Business context and reporting period
Fortress International Group, Inc. (the registrant named in this filing; its business includes Total Site Solutions, or TSS) filed this unaudited Form 10-Q for the quarter ended June 30, 2012. It provides planning, design, construction, installation and facility-management services for mission-critical facilities and information infrastructure. The filing’s registrant is Fortress International Group, Inc., not TSS, Inc.
Financial performance and position
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Revenue | $15.54 million | $29.85 million |
| Gross profit / margin | $2.33 million / 15.0% | $4.39 million / 14.7% |
| Operating income (loss) | $(2.22) million | $(3.43) million |
| Net income (loss) | $(2.27) million | $(3.52) million |
| Adjusted EBITDA, non-GAAP | $0.05 million | $(0.98) million |
| Operating cash flow | Not separately reported for the quarter | $(0.62) million |
Cash and cash equivalents were $5.72 million at June 30, down from $6.73 million at year-end 2011. Current assets were $17.57 million and current liabilities $12.16 million. Total liabilities were $14.43 million, including $2.71 million of unsecured convertible notes due in 2012 ($0.50 million classified current). The $2.0 million revolving credit facility was terminated June 28 after covenant breaches; there were no borrowings outstanding when it was terminated. Capital spending was $0.25 million in the first half.
Changes versus prior comparable periods
- Second-quarter revenue rose from $10.52 million to $15.54 million, primarily because a large construction-management project was in process; gross margin fell from 37.1% to 15.0%, and the company moved from $1.96 million net income to a $2.27 million net loss.
- First-half revenue increased from $20.13 million to $29.85 million, while gross margin fell from 39.9% to 14.7%. The company moved from $2.98 million net income to a $3.52 million net loss.
- First-half operating cash use improved to $0.62 million from $3.49 million in 2011, mainly due to working-capital movements. Cash nevertheless declined by $1.01 million.
- Goodwill was impaired by $2.07 million in the second quarter; net goodwill fell to $1.77 million from $3.84 million at year-end. First-half restructuring charges were $0.28 million, with a workforce reduction of 18 employees.
- Backlog declined to $19.1 million from $35.3 million at December 31, 2011; authorized work was $11.2 million, or 59% of backlog, versus $27.2 million, or 77%, at year-end.
Outlook, risks and unusual items
Management expected gross margins to remain in the 15%–20% range for the rest of 2012 and estimated that 62% of June backlog would be recognized over the next 12 months. It reported no formal revenue or earnings forecast. Management believed cash on hand and anticipated operating cash generation would cover working capital, capital expenditure and financing needs over the following 12 months, including $0.5 million of note repayments.
The company cited economic uncertainty, delayed or deferred customer projects, tighter credit, competition and pricing pressure as risks to revenue and margins, and said further cost reductions could be considered. Backlog may be cancelled or changed, and 42% of backlog related to two customers. Two customers represented approximately 46% of second-quarter revenue; receivables from those two customers totaled $4.6 million at June 30. Management had not determined the effect of losing the credit facility on total bonding capacity. The filing also reports related-party subcontracting and office-rent arrangements. No material litigation or off-balance-sheet arrangements were reported.
The goodwill impairment followed a decline in the company’s market capitalization. Prior-year results included $0.92 million of other income from a settlement; no comparable income occurred in 2012. Adjusted EBITDA is a non-GAAP measure and excludes items including goodwill impairment, stock compensation, bad-debt provision, interest, taxes, and depreciation and amortization.
Important facts for investors to verify
- Confirm the issuer identity and relationship to TSS, Inc.; this filing is for Fortress International Group, Inc.
- Assess liquidity and cash-generation assumptions following termination of the credit facility, including the impact on bonding capacity and the $0.5 million current note obligation.
- Track receivable collections and exposure to major customers, alongside the amount of backlog that is authorized and converted into revenue.
- Review project-level margins, cost-to-complete estimates, and the sustainability of management’s 15%–20% margin expectation.
- Evaluate the implications of the goodwill impairment, restructuring savings, and 1,532,500 stock options granted during the first half for future performance and potential dilution.