Use these links to rapidly review the document
TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-K

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

For the Fiscal Year Ended October 2, 2011

or

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
incorporation or organization)
  (I.R.S. Employer
Identification No.)

3475 East Foothill Boulevard, Pasadena, California 91107
(Address of principal executive offices) (Zip Code)

(626) 351-4664
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.01 par value

 

The NASDAQ Stock Market LLC
(Title of class)   (Name of exchange)

Securities registered pursuant to Section 12(g) of the Act:

None



          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o    No ý

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Act). Yes o    No ý

          The aggregate market value of the registrant's common stock held by non-affiliates on March 25, 2011 was $1.5 billion (based upon the closing price of a share of registrant's common stock as reported by the Nasdaq National Market on that date).

          On November 7, 2011, 62,537,372 shares of the registrant's common stock were outstanding.

DOCUMENT INCORPORATED BY REFERENCE

          Portions of registrant's Proxy Statement for its 2012 Annual Meeting of Stockholders are incorporated by reference in Part III of this report where indicated.


Table of Contents


TABLE OF CONTENTS

 
   
  Page  

PART I

 

Item 1

 

Business

   
4
 

 

General

    4  

 

Mission

    5  

 

Industry Overview

    5  

 

The Tetra Tech Strategy

    6  

 

Reportable Segments

    7  

 

Engineering and Consulting Services

    8  

 

Technical Support Services

    9  

 

Engineering and Architecture Services

    10  

 

Remediation and Construction Management

    11  

 

Project Examples

    12  

 

Clients

    14  

 

Contracts

    17  

 

Marketing and Business Development

    18  

 

Sustainability Program

    19  

 

Acquisitions

    19  

 

Competition

    20  

 

Backlog

    20  

 

Regulations

    21  

 

Seasonality

    22  

 

Potential Liability and Insurance

    22  

 

Employees

    22  

 

Executive Officers of the Registrant

    23  

Item 1A

 

Risk Factors

    28  

Item 1B

 

Unresolved Staff Comments

    45  

Item 2

 

Properties

    45  

Item 3

 

Legal Proceedings

    45  

PART II

 

Item 5

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   
47
 

Item 6

 

Selected Financial Data

    49  

Item 7

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    50  

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk

    69  

Item 8

 

Financial Statements and Supplementary Data

    71  

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    108  

Item 9A

 

Controls and Procedures

    108  

Item 9B

 

Other Information

    109  

2


Table of Contents

 
   
  Page  

PART III

 

Item 10

 

Directors, Executive Officers and Corporate Governance

   
109
 

Item 11

 

Executive Compensation

    109  

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    109  

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

    109  

Item 14

 

Principal Accounting Fees and Services

    109  

PART IV

 

Item 15

 

Exhibits, Financial Statement Schedules

   
110
 

 

Signatures

    112  

 

Index to Exhibits

    114  

3


Table of Contents

        This Annual Report on Form 10-K ("Report"), 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 harbors created under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). 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," "estimates," "seeks," "continues," "may," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, 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 "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.


PART I

Item 1.    Business

General

        Tetra Tech, Inc. is a leading provider of consulting, engineering, program management, construction management and technical services that focuses on supporting fundamental needs for water, natural resources, the environment, infrastructure and energy. 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 are a global provider of consulting and engineering renowned for our leadership in water-related services for public and private clients. Engineering News-Record ("ENR"), the leading trade journal for our industry, has ranked us the number one water services firm for the past eight years, most recently in its April 25, 2011, "Top 500 Design Firms" issue. In fiscal 2011, Tetra Tech was also ranked number one in water transmission lines and aqueducts, environmental management, and green design for government office buildings. ENR also ranks Tetra Tech among the top 10 firms in numerous service lines, including environmental science, engineering/design, sanitary/storm sewers, solid waste, chemical and soil remediation, site assessment and compliance, education, hazardous waste, industrial process, and manufacturing.

        Our commitment to continuous improvement and investment in growth has diversified our client base, expanded our geographic reach, and increased the breadth and depth of our service offerings to address existing and emerging markets. We currently have more than 13,000 employees worldwide, located primarily in North America.

        We were incorporated in Delaware in February 1988 and are headquartered in Pasadena, California. Our predecessor company (the Water Management Group of Tetra Tech, Inc.) was a subsidiary of Honeywell, Inc. and was incorporated in 1966. The mailing address of our headquarters is 3475 East Foothill Boulevard, Pasadena, California 91107, and the telephone number at that location is (626) 351-4664. Our corporate website is located at www.tetratech.com. Through a link in the Investor Relations section of our website, we make available our filings with the Securities and Exchange Commission ("SEC") free of charge.

4


Table of Contents


Mission

        Our mission is to be the premier worldwide consulting and engineering firm, focusing on water, natural resources, the environment, infrastructure and energy. The following core principles form the underpinning of how we work together to serve our clients:


Industry Overview

        We are part of the global consulting and engineering industry that serves public and private clients by addressing fundamental needs for water, natural resources and energy. Our industry provides clients with the technical studies, planning, engineering, design and construction management services that address their needs. The industry's clients vary in size and scope from small local public agencies and private companies to national governments and large multi-national corporations. These clients seek service firms with high-caliber technical expertise, practical experience, multi-disciplinary capabilities and the global reach needed to analyze their problems in order to develop and implement the most appropriate, cost-effective solutions.

        Many government and commercial organizations face complex challenges due to increased demand and competition for water and natural resources, newly understood threats to human health and the environment, aging infrastructure, demand for new infrastructure in emerging economies, and diversification and development of energy resources. As a global company with a local presence in many areas around the world, we provide the breadth of technical knowledge and capabilities to address our clients' needs in the areas of water, natural resources, the environment, infrastructure and energy. We work for a wide variety of clients to solve diverse and challenging problems. Our water market supports government agencies responsible for managing water supply, waste treatment, stormwater and flood protection. Our water market also supports private sector clients that require water supply and treatment for industrial processes. We help our clients develop water supplies and manage water resources, while addressing a wide range of local and federal government requirements and policies. We provide essential support for water and site management needs for resource extraction in the mining and oil and gas industries. Our water and environmental markets also include both government and commercial clients that are working to restore contaminated areas and protect uncontaminated areas. Our infrastructure market includes the design of public and commercial buildings and facilities, including high efficiency, low energy use buildings. Our energy market consists of both government and commercial clients that seek to develop renewable energy resources, identify energy efficiency improvements, and improve energy transmission.

        Increasingly, the consulting and engineering industry is being asked to provide integrated solutions in a global marketplace. Large firms such as Tetra Tech can offer fully integrated services, from front-end science and planning through construction management. Large firms that offer integrated solutions differentiate themselves from smaller firms that generally offer niche services by providing turn-key solutions intended to save time and money. As a large company with a history of leading with science, we

5


Table of Contents

are ideally suited to providing interdisciplinary solutions across our water and related service lines. As a provider of interdisciplinary services, we have increased our market share in each of the last several years.

        Public policy, demand for resources, infrastructure development challenges, and natural forces constantly shape changes in our industry. Public concern over environmental issues, especially water quality, has been a driving force behind numerous regulations and changes in public policies and practices. Public and private clients are increasingly focused on water management, energy efficiency and sustainability. Fluctuations in weather patterns and extreme events, such as droughts or flooding, are driving concerns over the reliability of water supplies and the need to protect coastal areas and upgrade water infrastructure. Energy policies, resource limitations and concern about climate change have encouraged implementation of energy conservation measures, retrofits to existing structures, upgrades to energy transmission infrastructure and the development of renewable energy resources. Governments are now using international development as a foreign policy tool to help developing nations to overcome numerous challenges, including challenges related to water accessibility and human health.


The Tetra Tech Strategy

        To continue our successful growth and maintain a competitive position, we have implemented the following strategy that is integral to our future success:

        Start with Science.    We typically start with science at the onset of a project, building on our staff's strong technical and interdisciplinary foundation in natural and physical sciences. This strength allows us to effectively evaluate and recommend potential solutions to our clients' problems. We can support our clients through the entire project life cycle by providing consulting, engineering, construction management, operations and maintenance, and information technology services. We offer these services individually or as part of our full-service approach.

        Capitalize on our Extensive Technical and Multi-Disciplinary Experience.    Since our inception, we have provided innovative consulting and engineering services, focusing on cost-effective solutions to all aspects of water resource management. We have been successful in leveraging this foundation of scientific and engineering capabilities into other market areas, including sustainable infrastructure and building design. Our services are provided by a wide range of professionals, including archaeologists, architects, biologists, chemical engineers, chemists, civil engineers, computer scientists, economists, electrical engineers, environmental engineers, environmental scientists, geologists, hydrogeologists, mechanical engineers, oceanographers, project managers and toxicologists. Because of the experience that we have gained from thousands of completed projects, we have relevant expertise to draw from and are often able to adapt and apply proven solutions to our clients' problems.

        Global Coverage and Local Delivery.    We believe that proximity to our clients is instrumental to understanding their needs and delivering comprehensive services. We have significantly broadened our geographic presence in recent years through strategic acquisitions and internal growth. We currently have North American operations throughout the United States and Canada. We have also increased our international presence with regional offices in Australia, Europe, Asia, South America, Africa and the Middle East. Our base of operations in North America and network of international offices provide a platform from which we can respond to the global need for essential water and energy services, foster economic development, and provide access to basic services. We are actively working in 135 countries, helping federal and local government agencies, the private sector and development assistance entities address complex water, infrastructure and energy challenges in an environmentally responsible manner.

        Leverage Existing Client Base.    We believe that we can effectively expand our service offerings to existing clients, resulting in more comprehensive and interdisciplinary projects and, ultimately, increases in our revenue. Often we have been able to secure design and program management contracts after having served clients on the scientific evaluation and engineering phases of a project. By expanding our role with

6


Table of Contents


existing clients, we can address larger problems and provide integrated solutions. For our global clients, we also focus on expanding from localized geographic areas to provide broader national and international support in multiple locations.

        Identify and Expand into New Business Areas.    We use our consulting services and specialized technical services as entry points to evaluate adjacent business areas. After our consulting practice is established in a new business area, we can expand our operations by offering additional technical services. For example, based on our work in watershed management consulting, we identify adjacent opportunities and expand into water infrastructure and engineering services.

        Focus on Large, Complex and Interdisciplinary Projects.    We continue to focus on expanding our public and private sector services and bidding for complex projects that are at the leading edge of policy and technology development. We can develop integrated, sustainable solutions by combining our interdisciplinary capabilities in water, natural resources, the environment, energy and infrastructure. Our combination of technical expertise with practical applications provides challenging and rewarding opportunities for our employees, thereby enhancing our ability to recruit and retain top quality talent.

        Focus on Cash Generation.    We take a disciplined approach to monitoring, managing and improving our return on investment in each of our business areas through our efforts to negotiate appropriate contract terms, manage our contract performance to minimize schedule delays and cost overruns, and promptly bill and collect accounts receivable.

        Actively Attract, Recruit and Retain Strategic Hires.    We focus on attracting and retaining top-quality individuals who provide technical skills, innovative thinking, teamwork, and dedication to maintaining long-term client relationships. Our full-service capabilities, internal coordination and networking programs, entrepreneurial environment, focus on technical excellence and global project portfolio help to attract and retain highly qualified individuals who support our long-term growth.

        Invest in Strategic Acquisitions.    We believe that strategic acquisitions will allow us to continue our growth in selected business areas, broaden our service offerings and extend our geographic presence. We intend to make acquisitions that will help establish our position in certain emerging business areas or further strengthen our position in our more established service offerings. We believe that our reputation makes us an attractive partner. Our effective integration of acquisitions can continue to enhance our ability to compete technically and geographically.


Reportable Segments

        We manage our business under four reportable segments. The following table presents the percentage of our revenue by reportable segment:

 
  Fiscal Year
 
  2011   2010   2009

Reportable Segment

 

 


 

 


 

 

Engineering and Consulting Services

    43.0%     33.2%     26.3%

Technical Support Services

    22.1         24.0         22.8    

Engineering and Architecture Services

    12.0         13.3         13.1    

Remediation and Construction Management

    28.2         34.5         41.6    

Inter-segment elimination

    (5.3)       (5.0)       (3.8)  
             

  100.0%   100.0%   100.0%
             

7


Table of Contents

        For more information concerning our reportable segments, see Note 17, "Reportable Segments" of the "Notes to Consolidated Financial Statements" included in Item 8.


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.

        Surface Water Management.    Public concern with the quality of rivers, lakes, streams, and coastal and marine waters, and the ensuing legislative and regulatory response, is driving demand for our services. More recently, two important factors have raised the visibility of the need for surface water management: competition for water resources and climate variations, such as those that cause droughts and floods. Over the past 40 years, we have developed a specialized set of technical skills that position us to compete effectively for surface water and watershed management projects. We provide water resource services to U.S. federal and Canadian provincial government clients such as the U.S. Environmental Protection Agency ("EPA"), the U.S. Department of Defense ("DoD"), the U.S. Department of Energy ("DOE") and the Alberta Ministry of Environment. We also provide these services to a broad base of commercial clients, including those in the aerospace, chemical, alternative energy, mining, petroleum, pharmaceutical, retail and utility industries. Further, we provide surface water modeling services to municipal government agencies in the United States and Canada, particularly in the areas of watershed management, climate adaptation analysis, flood control, and the optimal management of stormwater and combined sewer overflow systems.

        Groundwater.    Groundwater is a critical source of drinking water and represents a substantial portion of the water used for residential, industrial and agricultural purposes. Our activities in the groundwater field include projects such as evaluating the adequacy of water supplies, investigating and identifying the sources of chemical contamination to groundwater, examining the extent of contamination, analyzing the speed and direction of contamination migration, and designing and evaluating remedial alternatives. In addition, we conduct monitoring studies to assess the effectiveness of groundwater treatment and extraction wells.

        Waste Management.    We provide a wide range of engineering and consulting services for waste disposal, landfill design and management, hazardous waste contamination and remediation from initial site assessment through design and implementation. In addition, we perform risk assessments to determine the probability of adverse health effects that may result from exposure to toxic substances. We provide waste minimization and pollution prevention services, and we evaluate the effectiveness of innovative waste management technologies and novel solutions to environmental problems. We also provide full-service solutions for gas-to-energy facilities utilizing landfill methane gas.

        Mining and Geotechnical Sciences.    We offer a full range of services for mining projects from resource assessment to mine development, to operations support, and closure/remediation. Our full-service mining services team includes geologists, metallurgists, mine engineers, environmental scientists and water specialists. We are able to address tough challenges in engineering design, procurement, and construction to support all areas of mine operations, including underground and open pit operations, surface infrastructure, mills and process plants, power generation and transmission projects, water treatment, tailings management, and regulatory compliance. Our geotechnical practice includes geotechnical engineers, soils technicians and drillers who investigate, analyze, and develop geotechnical engineering recommendations for all types of soil and rock conditions. We have specialized capabilities to evaluate, monitor and design foundations and materials for roads, bridges, levees, flood walls, and buildings located in extremely poor soil conditions, including conditions common to coastal regions.

8


Table of Contents

        Arctic Engineering.    We provide world-class consulting and construction services to owners of transportation, mining, energy and community infrastructure in the circumpolar region, which includes the Arctic and areas of permafrost around the globe. In this extreme environment where temperatures can drop below -50 °C (-58 °F), we provide adaptive engineering and scientific services that reach beyond traditional approaches. Tetra Tech is one of the few firms that is capable of providing full life cycle services for northern development. We offer these arctic engineering services during all project phases: exploration and project planning; feasibility studies, design, and permitting; engineering, procurement, and construction management ("EPCM") and construction; and operation, decommissioning, and reclamation phases.

        Industrial Processes and Oil Sands.    We offer best-in-class plant engineering services for clients in heavy industry, including mining and metals clients, oil sands, and those in the chemical and petrochemical industries. We have supported the industrial process needs of clients with expertise in the production of base metals such as copper, zinc, magnesium, lead, iron ore, and their byproducts. We help renovate, upgrade, and modernize industrial facilities, including concentrators, smelters, and refineries. We provide significant services to major clients in the oil sands region of northern Alberta, including management of tailings treatment and recovery. We also provide plant engineering, project execution, program management, and full EPCM services for industrial process projects throughout North America.

        Information Technology.    We provide technology systems integration to support data management, data processing, communications/outreach and systems development. Our projects range from large-scale environmental monitoring, modeling, and data management to systems engineering and design for major infrastructure rehabilitation programs. We provide systems analysis and information management to optimize the U.S. National Airspace System and related aviation systems. We also support research and technical services for national-scale water resource and environmental data management, including archiving and statistical analysis.


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.

        Environmental Assessments/Hazardous Waste Management.    We provide comprehensive services for environmental planning, cleanup and reuse of sites contaminated with hazardous materials, toxic chemicals, and oil and petroleum products. Our services cover all phases of the remedial planning process, starting from emergency response and initial site assessment through removal actions and remedial design and implementation management. Sites range from small properties undergoing voluntary cleanup, to brownfields redevelopment projects, to DoD installations, to some of the largest and most complex Superfund sites in the United States. We support both commercial and government clients in planning and implementing remedial activities at numerous sites around the world. We also provide a broad range of environmental analysis and planning services to ensure that our clients are implementing their operations in a sustainable manner. Our services include air quality management, regulatory compliance, information management and geographic information systems, radiation protection/health physics, risk management, pollution prevention/control, radioactive and hazardous waste management, National Environmental Policy Act ("NEPA") services and environmental response training.

        Climate Change.    In a resource-constrained world, our experts assist clients in identifying, reducing and strategically managing their environmental footprint to provide cost savings, mitigate regulatory impacts, institute operational efficiencies, develop new business opportunities and promote corporate responsibility. Our services support our clients' efforts to become sustainable by "greening" energy supplies, implementing energy efficiency and resource conservation, using alternative fuels, capturing and

9


Table of Contents


sequestering carbon, improving land and forest resource management, and purchasing carbon offsets. Our experience has demonstrated that clients can concurrently reduce their carbon emissions and environmental impacts while saving money. Our services include climate change and strategic management consulting, project implementation, and greenhouse gas inventory assessment, certification, reduction and management.

        International Development.    We provide services to many donor agencies such as the U.S. Agency for International Development ("USAID"), the World Bank, the Asian Development Bank and the Inter-American Development Bank to develop safe and reliable water supplies and sanitation services, support the eradication of poverty, improve livelihoods, promote democracy and increase economic growth. We plan, design, implement, research and monitor projects in the broad areas of climate change, agriculture and rural development, governance and institutional development, natural resources and the environment, infrastructure, economic growth, energy, rule of law and justice systems, land tenure and property rights, and public-private partnerships training and consulting. We build capacity and strengthen institutions in areas such as global health, energy sector reform, utility management, food security and local governance. We currently provide international development services support in 67 countries around the world, working for the U.S. Department of State ("DoS"), USAID, the Millennium Challenge Corporation ("MCC") and DoD.

        International Reconstruction and Stabilization.    We provide integral support to the DoS and USAID in reconstruction and stabilization worldwide, including the design, development, implementation, and evaluation of these efforts. We also help develop training programs and curricula for "whole of government" reconstruction and stabilization training offered through the Foreign Service Institute. We helped develop the Interagency Conflict Assessment Framework, the tool now used by the U.S. government to assess and develop solutions in conflict-prone environments. Our experts have worked on these issues in such countries as the Republic of Georgia, South Sudan, Kosovo, Haiti, Bangladesh, Nepal, and the Democratic Republic of Congo.

        Energy.    We provide a full range of services to electric power utilities and independent power producers worldwide, ranging from macro-level planning, management and advisory services to project-specific environmental, engineering and construction services. For utilities and governmental agencies regulating power, we provide policy and regulatory development, utility management and privatization, power asset evaluation and management, and transaction support services. For energy developers and owners of renewable and conventional power generation facilities, as well as transmission and distribution assets, we provide environmental, engineering, procurement, operations and maintenance services for all project phases.

        Technical Government Consulting.    We provide a broad spectrum of professional and technical services, including advisory and assistance services, to supplement and support the internal staff of our U.S. federal government clients. Our service offerings include facility planning and operational support, infrastructure development and management, human resource management, program and logistics management, engineering, test and evaluation, information technology, and administrative support. We provide senior advisors and subject matter experts to a diverse array of clients including the DoS, U.S. National Guard Bureaus and MCC in such areas as political-military affairs, public diplomacy and strategic communication, strategic planning, and measurement and evaluation.


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.

10


Table of Contents

        Water Infrastructure.    Our design and technical services are applied to numerous aspects of water quality and quantity management, including major water and wastewater treatment plants, combined sewer storage and separation, and drainage and flood control. Our experience includes planning, permitting, design and construction management services for water treatment facilities, desalination facilities and water distribution systems, including pipelines and pump stations.

        Buildings.    We provide planning, architectural and engineering services for U.S. federal, state and local government and commercial facilities including military housing, educational, institutional, corporate headquarters, healthcare and research facilities. We specialize in designing high-performance, sustainable facilities that minimize environmental impacts, typically by minimizing water and power usage. Many of these green buildings include integrated interior systems for heat, light, security and communications, and may ultimately achieve LEED certification. Our projects include high-rise office buildings, museums, hotels, parks, visitor centers, marinas, and entertainment and leisure facilities. We have provided civil, electrical, mechanical, structural, plumbing and fire protection engineering and design services for high-profile buildings around the world. We have completed engineering and construction management projects for a wide range of clients with specialized needs such as security systems, training and audiovisual facilities, clean rooms, laboratories, medical facilities and emergency preparedness facilities.

        Transportation and Facilities.    We provide engineering, architecture, construction management and technical services for transportation projects that improve public safety and mobility. Our transportation projects include roadway improvements, commuter railway stations, airport expansions, bridges and major highways. We repair, replace and upgrade older transportation infrastructure. We also support planning, permitting, design and construction of water-related redevelopment projects, and parks and river corridor restoration projects, as well as state, local and mixed-use commercial, industrial and residential facility development projects.


Remediation and Construction Management ("RCM")

        RCM is focused on completing our full-service support to U.S. federal government, state and local governments and commercial clients. RCM's service lines include environmental remediation, infrastructure development, and alternative energy.

        Environmental Remediation.    We provide environmental remediation and reconstruction services to evaluate and restore lands to beneficial use. Environmental remediation includes activities to identify, evaluate and destroy unexploded ordinance ("UXO"), both domestically and internationally. Under the U.S. federal government's Base Realignment and Closure ("BRAC") Act, we help remediate and restore facilities at military locations in the United States and around the world. We provide environmental management and planning support to evaluate and mitigate impacts from human activities on the natural environment. In addition, we manage large, complex sediment remediation programs that help restore rivers and coastal waters to beneficial use.

        Infrastructure Development.    We provide program management, construction management, and development services for large scale water management infrastructure including flood protection structures, water conveyance and treatment facilities, and hydroelectric power projects. We also build energy-efficient buildings and support our clients in developing transportation-related structures including roads, bridges, aviation/runways and ports and harbor facilities. We provide environmental, engineering, procurement, construction and operations and maintenance services for all project phases.

11


Table of Contents

        Alternative Energy.    We provide full range of services for alternative energy development. For wind, solar and hydroelectric power development and upgrade projects, we provide environmental, engineering, procurement, construction and operations and maintenance services for all project phases. Our capabilities include site evaluation, planning, biological assessments, permitting, engineering, construction management, construction and electrical services. We also provide services for other emerging and alternative energy technologies including geothermal, nuclear and biogeneration technologies.


Project Examples

        The following table presents brief examples of current projects in our four segments:

  
   
Segment   Representative Projects

ECS

 

•       Supporting environmental activities at U.S. Air Force ("USAF") installations worldwide to assist the USAF in its environmental mission in the areas of environmental conservation and planning, environmental quality, environmental restoration, design and construction.

 

•       Assisting the EPA Office of Wastewater Management in conducting the Clean Water Needs Survey to assess financial needs for constructing wastewater treatment plants and other water-related infrastructure.

 

•       Providing environmental operations and maintenance services at Vandenberg Air Force Base in California. Also providing operations and maintenance services for a wastewater treatment plant and a hazardous waste collection plant, air monitoring and other services.

 

•       Providing watershed planning and modeling services for Los Angeles County to address water quality and optimize stormwater management program needs.

 

•       Providing full-service support to Cameco Corporation, such as due diligence, feasibility studies, environmental assessment and permitting, and EPCM, including design delivery and support for all phases of global uranium mine operations.

 

•       Providing engineering and procurement, and on-site engineering assistance to Yukon Zinc for the Wolverine Lake Mine, Yukon Territory, Canada.

TSS

 

•       Under EPA's Scientific, Technical, Research, Engineering, and Modeling Support contract, supporting the development and evaluation of technologies and tools to prevent or reduce pollution of air, land, and water, and restore ecosystems.

 

•       Providing support to the EPA's Climate Change Division to reduce methane (a greenhouse gas) from landfills and encourage recovery and beneficial use of landfill gas as an energy source.

 

•       Implementing the Africa Resilience to Climate Change project to support USAID's Africa, Latin America and Caribbean Bureaus by developing and implementing climate change vulnerability assessment methodologies and providing technical, outreach, and training support.

12


Table of Contents

  
   
Segment   Representative Projects

 

•       Helping USAID implement multiple international development programs in Afghanistan including the Sustainable Water Supply and Sanitation contract; the Rule of Law Stabilization Program – Formal component; the Kabul City Initiative; the Kabul Electricity Service Improvement Program; and the Land Reform in Afghanistan program.

 

•       Providing reconstruction and stabilization support services on behalf of the DoS in unstable countries around the world.

 

•       Providing specialty marine impact studies, permitting services, biological and cultural resources surveys, design and construction support for Garden State Offshore Energy, LLC, a major offshore wind developer. Similar environmental services are provided to multiple utilities such as Idaho Power for energy transmission line routing

 

•       Providing engineering, staff augmentation and technical support services to U.S. federal government agencies such as the U.S. Missile Defense Agency, the Transportation Security Administration ("TSA") and the DoS.

EAS

 

•       Providing architectural and engineering design services for numerous U.S. government facilities, including military housing and overhead protection systems.

 

•       Providing mechanical, electrical, plumbing and fire protection engineering design services for buildings, including major corporate headquarters buildings, healthcare facilities, research laboratories, cultural arts facilities and universities.

 

•       Providing design, construction management and design-build services to the City of Augusta, Georgia, for various infrastructure projects including pipelines, lift stations, storage tanks, buildings, treatment facilities and all associated electrical, instrumentation and control.

 

•       Providing design and traffic management services for the Massachusetts Department of Transportation's I-93 FAST 14 Bridge Replacement Program.

 

•       Providing architectural and engineering design services for new K-12 educational facilities throughout New York.

RCM

 

•       Providing program management services for environmental restoration of the Rocky Mountain Arsenal, a former chemical weapons manufacturing plant.

 

•       Providing engineering, project management and construction management to help construct facilities and infrastructure in Afghanistan for the USAF and the U.S. Army Corps of Engineers ("USACE").

13


Table of Contents

  
   
Segment   Representative Projects

 

•       Providing design-build services for energy-efficient facilities and environmental restoration services at various DoD BRAC sites, such as the Hunters Point Naval Shipyard in San Francisco, California.

 

•       Providing turn-key solutions for utilities and commercial energy developers, including environmental studies, permitting, engineering, design, construction and operations and maintenance services, for wind farms and solar facilities throughout the United States.

 

•       Providing turn-key design, construction, dredging and treatment services for the Lower Fox River remediation and clean-up.

 

•       Assisting Verizon and AT&T with the deployment and maintenance of a high-capacity broadband fiber optic network in the western and midwestern United States.


Clients

        We provide services to a diverse base of U.S. federal, state and local government agencies, as well as commercial and international clients. The following table presents the percentage of our revenue by client sector:

 
  Fiscal Year
 
  2011   2010   2009

Client Sector

 

 


 

 


 

 

Federal government(1)

    43.4%     51.9%     50.9%

State and local government

    11.0         14.8         12.1    

Commercial

    22.4         23.8         32.4    

International(2)

    23.2           9.5           4.6    
             

  100.0%   100.0%   100.0%
             

 

 

 

 

 

 

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

        U.S. federal government agencies are among our most significant clients. The DoD accounted for 20.4%, 28.6% and 30.9% of our revenue in fiscal 2011, 2010 and 2009, respectively. We typically support multiple programs within a single U.S. federal government agency, both domestically and internationally. We also assist state and local government clients in a variety of jurisdictions across the United States. Our commercial clients include companies in the chemical, energy, mining, pharmaceutical, retail, aerospace, automotive, petroleum, and communications industries. No single commercial client accounted for more than 10% of our revenue in fiscal 2011.

14


Table of Contents

        The following table presents a list of representative clients in our reportable segments.

  
  Representative Clients
Reportable
Segment
  Federal Government   State and Local
Governments
  Commercial   International
ECS   DoD; DOE; EPA; Federal Aviation Administration ("FAA"); International Boundary and Water Commission ("IBWC"); National Oceanic and Atmospheric Administration ("NOAA"); USACE; USAF; USAID; U.S. Bureau of Reclamation; U.S. Department of the Interior, Bureau of Land Management; U.S. Forest Service ("USFS"); U.S. General Services Administration ("GSA"); U.S. Navy ("USN")   California Department of Water Resources; City of Philadelphia, Pennsylvania; City of San Diego, California; County of Ventura, California; Fairfax County, Virginia; Los Angeles County, California; Louisiana Office of Coastal Protection and Restoration; Plaquemines Parish Government, Louisiana; Port of Los Angeles, California; Seattle Department of Transportation ("DOT"); State of Wyoming; Washington State DOT   AIG Domestic Claims, Inc.; Barrick Gold Corporation; Carson Marketplace, LLC; ConocoPhillips Co.; Exxon Mobil Corp.; Ford Motor Co.; General Electric Co.; Intrepid Potash-New Mexico, LLC; Kinder Morgan Energy Partners, L.P.; Lockheed Martin Corp.; McClellan Business Park, LLC; Newmont Mining Corp.; Shell Canada Limited; Southern California Gas Co.; Suncor Energy; Sunflower Redevelopment, LLC; Waste Management,  Inc.   BHP Billiton; Cameco Corp.; Canal Authority; Chevron Corporation; City of Calgary, Alberta; City of Paris, France; City of Toronto, Ontario; City of Winnipeg, Manitoba; Hydro One Incorporated.; Hydro-Quebec; Ontario Power Generation, Inc.; The Mosaic Co.; Panama Terrane Metals Corp.; Winnipeg Airports Authority, Inc.; Yukon Zinc Corporation

TSS

 

DOE; DoS; Department of Homeland Security; National Aeronautics and Space Administration; National Guard Bureaus; National Nuclear Security Administration; NOAA; TSA; USAF; USACE; USAID; U.S. Coast Guard ("USCG"); USEPA; U.S. Missile Defense Agency; USN

 

City of Chicago, Illinois; City of Kansas City, Missouri; City of Los Angeles, California; Idaho Power; Port of Los Angeles, California; Port of San Diego, California; Portland General Electric; States of California, Massachusetts, Missouri, Montana, New York, New Jersey, Pennsylvania and Wisconsin; University of California, Berkeley

 

ACCIONA Infrastructure North America; Alcoa Inc.; Bechtel Power Corp.; Carson Marketplace, LLC; Chartis, Inc.; ConocoPhillips Co.; D.R. Horton, Inc.; El Paso Corporation; Exxon Mobil Corp.; Ford Motor Co.; General Electric Co.; Lend Lease Americas; Lockheed Martin Corp.; McClellan Business Park, LLC; NextEra Energy Resources LLC; PPG Industries; Range Resources-Appalachia, LLC; Target Corp.; Texas Energy Group,  LLC; W.R. Grace & Co.

 

Agroreserve Russia; Al Taaqa; British Virgin Islands Tourist Board; Dead Sea Development Commission; Electricity Holding Co. of Oman; Enbridge Inc.; Gamesa Corporacíon Tecnológica; Hainan Land Property Group; Horizon Wind Energy LLC; Iberdrola S.A.; OPMAC Corporation of Japan; Pan-China Construction Group; Renewable Energy Systems Ltd.; Ridgeline Energy; RWE AG, Germany; Vnesheconombank

15


Table of Contents

  
  Representative Clients
Reportable
Segment
  Federal Government   State and Local
Governments
  Commercial   International
EAS   Defense Commissary Agency; GSA; MCC; USACE; USAF; USAID; USCG; USFS; U.S. Fish and Wildlife Service; USN; U.S. Postal Service   Allegheny County Sanitary Authority; Boston Water and Sewer Commission; City of Kansas City, Missouri; City of Lansing, Michigan; City of Omaha, Nebraska; City of Port Huron, Michigan; City of Toledo, Ohio; City of San Juan Capistrano, California; City of Tulsa, Oklahoma; Cortland Enlarged City School District; Geneva City School District; Huntsville Utilities; Irvine Ranch Water District; King County, Washington; Massachusetts DOT, Highway Division; Michigan DOT; Minisink Valley Central School District; Ohio DOT; Oklahoma DOT; Orange County Public Works, California; Orange County Utilities Department, Florida; Port of Long Beach, California; Tulsa Metropolitan Utility Authority; Whitesboro Central School District   Absher Construction Co.; AT&T Inc.; General Motors Co.; Genzyme Corp.; Goldman Sachs; Kendall/Heaton Associates, Inc.; Kohn, Pederson, Fox Associates, PC; Larfarge; Lockheed Martin Corp.; M. Arthur Gensler Jr. & Associates, Inc.; Parsons Brinckerhoff, Quade & Douglas, Inc.; Pascal & Ludwig Engineers; PCL Construction Services, Inc.; Pioneer Natural Resources Co.; Rafael Vinoly Architects PC; Record Steel and Construction Inc.; Skidmore, Owings and Merrill LLP; The Confederated Tribes of the Colville Reservation; Tutor Perini Corp.; White Kiewit Joint Venture   New Songdo City Development, LLC; Orissa Water Supply & Sewage Board; Societe d'Entreprise & de Gestion; TRO Jung/Brannen, Inc.

RCM

 

Air Force Center for Engineering and the Environment; DoD; DOE; The Naval Facilities Engineering Command; USACE; USCG; USFS

 

New Jersey Turnpike Authority; New York State DOT; New York State Office of General Services; South Florida Water Management District; State University Construction Fund

 

ACCIONA Infrastructure North America; Actus Lend Lease; Alcoa, Inc.; AT&T, Inc.; Castle & Cooke, Inc.; Cogentrix Energy, LLC; Comcast Corp.; Competitive Power Ventures Inc.; Idaho Power Co.; Keenan II Renewable Energy Co., LLC; Lower Fox River Remediation LLC; NextEra Energy Resources, LLC; Noble Constructors, LLC; PacifiCorp; Rockies Express Pipeline LLC; Sheldon Energy LLC; Verizon Communications, Inc.

 

Acciona S.A.; Eni SpA; Iberdrola S.A.; Kuwait Oil Co.; Suez Environnement S.A.; Veolia Environnement S.A.

16


Table of Contents


Contracts

        Our services are performed under three principal types of contracts with our clients: fixed-price, time-and-materials, and cost-plus. The following table presents the percentage of our revenue by contract type:

 
  Fiscal Year
 
  2011   2010   2009

Contract Type

 

 


 

 


 

 

Fixed-price

    40.4%     42.0%     40.8%

Time-and-materials

    38.7         34.0         37.2    

Cost-plus

    20.9         24.0         22.0    
             

  100.0%   100.0%   100.0%
             

        Our clients select the type of contract we enter into for a particular engagement. Under a fixed-price contract, the client agrees to pay a specified price for our performance of the entire contract or a specified portion of the contract. Some fixed-price contracts can include date-certain and/or performance obligations. Fixed-price contracts carry certain inherent risks, including risks of losses from underestimating costs, delays in project completion, problems with new technologies, price increases for materials, and economic and other changes that may occur over the contract period. Consequently, the profitability of fixed-price contracts may vary substantially. Under our time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and for other expenses. Profitability on these contracts is driven by billable headcount and cost control. Many of our time-and-materials contracts are subject to maximum contract values and, accordingly, revenue related to these contracts is recognized as if these contracts were fixed-price contracts. Under our cost-plus contracts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable, we may not be able to obtain full reimbursement. Further, the amount of the fee received for a cost-plus award fee contract partially depends upon the client's discretionary periodic assessment of our performance on that contract.

        Some contracts with the U.S. federal government are subject to annual funding approval. U.S. federal government agencies may impose spending restrictions that limit the continued funding of our existing contracts and may limit our ability to obtain additional contracts. These limitations, if significant, could have a material adverse effect on us. All contracts with the U.S. federal government may be terminated by the government at any time, with or without cause.

        U.S. federal government agencies have formal policies against continuing or awarding contracts that would create actual or potential conflicts of interest with other activities of a contractor. These policies may prevent us from bidding for or performing government contracts resulting from or related to certain work we have performed. In addition, services performed for a commercial or government sector client may create conflicts of interest that preclude or limit our ability to obtain work for a private organization. We attempt to identify actual or potential conflicts of interest and to minimize the possibility that such conflicts could affect our work under current contracts or our ability to compete for future contracts. We have, on occasion, declined to bid on a project because of an existing or potential conflict of interest.

        Our contracts with the U.S. federal government are subject to audit by the government, primarily by the Defense Contract Audit Agency ("DCAA"). The DCAA generally seeks to (i) identify and evaluate all activities that contribute to, or have an impact on, proposed or incurred costs of government contracts; (ii) evaluate a contractor's policies, procedures, controls and performance; and (iii) prevent or avoid wasteful, careless and inefficient production or service. To accomplish this, the DCAA examines our internal control systems, management policies and financial capability; evaluates the accuracy, reliability

17


Table of Contents


and reasonableness of our cost representations and records; and assesses our compliance with Cost Accounting Standards ("CAS") and defective-pricing clauses found within the Federal Acquisition Regulation ("FAR"). The DCAA also performs an annual review of our overhead rates and assists in the establishment of our final rates. This review focuses on the allowability of cost items and the applicability of CAS. The DCAA also audits cost-based contracts, including the close-out of those contracts.

        The DCAA reviews all types of U.S. federal government proposals, including those of award, administration, modification and re-pricing. The DCAA considers our cost accounting system, estimating methods and procedures, and specific proposal requirements. Operational audits are also performed by the DCAA. A review of our operations at every major organizational level is conducted during the proposal review period. During the course of its audit, the U.S. federal government may disallow costs if it determines that we accounted for such costs in a manner inconsistent with CAS. Under a government contract, only those costs that are reasonable, allocable and allowable are recoverable. A disallowance of costs by the U.S. federal government could have a material adverse effect on us.

        In accordance with our corporate policies, we maintain controls to minimize any occurrence of fraud or other unlawful activities that could result in severe legal remedies, including the payment of damages and/or penalties, criminal and civil sanctions, and debarment. In addition, we maintain preventative audit programs and mitigation measures to ensure that appropriate control systems are in place.

        We provide our services under contracts, purchase orders or retainer letters. Our policy provides that all contracts must be in writing. We bill our clients in accordance with the contract terms and periodically based on costs incurred, on either an hourly-fee basis or on a percentage-of-completion basis, as the project progresses. Most of our agreements permit our clients to terminate the agreements without cause upon payment of fees and expenses through the date of the termination. Generally, our contracts do not require that we provide performance bonds. If required, a performance bond, issued by a surety company, guarantees a contractor's performance under the contract. If the contractor defaults under the contract, the surety will, at its discretion, complete the job or pay the client the amount of the bond. If the contractor does not have a performance bond and defaults in the performance of a contract, the contractor is responsible for all damages resulting from the breach of contract. These damages include the cost of completion, together with possible consequential damages such as lost profits.


Marketing and Business Development

        Our corporate management team establishes the scope and range of services we provide and our overall business strategy. The centralized business development support group develops corporate marketing materials, conducts market research, and manages promotional and professional activities, including appearances at trade shows, direct mailings, advertising and public relations. Business development activities are implemented by our technical and professional management staff. We believe that these personnel have the best understanding of a client's needs and the effect of local or client-specific issues, laws and regulations. Our professional staff members hold frequent meetings with existing and potential clients; give presentations to civic and professional organizations; and present seminars on current technical topics. Essential to the effective development of business is each staff member's access to all of our service offerings through our technical and geographic network. Our strong internal network helps allow our professional staff members to recognize opportunities to provide new services to existing clients and broaden our client base in core services. We market throughout the client organizations we target, focusing on opportunities to deliver solutions to emerging programs and provide full-service support.

        For our major focus areas, we have established company-wide initiatives that reinforce internal coordination, track the development of new programs, identify and coordinate collective resources for major bids, and help us to build interdisciplinary teams. Our initiatives provide a forum for cross-sector collaboration and the development of interdisciplinary solutions. We continuously identify new markets

18


Table of Contents

that are consistent with our service offerings, and we leverage our full-service capabilities and internal coordination structure to develop and implement strategies to research, anticipate and position for future procurements.


Sustainability Program

        We lead and support programs that minimize our collective impacts on the environment through the solutions we provide for our clients ("Projects"), through our procurement and subcontracting approach ("Procurement"), and with internal policies and processes that promote sustainable practices, reduce costs and minimize environmental impacts ("Processes"). Collectively, we identify these three sustainability areas as the "3 Ps" that form the pillars of our Sustainability Program. Consistent with the Global Reporting Initiative's internationally recognized sustainability reporting guidelines, we have established a clear set of metrics that define our sustainability goals. We continuously implement sustainability policies and practices, and we assess the results of our efforts in order to improve upon them in the future.

        Our Sustainability Program is led by our Chief Sustainability Officer, who has been appointed by executive management and is supported by other key corporate stakeholders via our sustainability council. Our executive management team reviews and approves the Sustainability Program and evaluates our progress in achieving the goals and objectives outlined in our plan. We publish a periodic sustainability report that documents our progress.


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. Acquisitions are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful or will not have a material adverse effect on our financial position, results of operations or cash flow. All acquisitions require the approval of our Board of Directors, and those in excess of a certain size require the approval of our lenders.

        In fiscal 2007, we acquired Delaney Construction Corporation ("DGI"), which provides planning, development and construction services for wind energy programs, BRAC projects, and water and wastewater treatment and conveyance facilities to its broad-based clients. This acquisition enabled us to provide a wider range of services to our current and prospective wind energy clients, as DGI offers complementary capabilities and client relationships. In fiscal 2008, we acquired ARD, Inc. ("ARD"), which provides applied research, planning, design and implementation services focused on a range of water, energy, environmental and governance challenges. ARD manages large, complex international development projects for its clients, predominantly USAID. This acquisition increased our professional workforce in new geographic areas and technical specialties around the world. In fiscal 2009, we acquired

19


Table of Contents


Wardrop Engineering, Inc. ("Wardrop"), a Canadian firm that specializes in resource management, energy and infrastructure design. This acquisition significantly expanded our worldwide presence with offices throughout Canada, and in the United Kingdom and India. In fiscal 2010, we acquired EBA Engineering Consultants, Ltd. ("EBA"), a Canadian firm that provides natural science, engineering and arctic engineering services to the mining, energy and infrastructure sectors. This acquisition strengthened our geographic presence, and added new customers and complementary technical services. In fiscal 2011, we acquired 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 expands our geographic presence in eastern Canada, and enables us to provide clients with additional services throughout Canada. In fiscal 2011, we also acquired Proteus EPCM Engineers and Metalica Consultores, S.A., the Company's first two acquisitions in Australia and Chile, respectively. Since fiscal 2007, we also made other acquisitions that enhanced our service offerings to broad-based clients and expanded our geographic presence.


Competition

        The market for our services is generally competitive. We often compete with many other firms ranging from small regional firms to large international firms.

        We perform a broad spectrum of consulting, engineering and technical services across our reportable segments. Our client base includes U.S. federal government agencies, such as the DoD, USAID, DOE, EPA and FAA; state and local government agencies in the United States; provincial governments in Canada; the U.S. commercial sector, which consists primarily of large industrial companies and utilities; and our international commercial clients, which are predominately located in Canada and include primarily mining and oil companies. Our competition varies and is a function of the business areas in which, and client sectors for which, we perform our services. The number of competitors for any procurement can vary widely, depending upon technical qualifications, the relative value of the project, geographic location, the financial terms and risks associated with the work, and any restrictions placed upon competition by the client. Historically, clients have chosen among competing firms by weighing the quality, innovation and timeliness of the firm's service versus its cost to determine which firm offers the best value. When less work becomes available in a given market, price becomes an increasingly important factor.

        We believe that our principal competitors include the following firms, in alphabetical order: AECOM Technology Corporation; AMEC PLC; Arcadis NV; Black & Veatch Corporation; Brown & Caldwell; CH2M Hill Companies Ltd.; Camp Dresser & McKee, Inc.; Chemonics International Inc.; Dessau Inc.; GENIVAR Inc.; GHD; ICF International, Inc.; Jacobs Engineering Group Inc.; MWH Global, Inc.; Science Applications International Corporation; The Shaw Group Inc.; Sinclair Knight Merz Pty Ltd.; SNC-Lavalin Group Inc.; Stantec Inc.; TRC Companies, Inc.; URS Corporation; and Weston Solutions, Inc.


Backlog

        We include in our backlog only those contracts for which funding has been provided and work authorization has been received. We estimate that approximately 80% of our backlog at fiscal 2011 year-end will be recognized as revenue in fiscal 2012, as work is performed. However, we cannot guarantee that the revenue projected in our backlog will be realized or, if realized, will result in profits. In addition, project cancellations or scope adjustments may occur with respect to contracts reflected in our backlog. For example, certain of our contracts with the U.S. federal government and other clients are terminable at the discretion of the client, with or without cause. These types of backlog reductions could adversely affect our revenue and margins. Accordingly, our backlog as of any particular date is an uncertain indicator of our future earnings.

20


Table of Contents

        At fiscal 2011 year-end, our backlog was $1.95 billion, an increase of 5.2% compared to fiscal 2010 year-end. Our backlog growth was due primarily to our fiscal 2011 acquisitions and new orders from our international clients, particularly for our water, environmental and infrastructure design services in the mining and energy markets. Additionally, the growth was driven by demand for our energy, water and transportation infrastructure services in the commercial and state and local government markets. The overall growth was partially offset by delays on new awards for certain large construction management projects in the United States and abroad.


Regulations

        We engage in various service activities that are subject to government oversight, including environmental laws and regulations, general government procurement laws and regulations, and other regulations and requirements imposed by specific government agencies with which we conduct business.

        Environmental.    A substantial portion of our business involves planning, design, program management and construction management of pollution control facilities, as well as assessment and management of remediation activities at hazardous waste or Superfund sites and military bases. In addition, we contract with U.S. federal government entities to destroy hazardous materials, including weapons stockpiles. These activities require us to manage, handle, remove, treat, transport and dispose of toxic or hazardous substances.

        Some environmental laws, such as the Superfund law and similar state and local statutes, can impose liability for the entire cost of clean-up for contaminated facilities or sites upon present and former owners and operators, as well as generators, transporters and persons arranging for the treatment or disposal of such substances. In addition, while we strive to handle hazardous and toxic substances with care and in accordance with safe methods, the possibility of accidents, leaks, spills and the events of force majeure always exist. Humans exposed to these materials, including workers or subcontractors engaged in the transportation and disposal of hazardous materials and persons in affected areas, may be injured or become ill, resulting in lawsuits that expose us to liability that may result in substantial damage awards. Liabilities for contamination or human exposure to hazardous or toxic materials, or a failure to comply with applicable regulations, could result in substantial costs, including clean-up costs, fines, civil or criminal sanctions, third party claims for property damage or personal injury, or cessation of remediation activities.

        Certain of our business operations are covered by U.S. Public Law 85-804, which provides for government indemnification against claims and damages arising out of unusually hazardous activities performed at the request of the government. Due to changes in public policies and law, however, government indemnification may not be available in the case of any future claims or liabilities relating to other hazardous activities that we perform.

        Government Procurement.    The services we provide to the U.S. federal government are subject to FAR and other rules and regulations applicable to government contracts. These rules and regulations:

        In addition, services provided to the DoD are monitored by the Defense Contract Management Agency and audited by the DCAA. Our government clients can also terminate any of their contracts, and many of our government contracts are subject to renewal or extension annually.

21


Table of Contents


Seasonality

        We experience seasonal trends in our business. Our revenue is 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.


Potential Liability and Insurance

        Our business activities could expose us to potential liability under various environmental laws and under workplace health and safety regulations. In addition, we occasionally assume liability by contract under indemnification agreements. We cannot predict the magnitude of such potential liabilities.

        We maintain a comprehensive general liability policy with an umbrella policy that covers losses beyond the general liability limits. We also maintain professional errors and omissions liability and contractor's pollution liability insurance policies. We believe that both policies provide adequate coverage for our business. When we perform higher-risk work, such as fixed-price remediation with insurance or UXO services, we obtain the necessary types of insurance coverages for such activities, as is typically required by our clients.

        We obtain insurance coverage through a broker that is experienced in the professional liability field. The broker and our risk manager regularly review the adequacy of our insurance coverage. Because there are various exclusions and retentions under our policies, or an insurance carrier may become insolvent, there can be no assurance that all potential liabilities will be covered by our insurance policies or paid by our carrier.

        We evaluate the risk associated with claims. If we determine that a loss is probable and reasonably estimable, we establish an appropriate reserve. A reserve is not established if we determine that a claim has no merit or is not probable or reasonably estimable. Our historic levels of insurance coverage and reserves have been adequate. However, partially or completely uninsured claims, if successful and of significant magnitude, could have a material adverse effect on our business.


Employees

        Our principal asset is our employees. We currently have more than 13,000 employees. A large percentage of our employees have technical and professional backgrounds and undergraduate and/or advanced degrees, including the employees of recently acquired companies. Our professional staff includes archaeologists, architects, biologists, chemical engineers, chemists, civil engineers, computer scientists, economists, electrical engineers, environmental engineers, environmental scientists, geologists, hydrogeologists, mechanical engineers, oceanographers, project managers and toxicologists. Approximately 600 employees are represented by labor unions pursuant to collective bargaining agreements. We consider the relationships with our employees to be favorable. We believe that our ability to retain and expand our staff of qualified professionals will be an important factor in determining our future growth and success. To date, we believe that we have been successful in recruiting and retaining qualified employees, and we are not aware of any circumstances that are likely to result in a work stoppage at any of our facilities. On certain engagements, we supplement our consultants with independent contractors. We believe that the practice of retaining independent contractors on an engagement basis provides us with significant flexibility in adjusting professional personnel levels in response to changes in demand for our services.

22


Table of Contents


Executive Officers of the Registrant

        The following table shows the name, age and position at November 7, 2011, of each of our executive officers:

  
   
   
Name   Age   Position

Dan L. Batrack

  53   Chairman, Chief Executive Officer and President

     

Mr. Batrack joined our predecessor in 1980 and was named Chairman in January 2008. He has served as our Chief Executive Officer and a director since November 2005, and as our President since October 2008. Mr. Batrack has served in numerous capacities over the last 30 years, including project scientist, project manager, operations manager, Senior Vice President and President of an operating unit. He has managed complex programs for many small and Fortune 500 clients, both in the United States and internationally. Mr. Batrack holds a B.A. degree in Business Administration from the University of Washington.

Steven M. Burdick

 

47

 

Executive Vice President, Chief Financial Officer and Treasurer

     

Mr. Burdick was named Executive Vice President, Chief Financial Officer and Treasurer in July 2011. He served as our Senior Vice President and Corporate Controller from January 2004 to March 2011, and our acting Chief Financial Officer and Treasurer between March 2011 and July 2011. Mr. Burdick joined us in April 2003 as Vice President, Management Audit. Previously, Mr. Burdick served as the Executive Vice President and Chief Financial Officer for Aura Systems, Inc. From 2000 through 2002 he was the Chief Financial Officer for TRW Ventures. Prior to this, Mr. Burdick held the position of Senior Manager with Ernst & Young LLP in Los Angeles. Mr. Burdick holds a B.S. degree in Business Administration from Santa Clara University and is a Certified Public Accountant.

23


Table of Contents

  
   
   
Name   Age   Position

James R. Pagenkopf

 

60

 

Executive Vice President and President of Engineering and Consulting Services

     

Mr. Pagenkopf has served as the President of Engineering and Consulting Services since September 2009. He has 35 years of experience with us in both technical and management roles, including project and program manager, office manager, group manager, Vice President, and President of ECS' largest operating unit. Mr. Pagenkopf's academic and professional background is in the development and application of hydrodynamic and water quality models, which he has applied in more than 200 projects throughout the U.S. and internationally. He has served as program manager on several large technical support contracts for the EPA's Office of Water, and more recently has led our strategic water initiative to focus our growth in the Louisiana/Gulf Coast and Panama Canal water resources markets. Mr. Pagenkopf holds a B.S. in Civil Engineering from Valparaiso University and an M.S. in Civil Engineering from the Massachusetts Institute of Technology.

Ronald J. Chu

 

54

 

Executive Vice President and President of Technical Support Services

     

Mr. Chu has served as the President of Technical Support Services since June 2007. He has more than 16 years of experience with us and has served in various technical and management capacities, including project and program manager, office manager, regional manager and chief operating officer for TSS. Mr. Chu was named a Vice President in 2001. He began his career as a civil/sanitary engineer in 1981 and entered the environmental consulting field in 1984. His career has included management of major assessment, engineering and remediation programs for the DoD, the EPA, state and local government agencies, and commercial clients. Mr. Chu is a registered professional engineer in several states and has authored numerous technical articles. He holds a B.S. in Civil Engineering from Northeastern University and an M.S. in Environmental Engineering from the University of Southern California.

24


Table of Contents

  
   
   
Name   Age   Position

Douglas G. Smith

 

62

 

Executive Vice President and President of Engineering and Architecture Services

     

Mr. Smith has served as the President of Engineering and Architecture Services since November 2005. He has nearly 35 years of infrastructure industry experience focused on water infrastructure engineering. Mr. Smith joined us from MWH Global, Inc., where he was Senior Vice President of Strategic Planning. He spent the previous 24 years, from 1980 to 2004, at Black & Veatch, where he was promoted to President of the Europe Water Division. While at Black & Veatch, Mr. Smith focused on large program business development and acquisition integration. From 1976 to 1979, Mr. Smith was an adjunct professor of Civil Engineering at the University of Colorado, Boulder, and a director of Public Utilities for the City of Boulder. Mr. Smith holds a B.S. in Engineering from Kansas State University, an M.S. in Civil Engineering from the University of Colorado, and a J.D. from the University of Denver.

Frank C. Gross, Jr.

 

55

 

Executive Vice President and President of Remediation and Construction Management

     

Mr. Gross joined us as the President of Remediation and Construction Management in July 2011. He previously served as President of the Industrial/Process Business Unit of URS Corporation's Washington Division since February 2008. At his former employer, Mr. Gross led an $850 million per year business group focused on construction management. He joined URS in 1978 and gained progressive responsibility in a variety of technical and leadership roles. He has more than 30 years of experience with large, multi-disciplinary engineering and construction projects in power, oil and gas, industrial/manufacturing, automotive, and other heavy industries. Mr. Gross earned a B.S. in Civil and Environmental Engineering from Clarkson University.

25


Table of Contents

  
   
   
Name   Age   Position

William R. Brownlie

 

58

 

Senior Vice President, Chief Engineer

     

Dr. Brownlie was named Senior Vice President and Chief Engineer in September 2009. From December 2005 to September 2009, he served as President of ECS. Dr. Brownlie joined our predecessor in 1981 and was named a Senior Vice President in December 1993. Dr. Brownlie has managed various operating units and programs focusing on water resources and environmental services, including work with USACE, the USAF, Bureau of Reclamation and DOE. He is a registered professional engineer and has a strong technical background in water resources. Dr. Brownlie holds B.S. and M.S. degrees in Civil Engineering from the State University of New York at Buffalo and a Ph.D. in Civil Engineering from the California Institute of Technology.

Richard A. Lemmon

 

52

 

Senior Vice President, Corporate Administration

     

Mr. Lemmon joined our predecessor in 1981 in a technical capacity and became a member of its corporate staff in a management position in 1985. In 1988, at the time of our predecessor's divestiture from Honeywell, Inc., Mr. Lemmon structured and managed many of our corporate functions. He is currently responsible for insurance, risk management, human resources, safety and facilities.

Janis B. Salin

 

58

 

Senior Vice President, General Counsel and Secretary

     

Ms. Salin joined us in February 2002. For the prior 17 years, Ms. Salin was a Principal with the law firm of Riordan & McKinzie in Los Angeles (which merged into Bingham McCutchen LLP in 2003), and served as Managing Principal of that firm from 1990 to 1992. She served as our outside counsel from the time of our formation in 1988. Ms. Salin holds B.A. and J.D. degrees from the University of California at Los Angeles.

Craig L. Christensen

 

58

 

Senior Vice President, Chief Information Officer

     

Mr. Christensen joined us in 1998 through the acquisition of our Tetra Tech NUS, Inc. ("NUS") subsidiary. Mr. Christensen is responsible for our information services and technologies, including the implementation of our enterprise resource planning system. Previously, Mr. Christensen held positions at NUS, Brown and Root Services, and Landmark Graphics subsidiaries of Halliburton Company where his responsibilities included contracts administration, finance and system development. Prior to his service at Halliburton, Mr. Christensen held positions at Burroughs Corporation and Apple Computer. Mr. Christensen holds B.A. and M.B.A. degrees from Brigham Young University.

26


Table of Contents

  
   
   
Name   Age   Position

Michael A. Bieber

 

43

 

Senior Vice President, Corporate Development

     

Mr. Bieber joined us in 1996, and he is currently responsible for driving strategic growth through the leadership of our mergers and acquisitions program. Mr. Bieber has overseen our investor relations function since 2000. From 1996 to 2000, he was a proposal manager in our corporate marketing group. From 1994 to 1996, Mr. Bieber served as a strategic business development consultant to large defense, infrastructure, and environmental firms at CRC, Inc. and its successor. Prior to that, Mr. Bieber worked for IT Corporation (now The Shaw Group, Inc.), where he served as project manager and engineer on government nuclear and petrochemical projects. Mr. Bieber holds a B.S. degree in Civil Engineering from the Tennessee Technological University.

Leslie L. Shoemaker

 

54

 

Senior Vice President, Corporate Strategy

     

Dr. Shoemaker joined us in 1991, and she is currently responsible for our strategic planning, business development, sustainability and corporate communications functions. Dr. Shoemaker coordinates our Strategic Initiatives Program, which supports company-wide collaboration on key services in our major growth markets. Dr. Shoemaker is our Chief Sustainability Officer. She also leads water resources modeling and systems development projects, and consults on the development of policy and programs for watershed management and sustainable communities. Dr. Shoemaker has more than 25 years of industry experience and has previously served in various technical and management capacities including project engineer, project manager, Vice President, and technical practice leader. Dr. Shoemaker holds a B.A. degree in Mathematics from Hamilton College, a Master of Engineering from Cornell University and a Ph.D. in Agricultural Engineering from the University of Maryland.

Kevin P. McDonald

 

52

 

Senior Vice President, Corporate Human Resources

     

Mr. McDonald joined us in 2004 through the acquisition of Foster Wheeler Environmental Corporation. He is responsible for all areas of human resources ("HR"), including executive compensation, employee benefits, succession planning, human resources information systems, and employment law compliance. Prior to leading our corporate HR organization, Mr. McDonald was the HR Director for one of our subsidiaries. He has more than 30 years' experience in the engineering and construction services industry. Mr. McDonald earned a B.S. degree in Management from the University of Scranton and an M.B.A from Fairleigh Dickinson University.

27


Table of Contents

Item 1A.    Risk Factors

        Set forth below and elsewhere in this report and in other documents we file with the SEC are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report.

Our operating results may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address.

        General worldwide economic conditions have experienced a downturn due to the reduction of available credit, slower economic activity, concerns about inflation and deflation, increased energy and commodity costs, decreased consumer confidence and capital spending, adverse business conditions, and, in the United States, delays and uncertainties related to federal budgets. These conditions make it extremely difficult for our clients and our vendors to accurately forecast and plan future business activities and could cause businesses to slow spending on services, and they have also made it very difficult for us to predict the short-term and long-term impacts on our business. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery worldwide or in our industry. If the economy or markets in which we operate deteriorate from the level experienced in fiscal 2011, our business, financial condition and results of operations may be materially and adversely affected.

Our annual revenue, expenses and operating results may fluctuate significantly, which may adversely affect our stock price.

        Our annual revenue, expenses and operating results may fluctuate significantly because of numerous factors, some of which may contribute to more pronounced fluctuations in an uncertain global economic environment. These factors include:

28


Table of Contents

        As a consequence, operating results for a particular future period are difficult to predict and, therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our business, results of operations and financial condition that could adversely affect our stock price.

Demand from our state and local government and commercial clients is cyclical and vulnerable to economic downturns. If economic growth slows, state or local government fiscal conditions worsen, or client spending declines further, then our revenue, profits and our financial condition may deteriorate.

        Demand for services from our state and local government and commercial clients is cyclical and vulnerable to economic downturns, which may result in clients delaying, curtailing or canceling proposed and existing projects. Our business traditionally lags the overall recovery in the economy; therefore, our business may not recover immediately when the economy improves. If economic growth slows, state or local government fiscal conditions worsen, or client spending declines further, then our revenue, profits and overall financial condition may deteriorate. Our state and local government clients may face budget deficits that prohibit them from funding new or existing projects. In addition, our existing and potential clients may either postpone entering into new contracts or request price concessions. Difficult financing and economic conditions may cause some of our clients to demand better pricing terms or delay payments for services we perform, thereby increasing the average number of days our receivables are outstanding and the potential of increased credit losses of uncollectible invoices. Further, these conditions may result in the inability of some of our clients to pay us for services that we have already performed. If we are not able to reduce our costs quickly enough to respond to the revenue decline from these clients, our operating results may be adversely affected. Accordingly, these factors affect our ability to forecast our future revenue and earnings from business areas that may be adversely impacted by market conditions.

29


Table of Contents


Our revenue from commercial clients is significant, and the credit risks associated with certain of these clients could adversely affect our operating results.

        In fiscal 2011, we generated 22.4% of our revenue from U.S. commercial clients. Due to continuing weakness in general economic conditions, our commercial business may be at risk as we rely upon the financial stability and creditworthiness of our clients. To the extent the credit quality of these clients deteriorates or these clients seek bankruptcy protection, our ability to collect our receivables, and ultimately our operating results, may be adversely affected.

The recently approved federal debt ceiling legislation and delayed action by the federal government could significantly delay payment or reduce government demand for the services we provide.

        On August 2, 2011, the federal government approved an increase of the federal debt ceiling that allows it to continue to meet its obligations and debts. We, however, do not know whether delayed action by the federal government leading up to the recently approved legislation will result in significant delays in the timely billing and collection of our contractual payments. Our federal contracts typically require us to continue to perform the contract even if the federal government is unable to make timely payments. Otherwise, we may risk a termination for default. In addition, we do not know whether the recently approved federal debt ceiling legislation will significantly impact future government expenditure and demand for the services we provide. Any significant reduction in federal government expenditures or significant delays in the timely payment of billings may have a material adverse effect on our financial condition and results of operation.

We derive a majority of our revenue from government agencies, and any disruption in government funding or in our relationship with those agencies could adversely affect our business.

        In fiscal 2011, we generated 54.4% of our revenue from contracts with U.S. federal, state and local government agencies. U.S. federal government agencies are among our most significant clients. We generated 43.4% of our revenue for fiscal 2011 from the following agencies: 20.4% from DoD agencies, 11.2% from USAID and 11.8% from other U.S. federal government agencies. A significant amount of this revenue is derived under multi-year contracts, many of which are appropriated on an annual basis. As a result, at the beginning of a project, the related contract may be only partially funded, and additional funding is normally committed only as appropriations are made in each subsequent year. These appropriations, and the timing of payment of appropriated amounts, may be influenced by numerous factors as noted below. Our backlog includes only the projects that have funding appropriated.

        The demand for our government-related services is generally driven by the level of government program funding. Accordingly, the success and further development of our business depends, in large part, upon the continued funding of these government programs, and upon our ability to obtain contracts and perform well under these programs. There are several factors that could materially affect our government contracting business, including the following:

30


Table of Contents

        These and other factors could cause government agencies to delay or cancel programs, to reduce their orders under existing contracts, to exercise their rights to terminate contracts or not to exercise contract options for renewals or extensions. Any of these actions could have a material adverse effect on our revenue or timing of contract payments from these agencies.

A decline in U.S. defense or other federal government spending, or a change in budgetary priorities, could harm our operations and significantly reduce our profits and revenue.

        We generated 43.4% of our revenue for fiscal 2011 from the following U.S. federal government agencies: 20.4% from DoD agencies, 11.2% from USAID and 11.8% from other U.S. federal government agencies. The legislation passed in August 2011 includes significant reductions for in federal government spending over a ten-year period. Future levels of expenditures and authorizations for defense-related or other federal programs may decrease, remain constant or shift to other programs in areas in which we do not currently provide services. As a result, a general decline in U.S. defense or other federal spending or a change in budgetary priorities could reduce our profits and revenue.

A delay in the completion of the budget process of the U.S. government could delay procurement of our services and have an adverse effect on our future revenue.

        When the U.S. government does not complete its budget process before its fiscal year-end on September 30, government operations are typically funded by means of a continuing resolution that authorizes agencies to continue to operate but does not authorize new spending initiatives. When the U.S. government operates under a continuing resolution, government agencies may delay the procurement of services, which could reduce our future revenue.

As a government contractor, we must comply with various procurement laws and regulations and are subject to regular government audits; a violation of any of these laws and regulations or the failure to pass a government audit could result in sanctions, contract termination, forfeiture of profit, harm to our reputation or loss of our status as an eligible government contractor and could reduce our profits and revenue.

        We must comply with and are affected by U.S. federal, state, local and foreign laws and regulations relating to the formation, administration and performance of government contracts. For example, we must comply with FAR, the Truth in Negotiations Act, CAS, the American Recovery and Reinvestment Act of 2009 ("ARRA"), the Services Contract Act and DoD security regulations, as well as many other rules and regulations. In addition, we must also comply with other government regulations related to employment practices, environmental protection, health and safety, tax, accounting and anti-fraud measures, as well as many others regulations in order to maintain our government contractor status. These laws and regulations

31


Table of Contents


affect how we do business with our clients and, in some instances, impose additional costs on our business operations. Although we take precautions to prevent and deter fraud, misconduct and non-compliance, we face the risk that our employees or outside partners may engage in misconduct, fraud or other improper activities. Government agencies, such as the DCAA, routinely audit and investigate government contractors. These government agencies review and audit a government contractor's performance under its contracts and cost structure, and evaluate compliance with applicable laws, regulations and standards. In addition, during the course of its audits, the DCAA may question our incurred project costs. If the DCAA believes we have accounted for such costs in a manner inconsistent with the requirements for FAR or CAS, the DCAA auditor may recommend to our U.S. government corporate administrative contracting officer to disallow such costs. Historically, we have not experienced significant disallowed costs as a result of government audits. However, we can provide no assurance that the DCAA or other government audits will not result in material disallowance for incurred costs in the future. In addition, government contracts are subject to a variety of other requirements relating to the formation, administration, performance and accounting for these contracts. We may also be subject to qui tam litigation brought by private individuals on behalf of the government under the Federal Civil False Claims Act, which could include claims for treble damages. Government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit and/or suspension of payment, any of which could make us lose our status as an eligible government contractor. We could also suffer serious harm to our reputation. Any interruption or termination of our government contractor status could reduce our profits and revenue significantly.

Our inability to win or renew government contracts during regulated procurement processes could harm our operations and significantly reduce or eliminate our profits.

        Government contracts are awarded through a regulated procurement process. The U.S. federal government has increasingly relied upon multi-year contracts with pre-established terms and conditions, such as indefinite delivery/indefinite quantity ("IDIQ") contracts, which generally require those contractors who have previously been awarded the IDIQ to engage in an additional competitive bidding process before a task order is issued. The increased competition, in turn, may require us to make sustained efforts to reduce costs in order to realize revenue and profits under government contracts. If we are not successful in reducing the amount of costs we incur, our profitability on government contracts will be negatively impacted. The U.S. federal government has also increased its use of IDIQs in which the client qualifies multiple contractors for a specific program and then awards specific task orders or projects among the qualified contractors. As a result, new work awards tend to be smaller and of shorter duration, since the orders represent individual tasks rather than large, programmatic assignments. In addition, the U.S. government has announced its intention to scale back outsourcing of services in favor of "insourcing" jobs to its employees, which could reduce our revenue. Moreover, even if we are qualified to work on a government contract, we may not be awarded the contract because of existing government policies designed to protect small businesses and underrepresented minority contractors. Our inability to win or renew government contracts during regulated procurement processes could harm our operations and significantly reduce or eliminate our profits.

Each year, client funding for some of our government contracts may rely on government appropriations or public-supported financing. If adequate public funding is delayed or is not available, then our profits and revenue could decline.

        Each year, client funding for some of our government contracts may directly or indirectly rely on government appropriations or public-supported financing. Legislatures may appropriate funds for a given project on a year-by-year basis, even though the project may take more than one year to perform. In addition, public-supported financing such as state and local municipal bonds may be only partially raised to support existing projects. The outcome of ongoing political debate in Congress regarding cuts to government spending could result in reductions in the funding proposed by the Administration for certain

32


Table of Contents


projects. The legislation passed in August 2011 includes significant reductions in U.S. federal government spending over a ten-year period. Similarly, the impact of the economic downturn on state and local governments may make it more difficult for them to fund projects. In addition to the state of the economy and competing political priorities, public funds and the timing of payment of these funds may be influenced by, among other things, the state of the economy, competing political priorities, curtailments in the use of government contracting firms, increases in raw material costs, delays associated with insufficient numbers of government staff to oversee contracts, budget constraints, the timing and amount of tax receipts and the overall level of government expenditures. If adequate public funding is not available or is delayed, then our profits and revenue could decline.

Our government contracts may give government agencies the right to modify, delay, curtail, renegotiate or terminate existing contracts at their convenience at any time prior to their completion, and if we do not replace these contracts, we may suffer a decline in our profits and revenue.

        Government projects in which we participate as a contractor or subcontractor may extend for several years. Generally, government contracts include the right to modify, delay, curtail, renegotiate or terminate contracts and subcontracts at the government's convenience any time prior to their completion. Any decision by a government client to modify, delay, curtail, renegotiate or terminate our contracts at their convenience may result in a decline in our profits and revenue.

If we fail to complete a project in a timely manner, miss a required performance standard or otherwise fail to adequately perform on a project, then we may incur a loss on that project, which may reduce or eliminate our overall profitability.

        Our engagements often involve large-scale, complex projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our clients and our ability to effectively manage the project and deploy appropriate resources, including third-party contractors and our own personnel, in a timely manner. We may commit to a client that we will complete a project by a scheduled date. We may also commit that a project, when completed, will achieve specified performance standards. If the project is not completed by the scheduled date or fails to meet required performance standards, we may either incur significant additional costs or be held responsible for the costs incurred by the client to rectify damages due to late completion or failure to achieve the required performance standards. The uncertainty of the timing of a project can present difficulties in planning the amount of personnel needed for the project. If the project is delayed or canceled, we may bear the cost of an underutilized workforce that was dedicated to fulfilling the project. In addition, performance of projects can be affected by a number of factors beyond our control, including unavoidable delays from government inaction, public opposition, inability to obtain financing, weather conditions, unavailability of vendor materials, changes in the project scope of services requested by our clients, industrial accidents, environmental hazards, labor disruptions and other factors. To the extent these events occur, the total costs of the project could exceed our estimates, and we could experience reduced profits or, in some cases, incur a loss on a project, which may reduce or eliminate our overall profitability. Further, any defects or errors, or failures to meet our clients' expectations, could result in claims for damages against us. Our contracts generally limit our liability for damages that arise from negligent acts, errors, mistakes or omissions in rendering services to our clients. However, we cannot be sure that these contractual provisions will protect us from liability for damages in the event we are sued.

The loss of key personnel or our inability to attract and retain qualified personnel could significantly disrupt our business.

        As primarily a professional and technical services company, we are labor-intensive and, therefore, our ability to attract, retain and expand our senior management and our professional and technical staff is an important factor in determining our future success. The market for qualified scientists and engineers is

33


Table of Contents


competitive, and from time to time, it may be difficult to attract and retain qualified individuals with the expertise and in the timeframe demanded by our clients. For example, some of our government contracts may require us to employ only individuals who have particular government security clearance levels. In addition, we rely heavily upon the expertise and leadership of our senior management. If we are unable to retain executives and other key personnel, the roles and responsibilities of those employees will need to be filled, which may require that we devote time and resources to identify, hire and integrate new employees. With limited exceptions, we do not have employment agreements with any of our key personnel. The loss of the services of any of these key personnel could adversely affect our business. Although we have obtained non-compete agreements from certain principals and stockholders of companies we have acquired, we generally do not have non-compete or employment agreements with key employees who were once equity holders of these companies. Further, many of our non-compete agreements have expired. We do not maintain key-man life insurance policies on any of our executive officers or senior managers. Our failure to attract and retain key individuals could impair our ability to provide services to our clients and conduct our business effectively.

Our actual business and financial results could differ from the estimates and assumptions that we use to prepare our financial statements, which may significantly reduce or eliminate our profits.

        To prepare financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"), management is required to make estimates and assumptions as of the date of the financial statements. These estimates and assumptions affect the reported values of assets, liabilities, revenue and expenses, as well as disclosures of contingent assets and liabilities. For example, we recognize revenue over the life of a contract based on the proportion of costs incurred to date compared to the total costs estimated to be incurred for the entire project. Areas requiring significant estimates by our management include:

        Our actual business and financial results could differ from those estimates, which may significantly reduce or eliminate our profits.

34


Table of Contents


Our profitability could suffer if we are not able to maintain adequate utilization of our workforce.

        The cost of providing our services, including the extent to which we utilize our workforce, affects our profitability. The rate at which we utilize our workforce is affected by a number of factors, including:

        If we over-utilize our workforce, our employees may become disengaged, which will impact employee attrition. If we under-utilize our workforce, our profit margin and profitability could suffer.

Our use of the percentage-of-completion method of revenue recognition could result in a reduction or reversal of previously recorded revenue and profits.

        We account for most of our contracts on the percentage-of-completion method of revenue recognition. Generally, our use of this method results in recognition of revenue and profit ratably over the life of the contract, based on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions to revenue and estimated costs, including the achievement of award fees as well as the impact of change orders and claims, are recorded when the amounts are known and can be reasonably estimated. Such revisions could occur in any period and their effects could be material. Although we have historically made reasonably reliable estimates of the progress towards completion of long-term contracts, the uncertainties inherent in the estimating process make it possible for actual costs to vary materially from estimates, including reductions or reversals of previously recorded revenue and profit.

Our business and operating results could be adversely affected by our inability to accurately estimate the overall risks, revenue or costs on a contract. In particular, fixed-price contracts could increase the unpredictability of our earnings.

        It is important for us to accurately estimate and control our contract costs so that we can maintain positive operating margins and profitability. We generally enter into three principal types of contracts with our clients: fixed-price, time-and-materials and cost-plus.

        The U.S. federal government and some clients have increased the use of fixed-priced contracts. Under fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur and, consequently, we are exposed to a number of risks. We realize a profit on fixed-price contracts only if we can control our costs and prevent cost over-runs on our contracts. Fixed-price contracts require cost and scheduling estimates that are based on a number of assumptions, including those about future economic conditions, costs and availability of labor, equipment and materials, and other exigencies. We could experience cost overruns if these estimates are originally inaccurate as a result of errors or ambiguities in the contract specifications, or become inaccurate as a result of a change in circumstances following the submission of the estimate due to, among other things, unanticipated technical problems, difficulties in obtaining permits or approvals, changes in local laws or labor conditions, weather delays, changes in the costs of raw materials, or inability of our vendors or subcontractors to perform. If cost overruns occur, we could experience reduced profits or, in some cases, a loss for that project. If a project is significant, or if there are one or more common issues that impact multiple projects, costs overruns could increase the unpredictability of our earnings as well as have a material adverse impact on our business and earnings.

35


Table of Contents

        Under our time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and also paid for other expenses. Profitability on these contracts is driven by billable headcount and cost control. Many of our time-and-materials contracts are subject to maximum contract values and, accordingly, revenue relating to these contracts is recognized as if these contracts were fixed-price contracts. Under our cost-plus contracts, some of which are subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be able to obtain reimbursement for all of the costs we incur.

        Profitability on our contracts is driven by billable headcount and our ability to manage our subcontractors, vendors and material suppliers. If we are unable to accurately estimate and manage our costs, we may incur losses on our contracts, which could decrease our operating margins and significantly reduce or eliminate our profits. Certain of our contracts require us to satisfy specific design, engineering, procurement or construction milestones in order to receive payment for the work completed or equipment or supplies procured prior to achievement of the applicable milestone. As a result, under these types of arrangements, we may incur significant costs or perform significant amounts of services prior to receipt of payment. If a customer determines not to proceed with the completion of the project or if the customer defaults on its payment obligations, we may face difficulties in collecting payment of amounts due to us for the costs previously incurred or for the amounts previously expended to purchase equipment or supplies.

        Accounting for a contract requires judgments relative to assessing the contract's estimated risks, revenue, costs and other technical issues. Due to the size and nature of many of our contracts, the estimation of overall risk, revenue and cost at completion is complicated and subject to many variables. Changes in underlying assumptions, circumstances or estimates may also adversely affect future period financial performance. If we are unable to accurately estimate the overall revenue or costs on a contract, then we may experience a lower profit or incur a loss on the contract.

Our failure to win new contracts and renew existing contracts with private and public sector clients could adversely affect our profitability.

        Our business depends on our ability to win new contracts and renew existing contracts with private and public sector clients. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which is affected by a number of factors. These factors include market conditions, financing arrangements and required governmental approvals. For example, a client may require us to provide a bond or letter of credit to protect the client should we fail to perform under the terms of the contract. If negative market conditions arise, or if we fail to secure adequate financial arrangements or the required government approval, we may not be able to pursue particular projects, which could adversely affect our profitability.

We have made and expect to continue to make acquisitions that could disrupt our operations and adversely impact our business and operating results. Our failure to conduct due diligence effectively or our inability to successfully integrate acquisitions could impede us from realizing all of the benefits of the acquisitions, which could weaken our results of operations.

        A key part of our growth strategy is to acquire other companies that complement our lines of business or that broaden our technical capabilities and geographic presence. We expect to continue to acquire companies as an element of our growth strategy; however, our ability to make acquisitions is restricted under our credit agreement. Acquisitions involve certain known and unknown risks that could cause our actual growth or operating results to differ from our expectations or the expectations of securities analysts. For example:

36


Table of Contents

        In addition, our acquisition strategy may divert management's attention away from our existing businesses, resulting in the loss of key clients or key employees, and expose us to unanticipated problems or legal liabilities, including responsibility as a successor-in-interest for undisclosed or contingent liabilities of acquired businesses or assets.

        If we fail to conduct due diligence on our potential targets effectively, we may, for example, not identify problems at target companies or fail to recognize incompatibilities or other obstacles to successful integration. Our inability to successfully integrate future acquisitions could impede us from realizing all of the benefits of those acquisitions and could severely weaken our business operations. The integration process may disrupt our business and, if implemented ineffectively, may preclude realization of the full benefits expected by us and could harm our results of operations. In addition, the overall integration of the combining companies may result in unanticipated problems, expenses, liabilities, and competitive responses, and may cause our stock price to decline. The difficulties of integrating an acquisition include, among others:

        In addition, even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of the acquisition, including the synergies, cost savings or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all.

        Further, acquisitions may also cause us to:

37


Table of Contents

        Finally, acquired companies that derive a significant portion of their revenue from the U.S. federal government and that do not follow the same cost accounting policies and billing practices that we follow may be subject to larger cost disallowances for greater periods than we typically encounter. If we fail to determine the existence of unallowable costs and do not establish appropriate reserves in advance of an acquisition, we may be exposed to material unanticipated liabilities, which could have a material adverse effect on our business.

If our goodwill or other intangible assets become impaired, then our profits may be significantly reduced.

        Because we have historically acquired a significant number of companies, goodwill and other intangible assets have represented a substantial portion of our assets. At October 2, 2011, our goodwill was $569.4 million and other intangible assets were $81.1 million. We are required to perform a goodwill and indefinite-lived intangible asset impairment test for potential impairment at least on an annual basis. The goodwill impairment test requires us to determine the fair value of our reporting units, which are the components one level below our four reportable segments. In determining fair value, we make significant judgments and estimates, including assumptions about our strategic plans with regard to our operations. We also analyze current economic indicators and market valuations to help determine fair value. To the extent economic conditions that would impact the future operations of our reporting units change, our goodwill may be deemed to be impaired, and we would be required to record a non-cash charge that could result in a material adverse effect on our financial position or results of operations.

If we are not able to successfully manage our growth strategy, our business and results of operations may be adversely affected.

        Our expected future growth presents numerous managerial, administrative, operational and other challenges. Our ability to manage the growth of our operations will require us to continue to improve our management information systems and our other internal systems and controls. In addition, our growth will increase our need to attract, develop, motivate and retain both our management and professional employees. The inability of our management to effectively manage our growth or the inability of our employees to achieve anticipated performance could have a material adverse effect on our business.

Our backlog is subject to cancellation and unexpected adjustments, and is an uncertain indicator of future operating results.

        Our backlog at October 2, 2011, was $1.95 billion. We include in backlog only those contracts for which funding has been provided and work authorizations have been received. We cannot guarantee that the revenue projected in our backlog will be realized or, if realized, will result in profits. In addition, project cancellations or scope adjustments may occur, from time to time, with respect to contracts reflected

38


Table of Contents


in our backlog. For example, certain of our contracts with the U.S. federal government and other clients are terminable at the discretion of the client, with or without cause. These types of backlog reductions could adversely affect our revenue and margins. Accordingly, our backlog as of any particular date is an uncertain indicator of our future earnings.

Our international operations are subject to a number of risks that could significantly reduce our revenue and profits, or subject us to criminal and civil enforcement actions.

        In fiscal 2011, we generated 23.2% of our revenue from our foreign operations, primarily in Canada, and from international clients for work that is performed by our domestic operations. International business is subject to a variety of risks, including:

        International risks and violations of international regulations may significantly reduce our profits and revenue and subject us to criminal or civil enforcement actions, including fines, suspensions or disqualification from future U.S. federal procurement contracting. Although we have policies and procedures to ensure legal and regulatory compliance, our employees, subcontractors and agents could take actions that violate these requirements. As a result, our international risk exposure may be more or less than the percentage of revenue attributed to our international operations.

If our business partners fail to perform their contractual obligations on a project, we could be exposed to legal liability, loss of reputation and profit reduction or loss on the project.

        We routinely enter into subcontracts and, occasionally, teaming arrangements and other contractual arrangements so that we can jointly bid and perform on a particular project. Success under these arrangements depends in large part on whether our business partners fulfill their contractual obligations satisfactorily. If any of our business partners fail to satisfactorily perform their contractual obligations as a result of financial or other difficulties, we may be required to incur additional costs and provide additional services in order to make up for our business partners' shortfall. If we are unable to adequately address our business partners' performance issues, then our client could terminate the joint project, exposing us to legal liability, loss of reputation and reduced profit or loss on the project.

39


Table of Contents


If our contractors and subcontractors fail to satisfy their obligations to us or other parties, or if we are unable to maintain these relationships, our revenue, profitability and growth prospects could be adversely affected.

        We depend on contractors and subcontractors in conducting our business. There is a risk that we may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, client concerns about the subcontractor, or our failure to extend existing task orders or issue new task orders under a subcontract. In addition, if any of our subcontractors fail to deliver on a timely basis the agreed-upon supplies, fail to perform the agreed-upon services or go out of business, then our ability to fulfill our obligations as a prime contractor may be jeopardized.

        We also rely on relationships with other contractors when we act as their subcontractor or joint venture partner. The absence of qualified subcontractors with which we have a satisfactory relationship could adversely affect the quality of our service and our ability to perform under some of our contracts. Our future revenue and growth prospects could be adversely affected if other contractors eliminate or reduce their subcontracts or teaming arrangement relationships with us, or if a government agency terminates or reduces these other contractors' programs, does not award them new contracts or refuses to pay under a contract.

Changes in resource management or infrastructure industry laws, regulations and programs could directly or indirectly reduce the demand for our services, which could in turn negatively impact our revenue.

        Some of our services are directly or indirectly impacted by changes in U.S. federal, state, local or foreign laws and regulations pertaining to resource management, infrastructure and the environment. Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation or enforcement of these programs, could result in a decline in demand for our services, which could in turn negatively impact our revenue.

Changes in capital markets could adversely affect our access to capital and negatively impact our business.

        Our results could be adversely affected by an inability to access our $460 million revolving credit facility. Unfavorable financial or economic conditions could impact certain issuers' willingness or ability to fund our revolving credit facility. In addition, increases in interest rates or credit spreads, volatility in financial markets or the interest rate environment, significant political or economic events, defaults of significant issuers and other market and economic factors may negatively impact the general level of debt issuance, the debt issuance plans of certain categories of borrowers, the types of credit-sensitive products being offered, and/or a sustained period of market decline or weakness could have a material adverse effect on us.

Restrictive covenants in our credit agreement may restrict our ability to pursue certain business strategies.

        Our credit agreement limits or restricts our ability to, among other things:

40


Table of Contents

        Our credit agreement also requires that we maintain certain financial ratios, which we may not be able to achieve. The covenants may impair our ability to finance future operations or capital needs or to engage in other favorable business activities.

Our industry is highly competitive and we may be unable to compete effectively.

        Our industry is highly fragmented and intensely competitive. Our competitors are numerous, ranging from small private firms to multi-billion-dollar public companies. In addition, the technical and professional aspects of our services generally do not require large upfront capital expenditures and provide limited barriers against new competitors. Some of our competitors have achieved greater market penetration in some of the markets in which we compete, and some have substantially more financial resources and/or financial flexibility than we do. As a result of the number of competitors in the industry, our clients may select one of our competitors on a project due to competitive pricing or a specific skill set. These competitive forces could force us to make price concessions or otherwise reduce prices for our services. If we are unable to maintain our competitiveness, our market share, revenue and profits will decline.

The value of our common stock could be volatile.

        Our common stock has previously experienced substantial price volatility. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies and that have often been unrelated to the operating performance of these companies. The overall market and the price of our common stock may fluctuate greatly. The trading price of our common stock may be significantly affected by various factors, including:

        Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, many of whom are granted stock options and shares of restricted stock, the value of which is dependent on the performance of our stock price.

Legal proceedings, investigations and disputes could result in substantial monetary penalties and damages, especially if such penalties and damages exceed or are excluded from existing insurance coverage.

        We engage in consulting, engineering, program management, construction and technical services that can result in substantial injury or damages that may expose us to legal proceedings, investigations and disputes. For example, in the ordinary course of our business, we may be involved in legal disputes

41


Table of Contents


regarding personal injury claims, employee or labor disputes, professional liability claims, and general commercial disputes involving project cost overruns and liquidated damages as well as other claims. In addition, in the ordinary course of our business, we frequently make professional judgments and recommendations about environmental and engineering conditions of project sites for our clients. We may be deemed to be responsible for these judgments and recommendations if they are later determined to be inaccurate. Any unfavorable legal ruling against us could result in substantial monetary damages or even criminal violations. We maintain insurance coverage as part of our overall legal and risk management strategy to minimize our potential liabilities; however, insurance coverage contains exclusions and other limitations that may not cover our potential liabilities. Generally, our insurance program covers workers' compensation and employer's liability, general liability, automobile liability, professional errors and omissions liability, property, and contractor's pollution liability (in addition to other policies for specific projects). Our insurance program includes deductibles or self-insured retentions for each covered claim. In addition, our insurance policies contain exclusions that insurance providers may use to deny or restrict coverage. Excess liability and professional liability insurance policies provide for coverages on a "claims-made" basis, covering only claims actually made and reported during the policy period currently in effect. If we sustain liabilities that exceed or that are excluded from our insurance coverage or for which we are not insured, it could have a material adverse impact on our results of operations and financial condition, including our profits and revenue.

Unavailability or cancellation of third-party insurance coverage would increase our overall risk exposure as well as disrupt the management of our business operations.

        We maintain insurance coverage from third-party insurers as part of our overall risk management strategy and because some of our contracts require us to maintain specific insurance coverage limits. If any of our third-party insurers fail, suddenly cancel our coverage or otherwise are unable to provide us with adequate insurance coverage, then our overall risk exposure and our operational expenses would increase and the management of our business operations would be disrupted. In addition, there can be no assurance that any of our existing insurance coverage will be renewable upon the expiration of the coverage period or that future coverage will be affordable at the required limits.

Our inability to obtain adequate bonding could have a material adverse effect on our future revenue and business prospects.

        Certain clients require bid bonds and performance and payment bonds. These bonds indemnify the client should we fail to perform our obligations under a contract. If a bond is required for a particular project and we are unable to obtain an appropriate bond, we cannot pursue that project. In some instances, we are required to co-venture with a small or disadvantaged business to pursue certain U.S. federal or state government contracts. In connection with these ventures, we are sometimes required to utilize our bonding capacity to cover all of the payment and performance obligations under the contract with the client. We have a bonding facility but, as is typically the case, the issuance of bonds under that facility is at the surety's sole discretion. Moreover, due to events that can negatively affect the insurance and bonding markets, bonding may be more difficult to obtain or may only be available at significant additional cost. There can be no assurance that bonds will continue to be available to us on reasonable terms. Our inability to obtain adequate bonding and, as a result, to bid on new work could have a material adverse effect on our future revenue and business prospects.

Employee, agent or partner misconduct or our overall failure to comply with laws or regulations could harm our reputation, reduce our revenue and profits, and subject us to criminal and civil enforcement actions.

        Misconduct, fraud, non-compliance with applicable laws and regulations, or other improper activities by one of our employees, agents or partners could have a significant negative impact on our business and reputation. Such misconduct could include the failure to comply with government procurement

42


Table of Contents


regulations, regulations regarding the protection of classified information, regulations prohibiting bribery and other foreign corrupt practices, regulations regarding the pricing of labor and other costs in government contracts, regulations on lobbying or similar activities, regulations pertaining to the internal controls over financial reporting, environmental laws and any other applicable laws or regulations. For example, the FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these regulations and laws, and we take precautions to prevent and detect misconduct. However, since our internal controls are subject to inherent limitations, including human error, it is possible that these controls could be intentionally circumvented or become inadequate because of changed conditions. As a result, we cannot assure that our controls will protect us from reckless or criminal acts committed by our employees and agents. Our failure to comply with applicable laws or regulations or acts of misconduct could subject us to fines and penalties, loss of security clearances, and suspension or debarment from contracting, any or all of which could harm our reputation, reduce our revenue and profits, and subject us to criminal and civil enforcement actions.

Our business activities may require our employees to travel to and work in countries where there are high security risks, which may result in employee death or injury, repatriation costs or other unforeseen costs.

        Certain of our contracts may require our employees travel to and work in high-risk countries that are undergoing political, social and economic upheavals resulting in war, civil unrest, criminal activity, acts of terrorism or public health crises. For example, we currently have employees working in Afghanistan and Pakistan. As a result, we risk loss of or injury to our employees and may be subject to costs related to employee death or injury, repatriation or other unforeseen circumstances. We may choose or be forced to leave a country with little or no warning due to physical security risks.

Our failure to implement and comply with our safety program could adversely affect our operating results or financial condition.

        Our safety program is a fundamental element of our overall approach to risk management, and the implementation of the safety program is a significant issue in our dealings with our clients. We maintain an enterprise-wide group of health and safety professionals to help ensure that the services we provide are delivered safely and in accordance with standard work processes. Unsafe job sites and office environments have the potential to increase employee turnover, increase the cost of a project to our clients, expose us to types and levels of risk that are fundamentally unacceptable, and raise our operating costs. The implementation of our safety processes and procedures are monitored by various agencies and rating bureaus, and may be evaluated by certain clients in cases in which safety requirements have been established in our contracts. If we fail to meet these requirements or do not properly implement and comply with our safety program, there could be a material adverse effect on our business, operating results or financial condition.

We may be precluded from providing certain services due to conflict of interest issues.

        Many of our clients are concerned about potential or actual conflicts of interest in retaining management consultants. U.S. federal government agencies have formal policies against continuing or awarding contracts that would create actual or potential conflicts of interest with other activities of a contractor. These policies, among other things, may prevent us from bidding for or performing government contracts resulting from or relating to certain work we have performed. In addition, services performed for a commercial or government client may create a conflict of interest that precludes or limits our ability to obtain work from other public or private organizations. We have, on occasion, declined to bid on projects due to conflict of interest issues.

43


Table of Contents


We may be subject to liabilities under environmental laws and regulations.

        We must comply with a number of governmental laws that strictly regulate the handling, removal, treatment, transportation and disposal of toxic and hazardous substances. Under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended ("CERCLA"), and comparable state laws, we may be required to investigate and remediate regulated hazardous materials. CERCLA and comparable state laws typically impose strict, joint and several liabilities without regard to whether a company knew of or caused the release of hazardous substances. The liability for the entire cost of clean-up could be imposed upon any responsible party. Other principal federal environmental, health and safety laws affecting us include, but are not limited to, the Resource Conversation and Recovery Act, the National Environmental Policy Act, the Clean Air Act, the Occupational Safety and Health Act, the Toxic Substances Control Act and the Superfund Amendments and Reauthorization Act. Our business operations may also be subject to similar state and international laws relating to environmental protection. Liabilities related to environmental contamination or human exposure to hazardous substances, or a failure to comply with applicable regulations, could result in substantial costs to us, including clean-up costs, fines and civil or criminal sanctions, third-party claims for property damage or personal injury or cessation of remediation activities. Our continuing work in the areas governed by these laws and regulations exposes us to the risk of substantial liability.

Force majeure events, including natural disasters and terrorist actions could negatively impact the economies in which we operate or disrupt our operations, which may affect our financial condition, results of operations or cash flows.

        Force majeure or extraordinary events beyond the control of the contracting parties, such as natural and man-made disasters, as well as terrorist actions, could negatively impact the economies in which we operate by causing the closure of offices, interrupting projects and forcing the relocation of employees. Further, despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. We typically remain obligated to perform our services after a terrorist action or natural disaster unless the contract contains a force majeure clause that relieves us of our contractual obligations in such an extraordinary event. If we are not able to react quickly to force majeure, our operations may be affected significantly, which would have a negative impact on our financial condition, results of operations or cash flows.

We have only a limited ability to protect our intellectual property rights, and our failure to protect our intellectual property rights could adversely affect our competitive position.

        Our success depends, in part, upon our ability to protect our proprietary information and other intellectual property. We rely principally on trade secrets to protect much of our intellectual property where we do not believe that patent or copyright protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although our employees are subject to confidentiality obligations, this protection may be inadequate to deter or prevent misappropriation of our confidential information. In addition, we may be unable to detect unauthorized use of our intellectual property or otherwise take appropriate steps to enforce our rights. Failure to obtain or maintain trade secret protection would adversely affect our competitive business position. In addition, if we are unable to prevent third parties from infringing or misappropriating our trademarks or other proprietary information, our competitive position could be adversely affected.

44


Table of Contents


We rely on third-party internal and outsourced software to run our critical accounting, project management and financial information systems. As a result, any sudden loss, disruption or unexpected costs to maintain these systems could significantly increase our operational expense and disrupt the management of our business operations.

        We rely on third-party software to run our critical accounting, project management and financial information systems. We also depend on our software vendors to provide long-term software maintenance support for our information systems. Software vendors may decide to discontinue further development, integration or long-term software maintenance support for our information systems, in which case we may need to abandon one or more of our current information systems and migrate some or all of our accounting, project management and financial information to other systems, thus increasing our operational expense as well as disrupting the management of our business operations.

Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        Our corporate headquarters is located in Pasadena, California. This leased facility contains approximately 68,000 square feet of office space. Substantially all of our properties, including those of our recent acquisitions, are leased in approximately 342 office, warehouse, and laboratory locations in the United States and abroad. We own facilities located in Gloversville, New York; Casper, Wyoming; Virginia Beach, Virginia; and Shreveport, Louisiana that are used for operations. In total, our facilities contain approximately 2.1 million square feet of domestic office, warehouse, and laboratory space and 783,782 square feet of office space outside the United States. Our significant lease agreements expire at various dates through 2021. We also have some month-to-month leases.

        We believe that our current facilities are adequate for the operation of our business and that suitable additional space in various local markets is available to accommodate any needs that may arise. None of our facilities are individually material to our operations.

Item 3.    Legal Proceedings

        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 seek 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

45


Table of Contents


ITC's motion for prejudgment interest. AMT appealed the trial court's decision awarding compensatory 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. Final briefs were filed with the court of appeals and oral arguments were heard in December 2010. On October 28, 2011, the court of appeals issued its decision and affirmed the trial court's rulings. As of October 28, 2011, the outstanding judgment against AMT, including post-judgment interest, approximates $12.9 million dollars. ITC has filed a motion seeking additional attorneys' fees which is pending. AMT has posted a bond, as required by the trial court, for $13.4 million. We believe that a reasonably possible range of exposure, including attorneys' fees, is from $0 to approximately $14.5 million. At October 2, 2011, 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 their indemnification agreement with us for any and all costs and damages related to this lawsuit.

46


Table of Contents


PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

        Our common stock is traded on the NASDAQ Global Select Market under the symbol TTEK. There were 1,905 stockholders of record at November 7, 2011. The high and low sales prices per share for the common stock for the last two fiscal years, as reported by the NASDAQ Global Select Market, are set forth in the following tables.

 
  Prices  
 
  High   Low  

Fiscal Year 2011

 

 


 

 


 

First quarter

  $ 27.16   $ 20.53  

Second quarter

    25.50     22.23  

Third quarter

    25.49     21.49  

Fourth quarter

    23.81     17.57  

Fiscal Year 2010

 

 


 

 


 

First quarter

  $ 27.70   $ 24.28  

Second quarter

    28.18     19.51  

Third quarter

    25.14     20.04  

Fourth quarter

    21.61     18.00  

        We have not paid any cash dividends since our inception and do not intend to pay any cash dividends on our common stock in the foreseeable future. Our credit agreement restricts the extent to which cash dividends may be declared or paid. For information regarding our stock-based compensation, see Note 10, "Stockholders' Equity and Stock Compensation Plans" of the "Notes to Consolidated Financial Statements" in Item 8.

Stock Purchase

        None.

Performance Graph

        The following graph shows a comparison of our cumulative total returns with those of the NASDAQ Market Index, our self-constructed Peer Group Index (as defined below) and Former Peer Group Index (as defined below). The graph assumes that the value of an investment in our common stock and in each such index was $100 on October 2, 2006, and that all dividends have been reinvested. No cash dividends have been declared on shares of our common stock. Our self-constructed Peer Group Index includes the following companies: AECOM Technology Corporation; Foster Wheeler AG; Jacobs Engineering Group; Michael Baker Corporation; The Shaw Group, Inc.; URS Corporation; and Willbros Group, Inc. Our self-constructed Former Peer Group Index included the following companies: AECOM Technology Corporation; ICF International, Inc.; The Shaw Group, Inc.; and Stantec, Inc. We changed the composition of the Peer Group Index to better reflect our current primary competitors, given our larger exposure to industrial markets. The comparison in the graph below is based on historical data and is not intended to forecast the possible future performance of our common stock.

47


Table of Contents


COMPARISON OF CUMULATIVE TOTAL RETURN

CHART

ASSUMES $100 INVESTED ON OCTOBER 2, 2006
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING OCT. 2, 2011

 
  2006   2007   2008   2009   2010   2011  

Tetra Tech, Inc.

    100.00     121.24     146.33     147.70     121.64     107.58  

NASDAQ Market Index

    100.00     120.42     98.04     94.88     108.55     111.66  

Peer Group Index

    100.00     195.15     130.35     136.15     114.09     87.70  

Former Peer Group Index

    100.00     224.72     141.43     155.20     158.60     143.57  

        The performance graph above and related text are being furnished solely to accompany this annual report on Form 10-K pursuant to Item 201(e) of Regulation S-K, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any of our filings with the SEC, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

48


Table of Contents

Item 6.    Selected Financial Data

        The following selected financial data was derived from our consolidated financial statements, and should be read in conjunction with the information contained in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and the notes thereto contained in Item 8, "Consolidated Financial Statements and Supplementary Data" of this report.

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
  September 28,
2008
  September 30,
2007
 
 
  (in thousands, except per share data)
 
Statements of Income Data    
   
   
   
   
 

Revenue

  $ 2,573,144   $ 2,201,232   $ 2,287,484   $ 2,145,254   $ 1,553,888  

Operating income

    146,422     124,474     121,889     106,400     86,297  

Net income attributable to Tetra Tech

    90,039     76,819     87,028     60,906     46,353  

Diluted earnings per share

    1.43     1.24     1.43     1.02     0.79  

Balance Sheet Data

 

 


 

 


 

 


 

 


 

 


 

Working capital

  $ 307,393   $ 377,506   $ 223,654   $ 232,154   $ 194,375  

Total assets

    1,593,988     1,381,689     1,097,905     1,056,545     847,487  

Long-term debt, excluding current portion

    144,868     122,510     6,530     53,292     81,080  

Tetra Tech stockholders' equity

    854,725     748,133     646,478     511,514     415,703  

49


Table of Contents

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL OVERVIEW

        We are a leading provider of consulting, engineering, program management, construction management and technical services that focuses on supporting fundamental needs for water, natural resources, the environment, infrastructure and energy. 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 derive income 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 our services to a diverse base of U.S. federal and state and local government agencies, as well as commercial and international clients. The following table presents the percentage of our revenue by client sector:

 
  Fiscal Year
 
  2011   2010   2009

Client Sector

 

 


 

 


 

 

Federal government(1)

    43.4%     51.9%     50.9%

State and local government

    11.0         14.8         12.1    

Commercial

    22.4         23.8         32.4    

International(2)

    23.2           9.5           4.6    
             

  100.0%   100.0%   100.0%
             

 

 

 

 

 

 

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

        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.

50


Table of Contents

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

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

 
  Fiscal Year
 
  2011   2010   2009

Reportable Segment

 

 


 

 


 

 

ECS

    43.0%     33.2%     26.3%

TSS

    22.1         24.0         22.8    

EAS

    12.0         13.3         13.1    

RCM

    28.2         34.5         41.6    

Intersegment elimination

    (5.3)       (5.0)       (3.8)  
             

  100.0%   100.0%   100.0%
             

        We are implementing organizational changes that will result in a realignment of our reportable segments. These changes are intended to improve organizational effectiveness and efficiency by better aligning operations with similar customer types, project types and financial metrics. These changes will be effective at the beginning of the first quarter of fiscal 2012, and our reportable segment results on a prospective basis will be revised consistent with the new organizational structure. Prior period amounts will be restated to conform to the new presentation.

        For more information concerning our reportable segments, see Note 17, "Reportable Segments" of the "Notes to Consolidated Financial Statements" included in Item 8.

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

 
  Fiscal Year
 
  2011   2010   2009

Contract Type

 

 


 

 


 

 

Fixed-price

    40.4%     42.0%     40.8%

Time-and-materials

    38.7         34.0         37.2    

Cost-plus

    20.9         24.0         22.0    
             

  100.0%   100.0%   100.0%
             

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

51


Table of Contents

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.

        In the first quarter of fiscal 2011, we acquired 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. In the second quarter of fiscal 2009, we acquired Wardrop, a Canadian firm that specializes in resource management, energy and infrastructure design. This acquisition significantly expanded our worldwide presence with offices throughout Canada. These two acquisitions are part of the ECS segment. In fiscal 2009, 2010 and 2011, we made other acquisitions that enhanced our service offerings to broad-based clients and expanded our geographic presence. These acquisitions are part of the ECS, TSS and RCM segments.

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

        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. In fiscal 2009, 2010 and 2011, we did not have any divestitures.

OVERVIEW OF RESULTS AND BUSINESS TRENDS

        Management review of fiscal 2011 and outlook for the future.    In fiscal 2011, our operating results improved compared to fiscal 2010 despite continuing challenges for the markets in which we operate. We continued our focus on organic growth and the strategic acquisition of firms that enhance our service offerings and expand our geographic presence. Our revenue grew 16.9% compared to fiscal 2010 due to contributions from recent acquisitions and strength in mining and energy projects worldwide. However, continued weakness in U.S. federal construction management and reduced revenue in our state and local government business partially offset this growth.

        We foresee the continuation of a slow and gradual economic recovery in the United States following the severe economic weakness experienced during the global financial crisis and a continuation of strong market demand in our international markets. However, we believe that growth in our non-U.S. markets will experience a faster recovery. 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.

        U.S. Federal Government.    Our U.S. federal government business declined 2.3% in fiscal 2011 compared to fiscal 2010. The decline was primarily due to reduced revenue on back-end construction management projects for the USACE. The decline was partially offset by revenue growth from international development services for the USAID and from our front-end water, environmental, and infrastructure engineering and design services for other federal government agencies. These agencies included the various military branches of the DoD, the GSA, the IBWC, The National Science Foundation ("NSF"), the EPA, the U.S. Department of Agriculture ("DOA"), and the FAA. We also experienced increased workloads on DoD infrastructure design-build projects in Afghanistan. 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 have continued to experience delays on

52


Table of Contents


new awards for certain large construction management projects in the U.S. and abroad. Because of these delays, revenue from our U.S. federal government business is expected to be relatively flat in fiscal 2012 compared to fiscal 2011.

        U.S. State and Local Government.    Our state and local government business declined 13.2% in fiscal 2011 compared to fiscal 2010. The decline resulted primarily from reduced activity on a large transportation infrastructure project and a municipal landfill design project. We continue to experience weak economic conditions across our state and local government markets. Many state and local government agencies continue to face serious 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 state and local government programs are partially mitigated by regulatory requirements driving some of these programs, such as regulatory-mandated consent decrees. As a result, some programs will generally progress despite budget pressures. Because we anticipate that many state and local government agencies will continue to face serious economic challenges, our state and local government business is expected to experience slow to modest growth in fiscal 2012 compared to fiscal 2011.

        U.S. Commercial.    Our commercial business grew 10.3% in fiscal 2011 compared to fiscal 2010. The growth was primarily attributable to increased revenue from energy and industrial projects. Many of our largest commercial customers 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 commercial business, we are optimistic concerning the growth in commercial business due to increased spending by our largest commercial customers. Accordingly, we expect that our commercial business will grow moderately in fiscal 2012 compared to fiscal 2011. Our U.S. commercial clients typically react rapidly to economic change. Accordingly, if the U.S. economy experiences a slowdown in fiscal 2012, we would expect our U.S. commercial outlook to change accordingly.

        International.    Our international business grew 184.9% in fiscal 2011 compared to fiscal 2010. The growth was driven by our recent acquisitions in Canada and, to a lesser extent, in Australia and Chile. Additionally, the growth resulted from strong demand for our water, environmental and infrastructure design services in the mining and energy markets. We expect that our international business will continue its strong growth in fiscal 2012 compared to fiscal 2011 as a result of our recent acquisitions and demand for our services in the mining and energy markets worldwide.

53


Table of Contents

RESULTS OF OPERATIONS

Fiscal 2011 Compared to Fiscal 2010

Consolidated Results of Operations

 
  Fiscal Year Ended  
 
   
   
  Change  
 
  October 2,
2011
  October 3,
2010
 
 
  $   %  
 
  ($ in thousands)
 
  
   
   
   
   
 

Revenue

  $ 2,573,144   $ 2,201,232   $ 371,912     16.9 %

Subcontractor costs

    (780,817 )   (741,002 )   (39,815 )   (5.4 )
                     
 

Revenue, net of subcontractor costs(1)

    1,792,327     1,460,230     332,097     22.7  

Other costs of revenue

    (1,462,172 )   (1,172,542 )   (289,630 )   (24.7 )

Selling, general and administrative expenses

    (183,733 )   (163,214 )   (20,519 )   (12.6 )
                     
 

Operating income

    146,422     124,474     21,948     17.6  

Interest expense – net

    (5,930 )   (1,387 )   (4,543 )   (327.5 )
                     
 

Income before income tax expense

    140,492     123,087     17,405     14.1  

Income tax expense

    (47,510 )   (46,268 )   (1,242 )   (2.7 )
                     
 

Net income including noncontrolling interests

    92,982     76,819     16,163     21.0  
 

Net income attributable to noncontrolling interest

    (2,943 )       (2,943 )   100.0  
                     
 

Net income attributable to Tetra Tech

  $ 90,039   $ 76,819   $ 13,220     17.2 %
                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(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 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.

        Revenue increased significantly in 2011 compared to 2010. We experienced increased demand for our water, environmental, infrastructure design and construction management services in the mining and energy markets worldwide. The recent acquisitions, primarily in Canada, contributed $380.1 million and $323.9 million of additional revenue and revenue, net of subcontractor costs, respectively. Further, our revenue increased from our front-end water, environmental, and infrastructure engineering and design services for certain U.S. federal government clients including the EPA, FAA, NSF, IBWC, GSA, DOA and various military branches of the DoD. These revenue increases were largely offset by a decline in the U.S. federal government business due primarily to the wind-down of certain large construction management projects for the USACE and the DOE, and delays on new awards for certain large construction management projects in the U.S. and abroad. Our state and local government sector also experienced a revenue decrease as a result of continuing weakness in the economy, and reduced activity on a transportation infrastructure and municipal landfill design projects. Overall, revenue, net of subcontractor costs, grew at a higher rate than revenue. This resulted from the increase in self-performed work in the energy sector and reduced revenue from construction management projects, which typically have higher

54


Table of Contents


subcontracting activities. In comparing the results of fiscal 2011 to those of fiscal 2010, it is important to note that in the fourth quarter of fiscal 2010, we recognized approximately $45 million and $30 million in additional revenue and revenue, net of subcontractor costs, respectively, as result of the 53-week year in fiscal 2010 compared to the 52-week year in fiscal 2011.

        Operating income increased as a result of business growth. Additionally, operating income benefited from the recognition of government incentive award fees on a large environmental remediation program and favorable project close-outs on energy and construction management projects. Operating income also increased due to favorable claim settlements and lower bad debt expense on commercial projects. Further, we recognized a gain of $1.8 million from a net reduction of contingent earn-out liabilities associated with our fiscal 2010 and 2011 acquisitions. The operating income increase was partially offset by additional contract costs incurred for project overruns on several fixed-price construction projects and a large energy project. Further, we recognized additional selling, general and administrative ("SG&A") costs due to higher charges in fiscal 2011 related to our recent acquisitions including $15.3 million of amortization expense for intangible assets, $1.5 million of foreign currency exchange loss and other acquisition costs compared to fiscal 2010.

        Net interest expense grew as a result of increased borrowings on our credit facility for acquisitions and additional imputed interest costs recognized for long-term contingent earn-out liabilities associated with our fiscal 2010 and 2011 acquisitions.

        Income tax expense increased due to higher pre-tax income. Our effective tax rate for fiscal 2011 was 33.8% compared to 37.6% for fiscal 2010. The lower effective tax rate resulted from our continued foreign expansion during fiscal 2011 and the extension of U.S. R&E credits. In the first quarter of fiscal 2011, we recorded a $1.2 million benefit from U.S. R&E credits for the last nine months of fiscal 2010.

        Net income attributable to noncontrolling interests related primarily to the consolidated joint ventures associated with our Canadian acquisitions. Net income attributable to Tetra Tech grew for the reasons described above.

Segment Results of Operations

Engineering and Consulting Services

 
  Fiscal Year Ended  
 
   
   
  Change  
 
  October 2,
2011
  October 3,
2010
 
 
  $   %  
 
  ($ in thousands)
 
  
   
   
   
   
 

Revenue

  $ 1,107,944   $ 730,425   $ 377,519     51.7 %

Subcontractor costs

    (231,215 )   (188,559 )   (42,656 )   (22.6 )
                     

Revenue, net of subcontractor costs(1)

  $ 876,729   $ 541,866   $ 334,863     61.8 %
                     

Operating income

 
$

100,790
 
$

60,810
 
$

39,980
   
65.7

%
                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(1)
Represents a non-GAAP financial measure. For more information, see the "Consolidated Results of Operations" discussion above.

        Revenue increased significantly in fiscal 2011 compared to fiscal 2010. The recent acquisitions, primarily in Canada, contributed $328.2 million and $300.4 million of additional revenue and revenue, net of subcontractor costs, respectively. Excluding the effect of acquisitions, the growth was driven by increased demand for our water, environmental and infrastructure design services for mining clients worldwide. To a lesser extent, the growth resulted from increased activity on EPA, FAA, NSF, IBWC and

55


Table of Contents


other U.S. federal government projects. The overall growth was partially offset by a wind-down on certain DoD and DOE projects, reduced activity on a large municipal landfill design project, and weakness in the state and local government business. Revenue, net of subcontractor costs, grew at a faster pace than revenue due to the high level of self-performed work in our international business.

        Operating income increased due predominantly to revenue growth. As a percentage of revenue, operating income increased due to improved project execution and higher profit margins on international projects.

Technical Support Services

 
  Fiscal Year Ended  
 
   
   
  Change  
 
  October 2,
2011
  October 3,
2010
 
 
  $   %  
 
  ($ in thousands)
 
  
   
   
   
   
 

Revenue

  $ 568,335   $ 527,697   $ 40,638     7.7 %

Subcontractor costs

    (232,678 )   (198,238 )   (34,440 )   (17.4 )
                     

Revenue, net of subcontractor costs(1)

  $ 335,657   $ 329,459   $ 6,198     1.9 %
                     

Operating income

 
$

40,895
 
$

39,186
 
$

1,709
   
4.4

%
                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(1)
Represents a non-GAAP financial measure. For more information, see the "Consolidated Results of Operations" discussion above.

        Revenue increased modestly in fiscal 2011 compared to fiscal 2010. An acquisition in the fourth quarter of fiscal 2010 contributed $51.9 million and $23.6 million to fiscal 2011 revenue and revenue, net of subcontractor costs, respectively. Excluding the effect of this acquisition, revenue declined due to reduced workload on DoD and other U.S. federal government projects, partially offset by growth in the commercial, and state and local government sectors. Revenue, net of subcontractor costs, grew at a slower pace than revenue due to a change in contract mix on USAID projects, and a high level of subcontracting activities at the aforementioned acquired company and on certain EPA programs.

        Operating income increased due to revenue growth and favorable project close-outs in fiscal 2011. The increase was partially offset by additional contract costs incurred for project overruns in the second quarter of fiscal 2011. As a percentage of revenue, operating income was consistent with prior-year due to the reasons described above.

56


Table of Contents

Engineering and Architecture Services

 
  Fiscal Year Ended  
 
   
   
  Change  
 
  October 2,
2011
  October 3,
2010
 
 
  $   %  
 
  ($ in thousands)
 
  
   
   
   
   
 

Revenue

  $ 308,112   $ 294,112   $ 14,000     4.8 %

Subcontractor costs

    (83,916 )   (71,703 )   (12,213 )   (17.0 )
                     

Revenue, net of subcontractor costs(1)

  $ 224,196   $ 222,409   $ 1,787     0.8 %
                     

Operating income

 
$

22,597
 
$

12,194
 
$

10,403
   
85.3

%
                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(1)
Represents a non-GAAP financial measure. For more information, see the "Consolidated Results of Operations" discussion above.

        Revenue growth was driven by demand for our building and facility design services from several large commercial clients, and increased workload on international development projects for the U.S. federal government. Additionally, the growth resulted from increased activity on a few large water and transportation infrastructure projects for state and local government clients. The revenue growth was partially offset by the wind-down of several design projects overseas and the overall continued weakness in the state and local government markets. Revenue, net of subcontractor costs, grew at a slower pace than revenue due primarily to increased subcontracting activities on building and facility design and international development projects.

        Operating income increased due to revenue growth, a reduction in facility costs that resulted from prior-year office consolidations, and lower provisions for losses on accounts receivable as a result of cash collections. Additionally, operating income benefited from a favorable claim settlement of $2.3 million and favorable project close-outs. In fiscal 2010, operating income was reduced by a $3.1 million provision for losses on accounts receivable on certain commercial development and infrastructure projects.

Remediation and Construction Management

 
  Fiscal Year Ended  
 
   
   
  Change  
 
  October 2,
2011
  October 3,
2010
 
 
  $   %  
 
  ($ in thousands)
 
  
   
   
   
   
 

Revenue

  $ 725,569   $ 759,088   $ (33,519 )   (4.4 )%

Subcontractor costs

    (369,824 )   (392,592 )   22,768     5.8  
                     

Revenue, net of subcontractor costs(1)

  $ 355,745   $ 366,496   $ (10,751 )   (2.9 )%
                     

Operating income

 
$

18,746
 
$

33,651
 
$

(14,905

)
 
(44.3

)%
                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(1)
Represents a non-GAAP financial measure. For more information, see the "Consolidated Results of Operations" discussion above.

        Revenue declined in fiscal 2011 from fiscal 2010. This decline was due primarily to the wind-down of certain large construction management projects for the USACE, inclement weather in the northeast U.S., and reduced activity on DOE water and transportation infrastructure projects. Further, the decline resulted from reduced activity on a large transportation infrastructure project for a state and local

57


Table of Contents


government client. The decline was partially mitigated by strength in our energy markets worldwide, and increased activity on mining and certain U.S. federal government projects for GSA, DOA and various military branches of the DoD. Revenue, net of subcontractor costs, declined at a slower pace than revenue due to increased self-performed work on energy projects and reduced revenue from construction management projects, which typically have higher subcontracting activities.

        Operating income was adversely impacted by the aforementioned revenue decline, and lower profit rates on certain U.S. federal government and commercial construction management projects as a result of competitive pricing pressure and a lower realization on contract change orders and claims. In addition, we recognized approximately $20 million of cost overruns on several fixed-price construction and energy projects. In the fourth quarter of fiscal 2011, we incurred an additional $1.3 million charge for lease exit costs associated with our effort to further reduce overhead costs and consolidate certain facilities in response to the aforementioned revenue decline. The operating income decline was partially mitigated by the recognition of $10.6 million in government incentive award fees on a large environmental remediation program, favorable project close-outs related to energy and construction management projects and a favorable legal claim settlement in fiscal 2011.

Fiscal 2010 Compared to Fiscal 2009

Consolidated Results of Operations

 
  Fiscal Year Ended  
 
   
   
  Change  
 
  October 3,
2010
  September 27,
2009
 
 
  $   %  
 
  ($ in thousands)
 
  
   
   
   
   
 

Revenue

  $ 2,201,232   $ 2,287,484   $ (86,252 )   (3.8 )%

Subcontractor costs

    (741,002 )   (901,347 )   160,345     17.8  
                     
 

Revenue, net of subcontractor costs(1)

    1,460,230     1,386,137     74,093     5.3  

Other costs of revenue

    (1,172,542 )   (1,108,512 )   (64,030 )   (5.8 )

Selling, general and administrative expenses

    (163,214 )   (155,736 )   (7,478 )   (4.8 )
                     
 

Operating income

    124,474     121,889     2,585     2.1  

Interest expense – net

    (1,387 )   (2,684 )   1,297     48.3  
                     
 

Income before income tax expense

    123,087     119,205     3,882     3.3  

Income tax expense

    (46,268 )   (32,177 )   (14,091 )   (43.8 )
                     
 

Net income

  $ 76,819   $ 87,028   $ (10,209 )   (11.7 )%
                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(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 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.

        Revenue declined due to the prior-year completion of several large wind energy and Iraq-related contracts, and reduced activity on certain USAID, environmental remediation and water projects. Additionally, the decline was attributable to U.S. federal government delays in releasing new awards, and

58


Table of Contents


reduced workload from commercial clients due to continuing weakness in the economy. The overall decline was partially offset by increased funding on EPA, DOE, FAA and other federal programs. Also, we experienced growth in our international business and increased activity on a large transportation infrastructure project. Further, the decline was partially mitigated by approximately $130 million in revenue contribution from acquisitions in fiscal 2010 and approximately $45 million in additional revenue in the fourth quarter as a result of the 53-week year in fiscal 2010 compared to the 52-week year in fiscal 2009.

        The growth in revenue, net of subcontractor costs, was driven by approximately $84 million in contributions from acquisitions and approximately $30 million related to the additional week in fiscal 2010. Excluding the effect of acquisitions, revenue, net of subcontractor costs, slightly declined compared to fiscal 2009. The dollar and percentage changes were more favorable than those for revenue due primarily to a significant decrease in subcontracting activity. This resulted from the prior-year completion of several wind energy and Iraq-related projects, which were substantially subcontracted. However, our subcontracting activities remained relatively high due to USAID, BRAC and certain water programs. Additionally, our program management activities on U.S. federal government contracts typically result in higher levels of subcontracting that are partially driven by government-mandated small business set-aside requirements.

        Operating income grew as a result of the increase in revenue, net of subcontractor costs. The increase in operating income was partially offset by additional SG&A costs related to recent acquisitions, including $2.9 million of increased amortization expense related to intangible assets and $1.7 million of third-party acquisition costs.

        Net interest expense decreased due to lower average borrowings. We had minimal interest expense on our credit facility as we had no borrowings outstanding for most of fiscal 2010.

        Income tax expense increased due primarily to a higher effective tax rate. Our effective tax rate for fiscal 2010 was 37.6% compared to 27.0% for fiscal 2009. The prior-year tax rate benefited from a $3.3 million adjustment primarily from a settlement with the Internal Revenue Service ("IRS") for fiscal years 1997 through 2001, and the recognition of $9.7 million for previously unclaimed R&E credits for periods prior to fiscal 2009.

        Despite an increase in pre-tax income, net income decreased as a result of a higher effective tax rate for fiscal 2010 compared to fiscal 2009, for the reasons described above.

Segment Results of Operations

Engineering and Consulting Services

 
  Fiscal Year Ended  
 
   
   
  Change  
 
  October 3,
2010
  September 27,
2009
 
 
  $   %  
 
  ($ in thousands)
 
  
   
   
   
   
 

Revenue

  $ 730,425   $ 601,317   $ 129,108     21.5 %

Subcontractor costs

    (188,559 )   (157,916 )   (30,643 )   (19.4 )
                     

Revenue, net of subcontractor costs(1)

  $ 541,866   $ 443,401   $ 98,465     22.2 %
                     

Operating income

 
$

60,810
 
$

47,095
 
$

13,715
   
29.1

%
                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(1)
Represents a non-GAAP financial measure. For more information, see the "Consolidated Results of Operations" discussion above.

59


Table of Contents

        Our recent acquisitions contributed approximately $96 million and $74 million to the growth in revenue and revenue, net of subcontractor costs, respectively. Excluding the effect of acquisitions, both revenue and revenue, net of subcontractor costs, grew 5.5%, driven primarily by demand for international mining services, and increased workload on federal, state and local government programs. The growth was partially offset by reduced revenue from a large environmental remediation project for a commercial client resulting from funding and contract delays.

        Operating income increased due primarily to revenue growth. Additionally, the increase resulted from reductions in overhead costs, labor and other employee-related expenses in certain low-activity business areas. Further, contract costs related to inclement weather, regulatory delays and subcontractor issues were lower in fiscal 2010.

Technical Support Services

 
  Fiscal Year Ended  
 
   
   
  Change  
 
  October 3,
2010
  September 27,
2009
 
 
  $   %  
 
  ($ in thousands)
 
  
   
   
   
   
 

Revenue

  $ 527,697   $ 522,748   $ 4,949     0.9 %

Subcontractor costs

    (198,238 )   (207,863 )   9,625     4.6  
                     

Revenue, net of subcontractor costs(1)

  $ 329,459   $ 314,885   $ 14,574     4.6 %
                     

Operating income

 
$

39,186
 
$

37,584
 
$

1,602
   
4.3

%
                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(1)
Represents a non-GAAP financial measure. For more information, see the "Consolidated Results of Operations" discussion above.

        Revenue growth was driven by a fiscal 2010 acquisition, which contributed $8.3 million in revenue. Excluding the effect of the acquisition, TSS experienced a slight revenue decline from reduced activity on certain USAID and DoD projects. The overall decrease was partially mitigated by revenue growth from the EPA and other U.S. federal government agencies. Excluding the effect of acquisitions, revenue, net of subcontractor costs, grew 3.4% despite the aforementioned revenue decline. The growth resulted primarily from an increase in self-performed work, particularly on USAID and DoD projects.

        The increase in operating income substantially corresponded to the growth in revenue, net of subcontractor costs. The increase also resulted from improved project performance on certain fixed-price contracts.

60


Table of Contents

Engineering and Architecture Services

 
  Fiscal Year Ended  
 
   
   
  Change  
 
  October 3,
2010
  September 27,
2009
 
 
  $   %  
 
  ($ in thousands)
 
  
   
   
   
   
 

Revenue

  $ 294,112   $ 299,691   $ (5,579 )   (1.9 )%

Subcontractor costs

    (71,703 )   (64,850 )   (6,853 )   (10.6 )
                     

Revenue, net of subcontractor costs(1)

  $ 222,409   $ 234,841   $ (12,432 )   (5.3 )%
                     

Operating income

 
$

12,194
 
$

13,599
 
$

(1,405

)
 
(10.3

)%
                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(1)
Represents a non-GAAP financial measure. For more information, see the "Consolidated Results of Operations" discussion above.

        Both revenue and revenue, net of subcontractor costs, declined in the commercial sector, particularly in the real estate development and industrial markets. Our state and local government sector declined due to budget and spending constraints. The decline was partially mitigated by aggregate revenue growth of approximately $25 million in international and U.S. federal government sectors. The percentage decrease in revenue, net of subcontractor costs, was higher than that for revenue due to the increased level of subcontracting activity on the international and U.S. federal government work.

        Operating income decreased due largely to the aforementioned revenue decline. Further, in the second quarter of fiscal 2010, we recognized $3.1 million in losses on accounts receivable on certain commercial development and infrastructure projects. The decrease in operating income was partially mitigated by improved performance on international projects and reductions in overhead costs, labor and other employee-related expenses that corresponded to the aforementioned revenue decline.

Remediation and Construction Management

 
  Fiscal Year Ended  
 
   
   
  Change  
 
  October 3,
2010
  September 27,
2009
 
 
  $   %  
 
  ($ in thousands)
 
  
   
   
   
   
 

Revenue

  $ 759,088   $ 951,604   $ (192,516 )   (20.2 )%

Subcontractor costs

    (392,592 )   (558,594 )   166,002     29.7  
                     

Revenue, net of subcontractor costs(1)

  $ 366,496   $ 393,010   $ (26,514 )   (6.7 )%
                     

Operating income

 
$

33,651
 
$

38,156
 
$

(4,505

)
 
(11.8

)%
                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(1)
Represents a non-GAAP financial measure. For more information, see the "Consolidated Results of Operations" discussion above.

        Revenue declined as a result of the prior-year completion of several large contracts, primarily wind energy and Iraq-related projects, and reduced activity on a large water project for a commercial client. Revenue from remediation and construction work also decreased due to U.S. federal government delays in releasing new awards. Since wind energy and Iraq-related projects were substantially subcontracted, revenue, net of subcontractor costs, was not impacted by the completion of these projects to the same extent as revenue. The overall decline was partially offset by increased activity on DOE and other U.S.

61


Table of Contents


federal government programs, as well as a large transportation infrastructure project with a state government client. To a lesser extent, the decline was partially mitigated by the effect of a prior-year acquisition in the amounts of approximately $26 million and $6 million for revenue and revenue, net of subcontractor costs, respectively.

        Operating income decreased due largely to the aforementioned revenue decline. Further, the prior-year operating income benefited from favorable claim settlements and higher profit margins on certain commercial wind energy, water and telecommunication projects. The decrease in operating income was partially offset by current-year reductions in the provisions for accounts receivable, as well as lower overhead costs, labor and other employee-related expenses that corresponded to the revenue decline in remediation and construction work.

Non-GAAP Financial Measures

        We are providing certain non-GAAP financial measures that we believe are appropriate measures for evaluating the operating performance of our business. These non-GAAP measures should not be considered in isolation from, and are not intended to represent an alternative measure of, operating results or cash flows from operating activities, as determined in accordance with U.S. GAAP.

        EBITDA represents net income attributable to Tetra Tech plus net interest expense, income taxes, depreciation and amortization. We believe EBITDA is a useful representation of our operating performance because of significant amounts of acquisition-related non-cash amortization expense, which can fluctuate significantly depending on the timing, nature and size of our business acquisitions. Revenue, net of subcontractor costs, is defined as revenue less subcontractor costs. For more information, see the "Consolidated Results of Operations" discussion above.

        The following is a reconciliation of EBITDA to net income attributable to Tetra Tech as well as revenue, net of subcontractor costs, for fiscal 2011, 2010 and 2009:

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
 
  ($ in thousands)
 
  
   
   
   
 

Net income attributable to Tetra Tech

  $ 90,039   $ 76,819   $ 87,028  

Interest expense, net

    5,930     1,387     2,684  

Depreciation(1)

    27,138     20,402     17,031  

Amortization(1)

    27,979     12,683     9,820  

Income tax expense

    47,510     46,268     32,177  
               
 

EBITDA

  $ 198,596   $ 157,559   $ 148,740  
               

Revenue

 
$

2,573,144
 
$

2,201,232
 
$

2,287,484
 

Subcontractor costs

    (780,817 )   (741,002 )   (901,347 )
               
 

Revenue, net of subcontractors costs

  $ 1,792,327   $ 1,460,230   $ 1,386,137  
               

 

 

 

 

 

 

 

 

 

 

 
(1)
The total of depreciation and amortization expenses slightly varied from the amounts on the consolidated statements of cash flows, which include amortization of deferred debt costs.

62


Table of Contents

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

        Capital Requirements.    Our capital requirements are to fund working capital needs, capital expenditures and debt service requirements, as well as to fund acquisitions and earn-out obligations from prior-year acquisitions. We believe that our cash balances, operating cash flow and available borrowing under the credit agreement described below will be sufficient to meet our capital requirements for at least the next twelve months.

        Operating Activities.    For fiscal 2011, net cash provided by operating activities was $131.6 million, an increase of $24.8 million compared to fiscal 2010. The increase was driven by additional advance payments from clients on contract work, improved cash collections on accounts receivable and increased EBITDA. The overall increase was partially offset by unfavorable changes in accounts payable, other liabilities, and prepaid expenses and other assets compared to fiscal 2010 due to the timing of payments to vendors and subcontractors.

        Investing Activities.    For fiscal 2011, net cash used in investing activities was $293.8 million, an increase of $196.5 million compared to fiscal 2010. The increase was due to fiscal 2011 acquisitions and contingent earn-out payments related to prior-year acquisitions. Despite the business growth, our capital expenditures decreased due to less equipment required to satisfy project execution that corresponded to a revenue decline in the RCM segment, which is typically more capital-intensive than other businesses within Tetra Tech.

        Financing Activities.    For fiscal 2011, net cash provided by financing activities was $31.4 million, a decrease of $90.1 million compared to fiscal 2010. At the end of fiscal 2010, we borrowed $120 million under our credit agreement to fund the acquisition of BPR and working capital needs in the first quarter of fiscal 2011. In fiscal 2011, we had a net borrowing of $24.0 million to fund additional acquisitions. The overall decrease was partially offset by a $5.0 million increase in net proceeds from issuance of common stock related to options exercised.

        Debt Financing.    On March 28, 2011, we entered into a new credit agreement ("Credit Agreement") and concurrently terminated our prior credit agreement. The Credit Agreement provides for a $460 million, five-year revolving credit facility ("Facility") that matures on March 28, 2016. The Credit Agreement includes a $200 million sublimit for the issuance of standby letters of credit and a $100 million sublimit for multicurrency borrowings and letters of credit. At October 2, 2011, we had $143.8 million in borrowings under the Facility at a weighted-average interest rate of 2.0% per annum, $28.5 million in standby letters of credit and $287.7 million in availability under the Facility. We had $23.8 million in multicurrency borrowings and letters of credit under the Facility at October 2, 2011.

        The Credit Agreement contains certain financial and various other affirmative and negative covenants. They include, among others, a maximum consolidated leverage ratio of 2.5x (total funded debt/EBITDA, as defined in the Credit Agreement) and a minimum consolidated fixed charge coverage ratio of 1.25x (EBITDA as defined in the Credit Agreement minus capital expenditures/cash interest plus taxes plus principal payments of indebtedness including capital leases, notes and post acquisition payments). At October 2, 2011, we were in compliance with these covenants with a consolidated leverage ratio of 1.22x and a consolidated fixed charge coverage ratio of 2.34x. The Facility is guaranteed by our material subsidiaries and certain additional designated subsidiaries. Borrowings under the Credit Agreement are collateralized by our accounts receivable, the stock of our subsidiaries and intercompany debt.

        Inflation.    We believe our operations have not been, and, in the foreseeable future, are not expected to be, materially adversely affected by inflation or changing prices due to the average duration of our projects and our ability to negotiate prices as contracts end and new contracts begin.

63


Table of Contents

        Contractual Obligations.    The following sets forth our contractual obligations at October 2, 2011:

 
  Total   Year 1   Years 2 - 3   Years 4 - 5   Beyond  
 
  (in thousands)
 
  
   
   
   
   
   
 

Debt:

                               
 

Credit facility

  $ 143,803   $   $   $ 143,803   $  
 

Other debt

    1,935     1,524     411          
 

Interest(1)

    13,219     2,947     5,871     4,401      

Capital leases

    1,686     1,032     654          

Operating leases(2)

    212,539     63,062     94,756     41,092     13,629  

Contingent earn-outs(3)

    75,159     64,119     11,040          

Deferred compensation liability

    10,633                 10,633  

Unrecognized tax benefits(4)

    15,970     50             15,920  
                       
 

Total

  $ 474,944   $ 132,734   $ 112,732   $ 189,296   $ 40,182  
                       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(1)
Interest primarily related to the credit facility is based on a weighted-average interest rate at October 2, 2011, and borrowings that are presently outstanding.
(2)
Predominantly represents real estate leases.
(3)
Represents the estimated fair value recorded for contingent earn-out obligations for acquisitions consummated after fiscal 2009. The remaining maximum contingent earn-out obligations for these acquisitions are $92.8 million. The remaining maximum earn-out obligations for acquisitions consummated prior to fiscal 2010 are approximately $15.5 million, which would be paid by fiscal 2013, if earned.
(4)
Represents liabilities for unrecognized tax benefits related to uncertain tax positions, excluding amounts related primarily to outstanding refund claims. We are unable to reasonably predict the timing of tax settlements, as tax audits can involve complex issues and the resolution of those issues may span multiple years, particularly if subject to negotiation or litigation. For more information, see Note 7, "Income Taxes" of the "Notes to Consolidated Financial Statements" included in Item 8.

Off-Balance Sheet Arrangements

        Variable Interest Entities.    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 analyzed all of our joint ventures to determine whether they are variable interest entities ("VIEs"). If a joint venture is determined to be a VIE, we assess whether we are the primary beneficiary and need to consolidate that joint venture. At October 2, 2011, none of our unconsolidated joint ventures had any debt other than operating payables and accruals. For further discussion of our VIEs, see Note 15, "Joint Ventures" of the "Notes to Consolidated Financial Statements" included in Item 8.

CRITICAL ACCOUNTING POLICIES

        The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions in the application of certain accounting policies that affect amounts reported in our consolidated financial statements and related footnotes included in Item 8 of this report. In order to understand better the changes that may occur to key elements of our financial condition, results of operations and cash flows, readers should be aware of the critical accounting policies we apply and estimates we use in preparing our consolidated financial statements. Although such estimates and assumptions are based on management's best knowledge of current events and actions the Company may undertake in the future, actual results could differ materially from those estimates.

        Our significant accounting policies are described in the "Notes to Consolidated Financial Statements" included in Item 8. Highlighted below are the accounting policies that management considers most critical to investors' understanding of our financial results and condition, and that require complex judgments by management.

64


Table of Contents

Revenue Recognition and Contract Costs

        We recognize revenue for most of our contracts using the percentage-of-completion method, primarily based on contract costs incurred to date compared to total estimated contract costs. We generally utilize the cost-to-cost approach to estimate the progress towards completion in order to determine the amount of revenue and profit to recognize. This method of revenue recognition requires us to prepare estimates of cost to complete contracts in progress. In making such estimates, judgments are required to evaluate contingencies such as potential variances in schedule; the cost of materials and labor productivity; and the impact of change orders, liability claims, contract disputes and achievement of contractual performance standards. Changes in total estimated contract cost and losses, if any, could materially impact our results of operations or financial position. Certain of our contracts are service-related contracts, such as providing operations and maintenance services or a variety of technical assistance services. Our service contracts are accounted for using the proportional performance method under which revenue is recognized in proportion to the number of service activities performed, in proportion to the direct costs of performing the service activities, or evenly across the period of performance depending upon the nature of the services provided.

        We recognize revenue for work performed under three major types of contracts: fixed-price, time-and-materials and cost-plus.

        Fixed-Price.    We enter into two major types of fixed-price contracts: firm fixed-price ("FFP") and fixed-price per unit ("FPPU"). Under FFP contracts, our clients pay us an agreed fixed-amount negotiated in advance for a specified scope of work. We generally recognize revenue on FFP contracts using the percentage-of-completion method. If the nature or circumstances of the contract prevent us from preparing a reliable estimate at completion, we will delay profit recognition until adequate information about the contract's progress becomes available. Under our FPPU contracts, clients pay us a set fee for each service or production transaction that we complete. Accordingly, we recognize revenue under FPPU contracts as we complete the related service or production transactions, generally using the proportional performance method.

        Time-and-Materials.    Under time-and-materials contracts, we negotiate hourly billing rates and charge our clients based on the actual time that we spend on a project. In addition, clients reimburse us for our actual out-of-pocket costs of materials and other direct incidental expenditures that we incur in connection with our performance under the contract. The majority of our time-and-material contracts are subject to maximum contract values and, accordingly, revenue under these contracts is generally recognized under the percentage-of-completion method. However, time and materials contracts that are service-related contracts are accounted for utilizing the proportional performance method. Revenue on contracts that are not subject to maximum contract values is recognized based on the actual number of hours we spend on the projects plus any actual out-of-pocket costs of materials and other direct incidental expenditures that we incur on the projects. Our time-and-materials contracts also generally include annual billing rate adjustment provisions.

        Cost-Plus.    Under cost-plus contracts, we are reimbursed for allowable or otherwise defined costs incurred plus a fee or mark-up. The contracts may also include incentives for various performance criteria, including quality, timeliness, ingenuity, safety and cost-effectiveness. In addition, our costs are generally subject to review by our clients and regulatory audit agencies, and such reviews could result in costs being disputed as non-reimbursable under the terms of the contract. Revenue for cost-plus contracts is recognized at the time services are performed based upon the amounts we expect to realize using the percentage-of-completion method. Revenue is not recognized for non-recoverable costs. Performance incentives are included in our estimates of revenue when their realization is reasonably assured.

        If estimated total costs on any contract indicate a loss, we recognized the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to revenue, estimated costs to complete

65


Table of Contents


contracts, including penalties, incentive awards, change orders, claims, anticipated losses and others are recorded in the period in which the revisions are identified and the loss can be reasonably estimated. Such revisions could occur in any reporting period and the effects may be material depending on the size of the project or the adjustment.

        Once contract performance is underway, we may experience changes in conditions, client requirements, specifications, designs, materials and expectations regarding the period of performance. Such changes are "change orders" and may be initiated by us or by our clients. In many cases, agreement with the client as to the terms of change orders is reached prior to work commencing; however, sometimes circumstances require that work progress without obtaining client agreement. Revenue related to change orders is recognized as costs are incurred. Change orders that are unapproved as to both price and scope are evaluated as claims.

        Claims are amounts in excess of agreed contract prices that we seek to collect from our clients or other third parties for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of unanticipated additional costs. Revenue on claims is recognized only to the extent that contract costs related to the claims have been incurred and when it is probable that the claim will result in a bona fide addition to contract value that can be reliably estimated. No profit is recognized on a claim until final settlement occurs. This can lead to a situation in which costs are recognized in one period and revenue is recognized in a subsequent period when a client agreement is obtained or a claims resolution occurs.

Insurance Matters, Litigation and Contingencies

        In the normal course of business, we are subject to certain contractual guarantees and litigation. Generally, such guarantees relate to project schedules and performance. Most of the litigation involves us as a defendant in contractual disagreements, workers' compensation, personal injury and other similar lawsuits. We maintain insurance coverage for various aspects of our business and operations. However, we have elected to retain a portion of losses that may occur through the use of various deductibles, limits and retentions under our insurance programs. This practice may subject us to some future liability for which we are only partially insured or are completely uninsured.

        We record in our consolidated balance sheets amounts representing our estimated liability for self-insurance claims. We utilize actuarial analyses to assist in determining the level of reserves to establish for our employee medical and workers compensation self-insurance claims that are known and have been asserted against us, as well as for self-insurance claims that are believed to have been incurred based on actuarial analysis but have not yet been reported to our claims administrators at the balance sheet date. We include any adjustments to such insurance reserves in our consolidated results of operations.

        Except as described in Note 16, "Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" included in Item 8, we have not been affected by any litigation or other contingencies that have had, or are currently anticipated to have, a material impact on our results of operations or financial position. As additional information about current or future litigation or other contingencies becomes available, management will assess whether such information warrants the recording of additional expenses relating to those contingencies. Such additional expenses could potentially have a material impact on our results of operations and financial position.

Stock-Based Compensation

        Our stock-based compensation plans include stock options, restricted stock and an employee stock purchase plan for our eligible employees and outside directors. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of stock-based awards at the grant date requires management to make assumptions and apply judgment to determine the fair value of our awards. These

66


Table of Contents


assumptions and judgments include future employee turnover rates, along with estimating the future volatility of our stock price, future stock option exercise behaviors and, for performance-based awards, the achievement of company performance goals. Our stock-based compensation expense was $10.6 million, $10.2 million and $9.4 million for fiscal 2011, 2010 and 2009, respectively.

Goodwill and Business Combinations

        The cost of an acquired company is assigned to the tangible and intangible assets purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets and liabilities acquired requires us to make estimates and use valuation techniques when a market value is not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. Goodwill typically represents the value paid for the assembled workforce and enhancement of our service offerings. Effective September 28, 2009, our transaction costs associated with business combinations are expensed as they are incurred instead of being capitalized as part of the cost of the acquisition.

        Identifiable intangible assets include backlog, non-compete agreements, client relations, trade names, patents and other assets. The costs of these intangible assets are amortized over their contractual or economic lives, which range from one to ten years. We assess the recoverability of the unamortized balance of our intangible assets when indicators of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. Should the review indicate that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of the intangible assets would be recognized as an impairment loss.

        We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. Our annual review at July 4, 2011 (i.e., the first day of our fiscal fourth quarter), indicated that we had no impairment of goodwill, and all of our reporting units had estimated fair values that were substantially in excess of their carrying values, including goodwill. In addition, we regularly evaluate whether events and circumstances have occurred that may indicate a potential change in recoverability of goodwill. We perform interim goodwill impairment reviews between our annual reviews if certain events and circumstances have occurred, including a deterioration in general economic conditions, an increased competitive environment, a change in management, key personnel, strategy or customers, negative or declining cash flows, or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods. We believe the methodology that we use to review impairment of goodwill, which includes a significant amount of judgment and estimates, provides us with a reasonable basis to determine whether impairment has occurred. However, many of the factors employed in determining whether our goodwill is impaired are outside of our control and it is reasonably likely that assumptions and estimates will change in future periods. These changes could result in future impairments.

        The goodwill impairment review involves the determination of the fair value of our reporting units, which for us are the components one level below our reportable segments. This process requires us to make significant judgments and estimates, including assumptions about our strategic plans with regard to our operations as well as the interpretation of current economic indicators and market valuations. Furthermore, the development of the present value of future cash flow projections includes assumptions and estimates derived from a review of our expected revenue growth rates, profit margins, business plans, cost of capital and tax rates. We also make certain assumptions about future market conditions, market prices, interest rates and changes in business strategies. Changes in assumptions or estimates could materially affect the determination of the fair value of a reporting unit. This could eliminate the excess of fair value over carrying value of a reporting unit entirely and, in some cases, result in impairment. Such changes in assumptions could be caused by a loss of one or more significant contracts, reductions in government or commercial client spending, or a decline in the demand for our services due to changing economic conditions. In the event that we determine that our goodwill is impaired, we would be required

67


Table of Contents


to record a non-cash charge that could result in a material adverse effect on our results of operations or financial position.

        We utilize two methods to determine the fair value of our reporting units: (i) the Income Approach and (ii) the Market Approach. While each of these approaches is initially considered in the valuation of the business enterprises, the nature and characteristics of the reporting units indicate which approach is most applicable. The Income Approach utilizes the discounted cash flow method, which focuses on the expected cash flow of the reporting unit. In applying this approach, the cash flow available for distribution is calculated for a finite period of years. Cash flow available for distribution is defined, for purposes of this analysis, as the amount of cash that could be distributed as a dividend without impairing the future profitability or operations of the reporting unit. The cash flow available for distribution and the terminal value (the value of the reporting unit at the end of the estimation period) are then discounted to present value to derive an indication of the value of the business enterprise. The Market Approach is comprised of the guideline company method and the similar transactions method. The guideline company method focuses on comparing the reporting unit to select reasonably similar (or "guideline") publicly traded companies. Under this method, valuation multiples are (i) derived from the operating data of selected guideline companies; (ii) evaluated and adjusted based on the strengths and weaknesses of the reporting units relative to the selected guideline companies; and (iii) applied to the operating data of the reporting unit to arrive at an indication of value. In the similar transactions method, consideration is given to prices paid in recent transactions that have occurred in the reporting unit's industry or in related industries. For our annual impairment analysis at July 4, 2011, we weighted the Income Approach and the Market Approach at 70% and 30%, respectively. The Income Approach was given a higher weight because it has the most direct correlation to the specific economics of the reporting unit, as compared to the Market Approach, which is based on multiples of broad-based (i.e., less comparable) companies.

        Certain of our acquisition agreements include contingent earn-out payments, which are generally based on the achievement of future operating income. For acquisitions consummated after fiscal 2009, we estimated the fair value of contingent earn-out payments, and recorded the estimated fair value of contingent consideration as a liability in "Contingent earn-out liabilities" and "Other long-term liabilities" on the consolidated balance sheet at October 2, 2011. On a quarterly basis, we review and determine the fair value of the contingent consideration based on the Income Approach and the updated fair value could differ materially from those initial estimates. Any adjustments are recorded in earnings. Ultimately, the liability will be adjusted to the amount paid, and the difference between our initial estimates and amounts paid will be recorded in earnings. At October 2, 2011, our liability for contingent consideration was $75.2 million, representing our current estimate of the fair value of a maximum obligation of $108.3 million. The remaining maximum of $15.5 million for contingent consideration related to acquisitions completed prior to fiscal 2010 will be recorded as additions to goodwill if paid.

Income Taxes

        We file a consolidated U.S. federal income tax return and combined California franchise tax return. In addition, we file other returns that are required in the states, foreign jurisdictions and other jurisdictions in which we do business. We account for certain income and expense items differently for financial reporting and income tax purposes. Deferred tax assets and liabilities are computed for the differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to reverse. In determining the need for a valuation allowance on deferred tax assets, management reviews both positive and negative evidence, including current and historical results of operations, future income projections and potential tax planning strategies. Although realization is not assured, based on our assessment, we have concluded that it is more likely than not that the deferred tax assets at October 2, 2011, will be realized.

68


Table of Contents

        According to the authoritative guidance on accounting for uncertainty in income taxes, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. For more information related to our unrecognized tax benefits, see Note 7, "Income Taxes" of the "Notes to Consolidated Financial Statements" included in Item 8.

RECENT ACCOUNTING PRONOUNCEMENTS

        For a discussion of recent accounting standards and the effect they could have on the consolidated financial statements, see Note 2, "Basis of Presentation and Preparation" of the "Notes to Consolidated Financial Statements" included in Item 8.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        We do not enter into derivative financial instruments for trading or speculation purposes. In the normal course of business, we have exposure to both interest rate risk and foreign currency transaction and translation risk, primarily related to the Canadian dollar.

        We are exposed to interest rate risk under our credit agreement. We may borrow on our Facility, at our option, at either (a) a base rate (the highest of the U.S. federal funds rate plus 0.50% per annum, the bank's prime rate or the Eurocurrency rate plus 1.00%) plus a margin that ranges from 0.50% to 1.50% per annum, or (b) a Eurocurrency rate plus a margin that ranges from 1.50% to 2.50% per annum. Borrowings at the base rate have no designated term and may be repaid without penalty any time prior to the Facility's maturity date. Borrowings at a Eurodollar rate have a term no less than 30 days and no greater than 90 days. Typically, at the end of such term, such borrowings may be rolled over at our discretion into either a borrowing at the base rate or a borrowing at a Eurodollar rate with similar terms, not to exceed the maturity date of the Facility. The Facility matures on March 28, 2016, or earlier at our discretion upon payment in full of loans and other obligations. At October 2, 2011, we had $143.8 million in borrowings outstanding under the Facility at a weighted-average interest rate of 2.0% per annum.

        Most of our transactions are in U.S. dollars; however, some of our subsidiaries conduct business in foreign currencies, primarily the Canadian dollar. Therefore, we are subject to currency exposure and volatility because of currency fluctuations. We attempt to minimize our exposure to these fluctuations by matching revenue and expenses in the same currency for our contracts. For fiscal 2011, we had foreign currency losses of $1.3 million compared to a foreign currency gain of $0.2 million in fiscal 2010. The foreign currency loss in fiscal 2011 was primarily attributable to intercompany balances from transactions between and advances made to foreign affiliates denominated in currencies other than the U.S. dollar, and the unanticipated weakening of the values of certain foreign currencies relative to the U.S. dollar in the fourth quarter of fiscal 2011. These gains and losses were recognized as part of SG&A expenses in our consolidated statements of income.

        We have foreign currency exchange rate exposure in our results of operations and equity primarily as a result of the currency translation related to our subsidiaries in Canada where the local currency is the functional currency. To the extent the U.S. dollar strengthens against the Canadian dollar, the translation of these foreign currency denominated transactions will result in the reduced revenue, operating expenses, assets and liabilities. Similarly, our revenue, operating expenses, assets and liabilities will increase if the U.S. dollar weakens against the Canadian dollar. For fiscal 2011 and 2010, 23.2% and 9.5% of our consolidated revenue, respectively, was generated by our international business, and such revenue was primarily denominated in Canadian dollars. For fiscal 2011, the effect of foreign exchange rate translation on the consolidated balance sheets was a reduction in equity of $14.0 million compared to an increase in

69


Table of Contents


equity of $6.9 million in fiscal 2010. These amounts were recognized as an adjustment to equity through other comprehensive income.

        In the first quarter of fiscal 2010, we entered into three foreign currency forward contracts to manage foreign currency exposure related to interest income on an intercompany note denominated in Canadian dollars ("CAD"). Each contract is for CAD $4.2 million (equivalent to U.S. $4.0 million at the date of inception) and one contract matures on each of January 27, 2010, January 27, 2011, and January 27, 2012. In the second quarter of fiscal 2010, we settled the first foreign currency forward contract for U.S. $3.9 million, and we entered into a new 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 second quarter of fiscal 2011, we settled the second foreign currency forward contract for U.S. $3.9 million. In the third quarter of fiscal 2011, we entered into a new 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. For more information, see Note 14, "Fair Value Measurements" of the "Notes to Consolidated Financial Statements" included in Item 8.

70


Table of Contents

Item 8.    Financial Statements and Supplementary Data


INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

 
  Page
    
   

Report of Independent Registered Public Accounting Firm

  72

Consolidated Balance Sheets at October 2, 2011, and October 3, 2010

 
73

Consolidated Statements of Income for each of the three years in the period ended October 2, 2011

 
74

Consolidated Statements of Equity for each of the three years in the period ended October 2, 2011

 
75

Consolidated Statements of Cash Flows for each of the three years in the period ended October 2, 2011

 
76

Notes to Consolidated Financial Statements

 
77

Schedule II – Valuation and Qualifying Accounts and Reserves

 
111

71


Table of Contents


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders of Tetra Tech, Inc.:

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of equity and of cash flows present fairly, in all material respects, the financial position of Tetra Tech, Inc. and its subsidiaries at October 2, 2011, and October 3, 2010, and the results of their operations and their cash flows for each of the three years in the period ended October 2, 2011, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting at October 2, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting, appearing under Item 9A of this Form 10-K. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for business combinations on September 28, 2009. As discussed in Note 15 to the consolidated financial statements, the Company changed the manner in which it accounts for variable interest entities on October 4, 2010.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PRICEWATERHOUSECOOPERS LLP

Los Angeles, California
November 16, 2011

72


Table of Contents


TETRA TECH, INC.
Consolidated Balance Sheets
(in thousands, except par value)

 
  October 2,
2011
  October 3,
2010
 
  
   
   
 

ASSETS

 

CURRENT ASSETS:

             
 

Cash and cash equivalents

  $ 90,494   $ 220,933  
 

Accounts receivable – net

    657,179     566,642  
 

Prepaid expenses and other current assets

    84,612     49,889  
 

Income taxes receivable

    6,817     7,249  
           
   

Total current assets

    839,102     844,713  
           

PROPERTY AND EQUIPMENT – NET

   
77,536
   
79,383
 

INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES

    3,454     140  

GOODWILL

    569,414     394,422  

INTANGIBLE ASSETS – NET

    81,053     45,995  

OTHER ASSETS

    23,429     17,036  
           

TOTAL ASSETS

 
$

1,593,988
 
$

1,381,689
 
           

LIABILITIES AND EQUITY

 

CURRENT LIABILITIES:

             
 

Accounts payable

  $ 164,819   $ 166,450  
 

Accrued compensation

    110,937     93,243  
 

Billings in excess of costs on uncompleted contracts

    84,754     79,401  
 

Deferred income taxes

    22,870     21,851  
 

Current portion of long-term debt

    2,556     5,002  
 

Contingent earn-out liabilities

    64,119     10,513  
 

Other current liabilities

    81,654     90,747  
           
   

Total current liabilities

    531,709     467,207  
           

DEFERRED INCOME TAXES

   
25,394
   
12,506
 

LONG-TERM DEBT

    144,868     122,510  

OTHER LONG-TERM LIABILITIES

    36,767     31,333  

COMMITMENTS AND CONTINGENCIES

             

EQUITY:

             
 

Preferred stock – Authorized, 2,000 shares of $0.01 par value; no shares issued and outstanding at October 2, 2011, and October 3, 2010

         
 

Common stock – Authorized, 150,000 shares of $0.01 par value; issued and outstanding, 62,495 and 61,755 shares at October 2, 2011, and October 3, 2010, respectively

    625     618  
 

Additional paid-in capital

    399,420     368,865  
 

Accumulated other comprehensive income

    4,754     18,763  
 

Retained earnings

    449,926     359,887  
           

Tetra Tech stockholders' equity

    854,725     748,133  

Noncontrolling interests

    525      
           

TOTAL EQUITY

    855,250     748,133  
           

TOTAL LIABILITIES AND EQUITY

 
$

1,593,988
 
$

1,381,689
 
           

See accompanying Notes to Consolidated Financial Statements.

73


Table of Contents


TETRA TECH, INC.
Consolidated Statements of Income
(in thousands, except per share data)

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
  
   
   
   
 

Revenue

  $ 2,573,144   $ 2,201,232   $ 2,287,484  

Subcontractor costs

    (780,817 )   (741,002 )   (901,347 )

Other costs of revenue

    (1,462,172 )   (1,172,542 )   (1,108,512 )

Selling, general and administrative expenses

    (183,733 )   (163,214 )   (155,736 )
               
 

Operating income

    146,422     124,474     121,889  

Interest income

    879     801     554  

Interest expense

    (6,809 )   (2,188 )   (3,238 )
               
 

Income before income tax expense

    140,492     123,087     119,205  

Income tax expense

    (47,510 )   (46,268 )   (32,177 )
               
 

Net income including noncontrolling interests

    92,982     76,819     87,028  
 

Net income attributable to noncontrolling interests

    (2,943 )        
               
 

Net income attributable to Tetra Tech

  $ 90,039   $ 76,819   $ 87,028  
               

Earnings per share attributable to Tetra Tech:

                   
 

Basic

  $ 1.45   $ 1.25   $ 1.45  
               
 

Diluted

  $ 1.43   $ 1.24   $ 1.43  
               

Weighted-average common shares outstanding:

                   
 

Basic

    62,053     61,430     60,135  
               
 

Diluted

    62,775     62,087     60,994  
               

See accompanying Notes to Consolidated Financial Statements.

74


Table of Contents


TETRA TECH, INC.
Consolidated Statements of Equity
Fiscal Years Ended September 27, 2009, October 3, 2010, and October 2, 2011
(in thousands)

 
  Common Stock    
  Accumulated
Other
Comprehensive
Income (Loss)
   
   
   
   
 
 
  Additional
Paid-in
Capital
  Retained
Earnings
  Total
Tetra Tech
Equity
  Non-Controlling
Interests
  Total
Equity
 
 
  Shares   Amount  
  
   
   
   
   
   
   
   
   
 

BALANCE AT SEPTEMBER 28, 2008

    59,875   $ 599   $ 314,860   $ 15   $ 196,040   $ 511,514   $   $ 511,514  

Comprehensive income:

                                                 
 

Net income

                            87,028     87,028           87,028  
 

Foreign currency translation adjustment

                      12,211           12,211           12,211  
                                               

Comprehensive income

                                  99,239           99,239  
                                               

Stock-based compensation

                9,392                 9,392           9,392  

Stock options exercised

    1,219     12     19,824                 19,836           19,836  

Shares issued for Employee Stock Purchase Plan

    163     2     3,338                 3,340           3,340  

Tax benefit for stock options

                3,157                 3,157           3,157  
                                   

BALANCE AT SEPTEMBER 27, 2009

    61,257     613     350,571     12,226     283,068     646,478         646,478  

Comprehensive income:

                                                 
 

Net income

                            76,819     76,819           76,819  
 

Foreign currency translation adjustment

                      6,874           6,874           6,874  
 

Foreign currency hedge

                      (337 )         (337 )         (337 )
                                               

Comprehensive income

                                  83,356           83,356  
                                               

Stock-based compensation

                10,178                 10,178           10,178  

Stock options exercised

    291     3     2,510                 2,513           2,513  

Shares issued for Employee Stock Purchase Plan

    207     2     4,740                 4,742           4,742  

Tax benefit for stock options

                866                 866           866  
                                   

BALANCE AT OCTOBER 3, 2010

    61,755     618     368,865     18,763     359,887     748,133         748,133  

Comprehensive income:

                                                 
 

Net income

                            90,039     90,039     2,943     92,982  
 

Foreign currency translation adjustment

                      (14,447 )         (14,447 )   492     (13,955 )
 

Foreign currency hedge

                      438           438           438  
                                             

Comprehensive income

                                  76,030     3,435     79,465  
                                             

Adjustments for consolidation of variable interest entities

                                        670     670  

Noncontrolling interest from business acquisitions

                                        438     438  

Acquisition of noncontrolling interests

                6,883                 6,883     (2,316 )   4,567  

Distributions paid to noncontrolling interests

                                        (1,702 )   (1,702 )

Stock-based compensation

                10,582                 10,582           10,582  

Stock options exercised

    443     4     8,000                 8,004           8,004  

Shares issued for Employee Stock Purchase Plan

    297     3     5,246                 5,249           5,249  

Tax benefit for stock options

                (156 )               (156 )         (156 )
                                   

BALANCE AT OCTOBER 2, 2011

    62,495   $ 625   $ 399,420   $ 4,754   $ 449,926   $ 854,725   $ 525   $ 855,250  
                                   

See accompanying Notes to Consolidated Financial Statements.

75


Table of Contents


TETRA TECH, INC.
Consolidated Statements of Cash Flows
(in thousands)

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
  
   
   
   
 

CASH FLOWS FROM OPERATING ACTIVITIES:

                   

Net income including noncontrolling interests

 
$

92,982
 
$

76,819
 
$

87,028
 

Adjustments to reconcile net income including noncontrolling interests to net cash from operating activities:

                   
 

Depreciation and amortization

    55,684     33,491     27,256  
 

Loss on settlement of foreign currency forward contract

    293     28      
 

Equity in earnings of unconsolidated joint ventures

    (4,877 )   (1,184 )   (1,613 )
 

Distributions of earnings from unconsolidated joint ventures

    4,802     1,689     1,136  
 

Stock-based compensation

    10,582     10,178     9,392  
 

Excess tax benefits from stock-based compensation

    (104 )   (754 )   (2,025 )
 

Deferred income taxes

    1,720     11,641     (3,772 )
 

Provision for doubtful accounts

    3,733     7,179     24,207  
 

Exchange (gain) and loss

    1,288     (205 )   (20 )
 

Lease termination costs

    1,281          
 

Gain on disposal of property and equipment

    (231 )   (1,480 )   (296 )

Changes in operating assets and liabilities, net of effects of acquisitions:

                   
 

Accounts receivable

    2,046     (23,161 )   156,174  
 

Prepaid expenses and other assets

    (28,324 )   5,770     (10,292 )
 

Accounts payable

    (34,013 )   (10,002 )   (104,268 )
 

Accrued compensation

    11,157     4,582     (12,935 )
 

Billings in excess of costs on uncompleted contracts

    (1,669 )   (19,957 )   (5,102 )
 

Other liabilities

    4,720     9,590     (3,180 )
 

Income taxes receivable/payable

    10,553     2,618     36,558  
               
   

Net cash provided by operating activities

    131,623     106,842     198,248  
               

CASH FLOWS FROM INVESTING ACTIVITIES:

                   
 

Capital expenditures

    (18,901 )   (21,584 )   (19,803 )
 

Payments for business acquisitions, net of cash acquired

    (269,996 )   (78,905 )   (114,743 )
 

Payment in settlement of foreign currency forward contract

    (4,216 )   (3,960 )    
 

Receipt in settlement of foreign currency forward contract

    3,923     3,932      
 

Restricted cash

    (5,000 )        
 

Investments in unconsolidated joint ventures

    (530 )        
 

Proceeds from sale of discontinued operation

            192  
 

Proceeds from sale of property and equipment

    879     3,128     1,055  
               
   

Net cash used in investing activities

    (293,841 )   (97,389 )   (133,299 )
               

CASH FLOWS FROM FINANCING ACTIVITIES:

                   
 

Payments on long-term debt

    (43,047 )   (2,673 )   (168,711 )
 

Proceeds from borrowings

    66,892     120,000     118,290  
 

Net change overdrafts

    726          
 

Distributions paid to noncontrolling interests

    (1,702 )        
 

Excess tax benefits from stock-based compensation

    104     754     2,025  
 

Net proceeds from issuance of common stock

    8,378     3,353     20,336  
               
   

Net cash provided by (used in) financing activities

    31,351     121,434     (28,060 )
               

EFFECT OF EXCHANGE RATE CHANGES ON CASH

   
428
   
861
   
1,394
 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   
(130,439

)
 
131,748
   
38,283
 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    220,933     89,185     50,902  
               

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 90,494   $ 220,933   $ 89,185  
               

SUPPLEMENTAL CASH FLOW INFORMATION:

                   

Cash paid (received) during the year for:

                   
 

Interest

  $ 4,226   $ 1,287   $ 2,475  
 

Income taxes, net of refunds received

  $ 33,715   $ 32,407   $ (152 )

See accompanying Notes to Consolidated Financial Statements.

76


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Description of Business

        We are a leading provider of consulting, engineering, program management, construction management and technical services that focuses on supporting fundamental needs for water, natural resources, the environment, infrastructure and energy. 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.

2.     Basis of Presentation and Preparation

        Principles of Consolidation and Presentation.    The accompanying consolidated financial statements include the accounts of the Company and joint ventures of which we are the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.

        Fiscal Year.    We report results of operations based on 52 or 53-week periods ending near September 30 of each year. Fiscal years 2011, 2010 and 2009 contained 52, 53 and 52 weeks, respectively.

        Use of Estimates.    The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the amounts reported in our consolidated financial statements and accompanying notes. Although such estimates and assumptions are based on management's best knowledge of current events and actions we may take in the future, actual results could differ materially from those estimates.

        Revenue Recognition and Contract Costs.    We recognize revenue for most of our contracts using the percentage-of-completion method, primarily based on contract costs incurred to date compared to total estimated contract costs. We generally utilize the cost-to-cost approach to estimate the progress towards completion in order to determine the amount of revenue and profit to recognize. Certain of our contracts are service-related contracts, such as providing operations and maintenance services or a variety of technical assistance services. Our service contracts are accounted for using the proportional performance method under which revenue is recognized in proportion to the number of service activities performed, in proportion to the direct costs of performing the service activities, or evenly across the period of performance depending upon the nature of the services provided.

        We recognize revenue for work performed under three major types of contracts: fixed-price, time-and-materials and cost-plus.

        Fixed-Price.    We enter into two major types of fixed-price contracts: FFP and FPPU. Under FFP contracts, our clients pay us an agreed fixed-amount negotiated in advance for a specified scope of work. We generally recognize revenue on FFP contracts using the percentage-of-completion method. If the nature or circumstances of the contract prevent us from preparing a reliable estimate at completion, we will delay profit recognition until adequate information about the contract's progress becomes available. Under our FPPU contracts, clients pay us a set fee for each service or production transaction that we complete. Accordingly, we recognize revenue under FPPU contracts as we complete the related service or production transactions, generally using the proportional performance method.

        Time-and-Materials.    Under time-and-materials contracts, we negotiate hourly billing rates and charge our clients based on the actual time that we spend on a project. In addition, clients reimburse us for

77


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.     Basis of Presentation and Preparation (Continued)


our actual out-of-pocket costs for materials and other direct incidental expenditures that we incur in connection with our performance under the contract. The majority of our time-and-material contracts are subject to maximum contract values and, accordingly, revenue under these contracts is generally recognized under the percentage-of-completion method. However, time and materials contracts that are service-related contracts are accounted for utilizing the proportional performance method. Revenue on contracts that are not subject to maximum contract values is recognized based on the actual number of hours we spend on the projects plus any actual out-of-pocket costs of materials and other direct incidental expenditures that we incur on the projects. Our time-and-materials contracts also generally include annual billing rate adjustment provisions.

        Cost-Plus.    Under cost-plus contracts, we are reimbursed for allowable or otherwise defined costs incurred plus a fee or mark-up. The contracts may also include incentives for various performance criteria, including quality, timeliness, ingenuity, safety and cost-effectiveness. In addition, our costs are generally subject to review by our clients and regulatory audit agencies, and such reviews could result in costs being disputed as non-reimbursable under the terms of the contract. Revenue for cost-plus contracts is recognized at the time services are performed based upon the amounts we expect to realize using the percentage-of-completion method. Revenue is not recognized for non-recoverable costs. Performance incentives are included in our estimates of revenue when their realization is reasonably assured.

        If estimated total costs on any contract indicate a loss, we recognize the entire estimated loss in the period the loss becomes known. The cumulative effect of revisions to revenue; estimated costs to complete contracts, including penalties, incentive awards, change orders, claims, liquidated damages, anticipated losses; and other revisions are recorded in the period in which the revisions are identified and the loss can be reasonably estimated. Such revisions could occur in any reporting period and the effects may be material depending on the size of the project or the adjustment.

        Once contract performance is underway, we may experience changes in conditions, client requirements, specifications, designs, materials and expectations regarding the period of performance. Such changes are "change orders" and may be initiated by us or by our clients. In many cases, agreement with the client as to the terms of change orders is reached prior to work commencing; however, sometimes circumstances require that work progress without obtaining client agreement. Revenue related to change orders is recognized as costs are incurred. Change orders that are unapproved as to both price and scope are evaluated as claims.

        Claims are amounts in excess of agreed contract prices that we seek to collect from our clients or other third parties for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. Revenue on claims is recognized only to the extent that contract costs related to the claims have been incurred and when it is probable that the claim will result in a bona fide addition to contract value that can be reliably estimated. No profit is recognized on a claim until final settlement occurs. This can lead to a situation in which costs are recognized in one period and revenue is recognized in a subsequent period when a client agreement is obtained or a claims resolution occurs.

        Cash and Cash Equivalents.    Cash and cash equivalents include all highly liquid investments with maturities of 90 days or less at the date of purchase. At October 2, 2011, $5.0 million of restricted cash was included in "Prepaid expenses and other current assets" on our consolidated balance sheet. For cash held by our consolidated joint ventures, see Note 15, "Joint Ventures."

78


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.     Basis of Presentation and Preparation (Continued)

        Insurance Matters, Litigation and Contingencies.    In the normal course of business, we are subject to certain contractual guarantees and litigation. In addition, we maintain insurance coverage for various aspects of our business and operations. We record in our consolidated balance sheets amounts representing our estimated liability for these legal and insurance obligations. We include any adjustments to these liabilities in our consolidated results of operations.

        Accounts Receivable – Net.    Net accounts receivable is primarily comprised of billed and unbilled accounts receivable, contract retentions and allowances for doubtful accounts. 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 October 2, 2011, are expected to be billed and collected within twelve months. Unbilled accounts receivable also include amounts related to requests for equitable adjustment to contracts that provide for price redetermination primarily with the U.S. federal government. These amounts are recorded only when they can be reliably estimated and realization is probable. Contract retentions represent amounts withheld by clients until certain conditions are met or the project is completed, which may be several months or years. Allowances for doubtful accounts represent the amounts that may become uncollectible or unrealizable in the future. We determine an estimated allowance for uncollectible accounts based on management's judgment regarding our operating performance related to the adequacy of the services performed and delivered, the status of change orders and claims, our experience settling change orders and claims, and the financial condition of our clients. Billings in excess of costs on uncompleted contracts represent the amounts of cash collected from clients and billings to clients on contracts in advance of work performed and revenue recognized. The majority of these amounts will be earned within twelve months.

        Property and Equipment.    Property and equipment are recorded at cost and are depreciated over their estimated useful lives using the straight-line method. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from our consolidated balance sheets and any resulting gain or loss is reflected in our consolidated statements of income. Expenditures for maintenance and repairs are expensed as incurred. Generally, estimated useful lives range from three to ten years for equipment, furniture and fixtures. Buildings are depreciated over periods not exceeding 40 years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the length of the lease.

        Long-Lived Assets.    Our policy regarding long-lived assets is to evaluate the recoverability of our assets when the facts and circumstances suggest that the assets may be impaired. This assessment is performed based on the estimated undiscounted cash flows compared to the carrying value of the assets. If the future cash flows (undiscounted and without interest charges) are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.

        We recognize a liability for contract termination costs associated with an exit activity for costs that will continue to be incurred under a lease for its remaining term without economic benefit to us, initially measured at its fair value at the cease-use date. The fair value is determined based on the remaining lease rentals, adjusted for the effects of any prepaid or deferred items recognized under the lease, and reduced by estimated sublease rentals.

        Business Combinations.    The cost of an acquired company is assigned to the tangible and intangible assets purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. The

79


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.     Basis of Presentation and Preparation (Continued)


determination of fair values of assets and liabilities acquired requires us to make estimates and use valuation techniques when a market value is not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. Goodwill typically represents the value paid for the assembled workforce and enhancement of our service offerings. Beginning in fiscal 2010, the transaction costs associated with business combinations are expensed as they are incurred instead of being capitalized as part of the cost of the acquisitions. The transaction costs do not have a material impact on the consolidated financial statements.

        Certain of our acquisition agreements include contingent earn-out payments, which are generally based on the achievement of future operating income. For acquisitions consummated after fiscal 2009, we estimated the fair value of contingent earn-out payments and recorded the estimated fair value of contingent consideration as a liability in "Contingent earn-out liabilities" and "Other long-term liabilities" on the consolidated balance sheets. On a quarterly basis, we review and determine the fair value of the contingent consideration, and the updated fair value could differ materially from those initial estimates. Any adjustments are recorded in earnings. Ultimately, the liability will be adjusted to the amount paid, and the difference between our initial estimates and amounts paid will be recorded in earnings.

        Goodwill and Intangibles.    Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a business acquisition. Following an acquisition, we perform an analysis to value the acquired company's tangible and identifiable intangible assets and liabilities. With respect to identifiable intangible assets, we consider backlog, non-compete agreements, client relations, trade names, patents and other assets. The costs of these intangible assets are amortized using the straight-line method over their contractual or economic lives, which range from one to ten years. We assess the recoverability of the unamortized balance of our intangible assets when indicators of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. Should the review indicate that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of the intangible assets would be recognized as an impairment loss.

        We test our goodwill for impairment on an annual basis, and more frequently when an event occurs or circumstances indicate that the carrying value of the asset may not be recoverable. We believe the methodology that we use to review impairment of goodwill, which includes a significant amount of judgment and estimates, provides us with a reasonable basis to determine whether an impairment has occurred. However, many of the factors employed in determining whether our goodwill is impaired are outside of our control and it is reasonably likely that assumptions and estimates will change in future periods. These changes could result in future impairments.

        We perform our annual goodwill testing on the first day of our fiscal fourth quarter (July 4, 2011, in fiscal 2011). Our reporting units for goodwill impairment testing are the components one level below our reportable segments. The annual impairment test for goodwill is a two-step process involving the comparison of the estimated fair value of each reporting unit to the reporting unit's carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired; therefore, the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, we perform the second step of the goodwill impairment test to measure the amount of impairment loss to be recorded. If our goodwill were impaired, we would be required to record a non-cash charge that could have a material adverse effect on our consolidated financial statements.

80


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.     Basis of Presentation and Preparation (Continued)

        Stock-Based Compensation.    We recognize the fair value of our stock-based compensation awards as compensation expense on a straight-line basis over the requisite service period of the award. We estimate the fair value of options and stock purchase rights granted using the Black-Scholes option pricing model. The fair value of restricted stock grants is estimated at the grant date using the market price of the underlying common stock at the date of grant. The assumptions used in computing the fair value of stock-based payments reflect our estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. We estimate expected volatility based on historical daily price changes of our stock for a period that approximates the current expected term of the awards, in addition to recent option market activity. For performance-based awards, our expected performance is reviewed to determine the percentage of shares that will vest in accordance with our Executive Compensation Policy. The expected term is the number of years we estimate that the award will be outstanding prior to exercise considering vesting schedules and our historical exercise patterns.

        Deferred Compensation.    We maintain a non-qualified defined contribution supplemental retirement plan for certain key employees that is accounted for in accordance with applicable authoritative guidance on accounting for deferred compensation arrangements where amounts earned are held in a rabbi trust and invested. Employee deferrals and our match are deposited into a rabbi trust, and the funds are generally invested in individual variable life insurance contracts that we own and are specifically designed to informally fund savings plans of this nature. Our consolidated balance sheets reflect our investment in variable life insurance contracts in "Other assets." Our obligation to participating employees is reflected in "Other long-term liabilities." All income and expenses related to the rabbi trust are reflected in our consolidated statements of income.

        Selling, General and Administrative Expenses.    SG&A expenses represent overhead expenses that are not associated with contract execution and are expensed in the period incurred. SG&A expenses are comprised primarily of marketing, bid and proposal costs, and our corporate headquarters' costs related to the executive offices, finance, accounting, administration and information technology. Additionally, we include in our SG&A expenses the amortization of identifiable intangible assets.

        Income Taxes.    We file a consolidated U.S. federal income tax return and combined California franchise tax return. In addition, we file other returns that are required in the states, foreign jurisdictions and other jurisdictions in which we do business. We account for certain income and expense items differently for financial reporting and income tax purposes. Deferred tax assets and liabilities are computed for the difference between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to reverse. In determining the need for a valuation allowance, management reviews both positive and negative evidence, including current and historical results of operations, future income projections and potential tax planning strategies.

        According to the authoritative guidance on accounting for uncertainty in income taxes, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. This guidance also addresses de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and disclosure requirements for uncertain tax positions.

81


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.     Basis of Presentation and Preparation (Continued)

        Earnings Per Share.    Basic earnings per share ("EPS") is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding, less unvested restricted stock. 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.

        Fair Value of Financial Instruments.    The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturities of these instruments. Any borrowings under our revolving credit facility approximate fair value because the interest rates are based upon variable reference rates. Certain other assets and liabilities, such as contingent earn-out payable and forward foreign exchange contracts that we purchased as cash-flow hedges, are required to be carried in our consolidated financial statements at fair value.

        Concentration of Credit Risk.    Financial instruments that subject us to credit risk consist primarily of cash and cash equivalents and net accounts receivable. We place our temporary cash investments with lower risk financial institutions and, by policy, limit the amount of investment exposure to any one financial institution. Approximately 32% and 37% of accounts receivable were due from various agencies of the U.S. federal government at fiscal 2011 and 2010 year-ends, respectively. The remaining accounts receivable are generally diversified due to the large number of organizations comprising our client base and their geographic dispersion. We perform ongoing credit evaluations of our clients and maintain an allowance for potential credit losses.

        Foreign Currency Translation.    We determine the functional currency of our foreign operating units based upon the primary currency in which they operate. These operating units maintain their accounting records in their local currency, primarily Canadian dollars. Where the functional currency is not the U.S. dollar, translation of assets and liabilities to U.S. dollars is based on exchange rates at the balance sheet date. Translation of revenue and expenses to U.S. dollars is based on the average rate during the period. Translation gains or losses are reported as a component of other comprehensive income (loss). Gains or losses from foreign currency transactions are included in results of operations, with the exception of intercompany foreign transactions that are considered long-term investments, which are recorded in "Accumulated other comprehensive income" on the consolidated balance sheets.

        Recently Issued Accounting Guidance.    In October 2009, the Financial Accounting Standards Board ("FASB") issued updated accounting guidance that provides amendments to the criteria of Accounting Standards Codification Topic 605, "Revenue Recognition," for separately recognizing consideration in multiple-deliverable arrangements. The amendments establish a selling price hierarchy for determining the selling price of a deliverable. We adopted this guidance on October 4, 2010, and it did not have a material impact on our consolidated financial statements.

        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. This guidance is effective for us, with the exception of the new guidance concerning the Level 3 activity reconciliations.

82


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.     Basis of Presentation and Preparation (Continued)


The adoption of the effective portion of the guidance had no impact on the consolidated financial statements. The disclosure requirements for certain Level 3 activities will become effective for fiscal years beginning after December 15, 2010. As we do not currently have any significant Level 3 fair value measurements, we do not expect the adoption to 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. Early adoption is permitted. We will adopt the new disclosures in the first quarter of fiscal 2012.

        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. Early adoption is not permitted. We will adopt the new disclosures in the first quarter of fiscal 2012. We are currently evaluating the impact of this guidance, and we do not expect the adoption to have a material 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 will adopt the updated guidance in the first quarter of fiscal 2013, and we do not expect the adoption to have a material 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. This new guidance is effective for fiscal years and interim periods 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 is permitted. However, we chose not to adopt the guidance in fiscal 2011, and we do not expect the adoption to have a material impact on the consolidated financial statements.

83


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.     Accounts Receivable – Net

        Net accounts receivable and billing in excess of costs on uncompleted contracts consisted of the following at October 2, 2011, and October 3, 2010:

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
 
 
  (in thousands)
 
  
   
   
 

Billed

  $ 364,779   $ 314,905  

Unbilled

    309,091     271,643  

Contract retentions

    15,553     13,020  
           
 

Total accounts receivable – gross

    689,423     599,568  

Allowance for doubtful accounts

   
(32,244

)
 
(32,926

)
           
 

Total accounts receivable – net

  $ 657,179   $ 566,642  
           

Current billings in excess of costs on uncompleted contracts

 
$

84,754
 
$

79,401
 

Non-current billings in excess of costs on uncompleted contracts

    5,832     5,820  
           
 

Total billings in excess of costs on uncompleted contracts

  $ 90,586   $ 85,221  
           

        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 October 2, 2011 are expected to be billed and collected within twelve months. Unbilled accounts receivable at October 2, 2011 include approximately $16 million related to claims and requests for equitable adjustment on contracts that provide for price redetermination primarily with agencies with the U.S. federal government. This amount is management's estimate of the most probable amount to be realized upon the conclusion of claims settlement process. 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 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 twelve months.

        Billed accounts receivable related to U.S. federal government contracts were $88.5 million and $86.3 million at October 2, 2011, and October 3, 2010, respectively. U.S. federal government unbilled receivables, net of progress payments, were $102.7 million and $102.0 million at October 2, 2011, and October 3, 2010, respectively. The non-current billings in excess of costs on uncompleted contracts are reported as part of our "Other long-term liabilities" on our consolidated balance sheets. Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at October 2, 2011, and October 3, 2010.

84


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.     Mergers and Acquisitions

        In the second quarter of fiscal 2009, we acquired all of the outstanding shares of capital stock of Wardrop, a Canadian firm that specializes in resource management, energy and infrastructure design and is included in our ECS segment. This acquisition significantly expanded our worldwide presence with offices throughout Canada. The purchase price consisted of initial cash payments and the sellers may receive over a three-year period from the acquisition date contingent earn-out payments upon the achievement of specified financial objectives. At October 2, 2011, we had $88.2 million of goodwill related to the Wardrop acquisition, which represented the value paid for the assembled workforce, the international geographic presence, and engineering and consulting expertise.

        In fiscal 2009, we made other acquisitions in our ECS, TSS and RCM segments that enhanced our service offerings to broad-based clients, including USAID. The aggregate purchase price for fiscal 2009 acquisitions was approximately $121 million plus contingent earn-out payments of an aggregate maximum of approximately $44 million upon the achievement of certain financial objectives. One of these acquisitions resulted in an excess of $2.4 million of the fair value of identifiable assets acquired and liabilities assumed over the purchase price. Due to a contingent consideration agreement that would likely result in recognition of additional purchase price upon resolution, this amount was recognized as a liability in "Other current liabilities" on the consolidated balance sheet as of the date of acquisition.

        In fiscal 2010, we made other acquisitions that enhanced our service offerings and expanded our geographic presence in the ECS, TSS and RCM segments. The aggregate purchase price for 2010 acquisitions was approximately $102 million, of which $84.0 million was paid to the sellers and $17.6 million was the estimated fair value of contingent earn-out payments on acquisition with an aggregate maximum of $24.8 million upon the achievement of specified financial objectives.

        At the beginning of the first quarter of fiscal 2011, we acquired all of the outstanding capital stock of 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 expands our geographic presence in eastern Canada, and enables us to provide clients with additional services throughout Canada. BPR is part of our ECS segment. The estimated fair value of the purchase price was approximately $186 million, of which payments of $157.0 million were financed with borrowings under our credit facility and available cash resources and $28.7 million was the estimated fair value of contingent earn-out payments on acquisition with a maximum of $39.2 million upon the achievement of specified financial objectives over a two-year period from the acquisition date. The goodwill related to BPR acquisition represented the value paid for the assembled work force, the international geographic presence in eastern Canada, and engineering and consulting expertise. BPR's results are included with our consolidated results of operations for all of fiscal 2011. No pro forma results are presented for fiscal 2010 as the effect of the BPR acquisition was not considered material to our

85


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.     Mergers and Acquisitions (Continued)


consolidated results of operations. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition:

 
  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 ECS and TSS segments. The aggregate purchase price for these 2011 acquisitions was approximately $100 million, of which $68.7 million was paid to the sellers, $4.5 was accrued as part of "Other current liabilities" to be paid in the near future in accordance to certain provisions of the purchase agreements and $27.1 million was the estimated fair value of contingent earn-out obligations on acquisition with an aggregate maximum of $32.3 million upon the achievement of specified financial objectives. One acquisition included $5.0 million of restricted cash which is recorded as part of "Prepaid expenses and other current assets" on the consolidated balance at October 2, 2011 to settle contingent consideration payments under an earn-out arrangement.

        For acquisitions consummated after fiscal 2008, $44.3 million of contingent consideration was earned, of which $17.9 million was paid to the sellers and $26.4 million was accrued as part of "Contingent earn-out liabilities" on the consolidated balance sheet at October 2, 2011. The estimated fair value of remaining unearned contingent payments under earn-out arrangements for acquisitions consummated after fiscal 2009 resulted in a discounted liability of $48.7 million, of which $37.7 million is reflected in "Contingent earn-out liabilities" and $11.0 million is included in "Other long-term liabilities" on the consolidated balance sheet at October 2, 2011. In fiscal 2010, the estimated fair value of contingent payments under earn-out arrangements resulted in a discounted liability of $20.5 million, of which $10.5 million is reflected in "Contingent earn-out liabilities" and $10.0 million is reflected in "Other long term liabilities" on the consolidated balance sheet at October 3, 2010. Each contingent consideration is based on future operating income, and its fair value is estimated by management assessing the probability of the results being achieved in the future.

        The purchase price allocations related to the fiscal 2011 acquisitions excluding BPR are preliminary, and subject to adjustment based on the valuation and final determination of any net assets acquired. We do not believe that any adjustments will have a material effect on the consolidated results of operations.

        The results for each acquisition were included on the consolidated financial statements from the closing date of that acquisition. None of the acquisitions were considered material, individually or in the aggregate for the respective reporting periods. As a result, no pro forma information has been provided.

86


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.     Goodwill and Intangibles

        Our goodwill was $569.4 million at October 2, 2011, and $394.4 million at October 3, 2010. Our acquired identifiable intangible assets had a net book value of $81.1 million and $46.0 million at October 2, 2011, and October 3, 2010, respectively. The following table summarizes the changes in the carrying value of goodwill:

 
  ECS   TSS   EAS(1)   RCM   Total  
 
  (in thousands)
 
  
   
   
   
   
   
 

Balance at September 27, 2009

  $ 189,416   $ 57,256   $ 15,970   $ 57,043   $ 319,685  
 

Additions

    42,293     10,226         3,892     56,411  
 

Adjustments

    7,474     1,179     1,240     3,000     12,893  
 

Currency translation adjustments

    5,433                 5,433  
                       

Balance at October 3, 2010

    244,616     68,661     17,210     63,935     394,422  
 

Additions

    149,193     11,469             160,662  
 

Adjustments

    15,355     1,961     500         17,816  
 

Currency translation adjustments

    (3,486 )               (3,486 )
                       

Balance at October 2, 2011

  $ 405,678   $ 82,091   $ 17,710   $ 63,935   $ 569,414  
                       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(1)
Gross amount of goodwill for the EAS segment was $122.7 million and $122.2 million at October 2, 2011, and October 3, 2010, respectively. For both periods, accumulated impairment losses for the EAS segment were $105 million reflecting impairment charges in fiscal 2005. There were no impairment losses in the other reportable segments.

        The goodwill additions are attributable to the fiscal 2011 acquisitions described in Note 4, "Mergers and Acquisitions." Substantially all of the goodwill additions are not deductible for income tax purposes. The foreign currency translation adjustments relate to our foreign operations. The goodwill adjustments reflect earn-out payments and accruals associated with acquisitions consummated prior to fiscal 2010, which are accounted for as goodwill adjustments under previous accounting rules.

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

 
  October 2, 2011   October 3, 2010  
 
  Weighted-
Average
Remaining
Life
(in years)
  Gross
Amount
  Accumulated
Amortization
  Gross
Amount
  Accumulated
Amortization
 
 
  ($ in thousands)
 
  
   
   
   
   
   
 

Non-compete agreements

    2.0   $ 5,175   $ (3,430 ) $ 4,295   $ (2,177 )

Client relations

    6.3     81,619     (17,951 )   41,020     (8,351 )

Backlog

    0.9     52,938     (39,452 )   35,311     (24,329 )

Technology and trade names

    4.5     2,684     (530 )   246     (20 )
                         
 

Total

        $ 142,416   $ (61,363 ) $ 80,872   $ (34,877 )
                         

87


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.     Goodwill and Intangibles (Continued)

        In fiscal 2011, the increases in gross amounts are attributable to the fiscal 2011 acquisitions described in Note 4, "Mergers and Acquisitions" and, to a lesser extent, foreign currency translation adjustments. Amortization expense for these intangible assets for fiscal 2011, 2010 and 2009 was $28.0 million, $12.7 million and $9.8 million, respectively. Estimated amortization expense for the succeeding five years and beyond is as follows:

 
  Amount  
 
  (in thousands)
 
  
   
 

2012

  $ 26,203  

2013

    12,146  

2014

    10,875  

2015

    10,588  

2016

    9,096  

Beyond

    12,145  
       
 

Total

  $ 81,053  
       

6.     Property and Equipment

        The property and equipment consisted of the following:

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
 
 
  (in thousands)
 
  
   
   
 

Land and buildings

  $ 11,729   $ 11,707  

Equipment, furniture and fixtures

    160,644     145,210  

Leasehold improvements

    23,304     18,104  
           

    195,677     175,021  

Accumulated depreciation and amortization

    (118,141 )   (95,638 )
           
 

Property and equipment at cost, net

  $ 77,536   $ 79,383  
           

        The depreciation expense related to property and equipment, including assets under capital leases, was $27.1 million, $20.4 million and $17.0 million for fiscal 2011, 2010 and 2009, respectively.

88


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.     Income Taxes

        The income before income taxes, by geographic area, was as follows:

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
 
  (in thousands)
 
  
   
   
   
 

Income before income taxes:

                   
 

United States

  $ 126,912   $ 119,729   $ 119,174  
 

Foreign

    13,580     3,358     31  
               
   

Total income before income taxes

  $ 140,492   $ 123,087   $ 119,205  
               

        Income tax expense consisted of the following:

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
 
  (in thousands)
 
  
   
   
   
 

Current:

                   
 

Federal

  $ 30,246   $ 28,538   $ 26,152  
 

State

    5,948     5,489     10,423  
 

Foreign

    9,596     600     (626 )
               
   

Total current income tax expense

    45,790     34,627     35,949  
               

Deferred:

                   
 

Federal

    6,755     9,978     (4,360 )
 

State

    1,069     1,951     (969 )
 

Foreign

    (6,104 )   (288 )   1,557  
               
   

Total deferred income tax expense (benefit)

    1,720     11,641     (3,772 )
               
 

Total income tax expense

  $ 47,510   $ 46,268   $ 32,177  
               

89


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.     Income Taxes (Continued)

        Total income tax expense was different from the amount computed by applying the U.S. federal statutory rate to pre-tax income as follows:

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
 
  ($ in thousands)
 
  
   
   
   
   
   
   
 

Tax at federal statutory rate

  $ 49,172     35.0 % $ 43,080     35.0 % $ 41,722     35.0 %

State taxes, net of federal benefit

    4,376     3.1     4,787     3.9     5,685     4.8  

Examination settlements

            61         (3,312 )   (2.8 )

R&E credits

    (1,689 )   (1.2 )   (400 )   (0.3 )   (11,700 )   (9.8 )

Tax differential on foreign earnings

    (4,140 )   (3.0 )   (863 )   (0.7 )   (80 )   (0.1 )

Other

    (209 )   (0.1 )   (397 )   (0.3 )   (138 )   (0.1 )
                           

Total income tax expense

  $ 47,510     33.8 % $ 46,268     37.6 % $ 32,177     27.0 %
                           

        Our fiscal year 2011 effective tax rate was 33.8% compared to 37.6% for fiscal 2010. The lower effective tax rate resulted primarily from the extension of R&E credits and the continued expansion of our foreign operations. In the first quarter of fiscal 2011, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed into law. The Act included a retroactive extension of R&E credits for amounts incurred from January 1, 2010, through December 31, 2011. As a result of this extension, a $1.2 million benefit from R&E credits for the last nine months of fiscal 2010 was included in the first quarter of fiscal 2011 tax expense. We completed R&E credit studies for fiscal 2008 and fiscal 2009 during fiscal 2011. The results of these studies did not have a material impact on the benefit previously recognized for the R&E credits.

        We are currently under examination by the IRS for the fiscal years 2005 through 2009; and by the California Franchise Tax Board for fiscal years 2004 through 2005 related to R&E credits. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for fiscal years before 2004.

90


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.     Income Taxes (Continued)

        Temporary differences comprising the net deferred income tax liability shown on the accompanying consolidated balance sheets were as follows:

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
 
 
  (in thousands)
 
  
   
   
 

Deferred Tax Asset:

             
 

State taxes

  $ 765   $ 977  
 

Reserves and contingent liabilities

    5,271     6,984  
 

Allowance for doubtful accounts

    5,876     8,085  
 

Accrued liabilities

    16,974     16,217  
 

Stock-based compensation

    10,057     7,903  
 

Loss carry-forward

    388     5,569  
 

Valuation allowance on capital loss carry-forward

        (5,526 )
           
   

Total deferred tax asset

    39,331     40,209  
           

Deferred Tax Liability:

             
 

Unbilled revenue

    (47,858 )   (43,250 )
 

Prepaid expense

    (3,950 )   (2,020 )
 

Intangibles

    (26,128 )   (16,327 )
 

Cash-to-accrual adjustments

    (262 )   (717 )
 

Property and equipment

    (9,397 )   (12,252 )
           
   

Total deferred tax liability

    (87,595 )   (74,566 )
           
   

Net deferred tax liability

 
$

(48,264

)

$

(34,357

)
           

        Sales of U.S. operating units in previous years generated net capital losses. The federal capital loss carry-forward expired at the end of fiscal 2011, resulting in the removal of the valuation allowance associated with this capital loss carryforward. Accordingly, for the years ended October 2, 2011, October 3, 2010 and September 27, 2009, the valuation allowance on the capital loss carry-forward decreased by $5.5 million, $5.8 million and $0, respectively. We have performed an assessment of positive and negative evidence regarding the realization of the deferred tax assets at October 2, 2011. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, availability of carry-backs, and estimates of projected future taxable income. Although realization is not assured, based on our assessment, we have concluded that it is more likely than not that the assets will be realized. As such, no valuation allowance has been provided.

        Undistributed earnings of our foreign subsidiaries amounting to approximately $12.2 million at October 2, 2011 are expected to be permanently reinvested. Accordingly, no provision for U.S. income taxes or foreign withholding taxes has been made. Upon distribution of those earnings, we would be subject to U.S. income taxes and foreign withholding taxes. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable; however, the potential foreign tax credit associated with the deferred income would be available to reduce the resulting U.S. tax liabilities.

91


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.     Income Taxes (Continued)

        At October 2, 2011, we had $25.9 million of unrecognized tax benefits. Included in the balance of unrecognized tax benefits at the end of fiscal year 2011 were $19.2 million of tax benefits that, if recognized, would affect our effective tax rate. It is not expected that there will be a significant change in the unrecognized tax benefits in the next twelve months. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
 
  (in thousands)
 
  
   
   
   
 

Beginning balance

  $ 21,806   $ 20,530   $ 38,912  

Additions for current year tax positions

    8,007     6,895     7,306  

Additions for prior year tax positions

    2,554     2,720     9,208  

Reductions for prior year tax positions

    (6,315 )   (5,093 )   (24,955 )

Settlements

    (112 )   (3,246 )   (9,941 )
               

Ending balance

  $ 25,940   $ 21,806   $ 20,530  
               

        We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. The amount of interest expense (net of interest income) accrued at October 2, 2011, and October 3, 2010 was $3.2 million and $4.0 million, respectively.

8.     Long-Term Debt

        Long-term debt consisted of the following:

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
 
 
  (in thousands)
 
  
   
   
 

Credit facility

  $ 143,803   $ 120,000  

Other

    3,621     7,512  
           
 

Total long-term debt

    147,424     127,512  

Less: Current portion of long-term debt

    (2,556 )   (5,002 )
           

Long-term debt, less current portion

  $ 144,868   $ 122,510  
           

        On March 28, 2011, we entered into a new Credit Agreement and concurrently terminated our prior credit agreement. The Credit Agreement provides for a $460 million five-year Facility, which includes a $200 million sublimit for the issuance of standby letters of credit and a $100 million sublimit for multicurrency borrowings and letters of credit. At our election, the Facility may be increased from time to time by an amount up to $140 million in the aggregate, provided that no existing lender is required to commit to any such increased amount. At October 2, 2011, we had $143.8 million in borrowings outstanding at a weighted-average interest rate of 2.0% per annum, $28.5 million in standby letters of credit and $287.7 million in availability under the Facility. We had $23.8 million in multicurrency borrowings and standby letters of credit under the Facility at October 2, 2011.

92


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.     Long-Term Debt (Continued)

        Interest on borrowings under the Credit Agreement is payable, at our election, at either (a) a base rate (the highest of the U.S. federal funds rate plus 0.50% per annum, the bank's prime rate and the Eurocurrency rate plus 1.00%) plus a margin that ranges from 0.50% to 1.50% per annum, or (b) a Eurocurrency rate plus a margin that ranges from 1.50% to 2.50% per annum.

        In fiscal 2011, other debt includes capital leases of $1.7 million, property and equipment loans of $1.2 million, and a bank overdraft facility of $0.7 million at one of our foreign affiliates. In fiscal 2010, other debt includes capital leases of $2.5 million, property and equipment loans of $2.8 million, and $2.2 million of guaranteed deferred cash payments related to a prior-year acquisition.

        In fiscal 2011, we entered into a bank overdraft facility for one of our foreign affiliates in the amount of $2.0 million, of which $0.7 million was utilized at October 2, 2011. In addition, we entered into two letter of credit agreements with two banks to issue up to $40 million in standby letters of credit. The amount of standby letters of credit outstanding under these facilities at October 2, 2011, was immaterial.

        The following table presents scheduled maturities of our long-term debt:

 
  Amount  
 
  (in thousands)
 
  
   
 

2012

  $ 2,556  

2013

    902  

2014

    163  

2015

     

2016

    143,803  

Beyond

     
       
 

Total

  $ 147,424  
       

93


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.     Leases

        We lease office and field equipment, vehicles and buildings under various operating leases. In fiscal 2011, 2010 and 2009, we recognized $71.9 million, $60.9 million and $58.9 million of expense associated with operating leases, respectively. Amounts payable under non-cancelable operating and capital lease commitments are as follows during the following fiscal years:

 
  Operating   Capital  
 
  (in thousands)
 
  
   
   
 

2012

  $ 63,062   $ 1,032  

2013

    54,880     491  

2014

    39,876     163  

2015

    27,373      

2016

    13,719      

Beyond

    13,629      
           
 

Total

  $ 212,539     1,686  
             
 

Less: Amounts representing interest

         
118
 
             
 

Net present value

        $ 1,568  
             

        In the fourth quarter of fiscal 2011, we vacated certain facilities under long-term non-cancelable leases and recorded $1.3 million of contract termination costs in the RCM segment. This amount was initially measured at the fair value of the prorated portion of the lease payments associated with the vacated facilities, reduced by estimated sublease rentals, less the write off of a prorated portion of existing deferred items previously recognized on these leases. We expect the remaining lease payments to be paid through the various lease expiration dates which continue until 2017. The contract termination costs are recorded in "Other costs of revenue" on the consolidated statements of income.

10.   Stockholders' Equity and Stock Compensation Plans

        At October 2, 2011, we had the following stock-based compensation plans:

94


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.   Stockholders' Equity and Stock Compensation Plans (Continued)

        The stock-based compensation and related income tax benefits were as follows:

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
 
  (in thousands)
 
  
   
   
   
 

Total stock-based compensation

  $ 10,582   $ 10,178   $ 9,392  

Income tax benefit related to stock-based compensation

    (3,804 )   (3,590 )   (3,796 )
               
 

Stock-based compensation, net of tax benefit

  $ 6,778   $ 6,588   $ 5,596  
               

95


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.   Stockholders' Equity and Stock Compensation Plans (Continued)

        Stock option activity for the fiscal year ended October 2, 2011 was as follows:

 
  Number of
Options
(in thousands)
  Weighted-
Average
Exercise Price
per Share
  Weighted-
Average
Remaining
Contractual
Term
(in years)
  Aggregate
Intrinsic Value
(in thousands)
 
  
   
   
   
   
 

Outstanding on October 3, 2010

    5,240   $ 20.35              
 

Granted

    1,096     23.39              
 

Exercised

    (444 )   18.81              
 

Cancelled

    (312 )   22.89              
                         

Outstanding at October 2, 2011

    5,580     20.93     4.6     4,605  
                   

Vested or expected to vest at October 2, 2011

   
5,364
   
20.89
   
4.6
   
4,496
 
                   

Exercisable on October 2, 2011

   
3,267
   
19.55
   
6.2
   
3,866
 
                   

        The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between our closing stock price on the last trading day of fiscal 2011 and the exercise price, times the number of shares) that would have been received by the in-the-money option holders if they had exercised their options on October 2, 2011. This amount will change based on the fair market value of our stock. At October 2, 2011, we expect to recognize $14.5 million of unrecognized compensation cost related to stock option grants over a weighted-average period of 2.2 years. At October 2, 2011, there were approximately 2.9 million options available for future awards.

        The weighted-average fair value of stock options granted during fiscal 2011, 2010 and 2009 was $9.08, $10.09 and $7.60, respectively. The aggregate intrinsic value of options exercised during fiscal 2011, 2010 and 2009 was $2.3 million, $2.2 million and $13.2 million, respectively.

        The fair value of our stock options was estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used in the calculation:

 
  Fiscal Year Ended
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
  
   
   
   

Dividend yield

     

Expected stock price volatility

  41.8 - 42.7%   42.6 - 43.4%   48.8%

Risk-free rate of return, annual

  1.3 - 2.1%   2.0% - 2.5%   1.6% - 2.6%

Expected life (in years)

  4.8 - 5.5   4.4 - 5.6   4.4 - 5.6

        For purposes of the Black-Scholes model, forfeitures were estimated based on historical experience. For the fiscal years ended October 2, 2011, October 3, 2010, and September 27, 2009, we based our expected stock price volatility on historical volatility behavior and current implied volatility behavior. Our

96


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.   Stockholders' Equity and Stock Compensation Plans (Continued)


risk-free rate of return was based on constant maturity rates provided by the U.S. Treasury. The expected life was based on historical experience.

        Net cash proceeds from the exercise of stock options were $8.4 million, $3.4 million and $20.3 million for fiscal 2011, 2010 and 2009, respectively. Our policy is to issue shares from our authorized shares upon the exercise of stock options. The actual income tax benefit realized from exercises of nonqualified stock options and disqualifying dispositions of qualified options for fiscal 2011, 2010 and 2009 was $1.4 million, $2.0 million and $5.7 million, respectively.

ESPP

        The following table summarizes shares purchased, weighted-average purchase price, cash received and the aggregate intrinsic value for shares purchased under the ESPP:

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
 
  (in thousands, except for purchase price)
 
  
   
   
   
 

Shares purchased

    246     208     163  

Weighted-average purchase price

  $ 21.30   $ 22.87   $ 20.53  

Cash received from exercise of purchase rights

  $ 5,249   $ 4,733   $ 3,343  

Aggregate intrinsic value

  $ 926   $ 892   $ 590  

        The grant date fair value of each award granted under the ESPP was estimated using the Black-Scholes option pricing model with the following assumptions:

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
  
   
   
   
 

Dividend yield

             

Expected stock price volatility

    38.0 %   38.5 %   68.2 %

Risk-free rate of return, annual

    0.3 %   0.5 %   0.4 %

Expected life (in years)

    1     1     1  

        For fiscal 2011, 2010 and 2009, we based our expected stock price volatility on historical volatility behavior and current implied volatility behavior. The risk-free rate of return was based on constant maturity rates provided by the U.S. Treasury. The expected life was based on the ESPP terms and conditions.

        Included in stock-based compensation expense for fiscal 2011, 2010 and 2009 was a charge of $1.0 million, $1.3 million and $1.0 million, respectively, related to the ESPP. The unrecognized stock-based compensation costs for awards granted under the ESPP at October 2, 2011, and October 3, 2010 were $0.3 million and $0.3 million, respectively. At October 2, 2011, ESPP participants had accumulated $2.8 million to purchase our common stock.

97


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.   Stockholders' Equity and Stock Compensation Plans (Continued)

Restricted Stock Program

        In fiscal 2011, 2010 and 2009, we awarded 94,606 shares, 88,258 shares and 72,200 shares, respectively, of restricted stock to certain of our executive officers and directors. Of these 255,064 awards, 20,000 shares were time-based, and are dependent on the officer's continued employment with us, but otherwise vest over a four-year period. The remaining 235,064 shares were performance-based, where the percentage of awarded shares that ultimately vests depends on fiscal year earnings per share growth rates meeting certain targets for the three fiscal years that end after the award date. In fiscal 2011, 2010 and 2009, an additional 8,356 shares, 11,557 shares and 7,408 shares, respectively, of restricted stock were awarded for performance-based adjustments resulting from exceeding those targets. Restricted stock forfeitures result from employment terminations prior to vesting, and when the performance-based award growth rate targets are below the lowest target rate. Forfeited restricted stock shares return to the pool of authorized shares available for award. As of October 2, 2011, there were 528,403 shares available for future awards of restricted stock. At October 2, 2011, and October 3, 2010, there were 174,175 shares and 166,325 shares, respectively, of restricted stock outstanding.

        Activity in the restricted stock program for the fiscal year ended October 2, 2010, was as follows:

 
  Number of
Shares
(in thousands)
  Weighted-
Average
Grant Date
Fair Value
 
  
   
   
 

Nonvested balance at October 3, 2010

  166     $ 22.70  
 

Granted

  103       23.32  
 

Vested

  (56)     20.88  
 

Forfeited

  (39)     24.93  
           

Nonvested balance at October 2, 2011

  174     $ 23.14  
           

Vested or expected to vest at October 2, 2011

 

174  

 
$

23.14
 
           

        The fair value of the total compensation cost of each restricted stock award was determined at the date of grant using the market price of the underlying common stock as of the date of grant. For performance-based awards, our expected performance is reviewed to estimate the percentage of shares that will vest. The total compensation cost of the awards is then amortized over their applicable vesting period on a straight-line basis. The stock-based compensation expense related to the restricted stock program for fiscal years 2011, 2010 and 2009 was $1.7 million, $1.2 million and $2.0 million, respectively, and was included in the total stock-based compensation expense. As of October 2, 2011, there was $2.6 million of unrecognized compensation costs related to the restricted stock program that will be substantially recognized by the end of fiscal 2014.

11.   Retirement Plans

        We have established defined contribution plans including 401(k) plans. Generally, employees are eligible to participate in the defined contribution plans upon completion of one year of service and in the 401(k) plans upon commencement of employment. For fiscal 2011, 2010 and 2009, employer contributions to the plans were $14.1 million, $13.8 million and $13.6 million, respectively.

98


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11.   Retirement Plans (Continued)

        We have established a non-qualified deferred compensation plan for certain key employees and non-employee directors. Eligible employees and non-employee directors may elect to defer receipt of salary, incentive payments and Board of Directors' fees, which are generally invested by us in individual variable life insurance contracts we own that are designed to informally fund savings plans of this nature. At October 2, 2011, and October 3, 2010, the consolidated balance sheets reflect assets of $11.3 million and $8.6 million, respectively, related to the deferred compensation plan in "Other assets," and liabilities of $10.6 million and $8.6 million, respectively, related to the deferred compensation plan in "Other long-term liabilities."

12.   Earnings Per Share

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

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
 
  (in thousands, except per share data)
 
  
   
   
   
 

Net income attributable to Tetra Tech

  $ 90,039   $ 76,819   $ 87,028  
               
 

Weighted-average common shares outstanding – basic

    62,053     61,430     60,135  
 

Effect of diluted stock options and unvested restricted stock

    722     657     859  
               
 

Weighted-average common stock outstanding – diluted

    62,775     62,087     60,994  
               

Earnings per share attributable to Tetra Tech:

                   
 

Basic

  $ 1.45   $ 1.25   $ 1.45  
               
 

Diluted

  $ 1.43   $ 1.24   $ 1.43  
               

        For fiscal 2011, 2010 and 2009, 2.6 million, 3.1 million and 1.3 million 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. At October 2, 2011, 174,175 shares of restricted stock issued to employees were unvested, and therefore were excluded from the calculation of basic EPS for the fiscal year ended October 2, 2011.

99


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13.   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:

 
  Fiscal Year-Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
 
  (in thousands)
 
  
   
   
   
 

Net income including noncontrolling interests

  $ 92,982   $ 76,819   $ 87,028  

Other comprehensive income:

                   
 

Foreign currency translation adjustment

    (13,955 )   6,874     12,211  
 

Foreign currency hedge

    438     (337 )    
               
   

Comprehensive income including noncontrolling interests

    79,465     83,356     99,239  
 

Net income attributable to noncontrolling interests

    (2,943 )        
 

Foreign currency translation adjustment

    (492 )        
               
   

Comprehensive income attributable to noncontrolling interests

    (3,435 )        
               
   

Comprehensive income attributable to Tetra Tech

  $ 76,030   $ 83,356   $ 99,239  
               

14.   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. The intercompany note receivable is denominated in CAD and has a fixed rate of interest payable in Canadian dollars. In the first quarter of fiscal 2010, we entered into three foreign currency forward contracts to fix the U.S. dollar amount of interest income to be received over the next three annual periods. Each contract is for CAD $4.2 million (equivalent to U.S. $4.0 million at the date of inception) and one contract matures on each of January 27, 2010, January 27, 2011, and January 27, 2012. In the second quarter of fiscal 2010, we settled the first foreign currency forward contract for U.S. $3.9 million, and we entered into a new 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 second quarter of fiscal 2011, we settled the second foreign currency forward contract for U.S. $3.9 million. In the third quarter of fiscal 2011, we entered into a new 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. Our objective was 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 for a three-year period. 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 fiscal 2011 and 2010. 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.

100


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15.   Joint Ventures

        At the beginning of fiscal 2011, we adopted an accounting standard that requires us to perform an analysis to determine whether our variable interests give us a controlling financial interest in a VIE and whether we should therefore consolidate the VIE. This analysis requires 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. This guidance eliminates the quantitative approach previously required for determining the primary beneficiary of a VIE and significantly enhances disclosures.

        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. In accordance with the current consolidation standard, we analyzed all of our joint ventures and classified 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 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.

        In fiscal 2011, we assessed our joint ventures in accordance with the current consolidation standard and determined that 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

101


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15.   Joint Ventures (Continued)


primary beneficiary of those joint ventures. None of our current joint ventures determined to be a VIE are individually significant to our consolidated financial statements.

Consolidated Joint Ventures

        The following represents the financial information of consolidated joint ventures included in our consolidated financial statements:

 
  October 2, 2011  
 
  (in thousands)
 
  
   
 

Cash

  $ 978  

Other current assets

    2,318  

Non-current assets

    1  
       
 

Total assets

  $ 3,297  
       

Accounts payable

 
$

2,230
 

Other liabilities

    30  
       
 

Total liabilities

    2,260  

Total Tetra Tech equity

   
512
 

Noncontrolling interests

    525  
       
 

Total owners' equity

    1,037  
       
 

Total liabilities and owners' equity

  $ 3,297  
       

        The aggregate revenue of the consolidated joint ventures was $74.3 million for fiscal 2011. The assets, liabilities and revenue of the consolidated joint ventures were immaterial for prior annual and interim periods as the largest consolidated joint ventures were acquired in connection with the BPR acquisition in the first quarter of fiscal 2011. The assets of our consolidated joint ventures are restricted for use only by those joint ventures and are not available for our general operations.

Unconsolidated Joint Ventures

        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 consolidated statements of income. For fiscal 2011 and 2010, we reported $4.9 million and $1.2 million of equity in earnings of unconsolidated joint ventures, respectively. 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. The unconsolidated VIEs are, individually and in aggregate, immaterial to our consolidated financial statements.

        At October 2, 2011, the aggregate carrying values of the assets and liabilities of the unconsolidated VIEs were $24.0 million and $21.0 million, respectively. The carrying values of these assets and liabilities at October 3, 2010 were immaterial.

102


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   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, ITC filed a lawsuit in Montgomery County, Ohio against 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 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. Final briefs were filed with the court of appeals and oral arguments were heard in December 2010. On October 28, 2011, the court of appeals issued its decision and affirmed the trial court's rulings. As of October 28, 2011, the outstanding judgment against AMT, including post-judgment interest, approximates $12.9 million dollars. ITC has filed a motion seeking additional attorneys' fees which is pending. AMT has posted a bond, as required by the trial court, for $13.4 million. We believe that a reasonably possible range of exposure, including attorneys' fees, is from $0 to approximately $14.5 million. At October 2, 2011, 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 their indemnification agreement with us for any and all costs and damages related to this lawsuit.

17.   Reportable Segments

        Our reportable segments are as follows:

        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.

103


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17.   Reportable Segments (Continued)

        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 completing our full-service support to U.S. federal government, state and local governments and commercial clients. RCM's service lines include environmental remediation, 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 concerning our reportable segments:

Reportable Segments

 
  ECS   TSS   EAS   RCM   Total  
 
  (in thousands)
 

Fiscal Year 2011:

 

 


 

 


 

 


 

 


 

 


 

Revenue

  $ 1,107,944   $ 568,335   $ 308,112   $ 725,569   $ 2,709,960  

Segment operating income

    100,790     40,895     22,597     18,746     183,028  

Total assets

    913,167     338,379     111,555     317,514     1,680,615  

Fiscal Year 2010:

 

 


 

 


 

 


 

 


 

 


 

Revenue

  $ 730,425   $ 527,697   $ 294,112   $ 759,088   $ 2,311,322  

Segment operating income

    60,810     39,186     12,194     33,651     145,841  

Total assets

    618,025     281,376     93,696     327,393     1,320,490  

Fiscal Year 2009:

 

 


 

 


 

 


 

 


 

 


 

Revenue

  $ 601,317   $ 522,748   $ 299,691   $ 951,604   $ 2,375,360  

Segment operating income

    47,095     37,584     13,599     38,156     136,434  

Total assets

    486,002     223,177     91,646     351,247     1,152,072  

104


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17.   Reportable Segments (Continued)

Reconciliations

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
 
  (in thousands)
 

Revenue

 

 


 

 


 

 


 

Revenue from reportable segments

  $ 2,709,960   $ 2,311,322   $ 2,375,360  

Elimination of inter-segment revenue

    (136,816 )   (110,090 )   (87,876 )
               
 

Total consolidated revenue

  $ 2,573,144   $ 2,201,232   $ 2,287,484  
               

Operating Income

 

 


 

 


 

 


 

Segment operating income

  $ 183,028   $ 145,841   $ 136,434  

Amortization of intangibles

    (27,978 )   (12,683 )   (9,820 )

Other expense(1)

    (8,628 )   (8,684 )   (4,725 )
               
 

Total consolidated operating income

  $ 146,422   $ 124,474   $ 121,889  
               

Assets

 

 


 

 


 

 


 

Total assets of reportable segments

  $ 1,680,615   $ 1,320,490   $ 1,152,072  

Assets not allocated to segments and intercompany eliminations

    (86,627 )   61,199     (54,167 )
               
 

Total consolidated assets

  $ 1,593,988   $ 1,381,689   $ 1,097,905  
               

 

 

 

 

 

 

 

 

 

 

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

        We are implementing organizational changes that will result in a realignment of our reportable segments. These changes are intended to improve organizational effectiveness and efficiency by better aligning operations with similar customer types, project types and financial metrics. These changes will be effective at the beginning of the first quarter of fiscal 2012, and our reportable segment results on a prospective basis will be revised consistent with the new organizational structure. Prior period amounts will be restated to conform to the new presentation.

105


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17.   Reportable Segments (Continued)

Geographic Information

 
  Fiscal Year Ended  
 
  October 2, 2011   October 3, 2010   September 27, 2009  
 
  Revenue   Long-Lived
Assets
(2)
  Revenue   Long-Lived
Assets
(2)
  Revenue   Long-Lived
Assets
(2)
 
 
   
   
  (in thousands)
   
   
 
  
   
   
   
   
   
   
 

United States

  $ 1,976,452   $ 102,316   $ 1,991,758   $ 121,611   $ 2,182,998   $ 110,142  

Foreign countries(1)

    596,692     78,198     209,474     15,873     104,486     6,327  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(1)
Includes revenue generated from our foreign operations, primarily in Canada, and revenue generated from non-U.S. clients. Assets consist primarily of amounts from our Canadian operations.
(2)
Excludes goodwill.

Major Clients

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

        The following table presents our revenue by client sector:

 
  Fiscal Year Ended  
 
  October 2,
2011
  October 3,
2010
  September 27,
2009
 
 
  (in thousands)
 

Client Sector

 

 


 

 


 

 


 

Federal government(1)

  $ 1,115,729   $ 1,142,082   $ 1,164,751  

State and local government

    282,941     325,953     277,756  

Commercial

    577,782     523,723     740,491  

International(2)

    596,692     209,474     104,486  
               
 

Total

  $ 2,573,144   $ 2,201,232   $ 2,287,484  
               

 

 

 

 

 

 

 

 

 

 

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

106


Table of Contents


TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18.   Quarterly Financial Information – Unaudited

        In the opinion of management, the following unaudited quarterly data for fiscal years ended October 2, 2011 and October 3, 2010, reflect all adjustments necessary for a fair statement of the results of operations. All such adjustments are of a normal recurring nature.

 
  First Quarter   Second Quarter   Third Quarter   Fourth Quarter  
 
  (in thousands, except per share data)
 

Fiscal Year 2011

 

 


 

 


 

 


 

 


 

Revenue

  $ 611,124   $ 612,566   $ 673,792   $ 675,662  

Operating income

    34,325     29,256     39,408     43,433  

Net income attributable to Tetra Tech

    22,301     17,500     23,839     26,399  

Earnings per share attributable to Tetra Tech(1):

                         
 

Basic

  $ 0.36   $ 0.28   $ 0.38   $ 0.42  
                   
 

Diluted

  $ 0.36   $ 0.28   $ 0.38   $ 0.42  
                   

Weighted-average common shares outstanding:

                         
 

Basic

    61,665     62,121     62,203     62,310  
                   
 

Diluted

    62,443     62,945     62,934     62,864  
                   

Fiscal Year 2010

 

 


 

 


 

 


 

 


 

Revenue

  $ 541,957   $ 469,528   $ 562,365   $ 627,382  

Operating income

    31,117     23,527     32,706     37,124  

Net income attributable to Tetra Tech

    18,709     14,329     20,639     23,142  

Earnings per share attributable to Tetra Tech(1):

                         
 

Basic

  $ 0.31   $ 0.23   $ 0.34   $ 0.38  
                   
 

Diluted

  $ 0.30   $ 0.23   $ 0.33   $ 0.37  
                   

Weighted-average common shares outstanding:

                         
 

Basic

    61,161     61,511     61,560     61,580  
                   
 

Diluted

    62,089     62,168     62,181     61,999  
                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(1)
The sum of the quarterly EPS may not add up to the full-year EPS due to rounding.

107


Table of Contents

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

Item 9A.    Controls and Procedures

        Evaluation of disclosure controls and procedures and changes in internal control over financial reporting

        At October 2, 2011, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on our management's evaluation (with the participation of our principal executive officer and principal financial officer), our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), were effective.

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. Internal controls include those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.

        Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting at October 2, 2011, based on the criteria in Internal Control – Integrated Framework issued by the COSO. Based upon this assessment, management has concluded that our internal control over financial reporting was effective at October 2, 2011, at a reasonable assurance level.

        PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Form 10-K, has issued a report on our internal control over financial reporting. This report, dated November 16, 2011, appears on page 72 of this Form 10-K.

        There were no changes in our internal control over financial reporting during the three months ended October 2, 2011, that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

108


Table of Contents

Item 9B.    Other Information

        None.


PART III

Item 10.    Directors, Executive Officers and Corporate Governance

        The information required by this item relating to our directors and nominees, regarding compliance with Section 16(a) of the Exchange Act, and regarding our Audit Committee is included under the captions "Proposal No. 1 – Election of Directors – General" and "Business Experience of Nominees," "Ownership of Securities – Section 16(a) Beneficial Ownership Reporting Compliance," and "Proposal No. 1 – Election of Directors – Board Committees and Meetings" in our Proxy Statement related to the 2012 Annual Meeting of Stockholders and is incorporated by reference.

        Pursuant to General Instruction G(3) of Form 10-K, the information required by this item relating to our executive officers is included under the caption "Executive Officers of the Registrant" in Part I of this Report.

        We have adopted a code of ethics that applies to our principal executive officer and all members of our finance department, including our principal financial officer and principal accounting officer. This code of ethics, entitled "Finance Code of Professional Conduct," is posted on our website. The Internet address for our website is www.tetratech.com, and the code of ethics may be found through a link to the Investor Relations section of our website.

        We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K for any amendment to, or waiver from, a provision of this code of ethics by posting any such information on our website, at the address and location specified above.

Item 11.    Executive Compensation

        The information required by this item is included under the captions "Proposal No. 1 – Election of Directors – Director Compensation" and "Executive Compensation and Related Information" in our Proxy Statement related to the 2012 Annual Meeting of Stockholders and is incorporated by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        The information required by this item relating to security ownership of certain beneficial owners and management, and securities authorized for issuance under equity compensation plans, is included under the caption "Ownership of Securities" in our Proxy Statement related to the 2012 Annual Meeting of Stockholders and is incorporated by reference.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

        The information required by this item relating to review, approval or ratification of transactions with related persons is included under the captions "Review, Approval or Ratification of Transactions with Related Persons" and "Certain Transactions with Related Persons," and the information required by this item relating to director independence is included under the caption "Proposal No. 1 – Election of Directors – Independent Directors," in each case in our Proxy Statement related to the 2012 Annual Meeting of Stockholders and is incorporated by reference.

Item 14.    Principal Accounting Fees and Services

        The information required by this item is included under the captions "Proposal No. 4 – Ratification of Independent Registered Public Accounting Firm – Principal Accountant Fees and Services" and "Policy on

109


Table of Contents


Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm" in our Proxy Statement related to the 2012 Annual Meeting of Stockholders and is incorporated by reference.


PART IV

Item 15.    Exhibits, Financial Statement Schedules

(a.)   1.   Financial Statements

 

 

 

 

The Index to Financial Statements and Financial Statement Schedule on page 72 is incorporated by reference as the list of financial statements required as part of this Report.

 

 

2.

 

Financial Statement Schedule

 

 

 

 

The Index to Financial Statements and Financial Statement Schedule on page 72 is incorporated by reference as the list of financial statement schedules required as part of this Report.

 

 

3.

 

Exhibits

 

 

 

 

The exhibit list in the Index to Exhibits on pages 115-116 is incorporated by reference as the list of exhibits required as part of this Report.

110


Table of Contents


TETRA TECH, INC.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

For the Fiscal Years Ended
September 27, 2009, October 3, 2010, and October 2, 2011
(in thousands)

 
  Balance at
Beginning of
Period
  Additions
(Charged to
Costs, Expenses
and Revenue)
  Deductions(1)   Other(2)   Balance at
End of Period
 

Allowance for doubtful accounts:

 

 


 

 


 

 


 

 


 

 


 

Fiscal 2009

 
$

21,526
 
$

13,141
 
$

(5,721

)

$

1,947
 
$

30,893
 

Fiscal 2010

    30,893     7,179     (7,141 )   1,995     32,926  

Fiscal 2011

    32,926     3,733     (6,478 )   2,063     32,244  

Income tax valuation allowance:

 

 


 

 


 

 


 

 


 

 


 

Fiscal 2009

 
$

11,313
 
$

 
$

 
$

 
$

11,313
 

Fiscal 2010

    11,313     786         (6,573 )   5,526  

Fiscal 2011

    5,526             (5,526 )    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
(1)
Primarily represents uncollectible accounts written off, net of recoveries.
(2)
Includes allowances from new business acquisitions and represents valuation allowance adjustments related to a capital loss carry-forward expiration.

111


Table of Contents


SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

    TETRA TECH, INC.

Dated: November 16, 2011

 

By:

 

/s/ DAN L. BATRACK

Dan L. Batrack
Chairman, Chief Executive Officer
    and President


POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dan L. Batrack and Steven M. Burdick, jointly and severally, his attorney-in-fact, each with the full power of substitution, for such person, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature   Title   Date

 

 

 

 

 
/s/ DAN L. BATRACK

Dan L. Batrack
  Chairman, Chief Executive Officer and
President (Principal Executive Officer)
  November 16, 2011

/s/ STEVEN M. BURDICK

Steven M. Burdick

 

Chief Financial Officer and Treasurer
(Principal Financial Officer)

 

November 16, 2011

/s/ BRIAN N. CARTER

Brian N. Carter

 

Vice President, Corporate Controller
(Principal Accounting Officer)

 

November 16, 2011

/s/ ALBERT E. SMITH

Albert E. Smith

 

Director

 

November 16, 2011

/s/ HUGH M. GRANT

Hugh M. Grant

 

Director

 

November 16, 2011

/s/ PATRICK C. HADEN

Patrick C. Haden

 

Director

 

November 16, 2011

112


Table of Contents

Signature   Title   Date

 

 

 

 

 
/s/ J. CHRISTOPHER LEWIS

J. Christopher Lewis
  Director   November 16, 2011

/s/ J. KENNETH THOMPSON

J. Kenneth Thompson

 

Director

 

November 16, 2011

/s/ RICHARD H. TRULY

Richard H. Truly

 

Director

 

November 16, 2011

113


Table of Contents


INDEX TO EXHIBITS

3.1   Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated February 26, 2009).

3.2

 

Amended and Restated Bylaws of the Company (as of April 24, 2009) (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated April 24, 2009).

10.1

 

Credit Agreement, dated as of March 28, 2011, among the Registrant, certain subsidiaries of the Registrant, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report of Form 8-K dated March 30, 2011).

10.2

 

1992 Incentive Stock Plan (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended October 3, 1993).*

10.3

 

Form of Incentive Stock Option Agreement used by the Company in connection with the Company's 1992 Incentive Stock Plan (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended October 3, 1993).*

10.4

 

1992 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended October 3, 1993).*

10.5

 

Form of Non-Qualified Stock Option Agreement used by the Company in connection with the Company's 1992 Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended October 3, 1993).*

10.6

 

Employee Stock Purchase Plan (as amended and restated effective January 1, 2011) (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended October 3, 2010). +

10.7

 

Form of Stock Purchase Agreement used by the Company in connection with the Company's Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended October 2, 1994).

10.8

 

2005 Equity Incentive Plan (as amended through November 7, 2010) (incorporated by reference to the Company's Proxy Statement for its 2011 Annual Meeting of Stockholders held on March 1, 2011).*

10.9

 

Form of Stock Option Agreement to be used by the Company in connection with the 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended October 2, 2005).*

10.10

 

Form of Restricted Stock Agreement to be used by the Company in connection with the 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended October 2, 2005).*

10.11

 

Form of Stock Appreciation Rights Agreement to be used by the Company in connection with the 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended October 2, 2005).*

10.12

 

Form of Restricted Stock Unit Agreement to be used by the Company in connection with the 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended October 2, 2005).*

114


Table of Contents

10.13   2003 Outside Director Stock Option Plan (as amended through July 30, 2007) (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2007).*

10.14

 

Form of Option Agreement used by the Company in connection with the 2003 Outside Director Stock Option Plan (incorporated by reference to Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2003).*

10.15

 

Form of Indemnity Agreement entered into between the Company and each of its directors and executive officers (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended October 3, 2004).*

10.16

 

Executive Compensation Policy (as amended through November 7, 2010) (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended October 3, 2010).+*

10.17

 

Deferred Compensation Plan (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2007).*

10.18

 

Change of Control Agreement with Dan L. Batrack dated March 26, 2008 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated March 28, 2008).*

10.19

 

Form of Change of Control Agreement dated March 26, 2008 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated March 28, 2008).*

10.20

 

Letter Agreement dated August 5, 2005 between the Company and Albert E. Smith (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 5, 2005).*

10.21

 

Letter Agreement dated January 24, 2008 between the Company and Albert E. Smith (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated January 30, 2008).*

10.22

 

Executive Compensation Plan (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended September 28, 2008).*

21.

 

Subsidiaries of the Company.+

23.

 

Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP).+

24.

 

Power of Attorney (included on page 112 of this Annual Report on Form 10-K).

31.1

 

Chief Executive Officer Certification pursuant to Rule 13a-14(a)/15d-14(a).+

31.2

 

Chief Financial Officer Certification pursuant to Rule 13a-14(a)/15d-14(a).+

32.1

 

Certification of Chief Executive Officer pursuant to Section 1350.+

32.2

 

Certification of Chief Financial Officer pursuant to Section 1350.+

101

 

The following financial information from our Company's Annual Report on Form 10-K, for the period ended October 2, 2011, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Equity, (iv) Consolidated Statements of Cash Flows, (v) Notes to Consolidated Financial Statements.+(1)

*
Indicates a management contract or compensatory arrangement.
+
Filed herewith.
(1)
Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, or otherwise subject to the liability of the section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

115