10-Q 1 ttek-20220703.htm 10-Q ttek-20220703
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
  
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 3, 2022

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

Commission File Number 0-19655
  
TETRA TECH, INC.
(Exact name of registrant as specified in its charter)
Delaware95-4148514
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
 
3475 East Foothill Boulevard, Pasadena, California 91107
(Address of principal executive offices)  (Zip Code)
 
(626) 351-4664
(Registrant’s telephone number, including area code) 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueTTEKThe NASDAQ Stock Market LLC

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

As of July 25, 2022, 53,318,715 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)
ASSETSJuly 3,
2022
October 3,
2021
Current assets:  
Cash and cash equivalents$217,384 $166,568 
Accounts receivable, net722,868 668,998 
Contract assets99,830 103,784 
Prepaid expenses and other current assets94,497 112,338 
Income taxes receivable10,778 14,260 
Total current assets1,145,357 1,065,948 
Property and equipment, net35,010 37,733 
Right-of-use assets, operating leases191,022 215,422 
Investments in unconsolidated joint ventures3,974 3,282 
Goodwill1,151,457 1,108,578 
Intangible assets, net33,943 37,990 
Deferred tax assets56,634 54,413 
Other long-term assets60,309 53,196 
Total assets$2,677,706 $2,576,562 
LIABILITIES AND EQUITY  
Current liabilities:  
Accounts payable$138,190 $128,767 
Accrued compensation224,611 206,322 
Contract liabilities247,013 190,403 
Short-term lease liabilities, operating leases60,101 67,452 
Current portion of long-term debt and other short-term borrowings27,081 12,504 
Current contingent earn-out liabilities32,386 19,520 
Other current liabilities216,083 223,515 
Total current liabilities945,465 848,483 
Deferred tax liabilities18,282 10,563 
Long-term debt234,375 200,000 
Long-term lease liabilities, operating leases154,499 174,285 
Long-term contingent earn-out liabilities50,900 39,777 
Other long-term liabilities69,127 69,163 
Commitments and contingencies (Note 17)
Equity:  
Preferred stock - authorized, 2,000 shares of $0.01 par value; no shares issued and outstanding at July 3, 2022 and October 3, 2021
  
Common stock - authorized, 150,000 shares of $0.01 par value; issued and outstanding, 53,319 and 53,981 shares at July 3, 2022 and October 3, 2021, respectively
533 540 
Accumulated other comprehensive loss(157,806)(125,028)
Retained earnings1,362,284 1,358,726 
Tetra Tech stockholders’ equity1,205,011 1,234,238 
Noncontrolling interests47 53 
Total stockholders' equity1,205,058 1,234,291 
Total liabilities and stockholders' equity$2,677,706 $2,576,562 
See Notes to Consolidated Financial Statements.
3


Tetra Tech, Inc.
Consolidated Statements of Income
(unaudited – in thousands, except per share data)
 
 Three Months EndedNine Months Ended
 July 3,
2022
June 27,
2021
July 3,
2022
June 27,
2021
Revenue$890,231 $801,633 $2,601,485 $2,321,500 
Subcontractor costs(169,745)(163,590)(502,024)(478,461)
Other costs of revenue(575,902)(512,347)(1,679,937)(1,488,549)
Gross profit144,584 125,696 419,524 354,490 
Selling, general and administrative expenses(60,679)(55,889)(173,879)(157,625)
Income from operations83,905 69,807 245,645 196,865 
Interest expense, net(2,919)(2,737)(8,967)(8,585)
Income before income tax expense80,986 67,070 236,678 188,280 
Income tax expense(22,329)(15,146)(56,473)(38,380)
Net income58,657 51,924 180,205 149,900 
Net income attributable to noncontrolling interests(7)(21)(26)(44)
Net income attributable to Tetra Tech$58,650 $51,903 $180,179 $149,856 
Earnings per share attributable to Tetra Tech:    
Basic$1.10 $0.96 $3.35 $2.77 
Diluted$1.09 $0.95 $3.32 $2.74 
Weighted-average common shares outstanding:    
Basic53,507 54,117 53,777 54,095 
Diluted54,006 54,666 54,328 54,698 

See Notes to Consolidated Financial Statements.

4


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

 
 Three Months EndedNine Months Ended
 July 3,
2022
June 27,
2021
July 3,
2022
June 27,
2021
Net income$58,657 $51,924 $180,205 $149,900 
Other comprehensive income, net of tax
Foreign currency translation adjustment, net of tax
(44,884)11,159 (42,763)54,527 
Gain on cash flow hedge valuations, net of tax2,380 1,498 9,984 4,864 
Other comprehensive income (loss), net of tax(42,504)12,657 (32,779)59,391 
Comprehensive income, net of tax$16,153 $64,581 $147,426 $209,291 
Comprehensive income attributable to noncontrolling interests, net of tax6 23 25 50 
Comprehensive income attributable to Tetra Tech, net of tax$16,147 $64,558 $147,401 $209,241 

See Notes to Consolidated Financial Statements.

5


Tetra Tech, Inc.
Consolidated Statements of Cash Flows
(unaudited – in thousands)
 Nine Months Ended
 July 3,
2022
June 27,
2021
Cash flows from operating activities:  
Net income$180,205 $149,900 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization19,545 16,811 
Equity in income of unconsolidated joint ventures(5,233)(3,513)
Distributions of earnings from unconsolidated joint ventures4,532 2,773 
Amortization of stock-based awards19,104 16,261 
Deferred income taxes750 123 
Fair value adjustments to contingent consideration(64)(163)
Loss (gain) on sale of assets93 (110)
Changes in operating assets and liabilities, net of effects of business acquisitions:  
Accounts receivable and contract assets(54,874)10,999 
Prepaid expenses and other assets33,254 17,243 
Accounts payable8,845 19,712 
Accrued compensation15,349 (7,332)
Contract liabilities59,025 3,083 
Other liabilities(12,702)1,389 
Income taxes receivable/payable8,147 (638)
Net cash provided by operating activities275,976 226,538 
Cash flows from investing activities:  
Payments for business acquisitions, net of cash acquired(33,624)(17,154)
Capital expenditures(8,401)(6,234)
Proceeds from sale of assets3,754 333 
Net cash used in investing activities(38,271)(23,055)
Cash flows from financing activities:  
Proceeds from borrowings141,456 165,570 
Repayments on long-term debt(108,949)(173,895)
Bank overdrafts (33,770)
Repurchases of common stock(150,000)(45,000)
Taxes paid on vested restricted stock(25,193)(17,589)
Stock options exercised1,205 10,703 
Dividends paid(33,873)(29,241)
Payments of contingent earn-out liabilities(4,035)(12,374)
Principal payments on finance leases(3,097)(1,908)
Net cash used in financing activities(182,486)(137,504)
Effect of exchange rate changes on cash and cash equivalents(4,403)10,772 
Net increase in cash and cash equivalents50,816 76,751 
Cash and cash equivalents at beginning of period166,568 157,515 
Cash and cash equivalents at end of period$217,384 $234,266 
Supplemental information:  
Cash paid during the period for:  
Interest$7,556 $7,044 
Income taxes, net of refunds received of $4.2 million and $2.0 million
$49,131 $36,664 
Supplemental disclosures on non-cash investing activities:
Issuance of promissory note for business acquisition$14,578 $ 
See Notes to Consolidated Financial Statements.
6


Tetra Tech, Inc.
Consolidated Statements of Stockholders' Equity
Three Months Ended June 27, 2021 and July 03, 2022
(unaudited – in thousands)
Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Tetra Tech
Equity
Non-Controlling
Interests
Total
Equity
SharesAmount
BALANCE AT MARCH 28, 202154,158 $542 $ $(115,056)$1,261,661 $1,147,147 $81 $1,147,228 
Net income51,903 51,903 21 51,924 
Other comprehensive income12,655 12,655 2 12,657 
Distributions paid to noncontrolling interests— (9)(9)
Cash dividends of $0.20 per common share
(10,831)(10,831)(10,831)
Stock-based compensation5,695 5,695 5,695 
Restricted & performance shares released2 — (101)(101)(101)
Stock options exercised29 1 931 932 932 
Stock repurchases(118)(2)(6,525)(8,473)(15,000)(15,000)
BALANCE AT JUNE 27, 202154,071 $541 $ $(102,401)$1,294,260 $1,192,400 $95 $1,192,495 
BALANCE AT APRIL 3, 202253,683$537 $ $(115,303)$1,359,367 $1,244,601 $41 $1,244,642 
Net income58,650 58,650 7 58,657 
Other comprehensive loss(42,503)(42,503)(1)(42,504)
Cash dividends of $0.23 per common share
(12,311)(12,311)(12,311)
Stock-based compensation12,747 (6,035)6,712 6,712 
Restricted & performance shares released4 — (6,172)6,034 (138)(138)
Stock repurchases(368)(4)(6,575)(43,421)(50,000)(50,000)
BALANCE AT JULY 3, 202253,319 $533 $ $(157,806)$1,362,284 $1,205,011 $47 $1,205,058 

























7


Tetra Tech, Inc.
Consolidated Statements of Stockholders' Equity
Nine months ended June 27, 2021 and July 03, 2022
(unaudited – in thousands)
Common StockAdditional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Tetra Tech
Equity
Non-Controlling
Interests
Total
Equity
SharesAmount
BALANCE AT SEPTEMBER 27, 202053,797 $538 $ $(161,786)$1,198,567 $1,037,319 $54 $1,037,373 
Net income149,856 149,856 44 149,900 
Other comprehensive income59,385 59,385 6 59,391 
Distributions paid to noncontrolling interests— (9)(9)
Cash dividends of $0.54 per common share
(29,241)(29,241)(29,241)
Stock-based compensation16,261 16,261 16,261 
Restricted & performance shares released213 2 (17,591)(17,589)(17,589)
Stock options exercised304 4 10,699 10,703 10,703 
Shares issued for Employee Stock Purchase Plan124 1 10,705 10,706 10,706 
Stock repurchases(367)(4)(20,074)(24,922)(45,000)(45,000)
BALANCE AT JUNE 27, 202154,071 $541 $ $(102,401)$1,294,260 $1,192,400 $95 $1,192,495 
BALANCE AT OCTOBER 3, 202153,981$540 $ $(125,028)$1,358,726 $1,234,238 $53 $1,234,291 
Net income180,179 180,179 26 180,205 
Other comprehensive loss(32,778)(32,778)(1)(32,779)
Distributions paid to noncontrolling interests— (31)(31)
Cash dividends of $0.63 per common share
(33,873)(33,873)(33,873)
Stock-based compensation19,104  19,104 19,104 
Restricted & performance shares released189 2 (25,195) (25,193)(25,193)
Stock options exercised29 — 1,205 1,205 1,205 
Shares issued for Employee Stock Purchase Plan106 1 12,128 12,129 12,129 
Stock repurchases(986)(10)(7,242)(142,748)(150,000)(150,000)
BALANCE AT JULY 3, 202253,319 $533 $ $(157,806)$1,362,284 $1,205,011 $47 $1,205,058 

See Notes to Consolidated Financial Statements.




8


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

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

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

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

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

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

In October 2021, the FASB issued ASU 2021-08, which requires the recognition and measurement of contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers" ("ASC 606"). Considerations to determine the amount of contract assets and contract liabilities to record at the acquisition date include the terms of the acquired contract, such as timing of payment, identification of each performance obligation in the contract and allocation of the contract transaction price to each identified performance obligation on a relative standalone selling price basis as of contract inception. ASU 2021-08 is effective for us beginning in the first quarter of fiscal 2023. ASU 2021-08 should be applied prospectively for acquisitions occurring on or after the effective date of the amendments. Early adoption of the proposed amendments would be permitted, including adoption in an interim period. We adopted this guidance in the first quarter of fiscal 2022, and the adoption did not have an impact on our consolidated financial statements.

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

3.                                   Revenue and Contract Balances

We disaggregate revenue by client sector and contract type, as we believe it best depicts how the nature, timing, and uncertainty of revenue and cash flows are affected by economic factors. The following tables present revenue disaggregated by client sector and contract type:
9


 Three Months EndedNine Months Ended
 July 3,
2022
June 27,
2021
July 3,
2022
June 27,
2021
 (in thousands)
Client Sector:  
U.S. state and local government$150,731 $135,717 $465,770 $390,464 
U.S. federal government (1)
261,434 265,999 781,503 799,560 
U.S. commercial188,255 153,100 536,901 454,607 
International (2)
289,811 246,817 817,311 676,869 
Total$890,231 $801,633 $2,601,485 $2,321,500 
Contract Type:
Fixed-price$335,014 $294,568 $982,565 $841,118 
Time-and-materials417,898 379,705 1,221,598 1,082,143 
Cost-plus137,319 127,360 397,322 398,239 
Total$890,231 $801,633 $2,601,485 $2,321,500 
(1)    Includes revenue generated under U.S. federal government contracts performed outside the United States.
(2)    Includes revenue generated from foreign operations, primarily in Canada, Australia, the United Kingdom, and revenue generated from non-U.S. clients.

Other than the U.S. federal government, no single client accounted for more than 10% of our revenue for the three and nine months ended July 3, 2022 and June 27, 2021.

Contract Assets and Contract Liabilities

We invoice customers based on the contractual terms of each contract. However, the timing of revenue recognition may differ from the timing of invoice issuance.

Contract assets represent revenue recognized in excess of the amounts for which we have the contractual right to bill our customers. Such amounts are recoverable from customers based upon various measures of performance, including achievement of certain milestones or completion of a contract. In addition, many of our time and materials arrangements are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded, as revenue is recognized in advance of billings. Contract retentions, included in contract assets, represent amounts withheld by clients until certain conditions are met or the project is completed, which may extend beyond one year.

Contract liabilities consist of billings in excess of revenue recognized. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and increase as billings in advance of revenue recognition occur. Contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. There were no substantial non-current contract assets or liabilities for the periods presented. Net contract assets/liabilities consisted of the following:
Balance at
July 3,
2022
October 3, 2021
(in thousands)
Contract assets (1)
$99,830 $103,784 
Contract liabilities(247,013)(190,403)
Net contract liabilities$(147,183)$(86,619)
(1)    Includes $21.3 million and $12.2 million of contract retentions as of July 3, 2022 and October 3, 2021, respectively.

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In the first nine months of fiscal 2022 and 2021, we recognized revenue of approximately $111 million and $108 million, respectively, from amounts included in the contract liability balances at the end of fiscal 2021 and 2020, respectively.

We recognize revenue primarily using the cost-to-cost measure of progress method to estimate progress towards completion. Changes in those estimates could result in the recognition of cumulative catch-up adjustments to the contract’s inception-to-date revenue, costs and profit in the period in which such changes are made. As a result, we recognized net unfavorable revenue and operating income adjustments of $2.8 million and net favorable revenue and operating income adjustments of $2.2 million in the third quarter and first nine months of fiscal 2022, respectively, compared to net favorable adjustments of $1.7 million and $2.8 million in the third quarter and first nine months of fiscal 2021, respectively.

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 July 3, 2022 and October 3, 2021, our consolidated balance sheets included liabilities for anticipated losses of $11.1 million and $12.7 million, respectively. The estimated cost to complete these related contracts as of July 3, 2022 and October 3, 2021 was approximately $84 million and $104 million, respectively.

Accounts Receivable, Net

Net accounts receivable consisted of the following:

Balance at
 July 3,
2022
October 3,
2021
(in thousands)
Billed$451,065 $432,814 
Unbilled276,001 240,536 
Total accounts receivable727,066 673,350 
Allowance for doubtful accounts(4,198)(4,352)
Total accounts receivable, net$722,868 $668,998 

Billed accounts receivable represent amounts billed to clients that have not been collected. Unbilled accounts receivable, which represent an unconditional right to payment subject only to the passage of time, include unbilled amounts typically resulting from revenue recognized but not yet billed pursuant to contract terms or billed after the period end date. Substantially all of our unbilled receivables at July 3, 2022 are expected to be billed and collected within 12 months. The allowance for doubtful accounts represents amounts that are expected to become uncollectible or unrealizable in the future. We determine an estimated allowance for uncollectible accounts based on management's consideration of trends in the actual and forecasted credit quality of our clients, including delinquency and payment history; type of client, such as a government agency or a commercial sector client; and general economic and industry conditions, including the potential impacts of the coronavirus disease 2019 ("COVID-19") pandemic, that may affect our clients' ability to pay.

Claims are amounts in excess of agreed contract prices that we seek to collect from our clients or other third parties for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regards to both scope and price) should be recognized include the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in our performance, (c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting the claim is objective and verifiable. This can lead to a situation in which costs are recognized in one period and revenue is recognized in a subsequent period when a client agreement is obtained, or a claims resolution occurs. Total accounts receivable at October 3, 2021 included approximately $11 million related to claims, including requests for equitable adjustment, on contracts that provide for price redetermination. This amount related to a single claim in our Remediation and Construction Management ("RCM") reportable segment. In May 2022, we received a cash settlement for the claim, which resulted in an immaterial gain in the third quarter of fiscal 2022. There were no claims included in our total accounts receivable at July 3, 2022. We regularly evaluate all unsettled claim amounts and record appropriate adjustments to revenue when it is probable that the claim will result in a different contract value than the amount previously estimated. In the first nine months of fiscal 2022, we recorded no gains or losses related to claims other than the aforementioned immaterial gain on the settled RCM claim. In the first nine months of fiscal 2021 (all in the second quarter), we recognized increases to revenue and related gains of $2.8 million.

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

Remaining Unsatisfied Performance Obligations (“RUPO”)

Our RUPO represents a measure of the total dollar value of work to be performed on contracts awarded and in progress. We had $3.5 billion of RUPO as of July 3, 2022. RUPO increases with awards from new contracts or additions on existing contracts and decreases as work is performed and revenue is recognized on existing contracts. RUPO may also decrease when projects are canceled or modified in scope. We include a contract within our RUPO when the contract is awarded and an agreement on contract terms has been reached.

We expect to satisfy our RUPO as of July 3, 2022 over the following periods:
Amount
(in thousands)
Within 12 months$2,182,597 
Beyond 1,312,857 
Total $3,495,454 

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

4.            Acquisitions

For the first nine months of fiscal 2022, we acquired The Integration Group of America ("TIGA"), Piteau Associates (“PAE”) and other immaterial acquisitions. TIGA is based in Spring, Texas and is an industry leader in process automation and system integration solutions, including customized software and platform (SaaS/PaaS) applications, advanced data analytics, cloud data integration, and platform virtualization. PAE is based in Vancouver, British Columbia and is a global leader in sustainable natural resource analytics including hydrologic numerical modeling and dewatering system design. PAE is part of our CIG segment, and TIGA and other immaterial acquisitions are part of our GSG segment. The total fair value of the purchase price for all of these acquisitions was $86.5 million. This amount is comprised of $44.0 million in initial cash payments made to the sellers, $4.3 million of receivables (net) related to estimated post-closing adjustments for the net assets acquired, $15.5 million payable in a promissory note issued to the sellers along with related transaction expenses of the sellers (which were subsequently paid in July 2022), and $31.3 million for the estimated fair value of contingent earn-out obligations, with a maximum of $47.0 million, based upon the achievement of specified operating income targets in each of the three to five years following the acquisitions.

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

Goodwill additions resulting from fiscal 2022 business combinations are primarily attributable to the significant technical expertise residing in embedded workforces that are sought out by clients, long-term management experience, the industry reputations, and the synergies expected to arise after the acquisitions in the areas of data management, digitization, modeling, water, and natural resources. The fiscal 2021 goodwill additions represent the significant technical expertise residing
12


in embedded workforces that are sought out by clients and the long-standing reputation of HLE. In addition, these acquired capabilities, when combined with our existing global consulting and engineering business, result in opportunities that allow us to provide services under contracts that could not have been pursued individually by either us or the acquired companies. The results of these acquisitions were included in our consolidated financial statements from their respective closing dates. These acquisitions were not considered material, individually or in the aggregate, to our consolidated financial statements. As a result, no pro forma information has been provided.

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

Most of our acquisition agreements include contingent earn-out agreements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based on our valuations of the acquired companies and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved. The fair values of any earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in “Current contingent earn-out liabilities” and “Long-term contingent earn-out liabilities” on the consolidated balance sheets. We consider several factors when determining that contingent earn-out liabilities are part of the purchase price, including the following: (1) the valuation of our acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former owners of acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of our other key employees. The contingent earn-out payments are not affected by employment termination.

We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. We use a probability-weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period (generally three to five years), and the probability outcome percentages we assign to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability, with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the contingent earn-out liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows. Any amount paid in excess of the contingent earn-out liability on the acquisition date is reflected as cash used in operating activities in our consolidated statements of cash flows.

We review and re-assess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income. For the first nine months of fiscal 2022, we evaluated our estimates for contingent consideration liabilities for the remaining earn-out periods for each individual acquisition, which included a review of their financial results to-date, the status of ongoing projects in their RUPO, and the inventory of prospective new contract awards. In addition, we considered the potential impact of the global economic disruption due to the COVID-19 pandemic on our operating income projections over the various earn-out periods. For the first nine months of fiscal 2022 and 2021, total adjustments to our contingent earn-out liabilities in operating income were immaterial.

At July 3, 2022, there was a total potential maximum of $141.1 million of outstanding contingent consideration related to acquisitions. Of this amount, $83.3 million was estimated as the fair value and accrued on our consolidated balance sheet.
     
5.            Goodwill and Intangible Assets

The following table summarizes the changes in the carrying value of goodwill by reportable segment:
13


 GSGCIGTotal
(in thousands)
Balance at October 3, 2021$538,433 $570,145 $1,108,578 
Goodwill reallocation(51,497)51,497  
Acquisition activity46,326 26,318 72,644 
Translation and adjustments(3,961)(25,804)(29,765)
Balance at July 3, 2022$529,301 $622,156 $1,151,457 

Our goodwill balances reflect the goodwill reallocation related to the creation of our new HPB division on the first day of fiscal 2022, which included a transfer of some related operations in our GSG reportable segment to our CIG reportable segment. The foreign currency translation adjustments resulted from our foreign subsidiaries with functional currencies that are different than our reporting currency. These amounts are presented net of reductions from historical impairment adjustments. The gross amounts of goodwill for GSG were $547.0 million and $556.1 million at July 3, 2022 and October 3, 2021, respectively, excluding accumulated impairment of $17.7 million at each date. The gross amounts of goodwill for CIG were $743.7 million and $691.6 million at July 3, 2022 and October 3, 2021, respectively, excluding accumulated impairment of $121.5 million at each date.

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

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

The following table presents the gross amount and accumulated amortization of our acquired identifiable intangible assets with finite useful lives included in “Intangible assets, net” on the consolidated balance sheets:

Period Ended
 July 3, 2022October 3, 2021
 Weighted-
Average
Remaining Life
(in Years)
Gross
Amount
Accumulated
Amortization
Net AmountGross
Amount
Accumulated
Amortization
Net Amount
 ($ in thousands)
Client relations5.7$44,287 $(20,847)$23,440 $69,455 $(43,984)$25,471 
Backlog0.834,088 (29,811)4,277 34,577 (30,670)3,907 
Trade names3.913,651 (7,425)6,226 14,939 (6,327)8,612 
Total $92,026 $(58,083)$33,943 $118,971 $(80,981)$37,990 

Amortization expense for the three and nine months ended July 3, 2022 was $3.7 million and $9.6 million, respectively, compared to $2.2 million and $7.8 million for the prior-year periods. Estimated amortization expense for the
14


remainder of fiscal 2022 and succeeding years is as follows:
 Amount
 (in thousands)
2022$3,394 
20239,675 
20245,592 
20254,759 
20263,885 
Beyond6,638 
Total$33,943 

6.                                     Property and Equipment

Property and equipment consisted of the following:
Balance at
 July 3,
2022
October 3,
2021
 (in thousands)
Equipment, furniture and fixtures$100,667 $94,780 
Leasehold improvements35,818 36,462 
Total property and equipment136,485 131,242 
Accumulated depreciation(101,475)(93,509)
Property and equipment, net$35,010 $37,733 

The depreciation expense related to property and equipment was $3.2 million and $9.9 million for the three and nine months ended July 3, 2022, compared to $3.1 million and $9.0 million for the prior-year periods.

7.                                     Stock Repurchase and Dividends

On October 5, 2021, the Board of Directors authorized a new stock repurchase program under which we could repurchase up to $400 million of our common stock in addition to the $147.8 million remaining under the previous stock repurchase program at October 3, 2021. In the first nine months of fiscal 2022, we repurchased and settled