<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, 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 October 20, 2000, there were 7,157,987
shares of Common Stock, $.001 par value per share, outstanding.
<PAGE> 2
SCHUFF STEEL COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2000 (unaudited) and December 31, 1999 1
Condensed Consolidated Statements of Income (unaudited) -
Three Months Ended September 30, 2000 and 1999 and
Nine Months Ended September 30, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended September 30, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements (unaudited) -
September 30, 2000 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHUFF STEEL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ -----------
(Unaudited) (Note 1)
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,765 $ 8,682
Restricted funds on deposit 2,159 2,710
Receivables 67,150 51,968
Costs and recognized earnings in excess of billings
on uncompleted contracts 10,415 16,100
Inventories 12,791 7,614
Deferred tax asset 1,425 1,425
Prepaid expenses and other current assets 1,497 1,395
-------- --------
Total current assets 97,202 89,894
Property and equipment, net 30,041 25,322
Goodwill, net 49,412 51,036
Other assets 6,323 7,009
-------- --------
$182,978 $173,261
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,243 $ 11,950
Accrued payroll and employee benefits 4,752 4,017
Accrued interest 3,644 1,109
Other accrued liabilities 4,507 3,248
Billings in excess of costs and recognized earnings
on uncompleted contracts 13,039 8,864
Income taxes payable 921 --
Current portion of long-term debt 3,420 5,209
-------- --------
Total current liabilities 39,526 34,397
Long-term debt, less current portion 100,159 101,390
Deferred income taxes 2,488 2,491
Other liabilities 420 433
Stockholders' equity:
Preferred stock, $.001 par value - authorized
1,000,000 shares; none issued -- --
Common stock, $.001 par value - authorized
20,000,000 shares; 7,157,987 and 7,067,328 shares
issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 7 7
Additional paid-in capital 14,732 14,419
Retained earnings 25,646 20,124
-------- --------
Total stockholders' equity 40,385 34,550
-------- --------
$182,978 $173,261
======== ========
</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
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 72,318 $ 65,715 $ 206,752 $ 176,464
Cost of revenues 58,262 52,182 166,537 141,739
--------- --------- --------- ---------
Gross profit 14,056 13,533 40,215 34,725
General and administrative expenses 7,561 6,264 21,059 17,506
Goodwill amortization 541 538 1,624 1,614
--------- --------- --------- ---------
Operating income 5,954 6,731 17,532 15,605
Interest expense (2,907) (2,953) (8,868) (8,762)
Other income 284 300 852 924
--------- --------- --------- ---------
Income before income tax provision 3,331 4,078 9,516 7,767
Income tax provision 1,397 1,596 3,994 3,545
--------- --------- --------- ---------
Net income $ 1,934 $ 2,482 $ 5,522 $ 4,222
========= ========= ========= =========
Net income per share:
Basic $ 0.27 $ 0.35 $ 0.78 $ 0.60
========= ========= ========= =========
Diluted $ 0.27 $ 0.35 $ 0.77 $ 0.60
========= ========= ========= =========
Weighted average shares used in computation:
Basic 7,152 7,062 7,119 7,039
========= ========= ========= =========
Diluted 7,152 7,073 7,143 7,074
========= ========= ========= =========
</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
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,522 $ 4,222
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,847 4,226
(Gain) loss on disposal of property and
equipment (77) 8
Deferred taxes (3) (174)
Unearned compensation 28 28
Changes in operating assets and liabilities:
Restricted funds on deposit 551 (97)
Receivables (15,182) (5,444)
Costs and recognized earnings in excess of
billings on uncompleted contracts 5,685 (2,108)
Inventories (5,177) (1,381)
Prepaid expenses and other assets (102) 896
Accounts payable (2,707) (482)
Billings in excess of costs and recognized
earnings on uncompleted contracts 4,175 2,062
Accrued payroll and employee benefits 735 15
Income taxes payable 921 590
Other accrued liabilities 3,781 2,930
-------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,997 5,291
INVESTING ACTIVITIES
Acquisitions of property and equipment (7,669) (5,040)
Proceeds from disposals of property and
equipment 183 5
Decrease (increase) in other assets 307 (2,370)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (7,179) (7,405)
FINANCING ACTIVITIES
Proceeds from revolving line of credit and
long-term borrowings 66,999 32,155
Principal payments on revolving line of credit
and long-term debt (70,019) (32,897)
Proceeds from the issuance of common stock 285 190
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (2,735) (552)
DECREASE IN CASH AND CASH EQUIVALENTS (6,917) (2,666)
Cash and cash equivalents at beginning of period 8,682 15,431
-------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,765 $ 12,765
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
SCHUFF STEEL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 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 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 and nine
month periods ended September 30, 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>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ -----------
(in thousands)
<S> <C> <C>
Contract receivables:
Contracts in progress $47,952 $42,229
Unbilled retentions 19,011 9,241
------- -------
66,963 51,470
Other receivables 187 498
------- -------
$67,150 $51,968
======= =======
</TABLE>
3. INVENTORIES
Inventories consist of the following at:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ -----------
(in thousands)
<S> <C> <C>
Raw materials $12,455 $ 7,343
Finished goods 336 271
------- -------
$12,791 $ 7,614
======= =======
</TABLE>
4
<PAGE> 7
4. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999 2000 1999
------ ------ ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Net income $1,934 $2,482 $5,522 $4,222
====== ====== ====== ======
Denominator:
Weighted average shares 7,152 7,062 7,119 7,039
------ ------ ------ ------
Denominator for basic net income per share 7,152 7,062 7,119 7,039
Effect of dilutive securities:
Employee and director stock options -- 11 24 35
------ ------ ------ ------
Denominator for diluted net income
per share - adjusted weighted
average shares and assumed conversions 7,152 7,073 7,143 7,074
====== ====== ====== ======
Net income per share:
Basic $ 0.27 $ 0.35 $ 0.78 $ 0.60
====== ====== ====== ======
Diluted $ 0.27 $ 0.35 $ 0.77 $ 0.60
====== ====== ====== ======
</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 September 30, 2000 or
December 31, 1999 for which the eventual outcome would have a material adverse
impact on the Company.
On July 6, 2000, the Company announced that it had reached a confidential
settlement with the Church of Jesus Christ of Latter-day Saints relating to
change orders associated with the Company's fabrication and erection of the
Church's Conference Center in Salt Lake City, Utah, which were included in the
Company's Notice of Lien filed on March 10, 2000. This matter is more fully
discussed in the Company's Form 10-K Annual Report for the fiscal year ended
December 31, 1999. The Company reported that a negotiated settlement was
concluded on June 30, 2000.
5
<PAGE> 8
On November 2, 2000, the Company announced that it had reached a settlement
with the Arizona Professional Baseball Team Limited Partnership and related
parties with respect to a claim arising from changes the Company made to
complete the retractable dome roof at Bank One Ballpark. This matter is more
fully discussed in the Company's Form 10-K Annual Report for the fiscal year
ended December 31, 1999. The Company reported that a mediated settlement was
concluded on October 4, 2000. The Company also reported that it had received
an initial payment of approximately $2.4 million and expects to receive a
second and final payment of approximately $527,000 in the second quarter of
2001.
6. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
-----------------------------------------------------------------------
Western Pacific Southeastern
US Southwest Southwest US Total
------- --------- --------- ------------ -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 8,819 $33,543 $ 3,808 $26,148 $72,318
Intersegment revenues -- 262 653 2,685 3,600
Operating income, excluding
goodwill amortization 650 1,467 493 3,885 6,495
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
-----------------------------------------------------------------------
Western Pacific Southeastern
US Southwest Southwest US Total
------- --------- --------- ------------ -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 9,552 $25,616 $ 6,298 $24,249 $65,715
Intersegment revenues -- 748 745 1,236 2,729
Operating income, excluding
goodwill amortization 1,200 1,485 696 3,888 7,269
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
-----------------------------------------------------------------------
Western Pacific Southeastern
US Southwest Southwest US Total
------- --------- --------- ------------ -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 26,257 $100,151 $ 8,441 $ 71,903 $206,752
Intersegment revenues -- 2,401 1,915 5,809 10,125
Operating income, excluding
goodwill amortization 1,890 6,764 448 10,054 19,156
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
-----------------------------------------------------------------------
Western Pacific Southeastern
US Southwest Southwest US Total
------- --------- --------- ------------ -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 22,363 $ 73,551 $ 17,669 $ 62,881 $176,464
Intersegment revenues -- 800 1,771 4,290 6,861
Operating income, excluding
goodwill amortization
2,712 723 2,664 11,120 17,219
</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 Nine Months Ended
September 30 September 30
--------------------------------------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Total operating income, excluding goodwill
amortization for reportable segments $ 6,495 $ 7,269 $ 19,156 $ 17,219
Goodwill amortization (541) (538) (1,624) (1,614)
Interest expense (2,907) (2,953) (8,868) (8,762)
Other income 284 300 852 924
-------- -------- -------- --------
Income before income taxes $ 3,331 $ 4,078 $ 9,516 $ 7,767
======== ======== ======== ========
</TABLE>
7. COMPREHENSIVE INCOME
Total comprehensive income for the three months and nine months ended
September 30, 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
in 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 issued and outstanding capital
stock of Addison Structural Services, Inc. ("ASSI"), a privately-held holding
company headquartered in Albany, Georgia. 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. 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").
7
<PAGE> 10
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 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"), a privately-held company
headquartered in National City, California. 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.
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 on the dates of the
acquisitions with the excess of the purchase price over net assets acquired
being recorded as goodwill.
Results of Operations
Revenues
Revenues increased by 10.0 percent to $72.3 million for the three months ended
September 30, 2000 from $65.7 million for the three months ended September 30,
1999. Revenues increased by 17.2 percent to $206.8 million for the nine months
ended September 30, 2000 from $176.5 million for the nine months ended September
30, 1999. The increase in revenues was primarily a result of additional revenues
generated by the parent company from a greater number of projects.
The average revenues for the Company's ten largest revenue generating projects
in the three and nine month periods ended September 30, 2000 were $3.1 million
and $7.6 million, respectively, versus $1.7 million and $4.2 million in the
three and nine month periods ended September 30, 1999, respectively. Although
the Company's focus is on smaller projects with shorter cycle times and
increased productivity, the New Mile High Stadium project caused an increase in
average revenues over the three and nine months ended September 30, 2000.
Gross Profit
Gross profit increased by 3.9 percent to $14.1 million for the three month
period ended September 30, 2000 from $13.5 million for the three month period
ended September 30, 1999. Gross profit increased by 15.8 percent to $40.2
million for the nine month period ended September 30, 2000 from $34.7 million
for the nine month period ended September 30, 1999. Such increases were
primarily attributable to recognition of additional revenues. As a percentage of
revenues, gross profit decreased to 19.4 percent and 19.5 percent for the three
and nine month periods ended September 30, 2000, respectively, from 20.6 percent
and 19.7 percent for the three and nine month periods ended September 30, 1999.
The decreases in gross profit as a percentage of revenues were primarily
attributable to variations in project mix.
8
<PAGE> 11
General and Administrative Expenses
General and administrative expenses increased by 20.7 percent to $7.6 million
for the three months ended September 30, 2000 from $6.3 million for the three
months ended September 30, 1999. General and administrative expenses increased
by 20.3 percent to $21.1 million for the nine months ended September 30, 2000
from $17.5 million for the nine months ended September 30, 1999. The increases
in 2000 were largely attributable to additional general and administrative costs
required to support the revenue growth of the companies, the costs associated
with the Company's new joist manufacturing facility in Buckeye, Arizona and
increased legal fees associated with the settlement of pending claims. General
and administrative expenses as a percentage of revenues increased to 10.5
percent and 10.2 percent for the three and nine months ended September 30, 2000,
respectively, from 9.5 percent and 9.9 percent for the three and nine months
ended September 30, 1999.
Goodwill Amortization
Goodwill amortization was $541,000 and $538,000 for the three month periods
ended September 30, 2000 and 1999, respectively. Goodwill amortization was $1.6
million for the nine month periods ended September 30, 2000 and 1999,
respectively. The goodwill amortization represents the amortization of the
excess of cost over fair value of net assets acquired from the Addison, Quincy,
Six and Bannister business combinations in 1998. The goodwill is being amortized
on a straight-line basis over 25 years.
Interest Expense
Interest expense decreased to $2.9 million for the three months ended September
30, 2000 from $3.0 million for the three months ended September 30, 1999 and
increased to $8.9 million for the nine months ended September 30, 2000 from $8.8
million for the nine months ended September 30, 1999. The interest expense is
primarily attributable to the Company's $100.0 million 10-1/2% Senior Notes
issued in June 1998 and the Company's increased use of available lines of credit
during the nine months ended September 30, 2000.
Other Income
Other income decreased slightly to $284,000 for the three months ended September
30, 2000 from $300,000 for the three months ended September 30, 1999 and to
$852,000 for the nine months ended September 30, 2000 from $924,000 for the nine
months ended September 30, 1999.
Income Tax Provision
Income tax expense decreased by $200,000, or 12.5 percent, to $1.4 million,
which reflects a 41.9 percent effective tax rate, for the three months ended
September 30, 2000 from income tax expense of $1.6 million, or a 39.1 percent
effective tax rate, for the three months ended September 30, 1999. Income tax
expense increased by $500,000, or 12.7 percent, to $4.0 million, which reflects
a 42.0 percent effective tax rate, for the nine months ended September 30, 2000
from income tax expense of $3.5 million, or a 45.6 percent effective tax rate,
for the nine months ended September 30, 1999. 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. The increase
in the quarter to date effective tax rate
9
<PAGE> 12
was due primarily to a $265,000 income tax benefit related to a tax credit
recorded during the three months ended September 30, 1999. The decrease in the
year to date effective tax rate was due primarily to income tax credits
attributable to qualifying research and experimentation expenses associated with
the Company's engineering, detailing and software development activities.
Backlog
Backlog decreased 30.0 percent to $102.7 million at September 30, 2000 from
$146.5 million at June 30, 2000. The decrease in backlog compared to June 30,
2000 was primarily the result of job mix based on selected targeted projects.
The Company has made an effort to focus on bidding on a greater number of
projects with shorter duration to maximize efficiencies and reduce risk.
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 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 facilities to meet its working capital needs. At September 30, 2000, the
Company had working capital of approximately $57.7 million and $1.7 million of
borrowings under its line of credit, with approximately $11.4 million available
for future borrowings. 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 provided cash flows of $3.0
million and $5.3 million for the nine months ended September 30, 2000 and 1999.
For the nine months ended September 30, 2000, operating cash flows were less
than net income due to a net increase in working capital accounts. For the nine
months ended September 30, 1999, operating cash flows were more than net income
due to a net decrease in working capital accounts. Cash used in investing
activities totaled $7.2 million for the nine months ended September 30, 2000,
substantially all of which was related to the construction of the Company's new
joist manufacturing facility (approximately $4.0 million) and upgrades in
fabrication equipment. Investing activities of $7.4 million for the nine months
ended September 30, 1999, related primarily to construction of the new joist
facility and upgrades of fabrication and technology equipment. Financing
activities used $2.7 million and $552,000 for the nine months ended September
30, 2000 and 1999, respectively, substantially all of which was related to
payments in excess of draws on the Company's revolving line of credit in 2000
and 1999.
The Company renewed its bank credit facility in September 2000 and voluntarily
reduced the facility from $25 million to $15 million. The credit facility now
matures on June 30, 2002, and 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 interest rates, based on the leverage ratio achieved, can range
from a minimum
10
<PAGE> 13
of LIBOR plus 2.25% or prime to a maximum of prime plus 1.50% or LIBOR plus
3.50%. At September 30, 2000, there was approximately $11.4 million of credit
available under the credit facility for borrowings, which amount is net of
approximately $1.9 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 (i.e., Earnings Before Income Tax, Depreciation and
Amortization). 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
Company's bank.
On June 4, 1998, the Company completed a private placement pursuant to Rule 144A
of the Securities Act of 1933 of $100.0 million in principal amount of its
10-1/2% Senior Notes due 2008 ("Senior Notes"). Net proceeds from the Senior
Notes were used to repay certain indebtedness of the Company and to pay the cash
portions of the purchase price for the Company's acquisitions of ASSI, Six and
Bannister. The Senior Notes are redeemable at the option of the Company in whole
or in part, beginning in 2003 at a premium declining ratably to par by 2006. By
2001, the Company may redeem up to 35.0% of the Senior Notes at a premium with
the proceeds of an equity offering, provided that at least 65.0% of the
aggregate amount of the Senior Notes originally outstanding remain outstanding.
The Senior Notes contain covenants that, among other things, provide limitations
on additional indebtedness, sale of assets, change of control and dividend
payments. The Senior Notes are fully and unconditionally guaranteed, jointly and
severally, on a senior subordinated basis by the Company's current and future,
direct and indirect subsidiaries.
The Company has four other long-term debt commitments that are related to notes
payable generated from the Company's acquisitions in 1997 and 1998. The balance
of these notes was $1.9 million at September 30, 2000 with interest rates
ranging from 5.73 percent to prime and maturing in the years 2000 through 2002.
Letters of credit totaling an aggregate of $1.6 million secure two of the notes
payable.
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
Fabrications, Inc., 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 approximate
$4.1 million in addition to the approximately $4.0 million that has been
expended as of September 30, 2000, related to the remaining costs of
construction of its new joist manufacturing facility in Arizona. 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.
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<PAGE> 14
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% Senior Notes, existing line of credit facility and
other positionings, the Company is highly leveraged with substantial debt
service in addition to operating expenses and planned capital expenditures. The
Company's 10-1/2% Senior Notes permit the Company to incur additional
indebtedness, subject to certain limitations, including additional secured
indebtedness under existing credit facilities. The Company's level of
indebtedness will have several important effects on its future operations,
including, without limitation, (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest and principal
on its indebtedness, reducing the funds available for operations and for capital
expenditures, including acquisitions, (ii) covenants contained in the Senior
Notes or the credit facility or other credit facilities will require the Company
to meet certain financial tests, and other restrictions will limit its ability
to borrow additional funds or to dispose of assets, and may affect the Company's
flexibility in planning for, and reacting to, changes in its business, including
possible acquisition activities, (iii) the Company's leveraged position will
substantially increase its vulnerability to adverse changes in general economic,
industry and competitive conditions, (iv) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
general corporate and other purposes may be limited and (v) the Company's
leveraged position and the various covenants contained in the Senior Notes and
the credit facility may place the Company at a relative competitive disadvantage
as compared to certain of its competitors. The Company's ability to meet its
debt service obligations and to reduce its total indebtedness will be dependent
upon the Company's future performance, which will be subject to general
economic, industry and competitive conditions and to financial, business and
other factors affecting the operations of the Company, many of which are beyond
its control. There can be no assurance that the Company's business will continue
to generate cash flow at or above current levels. If the Company is unable to
generate sufficient cash flow from operations in the future to service its debt,
it may be required, among other things, to seek additional financing in the debt
or equity markets, to refinance or restructure all or a portion of its
indebtedness, including the Senior Notes, to sell selected assets, or to reduce
or delay planned capital expenditures and growth or business strategies. There
can be no assurance that any such measures would be sufficient to enable the
Company to service its debt, or that any of these measures could be effected on
satisfactory terms, if at all.
Fluctuating Quarterly Results of Operations
The Company has experienced, and in the future is expected to continue to
experience, substantial variations in its results of operations because 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
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<PAGE> 15
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 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.
Fixed Price Contracts
Of the Company's $102.7 million backlog at September 30, 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 $16.7 million, representing
16.3% of the Company's backlog at September 30, 2000, is 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".
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<PAGE> 16
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.
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.
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<PAGE> 17
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.
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 and nine month periods ended
September 30, 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
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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 may result in pressure
on pricing and operating margins, and the effects of competitive pressure in the
industry could continue indefinitely. 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 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
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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.
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 September 30, 2000, are $1.8 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.
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 Company's
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. 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 $2.50 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.
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
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not be limited to, the anticipated outcome of contingent events, including
litigation, projections of revenues, income or loss, capital expenditures, plans
for future operations, growth and acquisitions, financing needs or plans and the
availability of financing, and plans relating to services of the Company, as
well as assumptions relating to the foregoing. Such forward-looking statements
are within the meaning of that term in Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended.
Forward-looking statements reflect the Company's current views with respect to
future events and financial performance and speak only as of the date the
statements are made. Such forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward-looking statements. Statements in
this Quarterly Report, including the Notes to the Condensed Consolidated
Financial Statements and in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations," describe factors, among others,
that could contribute to or cause such differences. Other factors that could
cause actual results to differ materially from those expressed in such forward
looking statements are set forth above 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments
At September 30, 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 ($3.3 million outstanding balance at
September 30, 2000). Assuming an identical outstanding balance for the three and
nine months ended September 30, 2000, a hypothetical immediate 100 basis point
increase in interest rates would increase interest expense for the three and
nine months ended September 30, 2000 by approximately $83,000 and $248,000,
respectively.
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.
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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: November 6, 2000 By: /s/ Michael R. Hill
-----------------------------------------
Michael R. Hill
Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
19
