Nucor Corporation — Q2 2018 Form 10-Q
Business context and reporting period. Nucor manufactures steel and steel products, produces direct reduced iron, and processes and brokers metals. This unaudited report covers the 13 weeks and 26 weeks ended June 30, 2018, compared with periods ended July 1, 2017. Nucor reports steel mills, steel products, and raw materials segments.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $6.46 billion | $5.17 billion | $12.03 billion | $9.99 billion |
| Net earnings attributable to Nucor stockholders | $683.2 million | $323.0 million | $1.04 billion | $679.9 million |
| Diluted earnings per share | $2.13 | $1.00 | $3.23 | $2.11 |
| Gross margin | 18% | 14% | 16% | 15% |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $870.6 million | $350.9 million |
- Q2 sales rose 25% year over year, reflecting a 17% increase in average sales price per ton and 7% more tons shipped to outside customers. First-half sales increased 20%; average price per ton rose 13% and shipments rose 6%.
- Q2 earnings attributable to Nucor more than doubled year over year; first-half earnings rose 52%. First-half annualized return on average stockholders’ equity was 23%, versus 17%.
- Q2 earnings before tax by segment were $961.8 million for steel mills, $155.8 million for steel products, and $135.0 million for raw materials. First-half figures were $1.52 billion, $241.6 million, and $209.5 million, respectively.
- The effective tax rate was 21.9% in Q2 2018 versus 32.7% in Q2 2017, principally reflecting the reduction in the U.S. federal corporate tax rate under the Tax Reform Act. Management expects a full-year 2018 effective tax rate of approximately 23.4%.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $1.49 billion at June 30, 2018, up from $949.1 million at year-end 2017. The current ratio was 3.1, compared with 2.4 at year-end.
- Total reported debt was approximately $4.29 billion at quarter-end, including $59.2 million of short-term debt; long-term debt due after one year was $4.23 billion. Funded debt to total capitalization was 30%, against a 60% covenant limit. The $1.5 billion revolving credit facility was undrawn.
- First-half capital expenditures were $361.5 million. Management expects 2018 capital expenditures of approximately $1.0 billion, versus $507.1 million in 2017, for expansion and other projects.
- In April, Nucor issued $500 million of 3.950% notes due 2028 and $500 million of 4.400% notes due 2048; it used $500 million to repay 5.850% notes that matured in June. The company repurchased $170.3 million of treasury stock in the first half and had $567.7 million remaining under its $900 million authorization.
- The quarterly dividend was $0.38 per share, Nucor’s 181st consecutive quarterly cash dividend. Management said available cash, operating funds, and borrowing capacity should cover existing-operation capital and working-capital needs for at least 24 months.
Changes, outlook, and risks
- Higher selling prices and increased volumes more than offset higher scrap and scrap-substitute costs. Q2 average steel-mill selling prices rose 19%, while average scrap and substitute costs rose 19%. Steel-mill utilization was 95% in Q2 and 93% in the first half; first-half utilization in steel products and raw materials was 73% and 76%, respectively.
- Management expects Q3 2018 earnings to improve further from Q2. Steel mills are expected to remain strong, with margin expansion mainly in sheet and plate; steel products are expected to perform similarly to Q2; raw-materials performance is expected to decline because of margin compression.
- Management cited sustainable strength in steel end-use markets and stable or improving demand in 22 of 24 markets served. It also said imports were down more than 7% in the first half, amid trade actions and Section 232 tariffs. These are management assessments, not guarantees.
- Q2 results included $23.3 million of insurance recoveries across the raw-materials segment and marketing, administrative and other expenses, including a $9.6 million raw-materials benefit and a $13.7 million expense benefit. A treasury-lock settlement reduced interest expense. Foreign-currency translation reduced Q2 comprehensive income by $43.5 million.
- Key risks include steel-price and raw-material cost volatility, import competition and trade policy, cyclicality and global excess capacity, energy costs, demand weakness, foreign exchange, equipment failures, environmental regulation, and possible impairment of assets or equity investments. Nucor reported no material change in risk factors from its 2017 Form 10-K and did not expect ordinary-course legal proceedings to have a material adverse effect.
- Nucor announced a $240 million Florida rebar micro mill and a $240 million Arkansas galvanizing line. It also expects lease accounting changes effective in 2019 to increase recognized assets and liabilities, but not to significantly affect earnings, comprehensive income, or cash flows.
Important facts for investors to verify
- Whether Q3 performance and margin expectations were achieved, particularly the anticipated raw-materials margin compression.
- Whether steel prices and demand continued to offset rising scrap and other input costs, and how trade policy affected imports and pricing.
- Progress, spending, and expected returns on the approximately $1.0 billion 2018 capital program and announced expansion projects.
- Debt, liquidity, and capital returns following the 2018 bond issuance, debt repayment, repurchases, and dividends.
- Potential exposure from the guarantee of Nucor’s 50% share of Duferdofin Nucor borrowings, and impairment sensitivities for natural-gas assets and equity investments.
- The filing reports the statements as unaudited. Tubular products and piling were reclassified from steel mills to steel products; the company says this did not affect consolidated financial statements.