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, 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 Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller Reporting 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 November 5, 2008
----- ----------------
Common stock, $.01 par value 6,287,825
KSW, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2008
--------------------------------
TABLE OF CONTENTS
Page No.
- --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2008 (unaudited) and December 31, 2007 3
Consolidated Statements of Income -
Three and nine months ended September 30, 2008 and 2007
(unaudited) 4
Consolidated Statements of Comprehensive Income -
Three and nine months ended September 30, 2008 and 2007
(unaudited) 5
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2008 (unaudited) 6
Consolidated Statements of Cash Flows -
Nine months ended September 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 13
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 18
Item 4. Controls and Procedures 18
- --------------------------------------------------------------------------------
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 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits 20
- --------------------------------------------------------------------------------
SIGNATURE 21
INDEX TO EXHIBITS 22
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
KSW, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, 2008 December 31, 2007
------------------ -----------------
(unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $17,395 $16,232
Marketable securities 1,561 1,892
Accounts receivable 20,128 14,133
Retainage receivable 9,197 6,647
Costs and estimated earnings in excess of
billings on uncompleted contracts 894 1,107
Prepaid expenses and other receivables 472 359
Prepaid income taxes 154 -
------- -------
Total current assets 49,801 40,370
Property and equipment, net of accumulated
depreciation and amortization of $2,138 and $2,091
at 9/30/08 and 12/31/07, respectively 291 254
Deferred income taxes and other 300 313
------- -------
Total assets $50,392 $40,937
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $17,159 $14,182
Retainage payable 5,210 3,636
Accrued payroll and benefits 1,902 1,519
Accrued expenses 241 175
Billings in excess of costs and estimated
earnings on uncompleted contracts 6,560 4,031
Income taxes payable - 5
------- -------
Total current liabilities 31,072 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 9/30/08 and 12/31/07, respectively 63 62
Additional paid-in capital 13,289 13,139
Retained earnings 6,138 4,161
Accumulated other comprehensive income (loss):
Net unrealized holding gains (losses) on available -
for-sale securities (170) 27
------- -------
Total stockholders' equity 19,320 17,389
------- -------
Total liabilities and stockholders' equity $50,392 $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 Nine Months Nine Months
Ended Sept. 30, 2008 Ended Sept. 30, 2007 Ended Sept. 30, 2008 Ended Sept. 30, 2007
-------------------- -------------------- -------------------- --------------------
Revenues $ 25,527 $ 21,027 $ 68,016 $ 58,338
Cost of revenues 21,818 18,182 58,828 50,195
---------- ---------- ---------- ----------
Gross profit 3,709 2,845 9,188 8,143
Selling, general and
administrative expenses 1,496 1,212 4,147 3,537
---------- ---------- ---------- ----------
Operating income 2,213 1,633 5,041 4,606
---------- ---------- ---------- ----------
Other income:
Gain on sales of marketable securities 14 1 14 1
Interest income, net 80 159 286 393
---------- ---------- ---------- ----------
Total other income 94 160 300 394
---------- ---------- ---------- ----------
Income before provision
for income taxes 2,307 1,793 5,341 5,000
Provision for income taxes 986 829 2,106 2,278
---------- ---------- ---------- ----------
Net income $ 1,321 $ 964 $ 3,235 $ 2,722
========== ========== ========== ==========
Earnings per common share:
Basic $ .21 $ .16 $ .52 $ .44
Diluted $ .21 $ .15 $ .51 $ .44
Weighted average common
shares outstanding:
Basic 6,287,825 6,182,637 6,276,434 6,137,347
Diluted 6,341,282 6,284,395 6,333,594 6,237,379
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 Sept. 30, 2008 Ended Sept. 30, 2007 Ended Sept. 30, 2008 Ended Sept. 30, 2007
-------------------- -------------------- -------------------- --------------------
Net income $ 1,321 $ 964 $ 3,235 $ 2,722
-------- ------- -------- --------
Other comprehensive
income (loss) before
income tax (benefit):
Unrealized holding gains
(losses) arising
during the period (237) 10 (344) 58
Less: reclassification
adjustment for gains
included in
net income (14) (1) (14) (1)
-------- ------- -------- --------
Other comprehensive
income (loss)
before income tax
(benefit) (251) 9 (358) 57
Income tax (benefit)
related to items
of other
comprehensive income
(loss) (113) 4 (161) 26
-------- ------- -------- --------
Other comprehensive
income (loss), net of
income tax (benefit) (138) 5 (197) 31
-------- ------- -------- --------
Total comprehensive
income $ 1,183 $ 969 $ 3,038 $ 2,753
======== ======= ======== ========
See accompanying notes to consolidated financial statements.
5
KSW, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2008
(in thousands, except share data)
(unaudited)
Accumulated
Additional Other
Common Stock Paid-In Comprehensive
Shares Amount Capital Retained Earnings Income (loss) Total
------ ------ ------- ----------------- ------------- -----
Balances, January 1, 2008 6,244,324 $ 62 $ 13,139 $ 4,161 $ 27 $ 17,389
Net income - - - 3,235 - 3,235
Share transactions under employee stock option plan 43,501 1 67 - - 68
Amortization of share based compensation - - 21 - - 21
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 - - - - (197) (197)
--------- ----- -------- ------- ------- --------
Balances, September 30, 2008 6,287,825 $ 63 $ 13,289 $ 6,138 $ (170) $ 19,320
========= ===== ======== ======= ======= ========
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 Sept. 30, 2008 Ended Sept. 30, 2007
-------------------- --------------------
Cash flows from operating activities:
Net income $ 3,235 $ 2,722
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 63 54
Deferred income taxes 194 196
Tax benefits from exercise of stock options (62) (305)
Gain on sale of fixed asset (3) -
Gain on sale of marketable securities (14) (1)
Stock-based compensation expense related
to stock option plan 21 8
Changes in operating assets and liabilities:
Accounts receivable (5,995) (2,672)
Retainage receivable (2,550) (1,250)
Costs and estimated earnings in excess
of billings on uncompleted contracts 213 142
Prepaid expenses and other receivables (113) (141)
Prepaid income taxes (92) -
Other (20) -
Accounts payable 2,977 4,248
Retainage payable 1,574 860
Accrued payroll and benefits 383 535
Accrued expenses 66 (35)
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,529 (396)
Income taxes payable (5) (982)
------- -------
Net cash provided by operating activities 2,401 2,983
------- -------
Cash flows from investing activities:
Purchases of property and equipment (108) (27)
Proceeds from sale of marketable securities 18 6
Proceeds from sale of fixed asset 11 -
Purchases of marketable securities (31) (1,001)
------- -------
Net cash used in investing activities (110) (1,022)
------- -------
Cash flows from financing activities:
Proceeds from exercise of employee stock option plan 68 230
Dividends paid (1,258) -
Tax benefits from exercise of stock options 62 305
------- -------
Net cash (used in) provided by financing activities (1,128) 535
------- -------
Net increase in cash and cash
equivalents 1,163 2,496
Cash and cash equivalents, beginning of period 16,232 14,085
------- -------
Cash and cash equivalents, end of period $17,395 $16,581
======= =======
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 6 $ 4
Income taxes $ 2,046 $ 3,063
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", furnish and install
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 financial
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 normal recurring adjustments necessary for a fair
presentation of the consolidated financial position of the Company as of
September 30, 2008, and its results of operations and comprehensive income for
the three and nine month periods ended September 30, 2008 and 2007 and cash
flows for the nine month periods ended September 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 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
8
has not had a material impact on the Company's consolidated results of
operations or financial condition.
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 had no impact on the Company's
consolidated results of operations or financial condition, since the Company
elected not to report any assets or liabilities at fair value utilizing this
pronouncement.
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. There are 145,501 outstanding options, which were previously
issued under the 1995 plan, expiring on various dates through 2015.
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 nine months ended September 30, 2008, the Company incurred
compensation expense related to the vesting of stock options totaling
approximately $4,000 and $21,000, respectively. There were no stock options
exercised during the quarter ended September 30, 2008. 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 nine months ended September 30, 2007, the Company incurred
compensation expense related to the vesting of stock options totaling
approximately $3,000 and $8,000, respectively. In addition, during the quarter
ended September 30, 2007, two company executives exercised an aggregate of
29,750 options.
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.
9
As of September 30, 2008, there is approximately $27,000 of unrecognized
compensation expense related to unvested stock-based compensation awards. That
cost is expected to be recognized over the next 1.8 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 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, 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 September 30, 2008 165,501 $ 2.23 3.6 $506,000
=======
Exercisable at September 30, 2008 152,167 $ 1.81 3.1 $443,000
Cash proceeds, tax benefits and intrinsic value related to total stock options
exercised during the three and nine months ended September 30, 2008 and 2007 are
as follows:
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2008 September 30, 2007 September 30, 2008 September 30, 2007
------------------ ------------------ ------------------ ------------------
Proceeds from stock options
exercised $ - $ 46,000 $ 68,000 $230,000
Tax benefits related to stock
options exercised $ - $ 80,000 $ 62,000 $305,000
Intrinsic value of stock options
exercised $ - $173,000 $201,000 $691,000
10
(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.
4. Earnings per Share
------------------
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2008 September 30, 2007 September 30, 2008 September 30, 2007
------------------ ------------------ ------------------ ------------------
Net income $1,321,000 $ 964,000 $3,235,000 $2,722,000
========== ========== ========== ==========
Earnings per share - basic:
- ---------------------------
Weighted average shares
outstanding during the period 6,287,825 6,182,637 6,276,434 6,137,347
========== ========== ========== ==========
Earnings per share - basic $ .21 $ .16 $ .52 $ .44
========== ========== ========== ==========
Earnings per share - diluted:
- -----------------------------
Weighted average shares
outstanding during the period 6,287,825 6,182,637 6,276,434 6,137,347
Effect of stock option dilution 53,457 101,758 57,160 100,032
---------- ---------- ---------- ----------
Total shares outstanding for
purposes of calculating diluted
earnings per share 6,341,282 6,284,395 6,333,594 6,237,379
========== ========== ========== ==========
Earnings per share - diluted $ .21 $ .15 $ .51 $ .44
========== ========== ========== ==========
5. Commitment and Contingencies
----------------------------
(A) 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.
11
(B) Purchase of Pipe Fabrication Shop and Yard
-------------------------------------------
In September 2008, the Company entered into a written agreement with a related
party to purchase a pipe fabrication shop and an adjacent storage yard in Bronx,
New York for $2,500,000. The Company currently rents this property. The Company
intends to finance a portion of the purchase price. This transaction is expected
to close in December 2008 (see Item 5 of Part II, Other Information in this Form
10-Q).
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 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.
In May 2008, FASB issued Statement No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). The purpose of the new standard is to
provide a consistent framework for determining what accounting principles should
be used when preparing financial statements in conformity with accounting
principles generally accepted in the United States of America. Previous guidance
did not properly rank the accounting literature. The new standard is effective
60 days following the Securities and Exchange Commission's approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, "The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles". The adoption of SFAS 162 is not expected to have a material effect
on the Company's consolidated financial position or results of operations.
12
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, 2008 increased by $4,500,000,
or 21.4% to $25,527,000, as compared to $21,027,000 for the quarter ended
September 30, 2007. Total revenues for the nine months ended September 30, 2008
increased by $9,678,000, or 16.6%, to $68,016,000, as compared to $58,338,000
for the nine months ended September 30, 2007. This increase in revenues was a
result of the Company's performance on new work as well as work in its backlog.
As of September 30, 2008, the Company had backlog of approximately $117,200,000.
This backlog amount at September 30, 2008 does not include the contract value
for projects obtained in October 2008 which would include the 55 story
residential tower in Downtown Manhattan, valued in excess of $24,000,000, as
well as revenues from preconstruction trade management services currently being
provided on two new hospital projects. Approximately $92,000,000 of the
September 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 September 30, 2008 increased by
$3,636,000, or 20.0% to $21,818,000, as compared to $18,182,000 for the quarter
ended September 30, 2007. Costs of revenues for the nine months ended September
30, 2008 increased by $8,633,000, or 17.2% to $58,828,000, as compared to
$50,195,000 for the nine months ended September 30, 2007. The increase in costs
of revenues for the quarter and nine months ended September 30, 2008, as
compared to the same periods in 2007, is primarily associated with the increased
revenues.
Gross Profit
Gross profit for the quarter ended September 30, 2008 was $3,709,000, or 14.5%
of revenues, as compared to a gross profit of $2,845,000, or 13.5% of revenues,
for the quarter ended September 30, 2007.
Gross profit for the nine months ended September 30, 2008 was $9,188,000, or
13.5% of revenues, as compared to gross profit of $8,143,000, or 14.0% of
revenues, for the nine months ended September 30, 2007.
13
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for the quarter ended
September 30, 2008 increased by $284,000, or 23.4% to $1,496,000, as compared to
$1,212,000 for the quarter ended September 30, 2007. SG&A for the nine months
ended September 30, 2008, increased by $610,000, or 17.2% to $4,147,000, as
compared to $3,537,000 for the nine months ended September 30, 2007.
The increase in SG&A for the three and nine months ended September 30, 2008, as
compared to the three and nine months ended September 30, 2007, was primarily
related to an increase in employment costs, auto expenses, professional fees,
costs associated with the public filings, and expenses related to the hiring of
an investor relations firm.
Other Income
Other income, which is primarily interest income, for the quarter ended
September 30, 2008 was $94,000, as compared to $160,000 for the quarter ended
September 30, 2007. Other income for the nine months ended September 30, 2008
was $300,000, as compared to $394,000 for the nine months ended September 30,
2007. The decreases in other income for the three and nine month periods ended
September 30, 2008, as compared to the three and nine month periods ended
September 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 three months ended September 30, 2008 was
$986,000, as compared to the provision for income taxes of $829,000 for the
three months ended September 30, 2007. The provision for income taxes for the
nine months ended September 30, 2008 was $2,106,000, as compared to a provision
for income taxes of $2,278,000 for the nine months ended September 30, 2007.
The tax expense for the three and nine months ended September 30, 2008 was
lowered by 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
$1,321,000, or $.21 per share-basic and diluted, for the quarter ended September
30, 2008 as compared to reported net income of $964,000, or $.16 per share-basic
and $.15 diluted for the quarter ended September 30, 2007.
For the nine months ended September 30, 2008, the Company reported net income of
$3,235,000, or $.52 per share-basic and $.51 per share-diluted, as compared to
reported net income of $2,722,000 or $.44 per share-basic and diluted for the
nine months ended September 30, 2007.
14
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 September 30, 2008, total cash and cash equivalents was $17,395,000, an
increase from the $16,581,000 reported as of September 30, 2007. In addition, at
September 30, 2008 the Company held marketable equity securities totaling
$1,561,000 as compared to marketable equity securities totaling $1,716,000 held
at September 30, 2007.
Cash provided by operations
Net cash provided by operations was $2,401,000 for the nine months ended
September 30, 2008, as compared to $2,983,000 for the nine months ended
September 30, 2007. Cash at September 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 nine months ended September 30, 2007. In addition, during the
nine months ended September 30, 2008, the Company has submitted claims on
certain projects to recoup costs the Company has incurred 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 $110,000 for the nine months ended
September 30, 2008, as compared to $1,022,000 for the nine months ended
September 30, 2007. The Company purchased property and equipment of $108,000 and
$27,000 during the nine months ended September 30, 2008 and 2007, respectively.
During the nine months ended September 30, 2008 the Company sold fixed assets
which contributed cash proceeds of $11,000.
During the nine months ended September 30, 2008 and 2007, the Company purchased
marketable securities totaling $31,000 and $1,001,000, respectively. During the
nine months ended September 30, 2008 and 2007, the Company sold marketable
securities which contributed cash proceeds of $18,000 and $6,000, respectively.
Cash used in / provided by financing activities
Net cash used in financing activities for the nine months ended September 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 $535,000, for
the nine months ended September 30, 2007.
15
During the nine months ended September 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 nine months ended September 30, 2007, two company executives, an
employee, a director and a former director exercised options to purchase an
aggregate of 140,416 shares of the Company's common stock, contributing cash
proceeds of $230,000 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 $305,000 of excess tax benefits for the nine months ended
September 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, and was
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 September 30, 2008) or the
London Inter-Bank Offered Rate ("LIBOR") plus two and one-half percent per annum
(6.2% at September 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, 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.
Other than the Company's contract to purchase a pipe fabrication shop in Bronx,
New York that the Company is currently renting (see Item 5 of Part II, Other
Information in this Form 10-Q), the Company currently has no significant capital
expenditure commitments.
16
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 September
30, 2008, approximately $56,000,000 of the Company's backlog of $117,200,000 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, 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
17
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, the inability of developers to secure credit,
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 September 30, 2008, the Company has invested $1,561,000 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, 2008. 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, 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 September 30, 2008, 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
The entire country is experiencing a credit crisis and an economic downturn, the
duration
18
and extent of which cannot be determined at this time. While this downturn may
have a material adverse effect on construction throughout the country, including
New York City, it has not yet effected our operations or results. Most of our
customers are major developers and, to the Company's knowledge, all of its
current projects are adequately funded. While all of the Company's projects are
proceeding, it is impossible to determine whether the economic downturn will
have a material adverse effect in the future.
One result of the economic situation is the decline in prices of commodities,
such as steel pipe products. The Company has determined that it is not currently
prudent to enter into a long term purchase agreement for such commodities, as it
had utilized in the past.
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.
Since its inception, the Company has rented a pipe fabrication shop and an
adjacent storage yard, located in the Bronx, New York (the "Property"), from the
Company's Chief Executive Officer and a charitable foundation he controls
(together, "the Owner"). The Owner advised the Company that it intended to list
the Property for sale. The Company's Board of Directors requested and received a
right of first refusal. In July 2008, the Owner received three offers to
purchase the Property, the highest being a written offer of $2,650,000, without
a mortgage contingency. The Owner then offered to sell the Property to the
Company for $2,500,000.
The Company engaged a broker to determine the availability and costs of leasing
an alternative facility, and performed an economic analysis comparing those
costs with the costs to purchase the Property. The Board of Directors determined
that it was economically advantageous for the Company to purchase the Property.
By Resolution dated August 7, 2008, the four Independent Directors voted
unanimously to purchase the Property.
In September 2008, the Company entered into a written agreement to purchase the
Property for a total purchase price of $2,500,000. The Company intends to
finance a portion of the purchase price. This transaction is expected to close
in December 2008.
19
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
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 5, 2008
/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 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
22