<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 SEPTEMBER 30, 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 of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1841 W. Buchanan St. 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 October 22, 1999, there were 7,065,376
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 -
September 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income -
Three Months Ended September 30, 1999 and 1998 and
Nine Months Ended September 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements - September 30, 1999 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------ -----------
(Unaudited) (Note 1)
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,765 $ 15,431
Restricted funds on deposit 2,671 2,574
Receivables 52,754 47,310
Costs and recognized earnings in excess of billings on uncompleted 13,969 11,861
contracts
Inventories 8,205 6,825
Prepaid expenses and other current assets 1,457 1,936
-------- --------
Total current assets 91,821 85,937
Goodwill, net 51,578 53,303
Property, plant, and equipment, net 23,662 20,850
Other assets 7,489 5,498
-------- --------
$174,550 $165,588
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,885 $ 11,368
Accrued payroll and employee benefits 3,967 3,952
Other accrued liabilities 7,771 4,372
Billings in excess of costs and recognized earnings on uncompleted 9,088 7,025
contracts
Current portion of long-term debt 5,076 3,838
-------- --------
Total current liabilities 36,787 30,555
Long-term debt, less current portion 101,890 103,870
Other liabilities 2,298 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; 7,065,376
and 7,023,420 shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively 7 7
Additional paid-in capital 14,372 14,154
Retained earnings 19,196 14,974
-------- --------
Total stockholders' equity 33,575 29,135
======== ========
$174,550 $165,588
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
--------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 65,715 $ 55,960 $ 176,464 $ 119,119
Cost of revenues 52,182 46,948 141,739 101,828
--------- --------- --------- ---------
Gross profit 13,533 9,012 34,725 17,291
General and administrative expenses 6,264 4,592 17,506 9,944
Goodwill amortization 538 330 1,614 425
--------- --------- --------- ---------
Operating income 6,731 4,090 15,605 6,922
Interest expense (2,953) (2,738) (8,762) (3,842)
Other income 300 696 924 1,241
--------- --------- --------- ---------
Income before income tax provision 4,078 2,048 7,767 4,321
Income tax provision (1,596) (964) (3,545) (1,906)
--------- --------- --------- ---------
Net income $ 2,482 $ 1,084 $ 4,222 $ 2,415
========= ========= ========= =========
Net income per share:
Basic $ 0.35 $ 0.15 $ 0.60 $ 0.34
========= ========= ========= =========
Diluted $ 0.35 $ 0.15 $ 0.60 $ 0.34
========= ========= ========= =========
Weighted average shares used in computation:
Basic 7,062 7,022 7,039 7,011
========= ========= ========= =========
Diluted 7,073 7,161 7,074 7,180
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,222 $ 2,415
Adjustment to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,226 2,239
Loss (gain) on disposal of property and equipment 8 (151)
Deferred taxes (174) (390)
Unearned compensation 28 9
Changes in operating assets and liabilities:
Restricted funds on deposit (97) (449)
Receivables (5,444) (7,421)
Costs and recognized earnings in excess of billings in
uncompleted contracts (2,108) 631
Inventories (1,381) (1,237)
Prepaid expenses and other assets 896 240
Accounts payable (482) (1,038)
Billings in excess of costs and recognized earnings on
uncompleted contracts 2,062 3,192
Accrued payroll and employee benefits 15 860
Other accrued liabilities 3,520 1,495
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,291 395
INVESTING ACTIVITIES
Acquisitions of property and equipment (5,040) (1,642)
Proceeds from disposals of property and equipment 5 3,767
Increase in other assets (2,370) (10)
Purchase of businesses, net of cash acquired -- (62,362)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (7,405) (60,247)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and long-term borrowings 32,155 41,912
Proceeds from issuance of senior notes, net of issuance costs -- 95,694
Principal payments on revolving line of credit and long-term debt (32,897) (44,531)
Proceeds from the exercise of stock options 190 112
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (552) 93,187
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,666) 33,335
Cash and cash equivalents at beginning of period 15,431 197
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,765 $ 33,532
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
SCHUFF STEEL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 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. 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. 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 and nine
month periods ended September 30, 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 Condensed Consolidated Financial
Statements have been reclassified to conform to the 1999 presentation.
2. RECEIVABLES
Receivables consist of the following at:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------ -----------
(in thousands)
<S> <C> <C>
Contract receivables:
Contracts in progress $39,811 $36,717
Unbilled retentions 12,511 10,011
------- -------
52,322 46,728
Other receivables 432 582
------- -------
$52,754 $47,310
======= =======
</TABLE>
3. INVENTORIES
Inventories consist of the following at:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1999 1998
------------ -----------
(in thousands)
<S> <C> <C>
Raw materials $8,081 $6,307
Finished goods 124 518
------ ------
$8,205 $6,825
====== ======
</TABLE>
4
<PAGE> 7
4. 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
------ ------ ------ ------
(in thousands, except per share date)
<S> <C> <C> <C> <C>
Numerator:
Net income $2,482 $1,084 $4,222 $2,415
====== ====== ====== ======
Denominator:
Weighted average shares 7,062 7,022 7,039 7,011
------ ------ ------ ------
Denominator for basic net income per share 7,062 7,022 7,039 7,011
Effect of dilutive securities:
Employee and director stock options 11 139 35 169
------ ------ ------ ------
Denominator for diluted net income per share -
adjusted weighted average shares and assumed
conversions 7,073 7,161 7,074 7,180
====== ====== ====== ======
Net income per share:
Basic $ 0.35 $ 0.15 $ 0.60 $ 0.34
====== ====== ====== ======
Diluted $ 0.35 $ 0.15 $ 0.60 $ 0.34
====== ====== ====== ======
</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 September 30,
1999 for which the eventual outcome would have a material adverse impact on the
Company.
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
5
<PAGE> 8
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.
Results of Operations
Revenues
Revenues increased by 17.4 percent to $65.7 million for the three months ended
September 30, 1999 from $56.0 million for the three months ended September 30,
1998. Revenues increased by 48.1 percent to $176.5 million for the nine months
ended September 30, 1999 from $119.1 million for the nine months ended September
30, 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, offset by
a decrease in the Company's average revenues generated from larger projects. The
average revenues for the Company's ten largest revenue generating projects in
the three and nine month periods ended September 30, 1999 were $1.7 million and
$4.2 million, respectively, versus $2.8 million and $5.7 million in the three
and nine month periods ended September 30, 1998, respectively.
Gross Profit
Gross profit increased by 50.2 percent to $13.5 million for the three-month
period ended September 30, 1999 from $9.0 million for the three-month period
ended September 30, 1998. Gross profit increased by 100.8 percent to $34.7
million for the nine-month period ended September 30, 1999 from $17.3 million
for the nine-month period ended September 30, 1998. As a percentage of revenues,
gross profit increased to 20.6 percent and 19.7 percent for the three and
nine-month periods ended September 30, 1999, respectively, from 16.1 percent and
14.5 percent for the three and nine-month periods ended September 30, 1998. The
increases as a percentage of revenues were primarily attributable to increased
diversification of project mix in 1999.
6
<PAGE> 9
General and Administrative Expenses
General and administrative expenses increased by 36.4 percent to $6.3 million
for the three months ended September 30, 1999 from $4.6 million for the three
months ended September 30, 1998. General and administrative expenses increased
by 76.0 percent to $17.5 million for the nine months ended September 30, 1999
from $9.9 million for the nine months ended September 30, 1998. The increases in
1999 were largely attributable to additional general and administrative costs
resulting from the acquisitions of Addison, Six, and Bannister. General and
administrative expenses as a percentage of revenues increased to 9.5 percent for
the three months ended September 30, 1999 from 8.2 percent for the three months
ended September 30, 1998. General and administrative expenses as a percentage of
revenues increased to 9.9 percent for the nine months ended September 30, 1999
from 8.3 percent for the nine months ended September 30, 1998. The increases in
general and administrative expense as a percentage of revenues were due
primarily to increased general and 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 increased to $538,000 for the three-month period ended
September 30, 1999 from $330,000 for the three-month period ended September 30,
1998. Goodwill amortization increased to $1.6 million for the nine-month period
ended September 30, 1999 from $425,000 for the nine-month period ended September
30, 1998. The increases in goodwill amortization were a result of the Addison,
Six and Bannister acquisitions in 1998.
Interest Expense
Interest expense increased to $3.0 million for the three months ended September
30, 1999 from $2.7 million for the three months ended September 30, 1998 and to
$8.8 million for the nine months ended September 30, 1999 from $3.8 million for
the nine months ended September 30, 1998. The increases in interest expense were
primarily attributable to the addition of the $100.0 million of 10-1/2 percent
senior notes in June 1998.
Other Income
Other income decreased to $300,000 for the three months ended September 30, 1999
from $696,000 for the three months ended September 30, 1998 and decreased to
$924,000 for the nine months ended September 30, 1999 from $1.2 million for the
nine months ended September 30, 1998. The decreases were primarily attributable
to more proceeds from the Company's $100 million of 10-1/2 percent senior notes
being available for investment in 1998 than in 1999, by which time most of the
proceeds had been used to finance the Addison, Six and Bannister acquisitions.
7
<PAGE> 10
Income Tax Provision
Income tax expense for the three and nine months ended September 30, 1999
represent an effective tax rate of approximately 39.1 percent and 45.6 percent,
respectively. The income tax provision for the three and nine months ended
September 30, 1998 represented approximately 47.1 percent and 44.1 percent,
respectively. The effective tax rate is higher than the federal statutory rates
primarily because of state income taxes and the amortization of goodwill, which
is not deductible for tax purposes. During the three month period ended
September 30, 1999, the Company recorded a $265,000 income tax benefit related
to a tax credit.
Backlog
Backlog decreased 10.1 percent to $169.5 million at September 30, 1999 from
$188.5 million at June 30, 1999.
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 related projects. To the extent the Company is
not able to bill in advance of costs, it relies on its credit facilities to meet
its working capital needs. At September 30, 1999, the Company had $2.6 million
in borrowings under its line of credit and $55.0 million of working capital.
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 cash flows of $5.3
million and $395,000 for the nine months ended September 30, 1999 and 1998,
respectively. For the nine months ended September 30, 1999, operating cash flows
were greater than net income due to lower working capital requirements. For the
nine months ended September 30, 1998, operating cash flows were less than net
income due to increased working capital levels. Investing activities required
$7.4 million and $60.2 million for the nine months ended September 30, 1999 and
1998, respectively, substantially all of which were related to purchases of
property and equipment and the non-cash portion of the acquisitions in 1998.
Financing activities required $552,000 for the nine months ended September 30,
1999 which related largely to principal payments on debt and provided $93.2
million for the nine months ended September 30, 1998 relating primarily to the
net proceeds from the $100.0 million private placement of debt in June 1998.
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 percent to a maximum of prime plus 1.00
percent or LIBOR plus 3.00 percent. At September 30, 1999, there was
approximately $20.3 million of credit available for borrowings under the credit
facility, which has been reduced by approximately $2.1 million
8
<PAGE> 11
of outstanding letters of credit under which the Company is committed and $2.6
million in borrowings at September 30, 1999.
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 percent 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 percent of the Senior
Notes at a premium with the proceeds of an equity offering, provided that at
least 65.0 percent 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 $4.3 million at September 30, 1999 with interest rates
ranging from 5.73 percent 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.
The Company estimates that its capital expenditures for 1999 will be
approximately $12.5 million of which approximately $7.7 million had been
expended as of September 30, 1999. 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,
9
<PAGE> 12
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.
Substantial Leverage and Ability to Service Debt
With the Company's 10-1/2 percent 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 percent 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
10
<PAGE> 13
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, 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
11
<PAGE> 14
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 $169.5 million backlog at September 30, 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 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.
12
<PAGE> 15
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 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.
13
<PAGE> 16
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 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
14
<PAGE> 17
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 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.
15
<PAGE> 18
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
which 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.
The Company's assessment of the Year 2000 Issue has been completed and a
timetable for remediation of its remaining internal technology systems has been
established. The Company has already completed the remediation of approximately
95 percent of its information technology systems, including modifying and
upgrading existing software and developing and purchasing new software. The
Company continues to renovate portions of such systems for which remediation is
incomplete and expects to complete this final phase by December 10,1999.
Some of the Company's fabrication equipment has computer systems and
applications, and in some cases embedded microprocessors, that could be affected
by Year 2000 Issues. The Company has assessed the impact on its fabrication
equipment by contacting the vendors of such equipment. A majority of 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 non-compliant
fabrication equipment, and (iii) remediation will be made during future regular
maintenance visits. The Company has completed contacting the remaining
fabrication suppliers/vendors and expects to complete any required remediation
by December 10, 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 completed the 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. The Company has determined that only minor remediation is
required, and expects to complete the remediation by December 10, 1999.
16
<PAGE> 19
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 assessing each
external relationship based upon the potential business impact, available
alternatives, and cost of substitution. In the case of mission critical
suppliers such as banks, financial intermediaries, telecommunications providers
and other utilities, information technology vendors, financial market data
providers, steel and related product suppliers, and equipment providers, the
Company has completed its assessment of those parties' Year 2000 plans and
states of readiness and concluded its existing external relationships will be
Year 2000 compliant.
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 $810,000 has been incurred. These costs include only those components
that are necessary to replace non-compliant systems on an accelerated basis due
to Year 2000 Issues. Other costs incurred, or to be incurred, are part of a
planned system conversion which was not accelerated. The major components of
these costs are consultants, additional personnel, 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 may be adjusted
upon receipt of more information from the Company's suppliers, customers and
other third parties and upon implementation of the Company's contingency plan.
In addition, the availability and cost of consultants and other personnel
trained in this area 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.
17
<PAGE> 20
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 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.
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 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 which 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 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 statements" 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 September 30, 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 percent 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.
18
<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: August 16, 1999 By: /s/ Kenneth F. Zylstra
------------------------------------------------
Kenneth F. Zylstra
Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
19
<PAGE> 22
Exhibit Index
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,765
<SECURITIES> 0
<RECEIVABLES> 52,754
<ALLOWANCES> 0
<INVENTORY> 8,205
<CURRENT-ASSETS> 91,821
<PP&E> 37,219
<DEPRECIATION> 13,557
<TOTAL-ASSETS> 174,550
<CURRENT-LIABILITIES> 36,787
<BONDS> 101,890
0
0
<COMMON> 7
<OTHER-SE> 33,568
<TOTAL-LIABILITY-AND-EQUITY> 174,550
<SALES> 176,464
<TOTAL-REVENUES> 176,464
<CGS> 141,739
<TOTAL-COSTS> 141,739
<OTHER-EXPENSES> 19,120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,762
<INCOME-PRETAX> 7,767
<INCOME-TAX> 3,545
<INCOME-CONTINUING> 4,222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,222
<EPS-BASIC> .60
<EPS-DILUTED> .60
</TABLE>
