10-Q 1 ttek-20240331.htm 10-Q ttek-20240331
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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 March 31, 2024

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, a 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 

At April 22, 2024, 53,497,270 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)
ASSETSMarch 31,
2024
October 1,
2023
Current assets:  
Cash and cash equivalents$210,294 $168,831 
Accounts receivable, net1,037,883 974,535 
Contract assets102,991 113,939 
Prepaid expenses and other current assets128,753 98,719 
Total current assets1,479,921 1,356,024 
Property and equipment, net72,897 74,832 
Right-of-use assets, operating leases181,948 175,932 
Goodwill1,977,688 1,880,244 
Intangible assets, net175,611 173,936 
Deferred tax assets87,561 89,002 
Other non-current assets94,948 70,507 
Total assets$4,070,574 $3,820,477 
LIABILITIES AND EQUITY  
Current liabilities:  
Accounts payable$215,644 $173,271 
Accrued compensation251,035 302,755 
Contract liabilities373,682 335,044 
Short-term lease liabilities, operating leases70,793 65,005 
Current contingent earn-out liabilities46,959 51,108 
Other current liabilities235,821 280,959 
Total current liabilities1,193,934 1,208,142 
Deferred tax liabilities17,647 14,256 
Long-term debt951,031 879,529 
Long-term lease liabilities, operating leases139,364 144,685 
Non-current contingent earn-out liabilities27,620 22,314 
Other non-current liabilities156,128 148,045 
Commitments and contingencies (Note 18)
Equity:  
Preferred stock - authorized, 2,000 shares of $0.01 par value; no shares issued and outstanding at March 31, 2024 and October 1, 2023
  
Common stock - authorized, 150,000 shares of $0.01 par value; issued and outstanding, 53,497 and 53,248 shares at March 31, 2024 and October 1, 2023, respectively
535 532 
Additional paid-in capital18,972  
Accumulated other comprehensive loss(156,546)(195,295)
Retained earnings1,721,833 1,598,196 
Tetra Tech stockholders’ equity1,584,794 1,403,433 
Noncontrolling interests56 73 
Total stockholders' equity1,584,850 1,403,506 
Total liabilities and stockholders' equity$4,070,574 $3,820,477 
See Notes to Consolidated Financial Statements.
3


Tetra Tech, Inc.
Consolidated Statements of Income
(unaudited – in thousands, except per share data)
 
 Three Months EndedSix Months Ended
 March 31,
2024
April 2,
2023
March 31,
2024
April 2,
2023
Revenue$1,251,616 $1,158,226 $2,479,883 $2,052,991 
Subcontractor costs(198,989)(188,661)(412,087)(346,865)
Other costs of revenue(845,132)(798,719)(1,669,803)(1,382,035)
Gross profit207,495 170,846 397,993 324,091 
Selling, general and administrative expenses(89,812)(82,347)(169,229)(138,848)
Acquisition and integration expenses (19,944) (23,705)
Contingent consideration – fair value adjustments (7,544) (8,477)
Income from operations117,683 61,011 228,764 153,061 
Interest expense, net(9,883)(13,323)(19,461)(18,695)
Other non-operating income 21,407  89,402 
Income before income tax expense107,800 69,095 209,303 223,768 
Income tax expense(31,341)(26,254)(57,864)(64,212)
Net income76,459 42,841 151,439 159,556 
Net income attributable to noncontrolling interests(13)(11)(21)(20)
Net income attributable to Tetra Tech$76,446 $42,830 $151,418 $159,536 
Earnings per share attributable to Tetra Tech:    
Basic$1.43 $0.80 $2.83 $3.00 
Diluted$1.42 $0.80 $2.81 $2.98 
Weighted-average common shares outstanding:    
Basic53,484 53,227 53,419 53,165 
Diluted53,875 53,627 53,825 53,595 

See Notes to Consolidated Financial Statements.

4


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

 Three Months EndedSix Months Ended
 March 31,
2024
April 2,
2023
March 31,
2024
April 2,
2023
Net income$76,459 $42,841 $151,439 $159,556 
Other comprehensive income, net of tax
Foreign currency translation adjustment, net of tax
(24,344)(8,154)38,762 24,953 
Loss on cash flow hedge valuations, net of tax (896) (985)
Net pension adjustments 2,794 (13)2,794 
Other comprehensive income (loss), net of tax(24,344)(6,256)38,749 26,762 
Comprehensive income, net of tax$52,115 $36,585 $190,188 $186,318 
Comprehensive income attributable to noncontrolling interests, net of tax13 10 21 19 
Comprehensive income attributable to Tetra Tech, net of tax$52,102 $36,575 $190,167 $186,299 

See Notes to Consolidated Financial Statements.

5


Tetra Tech, Inc.
Consolidated Statements of Cash Flows
(unaudited – in thousands)
 Six Months Ended
 March 31,
2024
April 2,
2023
Cash flows from operating activities:  
Net income$151,439 $159,556 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization37,215 23,537 
Amortization of stock-based awards15,617 14,602 
Deferred income taxes(8,049)20,978 
Fair value adjustments to foreign currency forward contract (89,402)
Fair value adjustments to contingent consideration 8,477 
Other non-cash items1,032 (884)
Changes in operating assets and liabilities, net of effects of business acquisitions:  
Accounts receivable and contract assets(23,195)(36,545)
Prepaid expenses and other assets(33,412)(20,461)
Accounts payable36,406 43,169 
Accrued compensation(74,291)(42,872)
Contract liabilities34,801 29,037 
Income taxes receivable/payable(18,556)3,190 
Other liabilities(6,826)741 
Net cash provided by operating activities112,181 113,123 
Cash flows from investing activities:  
Payments for business acquisitions, net of cash acquired(71,796)(854,319)
Settlement of foreign currency forward contract 109,306 
Capital expenditures(7,463)(10,294)
Proceeds from sale of assets98 88 
Net cash used in investing activities(79,161)(755,219)
Cash flows from financing activities:  
Proceeds from borrowings180,000 975,889 
Repayments on long-term debt(110,000)(249,667)
Shares repurchased for tax withholdings on share-based awards(12,781)(16,680)
Payments of contingent earn-out liabilities(22,112)(2,000)
Stock options exercised1,462 91 
Dividends paid(27,781)(24,428)
Principal payments on finance leases(3,155)(2,714)
Net cash provided by financing activities5,633 680,491 
Effect of exchange rate changes on cash and cash equivalents2,810 7,899 
Net increase in cash and cash equivalents41,463 46,294 
Cash and cash equivalents at beginning of period168,831 185,094 
Cash and cash equivalents at end of period$210,294 $231,388 
Supplemental information:  
Cash paid during the period for:  
Interest$23,532 $18,791 
Income taxes, net of refunds received of $2.4 million and $1.2 million
$84,916 $40,107 
See Notes to Consolidated Financial Statements.

6


Tetra Tech, Inc.
Consolidated Statements of Stockholders' Equity
Three Months Ended April 2, 2023 and March 31, 2024
(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 JANUARY 1, 202353,226 $532 $3,281 $(175,126)$1,495,221 $1,323,908 $59 $1,323,967 
Net income42,830 42,830 11 42,841 
Other comprehensive loss(6,255)(6,255)(1)(6,256)
Cash dividends of $0.23 per common share
(12,242)(12,242)(12,242)
Stock-based compensation7,418 7,418 7,418 
Restricted & performance shares released1 — (94)(94)(94)
Stock options exercised1 — 34 34 34 
BALANCE AT APRIL 2, 202353,228 $532 $10,639 $(181,381)$1,525,809 $1,355,599 $69 $1,355,668 
BALANCE AT DECEMBER 31, 202353,466 $534 $9,979 $(132,202)$1,659,295 $1,537,606 $81 $1,537,687 
Net income76,446 76,446 13 76,459 
Other comprehensive income(24,344)(24,344)(24,344)
Distributions paid to noncontrolling interests— (38)(38)
Cash dividends of $0.26 per common share
(13,908)(13,908)(13,908)
Stock-based compensation7,976 7,976 7,976 
Restricted & performance shares released2 — (111)(111)(111)
Stock options exercised29 1 1,126 1,127 1,127 
Shares issued for Employee Stock Purchase Plan— — 2 2 2 
BALANCE AT MARCH 31, 202453,497 $535 $18,972 $(156,546)$1,721,833 $1,584,794 $56 $1,584,850 

7


Tetra Tech, Inc.
Consolidated Statements of Stockholders' Equity
Six Months Ended April 2, 2023 and March 31, 2024
(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 OCTOBER 2, 202252,981 $530 $ $(208,144)$1,390,701 $1,183,087 $50 $1,183,137 
Net income159,536 159,536 20 159,556 
Other comprehensive income (loss)26,763 26,763 (1)26,762 
Cash dividends of 0.46 per common share
(24,428)(24,428)(24,428)
Stock-based compensation14,602 14,602 14,602 
Restricted & performance shares released146 1 (16,681)(16,680)(16,680)
Stock options exercised3 — 91 91 91 
Shares issued for Employee Stock Purchase Plan98 $1 $12,627 12,628 12,628 
BALANCE AT APRIL 2, 202353,228 $532 $10,639 $(181,381)$1,525,809 $1,355,599 $69 $1,355,668 
BALANCE AT OCTOBER 1, 202353,248 $532 $ $(195,295)$1,598,196 $1,403,433 $73 $1,403,506 
Net income151,418 151,418 21 151,439 
Other comprehensive income38,749 38,749 38,749 
Distributions paid to noncontrolling interests— (38)(38)
Cash dividends of 0.52 per common share
(27,781)(27,781)(27,781)
Stock-based compensation15,617 15,617 15,617 
Restricted & performance shares released107 1 (12,782)(12,781)(12,781)
Stock options exercised38 1 1,461 1,462 1,462 
Shares issued for Employee Stock Purchase Plan104 1 14,676 14,677 14,677 
BALANCE AT MARCH 31, 202453,497 $535 $18,972 $(156,546)$1,721,833 $1,584,794 $56 $1,584,850 

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 1, 2023.

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. Certain prior year amounts have been reclassified to conform to the current year presentation in the accompanying notes.

2.                                   Recent Accounting Pronouncements

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires that an entity report segment information in accordance with Topic 280, Segment Reporting. The amendments in the ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 (fiscal 2025 for us). Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements; however, we do not plan to adopt Topic 280 before fiscal 2025.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires that an entity, on an annual basis, disclose additional income tax information, primarily related to the rate reconciliation and income taxes paid. The amendments in the ASU are intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in this ASU are effective for annual periods beginning after December 15, 2024 (fiscal 2026 for us). Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements; however, we do not plan to adopt Topic 740 before fiscal 2026.

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 our revenue and cash flows are affected by economic factors. The following tables present our revenue disaggregated by client sector and contract type (in thousands):

9


 Three Months EndedSix Months Ended
 March 31,
2024
April 2,
2023
March 31,
2024
April 2,
2023
Client Sector:  
U.S. federal government (1)
$407,002 $382,374 $789,078 $658,449 
U.S. state and local government147,551 147,791 298,476 300,985 
U.S. commercial201,407 208,538 423,837 407,494 
International (2)
495,656 419,523 968,492 686,063 
Total$1,251,616 $1,158,226 $2,479,883 $2,052,991 
Contract Type:
Fixed-price$459,022 $413,924 $930,464 $741,661 
Time-and-materials591,844 533,496 1,141,495 954,066 
Cost-plus200,750 210,806 407,924 357,264 
Total$1,251,616 $1,158,226 $2,479,883 $2,052,991 
(1)    Includes revenue generated under U.S. federal government contracts performed outside the United States.
(2)    Includes revenue generated from non-U.S. clients, primarily in Canada, Australia, Europe and the United Kingdom.

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, 2024 and April 2, 2023.

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 (in thousands):
Balance at
March 31,
2024
October 1, 2023
Contract assets (1)
$102,991 $113,939 
Contract liabilities(373,682)(335,044)
Net contract liabilities$(270,691)$(221,105)
(1)    Includes $5.5 million and $6.8 million of contract retentions at March 31, 2024 and October 1, 2023, respectively.

Our contract assets decreased, and our contract liabilities increased in the second quarter of fiscal 2024 compared to fiscal 2023 year-end, due to the timing of our milestone billing on fixed-price contracts which were different from the timing of revenue recognition on those contracts. In the first halves of fiscal 2024 and 2023, we recognized revenue of approximately $177 million and $121 million, respectively, from the amounts included in the contract liability balances at the end of fiscal 2023 and 2022, respectively.

10


Revenue is recognized by measuring progress over time under Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers". We estimate and measure progress on our contracts over time whereby we compare our total costs incurred on each contract as a percentage of the total expected contract costs. 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, in the first halves of fiscal 2024 and 2023, we recognized net favorable revenue and operating income adjustments of $9.9 million and $4.0 million, 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. At March 31, 2024 and October 1, 2023, our consolidated balance sheets included liabilities for anticipated losses of $13.3 million and $8.5 million, respectively. The estimated cost to complete these related contracts was approximately $104 million and $68 million at March 31, 2024 and October 1, 2023, respectively.

Accounts Receivable, Net

Net accounts receivable consisted of the following (in thousands):

Balance at
 March 31,
2024
October 1,
2023
Billed$674,059 $672,712 
Unbilled368,579 306,788 
Total accounts receivable1,042,638 979,500 
Allowance for doubtful accounts(4,755)(4,965)
Total accounts receivable, net$1,037,883 $974,535 

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 March 31, 2024 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, which may affect our clients' ability to pay.

Other than the U.S. federal government, no single client accounted for more than 10% of our accounts receivable at March 31, 2024 and October 1, 2023.

Remaining Unsatisfied Performance Obligation (“RUPO”)

Our RUPO represents a measure of the total dollar value of work to be performed on contracts awarded and in progress. We had $4.7 billion of RUPO at March 31, 2024. Our 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. Our 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 at March 31, 2024 over the following periods (in thousands):
Amount
Within 12 months$3,260,974 
Beyond 1,448,574 
Total $4,709,548 

Although RUPO reflects business that is considered to be firm, cancellations, deferrals or scope adjustments may occur. Our 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
11


terminated by the clients without a substantive financial penalty; therefore, the remaining performance obligations on such contracts are limited to the notice period required for the termination (usually 30, 60, or 90 days).

4.            Acquisitions

In the second quarter of fiscal 2024, we acquired LS Technologies ("LST"), an innovative U.S. federal enterprise technology services and management consulting firm based in Fairfax, Virginia. LST provides high-end consulting and engineering services including advanced data analytics, cybersecurity and digital transformation solutions to U.S. government clients. LST is included in our Government Services Group ("GSG") segment. The total fair value of the purchase price of LST was $102 million. This amount was comprised of $76 million in initial cash payments, $4 million of cash holdback related to a tax reserve, and $22 million for the estimated fair value of contingent earn-out obligations, with a maximum of $45 million, based upon the achievement of specified operating income targets in each of the three years following the acquisition date. The purchase price for LST of $102 million was allocated $10 million to net tangible assets, $21 million to identifiable intangible assets, and $71 million to goodwill. This allocation is preliminary and subject to adjustment as the estimates, assumptions, valuations and other analyses have not yet been finalized in order to make a definitive allocation. LST was not considered significant to our consolidated financial statements. As a result, no pro forma information has been provided.

On September 23, 2022, we made an all cash offer to acquire all of the outstanding shares of RPS Group plc ("RPS"), a publicly traded company on the London Stock Exchange for 222 pence per share, through a scheme of arrangement, which was unanimously recommended by RPS' Board of Directors. On November 3, 2022, RPS' shareholders approved the scheme of arrangement. On January 19, 2023, the court-sanctioned scheme of arrangement to purchase RPS was approved, and we completed the acquisition on January 23, 2023. RPS employs approximately 5,000 associates in the United Kingdom, Europe, Asia Pacific and North America, delivering high-end solutions, especially in energy transformation, water and program management for government and commercial clients. Substantially all of RPS is included in our Commercial/International Services Group ("CIG") segment.

The total purchase price for RPS was approximately £633 million ($784 million). In the second quarter and first half of fiscal 2023, we incurred $19.9 million and $23.7 million, respectively, related to acquisition and integration costs primarily for professional fees, substantially all of which were paid as of the end of the second quarter of fiscal 2023. On January 23, 2023, we also settled a foreign exchange forward contract that was integral to our plan to finance the RPS acquisition. The cash gain of $109.3 million did not qualify for hedge accounting. As a result, the gain was recognized as non-operating income over the life of the contract and not included in the purchase price allocation below. However, the cash proceeds of $109.3 million economically reduced the purchase price for the shares of RPS to approximately $675 million. This forward contract is explained further in Note 16, "Derivative Financial Instruments".

The table below represents the purchase price allocation for RPS based on estimates, assumptions, valuations and other analyses as of January 23, 2023. The all cash purchase consideration, excluding the aforementioned forward contract gain, was allocated to the tangible and intangible assets, and liabilities of RPS based on their estimated fair values, with any excess purchase consideration allocated to goodwill as follows (in thousands):

12


Amount
Cash and cash equivalents$32,093 
Accounts receivable and contract assets202,303 
Prepaid expenses and other current assets45,999 
Income taxes receivables1,999 
Property and equipment38,435 
Right-of-use assets, operating leases40,179 
Intangible assets174,094 
Deferred income taxes35,084 
Other long-term assets1,061 
Total assets acquired571,247 
Accounts payable$(44,376)
Accrued compensation(19,073)
Contract liabilities(46,287)
Income tax payable(7,083)
Short-term lease liabilities, operating leases(13,477)
Other current liabilities(135,474)
Current portion of long-term debt(91,973)
Long-term lease liabilities, operating leases(26,702)
Other long-term liabilities(13,742)
Deferred tax liabilities(41,613)
Total liabilities assumed(439,800)
Fair value of net assets acquired131,447 
Goodwill652,762 
Total purchase consideration$784,209 

The following table summarizes the estimated fair values that were assigned to intangible assets at the acquisition date:

Fair ValueWeighted-Average Estimated Useful Life
(in thousands)(in years)
Backlog$27,880 1.6
Trade names27,260 3.0
Client relations118,954 11.1
Total intangible assets acquired$174,094 8.3

Estimated fair value measurements for the intangible assets related to the RPS acquisition were made using Level 3 inputs including discounted cash flow techniques. Fair value was estimated using a multi-period excess earnings method for backlog and client relations and a relief from royalty method for trade names. The significant assumptions used in estimating fair value of backlog and client relations include (i) the estimated life the asset will contribute to cash flows, such as remaining contractual terms, (ii) revenue growth rates and EBITDA margins, (iii) attrition rate of customers, and (iv) the estimated discount rates that reflect the level of risk associated with receiving future cash flows. The significant assumptions used in estimating fair value of trade names include the royalty rates and discount rates.

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Supplemental Pro Forma Information (Unaudited)

Following are the supplemental consolidated financial results of Tetra Tech and RPS for the second quarter and first half of fiscal 2023 on an unaudited pro forma basis, as if the RPS acquisition had been consummated at the beginning of fiscal 2022 (in thousands):

Three Months EndedSix Months Ended
April 2,
2023
April 2,
2023
Revenue$1,203,538 $2,310,839 
Net Income including noncontrolling interests40,200 103,901 

In fiscal 2023, we also acquired Amyx, Inc. (“Amyx”), an enterprise technology services, cybersecurity and management consulting firm based in Reston, Virginia. With over 500 employees, Amyx provides application modernization, cybersecurity, systems engineering, financial management and program management support on over 30 Federal Government programs. Amyx is included in our GSG segment. The total fair value of the purchase price of Amyx was $120.9 million, comprised of a $100.0 million payable in a promissory note issued to the sellers (paid subsequent to closing), $8.7 million of payables related to estimated post-closing adjustments, and $12.2 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 date. Amyx was not considered significant to our consolidated financial statements. As a result, no pro forma information has been provided.

The fiscal 2024 goodwill addition from LST is deductible for tax purposes, while the majority of the goodwill from the fiscal 2023 acquisitions is not deductible for tax purposes. The results of fiscal 2024 and 2023 acquisitions were included in our consolidated financial statements beginning on their respective closing dates.

Our fiscal 2024 goodwill addition from the LST acquisition reflects the extensive technical knowledge of LST's workforce, the anticipated synergies in data analytics, cybersecurity and digital transformation services, and LST’s reputation in providing mission critical solutions to both commercial and government customers. The goodwill additions from fiscal 2023 business combinations are primarily attributable to the significant technical expertise residing in embedded workforces that are sought out by clients, synergies expected to arise after the acquisitions in the areas of enterprise technology services, data management, energy transformation, water, program management, and data analytics and the long-standing reputations of RPS and Amyx. These acquisitions further expand and complement our market-leading positions in water, renewable energy and sustainable infrastructure; enhanced by a combined suite of differentiated data analytics and digital technologies, and expansion into existing and new geographies.

Intangible assets with finite lives arise from business acquisitions and are amortized based on the period over which the contractual or economic benefit of the intangible assets are expected to be realized on a straight-line basis over the useful lives of the underlying assets, ranging from one to twelve years. These consist of client relations, backlog and trade names. 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 “Non-current 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
14


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 reassess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income. In the first half of fiscal 2024, 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.

During the second quarter and first half of fiscal 2024, we recorded immaterial adjustments, individually and in aggregate, to our contingent earn-out liabilities and included the corresponding amount in our operating income. During the first half of fiscal 2023, we recorded adjustments to our contingent earn-out liabilities and reported a related net loss in operating income of $8.5 million (largely in the second quarter). The net loss primarily resulted from increased valuation of the contingent consideration liabilities for our prior acquisitions of Segue Technologies, Inc., Hoare Lea, LLP and The Integration Group of Americas, Inc., reflecting financial performance that exceeded our previous expectations.

The following table summarizes the changes in the fair value of estimated contingent consideration for the second quarters and first halves of fiscal 2024 and 2023 (in thousands):

Three Months EndedSix Months Ended
 March 31,
2024
April 2,
2023
March 31,
2024
April 2,
2023
Beginning balance$55,604 $69,029 $73,422 $65,566 
Estimated earn-out liabilities for acquisitions21,900 12,248 21,900 12,248 
Payments of contingent consideration(3,250)(2,000)(22,112)(2,000)
Adjustments to fair value recorded in earnings14 7,544 (22)8,477 
Interest accretion expense444 697 915 1,212 
Effect of foreign currency exchange rate changes(133)564 476 2,579 
Ending balance$74,579 $88,082 $74,579 $88,082 
Maximum potential payout at end of period$129,253 $143,882 $129,253 $143,882 

5.            Goodwill and Intangible Assets

The following table summarizes the changes in the carrying value of goodwill by reportable segment (in thousands):

 GSGCIGTotal
Balance at October 1, 2023$659,942 $1,220,302 $1,880,244 
Acquisition activity71,100  71,100 
Translation adjustments2,155 24,189 26,344 
Balance at March 31, 2024$733,197 $1,244,491 $1,977,688 

The foreign currency translation adjustments resulted from our foreign subsidiaries with functional currencies that are different than our reporting currency. These goodwill amounts are presented net of reductions from historical impairment adjustments. The gross amounts for GSG were $750.9 million and $677.6 million at March 31, 2024 and October 1, 2023, respectively, excluding accumulated impairment of $17.7 million at each date. The gross amounts of goodwill for CIG were $1,366.0 million and $1,341.8 million at March 31, 2024 and October 1, 2023, respectively, excluding accumulated impairment of $121.5 million at each date.
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We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. Our most recent annual review at July 3, 2023 (i.e. the first day of our fourth quarter in fiscal 2023) 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. At July 3, 2023, we had no reporting units that had estimated fair values that exceeded their carrying values by less than 45%.

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 ($ in thousands):

Period Ended
 March 31, 2024October 1, 2023
 Weighted-
Average
Remaining Life
(in Years)
Gross
Amount
Accumulated
Amortization
Net AmountGross
Amount
Accumulated
Amortization
Net Amount
 
Client relations8.7$188,940 $(45,970)$142,970 $169,217 $(36,072)$133,145 
Backlog0.771,161 (58,761)12,400 63,825 (47,802)16,023 
Trade names1.938,633 (18,392)20,241 37,411 (12,643)24,768 
Total $298,734 $(123,123)$175,611 $270,453 $(96,517)$173,936 

Amortization expense for the second quarter and first half of fiscal 2024 was $12.1 million and $24.6 million, compared to $12.1 million and $15.5 million, respectively, for the prior-year periods. Estimated amortization expense for the remainder of fiscal 2024 and succeeding years is as follows (in thousands):
 Amount
 
2024 (remaining)$24,255 
202533,499 
202622,916 
202716,806 
202816,296 
Beyond61,839 
Total$175,611 

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6.                                     Property and Equipment

Property and equipment consisted of the following (in thousands):
Balance at
 March 31,
2024
October 1,
2023
 
Equipment, furniture and fixtures$131,308 $132,744 
Leasehold improvements46,094 44,733 
Total property and equipment177,402 177,477 
Accumulated depreciation(104,505)(102,645)
Property and equipment, net$72,897 $74,832 

For the second and first half of fiscal 2024, our depreciation expense related to property and equipment was $5.6 million and $12.6 million, respectively, compared to $4.8 million and $8.0 million for the fiscal 2023 periods.

7.                                     Stock Repurchase and Dividends

On October 5, 2021, our Board of Directors authorized a new stock repurchase program under which we could repurchase up to $400 million of our common stock. We did not repurchase any shares of our common stock in the first halves of fiscal 2024 and 2023. At March 31, 2024, we had a remaining balance of $347.8 million under our stock repurchase program.

The following table presents dividends declared and paid in the first halves of fiscal 2024 and 2023:

Declare DateDividend Paid Per ShareRecord DatePayment DateDividend Paid
(in thousands)
November 13, 2023$0.26 November 30, 2023December 13, 2023$13,873 
January 29, 2024$0.26 February 14, 2024February 27, 2024$13,908 
Total dividend paid as of March 31, 2024$27,781 
November 7, 2022$0.23 November 21, 2022December 9, 2022$12,186 
January 30, 2023$0.23 February 13, 2023February 24, 2023$12,242 
Total dividend paid as of April 2, 2023$24,428 

Subsequent Event.  On April 29, 2024, our Board of Directors declared a quarterly cash dividend of $0.29 per share payable on May 31, 2024 to stockholders of record as of the close of business on May 20, 2024.

8.                                     Leases

Our operating leases are primarily for corporate and project office spaces. To a much lesser extent, we have operating leases for vehicles and equipment. Our operating leases have remaining lease terms of one month to ten years, some of which may include options to extend the leases for up to five years.

We determine if an arrangement is a lease at inception. Operating leases are included in "Right-of-use assets, operating leases", "Short-term lease liabilities, operating leases" and "Long-term lease liabilities, operating leases" in the consolidated balance sheets. Our finance leases are primarily for certain IT equipment and are immaterial.

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

Three Months EndedSix Months Ended
March 31,
2024
April 2,
2023
March 31,
2024
April 2,
2023
Operating lease cost$24,785 $24,419 $49,018 $45,380 
Sublease income(106)(48)(163)(79)
Total lease cost$24,679 $24,371 $48,855 $45,301 

Supplemental cash flow information related to leases is as follows (in thousands):

Six Months Ended
March 31,
2024
April 2,
2023
Operating cash flows for operating leases$38,738 $36,439 
Right-of-use assets obtained in exchange for new operating lease liabilities32,637 52,036 

Supplemental balance sheet and other information related to leases are as follows (in thousands):

Balance at
March 31,
2024
October 1, 2023
Operating leases:
Right-of-use assets$181,948 $175,932 
Lease liabilities:
Current70,793 65,005 
Non-current139,364 144,685 
Total operating lease liabilities$210,157 $209,690 
Weighted-average remaining lease term:
Operating leases4 years5 years
Weighted-average discount rate:
Operating leases3.3 %3.0 %

At March 31, 2024, we had $1.0 million of operating leases that have not yet commenced.

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A maturity analysis of the future undiscounted cash flows associated with our lease liabilities at March 31, 2024 is as follows (in thousands):

Operating
Leases
2024 (remaining)$41,362 
202563,260 
202643,026 
202729,959 
202819,529 
Beyond28,198 
Total lease payments225,334 
 Less: imputed interest (15,177)
Total present value of lease liabilities$210,157 

9.    Employee Benefits

In fiscal 2020, the Canadian federal government implemented the Canadian Emergency Wage Subsidy ("CEWS") program in response to the negative impact of the coronavirus disease 2019 pandemic on businesses operating in Canada. Some of our Canadian legal entities qualified for and applied for these CEWS cash benefits to partially offset the impacts of revenue reductions and on-going staffing costs. The $21 million total received was initially recorded in "Other long-term liabilities" until all potential amendments to the qualification criteria, including some that were proposed with retroactive application, were finalized in fiscal 2022. In the first half of fiscal 2024 (all in the first quarter of fiscal 2024), we distributed approximately $10 million to our Canadian employees. The remaining $11 million, which we expect to distribute within one year, is reported in "Accrued compensation". We do not expect there will be any related impact on our operating income, and we have no outstanding applications for further government assistance.

10.                                     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, 2024 was $8.0 million and $15.6 million, compared to $7.4 million and $14.6 million for the same periods last year. Most of these amounts were included in selling, general and administrative expenses on our consolidated statements of income. In the first half of fiscal 2024, we awarded 55,836 performance share units (“PSUs”) to our non-employee directors and executive officers at an estimated fair value of $203.53 per share on the award date. All PSUs are performance-based and vest, if at all, after the conclusion of the three-year performance period. The number of PSUs that ultimately vest is based 50% on the growth in our diluted earnings per share and 50% on our relative total shareholder return over the vesting period. Additionally, we awarded 139,681 restricted stock units (“RSUs”) to our non-employee directors, executive officers and employees at a fair value of $164.33 per share on the award date. All executive officer and employee RSUs have time-based vesting over a four-year period, and the non-employee director RSUs vest after one year.

11.                                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.

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The following table presents the number of weighted-average shares used to compute basic and diluted EPS (in thousands, except per share data):

 Three Months EndedSix Months Ended
 March 31,
2024
April 2,
2023
March 31,
2024
April 2,
2023
 
Net income attributable to Tetra Tech$76,446 $42,830 $151,418 $159,536 
Weighted-average common shares outstanding – basic53,484 53,227 53,419 53,165 
Effect of dilutive stock options and unvested restricted stock391 400 406 430 
Weighted-average common shares outstanding – diluted53,875 53,627 53,825 53,595 
Earnings per share attributable to Tetra Tech:    
Basic$1.43 $0.80 $2.83 $3.00 
Diluted$1.42 $0.80 $2.81 $2.98 

For the second quarters and first halves of fiscal 2024 and 2023, no options were excluded from the calculation of dilutive potential common shares. The Convertible Senior Notes (the "Convertible Notes") described in Note 15, "Long-Term Debt", had no impact on the calculation of dilutive potential common shares in the second quarter and first half of fiscal 2024, as the price of our common stock did not exceed the conversion price. The Capped Call Transactions were excluded from the calculation of dilutive potential common shares as their effect is anti-dilutive.

12.                                  Income Taxes

The effective tax rates for the first halves of fiscal 2024 and 2023 were 27.6% and 28.7%, respectively. Income tax expense was reduced by $1.9 million and $1.8 million of excess tax benefits on share-based payments in the first halves of fiscal 2024 and 2023, respectively. In addition, income tax expense in the first half of fiscal 2024 (all in the second quarter) included $2.8 million of expense for the settlement of various tax positions that were under audit for fiscal years 2018 through 2021. Furthermore, income tax expense in the first half of fiscal 2023 (all in the second quarter) included non-operating income tax expenses of $6.7 million to recognize the tax liability for foreign earnings, primarily in the U.K. and Australia, that are no longer indefinitely reinvested and to increase the liability for an uncertain tax position. Excluding the impact of the excess tax benefits on share-based payments, the settlement amounts in the first half of fiscal 2024 and the additional $6.7 million in the first half of fiscal 2023, our effective tax rates in the first halves of fiscal 2024 and 2023 were 27.1% and 26.5%, respectively.

At March 31, 2024 and October 1, 2023, the liability for income taxes associated with uncertain tax positions was $62.3 million and $62.0 million, respectively. These liabilities represent our current estimates of the additional tax liabilities that we may be assessed when the related audits are concluded. If these audits are resolved in a manner more unfavorable than our current expectations, our additional tax liabilities could be materially higher than the amounts currently recorded resulting in additional tax expense.

13.                               Reportable Segments

We manage our operations under two reportable segments. Our GSG reportable segment primarily includes activities with U.S. government clients (federal, state and local) and all activities with development agencies worldwide. Our CIG reportable segment primarily includes activities with U.S. commercial clients and international clients other than development agencies.

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

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CIG primarily provides high-end consulting and engineering services to U.S. commercial clients, and international clients inclusive of the commercial and government sectors. CIG supports commercial clients worldwide in renewable energy, industrial, high performance buildings and aerospace markets. CIG also provides sustainable infrastructure and related environmental, engineering and project management services to commercial and local government clients across Canada, in Asia Pacific (primarily Australia and New Zealand), Europe, the United Kingdom and South America (primarily Brazil).

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. In the second quarter and first half of fiscal 2023, our Corporate segment operating losses included $19.9 million and $23.7 million of acquisition and integration expenses, respectively, as described in Note 4, “Acquisitions”.

The following tables summarize financial information regarding our reportable segments (in thousands):

 Three Months EndedSix Months Ended
 March 31,
2024
April 2,
2023
March 31,
2024
April 2,
2023
 
Revenue    
GSG$597,127 $563,254 $1,172,168 $1,034,322 
CIG671,155 610,358 1,340,262 1,049,914 
Elimination of inter-segment revenue(16,666)(15,386)(32,547)(31,245)
Total revenue$1,251,616 $1,158,226 $2,479,883 $2,052,991 
Income from operations    
GSG$64,007 $52,210 $127,134 $112,557 
CIG75,955 52,518 147,356 102,626 
Corporate (1)
(22,279)(43,717)(45,726)(62,122)
Total income from operations$117,683 $61,011 $228,764 $153,061 
(1)     Includes amortization of intangibles, acquisition and integration expenses, as well as other costs and other income not allocable to our reportable segments.

Balance at
 March 31,
2024
October 1,
2023
 
Total Assets  
GSG$628,814 $543,066 
CIG1,045,575 994,470 
Corporate (1)
2,396,185 2,282,941 
Total assets$4,070,574 $3,820,477 
(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.

14.                               Fair Value Measurements

We classified our assets and liabilities that were carried at fair value in one of the following categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
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Derivative Instruments. Our derivative instruments are categorized within Level 2 of the fair value hierarchy. For additional information about our derivative financial instruments (see Note 16, "Derivative Financial Instruments").

Contingent Consideration. 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. (see Note 4, "Acquisitions" for further information).

Debt. The fair value of long-term debt under our Credit Facility was determined using the present value of future cash flows based on the borrowing rates currently available for debt with similar terms and maturities (Level 2 measurement, as described in “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended October 1, 2023). The carrying value of our long-term debt under our Credit Facility approximated fair value at March 31, 2024 and October 1, 2023. At March 31, 2024, we had $390 million in outstanding borrowings under the Amended Credit Agreement, which was comprised of $320 million under the New Term Loan Facility and $70 million under the Amended Revolving Credit Facility.

The estimated fair value of our $575 million Convertible Notes was determined based on the trading price of the Convertible Notes as of the last trading day of our second quarter of fiscal 2024. We consider the fair value of the Convertible Notes to be a Level 2 measurement as they are not actively traded in markets. The carrying amounts and estimated fair values of the Convertible Notes were approximately $562 million and $631 million, respectively, at March 31, 2024, and $561 million and $566 million, respectively, at October 1, 2023.

15.    Long-Term Debt

Long-term debt consisted of the following (in thousands):

Balance at
 March 31,
2024
October 1,
2023
 
Credit facilities$390,000 $320,000 
Convertible notes575,000 575,000 
Debt issuance costs and discount(13,969)(15,471)
Long-term debt$951,031 $879,529 

On August 22, 2023, we issued $575.0 million in Convertible Notes that bear interest at a rate of 2.25% per annum payable in arrears on February 15 and August 15 of each year, beginning on February 15, 2024 and mature on August 15, 2028, unless converted, redeemed or repurchased. Prior to May 15, 2028, the Convertible Notes will be convertible at the option of the holders only upon the occurrence of certain events and during certain periods. Thereafter, the Convertible Notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date.

The initial conversion rate applicable to the Convertible Notes is 5.0855 shares of our common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial price of approximately $196.64 per share of our common stock, subject to adjustment if certain events occur. Upon conversion, we will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. In addition, upon the occurrence of a "fundamental change" as defined in the indenture governing the Convertible Notes, holders may require us to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased plus any accrued and unpaid interest. If certain corporate events occur prior to the maturity date of the Convertible Notes or if we deliver a notice of redemption, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such event or notice of redemption.

We will not be able to redeem the Convertible Notes prior to August 20, 2026. On or after August 20, 2026, we have the option to redeem for cash all or any portion of the Convertible Notes if the last reported sale price of our common stock is equal to or greater than 130% of the conversion price for a specified period of time at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus any accrued but unpaid interest. In addition, as described in the
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indenture governing the Convertible Notes, certain events of default including, but not limited to, bankruptcy, insolvency or reorganization, may result in the Convertible Notes becoming due and payable immediately.

Our net proceeds from the offering were approximately $560.5 million after deducting the initial purchasers’ discounts and commissions and offering expenses. We used approximately $51.8 million of the net proceeds to pay the cost of the capped call transactions described below. We used the remaining net proceeds to repay all $185.0 million principal amount outstanding under our revolving credit facility, the remaining $234.4 million principal amount outstanding under our senior secured term loan due 2027 and approximately $89.4 million principal amount outstanding under our senior secured term loan due 2026.

The Convertible Notes were recorded as a single unit within "Long-term debt" in our consolidated balance sheets as the conversion option within the Convertible Notes was not a derivative that would require bifurcation and the Convertible Notes did not involve a substantial premium. Transaction costs to issue the Convertible Notes were recorded as direct deductions from the related debt liabilities and are amortized to interest expense using the effective interest method over the terms of the Convertible Notes resulting in an effective annual interest rate of 2.79%.

The net carrying amount of the Convertible Notes was as follows (in thousands):

Balance at
 March 31,
2024
October 1,
2023
 
Principal$575,000 $575,000 
Unamortized discount and issuance costs(12,798)(14,158)
Net carrying amount$562,202 $560,842 

The following table sets forth the interest expense recognized related to the Convertible Notes for the second quarter and first half of fiscal 2024 (in thousands):

Three Months EndedSix Months Ended
 March 31,
2024
March 31,
2024
 
Interest expense$3,127 $6,397 
Amortization of discount and issuance costs683 1,360 
Total interest expense$3,810 $7,757 

Concurrent with the offering of the Convertible Notes, in August 2023, we entered into capped call transactions (the "Capped Call Transactions"). The Capped Call Transactions are expected generally to reduce the potential dilution of our common stock upon conversion of the Convertible Notes and/or offset any cash payments we elect to make in excess of the principal amount of converted Convertible Notes, as the case may be. If, however, the market price per share of our common stock, as measured under the terms of the Capped Call Transactions, exceeds the cap price of the Capped Call Transactions, there would nevertheless be dilution and/or there would not be an offset of such cash payments, in each case, to the extent that such market price exceeds the cap price of the Capped Call Transactions. The cap price of the Capped Call Transactions is initially $259.56 per share, which represents a premium of 65% over the last reported sale price of our common stock of $157.31 per share on the NASDAQ Global Select Market on August 17, 2023, and is subject to certain adjustments under the terms of the Capped Call Transactions. We recorded the Capped Call Transactions as separate transactions from the issuance of the Convertible Notes. The cost of $51.8 million incurred to purchase the Capped Call Transactions was recorded as a reduction to additional paid-in capital (net of $12.9 million in deferred taxes) on our consolidated balance sheet as of fiscal 2023 year-end.

On October 26, 2022, we entered into a Third Amended and Restated Credit Agreement that provides for an additional $500 million senior secured term loan facility (the "New Term Loan Facility") increasing our total borrowing capacity to $1.55 billion. On January 23, 2023, we drew the entire amount of the New Term Loan Facility to partially finance the RPS acquisition. The New Term Loan Facility is not subject to any amortization payments of principal and matures on the third anniversary of the RPS acquisition closing date in January 2026.

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On February 18, 2022, we entered into Amendment No. 2 to Second Amended and Restated Credit Agreement (“Amended Credit Agreement”) with a total borrowing capacity of $1.05 billion that will mature in February 2027. The Amended Credit Agreement is a $750 million senior secured, five-year facility that provides for a $250 million term loan facility (the “Amended Term Loan Facility”) and a $500 million revolving credit facility (the “Amended Revolving Credit Facility”). In addition, the Amended Credit Agreement includes a $300 million accordion feature that allows us to increase the Amended Credit Agreement to $1.05 billion subject to lender approval. The Amended Credit Agreement provides for, among other things, (i) refinance indebtedness under our Credit Agreement dated at July 30, 2018; (ii) finance open market repurchases of common stock, acquisitions, and cash dividends and distributions; and (iii) utilize the proceeds for working capital, capital expenditures and other general corporate purposes. The Amended Credit Agreement provides for a reduction in the interest grid for meeting certain sustainability targets related to the (i) reduction of greenhouse gas emissions through the Company’s projects and operational sustainability initiatives and (ii) improvement of peoples’ lives as a result of the Company’s projects that provide environmental, social and governance benefits. The Amended Revolving Credit Facility includes a $100 million sublimit for the issuance of standby letters of credit, a $20 million sublimit for swingline loans and a $300 million sublimit for multicurrency borrowings and letters of credit.

The entire Amended Term Loan Facility was drawn on February 18, 2022. We may borrow on the Amended Revolving Credit Facility, at our option, at either (a) a benchmark rate plus a margin that ranges from 1.000% to 1.875% per annum, or (b) a base rate for loans in U.S. dollars (the highest of the U.S. federal funds rate plus 0.50% per annum, the bank’s prime rate or the Secured Overnight Financing Rate ("SOFR") rate plus 1.00%, plus a margin that ranges from 0% to 0.875% per annum. In each case, the applicable margin is based on our Consolidated Leverage Ratio, calculated quarterly. The Amended Term Loan Facility is subject to the same interest rate provisions. The Amended Credit Agreement expires on February 18, 2027, or earlier at our discretion upon payment in full of loans and other obligations.

At March 31, 2024,