Nucor 2013 Annual Report Download - page 25

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24
Finally, due to our natural gas working interest drilling programs with Encana, a substantial or extended decline in natural gas prices could
have a material adverse effect on these programs and, by extension, us. In order to mitigate this risk, we announced a joint decision with
Encana in the fourth quarter of 2013 to temporarily suspend drilling new wells until there is a sustained improvement in natural gas pricing.
A substantial or extended decline in the price of natural gas could result in further delays or cancellation of existing or future drilling
programs or curtailment in production at some properties, all of which could have an adverse effect on our revenues, profitability and
cash flows. In addition, natural gas drilling and production are subject to intense federal and state regulation as well as to public interest in
environmental protection. Such regulation and interest, when coupled, could result in these drilling programs being forced to comply with
certain future regulations, resulting in unknown impacts on the programs’ ability to achieve the cost and hedge benefits we expect from
the programs.
OUR STRENGTHS AND OPPORTUNITIES
We are North America’s most diversified steel producer. As a result, our short-term performance is not tied to any one market.
The pie chart below shows the diversity of our product mix by total tons sold to outside customers in 2013.
Our highly variable cost structure, combined with our financial strength and liquidity, has allowed us to succeed during 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, which 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 also give 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 by many of the facilities in our steel products segment.
We begin measuring our performance by comparing our net sales, both in total and by individual segment, during a reporting period
with 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 during the period 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 last-in, first-out (LIFO) method of accounting to a
substantial portion of our inventory (45% of total inventories as of December 31, 2013). 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 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.
DIVERSIFIED PRODUCT MIX
Total Tons Sold to Outside Customers in 2013
Sheet
Bar
Structural
Plate
Downstream products
Raw materials
32%
22%
11%
10%
11%
14%