TETRA TECH INC 10-Q

Item 1. Financial Statements Tetra Tech, Inc. Consolidated Balance Sheets (unaudited - in thousands, except par value) ASSETS July 2, 2023 October 2, 2022 Current assets: Cash and cash equivalents $ 176,056 $ 185,094 Accounts receivable, net 1,002,087 755,112 Contract assets 125,360 92,405 Prepaid expenses and other current assets 114,440 125,605 Total current assets 1,417,943 1,158,216 Property and equipment, net 81,321 32,316 Right-of-use assets, operating leases 207,218 182,319 Goodwill 1,886,854 1,110,412 Intangible assets, net 225,032 29,163 Deferred tax assets 81,732 47,804 Other non-current assets 73,478 62,546 Total assets $ 3,973,578 $ 2,622,776 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 188,807 $ 147,436 Accrued compensation 270,924 237,669 Contract liabilities 351,048 241,340 Short-term lease liabilities, operating leases 68,555 57,865 Current portion of long-term debt 12,505 12,504 Current contingent earn-out liabilities 35,902 28,797 Other current liabilities 284,418 190,406 Total current liabilities 1,212,159 916,017 Deferred tax liabilities 71,425 15,161 Long-term debt 906,875 246,250 Long-term lease liabilities, operating leases 163,919 146,285 Non-current contingent earn-out liabilities 40,697 36,769 Other non-current liabilities 125,714 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 July 2, 2023 and October 2, 2022 — — Common stock - authorized, 150,000 shares of $ 0.01 par value; issued and outstanding, 53,243 and 52,981 shares at July 2, 2023 and October 2, 2022, respectively 532 530 Additional paid-in capital 17,906 — Accumulated other comprehensive loss ( 137,926 ) ( 208,144 ) Retained earnings 1,572,204 1,390,701 Tetra Tech stockholders’ equity 1,452,716 1,183,087 Noncontrolling interests 73 50 Total stockholders' equity 1,452,789 1,183,137 Total liabilities and stockholders' equity $ 3,973,578 $ 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 Nine Months Ended July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 Revenue $ 1,208,947 $ 890,231 $ 3,261,938 $ 2,601,485 Subcontractor costs ( 221,387 ) ( 169,745 ) ( 568,252 ) ( 502,024 ) Other costs of revenue ( 798,714 ) ( 575,902 ) ( 2,180,749 ) ( 1,679,937 ) Gross profit 188,846 144,584 512,937 419,524 Selling, general and administrative expenses ( 89,064 ) ( 60,942 ) ( 227,912 ) ( 173,943 ) Acquisition and integration expenses ( 2,107 ) — ( 25,812 ) — Contingent consideration – fair value adjustments — 263 ( 8,477 ) 64 Income from operations 97,675 83,905 250,736 245,645 Interest expense, net ( 14,869 ) ( 2,919 ) ( 33,563 ) ( 8,967 ) Other non-operating income — — 89,402 — Income before income tax expense 82,806 80,986 306,575 236,678 Income tax expense ( 22,568 ) ( 22,329 ) ( 86,781 ) ( 56,473 ) Net income 60,238 58,657 219,794 180,205 Net income attributable to noncontrolling interests ( 3 ) ( 7 ) ( 23 ) ( 26 ) Net income attributable to Tetra Tech $ 60,235 $ 58,650 $ 219,771 $ 180,179 Earnings per share attributable to Tetra Tech: Basic $ 1.13 $ 1.10 $ 4.13 $ 3.35 Diluted $ 1.12 $ 1.09 $ 4.10 $ 3.32 Weighted-average common shares outstanding: Basic 53,231 53,507 53,188 53,777 Diluted 53,653 54,006 53,615 54,328 See Notes to Consolidated Financial Statements. 4 Tetra Tech, Inc. Consolidated Statements of Comprehensive Income (unaudited – in thousands) Three Months Ended Nine Months Ended July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 Net income $ 60,238 $ 58,657 $ 219,794 $ 180,205 Other comprehensive income, net of tax Foreign currency translation adjustment, net of tax 44,500 ( 44,884 ) 69,453 ( 42,763 ) Gain (loss) on cash flow hedge valuations, net of tax ( 1,044 ) 2,380 ( 2,029 ) 9,984 Net pension adjustments — — 2,794 — Other comprehensive income (loss), net of tax 43,456 ( 42,504 ) 70,218 ( 32,779 ) Comprehensive income, net of tax $ 103,694 $ 16,153 $ 290,012 $ 147,426 Comprehensive income attributable to noncontrolling interests, net of tax 4 6 23 25 Comprehensive income attributable to Tetra Tech, net of tax $ 103,690 $ 16,147 $ 289,989 $ 147,401 See Notes to Consolidated Financial Statements. 5 Tetra Tech, Inc. Consolidated Statements of Cash Flows (unaudited – in thousands) Nine Months Ended July 2, 2023 July 3, 2022 Cash flows from operating activities: Net income $ 219,794 $ 180,205 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 43,221 19,545 Equity in income of unconsolidated joint ventures ( 4,831 ) ( 5,233 ) Distributions of earnings from unconsolidated joint ventures 4,345 4,532 Amortization of stock-based awards 21,640 19,104 Deferred income taxes 21,475 750 Fair value adjustments to contingent consideration 8,477 ( 64 ) (Gain) loss on sale of assets ( 310 ) 93 Fair value adjustments to foreign currency forward contract ( 89,402 ) — Changes in operating assets and liabilities, net of effects of business acquisitions: Accounts receivable and contract assets ( 41,824 ) ( 54,874 ) Prepaid expenses and other assets 1,970 33,254 Accounts payable ( 3,678 ) 8,845 Accrued compensation 5,263 15,349 Contract liabilities 56,189 59,025 Other liabilities ( 6,921 ) ( 12,702 ) Income taxes receivable/payable 10,645 8,147 Net cash provided by operating activities 246,053 275,976 Cash flows from investing activities: Payments for business acquisitions, net of cash acquired ( 854,319 ) ( 33,624 ) Capital expenditures ( 17,322 ) ( 8,401 ) Proceeds from sale of assets 439 3,754 Settlement of foreign currency forward contract 109,306 — Net cash used in investing activities ( 761,896 ) ( 38,271 ) Cash flows from financing activities: Proceeds from borrowings 979,859 141,456 Repayments on long-term debt ( 411,676 ) ( 108,949 ) Repurchases of common stock — ( 150,000 ) Taxes paid on vested restricted stock ( 16,785 ) ( 25,193 ) Stock options exercised 425 1,205 Dividends paid ( 38,268 ) ( 33,873 ) Payments of contingent earn-out liabilities ( 15,078 ) ( 4,035 ) Principal payments on finance leases ( 4,082 ) ( 3,097 ) Net cash provided by (used in) financing activities 494,395 ( 182,486 ) Effect of exchange rate changes on cash and cash equivalents 12,410 ( 4,403 ) Net (decrease) increase in cash and cash equivalents ( 9,038 ) 50,816 Cash and cash equivalents at beginning of period 185,094 166,568 Cash and cash equivalents at end of period $ 176,056 $ 217,384 Supplemental information: Cash paid during the period for: Interest $ 34,839 $ 7,556 Income taxes, net of refunds received of $ 1.5 million and $ 4.2 million $ 54,967 $ 49,131 Supplemental disclosures on non-cash investing activities: Issuance of promissory note for business acquisition $ — $ 14,578 See Notes to Consolidated Financial Statements. 6 Tetra Tech, Inc. Consolidated Statements of Stockholders' Equity Three Months Ended July 3, 2022 and July 02, 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 APRIL 3, 2022 53,683 $ 537 $ — $ ( 115,303 ) $ 1,359,367 $ 1,244,601 $ 41 $ 1,244,642 Net income 58,650 58,650 7 58,657 Other comprehensive loss ( 42,503 ) ( 42,503 ) ( 1 ) ( 42,504 ) Cash dividends of $ 0.23 per common share ( 12,311 ) ( 12,311 ) ( 12,311 ) Stock-based compensation 12,747 ( 6,035 ) 6,712 6,712 Restricted & performance shares released 4 — ( 6,172 ) 6,034 ( 138 ) ( 138 ) Stock repurchases ( 368 ) ( 4 ) ( 6,575 ) ( 43,421 ) ( 50,000 ) ( 50,000 ) BALANCE AT JULY 3, 2022 53,319 $ 533 $ — $ ( 157,806 ) $ 1,362,284 $ 1,205,011 $ 47 $ 1,205,058 BALANCE AT APRIL 2, 2023 53,228 $ 532 $ 10,639 $ ( 181,381 ) $ 1,525,809 $ 1,355,599 $ 69 $ 1,355,668 Net income 60,235 60,235 3 60,238 Other comprehensive income 43,455 43,455 1 43,456 Cash dividends of $ 0.26 per common share ( 13,840 ) ( 13,840 ) ( 13,840 ) Stock-based compensation 7,038 7,038 7,038 Restricted & performance shares released 3 — ( 105 ) ( 105 ) ( 105 ) Stock options exercised 12 — 334 334 334 BALANCE AT JULY 2, 2023 53,243 $ 532 $ 17,906 $ ( 137,926 ) $ 1,572,204 $ 1,452,716 $ 73 $ 1,452,789 7 Tetra Tech, Inc. Consolidated Statements of Stockholders' Equity Nine Months Ended July 3, 2022 and July 02, 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 180,179 180,179 26 180,205 Other comprehensive loss ( 32,778 ) ( 32,778 ) ( 1 ) ( 32,779 ) Distributions paid to noncontrolling interests — ( 31 ) ( 31 ) Cash dividends of $ 0.63 per common share ( 33,873 ) ( 33,873 ) ( 33,873 ) Stock-based compensation 19,104 — 19,104 19,104 Restricted & performance shares released 189 2 ( 25,195 ) — ( 25,193 ) ( 25,193 ) Stock options exercised 29 — 1,205 1,205 1,205 Shares issued for Employee Stock Purchase Plan 106 1 12,128 12,129 12,129 Stock repurchases ( 986 ) ( 10 ) ( 7,242 ) ( 142,748 ) ( 150,000 ) ( 150,000 ) BALANCE AT JULY 3, 2022 53,319 $ 533 $ — $ ( 157,806 ) $ 1,362,284 $ 1,205,011 $ 47 $ 1,205,058 BALANCE AT OCTOBER 2, 2022 52,981 $ 530 $ — $ ( 208,144 ) $ 1,390,701 $ 1,183,087 $ 50 $ 1,183,137 Net income 219,771 219,771 23 219,794 Other comprehensive income 70,218 70,218 — 70,218 Cash dividends of $ 0.72 per common share ( 38,268 ) ( 38,268 ) ( 38,268 ) Stock-based compensation 21,640 21,640 21,640 Restricted & performance shares released 149 1 ( 16,786 ) ( 16,785 ) ( 16,785 ) Stock options exercised 15 — 425 425 425 Shares issued for Employee Stock Purchase Plan 98 1 12,627 12,628 12,628 BALANCE AT JULY 2, 2023 53,243 $ 532 $ 17,906 $ ( 137,926 ) $ 1,572,204 $ 1,452,716 $ 73 $ 1,452,789 See Notes to Consolidated Financial Statements. 8 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 in the accompanying notes. 2. Recent Accounting Pronouncements In November 2021, the Financial Accounting Standards Board 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 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): 9 Three Months Ended Nine Months Ended July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 Client Sector: U.S. federal government (1) $ 338,022 $ 261,434 $ 996,471 $ 781,503 U.S. state and local government 151,462 150,731 $ 452,447 $ 465,770 U.S. commercial 225,907 188,255 633,401 536,901 International (2) 493,556 289,811 1,179,619 817,311 Total $ 1,208,947 $ 890,231 $ 3,261,938 $ 2,601,485 Contract Type: Fixed-price $ 452,605 $ 335,014 $ 1,194,266 $ 982,565 Time-and-materials 596,904 417,898 1,550,970 1,221,598 Cost-plus 159,438 137,319 516,702 397,322 Total $ 1,208,947 $ 890,231 $ 3,261,938 $ 2,601,485 (1) Includes revenue generated under U.S. federal government contracts performed outside the United States. (2) Includes revenue generated from non-U.S. clien ts, primarily in Canada, Australia and the United Kingdom. Other than the U.S. federal government, no single client accounted for more than 10% of our revenue for the three and nine months ended July 2, 2023 and July 3, 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 July 2, 2023 October 2, 2022 Contract assets (1) $ 125,360 $ 92,405 Contract liabilities 351,048 241,340 Net contract liabilities $ ( 225,688 ) $ ( 148,935 ) (1) Inclu des $ 8.1 million and $ 23.3 million of contract retentions at July 2, 2023 and October 2, 2022, respectively. In the first nine months of fiscal 2023 and 2022, we recognized revenue of approximately $ 143 million and $ 111 million, respectively, from the amounts included in the contract liability balances at the end of fiscal 2022 and 2021, respectively. 10 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 res ult, in the first nine months of fiscal 2023, we recognized net favorable revenue and operating income adjustments of $ 4.0 million (substantially all in the first quarter). In the third quarter and first nine months of fiscal 2022, we recognized net unfavorable revenue and operating income adjustments of $ 2.8 million and net favorable revenue and operating income adjustments of $ 2.2 million , 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 July 2, 2023 and October 2, 2022, our consolidated balance sheets included liabilities for anticipated losses of $ 9.7 million and $ 10.0 million, respectively. The estimated cost to complete these related contracts at July 2, 2023 and October 2, 2022 was approximately $ 69 million and $ 80 million, respectively. Accounts Receivable, Net Net accounts receivable consisted of the following (in thousands): Balance at July 2, 2023 October 2, 2022 Billed $ 677,915 $ 491,700 Unbilled 331,381 267,161 Total accounts receivable 1,009,296 758,861 Allowance for doubtful accounts ( 7,209 ) ( 3,749 ) Total accounts receivable, net $ 1,002,087 $ 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 July 2, 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 commerci al sector client; and general economic and industry conditions. Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at July 2, 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 had $ 4.4 billion of RUPO at July 2, 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 July 2, 2023 over the following periods (in thousands): Amount Within 12 months $ 2,815,736 Beyond 1,537,602 Total $ 4,353,338 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 11 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 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' Board of Directors. On November 3, 2022, RPS' 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, 2023. 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 is included in our Commercial/International Services Group ("CIG") segment. The total purchase price of RPS was approximately £ 633 million ($ 784 million). In the third quarter and first nine months of fiscal 2023, we incurred acquisition and integration costs of $ 2.1 million and $ 25.8 million, respectively, primarily for professional fees, substantially all of which were paid as of the end of the third quarter of fiscal 2023. On January 23, 2023, we also settled a foreign exchange forward contract that was integral to our plan to finance the RPS acquisition. The cash gain of $ 109.3 million did not qualify for hedge accounting. As a result, the gain was recognized as non-operating income over the life of the contract and not included in the purchase price allocation below. However, the cash proceeds of $ 109.3 million economically reduced the purchase price for the shares of RPS to approximately $ 675 million. This forward contract is explained further in Note 15, "Derivative Financial Instruments". The table below represents the preliminary purchase price allocation for RPS based on estimates, assumptions, valuations and other analyses as of January 23, 2023, that has not been finalized in order to make a definitive allocation. The purchase consideration, excluding the aforementioned forward contract gain, is allocated to the tangible and intangible assets, and liabilities of RPS based on their estimated fair values, with any excess purchase consideration allocated to goodwill as follows (in thousands): 12 Amount Cash and cash equivalents $ 32,093 Accounts receivable and contract assets 202,634 Prepaid expenses and other current assets 49,216 Income taxes receivables 1,999 Property and equipment 43,276 Right-of-use assets, operating leases 40,179 Intangible assets 206,186 Deferred income taxes 29,347 Other long-term assets 1,061 Total assets acquired 605,991 Accounts payable $ ( 44,376 ) Accrued compensation ( 22,290 ) Contract liabilities ( 46,287 ) Income tax payable ( 7,083 ) Short-term lease liabilities, operating leases ( 13,477 ) Other current liabilities ( 126,023 ) Long-term debt ( 91,973 ) Long-term lease liabilities, operating leases ( 26,702 ) Other long-term liabilities ( 7,423 ) Deferred tax liabilities ( 55,965 ) Total liabilities assumed ( 441,599 ) Fair value of net assets acquired 164,392 Goodwill 619,817 Total purchase consideration $ 784,209 The following table summarizes the estimated fair values that were assigned to intangible assets at the acquisition date: Fair Value Weighted-Average Estimated Useful Life (in thousands) (in years) Backlog $ 19,702 1.5 Trade names 17,843 3.0 Client relations 168,641 8.0 Total intangible assets acquired $ 206,186 6.9 Supplemental Pro Forma Information (Unaudited) Following are the supplemental consolidated financial results of Tetra Tech and RPS on an unaudited pro forma basis, as if the RPS acquisition had been consummated as of the beginning of fiscal 2022 (in thousands): 13 Three Months Ended Nine Months Ended July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 Revenue $ 1,208,947 $ 1,085,799 $ 3,519,792 $ 3,160,341 Net Income including noncontrolling interests $ 61,770 $ 45,456 $ 104,564 $ 101,519 RPS contributed revenue of $ 220.4 million and $ 389.9 million for the third quarter and first nine months of fiscal 2023, respectively, to our consolidated results. For the third quarter of fiscal 2023, RPS' net income, including interest expense, was $ 0.7 million, or $ 0.01 per share, before the related intangible amortization of $ 10.4 million. For the first nine months of fiscal 2023, RPS' net loss, including interest expense, was $ 1.0 million, or $ 0.02 per share, before the related intangible amortization of $ 18.1 million. In the second quarter of fiscal 2023, we also 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 is included in our Government Services Group (" GSG") segment. The total fair value of the purchase price of Amyx was $ 120.9 million, comprised of a $ 100.0 million payable in a promissory note issued to the sellers (paid subsequent to closing), $ 8.7 million of payables related to estimated post-closing adjustments, and $ 12.2 million for the estimated fair value of contingent earn-out obligations, with a maximum of $ 25.0 million, based upon the achievement of specified operating income targets in each of the three years following the acquisition date. Amyx was not considered significant to our consolidated financial statements. As a result, no pro forma information has been provided. In fiscal 2022, we acquired The Integration Group of America ("TIGA"), Piteau Associates (“PAE”) and two 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 the other financially 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. These acquisitions were not considered significant, individually or in the aggregate, to our consolidated financial statements. As a result, no pro forma information has been provided. The majority of the goodwill from the fiscal 2023 acquisitions is not deductible for tax purposes, while the majority of the goodwill from the fiscal 2022 acquisitions is deductible for tax purposes. The results of fiscal 2022 and 2023 acquisitions were included in our consolidated financial statements beginning on the respective closing dates. Goodwill additions resulting from the fiscal 2023 business combinations are primarily attributable to the significant technical expertise residing in embedded workforces that are sought out by clients, synergies expected to arise after the acquisitions in the areas of enterprise technology services, data management, energy transformation, water, program management, and data analytics and the long-standing reputations of RPS and Amyx. These acquisitions further expand and complement our market-leading positions in water, renewable energy and sustainable infrastructure; enhanced by a combined suite of differentiated data analytics and digital technologies, and expansion into existing and new geographies. Our fiscal 2022 goodwill additions 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. Intangible assets with finite lives arise from business acquisitions and are amortized based on the period over which the contractual or economic benefit of the intangible assets are expected to be realized or on a straight-line basis over the useful lives of the underlying assets, ranging from one to eight years . These consist of client relations, backlog and trade names. 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 14 fair values of any earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in “Current contingent earn-out liabilities” and “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 incom e. For the first nine months of fiscal 2023, we evaluated our estimates for contingent consideration liabilities for the remaining earn-out periods for each individual acquisition, which included a review of their financial results to-date, the status of ongoing projects in their RUPO, and the inventory of prospective new contract awards. During the first nine months of fiscal 2023, we recorded adjustments to our contingent earn-out liabilities and reported a related net charge to operating income of $ 8.5 million (all the in first half of fiscal 2023). The net charge primarily resulted from increased valuations of the contingent consideration liabilities for our prior acquisitions of Segue Technologies, Inc., Hoare Lea, LLP and TIGA reflecting financial performance that exceeded our previous expectations. For the third quarter and first nine months of fiscal 2022, we had no material adjustments to our contingent earn-out liabilities in operating income. At July 2, 2023, there was a total potential maximum of $ 120.3 million of outstanding contingent consideration related to acquisitions. Of this amount, $ 76.6 million was estimated as the fair value and accrued on our consolidated balance sheet at July 2, 2023. 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 Acquisition activity 104,100 619,832 723,932 Translation adjustments 5,459 47,051 52,510 Balance at July 2, 2023 $ 628,661 $ 1,258,193 $ 1,886,854 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 $ 646.4 million and $ 536.8 million at July 2, 2023 and October 2, 2022, respectively, excluding accumulated impairment of $ 17.7 million at each date. The gross amounts of goodwill for CIG were $ 1,379.7 million and $ 712.8 million at July 2, 2023 and October 2, 2022, respectively, excluding accumulated impairment of $ 121.5 million at each date. 15 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 val ues by less than 165 %. We also regularly evaluate whether events and circumstances have occurred that may indicate a potential change in the recoverability of goodwill. We perform interim goodwill impairment reviews between our annual reviews if certain events and circumstances have occurred, such as a deterioration in general economic conditions; an increase in the competitive environment; a change in management, key personnel, strategy or customers; negative or declining cash flows; or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods. Although we believe that our estimates of fair value for these reporting units are reasonable, if financial performance for these reporting units falls significantly below our expectations or market prices for similar business decline, the goodwill for these reporting units could become impaired. The 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 July 2, 2023 October 2, 2022 Weighted- Average Remaining Life (in Years) Gross Amount Accumulated Amortization Net Amount Gross Amount Accumulated Amortization Net Amount Client relations 7.2 $ 226,024 $ ( 36,952 ) $ 189,072 $ 41,676 $ ( 21,092 ) $ 20,584 Backlog 0.9 57,342 ( 41,616 ) 15,726 33,286 ( 29,990 ) 3,296 Trade names 2.7 29,262 ( 9,028 ) 20,234 12,711 ( 7,428 ) 5,283 Total $ 312,628 $ ( 87,596 ) $ 225,032 $ 87,673 $ ( 58,510 ) $ 29,163 Amortization expense for the three and nine months e nded July 2, 2023 w as $ 14.1 million and $ 29.6 million, compared to $ 3.7 million and $ 9.6 million for the prior-year periods. Estimated amortization expense for the remainder of fiscal 2023 and succeeding years is as follows (in thousands): Amount 2023 (remaining) $ 13,541 2024 46,669 2025 34,702 2026 29,585 2027 24,577 Beyond 75,958 Total $ 225,032 6. Property and Equipment Property and equipment consisted of the following (in thousands): 16 Balance at July 2, 2023 October 2, 2022 Equipment, furniture and fixtures $ 141,619 $ 96,710 Leasehold improvements 47,949 32,428 Total property and equipment 189,568 129,138 Accumulated depreciation ( 108,247 ) ( 96,822 ) Property and equipment, net $ 81,321 $ 32,316 The depreciation expense related to property and equipment was $ 5.6 million and $ 13.7 million for the three and nine months ended July 2, 2023, compared to $ 3.2 million and $ 9.9 million for the prior-year periods. The increases in property equipment from October 2, 2022 to July 2, 2023 are primarily due to the RPS acquisition. 7. Stock Repurchase and Dividends On October 5, 2021, our Board of Directors authorized a new stock repurchase program under which we could repurchase up to $ 400 million of our common stock . We did not repurchase any shares of our common stock in the first nine months of fiscal 2023. At July 2, 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 nine 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 January 30, 2023 $ 0.23 February 13, 2023 February 24, 2023 12,242 May 8, 2023 $ 0.26 May 24, 2023 June 6, 2023 13,840 Total dividend paid as of July 2, 2023 $ 38,268 November 15, 2021 $ 0.20 December 2, 2021 December 20, 2021 $ 10,793 January 31, 2022 $ 0.20 February 11, 2022 February 25, 2022 10,769 May 2, 2022 $ 0.23 May 13, 2022 May 27, 2022 12,311 Total dividend paid as of July 3, 2022 $ 33,873 Subsequent Event. On August 7, 2023, our Board of Directors declared a quarterly cash dividend of $ 0.26 per share payable on September 6, 2023 to stockholders of record as of the close of business on August 23, 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 immaterial. 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. 17 The components of lease costs are as follows (in thousands): Three Months Ended Nine Months Ended July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 Operating lease cost $ 24,775 $ 21,004 $ 70,155 $ 64,015 Sublease (income) cost ( 46 ) 140 ( 125 ) ( 116 ) Total lease cost $ 24,729 $ 21,144 $ 70,030 $ 63,899 Supplemental cash flow information related to leases is as follows (in thousands): Nine Months Ended July 2, 2023 July 3, 2022 Operating cash flows for operating leases $ 57,871 $ 50,965 Right-of-use assets obtained in exchange for new operating lease liabilities 72,294 32,175 Supplemental balance sheet and other information related to leases are as follows (in thousands): Balance at July 2, 2023 October 2, 2022 Operating leases: Right-of-use assets $ 207,218 $ 182,319 Lease liabilities: Current 68,555 57,865 Non-current 163,919 146,285 Total operating lease liabilities $ 232,474 $ 204,150 Weighted-average remaining lease term: Operating leases 5 years 5 years Weighted-average discount rate: Operating leases 3.0 % 2.2 % At July 2, 2023, we have no material operating leases that have not yet commenced. 18 A maturity analysis of the future undiscounted cash flows associated with our lease liabilities at July 2, 2023 is as follows (in thousands): Operating Leases 2023 (remaining) $ 20,727 2024 69,302 2025 53,634 2026 36,291 2027 25,689 Beyond 45,624 Total lease payments 251,267 Less: imputed interest ( 18,793 ) Total present value of lease liabilities $ 232,474 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 and nine months ended July 2, 2023 was $ 7.0 million and $ 21.6 million, respectively, compared to $ 6.7 million and $ 19.1 million for the same periods last year. Most of these amounts were included in selling, general and administrative expenses on our consolidated statements of income. In the first nine months of fiscal 2023, we awarded 56,214 performance share units (“PSUs”) to our non-employee directors and executive officers at a fair value of $ 195.50 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 103,016 restricted stock units (“RSUs”) to our non-employee directors, executive officers and employees at a fair value of $ 156.10 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. 19 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 Nine Months Ended July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 Net income attributable to Tetra Tech $ 60,235 $ 58,650 $ 219,771 $ 180,179 Weighted-average common shares outstanding – basic 53,231 53,507 53,188 53,777 Effect of dilutive stock options and unvested restricted stock 422 499 427 551 Weighted-average common shares outstanding – diluted 53,653 54,006 53,615 54,328 Earnings per share attributable to Tetra Tech: Basic $ 1.13 $ 1.10 $ 4.13 $ 3.35 Diluted $ 1.12 $ 1.09 $ 4.10 $ 3.32 11. Income Taxes The effective tax rates for the first nine months of fiscal 2023 and 2022 were 28.3 % and 23.9 %, respectively. Income tax expense was reduced by $ 2.2 million and $ 4.9 million of excess tax benefits on share-based payments in the first nine months of fiscal 2023 and 2022, respectively. In addition, income tax expense in the first nine months of fiscal 2023 included non-operating income tax expenses of $ 7.2 million ($ 6.9 million in the second quarter) to recognize the tax liability for foreign earnings, primarily in the U.K. and Australia, that are no longer indefinitely reinvested and to increase the liability for an uncertain tax position. Excluding the impact of the excess tax benefits on share-based payments and the non-operating tax expenses in the second and third quarter of fiscal 2023, our effective tax rates in the first nine months of fiscal 2023 and 2022 were 26.7 % and 25.9 %, respectively. At July 2, 2023 and October 2, 2022, the liability for income taxes associated with uncertain tax positions was $ 48.8 million and $ 10.6 million, respectively. These liabilities could materially decrease within the next 12 months as some related examinations have commenced. 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. 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. 20 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. In the third quarter and first nine months of fiscal 2023 , our Corporate segment operating losses include d $ 2.1 million and $ 25.8 million of acquisition and integration expenses, respectively, as described in Note 4, “Acquisitions”. The following tables summarize financial information regarding our reportable segments (in thousands): Three Months Ended Nine Months Ended July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022 Revenue GSG $ 531,050 $ 459,987 $ 1,565,371 $ 1,365,041 CIG 691,386 444,238 1,741,300 1,277,469 Elimination of inter-segment revenue ( 13,489 ) ( 13,994 ) ( 44,733 ) ( 41,025 ) Total revenue $ 1,208,947 $ 890,231 $ 3,261,938 $ 2,601,485 Income from operations GSG $ 54,496 $ 45,580 $ 167,053 $ 147,104 CIG 69,572 53,535 172,199 139,328 Corporate (1) ( 26,393 ) ( 15,210 ) ( 88,516 ) ( 40,787 ) Total income from operations $ 97,675 $ 83,905 $ 250,736 $ 245,645 (1) Includes amortization of intangibles, acquisition and integration expenses, as well as other costs and other income not allocable to our reportable segments. Balance at July 2, 2023 October 2, 2022 Total Assets GSG $ 588,469 $ 558,764 CIG 1,058,974 688,640 Corporate (1) 2,326,135 1,375,372 Total assets $ 3,973,578 $ 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 July 2, 2023 and October 2, 2022. At July 2, 2023, we had bor rowing s of $ 919.4 million outstanding under our Amended Credit Agreement, which were primarily used to fund business acquisitions, working capital needs, and capital expenditures. 14. Credit Facility 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. 21 On January 23, 2023, we 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. In the fourth quarter of fiscal 2022, we entered into a forward contract 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 plan to acquire 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 acquisition. Although an effective economic hedge of our foreign exchange risk related to this transaction, the forward contract did not qualify for hedge accounting. As a result, the forward contract was 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 22 $ 19.9 million, and an unrealized gain of the same amount was recognized in our fourth quarter of fiscal 2022 results. On January 23, 2023, the forward contract was settled at the fair value of $ 109.3 million. We recognized additional gains of $ 68.0 million and $ 21.4 million in the first and second quarters of fiscal 2023, respectively. All gains related to this transaction were reported in “Other non-operating income" on our consolidated income statements for the respective periods. In fiscal 2018, we enter ed 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 July 2, 2023, the notional principal of our outstanding interest swap agreements was $ 190.6 million ($ 38.1 million each.) The interest rate swaps have a fixed interest rate of 2.79 % and expire in July 2023 for all five agreements. At July 2, 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 $ 0.4 million and $ 2.4 million, respectively, which were reported in "Other non-current assets" on our consolidated balance sheets. Additionally, the related loss of $ 1.0 million and $ 2.0 million for the three and nine months ended July 2, 2023, compared to the related gain of $ 2.4 million and $ 10.0 million for the prior-year periods, were recognized and reported on our consolidated statements of comprehensive income. We expect to reclassify a credit of $ 0.4 million from accumulated other comprehensive loss to interest expense during the fourth quarter of fiscal 2023, up to the expiration date in July 2023. There were no other derivative instruments designated as hedging instruments for the first nine months of fiscal 2023. 16. Reclassifications Out of Accumulated Other Comprehensive Income The accumulated balances and activities for the three and nine months ended July 2, 2023 and July 3, 2022 related to reclassifications out of accumulated other comprehensive income are summarized as follows (in thousands): 23 Three Months Ended Foreign Currency Translation Adjustments Gain (Loss) on Derivative Instruments Net Pension Adjustments Accumulated Other Comprehensive Income (Loss) Balance at April 3, 2022 $ ( 113,513 ) $ ( 1,790 ) — $ ( 115,303 ) Other comprehensive (loss) income before reclassifications ( 44,883 ) 3,413 — ( 41,470 ) Amounts reclassified from accumulated other comprehensive loss: Interest rate contracts, net of tax (1) — ( 1,033 ) — ( 1,033 ) Net current-period other comprehensive (loss) income ( 44,883 ) 2,380 — ( 42,503 ) Balance at July 3, 2022 $ ( 158,396 ) $ 590 $ — $ ( 157,806 ) Balance at April 2, 2023 $ ( 185,602 ) $ 1,427 2,794 $ ( 181,381 ) Other comprehensive income (loss) before reclassifications 44,499 ( 2,137 ) — 42,362 Amounts reclassified from accumulated other comprehensive loss: Interest rate contracts, net of tax (1) — 1,093 — 1,093 Net current-period other comprehensive income (loss) 44,499 ( 1,044 ) — 43,455 Balance at July 2, 2023 $ ( 141,103 ) $ 383 $ 2,794 $ ( 137,926 ) Nine Months Ended Foreign Currency Translation Adjustments Gain (Loss) on Derivative Instruments Net Pension Adjustments Accumulated Other Comprehensive Income (Loss) Balance at October 3, 2021 $ ( 115,634 ) $ ( 9,394 ) — $ ( 125,028 ) Other comprehensive (loss) income before reclassifications ( 42,762 ) 13,833 — ( 28,929 ) Amounts reclassified from accumulated other comprehensive loss: Interest rate contracts, net of tax (1) — ( 3,849 ) ( 3,849 ) Net current-period other comprehensive (loss) income ( 42,762 ) 9,984 — ( 32,778 ) Balance at July 3, 2022 $ ( 158,396 ) $ 590 $ — $ ( 157,806 ) Balance at October 2, 2022 $ ( 210,556 ) $ 2,412 — $ ( 208,144 ) Other comprehensive income (loss) before reclassifications 69,453 ( 4,439 ) 2,794 67,808 Amounts reclassified from accumulated other comprehensive loss: Interest rate contracts, net of tax (1) — 2,410 — 2,410 Net current-period other comprehensive income (loss) 69,453 ( 2,029 ) 2,794 70,218 Balance at July 2, 2023 $ ( 141,103 ) $ 383 $ 2,794 $ ( 137,926 ) (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. 24 17. Commitments and Contingencies We are subject to certain claims and lawsuits typically filed against the consulting and engineering profession, alleging primarily professional errors or omissions. We carry professional liability insurance, subject to certain deductibles and policy limits, against such claims. However, in some actions, parties are seeking damages that exceed our insurance coverage or for which we are not insured. While management does not believe that the resolution of these claims will have a material adverse effect, individually or in aggregate, on our financial position, results of operations or cash flows, management acknowledges the uncertainty surrounding the ultimate resolution of these matters. On July 15, 2019, following an initial January 14, 2019 filing, the Civil Division of the United States Attorney's Office filed an amended complaint in intervention in three qui tam actions filed against our subsidiary, Tetra Tech EC, Inc. ("TtEC"), in the U.S. District Court for the Northern District of California. The complaint alleges False Claims Act violations and breach of contract related to TtEC's contracts to perform environmental remediation services at the former Hunters Point Naval Shipyard in San Francisco, California. TtEC disputes the claims and will defend this matter vigorously. We are currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any. 18. Related Party Transactions We often provide services to unconsolidated joint ventures. Our revenue related t o services we provided to unconsolidated joint ventures for the third quarter and first nine months of fiscal 2023 was approximately $ 22 million and $ 65 million, respectively, compared to $ 24 million and $ 74 million for the same periods last year. Our related reimbursable costs for the third quarter and nine months of fiscal 2023 were approximately $ 21 million and $ 61 million, respectively. Our related reimbursable costs for the third quarter and nine months of fiscal 2022 were approximately $ 23 million and $ 70 million, respectively. Our consolidated balance sheets also included the following amounts related to these services (in thousands): Balance at July 2, 2023 October 2, 2022 Accounts receivable, net $ 22,234 $ 16,818 Contract assets 1,800 2,935 Contract liabilities 2,768 3,464 25