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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

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, 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.

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  o   No  x

As of July 27, 2017, 56,551,468 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 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 October 2, 2016.

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.

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.  Except for amounts related to claims as discussed below, most of our unbilled receivables at July 2, 2017 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 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 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 progress without a definitive client agreement.  Unapproved change orders constitute claims in excess of agreed contract prices that we seek to collect from our clients 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 July 2, 2017 and October 2, 2016 included approximately $49 million and $45 million, respectively, related to claims, including requests for equitable adjustment, on contracts that provide for price redetermination.  We regularly evaluate all unsettled claim amounts 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 estimated.  As a result of this assessment, in the third quarter and first nine months of fiscal 2017, we recognized a reduction of revenue of $0.4 million and $4.9 million, respectively, and  related losses in operating income of $0.4 million and $3.6 million, respectively, in our Remediation and Construction Management (“RCM”) segment.  In the first nine months of fiscal 2016 (all in the first quarter), we collected $13.4 million to settle claims of $8.8 million, which resulted in gains in operating income of $4.6 million in the RCM segment.

Billed accounts receivable related to U.S. federal government contracts were $51.4 million and $47.4 million at July 2, 2017 and October 2, 2016, respectively.  U.S. federal government unbilled receivables were $95.7 million and $92.2 million at July 2, 2017 and October 2, 2016, respectively.  Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at July 2, 2017 and October 2, 2016.

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. 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 immaterial operating income adjustments during the third quarter of fiscal 2017, and net unfavorable operating income adjustments of $8.0 million ($2.3 million in the Resource Management and Energy (“RME”) segment and $5.7 million in the RCM segment) during the first nine months of fiscal 2017.  We recognized net unfavorable operating income adjustments during both the third quarter and first nine months of fiscal 2016 of $2.3 million (all in the RCM segment).  Changes in revenue and cost estimates could also result in a projected loss that would be recorded immediately in earnings.  As of July 2, 2017 and October 2, 2016, our balance sheets included liabilities for anticipated losses of $8.7 million and $6.7 million, respectively.  The estimated cost to complete the related contracts as of July 2, 2017 was $10.7 million.

3.             Mergers and Acquisitions

In the second quarter of fiscal 2017, we completed the acquisition of Eco Logical Australia (“ELA”), headquartered in Sydney, Australia.  ELA is a multi-disciplinary consulting firm with over 160 staff that provides innovative, high-end environmental and ecological services, and is part of our RME segment.  The fair value of the purchase price for ELA was $9.9 million.  Of this amount, $8.3 million was paid to the sellers and $1.6 million was the estimated fair value of contingent earn-out obligations, with a maximum of $1.7 million, based upon the achievement of specified operating income targets in each of the two years following the acquisition.

In the second quarter of fiscal 2016, we acquired INDUS Corporation (“INDUS”), headquartered in Vienna, Virginia. INDUS is an information technology solutions firm focused on water data analytics, geospatial analysis, secure infrastructure, and software applications management for U.S. federal government customers, and is included in our Water, Environment and Infrastructure (“WEI”) segment.  The fair value of the purchase price for INDUS was $18.7 million.  Of this amount, $14.0 million was paid to the sellers and $4.7 million was the estimated fair value of contingent earn-out obligations, with a maximum of $8.0 million, based upon the achievement of specified operating income targets in each of the two years following the acquisition.

In the second quarter of fiscal 2016, we acquired control of Coffey International Limited (“Coffey”), headquartered in Sydney, Australia. Coffey had approximately 3,300 staff delivering technical and engineering solutions in international development and geoscience. Coffey significantly expands our geographic presence, particularly in Australia and Asia Pacific, and is part of our RME segment.  In addition to Australia, Coffey’s international development business has operations supporting federal government agencies in the U.S. and the United Kingdom.  The fair value of the purchase price for Coffey was $76.1 million, in addition to $65.1 million of assumed debt, which consisted of secured bank term debt of $37.1 million and unsecured corporate bond obligations of $28.0 million.  All of this debt was paid in full from other borrowings in the second quarter of fiscal 2016 subsequent to the acquisition.

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The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the respective acquisition dates for our acquisitions completed in fiscal 2016 (in thousands):

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 addition related to the fiscal 2017 acquisition represents the value of a workforce with distinct expertise in the environmental and ecological markets. The goodwill additions related to the 2016 acquisitions primarily represent the value of workforces with distinct expertise in the international development, geoscience, and software applications management 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 our condensed consolidated financial statements from their respective closing dates.

Backlog and trade name intangible assets include the fair value of existing contracts and the underlying customer relationships with lives ranging from 1 to 5 years (weighted average of approximately 3 years), and the fair value of trade names with lives ranging from 3 to 5 years.

The table below presents summarized unaudited consolidated pro forma operating results including the related acquisition, integration and debt pre-payment charges, assuming we had acquired Coffey and INDUS at the beginning of fiscal 2016.  These pro-forma operating results are presented for illustrative purposes only and are not indicative of the operating results that would have been achieved had the related events occurred at the beginning of fiscal 2016.

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Acquisition and integration expenses in the accompanying condensed consolidated statements of income are comprised of the following:

All of the $16.9 million in acquisition and integration expenses were paid in fiscal 2016.  These expenses were included in our Corporate reportable segment, as presented in Note 10.  In addition, in the second quarter of fiscal 2016, we repaid Coffey’s bank loans and corporate bonds in full, including $1.9 million in pre-payment charges that are included in interest expense.

Most of our acquisition agreements include contingent earn-out agreements, which are generally based on the achievement of future operating income thresholds.  The contingent earn-out arrangements are based on our valuations of the acquired companies, and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved.  The fair values of any earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates.  For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in “Current contingent earn-out liabilities” and “Long-term contingent earn-out liabilities” on our 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.  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 first nine months of fiscal 2017 (all in the second quarter), we recorded decreases in our contingent earn-out liabilities and reported related gains in operating income totaling $7.1 million.  These gains resulted from updated valuations of the contingent consideration liabilities for INDUS and Cornerstone Environmental Group (“CEG”).

The acquisition agreement for INDUS included a contingent earn-out agreement based on the achievement of operating income thresholds in each of the first two years beginning on the acquisition date, which was in the second quarter of fiscal 2016.  The maximum earn-out obligation over the two-year earn-out period was $8.0 million ($4.0 million in each year).  These amounts could be earned on a pro-rata basis starting at 50% of the earn-out maximum for operating income within a predetermined range in each year. INDUS was required to meet a minimum operating income threshold in each year to earn any contingent consideration.  These minimum thresholds were $3.2 million and $3.6 million in years one and two, respectively.  In order to earn the maximum contingent consideration, INDUS needed to generate operating income of $3.6 million in year one and $4.0 million in year two.

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The determination of the fair value of the purchase price for INDUS on the acquisition date included our estimate of the fair value of the related contingent earn-out obligation.  The initial valuation was primarily based on probability-weighted internal estimates of INDUS’ operating income during each earn-out period.  As a result of these estimates, we calculated an initial fair value at the acquisition date of INDUS’ contingent earn-out liability of $4.7 million in the second quarter of fiscal 2016.  This amount had increased to $4.9 million at the end of fiscal 2016 due to the passage of time for the present value calculation.  In determining that INDUS would earn 59% of the maximum potential earn-out, we considered several factors including INDUS’ recent historical revenue and operating income levels and growth rates.  We also considered the recent trend in INDUS’ backlog level.

INDUS’ actual financial performance in the first earn-out period was below our original expectation at the acquisition date. As a result, in the second quarter of fiscal 2017, we evaluated our estimate of INDUS’ contingent consideration liability for both earn-out periods.  This assessment included a review of INDUS’ financial results in the first earn-out period, the status of ongoing projects in INDUS’ backlog, and the inventory of prospective new contract awards.  As a result of this assessment, we concluded that INDUS’ operating income in both the first and second earn-out periods would be lower than the minimum requirements of $3.2 million and $3.6 million, respectively, to earn any contingent consideration.  Accordingly, in the second quarter of fiscal 2017, we reduced the INDUS contingent earn-out liability to $0, which resulted in a gain of $5.0 million.

The acquisition agreement for CEG included a contingent earn-out agreement based on the achievement of operating income thresholds in each of the first three years beginning on the acquisition date, which was in the third quarter of fiscal 2015.  The maximum earn-out obligation over the three-year earn-out period was $9.8 million ($3.25 million in each year).  The annual amounts could be earned primarily on a pro-rata basis for operating income within a predetermined range in each year.  To a lesser extent, additional earn-out consideration could be earned for operating income above the high-end of the range up to the contractual maximum of $9.8 million.  CEG was required to meet a minimum operating income threshold in each year to earn any contingent consideration.  These minimum thresholds were $2.0 million, $2.3 million and $2.6 million in years one, two and three, respectively. In order to earn the maximum contingent consideration, CEG needed to achieve operating income of $4.5 million in year one, $4.8 million in year two and $5.1 million in year three.

The determination of the fair value of the purchase price for CEG on the acquisition date included our estimate of the fair value of the related contingent earn-out obligation.  The initial valuation was primarily based on probability-weighted internal estimates of CEG’s operating income during each earn-out period.  As a result of these estimates, we calculated an initial fair value at the acquisition date of CEG’s contingent earn-out liability of $4.1 million in the third quarter of fiscal 2015.  In determining that CEG would earn 42% of the maximum potential earn-out, we considered several factors including CEG’s recent historical revenue and operating income levels and growth rates.  We also considered the recent trend in CEG’s backlog level.

In the second quarter of fiscal 2016, we recorded an increase in our contingent earn-out liabilities and related losses in operating income of $1.8 million, which reflected our updated valuation of the contingent consideration liability for CEG.  This valuation included our updated projection of CEG’s financial performance during the earn-out period, which exceeded our original estimate at the acquisition date.  The first earn-out payment of $2.3 million was made in the fourth quarter of fiscal 2016, at which time a $3.9 million contingent consideration liability remained for the last two years of CEG’s earn-out period.

During the second quarter of fiscal 2017, we evaluated our estimate of CEG’s contingent consideration liability for the remaining two earn-out periods.  This assessment included a review of CEG’s financial results to-date in the second earn-out period, the status of ongoing projects in CEG’s backlog, and the inventory of prospective new contract awards.  As a result of this assessment, we concluded that CEG’s operating income in both the second and third earn-out periods would be lower than our previous estimate. Accordingly, we reduced the CEG contingent earn-out liability to $1.8 million as of April 2, 2017, which resulted in a gain of $2.1 million in the second quarter of fiscal 2017.

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During the second quarter of fiscal 2017, when we determined that INDUS’ and CEG’s operating income would be lower than our previous estimates, including our original estimates at the acquisition dates, we also evaluated the related goodwill for potential impairment.  In each case, we determined that the related reporting units’ long-term performance was not materially impacted and there was no resulting goodwill impairment.

During the first nine months of fiscal 2016 (all in the first quarter), we also recognized a $1.0 million loss, which represented the final cash settlement of an earn-out liability that was valued at $0 at the end of fiscal 2015.

At July 2, 2017, there was a total potential maximum of $12.2 million of outstanding contingent consideration related to acquisitions.  Of this amount, $3.5 million was estimated as the fair value and accrued on our condensed consolidated balance sheet.

4.             Goodwill and Intangible Assets

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

The goodwill addition of $7.1 million resulted from our acquisition of ELA.  In the first quarter of fiscal 2017, we completed our purchase price allocations for Coffey and INDUS and recorded a net goodwill adjustment of $0.7 million, which resulted from an updated valuation of our purchase price allocation of net assets acquired in the Coffey acquisition.  Foreign exchange impact relates to our foreign subsidiaries with functional currencies that are different than our reporting currency.  The gross amounts of goodwill for WEI were $319.4 million and $304.4 million at July 2, 2017 and October 2, 2016, respectively, excluding $82.4 million of accumulated impairment.  The gross amounts of goodwill for RME were $525.5 million and $529.2 million at July 2, 2017 and October 2, 2016, respectively, excluding $33.2 million of accumulated impairment.

We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter.  Our last review was performed at June 27, 2016 (i.e. the first day of our fourth quarter in fiscal 2016).  In addition, we 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.

We estimate the fair value of all reporting units with a goodwill balance based on a comparison and weighting of the income approach (weighted 70%), specifically the discounted cash flow method, and the market approach (weighted 30%), which estimates the fair value of our reporting units based upon comparable market prices and recent transactions and also validates the reasonableness of the multiples from the income approach.  The resulting fair value is most sensitive to the assumptions we use in our discounted cash flow analysis.  The assumptions that have the most significant impact on the fair value calculation are the reporting unit’s revenue growth rate and operating profit margin, and the discount rate used to convert future estimated cash flows to a single present value amount.

Our fourth quarter 2016 goodwill impairment review 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.  Although we believe that our estimates of fair value for our reporting units are reasonable, if financial performance for our reporting units falls significantly below our expectations or market prices for similar businesses decline, the goodwill for our 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 our condensed consolidated balance sheets, were as follows:

Amortization expense for the three and nine months ended July 2, 2017 was $5.6 million and $17.4 million, respectively, compared to $6.3 million and $16.1 million for the prior-year periods.  The gross amount and accumulated amortization for acquired identifiable assets decreased due to the full amortization of assets in fiscal 2017.  Estimated amortization expense for the remainder of fiscal 2017 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 was $5.3 million and $16.4 million for the three and nine months ended July 2, 2017, respectively, compared to $5.9 million and $17.2 million for the prior-year periods.

6.                                      Stock Repurchase and Dividends

On November 7, 2016, the Board of Directors authorized a new stock repurchase program under which we could repurchase up to $200 million of our common stock.  In the first nine months of fiscal 2017, we repurchased through open market purchases under this program a total of 1,352,999 shares at an average price of $44.35 for a total cost of $60.0 million.

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On November 7, 2016, the Board of Directors declared a quarterly cash dividend of $0.09 per share payable on December 14, 2016 to stockholders of record as of the close of business on December 1, 2016.  On January 30, 2017, the Board of Directors declared a quarterly cash dividend of $0.09 per share payable on March 3, 2017 to stockholders of record as of the close of business on February 17, 2017.  On May 1, 2017, the Board of Directors declared a quarterly cash dividend of $0.10 per share payable on June 2, 2017 to stockholders of record as of the close of business on May 18, 2017.  Dividends totaling $16.0 million and $14.6 million were paid in the first nine months of fiscal 2017 and 2016, respectively.

Subsequent Event.  On July 31, 2017, the Board of Directors declared a quarterly cash dividend of $0.10 per share payable on September 1, 2017 to stockholders of record as of the close of business on August 17, 2017.

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 nine months ended July 2, 2017 was $3.4 million and $10.0 million, respectively, compared to $3.2 million and $9.3 million for the same periods last year.  The majority of these amounts were included in “Selling, general and administrative (“SG&A”) expenses” in our condensed consolidated statements of income.  There were no material stock compensation awards in the third quarter of fiscal 2017.  In the nine months ended July 2, 2017, we granted 183,163 stock options with an exercise price of $40.67 per share and an estimated weighted-average fair value of $12.35 per share to our non-employee directors and executive officers.  The executive officer options vest over a four-year period, and the non-employee director options vest after one year.  In addition, we awarded 99,180 performance shares units (“PSUs”) to our non-employee directors and executive officers at the fair value of $48.36 per share on the award date.  All of the PSUs are performance-based and vest, if at all, after the conclusion of the three-year performance period.  The number of PSUs that ultimately vest is based 50% on the growth in our diluted earnings per share and 50% on our total shareholder return relative to a peer group of companies over the vesting period.  Additionally, we awarded 220,241 restricted stock units (“RSUs”) to our non-employee directors, executive officers and employees at the fair value of $40.82 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 nine months ended July 2, 2017, no options were excluded from the calculation of dilutive potential common shares for both periods, compared to 0.1 million and 0.3 million for the prior-year periods, respectively, because the assumed proceeds per share exceeded the average market price per share during the periods.  Therefore, their inclusion would have been anti-dilutive.

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9.                                      Income Taxes

The effective tax rates for the first nine months of fiscal 2017 and 2016 were 30.4% and 34.3%, respectively.  During the first nine months of fiscal 2017, we adopted accounting guidance which requires excess tax benefits and deficiencies on share-based payments to be recorded as an income tax benefit or expense, respectively, in the statement of income rather than being recorded in additional paid-in capital on the balance sheet.  As a result, we recognized income tax benefits of $2.1 million and $4.8 million in the third quarter and first nine months of fiscal 2017, respectively.  Also in the second quarter of fiscal 2017, the Internal Revenue Service (“IRS”) concluded their examination for fiscal years 2010 through 2013 and we recognized a related $1.2 million tax benefit in the second quarter of fiscal 2017.  Also, as a result of prior-year tax examinations we made payments to tax authorities totaling approximately $23 million in the third quarter of fiscal 2017.

In the second quarter of fiscal 2016, we incurred $13.3 million of acquisition and integration expenses and debt pre-payment fees for which no tax benefit was recognized.  Of this amount, $6.4 million resulted from acquisition expenses that were not tax deductible and $6.9 million resulted from integration expenses and debt pre-payment fees incurred in jurisdictions with current and historical net operating losses where the related deferred tax asset was fully reserved.  Additionally, during the first quarter of fiscal 2016, the U.S. Protecting Americans from Tax Hikes (“PATH”) Act of 2015 was signed into law.  This law permanently extended the federal research and development tax credits (“R&D Credits”) retroactively to January 1, 2015.  Our income tax expense for the first quarter of fiscal 2016 included an income tax benefit of $2.0 million attributable to the last nine months of fiscal 2015, primarily related to the retroactive recognition of the R&D Credits.  Excluding these items, the effective tax rate for the first nine months of fiscal 2016 was 32.7%.

We evaluate the realizability of our deferred tax assets by assessing the valuation allowance and adjust the allowance, if necessary.  The factors used to assess the likelihood of realization are our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.  The ability or failure to achieve the forecasted taxable income in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets.  Based on future operating results in certain jurisdictions, it is possible that the current valuation allowance positions of those jurisdictions could be adjusted in the next 12 months.

As of July 2, 2017 and October 2, 2016, the liability for income taxes associated with uncertain tax positions was $5.9 million and $13.3 million, respectively.  The net decrease in the liability during fiscal 2017 was primarily attributable to activity related to examinations conducted by various taxing authorities.

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 changes would be the result of ongoing examinations.

10.                               Reportable Segments

Our reportable segments are described as follows:

WEI:  WEI provides consulting and engineering services worldwide for a broad range of water and infrastructure-related needs in both developed and emerging economies.  WEI supports both public and private clients including federal, state/provincial, and local governments, and global and local commercial clients.  The primary markets for WEI’s services include water resources analysis and water management, environmental restoration, government consulting, and a broad range of civil infrastructure master planning and engineering design for facilities, transportation, and regional and local development.  WEI’s services span from early data collection and monitoring, to data analysis and information technology, to science and engineering applied research, to engineering design, to construction management and operations and maintenance.

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RME:  RME provides consulting and engineering services worldwide for a broad range of resource management and energy needs.  RME supports both private and public clients, including global industrial and commercial clients, U.S. federal agencies in large scale remediation, and major international development agencies.  The primary markets for RME’s services include natural resources, energy, international development, remediation, waste management and utilities.  RME’s services span from early data collection and monitoring, to data analysis and information technology, to science and engineering applied research, to engineering design, to construction management and operations and maintenance.  RME also supports engineering, procurement and construction management (“EPCM”) for full service implementation of commercial projects.

RCM:  We report the results of the wind-down of our non-core construction activities in the RCM reportable segment.  The remaining work to be performed in this segment will be substantially completed in calendar 2017.

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.

In the first nine months of fiscal 2017, our Corporate segment operating losses include gains of $7.1 million related to changes in the estimated fair value of contingent earn-out liabilities, compared to losses of $2.8 million in the same periods last year. Additionally, the Corporate segment operating losses in the third quarter and first nine months of fiscal 2016 include $1.0 million and $16.9 million of acquisition and integration expenses, respectively, as described in Note 3.

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 our reportable segments.

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