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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

x                               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 30, 2014

OR

o                                  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)

3475 East Foothill Boulevard, Pasadena, California 91107

(Address of principal executive offices)  (Zip Code)

(626) 351-4664

(Registrant’s telephone number, including area code)

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  x   No  o

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  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o   No  x

As of April 28, 2014, 64,957,358 shares of the registrant’s common stock were outstanding.

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TETRA TECH, INC.

INDEX

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PART I.  FINANCIAL INFORMATION

Item 1.                                 Financial Statements

Tetra Tech, Inc.

Condensed Consolidated Balance Sheets

(unaudited - in thousands, except par value)

See Notes to Condensed Consolidated Financial Statements.

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Tetra Tech, Inc.

Condensed Consolidated Statements of Income

(unaudited – in thousands, except per share data)

See Notes to Condensed Consolidated Financial Statements.

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Tetra Tech, Inc.

Condensed Consolidated Statements of Comprehensive Income

(unaudited – in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Tetra Tech, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited – in thousands)

See Notes to Condensed Consolidated Financial Statements.

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TETRA TECH, INC.

Notes to Condensed Consolidated Financial Statements

1.                                      Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and related notes of Tetra Tech, Inc. (“we,” “us” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“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 GAAP for complete financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended September 29, 2013.

These financial statements reflect all normal recurring adjustments that are considered necessary for the 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.  Certain immaterial reclassifications were made to the prior year to conform to current year presentation.

2.                                      Accounts Receivable – Net and Revenue Recognition

Net accounts receivable and billings in excess of costs on uncompleted contracts consisted of the following:

Billed accounts receivable represent amounts billed to clients that have not been collected.  Unbilled accounts receivable represent revenue recognized but not yet billed pursuant to contract terms or billed after the period end date.  Most of our unbilled receivables at March 30, 2014 are expected to be billed and collected within 12 months.  Contract retentions represent amounts withheld by clients until certain conditions are met or the project is completed, which may be several months or years.  The allowance for doubtful accounts represents amounts that may 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 particular industry conditions that may affect a client’s ability to pay.  Billings in excess of costs on uncompleted contracts represent the amount of cash collected from clients and billings to clients on contracts in advance of revenue recognized.  The majority of billings in excess of costs on uncompleted contracts will be earned within 12 months.

Once contract performance is underway, we may experience changes in conditions, client requirements, specifications, designs, materials and expectations regarding the period of performance.  Such changes result in “change orders” and may be initiated by us or by our clients.  In many cases, agreement with the client as to the terms of change orders is reached prior to work commencing; however, sometimes circumstances require that work progresses without obtaining a definitive client agreement. Unapproved change orders constitute claims 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, or other causes of unanticipated additional costs. Revenue on claims is recognized when contract costs related to claims have been incurred and when their addition to contract value can be reliably estimated.  This can lead to a situation in which costs are recognized in one period and revenue is recognized in a subsequent period such as when client agreement is obtained or a claims resolution occurs.

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Total accounts receivable at March 30, 2014 and September 29, 2013 include approximately $61 million and $41 million, respectively, related to claims, including requests for equitable adjustment, on contracts that provide for price redetermination, primarily with U.S. federal government agencies.  The increase from the end of fiscal 2013 primarily relates to the impact of cost overruns on an oil and gas project in Western Canada during the second quarter of fiscal 2014, primarily due to changes in scope that are currently in negotiation with the client.  As a result, we revised our estimate of the total costs to complete the project and recorded a charge of $5.3 million in the second quarter of fiscal 2014 to reverse profit recognized in prior periods.  As of March 30, 2014, this project was approximately 90% complete, with remaining estimated costs to complete of approximately $13 million.  In addition, during the second quarter of fiscal 2014, we recorded accounts receivable and revenue of approximately $10 million for this project based upon the portion of change orders that we believe have a technical and legal basis for recovery and are probable of collection. If the actual costs to complete the project exceed our estimates, or we are unable to fully collect the accounts receivable, we could incur further losses.  However, we intend to pursue all options to collect the entire amount of the change orders, which is expected to exceed the revenue recognized on the project.  If we are successful, we could recognize gains on recovery in future periods in our RCM segment.  In addition to new claims, we also regularly evaluate all claim amounts recorded as of the beginning of each period, and record appropriate adjustments to operating earnings when it is probable that the claim will result in a different contract value than the amount previously reliably estimated.  As a result of this assessment, we recognized revenue and an increase to operating income of $3.4 million and $1.1 million for the six months ended March 30, 2014 and March 31, 2013, respectively.

Billed accounts receivable related to U.S. federal government contracts were $68.9 million and $50.5 million at March 30, 2014 and September 29, 2013, respectively.  U.S. federal government unbilled receivables, net of progress payments, were $69.9 million and $79.3 million at March 30, 2014 and September 29, 2013, respectively.  Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at March 30, 2014 and September 29, 2013.

We recognize revenue for most of our contracts using the percentage-of-completion method, primarily utilizing the cost-to-cost approach to estimate the progress towards completion in order to determine the amount of revenue and profit to recognize. Revenue and cost estimates for each significant contract are reviewed and reassessed quarterly.  Changes in those estimates could result in 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 the net unfavorable operating income adjustment of $5.3 million previously described for the three and six months ended March 30, 2014.  No material operating income adjustments were recognized during the three and six months ended March 31, 2013.  Changes in revenue and cost estimates could also result in a projected loss that would be recorded immediately in earnings.  As of March 30, 2014 and September 29, 2013, we recorded a liability for anticipated losses of $9.2 million and $13.3 million, respectively.  The estimated cost to complete the related contracts as of March 30, 2014 was $41.1 million.  Loss contracts had an immaterial impact on our consolidated results for the three and six months ended March 30, 2014 and March 31, 2013.

3.                                      Mergers and Acquisitions

In the second quarter of fiscal 2013, we acquired American Environmental Group, Ltd. (“AEG”), headquartered in Richfield, Ohio.  AEG provides environmental, design, construction and maintenance services primarily to solid and hazardous waste, environmental, energy and utility clients.  Also in the second quarter of fiscal 2013, we acquired Parkland Pipeline Contractors Ltd., Parkland Pipeline Equipment Ltd., Park L Projects Ltd. and Parkland Projects Ltd. (collectively, “Parkland”), headquartered in Alberta, Canada.  Parkland serves the oil and gas industry in Western Canada, and specializes in the technical support, engineering support and construction of pipelines and oilfield facilities.  AEG and Parkland are both included in our Remediation and Construction Management (“RCM”) segment.  We also made other acquisitions that enhanced our service offerings and expanded our geographic presence in our Engineering and Consulting Services (“ECS”) and Technical Support Services (“TSS”) segments during fiscal 2013. The aggregate fair value of the purchase prices for fiscal 2013 acquisitions was $248.9 million.  Of this amount, $171.6 million was paid to the sellers, $2.0 million was recorded as liabilities in accordance with the purchase agreements, and $75.3 million was the estimated fair value of contingent earn-out obligations as of the respective acquisition dates, with an aggregate maximum of $86.7 million upon the achievement of specified financial objectives.  In the first quarter of fiscal 2014, we acquired a company that enhanced our service offerings in our ECS segment.

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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.  Specifically, the goodwill additions related to the fiscal 2013 acquisitions primarily represent the value of workforces with distinct expertise in the solid and hazardous waste, and oil and gas markets.  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 the consolidated financial statements from their respective closing dates.  The purchase price allocations related to acquisitions completed during the second half of fiscal 2013 and the first quarter of fiscal 2014 are preliminary, and subject to adjustment, based on the valuation and final determination of net assets acquired.  We do not believe that any such adjustment will have a material effect on our consolidated results of operations.  None of the acquisitions were considered material, individually or in the aggregate, to our condensed consolidated financial statements.  As a result, no pro forma information has been provided for the respective periods.

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 “Estimated contingent earn-out liabilities” and “Long-term estimated contingent earn-out liabilities” on the condensed 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 (as described in “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 29, 2013).  We use a probability-weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount.  The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period (generally two or three years), and the probability outcome percentages we assign to each scenario.  Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings.  The amount paid that is less than or equal to the contingent earn-out liability on the acquisition date is reflected as cash used in financing activities in our condensed 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.

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.  During the three and six months ended March 30, 2014, we recorded net decreases in our contingent earn-out liabilities and reported related net gains in operating income of $21.3 million and $26.0 million, respectively, compared to approximately $1.0 million for both the three and six months ended March 31, 2013.  The fiscal 2014 gains primarily resulted from updated valuations of the contingent consideration liability for Parkland.  We recognized a net unfavorable operating income adjustment for Parkland during the second quarter of fiscal 2014.  As a result, we lowered our income projections over the remaining earn-out period and recorded a corresponding reduction of the earn-out liability.  We also determined that this charge, which related to a single project, would not negatively impact Parkland’s longer-term performance or result in goodwill impairment.  However, if our income projections for Parkland were to decline further, this could result in the impairment of a portion of the related goodwill balance of $96.4 million.  In this event, we would also likely have gains in our operating income up to a maximum of the remaining Parkland contingent consideration liability.  Conversely, if Parkland’s performance increases beyond our projections, we could incur future losses in operating income if the resulting contingent consideration earned exceeds the current recorded liability.

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At March 30, 2014, there was a total maximum of $78.8 million of outstanding contingent consideration related to completed acquisitions.  Of this amount, $49.1 million was estimated as the fair value and accrued on our condensed consolidated balance sheets.  For the six months ended March 30, 2014, we made $10.6 million of earn-out payments to former owners.  Of this amount, we reported $9.3 million as cash used in financing activities and $1.3 million as cash used in operating activities.  For the six months ended March 31, 2013, we made $24.4 million of earn-out payments to former owners.  Of this amount, we reported $24.0 million as cash used in financing activities and $0.4 million as cash used in operating activities.

4.                                      Goodwill and Intangible Assets

The following table summarizes the changes in the carrying value of goodwill:

Goodwill additions are attributable to an acquisition completed in the first quarter of fiscal 2014.  Substantially all of the goodwill additions are not deductible for income tax purposes.  The foreign exchange impact relates to our foreign subsidiaries with functional currencies that are different than our reporting currency.  The gross amounts of goodwill for ECS were $404.4 million and $411.1 million at March 30, 2014 and September 29, 2013, respectively, excluding $57.5 million of accumulated impairment.

We test our goodwill for impairment on an annual basis, and more frequently when an event occurs or circumstances indicate that the carrying value of the asset may not be recoverable.  We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter.  Our last annual review at July 1, 2013, indicated that we had no impairment of goodwill, and all of our reporting units had estimated fair values that were in excess of their carrying values, including goodwill.  During this review we identified three operating units (with goodwill totaling $208.3 million as of March 30, 2014) in the ECS segment and two recently acquired reporting units (with goodwill totaling $135.1 million as of March 30, 2014) in the RCM segment with fair values in excess of their carrying values of less than 20%.  The goodwill related to the three reporting units in the ECS segment was adjusted to fair value in the third quarter of fiscal 2013, and a $56.6 million impairment charge was recorded.  The two reporting units in the RCM segment were acquired at fair value in the second quarter of fiscal 2013.  In addition, we regularly evaluate whether events and circumstances have occurred that may indicate a potential change in recoverability of goodwill.  Based on these assessments as of March 30, 2014, we also determined that all of our reporting units had estimated fair values that were in excess of their carrying values, including goodwill as of March 30, 2014 with the same five reporting units having fair value in excess of carrying value of less than 20%. Although we believe that our estimates of fair value for these reporting units are reasonable, if the financial performance for these reporting units falls significantly below our expectations or market prices for similar businesses decline, the goodwill for these reporting units could become impaired.

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The gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives included in “Intangible assets - net” on the condensed consolidated balance sheets, were as follows:

The gross amount and accumulated amortization for acquired identifiable intangible assets decreased due to a write-off of fully amortized assets in the first quarter of fiscal 2014. The recent acquisition added $2.2 million of identifiable intangible assets, partially offset by $2.8 million of foreign currency translation adjustments. Amortization expense for the identifiable intangible assets for the three and six months ended March 30, 2014 was $6.7 million and $15.3 million, respectively, compared to $9.1 million and $14.7 million for the prior-year periods. Estimated amortization expense for the remainder of fiscal 2014 and succeeding years is as follows:

5.                                      Property and Equipment

Property and equipment consisted of the following:

The depreciation expense related to property and equipment, including assets under capital leases, was $6.6 million and $13.7 million for the three and six months ended March 30, 2014, respectively, compared to $7.5 million and $14.3 million for the prior-year periods.

6.                                      Stock Repurchase and Dividends

In June 2013, our Board of Directors authorized a stock repurchase program (the “Stock Repurchase Program”) under which we may currently repurchase up to $100 million of our common stock.  In February 2014, our Board of Directors amended the Stock Repurchase Program to authorize the repurchase of up to $30 million of the $100 million Stock Repurchase Program in open market purchases through September 2014, revise the pricing parameters and extend the program through fiscal 2014.  Stock repurchases may be made on the open market or in

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privately negotiated transactions with third parties.  Because the repurchases under the Stock Repurchase Program are subject to certain pricing parameters, there is no guarantee as to the exact number of shares that will be repurchased under the program.  From the inception of the Stock Repurchase Program through March 30, 2014, we repurchased through open market purchases a total of 1.1 million shares at an average price of $24.61 per share, for a total cost of $26.6 million.

Subsequent Event.  On April 28, 2014, the Board of Directors declared a quarterly cash dividend of $0.07 per share payable on June 4, 2014 to stockholders of record as of the close of business on May 16, 2014.

7.                                      Stockholders’ Equity and Stock Compensation Plans

We recognize the fair value of our stock-based compensation awards as compensation expense on a straight-line basis over the requisite service period in which the award vests.  Stock-based compensation expense for the three and six months ended March 30, 2014 was $3.2 million and $5.5 million, respectively, compared to $2.3 million and $4.8 million for the same periods last year.  The majority of these amounts was included in “Selling, general and administrative (“SG&A”) expenses” in our condensed consolidated statements of income.  In the three months ended March 30, 2014, no stock options were granted and we awarded 125 restricted stock units (“RSUs”) to an employee at the fair value of $28.72 per share on the award date.  For the six months ended March 30, 2014, we granted 354,238 stock options with exercise prices of $28.58 - $28.68 per share and an estimated weighted-average fair value of $9.36 per share.  In addition, we awarded 117,067 shares of restricted stock to our non-employee directors and executive officers at the fair value of $28.58 per share on the award date.  All of these shares are performance-based and vest, if at all, over a three-year period.  The number of shares that ultimately vest is based on the growth in our diluted earnings per share. Additionally, we awarded 224,743 RSUs to our non-employee directors, executive officers and employees at the weighted-average fair value of $28.58 per share on the award date.  All of the executive officer and employee RSUs have time-based vesting over a four-year period, and the non-employee director RSUs vest after one year.

8.                                      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 sets forth the number of weighted-average shares used to compute basic and diluted EPS:

For the three and six months ended March 30, 2014, 0.3 million and no options were excluded from the calculation of dilutive potential common shares, respectively, compared to 0.4 million and 0.6 million options for the same periods last year.  These options were not included in the computation of dilutive potential common shares because the assumed proceeds per share exceeded the average market price per share during the period.  Therefore, their inclusion would have been anti-dilutive.

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9.             Income Taxes

The effective tax rates for the first half of fiscal 2014 and 2013 were 30.3% and 32.7%, respectively.  At March 30, 2014, undistributed earnings of our foreign subsidiaries, primarily in Canada, in the amount of approximately $31.8 million, are expected to be permanently reinvested.  Accordingly, no provision for U.S. income taxes or foreign withholding taxes has been made.  Upon distribution of those earnings, we would be subject to U.S. income taxes and foreign withholding taxes.  Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable; however, the potential foreign tax credit associated with the deferred income would be available to partially reduce the resulting U.S. tax liabilities.

We review the realizability of deferred tax assets on a quarterly basis by assessing the need for a valuation allowance.  As of March 30, 2014, we performed our assessment of net deferred tax assets.  Significant management judgment is required to determine the provision for income taxes and, in particular, any valuation allowance recorded against our deferred tax assets.  Applying the applicable accounting guidance requires an assessment of all available evidence, both positive and negative, regarding the realizability of the net deferred tax assets.  Based upon recent results, we concluded that a cumulative loss in recent years exists in certain foreign jurisdictions.  We have historically relied on the following factors in our assessment of the realizability of our net deferred tax assets:

·                  taxable income in prior carryback years as permitted under the tax law;

·                  future reversals of existing taxable temporary differences;

·                  consideration of available tax planning strategies and actions that could be implemented, if necessary; and

·                  estimates of future taxable income from our operations.

We considered these factors in our estimate of the reversal pattern of deferred tax assets, using assumptions that we believe are reasonable and consistent with operating results.  However, as a result of projected cumulative pre-tax losses in these certain foreign jurisdictions for the 36 months ended September 28, 2014, we concluded that our estimates of future taxable income and certain tax planning strategies did not constitute sufficient positive evidence to assert that it is more likely than not that certain deferred tax assets would be realizable before expiration.  Although we project earnings in the related business beyond 2014, we did not rely on these projections when assessing the realizability of our deferred tax assets.  Based on our assessment, we concluded that it is more likely than not that the assets will be realized except for the assets related to loss carry-forwards in foreign jurisdictions for which a valuation allowance of $7.6 million had been provided in previous years.

During the second quarter of fiscal 2013, the American Taxpayer Relief Act of 2012 was signed into law.  This law retroactively extended the federal research and experimentation credits (“R&E credits”) for amounts incurred from January 1, 2012 through December 31, 2013.  Our effective tax rate for the first quarter of fiscal 2014 includes a tax benefit from R&E credits attributable to the first three months of fiscal 2014.  Should the R&E credits provision be retroactively extended during fiscal 2014, additional benefits will be reflected in our effective tax rate during the quarter reporting period of enactment.

10.          Reportable Segments

Our reportable segments are as follows:

ECS:  provides front-end science, consulting engineering and project management services in the areas of surface water management, water infrastructure, solid waste management, mining, geotechnical sciences, arctic engineering, industrial processes and oil sands, transportation and information technology.

TSS:  provides management consulting and engineering services and strategic direction in the areas of environmental assessments/hazardous waste management, climate change, international development, international reconstruction and stabilization, energy, oil and gas, technical government consulting, and building and facilities.

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RCM:  provides full-service support, including construction and construction management, to all of our client sectors, including the U.S. federal government in the United States and internationally, and commercial clients worldwide, in the areas of environmental remediation, infrastructure development, solid waste management, energy, and oil and gas.

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 sales and transfers as if the sales and transfers were to third parties; that is, by applying a negotiated fee onto the costs of the services performed.  All significant intercompany balances and transactions are eliminated in consolidation.

The following tables set forth summarized financial information regarding our reportable segments:

Reportable Segments

(1)                Includes amortization of intangibles, other costs and other income not allocable to segments.

(1)                Corporate assets consist of intercompany eliminations and assets not allocated to segments including goodwill, intangible assets, deferred income taxes and certain other assets.

Major Clients

Other than the U.S. federal government, no single client accounted for more than 10% of our revenue.  All of our segments generated revenue from all client sectors.

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The following table represents our revenue by client sector:

(1)                Includes revenue generated from foreign operations, primarily in Canada, and revenue generated from non-U.S. clients.

(2)                Includes revenue generated under U.S. federal government contracts performed outside the United States.

11.          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 September 29, 2013).  The carrying value of our long-term debt approximated fair value at March 30, 2014 and September 29, 2013.  As of March 30, 2014, we had borrowings of $205.0 million under our amended credit agreement to fund our business acquisitions, working capital needs and contingent earn-outs.

12.          Joint Ventures

Consolidated Joint Ventures

The aggregate revenue of our consolidated joint ventures for the three and six months ended March 30, 2014 was $3.5 million and $6.2 million, respectively, compared to $3.0 million and $7.0 million for the same periods last year.  The assets and liabilities of these consolidated joint ventures were immaterial at March 30, 2014 and September 29, 2013.  These assets are restricted for use only by those joint ventures and are not available for our general operations.  For both March 30, 2014 and September 29, 2013, cash and cash equivalents maintained by the consolidated joint ventures were $1.2 million.

Unconsolidated Joint Ventures

We account for our unconsolidated joint ventures using the equity method of accounting.  Under this method, we recognize our proportionate share of the net earnings of these joint ventures within “Other costs of revenue” in our condensed consolidated statements of income.  For the three and six months ended March 30, 2014, we reported $0.8 million and $1.5 million of equity in earnings of unconsolidated joint ventures, respectively, compared to $1.3 million and $1.9 million for the same periods last year.  Our maximum exposure to loss as a result of our investments in unconsolidated joint ventures is typically limited to the aggregate of the carrying value of the investment.  Future funding commitments for our unconsolidated joint ventures are immaterial.  The unconsolidated joint ventures are, individually and in aggregate, immaterial to our consolidated financial statements.

The aggregate carrying values of the assets and liabilities of the unconsolidated joint ventures were $21.3 million and $18.8 million, respectively, at March 30, 2014, and $24.0 million and $21.8 million, respectively, at September 29, 2013.

13.          Derivative Financial Instruments

We use certain interest rate derivative contracts to hedge interest rate exposures on our variable rate debt. We have also entered into foreign currency derivative contracts with financial institutions to reduce the risk that cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations.  Our hedging program is not designated for trading or speculative purposes.

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We recognize derivative instruments as either assets or liabilities on the accompanying condensed 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 accounting hedges in our condensed consolidated balance sheets as accumulated other comprehensive income.

In fiscal 2013, we entered into three interest rate swap agreements that we designated as cash flow hedges to fix the variable interest rates on a portion of borrowings under our term loan facility.  In the first quarter of fiscal 2014, we entered into two additional interest rate swap agreements that we designated as cash flow hedges to fix the variable interest rates on the balance of the term loan facility.  At March 30, 2014, the effective portion of our interest rate swap agreements designated as cash flow hedges before tax effect was immaterial, all of which we expect to reclassify from accumulated other comprehensive income to interest expense within the next 12 months.

As of March 30, 2014, the notional principal, fixed rates and related expiration dates of our outstanding interest rate swap agreements are as follows:

The fair values of our outstanding derivatives designated as hedging instruments are as follows:

The impact of the effective portions of derivative instruments in cash flow hedging relationships on income and other comprehensive income from our interest rate swap agreements was immaterial for the first six months of fiscal 2014 and the fiscal year ended September 29, 2013. Additionally, there were no ineffective portions of derivative instruments.  Accordingly, no amounts were excluded from effectiveness testing for our interest rate swap agreements.  We had no derivative instruments that were not designated as hedging instruments for fiscal 2013 and the first half of fiscal 2014.

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14.          Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

The accumulated balances and reporting period activities for the three and six months ended March 30, 2014 and September 29, 2013 related to reclassifications out of accumulated other comprehensive income (loss) are summarized as follows: