Nucor Corporation — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the 13 weeks ended March 31, 2018, compared with the 13 weeks ended April 1, 2017. Nucor manufactures steel and steel products, produces direct reduced iron, and processes and brokers metals. Its reporting segments are steel mills, steel products, and raw materials. Tubular products and piling were reclassified from steel mills to steel products; comparative segment figures were recast without changing consolidated results.
Key financial metrics
| Metric | Q1 2018 | Comparable period |
|---|---|---|
| Net sales | $5.568 billion | $4.815 billion |
| Gross margin | $726.4 million; 13% of sales | $760.3 million; 16% of sales |
| Earnings before taxes and noncontrolling interests | $515.9 million | $549.0 million |
| Net earnings attributable to Nucor stockholders | $354.2 million | $356.9 million |
| Diluted earnings per share | $1.10 | $1.11 |
| Cash provided by operating activities | $127.9 million | $244.1 million |
| Capital expenditures | $172.2 million | $94.5 million |
| Cash and cash equivalents | $760.3 million at March 31, 2018 | $949.1 million at December 31, 2017 |
| Total debt, including current maturities | $3.817 billion carrying value | $3.795 billion at December 31, 2017 |
Sales rose 16%, reflecting a 9% increase in average sales price per ton and a 6% increase in tons shipped to outside customers. Gross margin declined despite higher sales. Net earnings attributable to Nucor shareholders were broadly flat year over year; the effective tax rate fell to 26.3% from 31.2%, partly offsetting lower pretax earnings. The company reported an annualized return on average stockholders’ equity of 16.0%, versus 17.8%.
At March 31, current assets were $7.079 billion and current liabilities were $2.845 billion; the reported current ratio was 2.5. Funded debt to total capitalization was 29%, and the $1.5 billion revolving credit facility was undrawn. Cash flow from operations was reduced by working-capital use, including increases in receivables and inventory and payouts of accrued compensation. Cash used in investing was $171.2 million; cash used in financing was $145.5 million. The quarterly dividend declared was $0.38 per share.
Material changes and segment performance
- Steel mills external sales increased 12% to $3.581 billion; segment pretax earnings fell to $560.5 million from $644.2 million. Management attributed the decline primarily to the prior-year benefit from lower scrap costs in inventory.
- Steel products external sales increased 21% to $1.469 billion; segment pretax earnings rose to $85.8 million from $66.9 million. Higher volumes and selling prices helped, while rising steel input costs compressed margins.
- Raw materials external sales increased 26% to $519.0 million; segment pretax earnings rose to $74.5 million from $26.4 million, supported by scrap-processing and direct-reduced-iron performance.
- Average utilization rates increased year over year to 92% for steel mills, 71% for steel products, and 74% for raw materials.
- Q1 2018 operating cash flow was lower than the prior year, while capital expenditures were higher. Q1 2017 investing cash flow included $485.1 million of acquisitions; there were no acquisitions in Q1 2018.
Outlook, commentary, risks, and unusual items
- Management expected Q2 2018 earnings to increase significantly from Q1. It anticipated improved steel-mill results as announced price increases took effect, and improved steel-products results as higher input costs were passed through. These are forward-looking expectations, not guarantees.
- Management expected a full-year 2018 effective tax rate of approximately 23.6%, compared with 21.1% for 2017. Q1’s lower tax rate reflected the U.S. federal corporate tax rate reduction, partly offset by elimination of the domestic manufacturing deduction and a $21.8 million deferred-tax-asset write-off.
- Capital expenditures for 2018 were expected to be approximately $1.0 billion, compared with $507.1 million in 2017. Major projects included mill expansions and two rebar micro mills; the announced Frostproof, Florida project was estimated at $240 million.
- In April 2018, Nucor issued $1.0 billion of notes: $500 million of 3.950% notes due 2028 and $500 million of 4.400% notes due 2048. Net proceeds were approximately $986.1 million; management planned to use proceeds in part to repay $500 million of debt maturing in Q2 2018. The revolving credit facility was also extended to April 2023.
- Principal risks include steel-price and demand cyclicality, imports and trade policy, scrap and energy costs, competition and substitute materials, operational interruptions, foreign exchange, environmental regulation, and possible impairment of assets or investments. Management noted that prolonged low natural-gas prices could put the carrying value of proved producing gas wells at risk; no impairment was recorded in the period.
- Environmental costs accrued were $16.8 million. Nucor stated that ordinary-course legal proceedings were not expected, individually or in aggregate, to materially adversely affect results, financial position, or cash flows. It also guarantees 50% of specified Duferdofin Nucor facility borrowings; no liability was recorded for the guarantee.
- Adoption of new revenue-recognition guidance had no material effect; under prior guidance Q1 sales and cost of products sold would each have been about $10.2 million higher, with no other line-item impact. No material changes in risk factors or internal control were reported.
Important facts for investors to verify
- Whether announced steel price increases and pass-through of higher input costs translated into the expected Q2 improvement.
- Whether working-capital demands, planned capital spending, dividends, and debt maturities were funded as anticipated.
- Progress, costs, and timing of the major expansion projects, including the micro mills and the Frostproof facility.
- Changes in scrap, steel, and natural-gas prices, trade measures, and demand conditions, and their effects on margins and asset valuations.
- Subsequent repayment of the $500 million debt maturity and the terms and use of proceeds from the April 2018 note issuance.