It's one thing to dig into a company's numbers, but it's another to take a little time and really get to know how it operates. Often that leads to a deeper understanding of how those numbers came to be, and why great companies are, in fact, great companies. U.S. steel giant Nucor Corp. (NUE 0.72%), for example, is worth getting to know in depth, because it helps explain so much about how it became one of the best companies in the steel industry.
1. You won't believe who founded the company
Nucor was founded as the REO Motor Company in 1905. The man behind REO was Ransom E. Olds, who had previously founded Olds Motor Works, home of the Oldsmobile marque (a once famous car brand, if you are too young to recall the nameplate). According to Nucor, Olds had a dispute with stockholders that led him to leave the first automaker to bear his name and found a competitor. That was a bit of a maverick move, to say the least, and it set the tone for the company's entire history.
Image source: Getty Images
2. It wasn't a steel company, at first -- or second
After the Korean War, the company sold off its manufacturing business, then merged with Nuclear Consultants and became the Nuclear Corporation of America. What you haven't heard about yet, however, is steel. That's because steel wasn't even on the businesses' radar until 1962, when the Nuclear Corporation acquired Vulcraft, a producer of steel joists and girders. To run that acquisition they hired Ken Iverson. The company had a brush with bankruptcy in 1965, then appointed Iverson to be its new president. He sold off assets and, in 1966, pushed the company into the steelmaking business.
It took a couple of years to get the first mill, located in Darlington, South Carolina, up and running. And it was meant to be a way to ensure a low-cost and reliable stream of steel for the company's Vulcraft division. But it quickly became obvious that its steel could be sold to other companies, as well. Nuclear expanded production to do just that. In 1971, management decided to focus on the steel industry, and changed the company's name to Nucor.
To this day, however, the company's mills serve both outside customers and its own internal needs. One of Nucor's corporate goals is to move up the manufacturing chain to churn out value-added products on which it can earn higher margins -- using its own steel as the main input. In other words, the history of the company has guided it from the day it built its first steel mill.
3. Holy dividend record!
Now it's time to offer up a hard stat: As of 2017, Nucor has increased its dividend annually for 44 years. That's an impressive record in any industry, let alone one that is as cyclical as steel. The company's focus on serving its own needs and the steel needs of outside customers has clearly been a good model. But there's more to the company than just customers -- the internal kind and the external ones.
4. Who works at Nucor?
Normally when you read about a company you can easily find the main players, like the CEO and CFO. But at Nucor you can find the employees listed in the company's annual report. Normally on the cover. This is because Nucor operates on the philosophy that its employees are its greatest asset, and it treats them well so they treat Nucor well. For example, during the Great Recession, when other companies were cutting staff, Nucor stood by its employees.
Jerry Richie, a manager at one of the company's mills, noted to the Journal Sentinel at the time that, "We are coming off our worst year in history, both as a local plant and as a corporation. But no one in our organization, all 20,000 employees, was laid off. We do not lay people off. It's not a policy, but it's a practice." He added, "People were severely impacted from a pay standpoint, in terms of hours being cut and our unique bonus structure. But everyone also understood that they kept their jobs and their benefits." Mutual respect is key at Nucor, and allows the company to succeed in good years and bad. It's also the backdrop for a lean corporate structure... there are just 100 people in the head office!
5. Sharing profits, protecting margins
That quote from Richie warrants a bit more explanation. He noted the company's unique bonus structure, which is a really big deal. Essentially, Nucor rewards employees well in the good years, and asks them to share in the pain during bad years. It's a pay-for-performance model, with income tied directly to "prime" steel production. The company believes employees (it calls them teammates) "perform better when they have the opportunity to earn according to their productivity." The company estimates that two-thirds of employee pay comes from pay-for-performance bonuses.
NUE EBITDA Margin (TTM) data by YCharts
But there's an additional benefit from this structure beyond being able to avoid layoffs. During down years, the company's costs fall just when it most needs the boost to profits and margins. That's a huge competitive advantage that's only available to it because it consistently shows that it cares about its employees.
6. It's more than just a single company...
All of that said, Nucor has changed a great deal over the years. From its first mill to today, it has grown into a Fortune 500 company with around 200 facilities. But it's not exactly that simple. The company is actually made up of about 90 businesses that operate independently of each other, but that compete as a single unit.
So Nucor is a big steel company, but it operates like a small one. Remember, there's only about 100 people at corporate headquarters. That's a pretty small number for a company with a $17 billion market cap. Some of the other names that live under the Nucor moniker include wholly owned subsidiaries Harris Steel, The David J. Joseph Company, and Skyline Steel. Mutual respect between Nucor and its employees is one of the reasons it can operate in this manner.
7. It's North America's most diversified steel company
The company has its fingers in a lot of different pies. That stems from its focus on supplying both external customers' needs and its own raw material needs for the value-added products it manufactures. The benefit of that is, as the company puts it, "our short-term performance is not tied to any one market."
Image source: Nucor
Nucor has been successful at spreading its bets like this because of the decentralized way it operates. If corporate tried to micromanage every mill, the model would likely break down. By trusting its employees and rewarding them well for success, Nucor has been able to keep expanding and diversifying.
A different kind of steel mill
By now, I hope you get the idea that Nucor has a unique business model that's built, in large part, on its history. Anything that was added and worked as the years went by (like pay-for-performance) became institutionalized in the culture.
Knowing that over the past decade, Nucor remained profitable in all but one year, while competitors like United States Steel lost money in seven, doesn't tell you enough. It glosses over the key factors that allowed Nucor to manage that deep economic downturn better than its competitors. But now, you understand a bit more about what makes Nucor tick, and can see why there's more to it than just the great numbers it has historically put up.
