Nucor Corporation (NUCOR) — Q1 2017 Form 10-Q
Business context and period. Nucor manufactures steel and steel products and produces and processes raw materials. This unaudited report covers the 13 weeks ended April 1, 2017; comparisons are with the 13 weeks ended April 2, 2016, unless noted.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $4.815 billion | $3.716 billion |
| Gross margin | $760.3 million (16% of sales) | $315.0 million (8% of sales) |
| Earnings before tax and noncontrolling interests | $549.0 million | $169.6 million |
| Net earnings attributable to Nucor stockholders | $356.9 million | $87.6 million |
| Diluted earnings per share | $1.11 | $0.27 |
| Cash provided by operating activities | $244.1 million | $550.9 million |
- Sales rose 30%; average sales price per ton increased 21% to $731, and shipments to outside customers increased 7% to 6.584 million tons. Net earnings attributable to Nucor were 7.4% of sales, versus 2.4%.
- Gross margin improved primarily due to higher steel selling prices, metal margins, and steel mill utilization. Average scrap and scrap-substitute cost increased 47% year over year to $284 per ton but was more than offset by higher prices and volumes.
- Steel mill utilization was 89%, versus 80%; steel products utilization was 60%, versus 56%; raw materials utilization was 67%, versus 60%.
- Net interest expense was $43.6 million, down from $44.9 million. The effective tax rate was 31.2%, compared with 27.8%.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $1.658 billion; short-term investments were $50.0 million. Combined, these totaled $1.708 billion, down $488.2 million from year-end 2016.
- Current assets were $6.878 billion and current liabilities were $2.838 billion; management reported a current ratio of 2.4, versus 2.7 at year-end.
- Reported debt carrying amounts totaled approximately $4.388 billion, including $48.2 million of short-term debt, $600 million due within one year, and $3.740 billion due thereafter. Funded debt to total capitalization was 34%; the $1.5 billion revolving credit facility was undrawn. The filing reports debt fair value of approximately $4.70 billion.
- Operating cash flow was lower chiefly because operating assets and liabilities used $338.7 million, including higher inventory and receivables. Capital expenditures were $94.5 million. Investing activities used $484.7 million, including acquisitions; financing activities used $147.1 million. Cash dividends paid were $121.3 million.
Material changes and notable items
- Steel mills segment sales increased 34% to $3.543 billion, with pretax earnings of $684.2 million versus $280.4 million. Steel products sales rose 4% to $860.1 million, but pretax earnings fell to $26.9 million from $42.4 million as input costs pressured margins. Raw materials sales increased 63% to $412.3 million; the segment returned to pretax profit of $26.4 million from a $63.4 million loss.
- Nucor acquired Southland Tube for approximately $130 million and Republic Conduit for $331.3 million, using cash on hand. Republic’s preliminary purchase accounting included $115.5 million of goodwill. The acquisitions expanded Nucor’s tubing and conduit products.
- Cash operating performance benefited from stronger earnings, but acquisition spending and working-capital investment contributed to the cash decline. Inventory rose 24% and receivables 21% from year-end.
- The 2016 comparative results were retrospectively adjusted after Nucor changed certain inventories from LIFO to FIFO. The change increased Q1 2016 Nucor-attributable earnings by $16.8 million and EPS by $0.05. Q1 2016 also included $13.4 million of out-of-period noncash gains, which management said were not material to previously reported periods.
Outlook, risks, and contingencies
- Management expected Q2 2017 earnings to improve from Q1, citing expected sheet and plate mill margin improvement, seasonal improvement in downstream construction markets, better DRI performance, and a smaller relative impact from intercompany profit eliminations. Scrap prices were expected to remain steady or ease slightly from late-Q1 peaks.
- Management expected 2017 capital expenditures of approximately $550 million and an effective tax rate of approximately 31.8%. It stated that available cash, operating funds, and borrowing capacity were expected to cover operating, working-capital, and capital needs for at least 24 months.
- Key exposures include steel and raw-material price volatility, imports and trade policy, energy costs, cyclical demand, foreign exchange, equipment interruptions, environmental regulation, and impairment risk. Management estimated imports represented about 25% of the finished steel market in the first three months of 2017.
- A five-week unplanned outage at Nucor Steel Louisiana affected Q1 DRI operations. A natural-gas well group with a $78.4 million carrying value was identified as more sensitive to future gas-price assumptions; adverse changes could lead to impairment. Management also noted possible further impairment of its Duferdofin Nucor investment if performance diverges materially from valuation assumptions.
- Accrued environmental costs were $20.9 million. Nucor said ordinary-course legal proceedings were not expected, individually or collectively, to materially adversely affect results, financial position, or cash flows. It reported no material risk-factor changes and effective disclosure controls.
Important facts for investors to verify
- Whether stronger steel pricing, utilization, and metal margins continued after Q1, and whether Q2 improvement matched management’s expectations.
- How the Southland and Republic acquisitions contributed to sales, earnings, integration costs, and cash generation; the Republic purchase-price allocation remained preliminary.
- Whether working-capital requirements and acquisition activity continue to constrain operating cash flow and liquidity.
- Exposure to imports, trade-case outcomes, scrap and energy prices, and potential impairment at the gas-well assets or Duferdofin Nucor.
- Debt maturities, covenant compliance, planned capital spending, and the sustainability of dividends and other capital allocation decisions.