Nucor Corporation (NYSE: NUE) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 26, 2021. This is an annual report, not a standalone fourth-quarter filing. Comparisons below are primarily with 2019.
Business context
Nucor manufactures steel and steel products and operates scrap processing, brokerage, and direct reduced iron businesses. It reports three segments: steel mills, steel products, and raw materials. Steel mills generated 60% of 2020 sales to external customers. Nucor recycled approximately 17.8 million gross tons of scrap steel during the year.
Key financial results
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $20.14 billion | $22.59 billion |
| Net earnings attributable to Nucor stockholders | $721.5 million | $1.27 billion |
| Diluted earnings per share | $2.36 | $4.14 |
| Gross margin | $2.23 billion (11%) | $2.68 billion (12%) |
| Cash provided by operating activities | $2.70 billion | $2.81 billion |
| Capital expenditures | $1.54 billion | $1.48 billion |
- External shipments declined 4% to 25.519 million tons, while average sales price per ton fell 7% to $789.
- Segment earnings before tax: steel mills $720 million, down from $1.79 billion; steel products $691 million, up from $511 million; raw materials $24 million, versus a $28 million loss.
- Steel mills utilization averaged 82%, compared with 84% in 2019. Steel products utilization was 71%; raw materials utilization was 67%.
- At year-end, cash and cash equivalents were $2.64 billion, short-term investments $408 million, and restricted cash $115 million. Working capital was $6.86 billion and the current ratio was 3.6, versus 3.3 in 2019.
- Long-term debt and finance lease obligations due after one year were $5.27 billion; short-term debt was $58 million. The $1.50 billion revolving credit facility was undrawn. Management reported net debt to total capital of approximately 13%.
- The company paid $1.61 per share in dividends and repurchased $39.5 million of stock in 2020.
Material changes and unusual items
- COVID-19 disrupted markets and operations from late in the first quarter. Earnings declined year over year, mainly reflecting lower steel selling prices, lower shipment volumes, and substantial asset-related losses and impairments.
- Reported 2020 losses and impairments of assets totaled $613.6 million, including approximately $483.5 million related to the exited Duferdofin Nucor investment and $103.2 million related primarily to Castrip inventory and long-lived assets. A further $27 million impairment related to unproved natural gas properties.
- The effective tax rate was -0.06%, compared with 23.1% in 2019. 2020 included tax benefits related to Duferdofin, state tax credits, and a CARES Act NOL carryback; the filing says these were partly offset by the tax-rate impact of impairments.
- Steel products delivered record segment profitability, supported by rebar fabrication and tubular products. Raw materials results improved as Louisiana DRI production recovered from a planned 2019 outage, although the DRI facilities still had combined operating losses in 2020.
- Year-end order backlog rose to $2.58 billion in steel mills and $2.66 billion in steel products, versus $1.68 billion and $2.24 billion, respectively, in 2019. Most steel products backlog was expected to be filled within one year.
Outlook, risks, and contingencies
- Management expected first-quarter 2021 earnings to increase significantly from fourth-quarter 2020, including a very significant improvement in steel mills earnings excluding fourth-quarter impairments. It expected steel products profitability to be similar to the fourth quarter and raw materials performance to improve.
- Management anticipated modest growth in full-year domestic steel demand in 2021 and stable or improving conditions in 23 of 24 steel-intensive end markets it monitors. Planned 2021 capital expenditures were approximately $2.00 billion.
- Major projects include the Gallatin sheet mill expansion and Arkansas galvanizing line, both expected to be completed in 2021, and the Brandenburg plate mill, expected to start up in late 2022. The 2021 outlook is subject to market and project execution uncertainty.
- Key risks include global steel overcapacity and import competition; cyclical demand; volatile scrap, iron ore, energy and steel prices; the timing of passing raw-material cost changes through to customers; COVID-19 impacts; and environmental, climate, permitting, safety, cyber, and operational risks.
- Nucor disclosed a Louisiana environmental compliance matter under discussion with regulators; the company believed any civil penalty would not be material. It reported $16 million in accrued environmental costs and did not expect ordinary-course legal proceedings to have a material adverse effect.
- The company had $48 million of unrecognized tax benefits and $12 million of accrued interest and penalties related to uncertain tax positions. It also guaranteed certain Nucor-JFE borrowing obligations; no related liability was recorded.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The critical audit matter concerned goodwill impairment testing for the Rebar Fabrication reporting unit.
Important facts for investors to verify
- How much of the earnings decline reflects underlying operating performance versus the Duferdofin exit, impairments, and unusually favorable tax items?
- Whether higher steel prices and shipment volumes translated into sustained margins, particularly as scrap and other input costs changed.
- Whether backlog converted to revenue and earnings as expected, and whether demand in construction, automotive, energy, and other end markets held up.
- Progress, cost, and returns on the major capital projects, including the 2021 expansions and the Brandenburg plate mill.
- Debt, liquidity, and capital returns as investment spending rises; note that reported cash includes restricted funds and cash held by joint ventures.
- Potential exposure from environmental matters, Nucor-JFE guarantees, uncertain tax positions, and future impairment risks.