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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

TETRA TECH, INC.

(Exact name of registrant as specified in its charter)

3475 East Foothill Boulevard, Pasadena, California  91107

(Address of principal executive office and zip code)

(626) 351-4664

(Registrant’s telephone number, including area code)

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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 December 28, 2008, the condensed consolidated statements of income for the three months ended December 28, 2008 and December 30, 2007, and the condensed consolidated statements of cash flows for the three months ended December 28, 2008 and December 30, 2007 of Tetra Tech, Inc. (“we,” “us” or “our”) are unaudited, and, in the opinion of management, include all adjustments necessary for a fair statement of the financial position, the results of operations and cash flows for the periods presented.  The condensed consolidated balance sheet as of September 28, 2008 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements.

The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 28, 2008.  The results of operations for the three months ended December 28, 2008 are not necessarily indicative of the results to be expected for the fiscal year ending September 27, 2009.  Certain prior year amounts have been reclassified to conform to the current year presentation.  In the first quarter of fiscal 2009, we began reporting under four reportable segments with reclassification of prior year results to conform to the new basis of presentation.  Refer to Note 7, “Reportable Segments” for additional information.

2.                                      Accounts Receivable – Net

Net accounts receivable consisted of the following:

Billed accounts receivable represent amounts billed to clients that have not been collected.  Unbilled accounts receivable represent revenue recognized but not yet billed pursuant to contract terms or billed after the period end date.  Substantially all unbilled receivables as of December 28, 2008 are expected to be billed and collected within 12 months.  Contract retentions represent amounts withheld by clients until certain conditions are met or the project is completed, which may be several months or years.  The allowance for doubtful accounts was determined based on a review of customer-specific accounts, bankruptcy filings by clients, and contract issues due to current events and circumstances.

Billed accounts receivable related to federal government contracts were $123.3 million and $100.2 million as of December 28, 2008 and September 28, 2008, respectively.  The federal government unbilled receivables, net of progress payments, were $56.6 million and $88.6 million as of December 28, 2008 and September 28, 2008, respectively.  The federal government and one commercial client each accounted for more than 10% of our accounts receivable as of December 28, 2008 and September 28, 2008.

3.                                      Goodwill and Intangibles

At the beginning of the first quarter of fiscal 2008, we acquired all of the outstanding shares of capital stock of ARD, Inc.  (“ARD”), which provides applied research, planning, design and implementation services focused on a

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range of water, energy, environmental and institutional issues.  ARD manages large, complex international development projects for its clients, predominantly the U.S. Agency for International Development (“USAID”).  This acquisition continues our international expansion as it increases our professional workforce in new geographic areas and technical specialties around the world.  ARD is part of our technical support services segment.  The purchase price consisted of $41.5 million in cash payments.  In the first quarter of fiscal 2009, we made one acquisition that offers complementary technical expertise to enhance our USAID service offerings in the technical support services segment.  No pro forma results are presented for the respective interim periods as these acquisitions were not considered material to our consolidated financial statements.

The changes in the carrying value of goodwill by segment for the three months ended December 28, 2008 were as follows:

The increase in goodwill is attributable to the acquisition described above, and earn-out payments associated with prior acquisitions.

The gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives as of December 28, 2008 and September 28, 2008, included in intangible assets – net on the condensed consolidated balance sheets, were as follows:

For the three months ended December 28, 2008, $0.1 million, $0.1 million and $1.5 million were assigned to non-compete agreements, customer relations and backlog, respectively, related to the acquisition described above.  For the first quarters of fiscal 2009 and 2008, amortization expense for acquired identifiable intangible assets with finite useful lives was $1.7 million and $1.4 million, respectively.  Estimated amortization expense for the remainder of fiscal 2009 and the succeeding years is as follows:

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Subsequent Events. In January 2009, we acquired Wardrop Engineering, Inc. (“Wardrop”), a Canadian firm that specializes in resource management, energy and infrastructure design.  For its fiscal year ended September 30, 2008, Wardrop reported in excess of $120 million of revenue.  This acquisition significantly expands our worldwide presence, adding 13 offices throughout Canada together with offices in the United Kingdom and India.  We also acquired a nuclear science and engineering firm that expands our service offerings to the federal government and commercial clients in the energy market.  Both of these acquisitions are part of our environmental consulting services segment.  The initial purchase price for these acquisitions, which is subject to adjustment, was financed with available cash resources and approximately $80 million of borrowings under our revolving credit facility.

4.                                      Stockholders’ Equity and Stock Compensation Plans

We account for stock-based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R) (“SFAS 123R”), Share-Based Payment (revised 2004).  Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the value of the award granted, and recognized over the period in which the award vests.  Stock-based compensation expense for the first quarters of fiscal 2009 and 2008 was $2.0 million and $1.7 million, respectively.  These amounts were primarily included in selling, general and administrative (“SG&A”) expenses in our condensed consolidated statements of income.  In the first quarter of fiscal 2009, we granted 983,200 stock options with an exercise price of $16.98 and an estimated weighted-average fair value of $6.10.

5.                                      Earnings Per Share (“EPS”)

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

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

For the first quarters of fiscal 2009 and 2008, 2.9 million and 2.5 million stock options were excluded from the calculation of dilutive potential common shares, respectively.  These options were not included in the computation of dilutive potential common shares because the assumed proceeds per share exceeded the average market price per share for that period.  Therefore, their inclusion would have been anti-dilutive.

6.                                      Income Taxes

We are currently under examination by the Internal Revenue Service (“IRS”) for fiscal years 1997 through 2004 and the California Franchise Tax Board (“FTB”) for fiscal years 2001 through 2003 related to research and experimentation credits (“R&E Credits”).  In addition, during fiscal 2002, the IRS approved our request to change

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the accounting method for revenue recognition for income tax purposes for some of our businesses.  In 2002, we filed amended tax returns for fiscal years 1997 through 2000 to claim R&E Credits and to claim refunds due under the newly approved accounting method.  At the time the refund claims were filed, we were under examination by the IRS for those years.  The claimed refunds are being held pending completion of the IRS examination.  The estimated realizable refunds have been classified as non-current income taxes receivable on our condensed consolidated balance sheets.  We have initiated an analysis for the tax years subsequent to the periods under audit to determine if we are entitled to claim R&E Credits for these years.  Accordingly, we may, in subsequent periods, file amended tax returns and reflect the estimated realizable R&E Credits in our consolidated financial statements.

We are currently in the IRS appeals process for fiscal years 1997 through 2004.  During the third quarter of fiscal 2008, we received a Notice of Proposed Assessment (“NOPA”) from the FTB related to fiscal 2001 through 2003.  We have protested the position in the NOPA.  Management believes that it is reasonably possible we will reach a resolution of the issues for fiscal years 1997 through 2001 under appeal with the IRS in the next 12 months.  If the resolution is favorable, the change in unrecognized tax benefits could be significant and we could receive a significant cash refund.  However, if the resolution is unfavorable, there may be a material adverse effect on our financial results as a result of an increase in income tax expense, but no material impact on our cash flow in future periods.  At this time, we cannot predict the outcome of the NOPA.  With a few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for fiscal years before 1997.

7.                                      Reportable Segments

Prior to fiscal 2009, we managed our business in three reportable segments: resource management, infrastructure and communications.  In fiscal 2006, we developed and began implementing a plan to consolidate our operating units and re-align our management structure.  In the first quarter of fiscal 2009, we completed the implementation and began reporting under four new reportable segments with reclassification of the prior year results to conform to the new basis of presentation.

Each of the new reportable segments is comprised of similar activities that focus on the services it provides, the markets it serves, the distribution method of its services, its contracting mechanisms, the organization and execution of its projects, the education and discipline of its workforce, and the metrics by which its client projects and staff are measured.  In addition, each of the operating groups, which are also our reportable segments is managed by its own president, each of whom has direct responsibility for the segment’s respective units and directly reports to our Chief Executive Officer, who is our chief operating decision maker (“CODM”).  The CODM regularly reviews the four reportable segments, allocates resources to these segments and assesses the individual segment performance.  The reportable segments are as follows:

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

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

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

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

Management evaluates the performance of these reportable segments based upon their respective income from operations before the effect of amortization expense related to acquisitions and other unallocated corporate

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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 cost of the services performed.  All inter-company balances and transactions are eliminated in consolidation.

The following tables set forth summarized financial information concerning our reportable segments (for and as of the periods noted below):

Reportable Segments:

Total assets by segment were as follows:

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Reconciliations:

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

Major Clients:

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

The following table presents revenue by client sector:

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

8.                                      Comprehensive Income

We include two components in comprehensive income: net income during a period and other comprehensive income.  Other comprehensive income consists of translation gains and losses from subsidiaries with functional currencies different than our reporting currency.

Comprehensive income was $16.3 million and $12.9 million for the first quarters of fiscal 2009 and 2008, respectively.  For the same periods, we realized an insignificant net translation loss and gain, respectively.

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9.                                      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 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 against AMT.  In addition, the jury awarded $17 million in punitive damages against AMT plus reasonable attorneys fees.  The court entered the judgment in January 2008.  It also required AMT to post a $1 million bond which has been done.  In July 2008, the Common Pleas Court of Montgomery County issued a decision in response to AMT’s post-trial motions.  AMT’s motion for judgment notwithstanding the verdict was denied and AMT’s motion for a new trial was conditionally denied.  AMT’s motion for remittitur was conditionally granted.  The court remitted the verdict to $2.0 million in compensatory damages and $5.8 million in punitive damages.  If ITC chose not to accept the remittitur, the court would grant AMT’s motion for new trial on damages.  ITC filed a notice that it accepted the remittitur, and AMT timely filed a notice of appeal.  The trial court has not ruled on ITC’s motion for prejudgment interest or attorneys fees.  Because the trial court made its post-trial decision a final appealable order, yet did not dispose of ITC’s motion for attorneys fees or prejudgment interest, it does not appear that the court of appeals has jurisdiction. The parties filed motions with the court of appeals for clarification.  In the meantime, the appeals court has remanded the case back to the trial court to review prejudgment interest and attorney fees.  We believe that a reasonably possible range of exposure is from $0 to approximately $13 million.  As of December 28, 2008, we have recorded a liability representing our best estimate of a probable loss.  Further, for the same amount, we have recorded a receivable from the former owners of AMT as we believe it is probable they will fully honor the terms of their indemnification agreement with us for any and all costs and damages related to this lawsuit pursuant to the terms of the purchase agreement.

On July 25, 2008, a domestic real estate investment trust (the “REIT”) that owns and rents apartments filed suit against us and a former employee in the United States District Court for the Eastern District of Virginia (the “Court”).  Subsequently, an amended complaint was filed.  The suit alleges that employees at one of our operating divisions in Colorado participated in a scheme to defraud the REIT in connection with contracts for environmental clean-up work between us and the REIT. The suit seeks as much as $21 million in damages (comprised of $7 million in damages, as well as Racketeer Influenced and Corrupt Organizations Act (“RICO”) damages) plus interest and legal fees.  Based on the information gathered to date and on the advice of legal counsel, we believe we have defenses and potential counter-claims to the allegations raised by the REIT, and we intend to defend ourselves vigorously.  On October 23, 2008, we filed cross and counter-claims against the REIT and our former employee and third-party claims against another entity and that entity’s principal.  Our claims allege that we were defrauded in connection with work we performed for the REIT and seek as much as $7.2 million in damages.  We have been advised by counsel that based on their review to date, there are significant legal and factual defenses to the claim that we are liable for treble damages under the RICO statute.  This matter has been stayed by the Court until other related cases are resolved.  We have accrued as of December 28, 2008 our best estimate of a liability related to this matter.  We do not expect the ultimate outcome to have a material adverse effect on our financial position, results of operations or cash flows.

10.                               Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standard Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  In February 2008, FASB Staff Position (“FSP”) No. FAS 157-2, Effective Dates of FASB Statement No. 157 was issued, which deferred the effective date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and liabilities until

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fiscal years beginning after November 15, 2008. In October 2008, the FASB also issued FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market of that financial asset is not active.  The FSP observes that revisions resulting from a change in valuation technique or its application should be accounted for as a change in accounting estimate, and any effects on fair-value measurement would be recognized in the period of adoption.  Our adoption of SFAS 157 on September 29, 2008 was limited to financial assets and liabilities and had no impact on our consolidated financial statements in the first quarter of fiscal 2009.  We are currently evaluating the anticipated effect of this statement on the non-financial assets and non-financial liabilities in our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“SFAS 159”).  SFAS 159 provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value.  A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.  SFAS 159 became effective for us as of the beginning of our fiscal year 2009.  We did not elect the fair value option for any financial assets or liabilities during the first quarter of fiscal 2009.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”).  SFAS 141R establishes the principles and requirements for how an acquirer (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141R makes significant changes to existing accounting practices for acquisitions, including the requirement to expense transaction costs and to reflect the fair value of contingent purchase price adjustments at the date of acquisition.  SFAS 141R is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008.  We will implement the new standard effective in fiscal 2010.  For any acquisitions completed after our fiscal 2009, we expect SFAS 141R will have an impact on our consolidated financial statements, however; the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51 (“SFAS 160”).  SFAS 160 establishes accounting and reporting standards that require (i) noncontrolling interests to be reported as a component of equity; (ii) changes in a parent’s ownership interest while the parent retains its controlling interest to be accounted for as equity transactions; and (iii) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value.  We do not currently have any less than wholly-owned consolidated subsidiaries.  SFAS 160 is to be applied prospectively at the beginning of the first annual reporting period on or after December 15, 2008.  We will implement the new standard effective in fiscal 2010.  We do not believe that the adoption of SFAS 160 will have a material effect on our consolidated financial statements.

In December 2007, Emerging Issues Task Force (“EITF”) 07-01, Accounting for Collaborative Arrangements (“EITF 07-01”), was issued to prescribe the accounting for collaborations. It requires certain transactions between collaborators to be recorded in the income statement on either a gross or net basis when certain characteristics exist in the collaboration relationship. EITF 07-01 is effective in fiscal 2010 for all of our collaborations.  We do not believe that the adoption of EITF 07-01 will have a material effect on our consolidated financial statements.

In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets.  FSP 142-3 will be effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for us). We are currently assessing the effect of FSP 142-3 on our consolidated financial statements.

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In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”), which identifies the sources of accounting principles and provides a framework, or hierarchy, for selecting the principles to be used in preparing U.S. GAAP financial statements for nongovernmental entities.  SFAS 162, effective November 15, 2008, makes the hierarchy explicitly and directly applicable to preparers of financial statements.  This recognizes the preparers’ responsibilities for selecting the accounting principles for their financial statements.  The adoption of SFAS 162 did not have a material effect on our consolidated financial statements.

In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”).  FSP EITF 03-6-1 states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.  FSP EITF 03-6-1, which is applied retrospectively, is effective for us in fiscal 2010.  We are currently assessing the effect of FSP EITF 03-6-1 on our consolidated financial statements.

In November 2008, the FASB ratified EITF 08-6, Equity Method Investment Accounting Considerations (“EITF 08-6”).  EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments.  EITF 08-6 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited.  We do not believe the adoption of EITF 08-6 will have a material impact on our 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 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.  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, as well as under the heading “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 any forward-looking statements for any reason.

OVERVIEW

We are a leading provider of consulting, engineering, program management, construction and technical services focusing on resource management, infrastructure and the environment.  We serve our clients by providing cost-effective and innovative solutions to fundamental needs for water, environmental and energy services.  We typically begin at the earliest stage of a project by applying science to problems and developing solutions tailored to our clients’ needs and resources.  Our solutions may span the entire life cycle of the project and include applied science, research and technology, engineering, design, construction management, construction, operations and maintenance, and information technology.

Since our initial public offering in December 1991, we have increased the size and scope of our business, expanded our service offerings, and diversified our client base and the markets we serve through internal growth and strategic acquisitions.  Today we are a full-service company with a global reach in the areas of water programs, environmental management and remediation, energy and supporting infrastructure.  We continue to focus on organic and acquisitive growth to expand our geographic reach and increase the breadth and depth of our service offerings to address existing and emerging markets.  As of January 2009, we had approximately 10,000 employees worldwide, located primarily in North America.

We derive revenue from fees for professional, technical, project management and construction 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 services to a diverse base of federal and state and local government agencies, as well as commercial and international clients.  The following table presents the approximate percentage of our revenue, net of subcontractor costs, by client sector:

Prior to fiscal 2009, we managed our business in three reportable segments: resource management, infrastructure and communications.  In fiscal 2006, we developed and began implementing a plan to consolidate our operating units and re-align our management structure.  In the first quarter of fiscal 2009, we completed the

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implementation and began reporting under four new reportable segments with reclassification of the prior year results to conform to the new basis of presentation.

Each of the new reportable segments is comprised of similar activities that focus on the services it provides, the markets it serves, the distribution method of its services, its contracting mechanisms, the organization and execution of its projects, the education and discipline of its workforce, and the metrics by which its client projects and staff are measured.  In addition, each of the operating groups, which are also our reportable segments is managed by its own president, each of whom has direct responsibility for the segment’s respective units and directly reports to our Chief Executive Officer, who is our CODM.  The CODM regularly reviews the four reportable segments, allocates resources to these segments and assesses the individual segment performance.  The reportable segments are as follows:

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

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

Engineering and Architecture Services.  EAS provides engineering, architecture, interior and exterior design, LEED, and program administration services for projects that include water and wastewater conveyance and treatment, building construction, land development and transportation services.

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

The following table represents the approximate percentage of our revenue, net of subcontractor costs, by reportable segment:

Our services are provided under three principal types of contracts:  fixed-price, time-and-materials and cost-plus.  The following table presents the approximate percentage of our revenue, net of subcontractor costs, by contract type:

Contract revenue and contract costs are recorded primarily using the percentage-of-completion (cost-to-cost) method.  Under this method, revenue is recognized in the ratio that contract costs incurred bear to total

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estimated 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.

In the course of providing our services, we routinely subcontract services and, under certain USAID programs, issue grants.  Generally, these subcontractor costs and grants are passed through to our clients and, in accordance with industry practice and GAAP, are included in our revenue when it is our responsibility to procure and manage these activities under a contract.  The grants are reported as part of our subcontractor costs on our condensed consolidated statements of income.  Because subcontractor services can change significantly from project to project and period to period, changes in revenue may not be indicative of our business trends.  Accordingly, we also report revenue less the cost of subcontractor services, and our discussion and analysis of financial condition and results of operations uses revenue, net of subcontractor costs, as a point of reference.

For analytical purposes only, we categorize our revenue into two types:  acquisitive and organic.  Acquisitive revenue consists of revenue derived from newly acquired companies that are reported individually as separate operating units during the first twelve months following their respective acquisition dates.  Organic revenue consists of our total revenue less any acquisitive revenue.

Our other 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 technology.  In addition, we include a large portion of stock-based compensation, depreciation of property and equipment, as well as a full amount of amortization of identifiable intangible assets, in SG&A expenses.  Most of these costs are unrelated to a specific client or project and can vary as expenses are incurred to support corporate activities and initiatives.

Our revenue, expenses and operating results may fluctuate significantly from quarter to quarter as a result of numerous factors, including:

·                  General economic or political conditions;

·                  Unanticipated changes in contract performance that may affect profitability, particularly with contracts that are fixed-price or have funding limits;

·                  Seasonality of the spending cycle of our public sector clients, notably the federal government, the spending patterns of our commercial sector clients, and weather conditions;

·                  Budget constraints experienced by our federal, state and local government clients;

·                  Acquisitions or integration of acquired companies;

·                  Divestiture or discontinuance of operating units;

·                  Employee hiring, utilization and turnover rates;

·                  The number and significance of client contracts commenced and completed during a quarter;

·                  Creditworthiness and solvency of clients;

·                  The ability of our clients to terminate contracts without penalties;

·                  Delays incurred in connection with a contract;

·                  The size, scope and payment terms of contracts;

·                  Contract negotiations on change orders and collections of related accounts receivable;

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·                  The timing of expenses incurred for corporate initiatives;

·                  Reductions in the prices of services offered by our competitors;

·                  Threatened or pending litigation;

·                  The impairment of goodwill or identifiable intangible assets; and

·                  Changes in accounting rules.

We experience seasonal trends in our business.  Our revenue is typically lower in the first half of the 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.  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 result in higher billable hours.  In addition, our revenue is typically higher in the fourth fiscal quarter due to the federal government’s fiscal year-end spending.

BUSINESS TREND ANALYSIS

General.  Overall, we continued to deliver strong financial results in the first quarter of fiscal 2009, which reflected improvement compared to the same quarter last year.  Our performance was driven by our continuing focus on long-term value creation through the execution of our growth strategy.  We invested in business development activities to grow our business organically and made strategic acquisitions to enhance our service offerings and further expand our geographical presence.  In addition, we continued to implement and enforce project management policies and programs that focus on contract execution and risk management controls.  We also focused on cost control and the strategic management of our portfolio of businesses.

We anticipate that our business will grow at a moderate rate as we continue to emphasize organic growth and pursue complementary acquisitions that expand our geographic reach and increase the breadth of our services to address existing and emerging markets.  In addition, we expect that the various government stimulus plans aimed at jump-starting the economy and loosening the credit markets should be successful.  However, because the timing and magnitude of any potential benefit to our business from a stimulus plan remains uncertain, contributions from such plan have not been factored into our outlook or our guidance.  Furthermore, we expect a period of considerable weakness in the economy even if government intervention succeeds.  As such, we recognize that the current economic forces that have severely impacted both the domestic and international economies could affect our future work for the U.S. federal government, state and local governments, and commercial businesses, which constituted approximately 45%, 11% and 44% of our revenue in the first quarter of fiscal 2009, respectively.

Federal Government.  In the first quarter of fiscal 2009, our federal government business experienced revenue growth of 7.6% compared to the same quarter last year.  This growth was driven primarily by our USAID projects and domestic projects for the U.S. Department of Defense (“DoD”).  However, the wind-down of our Iraq-related projects for the DoD partially offset this growth.  During periods of economic volatility, our federal government business has historically been the most stable and predictable.  Accordingly, we anticipate that our federal government business will experience modest growth in fiscal 2009 compared to last fiscal year due primarily to our increased work with USAID, increased Base Realignment and Closure (“BRAC”) spending, and water resource and infrastructure projects with the U.S. Army Corps of Engineers (“USACE”) and other federal clients.  However, due to the DoD’s current funding practices on projects in Iraq as well as the changing geopolitical landscape in Iraq and the United States, we believe our revenue from Iraq-related projects will continue to decrease during the remainder of fiscal 2009.  While it has not occurred, some of our anticipated projects could be delayed or cancelled due to the diversion of federal government resources to the financial markets.

State and Local Government.  In the first quarter of fiscal 2009, our state and local government business experienced a revenue decline of 13.9% compared to the same quarter last year due primarily to the economic conditions described below.  The decline also resulted from the wind-down of a large construction management contract and the conclusion of a fiber-to-the-premises contract in the second quarter of fiscal 2008.  Many state and local government agencies are facing increasingly challenging economic conditions including budget deficits,

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declining tax revenues and difficult cost-cutting decisions.  Simultaneously, states are facing major long-term infrastructure needs, including the maintenance, repair and upgrading of existing critical infrastructure and the need to build new facilities.  The funding risks associated with our state and local government programs are partially mitigated by the regulatory requirements driving these programs, such as regulatory-mandated consent decrees, as well as demographic shifts and increasing demand for water and wastewater services.  As a result, some programs will generally occur despite budget pressures, and we anticipate that infrastructure projects, especially those focused on the need for demand-driven water resource requirements, will be initiated and funded in fiscal 2009.  However, we expect that our state and local government business will continue to decline for the remainder of fiscal 2009.  We will remain vigilant in monitoring and evaluating state and local government budgets and will continue to assess any potential impact on our state and local government business, including the potential uncertainty of our clients’ ability to sell their infrastructure bonds and/or fund their ongoing operating requirements.

Commercial.  In the first quarter of fiscal 2009, our commercial business experienced robust growth of 127.0% compared to the same quarter last year.  This growth was driven by increased demand for our wind and other alternative energy services, as well as water programs.  To a lesser extent, our growth was attributable to environmental engineering and development projects.  We anticipate that our commercial business will experience growth in fiscal 2009 compared to fiscal 2008 due to existing backlog for wind and other alternative energy services, as well as water programs.  We also anticipate some growth in the transmission requirements for renewable energy sources.  Further, we expect our international commercial business to increase as a result of our recent acquisition.  However, we may experience lower revenue than anticipated if planned alternative energy projects are delayed or cancelled due to declining energy prices or other reasons.  Additionally, due to the current economic conditions, we may experience project delays and reduced workload from commercial clients for the remainder of fiscal 2009.

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 both privately held companies and subsidiaries of publicly held 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 both cash and 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.  As a result, we typically consummate a deal to acquire another business with a purchase price that results in the recognition of goodwill and other identifiable intangible assets.

In the first quarter of fiscal 2009, we made one acquisition that offers complementary technical expertise to enhance our USAID service offerings in the TSS segment.  In January 2009, we acquired Wardrop, a Canadian firm that specializes in resource management, energy and infrastructure design.  For its fiscal year ended September 30, 2008, Wardrop reported in excess of $120 million of revenue.  This acquisition significantly expands our worldwide presence, adding 13 offices throughout Canada together with offices in the United Kingdom and India.  We also acquired a nuclear science and engineering firm that expands our service offerings to the federal government and commercial clients in the energy market.  Both of these acquisitions are part of our ECS segment.  The initial purchase price for these acquisitions, which is subject to adjustment, was financed with available cash resources and approximately $80 million of borrowings under our revolving credit facility.

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 continue to divest certain non-core businesses and reallocate our resources to businesses that better align with our long-term strategic direction.  We had no divestitures in the first quarters of fiscal 2008 and 2009.

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RESULTS OF OPERATIONS

Overall, our results for the first quarter of fiscal 2009 improved compared to the same quarter last year due to our focus on organic growth and the strategic pursuit of acquisitions that enhance our service offerings and expand our geographical presence.  We continued to experience revenue growth across all segments, particularly from wind energy and water programs.  To a lesser extent, international development, environmental remediation and environmental engineering and development projects contributed to our growth.  However, reduced activity on reconstruction and UXO projects in Iraq partially offset this growth.

CONSOLIDATED RESULTS