TETRA TECH INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbor provisions created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “estimates,” “seeks,” “continues,” “may,” variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified below under “Part II, Item 1A. Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. GENERAL OVERVIEW Tetra Tech, Inc. is a leading global provider of high-end consulting and engineering services that focuses on water, environment, sustainable infrastructure, renewable energy and international development. We are a global company that is Leading with Science ® to provide innovative solutions for our public and private clients. We typically begin at the earliest stage of a project by identifying technical solutions and developing execution plans tailored to our clients' needs and resources. Our reputation for high-end consulting and engineering services and our ability to develop solutions for water and environmental management has supported our growth for more than 50 years. Today, we are proud to be making a difference in people’s lives worldwide through our high-end consulting, engineering and technology service offerings. In fiscal 2023, we worked on over 100,000 projects, in more than 100 countries on all seven continents, with a talent force of 27,000 associates. We are Leading with Science ® throughout our operations, with domain experts across multiple disciplines supported by our advanced analytics, artificial intelligence, machine learning and digital technology solutions. Our ability to provide innovative and first-of-kind solutions is enhanced by partnerships with our forward-thinking clients. We are diverse, equitable and inclusive, embracing the breadth of experience across our talented workforce worldwide with a culture of innovation and entrepreneurship. We are disciplined in our business, and focused on delivering value to customers and high performance for our shareholders. In supporting our clients, we seek to add value and provide long-term sustainable consulting, engineering and technology solutions. By combining ingenuity and practical experience, we have helped to advance sustainability by managing water, protecting the environment, providing renewable energy, restoring ecosystems and creating green solutions for our cities and communities. We derive income from fees for professional, technical, program management, and construction management services. As primarily a professional services company, we are labor-intensive rather than capital-intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding services to our clients and execute projects successfully. We provide services to a diverse base of U.S. federal government, U.S. state and local government, U.S. commercial and international clients. 25 The following table presents the percentage of our revenue by client sector: Three Months Ended December 31, 2023 January 1, 2023 Client Sector U.S. federal government (1) 31.1 % 30.9 % U.S. state and local government 12.3 17.1 U.S. commercial 18.1 22.2 International (2) 38.5 29.8 Total 100.0 % 100.0 % (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. We manage our operations under two reportable segments. Our Government Services Group ("GSG") reportable segment primarily includes activities with U.S. government clients (federal, state and local) and all activities with development agencies worldwide. Our Commercial/International Group ("CIG") reportable segment primarily includes activities with U.S. commercial clients and international clients other than development agencies. Government Services Group ( “ GSG ” ). 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. Commercial/International Group ( “ CIG ” ). 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). The following table presents the percentage of our revenue by reportable segment: Three Months Ended December 31, 2023 January 1, 2023 Reportable Segment GSG 46.8 % 52.7 % CIG 54.5 49.1 Inter-segment elimination (1.3) (1.8) Total 100.0 % 100.0 % Our services are performed under three principal types of contracts with our clients: fixed-price, time-and-materials and cost-plus. The following table presents the percentage of our revenue by contract type: 26 Three Months Ended December 31, 2023 January 1, 2023 Contract Type Fixed-price 38.4 % 36.6 % Time-and-materials 44.7 47.0 Cost-plus 16.9 16.4 Total 100.0 % 100.0 % Under fixed-price contracts, clients agree to pay a specified price for our performance of the entire contract or a specified portion of the contract. Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and paid for other expenses. Under cost-plus contracts, some of which are subject to a contract ceiling amount, we are reimbursed for allowable cost s plus fees, which may be fixed or performance-based. Profitability on these contracts is driven by billable headcount and our cost control. 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 period in which such changes are made. On a quarterly basis, we review and assess our revenue and cost estimates for each significant contract. Changes in revenue and cost estimates could also result in a projected loss that would be recorded immediately in earnings. Other contract costs include professional compensation and related benefits, together with certain direct and indirect overhead costs such as rents, utilities and travel. Professional compensation represents a large portion of these costs. Our "Selling, general and administrative expenses" ("SG&A") are comprised primarily of marketing and bid and proposal costs, and our corporate headquarters’ costs related to the executive offices, finance, accounting, administration and information technology. Our SG&A expenses also include a portion of stock-based compensation and depreciation of property and equipment related to our corporate headquarters, and the amortization of identifiable intangible assets. Most of these costs are unrelated to specific clients or projects, and can vary as expenses are incurred to support company-wide activities and initiatives. We experience seasonal trends in our business. Our revenue and operating income are typically lower in the first half of our fiscal year, primarily due to the Thanksgiving (in the U.S. and Canada), Christmas and New Year’s holidays. Many of our clients’ employees, as well as our own employees, take vacations during these holiday periods. Further, seasonal inclement weather conditions occasionally cause some of our offices to close temporarily or may hamper our project field work in the northern hemisphere's temperate and arctic regions. These occurrences result in fewer billable hours worked on projects and, correspondingly, less revenue recognized. ACQUISITIONS AND DIVESTITURES Acquisitions. We continuously evaluate the marketplace for acquisition opportunities to further our strategic growth plans. Due to our reputation, size, financial resources, geographic presence and range of services, we have numerous opportunities to acquire privately and publicly held companies or selected portions of such companies. We evaluate an acquisition opportunity based on its ability to strengthen our leadership in the markets we serve, the technologies and solutions they provide and the additional new geographies and clients they bring. Also, during our evaluation, we examine an acquisition's ability to drive organic growth, its accretive effect on long-term earnings and its ability to generate return on investment. Generally, we proceed with an acquisition if we believe that it will strategically expand our service offerings, improve our long-term financial performance and increase shareholder returns. We view acquisitions as a key component in the execution of our growth strategy, and we intend to use cash, debt or equity, as we deem appropriate, to fund acquisitions. We may acquire other businesses that we believe are synergistic and will ultimately increase our revenue and net income, strengthen our ability to achieve our strategic goals, provide critical mass with existing clients and further expand our lines of service. We typically pay a purchase price that results in the recognition of goodwill, generally representing the intangible value of a successful business with an assembled workforce specialized in our areas of interest. Acquisitions are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful or will not have a material adverse effect on our financial position, results of operations or cash flows. All acquisitions require the approval of our Board of Directors. 27 On January 23, 2023, we completed the acquisition of RPS Group plc ("RPS"), a publicly traded company on the London Stock Exchange in an all cash transaction totaling $784 million. We funded the RPS acquisition with debt, net of $109 million in proceeds from a foreign exchange forward contract that we entered into at the same time we made the formal offer to acquire RPS on September 23, 2022. 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. 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 GSG segment. For detailed information regarding acquisitions, see Note 4, “Acquisitions” of the “Notes to Consolidated Financial Statements”. Divestitures. We regularly review and evaluate our existing operations to determine whether our business model should change through the divestiture of certain businesses. Accordingly, from time to time, we may divest or wind-down certain non-core businesses and reallocate our resources to businesses that better align with our long-term strategic direction. OVERVIEW OF RESULTS AND BUSINESS TRENDS General. In the first quarter of fiscal 2024, our revenue increased 37.3% compared to the prior-year quarter. The growth includes revenue from the acquisition of RPS, which was completed in the second quarter of fiscal 2023, that did not have comparable revenue in the last year's first quarter. Excluding RPS, our revenue increased over 13% in the first quarter of fiscal 2024 compared to the year-ago quarter. The year-over-year growth, excluding RPS, primarily reflects increased activity in our U.S. Federal and International client sectors. U.S. Federal Government. Our U.S. federal government revenue increased 38.4% in the first quarter of fiscal 2024 compared to the same period last year. The growth was primarily due to increased international development activity, primarily in Ukraine, and broad-based increases across civilian agencies. Our international development revenue in Ukraine was approximately $65 million higher in the first quarter of fiscal 2024 compared to the same quarter last year. We expect our U.S. federal government revenue to continue to grow in fiscal 2024. Approximately $1 trillion in new U.S. federal funding passed in 2021 through the Infrastructure Investment and Jobs Act, the Inflation Reduction Act and the CHIPS and Science Act. Each of these programs includes substantial planned investments in our key end markets including water, environment and sustainable infrastructure over the next five to ten years. U.S. State and Local Government. Our U.S. state and local government revenue decreased 1.5% in the first quarter of fiscal 2024 compared to fiscal 2023 quarter, which includes lower disaster response activity. Excluding disaster response, our state and local government revenue increased 23.6% in the first quarter of fiscal 2024 compared to last year's quarter. The increase reflects continued broad-based growth in our U.S. state and local government infrastructure business, particularly with increased revenue from municipal water infrastructure work, including digital water projects. Most of our work for the U.S. state and local governments relates to critical water and environmental programs, which we expect to continue to grow in fiscal 2024. U.S. Commercial. Our U.S. commercial revenue increased 11.8% in the first quarter of fiscal 2024 compared to the year-ago quarter. The growth was primarily due to increased activity for environmental services and clean energy permitting. We expect growth in our U.S. commercial work in fiscal 2024. International. Our international revenue increased 77.4% in the first quarter of fiscal 2024 compared to the same quarter last year. Excluding the contribution from RPS, our international revenue increased 9.3% compared to fiscal 2023 quarter. The revenue growth reflects higher clean energy revenue and commercial activities related to an increased focus on sustainability. We expect growth in our international work to continue in fiscal 2024. 28 RESULTS OF OPERATIONS Consolidated Results of Operations Three Months Ended December 31, 2023 January 1, 2023 Change $ % ($ in thousands, except per share data) Revenue $ 1,228,267 $ 894,766 $ 333,501 37.3% Subcontractor costs (213,098) (158,204) (54,894) (34.7) Revenue, net of subcontractor costs (1) 1,015,169 736,562 278,607 37.8 Other costs of revenue (824,671) (583,316) (241,355) (41.4) Gross profit 190,498 153,246 37,252 24.3 Selling, general and administrative expenses (79,417) (56,502) (22,915) (40.6) Acquisition and integration expenses — (3,761) 3,761 NM Contingent consideration - fair value adjustments — (933) 933 NM Income from operations 111,081 92,050 19,031 20.7 Interest expense (9,577) (5,372) (4,205) (78.3) Other non-operating income — 67,995 (67,995) NM Income before income tax expense 101,504 154,673 (53,169) (34.4) Income tax expense (26,524) (37,958) 11,434 30.1 Net income 74,980 116,715 (41,735) (35.8) Net income attributable to noncontrolling interests (8) (9) 1 11.1 Net income attributable to Tetra Tech $ 74,972 $ 116,706 $ (41,734) (35.8) Diluted earnings per share $ 1.40 $ 2.18 $ (0.78) (35.8)% (1) We believe that the presentation of “Revenue, net of subcontractor costs”, which is a non-U.S. GAAP financial measure, enhances investors’ ability to analyze our business trends and performance because it substantially measures the work performed by our employees. While providing services, we routinely subcontract various services and, under certain international development programs, issue grants. Generally, these subcontractor costs and grants are passed through to our clients and, in accordance with U.S. GAAP and industry practice, are included in our revenue when it is our contractual responsibility to procure or manage these activities. Because subcontractor services can vary significantly from project to project and period to period, changes in revenue may not necessarily be indicative of our business trends. Accordingly, we segregate subcontractor costs from revenue to promote a better understanding of our business by evaluating revenue exclusive of costs associated with external service providers. NM = not meaningful In the first quarter of fiscal 2024, revenue and revenue, net of subcontractor costs, increased $333.5 million, or 37.3%, and $278.6 million, or 37.8%, respectively, compared to the fiscal 2023 quarter. Our GSG segment's revenue and revenue, net of subcontractor costs, increased $104.0 million, or 22.1%, and $89.7 million, or 25.4%, respectively, in the first quarter of fiscal 2024 compared to the prior-year quarter. Our CIG segment's revenue increased $229.6 million, or 52.2%, and revenue, net of subcontractor costs, increased $189.0 million, or 49.3% in the first quarter of fiscal 2024 compared to fiscal 2023 quarter. The first quarter of fiscal 2024 results for GSG and CIG segments are described below under "Government Services Group" and "Commercial/International Services Group", respectively. The following table reconciles our reported results to non-U.S. GAAP adjusted results, which exclude acquisition expenses related to the RPS acquisition and losses from adjustments to contingent consideration liabilities in the first quarter of fiscal 2023. Our adjusted earnings per share ("EPS") for the prior-year quarter also excludes a non-operating $68.0 million unrealized gain on a foreign exchange contract and the write-off of previously deferred debt origination fees, both related to our acquisition of RPS. This gain is reported as "Other non-operating income" in our Consolidated Statement of Income for last year's quarter. The effective tax rate applied to the adjustments to EPS to arrive at adjusted EPS average 26% for the year-ago quarter. We applied the relevant marginal statutory tax rate based on the nature of the adjustments and the tax jurisdiction in which it occurred. Both EPS and adjusted EPS were calculated using diluted weighted-average common shares outstanding for the fiscal 2023 quarter as reflected in our consolidated statement of income. 29 Three Months Ended December 31, 2023 January 1, 2023 Change $ % ($ in thousands, except per share data) Income from operations $ 111,081 $ 92,050 $ 19,031 20.7% Acquisition & integration expenses — 3,761 (3,761) NM Earn-Out adjustments — 933 (933) NM Adjusted income from operations (1) $ 111,081 $ 96,744 $ 14,337 14.8% EPS $ 1.40 $ 2.18 $ (0.78) (35.8)% Acquisition & integration expenses — 0.05 (0.05) NM Earn-out adjustments — 0.01 (0.01) NM Debt origination cost — 0.04 (0.04) NM Foreign exchange forward contract gain — (0.94) 0.94 NM Adjusted EPS (1) $ 1.40 $ 1.34 $ 0.06 4.5% NM = not meaningful (1) Non-GAAP financial measure Operating income increased $19.0 million, or 20.7%, in the first quarter of fiscal 2024 compared to fiscal 2023 quarter . The first quarter fiscal 2023 results include $3.8 million of acquisition expenses (primarily legal-related) for the RPS acquisition and losses of $0.9 million related to changes in the estimated fair value of contingent earn-out liabilities. Excluding the acquisition expenses and earn-out losses, our adjusted operating income increased $14.3 million, or 14.8% in the first quarter of fiscal 2024 compared to last year's quarter. The increase reflects improved results in both GSG and CIG segments, which are described below under "Government Services Group" and "Commercial/International Group", respectively. Our net interest expense was $9.6 million and $5.4 million in the first quarters of fiscal 2024 and 2023, respectively, and increased from last year primarily due to the additional borrowings to fund the RPS acquisition. Net interest expense in the prior-year quarter includes $2.7 million of additional expense for the write-off of previously deferred debt origination fees due to the cancellation of the bridge loan facility that we entered to support our offer to acquire RPS, which was replaced with an amendment to our existing debt facility. Other non-operating income of $68.0 million in the first quarter of fiscal 2023 reflects an unrealized gain on a foreign exchange forward contract integrated with the acquisition of RPS. 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 recognized in earnings each period. The forward contract was settled on January 23, 2023, together with the closing of the RPS acquisition, with a cumulative gain of approximately $109 million. The effective tax rates for the first quarters 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 in both quarters, our effective tax rates in the first quarters of fiscal 2024 and 2023 were 27.1% and 25.7%, respectively. Our EPS was $1.40 in the first quarter of fiscal 2024, compared to $2.18 in the prior-year quarter. Excluding the aforementioned non-operating and non-recurring items, our adjusted EPS was $1.34 in the fiscal 2023 quarter. There were no non-operating or non-recurring items impacting EPS in the first quarter of fiscal 2024. 30 Segment Results of Operations Government Services Group Three Months Ended December 31, 2023 January 1, 2023 Change $ % ($ in thousands) Revenue $ 575,041 $ 471,067 $ 103,974 22.1% Subcontractor costs (132,341) (118,020) (14,321) (12.1) Revenue, net of subcontractor costs $ 442,700 $ 353,047 $ 89,653 25.4 Income from operations $ 63,127 $ 60,347 $ 2,780 4.6% Revenue and revenue, net of subcontractor costs, increased $104.0 million, or 22.1%, and increased $89.7 million, or 25.4%, respectively, in the first quarter of fiscal 2024 compared to last year's quarter. The revenue growth includes an increase of approximately $65 million in revenue in the first quarter of fiscal 2024 related to a distinct international development funded energy program in Ukraine, compared to fiscal 2023 quarter. In addition, the growth reflects higher U.S. state and local government activities related to digital water and other U.S. federal programs, partially offset by lower disaster response revenue. Operating income increased $2.8 million in the first quarter of fiscal 2024 compared to the prior-year quarter. The increase in operating income was due to the revenue increase noted above. Our operating margin, based on revenue, net of subcontractor costs, was 14.3% in the first quarter of fiscal 2024, compared to 17.1% in the year-ago quarter. The decrease was due to a change in contract mix, specifically the aforementioned Ukraine energy program. The decrease was also due to lower favorable operating income adjustments for several projects upon their completion in the first quarter of fiscal 2024 compared to fiscal 2023 quarter. Commercial/International Group Three Months Ended December 31, 2023 January 1, 2023 Change $ % ($ in thousands) Revenue $ 669,107 $ 439,556 $ 229,551 52.2% Subcontractor costs (96,638) (56,041) (40,597) (72.4) Revenue, net of subcontractor costs $ 572,469 $ 383,515 $ 188,954 49.3 Income from operations $ 71,401 $ 50,108 $ 21,293 42.5% Revenue and revenue, net of subcontractor costs, increased $229.6 million, or 52.2%, and increased $189.0 million, or 49.3%, respectively, in the first quarter of fiscal 2024 compared to the year-ago quarter. The revenue from RPS was substantially all in the CIG segment. The remaining revenue growth in fiscal 2023 primarily reflects increased activity on high performance buildings, clean energy and international infrastructure. Operating income increased $21.3 million, or 42.5%, in the first quarter of fiscal 2024 compared to fiscal 2023 quarter. Our operating margin, based on revenue, net of subcontractor costs, was 12.5% in the first quarter of fiscal 2024 compared to 13.1% in the prior-year quarter. Excluding the RPS acquisition, which currently has a lower margin compared to the rest of the CIG segment, our operating margin was 13.4% in the first quarter of fiscal 2024 compared to 13.1% in fiscal 2023 quarter. The improved operating margin was primarily due to our increased focus on high-end consulting services, project execution and higher labor utilization. 31 Backlog Backlog generally represents the dollar amount of revenues we expect to realize in the future when we perform the work. The difference between remaining unsatisfied performance obligations (" RUPO") and backlog relates to contract terms. Specifically, our backlog does not consider the potential impact of termination for convenience clauses within the contracts. The contract term and thus remaining performance obligation on certain of our operations and maintenance contracts, are limited to the notice period required for contract termination (usually 30, 60, or 90 day s). The differences between our backlog and RUPO at December 31, 2023 and October 1, 2023 were immaterial (see the table below): Balance at December 31, 2023 October 1, 2023 ($ in millions) RUPO $ 4,707 $ 4,755 Backlog 4,737 4,790 Financial Condition, Liquidity and Capital Resources Capital Requirements. At December 31, 2023, we had $198.7 million of cash and cash equivalents and access to an additional $734.3 million of borrowings available under our credit facility. During the first quarter of fiscal 2024, we generated $9.2 million of cash from operations. Our primary sources of liquidity are cash flows from operations and borrowings under our credit facilities. Our primary uses of cash are to fund working capital, cash dividends, capital expenditures and repayment of debt, as well as to fund acquisitions and earn-out obligations from prior acquisitions. We believe that our existing cash and cash equivalents, operating cash flows and borrowing capacity under our credit agreement as amended for the RPS acquisition in the second quarter of fiscal 2023, as described below, will be sufficient to meet our capital requirements for at least the next 12 months. 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. In the first quarters of fiscal 2024 and 2023, we did not repurchase any shares of our common stock. At December 31, 2023, we had a remaining balance of $347.8 million under our stock repurchase program. On November 13, 2023, our Board of Directors declared a quarterly cash dividend of $0.26 per share payable on December 13, 2023 to stockholders of record as of the close of business on November 30, 2023. 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. Cash and Cash Equivalents. At December 31, 2023, our cash and cash equivalents were $198.7 million, an increase of $29.9 million compared to the fiscal 2023 year-end. Operating Activities . For the first quarter of fiscal 2024, net cash provided by operating activities was $9.2 million, a decrease of $15.9 million compared to last year's quarter. The decrease was primarily due to the timing of payments to our vendors and employees. Investing Activities . For the first quarter of fiscal 2024, net cash used in investing activities was $3.4 million, a decrease of $1.5 million compared to the year-ago quarter due to lower capital expenditures. Financing Activities . For the first quarter of fiscal 2024, net cash provided by financing activities was $18.4 million, compared to net cash used in financing activities of $42.3 million in fiscal 2023 quarter due to an increase in net debt borrowing. Debt Financing. 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. On February 18, 2022, we entered into Amendment No. 2 to our 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 32 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 as of 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. On August 22, 2023, we issued $575.0 million in convertible notes that bear interest at 2.25% per annum payable semiannually in arrears on February 15 and August 15 of each year, beginning on February 15, 2024 with a maturity date of August 15, 2028 (the "Convertible Notes"). As of October 1, 2023, $560.8 million of the Convertible Notes was included in long-term debt in our consolidated balance sheets, which is net of $14.2 million of unamortized debt issuance costs. The net proceeds from the Convertible Notes were $560.5 million, $51.8 million of which were used to purchase related capped call transactions on the issue date. The remaining proceeds were used to prepay and terminate the $234.4 million outstanding under the Amended Term Loan Facility, to prepay $89.4 million outstanding under the New Term Loan Facility and to pay down borrowings of $185.0 million under the Amended Revolving Credit Facility. See Note 14, "Long-term debt" of the "Notes to Consolidated Financial Statements" for further discussion. 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 deb t 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 1.84x and a consolidated interest coverage ratio of 9.49x. 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 borrowings under these facilities, and the aggregate amount of standby letters of credit outstanding was $57.4 million. At December 31, 2023, we had no bank overdrafts related to our disbursement bank accounts. Inflation. We believe our operations have not been, and, in the foreseeable future, are not expected to be, materially adversely affected by inflation or changing prices due to the average duration of our projects and our ability to negotiate prices as contracts end and new contracts begin. 33 Dividends. Our Board of Directors has authorized the following dividends in fiscal 2024: Dividend Per Share Record Date Total Maximum Payment (in thousands) Payment Date November 13, 2023 $ 0.26 November 30, 2023 $ 13,873 December 13, 2023 January 29, 2024 $ 0.26 February 14, 2024 N/A February 27, 2024 Income Taxes We evaluate the realizability of our deferred tax assets by assessing the valuation allowance and adjust the allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. The ability or failure to achieve the forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets. Based on future operating results in certain jurisdictions, it is unlikely that the current valuation allowance positions of those jurisdictions could be adjusted in the next 12 months. 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. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions may not significantly decrease within the next 12 months. These liabilities represent our current estimates of the additional tax liabilities that we may be assessed when the related audits are concluded. If these audits are resolved in a manner more unfavorable than our current expectations, our additional tax liabilities could be materially higher than the amounts currently recorded resulting in additional tax expense. Off-Balance Sheet Arrangements In the ordinary course of business, we may use off-balance sheet arrangements if we believe that such arrangements would be an efficient way to lower our cost of capital or help us manage the overall risks of our business operations. We do not believe that such arrangements have had a material adverse effect on our financial position or our results of operations. The following is a summary of our off-balance sheet arrangements: • Letters of credit and bank guarantees are used primarily to support project performance and insurance programs. We are required to reimburse the issuers of letters of credit and bank guarantees for any payments they make under the outstanding letters of credit or bank guarantees. Our Amended Credit Agreement and additional letter of credit facilities cover the issu ance of our standby letters of credit and bank guarantees and are critical for our normal operations. If we default on the Amended Credit Agreement or additional credit facilities, our inability to issue or renew standby letters of credit and bank guarantees would impair our ability to maintain normal operations. At December 31, 2023, we had $0.7 million in standby letters of credit outstanding under our Amended Credit Agreement and $57.4 million in standby letters of credit outstanding under our additional letter of credit facilities. • From time to time, we provide guarantees and indemnifications related to our services. If our services under a guaranteed or indemnified project are later determined to have resulted in a material defect or other material deficiency, then we may be responsible for monetary damages or other legal remedies. When sufficient information about claims on guaranteed or indemnified projects is available and monetary damages or other costs or losses are determined to be probable, we recognize such guaranteed losses. • In the ordinary course of business, we enter into various agreements as part of certain unconsolidated subsidiaries, joint ventures and other jointly executed contracts where we are jointly and severally liable. We enter into these agreements primarily to support the project execution commitments of these entities. The potential payment amount of an outstanding performance guarantee is typically the remaining cost of work to be performed by or on behalf of third parties under engineering and construction contracts. However, we are not able to estimate other amounts that may be required to be paid in excess of estimated costs to complete contracts and, accordingly, the total potential payment amount under our outstanding performance guarantees cannot be estimated. For cost-plus contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed under the contract. For lump sum or fixed-price 34 contracts, this amount is the cost to complete the contracted work less amounts remaining to be billed to the client under the contract. Remaining billable amounts could be greater or less than the cost to complete. In those cases where costs exceed the remaining amounts payable under the contract, we may have recourse to third parties, such as owners, co-venturers, subcontractors or vendors, for claims. • In the ordinary course of business, our clients may request that we obtain surety bonds in connection with contract performance obligations that are not required to be recorded in our consolidated balance sheets. We are obligated to reimburse the issuer of our surety bonds for any payments made thereunder. Each of our commitments under performance bonds generally ends concurrently with the expiration of our related contractual obligation. Critical Accounting Policies Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended October 1, 2023. To date, there have been no material changes in our critical accounting policies as reported in our 2023 Annual Report on Form 10-K. New Accounting Pronouncements For information regarding recent accounting pronouncements, see “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report. Financial Market Risks We do not enter into derivative financial instruments for trading or speculation purposes. In the normal course of business, we have exposure to both interest rate risk and foreign currency transaction and translation risk, primarily related to the Canadian and Australian dollars, the Euro, and the British Pound. We are exposed to interest rate risk under our Amended Credit Agreement. We can borrow, at our option, under both the Amended Term Loan Facility and Amended Revolving Credit Facility. We may borrow on the Amended Revolving Credit Facility, at our option, at either (a) a Eurocurrency 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 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. Borrowings at the base rate have no designated term and may be repaid without penalty any time prior to the Facility’s maturity date. Borrowings at a SOFR rate have a term no l ess than 30 days and no greater than 180 days and may be prepaid without penalty. Typically, at the end of such term, such borrowings may be rolled over at our discretion into either a borrowing at the base rate or a borrowing at a SOFR rate with similar terms, not to exceed the maturity date of the Facility. The Facility matures on February 18, 2027. 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%. The majority of our transactions are in U.S. dollars; however, some of our subsidiaries conduct business in foreign currencies, primarily the Canadian and Australian dollars, the Euro, and the British Pound. Therefore, we are subject to currency exposure and volatility because of currency fluctuations. We attempt to minimize our exposure to these fluctuati ons by matching revenue and expenses in the same currency for our contracts. We report our foreign currency gains and losses in “Selling, general and administrative expenses” on our consolidated statements of income. The impact of the foreign currency gains and losses was immaterial for the first quarters of fiscal 2024 and 2023. We have foreign currency exchange rate exposure in our results of operations and equity primarily because of the currency translation related to our foreign subsidiaries where the local currency is the functional currency. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated tran sactions will result in reduced revenue, operating expenses, assets and liabilities. Similarly, our revenue, operating expenses, assets and liabilities will increase if the U.S. dollar weakens against foreign currencies. For the first quarters of fiscal 2024 and 2023, 38.5% and 29.8% of our consolidated revenue, respectively, was generated by our international business. For the first quarter of fiscal 2024, the effect of foreign exchange rate translation on our consolidated balance sheet was an increase in equity by $63.1 million compared to an increase of $33.1 million in the prior-year quarter. These amounts were recognized as adjustments to equity through other comprehensive income. Item 3. Quantitative and Qualitative Disclosures about Market Risk 35 Please refer to the information we have included under the heading “Financial Market Risks” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 2 of this Form 10-Q which is incorporated herein by reference.