<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, 2000
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 May 8, 2000, there were 7,114,557 shares
of Common Stock, $.001 par value per share, outstanding.
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SCHUFF STEEL COMPANY
TABLE OF CONTENTS
<TABLE>
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Page
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Part I: Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements - March 31, 2000 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999
----------------------------
(Unaudited) (Note 1)
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,532 $ 8,682
Restricted funds on deposit 2,743 2,710
Receivables 52,109 51,968
Costs and recognized earnings in excess of
billings on uncompleted contracts 18,281 16,100
Inventories 10,124 7,614
Deferred tax asset 1,425 1,425
Prepaid expenses and other current assets 1,373 1,395
--------------------------
Total current assets 88,587 89,894
Property, plant and equipment, net 28,092 25,322
Goodwill, net 50,495 51,036
Other assets 6,934 7,009
--------------------------
$174,108 $173,261
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,285 $ 11,950
Accrued payroll and employee benefits 3,475 4,017
Accrued interest 3,760 1,109
Other accrued liabilities 3,520 3,248
Billings in excess of costs and recognized 9,433 8,864
earnings on uncompleted contracts
Income taxes payable 1,060 --
Current portion of long-term debt 3,169 5,209
--------------------------
Total current liabilities 33,702 34,397
Long-term debt, less current portion 101,230 101,390
Deferred income taxes 2,490 2,491
Other liabilities 432 433
Stockholders' equity:
Preferred stock, $.001 par value - authorized -- --
1,000,000 shares; none issued
Common stock, $.001 par value - authorized
20,000,000 shares; 7,114,557 and 7,067,328 shares
issued and outstanding at March 31, 2000 and 7 7
December 31, 1999, respectively
Additional paid-in capital 14,589 14,419
Retained earnings 21,658 20,124
--------------------------
Total stockholders' equity 36,254 34,550
--------------------------
$174,108 $173,261
==========================
</TABLE>
See notes to condensed consolidated financial statements.
1
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SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
2000 1999
---------------------------
(in thousands)
<S> <C> <C>
Revenues $ 62,940 $ 54,113
Cost of revenues 50,526 42,568
---------------------------
Gross profit 12,414 11,545
General & administrative expenses 6,601 5,442
Goodwill amortization 541 539
---------------------------
Operating income 5,272 5,564
Interest expense (2,967) (2,964)
Other income 339 217
---------------------------
Income before income tax provision 2,644 2,817
Income tax provision 1,110 1,360
---------------------------
Net income $ 1,534 $ 1,457
===========================
Net income per share:
Basic $ 0.22 $ 0.21
===========================
Diluted $ 0.22 $ 0.21
===========================
Weighted average shares used in computation:
Basic 7,089 7,025
===========================
Diluted 7,111 7,079
===========================
</TABLE>
See notes to condensed consolidated financial statements.
2
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SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
2000 1999
---------------------------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,534 $ 1,457
Adjustment to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization 1,490 1,413
(Gain) loss on disposal of property and equipment (10) 21
Deferred taxes (1) 33
Unearned compensation 9 9
Stock awards 16
Changes in operating assets and liabilities:
Restricted funds on deposit (33) (27)
Receivables (141) 1,832
Costs and recognized earnings in excess of billings on
uncompleted contracts (2,181) 455
Inventories (2,510) (1,094)
Prepaid expenses and other assets 22 (1,046)
Accounts payable (2,665) (4,419)
Accrued payroll and employee benefits (542) (147)
Accrued interest 2,652 2,767
Other accrued liabilities 272 (196)
Billings in excess of costs and recognized earnings on
uncompleted contracts 569 1,437
Income taxes payable 1,060 --
Other accrued liabilities (1) 188
---------------------------
NET CASH (USED IN) PROVIDED BY OPERATING (460) 2,683
ACTIVITIES
INVESTING ACTIVITIES
Acquisitions of property and equipment (3,614) (1,019)
Proceeds from disposals of property and equipment 31 3
Change in other assets (51) --
---------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,634) (1,016)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and long-term borrowings 25,935 10,286
Principal payments on revolving line of credit and long-term debt (28,135) (11,827)
Proceeds from the exercise of stock options and stock purchase plan 144 27
---------------------------
NET CASH USED IN FINANCING ACTIVITIES (2,056) (1,514)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,150) 153
Cash and cash equivalents at beginning of period 8,682 15,431
---------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,532 $ 15,584
===========================
</TABLE>
See notes to condensed consolidated financial statements.
3
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SCHUFF STEEL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
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, 1999 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 months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ended December
31, 2000. 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, 1999.
2. RECEIVABLES
Receivables consist of the following at:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999
------------------------
(in thousands)
<S> <C> <C>
Contract receivables:
Contracts in progress $41,023 $42,229
Unbilled retentions 10,729 9,241
------------------------
51,752 51,470
Other receivables 357 498
------------------------
$52,109 $51,968
========================
</TABLE>
3. INVENTORIES
Inventories consist of the following at:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999
------------------------
(in thousands)
<S> <C> <C>
Raw materials $ 9,860 $ 7,343
Finished goods 264 271
------------------------
$10,124 $ 7,614
========================
</TABLE>
4
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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
MARCH 31
2000 1999
------ ------
(in thousands,
except per share data)
<S> <C> <C>
Numerator:
Net income $1,534 $1,457
======================
Denominator:
Weighted average shares 7,089 7,025
----------------------
Denominator for basic net income per share 7,089 7,025
Effect of dilutive securities:
Employee and director stock options 22 54
----------------------
Denominator for diluted net income per
share - adjusted weighted average
shares and assumed conversions 7,111 7,079
======================
Net income per share:
Basic $ 0.22 $ 0.21
======================
Diluted $ 0.22 $ 0.21
======================
</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, 1999 or March 31, 2000 for which the eventual outcome would have a
material adverse impact on the Company.
6. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
----------------------------------------------------------------------
Western Pacific Southeastern
US Southwest Southwest US Total
----------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 8,783 $ 30,491 $ 2,148 $ 21,518 $ 62,940
Intersegment revenues -- 1,200 615 1,077 2,892
Operating income, excluding
goodwill amortization 655 2,394 (80) 2,844 5,813
</TABLE>
5
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<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
----------------------------------------------------------------------
Western Pacific Southeastern
US Southwest Southwest US Total
----------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 5,939 $ 23,455 $ 5,863 $ 18,856 $ 54,113
Intersegment revenues -- -- 547 1,225 1,772
Operating income, excluding
goodwill amortization 757 182 1,110 4,054 6,103
</TABLE>
A reconciliation of combined operating income, excluding goodwill
amortization, for all segments to consolidated income before income taxes
is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------------
2000 1999
------------------------------
(in thousands)
<S> <C> <C>
Total operating income, excluding goodwill
amortization for reportable segments $ 5,813 $ 6,103
Goodwill amortization (541) (539)
Interest expense (2,967) (2,964)
Other income 339 217
------------------------------
Income before income taxes $ 2,644 $ 2,817
==============================
</TABLE>
7. COMPREHENSIVE INCOME
Total comprehensive income for the three months ended March 31, 2000 and
1999 equaled net income for the corresponding periods.
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, 1999.
On June 4, 1998, the Company acquired all of the capital stock of Addison
Structural Services, Inc. ("ASSI"), a privately-held holding company
headquartered in Albany, Georgia. The aggregate purchase price was $59.5
million, of which approximately $56.3 million was paid in cash at closing
and $3.2 million was paid in the form of a promissory note. As a result of
such purchase, the Company acquired indirect ownership of the assets of
ASSI's wholly owned operating subsidiaries Addison Steel, Inc. ("Addison")
and Quincy Joist Company ("Quincy").
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On August 31, 1998, the Company acquired all of the capital stock of Six
Industries, Inc. ("Six"), a privately-held company headquartered in
Houston, Texas. The aggregate purchase price was $18.2 million, of which
$16.7 million was paid in cash at closing and $1.5 million was paid in the
form of a promissory note.
On October 15, 1998, the Company acquired all of the capital stock of
Bannister Steel, Inc. ("Bannister"), a privately-held company
headquartered in National City, California. The aggregate purchase price
was $16.8 million, of which $15.8 million was paid in cash at closing and
$1.0 million was paid in the form of a promissory note.
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 with the excess of the purchase price over net assets
acquired being recorded as goodwill.
Results of Operations
Revenues
Revenues increased by $8.8 million, or 16.3 percent, to $62.9 million for
the three months ended March 31, 2000 from $54.1 million for the three
months ended March 31, 1999. The increase in revenues was primarily a
result of additional revenues generated by the parent company. The average
revenues for the Company's ten largest revenue generating contracts was
$2.6 million for the three months ended March 31, 2000 and $1.9 million in
the three months ended March 31, 1999.
Gross Profit
Gross profit increased by $869,000, or 7.5 percent, to $12.4 million for
the three months ended March 31, 2000 from $11.5 million for the three
months ended March 31, 1999. As a percentage of revenues, gross profit
decreased to 19.7 percent in the first quarter of 2000 from 21.3 percent
in the comparable 1999 period. The decrease as a percentage of revenues
was primarily attributable to variations in project mix and unusually low
steel prices in 1999.
General and Administrative Expenses
General and administrative expenses increased by $1.2 million, or 21.3
percent, to $6.6 million for the three months ended March 31, 2000 from
$5.4 million for the three months ended March 31, 1999. The $1.2 million
increase in 2000 was largely attributable to additional general and
administrative costs required to support the revenue growth of the
companies acquired in 1998. General and administrative expenses as a
percentage of revenues increased to 10.5 percent for the first quarter of
2000 from 10.1 percent in the comparable 1999 period.
Goodwill Amortization
Goodwill amortization was $541,000 in 2000 and $539,000 in 1999 and
represents the amortization of the excess of cost over the fair value of
net assets acquired from the Addison, Quincy, Six and
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Bannister business combinations in 1998. The goodwill is being amortized
on a straight-line basis over 25 years.
Interest Expense
Interest expense was $3.0 million in both the three months ended March 31,
2000 and 1999. The interest expense is primarily attributable to the
Company's $100.0 million 10-1/2% Senior Notes issued in June 1998.
Other Income
Other income increased slightly to $339,000 in 2000 from $217,000 in 1999.
Income Tax Provision
Income tax expense decreased by $250,000, or 18.4 percent, to $1.1
million, or a 42.0 percent effective tax rate, for the three months ended
March 31, 2000 from income tax expense of $1.4 million, or a 48.3 percent
effective tax rate, for the three months ended March 31, 1999. The
effective tax rate is higher than the federal statuary rates primarily
because of state income taxes and the amortization of goodwill, which is
not deductible for tax purposes. The decrease in the effective tax rate is
due primarily to income tax credits attributable to qualifying research
and experimentation expenses associated with the Company's engineering,
detailing and software development activities.
Net Income
Net income increased by $77,000, or 5.3 percent, to $1.5 million for the
three months ended March 31, 2000 from net income of $1.4 million for the
three months ended March 31, 1999, primarily due to the factors described
above.
Backlog
Backlog at March 31, 2000 was $151.0 million, representing a $14.5 million
decrease over backlog at March 31, 1999, of $165.5 million. The decrease
in backlog compared to March 31, 1999 was primarily the result of three
major construction contracts in progress in the first quarter of 1999
which were completed prior to March 31, 2000.
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 payment arrangements under its contracts
to match costs incurred on related projects. To the extent the Company is
able to bill in advance of costs incurred, it generates working capital
through billings in excess of costs and recognized earnings on uncompleted
contracts. To the extent the Company is not able to bill in advance of
costs, it relies on its credit
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facilities to meet its working capital needs. At March 31, 2000, the
Company had $688,000 of outstanding borrowings under its line of credit,
with approximately $22.7 million available for borrowings, and working
capital of approximately $54.9 million. The Company believes that it has
sufficient liquidity through its present resources and the existence of
its bank credit facility to meet its near-term operating needs.
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 used $460,000
and provided cash flows of $2.7 million in the three months ended March
31, 2000 and 1999, respectively. For the three months ended March 31,
2000, operating cash flows were less than net income primarily due to a
$2.2 million increase in costs and recognized earnings in excess of
billings on uncompleted contracts, a $2.5 million increase in inventory,
and a $2.7 million decrease in accounts payable. 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. Cash
used in investing activities totaled $3.6 million in the three months
ended March 31, 2000, substantially all of which was related to the
construction of the Company's new joist manufacturing facility and
upgrades in fabrication equipment. Investing activities of $1.0 million
for the three months ended March 31, 1999, primarily related to upgrades
in fabrication equipment. Financing activities required $2.1 million and
$1.5 million in the three months ended March 31, 2000 and 1999,
respectively, substantially all of which was related to payments on the
Company's revolving line of credit in 2000 and 1999.
The Company maintains a $25.0 million bank credit facility 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 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 interest rates, based on the leverage ratio
achieved can range from a minimum of prime or LIBOR plus 2.25% to a
maximum of prime plus 1.50% or LIBOR plus 3.50%. At March 31, 2000, there
was approximately $22.7 million of credit available under the credit
facility for borrowings, which has been reduced by approximately $1.6
million of outstanding letters of credit 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 of $100.0
million in principal amount of its 10-1/2% Senior Notes due 2008 ("Senior
Notes"). Net proceeds of 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, Quincy, 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
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other things, provide limitations on additional indebtedness, sales 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 $3.7 million at March 31, 2000 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 $1.6 million.
The Company leases some if its fabrication and office facilities from a
partnership in which the principal beneficial stockholders of the Company
and their family members are the general and limited partners. The Company
has three leases with the partnership for its principal fabrication and
office facilities, the property and equipment acquired in the 1997
acquisition of B&K Steel, and additional office facilities adjacent to the
Company's principal office and shop facilities. Each lease has a 20-year
term and is subject to increases every five years commencing in 2002
pursuant to a Consumer Price Index formula. The Company's annual rental
payments for the three leases were $1.0 million in 1999, increasing to
$1.1 million in each year thereafter during the remaining terms of the
leases.
The Company estimates that its capital expenditures for 2000 will be
approximately $5 million of which approximately $3.6 million had been
expended as of March 31, 2000, which was primarily related to the
remaining costs of construction of its new joist manufacturing facility in
Arizona. The Company is also considering expansion of certain of its
facilities and production capacities, which would increase the 2000
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.
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
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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, Quincy, 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
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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, Quincy, 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, Quincy, Six, and Bannister for day-to-day management
and future operating results.
Fixed Price Contracts
Of the Company's $151.0 million backlog at March 31, 2000, 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. For example, approximately $33.3 million,
representing 22.1% of the Company's backlog at March 31, 2000, was
attributable to two 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.
12
<PAGE> 15
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 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.
13
<PAGE> 16
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. However, less
than 1% of the Company's revenues in 1999 and in the three months ended
March 31, 2000 were related to projects outside the United States. 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.
14
<PAGE> 17
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 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
15
<PAGE> 18
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.
Potential Asset Impairment
In December 1999, the Company temporarily suspended its efforts to install
new financial accounting software. Included in "Other Assets" on the
Company's Balance Sheet at March 31, 2000, are $2.2 million of cumulative
related costs. Under SFAS No. 121, the suspension of this project is an
indication of impairment, which could result in the write-off of some or
all of the accumulated costs at some future date if the Company is not
successful in completing the project. However, the Company's management
intends to complete the project when the software vendor completes certain
modifications to the software.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000
date change. The Company is not aware of any material problems resulting
from Year 2000 issues, either with its products, its internal systems or
the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any future
Year 2000 matters that may arise are addressed promptly.
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 is also 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. In July 1997, the Company completed an initial public
offering of its Common Stock for $8.00 per share. Since that time, the
Company's Common Stock has traded as low as $3.00 per share and as high as
$15.625 per share. The market price for the Company's Common Stock remains
volatile and there is no assurance that the market price will not
experience significant changes in the future.
16
<PAGE> 19
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," contains
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 consummation of
acquisitions and the integration and benefits expected to be derived from
the acquired companies, 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 and
Section 21E of the Securities Exchange Act of 1934.
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 on Form
10-Q, 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. In addition, new factors
emerge from time to time and it is not possible for management to predict
all 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, whether as a result of new information, future
events, or any other reason.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments
At March 31, 2000, the Company did not participate in any derivative
financial instruments, or other financial or derivative commodity
instruments, and did not hold any investment securities.
Primary Market Risk Exposure
The Company is exposed to market risk from changes in interest rates
associated with its holding variable rate debt ($4.1 million outstanding
balance at March 31, 2000). Assuming an identical outstanding balance for
the first three months of 2000, a hypothetical immediate 100 basis point
increase in interest rates would increase interest expense for the three
months ended March 31, 2000 by approximately $103,000.
17
<PAGE> 20
The Company is also exposed to market risk from 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
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
-------------- ----------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) The Company filed no reports on Form 8-K during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHUFF STEEL COMPANY
Date: May 15, 2000 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 OF EXHIBITS
- -------- ---------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,532
<SECURITIES> 0
<RECEIVABLES> 52,109
<ALLOWANCES> 0
<INVENTORY> 10,124
<CURRENT-ASSETS> 88,587
<PP&E> 43,136
<DEPRECIATION> 15,044
<TOTAL-ASSETS> 174,108
<CURRENT-LIABILITIES> 33,702
<BONDS> 101,230
0
0
<COMMON> 7
<OTHER-SE> 36,247
<TOTAL-LIABILITY-AND-EQUITY> 174,108
<SALES> 62,940
<TOTAL-REVENUES> 62,940
<CGS> 50,526
<TOTAL-COSTS> 50,526
<OTHER-EXPENSES> 7,142
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,967
<INCOME-PRETAX> 2,644
<INCOME-TAX> 1,110
<INCOME-CONTINUING> 1,534
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,534
<EPS-BASIC> .22
<EPS-DILUTED> .22
</TABLE>
