TWST: What is Tetra Tech?
Mr. Batrack: Tetra Tech is a consulting and engineering services firm. We concluded our fiscal year 2005 with revenue of approximately $1.3 billion and currently employ about 7,500 people worldwide. Most of our work is performed in the United States although we do serve several US- based customers in international markets. Tetra Tech is focused primarily on the water market. Some of our high profile projects include the Los Angeles River Revitalization Master Plan program and watershed management programs in the Chesapeake Bay, Great Lakes, and Sacramento/San Joaquin River Delta. We are currently ranked number one in water by the Engineering News-Record.
We were originally founded in 1966 as a coastal engineering and water sciences firm. Tetra Tech's early growth was driven by our work in deepwater science evaluations of tsunamis, water hydraulics, and hydrology. Through the 1980s and 1990s, the company diversified into water quality, environmental, and infrastructure work. The company delved briefly into wireless telecommunications in the early 2000s. But now we have redirected our primary focus back to our core business, which is consulting and engineering for the water market. Our three major client sectors are the federal government (46%), state and local governments (19%), and commercial clients (35%). Some of our biggest clients are the various branches of the U.S. Department of Defense, the U.S. Environmental Protection Agency, the Federal Aviation Administration, the U.S. Department of Energy, and many state and local government agencies across the United States. Big private clients include Lockheed Martin (NYSE:LMT), General Motors (NYSE:GM), and national real estate developers and general builders. We currently organize the company into two primary segments.
The first segment is our resource management group, which represents just over 60% of our business. This group provides environmental engineering and consulting, remediation and remedial construction, and environmental compliance services to a broad base of public and private clients. The employees in this segment are consultants, scientists, geologists, and technical consulting professionals. Market drivers for this segment include improving national water quality and management and the military's Base Realignment and Closure activities, among many other factors. Tetra Tech's infrastructure group represents just under 40% of our business. This group is comprised of civil engineers, structural engineers, and technical and design professionals that prepare plans and specifications primarily associated with projects in the water sector.
Market drivers for this group include the need to improve our nation's aging water infrastructure, water quality pressures, and population shifts towards the sunshine states in the West and South. Our infrastructure clients predominantly include state and local government agencies and commercial clients. The infrastructure group also includes our systems support and security business. Tetra Tech is primarily focused on the forefront of the project cycle, which has a higher technical barrier to entry and higher margin than the downstream phases of a project. The project cycle starts with research and development and continues through science, engineering, and project management, which is typically where we finish off.
TWST: How strong financially is the organization at this point as you review balance sheets and P&L? Are there particular items that you are focused on for improvement?
Mr. Batrack: Tetra Tech is very strong financially. Our backlog has grown 8.3% during the last quarter. We measure backlog in the most conservative manner, by including only project work that has been awarded, funded, and authorized for expenditure by the client. In our business model, backlog growing faster than revenue is the best indication that organic growth will improve in future quarters. Our operating margins are improving back toward our target of 10%. We are watching these items closely, and they are improving in accordance with our guidance. We have very strong cash generation, which will help facilitate acquisitions should we find the right opportunities. We generated approximately $35 million in cash from operations last year and are forecasting $40 million to $50 million this year. Our net debt is just over $50 million currently, so our balance sheet can accommodate acquisitions within and even above that range of $100-$300 million I just mentioned.