Tetra Tech Inc 10-K/A, filed Aug 15, 2023
Tetra Tech Inc (TTEK)
About this 10-K/A
Tetra Tech Inc filed this 10-K/A on August 15, 2023, covering the fiscal year ended October 2, 2022.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
| (Mark One) | |
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Fiscal Year Ended
|
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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.
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨
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.
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).
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ¨
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of
its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes
The aggregate market value of the registrant’s
common stock held by non-affiliates on April 3, 2022, was $
On November 9, 2022, shares of the registrant’s common stock were outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Portions of registrant’s Proxy Statement for its 2023 Annual Meeting of Stockholders are incorporated by reference in Part III of this report where indicated.
| Auditor Firm ID | Auditor Name | Auditor Location |
| /s/ |
Explanatory Note
Tetra Tech, Inc. (the “Company”) is filing this Amendment No. 1 (“Form 10-K/A”) to its Annual Report on Form 10-K for the fiscal year ended October 2, 2022, as filed with the Securities and Exchange Commission on November 23, 2022 (the “Original Form 10-K”), to:
| 1. | Provide an amended report of its independent registered public accounting firm, in order to correct an administrative oversight related to the omission of references to the information contained in Schedule II - Valuation and Qualifying Accounts and Reserves as required by Rule 5-04(c) of Regulation S-X; and |
| 2. | Provide an updated consent of its independent registered public accounting firm. |
In accordance with applicable Securities and Exchange Commission rules and as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, Form 10-K/A includes new certifications from our Principal Executive Officer and Principal Financial Officer dated as of the date of filing of this Form 10-K/A.
This Form 10-K/A speaks as of the original filing date of the Original Form 10-K, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way the Company’s disclosures made in the Original Form 10-K. There are no changes to the Original Form 10-K other than to the report of the Company’s independent registered public accounting firm as specified above.
2
TABLE OF CONTENTS
| Page | ||
| PART II | ||
| Item 8 | Financial Statements and Supplementary Data | 4 |
| Item 9A | Controls and Procedures | 43 |
| PART IV | ||
| Item 15 | Exhibits, Financial Statement Schedules | 44 |
| Index to Exhibits | 46 | |
3
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Tetra Tech, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Tetra Tech, Inc. and its subsidiaries (the “Company”) as of October 2, 2022 and October 3, 2021, and the related consolidated statements of income, of comprehensive income, of equity and of cash flows for each of the three years in the period ended October 2, 2022, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of October 2, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 2, 2022 and October 3, 2021, and the results of its operations and its cash flows for each of the three years in the period ended October 2, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 2, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, 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. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
5
Revenue Recognition - Determination of Total Estimated Contract Cost for Fixed-price Contracts
As described in Note 3 to the consolidated financial statements, $1.32 billion of the Company’s total revenues for the year ended October 2, 2022 was generated from fixed-price contracts. As disclosed by management, under fixed-price contracts, the Company's clients pay an agreed fixed-amount negotiated in advance for a specified scope of work. Revenue is recognized over time as the related performance obligation is satisfied by transferring control of a promised good or service to the Company's customers. Progress toward complete satisfaction of the performance obligation is primarily measured using a cost-to-cost measure of progress method. The cost input is based primarily on contract cost incurred to date compared to total estimated contract cost. This measure includes forecasts based on the best information available and reflects management's judgment to faithfully depict the value of the services transferred to the customer. Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost measure of progress method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. As a result, the Company recognized immaterial operating income adjustments for the year ended October 2, 2022. Changes in revenue and cost estimates could also result in a projected loss, determined at the contract level, which would be recorded immediately in earnings. The anticipated losses and estimated cost to complete the related contracts was $10.0 million and approximately $80 million, respectively, as of October 2, 2022. Claims are amounts in excess of agreed contract prices that the Company seeks to collect from clients or other third parties. The Company had no claims as of October 2, 2022.
The principal considerations for our determination that performing procedures relating to revenue recognition - determination of total estimated contract cost for fixed-price contracts is a critical audit matter are the significant amount of judgment required by management in determining the total estimated contract cost for fixed-price contracts which, in turn, led to a high degree of auditor judgment, subjectivity, and audit effort in performing procedures and in evaluating the audit evidence obtained related to the total estimated contract costs for fixed-price contracts with cumulative catch-up adjustments, anticipated losses or claims.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the determination of total estimated contract cost for fixed-price contracts. These procedures also included, among others, (i) evaluating and testing management’s process for determining the total estimated contract cost for a sample of contracts with cumulative catch-up adjustments, anticipated losses or claims, which included evaluating the contract terms and other documents that support those estimates, and testing of underlying contract costs; (ii) assessing management's ability to reasonably estimate total contract costs by performing a comparison of the total estimated contract cost as compared with prior period estimates, including evaluating the timely identification of circumstances that may warrant a modification to the total estimated contract cost; and (iii) evaluating, for certain contracts, management’s methodologies and assessing the consistency of management’s approach over the life of the contract.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
November 23, 2022
We have served as the Company’s auditor since 2004.
6
Tetra Tech, Inc.
Consolidated Balance Sheets
(in thousands, except par value)
| October 2, 2022 | October 3, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 185,094 | $ | 166,568 | ||||
| Accounts receivable, net | 755,112 | 668,998 | ||||||
| Contract assets | 92,405 | 103,784 | ||||||
| Prepaid expenses and other current assets | 115,400 | 112,338 | ||||||
| Income taxes receivable | 10,205 | 14,260 | ||||||
| Total current assets | 1,158,216 | 1,065,948 | ||||||
| Property and equipment, net | 32,316 | 37,733 | ||||||
| Right-of-use assets, operating leases | 182,319 | 215,422 | ||||||
| Investments in unconsolidated joint ventures | 4,570 | 3,282 | ||||||
| Goodwill | 1,110,412 | 1,108,578 | ||||||
| Intangible assets, net | 29,163 | 37,990 | ||||||
| Deferred tax assets | 47,804 | 54,413 | ||||||
| Other long-term assets | 57,976 | 53,196 | ||||||
| Total assets | $ | 2,622,776 | $ | 2,576,562 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 147,436 | $ | 128,767 | ||||
| Accrued compensation | 237,669 | 206,322 | ||||||
| Contract liabilities | 241,340 | 190,403 | ||||||
| Short-term lease liabilities, operating leases | 57,865 | 67,452 | ||||||
| Current portion of long-term debt | 12,504 | 12,504 | ||||||
| Current contingent earn-out liabilities | 28,797 | 19,520 | ||||||
| Other current liabilities | 190,406 | 223,515 | ||||||
| Total current liabilities | 916,017 | 848,483 | ||||||
| Deferred tax liabilities | 15,161 | 10,563 | ||||||
| Long-term debt | 246,250 | 200,000 | ||||||
| Long-term lease liabilities, operating leases | 146,285 | 174,285 | ||||||
| Long-term contingent earn-out liabilities | 36,769 | 39,777 | ||||||
| Other long-term liabilities | 79,157 | 69,163 | ||||||
| Commitments and contingencies (Note 17) | ||||||||
| Equity: | ||||||||
| Preferred stock – Authorized, 2,000 shares of $0.01 par value; no shares issued and outstanding at October 2, 2022 and October 3, 2021 | — | — | ||||||
| Common stock – Authorized, 150,000 shares of $0.01 par value; issued and outstanding, 52,981 and 53,981 shares at October 2, 2022 and October 3, 2021, respectively | 530 | 540 | ||||||
| Accumulated other comprehensive loss | (208,144 | ) | (125,028 | ) | ||||
| Retained earnings | 1,390,701 | 1,358,726 | ||||||
| Tetra Tech stockholders' equity | 1,183,087 | 1,234,238 | ||||||
| Noncontrolling interests | 50 | 53 | ||||||
| Total stockholders' equity | 1,183,137 | 1,234,291 | ||||||
| Total liabilities and stockholders' equity | $ | 2,622,776 | $ | 2,576,562 | ||||
See accompanying Notes to Consolidated Financial Statements.
7
Tetra Tech, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
| Fiscal Year Ended | ||||||||||||
| October 2, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| Revenue | $ | 3,504,048 | $ | 3,213,513 | $ | 2,994,891 | ||||||
| Subcontractor costs | (668,468 | ) | (661,341 | ) | (646,319 | ) | ||||||
| Other costs of revenue | (2,260,021 | ) | (2,053,772 | ) | (1,902,037 | ) | ||||||
| Gross profit | 575,559 | 498,400 | 446,535 | |||||||||
| Selling, general and administrative expenses | (234,784 | ) | (222,972 | ) | (204,615 | ) | ||||||
| Contingent consideration – fair value adjustments | (329 | ) | 3,273 | 14,971 | ||||||||
| Impairment of goodwill | — | — | (15,800 | ) | ||||||||
| Income from operations | 340,446 | 278,701 | 241,091 | |||||||||
| Interest income | 1,780 | 917 | 1,375 | |||||||||
| Interest expense | (13,364 | ) | (12,748 | ) | (14,475 | ) | ||||||
| Other income | 19,904 | — | — | |||||||||
| Income before income tax expense | 348,766 | 266,870 | 227,991 | |||||||||
| Income tax expense | (85,602 | ) | (34,039 | ) | (54,101 | ) | ||||||
| Net income | 263,164 | 232,831 | 173,890 | |||||||||
| Net income attributable to noncontrolling interests | (39 | ) | (21 | ) | (31 | ) | ||||||
| Net income attributable to Tetra Tech | $ | 263,125 | $ | 232,810 | $ | 173,859 | ||||||
| Earnings per share attributable to Tetra Tech: | ||||||||||||
| Basic | $ | 4.91 | $ | 4.31 | $ | 3.21 | ||||||
| Diluted | $ | 4.86 | $ | 4.26 | $ | 3.16 | ||||||
| Weighted-average common shares outstanding: | ||||||||||||
| Basic | 53,620 | 54,078 | 54,235 | |||||||||
| Diluted | 54,163 | 54,675 | 55,022 | |||||||||
See accompanying Notes to Consolidated Financial Statements.
8
Tetra Tech, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
| Fiscal Year Ended | ||||||||||||
| October 2, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| Net income | $ | 263,164 | $ | 232,831 | $ | 173,890 | ||||||
| Other comprehensive income, net of tax | ||||||||||||
| Foreign currency translation adjustments, net of tax | (94,933 | ) | 30,644 | 3,435 | ||||||||
| Gain (loss) on cash flow hedge valuations, net of tax | 11,806 | 6,117 | (4,638 | ) | ||||||||
| Other comprehensive income (loss), net of tax | (83,127 | ) | 36,761 | (1,203 | ) | |||||||
| Comprehensive income, net of tax | $ | 180,037 | $ | 269,592 | $ | 172,687 | ||||||
| Comprehensive income attributable to noncontrolling interests, net of tax | 28 | 24 | 30 | |||||||||
| Comprehensive income attributable to Tetra Tech, net of tax | $ | 180,009 | $ | 269,568 | $ | 172,657 | ||||||
See accompanying Notes to Consolidated Financial Statements.
9
Tetra Tech, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| Fiscal Year Ended | ||||||||||||
| October 2, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 263,164 | $ | 232,831 | $ | 173,890 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 27,033 | 23,805 | 24,611 | |||||||||
| Equity in income of unconsolidated joint ventures | (7,525 | ) | (4,990 | ) | (6,605 | ) | ||||||
| Distributions of earnings from unconsolidated joint ventures | 6,177 | 4,604 | 6,310 | |||||||||
| Amortization of stock-based awards | 26,227 | 23,067 | 19,424 | |||||||||
| Deferred income taxes | 2,175 | (38,494 | ) | 565 | ||||||||
| Impairment of goodwill | — | — | 15,800 | |||||||||
| Fair value adjustments to contingent consideration | 329 | (3,273 | ) | (14,971 | ) | |||||||
| Loss (gain) on sale of assets | 103 | (110 | ) | (11,066 | ) | |||||||
| Fair value adjustment to foreign currency forward contract | (19,904 | ) | — | — | ||||||||
| Changes in operating assets and liabilities, net of effects of business acquisitions: | ||||||||||||
| Accounts receivable and contract assets | (89,781 | ) | 13,301 | 156,015 | ||||||||
| Prepaid expenses and other assets | 69,697 | (582 | ) | (11,321 | ) | |||||||
| Accounts payable | 17,099 | 13,551 | (102,162 | ) | ||||||||
| Accrued compensation | 27,458 | 5,425 | (8,173 | ) | ||||||||
| Contract liabilities | 55,915 | 13,407 | 5,894 | |||||||||
| Other liabilities | (56,606 | ) | 8,740 | 19,460 | ||||||||
| Income taxes receivable/payable | 14,627 | 13,090 | (5,192 | ) | ||||||||
| Net cash provided by operating activities | 336,188 | 304,372 | 262,479 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Payments for business acquisitions, net of cash acquired | (49,124 | ) | (84,911 | ) | (68,488 | ) | ||||||
| Capital expenditures | (10,582 | ) | (8,573 | ) | (12,245 | ) | ||||||
| Proceeds from sales of assets | 3,966 | 492 | 17,710 | |||||||||
| Net cash used in investing activities | (55,740 | ) | (92,992 | ) | (63,023 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from borrowings | 161,456 | 370,222 | 308,364 | |||||||||
| Repayments on long-term debt | (117,080 | ) | (414,308 | ) | (331,066 | ) | ||||||
| Repurchases of common stock | (200,000 | ) | (60,000 | ) | (117,188 | ) | ||||||
| Taxes paid on vested restricted stock | (25,223 | ) | (17,630 | ) | (11,166 | ) | ||||||
| Payments of contingent earn-out liabilities | (20,124 | ) | (20,251 | ) | (22,900 | ) | ||||||
| Stock options exercised | 1,806 | 11,250 | 10,334 | |||||||||
| Bank overdrafts | — | (36,627 | ) | 36,627 | ||||||||
| Dividends paid | (46,099 | ) | (40,041 | ) | (34,743 | ) | ||||||
| Principal payments on finance leases | (4,344 | ) | (2,714 | ) | (1,311 | ) | ||||||
| Net cash used in financing activities | (249,608 | ) | (210,099 | ) | (163,049 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (12,314 | ) | 7,772 | 207 | ||||||||
| Net increase in cash and cash equivalents | 18,526 | 9,053 | 36,614 | |||||||||
| Cash and cash equivalents at beginning of year | 166,568 | 157,515 | 120,901 | |||||||||
| Cash and cash equivalents at end of year | $ | 185,094 | $ | 166,568 | $ | 157,515 | ||||||
| Supplemental information: | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Interest | $ | 13,378 | $ | 10,330 | $ | 13,256 | ||||||
| Income taxes, net of refunds received of $4.8 million, $2.1 million and $1.4 million | $ | 70,799 | $ | 59,111 | $ | 55,039 | ||||||
See accompanying Notes to Consolidated Financial Statements.
10
Tetra Tech, Inc.
Consolidated Statements of Equity
Fiscal Years Ended September 27, 2020, October 3, 2021, and October 2, 2022
(in thousands)
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Retained | Total Tetra Tech | Non-Controlling | Total | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Earnings | Equity | Interests | Equity | |||||||||||||||||||||||||
| BALANCE AT SEPTEMBER 29, 2019 | 54,565 | $ | 546 | $ | 78,132 | $ | (160,584 | ) | $ | 1,071,192 | $ | 989,286 | $ | 178 | $ | 989,464 | ||||||||||||||||
| Comprehensive income, net of tax: | ||||||||||||||||||||||||||||||||
| Net income | 173,859 | 173,859 | 31 | 173,890 | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 3,436 | 3,436 | (1 | ) | 3,435 | |||||||||||||||||||||||||||
| Loss on cash flow hedge valuations | (4,638 | ) | (4,638 | ) | (4,638 | ) | ||||||||||||||||||||||||||
| Comprehensive income, net of tax | 172,657 | 30 | 172,687 | |||||||||||||||||||||||||||||
| Distributions paid to noncontrolling interests | (154 | ) | (154 | ) | ||||||||||||||||||||||||||||
| Cash dividends of $0.64 per common share | (34,743 | ) | (34,743 | ) | (34,743 | ) | ||||||||||||||||||||||||||
| Stock-based compensation | 19,424 | 19,424 | 19,424 | |||||||||||||||||||||||||||||
| Restricted & performance shares released | 212 | 2 | (11,168 | ) | (11,166 | ) | (11,166 | ) | ||||||||||||||||||||||||
| Stock options exercised | 361 | 4 | 10,330 | 10,334 | 10,334 | |||||||||||||||||||||||||||
| Shares issued for Employee Stock Purchase Plan | 168 | 1 | 8,714 | 8,715 | 8,715 | |||||||||||||||||||||||||||
| Stock repurchases | (1,509 | ) | (15 | ) | (105,432 | ) | $ | (11,741 | ) | (117,188 | ) | (117,188 | ) | |||||||||||||||||||
| BALANCE AT SEPTEMBER 27, 2020 | 53,797 | 538 | — | (161,786 | ) | 1,198,567 | 1,037,319 | 54 | 1,037,373 | |||||||||||||||||||||||
| Comprehensive income, net of tax: | ||||||||||||||||||||||||||||||||
| Net income | 232,810 | 232,810 | 21 | 232,831 | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 30,641 | 30,641 | 3 | 30,644 | ||||||||||||||||||||||||||||
| Gain on cash flow hedge valuations | 6,117 | 6,117 | 6,117 | |||||||||||||||||||||||||||||
| Comprehensive income, net of tax | 269,568 | 24 | 269,592 | |||||||||||||||||||||||||||||
| Distributions paid to noncontrolling interests | (25 | ) | (25 | ) | ||||||||||||||||||||||||||||
| Cash dividends of $0.74 per common share | (40,041 | ) | (40,041 | ) | (40,041 | ) | ||||||||||||||||||||||||||
| Stock-based compensation | 23,067 | 23,067 | 23,067 | |||||||||||||||||||||||||||||
| Restricted & performance shares released | 215 | 3 | (17,633 | ) | (17,630 | ) | (17,630 | ) | ||||||||||||||||||||||||
| Stock options exercised | 324 | 3 | 11,247 | 11,250 | 11,250 | |||||||||||||||||||||||||||
| Shares issued for Employee Stock Purchase Plan | 124 | 1 | 10,704 | 10,705 | 10,705 | |||||||||||||||||||||||||||
| Stock repurchases | (479 | ) | (5 | ) | (27,385 | ) | (32,610 | ) | (60,000 | ) | (60,000 | ) | ||||||||||||||||||||
| BALANCE AT OCTOBER 3, 2021 | 53,981 | 540 | — | (125,028 | ) | 1,358,726 | 1,234,238 | 53 | 1,234,291 | |||||||||||||||||||||||
| Comprehensive income, net of tax: | ||||||||||||||||||||||||||||||||
| Net income | 263,125 | 263,125 | 39 | 263,164 | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (94,922 | ) | (94,922 | ) | (11 | ) | (94,933 | ) | ||||||||||||||||||||||||
| Gain on cash flow hedge valuations | 11,806 | 11,806 | 11,806 | |||||||||||||||||||||||||||||
| Comprehensive income, net of tax | 180,009 | 28 | 180,037 | |||||||||||||||||||||||||||||
| Distributions paid to noncontrolling interests | (31 | ) | (31 | ) | ||||||||||||||||||||||||||||
| Cash dividends of $0.86 per common share | (46,099 | ) | (46,099 | ) | (46,099 | ) | ||||||||||||||||||||||||||
| Stock-based compensation | 26,227 | 26,227 | 26,227 | |||||||||||||||||||||||||||||
| Restricted & performance shares released | 190 | 2 | (25,225 | ) | (25,223 | ) | (25,223 | ) | ||||||||||||||||||||||||
| Stock options exercised | 46 | — | 1,806 | 1,806 | 1,806 | |||||||||||||||||||||||||||
| Shares issued for Employee Stock Purchase Plan | 106 | 1 | 12,128 | 12,129 | 12,129 | |||||||||||||||||||||||||||
| Stock repurchases | (1,342 | ) | (13 | ) | (14,936 | ) | (185,051 | ) | (200,000 | ) | (200,000 | ) | ||||||||||||||||||||
| BALANCE AT OCTOBER 2, 2022 | 52,981 | $ | 530 | $ | — | $ | (208,144 | ) | $ | 1,390,701 | $ | 1,183,087 | $ | 50 | $ | 1,183,137 | ||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
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Tetra Tech, Inc.
Notes to Consolidated Financial Statements
1. Description of Business
We are a leading global provider of high-end consulting and engineering services that focuses on water, environment, sustainable infrastructure, renewable energy and international development. We are a global company that is Leading with Science® to provide innovative solutions for our public and private clients. We typically begin at the earliest stage of a project by identifying technical solutions and developing execution plans tailored to our clients’ needs and resources. Our solutions may span the entire life cycle of high-end consulting and engineering projects and include applied science, data analysis, research, engineering, design, project management and operations and maintenance.
We manage our business under two reportable segments. Our Government Services Group (“GSG”) reportable segment primarily includes activities with U.S. government clients (federal, state and local) and all activities with development agencies worldwide. Our Commercial/International Services Group (“CIG”) reportable segment primarily includes activities with U.S. commercial clients and international clients other than development agencies. Beginning in fiscal 2022, we aligned our operations to better serve our clients and markets, and created a new High Performance Buildings ("HPB") division in our CIG reportable segment. As a result, we transferred some related operations in our GSG reportable segment to our CIG reportable segment. Prior year amounts for reportable segments have been reclassified to conform to the current year presentation.
2. Basis of Presentation and Preparation
Principles of Consolidation and Presentation. The consolidated financial statements include our accounts and those of 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 on the Sunday nearest September 30. Fiscal years 2022, 2021 and 2020 contained 52, 53 and 52 weeks, respectively.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("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.
Cash and Cash Equivalents. Cash and cash equivalents include highly liquid investments with original maturities of 90 days or less. Occasionally, we have bank overdrafts, which occur when a bank honors disbursements in excess of funds on deposit in our bank accounts. We classify bank overdrafts as short-term borrowings on our consolidated balance sheets, and report the change in overdrafts as a financing activity in our consolidated statements of cash flows.
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. Any adjustments to these liabilities are recorded in our consolidated statements of income.
Accounts Receivable – Net. Net accounts receivable consists of billed and unbilled accounts receivable, and allowances for doubtful accounts. Billed accounts receivable represent amounts billed to clients that have not been collected. Unbilled accounts receivable, which represent an unconditional right to payment subject only to the passage of time, include unbilled amounts typically resulting from 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, 2022 are expected to be billed and collected within 12 months. Unbilled accounts receivable also include amounts related to requests for equitable adjustment to contracts that provide for price redetermination. These amounts are recorded only when they can be reliably estimated and realization is probable. The allowance for doubtful accounts represents amounts that are expected to become uncollectible or unrealizable in the future. We determine an estimated allowance for uncollectible accounts based on management's consideration of trends in the actual and forecasted credit quality of our clients, including delinquency and payment history; type of client, such as a government agency or a commercial sector client; and general economic and industry conditions that may affect our clients' ability to pay.
Contract Assets and Contract Liabilities. Contract assets represent revenue recognized in excess of the amounts for which we have the contractual right to bill our customers. Contract retentions, included in contract assets, represent amounts withheld by clients until certain conditions are met or the project is completed, which may extend beyond one year. Contract liabilities represent the amount of cash collected from clients and billings to clients on contracts in advance of work performed and revenue recognized. The majority of these amounts are expected be earned within 12 months and are classified as current liabilities.
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Prepaid and other current assets. Prepaid assets consist primarily of payments for insurance and software costs and are amortized over the estimated period of benefit. Other current assets include primarily sales/services and use tax receivables from our U.S and foreign operations.
Property and Equipment. Property and equipment are recorded at cost and 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 seven years for equipment, furniture and fixtures. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease term. Assets held for sale are measured at the lower of carrying amount (i.e., net book value) and fair value less cost to sell, and are reported within "Prepaid expenses and other current assets" on our consolidated balance sheets. Once assets are classified as held for sale, they are no longer depreciated.
Long-Lived Assets. We evaluate the recoverability of our long-lived 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.
Leases. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, and current and long-term operating lease liabilities in the consolidated balance sheets. Our finance leases are reported in "Other long-term assets", "Other current liabilities" and "Other long-term liabilities" on our consolidated balance sheet.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, incremental borrowing rates are used based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset at the commencement date also includes any lease payments made to the lessor at or before the commencement date and initial direct costs less lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
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 based on their fair values at the date of acquisition. The determination of fair values of these assets and liabilities 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. Transaction costs associated with business combinations are expensed as incurred.
Goodwill and Intangible Assets. 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. We amortize our intangible assets based on the period over which the contractual or economic benefits of the intangible assets are expected to be realized. 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 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.
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We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. Our last annual review was performed at July 4, 2022 (i.e., the first day of our fiscal fourth quarter). 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 assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. Our operating segments are the same as our reportable segments and our reporting units for goodwill impairment testing are the components one level below our reportable segments. These components constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. We aggregate components within an operating segment that have similar economic characteristics.
The impairment test for goodwill involves the comparison of the estimated fair value of each reporting unit to the reporting unit's carrying value, including goodwill. We estimate the fair value of reporting units based on a comparison and weighting of the income approach, specifically the discounted cash flow method and the market approach, which estimates the fair value of our reporting units based upon comparable market prices and recent transactions and also validates the reasonableness of the multiples from the income approach. 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, operating profit margins, discount rates and the terminal growth rate. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of that reporting unit is not considered impaired. However, if its carrying value exceeds its fair value, our goodwill is impaired, and we are required to record a non-cash charge that could have a material adverse effect on our consolidated financial statements. An impairment loss recognized, if any, should not exceed the total amount of goodwill allocated to the reporting unit.
Contingent Consideration. Most of our acquisition agreements include contingent earn-out arrangements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based upon our valuations of the acquired companies and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved.
The fair values of these earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in "Current contingent earn-out liabilities" and "Long-term contingent earn-out liabilities" on the consolidated balance sheets. We consider several factors when determining that contingent earn-out liabilities are part of the purchase price, including the following: (1) the valuation of our acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former owners of acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of our other key employees. The contingent earn-out payments are not affected by employment termination.
We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. We use a probability weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period (generally three or five years) and the probability outcome percentages we assign to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability, with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the contingent earn-out liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows. Any amount paid in excess of the contingent earn-out liability on the acquisition date is reflected as cash used in operating activities in our consolidated statements of cash flows.
We review and re-assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income.
Other current liabilities. Other current liabilities consists primarily of accrued insurance, contingent liabilities, sales/services and use taxes due to our U.S. and foreign operations, other tax accruals and accrued professional fees.
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Fair Value of Financial Instruments. We determine the fair values of our financial instruments, including short-term investments, debt instruments, derivative instruments and pension plan assets based on inputs or assumptions that market participants would use in pricing an asset or a liability. We categorize our instruments using a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair values based on their short-term nature. The carrying amounts of our revolving credit facility approximates fair value because the interest rates are based upon variable reference rates. Certain other assets and liabilities, such as contingent earn-out liabilities and amounts related to cash-flow hedges, are required to be carried in our consolidated financial statements at fair value.
Our fair value measurement methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although we believe our valuation methods are appropriate and consistent with those used by other market participants, the use of different methodologies or assumptions to determine fair value could result in a different fair value measurement at the reporting date.
Derivative Financial Instruments. We account for our derivative instruments as either assets or liabilities and carry them at fair value. For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income in stockholders' equity and reclassified into income in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in current income. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.
The net gain or loss on the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency translation exposure generated by the re-measurement of certain assets and liabilities denominated in a non-functional currency in a foreign operation is reported in the same manner as a foreign currency translation adjustment. Accordingly, any gains or losses related to these derivative instruments are recognized in current income. Derivatives that do not qualify as hedges are adjusted to fair value through current income.
Deferred Compensation. We maintain a non-qualified defined contribution supplemental retirement plan for certain key employees and non-employee directors 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 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 long-term assets." Our obligation to participating employees is reflected in "Other long-term liabilities." The net gains and losses related to the deferred compensation plan are reported as part of “Selling, general and administrative expenses” in our consolidated statements of income.
Pension Plan. We assumed a defined benefit pension plan from a fiscal 2021 acquisition. We calculate the market-related value of assets, which is used to determine the return-on-assets component of annual pension expense and the cumulative net unrecognized gain or loss subject to amortization. This calculation reflects our anticipated long-term rate of return and amortization of the difference between the actual return (including capital, dividends, and interest) and the expected return. Cumulative net unrecognized gains or losses that exceed 10% of the greater of the projected benefit obligation or the fair market related value of plan assets are subject to amortization.
Income Taxes. We file a consolidated U.S. federal income 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, scheduled reversals of deferred tax amounts, availability of carrybacks and potential tax planning strategies. Based on our assessment, we have concluded that a portion of the deferred tax assets will not be realized.
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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.
Concentration of Credit Risk. Financial instruments that subject us to credit risk consist primarily of cash and cash equivalents and net accounts receivable. In the event that we have surplus cash, 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 23% of accounts receivable were due from various agencies of the U.S. federal government at fiscal 2022 year-end. 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. Approximately 48%, 21% and 31% of our fiscal 2022 revenue was generated from our U.S. government, U.S. commercial and international clients, respectively.
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 and Australian dollars and British pounds. 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. Gains or losses from foreign currency transactions are included in income from operations.
Reclassifications. Certain reclassifications were made to the prior fiscal years to conform to the current-year presentation.
Recently Issued Accounting Pronouncements Adopted in Fiscal 2022.
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12, which simplifies the accounting for income taxes by removing certain exceptions to general principles in Topic 740 and amending certain existing guidance for clarity. We adopted this guidance in the first quarter of fiscal 2022, and the adoption did not have an impact on our consolidated financial statements.
In May 2020, the Securities and Exchange Commission issued guidance amending certain financial disclosures about acquired and disposed businesses. The amendments are designed to assist registrants in making more meaningful determinations of whether a subsidiary or an acquired or disposed business is significant, and to improve the related disclosure requirements. We adopted this guidance in the first quarter of fiscal 2022, and the adoption did not have an impact on our consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, which requires the recognition and measurement of contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers" ("ASC 606"). Considerations to determine the amount of contract assets and contract liabilities to record at the acquisition date include the terms of the acquired contract, such as timing of payment, identification of each performance obligation in the contract and allocation of the contract transaction price to each identified performance obligation on a relative standalone selling price basis as of contract inception. ASU 2021-08 is effective for us beginning in the first quarter of fiscal 2023. ASU 2021-08 should be applied prospectively for acquisitions occurring on or after the effective date of the amendments. Early adoption of the proposed amendments would be permitted, including adoption in an interim period. We adopted this guidance in the first quarter of fiscal 2022, and the adoption did not have an impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), which requires disclosures for transactions with a government authority that are accounted for by applying a grant or contribution model by analogy, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity's financial statements. ASU 2021-10 is effective for us beginning in the first quarter of fiscal 2023, with early adoption permitted. This guidance should be applied prospectively to all transactions that are reflected in the financial statements at the date of initial application and to new transactions that are entered into after that date, or retrospectively.
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In fiscal 2020, the Canadian federal government implemented the Canadian Emergency Wage Subsidy ("CEWS") program in response to the negative impact of the coronavirus disease 2019 ("COVID-19") pandemic on businesses operating in Canada. Our Canadian legal entities qualified for and applied for these CEWS cash benefits to partially offset the impacts of revenue reductions and on-going staffing costs. The $26.0 million total received was initially recorded in "Other current liabilities" until all potential amendments to the qualification criteria, including some that were proposed with retroactive application, were finalized in fiscal 2022. As there are no further contingencies, beginning in fiscal 2023, the amounts received will be distributed to all Canadian employees. We expect to distribute approximately $9 million in the next twelve months. Accordingly, this amount was reclassified from "Other current liabilities" to "Accrued compensation" on our consolidated balance sheet as of October 2, 2022. The remaining $17.0 million, which we expect to distribute beyond one year, was reclassified to "Other long-term liabilities". We do not expect there will be any related impact to our operating income, and we have no outstanding applications for further government assistance.
3. Revenue and Contract Balances
We recognize revenue over time as the related performance obligation is satisfied by transferring control of a promised good or service to our customers. Progress toward complete satisfaction of the performance obligation is primarily measured using a cost-to-cost measure of progress method. The cost input is based primarily on contract cost incurred to date compared to total estimated contract cost. This measure includes forecasts based on the best information available and reflects our judgement to faithfully depict the value of the services transferred to the customer. For certain on-call engineering or consulting and similar contracts, we recognize revenue in the amount which we have the right to invoice the customer if that amount corresponds directly with the value of our performance completed to date.
Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost measure of progress method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs indicates a loss, a provision for the entire estimated loss on the contract is made in the period in which the loss becomes evident.
Disaggregation of Revenue
We disaggregate revenue by client sector and contract type, as we believe it best depicts how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors. The following tables present revenue disaggregated by client sector and contract type:
| Fiscal Year Ended | ||||||||||||
| October 2, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Client Sector: | ||||||||||||
| U.S. federal government (1) | $ | 1,064,347 | $ | 1,081,608 | $ | 993,835 | ||||||
| U.S. state and local government | 603,286 | 536,309 | 439,019 | |||||||||
| U.S. commercial | 748,953 | 638,169 | 674,605 | |||||||||
| International (2) | 1,087,462 | 957,427 | 887,432 | |||||||||
| Total | $ | 3,504,048 | $ | 3,213,513 | $ | 2,994,891 | ||||||
| Contract Type: | ||||||||||||
| Fixed-price | $ | 1,317,993 | $ | 1,191,244 | $ | 1,078,432 | ||||||
| Time-and-materials | 1,637,019 | 1,492,813 | 1,391,592 | |||||||||
| Cost-plus | 549,036 | 529,456 | 524,867 | |||||||||
| Total | $ | 3,504,048 | $ | 3,213,513 | $ | 2,994,891 | ||||||
(1) Includes revenue generated under U.S. federal government contracts performed outside the United States.
(2) Includes revenue generated from foreign operations, primarily in Canada, Australia, the United Kingdom and revenue generated from non-U.S. clients.
Other than the U.S. federal government, no single client accounted for more than 10% of our revenue for fiscal 2022 and 2021.
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Contract Assets and Contract Liabilities
We invoice customers based on the contractual terms of each contract. However, the timing of revenue recognition may differ from the timing of invoice issuance.
Contract assets represent revenue recognized in excess of the amounts for which we have the contractual right to bill our customers. Such amounts are recoverable from customers based upon various measures of performance, including achievement of certain milestones or completion of a contract. In addition, many of our time and materials arrangements are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded, as revenue is recognized in advance of billings. Contract retentions, included in contract assets, represent amounts withheld by clients until certain conditions are met or the project is completed, which may extend beyond one year.
Contract liabilities consist of billings in excess of revenue recognized. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and increase as billings in advance of revenue recognition occur. Contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. There were no substantial non-current contract assets or liabilities for the periods presented. Net contract liabilities consisted of the following:
| Balance at | ||||||||
| October 2, 2022 | October 3, 2021 | |||||||
| (in thousands) | ||||||||
| Contract assets (1) | $ | 92,405 | $ | 103,784 | ||||
| Contract liabilities | 241,340 | 190,403 | ||||||
| Net contract liabilities | $ | (148,935 | ) | $ | (86,619 | ) | ||
(1) Includes $23.3 million and $12.2 million of contract retentions as of October 2, 2022 and October 3, 2021, respectively.
In fiscal 2022, we recognized revenue of approximately $125 million from amounts included in the contract liability balance at the end of fiscal 2021, compared to approximately $119 million in fiscal 2021.
We recognize revenue primarily using the cost-to-cost measure of progress method to estimate progress towards completion. Changes in those estimates could result in the recognition of cumulative catch-up adjustments to the contract’s inception-to-date revenue, costs and profit in the period in which such changes are made. The corresponding net revenue and operating income adjustments were immaterial for fiscal 2022 and 2021.
Changes in revenue and cost estimates could also result in a projected loss, determined at the contract level, which would be recorded immediately in earnings. As of October 2, 2022 and October 3, 2021, our consolidated balance sheets included liabilities for anticipated losses of $10.0 million and $12.7 million, respectively. The estimated cost to complete these related contracts as of October 2, 2022 and October 3, 2021 was approximately $80 million and $104 million, respectively.
Accounts Receivable, Net
Net accounts receivable consisted of the following:
| Balance at | ||||||||
| October 2, 2022 | October 3, 2021 | |||||||
| (in thousands) | ||||||||
| Billed | $ | 491,700 | $ | 432,814 | ||||
| Unbilled | 267,161 | 240,536 | ||||||
| Total accounts receivable | 758,861 | 673,350 | ||||||
| Allowance for doubtful accounts | (3,749 | ) | (4,352 | ) | ||||
| Total accounts receivable, net | $ | 755,112 | $ | 668,998 | ||||
Billed accounts receivable represent amounts billed to clients that have not been collected. Unbilled accounts receivable, which represent an unconditional right to payment subject only to the passage of time, include unbilled amounts typically resulting from revenue recognized but not yet billed pursuant to contract terms or billed after the period end date. Substantially all of our unbilled receivables at October 2, 2022 are expected to be billed and collected within 12 months. The allowance for doubtful accounts represents amounts that are expected to become uncollectible or unrealizable in the future. We determine an estimated allowance for uncollectible accounts based on management's consideration of trends in the actual and forecasted credit quality of our clients, including delinquency and payment history; type of client, such as a government agency or a commercial sector client; and general economic and industry conditions, including the potential impacts of the COVID-19 pandemic, that may affect our clients' ability to pay.
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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. Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regards to both scope and price) should be recognized include the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in our performance, (c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting the claim is objective and verifiable. 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. Total accounts receivable at October 3, 2021 included approximately $11 million related to claims, including requests for equitable adjustment, on contracts that provide for price redetermination. This amount related to a single claim in our RCM reportable segment. In May 2022, we received a cash settlement for the claim, which resulted in an immaterial gain in the third quarter of fiscal 2022. There were no claims included in our total accounts receivable at October 2, 2022.
We regularly evaluate all unsettled claim amounts and record appropriate adjustments to revenue when it is probable that the claim will result in a different contract value than the amount previously estimated. In fiscal 2022, we recorded no gains or losses related to claims other than the aforementioned immaterial gain on the settled RCM claim. In fiscal 2021 (all in the second quarter), we recognized increases to revenue and related gains of $2.8 million in our CIG reportable segment.
No single client accounted for more than 10% of our accounts receivable at October 2, 2022 and October 3, 2021.
Remaining Unsatisfied Performance Obligations (“RUPOs”)
Our RUPOs represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. We had $3.7 billion of RUPOs as of October 2, 2022. RUPOs increase with awards from new contracts or additions on existing contracts and decrease as work is performed and revenue is recognized on existing contracts. RUPOs may also decrease when projects are canceled or modified in scope. We include a contract within our RUPOs when the contract is awarded and an agreement on contract terms has been reached.
We expect to satisfy our RUPOs as of October 2, 2022 over the following periods:
| Amount | ||||
| (in thousands) | ||||
| Within 12 months | $ | 2,394,090 | ||
| Beyond | 1,327,544 | |||
| Total | $ | 3,721,634 | ||
Although RUPOs reflect business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. RUPOs are adjusted to reflect any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals, as appropriate. Our operations and maintenance contracts can generally be terminated by the clients without a substantive financial penalty. Therefore, the remaining performance obligations on such contracts are limited to the notice period required for the termination (usually 30, 60 or 90 days).
4. Stock Repurchase and Dividends
On October 5, 2021, our Board of Directors authorized a new stock repurchase program under which we could repurchase up to $400 million of our common stock in addition to the $147.8 million under the previous stock repurchase program at October 3, 2021. In fiscal 2022, we repurchased and settled 1,341,679 shares with an average price of $149.07 per share for a total cost of $200.0 million in the open market. As of October 2, 2022, we had a remaining balance of $347.8 million under our repurchase program.
19
The following table presents dividends declared and paid in fiscal 2022 and 2021:
| Declare Date | Dividend Paid Per Share | Record Date | Payment Date | Dividends Paid (in thousands) | ||||||||
| November 15, 2021 | $ | 0.20 | December 2, 2021 | December 20, 2021 | $ | 10,793 | ||||||
| January 31, 2022 | $ | 0.20 | February 11, 2022 | February 25, 2022 | 10,769 | |||||||
| May 2, 2022 | $ | 0.23 | May 13, 2022 | May 27, 2022 | 12,311 | |||||||
| August 1, 2022 | $ | 0.23 | August 12, 2022 | August 26, 2022 | 12,226 | |||||||
| Total dividends paid as of October 2, 2022 | $ | 46,099 | ||||||||||
| November 9, 2020 | $ | 0.17 | November 30, 2020 | December 11, 2020 | $ | 9,198 | ||||||
| January 25, 2021 | $ | 0.17 | February 10, 2021 | February 26, 2021 | 9,212 | |||||||
| April 26, 2021 | $ | 0.20 | May 12, 2021 | May 28, 2021 | 10,831 | |||||||
| July 26, 2021 | $ | 0.20 | August 20, 2021 | September 3, 2021 | 10,800 | |||||||
| Total dividends paid as of October 3, 2021 | $ | 40,041 | ||||||||||
Subsequent Events. On November 7, 2022, our Board of Directors declared a quarterly cash dividend of $0.23 per share payable on December 9, 2022 to stockholders of record as of the close of business on November 21, 2022.
| 5. | Acquisitions |
On September 23, 2022, we made an all cash offer to acquire all the outstanding shares of RPS Group plc ("RPS"), a publicly traded company on the London Stock Exchange for 222 pence per share, which was unanimously recommended by RPS's Board of Directors. RPS employs approximately 5,000 associates in the United Kingdom, Europe, Asia Pacific and North America, delivering high-end solutions especially in energy transformation, water and program management for government and commercial clients. The transaction is to be affected using a court sanctioned scheme of arrangement between RPS and its shareholders and is subject to certain regulatory approvals and approval by RPS shareholders.
Subsequent Event. On November 3, 2022, RPS's shareholders approved the scheme of arrangement, with the acquisition expected to be closed and effective in January 2023 after regulatory and court approval with an all cash purchase price for 100% of the outstanding shares of approximately GBP 636 million.
In fiscal 2022, we acquired The Integration Group of America ("TIGA"), Piteau Associates (“PAE”) and two other immaterial acquisitions. TIGA is based in Spring, Texas and is an industry leader in process automation and system integration solutions, including customized software and platform (SaaS/PaaS) applications, advanced data analytics, cloud data integration and platform virtualization. PAE is based in Vancouver, British Columbia and is a global leader in sustainable natural resource analytics including hydrologic numerical modeling and dewatering system design. PAE is part of our CIG segment, and TIGA and other immaterial acquisitions are part of our GSG segment. The total fair value of the purchase price for all four acquisitions was $88.3 million. This amount is comprised of $44.0 million in initial cash payments made to the sellers, $2.5 million of receivables (net) related to estimated post-closing adjustments for the net assets acquired, $15.5 million payable in a promissory note issued to the sellers along with related transaction expenses of the sellers (which were subsequently paid in July 2022) and $31.3 million for the estimated fair value of contingent earn-out obligations, with a maximum of $47.0 million, based upon the achievement of specified operating income targets in each of the three to five years following the acquisitions.
In fiscal 2021, we acquired Coanda Research and Development Corporation ("CRD"), The Kaizen Company (“KZN”), IBRA-RMAC Automation Solutions (“IRM”) and Hoare Lea, LLP and Subsidiaries ("HLE"). CRD is based in Burnaby, British Columbia and provides world-class expertise in computational fluid dynamics and utilizes industry-leading capabilities to solve complex engineering science problems for commercial customers, across a broad range of industries. KZN is based in Washington, D.C. and provides international development advisory and management consulting services offering a suite of innovative tools that support advanced solutions in health, education, governance, peace and stability and sustainable economic growth. IRM is based in San Diego, California and provides digital water transformation consulting services and an innovative suite of tools to address complex water system modernization challenges. HLE is a leader in sustainable engineering design based in Bristol, United Kingdom. It was established in 1862 and is an award-winning high-end consultancy firm in the United Kingdom, with more than 900 employees, providing innovative solutions to complex engineering and design challenges for sustainable infrastructure and high performance buildings. CRD and HLE are part of our CIG segment, and KZN and IRM are part of our GSG segment. The total fair value of the purchase price for these acquisitions was $151.7 million. This amount was comprised of $101.4 million in initial cash payments made to the sellers and $50.3 million for the estimated fair value of contingent earn-out obligations, with a maximum of $74.0 million, based upon the achievement of specified operating income targets in each of the three to four years following the acquisitions.
20
In fiscal 2020, we acquired Segue Technologies, Inc. ("SEG"), a leading information technology management consulting firm based in Arlington, Virginia, and BlueWater Federal Solutions, Inc. ("BWF"), a leading information technology management consulting firm based in Chantilly, Virginia. Both of these acquisitions are part of our GSG segment. The total fair value of the purchase price for these two acquisitions was $88.6 million. This amount was comprised of $71.4 million in initial cash payments made to the sellers, $0.7 million of payables related to estimated post-closing adjustments for net assets acquired and $16.5 million for the estimated fair value of contingent earn-out obligations, with a maximum of $28.0 million, based upon the achievement of specified operating income targets in each of the three years following the acquisitions.
Goodwill additions resulting from fiscal 2022 business combinations are primarily attributable to the significant technical expertise residing in embedded workforces that are sought out by clients, long-term management experience, the industry reputations and the synergies expected to arise after the acquisitions in the areas of data management, digitization, modeling, water and natural resources. The fiscal 2021 goodwill additions represent the significant technical expertise residing in embedded workforces that are sought out by clients and the long-standing reputation of HLE. The fiscal 2020 goodwill additions represent the value of a workforce with distinct expertise in the high-end information technology field, in the areas of data analytics, modeling and simulation, cloud and agile software development. In addition, these acquired capabilities, when combined with our existing global consulting and engineering business, result in opportunities that allow us to provide services under contracts that could not have been pursued individually by either us or the acquired companies. The results of these acquisitions were included in our consolidated financial statements from their respective closing dates. These acquisitions were not considered material, individually or in the aggregate, to our consolidated financial statements. As a result, no pro forma information has been provided.
Backlog and client relations intangible assets include the fair value of existing contracts and the underlying customer relationships with lives ranging from one to ten years, and trade names intangible assets have lives ranging from three to five years.
Most of our acquisition agreements include contingent earn-out agreements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based on our valuations of the acquired companies and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved. The fair values of any earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in “Current contingent earn-out liabilities” and “Long-term contingent earn-out liabilities” on the consolidated balance sheets. We consider several factors when determining that contingent earn-out liabilities are part of the purchase price, including the following: (1) the valuation of our acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former owners of acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of our other key employees. The contingent earn-out payments are not affected by employment termination.
We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. We use a probability-weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period (generally three or five years) and the probability outcome percentages we assign to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability, with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the contingent earn-out liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows. Any amount paid in excess of the contingent earn-out liability on the acquisition date is reflected as cash used in operating activities in our consolidated statements of cash flows.
We review and re-assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income. In each quarter during fiscal 2022, we evaluated our estimates for contingent consideration liabilities for the remaining earn-out periods for each individual acquisition, which included a review of their financial results to-date, the status of ongoing projects in their RUPOs and the inventory of prospective new contract awards.
In fiscal 2022, total adjustments to our contingent earn-out liabilities in operating income were immaterial.
21
In fiscal 2021, we recorded adjustments to our contingent earn-out liabilities and reported a net gain in operating income of $3.3 million, substantially all in the fourth quarter. These adjustments resulted from the updated valuations of the contingent consideration liabilities, which reflect updated projections of acquired companies' financial performance during their respective earn-out periods.
In fiscal 2020, we recorded adjustments to our contingent earn-out liabilities and reported related net gains in operating income of $15.0 million, substantially all in the fourth quarter. These gains primarily resulted from updated valuations of the contingent consideration liabilities for Norman, Disney and Young ("NDY"), eGlobalTech ("EGT") and SEG.
The acquisition agreement for NDY included a contingent earn-out agreement based on the achievement of operating income thresholds (in Australian dollars) in each of the first three years beginning on the acquisition date, which was in the second quarter of fiscal 2018. The maximum earn-out obligation over the three-year earn-out period was A$25 million (A$7.4 million in year one, and A$8.8 million each in years two and three). These amounts could be earned primarily on a pro-rata basis for operating income within a predetermined range in each year. NDY was required to meet a minimum operating income threshold in each year to earn any contingent consideration.
The determination of the fair value of the purchase price for NDY on the acquisition date included our estimate of the fair value of the related contingent earn-out obligation. The initial valuation was primarily based on probability-weighted internal estimates of NDY's operating income during each earn-out period. Based on these estimates, we calculated an initial fair value at the acquisition date of A$9.4 million for NDY's contingent earn-out liability in the second quarter of fiscal 2018. In determining that NDY would earn 38% of the maximum potential earn-out, we considered several factors including NDY's recent historical revenue and operating income levels and growth rates. We also considered the recent trend in NDY's backlog level.
NDY's actual financial performance in the first two earn-out periods exceeded our original estimates at the acquisition date. As a result, we increased the related contingent consideration liability and recognized losses of $2.1 million (A$3.0 million) and $5.4 million (A$7.9 million) in fiscal 2018 and 2019, respectively. In the fourth quarter of fiscal 2020, we evaluated our estimate of NDY’s contingent consideration liability for the third and final earn-out period. This assessment included a review of NDY’s actual and forecasted results for the third earn-out period, which included an evaluation of the status of ongoing projects in NDY’s backlog, the inventory of prospective new contract awards and the impact of the COVID-19 pandemic on the Australian economy and NDY's operations. As a result of this assessment, we concluded that NDY’s operating income in the third earn-out period would be lower than previously estimated, and we reduced NDY’s contingent earn-out liability to $1.8 million (A$2.6 million), which resulted in a gain of $3.7 million (A$5.2 million).
The acquisition agreement for EGT included a contingent earn-out agreement based on the achievement of operating income thresholds in each of the first three years beginning on the acquisition date, which was in the second quarter of fiscal 2019. The maximum earn-out obligation over the three-year earn-out period was $25 million ($8.5 million in year one, $9.0 million in year two and $7.5 million in year three). In each of the first two earn-out years, EGT was to receive a portion of the contingent consideration if EGT achieved a minimum operating income threshold. The remaining contingent consideration could be earned primarily on a pro-rata basis for operating income within a predetermined range in each year. EGT was required to meet a minimum operating income threshold in each year to earn any of this contingent consideration.
The determination of the fair value of the purchase price for EGT on the acquisition date included our estimate of the fair value of the related contingent earn-out obligation. The initial valuation was primarily based on probability-weighted internal estimates of EGT's operating income during each earn-out period. Based on these estimates, we calculated an initial fair value at the acquisition date of $21.1 million for EGT's contingent earn-out liability in the second quarter of fiscal 2019. In determining that EGT would earn 84% of the maximum potential earn-out, we considered several factors including EGT's recent historical revenue and operating income levels and growth rates. We also considered the recent trend in EGT's backlog level and the prospects for the U.S. federal information technology market.
In the third quarter of fiscal 2020, EGT achieved and was paid the maximum earn-out obligation for the first earn-out period. Subsequently, we evaluated our estimate of EGT’s contingent consideration liability for the second and third earn-out periods. This assessment included a review of EGT’s actual and forecasted results for the second and third earn-out periods, which included an evaluation of the status of ongoing projects in EGT’s backlog and the inventory of prospective new contract awards. As a result of this assessment, we concluded that EGT's operating income in the second and third earn-out period would be lower than previously estimated. Accordingly, in the fourth quarter of fiscal 2020, we reduced EGT’s contingent earn-out liability to $7.5 million, which resulted in a gain of $4.7 million.
The acquisition agreement for SEG included a contingent earn-out agreement based on the achievement of operating income thresholds in each of the first three years beginning on the acquisition date, which was in the second quarter of fiscal 2020. The maximum earn-out obligation over the three-year earn-out period was $20 million ($5.0 million, $7.0 million and $8.0 million for years one, two and three, respectively). SEG was to receive a portion of the contingent consideration if SEG achieved a minimum operating income threshold in each year of the earn-out period. The remaining contingent consideration could be earned primarily on a pro-rata basis for operating income within a predetermined range in each year. SEG was required to meet a minimum operating income threshold in each year to earn any of this contingent consideration.
22
The determination of the fair value of the purchase price for SEG on the acquisition date included our estimate of the fair value of the related contingent earn-out obligation. The initial valuation was primarily based on probability-weighted internal estimates of SEG's operating income during each earn-out period. Based on these estimates, we calculated an initial fair value at the acquisition date of $11.3 million for SEG's contingent earn-out liability in the second quarter of fiscal 2020. In determining that SEG would earn 57% of the maximum potential earn-out, we considered several factors including SEG's recent historical revenue and operating income levels and growth rates. We also considered the recent trend in SEG's backlog level and the prospects for the U.S. federal information technology market.
SEG’s actual financial performance in the first earn-out period on a year to date basis was below our original expectation at the acquisition date. As a result, in the fourth quarter of fiscal 2020, we evaluated our estimate of SEG’s contingent consideration liability for all earn-out periods. This assessment included a review of SEG’s financial results in the first earn-out period, the status of ongoing projects in SEG’s backlog, the inventory of prospective new contract awards and future synergies with other Tetra Tech operating units. As a result of this assessment, we concluded that SEG’s operating income in all earn-out periods would be lower than originally anticipated. Accordingly, in the fourth quarter of fiscal 2020, we reduced the SEG contingent earn-out liability to $8.1 million, which resulted in a gain of $3.4 million.
At October 2, 2022, there was a total potential maximum of $120.9 million of outstanding contingent consideration related to acquisitions. Of this amount, $65.6 million was estimated as the fair value and accrued on our consolidated balance sheet.
The following table summarizes the changes in the carrying value of estimated contingent earn-out liabilities:
| Fiscal Year Ended | ||||||||||||
| October 2, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Beginning balance | $ | 59,297 | $ | 32,617 | $ | 52,992 | ||||||
| Acquisition date fair value of contingent earn-out liabilities | 31,341 | 50,235 | 16,581 | |||||||||
| Change in fair value of contingent earn-out liabilities | 2,184 | 992 | 1,162 | |||||||||
| Re-measurement of contingent earn-out liabilities | 329 | (3,273 | ) | (14,971 | ) | |||||||
| Foreign exchange impact | (7,152 | ) | (596 | ) | (247 | ) | ||||||
| Earn-out payments: | ||||||||||||
| Reported as cash used in operating activities | (310 | ) | (427 | ) | — | |||||||
| Reported as cash used in financing activities | (20,123 | ) | (20,251 | ) | (22,900 | ) | ||||||
| Ending balance | $ | 65,566 | $ | 59,297 | $ | 32,617 | ||||||
| 6. | Goodwill and Intangible Assets |
The following table summarizes the changes in the carrying value of goodwill:
| GSG | CIG | Total | ||||||||||
(in thousands) | ||||||||||||
| Balance at September 27, 2020 | $ | 516,315 | $ | 477,183 | $ | 993,498 | ||||||
| Acquisitions | 15,112 | 75,479 | 90,591 | |||||||||
| Translation and other | 7,006 | 17,483 | 24,489 | |||||||||
| Balance at October 3, 2021 | 538,433 | 570,145 | 1,108,578 | |||||||||
| Goodwill reallocation | (51,497 | ) | 51,497 | — | ||||||||
| Acquisitions | 42,365 | 26,318 | 68,683 | |||||||||
| Translation and other | (10,199 | ) | (56,650 | ) | (66,849 | ) | ||||||
| Balance at October 2, 2022 | $ | 519,102 | $ | 591,310 | $ | 1,110,412 | ||||||
23
Our goodwill balances reflect the goodwill reallocation related to the creation of our new HPB division on the first day of fiscal 2022, which included a transfer of some related operations in our GSG reportable segment to our CIG reportable segment. The foreign currency translation adjustments resulted from our foreign subsidiaries with functional currencies that are different than our reporting currency. The goodwill additions relate to our fiscal 2022 acquisitions. The purchase price allocations for our fiscal 2022 acquisitions are preliminary and subject to adjustment based upon the final determinations of the net assets acquired and information to perform the final valuations.
We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. Our last review at July 4, 2022 (i.e. the first day of our fourth quarter in fiscal 2022) indicated that we had no impairment of goodwill, and all of our reporting units had estimated fair values that were in excess of their carrying values, including goodwill. As of July 4, 2022, and after the reallocation of goodwill on the first day of fiscal 2022, we had no reporting units that had estimated fair values that exceeded their carrying values by less than 165%.
We also regularly evaluate whether events and circumstances have occurred that may indicate a potential change in the recoverability of goodwill. We perform interim goodwill impairment reviews between our annual reviews if certain events and circumstances have occurred, such as a deterioration in general economic conditions; an increase in the 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. Although we believe that our estimates of fair value for these reporting units are reasonable, if financial performance for these reporting units falls significantly below our expectations or market prices for similar business decline, the goodwill for these reporting units could become impaired.
The gross amounts of goodwill for GSG were $536.8 million and $556.1 million at fiscal 2022 and 2021 year-ends, respectively, excluding accumulated impairment of $17.7 million for each period. The gross amounts of goodwill for CIG were $712.8 million and $691.6 million at fiscal 2022 and 2021 year-ends, respectively, excluding accumulated impairment of $121.5 million for each period.
The following table presents the gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives included in "Intangible assets, net" on the consolidated balance sheets:
| Fiscal Year Ended | ||||||||||||||||||||||||||||
| October 2, 2022 | October 3, 2021 | |||||||||||||||||||||||||||
| Weighted- Average Remaining Life (in years) |
Gross Amount |
Accumulated Amortization |
Net Amount |
Gross Amount |
Accumulated Amortization |
Net Amount |
||||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||
| Client relations | 5.5 | $ | 41,676 | $ | (21,092 | ) | $ | 20,584 | $ | 69,455 | $ | (43,984 | ) | $ | 25,471 | |||||||||||||
| Backlog | 0.6 | 33,286 | (29,990 | ) | 3,296 | 34,577 | (30,670 | ) | 3,907 | |||||||||||||||||||
| Technology and trade names | 3.7 | 12,711 | (7,428 | ) | 5,283 | 14,939 | (6,327 | ) | 8,612 | |||||||||||||||||||
| Total | $ | 87,673 | $ | (58,510 | ) | $ | 29,163 | $ | 118,971 | $ | (80,981 | ) | $ | 37,990 | ||||||||||||||
Amortization expense for the identifiable intangible assets for fiscal 2022, 2021 and 2020 was $13.2 million, $11.5 million and $11.6 million, respectively. Foreign currency translation adjustments reduced net identifiable intangible assets by $5.3 million in fiscal 2022 and were immaterial for fiscal 2021.
Estimated amortization expense for the succeeding five fiscal years and beyond is as follows:
| Amount | ||||
(in thousands) | ||||
| 2023 | $ | 9,788 | ||
| 2024 | 5,244 | |||
| 2025 | 4,411 | |||
| 2026 | 3,590 | |||
| 2027 | 2,168 | |||
| Beyond | 3,962 | |||
| Total | $ | 29,163 | ||
24
| 7. | Property and Equipment |
Property and equipment consisted of the following:
| Fiscal Year Ended | ||||||||
| October 2, 2022 | October 3, 2021 | |||||||
| (in thousands) | ||||||||
| Equipment, furniture and fixtures | $ | 96,710 | $ | 94,780 | ||||
| Leasehold improvements | 32,428 | 36,462 | ||||||
| Total property and equipment | 129,138 | 131,242 | ||||||
| Accumulated depreciation | (96,822 | ) | (93,509 | ) | ||||
| Property and equipment, net | $ | 32,316 | $ | 37,733 | ||||
The depreciation expense related to property and equipment was $13.9 million, $12.3 million and $13.0 million for fiscal 2022, 2021 and 2020, respectively.
| 8. | Income Taxes |
Income before income taxes, by geographic area, was as follows:
| Fiscal Year Ended | ||||||||||||
| October 2, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Income before income taxes: | ||||||||||||
| United States | $ | 262,428 | $ | 211,222 | $ | 209,443 | ||||||
| Foreign | 86,338 | 55,648 | 18,548 | |||||||||
| Total income before income taxes | $ | 348,766 | $ | 266,870 | $ | 227,991 | ||||||
Income tax expense consisted of the following:
| Fiscal Year Ended | ||||||||||||
| October 2, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Current: | ||||||||||||
| Federal | $ | 47,447 | $ | 41,056 | $ | 24,102 | ||||||
| State | 9,613 | 9,893 | 6,872 | |||||||||
| Foreign | 26,332 | 18,887 | 20,398 | |||||||||
| Total current income tax expense | 83,392 | 69,836 | 51,372 | |||||||||
| Deferred: | ||||||||||||
| Federal | (424 | ) | (6,034 | ) | 2,187 | |||||||
| State | (382 | ) | (2,060 | ) | 870 | |||||||
| Foreign | 3,016 | (27,703 | ) | (328 | ) | |||||||
| Total deferred income tax expense (benefit) | 2,210 | (35,797 | ) | 2,729 | ||||||||
| Total income tax expense | $ | 85,602 | $ | 34,039 | $ | 54,101 | ||||||
25
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, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| Tax at federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
| State taxes, net of federal benefit | 2.1 | 2.3 | 2.7 | |||||||||
| Research and Development ("R&D") credits | (1.0 | ) | (2.6 | ) | (2.2 | ) | ||||||
| Tax differential on foreign earnings | 1.0 | 0.9 | 0.7 | |||||||||
| Non-taxable foreign interest income | — | (1.0 | ) | (1.1 | ) | |||||||
| Goodwill | — | — | 1.5 | |||||||||
| Stock compensation | (2.0 | ) | (3.3 | ) | (2.2 | ) | ||||||
| Valuation allowance | 0.2 | (9.3 | ) | 1.6 | ||||||||
| Change in uncertain tax positions | (1.1 | ) | 1.7 | 0.4 | ||||||||
| Return to provision | 1.4 | (3.7 | ) | 0.8 | ||||||||
| Disallowed officer compensation | 1.9 | 2.0 | 0.2 | |||||||||
| Cash repatriation | 0.1 | 2.1 | — | |||||||||
| Unremitted earnings | (0.2 | ) | 1.0 | — | ||||||||
| Deferred tax adjustments | 0.1 | 0.8 | (1.3 | ) | ||||||||
| Other | 1.0 | 0.9 | 1.6 | |||||||||
| Total income tax expense | 24.5 | % | 12.8 | % | 23.7 | % | ||||||
The effective tax rates for fiscal 2022, 2021 and 2020 were 24.5%, 12.8% and 23.7%, respectively. The fiscal 2021 effective tax rate reflects a non-recurring net tax benefit of $21.6 million, consisting of a valuation allowance in the United Kingdom that was released due to sufficient positive evidence being obtained in fiscal 2021. The valuation allowance was primarily related to net operating loss carry-forwards. We evaluated the positive evidence against any negative evidence and determined that it was more likely than not that the deferred tax assets would be realized. The primary factors used to assess the likelihood of realization were the past performance of the related entity and our forecast of future taxable income. In fiscal 2021, we repatriated approximately $80 million from Canada and recognized a related tax expense of $5.6 million. At that time, we also determined that our remaining undistributed earnings in Canada of approximately $20.1 million were no longer being indefinitely reinvested and recorded an additional deferred tax liability/expense of $3.1 million. The goodwill impairment charge in fiscal 2020 did not have related tax benefits. Also, income tax expense was reduced by $10.3 million, $12.9 million and $8.3 million of excess tax benefits on share-based payments in fiscal 2022, 2021 and 2020, respectively.
Excluding the impact of the valuation allowance release, the non-deductible goodwill impairment charge, the Canadian repatriation and the excess tax benefits on share-based payments our effective tax rates in fiscal 2022, 2021 and 2020 were 27.5%, 25.7% and 25.6% respectively.
In fiscal 2022, the Inflation Reduction Act and the CHIPS and Science Act were signed into law. These Acts both contain new U.S. income tax provisions; however, we do not expect them to have a material impact on our consolidated financial statements.
We are currently under examination by the Internal Revenue Service for fiscal years 2018 and 2019, and the Canada Revenue Agency for fiscal years 2011 through 2016. We are also subject to various other state audits.
26
Temporary differences comprising the net deferred income tax asset shown on the accompanying consolidated balance sheets were as follows:
| Fiscal Year Ended | ||||||||
| October 2, 2022 | October 3, 2021 | |||||||
| (in thousands) | ||||||||
| Deferred Tax Assets: | ||||||||
| State taxes | $ | 1,238 | $ | 1,342 | ||||
| Reserves and contingent liabilities | 5,023 | 6,662 | ||||||
| Accounts receivable including the allowance for doubtful accounts | 4,986 | 5,917 | ||||||
| Accrued liabilities | 35,973 | 41,657 | ||||||
| Lease liabilities, operating leases | 49,618 | 60,181 | ||||||
| Stock-based compensation | 2,925 | 3,560 | ||||||
| Unbilled revenue | 4,885 | — | ||||||
| Loss carry-forwards | 41,648 | 54,825 | ||||||
| Valuation allowance | (12,286 | ) | (13,040 | ) | ||||
| Total deferred tax assets | 134,010 | 161,104 | ||||||
| Deferred Tax Liabilities: | ||||||||
| Unbilled revenue | — | (5,595 | ) | |||||
| Prepaid expense | (6,065 | ) | (8,136 | ) | ||||
| Right-of-use assets, operating leases | (49,618 | ) | (60,181 | ) | ||||
| Intangibles | (42,863 | ) | (40,121 | ) | ||||
| Undistributed earnings | (2,200 | ) | (3,136 | ) | ||||
| Property and equipment | (621 | ) | (85 | ) | ||||
| Total deferred tax liabilities | (101,367 | ) | (117,254 | ) | ||||
| Net deferred tax assets | $ | 32,643 | $ | 43,850 | ||||
Prospectively, from the date of the aforementioned repatriation, our earnings in Canada are not considered indefinitely reinvested and any potential tax liability that would be incurred upon repatriation is recognized currently with the related income. At October 2, 2022, undistributed earnings of our other foreign subsidiaries, primarily in Australia and the United Kingdom of approximately $81.7 million are expected to be indefinitely reinvested in these foreign countries. Accordingly, no provision for foreign withholding taxes has been made. Assuming the indefinitely reinvested foreign earnings were repatriated under the laws and rates applicable at October 2, 2022, the incremental taxes applicable to those earnings would not be material.
At October 2, 2022, we had available unused state net operating loss ("NOL") carry forwards of $43.7 million that expire at various dates from 2026 to 2037; and available foreign NOL carry forwards of $119.1 million, of which $17.9 million expire at various dates from 2023 to 2042, and $101.2 million have no expiration date. In addition, we had foreign capital loss carryforwards of $18.4 million and foreign research and development credits of $3.9 million that do not have expiration dates. We have performed an assessment of positive and negative evidence regarding the realization of the deferred tax assets. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, availability of carrybacks, cumulative losses in recent years, estimates of projected future taxable income and tax planning strategies. 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 except for the deferred tax assets related to the loss carry-forwards for which a valuation allowance of $12.3 million has been provided.
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At October 2, 2022, we had $8.9 million of unrecognized tax benefits, all of which, if recognized, would affect our effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of our unrecognized tax positions may significantly decrease in the next 12 months. These changes would be the result of ongoing examinations. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| Fiscal Year Ended | ||||||||||||
| October 2, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Beginning balance | $ | 12,899 | $ | 9,228 | $ | 9,169 | ||||||
| Additions for current fiscal year tax positions | — | 2,171 | 700 | |||||||||
| Additions for prior fiscal year tax positions | — | 1,500 | — | |||||||||
| Reductions for prior fiscal year tax positions | (3,014 | ) | — | (641 | ) | |||||||
| Settlements | (977 | ) | — | — | ||||||||
| Ending balance | $ | 8,908 | $ | 12,899 | $ | 9,228 | ||||||
We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. During fiscal years 2022, 2021 and 2020, we accrued additional interest and penalties of $0.5 million, $0.8 million and $0.8 million, respectively, and recorded reductions in accrued interest and penalties of $0.4 million, $0 and $0, respectively, as a result of audit settlements and other prior-year adjustments. The amount of interest and penalties accrued at October 2, 2022, October 3, 2021 and September 27, 2020 was $5.3 million, $5.2 million and $4.4 million, respectively.
| 9. | Long-Term Debt |
Long-term debt consisted of the following:
| Fiscal Year Ended | ||||||||
| October 2, 2022 | October 3, 2021 | |||||||
| (in thousands) | ||||||||
| Credit facilities | $ | 258,754 | $ | 212,500 | ||||
| Less: Current portion of long-term debt | (12,504 | ) | (12,500 | ) | ||||
| Long-term debt | $ | 246,250 | $ | 200,000 | ||||
On February 18, 2022, we entered into Amendment No. 2 to our Second Amended and Restated Credit Agreement (“Amended Credit Agreement”) with a total borrowing capacity of $1.05 billion that will mature in February 2027. The Amended Credit Agreement is a $750 million senior secured, five-year facility that provides for a $250 million term loan facility (the “Amended Term Loan Facility”) and a $500 million revolving credit facility (the “Amended Revolving Credit Facility”). In addition, the Amended Credit Agreement includes a $300 million accordion feature that allows us to increase the Amended Credit Agreement to $1.05 billion subject to lender approval. The Amended Credit Agreement provides for, among other things, (i) refinance indebtedness under our Credit Agreement dated as of July 30, 2018; (ii) finance open market repurchases of common stock, acquisitions and cash dividends and distributions; and (iii) utilize the proceeds for working capital, capital expenditures and other general corporate purposes. The Amended Credit Agreement provides for a reduction in the interest grid for meeting certain sustainability targets related to the (i) reduction of greenhouse gas emissions through the Company’s projects and operational sustainability initiatives and (ii) improvement of peoples’ lives as a result of the Company’s projects that provide environmental, social and governance benefits. The Amended Revolving Credit Facility includes a $100 million sublimit for the issuance of standby letters of credit, a $20 million sublimit for swingline loans and a $300 million sublimit for multicurrency borrowings and letters of credit.
The entire Amended Term Loan Facility was drawn on February 18, 2022. The Amended Term Loan Facility is subject to quarterly amortization of principal at 5% annually commencing June 30, 2022. We may borrow on the Amended Revolving Credit Facility, at our option, at either (a) a benchmark rate plus a margin that ranges from 1.000% to 1.875% per annum, or (b) a base rate for loans in U.S. dollars (the highest of the U.S. federal funds rate plus 0.50% per annum, the bank’s prime rate or the Secured Overnight Financing Rate ("SOFR") rate plus 1.00%, plus a margin that ranges from 0% to 0.875% per annum. In each case, the applicable margin is based on our Consolidated Leverage Ratio, calculated quarterly. The Amended Term Loan Facility is subject to the same interest rate provisions. The Amended Credit Agreement expires on February 18, 2027, or earlier at our discretion upon payment in full of loans and other obligations.
At October 2, 2022, we had $258.8 million in outstanding borrowings under the Amended Credit Agreement, which was comprised of $243.8 million under the Amended Term Loan Facility and $15.0 million under the Amended Revolving Credit Facility. The year-to-date weighted-average interest rate of the outstanding borrowings during fiscal 2022 was 1.97%. In addition, we had $0.7 million in standby letters of credit under the Amended Credit Agreement. Our year-to-date weighted-average interest rate on borrowings outstanding during fiscal 2021 under the Amended Credit Agreement, including the effects of interest rate swap agreements described in Note 14, “Derivative Financial Instruments” of the "Notes to Consolidated Financial Statements" included in Item 8, was 3.60%. At October 2, 2022, we had $484.3 million of available credit under the Amended Revolving Credit Facility, all of which could be borrowed without a violation of our debt covenants.
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The Amended Credit Agreement contains certain affirmative and restrictive covenants, and customary events of default. The financial covenants provide for a maximum Consolidated Leverage Ratio of 3.25 to 1.00 (total funded debt/EBITDA, as defined in the Amended Credit Agreement) and a minimum Consolidated Interest Coverage Ratio of 3.00 to 1.00 (EBITDA/Consolidated Interest Charges, as defined in the Amended Credit Agreement). Our obligations under the Amended Credit Agreement are guaranteed by certain of our domestic subsidiaries and are secured by first priority liens on (i) the equity interests of certain of our subsidiaries, including those subsidiaries that are guarantors or borrowers under the Amended Credit Agreement, and (ii) the accounts receivable, general intangibles and intercompany loans, and those of our subsidiaries that are guarantors or borrowers. At October 2, 2022, we were in compliance with these covenants with a consolidated leverage ratio of 0.76x and a consolidated interest coverage ratio of 29.52x.
In addition to the Amended Credit Agreement, we maintain other credit facilities, which may be used for short-term cash advances and bank guarantees. At October 2, 2022, there were no outstanding borrowings under these facilities and the aggregate amount of standby letters of credit outstanding was $44.4 million. As of October 2, 2022 we had no bank overdrafts related to our disbursement bank accounts.
The following table presents scheduled maturities of our long-term debt:
| Amount | ||||
| (in thousands) | ||||
| 2023 | 12,504 | |||
| 2024 | 12,500 | |||
| 2025 | 12,500 | |||
| 2026 | 12,500 | |||
| 2027 | 208,750 | |||
| Total | $ | 258,754 | ||
Subsequent Event: On October 26, 2022, we entered into a Third Amended and Restated Credit Agreement that provides for an additional $500 million senior secured term loan facility (the "New Term Loan Facility") increasing our total borrowing capacity to $1.55 billion. We expect to draw the entire amount of the New Term Loan Facility to partially finance the acquisition of RPS. The remaining purchase price is expected to be financed with existing cash on hand and borrowings under the Amended Revolving Credit Facility. The New Term Loan Facility is not subject to any amortization payments of principal and matures on the third anniversary of the RPS acquisition closing date.
| 10. | Leases |
Our operating leases are primarily for corporate and project office spaces. To a much lesser extent, we have operating leases for vehicles and equipment. Our operating leases have remaining lease terms of one month to ten years, some of which may include options to extend the leases for up to five years.
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets and current and long-term operating lease liabilities in the consolidated balance sheets. Our finance leases are primarily for certain IT equipment. The related ROU assets and lease liabilities were immaterial.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, incremental borrowing rates are used based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset at the commencement date also includes any lease payments made to the lessor at or before the commencement date and initial direct costs less lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
29
The components of lease costs are as follows:
| Fiscal Year Ended | ||||||||
| October 2, 2022 | October 3, 2021 | |||||||
| (in thousands) | ||||||||
| Operating lease cost | $ | 86,725 | $ | 91,076 | ||||
| Sublease income | (150 | ) | (106 | ) | ||||
| Total lease cost | $ | 86,575 | $ | 90,970 | ||||
Supplemental cash flow information related to leases is as follows:
| Fiscal Year Ended | ||||||||
| October 2, 2022 | October 3, 2021 | |||||||
| (in thousands) | ||||||||
| Operating cash flows for operating leases | $ | 71,365 | $ | 81,943 | ||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 44,096 | $ | 72,076 | ||||
Supplemental balance sheet and other information related to leases are as follows:
| Fiscal Year Ended | ||||||||
| October 2, 2022 | October 3, 2021 | |||||||
| (in thousands) | ||||||||
| Operating leases: | ||||||||
| Right-of-use assets | $ | 182,319 | $ | 215,422 | ||||
| Lease liabilities: | ||||||||
| Current | $ | 57,865 | $ | 67,452 | ||||
| Long-term | 146,285 | 174,285 | ||||||
| Total operating lease liabilities | $ | 204,150 | $ | 241,737 | ||||
| Weighted-average remaining lease term: | ||||||||
| Operating leases | 5 years | 5 years | ||||||
| Weighted-average discount rate: | ||||||||
| Operating leases | 2.2 | % | 2.2 | % | ||||
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As of October 2, 2022, we do not have any material additional operating leases that have not yet commenced.
A maturity analysis of the future undiscounted cash flows associated with our operating lease liabilities as of October 2, 2022 is as follows:
| Amount | ||||
| (in thousands) | ||||
| 2023 | $ | 61,703 | ||
| 2024 | 47,520 | |||
| 2025 | 35,466 | |||
| 2026 | 23,481 | |||
| 2027 | 16,961 | |||
| Beyond | 31,927 | |||
| Total lease payments | 217,058 | |||
| Less: imputed interest | (12,908 | ) | ||
| Total present value of lease liabilities | $ | 204,150 | ||
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11. Stockholders' Equity and Stock Compensation Plans
At October 2, 2022, we had the following stock-based compensation plans:
| · | 2005 Equity Incentive Plan. Key employees and non-employee directors may be granted equity awards, including stock options, restricted stock and restricted stock units ("RSUs"). Options vest at 25% on each anniversary of the grant date and expire no later than eight years from the grant date. RSUs granted to date vest at 25% on each anniversary of the grant date. |
| · | 2015 Equity Incentive Plan ("2015 EIP"). Key employees and non-employee directors may be granted equity awards, including stock options, performance share units ("PSUs") and RSUs. Shares issued with respect to awards granted under the 2015 EIP other than stock options or stock appreciation rights, which are referred to as "full value awards", are counted against the 2015 EIP's aggregate share limit as three shares for every share or unit actually issued. No awards have been made under the 2015 Equity Incentive Plan since the adoption of the 2018 Equity Incentive Plan on March 8, 2018 described below. |
| · | 2018 Equity Incentive Plan ("2018 EIP"). Key employees and non-employee directors may be granted equity awards, including stock options, PSUs and RSUs. Shares issued with respect to awards granted under the 2018 EIP other than stock options or stock appreciation rights, which are referred to as "full value awards", are counted against the 2018 EIP's aggregate share limit as one share for every share or unit issued. At October 2, 2022, there were 2.2 million shares available for future awards pursuant to the 2018 EIP. |
| · | Employee Stock Purchase Plan ("ESPP"). Purchase rights to purchase common stock are granted to our eligible full and part-time employees, and shares of common stock are issued upon exercise of the purchase rights. An aggregate of 380,784 shares may be issued pursuant to such exercise. The maximum amount that an employee can contribute during a purchase right period is $5,000. The exercise price of a purchase right is the lesser of 100% of the fair market value of a share of common stock on the first day of the purchase right period (the business day preceding January 1) or 85% of the fair market value on the last day of the purchase right period (December 15, or the business day preceding December 15 if December 15 is not a business day). |
The following table presents our stock-based compensation and related income tax benefits:
| Fiscal Year Ended | ||||||||||||
| October 2, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Total stock-based compensation | $ | 26,227 | $ | 23,067 | $ | 19,424 | ||||||
| Income tax benefit related to stock-based compensation | (5,377 | ) | (4,910 | ) | (4,318 | ) | ||||||
| Stock-based compensation, net of tax benefit | $ | 20,850 | $ | 18,157 | $ | 15,106 | ||||||
We recognize the fair value of our stock-based awards as compensation expense on a straight-line basis over the requisite service period in which the award vests. Most of these amounts were included in selling, general and administrative expenses on our consolidated statements of income.
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Stock Options
The following table presents our stock option activity for fiscal year ended October 2, 2022:
| 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, 2021 | 214 | $ | 38.80 | |||||||||||||
| Exercised | (46 | ) | 39.44 | |||||||||||||
| Forfeited | — | — | ||||||||||||||
| Outstanding at October 2, 2022 | 168 | $ | 38.62 | 4.04 | $ | 15,086 | ||||||||||
| Vested or expected to vest at October 2, 2022 | 168 | $ | 38.62 | 4.04 | $ | 15,086 | ||||||||||
| Exercisable on October 2, 2022 | 168 | $ | 38.62 | 4.04 | $ | 15,086 | ||||||||||
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 2022 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, 2022. This amount will change based on the fair market value of our stock.
No stock options were granted in fiscal 2022, 2021 and 2020. The aggregate intrinsic value of options exercised during fiscal 2022, 2021 and 2020 was $5.7 million, $29.4 million and $22.4 million, respectively.
Net cash proceeds from the exercise of stock options were $1.8 million, $11.3 million and $10.3 million for fiscal 2022, 2021 and 2020, 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 for fiscal 2022, 2021 and 2020 was $1.3 million, $6.7 million and $4.9 million, respectively.
RSU and PSU
RSU awards are granted to our key employee and non-employee directors. The fair value of the RSU was determined at the date of grant using the market price of the underlying common stock as of the date of grant. All of the RSUs have time-based vesting over a four-year period, except that RSUs awarded to directors vest after one year. The total compensation cost of the awards is then amortized over their applicable vesting period on a straight-line basis.
PSU awards are granted to our executive officers and non-employee directors. All of the PSUs are performance-based and vest, if at all, after the conclusion of the three-year performance period. The number of PSUs that ultimately vest is based 50% on growth in our EPS and 50% on our relative total shareholder return over the vesting period. For these 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.
33
A summary of the RSU and PSU activity under our stock plans is as follows:
| RSU | PSU | |||||||||||||||
| Number of Shares (in thousands) | Weighted- Average Grant Date Fair Value per Share | Number of Shares (in thousands) | Weighted- Average Grant Date Fair Value per Share | |||||||||||||
| Nonvested balance at September 29, 2019 | 470 | $ | 50.42 | 384 | $ | 53.67 | ||||||||||
| Granted | 168 | 83.92 | 74 | 99.85 | ||||||||||||
| Vested | (178 | ) | 46.87 | (162 | ) | 47.28 | ||||||||||
| Adjustment (1) | — | — | 64 | 48.36 | ||||||||||||
| Forfeited | (16 | ) | 65.43 | (5 | ) | 83.98 | ||||||||||
| Nonvested balance at September 27, 2020 | 444 | 63.93 | 355 | 64.83 | ||||||||||||
| Granted | 118 | 122.02 | 58 | 153.03 | ||||||||||||
| Vested | (167 | ) | 59.64 | (193 | ) | 57.40 | ||||||||||
| Adjustment (1) | — | — | 99 | 57.40 | ||||||||||||
| Forfeited | (14 | ) | 77.74 | (1 | ) | 74.05 | ||||||||||
| Nonvested balance at October 3, 2021 | 381 | 83.30 | 318 | 82.96 | ||||||||||||
| Granted | 78 | 184.61 | 42 | 247.16 | ||||||||||||
| Vested | (147 | ) | 77.47 | (176 | ) | 80.17 | ||||||||||
| Adjustment (1) | — | — | 88 | 80.63 | ||||||||||||
| Forfeited | (13 | ) | 109.01 | — | — | |||||||||||
| Nonvested balance at October 2, 2022 | 299 | $ | 111.40 | 272 | $ | 109.23 | ||||||||||
(1) Fiscal 2020 includes a payout adjustment of 63,643 PSUs due to the actual performance level achieved for PSUs granted in fiscal 2017 that vested during fiscal 2020. Fiscal 2021 includes a payout adjustment of 99,214 PSUs due to the actual performance level achieved for PSUs granted in fiscal 2018 that vested during fiscal 2021. Fiscal 2022 includes a payout adjustment of 88,198 PSUs due to the actual performance level achieved for PSUs granted in fiscal 2019 that vested during fiscal 2022.
During fiscal 2022, 2021 and 2020, we awarded 77,844, 117,934 and 167,525 shares of RSUs, respectively, to our key employees and non-employee directors. The weighted-average grant-date fair value of RSUs granted during fiscal 2022, 2021 and 2020 was $184.61, $122.02 and $83.92, respectively. At October 2, 2022, there were 299,055 RSUs outstanding. RSU forfeitures result from employment terminations prior to vesting. Forfeited shares return to the pool of authorized shares available for award. We use historical data as a basis to estimate the probability of forfeitures related to RSUs and the ESPP Plan.
During fiscal 2022, 2021 and 2020, we awarded 41,734, 57,542 and 74,011 shares of PSUs, respectively, to our executive officers and non-employee directors. The weighted-average grant-date fair value of PSUs granted during fiscal 2022, 2021 and 2020 was $247.16, $153.03 and $99.85, respectively.
The stock-based compensation expense related to RSUs and PSUs for fiscal 2022, 2021 and 2020 was $23.9 million, $20.9 million and $17.7 million, respectively, and was included in total stock-based compensation expense. The actual income tax benefit realized from RSUs and PSUs for fiscal 2022, 2021 and 2020 was $9.1 million, $6.2 million and $3.4 million, respectively. At October 2, 2022, there was $35.9 million of unrecognized stock-based compensation costs related to nonvested RSUs and PSUs that will be substantially recognized by the end of fiscal 2025.
34
ESPP
The following table summarizes shares purchased, weighted-average purchase price, and cash received for shares purchased under the ESPP:
| Fiscal Year Ended | ||||||||||||
| October 2, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| (in thousands, except for purchase price) | ||||||||||||
| Shares purchased | 106 | 124 | 168 | |||||||||
| Weighted-average purchase price per share | $ | 114.17 | $ | 86.16 | $ | 51.77 | ||||||
| Cash received from exercise of purchase rights | $ | 12,129 | $ | 10,705 | $ | 8,715 | ||||||
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, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| Dividend yield | 1.0 | % | 1.0 | % | 1.0 | % | ||||||
| Expected stock price volatility | 32.2 | % | 47.9 | % | 26.5 | % | ||||||
| Risk-free rate of return, annual | 0.4 | % | 0.1 | % | 1.6 | % | ||||||
| Expected life (in years) | 1 | 1 | 1 | |||||||||
For fiscal 2022, 2021 and 2020, 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.
Stock-based compensation expense for fiscal 2022, 2021 and 2020 included $2.3 million, $2.0 million and $1.2 million, respectively, related to the ESPP. The unrecognized stock-based compensation costs for awards granted under the ESPP at fiscal 2022 and 2021 year-ends were $0.6 million and $0.5 million, respectively. At October 2, 2022, ESPP participants had accumulated $11 million to purchase our common stock.
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12. Retirement Plans
We have defined contribution plans in various countries where we have employees. This primarily includes 401(k) plans in the United States. For fiscal 2022, 2021 and 2020, employer contributions to the U.S. plans were $29.3 million, $26.9 million and $25.0 million, respectively.
Additionally, we have established a non-qualified deferred compensation plan for certain key employees and non-employee directors. These eligible employees and non-employee directors may elect to defer the receipt of salary, incentive payments, restricted stock, PSU and RSU awards and non-employee director fees. The plan 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 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. At October 2, 2022 and October 3, 2021, the consolidated balance sheets reflect assets of $36.7 million and $41.4 million, respectively, related to the deferred compensation plan in "Other long-term assets," and liabilities of $36.3 million and $41.1 million, respectively, related to the deferred compensation plan in "Other long-term liabilities." The net gains and losses related to the deferred compensation plan are reported as part of “Selling, general and administrative expenses” in our consolidated statements of income. These related net gains and losses were immaterial for fiscal 2022, 2021 and 2020.
In connection with the acquisition of HLE in fiscal 2021, we assumed a defined benefit pension plan (the “Plan”), which HLE operates for all qualifying employees. The assets of the Plan are held in a separate trustee administered fund. The Plan was closed to new entrants in August 2003, except for current employees who had not attained the age of 24 at that date. The Plan was closed to future accrual on December 31, 2009. Under the agreed schedule of contributions, HLE will make no further contributions, and is to pay the expenses of administering the plan.
The change in the defined benefit obligation, the change in fair value of plan assets and the amounts recognized in the Consolidated Statement of Income, the Consolidated Statement of Comprehensive Income and the Consolidated Statements of Shareholders’ Equity for fiscal 2022 and fiscal 2021 were immaterial.
The Plan's funded status was as follows:
| Fiscal Year Ended | ||||||||
| October 2, 2022 | October 3, 2021 | |||||||
| (in thousands) | ||||||||
| Fair value of plan assets | $ | 36,250 | $ | 65,836 | ||||
| Benefit obligation | (33,006 | ) | (64,830 | ) | ||||
| Net surplus | $ | 3,244 | $ | 1,006 | ||||
The net surplus is reflected in other long-term assets on our consolidated balance sheets at October 2, 2022 and October 3, 2021. As the plan is closed to new participants and to future benefit accrual, the reduction in the fair value of plan assets and the benefit obligation were primarily due to actual losses on plan assets and an increased discount rate, respectively. Benefits paid during fiscal 2022 were $1.0 million.
The fair values of the plan assets are substantially categorized within Level 2 of the fair value hierarchy. The fair values of the plan assets by major asset categories were as follows:
| Fiscal Year Ended | ||||||||
| October 2, 2022 | October 3, 2021 | |||||||
| (in thousands) | ||||||||
| Equities | $ | 8,390 | $ | 13,646 | ||||
| Mutual funds | 20,886 | 33,826 | ||||||
| Liability driven investment funds | 6,484 | 17,653 | ||||||
| Cash/other | 490 | 711 | ||||||
| Fair value of plan assets | $ | 36,250 | $ | 65,836 | ||||
We seek a competitive rate of return relative to an appropriate level of risk depending on the funded status and obligations of each plan and typically employ both active and passive investment management strategies. The risk in our practices include diversification across asset classes and investment styles and periodic rebalancing toward asset allocation targets. The target asset allocation selected for each plan reflects a risk/return profile that we believe is appropriate relative to each plan’s liability structure and return goals.
36
Principal assumptions used for the benefit obligation in the valuation are as follows:
| Fiscal Year Ended | ||||||||
| October 2, 2022 | October 3, 2021 | |||||||
| Discount rate | 4.75% | 2.00% | ||||||
| Rate of inflation | 2.95% to 3.55% | 2.85% to 3.50% | ||||||
13. 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, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| (in thousands, except per share data) | ||||||||||||
| Net income attributable to Tetra Tech | $ | 263,125 | $ | 232,810 | $ | 173,859 | ||||||
| Weighted-average common shares outstanding – basic | 53,620 | 54,078 | 54,235 | |||||||||
| Effect of diluted stock options and unvested restricted stock | 543 | 597 | 787 | |||||||||
| Weighted-average common stock outstanding – diluted | 54,163 | 54,675 | 55,022 | |||||||||
| Earnings per share attributable to Tetra Tech: | ||||||||||||
| Basic | $ | 4.91 | $ | 4.31 | $ | 3.21 | ||||||
| Diluted | $ | 4.86 | $ | 4.26 | $ | 3.16 | ||||||
For fiscal 2022, 2021 and 2020, no options were excluded from the calculation of dilutive potential common shares.
14. Derivative Financial Instruments
We use certain interest rate derivative contracts to hedge interest rate exposures on our variable rate debt. Also, we may enter in foreign currency derivative contracts with financial institutions to reduce the risk that cash flows and earnings could adversely be affected by foreign currency exchange rate fluctuations. Our hedging program is not designated for trading or speculative purposes.
We recognize derivative instruments as either assets or liabilities on the accompanying consolidated balance sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives that have been designated as cash flow hedges in our consolidated balance sheets as accumulated other comprehensive income, and in our consolidated statements of income for those derivatives designated as fair value hedges. Our derivative contracts are categorized within Level 2 of the fair value hierarchy.
In the anticipation of the planned acquisition of RPS, we entered into a forward contract during the fourth quarter of fiscal 2022 to acquire GBP 714.0 million at a rate of 1.0852 for a total of USD 774.8 million. The contract matures on December 30, 2022. Although an effective economic hedge of our foreign exchange risk related to this transaction, the forward contract did not qualify for hedge accounting. As a result, the forward contract is marked-to-market with changes in fair value recognized in earnings each period. The intrinsic value of the forward contract was immaterial at inception as the GBP/USD spot and forward exchange rates were essentially the same. The fair value of the forward contract at October 2, 2022 was $19.9 million, which resulted in an unrealized gain of the same amount in the fourth quarter fiscal 2022, which is reflected in “Other income" on the consolidated income statement for fiscal 2022. The related $19.9 million asset is reported in "Prepaid expenses and other current assets" on the consolidated balance sheet at October 2, 2022.
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In fiscal 2018, we entered into five interest rate swap agreements that we designated as cash flow hedges to fix the interest rates on the borrowings under our term loan facility. As of October 2, 2022, the notional principal of our outstanding interest swap agreements was $200.0 million ($40.0 million each.) The interest rate swaps have a fixed interest rate of 2.79% and expire in July 2023 for all five agreements. At October 2, 2022 and October 3, 2021, the fair value of the effective portion of our interest rate swap agreements designated as cash flow hedges before tax effect was an unrealized gain of $2.4 million and an unrealized loss of $9.4 million, which were reported in "Other long-term assets" and "Other current liabilities" on our consolidated balance sheets, respectively. Additionally, the related gain of $11.8 million, a gain of $6.1 million and a loss of $4.6 million for fiscal year ended 2022, 2021 and 2020, respectively, were recognized and reported on our consolidated statements of comprehensive income. We expect to reclassify a credit of $3.1 million from accumulated other comprehensive loss to interest expense within the next 12 months. There were no other derivative instruments that were not designated as hedging instruments for fiscal 2022, 2021 and 2020.
15. Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
The accumulated balances and reporting period activities for fiscal 2022, 2021 and 2020 related to reclassifications out of accumulated other comprehensive income are summarized as follows:
| Foreign Currency Translation Adjustments | Gain (Loss) on Derivative Instruments | Accumulated Other Comprehensive Income (Loss) | ||||||||||
| (in thousands) | ||||||||||||
| Balances at September 29, 2019 | $ | (149,711 | ) | $ | (10,873 | ) | $ | (160,584 | ) | |||
| Other comprehensive income (loss) before reclassifications | 3,436 | (599 | ) | 2,837 | ||||||||
| Amounts reclassified from accumulated other comprehensive income | ||||||||||||
| Interest rate contracts, net of tax (1) | — | (4,039 | ) | (4,039 | ) | |||||||
| Net current-period other comprehensive income (loss) | 3,436 | (4,638 | ) | (1,202 | ) | |||||||
| Balances at September 27, 2020 | $ | (146,275 | ) | $ | (15,511 | ) | $ | (161,786 | ) | |||
| Other comprehensive income before reclassifications | 30,641 | 12,175 | 42,816 | |||||||||
| Amounts reclassified from accumulated other comprehensive income | ||||||||||||
| Interest rate contracts, net of tax (1) | — | (6,058 | ) | (6,058 | ) | |||||||
| Net current-period other comprehensive income | 30,641 | 6,117 | 36,758 | |||||||||
| Balances at October 3, 2021 | $ | (115,634 | ) | $ | (9,394 | ) | $ | (125,028 | ) | |||
| Other comprehensive income before reclassifications | (94,922 | ) | 15,937 | (78,985 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive income | ||||||||||||
| Interest rate contracts, net of tax (1) | — | (4,131 | ) | (4,131 | ) | |||||||
| Net current-period other comprehensive income | (94,922 | ) | 11,806 | (83,116 | ) | |||||||
| Balances at October 2, 2022 | $ | (210,556 | ) | $ | 2,412 | $ | (208,144 | ) | ||||
(1) This accumulated other comprehensive component is reclassified to "Interest expense" in our consolidated statements of income. See Note 14, "Derivative Financial Instruments", for more information.
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16. Fair Value Measurements
Derivative Instruments. Our derivative instruments are categorized within Level 2 of the fair value hierarchy. For additional information about our derivative financial instruments (see Note 2, "Basis of Presentation and Preparation" and Note 14, "Derivative Financial Instruments").
Contingent Consideration. We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. (see Note 2, "Basis of Presentation and Preparation" and Note 5, "Acquisitions" for further information).
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 (Level 2 measurement). The carrying value of our long-term debt approximated fair value at October 2, 2022 and October 3, 2021. At October 2, 2022, we had borrowings of $258.8 million outstanding under our Amended Credit Agreement, which were used to fund our business acquisitions, working capital needs, stock repurchases, dividends, capital expenditures and contingent earn-outs.
Defined Benefit Pension Plan. The fair values of the plan assets are primarily categorized within Level 2 of the fair value hierarchy. For additional information about our defined benefit pension plan (see Note 12, "Retirement Plans").
17. Commitments and Contingencies
We are subject to certain claims and lawsuits typically filed against the consulting and engineering 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.
On July 15, 2019, following an initial January 14, 2019 filing, the Civil Division of the United States Attorney's Office filed an amended complaint in intervention in three qui tam actions filed against our subsidiary, Tetra Tech EC, Inc. ("TtEC"), in the U.S. District Court for the Northern District of California. The complaint alleges False Claims Act violations and breach of contract related to TtEC's contracts to perform environmental remediation services at the former Hunters Point Naval Shipyard in San Francisco, California. TtEC disputes the claims and will defend this matter vigorously. We are currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.
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18. Reportable Segments
We manage our operations under two reportable segments. Our GSG reportable segment primarily includes activities with U.S. government clients (federal, state and local) and all activities with development agencies worldwide. Our CIG reportable segment primarily includes activities with U.S. commercial clients and international clients other than development agencies. Additionally, we continue to report the results of the wind-down of our non-core construction activities in the RCM reportable segment. There has been no remaining backlog for RCM since fiscal 2018 as the projects were complete.
Our reportable segments are described as follows:
GSG: GSG provides high-end consulting and engineering services primarily to U.S. government clients (federal, state and local) and development agencies worldwide. GSG supports U.S. government civilian and defense agencies with services in water, environment, sustainable infrastructure, information technology and disaster management. GSG also provides engineering design services for U.S. municipal and commercial clients, especially in water infrastructure, solid waste and high-end sustainable infrastructure designs. GSG also leads our support for development agencies worldwide, especially in the United States, the United Kingdom and Australia.
CIG: CIG primarily provides high-end consulting and engineering services to U.S. commercial clients, and international clients that include both commercial and government sectors. CIG supports commercial clients across the Fortune 500, renewable energy, industrial, high performance buildings and aerospace markets. CIG also provides sustainable infrastructure and related environmental, engineering and project management services to commercial and local government clients across Canada, in Asia Pacific (primarily Australia and New Zealand), the United Kingdom, as well as Brazil and Chile.
RCM: We continued to report the results of the wind-down of our non-core construction activities in the RCM reportable segment in fiscal 2022. There has been no remaining backlog for RCM since fiscal 2018 as the projects were complete. In May 2022, we received a cash settlement for the last $11 million RCM claim outstanding. This settlement resulted in an immaterial gain in the third quarter of fiscal 2022. There were no significant operating activities in RCM for fiscal 2022, 2021 and 2020.
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 revenues and transfers as if they 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 present summarized financial information of our reportable segments:
Reportable Segments
| Fiscal Year Ended | ||||||||||||
| October 2, 2022 | October 3, 2021 | September 27, 2020 | ||||||||||
| (in thousands) | ||||||||||||
| Revenue | ||||||||||||
| GSG | $ | 1,820,868 | $ | 1,772,905 | $ | 1,578,332 | ||||||
| CIG | 1,738,436 | 1,500,074 | 1,471,097 | |||||||||
| RCM | — | 613 | 198 | |||||||||
| Elimination of inter-segment revenue | (55,256 | ) | (60,079 | ) | (54,736 | ) | ||||||
| Total revenue | $ | 3,504,048 | $ | 3,213,513 | $ | 2,994,891 | ||||||
| Income from operations | ||||||||||||
| GSG | $ | 198,448 | $ | 174,755 | $ | 146,273 | ||||||
| CIG | 194,142 | 152,262 | 136,418 | |||||||||
| Corporate (1) | (52,144 | ) | (48,316 | ) | (41,600 | ) | ||||||
| Total income from operations | $ | 340,446 | $ | 278,701 | $ | 241,091 | ||||||
(1) Includes goodwill and intangible assets impairment charges, amortization of intangibles, other costs and other income not allocable to segments. The intangible asset amortization expense for fiscal 2022, 2021 and 2020 was $13.2 million, $11.5 million and $11.6 million, respectively. Additionally, Corporate results included income (loss) for fair value adjustments to contingent consideration liabilities of $(0.3) million, $3.3 million and $15.0 million for fiscal 2022, 2021 and 2020, respectively. Corporate results in fiscal 2020 also included $15.8 million goodwill impairment charges. See Note 6 - "Goodwill and Intangible Assets" for more information.
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| Balance at | ||||||||
| October 2, 2022 | October 3, 2021 | |||||||
| (in thousands) | ||||||||
| Total Assets | ||||||||
| GSG | $ | 558,764 | $ | 545,533 | ||||
| CIG | 688,640 | 698,916 | ||||||
| RCM | 2 | 11,360 | ||||||
| Corporate (1) | 1,375,370 | 1,320,753 | ||||||
| Total assets | $ | 2,622,776 | $ | 2,576,562 | ||||
(1) Corporate assets consist of intercompany eliminations and assets not allocated to our reportable segments including goodwill, intangible assets, deferred income taxes and certain other assets.
Geographic Information
| Fiscal Year Ended | ||||||||||||
| Revenue: | October 2, 2022 | October 3, 2021 | September 27, 2020 | |||||||||
| (in thousands) | ||||||||||||
| United States | $ | 2,416,586 | $ | 2,256,086 | $ | 2,107,459 | ||||||
| Foreign countries (1) | 1,087,462 | 957,427 | 887,432 | |||||||||
| Total | $ | 3,504,048 | $ | 3,213,513 | $ | 2,994,891 | ||||||
| Balance at | ||||||||
| Long-lived assets (2): | October 2, 2022 | October 3, 2021 | ||||||
| (in thousands) | ||||||||
| United States | $ | 199,875 | $ | 215,689 | ||||
| Foreign countries (1) | 77,305 | 87,771 | ||||||
| Total | $ | 277,180 | $ | 303,460 | ||||
(1) Includes revenue and long-lived assets from our foreign operations, primarily in Canada, Australia and the United Kingdom, and revenue generated from non-U.S. clients.
(2) Excludes goodwill, intangible assets and deferred income taxes.
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19. Related Party Transactions
We often provide services to unconsolidated joint ventures. Our revenue related to services we provided to unconsolidated joint ventures for fiscal 2022, 2021 and 2020 was $96.0 million, $95.5 million and $88.2 million, respectively. Our related reimbursable costs for fiscal 2022, 2021 and 2020 were $91.7 million, $92.4 million and $86.4 million, respectively. Our consolidated balance sheets also included the following amounts related to these services:
| Balance at | ||||||||
| October 2, 2022 | October 3, 2021 | |||||||
| (in thousands) | ||||||||
| Accounts receivable, net | $ | 16,818 | $ | 19,082 | ||||
| Contract assets | 2,935 | 5,092 | ||||||
| Contract liabilities | 3,464 | 3,026 | ||||||
20. Quarterly Financial Information – Unaudited
In the opinion of management, the following unaudited quarterly data for the fiscal years ended October 2, 2022 and October 3, 2021 reflect all adjustments necessary for a fair statement of the results of operations.
In the fourth quarter of fiscal 2022, we recognized a $19.9 million unrealized gain on a foreign currency forward contract related to the planned acquisition of RPS.
In the fourth quarter of fiscal 2021, we recognized a non-recurring net tax benefit of $21.6 million primarily consisting of valuation allowances in the United Kingdom that were released due to sufficient positive evidence being obtained.
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
| Fiscal Year 2022 | ||||||||||||||||
| Revenue | $ | 858,510 | $ | 852,744 | $ | 890,231 | $ | 902,562 | ||||||||
| Income from operations | 87,220 | 74,520 | 83,905 | 94,802 | ||||||||||||
| Net income attributable to Tetra Tech | 68,489 | 53,040 | 58,650 | 82,947 | ||||||||||||
| Earnings per share attributable to Tetra Tech: | ||||||||||||||||
| Basic | $ | 1.27 | $ | 0.99 | $ | 1.10 | $ | 1.56 | ||||||||
| Diluted | $ | 1.25 | $ | 0.98 | $ | 1.09 | $ | 1.55 | ||||||||
| Weighted-average common shares outstanding: | ||||||||||||||||
| Basic | 53,937 | 53,834 | 53,507 | 53,148 | ||||||||||||
| Diluted | 54,577 | 54,346 | 54,006 | 53,667 | ||||||||||||
| Fiscal Year 2021 | ||||||||||||||||
| Revenue | $ | 765,104 | $ | 754,764 | $ | 801,633 | $ | 892,012 | ||||||||
| Income from operations | 66,252 | 60,807 | 69,807 | 81,836 | ||||||||||||
| Net income attributable to Tetra Tech | 52,436 | 45,517 | 51,903 | 82,954 | ||||||||||||
| Earnings per share attributable to Tetra Tech: | ||||||||||||||||
| Basic | $ | 0.97 | $ | 0.84 | $ | 0.96 | $ | 1.54 | ||||||||
| Diluted | $ | 0.96 | $ | 0.83 | $ | 0.95 | $ | 1.52 | ||||||||
| Weighted-average common shares outstanding: | ||||||||||||||||
| Basic | 53,927 | 54,187 | 54,117 | 54,019 | ||||||||||||
| Diluted | 54,637 | 54,736 | 54,666 | 54,597 | ||||||||||||
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Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures and changes in internal control over financial reporting
At October 2, 2022, 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.
Management's Report on Internal Control over Financial Reporting
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, 2022, based on the criteria in Internal Control – Integrated Framework (2013) issued by the COSO. Based upon this assessment, management has concluded that our internal control over financial reporting was effective at October 2, 2022.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Form 10-K/A, has issued a report on our internal control over financial reporting. This report, dated November 23, 2022, appears on pages 5 - 6 of this Form 10-K/A.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended October 2, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
44
Tetra Tech, Inc.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Fiscal Years Ended
September 27, 2020, October 3, 2021 and October 2, 2022
(in thousands)
Balance at Beginning of Period | Charged to Costs and Expenses | Deductions (2) | Other (3) | Balance at End of Period | ||||||||||||||||
| Allowance for doubtful accounts (1): | ||||||||||||||||||||
| Fiscal 2020 | $ | 10,562 | $ | 1,472 | $ | (4,887 | ) | — | $ | 7,147 | ||||||||||
| Fiscal 2021 | 7,147 | (4,130 | ) | 195 | 1,140 | 4,352 | ||||||||||||||
| Fiscal 2022 | 4,352 | (73 | ) | (400 | ) | (130 | ) | 3,749 | ||||||||||||
| Income tax valuation allowance: | ||||||||||||||||||||
| Fiscal 2020 | $ | 20,543 | $ | 3,852 | $ | — | $ | — | $ | 24,395 | ||||||||||
| Fiscal 2021 | 24,395 | 13,698 | (26,059 | ) | 1,006 | 13,040 | ||||||||||||||
| Fiscal 2022 | 13,040 | — | (162 | ) | (592 | ) | 12,286 | |||||||||||||
(1) Reflects updated presentation of allowance for doubtful accounts to include expected credit losses in anticipation of our adoption of ASU 2016-13 in the first quarter of fiscal 2021.
(2) Primarily represents write-offs of uncollectible amounts, net of recoveries for the allowance for doubtful accounts. The income tax valuation amount represents the release of a valuation allowance in the United Kingdom in fiscal 2021.
(3) Includes loss in foreign jurisdictions, currency adjustments and valuation allowance adjustments related to net operating loss carry-forwards.
45
INDEX TO EXHIBIT
| + | Filed herewith. |
46
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/A to be signed on its behalf by the undersigned, thereunto duly authorized.
| TETRA TECH, INC. | ||
| By: | /s/ STEVEN M. BURDICK | |
| Steven M. Burdick | ||
| Date: August 14, 2023 | Chief Financial Officer | |
47
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-226586, 333-211153, 333-203817, 333-184958, 333-174032, 333-158932, 333-148712, 333-145201, 333-145199, 333-85558, 333-53036, and 333-11757) of Tetra Tech, Inc. of our report dated November 23, 2022 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K/A.
| /s/ PricewaterhouseCoopers LLP | |
| Los Angeles, California | |
| August 14, 2023 |
EXHIBIT 31.1
Chief Executive Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Dan L. Batrack, certify that:
1. I have reviewed this Annual Report on Form 10-K/A of Tetra Tech, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: August 14, 2023 | /s/ Dan L. Batrack |
| Dan L. Batrack | |
| Chairman and Chief Executive Officer | |
| (Principal Executive Officer) |
EXHIBIT 31.2
Chief Financial Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Steven M. Burdick, certify that:
1. I have reviewed this Annual Report on Form 10-K/A of Tetra Tech, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: August 14, 2023 | /s/ Steven M. Burdick |
| Steven M. Burdick | |
| Chief Financial Officer and Treasurer | |
| (Principal Financial Officer) |
EXHIBIT 32.1
Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Tetra Tech, Inc. (the "Company") on Form 10-K/A for the fiscal year ended October 2, 2022, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dan L. Batrack, Chairman and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: August 14, 2023 | /s/ DAN L. BATRACK |
| Dan L. Batrack | |
| Chairman and Chief Executive Officer | |
| (Principal Executive Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Tetra Tech, Inc. and will be retained by Tetra Tech, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-K/A and shall not be considered filed as part of the Form 10-K/A.
EXHIBIT 32.2
Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Tetra Tech, Inc. (the "Company") on Form 10-K/A for the fiscal year ended October 2, 2022, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven M. Burdick, Chief Financial Officer and Treasurer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: August 14, 2023 | /s/ STEVEN M. BURDICK |
| Steven M. Burdick | |
| Chief Financial Officer and Treasurer | |
| (Principal Financial Officer) |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Tetra Tech, Inc. and will be retained by Tetra Tech, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-K/A and shall not be considered filed as part of the Form 10-K/A.