Titan to Exit International Telecommunications Operations
TTN -- Titan Corp, July 11, 2002


Executive on call: Eric M. DeMarco, President and COO
Gene W. Ray, Chairman and CEO
Mark Sopp, CFO


Overview

Titan announced today that it would exit the International telecommunications business. Titan will leave the industry by selling or winding down this business segment. The Question and Answer session centered on the overall impact of this move on the company's future.

 

Key Data


** In 2Q02 Titan Wireless losses approximated $4m.
** This resulted in a revised 2Q02 EPS guidance of $0.9 from $0.13.
** Company expects to recognize an after tax, nonrecurring charge in 3Q02 of up to $200m or approximately $2.56 per share related to exiting the telecommunications business.

 

 

 

Announcement - Overview


** CEO Gene W. Ray speaking:
** We are exiting the International telecommunications industry by selling or winding down our business in this market.
** We did not expect the depth or extent of the deterioration of the International telecommunications market.
** We believed that our nitch in the developing countries market where the demand was so great that that would shield us from the full impact of the decay in the telecommunications market.
** It was the case for some time as we realized good internal growth and margins in excess of 10% through 2001.
** It is not true today.
** The market we are in is deteriorating at a rapid pace.
** The over capacity and financial pressure, including bankruptcies, restructuring, etc, are such that pricing has dropped precipitously.
** There are two other key factors that exiting the market now is in our shareholder's best interest.
** Although I must admit this is a most in opportune time to exit the market.
** There is little if any visibility into how long it will take for the telecommunications industry to turn around.
** International telecommunications is not our core business. Our core defense business is continuing to grow with new and major opportunities continuing to materialize. We believe it is time for us to focus on our core capabilities.
** We started Titan 21 years ago as a defense communications company.
** We have built one of the premier companies in our field.
** We will not let Titan wireless, which contributed 6.1% of our revenues in 1Q this year, defer us from realizing the full value our defense business can bring to our shareholders.
** These are the reasons we are exiting the International telecommunications business by selling, or winding down that business as soon as practical.

Announcement - Operational Details


** President and COO Eric DeMarco speaking:
** The continued deterioration of the International telecom market significantly affected Titan wireless, which has generated operating profits of around 10% for us.
** Earlier this year the slowdown in capital spending and wireless network buildup did significantly impact Titan Wireless system integration business.
** Despite our belief that new business will materialize this business has not rebounded and we do not see a rebound in sight.
** In the past month or so significant decline in our wholesale long distance business, which up until now had been profitable.
** This decline has continued into this Q.
** Up until recently we were optimistic that pricing in the emerging market for long distance business had stabilized that over time revenues had expanded significantly contributed to Titan's bottom line.
** That is not the case and that is not going to happen.
** With the bankruptcy of numerous providers like Global Crossing and Globaltron and the dire financial positions of numerous others, we are now totally convinced there was no turn around for telecom in sight.
** In the case of Titan Wireless this is far reaching across each and every one of our product lines.
** We are now seeing significant pricing pressure from our competitors in markets that were stable a short time ago. We believe this is coming from weak or dying competitors trying to pull every revenue dollar they can regardless of the cost and regardless of the loss it generates for them.
** As a result in 2Q Titan Wireless lost approximately $4m which has resulted in a revised guidance of $0.09 for the Q versus our previous guidance of $0.13.
** Throughout the 2Q we believed we would still be able to meet our prior target of $0.13 based on the strength of our defense business and the potential strength of our other operations.
** This did not materialize.
** June was an incredibly difficult month for Titan Wireless.
** The magnitude of the 2Q loss made reaching our prior target impossible.
** The size of the 2Q loss combined with serious concerns about recovery of International telecom industry has lead us to the conclusion that it is in the best interest of Titan to exit the International telecommunications industry.
** We will immediately shut down systems integration business with exception of those few contracts with which we have continuing responsibility.
** We will immediately restructure the operation of our long distance business by elimination of all excess facilities, reducing the workforce and eliminating all nonessential cost of the business so that it no longer looses money after we move to sell it.
** If we cannot sell the business as an ongoing operation, or we cannot run it without loosing money as we attempt to sell it we will wind it down.
** All of this should be completed by end of this year
** The financial health of Titan remains solidly intact.
** All of our bank covenants remain intact.
** Cash flow from operations remains at over $130m of EBITDA from defense or government business this year.
** Net cash available and borrowing capacity is approximaely $135m.
** Net bank debt has remained stable at approximately $300m.
** Cash flow from operations continues to improve as Titan's defense business is posting solid results.
** From last Q made significant progress in terms of DSO and other metrics which we will disclose in our call in August.
** Defense business continues to generate new contract with over $700m in new contracts announced in 2Q.
** Proposal pipeline in excess of $4b.
** Opportunities are in growth of defense business
** Titan's government business and defense business is expected to account for 95% of revenues, profits and cash flows in next 12 months.
** Expect to benefit from increases in US defense budget.
** Defense spending seeing 1st double-digit growth in over a decade.
** Homeland security spending expected to double in '03 to over $30b.
** Significant part of that in information technologies where Titan is strategically placed, such as affordable missile program announced last quarter.
** Goal never been to be multi industry company.
** Monatization of commercial companies more difficult in today's environment.
** Will be altering tactics -- focus on monatization of intellectual property by licensing or selling to outside parties or by attracting outside capital to help develop the businesses.
** Going forward will minimize Titan's investment in building these businesses best approach to creating shareholder value
** Will provide detailed operational updates on our 2Q conference call in a few weeks.

Announcement - Financial Details


** CFO Mark Sopp speaking:
** Expect to recognize an after tax, nonrecurring charge for 3Q of up to $200m or approximately $2.56 per share related to exiting our International telecommunications business.
** These estimated charges reflect asset impairment in most of Titan Wirelessís businesses, including investments, goodwill and fixed assets.
** The estimate includes costs associated with infrastructure reductions including personnel, severance costs, termination of weak facilities and termination of satellite space segment commitments.
** Due to recent and significant decline in valuation of telecom asset and our intent to sell or wind down the operations as soon as possible, the estimated charge sees no recoverable value in equity, good will and net fixed asset values for Globalnet, Sacom (phonetic) and Vicom (phonetic) telecom.
** The after tax charge includes impairment of $51m in goodwill, $51m investments and $50m in net fixed assets with the remainder in estimated exit costs, commitments and contingencies.
** The cash impact with the estimated 3Q charge is expected to be about $13m or about 6% of the total charge.
** Will be working closely with auditors in coming weeks to precisely determine the charge to be taken for these actions.
** Do not expect the after tax charge to exceed $200m.
** Current cash and net debt position has strengthened significantly in 2Q.
** Obtained a new credit facility about two months ago.
** The anticipated one-time charges will not adversely affect our banking agreement.
** While the one time non-recurring charge will bew significant in the short term, in fact it will be beneficial in the long term.
** Will provide further details in August conference call.

Executive Summary


** CEO Gene Ray speaking:
** Set record date for tax-free spin-off of SureBeam for July 26, 2002.
** Distribution date is August 5.
** We are pleased to provide our shareholders this taxfree dividend in SureBeam.
** I am convinced SureBeam solves a national public health problem.
** It has the potential to be built into a billion dollar plus enterprise and it has the potential to be very rewarding for its shareholders.
** In Titan we have a strong growth, predictable, and now focused defense business that we expect to bring excellent value to our shareholders as we go forward.

Question and Answers

QN: Steve Murphy
QC: CIBC Oppenheimer
Q: A few questions about restructuring wireless unit. You mentioned $4m loss, what was the revenue?
AN: Mark Sopp
A: Roughly $45m for the Q

QN: Steve Murphy
QC: CIBC Oppenheimer
Q: When you talk about cash impact of $13m, is that assuming you get this unit to break even in the 3Q and keep it there until itís sold? Can you talk about the cost structure of the unit and what revenue run rate it runs at at break-even? Is there a chance $13m might not be sufficient?
AN: Eric DeMarco
A: What we are going to do is run that business at only positive gross margins. We had new routes we expected to open up in late May and June. When they did we had significant under pricing. We will have to eliminate any routes that have a negative gross margin as we wind down and try to sell the business. If the business cannot be very close to break even while we sell them, we may make some hard decisions to wind them down and shut them down quickly. We do not expect that $13m figure to be significantly higher at all because of the actions we are taking.

QN: Steve Murphy
QC: CIBC Oppenheimer
Q: So you have a significant or a reasonable portion of the revenue run rate on profitable routes now, which are on long term contracts?
AN: Eric DeMarco
A: No these contracts are not long term at all. We can exit these contracts very quickly. The revenue number may come down precipitously because we will manage it to only profitable routes to make the business break even. I believe the $45m revenue number may be lower in the Q. Because I donít believe, as I see it, profitable routes generating that type of a volume.

QN: Steve Murphy
QC: CIBC Oppenheimer
Q: I was speaking more of the customer side about the contracts that are in place.
AN: Eric DeMarco
A: Theway these contracts re written today, these customers are free in a very short period of time to go to the provider that is costing the least.

QN: Steve Murphy
QC: CIBC Oppenheimer
Q: So your profit is not competition based?
AN: Eric DeMarco
A: Yeah.

QN: Steve Murphy
QC: CIBC Oppenheimer
Q: There is about $50m on balance sheet in category of long-term project receivable related to Benin. How is that handled and what is the expectation whether that will be collected?
AN: Eric DeMarco
A: The expectation from a cash standpoint, that's a government contracted entity. We are being paid, and we expect to go after and collect that. In addition to that we have approximately $30m of political risk insurance in the event there was any issue with the government there becasue our contract there is with the government-owned PTT.

QN: Steve Murphy
QC: CIBC Oppenheimer QN:
Q: Is there any change in the status of the SEA acquisition and when you expect to close? Will there be a renegotiation?
AN: Eric DeMarco
A: I believe there may be a slight renegotiation, hopefull this transaction will close in this Q

QN: Mike Crawford
QC: B. Reilly and Company
Q: Further to Benin, the receivable, and the insurance. How does that factor into the $13m net cash use expected from the whole wireless situation?
AN: Eric DeMarco
A: It does not. The revenue and net cash generated from that project is covering all operating expenses plus profit. Operating costs for that for Titan are very low because the network is complete and we are just co-operating it right now for the government.

QN: Mike Crawford
QC: B. Reilly and Company
Q: If you did collect the $50m how does that affect things?
AN: Eric DeMarco
A: It would offset it. The $50 would net the $13 and you would have a net of $37 positive.

QN: Mike Crawford
QC: B Reilly and Company
Q: What about some of your virtual product network business in Africa with banks and oil companies, Coca-Cola, etc?
AN: Eric DeMarco
A: We will be turning those over to our partners and affiliates as we exit the business.

QN: Mike Crawford
QC: B. Reilly and Company
Q: Is there any change in the status of the accounting for that business segment?
AN: Eric DeMarco
A: No, there are no issues like that. That business is solid as a rock

QN: Mike Crawford
QC: B. Reilly and Company
Q: When was the last time you had a government audit?
AN: Eric DeMarco
A: We like most government contractors are under a constant audit process. There are auditors on site. It is a continuing process.

QN: Mark Jordan
QC: A G Edwards
Q: With previous expectations for corporate overhead somewhere around $22m for next year, does backing out of wireless impact that number?
AN: Eric DeMarco
A: Over the next couple weeks, we are going to be going over corporate budget top to bottom. I imagine there will be some impact. Right now it is a little too early to say.

QN: Mark Jordan
QC: A G Edwards
Q: On Benin again, your assumption that there will be zero recoupments across the board, to the extent you do get payment back from Benin, which you do expect, and they are paying as we speak that would offset the current $13m cash loss that you would see?
AN: Eric DeMarco
A: Absolutely. Over next 12 months, excluding Benin we are going to have cash out related to this exit at $13m. I believe we will collect the $50m. The 50 will offset the 13 for a net positive 37.

QN: Mark Jordan
QC: A G Edwards
Q: Winding down would be a positive cash flow event from nothing else than Benin?
AN: Eric DeMarco
A: From a cash standpoint, yes.

QN: Mark Jordan
QC: A G Edwards
Q: Do you have a grasp of free cash flow generation of Titan systems and merging tech which be left for 03?
AN: Eric DeMarco
A: We just started working that this morning. We have not had time based on what we have done. I'd rather wait for the next call and be precise.

QN: Mark Jordan
QC: A G Edwards
Q: As you stated, Titan Systems, excluding the change on a wireless model, that systems was on budget, and there was nothing you would change in terms of the expectation you have laid out for the systems business over the balance of this year and next? Is that right?
AN: Eric DeMarco
A: They did a little better than we expected in Q2. We expect to be very solid going forward.

QN: Steve Levinson
QC: Gerard Klauer Mattison
Q: Can you give us an idea if the magnitude of improvement in DSOs was all related to collections on the defense business, or did it relate to other segments?
AN: Eric DeMarco
A: Collections. 99% in defense and government business and a little bit elsewhere. It was all cash collections.

QN: Steve Levinson
QC: Gerard Klauer Mattison
Q: Can you give us an idea based on your current understanding what sort of increases you expect to see in government outsourcing?
AN: Gene Ray
A: In general we see defense budget increasing. Segments that we are in, IT as well as some others, like the affordable missile are areas that are getting increased funding. Whether there is an increase in outsourcing or not, we believe the market we are in is getting larger. We believe we can get a larger penetration of our market, a greater market share

QN: Colin Gillis
QC: RBC Capital Markets
Q: Regarding the SureBeam spinout, do you think there might be any cross effects with exiting the wireless business that we should be concerned about?
AN: Eric DeMarco
A: There is nothing I am concerned with at all. It is on track.

QN: Colin Gillis
QC: RBC Capital Markets
Q: Is there going to be a lock up on the shares, the dividends?
AN: Eric DeMarco
A: No lockup

QN: Steve Murphy
QC: CIBC
Q: Given your mention of changing philosophy, more licensing of technologies rather than operations, will that have an impact on your current portfolio? Brief overview about the results for Titan tech in the 2Q about break-even.
AN: Eric DeMarco
A: On the business in the portfolio like Titan Scan -- non-food, non-flour, non-produce technology side that business is growing very well, is very profitable. We will continue to build that business because it is generating positive cash flow. We will look to monitize it when the valuation is appropriate. On new technologies that come out of our defense and government busienss. Under the new philosophy, we will probably provide some feed money as we do marketing studies, competitive studies, we may put some seed money in. However we will not be building a SureBeam in Titan Wireless where it takes tens of million dollars. Pivot (phonetic) place was sold to Intel for $500m. We openly gave up 90 or 91%, but we did receive a dividend of $40m. It will be more of that philosophy going forward, rather than putting at risk several millions of its own capital which can impact the predictability of our earnings stream.

QN: Steve Murphy
QC: CIBC
Q: Given the downsizing, you're with the model you want now?
AN: Eric DeMarco
A: I don't expect significant changes, but lets wait for 2Q and go through everything.

QN: Steve Murphy
QC: CIBC
Q: About how much was current receivables which was about $398m last Q was from tech wireless??
AN: Mark Sopp
A: Right around a $100m including the receivable from the government of Benin (phonetic).

QN: Adam Wiener
QC: CSFB
Q: What is the run rate of what you consider ongoing Titan wireless, like if you were to breakout revenue of $45m, how much of that is ongoing?
AN: (unidentified)
A: You mean for the services side?

QN: Adam Wiener
QC: CSFB
Q: From the whole (indiscernible) of long distance.
AN: Eric DeMarco
A: Approximately $40m

QN: Adam Wiener
QC: CSFB
Q: 40 of the 45m
AN: Eric DeMarco
A: Yes, approximately.

QN: Adam Wiener
QC: CSFB
Q: Going forward are you going to report these figures as continuing operations in the back half of the year?
AN: Eric DeMarco
A: We are working that issues with our accountants right now. It's very possible that run rate may drop participiously (phonetic) as we narrow it down to get ready for sale. That run rate could come down significantly as we streamline.

QN: Adam Wiener
QC: CSFB
Q: What was the net debt at the end of the Q?
AN: Eric DeMarco
A: Net debt was approximately $300m, cash on the balance sheet.


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