The business of supplying translators to the government helped drive a 12 percent increase in third-quarter revenue for Titan Corp., although the San Diego defense contractor said its profit stayed relatively flat.
Titan yesterday reported net income of $15.8 million, or 18 cents a diluted share, for the three months ended Sept. 30. That compares with net income of $15 million, or 18 cents a share, for the same period last year.
Analysts had estimated the company would earn 19 cents a share, based on the average of eight analysts surveyed by Thomson Financial.
Profitability was hampered by several factors, Titan said.
The company incurred $2.9 million in legal costs related to a government investigation into foreign bribery allegations. Titan said an additional $800,000 in legal costs was due to this summer's termination of its planned merger with Lockheed Martin Corp.
Sales grew to $526 million from $468.4 million during the third quarter of 2003, due partly to Titan's expansion as the predominant provider of translators to the government.
Titan has been providing linguists to Army units in Afghanistan, Iraq and elsewhere under a contract valued at $657 million. Under an extension awarded last month, that work represents 14 percent of Titan's revenue.
More recently, Titan won a $63 million contract to provide translators for the National Security Agency, which conducts electronic eavesdropping around the world.
The increase in top-line growth also has been fueled by a succession of major contracts awarded by the Pentagon and other government agencies, said Gene W. Ray, Titan's chairman and chief executive.
That success continued in the third quarter, Ray said, as Titan won six of seven bids awarded by the government, each bearing $100 million or more in potential revenue. At least nine more bids are pending, each with potential revenue of $100 million or more, the company said.
Titan also noted that its total backlog in the third quarter amounted to $6 billion, a 20 percent increase over the same period last year.
The price of Titan shares slipped by 8 cents to close at $14.85 on the New York Stock Exchange, in heavier-than-normal trading. The company released its financial results yesterday before the market opened.
In a conference call with analysts, Ray said he wants Titan's strong revenue growth to continue.
"Our objective is to stay in double-digit growth over the next few years," Ray said. Yet some analysts saw reasons for concern.
Timothy J. Quillin, who covers Titan for Stephens Inc., said revenue growth from the Army linguistic contract far surpasses the growth of any other business at Titan. By subtracting the linguists' program, Quillin said Titan's revenue growth was only 5 percent over the past year and it declined from the previous quarter.
As a result, Quillin sees greater risk for the company as its linguistic business expands.
"This would not be considered high-quality revenue," Quillin added. "It's a little bit lower-margin. It's a little bit more difficult to get paid, especially in Iraq. And it carries a bit more political risk, especially in Iraq."
An Army investigation into torture and abuse at Iraq's Abu Ghraib prison has implicated at least two Titan civilian translators. The company also has suffered numerous casualties in Iraq, although it has declined to say how many. Earlier this month, Iraqi insurgents kidnapped and executed a Titan translator.
David M. Garrity, a New York analyst who follows Titan for Caris & Co., prefers to focus on the company's impressive backlog of work.
"To the extent the company has been able to grow their backlog by 20 percent provides a clear indication that their revenue growth should accelerate from here," Garrity said. "The other thing to focus on here is that profits will improve faster than revenue."
That may well happen, but analyst Chythia Houlton of RBC Capital Markets said her view of Titan was tempered by a still unresolved government investigation of foreign bribery allegations.
The company also is working to sell two subsidiaries, Datron World Communications and Titan Scan Technologies, that are not as profitable as Titan's core business in information technologies and communications.