Tetra/22″/mike1st/mark2nd

By JILL ROSENFELD

Staff Reporter

Tetra Tech Inc. has had quite a ride in recent days. Its stock has bucked and kicked, hitting a 52-week high at the end of September and then nosediving last week.

What happened?

“The business is fine, the quarter will be fine, but the market has been unkind to higher-multiple stocks,” said analyst Richard Eastman of investment firm Cleary Gull Reiland & McDevitt in Milwaukee. “In the face of a soft market for smaller-cap stocks, I think the stock has sold off. In fact, this is a good opportunity. The fundamentals are quite sound.”

Sure enough, the financial record of the Pasadena-based engineering firm has been a stark contrast to the performance of its volatile stock, which was trading late last week in the $17 to $18 range.

For the third quarter ended June 30, net income was $5.5 million (19 cents per diluted share), compared with $3.6 million (18 cents) for the like period a year ago. Third-quarter revenues were $75.1 million vs. $60.9 million.

For the year ended Sept. 30, 1997, net income was $14.3 million (72 cents), up from $10.1 million (56 cents a share) in 1996.

Tetra Tech’s stock volatility became extreme in late September when it announced the acquisition of Sentrex Cen-Comm Communications Systems Inc., a Toronto-based company that upgrades cable network TV systems in the United States. The acquisition is part of a diversification into telecommunications by Tetra Tech, which is primarily an engineering and management consulting firm specializing in water-quality issues.

Sentrex is just the latest in a series of smaller companies that have been acquired.

“The company is managed fairly aggressively, financially,” said Chief Executive Li-San Hwang, who led a leveraged buyout from Honeywell Inc. in 1988. “That has allowed us to buy other companies and grow.”

L.A. Mayor Richard Riordan was a member of Hwang’s original LBO group an investment that came back to haunt him when he was accused of violating conflict-of-interest laws.

With a $9.75 million ownership stake in Tetra Tech, the recently elected Riordan had pushed through an amendment in 1993 to the Metropolitan Transportation Authority that committed $97 million to the Pasadena light rail project thus providing funding for a contract Tetra Tech had earlier received. The Los Angeles Ethics Commission ultimately ruled that Riordan had not violated any laws.

Meanwhile, revenues over the years have continued to grow.

“(1988) revenues were about $23 million,” said Hwang, who earned a Ph.D. in civil engineering from the California Institute of Technology. This year the company is projecting $375 million in revenues, and $500 million in 1999, due to recent acquisitions. “Ever since we went to market in late 1991, we’ve grown about 25 percent every year,” Hwang said. “Our stock price went up seven or eight-fold. And we normally have very little debt.”

The federal government alone accounts for 52 percent of Tetra Tech’s revenues much of that work involving maintenance support for military bases, where about 60 company employees staff the water treatment plant, sewage plant and other facilities.

Eastman said Tetra Tech has a backlog of federal contracts that total more than $1.5 billion. “The fact that they have that base to work on is a fairly significant entry barrier for other companies,” he said. “Federal contracts tend to have a life of their own and are often reauthorized. Oftentimes it can be a chicken-and-egg situation. You need the history to get the projects. And you need the projects to get the experience.”

Tetra Tech enhanced its base of government contracts this year when it purchased an environmental consulting, engineering and design subsidiary of Halliburton Co. Also this year, it purchased Detroit-based MPS Inc., a wastewater treatment company that provided a larger Midwest presence.

“Their core business is tied in large part to government priorities and is subject to some whims of politics. So there is some political risk,” said John Gladue, an analyst at Chapman Co. in Baltimore. “The new business they’re in can provide relief from the political risk.”

This year, about 15 percent of revenues will come from Tetra Tech’s telecommunications activities, Hwang said. Engineering and construction work currently account for another 17 percent, while resource management accounts for the remaining 68 percent.