<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, 1999
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 (I.R.S. Employer Identification No.)
of Incorporation or Organization)
1841 West Buchanan Street 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 5, 1999, there were 7,027,173 shares
of Common Stock, $.001 par value per share, outstanding.
<PAGE> 2
SCHUFF STEEL COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I: Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
-------- -----------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,584 $ 15,431
Restricted funds on deposit 2,601 2,574
Receivables 45,478 47,310
Costs and recognized earnings in excess of billings on uncompleted contracts 11,406 11,861
Inventories 7,919 6,825
Prepaid expenses and other current assets 3,035 1,936
-------- --------
Total current assets 86,023 85,937
Property, plant and equipment, net 21,096 20,850
Goodwill, net 52,660 53,303
Other assets 5,404 5,498
-------- --------
$165,183 $165,588
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 6,949 $ 11,368
Accrued payroll and employee benefits 3,805 3,952
Accrued interest 3,848 1,081
Other accrued liabilities 3,095 3,291
Billings in excess of costs and recognized earnings on uncompleted contracts 8,462 7,025
Current portion of long-term debt 2,456 3,838
-------- --------
Total current liabilities 28,615 30,555
Long-term debt, less current portion 103,711 103,870
Other non-current liabilities 2,229 2,028
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; 7,027,173 and
7,023,420 shares issued and outstanding at March 31, 1999 and December 31,
1998, respectively 7 7
Additional paid-in capital 14,190 14,154
Retained earnings 16,431 14,974
-------- --------
Total stockholders' equity 30,628 29,135
-------- --------
$165,183 $165,588
======== ========
</TABLE>
Note: The balance sheet at December 31, 1998 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.
3
<PAGE> 4
SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
-------- --------
(in thousands,
except per share data)
<S> <C> <C>
Revenues $ 54,113 $ 27,426
Cost of revenues 42,568 22,434
-------- --------
Gross profit 11,545 4,992
General and administrative expenses 5,442 2,394
Goodwill amortization 539 --
-------- --------
Operating income 5,564 2,598
Interest expense (2,964) (98)
Other income 217 241
-------- --------
Income before income tax expense 2,817 2,741
Income tax expense 1,360 1,146
-------- --------
Net income $ 1,457 $ 1,595
======== ========
Net income per share:
Basic $ 0.21 $ 0.23
======== ========
Diluted $ 0.21 $ 0.22
======== ========
Weighted average shares used in computation:
Basic 7,025 7,000
======== ========
Diluted 7,079 7,159
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 1998
---------------------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,457 $ 1,595
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,413 423
Gain on disposal of property and equipment 21 (139)
Deferred income taxes 33 1
Unearned compensation 9
Changes in operating assets and liabilities:
Restricted funds on deposit (27) (566)
Receivables 1,832 2,813
Costs and recognized earnings in excess of billings on
uncompleted contracts 455 (2,147)
Inventories (1,094) (99)
Prepaid expenses and other current assets (1,046) 312
Accounts payable (4,419) (2,953)
Accrued payroll and employee benefits (147) 1,062
Accrued interest payable 2,767 --
Other accrued liabilities (196) 916
Billings in excess of costs and recognized earnings on
uncompleted contracts 1,437 532
Other liabilities 188 60
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,683 1,810
INVESTING ACTIVITIES
Acquisitions of property and equipment (1,019) (592)
Proceeds from disposals of property and equipment 3 140
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,016) (452)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and long-term borrowings 10,286 13,404
Principal payments on revolving line of credit and long-term debt (11,827) (14,666)
Proceeds from issuance of common stock 27 10
Cash distributions to stockholders -- --
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (1,514) (1,252)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 153 106
Cash and cash equivalents at beginning of period 15,431 197
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,584 $ 303
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
SCHUFF STEEL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
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 periods ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. 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, 1998. Certain amounts in the
1998 consolidated financial statements have been reclassified to conform with
the 1999 presentation.
2. RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
-------------------------
(in thousands)
<S> <C> <C>
Contract receivables:
Contracts in progress $ 37,873 $ 36,717
Unbilled retentions 7,497 10,011
45,370 46,728
Other receivables 108 582
-------------------------
$ 45,478 $ 47,310
=========================
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
-------------------------
(in thousands)
<S> <C> <C>
Raw materials $ 7,263 $ 6,307
Finished goods 656 518
-------------------------
$ 7,919 $ 6,825
=========================
</TABLE>
6
<PAGE> 7
4. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
-----------------------
(in thousands,
except per share data)
<S> <C> <C>
Numerator:
Net income $1,457 $1,595
=======================
Denominator:
Denominator for basic net income per share -
weighted average shares 7,025 7,000
Effect of dilutive securities:
Employee and director stock options 54 159
-----------------------
Denominator for diluted net income per share -
adjusted weighted average shares and
assumed conversions 7,079 7,159
=======================
Net income per share:
Basic $ 0.21 $ 0.23
=======================
Diluted $ 0.21 $ 0.22
=======================
</TABLE>
5. 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, 1998 or March 31, 1999
for which the eventual outcome would have a material adverse impact on the
Company.
7
<PAGE> 8
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, 1998.
On June 4, 1998, the Company acquired all of the issued and outstanding capital
stock of Addison Structural Services, Inc. ("Addison"). As a result of such
purchase, the Company acquired indirect ownership of the assets of Addison's
wholly-owned operating subsidiaries, Addison Steel, Inc. and Quincy Joist
Company. The aggregate purchase price was approximately $59.5 million, of which
approximately $56.3 million was paid in cash and $3.2 million was paid in the
form of a promissory note secured by a letter of credit. On August 31, 1998, the
Company acquired all of the issued and outstanding capital stock of Six
Industries, Inc. ("Six"). The aggregate purchase price was approximately $18.2
million, of which approximately $16.7 million was paid in cash and $1.5 million
was paid in the form of a promissory note. On October 15, 1998, the Company
acquired all of the issued and outstanding capital stock of Bannister Steel,
Inc. ("Bannister"). The aggregate purchase price was approximately $16.8
million, of which approximately $15.8 million was paid in cash and $1.0 million
was paid in the form of a promissory note secured by a letter of credit.
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the purchase prices have been allocated to the
assets and liabilities acquired based on the fair values at the dates of the
acquisition. The operating results of Addison, Six, and Bannister have been
included in the Company's Consolidated Financial Statements from the closing
date of each of the acquisitions.
Comparison of Three Months Ended March 31, 1999 and March 31, 1998
Revenues. Revenues increased by $26.7 million, or 97.3 percent, to $54.1 million
for the three months ended March 31, 1999 from $27.4 million for the three
months ended March 31, 1998. The increase in revenues was primarily a result of
additional revenues being generated by Addison, Six, and Bannister following
their acquisitions by the Company in June 1998, August 1998, and October 1998,
respectively. The average revenues for the Company's ten largest revenue
generating contracts was $1.9 million for the three months ended March 31, 1999
and 1998.
Gross Profit. Gross profit increased by $6.6 million, or 131.3 percent, to $11.5
million for the three months ended March 31, 1999 from $5.0 million for the
three months ended March 31, 1998. As a percentage of revenues, gross profit
increased to 21.3 percent in the first quarter of 1999 from 18.2 percent in the
comparable 1998 period. The increase as a percentage of revenues was primarily
attributable to higher average margins achieved by recently acquired Addison,
Six, and Bannister.
General and Administrative Expenses. General and administrative expenses
increased by $3.0 million, or 127.3 percent, to $5.4 million for the three
months ended March 31, 1999 from $2.4 million for the three months ended March
31, 1998. The $3.0 million increase in 1999 was largely attributable to
additional general and administrative costs resulting from recently acquired
Addison, Six, and Bannister. General and administrative expenses as a percentage
of revenues increased to 10.1 percent for the first quarter of
8
<PAGE> 9
1999 from 8.7 percent in the comparable 1998 period. The increases in general
and administrative costs as a percentage of revenues were due primarily to
increased administrative costs associated with the Company's acquisitions and
the addition of general and administrative costs of the acquired companies which
had higher general and administrative costs as a percentage of revenues than the
Company prior to the acquisitions.
Goodwill amortization. Goodwill amortization was $539,000 in 1999 and represents
the amortization of the excess of cost over the fair value of net assets
acquired from the Addison, Six, and Bannister business combinations in 1998. The
goodwill is amortized on a straight-line basis over 25 years. There was no
amortization in the first quarter of 1998, as the Company had no goodwill.
Interest Expense. Interest expense increased to $3.0 million in the three months
ended March 31, 1999 from $98,000 in the three months ended March 31, 1998. The
increase in interest expense was attributable primarily to the interest costs
related to the Company's $100.0 million 10-1/2% Senior Notes issued in June
1998.
Other income. Other income decreased slightly to $217,000 in 1999 from $241,000
in 1998.
Income Tax Expense. Income tax expense increased by $214,000 or 18.7 percent, to
$1.4 million, or a 48.3 percent effective tax rate, for the three months ended
March 31, 1999 from income tax expense of $1.1 million, or a 41.8 percent
effective tax rate, for the three months ended March 31, 1998. The increase in
the effective tax rate was due primarily to goodwill amortization of $539,000
resulting from the Company's acquisitions of Addison, Six, and Bannister, and
which is not deductible for tax purposes.
Net Income. Net income decreased by $138,000, or 8.7 percent, to $1.5 million
for the three months ended March 31, 1999 from net income of $1.6 million for
the three months ended March 31, 1998, primarily due to the factors described
above.
Backlog. Backlog at March 31, 1999 was $165.5 million, representing a $99.0
million increase over backlog at March 31, 1998 of $66.5 million. The increase
in backlog compared to March 31, 1998 was the result of additional backlog
generated by Addison, Six, and Bannister.
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 attempts to structure the payment arrangements under its contracts
to match costs incurred under the project. To the extent the Company is not able
to bill in advance of costs, it relies on bank credit facilities to meet its
working capital needs. At March 31, 1999, the Company had no outstanding
indebtedness under its revolving line of credit and had working capital of
approximately $57.4 million.
The Company'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
9
<PAGE> 10
cash flows of $2.7 million and $1.8 million for the three months ended March 31,
1999 and 1998, respectively. For the three months ended March 31, 1999,
operating cash flows were greater than net income due to depreciation and
amortization of $1.4 million and changes in working capital requirements
resulting from day-to-day operations. For the three months ended March 31, 1998,
operating cash flows approximated net income for the period. Investing
activities required $1.0 million and $452,000 for the three months ended March
31, 1999 and 1998, respectively, substantially all of which were related to
purchases of property and equipment in 1999 and 1998. Financing activities
consumed $1.5 million and $1.3 million for the three months ended March 31, 1999
and 1998 respectively. Cash consumed by financing activities in 1999 and 1998
was related primarily to the repayment of long-term debt and line of credit
balances.
The Company maintains a $25.0 million credit facility with a bank that matures
on June 30, 2001, which is available for working capital and general corporate
purposes. The credit facility is secured by a first priority, perfected security
interest in all the assets of the Company and its present and future
subsidiaries. The Company will be eligible for reductions in the interest rates
on the credit facility if the Company achieves certain leverage ratio targets.
The interests rates, based on the leverage ratio achieved, can range from a
minimum of prime or LIBOR plus 2.00% to a maximum of prime plus 1.00% or LIBOR
plus 3.00%. At March 31, 1999, there was approximately $22.9 million of credit
available under the credit facility for borrowings, which has been reduced by
approximately $2.1 million of outstanding letters of credits under which the
Company is committed.
The credit facility also requires that the Company maintain specified leverage
ratios, interest coverage ratios, fixed charge coverage ratios and a specified
minimum EBITDA. The credit facility also contains other covenants that, among
other things, limit the Company's ability to pay cash dividends or make other
distributions, change its business, merge, consolidate or dispose of material
portions of its assets.
The security agreements pursuant to which the Company's assets are pledged
prohibit any further pledge of such assets without the written consent of the
bank.
On June 4, 1998, the Company completed a private placement pursuant to Rule 144A
of the Securities Act of 1933 of $100.0 million in principal amount of its
10-1/2% Senior Notes due 2008 ("Senior Notes"). Net proceeds from the Senior
Notes were used to repay certain indebtedness of the Company and to pay the cash
portions of the purchase price for the Company's acquisitions of Addison, Six
and Bannister. The Senior Notes are redeemable at the option of the Company in
whole or in part, beginning in 2003 at a premium declining ratably to par by
2006. By 2001, the Company may redeem up to 35.0% of the Senior Notes at a
premium with the proceeds of an equity offering, provided that at least 65.0% of
the aggregate amount of the Senior Notes originally outstanding remain
outstanding. The Senior Notes contain covenants that, among other things,
provide limitations on additional indebtedness, sale of assets, change of
control and dividend payments. The Senior Notes are fully and unconditionally
guaranteed, jointly and severally, on a senior subordinated basis by the
Company's current and future, direct and indirect subsidiaries.
The Company has four other long-term debt commitments that are related to notes
payable generated from the Company's acquisitions in 1997 and 1998. The balance
of these notes was $6.2 million at March 31, 1999 with interest rates ranging
from 5.73% to prime and maturing in the years 2000 through 2002. Two of the
notes payable are secured by letters of credit totaling an aggregate of $2.1
million.
10
<PAGE> 11
The Company estimates that its capital expenditures for 1999 will be
approximately $3.5 million of which approximately $1.0 million had been expended
as of March 31, 1999. The Company is considering the expansion of certain of its
facilities and production capacities, which would increase the 1999 estimated
capital expenditures. 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.
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 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.
11
<PAGE> 12
Substantial Leverage and Ability to Service Debt
With the Company's 10-1/2% Senior Notes, existing line of credit facility and
other positionings, the Company is highly leveraged with substantial debt
service in addition to operating expenses and planned capital expenditures. The
Company's 10-1/2% Senior Notes permit the Company to incur additional
indebtedness, subject to certain limitations, including additional secured
indebtedness under existing credit facilities. The Company's level of
indebtedness will have several important effects on its future operations,
including, without limitation, (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest and principal
on its indebtedness, reducing the funds available for operations and for capital
expenditures, including acquisitions, (ii) covenants contained in the Senior
Notes or the credit facility or other credit facilities will require the Company
to meet certain financial tests, and other restrictions will limit its ability
to borrow additional funds or to dispose of assets, and may affect the Company's
flexibility in planning for, and reacting to, changes in its business, including
possible acquisition activities, (iii) the Company's leveraged position will
substantially increase its vulnerability to adverse changes in general economic,
industry and competitive conditions, (iv) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
general corporate and other purposes may be limited and (v) the Company's
leveraged position and the various covenants contained in the Senior Notes and
the credit facility may place the Company at a relative competitive disadvantage
as compared to certain of its competitors. The Company's ability to meet its
debt service obligations and to reduce its total indebtedness will be dependent
upon the Company's future performance, which will be subject to general
economic, industry and competitive conditions and to financial, business and
other factors affecting the operations of the Company, many of which are beyond
its control. There can be no assurance that the Company's business will continue
to generate cash flow at or above current levels. If the Company is unable to
generate sufficient cash flow from operations in the future to service its debt,
it may be required, among other things, to seek additional financing in the debt
or equity markets, to refinance or restructure all or a portion of its
indebtedness, including the Senior Notes, to sell selected assets, or to reduce
or delay planned capital expenditures and growth or business strategies. There
can be no assurance that any such measures would be sufficient to enable the
Company to service its debt, or that any of these measures could be effected on
satisfactory terms, if at all.
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, changes in construction schedules
for 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 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.
No Assurance of Successful Acquisitions
In addition to the acquisitions of Addison, Six and Bannister, the Company
intends to consider acquisitions of and alliances with other companies in its
industry that could complement the Company's business,
12
<PAGE> 13
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.
The acquisitions of Addison, Six, and Bannister have consumed and will continue
to consume substantial management attention and resources of the Company and
will require substantial efforts and entail certain risks in the integration of
their operations. There can be no assurance that anticipated cost savings or
synergies will be achieved. The Company will be dependent on the retention and
future performance of key officers and employees of Addison, Six, and Bannister
for day-to-day management and future operating results.
Fixed Price Contracts
Of the Company's $165.5 million backlog at March 31, 1999, most consisted 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 terms 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.
Variations in Backlog; Dependence on Large Contracts
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 could 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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
13
<PAGE> 14
activity declines significantly in the Company's principal markets, the
Company's business, financial condition and results of operations would be
adversely affected.
Capacity Constraints; Dependence on Subcontractors
The Company routinely relies on subcontractors to perform a significant portion
of its fabrication, erection 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.
Union Contracts
The Company currently is a party to a number of collective bargaining agreements
with various unions representing some of 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
revenues 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, Nevada, Florida, Georgia, California and Texas, 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 these states and in the southwestern and
southeastern 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, retail shopping
centers, industrial facilities, hotels and casinos, convention centers and other
facilities, the prevailing market prices
14
<PAGE> 15
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.
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 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.
Risks of International Operations
The Company currently operates in selected international markets and is seeking
to further expand its presence in these 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 may 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
15
<PAGE> 16
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 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 progress 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.
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. 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 could
materially and adversely affect the Company. Certain environmental laws, such as
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") 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
16
<PAGE> 17
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.
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.
Year 2000
The Company is preparing for the impact of the Year 2000 on its business, as
well as on the businesses of its customers, suppliers and business partners. The
"Year 2000 Issue" refers to the risk that systems, products, and equipment
having date-sensitive components will not recognize dates after December 31,
1999. These risks are derived predominantly from the fact that many software
programs have historically categorized the "year" in a two-digit format. The
Year 2000 Issue creates potential risks for the Company in its information
technology and non-information technology systems used in its business
operations. The Company may also be exposed to risks from third parties with
whom the Company interacts who fail to adequately address their own Year 2000
Issues.
The Company's Readiness
The Company started to formulate a plan to address the Year 2000 Issue in 1997.
To date, the Company's primary focus has been on its own internal information
technology systems, including all types of systems in use by the Company in its
operations, finance and human resources departments, and to deal with the most
critical systems first. The Company is continually developing a Year 2000 plan
to address all of its Year 2000 Issues. The Company's Year 2000 plan involves
the following phases: awareness, assessment, remediation, testing and
implementation.
Although the Company's assessment of the Year 2000 Issue is incomplete, the
Company has completed an assessment of approximately 60% of its internal
information technology systems. The Company estimates that it will complete the
assessment of its remaining internal information technology systems by June 30,
1999 and establish a timetable for the remediation of its remaining technology
systems. The Company has already completed the remediation of approximately 20%
of its information technology systems, including modifying and upgrading
existing software and developing and purchasing new software, and continues to
renovate portions of such systems for which assessment is complete. The Company
has not begun or established a timetable for its testing and implementation
phases. The Company's goal is to complete such phases by August 31, 1999,
although complications arising from potential or unanticipated acquisitions
might cause some delay.
Some of the Company's fabrication equipment have computer systems and
applications, and in some cases embedded microprocessors, that could be affected
by Year 2000 Issues. The Company has begun to assess the impact on its
fabrication equipment by contacting the vendors of such equipment. A majority of
17
<PAGE> 18
vendors have informed the Company that (i) certain fabrication equipment is Year
2000 compliant, (ii) they have developed software for functional workarounds to
ensure Year 2000 compliance with respect to the balance of their noncompliant
fabrication equipment and (iii) remediation will be made during future regular
maintenance visits. The Company is in the process of contacting the remaining
vendors of its fabrication equipment and expects to receive information from
such other vendors by May 31, 1999, with respect to their assessment of the
impact on the fabrication equipment that they provided to the Company and the
nature and timetable of the remediation that such vendors may propose. The
Company expects to complete its assessment by August 31, 1999 and that any
required remediation will be completed by December 31, 1999. The Company expects
that its equipment vendors will propose timely remediation and will bear the
cost of modifying or otherwise renovating the Company's fabrication equipment.
The Company has recently begun an assessment of the potential for Year 2000
Issues arising from embedded microprocessors in its other equipment, facilities
and corporate and other offices, including telecommunications systems,
utilities, and security systems, and expects to complete the assessment by June
1, 1999.
External Relationships
The Company also faces the risk that one or more of its critical suppliers or
customers ("external relationships") will not be able to interact with the
Company due to the third party's inability to resolve its own Year 2000 Issues,
including those associated with its own external relationships. The Company is
completing its inventory of external relationships and is risk rating each
external relationship based upon the potential business impact, available
alternatives and cost of substitution. The Company is also attempting to
determine the overall Year 2000 readiness of its external relationships. In the
case of mission critical suppliers such as banks, financial intermediaries (such
as stock exchanges), telecommunications providers and other utilities,
information technology vendors, financial market data providers, steel and
related product suppliers, and equipment providers (including maintenance), the
Company is engaged in discussions with the third parties and is attempting to
obtain detailed information as to those parties' Year 2000 plans and states of
readiness. The Company has received some preliminary information concerning the
Year 2000 readiness of some of its customers, suppliers and other third parties
with which the Company has a material relationship and expects to engage in
discussions with most of such parties through 1999 in an attempt to determine
the extent to which the Company is vulnerable to those parties' possible failure
to become Year 2000 compliant. The Company, however, does not have sufficient
information at the current time to predict whether its external relationships
will be Year 2000 ready.
Costs to Address Year 2000 Issue
The Company's preliminary estimates for the expected total aggregate costs for
assessment, remediation, testing and implementation of its internal information
technology systems will range from approximately $1.0 million to $1.5 million,
of which $300,000 has been incurred. These costs include only those that are
necessary to replace non-compliant systems on an accelerated basis due to Year
2000 Issues. Many other costs incurred or to be incurred were part of a planned
system conversion, which was not accelerated. The major components of these
costs are: consultants, additional personnel costs, programming, new software
and hardware, software upgrades and travel expenses. The Company expects that
such costs will be funded through operating cash flows. This estimate, based on
currently available information, will be
18
<PAGE> 19
updated as the Company continues its assessment and proceeds with renovation,
testing and implementation and may be adjusted upon receipt of more information
from the Company's suppliers, customers and other third parties and upon the
design and implementation of the Company's contingency plan. In addition, the
availability and cost of consultants and other personnel trained in this area
and potential or unanticipated acquisitions might materially affect the
estimated costs.
Risks to the Company
The Company's Year 2000 Issue involves significant risks. The Company has and
will continue to devote substantial resources to address its Year 2000 Issue,
however, there can be no assurance that the Company will succeed in implementing
its evolving Year 2000 plan on a timely basis. The following describes the
Company's "most reasonably likely worst-case scenarios", given current
uncertainties. If the Company's renovated or replaced internal information
technology systems fail the testing phase, or any software application or
embedded microprocessors central to the Company's operations are overlooked in
the assessment or implementation phases, significant problems including delays
may be incurred in purchasing and fabricating product, and billing the Company's
customers for services performed. Furthermore, if its major customers' systems
do not become Year 2000 compliant on a timely basis, the Company will have
problems and incur delays in receiving payments.
If the Company's vendors or suppliers of the Company's necessary steel, power,
telecommunications, transportation, and erection and subcontract services fail
to provide the Company with equipment, raw material and services, the Company
may be unable to provide services to its customers.
If any of these uncertainties were to occur, the Company's business, financial
condition and results of operations would be adversely affected. The Company is
unable to assess the likelihood of such events occurring or the extent of the
effect on the Company.
Contingency Plans
The Company has not yet established contingency plans to address the Company's
worst case scenarios and other unavoided or unavoidable Year 2000 Issues with
internal information and non-information systems technology and with customers,
vendors and other third parties, but it expects to create such plans by October
31, 1999.
Year 2000 Forward-Looking Statements
The foregoing Year 2000 discussion contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including without limitation, anticipated costs and the dates by
which the Company expects to complete certain actions, are based on management's
best current estimates, which were derived utilizing numerous assumptions about
future events, including the continued availability of certain resources,
representations received from third parties and other factors. However, there
can be no guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the ability to
identify and remediate all relevant information technology and non-information
technology systems, results of Year 2000 testing, adequate resolution of Year
2000 Issues by businesses and other third parties who are service providers,
suppliers or customers of
19
<PAGE> 20
the Company, unanticipated system costs, potential or unanticipated
acquisitions, the adequacy of and ability to develop and implement contingency
plans and similar uncertainties. The "forward-looking statements" made in the
foregoing Year 2000 discussion speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS
At March 31, 1999, the Company did not participate in any derivative financial
instruments, or other financial and commodity instruments for which fair value
disclosure would be required under SFAS No. 107. The Company holds no investment
securities which would require disclosure of market risk.
PRIMARY MARKET RISK EXPOSURE
The Company is potentially exposed to market risk associated with changes in
interest rates primarily as a result of its $100.0 million 10-1/2% fixed rate
Senior Notes, which were issued on June 4, 1998. Specifically, the Company is
exposed to changes in the fair value of its $100.0 million Senior Notes. The
variation in fair value is a function of market interest rate changes and the
investor perception of the investment quality of the Senior Notes.
20
<PAGE> 21
PART II OTHER INFORMATION
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 14, 1999 By: /s/ Kenneth F. Zylstra
------------------------------------------
Kenneth F. Zylstra
Vice President and Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 18,185
<SECURITIES> 0
<RECEIVABLES> 45,478
<ALLOWANCES> 0
<INVENTORY> 7,919
<CURRENT-ASSETS> 86,023
<PP&E> 33,261
<DEPRECIATION> 12,165
<TOTAL-ASSETS> 165,183
<CURRENT-LIABILITIES> 28,615
<BONDS> 103,711
0
0
<COMMON> 7
<OTHER-SE> 30,621
<TOTAL-LIABILITY-AND-EQUITY> 165,183
<SALES> 54,113
<TOTAL-REVENUES> 54,113
<CGS> 42,568
<TOTAL-COSTS> 42,568
<OTHER-EXPENSES> 5,981
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,964
<INCOME-PRETAX> 2,817
<INCOME-TAX> 1,360
<INCOME-CONTINUING> 1,457
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,457
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
