at approximately $500 million for 2017. Management said available funds and credit facilities were expected to cover capital and working-capital needs for at least 24 months. The quarterly dividend was $0.3775 per share.
Important facts for investors to verify
- Whether Q3 margin pressure from scrap costs, imports, and steel-product competition persists, and whether management’s Q4 outlook was realized.
- Working-capital trends, especially inventory and receivables, and the effect on operating cash flow and liquidity.
- Debt maturities and capacity to fund planned capital projects, acquisitions, dividends, and repurchases.
- Progress and returns from recent acquisitions and announced mill investments, including the Louisiana DRI facility’s operating consistency.
- Developments in the recorded legal accrual, environmental obligations, and potential Duferdofin Nucor impairment or guarantee exposure.