Telos Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Telos provides IT solutions and services, primarily to U.S. federal government customers, and reports one operating segment.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $31.2 million | $32.4 million; down 3.8% |
| Gross profit / margin | $9.0 million / 28.8% | $10.2 million / 31.6% |
| Operating loss | $1.4 million | $22,000 |
| Net loss attributable to Telos | $3.4 million | $2.0 million |
| Cash from operating activities | $4.0 million | $0.8 million |
| Cash used in investing activities | $2.9 million | $1.1 million |
| Cash used in financing activities | $1.0 million | $0.2 million |
Services revenue was $28.0 million and product revenue was $3.1 million. Product gross margin fell to 36.1% from 54.5%; services gross margin declined to 28.0% from 28.7%. The filing attributes the margin deterioration mainly to program and sales mix, including lower proprietary software sales. Interest expense rose to $1.8 million from $1.7 million.
At March 31, cash was $221,000, current assets were $32.4 million and current liabilities were $35.8 million, yielding negative working capital of $3.4 million. Total liabilities were $205.2 million, including $11.0 million of net senior term debt, $2.7 million of subordinated debt, $17.7 million of finance lease obligations, and $136.3 million of public preferred stock classified as noncurrent. Public preferred dividends accrue at 12% annually; $104.5 million of cash dividends had accumulated. Stockholders’ deficit was $135.8 million.
Material changes and operating trends
- Revenue decreased as lower Secure Mobility and product sales outweighed growth in Cyber Security and IT & Enterprise services.
- Gross profit fell $1.2 million while selling, general and administrative expense increased 1% to $10.4 million, driving the larger operating loss.
- Operating cash flow improved, but was supported by a $5.3 million contribution from changes in operating assets and liabilities. Accounts receivable declined to $25.6 million from $34.5 million.
- Capital spending and capitalized software development totaled $2.9 million. Telos distributed $716,000 to the non-controlling member of Telos ID.
- Adoption of lease accounting on January 1, 2019 added approximately $2.0 million each of right-of-use assets and lease liabilities; the company reported no material effect on results or cash flows.
Outlook, risks and contingencies
- Funded backlog was $84.6 million at quarter-end, versus $79.3 million a year earlier. Management expected approximately 95.4% to be recognized in 2019, 4.5% in 2020, and the remainder thereafter. Total backlog, including unfunded amounts and options, was $270.2 million; timing and realization are not assured.
- Management expected EnCap financing, the receivables purchase arrangement with Republic Capital Access (RCA), and operating cash generation to meet liquidity needs for the next 12 months, but gave no assurance. RCA’s agreement has a $10 million outstanding-receivables cap and runs through June 2020. Failure to maintain or replace the arrangement could materially harm liquidity. The separate Action Capital facility was not extended beyond January 2, 2019.
- The senior term loan bears interest at 13% (subject to specified increases) and matures January 2022. Telos said it was in compliance with financial covenants at March 31, 2019, based on agreed definitions of covenant inputs.
- Management cited uncertainty over future federal and defense spending, potential government disruption or shutdown, and procurement competition. No formal earnings guidance is provided in the supplied filing text.
- Two long-running shareholder/director litigations remained pending, with no material developments in the quarter. Management said outcomes could not be reasonably determined; ordinary-course litigation was not expected to have a material adverse effect based on available information.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether operating cash generation is sustainable, given the quarter’s reliance on working-capital movements and very low cash balance.
- The availability, costs, eligibility conditions and renewal or replacement prospects for RCA receivables financing.
- Progress in restoring margins, particularly product margin, and the effect of contract and delivery mix.
- Funded-backlog conversion and exposure to government funding, task-order timing and contract awards.
- The obligations and restrictions associated with the 12% cumulative preferred stock, including accumulated dividends and the large stockholders’ deficit.