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Tetra Tech Building Strong Connection to Wireless

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TIMES STAFF WRITER

In a page out of a science fiction novel, engineers at Tetra Tech Inc. are developing a $15-million, 3-D directory that would direct visitors to their destinations around the massive Time Warner Center under construction in midtown Manhattan.

If only Tetra Tech could see its own path as clearly.

It’s not that the Pasadena-based company, which has seen its stock rise 120% this year, doesn’t have a vision. What’s difficult, said Chief Executive Li-San Hwang, is that plunging values for technology stocks have made that vision harder to turn into reality. On Thursday, its shares rose 44 cents to close at $33.88 on Nasdaq.

Tetra Tech wants to put a lot more money into what it calls “indoor communications.” It sees a growth market in weaving the electronic fabric of office complexes--satellite and cable communications, fiber-optic links, phone and wireless computer networks and private networks for hand-held computers.

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With tech companies leading an unprecedented rally on the Nasdaq market early this year, Hwang planned to spin off half of its telecommunications business--the part that dealt with “outdoor” communications such as cable and cellular phone networks--and use the funds to move “indoors.”

But then the tech-laden Nasdaq crashed, falling 37% for the year so far and nearly 50% from its high in March. Hwang said he still wants to pursue that plan, yet he acknowledged “that in the end it will be decided by how the market reacts.”

What is clear is that Hwang will have less money to spend than compared with the market peak, even if he moves ahead with Tetra Tech’s plan to sell a 20% interest in the division in a public stock offering.

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Investment bankers vying for the business say the offering could collect up to $200 million in the current market, Hwang said. That’s down roughly $100 million from what the offering might once have fetched. Still, that’s a pretty hefty figure considering that all of Tetra Tech’s stock could have been bought for about $500 million last December.

That there is still equity to harvest from the company’s technology business is a validation of Hwang’s strategy. Tetra Tech has bucked Wall Street’s bears to grow to a market value of more than $1.3 billion this year.

Much of that strength is from a growing investor awareness that Tetra Tech--which in its early days analyzed water properties for a Pentagon submarine warfare program during the Cold War--looks increasingly like a telecommunications infrastructure company.

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“This was a company that was off everybody’s radar screen until the word ‘wireless’ came into it,” said Jaimi Goodfriend, an analyst with First Analysis Securities Corp. in Chicago.

Even now, most of the company’s business comes from its earlier incarnation as an environmental control and water systems designer. Less than a third of Tetra Tech’s $598.1 million in net revenue for fiscal 2000 came from its technology and telecommunications business, Goodfriend said.

But that hasn’t cooled investor ardor, spurred by a series of key acquisitions and large contracts, including a $375-million, five-year deal to build a cable television and Internet network for WideOpenWest in the Denver area.

One attraction is that if Tetra Tech takes the communications division public, it’s then expected to distribute the remaining shares to Tetra Tech shareholders.

Analysts say the market value of the spinoff company could exceed that of its parent. That’s because Hwang will be divesting the piece of the company Wall Street is most excited about, and will plow money back into the portion of the company he believes will grow just as fast.

Founded in 1966, Tetra Tech has taken a circuitous route to the frontier of telecommunications. At its inception, the company was essentially a defense contractor, studying issues such as submarine detection that were important during the Cold War.

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The company was sold to Honeywell in 1983. Managers bought it back in a 1988 leveraged buyout and it first offered stock to the public in 1991.

The early work with water gave the company an understanding of how liquid moves and circulates, Hwang said. That allowed Tetra Tech to move into pollution control, environmental remediation and related fields.

“We found that we could no longer rely fully on the government, so we got into design issues such as how to build a water treatment plant or a sewage system,” said Hwang.

About 28% of Tetra Tech’s business is with the federal government, though most of that work is in pollution control rather than defense.

With engineers and scientists on its staff of 5,400, the company looked to put the expertise it had developed in designing infrastructure projects to other uses.

It was an easy jump to helping telecom companies locate sites for cellular communication towers, said Richard Eastman, an analyst with Robert W. Baird & Co. in Milwaukee.

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From there, Tetra Tech moved deeper into telecommunications.

And the company found that the growth rates in its communications business were outpacing the single-digit increases in its older business lines. For the fourth quarter ended Oct 1, net income rose 70% to $14.8 million, compared with the same period a year ago. Revenue rose about 39% to $173.6 million.

Though its not obvious, there is common ground between the type of water and environmental projects that are Tetra Tech’s bread and butter and the telecommunications infrastructure business, Hwang said.

“We have a bunch of engineers and scientists who understand problems and design solutions,” he said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Doing Swimmingly

Shares of Pasadena-based Tetra Tech have more than doubled in the last year as investors became excited over the water system design company’s move into telecommunications system design.

Monthly closes and latest for Tetra Tech (ticker: TTEK) on Nasdaq

Thursday: $33.88, up 44 cents

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Source: Bloomberg News

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