UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2004
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 INTERNATIONAL, INC.
DELAWARE (State or Other Jurisdiction of Incorporation or Organization) |
86-1033353 (I.R.S. Employer Identification No.) |
|
1841 W. Buchanan St. Phoenix, Arizona (Address of Principal Executive Offices) |
85007 (Zip Code) |
(602) 252-7787
Registrants 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares of each of the issuers classes of common stock, as of the latest practical date: As of May 6, 2004, there were 7,063,122 shares of Common Stock, $.001 par value per share, outstanding.
SCHUFF INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCHUFF INTERNATIONAL, INC.
March 31 | December 31 | |||||||
2004 |
2003 |
|||||||
(in thousands) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,129 | $ | 7,645 | ||||
Restricted funds on deposit |
7,530 | 7,513 | ||||||
Receivables |
62,743 | 48,923 | ||||||
Income tax receivable |
1,876 | 2,491 | ||||||
Costs and recognized earnings in excess of billings on uncompleted contracts |
11,875 | 10,723 | ||||||
Inventories |
6,156 | 4,374 | ||||||
Deferred tax asset |
2,467 | 2,695 | ||||||
Prepaid expenses and other current assets |
653 | 736 | ||||||
Total current assets |
94,429 | 85,100 | ||||||
Property and equipment, net |
23,669 | 24,394 | ||||||
Goodwill, net |
17,115 | 17,115 | ||||||
Other assets |
3,549 | 3,673 | ||||||
$ | 138,762 | $ | 130,282 | |||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 17,931 | $ | 11,946 | ||||
Accrued payroll and employee benefits |
3,835 | 3,400 | ||||||
Accrued interest |
3,090 | 798 | ||||||
Other accrued liabilities |
5,740 | 7,019 | ||||||
Billings in excess of costs and recognized earnings on uncompleted contracts |
9,330 | 8,464 | ||||||
Total current liabilities |
39,926 | 31,627 | ||||||
Long-term debt, less current portion |
87,040 | 87,040 | ||||||
Deferred income taxes |
1,500 | 1,728 | ||||||
Other liabilities |
349 | 356 | ||||||
Minority interest |
43 | 46 | ||||||
Stockholders equity: |
||||||||
Preferred stock, $.001 par value authorized 1,000,000 shares; none issued |
| | ||||||
Common stock, $.001 par value 20,000,000 shares authorized; 7,498,922 and
7,472,757 issued and 7,063,122 and 7,036,957 outstanding, respectively |
7 | 7 | ||||||
Additional paid-in capital |
15,405 | 15,369 | ||||||
Accumulated deficit |
(4,852 | ) | (5,235 | ) | ||||
Treasury stock - 435,800 shares, at cost |
(656 | ) | (656 | ) | ||||
Total stockholders equity |
9,904 | 9,485 | ||||||
$ | 138,762 | $ | 130,282 | |||||
See notes to consolidated financial statements.
1
SCHUFF INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended | ||||||||
March 31 | ||||||||
2004 |
2003 |
|||||||
(in thousands, except per share data) | ||||||||
Revenues |
$ | 58,075 | $ | 50,240 | ||||
Cost of revenues |
49,160 | 42,948 | ||||||
Gross profit |
8,915 | 7,292 | ||||||
General and administrative expenses |
5,966 | 5,996 | ||||||
Operating income |
2,949 | 1,296 | ||||||
Interest expense |
(2,468 | ) | (2,500 | ) | ||||
Other income |
34 | 384 | ||||||
Income (loss) before income taxes and minority interest |
515 | (820 | ) | |||||
Income tax (provision) benefit |
(139 | ) | 389 | |||||
Income (loss)before minority interest |
376 | (431 | ) | |||||
Minority interest in loss of subsidiaries |
7 | 21 | ||||||
Net income (loss) |
$ | 383 | $ | (410 | ) | |||
Income (loss) per share: |
||||||||
Basic |
$ | 0.05 | $ | (0.06 | ) | |||
Diluted |
$ | 0.05 | $ | (0.06 | ) | |||
Weighted average shares used in computation: |
||||||||
Basic |
7,053 | 6,979 | ||||||
Diluted |
7,053 | 6,979 | ||||||
See notes to consolidated financial statements.
2
SCHUFF INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended March 31 | ||||||||
2004 |
2003 |
|||||||
(in thousands) | ||||||||
Operating activities |
||||||||
Net income (loss) |
$ | 383 | $ | (410 | ) | |||
Adjustment to reconcile net income (loss) to net cash (used in) provided by
operating activities: |
||||||||
Depreciation and amortization |
1,006 | 1,046 | ||||||
Gain from extinguishment of debt |
| (182 | ) | |||||
Gain on disposal of property and equipment |
(8 | ) | (104 | ) | ||||
Stock awards |
12 | 10 | ||||||
Minority interest in loss of subsidiaries |
(7 | ) | (21 | ) | ||||
Minority interest |
36 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Restricted funds on deposit |
(17 | ) | | |||||
Receivables |
(13,820 | ) | 15,134 | |||||
Costs and recognized earnings in excess of billings on uncompleted contracts |
(1,152 | ) | 2,434 | |||||
Inventories |
(1,782 | ) | 117 | |||||
Prepaid expenses and other assets |
83 | 40 | ||||||
Accounts payable |
5,985 | (4,744 | ) | |||||
Accrued payroll and employee benefits |
435 | (777 | ) | |||||
Accrued interest |
2,292 | 2,357 | ||||||
Other accrued liabilities |
(1,279 | ) | (446 | ) | ||||
Billings in excess of costs and recognized earnings on uncompleted contracts |
866 | (5,618 | ) | |||||
Income taxes receivable/payable |
615 | (547 | ) | |||||
Other liabilities |
(7 | ) | (968 | ) | ||||
Net cash (used in) provided by operating activities |
(6,359 | ) | 7,321 | |||||
Investing activities |
||||||||
Acquisition of property and equipment |
(176 | ) | (123 | ) | ||||
Proceeds from disposals of property and equipment |
8 | 150 | ||||||
Decrease in other assets |
19 | 38 | ||||||
Net cash (used in) provided by investing activities |
(149 | ) | 65 | |||||
Financing activities |
||||||||
Principal payments on long-term debt |
| (798 | ) | |||||
Distribution to minority shareholder |
(32 | ) | | |||||
Proceeds from the issuance of common stock |
24 | 55 | ||||||
Net cash used in financing activities |
(8 | ) | (743 | ) | ||||
(Decrease) increase in cash and cash equivalents |
(6,516 | ) | 6,643 | |||||
Cash and cash equivalents at beginning of period |
7,645 | 10,755 | ||||||
Cash and cash equivalents at end of period |
$ | 1,129 | $ | 17,398 | ||||
See notes to consolidated financial statements.
3
Schuff International, Inc.
Three Months Ended March 31, 2004 and 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, 2003 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 month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2003.
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 CompensationTransition 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.
4
Three months ended | ||||||||
March 31 | ||||||||
2004 |
2003 |
|||||||
(in thousands) | ||||||||
Net income (loss) as reported |
$ | 383 | $ | (410 | ) | |||
Deduct: Total stock-based employee compensation
expense determined under fair value method for
all awards |
40 | 94 | ||||||
Pro forma net income (loss) |
$ | 343 | $ | (504 | ) | |||
Income (loss) per share-basic-as reported |
$ | 0.05 | $ | (0.06 | ) | |||
Pro forma income (loss) per sharebasic |
$ | 0.05 | $ | (0.07 | ) | |||
Income (loss) per share-diluted-as reported |
$ | 0.05 | $ | (0.06 | ) | |||
Pro forma income (loss) per sharediluted |
$ | 0.05 | $ | (0.07 | ) | |||
3. Reclassifications
Certain amounts in the 2003 consolidated financial statements have been reclassified to conform with the 2004 presentation.
4. New Accounting Pronouncements
In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits. The provisions of this revised statement retain the existing disclosure requirements of the original guidance in SFAS No. 132 and contain additional requirements for both annual and interim reporting. This revision also amends the disclosure requirements under APB Opinion No. 28, Interim Financial Reporting. The revised statement is effective for fiscal years ending and interim periods beginning after December 15, 2003. The adoption of this Statement had no impact on the Companys financial position or results of operations.
In January 2003, the FASB issued Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities An Interpretation of Accounting Research Bulletin (ARB) No. 51. This interpretation was subsequently revised by FIN 46 (Revised 2003) in December 2003. This revised interpretation states that consolidation of variable interest entities will be required by the primary beneficiary if the entities do not effectively disperse risks among the parties involved. The requirements are effective for fiscal years ending after December 15, 2003 for special-purpose entities and for all other types of entities for periods ending after March 15, 2004. The Company does not have any variable interest entities and the adoption of FIN No. 46(R) did not impact its financial position or results of operations.
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5. Receivables
Receivables consist of the following at:
March 31 | December 31 | |||||||
2004 |
2003 |
|||||||
(in thousands) | ||||||||
Contract receivables: |
||||||||
Contracts in progress |
$ | 49,789 | $ | 36,433 | ||||
Unbilled retentions |
12,670 | 12,578 | ||||||
Allowance for doubtful accounts |
(214 | ) | (227 | ) | ||||
62,245 | 48,784 | |||||||
Other receivables |
498 | 139 | ||||||
$ | 62,743 | $ | 48,923 | |||||
6. Inventories
Inventories consist of the following at:
March 31 | December 31 | |||||||
2004 |
2003 |
|||||||
(in thousands) | ||||||||
Raw materials |
$ | 6,037 | $ | 4,266 | ||||
Finished goods |
119 | 108 | ||||||
$ | 6,156 | $ | 4,374 | |||||
7. Line of Credit
On August 13, 2003, the Company entered into a Credit and Security Agreement with Wells Fargo Credit, Inc. (Wells Fargo), pursuant to which Wells Fargo agreed to advance up to a maximum aggregate amount of $15.0 million to the Company and cause the issuance of letters of credit in the maximum amount of $11.5 million for the Companys account. The facility under the Credit and Security Agreement replaces the Companys credit facility under the Credit Agreement, dated June 30, 1998, as amended, between the Company and Wells Fargo Bank, N.A. The credit facility is primarily maintained to enable the Company to issue letters of credit to its performance bond surety and workers compensation insurance carrier. At March 31, 2004, the Company had no borrowings but had $9.9 million of outstanding letters of credit issued under its line of credit. These letters of credit are secured by cash held in an escrow account, which is classified as restricted funds on deposit on the March 31, 2004 balance sheet.
The new credit facility is secured by a first priority, perfected security interest in all of the Companys assets and its present and future subsidiaries. The interest rate is prime plus 1.50%. The credit facility contains covenants that, among other things, limit the Companys ability to pay cash dividends or make other distributions; repurchase its Senior Notes; incur additional indebtedness; change its business; and merge, consolidate or dispose of material portions of its assets. The security agreements pursuant to which the Companys assets are pledged prohibit any further pledge of such assets without the written consent of the bank.
6
The new credit facility requires that the Company maintain a specified Debt Service Coverage Ratio (defined as the sum of net income, depreciation and amortization, interest expense and unfinanced capital expenditures divided by the sum of current maturities of long-term debt and interest expense), a minimum book net worth, a minimum monthly stop loss (defined as a net loss not exceeding $500,000 in any one month and $1.0 million in any two consecutive months) and maximum capital expenditures. At March 31, 2004, the Company was in compliance with these credit facility covenants.
8. Income (loss) Per Share
The following table sets forth the computation of basic and diluted income (loss) per share:
Three months ended | ||||||||
March 31 |
||||||||
2004 |
2003 |
|||||||
(in thousands, except per | ||||||||
share data) | ||||||||
Numerator: |
||||||||
Net income (loss) |
$ | 383 | $ | (410 | ) | |||
Denominator for basic income (loss) per share: |
||||||||
Weighted average shares |
7,053 | 6,979 | ||||||
Effect of dilutive securities: |
||||||||
Employee and director stock options |
| | ||||||
Denominator for diluted net income (loss)
per share adjusted weighted average
shares and assumed conversions |
7,053 | 6,979 | ||||||
Income (loss) per share: |
||||||||
Basic |
$ | 0.05 | $ | (0.06 | ) | |||
Diluted |
$ | 0.05 | $ | (0.06 | ) | |||
Options to purchase 984,125 shares of common stock at prices ranging from $1.30 to $13.75 were outstanding during the three months ended March 31, 2004 but were not included in the computation of diluted net loss per share because the weighted average share price was less than the option price. Options to purchase 1,102,000 shares of common stock at prices ranging from $1.30 to $13.75 were outstanding during the three months ended March 31, 2003 but were not included in the computation of diluted net income per share because the options would be anti-dilutive due to the net loss.
9. Gains on Extinguishment of Debt
The Company recognized a gain of $182,000 (included in other income) during the three months ended March 31, 2003 due to the repayment of $1.0 million of the Companys 10-1/2% Senior Notes at a 20.25% discount, net of the write-off of related unamortized debt issue costs.
7
10. 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 Companys 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 three months ended March 31, 2004.
On April 2, 2003, Evans Welding Services Inc. brought suit in the General Court of Justice, Superior Court Division, County of Mecklenburg, North Carolina against the Companys subsidiary, Addison Steel, Inc., its surety bond, the general contractor J.A. Jones Construction Company and its surety bonds and Starport I, LLC, the owner of the new Westin Hotel in Charlotte, North Carolina. J.A. Jones was the general contractor to the owner, Starport. Addison Steel was the structural steel subcontractor to J.A. Jones and Evans Welding was Addisons erection subcontractor. Evans Weldings claim was for approximately $300,000 of additional work on the project. Addison Steel filed a cross claim and its own action, which was consolidated with the Evans Welding lawsuit. Addison Steel sought to enforce its lien and bond rights and was owed approximately $2.4 million from J.A. Jones for unpaid contract work, retention, change orders and claims. On September 25, 2003, J.A. Jones filed for bankruptcy. However, Addison Steel continued to pursue its lien and bond rights against the owner and J.A. Jones sureties. The sureties asserted backcharges against Addison Steel for approximately $1.0 million. On April 9, 2004, the Company reached a settlement in which the sureties agreed to pay Addison Steel approximately $1.5 million by May 30, 2004. As part of the settlement, Addison Steel paid Evans Welding Services $100,000 on April 15, 2004.
The Company does not believe there were any material changes to the other contingencies existing at December 31, 2003, as listed in the Companys Annual Report on Form 10-K, for which the eventual outcome could have a material adverse impact on the Company.
12. Segment Information
Three Months Ended March 31, 2004 |
||||||||||||||||||||
Commercial |
Manufacturing |
|||||||||||||||||||
Pacific |
Southwest |
Southeast |
Other |
Total |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues from external
customers |
$ | 8,795 | $ | 31,897 | $ | 6,114 | $ | 11,269 | $ | 58,075 | ||||||||||
Intersegment revenues |
| 462 | 418 | 888 | 1,768 | |||||||||||||||
Gross profit |
675 | 4,709 | 1,097 | 2,434 | 8,915 | |||||||||||||||
Operating (loss) income |
(52 | ) | 2,003 | (16 | ) | 1,014 | 2,949 |
Three Months Ended March 31, 2003 |
||||||||||||||||||||
Commercial |
Manufacturing |
|||||||||||||||||||
Pacific |
Southwest |
Southeast |
Other |
Total |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues from external
customers |
$ | 6,428 | $ | 26,297 | $ | 8,711 | $ | 8,804 | $ | 50,240 | ||||||||||
Intersegment revenues |
| 203 | | 1,829 | 2,032 | |||||||||||||||
Gross profit |
899 | 2,725 | 1,595 | 2,073 | 7,292 | |||||||||||||||
Operating income |
98 | 227 | 328 | 643 | 1,296 |
8
13. Comprehensive Loss
Total comprehensive loss for the three months ended March 31, 2004 and 2003 equaled net loss for the corresponding periods.
14. Backlog
The Companys backlog was $100.1 million ($43.0 million under contracts or purchase orders and $57.1 million under letters of intent) at March 31, 2004. The Companys backlog can be significantly affected by the receipt, or loss, of individual contracts. Approximately $46.0 million, representing 45.9 percent of the Companys backlog at March 31, 2004, is attributable to five contracts, letters of intent, notices to proceed or purchase orders. In the event one or more large contracts were terminated or their scope reduced, the Companys backlog could decrease substantially.
Item 2. Managements 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 Managements 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, 2003.
Recent Developments
On April 30, 2004, our Chairman of the Board, David A. Schuff, and our President and Chief Executive Officer, Scott A. Schuff, and their affiliates (the Schuffs) caused Schuff Acquisition Corp., an Arizona corporation wholly owned by the Schuffs, to commence a tender offer to acquire all of the outstanding shares of common stock of Schuff International (the Shares) not owned by the stockholders of Schuff Acquisition Corp. for $2.17 in cash per Share. In response to the tender offer, a special committee of the independent directors on Schuff Internationals Board was formed to review and evaluate the tender offer. Following an evaluation and review of the tender offer by the special committee, and subsequent discussions with the Schuffs, on May 12, 2004, the Schuffs agreed to cause Schuff Acquisition Corp. to increase its tender offer to $2.30 in cash per Share. All other terms and conditions of the tender offer will remain the same. The revised tender offer will remain open until 5:00 p.m., Denver time, on Friday, May 28, 2004, unless the offer is extended.
Currently, the Schuffs own 71.1% of the common stock of Schuff International. If all of the conditions of the tender offer are met or waived, the Schuffs will transfer all of their outstanding Shares to Schuff Acquisition Corp., making Schuff Acquisition Corp. the holder of at least 90% of the outstanding shares. As the holder of at least 90% of the outstanding Shares, Schuff Acquisition Corp. intends to merge Schuff International into Schuff Acquisition Corp. in a short-form merger. As permitted under Delaware Corporations Law, this merger will be effected without the approval of Schuff Internationals Board of Directors. As a result of the merger, the common stock of Schuff International would no longer trade on the American Stock Exchange. Schuff Acquisition Corp. commenced the tender offer without obtaining
9
the prior approval of the board of directors or stockholders of Schuff International, although neither of such approvals was required for the commencement and consummation of the tender offer.
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 of America 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 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. We completed our annual assessment of goodwill as of October 31, 2003. Our assessment determined that the fair value exceeded the carrying value of the assets.
10
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 provided for a valuation allowance because we believe that our deferred tax assets related to state net operating losses may not 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.
Results of Operations
Overview
Our results of operations are affected primarily by (i) the level of commercial and industrial construction in our principal markets; (ii) our ability to win project contracts; (iii) the amount and complexity of project changes requested by customers or general contractors; (iv) our success in utilizing our resources at or near full capacity; and (v) our ability to complete contracts on a timely and cost-effective basis. The level of commercial and industrial construction activity is related to several factors, including local, regional and national economic conditions, interest rates, availability of financing, and the supply of existing facilities relative to demand.
During the first quarter of 2004, the commercial and industrial construction industry, which includes commercial steel fabrication and erection along with joist manufacturing, began to experience less difficult conditions as a result of the improving macroeconomic climate offset by higher steel costs due to increased foreign demand for scrap steel. These factors, as well as continued pricing pressure from local and regional competitors, resulted in a larger number of small projects with lower gross margins being awarded that increased our capacity utilization and helped to cover our fixed operating costs.
Revenues
Revenues increased by 15.6 percent to $58.1 million for the three months ended March 31, 2004 from $50.2 million for the three months ended March 31, 2003. The increase in revenues was primarily a result of a large amount of work being completed in the three months ended March 31, 2004 on a large
11
casino project in Southern California along with being awarded a large number of smaller projects. The average revenues for our ten largest revenue generating projects in the three month period ended March 31, 2004 were $2.5 million versus $1.8 million in the three month period ended March 31, 2003. The increase in the average revenues was primarily due to the large casino project in Southern California that generated approximately $10.1 million in revenue in the three months ended March 31, 2004.
| Revenues for the Commercial-Pacific segment increased by 36.8% to $8.8 million for the three months ended March 31, 2004 from $6.4 million for the three months ended March 31, 2003 primarily because of an increase in the number of projects awarded to this segment due to the increased commercial construction activity in the region and less competition from Los Angeles-based companies. | |||
| Revenues for the Commercial-Southwest segment increased by 21.3% to $31.9 million for the three months ended March 31, 2004 from $26.3 million for the three months ended March 31, 2003 primarily because of increased activity on the Cardinals Stadium project along with casino projects in Southern California and Las Vegas. | |||
| Revenues for the Commercial-Southeast segment decreased by 29.8% to $6.1 million for the three months ended March 31, 2004 from $8.7 million for the three months ended March 31, 2003 primarily because of the continued regional economic downturn and intense competition for the projects that became available to bid. | |||
| Revenues for the Manufacturing-Other segment increased by 28.0% to $11.3 million for the three months ended March 31, 2004 from $8.8 million for the three months ended March 31, 2003 primarily because of the increased activity in the industrial construction market along with improvement in pricing in the joist market. |
Gross Profit
Gross profit increased by 22.3 percent to $8.9 million for the three month period ended March 31, 2004, from $7.3 million for the three month period ended March 31, 2003. As a percentage of revenues, gross profit increased to 15.4 percent for the three month period ended March 31, 2004, from 14.5 percent for the three month period ended March 31, 2003. The increases were primarily attributable to:
| Gross profit for the Commercial-Pacific segment decreased by 24.9% to $675,000 for the three months ended March 31, 2004 from $899,000 for the three months ended March 31, 2003 primarily because of the lower margin projects that were awarded late in 2003 which were completed in the three months ended March 31, 2004. We were awarded lower margin projects in 2003 due to increased competition from fabricators outside of the region. | |||
| Gross profit for the Commercial-Southwest segment increased by 72.8% to $4.7 million for the three months ended March 31, 2004 from $2.7 million for the three months ended March 31, 2003 primarily because of the large Cardinals Stadium project and the casino projects in Southern California and Las Vegas. The casino projects were not in our project mix and there was no work being performed on the Cardinals Stadium in the three months ended March 31, 2003. |
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| Gross profit for the Commercial-Southeast segment decreased by 31.2% to $1.1 million for the three months ended March 31, 2004 from $1.6 million for the three months ended March 31, 2003 primarily because of the continued economic downturn in the region and the apparent continued willingness of local competitors to bid and complete projects at or below their cost. | |||
| Gross profit for the Manufacturing-Other segment increased by 17.4% to $2.4 million for the three months ended March 31, 2004 from $2.1 million for the three months ended March 31, 2003, primarily because of obtaining a higher number of projects in the petro-chemical industry, which had higher margins over the previous year. Additionally, the joist market has begun to experience improved pricing and gross margins. |
General and Administrative Expenses
General and administrative expenses were $6.0 million for the three months ended March 31, 2004 and 2003. General and administrative expenses as a percentage of revenues decreased to 10.3 percent for the three months ended March 31, 2004, from 11.9 percent for the three months ended March 31, 2003. The decrease was primarily due to increased revenues in 2004. We are still making a concerted effort to contain costs while supporting the increase in our revenues. However, due to the tender offer discussed above, we do anticipate that our general and administrative costs will increase in the second quarter for costs related to the special committee.
Interest Expense
Interest expense was $2.5 million for the three months ended March 31, 2004 and 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 $34,000 for the three months ended March 31, 2004 from $384,000 for the three months ended March 31, 2003. The decrease in other income was primarily due to the $182,000 gain on extinguishment of debt and the $104,000 gain on the disposal of property and equipment that occurred in 2003 but not in 2004.
Income Tax Provision
Income tax provision was $139,000, which reflects a 27.0 percent effective tax rate for the three months ended March 31, 2004. The effective tax rate for the three months ended March 31, 2004 was lower than the statutory rates primarily because it was reduced by available federal and state research and development tax credits which was partially offset by state income taxes and the effect of permanent tax differences. Income tax benefit was $389,000, which reflects a 47.4 percent effective tax rate, for the three months ended March 31, 2003. The effective tax rate was higher for purposes of calculating the tax benefit than the federal statutory rate due to the recognition of federal research and development tax credits for book purposes which was partially offset by state income taxes and the effect of permanent tax differences.
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Backlog
Backlog decreased 11.6 percent to $100.1 million ($43.0 million under contracts or purchase orders and $57.1 million under letters of intent) at March 31, 2004 from $113.3 million ($42.3 million under contracts or purchase orders and $71.0 million under letters of intent) at December 31, 2003. The decrease in backlog compared to December 31, 2003 was due to projects being completed faster than they were replaced due to the smaller projects that were added during the quarter ended March 31, 2004.
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
Cash Used in or Provided by Operating Activities
Cash flow from operating activities is the principal source of cash used to fund our operating expenses, interest payments on debt, and capital expenditures. Our short-term cash needs are primarily for working capital to support operations including receivables, inventories, and other costs incurred in performing our contracts. We attempt to structure the payment arrangements under our contracts to match costs incurred under the project. To the extent we are able to bill in advance of costs incurred, we generate cash through billings in excess of costs and recognized earnings on uncompleted contracts. To the extent we are not able to bill in advance of costs, we rely on our credit facilities to meet our working capital needs. We believe that our existing borrowing availability together with cash from operations will be adequate to meet all funding requirements for our operating expenses, interest payments on debt and capital expenditures for the foreseeable future.
We are required to make semi-annual interest payments on our 10½% Senior Notes on June 1st and December 1st of each year. Based upon the March 31, 2004 Senior Note balance of $87.0 million, we anticipate that our semi-annual interest payments will be $4.6 million each.
Net cash used in operations in the three months ended March 31, 2004 was $6.4 million versus net cash provided by operations in the three months ended March 31, 2003 of $7.3 million. Cash flow from operations was down in the three months ended March 31, 2004 due to the increase in expenditures to support the increase in revenue activity from the Cardinals Stadium and other large casino projects in Southern California and Las Vegas. We will continue our efforts to collect outstanding retention receivables on completed projects, effectively manage our inventory levels and keep our required overhead increases to a minimum.
Cash Used in or Provided by Investing Activities
Net cash used in investing activities totaled $149,000 in the three months ended March 31, 2004 versus net cash provided by investing activities of $65,000 in the three months ended March 31, 2003. The increase in cash used in investing activities in 2004 from 2003 is primarily related to increased capital expenditures and decreased proceeds from disposals of property and equipment. Our capital expenditures are primarily for new and replacement fabrication equipment at each of our segments.
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We estimate that our capital expenditures for 2004 will be approximately $1.3 million in addition to the $176,000 that has been expended as of March 31, 2004. We believe that our available funds, cash generated by operating activities and funds available under our bank credit facilities will be sufficient to fund these capital expenditures and our working capital needs. However, we may expand our operations through future acquisitions and may require additional equity or debt financing.
Cash Used in Financing Activities
Net cash used by financing activities was $8,000 in the three months ended March 31, 2004 versus $743,000 in the three months ended March 31, 2003. We did not repurchase any of our Senior Notes at a discount on the open market in the three months ended March 31, 2004.
We had the following contractual obligations outstanding as of March 31, 2004:
Payments Due by Period | ||||||||||||||||||||
(in thousands) |
||||||||||||||||||||
Less than 1 | ||||||||||||||||||||
Total |
year |
1-3 years |
4-5 years |
After 5 years |
||||||||||||||||
Long-Term Debt |
$ | 87,040 | $ | | $ | | $ | 87,040 | $ | | ||||||||||
Operating Leases |
15,163 | 1,309 | 2,484 | 2,330 | 9,040 | |||||||||||||||
Total Contractual
Cash Obligations |
$ | 102,203 | $ | 1,309 | $ | 2,484 | $ | 89,370 | $ | 9,040 | ||||||||||
We had the following commercial commitments outstanding as of March 31, 2004:
Amount of Commitment Expiration Per Period | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Total | ||||||||||||||||||||
Amounts | Less than 1 | |||||||||||||||||||
Committed |
year |
1-3 years |
4-5 years |
After 5 years |
||||||||||||||||
Standby Letters of
Credit |
$ | 9,891 | $ | 9,891 | $ | | $ | | $ | | ||||||||||
Total Commercial
Commitments |
$ | 9,891 | $ | 9,891 | $ | | $ | | $ | | ||||||||||
Performance bonds issued on our behalf as of March 31, 2004 totaled $12.8 million. The performance bonds were required by various general contractors to guarantee our performance on projects.
Long-term Debt
On June 4, 1998, we completed a private placement of $100.0 million in principal amount of our 10 1/2% Senior Notes due 2008 (Senior Notes). 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 three months ended March 31, 2003, we repurchased $1.0 million in principal
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amount of our Senior Notes at a discount on the open market. We recognized a gain of $182,000 during the three months ended March 31, 2003 on the repurchase of our Senior Notes. At March 31, 2004, the Company was in compliance with all covenants under our Senior Notes.
Operating Leases
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, 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 years pursuant to the Consumer Price Index. Our annual rental payments for the three leases were $1.0 million in 2003. During 2002, we amended the leases. The annual rent was reduced to $800,000 from $1.1 million. Effective July 1, 2003, the partnership increased the annual rent to the original amount.
Line of Credit
On August 13, 2003, we signed a new $15.0 million credit facility agreement with Wells Fargo Credit, Inc. (the Bank). The credit facility is primarily maintained to enable us to issue letters of credit to our performance bond surety and workers compensation insurance carrier. At March 31, 2004, we had no outstanding borrowings under our credit facility.
The new 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 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.
The new credit facility requires that we maintain a specified Debt Service Coverage Ratio (defined as the sum of net income, depreciation and amortization, interest expense and unfinanced capital expenditures divided by the sum of current maturities of long-term debt and interest expense), a minimum book net worth, a minimum monthly stop loss (defined as a net loss not exceeding $500,000 in any one month and $1.0 million in any two consecutive months) and maximum capital expenditures. At March 31, 2004, we were in compliance with all of these credit facility covenants.
At March 31, 2004, we had no outstanding borrowings under our line of credit, with approximately $5.1 million available for borrowings.
Standby Letters of Credit
We have $9.9 million of standby letters of credit issued under our $15.0 million credit facility, of which $6.0 million are for the benefit of our performance bond surety and $3.9 million are for the benefit of our workers compensation insurance carrier.
Our performance bond surety requires that standby letters of credit be issued because of our past financial performance and the surety industry as a whole. Since the terrorist attacks that occurred on September
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11, 2001, the number of available reinsurance companies that the sureties assigned their bonding risk to has dramatically decreased. Therefore, our performance bond surety has now been forced to retain a major portion of their risk that was previously assigned to reinsurance companies. Their retention of this risk has caused the surety to require us to issue the standby letters of credit as collateral for our performance bonds. Our collateral requirement will be reviewed periodically and is based upon our overall financial performance. If our financial performance and liquidity improves in the future, our surety may reduce or eliminate the collateral requirements.
Our workers compensation insurance carrier requires standby letters of credit to be issued as collateral on all of our outstanding indemnity cases. The amount of collateral required is determined each year and is provided to the carrier for outstanding indemnity claims not greater than 54 months old. The prior years levels of required collateral can be adjusted each year based upon the costs incurred and settlements reached on the outstanding indemnity cases.
These letters of credit are secured by cash held in an investment account, which is classified as restricted funds on deposit on the March 31, 2004 balance sheet. The Bank has required us to deposit cash into an investment account to support the issuance of our standby letters of credit issued under our $15.0 million credit facility. Under the credit facility agreement, the first $5.0 million of standby letters of credit issued require us to deposit cash totaling 100% of the value of those standby letters of credit. When the amount of standby letters of credit issued exceeds $5.0 million, we are required to deposit cash totaling 75% of the total outstanding standby letters of credit.
On December 4, 2003, Moodys Investor Service announced its decision to downgrade our ratings to Caa2 (poor standing and subject to very high risk, ranking in the middle of the range) from B3 (speculative and subject to high credit risk, ranking in the low end of the range) for our senior implied and Senior Notes rating and Caa3 (poor standing and subject to very high risk, ranking in the low end of the range) from Caa1 (poor standing and subject to very high risk, ranking in the high end of the range) for our issuer rating. The downgrades were prompted by our sharply declining revenues, operating income and EBITDA, weakened debt protection measures, bank covenant violations and likely asset impairment values in the event of a distress situation. The downgrading of our credit ratings may result in higher borrowing costs on any future financings.
If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to sell assets, reduce capital expenditures, refinance all or a portion of our existing debt or obtain additional financing. Our ability to make scheduled principal payments, to pay interest on or to refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the construction industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control, including the severity and duration of the economic downturn.
Off-Balance Sheet Arrangements
The nature of our off-balance sheet arrangements at March 31, 2004 includes letters of credit of $9.9 million, performance bonds of $12.8 million, and operating leases of approximately $15.2 million. These items are more fully discussed earlier in this section.
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Factors That May Affect Future Operating Results and Financial Condition.
Our future operating results and financial condition are dependent on a number of factors that we must successfully manage in order to achieve favorable future operating results and improve our financial condition. The following potential risks and uncertainties, together with those mentioned elsewhere herein, could affect our future operating results, financial condition, and the market price of our Common Stock.
Substantial Leverage and Ability to Service Debt
With our 10-1/2% Senior Notes and new line of credit facility, we are highly leveraged with substantial debt service in addition to operating expenses and planned capital expenditures. Our 10-1/2% Senior Notes permit us to incur additional indebtedness, subject to certain limitations, including additional secured indebtedness under existing credit facilities. Our level of indebtedness will have several important effects on our future operations, including, without limitation, (i) a substantial portion of our cash flow from operations must be dedicated to the payment of interest and principal on our 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 us to meet certain financial tests, and other restrictions will limit our ability to borrow additional funds or to dispose of assets, and may affect our flexibility in planning for, and reacting to, changes in our business, including possible acquisition activities, (iii) our leveraged position will substantially increase our vulnerability to adverse changes in general economic, industry and competitive conditions, (iv) our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes may be limited and (v) our leveraged position and the various covenants contained in the Senior Notes and the credit facility may place us at a relative competitive disadvantage as compared to certain of our competitors. Our ability to meet our debt service obligations and to reduce our total indebtedness will be dependent upon our future performance, which will be subject to general economic, industry and competitive conditions and to financial, business and other factors affecting our operations, many of which are beyond our control. There can be no assurance that our business will continue to generate cash flow at or above current levels. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we 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 our 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 us to service our debt, or that any of these measures could be effected on satisfactory terms, if at all.
Dependence on Construction Industry
We earn virtually all of our revenues in the building construction industry, which is subject to local, regional and national economic cycles. Our 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 does not continue to improve in our principal markets, our business, financial condition and results of operations could be adversely affected.
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Rising Steel Prices
Our gross profit can be significantly affected by the cost of steel shapes and plate. Steel scrap is the primary component utilized in the production of structural steel shapes in the United States and is an essential component in the production of steel plate. The price of steel scrap has increased dramatically over the last year and we expect it to continue to increase in the future. If steel prices continue to increase or increase more than we anticipate, our gross profit could be negatively impacted. Additionally, the increased cost of steel could cause owners and contractors of projects to seek out less-expensive alternatives to steel buildings, such as concrete. If the use of steel in the construction of buildings declines significantly, it would have a material adverse effect on our business, financial condition and results of our operations for any period.
Fluctuating Quarterly Results of Operations
We have experienced, and in the future expect to continue to experience, substantial variations in our results of operations because of a number of factors, many of which are outside our control. In particular, our operating results may vary because of downturns in one or more segments of the building construction industry, changes in economic conditions, our failure to obtain, or delays in awards of, major projects, the cancellation of major projects, changes in construction schedules for major projects or our failure to timely replace projects that have been completed or are nearing completion. In addition, from time to time, we have disputes with our customers concerning change orders to our contracts. To the extent such disputes are not resolved on a timely basis, our results of operations may be affected. Any of these factors could result in the periodic inefficient or underutilization of our resources and could cause our operating results to fluctuate significantly from period to period, including on a quarterly basis.
Revenue Recognition Estimates
We recognize revenues using the percentage of completion accounting method. Under this method, revenues are recognized based on either the ratio that costs incurred to date bear to the total estimated costs to complete the project or the ratio of labor hours incurred to date to the total estimated labor hours. Estimated losses on contracts are recognized in full when we determine that a loss will be incurred. We frequently review and revise 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, we would recognize a charge against operating results, which could have a material adverse effect on our results of operations for the applicable period.
Variations in Backlog; Dependence on Large Contracts
Our backlog can be significantly affected by the receipt, or loss, of individual contracts. For example, approximately $46.0 million, representing 45.9 percent of our backlog at March 31, 2004, is attributable to five contracts, letters of intent, notices to proceed or purchase orders. In the event one or more large contracts were terminated or their scope reduced, our backlog could decrease substantially. Our future business and results of operations may be adversely affected if we are unable to replace significant
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contracts when lost or completed, or if we otherwise fail to maintain a sufficient level of backlog. In addition, if a project representing a significant portion of our backlog is delayed or otherwise postponed, our anticipated revenue from that project may not be realized until later than anticipated.
Fixed Price Contracts
Most of our $100.1 million backlog at March 31, 2004 represented projects being performed on a fixed price basis. In bidding on projects, we estimate our 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 our business, financial condition and results of operations for any period.
Geographic Concentration
Our fabrication and erection operations currently are conducted primarily in Arizona, Nevada, Florida, Georgia, California, Texas and Colorado, states in which the construction industry has experienced cycles of substantial growth followed by periodic economic downturns. Because of this concentration, future construction activity and our 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.
Competition
Many small and various large companies offer fabrication, erection and related services that compete with those that we provide. Local and regional companies offer competition in one or more of our geographic markets or product segments. Out of state or international companies may provide competition in any market. We compete for every project we obtain. Although we believe customers consider, among other things, the availability and technical capabilities of equipment and personnel, efficiency, safety record and reputation, price 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 our competitors may have greater capital and other resources than ours and are more established in their respective markets. There can be no assurance that our competitors will not substantially increase their commitment of resources devoted to competing aggressively with us or that we will be able to compete profitably with our competitors.
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Substantial Liquidity Requirements
Our 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, our contract arrangements with customers sometimes require us to provide payment and performance bonds to partially secure our obligations under our contracts, which may require us to incur significant expenditures prior to receipt of payments. Furthermore, our customers often will retain a portion of amounts otherwise payable to us during the course of a project as a guarantee of completion of that project. To the extent we are unable to receive progress payments in the early stages of a project, our cash flow would be reduced, which could have a material adverse effect on our business, financial condition and results of operations.
Capacity Constraints; Dependence on Subcontractors
We routinely rely on subcontractors to perform a significant portion of our fabrication, erection and project detailing to fulfill projects that we cannot fulfill in-house due to capacity constraints or that are in markets in which we have not established a strong local presence. With respect to these projects, our success depends on our ability to retain and successfully manage these subcontractors. Any difficulty in attracting and retaining qualified subcontractors on terms and conditions favorable to us could have an adverse effect on our ability to complete these projects in a timely and cost effective manner.
Dependence Upon Key Personnel
Our success depends on the continued services of our senior management and key employees as well as our ability to attract additional members to our management team with experience in the steel fabrication and erection industry. The unexpected loss of the services of any of our management or other key personnel, or our inability to attract new management when necessary, could have a material adverse effect upon our operations.
Union Contracts
We currently are a party to a number of collective bargaining agreements with various unions representing some of our fabrication and erection employees. These contracts expire or are subject to expiration at various times in the future. Our inability to renew such contracts could result in work stoppages and other labor disturbances, which could disrupt our business and adversely affect our results of operations.
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. We are subject to litigation claims in the ordinary course of business, including lawsuits asserting substantial claims. Currently, we do not maintain any reserves for our ongoing litigation. We periodically review the need to maintain a litigation reserve. We maintain risk management, insurance, and safety programs intended to
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prevent or mitigate losses. There can be no assurance that any of these programs will be adequate or that we will be able to maintain adequate insurance in the future at rates that we consider reasonable.
Potential Environmental Liability
Our 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 our operations. 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 we have not incurred any material environmental related liability in the past and believe that we are in material compliance with environmental laws, there can be no assurance that we, or entities for which we may be responsible, will not incur such liability in connection with the investigation and remediation of facilities we currently operate (or formerly owned or operated) or other locations in a manner that could materially and adversely affect our operations.
Governmental Regulation
Many aspects of our operations are subject to governmental regulations in the United States and in other countries in which we operate, including regulations relating to occupational health and workplace safety, principally the Occupational Safety and Health Act and regulations thereunder. In addition, we are subject to licensure and hold or have applied for licenses in each of the states in the United States in which we operate and in certain local jurisdictions within such states. Although we believe that we are in material compliance with applicable laws and permitting requirements, there can be no assurance that we will be able to maintain this status. Further, we cannot determine to what extent future operations and earnings may be affected by new legislation, new regulations or changes in or new interpretations of existing regulations.
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 our common stock could also be subject to significant fluctuations in response to variations in our quarterly operating results, analyst reports, announcements concerning us, legislative or regulatory changes or the interpretation of existing statutes or regulations affecting our business, litigation, general trends in the industry and other events or factors. In July 1997, we completed an initial public offering of our common stock for $8.00 per share. Since that time, our common stock has traded as low as $1.10 per share and as high as $15.625 per share. The market price for our common stock remains volatile and there is no assurance that the market price will not experience significant changes in the future.
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Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the Notes to the Consolidated Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements. Among other matters, this Quarterly Report on Form 10-Q includes forward-looking statements relating to our estimated capital expenditures for 2004, our belief that we have sufficient liquidity through our present resources and the existence of our bank credit facility to meet our near-term operating needs, our belief that our gross profit could be negatively impacted by rising steel prices, and our anticipated business operations in future periods. Additional written or oral forward-looking statements may be made by us from time to time in filings with the Securities and Exchange Commission, in our press releases, or otherwise. The words believe, expect, anticipate, intends, forecast, project, and similar expressions identify forward-looking statements. Such statements may include, but not be limited to, the anticipated outcome of contingent events, including litigation, projections of revenues, income or loss, capital expenditures, plans for future operations, growth and acquisitions, financing needs or plans and the availability of financing, and plans relating to our services, 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 our 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 Consolidated Financial Statements and in Managements Discussion and Analysis of Financial Condition and Results of Operations, describe factors, among others, that could contribute to or cause such differences, including the potential that unanticipated repairs or replacement of fabrication equipment could increase our capital expenditures and that the loss of major contracts could negatively impact our liquidity. 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. We undertake no obligation to publicly update or review any forward-looking statements as a result of new information, future events, or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments
At March 31, 2004, we did not participate in any derivative financial instruments, or other financial or derivative commodity instruments, and did not hold any investment securities.
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Primary Market Risk Exposure
We are potentially exposed to market risk associated with changes in interest rates primarily as a result of our initial $100.0 million 10-1/2% fixed rate Senior Notes in the original principal amount of $100.0 million, which were issued on June 4, 1998. Specifically, we are exposed to changes in the fair value of the remaining $87.0 million in principal amount of 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.
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) as of the end of the fiscal period covered by this Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting information required to be disclosed by us in the reports we file or submit under the Exchange Act within the time periods specified in the SECs rules and forms. There have not been any changes in our internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal period covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 5. Other Information
On April 30, 2004, our Chairman of the Board, David A. Schuff, and our President and Chief Executive Officer, Scott A. Schuff, and their affiliates (the Schuffs) caused Schuff Acquisition Corp., an Arizona corporation wholly owned by the Schuffs, to commence a tender offer to acquire all of the outstanding shares of common stock of Schuff International (the Shares) not owned by the stockholders of Schuff Acquisition Corp. for $2.17 in cash per Share. In response to the tender offer, a special committee of the independent directors on Schuff Internationals Board was formed to review and evaluate the tender offer. Following an evaluation and review of the tender offer by the special committee, and subsequent discussions with the Schuffs, on May 12, 2004, the Schuffs agreed to cause Schuff Acquisition Corp. to increase its tender offer to $2.30 in cash per Share. All other terms and conditions of the tender offer will remain the same. The revised tender offer will remain open until 5:00 p.m., Denver time, on Friday, May 28, 2004, unless the offer is extended.
Currently, the Schuffs own 71.1% of the common stock of Schuff International. If all of the conditions of the tender offer are met or waived, the Schuffs will transfer all of their outstanding Shares to Schuff Acquisition Corp., making Schuff Acquisition Corp. the holder of at least 90% of the outstanding shares. As the holder of at least 90% of the outstanding Shares, Schuff Acquisition Corp. intends to merge Schuff International into Schuff Acquisition Corp. in a short-form merger. As permitted under Delaware Corporations Law, this merger will be effected without the approval of Schuff Internationals Board of Directors. As a result of the merger, the common stock of Schuff International would no longer trade on the American Stock Exchange. Schuff Acquisition Corp. commenced the tender offer without obtaining
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the prior approval of the board of directors or stockholders of Schuff International, although neither of such approvals was required for the commencement and consummation of the tender offer.
Item 6. Exhibits and Reports on Form 8-K
(a) | Exhibits |
Exhibit 31.1.
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 31.2.
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 32.1.
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) | During the quarter ended March 31, 2004, the Company filed a Current Report on Form 8-K dated March 11, 2004 pursuant to Items 7 and 9 to announce that the Company had issued a press release on March 11, 2004 announcing its financial results for 2003. |
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 INTERNATIONAL, INC. |
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Date: May 14, 2004 | By: | /s/ Michael R. Hill | ||
Michael R. Hill | ||||
Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) |
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