Nucor Corporation — Q3 2018 Form 10-Q
Business context and reporting period. Nucor manufactures steel and steel products, produces direct reduced iron, and processes and brokers metals. Its reportable segments are steel mills, steel products, and raw materials. This unaudited filing covers the 13 and 39 weeks ended September 29, 2018, compared with the periods ended September 30, 2017. Tubular and piling products were moved from steel mills to steel products for 2018 reporting; prior segment figures were reclassified.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $6.742B | $5.170B | $18.771B | $15.160B |
| Net earnings attributable to Nucor stockholders | $676.7M | $254.9M | $1.714B | $934.8M |
| Diluted earnings per share | $2.13 | $0.79 | $5.35 | $2.90 |
| Gross margin | $1.29B (19%) | $579.0M (11%) | $3.18B (17%) | $2.05B (14%) |
| Cash provided by operating activities | — | $1.901B | $766.6M | |
| Capital expenditures | — | $624.7M | $292.3M |
Q3 net earnings attributable to Nucor were 10% of sales, versus 5% a year earlier; the corresponding nine-month proportions were 9% and 6%. Nine-month annualized return on average stockholders’ equity was 25%, compared with 15%.
Drivers and segment results. Q3 sales increased 30%, with average sales price per ton up 23% and outside shipments up 6%. For the first nine months, sales increased 24%, average price per ton rose 16%, and outside shipments rose 6%. Management attributed stronger earnings primarily to improved steel metal margins, higher selling prices and volumes, and improved performance across most steel products businesses. Q3 earnings before tax were $1.095B for steel mills, $138.7M for steel products, and a $29.1M loss for raw materials; the raw materials result included the natural-gas-asset impairment.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.932B at September 29, 2018, up from $949.1M at year-end 2017. Current assets were $8.844B and current liabilities $2.808B; the reported current ratio was 3.2, versus 2.4 at year-end.
- Total debt carrying value was approximately $4.286B, including $52.8M short-term debt and $4.233B long-term debt. Nucor issued $1.0B of notes in April 2018—$500M at 3.950% due 2028 and $500M at 4.400% due 2048—and repaid $500M of 5.850% notes due 2018. Funded debt to total capitalization was 29%; the $1.5B revolving credit facility was undrawn.
- Operating cash flow was $1.901B; investing activities used $633.0M and financing activities used $281.1M. The filing reports capital expenditures of $624.7M for the nine months. Cash flow less capital expenditures was approximately $1.277B, calculated from those reported figures.
- Nucor repurchased $351.4M of treasury stock in the first nine months. A new discretionary $2.0B repurchase authorization was approved in September; no purchases had been made under that new program by quarter-end. The quarterly dividend was $0.38 per share.
Outlook, commentary and key risks
- Management expected Q4 2018 earnings to decline across all three operating segments from Q3, excluding the Q3 impairment, primarily due to seasonality. It nevertheless expected another strong quarter and earnings noticeably above Q4 2017.
- Management expected the 2018 effective tax rate to be approximately 23.4%, compared with 21.1% in 2017. The 2017 rate included a provisional $175.2M net tax benefit, mainly from revaluing deferred tax balances under tax reform.
- 2018 capital expenditures were expected to be approximately $1.0B, versus $507.1M in 2017, reflecting expansion projects. Management said available operating funds, cash and potential borrowing were expected to meet capital expenditure and working-capital needs for at least 24 months.
- Management cited strength in U.S. economic fundamentals and steel demand; 23 of the 24 markets served reportedly had stable or increased demand. It said steel imports were down approximately 12% through the first nine months of 2018, and noted trade cases and Section 232 tariffs as contributing factors. These market assessments and forward-looking expectations are not guarantees.
- Key exposures include steel pricing and competition, imports and trade policy, scrap and other input costs, energy prices and availability, cyclical demand and construction activity, global steel overcapacity, currency movements, operational interruptions, environmental regulation, and impairment risk.
Unusual items, contingencies and other changes
- Nucor recorded a $110.0M impairment charge on two groups of proved-producing natural gas wells after deterioration in current and projected Piceance Basin gas prices. Their combined post-impairment carrying value was $72.4M. Further impairment could result from weaker prices or changes in reserve, production-cost or other assumptions.
- Insurance recoveries benefited raw-materials gross margin by $48.1M for the first nine months, including $24.8M in Q3; additional insurance-recovery benefits in marketing and administrative expenses were $20.5M for the nine months and $6.8M for Q3. The filing also reports an $18.0M Q3 insurance benefit in raw-materials gross margin.
- Q3 included a $2.4M transition-tax expense as Nucor finalized its 2017 federal tax return. The company said it did not anticipate further Tax Reform Act adjustments, although the SAB 118 measurement period remained open pending guidance.
- Accrued environmental costs totaled $17.5M, subject to estimation uncertainties. Nucor also guaranteed 50% of a joint venture’s borrowings under Facility A; €148.5M was outstanding at quarter-end, and Nucor had recorded no liability for the guarantee. Management did not expect ordinary-course legal proceedings, individually or collectively, to materially adversely affect results, financial position or cash flows.
- Management said the adoption of new revenue-recognition guidance did not significantly change revenue recognition and had no material impact on earnings. The company expected lease-accounting adoption in 2019 to increase reported assets and liabilities, without significant impact on earnings, comprehensive income or cash flows.
Important facts for investors to verify
- Whether price increases and improved metal margins remain sufficient to offset higher scrap and other input costs, particularly through the seasonally weaker fourth quarter.
- The assumptions behind the $110.0M natural-gas-asset impairment and whether continued low prices could cause further impairment.
- Execution, cost and timing of the announced expansion projects, and the expected approximately $1.0B of 2018 capital expenditures.
- Actual use of the new $2.0B share-repurchase authorization, alongside dividends, growth investment and debt levels.
- Whether reported insurance recoveries and the lower tax rate are repeatable, and the outcome of remaining tax examinations and open tax matters.
- Future performance and potential obligations related to equity-method investments and the Duferdofin Nucor guarantee.