Filing summary
Entity and period: The supplied filing is Fortress International Group, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2011—not a filing in the name of TSS, Inc. Fortress acquired VTC, L.L.C., doing business as Total Site Solutions (“TSS”), in 2007. The company provides consulting, engineering, construction management, systems installation, and facilities management for mission-critical facilities.
Financial performance
- Third quarter: Revenue was $7.68 million, down 63% from $21.00 million in Q3 2010. Gross profit was $2.96 million; gross margin rose to 38.6% from 15.5%. Operating income was $140,000 versus $496,000, and net income was $113,000 versus $466,000. Basic and diluted EPS were both $0.01, compared with $0.03.
- Nine months: Revenue was $27.81 million, down 54% from $60.77 million. Gross profit was $11.00 million versus $8.91 million, and gross margin increased to 39.6% from 14.7%. Operating income was $2.24 million versus $703,000; net income was $3.10 million versus $610,000. Basic EPS was $0.23 versus $0.05; diluted EPS was $0.21 versus $0.04.
- Cash flow: Operating activities used $2.99 million in the first nine months, compared with $8.90 million provided in the prior-year period. Investing activities used $31,000 and financing activities used $468,000. Cash declined $3.49 million to $7.49 million from December 31, 2010.
- Liquidity and balance sheet: Working capital was $8.4 million, up from $5.3 million at year-end 2010. Current assets were $15.40 million and current liabilities $7.02 million. Total debt was $2.83 million, principally a 4% unsecured convertible note to the COO; $250,000 was classified as current. Total liabilities were $9.69 million and stockholders’ equity was $9.97 million.
- Other metrics: Nine-month Adjusted EBITDA, a non-GAAP measure, was $2.91 million versus $1.45 million; Q3 Adjusted EBITDA was $287,000 versus $678,000. The company reported no income tax expense and maintained a full valuation allowance against deferred tax assets.
Changes, outlook, and risks
- Revenue fell mainly because a large construction-management project, which had been at full production in 2010, was substantially completed in Q2 2011. Facilities-management revenue partly offset the decline. Construction management’s share of sales decreased, helping lift gross margin; management expects gross margin to decline as new construction-management projects begin.
- Nine-month net income included $919,000 of other income, primarily from settlement of a dispute concerning a potential project. The filing also reports $50,000 of principal and accrued interest extinguished in settlement of SMLB seller notes. These items contributed to reported earnings and should be distinguished from recurring operating performance.
- Backlog was $35.9 million at September 30, 2011, up from $30.6 million at year-end; $27.2 million was authorized to proceed. Management estimated about 80% of September backlog would be recognized within 12 months. Two customers represented approximately 69% of backlog, and two customers generated 39% of nine-month revenue. A customer’s acquisition in 2010 led to cancellation of a contract and a $7.2 million backlog reduction in Q2 2011.
- Management said cash on hand and expected operating cash generation should cover working capital, investment, and financing needs over the next 12 months, including about $0.3 million of expected debt service. This is management’s expectation, not formal earnings guidance. The company may further reduce operating costs if bookings or revenue weaken.
- After quarter-end, on November 8, the company obtained a one-year revolving credit facility of up to $2.0 million, subject to an 80% eligible-receivables borrowing base, at 30-day LIBOR plus 2.25%. It is secured by substantially all borrower assets and has financial covenants and other restrictions.
- Risks cited include economic uncertainty and project delays, price pressure from larger competitors, possible margin erosion, customer and backlog concentration, and dependence on estimates in percentage-of-completion contract accounting. The filing reports no material litigation, no off-balance-sheet arrangements, and effective disclosure controls as of September 30.
Important facts to verify
- Confirm the requested issuer: the filing is for Fortress International Group, Inc., although TSS is identified as its acquired operating business.
- Assess how much of the $3.10 million nine-month net income and $2.91 million Adjusted EBITDA reflects recurring operations versus the $919,000 dispute-related other income and other adjustments.
- Check current cash conversion and working-capital needs, given $2.99 million of operating cash use despite reported net income.
- Review the composition, customer concentration, authorization status, and expected timing of backlog, and the risk of further cancellations or project delays.
- Review the post-quarter credit facility’s borrowing availability, collateral, covenants, and compliance requirements, as well as the COO note’s repayment schedule and change-of-control provisions.