2023财年第二季度，我们完成了对伦敦证券交易所上市公司RPS Group plc（「RPS」）的全现金交易，交易总额为78400万美元。我们通过债务为RPS收购提供资金，扣除了我们在2022年9月23日提出收购RPS的正式要约的同时签订的外汇远期合同的收益10900万美元。RPS在英国、欧洲、亚太地区和北美拥有约5，000名员工，为政府和商业客户提供高端解决方案，特别是在能源转型、水和项目管理方面。几乎所有RPS都包含在我们的CIG部门中。
Our failure to implement and comply with our safety program could adversely affect our operating results or financial condition.
Our project sites often put our employees and others in close proximity with mechanized equipment, moving vehicles, chemical and manufacturing processes and highly regulated materials. We maintain an enterprise-wide group of health and safety professionals to help ensure that the services we provide are delivered safely and in accordance with standard work processes. Unsafe job sites and office environments have the potential to increase employee turnover, increase the cost of a project to our clients, expose us to types and levels of risk that are fundamentally unacceptable and raise our operating costs. The implementation of our safety processes and procedures are monitored by various agencies, including the U.S. Mine Safety and Health Administration (“MSHA”), and rating bureaus and may be evaluated by certain clients in cases in which safety requirements have been established in our contracts. Our failure to meet these requirements or our failure to properly implement and comply with our safety program could result in reduced profitability, the loss of projects or clients or potential litigation, and could have a material adverse effect on our business, operating results or financial condition.
Our business activities may require our employees to travel to and work in countries where there are high security risks, which may result in employee death or injury, repatriation costs or other unforeseen costs.
Certain of our contracts require our employees travel to and work in high-risk countries that are undergoing political, social and economic upheavals resulting from war, civil unrest, criminal activity, acts of terrorism or public health crises. As a
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result, we risk loss of or injury to our employees and may be subject to costs related to employee death or injury, repatriation or other unforeseen circumstances. We may choose or be forced to leave a country with little or no warning due to physical security risks.
Unavailability or cancellation of third-party insurance coverage would increase our overall risk exposure as well as disrupt the management of our business operations.
Our services involve significant risks of professional and other liabilities, which may substantially exceed the fees that we derive from our services. We maintain insurance coverage from third-party insurers as part of our overall risk management strategy and because some of our contracts require us to maintain specific insurance coverage limits. From time to time, we assume liabilities as a result of indemnification provisions contained in our service contracts. We cannot predict the magnitude of these potential liabilities.
We are liable to pay such liabilities from our assets if and when the aggregate settlement or judgment amount exceeds our insurance policy limits. Further, our insurance may not protect us against liability because our policies typically have various exceptions to the claims covered and also require us to assume some costs of the claim even though a portion of the claim may be covered. A partially or completely uninsured claim, if successful and of significant magnitude, could have a material adverse effect on our liquidity.
If any of our third-party insurers fail, suddenly cancel our coverage, or otherwise are unable to provide us with adequate insurance coverage, then our overall risk exposure and our operational expenses would increase and the management of our business operations would be disrupted. In addition, if we expand into new markets, we may not be able to obtain insurance coverage for these new activities or, if insurance is obtained, the dollar amount of any liabilities incurred could exceed our insurance coverage. There can be no assurance that any of our existing insurance coverage will be renewable upon the expiration of the coverage period or that future coverage will be affordable at the required limits.
Our inability to obtain adequate bonding could have a material adverse effect on our future revenue and business prospects.
Certain clients require bid bonds, and performance and payment bonds. These bonds indemnify the client should we fail to perform our obligations under a contract. If a bond is required for a certain project and we are unable to obtain an appropriate bond, we cannot pursue that project. In some instances, we are required to co-venture with a small or disadvantaged business to pursue certain government contracts. In connection with these ventures, we are sometimes required to utilize our bonding capacity to cover all of the obligations under the contract with the client. We have a bonding facility but, as is typically the case, the issuance of bonds under that facility is at the surety’s sole discretion. There can be no assurance that bonds will continue to be available to us on reasonable terms. Additionally, even if we continue to access bonding capacity to sufficiently bond future work, we may be required to post collateral to secure bonds, which would decrease the liquidity available for other purposes. Our inability to obtain adequate bonding and, as a result, to bid on new work could have a material adverse effect on our future revenue and business prospects.
We may be precluded from providing certain services due to conflict of interest issues.
Many of our clients are concerned about potential or actual conflicts of interest in retaining management consultants. Many commercial and government clients have formal policies against continuing or awarding contracts that would create actual or potential conflicts of interest with other activities of a contractor. These policies may prevent us from bidding for or performing contracts resulting from or relating to certain work we have performed. We have, on occasion, declined to bid on projects due to conflict of interest issues. If we fail to address actual or potential conflicts properly, or even if we simply fail to recognize a perceived conflict, we may be in violation of our existing contracts, may otherwise incur liability, and may lose future business for not preventing the conflict from arising, and our reputation may suffer.
Our actual business and financial results could differ from the estimates and assumptions that we use to prepare our consolidated financial statements, which may significantly reduce or eliminate our profits.
To prepare consolidated financial statements in conformity with generally accepted accounting principles in the U.S., management is required to make estimates and assumptions as of the date of the consolidated financial statements. These estimates and assumptions affect the reported values of assets, liabilities, revenue and expenses as well as disclosures of contingent assets and liabilities. For example, we typically recognize revenue over the life of a contract based on the proportion of costs incurred to date compared to the total costs estimated to be incurred for the entire project. Areas requiring significant estimates by our management include: the application of the percentage-of-completion method of accounting and revenue recognition on contracts, change orders and contract claims, including related unbilled accounts receivable; unbilled accounts receivable, including amounts related to requests for equitable adjustment to contracts that provide for price redetermination, primarily with the U.S. federal government. These amounts are recorded only when they can be reliably estimated and realization is probable; provisions for uncollectible receivables, client claims and recoveries of costs from subcontractors,
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vendors and others; provisions for income taxes, research and development tax credits, valuation allowances and unrecognized tax benefits; and value of goodwill and recoverability of intangible assets.
Our actual business and financial results could differ from those estimates, which may significantly reduce or eliminate our profits.
Our profitability could suffer if we are not able to maintain adequate utilization of our workforce.
The cost of providing our services, including the extent to which we utilize our workforce, affects our profitability. The rate at which we utilize our workforce is affected by a number of factors, including: our ability to transition employees from completed projects to new assignments and to hire and assimilate new employees; our ability to forecast demand for our services and thereby maintain an appropriate headcount in each of our geographies and operating units; and our ability to manage attrition.
If we over-utilize our workforce, our employees may become disengaged, which could impact employee attrition. If we under-utilize our workforce, our profit margin and profitability could suffer.
Our use of the percentage-of-completion method of revenue recognition could result in a reduction or reversal of previously recorded revenue and profits.
We account for most of our contracts on the percentage-of-completion method of revenue recognition. Generally, our use of this method results in recognition of revenue and profit ratably over the life of the contract, based on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions to estimated revenue and costs, including the achievement of award fees and the impact of change orders and claims, are recorded when the amounts are known and can be reasonably estimated. Such revisions could occur in any period and their effects could be material. Although we have historically made reasonably reliable estimates of the progress towards completion of long-term contracts, the uncertainties inherent in the estimating process make it possible for actual costs to vary materially from estimates, including reductions or reversals of previously recorded revenue and profit.
If we are unable to accurately estimate and control our contract costs, then we may incur losses on our contracts, which could decrease our operating margins and reduce our profits. Specifically, our fixed-price contracts could increase the unpredictability of our earnings.
It is important for us to accurately estimate and control our contract costs so that we can maintain positive operating margins and profitability. We generally enter into three principal types of contracts with our clients: fixed-price, time-and-materials and cost-plus.
The U.S. federal government and certain other clients have increased the use of fixed-priced contracts. Under fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur and, consequently, we are exposed to a number of risks. We realize a profit on fixed-price contracts only if we can control our costs and prevent cost over-runs on our contracts. Fixed-price contracts require cost and scheduling estimates that are based on a number of assumptions, including those about future economic conditions, costs and availability of labor, equipment and materials and other exigencies. We could experience cost over-runs if these estimates are originally inaccurate as a result of errors or ambiguities in the contract specifications or become inaccurate as a result of a change in circumstances following the submission of the estimate due to, among other things, unanticipated technical or equipment problems, difficulties in obtaining permits or approvals, changes in local laws or labor conditions, weather delays, changes in the costs of raw materials or the inability of our vendors or subcontractors to perform their obligations. If cost overruns occur, we could experience reduced profits or, in some cases, a loss for that project and could increase the unpredictability of our earnings, as well as have a material adverse impact on our business and earnings.
Under our time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and paid for other expenses. Profitability on these contracts is driven by billable headcount and cost control. Many of our time-and-materials contracts are subject to maximum contract values and, accordingly, revenue relating to these contracts is recognized as if these contracts were fixed-price contracts. Under our cost-plus contracts, some of which are subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be able to obtain reimbursement for all of the costs we incur.
Profitability on our contracts is driven by billable headcount and our ability to manage our subcontractors, vendors and material suppliers. If we are unable to accurately estimate and manage our costs, we may incur losses on our contracts, which could decrease our operating margins and significantly reduce or eliminate our profits. Certain of our contracts require us to satisfy specific design, engineering, procurement or construction milestones in order to receive payment for the work completed or equipment or supplies procured prior to achievement of the applicable milestone. As a result, under these types of arrangements, we may incur significant costs or perform significant amounts of services prior to receipt of payment. If a client
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determines not to proceed with the completion of the project or if the client defaults on its payment obligations, we may face difficulties in collecting payment of amounts due to us for the costs previously incurred or for the amounts previously expended to purchase equipment or supplies.
Accounting for a contract requires judgments relative to assessing the contract’s estimated risks, revenue, costs and other technical issues. Due to the size and nature of many of our contracts, the estimation of overall risk, revenue and cost at completion is complicated and subject to many variables. Changes in underlying assumptions, circumstances or estimates may also adversely affect future period financial performance. If we are unable to accurately estimate the overall revenue or costs on a contract, then we may experience a lower profit or incur a loss on the contract.
Cyber security incidents affecting our systems and information technology could adversely impact our ability to operate and we could experience adverse consequences resulting from such compromises, including but not limited to regulatory investigations or actions; litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; and other adverse consequences.
We face the threat to our computer systems of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks and other security problems and system disruptions, including possible unauthorized access to our and our clients' proprietary or classified information. We rely on industry-accepted security measures and technology to securely maintain all confidential and proprietary information on our information systems. In addition, we rely on the security of third-party service providers, vendors and cloud services providers to protect confidential data. In the ordinary course of business, we have been targeted by malicious cyber-attacks. A user who circumvents security measures could misappropriate confidential or proprietary information, including information regarding us, our personnel and/or our clients or cause interruptions or malfunctions in operations. As a result, we may be required to expend significant resources to protect against the threat of these system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches.
We also rely in part on third-party software and information technology vendors to run our critical accounting, project management and financial information systems. Our software and information technology vendors may decide to discontinue further development, integration or long-term software and hardware support for our information systems, in which case we may need to abandon one or more of our current information systems and migrate some or all of our accounting, project management and financial information to other systems, thus increasing our operational expense, as well as disrupting the management of our business operations.
While we have implemented security measures designed to protect against security incidents, there can be no assurance that these measures will be effective. Vulnerabilities in our systems pose material risks to our business. Applicable data privacy and security obligations may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and the disclosure or the failure to comply with such requirements could lead to adverse consequences. Any of these events could damage our reputation and have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition, we cannot be sure that our insurance coverage will be adequate or sufficient to protect us from or to mitigate liabilities arising out of our privacy and security practices, that such coverage will continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims.
Risks Related to Our Clients
We derive a substantial amount of our revenue from U.S. federal, state and local government agencies, and any disruption in government funding or in our relationship with those agencies could adversely affect our business.
In fiscal 2024, we generated 44.0% of our revenue from contracts with U.S. federal, and state and local government agencies. A significant amount of this revenue is derived under multi-year contracts, many of which are appropriated on an annual basis. As a result, at the beginning of a project, the related contract may be only partially funded, and additional funding is normally committed only as appropriations are made in each subsequent year. These appropriations, and the timing of payment of appropriated amounts, may be influenced by numerous factors as noted below. Our backlog includes only the projects that have funding appropriated.
The demand for our U.S. government-related services is generally driven by the level of government program funding. A significant reduction in federal government spending, the absence of a bipartisan agreement on the federal government budget, a partial or full federal government shutdown or a change in budgetary priorities could reduce demand for our services, cancel or delay federal projects, result in the closure of federal facilities and significant personnel reductions and have a material and adverse impact on our business, financial condition, results of operations and cash flows.
There are several additional factors that could materially affect our U.S. government contracting business, which could cause U.S. government agencies to delay or cancel programs, to reduce their orders under existing contracts, to exercise their rights to terminate contracts or not to exercise contract options for renewals or extensions. Such factors, which include the
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following, could have a material adverse effect on our revenue or the timing of contract payments from U.S. government agencies: the failure of the U.S. government to complete its budget and appropriations process before its fiscal year-end; changes in and delays or cancellations of government programs, procurements, requirements or appropriations; budget constraints or policy changes resulting in delay or curtailment of expenditures related to the services we provide; and re-competes of government contracts.
Our failure to win new contracts and renew existing contracts with private and public sector clients could adversely affect our profitability.
Our business depends on our ability to win new contracts and renew existing contracts with private and public sector clients. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which is affected by a number of factors. These factors include market conditions, financing arrangements, required governmental approvals, client relationships and our professional reputation. If we are not able to replace the revenue from expiring contracts, either through follow-on contracts or new contracts, our business, results of operations and financial condition may be adversely affected. If negative market conditions continue to persist, or if we fail to secure adequate financial arrangements or the required government approval, we may not be able to pursue certain projects, which could adversely affect our profitability.
Our inability to win or renew U.S. government contracts during regulated procurement processes could harm our operations and significantly reduce or eliminate our profits.
U.S. government contracts are awarded through a regulated procurement process. The U.S. federal government has increasingly relied upon multi-year contracts with pre-established terms and conditions, such as indefinite delivery/indefinite quantity (“IDIQ”) contracts, which generally require those contractors who have previously been awarded the IDIQ to engage in an additional competitive bidding process before a task order is issued. As a result, new work awards tend to be smaller and of shorter duration, since the orders represent individual tasks rather than large, programmatic assignments. In addition, we believe that there has been an increase in the award of federal contracts based on a low-price, technically acceptable criteria emphasizing price over qualitative factors, such as past performance. As a result, pricing pressure may reduce our profit margins on future federal contracts. Moreover, even if we are qualified to work on a government contract, we may not be awarded the contract because of existing government policies designed to protect small businesses and under-represented minority contractors. Our inability to win or renew government contractsduring regulated procurement processes could harm our operations and significantly reduce or eliminate our profits.
Each year, client funding for some of our U.S. government contracts may rely on government appropriations or public-supported financing. If adequate public funding is delayed or is not available, then our profits and revenue could decline.
A substantial portion of our revenue is derived from contracts with agencies and departments of federal, state and local governments. Each year, client funding for some of our U.S. government contracts may directly or indirectly rely on government appropriations or public-supported financing. Legislatures may appropriate funds for a given project on a year-by-year basis, even though the project may take more than one year to perform. In addition, public-supported financing such as U.S. state and local municipal bonds may be only partially raised to support existing projects. Similarly, an economic downturn may make it more difficult for governments to fund projects. In addition to the state of the economy and competing political priorities, public funds and the timing of payment of these funds may be influenced by, among other things, curtailments in the use of government contracting firms, increases in raw material costs, delays associated with insufficient numbers of government staff to oversee contracts, budget constraints, the timing and amount of tax receipts and the overall level of government expenditures. If adequate funding is not available or is delayed, then our profits and revenue could decline.
If we cannot collect our receivables or if payment is delayed, our business may be adversely affected by our inability to generate cash flow, provide working capital, or continue our business operations.
We depend on the timely collection of our receivables to generate cash flow, provide working capital, and continue our business operations. If the U.S. government or any other client or any prime contractor for whom we are a subcontractor fails to pay or delays the payment of invoices for any reason, our business and financial condition may be materially and adversely affected. Clients may delay or fail to pay invoices for a number of reasons, including lack of appropriated funds, lack of an approved budget, lack of revised or final settled billing rates as a result of open audit years, as a result of audit findings by government regulatory agencies or for a variety of other reasons.
Certain contracts may give clients the right to modify, delay, curtail, renegotiate or terminate existing contracts at their convenience at any time prior to their completion, which may result in a decline in our profits and revenue.
Certain projects in which we participate as a contractor or subcontractor may extend for several years. Generally, government contracts include the right to modify, delay, curtail, renegotiate or terminate contracts and subcontracts at the government’s convenience any time prior to their completion. Any decision by a client to modify, delay, curtail, renegotiate or terminate our contracts at their convenience may result in a decline in our profits and revenue. If one of these clients terminates
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their contract for convenience, we may only be able to bill the client for work completed prior to the termination, plus any commitments and settlement expenses such client agrees to pay, but not for any work not yet performed.
Our revenue and growth prospects may be harmed if we or our employees are unable to obtain government granted eligibility or other qualifications we and they need to perform services for our customers.
A number of government programs require contractors to have certain kinds of government granted eligibility, such as security clearance credentials. Depending on the project, eligibility can be difficult and time-consuming to obtain. If we or our employees are unable to obtain or retain the necessary eligibility, we may not be able to win new business, and our existing customers could terminate their contracts with us or decide not to renew them. To the extent we cannot obtain or maintain the required security clearances for our employees working on a particular contract, we may not derive the revenue or profit anticipated from such contract.
Risks Related to Our Indebtedness
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including our convertible notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders, which may impact our ability to execute on our current or future business strategies.
If we do not generate sufficient cash flow from operations or otherwise, we may need additional financing to execute on our current or future business strategies, including developing new or enhancing existing service lines, expanding our business geographically, enhancing our operating infrastructure, acquiring complementary businesses, or otherwise responding to competitive pressures. We cannot assure that additional financing will be available to us on favorable terms, or at all. Furthermore, if we raise additional funds through the issuance of convertible debt or equity securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, meet obligations in the normal course of business, take advantage of strategic business opportunities, or otherwise respond to competitive pressures would be significantly limited.
Restrictive covenants in our credit agreement may restrict our ability to pursue certain business strategies.
Our credit agreement limits or restricts our ability to, among other things: incur additional indebtedness; create liens securing debt or other encumbrances on our assets; make loans or advances; pay dividends or make distributions to our stockholders; purchase or redeem our stock; repay indebtedness that is junior to indebtedness under our credit agreement; acquire the assets of, or merge or consolidate with, other companies; and sell, lease or otherwise dispose of assets.
Our credit agreement also requires that we maintain certain financial ratios, which we may not be able to achieve. The covenants may impair our ability to finance future operations or capital needs or to engage in other favorable business activities. Failing to comply with these covenants could result in an event of default under the credit agreement, which could result in us being required to repay the amounts outstanding prior to maturity. These prepayment obligations could have an adverse effect on our business, results of operations and financial condition.
Furthermore, if we are unable to repay the amounts due and payable under the credit agreement, the lenders could proceed against the collateral granted to them to secure that indebtedness. In the event the lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness.
We may not have the ability to raise the funds necessary to settle conversions of our convertible notes or to repurchase our convertible notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of our convertible notes.
Holders of our convertiblenotes have the right, subject to certain conditions and limited exceptions, to require us to repurchase all or a portion of their convertible notes upon the occurrence of a fundamental change (as defined in the indenture governing the convertible notes) at a fundamental change repurchase price equal to 100% of the principal amount of the convertible notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change
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repurchase date. In addition, upon any conversion of our convertible notes, we will be required to make cash payments for each $1,000 in principal amount of our convertible notes converted of at least the lesser of $1,000 and the sum of the daily conversion values indenture governing our convertible notes. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of our convertiblenotes surrendered or pay cash with respect to our convertible notes being converted. In addition, our ability to repurchase our convertiblenotes or to pay cash upon conversions of our convertible notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase our convertiblenotes at a time when the repurchase is required by the indenture governing our convertible notes or to pay any cash payable on future conversions of our convertible notes as required by the indenture governing our convertible notes would constitute a default under the indenture governing our convertible notes. A default under the indenture governing our convertible notes or the fundamental change itself could also lead to a default under agreements governing our indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase our convertible notes or make cash payments upon conversions thereof.
The conditional conversion feature of our convertible notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of our convertible notes is triggered, holders of our convertible notes will be entitled to convert their notes at any time during specified periods at their option. If one or more holders elect to convert their notes, we would be required to settle any converted principal amount of such notes through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of our convertible notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
Changes in the accounting method for convertible debt securities that may be settled in cash, such as our convertible notes, could have a material effect on our reported financial results.
The accounting method for reflecting our convertible notes on our balance sheet, accruing interest expense for our convertible notes and reflecting the underlying shares of our common stock in our reported diluted earnings per share may adversely affect our reported earnings and financial condition.
In August 2020, the Financial Accounting Standards Board published Accounting Standards Update (“ASU”) 2020-06 (“ASU 2020-06”), which simplified certain of the accounting standards that apply to convertible notes. ASU 2020-06 eliminated the cash conversion and beneficial conversion feature modes used to separately account for embedded conversion features as a component of equity. Instead, an entity would account for convertible debt or convertible preferred stock securities as a single unit of account, unless the conversion feature requires bifurcation and recognition as derivatives. Additionally, the guidance requires entities to use the “if-converted” method for all convertible instruments in the diluted earnings per share calculation and to include the effect of potential share settlement for instruments that may be settled in cash or shares. We adopted ASU 2020-06 in the first quarter of fiscal year 2020.
In accordance with ASU 2020-06, our convertible notes are reflected as a liability on our balance sheets, with the initial carrying amount equal to the principal amount of the convertible notes, net of issuance costs. The issuance costs were treated as contra debt for accounting purposes, which will be amortized into interest expense over the term of our convertible notes. As a result of this amortization, the interest expense that we expect to recognize for our convertible notes for accounting purposes will be greater than the cash interest payments we will pay on our convertible notes.
In addition, the shares of our common stock underlying our convertible notes will be reflected in our diluted earnings per share using the “if-converted” method, in accordance with ASU 2020-06. Under the “if-converted” method, diluted earnings per share would generally be calculated assuming that all our convertible notes were converted solely into shares of our common stock at the beginning of the reporting period, unless the result would be anti-dilutive. However, for convertible notes in which the principal amount must be settled in cash and the conversion spread value in shares or cash upon conversions (such as our convertible notes), the “if-converted” method requires that interest expense is not adjusted in the numerator and the denominator only includes the net number of incremental shares that would be issued upon conversion. The application of the if-converted method may reduce our reported diluted earnings per share, to the extent the price of our common stock exceeds the conversion price. Accounting standards may change in the future in a manner that may adversely affect our diluted earnings per share.
Furthermore, if any of the conditions to the convertibility of our convertible notes is satisfied, then we may be required under applicable accounting standards to reclassify the liability carrying value of our convertible notes as a current, rather than a long-term, liability. This reclassification could be required even if no holders convert their notes and could materially reduce our reported working capital.
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Conversion of our convertible notes may dilute the ownership interest of our stockholders or may otherwise depress the price of our common stock.
The conversion of some or all of our convertible notes may dilute the ownership interests of our stockholders. Upon conversion of our convertible notes, we have the option to 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 in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of our convertible notes being converted. If we elect to settle the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of our convertible notes being converted in shares of our common stock or a combination of cash and shares of our common stock, any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of our convertible notes may encourage short selling by market participants because the conversion of our convertible notes could be used to satisfy short positions, or anticipated conversion of our convertible notes into shares of our common stock could depress the price of our common stock.
The capped call transactions may affect the value of our common stock.
In connection with the pricing of our convertible notes, we entered into privately negotiated capped call transactions with the option counterparties. The capped call transactions cover, subject to customary adjustments substantially similar to those applicable to our convertible notes, the number of shares of our common stock initially underlying our convertible notes. The capped call transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of our convertible notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes (if and when we elect to settle the conversion spread value in cash), as the case may be, with such reduction and/or offset subject to a cap.
In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions following the pricing of our convertible notes and prior to the maturity of our convertible notes (and are likely to do so during any observation period related to a conversion of our convertible notes or, to the extent we exercise the relevant election under the capped call transactions, following any repurchase or redemption of our convertible notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock.
In addition, if any such capped call transactions fail to become effective, the option counterparties or their respective affiliates may unwind their hedge positions with respect to our common stock, which could adversely affect the value of our common stock.
We are subject to counterparty risk with respect to the capped call transactions.
The option counterparties are financial institutions, and we are subject to the risk that any or all of them might default under the capped call transactions. Our exposure to the credit risk of the option counterparties is not secured by any collateral.
If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the capped call transaction with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market price and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.
Risks Related to Growth and Acquisitions
If we are not able to successfully manage our growth strategy, our business and results of operations may be adversely affected.
Our expected future growth presents numerous managerial, administrative, operational and other challenges. Our ability to manage the growth of our operations will require us to continue to improve our management information systems and our other internal systems and controls. In addition, our growth will increase our need to attract, develop, motivate and retain both our management and professional employees. The inability to effectively manage our growth or the inability of our employees to achieve anticipated performance could have a material adverse effect on our business.
We have made and expect to continue to make acquisitions. Acquisitions could disrupt our operations and adversely impact our business and operating results. Our failure to conduct due diligence effectively or our inability to successfully integrate acquisitions could impede us from realizing all of the benefits of the acquisitions, which could weaken our results of operations.
A key part of our growth strategy is to acquire other companies that complement our lines of business or that broaden our technical capabilities and geographic presence. However, our ability to make acquisitions is restricted under our credit
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agreement. Acquisitions involve certain known and unknown risks that could cause our actual growth or operating results to differ from our expectations or the expectations of securities analysts. For example: we may not be able to identify suitable acquisition candidates or to acquire additional companies on acceptable terms; we have completed and we will continue to pursue international acquisitions, which inherently pose more risk than domestic acquisitions; we compete with others to acquire companies, which may result in decreased availability of, or increased price for, suitable acquisition candidates; and we may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of our potential acquisitions.
If we fail to conduct due diligence on our potential targets effectively, we may, for example, not identify problems at target companies, or fail to recognize incompatibilities or other obstacles to successful integration. The integration process may disrupt our business and, if implemented ineffectively, may preclude realization of the full benefits expected by us and could harm our results of operations.
Further, acquisitions may cause us to: issue common stock that would dilute our current stockholders’ ownership percentage; use a substantial portion of our cash resources; increase our interest expense, leverage and debt service requirements (if we incur additional debt to fund an acquisition); or record goodwill and non-amortizable intangible assets that are subject to impairment testing and potential impairment charges.
If our goodwill or other intangible assets become impaired, then our profits may be significantly reduced.
Because we have historically acquired a significant number of companies, goodwill and other intangible assets represent a substantial portion of our assets. As of fiscal 2024 year-end, our goodwill was $2.0 billion and other intangible assets were $160.6 million. We are required to perform a goodwill impairment test for potential impairment at least on an annual basis. We also assess the recoverability of the unamortized balance of our intangible assets when indications of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. The goodwill impairment test requires us to determine the fair value of our reporting units, which are the components one level below our reportable segments. In determining fair value, we make significant judgments and estimates, including assumptions about our strategic plans with regard to our operations. We also analyze current economic indicators and market valuations to help determine fair value. To the extent economic conditions that would impact the future operations of our reporting units change, our goodwill may be deemed to be impaired, and we would be required to record a non-cash charge that could result in a material adverse effect on our financial position or results of operations. We had no goodwill impairment in fiscal 2024, 2023 or 2022.
Risks Related to Our Legal and Regulatory Environment
As a U.S. government contractor, we must comply with various procurement laws and regulations and are subject to regular government audits; a violation of any of these laws and regulations or the failure to pass a government audit could result in sanctions, contract termination, forfeiture of profit, harm to our reputation or loss of our status as an eligible government contractor and could reduce our profits and revenue.
We must comply with and are affected by U.S. federal, state, local and foreign laws and regulations relating to the formation, administration and performance of government contracts. For example, we must comply with FAR, the Truth in Negotiations Act, CAS, the American Recovery and Reinvestment Act of 2009, the Services Contract Act, the DoD security regulations as well as many other rules and regulations. In addition, we must comply with other government regulations related to employment practices, environmental protection, health and safety, tax, accounting, anti-fraud measures as well as many other regulations in order to maintain our government contractor status. Although we take precautions to prevent and deter fraud, misconduct and non-compliance, we face the risk that our employees or outside partners may engage in misconduct, fraud or other improper activities. U.S. government agencies, such as the DCAA, routinely audit and investigate government contractors. These government agencies review and audit a government contractor’s performance under its contracts and cost structure, and evaluate compliance with applicable laws, regulations and standards. In addition, during the course of its audits, the DCAA may question our incurred project costs. If the DCAA believes we have accounted for such costs in a manner inconsistent with the requirements for FAR or CAS, the DCAA auditor may recommend to our U.S. government corporate administrative contracting officer that such costs be disallowed. Historically, we have not experienced significant disallowed costs as a result of government audits. However, we can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future. In addition, U.S. government contracts are subject to various other requirements relating to the formation, administration, performance and accounting for these contracts. We may also be subject to qui tam litigation brought by private individuals on behalf of the U.S. government under the Federal Civil False Claims Act, which could include claims for treble damages. For example, as discussed elsewhere in this report, on January 14, 2019, the Civil Division of the United States Attorney’s Office ("USAO") filed complaints 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 ("NDCA"). U.S. government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit and/or suspension of payment, any of which could make us lose our status as
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an eligible government contractor. We could also suffer serious harm to our reputation. Any interruption or termination of our U.S. government contractor status could reduce our profits and revenue significantly.
Legal proceedings, investigations and disputes could result in substantial monetary penalties and damages, especially if such penalties and damages exceed or are excluded from existing insurance coverage.
We engage in consulting, engineering, program management and technical services that can result in substantial injury or damages that may expose us to legal proceedings, investigations and disputes. For example, in the ordinary course of our business, we may be involved in legal disputes regarding personal injury claims, employee or labor disputes, professional liability claims and general commercial disputes involving project cost overruns and liquidated damages as well as other claims. In addition, in the ordinary course of our business, we frequently make professional judgments and recommendations about environmental and engineering conditions of project sites for our clients, and we may be deemed to be responsible for these judgments and recommendations if they are later determined to be inaccurate. For example, as discussed elsewhere in this report, the USAO filed complaints against TtEC in the NDCA alleging violations of the False Claims Act, Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”) and common law, and several ancillary claims brought by third-party private plaintiffs arising from the same services provided by TtEC on the same project are ongoing. Any unfavorable legal ruling against us could result in substantial monetary damages or even criminal violations. We maintain insurance coverage as part of our overall legal and risk management strategy to minimize our potential liabilities; however, insurance coverage contains exclusions and other limitations that may not cover our potential liabilities. Generally, our insurance program covers workers’ compensation and employer’s liability, general liability, automobile liability, professional errors and omissions liability, property and contractor’s pollution liability (in addition to other policies for specific projects). Our insurance program includes deductibles or self-insured retentions for each covered claim that may increase over time. In addition, our insurance policies contain exclusions that insurance providers may use to deny or restrict coverage. Excess liability and professional liability insurance policies provide for coverage on a “claims-made” basis, covering only claims actually made and reported during the policy period currently in effect. If we sustain liabilities that exceed or that are excluded from our insurance coverage, or for which we are not insured, it could have a material adverse impact on our financial condition, results of operations and cash flows.
We could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws.
The FCPA and similar anti-bribery laws generally prohibit companies and their intermediaries from making direct or indirect improper payments to foreign government officials for the purpose of obtaining or retaining business. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. The U.K. Bribery Act of 2010 prohibits both domestic and international bribery, as well as bribery across both private and public sectors. Improper payments are also prohibited under the Canadian Corruption of Foreign Public Officials Act and the Brazilian Clean Companies Act. Local business practices in many countries outside the United States create a greater risk of government corruption than that found in the United States and other more developed countries. Our policies mandate compliance with anti-bribery laws, and we have established policies and procedures designed to monitor compliance with anti-bribery law requirements; however, we cannot ensure that our policies and procedures will prevent potential reckless or criminal acts committed by individual employees, agents or partners. If we are found to be liable for anti-bribery law violations, we could suffer from criminal or civil penalties or other sanctions that could have a material adverse effect on our business.
We could be adversely impacted if we fail to comply with domestic and international export control and sanctions laws.
To the extent we export technical services, data and products outside of the United States, we are subject to U.S. and international laws and regulations governing international trade and exports, including but not limited to the International Traffic in Arms Regulations, the Export Administration Regulations and trade sanctions. These laws and regulations may restrict or prohibit altogether the sale or supply of certain of our services to certain governments, persons, entities, countries, and territories, including those that are the target of comprehensive sanctions, unless there are license exceptions that apply or specific licenses are obtained. A failure to comply with these laws and regulations could result in civil or criminal sanctions, including the imposition of fines, the denial of export privileges and suspension or debarment from participation in U.S. government contracts, which could have a material adverse effect on our business.
New legal requirements could adversely affect our operating results.
Our business and results of operations could be adversely affected by the passage of climate change, defense, environmental, infrastructure and other legislation, policies and regulations. Growing concerns about climate change may result in the imposition of additional environmental regulations. For example, legislation, international protocols, regulation or other restrictions on emissions could increase the costs of projects for our clients or, in some cases, prevent a project from going forward, thereby potentially reducing the need for our services. In addition, relaxation or repeal of laws and regulations, or changes in governmental policies regarding environmental, defense, infrastructure or other industries we serve could result in a decline in demand for our services, which could in turn negatively impact our revenues. We cannot predict when or whether any of these various proposals may be enacted or what their effect will be on us or on our customers.
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We may be subject to liabilities under environmental laws and regulations.
Our services are subject to numerous U.S. and international environmental protection laws and regulations that are complex and stringent. For example, we must comply with a number of U.S. federal government laws that strictly regulate the handling, removal, treatment, transportation and disposal of toxic and hazardous substances. Under CERCLA and comparable state laws, we may be required to investigate and remediate regulated hazardous materials. CERCLA and comparable state laws typically impose strict, joint and several liabilities without regard to whether a company knew of or caused the release of hazardous substances. The liability for the entire cost of clean-up could be imposed upon any responsible party. Other principal U.S. federal environmental, health and safety laws affecting us include, but are not limited to, the Resource Conservation and Recovery Act, National Environmental Policy Act, the Clean Air Act, the Occupational Safety and Health Act, the Federal Mine Safety and Health Act of 1977 (the “Mine Act”), the Toxic Substances Control Act and the Superfund Amendments and Reauthorization Act. Our business operations may also be subject to similar state and international laws relating to environmental protection. Further, past business practices at companies that we have acquired may also expose us to future unknown environmental liabilities. Liabilities related to environmental contamination or human exposure to hazardous substances, or a failure to comply with applicable regulations, could result in substantial costs to us, including clean-up costs, fines, civil or criminal sanctions, and third-party claims for property damage or personal injury or cessation of remediation activities. Our continuing work in the areas governed by these laws and regulations exposes us to the risk of substantial liability.
Uncertainties in the interpretation and application of existing, new and proposed tax laws and regulations could materially affect our tax obligations and effective tax rate.
The tax regimes to which we are subject or under which we operate are unsettled and may be subject to significant change. The issuance of additional guidance related to existing or future tax laws, or changes to tax laws, tax treaties or regulations proposed or implemented by the current or a future U.S. presidential administration, Congress, taxing authorities in other jurisdictions, including jurisdictions outside of the United States, or by bodies such as the European Commission or the Organisation for Economic Co-operation and Development ("OECD"), could materially affect our tax obligations (including the cost of compliance) and effective tax rate. To the extent that such changes have a negative impact on us, including as a result of related uncertainty, these changes may adversely impact our business, financial condition, results of operations, and cash flows.
The amount of taxes we pay in different jurisdictions depends on the application of the tax laws of various jurisdictions, including the United States, to our international business activities, the relative amounts of income before taxes in the various jurisdictions in which we operate, new or revised tax laws, or interpretations of tax laws and policies, the outcome of current and future tax audits, examinations or administrative appeals, our ability to realize our deferred tax assets, and our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for pricing intercompany transactions pursuant to our intercompany arrangements or disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a challenge or disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest, and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows, and lower overall profitability of our operations. Our financial statements could fail to reflect adequate reserves to cover such a contingency. Similarly, a taxing authority could assert that we are subject to tax in a jurisdiction where we believe we have not established a taxable connection, often referred to as a “permanent establishment” under international tax treaties, and such an assertion, if successful, could increase our expected tax liability in one or more jurisdictions.
Employee, agent or partner misconduct, or our failure to comply with anti-bribery and other laws or regulations, could harm our reputation, reduce our revenue and profits and subject us to criminal and civil enforcement actions.
Misconduct, fraud, non-compliance with applicable laws and regulations or other improper activities by one of our employees, agents or partners could have a significant negative impact on our business and reputation. Such misconduct could include the failure to comply with government procurement regulations, regulations regarding the protection of classified information, regulations prohibiting bribery and other foreign corrupt practices, regulations regarding the pricing of labor and other costs in government contracts, regulations on lobbying or similar activities, regulations pertaining to the internal controls over financial reporting, environmental laws and any other applicable laws or regulations. Our policies mandate compliance with these regulations and laws, and we take precautions to prevent and detect misconduct. However, since our internal controls are subject to inherent limitations, including human error, it is possible that these controls could be intentionally circumvented or become inadequate because of changed conditions. As a result, we cannot assure that our controls will protect us from reckless or criminal acts committed by our employees, agents or partners. Our failure to comply with applicable laws or regulations or acts of misconduct could subject us to fines and penalties, loss of security clearances and suspension or debarment from contracting, any or all of which could harm our reputation, reduce our revenue and profits and subject us to criminal and civil enforcement actions.
If our reports and opinions are not in compliance with professional standards and other regulations, we could be subject to monetary damages and penalties.
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We issue reports and opinions to clients based on our professional engineering expertise, as well as our other professional credentials. Our reports and opinions may need to comply with professional standards, licensing requirements, securities regulations and other laws and rules governing the performance of professional services in the jurisdiction in which the services are performed. In addition, the reports and other work product we produce for clients sometimes include projections, forecasts and other forward-looking statements. Such information by its nature is subject to numerous risks and uncertainties, any of which could cause the information produced by us to ultimately prove inaccurate. While we include appropriate disclaimers in the reports that we prepare for our clients, once we produce such written work product, we do not always have the ability to control the manner in which our clients use such information. As a result, if our clients reproduce such information to solicit funds from investors for projects without appropriate disclaimers or the information proves to be incorrect, or if our clients reproduce such information for potential investors in a misleading or incomplete manner, our clients or such investors may threaten to or file suit against us for, among other things, securities law violations.
We have only a limited ability to protect our intellectual property rights, and our failure to protect our intellectual property rights could adversely affect our competitive position.
We rely upon a combination of nondisclosure agreements and other contractual arrangements, as well as copyright, trademark, patent and trade secret laws to protect our proprietary information. We also enter into proprietary information and intellectual property agreements with employees, which require them to disclose any inventions created during employment, to convey such rights to inventions to us, and to restrict any disclosure of proprietary information. Trade secrets are generally difficult to protect. Although our employees are subject to confidentiality obligations, this protection may be inadequate to deter or prevent misappropriation of our confidential information and/or the infringement of our patents and copyrights. Further, we may be unable to detect unauthorized use of our intellectual property or otherwise take appropriate steps to enforce our rights. Failure to adequately protect, maintain or enforce our intellectual property rights may adversely limit our competitive position.
Assertions by third parties of infringement, misappropriation or other violations by us of their intellectual property rights could result in significant costs and substantially harm our business, financial condition and operating results.
In recent years, there has been significant litigation involving intellectual property rights in technology industries. We may face from time to time, allegations that we or a supplier or customer have violated the rights of third parties, including patent, trademark and other intellectual property rights. If, with respect to any claim against us for violation of third-party intellectual property rights, we are unable to prevail in the litigation or retain or obtain sufficient rights or develop non-infringing intellectual property or otherwise alter our business practices on a timely or cost-efficient basis, our business, financial condition or results of operations may be adversely affected.
Any infringement, misappropriation or related claims, whether or not meritorious, are time consuming, divert technical and management personnel and are costly to resolve. As a result of any such dispute, we may have to develop non-infringing technology, pay damages, enter into royalty or licensing agreements, cease utilizing products or services or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable to us.
We are subject to stringent and evolving U.S. and foreign laws, regulations, rules, contractual obligations, policies and other obligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation (including class claims) and mass arbitration demands; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; loss of customers or sales; and other adverse business consequences.
We develop, install and maintain information technology systems for ourselves, as well as for customers. Client contracts for the performance of information technology services, as well as various privacy and securities laws, require us to manage and protect sensitive and confidential information, including federal and other government information, from disclosure. We also need to protect our own internal trade secrets and other business confidential information, as well as personal data of our employees and contractors, from disclosure.
In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), and other similar laws. For example, the California Consumer Privacy Act of 2018, as amended by the California Privacy Rights Act of 2020 (collectively, “CCPA”) applies to personal information of consumers, business representatives, and employees who are California residents, and requires businesses to provide specific disclosures in privacy notices and honor requests of such individuals to exercise certain privacy rights. The CCPA provides for administrative fines of up to $7,500 per violation and allows private litigants affected by certain data breaches to recover significant statutory damages. Other states, such as Virginia and Colorado, have also passed comprehensive privacy laws, and similar laws are being considered in several other states, as well as at the federal and local levels.
Outside the United States, an increasing number of laws, regulations, and industry standards govern data privacy and security. For example, the European Union's General Data Protection Regulation ("EU GDPR"), the United Kingdom’s GDPR,
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and Brazil’s General Data Protection Law (Lei Geral de Proteção de Dados Pessoais, or “LGPD”) (Law No. 13,709/2018) impose strict requirements for processing personal data. For example, the EU GDPR extends the scope of the European Union data protection laws to all companies processing data of European Union residents, regardless of the company's location.
In the ordinary course of business, we may transfer personal data from Europe and other jurisdictions to the United States or other countries. Europe and other jurisdictions have enacted laws requiring data to be localized or limiting the transfer of personal data to other countries. In particular, the European Economic Area (“EEA”) and the United Kingdom (“UK”) have significantly restricted the transfer of personal data to the United States and other countries whose privacy laws it generally believes are inadequate. Other jurisdictions may adopt similarly stringent interpretations of their data localization and cross-border data transfer laws.
Although there are currently various mechanisms that may be used to transfer personal data from the EEA and UK to the United States in compliance with law, such as the EEA and UK’s standard contractual clauses, the UK’s International Data Transfer Agreement / Addendum, and the EU-U.S. Data Privacy Framework (which allows for transfers for relevant U.S.-based organizations who self-certify compliance and participate in the Framework), these mechanisms are subject to legal challenges, and there is no assurance that we can satisfy or rely on these measures to lawfully transfer personal data to the United States.
If there is no lawful manner for us to transfer personal data from the EEA, the UK or other jurisdictions to the United States, or if the requirements for a legally-compliant transfer are too onerous, we could face significant adverse consequences, including the interruption or degradation of our operations, the need to relocate part of or all of our business or data processing activities to other jurisdictions (such as Europe) at significant expense, increased exposure to regulatory actions, substantial fines and penalties, the inability to transfer data and work with partners, vendors and other third parties, and injunctions against our processing or transferring of personal data necessary to operate our business. Additionally, companies that transfer personal data out of the EEA and UK to other jurisdictions, particularly to the United States, are subject to increased scrutiny from regulators, individual litigants, and activist groups.
General Risk Factors
We may not be able to continue, or may elect to discontinue, paying dividends which may adversely affect our stock price.
Current dividends may not be indicative of future dividends, and our ability to continue to pay or increase dividends to our stockholders is subject to our Board of Director’s discretion and depends on: our ability to comply with covenants imposed by our financing agreements that limit our ability to pay dividends and make certain restricted payments; difficulties in raising additional capital; our ability to re-finance our long-term debt before it matures; principal repayments and other capital needs; our results of operations and general business conditions; legal restrictions on the payment of dividends and other factors that our Board of Directors deems relevant. In the future we may elect not to pay dividends, be unable to pay dividends or maintain or increase our current level of dividends, which may negatively affect our stock price.
Delaware law and our organizational documents may impede or discourage a merger, takeover or other business combination with us even if the business combination would have been in the short-term best interests of our stockholders.
We are a Delaware corporation and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our stockholders. In addition, our Board of Directors has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock, which could be used defensively if a takeover is threatened. These features, as well as provisions in our certificate of incorporation and bylaws, such as those relating to advance notice of certain stockholder proposals and nominations, could impede a merger, takeover or other business combination involving us, or discourage a potential acquirer from making a tender offer for our common stock, even if the business combination would have been in the best interests of our current stockholders.
Corporate responsibility, specifically related to environmental, social and governance (“ESG”) matters, may impose additional costs and expose us to new risks.
Public ESG and sustainability reporting is becoming more broadly expected by investors, stockholders, and other stakeholders. Certain organizations that provide corporate governance and other corporate risk information to investors and shareholders have developed, and others may in the future develop, scores and ratings to evaluate companies and investment funds based upon ESG or “sustainability” metrics. Many investment funds focus on positive ESG business practices and sustainability scores when making investments and may consider a company’s ESG or sustainability scores as a reputational or other factor in making an investment decision. In addition, investors, particularly institutional investors, use these scores to benchmark companies against their peers and if a company is perceived as lagging, these investors may engage with such company to improve ESG disclosure or performance and may also make voting decisions, or take other actions, to hold these companies and their boards of directors accountable. We may also face reputational damage in the event our corporate
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responsibility initiatives or objectives do not meet the standards set by our investors, stockholders, lawmakers, listing exchanges or other constituencies, or if we are unable to achieve an acceptable ESG or sustainability rating from third party rating services. A low ESG or sustainability rating by a third-party rating service could also result in the exclusion of our common stock from consideration by certain investors who may elect to invest with our competition instead. Ongoing focus on corporate responsibility matters by investors and other parties as described above may impose additional costs or expose us to new risks.
Item 1B Unresolved Staff Comments
None.
Item 2. Properties
At fiscal 2024 year-end, we leased approximately 560 operating facilities in domestic and foreign locations. Our significant lease agreements expire at various dates through 2033. We believe that our current facilities are adequate for the operation of our business, and that suitable additional space in various local markets is available to accommodate any needs that may arise.
The following table summarizes our ten most significant leased properties by location based on annual rental expenses (listed alphabetically, except for our corporate headquarters):
Location
Description
Reportable Segment
Pasadena, CA
Corporate Headquarters
Corporate
Arlington, VA
Office Building
GSG / CIG
Boston, MA
Office Building
GSG / CIG
Irvine, CA
Office Building
GSG / CIG
London, United Kingdom
Office Building
GSG / CIG
Melbourne, Australia
Office Building
CIG
New York, NY
Office Building
GSG /CIG
Orlando, FL
Office Building
GSG / CIG
Pittsburgh, PA
Office Building
GSG / CIG
Portland, OR
Office Building
GSG / CIG
Item 3. Legal Proceedings
For a description of our material pending legal and regulatory proceedings and settlements, see Note 18, "Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" included in Item 8.
Item 4. Mine Safety Disclosures
Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires domestic mine operators to disclose violations and orders issued under the Mine Act by MSHA. We do not act as the owner of any mines, but we may act as a mining operator as defined under the Mine Act where we may be an independent contractor performing services or construction at such mine. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K is included in Exhibit 95.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol TTEK. There were approximately 1,046 stockholders of record at September 29, 2024.
Stock-Based Compensation
For information regarding our stock-based compensation, see Note 12, "Stockholders' Equity and Stock Compensation Plans" of the "Notes to Consolidated Financial Statements" included in Item 8.
Performance Graph
The following graph shows a comparison of our cumulative total returns with those of the NASDAQ Market Index and the Standard & Poor's ("S&P") 1000 Index. At this time, we do not have a comparable peer group due to the combination of our differentiated high-end consulting services and our end-markets. Thus, we have selected the S&P 1000 Index. The graph assumes that the value of an investment in our common stock and in each such index was $100 on September 29, 2019, and that all dividends have been reinvested. Dividends declared and paid in fiscal 2024 totaled $0.220 per share. We declared and paid dividends in the first and second quarters totaling $0.104 per share ($0.052 each quarter) on our common stock and paid dividends in the third and fourth quarters totaling $0.116 per share ($0.058 each quarter) on our common stock. We declared and paid dividends totaling $0.196, $0.172, $0.148 and $0.128 per share in fiscal 2023, 2022, 2021 and 2020, respectively. The comparison in the graph below is based on historical data and is not intended to forecast the possible future performance of our common stock.
ASSUMES $100 INVESTED ON SEPTEMBER 29, 2019
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDED SEPTEMBER 29, 2024
2019
2020
2021
2022
2023
2024
Tetra Tech, Inc.
$
100.00
$
108.26
$
181.19
$
154.26
$
183.65
$
281.86
NASDAQ Market Index
100.00
138.78
186.51
136.43
172.05
237.60
S&P 1000 Index
100.00
94.20
145.00
119.23
135.76
171.48
The performance graph above and related text are being furnished solely to accompany this annual report on Form 10-K pursuant to Item 201(e) of Regulation S-K, and are not being filed for purposes of Section 18 of the Exchange Act, and are
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not to be incorporated by reference into any of our filings with the SEC, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Stock Repurchase Program
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 fiscal 2024 and 2023, we did not repurchase any shares of our common stock. In fiscal 2022, we repurchased and settled 6,708,395 shares with an average price of $29.81 per share for a total cost of $200.0 million. At fiscal 2024 year-end, we had a remaining balance of $347.8 million under our stock repurchase program.
Item 6. [Reserved]
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following analysis of our financial condition and results of operations should be read in conjunction with Part I of this report, as well as our consolidated financial statements and accompanying notes in Item 8. The following analysis contains forward-looking statements about our future results of operations and expectations. Our actual results and the timing of events could differ materially from those described herein. See Part 1, Item 1A, "Risk Factors" for a discussion of the risks, assumptions and uncertainties affecting these statements.
OVERVIEW OF RESULTS AND BUSINESS TRENDS
General. In fiscal 2024, our revenue increased 15.0% compared to fiscal 2023 primarily reflecting increased activity in our U.S. federal and international client sectors. This revenue growth includes $332 million from our recent acquisitions, that did not have comparable revenue for all of fiscal 2023. Excluding the impact of these acquisitions, our revenue increased 7.6% compared to the prior-year period.
The table below presents our revenue by client sector (amounts in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
Client sector
U.S. federal government (1)
$
1,675,996
$
1,387,101
$
288,895
20.8%
U.S. state and local government
613,185
607,074
6,111
1.0
U.S. commercial
909,642
869,460
40,182
4.6
International (2)
1,999,856
1,658,915
340,941
20.6
Total
$
5,198,679
$
4,522,550
$
676,129
15.0%
(1) Includes revenue generated under U.S. federal government contracts performed outside the United States.
(2) Includes revenue generated from non-U.S. clients, primarily in the United Kingdom, Australia and Canada.
U.S. Federal Government
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
($ in thousands)
Revenue
$
1,675,996
$
1,387,101
$
288,895
20.8%
Our 20.8% growth in U.S. federal revenue in fiscal 2024 compared to fiscal 2023 primarily reflects increased international development activity and increased environmental activity for both civilian and defense agencies. The growth in our international development activity primarily relates to activity in Ukraine to support energy security and other humanitarian needs. In fiscal 2024, our international development revenue increased approximately $122 million compared to fiscal 2023. The overall revenue growth also includes approximately $115 million of revenue from our recent acquisitions, that did not have comparable revenue for all last year. We expect our U.S. federal government revenue to continue to grow in fiscal 2025. 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
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
($ in thousands)
Revenue
$
613,185
$
607,074
$
6,111
1.0%
34
In fiscal 2024, our U.S. state and local government revenue increased compared to last fiscal year due to continued investment by our clients in clean drinking water; this growth was offset by lower disaster response revenue of approximately $46 million primarily due to the wind-down of hurricane related projects in the southeastern U.S. last year. Excluding our disaster response activities, our U.S. state and local government revenue increased 12.4% in fiscal 2024 compared to fiscal 2023, primarily reflecting continued increased revenue from advanced water treatment projects. Most of our work for U.S. state and local governments relates to critical water and environmental programs, which we expect to continue to grow in fiscal 2025.
U.S. Commercial
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
($ in thousands)
Revenue
$
909,642
$
869,460
$
40,182
4.6%
Our U.S. commercial revenue growth of 4.6% this fiscal year was primarily due to increased planning and permitting projects related to renewable energy generation and transmission. We expect revenue growth to continue in our U.S. commercial business in fiscal 2025.
International
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
($ in thousands)
Revenue
1,999,856
$
1,658,915
$
340,941
20.6%
For fiscal 2024, our international revenue increased 20.6% compared to last year primarily due to higher renewable energy revenue and commercial activities related to an increased focus on sustainability in addition to contributions from acquisitions. This revenue growth includes approximately $182 million of revenue from our recent acquisitions, that did not have comparable revenue for all of last year. Excluding the impact of these acquisitions, our revenue increased 9.6% compared to fiscal 2023. We expect growth in our international work to continue in fiscal 2025.
35
RESULTS OF OPERATIONS
Fiscal 2024 Compared to Fiscal 2023
Consolidated Results of Operations
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
($ in thousands, except per share data)
Revenue
$
5,198,679
$
4,522,550
$
676,129
15.0%
Subcontractor costs
(876,817)
(771,461)
(105,356)
(13.7)
Revenue, net of subcontractor costs (1)
4,321,862
3,751,089
570,773
15.2
Other costs of revenue
(3,455,422)
(3,026,060)
(429,362)
(14.2)
Gross profit
866,440
725,029
141,411
19.5
Selling, general and administrative expenses
(356,024)
(305,107)
(50,917)
(16.7)
Acquisition and integration expenses
(7,138)
(33,169)
26,031
78.5
Right-of-use operating lease asset impairment
—
(16,385)
16,385
NM
Contingent consideration – fair value adjustments
(2,541)
(12,255)
9,714
79.3
Income from operations
500,737
358,113
142,624
39.8
Interest expense – net
(37,271)
(46,537)
9,266
19.9
Other non-operating income
—
89,402
(89,402)
NM
Income before income tax expense
463,466
400,978
62,488
15.6
Income tax expense
(130,023)
(127,526)
(2,497)
(2.0)
Net income
333,443
273,452
59,991
21.9
Net income attributable to noncontrolling interests
(61)
(32)
(29)
(90.6)
Net income attributable to Tetra Tech
$
333,382
$
273,420
$
59,962
21.9
Diluted earnings per share
$
1.23
$
1.02
$
0.21
20.6%
(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. In the course of 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 generally accepted accounting principles in the United States of America ("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
Our revenue growth in fiscal 2024 reflects increases in both of our reportable segments. Our GSG segment's revenue and revenue, net of subcontractor costs, increased $324.5 million, or 15.0%, and $274.5 million, or 16.8%, respectively, in fiscal 2024 compared to last year. Our CIG segment's revenue increased $362.1 million, or 14.9%, and revenue, net of subcontractor costs, increased $296.2 million, or 14.0% in fiscal 2024 compared to fiscal 2023. The fiscal 2024 results for GSG and CIG segments are described below under "Government Services Group" and "Commercial/International Group", respectively.
The following table reconciles our reported results to non-U.S. GAAP adjusted results, which exclude acquisition and integration costs and adjustments to contingent consideration liabilities in fiscal 2024. Our fiscal 2023 adjusted results exclude acquisition and integrations costs related to the RPS acquisition and related lease impairment charge and adjustments to contingent consideration liabilities. Our adjusted earnings per share ("EPS") for fiscal 2023 also excludes non-operating gains on a foreign exchange contract of $89.4 million and non-recurring tax expense items. The foreign exchange gain is reported as "Other non-operating income" in our consolidated statements of income. The effective tax rate applied to the adjustments to EPS to arrive at adjusted EPS was 17% and 26% for fiscal 2024 and 2023, respectively. The fiscal 2024 rate reflects certain integration costs/losses that were not tax deductible. 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 respective periods as reflected in our consolidated statements of income.
36
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
($ in thousands, except per share data)
Income from operations
$
500,737
$
358,113
$
142,624
39.8%
Acquisition and integration expenses
7,138
33,169
(26,031)
(78.5)
Right-of-use operating lease asset impairment
—
16,385
(16,385)
NM
Earn-out adjustments
2,541
12,255
(9,714)
(79.3)
Adjusted income from operations (1)
$
510,416
$
419,922
$
90,494
21.6%
EPS
$
1.23
$
1.02
$
0.21
20.6%
Acquisition and integration expenses
0.02
0.11
(0.09)
(81.8)
Right-of-use operating lease asset impairment
—
0.04
(0.04)
NM
Earn-out adjustments
0.01
0.04
(0.03)
(75.0)
Foreign exchange forward contract gain
—
(0.25)
0.25
NM
Non-recurring tax items
—
0.08
(0.08)
NM
Adjusted EPS (1)
$
1.26
$
1.04
$
0.22
21.2%
NM = not meaningful
(1) Non-U.S. GAAP financial measure
Operating income in fiscal 2024 includes $7.1 million of acquisition and integration expenses (non-cash divestiture and asset impairment charges). The fiscal 2023 results include $33.2 million of acquisition and integration expenses (primarily investment banking, legal and other professional fees) for the RPS acquisition and a related $16.4 million lease right-of-use asset ("ROU") impairment expense. The fiscal 2024 and 2023 results also include charges of $2.5 million and $12.3 million, respectively, related to changes in the estimated fair value of contingent earn-out liabilities. Excluding the acquisition and integration expenses and earn-out charges, our adjusted operating income increased $90.5 million, or 21.6% in fiscal 2024 compared to fiscal 2023. These increases reflect improved results in both of our operating segments, which are described below under "Government Services Group" and "Commercial/International Group", respectively.
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
($ in thousands)
Interest expense – net
$
37,271
$
46,537
$
(9,266)
(19.9)%
Net interest expense decreased in fiscal 2024 compared to last fiscal year primarily due to the lower borrowing costs from our convertible notes (the "Convertible Notes") issued in the fourth quarter of fiscal 2023, which we used to refinance the existing higher-cost debt. In fiscal 2023, net interest expense included $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 and $1.1 million of additional expense for the write-off of previously deferred debt origination fees due to the repayment of RPS' debt facilities. Excluding these write-offs, our interest expense decreased $5.5 million in fiscal 2024 compared to last year.
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
($ in thousands)
Other non-operating income
$
—
$
89,402
$
(89,402)
NM
Other non-operating income in fiscal 2023 reflects gains 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
37
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 cash gain of approximately $109 million.
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
($ in thousands)
Income tax expense
$
130,023
$
127,526
$
2,497
2.0%
The effective tax rates for fiscal 2024 and 2023 were 28.1% and 31.8%, respectively. Income tax expense was reduced by $4.5 million and $4.6 million of excess tax benefits on share-based payments in fiscal 2024 and 2023, respectively. In addition, income tax expense in fiscal 2024 included $4.2 million of expense for the settlement of various tax positions that were under audit for fiscal years 2011 through 2021. Furthermore, income tax expense in fiscal 2023 included non-operating income tax expenses totaling $20.6 million to (i) increase the tax liability for uncertain tax positions related to certain U.S. tax credits and an intercompany financing transaction, (ii) recognize the tax liability for foreign earnings, primarily in the United Kingdom and Australia, that are no longer indefinitely reinvested. Excluding the impact of the excess tax benefits on share-based payments in both years, the settlement amount in fiscal 2024 and the non-operating tax expenses in fiscal 2023, our effective tax rates in fiscal 2024 and 2023 were 28.1% and 27.8%, respectively.
In December 2021, the Organisation for Economic Cooperation and Development ("OECD") released Pillar Two Model Rules (also referred to as the global minimum tax or Global Anti-Base Erosion "GloBE" rules), which were designed to ensure large multinational enterprises pay a minimum 15 percent level of tax on the income arising in each jurisdiction in which they operate. Several jurisdictions in which we operate have enacted these rules, which are effective for the first quarter of fiscal 2025. We are continually monitoring developments and evaluating the potential impacts. At this time, we do not anticipate a material tax charge as a result of implementation of these rules.
Segment Results of Operations
Government Services Group ("GSG")
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
($ in thousands)
Revenue
$
2,483,355
$
2,158,889
$
324,466
15.0%
Subcontractor costs
(573,377)
(523,449)
(49,928)
(9.5)
Revenue, net of subcontractor costs
$
1,909,978
$
1,635,440
$
274,538
16.8
Income from operations
$
281,026
$
231,762
$
49,264
21.3%
For fiscal 2024, the revenue growth of 15.0% compared to fiscal 2023 primarily reflects higher U.S. federal government activities related to international development, U.S. state and local government activities related to advanced water treatment and contributions from our recent acquisitions. This growth was partially offset by lower disaster response activity. The revenue growth in fiscal 2024 includes a $122 million increase from the aforementioned international development activities in Ukraine compared to last year. For fiscal 2024, our revenue growth also includes approximately $128 million of revenue from our recent acquisitions, that did not have comparable revenue for all of fiscal 2023. Conversely, our revenue growth also includes decreased revenue from disaster response activities, which was approximately $46 million lower in fiscal 2024 compared to fiscal 2023. Excluding the acquisitions, increased activity in Ukraine and the partially offsetting lower disaster response revenue, our revenue increased 6.7% in fiscal 2024 compared to last year.
Operating income increased primarily due to the aforementioned revenue growth. Additionally, our fiscal 2023 operating income was reduced by $6.8 million of the aforementioned lease impairment charge. Excluding last year's lease impairment charge, our operating margin, based on revenue, net of subcontractor costs, increased to 14.7% in fiscal 2024 compared to 14.6% in fiscal 2023.
38
Commercial/International Services Group ("CIG")
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
($ in thousands)
Revenue
$
2,786,731
$
2,424,649
$
362,082
14.9%
Subcontractor costs
(374,847)
(309,000)
(65,847)
(21.3)
Revenue, net of subcontractor costs
$
2,411,884
$
2,115,649
$
296,235
14.0
Income from operations
$
328,510
$
243,750
$
84,760
34.8%
For fiscal 2024, the revenue growth of 14.9% compared to fiscal 2023 primarily reflects increased activities related to renewable energy and international sustainable infrastructure in addition to contributions from acquisitions. The revenue growth in fiscal 2024 includes approximately $205 million from the RPS acquisition that did not have comparable revenue in fiscal 2023. Excluding the impact of the RPS acquisition, our revenue increased 6.5% in fiscal 2024 compared to last year.
For fiscal 2024, our operating income increased due to the aforementioned revenue growth. Additionally, our operating income in fiscal 2023 was reduced by $8.3 million of the aforementioned lease impairment charge. Our operating margin also improved in fiscal 2024 compared to last year resulting in enhanced operating income. Excluding the lease impairment charge last year, our operating margin, based on revenue, net of subcontractor costs, improved approximately 170 basis points from 11.9% in fiscal 2023 to 13.6% in this fiscal year. The improved operating margin was primarily due to our increased focus on high-end consulting services, and improved project execution, particularly in the RPS operations.
Fiscal 2023 Compared to Fiscal 2022
Consolidated Results of Operations
Fiscal Year Ended
October 1, 2023
October 2, 2022
Change
$
%
($ in thousands, except per share data)
Revenue
$
4,522,550
$
3,504,048
$
1,018,502
29.1%
Subcontractor costs
(771,461)
(668,468)
(102,993)
(15.4)
Revenue, net of subcontractor costs (1)
3,751,089
2,835,580
915,509
32.3
Other costs of revenue
(3,026,060)
(2,260,021)
(766,039)
(33.9)
Gross profit
725,029
575,559
149,470
26.0
Selling, general and administrative expenses
(305,107)
(234,784)
(70,323)
(30.0)
Acquisition and integration expenses
(33,169)
—
(33,169)
NM
Right-of-use operating lease asset impairment
(16,385)
—
(16,385)
NM
Contingent consideration – fair value adjustments
(12,255)
(329)
(11,926)
NM
Income from operations
358,113
340,446
17,667
5.2
Interest expense – net
(46,537)
(11,584)
(34,953)
(301.7)
Other non-operating income
89,402
19,904
69,498
349.2
Income before income tax expense
400,978
348,766
52,212
15.0
Income tax expense
(127,526)
(85,602)
(41,924)
(49.0)
Net income
273,452
263,164
10,288
3.9
Net income attributable to noncontrolling interests
(32)
(39)
7
17.9
Net income attributable to Tetra Tech
$
273,420
$
263,125
$
10,295
3.9
Diluted earnings per share
$
1.02
$
0.97
$
0.05
5.2%
39
(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. In the course of 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 fiscal 2023, revenue and revenue, net of subcontractor costs, increased $1.02 billion, or 29.1%, and $915.5 million, or 32.3%, respectively, compared to fiscal 2022. Excluding the contribution from RPS, our revenue increased 12.0% in fiscal 2023 compared to the previous year. Our GSG segment's revenue and revenue, net of subcontractor costs, increased $338.0 million, or 18.6%, and $299.0 million, or 22.4%, respectively, in fiscal 2023 compared to fiscal 2022. Our CIG segment's revenue increased $686.2 million, or 39.5%, and revenue, net of subcontractor costs, increased $616.5 million, or 41.1% in fiscal 2023 compared to the previous year. Excluding the contribution from RPS, our CIG segment's revenue increased approximately 6.7% in fiscal 2023 compared to fiscal 2022 (9.5% on a constant currency basis).The fiscal 2023 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 our acquisition and integration costs related to the RPS acquisition, a related lease impairment charge and adjustments to contingent consideration liabilities in fiscal 2023, and a non-operating benefit from Employee Retention Credits ("ERC's") received in fiscal 2022. Our adjusted EPS also excludes non-operating gains on a foreign exchange contract of $89.4 million for fiscal 2023 and $19.9 million for fiscal 2022, as well as non-recurring tax expense items for fiscal 2023. The foreign exchange gain is reported as "Other non-operating income" in our consolidated statements of income. The effective tax rates applied to the adjustments to EPS to arrive at adjusted EPS average 26% for both fiscal 2023 and 2022. 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 respective periods as reflected in our consolidated statements of income.
Fiscal Year Ended
October 1, 2023
October 2, 2022
Change
$
%
($ in thousands, except per share data)
Income from operations
$
358,113
$
340,446
$
17,667
5.2%
Employee retention credits
—
(6,486)
6,486
NM
Acquisition and integration expenses
33,169
—
33,169
NM
Right-of-use operating lease asset impairment
16,385
—
16,385
NM
Earn-out adjustments
12,255
—
12,255
NM
Adjusted income from operations (1)
$
419,922
$
333,960
$
85,962
25.7%
EPS
$
1.02
$
0.97
$
0.05
5.2%
Employee retention credits
—
(0.02)
0.02
NM
Acquisition and integration expenses
0.11
—
0.11
NM
Right-of-use operating lease asset impairment
0.04
—
0.04
NM
Earn-out adjustments
0.04
—
0.04
NM
Foreign exchange forward contract gain
(0.25)
(0.06)
(0.19)
NM
Non-recurring tax items
0.08
—
0.08
NM
Adjusted EPS (1)
$
1.04
$
0.89
$
0.15
16.9%
NM = not meaningful
(1) Non-U.S. GAAP financial measure
Operating income increased $17.7 million, or 5.2%, in fiscal 2023 compared to fiscal 2022. The fiscal 2023 results include $33.2 million of acquisition and integration expenses (primarily investment banking, legal and other professional fees) for the RPS acquisition and a related $16.4 million of ROU lease asset impairment expense. The fiscal 2023 results also include losses of $12.3 million, related to changes in the estimated fair value of contingent earn-out liabilities. The fiscal 2022 results include the benefit of Employee Retention Credits ("ERC's") totaling $6.5 million, which represents reimbursement from the U.S. federal government under the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") for the costs that
40
we incurred during fiscal 2020 to address the coronavirus disease 2019 pandemic. These amounts were recognized in fiscal 2022 when the funds were received due to the uncertainty related to the computation of qualifying amounts and delayed processing times for our application. These amounts were primarily reflected as a reduction to "Other costs of revenue" in our consolidated statement of income and an increase to "Net cash provided by operating activities" in our consolidated statement of cash flows for fiscal 2022, consistent with the presentation of the related costs recognized in fiscal 2020.
Excluding the acquisition and integration expenses, ROU asset impairment, earn-out losses and the ERC's, our adjusted operating income increased $86.0 million, or 25.7% in fiscal 2023 compared to fiscal 2022. These increases reflect 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 $46.5 million and $11.6 million in fiscal 2023 and 2022, respectively. Net interest expense in fiscal 2023 included $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 and $1.1 million of additional expense for the write-off of previously deferred debt origination fees due to the repayment and cancellation of RPS' debt facilities.Excluding these write-offs, our interest expense increased $31.2 million in fiscal 2023 compared to fiscal 2022 primarily due to the additional borrowings to fund the RPS acquisition.
Other non-operating income of $89.4 million in fiscal 2023 and $19.9 million in fiscal 2022, reflect the previously described gain on a foreign exchange forward contract integrated with the RPS acquisition.
The effective tax rates for fiscal 2023 and 2022 were 31.8% and 24.5%, respectively. Income tax expense in fiscal 2023 included non-operating income tax expenses totaling $20.6 million to (i) increase the tax liability for uncertain tax positions related to certain U.S. tax credits and an intercompany financing transaction, (ii) recognize the tax liability for foreign earnings, primarily in the United Kingdom and Australia, that are no longer indefinitely reinvested. In addition, income tax expense was reduced by $4.6 million and $10.3 million of excess tax benefits on share-based payments in fiscal 2023 and 2022, respectively. Excluding the impact of the non-operating tax expenses in fiscal 2023 and the excess tax benefits on share-based payments in both years, our effective tax rates in fiscal 2023 and 2022 were 27.8% and 27.5%.
Segment Results of Operations
Government Services Group ("GSG")
Fiscal Year Ended
October 1, 2023
October 2, 2022
Change
$
%
($ in thousands)
Revenue
$
2,158,889
$
1,820,868
$
338,021
18.6%
Subcontractor costs
(523,449)
(484,412)
(39,037)
(8.1)
Revenue, net of subcontractor costs
$
1,635,440
$
1,336,456
$
298,984
22.4
Income from operations
$
231,762
$
198,448
$
33,314
16.8%
Revenue and revenue, net of subcontractor costs, increased $338.0 million, or 18.6%, and increased $299.0 million, or 22.4%, respectively, in fiscal 2023 compared to fiscal 2022. This increase includes approximately $70 million in revenue in the second quarter of fiscal 2023 related to a distinct international development funded energy program in Ukraine. In addition, the increases reflect higher U.S. state and local government activities related to digital water and U.S. federal programs, partially offset by lower disaster response revenue.
Operating income increased $33.3 million in fiscal 2023 compared to fiscal 2022. The increase in operating income is consistent with the revenue increase noted above. The fiscal 2023 results were reduced by $6.8 million of the aforementioned lease impairment charge and the fiscal 2022 results included $4.4 million of the aforementioned ERC's. Our operating margin, based on revenue, net of subcontractor costs, was 14.2% in fiscal 2023 compared to 14.8% the previous year. Excluding the lease impairment charge in fiscal 2023 and the ERC's in fiscal 2022, our operating margin increased to 14.6% in fiscal 2023 from 14.5% in fiscal 2022.
41
Commercial/International Services Group ("CIG")
Fiscal Year Ended
October 1, 2023
October 2, 2022
Change
$
%
($ in thousands)
Revenue
$
2,424,649
$
1,738,436
$
686,213
39.5%
Subcontractor costs
(309,000)
(239,312)
(69,688)
(29.1)
Revenue, net of subcontractor costs
$
2,115,649
$
1,499,124
$
616,525
41.1
Income from operations
$
243,750
$
194,142
$
49,608
25.6%
Revenue and revenue, net of subcontractor costs, increased $686.2 million, or 39.5%, and increased $616.5 million, or 41.1%, respectively, in fiscal 2023 compared to fiscal 2022. The RPS acquisition contributed approximately $570 million to revenue growth in fiscal 2023. The remaining revenue growth in fiscal 2023 primarily reflects increased activity on high-performance buildings, clean energy and international infrastructure.
Operating income increased $49.6 million in fiscal 2023 compared to fiscal 2022. The RPS acquisition contributed approximately $34 million to operating income in fiscal 2023. Conversely, the fiscal 2023 results were reduced by $8.3 million of the aforementioned lease impairment charge. The fiscal 2022 operating income included $1.9 million of the aforementioned ERC's. Our operating margin, based on revenue, net of subcontractor costs, was 11.5% in fiscal 2023 compared to 13.0% in fiscal 2022. Excluding the lease impairment and RPS in fiscal 2023 and the ERC's in fiscal 2022, our operating margin was 13.3% in fiscal 2023 compared to 12.8% in fiscal 2022. The improved operating margin was primarily due to our increased focus on high-end consulting services, project execution and higher labor utilization.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements.At September 29, 2024, we had $232.7 million of cash and cash equivalents and access to an additional $800 million of borrowing available under our credit facility. We generated $358.7 million of cash from operations in fiscal 2024. 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 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 fiscal 2024 and 2023, we did not repurchase any shares of our common stock.At fiscal 2024 year-end, we had a remaining balance of $347.8 million under our stock repurchase program. We declared and paid common stock dividends totaling $58.8 million, or $0.220 per share, in fiscal 2024 compared to $52.1 million, or $0.196 per share, in fiscal 2023.
Subsequent Events.On November 11, 2024, our Board of Directors declared a quarterly cash dividend of $0.058 per share payable on December 13, 2024 to stockholders of record as of the close of business on November 27, 2024.
Cash and Cash Equivalents. The following tables summarize information regarding our cash and cash equivalents (amounts in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
Cash and cash equivalents
$
232,689
$
168,831
$
63,858
37.8%
42
Fiscal Year Ended
September 29, 2024
October 1, 2023
Change
$
%
Net cash provided by (used in):
Operating activities
$
358,708
$
368,463
$
(9,755)
(2.6)%
Investing activities
(111,043)
(771,199)
660,156
85.6
Financing activities
(191,380)
382,380
(573,760)
(150.0)
Effect of exchange rate changes
7,573
4,093
3,480
85.0
Net increase (decrease) in cash and cash equivalents
$
63,858
$
(16,263)
$
80,121
492.7%
Operating Activities. Cash from operations in fiscal 2024 decreased 2.6% compared to fiscal 2023. Our cash flow from operations in fiscal 2023 benefited from improved management of working capital through faster collection of accounts receivable compared to previous years. This trend was stable in fiscal 2024. For fiscal 2024, we paid $10.5 million less in interest compared to last year, primarily due the lower borrowing costs from our convertible notes issued in the fourth quarter of fiscal 2023, which we used to refinance the existing higher-cost debt incurred to fund the RPS acquisition in the second quarter of fiscal 2023. This improvement and the benefit of higher earnings in fiscal 2024 were substantially offset by higher income tax payments. We paid $27 million in U.S. federal income tax in the first quarter of fiscal 2024 that typically would have been made in fiscal 2023, but the IRS permitted, and we elected, 2023 federal tax payment deferrals for entities in disaster zones.
Investing Activities.For fiscal 2024, the cash used in investing activities includes net payments of $94 million for the acquisitions completed during the year. The fiscal 2023 period reflects $854 million of net payments for the acquisitions completed last year (primarily RPS), net of the $109 million of related foreign exchange hedge proceeds received in the second quarter of fiscal 2023.
Financing Activities.For fiscal 2024, net cash provided by financing activities declined. The decrease was due to a net borrowing of $544 million in fiscal 2023 versus net debt repayments of $70 million in fiscal 2024. The fiscal 2023 borrowings were used primarily to fund our fiscal 2023 acquisitions. To a lesser extent, the decline in our net cash provided by financing activities was due to $25 million more cash used for contingent earn-out payments in fiscal 2024 compared to last year.
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 in January 2026.
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 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. In fiscal 2023, we repaid the Amended Term Loan Facility in full with the Convertible Notes proceeds.
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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 9, "Long-Term Debt" of the "Notes to Consolidated Financial Statements" in Item 8 for further discussion.
At fiscal 2024 year-end, we had $250 million in outstanding borrowings under the Amended Credit Agreement, which consisted of $250 million under the New Term Loan Facility and no borrowings under the Amended Revolving Credit Facility. The weighted-average interest rate of the outstanding borrowings under the Amended Credit Agreement during fiscal 2024 was 6.70%. In addition, we had $0.7 million in standby letters of credit under the Amended Credit Agreement. At September 29, 2024, we had $499.3 million of available credit under the Amended Revolving Credit Facility, all of which could be borrowed without a violation of our debt covenants. Commitment fees related to our revolving credit facilities were $0.8 million, $0.6 million, and $0.7 million for fiscal year 2024, 2023 and 2022, respectively.
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 September 29, 2024, we were in compliance with these covenants with a consolidated leverage ratio of 1.38x and a consolidated interest coverage ratio of 13.94x.
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 September 29, 2024, there were no outstanding borrowings under these facilities, and the aggregate amount of standby letters of credit outstanding was $43.3 million. As of September 29, 2024, 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.
Dividends.Our Board of Directors has authorized the following dividends:
Dividend Per Share
Record Date
Total Maximum Payment (in thousands)
Payment Date
November 13, 2023
$
0.052
November 30, 2023
$
13,873
December 13, 2023
January 29, 2024
$
0.052
February 14, 2024
$
13,908
February 27, 2024
April 29, 2024
$
0.058
May 20, 2024
$
15,522
May 31, 2024
July 29, 2024
$
0.058
August 15, 2024
$
15,525
August 30, 2024
November 11, 2024
$
0.058
November 27, 2024
N/A
December 13, 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 the end of fiscal 2024 and 2023, the liability for income taxes associated with uncertain tax positions was $50.1 million and $62.0 million, respectively.
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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 issuance 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 fiscal 2024 year-end, we had $0.7 million in standby letters of credit outstanding under our Amended Credit Agreement and $43.3 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 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 AND ESTIMATES
The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions in the application of certain accounting policies that affect amounts reported in our consolidated financial statements and accompanying footnotes included in Item 8 of this report. In order to understand better the changes that may occur to our financial condition, results of operations and cash flows, readers should be aware of the critical accounting policies we apply and estimates we use in preparing our consolidated financial statements. Although such estimates and assumptions are based on management's best knowledge of current events and actions we may undertake in the future, actual results could differ materially from those estimates.
Our significant accounting policies are described in the "Notes to Consolidated Financial Statements" included in Item 8. Highlighted below are the accounting policies that management considers most critical to investors' understanding of our financial results and condition, and that require complex judgments by management.
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Revenue Recognition and Contract Costs
To determine the proper revenue recognition method for contracts under Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers", we evaluate whether multiple contracts should be combined and accounted for as a single contract and whether the combined or single contract should be accounted for as having more than one performance obligation. The decision to combine a group of contracts or separate a combined or single contract into multiple performance obligations may impact the amount of revenue recorded in a given period. Contracts are considered to have a single performance obligation if the promises are not separately identifiable from other promises in the contracts.
At contract inception, we assess the goods or services promised in a contract and identify, as a separate performance obligation, each distinct promise to transfer goods or services to the customer. The identified performance obligations represent the “units of account” for purposes of determining revenue recognition. In order to properly identify separate performance obligations, we apply judgment in determining whether each good or service provided is: (a) capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (b) distinct within the context of the contract, whereby the transfer of the good or service to the customer is separately identifiable from other promises in the contract.
Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from existing contracts due to the significant integration provided or significant interdependencies in the context of the contract and are accounted for as if they were part of the original contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
We account for contract modifications as a separate contract when the modification results in the promise to deliver additional goods or services that are distinct and the increase in price of the contract is for the same amount as the stand-alone selling price of the additional goods or services included in the modification.
The transaction price represents the amount of consideration to which we expect to be entitled in exchange for transferring promised goods or services to our customers. The consideration promised within a contract may include fixed amounts, variable amounts or both. The nature of our contracts gives rise to several types of variable consideration, including claims, award fee incentives, fiscal funding clauses and liquidated damages. We recognize revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized for the contract will not occur. We estimate the amount of revenue to be recognized on variable consideration using either the expected value or the most likely amount method, whichever is expected to better predict the amount of consideration to be received. Project mobilization costs are generally charged to project costs as incurred when they are an integrated part of the performance obligation being transferred to the client.
For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation using a best estimate of the standalone selling price of each distinct good or service in the contract. The standalone selling price is typically determined using the estimated cost of the contract plus a margin approach. For contracts containing variable consideration, we allocate the variability to a specific performance obligation within the contract if such variability relates specifically to our efforts to satisfy the performance obligation or transfer the distinct good or service, and the allocation depicts the amount of consideration to which we expect to be entitled.
We recognize revenue over time as the related performance obligation is satisfied by transferring control of a promised good or service to our customers. Progress toward complete satisfaction of the performance obligation is primarily measured using a cost-to-cost measure of progress method. The cost input is based primarily on contract cost incurred to date compared to total estimated contract cost. This measure includes forecasts based on the best information available and reflects our judgment to faithfully depict the value of the services transferred to the customer. For certain on-call engineering or consulting and similar contracts, we recognize revenue in the amount which we have the right to invoice the customer if that amount corresponds directly with the value of our performance completed to date.
Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost measure of progress method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs indicates a loss, a provision for the entire estimated loss on the contract is made in the period in which the loss becomes evident.
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Contract Types
Our services are performed under three principal types of contracts: fixed-price, time-and-materials and cost-plus. Customer payments on contracts are typically due within 60 days of billing, depending on the contract.
Fixed-Price. Under fixed-price contracts, clients pay us an agreed fixed-amount negotiated in advance for a specified scope of work.
Time-and-Materials.Under time-and-materials contracts, we negotiate hourly billing rates and charge our clients based on the actual time that we spend on a project. In addition, clients reimburse us for our actual out-of-pocket costs for materials and other direct incidental expenditures that we incur in connection with our performance under the contract. Most of our time-and-material contracts are subject to maximum contract values, and also may include annual billing rate adjustment provisions.
Cost-Plus. Under cost-plus contracts, we are reimbursed for allowed or otherwise defined costs incurred plus a negotiated fee. The contracts may also include incentives for various performance criteria, including quality, timeliness, ingenuity, safety and cost-effectiveness. In addition, our costs are generally subject to review by our clients and regulatory audit agencies, and such reviews could result in costs being disputed as non-reimbursable under the terms of the contract.
Goodwill and Intangibles
The cost of an acquired company is assigned to the tangible and intangible assets purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets and liabilities acquired requires us to make estimates and use valuation techniques when a market value is not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. Goodwill typically represents the value paid for the assembled workforce and enhancement of our service offerings.
Identifiable intangible assets primarily include backlog, client relations and trade names. The costs of these intangible assets are amortized over their contractual or economic lives, which range from one to 12 years. We assess the recoverability of the unamortized balance of our intangible assets when indicators of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. Should the review indicate that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of the intangible assets would be recognized as an impairment loss.
Estimated fair value measurements for intangible assets are made using Level 3 inputs including discounted cash flow techniques. Fair value is 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.
We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. In addition, we regularly evaluate whether events and circumstances have occurred that may indicate a potential change in recoverability of goodwill. We perform interim goodwill impairment reviews between our annual reviews if certain events and circumstances have occurred, including a deterioration in general economic conditions, an increased 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 (see Note 6, "Goodwill and Intangible Assets" of the "Notes to Consolidated Financial Statements" in Item 8 for further discussion).
We believe the methodology that we use to review impairment of goodwill, which includes a significant amount of judgment and estimates, provides us with a reasonable basis to determine whether impairment has occurred. However, many of the factors employed in determining whether our goodwill is impaired are outside of our control, and it is reasonably likely that assumptions and estimates will change in future periods. These changes could result in future impairments.
The goodwill impairment review involves the determination of the fair value of our reporting units, which for us are the components one level below our reportable segments. This process requires us to make significant judgments and estimates, including assumptions about our strategic plans with regard to our operations as well as the interpretation of current economic indicators and market valuations. Furthermore, the development of the present value of future cash flow projections includes assumptions and estimates derived from a review of our expected revenue growth rates, operating profit margins, business plans, discount rates and terminal growth rates. We also make certain assumptions about future market conditions, market prices, interest rates and changes in business strategies. Changes in assumptions or estimates could materially affect the determination of the fair value of a reporting unit. This could eliminate the excess of fair value over carrying value of a reporting unit entirely and, in some cases, result in impairment. Such changes in assumptions could be caused by a loss of one or more significant contracts, reductions in government or commercial client spending or a decline in the demand for our services due to changing economic conditions. In the event that we determine that our goodwill is impaired, we would be
47
required to record a non-cash charge that could result in a material adverse effect on our results of operations or financial position.
We use two methods to determine the fair value of our reporting units: (i) the Income Approach and (ii) the Market Approach. While each of these approaches is initially considered in the valuation of the business enterprises, the nature and characteristics of the reporting units indicate which approach is most applicable. The Income Approach utilizes the discounted cash flow method, which focuses on the expected cash flow of the reporting unit. In applying this approach, the cash flow available for distribution is calculated for a finite period of years. Cash flow available for distribution is defined, for purposes of this analysis, as the amount of cash that could be distributed as a dividend without impairing the future profitability or operations of the reporting unit. The cash flow available for distribution and the terminal value (the value of the reporting unit at the end of the estimation period) are then discounted to present value to derive an indication of the value of the business enterprise. The Market Approach is comprised of the guideline company method and the similar transactions method. The guideline company method focuses on comparing the reporting unit to select reasonably similar (or "guideline") publicly traded companies. Under this method, valuation multiples are (i) derived from the operating data of selected guideline companies; (ii) evaluated and adjusted based on the strengths and weaknesses of the reporting units relative to the selected guideline companies; and (iii) applied to the operating data of the reporting unit to arrive at an indication of value. In the similar transactions method, consideration is given to prices paid in recent transactions that have occurred in the reporting unit's industry or in related industries. For our annual impairment analysis, we weighted the Income Approach and the Market Approach at 70% and 30%, respectively. The Income Approach was given a higher weight because it has the most direct correlation to the specific economics of the reporting unit, as compared to the Market Approach, which is based on multiples of broad-based (i.e., less comparable) companies. Our last review at July 1, 2024 (i.e., the first day of our fourth quarter in fiscal 2024), 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. We had no reporting units that had estimated fair values that exceeded their carrying values by less than 72%.
Contingent Consideration
Certain of our acquisition agreements include contingent earn-out arrangements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based upon 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 these 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 "Estimated contingent earn-out liabilities" and "Long-term estimated 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 shareholders 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 (See Note 2, "Basis of Presentation – Fair Value of Financial Instruments" of the "Notes to Consolidated Financial Statements" included in Item 8). We use a probability weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period (generally two or three years), and the probability outcome percentages we assign to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the 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 liability on the acquisition date is reflected as cash used in operating activities in our consolidated statements of cash flows.
We review and re-assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income.
RECENT ACCOUNTING PRONOUNCEMENTS
48
For a discussion of recent accounting standards and the effect they could have on the consolidated financial statements, see Note 2, "Basis of Presentation" of the "Notes to Consolidated Financial Statements" included in Item 8.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
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 less 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 September 29, 2024, we had $250 million in outstanding borrowings under the Amended Credit Agreement, which was consisted of $250 million under the New Term Loan Facility, and no borrowings under the Amended Revolving Credit Facility. The year-to-date weighted-average interest rate of the outstanding borrowings during fiscal 2024 was 6.70%.
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 British Pound. Therefore, we are subject to currency exposure and volatility because of currency fluctuations. We attempt to minimize our exposure to these fluctuations by matching revenue and expenses in the same currency for our contracts. We reported $1.8 million of foreign currency losses in fiscal 2024 in “Selling, general and administrative expenses” on our consolidated statement of income. The impact of foreign currency was immaterial in fiscal 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 transactions 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 fiscal 2024 and 2023, 38.5% and 36.7% of our consolidated revenue, respectively, was generated by our international business. For fiscal 2024, the effect of foreign exchange rate translation on the consolidated balance sheets was an increase in equity of $115.1 million compared to an increase in equity of $12.6 million in fiscal 2023. These amounts were recognized as an adjustment to equity through other comprehensive income.
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 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 for cash proceeds of $109.3 million and we recognized additional gains of $89.4 million in fiscal 2023. All gains related to this transaction were reported in “Other non-operating income" on our consolidated income statements for the respective periods.
49
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To theBoard of Directors and Stockholders of Tetra Tech, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Tetra Tech, Inc. and its subsidiaries (the “Company”) as of September 29, 2024 and October 1, 2023, and the related consolidated statements of income, of comprehensive income, of equity and of cash flows for each of the three years in the period ended September 29, 2024, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of September 29, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 29, 2024 and October 1, 2023, and the results of its operations and its cash flows for each of the three years in the period ended September 29, 2024 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 29, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management's Report on Internal Control over Financial Reporting, management has excluded LS Technologies ("LST") from its assessment of internal control over financial reporting as of September 29, 2024 because it was acquired by the Company in a purchase business combination during 2024. We have also excluded LST from our audit of internal control over financial reporting. LST is a wholly-owned subsidiary whose total assets and total revenues excluded from management's assessment and our audit of internal control over financial reporting represent 1.4% and 1.7%, respectively, of the related consolidated financial statement amounts as of and for the year ended September 29, 2024.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
51
Critical Audit Matters
The critical audit matter communicated below is a matterarising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Certain fixed-price, time-and-materials and cost-plus contracts
As described in Note 3 to the consolidated financial statements, the Company recognized revenue of $5,199 million for the year ended September 29, 2024, of which a majority relates to revenue recognized for certain fixed-price, time-and-materials and cost-plus contracts. The Company recognizes revenue over time as the related performance obligation is satisfied by transferring control of a promised good or service to the Company's customers. Progress toward complete satisfaction of the performance obligation is primarily measured using a cost-to-cost measure of progress method. The cost input is based primarily on contract cost incurred to date compared to total estimated contract cost. This measure includes forecasts based on the best information available and reflects management's judgment to depict the value of the services transferred to the customer. For those performance obligations for which revenue is recognized using a cost-to-cost measure of progress method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. For certain on-call engineering or consulting and similar contracts, the Company recognizes revenue in the amount which they have the right to invoice the customer if that amount corresponds directly with the value of the performance completed to date. Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term.
The principal consideration for our determination that performing procedures relating to revenue recognition for certain fixed-price, time-and-materials and cost-plus contracts is a critical audit matter is a high degree of audit effort in performing procedures related to the Company's revenue recognition.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process. These procedures also included, among others, (i) evaluating management’s significant accounting policies related to revenue recognition; (ii) for certain fixed-price contracts, testing management's process for developing the estimate of total contract cost for a sample of contracts with cumulative catch-up adjustments and anticipated losses or claims, and evaluating the contract terms and other documents that support the changes in total estimated contract costs; (iii) assessing, for a sample of fixed-price contracts, estimated total contract costs by performing a comparison of the total estimated contract cost as compared with prior period estimates and evaluating the timely identification of circumstances that may warrant a modification to the total estimated contract cost; (iv) evaluating, for certain contracts, management’s methodologies and assessing the consistency of management’s methodology over the life of the contract; (v) re-calculating revenue recognized based on the contract value, year-to-date costs, and total estimated costs to complete; (vi) testing the existence and accuracy of total contract revenue recorded, on a sample basis, by obtaining and inspecting source documents such as contracts and purchase orders; (vii) for certain on-call engineering or consulting contracts where revenue is recognized using the practical expedient right to invoice, testing the accuracy of revenue recognized, on a sample basis by obtaining and inspecting source documents, such as contracts and purchase orders; and (viii) for certain contracts, testing the completeness and accuracy of costs incurred to date, on a sample basis, by obtaining and inspecting source documents, such as invoices and timecards.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
November 19, 2024
We have served as the Company’s auditor since 2004.
52
Tetra Tech, Inc.
Consolidated Balance Sheets
(in thousands, except par value)
Fiscal Year Ended
ASSETS
September 29, 2024
October 1, 2023
Current assets:
Cash and cash equivalents
$
232,689
$
168,831
Accounts receivable, net
1,051,461
974,535
Contract assets
129,678
113,939
Prepaid expenses and other current assets
91,585
89,096
Income taxes receivable
21,970
9,623
Total current assets
1,527,383
1,356,024
Property and equipment, net
73,065
74,832
Right-of-use assets, operating leases
177,950
175,932
Goodwill
2,046,569
1,880,244
Intangible assets, net
160,585
173,936
Deferred tax assets
105,529
89,002
Other non-current assets
101,595
70,507
Total assets
$
4,192,676
$
3,820,477
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
$
197,440
$
173,271
Accrued compensation
332,096
302,755
Contract liabilities
351,738
335,044
Short-term lease liabilities, operating leases
63,419
65,005
Current contingent earn-out liabilities
26,934
51,108
Other current liabilities
247,900
280,959
Total current liabilities
1,219,527
1,208,142
Deferred tax liabilities
30,162
14,256
Long-term debt
812,634
879,529
Long-term lease liabilities, operating leases
140,095
144,685
Non-current contingent earn-out liabilities
21,812
22,314
Other non-current liabilities
138,033
148,045
Commitments and contingencies (Note 18)
Equity:
Preferred stock – Authorized, 2,000 shares of $0.01 par value; no shares issued and outstanding at September 29, 2024 and October 1, 2023
—
—
Common stock – Authorized, 750,000 shares of $0.01 par value; issued and outstanding, 267,717 and 266,238 shares at September 29, 2024 and October 1, 2023, respectively
2,677
2,662
Additional paid-in capital
35,900
—
Accumulated other comprehensive loss
(78,875)
(195,295)
Retained earnings
1,870,620
1,596,066
Tetra Tech stockholders' equity
1,830,322
1,403,433
Noncontrolling interests
91
73
Total stockholders' equity
1,830,413
1,403,506
Total liabilities and stockholders' equity
$
4,192,676
$
3,820,477
See accompanying Notes to Consolidated Financial Statements.
53
Tetra Tech, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Revenue
$
5,198,679
$
4,522,550
$
3,504,048
Subcontractor costs
(876,817)
(771,461)
(668,468)
Other costs of revenue
(3,455,422)
(3,026,060)
(2,260,021)
Gross profit
866,440
725,029
575,559
Selling, general and administrative expenses
(356,024)
(305,107)
(234,784)
Acquisition and integration expenses
(7,138)
(33,169)
—
Right-of-use operating lease asset impairment
—
(16,385)
—
Contingent consideration – fair value adjustments
(2,541)
(12,255)
(329)
Income from operations
500,737
358,113
340,446
Interest income
7,288
5,898
1,780
Interest expense
(44,559)
(52,435)
(13,364)
Other non-operating income
—
89,402
19,904
Income before income tax expense
463,466
400,978
348,766
Income tax expense
(130,023)
(127,526)
(85,602)
Net income
333,443
273,452
263,164
Net income attributable to noncontrolling interests
(61)
(32)
(39)
Net income attributable to Tetra Tech
$
333,382
$
273,420
$
263,125
Earnings per share attributable to Tetra Tech:
Basic
$
1.25
$
1.03
$
0.98
Diluted
$
1.23
$
1.02
$
0.97
Weighted-average common shares outstanding:
Basic
267,364
266,015
268,100
Diluted
270,042
268,185
270,815
See accompanying Notes to Consolidated Financial Statements.
54
Tetra Tech, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Net income
$
333,443
$
273,452
$
263,164
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of tax
115,120
12,622
(94,933)
(Loss) gain on cash flow hedge valuations, net of tax
—
(2,412)
11,806
Net pension adjustments
1,300
2,638
—
Other comprehensive income (loss), net of tax
116,420
12,848
(83,127)
Comprehensive income, net of tax
$
449,863
$
286,300
$
180,037
Less: comprehensive income attributable to noncontrolling interests, net of tax
61
31
28
Comprehensive income attributable to Tetra Tech, net of tax
$
449,802
$
286,269
$
180,009
See accompanying Notes to Consolidated Financial Statements.
55
Tetra Tech, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Cash flows from operating activities:
Net income
$
333,443
$
273,452
$
263,164
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
73,677
61,206
27,033
Amortization of stock-based awards
31,155
28,607
26,227
Deferred income taxes
(19,980)
(21,204)
2,175
Fair value adjustments to contingent consideration
2,541
12,255
329
Right-of-use operating lease asset impairment
—
16,385
—
Fair value adjustment to foreign currency forward contract
—
(89,402)
(19,904)
Acquisition and integration expenses
7,138
—
—
Other non-cash items
5,369
975
(1,245)
Changes in operating assets and liabilities, net of effects of business acquisitions:
Accounts receivable and contract assets
(40,188)
(19,783)
(89,781)
Prepaid expenses and other assets
(20,894)
78,686
69,697
Accounts payable
18,091
(19,214)
17,099
Accrued compensation
6,657
37,094
27,458
Contract liabilities
4,704
44,152
55,915
Cash settled contingent earn-out liability
(7,943)
—
—
Income taxes receivable/payable
(35,530)
40,527
14,627
Other liabilities
468
(75,273)
(56,606)
Net cash provided by operating activities
358,708
368,463
336,188
Cash flows from investing activities:
Payments for business acquisitions, net of cash acquired
(93,650)
(854,319)
(49,124)
Settlement of foreign currency forward contract
—
109,306
—
Capital expenditures
(18,135)
(26,901)
(10,582)
Proceeds from sales of assets
742
715
3,966
Net cash used in investing activities
(111,043)
(771,199)
(55,740)
Cash flows from financing activities:
Proceeds from borrowings
217,000
994,859
161,456
Repayments on long-term debt
(287,000)
(1,026,051)
(117,080)
Proceeds from issuance of convertible notes
—
575,000
—
Payments of debt issuance costs
—
(14,451)
—
Capped call transactions
—
(51,750)
—
Repurchases of common stock
—
—
(200,000)
Shares repurchased for tax withholdings on share-based awards
(12,982)
(16,833)
(25,223)
Payments of contingent earn-out liabilities
(46,107)
(21,328)
(20,124)
Stock options exercised
3,067
626
1,806
Dividends paid
(58,828)
(52,113)
(46,099)
Principal payments on finance leases
(6,530)
(5,579)
(4,344)
Net cash (used in) provided by financing activities
(191,380)
382,380
(249,608)
Effect of exchange rate changes on cash and cash equivalents
7,573
4,093
(12,314)
Net increase (decrease) in cash and cash equivalents
63,858
(16,263)
18,526
Cash and cash equivalents at beginning of year
168,831
185,094
166,568
Cash and cash equivalents at end of year
$
232,689
$
168,831
$
185,094
Supplemental information:
Cash paid during the year for:
Interest
$
36,855
$
47,367
$
13,378
Income taxes, net of refunds received of $4.2 million, $2.2 million and $4.8 million
$
180,707
$
93,176
$
70,799
See accompanying Notes to Consolidated Financial Statements.
56
Tetra Tech, Inc.
Consolidated Statements of Equity
Fiscal Years Ended October 2, 2022, October 1, 2023, and September 29, 2024
(in thousands)
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive (Loss) Income
Retained Earnings
Total Tetra Tech Equity
Non-Controlling Interests
Total Equity
Shares
Amount
BALANCE AT OCTOBER 3, 2021
53,981
$
540
$
—
$
(125,028)
$
1,358,726
$
1,234,238
$
53
$
1,234,291
Issuance of shares under five-for-one stock split
215,926
2,160
—
—
(2,160)
—
—
—
Comprehensive income, net of tax:
Net income
—
—
—
—
263,125
263,125
39
263,164
Foreign currency translation adjustments
—
—
—
(94,922)
—
(94,922)
(11)
(94,933)
Gain on cash flow hedge valuations
—
—
—
11,806
—
11,806
—
11,806
Comprehensive income, net of tax
180,009
28
180,037
Distributions paid to noncontrolling interests
—
—
—
—
—
—
(31)
(31)
Cash dividends of $0.172 per common share
—
—
—
—
(46,099)
(46,099)
—
(46,099)
Stock-based compensation
—
—
26,227
—
—
26,227
—
26,227
Restricted & performance shares released
944
10
(25,233)
—
—
(25,223)
—
(25,223)
Stock options exercised
229
—
1,806
—
—
1,806
—
1,806
Shares issued for Employee Stock Purchase Plan
531
5
12,124
—
—
12,129
—
12,129
Stock repurchases
(6,708)
(65)
(14,884)
—
$
(185,051)
(200,000)
—
(200,000)
Reclassification of APIC
—
—
(40)
—
40
—
—
—
BALANCE AT OCTOBER 2, 2022
264,903
2,650
—
(208,144)
1,388,581
1,183,087
50
1,183,137
Comprehensive income, net of tax:
Net income
—
—
—
—
273,420
273,420
32
273,452
Foreign currency translation adjustments
—
—
—
12,623
—
12,623
(1)
12,622
Pension
—
—
—
2,638
—
2,638
—
2,638
Gain on cash flow hedge valuations
—
—
—
(2,412)
—
(2,412)
—
(2,412)
Comprehensive income, net of tax
286,269
31
286,300
Distributions paid to noncontrolling interests
—
—
—
—
—
—
(8)
(8)
Cash dividends of $0.196 per common share
—
—
—
—
(52,113)
(52,113)
—
(52,113)
Stock-based compensation
—
—
28,607
—
—
28,607
—
28,607
Restricted & performance shares released
746
7
(16,840)
—
—
(16,833)
—
(16,833)
Stock options exercised
97
—
626
—
—
626
—
626
Shares issued for Employee Stock Purchase Plan
492
5
12,623
—
—
12,628
—
12,628
Reclassification of APIC
—
—
26,734
—
(26,734)
—
—
—
57
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive (Loss) Income
Retained Earnings
Total Tetra Tech Equity
Non-Controlling Interests
Total Equity
Shares
Amount
Capped call transactions
—
—
(51,750)
—
12,912
(38,838)
—
(38,838)
BALANCE AT OCTOBER 1, 2023
266,238
2,662
—
(195,295)
1,596,066
1,403,433
73
1,403,506
Comprehensive income, net of tax:
Net income
—
—
—
—
333,382
333,382
61
333,443
Foreign currency translation adjustments
—
—
—
115,120
—
115,120
—
115,120
Pension
—
—
—
1,300
—
1,300
—
1,300
Comprehensive income, net of tax
449,802
61
449,863
Distributions paid to noncontrolling interests
—
—
—
—
—
—
(43)
(43)
Cash dividends of $0.220per common share
—
—
—
—
(58,828)
(58,828)
—
(58,828)
Stock-based compensation
—
—
31,155
—
—
31,155
—
31,155
Restricted & performance shares released
547
5
(12,987)
—
—
(12,982)
—
(12,982)
Stock options exercised
410
4
3,063
—
—
3,067
—
3,067
Shares issued for Employee Stock Purchase Plan
522
6
14,669
—
—
14,675
—
14,675
BALANCE AT SEPTEMBER 29, 2024
267,717
$
2,677
$
35,900
$
(78,875)
$
1,870,620
$
1,830,322
$
91
$
1,830,413
See accompanying Notes to Consolidated Financial Statements.
58
Tetra Tech, Inc.
Notes to Consolidated Financial Statements
1. Description of Business
We are a leading global provider of high-end consulting and engineering services that focuses on water, environment and sustainable infrastructure. 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 solutions may span the entire life cycle of high-end consulting and engineering projects and include applied science, data analysis, research, engineering, design, project management and operations and maintenance.
We manage our business 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 Services Group (“CIG”) reportable segment primarily includes activities with U.S. commercial clients and international clients other than development agencies.
2. Basis of Presentation
Principles of Consolidation. The accompanying consolidated financial statements include our accounts and those of joint ventures of which we are the primary beneficiary and are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and expressed in U.S. dollars. All significant intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year. We operate on a 52 or 53-week year, ending on the Sunday nearest September 30. Fiscal years 2024, 2023 and 2022 are 52-week years.
Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Although such estimates and assumptions are based on management's best knowledge of current events and actions we may take in the future, actual results could differ materially from those estimates. On an on-going basis, we evaluate our estimates based on historical facts and other assumptions that we believe are reasonable.
Stock Split. On July 29, 2024, our Board of Directors approved a five-for-one stock split of our common stock. The stock split had a record date of September 5, 2024 and an effective date of September 6, 2024. The par value per share of our common stock remains unchanged at $0.01 per share after the stock split. All prior-period share or per share amounts presented herein have been retroactively adjusted to reflect the stock split.
Cash and Cash Equivalents. Cash and cash equivalents include highly liquid investments with original maturities of 90 days or less. Occasionally, we have bank overdrafts, which occur when a bank honors disbursements in excess of funds on deposit in our bank accounts. We classify bank overdrafts as short-term borrowings on our consolidated balance sheets, and report the change in overdrafts as a financing activity in our consolidated statements of cash flows.
Insurance Matters, Litigation and Contingencies. In the normal course of business, we are subject to certain contractual guarantees and litigation. In addition, we maintain insurance coverage for various aspects of our business and operations. We record in our consolidated balance sheets amounts representing our estimated liability for these legal and insurance obligations. Any adjustments to these liabilities are recorded in our consolidated statements of income.
Accounts Receivable - Net. Net accounts receivable consists of billed and unbilled accounts receivable, and allowances for doubtful accounts. 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 fiscal 2024 year-end are expected to be billed and collected within 12 months. Unbilled accounts receivable also include amounts related to requests for equitable adjustment to contracts that provide for price redetermination. These amounts are recorded only when they can be reliably estimated, and realization is probable. The allowance for doubtful accounts represents amounts that are expected to become uncollectible or unrealizable in the future. We determine an estimated allowance for uncollectible accounts based on management's consideration of trends in the actual and forecasted credit quality of our clients, including delinquency and payment history; type of client, such as a government agency or a commercial sector client; and general economic and industry conditions that may affect our clients' ability to pay.
Contract Assets and Contract Liabilities. Contract assets represent revenue recognized in excess of the amounts for which we have the contractual right to bill our customers. 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
59
liabilities represent the amount of cash collected from clients and billings to clients on contracts in advance of work performed and revenue recognized. The majority of these amounts are expected be earned within 12 months and are classified as current liabilities.
Prepaid and other current assets. Prepaid assets consist primarily of payments for insurance and software costs and are amortized over the estimated period of benefit. Other current assets include primarily sales/services and use tax receivables from our U.S and foreign operations.
Property and Equipment. Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from our consolidated balance sheets and any resulting gain or loss is reflected in our consolidated statements of income. Expenditures for maintenance and repairs are expensed as incurred. Generally, estimated useful lives range from three to seven years for equipment, furniture and fixtures. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease term. Assets held for sale are measured at the lower of carrying amount (i.e., net book value) and fair value less cost to sell, and are reported within "Prepaid expenses and other current assets" on our consolidated balance sheets. Once assets are classified as held for sale, they are no longer depreciated.
Long-Lived Assets. We evaluate the recoverability of our long-lived assets when the facts and circumstances suggest that the assets may be impaired. This assessment is performed based on the estimated undiscounted cash flows compared to the carrying value of the assets. If the future cash flows (undiscounted and without interest charges) are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.
Leases. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, and current and long-term operating lease liabilities in the consolidated balance sheets. Our finance leases are reported in "Other long-term assets", "Other current liabilities" and "Other long-term liabilities" on our consolidated balance sheet.
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 the 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.
We recognize a liability for contract termination costs associated with an exit activity for costs that will continue to be incurred under a lease for its remaining term without economic benefit to us, initially measured at its fair value at the cease-use date. The fair value is determined based on the remaining lease rentals, adjusted for the effects of any prepaid or deferred items recognized under the lease, and reduced by estimated sublease rentals.
Business Combinations. The cost of an acquired company is assigned to the tangible and intangible assets purchased and the liabilities assumed based on their fair values at the date of acquisition. The determination of fair values of these assets and liabilities requires us to make estimates and use valuation techniques when a market value is not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. Goodwill typically represents the value paid for the assembled workforce and enhancement of our service offerings. Transaction costs associated with business combinations are expensed as incurred.
Goodwill and Intangible Assets. Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a business acquisition. Following an acquisition, we perform an analysis to value the acquired company's tangible and identifiable intangible assets and liabilities. With respect to identifiable intangible assets, we consider backlog, non-compete agreements, client relations, trade names, patents and other assets. We amortize our intangible assets based on the period over which the contractual or economic benefits of the intangible assets are expected to be realized. We assess the recoverability of the unamortized balance of our intangible assets when indicators of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. Should the review indicate that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of the intangible assets would be recognized as an impairment loss.
We test our goodwill for impairment on an annual basis, and more frequently when an event occurs, or circumstances indicate that the carrying value of the asset may not be recoverable. We believe the methodology that we use to review impairment of goodwill, which includes a significant amount of judgment and estimates, provides us with a reasonable basis to determine whether impairment has occurred. However, many of the factors employed in determining whether our goodwill is
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impaired are outside of our control and it is reasonably likely that assumptions and estimates will change in future periods. These changes could result in future impairments.
We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. Our last annual review was performed at July 1, 2024 (i.e., the first day of our fiscal fourth quarter). In addition, we regularly evaluate whether events and circumstances have occurred that may indicate a potential change in recoverability of goodwill. We perform interim goodwill impairment reviews between our annual reviews if certain events and circumstances have occurred, including a deterioration in general economic conditions, an increased 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. We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. Our operating segments are the same as our reportable segments and our reporting units for goodwill impairment testing are the components one level below our reportable segments. These components constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. We aggregate components within an operating segment that have similar economic characteristics.
The impairment test for goodwill involves the comparison of the estimated fair value of each reporting unit to the reporting unit's carrying value, including goodwill. We estimate the fair value of reporting units based on a comparison and weighting of the income approach, specifically the discounted cash flow method and the market approach, which estimates the fair value of our reporting units based upon comparable market prices and recent transactions and also validates the reasonableness of the multiples from the income approach. The development of the present value of future cash flow projections includes assumptions and estimates derived from a review of our expected revenue growth rates, operating profit margins, discount rates and the terminal growth rate. If the fair value of a reporting unit exceeds its carrying amount, the goodwill of that reporting unit is not considered impaired. However, if its carrying value exceeds its fair value, our goodwill is impaired, and we are required to record a non-cash charge that could have a material adverse effect on our consolidated financial statements. An impairment loss recognized, if any, should not exceed the total amount of goodwill allocated to the reporting unit.
Contingent Consideration. Most of our acquisition agreements include contingent earn-out arrangements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based upon 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 these 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 "Long-term contingent earn-out liabilities" on the consolidated balance sheets. We consider several factors when determining that contingent earn-out liabilities are part of the purchase price, including the following: (1) the valuation of our acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former owners of acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of our other key employees. The contingent earn-out payments are not affected by employment termination.
We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. We use a probability weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period (generally three or 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 income.
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Other Current Liabilities. Other current liabilities consist primarily of accrued insurance, contingent liabilities, sales/services and use taxes due to our U.S. and foreign operations, other tax accruals and accrued professional fees.
Fair Value of Financial Instruments. We determine the fair values of our financial instruments, including short-term investments, debt instruments, derivative instruments and pension plan assets based on inputs or assumptions that market participants would use in pricing an asset or a liability. We categorize our instruments using a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair values based on their short-term nature. The carrying amounts of our revolving credit facility approximates fair value because the interest rates are based upon variable reference rates. Certain other assets and liabilities, such as contingent earn-out liabilities and amounts related to cash-flow hedges, are required to be carried in our consolidated financial statements at fair value.
Our fair value measurement methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although we believe our valuation methods are appropriate and consistent with those used by other market participants, the use of different methodologies or assumptions to determine fair value could result in a different fair value measurement at the reporting date.
Derivative Financial Instruments. We account for our derivative instruments as either assets or liabilities and carry them at fair value. For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income in stockholders' equity and reclassified into income in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in current income. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.
The net gain or loss on the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency translation exposure generated by the re-measurement of certain assets and liabilities denominated in a non-functional currency in a foreign operation is reported in the same manner as a foreign currency translation adjustment. Accordingly, any gains or losses related to these derivative instruments are recognized in current income. Derivatives that do not qualify as hedges are adjusted to fair value through current income.
Deferred Compensation. We maintain a non-qualified defined contribution supplemental retirement plan for certain key employees and non-employee directors that is accounted for in accordance with applicable authoritative guidance on accounting for deferred compensation arrangements where amounts earned are held in a rabbi trust and invested. Employee deferrals are deposited into a rabbi trust, and the funds are generally invested in individual variable life insurance contracts that we own and are specifically designed to informally fund savings plans of this nature. Our consolidated balance sheets reflect our investment in variable life insurance contracts in "Other long-term assets." Our obligation to participating employees is reflected in "Other long-term liabilities." The net gains and losses related to the deferred compensation plan are reported as part of “Selling, general and administrative expenses” in our consolidated statements of income.
Pension Plan. We assumed a defined benefit pension plan from an acquisition. We calculate the market-related value of assets, which is used to determine the return-on-assets component of annual pension expense and the cumulative net unrecognized gain or loss subject to amortization. This calculation reflects our anticipated long-term rate of return and amortization of the difference between the actual return (including capital, dividends, and interest) and the expected return. Cumulative net unrecognized gains or losses that exceed 10% of the greater of the projected benefit obligation or the fair market-related value of plan assets are subject to amortization.
Income Taxes. We file a consolidated U.S. federal income tax return. In addition, we file other returns that are required in the states, foreign jurisdictions and other jurisdictions in which we do business. We account for certain income and expense items differently for financial reporting and income tax purposes. Deferred tax assets and liabilities are computed for the difference between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to reverse. In determining the need for a valuation allowance, management reviews both positive and negative evidence, including current and historical results of operations, future income projections, scheduled reversals of deferred tax amounts, availability of carrybacks and potential tax planning strategies. Based on our assessment, we have concluded that a portion of the deferred tax assets will not be realized.
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According to the authoritative guidance on accounting for uncertainty in income taxes, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. This guidance also addresses de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and disclosure requirements for uncertain tax positions.
Concentration of Credit Risk. Financial instruments that subject us to credit risk consist primarily of cash and cash equivalents and net accounts receivable. In the event that we have surplus cash, we place our temporary cash investments with lower risk financial institutions and, by policy, limit the amount of investment exposure to any one financial institution. Approximately 24% of accounts receivable were due from various agencies of the U.S. federal government at fiscal 2024 year-end. The remaining accounts receivable are generally diversified due to the large number of organizations comprising our client base and their geographic dispersion. We perform ongoing credit evaluations of our clients and maintain an allowance for potential credit losses. Approximately 32%, 12%, 18% and 38% of our fiscal 2024 revenue was generated from our U.S. federal government, U.S. state and local government, U.S. commercial and international clients, respectively.
Foreign Currency Translation. We determine the functional currency of our foreign operating units based upon the primary currency in which they operate. These operating units maintain their accounting records in their local currency, primarily Canadian and Australian dollars, Euros and British pounds. Where the functional currency is not the U.S. dollar, translation of assets and liabilities to U.S. dollars is based on exchange rates at the balance sheet date. Translation of revenue and expenses to U.S. dollars is based on the average rate during the period. Translation gains or losses are reported as a component of other comprehensive income. Gains or losses from foreign currency transactions are included in income from operations.
Recently Issued Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“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; however, we do not plan to adopt Topic 280 before fiscal 2025.
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 recognize revenue over time as the related performance obligation is satisfied by transferring control of a promised good or service to our customers. Progress toward complete satisfaction of the performance obligation is primarily measured using a cost-to-cost measure of progress method. The cost input is based primarily on contract cost incurred to date compared to total estimated contract cost. This measure includes forecasts based on the best information available and reflects our judgement to faithfully depict the value of the services transferred to the customer. For certain on-call engineering or consulting and similar contracts, we recognize revenue in the amount which we have the right to invoice the customer if that amount corresponds directly with the value of our performance completed to date.
Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near term. For those performance obligations for which revenue is recognized using a cost-to-cost measure of progress method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs indicates a loss, a provision for the entire estimated loss on the contract is made in the period in which the loss becomes evident.
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Disaggregation of Revenue
We disaggregate revenue by client sector and contract type, as we believe it best depicts how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors. The following tables present revenue disaggregated by client sector and contract type (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Client Sector:
U.S. federal government (1)
$
1,675,996
$
1,387,101
$
1,064,347
U.S. state and local government
613,185
607,074
603,286
U.S. commercial
909,642
869,460
748,953
International (2)
1,999,856
1,658,915
1,087,462
Total
$
5,198,679
$
4,522,550
$
3,504,048
Contract Type:
Fixed-price
$
2,016,638
$
1,643,849
$
1,317,993
Time-and-materials
2,337,913
2,166,671
1,637,019
Cost-plus
844,128
712,030
549,036
Total
$
5,198,679
$
4,522,550
$
3,504,048
(1) Includes revenue generated under U.S. federal government contracts performed outside the United States.
(2) Includes revenue generated from non-U.S. clients, primarily in United Kingdom, Australia and Canada.
Other than the U.S. federal government, no single client accounted for more than 10% of our revenue for fiscal 2024, 2023 and 2022.
Contract Assets and Contract Liabilities
We invoice customers based on the contractual terms of each contract. However, the timing of revenue recognition may differ from the timing of invoice issuance.
Contract assets represent revenue recognized in excess of the amounts for which we have the contractual right to bill our customers. Such amounts are recoverable from customers based upon various measures of performance, including achievement of certain milestones or completion of a contract. In addition, many of our time-and-materials arrangements are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded, as revenue is recognized in advance of billings. Contract retentions, included in contract assets, represent amounts withheld by clients until certain conditions are met or the project is completed, which may extend beyond one year.
Contract liabilities consist of billings in excess of revenue recognized. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and increase as billings in advance of revenue recognition occur. Contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. There were no substantial non-current contract assets or liabilities for the periods presented.Net contract assets/liabilities consisted of the following (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Contract assets (1)
$
129,678
$
113,939
Contract liabilities
(351,738)
(335,044)
Net contract liabilities
$
(222,060)
$
(221,105)
(1) Includes $7.9 million and $6.8 million of contract retentions at fiscal 2024 and 2023 year-ends, respectively.
Both our contract assets and contract liabilities increased in fiscal 2024 compared to fiscal 2023 year-end, due to the timing of our milestone billing on fixed-price contracts which were different from the timing of revenue recognition on those
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contracts. In fiscal 2024 and 2023, we recognized revenue of approximately $247 million and $164 million, respectively, from 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 period in which such changes are made. As a result, in fiscal 2024 and 2023, we recognized net favorable revenue and operating income adjustments of $29.8 million and $11.0 million, respectively. The corresponding net revenue and operating income adjustments were immaterial for fiscal 2022.
Changes in revenue and cost estimates could also result in a projected loss, determined at the contract level, which would be recorded immediately in earnings. As of September 29, 2024 and October 1, 2023, our consolidated balance sheets included liabilities for anticipated losses of $15.1 million and $8.5 million, respectively. The estimated cost to complete these related contracts at the end of fiscal 2024 and 2023 was approximately $101 million and $68 million, respectively.
Accounts Receivable, Net
Net accounts receivable consisted of the following (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Billed
$
707,406
$
672,712
Unbilled
348,907
306,788
Total accounts receivable
1,056,313
979,500
Allowance for doubtful accounts
(4,852)
(4,965)
Total accounts receivable, net
$
1,051,461
$
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 fiscal 2024 year-endare expected to be billed and collected within12 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 government agency or a commercial 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 fiscal 2024 and 2023 year-ends.
Our RUPO represents a measure of the total dollar value of work to be performed on contracts awarded and in progress. We had $5.3 billion of RUPO as of September 29, 2024. Our RUPO increases with awards from new contracts or additions to existing contracts and decreases as work is performed and revenue is recognized on existing contracts. Our 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.
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We expect to satisfy our RUPO as of fiscal 2024 year-end over the following periods (in thousands):
Amount
Within 12 months
$
3,723,668
Beyond
1,607,721
Total
$
5,331,389
Although RUPO reflects business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. Our RUPO is adjusted to reflect any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals, as appropriate. Our operations and maintenance contracts can generally be terminated by the clients without a substantive financial penalty; therefore, the remaining performance obligations on such contracts are limited to the notice period required for the termination (usually 30, 60 or 90 days).
4. Stock Repurchase and Dividends
On October 5, 2021, our Board of Directors authorized a stock repurchase program under which we could repurchase up to $400 million of our common stock. In fiscal 2024 and 2023, we did not repurchase any shares of our common stock. We repurchased and settled 6,708,395 shares with an average price of $29.81 per share for a total cost of $200.0 million in fiscal 2022 in the open market. At fiscal 2024 year-end, we had a remaining balance of $347.8 million under our stock repurchase program.
The following table presents dividends declared and paid in fiscal 2024, 2023 and 2022:
Declare Date
Dividend Paid Per Share
Record Date
Payment Date
Dividends Paid (in thousands)
November 13, 2023
$
0.052
November 30, 2023
December 13, 2023
$
13,873
January 29, 2024
0.052
February 14, 2024
February 27, 2024
13,908
April 29, 2024
0.058
May 20, 2024
May 31, 2024
15,522
July 29, 2024
0.058
August 15, 2024
August 30, 2024
15,525
Total dividends paid as of September 29, 2024
$
58,828
November 7, 2022
$
0.046
November 21, 2022
December 9, 2022
$
12,186
January 30, 2023
0.046
February 13, 2023
February 24, 2023
12,242
May 8, 2023
0.052
May 24, 2023
June 6, 2023
13,840
August 7, 2023
0.052
August 23, 2023
September 6, 2023
13,845
Total dividends paid as of October 1, 2023
$
52,113
November 15, 2021
$
0.040
December 2, 2021
December 20, 2021
$
10,793
January 31, 2022
0.040
February 11, 2022
February 25, 2022
10,769
May 2, 2022
0.046
May 13, 2022
May 27, 2022
12,311
August 1, 2022
0.046
August 12, 2022
August 26, 2022
12,226
Total dividends paid as of October 2, 2022
$
46,099
Subsequent Events.On November 11, 2024, our Board of Directors declared a quarterly cash dividend of $0.058 per share payable on December 13, 2024 to stockholders of record as of the close of business on November 27, 2024.
5. Acquisitions
In fiscal 2024, we acquired LS Technologies ("LST"), an innovative U.S. federal enterprise technology services and management consulting firm based in Fairfax, Virginia. LST provides high-end consulting and engineering services including advanced data analytics, cybersecurity and digital transformation solutions to U.S. government clients. Additionally, we acquired Convergence Controls & Engineering ("CCE"), an industry leader in process automation and systems integration solutions. CCE’s expertise includes customized digital controls and software solutions, advanced data analytics, cloud data integration and cybersecurity applications. Both LST and CCE are included in our GSG segment. The aggregate fair value of the purchase price of these two acquisitions was $120 million. This amount consisted of $93 million in initial cash payments, $4 million of cash holdback related to a tax reserve, and $23 million for the estimated fair value of contingent earn-out obligations, with a maximum of $60 million, based upon the achievement of specified operating income targets in each of the
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three years following the acquisition dates. The $120 million purchase price was allocated $12 million to net tangible assets, $23 million to identifiable intangible assets, and $85 million to goodwill. The purchase price allocation is preliminary and subject to adjustment as the estimates, assumptions, valuations and other analyses have not yet been finalized in order to make a definitive allocation. These acquisitions were not considered material, individually or in aggregate, to our consolidated financial statements. As a result, no pro forma information has been provided.
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 employed 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 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 all cash 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
Account 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
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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 on an unaudited pro forma basis, as if the RPS acquisition had been consummated as of the beginning of fiscal 2022 (in thousands):
Fiscal Year Ended
October 1, 2023
October 2, 2022
Revenue
$
4,780,404
$
4,271,580
Net income including noncontrolling interests
$
223,857
$
152,964
Our fiscal 2023 consolidated results reflect RPS' contribution of revenue of approximately $600 million, with net income, including interest expense, of $3.6 million, or $0.01 per share, before the related intangible amortization of $26.8 million.
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, consisted 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 material to our consolidated financial statements. As a result, no pro forma information has been provided.
In fiscal 2022, we acquired The Integration Group of America ("TIGA"), Piteau Associates (“PAE”) and two other financially immaterial acquisitions. TIGA is based in Spring, Texas and is an industry leader in process automation and system integration solutions, including customized software and platform (SaaS/PaaS) applications, advanced data analytics, cloud data integration and platform virtualization. PAE is based in Vancouver, British Columbia and is a global leader in sustainable natural resource analytics including hydrologic numerical modeling and dewatering system design. PAE is part of our CIG segment, and TIGA and other financially immaterial acquisitions are part of our GSG segment. The total fair value of the purchase price for all four acquisitions was $88.3 million. This amount is comprised of $44.0 million in initial cash payments made to the sellers, $2.5 million of receivables (net) related to estimated post-closing adjustments for the net assets acquired, $15.5 million payable in a promissory note issued to the sellers along with related transaction expenses of the sellers (which were subsequently paid in July 2022) and $31.3 million for the estimated fair value of contingent earn-out obligations, with a maximum of $47.0 million, based upon the achievement of specified operating income targets in each of the three to five years following the acquisitions. These acquisitions were not considered material, individually or in the aggregate, to our consolidated financial statements. As a result, no pro forma information has been provided.
The majority of the goodwill from fiscal 2024 and 2022 acquisitions is deductible for tax purposes, while the majority of the goodwill from the fiscal 2023 acquisitions is not deductible for tax purposes. The results of our acquisitions were included in our consolidated financial statements beginning on the respective closing dates.
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In fiscal 2024, our goodwill additions from the LST and CCE acquisitions reflect the extensive technical knowledge of the acquired workforces, the anticipated synergies in data analytics, cybersecurity and digital transformation services, and collective reputations of these acquisitions in providing mission critical solutions to both commercial and government customers. In fiscal 2023, our goodwill additions 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 and environment; enhanced by a combined suite of differentiated data analytics and digital technologies, and expansion into existing and new geographies. The fiscal 2022 goodwill additions are primarily attributable to the significant technical expertise residing in embedded workforces that are sought out by clients, long-term management experience, the industry reputations and the synergies expected to arise after the acquisitions in the areas of data management, digitization, modeling, water and natural resources. In addition, these acquired capabilities, when combined with our existing global consulting and engineering business, result in opportunities that allow us to provide services under contracts that could not have been pursued individually by either us or the acquired companies.
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 lives of the underlying assets, ranging from one to 12 years. These consist of client relations, backlog and trade names. For detailed information regarding our intangible assets, see Note 6, “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 or 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 income. In each quarter during 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.
In fiscal 2024, we recorded adjustments to our contingent earn-out liabilities and reported a net loss to operating income of $2.5 million. The net loss primarily resulted from increased valuations of the contingent consideration liabilities for our prior acquisitions of LST and BlueWater Federal Solutions, Inc., reflecting their financial performance that exceeded our previous expectations. These increases were partially offset primarily by a decreased valuation of the contingent consideration for Amyx, as forecasted revenues and earnings did not become realized as originally anticipated.
In fiscal 2023, we recorded adjustments to our contingent earn-out liabilities and reported a net loss to operating income of $12.3 million. The net loss primarily resulted from increased valuations of the contingent consideration liabilities for our prior acquisitions of Segue Technologies, Inc., Hoare Lea, LLP ("HLE"), TIGA and PAE, reflecting their financial
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performance that exceeded our previous expectations. These increases were partially offset by a decreased valuation of the contingent consideration for Amyx.
In fiscal 2022, total adjustments to our contingent earn-out liabilities in operating income were immaterial.
The following table summarizes the changes in the fair value of estimated contingent consideration (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Beginning balance
$
73,422
$
65,566
$
59,297
Estimated earn-out liabilities for acquisitions
23,038
12,248
31,341
Payments of contingent consideration
(54,050)
(21,328)
(20,433)
Adjustments to fair value reported in earnings
2,541
12,255
329
Interest accretion expense
2,639
2,480
2,184
Effect of foreign currency exchange rate changes
1,156
2,201
(7,152)
Ending balance
$
48,746
$
73,422
$
65,566
Maximum potential payout at end of period
$
102,006
$
113,820
$
120,882
6. Goodwill and Intangible Assets
The following table summarizes the changes in the carrying value of goodwill by reportable segment (in thousands):
GSG
CIG
Total
Balance at October 2, 2022
$
519,102
$
591,310
$
1,110,412
Acquisition activity
138,380
621,496
759,876
Translation and other adjustments
2,460
7,496
9,956
Balance at October 1, 2023
659,942
1,220,302
1,880,244
Acquisition activity
84,865
—
84,865
Translation and other adjustments
6,010
75,450
81,460
Balance at September 29, 2024
$
750,817
$
1,295,752
$
2,046,569
Goodwill amounts are presented net of reductions from historical impairment adjustments. The fiscal 2024 goodwill addition resulted from the purchase price allocations for our recent acquisitions which are preliminary and subject to adjustment based upon the final determinations of the net assets acquired and information to perform the final valuation. Goodwill adjustments primarily related to the foreign currency translation adjustments which resulted from our foreign subsidiaries with functional currencies that are different than our reporting currency.
We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. Our last review at July 1, 2024 (i.e., the first day of our fourth quarter in fiscal 2024) 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. As of July 1, 2024, we had no reporting units that had estimated fair values that exceeded their carrying values by less than 72%.
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 gross amounts of goodwill for GSG were $768.5 million and $677.6 million at fiscal 2024 and 2023 year-ends, respectively, excluding accumulated impairment of $17.7 million for each period. The gross amounts of goodwill for CIG were $1,417.3 million and $1,341.8 million at fiscal 2024 and 2023 year-ends, respectively, excluding accumulated impairment of $121.5 million for each period.
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The following table presents the gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives included in "Intangible assets, net" on the consolidated balance sheets ($ in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Weighted- Average Remaining Life (in years)
Gross Amount
Accumulated Amortization
Net Amount
Gross Amount
Accumulated Amortization
Net Amount
Client relations
8.3
$
198,726
$
(57,975)
$
140,751
$
169,217
$
(36,072)
$
133,145
Backlog
0.4
75,194
(71,101)
4,093
63,825
(47,802)
16,023
Trade names
1.4
40,926
(25,185)
15,741
37,411
(12,643)
24,768
Total
$
314,846
$
(154,261)
$
160,585
$
270,453
$
(96,517)
$
173,936
Amortization expense for the identifiable intangible assets for fiscal 2024, 2023 and 2022 was $50.0 million, $41.2 million and $13.2 million, respectively. Foreign currency translation adjustments increased net identifiable intangible assets by $13.4 million in fiscal 2024. The foreign currency translation adjustments were immaterial in fiscal 2023.
Estimated amortization expense for the succeeding five fiscal years and beyond is as follows (in thousands):
Amount
2025
$
36,198
2026
24,332
2027
17,625
2028
17,116
2029
16,204
Beyond
49,110
Total
$
160,585
7. Property and Equipment
Property and equipment consisted of the following (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Equipment, furniture and fixtures
$
139,070
$
132,744
Leasehold improvements
44,883
44,733
Total property and equipment
183,953
177,477
Accumulated depreciation
(110,888)
(102,645)
Property and equipment, net
$
73,065
$
74,832
The depreciation expense related to property and equipment was $23.7 million, $20.0 million and $13.9 million for fiscal 2024, 2023 and 2022, respectively.
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8. Income Taxes
Income before income taxes, by geographic area, was as follows (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Income before income taxes:
United States
$
294,401
$
287,295
$
262,428
Foreign
169,065
113,683
86,338
Total income before income taxes
$
463,466
$
400,978
$
348,766
Income tax expense consisted of the following (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Current:
Federal
$
76,851
$
110,371
$
47,447
State
20,997
16,025
9,613
Foreign
44,402
28,970
26,332
Total current income tax expense
142,250
155,366
83,392
Deferred:
Federal
(18,734)
(18,062)
(424)
State
(6,747)
(4,976)
(382)
Foreign
13,254
(4,802)
3,016
Total deferred income tax (benefit) expense
(12,227)
(27,840)
2,210
Total income tax expense
$
130,023
$
127,526
$
85,602
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Total income tax expense was different from the amount computed by applying the U.S. federal statutory rate to pre-tax income as follows:
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Tax at federal statutory rate
21.0%
21.0%
21.0%
State taxes, net of federal benefit
2.4
2.2
2.1
Research and Development ("R&D") credits
(1.2)
(0.5)
(1.0)
Tax differential on foreign earnings
2.0
1.5
1.0
Stock compensation
(0.4)
(0.4)
(2.0)
Valuation allowance
(0.1)
1.3
0.2
Change in uncertain tax positions
1.3
11.6
(1.1)
Return to provision
(1.0)
1.1
1.4
Disallowed officer compensation
0.9
1.2
1.9
Unremitted earnings
0.4
0.2
(0.2)
Hedging gain
—
(5.7)
—
Deferred tax adjustments
0.8
(2.3)
0.1
Audit settlements
0.9
—
—
Other
1.1
0.6
1.1
Total income tax expense
28.1%
31.8%
24.5%
The effective tax rates for fiscal 2024, 2023 and 2022 were 28.1%,31.8% and 24.5%, respectively. The fiscal 2024 income tax expense included $4.2 million of expense for the settlement of various tax positions that were under audit for fiscal years 2011 through 2021. The fiscal 2023 income tax expense included non-operating income tax expenses totaling $20.6 millionto (i) increase the tax liability for uncertain tax positions related to certain U.S. tax credits and an intercompany financing transaction, (ii) recognize the tax liability for foreign earnings, primarily in the United Kingdom and Australia, that are no longer indefinitely reinvested. Also, income tax expense was reduced by $4.5 million, $4.6 million and $10.3 million of excess tax benefits on share-based payments in fiscal 2024, 2023 and 2022, respectively.
Excluding the impact of the excess tax benefits on share-based payments in all years, the settlement amount in fiscal 2024, and the non-operating tax expenses in fiscal 2023, our effective tax rates for fiscal 2024, 2023 and 2022 were 28.1%, 27.8% and 27.5%, respectively.
Temporary differences comprising the net deferred income tax asset shown on the accompanying consolidated balance sheets were as follows (in thousands):
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Fiscal Year Ended
September 29, 2024
October 1, 2023
Deferred Tax Assets:
State taxes
$
3,916
$
2,686
Reserves and contingent liabilities
—
2,849
Accounts receivable including the allowance for doubtful accounts
5,315
5,323
Accrued liabilities
64,929
64,155
Lease liabilities, operating leases
51,841
53,437
Stock-based compensation
1,923
1,900
Unbilled revenue
9,273
3,090
Loss and other carry-forwards
48,256
67,673
Property and equipment
—
552
Capitalized research and development
37,417
17,778
Capped call transactions
10,311
12,696
Valuation allowance
(16,841)
(16,559)
Total deferred tax assets
216,340
215,580
Deferred Tax Liabilities:
Prepaid expense
(3,065)
(2,702)
Reserves and contingent liabilities
(153)
—
Right-of-use assets, operating leases
(51,841)
(53,437)
Intangibles
(81,623)
(83,242)
Undistributed earnings
(2,708)
(1,453)
Property and equipment
(1,583)
—
Total deferred tax liabilities
(140,973)
(140,834)
Net deferred tax assets
$
75,367
$
74,746
Our foreign earnings are not considered indefinitely reinvested and any potential tax liability that would be incurred upon repatriation is recognized currently with the related income.
At September 29, 2024, we had available state net operating loss carry forwards of $26.6 million that expire at various dates from 2025 to 2043; and available foreign NOL carry forwards of $123.9 million, of which $15.0 million expire at various dates from 2025 to 2044, and $108.9 million have no expiration date. In addition, we had foreign capital loss carryforwards of $41.4 million, foreign corporate interest restriction allowances of $7.5 million, and foreign research and development credits of $4.2 million that do not have expiration dates. We have performed an assessment of positive and negative evidence regarding the realization of the deferred tax assets. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, availability of carrybacks, cumulative losses in recent years, estimates of projected future taxable income and tax planning strategies. Although realization is not assured, based on our assessment, we have concluded that it is more likely than not that the assets will be realized except for the deferred tax assets related to certain loss carry-forwards for which a valuation allowance of $16.8 million has been provided.
At September 29, 2024, we had $41.4 million of unrecognized tax benefits, all of which, if recognized, would affect our effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of our unrecognized tax positions may not significantly decrease in the next 12 months.A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
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Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Beginning balance
$
53,619
$
8,908
$
12,899
Acquisition of RPS Group
—
6,012
—
Additions for current fiscal year tax positions
1,000
27,272
—
Additions for prior fiscal year tax positions
1,000
14,602
—
Reductions for prior fiscal year tax positions
—
(1,358)
(3,014)
Settlements
(14,179)
(1,817)
(977)
Ending balance
$
41,440
$
53,619
$
8,908
We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. During fiscal 2024, 2023 and 2022, we accrued additional interest and penalties of $3.8 million, $4.6 million and $0.5 million, respectively, and recorded reductions in accrued interest and penalties of $3.2 million, $2.0 million and $0.4 million, respectively, as a result of audit settlements and other prior-year adjustments. The amount of interest and penalties accrued at September 29, 2024, October 1, 2023 and October 2, 2022 was $8.6 million, $8.0 million and $5.3 million, respectively.
9. Long-Term Debt
Long-term debt consisted of the following (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Credit facilities
$
250,000
$
320,000
Convertible notes
575,000
575,000
Debt issuance costs and discount
(12,366)
(15,471)
Long-term debt
$
812,634
$
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 (the "Convertible Notes"). 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 was 5.0855 shares (pre-stock split) 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 (pre-stock split) of our common stock. The conversion rate is subject to adjustment for certain events, including stock splits and issuance of certain stock dividends on our common stock. As adjusted to give effect to the stock split, the applicable conversion rate was 25.4345 shares of common stock per $1,000 principal amount of the Convertible Notes (equivalent to an adjusted conversion price of approximately $39.32 per share of common stock) at September 29, 2024. 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.
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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 sheet 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 are amortized to interest expense using the effective interest method over the terms of the Convertible Notes resulting in an effective annual interest rate of 2.79%.
The net carrying amount of the Convertible Notes was as follows (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Principal
$
575,000
$
575,000
Unamortized discount and issuance costs
(11,434)
(14,158)
Net carrying amount
$
563,566
$
560,842
The following table sets forth the interest expense recognized related to the Convertible Notes (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Interest expense
$
12,866
$
1,438
Amortization of discount and issuance costs
2,724
292
Total interest expense
$
15,590
$
1,730
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 was initially $259.56 per share (pre-stock split), which represents a premium of 65% over the last reported sale price of our common stock of $157.31 per share (pre-stock split) on the NASDAQ Global Select Market on August 17, 2023. The cap price is subject to adjustment for certain events, including stock splits and issuance of certain stock dividends on our common stock. As adjusted to give effect to the stock split, the adjusted cap price was approximately $51.90 per share at September 29, 2024. 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 in January 2026.
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 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
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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. In fiscal 2023, we repaid the Amended Term Loan Facility in full with the Convertible Notes proceeds.
At fiscal 2024 year-end, we had $250 million in outstanding borrowings under the Amended Credit Agreement, which was consisted of $250 million under the New Term Loan Facility and no borrowings under the Amended Revolving Credit Facility. The weighted-average interest rate of the outstanding borrowings under the Amended Credit Agreement during fiscal 2024 was 6.70%. In addition, we had $0.7 million in standby letters of credit under the Amended Credit Agreement. At September 29, 2024, we had $499.3 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 fiscal 2024 year-end, we were in compliance with these covenants with a consolidated leverage ratio of 1.38x and a consolidated interest coverage ratio of 13.94x.
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 fiscal 2024 year-end, there were no outstanding borrowings under these facilities and the aggregate amount of standby letters of credit outstanding was $43.3 million. As of September 29, 2024 we had no bank overdrafts related to our disbursement bank accounts.
The following table presents scheduled maturities of our long-term debt (in thousands):
Amount
2025
—
2026
250,000
2027
—
2028
575,000
Total
$
825,000
10. 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 and are immaterial.
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
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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.
In fiscal 2023, we exited certain lease arrangements as a result of the RPS acquisition and its subsequent integration. Accordingly, we evaluated the ongoing value of the ROU assets associated with the discontinued lease agreements. Based on this evaluation, we determined that some long-lived assets were no longer recoverable and were in fact impaired. Fair value was based on expected future cash flows using Level 3 inputs under Accounting Standards Codification Topic 820, Fair Value Measurement. The cash flows are those expected to be generated by the market participants, discounted at a real estate-based rate of interest. As a result of our evaluation, we recorded a $16.4 million non-cash charge related to the ROU operating lease asset impairment which was reported in our fiscal 2023 statement of income, and a corresponding decrease to our ROU assets operating leases on our consolidated balance sheet at fiscal 2023 year-end.
The components of lease costs are as follows (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Operating lease cost
$
100,002
$
93,674
Sublease income
(589)
(740)
Total lease cost
$
99,413
$
92,934
Supplemental cash flow information related to leases is as follows (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Operating cash flows for operating leases
$
79,354
$
78,268
Right-of-use assets obtained in exchange for new operating lease liabilities
62,601
70,552
Supplemental balance sheet and other information related to leases are as follows (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Operating leases:
Right-of-use assets
$
177,950
$
175,932
Lease liabilities:
Current
$
63,419
$
65,005
Non-current
140,095
144,685
Total operating lease liabilities
$
203,514
$
209,690
Weighted-average remaining lease term:
Operating leases
5 years
5 years
Weighted-average discount rate:
Operating leases
3.6
%
3.0
%
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As of fiscal 2024 year-end, we had $15.3 million of operating leases that have not yet commenced.
A maturity analysis of the future undiscounted cash flows associated with our lease liabilities at fiscal 2024 year-end is as follows (in thousands):
Amount
2025
$
68,743
2026
51,485
2027
38,106
2028
25,111
2029
15,551
Beyond
21,436
Total lease payments
220,432
Less: imputed interest
(16,918)
Total present value of lease liabilities
$
203,514
11.Employee Benefits
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 fiscal 2024 (all 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 in the first quarter of fiscal 2025, 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.
12. Stockholders' Equity and Stock Compensation Plans
Stock Split. On September 9, 2024, we completed a five-for-one stock split of our common stock. All share, equity award and per share amounts and related stockholders' equity balances presented herein have been retroactively adjusted, where applicable, to reflect the stock split.
At fiscal 2024 year-end, we had the following stock-based compensation plans:
•2015 Equity Incentive Plan ("2015 EIP"). Key employees and non-employee directors may be granted equity awards, including stock options, performance share units ("PSUs") and restricted stock units ("RSUs"). Shares issued with respect to awards granted under the 2015 EIP other than stock options or stock appreciation rights, which are referred to as "full value awards", are counted against the 2015 EIP's aggregate share limit as three shares for every share or unit actually issued. No awards have been made under the 2015 Equity Incentive Plan since the adoption of the 2018 Equity Incentive Plan on March 8, 2018 as described below.
•2018 Equity Incentive Plan ("2018 EIP"). Key employees and non-employee directors may be granted equity awards, including stock options, PSUs and RSUs. Shares issued with respect to awards granted under the 2018 EIP other than stock options or stock appreciation rights, which are referred to as "full value awards", are counted against the 2018 EIP's aggregate share limit as one share for every share or unit issued. At fiscal 2024 year-end, there were 12.8 million shares available for future awards pursuant to the 2018 EIP.
•Employee Stock Purchase Plan ("ESPP"). Purchase rights to purchase common stock are granted to our eligible full and part-time employees, and shares of common stock are issued upon exercise of the purchase rights. An aggregate of 890,250 shares may be issued pursuant to such exercise. The maximum amount that an employee can contribute during a purchase right period is $5,000. The exercise price of a purchase right is the lesser of 100% of the fair market value of a share of common stock on the first day of the purchase right period (the business day preceding January 1) or 85% of the fair market value on the last day of the purchase right period (December 15, or the business day preceding December 15 if December 15 is not a business day).
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The following table presents our stock-based compensation and related income tax benefits (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Total stock-based compensation
$
31,155
$
28,607
$
26,227
Income tax benefit related to stock-based compensation
(6,489)
(5,779)
(5,377)
Stock-based compensation, net of tax benefit
$
24,666
$
22,828
$
20,850
We recognize the fair value of our stock-based awards as compensation expense on a straight-line basis over the requisite service period in which the award vests. Most of these amounts were included in selling, general and administrative expenses on our consolidated statements of income.
Stock Options
The following table presents our stock option activity for fiscal 2024 year-end:
Number of Options (in thousands)
Weighted- Average Exercise Price per Share
Weighted- Average Remaining Contractual Term (in years)
Aggregate Intrinsic Value (in thousands)
Outstanding on October 1, 2023
742
$
7.89
Exercised
(410)
7.47
Outstanding on September 29, 2024
332
$
8.41
2.44
$
12,598
Vested or expected to vest on September 29, 2024
332
$
8.41
2.44
$
12,598
Exercisable on September 29, 2024
332
$
8.41
2.44
$
12,598
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between our closing stock price on the last trading day of fiscal 2024 and the exercise price, times the number of shares) that would have been received by the in-the-money option holders if they had exercised their options on September 29, 2024. This amount will change based on the fair market value of our stock.
No stock options were granted in fiscal 2024, 2023 and 2022. The aggregate intrinsic value of options exercised during fiscal 2024, 2023 and 2022 was $12.7 million, $2.5 million and $5.7 million, respectively.
Net cash proceeds from the exercise of stock options were $3.1 million, $0.6 million and $1.8 million for fiscal 2024, 2023 and 2022, respectively. Our policy is to issue shares from our authorized shares upon the exercise of stock options. The actual income tax benefit realized from exercises of nonqualified stock options for fiscal 2024, 2023 and 2022 was $2.8 million, $0.6 million and $1.3 million, respectively.
RSU and PSU
RSU awards are granted to our key employee and non-employee directors. The fair value of the RSU was determined at the date of grant using the market price of the underlying common stock as of the date of grant. All of the RSUs have time-based vesting over a four-year period, except that RSUs awarded to directors vest after one year. The total compensation cost of the awards is then amortized over their applicable vesting period on a straight-line basis.
PSU awards are granted to our executive officers and non-employee directors. All of the 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 growth in our diluted EPS and 50% on our relative total shareholder return over the vesting period. For these performance-based awards, our expected performance is reviewed to estimate the percentage of shares that will vest. The total compensation cost of the awards is then amortized over their applicable vesting period on a straight-line basis.
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A summary of the RSU and PSU activity under our stock plans is as follows:
RSU
PSU
Number of Shares (in thousands)
Weighted- Average Grant Date Fair Value per Share
Number of Shares (in thousands)
Weighted- Average Grant Date Fair Value per Share
Nonvested balance at October 3, 2021
1,903
$
16.66
1,588
$
16.59
Granted
389
36.92
209
49.43
Vested
(734)
15.49
(880)
16.03
Adjustment (1)
—
—
441
16.13
Forfeited
(63)
21.80
—
—
Nonvested balance at October 2, 2022
1,495
22.28
1,358
21.85
Granted
525
31.27
281
39.10
Vested
(595)
20.81
(689)
19.97
Adjustment (1)
—
—
344
19.97
Forfeited
(78)
28.00
(45)
38.74
Nonvested balance at October 1, 2023
1,347
26.12
1,249
25.64
Granted
723
33.14
279
41.08
Vested
(508)
25.87
(431)
30.61
Adjustment (1)
—
—
193
30.61
Forfeited
(75)
31.45
(29)
40.36
Nonvested balance at September 29, 2024
1,487
$
29.35
1,261
$
27.78
(1) Fiscal 2022 includes a payout adjustment of 440,990 PSUs due to the actual performance level achieved for PSUs granted in fiscal 2019 that vested during fiscal 2022. Fiscal 2023 includes a payout adjustment of 343,960 PSUs due to the actual performance level achieved for PSUs granted in fiscal 2020 that vested during fiscal 2023. Fiscal 2024 includes a payout adjustment of 193,340 PSUs due to the actual performance level achieved for PSUs granted in fiscal 2021 that vested during fiscal 2024.
In fiscal 2024, 2023 and 2022, we awarded 723,420, 525,410 and 389,220 shares of RSUs, respectively, to our key employees and non-employee directors. The weighted-average grant-date fair value of RSUs granted during fiscal 2024, 2023 and 2022 was $33.14, $31.27 and $36.92, respectively. At fiscal 2024 year-end, there were 1,486,725 RSUs outstanding. RSU forfeitures result from employment terminations prior to vesting. Forfeited shares return to the pool of authorized shares available for award. We use historical data as a basis to estimate the probability of forfeitures related to RSUs and the ESPP Plan.
In fiscal 2024, 2023 and 2022, we awarded 279,180, 281,070 and 208,670 shares of PSUs, respectively, to our executive officers and non-employee directors. The weighted-average grant-date fair value of PSUs granted in fiscal 2024, 2023 and 2022 was $41.08, $39.10 and $49.43, respectively. At fiscal 2024 year-end, there were 1,261,120 PSUs outstanding.
The stock-based compensation expense related to RSUs and PSUs for fiscal 2024, 2023 and 2022 was $29.1 million, $26.2 million and $23.9 million, respectively, and was included in total stock-based compensation expense. The actual income tax benefit realized from RSUs and PSUs for fiscal 2024, 2023 and 2022 was $1.6 million, $4.0 million and $9.1 million, respectively. At fiscal 2024 year-end, there was $46.4 million of unrecognized stock-based compensation costs related to nonvested RSUs and PSUs that will be substantially recognized by fiscal 2027 year-end.
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ESPP
The following table summarizes shares purchased, weighted-average purchase price, and cash received for shares purchased under the ESPP (in thousands, except for purchase price):
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Shares purchased
522
492
531
Weighted-average purchase price per share
$
28.14
$
25.66
$
22.83
Cash received from exercise of purchase rights
$
14,675
$
12,628
$
12,129
The grant date fair value of each award granted under the ESPP was estimated using the Black-Scholes option pricing model with the following assumptions:
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Dividend yield
0.7%
0.7%
1.0%
Expected stock price volatility
27.1%
38.0%
32.2%
Risk-free rate of return, annual
4.7%
4.7%
0.4%
Expected life (in years)
1
1
1
For fiscal 2024, 2023 and 2022, we based our expected stock price volatility on historical volatility behavior and current implied volatility behavior. The risk-free rate of return was based on constant maturity rates provided by the U.S. Treasury. The expected life was based on the ESPP terms and conditions.
Stock-based compensation expense for fiscal 2024, 2023 and 2022 included $2.0 million, $2.4 million and $2.3 million, respectively, related to the ESPP. The unrecognized stock-based compensation costs for awards granted under the ESPP at fiscal 2024 and 2023 year-ends were $0.5 million and $0.6 million, respectively. At fiscal 2024 year-end, ESPP participants had accumulated $13 million to purchase our common stock.
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13. Retirement Plans
We have defined contribution plans in various countries where we have employees. This primarily includes 401(k) plans in the United States. For fiscal 2024, 2023 and 2022, employer contributions to the U.S. plans were $35.3 million, $31.6 million and $29.3 million, respectively.
Additionally, we have established a non-qualified deferred compensation plan for certain key employees and non-employee directors. These eligible employees and non-employee directors may elect to defer the receipt of salary, incentive payments, restricted stock, PSU and RSU awards and non-employee director fees. The plan is accounted for in accordance with applicable authoritative guidance on accounting for deferred compensation arrangements where amounts earned are held in a rabbi trust and invested. Employee deferrals are deposited into a rabbi trust, and the funds are generally invested in individual variable life insurance contracts that we own and are specifically designed to informally fund savings plans of this nature. At fiscal 2024 and 2023 year-ends, the consolidated balance sheets reflect assets of $70.1 million and $43.5 million, respectively, related to the deferred compensation plan in "Other long-term assets," and liabilities of $74.3 million and $43.4 million, respectively, related to the deferred compensation plan in "Other long-term liabilities." The net gains and losses related to the deferred compensation plan are reported as part of “Selling, general and administrative expenses” in our consolidated statements of income. These related net gains and losses were immaterial for fiscal 2024, 2023 and 2022.
In connection with an acquisition, we assumed a defined benefit pension plan (the “Plan”), which was operated for all qualifying employees. The assets of the Plan are held in a separate trustee administered fund. The plan is closed to new participants and to future benefit accrual. Under the agreed schedule of contributions, we make no further contributions, and continue to pay the expenses of administering the plan.
The change in the defined benefit obligation, the change in fair value of plan assets and the amounts recognized in the Consolidated Statement of Income, the Consolidated Statement of Comprehensive Income and the Consolidated Statements of Shareholders’ Equity for fiscal 2024, 2023 and 2022 were immaterial.
The Plan's funded status was as follows (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Fair value of plan assets
$
46,815
$
39,572
Benefit obligation
(39,722)
(35,303)
Net surplus
$
7,093
$
4,269
The net surplus is reflected in other long-term assets on our consolidated balance sheets as of fiscal 2024 and 2023 year-ends. The benefits paid in fiscal 2024 and 2023 were $1.5 million and $1.3 million, respectively.
The fair values of the plan assets are substantially categorized within Level 2 of the fair value hierarchy. The fair values of the plan assets by major asset categories were as follows (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Equities
$
3,739
$
2,213
Mutual funds
22,923
20,458
Liability driven investment funds
15,833
13,807
Bonds
2,657
2,354
Cash/other
1,663
740
Fair value of plan assets
$
46,815
$
39,572
We seek a competitive rate of return relative to an appropriate level of risk depending on the funded status and obligations of each plan and typically employ both active and passive investment management strategies. The risk in our practices includes diversification across asset classes and investment styles and periodic rebalancing toward asset allocation targets. The target asset allocation selected for each plan reflects a risk/return profile that we believe is appropriate relative to each plan’s liability structure and return goals.
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Principal assumptions used for the benefit obligation in the valuation are as follows:
Fiscal Year Ended
September 29, 2024
October 1, 2023
Discount rate
5.00
%
5.35
%
Rate of inflation
2.70% to 3.15%
2.80% to 3.35%
14. Earnings per Share
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 stock-based awards and shares underlying our Convertible Notes.
For fiscal 2024, our Convertible Notes, described in Note 9, "Long-Term Debt", had a dilution impact on the dilutive potential common shares, which was calculated using the if-converted method. The dilution impact was due to the price of our common stock exceeding the conversion price. The related Capped Call Transactions were excluded from the calculation of dilutive potential common shares as their effect is anti-dilutive. For fiscal 2024, 2023 and 2022, no options were excluded from the calculation of dilutive potential common shares.
The following table presents the number of weighted-average shares used to compute basic and diluted EPS (in thousands, except per share data):
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Net income attributable to Tetra Tech
$
333,382
$
273,420
$
263,125
Weighted-average common shares outstanding – basic
267,364
266,015
268,100
Effect of diluted stock options and unvested restricted stock
2,125
2,170
2,715
Shares issuable assuming conversion of convertible notes
553
—
—
Weighted-average common stock outstanding – diluted
270,042
268,185
270,815
Earnings per share attributable to Tetra Tech:
Basic
$
1.25
$
1.03
$
0.98
Diluted
$
1.23
$
1.02
$
0.97
15. Derivative Financial Instruments
We periodically 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 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
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$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 rates on the borrowings under our term loan facility. The five swaps expired on July 31, 2023. At fiscal 2022 year-end, the fair value of the effective portion of our interest rate swap agreements designated as cash flow hedges before tax effect was an unrealized gain of $2.4 million, which was reported in "Other non-current assets" on our consolidated balance sheet. Additionally, the related loss of $2.4 million and a gain of $11.8 million for fiscal year ended 2023 and 2022, respectively, were recognized and reported on our consolidated statements of comprehensive income. There were no derivative instruments that were not designated as hedging instruments for fiscal 2024, 2023 and 2022.
16. Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
The accumulated balances and reporting period activities for fiscal 2024, 2023 and 2022 related to reclassifications out of accumulated other comprehensive income (loss) are summarized as follows (in thousands):
Foreign Currency Translation Adjustments
(Loss) Gain on Derivative Instruments
Net Pension Adjustments
Accumulated Other Comprehensive (Loss) Income
Balances at October 3, 2021
$
(115,634)
$
(9,394)
$
—
$
(125,028)
Other comprehensive (loss) income before reclassifications
(94,922)
15,937
—
(78,985)
Amounts reclassified from accumulated other comprehensive income
Interest rate contracts, net of tax (1)
—
(4,131)
—
(4,131)
Net current-period other comprehensive (loss) income
(94,922)
11,806
—
(83,116)
Balances at October 2, 2022
$
(210,556)
$
2,412
$
—
$
(208,144)
Other comprehensive income (loss) before reclassifications
12,623
(5,192)
2,638
10,069
Amounts reclassified from accumulated other comprehensive income (loss)
Interest rate contracts, net of tax (1)
—
2,780
—
2,780
Net current-period other comprehensive income (loss)
12,623
(2,412)
2,638
12,849
Balances at October 1, 2023
$
(197,933)
$
—
$
2,638
$
(195,295)
Other comprehensive income before reclassifications
115,120
—
1,300
116,420
Net current-period other comprehensive income
115,120
—
1,300
116,420
Balances at September 29, 2024
$
(82,813)
$
—
$
3,938
$
(78,875)
(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. 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 2, "Basis of Presentation" and Note 15, "Derivative Financial Instruments").
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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 2, "Basis of Presentation" and Note 5, "Acquisitions" for further information).
Debt. The fair value of long-term debt under our Credit Facility 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). The carrying value of our long-term debt under our Credit Facility approximated fair value at the end of our fiscal 2024 and 2023. At fiscal 2024 year-end, we had $250 million in outstanding borrowings under our Amended Credit Agreement, which consisted of $250 million under the New Term Loan Facility and no borrowings under the Amended Revolving Credit Facility.
The estimated fair value of our $575 million Convertible Notes, which were used to fund our business acquisitions, working capital needs, dividends, capital expenditures and contingent earn-outs, was determined based on the trading price of the Convertible Notes as of the last trading day 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 $564 million and $743 million, respectively, at September 29, 2024, and $561 million and $566 million, respectively, at October 1, 2023 (see Note 9, "Long-Term Debt").
Defined Benefit Pension Plan. The fair values of the plan assets are primarily categorized within Level 2 of the fair value hierarchy. For additional information about our defined benefit pension plan (see Note 13, "Retirement Plans").
18. 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 ("the USAO") filed an amended complaint in the intervention of 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 Court"). The complaint alleges False Claims Act violations and breach of contract related to TtEC's contracts to perform environmental remediation services at the former Hunters Point Naval Shipyard in San Francisco, California. On March 5, 2024, the Court granted the USAO's motion to amend the filing to include additional claims against TtEC under the Comprehensive Environmental Response, Compensation, and Liability Act and common law. Several ancillary claims brought by third-party private plaintiffs arising from the same services provided by TtEC at Hunters Point are also ongoing. To explore whether a negotiated resolution is possible, TtEC began engaging in discussions with the USAO subsequent to the end of fiscal 2024 regarding a potential resolution of all claims. There can be no assurance that any framework for resolution will be achieved and, if any settlement is achieved, what the final terms or dollar amount will be. If a settlement is achieved, TtEC would not admit any wrongdoing and would be settling to avoid the delay, uncertainty and expense of protracted litigation. It is reasonably possible that a charge to income, which could be material to our financial position, results of operations and cash flows, may be required in future periods as discussions with the USAO continue and additional information becomes available.
19. 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.
Our reportable segments are described as follows:
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.
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
86
Canada, in Asia Pacific (primarily Australia and New Zealand), Europe, the United Kingdom and South America (primarily Brazil).
Management evaluates the performance of these reportable segments based upon their respective segment operating income before the effect of amortization expense related to acquisitions, and other unallocated corporate expenses. We account for inter-segment revenues and transfers as if they were to third parties; that is, by applying a negotiated fee onto the costs of the services performed. All significant intercompany balances and transactions are eliminated in consolidation. In fiscal 2023, our Corporate segment operating losses included $33.2 million of acquisition and integration expenses as described in Note 5, "Acquisitions". We also recorded a $16.4 million ($6.8 million in GSG, $8.3 million in CIG and $1.3 million in Corporate) non-cash impairment charge related to our ROU operating lease assets in fiscal 2023 (see Note 10, "Leases" for more information).
The following tables present summarized financial information of our reportable segments (in thousands):
Reportable Segments
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Revenue
GSG
$
2,483,355
$
2,158,889
$
1,820,868
CIG
2,786,731
2,424,649
1,738,436
Elimination of inter-segment revenue
(71,407)
(60,988)
(55,256)
Total revenue
$
5,198,679
$
4,522,550
$
3,504,048
Income from operations
GSG
$
281,026
$
231,762
$
198,448
CIG
328,510
243,750
194,142
Corporate (1)
(108,799)
(117,399)
(52,144)
Total income from operations
$
500,737
$
358,113
$
340,446
(1) Includes amortization of intangibles, acquisition and integration expenses, as well as other costs and other income not allocable to segments. The intangible asset amortization expense for fiscal 2024, 2023 and 2022 was $50.0 million, $41.2 million and $13.2 million, respectively. Additionally, Corporate results included loss for fair value adjustments to contingent consideration liabilities of $(2.5) million, $(12.3) million and $(0.3) million for fiscal 2024, 2023 and 2022, respectively. See Note 6 - "Goodwill and Intangible Assets" for more information.
Fiscal Year Ended
September 29, 2024
October 1, 2023
Total Assets
GSG
$
658,493
$
543,066
CIG
1,059,915
994,470
Corporate (1)
2,474,268
2,282,941
Total assets
$
4,192,676
$
3,820,477
(1) Corporate assets consist of intercompany eliminations and assets not allocated to our reportable segments including goodwill, intangible assets, deferred income taxes and certain other assets.
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Geographic Information
Fiscal Year Ended
Revenue:
September 29, 2024
October 1, 2023
October 2, 2022
United States
$
3,198,823
$
2,863,635
$
2,416,586
Foreign countries (1)
1,999,856
1,658,915
1,087,462
Total
$
5,198,679
$
4,522,550
$
3,504,048
Fiscal Year Ended
Long-lived assets (2):
September 29, 2024
October 1, 2023
United States
$
154,616
$
159,856
Foreign countries (1)
196,376
160,174
Total
$
350,992
$
320,030
(1) Includes revenue and long-lived assets from our foreign operations, primarily in the United Kingdom, Australia and Canada, and revenue generated from non-U.S. clients.
(2) Excludes goodwill, intangible assets and deferred income taxes.
20. Related Party Transactions
We often provide services to unconsolidated joint ventures. The table below presents revenue and reimbursable costs related to services we provided to our unconsolidated joint ventures (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
October 2, 2022
Revenue
$
67,744
$
83,148
$
95,967
Related reimbursable costs
61,637
78,489
91,656
Our consolidated balance sheets also included the following amounts related to these services (in thousands):
Fiscal Year Ended
September 29, 2024
October 1, 2023
Accounts receivable, net
$
15,612
$
19,944
Contract assets
1,625
2,723
Contract liabilities
(4,237)
(3,158)
21. Quarterly Financial Information – Unaudited
In the opinion of management, the following unaudited quarterly data for the fiscal 2024 and 2023 reflect all adjustments necessary for a fair statement of the results of operations (in thousands, except per share data).
In the first and second quarters of fiscal 2023, we recognized $68.0 million and $21.4 million, respectively, of unrealized gain on a foreign currency forward contract related to the planned acquisition of RPS. We also recorded a $16.4 million non-cash impairment charge related to our ROU operating lease assets in the fourth quarter of fiscal 2023 (see Note 10, "Leases" for more information). Additionally, we incurred $33.2 million of acquisition and integration expenses in fiscal 2023 (largely comprised of $19.9 million in the second quarter and $7.3 million in fourth quarter) as described in Note 5, "Acquisitions".
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First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year 2024
Revenue
$
1,228,267
$
1,251,616
$
1,344,323
$
1,374,473
Income from operations
111,081
117,683
128,630
143,343
Net income attributable to Tetra Tech
74,972
76,446
85,810
96,154
Earnings per share attributable to Tetra Tech:
Basic
$
0.28
$
0.29
$
0.32
$
0.36
Diluted
$
0.28
$
0.28
$
0.32
$
0.35
Weighted-average common shares outstanding:
Basic
266,585
267,420
267,575
267,687
Diluted
268,690
269,375
270,260
271,656
Fiscal Year 2023
Revenue
$
894,766
$
1,158,226
$
1,208,947
$
1,260,611
Income from operations
92,050
61,011
97,675
107,377
Net income attributable to Tetra Tech
116,706
42,830
60,235
53,649
Earnings per share attributable to Tetra Tech:
Basic
$
0.44
$
0.16
$
0.23
$
0.20
Diluted
$
0.44
$
0.16
$
0.22
$
0.20
Weighted-average common shares outstanding:
Basic
265,345
266,135
266,155
266,235
Diluted
267,645
268,135
268,265
268,510
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures and changes in internal control over financial reporting
At September 29, 2024, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on our management's evaluation (with the participation of our principal executive officer and principal financial officer), our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), were effective.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. Internal controls include those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting at September 29, 2024, based on the criteria in Internal Control – Integrated Framework (2013) issued by the COSO. Based upon this assessment, management has concluded that our internal control over financial reporting was effective at September 29, 2024.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Form 10-K, has issued a report on our internal control over financial reporting. This report, dated November 19, 2024, appears on pages 51-52 of this Form 10-K.
Consistent with the guidance issued by the Securities and Exchange Commission Staff, management's assessment of internal control over financial reporting excluded LS Technologies ("LST"), which we acquired on January 31, 2024. LST is a wholly owned subsidiary whose total assets and total revenues represent 1.4% and 1.7%, respectively, of the related consolidated financial statement amounts as of and for the fiscal year ended September 29, 2024.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended September 29, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Insider Trading Arrangements
During fiscal 2024, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act or any "non-Rule 10b5-1 trading arrangement" as defined in Item 408(c) of Regulation S-K.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item relating to our directors and nominees, regarding compliance with Section 16(a) of the Exchange Act, and regarding our Audit Committee is included under the captions "Item No. 1 – Election of Directors"
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and "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement related to the 2025 Annual Meeting of Stockholders and is incorporated by reference.
Pursuant to General Instruction G (3) of Form 10-K, the information required by this item relating to our executive officers is included under the caption "Executive Officers of the Registrant" in Part I of this Report.
We have adopted a code of ethics that applies to our principal executive officer and all members of our finance department, including our principal financial officer and principal accounting officer. This code of ethics, entitled "Finance Code of Professional Conduct," is posted on our website. The Internet address for our website is www.tetratech.com, and the code of ethics may be found through a link to the Investor Relations section of our website.
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K for any amendment to, or waiver from, a provision of this code of ethics by posting any such information on our website, at the address and location specified above.
Item 11. Executive Compensation
The information required by this item is included under the captions "Item No. 1 – Election of Directors" and "Executive Compensation Tables" in our Proxy Statement related to the 2025 Annual Meeting of Stockholders and is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item relating to security ownership of certain beneficial owners and management, and securities authorized for issuance under equity compensation plans, is included under the caption "Security Ownership of Management and Significant Stockholders" in our Proxy Statement related to the 2025 Annual Meeting of Stockholders and is incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item relating to review, approval or ratification of transactions with related persons is included under the caption "Related Person Transactions," and the information required by this item relating to director independence is included under the caption "Item No. 1 – Election of Directors," in each case in our Proxy Statement related to the 2025 Annual Meeting of Stockholders and is incorporated by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item is included under the caption "Item No. 4 – Ratification of Independent Registered Public Accounting Firm" in our Proxy Statement related to the 2025 Annual Meeting of Stockholders and is incorporated by reference.
The following financial information from our Company's Annual Report on Form 10-K, for the period ended September 29, 2024, formatted in Inline eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statement of Comprehensive Income, (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.+
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
Indicates a management contract or compensatory arrangement.
+
Filed herewith.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
TETRA TECH, INC.
By:
/s/ DAN L. BATRACK
Date: November 19, 2024
Dan L. Batrack Chairman, Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dan L. Batrack and Steven M. Burdick, jointly and severally, his attorney-in-fact, each with the full power of substitution, for such person, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
