Nucor Corporation (NYSE: NUE) — Q2 2020 Form 10-Q
Reporting period: 13 weeks ended July 4, 2020; year-to-date comparisons cover 26 weeks. Amounts are in U.S. dollars unless stated otherwise. Interim financial statements are unaudited.
Business context and financial performance
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 identified the COVID-19 pandemic as the most significant ongoing factor affecting the business.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $4.327 billion | $5.896 billion | $9.952 billion | $11.993 billion |
| Gross margin | $378.0 million (9%) | $775.5 million (13%) | $1.01 billion (10%) | $1.67 billion (14%) |
| Earnings attributable to Nucor stockholders | $108.9 million | $386.5 million | $129.2 million | $888.3 million |
| Diluted earnings per share | $0.36 | $1.26 | $0.42 | $2.88 |
Q2 outside shipments fell 19% year over year to 5.479 million tons, while average selling price declined 10% to $790 per ton. For the first half, outside shipments fell 6% to 12.666 million tons and average selling price fell 12% to $786 per ton. Steel mills earnings before taxes and noncontrolling interests were $150.4 million in Q2, versus $578.9 million a year earlier; steel products earnings rose to $152.9 million from $116.1 million; raw materials reported a $1.4 million loss versus $21.7 million of earnings.
Q2 net margin attributable to Nucor stockholders was 2.5%, compared with 6.6%; first-half net margin was 1.3%, compared with 7.4%. First-half annualized return on average stockholders’ equity was 2.5%, versus 17.7%.
Cash flow, debt, and liquidity
- First-half operating cash flow was $1.350 billion, compared with $1.188 billion in 2019. Capital expenditures were $777.3 million, versus $649.9 million.
- Cash and cash equivalents were $2.789 billion at July 4, 2020; short-term investments were $247.5 million, for combined cash and investments of approximately $3.04 billion.
- Total debt and finance lease obligations on the balance sheet were approximately $5.37 billion, up from approximately $4.38 billion at year-end 2019. In May, Nucor issued $500 million of 2.000% notes due 2025 and $500 million of 2.700% notes due 2030.
- The current ratio was 4.4, compared with 3.3 at year-end 2019. The $1.50 billion revolving credit facility was undrawn; funded debt to total capitalization was 34%, below the 60% covenant limit. Management reported no significant debt maturities until September 2022.
- First-half dividends paid were $245.6 million; treasury stock repurchases were $39.5 million. Approximately $1.16 billion remained under the $2.00 billion share-repurchase authorization.
Material changes, outlook, and risks
Management attributed the earnings decline primarily to pandemic-related customer production cuts, weaker demand—especially in energy—and lower steel prices and shipment volumes. Lower selling prices and volumes outweighed lower scrap costs, reducing steel mills’ metal margins. Nonresidential construction was comparatively resilient and supported steel products results. Steel mill utilization averaged 79% in the first half, down from 85% a year earlier.
First-half losses on assets were $292.8 million, principally related to the Duferdofin Nucor joint venture in Italy: a $255.0 million noncash investment impairment and a reserve against a note receivable. The filing cites adverse commercial developments, worsened by COVID-19. Further impairment is possible if performance or valuation assumptions deteriorate. Nucor also guarantees 50% of certain Duferdofin borrowings; it had not recorded a liability for the guarantee.
Management expected Q3 2020 earnings to be similar to Q2. It anticipated another strong quarter for downstream steel products, steel mills performance similar to Q2, and weaker raw materials performance because of depressed raw-material pricing. Management cautioned that rising COVID-19 cases and uncertain market conditions could adversely affect the second half. It estimated 2020 capital expenditures at approximately $1.70 billion after revising and reprioritizing projects, while reaccelerating investment in the Kentucky plate mill and Gallatin sheet mill expansion. Management said existing liquidity and funding sources were expected to cover capital and working-capital needs for at least 24 months.
Key risks include pandemic effects on demand, operations, supply chains and capital projects; steel price and volume cyclicality; scrap, energy and other input costs; import competition and trade policy; and potential asset impairments. The filing reports $16.3 million of accrued environmental costs. Nucor Steel Louisiana was negotiating with the state environmental agency over emissions issues; no penalty was finalized, and the company expected the civil penalty to exceed $100,000 but not be material. Management did not expect other ordinary-course legal proceedings, individually or collectively, to have a material adverse effect.
Subsequent to quarter-end, Nucor became an obligor on $162.6 million of 40-year variable-rate Green Bonds to partially fund the Brandenburg plate mill. The proceeds were being held in trust for project costs. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether demand, shipment volumes, steel selling prices, and segment margins improved or worsened after July 4, 2020, particularly in energy-related markets.
- Whether the Duferdofin investment and receivable require further impairment, and any potential exposure under Nucor’s joint-venture guarantees.
- Progress against the $1.70 billion capital-spending estimate, project timelines and returns, and the impact of the post-quarter Green Bonds on debt and liquidity.
- Whether the Q3 outlook, cash generation, and management’s stated 24-month liquidity assessment were borne out by subsequent results.
- Resolution and final penalty, if any, in the Louisiana emissions matter, and any changes in environmental or other contingencies.