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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 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.

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 July 27, 2009, 60,567,084 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 June 28, 2009, the condensed consolidated statements of income for the three and nine months ended June 28, 2009 and June 29, 2008, and the condensed consolidated statements of cash flows for the nine months ended June 28, 2009 and June 29, 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 nine months ended June 28, 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 June 28, 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 June 28, 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 $116.4 million and $100.2 million as of June 28, 2009 and September 28, 2008, respectively.  Federal government unbilled receivables, net of progress payments, were $102.6 million and $88.6 million as of June 28, 2009 and September 28, 2008, respectively.  Other than the U.S. federal government, no single client accounted for more that 10% of our accounts receivable as of June 28, 2009.  The federal government and one commercial client each accounted for more than 10% of our accounts receivable as of 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 continued our international expansion as it increased our professional workforce in new geographic areas and technical specialties around the world.  ARD is part of our technical support services (“TSS”) segment.  In the second and third quarters of fiscal 2008, we made other acquisitions that enhanced our service offerings and expanded our geographic reach in our engineering and architecture services (“EAS”), environmental consulting services (“ECS”) and TSS segments.  The purchase prices for these acquisitions consisted of cash and, for certain acquisitions, contingent earn-out payments due upon achievement of certain financial objectives.

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 ECS segment. This acquisition significantly expanded our worldwide presence, adding 13 offices throughout Canada and offices in the United Kingdom and India.  During the first nine months of fiscal 2009, we made other acquisitions that broadened our service offerings to USAID in the TSS segment, to broad-based clients in the ECS segment, and to federal government clients in the remediation and construction management (“RCM”) segment.  The aggregate purchase price for these acquisitions was approximately $100 million plus contingent earn-out payments due upon achievement of certain financial objectives.  One of these acquisitions resulted in an excess of $2.6 million of the fair value of identifiable assets acquired and liabilities assumed over the purchase price.  Due to a contingent consideration agreement that will likely result in a recognition of additional purchase price upon resolution, the excess amount of $2.6 million was recognized as a liability as part of “Other current liabilities” on our condensed consolidated balance sheet as of June 28, 2009,  in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations.  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 nine months ended June 28, 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, a guaranteed deferred cash payment, foreign currency translation adjustments, agreed upon net asset value adjustments, and the final purchase price allocations associated with prior acquisitions.  The purchase price allocations related to the Wardrop acquisition and certain recent acquisitions are 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 June 28, 2009 and September 28, 2008, included in “Intangible assets - net” on the condensed consolidated balance sheets, were as follows:

For the nine months ended June 28, 2009, non-compete agreements, customer relations and backlog increased $2.0 million, $14.3 million and $6.0 million in gross amounts, respectively, due to our aforementioned acquisitions and, to a lesser extent, foreign currency translation adjustments.  For the three and nine months ended June 28, 2009, amortization expense for these intangible assets was $2.7 million and $6.8 million, compared to $1.4 million and $3.9 million for the same periods last year, respectively.  Estimated amortization expense for the remainder of fiscal 2009 and the succeeding years is as follows:

Subsequent Event.  In the fourth quarter of fiscal 2009, we acquired Bryan A. Stirrat & Associates, a consulting and engineering firm that specializes in landfill design, leachate and hazardous waste management, energy recovery and groundwater protection services.  This acquisition is part of our ECS segment and is not material to our condensed consolidated financial statements.  We evaluated subsequent events through July 31, 2009, the date our financial statements were issued.

4.                                      Stockholders’ Equity and Stock Compensation Plans

We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment (revised 2004) (“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 nine months ended June 28, 2009, stock-based compensation expense was $2.4 million and $7.0 million, compared to $2.2 million and $6.1 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 third quarter of fiscal 2009, we granted 4,000 stock options with exercise prices of $21.96 per share and an estimated weighted-average fair value of $10.22 per share.  For the nine months ended June 28, 2009, we granted 1,036,200 stock options with exercise prices ranging from $16.98 to $22.40 per share and an estimated weighted-average fair value of $7.59 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 nine months ended June 28, 2009, 0.9 million and 1.3 million common stock options were excluded from the calculation of dilutive potential common shares, compared to 1.5 million and 2.6 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 the second quarter of fiscal 2009, we received notification from the Internal Revenue Service (“IRS”) that our appeals settlement for fiscal years 1997 through 2001 was approved.  The IRS approved refunds for a tax accounting method change for revenue recognition and refund claims for research and experimentation credits (“R&E Credits”).  In the third quarter of fiscal 2009, we received a cash refund of $39.8 million from the IRS settlement for these years, which included interest.  The amount of the settlement exceeded the amount of the receivable previously recognized in our financial statements.  We recorded a benefit of $3.3 million in our 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.

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 twelve 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.

In the third quarter of fiscal 2009, we completed R&E Credit studies and analyses for the tax years subsequent to the years settled.  In order to claim an R&E Credit, we had to perform a detailed study to determine those activities that qualified for credits in any fiscal year.  The tax regulations are complex and our business activities change from year to year.  Prior to the IRS appeals settlement for fiscal years 1997 through 2001, there was uncertainty about whether and to what extent the IRS would approve our study methodology and any credit we claimed.  As a result, we did not incur the cost of studies until we believed the credit ultimately sustainable under examination would exceed the cost of the study.  Based upon the IRS settlement and the completed studies and analyses, we now have sufficient information to reasonably estimate the income tax benefits for R&E Credits for fiscal years subsequent to fiscal 2004.  We recorded a benefit of approximately $9.7 million in our income tax expense in the third quarter of fiscal 2009 to reflect the estimated amount of previously unclaimed R&E Credits for periods prior to fiscal 2009.  Additionally, we have revised our estimated annual effective tax rate for fiscal 2009 to include R&E Credits for fiscal 2009.

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Our effective tax rate is 3.9% and 23.5% for the three and nine months ended June 28, 2009, respectively.  The $3.3 million and the $9.7 million adjustments in the second and third quarters of fiscal 2009, respectively, reduced our effective tax rate for the nine months ended June 28, 2009 by 15.0%.

As a result of the settlement, studies and analyses described above, we adjusted certain unrecognized tax benefits and reclassified various balance sheet amounts to reflect our tax position as of June 28, 2009.  The total adjustment to unrecognized tax benefits was a net decrease of $18.0 million for the nine months ended June 28, 2009, resulting in a balance of $20.9 million as of June 28, 2009.  Included in this balance was $14.9 million of tax benefits that, if recognized, would affect our income tax provision.  Our current deferred income tax liability of $16.8 million as of June 28, 2009 increased from September 28, 2008 primarily because of the recognition of previously unrecognized tax benefits related to our approved tax accounting method change for revenue recognition.

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, 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, we had no 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 covered 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.  Through the third 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 from the purchase agreement escrow account.  The remaining liability for active employees was estimated to be approximately $4.9 million.  The net periodic benefit expense for the three and nine months ended June 28, 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: