Edgar Filing: TETRA TECH INC

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 1, 2012

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number 0-19655

TETRA TECH, INC.

(Exact name of registrant as specified in its charter)

Delaware		95-4148514
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

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 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 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.

Large accelerated filer ý	Accelerated filer o	Non-accelerated filer o	(Do not check if a smaller reporting company)
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 ý

As of April 30, 2012 63,427,741 shares of the registrant’s common stock were outstanding.

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TETRA TECH, INC.

INDEX

PART I.	FINANCIAL INFORMATION	PAGE NO.

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Income	4

	Condensed Consolidated Statements of Cash Flows	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	31

Item 6.	Exhibits	46

SIGNATURES		47

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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)

ASSETS	April 1, 2012		October 2, 2011
CURRENT ASSETS:
Cash and cash equivalents	$	106,027	$	90,494
Accounts receivable – net	642,420		657,179
Prepaid expenses and other current assets	62,325		84,612
Income taxes receivable	11,922		6,817
Total current assets	822,694		839,102

PROPERTY AND EQUIPMENT – NET	72,393		77,536
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES	3,550		3,454
GOODWILL	584,141		569,414
INTANGIBLE ASSETS – NET	68,875		81,053
OTHER ASSETS	24,431		23,429

TOTAL ASSETS	$	1,576,084	$	1,593,988

LIABILITIES AND EQUITY

CURRENT LIABILITIES:
Accounts payable	$	141,426	$	164,819
Accrued compensation	97,160		110,937
Billings in excess of costs on uncompleted contracts	85,086		84,754
Deferred income taxes	18,879		22,870
Current portion of long-term debt	2,249		2,556
Estimated contingent earn-out liabilities	40,687		64,119
Other current liabilities	79,197		81,654
Total current liabilities	464,684		531,709

DEFERRED INCOME TAXES	28,269		25,394
LONG-TERM DEBT	107,901		144,868
OTHER LONG-TERM LIABILITIES	35,728		36,767

COMMITMENTS AND CONTINGENCIES

EQUITY:
Preferred stock – Authorized, 2,000 shares of $0.01 par value; no shares issued and outstanding at April 1, 2012, and October 2, 2011	–		–
Common stock – Authorized, 150,000 shares of $0.01 par value; issued and outstanding, 63,372 and 62,495 shares at April 1, 2012, and October 2, 2011, respectively	634		625
Additional paid-in capital	418,667		399,420
Accumulated other comprehensive income	24,711		4,754
Retained earnings	494,820		449,926
Tetra Tech stockholders’ equity	938,832		854,725
Noncontrolling interests	670		525
TOTAL EQUITY	939,502		855,250

TOTAL LIABILITIES AND EQUITY	$	1,576,084	$	1,593,988

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)

	Three Months Ended						Six Months Ended
	April 1, 2012			April 3, 2011			April 1, 2012			April 3, 2011

Revenue	$	624,345		$	612,566		$	1,306,972		$	1,223,690
Subcontractor costs	(147,453		)	(182,260		)	(338,024		)	(387,805		)
Other costs of revenue	(388,915		)	(355,445		)	(796,251		)	(685,372		)
Selling, general and administrative expenses	(52,434		)	(45,605		)	(101,062		)	(86,932		)
Operating income	35,543			29,256			71,635			63,581

Interest expense - net	(1,453		)	(1,471		)	(2,763		)	(2,776		)
Income before income tax expense	34,090			27,785			68,872			60,805

Income tax expense	(11,769		)	(9,704		)	(23,848		)	(19,970		)

Net income including noncontrolling interests	22,321			18,081			45,024			40,835

Net income attributable to noncontrolling interests	(37		)	(581		)	(130		)	(1,034		)

Net income attributable to Tetra Tech	$	22,284		$	17,500		$	44,894		$	39,801

Earnings per share attributable to Tetra Tech:
Basic	$	0.35		$	0.28		$	0.71		$	0.64
Diluted	$	0.35		$	0.28		$	0.71		$	0.64

Weighted-average common shares outstanding:
Basic	63,072			62,121			62,846			61,836
Diluted	63,817			62,945			63,497			62,638

See accompanying Notes to Condensed Consolidated Financial Statements.

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Tetra Tech, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

	Six Months Ended
	April 1, 2012			April 3, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income including noncontrolling interests	$	45,024		$	40,835

Adjustments to reconcile net income including noncontrolling interests to net cash from operating activities:
Depreciation and amortization	29,071			27,376
Loss on settlement of foreign currency forward contract	286			293
Equity in earnings of unconsolidated joint ventures	(1,553		)	(2,428		)
Distributions of earnings from unconsolidated joint ventures	1,595			2,503
Stock-based compensation	5,648			5,314
Excess tax benefits from stock-based compensation	(147		)	(90		)
Deferred income taxes	(2,533		)	(4,445		)
Provision for doubtful accounts	3,721			1,354
Exchange gain	(137		)	(328		)
Gain on disposal of property and equipment	(69		)	(148		)

Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	11,038			42,848
Prepaid expenses and other assets	11,234			(10,043		)
Accounts payable	(23,392		)	(60,729		)
Accrued compensation	(13,777		)	96
Billings in excess of costs on uncompleted contracts	(1,156		)	(10,931		)
Other liabilities	10,714			2,791
Income taxes receivable/payable	(4,178		)	8,372
Net cash provided by operating activities	71,389			42,640

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(7,983		)	(9,476		)
Payments for business acquisitions, net of cash acquired	(2,831		)	(188,031		)
Payment in settlement of foreign currency forward contract	(4,192		)	(4,216		)
Receipt in settlement of foreign currency forward contract	3,906			3,923
Proceeds from sale of property and equipment	497			340
Net cash used in investing activities	(10,603		)	(197,460		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt	(51,837		)	(2,403		)
Proceeds from borrowings	13,025			21,867
Payments of earn-out liabilities	(18,055		)	–
Distributions paid to noncontrolling interests	–			(501		)
Excess tax benefits from stock-based compensation	147			90
Net proceeds from issuance of common stock	8,882			5,373
Net cash (used in) provided by financing activities	(47,838		)	24,426

EFFECT OF EXCHANGE RATE CHANGES ON CASH	2,585			402

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	15,533			(129,992		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	90,494			220,933
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	106,027		$	90,941

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	2,839		$	1,998
Income taxes, net of refunds received	$	30,974		$	14,856

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 unaudited condensed consolidated financial statements and related notes of Tetra Tech, Inc. (“we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended October 2, 2011.

Our condensed consolidated financial statements reflect all normal recurring adjustments that are considered necessary for a fair statement of our financial position, results of operations and cash flows for the interim periods presented. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year.

Our condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries, and joint ventures of which we are the primary beneficiary. For the joint ventures in which we do not have a controlling interest, but exert a significant influence, we apply the equity method of accounting (see Note 12, “Joint Ventures” for further discussion). In the first quarter of fiscal 2012, we re-aligned certain operating activities in our reportable segments to improve organizational effectiveness and efficiency by better aligning operations with similar client types, project types and financial metrics (see Note 9, “Reportable Segments” for further discussion). Prior year amounts for reportable segments have been reclassified to conform to the current year presentation. For both fiscal 2012 and 2011, “Interest expense – net” on the condensed consolidated statements of income includes $0.2 million and $0.4 million in interest income for the three and six-month periods, respectively.

2. Accounts Receivable – Net

Net accounts receivable and billings in excess of costs on uncompleted contracts consisted of the following:

	April 1, 2012			October 2, 2011
	(in thousands)

Billed	$	326,991		$	364,779
Unbilled	329,328			309,091
Contract retentions	22,057			15,553
Total accounts receivable – gross	678,376			689,423

Allowance for doubtful accounts	(35,956		)	(32,244		)
Total accounts receivable – net	$	642,420		$	657,179

Current billings in excess of costs on uncompleted contracts	$	85,086		$	84,754
Non-current billings in excess of costs on uncompleted contracts	4,344			5,832
Total billings in excess of costs on uncompleted contracts	$	89,430		$	90,586

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. Most of our unbilled receivables at April 1, 2012 are expected to be billed and collected within 12 months. Unbilled accounts receivable at April 1, 2012 and October 2, 2011 include approximately $21 million and $16 million, respectively, related to claims and requests for equitable adjustment on contracts that provide for price redetermination primarily with agencies of the U.S. federal government. These amounts are management’s estimate of the most probable amount to be realized upon the conclusion of the claims settlement process. We regularly evaluate these claim amounts and record appropriate charges to operating earnings when collection is not deemed to be probable. No material losses were recognized related to the collectability of claims during the second quarter and first six months of fiscal 2012 and 2011. Contract retentions represent amounts withheld by clients until certain

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conditions are met or the project is completed, which may take several months or years. The allowance for doubtful accounts is determined based on a review of client-specific accounts, 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. The non-current billings in excess of costs on uncompleted contracts were reported as part of our “Other long-term liabilities” on our condensed consolidated balance sheets.

Billed accounts receivable related to U.S. federal government contracts were $91.0 million and $88.5 million at April 1, 2012 and October 2, 2011, respectively. U.S. federal government unbilled receivables, net of progress payments, were $103.0 million and $102.7 million at April 1, 2012 and October 2, 2011, respectively. Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at April 1, 2012 and October 2, 2011.

3. Mergers and Acquisitions

At the beginning of the first quarter of fiscal 2011, we acquired all of the outstanding capital stock of BPR, Inc. (“BPR”), a Canadian scientific and engineering services firm that provides multidisciplinary consulting and engineering support for water, energy, industrial plants, buildings and infrastructure projects. This acquisition further expanded our geographic presence in eastern Canada, and enabled us to provide clients with additional services throughout Canada. BPR is part of our Engineering and Consulting Services segment. As of the acquisition date, the estimated fair value of the purchase price was approximately $186 million, which resulted in $128.1 million of goodwill. The goodwill amount represented the value paid for the assembled work force, the international geographic presence in eastern Canada, and engineering and consulting expertise. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date:

	Amount
	(in thousands)

Current assets	$	77,698
Property and equipment	7,178
Goodwill	128,140
Intangible and other assets	36,988
Current liabilities	(42,481		)
Long-term deferred taxes	(9,622		)
Noncontrolling interests	(12,222		)
Net assets acquired	$	185,679

In fiscal 2011, we made other acquisitions that enhanced our service offerings and expanded our geographic presence in the Engineering and Consulting Services and Technical Support Services segments. The aggregate fair value of the purchase price for these acquisitions was approximately $100 million. For fiscal 2011 acquistions, the fair value purchase price included estimated contingent earn-out liabities as of the respective acquistion dates in the aggregate amount of $58.5 million.

Certain of our acquisition agreements include contingent earn-out arrangements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based upon our valuations of the acquired company and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved. For acquisitions completed prior to fiscal 2010, contingent earn-out payments are accrued as “Contingent earn-out liabilities” when the related operating income thresholds have been achieved, and a corresponding increase in goodwill is recorded. These contingent earn-out payments are reflected as cash flows used in investing activities on the condensed consolidated statements of cash flows in the period paid. At April 1, 2012, there was a maximum of $16 million for contingent consideration related to acquisitions completed prior to fiscal 2010 that will be recorded as an addition to goodwill if earned.

For acquisitions consummated in or after fiscal 2010, the fair values of these earn-out arrangements are included as part of the purchase price of the acquired companies on the date of acquisition. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in “Contingent earn-out liabilities” and “Other long-term liabilities” on the condensed consolidated balance sheets. We consider several factors when determining that

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contingent earn-out liabilities are part of the purchase price, including the following: (1) the valuation of our acquisitions is not supported solely by the initial consideration paid. The contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former shareholders of acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of our other key employees. The contingent earn-out payments are not affected by employment termination.

We perform fair value measurements in accordance with the Financial Accounting Standards Board’s (“FASB”) guidance on “Fair Value Measurements and Disclosures”. This standard defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance. This standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three levels:

Level 1:		quoted prices in active markets for identical assets or liabilities.

Level 2:		quoted prices that are observable for the asset or liability, either directly or indirectly such as quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in market that are not active.

Level 3:		unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. We use a probability weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. We review and re-assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income.

Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the liability on the acquisition date is reflected as cash used in financing activities in our condensed consolidated statements of cash flows. Any amount paid in excess of the liability on the acquisition date is reflected as cash used in operating activities.

The aggregate current estimated earn-out liabilities of $40.7 million and $64.1 million are reported in “Estimated contingent earn-out liabilities”, and the aggregate non-current estimated earn-out liabilities of $9.6 million and $11.0 million are reported in “Other long-term liabilities” on the condensed consolidated balance sheets at April 1, 2012 and October 2, 2011, respectively. In the first half of fiscal 2012, $20.5 million of earn-outs were paid to former shareholders. Of this amount, $18.1 million was reported as cash used in financing activities, $0.6 million was reported as cash used in operating activities and $1.8 million was reported as cash used in investing activities. In the first half of fiscal 2011, $10.3 million of earn-outs were paid to former shareholders, all of which was reported as cash used in investing activities. For the first half of fiscal 2012 and fiscal 2011, the effect of the change in fair value measurement did not have a material impact on earnings.

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4. Goodwill and Intangibles

The following table summarizes the changes in the carrying value of goodwill:

	Engineering and Consulting Services			Technical Support Services		Engineering and Architecture Services (3)		Remediation and Construction Management			Total
	(in thousands)

Balance at October 2, 2011	$	405,678		$	82,091	$	17,710	$	63,935		$	569,414
Inter-segment transfers(1)	(29,338		)	45,435		–		(16,097		)	–
Currency translation adjustments(2)	14,727			–		–		–			14,727
Balance at April 1, 2012	$	391,067		$	127,526	$	17,710	$	47,838		$	584,141

(1) Transfers resulted from a realignment of certain operating activities in our reportable segments (See Note 9, “Reportable Segments” for more information).

(2) Currency translation adjustments relate to our foreign subsidiaries with functional currencies different than our reporting currency.

(3) Gross amount of goodwill for the Engineering and Architecture Services segment was $122.7 million for both April 1, 2012, and October 2, 2011. For both periods, accumulated impairment losses for this segment were $105 million, reflecting impairment charges in fiscal 2005. There were no impairment losses in the other reportable segments.

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

	April 1, 2012						October 2, 2011
	Weighted- Average Remaining Life (in Years)	Gross Amount		Accumulated Amortization			Gross Amount		Accumulated Amortization
	($ in thousands)

Non-compete agreements	1.5	$	5,329	$	(4,086	)	$	5,175	$	(3,430	)
Client relations	5.8	84,623		(24,652		)	81,619		(17,951		)
Backlog	0.5	54,220		(48,502		)	52,938		(39,452		)
Technology and trade names	4.2	2,816		(873		)	2,684		(530		)
Total		$	146,988	$	(78,113	)	$	142,416	$	(61,363	)

In the first half of fiscal 2012, gross amounts increased due to foreign currency translation adjustments. Amortization expense for these intangible assets for the three and six months ended April 1, 2012 were $6.9 million and $15.2 million, respectively, compared to $6.9 million and $13.7 million for the same periods last year. Estimated amortization expense for the remainder of fiscal 2012 and succeeding years is as follows:

	Amount
	(in thousands)

2012	$	12,321
2013	12,509
2014	11,399
2015	11,101
2016	9,552
Beyond	11,993
Total	$	68,875

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5. Property and Equipment - Net

Property and equipment consisted of the following:

	April 1, 2012			October 2, 2011
	(in thousands)

Land and buildings	$	11,729		$	11,729
Equipment, furniture and fixtures	166,338			160,644
Leasehold improvements	25,016			23,304
	203,083			195,677
Accumulated depreciation and amortization	(130,690		)	(118,141		)
Property and equipment at cost, net	$	72,393		$	77,536

For the three and six months ended April 1, 2012, the depreciation expense related to property and equipment, including assets under capital leases, was $6.8 million and $13.6 million, respectively, compared to $6.7 million and $13.4 million for the same periods last year.

6. 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. For the three and six months ended April 1, 2012, stock-based compensation expense was $2.7 million and $5.6 million, respectively, compared to $2.5 million and $5.3 million for the same periods last year. The majority of these amounts was included in “Selling, general and administrative (“SG&A”) expenses” in our condensed consolidated statements of income. In the three months ended April 1, 2012, we granted 51,000 stock options with exercise prices of $22.95 - $25.27 per share and an estimated weighted-average fair value of $8.95 per share. For the six months ended April 1, 2012, we granted 458,249 stock options with exercise prices of $22.53 - $25.27 per share and an estimated weighted-average fair value of $8.10 per share. In addition, we awarded 105,567 shares of restricted stock in the first quarter of fiscal 2012 to our directors and executive officers at the fair value of $22.53 per share on the award date. All of these restricted shares are performance-based and vest over a three-year period. The number of restricted shares that ultimately vest is based on the growth in our diluted earnings per share. In the first quarter of fiscal 2012, we also awarded 181,348 restricted stock units (“RSUs”) to our employees at the fair value of $22.53 per share on the award date. All of the RSUs have time-based vesting over a four-year period.

7. 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:

	Three Months Ended				Six Months Ended
	April 1, 2012		April 3, 2011		April 1, 2012		April 3, 2011
	(in thousands, except per share data)

Net income attributable to Tetra Tech	$	22,284	$	17,500	$	44,894	$	39,801

Weighted-average common shares outstanding – basic	63,072		62,121		62,846		61,836
Effect of dilutive stock options and unvested restricted stock	745		824		651		802
Weighted-average common stock outstanding – diluted	63,817		62,945		63,497		62,638

Earnings per share attributable to Tetra Tech:
Basic	$	0.35	$	0.28	$	0.71	$	0.64
Diluted	$	0.35	$	0.28	$	0.71	$	0.64

For the three and six months ended April 1, 2012, 2.4 million and 3.0 million options were excluded from the calculation of dilutive potential common shares, respectively, compared to 2.3 million and 2.8 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.

8. Income Taxes

The effective tax rate for the first half of fiscal 2012 was 34.6% compared to 32.8% for the same period last year. In the first quarter of fiscal 2011, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed into law, including a retroactive extension of federal research and experimentation credits (“R&E credits”) for amounts incurred from January 1, 2010 through December 31, 2011. As a result of the retroactive extension, a $1.2 million benefit from R&E credits for the last nine months of fiscal 2010 was included in our first quarter of fiscal 2011 tax expense, resulting in a lower effective tax rate in fiscal 2011. With the expiration of federal R&E credits on December 31, 2011, we have not estimated a benefit from these credits beyond the expiration date. Should the R&E credits provision be retroactively extended during fiscal 2012, additional benefits will be reflected in our effective tax rate during the quarter reporting period of enactment.

9. Reportable Segments

In the first quarter of fiscal 2012, we implemented organizational changes that resulted in a realignment of certain operating activities in our reportable segments. This realignment resulted from the organic growth of new activities in a component of an existing reportable segment due to changing business conditions. These activities are not regularly reviewed by our Chief Operating Decision Maker (“CODM”) to assess performance or make decisions about the resources to be allocated to them and do not meet the definition of a reportable operating segment. The changes are intended to improve organizational effectiveness and efficiency by better aligning operations with similar characteristics such as client types, project types, required resources and financial metrics. Prior year amounts have been reclassified to conform to the current year presentation.

Our reportable segments are as follows:

Engineering and Consulting Services (“ECS”). ECS provides front-end science, consulting engineering services and project management in the areas of surface water management, groundwater, waste management, mining and geotechnical sciences, arctic engineering, industrial processes, and information technology.

Technical Support Services (“TSS”). TSS advises clients through the study, design and implementation phases of projects. TSS provides management consulting and strategic direction in the areas of environmental assessments/hazardous waste management, climate change, international development/stabilization, energy services, and technical government staffing services.

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

Remediation and Construction Management (“RCM”). RCM is focused on providing full-service support to U.S. federal government, U.S. state and local governments, and U.S. commercial clients. RCM’s service lines include environmental remediation, construction management, infrastructure development, and alternative energy.

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. 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 significant intercompany balances and transactions are eliminated in consolidation.

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

Reportable Segments

	ECS		TSS		EAS		RCM		Total
	(in thousands)

Three months ended April 1, 2012:
Revenue	$	251,486	$	224,001	$	79,788	$	117,414	$	672,689
Segment operating income	18,022		17,063		5,413		3,999		44,497

Three months ended April 3, 2011:
Revenue	$	225,958	$	200,642	$	73,659	$	134,921	$	635,180
Segment operating income	17,771		13,458		5,163		1,801		38,193

Six months ended April 1, 2012:
Revenue	$	497,149	$	452,832	$	161,422	$	278,171	$	1,389,574
Segment operating income	37,514		32,565		9,817		9,889		89,785

Six months ended April 3, 2011:
Revenue	$	431,348	$	423,947	$	141,642	$	279,485	$	1,276,422
Segment operating income	36,072		29,247		9,907		4,912		80,138

Total assets by segment were as follows:

	April 1, 2012		October 2, 2011
	(in thousands)

ECS	$	808,139	$	767,347
TSS	542,378		505,198
EAS	114,592		111,555
RCM	278,981		296,361
Total assets	$	1,744,090	$	1,680,461

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Reconciliations

	Three Months Ended				Six Months Ended
	April 1, 2012		April 3, 2011		April 1, 2012		April 3, 2011
	(in thousands)

Revenue
Revenue from reportable segments	$	672,689	$	635,180	$	1,389,574	$	1,276,422
Elimination of inter-segment revenue	(48,344)		(22,614)		(82,602)		(52,732)
Total consolidated revenue	$	624,345	$	612,566	$	1,306,972	$	1,223,690

Operating Income
Segment operating income	$	44,497	$	38,193	$	89,785	$	80,138
Amortization of intangibles	(6,917)		(6,942)		(15,182)		(13,723)
Other expense(1)	(2,037)		(1,995)		(2,968)		(2,834)
Total consolidated operating income	$	35,543	$	29,256	$	71,635	$	63,581

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

	April 1, 2012		October 2, 2011
	(in thousands)

Assets
Total assets of reportable segments	$	1,744,090	$	1,680,461
Assets not allocated to segments and intercompany eliminations(1)	(168,006)		(86,473)
Total consolidated assets	$	1,576,084	$	1,593,988

(1) Assets not allocated to segments include goodwill, other intangible assets, deferred income taxes, and certain other assets.

Major Clients

Other than the U.S. federal government, no single client 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:

	Three Months Ended				Six Months Ended
	April 1, 2012		April 3, 2011		April 1, 2012		April 3, 2011
	(in thousands)
Client Sector
International(1)	$	154,781	$	150,024	$	314,713	$	276,581
U.S. commercial	142,438		112,072		319,868		247,207
U.S. federal government(2)	252,709		284,510		524,116		568,030
U.S. state and local government	74,417		65,960		148,275		131,872
Total	$	624,345	$	612,566	$	1,306,972	$	1,223,690

(1) Includes revenue generated from our foreign operations, primarily in Canada, and revenue generated from non-U.S. clients.
(2) Includes revenue generated under U.S. government contracts performed outside the United States.

10. Comprehensive Income

Comprehensive income is comprised of net income, translation gains and losses from foreign subsidiaries with functional currencies different than our reporting currency, and unrealized gains and losses on hedging activities. The components of comprehensive income, net of related tax, are as follows:

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	Three Months Ended				Six Months Ended
	April 1, 2012		April 3, 2011		April 1, 2012		April 3, 2011
	(in thousands)

Net income including noncontrolling interests	$	22,321	$	18,081	$	45,024	$	40,835
Other comprehensive income:
Foreign currency translation adjustment	9,357		12,688		20,185		20,585
Foreign currency hedge	(12)		(134)		(214)		(325)
Comprehensive income including noncontrolling interests	31,666		30,635		64,995		61,095

Net income attributable to noncontrolling interest	(37)		(581)		(130)		(1,034)
Foreign currency translation adjustment	(14)		(216)		(14)		(748)
Comprehensive income attributable to noncontrolling interests	(51)		(797)		(144)		(1,782)

Comprehensive income attributable to Tetra Tech	$	31,615	$	29,838	$	64,851	$	59,313

11. Other Fair Value Measurements

Derivative Instruments. In fiscal 2009, we entered into an intercompany promissory note with a wholly-owned Canadian subsidiary in connection with the acquisition of Wardrop Engineering, Inc. The intercompany note receivable is denominated in Canadian dollars (“CAD”) and has a fixed rate of interest payable in CAD. In the first quarter of fiscal 2010, we entered into a forward contract for CAD $4.2 million (equivalent to U.S. $4.0 million at the date of inception) that matured on January 27, 2012. In the second quarter of fiscal 2010, we entered into a forward contract for CAD $4.2 million (equivalent to U.S. $3.9 million at the date of inception) that matures on January 28, 2013. In the third quarter of fiscal 2011, we entered into a forward contract for CAD $4.2 million (equivalent to U.S. $4.2 million at the date of inception) that matures on January 27, 2014. In the second quarter of fiscal 2012, we settled one of the foreign currency forward contracts for U.S. $3.9 million. Our objective is to eliminate variability of our cash flows on the amount of interest income we receive on the promissory note from changes in foreign currency exchange rates. These contracts were designated as cash flow hedges. Accordingly, changes in the fair value of the contracts are recorded in “Other comprehensive income”. The fair value and the change in the fair value were not material for the three and six-month periods of fiscal 2012 and 2011. No gains or losses were recognized in earnings as these contracts were deemed to be effective hedges.

Debt. The fair value of long-term debt was determined using the present value of future cash flows based on the borrowing rates currently available for debt with similar terms and maturities. The carrying value of our long-term debt approximates fair value.

12. Joint Ventures

In the normal course of business, we form joint ventures, including partnerships and partially-owned limited liability companies, with third parties primarily to bid on and execute specific projects. We perform an analysis to determine whether our variable interests give us a controlling financial interest in a variable interest entity (“VIE”) and whether we should therefore consolidate the VIE. This analysis enables us to assess whether we have the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. In accordance with the current consolidation standard, we analyze all of our joint ventures and classify them into two groups: (1) joint ventures that must be consolidated because they are either not VIEs and we hold the majority voting interest, or because they are VIEs and we are the primary beneficiary; and (2) joint ventures that do not need to be consolidated because they are either not VIEs and we hold a minority voting interest, or because they are VIEs and we are not the primary beneficiary.

Joint ventures are considered VIEs if (1) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support; (2) as a group, the holders of the equity investment at risk lack the ability to make certain decisions, the obligation to absorb expected losses or the right to receive expected residual returns; or (3) an equity investor has voting rights that are disproportionate to its economic interest and substantially all of the entity’s activities are on behalf of the investor. Many of our joint venture agreements provide for capital calls to fund operations, as necessary; however, such funding has been historically

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infrequent and is not anticipated to be material. The majority of our joint ventures are pass-through entities for client invoicing purposes. As such, these are VIEs because the total equity investment is typically nominal and not sufficient to permit the entity to finance its activities without additional financial support.

We are considered the primary beneficiary and required to consolidate a VIE if we have the power to direct the activities that most significantly impact that VIE’s economic performance, and the obligation to absorb losses or the right to receive benefits of that VIE that could potentially be significant to the VIE. In determining whether we are the primary beneficiary, our significant assumptions and judgments include the following: (1) identifying the significant activities and the parties that have the power to direct them; (2) reviewing the governing board composition and participation ratio; (3) determining the equity, profit and loss ratio; (4) determining the management-sharing ratio; (5) reviewing employment terms, including which joint venture partner provides the project manager; and (6) reviewing the funding and operating agreements. Examples of significant activities include engineering and design services; management consulting services; procurement and construction services; program management; construction management; and operations and maintenance services. If we determine that the power to direct the significant activities is shared by two or more joint venture parties, then there is no primary beneficiary and no party consolidates the VIE. In making the shared-power determination, we analyze the key contractual terms, governance, related party and de facto agency as they are defined in the accounting standard, and other arrangements.

A majority of our joint ventures were unconsolidated VIEs because we were not the primary beneficiary of those joint ventures. In some cases, we consolidated VIEs because we were the primary beneficiary of those joint ventures. In the first half of fiscal 2012, there were no changes in the status of the VIEs and no changes to the primary beneficiary designation of each VIE. Accordingly, we determined that none of the unconsolidated joint ventures should be consolidated and none of the consolidated joint ventures should be de-consolidated.

We account for the majority of our unconsolidated joint ventures using the equity method of accounting. Under this method, we recognize our proportionate share of the net earnings of these joint ventures as a single line item under “Other costs of revenue” in our condensed consolidated statements of income. For the three and six months ended April 1, 2012, we reported $0.6 million and $1.6 million of equity in earnings of unconsolidated joint ventures, respectively, compared to $1.5 million and $2.4 million for the same periods last year. Our maximum exposure to loss as a result of our investments in unconsolidated VIEs is typically limited to the aggregate of the carrying value of the investment and future funding commitments. Future funding commitments for the unconsolidated VIEs are immaterial. For consolidated joint ventures, the assets are restricted for use only by those joint ventures and are not available for our general operations. Our consolidated and unconsolidated joint ventures are each, individually and in aggregate, immaterial to our condensed consolidated financial statements.

13. Commitments and Contingencies

We are subject to certain claims and lawsuits typically filed against the engineering, consulting and construction profession, alleging primarily professional errors or omissions. We carry professional liability insurance, subject to certain deductibles and policy limits, against such claims. However, in some actions, parties are seeking damages that exceed our insurance coverage or for which we are not insured. While management does not believe that the resolution of these claims will have a material adverse effect, individually or in aggregate, on our financial position, results of operations or cash flows, management acknowledges the uncertainty surrounding the ultimate resolution of these matters.

In May 2003, Innovative Technologies Corporation (“ITC”) filed a lawsuit in Montgomery County, Ohio against Advanced Management Technology, Inc. (“AMT”) and other defendants for misappropriation of trade secrets, among other claims. In June 2004, we purchased all the outstanding shares of AMT. As part of the purchase agreement, the former owners of AMT agreed to indemnify us for all costs and damages related to this lawsuit. In December 2007, the case went to trial and the jury awarded $5.8 million in compensatory damages to ITC. In addition, the jury awarded $17 million in punitive damages to ITC plus reasonable attorneys’ fees. In July 2008, the Common Pleas Court of Montgomery County denied AMT’s motion for judgment notwithstanding the verdict and conditionally denied AMT’s motion for a new trial. Further, the court remitted the verdict to $2.0 million in compensatory damages and $5.8 million in punitive damages. ITC accepted the remittitur, and AMT appealed. The appellate court remanded the matter to the trial court for ruling on ITC’s motion for prejudgment interest and attorneys’ fees. In December 2009, the trial court awarded ITC $2.9 million in attorneys’ fees and costs, and denied ITC’s motion for prejudgment interest. AMT appealed the trial court’s decision awarding compensatory

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and punitive damages, and attorneys’ fees and costs. ITC cross-appealed the trial court’s decision to remit the jury verdict and the trial court’s denial of prejudgment interest. On October 28, 2011, the court of appeals issued its decision and affirmed the trial court’s rulings. ITC has filed a motion seeking additional attorneys’ fees which is pending. In December 2011, AMT appealed the court of appeals decision to the Ohio Supreme Court which declined to accept the appeal. At April 1, 2012, we recorded a liability for the full amount of the judgment, including all post-judgment interest, in the amount of $14.4 million. Further, we recorded a receivable from the former owners of AMT in the same amount as a result of their indemnification obligations. On April 5, 2012, AMT paid the judgment in the amount of $14.4 million, including all post-judgment interest, in full. The former owners of AMT honored their indemnification agreement and reimbursed us in full for the amount paid in satisfaction of the judgment.

On April 17, 2012, Quebec authorities charged two employees of BPR Triax, a subsidiary of BPR Inc., and BPR Triax, under the Canadian Criminal Code with allegations of corruption. BPR Triax generates approximately $7 million in annual revenue. BPR Inc. is one of our Canadian subsidiaries, headquartered in Quebec City, Quebec. The charges are known in general, but the specific facts underlying the charges will not be known before the court appearance scheduled for June 19, 2012. Pleas will be entered on June 19, 2012; however, no formal hearing is expected before mid-2013. We are conducting an internal investigation concerning this matter. The financial impact to us is unknown at this time.

14. Recent Accounting Pronouncements

In January 2010, the FASB issued updated accounting guidance that amends the disclosure requirements with respect to fair value measurements. Specifically, the new guidance requires disclosure of amounts transferred in and out of Levels 1 and 2 fair value measurements, a reconciliation presented on a gross basis rather than a net basis of activity in Level 3 fair value measurements, greater disaggregation of the assets and liabilities for which fair value measurements are presented, and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and 3 fair value measurements. Part of this guidance was effective for us in the first quarter of fiscal 2011. We adopted the additional requirement on Level 3 fair value measurements on October 3, 2011. The adoption of this guidance did not have a material impact on the consolidated financial statements.

In December 2010, the FASB issued updated accounting guidance to clarify that pro forma disclosures should be presented as if a business combination occurred at the beginning of the prior annual period for purposes of preparing both the current reporting period and the prior reporting period pro forma financial information. These disclosures should be accompanied by a narrative description about the nature and amount of material, nonrecurring pro forma adjustments. The new accounting guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We adopted this guidance on October 3, 2011; however, no business combinations have been completed since adoption.

In December 2010, the FASB issued updated accounting guidance to amend the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The new accounting guidance is effective for fiscal years beginning after December 15, 2010. We adopted the disclosures on October 3, 2011 and it did not have an impact on the consolidated financial statements.

In May 2011, the FASB issued updated guidance to improve comparability of fair value measurements between GAAP and International Financial Reporting Standards. This update amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The updated guidance is effective for fiscal years and interim periods beginning after December 15, 2011. Early adoption is not permitted. We adopted the updated guidance in the second quarter of fiscal 2012, and the adoption did not have an impact on the consolidated financial statements.

In June 2011, the FASB issued new guidance on the presentation of comprehensive income. The new guidance allows an entity to present components of net income and other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance.

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Additionally, in December 2011, the FASB issued new guidance to defer the effective date pertaining to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. During the deferral period, the existing requirements in the original guidance for the presentation of reclassification adjustments must continue to be followed. This new guidance is effective for fiscal years (and interim periods within those years) beginning after December 15, 2011 (first quarter of fiscal 2013 for us) on a retrospective basis.

In September 2011, the FASB issued updated accounting guidance to simplify how an entity tests goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will not be required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The updated guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted, and we adopted the guidance in fiscal 2012.

In December 2011, the FASB issued new guidance to enhance disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. Entities are required to provide both net and gross information for these assets and liabilities in order to facilitate comparability between financial statements prepared on the basis of GAAP and financial statements prepared on the basis of International Financial Reporting Standards. This guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods with retrospective application required. We will adopt the updated guidance in the first quarter of fiscal 2014 and are evaluating the impact on the consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbor provisions created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified below under “Part II, Item 1A. Risk Factors” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

GENERAL OVERVIEW

We are a leading provider of consulting, engineering, program management, construction management and technical services that focuses on supporting the global fundamental needs for water, the environment, energy, infrastructure and natural resources. We are a full-service company that leads with science. We typically begin at the earliest stage of a project by identifying technical solutions to problems and developing execution plans tailored to our clients’ needs and resources. Our solutions may span the entire life cycle of consulting and engineering projects and include applied science, research and technology, engineering, design, construction management, construction, operations and maintenance, and information technology. We focus on both organic and acquisitive growth to expand our geographic reach, diversify our client base, and increase the breadth and depth of our service offerings to address existing and emerging markets. We currently have approximately 13,000 employees worldwide, located primarily in North America.

We derive income from fees for professional, technical, program management and construction management services. As primarily a service-based company, we are labor-intensive rather than capital-intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding services to our clients and execute projects successfully. We provide our services to a diverse base of international and U.S. commercial clients, as well as U.S. federal and U.S. state and local government agencies. The following table presents the percentage of our revenue by client sector:

	Three Months Ended				Six Months Ended
	April 1, 2012		April 3, 2011		April 1, 2012		April 3, 2011
Client Sector
International(1)	24.8	%	24.5	%	24.1	%	22.6	%
U.S. commercial	22.8		18.3		24.5		20.2
U.S. federal government(2)	40.5		46.4		40.1		46.4
U.S. state and local government	11.9		10.8		11.3		10.8
Total	100.0	%	100.0	%	100.0	%	100.0	%

(1) Includes revenue generated from our foreign operations, primarily in Canada, and revenue generated from non-U.S. clients.
(2) Includes revenue generated under U.S. government contracts performed outside the United States.

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be allocated to them and do not meet the definition of a reportable operating segment. The changes are intended to improve organizational effectiveness and efficiency by better aligning operations with similar characteristics such as client types, project types, required resources and financial metrics. Prior year amounts have been reclassified to conform to the current year presentation.

We manage our business under the following four reportable segments:

Engineering and Consulting Services. ECS provides front-end science, consulting engineering services and project management in the areas of surface water management, groundwater, waste management, mining and geotechnical sciences, arctic engineering, industrial processes, and information technology.

Technical Support Services. TSS advises clients through the study, design and implementation phases of projects. TSS provides management consulting and strategic direction in the areas of environmental assessments/hazardous waste management, climate change, international development/stabilization, energy services, and technical government staffing services.

Engineering and Architecture Services. EAS provides engineering and architecture design services, including LEED and sustainability services, together with technical and program administration services for projects related to water infrastructure, buildings, and transportation and facilities.

Remediation and Construction Management. RCM is focused on providing our full-service support to U.S. federal government, U.S. state and local governments, and U.S. commercial clients. RCM’s service lines include environmental remediation, construction management, infrastructure development, and alternative energy.

The following table represents the percentage of our revenue by reportable segment:

	Three Months Ended				Six Months Ended
	April 1, 2012		April 3, 2011		April 1, 2012		April 3, 2011
Reportable Segment
ECS	40.2	%	36.9	%	38.0	%	35.3	%
TSS	35.9		32.8		34.6		34.6
EAS	12.8		12.0		12.4		11.6
RCM	18.8		22.0		21.3		22.8
Inter-segment elimination	(7.7	)	(3.7	)	(6.3	)	(4.3	)
Total	100.0	%	100.0	%	100.0	%	100.0	%

We provide services under three principal types of contracts: fixed-price, time-and-materials and cost-plus. The following table represents the percentage of our revenue by contract type:

	Three Months Ended				Six Months Ended
	April 1, 2012		April 3, 2011		April 1, 2012		April 3, 2011
Contract Type
Fixed-price	36.2	%	37.2	%	39.5	%	37.4	%
Time-and-materials	42.5		40.8		40.4		39.1
Cost-plus	21.3		22.0		20.1		23.5
Total	100.0	%	100.0	%	100.0	%	100.0	%

A majority of our contract revenue and contract costs are recorded using the percentage-of-completion (cost-to-cost) method. Under this method, revenue is recognized in the ratio of contract costs incurred compared to total estimated contract costs. Revenue and profit on these contracts are subject to revision throughout the duration of the contracts and any required adjustments are made in the period in which the revisions become known. Losses on contracts are recorded in full as they are identified.

Contract costs include professional compensation and related benefits, together with certain direct and indirect overhead costs such as rents, utilities and travel. Professional compensation represents a large portion of these costs. Our SG&A expenses are comprised primarily of marketing and bid and proposal costs, and our corporate headquarters’ costs related to the executive offices, finance, accounting, administration and information

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technology. Our SG&A expenses also include a majority of our stock-based compensation, a portion of our depreciation of property and equipment related to our corporate headquarters, and the amortization of identifiable intangible assets. Most of these costs are unrelated to specific clients or projects and can vary as expenses are incurred to support company-wide activities and initiatives.

We experience seasonal trends in our business. Our revenue and operating income are typically lower in the first half of our fiscal year, primarily due to the Thanksgiving, Christmas and New Year’s holidays. Many of our clients’ employees, as well as our own employees, take vacations during these holiday periods. Further, seasonal inclement weather conditions occasionally cause some of our offices to close temporarily or may hamper our project field work, particularly in the ECS and RCM segments. These occurrences result in fewer billable hours worked on projects and, correspondingly, less revenue recognized. Our revenue is typically higher in the second half of the fiscal year due to favorable weather conditions during spring and summer months that may result in higher billable hours. In addition, our revenue is typically higher in the fourth fiscal quarter due to the U.S. federal government’s fiscal year-end spending.

ACQUISITIONS AND DIVESTITURES

Acquisitions. We continuously evaluate the marketplace for strategic acquisition opportunities. Due to our reputation, size, financial resources, geographic presence and range of services, we have numerous opportunities to acquire privately and publicly held companies or selected portions of such companies. During our evaluation, we examine the effect an acquisition may have on our long-range business strategy and results of operations. Generally, we proceed with an acquisition if we believe that it would have a positive effect on future operations and could strategically expand our service offerings. As successful integration and implementation are essential to achieving favorable results, no assurance can be given that all acquisitions will provide accretive results. Our strategy is to position ourselves to address existing and emerging markets. We view acquisitions as a key component of our growth strategy, and we intend to use cash, debt or securities, as we deem appropriate, to fund acquisitions. We may acquire other businesses that we believe are synergistic and will ultimately increase our revenue and net income, strengthen our ability to achieve our strategic goals, provide critical mass with existing clients and further expand our lines of service. We typically pay a purchase price that results in the recognition of goodwill, generally representing the intangible value of a successful business with an assembled workforce specialized in our areas of interest. For analytical purposes, acquisitive revenue consists of revenue derived from acquired companies during the first 12 months following their respective acquisition dates.

During fiscal 2011, we made acquisitions that enhanced our service offerings and expanded our geographic presence in the ECS and TSS segments. The largest of these acquisitions was BPR, which was completed in the first quarter of fiscal 2011. BPR is a Canadian scientific and engineering services firm that provides multidisciplinary consulting and engineering support for water, energy, industrial plants, buildings and infrastructure projects. This acquisition further expanded our geographic presence in eastern Canada, and enabled us to provide clients with additional services throughout Canada. BPR is part of the ECS segment.

Divestitures. To complement our acquisition strategy and our focus on internal growth, we regularly review and evaluate our existing operations to determine whether our business model should change through the divestiture of certain businesses. Accordingly, from time to time, we may divest certain non-core businesses and reallocate our resources to businesses that better align with our long-term strategic direction. We did not have any divestitures in the first half of fiscal 2012 and 2011.

OVERVIEW OF RESULTS AND BUSINESS TRENDS

General. In the second quarter of fiscal 2012, our business grew compared to the year-ago quarter. We continued our focus on organic growth and the pursuit of strategic acquisitions that are expected to enhance our service offerings and expand our geographic presence. Our revenue grew compared to the year-ago quarter due to contributions from fiscal 2011 acquisitions and strength in projects for large multi-national companies.

We foresee the continuation of strong demand in our U.S. commercial and international markets, while our U.S. government markets continue to remain stable. As such, we expect that our revenue will grow moderately in fiscal 2012 compared to fiscal 2011 due to anticipated growth in our business and contributions from our international activities.

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International. For the first half of fiscal 2012, our international business grew 13.8% compared to the year-ago period. The growth was driven by demand for our water, environmental and infrastructure design services in Canada, Australia and Chile, primarily for mining and other commodity-driven businesses. We expect that our international business will continue its strong growth in fiscal 2012 compared to fiscal 2011 as a result of our continued expansion in Canada, our recent expansion into Australia and Chile, and demand for our services from broad-based clients worldwide.

U.S. Commercial. For the first half of fiscal 2012, our U.S. commercial business grew 29.4% compared to the year-ago period. The growth was primarily attributable to increased revenue from industrial and energy projects for large multi-national companies. Many of our largest U.S. commercial clients are returning to more typical environmental and infrastructure capital spending levels following a period of budgetary constraints during the global financial crisis. Therefore, although we expect that some economic weakness may continue in certain sectors of our U.S. commercial business, we are optimistic regarding the growth in this business due to increased spending by our largest U.S. commercial clients. We expect that our U.S. commercial business will continue its strong growth in fiscal 2012 compared to fiscal 2011. Our U.S. commercial clients typically react rapidly to economic change. However, if the U.S. economy experiences a slowdown in the remainder of fiscal 2012, we would expect our U.S. commercial outlook to change accordingly.

U.S. Federal Government. For the first half of fiscal 2012, our U.S. federal government business declined 7.7% compared to the year-ago period. The decline was primarily due to reduced activity on several large New Orleans hurricane protection and environmental remediation programs for U.S. Army Corps of Engineers (“USACE”). The decline was partially offset by revenue growth from international development services for the U.S. Department of State (“DoS”) and from our front-end water, environmental, and infrastructure engineering and design services for other federal government agencies. These agencies included the National Science Foundation (“NSF”), and the Federal Aviation Administration (“FAA”). During periods of economic volatility, our U.S. federal government business has historically been the most stable and predictable. However, due to U.S. federal budget uncertainties, we remain cautious.

U.S. State and Local Government. For the first half of fiscal 2012, our U.S. state and local government business increased 12.4% compared to the year-ago period. The growth was driven by increased revenue from essential programs and infrastructure projects. Many state and local government agencies continue to face economic challenges, including budget deficits and difficult cost-cutting decisions. Simultaneously, states are facing major long-term infrastructure needs, including the need for maintenance, repair and upgrading of existing critical infrastructure and the need to build new facilities. The funding risks associated with our U.S. state and local government programs are partially mitigated by legal requirements driving some of these programs, such as regulatory-mandated consent decrees. As a result, some programs will generally progress despite budget pressures as demonstrated by the growth in the second quarter of fiscal 2012. We were awarded transportation infrastructure projects totaling over $200 million during the second quarter of fiscal 2012. Although we anticipate that many state and local government agencies will continue to face economic challenges, we expect our U.S. state and local government business to experience strong growth in fiscal 2012 compared to fiscal 2011 because of our focus on essential programs.

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RESULTS OF OPERATIONS

Consolidated Results of Operations

		Three Months Ended											Six Months Ended
		April 1,			April 3,			Change					April 1,			April 3,			Change
		2012			2011			$			%		2012			2011			$			%
		($ in thousands)

Revenue		$	624,345		$	612,566		$	11,779		1.9	%	$	1,306,972		$	1,223,690		$	83,282		6.8	%
Subcontractor costs		(147,453		)	(182,260		)	34,807			19.1		(338,024		)	(387,805		)	49,781			12.8
Revenue, net of subcontractor costs(1)		476,892			430,306			46,586			10.8		968,948			835,885			133,063			15.9
Other costs of revenue		(388,915		)	(355,445		)	(33,470		)	(9.4	)	(796,251		)	(685,372		)	(110,879		)	(16.2	)
Selling, general and administrative expenses		(52,434		)	(45,605		)	(6,829		)	(15.0	)	(101,062		)	(86,932		)	(14,130		)	(16.3	)
Operating income		35,543			29,256			6,287			21.5		71,635			63,581			8,054			12.7
Interest expense - net		(1,453		)	(1,471		)	18			1.2		(2,763		)	(2,776		)	13			0.5
Income before income tax expense		34,090			27,785			6,305			22.7		68,872			60,805			8,067			13.3
Income tax expense		(11,769		)	(9,704		)	(2,065		)	(21.3	)	(23,848		)	(19,970		)	(3,878		)	(19.4	)
Net income including noncontrolling interests		22,321			18,081			4,240			23.5		45,024			40,835			4,189			10.3
Net income attributable to noncontrolling interests		(37		)	(581		)	544			93.6		(130		)	(1,034		)	904			87.4
Net income attributable to Tetra Tech		$	22,284		$	17,500		$	4,784		27.3	%	$	44,894		$	39,801		$	5,093		12.8	%


(1)	We believe that the presentation of “Revenue, net of subcontractor costs”, a non-GAAP financial measure, enhances investors’ ability to analyze our business trends and performance because it substantially measures the work performed by our employees. In the course of providing services, we routinely subcontract various services and, under certain U.S. Agency for International Development (“USAID”) programs, issue grants. Generally, these subcontractor costs and grants are passed through to our clients and, in accordance with GAAP and industry practice, are included in our revenue when it is our contractual responsibility to procure or manage these activities. The grants are included as part of our subcontractor costs. Because subcontractor services can vary significantly from project to project and period to period, changes in revenue may not necessarily be indicative of our business trends. Accordingly, we segregate subcontractor costs from revenue to promote a better understanding of our business by evaluating revenue exclusive of costs associated with external service providers.

For the three and six-month periods, both revenue and revenue, net of subcontractor costs, increased compared to the prior-year periods. Our revenue growth was driven by the continued expansion of our international business, strong results in our U.S. commercial business, and contributions from acquisitions completed after the first quarter of fiscal 2011.

Revenue and revenue, net of subcontractor costs, for our international business increased $4.8 million and $27.9 million, respectively, during the second quarter of fiscal 2012 compared to the prior-year period. For the first six months of fiscal 2012, international revenue increased $38.1 million and revenue, net of subcontractor costs, increased $69.9 million. This growth was driven by increased activity on our water, environmental and infrastructure design projects in Canada, Australia and Chile, primarily for mining and other commodity-driven businesses.

Revenue and revenue, net of subcontractor costs, for our U.S. commercial business increased $30.4 million and $13.6 million, respectively, during the second quarter of fiscal 2012 compared to the prior-year period. On a year-to-date basis, U.S. commercial revenue and revenue, net of subcontractor costs, increased $72.7 million and $38.4 million, respectively, compared to the prior-year period. The U.S. commercial growth was experienced across all of our reportable segments and was primarily attributable to increased revenue from industrial and energy projects for large multi-national companies.

Of the increases in revenue and revenue, net of subcontractor costs, fiscal 2011 acquisitions contributed $32.0 million and $28.8 million for the three-month period, and $69.0 million and $62.9 million for the six-month period, respectively. The overall growth was partially offset by lower revenue and revenue, net of subcontractors costs, on DoD programs in the amounts of $44.7 million and $20.8 million for the three-month period, and $68.1 million and $25.2 million for the six-month period, respectively. The reduction resulted primarily from the wind-down of several large New Orleans hurricane protection and environmental remediation programs for

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USACE. These programs had a high level of subcontracting activities and, accordingly, revenue, net of subcontractor costs, grew at a faster pace than revenue for both periods.

The increases in operating income for the second quarter and first half of fiscal 2012 were largely due to revenue growth. For both prior-year periods, operating income benefited from the recognition of government performance-based incentive award fees of $10.6 million on a large environmental remediation program in the RCM segment and a $2.0 million net favorable project settlement in the EAS segment. These prior year items were substantially offset by additional contract costs incurred for project overruns of $13 million for the second quarter and $16 million for the first half of fiscal 2011 on several fixed-priced construction management projects in the RCM segment and on an international development program in the TSS segment. Further, we recorded an additional $1.5 million of amortization expense for intangible assets related to our recent acquisitions in the first half of fiscal 2012 compared to the prior-year period. Amortization expense for the comparable quarterly periods was substantially the same.

For both periods in fiscal 2012, income tax expense increased as a result of higher pre-tax income. For the six-month period, our effective tax rate was 34.6% compared to 32.8% for the prior-year period. The prior-year tax rate benefited from the extension of R&E credits. There was a $1.2 million benefit from R&E credits for the last nine months of fiscal 2010 that was recorded in the first quarter of fiscal 2011.

For both periods, net income attributable to noncontrolling interests declined because we acquired the remaining interests in a Canadian consolidated joint venture in the fourth quarter of fiscal 2011. Net income attributable to Tetra Tech increased for the reasons described above.

Segment Results of Operations

Engineering and Consulting Services

	Three Months Ended										Six Months Ended
	April 1,			April 3,			Change				April 1,			April 3,			Change
	2012			2011			$		%		2012			2011			$		%
	($ in thousands)

Revenue	$	251,486		$	225,958		$	25,528	11.3	%	$	497,149		$	431,348		$	65,801	15.3	%
Subcontractor costs	(42,405		)	(46,923		)	4,518		9.6		(85,071		)	(87,556		)	2,485