Nucor corporation in 2016 case analysis

Nucor Corporation

option:

Expand internationally by a joint venture with India steel companies.

Must address:

1. How much will it cost?

2. How likely will this option meet my decision criteria?

3. How profitable will it be (Does this option create a positive ROI?)

4. ***Most important—What could go wrong?—Risks, Assumptions, Confidence, Mitigation Strategies—Sensitivity Analysis—Break even, Best Case, Worst Case

COMPANY BACKGROUND Nucor began its journey from obscurity to a steel industry leader in the 1960s. Operating under the name of Nuclear Corporation of America in the 1950s and early 1960s, the company was a maker of nuclear instruments and electronics products. After suffering through several money-losing years and facing bankruptcy in 1964, Nuclear Corporation of America’s board of directors opted for new leader- ship and appointed F. Kenneth Iverson as president and CEO. Shortly thereafter, Iverson concluded that the best way to put the company on sound footing was to exit the nuclear instrument and electronics business and rebuild the company around its profit- able South Carolina–based Vulcraft subsidiary that was in the steel joist business—Iverson had been the head of Vulcraft prior to being named president. Iverson moved the company’s headquarters from Phoenix, Arizona, to Charlotte, North Carolina, in 1966, and proceeded to expand the joist business with new operations in Texas and Alabama. Then, in 1968, top management decided to integrate back- ward into steelmaking, partly because of the benefits of supplying its own steel requirements for producing steel joists and partly because Iverson saw opportu- nities to capitalize on newly emerging technologies to produce steel more cheaply. In 1972 the company

In 2016, Nucor Corp., with a production capacity of 29 million tons, was the largest manufacturer of steel and steel products in North America and ranked as the 13th largest steel company in the world based on tons shipped in 2014. It was regarded as a low-cost producer, and it had a sterling reputation for being a global first-mover in implementing cost- effective steel-making production methods and prac- tices throughout its operations.

Heading into 2016, Nucor had 24 steel mills with the capability to produce a diverse assortment of steel shapes (steel bars, sheet steel, steel plate, and struc- tural steel) and additional finished steel manufactur- ing facilities that made steel joists, steel decking, cold finish bars, steel buildings, steel mesh, steel grating, steel fasteners, and fabricated steel reinforcing prod- ucts. The company’s lineup of product offerings was the broadest of any steel producer serving steel users in North America. Nucor had 2015 revenues of $16.4 billion and net profits of $357.7 million, far below its 2008 pre-recession peak of $23.7 billion in revenues and $1.8 billion in net profits and also substantially worse than its 2014 revenues of $21.1 billion and net profits of $714 million. Nucor’s sharp declines in sales and net profits in 2015 resulted from erod- ing market prices for many steel products and a sharp falloff in customer orders in several major product categories, both largely due to a surge in ultra-cheap imported steel products coming from a variety of foreign sources (but mainly China). The outlook for 2016 was not encouraging.

Arthur A. Thompson The University of Alabama

Nucor Corporation in 2016: Contending with the Challenges of Low-Cost Foreign Imports and Weak Demand for Steel Products

CASE 27

Copyright © 2016 by Arthur A. Thompson. All rights reserved.

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chair and CEO through 2012. Like his predecessors, DiMicco continued to pursue Nucor’s longstanding strategy to aggressively grow the company’s produc- tion capacity and product offerings via both acquisi- tion and new plant construction; tons sold rose from 11.2 million in 2000 to 25.2 million in 2008. Then the unexpected financial crisis in the fourth quarter of 2008 and the subsequent economic fallout caused tons sold in 2009 to plunge to 17.6 million tons and revenues to nosedive from $23.7 billion in 2008 to $11.2 billion in 2009.

Even though the steel industry remained in the doldrums until he retired in 2012, DiMicco was undeterred by the depressed market demand for steel and proceeded to expand Nucor’s production capa- bilities and range of product offerings. It was his strong belief that Nucor should be opportunistic in initiating actions to strengthen its competitive posi- tion despite slack market demand for steel because doing so put the company in even better position to significantly boost its financial performance when market demand for steel products grew stronger. DiMicco expressed his thinking thusly:2

Nucor uses each economic downturn as an opportu- nity to grow stronger. We use the good times to pre- pare for the bad, and we use the bad times to prepare for the good. Emerging from downturns stronger than we enter them is how we build long-term value for our stockholders. We get stronger because our team is focused on continual improvement and because our financial strength allows us to invest in attractive growth opportunities throughout the economic cycle.

During DiMicco’s 12-year tenure, Nucor com- pleted more than 50 acquisitions, expanding Nucor’s operations from 18 locations to more than 200, boost- ing revenues from $4.8 billion in 2000 to $19.4 billion at the end of 2012, and transforming Nucor into the undisputed leader in providing steel products to North American buyers. When DiMicco retired at the end of 2012, he was succeeded by John J. Ferriola, who had served as Nucor’s president and COO since 2011. Ferriola immediately embraced Nucor’s strategy of investing in down markets to better position Nucor for success when the economy strengthened and market demand for steel products became more robust.

Going into 2016, Nucor was the biggest, most cost-efficient, and most diversified steel producer in North America. It had the capacity to produce 29 mil- lion tons of steel annually at its 24 steel mills. All of its steel mills were among the most modern and efficient

adopted the name Nucor Corporation, and Iverson initiated a long-term strategy to grow Nucor into a major player in the U.S. steel industry.

By 1985 Nucor had become the seventh largest steel company in North America, with revenues of $758 million, six joist plants, and four state-of-the-art steel mills that used electric arc furnaces to produce new steel products from recycled scrap steel. More- over, Nucor had gained a reputation as an excellently managed company, an accomplished low-cost pro- ducer, and one of the most competitively successful manufacturing companies in the country.1 A series of articles in The New Yorker related how Nucor, a relatively small American steel company, had built an enterprise that led the whole world into a new era of making steel with recycled scrap steel. Network broadcaster NBC did a business documentary that used Nucor to make the point that American manu- facturers could be successful in competing against low-cost foreign manufacturers.

Under Iverson’s leadership, Nucor came to be known for its aggressive pursuit of innovation and technical excellence in producing steel, rigorous qual- ity systems, strong emphasis on workforce produc- tivity and job security for employees, cost-conscious corporate culture, and skills in achieving low costs per ton produced. The company had a very stream- lined organizational structure, incentive-based com- pensation systems, and steel mills that were among the most modern and efficient in the United States. Iverson proved himself as a master in crafting and executing a low-cost provider strategy, and he made a point of practicing what he preached when it came to holding down costs throughout the company. The offices of executives and division general manag- ers were simply furnished. There were no company planes and no company cars, and executives were not provided with company-paid country club mem- berships, reserved parking spaces, executive dining facilities, or other perks. To save money on his own business expenses and set an example for other Nucor managers, Iverson flew coach class and took the sub- way when he was in New York City.

When Iverson left the company in 1998 follow- ing disagreements with the board of directors, he was succeeded briefly by John Correnti and then Dave Aycock, both of whom had worked in various roles under Iverson for a number of years. In 2000, Daniel R. DiMicco, who had joined Nucor in 1982 and risen up through the ranks to executive vice president, was named president and CEO. DiMicco was Nucor’s

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earned a profit in every quarter of every year since 1966—a truly remarkable accomplishment in a mature and cyclical business where it was common for industry members to post losses when demand for steel sagged. As of February 2016, Nucor had paid a dividend for 171 consecutive quarters and had raised the base dividend it paid to stockholders for 43 consecutive years (every year since 1973 when the company first began paying cash dividends). In years when earnings and cash flows permitted, Nucor had paid a supplemental year-end dividend in addition to the base quarterly dividend. Exhibit 1 provides highlights of Nucor’s growth and perfor- mance since 1970. Exhibit 2 shows Nucor’s sales by product category for 1990–2015. Exhibit 3 contains a summary of Nucor’s financial and operating per- formance during 2011–2015.

mills in the United States. The breadth of Nucor’s product line in steel mill products and finished steel products was unmatched; it competed in 11 distinct product categories. No other producer of steel prod- ucts in North America competed in more than 5 of the 11 product categories in which Nucor competed.3 Moreover, Nucor was the North American market leader in 9 of the 11 product categories in which it had a market presence—steel bars, structural steel, steel reinforcing bars, steel joists, steel deck, cold-finished bar steel, metal buildings, steel pilings distribution, and rebar fabrication, distribution, and place.4 In the other two categories in North America where Nucor competed, it ranked number two in sales of plate steel and number three in sales of sheet steel.

With the exception of 3 quarters in 2009, 1 quarter in 2010, and the 4th quarter of 2015, Nucor

EXHIBIT 1 Nucor’s Growing Presence in the Market for Steel, 1970–2015

Year

Total Tons Sold to Outside

Customers Average

Price per Ton Net Sales

(in millions)

Earnings before Taxes (in millions)

Pretax Earnings per Ton

Net Earnings (in millions)

1970 207,000 $245 $ 50.8 $ 2.2 $ 10 $ 1.1 1975 387,000 314 121.5 11.7 30 7.6 1980 1,159,000 416 482.4 76.1 66 45.1 1985 1,902,000 399 758.5 106.2 56 58.5 1990 3,648,000 406 1,481.6 111.2 35 75.1 1995 7,943,000 436 3,462.0 432.3 62 274.5 2000 11,189,000 425 4,756.5 478.3 48 310.9 2001 12,237,000 354 4,333.7 179.4 16 113.0 2002 13,442,000 357 4,801.7 227.0 19 162.1 2003 17,473,000 359 6,265.8 70.0 4 62.8 2004 19,109,000 595 11,376.8 1,725.9 96 1,121.5 2005 20,465,000 621 12,701.0 2,027.1 104 1,310.3 2006 22,118,000 667 14,751.3 2,692.4 129 1,757.7 2007 22,940,000 723 16,593.0 2,253.3 104 1,471.9 2008 25,187,000 940 23,663.3 2,790.5 116 1,831.0 2009 17,576,000 637 11,190.3 (470.4) (28) (293.6) 2010 22,019,000 720 15,844.6 194.9 9 134.1 2011 23,044,000 869 20,023.6 1,169.9 53 778.2 2012 23,092,000 841 19,429.3 764.4 34 504.6 2013 23,730,000 803 19,052.0 693.6 30 488.0 2014 25,413,000 830 21,105.1 1,102.7 44 713.9 2015 22,680,000 725 16,439.3 570.8 26 357.7

Source: Company records posted at www.nucor.com (accessed February 10, 2016).

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EXHIBIT 3 Five-Year Financial and Operating Summary, Nucor Corporation, 2011–2015 ($ in millions, except per share data and sales per employee)

2015 2014 2013 2012 2011

FOR THE YEAR Net sales $ 16,439.3 $ 21,105.1 $ 19,052.0 $ 19,429.3 $ 20,023.6 Costs, expenses and other: Cost of products sold 14,858.0 19,198.6 17,641.4 17,915.7 18,142.1 Marketing, administrative and other

expenses 459.0 520.8 481.9 454.9 439.5

EXHIBIT 2 Nucor’s Sales of Steel Mill and Finished Steel Products to Outside Customers, by Product Category, 1990–2015

Tons Sold to Outside Customers (in thousands)

Steel Mill Products Finished Steel Products

Year

Sheet Steel (2015

capacity of ~13.1 million tons)

Steel Bars (2015

capacity of ~9.1 million tons)

Structural Steel (2015

capacity of ~3.7 million tons)

Steel Plate (2015

capacity of ~2.9 million tons)

Total (2015

capacity of ~29 million tons)

Steel Joists (2015

capacity of

~715,000 tons)

Steel Deck (2015

capacity of

~530,000 tons)

Cold Finished

Steel (2015

capacity of

~920,000 tons)

Rebar Fabrication

(2015 capacity of ~1.7 million tons)

and Other Products*

Total Tons Sold

2015 8,080 4,790 2,231 1,905 17,006 427 401 449 4,397 22,680 2014 8,153 5,526 2,560 2,442 18,681 421 396 504 5,411 25,413 2013 7,491 5,184 2,695 2,363 17,733 342 334 474 4,847 23,730 2012 7,622 5,078 2,505 2,268 17,473 291 308 492 4,528 23,092 2011 7,500 4,680 2,338 2,278 16,796 288 312 494 5,154 23,044 2010 7,434 4,019 2,139 2,229 15,821 276 306 462 5,154 22,019 2009 5,212 3,629 1,626 1,608 12,075 264 310 330 4,596 17,576 2008 7,505 5,266 2,934 2,480 18,185 485 498 485 4,534 25,187 2007 8,266 6,287 3,154 2,528 20,235 542 478 449 1,236 22,940 2006 8,495 6,513 3,209 2,432 20,649 570 398 327 174 22,118 2005 8,026 5,983 2,866 2,145 19,020 554 380 342 169 20,465 2004 8,078 5,244 2,760 1,705 17,787 522 364 271 165 19,109 2003 6,954 5,530 2,780 999 16,263 503 353 237 117 17,473 2002 5,806 2,947 2,689 872 12,314 462 330 226 110 13,442 2001 5,074 2,687 2,749 522 11,032 532 344 203 126 12,237 2000 4,456 2,209 3,094 20 9,779 613 353 250 194 11,189 1995 2,994 1,799 1,952 — 6,745 552 234 234 178 7,943 1990 420 1,382 1,002 — 2,804 443 134 163 104 3,648

*Other products include steel fasteners (steel screws, nuts, bolts, washers, and bolt assemblies), steel mesh, steel grates, metal building systems, light gauge steel framing, and scrap metal.

Source: Company records posted at www.nucor.com (accessed February 11, 2016).

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2015 2014 2013 2012 2011

Equity in (earnings) losses of minority-owned enterprises (5.3) (13.5) (9.3) 13.3 10.0

Impairment and losses on assets 244.8 25.4 — 30.0 13.9 Interest expense, net 173.5 169.3 146.9 162.4 166.1 Total 15,730.0 19,900.6 18,260.9 18,576.3 18,771.8 Earnings before income taxes and non-controlling interests 709.2 1,204.6 791.1 852.9 1,251.8 Provision for income taxes 213.2 388.8 205.6 259.8 390.8 Net earnings (loss) 496.1 815.8 585.5 593.1 861.0 Less earnings attributable to the minority interest partners of Nucor’s joint ventures* 138.4 101.8 97.5 88.5 82.8 Net earnings (loss) attributable to Nucor stockholders $ 357.7 $ 713.9 $ 488.0 $ 504.6 $ 778.2 Net earnings (loss) per share: Basic $1.11 $2.22 $1.52 $1.58 $2.45 Diluted 1.11 2.22 1.52 1.58 2.45 Dividends declared per share $1.49 $1.48 $1.4725 $1.4625 $1.4525 Percentage of net earnings to net sales 2.2% 3.4% 2.6% 2.6% 3.9% Return on average stockholders’ equity 4.8% 9.3% 6.4% 6.7% 10.7% Capital expenditures $ 374.1 $ 668.0 $ 1,230.4 $ 1,019.3 $ 450.6 Acquisitions (net of cash acquired) 19.1 768.6 — 760.8 4.0 Depreciation 625.8 652.0 535.9 534.0 522.6 Sales per employee (000s) 690 921 859 906 974

AT YEAR END

Cash, cash equivalents, and short-term investments $ 2,039.5 $ 1,124.1 $ 1,511.5 $ 1,157.1 $ 2,563.3 Current assets 5,754.4 6,441.9 6,410.0 5,661.4 6,708.1 Current liabilities 1,385.2 2,097.8 1,960.2 2,029.6 2,396.1 Working capital 4,369.2 4,344.1 4,449.8 3,631.8 4,312.0 Cash provided by operating activities 2,157.0 1,342.8 1,077.9 1,200.4 1,032.6 Current ratio 4.2 3.1 3.3 2.8 2.8 Property, plant and equipment $ 4,891.2 $ 5,287.6 $ 4,917.0 $ 4,283.1 $ 3,755.6 Total assets 14,250.4 15,615.9 15,203.3 14,152.1 14,570.4 Long-term debt (including current maturities) 4,360.6 4,376.9 4,380.2 3,630.2 4,280.2 Percentage of long-term debt to

total capital** 37.0% 36.0% 35.6% 31.5% 35.7% Stockholders’ equity 7,416.9 7,772.5 7,645.8 7,641.6 7,474.9 Shares outstanding (000s) 317,962 319,033 318,328 317,663 316,749 Employees 23,700 23,600 22,300 22,200 20,800

*The principal joint venture responsible for these earnings is the Nucor-Yamato Steel Company, of which Nucor owns 51 percent. This joint venture operates a structural steel mill in Blytheville, Arkansas, and is the largest producer of structural steel beams in the Western Hemisphere.

**Total capital is defined as stockholders’ equity plus long-term debt.

Sources: Nucor’s 2013 Annual Report, p. 43; Nucor’s 2015 10-K, p. 32.

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it elected to compete. Nucor’s top executives were very disciplined in executing Nucor’s strategy to broaden the company’s product offerings; no moves to enter new steel product categories were made unless management was confident that the company had the resources and capabilities needed to operate the accompanying production facilities efficiently enough to be cost-competitive.

Finished Steel Products Nucor’s first venture into steel in the late 1960s, via its Vulcraft division, was principally one of fabri- cating steel joists and joist girders from steel that was purchased from various steelmakers. Vulcraft expanded into the fabrication of steel decking in 1977. The division expanded its operations over the years and, as of 2016, Nucor’s Vulcraft division was the largest producer and leading innovator of open- web steel joists, joist girders, and steel deck in the United States. It had seven plants with annual capac- ity of 715,000 tons that made steel joists and joist girders and nine plants with 530,000 tons of capacity that made steel deck; typically, about 85 percent of the steel needed to make these products was supplied by various Nucor steelmaking plants. Vulcraft’s joist, girder, and decking products were used mainly for roof and floor support systems in retail stores, shop- ping centers, warehouses, manufacturing facilities, schools, churches, hospitals, and, to a lesser extent, multistory buildings and apartments. Customers for these products were principally nonresidential con- struction contractors.

In 1979, Nucor began fabricating cold finished steel products. These consisted mainly of cold drawn and turned, ground, and polished steel bars or rods of various shapes—rounds, hexagons, flats, channels, and squares—made from carbon, alloy, and leaded steels based on customer specifications or end-use requirements. Cold finished steel products were used in tens of thousands of products, including anchor bolts, hydraulic cylinders, farm machinery, air condi- tioner compressors, electric motors, motor vehicles, appliances, and lawn mowers. Nucor sold cold finish steel directly to large-quantity users in the automo- tive, farm machinery, hydraulic, appliance, and elec- tric motor industries and to steel service centers that in turn supplied manufacturers needing only relatively small quantities. In 2015, Nucor Cold Finish was the largest producer of cold finished bar products in North

NUCOR’S STRATEGY TO BECOME THE BIGGEST AND MOST DIVERSIFIED STEEL PRODUCER IN NORTH AMERICA, 1967–2016 In its nearly 50-year march to become North Amer- ica’s biggest and most diversified steel producer, Nucor relentlessly expanded its production capabili- ties to include a wider range of steel shapes and more categories of finished steel products. However, most every steel product that Nucor produced was viewed by buyers as a “commodity.” Indeed, the most com- petitively relevant feature of the various steel shapes and finished steel products made by the world’s dif- ferent producers was that, for any given steel item, there were very few, if any, differences in the prod- ucts of rival steel producers. While some steelmakers had plants where production quality was sometimes inconsistent or on occasions failed to meet customer- specified metallurgical characteristics, most steel plants turned out products of comparable metallur- gical quality—one producer’s reinforcing bar was essentially the same as another producer’s reinforcing bar, a particular type and grade of sheet steel made at one plant was essentially identical to the same type and grade of sheet steel made at another plant.

The commodity nature of steel products meant that steel buyers typically shopped the market for the best price, awarding their business to whichever seller offered the best deal. The ease with which buyers could switch their orders from one supplier to another forced steel producers to be very price competitive. In virtually all instances, the going market price of each particular steel product was in constant flux, rising or falling in response to shifting market circumstances (or shifts in the terms that par- ticular buyers or sellers were willing to accept). As a consequence, spot market prices for commodity steel products bounced around on a weekly or even daily basis. Because competition among rival steel producers was so strongly focused on price, it was incumbent on all industry participants to be cost- competitive and operate their production facilities as efficiently as they could.

Nucor’s success over the years stemmed largely from its across-the-board prowess in cost-efficient operations for all the product categories in which

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because U.S. manufacturers were not competitive on cost and price. Iverson said, “We’re going to bring that business back; we can make bolts as cheaply as foreign producers.” Nucor built a second fastener plant in 1995, giving it the capacity to supply about 20 percent of the U.S. market for steel fasteners. Currently, these two facilities had annual capacity of over 75,000 tons and produced carbon and alloy steel hex head cap screws, hex bolts, structural bolts, nuts and washers, finished hex nuts, and custom- engineered fasteners that were used for automotive, machine tool, farm implement, construction, mili- tary, and various other applications. Nucor Fastener obtained much of the steel it needed from Nucor’s mills that made steel bar.

Beginning in 2007, Nucor—through its newly acquired Harris Steel subsidiary—began fabricat- ing, installing, and distributing steel reinforcing bars (rebar) for highways, bridges, schools, hospitals, airports, stadiums, office buildings, high-rise resi- dential complexes, and other structures where steel reinforcing was essential to concrete construction. Harris Steel had over 70 fabrication facilities in the United States and Canada, with each facility serv- ing the surrounding local market. Since acquiring Harris Steel, Nucor had more than doubled its rebar fabrication capacity to over 1,700,000 tons annually. Total fabricated rebar sales in 2015 were 1,190,000 tons, up from 1,185,000 tons in 2014. Much of the steel used in making fabricated rebar products was obtained from Nucor steel plants that made steel bar. Fabricated reinforcing products were sold only on a contract bid basis.

Steel Mill Products Nucor entered the market for steel mill products in 1968, when the decision was made to build a facil- ity in Darlington, South Carolina, to manufacture steel bars. The Darlington mill was one of the first steelmaking plants of major size in the United States to use electric arc furnace technology to melt scrap steel and cast molten metal into various shapes. Elec- tric arc furnace technology was particularly appealing to Nucor because the labor and capital requirements to melt steel scrap and produce crude steel were far lower than those at conventional integrated steel mills where raw steel was produced using coke ovens, basic oxygen blast furnaces, ingot casters, and mul- tiple types of finishing facilities to make crude steel

America and had facilities in Missouri, Nebraska, South Carolina, Utah, Wisconsin, Ohio, Georgia, and Ontario, Canada, with a capacity of about 920,000 tons per year. It obtained most of its steel from Nucor’s mills that made steel bar. This factor, along with the fact that all of Nucor’s cold finished facilities employed the latest technology and were among the most modern in the world, resulted in Nucor Cold Fin- ish having a highly competitive cost structure. It main- tained sufficient inventories of cold finish products to fulfill anticipated orders. Sales of cold finished steel products were 449,000 tons in 2015, down 11 percent from 504,000 tons in 2014.

Nucor produced metal buildings and components throughout the United States under several brands: Nucor Building Systems, American Buildings Com- pany, Kirby Building Systems, Gulf States Manufac- turers, and CBC Steel Buildings. In 2016, the Nucor Buildings Group had 11 metal buildings plants with an annual capacity of approximately 465,000 tons. Nucor’s Buildings Group began operations in 1987 and currently had the capability to supply customers with buildings ranging from less than 1,000 square feet to more than 1,000,000 square feet. Complete metal building packages could be customized and combined with other materials such as glass, wood, and masonry to produce a cost-effective, aestheti- cally pleasing building built to a customer’s particu- lar requirements. The buildings were sold primarily through an independent builder distribution network. The primary markets served were commercial, indus- trial, and institutional buildings, including distribu- tion centers, automobile dealerships, retail centers, schools, warehouses, and manufacturing facilities. Nucor’s Buildings Group obtained a significant por- tion of its steel requirements from the Nucor bar and sheet mills. Sales were 307,000 tons in 2015, an increase of 5 percent over 292,000 tons in 2014.

Another Nucor division produced steel mesh, grates, and fasteners. Various steel mesh products were made at two facilities in the United States and one in Canada that had combined annual production capacity of about 128,000 tons. Steel and aluminum bar grating, safety grating, and expanded metal prod- ucts were produced at several North American loca- tions that had combined annual production capacity of 103,000 tons. Nucor Fastener, located in Indiana, began operations in 1986 with the construction of a $25 million plant. At the time, imported steel fas- teners accounted for 90 percent of the U.S. market

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casters. It was much cheaper to then build and oper- ate facilities to roll thin-gauge sheet steel from 1.5- to 2-inch-thick slabs than from 8- to 10-inch-thick slabs. When the Crawfordsville plant first opened in 1989, it was said to have costs $50 to $75 per ton below the costs of traditional sheet steel plants, a highly signifi- cant cost advantage in a commodity market where the going price at the time was $400 per ton. Forbes magazine described Nucor’s pioneering use of thin- slab casting as the most substantial, technological, industrial innovation in the past 50 years.5 By 1996 two additional sheet steel mills that employed thin- slab casting technology were constructed and a fourth mill was acquired in 2002, giving Nucor the capacity to produce 11.3 million tons of sheet steel products annually. Nucor also operated two Castrip sheet pro- duction facilities, one built in 2002 at the Crawfords- ville plant and a second built in Arkansas in 2009; these facilities used the breakthrough strip casting technology that involved the direct casting of molten steel into final shape and thickness without further hot or cold rolling. The process allowed for lower capital investment, reduced energy consumption, and smaller scale plants, and improved environmental impact (because of significantly lower emissions). A fifth sheet mill with annual capacity of 1.8 mil- lion tons, strategically located on the Ohio River in Kentucky, was acquired in 2014, giving Nucor a total flat-rolled capacity of 13.1 million tons.

Entry into Structural Steel Products Also in the late 1980s, Nucor added wide-flange steel beams, pilings, and heavy structural steel products to its lineup of product offerings. Structural steel prod- ucts were used in buildings, bridges, overpasses, and similar such projects where strong weight-bearing support was needed. Customers included construction companies, steel fabricators, manufacturers, and steel service centers. To gain entry to the structural steel segment, in 1988 Nucor entered into a joint venture with Yamato-Kogyo, one of Japan’s major producers of wide-flange beams, to build a new structural steel mill in Arkansas; a second mill was built on the same site in the 1990s that made the Nucor–Yamato ven- ture in Arkansas the largest structural beam facility in the Western Hemisphere. In 1999, Nucor started operations at a third structural steel mill in South Carolina. The mills in Arkansas and South Carolina both used a special continuous casting method that was quite cost-effective. In 2014, the Nucor–Yamato

from iron ore, coke, limestone, oxygen, scrap steel, and other ingredients. By 1981, Nucor had four steel mills making carbon and alloy steels in bars, angles, and light structural shapes; since then, Nucor had undertaken extensive capital projects to keep these facilities modernized and globally competitive. Dur- ing 2000–2011, Nucor aggressively expanded its market presence in steel bars and by 2012 had 13 bar mills located across the United States that produced concrete reinforcing bars, hot-rolled bars, rods, light shapes, structural angles, channels, and guard rail in carbon and alloy steels; in 2015, these 13 plants had total annual capacity of approximately 9.1 mil- lion tons. Four of the 13 mills made hot-rolled special quality bar manufactured to exacting specifications. The products of the 13 bar mills had wide usage and were sold primarily to customers in the agricultural, automotive, construction, energy, furniture, machin- ery, metal building, railroad, recreational equipment, shipbuilding, heavy truck, and trailer industries.

Recently, Nucor had completed a $290 million project to expand its wire rod and special quality steel bar production capabilities at three existing bar mills by 1 million tons annually. The expansion enabled Nucor to produce engineered bar for the most demand- ing applications (and realize a significantly higher price) while maintaining its market share in commod- ity bar products by shifting production to its other bar mills that were operating below capacity. Incremental investments were underway in 2016 to expand Nucor’s special quality steel bar production capabilities. In addition, an existing wire rod and bar mill in Kingman, Arizona, was renovated to boost production capacity from 200,000 tons annually to 500,000 tons annually and put Nucor in a strong position to serve wire rod and rebar customers in the southwestern U.S. market.

Expansion into Sheet Steel In the late 1980s, Nucor entered into the production of sheet steel at a newly constructed plant in Crawfordsville, Indiana. Flat-rolled sheet steel was used in the production of motor vehicles, appliances, steel pipe and tubes, and other durable goods. The Crawfordsville plant was the first in the world to employ a revolutionary thin slab casting process that substantially reduced the capital investment and costs to produce flat-rolled sheet steel. Thin-slab casting machines had a funnel- shaped mold to squeeze molten steel down to a thick- ness of 1.5–2.0 inches, compared to the typically 8- to 10-inch-thick slabs produced by conventional

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However, despite Nucor’s demonstrated skills in operating steel mills at low costs per ton, it had been stymied throughout the 2010–2015 period in its quest to operate its 24 steel mills as cost-efficiently as they were capable of being operated. Ever since the Great Recession of 2008–2009, the combination of an anemic economic recovery, depressed market demand for steel products, industrywide overcapacity, and fierce com- petition from foreign imports in certain product cat- egories had forced Nucor to operate its steel mills well below full capacity. Whereas in the first three quarters of 2008, Nucor’s steel mills operated at an average of 91 percent of full capacity, the average capacity utili- zation rates at Nucor’s steel mills were 54 percent in 2009, 70 percent in 2010, 74 percent in 2011, 75 per- cent in 2012, 76 percent in 2013, 78 percent in 2014, and 68 percent in 2015 (including tons shipped to outside customers and tons shipped to Nucor facilities making finished steel products). Likewise, subpar aver- age capacity utilization rates at Nucor’s facilities for producing finished steel products—54 percent in 2010, 57 percent in 2011, 58 percent in 2012, 61 percent in 2013, 66 percent in 2014, and 61 percent in 2015— had impaired Nucor’s ability to keep overall production costs for finished steel products as low as they would otherwise have been at higher levels of capacity utiliza- tion. Nucor’s unused capacity for producing so many types of steel mill and finished steel products during 2009–2015 represented one of the longest and deepest periods of overcapacity in Nucor’s history.

Pricing and Sales Since 2012, approximately 86 percent of the steel shipped from Nucor’s steel mills had gone to exter- nal customers. The balance of the company’s steel mill shipments went to supply the steel needs of the company’s joist, deck, rebar fabrication, fastener, metal buildings, and cold finish operations. The big majority of Nucor’s steel sales were to customers who placed orders monthly based on their immedi- ate upcoming needs; Nucor’s pricing strategy was to charge customers the going spot price on the day an order was placed. Shifting market demand–supply conditions and spot market prices caused Nucor’s average sales prices per ton to fluctuate from quarter to quarter, sometimes by considerable amounts—see Exhibit 4. It was Nucor’s practice to quote the same payment terms to all customers and for customers to pay all shipping charges.

mill completed a $115 million project to add several new sheet piling sections, increase production of sin- gle sheet widths by 22 percent, and provide customers with a lighter stronger sheet covering more area at a lower installed cost. Going into 2016, Nucor had the capacity to make 3.7 million tons of structural steel products annually. Entry into the Market for Steel Plate Start- ing in 2000, Nucor began producing steel plate of various thicknesses and lengths that was sold to man- ufacturers of heavy equipment, ships, barges, bridges, rail cars, refinery tanks, pressure vessels, pipe and tube, wind towers, and similar products. Steel plate was made at two mills in Alabama and North Caro- lina that had combined capacity of about 2.9 million tons. In 2011–2013, Nucor greatly expanded its plate product capabilities by constructing a 125,000-ton heat treating facility and a 120,000-ton normalizing line at its North Carolina plate mill. These invest- ments yielded two big strategic benefits: (1) enabling the North Carolina mill to produce higher-margin plate products sold to companies making pressure vessels, tank cars, tubular structures for offshore oil rigs, and naval and commercial ships; and (2) reduc- ing the mill’s exposure to competition from foreign producers of steel plate who lacked the capability to match the features of the steel plate Nucor produced for these end-use customers. The Cost-Efficiency of Nucor’s Steel Mills All of Nucor’s 24 steel mills used electric arc fur- naces, whereby scrap steel and other metals were melted and the molten metal then poured into con- tinuous casting systems. Sophisticated rolling mills converted the billets, blooms, and slabs produced by various casting equipment into rebar, angles, rounds, channels, flats, sheet, beams, plate, and other finished steel products. Nucor’s steel mill operations were highly automated, typically requiring fewer operating employees per ton produced than the mills of rival companies. High worker productivity at all Nucor steel mills resulted in labor costs roughly 50 percent lower than the labor costs at the integrated mills of companies using union labor and conventional blast furnace technology. Nucor’s value chain (anchored in using electric arc furnace technology to recycle scrap steel) involved far fewer production steps, far less capital investment, and considerably less labor than the value chains of companies with integrated steel mills that made crude steel from iron ore.

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EXHIBIT 4 Nucor’s Average Quarterly Sales Prices for Steel Products, by Product Category, 2011–2015

Average Sales Prices per Ton Sold

Period Sheet Steel Steel Bars Structural Steel Steel Plate All Steel

Mill Products All Finished

Steel Products*

2011

Qtr 1 $755 $779 $831 $ 880 $789 $1,274 Qtr 2 894 803 923 1,029 891 1,361 Qtr 3 800 811 901 1,021 847 1,381 Qtr 4 744 796 891 946 806 1,395

2012

Qtr 1 $780 $823 $866 $ 929 $824 $1,387 Qtr 2 759 795 905 922 812 1,395 Qtr 3 707 745 973 837 775 1,371 Qtr 4 690 723 956 778 751 1,420

2013

Qtr 1 $699 $732 $949 $ 769 $756 $1,380 Qtr 2 676 731 959 765 746 1,374 Qtr 3 693 708 923 753 741 1,369 Qtr 4 724 709 969 767 763 1,378

2014

Qtr 1 $744 $737 $941 $ 816 $783 $1,348 Qtr 2 737 732 1,039 837 789 1,367 Qtr 3 750 738 1,011 838 793 1,369 Qtr 4 712 724 1,063 875 776 1,432

2015

Qtr 1 $663 $698 $996 $ 805 $732 $1,404 Qtr 2 560 623 991 691 646 1,380 Qtr 3 552 625 926 648 635 1,351 Qtr 4 508 558 923 588 588 1,367

*An average of the steel prices for steel deck, steel joists and girders, steel buildings, cold finished steel products, steel mesh, fasteners, fabricated rebar, and other finished steel products.

Source: Company records posted at www.nucor.com (accessed February 21, 2016).

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NUCOR’S STRATEGY TO GROW AND STRENGTHEN ITS BUSINESS AND COMPETITIVE CAPABILITIES Starting in 2000, Nucor embarked on a five-part growth strategy that involved new acquisitions, new plant construction, continued plant upgrades and cost reduction efforts, international growth through joint ventures, and greater control over raw materials costs.

Strategic Acquisitions Beginning in the late 1990s, Nucor management con- cluded that growth-minded companies like Nucor might well be better off purchasing existing plant capacity rather than building new capacity, provided the acquired plants could be bought at bargain prices, economically retrofitted with new equipment if need be, and then operated at costs comparable to (or even below) those of newly constructed state-of-the-art plants. At the time, the steel industry worldwide had far more production capacity than was needed to meet market demand, forcing many companies to operate in the red. Nucor had not made any acquisitions since about 1990, and a team of five people was assembled in 1998 to explore acquisition possibilities that would strengthen Nucor’s customer base, geographic cover- age, and lineup of product offerings.

For almost three years, no acquisitions were made. But then the economic recession that hit Asia and Europe in the late 1990s reached the United States in full force in 2000–2001. The September 11, 2001, terrorist attacks further weakened steel purchases by such major steel-consuming industries as construc- tion, automobiles, and farm equipment. Many steel companies in the United States and other parts of the world were operating in the red. Market conditions in the U.S. were particularly grim. Between October 2000 and October 2001, 29 steel companies in the United States, including Bethlehem Steel Corp. and LTV Corp., the nation’s third and fourth largest steel producers, respectively, filed for bankruptcy protec- tion. Bankrupt steel companies accounted for about 25 percent of U.S. capacity. The Economist noted

Nucor marketed the output of its steel mills and steel products facilities mainly through an in-house sales force; there were salespeople located at most every Nucor production facility. Going into 2016, approximately 50 percent of Nucor’s sheet steel sales were to contract customers (versus 65 percent in 2012–2013 and 30 percent in 2009); these con- tracts for sheet steel were usually for periods of 6 to 12 months, were noncancelable, and permitted price adjustments to reflect changes in the market pric- ing for steel and/or raw material costs at the time of shipment. The other 50 percent of Nucor’s sheet steel shipments and virtually all of the company’s shipments of plate, structural, and bar steel were at the prevailing spot market price—customers not purchasing sheet steel rarely ever wanted to enter into a contract sales agreement. Nucor’s steel mills maintained inventory levels deemed adequate to fill the expected incoming orders from customers. The average prices Nucor received for its various steel mill products are shown in the first four columns of Exhibit 4; the average prices received for sheet steel, steel bars, and steel plate in the last quarter of 2015 were 20 to 27 percent lower than in the first quarter of 2015 and the lowest of any quarter since 2010.

Nucor sold steel joists and joist girders, and steel deck on the basis of firm, fixed-price con- tracts that, in most cases, were won in competitive bidding against rival suppliers. Longer-term supply contracts for these items that were sometimes nego- tiated with customers contained clauses permitting price adjustments to reflect changes in prevailing raw materials costs. Steel joists, girders, and deck were manufactured to customers’ specifications and shipped immediately; Nucor’s plants did not main- tain inventories of steel joists, girders, or steel deck. Nucor also sold fabricated reinforcing products only on a construction contract bid basis. However, cold finished steel, steel fasteners, steel grating, wire, and wire mesh were all manufactured in standard sizes, with each facility maintaining sufficient inventories of its products to fill anticipated orders; most all sales of these items were made at the prevailing spot price. The average prices Nucor received for its various fin- ished steel products are shown in the last column of Exhibit 4.

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production capacity via acquisition. Starting in 2001 and continuing through 2015, the company proceeded to make a series of strategic acquisitions to strengthen Nucor’s competitiveness, selectively expand its prod- uct offerings improve its ability to serve customers in particular geographic locations, and boost the com- pany’s financial performance in times when market demand for steel was strong enough to boost prices to more profitable levels: ∙ In 2001, Nucor paid $115 million to acquire sub-

stantially all of the assets of Auburn Steel Com- pany’s 400,000-ton steel bar facility in Auburn, New York. This acquisition gave Nucor expanded market presence in the Northeast and was seen as a good source of supply for a new Vulcraft joist plant being constructed in Chemung, New York.

∙ In November 2001, Nucor announced the acqui- sition of ITEC Steel Inc. for a purchase price of $9 million. ITEC Steel had annual revenues of $10 million and produced load bearing light gauge steel framing for the residential and com- mercial market at facilities in Texas and Georgia. Nucor was impressed with ITEC’s dedication to continuous improvement and intended to grow ITEC’s business via geographic and product line expansion.

∙ In July 2002, Nucor paid $120 million to purchase Trico Steel Company, which had a 2.2 million ton sheet steel mill in Decatur, Alabama. Trico Steel was a joint venture of LTV (which owned a 50 per- cent interest) and two leading international steel companies—Sumitomo Metal Industries and Brit- ish Steel. The joint venture partners had built the mill in 1997 at a cost of $465 million, but Trico was in Chapter 11 bankruptcy proceedings at the time of the acquisition and the mill was shut down. The Trico mill’s capability to make thin sheet steel with a superior surface quality added com- petitive strength to Nucor’s strategy to gain sales and market share in the flat-rolled sheet segment. By October 2002, two months ahead of schedule, Nucor had restarted operations at the Decatur mill and was shipping products to customers.

∙ In December 2002, Nucor paid $615 million to purchase substantially all of the assets of Birmingham Steel Corporation, which included four bar mills in Alabama, Illinois, Washington, and Mississippi. The four plants had capacity of approximately 2 million tons annually. Top exec- utives believed the Birmingham Steel acquisition

that of the 14 steel companies tracked by Standard & Poor’s, only Nucor was indisputably healthy. Some experts believed that close to half of the U.S. steel industry’s production capacity might be forced to close before conditions improved; about 47,000 jobs in the U.S. steel industry had vanished since 1997.

One of the principal reasons for the distressed market conditions in the United States was a surge in imports of low-priced steel from foreign coun- tries. Outside the United States, weak demand and a glut of capacity had driven commodity steel prices to 20-year lows in 1998. Globally, the industry had about 1 billion tons of annual capacity, but puny demand had kept production levels in the 750 to 800 million tons per year range during 1998–2000. A number of foreign steel producers, anxious to keep their mills running and finding few good market opportunities elsewhere, began selling steel in the U.S. market at cut-rate prices in 1997–1999. Nucor and other U.S. companies reduced prices to better compete and several filed unfair trade complaints against foreign steelmakers. The U.S. Department of Commerce concluded in March 1999 that steel companies in six countries (Canada, South Korea, Taiwan, Italy, Belgium, and South Africa) had ille- gally dumped stainless steel in the United States, and the governments of Belgium, Italy, and South Africa further facilitated the dumping by giving their steel producers unfair subsidies that at least partially made up for the revenues losses of selling at below- market prices. Congress and the Clinton administra- tion opted to not impose tariffs or quotas on imported steel, which helped precipitate the number of bank- ruptcy filings. However, the Bush administration was more receptive to protecting the U.S. steel industry from the dumping practices of foreign steel compa- nies. In October 2001, the U.S. International Trade Commission (ITC) ruled that increased steel imports of semi-finished steel, plate, hot-rolled sheet, strip and coils, cold-rolled sheet and strip, and corrosion- resistant and coated sheet and strip were a substantial cause of serious injury, or threat of serious injury, to the U.S. industry. In March 2002, the Bush adminis- tration imposed tariffs of up to 30 percent on imports of selected steel products to help provide relief from Asian and European companies dumping steel in the United States at ultra-low prices.

Even though market conditions were tough for Nucor, management concluded that oversupplied steel industry conditions and the number of beleaguered U.S. companies made it attractive to expand Nucor’s

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∙ In January 2007, Nucor acquired Canada-based Harris Steel for about $1.07 billion. Harris Steel had 2005 sales of Cdn$1.0 billion and earnings of Cdn$64 million. The company’s operations con- sisted of (1) Harris Rebar which was involved in the fabrication and placing of concrete reinforcing steel and the design and installation of concrete post- tensioning systems; (2) Laurel Steel which manufactured and distributed wire and wire prod- ucts, welded wire mesh, and cold finished bar; and (3) Fisher & Ludlow which manufactured and distributed heavy industrial steel grating, alu- minum grating, and expanded metal. In Canada, Harris Steel had 24 reinforcing steel fabricating plants, 2 steel grating distribution centers, and 1 cold finished bar and wire processing plant; in the United States it had 10 reinforcing steel fabricat- ing plants, 2 steel grating manufacturing plants, and 3 steel grating manufacturing plants. Harris had customers throughout Canada and the United States and employed about 3,000 people. For the past three years, Harris had purchased a big percentage of its steel requirements from Nucor. Nucor management opted to operate Harris Steel as an independent subsidiary.

∙ Over several months in 2007 following the Harris Steel acquisition, Nucor through its new Harris Steel subsidiary acquired rebar fabricator South Pacific Steel Corporation, Consolidated Rebar, Inc., a 90 percent equity interest in rebar fabri- cator Barker Steel Company, and several smaller transactions—all aimed at growing its presence in the rebar fabrication marketplace.

∙ In August 2007, Nucor acquired LMP Steel & Wire Company for a cash purchase price of approxi- mately $27.2 million, adding 100,000 tons of cold drawn steel capacity.

∙ In October 2007, Nucor completed the acquisition of Nelson Steel, Inc. for a cash purchase price of approximately $53.2 million, adding 120,000 tons of steel mesh capacity.

∙ In the third quarter of 2007, Nucor completed the acquisition of Magnatrax Corporation, a leading provider of custom-engineered metal buildings, for a cash purchase price of approximately $275.2 mil- lion. The Magnatrax acquisition enabled Nucor’s Building System Group to become the second larg- est metal building producer in the United States.

∙ In August 2008, Nucor’s Harris Steel subsid- iary acquired Ambassador Steel Corporation for

would broaden Nucor’s customer base and build profitable market share in bar steel products.

∙ In August 2004, Nucor acquired a cold rolling mill in Decatur, Alabama, from Worthington Industries for $80 million. This 1-million-ton mill, which opened in 1998, was located adjacent to the previ- ously acquired Trico mill and gave Nucor added ability to service the needs of sheet steel buyers located in the southeastern United States.

∙ In June 2004, Nucor paid a cash price of $80 million to acquire a plate mill owned by Britain- based Corus Steel that was located in Tuscaloosa, Alabama. The Tuscaloosa mill, which currently had capacity of 700,000 tons that Nucor man- agement believed was expandable to 1 million tons, was the first U.S. mill to employ a special technology that enabled high-quality wide steel plate to be produced from coiled steel plate. The mill produced coiled steel plate and plate prod- ucts that were cut to customer-specified lengths. Nucor intended to offer these niche products to its commodity plate and coiled sheet customers.

∙ In February 2005, Nucor completed the purchase of Fort Howard Steel’s operations in Oak Creek, Wisconsin; the Oak Creek facility produced cold finished bars in size ranges up to 6-inch rounds and had approximately 140,000 tons of annual capacity.

∙ In June 2005, Nucor purchased Marion Steel Com- pany located in Marion, Ohio, for a cash price of $110 million. Marion operated a bar mill with annual capacity of about 400,000 tons; the Marion location was within close proximity to 60 percent of the steel consumption in the United States.

∙ In May 2006, Nucor acquired Connecticut Steel Corporation for $43 million in cash. Connecti- cut Steel’s bar products mill in Wallingford had annual capacity to make 300,000 tons of wire rod and rebar and approximately 85,000 tons of wire mesh fabrication and structural mesh fabrication, products that complemented Nucor’s present lineup of steel bar products provided to construc- tion customers.

∙ In late 2006, Nucor purchased Verco Manufactur- ing Co. for approximately $180 million; Verco produced steel floor and roof decking at one loca- tion in Arizona and two locations in California. The Verco acquisition further solidified Vulcraft’s market leading position in steel decking, giving it total annual capacity of over 500,000 tons.

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75,000 tons per year. These facilities, purchased for about $75 million, strengthened Nucor’s already strong competitive position in cold-fin- ished steel bars by expanding Nucor’s geographic coverage and range of cold-finished product offerings.

Aggressively Investing to Expand the Company’s Internal Production Capabilities Complementing Nucor’s ongoing strategic efforts to grow its business via acquisitions was a strategy ele- ment to invest aggressively in (1) the construction of new plant capacity and (2) enhanced production capabilities at existing plants whenever management spotted opportunities to boost sales with an expanded range of product offerings and/or strengthen its com- petitive position vis-à-vis rivals by lowering costs per ton or expanding its geographic coverage. The purpose of making ongoing capital investments was to improve efficiency and lower production costs at each and every facility it operated.

This strategy element had been in place since Nucor’s earliest days in the steel business. Nucor always built state-of-the-art facilities in the most eco- nomical fashion possible and then made it standard company practice to invest in plant modernization and efficiency improvements whenever cost-saving opportunities emerged.

Examples of Nucor’s efforts included the following: ∙ In 2006, Nucor announced that it would construct

a new $27 million facility to produce metal build- ings systems in Brigham City, Utah. The new plant, Nucor’s fourth building systems plant, had capacity of 45,000 tons and gave Nucor national market reach in building systems products.

∙ In 2006, Nucor initiated construction of a $230 mil- lion state-of-the-art steel mill in Memphis, Tennes- see, with annual capacity to produce 850,000 tons of special quality steel bars. Management believed this mill, together with the company’s other special bar quality mills in Nebraska and South Carolina, would give Nucor the broadest, highest-quality, and lowest-cost offering of special quality steel bar in North America.

∙ In 2009, Nucor opened an idle and newly reno- vated $50 million wire rod and bar mill in King- man, Arizona, that had been acquired in 2003.

a cash purchase price of about $185.1 million. Ambassador Steel was one of the largest inde- pendent fabricators and distributors of concrete reinforcing steel—in 2007, Ambassador shipped 422,000 tons of fabricated rebar and distributed another 228,000 tons of reinforcing steel. Its busi- ness complemented that of Harris Steel and rep- resented another in a series of moves to greatly strengthen Nucor’s competitive position in the rebar fabrication marketplace.

∙ Another small rebar fabrication company, Free State Steel, was acquired in late 2009, adding to Nucor’s footprint in rebar fabrication.

∙ In June 2012, Nucor acquired Skyline Steel, LLC and its subsidiaries for a cash price of approxi- mately $675.4 million. Skyline was a market- leading distributor of steel pilings, and it also processed and fabricated spiral weld pipe piling, rolled and welded pipe piling, cold-formed sheet piling, and threaded bar. The Skyline acquisi- tion paired Skyline’s leadership position in the steel piling distribution market with Nucor’s own Nucor–Yamato plant in Arkansas that was the market leader in steel piling manufacturing. To capitalize on the strategic fits between Skyline’s business and Nucor’s business, Nucor launched a $155 million capital project at the Nucor–Yamato mill to (1) add several new sheet piling sections, (2) increase the production of single sheet widths by 22 percent, and (3) produce a lighter, stron- ger sheet covering more area at a lower installed cost—outcomes that would broaden the range of hot-rolled steel piling products Nucor could market through Skyline’s distribution network in the United States, Canada, Mexico, and the Caribbean.

∙ In 2014, Nucor acquired Gallatin Steel Company for approximately $779 million. Gallatin produced a range of flat-rolled steel products (principally steel pipe and tube) at a mill with annual produc- tion capacity of 1.8 million tons that was located on the Ohio River in Kentucky. The Gallatin mill strengthened Nucor’s position as the North Amer- ican market leader in hot-rolled steel products by boosting its capacity to supply customers in the Midwest region, the largest flat-rolled consuming market region in the United States.

∙ In 2015, Nucor acquired Gerdau Long Steel’s two facilities in Ohio and Georgia that produced cold- drawn steel bars and had combined capacity of

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with a path to driving down costs per ton and/ or leapfrogging competitors in terms of product quality, range of product offerings, and/or mar- ket share.

Nucor’s biggest success in pioneering trailblaz- ing technology had been at its Crawfordsville, Indi- ana, facilities where Nucor installed the world’s first facility for direct strip casting of carbon sheet steel— a process called Castrip®. The Castrip process, which Nucor tested and refined for several years before implementing it in 2005, was a major tech- nological breakthrough for producing flat-rolled, carbon, and stainless steels in very thin gauges because (1) it involved far fewer process steps to cast metal at or very near customer-desired thicknesses and shapes and (2) the process drastically reduced capital outlays for equipment and produced sizable savings on operating expenses (by enabling the use of cheaper grades of scrap metal and requiring 90 percent less energy to process liquid metal into hot- rolled steel sheets). An important environmental benefit of the Castrip process was cutting green- house gas emissions by up to 80 percent. Seeing these advantages earlier than rivals, Nucor manage- ment had the foresight to acquire exclusive rights to Castrip technology in the United States and Brazil. Once it was clear that the expected benefits of the Castrip facility at Crawfordsville were indeed going to become a reality, Nucor in 2006 launched con- struction of a second Castrip facility on the site of its structural steel mill in Arkansas.

Since technological breakthroughs (like the Cas- trip process) were relatively rare, Nucor management made a point of scouring locations across the world for reports of possible cost-effective technologies, ways to improve production methods and efficiency, and new and better equipment that could be used to improve operations and/or lower costs in Nucor’s facilities. All such reports were checked out thor- oughly, including making trips to inspect promising new developments firsthand if circumstances war- ranted. Projects to improve production methods or install more efficient equipment were promptly under- taken when the investment payback was attractive. The Drive for Improved Efficiency and Lower Production Costs When Nucor acquired plants, it drew upon its ample financial strength and cash flows from operations to immediately fund efforts to get them up to Nucor standards—a process

Production of straight-length rebar, coiled rebar, and wire rod began in mid-2010; the plant had initial capacity of 100,000 tons, with the ability to increase annual production to 500,000 tons.

∙ The construction of a $150 million galvanizing facility located at the company’s sheet steel mill in Decatur, Alabama, gave Nucor the ability to make 500,000 tons of 72-inch-wide galvanized sheet steel, a product used by motor vehicle and appliance producers and in various steel frame and steel stud buildings. The galvanizing process entailed dipping steel in melted zinc at extremely high temperatures; the zinc coating protected the steel surface from corrosion.

∙ In 2013 Nucor installed caster and hot mill upgrades at its Berkeley, South Carolina, sheet mill that enabled it to roll light-gauge sheet steel to a finished width of 74 inches. This new capabil- ity (which most foreign competitors did not have) opened opportunities to sell large quantities of wide-width, flat-rolled products to customers in a variety of industries while at the same time pro- viding the mill with less exposure to competition from imports of less wide, flat-rolled products.

∙ A 2016 project to install a $75 million cooling process at the Nucor–Yamato mill in Arkansas was expected to generate savings on alloy costs of $12 million annually.

Nucor’s Strategy to Be a First-Mover in Adopting the Best, Most Cost- Efficient Production Methods The third element of Nucor’s competitive strategy was to be a technology leader and first-rate operator of all its production facilities—outcomes that senior executives had pursued since the company’s earliest days. Two approaches to improving and expanding Nucor’s steelmaking capabilities and achieving low costs per ton were utilized: ∙ Being quick to implement disruptive techno-

logical innovations that would give Nucor a sus- tainable competitive advantage because of the formidable barriers rivals would have to hurdle to match Nucor’s cost-competitiveness and/or prod- uct quality and/or range of products offered.

∙ Being quick to implement ongoing advances in production methods and install the latest and best steelmaking equipment, thus providing Nucor

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and yield better profit margins than could be had by producing lower-end or commodity steel products. Examples included: ∙ Adding new galvanizing capability at the Decatur,

Alabama, mill that enabled Nucor to sell 500,000 tons of corrosion-resistant, galvanized sheet steel for high-end applications.

∙ Expanding the cut-to-length capabilities at the Tuscaloosa, Alabama, mill that put the mill in position to sell as many as 200,000 additional tons per year of cut-to-length and tempered steel plate.

∙ Shipping 250,000 tons of new steel plate and struc- tural steel products in 2010 that were not offered in 2009, and further increasing shipments of these same new products to 500,000 tons in 2011.

∙ Completing installation of a heat-treating facility at the Hertford County, North Carolina, plate mill in 2011 that gave Nucor the capability to produce as much as 125,000 tons annually of heat-treated steel plate ranging from 3/16 of an inch through 2 inches thick.

that employees called “Nucorizing.” This included not only revising production methods and installing better equipment but also striving to increase opera- tional efficiency by reducing the amount of time, space, energy, and manpower it took to produce steel products and paying close attention to worker safety and environmental protection practices.

Simultaneously, Nucor’s top-level executives insisted upon continual improvement in product quality and cost at every company facility. Most all of Nucor’s production locations were ISO 9000 and ISO 14000 certified. The company had a “BEST- marking” program aimed at being the industrywide best performer on a variety of production and effi- ciency measures. Managers at all Nucor plants were accountable for demonstrating that their operations were competitive on both product quality and cost vis-à-vis the plants of rival companies. A deeply embedded trait of Nucor’s corporate culture was the expectation that plant-level managers would be per- sistent in initiating actions to improve product qual- ity and keep costs per ton low relative to rival plants.

Nucor management viewed the task of pursuing operating excellence in its manufacturing operations as a continuous process. According to former CEO Dan DiMicco:6. We talk about ‘climbing a mountain without a peak’ to describe our constant improve- ments. We can take pride in what we have accom- plished, but we are never satisfied.

The strength of top management’s commitment to funding projects to improve plant efficiency, keep costs as low as possible, and achieve overall operat- ing excellence was reflected in the company’s capital expenditures for new technology, plant improvements, and equipment upgrades (see Exhibit 5). The beneficial outcomes of these expenditures, coupled with compa- nywide vigilance and dedication to discovering and implementing ways to operate most cost- efficiently, were major contributors to Nucor’s standing as North America’s lowest-cost, most diversified provider of steel products.

Shifting Production from Lower-End Steel Products to Value-Added Products During 2010–2015, Nucor undertook a number of actions to shift more of the production tonnage at its steel mills and steel products facilities to “value- added products” that could command higher prices

EXHIBIT 5 Nucor’s Capital Expenditures for New Plants, Plant Expansions, New Technology, Equipment Upgrades, and Other Operating Improvements, 2000–2015

Year

Capital Expenditures (in millions) Year

Capital Expenditures (in millions)

2000 $415.0 2008 $1,019.0 2001 261.0 2009 390.5 2002 244.0 2010 345.2 2003 215.4 2011 450.6 2004 285.9 2012 1,019.3 2005 331.5 2013 1,230.4 2006 338.4 2014 568.9 2007 520.4 2015 364.8

Sources: Company records, accessed at www.nucor.com, various dates; data for 2009–2015 are from the 2013 10-K report, p. 43, and the 2015 10-K report, p. 45.

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with high-strength, low-alloy grade chemistry; both projects helped Nucor grow sales of value- added structural steel products that had above- average profitability.

∙ Acquiring two Gerdau Long Steel facilities in 2015 that produced higher-margin, value-added cold-finished bars sold to steel service centers and other customers across the United States.

Product upgrades had also been undertaken at several Nucor facilities making cold-finished and fastener products. Senior management believed that all of these upgrades to higher-value product offer- ings would boost revenues and earnings in the years ahead.

Global Growth via Joint Ventures In 2007, Nucor management decided it was time to begin building an international growth platform. The company’s strategy to grow its international revenues had two elements: ∙ Establishing foreign sales offices and export-

ing U.S.-made steel products to foreign markets. Because about 60 percent of Nucor’s steelmaking capacity was located on rivers with deep water transportation access, management believed that the company could be competitive in shipping U.S.-made steel products to customers in a num- ber of foreign locations.

∙ Entering into joint ventures with foreign partners to invest in steelmaking projects outside North America. Nucor executives believed that the suc- cess of this strategy element was finding the right partners to grow with internationally.

Nucor opened a Trading Office in Switzerland and proceeded to establish international sales offices in Mexico, Brazil, Colombia, the Middle East, and Asia. The company’s Trading Office bought and sold steel and steel products that Nucor and other steel producers had manufactured. In 2010, approximately 11 percent of the shipments from Nucor’s steel mills were exported. Customers in South and Central America presented the most consistent opportunities for export sales, but there was growing interest from customers in Europe and other locations.

In January 2008, Nucor entered in a 50–50 joint venture with the European-based Duferco Group to establish the production of beams and other long products in Italy, with distribution in Europe and

∙ Installing new vacuum degassers at the Hickman, Arkansas, sheet mill and Hertford County, North Carolina, mill to enable production of increased volumes of higher-value sheet steel, steel plate, steel piping, and tubular products.

∙ Investing $290 million at its three steel bar mills to enable the production of steel bars and wire rod for the most demanding engineered bar applica- tions and also put in place state-of-the-art quality inspection capabilities. The project enabled Nucor to offer higher-value steel bars and wire rod to customers in the energy, automotive, and heavy truck and equipment markets (where the demand for steel products had been relatively strong in recent years).

∙ Completing installation of a new 120,000-ton “normalizing” process for making steel plate at the Hertford County mill in June 2013; the new normalizing process allowed the mill to produce a higher grade of steel plate that was less brittle and had a more uniform fine-grained structure (which permitted the plate to be machined to more precise dimensions). Steel plate with these qualities was more suitable for armor plate appli- cations and for certain uses in the energy, trans- portation, and shipbuilding industries. Going into 2014, the normalizing process, coupled with the company’s recent investments in a vacuum tank degasser and a heat-treating facility at this same plant, doubled the Hertford mill’s capacity to pro- duce higher-quality steel plate products that com- manded a higher market price.

∙ Modernizing the casting, hot-rolling, and down- stream operations at the Berkeley, South Carolina, mill in 2013 to enable the production of 72-inch- wide sheet steel and lighter gauge hot-rolled and cold-rolled steel products with a finished width of 74 inches, thereby opening opportunities for Nucor to sell higher-value sheet steel products to customers in the agricultural, pipe and tube, industrial equipment, automotive, and heavy- equipment industries. In 2015, the Berkeley mill shipped 150,000 tons of wider-width products and was pursuing a goal of increasing shipments to 400,000 tons.

∙ Instituting a $155 million project at the Nucor– Yamato mill in 2014 to produce lighter, wider, and stronger steel pilings and a second $75 million project in 2016 to produce structural steel sections

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average, it took approximately 1.1 tons of scrap and scrap substitutes to produce a ton of steel—the pro- portions averaged about 70 percent scrap steel and 30 percent scrap substitutes. Nucor was the biggest user of scrap metal in North America, and it also purchased millions of tons of pig iron, HBI, DRI, and other iron products annually—top-quality scrap substitutes were especially critical in making pre- mium grades of sheet steel, steel plate, and special bar quality steel at various Nucor mills. Scrap prices were driven by market demand-supply conditions and could fluctuate significantly—see Exhibit 6. Rising scrap prices adversely impacted the compa- ny’s costs and ability to compete against steelmakers that made steel from scratch using iron ore, coke, and traditional blast furnace technology.

Nucor’s raw materials strategy was aimed at achieving greater control over the costs of all types of metallic inputs (both scrap metal and iron-related substitutes) used at its steel plants. A key element of this strategy was to backward integrate into the pro- duction of 6 to 7 million tons per year of high-quality scrap substitutes (chiefly pig iron and direct reduced iron) at either its own wholly owned and operated plants or at plants jointly owned by Nucor and other partners—integrating backward into supplying a big fraction of its own iron requirements held promise of raw material savings and less reliance on outside iron suppliers. The costs of producing pig iron and direct reduced iron (DRI) were not as subject to steep swings as was the price of scrap steel.

Nucor’s first move to execute its long-term raw materials strategy came in 2002 when it partnered with the Rio Tinto Group, Mitsubishi Corporation, and Chinese steelmaker Shougang Corporation to pioneer Rio Tinto’s HIsmelt® technology at a new plant to be constructed in Kwinana, Western Aus- tralia. The HIsmelt technology entailed converting iron ore to liquid metal or pig iron and was both a replacement for traditional blast furnace technology and a hot metal source for electric arc furnaces. Rio Tinto had been developing the HIsmelt technology for 10 years and believed the technology had the potential to revolutionize ironmaking and provide low-cost, high-quality iron for making steel. Nucor had a 25 percent ownership in the venture and had a joint global marketing agreement with Rio Tinto to license the technology to other interested steel companies. The Australian plant represented the world’s first commercial application of the HIsmelt

North Africa. A few months later, Nucor acquired 50 percent of the stock of Duferdofin–Nucor S.r.l. for approximately $667 million (Duferdofin was Duferco’s Italy-based steelmaking subsidiary). In 2013, Duferdofin–Nucor operated at various loca- tions a steel melt shop and bloom/billet caster with an annual capacity of 1.1 million tons, two beam rolling mills with combined capacity of 1.1 million tons, a 495,000-ton merchant bar mill, and a 60,000- ton trackshoes/cutting edges mill. The customers for the products produced by Duferdofin–Nucor were primarily steel service centers and distributors located both in Italy and throughout Europe. So far, the joint venture project had not lived up to the part- ners’ financial expectations because all of the plants made construction-related products. The European construction industry had been hard hit by the eco- nomic events of 2008–2009 and the construction- related demand for steel products in Europe was very slowly creeping back toward pre-crisis levels. Ongoing losses at Duferdofin–Nucor and revalu- ation of the joint venture’s assets had resulted in Nucor’s investment in Duferdofin–Nucor being val- ued at $412.9 million at December 31, 2014, and $258.2 million at December 31, 2015.

In early 2010, Nucor invested $221.3 million to become a 50–50 joint venture partner with Mitsui USA to form NuMit LLC—Mitsui USA was the larg- est wholly owned subsidiary of Mitsui & Co., Ltd., a diversified global trading, investment, and service enterprise headquartered in Tokyo, Japan. NuMit LLC owned 100 percent of the equity interest in Steel Tech- nologies LLC, an operator of 25 sheet steel process- ing facilities throughout the United States, Canada, and Mexico. The NuMit joint venture was profitable in both 2012 and 2013. At the end of 2015, Nucor’s investment in NuMit was $314.5 million, which con- sisted of the initial investment plus additional capital contributions and equity method earnings less distri- butions to Nucor; Nucor received distributions from NuMit of $6.7 million in 2013, $52.7 million in 2014, and $13.1 million in 2015.

Nucor’s Raw Materials Strategy Scrap metal and scrap substitutes were Nucor’s single biggest cost—all of Nucor’s steel mills used electric arc furnaces to make steel products from recycled scrap steel, scrap iron, pig iron, hot briquet- ted iron (HBI), and direct reduced iron (DRI). On

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world-class product quality levels in making DRI; this achievement allowed Nucor to use an even larger percentage of DRI in producing the most demanding steel products.

In September 2010, Nucor announced plans to build a $750 million DRI facility with annual capacity of 2.5 million tons on a 4,000-acre site in St. James Parish, Louisiana. This investment moved Nucor two- thirds of the way to its long-term objective of being able to supply 6 to 7 million tons of its requirements for high-quality scrap substitutes. However, the new DRI facility was the first phase of a multiphase plan that included a second 2.5-million-ton DRI facility, a coke plant, a blast furnace, an iron ore pellet plant, and a steel mill. Permits for both DRI plants were received from the Louisiana Department of Environmental

technology; it had a capacity of over 880,000 tons and was expandable to 1.65 million tons at an attrac- tive capital cost per incremental ton. Production started in January 2006. However, the joint venture partners opted to permanently close the HIsmelt plant in December 2010 because the project, while technologically acclaimed, proved to be financially unviable. Nucor’s loss in the joint venture partner- ship amounted to $94.8 million.

In April 2003, Nucor entered a joint venture with Companhia Vale do Rio Doce (CVRD) to construct and operate an environmentally friendly $80 million pig iron project in northern Brazil. The project, named Ferro Gusa Carajás, utilized two conventional mini-blast furnaces to produce about 418,000 tons of pig iron per year, using iron ore from CVRD’s Carajás mine in northern Brazil. The charcoal fuel for the plant came exclusively from fast-growing eucalyptus trees in a cultivated forest in northern Brazil owned by a CVRD subsidiary. The cultivated forest removed more carbon dioxide from the atmosphere than the blast furnace emitted, thus counteracting global warming—an outcome that appealed to Nucor management. Nucor invested $10 million in the project and was a 22 percent owner. Production of pig iron began in the fourth quarter of 2005; the joint venture agreement called for Nucor to purchase all of the plant’s production. However, Nucor sold its interest in the project to CVRD in April 2007.

Nucor’s third raw-material sourcing initia- tive came in 2004 when it acquired an idled direct reduced iron (DRI) plant in Louisiana, relocated all of the plant assets to Trinidad and Tobago (a dual-island nation off the coast of South America near Venezuela), and expanded the project (named Nu-Iron Unlimited) to a capacity of 2 million tons. The plant used a proven technology that converted iron ore pellets into direct reduced iron. The Trini- dad site was chosen because it had a long-term and very cost-attractive supply of natural gas (large volumes of natural gas were consumed in the plant’s production process), along with favorable logistics for receiving iron ore and shipping direct reduced iron to Nucor’s steel mills in the United States. Nucor entered into contracts with natural gas suppliers to purchase natural gas in amounts needed to operate the Trinidad through 2028. Pro- duction began in January 2007. Nu-Iron person- nel at the Trinidad plant had recently achieved