Filing summary
Entity and period: The supplied filing is Fortress International Group, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2012—not a filing identified as TSS, Inc. The company provides consulting, design, construction management, installation, and facilities-management services for mission-critical facilities.
Financial performance
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $14.31 million | $9.61 million; up 48.8% |
| Gross profit and margin | $2.05 million; 14.4% | $4.14 million; 43.0% |
| Operating income (loss) | $(1.21) million | $1.04 million |
| Net income (loss) | $(1.25) million; $(0.09) per share | $1.02 million; $0.08 per share basic |
| Adjusted EBITDA | $(1.04) million | $1.30 million |
| Cash from operations | $(0.47) million | $(3.93) million |
| Cash and cash equivalents | $6.04 million at March 31 | $6.73 million at December 31, 2011 |
Higher construction-management revenue drove the revenue increase, but the company reported substantially lower gross profit and a loss. Management attributed the prior-year margin to a large project nearing completion, including resolution of disputed change orders and a more favorable service mix. SG&A was $2.91 million, down from $3.03 million; Q1 2012 also included $0.28 million of restructuring charges. Interest expense was $42,768, versus $16,834.
Financial position and liquidity
- Total assets were $23.56 million and total liabilities $15.96 million at March 31, 2012. Stockholders’ equity was $7.60 million.
- Current assets of $19.18 million exceeded current liabilities of $13.55 million; working capital was approximately $5.64 million, down from $7.03 million at year-end.
- Convertible unsecured notes totaled $2.83 million, including $0.50 million classified as current. The company reported no outstanding borrowings on its $2.0 million revolving credit facility.
- The company breached financial covenants on the revolver and could not borrow under it at quarter-end. It was discussing a waiver or amendment with the bank; there was no assurance an agreement would be reached.
- Investing cash outflow was $0.22 million, mainly for property and equipment. Financing cash outflow was $0.002 million. Cash declined $0.69 million during the quarter.
Changes, outlook, and risks
- Backlog: Total backlog fell to $23.5 million from $35.3 million at December 31, 2011. Authorized work was $15.1 million (64% of backlog), versus $27.2 million (77%) at year-end. Management estimated that approximately 64% of March backlog would be recognized over the next 12 months. Backlog is not a GAAP measure and may be cancelled or changed.
- Cost actions and margin outlook: A restructuring plan included an 18-person workforce reduction and was estimated to yield $2.8 million in annual savings, including $1.4 million in SG&A savings. Management anticipated gross margins of 15%–20% for the remainder of 2012 and said additional cost reductions could be considered.
- Liquidity outlook: Management believed cash on hand and expected operating cash generation would cover anticipated working capital, capital spending, and financing needs for the next 12 months, including $0.5 million of note repayments. This outlook is subject to operating performance and the unavailable credit facility.
- Customer concentration: Two customers represented approximately 46% of Q1 2012 revenue; receivables from those customers totaled $4.6 million. Two customers represented 69% of backlog at March 31. The company reported no Q1 revenue from two customers that had contributed 41% of Q1 2011 revenue.
- Bonding: $17.9 million of outstanding performance bonds were secured by specific project receivables. The company had not determined whether the revolver’s unavailability would limit its bonding capacity.
- Goodwill: After quarter-end, the company’s market value fell below book equity, a possible impairment indicator that could require an earlier goodwill evaluation. Goodwill was $3.84 million; any impairment amount was undetermined.
- Other disclosures: The company reported no material litigation, no off-balance-sheet arrangements, and effective disclosure controls as of March 31, 2012. Deferred tax assets were fully reserved by a valuation allowance.
Important facts for investors to verify
- Whether the bank waived or amended the revolver covenants and restored borrowing availability, and any effect on bonding capacity.
- Whether the projected restructuring savings are realized and whether the anticipated 15%–20% gross margin range is achieved.
- Backlog conversion, cancellations, and dependence on a small number of customers; also monitor receivable collection and project estimates.
- Whether the post-quarter market-value decline led to a goodwill impairment test or charge.
- The timing and source of cash to meet the $0.5 million current note obligation and other forecast liquidity needs.