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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
  
FORM 10-Q
 
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended January 2, 2022

OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission File Number 0-19655
  
TETRA TECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4148514
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)
 
3475 East Foothill Boulevard, Pasadena, California 91107
(Address of principal executive offices)  (Zip Code)
 
(626) 351-4664
(Registrant’s telephone number, including area code) 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value TTEK The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  ☒   No  ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  ☒   No  ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company
☐  
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐   No  ☒

As of January 24, 2022, 53,999,410 shares of the registrant’s common stock were outstanding.

TETRA TECH, INC.
 
INDEX
 
PAGE NO.
3
 
3
 
4
 
5
6
7
 
8
21
31
32
32
32
33
33
33
33
34
2

PART I.                                                  FINANCIAL INFORMATION

    Item 1.                                 Financial Statements
 Tetra Tech, Inc.
Consolidated Balance Sheets
(unaudited - in thousands, except par value)
ASSETS January 2,
2022 		October 3,
2021
Current assets:    
Cash and cash equivalents $ 205,542  $ 166,568 
Accounts receivable, net 696,586  668,998 
Contract assets 98,439  103,784 
Prepaid expenses and other current assets 103,266  112,338 
Income taxes receivable 9,567  14,260 
Total current assets 1,113,400  1,065,948 
Property and equipment, net 35,428  37,733 
Right-of-use assets, operating leases 212,018  215,422 
Investments in unconsolidated joint ventures 3,893  3,282 
Goodwill 1,123,060  1,108,578 
Intangible assets, net 36,535  37,990 
Deferred tax assets 58,876  54,413 
Other long-term assets 57,246  53,196 
Total assets $ 2,640,456  $ 2,576,562 
LIABILITIES AND EQUITY    
Current liabilities:    
Accounts payable $ 142,847  $ 128,767 
Accrued compensation 166,002  206,322 
Contract liabilities 219,519  190,403 
Short-term lease liabilities, operating leases 65,185  67,452 
Current portion of long-term debt and other short-term borrowings 16,728  12,504 
Current contingent earn-out liabilities 21,931  19,520 
Other current liabilities 217,056  223,515 
Total current liabilities 849,268  848,483 
Deferred tax liabilities 13,916  10,563 
Long-term debt 246,875  200,000 
Long-term lease liabilities, operating leases 172,795  174,285 
Long-term contingent earn-out liabilities 43,839  39,777 
Other long-term liabilities 75,818  69,163 
Commitments and contingencies (Note 16)
Equity:    
Preferred stock - authorized, 2,000 shares of $0.01 par value; no shares issued and outstanding at January 2, 2022 and October 3, 2021
—  — 
Common stock - authorized, 150,000 shares of $0.01 par value; issued and outstanding, 53,999 and 53,981 shares at January 2, 2022 and October 3, 2021, respectively
540  540 
Accumulated other comprehensive loss (123,048) (125,028)
Retained earnings 1,360,390  1,358,726 
Tetra Tech stockholders’ equity 1,237,882  1,234,238 
Noncontrolling interests 63  53 
Total stockholders' equity 1,237,945  1,234,291 
Total liabilities and stockholders' equity $ 2,640,456  $ 2,576,562 
See Notes to Consolidated Financial Statements.
3

Tetra Tech, Inc.
Consolidated Statements of Income
(unaudited – in thousands, except per share data)
 
  Three Months Ended
  January 2,
2022 		December 27,
2020
Revenue $ 858,510  $ 765,104 
Subcontractor costs (179,177) (159,933)
Other costs of revenue (539,567) (488,861)
Gross profit 139,766  116,310 
Selling, general and administrative expenses (52,546) (50,058)
Income from operations 87,220  66,252 
Interest expense, net (2,904) (3,026)
Income before income tax expense 84,316  63,226 
Income tax expense (15,817) (10,778)
Net income 68,499  52,448 
Net income attributable to noncontrolling interests (10) (12)
Net income attributable to Tetra Tech $ 68,489  $ 52,436 
Earnings per share attributable to Tetra Tech:    
Basic $ 1.27  $ 0.97 
Diluted $ 1.25  $ 0.96 
Weighted-average common shares outstanding:    
Basic 53,937  53,927 
Diluted 54,577  54,637 

See Notes to Consolidated Financial Statements.

4

Tetra Tech, Inc.
Consolidated Statements of Comprehensive Income
(unaudited – in thousands)

 
  Three Months Ended
  January 2,
2022 		December 27,
2020
Net income $ 68,499  $ 52,448 
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment, net of tax
(686) 32,393 
Gain on cash flow hedge valuations, net of tax 2,666  1,476 
Other comprehensive income, net of tax 1,980  33,869 
Comprehensive income, net of tax $ 70,479  $ 86,317 
Comprehensive income attributable to noncontrolling interests, net of tax 10  14 
Comprehensive income attributable to Tetra Tech, net of tax $ 70,469  $ 86,303 

See Notes to Consolidated Financial Statements.

5

Tetra Tech, Inc.
Consolidated Statements of Cash Flows
(unaudited – in thousands)
  Three Months Ended
  January 2,
2022 		December 27,
2020
Cash flows from operating activities:    
Net income $ 68,499  $ 52,448 
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 6,111  6,238 
Equity in income of unconsolidated joint ventures (1,440) (1,107)
Distributions of earnings from unconsolidated joint ventures 842  931 
Amortization of stock-based awards 5,828  4,898 
Deferred income taxes (878) 954 
(Gain) loss on sale of property and equipment 239  (7)
Changes in operating assets and liabilities, net of effects of business acquisitions:    
Accounts receivable and contract assets (21,560) (11,400)
Prepaid expenses and other assets 5,364  11,813 
Accounts payable 14,056  23,631 
Accrued compensation (40,321) (61,690)
Contract liabilities 29,227  27,392 
Other liabilities 11,615  (23,373)
Income taxes receivable/payable 4,837  2,452 
Net cash provided by operating activities 82,419  33,180 
Cash flows from investing activities:    
Payments for business acquisitions, net of cash acquired (8,858) — 
Capital expenditures (1,518) (1,795)
Proceeds from sales of assets 3,514  9 
Net cash used in investing activities (6,862) (1,786)
Cash flows from financing activities:    
Proceeds from borrowings 50,831  123,533 
Repayments on long-term debt (3,956) (114,752)
Bank overdrafts 4,158  — 
Repurchases of common stock (50,000) (15,000)
Taxes paid on vested restricted stock (24,949) (17,330)
Stock options exercised 960  7,495 
Dividends paid (10,793) (9,198)
Payments of contingent earn-out liabilities (1,720) (7,037)
Principal payments on finance leases (945) (538)
Net cash used in financing activities (36,414) (32,827)
Effect of exchange rate changes on cash and cash equivalents (169) 7,356 
Net increase in cash and cash equivalents 38,974  5,923 
Cash and cash equivalents at beginning of period 166,568  157,515 
Cash and cash equivalents at end of period $ 205,542  $ 163,438 
Supplemental information:    
Cash paid during the period for:    
Interest $ 2,456  $ 1,968 
Income taxes, net of refunds received of $2.3 million and $1.1 million
$ 11,535  $ 5,696 
See Notes to Consolidated Financial Statements.
6

Tetra Tech, Inc.
Consolidated Statements of Stockholders' Equity
Three Months Ended December 27, 2020 and January 02, 2022
(unaudited – in thousands)
Common Stock Additional
Paid-in
Capital 		Accumulated
Other
Comprehensive
Loss 		Retained
Earnings 		Total
Tetra Tech
Equity 		Non-Controlling
Interests 		Total
Equity
Shares Amount
BALANCE AT SEPTEMBER 27, 2020 53,797  $ 538  $ —  $ (161,786) $ 1,198,567  $ 1,037,319  $ 54  $ 1,037,373 
Net income 52,436  52,436  12  52,448 
Other comprehensive income 33,867  33,867  2  33,869 
Cash dividends of $0.17 per common share
(9,198) (9,198) (9,198)
Stock-based compensation 4,898  4,898  4,898 
Restricted & performance shares released 209  2  (17,332) (17,330) (17,330)
Stock options exercised 198  2  7,493  7,495  7,495 
Shares issued for Employee Stock Purchase Plan 124  1  10,698  10,699  10,699 
Stock repurchases (135) (1) (5,757) $ (9,242) (15,000) (15,000)
BALANCE AT DECEMBER 27, 2020 54,193  $ 542  $ —  $ (127,919) $ 1,232,563  $ 1,105,186  $ 68  $ 1,105,254 
BALANCE AT OCTOBER 3, 2021 53,981 $ 540  $ —  $ (125,028) $ 1,358,726  $ 1,234,238  53  $ 1,234,291 
Net income 68,489  68,489  10  68,499 
Other comprehensive income 1,980  1,980  1,980 
Cash dividends of $0.20 per common share
(10,793) (10,793) (10,793)
Stock-based compensation 5,828  5,828  5,828 
Restricted & performance shares released 182  2  (18,916) (6,035) (24,949) (24,949)
Stock options exercised 20  —  960  960  960 
Shares issued for Employee Stock Purchase Plan 106  1  12,128  12,129  12,129 
Stock repurchases (290) (3) —  (49,997) (50,000) (50,000)
BALANCE AT JANUARY 2, 2022 53,999  $ 540  $ —  $ (123,048) $ 1,360,390  $ 1,237,882  $ 63  $ 1,237,945 

See Notes to Consolidated Financial Statements.




7

TETRA TECH, INC.
Notes to Consolidated Financial Statements
 
1.                                      Basis of Presentation

The accompanying unaudited consolidated financial statements and related notes of Tetra Tech, Inc. (“we,” “us,” “our” or "Tetra Tech") have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and the notes contained in our Annual Report on Form 10-K for the fiscal year ended October 3, 2021.

These financial statements reflect all normal recurring adjustments that are considered necessary for a fair statement of our financial position, results of operations and cash flows for the interim periods presented. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year or for future years.

Beginning in fiscal 2022, we aligned our operations to better serve our clients and markets, and created a new High Performance Buildings ("HPB") division in our Commercial/International Services Group ("CIG") reportable segment. As a result, we transferred some related operations in our Government Services Group ("GSG") reportable segment to our CIG reportable segment. Prior year amounts for reportable segments have been reclassified to conform to the current year presentation.

2.                                   Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12, which simplifies the accounting for income taxes by removing certain exceptions to general principles in Topic 740 and amending certain existing guidance for clarity. We adopted this guidance in the first quarter of fiscal 2022, and the adoption did not have an impact on our consolidated financial statements.

In May 2020, the Securities and Exchange Commission issued guidance amending certain financial disclosures about acquired and disposed businesses. The amendments are designed to assist registrants in making more meaningful determinations of whether a subsidiary or an acquired or disposed business is significant, and to improve the related disclosure requirements. We adopted this guidance in the first quarter of fiscal 2022, and the adoption did not have an impact on our consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, which requires the recognition and measurement of contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers" ("ASC 606"). Considerations to determine the amount of contract assets and contract liabilities to record at the acquisition date include the terms of the acquired contract, such as timing of payment, identification of each performance obligation in the contract and allocation of the contract transaction price to each identified performance obligation on a relative standalone selling price basis as of contract inception. ASU 2021-08 is effective for us beginning in the first quarter of fiscal 2023. ASU 2021-08 should be applied prospectively for acquisitions occurring on or after the effective date of the amendments. Early adoption of the proposed amendments would be permitted, including adoption in an interim period. We are currently assessing the impact this standard will have on our consolidated financial statements.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), which requires disclosures for transactions with a government authority that are accounted for by applying a grant or contribution model by analogy, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity's financial statements. ASU 2021-10 is effective for us beginning in the first quarter of fiscal 2023, with early adoption permitted. This guidance should be applied prospectively to all transactions that are reflected in the financial statements at the date of initial application and to new transactions that are entered into after that date, or retrospectively. We do not expect the adoption of this guidance to have an impact on our consolidated financial statements.

3.                                   Revenue and Contract Balances

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:
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  Three Months Ended
  January 2,
2022 		December 27,
2020
  (in thousands)
Client Sector:    
U.S. state and local government $ 159,008  $ 125,008 
U.S. federal government (1)
266,797  265,873 
U.S. commercial 176,904  157,787 
International (2)
255,801  216,436 
Total $ 858,510  $ 765,104 
Contract Type:
Fixed-price $ 331,248  $ 274,406 
Time-and-materials 395,648  355,270 
Cost-plus 131,614  135,428 
Total $ 858,510  $ 765,104 
(1)     Includes revenue generated under U.S. federal government contracts performed outside the United States.
(2) Includes revenue generated from foreign operations, primarily in Canada, Australia, the United Kingdom, and revenue generated from non-U.S. clients.

Other than the U.S. federal government, no single client accounted for more than 10% of our revenue for the three months ended January 2, 2022 and December 27, 2020.

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:

Balance at
January 2,
2022 		October 3, 2021
(in thousands)
Contract assets (1)
$ 98,439  $ 103,784 
Contract liabilities (219,519) (190,403)
Net contract liabilities $ (121,080) $ (86,619)
(1)     Includes $13.5 million and $12.2 million of contract retentions as of January 2, 2022 and October 3, 2021, respectively.

In the first quarters of fiscal 2022 and 2021, we recognized revenue of approximately $63 million and $60 million, respectively, from amounts included in the contract liability balances at the end of fiscal 2021 and 2020, respectively.
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We recognize revenue primarily using the cost-to-cost measure of progress to estimate progress towards completion. Changes in those estimates could result in the recognition of cumulative catch-up adjustments to the contract’s inception-to-date revenue, costs and profit in the period in which such changes are made. As a result, we recognized net favorable revenue and operating income adjustments of $2.8 million in the first quarter of fiscal 2022. For the first quarter of fiscal 2021, these net adjustments to our revenue and operating income were immaterial.

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 January 2, 2022 and October 3, 2021, our consolidated balance sheets included liabilities for anticipated losses of $14.2 million and $12.7 million, respectively. The estimated cost to complete these related contracts as of January 2, 2022 and October 3, 2021 was approximately $116 million and $104 million, respectively.

Accounts Receivable, Net

Net accounts receivable consisted of the following:

Balance at
  January 2,
2022 		October 3,
2021
(in thousands)
Billed $ 441,652  $ 432,814 
Unbilled 259,918  240,536 
Total accounts receivable 701,570  673,350 
Allowance for doubtful accounts (4,984) (4,352)
Total accounts receivable, net $ 696,586  $ 668,998 

Billed accounts receivable represent amounts billed to clients that have not been collected. Unbilled accounts receivable, which represent an unconditional right to payment subject only to the passage of time, include unbilled amounts typically resulting from revenue recognized but not yet billed pursuant to contract terms or billed after the period end date. Substantially all of our unbilled receivables at January 2, 2022 are expected to be billed and collected within 12 months. The allowance for doubtful accounts represents amounts that are expected to become uncollectible or unrealizable in the future. We determine an estimated allowance for uncollectible accounts based on management's consideration of trends in the actual and forecasted credit quality of our clients, including delinquency and payment history; type of client, such as a government agency or a commercial sector client; and general economic and industry conditions, including the potential impacts of the coronavirus disease 2019 ("COVID-19") pandemic, that may affect our clients' ability to pay.

Total accounts receivable at January 2, 2022 and October 3, 2021 included approximately $11 million for each period, related to claims, including requests for equitable adjustment, on contracts that provide for price redetermination. Claims are amounts in excess of agreed contract prices that we seek to collect from our clients or other third parties for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regards to both scope and price) should be recognized include the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in our performance, (c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting the claim is objective and verifiable. This can lead to a situation in which costs are recognized in one period and revenue is recognized in a subsequent period when a client agreement is obtained, or a claims resolution occurs.

We regularly evaluate all unsettled claim amounts and record appropriate adjustments to revenue when it is probable that the claim will result in a different contract value than the amount previously estimated. In the first quarters of fiscal 2022 and fiscal 2021, we recorded no gains or losses related to claims.

Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at January 2, 2022 and October 3, 2021.

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Remaining Unsatisfied Performance Obligations (“RUPO”)

Our RUPO represents a measure of the total dollar value of work to be performed on contracts awarded and in progress. We had $3.4 billion of RUPO as of January 2, 2022. RUPO increases with awards from new contracts or additions on existing contracts and decreases as work is performed and revenue is recognized on existing contracts. RUPO may also decrease when projects are canceled or modified in scope. We include a contract within our RUPO when the contract is awarded and an agreement on contract terms has been reached.

We expect to satisfy our RUPO as of January 2, 2022 over the following periods:
Amount
(in thousands)
Within 12 months $ 2,042,908 
Beyond 1,392,475 
Total $ 3,435,383 

Although RUPO reflects business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. RUPO is adjusted to reflect any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals, as appropriate. Our operations and maintenance contracts can generally be terminated by the clients without a substantive financial penalty. Therefore, the remaining performance obligations on such contracts are limited to the notice period required for the termination (usually 30, 60, or 90 days).

4.            Acquisitions

In the first quarter of fiscal 2022, our acquisition activity was immaterial. In fiscal 2021, we acquired Coanda Research and Development Corporation ("CRD"), The Kaizen Company (“KZN”), IBRA-RMAC Automation Solutions (“IRM”), and the partnership interests of Hoare Lea, LLP and Subsidiaries ("HLE"). CRD is based in Burnaby, British Columbia and provides world-class expertise in computational fluid dynamics and utilizes industry-leading capabilities to solve complex engineering science problems for commercial customers, across a broad range of industries. KZN is based in Washington, DC and provides international development advisory and management consulting services offering a suite of innovative tools that support advanced solutions in health, education, governance, peace and stability, and sustainable economic growth. IRM is based in San Diego, California, and provides digital water transformation consulting services and an innovative suite of tools to address complex water system modernization challenges. HLE is a leader in sustainable engineering design based in Bristol, United Kingdom. It was established in 1862 and is an award-winning high-end consultancy firm in the United Kingdom, with more than 900 employees, providing innovative solutions to complex engineering and design challenges for sustainable infrastructure and high performance buildings. CRD and HLE are part of our CIG segment, and KZN and IRM are part of our GSG segment. The total fair value of the purchase price for these acquisitions was $151.7 million. This amount was comprised of $101.4 million in initial cash payments made to the sellers, and $50.3 million for the estimated fair value of contingent earn-out obligations, with a maximum of $74.0 million, based upon the achievement of specified operating income targets in each of the three to four years following the acquisitions.

Goodwill additions resulting from the above business combinations are primarily attributable to the existing workforce of the acquired companies and the synergies expected to arise after the acquisitions. The fiscal 2021 goodwill additions represent the significant technical expertise residing in embedded workforces that are sought out by clients and the long-standing reputation of HLE. 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. The results of these acquisitions were included in our consolidated financial statements from their respective closing dates. 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.

Backlog, client relations and trade name intangible assets include the fair value of existing contracts and the underlying customer relationships with lives ranging from one to ten years, and trade names with lives ranging from three to five years. For detailed information regarding our intangible assets, see Note 5, “Goodwill and Intangible Assets”.

Most of our acquisition agreements include contingent earn-out agreements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based on our valuations of the acquired companies and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved. The fair values of any earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in “Current contingent earn-out liabilities”
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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 to five years), and the probability outcome percentages we assign to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability, with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the contingent earn-out liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows. Any amount paid in excess of the contingent earn-out liability on the acquisition date is reflected as cash used in operating activities in our consolidated statements of cash flows.

We review and re-assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income. In the first quarter of fiscal 2022, 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 addition, we considered the potential impact of the global economic disruption due to the COVID-19 pandemic on our operating income projections over the various earn-out periods. For the first quarters of fiscal 2022 and 2021, we had no material adjustments to our contingent earn-out liabilities in operating income.

At January 2, 2022, there was a total potential maximum of $119.4 million of outstanding contingent consideration related to acquisitions. Of this amount, $65.8 million was estimated as the fair value and accrued on our consolidated balance sheet. If the global economic disruption related to the COVID-19 pandemic is prolonged, we could have significant reductions in our contingent earn-out liabilities and related gains in our operating income in future periods.
     
5.            Goodwill and Intangible Assets

The following table summarizes the changes in the carrying value of goodwill by reportable segment:
  GSG CIG Total
(in thousands)
Balance at October 3, 2021 $ 538,433  $ 570,145  $ 1,108,578 
Goodwill reallocation (51,497) 51,497  — 
Acquisition activity 14,671  —  14,671 
Translation and adjustments 44  (233) (189)
Balance at January 2, 2022 $ 501,651  $ 621,409  $ 1,123,060 

Our goodwill balances reflect the goodwill reallocation related to the creation of our new HPB division on the first day of fiscal 2022, which included a transfer of some related operations in our GSG reportable segment to our CIG reportable segment. The foreign currency translation adjustments resulted from our foreign subsidiaries with functional currencies that are different than our reporting currency. These amounts are presented net of reductions from historical impairment adjustments. The gross amounts of goodwill for GSG were $519.4 million and $556.1 million at January 2, 2022 and October 3, 2021, respectively, excluding accumulated impairment of $17.7 million for each period. The gross amounts of goodwill for CIG were $742.9 million and $691.6 million at January 2, 2022 and October 3, 2021, respectively, excluding accumulated impairment of $121.5 million for each period.

We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. Our most recent annual review at June 28, 2021 (i.e. the first day of our fourth quarter in fiscal 2021) 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
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goodwill. As of June 28, 2021, and after the reallocation of goodwill on the first day of fiscal 2022, we had no reporting units that had estimated fair values that exceeded their carrying values by less than 150%.

We also regularly evaluate whether events and circumstances have occurred that may indicate a potential change in the recoverability of goodwill. We perform interim goodwill impairment reviews between our annual reviews if certain events and circumstances have occurred, such as a deterioration in general economic conditions; an increase in the competitive environment; a change in management, key personnel, strategy or customers; negative or declining cash flows; or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods. Although we believe that our estimates of fair value for these reporting units are reasonable, if financial performance for these reporting units falls significantly below our expectations or market prices for similar business decline, the goodwill for these reporting units could become impaired.    

The following table presents the gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives included in “Intangible assets, net” on the consolidated balance sheets:
Period Ended
  January 2, 2022 October 3, 2021
  Weighted-
Average
Remaining Life
(in Years) 		Gross
Amount 		Accumulated
Amortization 		Net Amount Gross
Amount 		Accumulated
Amortization 		Net Amount
  ($ in thousands)
Client relations 6.4 $ 43,646  $ (18,723) $ 24,923  $ 69,455  $ (43,984) $ 25,471 
Backlog 1.2 32,113  (28,573) 3,540  34,577  (30,670) 3,907 
Technology and trade names 4.3 14,936  (6,864) 8,072  14,939  (6,327) 8,612 
Total   $ 90,695  $ (54,160) $ 36,535  $ 118,971  $ (80,981) $ 37,990 

Amortization expense for the three months ended January 2, 2022 was $2.7 million, compared to $3.4 million for the prior-year periods. Estimated amortization expense for the remainder of fiscal 2022 and succeeding years is as follows:
  Amount
  (in thousands)
2022 $ 7,733 
2023 7,859 
2024 5,193 
2025 4,359 
2026 3,963 
Beyond 7,428 
Total $ 36,535 

6.                                     Property and Equipment

Property and equipment consisted of the following:
Balance at
  January 2,
2022 		October 3,
2021
  (in thousands)
Equipment, furniture and fixtures $ 95,228  $ 94,780 
Leasehold improvements 36,472  36,462 
Total property and equipment 131,700  131,242 
Accumulated depreciation (96,272) (93,509)
Property and equipment, net $ 35,428  $ 37,733 

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The depreciation expense related to property and equipment was $3.4 million for the three months ended January 2, 2022, compared to $2.9 million for the prior-year period.

7.                                     Stock Repurchase and Dividends

On October 5, 2021, the Board of Directors authorized a new stock repurchase program under which we could repurchase up to $400 million of our common stock in addition to the $147.8 million remaining under the previous stock repurchase program at October 3, 2021. In the first quarter of fiscal 2022, we repurchased and settled 290,196 shares with an average price of $172.30 per share for a total cost of $50.0 million in the open market. At January 2, 2022, we had a remaining balance of $497.8 million under our stock repurchase program.

The following table presents dividends declared and paid in the first quarters of fiscal 2022 and 2021:

Declare Date Dividend Paid Per Share Record Date Payment Date Dividend Paid
(in thousands)
November 15, 2021 $ 0.20  December 2, 2021 December 20, 2021 $ 10,793 
November 9, 2020 $ 0.17  November 30, 2020 December 11, 2020 $ 9,198 

Subsequent Event.  On January 31, 2022, the Board of Directors declared a quarterly cash dividend of $0.20 per share payable on February 25, 2022 to stockholders of record as of the close of business on February 11, 2022.

8.                                     Leases

Our operating leases are primarily for corporate and project office spaces. To a much lesser extent, we have operating leases for vehicles and equipment. Our operating leases have remaining lease terms of one month to twelve 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 operating lease right-of-use ("ROU") assets and current and long-term operating lease liabilities in the consolidated balance sheets. Our finance leases are primarily for certain information technology equipment. The related ROU assets and lease liabilities were immaterial, and are included in "Property and equipment, net", "Other current liabilities" and "Other long-term liabilities", accordingly, in the consolidated balance sheets at January 2, 2022 and October 3, 2021.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, incremental borrowing rates are used based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset at the commencement date also includes any lease payments made to the lessor at or before the commencement date and initial direct costs less lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

The components of lease costs are as follows:

Three Months Ended
January 2,
2022 		December 27,
2020
(in thousands)
Operating lease cost $ 21,751  $ 22,069 
Sublease income (125) (29)
Total lease cost $ 21,626  $ 22,040 

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Supplemental cash flow information related to leases is as follows:

Three Months Ended
January 2,
2022 		December 27,
2020
(in thousands)
Operating cash flows for operating leases $ 17,519  $ 18,800 
Right-of-use assets obtained in exchange for new operating lease liabilities $ 12,347  $ 10,293 

Supplemental balance sheet and other information related to leases are as follows:

Balance at
January 2, 2022 October 3, 2021
(in thousands)
Operating leases:
Right-of-use assets $ 212,018  $ 215,422 
Lease liabilities:
Current 65,185  67,452 
Long-term 172,795  174,285 
Total operating lease liabilities $ 237,980  $ 241,737 
Weighted-average remaining lease term:
Operating leases 5 years 5 years
Weighted-average discount rate:
Operating leases 2.1  % 2.2  %

As of January 2, 2022, we do not have any material additional operating leases that have not yet commenced.

A maturity analysis of the future undiscounted cash flows associated with our operating lease liabilities at January 2, 2022 is as follows:

Amount
(in thousands)
2022 $ 53,596 
2023 57,830 
2024 42,775 
2025 31,876 
2026 21,407 
Beyond 45,581 
Total lease payments 253,065 
 Less: imputed interest (15,085)
Total present value of lease liabilities $ 237,980 

9.                                     Stockholders’ Equity and Stock Compensation Plans

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. Stock-based compensation expense for the three months ended January 2, 2022 was $5.8 million, compared to $4.9 million for the same period last year. Most of these amounts were included in selling,
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general and administrative expenses on our consolidated statements of income. In the first quarter of fiscal 2022, we awarded 41,199 performance share units (“PSUs”) to our non-employee directors and executive officers at an estimate fair value of $227.94 per share on the award date. All PSUs are performance-based and vest, if at all, after the conclusion of the three-year performance period. The number of PSUs that ultimately vest is based 50% on the growth in our diluted earnings per share and 50% on our relative total shareholder return over the vesting period. Additionally, we awarded 70,976 restricted stock units (“RSUs”) to our non-employee directors, executive officers and employees at a fair value of $188.32 per share on the award date. All executive officer and employee RSUs have time-based vesting over a four-year period, and the non-employee director RSUs vest after one year.

10.                                Earnings per Share (“EPS”)

Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding, less unvested restricted stock for the period. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive potential common shares for the period. Potential common shares include the weighted-average dilutive effects of outstanding stock options and unvested restricted stock using the treasury stock method.

The following table presents the number of weighted-average shares used to compute basic and diluted EPS:

  Three Months Ended
  January 2,
2022 		December 27,
2020
  (in thousands, except per share data)
Net income attributable to Tetra Tech $ 68,489  $ 52,436 
Weighted-average common shares outstanding – basic 53,937  53,927 
Effect of dilutive stock options and unvested restricted stock 640  710 
Weighted-average common shares outstanding – diluted 54,577  54,637 
Earnings per share attributable to Tetra Tech:    
Basic $ 1.27  $ 0.97 
Diluted $ 1.25  $ 0.96 

11.                                  Income Taxes

The effective tax rates for the first three months of fiscal 2022 and 2021 were 18.8% and 17.0%, respectively. Income tax expense was reduced by $4.5 million and $6.1 million of excess tax benefits on share-based payments in the first three months of fiscal 2022 and 2021, respectively. Excluding the impact of the excess tax benefits on share-based payments, our effective tax rates in the first three months fiscal 2022 and 2021 were 24.1% and 26.8%, respectively.

As of January 2, 2022 and October 3, 2021, the liability for income taxes associated with uncertain tax positions was $13.4 million and $14.1 million, respectively. These uncertain tax positions substantially relate to ongoing examinations. It is reasonably possible that these examinations will be resolved 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.

12.                               Reportable Segments

We manage our operations under two reportable segments. Our GSG reportable segment primarily includes activities with U.S. government clients (federal, state and local) and all activities with development agencies worldwide. Our CIG reportable segment primarily includes activities with U.S. commercial clients and international clients other than development agencies. Additionally, we continue to report the results of the wind-down of our non-core construction activities in the RCM reportable segment. There has been no remaining backlog for RCM since fiscal 2018 as the projects were complete.


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GSG provides high-end consulting and engineering services primarily to U.S. government clients (federal, state and local) and development agencies worldwide. GSG supports U.S. government civilian and defense agencies with services in water, environment, sustainable infrastructure, information technology, and disaster management. GSG also provides engineering design services for U.S. municipal and commercial clients, especially in water infrastructure, solid waste, and high-end sustainable infrastructure designs. GSG also leads our support for development agencies worldwide, especially in the United States, United Kingdom, and Australia.

CIG primarily provides high-end consulting and engineering services to U.S. commercial clients, and international clients that include both commercial and government sectors. CIG supports commercial clients across the Fortune 500, renewable energy, industrial, high performance buildings, and aerospace markets. CIG also provides sustainable infrastructure and related environmental, engineering and project management services to commercial and local government clients across Canada, in Asia Pacific (primarily Australia and New Zealand), the United Kingdom, as well as Brazil and Chile.

Beginning in fiscal 2022, we aligned our operations to better serve our clients and markets, and created a new HPB division in our CIG reportable segment. As a result, we transferred some related operations in our GSG reportable segment to our CIG reportable segment. Accordingly, related balances in our segment reporting for the first quarter of fiscal 2021 have been reclassified to conform to the current year presentation.

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.

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The following tables summarize financial information regarding our reportable segments:

  Three Months Ended
  January 2,
2022 		December 27,
2020
  (in thousands)
Revenue    
GSG $ 456,099  $ 424,663 
CIG 416,286  356,526 
Elimination of inter-segment revenue (13,875) (16,085)
Total revenue $ 858,510  $ 765,104 
Income from operations    
GSG $ 51,179  $ 42,695 
CIG 45,308  34,563 
Corporate (1)
(9,267) (11,006)
Total income from operations $ 87,220  $ 66,252 
(1) Includes amortization of intangibles, other costs and other income not allocable to our reportable segments.

Balance at
  January 2,
2022 		October 3,
2021
  (in thousands)
Total Assets    
GSG $ 575,206  $ 545,533 
CIG 703,777  698,916 
RCM 11,316  11,360 
Corporate (1)
1,350,157  1,320,753 
Total assets $ 2,640,456  $ 2,576,562 
(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.

13.                               Fair Value Measurements

The fair value of long-term debt was determined using the present value of future cash flows based on the borrowing rates currently available for debt with similar terms and maturities (Level 2 measurement, as described in “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended October 3, 2021). The carrying value of our long-term debt approximated fair value at January 2, 2022 and October 3, 2021. At January 2, 2022, we had borrowings of $259.4 million outstanding under our Amended Credit Agreement, which were used to fund business acquisitions, working capital needs, stock repurchases, dividends, capital expenditures and contingent earn-outs.

14.                               Derivative Financial Instruments

We often use certain interest rate derivative contracts to hedge interest rate exposures on our variable rate debt. Also, we may enter in 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
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income for those derivatives designated as fair value hedges. The derivative contracts to hedge interest exposure are categorized within Level 2 of the fair value hierarchy.

In fiscal 2018, we entered into five interest rate swap agreements that we designated as cash flow hedges to fix the interest rate on the borrowings under our term loan facility. As of January 2, 2022, the notional principal of our outstanding interest swap agreements was $209.4 million ($41.9 million each.) The interest rate swaps have a fixed interest rate of 2.79% and expire in July 2023 for all five agreements. At January 2, 2022 and October 3, 2021, the fair value of the effective portion of our interest rate swap agreements designated as cash flow hedges before tax effect was $(6.7) million and $(9.4) million, which were reported in "Other current liabilities" on our consolidated balance sheets. Additionally, the related gains of $2.7 million for the three months ended January 2, 2022, compared to related gains of $1.5 million for the prior-year period, were recognized and reported on our consolidated statements of comprehensive income. We expect to reclassify $4.6 million from accumulated other comprehensive loss to interest expense within the next twelve months. There were no other derivative instruments designated as hedging instruments for the first three months of fiscal 2022.

15.                               Reclassifications Out of Accumulated Other Comprehensive Income

The accumulated balances and activities for the three months ended January 2, 2022 and December 27, 2020 related to reclassifications out of accumulated other comprehensive income are summarized as follows:

  Three Months Ended
  Foreign
Currency
Translation
Adjustments 		Gain (Loss)
on Derivative
Instruments 		Accumulated Other Comprehensive Income (Loss)
  (in thousands)
Balance at September 27, 2020 $ (146,275) $ (15,511) $ (161,786)
Other comprehensive income before reclassifications 32,391  2,978  35,369 
Amounts reclassified from accumulated other comprehensive loss
Interest rate contracts, net of tax (1)
—  (1,502) (1,502)
Net current-period other comprehensive income 32,391  1,476  33,867 
Balance at December 27, 2020 $ (113,884) $ (14,035) $ (127,919)
Balance at October 3, 2021 $ (115,634) $ (9,394) $ (125,028)
Other comprehensive income (loss) before reclassifications (686) 4,032  3,346 
Amounts reclassified from accumulated other comprehensive loss
Interest rate contracts, net of tax (1)
—  (1,366) (1,366)
Net current-period other comprehensive income (loss) (686) 2,666  1,980 
Balance at January 2, 2022 $ (116,320) $ (6,728) $ (123,048)
(1) This accumulated other comprehensive component is reclassified to “Interest expense” in our consolidated statements of income. See Note 14, “Derivative Financial Instruments”, for more information.

16.                               Commitments and Contingencies

We are subject to certain claims and lawsuits typically filed against the consulting and engineering profession, alleging primarily professional errors or omissions. We carry professional liability insurance, subject to certain deductibles and policy limits, against such claims. However, in some actions, parties are seeking damages that exceed our insurance coverage or for which we are not insured. While management does not believe that the resolution of these claims will have a material adverse effect, individually or in aggregate, on our financial position, results of operations or cash flows, management acknowledges the uncertainty surrounding the ultimate resolution of these matters.

On July 15, 2019, following an initial January 14, 2019 filing, the Civil Division of the United States Attorney's Office filed an amended complaint in intervention in three qui tam actions filed against our subsidiary, Tetra Tech EC, Inc. ("TtEC"), in the U.S. District Court for the Northern District of California. The complaint alleges False Claims Act violations and breach
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of contract related to TtEC's contracts to perform environmental remediation services at the former Hunters Point Naval Shipyard in San Francisco, California. TtEC disputes the claims and will defend this matter vigorously. We are currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.

17.                               Related Party Transactions

We often provide services to unconsolidated joint ventures. Our revenue related to services we provided to unconsolidated joint ventures for the first quarter of fiscal 2022 and 2021 was approximately $26 million and $22 million, respectively. Related reimbursable costs for the first quarter of fiscal 2022 and 2021 were $25 million and $21 million, respectively. Our consolidated balance sheets also included the following amounts related to these services:
Balance at
January 2,
2022 		October 3, 2021
(in thousands)
Accounts receivable, net $ 16,323  $ 19,082 
Contract assets 4,126  5,092 
Contract liabilities 3,978  3,026 

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Item 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations

 FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbor provisions created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “estimates,” “seeks,” “continues,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified below under “Part II, Item 1A. Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

GENERAL OVERVIEW

Tetra Tech, Inc. is a leading global provider of high-end consulting and engineering services that focuses on water, environment, sustainable infrastructure, renewable energy, and international development. We are a global company that is Leading with Science® to provide innovative solutions for our public and private clients. We typically begin at the earliest stage of a project by identifying technical solutions and developing execution plans tailored to our clients' needs and resources.

Our reputation for high-end consulting and engineering services and our ability to develop solutions for water and environmental management has supported our growth for more than 50 years. Today, we are proud to be making a difference in people’s lives worldwide through our high-end consulting, engineering, and technology service offerings. We worked on over 70,000 projects, in more than 100 countries on seven continents, with a talent force of 21,000 associates. We are Leading with Science® throughout our operations, with domain experts across multiple disciplines supported by our advanced analytics, artificial intelligence, machine learning, and digital technology solutions. Our ability to provide innovation and first-of-kind solutions is enhanced by partnerships with our forward-thinking clients. We are diverse, equitable, and inclusive, embracing the breadth of experience across our talented workforce worldwide with a culture of innovation and entrepreneurship. We are disciplined in our business, and focused on delivering value to customers and high performance for our shareholders. In supporting our clients, we seek to add value and provide long-term sustainable consulting, engineering and technology solutions.

By combining ingenuity and practical experience, we have helped to advance sustainability by managing water, protecting the environment, providing renewable energy, and engineering green solutions for our cities and communities.

We derive income from fees for professional, technical, program management, and construction management services. As primarily a professional services company, we are labor-intensive rather than capital-intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding services to our clients and execute projects successfully. We provide services to a diverse base of U.S. state and local government, U.S. federal government, U.S. commercial, and international clients.
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The following table presents the percentage of our revenue by client sector:

  Three Months Ended
January 2,
2022 		December 27,
2020
Client Sector    
U.S. state and local government 18.5  % 16.3  %
U.S. federal government (1)
31.1  34.8 
U.S. commercial 20.6  20.6 
International (2)
29.8  28.3 
Total 100.0  % 100.0  %
(1)     Includes revenue generated under U.S. federal government contracts performed outside the United States.
(2)    Includes revenue generated from foreign operations, primarily in Canada, Australia, the United Kingdom, and revenue generated from non-U.S. clients.

We manage our operations under two reportable segments. Our Government Services Group ("GSG") reportable segment primarily includes activities with U.S. government clients (federal, state and local) and all activities with development agencies worldwide. Our Commercial/International Services Group ("CIG") reportable segment primarily includes activities with U.S. commercial clients and international clients other than development agencies. Additionally, we continue to report the results of the wind-down of our non-core construction activities in the Remediation and Construction Management ("RCM") reportable segment. RCM's projects were complete at the end of fiscal 2018; however, there are a few outstanding claims currently in dispute resolution. There were no significant operating activities in RCM in the first quarters of fiscal 2022 and 2021.

Government Services Group (“GSG”).  GSG provides high-end consulting and engineering services primarily to U.S. government clients (federal, state and local) and development agencies worldwide. GSG supports U.S. government civilian and defense agencies with services in water, environment, sustainable infrastructure, information technology, and disaster management. GSG also provides engineering design services for U.S. municipal and commercial clients, especially in water infrastructure, solid waste, and high-end sustainable infrastructure designs. GSG also leads our support for development agencies worldwide, especially in the United States, United Kingdom, and Australia.

Commercial/International Services Group (“CIG”).  CIG primarily provides high-end consulting and engineering services to U.S. commercial clients, and international clients that include both commercial and government sectors. CIG supports commercial clients across the Fortune 500, renewable energy, industrial, high performance buildings, and aerospace markets. CIG also provides sustainable infrastructure and related environmental, engineering and project management services to commercial and local government clients across Canada, in Asia Pacific (primarily Australia and New Zealand), the United Kingdom, as well as Brazil and Chile.

Beginning in fiscal 2022, we aligned our operations to better serve our clients and markets, and created a new High Performance Buildings division in our CIG reportable segment. As a result, we transferred some related operations in our GSG reportable segment to our CIG reportable segment. Certain prior year amounts for reportable segments have been reclassified to conform to the current year presentation.

The following table presents the percentage of our revenue by reportable segment:

  Three Months Ended
  January 2,
2022 		December 27,
2020
Reportable Segment    
GSG 53.1  % 55.5  %
CIG 48.5  46.6 
Inter-segment elimination (1.6) (2.1)
Total 100.0  % 100.0  %

Our services are performed under three principal types of contracts with our clients: fixed-price, time-and-materials, and cost-plus. The following table presents the percentage of our revenue by contract type:
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  Three Months Ended
  January 2,
2022 		December 27,
2020
Contract Type    
Fixed-price 38.6  % 35.9  %
Time-and-materials 46.1  46.4 
Cost-plus 15.3  17.7 
Total 100.0  % 100.0  %

Under fixed-price contracts, clients agree to pay a specified price for our performance of the entire contract or a specified portion of the contract. Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and paid for other expenses. Under cost-plus contracts, some of which are subject to a contract ceiling amount, we are reimbursed for allowable costs plus fees, which may be fixed or performance-based. Profitability on these contracts is driven by billable headcount and our cost control. We recognize revenue from contracts using the cost-to-cost measure of progress method to estimate the progress towards completion to determine the amount of revenue and profit to recognize. Changes in those estimates could result in the recognition of cumulative catch-up adjustments to the contract’s inception-to-date revenue, costs and profit in the period in which such changes are made. On a quarterly basis, we review and assess our revenue and cost estimates for each significant contract. Changes in revenue and cost estimates could also result in a projected loss that would be recorded immediately in earnings.

Other contract costs include professional compensation and related benefits, together with certain direct and indirect overhead costs such as rents, utilities, and travel. Professional compensation represents a large portion of these costs. Our "Selling, general and administrative expenses" ("SG&A") are comprised primarily of marketing and bid and proposal costs, and our corporate headquarters’ costs related to the executive offices, finance, accounting, administration, and information technology. Our SG&A expenses also include a portion of stock-based compensation and depreciation of property and equipment related to our corporate headquarters, and the amortization of identifiable intangible assets. Most of these costs are unrelated to specific clients or projects, and can vary as expenses are incurred to support company-wide activities and initiatives.

We experience seasonal trends in our business.  Our revenue and operating income are typically lower in the first half of our fiscal year, primarily due to the Thanksgiving (in the U.S.), Christmas, and New Year’s holidays. Many of our clients’ employees, as well as our own employees, take vacations during these holiday periods. Further, seasonal inclement weather conditions occasionally cause some of our offices to close temporarily or may hamper our project field work in the northern hemisphere's temperate and arctic regions. These occurrences result in fewer billable hours worked on projects and, correspondingly, less revenue recognized.

ACQUISITIONS AND DIVESTITURES

Acquisitions.  We continuously evaluate the marketplace for acquisition opportunities to further our strategic growth plans. Due to our reputation, size, financial resources, geographic presence and range of services, we have numerous opportunities to acquire privately and publicly held companies or selected portions of such companies. We evaluate an acquisition opportunity based on its ability to strengthen our leadership in the markets we serve, the technologies and solutions they provide, and the additional new geographies and clients they bring. Also, during our evaluation, we examine an acquisition's ability to drive organic growth, its accretive effect on long-term earnings, and its ability to generate return on investment. Generally, we proceed with an acquisition if we believe that it will strategically expand our service offerings, improve our long-term financial performance, and increase shareholder returns.

We view acquisitions as a key component in the execution of our growth strategy, and we intend to use cash, debt or equity, as we deem appropriate, to fund acquisitions. We may acquire other businesses that we believe are synergistic and will ultimately increase our revenue and net income, strengthen our ability to achieve our strategic goals, provide critical mass with existing clients, and further expand our lines of service. We typically pay a purchase price that results in the recognition of goodwill, generally representing the intangible value of a successful business with an assembled workforce specialized in our areas of interest. Acquisitions are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful or will not have a material adverse effect on our financial position, results of operations, or cash flows. All acquisitions require the approval of our Board of Directors. For detailed information regarding acquisitions, see Note 4, “Acquisitions” of the “Notes to Consolidated Financial Statements”.

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Divestitures.  We regularly review and evaluate our existing operations to determine whether our business model should change through the divestiture of certain businesses. Accordingly, from time to time, we may divest or wind-down certain non-core businesses and reallocate our resources to businesses that better align with our long-term strategic direction.

OVERVIEW OF RESULTS AND BUSINESS TRENDS

General. As the coronavirus disease 2019 ("COVID-19") spread globally, we responded quickly to ensure the health and safety of our employees, clients and the communities we support. Our high-end consulting focus and the technologies we deployed have allowed our staff to support clients and projects remotely without interruption. We remain focused on providing clients with the highest level of service and our 450 global offices are operational, supporting our programs and projects. By Leading with Science®, we are responding to the challenges of COVID-19, with the commitment of our 21,000 associates supported by technological innovation. Our government business, which represents approximately 60% of our revenue, has been stable, while our commercial business experienced relatively more impact. Much of our commercial business has continued due to regulatory drivers, but we have seen project delays in the industrial sectors. Our diversified end-markets have allowed us to redeploy staff to areas of uninterrupted or increased demand, and we have made decisions to align our cost structures with our clients' projects. The actions we have taken to navigate through this worldwide pandemic, the strength of our balance sheet, and our technical leadership position us well to address the global challenges of providing clean water, environmental restoration, and the impacts of climate change.

In the first quarter of fiscal 2022, revenue increased 12.2% compared to the prior-year quarter. This year-over-year growth primarily reflects increased activity with U.S. state and local government clients and commercial clients, both in the U.S. and international. Our revenue also includes contributions from acquisitions that did not contribute to our revenue in the first quarter of fiscal 2021.

U.S. State and Local Government.  Our U.S. state and local government revenue increased 27.2% in the first quarter of fiscal 2022 compared to the same quarter last year. The increase reflects continued broad-based growth in our U.S. state and local government project-related infrastructure business, particularly with increased revenue from municipal water infrastructure work in the metropolitan areas of California, Texas, and Florida. Our disaster response activities also increased compared to the first quarter of fiscal 2021. Most of our work for the U.S. state and local governments relates to critical water and environmental programs, which we expect to continue to grow for the remainder of fiscal 2022.

U.S. Federal Government.  Our U.S. federal government revenue increased 0.3% in the first quarter of fiscal 2022 compared to the prior-year quarter. These stable results reflect increased year-over-year revenue for both Department of Defense and civilian agencies, which were substantially offset by reduced international development activity in Afghanistan. During periods of economic volatility, including during the COVID-19 pandemic, our U.S. federal government business has historically been the most stable and predictable. We expect our U.S. federal government revenue to grow in the remainder of fiscal 2022 primarily due to increased advanced analytics activity and the current administration's focus on long-term infrastructure, climate change, and international development.

U.S. Commercial.  Our U.S. commercial revenue increased 12.1% in the first quarter of fiscal 2022 compared to the same quarter last year. This increase was primarily due to more activity on environmental programs, including meeting net zero carbon goals and high performance buildings. We expect these trends and the related growth in our U.S. commercial work to continue for the remainder of fiscal 2022.

International.  Our international revenue increased 18.2% in the first quarter of fiscal 2022 compared to the prior-year quarter. The revenue growth primarily reflects government stimulus spending on infrastructure and increased commercial activity related to new regulatory requirements for sustainability. Our revenue also includes contributions from acquisitions that did not contribute to our revenue in the first quarter of fiscal 2021. We expect these trends and the related growth in our international work to continue for the remainder of fiscal 2022.

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RESULTS OF OPERATIONS

Consolidated Results of Operations
  Three Months Ended
  January 2,
2022 		December 27,
2020 		Change
  $ %
($ in thousands, except per share data)
Revenue $ 858,510  $ 765,104  $ 93,406  12.2%
Subcontractor costs (179,177) (159,933) (19,244) (12.0)
Revenue, net of subcontractor costs (1)
679,333  605,171  74,162  12.3
Other costs of revenue (539,567) (488,861) (50,706) (10.4)
Gross profit 139,766  116,310  23,456  20.2
Selling, general and administrative expenses (52,546) (50,058) (2,488) (5.0)
Income from operations 87,220  66,252  20,968  31.6
Interest expense (2,904) (3,026) 122  4.0
Income before income tax expense 84,316  63,226  21,090  33.4
Income tax expense (15,817) (10,778) (5,039) (46.8)
Net income 68,499  52,448  16,051  30.6
Net income attributable to noncontrolling interests (10) (12) 2  16.7
Net income attributable to Tetra Tech $ 68,489  $ 52,436  $ 16,053  30.6
Diluted earnings per share $ 1.25  $ 0.96  $ 0.29  30.2%
(1)    We believe that the presentation of “Revenue, net of subcontractor costs”, which is a non-U.S. GAAP financial measure, enhances investors’ ability to analyze our business trends and performance because it substantially measures the work performed by our employees. While providing services, we routinely subcontract various services and, under certain U.S. Agency for 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. The grants are included as part of our subcontractor costs. 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.

In the first quarter of fiscal 2022, revenue and revenue, net of subcontractor costs, increased $93.4 million, or 12.2%, and $74.2 million, or 12.3%, respectively, compared to year-ago quarter. Excluding the contributions from acquisitions that did not have activity in the first quarter of last year, our revenue increased approximately 7% in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. Our GSG segment's revenue and revenue, net of subcontractor costs, increased $31.4 million, or 7.4%, and $22.5 million, or 7.4%, respectively, in the first quarter of fiscal 2022 compared to last year's first quarter. Our CIG segment's revenue increased $59.8 million, or 16.8%, and revenue, net of subcontractor costs, increased $51.7 million, or 17.2% in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. Our first quarter of fiscal 2022 results for our 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 a non-operating benefit of Employee Retention Credits ("ERC's") related to COVID-19. The effective tax rate applied to the adjustment to earnings per share ("EPS") to arrive at adjusted EPS was 26% for fiscal 2022. We applied the relevant marginal statutory tax rate based on the nature of the adjustment and tax jurisdiction in which it occurred. Both EPS and adjusted EPS were calculated using diluted weighted-average common shares outstanding as reflected in our consolidated statements of income.
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  Three Months Ended
  January 2,
2022 		December 27,
2020 		Change
  $ %
($ in thousands, except per share data)
Income from operations $ 87,220  $ 66,252  $ 20,968  31.6%
COVID-19 Credits (4,451) —  (4,451) NM
Adjusted income from operations (1)
$ 82,769  $ 66,252  $ 16,517  24.9%
EPS $ 1.25  $ 0.96  $ 0.29  30.2%
COVID-19 Credits (0.06) —  (0.06) NM
Adjusted EPS (1)
$ 1.19  $ 0.96  $ 0.23  24.0%
NM = not meaningful
(1) Non-GAAP financial measure

Operating income increased $21.0 million, or 31.6%, in the first quarter of fiscal 2022 compared to the year-ago quarter. In the first quarter of fiscal 2022, we recognized the benefit of ERC's totaling $4.5 million, which represent reimbursement from the U.S. federal government under the Coronavirus Aid, Relief and Economic Security Act for the costs incurred during the second quarter of fiscal 2020 to address the COVID-19 pandemic. These amounts were recognized in the first quarter of 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 "Cash Provided by Operations" in our Consolidated Statement of Cash Flows for the first quarter of fiscal 2022, consistent with the presentation of the related costs in the second quarter of fiscal 2020. The ERC's increased operating income in our GSG and CIG segments $3.1 million and $1.4 million, respectively.

Excluding the ERC's, our adjusted operating income increased $16.5 million, or 24.9%, in the first quarter of fiscal 2022 compared to the same quarter last year. The increase reflects improved results in our GSG and CIG segments, which are described below under "Government Services Group" and "Commercial/International Services Group", respectively.

Our net interest expense was $2.9 million in the first quarter of fiscal 2022 compared to $3.0 million in the prior-year quarter. The benefit of lower average year-over-year borrowings was substantially offset by the increased interest expense related to our contingent earn-out liabilities.

The effective tax rates for the first quarters of fiscal 2022 and 2021 were 18.8% and 17.0%, respectively. Income tax expense was reduced by $4.5 million and $6.1 million of excess tax benefits on share-based payments in the first quarters of fiscal 2022 and 2021, respectively. Excluding the impact of these tax benefits, our effective tax rates for the first quarters of fiscal 2022 and 2021 were 24.1% and 26.8%, respectively.

Our EPS was $1.25 in the first quarter of fiscal 2022, compared to $0.96 in the year-ago quarter. On the same basis as our adjusted operating income, EPS was $1.19 in the first quarter of fiscal 2022 compared to $0.96 in the first quarter of fiscal 2021.



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Segment Results of Operations

Government Services Group
  Three Months Ended
  January 2,
2022 		December 27,
2020 		Change
  $ %
  ($ in thousands)
Revenue $ 456,099  $ 424,663  $ 31,436  7.4%
Subcontractor costs (129,004) (120,031) (8,973) (7.5)
Revenue, net of subcontractor costs $ 327,095  $ 304,632  $ 22,463  7.4
Income from operations $ 51,179  $ 42,695  $ 8,484  19.9%

Revenue increased $31.4 million and revenue, net of subcontractor costs, increased $22.5 million in the first quarter of fiscal 2022 compared to the year-ago quarter; both reflecting increases of 7.4%. These increases primarily reflect higher U.S. state and local government activities related to water and environmental programs, and disaster response. The increases also reflect contributions from acquisitions, which did not have comparable revenue in the first quarter of last year.

Operating income increased $8.5 million, or 19.9%, in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. Operating income in the first quarter of fiscal 2022 included $3.1 million of the aforementioned ERC's. Excluding this benefit, operating income increased 12.8% in the first quarter of fiscal 2022 compared to the same period last year. Our operating margin, based on revenue, net of subcontractor costs, improved to 15.6% in the first quarter of fiscal 2022 compared to 14.0% in last year's first quarter. Excluding the ERC's, our operating margin was 14.7% in the first quarter of fiscal 2022. The improved operating margin was primarily due to our increased focus on high-end consulting services and improved labor utilization.

Commercial/International Services Group
  Three Months Ended
  January 2,
2022 		December 27,
2020 		Change
  $ %
  ($ in thousands)
Revenue $ 416,286  $ 356,526  $ 59,760  16.8%
Subcontractor costs (64,048) (55,987) (8,061) (14.4)
Revenue, net of subcontractor costs $ 352,238  $ 300,539  $ 51,699  17.2
Income from operations $ 45,308  $ 34,563  $ 10,745  31.1%

Revenue and revenue, net of subcontractor costs, increased $59.8 million, or 16.8%, and $51.7 million, or 17.2%, respectively, in the first quarter of fiscal 2022 compared to the prior-year quarter. The revenue growth in the first quarter of fiscal 2022 primarily reflects more activity on commercial environmental programs, including meeting net zero carbon goals and high performance buildings. These increases were also due to international government stimulus spending on infrastructure. Additionally, revenue in the first quarter of fiscal 2022, includes contributions from acquisitions, which did not have comparable revenue in the first quarter last year.

Operating income increased $10.7 million, or 31.1 %, in the first quarter of fiscal 2022, compared to the first quarter of fiscal 2021 primarily due to revenue growth. Additionally, operating income in the first quarter of fiscal 2022 included $1.4 million of the aforementioned ERC's. Excluding this benefit, operating income increased 27.2% in the first quarter of fiscal 2022 compared to the year-ago quarter. Our operating margin, based on revenue, net of subcontractor costs, improved to 12.9% in the first quarter of fiscal 2022 compared to 11.5% in the prior-year quarter. Excluding the ERC's, our operating margin was 12.5% in the first quarter of fiscal 2022. The improved operating margin was primarily due to our increased focus on high-end consulting services and improved labor utilization.

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Backlog

Backlog generally represents the dollar amount of revenues we expect to realize in the future when we perform the work. The difference between remaining unsatisfied performance obligations ("RUPO") and backlog relates to contract terms. Specifically, our backlog does not consider the impact of termination for convenience clauses within the contracts. The contract term and thus remaining performance obligation on certain of our operations and maintenance contracts, are limited to the notice period required for contract termination (usually 30, 60, or 90 days). At January 2, 2022 and October 3, 2021, the differences between our backlog and RUPO of $3.4 billion were immaterial.

Financial Condition, Liquidity and Capital Resources

Capital Requirements.  As of January 2, 2022, we had $205.5 million of cash and cash equivalents and access to an additional $699 million of borrowings available under our credit facility. During the first quarter of fiscal 2022, we generated $82.4 million of cash from operations. To date, we have not experienced any significant deterioration in our financial condition or liquidity due to the COVID-19 pandemic and our credit facilities remain available.

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, capital expenditures, stock repurchases, cash dividends 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 including any additional resources needed to address the COVID-19 pandemic.

We use a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We currently have no need or plans to repatriate undistributed foreign earnings, other than from Canada, in the foreseeable future; however, this could change due to varied economic circumstances.

On October 5, 2021, the Board of Directors authorized a new stock repurchase program under which we could repurchase up to $400 million of our common stock in addition to the $147.8 million remaining under the previous stock repurchase program at October 3, 2021. In the first quarter of fiscal 2022, we repurchased and settled 290,196 shares with an average price of $172.30 per share for a total cost of $50.0 million in the open market. At January 2, 2022, we had a remaining balance of $497.8 million under our stock repurchase program.

On November 15, 2021, the Board of Directors declared a quarterly cash dividend of $0.20 per share payable on December 20, 2021 to stockholders of record as of the close of business on December 2, 2021.

Subsequent Event.  On January 31, 2022, the Board of Directors declared a quarterly cash dividend of $0.20 per share payable on February 25, 2022 to stockholders of record as of the close of business on February 11, 2022.

Cash and Cash Equivalents.  As of January 2, 2022, our cash and cash equivalents were $205.5 million, an increase of $39.0 million compared to the fiscal 2021 year-end. The increase was due to net cash provided by operating activities and net borrowings of long-term debt, partially offset by stock repurchases, dividends, as well as payments for taxes on vested restricted stock, business acquisitions and contingent earn-outs.

Operating Activities.  For the first quarter of fiscal 2022, net cash provided by operating activities was $82.4 million, an increase of $49.2 million compared to the prior-year quarter. The increase primarily reflects an increase in earnings adjusted for non-cash items and improved working capital from faster collections of our receivables in the first quarter of fiscal 2022 compared to the same quarter last year.

Investing Activities.  For the first quarter of fiscal 2022, net cash used in investing activities was $6.9 million, an increase of $5.1 million compared to the year-ago quarter. The increase was due to a payment related to an acquisition in the first quarter of fiscal 2022, partially offset by the proceeds from sales of assets in the first quarter of fiscal 2021.

Financing Activities.  For the first quarter of fiscal 2022, net cash used in financing activities was $36.4 million, an increase of $3.6 million compared to the same quarter last year. The increase was due to higher stock repurchases, taxes paid on vested restricted stock and stock options exercised, partially offset by a net increase of borrowings of long-term debt and lower contingent earn-out payments compared to the year-ago quarter.

Debt Financing. On July 30, 2018, we entered into a Second Amended and Restated Credit Agreement (“Amended Credit Agreement”) with a total borrowing capacity of $1 billion that will mature in July 2023. The Amended Credit Agreement
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is a $700 million senior secured, five-year facility that provides for a $250 million term loan facility (the “Amended Term Loan Facility”), a $450 million revolving credit facility (the “Amended Revolving Credit Facility”), and a $300 million accordion feature that allows us to increase the Amended Credit Agreement to $1 billion subject to lender approval. The Amended Credit Agreement allows us to, among other things, (i) refinance indebtedness under our Credit Agreement dated as of May 7, 2013; (ii) finance certain permitted open market repurchases of our common stock, permitted acquisitions, and cash dividends and distributions; and (iii) utilize the proceeds for working capital, capital expenditures and other general corporate purposes. 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 $200 million sublimit for multicurrency borrowings and letters of credit.

The entire Amended Term Loan Facility was drawn on July 30, 2018. The Amended Term Loan Facility is subject to quarterly amortization of principal at 5% annually beginning December 31, 2018. We may borrow on the Amended Revolving Credit Facility, at our option, at either (a) a Eurocurrency rate plus a margin that ranges from 1.00% to 1.75% 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 Eurocurrency rate plus 1.00%) plus a margin that ranges from 0% to 0.75% 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 July 30, 2023, or earlier at our discretion upon payment in full of loans and other obligations.

As of January 2, 2022, we had $259.4 million. in outstanding borrowings under the Amended Credit Agreement, which was comprised of $209.4 million under the Amended Term Loan Facility and $50.0 million outstanding under the Amended Revolving Credit Facility. The weighted-average interest rate of the outstanding borrowings during January 2, 2022 is 1.21%. In addition, we had $0.7 million in standby letters of credit under the Amended Credit Agreement. Our weighted-average interest rate on borrowings outstanding during the three months ended January 2, 2022 under the Amended Credit Agreement, including the effects of interest rate swap agreements described in Note 14, “Derivative Financial Instruments” of the “Notes to Consolidated Financial Statements”, was 3.73%. At January 2, 2022, we had $399.3 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 3.00 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 January 2, 2022, we were in compliance with these covenants with a consolidated leverage ratio of 1.01x and a consolidated interest coverage ratio of 27.52x.

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 January 2, 2022, there were no outstanding borrowings under these facilities, and the aggregate amount of standby letters of credit outstanding was $53.1 million. As of January 2, 2022, we had $4.2 million of 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 in fiscal 2022:

  Dividend 
Per Share 		Record Date Total Maximum
Payment
(in thousands) 		Payment Date
November 15, 2021 $ 0.20  December 2, 2021 $ 10,793  December 20, 2021
January 31, 2022 $ 0.20  February 11, 2022 N/A February 25, 2022

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.
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Based on projected 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.

As of January 2, 2022 and October 3, 2021, the liability for income taxes associated with uncertain tax positions was $13.4 million and $14.1 million, respectively. 

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions may 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 January 2, 2022, we had $0.7 million in standby letters of credit outstanding under our Amended Credit Agreement and $53.1 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
 
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended October 3, 2021. To date, there have been no material changes in our critical accounting policies as reported in our 2021 Annual Report on Form 10-K.
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New Accounting Pronouncements

For information regarding recent accounting pronouncements, see “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report.

Financial Market Risks

We do not enter into derivative financial instruments for trading or speculation purposes. In the normal course of business, we have exposure to both interest rate risk and foreign currency transaction and translation risk, primarily related to the Canadian and Australian dollar, and 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 1.00% to 1.75% 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 Eurocurrency rate plus 1.00%) plus a margin that ranges from 0% to 0.75% per annum. 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 Eurodollar 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 Eurodollar rate with similar terms, not to exceed the maturity date of the Facility. The Facility matures on July 30, 2023. At January 2, 2022, we had $259.4 million in outstanding borrowings under the Amended Credit Agreement, which was comprised of $209.4 million under the Amended Term Loan Facility and $50.0 million outstanding under the Amended Revolving Credit Facility. The weighted-average interest rate of the outstanding borrowings during first quarter of fiscal 2022 was 1.21%.

In August 2018, we entered into five interest rate swap agreements with five banks to fix the variable interest rate on $250 million of our Amended Term Loan Facility. The objective of these interest rate swaps was to eliminate the variability of our cash flows on the amount of interest expense we pay under our Credit Agreement. As of January 2, 2022, the notional principal of our outstanding interest swap agreements was $209.4 million ($41.9 million each.) Our year-to-date average effective interest rate on borrowings outstanding under the Credit Agreement, including the effects of interest rate swap agreements, at January 2, 2022, was 3.73%. For more information, see Note 14, “Derivative Financial Instruments” of the “Notes to Consolidated Financial Statements”.

Most of our transactions are in U.S. dollars; however, some of our subsidiaries conduct business in foreign currencies, primarily the Canadian and Australian dollar, 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. For the first quarter of fiscal 2021, we reported $1.3 million of foreign currency losses in “Selling, general and administrative expenses” on our consolidated statements of income. The foreign currency impact for the first quarter of fiscal 2022 was immaterial.

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 the first quarters of fiscal 2022 and 2021, 29.8% and 28.3% of our consolidated revenue, respectively, was generated by our international business. For the first quarter of fiscal 2022, the effect of foreign exchange rate translation on the consolidated balance sheets was a decrease in our equity by $0.7 million compared to an increase in equity of $32.4 million in the first quarter of fiscal 2021. These amounts were recognized as adjustments to equity through other comprehensive income.

Item 3.           Quantitative and Qualitative Disclosures about Market Risk

Please refer to the information we have included under the heading “Financial Market Risks” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 2 of this Form 10-Q which is incorporated herein by reference.
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Item 4.           Controls and Procedures

Evaluation of disclosure controls and procedures and changes in internal control over financial reporting.  As of January 2, 2022, 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 Rule 13a-15(e) and 15d-15(e) under the Exchange Act), were effective.

Changes in internal control over financial reporting.  There were no changes in our internal control over financial reporting that occurred during the quarter ended January 2, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.               OTHER INFORMATION

Item 1.           Legal Proceedings

For information regarding legal proceedings, see Note 16, "Commitments and Contingencies" included in the "Notes to Consolidated Financial Statements" included in Part I, Item 1 of this Form 10-Q which is incorporated herein by reference.
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Item 1A.                Risk Factors

There have been no material changes in our risk factors disclosed in Part I, Item 1A in our 2021 Annual Report on Form 10-K. For updated disclosures related to interest and exchange rate risks, see “Financial Market Risks” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 2 of this Form 10-Q which is incorporated herein by reference.

Item 2.                                                         Unregistered Sales of Equity Securities and Use of Proceeds

On October 5, 2021, the Board of Directors authorized a new stock repurchase program under which we could repurchase up to $400 million of our common stock in addition to the $147.8 million remaining under the previous stock repurchase program at October 3, 2021. In the first quarter of fiscal 2022, we repurchased and settled 290,196 shares with an average price of $172.30 per share for a total cost of $50.0 million in the open market. At January 2, 2022, we had a remaining balance of $497.8 million under our stock repurchase program.
Below is a summary of the stock repurchases that were traded and settled during the first quarter of fiscal 2022:
Period Total Number
of Shares
Purchased 		Average Price
Paid per Share 		Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs 		Maximum
Dollar Value
that May Yet
be Purchased
Under the
Plans or
Programs (in thousands)
October 4, 2021 - October 31, 2021 97,020  $ 160.47  97,020  $ 532,244 
November 1, 2021 - November 28, 2021 91,216  180.16  91,216  515,811 
November 29, 2021 - January 2, 2022 101,960  176.52  101,960  497,813 

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 Mine Safety and Health Administration. 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.

Item 6.                                                         Exhibits

The following documents are filed as Exhibits to this Report:
   
   
   
   
95
   
101 The following financial information from our Company’s Quarterly Report on Form 10-Q, for the period ended January 2, 2022, formatted in Inline eXtensible Business Reporting Language: (i) Consolidated Balance Sheets (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Equity, (vi) Notes to Consolidated Financial Statements.

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SIGNATURES
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Dated: February 4, 2022 TETRA TECH, INC.
 
 
 
  By: /s/ DAN L. BATRACK
    Dan L. Batrack
    Chairman and Chief Executive Officer
    (Principal Executive Officer)
   
   
  By: /s/ STEVEN M. BURDICK
    Steven M. Burdick
    Executive Vice President, Chief Financial Officer
    (Principal Financial Officer)
   
   
  By: /s/ BRIAN N. CARTER
    Brian N. Carter
    Senior Vice President, Corporate Controller
    (Principal Accounting Officer)

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