TETRA TECH INC 10-Q

Item 1. Financial Statements Tetra Tech, Inc. Consolidated Balance Sheets (unaudited - in thousands, except par value) ASSETS January 1, 2023 October 2, 2022 Current assets: Cash and cash equivalents $ 164,397 $ 185,094 Accounts receivable, net 795,872 755,112 Contract assets 80,903 92,405 Prepaid expenses and other current assets 193,635 125,605 Total current assets 1,234,807 1,158,216 Property and equipment, net 34,890 32,316 Right-of-use assets, operating leases 182,500 182,319 Goodwill 1,133,303 1,110,412 Intangible assets, net 27,536 29,163 Deferred tax assets 52,009 47,804 Other non-current assets 66,435 62,546 Total assets $ 2,731,480 $ 2,622,776 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 151,256 $ 147,436 Accrued compensation 184,468 237,669 Contract liabilities 274,118 241,340 Short-term lease liabilities, operating leases 55,809 57,865 Current portion of long-term debt 12,505 12,504 Current contingent earn-out liabilities 33,701 28,797 Other current liabilities 158,758 190,406 Total current liabilities 870,615 916,017 Deferred tax liabilities 32,779 15,161 Long-term debt 234,120 246,250 Long-term lease liabilities, operating leases 148,034 146,285 Non-current contingent earn-out liabilities 35,328 36,769 Other non-current liabilities 86,637 79,157 Commitments and contingencies (Note 17) Equity: Preferred stock - authorized, 2,000 shares of $ 0.01 par value; no shares issued and outstanding at January 1, 2023 and October 2, 2022 — — Common stock - authorized, 150,000 shares of $ 0.01 par value; issued and outstanding, 53,226 and 52,981 shares at January 1, 2023 and October 2, 2022, respectively 532 530 Additional paid-in capital 3,281 — Accumulated other comprehensive loss ( 175,126 ) ( 208,144 ) Retained earnings 1,495,221 1,390,701 Tetra Tech stockholders’ equity 1,323,908 1,183,087 Noncontrolling interests 59 50 Total stockholders' equity 1,323,967 1,183,137 Total liabilities and stockholders' equity $ 2,731,480 $ 2,622,776 See Notes to Consolidated Financial Statements. 3 Tetra Tech, Inc. Consolidated Statements of Income (unaudited – in thousands, except per share data) Three Months Ended January 1, 2023 January 2, 2022 Revenue $ 894,766 $ 858,510 Subcontractor costs ( 158,204 ) ( 179,177 ) Other costs of revenue ( 583,316 ) ( 539,567 ) Gross profit 153,246 139,766 Selling, general and administrative expenses ( 56,502 ) ( 52,546 ) Acquisition and integration expenses ( 3,761 ) — Contingent consideration – fair value adjustments ( 933 ) — Income from operations 92,050 87,220 Interest expense, net ( 5,372 ) ( 2,904 ) Other non-operating income 67,995 — Income before income tax expense 154,673 84,316 Income tax expense ( 37,958 ) ( 15,817 ) Net income 116,715 68,499 Net income attributable to noncontrolling interests ( 9 ) ( 10 ) Net income attributable to Tetra Tech $ 116,706 $ 68,489 Earnings per share attributable to Tetra Tech: Basic $ 2.20 $ 1.27 Diluted $ 2.18 $ 1.25 Weighted-average common shares outstanding: Basic 53,069 53,937 Diluted 53,529 54,577 See Notes to Consolidated Financial Statements. 4 Tetra Tech, Inc. Consolidated Statements of Comprehensive Income (unaudited – in thousands) Three Months Ended January 1, 2023 January 2, 2022 Net income $ 116,715 $ 68,499 Other comprehensive income, net of tax Foreign currency translation adjustment, net of tax 33,107 ( 686 ) Gain (loss) on cash flow hedge valuations, net of tax ( 89 ) 2,666 Other comprehensive income, net of tax 33,018 1,980 Comprehensive income, net of tax $ 149,733 $ 70,479 Comprehensive income attributable to noncontrolling interests, net of tax 9 10 Comprehensive income attributable to Tetra Tech, net of tax $ 149,724 $ 70,469 See Notes to Consolidated Financial Statements. 5 Tetra Tech, Inc. Consolidated Statements of Cash Flows (unaudited – in thousands) Three Months Ended January 1, 2023 January 2, 2022 Cash flows from operating activities: Net income $ 116,715 $ 68,499 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,616 6,111 Equity in income of unconsolidated joint ventures ( 1,447 ) ( 1,440 ) Distributions of earnings from unconsolidated joint ventures 1,115 842 Amortization of stock-based awards 7,184 5,828 Deferred income taxes 15,935 ( 878 ) Fair value adjustments to contingent consideration 933 — Fair value adjustments to foreign currency forward contract ( 67,995 ) — Changes in operating assets and liabilities, net of effects of business acquisitions: Accounts receivable and contract assets ( 16,175 ) ( 21,560 ) Prepaid expenses and other assets 5,967 5,364 Accounts payable 3,820 14,056 Accrued compensation ( 53,201 ) ( 40,321 ) Contract liabilities 27,769 29,227 Other liabilities ( 26,432 ) 11,854 Income taxes receivable/payable 4,387 4,837 Net cash provided by operating activities 25,191 82,419 Cash flows from investing activities: Payments for business acquisitions, net of cash acquired — ( 8,858 ) Capital expenditures ( 4,996 ) ( 1,518 ) Proceeds from sale of assets 51 3,514 Net cash used in investing activities ( 4,945 ) ( 6,862 ) Cash flows from financing activities: Proceeds from borrowings 60,889 54,989 Repayments on long-term debt ( 73,125 ) ( 3,956 ) Repurchases of common stock — ( 50,000 ) Taxes paid on vested restricted stock ( 16,586 ) ( 24,949 ) Stock options exercised 57 960 Dividends paid ( 12,186 ) ( 10,793 ) Payments of contingent earn-out liabilities — ( 1,720 ) Principal payments on finance leases ( 1,316 ) ( 945 ) Net cash used in financing activities ( 42,267 ) ( 36,414 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash 8,695 ( 169 ) Net increase (decrease) in cash, cash equivalents and restricted cash ( 13,326 ) 38,974 Cash, cash equivalents and restricted cash at beginning of period 185,491 166,568 Cash, cash equivalents and restricted cash at end of period $ 172,165 $ 205,542 Supplemental information: Cash paid during the period for: Interest $ 3,433 $ 2,456 Income taxes, net of refunds received of $ 0.1 million and $ 2.3 million $ 14,540 $ 11,535 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 164,397 $ 205,542 Restricted cash 7,768 — Total cash, cash equivalents and restricted cash $ 172,165 $ 205,542 See Notes to Consolidated Financial Statements. 6 Tetra Tech, Inc. Consolidated Statements of Stockholders' Equity Three Months Ended January 2, 2022 and January 01, 2023 (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 OCTOBER 3, 2021 53,981 $ 540 $ — $ ( 125,028 ) $ 1,358,726 $ 1,234,238 $ 53 $ 1,234,291 Net income 68,489 68,489 10 68,499 Other comprehensive income 1,980 1,980 1,980 Cash dividends of $ 0.20 per common share ( 10,793 ) ( 10,793 ) ( 10,793 ) Stock-based compensation 5,828 5,828 5,828 Restricted & performance shares released 182 2 ( 18,916 ) ( 6,035 ) ( 24,949 ) ( 24,949 ) Stock options exercised 20 — 960 960 960 Shares issued for Employee Stock Purchase Plan 106 1 12,128 12,129 12,129 Stock repurchases ( 290 ) ( 3 ) — ( 49,997 ) ( 50,000 ) ( 50,000 ) BALANCE AT JANUARY 2, 2022 53,999 $ 540 $ — $ ( 123,048 ) $ 1,360,390 $ 1,237,882 $ 63 $ 1,237,945 BALANCE AT OCTOBER 2, 2022 52,981 $ 530 $ — $ ( 208,144 ) $ 1,390,701 $ 1,183,087 $ 50 $ 1,183,137 Net income 116,706 116,706 9 116,715 Other comprehensive income 33,018 33,018 33,018 Cash dividends of $ 0.23 per common share ( 12,186 ) ( 12,186 ) ( 12,186 ) Stock-based compensation 7,184 7,184 7,184 Restricted & performance shares released 145 1 ( 16,587 ) ( 16,586 ) ( 16,586 ) Stock options exercised 2 — 57 57 57 Shares issued for Employee Stock Purchase Plan 98 1 12,627 12,628 12,628 BALANCE AT JANUARY 1, 2023 53,226 $ 532 $ 3,281 $ ( 175,126 ) $ 1,495,221 $ 1,323,908 $ 59 $ 1,323,967 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 October 2, 2022. 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 fiscal year or for future fiscal yea rs. Certain prior year amounts have been reclassified to conform to the current year presentation. 2. Recent Accounting Pronouncements In November 2021, the Financial Accounting Standards Board ("FASB") issued ASU 2021-10, Government Assistance (Topic 832), which requires annual disclosures for transactions with a government authority that are accounted for by applying a grant or contribution model by analogy, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity's financial statements. ASU 2021-10 was effective for us beginning in the first quarter of fiscal 2023. In fiscal 2020, the Canadian federal government implemented the Canadian Emergency Wage Subsidy ("CEWS") program in response to the negative impact of the coronavirus disease 2019 (" COVID-19") pandemic on businesses operating in Canada. Our Canadian legal entities qualified for and applied for these CEWS cash benefits to partially offset the impacts of revenue reductions and on-going staffing costs. The $ 26.0 million total received was initially recorded in "Other current liabilities" until all potential amendments to the qualification criteria, including some that were proposed with retroactive application, were finalized in fiscal 2022. As there are no further contingencies, beginning in fiscal 2023, the amounts received will be distributed to all Canadian employees. We expect to distribute approximately $ 9 million in the next twelve months. Accordingly, this amount was reclassified from "Other current liabilities" to "Accrued compensation" on our consolidated balance sheet at October 2, 2022. The remaining $ 17.0 million, which we expect to distribute beyond one year, was reclassified to "Other non-current liabilities". We do not expect there will be any related impact to our operating income, and we have no outstanding applications for further government assistance. 3. Revenue and Contract Balances We 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 (in thousands): 8 Three Months Ended January 1, 2023 January 2, 2022 Client Sector: U.S. federal government (1) $ 276,075 $ 266,797 U.S. state and local government 153,195 159,008 U.S. commercial 198,956 176,904 International (2) 266,540 255,801 Total $ 894,766 $ 858,510 Contract Type: Fixed-price $ 327,737 $ 331,248 Time-and-materials 420,570 395,648 Cost-plus 146,459 131,614 Total $ 894,766 $ 858,510 (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 January 1, 2023 and January 2, 2022. 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 (in thousands): Balance at January 1, 2023 October 2, 2022 Contract assets (1) $ 80,903 $ 92,405 Contract liabilities 274,118 241,340 Net contract liabilities $ ( 193,215 ) $ ( 148,935 ) (1) Inclu des $ 17.2 million and $ 23.3 million of contract retentions at January 1, 2023 and October 2, 2022, respectively. In the first quarters of fiscal 2023 and 2022 , we recognized revenue of approximately $ 81 million and $ 63 million, respectively, from amounts included in the contract liability balances at the end of fiscal 2022 and 20 21, respectively. We recognize revenue primarily using the cost-to-cost measure of progress method to estimate progress towards completion. Changes in those estimates could result in the recognition of cumulative catch-up adjustments to the contract’s inception-to-date revenue, costs and profit in the period in which such changes are made. As a result, we recognized net 9 favorable revenue and operating income adjustments of $ 3.5 million and $ 2.8 million in the first quarters of fiscal 2023 and 2022, respectively. C hanges in revenue and cost estimates could also result in a projected loss, determined at the contract level, which would be recorded immediate ly in earnings. At January 1, 2023 and October 2, 2022, our consolidated balance sheets included liabilities for anticipated losses of $ 7.6 million and $ 10.0 million, respectively. The estimated cost to complete these related contracts at January 1, 2023 and October 2, 2022 was approximately $ 55 million and $ 80 million, respectively. Accounts Receivable, Net Net accounts receivable consisted of the following (in thousands): Balance at January 1, 2023 October 2, 2022 Billed $ 486,027 $ 491,700 Unbilled 313,782 267,161 Total accounts receivable 799,809 758,861 Allowance for doubtful accounts ( 3,937 ) ( 3,749 ) Total accounts receivable, net $ 795,872 $ 755,112 Billed accounts receivable represent amounts billed to clients that have not been collected. Unbilled accounts receivable, which represent an unconditional right to payment subject only to the passage of time, include unbilled amounts typically resulting from revenue recognized but not yet billed pursuant to contract terms or billed after the period end date. Substantially all of our unbilled receivables at January 1, 2023 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. 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. There were no claims included in our total accounts receivable at January 1, 2023 and October 2, 2022. We regularly evaluate all unsettled claim amounts and record appropriate adjustments to revenue when it is probable that the claim will result in a different contract value than the amount previously estimated. In the first quarters of fiscal 2023 and 2022, we recorded no gains or losses related to claims. Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at January 1, 2023 and October 2, 2022. Remaining Unsatisfied Performance Obligations (“RUPO”) Our RUPO represents a measure of the total dollar value of work to be performed on contracts awarded and in progress. We h ad $ 3.8 billion of RUPO at January 1, 2023. RUPO increases with awards from new contracts or additions on existing contracts and decreases as work is performed and revenue is recognized on existing contracts. RUPO may also decrease when projects are canceled or modified in scope. We include a contract within our RUPO when the contract is awarded and an agreement on contract terms has been reached. We expect to satisfy our RUPO at January 1, 2023 over the following periods (in thousands): Amount Within 12 months $ 2,460,171 Beyond 1,329,949 Total $ 3,790,120 10 Although RUPO reflects business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. RUPO is 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 Subsequent Event. O n January 3, 2023, we acquired Amyx, Inc. (“Amyx”), an enterprise technology services, cybersecurity and management consulting firm. Based in Reston, Virginia, Amyx, with over 500 employees, provides application modernization, cybersecurity, systems engineering, financial management, and program management support on over 30 Federal Government programs. Amyx will be included in our GSG segment. Subsequent Event. On September 23, 2022, we made an all cash offer to acquire all of the outstanding shares of RPS Group plc ("RPS"), a publicly traded company on the London Stock Exchange for 222 pence per share, through a scheme of arrangement, which was unanimously recommended by RPS's Board of Directors. On November 3, 2022, RPS's shareholders approved the scheme of arrangement. On January 19, 2023, the court sanctioned scheme of arrangement to purchase RPS was approved, and we completed the acquisition on January 23, 202 3. The total purchase price including assumed debt and transactions costs was approximately GBP 714 million. RPS employs approximately 5,000 associates in the United Kingdom, Europe, Asia Pacific and North America, delivering high-end solutions, especially in energy transformation, water and program management for government and commercial clients. Substantially all of RPS will be included in our CIG segment. T he results of these acquisitions will be included in our consolidated financial statements beginning on the respective closing dates. We are in the process of performing procedures to determine the fair value of assets acquired and liabilities assumed related to the acquisitions, and will include the preliminary purchase price allocation in our Quarterly Report on Form 10-Q for the period ending April 2, 2023. See Note 14, "Credit Facility" for additional information regarding the financing of these acquisitions. In fiscal 2022, we acquired The Integration Group of America ("TIGA"), Piteau Associates (“PAE”) and other financially immaterial acquisitions. TIGA is based in Spring, Texas and is an industry leader in process automation and system integration solutions, including customized software and platform (SaaS/PaaS) applications, advanced data analytics, cloud data integration and platform virtualization. PAE is based in Vancouver, British Columbia and is a global leader in sustainable natural resource analytics including hydrologic numerical modeling and dewatering system design. PAE is part of our CIG segment, and TIGA and other immaterial acquisitions are part of our GSG segment. The total fair value of the purchase price for all four acquisitions was $ 88.3 million. This amount is comprised of $ 44.0 million in initial cash payments made to the sellers, $ 2.5 million of receivables (net) related to estimated post-closing adjustments for the net assets acquired, $ 15.5 million payable in a promissory note issued to the sellers along with related transaction expenses of the sellers (which were subsequently paid in July 2022), and $ 31.3 million for the estimated fair value of contingent earn-out obligations, with a maximum of $ 47.0 million, based upon the achievement of specified operating income targets in each of the three to five years following the acquisitions. Goodwill additions resulting from fiscal 2022 business combinations are primarily attributable to the significant technical expertise residing in embedded workforces that are sought out by clients, long-term management experience, the industry reputations, and the synergies expected to arise after the acquisitions in the areas of data management, digitization, modeling, water, and natural resources. These acquired capabilities, when combined with our exis ting 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 financial statements, individually or in the aggregate, to our consolidated financial statements. As a result, no pro forma information has been provided. Backlog and client relations intangible assets include the fair value of existing contracts and the underlying customer relationships with lives ranging from one to ten years , and trade names intangible assets have lives ranging from three to five years . 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 “Non-current contingent earn-out liabilities” on the consolidated balance sheets. We consider several factors when determining that contingent earn-out liabilities are part of the purchase price, including the following: (1) the valuation of our acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former owners of acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of our other key employees. The contingent earn-out payments are not affected by employment termination. We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. We use a probability-weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period (generally three to five years ), and the probability outcome percentages we assign to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability, with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the contingent earn-out liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows. Any amount paid in excess of the contingent earn-out liability on the acquisition date is reflected as cash used in operating activities in our consolidated statements of cash flows. We review and re-assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income. For the first quarter of fiscal 2023, we evaluated our estimates for contingent consideration liabilities for the remaining earn-out periods for each individu al acquisition, which included a review of their financial results to-date, the status of ongoing projects in their RUPO, 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 peri ods. For the first quarters of fiscal 2023 and 2022, we had no material adjustments to our contingent earn-out liabilities in operating income. At January 1, 2023, there was a total potential maximum of $ 120.9 million of outstanding contingent consideration related to acquisitions. Of this amount, $ 69.0 million was estimated as the fair value and accrued on our consolidated balance sheet. 5. Goodwill and Intangible Assets The following table summarizes the changes in the carrying value of goodwill by reportable segment (in thousands): GSG CIG Total Balance at October 2, 2022 $ 519,102 $ 591,310 $ 1,110,412 Translation adjustments 2,792 20,099 22,891 Balance at January 1, 2023 $ 521,894 $ 611,409 $ 1,133,303 The foreign currency translation adjustments resulted from our foreign subsidiaries with functional currencies that are different than our reporting currency. These goodwill amounts are presented net of reductions from historical impairment adjustments. The gross amounts for GSG were $ 539.6 million and $ 536.8 million at January 1, 2023 and October 2, 2022, respectively, excluding accumulated impairment of $ 17.7 million at each date. The gross amounts of goodwill for CIG were $ 732.9 million and $ 712.8 million at January 1, 2023 and October 2, 2022, respectively, excluding accumulated impairment of $ 121.5 million at each date. We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. Our most recent annual review at July 4, 2022 (i.e. the first day of our fourth quarter in fiscal 2022) indicated that we had no impairment of goodwill, and all of our reporting units had estimated fair values that were in excess of their carrying values, including goodwill. At July 4, 2022, and after the reallocation of goodwill on the first day of fiscal 2022, we had no reporting units that had estimated fair values that exceeded their carrying values by less than 165 %. We also regularly evaluate whether events and circumstances have occurred that may indicate a potential change in the recoverability of goodwill. We perform interim goodwill impairment reviews between our annual reviews if certain events and circumstances have occurred, such as a deterioration in general economic conditions; an increase in the competitive environment; a change in management, key personnel, strategy or customers; negative or declining cash flows; or a decline in 12 actual or planned revenue or earnings compared with actual and projected results of relevant prior periods. Although we believe that our estimates of fair value for these reporting units are reasonable, if financial performance for these reporting units falls significantly below our expectations or market prices for similar business decline, the goodwill for these reporting units could become impaired. The 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 ($ in thousands): Period Ended January 1, 2023 October 2, 2022 Weighted- Average Remaining Life (in Years) Gross Amount Accumulated Amortization Net Amount Gross Amount Accumulated Amortization Net Amount Client relations 5.4 $ 43,601 $ ( 23,081 ) $ 20,520 $ 41,676 $ ( 21,092 ) $ 20,584 Backlog 0.4 34,837 ( 33,033 ) 1,804 33,286 ( 29,990 ) 3,296 Trade names 3.5 13,656 ( 8,444 ) 5,212 12,711 ( 7,428 ) 5,283 Total $ 92,094 $ ( 64,558 ) $ 27,536 $ 87,673 $ ( 58,510 ) $ 29,163 Amortization expense for the three months e nded January 1, 2023 wa s $ 3.4 million, compared to $ 2.7 million for the prior-year period. Estimated amortization expense for the remainder of fiscal 2023 and succeeding years is as follows (in thousands): Amount 2023 (remaining) $ 6,755 2024 5,552 2025 4,719 2026 3,869 2027 2,349 Beyond 4,292 Total $ 27,536 6. Property and Equipment Property and equipment consisted of the following (in thousands): Balance at January 1, 2023 October 2, 2022 Equipment, furniture and fixtures $ 101,002 $ 96,710 Leasehold improvements 32,985 32,428 Total property and equipment 133,987 129,138 Accumulated depreciation ( 99,097 ) ( 96,822 ) Property and equipment, net $ 34,890 $ 32,316 The depreciation expense related to property and equipment was $ 3.2 million for th e three months ended January 1, 2023, compared t o $ 3.4 million for the prior-year period. 7. Stock Repurchase and Dividends 13 On October 5, 2021, our Board of Directors authorized a new stock repurchase program under which we could repurchase up to $ 400 million of our common stock . We did not repurchase any shares of our common stock in the first quarter of fiscal 2023. At January 1, 2023, we had a remaining balance of $ 347.8 million under our stock repurchase program. The following table presents dividends declared and paid in the first three months of fiscal 2023 and 2022: Declare Date Dividend Paid Per Share Record Date Payment Date Dividend Paid (in thousands) November 7, 2022 $ 0.23 November 21, 2022 December 9, 2022 $ 12,186 November 15, 2021 $ 0.20 December 2, 2021 December 20, 2021 $ 10,793 Subsequent Event. On January 30, 2023, our Board of Directors declared a quarterly cash dividend of $ 0.23 per share payable on February 24, 2023 to stockholders of record as of the close of business on February 13, 2023. 8. Leases Our operating leases are primarily for corporate and project office spaces. To a much lesser extent, we have operating leases for vehicles and equipment. Our operating leases have remaining lease terms of one month to ten years , some of which may include options to extend the leases for up to five years . We determine if an arrangement is a lease at inception. Operating leases are included in "Right-of-use assets, operating leases", "Short-term lease liabilities, operating leases" and "Long-term lease liabilities, operating leases" in the consolidated balance sheets. Our finance leases are primarily for certain information technology equipment , and are included in "Other non-current assets", "Other current liabilities" and "Other non-current liabilities" in the consolidated balance sheets at January 1, 2023 and October 2, 2022. Right-of-use ("ROU") assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, incremental borrowing rates are used based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset at the commencement date also includes any lease payments made to the lessor at or before the commencement date and initial direct costs less lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The components of lease costs are as follows (in thousands): Three Months Ended January 1, 2023 January 2, 2022 Operating lease cost $ 20,961 $ 21,751 Sublease income ( 32 ) ( 125 ) Total lease cost $ 20,929 $ 21,626 Supplemental cash flow information related to leases is as follows (in thousands): Three Months Ended January 1, 2023 January 2, 2022 Operating cash flows for operating leases $ 16,493 $ 17,519 Financing cash flows for finance leases 1,316 945 Right-of-use assets obtained in exchange for new operating lease liabilities 11,117 12,347 Right-of-use assets obtained in exchange for new finance lease liabilities $ 1,431 $ 1,349 14 Supplemental balance sheet and other information related to leases are as follows (in thousands): Balance at January 1, 2023 October 2, 2022 Operating leases: Right-of-use assets $ 182,500 $ 182,319 Lease liabilities: Current 55,809 57,865 Non-current 148,034 146,285 Total operating lease liabilities $ 203,843 $ 204,150 Finance leases: Other non-current assets $ 9,932 $ 9,564 Other current liabilities $ 4,582 $ 4,481 Other non-current liabilities $ 5,343 $ 4,745 Weighted-average remaining lease term: Operating leases 5 years 5 years Finance leases 2 years 2 years Weighted-average discount rate: Operating leases 2.2 % 2.2 % Finance leases 3 % 3 % At January 1, 2023, we have approximately $ 8 million of operating leases that have not yet commenced. A maturity analysis of the future undiscounted cash flows associated with our lease liabilities at January 1, 2023 is as follows (in thousands): Operating Leases Finance Leases 2023 (remaining) $ 49,216 $ 3,787 2024 51,833 3,699 2025 39,744 2,182 2026 25,234 574 2027 17,870 211 Beyond 32,484 — Total lease payments 216,381 10,453 Less: imputed interest ( 12,538 ) ( 521 ) Total present value of lease liabilities $ 203,843 $ 9,932 9. Stockholders’ Equity and Stock Compensation Plans We recogniz e 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 three months ended January 1, 2023 was $ 7.2 million, compared to $ 5.8 million for the same period last year. Most of these amounts were included in selling, general and administrative expenses on our consolidated statements of income. In the first quarter of fiscal 2023, we awarded 55,708 performance share units (“PSUs”) to our non-employee directors and executive officers at an estimated fair value of $ 204.00 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 98,305 restricted stock units 15 (“RSUs”) to our non-employee directors, executive officers and employees at a fair value of $ 156.52 per share on the award 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”) 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 (in thousands, except per share data): Three Months Ended January 1, 2023 January 2, 2022 Net income attributable to Tetra Tech $ 116,706 $ 68,489 Weighted-average common shares outstanding – basic 53,069 53,937 Effect of dilutive stock options and unvested restricted stock 460 640 Weighted-average common shares outstanding – diluted 53,529 54,577 Earnings per share attributable to Tetra Tech: Basic $ 2.20 $ 1.27 Diluted $ 2.18 $ 1.25 11. Income Taxes The effective tax rates for the first three months of fiscal 2023 and 2022 were 24.5 % and 18.8 %, respectively. Income tax expense was reduced by $ 1.7 million and $ 4.5 million of excess tax benefits on share-based payments in the first quarters of fiscal 2023 and 2022, respectively. Excluding the impact of the excess tax benefits on share-based payments, our effective tax rates in the first quarters of fiscal 2023 and 2022 were 25.7 % an d 24.1 %, r espectively. At January 1, 2023 and October 2, 2022, the liability for income taxes associated with uncertain tax positions was $ 10.8 million and $ 10.6 million, respectively. These uncertain tax positions substantially relate to ongoing examinations. It is reasonably p ossible that these liabilities may decrease within the next 12 months as certain examinations are resolved. 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. GSG provides high-end consulting and engineering services primarily to U.S. government clients (federal, state and local) and development agencies worldwide. GSG supports U.S. government civilian and defense agencies with services in water, environment, sustainable infrastructure, information technology, and disaster management. GSG also provides engineering design services for U.S. based federal and municipal clients, especially in water infrastructure, flood protection and solid waste. GSG also leads our support for development agencies worldwide, especially in the United States, United Kingdom, and Australia. 16 CIG primarily provides high-end consulting and engineering services to U.S. commercial clients, and international clients inclusive of the commercial and government sectors. CIG supports commercial clients across the Fortun e 500, renewable energy, industrial, high performance buildings, and aerospace markets. CIG also provides sustainable infrastructure and related environmental, engineering and project management services to commercial and local government clients across Canada, in Asia Pacific (primarily Australia and New Zealand), the United Kingdom, as well as Brazil and Chile. Management evaluates th e performance of these reportable segments based upon their respective segment operating income before the effect of amortization expense related to acquisitions, and other unallocated corporate expenses. We account for inter-segment revenues and transfers as if they were to third parties; that is, by applying a negotiated fee onto the costs of the services performed. All significant intercompany balances and transactions are eliminated in consolidation. The following tables summarize financial information regarding our reportable segments (in thousands): Three Months Ended January 1, 2023 January 2, 2022 Revenue GSG $ 471,067 $ 456,099 CIG 439,556 416,286 Elimination of inter-segment revenue ( 15,857 ) ( 13,875 ) Total revenue $ 894,766 $ 858,510 Income from operations GSG $ 60,347 $ 51,179 CIG 50,108 45,308 Corporate (1) ( 18,405 ) ( 9,267 ) Total income from operations $ 92,050 $ 87,220 (1) Includes amortization of intangibles, other costs and other income not allocable to our reportable segments. Balance at January 1, 2023 October 2, 2022 Total Assets GSG $ 586,128 $ 558,764 CIG 742,288 688,640 Corporate (1) 1,403,064 1,375,372 Total assets $ 2,731,480 $ 2,622,776 (1) Corporate assets consist of intercompany eliminations and assets not allocated to our reportable segments including goo dwill, 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 October 2, 2022 ). The carrying value of our long-term debt approximated fair value at January 1, 2023 and October 2, 2022. At January 1, 2023, we had bor rowing s of $ 240.6 million outstanding under our Amended Credit Agreement, which were used to fund business acquisitions, work ing capital needs, stock repurchases, dividends, capital expenditures and contingent earn-outs. 14. Credit Facility 17 On October 26, 2022, we entered into a Third Amended and Restated Credit Agreement that provides for an additional $ 500 million senior secured term loan facility (the "New Term Loan Facility") increasing our total borrowing capacity to $ 1.55 billion. Subsequent Event. On January 23, 2023, we acquired RPS and drew the entire amount of the New Term Loan Facility to partially finance the RPS acquisition. The remaining purchase price was financed with existing cash on hand and borrowings under the existing Amended Revolving Credit Facility. The New Term Loan Facility is not subject to any amortization payments of principal and matures on the third anniversary of the RPS acquisition closing date. On February 18, 2022, we entered into Amendment No. 2 to Second Amended and Restated Credit Agreement (“Amended Credit Agreement”) with a total borrowing capacity of $ 1.05 billion that will mature in February 2027. The Amended Credit Agreement is a $ 750 million senior secured, five-year facility that provides for a $ 250 million term loan facility (the “Amended Term Loan Facility”) and a $ 500 million revolving credit facility (the “Amended Revolving Credit Facility”). In addition, the Amended Credit Agreement includes a $ 300 million accordion feature that allows us to increase the Amended Credit Agreement to $ 1.05 billion subject to lender approval. The Amended Credit Agreement provides for, among other things, (i) refinance indebtedness under our Credit Agreement dated at July 30, 2018; (ii) finance open market repurchases of common stock, acquisitions, and cash dividends and distributions; and (iii) utilize the proceeds for working capital, capital expenditures and other general corporate purposes. The Amended Credit Agreement provides for a reduction in the interest grid for meeting certain sustainability targets related to the (i) reduction of greenhouse gas emissions through the Company’s projects and operational sustainability initiatives and (ii) improvement of peoples’ lives as a result of the Company’s projects that provide environmental, social and governance benefits. The Amended Revolving Credit Facility includes a $ 100 million sublimit for the issuance of standby letters of credit, a $ 20 million sublimit for swingline loans, and a $ 300 million sublimit for multicurrency borrowings and letters of credit. The entire Amended Term Loan Facility was drawn on February 18, 2022. The Amended Term Loan Facility is subject to quarterly amortization of principal at 5 % annually commencing June 30, 2022. We may borrow on the Amended Revolving Credit Facility, at our option, at either (a) a benchmark rate plus a margin that ranges from 1.000 % to 1.875 % per annum, or (b) a base rate for loans in U.S. dollars (the highest of the U.S. federal funds rate plus 0.50 % per annum, the bank’s prime rate or the Secured Overnight Financing Rate ("SOFR") rate plus 1.00 %, plus a margin that ranges from 0 % to 0.875 % per annum. In each case, the applicable margin is based on our Consolidated Leverage Ratio, calculated quarterly. The Amended Term Loan Facility is subject to the same interest rate provisions. The Amended Credit Agreement expires on February 18, 2027, or earlier at our discretion upon payment in full of loans and other obligations. The Amended Credit Agreement contains certain affirmative and restrictive covenants, and customary events of default. The financial covenants provide for a maximum Consolidated Leverage Ratio of 3.25 to 1.00 (total funded debt/EBITDA, as defined in the Amended Credit Agreement) and a minimum Consolidated Interest Coverage Ratio of 3.00 to 1.00 (EBITDA/Consolidated Interest Charges, as defined in the Amended Credit Agreement). Our obligations under the Amended Credit Agreement are guaranteed by certain of our domestic subsidiaries and are secured by first priority liens on (i) the equity interests of certain of our subsidiaries, including those subsidiaries that are guarantors or borrowers under the Amended Credit Agreement, and (ii) the accounts receivable, general intangibles and intercompany loans, and those of our subsidiaries that are guarantors or borrowers. 15. Derivative Financial Instruments We use certain interest rate derivative contracts to hedge interest rate exposures on our variable rate debt. We also enter into foreign currency derivative contracts with financial institutions to reduce the risk that cash flows and earnings could adversely be affected by foreign currency exchange rate fluctuations. Our hedging program is not designated for trading or speculative purposes. We recognize derivative instruments as either assets or liabilities on the accompanying consolidated balance sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives that have been designated as cash flow hedges in our consolidated balance sheets as accumulated other comprehensive income, and in our consolidated statements of income for those derivatives designated as fair value hedges. Our derivative contracts are categorized within Level 2 of the fair value hierarchy. We entered into a forward contract in the fourth quarter of fiscal 2022 to acquire GBP 714.0 million at a rate of 1.0852 for a total of USD 774.8 million that was integrated with our planned acquisition of RPS. This contract matured on December 30, 2022. On December 28, 2022, we entered into an extension of the integrated forward contr act to acquire GBP 714.0 million at a rate of 1.086 for a total of USD 775.4 million, extending the maturity date to January 23, 2023, the closing date of the RPS 18 acquisition. Although an effective economic hedge of our foreign exchange risk related to this transaction, the forward contract does not qualify for hedge accounting. As a result, the forward contract is marked-to-market with changes in fair value recogni zed in earnings each period. The intrinsic value of the forward contract was immaterial at inception as the GBP/USD spot and forward exchange rates were essentially the same. The fair value of the forward contract at October 2, 2022 was $ 19.9 million, and an unrealized gain of the same amount was recognized in the fourth quarter of fiscal 2022 results. The fair value of the forward contract at January 1, 2023 was $ 87.9 million, which is reported in the "Prepaid expenses and other current assets" on our consolidated balance sheet at January 1, 2023. This resulted in an unrealized gain of $ 68.0 million in the first quarter of fiscal 2023, which was recognized in earnings and reported in the “Other non-operating income" on our consolidated income statement. The forward contract was settled on January 23, 2023, with a cumulative gain of approximately $ 109 million. In fiscal 2018, we entere d 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. At January 1, 2023, the notional principal of our outstanding interest swap agreements was $ 196.9 million ($ 39.4 million each.) The interest rate swaps have a fixed interest rate of 2.79 % and expire in July 2023 for all five agreements. At January 1, 2023 and October 2, 2022, the fair values of the effective portion of our interest rate swap agreements designated as cash flow hedges before tax effect were unrealized gains of $ 2.3 million and $ 2.4 million, respectively, which were reported in "Other non-current assets" on our consolidated balance sheets. Additionally, the related loss of $ 0.1 million for the three months ended January 1, 2023, compared to the related gain of $ 2.7 million for the prior-year period, were recognized and reported on our consolidated statements of comprehensive income. We expect to reclassify a credit of $ 2.2 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 2023. 16. Reclassifications Out of Accumulated Other Comprehensive Income The accumulated balances and activities for the three months ended January 1, 2023 and January 2, 2022 related to reclassifications out of accumulated other comprehensive income are summarized as follows (in thousands): Three Months Ended Foreign Currency Translation Adjustments Gain (Loss) on Derivative Instruments Accumulated Other Comprehensive Income (Loss) Balance at October 3, 2021 $ ( 115,634 ) $ ( 9,394 ) $ ( 125,028 ) Other comprehensive income (loss) before reclassifications ( 686 ) 4,032 3,346 Amounts reclassified from accumulated other comprehensive loss Interest rate contracts, net of tax (1) — ( 1,366 ) ( 1,366 ) Net current-period other comprehensive income (loss) ( 686 ) 2,666 1,980 Balance at January 2, 2022 $ ( 116,320 ) $ ( 6,728 ) $ ( 123,048 ) Balance at October 2, 2022 $ ( 210,556 ) $ 2,412 $ ( 208,144 ) Other comprehensive income (loss) before reclassifications 33,107 ( 535 ) 32,572 Amounts reclassified from accumulated other comprehensive loss Interest rate contracts, net of tax (1) — 446 446 Net current-period other comprehensive income (loss) 33,107 ( 89 ) 33,018 Balance at January 1, 2023 $ ( 177,449 ) $ 2,323 $ ( 175,126 ) (1) This accumulated other comprehensive component is reclassified to “Interest expense” in our consolidated statements of income. See Note 15 “Derivative Financial Instruments”, for more information. 17. Commitments and Contingencies We are subject to certain claims and lawsuits typically filed against the consulting and engineering profession, alleging primarily professional errors or omissions. We carry professional liability insurance, subject to certain deductibles and policy limits, against such claims. However, in some actions, parties are seeking damages that exceed our insurance coverage or for which we are not insured. While management does not believe that the resolution of these claims will have a material adverse 19 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. 18. Related Party Transactions We often provide services to unconsolidated joint ventures. Our revenue related to services we provided to unconsolidated joint ventures for th e first quarters o f fiscal 2023 and 2022 was approxim ately $ 23 million and $ 26 million, respectively. Our related reimbursable costs for the first quarters of fiscal 2023 and 2022 were approximately $ 22 million and $ 25 million, respectively. Our consolidated balance sheets also included the following amounts related to these services (in thousands): Balance at January 1, 2023 October 2, 2022 Accounts receivable, net $ 18,376 $ 16,818 Contract assets 2,140 2,935 Contract liabilities 3,514 3,464 20