Document

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
  
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2019

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)
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) 
 
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  ý   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  ý   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. 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
 
 
 
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  ý

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

As of April 26, 2019, 54,866,464 shares of the registrant’s common stock were outstanding.

 


TETRA TECH, INC.
 
INDEX
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I.                                                  FINANCIAL INFORMATION

Item 1.                                 Financial Statements
 
Tetra Tech, Inc.
Consolidated Balance Sheets
(unaudited - in thousands, except par value)
ASSETS
March 31,
2019
 
September 30,
2018
Current assets:
 

 
 

Cash and cash equivalents
$
130,728

 
$
146,185

Accounts receivable – net
629,597

 
694,221

Contract assets
157,918

 
142,882

Prepaid expenses and other current assets
71,999

 
56,003

Income taxes receivable
8,178

 
11,089

Total current assets
998,420

 
1,050,380

 
 
 
 
Property and equipment – net
41,660

 
43,278

Investments in unconsolidated joint ventures
3,536

 
3,370

Goodwill
827,676

 
798,820

Intangible assets – net
11,698

 
16,123

Deferred tax assets
30,581

 
8,607

Other long-term assets
38,294

 
38,843

Total assets
$
1,951,865

 
$
1,959,421

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
135,393

 
$
160,222

Accrued compensation
156,079

 
180,153

Contract liabilities
154,609

 
143,270

Income taxes payable
1,877

 
8,272

Promissory note
24,688

 
—

Current portion of long-term debt
12,551

 
12,599

Current contingent earn-out liabilities
20,026

 
13,633

Other current liabilities
119,219

 
99,944

Total current liabilities
624,442

 
618,093

 
 
 
 
Deferred tax liabilities
25,622

 
30,166

Long-term debt
231,332

 
264,712

Long-term contingent earn-out liabilities
25,869

 
21,657

Other long-term liabilities
53,995

 
57,693

 
 
 
 
Commitments and contingencies (Note 16)


 


 
 
 
 
Equity:
 

 
 

Preferred stock - authorized, 2,000 shares of $0.01 par value; no shares issued and outstanding at March 31, 2019 and September 30, 2018
—

 
—

Common stock - authorized, 150,000 shares of $0.01 par value; issued and outstanding, 54,947 and 55,349 shares at March 31, 2019 and September 30, 2018, respectively
549

 
553

Additional paid-in capital
111,277

 
148,803

Accumulated other comprehensive loss
(148,217
)
 
(127,350
)
Retained earnings
1,026,836

 
944,965

Tetra Tech stockholders’ equity
990,445

 
966,971

Noncontrolling interests
160

 
129

Total stockholders' equity
990,605

 
967,100

Total liabilities and stockholders' equity
$
1,951,865

 
$
1,959,421

See Notes to Consolidated Financial Statements.

3


Tetra Tech, Inc.
Consolidated Statements of Income
(unaudited – in thousands, except per share data)
 
 
Three Months Ended
 
Six Months Ended
 
March 31,
2019
 
April 1,
2018
 
March 31,
2019
 
April 1,
2018
Revenue
$
722,621

 
$
700,262

 
$
1,440,052

 
$
1,460,010

Subcontractor costs
(137,237
)
 
(167,469
)
 
(301,305
)
 
(382,370
)
Other costs of revenue
(488,913
)
 
(441,368
)
 
(943,592
)
 
(892,070
)
Gross profit
96,471

 
91,425

 
195,155

 
185,570

Selling, general and administrative expenses
(48,898
)
 
(46,791
)
 
(91,871
)
 
(92,347
)
Contingent consideration – fair value adjustments
(28
)
 
(1,918
)
 
(28
)
 
(1,918
)
Income from operations
47,545

 
42,716

 
103,256

 
91,305

Interest expense
(3,164
)
 
(4,092
)
 
(6,061
)
 
(7,252
)
Income before income tax benefit (expense)
44,381

 
38,624

 
97,195

 
84,053

Income tax benefit (expense)
11,563

 
(9,877
)
 
781

 
(9,254
)
Net income
55,944

 
28,747

 
97,976

 
74,799

Net income attributable to noncontrolling interests
(33
)
 
(22
)
 
(69
)
 
(40
)
Net income attributable to Tetra Tech
$
55,911

 
$
28,725

 
$
97,907

 
$
74,759

Earnings per share attributable to Tetra Tech:
 

 
 

 
 

 
 

Basic
$
1.01

 
$
0.51

 
$
1.77

 
$
1.34

Diluted
$
1.00

 
$
0.51

 
$
1.74

 
$
1.32

Weighted-average common shares outstanding:
 

 
 

 
 

 
 

Basic
55,143

 
55,841

 
55,237

 
55,900

Diluted
55,985

 
56,673

 
56,161

 
56,825

 
See Notes to Consolidated Financial Statements.


4


Tetra Tech, Inc.
Consolidated Statements of Comprehensive Income
(unaudited – in thousands)
 
 
Three Months Ended
 
Six Months Ended
 
March 31,
2019
 
April 1,
2018
 
March 31,
2019
 
April 1,
2018
Net income
$
55,944

 
$
28,747

 
$
97,976

 
$
74,799

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
9,245

 
(16,116
)
 
(14,089
)
 
(19,583
)
(Loss) gain on cash flow hedge valuations
(2,769
)
 
(27
)
 
(6,778
)
 
39

Other comprehensive income (loss) attributable to Tetra Tech
6,476

 
(16,143
)
 
(20,867
)
 
(19,544
)
Other comprehensive income (loss) attributable to noncontrolling interests
1

 
(5
)
 
238

 
(7
)
Comprehensive income
$
62,421

 
$
12,599

 
$
77,347

 
$
55,248

 
 
 
 
 
 
 
 
Comprehensive income attributable to Tetra Tech
$
62,387

 
$
12,582

 
$
77,040

 
$
55,215

Comprehensive income attributable to noncontrolling interests
34

 
17

 
307

 
33

Comprehensive income
$
62,421

 
$
12,599

 
$
77,347

 
$
55,248

 
See Notes to Consolidated Financial Statements.


5


Tetra Tech, Inc.
Consolidated Statements of Equity
Three Months Ended April 1, 2018 and March 31, 2019
(unaudited – in thousands)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
Tetra Tech
Equity
 
Non-Controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
BALANCE AT DECEMBER 31, 2017
55,988

 
$
560

 
$
175,293

 
$
(101,901
)
 
$
873,004

 
$
946,956

 
$
165

 
$
947,121

Net income
 
 
 
 
 
 
 
 
28,725

 
28,725

 
22

 
28,747

Other comprehensive loss
 
 
 
 
 
 
(16,143
)
 
 
 
(16,143
)
 
(5
)
 
(16,148
)
Cash dividends of $0.10 per common share
 
 
 
 
 
 
 
 
(5,583
)
 
(5,583
)
 
 
 
(5,583
)
Stock-based compensation
 
 
 
 
4,735

 
 
 
 
 
4,735

 
 
 
4,735

Restricted & performance shares released
2

 
(1
)
 
(6
)
 
 
 
 
 
(7
)
 
 
 
(7
)
Stock options exercised
264

 
3

 
6,360

 
 
 
 
 
6,363

 
 
 
6,363

Stock repurchases
(505
)
 
(5
)
 
(24,995
)
 
 
 
 
 
(25,000
)
 
 
 
(25,000
)
BALANCE AT APRIL 1, 2018
55,749

 
$
557

 
$
161,387

 
$
(118,044
)
 
$
896,146

 
$
940,046

 
$
182

 
$
940,228

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT DECEMBER 31, 2018
55,326

 
$
553

 
$
130,753

 
$
(154,693
)
 
$
977,541

 
$
954,154

 
$
147

 
$
954,301

Net income
 
 
 
 
 
 
 
 
55,911

 
55,911

 
33

 
55,944

Other comprehensive income
 
 
 
 
 
 
6,476

 
 
 
6,476

 
1

 
6,477

Distributions paid to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
—

 
(21
)
 
(21
)
Cash dividends of $0.12 per common share
 
 
 
 
 
 
 
 
(6,616
)
 
(6,616
)
 
 
 
(6,616
)
Stock-based compensation
 
 
 
 
4,066

 
 
 
 
 
4,066

 
 
 
4,066

Restricted & performance shares released
5

 
—

 
(66
)
 
 
 
 
 
(66
)
 
 
 
(66
)
Stock options exercised
65

 
1

 
1,519

 
 
 
 
 
1,520

 
 
 
1,520

Stock repurchases
(449
)
 
(5
)
 
(24,995
)
 
 
 
 
 
(25,000
)
 
 
 
(25,000
)
BALANCE AT MARCH 31, 2019
54,947

 
$
549

 
$
111,277

 
$
(148,217
)
 
$
1,026,836

 
$
990,445

 
$
160

 
$
990,605

















6


Tetra Tech, Inc.
Consolidated Statements of Equity
Six Months Ended April 1, 2018 and March 31, 2019
(unaudited – in thousands)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
Tetra Tech
Equity
 
Non-Controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
BALANCE AT OCTOBER 1, 2017
55,873

 
$
559

 
$
193,835

 
$
(98,500
)
 
$
832,559

 
$
928,453

 
$
171

 
$
928,624

Net income
 
 
 
 
 
 
 
 
74,759

 
74,759

 
40

 
74,799

Other comprehensive loss
 
 
 
 
 
 
(19,544
)
 
 
 
(19,544
)
 
(7
)
 
(19,551
)
Distributions paid to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
—

 
(22
)
 
(22
)
Cash dividends of $0.20 per common share
 
 
 
 
 
 
 
 
(11,172
)
 
(11,172
)
 
 
 
(11,172
)
Stock-based compensation
 
 
 
 
8,705

 
 
 
 
 
8,705

 
 
 
8,705

Restricted & performance shares released
273

 
2

 
(8,821
)
 
 
 
 
 
(8,819
)
 
 
 
(8,819
)
Stock options exercised
481

 
5

 
11,933

 
 
 
 
 
11,938

 
 
 
11,938

Shares issued for Employee Stock Purchase Plan
142

 
1

 
5,725

 
 
 
 
 
5,726

 
 
 
5,726

Stock repurchases
(1,020
)
 
(10
)
 
(49,990
)
 
 
 
 
 
(50,000
)
 
 
 
(50,000
)
BALANCE AT APRIL 1, 2018
55,749

 
$
557

 
$
161,387

 
$
(118,044
)
 
$
896,146

 
$
940,046

 
$
182

 
$
940,228

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT SEPTEMBER 30, 2018
55,349

 
$
553

 
$
148,803

 
$
(127,350
)
 
$
944,965

 
$
966,971

 
$
129

 
$
967,100

Net income
 
 
 
 
 
 
 
 
97,907

 
97,907

 
69

 
97,976

Other comprehensive income (loss)
 
 
 
 
 
 
(20,867
)
 
 
 
(20,867
)
 
238

 
(20,629
)
Distributions paid to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
—

 
(276
)
 
(276
)
Cash dividends of $0.24 per common share
 
 
 
 
 
 
 
 
(13,270
)
 
(13,270
)
 
 
 
(13,270
)
Stock-based compensation
 
 
 
 
8,595

 
 
 
 
 
8,595

 
 
 
8,595

Restricted & performance shares released
179

 
2

 
(6,804
)
 
 
 
 
 
(6,802
)
 
 
 
(6,802
)
Stock options exercised
151

 
2

 
3,832

 
 
 
 
 
3,834

 
 
 
3,834

Shares issued for Employee Stock Purchase Plan
148

 
1

 
6,842

 
 
 
 
 
6,843

 
 
 
6,843

Stock repurchases
(880
)
 
(9
)
 
(49,991
)
 
 
 
 
 
(50,000
)
 
 
 
(50,000
)
Cumulative effect of accounting changes
 
 
 
 
 
 
 
 
(2,766
)
 
(2,766
)
 
 
 
(2,766
)
BALANCE AT MARCH 31, 2019
54,947

 
$
549

 
$
111,277

 
$
(148,217
)
 
$
1,026,836

 
$
990,445

 
$
160

 
$
990,605

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For certain items, the sum of the quarterly information above does not equal the year to date amounts reflected throughout this Form 10-Q due to rounding associated with the calculations on an individual quarter basis. These differences are not material to the Consolidated Financial Statements.

See Notes to Consolidated Financial Statements.


7


Tetra Tech, Inc.
Consolidated Statements of Cash Flows
(unaudited – in thousands)
 
Six Months Ended
 
March 31,
2019
 
April 1,
2018
Cash flows from operating activities:
 

 
 

Net income
$
97,976

 
$
74,799

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
14,731

 
20,312

Equity in income of unconsolidated joint ventures, net of distributions
(193
)
 
(562
)
Amortization of stock-based awards
8,595

 
8,705

Deferred income taxes
(26,092
)
 
(10,100
)
Provision for doubtful accounts
9,878

 
2,390

Fair value adjustments to contingent consideration
28

 
1,918

Gain on sale of property and equipment
(223
)
 
(1,205
)
Changes in operating assets and liabilities, net of effects of business acquisitions:
 

 
 

Accounts receivable and contract assets
48,041

 
(42,912
)
Prepaid expenses and other assets
(16,007
)
 
(15,528
)
Accounts payable
(26,908
)
 
(26,460
)
Accrued compensation
(29,604
)
 
(11,453
)
Contract liabilities
5,114

 
15,367

Other liabilities
17,863

 
9,535

Income taxes receivable/payable
(3,951
)
 
(1,213
)
Net cash provided by operating activities
99,248

 
23,593

 
 
 
 
Cash flows from investing activities:
 

 
 

Payments for business acquisitions, net of cash acquired
3,545

 
(64,451
)
Capital expenditures
(7,178
)
 
(4,565
)
Proceeds from sale of property and equipment
250

 
1,651

Net cash used in investing activities
(3,383
)
 
(67,365
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from borrowings
128,717

 
180,026

Repayments on long-term debt
(162,092
)
 
(62,109
)
Repurchases of common stock
(50,000
)
 
(50,000
)
Taxes paid on vested restricted stock
(6,802
)
 
(8,819
)
Stock options exercised
3,834

 
11,945

Dividends paid
(13,270
)
 
(11,172
)
Payments of contingent earn-out liabilities
(11,067
)
 
(854
)
Net cash (used in) provided by financing activities
(110,680
)
 
59,017

 
 
 
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(645
)
 
(2,047
)
 
 
 
 
Net (decrease) increase in cash, cash equivalents and restricted cash
(15,460
)
 
13,198

Cash, cash equivalents and restricted cash at beginning of period
148,884

 
192,690

Cash, cash equivalents and restricted cash at end of period
$
133,424

 
$
205,888

 
 
 
 
Supplemental information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
6,057

 
$
6,895

Income taxes, net of refunds received of $0.9 million and $0.3 million
$
30,707

 
$
20,151

 
 
 
 
Supplemental disclosures of non-cash investing activities:
 
 
 
Issuance of promissory note for business acquisition
$
24,688

 
$
—

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
130,728

 
$
203,177

Restricted cash
2,696

 
2,711

Total cash, cash equivalents and restricted cash
$
133,424

 
$
205,888

See Notes to Consolidated Financial Statements.

8


TETRA TECH, INC.
Notes to Consolidated Financial Statements
 
1.                                      Basis of Presentation
 
The accompanying unaudited interim 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 related notes contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

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. Certain reclassifications were made to the prior year to conform to current year presentation.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 ("ASC 606"), "Revenue from Contracts with Customers", which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance and the related ASUs were effective for interim and annual reporting periods beginning after December 15, 2017 (first quarter of fiscal 2019 for us). On October 1, 2018, we adopted ASC 606 using the modified retrospective method in which the new guidance was applied retrospectively to contracts that were not substantially completed as of the date of adoption. Results for the reporting period beginning after October 1, 2018 have been presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the previous guidance. See Note 3, "Revenue Recognition" for further discussion of the adoption and the impact on our consolidated financial statements.

2.                                   Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In January 2016, the FASB issued guidance that generally requires companies to measure investments in other entities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income. The guidance was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2017 (first quarter of fiscal 2019 for us). The adoption of this guidance had no impact on our consolidated financial statements.

In March 2016, the FASB issued updated guidance which requires excess tax benefits and deficiencies on share-based payments to be recorded as income tax expense or benefit in the income statement rather than being recorded in additional paid-in capital. It also requires the presentation of employee taxes as financing activities on consolidated statements of cash flows, which was previously classified as operating activities. This guidance was effective for annual and interim periods beginning after December 15, 2016 (first quarter of fiscal 2018 for us), with early adoption permitted. In the first quarter of fiscal 2017, we adopted this guidance. At the beginning of fiscal 2019, we revised the presentation of "Net cash provided by operating activities" and "Net cash (used in) provided by financing activities" in the consolidated statement of cash flows for prior period to correct the presentation of “Taxes paid on vested restricted stock” and appropriately reflect such amounts as financing activities. The correction resulted in an increase of net cash provided by operating activities of $8.8 million and a decrease of net cash provided by financing activities of $8.8 million for the six months ended April 1, 2018. We assessed the materiality of these errors on our consolidated financial statements for prior periods and concluded that the amounts were not material to any prior interim or annual periods. We elected to revise the presentation for comparability purposes.

In August 2016, the FASB issued guidance to address eight specific cash flow issues to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2017 (first quarter of fiscal 2019 for us). The adoption of this guidance had no material impact on our consolidated financial statements.

In October 2016, the FASB issued updated guidance which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance was effective for fiscal reporting periods and interim reporting periods within those fiscal reporting periods, beginning after December 15, 2017 (first quarter of fiscal 2019 for us). The adoption of this guidance had no material impact on our consolidated financial statements.

9



In November 2016, the FASB issued updated guidance which provides amendments to address the classification and presentation of changes in restricted cash in the statement of cash flows. The guidance was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2017 (first quarter of fiscal 2019 for us). The adoption of this guidance had no material impact on our consolidated financial statements. We updated certain captions in our consolidated statements of cash flows to include restricted cash, which is reported in our "Prepaid expenses and other current assets" on the consolidated balance sheets.

In May 2017, the FASB issued updated guidance to clarify when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under the updated guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes because of a change in terms or conditions. The guidance was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2017 (first quarter of fiscal 2019 for us), on a prospective basis. The adoption of this guidance had no impact on our consolidated financial statements.

In August 2018, the Securities and Exchange Commission (“SEC”) published Release No. 33-10532, Disclosure Update and Simplification, which adopted amendments to certain disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded, considering other SEC disclosure requirements, U.S. GAAP, or changes in the information environment. While most of the amendments eliminate outdated or duplicative disclosure requirements, the final rule amends the interim financial statement requirements to include a reconciliation of changes in stockholders’ equity in the notes or as a separate statement for each period for which a statement of comprehensive income is required to be filed. The new interim reconciliation of changes in stockholders’ equity is included herein as a separate statement. Additionally, we removed the disclosure on cash dividends paid per share from our consolidated statements of income.

Recently Issued Accounting Standards Not Yet Adopted

In February 2016, the FASB issued guidance that requires the rights and obligations associated with leasing arrangements be reflected on the balance sheet to increase transparency and comparability among organizations. Under the guidance, lessees will be required to recognize a right-of-use asset and a liability to make lease payments and disclose key information about leasing arrangements. The guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018 (first quarter of fiscal 2020 for us). Early adoption is permitted, and the standard must be adopted using a modified retrospective approach. In July 2018, the FASB issued updated guidance, which provides entities with an additional transition method to adopt the lease accounting guidance. Under the new transition method, an entity initially applies the new standard at the adoption date, versus at the beginning of the earliest period presented, and recognizes a cumulative-effective adjustment to the opening balance of retained earnings in the period of adoption, if any. While we are currently evaluating the impact that this guidance will have on our consolidated financial statements, we currently expect that the adoption of the new guidance will result in a significant increase in the assets and liabilities on our consolidated balance sheets and will likely have no impact on our consolidated statements of income and cash flows.

In June 2016, the FASB issued updated guidance which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019 (first quarter of fiscal 2021 for us). Early adoption is permitted. We are currently evaluating the impact that this guidance will have on our consolidated financial statements.

In August 2017, the FASB issued accounting guidance on hedging activities. The amendment better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018 (first quarter of fiscal 2020 for us). Early adoption is permitted. We are currently evaluating the impact that this guidance will have on our consolidated financial statements.

In February 2018, the FASB issued guidance on reclassification of certain tax effects from accumulated comprehensive income, which allows for a reclassification of stranded tax effects from the Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018 (first quarter of fiscal 2020 for us). We are currently evaluating the impact that this guidance will have on our consolidated financial statements.

10



3.                                   Revenue Recognition

On October 1, 2018, we adopted ASC 606, which supersedes most current revenue recognition guidance, including industry-specific guidance. We adopted the standard on a modified retrospective basis which results in no restatement of the comparative periods presented and a cumulative effect adjustment to retained earnings as of the date of adoption. As part of our adoption, the new standard was applied only to those contracts that were not substantially completed as of the date of adoption.

To determine the proper revenue recognition method for contracts under ASC 606, we evaluate whether multiple contracts should be combined and accounted for as a single contract and whether the combined or single contract should be accounted for as having more than one performance obligation. The decision to combine a group of contracts or separate a combined or single contract into multiple performance obligations may impact the amount of revenue recorded in a given period. Contracts are considered to have a single performance obligation if the promises are not separately identifiable from other promises in the contracts.

At contract inception, we assess the goods or services promised in a contract and identify, as a separate performance obligation, each distinct promise to transfer goods or services to the customer. The identified performance obligations represent the “unit of account” for purposes of determining revenue recognition. In order to properly identify separate performance obligations, we apply judgment in determining whether each good or service provided is: (a) capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (b) distinct within the context of the contract, whereby the transfer of the good or service to the customer is separately identifiable from other promises in the contract.

Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from existing contracts due to the significant integration provided or significant interdependencies in the context of the contract and are accounted for as if they were part of the original contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
 
We account for contract modifications as a separate contract when the modification results in the promise to deliver additional goods or services that are distinct and the increase in price of the contract is for the same amount as the stand-alone selling price of the additional goods or services included in the modification.

The transaction price represents the amount of consideration to which we expect to be entitled in exchange for transferring promised goods or services to our customers. The consideration promised within a contract may include fixed amounts, variable amounts, or both. The nature of our contracts gives rise to several types of variable consideration, including claims, award fee incentives, fiscal funding clauses, and liquidated damages. We recognize revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized for the contract will not occur. We estimate the amount of revenue to be recognized on variable consideration using either the expected value or the most likely amount method, whichever is expected to better predict the amount of consideration to be received. Project mobilization costs are generally charged to project costs as incurred when they are an integrated part of the performance obligation being transferred to the client.

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. Revenue on claims is recognized only to the extent that contract costs related to the claims have been incurred and when it is probable that any significant revenue recognized related to the claim will not be reversed. Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regard 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. In some cases, contract retentions are withheld by clients until certain conditions are met or the project is completed, which may be several months or years. In these cases, we have not identified a significant financing component under ASC 606 as the timing difference in payment compared to delivery of obligations under the contract is not for purposes of financing.


11


For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation using a best estimate of the standalone selling price of each distinct good or service in the contract. The standalone selling price is typically determined using the estimated cost of the contract plus a margin approach. For contracts containing variable consideration, we allocate the variability to a specific performance obligation within the contract if such variability relates specifically to our efforts to satisfy the performance obligation or transfer the distinct good or service, and the allocation depicts the amount of consideration to which we expect to be entitled.

We recognize revenue over time as the related performance obligation is satisfied by transferring control of a promised good or service to our customers. Progress toward complete satisfaction of the performance obligation is primarily measured using a cost-to-cost measure of progress method. The cost input is based primarily on contract cost incurred to date compared to total estimated contract cost. This measure includes forecasts based on the best information available and reflects our judgment to faithfully depict the value of the services transferred to the customer. For certain on-call engineering or consulting and similar contracts, we recognize revenue in the amount which we have the right to invoice the customer if that amount corresponds directly with the value of our performance completed to date.

Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost measure of progress method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident.

Contract Types

Our services are performed under three principal types of contracts: fixed-price, time-and-materials and cost-plus. Customer payments on contracts are typically due within 60 days of billing, depending on the contract.

Fixed-Price. Under fixed-price contracts, clients pay us an agreed fixed-amount negotiated in advance for a specified scope of work.

Time-and-Materials. Under time-and-materials contracts, we negotiate hourly billing rates and charge our clients based on the actual time that we spend on a project. In addition, clients reimburse us for our actual out-of-pocket costs for materials and other direct incidental expenditures that we incur in connection with our performance under the contract. Most of our time-and-material contracts are subject to maximum contract values, and also may include annual billing rate adjustment provisions.

Cost-Plus. Under cost-plus contracts, we are reimbursed for allowed or otherwise defined costs incurred plus a negotiated fee. The contracts may also include incentives for various performance criteria, including quality, timeliness, ingenuity, safety and cost-effectiveness. In addition, our costs are generally subject to review by our clients and regulatory audit agencies, and such reviews could result in costs being disputed as non-reimbursable under the terms of the contract.     

Adoption

Upon adoption on October 1, 2018, under the modified retrospective method, we recorded a cumulative effect adjustment to decrease retained earnings by $2.8 million on October 1, 2018, as well as the following cumulative effect adjustments:

•
A decrease to contract assets of $5.0 million
•
A decrease to contract liabilities of $1.1 million
•
An increase to deferred tax assets of $1.1 million

The decrease in retained earnings primarily resulted from a change in the way we determine the unit of account for projects (i.e. performance obligations). Under previous guidance, we typically accounted for a contract as a single unit of revenue recognition. Upon adoption of ASC 606, we assess the nature of the promises in the contract and recognize revenue based on performance obligations within the respective contract or combined contract.


12


The following table presents how the adoption of ASC 606 affected certain line items in our consolidated statements of income for the three and six months ended March 31, 2019:
 
Three Months Ended
 
Six Months Ended
 
Recognition Under Previous Guidance
 
Impact of the Adoption of ASC 606
 
Recognition Under ASC 606
 
Recognition Under Previous Guidance
 
Impact of the Adoption of ASC 606
 
Recognition Under ASC 606
 
(in thousands)
Revenue
$
723,666

 
$
(1,045
)
 
$
722,621

 
$
1,438,894

 
$
1,158

 
$
1,440,052

Income from operations
48,590

 
(1,045
)
 
47,545

 
102,098

 
1,158

 
103,256

Income tax benefit (expense)
11,317

 
246

 
11,563

 
1,061

 
(280
)
 
781

Net income (loss) attributable to Tetra Tech
56,710

 
(799
)
 
55,911

 
97,028

 
879

 
97,907


The following table presents how the adoption of ASC 606 affected certain line items in our consolidated balance sheet as of March 31, 2019:
 
Recognition Under Previous Guidance
 
Impact of the Adoption of ASC 606
 
Recognition Under ASC 606
 
(in thousands)
Assets
 
 
 
 
 
Accounts receivable - net
$
634,972

 
$
(5,375
)
 
$
629,597

Contract assets (1)
165,530

 
(7,612
)
 
157,918

Deferred tax assets
29,461

 
1,120

 
30,581

 
 
 
 
 
 
Liabilities and equity
 
 
 
 
 
Contract liabilities (2)
$
164,868

 
$
(10,259
)
 
$
154,609

Income taxes payable
1,597

 
280

 
1,877

 
 
 
 
 
 
Equity (3)
 
 
 
 
 
Retained earnings
$
1,028,724

 
$
(1,888
)
 
$
1,026,836

 
 
 
 
 
 
(1) Previously included in "Account receivable - net".
(2) Previously presented as "Billings in excess of costs on uncompleted contracts".
(3) Includes $2.8 million of cumulative catch-up adjustment to retained earnings on October 1, 2018 upon adoption of ASC 606.

The following table presents how the adoption of ASC 606 affected certain line items in our consolidated statement of cash flows for the six months ended March 31, 2019:
 
Recognition Under Previous Guidance
 
Impact of the Adoption of ASC 606
 
Recognition Under ASC 606
 
(in thousands)
Cash flows from operating activities:
 
 
 
 
 
Net income
$
97,097

 
$
879

 
$
97,976

Accounts receivable and contract assets
32,716

 
15,325

 
48,041

Contract liabilities
21,598

 
(16,484
)
 
5,114

Income taxes receivable/payable
(4,231
)
 
280

 
(3,951
)
Net cash provided by operating activities
99,248

 
—

 
99,248


13



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.

As part of the adoption of ASC 606, contract assets have been bifurcated from billed and unbilled receivables. 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 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 liabilities/assets consisted of the following:
 
Balance at
 
March 31, 2019
 
September 30, 2018
 
(in thousands)
Contract assets
$
157,918

 
$
142,882

Contract liabilities
154,609

 
143,270

Net contract assets (liabilities)
$
3,309

 
$
(388
)

We recognized $74.2 million of revenue during the first half of fiscal 2019 that was included in contract liabilities as of September 30, 2018. The amount of revenue recognized from changes in transaction price associated with performance obligations satisfied in prior periods during the first half of fiscal 2019 was not material. The change in transaction price primarily relates to reimbursement of costs incurred in prior periods.

We recognize revenue from contracts primarily utilizing 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. As a result, we recognized net unfavorable operating income adjustments of $2.8 million and $3.2 million for the second quarter and first half of fiscal 2019, respectively, compared to $0.7 million and $1.4 million for the prior-year periods in the Commercial/International Services Group ("CIG") segment. 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 March 31, 2019 and September 30, 2018, our consolidated balance sheets included liabilities for anticipated losses of $11.7 million and $13.6 million, respectively. The estimated cost to complete the related contracts as of March 31, 2019 was $11.7 million.

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 provide information about disaggregated revenue and a reconciliation of the disaggregated revenue:


14


 
Three Months Ended
 
Six Months Ended
 
March 31,
2019
 
April 1,
2018
 
March 31,
2019
 
April 1,
2018
 
 
Client Sector
 

 
 

 
 
 
 
U.S. state and local government
$
129,868

 
$
104,905

 
$
253,147

 
$
256,659

U.S. federal government (1)
216,498

 
236,951

 
441,256

 
473,199

U.S. commercial
165,970

 
180,398

 
338,758

 
387,184

International (2)
210,285

 
178,008

 
406,891

 
342,968

Total
$
722,621

 
$
700,262

 
$
1,440,052

 
$
1,460,010

 
 
 
 
 
 
 
 
(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 and Australia, 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 and six months ended March 31, 2019 and April 1, 2018.
 
Three Months Ended
 
Six Months Ended
 
March 31, 2019
 
April 1,
2018
 
March 31, 2019
 
April 1,
2018
 
(in thousands)
Contract Type
 
 
 
 
 
 
 
Fixed-price
$
247,831

 
$
224,878

 
$
488,764

 
$
460,298

Time-and-materials
345,626

 
333,590

 
682,163

 
710,362

Cost-plus
129,164

 
141,794

 
269,125

 
289,350

Total
$
722,621

 
$
700,262

 
$
1,440,052

 
$
1,460,010


Remaining Unsatisfied Performance Obligations (“RUPOs”)

Our RUPOs represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. We had $2.8 billion of RUPOs as of March 31, 2019. RUPOs increase with awards from new contracts or additions on existing contracts and decrease as work is performed and revenue is recognized on existing contracts. RUPOs may also decrease when projects are canceled or modified in scope. We include a contract within our RUPOs when the contract is awarded and an agreement on contract terms has been reached.

We expect to satisfy our RUPOs as of March 31, 2019 over the following periods:
 
Amount
 
(in thousands)
Within 12 months
$
1,807,078

Beyond
993,344

Total
$
2,800,422


Although RUPOs reflect business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. RUPOs are 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.            Accounts Receivable - Net
 
Net accounts receivable consisted of the following:

15


 
March 31,
2019
 
September 30,
2018
 
(in thousands)
Billed
$
439,480

 
$
464,062

Unbilled
234,577

 
267,739

Total accounts receivable – gross
674,057

 
731,801

Allowance for doubtful accounts
(44,460
)
 
(37,580
)
Total accounts receivable – net
$
629,597

 
$
694,221


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. Most of our unbilled receivables at March 31, 2019 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 that may affect a client's ability to pay.

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. Revenue and any corresponding receivable in these cases is recognized based on the policy described in Note 3, "Revenue Recognition" above.

The total accounts receivable at both March 31, 2019 and September 30, 2018 included approximately $53 million and $74 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. In the first half of fiscal 2019 (all in the second quarter), we recognized reductions of revenue of $4.8 million and $3.6 million and related losses in operating income of $5.9 million and $3.6 million in our RCM and CIG segments, respectively. We recorded no material gains or losses related to claims in the first half of fiscal 2018.

On U.S. federal government contracts, billed accounts receivable were $76.2 million and $81.5 million at March 31, 2019 and September 30, 2018, respectively. The total of unbilled receivables and contract assets were $101.9 million and $102.7 million at March 31, 2019 and September 30, 2018, respectively. Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at March 31, 2019 and September 30, 2018.

5.            Acquisitions and Divestitures

At the end of second quarter of fiscal 2019, we acquired eGlobalTech ("eGT"), a high-end information technology solutions, cloud migration, cybersecurity, and management consulting firm based in Arlington, Virginia. eGT is part of our Government Services Group ("GSG") segment. The fair value of the purchase price was $48.4 million. This amount was comprised of a $24.7 million promissory note issued to the sellers (which was subsequently paid in full in the third quarter of fiscal 2019), $2.6 million of payables related to estimated post-closing adjustments for net assets acquired, and $21.1 million for the estimated fair value of contingent earn-out obligations, with a maximum of $25.0 million, based upon the achievement of specified operating income targets in each of the three years following the acquisition.

In the first quarter of fiscal 2018, we acquired Glumac, headquartered in Portland, Oregon. Glumac is a leader in sustainable infrastructure design with more than 300 employees and is part of our GSG segment. The fair value of the purchase price for Glumac was $38.4 million. This amount was comprised of $20.0 million of initial cash payments made to the sellers and $18.4 million for the estimated fair value of contingent earn-out obligations, with a maximum of $20.0 million payable, based upon the achievement of specified operating income targets in each of the three years following the acquisition.

In the second quarter of fiscal 2018, we completed the acquisition of Norman Disney & Young (“NDY”), a leader in sustainable infrastructure engineering design. NDY is an Australian-based global engineering design firm with more than 700 professionals operating in offices throughout Australia, the Asia-Pacific region, the United Kingdom, and Canada and is part of

16


our CIG segment. The fair value of the purchase price for NDY was $56.1 million. This amount was comprised of $46.9 million of initial cash payments made to the sellers, $1.6 million held in escrow, and $7.6 million for the estimated fair value of contingent earn-out obligations, with a maximum amount of $20.2 million, based upon the achievement of specified operating income targets in each of the three years following the acquisition.

In the third quarter of fiscal 2018, we divested our non-core utility field services operations in the CIG segment for net proceeds after transaction costs of $30.2 million. This operation generated approximately $70 million in annual revenue primarily from our U.S. commercial clients. These non-core divestitures resulted in a pre-tax loss of $1.7 million, which was included in "Selling, general and administrative expenses" ("SG&A") in the third quarter of fiscal 2018.

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 goodwill addition related to our fiscal 2018 acquisitions primarily represent the value of a workforce with distinct expertise in the sustainable infrastructure design market. The fiscal 2019 goodwill addition represents the value of a workforce with emerging technology and new techniques that incorporate artificial intelligence, data analytics and advanced cybersecurity solutions for government and commercial clients. 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 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 1 to 10 years, and trade names with lives ranging from 3 to 5 years. For detailed information regarding our intangible assets, see Note 6, “Goodwill and Intangible Assets”.

Most of our acquisition agreements include contingent earn-out agreements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based on our valuations of the acquired companies and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved. The fair values of any earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in “Current contingent earn-out liabilities” and “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 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 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 statement 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. During the first half of fiscal 2019, we recorded an immaterial adjustment related to NDY contingent earn-out liability and reported the related loss in operating income. During the first half of fiscal 2018 (all in the second quarter), we recorded increases in our contingent earn-out liabilities related to Eco Logical Australia and Cornerstone Environmental Group and reported related losses in operating income totaling $1.9 million.


17


At March 31, 2019, there was a total potential maximum of $62.7 million of outstanding contingent consideration related to acquisitions.  Of this amount, $45.9 million was estimated as the fair value and accrued on our consolidated balance sheet.
 
6.            Goodwill and Intangible Assets

The following table summarizes the changes in the carrying value of goodwill:
 
 
GSG
 
CIG
 
Total
 
 
(in thousands)
Balance at September 30, 2018
 
$
389,741

 
$
409,079

 
$
798,820

Acquisition activity
 
38,680

 
—

 
38,680

Translation and other
 
(1,751
)
 
(8,073
)
 
(9,824
)
Balance at March 31, 2019
 
$
426,670

 
$
401,006

 
$
827,676


The goodwill addition in GSG relates to our eGT acquisition completed in the second quarter of fiscal 2019. The purchase price allocation for this acquisition is preliminary and subject to adjustment based upon the final determination of the net assets acquired and information to perform the final valuation. Our goodwill was impacted by foreign currency translation related to our foreign subsidiaries with functional currencies that are different than our reporting currency. The goodwill amounts above are presented net of any reductions from historical impairment adjustments. The gross amounts of goodwill for GSG were $444.4 million and $407.4 million at March 31, 2019 and September 30, 2018, respectively, excluding $17.7 million of accumulated impairment. The gross amounts of goodwill for CIG were $498.9 million and $507.0 million at March 31, 2019 and September 30, 2018, respectively, excluding $97.9 million of accumulated impairment.

We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. Our most recent annual review at July 2, 2018 (i.e. the first day of our fourth quarter in fiscal 2018) indicated that we had no impairment of goodwill, and all of our reporting units had estimated fair values that exceeded their carrying values, including goodwill, by more than 30%.

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.


18


The gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives included in “Intangible assets - net” on our consolidated balance sheets, were as follows:
 
March 31, 2019
 
September 30, 2018
 
Weighted-
Average
Remaining Life
(in Years)
 
Gross
Amount
 
Accumulated
Amortization
 
Gross
Amount
 
Accumulated
Amortization
 
($ in thousands)
Non-compete agreements
—
 
$
—

 
$
—

 
$
83

 
$
(83
)
Client relations
2.6
 
54,277

 
(48,733
)
 
54,639

 
(46,449
)
Backlog
0.8
 
25,042

 
(22,552
)
 
23,371

 
(20,007
)
Trade names
2.8
 
8,028

 
(4,364
)
 
8,144

 
(3,575
)
Total
 
 
$
87,347

 
$
(75,649
)
 
$
86,237

 
$
(70,114
)

Amortization expense for the three and six months ended March 31, 2019 was $2.2 million and $6.2 million, respectively, compared to $5.0 million and $9.7 million for the prior-year periods. Estimated amortization expense for the remainder of fiscal 2019 and succeeding years is as follows:
 
Amount
 
(in thousands)
2019
$
3,691

2020
4,295

2021
2,256

2022
1,026

2023
430

Total
$
11,698

 
7.                                     Property and Equipment

Property and equipment consisted of the following:
 
March 31,
2019
 
September 30,
2018
 
(in thousands)
Equipment, furniture and fixtures
$
133,593

 
$
131,521

Leasehold improvements
31,915

 
31,430

Land and buildings
411

 
413

Total property and equipment
165,919

 
163,364

Accumulated depreciation
(124,259
)
 
(120,086
)
Property and equipment, net
$
41,660

 
$
43,278


The depreciation expense related to property and equipment was $4.2 million and $8.5 million for the three and six months ended March 31, 2019, respectively, compared to $5.1 million and $10.3 million for the prior-year periods.
 
8.                                     Stock Repurchase and Dividends

On November 5, 2018, the Board of Directors authorized a new stock repurchase program under which we could repurchase up to $200 million of our common stock in addition to the $25 million remaining under the previous stock repurchase program. In the first quarter of fiscal 2019, we expended the remaining $25 million under the previous program by repurchasing 430,559 shares through open market purchases at an average price of $58.06. In fiscal 2018, we repurchased through open market purchases under the previous program a total of 1,491,569 shares at an average price of $50.28 for a total cost of $75 million. In

19


the second quarter of fiscal 2019, we repurchased through open market purchases under the new program a total of 449,055 shares at an average price of $55.67 for a total cost of $25 million.

The following table summarizes dividend declared and paid in the first half of fiscal 2019 and 2018:
Declare Date
 
Dividend Paid Per Share
 
Record Date
 
Payment Date
 
Dividend Paid
(in thousands, except per share data)
November 5, 2018
 
$
0.12

 
November 30, 2018
 
December 14, 2018
 
$
6,654

January 28, 2019
 
$
0.12

 
February 13, 2019
 
February 28, 2019
 
6,616

Total dividend paid as of March 31, 2019
 
$
13,270

 
 
 
 
 
 
 
 
 
November 6, 2017
 
$
0.10

 
November 30, 2017
 
December 15, 2017
 
$
5,589

January 29, 2018
 
$
0.10

 
February 14, 2018
 
March 2, 2018
 
5,583

Total dividend paid as of April 1, 2018
 
$
11,172

 
 
 
 
 
 
 
 
 

Subsequent Event.  On April 29, 2019, the Board of Directors declared a quarterly cash dividend of $0.15 per share payable on May 31, 2019 to stockholders of record as of the close of business on May 15, 2019.
 
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 and six months ended March 31, 2019 was $4.1 million and $8.6 million, respectively, compared to $4.7 million and $8.7 million for the same periods last year. Most of these amounts were included in SG&A in our consolidated statements of income. There were no material stock compensation awards in the second quarter of fiscal 2019. In the first half of fiscal 2019, we awarded 89,816 performance share units (“PSUs”) to our non-employee directors and executive officers at a fair value of $80.41 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 and a stock market index over the vesting period. Additionally, we awarded 176,491 restricted stock units (“RSUs”) to our non-employee directors, executive officers and employees at the fair value of $66.11 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.
 
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.


20


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

 
Three Months Ended
 
Six Months Ended
 
March 31,
2019
 
April 1,
2018
 
March 31,
2019
 
April 1,
2018
 
(in thousands, except per share data)
Net income attributable to Tetra Tech
$
55,911

 
$
28,725

 
$
97,907

 
$
74,759

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic
55,143

 
55,841

 
55,237

 
55,900

Effect of dilutive stock options and unvested restricted stock
842

 
832

 
924

 
925

Weighted-average common shares outstanding – diluted
55,985

 
56,673

 
56,161

 
56,825

 
 
 
 
 
 
 
 
Earnings per share attributable to Tetra Tech:
 

 
 

 
 

 
 

Basic
$
1.01

 
$
0.51

 
$
1.77

 
$
1.34

Diluted
$
1.00

 
$
0.51

 
$
1.74

 
$
1.32


For both the three and six months of fiscal 2019, 0.1 million options and restricted stock units were excluded from the calculation of dilutive potential common shares, compared to no options for the prior-year periods because the assumed proceeds per share exceeded the average market price per share during the periods. Therefore, their inclusion would have been anti-dilutive.

11.                                  Income Taxes

The effective tax rates for the first half of fiscal 2019 and 2018 were (0.8)% and 11.0%, respectively. The tax rates for fiscal 2019 and 2018 reflect the impact of the comprehensive tax legislation enacted by the U.S. government on December 22, 2017, which is commonly referred to as the Tax Cuts and Jobs Act ("TCJA"). The TCJA significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, limiting the deductibility of certain executive compensation, and implementing a modified territorial tax system with the introduction of the Global Intangible Low-Taxed Income (“GILTI”) tax rules. The TCJA also imposes a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries. Based on our analysis of tax earnings and profits and tax deficits at the prescribed measurement dates, we have a cumulative net tax deficit and do not have any tax liability related to this tax. As we have a September 30 fiscal year-end, our U.S. federal corporate income tax rate was blended in fiscal 2018, resulting in a statutory federal rate of approximately 24.5% (3 months at 35% and 9 months at 21%), and will be 21% for fiscal 2019 and subsequent fiscal years.

U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the tax law was enacted. As a result of the TCJA, we reduced our deferred tax liabilities and recorded a one-time deferred tax benefit of approximately $10.1 million in the first quarter of fiscal 2018 to reflect our estimate of temporary differences in the United States that would be recovered or settled in fiscal 2018 based on the 24.5% blended corporate tax rate or based on the 21% tax rate in fiscal 2019 and beyond versus the previous enacted 35% corporate tax rate. We finalized this analysis in the first quarter of fiscal 2019 and recorded an additional deferred tax benefit of $2.6 million.

Valuation allowances of $22.3 million in Australia were released due to sufficient positive evidence obtained during the second quarter of fiscal 2019. The valuation allowances are primarily related to net operating loss and R&D credit carryforwards and other temporary differences. We evaluated the positive evidence against any negative evidence and determined that it is more likely than not that the deferred tax assets will be realized. The factors used to assess the likelihood of realization were the past performance of the related entities, our forecast of future taxable income, and available tax planning strategies that could be implemented to realize the deferred tax assets. Excluding the net deferred tax benefits from the TCJA and valuation allowance releases, our effective tax rate in the first half of fiscal 2019 was 24.8% compared to 23.0% in first half of fiscal 2018.

We have completed our measurement of the tax effects of the TCJA with respect to the one-time revaluation of our deferred tax liabilities and the one-time transition tax on foreign earnings pursuant to Staff Accounting Bulletin No. 118 in the first quarter of fiscal 2019. The amounts recorded for these two items incorporate assumptions made based on our current interpretation of the TCJA and should not materially change.

With respect to the GILTI provisions of the TCJA, we have analyzed our structure and expected global results of operations and do not expect to have any adjustment related to potential GILTI tax in our consolidated financial statements. Because of the

21


complexity of the new GILTI tax rules, we will continue to evaluate the impact of this provision and the application of Accounting Standards Codification 740, Income Taxes.

As of March 31, 2019 and September 30, 2018, the liability for income taxes associated with uncertain tax positions was $12.1 million and $9.4 million, respectively. These uncertain tax positions substantially relate to ongoing examinations, which are reasonably likely to be resolved within the next 12 months. 
 
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 all international activities other than work for development agencies. Additionally, we will continue to report the results of the wind-down of our non-core construction activities in the Remediation and Construction Management ("RCM") segment. As of March 31, 2019, there was no remaining backlog for RCM as the projects were complete.

GSG provides 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, infrastructure, information technology, and disaster response and recovery planning services. GSG also provides engineering design services for 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 provides consulting and engineering services primarily to U.S. commercial clients and international clients, both commercial and government. CIG supports commercial clients across the Fortune 500, oil and gas, energy utilities, manufacturing, aerospace, and mining markets. CIG also provides infrastructure and related environmental and geotechnical services, testing, engineering and project management services to commercial and local government clients across Canada, in Asia Pacific (primarily Australia and New Zealand), as well as Brazil and Chile.

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.


22


Reportable Segments

The following tables summarize financial information regarding our reportable segments:
 
Three Months Ended
 
Six Months Ended
 
March 31,
2019
 
April 1,
2018
 
March 31,
2019
 
April 1,
2018
 
(in thousands)
Revenue
 

 
 

 
 

 
 

GSG
$
417,526

 
$
406,027

 
$
829,497

 
$
848,799

CIG
322,458

 
309,704

 
640,252

 
641,217

RCM
(4,645
)
 
1,480

 
(3,192
)
 
8,286

Elimination of inter-segment revenue
(12,718
)
 
(16,949
)
 
(26,505
)
 
(38,292
)
Total
$
722,621

 
$
700,262

 
$
1,440,052

 
$
1,460,010

 
 
 
 
 
 
 
 
Income from operations
 

 
 

 
 

 
 

GSG
$
44,803

 
$
34,177

 
$
82,217

 
$
73,302

CIG
20,869

 
18,400

 
47,968

 
39,693

RCM
(5,938
)
 
(489
)
 
(5,934
)
 
(1,647
)
Corporate (1)
(12,189
)
 
(9,372
)
 
(20,995
)
 
(20,043
)
Total
$
47,545

 
$
42,716

 
$
103,256

 
$
91,305

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

 
March 31,
2019
 
September 30,
2018
 
(in thousands)
Total Assets
 

 
 

GSG
$
524,796

 
$
468,010

CIG
410,918

 
478,197

RCM
17,213

 
25,683

Corporate (1)
998,938

 
987,531

Total
$
1,951,865

 
$
1,959,421

 
 
 
 
(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 September 30, 2018). The carrying value of our long-term debt approximated fair value at March 31, 2019 and September 30, 2018. At March 31, 2019, we had borrowings of $243.8 million outstanding under our Amended Credit Agreement, which were used to fund our business acquisitions, working capital needs, stock repurchases, dividends, capital expenditures and contingent earn-outs.
 
14.                               Derivative Financial Instruments

We use certain interest rate derivative contracts to hedge interest rate exposures on our variable rate debt. We enter 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.


23


We recognize derivative instruments as either assets or liabilities on the accompanying consolidated balance sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives that have been designated as cash flow hedges in our consolidated balance sheets as accumulated other comprehensive income, and in our consolidated statements of income for those derivatives designated as fair value hedges.

In the fourth quarter of 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 March 31, 2019, the notional principal of our outstanding interest swap agreements was $243.8 million. The interest rate swaps have a fixed interest rate of 2.79% and expire in July 2023. At March 31, 2019 and September 30, 2018, the fair value of the effective portion of our interest rate swap agreements designated as cash flow hedges before tax effect was $5.5 million and $(1.3) million, respectively, of which we expect to reclassify $1.0 million from accumulated other comprehensive income to interest expense within the next twelve months.

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

 
 
 
Fair Value of Derivative
Instruments as of
 
Balance Sheet Location
 
March 31, 2019
 
September 30, 2018
 
 
 
(in thousands)
Interest rate swap agreements
Other current (liabilities) assets
 
$
(5,530
)
 
$
1,244


The impact of the effective portions of derivative instruments in cash flow hedging relationships and fair value relationships on other comprehensive income was $(6.8) million for the first half of fiscal 2019 and was immaterial for the first half of fiscal 2018, respectively. Additionally, there were no ineffective portions of derivative instruments. Accordingly, no amounts were excluded from effectiveness testing for our interest rate swap agreements.


24


15.                               Reclassifications Out of Accumulated Other Comprehensive Income

The accumulated balances and reporting period activities for the three and six months ended March 31, 2019 and April 1, 2018 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
Loss
 
(in thousands)
Balances at December 31, 2017
$
(102,413
)
 
$
512

 
$
(101,901
)
Other comprehensive loss before reclassifications
(16,116
)
 
(136
)
 
(16,252
)
Amounts reclassified from accumulated other comprehensive income
 
 
 
 
 
Interest rate contracts, net of tax (1)
—

 
109

 
109

Net current-period other comprehensive loss
(16,116
)
 
(27
)
 
(16,143
)
Balances at April 1, 2018
$
(118,529
)
 
$
485

 
$
(118,044
)
 
 
 
 
 
 
Balances at December 30, 2018
$
(151,936
)
 
$
(2,757
)
 
$
(154,693
)
Other comprehensive loss before reclassifications
9,245

 
(2,504
)
 
6,741

Amounts reclassified from accumulated other comprehensive income
 
 
 
 
 
Interest rate contracts, net of tax (1)
—

 
(265
)
 
(265
)
Net current-period other comprehensive income (loss)
9,245

 
(2,769
)
 
6,476

Balance at March 31, 2019
$
(142,691
)
 
$
(5,526
)
 
$
(148,217
)
 
 
 
 
 
 
 
Six Months Ended
 
Foreign
Currency
Translation
Adjustments
 
Gain (Loss)
on Derivative
Instruments
 
Accumulated
Other
Comprehensive
Loss
 
(in thousands)
Balances at October 1, 2017
$
(98,946
)
 
$
446

 
$
(98,500
)
Other comprehensive loss before reclassifications
(19,583
)
 
(52
)
 
(19,635
)
Amounts reclassified from accumulated other comprehensive income
 
 
 
 
 
Interest rate contracts, net of tax (1)
—

 
91

 
91

Net current-period other comprehensive (loss) income
(19,583
)
 
39

 
(19,544
)
Balances at April 1, 2018
$
(118,529
)
 
$
485

 
$
(118,044
)
 
 
 
 
 
 
Balances at September 30, 2018
$
(128,602
)
 
$
1,252

 
$
(127,350
)
Other comprehensive loss before reclassifications
(14,089
)
 
(6,287
)
 
(20,376
)
Amounts reclassified from accumulated other comprehensive income
 
 
 
 
 
Interest rate contracts, net of tax (1)
—

 
(491
)
 
(491
)
Net current-period other comprehensive loss
(14,089
)
 
(6,778
)
 
(20,867
)
Balances at March 31, 2019
$
(142,691
)
 
$
(5,526
)
 
$
(148,217
)
 
 
 
 
 
 
(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.


25


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 January 14, 2019, the Civil Division of the United States Attorney's Office ("USAO") filed complaints in intervention in three qui tam actions filed against our subsidiary, Tetra Tech EC, Inc. ("TtEC"), in the U.S. District Court for the Northern District of California. The complaints allege False Claims Act violations and breach of contract related to TtEC's contracts to perform environmental remediation services at the former Hunters Point Naval Shipyard in San Francisco, California. 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.

26


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,” “seeks,” “estimates,” “continues,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any 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, infrastructure, resource management, energy, and international development. We are a global company that leads with science and is renowned for our expertise in providing water-related solutions for public and private clients. We typically begin at the earliest stage of a project by identifying technical solutions and developing execution plans tailored to our clients’ needs and resources. Our solutions may span the entire life cycle of consulting and engineering projects and include applied science, data analysis, research, engineering, design, construction management, and operations and maintenance.

Our reputation for high-end consulting and engineering services and our ability to apply our skills to develop solutions for water and environmental management has supported our growth for over 50 years since the founding of our predecessor company. By combining ingenuity and practical experience, we have helped to advance sustainable solutions for managing water, protecting the environment, providing energy, and engineering the infrastructure for our cities and communities.