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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 offices)  (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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý   No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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  ý   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  ý

As of April 26, 2010, 61,715,022 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 28, 2010, the condensed consolidated statements of income for the three and six months ended March 28, 2010 and March 29, 2009, and the condensed consolidated statements of cash flows for the six months ended March 28, 2010 and March 29, 2009 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 condensed consolidated balance sheet as of September 27, 2009 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 27, 2009.  The results of operations for the three and six months ended March 28, 2010 are not necessarily indicative of the results to be expected for the fiscal year ending October 3, 2010.

In the second quarter of fiscal 2010, we discontinued reporting “Revenue, net of subcontractor costs” and “Gross profit” on our condensed consolidated statements of income.  In addition, “Other contract costs” have been relabeled as “Other costs of revenue” and “Long-term obligations” have been relabeled as “Long-term debt”.

2.                                      Accounts Receivable – Net

Net accounts receivable and billings in excess of costs on uncompleted contracts 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 28, 2010 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 client-specific accounts, bankruptcy filings by clients, and contract issues resulting from current events and economic circumstances.  Billings in excess of costs on uncompleted contracts represent the amount of cash collected from clients and billings to clients on contracts in advance of revenue recognized.  The majority of billings in excess of costs on uncompleted contracts will be earned within 12 months.

Billed accounts receivable related to U.S. federal government contracts were $75.3 million and $97.3 million as of March 28, 2010 and September 27, 2009, respectively.  Federal government unbilled receivables, net of progress payments, were $94.6 million and $68.1 million as of March 28, 2010 and September 27, 2009, respectively.  Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable as of March 28, 2010 and September 27, 2009.

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3.                                      Mergers and Acquisitions

In the second quarter of fiscal 2010, we acquired a company that enhances our nuclear energy service offerings in our remediation and construction management reportable segment.  The purchase price consisted of initial cash payments and is subject to additional contingent earn-out payments based on achievement of certain financial objectives.  As a result, we estimated the fair value of the contingent consideration and recorded a liability on our condensed consolidated balance sheet as of March 28, 2010.  No pro forma results are presented for the respective interim periods as the effect of this acquisition was not considered material to our condensed consolidated financial statements.

In the six months ended March 29, 2009, we acquired several companies, the largest of which was Wardrop Engineering, Inc. (“Wardrop”), a Canadian firm that specializes in resource management, energy and infrastructure design and is included in our environmental consulting services reportable segment.  The acquisition date was January 28, 2009, and Wardrop significantly expanded our worldwide presence, adding offices throughout Canada, and in the United Kingdom and India.  The purchase price consisted of initial cash payments of $91.2 million.  In addition, the former shareholders may receive over a three-year period from the acquisition date contingent earn-out payments up to an aggregate maximum of $29.2 million upon achievement of certain financial objectives.  As of March 28, 2010, we recorded $82.2 million of goodwill, which represented the value paid for the assembled workforce, the international geographic presence, and engineering and consulting expertise. 

4.                                      Goodwill and Intangibles

The changes in the carrying value of goodwill by segment for the six months ended March 28, 2010 were as follows:

Other adjustments consisted of earn-out accruals and payments related to prior year acquisitions.  The $3.9 million addition to goodwill was attributable to the aforementioned acquisition in the second quarter of fiscal 2010, which is expected to be deductible for tax purposes.

The gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives as of March 28, 2010 and September 27, 2009, included in “Intangible assets - net” on the condensed consolidated balance sheets, were as follows:

For the six months ended March 28, 2010, the gross amounts in the table above increased due to foreign currency translation adjustments and the acquisition described above.  For the three months ended March 28, 2010 and March 29, 2009, amortization expense for these intangible assets was $3.0 million and $2.4 million, respectively.  For the six months ended March 28, 2010 and March 29, 2009, amortization expense was $6.0 million

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and $4.1 million, respectively.  Estimated amortization expense for the remainder of fiscal 2010 and the succeeding years is as follows:

5.                                      Stockholders’ Equity and Stock Compensation Plans

We recognize the fair value of our stock-based compensation awards as compensation expense on a straight-line basis over the requisite service period in which the award vests.  Stock-based compensation expense for the three and six months ended March 28, 2010 was $2.7 million and $5.4 million, compared to $2.5 million and $4.6 million for the same period 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 2010, we granted 51,000 stock options with exercise prices ranging from $20.28 - $25.08 per share and an estimated weighted-average fair value of $7.95 per share.  For the six months ended March 28, 2010, we granted 1,085,974 stock options with exercise prices ranging from $20.28 - $26.77 per share and an estimated weighted-average fair value of $10.09 per share.  In the first quarter of fiscal 2010, we also granted 88,258 shares of restricted stock to certain directors and executive officers at the fair value of $25.55 per share on the grant date.

6.                                      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.

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 28, 2010, 2.3 million and 2.0 million options were excluded from the calculation of dilutive potential common shares, compared to 2.4 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.

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7.                                      Income Taxes

We remain in the appeals process with the Internal Revenue Service (“IRS”) for fiscal years 2002 through 2004 related to research and experimentation credits (“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.  We have completed R&E Credit studies and analyses for the tax years subsequent to fiscal 2004 and are in the process of filing amended returns to claim federal and state R&E Credits for certain years.  There is a high probability that claimed R&E Credits will be examined by the taxing authorities.  If the resolution of these pending and anticipated examinations is more favorable than expected, the change in unrecognized tax benefits could be significant.  However, if the resolution is less favorable than expected, there could be a material increase in our income tax expense in the period in which the determination is made.  With 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 2001.

In the second quarter of fiscal 2009, we received notification from the IRS that our appeals settlement related to an approved tax accounting method change for revenue recognition and R&E Credits was approved for fiscal years 1997 through 2001.  Accordingly, we 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.  These adjustments reduced our effective tax rates to 28.8% and 35.0% for the three and six months ended March 29, 2009, respectively.

On December 31, 2009, the federal R&E Credits provision expired.  As such, we have only estimated a benefit from federal R&E Credits through the expiration date.  Should the R&E Credits provision be retroactively extended during fiscal 2010, additional benefits will be reflected in our effective tax rate during the quarter reporting period of enactment.

8.                                      Reportable Segments

Our reportable segments are as follows:

Environmental Consulting Services (“ECS”).  ECS provides front-end science and consulting services and project management 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 through the study, design and implementation of projects.  TSS conducts research in the areas of remedial planning, disaster management, sustainable solutions including climate change and carbon management, technical government staffing services, and program management for complex U.S. federal government and international development projects.

Engineering and Architecture Services (“EAS”).  EAS provides engineering and architecture design services, including Leadership in Energy and Environmental Design (“LEED”) services, together with technical and program administration services for projects related to water infrastructure, buildings and land development, and transportation.

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.  RCM is focused on federal construction, environmental remediation including unexploded ordinance (“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 segment operating income before the effect of amortization expense related to acquisitions and other unallocated corporate expenses.  In the second quarter of fiscal 2010, we discontinued reporting “Revenue, net of subcontractor costs” and “Gross profit” to be consistent with the current presentation of our condensed consolidated statement of income and management’s emphasis on segment operating income which emphasis is unchanged from prior periods.  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 intercompany balances and transactions are eliminated

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in consolidation.  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.

(2)     Other includes depreciation expense from corporate headquarters.

Major Clients

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

The following table represents our revenue by client sector: