Titan: Geared for Growth

A YEAR AGO, DEFENSE CONTRACTOR Titan Corporation sat in the catbird’s seat—aerospace giant Lockheed Martin had agreed to pay a premium for the publicly held company. With Titan’s outstanding debt tossed in for good measure, the price tag stood at $2.2 billion.

But a federal corruption investigation scuttled the merger and sent Titan’s stock plummeting to new lows when Titan failed to reach a quick settlement with the SEC and the Department of Justice. Titan representatives were accused of bribing foreign officials to win wireless telecommunications contracts in Africa, in violation of the Foreign Corrupt Practices Act. That can be a hanging offense.

In March, Titan pleaded guilty to three felony counts, agreeing to make total payments of $28.5 million and three years of supervised probation. The company has since implemented a best-practices compliance program that will allow it to continue to receive U.S. government contracts.

Titan downplayed the problem—after all, those accused were representatives of a subsidiary telecommunications company Titan no longer owned. But investors feared Titan might be barred from future government work. For a company that generates about 95 percent of its revenue doing business with the federal government and the Pentagon, that would be a devastating, if not fatal, blow.

“If the Department of Justice felt a company was trying to stonewall things, they had the ability to issue what’s virtually a death warrant,” says Mark Jordan, a stock analyst with A.G. Edwards & Sons. “Having that removed is a terribly important event [for Titan].”

Lockheed, the nation’s largest defense contractor, had its eye on Titan because of the company’s dominance in government information technology. The merger would have been Titan cofounder, chairman and CEO Gene Ray’s swan song. Having taken the company from a concept scribbled on a cocktail napkin in 1981 to $2 billion in annual revenue, Ray would retire after more than two decades at the helm. But when the Lockheed deal fell through, Titan’s stock lost nearly half its value over the ensuing month to peg a low of $11.15 a share, down from $21.99 earlier in the year.

Since the settlement with federal agencies, the stock has rebounded to the $18 range, and operationally Titan appears stronger than ever, having moved into the acquisition mode itself. The company also has several promising military programs in the pipeline.

“Titan is back,” says Michael Lewis, a stock analyst with BB&T Capital. “Operationally, it’s a very strong company, one of the better companies in win rates of bids in the pipeline.”

Indeed, in 2004, revenues climbed to $2.05 billion, an increase of 17 percent over 2003, which boasted 28 percent revenue growth. The company’s contract backlog totals $6.6 billion. Net income in 2004 fell, due in large part to $59.9 million in costs related to the failed Lockheed merger and the federal investigation and settlement. But with the bribery probe behind it, the company is well positioned, Lewis says.

Ray argues Titan never left. Yes, the stock price—over which Titan has no control—fell, but the company “never stopped growing,” he says, pointing to nearly 50 percent revenue growth over the past two years.

The trend continues. Milestones this year include the launch in February of the X-Craft experimental catamaran, a new breed of high-speed ship about the size of a football field yet capable of going into water as shallow as 12 feet for special operations. And in April, Titan acquired Intelligence Data Systems (IDS), a high-technology and professional services firm that supports intelligence operations at government agencies.

“Titan has executed, post-Lockheed, and that has propelled them into what I expect to be a record year in 2005,” Lewis says.

What differentiates Titan from other information technology services firms, analysts say, is its focus on transformational military programs, the Pentagon’s response to Congressional demands that it speed up the integration of improved capabilities at an affordable price. In addition to the X-craft, Titan has an affordable weapon system (a guided missile that offers a less costly alternative to the proven but pricy Tomahawk cruise missile) and a triage glove embedded with electronic sensors so a battlefield medic can gather and transmit a victim’s vital signs almost instantaneously, allowing faster, more-informed medical decisions.

WITH THIS ROSY OUTLOOK, might Titan be back on the auction block? Ray insists the company is not for sale, but some Wall Street analysts—including Jordan of A.G. Edwards—believe that another takeover attempt is just a matter of time. Jordan named several companies as potential suitors over the next two to three years. Among them: Northrop Grumman, Raytheon, General Dynamics, Boeing and L-3 Communications in the United States, as well as BAE Systems and Airbus parent EADS in Europe.

“These are significant free cashflow generators, and the hardware side of the house is pretty much consolidated,” Jordan says. “So, in their normal governance, you’d think that they would look at service companies like Titan, because services is gaining a greater share of the defense budget.”

“Pure speculation,” counters Lewis. “The way I see it, a lot of investors have been buying Titan believing that it’s going to be back on the block soon, but with the IDS acquisition coming into play, that could be a message to investors that they intend to remain independent over the short to intermediate term.”

Ray, who worked for SAIC for nine years before forming Titan, views it in practical terms. “If someone makes an offer that our board feels is in the best interest of our shareholders, the board obviously has to address that issue,” he says. “There is no public company in business that is not out to maximize its value for shareholders.”

A merger may hinge on who takes the helm from Ray. If Titan has trouble finding a replacement, the board of directors might well put the company on the auction block. But if a strong CEO is hired, it’s more likely the company will remain independent, analysts contend.

Ray says the board of directors has interviewed some “outstanding candidates,” but no deadline has been set for naming his successor. “Finding the right person is more important than a particular timetable,” says Ray, who will remain chairman during the transition.

The company, which now tallies some 12,000 employees worldwide and about 1,000 locally, was founded at the height of the Cold War, Ray recalls. “We started as a company to serve our nation, to provide key technology, and we have been able to do that.” He expects that to continue for the foreseeable future.