Telos Corporation — Q1 2013 Form 10-Q
Period: Three months ended March 31, 2013; unaudited consolidated results. Telos provides IT solutions and services, principally to U.S. government customers, through Cyber Operations and Defense, Secure Communications, and Telos ID. Unless noted otherwise, figures below are in U.S. dollars.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $47.6 million | $54.4 million |
| Gross profit / margin | $8.0 million / 16.9% | $14.1 million / 25.8% |
| Operating income (loss) | ($0.7) million | $5.5 million |
| Net income (loss) attributable to Telos | ($1.0) million | $1.8 million |
| Cash provided by operating activities | $5.8 million | $2.1 million |
Services revenue fell to $33.8 million from $47.4 million; product revenue rose to $13.8 million from $7.0 million. Interest expense was $1.4 million, versus $1.8 million. An income tax benefit of $1.4 million compared with a $1.7 million tax provision in the prior-year quarter. Operating cash flow benefited from $6.4 million of changes in operating assets and liabilities; cash flow therefore reflects working-capital timing as well as earnings.
Liquidity, debt and capital structure
At March 31, cash was $0.1 million, working capital was $5.4 million (down from $15.0 million at December 31, 2012), and total assets were $74.2 million. The Wells Fargo facility had $10.1 million outstanding and $12.1 million of unused availability, compared with $18.9 million drawn and $2.2 million available at year-end. The facility rate was 4.25% at quarter-end; borrowings are secured by substantially all company assets and the facility matures May 17, 2014. Telos reported covenant compliance at March 31.
The company reported $130.7 million of debt and long-term obligations, including approximately $117.4 million of redeemable preferred stock classified as liabilities and $3.4 million of capital leases. Total liabilities were $172.1 million, and stockholders’ deficit was $97.9 million. Preferred stock accrues cumulative dividends—12% on public preferred and 14.125% on senior preferred—and payment or redemption is restricted. The company has not paid public preferred dividends since 1991; accrued cash dividends on that stock were $81.6 million at quarter-end.
Changes, outlook and risks
- Revenue declined 12.6%, principally because of lower services sales on U.S. Air Force NETCENTS delivery orders. Management cited decreases in secure-network and information-assurance services and Secure Communications, partly offset by higher identity-management services and product resales.
- Gross margin fell to 16.9% from 25.8%. Services margin declined to 22.1% from 27.1%, and product margin to 4.0% from 17.2%, reflecting program and sales mix, including more low-margin resold products. Management cautioned that contract and delivery timing can make quarterly results variable.
- Total backlog was $596.2 million, versus $594.2 million a year earlier and $581.3 million at December 31, 2012. Funded backlog was $121.0 million, versus $111.7 million a year earlier and $99.1 million at year-end; the remainder includes unfunded orders.
- Management believes cash and facility availability will meet operating, debt-service, and capital-expenditure needs for the foreseeable future, while anticipating continued need for a similar credit facility for long-term needs. This outlook depends materially on continued borrowing-base availability, customer collections, and access to credit; the facility is due in 2014.
- Legal proceedings include long-running litigation by Costa Brava and litigation by Hamot and Siegel; no material developments were reported in the quarter. Management said ordinary-course litigation was not expected to materially affect financial condition, results, or cash flows, while noting outcomes cannot be predicted with certainty.
- Telos granted 4.312 million restricted shares to executives and employees in March 2013. The filing described compensation expense as immaterial because the estimated share value was nominal. The company reported no material change in risk factors and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether NETCENTS demand, customer/order mix, and contract execution support revenue and gross-margin recovery; backlog includes unfunded orders.
- How sustainable operating cash generation is after the favorable working-capital contribution, and whether working capital and facility availability remain adequate.
- Plans for the May 2014 credit-facility maturity, covenant compliance, borrowing-base capacity, and any refinancing or renewal terms.
- The obligations, restrictions, and potential economic claims associated with the $117.4 million of redeemable preferred stock liabilities and cumulative unpaid dividends.
- The effect of the March restricted-stock grant on outstanding shares, dilution, vesting, and future compensation expense.
- Developments in the Costa Brava and Hamot/Siegel litigation and any changes in related contingencies.