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 June 30, 2008
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.
---------
(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
------------
(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, a non-accelerated filer or a smaller reporting
company. See definitions of "large accelerated filer", "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Accelerated Non-Accelerated Smaller Reporting
Filer [ ] Filer [ ] Filer [ ] Company [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 August 4, 2008
----- --------------
Common stock, $.01 par value 6,287,825
KSW, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2008
---------------------------
TABLE OF CONTENTS
Page No.
- -------------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2008 (unaudited) and December 31, 2007 3
Consolidated Statements of Income -
Three and six months ended June 30, 2008 and 2007 (unaudited) 4
Consolidated Statements of Comprehensive Income -
Three and six months ended June 30, 2008 and 2007 (unaudited) 5
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2008 (unaudited) 6
Consolidated Statements of Cash Flows-
Six months ended June 30, 2008 and 2007 (unaudited) 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 17
Item 4. Controls and Procedures 17
- -------------------------------------------------------------------------------------
PART II OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 1A Risk Factors 18
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits 19
- -------------------------------------------------------------------------------------
SIGNATURE 20
INDEX TO EXHIBITS 21
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
--------------------
KSW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, 2008 December 31, 2007
------------- -----------------
ASSETS (unaudited)
- ------
Current assets:
Cash and cash equivalents $16,118 $16,232
Marketable securities 1,811 1,892
Accounts receivable 18,708 14,133
Retainage receivable 7,788 6,647
Costs and estimated earnings in excess of
billings on uncompleted contracts 795 1,107
Prepaid expenses and other receivables 567 359
Prepaid income taxes 362 -
------- -------
Total current assets 46,149 40,370
Property and equipment, net of accumulated
depreciation and amortization of $2,116 and $2,091
at 6/30/08 and 12/31/07, respectively 287 254
Deferred income taxes and other 202 313
------- -------
Total assets $46,638 $40,937
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $17,576 $14,182
Retainage payable 3,793 3,636
Accrued payroll and benefits 1,154 1,519
Accrued expenses 273 175
Billings in excess of costs and estimated
earnings on uncompleted contracts 5,709 4,031
Income taxes payable - 5
------- -------
Total current liabilities 28,505 23,548
------- -------
Commitments and contingencies (Note 5)
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, 6,287,825 and 6,244,324 shares issued
and outstanding at 6/30/08 and 12/31/07, respectively 63 62
Additional paid-in capital 13,285 13,139
Retained earnings 4,817 4,161
Accumulated other comprehensive income (loss):
Net unrealized holding gains (losses) on available -
for-sale securities (32) 27
------- -------
Total stockholders' equity 18,133 17,389
------- -------
Total liabilities and stockholders' equity $46,638 $40,937
======= =======
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 Six Months Six Months
Ended June 30, 2008 Ended June 30, 2007 Ended June 30, 2008 Ended June 30, 2007
------------------- ------------------- ------------------- -------------------
Revenues $ 21,998 $ 19,320 $ 42,489 $ 37,311
Cost of revenues 18,836 16,512 37,010 32,013
---------- ---------- ---------- ----------
Gross profit 3,162 2,808 5,479 5,298
Selling, general and
administrative expenses 1,343 1,312 2,651 2,325
---------- ---------- ---------- ----------
Operating income 1,819 1,496 2,828 2,973
Other income:
Interest income, net 82 121 206 234
---------- ---------- ---------- ----------
Income before provision
for income taxes 1,901 1,617 3,034 3,207
Provision for income taxes 827 757 1,120 1,449
---------- ---------- ---------- ----------
Net income $ 1,074 $ 860 $ 1,914 $ 1,758
========== ========== ========== ==========
Earnings per common share:
Basic $ .17 $ .14 $ .31 $ .29
Diluted $ .17 $ .14 $ .30 $ .28
Weighted average common
shares outstanding:
Basic 6,284,325 6,142,825 6,271,552 6,115,000
Diluted 6,340,461 6,254,400 6,330,019 6,226,425
See accompanying notes to consolidated financial statements.
4
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three Months Three Months Six Months Six Months
Ended June 30, 2008 Ended June 30, 2007 Ended June 30, 2008 Ended June 30, 2007
------------------- ------------------- ------------------- -------------------
Net income $ 1,074 $ 860 $ 1,914 $ 1,758
-------- ------ -------- --------
Other comprehensive
income (loss) before
income tax (benefit):
Unrealized holding gains
(losses) arising
during the period 10 33 (109) 48
Less: reclassification
adjustment for gains
included in
net income - - - -
-------- ------ -------- --------
Other comprehensive
income (loss)
before income tax
(benefit) 10 33 (109) 48
Income tax (benefit)
related to items
of other
comprehensive income
(loss) 4 15 (50) 22
-------- ------ -------- --------
Other comprehensive
income (loss), net of
income tax (benefit) 6 18 (59) 26
-------- ------ -------- --------
Total comprehensive
income $ 1,080 $ 878 $ 1,855 $ 1,784
======== ====== ======== ========
See accompanying notes to consolidated financial statements.
5
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2008
(in thousands, except share data)
(unaudited)
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income (loss) Total
------ ------ ------- -------- ------------- -----
Balances, January 1, 2008 6,244,324 $ 62 $ 13,139 $ 4,161 $ 27 $ 17,389
Net income - - - 1,914 - 1,914
Share transactions under employee stock option plan 43,501 1 67 - - 68
Amortization of share based compensation - - 17 - - 17
Tax benefits from exercise of employee stock option
plan - - 62 - - 62
Cash dividend paid - $.20 per share - - - (1,258) - (1,258)
Net unrealized losses on available-for-sale securities - - - - (59) (59)
--------- ------ -------- ------- ------- --------
Balances, June 30, 2008 6,287,825 $ 63 $ 13,285 $ 4,817 $ (32) $ 18,133
========= ====== ======== ======= ======= ========
See accompanying notes to consolidated financial statements.
6
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Six Months
Ended June 30, 2008 Ended June 30, 2007
------------------- -------------------
Cash flows from operating activities:
Net income $ 1,914 $ 1,758
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 41 35
Deferred income taxes 161 187
Tax benefits from exercise of stock options (62) (225)
Gain on sale of fixed asset (3) -
Stock-based compensation expense related
to stock option plan 17 5
Changes in operating assets and liabilities:
Accounts receivable (4,575) 1,241
Retainage receivable (1,141) (923)
Costs and estimated earnings in excess
of billings on uncompleted contracts 312 626
Prepaid expenses and other receivables (208) (244)
Prepaid income taxes (300) -
Accounts payable 3,394 (206)
Retainage payable 157 597
Accrued payroll and benefits (365) 174
Accrued expenses 98 77
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,678 480
Income taxes payable (5) (845)
------- -------
Net cash provided by operating activities 1,113 2,737
------- -------
Cash flows from investing activities:
Purchases of property and equipment (82) (8)
Proceeds from sale of fixed asset 11 -
Purchases of marketable securities (28) -
------- -------
Net cash used in investing activities (99) (8)
------- -------
Cash flows from financing activities:
Proceeds from exercise of employee stock option plan 68 184
Dividends paid (1,258) -
Tax benefits from exercise of stock options 62 225
------- -------
Net cash (used in) provided by financing activities (1,128) 409
------- -------
Net increase (decrease) in cash and cash
equivalents (114) 3,138
Cash and cash equivalents, beginning of period 16,232 14,085
------- -------
Cash and cash equivalents, end of period $16,118 $17,223
======= =======
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 4 $ 4
Income taxes $ 1,267 $ 2,109
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
----------------------------------------------
KSW, Inc. and its Subsidiary, collectively 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 operates as one 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 disclosures required by accounting principles generally
accepted in the United States of America. These consolidated statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2007.
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments necessary for a fair presentation of the
consolidated financial position of the Company as of June 30, 2008, and its
results of operations and comprehensive income for the three and six month
periods ended June 30, 2008 and 2007 and cash flows for the six month periods
ended June 30, 2008 and 2007. The operating results of the Company for any
period may not be indicative of operating results for any 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 the Company's Annual Report
on Form 10-K for the year ended December 31, 2007. The Company has made no
significant changes to these policies during 2008.
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157 provides guidance for
using fair value to measure assets and liabilities. It also responds to
investors' requests for expanded information about the extent to which companies
measure assets and liabilities at fair value, the information used to measure
fair value, and the effect of fair value measurements on earnings. SFAS 157
applies whenever other standards require (or permit) assets or liabilities to be
measured at fair value, and does not expand the use of fair value in any new
circumstances. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company's investments in marketable
securities are exposed to price fluctuation. The Company values these
securities, based on Level 1 of the SFAS 157 fair value hierarchy, using quoted
prices in active markets, as it did prior to the adoption of SFAS 157. The
adoption of SFAS 157 has not had a material impact on the Company's
consolidated results of operations or financial condition.
8
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. SFAS 159 is
effective for the Company's financial statements beginning with the first
quarter of 2008. The adoption of SFAS 159 has not had a material impact on the
Company's consolidated results of operations or financial condition.
3. Stockholders' Equity
--------------------
(A) Stock Option Plans
------------------
The Company has outstanding stock options issued under two plans, the KSW, Inc.
1995 Stock Option Plan ("1995 plan") and the KSW, Inc. 2007 Stock Option Plan
("2007 plan").
The 1995 plan expired December 2005. Therefore, no new options can be granted
under that plan.
The 2007 plan was adopted and approved by the Company's Board of Directors on
May 8, 2007 and was approved by the shareholders at the May 2008 Annual Meeting
of Stockholders. Pursuant to the 2007 plan, 300,000 shares of common stock of
the Company are reserved for issuance to employees, consultants and directors of
the Company. The primary purpose of the 2007 plan is to reward and retain key
employees. No options have been issued to officers or employees under the 2007
plan. Under this plan the Company has issued to a Company director options to
purchase 20,000 shares of the Company's common stock at an exercise price of
$6.95 per share.
During the three and six months ended June 30, 2008, the Company incurred
compensation expense related to the vesting of stock options totaling
approximately $15,000 and $17,000, respectively. In addition, during the quarter
ended June 30, 2008 an officer exercised 7,001 options. A director, an executive
and an employee exercised an aggregate of 36,500 options during the quarter
ended March 31, 2008.
During the three and six months ended June 30, 2007, the Company incurred
compensation expense related to the vesting of stock options totaling
approximately $0 and $5,000, respectively.
In addition, during the quarter ended June 30, 2007, two Company executives, an
employee and a director exercised an aggregate of 40,166 options. During the
quarter ended March 31, 2007, an executive and a former director exercised an
aggregate of 70,500 options.
As of June 30, 2008, there is approximately $31,000 of unrecognized compensation
expense related to unvested stock-based compensation awards granted. That cost
is expected to be recognized over the next 2.1 years.
Under both plans, options were granted to certain employees, executives and
directors at prices equal to the market value of the stock on the dates the
options were issued. The
9
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 six months ended June 30, 2008 was as follows:
Weighted Average
Number Weighted Average Remaining Contractual Aggregate
of Shares Exercise Price Term in Years Intrinsic Value
--------- -------------- ------------- ---------------
Outstanding at January 1, 2008 189,002 $ 1.58
Expired/canceled - -
Granted 20,000 $ 6.95
Exercised (43,501) $ 1.58
-------
Outstanding at June 30, 2008 165,501 $ 2.23 3.8 $569,000
=======
Exercisable at June 30, 2008 138,501 $ 1.58 2.9 $440,000
Cash proceeds, tax benefits and intrinsic value related to total stock options
exercised during the three and six months ended June 30, 2008 and 2007 are as
follows:
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
------------- ------------- ------------- -------------
Proceeds from stock options
exercised $ 11,000 $ 67,000 $ 68,000 $184,000
Tax benefits related to stock
options exercised $ - $ 76,000 $ 62,000 $225,000
Intrinsic value of stock options
exercised $ 24,000 $177,000 $201,000 $470,000
(B) Dividend
--------
On April 30, 2008, the Company's Board of Directors declared a cash dividend of
$.20 per share. The aggregate amount of the dividend was $1,258,000, and was
paid on June 17, 2008 to shareholders of record as of May 26, 2008.
10
4. Earnings per Share
------------------
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
------------- ------------- ------------- -------------
Net income $1,074,000 $ 860,000 $1,914,000 $1,758,000
========== ========== ========== ==========
Earnings per share - basic:
Weighted average shares
outstanding during the period 6,284,325 6,142,825 6,271,552 6,115,000
========== ========== ========== ==========
Earnings per share - basic $ .17 $ .14 $ .31 $ .29
========== ========== ========== ==========
Earnings per share - diluted:
Weighted average shares
outstanding during the period 6,284,325 6,142,825 6,271,552 6,115,000
Effect of stock option dilution 56,136 111,575 58,467 111,425
---------- ---------- ---------- ----------
Total shares outstanding for
purposes of calculating diluted
earnings per share 6,340,461 6,254,400 6,330,019 6,226,425
========== ========== ========== ==========
Earnings per share - diluted $ .17 $ .14 $ .30 $ .28
========== ========== ========== ==========
5. Commitment and Contingencies
----------------------------
Proposals and Claims. 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, the claims 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.
6. Recently Issued Accounting Pronouncements
-----------------------------------------
In December 2007, the FASB issued Statement No. 141 (revised 2007), "Business
Combinations" ("SFAS 141-R"). SFAS 141-R changes the accounting for acquisitions
specifically eliminating the step acquisition model, changing the recognition of
contingent consideration from being recognized when it is probable to being
recognized at the time of acquisition, disallowing the capitalization of
transaction costs and changes when restructurings related to acquisition can be
recognized. The standard is effective for
11
fiscal years beginning on or after December 15, 2008 and will only impact the
accounting for acquisitions that are made after adoption.
In December 2007, the FASB issued Statement No. 160, "Noncontrolling Interests
in Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160").
This statement is effective for fiscal years beginning on or after December 15,
2008, with earlier adoption prohibited. This statement requires the recognition
of a noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the Company's equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the consolidated income statement. It
also amends certain of ARB No. 51's consolidation procedures for consistency
with the requirements of SFAS 141-R. This statement also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. The Company believes the adoption of SFAS 160 will not
have an effect on the Company's consolidated financial position or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of Operations
- ---------------------
Revenues
Total revenues for the quarter ended June 30, 2008 increased by $2,678,000, or
13.9% to $21,998,000, as compared to $19,320,000 for the quarter ended June 30,
2007. Total revenues for the six months ended June 30, 2008 increased by
$5,178,000, or 13.9% to $42,489,000, as compared to $37,311,000 for the six
months ended June 30, 2007. This increase in revenues was a result of the
Company's performance on new work as well as backlog.
As of June 30, 2008, the Company had backlog of approximately $139,100,000.
Approximately $90,000,000 of the June 30, 2008 backlog is not reasonably
expected to be completed within the year ended December 31, 2008. New contracts
secured during the remainder of 2008 could also increase 2008 revenues. The
amount of backlog not reasonably expected to be completed in the next fiscal
year is subject to various uncertainties and risks. The Company continues to
actively seek new projects to add to its backlog.
Cost of Revenues
Costs of revenues for the quarter ended June 30, 2008 increased by $2,324,000,
or 14.1% to $18,836,000, as compared to $16,512,000 for the quarter ended June
30, 2007. Costs of revenues for the six months ended June 30, 2008 increased by
$4,997,000, or 15.6% to $37,010,000, as compared to $32,013,000 for the six
months ended June 30, 2007. The increase in costs of revenues for the quarter
and six months ended June 30, 2008, as compared to the same periods in 2007, is
primarily associated with the increased revenues.
During the first quarter of 2008, the union which supplied the majority of the
Company's
12
direct labor notified the Company, as well as other signatories to the
collective bargaining agreement, that it had incorrectly billed for wages and
fringe benefits for 2006 and 2007. The Company recorded additional costs during
the six months ending June 30, 2008 of approximately $85,000 to account for this
billing error.
Gross Profit
Gross profit for the quarter ended June 30, 2008 was $3,162,000, or 14.4% of
revenues, as compared to a gross profit of $2,808,000, or 14.5% of revenues, for
the quarter ended June 30, 2007.
Gross profit for the six months ended June 30, 2008 was $5,479,000, or 12.9% of
revenues, as compared to gross profit of $5,298,000, or 14.2% of revenues, for
the six months ended June 30, 2007. The Company has submitted claims on certain
projects to recoup costs due to project delays. While there is no assurance
that these costs will be reimbursed, the Company believes its claims are
meritorious. Until written acknowledgements of the validity of these claims are
received, the amounts claimed are not recognized in the Company's consolidated
financial statements.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for the quarter ended June
30, 2008 increased by $31,000, or 2.4% to $1,343,000, as compared to $1,312,000
for the quarter ended June 30, 2007. SG&A for the six months ended June 30,
2008, increased by $326,000, or 14.0% to $2,651,000, as compared to $2,325,000
for the six months ended June 30, 2007.
The increase in SG&A for the six months ended June 30, 2008, as compared to the
six months ended June 30, 2007, was primarily related to an increase in
employment costs, auto expenses, costs associated with the filing of the 2007
Annual Report on Form 10-K and related report to shareholders and expenses
related to the vesting of stock options.
Other Income
Other income, which is primarily interest income, for the quarter ended June 30,
2008 was $82,000, as compared to $121,000 for the quarter ended June 30, 2007.
Other income for the six months ended June 30, 2008 was $206,000, as compared to
$234,000 for the six months ended June 30, 2007. The decreases in other income
for the quarter and six month periods ended June 30, 2008, as compared to the
quarter and six month periods ended June 30, 2007, was primarily due to a
reduction in the interest rates that investment accounts were able to earn.
Provision for Income Taxes
The provision for income taxes for the quarter ended June 30, 2008 was $827,000,
as compared to the provision for income taxes of $757,000 for the quarter ended
June 30, 2007. The provision for income taxes for the six months ended June 30,
2008 was $1,120,000, as compared to a provision for income taxes of $1,449,000
for the six months ended June 30, 2007.
13
The tax expense for the quarter and six month periods ended June 30, 2008 was
lower as a result of the Company's ability to utilize the Domestic Production
Activities Deduction, a credit available to qualifying entities in construction
and other industries.
Net Income
As a result of the above mentioned items, the Company reported net income of
$1,074,000, or $.17 per share-basic and diluted, for the quarter ended June 30,
2008 as compared to reported net income of $860,000, or $.14 per share-basic and
diluted for the quarter ended June 30, 2007.
For the six months ended June 30, 2008, the Company reported net income of
$1,914,000, or $.31 per share-basic and $.30 per share-diluted, as compared to
reported net income of $1,758,000 or $.29 per share-basic and $.28 per share
- -diluted for the six months ended June 30, 2007.
Liquidity and Capital Resources
- -------------------------------
General
The Company's principal capital requirement is to fund its work on construction
projects. Projects are billed monthly 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 a line of
credit which is subject to certain conditions. The Company has not relied on
bank borrowings to finance its operation since July 2003.
As of June 30, 2008, total cash and cash equivalents was $16,118,000, a decrease
from the $17,223,000 reported as of June 30, 2007. In addition, at June 30, 2008
the Company held marketable equity securities totaling $1,811,000 as compared to
marketable equity securities totaling $707,000 held at June 30, 2007.
Cash provided by operations
Net cash provided by operations was $1,113,000 for the six months ended June 30,
2008, as compared to $2,737,000 for the six months ended June 30, 2007. The net
cash at June 30, 2008 was reduced by the funding of a greater number of new
projects and the payment of increased employment cost, as compared to the six
months ended June 30, 2007. In addition, during the six months ended June 30,
2008, the Company has submitted claims on certain projects to recoup costs due
to project delays. There is no assurance that these costs will be reimbursed.
The Company believes its claims are meritorious.
Cash used in investing activities
Net cash used in investing activities was $99,000 for the six months ended June
30, 2008, as compared to $8,000 for the six months ended June 30, 2007. The
Company purchased
14
property and equipment of $82,000 and $8,000 during the six months ended June
30, 2008 and 2007, respectively.
During the six months ended June 30, 2008, the Company purchased $28,000 of
marketable securities and sold fixed assets which contributed cash proceeds of
$11,000.
Cash (used in) provided by financing activities
Net cash used in financing activities for the six months ended June 30, 2008,
which includes the dividend paid on June 17, 2008, was $1,128,000 as compared to
net cash provided by financing activities totaling $409,000 for the six months
ended June 30, 2007.
During the six months ended June 30, 2008, two executives, an employee and a
director exercised options to purchase an aggregate of 43,501 shares of the
Company's common stock, contributing cash proceeds of $68,000 to the Company.
During the six months ended June 30, 2007, two company executives, an employee,
a director and a former director exercised options to purchase an aggregate of
110,666 shares of the Company's common stock, contributing cash proceeds of
$184,000 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, $62,000 and $225,000 of excess tax benefits for the six months ended June
30, 2008 and 2007, respectively, have been classified as an operating cash
outflow and a financing cash inflow.
On April 30, 2008, the Company's Board of Directors declared a cash dividend of
$.20 per share. The aggregate amount of the dividend was $1,258,000 paid on June
17, 2008 to shareholders of record as of May 26, 2008.
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, 2009, is secured by the Company's assets, and is guaranteed
by the Company's subsidiary, KSW Mechanical Services, Inc. There have been no
borrowings against this line of credit.
Advances bear interest, at the Company's option, at either the bank's prime
lending rate plus one percent per annum (6.0% at June 30, 2008) or the London
Inter-Bank Offered Rate ("LIBOR") plus two and one-half percent per annum (4.96%
at June 30, 2008).
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,
15
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.
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 obtains its surety bonds from Federal Insurance Company, a member of
Chubb Group of Insurance Companies. 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 that might result from
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.
The Company's bonding limits have been sufficient given the volume and size of
the Company's contracts. The Company's surety may require that the Company
maintain certain tangible net worth levels, and may require additional
guarantees if the Company should desire increased bonding limits. At June 30,
2008, approximately $63,000,000 of the Company's backlog of $139,100,000 is
anticipated to be bonded.
Critical Accounting Policies and Estimates
- ------------------------------------------
There have been no material changes in the accounting policies and estimates
that the Company considers to be "critical" from those disclosed in the
Company's Annual Report on Form 10-K for the year-ended December 31, 2007.
Recently Issued Accounting Pronouncements
- -----------------------------------------
See Note (6) to the consolidated financial statements for a summary of recently
issued accounting pronouncements and their impact on 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 words 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,
16
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 terrorism 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" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2007 and in Part II, Item 1A. "Risk
Factors" in this report. Forward-looking statements speak only as of the date
of the document in which they are made. Other than required by applicable law,
the Company disclaims any obligation or undertaking to provide any updates or
revisions to any forward-looking statements to reflect any changes in the
Company's expectations or any changes in events, conditions or circumstances on
which the forward-looking statements are based.
ITEM 3. QUANTITITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------
The Company does not utilize futures, options or other derivative instruments.
As of June 30, 2008, the Company has invested $1,811,000 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 June 30, 2008. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of June 30, 2008.
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 quarter ended June 30, 2008, that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
17
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 Company's December 31, 2007 Annual Report on Form
10-K except for the following:
During the first half of 2008, the prices of steel pipe and related materials,
which constitute approximately 10% of the Company's project costs, increased
significantly. The Company has a long-term purchase agreement, expiring October
31, 2008, that fixes the price for a portion of its steel purchase requirements.
The Company has also increased its projected material costs in its estimates for
future work. These actions have limited the short-term effect of the steep
increase in the costs of steel pipe and related materials. However, there is no
assurance that steel prices will abate and, accordingly, the Company has been
unable to secure a new long-term contract for its steel purchase requirements.
To the extent the Company is unable to estimate future increases or recover
these costs, continued increases may have an adverse effect on the Company's
results of operations and cash flows.
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
The results of the shareholder voting at the Company's Annual Meeting of
Stockholders held on May 6, 2008 were reported in the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2008 and are incorporated
herein by reference.
Item 5. Other Information
None.
18
Item 6. Exhibits
Exhibit 11 - Statement regarding Computation of Earnings per Share (see
Note 4 to the Consolidated Financial Statements included elsewhere in
this Report)
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
19
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: August 4, 2008
/s/Richard W. Lucas
-------------------
Richard W. Lucas
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
20
KSW, INC.
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
11 Statement Regarding Computation of Earnings per Share (see Note 4 to
the Consolidated Financial Statements included elsewhere in this
Report)
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. [SEC]1350
32.2 Certification of Chief Financial Officer required by Rule 13a-14 (b)
and 18 U.S.C. [SEC]1350
21