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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x     Accelerated filer  o     Non-accelerated filer  o     Smaller reporting company  o

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 27, 2009, 60,222,957 shares of the registrant’s common stock were outstanding.

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TETRA TECH, INC.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1.            Financial Statements

Tetra Tech, Inc.

Condensed Consolidated Balance Sheets

(unaudited - 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 29, 2009, the condensed consolidated statements of income for the three and six months ended March 29, 2009 and March 30, 2008, and the condensed consolidated statements of cash flows for the six months ended March 29, 2009 and March 30, 2008 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, results of operations and cash flows for the periods presented.  The consolidated balance sheet as of September 28, 2008 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 28, 2008.  The results of operations for the three and six months ended March 29, 2009 are not necessarily indicative of the results to be expected for the fiscal year ending September 27, 2009.  Certain prior year amounts have been reclassified to conform to the current year presentation.  In the first quarter of fiscal 2009, we began reporting under four reportable segments with reclassification of prior year segment results to conform to the new basis of presentation.  Refer to Note 7, “Reportable Segments” for additional information.

Our international operating units have functional currencies that are different than our reporting currency.  Their functional currencies are typically based upon the currencies of the primary country in which they operate.  Translation of assets and liabilities to U.S. dollars is based on exchange rates at the balance sheet date.  Translation of revenue and expenses to U.S. dollars is based on the average rate during the period.  Translation gains or losses are reported as a component of “Accumulated other comprehensive income”.  Gains or losses from foreign currency transactions are included in results of operations, with the exception of inter-company foreign transactions that represent a long-term investment, which are recorded in “Accumulated other comprehensive income” on our condensed consolidated balance sheet as of March 29, 2009.

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 29, 2009 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 resulting from current events and economic circumstances.

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Billed accounts receivable related to federal government contracts were $104.7 million and $100.2 million as of March 29, 2009 and September 28, 2008, respectively.  The federal government unbilled receivables, net of progress payments, were $78.4 million and $88.6 million as of March 29, 2009 and September 28, 2008, respectively.  The federal government and one commercial client each accounted for more than 10% of our accounts receivable as of March 29, 2009 and September 28, 2008.

3.                                      Goodwill and Intangibles

In the first quarter of fiscal 2008, we acquired 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 has continued our international expansion as it has increased our professional workforce in new geographic areas and technical specialties around the world.  ARD is part of our technical support services (“TSS”) segment.  The purchase price consisted of $41.5 million in cash payments.  In the second quarter of fiscal 2008, we made other acquisitions that have enhanced our service offerings and expanded our geographic reach in our engineering and architecture services (“EAS”) segment and environmental consulting services (“ECS”) segment.

In the second quarter of fiscal 2009, we acquired Wardrop Engineering, Inc. (“Wardrop”), a Canadian firm that specializes in resource management, energy and infrastructure design and is included in our environmental consulting services segment. This acquisition significantly expands our worldwide presence, adding 13 offices throughout Canada and offices in the United Kingdom and India.  During the first half of fiscal 2009, we made other acquisitions that expand our service offerings to USAID in the TSS segment, and to the federal government and commercial clients in the ECS segment.  The initial purchase prices for these acquisitions, which are subject to adjustment, were financed with available cash resources and approximately $80 million of borrowings under our revolving credit facility.  No pro forma results are presented for the respective interim periods as the effect of these acquisitions was not material, individually or in the aggregate, to our condensed consolidated financial statements.

The changes in the carrying value of goodwill by segment for the six months ended March 29, 2009 were as follows:

The goodwill additions are attributable to the fiscal 2009 acquisitions described above.  Substantially all of the goodwill additions are not deductible for income tax purposes.  The goodwill adjustments reflect earn-out payments, agreed upon net asset adjustments, and the final purchase price allocations associated with prior acquisitions.  The purchase price allocation related to the Wardrop acquisition is preliminary, and subject to adjustment based on the valuation and final determination of the net assets acquired.

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The gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives as of March 29, 2009 and September 28, 2008, included in “Intangible assets - net” on the condensed consolidated balance sheets, were as follows:

For the six months ended March 29, 2009, $1.7 million, $11.4 million and $5.4 million were assigned to non-compete agreements, customer relations and backlog, respectively, related to the acquisitions described above.  For the three months ended March 29, 2009 and March 30, 2008, amortization expense for acquired identifiable intangible assets with finite useful lives was $2.4 million and $1.1 million, respectively.  For the six months ended March 29, 2009 and March 30, 2008, amortization expense was $4.1 million and $2.5 million, respectively.  Estimated amortization expense for the remainder of fiscal 2009 and the succeeding years is as follows:

4.                                      Stockholders’ Equity and Stock Compensation Plans

We account for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R) (“SFAS 123R”), Share-Based Payment (revised 2004).  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 29, 2009, stock-based compensation expense was $2.5 million and $4.6 million, compared to $2.2 million and $3.9 million for the same periods last year, respectively.  These amounts were primarily included in “Selling, general and administrative (“SG&A”) expenses” in our condensed consolidated statements of income.  In the second quarter of fiscal 2009, we granted 49,000 stock options with exercise prices ranging from $20.34 to $22.40 per share and an estimated weighted-average fair value of $9.32 per share.  For the six months ended March 29, 2009, we granted 1,032,200 stock options with exercise prices ranging from $16.98 to $22.40 per share and an estimated weighted-average fair value of $7.58 per share.

5.                                      Earnings Per Share (“EPS”)

Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding, less unvested restricted stock for the period.  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 and unvested restricted stock using the treasury stock method.

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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 29, 2009, 2.4 million and 2.6 million common stock options were excluded from the calculation of dilutive potential common shares, compared to 3.5 million and 4.0 million options for the same periods last year.  These options were not included in the computation of dilutive potential common shares because the assumed proceeds per share exceeded the average market price per share for that period.  Therefore, their inclusion would have been anti-dilutive.

6.                                      Income Taxes

In 2002, we filed amended tax returns for fiscal years 1997 through 2000 to claim research and experimentation credits (“R&E Credits”) and to claim refunds due under an approved tax accounting method change for revenue recognition.  At the time the refund claims were filed, we were under examination by the Internal Revenue Service (“IRS”) for those years.  The claimed refunds were held pending completion of the IRS examination.  In the second quarter of fiscal 2009, we received notification from the IRS that our appeals settlement was approved for fiscal years 1997 through 2001.  In the third quarter of fiscal 2009, we received the cash refund of $39.8 million from the IRS settlement, which included interest.  The amount of the settlement exceeded the amount of the receivable previously recognized in our financial statements.  We have recorded a benefit of $3.3 million in income tax expense in the second quarter of fiscal 2009 to reflect the settlement adjustment and an adjustment to certain unrecognized tax benefits (including related interest) for the fiscal years subsequent to the settlement.  These adjustments reduced our effective tax rate from 41.1% for the first quarter of fiscal 2009 to 28.8% and to 35.0% for the three and six months ended March 29, 2009, respectively.

As a result of the settlement described above, we adjusted certain unrecognized tax benefits and reclassified various balance sheet amounts to reflect our tax position as of March 29, 2009.  The total adjustment to unrecognized tax benefits was a net decrease of $27.7 million, resulting in a balance of $11.2 million as of March 29, 2009.  Included in this balance were approximately $5 million of tax benefits that, if recognized, would affect our income tax provisions.  Our current deferred income tax liability of $17.7 million as of March 29, 2009 increased from September 28, 2008 primarily because of the recognition of previously unrecognized tax benefits related to our tax accounting method for revenue recognition.  The current tax receivable of $46.5 million as of March 29, 2009 includes the $39.8 million receivable from the IRS associated with the settled years.

We remain in the appeals process with the IRS for fiscal years 2002 through 2004 related to R&E Credits and our tax accounting method for revenue recognition.  We are also under examination by the California Franchise Tax Board (“FTB”) for fiscal years 2001 through 2003 related to R&E Credits.  Management believes that it is reasonably possible we will reach a resolution of these audits within the next 12 months.  If the resolution is more favorable than expected, the change in unrecognized tax benefits could be significant.  However, if the resolution is less favorable than expected, there may be a material increase in our income tax expense in the period in which the determination is made.

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We have initiated and are conducting studies for the tax years subsequent to fiscal 2004 to determine if we are entitled to claim federal and state R&E Credits for those years.  We expect to substantially complete the studies in the second half of fiscal 2009 and will consider filing amended tax returns to claim any credits.  Due to the complexities of the R&E studies, we do not yet have sufficient information to reasonably estimate the income tax benefit of any unclaimed R&E Credits for tax years subsequent to fiscal 2004.

7.                                      Reportable Segments

In the first quarter of fiscal 2009, we began reporting under four new reportable segments with reclassification of the prior year segment results to conform to the new basis of presentation.  Each of the new reportable segments is comprised of similar activities that focus on the services it provides, the markets it serves, the distribution method of its services, its contracting mechanisms, the organization and execution of its projects, the education and discipline of its workforce, and the metrics by which its client projects and staff are measured.  In addition, each of our operating groups, which are also our reportable segments, is managed by its own president, who has responsibility for the segment’s business units.  Each president directly reports to our Chief Executive Officer, who is our chief operating decision maker (“CODM”).  The CODM regularly reviews the four reportable segments, allocates resources to these segments and assesses each segment’s performance.  The reportable segments are as follows:

Environmental Consulting Services (“ECS”).  ECS provides front-end science and consulting services and project management skills in the areas of water resources, groundwater services, watershed management, mining and geotechnical sciences, environmental management, and information technology and modeling consulting.

Technical Support Services (“TSS”).  TSS advises clients, studies, designs and implements projects, and conducts research in the areas of remedial and developmental planning, regulatory consulting, climate change and carbon management services, disaster management, systems test and support services, and program management for complex federal government and international development projects.

Engineering and Architecture Services (“EAS”).  EAS provides engineering, architecture, interior and exterior design, Leadership in Energy and Environmental Design (“LEED”), and program administration services for projects that include water and wastewater conveyance and treatment, building construction, land development and transportation services.

Remediation and Construction Management (“RCM”).  RCM provides a wide array of services, including program management, engineering, procurement and construction, construction management, and operations and maintenance focused on federal construction, environmental remediation including unexploded ordnance (“UXO”) and wetland restoration, and energy projects including wind, nuclear engineering and other alternative energies, and communications development and construction.

Management evaluates the performance of these reportable segments based upon their respective income from operations before the effect of amortization expense related to acquisitions and other unallocated corporate expenses.  We account for inter-segment sales and transfers as if the sales and transfers were to third parties; that is, by applying a negotiated fee onto the costs of the services performed.  All inter-company balances and transactions are eliminated in consolidation.

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

Reportable Segments:

Total assets by segment were as follows:

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Reconciliations:

(1)             Other expense includes corporate costs not allocable to segments.

Major Clients:

Other than the federal government and one commercial client, we had no other single client that accounted for more that 10% of our revenue.  All of our segments generated revenue from all client sectors.

The following table presents revenue by client sector:

(1)             Includes revenue generated from our international clients.  Revenue related to projects performed in foreign countries for U.S. government and U.S. commercial clients was reported as part of our federal government and commercial client sectors, respectively.

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8.                                      Pension Plan

In connection with the Wardrop acquisition, we assumed the assets and obligations under Wardrop’s defined benefit pension plan, which primarily covers a group of active and inactive employees and a limited number of retirees.  No new employees are eligible to participate in this plan.  Pursuant to the Wardrop purchase agreement, Wardrop agreed to terminate this plan by the end of fiscal 2009.  Further, an escrow account was established under the purchase agreement to fully fund the defined benefit pension settlement liability and all post-closing expenses.  We assumed the initial net liability of approximately $5.7 million (net of plan assets of approximately $11.3 million) as of the acquisition date.  In the second quarter of fiscal 2009, Wardrop purchased insurance annuities for existing pensioners and inactive employees, and settled the obligations with these participants for approximately $12.4 million.  This amount was paid with plan assets and a portion of funds in the purchase agreement escrow account.  The remaining liability for active employees is estimated to be approximately $4.5 million, which is reported as part of the “Other current liabilities” on our condensed consolidated balance sheet as of March 29, 2009.  There is a corresponding asset related to the escrow account that is reported as part of “Prepaid expenses and other current assets” on our condensed consolidated balance sheet as of March 29, 2009.  The net periodic benefit expense for the second quarter of fiscal 2009 was immaterial.

9.                                      Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income, which includes translation gains and losses from foreign subsidiaries with functional currencies different than our reporting currency.  The following summarizes our comprehensive income: