Nucor Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended July 1, 2017 (13 and 26 weeks, respectively), compared with periods ended July 2, 2016. Unaudited interim statements.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $5.175 billion | $4.246 billion | $9.990 billion | $7.961 billion |
| Net earnings attributable to Nucor stockholders | $323.0 million | $243.6 million | $679.9 million | $331.2 million |
| Diluted earnings per share | $1.00 | $0.76 | $2.11 | $1.03 |
| Gross margin | $709.6 million (14%) | $585.3 million (14%) | $1.47 billion (15%) | $900.2 million (11%) |
- Q2 sales increased 22%; average sales price per ton rose 17% to $767 and outside shipments increased 5% to 6.748 million tons. First-half sales increased 25%, with average price per ton up 19% to $749 and outside shipments up 6% to 13.332 million tons.
- Q2 stockholder earnings increased about 33%; first-half earnings increased about 105%. Stockholder earnings as a share of sales were 6% in both Q2 periods and 7% versus 4% for the first half.
- Cash provided by operations was $347.0 million in the first half, down from $866.4 million. Investing used $575.1 million, including acquisitions; financing used $307.7 million. Cash and equivalents declined $534.6 million to $1.511 billion.
- At July 1, cash and short-term investments totaled $1.561 billion. Current assets were $7.183 billion and current liabilities $3.325 billion; the reported current ratio was 2.2, down from 2.7 at year-end 2016.
- Total debt was approximately $4.38 billion, including $1.1 billion due within one year; funded debt to total capitalization was 33%. The $1.5 billion revolving facility was undrawn, with no borrowings, and matures in April 2021. Total equity was $8.712 billion.
- Quarterly dividends declared were $0.3775 per share. First-half cash dividends were $242.7 million.
Changes and operating drivers
- Steel mills drove the revenue and earnings improvement: first-half segment sales rose 30% and segment pretax earnings were $1.302 billion versus $811.1 million. Higher selling prices and volumes more than offset higher scrap and energy costs.
- Steel products sales rose 5% in Q2 and 4% in the first half, but segment pretax earnings fell to $45.8 million for Q2 and $72.7 million for the first half, reflecting competitive pressure, margin compression, and higher steel input costs.
- Raw materials segment sales rose 32% in Q2 and 46% in the first half. Segment pretax results improved to $66.2 million and $92.6 million, respectively, from losses in the comparable 2016 periods, aided by DRI pricing and DJJ brokerage and scrap operations.
- Working capital absorbed cash: receivables rose 28% and inventories 34% from year-end. Management attributed this to increased shipments and prices, higher scrap costs, and more inventory to support higher operating rates.
- Net debt maturities classified as current rose by $500 million after debt due in June 2018 was reclassified to current liabilities. Long-term debt due after one year declined to $3.241 billion from $3.739 billion at year-end.
Outlook, risks, and notable items
- Management expected Q3 2017 earnings to be in a range similar to quarterly results in the first half. It cited healthy nonresidential construction indicators, continued automotive-market gains, and improved energy markets. Scrap prices were expected to be stable entering the second half.
- Management expected a 2017 effective tax rate of approximately 32.3% and capital expenditures of approximately $500 million. It said available resources should meet existing-operation capital expenditure and working-capital needs for at least 24 months.
- Announced investments included an $85 million bar-mill upgrade and an estimated $176 million galvanizing and pickling line, expected to take two years to construct after approvals. Nucor acquired Southland Tube for approximately $130 million and Republic Conduit for $331.6 million; both acquisitions expanded tubular and value-added offerings.
- Finished steel imports increased an estimated 15% in the first half and represented an estimated 27% of the U.S. market. Risks include competition and imports, steel and scrap price cycles, raw-material and energy costs, nonresidential construction demand, foreign exchange, operational interruptions, environmental regulation, and possible asset or investment impairments.
- Potential sensitivities include a possible further impairment of the Duferdofin Nucor investment amid challenging European steel conditions, and impairment of certain natural-gas assets if prices remain low beyond management’s assumptions. Nucor also guarantees 50% of certain Duferdofin facility borrowings; $131.4 million was outstanding under that facility at July 1.
- Accrued environmental costs were $17.4 million, subject to estimation uncertainty. Management did not expect ordinary-course legal proceedings, individually or collectively, to materially affect results, financial position, or cash flows.
- Comparative 2016 results were retrospectively adjusted for Nucor’s change from LIFO to FIFO for certain inventories; this increased reported first-half 2016 stockholder earnings by $26.7 million and diluted EPS by $0.08. The 2017 adoption of share-based payment guidance and early adoption of goodwill impairment guidance had no material financial-statement impact.
Important facts for investors to verify
- Whether higher steel selling prices and margins persist as scrap costs, imports, and demand conditions change.
- Whether working-capital investment reverses and operating cash flow improves from the first-half level.
- Integration, returns, and final purchase-price allocations for Southland Tube and Republic Conduit, plus execution and approvals for announced capital projects.
- Debt repayment requirements, liquidity, and the effect of the $1.1 billion current debt classification on upcoming funding needs.
- Potential impairment exposure in Duferdofin Nucor and natural-gas assets, and the status of environmental, legal, and tax contingencies.