Nucor 2011 Annual Report Download - page 23

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Our highly variable cost structure, combined with our financial strength and liquidity, has allowed us to succeed in cyclical severely
depressed steel industry market conditions in the past. In such times, our incentive-based pay system reduces our payroll costs,
both hourly and salary, which helps to offset lower selling prices. Our pay-for-performance system that is closely tied to our levels of
production also allows us to keep our work force intact and to continue operating our facilities when some of our competitors with
greater fixed costs are forced to shut down some of their facilities. Because we use electric arc furnaces to produce our steel, we
can easily vary our production levels to match short-term changes in demand, unlike our integrated competitors. We believe these
strengths have given us opportunities to gain market share during such times.
EVALUATING OUR OPERATING PERFORMANCE
We report our results of operations in three segments: steel mills, steel products and raw materials. Most of the steel we produce in our
mills is sold to outside customers, but a significant percentage is used internally.
We begin measuring our performance by comparing our net sales, both in total and by individual segment, during a reporting period to our
net sales in the corresponding period in the prior year. In doing so, we focus on changes in and the reasons for such changes in the two
key variables that have the greatest influence on our net sales, average sales price per ton and total tons shipped to outside customers.
We also focus on both dollar and percentage changes in gross margins, which are key drivers of our profitability, and the reasons for
such changes. There are many factors from period to period that can affect our gross margins. One consistent area of focus for us
is changes in “metal margins,” which is the difference between the selling price of steel and the cost of scrap and scrap substitutes.
Increases in the cost of scrap and scrap substitutes that are not offset by increases in the selling price of steel can quickly compress our
margins and reduce our profitability.
Another factor affecting our gross margins in any given period is the application of the LIFO method of accounting to a substantial
portion of our inventory (47% of total inventories as of December 31, 2011). LIFO charges or credits for interim periods are based
on management’s interim period-end estimates, after considering current and anticipated market conditions, of both inventory costs
and quantities at fiscal year end. The actual year end amounts of inventory costs and/or quantities may differ significantly from
these estimated interim amounts. Annual LIFO charges or credits are largely based on the relative changes in cost and quantities
year over year, primarily with raw material inventory in the steel mills segment.
Because we are such a large user of energy, material changes in energy costs per ton can also significantly affect our gross margins.
Lower energy costs per ton increase our gross margins. Generally, our energy costs per ton are lower when the average utilization rates
of all operating facilities in our steel mills segment are higher.
Changes in marketing, administrative and other expenses, particularly freight and profit sharing costs, can also have a material effect
on our results of operations for a reporting period. Profit sharing costs vary significantly from period to period as they are based upon
changes in our pre-tax earnings and are a reflection of our pay-for-performance system that is closely tied to our levels of production.
EVALUATING OUR FINANCIAL CONDITION
We evaluate our financial condition each reporting period by focusing primarily on cash provided by operating activities, our current ratio, the
turnover rate of our accounts receivable and inventories, the amount and reasons for changes in cash used in investing activities, the amount
and reasons for changes in cash provided by financing activities and our cash and cash equivalents and short-term investments position
at period end. Our conservative financial practices have served us well in the past and are serving us well today. As a result, our financial
position remains strong despite the negative effects on our business of the current downturn in the economic cycle.
COMPARISON OF 2011 TO 2010
RESULTS OF OPERATIONS
NET SALES
Net sales to external customers by segment for 2011 and 2010 were as follows:
(in thousands)
Year Ended December 31, 2011 2010 % Change
Steel mills $13,960,245 $10,860,760 29%
Steel products 3,431,490 2,831,209 21%
Raw materials 2,128,391 1,814,329 17%
All other 503,438 338,329 49%
Total net sales to external customers $20,023,564 $15,844,627 26%