TETRA TECH INC 10-Q

Item 1. Financial Statements Tetra Tech, Inc. Consolidated Balance Sheets (unaudited - in thousands, except par value) ASSETS December 31, 2023 October 1, 2023 Current assets: Cash and cash equivalents $ 198,689 $ 168,831 Accounts receivable, net 1,040,510 974,535 Contract assets 89,073 113,939 Prepaid expenses and other current assets 125,769 98,719 Total current assets 1,454,041 1,356,024 Property and equipment, net 74,971 74,832 Right-of-use assets, operating leases 179,513 175,932 Goodwill 1,923,146 1,880,244 Intangible assets, net 168,134 173,936 Deferred tax assets 76,210 89,002 Other non-current assets 74,808 70,507 Total assets $ 3,950,823 $ 3,820,477 LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 207,062 $ 173,271 Accrued compensation 222,686 302,755 Contract liabilities 382,862 335,044 Short-term lease liabilities, operating leases 68,091 65,005 Current contingent earn-out liabilities 37,556 51,108 Other current liabilities 242,738 280,959 Total current liabilities 1,160,995 1,208,142 Deferred tax liabilities 11,620 14,256 Long-term debt 945,319 879,529 Long-term lease liabilities, operating leases 139,537 144,685 Non-current contingent earn-out liabilities 18,048 22,314 Other non-current liabilities 137,617 148,045 Commitments and contingencies (Note 17) Equity: Preferred stock - authorized, 2,000 shares of $ 0.01 par value; no shares issued and outstanding at December 31, 2023 and October 1, 2023 — — Common stock - authorized, 150,000 shares of $ 0.01 par value; issued and outstanding, 53,466 and 53,248 shares at December 31, 2023 and October 1, 2023, respectively 534 532 Additional paid-in capital 9,979 — Accumulated other comprehensive loss ( 132,202 ) ( 195,295 ) Retained earnings 1,659,295 1,598,196 Tetra Tech stockholders’ equity 1,537,606 1,403,433 Noncontrolling interests 81 73 Total stockholders' equity 1,537,687 1,403,506 Total liabilities and stockholders' equity $ 3,950,823 $ 3,820,477 See Notes to Consolidated Financial Statements. 3 Tetra Tech, Inc. Consolidated Statements of Income (unaudited – in thousands, except per share data) Three Months Ended December 31, 2023 January 1, 2023 Revenue $ 1,228,267 $ 894,766 Subcontractor costs ( 213,098 ) ( 158,204 ) Other costs of revenue ( 824,671 ) ( 583,316 ) Gross profit 190,498 153,246 Selling, general and administrative expenses ( 79,417 ) ( 56,502 ) Acquisition and integration expenses — ( 3,761 ) Contingent consideration – fair value adjustments — ( 933 ) Income from operations 111,081 92,050 Interest expense, net ( 9,577 ) ( 5,372 ) Other non-operating income — 67,995 Income before income tax expense 101,504 154,673 Income tax expense ( 26,524 ) ( 37,958 ) Net income 74,980 116,715 Net income attributable to noncontrolling interests ( 8 ) ( 9 ) Net income attributable to Tetra Tech $ 74,972 $ 116,706 Earnings per share attributable to Tetra Tech: Basic $ 1.41 $ 2.20 Diluted $ 1.40 $ 2.18 Weighted-average common shares outstanding: Basic 53,317 53,069 Diluted 53,738 53,529 See Notes to Consolidated Financial Statements. 4 Tetra Tech, Inc. Consolidated Statements of Comprehensive Income (unaudited – in thousands) Three Months Ended December 31, 2023 January 1, 2023 Net income $ 74,980 $ 116,715 Other comprehensive income, net of tax Foreign currency translation adjustment, net of tax 63,106 33,107 Gain (loss) on cash flow hedge valuations, net of tax — ( 89 ) Net pension adjustments ( 13 ) — Other comprehensive income, net of tax 63,093 33,018 Comprehensive income, net of tax $ 138,073 $ 149,733 Comprehensive income attributable to noncontrolling interests, net of tax 8 9 Comprehensive income attributable to Tetra Tech, net of tax $ 138,065 $ 149,724 See Notes to Consolidated Financial Statements. 5 Tetra Tech, Inc. Consolidated Statements of Cash Flows (unaudited – in thousands) Three Months Ended December 31, 2023 January 1, 2023 Cash flows from operating activities: Net income $ 74,980 $ 116,715 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,484 6,616 Amortization of stock-based awards 7,641 7,184 Deferred income taxes ( 1,624 ) 15,935 Fair value adjustments to foreign currency forward contract — ( 67,995 ) Other non-cash items 123 601 Changes in operating assets and liabilities, net of effects of business acquisitions: Accounts receivable and contract assets ( 22,288 ) ( 16,175 ) Prepaid expenses and other assets ( 28,615 ) 5,967 Accounts payable 33,790 3,820 Accrued compensation ( 80,069 ) ( 53,201 ) Contract liabilities 41,862 27,769 Income taxes receivable/payable ( 15,941 ) 4,387 Other liabilities ( 20,097 ) ( 26,432 ) Net cash provided by operating activities 9,246 25,191 Cash flows from investing activities: Capital expenditures ( 3,456 ) ( 4,996 ) Proceeds from sale of assets 22 51 Net cash used in investing activities ( 3,434 ) ( 4,945 ) Cash flows from financing activities: Proceeds from borrowings 125,000 60,889 Repayments on long-term debt ( 60,000 ) ( 73,125 ) Taxes paid on vested restricted stock ( 12,670 ) ( 16,586 ) Payments of contingent earn-out liabilities ( 18,862 ) — Stock options exercised 335 57 Dividends paid ( 13,873 ) ( 12,186 ) Principal payments on finance leases ( 1,539 ) ( 1,316 ) Net cash provided by (used in) financing activities 18,391 ( 42,267 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash 5,655 8,695 Net increase (decrease) in cash, cash equivalents and restricted cash 29,858 ( 13,326 ) Cash, cash equivalents and restricted cash at beginning of period 168,831 185,491 Cash, cash equivalents and restricted cash at end of period $ 198,689 $ 172,165 Supplemental information: Cash paid during the period for: Interest $ 9,768 $ 3,433 Income taxes, net of refunds received o f $ 0.9 million and $ 0.1 million $ 43,297 $ 14,540 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 198,689 $ 164,397 Restricted cash — 7,768 Total cash, cash equivalents and restricted cash $ 198,689 $ 172,165 See Notes to Consolidated Financial Statements. 6 Tetra Tech, Inc. Consolidated Statements of Stockholders' Equity Three Months Ended January 1, 2023 and December 31, 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 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 BALANCE AT OCTOBER 1, 2023 53,248 $ 532 $ — $ ( 195,295 ) $ 1,598,196 $ 1,403,433 $ 73 $ 1,403,506 Net income 74,972 74,972 8 74,980 Other comprehensive income 63,093 63,093 63,093 Cash dividends of $ 0.26 per common share ( 13,873 ) ( 13,873 ) ( 13,873 ) Stock-based compensation 7,641 7,641 7,641 Restricted & performance shares released 105 1 ( 12,671 ) ( 12,670 ) ( 12,670 ) Stock options exercised 9 — 335 335 335 Shares issued for Employee Stock Purchase Plan 104 1 14,674 14,675 14,675 BALANCE AT DECEMBER 31, 2023 53,466 $ 534 $ 9,979 $ ( 132,202 ) $ 1,659,295 $ 1,537,606 $ 81 $ 1,537,687 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 1, 2023. 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 ("FASB") issued Accounting Standards Update (“ASU”) No. 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. Some of 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 $ 21 million total received was initially recorded in "Other long-term liabilities" until all potential amendments to the qualification criteria, including some that were proposed with retroactive application, were finalized in fiscal 2022. In the first quarter of fiscal 2024, we distributed approximately $ 10 million to our Canadian employees. The remaining $ 11 million, which we expect to distribute within one year, is reported in "Accrued compensation". We do not expect there will be any related impact on our operating income, and we have no outstanding applications for further government assistance. In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which requires that an entity report segment information in accordance with Topic 280, Segment Reporting. The amendments in the ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 (fiscal 2025 for us). Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures , which requires that an entity, on an annual basis, disclose additional income tax information, primarily related to the rate reconciliation and income taxes paid. The amendments in the ASU are intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in this ASU are effective for annual periods beginning after December 15, 2024 (fiscal 2026 for us). Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements; however, we do not plan to adopt Topic 740 before fiscal 2026. 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 December 31, 2023 January 1, 2023 Client Sector: U.S. federal government (1) $ 382,076 $ 276,075 U.S. state and local government 150,925 153,195 U.S. commercial 222,430 198,956 International (2) 472,836 266,540 Total $ 1,228,267 $ 894,766 Contract Type: Fixed-price $ 471,442 $ 327,737 Time-and-materials 549,651 420,570 Cost-plus 207,174 146,459 Total $ 1,228,267 $ 894,766 (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, Europe and the United Kingdom. Other than the U.S. federal government, no single client accounted for more than 10% of our revenue for the first quarters of fiscal 2024 and 2023. 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 December 31, 2023 October 1, 2023 Contract assets (1) $ 89,073 $ 113,939 Contract liabilities 382,862 335,044 Net contract liabilities $ ( 293,789 ) $ ( 221,105 ) (1) Inclu des $ 6.0 million and $ 6.8 million of contract retentions at December 31, 2023 and October 1, 2023, respectively. In the first quarters of fiscal 2024 and 2023, we recognized revenue of approximately $ 130 million and $ 81 million, respectively, from the amounts included in the contract liability balances at the end of fiscal 2023 and 2022, respectively. Revenue is recognized by measuring progress over time under Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers". We estimate and measure progress on our contracts over time whereby we compare our total costs incurred on each contract as a percentage of the total expected contract costs. 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 9 period in which such changes are made. As a result, in the first quarters of fiscal 2024 and 2023, we recognized net favorable revenue and operating income adjustments of $ 5.7 million and $ 3.5 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 December 31, 2023 and October 1, 2023, our consolidated balance sheets included liabilities for anticipated losses of $ 9.2 million and $ 8.5 million, respectively. The estimated cost to complete these related contracts was approximately $ 68 million at December 31, 2023 and October 1, 2023. Accounts Receivable, Net Net accounts receivable consisted of the following (in thousands): Balance at December 31, 2023 October 1, 2023 Billed $ 700,880 $ 672,712 Unbilled 344,628 306,788 Total accounts receivable 1,045,508 979,500 Allowance for doubtful accounts ( 4,998 ) ( 4,965 ) Total accounts receivable, net $ 1,040,510 $ 974,535 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 December 31, 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 , which may affect our clients' ability to pay . Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at December 31, 2023 and October 1, 2023. 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 $ 4.7 billion of RUPO at December 31, 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 December 31, 2023 over the following periods (in thousands): Amount Within 12 months $ 3,149,015 Beyond 1,558,073 Total $ 4,707,088 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) . 10 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 connection with the transaction, we incurred acquisition and integration costs of $ 33.2 million, primarily for professional fees, substantially all of which were paid as of fiscal 2023 year-end. 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 purchase price allocation for RPS based on estimates, assumptions, valuations and other analyses as of January 23, 2023. The purchase consideration, excluding the aforementioned forward contract gain, was 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): Amount Cash and cash equivalents $ 32,093 Accounts receivable and contract assets 202,303 Prepaid expenses and other current assets 45,999 Income taxes receivables 1,999 Property and equipment 38,435 Right-of-use assets, operating leases 40,179 Intangible assets 174,094 Deferred income taxes 35,084 Other long-term assets 1,061 Total assets acquired 571,247 Accounts payable $ ( 44,376 ) Accrued compensation ( 19,073 ) Contract liabilities ( 46,287 ) Income tax payable ( 7,083 ) Short-term lease liabilities, operating leases ( 13,477 ) Other current liabilities ( 135,474 ) Current portion of long-term debt ( 91,973 ) Long-term lease liabilities, operating leases ( 26,702 ) Other long-term liabilities ( 13,742 ) Deferred tax liabilities ( 41,613 ) Total liabilities assumed ( 439,800 ) Fair value of net assets acquired 131,447 Goodwill 652,762 Total purchase consideration $ 784,209 11 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 $ 27,880 1.6 Trade names 27,260 3.0 Client relations 118,954 11.1 Total intangible assets acquired $ 174,094 8.3 Estimated fair value measurements for the intangible assets related to the RPS acquisition were made using Level 3 inputs including discounted cash flow techniques. Fair value was estimated using a multi-period excess earnings method for backlog and client relations and a relief from royalty method for trade names. The significant assumptions used in estimating fair value of backlog and client relations include (i) the estimated life the asset will contribute to cash flows, such as remaining contractual terms, (ii) revenue growth rates and EBITDA margins, (iii) attrition rate of customers, and (iv) the estimated discount rates that reflect the level of risk associated with receiving future cash flows. The significant assumptions used in estimating fair value of trade names include the royalty rates and discount rates. Supplemental Pro Forma Information (Unaudited) Following are the supplemental consolidated financial results of Tetra Tech and RPS for the first quarter of fiscal 2023 on an unaudited pro forma basis, as if the RPS acquisition had been consummated as of the beginning of fiscal 2022 (in thousands): Three Months Ended January 1, 2023 Revenue $ 1,107,301 Net Income including noncontrolling interests $ 63,701 In fiscal 2023, we also acquired Amyx, Inc. (“Amyx”), an enterprise technology services, cybersecurity and management consulting firm based in Reston, Virginia. With over 500 employees, Amyx 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. The majority of the goodwill from the fiscal 2023 acquisitions is not deductible for tax purposes. The results of fiscal 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. 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 on a straight-line basis over the useful 12 lives of the underlying assets, ranging from one to twelve 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 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 reassess 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. In the first quarter of fiscal 2024, 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. For the first quarters of fiscal 2024 and 2023, we had no material adjustments to our contingent earn-out liabilities in operating income. The following table summarizes the changes in the fair value of estimated contingent consideration for the first quarters of fiscal 2024 and 2023 (in thousands): Three Months Ended December 31, 2023 January 1, 2023 Beginning balance $ 73,422 $ 65,566 Payments of contingent consideration ( 18,862 ) — Adjustments to fair value recorded in earnings ( 37 ) 933 Interest accretion expense 471 513 Effect of foreign currency exchange rate changes 610 2,017 Ending balance $ 55,604 $ 69,029 Maximum potential payout at end of period $ 92,253 $ 120,882 5. Goodwill and Intangible Assets The following table summarizes the changes in the carrying value of goodwill by reportable segment (in thousands): 13 GSG CIG Total Balance at October 1, 2023 $ 659,942 $ 1,220,302 $ 1,880,244 Translation adjustments 2,731 40,171 42,902 Balance at December 31, 2023 $ 662,673 $ 1,260,473 $ 1,923,146 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 $ 680.4 million and $ 677.6 million at December 31, 2023 and October 1, 2023, respectively, excluding accumulated impairment of $ 17.7 million at each date. The gross amounts of goodwill for CIG were $ 1,381.9 million and $ 1,341.8 million at December 31, 2023 and October 1, 2023, 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 3, 2023 (i.e. the first day of our fourth quarter in fiscal 2023) 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 3, 2023, and after the reallocation of goodwill on the first day of fiscal 2023, we had no reporting units that had estimated fair values that exceeded their carrying val ues by less than 45 %. 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 December 31, 2023 October 1, 2023 Weighted- Average Remaining Life (in Years) Gross Amount Accumulated Amortization Net Amount Gross Amount Accumulated Amortization Net Amount Client relations 9.2 $ 175,486 $ ( 41,572 ) $ 133,914 $ 169,217 $ ( 36,072 ) $ 133,145 Backlog 0.8 66,052 ( 54,960 ) 11,092 63,825 ( 47,802 ) 16,023 Trade names 2.1 39,084 ( 15,956 ) 23,128 37,411 ( 12,643 ) 24,768 Total $ 280,622 $ ( 112,488 ) $ 168,134 $ 270,453 $ ( 96,517 ) $ 173,936 Amortization expense for the three months e nded December 31, 2023 w as $ 12.5 million, compared to $ 3.4 million for the prior-year periods. Estimated amortization expense for the remainder of fiscal 2024 and succeeding years is as follows (in 14 thousands): Amount 2024 (remaining) $ 31,021 2025 29,138 2026 20,563 2027 14,440 2028 13,930 Beyond 59,042 Total $ 168,134 6. Property and Equipment Property and equipment consisted of the following (in thousands): Balance at December 31, 2023 October 1, 2023 Equipment, furniture and fixtures $ 136,873 $ 132,744 Leasehold improvements 40,942 44,733 Total property and equipment 177,815 177,477 Accumulated depreciation ( 102,844 ) ( 102,645 ) Property and equipment, net $ 74,971 $ 74,832 The depreciation expense related to property and equipment was $ 7.0 million and $ 3.2 million for the first quarters of fiscal 2024 and 2023, respectively. 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 quarters of fiscal 2024 and 2023. At December 31, 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 quarters of fis cal 2024 and 2023: Declare Date Dividend Paid Per Share Record Date Payment Date Dividend Paid (in thousands) November 13, 2023 $ 0.26 November 30, 2023 December 13, 2023 $ 13,873 November 7, 2022 $ 0.23 November 21, 2022 December 9, 2022 $ 12,186 Subsequent Event. On January 29, 2024, our Board of Directors declared a quarterly cash dividend of $ 0.26 per share payable on February 27, 2024 to stockholders of record as of the close of business on February 14, 2024. 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 IT equipment. Our finance leases are immaterial. 15 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 December 31, 2023 January 1, 2023 Operating lease cost $ 24,232 $ 20,961 Sublease (income) cost ( 57 ) ( 32 ) Total lease cost $ 24,175 $ 20,929 Supplemental cash flow information related to leases is as follows (in thousands): Three Months Ended December 31, 2023 January 1, 2023 Operating cash flows for operating leases $ 19,682 $ 16,493 Right-of-use assets obtained in exchange for new operating lease liabilities 9,803 11,117 Supplemental balance sheet and other information related to leases are as follows (in thousands): Balance at December 31, 2023 October 1, 2023 Operating leases: Right-of-use assets $ 179,513 $ 175,932 Lease liabilities: Current 68,091 65,005 Non-current 139,537 144,685 Total operating lease liabilities $ 207,628 $ 209,690 Weighted-average remaining lease term: Operating leases 5 years 5 years Weighted-average discount rate: Operating leases 3.1 % 3.0 % At December 31, 2023, we had $ 8.5 million of operating leases that have not yet commenced. 16 A maturity analysis of the future undiscounted cash flows associated with our lease liabilities at December 31, 2023 is as follows (in thousands): Operating Leases 2024 (remaining) $ 57,581 2025 56,335 2026 38,422 2027 26,272 2028 17,751 Beyond 27,148 Total lease payments 223,509 Less: imputed interest ( 15,881 ) Total present value of lease liabilities $ 207,628 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 December 31, 2023 was $ 7.6 million, compared to $ 7.2 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 quarter of fiscal 2024, we awarded 55,836 performance share units (“PSUs”) to our non-employee directors and executive officers at an estimated fair value of $ 205.39 per share on the award date. All PSUs are performance-based and vest, if at all, after the conclusion of the three-year performance period. The number of PSUs that ultimately vest is based 50 % on the growth in our diluted earnings per share and 50 % on our relative total shareholder return over the vesting period. Additionally, we awarded 107,860 restricted stock units (“RSUs”) to our non-employee directors, executive officers and employees at a fair value of $ 164.27 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. 17 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 December 31, 2023 January 1, 2023 Net income attributable to Tetra Tech $ 74,972 $ 116,706 Weighted-average common shares outstanding – basic 53,317 53,069 Effect of dilutive stock options and unvested restricted stock 421 460 Weighted-average common shares outstanding – diluted 53,738 53,529 Earnings per share attributable to Tetra Tech: Basic $ 1.41 $ 2.20 Diluted $ 1.40 $ 2.18 For the first quarters of fiscal 2024 and 2023, no options were excluded from the calculation of dilutive potential common shares. The Convertible Notes described in Note 14 "Long-Term Debt", had no impact on the calculation of dilutive potential common shares in the first quarter of fiscal 2024, as the price of our common stock did not exceed the conversion price. The Capped Call Transactions were excluded from the calculation of dilutive potential common shares as their effect is anti-dilutive. 11. Income Taxes The effective tax rates for the first three months of fiscal 2024 and 2023 were 26.1 % and 24.5 %, respectively. Income tax expense was reduced by $ 1.0 million and $ 1.7 million of excess tax benefits on share-based payments in the first quarters of fiscal 2024 and 2023, respectively. Excluding the impact of the excess tax benefits on share-based payments, our effective tax rates in the first quarters of fiscal 2024 and 2023 were 27.1 % and 25.7 %, respectively. At December 31, 2023 and October 1, 2023, the liability for income taxes associated with uncertain tax positions was $ 61.7 million and $ 62.0 million, respectively. 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 international 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 worldwide in 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), Europe, the United Kingdom and South America (primarily Brazil and Chile). 18 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 December 31, 2023 January 1, 2023 Revenue GSG $ 575,041 $ 471,067 CIG 669,107 439,556 Elimination of inter-segment revenue ( 15,881 ) ( 15,857 ) Total revenue $ 1,228,267 $ 894,766 Income from operations GSG $ 63,127 $ 60,347 CIG 71,401 50,108 Corporate (1) ( 23,447 ) ( 18,405 ) Total income from operations $ 111,081 $ 92,050 (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 December 31, 2023 October 1, 2023 Total Assets GSG $ 584,208 $ 543,066 CIG 1,065,638 994,470 Corporate (1) 2,300,977 2,282,941 Total assets $ 3,950,823 $ 3,820,477 (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 We classified our assets and liabilities that were carried at fair value in one of the following categories: • Level 1: Quoted market prices in active markets for identical assets or liabilities. • Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. • Level 3: Unobservable inputs that are not corroborated by market data. Derivative Instruments. Our derivative instruments are categorized within Level 2 of the fair value hierarchy. For additional information about our derivative financial instruments (see Note 15, "Derivative Financial Instruments"). Contingent Consideration. We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. (see Note 4, "Acquisitions" for further information). 19 Debt. The fair value of long-term debt was determined using the present value of future cash flows based on the borrowing rates currently available for debt with similar terms and maturities (Level 2 measurement, as described in “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended October 1, 2023). The carrying value of our long-term debt under our Credit Facility approximated fair value at December 31, 2023 and October 1, 2023. At December 31, 2023, we had $ 385 million in outstanding borrowings under the Amended Credit Agreement, which was comprised of $ 320 million under the New Term Loan Facility and $ 65 million under the Amended Revolving Credit Facility. The estimated fair value of our $ 575 million Convertible Senior Notes (the "Convertible Notes") was determined based on the trading price of the Convertible Notes as of the last trading day of our first quarter of fiscal 2024. We consider the fair value of the Convertible Notes to be a Level 2 measurement as they are not actively traded in markets. The carrying amounts and estimated fair values of the Convertible notes were approximately $ 562 million and $ 603 million, respectively, at December 31, 2023, and $ 561 million and $ 566 million, respectively, at October 1, 2023. The Credit Facility and Convertible Notes were used to fund our business acquisitions, working capital needs, dividends, capital expenditures and contingent earn-outs. 14. Long-Term Debt Long-term debt consisted of the following (in thousands): Balance at December 31, 2023 October 1, 2023 Credit facilities $ 385,000 $ 320,000 Convertible notes 575,000 575,000 Debt issuance costs and discount ( 14,681 ) ( 15,471 ) Long-term debt $ 945,319 $ 879,529 On August 22, 2023, we issued $ 575.0 million in convertible notes that bear interest at a rate of 2.25 % per annum payable in arrears on February 15 and August 15 of each year, beginning on February 15, 2024 and mature on August 15, 2028, unless converted, redeemed or repurchased. Prior to May 15, 2028, the Convertible Notes will be convertible at the option of the holders only upon the occurrence of certain events and during certain periods. Thereafter, the Convertible Notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The initial conversion rate applicable to the Convertible Notes is 5.0855 shares of our common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial price of approximately $ 196.64 per share of our common stock, subject to adjustment if certain events occur. Upon conversion, we will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. In addition, upon the occurrence of a "fundamental change" as defined in the indenture governing the Convertible Notes, holders may require us to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the Convertible Notes to be repurchased plus any accrued and unpaid interest. If certain corporate events occur prior to the maturity date of the Convertible Notes or if we deliver a notice of redemption, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such event or notice of redemption. We will not be able to redeem the Convertible Notes prior to August 20, 2026. On or after August 20, 2026, we have the option to redeem for cash all or any portion of the Convertible Notes if the last reported sale price of our common stock is equal to or greater than 130 % of the conversion price for a specified period of time at a redemption price equal to 100 % of the principal amount of the Convertible Notes to be redeemed, plus any accrued but unpaid interest. In addition, as described in the indenture governing the Convertible Notes, certain events of default including, but not limited to, bankruptcy, insolvency or reorganization, may result in the Convertible Notes becoming due and payable immediately. 20 Our net proceeds from the offering were approximately $ 560.5 million after deducting the initial purchasers’ discounts and commissions and offering expenses. We used approximately $ 51.8 million of the net proceeds to pay the cost of the capped call transactions described below. We used the remaining net proceeds to repay all $ 185.0 million principal amount outstanding under our revolving credit facility, the remaining $ 234.4 million principal amount outstanding under our senior secured term loan due 2027 and approximately $ 89.4 million principal amount outstanding under our senior secured term loan due 2026. The Convertible Notes were recorded as a single unit within "Long-term debt" in our consolidated balance sheets as the conversion option within the Convertible Notes was not a derivative that would require bifurcation and the Convertible Notes did not involve a substantial premium. Transaction costs to issue the Convertible Notes were recorded as direct deductions from the related debt liabilities and amortized to interest expense using the effective interest method over the terms of the Convertible Notes. Debt issuance costs for the Convertible Notes have been amortized to interest expense over the terms of the Convertible Notes at an effective annual interest rate of 2.79 %. The net carrying amount of the Convertible Notes was as follows (in thousands) : Balance at December 31, 2023 October 1, 2023 Principal $ 575,000 $ 575,000 Unamortized discount and issuance costs ( 13,481 ) ( 14,158 ) Net carrying amount $ 561,519 $ 560,842 The following table sets forth the interest expense recognized related to the Convertible Notes for the first quarter of fiscal 2024 (in thousands) : Amount Interest expense 3,270 Amortization of discount and issuance costs 678 Total interest expense $ 3,948 Concurrent with the offering of the Convertible Notes, in August 2023, we entered into capped call transactions (the "Capped Call Transactions"). The Capped Call Transactions are expected generally to reduce the potential dilution of our common stock upon conversion of the Convertible Notes and/or offset any cash payments we elect to make in excess of the principal amount of converted Convertible Notes, as the case may be. If, however, the market price per share of our common stock, as measured under the terms of the Capped Call Transactions, exceeds the cap price of the Capped Call Transactions, there would nevertheless be dilution and/or there would not be an offset of such cash payments, in each case, to the extent that such market price exceeds the cap price of the Capped Call Transactions. The cap price of the Capped Call Transactions is initially $ 259.56 per share, which represents a premium of 65 % over the last reported sale price of our common stock of $ 157.31 per share on the NASDAQ Global Select Market on August 17, 2023, and is subject to certain adjustments under the terms of the Capped Call Transactions. We recorded the Capped Call Transactions as separate transactions from the issuance of the Convertible Notes. The cost of $ 51.8 million incurred to purchase the Capped Call Transactions was recorded as a reduction to additional paid-in capital (net of $ 12.9 million in deferred taxes) on our consolidated balance sheet as of fiscal 2023 year-end. 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. On January 23, 2023, we drew the entire amount of the New Term Loan Facility to partially finance the RPS acquisition. 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 in January 2026. 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 21 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. We may borrow on the Amended Revolving Credit Facility, at our option, at either (a) a benchmark rate plus a margin that ranges from 1.000 % to 1.875 % per annum, or (b) a base rate for loans in U.S. dollars (the highest of the U.S. federal funds rate plus 0.50 % per annum, the bank’s prime rate or the Secured Overnight Financing Rate ("SOFR") rate plus 1.00 %, plus a margin that ranges from 0 % to 0.875 % per annum. In each case, the applicable margin is based on our Consolidated Leverage Ratio, calculated quarterly. The Amended Term Loan Facility is subject to the same interest rate provisions. The Amended Credit Agreement expires on February 18, 2027, or earlier at our discretion upon payment in full of loans and other obligations. At December 31, 2023, we had $ 385 million in outstanding borrowings under the Amended Credit Agreement, which was comprised of $ 320 million under the New Term Loan Facility and $ 65 million under the Amended Revolving Credit Facility. For the first quarter of fiscal 2024, the weighted-average interest rate of the outstanding borrowings under the Amended Credit Agreement was 6.75 %. In addition, we had $ 0.7 million in standby letters of credit under the Amended Credit Agreement. At December 31, 2023, we had $ 434.3 million of available credit under the Amended Revolving Credit Facility, all of which could be borrowed without a violation of our debt covenants. The Amended Credit Agreement contains certain affirmative and restrictive covenants, and customary events of default. The financial covenants provide for a maximum Consolidated Leverage Ratio of 3.25 to 1.00 (total funded debt/EBITDA, as defined in the Amended Credit Agreement) and a minimum Consolidated Interest Coverage Ratio of 3.00 to 1.00 (EBITDA/Consolidated Interest Charges, as defined in the Amended Credit Agreement). Our obligations under the Amended Credit Agreement are guaranteed by certain of our domestic subsidiaries and are secured by first priority liens on (i) the equity interests of certain of our subsidiaries, including those subsidiaries that are guarantors or borrowers under the Amended Credit Agreement, and (ii) the accounts receivable, general intangibles and intercompany loans and those of our subsidiaries that are guarantors or borrowers. At December 31, 2023, we were in compliance with these covenants with a consolidated leverage ratio of 1.84 x and a consolidated interest coverage ratio of 9.49 x. In addition to the Amended Credit Agreement, we maintain other credit facilities, which may be used for short-term cash advances and bank guarantees. At December 31, 2023, there were no outstanding borrowings under these facilities and the aggregate amount of standby letters of credit outstanding was $ 57.4 million. As of December 31, 2023, we had no bank overdrafts related to our disbursement bank accounts. 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 contract 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 22 recognized in earnings each period. The intrinsic value of the forward contract was immaterial at inception as the GBP/USD spot and forward exchange rates were essentially the same. The fair value of the forward contract at October 2, 2022 was $ 19.9 million, 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 entered into five interest rate swap agreements that we designated as cash flow hedges to fix the interest rate on the borrowings under our term loan facility. The five swaps expired on July 31, 2023. The related loss of $ 0.1 million was recognized and reported on our consolidated statement of comprehensive income for the first quarter of fiscal 2023. There were no derivative instruments that were not designated as hedging instruments for the first quarters of fiscal 2024 and 2023. 16. Reclassifications Out of Accumulated Other Comprehensive Income The accumulated balances and activities for the three months ended December 31, 2023 and January 1, 2023 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 Net Pension Adjustments Accumulated Other Comprehensive Income (Loss) 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 ) Balance at October 1, 2023 $ ( 197,933 ) $ — 2,638 $ ( 195,295 ) Other comprehensive income (loss) before reclassifications 63,106 — ( 13 ) 63,093 Net current-period other comprehensive income (loss) 63,106 — ( 13 ) 63,093 Balance at December 31, 2023 $ ( 134,827 ) $ — $ 2,625 $ ( 132,202 ) (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 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 23 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 first quarters of fiscal 2024 and 2023 was approxima tely $ 19 million and $ 23 million, respectively. Our related reimbursable costs for the first quarters of fiscal 2024 and 2023 were approximately $ 18 million a nd $ 22 million, respectively. Our consolidated balance sheets also included the following amounts related to these services (in thousands): Balance at December 31, 2023 October 1, 2023 Accounts receivable, net $ 23,501 $ 19,944 Contract assets 2,203 2,723 Contract liabilities 4,025 3,158 24