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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
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 001-32865
KSW, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-3191686
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
37-16 23rd Street, Long Island City, New York 11101
--------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
718-361-6500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
OUTSTANDING AT
CLASS NOVEMBER 7, 2006
----------------------------------- ----------------
Common stock, $.01 par value 5,734,811
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KSW, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS
PAGE NO.
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PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2006 and December 31, 2005 3
Consolidated Statements of Income -
Three and nine months ended September 30, 2006 and 2005 4
Consolidated Statements of Comprehensive Income -
Three and nine months ended September 30, 2006 and 2005 5
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2006 6
Consolidated Statements of Cash Flows
Nine months ended September 30, 2006 and 2005 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 1A Risk Factors 20
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits 20
SIGNATURE 21
INDEX TO EXHIBITS 22
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
KSW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2006 2005
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash $ 11,514 $ 5,199
Marketable securities 813 774
Accounts receivable, less allowance
for doubtful accounts of $200 at
9/30/06 and 12/31/05 12,746 11,887
Retainage receivable 5,570 2,764
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,468 480
Prepaid expenses and other receivables 293 144
------------- -------------
Total current assets 32,404 21,248
Property and equipment, net of accumulated
depreciation and amortization of $2,017 and $1,969
at 9/30/06 and 12/31/05, respectively 252 112
Deferred income taxes and other 621 1,350
------------- -------------
Total assets $ 33,277 $ 22,710
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,497 $ 9,533
Retainage payable 2,981 1,576
Accrued payroll and benefits 1,300 542
Accrued expenses 427 206
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,544 1,335
Income taxes payable 678 -
------------- -------------
Total current liabilities 21,427 13,192
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $.01 par value, 25,000,000 shares
authorized, 5,716,611 and 5,470,311 shares issued
and outstanding at 9/30/06 and 12/31/05, respectively 57 54
Additional paid-in capital 10,635 9,729
Retained earnings (deficit) 1,061 (347)
Accumulated other comprehensive income:
Net unrealized holding gains on available
for sale securities 97 82
------------- -------------
Total stockholders' equity 11,850 9,518
------------- -------------
Total liabilities and stockholders' equity $ 33,277 $ 22,710
============= =============
See accompanying notes to consolidated financial statements.
3
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
------------- ------------- ------------- -------------
Revenues $ 21,644 $ 14,849 $ 57,537 $ 36,277
Cost of revenues 19,204 13,333 50,489 32,490
------------- ------------- ------------- -------------
Gross profit 2,440 1,516 7,048 3,787
Selling, general and
administrative expenses 1,149(1) 1,022 4,001(1) 2,831
------------- ------------- ------------- -------------
Operating income 1,291 494 3,047 956
------------- ------------- ------------- -------------
Other income :
Interest income, net 94 2 212 12
Gain on sales of
marketable securities - - - 15
------------- ------------- ------------- -------------
Total other income 94 2 212 27
------------- ------------- ------------- -------------
Income before provision
(benefit) for income taxes 1,385 496 3,259 983
Provision (benefit) for income
taxes 600 (766)(2) 1,510 (732)(2)
------------- ------------- ------------- -------------
Net income $ 785 $ 1,262 $ 1,749 $ 1,715
============= ============= ============= =============
Income per common share:
Basic $ .14 $ .23 $ .31 $ .31
Diluted $ .13 $ .23 $ .30 $ .31
Weighted average common
shares outstanding:
Basic 5,711,886 5,470,311 5,644,441 5,470,311
Diluted 5,843,934 5,547,363 5,775,160 5,470,311
Cash dividend declared and
and paid per common share $ - $ - $ .06 $ -
(1) During the three months and nine months ended September 30, 2006, selling
and general administrative expenses include stock compensation expenses of $23
and $506, respectively, related to the exercise of stock options and the
adoption of the new accounting standard, SFAS 123-R.
(2) During the three months and nine months ended September 30, 2005, the
provision (benefit) for income taxes includes the reversal of a deferred tax
valuation allowance of $759.
See accompanying notes to consolidated financial statements.
4
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
------------- ------------- ------------- -------------
Net income $ 785 $ 1,262 $ 1,749 $ 1,715
------------- ------------- ------------- -------------
Other comprehensive income
before tax:
Unrealized holding gains
arising during the
period 27 39 27 29
Less: reclassification adjustment
for gains included in net
income - - - (15)
------------- ------------- ------------- -------------
Other comprehensive income
before tax expense 27 39 27 14
Income tax expense related to
items of other comprehensive
income 12 18 12 7
------------- ------------- ------------- -------------
Other comprehensive income,
net of tax expense 15 21 15 7
------------- ------------- ------------- -------------
Total comprehensive income $ 800 $ 1,283 $ 1,764 $ 1,722
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
5
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2006
(in thousands, except share data)
(unaudited)
Accumulated
Common Stock Additional Retained Other
------------------------- Paid-In Earnings Comprehensive
Shares Amount Capital (Deficit) Income Total
----------- ----------- ------------- ------------- ------------- -------------
Balances, December 31, 2005 5,470,311 $ 54 $ 9,729 $ (347) $ 82 $ 9,518
Net income - - - 1,749 - 1,749
Exercise of stock options 246,300 3 887 - - 890
Stock based compensation - - 19 - - 19
Cash dividends paid - $ .06 per share - - - (341) - (341)
Net unrealized gains on available
for sale securities - - - - 15 15
----------- ----------- ------------- ------------- ------------- -------------
Balances, September 30, 2006 5,716,611 $ 57 $ 10,635 $ 1,061 $ 97 $ 11,850
=========== =========== ============= ============= ============= =============
See accompanying notes to consolidated financial statements.
6
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2006 2005
------------- -------------
Cash flows from operating activities:
Net income $ 1,749 $ 1,715
Adjustments to reconcile net income to
cash provided by operating
activities:
Depreciation and amortization 48 45
Deferred income taxes 949 (766)
Realized gain on sales of marketable
securities - (15)
Stock-based compensation expense
related to stock option plan 503 -
Changes in operating assets and liabilities:
Accounts receivable (859) (4,833)
Retainage receivable (2,806) (858)
Costs and estimated earnings in
excess of billings on uncompleted
contracts (988) (506)
Prepaid expenses and other receivables (149) (151)
Accounts payable 2,964 4,270
Retainage payable 1,405 570
Accrued payroll and benefits 758 277
Accrued expenses 221 138
Billings in excess of costs and
estimated earnings on uncompleted
contracts 2,209 1,492
Income taxes payable 678 -
------------- -------------
Net cash provided by operating activities 6,682 1,378
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (188) (58)
Proceeds from sales of marketable securities - 153
Purchases of marketable securities (12) (158)
------------- -------------
Net cash used in investing activities (200) (63)
------------- -------------
Cash flows from financing activities:
Proceeds from exercise of stock options 406 -
Tax benefits from exercise of stock options (232) -
Cash dividends paid (341) -
------------- -------------
Net cash used in financing activities (167) -
------------- -------------
Net increase in cash 6,315 1,315
Cash, beginning of period 5,199 2,960
------------- -------------
Cash, end of period $ 11,514 $ 4,275
============= =============
Supplemental disclosure of cash flow
Information
Cash paid during the period for:
Interest $ 9 $ 9
Income taxes $ 113 $ 34
See accompanying notes to consolidated financial statements.
7
KSW, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Nature of Operations and Basis of Presentation
The Company furnishes and installs heating, ventilating and air conditioning
systems and process piping systems for institutional, industrial, commercial,
high-rise residential and public works projects, primarily in the State of New
York. The Company also serves as a mechanical trade manager, performing project
management services relating to the mechanical trades. The Company considers
itself to be one operating segment.
The unaudited consolidated financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and note disclosures required by accounting principles
generally accepted in the United States of America. These consolidated
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
2005.
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments, necessary for a fair presentation of the
financial position of the Company as of September 30, 2006 and December 31,
2005, and its income and comprehensive income for the three and nine month
periods ended September 30, 2006 and 2005, and cash flows for the nine months
ended September 30, 2006 and 2005. Because of the possible fluctuations in the
marketplace in the construction industry, operating results of the Company on a
quarterly basis may not be indicative of operating results for the full year.
2. Significant Accounting Policies
The significant accounting policies followed by the Company and its subsidiary
in preparing its consolidated financial statements are set forth in Note (2) to
such consolidated financial statements included in Form 10-K for the year ended
December 31, 2005. The Company has made no significant changes to these policies
during 2006, except for its accounting policy related to stock-based
compensation, described below:
On January 1, 2006, the Company adopted Statement No. 123-R, "Share Based
Payment" ("SFAS 123-R"). SFAS 123-R requires all share based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on the awards fair value at the date of grant (pro
forma disclosure is no longer an alternative to financial statement
recognition). The Company has elected to adopt SFAS 123-R on the modified
prospective method. Under the modified prospective method of transition under
SFAS 123-R, compensation costs in 2006 include costs for options granted prior
to, but not vested as of December 31, 2005, and options vested in 2006.
Therefore, results for prior periods have not been restated.
Prior to January 1, 2006, the Company applied Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations.
8
The Company did not record compensation expense because the exercise price of
the shares was equal to the market price at the date of the grant. SFAS 123,
"Accounting for Stock Based Compensation - Transition and Disclosure", requires
proforma net income disclosures as if the fair value based method defined in
SFAS No. 123 has been applied. The Company continued to apply the provisions of
APB 25 and provided the proforma disclosures required by SFAS 123 and amended by
SFAS 148.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS 123-R
during the three months and nine months ended September 30, 2005. For the
purposes of this pro forma disclosure, the value of the options is estimated
using a Black-Scholes option-pricing model and amortized to expense over the
option vesting periods.
Three Months Nine Months
Ended Ended
September 30, September 30,
2005 2005
------------- -------------
Net income, as reported $ 1,262,000 $ 1,715,000
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards,
net of related tax effects 2,000 2,000
------------- -------------
Pro forma net income $ 1,260,000 $ 1,713,000
============= =============
Earnings per share:
Basic - as reported $ .23 $ .31
Basic - pro forma $ .23 $ .31
Diluted - as reported $ .23 $ .31
Diluted - pro forma $ .23 $ .31
The Company uses the Black-Scholes option - pricing model, which requires the
input of subjective assumptions. These assumptions include estimating the length
of time employees will retain their vested stock options before exercising them
("expected term"), the estimated volatility of the Company's common stock price
over the expected term and the number of options that will ultimately not
complete their vesting requirements ("forfeitures"). Changes in the subjective
assumptions can materially affect the estimate of fair value stock-based
compensation and consequently, the related amount recognized on the consolidated
statements of income.
See Note (3) to these consolidated financial statements, "Stockholders' Equity",
for a more detailed discussion of the effects of SFAS 123-R on the Company's
results of operations and financial condition.
3. Stockholders' Equity
On May 8, 2006, the Company's Board of Directors declared a special cash
dividend of $.06 per share. The aggregate amount of the dividend was $341,000
and such dividend was paid on June 15, 2006 to shareholders of record as of May
24, 2006.
9
The adoption of SFAS 123-R lowered net income by approximately $3,000 and
$9,000 for the three and nine months ended September 30, 2006, respectively. In
addition, during the quarter ended September 30, 2006 an executive exercised
options to purchase 6,300 shares which lowered net income for the quarter by
$9,000. During the quarter ended June 30, 2006, an executive and a director
exercised options to purchase 45,000 shares which lowered net income for the
quarter by $59,000. During the first quarter of 2006, two executives and a
former director exercised options to purchase 195,000 shares which lowered net
income by $196,000.
As of September 30, 2006, there was approximately $48,000 of unrecognized
compensation costs related to unvested share-based compensation awards granted.
That cost is expected to be recognized over the next 2 years.
In November 2005, the FASB issued FASB Staff Position No. SFAS 123-R-3,
"Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards" ("FSP 123-R-3"). FSP 123-R-3 provides an elective alternative
transition method for calculating the pool of excess tax benefits available to
absorb tax deficiencies recognized subsequent to the adoption of SFAS 123-R.
Companies may take up to one year from the effective date of FSP 123-R-3 to
evaluate the available transition alternatives and make a one-time election as
to which method to adopt. The Company is currently in the process of evaluating
the alternative methods.
Options are granted to certain employees and directors at prices equal to the
market value of the stock on the dates the options were granted. The options
granted generally have a term of 10 years from the grant date and granted
options vest ratably over a three year period. The fair value of each option is
amortized into compensation expense on a straight-line basis between the grant
date for the option and each vesting date. The Company estimates the fair value
of all stock option awards as of the date of the grant by applying the
Black-Scholes pricing valuation model. The application of this valuation model
involves assumptions that are judgmental and sensitive in the determination of
compensation expense which would include the expected stock price volatility,
risk-free interest rate, weighted average expected life of the options and the
dividend yield.
Historical information is the primary basis for the selection of the expected
volatility, expected dividend yield and the expected lives of options. The risk
free interest rate was selected based upon yields of U.S. Treasury issues with a
term equal to the expected life of the option being valued. Stock option
activity for the nine months ended September 30, 2006 is as follows:
10
Weighted
Average
Weighted Remaining Aggregate
Number of Average Contractual Intrinsic
Shares Exercise Price Term in Years Value
------------- -------------- ------------- -------------
Outstanding at January 1, 2006 656,667 $ 1.65
Expired/canceled - -
Granted - -
Exercised (246,300) $ 1.65
-------------
Outstanding at Sept. 30, 2006 410,367 $ 1.65 5.03 $ 1,079,000
=============
Exercisable at Sept. 30, 2006 357,033 $ 1.65 4.82 $ 939,000
There were no options granted during the nine month period ended September 30,
2006.
Cash proceeds, tax benefits and intrinsic value related to total stock options
exercised during the three and nine months ended September 30, 2006 and 2005,
respectively, are as follows:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 2006 Sept. 30, 2005 Sept. 30, 2006 Sept. 30, 2005
-------------- -------------- -------------- --------------
Proceeds from stock options exercised $ 11,000 $ - $ 406,000 $ -
Tax benefits related to stock options exercised $ 9,000 $ - $ 232,000 $ -
Intrinsic value of stock options exercised $ 13,000 $ - $ 484,000 $ -
4. Commitment and Contingencies -
Proposals and Claims. During the ordinary and routine course of its work on
construction projects, the Company may incur expenses for work outside the
scope of its contractual obligations, for which the owner or general
contractor agrees that the Company will be entitled to additional
compensation, but where there is not yet an agreement on price. The
Company's financial statements include the amounts the Company believes it
will ultimately receive on these authorized proposals. Also during the
course of its work on construction projects, the Company may incur expenses
for work outside the scope of its contractual obligations, for which no
acknowledgment of liability exists from the owner or general contractor for
such additional work. These claims may include change proposals for extra
work or requests for an equitable adjustment to the Company's contract
price due to unforeseen disruptions to its work. In accordance with
accounting principles generally accepted in the United States of America
for the construction industry, until written acknowledgments of the
validity of the claims are received, they are not recognized in the
accompanying consolidated financial statements. No accruals have been made
in the accompanying consolidated financial statements related to these
proposals for which no acknowledgment of liability exists. While the
Company has been generally successful in obtaining a favorable resolution
of such claims, there is no assurance that the Company will be successful
in the future.
11
Purchase Agreement
On May 4, 2006, the Company entered into an agreement with a supplier of
piping materials, whereby the Company has committed to purchase certain
piping products normally used in its operations, as well as fabrication
services, at set prices through April 30, 2007. This agreement does not
cover all types of materials the Company utilizes on its projects. The
Company has not been able to obtain fixed pricing on certain materials,
such as copper tubing, due to current pricing volatility. The Company does
not believe that pricing increases on items not covered by this purchase
agreement will have a material effect on the Company's results of
operations.
5. Recently Issued Accounting Pronouncements:
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement 109" ("FIN 48"). FIN 48 prescribes a
comprehensive model for recognizing, measuring, presenting and disclosing
in the financial statements tax positions taken or expected to be taken on
a tax return, including a decision whether to file or not to file in a
particular jurisdiction. FIN 48 is effective for fiscal years beginning
after December 15, 2006. We are currently evaluating the impact of
implementing FIN 48 on our consolidated financial statements.
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 108 ("SAB 108"). SAB 108 is effective for
fiscal years ending after November 15, 2006, and early application is
encouraged. We are currently evaluating the impact, if any, of SAB 108 on
our consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standard No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements, but does not change existing
guidance as to whether or not an instrument is carried at fair value. SFAS
157 is effective for fiscal years beginning after November 15, 2007. We are
currently evaluating the impact of implementing SFAS 157 on our
consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Total revenues for the quarter ended September 30, 2006 increased by $6,795,000,
or 45.8%, to $21,644,000, as compared to $14,849,000 for the quarter ended
September 30, 2005. Total revenues for the nine months ended September 30, 2006,
increased by
12
$21,260,000, or 58.6%, to $57,537,000, as compared to $36,277,000 for the nine
months ended September 30, 2005. These increases in revenues were a result of
the Company's performance on its backlog of work as of December 31, 2005, as
well as work obtained during the period. As of September 30, 2006, the Company
had backlog of approximately $104,400,000, as compared to approximately
$83,000,000 as of September 30, 2005. Not included in this backlog amount is
approximately $8,500,000 of new contracts awarded since September 30, 2006. The
Company believes that approximately $85,000,000 of the Company's backlog at
September 30, 2006 is not reasonably expected to be completed by December 31,
2006.
COST OF REVENUES
Cost of revenues for the quarter ended September 30, 2006 increased by
$5,871,000, or 44.0%, to $19,204,000, as compared to $13,333,000 for the quarter
ended September 30, 2005. Cost of revenues for the nine months ended September
30, 2006 increased by $17,999,000, or 55.4%, to $50,489,000, as compared to
$32,490,000 for the nine months ended September 30, 2005. The increase in cost
of revenues corresponded to the increase in revenues for the applicable periods.
The increased revenues have allowed the Company to allocate the cost of project
supervision and drafting salaries over multiple projects and more effectively
utilize its experienced field labor personnel. In addition, the Company has
taken steps to reduce pricing volatility of piping materials by entering into
agreements to purchase these products at fixed prices.
GROSS PROFIT
Gross profit for the quarter ended September 30, 2006 was $2,440,000, or 11.3%
of revenues, as compared to a gross profit of $1,516,000, or 10.2% of revenues,
for the quarter ended September 30, 2005. Gross profit for the nine months ended
September 30, 2006 was $7,048,000, or 12.2% of revenues, as compared to
$3,787,000, or 10.4% of revenues, for the nine months ended September 30, 2005.
The increase in gross profit for the three and nine months ended September 30,
2006, as compared to the three and nine months ended September 30, 2005, was
primarily a result of the overall increases in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the quarter ended
September 30, 2006 increased by $127,000, or 12.4%, to $1,149,000, as compared
to $1,022,000 for the quarter ended September 30, 2005. SG&A for the nine months
ended September 30, 2006 increased by $1,170,000, or 41.3%, to $4,001,000, as
compared to $2,831,000 for the nine months ended September 30, 2005. A portion
of the changes were a result of the exercise of stock options, as well as
expenses related to the vesting of stock options, which increased SG&A by
$23,000 and $506,000 for the three and nine months ended September 30, 2006,
respectively, as compared to the three and nine months ended September 30, 2005.
Professional fees, related to the Company's public filings with the Securities
and Exchange Commission, together with American Stock Exchange fees,
13
increased by $11,000 and $96,000 for the three and nine months ended September
30, 2006, respectively, as compared to three and nine months ended September 30,
2005. The remaining increases in SG&A for the three and nine months ended
September 30, 2006, as compared to the same periods in 2005, were primarily a
result of increases in employment costs and office expenses. During the latter
half of 2005, the Company's Chief Executive Officer returned to a five-day work
week, and additional office staff was hired, which contributed to the increases
in 2006.
OTHER INCOME
Other income for the quarter ended September 30, 2006 was $94,000, as compared
to other income of $2,000 for the quarter ended September 30, 2005. Other income
for the nine months ended September 30, 2006 was $212,000, as compared to other
income of $27,000 for the nine months ended September 30, 2005. The changes in
other income during the three and nine months ended September 30, 2006, as
compared to the same periods in prior years, were primarily a result of the
Company's ability to earn interest income on its higher cash position. For the
nine months ended September 30, 2005, the Company realized gains on sales of
marketable securities totaling $15,000.
PROVISION (BENEFIT) FOR INCOME TAXES
The tax provision for the quarter ended September 30, 2006 was $600,000, as
compared to a tax benefit of $766,000 for the quarter ended September 30, 2005.
The tax provision for the nine months ended September 30, 2006 was $1,510,000,
as compared to a tax benefit of $732,000 for the nine months ended September 30,
2005. The tax rates in all periods were affected by certain state and local
taxes which are based on net worth. For the three and nine months ended
September 30, 2005, the provision for income taxes differs from the Company's
effective income tax rate primarily due to a deferred income tax valuation
allowance. During 2001, the Financial Accounting Standards Board issued SFAS
142, Goodwill and Other Intangible Assets, establishing, as of January 1, 2002,
a test whereby the fair value of goodwill is compared to its carrying value.
Based upon this test, the goodwill of the Company was written-off during the
first quarter of 2002. This write-off of goodwill created an increase in the
deferred tax assets.
At December 31, 2002, the Company provided a valuation allowance (or reserve)
against its net deferred tax assets based upon the uncertainty regarding the
ultimate realization (or use) in their entirety of these deferred tax assets. At
December 31, 2004, the outstanding deferred tax asset valuation allowance was
$1,220,000. During the nine months ended September 30, 2005, the Company
generated profits which reduced this deferred tax valuation allowance by
$461,000. Based upon the Company's backlog as of September 30, 2005, management
reevaluated the likelihood that these assets could be used in their entirety,
and concluded that the valuation allowance was not required. At September 30,
2005, the Company reversed the outstanding deferred tax valuation allowance
totaling approximately $759,000.
NET INCOME
As a result of all the items mentioned above, the Company reported net income of
14
$785,000, or $.14 per share - basic and $.13 per share-diluted, for the quarter
ended September 30, 2006, as compared to reported net income of $1,262,000, or
$.23 per share - basic and diluted, for the quarter ended September 30, 2005.
Included in the net income for the quarter ended September 30, 2006 are net
expenses of approximately $12,000, related to exercising and vesting of stock
options during the period, which resulted in the reduction in the calculation of
diluted earnings per share of approximately $.01 per share. Excluding the effect
of stock options, net income would have been $797,000, or $.14 per share - basic
and diluted, for the quarter ended September 30, 2006.
For the nine months ended September 30, 2006, the Company reported net income of
$1,749,000, or $.31 per share - basic and $.30 per share diluted, as compared to
reported net income of $1,715,000, or $.31 per share - basic and diluted, for
the nine months ended September 30, 2005. Included in net income for the nine
months ended September 30, 2006 are net expenses of $273,000 related to
exercising and vesting of stock options during the period, which resulted in a
reduction in the calculation of earnings per share of approximately $.05 per
share - basic and diluted. Excluding the effect of stock options, net income
would have been $2,022,000, or $.36 per share - basic and $.35 per share -
diluted, for the nine months ended September 30, 2006.
Net income for the three and nine months ending September 30, 2005 was increased
by the reversal of a deferred tax valuation allowance of $759,000, which
resulted in an increase in the calculation of earnings per share of
approximately $.14 per share-basic and diluted. Excluding the effect of this
reversal of the deferred tax valuation allowance, net income would have been
$503,000 (or $.09 per share-basic and diluted) for the quarter ended September
30, 2005 and $956,000 (or $.17 per share-basic and diluted) for the nine months
ended September 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's principal capital requirement is to fund its work on construction
projects. Projects are billed on a monthly basis based on the work performed to
date. These project billings, less a withholding of retention, which is received
as the project nears completion, are collectible based on their respective
contract terms. The Company has historically relied primarily on internally
generated funds and bank borrowings to finance its operations. The Company has
not relied on bank borrowings to finance its operations since July 2003. The
Company has a $2,000,000 line of credit, which is subject to certain covenants
of which all requirements have been met.
As of September 30, 2006, total cash was $11,514,000, a $7,239,000 increase from
the $4,275,000 reported as of September 30, 2005. As described below, this
increase is principally the result of an increase in cash provided by
operations.
CASH PROVIDED BY OPERATIONS
Net cash provided by operations was $6,682,000 and $1,378,000 for the nine
months ended September 30, 2006 and 2005, respectively.
15
The increase in the net cash provided by operations for the nine months ended
September 30, 2006 as compared to the nine months ended September 30, 2005 was
primarily a result of the Company's increased earnings and the receipt of the
last two installments on the Co-Op City litigation settlement.
CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities was $200,000 and $63,000 during the nine
months ended September 30, 2006 and 2005, respectively.
The Company received proceeds on the sales of marketable securities of $153,000
during the nine months ended September 30, 2005. The Company purchased
marketable securities of $12,000 and $158,000 during the nine months ended
September 30, 2006 and 2005, respectively. In addition, the Company purchased
property and equipment totaling $188,000 and $58,000 during the nine months
ended September 30, 2006 and 2005, respectively.
CASH USED IN FINANCING ACTIVITIES
Net cash used in financing activities during the nine months ended September 30,
2006 was $167,000. During the nine months ended September 30, 2006, two company
executives, a director and a former director exercised options to purchase an
aggregate of 246,300 shares contributing cash proceeds of $406,000 to the
Company.
Prior to adopting SFAS 123-R, the Company presented all tax benefits resulting
from the exercise of stock options as operating cash flows in the Statement of
Cash Flows. SFAS 123-R requires cash flows resulting from excess tax benefits to
be classified as a part of cash flows from financing activities. Excess tax
benefits represent tax benefits related to exercised options in excess of the
associated deferred tax asset for such options. As a result of adopting SFAS
123-R, $232,000 of excess tax benefits for the nine months ended September 30,
2006 have been classified as an operating cash outflow and a financing cash
inflow.
On May 8, 2006, the Company's Board of Directors declared a special cash
dividend of $.06 per share. The aggregate amount of the dividend was $341,000
and such dividend was paid on June 15, 2006 to shareholders of record as of May
24, 2006.
There were no financing activities during the quarter ended September 30, 2005.
CREDIT FACILITY
The Company has a line of credit facility from Bank of America, N.A., which
provides borrowings for working capital purposes up to $2,000,000. This facility
expires on April 1, 2007, is secured by the Company's assets and is guaranteed
by the Company's subsidiary, KSW Mechanical Services, Inc.
There were no borrowings against this line of credit during 2006.
16
Advances bear interest, based on the Company's option, at either the bank's
prime lending rate plus one percent per annum (9.25% at September 30, 2006), or
the London Interbank Offered Rate ("LIBOR") plus two and one-half percent per
annum (7.83% at September 30, 2006).
Payment may be accelerated by certain events of default such as unfavorable
credit factors, the occurrence of a material adverse change in the Company's
business, properties or financial condition, a default in payment on the line,
impairment of security, bankruptcy, or the Company ceasing operations or being
unable to pay its debts. The line of credit must be paid in full at the end of
the term on April 1, 2007.
The Company currently has no significant capital expenditure commitments.
SURETY
On some of its projects, the Company is required to provide a surety bond. The
Company's ability to obtain bonding, and the amount of bonding required, is
solely at the discretion of the surety and is primarily based upon the Company's
net worth, working capital, the number and size of projects under construction
and the surety's relationship with management. The Company is contingently
liable to the surety under a general indemnity agreement. The Company agrees to
indemnify the surety for any payments made on contracts of suretyship, guaranty
or indemnity as a result of the Company not having the financial capacity to
complete projects. Management believes the likelihood of the surety having to
complete projects is remote. The contingent liability is the cost of completing
all bonded projects, which is an undeterminable amount because it is subject to
bidding by third parties. Management believes that all contingent liabilities
will be satisfied by the Company's performance on the specific bonded contracts
involved. The surety provides bonding solely at its discretion, and the
arrangement with the surety is an at-will arrangement subject to termination.
As of September 30, 2006, approximately $14,000,000 of the Company's backlog of
$104,400,000 was bonded. The Company provides its surety with a detailed
schedule of backlog on a quarterly basis. The Company's bonding limits have been
sufficient given the volume and size of the Company's bonded contracts.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue is primarily recognized on the "percentage of completion" method for
reporting revenue on long-term construction contracts not yet completed,
measured by the percentage of total costs incurred-to-date to estimated total
costs at completion for each contract. This method is utilized because
management considers the cost-to-cost method the best method available to
measure progress on these contracts. Revenues and estimated total costs at
completion are adjusted monthly as additional information
17
becomes available and based upon the Company's internal tracking systems.
Because of the inherent uncertainties in estimating revenue and costs, it is
reasonably possible that the estimates used will change within the near term.
Contract costs include all direct material and labor costs and those other
indirect costs related to contract performance including, but not limited to,
indirect labor, subcontract costs and supplies. General and administrative costs
are charged to expense as incurred.
The Company has contracts that may extend over more than one year. Therefore,
revisions in cost and profit estimates during the course of the work are
reflected in the accounting period in which the facts, which require the
revisions, become known.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
The Company does not record any income from claims until the claims have been
received or awarded.
Revenues recognized in excess of amounts billed are recorded as a current asset
under the caption "Costs and estimated earnings in excess of billings on
uncompleted contracts." Billings in excess of revenues recognized are recorded
as a current liability under the caption "Billings in excess of costs and
estimated earnings on uncompleted contracts."
In accordance with construction industry practice, the Company reports in
current assets and liabilities those amounts relating to construction contracts
realizable and payable over a period in excess of one year.
Fees for the management of certain contracts are recognized when services are
provided.
STOCK - BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with the fair
value recognition provisions of SFAS 123-R. The Company uses the Black-Scholes
option - pricing model, which requires the input of subjective assumptions.
These assumptions include estimating the length of time employees will retain
their vested stock options before exercising them ("expected term"), the
estimated volatility of the Company's common stock price over the expected term
and the number of options that will ultimately not complete their vesting
requirements ("forfeitures"). Changes in the subjective assumptions can
materially affect the estimate of fair value stock - based compensation and
consequently the related amount recognized in the consolidated income
statements.
See Note (2) to the consolidated financial statements for more detailed
discussion of the effects of SFAS 123-R on our results of operations and
financial condition.
18
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note (5) to the Consolidated Financial Statements for a summary of recently
issued accounting pronouncements impacting the Company.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are not historical facts and
constitute "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995). These forward-looking statements
generally can be identified as statements that include phrases such as
"believe", "expect", "anticipate", "intend", "plan", "foresee", "likely", "will"
or other similar words or phrases. Such forward-looking statements concerning
management's expectations, strategic objectives, business prospects, anticipated
economic performance and financial condition, and other similar matters involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of results to differ
materially from any future results, performance or achievements discussed or
implied by such forward-looking statements. This document describes factors that
could cause actual results to differ materially from expectations of the
Company. All written and oral forward-looking statements attributable to the
Company or persons acting on behalf of the Company are qualified in their
entirety by such factors. Such risks, uncertainties, and other important factors
include, among others: inability to obtain bonding, inability to retain senior
management, low labor productivity and shortages of skilled labor, a rise in the
price of steel products, economic downturn, reliance on certain customers,
competition, inflation, the adverse effect of terrorist concerns and activities
on public budgets and insurance costs, the unavailability of private funds for
construction, and other various matters, many of which are beyond the Company's
control and other factors as are described in "Item 1A. Risk Factors" of the
Company's Form 10-K for the fiscal year ended December 31, 2005. Forward-looking
statements speak only as of the date of the document in which they are made.
Other than required by law, the Company disclaims any obligation or undertaking
to provide any updates or revisions to any forward-looking statement to reflect
any change in the Company's expectations or any change in events, conditions or
circumstances on which the forward-looking statement is based.
ITEM 3. QUANTITITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize futures, options or other derivative instruments.
As of September 30, 2006, the Company has invested $813,000 in marketable
securities.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of September 30, 2006. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of September 30, 2006.
19
There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the Company's fiscal quarter ended September 30, 2006, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
There have been no material changes related to risk factors from those items
previously disclosed in the December 31, 2005 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit 11 - Statement regarding Computation of Income per Share
Exhibit 31.1 - Certification of Chief Executive Officer required by Rule
13a-14(a)
Exhibit 31.2 - Certification of Chief Financial Officer required by Rule
13a-14(a)
Exhibit 32.1 - Certification of Chief Executive Officer required by Rule
13a-14(b) and 18 U.S.C. Section 1350
Exhibit 32.2 - Certification of Chief Financial Officer required by Rule
13a-14(b) and 18 U.S.C. Section 1350
20
SIGNATURE
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.
KSW, INC.
Date: November 7, 2006
/s/ Richard W. Lucas
-------------------------------------------
Richard W. Lucas
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
21
KSW, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- ----------------------------------------------------------------------
11 Statement Regarding Computation of Income per Share
31.1 Certification of Chief Executive Officer required by Rule 13a-14(a)
31.2 Certification of Chief Financial Officer required by Rule 13a-14(a)
32.1 Certification of Chief Executive Officer required by Rule 13a-14(b)
and 18 U.S.C. Section 1350
32.2 Certification of Chief Financial Officer required by Rule 13a-14 (b)
and 18 U.S.C. Section 1350
22