Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
TLSRP > SEC Filings for TLSRP > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for TELOS CORP

Form 10-Q for TELOS CORP


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth in the risk factors section included in the Company's Form 10-K for the year ended December 31, 2011, as filed with the SEC.

General

Our goal is to deliver superior IT solutions that meet or exceed our customers' expectations. We focus on secure enterprise solutions that address the unique requirements of the federal government, the military, and the intelligence community, as well as commercial enterprises that require secure solutions. In the first quarter of 2012, our Secure Networks and Information Assurance solutions areas were merged. Our IT solutions consist of the following:

Cyber Operations and Defense (formerly Secure Networks and Information Assurance) - Secure wired and wireless network solutions for Department of Defense ("DoD") and other federal agencies. We provide an extensive range of wired and wireless voice, data, and video secure network solutions and mobile application development to support defense and civilian missions. In July 2011, we acquired all of the assets of IT Logistics, Inc. ("ITL") and incorporated such assets into our Secure Networks business solutions. Software products and consulting services automate, streamline, and enforce IT security and risk management processes enterprise-wide. We offer information assurance consulting services and Xacta brand GRC (governance, risk, and compliance) solutions to protect and defend IT systems, ensuring their availability, integrity, authentication, and confidentiality.

Secure Communications (formerly Secure Messaging) - The next-generation messaging solution supporting warfighters throughout the world. Telos Secure Information eXchange (T-6) and the AMHS platform offer secure, automated, Web-based capabilities for distributing and managing enterprise messages formatted for the Defense Messaging System as well as collaborating in real-time through video, text, whiteboarding, and document sharing.

Identity Management - End-to-end logical and physical security from the gate to the network. Our identity management solutions provide control of physical access to bases, offices, workstations, and other facilities, as well as control of logical access to databases, host systems, and other IT resources.

Backlog

Our total backlog was $591.2 million and $636.8 million at September 30, 2012 and 2011, respectively. Backlog was $609.6 million at December 31, 2011.

Such backlog amounts include both funded backlog (unfilled firm orders for our products and services for which funding has been both authorized and appropriated), and unfunded backlog (firm orders for which funding has not been appropriated). Funded backlog as of September 30, 2012 and 2011 was $105.5 million and $174.7 million, respectively. Funded backlog was $124.2 million at December 31, 2011.

Consolidated Results of Operations (Unaudited)

The accompanying condensed consolidated financial statements include the accounts of Telos Corporation and its subsidiaries including Ubiquity.com, Inc., Xacta Corporation and Telos Delaware, Inc., all of whose issued and outstanding share capital is owned by Telos Corporation (collectively, the "Company" or "Telos" or "We"). We have also consolidated the results of operations of Telos ID (see Note 2 - Sale of Assets) and Teloworks, Inc. All intercompany transactions have been eliminated in consolidation.

Our operating cycle involves many types of solution, product and service contracts with varying delivery schedules. Accordingly, results of a particular quarter, or quarter-to-quarter comparisons of recorded sales and operating profits, may not be indicative of future operating results and the following comparative analysis should therefore be viewed in such context.


Index

We provide different solutions and revenue types under the NETCENTS (Network-Centric Solutions) contract to the U.S. Air Force. NETCENTS is a GWAC-like (government-wide acquisition contracts) IDIQ (indefinite delivery/indefinite quantity) contract, therefore any government customer may utilize the NETCENTS vehicle to meet its purchasing needs. Consequently, revenue earned on the underlying NETCENTS delivery orders varies from period to period according to the customer and solution mix for the products and services delivered during a particular period, unlike a standalone contract with one separately identified customer. The majority of our task/delivery orders have periods of performance of less than 12 months, which contributes to the variances between interim and annual reporting periods. The NETCENTS contract was awarded in 2004 and has been modified 36 times since that time, including numerous modifications to extend the period of performance. The contract itself does not award any revenue and it states that the contract is for an indefinite delivery and indefinite quantity. While we derive a substantial amount of revenue from task/delivery orders under the NETCENTS contract, we have also been awarded other IDIQ/GWACs, including blanket purchase agreements under our GSA schedule.

The principal element of the Company's operating expenses as a percentage of sales for the three and nine months ended September 30, 2012 and 2011 are as follows:

                                                                (unaudited)
                                              Three Months Ended            Nine Months Ended
                                                 September 30,                September 30,
                                              2012           2011           2012          2011

Revenue                                         100.0 %        100.0 %        100.0 %       100.0 %
Cost of sales                                    77.7           77.9           75.5          75.4
Selling, general, and administrative
expenses                                         16.6           17.1           16.0          17.5

Operating income                                  5.7            5.0            8.5           7.1

Other income                                      0.3            0.1            0.3           0.2
Interest expense                                 (2.4 )         (3.1 )         (2.9 )        (3.2 )

Income before income taxes                        3.6            2.0            5.9           4.1
Income tax (provision) benefit                   (1.7 )          0.3           (2.6 )        (1.5 )
Net income                                        1.9            2.3            3.3           2.6
Less: Net income attributable to
non-controlling interest                         (1.1 )         (2.1 )         (0.9 )        (1.2 )
Net income attributable to Telos
Corporation                                       0.8 %          0.2 %          2.4 %         1.4 %

Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011

Revenue increased by 26.3% to $66.9 million for the third quarter of 2012, from $53.0 million for the same period in 2011. Such increase primarily consists of an increase of $17.2 million in sales from the U.S. Air Force NETCENTS contract. Services revenue increased to $47.4 million for the third quarter of 2012 from $28.6 million for the same period in 2011, primarily attributable to increases in sales of $17.6 million of Cyber Operations and Defense network solutions deliverables under several NETCENTS delivery orders for Telos-installed solutions, $1.1 million of Cyber Operations and Defense information assurance deliverables, $0.6 million of Identity Management solutions, offset by a decrease in sales of $0.5 million of Secure Communications solutions. The change in product and services revenue varies from period to period depending on the mix of solutions sold and the nature of such solutions, as well as the timing of deliverables, but this is not currently indicative of a trend. Product revenue decreased to $19.5 million for the third quarter of 2012 from $24.3 million for the same period in 2011, primarily attributable to decreases in sales of $4.1 million of Identity Management solutions, $0.3 million of Cyber Operations and Defense network solutions deliverables, $0.2 million of Cyber Operations and Defense information assurance deliverables, and $0.2 million of Secure Communications solutions.


Index

Cost of sales increased by 26.0% to $52.0 million for the third quarter of 2012 from $41.3 million for the same period in 2011, primarily due to an increase in revenue of $13.9 million. Cost of sales for services increased by $13.0 million; and as a percentage of services revenue decreased by 4.9%, due to a change in the mix and nature of the programs including an increase in certain Telos-installed solutions in Cyber Operations and Defense network solutions deliverables under NETCENTS. Cost of sales for product decreased by $2.3 million, and as a percentage of product revenue increased by 6.6%, primarily due to decreases in product revenue for Telos-manufactured technology solutions under NETCENTS and a decrease in sales of proprietary software. The increase in cost of sales is not necessarily indicative of a trend as the mix of solutions sold and the nature of such solutions can vary from period to period, and further can be affected by the timing of deliverables.

Gross profit increased by 27.4% to $14.9 million for the third quarter of 2012 from $11.7 million for the same period in 2011. Gross margin increased to 22.3% in the third quarter of 2012, from 22.1% for the same period in 2011. Services gross margin increased to 23.3% from 18.4% due primarily to a change in program mix during the period as noted above. Product gross margin decreased to 19.8% from 26.4% due primarily to a decrease in sales of proprietary software.

Selling, general and administrative expense increased by 23.2% to $11.1 million for the third quarter of 2012, from $9.0 million for the same period in 2011, primarily attributable to the increases in legal fees of $0.7 million, accrued bonuses of $1.1 million which were subject to achievement of performance targets, labor costs of $0.7 million, offset by a decrease in trade show expenses of $0.2 million.

Operating income increased by 41.7% to $3.8 million for the third quarter of 2012, from $2.7 million for the same period in 2011, due primarily to an increase of $3.2 million in gross profit resulting from a change in the mix of the solutions sold.

Interest expense decreased by 3.1% to $1.6 million for the third quarter of 2012, from $1.7 million for the same period in 2011, primarily due to a decrease in accrued dividends attributable to the redemption of senior preferred stock, offset by the accretion of the ITL note.

Income tax expense increased to $1.1 million for the third quarter of 2012, from $0.1 million of income tax benefit for the same period in 2011, which is based on the estimated annual effective tax rate applied to the pretax income incurred for the quarter, based on our expectation of pretax income for the fiscal year.

Net income attributable to Telos Corporation increased to $0.5 million for the third quarter of 2012, compared to $0.1 million for the same period in 2011, primarily attributable to the increase in operating income as discussed above.

Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011

Revenue increased by 25.0% to $177.7 million for the nine months ended September 30, 2012 from $142.1 million in the same period in 2011. Such increase primarily consists of an increase of $35.5 million in sales from the U.S. Air Force NETCENTS contract. Services revenue increased to $142.1 million for the nine months ended September 30, 2012 from $94.0 million for the same period in 2011, primarily attributable to increases in sales of $40.3 million of Cyber Operations and Defense network solutions deliverables under several NETCENTS delivery orders for Telos-installed solutions, $6.6 million of Cyber Operations and Defense information assurance deliverables, and $1.7 million of Identity Management solutions, offset by a decrease in sales of $0.5 million of Secure Communications solutions. The change in product and services revenue varies from period to period depending on the mix of solutions sold and the nature of such solutions, as well as the timing of deliverables, but this is not currently indicative of a trend. Product revenue decreased to $35.6 million for the nine months ended September 30, 2012 from $48.1 million for the same period in 2011, primarily attributable to a decrease in sales of $9.5 million in Telos-manufactured technology solutions of Cyber Operations and Defense network solutions deliverables, $3.4 million of Identity Management solutions, $0.2 million of Secure Communications solutions, offset by an increase in proprietary software sales of $0.6 million of Cyber Operations and Defense information assurance deliverables.

Cost of sales increased by 25.1% to $134.1 million for the nine months ended September 30, 2012 from $107.2 million for the same period in 2011, due primarily to the increase in services sales as discussed above.


Index

Gross profit increased by 24.8% to $43.6 million for the nine months ended September 30, 2012 from $34.9 million compared to the same period in 2011, due primarily to the change in the mix of the solutions sold. Gross margin decreased by 0.1% to 24.5% for the nine months ended September 30, 2012, from 24.6% in the same period in 2011.

Selling, general and administrative expense increased by 14.6% to $28.5 million for the nine months ended September 30, 2012 from $24.8 million for the same period in 2011, primarily due to increases in the amortization of intangible assets of $1.1 million, legal fees of $1.5 million, labor costs of $1.0 million, and accrued bonuses of $0.6 million which were subject to achievement of performance targets, offset by decreases in outside services of $0.3 million and trade show expenses of $0.2 million.

Operating income increased by 49.8% to $15.1 million for the nine months ended September 30, 2012, from $10.1 million for the same period in 2011, due primarily to the increase in gross profit as noted above.

Interest expense increased by 11.1% to $5.1 million for the nine months ended September 30, 2012, from $4.6 million for the same period in 2011, primarily due to accretion of the ITL notes, an increase in interest expense on the Facility, offset by a decrease in accrued dividends attributable to the redemption of senior preferred stock.

Income tax expense increased to $4.6 million for the nine months ended September 30, 2012, from $2.2 million for the same period in 2011, which is based on the estimated annual effective tax rate applied to the pretax income or loss for the nine month period, adjusted for the income tax benefit previously provided, based on our expectation of pretax income for the fiscal year.

Net income attributable to Telos Corporation increased to $4.3 million for the nine months ended September 30, 2012, compared to $2.0 million for the same period in 2011, primarily attributable to the increase in operating income as discussed above.

Liquidity and Capital Resources

As described in more detail below, we maintain a revolving credit facility (the "Facility") with Wells Fargo Capital Finance, Inc. ("Wells Fargo"). Borrowings under the Facility are collateralized by substantially all of our assets including inventory, equipment, and accounts receivable. The amount of available borrowings fluctuates based on the underlying asset-borrowing base, in general 85% of our trade accounts receivable, as adjusted by certain reserves (as further defined in the Facility agreement). The Facility provides us with virtually all of the liquidity we require to meet our operating, investing and financing needs. Therefore maintaining sufficient availability on the Facility is the most critical factor in our liquidity. While a variety of factors related to sources and uses of cash, such as timeliness of accounts receivable collections, vendor credit terms, or significant collateral requirements, ultimately impact our liquidity; such factors may or may not have a direct impact on our liquidity, based on how the transactions associated with such circumstances impact our availability under the Facility. For example, a contractual requirement to post collateral for a duration of several months, depending on the materiality of the amount, could have an immediate negative effect on our liquidity, as such a circumstance would utilize availability on the Facility without a near-term cash inflow back to us. Likewise, the release of such collateral could have a corresponding positive effect on our liquidity, as it would represent an addition to our availability without any corresponding near-term cash outflow. Similarly, a slow-down of payments from a customer, group of customers or government payment office would not have an immediate and direct effect on our availability on the Facility unless the slowdown was material in amount and over an extended period of time. Management believes that the Company's borrowing capacity is sufficient to fund our capital and liquidity needs for the foreseeable future.

Cash provided by operating activities was $19.4 million for the nine months ended September 30, 2012, compared to $11.1 million for the same period in 2011. Cash provided by or used in operating activities is primarily driven by the Company's operating income, the timing of receipt of customer payments, and the timing of its payments to vendors and employees, and the timing of inventory turnover, adjusted for certain non cash items that do not impact cash flows from operating activities. Additionally, for the nine months ended September 30, 2012, net income was $5.9 million compared to net income of $3.7 million for the nine months ended September 30, 2011.

Cash used in investing activities was approximately $0.3 million and $8.5 million for the nine months ended September 30, 2012 and 2011, respectively, due to the acquisition of ITL in July 2011.


Index

Cash used in financing activities for the nine months ended September 30, 2012 was $19.1 million, primarily attributable to the redemption of $4.0 million of the Company's senior redeemable preferred stock (the "Senior Redeemable Preferred Stock"), repayments of a note payable of $3.5 million, net repayments to the Facility of $9.3 million, repayment of a term loan of $0.3 million, payments under capital lease obligations of $0.8 million, and distributions of $1.2 million to the Class B Member of Telos ID. Cash used in financing activities for the nine months ended September 30, 2011 was $2.5 million, primarily attributable to the redemption of $2.1 million of the Senior Redeemable Preferred Stock, repayments of a note payable of $1.4 million, distributions of $1.0 million to the Class B Member of Telos ID, payments under capital lease obligations of $0.7 million, and repayment of a term loan of $0.3 million, offset by net proceeds of $2.9 million from the Facility.

Additionally, our capital structure consists of redeemable preferred stock and common stock. The capital structure is complex and requires an understanding of the terms of the instruments, certain restrictions on scheduled payments and redemptions of the various instruments, and the interrelationship of the instruments especially as it relates to the subordination hierarchy. Therefore a thorough understanding of how our capital structure impacts our liquidity is necessary and accordingly we have disclosed the relevant information about each instrument as follows:

Senior Revolving Credit Facility

On May 17, 2010, we amended the Facility with Wells Fargo. Under the amended terms, the maturity date of the Facility was extended to May 17, 2014 from September 30, 2011, the limit on the Facility was increased to $30 million from $25 million, and a term loan component of $7.5 million was added to the Facility. The principal of the term loan component will be repaid in quarterly installments of $93,750, with a final installment of the unpaid principal amount payable on May 17, 2014. The interest rate on the term loan component is the same as that on the revolving credit component of the Facility, which was changed to the higher of the Wells Fargo Bank "prime rate" plus 1%, the Federal Funds rate plus 1.5%, or the 3-month LIBOR rate plus 2%. In lieu of having interest charged at the foregoing rates, the Company may elect to have the interest on all or a portion of the advances on the revolving credit component be a rate based on the LIBOR Rate (as defined in the Facility) plus 3.75%. As of September 30, 2012, we have not elected the LIBOR Rate option. Borrowings under the Facility continue to be collateralized by substantially all of the Company's assets including inventory, equipment, and accounts receivable. The financial covenants were updated to include minimum EBITDA (as defined in the Facility), minimum recurring revenue and a limit on capital expenditures. The Facility's anniversary fee was discontinued and the collateral management fee was reduced.

On September 27, 2010, the Facility was amended to allow for the redemption of up to $2.5 million of the aggregate value of the Senior Redeemable Preferred Stock at a discount from par value of at least 10%. On September 27, 2010 and on April 8, 2011, a portion of the Senior Redeemable Preferred Stock was redeemed (see Note 7 - Redeemable Preferred Stock).

On May 11, 2012, the Facility was amended to allow for the redemption of Senior Redeemable Preferred Stock, under certain conditions, at a discount from par value plus accrued dividends of at least 10%, at an aggregate price not to exceed $4.0 million. On May 16, 2012 and on August 24, 2012, a portion of the Senior Redeemable Preferred Stock was redeemed (see Note 7 - Redeemable Preferred Stock).

As of September 30, 2012, the interest rate on the Facility was 4.25%. We incurred interest expense in the amount of $0.2 million and $0.6 million for the three and nine months ended September 30, 2012, and $0.2 million and $0.5 million for the three and nine months ended September 30, 2011, respectively, on the Facility.

The Facility has various covenants that may, among other things, affect our ability to merge with another entity, sell or transfer certain assets, pay dividends and make other distributions beyond certain limitations. As of September 30, 2012, we were in compliance with the Facility's financial covenants, including EBITDA covenants. The term loan component of the Facility amortizes at 5% per year, or $0.4 million, which is paid in quarterly installments and is classified as current on the consolidated balance sheets. The remaining balance of the term loan, or $6.3 million, and the revolving component of the Facility mature over the period 2012 through 2014.


Index

At September 30, 2012, we had outstanding borrowings of $6.9 million on the Facility, which included the $6.7 million term loan, of which $0.4 million was short-term. At December 31, 2011, we had outstanding borrowings of $17.9 million on the Facility, which included the $6.9 million term loan, of which $0.4 million was short-term. At September 30, 2012 and December 31, 2011, we had unused borrowing availability on the Facility of $16.0 million and $5.3 million, respectively. The effective weighted average interest rates on the outstanding borrowings under the Facility were 5.4% and 6.6% for the nine months ended September 30, 2012 and 2011, respectively. The effective weighted average rates (including interest and various fees paid whether capitalized or expensed pursuant to the Facility agreement and related amendments) on the outstanding borrowings under the Facility were 5.7% and 7.1% for the nine months ended September 30, 2012 and 2011, respectively.

Note payable - IT Logistics, Inc.

On July 1, 2011, we entered into, and concurrently completed the transactions contemplated by, the Asset Purchase Agreement with IT Logistics Inc., an Alabama corporation ("ITL"), and its sole stockholder, see Note 3 - Acquisition of IT Logistics, Inc. We purchased certain assets relating to the operation of ITL's business of providing survey, design, engineering, and installation services of inside and outside plant secure networking infrastructure and program management expertise. Under the terms of the asset purchase agreement, Telos assumed certain liabilities of ITL, principally liabilities that accrued on or after July 1, 2011, under certain contracts assumed by Telos.

The purchase price for the assets (in addition to the assumed liabilities described above) consisted of (1) $8 million payable on July 1, 2011, (2) $7 million payable in ten monthly payments of $700,000, together with interest on the unpaid balance of such amount at the rate of 0.50% per annum, beginning on August 1, 2011 and on the first day of each subsequent month thereafter, and (3) a subordinated promissory note (the "Note") with a principal amount of $15 million. The Note accrues interest at a rate of 6.0% per annum beginning November 1, 2012, and is payable on July 1, 2041. The entire unpaid principal balance plus accrued and unpaid interest is due and payable upon the occurrence of a Change in Control (as defined in the Note), provided that all "Senior Obligations" are satisfied prior to or concurrent with such Change in Control. For purposes of the Note, "Senior Obligations" means, collectively, all
(1) outstanding indebtedness of Telos, and (2) amounts due to the holders of the outstanding shares of the Company's Series A-1 Redeemable Preferred Stock, Series A-2 Redeemable Preferred Stock, and 12% Cumulative Exchangeable Preferred Stock (or any securities redeemable or exchangeable for any of the foregoing) upon a Change in Control, upon the voluntary or involuntary liquidation, dissolution, or winding up of the affairs of Telos, or otherwise.

At September 30, 2012, the $7 million payable in ten installments had been fully paid. We incurred interest expense in the amount of $0 and $4,000 on the $7 million payable in ten installments for the three and nine months ended September 30, 2012, respectively. Additionally, the Note was recorded at its fair value of $11.7 million and has been accreted to its current carrying value of $12.5 million as of September 30, 2012. The Note will be accreted to its face value over 60 months, when we estimate repayment.

Redeemable Preferred Stock

We currently have two primary classes of redeemable preferred stock - Senior Redeemable Preferred Stock and Public Preferred Stock. These classes of stock carry cumulative dividend rates of 14.125% and 12%, respectively. We accrue dividends on both classes of redeemable preferred stock and provided for accretion related to the Public Preferred Stock. As of December 31, 2008, the Public Preferred Stock was fully accreted. The total carrying amount of redeemable preferred stock, including accumulated and unpaid dividends was $115.5 million and $116.9 million at September 30, 2012 and December 31, 2011, respectively. We recorded dividends of $1.0 million and $3.1 million for each of . . .

  Add TLSRP to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for TLSRP - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.