UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

Commission File Number 0-19655

TETRA TECH, INC.

(Exact name of registrant as specified in its charter)

3475 East Foothill Boulevard, Pasadena, California 91107

(Address of principal executive office and zip code)

(626) 351-4664

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes   x  No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   o  No   x

As of April 28, 2008, 58,846,440 shares of the registrant’s common stock were outstanding.

TETRA TECH, INC.

INDEX

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PART I.                 FINANCIAL INFORMATION

Item 1.            Financial Statements

Tetra Tech, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except par value)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Tetra Tech, Inc.

Condensed Consolidated Statements of Income

(unaudited – in thousands, except per share data)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Tetra Tech, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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TETRA TECH, INC.

Notes To Condensed Consolidated Financial Statements

1.             Basis of Presentation

The accompanying condensed consolidated balance sheet as of March 30, 2008, the condensed consolidated statements of income for the three and six months ended March 30, 2008 and April 1, 2007, and the condensed consolidated statements of cash flows for the six months ended March 30, 2008 and April 1, 2007 of Tetra Tech, Inc. (“we,” “us” or “our”) are unaudited, and, in the opinion of management, include all adjustments necessary for a fair statement of the financial position, the results of operations and cash flows for the periods presented.  The condensed consolidated balance sheet as of September 30, 2007 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements.

The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007.  Certain prior year amounts have been reclassified to conform to the current year presentation.  The results of operations for the three and six months ended March 30, 2008 are not necessarily indicative of the results to be expected for the fiscal year ending September 28, 2008.

2.             Accounts Receivable – Net

Net accounts receivable consisted of the following:

Billed accounts receivable represent amounts billed to clients that have not been collected.  Unbilled accounts receivable represent revenue recognized but not yet billed pursuant to contract terms or billed after the period end date.  Substantially all unbilled receivables as of March 30, 2008 are expected to be billed and collected within 12 months.  Contract retentions represent amounts withheld by clients until certain conditions are met or the project is completed, which may be several months or years.  The allowance for doubtful accounts was determined based on a review of customer-specific accounts, bankruptcy filings by clients, and contract issues due to current events and circumstances.  As of March 30, 2008, our billings in excess of costs on uncompleted contracts increased $23.2 million due primarily to large advance payments from commercial clients on environmental remediation and alternative energy projects.

Billed accounts receivable related to federal government contracts were $117.9 million and $95.5 million as of March 30, 2008 and September 30, 2007, respectively.  The federal government unbilled receivables, net of progress payments, were $55.1 million and $88.5 million as of March 30, 2008 and September 30, 2007, respectively.  Other than the federal government, no single client accounted for more than 10% of our accounts receivable as of March 30, 2008 and September 30, 2007.

3.             Business Combinations, Goodwill and Intangibles

In the third quarter of fiscal 2007, we acquired (i) all of the outstanding shares of Delaney Construction Corporation, Delaney Crushed Stone Products, Inc. and Delaney Leasing Company, Inc.; and (ii) all of the limited

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liability company interests of Delaney Properties, LLC (collectively, “The Delaney Group” or “DGI”), which provides planning, development and construction services for wind energy programs, Base Realignment and Closure (“BRAC”) projects, and water and wastewater treatment and conveyance facilities to its broad-based clients.  The purchase price consisted of cash payments of approximately $32.5 million.  In addition, the former shareholders will receive, over a four-year period from the acquisition date, guaranteed deferred cash payments in the aggregate amount of $9.0 million and contingent earn-out payments up to an aggregate maximum of $12.0 million upon achievement of certain financial objectives.  DGI is part of our resource management segment.

In fiscal 2007, we acquired the following small companies or their assets to enhance our service offerings and expand our geographic presence:

The total purchase price for these small acquisitions consisted of the initial cash payments of approximately $8.1 million and, over a three or four-year period from their respective acquisition dates, guaranteed deferred cash payments and/or contingent earn-out payments upon achievement of certain financial objectives.

On October 1, 2007, we acquired all of the outstanding shares of capital stock of ARD, Inc. (“ARD”), which provides applied research, planning, design and implementation services focused on a range of water, energy, environmental and institutional issues.  ARD manages large, complex international development projects for its clients, predominantly the U.S. Agency for International Development (“USAID”).  This acquisition continues our international expansion as it increases our professional workforce in new geographic areas and technical specialties around the world.  ARD is part of our resource management segment.  The purchase price consisted of $41.5 million in cash payments, which were paid during the first half of fiscal 2008.  The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition.

No pro forma information is presented for the second quarter and first half of fiscal 2008 as the ARD acquisition closed on the first day of our fiscal year.  The table below presents summarized unaudited consolidated pro forma operating results, assuming we had purchased ARD at the beginning of fiscal 2007:

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In the second quarter of fiscal 2008, we acquired certain assets of two civil engineering firms, Daylor Consulting Group, Inc. (“Daylor”) and WJA P.L.L.C. (“WJA”).  These acquisitions, which were integrated into our infrastructure segment, offer complementary technical expertise and enable us to enhance our infrastructure service offerings.  We also acquired all of the outstanding shares of capital stock of INCA Engineers, Inc. (“INCA”).  INCA provides consulting and civil/mechanical engineering services for water infrastructure and transportation projects, including locks, levees and dams projects for the U.S. Army Corps of Engineers (“USACE”).  INCA is part of our resource management segment.  The total initial purchase price for these three acquisitions consisted of approximately $10 million in cash.  In addition, the sellers have certain earn-out rights that will allow them to receive additional cash payments over a three-year period upon achievement of certain financial objectives.

                All of the above acquisitions were accounted for as business combinations.  Accordingly, the purchase prices were allocated to the assets acquired and liabilities assumed based on their fair values.  The purchase price allocations for fiscal 2008 acquisitions, except for ARD, are preliminary and subject to adjustments based upon the valuation and final determination of the net assets acquired.  None of the fiscal 2007 and 2008 acquisitions, except for ARD, were considered material, individually or in the aggregate, as they did not have a material impact on our financial position, results of operations or cash flows for the respective reporting periods and, as such, no pro forma results are presented.

                In the first half of fiscal 2008, we recorded $17.9 million, $3.8 million and $0.6 million of goodwill on our condensed consolidated balance sheet as of March 30, 2008 for the ARD, INCA and WJA acquisitions, respectively.  These amounts resulted from the excess of the purchase price for each of these individual acquisitions over the fair value of their net tangible and identifiable intangible assets acquired.  In addition, we adjusted goodwill for purchase price allocation adjustments related to certain fiscal 2007 acquisitions, and a payment of $1.5 million related to an Internal Revenue Code Section 338(h)(10) election under which the stock purchase was treated as an asset purchase for tax purposes.  The changes in the carrying value of goodwill by segment for the six months ended March 30, 2008 were as follows:

                The gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives as of March 30, 2008 and September 30, 2007, included in intangible assets – net on the condensed consolidated balance sheets, were as follows:

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                For the six months ended March 30, 2008, $0.6 million, $2.6 million and $8.5 million were assigned to non-compete agreements, customer relations and backlog, respectively.  These amounts were related to the preliminary purchase price allocations for ARD, INCA, WJA and Daylor, and, to a lesser extent, adjustments for certain fiscal 2007 acquisitions.  For the three months ended March 30, 2008 and April 1, 2007, amortization expense for acquired identifiable intangible assets with finite useful lives was $1.1 million and $0.4 million, respectively.  For the six months ended March 30, 2008 and April 1, 2007, the amortization expense was $2.5 million and $0.8 million, respectively.  Estimated amortization expense for the remainder of fiscal 2008 and the succeeding years is as follows:

4.             Discontinued Operation

In fiscal 2006, we sold Vertex Engineering Services, Inc. (“VES”) and, accordingly, this operating unit was accounted for as a discontinued operation in the condensed consolidated financial statements for all reporting periods.  For both the three and six months ended April 1, 2007, we reported a gain from discontinued operation, net of tax, of approximately $26,000.

5.             Debt

                In December 2006, we retired our senior secured notes and paid off the remaining principal balance of $72.9 million.  In connection with this early debt retirement, we incurred pre-payment premiums of $3.1 million and expensed the remaining unamortized deferred financing costs of $1.1 million in the first quarter of fiscal 2007.  In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 145, Rescission of Financial Accounting Standards Board (“FASB”) Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, we reported a $4.2 million loss on retirement of debt as part of our income from operations in the first quarter of fiscal 2007.

6.             Stockholders’ Equity and Stock Compensation Plans

                We account for stock-based compensation in accordance with SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”).  Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the value of the award granted, and recognized over the period in which the award vests.  For the three and six months ended March 30, 2008, stock-based compensation expense was $2.2 million and $3.9 million, compared to $1.5 million and $2.6 million for the same periods last year, respectively.  These amounts are primarily included in selling, general and administrative (“SG&A”) expenses in our condensed consolidated statements of income.  Stock-based compensation expense for the three and six months ended March 30, 2008 may not be indicative of the total expense to be expected for fiscal year 2008.

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7.             Earnings Per Share

                Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding and dilutive potential common shares for the period.  Potential common shares include the weighted average dilutive effects of outstanding stock options using the treasury stock method.

                The following table sets forth the number of weighted average shares used to compute basic and diluted EPS:

For the three and six months ended March 30, 2008, 3.5 million and 4.0 million common stock options were anti-dilutive, compared to 4.1 million options for the same periods last year.  These options were excluded from the calculation of dilutive potential common shares because the strike prices were above the average market prices for the reporting periods.

8.             Income Taxes

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.  FIN 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and disclosure requirements for uncertain tax positions.

We adopted the provisions of FIN 48 on October 1, 2007 and did not record any cumulative effect adjustment to retained earnings as a result of this adoption.  The amount of unrecognized tax benefits at October 1, 2007 was $32.1 million, of which $15.4 million would impact our effective tax rate if recognized.  The amount of unrecognized tax benefits as of March 30, 2008 was $36.0 million, of which $15.4 million would impact our effective tax rate if recognized.  We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense.  The amount of interest income accrued as of October 1, 2007 was $8.4 million.  The amount of

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interest income accrued as of March 30, 2008 was $9.1 million and is included in the non-current income taxes receivable.

While the adoption of FIN 48 did not have a cumulative effect on retained earnings, we recorded certain reclassifications that affected the presentation on our condensed consolidated balance sheet as of March 30, 2008. We recorded a reclassification from deferred tax liability to non-current income taxes payable to reflect the amount of expected tax payments related to temporary differences.  Our net deferred tax asset balances reflect the expected future net tax deductions. While unrelated to the adoption of FIN 48, the increase in our current income taxes receivable reflects estimated tax payments in excess of our current provision.

We are currently under examination by the Internal Revenue Service (“IRS”) for fiscal years 1997 through 2004 and the California Franchise Tax Board (“FTB”) for fiscal years 2001 through 2003 related to research and experimentation credits (“R&E Credits”).  In addition, during fiscal 2002, the IRS approved our request to change the accounting method for revenue recognition for income tax purposes for some of our businesses.  In 2002, we filed amended tax returns for fiscal years 1997 through 2000 to claim R&E Credits and to claim refunds due under the newly approved accounting method.  At the time the refund claims were filed, we were under examination by the IRS for those years.  The claimed refunds are being held pending completion of the IRS examination.  The estimated realizable refunds have been classified as non-current income taxes receivable on our condensed consolidated balance sheets.

During the third quarter of fiscal 2006, we received a 30-day letter from the IRS related to fiscal years 1997 through 2001.  We protested the position in the letter and began the IRS appeals process in January 2007.  In October 2007, we received an Audit Issue Presentation Sheet (“AIPS”) from the FTB related to fiscal 2001 through 2003.  We have protested the position in the AIPS.  Management believes that it is reasonably possible we will reach a resolution of the issues for fiscal years 1997 through 2001 under appeal with the IRS in the next twelve months.  If the resolution is favorable, the change in unrecognized tax benefits could be significant and we could receive a significant cash refund.  However, if the resolution is unfavorable, there may be a material adverse effect on our financial results as a result of an increase in income tax expense, but no material impact on our cash flow in future periods.  At this time, an estimate of the outcome cannot be reliably made.   With a few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for fiscal years before 1997.

9.             Reportable Segments

                We currently manage our business in three reportable segments: resource management, infrastructure and communications.  Management established these segments based upon the services provided, the different marketing strategies associated with these services and the specialized needs of their respective clients.  Our resource management segment provides engineering, consulting and construction services primarily addressing water quality and availability, environmental restoration, productive reuse of defense facilities, strategic environmental resource planning and alternative energy.  Our infrastructure segment provides engineering, systems integration, program management, and construction management services for the development, upgrading, replacement and maintenance of civil infrastructure.  Our communications segment provides engineering, permitting, site acquisition and construction management services for utility and telecommunication infrastructure projects.

                During the first quarter of fiscal 2006, we developed and started implementing the initial phase of a plan to combine operating units and re-align our management structure.  Throughout fiscal 2007 and to date, we consolidated some of our reporting units under common management structure, information systems and back-office functions.  These changes have had no impact on our operating segment structure to date.  As a result of our exit from the wireless communications business in fiscal 2006, the remaining portion of the communication business, known as the wired business, represents a small part of our overall business.  In addition, the wired business operating units increasingly perform services and serve clients that are similar in nature to those of the infrastructure business.  The wired business operating units provide engineering, permitting, site acquisition and construction management to state and local governments, telecommunications and cable operators, utility companies and other commercial clients.  We continue to assess our operating and management structure, including the alignment of our wired business operating units.  Should further changes be effected, we will evaluate the impact on our segment reporting as appropriate.

                Management evaluates the performance of these reportable segments based upon their respective income from operations before the effect of amortization expense related to acquisitions.  We account for inter-segment

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sales and transfers as if the sales and transfers were to third parties; that is, by applying a negotiated fee onto the cost of the services performed.  All inter-company balances and transactions are eliminated in consolidation.

The following tables set forth summarized financial information concerning our reportable segments:

Reportable Segments:

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Reconciliations: