Why did Nucor's earnings decline so sharply in 2003 despite higher sales?

Net earnings fell 61% to $62.8 million even though net sales rose 30%. The filing cites higher scrap and energy costs, increased LIFO charges of $115 million, higher pre-operating and start-up costs of $117.5 million tied to the Decatur sheet mill and Castrip facility, increased interest expense, and lower other income. These were partly offset by lower profit-sharing costs and a lower effective tax rate of 6.12%.

What is Nucor doing to restore margins?

Nucor imposed a raw material surcharge on its products effective January 2004, which management says should restore margins and help ensure it can buy the scrap needed to fill customer orders. Management expects higher margins in 2004 than in 2003, supported by improving supply and demand and economic recovery, and expects the Decatur sheet mill to be out of start-up by the second quarter of 2004.

How strong is Nucor's balance sheet and liquidity position?

At year-end 2003, Nucor had stockholders' equity of $2.34 billion, long-term debt of $903.6 million, and working capital of $991 million with a current ratio of 2.6. Cash and short-term investments were $350.3 million, and the company had an unused $425 million revolving credit facility with no borrowings outstanding at December 31, 2003.

What acquisitions and growth projects shaped 2003 and beyond?

The 2002 acquisitions of Trico Steel (Decatur, Alabama, for $117.7 million) and Birmingham Steel (about $615 million) drove 2003 volume growth, and a $35 million North Star Steel facility in Kingman, Arizona was acquired in March 2003. Pending projects include a one-half interest in Harris Steel for about $21 million, the HIsmelt plant in Australia (Nucor holds 25%, production expected in Q4 2004), and a Brazil pig iron joint venture with CVRD (production expected late 2004).

What were the company's major risks and legal exposures?

The filing identifies scrap and raw material cost volatility, electricity and natural gas costs, competition from imports, trade policy changes, and cyclical demand in construction. Environmental reserves totaled $54.9 million at year-end 2003 under a 2000 EPA consent decree. Nucor states that pending legal proceedings are not expected to have a material adverse effect on its financial results.

NUE 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 12, 2004. Cited figures are marked; the original filing is the authoritative source.

Nucor Corporation's 2003 Form 10-K reports net sales of $6.27 billion^a for 2003, up 30% from $4.80 billion in 2002, driven largely by the Trico and Birmingham Steel acquisitions and record steel shipments to outside customers of 16,263,000 tons.

Profitability fell sharply, however: net earnings declined 61% to $62.8 million^b ($0.80 per diluted share) from $162.1 million, and gross margin dropped from 10% to 4%. The filing attributes the decline to higher scrap and energy costs, larger LIFO charges of $115 million, pre-operating and start-up costs of $117.5 million (up 39%), and higher interest expense. Scrap prices rose $65 per ton (57%) from December 2002 to December 2003, and Nucor imposed a raw material surcharge effective January 2004, which management expects will improve margins.

The balance sheet remained solid, with stockholders' equity of $2.34 billion^c, long-term debt of $903.6 million, working capital of $991 million, and a current ratio of 2.6. Cash and short-term investments rose to $350.3 million, and operating cash flow was $494.6 million. Capital expenditures were $215.4 million, and the company projects approximately $230 million for 2004.

Management expects higher margins in 2004 than in 2003, citing improving supply and demand and economic recovery, while acknowledging that raw material costs, imports, and the economy add uncertainty. The company operates two segments, steel mills and steel products.

The steel mills segment generated $5.45 billion^d of external sales and the steel products segment $819.7 million. Other items disclosed include a $21 million agreement to buy a one-half interest in Harris Steel, Inc., a 25% stake in the HIsmelt joint venture in Western Australia, and a 2003 backlog of about $1.43 billion, up from $816 million at the end of 2002.

02—Key points

Key Highlights

Net sales rose 30% to $6.27 billion in 2003, reflecting the Trico and Birmingham Steel acquisitions and record outside steel shipments of 16.26 million tons.
Net earnings fell 61% to $62.8 million, or $0.80 per diluted share, versus $162.1 million, or $2.07 per diluted share, in 2002.
Gross margin declined to 4% from 10%, pressured by scrap and energy costs, a $115 million LIFO charge, and $117.5 million in pre-operating and start-up costs.
Scrap prices rose $65 per ton (57%) from December 2002 to December 2003; Nucor implemented a raw material surcharge effective January 2004.
Balance sheet remained strong, with stockholders' equity of $2.34 billion, working capital of $991 million, a 2.6 current ratio, and cash and short-term investments of $350.3 million.
Operating cash flow was $494.6 million, and 2004 capital expenditures are projected at about $230 million.
Backlog at December 31, 2003 was about $1.43 billion, versus $816 million a year earlier.

03—Questions

Frequently Asked Questions

Why did Nucor's earnings decline so sharply in 2003 despite higher sales?
Net earnings fell 61% to $62.8 million even though net sales rose 30%. The filing cites higher scrap and energy costs, increased LIFO charges of $115 million, higher pre-operating and start-up costs of $117.5 million tied to the Decatur sheet mill and Castrip facility, increased interest expense, and lower other income. These were partly offset by lower profit-sharing costs and a lower effective tax rate of 6.12%.
What is Nucor doing to restore margins?
Nucor imposed a raw material surcharge on its products effective January 2004, which management says should restore margins and help ensure it can buy the scrap needed to fill customer orders. Management expects higher margins in 2004 than in 2003, supported by improving supply and demand and economic recovery, and expects the Decatur sheet mill to be out of start-up by the second quarter of 2004.
How strong is Nucor's balance sheet and liquidity position?
At year-end 2003, Nucor had stockholders' equity of $2.34 billion, long-term debt of $903.6 million, and working capital of $991 million with a current ratio of 2.6. Cash and short-term investments were $350.3 million, and the company had an unused $425 million revolving credit facility with no borrowings outstanding at December 31, 2003.
What acquisitions and growth projects shaped 2003 and beyond?
The 2002 acquisitions of Trico Steel (Decatur, Alabama, for $117.7 million) and Birmingham Steel (about $615 million) drove 2003 volume growth, and a $35 million North Star Steel facility in Kingman, Arizona was acquired in March 2003. Pending projects include a one-half interest in Harris Steel for about $21 million, the HIsmelt plant in Australia (Nucor holds 25%, production expected in Q4 2004), and a Brazil pig iron joint venture with CVRD (production expected late 2004).
What were the company's major risks and legal exposures?
The filing identifies scrap and raw material cost volatility, electricity and natural gas costs, competition from imports, trade policy changes, and cyclical demand in construction. Environmental reserves totaled $54.9 million at year-end 2003 under a 2000 EPA consent decree. Nucor states that pending legal proceedings are not expected to have a material adverse effect on its financial results.

04—Continue

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