Titan posts Q2 loss, but sees life after Lockheed

By Paul Deckelman

New York, Aug. 4 - Titan Corp. reported a second-quarter loss Wednesday - reflecting in large part the San Diego-based defense contractor's well publicized woes, including federal investigations of foreign bribery allegations and its aborted merger with Lockheed Martin Corp., which ran aground on Titan's inability to resolve its legal problems.

However, Titan executives told analysts and investors on a conference call that the company had record quarterly revenues and a record order backlog and continues to both win new contracts and hold onto its existing business. They also touted Titan's strong debt and liquidity position and said that they would look to reduce debt in the coming year, although they offered no details.

Titan posted a net loss for the second quarter ended June 30 of $66.552 million, or 79 cents a share, versus a profit of $5.9 million, or seven cents per share, for the second quarter of 2003.

While the company had an operating profit before special items of $ 33.92 million, this was more than offset by some $34.332 million of costs related to the investigations undertaken by the Justice Department and the Securities and Exchange Commission of the foreign payment allegations, money reserved for possible settlement of those problems, and the failed merger with Lockheed, which said on June 26 that it was pulling the plug on the deal - which had been first announced back in mid-September 2003 - due to Titan's continued legal problems.

That charge included about $8.8 million of actual outlays, mostly legal expenses connected with the merger or the investigations, and a $25.5 million provision for settlement costs Titan projects it would have to pay to settle the probes.

Neither Ray nor chief financial officer Mark Sopp would comment on the specifics of the government's ongoing investigation of whether Titan subsidiaries may have paid gratuities to officials in Saudi Arabia and the West African state of Benin to drum up business there - something U.S. companies or their foreign units are strictly barred from doing under the Foreign Corrupt Practices Act - citing legal prohibitions against discussion of the case. The executives reiterated that Titan is cooperating fully with the government and hopes for a speedy resolution of the matter.

After the allegations of possible FCPA violations began surfacing early in the year, Bethesda, Md.-aerospace giant Lockheed granted Titan two extensions on its merger deal - bringing the cash price of the deal down to $1.66 billion from the original $1.8 billion in the process - but it refused to consider a third extension, spiking the deal in late June. Under the terms of the deal, Lockheed was also to assume $600 million of Titan debt, including its $200 million of outstanding 8% senior subordinated notes due 2011.

No provision for legal costs

Sopp said that Titan did not make a provision for expected future continued legal costs connected with the investigations, class-action suits brought against the company by disgruntled investors or other related matters, even though he said they would likely be "significant." He said the company expected total legal costs growing out of the investigation of $5 million to $10 million this year, but said the company did not anticipate this continuing into 2005. Any such future legal expenditures would be expensed as they occurred as period costs, and were not reflected in forward guidance, the CFO said.

On top of the costs associated with the failed merger and with the investigation, the company suffered asset impairment charges during the second quarter of $22.695 million and net after-tax losses from discontinued operations of $37.123 million.

Interestingly, the impaired assets include some associated with a reduction in scope of planned business activities in Saudi Arabia, while the discontinued operations charge includes $11.9 million pertaining to the company's discontinued Titan Wireless activities in Benin - but in answer to an analyst's question as to whether Titan's winding down of activities in those particular countries constitutes a gesture toward government regulators - sort of an olive branch - the company's chairman, president and chief executive officer, Gene Ray, cautioned "don't read anything into" the decision, which he said was taken purely because those particular operations, like some others elsewhere being discontinued or wound down, were underperforming and were not considered part of Titan's core national defense technology business.

Record quarterly revenues

The latter area is meanwhile booming along despite the cancelled merger and the FCPA legal problems.

For the quarter, Titan reported record quarterly revenues of $515 million, up 19% from a year ago, and said that its backlog as of June 30 was a record $5.6 billion, well up from $4.7 billion a year earlier. Ray and Sopp outlined a slew of new contracts the company had won during the quarter from the various armed services as well as the Department of Homeland Security, and others that it successfully retained, including its lucrative contract to provide the Army with linguists, some of whom are currently attached to U.S. forces in Iraq.

"The second quarter was a period of continued top-line growth," Ray declared.

During the question-and-answer portion of the conference call, an analyst asked whether the outcome of the FCPA investigations would have any ramifications on the company's domestic business in terms of the government more carefully scrutinizing Titan's bids for Defense Department work or even penalizing the company. Ray said that the investigation pertain solely to the company's foreign business, not to its U.S. government contracts, and he fully expects Titan's government contracts to continue.

Another analyst asked about whether Titan faces any kind of near-term debt maturities. The answer, the executives said, is no. Sopp noted that its 8% notes, issued in May 2003, don't mature until 2011 and aren't even callable at the company's option till 2007, and then at 104, so anything related to those notes "is very far out."

As for the senior bank debt, he said, the first "significant" [mandatory] paydown, other than the 1% per year amortization, just $3.5 million, is in the second half of 2008.

"So the bottom line is that until the second half of 2008, there are no significant mandatory reductions of our debt required.

Plans to reduce debt soon

"That said," he added, "we intend to reduce our debt over the fairly short-term period."

Sopp said that the company had $8.9 million of net interest expenses in the second quarter. He said liquidity measures were consistent with projections the company had made when it released its preliminary second-quarter figures on July 8. The company had $75 million available under its senior credit facility as of June 30. Its bank debt, net of cash on hand, increased by some $10 million during the quarter, to $368 million.

The company's leverage ratio of senior debt to trailing 12 months EBITDA stood at 2.58 times at the quarter's end and the ratio of total debt load, including the $200 million of subordinated notes, to ;last 12 months EBITDA was 3.8 times. The interest coverage ratio - trailing 12 months EBITDA versus trailing 12 months interest expense - was 4.54 times. As of June 30, Titan was in compliance with all credit covenants.

Looking ahead, Sopp said Titan expects to generate from $25 million to $50 million of cash flow from operations in the second half, assuming the any settlement for the foreign bribery probe comes in consistent with the amount of funds Titan has already set aside.

"We project to have sufficient capital from our existing line of credit to execute our strategy and foreseeable cash needs," the CFO predicted, "and we expect to be in compliance with all of our financial covenants through 2005 and beyond."

In 2005, Sopp said that Titan foresees full-year net interest expenses of between $37 million to $39 million, "reflecting slightly higher interest rates on our variable-rate debt."

The company expects EBITDA for 2005 to come in around $194 million to $206 million, with net cash flow of $90 million to $110 million.

"With EBITDA in the $200 million range and net debt reduction in the $100 million range," he said, "we project our total leverage ratio to be in the mid-twos by the end of 2005, consistent with the goals we have set to reduce our leverage."

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