TETRA TECH INC 10-Q

Item 1. Financial Statements Tetra Tech, Inc. Consolidated Balance Sheets (unaudited - in thousands, except par value) ASSETS December 27, 2020 September 27, 2020 Current assets: Cash and cash equivalents $ 163,438 $ 157,515 Accounts receivable, net 673,763 649,035 Contract assets 91,598 92,632 Prepaid expenses and other current assets 91,597 81,094 Income taxes receivable 15,050 19,509 Total current assets 1,035,446 999,785 Property and equipment, net 35,141 35,507 Right-of-use assets, operating leases 225,787 239,396 Investments in unconsolidated joint ventures 7,919 7,332 Goodwill 1,017,909 993,498 Intangible assets, net 10,893 13,943 Deferred tax assets 34,511 32,052 Other long-term assets 47,266 57,045 Total assets $ 2,414,872 $ 2,378,558 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 135,435 $ 111,804 Accrued compensation 138,112 199,801 Contract liabilities 199,297 171,905 Short-term lease liabilities, operating leases 69,612 69,650 Current portion of long-term debt and other short-term borrowings 26,179 49,264 Current contingent earn-out liabilities 10,945 16,142 Other current liabilities 175,141 174,890 Total current liabilities 754,721 793,456 Deferred tax liabilities 18,462 16,316 Long-term debt 275,983 242,395 Long-term lease liabilities, operating leases 181,473 191,955 Long-term contingent earn-out liabilities 15,074 16,475 Other long-term liabilities 63,905 80,588 Commitments and contingencies (Note 16) Equity: Preferred stock - authorized, 2,000 shares of $ 0.01 par value; no shares issued and outstanding at December 27, 2020 and September 27, 2020 — — Common stock - authorized, 150,000 shares of $ 0.01 par value; issued and outstanding, 54,193 and 53,797 shares at December 27, 2020 and September 27, 2020, respectively 542 538 Accumulated other comprehensive loss ( 127,919 ) ( 161,786 ) Retained earnings 1,232,563 1,198,567 Tetra Tech stockholders’ equity 1,105,186 1,037,319 Noncontrolling interests 68 54 Total stockholders' equity 1,105,254 1,037,373 Total liabilities and stockholders' equity $ 2,414,872 $ 2,378,558 See Notes to Consolidated Financial Statements. 3 Tetra Tech, Inc. Consolidated Statements of Income (unaudited – in thousands, except per share data) Three Months Ended December 27, 2020 December 29, 2019 Revenue $ 765,104 $ 797,623 Subcontractor costs ( 159,933 ) ( 183,600 ) Other costs of revenue ( 488,861 ) ( 504,286 ) Gross profit 116,310 109,737 Selling, general and administrative expenses ( 50,058 ) ( 46,435 ) Income from operations 66,252 63,302 Interest expense ( 3,026 ) ( 3,349 ) Income before income tax expense 63,226 59,953 Income tax expense ( 10,778 ) ( 12,636 ) Net income 52,448 47,317 Net income attributable to noncontrolling interests ( 12 ) ( 7 ) Net income attributable to Tetra Tech $ 52,436 $ 47,310 Earnings per share attributable to Tetra Tech: Basic $ 0.97 $ 0.87 Diluted $ 0.96 $ 0.85 Weighted-average common shares outstanding: Basic 53,927 54,560 Diluted 54,637 55,438 See Notes to Consolidated Financial Statements. 4 Tetra Tech, Inc. Consolidated Statements of Comprehensive Income (unaudited – in thousands) Three Months Ended December 27, 2020 December 29, 2019 Net income $ 52,448 $ 47,317 Other comprehensive income, net of tax Foreign currency translation adjustment, net of tax 32,393 13,901 Gain on cash flow hedge valuations, net of tax 1,476 1,670 Other comprehensive income, net of tax 33,869 15,571 Comprehensive income, net of tax $ 86,317 $ 62,888 Comprehensive income attributable to noncontrolling interests, net of tax 14 9 Comprehensive income attributable to Tetra Tech, net of tax $ 86,303 $ 62,879 See Notes to Consolidated Financial Statements. 5 Tetra Tech, Inc. Consolidated Statements of Cash Flows (unaudited – in thousands) Three Months Ended December 27, 2020 December 29, 2019 Cash flows from operating activities: Net income $ 52,448 $ 47,317 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,238 6,235 Equity in income of unconsolidated joint ventures ( 1,107 ) ( 1,675 ) Distributions of earnings from unconsolidated joint ventures 931 1,447 Amortization of stock-based awards 4,898 4,482 Deferred income taxes 954 2,173 Gain on sale of property and equipment ( 7 ) ( 897 ) Changes in operating assets and liabilities: Accounts receivable and contract assets ( 11,400 ) 44,040 Prepaid expenses and other assets 11,813 ( 2,053 ) Accounts payable 23,631 ( 66,381 ) Accrued compensation ( 61,690 ) ( 79,098 ) Contract liabilities 27,392 38,207 Other liabilities ( 23,373 ) ( 14,917 ) Income taxes receivable/payable 2,452 3,096 Net cash provided by (used in) operating activities 33,180 ( 18,024 ) Cash flows from investing activities: Capital expenditures ( 1,795 ) ( 3,331 ) Proceeds from sale of property and equipment 9 455 Net cash used in investing activities ( 1,786 ) ( 2,876 ) Cash flows from financing activities: Proceeds from borrowings 123,533 198,364 Repayments on long-term debt ( 114,752 ) ( 141,550 ) Repurchases of common stock ( 15,000 ) ( 21,177 ) Taxes paid on vested restricted stock ( 17,330 ) ( 10,818 ) Stock options exercised 7,495 1,413 Dividends paid ( 9,198 ) ( 8,190 ) Payments of contingent earn-out liabilities ( 7,037 ) ( 9,236 ) Principal payments on finance leases ( 538 ) — Net cash (used in) provided by financing activities ( 32,827 ) 8,806 Effect of exchange rate changes on cash, cash equivalents and restricted cash 7,356 2,200 Net increase (decrease) in cash, cash equivalents and restricted cash 5,923 ( 9,894 ) Cash, cash equivalents and restricted cash at beginning of period 157,515 120,901 Cash, cash equivalents and restricted cash at end of period $ 163,438 $ 111,007 Supplemental information: Cash paid during the period for: Interest $ 1,968 $ 3,082 Income taxes, net of refunds received of $ 1.1 million and $ 0.3 million $ 5,696 $ 5,579 Supplemental disclosures of non-cash investing activities: Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 163,438 $ 110,833 Restricted cash — 174 Total cash, cash equivalents and restricted cash $ 163,438 $ 111,007 See Notes to Consolidated Financial Statements. 6 Tetra Tech, Inc. Consolidated Statements of Stockholders' Equity Three Months Ended December 29, 2019 and December 27, 2020 (unaudited – in thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Total Tetra Tech Equity Non-Controlling Interests Total Equity Shares Amount BALANCE AT SEPTEMBER 29, 2019 54,565 $ 546 $ 78,132 $ ( 160,584 ) $ 1,071,192 $ 989,286 $ 178 $ 989,464 Net income 47,310 47,310 7 47,317 Other comprehensive income 15,569 15,569 2 15,571 Distributions paid to noncontrolling interests — ( 13 ) ( 13 ) Cash dividends of $ 0.15 per common share ( 8,190 ) ( 8,190 ) ( 8,190 ) Stock-based compensation 4,482 4,482 4,482 Restricted & performance shares released 185 1 ( 10,819 ) ( 10,818 ) ( 10,818 ) Stock options exercised 54 1 1,412 1,413 1,413 Shares issued for Employee Stock Purchase Plan 168 1 8,715 8,716 8,716 Stock repurchases ( 244 ) ( 2 ) ( 21,175 ) ( 21,177 ) ( 21,177 ) BALANCE AT DECEMBER 29, 2019 54,728 $ 547 $ 60,747 $ ( 145,015 ) $ 1,110,312 $ 1,026,591 $ 174 $ 1,026,765 BALANCE AT SEPTEMBER 27, 2020 53,797 $ 538 $ — $ ( 161,786 ) $ 1,198,567 $ 1,037,319 $ 54 $ 1,037,373 Net income 52,436 52,436 12 52,448 Other comprehensive income 33,867 33,867 2 33,869 Cash dividends of $ 0.17 per common share ( 9,198 ) ( 9,198 ) ( 9,198 ) Stock-based compensation 4,898 4,898 4,898 Restricted & performance shares released 209 2 ( 17,332 ) ( 17,330 ) ( 17,330 ) Stock options exercised 198 2 7,493 7,495 7,495 Shares issued for Employee Stock Purchase Plan 124 1 10,698 10,699 10,699 Stock repurchases ( 135 ) ( 1 ) ( 5,757 ) ( 9,242 ) ( 15,000 ) ( 15,000 ) BALANCE AT DECEMBER 27, 2020 54,193 $ 542 $ — $ ( 127,919 ) $ 1,232,563 $ 1,105,186 $ 68 $ 1,105,254 See Notes to Consolidated Financial Statements. 7 TETRA TECH, INC. Notes to Consolidated Financial Statements 1. Basis of Presentation The accompanying unaudited consolidated financial statements and related notes of Tetra Tech, Inc. (“we,” “us,” “our” or "Tetra Tech") have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and the notes contained in our Annual Report on Form 10-K for the fiscal year ended September 27, 2020. These financial statements reflect all normal recurring adjustments that are considered necessary for a fair statement of our financial position, results of operations and cash flows for the interim periods presented. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year or for future years. Certain reclassifications were made to the prior year to conform to current year presentation. 2. Recent Accounting Pronouncements In June 2016, the Financial Accounting Standards Board ("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. We adopted this guidance in the first quarter of fiscal 2021, and the adoption did not have a material impact on our consolidated financial statements. In August 2018, the FASB issued updated guidance modifying certain fair value measurement disclosures. The guidance contains additional disclosures to enable users of the financial statements to better understand the entity’s assumptions 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. We adopted this guidance in the first quarter of fiscal 2021, and the adoption did not have a material 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 a material impact on our consolidated financial statements. In May 2020, the Securities and Exchange Commission issued guidance amending certain financial disclosures about acquired and disposed businesses. The amendments are designed to assist registrants in making more meaningful determinations of whether a subsidiary or an acquired or disposed business is significant, and to improve the related disclosure requirements. 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 a material impact on our consolidated financial statements. 3. Revenue and Contract Balances 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: 8 Three Months Ended December 27, 2020 December 29, 2019 (in thousands) Client Sector: U.S. state and local government $ 124,966 $ 123,836 U.S. federal government (1) 265,864 245,303 U.S. commercial 157,806 181,491 International (2) 216,468 246,993 Total $ 765,104 $ 797,623 Contract Type: Fixed-price $ 274,432 $ 271,055 Time-and-materials 355,241 388,158 Cost-plus 135,431 138,410 Total $ 765,104 $ 797,623 (1) Includes revenue generated under U.S. federal government contracts performed outside the United States. (2) Includes revenue generated from foreign operations, primarily in Canada, Australia, the United Kingdom, and revenue generated from non-U.S. clients. Other than the U.S. federal government, no single client accounted for more than 10% of our revenue for the three months ended December 27, 2020 and December 29, 2019. Contract Assets and Contract Liabilities We invoice customers based on the contractual terms of each contract. However, the timing of revenue recognition may differ from the timing of invoice issuance. Contract assets represent revenue recognized in excess of the amounts for which we have the contractual right to bill our customers. Such amounts are recoverable from customers based upon various measures of performance, including achievement of certain milestones or completion of a contract. In addition, many of our time and materials arrangements are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded, as revenue is recognized in advance of billings. Contract retentions, included in contract assets, represent amounts withheld by clients until certain conditions are met or the project is completed, which may extend beyond one year. Contract liabilities consist of billings in excess of revenue recognized. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and increase as billings in advance of revenue recognition occur. Contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. There were no substantial non-current contract assets or liabilities for the periods presented. Net contract assets/liabilities consisted of the following: Balance at December 27, 2020 September 27, 2020 (in thousands) Contract assets (1) $ 91,598 $ 92,632 Contract liabilities ( 199,297 ) ( 171,905 ) Net contract liabilities $ ( 107,699 ) $ ( 79,273 ) (1) Includes $ 8.5 million and $ 12.3 million of contract retentions as of December 27, 2020 and September 27, 2020, respectively. 9 In the first quarter of fiscal 2021, we recognized revenue of approximate ly $ 60 million from amounts included in the contract liability balance at the end of fiscal 2020, compared to approximately $ 64 million for the same period last year. 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. For the first quarters of fiscal 2021 and 2020, these net adjustments to our operating income were immaterial. 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 December 27, 2020 and September 27, 2020, our consolidated balance sheets included liabilities for anticipated losses of $ 11.4 million and $ 13.2 million, respectively. The estimated cost to complete the related contracts as of December 27, 2020 was approxima tely $ 135 million . Accounts Receivable, Net Net accounts receivable consisted of the following: Balance at December 27, 2020 September 27, 2020 (in thousands) Billed $ 438,458 $ 402,818 Unbilled 242,890 253,364 Total accounts receivable 681,348 656,182 Allowance for doubtful accounts ( 7,585 ) ( 7,147 ) Total accounts receivable, net $ 673,763 $ 649,035 Billed accounts receivable represent amounts billed to clients that have not been collected. Unbilled accounts receivable, which represent an unconditional right to payment subject only to the passage of time, include unbilled amounts typically resulting from revenue recognized but not yet billed pursuant to contract terms or billed after the period end date. Most of our unbilled receivables at December 27, 2020 are expected to be billed and collecte d within 12 months. The allowance for doubtful accounts represents amounts that are expected to become uncollectible or unrealizable in the future. We determine an estimated allowance for uncollectible accounts based on management's consideration of trends in the actual and forecasted credit quality of our clients, including delinquency and payment history; type of client, such as a government agency or a commercial sector client; and general economic and industry conditions, including the potential impacts of the coronavirus disease 2019 ("COVID-19") pandemic, that may affect our clients' ability to pay. Total accounts receivable at December 27, 2020 and September 27, 2020 included approximate ly $ 14 million for each period (all in our Remediation Construction Management ("RCM") segment) , r elated to claims, including requests for equitable adjustment, on contracts that provide for price redeterminat ion . Claims are amounts in excess of agreed contract prices that we seek to collect from our clients or other third parties for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regards to both scope and price) should be recognized include the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in our performance, (c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting the claim is objective and verifiable. This can lead to a situation in which costs are recognized in one period and revenue is recognized in a subsequent period when a client agreement is obtained, or a claims resolution occurs. We regularly evaluate all unsettled claim amounts and record appropriate adjustme nts to operating earnings when it is probable that the claim will result in a different contract value than the amount previously estimated. In the first quarters of fiscal 2021 and 2020, we recorded no material gains or losses related to claims. No single client accounted for more than 10% of our accounts receivable at December 27, 2020 and September 27, 2020. 10 Remaining Unsatisfied Performance Obligations (“RUPOs”) Our RUPOs represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. We had $ 3.2 billion of RUPOs as of December 27, 2020. RUPOs increase with awards from new contracts or additions on existing contracts and decrease as work is performed and revenue is recognized on existing contracts. RUPOs may also decrease when projects are canceled or modified in scope. We include a contract within our RUPOs when the contract is awarded and an agreement on contract terms has been reached. We expect to satisfy our RUPOs as of December 27, 2020 over the following periods: Amount (in thousands) Within 12 months $ 1,823,137 Beyond 1,341,016 Total $ 3,164,153 Although RUPOs reflect business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. RUPOs are adjusted to reflect any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals, as appropriate. Our operations and maintenance contracts can generally be terminated by the clients without a substantive financial penalty. Therefore, the remaining performance obligations on such contracts are limited to the notice period required for the termination (usually 30 , 60 , or 90 days). 4. Acquisitions In the second quarter of fiscal 2020, we acquired Segue Technologies, Inc. ("SEG"), a leading information technology management consulting firm based in Arlington, Virginia. SEG is part of our Government Services Group ("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 the fourth quarter of 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 $ 47.7 million. T his amount was comprised of $ 41.8 million in initial cash payments made to the sellers, $ 0.7 million of payables related to estimated post-closing adjustments for net assets acquired, and $ 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. The fiscal 2020 goodwill additions represent the value of a workforce with distinct expertise in the high-end information technology field, in the areas of data analytics, modeling and simulation, cloud, and agile software development. In addition, these acquired capabilities, when combined with our existing global consulting and engineering business, result in opportunities that allow us to provide services under contracts that could not have been pursued individually by either us or the acquired companies. The results of these acquisitions were included in our consolidated financial statements from their respective closing dates. These acquisitions were not considered material 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 one to ten years , and trade names with lives ranging from three to five years . For detailed information regarding our intangible assets, see Note 5, “Goodwill and Intangible Assets”. Most of our acquisition agreements include contingent earn-out agreements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based on our valuations of the acquired companies and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved. The fair values of any earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in “Current contingent earn-out liabilities” 11 and “Long-term contingent earn-out liabilities” on the consolidated balance sheets. We consider several factors when determining that contingent earn-out liabilities are part of the purchase price, including the following: (1) the valuation of our acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former owners of acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of our other key employees. The contingent earn-out payments are not affected by employment termination. We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. We use a probability-weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period (generally two or three years ), and the probability outcome percentages we assign to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability, with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the contingent earn-out liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows. Any amount paid in excess of the contingent earn-out liability on the acquisition date is reflected as cash used in operating activities in our consolidated statements of cash flows. We evaluated our estimated fair value of contingent consideration liabilities for each individual acquisition on a quarterly basis, 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. We also 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. The updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income. For the first quarters of fiscal 2021 and 2020, we had no material adjustments to our contingent earn-out liabilities in operating income . At December 27, 2020, there was a total potential maximu m of $ 63.9 million of outs tanding contingent consideration related to acquisitions. Of this amount, $ 26.0 million was estimated as the fair value and accrued on our consolidated balance sheet. If the global economic disruption related to the COVID-19 pandemic is prolonged, we could have more significant reductions in our contingent earn-out liabilities and related gains in our operating income in future periods. 5. Goodwill and Intangible Assets The following table summarizes the changes in the carrying value of goodwill by reportable segment: GSG CIG Total (in thousands) Balance at September 27, 2020 $ 516,315 $ 477,183 $ 993,498 Translation 5,834 18,577 24,411 Balance at December 27, 2020 $ 522,149 $ 495,760 $ 1,017,909 Our goodwill balances reflect foreign currency translation adjustments related to our foreign subsidiaries with functional currencies that are different than our reporting currency. These amounts are presented net of reductions from historical impairment adjustments. The gross amounts of goodwill for GSG were $ 539.9 million and $ 534.0 million at December 27, 2020 and September 27, 2020, respectively, excluding accumulated impairment of $ 17.7 million for each period. The gross amounts of goodwill for CIG were $ 617.3 million and $ 598.7 million at December 27, 2020 and September 27, 2020, respectively, excluding accumulated impairment of $ 121.5 million for each period. We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. Our most recent annual 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 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 %. 12 We also regularly evaluate whether events and circumstances have occurred that may indicate a potential change in the recoverability of goodwill. We perform interim goodwill impairment reviews between our annual reviews if certain events and circumstances have occurred, such as a deterioration in general economic conditions; an increase in the competitive environment; a change in management, key personnel, strategy or customers; negative or declining cash flows; or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods. Although we believe that our estimates of fair value for these reporting units are reasonable, if financial performance for these reporting units falls significantly below our expectations or market prices for similar business decline, the goodwill for these reporting units could become impaired. 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 June 30, 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 our 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. 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. On September 28, 2020 (the first day of our fiscal 2021), we merged our ASP reporting unit into our Client Account Management reporting unit. 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: December 27, 2020 September 27, 2020 Weighted- Average Remaining Life (in Years) Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization ($ in thousands) Client relations 2.8 $ 47,222 $ ( 40,497 ) $ 60,775 $ ( 53,392 ) Backlog 0.6 30,085 ( 27,329 ) 37,682 ( 32,761 ) Trade names 1.9 7,164 ( 5,752 ) 7,964 ( 6,325 ) Total $ 84,471 $ ( 73,578 ) $ 106,421 $ ( 92,478 ) Amortization expense for the three months ended December 27, 2020 was $ 3.4 million, compared to $ 2.9 million for the prior-year period. Estimated amortization expense for the remainder of fiscal 2021 and succeeding years is as follows: Amount (in thousands) 2021 $ 5,600 2022 2,741 2023 1,962 2024 590 Total $ 10,893 6. Property and Equipment Property and equipment consisted of the following: 13 Balance at December 27, 2020 September 27, 2020 (in thousands) Equipment, furniture and fixtures $ 94,545 $ 90,942 Leasehold improvements 34,464 34,569 Total property and equipment 129,009 125,511 Accumulated depreciation ( 93,868 ) ( 90,004 ) Property and equipment, net $ 35,141 $ 35,507 The depreciation expense related to property and equipment was $ 2.9 million for the first quarter of fiscal 2021, compared to $ 3.3 million for the prior-year quarter. 7. Stock Repurchase and Dividends On January 27, 2020, the Board of Directors authorized a new $ 200 million stock repurchase program, which was included in our remaining balance of $ 207.8 million as of fiscal 2020 year-end. In the first quarter of fiscal 2021, we repurchased and settled 135,413 shares with an average price of $ 110.77 per share for a total cost of $ 15 million in the open market. At December 27, 2020, we had a remaining balance of $ 192.8 million under our stock repurchase program. The following table presents dividends declared and paid in the first quarters of fiscal 2021 and 2020: Declare Date Dividend Paid Per Share Record Date Payment Date Dividend Paid (in thousands) November 9, 2020 $ 0.17 November 30, 2020 December 11, 2020 $ 9,198 November 11, 2019 $ 0.15 December 2, 2019 December 13, 2019 $ 8,190 Subsequent Event. On January 25, 2021, the Board of Directors declared a quarterly cash dividend of $ 0.17 pe r share payable on February 26, 2021 to stockholders of record as of the close of business on February 10, 2021. 8. Leases In February 2016, the 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 right-of-use (“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 information technology equipment and the related ROU and lease liabilities were immaterial, and included in "Other current liabilities" and "Other long-term liabilities" accordingly on our consolidated balance sheets at December 27, 2020 and September 27, 2020. 14 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. 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 . The components of lease costs are as follows: Three Months Ended December 27, 2020 December 29, 2019 (in thousands) Operating lease cost $ 22,069 $ 21,172 Sublease income ( 29 ) ( 574 ) Other — 18 Total lease cost $ 22,040 $ 20,616 Supplemental cash flow information related to leases is as follows: Three Months Ended December 27, 2020 December 29, 2019 (in thousands) Operating cash flows for operating leases $ 18,800 $ 19,715 Right-of-use assets obtained in exchange for new operating lease liabilities $ 10,293 $ 262,248 Supplemental balance sheet and other information related to leases are as follows: 15 Balance at December 27, 2020 September 27, 2020 (in thousands) Operating leases: Right-of-use assets $ 225,787 $ 239,396 Lease liabilities: Current 69,612 69,650 Long-term 181,473 191,955 Total operating lease liabilities $ 251,085 $ 261,605 Weighted-average remaining lease term: Operating leases 5 years 5 years Weighted-average discount rate: Operating leases 2.5 % 2.5 % As of December 27, 2020, we do not have any material additional operating leases that have not yet commenced. A maturity analysis of the future undiscounted cash flows associated with our operating lease liabilities is as follows: Balance at December 27, 2020 September 27, 2020 (in thousands) 2021 $ 57,306 $ 75,074 2022 68,072 64,972 2023 45,590 44,733 2024 31,380 30,991 2025 22,112 21,466 Beyond 44,928 44,169 Total lease payments 269,388 281,405 Less: imputed interest ( 18,303 ) ( 19,800 ) Total present value of lease liabilities $ 251,085 $ 261,605 9. Stockholders’ Equity and Stock Compensation Plans We recognize the fair value of our stock-based awards as compensation expense on a straight-line basis over the requisite service period in which the award vests. Stock-based compensation expense for the first quarters of fiscal 2021 and 2020 was $ 4.9 million and $ 4.5 million, respectively. Most of these amounts were included in selling, general and administrative expenses on our consolidated statements of income. In the first quarter of fiscal 2021, we awarded 57,542 performance share units (“PSUs”) to our non-employee directors and executive officers at a fair value of $ 144.33 per share on the award date. All PSUs are performance-based and vest, if at all, after the conclusion of the three-year performance period. The number of PSUs that ultimately vest is based 50 % on the growth in our diluted earnings per share and 50 % on our relative total shareholder return over the vesting period. Additionally, we awarded 107,384 restricted stock units (“RSUs”) to our non-employee directors, executive officers and employees at a fair value of $ 121.00 per share on the aw ard date. All executive officer and employee RSUs have time-based vesting over a four-year period, and the non-employee director RSUs vest after one year . 10. Earnings per Share (“EPS”) 16 Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding, less unvested restricted stock for the period. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive potential common shares for the period. Potential common shares include the weighted-average dilutive effects of outstanding stock options and unvested restricted stock using the treasury stock method. The following table presents the number of weighted-average shares used to compute basic and diluted EPS: Three Months Ended December 27, 2020 December 29, 2019 (in thousands, except per share data) Net income attributable to Tetra Tech $ 52,436 $ 47,310 Weighted-average common shares outstanding – basic 53,927 54,560 Effect of dilutive stock options and unvested restricted stock 710 878 Weighted-average common shares outstanding – diluted 54,637 55,438 Earnings per share attributable to Tetra Tech: Basic $ 0.97 $ 0.87 Diluted $ 0.96 $ 0.85 11. Income Taxes The effective tax rates for the first quarters of fiscal 2021 and 2020 were 17.0 % and 21.1 %, respectively. Income tax expense was reduced by $ 6.1 million and $ 3.6 million of excess tax benefits on share-based payments in the first quarter of fiscal 2021 and 2020, respectively. Excluding the impact of the excess tax benefits on share-based payments, our effective tax rates in the first quarter of fiscal 2021 and 2020 were 26.8 % and 27.1 % respectively. As of December 27, 2020 and September 27, 2020, the liability for income taxes associated with uncertain tax positions was $ 10.7 million and $ 9.7 million, respectively. These uncertain tax positions substantially relate to ongoing examinations, which are reasonably likely to be resolved within the next 12 months. These liabilities represent our current estimates of the additional tax liabilities that we may be assessed when the related audits are concluded. If these audits are resolved in a manner more unfavorable than our current expectations, our additional tax liabilities could be materially higher than the amounts currently recorded resulting in additional tax expense. 12. Reportable Segments We manage our operations under two reportable segments. Our GSG reportable segment primarily includes activities with U.S. government clients (federal, state and local) and all activities with development agencies worldwide. Our CIG reportable segment primarily includes activities with U.S. commercial clients and international clients other than development agencies. Additionally , we continue to report the results of the wind-down of our non-core construction activities in the RCM reportable segment. Substantially, there has been no remaining backlog for RCM since fiscal 2018 as the projects were complete. GSG provides consulting and engineering services primarily to U.S. government clients (federal, state and local) and development agencies worldwide. GSG supports U.S. government civilian and defense agencies with services in water, environment, sustainable infrastructure, information technology, and disaster management. GSG also provides engineering design services for U.S. municipal and commercial clients, especially in water infrastructure, solid waste, and high-end sustainable infrastructure designs. GSG also leads our support for development agencies worldwide, especially in the United States, United Kingdom, and Australia. CIG primarily provides consulting and engineering services to U.S. commercial clients, and international clients that include both commercial and government sectors. CIG supports commercial clients across the Fortune 500, energy utilities, industrial, manufacturing, aerospace, and resource management markets. CIG also provides infrastructure and related environmental, engineering and project management services to commercial and local government clients across Canada, in Asia Pacific (primarily Australia and New Zealand), the United Kingdom, as well as Brazil and Chile. 17 Management evaluates the performance of these reportable segments based upon their respective segment operating income before the effect of amortization expense related to acquisitions, and other unallocated corporate expenses. We account for inter-segment revenues and transfers as if they were to third parties; that is, by applying a negotiated fee onto the costs of the services performed. All significant intercompany balances and transactions are eliminated in consolidation. Reportable Segments The following tables summarize financial information regarding our reportable segments: Three Months Ended December 27, 2020 December 29, 2019 (in thousands) Revenue GSG $ 468,623 $ 457,404 CIG 311,024 351,164 RCM — 145 Elimination of inter-segment revenue ( 14,543 ) ( 11,090 ) Total $ 765,104 $ 797,623 Income from operations GSG $ 47,700 $ 42,048 CIG 29,559 31,632 RCM — 1 Corporate (1) ( 11,007 ) ( 10,379 ) Total $ 66,252 $ 63,302 (1) Includes amortization of intangibles, other costs and other income not allocable to our reportable segments. Balance at December 27, 2020 September 27, 2020 (in thousands) Total Assets GSG $ 659,042 $ 649,417 CIG 481,545 479,238 RCM 14,256 14,258 Corporate (1) 1,260,029 1,235,645 Total $ 2,414,872 $ 2,378,558 (1) Corporate assets consist of intercompany eliminations and assets not allocated to our reportable segments including goodwill, intangible assets, deferred income taxes and certain other assets . 13. Fair Value Measurements The fair value of long-term debt was determined using the present value of future cash flows based on the borrowing rates currently available for debt with similar terms and maturities (Level 2 measurement, as described in “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 27, 2020). The carrying value of our long-term debt approximated fair value at December 27, 2020 and September 27, 2020. At December 27, 2020, we had borrowings of $ 288.5 million outstanding under our Amended Credit Agreement, which were used to fund business acquisitions, working capital needs, stock repurchases, dividends, capital expenditures and contingent earn-outs. 18 14. Derivative Financial Instruments We often use certain interest rate derivative contracts to hedge interest rate exposures on our variable rate debt. Also, we may enter in foreign currency derivative contracts with financial institutions to reduce the risk that cash flows and earnings could adversely be affected by foreign currency exchange rate fluctuations. Our hedging program is not designated for trading or speculative purposes. We recognize derivative instruments as either assets or liabilities on the accompanying consolidated balance sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives that have been designated as cash flow hedges in our consolidated balance sheets as accumulated other comprehensive income, and in our consolidated statements of income for those derivatives designated as fair value hedges. In fiscal 2018, we entered into five interest rate swap agreements that we designated as cash flow hedges to fix the interest rate on the borrowings under our term loan facility. As of December 27, 2020, the notional principal of our outstanding interest swap agreements was $ 225.0 million ($ 45.0 million each.) The interest rate swaps have a fixed interest rate of 2.79 % and expire in July 2023 for all five agreements. At December 27, 2020 and September 27, 2020, the fair value of the effective portion of our interest rate swap agreements designated as cash flow hedges before tax effect was $( 14.0 ) million and $( 15.5 ) million, which were reported in "Other current liabilities" on our consolidated balance sheets. Additionally, the related gains of $ 1.5 million and $ 1.7 million for the first quarters of fiscal 2021 and 2020, respectively, were recognized and reported on our consolidated statements of comprehensive income. We expect to reclassify $ 5.7 million from accumulated other comprehensive loss to interest expense within the next twelve months. There were no other derivative instruments designated as hedging instruments for the first quarter of fiscal 2021. 15. Reclassifications Out of Accumulated Other Comprehensive Income The accumulated balances and activities for the first quarters of fiscal 2021 and 2020 related to reclassifications out of accumulated other comprehensive income are summarized as follows: Three Months Ended Foreign Currency Translation Adjustments Gain (Loss) on Derivative Instruments Accumulated Other Comprehensive Income (Loss) (in thousands) Balances at September 29, 2019 $ ( 149,711 ) $ ( 10,873 ) $ ( 160,584 ) Other comprehensive income before reclassifications 13,899 2,153 16,052 Amounts reclassified from accumulated other comprehensive income Interest rate contracts, net of tax (1) — ( 483 ) ( 483 ) Net current-period other comprehensive income 13,899 1,670 15,569 Balances at December 29, 2019 $ ( 135,812 ) $ ( 9,203 ) $ ( 145,015 ) Balances at September 27, 2020 $ ( 146,275 ) $ ( 15,511 ) $ ( 161,786 ) Other comprehensive income before reclassifications 32,391 2,978 35,369 Amounts reclassified from accumulated other comprehensive income Interest rate contracts, net of tax (1) — ( 1,502 ) ( 1,502 ) Net current-period other comprehensive income 32,391 1,476 33,867 Balances at December 27, 2020 $ ( 113,884 ) $ ( 14,035 ) $ ( 127,919 ) (1) This accumulated other comprehensive component is reclassified to “Interest expense” in our consolidated statements of income. See Note 14 , “Derivative Financial Instruments”, for more information. 16. Commitments and Contingencies We are subject to certain claims and lawsuits typically filed against the consulting and engineering profession, alleging primarily professional errors or omissions. We carry professional liability insurance, subject to certain deductibles and policy 19 limits, against such claims. However, in some actions, parties are seeking damages that exceed our insurance coverage or for which we are not insured. While management does not believe that the resolution of these claims will have a material adverse effect, individually or in aggregate, on our financial position, results of operations or cash flows, management acknowledges the uncertainty surrounding the ultimate resolution of these matters. On July 15, 2019, following an initial January 14, 2019 filing, the Civil Division of the United States Attorney's Office filed an amended complaint in intervention in three qui tam actions filed against our subsidiary, Tetra Tech EC, Inc. ("TtEC"), in the U.S. District Court for the Northern District of California. The complaint alleges False Claims Act violations and breach of contract related to TtEC's contracts to perform environmental remediation services at the former Hunters Point Naval Shipyard in San Francisco, California. TtEC disputes the claims and will defend this matter vigorously. We are currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any. 17. Related Party Transactions We often provide services to unconsolidated joint ventures. Revenue generated from the services we provided to unconsolidated joint ventures for the first quarters of fiscal 2021 and 2020 was approxim ately $ 22 million and $ 29 million, respectively. Related reimbursable costs for the first quarters of fiscal 2021 and 2020 were approximately the same as our revenue since these reimbursable costs are pass-through costs. Our consolidated balance sheets also included the following amounts related to these services: Balance at December 27, 2020 September 27, 2020 (in thousands) Accounts receivable, net $ 27,707 $ 20,884 Contract assets 4,589 3,261 Contract liabilities 2,297 478 20