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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2003

OR

For the transition period from ___________ to ____________

Commission File Number 000-22715

SCHUFF INTERNATIONAL, INC.

(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   o

Indicate the number of shares of each of the issuer’s classes of common stock, as of the latest practical date: As of August 1, 2003, there were 7,028,217 shares of Common Stock, $.001 par value per share, outstanding.

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SCHUFF INTERNATIONAL, INC.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

     SCHUFF INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

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SCHUFF INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See notes to consolidated financial statements.

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SCHUFF INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See notes to consolidated financial statements.

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Schuff International, Inc.
Notes to Consolidated Financial Statements (Unaudited)

June 30, 2003

1.     Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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, 2002 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 six month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. 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, 2002.

2.     Stock Options

The Company has a stock-based employee compensation plan. The Company generally grants stock options for a fixed number of shares to employees and directors with an exercise price equal to the fair market value of the shares at the date of grant. The Company accounts for stock option grants to employees and directors under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, as amended by Statement of Financial Accounting Standards No. 148,  Accounting for Stock-Based Compensation—Transition and Disclosure. Accordingly, no compensation cost has been recognized for these stock option grants. Awards under the plan vest over periods ranging from immediate vesting to five years, depending upon the type of award. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period presented, using the Black-Scholes valuation model.

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3.     Reclassifications

Certain amounts in the 2002 consolidated financial statements have been reclassified to conform with the 2003 presentation.

4.     New Accounting Pronouncement

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, which clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, relating to consolidation of certain entities. FIN 46 will require identification of the Company’s participation in variable interest entities (“VIEs”), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit it to operate on a standalone basis. For entities identified as a VIE, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE (if any) bears a majority of the exposure to its expected losses, or stands to gain from a majority of its expected returns. This Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which the Company obtains an interest after that date. The Company must adopt FIN 46 in the first interim or annual period beginning after June 15, 2003 for any VIEs created before February 1, 2003. Management does not believe that the Company had any VIEs at June 30, 2003.

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5.     Receivables

Receivables consist of the following at:

6.     Inventories

Inventories consist of the following at:

7.     Line of Credit

The Company has received a 90-day extension of its existing credit facility, which expired on June 30, 2003. The Company is currently in the process of negotiating the final terms and conditions of a new credit facility with its existing financial institution. The credit facility is primarily maintained to enable the Company to issue letters of credit to its performance bond surety. At June 30, 2003, the Company had no borrowings under its line of credit. The existing credit facility requires that the Company maintain a specified EBITDAR coverage (defined as the sum of earnings before interest, taxes, depreciation, amortization and rents divided by the sum of interest, rents, Senior Note and/or treasury stock repurchases and capital expenditures), a minimum tangible net worth, and quarterly profitability. At June 30, 2003, the Company was not in compliance with these credit facility covenants due to its second quarter financial performance. The Company received a waiver of such noncompliance from the bank dated July 28, 2003.

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8.     Net Loss Per Share

The following table sets forth the computation of basic and diluted net loss per share:

Options to purchase 1,017,686 and 1,149,274 shares of common stock at prices ranging from $1.30 to $13.75 were outstanding during the three and six months ended June 30, 2003 and 2002, respectively, but were not included in the computation of diluted net loss per share because the options would be anti-dilutive due to the net loss.

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9.     Adoption of SFAS No. 142, “Goodwill and Other Intangible Assets”

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board Opinion No. 17, “Intangible Assets.” Under SFAS No. 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed at least annually for impairment.

SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level at adoption and at least annually thereafter, utilizing a two step methodology. The initial step requires the Company to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of this unit may be impaired. The amount, if any, of the impairment would then be measured in the second step.

In connection with adopting this standard as of January 1, 2002, during the first quarter of 2002 the Company completed step one of the test for impairment, which indicated that the carrying values of certain reporting units exceeded their estimated fair values, as determined utilizing various valuation techniques including discounted cash flow and comparative market analysis. Given the indication of a potential impairment, the Company completed step two of the test. Based on that analysis, a transitional impairment loss of $29.6 million, or $4.07 per basic and diluted earnings per share, was recognized as the cumulative effect of an accounting change as of January 1, 2002. The impairment charge resulted from declining results given current and expected future economic conditions in the Commercial-Pacific, Commercial-Southeast and Manufacturing-Other segments. The enterprise values of the reporting units were estimated by a third party appraisal firm considering both an income and market multiple approach. The impaired goodwill was not deductible for tax purposes, and as a result, no tax benefit was recorded in relation to the charge.

10.     Gain on Extinguishment of Debt

The Company recognized a gain of $182,000 (included in other income) and related income tax expense of $78,000 during the six months ended June 30, 2003 due to the repayment of $1.0 million of the Company’s 10-1/2% Senior Notes at a 20.25% discount, net of the write-off of related unamortized debt issue costs.

11.     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 any new contingencies arose during the six months ended June 30, 2003.

On October 24, 2002, a union organizer and several employees brought a lawsuit against the Company’s subsidiary, Bannister Steel, in San Diego County Superior Court, State of California, alleging certain violations of the California wage and hour laws. The Company denied any knowing violation of the California wage and hour laws and believed the lawsuit was improperly brought as part

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of union organizing efforts by the Ironworkers Local 627, Shopworkers (the “Union”). An organizing election was held in the fourth quarter of 2002 with the Union prevailing. Bannister objected to the election because the Union impermissibly influenced the election by sponsoring and pursuing the wage and labor lawsuit against Bannister. The Local Region of the NLRB denied Bannister’s objections to the election in late February 2003. Bannister appealed that decision to the NLRB in Washington D.C. to pursue a new election. In June 2003, the Union, several employees and Bannister Steel reached a comprehensive settlement agreement of all outstanding matters. The settlement resulted in the recognition of the Union until the end of 2003, with an extension of a collective bargaining agreement until June 2006 upon approval by the San Diego Superior Court of the settlement and dismissal of the wage and hour lawsuit. Under the terms of the settlement, Bannister will pay a class of current and former employees the sum of $120,000. The settlement is subject to Court approval, which is expected in the fourth quarter of 2003. The Company believes that this was a satisfactory resolution to the matter, given the time, expense and distraction of litigation. The Company has provided an accrual for the $120,000 settlement in the accompanying consolidated balance sheet and statements of operations.

The Company does not believe there were any material changes to the other contingencies existing at December 31, 2002, as listed in the Company’s Annual Report on Form 10-K, for which the eventual outcome could have a material adverse impact on the Company.

12.     Segment Information

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13.     Comprehensive Loss

Total comprehensive loss for the three and six months ended June 30, 2003 and 2002 equaled net loss for the corresponding periods.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited 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 our Annual Report on Form 10-K for the year ended December 31, 2002.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, inventories, intangible assets, income taxes and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We have adopted the following critical accounting policies used in the preparation of our consolidated financial statements.

Revenue Recognition

We perform our services primarily under fixed-price contracts and recognize revenues using the percentage of completion accounting method. Under this method, revenues are recognized based upon either the ratio of costs incurred to date to the estimated total cost to complete the project or the ratio of labor hours incurred to date to the total estimated labor hours. Revenue recognition begins when work has

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commenced. Revenues relating to changes in the scope of a contract are recognized when the work has commenced, we have made an estimate of the amount that will be paid for the change, and there is a high degree of probability that the charges will be approved by the customer or general contractor. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which revisions become known. Estimated losses on contracts are recognized in full when it is determined that a loss will be incurred on a contract.

Goodwill and Intangible Asset Impairment

We assess the impairment of goodwill on an annual basis as required by Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” When we determine that the carrying value of goodwill may not be recoverable, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model and a comparative market analysis. In accordance with SFAS No. 142, on January 1, 2002, we ceased amortizing goodwill. SFAS No. 142 requires an assessment of goodwill upon adoption and at least annually thereafter, using a two step methodology. Based upon the assessment at adoption, we recorded a transitional impairment loss of $29.6 million, or $4.07 per basic and diluted earnings per share, as a cumulative effect of an accounting change at the beginning of the first quarter of 2002. We completed our first annual assessment of goodwill as of October 31, 2002. Our assessment determined that the fair value exceeded the carrying value of the assets.

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. We have not provided for a valuation allowance because we believe that our deferred tax assets will be recovered from future taxable income.

Legal Contingencies

We are currently involved in certain legal proceedings. We do not believe these proceedings will have a material adverse effect on our consolidated financial position or results of operations. Because of the uncertainties related to both the amount and range of loss on the remaining pending litigation, management is unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, we will assess the potential liability related to our pending litigation and revise our estimates as necessary. Such revisions in our estimates of the potential liability could materially impact our results of operations and financial position.

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Results of Operations

Overview

During the last 21 months, the commercial construction industry has experienced a dramatic downturn as a result of macroeconomic conditions and increasing geopolitical uncertainty. The threat of possible U.S. military action in the Middle East, which ultimately came to pass late in the first quarter of 2003, was a primary cause of the uncertainty. These factors, as well as extreme pricing pressure from local and regional competitors, resulted in elongated selling cycles and reduced demand for our products and services, especially in leisure and tourism-based construction projects. In addition, to the extent that we experience a decreased demand for our products, we must manage our capacity in an effort to cover our fixed operating costs. The net results were lower revenues and gross margins across all of our business units and in projects both large and small.

Revenues

Revenues decreased by 22.9 percent to $40.0 million for the three months ended June 30, 2003 from $51.9 million for the three months ended June 30, 2002. The average revenues for our ten largest revenue generating projects in the three month period ended June 30, 2003 were $1.4 million versus $1.7 million in the three month period ended June 30, 2002. Revenues decreased by 12.4 percent to $90.2 million for the six months ended June 30, 2003 from $103.0 million for the six months ended June 30, 2002. The average revenues for our ten largest revenue generating projects in the six month period ended June 30, 2003 were $2.7 million versus $3.0 million in the six month period ended June 30, 2002. The decrease in revenues and average revenues was the result of the continued downturn of the commercial construction industry, as described above.

Gross Profit

Gross profit decreased by 30.1 percent to $4.9 million for the three month period ended June 30, 2003 from $7.0 million for the three month period ended June 30, 2002. Gross profit decreased by 21.4 percent to $12.2 million for the six month period ended June 30, 2003 from $15.5 million for the six month period ended June 30, 2002. As a percentage of revenues, gross profit decreased to 12.2 percent for the three month period June 30, 2003, from 13.4 percent for the three month period ended March 31, 2002. As a percentage of revenues, gross profit decreased to 13.5 percent for the six month period June 30, 2003, from 15.0 percent for the six month period ended June 30, 2002. The decreases were primarily attributable to lower demand for our products and our acceptance of lower-margin projects. Our industry continues to face extreme pricing pressures. Therefore, we have accepted lower-margin projects in an attempt to sustain our volume in order to cover our fixed operating costs.

During the three and six month periods ended June 30, 2003, costs associated with certain departments at our Commercial-Southeast segment were included in general and administrative expenses. In order to conform with the 2003 presentation, $257,000 and $483,000 of these costs for the Commercial-Southeast segment were reclassified from cost of revenues to general and administrative expense in the three and six months ended June 30, 2002, respectively. The costs of these departments of our other segments continue to be included in general and administrative expense for all periods presented.

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General and Administrative Expenses

General and administrative expenses decreased by 8.3 percent to $5.5 million for the three months ended June 30, 2003 from $6.0 million for the three months ended June 30, 2002. General and administrative expenses decreased by 4.1 percent to $11.5 million for the six months ended June 30, 2003 from $12.0 million for the six months ended June 30, 2002. The decreases in 2003 were largely attributable to our continued efforts to reduce costs. General and administrative expenses as a percentage of revenues increased to 13.7 percent and 12.7 percent for the three and six months ended June 30, 2003, respectively, from 11.5 percent and 11.6 percent for the three and six months ended June 30, 2002,respectively. The increase was primarily due to decreased revenues in 2003.

Interest Expense

Interest expense decreased to $2.5 million for the three months ended June 30, 2003 from $2.6 million for the three months ended June 30, 2002 and to $5.0 million for the six months ended June 30, 2003 from $5.2 million for the six months ended June 30, 2002. The decrease in interest expense was due to the reduction of long term debt that occurred in late 2002 and the first quarter of 2003. Interest expense is primarily attributable to our remaining $90.0 million 10-1/2% Senior Notes issued in June 1998.

Other Income

Other income decreased to $121,000 for the three months ended June 30, 2003 from $294,000 for the three months ended June 30, 2002. The decrease in other income was primarily due to reduced interest income. Other income increased to $505,000 for the six months ended June 30, 2003 from $441,000 for the six months ended June 30, 2002. The increase was primarily due to the $182,000 gain on the extinguishment of debt that occurred in 2003 offset by the above decrease in interest income.

Income Tax Provision

Income tax benefit was $1.3 million, which reflects a 44.5 percent effective tax rate, and $1.7 million, which reflects a 45.2 percent effective tax rate, for the three and six months ended June 30, 2003, respectively. The effective tax rate was higher for purposes of calculating the tax benefit than the federal statutory rate due to the recognition of research and development tax credits for book purposes offset by state income taxes and the effect of permanent tax differences. Income tax benefit was $351,000, which reflects a 27.4 percent effective tax rate, and $403,000, which reflects a 32.4 percent effective tax rate, for the three and six months ended June 30, 2002, respectively. The 2003 effective tax rates are higher than the 2002 rates primarily because of greater available federal and state research and development tax credits available for carryback to prior years.

Cumulative Effect of a Change in Accounting Principle

We adopted SFAS No. 142 at the beginning of the quarter ended March 31, 2002. This standard eliminates goodwill amortization upon adoption and requires an assessment for goodwill impairment upon adoption and at least annually thereafter. As a result of adoption of this standard, we did not amortize goodwill during the three and six month periods ended June 30, 2003 and 2002 and incurred a noncash transitional impairment charge of $29.6 million during the quarter ended March 31, 2002.

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Backlog

Backlog decreased 9.9 percent to $97.0 million ($41.6 million under contracts or purchase orders and $55.4 million under letters of intent) at June 30, 2003 from $107.6 million ($38.3 million under contracts or purchase orders and $69.3 million under letters of intent) at March 31, 2003. The decrease in backlog compared to March 31, 2003 was the result of several large projects nearing completion that have not been replaced by other projects of a comparable size. The decrease is also a result of the overall decline in the construction industry discussed above. We have made a continuing effort to focus on bidding on a greater number of projects with a shorter duration to maximize efficiencies and reduce risk.

We have experienced, and expect 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

We attempt to structure the payment arrangements under our contracts to match costs incurred under related projects. To the extent we are able to bill in advance of costs incurred, we generate working capital through billings in excess of costs and recognized earnings on uncompleted contracts. If we were not able to bill in advance of costs, we would rely on our credit facility to meet our working capital needs. At June 30, 2003, we had working capital of approximately $60.4 million. We believe that we have sufficient liquidity through our present resources to meet our near-term operating needs.

We are currently in the process of negotiating the final terms and conditions of a new credit facility. The credit facility is primarily maintained to enable us to issue letters of credit to our performance bond surety. At June 30, 2003, we had no outstanding borrowings under our existing credit facility. We have $8.0 million of outstanding letters of credit that were issued under the existing $10.0 million credit facility. These letters of credit are secured by cash held in an escrow account, which is classified as restricted funds on deposit on the June 30, 2003 balance sheet.

The existing credit facility is secured by a first priority, perfected security interest in all of our assets and our present and future subsidiaries. The interest rate is prime plus 1.50%. The existing credit facility contains covenants that, among other things, limit our ability to pay cash dividends or make other distributions, repurchase our Senior Notes, incur additional indebtedness, change our business, and merge, consolidate or dispose of material portions of our assets. The security agreements pursuant to which our assets are pledged prohibit any further pledge of such assets without the written consent of the bank. We anticipate that the new credit facility will contain similar terms and conditions.

The existing credit facility also requires that we maintain a specified EBITDAR coverage (defined as the sum of earnings before interest, taxes, depreciation, amortization and rents divided by the sum of interest, rents, Senior Note and/or treasury stock repurchases and capital expenditures), a minimum tangible net worth and quarterly profitability. At June 30, 2003, we were not in compliance with these credit facility covenants due to our second quarter financial performance. We received a waiver of such noncompliance from the bank dated July 28, 2003.

We received a 90-day extension of our existing credit facility, which expired on June 30, 2003. Although we have received a waiver and extension from the bank, there is no guarantee that we will be able to

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successfully negotiate the final terms and conditions of a new credit facility with our existing financial institution. If we are unable to finalize negotiations regarding a new credit facility with our existing financial institution, we will have to try to negotiate a new credit facility with another financial institution. If we are unable to negotiate a credit facility with any financial institution, our liquidity and ability to obtain performance bonding on projects will be negatively impacted.

Our short term cash needs are primarily for working capital to support operations including receivables, inventories, and other costs incurred in performing our contracts. Operating activities used cash flows of $675,000 and provided cash flows of $7.9 million in the six months ended June 30, 2003 and 2002, respectively. For the six months ended June 30, 2003, operating cash flows were greater than net loss due to the $16.2 million decrease in accounts receivable, $2.5 million decrease in costs and recognized earnings in excess of billings and $2.1 million of depreciation and amortization offset by the $2.1 million decrease in accounts payable, $4.9 million decrease in billings in excess of costs and recognized earnings and $1.8 million increase in the income tax receivable. For the six months ended June 30, 2002, operating cash flows were greater than net loss due to the addback of the $29.6 million non-cash charge for the cumulative effect of a change in accounting principle, $1.4 million decrease in accounts receivable, $1.6 million decrease in costs and recognized earnings in excess of billings on uncompleted contracts, $1.1 million increase in accounts payable and $2.0 million increase in billings in excess of costs and recognized earnings offset by a $1.2 million decrease in accrued payroll and employee benefits. Cash used in investing activities totaled $370,000 and $246,000 for the six months ended June 30, 2003 and 2002, respectively, substantially all of which was purchases of equipment offset by proceeds from the sale of property and equipment. Financing activities used $743,000 in the six months ended June 30, 2003, substantially all of which was related to the repayment of $1.0 million of our 10-1/2% Senior Notes at a discount. Financing activities used $61,000 in the six months ended June 30, 2002, which was related to the purchase of treasury stock offset by the issuance of common stock.

On June 4, 1998, we completed a private placement pursuant to Rule 144A of the Securities Act of 1933 of $100.0 million in principal amount of our 10-1/2% Senior Notes due 2008 (“Senior Notes”). Net proceeds from the Senior Notes were used to repay certain indebtedness and to pay the cash portions of the purchase price for our acquisitions of Addison Structural Services, Inc., Six Industries, Inc. and Bannister Steel, Inc. The Senior Notes are redeemable at our option, in whole or in part, beginning in 2003 at a premium declining ratably to par by 2006. We 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 our current and future, direct and indirect subsidiaries. During the six months ended June 30, 2003, we repurchased $1.0 million in principal amount of our Senior Notes at a discount on the open market.

We have no other long-term debt commitments.

We lease some of our fabrication and office facilities from a partnership in which our principal beneficial stockholders and their family members are the general and limited partners. We have three leases with the partnership for our 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 our principal office and shop facilities. Each lease has a 20-year term and is subject to increases every five