Telos Corporation (10-Q) — Q2 2020
Reporting period: Three and six months ended June 30, 2020. Amounts below are in millions of dollars unless noted. Telos provides information technology, cybersecurity, cloud-security and enterprise-security solutions, primarily to U.S. Government customers. It reports as one operating segment.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $48.6 | $36.0 | $87.6 | $67.2 |
| Gross profit / margin | $17.6 / 36.2% | $10.0 / 27.8% | $29.8 / 34.0% | $19.0 / 28.2% |
| Operating income (loss) | $5.1 | $(0.4) | $5.5 | $(1.8) |
| Consolidated net income (loss) | $3.1 | $(2.0) | $1.6 | $(4.9) |
| Net income (loss) attributable to Telos | $0.3 | $(1.7) | $(2.0) | $(5.2) |
| Interest expense | $2.0 | $1.7 | $4.0 | $3.5 |
- Q2 revenue grew 34.8%; first-half revenue grew 30.3%. Services drove most of the increase, with Telos ID Enterprise Solutions and Secure Communications Cyber and Enterprise Solutions cited as key contributors. Federal customers generated $83.0 million, or nearly all first-half revenue.
- First-half operating cash flow was $0.8 million, versus $5.9 million a year earlier. Investing activities used $3.5 million, including $3.2 million of capitalized software development; financing activities used $1.7 million. Cash fell to $2.4 million from $6.8 million at year-end 2019.
- At June 30, current assets were $46.9 million and current liabilities $59.7 million, producing a $12.8 million working-capital deficit. Management attributed the deficit mainly to classifying the EnCap term loan as current because its January 2021 maturity had not yet been extended.
- Senior term debt, net, was $16.7 million current; subordinated debt was $3.1 million. Finance lease obligations totaled $16.3 million. Public preferred stock was recorded as a $141.1 million noncurrent liability; accrued cumulative preferred dividends were $109.3 million. Total stockholders’ deficit was $136.0 million.
- Receivables were $38.4 million, including $20.7 million unbilled; funded backlog was $84.8 million, down from $112.4 million at December 31, 2019. Total backlog was $308.6 million.
Changes, outlook and risks
- Profitability improved substantially against the prior-year periods as revenue grew and gross margin expanded. Management cited program and delivery mix, particularly in Telos ID, as a principal factor. SG&A also increased, to $12.5 million in Q2 and $24.3 million in the first half.
- The consolidated earnings figures require care: Telos ID is 50%-owned by outside investors, whose share of income was $2.8 million in Q2 and $3.6 million in the first half. As a result, Telos itself reported only $0.3 million of Q2 income and a $2.0 million first-half loss.
- Management expected EnCap financing, the receivables purchase arrangement and operating cash generation to cover operating, investing and financing needs for the next 12 months, while noting this was not assured. EnCap’s maturity remained January 15, 2021; the company had four quarterly extension options, but had not exercised them by June 30. Each extension increases the exit fee by $250,000. Telos reported compliance with financial covenants at June 30.
- Remaining performance obligations were $84.8 million; management expected approximately 87.6% to be recognized in 2020 and 11.4% in 2021. These are expectations, not revenue guidance.
- COVID-19 had an immaterial effect on first-half results and liquidity, according to management. Most programs continued through remote work or other measures, but future effects were uncertain, including possible impacts to operations, supply chains, margins, customer demand and access to financing.
- Other risks include dependence on U.S. Government contracting and appropriations, possible continuing resolutions or shutdowns, contract timing and funding, collection delays, and the ability to maintain or replace financing. The filing reported no material litigation developments; management said ordinary-course litigation was not expected to materially affect results, while the outcome of any renewed indemnification claim in the Hamot matter could not be assessed.
- Public preferred stock dividends have not been declared or paid since 1991; the stock accrues a cumulative 12% annual dividend. Financing restrictions limit redemption and dividend payments. No material changes to the company’s previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether and when Telos exercised EnCap extension options, and the resulting maturity, exit fee, covenant position and refinancing plan.
- Cash conversion and working-capital trends, especially collections of billed and unbilled receivables and the timing of customer payments.
- Whether revenue growth and margin gains persist as contract and program mix changes; compare Telos-attributable earnings with consolidated earnings and Telos ID’s non-controlling interest.
- Backlog conversion, customer funding and renewal assumptions, including the timing of the expected 2020 performance obligations.
- The cumulative preferred dividend and redemption obligations, and any changes in financing restrictions or the company’s ability to meet them.
- Any subsequent COVID-19 effects, significant contract developments, or changes in the financing and litigation disclosures.