Nucor Corporation (NYSE: NUE) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 28, 2019. Unaudited results; comparable periods ended September 29, 2018.
Business context
Nucor manufactures steel and steel products, produces direct reduced iron, and processes and brokers metals and scrap. It reports three segments: steel mills, steel products, and raw materials. Management attributed weaker 2019 conditions to customer destocking after strong 2018 demand, difficult weather earlier in the year, and lower average selling prices.
Key financial results
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Net sales | $5.465 billion | $6.742 billion | $17.457 billion | $18.771 billion |
| Gross margin | $572.5 million (10%) | $1.29 billion (19%) | $2.24 billion (13%) | $3.18 billion (17%) |
| Net earnings attributable to Nucor stockholders | $275.0 million | $676.7 million | $1.163 billion | $1.714 billion |
| Diluted EPS | $0.90 | $2.13 | $3.78 | $5.35 |
| Cash provided by operating activities | Not separately stated for quarter | Not separately stated for quarter | $2.120 billion | $1.901 billion |
Q3 average selling price per ton fell 13% year over year to $834, while outside shipments declined 7% to 6.555 million tons. For the first nine months, average price declined 2% to $871 and outside shipments fell 5% to 20.046 million tons. Steel mills earnings before tax were $309.9 million in Q3 versus $1.095 billion; steel products earnings were $170.2 million versus $138.7 million; raw materials recorded a $10.6 million loss versus a $29.1 million loss.
Balance sheet, liquidity and capital allocation
At September 28, 2019, cash and cash equivalents were $1.686 billion and short-term investments were $249.6 million. The current ratio was 3.4, compared with 3.1 at year-end 2018. Total debt and finance lease obligations on the balance sheet were approximately $4.364 billion, including current maturities; the filing separately estimates fair value of short- and long-term debt at approximately $4.83 billion. The $1.50 billion revolving credit facility was undrawn. Funded debt to total capitalization was 29%, below the facility’s 60% limit.
Capital expenditures were $984.6 million in the first nine months, up from $624.7 million. Management expected full-year 2019 capital expenditures of approximately $1.50 billion. Cash dividends paid were $369.3 million in the first nine months; share repurchases were $197.5 million, with approximately $1.30 billion remaining under the $2.0 billion authorization. Management said available resources were expected to cover capital and working-capital needs for at least 24 months.
Material changes and management outlook
- Total Q3 sales declined 19% year over year; steel mills sales fell 26%, raw materials 19%, and steel products 2%. Nine-month sales declined 7%.
- The steel mills segment’s lower selling prices, shipments, and metal margins drove much of the earnings decline. Steel mills utilization was 85% for the first nine months versus 93% a year earlier.
- Steel products performed relatively better: Q3 segment earnings increased, supported by joist, deck, rebar fabrication, and building systems. Tubular products remained pressured by destocking and lower prices.
- Raw materials faced margin compression, weaker scrap-processing volumes, and lower DRI profitability. A planned Louisiana DRI plant outage was expected to continue until mid-November 2019.
- Management expected Q4 2019 earnings to decrease from Q3: lower steel prices were expected to weigh on steel mills, year-end seasonality to slightly reduce steel products profitability, and the DRI outage and margin pressure to weigh on raw materials. Management believed scrap prices had bottomed as Q4 began.
- Nucor announced a new 1.2-million-ton annual-capacity plate mill in Kentucky, expected to be fully operational in 2022. Construction and expansion projects contributed to higher start-up costs: approximately $28 million in Q3 and $68 million year to date.
Risks, contingencies and unusual items
- Key exposures include steel-price competition and imports, trade policy, scrap and other input costs, energy prices, cyclical demand, global excess steel capacity, foreign exchange, equipment failures, and environmental regulation.
- Management reported no 2019 impairment charges; 2018 included a $110 million impairment of natural gas well assets. The filing notes possible future impairment risk for natural gas assets, goodwill, and equity investments if assumptions or performance deteriorate. The Grating reporting unit’s estimated fair value exceeded carrying value by about 17%; Rebar Fabrication’s by about 8% at its latest assessment.
- Nucor had guarantees on borrowings of its joint ventures Duferdofin Nucor and Nucor-JFE; no related liability was recorded. Accrued environmental costs were $17.1 million. Management did not expect ordinary-course legal proceedings, individually or in aggregate, to have a material adverse effect.
- The effective tax rate was 22.8% in Q3; management estimated approximately 23.0% for full-year 2019. Interim financial statements are unaudited.
Important facts for investors to verify
- Whether steel prices, shipment volumes, and customer destocking improved after the quarter, especially in steel mills and tubular products.
- Actual Q4 results versus management’s expectation of sequential earnings declines, including the impact and timing of the Louisiana DRI outage.
- Execution, spending, and expected returns on the $1.50 billion 2019 capital program and major expansion projects.
- Whether the performance assumptions supporting goodwill and other asset valuations remain achievable, particularly for Grating and Rebar Fabrication.
- Current debt, liquidity, joint-venture guarantee exposures, and the pace of dividends and share repurchases.