TELOS CORP 10-Q Summary: Quarter Ended March 31, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009. Telos Corporation is an information technology solutions and services company serving U.S. Government and commercial customers. The company focuses on secure enterprise solutions, including Secure Networks, Information Assurance, Secure Messaging, and Identity Management. The company no longer reports multiple operating segments, having consolidated its previous Managed Solutions segment into Secure Networks.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenue | $50,680 | $47,605 |
| Operating (Loss) Income | $(215) | $4,170 |
| Net (Loss) Income Attributable to Telos | $(612) | $2,065 |
| Cash Used in Operating Activities | $(2,866) | $613 (Provided) |
| Cash and Cash Equivalents (End of Period) | $188 | $16 |
| Working Capital | $14,795 | N/A |
| Total Debt & Preferred Stock Obligations | $136,200 | N/A |
Note: Working capital calculated as Current Assets ($57,340) minus Current Liabilities ($42,545).
Material Changes vs. Prior Period
- Revenue: Increased 6.5% to $50.7 million, driven by a $3.0 million increase in Secure Networks product sales. However, Services revenue declined 9.1% due to decreases in Secure Networks and Information Assurance sales.
- Profitability: The company shifted from an operating income of $4.2 million in Q1 2008 to an operating loss of $0.2 million in Q1 2009. Gross margin declined from 22.6% to 15.9%, primarily due to a change in program mix and a $1.1 million warranty liability adjustment in the prior year that did not recur.
- Expenses: Selling, General, and Administrative (SG&A) expenses rose 25.8% to $8.3 million, attributed to increased litigation costs, labor, audit fees, and bad debt expenses.
- Tax Benefit: A $1.4 million income tax benefit was recorded in Q1 2009 due to the pretax loss and noncash interest on redeemable preferred stock, compared to a $72,000 tax provision in Q1 2008.
- Liquidity: Cash used in operating activities was $2.9 million, a reversal from the $0.6 million provided in the prior year. Financing activities provided $3.5 million, primarily through net borrowings from the senior credit facility.
Guidance, Outlook, Risks, and Contingencies
- Liquidity Outlook: Management believes available cash and borrowings under the amended $25 million Wells Fargo Foothill credit facility will be sufficient to meet operating and debt service needs for the foreseeable future. The facility is the primary source of liquidity.
- Debt Structure: The company carries significant obligations, including $16.5 million on the senior credit facility, $4.2 million in senior subordinated notes, and approximately $108.1 million in redeemable preferred stock classified as liabilities. The company is precluded by Maryland law and credit facility covenants from redeeming preferred stock or paying dividends until September 30, 2011.
- Legal Proceedings:
- Costa Brava Partnership III, L.P. v. Telos Corporation: Plaintiffs (holders of Public Preferred Stock) appealed a dismissal of their claims to the Court of Special Appeals of Maryland. The company is vigorously defending against claims regarding dividend payments and fiduciary duties.
- Hamot et al. v. Telos Corporation: Class D Directors filed a petition for constructive civil contempt alleging failure to provide documents. The company has filed motions to dismiss. An appeal regarding a preliminary injunction preventing directors from interfering with auditors was dismissed as moot.
- Backlog: Total backlog increased significantly to $675.9 million as of March 31, 2009, compared to $114.8 million in the prior year. Funded backlog was $172.6 million.
Key Facts for Investor Verification
- Preferred Stock Liability: Verify the classification of ~$108 million in preferred stock as a liability and the inability to redeem or pay dividends due to credit facility covenants and Maryland law.
- Credit Facility Covenants: Confirm continued compliance with EBITDA covenants under the Wells Fargo Foothill facility, which is critical for ongoing operations.
- Margin Compression: Investigate the sustainability of the 15.9% gross margin and the impact of the shift in revenue mix toward lower-margin product sales versus services.
- Legal Exposure: Monitor the status of the Costa Brava appeal and the Hamot contempt petition, as adverse outcomes could impact management stability or financial obligations.
- Backlog Quality: Assess the funded vs. unfunded portion of the $675.9 million backlog to gauge near-term revenue visibility.