What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2020-11-23 compared with 2019-11-29 · 665 added, 549 removed, 749 unchanged (62% of the section changed)

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Consolidated Balance Sheets at September 27, 2020 and September 29, 2019

Consolidated Statements of Income for the fiscal years ended September 29, 2019, September 30, 2018 and October 1, 2017

Consolidated Statements of Comprehensive Income for the fiscal years ended September 29, 2019, September 30, 2018 and October 1, 2017

Consolidated Statements of Equity for the fiscal years ended September 29, 2019, September 30, 2018 and October 1, 2017

Consolidated Statements of Cash Flows for the fiscal years ended September 29, 2019, September 30, 2018 and October 1, 2017

Consolidated Statements of Income for the fiscal years ended September 27, 2020, September 29, 2019 and September 30, 2018

Consolidated Statements of Comprehensive Income for the fiscal years ended September 27, 2020, September 29, 2019 and September 30, 2018

Consolidated Statements of Cash Flows for the fiscal years ended September 27, 2020, September 29, 2019 and September 30, 2018

Consolidated Statements of Equity for the fiscal years ended September 27, 2020, September 29, 2019 and September 30, 2018

Notes to Consolidated Financial Statements

Schedule II – Valuation and Qualifying Accounts and Reserves for the fiscal years ended September 29, 2019, September 30, 2018 and October 1, 2017

Schedule II – Valuation and Qualifying Accounts and Reserves for the fiscal years ended September 27, 2020, September 29, 2019, and September 30, 2018

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 27, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal 2020.

Basis for Opinions

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We believe that our audits provide a reasonable basis for our opinions.

As described in Management's Report on Internal Control over Financial Reporting, management has excluded WYG plc (WYG) from its assessment of internal control over financial reporting as of September 29, 2019, because it was acquired by the Company in a purchase business combination during 2019.

We have also excluded WYG from our audit of internal control over financial reporting.

WYG is a wholly-owned subsidiary whose total assets and total revenue excluded from management's assessment and our audit of internal control over financial reporting represent approximately 3% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended September 29, 2019.

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;

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Revenue Recognition - Determination of Total Estimated Contract Cost for Fixed-price Contracts

As described in Note 3 to the consolidated financial statements, the Company’s services are performed under three principal types of contracts:

fixed-price, time-and-materials and cost-plus.

Under fixed-price contracts, which account for approximately 34% of the Company's total consolidated revenue, the Company’s clients pay an agreed fixed-amount negotiated in advance for a specified scope of work.

Revenue on fixed-price contracts 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.

As described in Note 3 to the consolidated financial statements, $1.1 billion of the Company’s total revenues for the year ended September 27, 2020 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.

As disclosed by management, this measure includes forecasts based on the best information available and reflects the judgment to faithfully depict the value of the services transferred to the customer.

This measure includes forecasts based on the best information available and reflects the judgement 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.

When the current estimate of total costs for a performance obligation indicates a loss, a provision for the entire estimated loss on the contract is made in the period in which the loss becomes evident.

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 there was a 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 our procedures to evaluate the total estimated contract costs for fixed-price contracts and the audit evidence obtained.

As a result, the Company recognized net favorable operating income adjustments of $0.8 million as of September 27, 2020, exclusive of the amounts related to claims described below.

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 $13.2 million and $118 million as of September 27, 2020.

Claims are amounts in excess of agreed contract prices that the Company seeks to collect from clients or other third parties.

Claims were approximately $14 million as of September 27, 2020.

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, which included review of contracts and other documents that support those estimates, and testing of underlying contract costs;

(ii) assessing management's ability to reasonably estimate total contract cost by performing a comparison of the actual 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 management’s methodologies and assessing the consistency of management’s approach over the life of the contract.

Goodwill impairment assessment - Remediation and Field Services reporting unit

As described in Notes 2 and 7 to the consolidated financial statements, the Company's consolidated goodwill balance was $924.8 million as of September 29, 2019, and the goodwill associated with the Remediation and Field Services (RFS) reporting unit was $48.8 million.

Management performs an annual goodwill impairment review at the beginning of the fiscal fourth quarter of each year, July 1, 2019, for fiscal 2019, or more frequently when an event occurs or circumstances indicate that the carrying value of the asset may not be recoverable.

During the fourth quarter of fiscal 2019, management performed a strategic review of

the Company's operations.

As a result, management decided to dispose of the Canadian turn-key pipeline activities in the RFS reporting unit, which is in the Commercial/International Services Group (CIG) reportable segment.

Management performed an interim goodwill impairment review of the RFS reporting unit and recorded a $7.8 million goodwill impairment charge.

As a result of the impairment charge, the estimated fair value of the RFS reporting unit equals its carrying value of $61 million at September 29, 2019, including the remaining $48.8 million of goodwill.

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 actual 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.

Goodwill Impairment Assessment - Asia/Pacific Reporting Unit

As described in Notes 2 and 6 to the consolidated financial statements, the Company's consolidated goodwill balance was $993.5 million as of September 27, 2020, and the goodwill associated with the Asia/Pacific (ASP) reporting unit was $95.5 million.

Management performs an annual goodwill impairment review at the beginning of the fiscal fourth quarter, June 29, 2020, or more frequently when an event occurs or circumstances indicate that the carrying value of the asset may not be recoverable.

On September 2, 2020, Australia announced that it had fallen into economic recession in the quarter ending in June 2020.

Management performed an interim goodwill impairment review of the ASP reporting unit and recorded a $15.8 million goodwill impairment charge.

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.

Management estimates 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.

Management's cash flow projections for the RFS Reporting Unit included significant judgments and assumptions relating to revenue growth rate, operating profit margin forecasts and the discount rate.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the RFS reporting unit is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting unit which, in turn, led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management's cash flow projections and significant assumptions, including revenue growth rate, operating profit margin forecasts and the discount rate.

In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements.

These procedures included testing the effectiveness of controls relating to management's goodwill impairment assessment, including controls over the evaluation of the Company's reporting units.

These procedures also included, among others, testing management's process for developing the fair value estimate;

evaluating the appropriateness of the discounted cash flow method;

testing the completeness, accuracy, and relevance of underlying data used in the cash flow projections;

and evaluating the significant assumptions used by management, including revenue growth rate, operating margin forecasts and the discount rate.

Evaluating management's assumptions related to revenue growth rates and projected operating income involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company's discounted cash flow method and certain significant assumptions, including the discount rate.

Management estimates 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

The development of the present value of future cash flow projections include assumptions and estimates derived from expected revenue growth rates, operating profit margins, discount rates and the terminal growth rates.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the ASP reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the reporting unit ;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management's significant assumptions related to revenue growth rates, operating profit margins, discount rates and terminal growth rates:

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

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 management's goodwill impairment assessment, including controls over the valuation of the ASP reporting unit.

These procedures also included, among others, (i) testing management's process for developing the fair value estimate;

(ii) evaluating the appropriateness of the discounted cash flow method;

and the market approach;

(iii) testing the completeness and accuracy of underlying data used in the valuation approaches;

and (iv) evaluating the significant assumptions used by management related to the expected revenue growth rates, operating margins, discount rates and the terminal growth rates.

Evaluating management's assumptions related to expected revenue growth rates and operating profit margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit;

(ii) the consistency with external market and industry data;

and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company's discounted cash flow method and market approach and management's assumptions related to the discount rates and terminal growth rates.

/s/ PricewaterhouseCoopers LLP

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(in thousands, except par value)

September 29,

ASSETS September 27,

2020 September 29,

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Property and equipment, net 35,507 39,441

Right-of-use assets, operating leases 239,396 —

Investments in unconsolidated joint ventures 7,332 6,873

Goodwill 993,498 924,820

Intangible assets, net 13,943 16,440

Deferred income taxes

Deferred tax assets 32,052 28,385

Other long-term assets 57,045 51,657

Total assets $ 2,378,558 $ 2,147,408

LIABILITIES AND EQUITY

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Contract liabilities 171,905 165,611

Income taxes payable

Current portion of long-term debt

Short-term lease liabilities, operating leases 69,650 —

Current portion of long-term debt and other short-term borrowings 49,264 12,500

Current contingent earn-out liabilities 16,142 24,977

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Total current liabilities 793,456 769,954

Deferred income taxes

Deferred tax liabilities 16,316 12,971

Long-term debt 242,395 263,934

Long-term lease liabilities, operating leases 191,955 —

Long-term contingent earn-out liabilities 16,475 28,015

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2020 September 29,

2019 September 30, 2018

Revenue $ 2,994,891 $ 3,107,348 $ 2,964,148

Subcontractor costs ( 646,319 ) ( 717,711 ) ( 763,414 )

Other costs of revenue ( 1,902,037 ) ( 1,981,454 ) ( 1,816,276 )

Gross profit 446,535 408,183 384,458

Selling, general and administrative expenses ( 204,615 ) ( 200,230 ) ( 190,120 )

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Income tax expense ( 54,101 ) ( 16,375 ) ( 37,605 )

Net income 173,890 158,761 136,957

Net income attributable to noncontrolling interests ( 31 ) ( 93 ) ( 74 )

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Earnings per share attributable to Tetra Tech:

Basic $ 3.21 $ 2.89 $ 2.46

Diluted $ 3.16 $ 2.84 $ 2.42

Weighted-average common shares outstanding:

Basic 54,235 54,986 55,670

Diluted 55,022 55,936 56,598

See accompanying Notes to Consolidated Financial Statements.

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2020 September 29,

Other comprehensive income (loss), net of tax

Foreign currency translation adjustments

(Loss) gain on cash flow hedge valuations

Other comprehensive (loss) income attributable to Tetra Tech

Other comprehensive income (loss) attributable to noncontrolling interests

Comprehensive income

Comprehensive income attributable to Tetra Tech

Comprehensive income attributable to noncontrolling interests

Comprehensive income

See accompanying Notes to Consolidated Financial Statements.

TETRA TECH, INC.

Consolidated Statements of Equity

Fiscal Years Ended October 1, 2017 , September 30, 2018 , and September 29, 2019

(in thousands)

Comprehensive

Income (Loss)

Non-Controlling

BALANCE AT OCTOBER 2, 2016

Comprehensive income, net of tax:

Foreign currency translation adjustments

Gain on cash flow hedge valuations

Comprehensive income, net of tax

Distributions paid to noncontrolling interests

Cash dividends of $0.38 per common share

Stock-based compensation

Stock options exercised

Restricted stock award, restricted & performance shares released

Shares issued for Employee Stock Purchase Plan

Stock repurchases

BALANCE AT OCTOBER 1, 2017

Comprehensive income, net of tax:

Foreign currency translation adjustments

Gain on cash flow hedge valuations

Comprehensive income, net of tax

Distributions paid to noncontrolling interests

Cash dividends of $0.44 per common share

Stock-based compensation

Restricted & performance shares released

Stock options exercised

Shares issued for Employee Stock Purchase Plan

Stock repurchases

BALANCE AT SEPTEMBER 30, 2018

2019 September 30, 2018

Net income $ 173,890 $ 158,761 $ 136,957

Other comprehensive income, net of tax

Foreign currency translation adjustments, net of tax 3,436 ( 21,109 ) ( 29,656 )

(Loss) gain on cash flow hedge valuations, net of tax ( 4,638 ) ( 12,125 ) 806

Other comprehensive loss attributable to Tetra Tech, net of tax ( 1,202 ) ( 33,234 ) ( 28,850 )

Other comprehensive income (loss) attributable to noncontrolling interests, net of tax ( 1 ) 243 ( 64 )

Comprehensive income, net of tax $ 172,687 $ 125,770 $ 108,043

Foreign currency translation adjustments

Loss on cash flow hedge valuations

Comprehensive income attributable to Tetra Tech, net of tax $ 172,657 $ 125,434 $ 108,033

Comprehensive income attributable to noncontrolling interests, net of tax 30 336 10

Comprehensive income, net of tax $ 172,687 $ 125,770 $ 108,043

Distributions paid to noncontrolling interests

Cash dividends of $0.54 per common share

Stock-based compensation

Restricted & performance shares released

Stock options exercised

Shares issued for Employee Stock Purchase Plan

Stock repurchases

Cumulative effect of accounting changes

BALANCE AT SEPTEMBER 29, 2019

See accompanying Notes to Consolidated Financial Statements.

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2020 September 29,

2019 September 30, 2018

Cash flows from operating activities:

Net income $ 173,890 $ 158,761 $ 136,957

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 24,611 28,844 38,636

Equity in income of unconsolidated joint ventures, net of distributions

Equity in income of unconsolidated joint ventures ( 6,605 ) ( 4,073 ) ( 4,008 )

Distributions of earnings from unconsolidated joint ventures 6,310 4,048 3,440

Amortization of stock-based awards 19,424 17,618 19,582

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Fair value adjustments to contingent consideration ( 14,971 ) 1,085 4,252

Loss (gain) on sale of assets and divested business

(Gain) loss on sale of assets and divested business ( 11,066 ) ( 232 ) 1,045

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

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Cash flows from investing activities:

Capital expenditures

Payments for business acquisitions, net of cash acquired ( 68,488 ) ( 84,159 ) ( 68,256 )

Capital expenditures ( 12,245 ) ( 16,198 ) ( 9,726 )

Proceeds from sale of assets and divested business, net 17,710 651 35,348

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Cash flows from financing activities:

Repayments on long-term debt

Proceeds from borrowings 344,991 417,262 401,965

Repayments on long-term debt ( 331,066 ) ( 415,491 ) ( 485,946 )

Repurchases of common stock ( 117,188 ) ( 100,000 ) ( 75,000 )

Taxes paid on vested restricted stock ( 11,166 ) ( 6,893 ) ( 8,871 )

Payments of contingent earn-out liabilities ( 22,900 ) ( 12,018 ) ( 1,412 )

Debt pre-payment costs — — ( 1,737 )

Repurchases of common stock

Stock options exercised 10,334 11,751 13,520

Dividends paid ( 34,743 ) ( 29,674 ) ( 24,477 )

Taxes paid on vested restricted stock

Principal payments on finance leases ( 1,311 ) — —

Net cash used in financing activities ( 163,049 ) ( 135,063 ) ( 181,958 )

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Cash paid during the year for:

Interest $ 13,256 $ 12,310 $ 15,570

Income taxes, net of refunds received of $ 1.4 million, $ 5.2 million and $ 2.5 million

$ 55,039 $ 66,038 $ 49,842

Reconciliation of cash, cash equivalents and restricted cash:

Cash and cash equivalents $ 157,515 $ 120,732 $ 146,185

Restricted cash

Restricted cash included in other current assets — 169 2,699

Total cash, cash equivalents and restricted cash $ 157,515 $ 120,901 $ 148,884

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Tetra Tech, Inc.

Consolidated Statements of Equity

Fiscal Years Ended September 30, 2018, September 29, 2019, and September 27, 2020

(in thousands)

Common Stock Additional

Capital Accumulated

Comprehensive

Income (Loss) Retained

Earnings Total

Equity Non-Controlling

Interests Total

Shares Amount

BALANCE AT OCTOBER 1, 2017 55,873 $ 559 $ 193,835 $ ( 98,500 ) $ 832,559 $ 928,453 $ 171 $ 928,624

Comprehensive income, net of tax:

Net income 136,883 136,883 74 136,957

Foreign currency translation adjustments ( 29,656 ) ( 29,656 ) ( 64 ) ( 29,720 )

Gain on cash flow hedge valuations 806 806 806

Comprehensive income, net of tax 108,033 10 108,043

Distributions paid to noncontrolling interests ( 52 ) ( 52 )

Cash dividends of $ 0.44 per common share

( 24,477 ) ( 24,477 ) ( 24,477 )

Stock-based compensation 19,582 19,582 19,582

Stock options exercised 549 5 13,506 13,511 13,511

Restricted & performance shares released 277 3 ( 8,874 ) ( 8,871 ) ( 8,871 )

Shares issued for Employee Stock Purchase Plan 142 1 5,739 5,740 5,740

Stock repurchases ( 1,492 ) ( 15 ) ( 74,985 ) ( 75,000 ) ( 75,000 )

BALANCE AT SEPTEMBER 30, 2018 55,349 553 148,803 ( 127,350 ) 944,965 966,971 129 967,100

Comprehensive income, net of tax:

Net income 158,668 158,668 93 158,761

Foreign currency translation adjustments ( 21,109 ) ( 21,109 ) 243 ( 20,866 )

Gain on cash flow hedge valuations ( 12,125 ) ( 12,125 ) ( 12,125 )

Comprehensive income, net of tax 125,434 336 125,770

Distributions paid to noncontrolling interests ( 287 ) ( 287 )

Cash dividends of $ 0.54 per common share

( 29,674 ) ( 29,674 ) ( 29,674 )

Stock-based compensation 17,618 17,618 17,618

Restricted & performance shares released 183 2 ( 6,895 ) ( 6,893 ) ( 6,893 )

Stock options exercised 448 5 11,746 11,751 11,751

Shares issued for Employee Stock Purchase Plan 148 2 6,844 6,846 6,846

Stock repurchases ( 1,563 ) ( 16 ) ( 99,984 ) ( 100,000 ) ( 100,000 )

Cumulative effect of accounting changes ( 2,767 ) ( 2,767 ) ( 2,767 )

Common Stock Additional

Capital Accumulated

Comprehensive

Income (Loss) Retained

Earnings Total

Equity Non-Controlling

Interests Total

Shares Amount

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

See accompanying Notes to Consolidated Financial Statements.

Tetra Tech, Inc.

Notes to Consolidated Financial Statements

Description of Business

We are a leading global provider of consulting and engineering services that focuses on water, environment, infrastructure, resource management, energy, and international development.

We are a global company that leads with science and is renowned for our expertise in providing water-related services for public and private clients.

We are a leading global provider of consulting and engineering services that focuses on water, environment, sustainable infrastructure, resource management, 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 consulting and engineering projects and include applied science, data analysis, research, engineering, design, construction management, and operations and maintenance.

Beginning in fiscal 2018, we aligned our operations to better serve our clients and markets, resulting in two renamed reportable segments.

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 activities with development agencies worldwide.

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 activities other than work for development agencies.

commercial clients and international clients other than development agencies.

This alignment allows us to capitalize on our growing market opportunities and enhance the development of high-end consulting and technical solutions to meet our growing client demand.

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Use of Estimates.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and assumptions.

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.

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Cash and Cash Equivalents.

Cash and cash equivalents include highly liquid investments with maturities of 90 days or less at the date of purchase.

We record cash and cash equivalents as restricted when we are unable to freely use such cash and cash equivalents for our general operating purposes.

As of fiscal 2019 and fiscal 2018 year-ends, we had restricted cash of $ 0.2 million and $ 2.7 million , respectively, on the consolidated balance sheet, and it was included in our "Prepaid expenses and other current assets".

Cash and cash equivalents include highly liquid investments with original maturities of 90 days or less.

We classify cash and cash equivalents as restricted when we are unable to freely use such cash and cash equivalents for our general operating purposes.

Restricted cash balances are reported within our "Prepaid expenses and other current assets" on the consolidated balance sheets.

Occasionally, we have book overdrafts which represent checks issued in excess of funds on deposit in our bank accounts that have not yet been paid by the applicable bank at the balance sheet date.

Bank overdrafts occur when a bank honors disbursements in excess of funds on deposit in our bank accounts.

We classify book and 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.

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Accounts Receivable – Net.

Net accounts receivable is primarily comprised of billed and unbilled accounts receivable, contract retentions and allowances for doubtful accounts.

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 represent revenue recognized but not yet billed pursuant to contract terms or billed after the period end date.

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 September 27, 2020 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.

Contract retentions represent amounts withheld by clients until certain conditions are met or the project is completed, which may be several months or years.

Allowances for doubtful accounts represent the amounts that may become uncollectible or unrealizable in the future.

These amounts are recorded only when they can be reliably estimated and realization is probabl e.

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 particular industry conditions that may affect a client's ability to pay.

Billings in excess of costs on uncompleted contracts represent the amount of cash collected from clients and billings to clients on contracts in advance of work performed and revenue recognized.

The majority of these amounts will be earned within 12 months.

and general economic and industry conditions, including the potential impacts of the coronavirus disease 2019 ("COVID-19") pandemic, 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.

Property and Equipment.

Property and equipment are recorded at cost and are depreciated over their estimated useful lives using the straight-line method.

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 ten years for equipment, furniture and fixtures.

Buildings are depreciated over periods not exceeding 40 years.

Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the length of the lease.

Assets held for sale are carried at the lower of their carrying amount (i.e., net book value) or fair value less cost to sell and are reported as "Prepaid expenses and other current assets" on our consolidated balance sheets.

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.

Our policy regarding long-lived assets is to evaluate the recoverability of our assets when the facts and circumstances suggest that the assets may be impaired.

Our policy is to 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.

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 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 also includes any lease payments made and excludes lease incentives.

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.

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 twelve years , some of which may include options to extend the leases for up to five years .

We also have finance leases which are primarily related to IT equipment.

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.

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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 assets and liabilities acquired requires us to make estimates and use valuation techniques when a market value is not readily available.

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 they are incurred.

Transaction costs associated with business combinations are expensed as incurred.

Goodwill and Intangible Assets.

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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 1, 2019 (i.e., the first day of our fiscal fourth quarter).

Our last annual review was performed at June 29, 2020 (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.

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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.

If the fair value of a reporting unit exceeds its carrying amount, the goodwill of that reporting unit is

not considered impaired.

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.

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Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings.

The amount paid that is less than or equal to the liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows.

Any amount paid in excess of the liability on the acquisition date is reflected as cash used in operating activities.

The 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.

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.

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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 and our match are deposited into a rabbi trust, and the funds are generally invested in individual variable life insurance contracts that we own and are specifically designed to informally fund savings plans of this nature.

Our consolidated balance sheets reflect our investment in variable life insurance contracts in "Other long-term assets." Our obligation to participating employees is reflected in "Other long-term liabilities." All income and expenses related to the rabbi trust are reflected in our consolidated statements of income.

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 .

Income Taxes.

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Deferred tax assets and liabilities are computed for the difference between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to reverse.

In determining the need for a valuation allowance, management reviews both positive and negative evidence, including current and historical results of operations, future income projections and potential tax planning strategies.

Based on our assessment, we have concluded that a portion of the deferred tax assets at September 29, 2019 will not be realized.

Based on our assessment, we have concluded that a portion of the deferred tax assets will not be realized.

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.

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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.

In th e 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 28 % of accounts receivable were due from various agencies of the U.S.

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We perform ongoing credit evaluations of our clients and maintain an allowance for potential credit losses.

Approximately 49 % , 23 % and 28 % of our fiscal 2019 revenue was generated from our U.S government, U.S.

Approximately 48 %, 22 % and 30 % of our fiscal 2020 revenue was generated from our U.S.

government, U.S.

commercial and international clients, respectively.

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Gains or losses from foreign currency transactions are included in income from operations.

Recent Accounting Pronouncements.

New accounting pronouncements implemented by us during fiscal 2019 are discussed below.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 ("ASC 606"), "Revenue from Contracts with Customers", which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.

The guidance and the related ASUs were effective for interim and annual reporting periods beginning after December 15, 2017 (first quarter of fiscal 2019 for us).

On October 1, 2018, we adopted ASC 606 using the modified retrospective method in which the new guidance was applied retrospectively to contracts that were not substantially completed as of the date of adoption.

Results for the reporting period beginning after October 1, 2018 have been presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the previous guidance.

See Note 3 , " Revenue Recognition " for further discussion of the adoption and the impact on our consolidated financial statements.

In January 2016, the FASB issued guidance that generally requires companies to measure investments in other entities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income.

The guidance was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2017 (first quarter of fiscal 2019 for us).

The adoption of this guidance had no impact on our consolidated financial statements.

In March 2016, the FASB issued updated guidance which requires excess tax benefits and deficiencies on share-based payments to be recorded as income tax expense or benefit in the income statement rather than being recorded in additional paid-in capital.

It also requires the presentation of employee taxes as financing activities on consolidated statements of cash flows, which was previously classified as operating activities.

This guidance was effective for annual and interim periods beginning after December 15, 2016 (first quarter of fiscal 2018 for us), with early adoption permitted.

In the first quarter of fiscal 2017, we adopted this guidance.

At the beginning of fiscal 2019, we revised the presentation of "Net cash provided by operating activities" and "Net cash (used in) provided by financing activities" in the consolidated statement of cash flows for prior period to adjust the presentation of “Taxes paid on vested restricted stock” and appropriately reflect such amounts as financing activities.

The adjustment resulted in an increase of net cash provided by operating activities of $ 8.9 million and $ 3.5 million , and an increase of net cash used in financing activities of $ 8.9 million and $ 3.5 million for fiscal 2018 and 2017, respectively.

We assessed the materiality of these adjustments on our consolidated financial statements for prior periods and concluded that the amounts were not material to any prior interim or annual periods.

We elected to revise the presentation for comparability purposes.

In August 2016, the FASB issued guidance to address eight specific cash flow issues to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.

The guidance was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2017 (first quarter of fiscal 2019 for us).

The adoption of this guidance had no material impact on our consolidated financial statements.

In October 2016, the FASB issued updated guidance which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.

The guidance was effective for fiscal reporting periods and interim reporting periods within those fiscal reporting periods, beginning after December 15, 2017 (first quarter of fiscal 2019 for us).

The adoption of this guidance had no material impact on our consolidated financial statements.

In November 2016, the FASB issued updated guidance which provides amendments to address the classification and presentation of changes in restricted cash in the statement of cash flows.

The guidance was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2017 (first quarter of fiscal 2019 for us).

The adoption of this guidance had no material impact on our consolidated financial statements.

We updated certain captions in our consolidated statements of cash flows to include restricted cash, which is reported in our "Prepaid expenses and other current assets" on the consolidated balance sheets.

In May 2017, the FASB issued updated guidance to clarify when changes to the terms or conditions of a share-based payment award must be accounted for as modifications.

Under the updated guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes because of a change in terms or conditions.

The guidance was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2017 (first quarter of fiscal 2019 for us), on a prospective basis.

The adoption of this guidance had no impact on our consolidated financial statements.

In August 2018, the Securities and Exchange Commission (“SEC”) published Release No.

33-10532, Disclosure Update and Simplification, which adopted amendments to certain disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded, considering other SEC disclosure requirements, U.S.

GAAP, or changes in the information environment.

As such, we removed the disclosure of cash dividends paid per share from our consolidated statements of income.

New accounting pronouncements requiring implementation in future periods are discussed below.

In February 2016, the FASB issued guidance that requires the rights and obligations associated with leasing arrangements be reflected on the balance sheet to increase transparency and comparability among organizations, and further clarified and amended this guidance.

Lessees will be required to recognize a right-of-use asset and a lease liability on the balance sheet for leases with terms greater than twelve months or leases that contain a purchase option that is reasonably certain to be exercised.

Lessees will classify leases as either finance or operating leases.

Substantially all of our leases are operating leases, which will result in lease expense on a straight-line basis over the term of the lease.

The guidance is effective for interim and annual reporting periods beginning after December 15, 2018 (first quarter of fiscal 2020 for us).

The new guidance will be applied to leases that exist or are entered into on or after September 30, 2019 (first day of our fiscal 2020) without adjusting comparative periods in the financial statements.

We expect to utilize the practical expedients that, upon adoption of this guidance, allow us to (1) not reassess whether

any expired or existing contracts are or contain leases, (2) retain the classification of leases (e.g., operating or finance lease) existing as of the date of adoption and (3) not reassess initial direct costs for any existing leases.

We are in the final stages of evaluating our existing lease portfolio, including accumulating all of the necessary information required to properly account for leases under the new guidance.

Based on the most recent assessment of existing leases, the adoption of the guidance is expected to result in right-of-use assets and lease liabilities that will be included on the balance sheet as of September 30, 2019 of approximately $ 300 million .

We do not expect the adoption of this guidance to have a material impact on our consolidated statements of income or cash flows.

Our current amounts payable under non-cancelable lease commitments are disclosed in Note 11, "Leases".

In June 2016, the FASB issued updated guidance which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

The updated guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses.

This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019 (first quarter of fiscal 2021 for us).

Early adoption is permitted.

We are currently evaluating the impact that this guidance will have on our consolidated financial statements.

Recently Issued Accounting Pronouncements Adopted in Fiscal 2020.

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02 “Leases (Topic 842)”, which is a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets obtained in exchange for lease liabilities on the balance sheet.

Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases.

Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

In the first quarter of fiscal 2020, we adopted the standard using the modified retrospective method.

The standard was applied to leases that existed or were entered into on or after September 30, 2019.

Our fiscal 2020 financial statements have been presented under this standard.

However, the prior-year financial statements have not been adjusted and continue to be reported in accordance with previous guidance.

See Note 10, "Leases" for further discussion of the adoption and the impact on our consolidated financial statements.

In August 2017, the FASB issued accounting guidance on hedging activities.

The amendment better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.

The guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018 (first quarter of fiscal 2020 for us).

We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

The guidance was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018 (first quarter of fiscal 2020 for us).

The adoption of this guidance had no impact on our consolidated financial statements.

In February 2018, the FASB issued guidance on reclassification of certain tax effects from accumulated comprehensive income, which allows for a reclassification of stranded tax effects from the Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to retained earnings.

The guidance is effective for fiscal years beginning after December 15, 2018 (first quarter of fiscal 2020 for us).

We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

The guidance was effective for fiscal years beginning after December 15, 2018 (first quarter of fiscal 2020 for us).

We did not reclassify our stranded effects from the TCJA, which were immaterial.

Recently Issued Accounting Pronouncements Not Yet Adopted.

In June 2016, the FASB issued updated guidance, Accounting Standards Update ("ASU") 2016-13, related to the measurement of credit losses for certain financial assets.

This guidance replaces the current incurred loss methodology with an expected credit loss methodology.

It requires us to recognize an allowance equal to our current estimate of all contractual cash flows that we do not expect to collect.

Our estimate would consider relevant information about past events, current conditions, and reasonable and supportable forecasts impacting the collectability of the reported amounts.

The guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019 (first quarter of fiscal 2021 for us).

In anticipation of our adoption of ASU 2016-13, we have updated our presentation of gross receivables and the allowance for doubtful accounts to reflect only expected credit losses in the allowance.

We do not expect the adoption in the first quarter of fiscal 2021 to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued updated guidance modifying certain fair value measurement disclosures.

The updated guidance contains additional disclosures to enable users of the financial statements to better understand the entity’s assumption used to develop significant unobservable inputs for Level 3 fair value measurements, but also eliminates the requirement for entities to disclose the amount of and reasons for transfers between Level 1 and Level 2 investments within the fair value hierarchy.

The guidance contains additional disclosures to enable users of the financial statements to better understand the entity’s assumption used to develop significant unobservable inputs for Level 3 fair value measurements, but also eliminates the requirement for entities to disclose the amount of and reasons for transfers between Level 1 and Level 2 investments within the fair value hierarchy.

This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019 (first quarter of fiscal 2021 for us).

Early adoption is permitted.

We do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.

In December 2019, the FASB issued guidance simplifying the accounting for income taxes by removing certain exceptions to general principles in Topic 740 and amending certain existing guidance for clarity.

This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020 (first quarter of fiscal 2022 for us).

Early adoption is permitted.

We do not expect the adoption of this guidance to have an impact on our consolidated financial statements.

Revenue Recognition

On October 1, 2018, we adopted ASC 606, "Revenue from Contracts with Customers", which supersedes most current revenue recognition guidance, including industry-specific guidance.

We adopted the standard on a modified retrospective basis which results in no restatement of the comparative periods presented and a cumulative effect adjustment to retained earnings as of the date of adoption.

As part of our adoption, the new standard was applied only to those contracts that were not substantially completed as of the date of adoption.

To determine the proper revenue recognition method for contracts under ASC 606, we evaluate whether multiple contracts should be combined and accounted for as a single contract and whether the combined or single contract should be accounted for as having more than one performance obligation.

The decision to combine a group of contracts or separate a combined or single contract into multiple performance obligations may impact the amount of revenue recorded in a given period.

Contracts are considered to have a single performance obligation if the promises are not separately identifiable from other promises in the contracts.

At contract inception, we assess the goods or services promised in a contract and identify, as a separate performance obligation, each distinct promise to transfer goods or services to the customer.

The identified performance obligations represent the “unit of account” for purposes of determining revenue recognition.

In order to properly identify separate performance obligations, we apply judgment in determining whether each good or service provided is:

(a) capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (b) distinct within the context of the contract, whereby the transfer of the good or service to the customer is separately identifiable from other promises in the contract.

Contracts are often modified to account for changes in contract specifications and requirements.

We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations.

Most of our contract modifications are for goods or services that are not distinct from existing contracts due to the significant integration provided or significant interdependencies in the context of the contract and are accounted for as if they were part of the original contract.

The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

We account for contract modifications as a separate contract when the modification results in the promise to deliver additional goods or services that are distinct and the increase in price of the contract is for the same amount as the stand-alone selling price of the additional goods or services included in the modification.

The transaction price represents the amount of consideration to which we expect to be entitled in exchange for transferring promised goods or services to our customers.

The consideration promised within a contract may include fixed amounts, variable amounts, or both.

The nature of our contracts gives rise to several types of variable consideration, including claims, award fee incentives, fiscal funding clauses, and liquidated damages.

We recognize revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized for the contract will not occur.

We estimate the amount of revenue to be recognized on variable consideration using either the expected value or the most likely amount method, whichever is expected to better predict the amount of consideration to be received.

Project mobilization costs are generally charged to project costs as incurred when they are an integrated part of the performance obligation being transferred to the client.

Claims are amounts in excess of agreed contract prices that we seek to collect from our clients or other third parties for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs.

Revenue on claims is recognized only to the extent that contract costs related to the claims have been incurred and when it is probable that any significant revenue recognized related to the claim will not be reversed.

Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regard 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.

In some cases, contract retentions are withheld by clients until certain conditions are met or the project is completed, which may be several months or years.

In these cases, we have not identified a significant financing component under ASC 606 as the timing difference in payment compared to delivery of obligations under the contract is not for purposes of financing.

For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation using a best estimate of the standalone selling price of each distinct good or service in the contract.

The standalone selling price is typically determined using the estimated cost of the contract plus a margin approach.

For contracts containing variable consideration, we allocate the variability to a specific performance obligation within the contract if such variability relates specifically to our efforts to satisfy the performance obligation or transfer the distinct good or service, and the allocation depicts the amount of consideration to which we expect to be entitled.

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.

The guidance is effective for fiscal years beginning after December 31, 2020 (first quarter of fiscal 2022 for us).

We do not expect the adoption of this guidance to have an impact on our consolidated financial statements.

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.

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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 judgment to faithfully depict the value of the services transferred to the customer.

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.

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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.

Contract Types

Our services are performed under three principal types of contracts:

fixed-price, time-and-materials and cost-plus.

Customer payments on contracts are typically due within 60 days of billing, depending on the contract.

Fixed-Price .

Under fixed-price contracts, clients pay us an agreed fixed-amount negotiated in advance for a specified scope of work.

Time-and-Materials .

Under time-and-materials contracts, we negotiate hourly billing rates and charge our clients based on the actual time that we spend on a project.

In addition, clients reimburse us for our actual out-of-pocket costs for materials and other direct incidental expenditures that we incur in connection with our performance under the contract.

Most of our time-and-material contracts are subject to maximum contract values, and may include annual billing rate adjustment provisions.

Under cost-plus contracts, we are reimbursed for allowed or otherwise defined costs incurred plus a negotiated fee.

The contracts may also include incentives for various performance criteria, including quality, timeliness, ingenuity, safety and cost-effectiveness.

In addition, our costs are generally subject to review by our clients and regulatory audit agencies, and such reviews could result in costs being disputed as non-reimbursable under the terms of the contract.

Upon adoption on October 1, 2018, under the modified retrospective method, we recorded a cumulative effect adjustment to decrease retained earnings by $ 2.8 million on October 1, 2018, as well as the following cumulative effect adjustments:

A decrease to contract assets of $ 5.0 million

A decrease to contract liabilities of $ 1.1 million

An increase to deferred tax assets of $ 1.1 million

The decrease in retained earnings primarily resulted from a change in the way we determine the unit of account for projects (i.e.

performance obligations).

Under previous guidance, we typically accounted for a contract as a single unit of revenue recognition.

Upon adoption of ASC 606, we assess the nature of the promises in the contract and recognize revenue based on performance obligations within the respective contract or combined contract.

The following table presents how the adoption of ASC 606 affected certain line items in our consolidated statements of income for fiscal year ended September 29, 2019 :

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

Recognition Under Previous Guidance

Impact of the Adoption of ASC 606

Recognition Under ASC 606

(in thousands)

Income from operations

Income tax expense

Net income attributable to Tetra Tech

The following table presents how the adoption of ASC 606 affected certain line items in our consolidated balance sheet as of September 29, 2019 :

Recognition Under Previous Guidance

Impact of the Adoption of ASC 606

Recognition Under ASC 606

(in thousands)

Accounts receivable - net

Contract assets (1)

Liabilities and equity

Contract liabilities (2)

Deferred income taxes

Retained earnings

(1) Previously included in "Account receivable - net".

(2) Previously presented as "Billings in excess of costs on uncompleted contracts".

(3) Includes $ 2.8 million of cumulative catch-up adjustment to retained earnings on October 1, 2018 upon adoption of ASC 606.

The following table presents how the adoption of ASC 606 affected certain line items in our consolidated statement of cash flows for fiscal year ended September 29, 2019 :

Recognition Under Previous Guidance

Impact of the Adoption of ASC 606

Recognition Under ASC 606

September 27,

2020 September 29,

2019 September 30, 2018

(in thousands)

Cash flows from operating activities:

Deferred income taxes

Accounts receivable and contract assets

Contract liabilities

Net cash provided by operating activities

Client Sector:

state and local government $ 439,019 $ 587,364 $ 469,231

federal government (1)

993,835 941,102 974,384

commercial 674,605 719,314 788,398

International (2)

887,432 859,568 732,135

Total $ 2,994,891 $ 3,107,348 $ 2,964,148

Contract Type:

Fixed-price $ 1,078,432 $ 1,048,157 $ 986,910

Time-and-materials 1,391,592 1,509,901 1,395,148

Cost-plus 524,867 549,290 582,090

Total $ 2,994,891 $ 3,107,348 $ 2,964,148

(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.

Other than the U.S.

federal government, no single client accounted for more than 10% of our revenue for the twelve months ended months ended September 27, 2020 and September 29, 2019.

Contract Assets and Contract Liabilities

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However, the timing of revenue recognition may differ from the timing of invoice issuance.

As part of the adoption of ASC 606, contract assets have been bifurcated from billed and unbilled receivables.

Contract assets represent revenue recognized in excess of the amounts for which we have the contractual right to bill our customers.

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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.

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There were no substantial non-current contract assets or liabilities for the periods presented.

Net contract liabilities/assets consisted of the following:

Net contract assets/liabilities consisted of the following:

September 27,

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Contract assets (1)

$ 92,632 114,324

Contract liabilities 171,905 165,611

Net contract liabilities $ ( 79,273 ) $ ( 51,287 )

We recognized $ 90.0 million of revenue during fiscal 2019 that was included in contract liabilities as of September 30, 2018.

The amount of revenue recognized from changes in transaction price associated with performance obligations satisfied in prior periods during fiscal 2019 was not material.

The change in transaction price primarily relates to reimbursement of costs incurred in prior periods.

We recognize revenue from contracts primarily utilizing the cost-to-cost measure of progress method in order to estimate the progress towards completion and determine the amount of revenue and profit to recognize.

(1) Include s $ 12.3 million and $ 26.5 million of contract retentions as of September 27, 2020 and September 29, 2019, respectively.

In fiscal 2020, we recognized revenue of approximately $ 118 million from amounts included in the contract liability balance at the end of fiscal 2019, compared to approximately $ 90 million for the c omparative prior-year period.

We recognize revenue primarily using the cost-to-cost measure of progress method, which involves the estimates of 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.

As a result, we recognized net favorable operating income adjustments of $ 0.8 million for fiscal 2019 , compared to net unfavorable operating income adjustments of $ 11.2 million for fiscal 2018.

As a result, we recognized net favorable operating income adjustments o f $ 0.8 million fo r both fiscal 2020 and fiscal 2019, exclusive of the amounts related to claims described below.

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 September 27, 2020 and September 29, 2019, our consolidated balance sheets included liabilities for anticipated losses of $ 13.2 million and $ 11.5 million, respectively.

The estimated cost to complete the related contracts as of September 29, 2019 was $ 15.2 million .

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 provide information about disaggregated revenue and a reconciliation of the disaggregated revenue:

Fiscal Year Ended

September 29,

September 30,

(in thousands)

Client Sector

state and local government

federal government (1)

International (2)

(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.

Other than the U.S.

federal government, no single client accounted for more than 10% of our revenue for the twelve months ended months ended September 29, 2019 and September 30, 2018 .

Fiscal Year Ended

The estimated cost to complete the related contracts as of September 27, 2020 was approximately $ 118 million.

Accounts Receivable, Net

Net accounts receivable consisted of the following:

September 27,

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(in thousands)

Contract Type

Time-and-materials

Billed $ 402,818 $ 496,985

Unbilled 253,364 282,297

Total accounts receivable 656,182 779,282

Allowance for doubtful accounts ( 7,147 ) ( 10,562 )

Total accounts receivable, net $ 649,035 $ 768,720

Billed accounts receivable represent amounts billed to clients that have not been collected.

Most of our unbilled receivables at September 27, 2020 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.

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.

Total accounts receivable at September 27, 2020 and September 29, 2019 included approximate ly $ 14 million and $ 15 million, respectively, related to claims, including requests for equitable adjustment, on contracts that provide for price redetermination.

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:

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.

We regularly evaluate all unsettled claim amounts and record appropriate adjustments to operating earnings when it is probable that the claim will result in a different contract value than the amount previously estimated.

In fiscal 2020, we recorded net losses in operating income related to claims of $ 4.4 million in our CIG segment.

In fiscal 2019 , we recognized reductions of revenue of $ 26.7 million and $ 4.6 million, and related losses in operating income of $ 28.2 million and $ 5.7 million in our CIG and RCM segments, respectively, primarily due to the resolution of several claims in fiscal 2019 for amounts lower than we previously expected.

No single client accounted for more than 10% of our accounts receivable at September 27, 2020 and September 29, 2019.

Remaining Unsatisfied Performance Obligations (“RUPOs”)

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Within 12 months $ 1,846,527

Beyond 1,372,446

Total $ 3,218,973

Although RUPOs reflect business that is considered to be firm, cancellations, deferrals or scope adjustments may occur.

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Stock Repurchase and Dividends

On November 5, 2018, the Board of Directors authorized a new stock repurchase program under which we could repurchase up to $ 200 million of our common stock.

This was in addition to the $ 25 million remaining as of fiscal 2018 year-end under the previous stock repurchase program.

All of our repurchased shares were through open market purchases.

As of the fiscal 2019 year-end, we had $ 125 million remaining under our new program.

The following table summarizes stock repurchase activity for fiscal 2018 and 2019:

Stock Repurchase Program

Shares Repurchased

Average Price Paid per Share

(in thousands)

The following table summarizes dividends declared and paid in fiscal 2019 and 2018 :

Declaration Date

Dividend Paid Per Share

Dividends Paid

On November 5, 2018, the Board of Directors authorized a stock repurchase program ("2019 Program") under which we could repurchase up to $ 200 million of our common stock.

This was in addition to the $ 25 million remaining as of fiscal 2018 year-end under the previous stock repurchase program ("2018 Program").

On January 27, 2020, the Board of Directors authorized a new $ 200 million stock repurchase program ("2020 Program").

As of September 27, 2020, we had a remaining balance of $ 207.8 million available under the 2019 and 2020 programs.

The following table summarizes stock repurchases in the open market and settled in fiscal 2019 and fiscal 2020:

Fiscal Year Stock Repurchase Program Shares Repurchased Average Price Paid per Share Total Cost

(in thousands)

November 5, 2018

November 30, 2018

December 14, 2018

January 28, 2019

February 13, 2019

February 28, 2019

April 29, 2019

July 29, 2019

August 14, 2019

August 30, 2019

Total dividend paid as of September 29, 2019

November 6, 2017

November 30, 2017

December 15, 2017

January 29, 2018

February 14, 2018

March 2, 2018

April 30, 2018

July 30, 2018

August 16, 2018

August 31, 2018

Total dividend paid as of September 30, 2018

Subsequent Events.

On November 11, 2019, the Board of Directors declared a quarterly cash dividend of $ 0.15 per share payable on December 13, 2019 to stockholders of record as of the close of business on December 2, 2019.

Accounts Receivable - Net

Net accounts receivable consisted of the following at September 29, 2019 and September 30, 2018 :

September 29,

September 30,

2019 2018 Program 430,559 $ 58.06 $ 25,000

2019 2019 Program 1,131,962 $ 66.26 75,000

2019 Total 1,562,521 $ 64.00 $ 100,000

2020 2019 Program 1,508,747 $ 77.67 $ 117,188

The following table presents dividends declared and paid in fiscal 2020 and 2019:

Declare Date Dividend Paid Per Share Record Date Payment Date Dividends Paid

(in thousands)

Total accounts receivable – gross

Allowance for doubtful accounts

Total accounts receivable – net

Billed accounts receivable represent amounts billed to clients that have not been collected.

Most of our unbilled receivables at September 29, 2019 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.

type of client, such as a government agency or a commercial sector client;

and general economic and industry conditions that may affect a client's ability to pay.

Once contract performance is underway, we may experience changes in conditions, client requirements, specifications, designs, materials and expectations regarding the period of performance.

Such changes result in change orders and may be initiated by us or by our clients.

In many cases, agreement with the client as to the terms of change orders is reached prior to work commencing;

however, sometimes circumstances require that work progress without a definitive client agreement.

Revenue and any corresponding receivable in these cases are recognized based on the policy described in Note 3 , " Revenue Recognition " above.

Total accounts receivable at September 29, 2019 and September 30, 2018 included approximately $ 15 million and $ 74 million , respectively, related to claims, including requests for equitable adjustment, on contracts that provide for price redetermination.

In fiscal 2019, we recognized reductions of revenue of $ 26.7 million and $ 4.6 million , and related losses in operating income of $ 28.2 million and $ 5.7 million in our CIG and RCM segments, respectively, primarily due to the resolution of several claims in fiscal 2019 for amounts lower than we previously expected.

In fiscal 2018, we recognized a reduction of revenue of $ 10.6 million and related losses in operating income of $ 12.5 million in our CIG segment for a fixed-price construction project that was completed in fiscal 2014 prior to our decision to exit similar activities in the RCM segment.

On our state and local government contracts, billed accounts receivable were $ 129.3 million and $ 89.3 million at September 29, 2019 and September 30, 2018 , respectively.

The total of unbilled receivables and contract assets were $ 59.6 million and $ 38.6 million at September 29, 2019 and September 30, 2018 , respectively.

Other than the state and local governments and U.S.

federal government, no single client accounted for more than 10% of our accounts receivable at September 29, 2019 and September 30, 2018 .

November 11, 2019 $ 0.15 December 2, 2019 December 13, 2019 $ 8,190

January 27, 2020 $ 0.15 February 12, 2020 February 28, 2020 8,225

April 27, 2020 $ 0.17 May 13, 2020 May 29, 2020 9,175

July 27, 2020 $ 0.17 August 21, 2020 September 4, 2020 9,153

Total dividends paid as of September 27, 2020 $ 34,743

November 5, 2018 $ 0.12 November 30, 2018 December 14, 2018 $ 6,654

January 28, 2019 $ 0.12 February 13, 2019 February 28, 2019 6,616

April 29, 2019 $ 0.15 May 15, 2019 May 31, 2019 8,219

July 29, 2019 $ 0.15 August 14, 2019 August 30, 2019 8,185

Total dividends paid as of September 29, 2019 $ 29,674

Subsequent Event.

On November 9, 2020, the Board of Directors declared a quarterly cash dividend of $ 0.17 per share payable on December 11, 2020 to stockholders of record as of the close of business on November 30, 2020.

Acquisitions and Divestitures

In fiscal 2017, we acquired Eco Logical Australia (“ELA”), headquartered in Sydney, Australia.

ELA is a multi-disciplinary consulting firm with over 160 staff that provides innovative, high-end environmental and ecological services, and is part of our CIG segment.

The fair value of the purchase price for ELA was $ 9.9 million .

Of this amount, $ 8.3 million was paid to the sellers and $ 1.6 million was the estimated fair value of contingent earn-out obligations, with a maximum of $ 1.7 million , based upon the achievement of specified operating income targets in each of the two years following the acquisition.

In fiscal 2018, we acquired Glumac, headquartered in Portland, Oregon.

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commercial clients.

We also divested non-core assets during the third quarter of fiscal 2018 further described in Note 8 , " Property and Equipment " resulting in a pre-tax loss of $ 3.4 million , which is included in selling, general and administrative expenses for fiscal 2018.

In the second quarter of fiscal 2019, we acquired eGlobalTech ("EGT"), a high-end information technology solutions, cloud migration, cybersecurity, and management consulting firm based in Arlington, Virginia.

We also divested non-core assets during the third quarter of fiscal 2018 resulting in a pre-tax loss of $ 3.4 million, which is included in selling, general and administrative expenses for fiscal 2018.

In fiscal 2019, we acquired eGlobalTech ("EGT"), a high-end information technology solutions, cloud migration, cybersecurity, and management consulting firm based in Arlington, Virginia.

EGT is part of our GSG segment.

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This amount was comprised of a $ 24.7 million promissory note issued to the sellers (which was subsequently paid in full in the third quarter of fiscal 2019), $ 3.3 million of payables related to estimated post-closing adjustments for net assets acquired, and $ 21.1 million for the estimated fair value of contingent earn-out obligations, with a maximum of $ 25.0 million, based upon the achievement of specified operating income targets in each of the three years following the acquisition.

In the fourth quarter of fiscal 2019, we acquired WYG plc (“WYG”), which employs approximately 1,600 staff primarily in the United Kingdom and Europe, delivering consulting and engineering solutions for complex projects across key service areas including planning, water and environment, transport, infrastructure, the built environment, architecture, urban design, surveying, asset management, program management, and international development.

WYG’s UK based consulting and engineering business is part of our CIG segment, while its international development business is part of our GSG segment.

In fiscal 2019, we acquired WYG plc (“WYG”), which employs approximately 1,600 staff primarily in the United Kingdom and Europe, delivering consulting and engineering solutions for complex projects across key service areas including planning, water and environment, transport, infrastructure, the built environment, architecture, urban design, surveying, asset

management, program management, and international development.

WYG’s United Kingdom based consulting and engineering business is part of our CIG segment, while its international development business is part of our GSG segment.

The fair value of the purchase price was $ 54.2 million, entirely paid in cash.

In addition, we assumed a net debt of $ 11.5 million , which was subsequently paid in full in the fourth quarter of fiscal 2019.

We also incurred $ 10.4 million in acquisition and transaction costs related to the WYG acquisition in the fourth quarter of fiscal 2019.

In addition, we assumed net debt of $ 11.5 million, which was subsequently paid in full in the fourth quarter of fiscal 2019.

We also incurred $ 10.4 million in acquisition and integration costs related to the WYG acquisition in the fourth quarter of fiscal 2019.

In fiscal 2020, we acquired Segue Technologies, Inc.

("SEG"), a leading information technology management consulting firm based in Arlington, Virginia.

SEG is part of our GSG segment.

The fair value of the purchase price w as $ 40.9 million.

T his amount was comprised of $ 29.6 million in initial cash payments made to the sellers and $ 11.3 million for the estimated fair value of contingent earn-out obligations, with a maximum of $ 20.0 million, based upon the achievement of specified operating income targets in each of the three years following the acquisition.

In fiscal 2020, we acquired BlueWater Federal Solutions, Inc.

("BWF"), a leading information technology management consulting firm based in Chantilly, Virginia.

BWF is part of our GSG segment.

The fair value of the purchase price w as $ 48.5 million.

T his amount was comprised of $ 41.8 million in initial cash payments made to the sellers, $ 1.5 million of payables related to estimated post-closing adjustments for net assets acquired, and $ 5.2 million for the estimated fair value of contingent earn-out obligations, with a maximum of $ 8.0 million, based upon the achievement of specified operating income targets in each of the three years following the acquisition.

Goodwill additions resulting from the above business combinations are primarily attributable to the existing workforce of the acquired companies and the synergies expected to arise after the acquisitions.

Fiscal 2018 goodwill additions represent the value of a workforce with distinct expertise in the sustainable infrastructure design market.

The goodwill additions related to our fiscal 2019 acquisitions represent the value of a workforce with emerging technology and new techniques that incorporate artificial intelligence, data analytics and advanced cybersecurity solutions for government and commercial clients, and expanding our geographic presence in the UK with a strong platform for growth in the UK and Europe.

The goodwill additions related to our fiscal 2019 acquisitions represent the value of a workforce with emerging technology and new techniques that incorporate artificial intelligence, data analytics and advanced cybersecurity solutions for government and commercial clients, and expanding our geographic presence in the United Kingdom with a strong platform for growth in the United Kingdom and Europe.

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.

The results of these acquisitions were included in our consolidated financial statements from their respective closing dates.

These acquisitions were not considered material to our consolidated financial statements.

As a result, no pro forma information has been provided.

Backlog, client relations and trade name intangible assets include the fair value of existing contracts and the underlying customer relationships with lives ranging from 1 to 10 years, and trade names with lives ranging from 3 to 5 years.

Backlog, client relations and trade name 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 with 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.

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Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income.

In each quarter during fiscal 2020, 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 addition, we considered the potential impact of the global economic disruption due to the COVID-19 pandemic on our operating income projections over the various earn-out periods.

During 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 NDY, 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) an d $ 5.4 million (A$ 7.9 million) in fis cal 2018 and fiscal 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, and 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.

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.

In fiscal 2019, we recorded adjustments to our contingent earn-out liabilities and reported a related net loss of $ 1.1 million in operating income.

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In fiscal 2018, we recorded adjustments to our contingent earn-out liabilities and reported related losses in operating income of $ 4.3 million.

These losses resulted from updated valuations of the contingent consideration liabilities for NDY, ELA and Cornerstone Environmental Group ("CEG"), as the financial performance during the earn-out periods exceeded our original estimates at the acquisition dates.

At September 29, 2019 , there was a total maximum of $ 72.4 million of outstanding contingent consideration related to acquisitions.

Of this amount, $ 53.0 million was estimated as the fair value and accrued on our consolidated balance sheet.

These losses resulted from updated valuations of the contingent consideration liabilities for NDY, Eco Logical Australia and Cornerstone Environmental Group, as the actual and expected financial performance during the earn-out periods exceeded our original estimates at the acquisition dates.

At September 27, 2020, there was a total potential maximum o f $ 70.9 million of outstanding contingent consideration related to acquisitions.

Of this amount, $ 32.6 million was estimated as the fair value and a ccrued on our consolidated balance sheet.

If the global economic disruption due to the COVID-19 pandemic is prolonged, we could have more significant reductions in our contingent earn-out liabilities and related gains in operating income in future periods.

The following table summarizes the changes in the carrying value of estimated contingent earn-out liabilities:

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2020 September 29,

2019 September 30,

(in thousands)

Beginning balance (at fair value)

Estimated earn-out liabilities for acquisitions during the fiscal year

Increases due to re-measurement of fair value reported in interest expense

Net increase (decrease) due to re-measurement of fair value reported as losses (gains) in operating income

Beginning balance $ 52,992 $ 35,290 $ 2,438

Acquisition date fair value of contingent earn-out liabilities 16,581 27,704 32,210

Change in fair value of contingent earn-out liabilities 1,162 1,489 1,005

Re-measurement of contingent earn-out liabilities ( 14,971 ) 1,085 4,252

Foreign exchange impact ( 247 ) ( 558 ) ( 854 )

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Reported as cash used in financing activities ( 22,900 ) ( 12,018 ) ( 1,412 )

Ending balance (at fair value)

Ending balance $ 32,617 $ 52,992 $ 35,290

Goodwill and Intangible Assets

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

GSG CIG Total

(in thousands)

Balance at October 1, 2017

Balance at September 30, 2018 $ 389,741 $ 409,079 $ 798,820

Acquisitions 53,098 93,601 146,699

Impairment — ( 7,755 ) ( 7,755 )

Translation and other ( 1,037 ) ( 11,907 ) ( 12,944 )

Balance at September 29, 2019 441,802 483,018 924,820

Acquisitions 74,882 5,294 80,176

Impairment — ( 15,800 ) ( 15,800 )

Translation and other ( 369 ) 4,671 4,302

Balance at September 27, 2020 $ 516,315 $ 477,183 $ 993,498

The goodwill additions related to our fiscal 2020 acquisitions of SEG and BWF and adjustments of the final valuations for our fiscal 2019 acquisitions.

The purchase price allocations for the SEG and BWF acquisitions are preliminary and subject to adjustment based upon the final determinations of the net assets acquired and information to perform the final valuations.

Our goodwill was also impacted by foreign currency translation related to the goodwill balances of our foreign subsidiaries with functional currencies that are different than our reporting currency.

We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter.

Our last review at July 1, 2019 (i.e.

Our last review at June 29, 2020 (i.e.

the first day of our fourth quarter in fiscal 2020), 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.

All of our reporting units had estimated fair values that exceeded their carrying values by more than 25 % .

All of our reporting units had estimated fair values that exceeded their carrying values by more than 80 %, with the exception of our Asia/Pacific ("ASP") reporting unit, which is in our CIG reportable segment.

Our ASP reporting unit had an estimated fair value that exceeded its carrying value by less than 20 %.

We also regularly evaluate whether events and circumstances have occurred that may indicate a potential change in the recoverability of goodwill.

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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.

During the fourth quarter of fiscal 2019, we performed as strategic review of our operations.

As a result, we decided to dispose of our Canadian turn-key pipeline activities in the Remediation and Field Services ("RFS") reporting unit, which is in the CIG reportable segment.

We performed an interim goodwill impairment review of the RFS reporting unit and recorded a $ 7.8 million goodwill impairment charge.

As a result of the impairment charge, the estimated fair value of the RFS reporting unit equals its carrying value of $ 61 million at September 29, 2019, including the remaining $ 48.8 million of goodwill.

If the financial performance of the remaining operations in the RFS reporting unit were to fall below our revenue growth or operating profit margin

forecasts, or we are required to increase the discount rate used in our cash flow analysis, the related goodwill may become further impaired.

Foreign exchange translation relates to the goodwill balances of our foreign subsidiaries with functional currencies that are different than our reporting currency.

The gross amounts of goodwill for GSG were $ 459.5 million and $ 407.4 million at September 29, 2019 and September 30, 2018 , respectively, excluding $ 17.7 million of accumulated impairment.

The gross amounts of goodwill for CIG were $ 588.7 million and $ 507.0 million at September 29, 2019 and September 30, 2018 , respectively, excluding $ 105.7 million and $ 97.9 million , respectively, of accumulated impairment.

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

On September 2, 2020, Australia announced that it had fallen into economic recession, defined as two consecutive quarters of negative growth, for the first time since 1991 including 7 % negative growth in the quarter ending in June 2020.

This prompted a strategic review of our ASP reporting unit.

As a result of the economic recession in Australia, our revenue growth and profit margin forecasts for the ASP reporting unit declined from the previous forecast used for our annual goodwill impairment review as of June 29, 2020.

We also performed an interim goodwill impairment review of our ASP reporting unit in September 2020 and recorded a $ 15.8 million goodwill impairment charge.

The impaired goodwill related to our acquisitions of Coffey and NDY.

As a result of the impairment charge, the estimated fair value of our ASP reporting unit equaled its carrying value of $ 144.9 million, including $ 95.5 million of goodwill, at September 27, 2020.

During the fourth quarter of fiscal 2019, we performed an interim goodwill impairment review of our RFS reporting unit and recorded a $ 7.8 million goodwill impairment charge.

As a result of the impairment charge, the estimated fair value of the RFS reporting unit equaled its carrying value of $ 61 million at September 29, 2019, including the remaining $ 48.8 million of goodwill.

The gross amounts of goodwill for GSG were $ 534.0 million and $ 459.5 million at fiscal 2020 and 2019 year-ends, respectively, excluding accumulated impairment of $ 17.7 million for each period.

The gross amounts of goodwill for CIG were $ 598.7 million and $ 588.7 million at fiscal 2020 and 2019 year-ends, respectively, excluding accumulated impairment of $ 121.5 million and $ 105.7 million, respectively.

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

September 29, 2019

September 30, 2018

September 27, 2020 September 29, 2019

(in years) Gross

Amount Accumulated

Amortization Gross

Amount Accumulated

($ in thousands)

Non-compete agreements

Client relations 2.9 $ 60,775 $ ( 53,392 ) $ 56,779 $ ( 50,455 )

Backlog 0.7 37,682 ( 32,761 ) 32,229 ( 24,968 )

Technology and trade names 1.8 7,964 ( 6,325 ) 7,714 ( 4,859 )

Foreign currency translation adjustments reduced net identifiable intangible assets by $ 0.3 million and $ 0.9 million in fiscal 2019 and 2018 , respectively.

Total $ 106,421 $ ( 92,478 ) $ 96,722 $ ( 80,282 )

Foreign currency translation adjustments reduced net identifiable intangible asse ts by $ 0.4 million and $ 0.3 million in fiscal 2020 and 2019, respectively.

Amortization expense for the identifiable intangible assets for fiscal 2020, 2019 and 2018 was $ 11.6 million, $ 11.6 million and $ 18.2 million, respectively.

Estimated amortization expense for the succeeding four years is as follows:

Estimated amortization expense for the succeeding four fiscal years is as follows:

(in thousands)

Total $ 13,943

Property and Equipment

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Property and equipment, net $ 35,507 $ 39,441

The depreciation expense related to property and equipment was $ 17.3 million , $ 19.6 million and $ 22.2 million for fiscal 2019 , 2018 and 2017 , respectively.

In the fourth quarter of fiscal 2019, we classified $ 5.4 million of net assets as held-for-sale and reported them as "Prepaid expenses and other current assets" on our consolidated balance sheet as of September 29, 2019.

In fiscal 2018, our property and equipment declined $ 7.0 million ( $ 3.0 million of which was land and buildings) due to the divestitures of our non-core utility field services operations in the CIG reportable segment and certain non-core assets.

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

The depreciation expense related to property and equipment w as $ 13.0 million, $ 17.3 million and $ 19.6 million for fiscal 2020, 2019 and 2018, respectively.

As of September 29, 2019, we classified $ 5.4 million of net assets related to the disposal of our Canadian turn-key pipeline activities as held-for-sale, and reported them as "Prepaid expense s and other current assets" on our consolidated balance sheet.

These assets were sold during fiscal 2020 resulting in a net gain of $ 8.5 million, which is reported in "Other costs of revenue" on the consolidated statement of income.

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

Fiscal Year Ended

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2020 September 29,

2019 September 30,

(in thousands)

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United States $ 209,443 $ 185,535 $ 180,034

Foreign 18,548 ( 10,399 ) ( 5,472 )

Total income before income taxes $ 227,991 $ 175,136 $ 174,562

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2020 September 29,

2019 September 30,

(in thousands)

Federal $ 24,102 $ 30,051 $ 46,840

State 6,872 8,923 9,228

Foreign 20,398 15,016 10,897

Total current income tax expense 51,372 53,990 66,965

Federal 2,187 ( 9,108 ) ( 22,072 )

State 870 ( 1,195 ) ( 1,471 )

Foreign ( 328 ) ( 27,312 ) ( 5,817 )

Total deferred income tax expense 2,729 ( 37,615 ) ( 29,360 )

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2020 September 29,

2019 September 30,

Tax at federal statutory rate 21.0 % 21.0 % 24.5 %

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Non-taxable foreign interest income ( 1.1 ) ( 1.7 ) ( 2.0 )

Goodwill 1.5 0.9 1.7

Stock compensation ( 2.2 ) ( 2.4 ) ( 2.7 )

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Transition tax on foreign earnings — 1.4 —

Other 2.6 3.3 1.8

Total income tax expense 23.7 % 9.3 % 21.5 %

The effective tax rates for fiscal 2020, 2019 and 2018 were 23.7 %, 9.3 % and 21.5 %, respectively.

These tax rates reflect the impact of the comprehensive tax legislation enacted by the U.S.

government on December 22, 2017, which is commonly referred to as the TCJA.

The TCJA significantly revised the U.S.

corporate income tax regime by, among other things, lowering the U.S.

corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, limiting the deductibility of certain executive compensation, and implementing a modified territorial tax system with the introduction of the Global Intangible Low-Taxed Income ("GILTI") tax rules.

The TCJA also imposed a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries.

In fiscal 2019, we finalized our fiscal 2018 U.S.

federal tax return and recorded a $ 2.4 million tax expense with respect to the one-time transition tax on foreign earnings.

As we have a September 30 fiscal year-end, our U.S.

federal corporate income tax rate was blended in fiscal 2018, resulting in a statutory federal rate of 24.5 % (3 months at 35% and 9 months at 21%), and was 21% in fiscal 2019.

GAAP requires that the impact of tax legislation be recognized in the period in which the tax law was enacted.

As a result of the TCJA, we reduced our deferred tax liabilities and recorded a deferred tax benefit of $ 10.1 million in fiscal 2018 to reflect our estimate of temporary differences in the United States that were to be recovered or settled in fiscal 2018 based on the 24.5 % blended corporate tax rate or based on the 21% tax rate in fiscal 2019 and beyond versus the previous enacted 35% corporate tax rate.

We finalized this analysis in the first quarter of fiscal 2019 and recorded an additional deferred tax benefit of $ 2.6 million .

Valuation allowances of $ 23.4 million in Australia were released due to sufficient positive evidence being obtained in fiscal 2019.

The valuation allowances were primarily related to net operating loss and R&D credit carry-forwards and other temporary differences.

We evaluated the positive evidence against any negative evidence and determined that it was more likely than not that the deferred tax assets will be realized.

The goodwill impairment charges in fiscal 2020 and fiscal 2019 and certain of the transaction charges in fiscal 2019 did not have related tax benefits.

Income tax expense was reduced by $ 8.3 million, $ 6.4 million, $ 5.1 million of excess tax benefits on share-based payments in fiscal 2020, 2019, and 2018, respectively.

Additionally, we analyzed our deferred tax liabilities for the Tax Cuts and Jobs Act's ("TCJA's") lower tax rates and recorded a deferred tax benefit of $ 2.6 million and $ 10.1 million in fiscal 2019 and fiscal 2018, respectively .

Also, valuation allowances of $ 22.3 million in Australia were released due to sufficient positive evidence obtained during the second quarter of fiscal 2019.

The valuation allowances were primarily related to net operating loss and research and development credit carryforwards and other temporary differences.

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 factors used to assess the likelihood of realization were the past performance of the related entities, our forecast of future taxable income, and available tax planning strategies that could be implemented to realize the deferred tax assets.

Excluding the net deferred tax benefits from the TCJA and the release of the valuation allowance, our effective tax rate in fiscal 2019 was 21.9 % in fiscal 2019 compared to 25.1 % in fiscal 2018 primarily due to the reduced U.S.

corporate income tax rate.

With respect to the GILTI provisions of the TCJA, we have analyzed our structure and global results of operations and expect to have a GILTI tax of $ 0.4 million for fiscal 2019, which was included in our fiscal 2019 income tax expense.

We are currently under examination by the Canada Revenue Agency for fiscal years 2011 through 2016 and the California Franchise Tax Board for fiscal years 2014 through 2016.

Excluding the impact of the non-deductible goodwill impairment charges and transaction costs, the excess tax benefits on share-based payments, the net deferred tax benefits from the TCJA, and the valuation allowance release, our effective tax rates in fiscal 2020, 2019, and 2018 were 25.6 %, 24.6 %, and 30.3 % respectively.

We are currently under examination by the Internal Revenue Service for fiscal year 2018, the Canada Revenue Agency for fiscal years 2011 through 2016, and the California Franchise Tax Board for fiscal years 2014 through 2016.

We are also subject to various other state audits.

With a few exceptions, we are no longer subject to U.S.

federal, state and local, or non-U.S.

income tax examinations for fiscal years before 2011.

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

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

Fiscal Year Ended

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Deferred Tax Assets:

State taxes $ 1,146 $ 764

Reserves and contingent liabilities 6,262 5,500

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Accrued liabilities 28,223 28,232

Lease liabilities, operating leases 66,941 —

Stock-based compensation 5,905 6,700

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Prepaid expense ( 5,967 ) ( 3,026 )

Right-of-use assets, operating leases ( 66,941 ) —

Intangibles ( 29,130 ) ( 26,482 )

Property and equipment ( 1,615 ) ( 1,133 )

Total deferred tax liability

Net deferred tax assets (liabilities)

Total deferred tax liabilities ( 118,104 ) ( 52,527 )

Net deferred tax assets $ 15,736 $ 15,414

At September 27, 2020, undistributed earnings of our foreign subsidiaries, primarily in Canada, amounting to approximately $ 66.9 million are expected to be permanently reinvested.

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and available foreign NOL carry forwards of $ 138.4 million, of which $ 31.6 million expire at various dates from 2024 to 2040, and $ 106.8 million have no expiration date.

In addition, we had foreign capital loss

carryforwards of $ 13.8 million and foreign research and development credits of $ 4.3 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, and estimates of projected future taxable income.

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 assets related to the loss carry-forwards and certain foreign intangibles for which a valuation allowance of $ 24.4 million has been provided.

At September 27, 2020, we had $ 9.2 million of unrecognized tax benefits, all of which, if recognized, would affect our effective tax rate.

It is not expected that there will be a significant change in the unrecognized tax benefits in the next 12 months.

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:

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2020 September 29,

2019 September 30,

(in thousands)

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Reductions for prior year tax positions ( 641 ) ( 100 ) —

Settlements — ( 757 ) ( 4,053 )

Ending balance $ 9,228 $ 9,169 $ 8,328

We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense.

During fiscal years 2019, 2018 and 2017, we accrued additional interest expense of $ 0.5 million , $ 0.6 million and $ 0.4 million , respectively, and recorded reductions in accrued interest of $ 0.2 million , $ 0.3 million and $ 0.9 million , respectively, as a result of audit settlements and other prior-year adjustments.

The amount of interest and penalties accrued at September 29, 2019 , September 30, 2018 and October 1, 2017 was $ 2.4 million , $ 1.2 million and $ 1.1 million , respectively.

During fiscal years 2020, 2019 and 2018, we accrued additional interest and penalties of $ 0.8 million, $ 2.6 million and $ 0.6 million, respectively, and recorded reductions in accrued interest and penalties of $ 0 , $ 0.2 million and $ 0.3 million, respectively, as a result of audit settlements and other prior-year adjustments.

The amount of interest and penalties accrued at September 27, 2020, September 29, 2019 and September 30, 2018 was $ 4.4 million, $ 3.6 million and $ 1.2 million, respectively.

Long-Term Debt

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Credit facilities $ 291,659 $ 276,434

Capital leases

Total long-term debt

Current portion of long-term debt

Long-term debt, less current portion

Current portion of long-term debt and other short-term borrowings ( 49,264 ) ( 12,500 )

Long-term debt, less current portion and other short-term borrowings $ 242,395 $ 263,934

On July 30, 2018, we entered into a Second Amended and Restated Credit Agreement (“Amended Credit Agreement”) with a total borrowing capacity of $ 1 billion that will mature in July 2023.

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dollars (the highest of the U.S.

federal funds rate plus 0.50 % per annum, the bank’s prime rate or the Eurocurrency rate plus 1.00 % ) plus a margin that ranges from 0 % to 0.75 % per annum.

federal funds rate plus 0.50 % per annum, the bank’s prime rate or

the Eurocurrency rate plus 1.00 %) plus a margin that ranges from 0 % to 0.75 % per annum.

In each case, the applicable margin is based on our Consolidated Leverage Ratio, calculated quarterly.

1 unchanged sentence

The Amended Credit Agreement expires on July 30, 2023, or earlier at our discretion upon payment in full of loans and other obligations.

At September 29, 2019 , we had $ 276.4 million in outstanding borrowings under the Amended Credit Agreement, which was comprised of $ 240.6 million under the Term Loan Facility and $ 35.8 million under the Amended Revolving Credit Facility at a year-to-date weighted-average interest rate of 3.37 % per annum.

In addition, we had $ 0.7 million in standby letters of credit

under the Amended Credit Agreement.

Our average effective weighted-average interest rate on borrowings outstanding during the year-to-date period ending September 29, 2019 under the Amended Credit Agreement, including the effects of interest rate swap agreements described in Note 15 , " Derivative Financial Instruments ", was 3.65 % .

At September 27, 2020, we had $ 254.9 million in outstanding borrowings under the Amended Credit Agreement, which was comprised of $ 228.1 million under the Amended Term Loan Facility and $ 26.8 million outstanding under the Amended Revolving Credit Facility at a year-to-date weighted-average interest rate of 2.31 % per annum.

In addition, we had $ 0.7 million in standby letters of credit under the Amended Credit Agreement.

Our average effective weighted-average interest rate on borrowings outstanding during the year-to-date period ended September 27, 2020 under the Amended Credit Agreement, including the effects of interest rate swap agreements described in Note 14, "Derivative Financial Instruments", was 3.52 %.

At September 27, 2020, we had $ 422.4 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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At September 27, 2020, we were in compliance with these covenants with a consolidated leverage ratio of 1.10 x and a consolidated interest coverage ratio of 19.76 x.

Our obligations under the Amended Credit Agreement are guaranteed by certain of our 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) our accounts receivable, general intangibles and intercompany loans, and those of our subsidiaries that are guarantors or borrowers.

In addition to the credit facility, we entered into agreements to issue standby letters of credit.

The aggregate amount of standby letters of credit outstanding under these additional agreements and other bank guarantees was $ 41.4 million , of which $ 10.2 million was issued in currencies other than the U.S.

We maintain at our Australian subsidiary an AUD $ 30 million credit facility, which may be used for bank overdrafts, short-term cash advances and bank guarantees.

This facility expires in March 2020 and is secured by a parent guarantee.

At September 29, 2019 , there were no borrowings outstanding under this facility and bank guarantees outstanding of USD $ 6.1 million , which were issued in currencies other than the U.S.

We maintain at our United Kingdom subsidiary a GBP£ 35 million credit facility, which may be used for bank overdrafts, short-term cash advances and bank guarantees.

This facility expires in July 2020 and is secured by a parent guarantee.

At September 29, 2019, there were no borrowings outstanding under this facility and bank guarantees outstanding of USD $ 17.4 million , which were issued in currencies other than the U.S.

In addition to the Amended Credit Agreement, we maintain other credit facilities, which may be used for bank overdrafts, short-term cash advances and bank guarantees.

At September 27, 2020, th ere was $ 36.6 million outstanding under these facilities and the aggregate amount of standby letters of credit outstanding was $ 69.7 million.

As of September 27, 2020, we had bank overdrafts of $ 33.6 million related to our U.S.

disbursement bank accounts.

This balance is reported in the "Current portion of long-term debt and other short-term borrowings" within our fiscal 2020 year-end consolidated balance sheet.

The change in bank overdraft balance is classified as cash flows from financing activities within our consolidated statements of cash flows as we believe these overdrafts to be a form of short-term financing from the bank due to our ability to fund the overdraft with the $ 50.0 million overdraft protection on the bank accounts or our other credit facilities if needed.

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

(in thousands)

We lease office and field equipment, vehicles and buildings under various operating leases.

In fiscal 2019 , 2018 and 2017 , we recognized $ 79.3 million , $ 77.8 million and $ 71.3 million of expense related to operating leases, respectively.

The following amounts are payable under non-cancelable operating and capital lease commitments for the next five fiscal years and beyond:

Total $ 291,659

In February 2016, the FASB issued Leases (Topic 842), which is a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of ROU assets obtained in exchange for lease liabilities on the balance sheet.

Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases.

Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

We elected to adopt the standard, and available practical expedients, effective September 30, 2019 (the first day of our fiscal 2020).

These practical expedients allowed us to keep the lease classification assessed under the previous lease accounting standard (ASC 840) without reassessment under the new standard, and allowed all separate lease components, including non-lease components, to be accounted for as a single lease component for all existing leases prior to adoption of the new standard.

We adopted this new standard under the modified retrospective transition approach without adjusting comparative periods in the financial statements, as allowed under Leases (Topic 842), and implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

The standard had a material impact on our consolidated balance sheets but did not have an impact on the consolidated income statements.

The most significant impact was

the recognition of ROU assets and lease liabilities for operating leases, while accounting for finance leases remained substantially unchanged.

Our finance leases are primarily for certain IT equipment and the related ROU and lease liabilities were immaterial, and included in "Other current liabilities" and "Other long-term liabilities" accordingly in the consolidated balance sheet at September 27, 2020 .

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.