Tetra Tech Moves Away From Telecom and Towards Military

Staff Reporter

Federal contracts and acquisitions have helped Tetra Tech Inc. rebound after being caught up in the bursting telecom bubble. But the recovery continues to be hampered by telecom, as well as reduced capital spending in its environmental infrastructure segment.

Shares in the Pasadena-based firm have doubled in the past year. At a closing price of $19.73 on Sept. 10, the stock was up 62 percent so far this year.

The gains have resulted from the decision last year to move away from designing and building cell towers and other telecom infrastructures. Clients such as Nextel Communications have slowed such activity drastically over the past two years. The new focus is on garnering military contracts for managing environmental remediation projects and on designing and supervising wastewater construction projects.

Tetra Tech was founded in 1966 to conduct experiments on how much damage an offshore nuclear explosion would do to a shoreline. Honeywell International Inc. purchased the company in 1982, then sold it six years later to a management group led by current Chairman Li-San Hwang, who expanded the reach into the environmental arena before moving into telecom.

That worked well for a while, but recently the activity has shifted back to the military and federal agencies, such as the Environmental Protection Agency. In August, Tetra Tech won a one-year, $65 million contract to collect, dispose and store munitions captured by the United States during the Iraq invasion.

Aiding its inroads into the public sector has been a series of acquisitions. In March 2002, Tetra Tech paid $65.5 million for the environmental services division of engineering firm Foster Wheeler Corp. The unit received a $1.1 billion environmental remediation design contract from the Air Force in March.

The company expects federal contracts to make up about 40 percent of its revenues for the fiscal year ending Sept. 29, versus 25 percent in the previous year.

Those contracts are more stable, Hwang said. "We are talking about three- to five-year contracts normally and sometimes longer."

Net income for the third quarter ended June 29 was $13.8 million, compared with $8.1 million for the like period a year ago. Net revenues, which exclude funds passed through to subcontractors, rose 25 percent, to $231.8 million.

Tetra Tech will likely generate revenues of $850 million for the fiscal year ending Sept. 29, a 14 percent increase over last year according to Sidoti & Co. analyst Seth Tutlis.

The company is looking to the federal government for new growth, including contracts with the Department of Homeland Security. It moved into the weapons-test design arena last month when it snapped up Camarillo-based Engineering Management Concepts Inc., whose largest client is the Missile Defense Agency.

Hwang said adding a third sector to its water and infrastructure businesses will make it more stable. But there are pitfalls to diversification, too, which Tetra Tech knows all too well.

Anticipating the boom in telecom services in 1997, the company moved into the market for telecom infrastructure by gobbling up a string of smaller companies. Four years later, telecom generated $185 million in revenues, or one-quarter of the company's total.

But the collapse in the telecommunications market hit the Tetra Tech hard. Revenues in the sector fell 40 percent, to $110.4 million, in the fiscal year ended in September 2002.

Hwang said a rebound is coming, thanks to reduced competition for clients. But the segment continues to perform poorly, with third quarter revenues declining from the like-year earlier period by 20 percent, to $23.9 million.

Cutbacks in private sector spending on environmental infrastructure projects, as well as declining expenditures from state and local governments, have also taken their toll. They, along with telecom, still account for 60 percent of Tetra Tech's revenues.

Internal growth in the environmental infrastructure segment has been negative, according to Tutlis, but the company has compensated by acquiring businesses.

Last year, it snapped up three firms, including Ardaman & Associates, an Orlando, Fla.-based engineering firm specializing in work on sinkholes and groundwater protection.

But acquisitions can only go so far.

"Things are improving in the private and the other government sectors, so organic growth for (Tetra Tech) will improve," said Tutlis, who has a "buy" rating on the stock. "But if the improvement stalls, they are exposed."

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