Telos Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. Telos provides IT solutions and services to U.S. government and commercial customers across Cyber Operations and Defense, Identity Management, and IT & Enterprise Solutions. It reports as one operating segment.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Revenue | $27.1 million | $28.0 million |
| Gross profit / margin | $10.6 million / 39.1% | $6.8 million / 24.2% |
| Operating income (loss) | $1.2 million | $(1.7) million |
| Consolidated net loss | $(0.2) million | $(2.4) million |
| Net loss attributable to Telos | $(0.9) million | $(2.7) million |
| Cash from operations | $4.3 million | $3.3 million |
| Cash and cash equivalents, March 31 | $0.05 million | $0.04 million, March 31, 2015 |
Revenue comprised $24.3 million of services and $2.8 million of products. Gross margin improvement was driven mainly by services program mix and a settlement on a prior-period loss contract. SG&A rose 10% to $9.3 million; interest expense rose 5.2% to $1.4 million. The reported consolidated loss includes $0.7 million of income attributable to Telos ID’s non-controlling owner.
Operating cash flow was $4.3 million; investing activities used $0.1 million and financing activities used $4.1 million, mainly reflecting net credit-facility repayments. Capital expenditures were $0.1 million.
At March 31, total assets were $56.5 million and total current liabilities were $24.1 million. Working capital was negative $0.8 million, versus positive $1.1 million at December 31, 2015. Cash was only $53,000. Facility borrowings were $5.1 million, with $5.8 million of reported unused availability; subordinated Porter Notes were $2.5 million, and capital lease obligations totaled approximately $20.5 million. Redeemable preferred stock was carried at $126.9 million, including accumulated dividends; total stockholders’ deficit was $124.5 million.
Material changes and business developments
- Revenue declined 3.4%, principally due to reduced sales under the U.S. Air Force NETCENTS contract. Services revenue fell $1.0 million; products increased $0.1 million.
- Services cost of sales fell $4.9 million, supporting the increase in gross profit and return to operating income. Management cautioned that program mix and delivery timing make this improvement an unreliable indicator of future results.
- Funded backlog was $58.3 million at March 31, 2016, down from $61.5 million a year earlier and $59.2 million at December 31, 2015.
- The credit facility’s March 30 amendment reduced total availability from $20 million to $10 million, reset EBITDA covenants, fixed pricing at the higher specified benchmark-plus-spread rate, and raised minimum excess-availability requirements. The filing reports a May 16, 2016 amendment extending maturity to April 1, 2017.
Outlook, risks, and unusual items
- Management said current borrowing capacity was expected to meet capital and liquidity needs for the next 12 months, but emphasized reliance on the Wells Fargo facility and the importance of maintaining borrowing availability. Failure to renew or replace it on comparable terms could materially harm liquidity and results. Management may curb capital spending and indirect expense growth.
- The March facility amendment required $5 million of equity or subordinated investment by June 1, 2016 to avoid stepped-up minimum-availability requirements and a $100,000 fee. The filing does not clarify whether this investment was obtained; investors should review subsequent disclosures.
- Telos lost a government-agency contract re-compete with more than $45 million in funded value over the preceding three years, representing about 11% of 2015 revenue. Its appeal was pending, and the existing contract was scheduled to end May 22, 2016. NETCENTS-2 procurement delays and government funding issues also weighed on sales; management cited the 2015 budget agreement as supportive of more stable DoD funding.
- Cumulative unpaid Public Preferred Stock dividends were $93.0 million; total carrying amount of the two redeemable preferred classes was $126.9 million. Dividends and redemptions are restricted by financing covenants and other limitations. Preferred dividends are included in interest expense, including $1.0 million in Q1 2016.
- Goodwill was $14.9 million, with no Q1 impairment trigger identified. Management warned that contract losses or failure to achieve projected growth could lead to future impairment. Deferred tax assets had a full valuation allowance.
- Long-running litigation involving Public Preferred Stock holders and separate litigation by two directors had no material developments in the quarter; outcomes could not be reasonably determined. The company said no material risk-factor changes occurred in Q1.
Important facts for investors to verify
- Whether the required $5 million capital investment was secured and whether the facility’s availability thresholds or fee were triggered.
- The outcome and financial effect of the government contract appeal, the May 22, 2016 contract expiration, and subsequent replacement work or awards.
- Actual facility availability, covenant compliance, and borrowing-base capacity, given minimal cash and negative working capital.
- Changes in funded backlog, customer receipts, and service margins, especially whether Q1’s improved margins persist.
- Future financing, preferred-stock dividend and redemption restrictions, and developments in the pending litigation.