Telos Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing was signed April 1, 2013. Telos provides secure IT, cyber/network, communications, and identity-management solutions, primarily to U.S. government customers. The figures below are in U.S. dollars; financial statements report amounts in thousands.
Financial performance
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $226.1 million | $189.9 million |
| Gross profit / margin | $54.8 million / 24.2% | $47.5 million / 25.1% |
| Operating income / margin | $17.7 million / 7.8% | $12.7 million / 6.7% |
| Income before taxes | $16.7 million | $6.7 million |
| Net income | $9.5 million | $3.5 million |
| Net income attributable to Telos | $7.4 million | $1.5 million |
| Cash from operating activities | $16.1 million | $14.9 million |
| Cash and cash equivalents at year-end | $0.2 million | $0.2 million |
| Working capital at year-end | $15.0 million | $15.2 million |
- Revenue rose 19.1%, driven principally by U.S. Air Force NETCENTS work. Services revenue increased 41.8% to $177.3 million, while product revenue declined 24.8% to $48.8 million.
- Gross profit grew 15.3%, but gross margin fell 0.9 percentage points, reflecting contract and solution mix. SG&A increased 6.5% to $37.1 million, including higher legal fees and intangible-asset amortization.
- Reported income included a $5.2 million gain from settling the IT Logistics (ITL) note for $7.6 million, a 50% discount to its $15 million principal. This materially boosted pretax and net income.
- Q4 2012 revenue was $48.4 million versus $47.8 million in Q4 2011. Q4 gross profit was $11.2 million versus $12.6 million; income before taxes was $6.2 million versus $0.9 million; Telos-attributable net income was $3.1 million versus a $0.5 million loss. The 2012 Q4 result included the ITL debt-extinguishment gain.
Balance sheet, debt, and liquidity
- Year-end total assets were $79.2 million, total liabilities $176.0 million, and stockholders’ deficit $96.8 million. Redeemable preferred stock is classified as a liability.
- Facility borrowings were $18.9 million, including a $6.6 million term loan; unused borrowing availability was $2.2 million, down from $5.3 million a year earlier. The facility is secured by substantially all company assets, matures May 17, 2014, and bore a 4.25% stated rate at year-end. Telos reported compliance with its financial covenants.
- Management described the facility as the principal source of liquidity and said available cash and borrowing capacity should meet foreseeable operating, debt-service, and capital needs. Cash itself was only $0.2 million, making access to the facility and borrowing base important.
- Total debt and long-term obligations were reported at $138.9 million, including $18.6 million of facility debt, $3.8 million of long-term capital leases, and $116.5 million of redeemable preferred stock. Preferred stock carries cumulative dividend rates of 14.125% for senior preferred and 12% for public preferred; accrued preferred dividends are included in interest expense.
- Operating cash flow was $16.1 million; investing activities used $0.6 million and financing activities used $15.5 million. Financing outflows included $10.9 million of ITL-note payments and $4.0 million of senior preferred redemptions. Planned 2013 capital expenditures were approximately $1.3 million.
Changes, outlook, and material risks
- Total backlog declined to approximately $581.3 million from $609.6 million; funded backlog fell to $99.1 million from $124.2 million. Backlog includes potential orders and options, and timing or realization is not assured.
- Federal customers generated 99.1% of revenue in both 2012 and 2011. Fixed-price contracts represented 82.7% of 2012 revenue, compared with 88.8% in 2011. The company notes government fiscal-year seasonality, with activity historically stronger in the third and fourth quarters.
- Management cited uncertainty over federal budgets and the March 2013 sequestration, which could delay awards or reduce, delay, or terminate programs. Other key risks include dependence on government funding and contract vehicles, customer concentration, competitive pricing, contract performance and cost-estimation risk, availability of skilled staff and suppliers, cybersecurity threats, and reliance on revolving-credit availability.
- Two significant shareholder/director disputes remained unresolved. The Costa Brava/Wynnefield litigation was remanded for further proceedings; management said the outcome could not be reasonably assessed. Trial in the Hamot matter was scheduled for June 12, 2013. The company stated ordinary-course litigation was not expected to have a material adverse effect, based on available information.
- No formal revenue or earnings guidance was provided. Management expected continued need for a credit facility on broadly similar terms and anticipated approximately $1.3 million in 2013 capital expenditures. No goodwill or intangible-asset impairment was recorded for 2012.
Investor verification points
- Assess the sustainability of earnings excluding the one-time $5.2 million ITL note gain and the effect of preferred-stock redemption gains.
- Verify facility borrowing availability, borrowing-base headroom, covenant compliance, and refinancing plans ahead of the May 2014 maturity.
- Review the terms, accumulated obligations, and payment restrictions on the $116.5 million of redeemable preferred stock, including its continuing cumulative dividends.
- Track funded backlog, NETCENTS order activity, federal budget/sequestration effects, and the extent to which reported backlog converts to revenue.
- Follow developments in the shareholder and director litigation and any related financial or governance consequences.