<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 000-22715
SCHUFF STEEL COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 86-0318760
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
420 South 19th Avenue 85009
Phoenix, Arizona (Zip Code)
(Address of Principal Executive Offices)
(602) 252-7787
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practical date: As of May 13, 1998, there were 7,003,700 shares
of Common Stock, $.001 par value per share, outstanding.
<PAGE> 2
SCHUFF STEEL COMPANY
TABLE OF CONTENTS
Page
Part I: Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II: Other Information
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 19
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
------- -------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 303 $ 197
Restricted funds on deposit 2,662 2,096
Receivables 21,904 24,717
Costs and recognized earnings in excess of billings on uncompleted contracts 6,129 3,982
Inventories 2,463 2,364
Prepaid expenses 438 750
Deferred income taxes 389 417
------- -------
Total current assets 34,288 34,523
Property and equipment, net 7,583 7,415
Other assets 100 100
------- -------
$41,971 $42,038
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,796 $ 5,749
Accrued payroll and employee benefits 2,085 1,023
Insurance payable 906 721
Other accrued liabilities 304 420
Billings in excess of costs and recognized earnings on uncompleted contracts 4,290 3,758
Income taxes payable 847 --
Current portion of long-term debt 304 304
------- -------
Total current liabilities 11,532 11,975
Long-term debt, less current portion 3,665 4,927
Deferred income taxes 199 226
Other liabilities 297 237
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $.001 par value - authorized 1,000,000 shares; none issued
Common stock, $.001 par value - authorized 20,000,000 shares; 7,002,000 and
7,000,000 shares issued and outstanding at March 31, 1998 and December 31,
1997, respectively 7 7
Additional paid-in capital 14,023 14,013
Retained earnings 12,248 10,653
------- -------
Total stockholders' equity 26,278 24,673
------- -------
$41,971 $42,038
======= =======
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed consolidated financial statements.
1
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SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31
1998 1997
-------- --------
(in thousands, except per
share data)
<S> <C> <C>
Revenues $ 27,426 $ 25,507
Cost of revenues 22,434 21,655
-------- --------
Gross profit 4,992 3,852
General and administrative expenses 2,394 2,081
-------- --------
Operating income 2,598 1,771
Interest expense (98) (95)
Other income 241 96
-------- --------
Income before income tax expense 2,741 1,772
Income tax expense 1,146 --
-------- --------
Net income $ 1,595 $ 1,772
======== ========
Pro forma, net income data:
Net income as reported $ 1,595 $ 1,772
Pro forma provision for income taxes related to operations as S
Corporation -- 710
-------- --------
Pro forma net income $ 1,595 $ 1,062
======== ========
Pro forma net income per share:
Basic $ 0.23 $ 0.18
======== ========
Diluted $ 0.22 $ 0.18
======== ========
Weighted average shares used in computation:
Basic 7,000 5,941
======== ========
Diluted 7,159 5,941
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,595 $ 1,772
Adjustment to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 423 361
Gain on disposal of property and equipment (139) (12)
Deferred income taxes 1 --
Changes in operating assets and liabilities:
Restricted funds on deposit (566) (647)
Receivables 2,813 (522)
Costs and recognized earnings in excess of billings on
uncompleted contracts (2,147) 137
Inventories (99) (2,757)
Prepaid expenses 312 (233)
Accounts payable (2,953) (2,482)
Accrued payroll and employee benefits 1,062 1,266
Insurance payable 185 (404)
Other accrued liabilities (116) 1,031
Billings in excess of costs and recognized earnings on
uncompleted contracts 532 2,777
Income taxes payable 847 --
Other liabilities 60 --
Accrued pension cost -- (36)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,810 251
INVESTING ACTIVITIES
Acquisitions of property and equipment (592) (310)
Proceeds from disposals of property and equipment 140 32
Purchase of business -- (427)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (452) (705)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and long-term borrowings 13,404 --
Principal payments on revolving line of credit and long-term debt (14,666) (1,273)
Proceeds from issuance of common stock 10 --
Cash distributions to stockholders -- (776)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (1,252) (2,049)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 106 (2,503)
Cash and cash equivalents at beginning of period 197 7,253
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 303 $ 4,750
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
Schuff Steel Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997.
2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings Per Share" (SFAS No. 128), adopted by the Company on December
31, 1997. SFAS No. 128 replaced the previously reported primary or fully diluted
pro forma earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
share is very similar to the previously reported primary earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the SFAS No. 128 requirements. The impact of
SFAS No. 128 on the calculation of fully diluted earnings per share for each of
the periods presented was not material.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The adoption of SFAS No. 131 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows. Schuff Steel is a calendar year end company, so it must adopt
SFAS No. 131 in 1998. Because SFAS No. 131 is not required to be applied to
interim financial statements in the initial year of adoption, the Company is not
required to disclose segment information in accordance with SFAS No. 131 until
its 1998 annual report, at which time it will restate prior years' segment
disclosures to conform to the SFAS No. 131
4
<PAGE> 7
Schuff Steel Company
Notes to Condensed Consolidated Financial
Statements (Unaudited) (continued)
2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
segment presentation, if practicable. In the Company's first quarter 1999
report, and in subsequent quarters, it will present the interim disclosures
required by SFAS No. 131 for both 1999 and 1998.
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its shareholders' equity. SFAS No. 130
requires the Company's changes in unfunded pension losses, which prior to
adoption were reported separately in stockholders' equity, to be included in
other comprehensive income. During the first quarter of 1997, total
comprehensive income approximated net income.
3. RECEIVABLES
Receivables consist of the following at:
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Contract receivables:
Contracts in progress $15,874 $18,094
Unbilled retentions 5,954 6,520
------- -------
21,828 24,614
Other receivables 76 103
======= =======
$21,904 $24,717
======= =======
</TABLE>
4. INVENTORIES
Inventories consist of the following at:
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Raw materials $1,849 $1,846
Finished goods 614 518
------ ------
$2,463 $2,364
====== ======
</TABLE>
5
<PAGE> 8
SCHUFF STEEL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
5. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted pro forma
net income per share:
<TABLE>
<CAPTION>
Three months ended
March 31
1998 1997
------ ------
(in thousands,
except per share date)
<S> <C> <C>
Numerator:
Pro forma net income $1,595 $1,062
====== ======
Denominator:
Weighted average shares 7,000 5,000
Net effect of shares issued that are attributed to stockholder
distributions made from initial public offering proceeds -- 941
------ ------
Denominator for basic pro forma net income per share 7,000 5,941
Effect of dilutive securities:
Employee and director stock options 159 --
------ ------
Denominator for diluted pro forma net income per share - adjusted
weighted average shares and assumed conversions 7,159 5,941
====== ======
Pro forma net income per share:
Basic $ 0.23 $ 0.18
====== ======
Diluted $ 0.22 $ 0.18
====== ======
</TABLE>
6. INCOME TAXES
For the three months ended March 31, 1997, the financial statements of the
Company do not include a provision for income taxes because the taxable income
of the Company was included in the income tax returns of the stockholders under
the S Corporation elections.
Pro forma net income reflects the provision for income taxes that would have
been recorded had all of the Company's income been subject to income taxes as a
C Corporation for the S Corporation period assuming an effective tax rate of 40
percent.
6
<PAGE> 9
SCHUFF STEEL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (continued)
7. CONTINGENT MATTERS
The Company is involved from time to time through the ordinary course of
business in certain claims, litigation and assessments. Due to the nature of the
construction industry, the Company's employees from time to time become subject
to injury, or even death, while employed by the Company. The Company does not
believe there are any such contingencies at December 31, 1997 or March 31, 1998
for which the eventual outcome would have a material adverse impact on the
Company.
During 1996, the primary contractor on the Company's largest contract claimed
that the Company was liable under delay provisions and is seeking damages. The
Company believes that the reasons for the delay should preclude any liability,
and accordingly, no reserves have been created for this claim.
During 1996, the Company was named as a defendant in a lawsuit relating to an
incident at one of its worksites whereby one of its employees was killed in a
crane accident. The Company believes the loss, if any, relating to the incident
will be fully insured and does not expect the ultimate outcome of the matter to
have a material adverse impact on its financial position.
Relating to the incident set forth in the prior paragraph, the Company has been
named as a defendant in a lawsuit brought by the crane operator who claims he
was assaulted by employees of the Company after the incident. The Company's
insurance carrier has declined coverage. However, management does not expect the
amount of loss, if any, relating to the ultimate resolution of this matter to
have a material adverse impact on its financial position, regardless of whether
or not the insurance carrier ultimately provides coverage.
7
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion and analysis of financial condition and results of operations
should be read in conjunction with the unaudited condensed consolidated
financial statements and the related disclosures included elsewhere herein and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included as part of the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
Comparison of Three Months Ended March 31, 1998 and March 31, 1997
Revenues. Revenues increased by $1.9 million, or 7.5 percent, to $27.4 million
for the three months ended March 31, 1998 from $25.5 million for the three
months ended March 31, 1997. The increase was attributable primarily to an
increase in the average revenues for the Company's top ten contracts. Excluding
the Bank One Ballpark project, the average revenues for the Company's ten
largest revenue generating contracts for the three month period ended March 31,
1998 increased to an average of $1.9 million from an average of $1.2 million for
the three months ended March 31, 1997, an aggregate increase of approximately
$7.0 million. The increase in average contract revenues was partially offset by
a decrease in the revenues recognized on the Bank One Ballpark project. The Bank
One Ballpark contract contributed revenues of $3.6 million for the first quarter
of 1998 compared to revenues of $9.0 million for the first quarter of 1997.
Gross Profit. Gross profit increased by $1.1 million, or 29.6 percent, to $5.0
million for the three months ended March 31, 1998 from $3.9 million for the
three months ended March 31, 1997. As a percentage of revenues, gross profit
increased to 18.2 percent in the first quarter of 1998 from 15.1 percent in the
comparable 1997 period. The increase was primarily attributable to recognition
of revenues related to work performed on the Bank One Ballpark project in prior
periods that became recognizable as an authorized change to the contract during
the quarter.
General and Administrative Expenses. General and administrative expenses
increased by $313,000, or 15.0 percent, to $2.4 million for the three months
ended March 31, 1998 from $2.1 million for the three months ended March 31,
1997. General and administrative expenses as a percentage of revenues increased
to 8.7 percent for the first quarter of 1998 from 8.2 percent in the comparable
1997 period due to costs associated with the acquisition of B&K Steel for a full
three months in 1998 compared to two months in 1997. B&K Steel has higher
general and administrative costs as a percentage of revenues than Schuff. Other
factors contributing to the increase in general and administrative expenses were
increased lease expenses due to assumption of additional space and increased
costs associated with being a publicly held company. General and administrative
expenses include those for contract bids, estimating, sales and marketing,
facilities, project management and support services. The Company believes that
it currently has sufficient management and administrative resources to support
continued growth in revenues without a proportionate increase in general and
administrative expenses.
8
<PAGE> 11
Interest Expense. Interest expense increased slightly in the three months ended
March 31, 1998 from the comparable 1997 period.
Income Tax Expense. Income tax expense increased by $436,000, or 61.4 percent,
to $1.1 million, or a 41.8 percent effective tax rate, for the three months
ended March 31, 1998 from pro forma income tax expense of $710,000, or a 40.1
percent effective tax rate, for the three months ended March 31, 1997.
Net Income. Net income increased by $533,000, or 50.2 percent, to $1.6 million
for the three months ended March 31, 1998 from pro forma net income of $1.1
million for the three months ended March 31, 1997, primarily due to the factors
described above.
Backlog. Backlog at March 31, 1998 was $66.5 million, representing a $989,000
increase over backlog at March 31, 1997 of $65.5 million. Backlog at March 31,
1997 included $26.8 million relating to the second and third phases of the Bank
One Ballpark project. The March 31, 1997 backlog that related to the Bank One
Ballpark project was substantially recognized as revenue in 1997 and the first
quarter of 1998, and such backlog was substantially replaced by two other
significant contracts for $13.0 million and $11.5 million at March 31, 1998 with
separate customers.
The Company has experienced, and is expected to continue to experience,
variations in quarterly and annual results of operations. Factors that may
affect these results include, among other things, the timing and terms of major
contract awards and the starting and completion dates of projects.
Liquidity and Capital Resources
The Company completed its initial public offering of 2,000,000 shares of common
stock, $.001 par value in July 1997. Such offering yielded $14.0 million in
proceeds net of underwriting discounts and other costs. Schuff used
approximately $7.0 million of the proceeds to fund S corporation distributions
and used the remaining proceeds to purchase specialized fabrication equipment
and to fund general corporate purposes.
Schuff attempts to structure the payment arrangements under its contracts to
match costs incurred under the project. To the extent Schuff is able to bill in
advance of costs incurred, it generates working capital through billings in
excess of costs and recognized earnings on uncompleted contracts. To the extent
Schuff is not able to bill in advance of costs, it relies on bank credit
facilities to meet its working capital needs. At March 31, 1998, Schuff had $1.6
million of outstanding indebtedness under its revolving line of credit. At March
31, 1998, Schuff had working capital of approximately $22.8 million.
Schuff's short term cash needs are primarily for working capital to support
operations including receivables, inventories and other costs incurred in
performing its contracts. Operating activities provided cash flows of $1.8
million and $251,000 for the three months ended March 31, 1998 and 1997,
respectively. For the three months ended March 31, 1998, operating cash flows
9
<PAGE> 12
approximated net income for the period. For the three months ended March 31,
1997, operating cash flows were less than net income (excluding pro forma income
taxes) due to increased working capital requirements. Investing activities
required $452,000 and $705,000 for the three months ended March 31, 1998 and
1997, respectively, substantially all of which were related to purchases of
property and equipment in 1997 and 1998 and the cash portion of the acquisition
of B&K Steel in 1997. Financing activities consumed $1.3 million and $2.0
million for the three months ended March 31, 1998 and 1997, respectively. Cash
consumed by financing activities in 1998 and 1997 was related primarily to
repayments of long-term debt and line of credit balances with $776,000 of S
Corporation distributions also being paid in 1997.
The Company's existing credit facility consists of a $10.0 million revolving
line of credit that is subject to renewal on June 30, 1999 and is collateralized
by contract receivables, equipment and inventory, and, effective December 10,
1997, an additional $10.0 million line of credit solely to finance the
acquisition of other companies. At March 31, 1998, there was $18.4 million
credit available under the lines for future borrowings.
The Company has two other long-term debt commitments that are related to its
property and equipment and to the acquisition of B&K Steel. One is a
subordinated note payable to a limited partnership comprised of two of the
Company's principal stockholders and certain of their family members, which
requires monthly payments of $12,037 plus interest and matures in 2003. The
balance on this loan was approximately $1.8 million at March 31, 1998. The other
long-term debt of the Company consists of two notes incurred as part of the
consideration for the B&K Steel acquisition of which $639,000 was outstanding at
March 31, 1998. Such notes are payable in five equal annual installments ending
in 2002.
The Company estimates that its capital expenditures for 1998 will be
approximately $1.5 million of which approximately $592,000 had been expended as
of March 31, 1998. The Company believes that its available funds, cash generated
by operating activities and funds available under its bank credit facilities
will be sufficient to fund these capital expenditures and its operating needs.
However, the Company may expand its operations through future acquisitions and
may require additional equity or debt financing.
The Company has entered into a definitive agreement to acquire all of the
outstanding shares of capital stock of Addison Structural Services, Inc.
(Addison). The Company does not currently have sufficient working capital or
other resources from which to pay the entire estimated purchase price should the
acquisition occur and would rely on obtaining interim or extended commercial or
other debt financing. The Company is seeking to obtain such financing. There can
be no assurance that the Company could obtain such financing on terms favorable
or acceptable to it, if at all.
10
<PAGE> 13
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings Per Share" (SFAS No. 128), adopted by the Company on December
31, 1997. SFAS No. 128 replaced the previously reported primary or fully diluted
pro forma earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
share is very similar to the previously reported primary earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the SFAS No. 128 requirements. The impact of
SFAS No. 128 on the calculation of fully diluted earnings per share for each of
the periods presented was not material.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The adoption of SFAS No. 131 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows. Schuff Steel is a calendar year end company, so it must adopt
SFAS No. 131 in 1998. Because SFAS No. 131 is not required to be applied to
interim financial statements in the initial year of adoption, the Company is not
required to disclose segment information in accordance with SFAS No. 131 until
its 1998 annual report, at which time it will restate prior years' segment
disclosures to conform to SFAS No. 131 segment presentation, if practicable.
In the Company's first quarter 1999 report, and in subsequent quarters, it
will present the interim disclosures required by SFAS No. 131 for both 1999
and 1998.
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its shareholders' equity. SFAS No. 130
requires the Company's changes in unfunded pension losses, which prior to
adoption were reported separately in stockholders' equity, to be included in
other comprehensive income.
Special Note Concerning Forward Looking Statements
This Quarterly Report on Form 10-Q, including the Notes to the Condensed
Consolidated Financial Statements and this "Management's Discussion and Analysis
of Financial Condition and Results of Operations," contain forward looking
statements. Additional written or oral forward looking statements may be made by
the Company from time to time in filings with the Securities and Exchange
Commission, in its press releases, or otherwise. The words "believe," "expect,"
"anticipate," "intends," "forecast," "project," and similar expressions identify
forward looking statements. Such statements may include, but not be limited to,
the anticipated outcome of contingent events, including litigation, projections
of revenues, income or loss, capital
11
<PAGE> 14
expenditures, plans for future operations, growth and acquisitions, financing
needs or plans and the availability of financing, and plans relating to services
of the Company, as well as assumptions relating to the foregoing. Such forward
looking statements are within the meaning of that term in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended.
Forward looking statements reflect the Company's current views with respect to
future events and financial performance and speak only as of the date the
statements are made. Such forward looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward looking statements. Statements in
this Quarterly Report, including the Notes to the Condensed Consolidated
Financial Statements and in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations," describe factors, among others,
that could contribute to or cause such differences. Other factors that could
cause actual results to differ materially from those expressed in such forward
looking statements are set forth below under the caption "Factors That May
Affect Future Operating Results and Financial Condition." In addition, new
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor on
the business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from forward looking statements. The
Company undertakes no obligation to publicly update or review any forward
looking statements as a result of new information, future events, or any other
reason.
Factors That May Affect Future Operating Results and Financial Condition.
The Company's future operating results and financial condition are dependent on
a number of factors that the Company must successfully manage in order to
achieve favorable future operating results and financial condition. The
following potential risks and uncertainties, together with those mentioned
elsewhere herein, could affect the Company's future operating results, financial
condition, and the market price of its Common Stock.
Fluctuating Quarterly Results of Operations
The Company has experienced, and in the future is expected to continue to
experience, substantial variations in its results of operations as a result of a
number of factors, many of which are outside the Company's control. In
particular, the Company's operating results may vary because of downturns in one
or more segments of the building construction industry, changes in economic
conditions, the Company's failure to obtain, or delays in awards of, major
projects, the cancellation of major projects, or the Company's failure to timely
replace projects that have been completed or are nearing completion. Any of
these factors could result in the periodic inefficient use or underutilization
of the Company's resources and could cause the Company's operating results to
fluctuate significantly from period to period, including on a quarterly basis.
12
<PAGE> 15
Fixed Price Contracts
A substantial portion of the Company's backlog consists of projects being
performed on a fixed price basis. In bidding on projects, the Company estimates
its costs, including projected increases in costs of labor, material and
services. Despite these estimates, costs and gross profit realized on a fixed
price contract may vary from estimated amounts because of unforeseen conditions
or changes in job conditions, variations in labor and equipment productivity
over the durations of contracts, higher than expected increases in labor or
material costs and other factors. These variations could have a material adverse
effect on the Company's business, financial condition and results of operations
for any period.
Dependence On Construction Industry
The Company earns virtually all of its revenues in the building construction
industry, which is subject to local, regional and national economic cycles. The
Company's revenues and cash flows depend to a significant degree on major
construction projects in various industries, including the hotel and casino,
retail shopping, health care, mining, computer chip manufacturing, public works
and other industries, each of which industries may be adversely affected by
general or specific economic conditions. If construction activity declines
significantly in the Company's principal markets, the Company's business,
financial condition and results of operations would be adversely affected.
Dependence On Subcontractors
The Company routinely relies on subcontractors to perform a significant portion
of its fabrication and project detailing to fulfill projects that the Company
cannot fulfill in-house due to capacity constraints or that are in markets in
which the Company has not established a strong local presence. With respect to
these projects, the Company's success depends on its ability to retain and
successfully manage these subcontractors. Any difficulty in attracting and
retaining qualified subcontractors on terms and conditions favorable to the
Company could have an adverse effect on the Company's ability to complete these
projects in a timely and cost effective manner.
Operating Risks; Litigation
Construction and heavy steel plate weldments involve a high degree of
operational risk. Natural disasters, adverse weather conditions, design,
fabrication and erection errors and work environment accidents can cause death
or personal injury, property damage and suspension of operations. The occurrence
of any of these events could result in loss of revenues, increased costs, and
liability to third parties. The Company is subject to litigation claims in the
ordinary course of business, including lawsuits asserting substantial claims.
Currently, the Company does not maintain any reserves for its ongoing
litigation. The Company periodically reviews the need to maintain a litigation
reserve. The Company maintains risk management, insurance, and safety programs
intended to prevent or mitigate losses. There can be
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<PAGE> 16
no assurance that any of these programs will be adequate or that the Company
will be able to maintain adequate insurance in the future at rates that it
considers reasonable.
Union Contracts
The Company currently is a party to a number of collective bargaining agreements
with various unions representing the Company's fabrication and erection
employees. These contracts expire or are subject to expiration at various times
in the future. The inability of the Company to renew such contracts could result
in work stoppages and other labor disturbances, which could disrupt the
Company's business and adversely affect the Company's results of operations.
Revenue Recognition Estimates
The Company recognizes revenues using the percentage of completion accounting
method. Under this method, revenues are recognized based on the ratio that costs
incurred to date bear to the total estimated costs to complete the project.
Estimated losses on contracts are recognized in full when the Company determines
that a loss will be incurred. The Company frequently reviews and revises revenue
and total cost estimates as work progresses on a contract and as contracts are
modified. Accordingly, revenue adjustments based upon the revised completion
percentage are reflected in the period that estimates are revised. Although
revenue estimates are based upon management assumptions supported by historical
experience, these estimates could vary materially from actual results. To the
extent percentage of completion adjustments reduce previously reported revenues,
the Company would recognize a charge against operating results, which could have
a material adverse effect on the Company's results of operations for the
applicable period.
Geographic Concentration
The Company's fabrication and erection operations currently are conducted
primarily in Arizona and Nevada, states in which the construction industry has
experienced substantial growth during recent years. Because of this
concentration, future construction activity and the Company's business may be
adversely affected in the event of a downturn in economic conditions existing in
Arizona and Nevada and in the southwestern United States generally. Factors that
may affect economic conditions include increases in interest rates or
limitations in the availability of financing for construction projects,
decreases in the amount of funds budgeted for governmental projects, decreases
in capital expenditures devoted to the construction of plants, distribution
centers, industrial facilities, hotels and casinos, convention centers and other
facilities, the prevailing market prices of copper, gold and other metals that
impact related mining activity, and downturns in occupancy rates, office space
demand, tourism and convention related activity and population growth.
14
<PAGE> 17
Variations In Backlog
The Company's backlog can be significantly affected by the receipt, or loss, of
individual contracts. In the event one or more large contracts were terminated
or their scope reduced, the Company's backlog would decrease substantially. The
Company's future business and results of operations may be adversely affected if
it is unable to replace significant contracts when lost or completed, or if it
otherwise fails to maintain a sufficient level of backlog.
Risks Of International Operations
The Company currently is expanding into international markets. The Company's
international operations are subject to certain political, economic and other
uncertainties, including risks of war, nationalization of assets, renegotiation
or nullification of existing contracts, changing political conditions, changing
laws and policies affecting trade and investment, and overlap of different tax
structures. Although the Company currently attempts to limit its exposure to
currency fluctuations by dealing solely in United States dollars, there can be
no assurance that the Company's international operations will escape the risks
of fluctuating currency values, hard currency shortages, or controls on currency
exchange.
Competition
Many small and various large companies offer fabrication, erection and related
services that compete with those provided by the Company. Local and regional
companies offer competition in one or more of the Company's geographic markets
or product segments. Out of state or international companies may provide
competition in any market. The Company competes for every project it obtains.
Although the Company believes customers consider, among other things, the
availability and technical capabilities of equipment and personnel, efficiency,
safety record and reputation, price competition usually is the primary factor in
determining which qualified contractor is awarded a contract. Competition has
resulted in pressure on pricing and operating margins, and the effects of
competitive pressure in the industry may continue. Some of the Company's
competitors have greater capital and other resources than the Company and are
well established in their respective markets. There can be no assurance that the
Company's competitors will not substantially increase their commitment of
resources devoted to competing aggressively with the Company or that the Company
will be able to compete profitably with its competitors.
Substantial Liquidity Requirements
The Company's operations require significant amounts of working capital to
procure materials for contracts to be performed over relatively long periods,
and for purchases and modifications of heavy-duty and specialized fabrication
equipment. In addition, the Company's contract arrangements with customers
sometimes require the Company to provide payment and performance bonds and, in
selected cases, letters of credit, to partially secure the Company's obligations
under its contracts, which may require the Company to incur significant
expenditures
15
<PAGE> 18
prior to receipt of payments. Furthermore, the Company's customers often will
retain a portion of amounts otherwise payable to the Company during the course
of a project as a guarantee of completion of that project. To the extent the
Company is unable to receive project payments in the early stages of a project,
the Company's cash flow would be reduced, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
No Assurance Of Successful Acquisitions
In addition to Addison, the Company intends to consider acquisitions of and
alliances with other companies in its industry that could complement the
Company's business, including the acquisition of entities in diverse geographic
regions and entities offering greater access to industries and markets not
currently served by the Company. There can be no assurance that suitable
acquisition or alliance candidates can be identified or, if identified, that the
Company will be able to consummate such transactions. Further, there can be no
assurance that the Company will be able to integrate successfully any acquired
companies into its existing operations, which could increase the Company's
operating expenses.
Moreover, any acquisition by the Company may result in potentially dilutive
issuances of equity securities, incurrence of additional debt and amortization
of expenses related to goodwill and intangible assets, all of which could
adversely affect the Company's profitability. Acquisitions involve numerous
risks, such as diverting attention of the Company's management from other
business concerns, the entrance of the Company into markets in which it has had
no or only limited experience and the potential loss of key employees of the
acquired company, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence Upon Key Personnel
The Company's success depends on the continued services of the Company's senior
management and key employees as well as the Company's ability to attract
additional members to its management team with experience in the steel
fabrication and erection industry. Although the Company has implemented a stock
option plan designed to retain key management and other employees, and believes
that it offers competitive compensation to such personnel, the Company is not a
party to any employment agreements with its management personnel or other key
employees. The unexpected loss of the services of any of the Company's
management or other key personnel, or its inability to attract new management
when necessary, could have a material adverse effect upon the Company.
Potential Environmental Liability
The Company's operations and properties are affected by numerous federal, state
and local environmental protection laws and regulations, such as those governing
discharges to air and water and the handling and disposal of solid and hazardous
wastes. Compliance with these laws and regulations has become increasingly
stringent, complex and costly. There can be no assurance that such laws and
regulations or their interpretation will not change in a manner that
16
<PAGE> 19
could materially and adversely affect the Company. Certain environmental laws,
such as the Comprehensive Environmental Response, Compensation and Liability Act
and its state law counterparts, provide for strict and joint and several
liability for investigation and remediation of spills and other releases of
toxic and hazardous substances. These laws may apply to conditions at properties
currently or formerly owned or operated by an entity or its predecessors, as
well as to conditions at properties at which wastes or other contamination
attributable to an entity or its predecessors come to be located.
Although the Company has not incurred any material environmental related
liability in the past and believes that it is in material compliance with
environmental laws, there can be no assurance that the Company, or entities for
which it may be responsible, will not incur such liability in connection with
the investigation and remediation of facilities it currently operates (or
formerly owned or operated) or other locations in a manner that could materially
and adversely affect the Company.
Governmental Regulation
Many aspects of the Company's operations are subject to governmental regulations
in the United States and in other countries in which the Company operates,
including regulations relating to occupational health and workplace safety,
principally the Occupational Safety and Health Act and regulations thereunder.
In addition, the Company is subject to licensure and holds or has applied for
licenses in each of the states in the United States in which it operates and in
certain local jurisdictions within such states. Although the Company believes
that it is in material compliance with applicable laws and permitting
requirements, there can be no assurance that it will be able to maintain this
status. Further, the Company cannot determine to what extent future operations
and earnings of the Company may be affected by new legislation, new regulations
or changes in or new interpretations of existing regulations.
Year 2000
The Company has determined that it will need to modify or replace portions of
its software so that its computer systems will function properly with respect to
dates in the year 2000 and beyond. The Company also has initiated discussion
with its significant suppliers, large customers and financial institutions to
ensure that those parties have appropriate plans to remediate year 2000 issues
where their systems interface with the Company's systems or otherwise impact its
operations. The Company is assessing the extent to which its operations are
vulnerable should those organizations fail to remediate properly their computer
systems.
The Company's assessment of and necessary modifications for the year 2000 issue
are estimated to be completed in early 1999. The Company believes that with
current systems and anticipated modifications, the year 2000 issue will not pose
significant operational problems for its computer systems. However, if such
modifications and necessary conversions are not made or are not completed in a
timely manner, the year 2000 issue could have a material impact on the
operations of the Company. There can also be no guarantee that the systems of
any other companies on which the Company's systems and operations rely will be
converted on a timely basis and will
17
<PAGE> 20
not have a material effect on the Company. Any remaining costs of year 2000
initiatives are not expected to be material to the Company's results of
operation or financial position.
Possible Volatility Of Stock Price
The stock market has experienced price and volume fluctuations that have
affected the market for many companies and have often been unrelated to the
operating performance of such companies. The market price of the Common Stock
could also be subject to significant fluctuations in response to variations in
the Company's quarterly operating results, analyst reports, announcements
concerning the Company, legislative or regulatory changes or the interpretation
of existing statutes or regulations affecting the Company's business,
litigation, general trends in the industry and other events or factors.
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
Use of Proceeds
The Company sold 2,000,000 shares of common stock, par value $0.001 per share,
pursuant to a Registration Statement on Form S-1 (File No. 333-26711), which was
declared effective by the Securities and Exchange Commission on July 1, 1997
(the Offering). The Offering commenced on June 30, 1997. All registered
securities subject to this Offering were sold prior to the termination of the
Offering. The managing underwriters of the offering were Principal Financial
Securities, Inc., and Cruttenden Roth Incorporated. All securities were sold for
the account of the Company and there were no selling securityholders. The
aggregate gross proceeds of the Offering were $16,000,000. The Company's total
expenses in connection with the Offering from the effective date of the
registration statement through March 31, 1998 were approximately $2,000,000, of
which $1,120,000 was for underwriting discounts and commissions and
approximately $880,000 was for other expenses, all of which were paid to persons
other than directors or officers of the Company, persons owning more than 10
percent of any class of equity securities of the Company, or affiliates of the
Company. The Company's net proceeds from the Offering were approximately $14.0
million. The Company expended $7,000,000 on S corporation distributions to
certain of its stockholders prior to the Offering (each of which stockholders
own more than 10 percent of the company's stock and are controlled by two
directors and an executive officer of the Company), and $7,000,000 of such net
proceeds for the purchase of specialized fabrication equipment and to fund
general corporate purposes. As of March 31, 1998, the Company had expended the
$14.0 million of such net proceeds.
18
<PAGE> 21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHUFF STEEL COMPANY
Date: May 15, 1998 By: /s/ Kenneth F. Zylstra
----------------------
Kenneth F. Zylstra
Vice President and Chief Financial
Officer
(Principal Financial Officer
and Duly Authorized Officer)
19
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