Document

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 December 29, 2019



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

For the transition period from to

Commission File Number 0-19655

TETRA TECH, INC.

(Exact name of registrant as specified in its charter)



Delaware		95-4148514
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

3475 East Foothill Boulevard, Pasadena, California 91107

(Address of principal executive offices) (Zip Code)

(626) 351-4664

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	TTEK	The NASDAQ Stock Market LLC

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 filer	☒	Accelerated filer	☐	Non-accelerated filer	☐	Smaller 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 January 22, 2020, 54,683,812 shares of the registrant’s common stock were outstanding.

TETRA TECH, INC.

INDEX



PART I.	FINANCIAL INFORMATION	PAGE NO.

Item 1.	Financial Statements (unaudited)	3

	Consolidated Balance Sheets as of December 29, 2019 and September 29, 2019	3

	Consolidated Statements of Income for the Three Months Ended December 29, 2019 and December 30, 2018	4

	Consolidated Statements of Comprehensive Income for the Three Months Ended December 29, 2019 and December 30, 2018	5

	Consolidated Statements of Equity for the Three Months Ended December 29, 2019 and December 30, 2018	6

	Consolidated Statements of Cash Flows for the Three Months Ended December 29, 2019 and December 30, 2018	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION	33

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 4.	Mine Safety Disclosure	50

Item 6.	Exhibits	50

SIGNATURES		52

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Tetra Tech, Inc.

Consolidated Balance Sheets

(unaudited - in thousands, except par value)



ASSETS	December 29, 2019			September 29, 2019
Current assets:
Cash and cash equivalents	$	110,833		$	120,732
Accounts receivable, net	735,128			768,720
Contract assets	111,115			114,324
Prepaid expenses and other current assets	82,745			62,196
Income taxes receivable	10,483			13,820
Total current assets	1,050,304			1,079,792

Property and equipment, net	40,438			39,441
Right-of-use assets, operating leases	223,930			—
Investments in unconsolidated joint ventures	7,172			6,873
Goodwill	937,068			924,820
Intangible assets, net	14,081			16,440
Deferred tax assets	27,827			28,385
Other long-term assets	51,733			51,657
Total assets	$	2,352,553		$	2,147,408

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	140,228		$	206,609
Accrued compensation	124,286			203,384
Contract liabilities	203,818			165,611
Short-term lease liabilities, operating leases	70,958			—
Current portion of long-term debt	12,546			12,572
Current contingent earn-out liabilities	22,825			24,977
Other current liabilities	137,815			156,801
Total current liabilities	712,476			769,954

Deferred tax liabilities	13,134			12,971
Long-term debt	322,496			263,949
Long-term lease liabilities, operating leases	172,121			—
Long-term contingent earn-out liabilities	21,598			28,015
Other long-term liabilities	83,963			83,055

Commitments and contingencies (Note 16)

Equity:
Preferred stock - authorized, 2,000 shares of $0.01 par value; no shares issued and outstanding at December 29, 2019 and September 29, 2019	—			—
Common stock - authorized, 150,000 shares of $0.01 par value; issued and outstanding, 54,728 and 54,565 shares at December 29, 2019 and September 29, 2019, respectively	547			546
Additional paid-in capital	60,747			78,132
Accumulated other comprehensive loss	(145,015		)	(160,584		)
Retained earnings	1,110,312			1,071,192
Tetra Tech stockholders’ equity	1,026,591			989,286
Noncontrolling interests	174			178
Total stockholders' equity	1,026,765			989,464
Total liabilities and stockholders' equity	$	2,352,553		$	2,147,408

See Notes to Consolidated Financial Statements.

Tetra Tech, Inc.

Consolidated Statements of Income

(unaudited – in thousands, except per share data)



	Three Months Ended
	December 29, 2019			December 30, 2018
Revenue	$	797,623		$	717,431
Subcontractor costs	(183,600		)	(164,067		)
Other costs of revenue	(504,286		)	(454,680		)
Gross profit	109,737			98,684
Selling, general and administrative expenses	(46,435		)	(42,973		)
Income from operations	63,302			55,711
Interest expense	(3,349		)	(2,897		)
Income before income tax expense	59,953			52,814
Income tax expense	(12,636		)	(10,782		)
Net income	47,317			42,032
Net income attributable to noncontrolling interests	(7		)	(35		)
Net income attributable to Tetra Tech	$	47,310		$	41,997
Earnings per share attributable to Tetra Tech:
Basic	$	0.87		$	0.76
Diluted	$	0.85		$	0.75
Weighted-average common shares outstanding:
Basic	54,560			55,390
Diluted	55,438			56,366

See Notes to Consolidated Financial Statements.

Tetra Tech, Inc.

Consolidated Statements of Comprehensive Income

(unaudited – in thousands)



	Three Months Ended
	December 29, 2019		December 30, 2018
Net income	$	47,317	$	42,032

Other comprehensive income, net of tax
Foreign currency translation adjustment, net of tax	13,899		(23,334		)
Gain (loss) on cash flow hedge valuations, net of tax	1,670		(4,009		)
Other comprehensive income (loss) attributable to Tetra Tech, net of tax	15,569		(27,343		)
Other comprehensive income attributable to noncontrolling interests, net of tax	2		237
Comprehensive income, net of tax	$	62,888	$	14,926

Comprehensive income attributable to Tetra Tech, net of tax	$	62,879	$	14,654
Comprehensive income attributable to noncontrolling interests, net of tax	9		272
Comprehensive income, net of tax	$	62,888	$	14,926

See Notes to Consolidated Financial Statements.

Tetra Tech, Inc.

Consolidated Statements of Equity

Three Months Ended December 30, 2018 and December 29, 2019

(unaudited – in thousands)



	Common Stock					Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Tetra Tech Equity			Non-Controlling Interests			Total Equity
	Shares		Amount			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Tetra Tech Equity			Non-Controlling Interests			Total Equity
BALANCE AT SEPTEMBER 30, 2018	55,349		$	553		$	148,803		$	(127,350	)	$	944,965		$	966,971		$	129		$	967,100
Net income												41,997			41,997			35			42,032
Other comprehensive income (loss)									(27,343		)				(27,343		)	237			(27,106		)
Distributions paid to noncontrolling interests															—			(254		)	(254		)
Cash dividends of $0.12 per common share												(6,654		)	(6,654		)				(6,654		)
Stock-based compensation						4,529									4,529						4,529
Restricted & performance shares released	174		2			(6,742		)							(6,740		)				(6,740		)
Stock options exercised	86		1			2,313									2,314						2,314
Shares issued for Employee Stock Purchase Plan	148		1			6,846									6,847						6,847
Stock repurchases	(431	)	(4		)	(24,996		)							(25,000		)				(25,000		)
Cumulative effect of accounting changes												(2,765		)	(2,765		)				(2,765		)
BALANCE AT DECEMBER 30, 2018	55,326		$	553		$	130,753		$	(154,693	)	$	977,543		$	954,156		$	147		$	954,303

BALANCE AT SEPTEMBER 29, 2019	54,565		$	546		$	78,132		$	(160,584	)	$	1,071,192		$	989,286		$	178		$	989,464
Net income												47,310			47,310			7			47,317
Other comprehensive income									15,569						15,569			2			15,571
Distributions paid to noncontrolling interests															—			(13		)	(13		)
Cash dividends of $0.15 per common share												(8,190		)	(8,190		)				(8,190		)
Stock-based compensation						4,482									4,482						4,482
Restricted & performance shares released	185		1			(10,819		)							(10,818		)				(10,818		)
Stock options exercised	54		1			1,412									1,413						1,413
Shares issued for Employee Stock Purchase Plan	168		1			8,715									8,716						8,716
Stock repurchases	(244	)	(2		)	(21,175		)							(21,177		)				(21,177		)
BALANCE AT DECEMBER 29, 2019	54,728		$	547		$	60,747		$	(145,015	)	$	1,110,312		$	1,026,591		$	174		$	1,026,765

See Notes to Consolidated Financial Statements.

Tetra Tech, Inc.

Consolidated Statements of Cash Flows

(unaudited – in thousands)



	Three Months Ended
	December 29, 2019			December 30, 2018
Cash flows from operating activities:
Net income	$	47,317		$	42,032
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	6,235			8,274
Equity in income of unconsolidated joint ventures	(1,675		)	(581		)
Distributions of earnings from unconsolidated joint ventures	1,447			1,002
Amortization of stock-based awards	4,482			4,530
Deferred income taxes	2,173			(1,424		)
Provision for doubtful accounts	3,121			3,073
Gain on sale of property and equipment	(897		)	(104		)
Changes in operating assets and liabilities, net of effects of business acquisitions:
Accounts receivable and contract assets	40,919			14,528
Prepaid expenses and other assets	(2,053		)	(3,936		)
Accounts payable	(66,381		)	(40,859		)
Accrued compensation	(79,098		)	(68,957		)
Contract liabilities	38,207			6,090
Other liabilities	(14,917		)	9,015
Income taxes receivable/payable	3,096			12,015
Net cash used in operating activities	(18,024		)	(15,302		)

Cash flows from investing activities:
Capital expenditures	(3,331		)	(3,853		)
Proceeds from sale of property and equipment	455			115
Net cash used in investing activities	(2,876		)	(3,738		)

Cash flows from financing activities:
Proceeds from borrowings	198,364			45,727
Repayments on long-term debt	(141,550		)	(62,668		)
Repurchases of common stock	(21,177		)	(25,000		)
Taxes paid on vested restricted stock	(10,818		)	(6,740		)
Stock options exercised	1,413			2,314
Dividends paid	(8,190		)	(6,654		)
Payments of contingent earn-out liabilities	(9,236		)	(6,000		)
Net cash provided by (used in) financing activities	8,806			(59,021		)

Effect of exchange rate changes on cash, cash equivalents and restricted cash	2,200			(1,626		)

Net decrease in cash, cash equivalents and restricted cash	(9,894		)	(79,687		)
Cash, cash equivalents and restricted cash at beginning of period	120,901			148,884
Cash, cash equivalents and restricted cash at end of period	$	111,007		$	69,197

Supplemental information:
Cash paid during the period for:
Interest	$	3,082		$	2,229
Income taxes, net of refunds received of $0.3 million and $0.6 million	$	5,579		$	2,231

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	110,833		$	66,502
Restricted cash	174			2,695
Total cash, cash equivalents and restricted cash	$	111,007		$	69,197

See Notes to Consolidated Financial Statements.

TETRA TECH, INC.

Notes to Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited interim consolidated financial statements and related notes of Tetra Tech, Inc. (“we,” “us,” “our” or "Tetra Tech") have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended September 29, 2019.

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

In the first quarter of fiscal 2020, we adopted Accounting Standards Update ("ASU") 2016-02 "Leases (Topic 842)", using the modified retrospective method. The new guidance was applied to leases that existed or were entered into on or after September 30, 2019. Our current year financial statements have been presented under Leases (Topic 842). However, the prior-year financial statements have not been adjusted and continue to be reported in accordance with previous guidance. See Note 8, "Leases" for further discussion of the adoption and the impact on our financial statements.

2. Recent Accounting Pronouncements

In August 2017, the Financial Accounting Standards Board ("FASB") issued accounting guidance on hedging activities. The amendment better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018 (first quarter of fiscal 2020 for us). The adoption of this guidance had no impact on our consolidated financial statements.

In February 2018, the FASB issued guidance on reclassification of certain tax effects from accumulated comprehensive income, which allows for a reclassification of stranded tax effects from the Tax Cuts and Jobs Act ("TCJA") from accumulated other comprehensive income to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018 (first quarter of fiscal 2020 for us). The adoption of this guidance had no material impact on our consolidated financial statements.

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

In August 2018, the FASB issued updated guidance modifying certain fair value measurement disclosures. The updated guidance contains additional disclosures to enable users of the financial statements to better understand the entity’s assumption used to develop significant unobservable inputs for Level 3 fair value measurements, but also eliminates the requirement for entities to disclose the amount of and reasons for transfers between Level 1 and Level 2 investments within the fair value hierarchy. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019 (first quarter of fiscal 2021 for us). Early adoption is permitted. We do not expect the adoption of this guidance to have an impact on our consolidated financial statements.

In December 2019, the FASB issued guidance simplifying the accounting for income taxes by removing certain exceptions to general principles in Topic 740 and amending certain existing guidance for clarity. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020 (first quarter of fiscal 2022 for us). Early adoption is permitted. We do not expect the adoption of this guidance to have an impact on our consolidated financial statements

3. Revenue and Contract Balances

Disaggregation of Revenue

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



	Three Months Ended
	December 29, 2019		December 30, 2018
	(in thousands)
Client Sector:
U.S. state and local government	$	122,356	$	123,280
U.S. federal government ⁽¹⁾	245,303		224,757
U.S. commercial	182,971		172,788
International ⁽²⁾	246,993		196,606
Total	$	797,623	$	717,431

Contract Type:
Fixed-price	$	271,055	$	240,933
Time-and-materials	388,158		336,537
Cost-plus	138,410		139,961
Total	$	797,623	$	717,431

⁽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 and 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 months ended December 29, 2019 and December 30, 2018.

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 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
	December 29, 2019			September 29, 2019
	(in thousands)
Contract assets ⁽¹⁾	$	111,115		$	114,324
Contract liabilities	(203,818		)	(165,611		)
Net contract liabilities	$	(92,703	)	$	(51,287	)

⁽¹⁾ Includes $22.8 million and $26.5 million of contract retentions as of December 29, 2019 and September 29, 2019, respectively.

Revenue recognized in the first quarter of fiscal 2020 from amounts included in contract liabilities at the beginning of the period was approximately $64 million (approximately $56 million in the first quarter of fiscal 2019.)

We recognize revenue primarily using the cost-to-cost measure of progress method, which involves the estimates of 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. For the first quarters of fiscal 2020 and 2019, these adjustments to our operating income were immaterial. 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 December 29, 2019 and September 29, 2019, our consolidated balance sheets included liabilities for anticipated losses of $13.0 million and $11.5 million, respectively. The estimated cost to complete the related contracts as of December 29, 2019 was approximately $60 million.

Accounts Receivable, Net

Net accounts receivable consisted of the following:



	Balance at
	December 29, 2019			September 29, 2019
	(in thousands)
Billed	$	528,011		$	522,256
Unbilled	262,771			300,035
Total accounts receivable	790,782			822,291
Allowance for doubtful accounts	(55,654		)	(53,571		)
Total accounts receivable, net	$	735,128		$	768,720

Billed accounts receivable represent amounts billed to clients that have not been collected. Unbilled accounts receivable, which represent an unconditional right to payment subject only to the passage of time, include unbilled amounts typically resulting from revenue recognized but not yet billed pursuant to contract terms or billed after the period end date. Most of our unbilled receivables at December 29, 2019 are expected to be billed and collected within 12 months. The allowance for doubtful accounts represents amounts that are expected to become uncollectible or unrealizable in the future. We determine an estimated allowance for uncollectible accounts based on management's consideration of trends in the actual and forecasted credit quality of our clients, including delinquency and payment history; type of client, such as a government agency or a commercial sector client; and general economic and industry conditions that may affect a client's ability to pay.

Total accounts receivable at both December 29, 2019 and September 29, 2019 included approximately $14 million and $15 million, respectively, related to claims, including requests for equitable adjustment, on contracts that provide for price redetermination. We regularly evaluate all unsettled claim amounts and record appropriate adjustments to operating earnings when it is probable that the claim will result in a different contract value than the amount previously estimated. We recorded no material gains or losses related to claims in the first quarters of fiscal 2020 and fiscal 2019.

On our state and local government contracts, billed accounts receivable were $108.3 million and $129.3 million at December 29, 2019 and September 29, 2019, respectively. The total of unbilled receivables and contract assets were $44.1 million and $59.6 million at December 29, 2019 and September 29, 2019, respectively. Other than the state and local governments and

U.S. federal government, no single client accounted for more than 10% of our accounts receivable at December 29, 2019 and September 29, 2019.

Remaining Unsatisfied Performance Obligations (“RUPOs”)

Our RUPOs represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. We had $3.1 billion of RUPOs as of December 29, 2019. RUPOs increase with awards from new contracts or additions on existing contracts and decrease as work is performed and revenue is recognized on existing contracts. RUPOs may also decrease when projects are canceled or modified in scope. We include a contract within our RUPOs when the contract is awarded and an agreement on contract terms has been reached.

We expect to satisfy our RUPOs as of December 29, 2019 over the following periods:



	Amount
	(in thousands)
Within 12 months	$	1,812,206
Beyond	1,337,324
Total	$	3,149,530

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

4. Acquisitions

In the second quarter of fiscal 2019, we acquired eGlobalTech ("EGT"), a high-end information technology solutions, cloud migration, cybersecurity, and management consulting firm based in Arlington, Virginia. EGT is part of our Government Services Group ("GSG") segment. The fair value of the purchase price was $49.1 million. This amount was comprised of a $24.7 million promissory note issued to the sellers (which was subsequently paid in full in the third quarter of fiscal 2019), $3.3 million of payables related to estimated post-closing adjustments for net assets acquired, and $21.1 million for the estimated fair value of contingent earn-out obligations, with a maximum of $25.0 million, based upon the achievement of specified operating income targets in each of the three years following the acquisition.

In the fourth quarter of fiscal 2019, we acquired WYG plc (“WYG”), which employs approximately 1,600 staff primarily in the United Kingdom and Europe, delivering consulting and engineering solutions for complex projects across key service areas including planning, water and environment, transport, infrastructure, the built environment, architecture, urban design, surveying, asset management, program management, and international development. WYG’s United Kingdom based consulting and engineering business is part of our CIG segment, while its international development business is part of our GSG segment. The fair value of the purchase price was $54.2 million, entirely paid in cash. In addition, we assumed a net debt of $11.5 million, which was subsequently paid in full in the fourth quarter of fiscal 2019. We also incurred $10.4 million in acquisition and transaction costs related to the WYG acquisition in the fourth quarter of fiscal 2019.

Goodwill additions resulting from the above business combinations are primarily attributable to the existing workforce of the acquired companies and the synergies expected to arise after the acquisitions. The goodwill addition related to our fiscal 2019 acquisitions represent the value of a workforce with emerging technology and new techniques that incorporate artificial intelligence, data analytics and advanced cybersecurity solutions for government and commercial clients, and expanding our geographic presence in the United Kingdom with a strong platform for growth in the United Kingdom and Europe. In addition, these acquired capabilities, when combined with our existing global consulting and engineering business, result in opportunities that allow us to provide services under contracts that could not have been pursued individually by either us or the acquired companies. The results of these acquisitions were included in our consolidated financial statements from their respective closing dates. These acquisitions were not considered material to our consolidated financial statements. As a result, no pro forma information has been provided.

Backlog, client relations and trade name intangible assets include the fair value of existing contracts and the underlying customer relationships with lives ranging from one to ten years, and trade names with 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 two or three years), and the probability outcome percentages we assign to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability, with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the contingent earn-out liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows. Any amount paid in excess of the contingent earn-out liability on the acquisition date is reflected as cash used in operating activities in our consolidated 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. We had no adjustments to our contingent earn-out liabilities in operating income in the first quarters of fiscal 2020 and 2019.

At December 29, 2019, there was a total potential maximum of $63.0 million of outstanding contingent consideration related to acquisitions. Of this amount, $44.4 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:



	GSG		CIG		Total
	(in thousands)
Balance at September 29, 2019	$	441,802	$	483,018	$	924,820
Translation	2,502		9,746		12,248
Balance at December 29, 2019	$	444,304	$	492,764	$	937,068

Our goodwill was impacted by foreign currency translation related to our foreign subsidiaries with functional currencies that are different than our reporting currency. The goodwill amounts above are presented net of any reductions from historical impairment adjustments. The gross amounts of goodwill for GSG were $462.0 million and $459.5 million at December 29, 2019 and September 29, 2019, respectively, excluding $17.7 million of accumulated impairment. The gross amounts of goodwill for CIG were $598.5 million and $588.7 million at December 29, 2019 and September 29, 2019, respectively, excluding $105.7 million of accumulated impairment.

We perform our annual goodwill impairment review at the beginning of our fiscal fourth quarter. Our most recent annual review at July 1, 2019 (i.e. the first day of our fourth quarter in fiscal 2019) 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. All of our reporting units had estimated fair values that exceeded their carrying values by more than 25%.

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.

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

During the fourth quarter of fiscal 2019, we performed an interim goodwill impairment review of our Remediation and Field Services ("RFS") reporting unit and recorded a $7.8 million goodwill impairment charge. As a result of the impairment charge, the estimated fair value of the RFS reporting unit equaled its carrying value of $61 million at September 29, 2019, including the remaining $48.8 million of goodwill. If the financial performance of the operations in the RFS reporting unit were to fall below our revenue growth or operating profit margin forecasts, or we are required to increase the discount rate used in our cash flow analysis, the related goodwill may become further impaired.

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



	December 29, 2019						September 29, 2019
	Weighted- Average Remaining Life (in Years)	Gross Amount		Accumulated Amortization			Gross Amount		Accumulated Amortization
	($ in thousands)
Client relations	2.8	$	57,065	$	(51,401	)	$	56,779	$	(50,455	)
Backlog	1.2	33,112		(27,312		)	32,229		(24,968		)
Trade names	2.2	7,919		(5,302		)	7,714		(4,859		)
Total		$	98,096	$	(84,015	)	$	96,722	$	(80,282	)

Amortization expense for the three months ended December 29, 2019 was $2.9 million, compared to $4.0 million for the prior-year period. Estimated amortization expense for the remainder of fiscal 2020 and succeeding years is as follows:



	Amount
	(in thousands)
2020	$	6,770
2021	4,729
2022	1,660
2023	922
Total	$	14,081

6. Property and Equipment

Property and equipment consisted of the following:



	Balance at
	December 29, 2019			September 29, 2019
	(in thousands)
Equipment, furniture and fixtures	$	118,433		$	114,652
Leasehold improvements	36,346			34,881
Land and buildings	382			371
Total property and equipment	155,161			149,904
Accumulated depreciation	(114,723		)	(110,463		)
Property and equipment, net	$	40,438		$	39,441

The depreciation expense related to property and equipment was $3.3 million for the three months ended December 29, 2019, compared to $4.3 million for the prior-year period. We classified $5.4 million of net assets as held-for-sale and reported them as "Prepaid expenses and other current assets" on our consolidated balance sheets as of December 29, 2019 and September 29, 2019.

7. Stock Repurchase and Dividends

On November 5, 2018, the Board of Directors authorized a stock repurchase program under which we could repurchase up to $200 million of our common stock. This was in addition to the $25 million remaining as of fiscal 2018 year-end under the previous stock repurchase program. All repurchased shares were through open market purchases. As of December 29, 2020, we had a remaining balance of $103.8 million available for stock repurchases. The following table summarizes stock repurchase activity for fiscal 2019 and the first quarter of fiscal 2020:



Fiscal-Year Activity	Stock Repurchase Program	Shares Repurchased	Average Price Paid per Share		Total Cost (in thousands)
2019	2018 Program	430,559	$	58.06	$	25,000
2019	2019 Program	1,131,962	66.26		75,000
2019 Total		1,562,521	$	64.00	$	100,000

2020	2019 Program	244,438	$	86.64	$	21,177

The following table presents dividend declared and paid in the first quarters of fiscal 2020 and 2019:



Declare Date	Dividend Paid Per Share		Record Date	Payment Date	Dividend Paid (in thousands)
November 11, 2019	$	0.15	December 2, 2019	December 13, 2019	$	8,190

November 5, 2018	$	0.12	November 30, 2018	December 14, 2018	$	6,654

Subsequent Event. On January 27, 2020, the Board of Directors declared a quarterly cash dividend of $0.15 per share payable on February 28, 2020 to stockholders of record as of the close of business on February 12, 2020. Additionally, the Board of Directors authorized a new $200 million stock repurchase program. The newly authorized program and the $103.8 million remaining under the previously approved program provide a total of $303.8 million available for repurchases.

8. Leases

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, which is a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets obtained in exchange for lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

We elected to adopt the standard, and available practical expedients, effective September 30, 2019 (the first day of our fiscal 2020). These practical expedients allowed us to keep the lease classification assessed under the previous lease accounting standard (ASC 840) without reassessment under the new standard, and allowed all separate lease components, including non-lease components, to be accounted for as a single lease component for all existing leases prior to adoption of the new standard.

We adopted this new standard under the modified retrospective transition approach without adjusting comparative periods in the financial statements, as allowed under Leases (Topic 842), and implemented internal controls and key system functionality to enable the preparation of financial information on adoption. The standard had a material impact on our consolidated balance sheets but did not have an impact on the consolidated income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while accounting for finance leases remained substantially unchanged. Our finance leases are primarily for certain information technology ("IT") equipment and the related ROU and lease liabilities were immaterial at December 29, 2019.

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets and

current and long-term operating lease liabilities in the consolidated balance sheets.

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 also includes any lease payments made and excludes lease incentives. 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.

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

The components of lease costs for the three months ended December 29, 2019 are as follows:



	Amount
	(in thousands)
Operating lease cost	$	21,172
Sublease income	(574		)
Other	18
Total lease cost	$	20,616

Supplemental cash flow information related to leases for the three months ended December 29, 2019 is as follows:



	Amount
	(in thousands)
Operating cash flows for operating leases	$	19,715
Right-of-use assets obtained in exchange for new operating lease liabilities	$	262,248

Supplemental balance sheet and other information related to leases as of December 29, 2019 are as follows:



	Amount
	(in thousands)
Operating leases:
Right-of-use assets	$	223,930

Lease liabilities:
Current	$	70,958
Long-term	172,121
Total operating lease liabilities	$	243,079

Weighted-average remaining lease term:
Operating leases	4 years
Weighted-average discount rate:
Operating leases	2.3		%

As of December 29, 2019, we have additional operating leases, primarily for office space, that have not yet commenced of $58.8 million. These operating leases will commence in fiscal 2020 and 2021 with lease terms of five years to twelve years.

A maturity analysis of the future undiscounted cash flows associated with our operating lease liabilities as of December 29, 2019 is as follows:



	Amount
	(in thousands)
2020	$	59,146
2021	62,919
2022	51,443
2023	33,497
2024	22,540
Beyond	26,380
Total lease payments	255,925
Less: imputed interest	(12,846		)
Total present value of lease liabilities	$	243,079

As of September 29, 2019, $343.5 million of minimum rental commitments on operating leases was payable as follows: $108.8 million in fiscal 2020, $66.4 million in fiscal 2021, $51.4 million in fiscal 2022, $36.5 million in fiscal 2023, $25.8 million in fiscal 2024, and $54.6 million thereafter. Rental expense for the three months ended December 30, 2018 was $19.4 million.

9. Stockholders’ Equity and Stock Compensation Plans

We recognize the fair value of our stock-based awards as compensation expense on a straight-line basis over the requisite service period in which the award vests. Stock-based compensation expense for the first quarters of fiscal 2020 and 2019 was $4.5 million and $4.5 million, respectively. Most of these amounts were included in SG&A in our consolidated statements of income. In the first quarter of fiscal 2020, we awarded 74,011 performance share units (“PSUs”) to our non-employee directors and executive officers at a fair value of $102.13 per share on the award date. All of the PSUs are performance-based and vest, if at all, after the conclusion of the three-year performance period. The number of PSUs that ultimately vest is based on 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 160,775 restricted stock units (“RSUs”) to our non-employee directors, executive officers and employees at the fair value of $83.95 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.

10. Earnings per Share (“EPS”)

Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding, less unvested restricted stock for the period. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive potential common shares for the period. Potential common shares include the weighted-average dilutive effects of outstanding stock options and unvested restricted stock using the treasury stock method.

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



	Three Months Ended
	December 29, 2019		December 30, 2018
	(in thousands, except per share data)
Net income attributable to Tetra Tech	$	47,310	$	41,997

Weighted-average common shares outstanding – basic	54,560		55,390
Effect of dilutive stock options and unvested restricted stock	878		976
Weighted-average common shares outstanding – diluted	55,438		56,366

Earnings per share attributable to Tetra Tech:
Basic	$	0.87	$	0.76
Diluted	$	0.85	$	0.75

11. Income Taxes

The effective tax rates for the first quarters of fiscal 2020 and 2019 were 21.1% and 20.4%, respectively. The tax rates for fiscal 2020 and 2019 reflect the impact of the comprehensive tax legislation enacted by the U.S. government on December 22, 2017, which is commonly referred to as the Tax Cuts and Jobs Act ("TCJA"). The TCJA significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, limiting the deductibility of certain executive compensation, and implementing a modified territorial tax system with the introduction of the Global Intangible Low-Taxed Income tax rules. The TCJA also imposed a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries.

U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the tax law was enacted. We finalized the analysis of our deferred tax liabilities for the TCJA's lower tax rates in the first quarter of fiscal 2019 and recorded a deferred tax benefit of $2.6 million. Excluding the deferred tax benefit from the TCJA, our effective tax rate in the first quarter of fiscal 2019 was 25.3%.

As of December 29, 2019 and September 29, 2019, the liability for income taxes associated with uncertain tax positions was $9.6 million and $9.2 million, respectively. These uncertain tax positions substantially relate to ongoing examinations, which are reasonably likely to be resolved within the next 12 months.

12. Reportable Segments

We manage our operations under two reportable segments. Our GSG reportable segment primarily includes activities with U.S. government clients (federal, state and local) and all activities with development agencies worldwide. Our CIG reportable segment primarily includes activities with U.S. commercial clients and international clients other than development agencies. This alignment allows us to capitalize on our growing market opportunities and enhance the development of high-end consulting and technical solutions to meet our growing client demand. We continue to report the results of the wind-down of our non-core construction activities in the Remediation Construction Management ("RCM") reportable segment.

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

CIG primarily provides consulting and engineering services to U.S. commercial clients, and international clients that include both commercial and government sectors. CIG supports commercial clients across the Fortune 500, energy, utilities, industrial, manufacturing, aerospace, and resource management markets. CIG also provides infrastructure and related environmental and geotechnical services, testing, engineering and project management services to commercial and local government clients across Canada, in Asia Pacific (primarily Australia and New Zealand), the United Kingdom, as well as Brazil and Chile.

Management evaluates the performance of these reportable segments based upon their respective segment operating income before the effect of amortization expense related to acquisitions, and other unallocated corporate expenses. We account for inter-segment revenues and transfers as if they were to third parties; that is, by applying a negotiated fee onto the costs of the services performed. All significant intercompany balances and transactions are eliminated in consolidation.

Reportable Segments

The following tables summarize financial information regarding our reportable segments:



	Three Months Ended
	December 29, 2019			December 30, 2018
	(in thousands)
Revenue
GSG	$	457,404		$	411,971
CIG	351,164			317,793
RCM	145			1,453
Elimination of inter-segment revenue	(11,090		)	(13,786		)
Total	$	797,623		$	717,431

Income from operations
GSG	$	42,048		$	37,413
CIG	31,632			27,099
RCM	1			4
Corporate ⁽¹⁾	(10,379		)	(8,805		)
Total	$	63,302		$	55,711

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



	Balance at
	December 29, 2019		September 29, 2019
	(in thousands)
Total Assets
GSG	$	588,062	$	587,040
CIG	414,926		450,276
RCM	14,358		15,608
Corporate ⁽¹⁾	1,335,207		1,094,484
Total	$	2,352,553	$	2,147,408

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

13. Fair Value Measurements

The fair value of long-term debt was determined using the present value of future cash flows based on the borrowing rates currently available for debt with similar terms and maturities (Level 2 measurement, as described in “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended September 29, 2019). The carrying value of our long-term debt approximated fair value at December 29, 2019 and September 29, 2019. At December 29, 2019, we had borrowings of $335.0 million outstanding under our Amended Credit Agreement, which were used to fund business acquisitions, working capital needs, stock repurchases, dividends, capital expenditures and contingent earn-outs.

14. Derivative Financial Instruments

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

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

In fiscal 2018, we entered into five interest rate swap agreements that we designated as cash flow hedges to fix the interest rate on the borrowings under our term loan facility. As of December 29, 2019, the notional principal of our outstanding interest swap agreements was $237.5 million ($47.5 million each.) The interest rate swaps have a fixed interest rate of 2.79% and expire in July 2023 for all five agreements. At December 29, 2019 and September 29, 2019, the fair value of the effective portion of our interest rate swap agreements designated as cash flow hedges before tax effect was $(9.2) million and $(10.9) million, respectively, of which we expect to reclassify $2.5 million from accumulated other comprehensive income to interest expense within the next twelve months.

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



		Fair Value of Derivative Instruments as of
	Balance Sheet Location	December 29, 2019			September 29, 2019
		(in thousands)
Interest rate swap agreements	Other current liabilities	$	(9,203	)	$	(10,873	)

Changes in the fair value of the interest rate swap agreements are presented on the consolidated statements of comprehensive income as follows:



	Three Months Ended
	December 29, 2019		December 30, 2018
	(in thousands)
Gain (loss) recognized in other comprehensive income, net of tax:
Interest rate swap agreements	$	1,670	$	(4,009	)

We had no other derivative instruments that were not designated as hedging instruments for the first quarter of fiscal 2020 and fiscal year ended September 29, 2019.

15. Reclassifications Out of Accumulated Other Comprehensive Income

The accumulated balances and reporting period activities for the three months ended December 29, 2019 and December 30, 2018 related to reclassifications out of accumulated other comprehensive income (loss) are summarized as follows:



	Three Months Ended
	Foreign Currency Translation Adjustments			Gain (Loss) on Derivative Instruments			Accumulated Other Comprehensive Gain (Loss)
	(in thousands)
Balances at September 30, 2018	$	(128,602	)	$	1,252		$	(127,350	)
Other comprehensive loss before reclassifications	(23,334		)	(3,783		)	(27,117		)
Amounts reclassified from accumulated other comprehensive loss:
Interest rate contracts, net of tax ⁽¹⁾	—			(226		)	(226		)
Net current-period other comprehensive loss	(23,334		)	(4,009		)	(27,343		)
Balances at December 30, 2018	$	(151,936	)	$	(2,757	)	$	(154,693	)

Balances at September 29, 2019	$	(149,711	)	$	(10,873	)	$	(160,584	)
Other comprehensive income before reclassifications	13,899			2,153			16,052
Amounts reclassified from accumulated other comprehensive loss:
Interest rate contracts, net of tax ⁽¹⁾	—			(483		)	(483		)
Net current-period other comprehensive income	13,899			1,670			15,569
Balances at December 29, 2019	$	(135,812	)	$	(9,203	)	$	(145,015	)

(1) This accumulated other comprehensive component is reclassified to “Interest expense” in our consolidated statements of income. See Note 14, “Derivative Financial Instruments”, for more information.

16. Commitments and Contingencies

We are subject to certain claims and lawsuits typically filed against the consulting and engineering profession, alleging primarily professional errors or omissions. We carry professional liability insurance, subject to certain deductibles and policy limits, against such claims. However, in some actions, parties are seeking damages that exceed our insurance coverage or for which we are not insured. While management does not believe that the resolution of these claims will have a material adverse effect, individually or in aggregate, on our financial position, results of operations or cash flows, management acknowledges the uncertainty surrounding the ultimate resolution of these matters.

On July 15, 2019, following an initial January 14, 2019 filing, the Civil Division of the United States Attorney's Office ("USAO") filed an amended complaint in intervention in three qui tam actions filed against our subsidiary, Tetra Tech EC, Inc. ("TtEC"), in the U.S. District Court for the Northern District of California. The complaint alleges False Claims Act violations and breach of contract related to TtEC's contracts to perform environmental remediation services at the former Hunters Point Naval Shipyard in San Francisco, California. TtEC disputes the claims and will defend this matter vigorously. We are currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.

17. Related Party Transaction

We often provide services to unconsolidated joint ventures. For the first quarters of fiscal 2020 and 2019, our revenue included $28.9 million and $23.9 million, respectively, related to services we provided to unconsolidated joint ventures, and incurred the related reimbursable costs of approximately $28.7 million and $23.4 million, respectively. Our consolidated balance sheets also included the following amounts related to these services:



	Balance at
	December 29, 2019			September 29, 2019
	(in thousands)
Accounts receivable, net	$	20,573		$	19,351
Contract assets	11,415			9,681
Contract liabilities	(395		)	(111		)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are subject to the safe harbor provisions created under the Securities Act of 1933 and the Securities Exchange Act of 1934. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “estimates,” “seeks,” “continues,” “may,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict, including those identified below under “Part II, Item 1A. Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

GENERAL OVERVIEW

Tetra Tech, Inc. is a leading global provider of consulting and engineering services that focuses on water, environment, infrastructure, resource management, energy, and international development. We are a global company that is Leading with Science® to provide innovative solutions for our public and private clients. We typically begin at the earliest stage of a project by identifying technical solutions and developing execution plans tailored to our clients’ needs and resources.

Our reputation for high-end consulting and engineering services and our ability to develop solutions for water and environmental management has supported our growth for more than 50 years. Today, we are proud to be making a difference in people’s lives worldwide through broad consulting, engineering, and technology service offerings. We are working on over 70,000 projects a year, in more than 100 countries on seven continents, from 450 offices, with a talent force of 20,000 associates. We are Leading with Science throughout our operations, with domain experts across multiple disciplines supported by advanced analytics, artificial intelligence, machine learning, and digital technology. Our ability to provide innovation and first-of-kind solutions is enhanced by partnerships with our forward-thinking clients. We are diverse and inclusive, embracing the breadth of experience across our talent force worldwide with a culture of innovation and entrepreneurship. We are disciplined in our business delivering value to customers and high performance to our shareholders. In supporting our clients, we seek to add value and provide long-term sustainable consulting, engineering, and technology solutions.

By combining ingenuity and practical experience, we have helped to advance sustainable solutions for managing water, protecting the environment, providing energy, and engineering the infrastructure for our cities and communities.

We derive income from fees for professional, technical, program management, and construction management services. As primarily a professional services company, we are labor-intensive rather than capital-intensive. Our revenue is driven by our ability to attract and retain qualified and productive employees, identify business opportunities, secure new and renew existing client contracts, provide outstanding services to our clients and execute projects successfully. We provide services to a diverse base of U.S. state and local government, U.S. federal government, U.S. commercial, and international clients.

The following table presents the percentage of our revenue by client sector:



	Three Months Ended
	December 29, 2019		December 30, 2018
Client Sector
U.S. state and local government	15.3	%	17.2	%
U.S. federal government ⁽¹⁾	30.8		31.3
U.S. commercial	22.9		24.1
International ⁽²⁾	31.0		27.4
Total	100.0	%	100.0	%

⁽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 and the United Kingdom, and revenue generated from non-U.S. clients.

We manage our operations under two reportable segments. Our Government Services Group reportable segment primarily includes activities with U.S. government clients (federal, state and local) and all activities with development agencies worldwide. Our Commercial/International Services Group reportable segment primarily includes activities with U.S. commercial clients and international clients other than development agencies. This alignment allows us to capitalize on our growing market opportunities and enhance the development of high-end consulting and technical solutions to meet our growing client demand. We continue to report the results of the wind-down of our non-core construction activities in the Remediation and Construction Management ("RCM") reportable segment.

Our reportable segments are as follows:

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

Commercial/International Services Group (“CIG”). CIG primarily provides consulting and engineering services to U.S. commercial clients, and international clients that include both commercial and government sectors. CIG supports commercial clients across the Fortune 500, energy utilities, industrial, manufacturing, aerospace, and resource management markets. CIG also provides infrastructure and related environmental and geotechnical services, testing, engineering and project management services to commercial and local government clients across Canada, in Asia Pacific (primarily Australia and New Zealand), the United Kingdom, as well as Brazil and Chile.

The following table presents the percentage of our revenue by reportable segment:



	Three Months Ended
	December 29, 2019		December 30, 2018
Reportable Segment
GSG	57.3	%	57.4	%
CIG	44.0		44.3
RCM	—		0.2
Inter-segment elimination	(1.3	)	(1.9	)
Total	100.0	%	100.0	%

Our services are performed under three principal types of contracts with our clients: fixed-price, time-and-materials, and cost-plus. The following table presents the percentage of our revenue by contract type:



	Three Months Ended
	December 29, 2019		December 30, 2018
Contract Type
Fixed-price	34.0	%	33.6	%
Time-and-materials	48.7		46.9
Cost-plus	17.3		19.5
Total	100.0	%	100.0	%

Under fixed-price contracts, the client agrees to pay a specified price for our performance of the entire contract or a specified portion of the contract. Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and paid for other expenses. Under cost-plus contracts, some of which are subject to a contract ceiling amount, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. Profitability on these contracts is driven by billable headcount and our cost control. We recognize revenue from contracts using the cost-to-cost measure of progress method to estimate the progress towards completion to determine the amount of revenue and profit to recognize. Changes in those estimates could result in the recognition of cumulative catch-up adjustments to the contract’s inception-to-date revenue, costs and profit in the period in which such changes are made. On a quarterly basis, we review and assess our revenue and cost estimates for each significant contract. Changes in revenue and cost estimates could also result in a projected loss that would be recorded immediately in earnings.

Other contract costs include professional compensation and related benefits, together with certain direct and indirect overhead costs such as rents, utilities, and travel. Professional compensation represents a large portion of these costs. Our "Selling, general and administrative expenses" ("SG&A") are comprised primarily of marketing and bid and proposal costs, and our corporate headquarters’ costs related to the executive offices, finance, accounting, administration, and information technology. Our SG&A expenses also include a portion of stock-based compensation and depreciation of property and equipment related to our corporate headquarters, and the amortization of identifiable intangible assets. Most of these costs are unrelated to specific clients or projects, and can vary as expenses are incurred to support company-wide activities and initiatives.

We experience seasonal trends in our business. Our revenue and operating income are typically lower in the first half of our fiscal year, primarily due to the Thanksgiving (in the U.S.), Christmas, and New Year’s holidays. Many of our clients’ employees, as well as our own employees, take vacations during these holiday periods. Further, seasonal inclement weather conditions occasionally cause some of our offices to close temporarily or may hamper our project field work in the northern hemisphere's temperate and arctic regions. These occurrences result in fewer billable hours worked on projects and, correspondingly, less revenue recognized.

ACQUISITIONS AND DIVESTITURES

Acquisitions. We continuously evaluate the marketplace for acquisition opportunities to further our strategic growth plans. Due to our reputation, size, financial resources, geographic presence and range of services, we have numerous opportunities to acquire privately and publicly held companies or selected portions of such companies. We evaluate an acquisition opportunity based on its ability to strengthen our leadership in the markets we serve, the technologies and solutions they provide, and the additional new geographies and clients they bring. Also, during our evaluation, we examine an acquisition's ability to drive organic growth, its accretive effect on long-term earnings, and its ability to generate return on investment. Generally, we proceed with an acquisition if we believe that it will strategically expand our service offerings, improve our long-term financial performance, and increase shareholder returns.

We view acquisitions as a key component in the execution of our growth strategy, and we intend to use cash, debt or equity, as we deem appropriate, to fund acquisitions. We may acquire other businesses that we believe are synergistic and will ultimately increase our revenue and net income, strengthen our ability to achieve our strategic goals, provide critical mass with existing clients, and further expand our lines of service. We typically pay a purchase price that results in the recognition of goodwill, generally representing the intangible value of a successful business with an assembled workforce specialized in our areas of interest. Acquisitions are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful or will not have a material adverse effect on our financial position, results of operations, or cash flows. All acquisitions require the approval of our Board of Directors. For detailed information regarding acquisitions, see Note 4, “Acquisitions” of the “Notes to Consolidated Financial Statements”.

Divestitures. We regularly review and evaluate our existing operations to determine whether our business model should change through the divestiture of certain businesses. Accordingly, from time to time, we may divest or wind-down certain non-core businesses and reallocate our resources to businesses that better align with our long-term strategic direction.

OVERVIEW OF RESULTS AND BUSINESS TRENDS

General. In the first quarter of fiscal 2020, our revenue increased 11.2% compared to the prior-year period. Our revenue includes $59.3 million of revenue from the acquisitions of eGlobalTech ("EGT") and WYG plc (“WYG”), which were completed in second and fourth quarters of fiscal 2019, respectively. Excluding the contribution from these acquisitions, our revenue increased 2.9%.

U.S. State and Local Government. Our U.S. state and local government revenue decreased 0.7% in the first quarter of fiscal 2020 compared to the same period last year as we experienced a decrease in revenue from disaster response activities. This decline was substantially offset by continued broad-based growth in our U.S. state and local government project-related infrastructure business, particularly with increased revenue from municipal water infrastructure work in the metropolitan areas of California, Texas, and Florida. We expect our U.S. state and local government business to continue to grow in fiscal 2020 excluding the disaster response activities.

U.S. Federal Government. Our U.S. federal government revenue increased 9.1% in the first quarter of fiscal 2020 compared to the prior-year period. Excluding contributions from acquisitions, our revenue grew 2.7% in the first quarter of fiscal 2020 compared to last-year's first quarter. The increase was primarily due to activity with civilian agencies, particularly water and environmental programs. During periods of economic volatility, our U.S. federal government clients have historically been the most stable and predictable. We anticipate revenue growth in U.S. federal government revenue in fiscal 2020.

U.S. Commercial. Our U.S. commercial revenue increased 5.9% in the first quarter of fiscal 2020 compared to the prior-year period. This growth was primarily related to renewable energy and environmental remediation projects. We expect our U.S. commercial revenue to continue to grow in fiscal 2020, primarily due to increased activities for industrial water treatment, environmental programs, high-performance green buildings, and renewable energy.

International. Our international revenue increased 25.6% in the first quarter of fiscal 2020 compared to the prior-year period. Excluding contributions from acquisitions, our revenue grew 3.0% compared to the first quarter of fiscal 2019. The revenue growth primarily reflects increased renewable energy activity in Canada. We anticipate our total international revenue to continue to grow in fiscal 2020.

RESULTS OF OPERATIONS

Consolidated Results of Operations



	Three Months Ended
	December 29, 2019			December 30, 2018			Change
	December 29, 2019			December 30, 2018			$			%
	($ in thousands)
Revenue	$	797,623		$	717,431		$	80,192		11.2%
Subcontractor costs	(183,600		)	(164,067		)	(19,533		)	(11.9)
Revenue, net of subcontractor costs ⁽¹⁾	614,023			553,364			60,659			11.0
Other costs of revenue	(504,286		)	(454,680		)	(49,606		)	(10.9)
Gross profit	109,737			98,684			11,053			11.2
Selling, general and administrative expenses	(46,435		)	(42,973		)	(3,462		)	(8.1)
Income from operations	63,302			55,711			7,591			13.6
Interest expense	(3,349		)	(2,897		)	(452		)	(15.6)
Income before income tax expense	59,953			52,814			7,139			13.5
Income tax expense	(12,636		)	(10,782		)	(1,854		)	(17.2)
Net income	47,317			42,032			5,285			12.6
Net income attributable to noncontrolling interests	(7		)	(35		)	28			80.0
Net income attributable to Tetra Tech	$	47,310		$	41,997		$	5,313		12.7
Diluted earnings per share	$	0.85		$	0.75		$	0.10		13.3%

⁽¹⁾ We believe that the presentation of “Revenue, net of subcontractor costs”, which is a non-U.S. GAAP financial measure, enhances investors’ ability to analyze our business trends and performance because it substantially measures the work performed by our employees. While providing services, we routinely subcontract various services and, under certain U.S. Agency for International Development programs, issue grants. Generally, these subcontractor costs and grants are passed through to our clients and, in accordance with U.S. GAAP and industry practice, are included in our revenue when it is our contractual responsibility to procure or manage these activities. The grants are included as part of our subcontractor costs. Because subcontractor services can vary significantly from project to project and period to period, changes in revenue may not necessarily be indicative of our business trends. Accordingly, we segregate subcontractor costs from revenue to promote a better understanding of our business by evaluating revenue exclusive of costs associated with external service providers.

The following table reconciles our reported results to non-U.S. GAAP adjusted results, which exclude the RCM results and non-recurring tax benefits. Adjusted results also exclude gains related to the disposal of our Canadian turn-key pipeline activities that commenced in the fourth quarter of fiscal 2019. The effective tax rates applied to the adjustments to earnings per share ("EPS") to arrive at adjusted EPS averaged 28.0% and 23.9% in the first quarters of fiscal 2020 and 2019, respectively. We applied the relevant marginal statutory tax rate based on the nature of the adjustments and tax jurisdiction in which they occur. Both EPS and adjusted EPS were calculated using diluted weighted-average common shares outstanding for the respective periods as reflected in our consolidated statements of income.



	Three Months Ended
	December 29, 2019			December 30, 2018			Change
	December 29, 2019			December 30, 2018			$			%
	($ in thousands)
Income from operations	$	63,302		$	55,711		$	7,591		13.6%
RCM	(1		)	(4		)	3			NM
Non-core equipment disposal	(800		)	—			(800		)	NM
Adjusted income from operations (Non-GAAP)	$	62,501		$	55,707		$	6,794		12.2%

EPS	$	0.85		$	0.75		$	0.10		13.3%
Non-core equipment disposal	(0.01		)	—			(0.01		)	NM
Revaluation of deferred tax liabilities	—			(0.05		)	0.05			NM
Adjusted EPS (Non-GAAP)	$	0.84		$	0.70		$	0.14		20.0%

NM = not meaningful

In the first quarter of fiscal 2020, revenue and revenue, net of subcontractor costs increased $80.2 million, or 11.2%, and $60.7 million, or 11.0%, respectively, compared to the same period last year. Excluding the contributions from the EGT and WYG acquisitions, our revenue grew $20.9 million, or 2.9% in the first quarter of fiscal 2020 compared to last year's first quarter. This growth primarily reflects growth in our U.S. commercial revenue, which increased $9.7 million, or 5.6%, in the first quarter of fiscal 2020 compared to prior-year period. Additionally, in the first quarter of fiscal 2020, our international revenue, excluding contributions from acquisitions, increased $5.9 million, or 3.0%, primarily due to increased renewable energy activity in Canada.

Our operating income increased $7.6 million in the first quarter of fiscal 2020 compared to the same period last year. The increase reflects improved results in both our GSG and CIG segments. GSG's operating income increased $4.6 million in the first quarter of fiscal 2020 compared to last year's first quarter. These results are described below under "Government Services Group." CIG's operating income increased $4.5 million in the first quarter of fiscal 2020 compared to the first quarter of fiscal 2019. These results are described below under "Commercial/International Services Group."

Interest expense, net was $3.3 million in the first quarter of fiscal 2020 compared to $2.9 million in the prior-year period. The increase reflects increased borrowings, partially offset by lower interest rates (primarily LIBOR).

The effective tax rates for the first quarters of fiscal 2020 and 2019 were 21.1% and 20.4%, respectively. Both of these tax rates reflect the impact of the comprehensive tax legislation enacted by the U.S. government on December 22, 2017, which is commonly referred to as the Tax Cuts and Jobs Act ("TCJA"). The TCJA significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, limiting the deductibility of certain executive compensation, and implementing a modified territorial tax system with the introduction of the Global Intangible Low-Taxed Income tax rules. The TCJA also imposed a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the tax law was enacted. We finalized the analysis of our deferred tax liabilities for the TCJA's lower tax rates in the first quarter of fiscal 2019 and recorded a deferred tax benefit of $2.6 million. Excluding the deferred tax benefit from the TCJA, our effective tax rate in the first quarter of fiscal 2019 was 25.3%.

Our EPS was $0.85 in the first quarter of fiscal 2020, compared to $0.75 in last year's first quarter. On the same basis as our adjusted operating income and excluding non-recurring tax benefits, adjusted EPS was $0.84 in the first quarter of fiscal 2020, compared to $0.70 in the first quarter of fiscal 2019.

Segment Results of Operations

Government Services Group



	Three Months Ended
	December 29, 2019			December 30, 2018			Change
	December 29, 2019			December 30, 2018			$			%
	($ in thousands)
Revenue	$	457,404		$	411,971		$	45,433		11.0%
Subcontractor costs	(127,697		)	(108,690		)	(19,007		)	(17.5)
Revenue, net of subcontractor costs	$	329,707		$	303,281		$	26,426		8.7

Income from operations	$	42,048		$	37,413		$	4,635		12.4%

Revenue and revenue, net of subcontractor costs, increased $45.4 million, or 11.0%, and $26.4 million, or 8.7%, respectively, in the first quarter of fiscal 2020 compared to the year-ago quarter. These increases include contributions from the aforementioned acquisitions completed in fiscal 2019. Excluding these contributions, revenue increased 4.5% in the first quarter of fiscal 2020 compared to last year's first quarter. This increase reflects continued broad-based growth in our U.S. government water and environmental programs partially offset by decreased revenue from disaster response projects compared to last year. Operating income increased $4.6 million in the first quarter of fiscal 2020 compared to the first quarter of fiscal 2019, primarily reflecting the higher revenue. In addition, our operating margin, based on revenue, net of subcontractor costs, improved to 12.8% in the first quarter of fiscal 2020 from 12.3% in the same period last year.

Commercial/International Services Group



	Three Months Ended
	December 29, 2019			December 30, 2018			Change
	December 29, 2019			December 30, 2018			$		%
	($ in thousands)
Revenue	$	351,164		$	317,793		$	33,371	10.5%
Subcontractor costs	(66,885		)	(68,287		)	1,402		2.1
Revenue, net of subcontractor costs	$	284,279		$	249,506		$	34,773	13.9

Income from operations	$	31,632		$	27,099		$	4,533	16.7%

Revenue and revenue, net of subcontractor costs, increased $33.4 million, or 10.5%, and $34.8 million, or 13.9%, respectively, in the first quarter of fiscal 2020 compared to the year-ago quarter. Excluding the contribution from the aforementioned acquisitions, revenue increased 0.3% in the first quarter of fiscal 2020 compared to last year's first quarter. This increase primarily reflects increased renewable energy projects in North America. Operating income in the first quarter of fiscal 2020, includes gains of $0.8 million from the disposition of non-core equipment. Excluding this amount, our operating income increased $3.7 million in the first quarter of fiscal 2020 compared to the first quarter of fiscal 2019 reflecting the higher revenue. Our operating margin based on revenue, net of subcontractor costs, was 11.1% (10.8% adjusted for the non-core gain) in the first quarter of fiscal 2020, which was stable compared to the same period last year.

Remediation and Construction Management



	Three Months Ended
	December 29, 2019			December 30, 2018			Change
	December 29, 2019			December 30, 2018			Change
	($ in thousands)
Revenue	$	145		$	1,453		$	(1,308	)
Subcontractor costs	(108		)	(876		)	768
Revenue, net of subcontractor costs	$	37		$	577		$	(540	)

Income from operations	$	1		$	4		$	(3	)

RCM's projects were substantially complete at the end of fiscal 2019.

Backlog

The following table provides a reconciliation between remaining unsatisfied performance obligations ("RUPOs") and backlog:



	Balance at
	December 29, 2019		September 29, 2019
	(in thousands)
RUPOs	$	3,149,530	$	3,081,471
Items impacting comparability:
Contract term	16,238		10,386
Backlog	$	3,165,768	$	3,091,857

Backlog generally represents the dollar amount of revenues we expect to realize in the future when we perform the work. The difference between RUPOs and backlog relates to contract terms. Specifically, our backlog does not consider the impact of termination for convenience clauses within the contracts. The contract term and thus remaining performance obligation on certain of our operations and maintenance contracts, are limited to the notice period required for contract termination (usually 30, 60, or 90 days).

Financial Condition, Liquidity and Capital Resources

Capital Requirements. Our primary sources of liquidity are cash flows from operations and borrowings under our credit facilities. Our primary uses of cash are to fund working capital, capital expenditures, stock repurchases, cash dividends and repayment of debt, as well as to fund acquisitions and earn-out obligations from prior acquisitions. We believe that our existing cash and cash equivalents, operating cash flows and borrowing capacity under our credit agreement, as described below, will be sufficient to meet our capital requirements for at least the next 12 months.

On November 5, 2018, the Board of Directors authorized a stock repurchase program under which we could repurchase up to $200 million of our common stock in addition to the $25 million under the previous stock purchase program. In fiscal 2019, we expended $100 million to repurchase our stock under these programs. In the first quarter of fiscal 2020, we expended an additional $21.2 million. As a result, we had $103.8 million of stock repurchase authorization remaining as of December 29, 2019.

On November 11, 2019, the Board of Directors declared a quarterly cash dividend of $0.15 per share payable on December 13, 2019 to stockholders of record as of the close of business on December 2, 2019.

We use a variety of tax planning and financing strategies to manage our worldwide cash and deploy funds to locations where they are needed. We have no need or plans to repatriate foreign earnings in the foreseeable future.

Cash Equivalents and Restricted Cash. As of December 29, 2019, cash equivalents and restricted cash were $111.0 million, a decrease of $9.9 million compared to the fiscal 2019 year-end. The decrease was primarily due to cash used in operating activities, contingent earn-out payments, stock repurchases and dividends.

Operating Activities. For the first quarter of fiscal 2020, net cash used in operating activities was $18.0 million, an increase of $2.7 million compared to the prior-year period. The increase primarily resulted from additional performance-based compensation payments.

Investing Activities. For the first quarter of fiscal 2020, net cash used in investing activities was $2.9 million, a decrease of $0.9 million compared to the year-ago period. The decrease was primarily the result of lower capital expenditures.

Financing Activities. For the first quarter of fiscal 2020, net cash provided by financing activities was $8.8 million, compared to net cash used in financing activities of $59.0 million in the prior-year period. The change was due to higher net borrowings of long-term debt in the first quarter of fiscal 2020 compared to the same period last year.

Debt Financing. On July 30, 2018, we entered into a Second Amended and Restated Credit Agreement (“Amended Credit Agreement”) with a total borrowing capacity of $1 billion that will mature in July 2023. The Amended Credit Agreement is a $700 million senior secured, five-year facility that provides for a $250 million term loan facility (the “Amended Term Loan Facility”), a $450 million revolving credit facility (the “Amended Revolving Credit Facility”), and a $300 million accordion feature that allows us to increase the Amended Credit Agreement to $1 billion subject to lender approval. The Amended Credit Agreement allows us to, among other things, (i) refinance indebtedness under our Credit Agreement dated as of May 7, 2013; (ii) finance certain permitted open market repurchases of our common stock, permitted acquisitions, and cash dividends and distributions; and (iii) utilize the proceeds for working capital, capital expenditures and other general corporate purposes. 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 $200 million sublimit for multicurrency borrowings and letters of credit.

The entire Amended Term Loan Facility was drawn on July 30, 2018. The Amended Term Loan Facility is subject to quarterly amortization of principal at 5% annually beginning December 31, 2018. We may borrow on the Amended Revolving Credit Facility, at our option, at either (a) a Eurocurrency rate plus a margin that ranges from 1.00% to 1.75% 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 Eurocurrency rate plus 1.00%) plus a margin that ranges from 0% to 0.75% 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 July 30, 2023, or earlier at our discretion upon payment in full of loans and other obligations.

As of December 29, 2019, we had $335.0 million in outstanding borrowings under the Amended Credit Agreement, which was comprised of $237.5 million under the Term Loan Facility and $97.5 million outstanding under the Amended Revolving Credit Facility at a year-to-date weighted-average interest rate of 3.00% per annum. In addition, we had $0.7 million in standby letters of credit under the Amended Credit Agreement. Our average effective weighted-average interest rate on borrowings outstanding during the year-to-date period ending December 29, 2019 under the Amended Credit Agreement, including the effects of interest rate swap agreements described in Note 14, “Derivative Financial Instruments” of the “Notes to Consolidated Financial Statements”, was 3.69%. At December 29, 2019, we had $351.6 million of available credit under the Amended Revolving Credit Facility, all of which could be borrowed without a violation of our debt covenants.

The Amended Credit Agreement contains certain affirmative and restrictive covenants, and customary events of default. The financial covenants provide for a maximum Consolidated Leverage Ratio of 3.00 to 1.00 (total funded debt/EBITDA, as defined in the Amended Credit Agreement) and a minimum Consolidated Interest Coverage Ratio of 3.00 to 1.00 (EBITDA/Consolidated Interest Charges, as defined in the Amended Credit Agreement). Our obligations under the Amended Credit Agreement are guaranteed by certain of our domestic subsidiaries and are secured by first priority liens on (i) the equity interests of certain of our subsidiaries, including those subsidiaries that are guarantors or borrowers under the Amended Credit Agreement, and (ii) the accounts receivable, general intangibles and intercompany loans, and those of our subsidiaries that are guarantors or borrowers.

At December 29, 2019, we were in compliance with these covenants with a consolidated leverage ratio of 1.47x and a consolidated interest coverage ratio of 16.71x. Our obligations under the Amended Credit Agreement are guaranteed by certain of our subsidiaries and are secured by first priority liens on (i) the equity interests of certain of our subsidiaries, including those

subsidiaries that are guarantors or borrowers under the Amended Credit Agreement, and (ii) our accounts receivable, general intangibles and intercompany loans, and those of our subsidiaries that are guarantors or borrowers.

In addition to the credit facility, we entered into agreements to issue standby letters of credit. The aggregate amount of standby letters of credit outstanding under these additional agreements and other bank guarantees was $46.7 million, of which $12.1 million was issued in currencies other than the U.S. dollar.

We maintain at our Australian subsidiary an AUD$30 million credit facility, which may be used for bank overdrafts, short-term cash advances and bank guarantees. This facility expires in March 2020 and is secured by a parent guarantee. At December 29, 2019, there were no borrowings outstanding under this facility and bank guarantees outstanding of USD$6.2 million, which were issued in currencies other than the U.S. dollar.

We maintain at our United Kingdom subsidiary a GBP£35 million credit facility, which may be used for bank overdrafts, short-term cash advances and bank guarantees. This facility expires in July 2020 and is secured by a parent guarantee. At December 29, 2019, there was USD$1.5 million borrowings outstanding under this facility and bank guarantees outstanding of USD$17.5 million, which were issued in currencies other than the U.S. dollar.

Inflation. We believe our operations have not been, and, in the foreseeable future, are not expected to be, materially adversely affected by inflation or changing prices due to the average duration of our projects and our ability to negotiate prices as contracts end and new contracts begin.

Dividends. Our Board of Directors has authorized the following dividends in fiscal 2020:



	Dividend Per Share		Record Date	Total Maximum Payment (in thousands)		Payment Date
November 11, 2019	$	0.15	December 2, 2019	$	8,190	December 13, 2019
January 27, 2020	$	0.15	February 12, 2020	N/A		February 28, 2020

Income Taxes

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

As of December 29, 2019 and September 29, 2019, the liability for income taxes associated with uncertain tax positions was $9.6 million and $9.2 million, respectively.

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions may significantly decrease within the next 12 months. These changes would be the result of ongoing examinations.

Off-Balance Sheet Arrangements

In the ordinary course of business, we may use off-balance sheet arrangements if we believe that such arrangements would be an efficient way to lower our cost of capital or help us manage the overall risks of our business operations. We do not believe that such arrangements have had a material adverse effect on our financial position or our results of operations.

The following is a summary of our off-balance sheet arrangements:

•

Letters of credit and bank guarantees are used primarily to support project performance and insurance programs. We are required to reimburse the issuers of letters of credit and bank guarantees for any payments they make under the outstanding letters of credit or bank guarantees. Our Amended Credit Agreement and additional letter of credit facilities cover the issuance of our standby letters of credit and bank guarantees and are critical for our normal operations. If we default on the Amended Credit Agreement or additional credit facilities, our inability to issue or renew standby letters of credit and bank guarantees would impair our ability to maintain normal operations. At

December 29, 2019, we had $0.7 million in standby letters of credit outstanding under our Amended Credit Agreement, $46.7 million in standby letters of credit outstanding under our additional letter of credit facilities, $6.2 million of bank guarantees under our Australian facility, and $17.5 million under our United Kingdom facility.

•

From time to time, we provide guarantees and indemnifications related to our services. If our services under a guaranteed or indemnified project are later determined to have resulted in a material defect or other material deficiency, then we may be responsible for monetary damages or other legal remedies. When sufficient information about claims on guaranteed or indemnified projects is available and monetary damages or other costs or losses are determined to be probable, we recognize such guaranteed losses.

•

In the ordinary course of business, we enter into various agreements as part of certain unconsolidated subsidiaries, joint ventures, and other jointly executed contracts where we are jointly and severally liable. We enter into these agreements primarily to support the project execution commitments of these entities. The potential payment amount of an outstanding performance guarantee is typically the remaining cost of work to be performed by or on behalf of third parties under engineering and construction contracts. However, we are not able to estimate other amounts that may be required to be paid in excess of estimated costs to complete contracts and, accordingly, the total potential payment amount under our outstanding performance guarantees cannot be estimated. For cost-plus contracts, amounts that may become payable pursuant to guarantee provisions are normally recoverable from the client for work performed under the contract. For lump sum or fixed-price contracts, this amount is the cost to complete the contracted work less amounts remaining to be billed to the client under the contract. Remaining billable amounts could be greater or less than the cost to complete. In those cases where costs exceed the remaining amounts payable under the contract, we may have recourse to third parties, such as owners, co-venturers, subcontractors or vendors, for claims.

•

In the ordinary course of business, our clients may request that we obtain surety bonds in connection with contract performance obligations that are not required to be recorded in our consolidated balance sheets. We are obligated to reimburse the issuer of our surety bonds for any payments made thereunder. Each of our commitments under performance bonds generally ends concurrently with the expiration of our related contractual obligation.

Critical Accounting Policies

Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended September 29, 2019. To date, there have been no other material changes in our critical accounting policies as reported in our 2019 Annual Report on Form 10-K.

New Accounting Pronouncements

For information regarding recent accounting pronouncements, see “Notes to Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report.

Financial Market Risks

We do not enter into derivative financial instruments for trading or speculation purposes. In the normal course of business, we have exposure to both interest rate risk and foreign currency transaction and translation risk, primarily related to the Canadian and Australian dollar, and British Pound.

We are exposed to interest rate risk under our Amended Credit Agreement. We can borrow, at our option, under both the Amended Term Loan Facility and Amended Revolving Credit Facility. We may borrow on the Amended Revolving Credit Facility, at our option, at either (a) a Eurocurrency rate plus a margin that ranges from 1.00% to 1.75% 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 Eurocurrency rate plus 1.00%) plus a margin that ranges from 0% to 0.75% per annum. Borrowings at the base rate have no designated term and may be repaid without penalty any time prior to the Facility’s maturity date. Borrowings at a Eurodollar rate have a term no less than 30 days and no greater than 180 days and may be prepaid without penalty. Typically, at the end of such term, such borrowings may be rolled over at our discretion into either a borrowing at the base rate or a borrowing at a Eurodollar rate with similar terms, not to exceed the maturity date of the Facility. The Facility matures on July 30, 2023. At December 29, 2019, we had borrowings outstanding under the Credit Agreement of $335.0 million at a year-to-date weighted-average interest rate of 3.00% per annum.

In August 2018, we entered into five interest rate swap agreements with five banks to fix the variable interest rate on $250 million of our Amended Term Loan Facility. The objective of these interest rate swaps was to eliminate the variability of our cash flows on the amount of interest expense we pay under our Credit Agreement. As of December 29, 2019, the notional principal of our outstanding interest swap agreements was $237.5 million ($47.5 million each.) Our year-to-date average effective interest rate on borrowings outstanding under the Credit Agreement, including the effects of interest rate swap agreements, at December 29, 2019, was 3.69%. For more information, see Note 14, “Derivative Financial Instruments” of the “Notes to Consolidated Financial Statements”.

Most of our transactions are in U.S. dollars; however, some of our subsidiaries conduct business in foreign currencies, primarily the Canadian and Australian dollar, and British Pound. Therefore, we are subject to currency exposure and volatility because of currency fluctuations. We attempt to minimize our exposure to these fluctuations by matching revenue and expenses in the same currency for our contracts. Foreign currency gains and losses were immaterial for both first quarters of fiscal 2020 and 2019. Foreign currency gains and losses are reported as part of “Selling, general and administrative expenses” in our consolidated statements of income.

We have foreign currency exchange rate exposure in our results of operations and equity primarily because of the currency translation related to our foreign subsidiaries where the local currency is the functional currency. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions will result in reduced revenue, operating expenses, assets and liabilities. Similarly, our revenue, operating expenses, assets and liabilities will increase if the U.S. dollar weakens against foreign currencies. For the first quarters of fiscal 2020 and 2019, 31.0% and 27.4% of our consolidated revenue, respectively, was generated by our international business. For the three-month periods ended December 29, 2019 and December 30, 2018, the effect of foreign exchange rate translation on the consolidated balance sheets was an increase in equity of $13.9 million compared to a decrease in equity of $23.3 million, respectively. These amounts were recognized as an adjustment to equity through other comprehensive income.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Please refer to the information we have included under the heading “Financial Market Risks” in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which is incorporated herein by reference.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures and changes in internal control over financial reporting. As of December 29, 2019, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act), were effective.

Changes in internal control over financial reporting. On September 30, 2019, we adopted ASU 2016-02, "Leases (Topic 842)". In connection with the adoption, we implemented certain changes in our processes, systems, and controls. There were no other changes in our internal control over financial reporting that occurred during the quarter ended December 29, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

breach of contract related to TtEC's contracts to perform environmental remediation services at the former Hunters Point Naval Shipyard in San Francisco, California. TtEC disputes the claims and will defend this matter vigorously. We are currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.

Item 1A. Risk Factors

We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially adversely affect our operations. Set forth below and elsewhere in this report and in other documents we file with the United States Securities and Exchange Commission ("SEC") are descriptions of the risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. Additional risks we do not yet know of or that we currently think are immaterial may also affect our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected.

Continuing worldwide political and economic uncertainties may adversely affect our revenue and profitability.

The last several years have been periodically marked by political and economic concerns, including decreased consumer confidence, the lingering effects of international conflicts, energy costs and inflation. Although certain indices and economic data have shown signs of stabilization in the United States and certain global markets, there can be no assurance that these improvements will be broad-based or sustainable. This instability can make it extremely difficult for our clients, our vendors and us to accurately forecast and plan future business activities, and could cause constrained spending on our services, delays and a lengthening of our business development efforts, the demand for more favorable pricing or other terms, and/or difficulty in collection of our accounts receivable. Our government clients may face budget deficits that prohibit them from funding proposed and existing projects. Further, ongoing economic instability in the global markets could limit our ability to access the capital markets at a time when we would like, or need, to raise capital, which could have an impact on our ability to react to changing business conditions or new opportunities. If economic conditions remain uncertain or weaken, or government spending is reduced, our revenue and profitability could be adversely affected.

Changes in applicable tax regulations could negatively affect our financial results.

We are subject to taxation in the United States and numerous foreign jurisdictions. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("TCJA"). The changes to U.S. tax law implemented by the TCJA are broad and complex. The final impacts of the TCJA may differ from the estimates provided elsewhere in this report, possibly materially, due to, among other things, changes in interpretations of the TCJA, any legislative action to address questions that arise because of the TCJA, any changes in accounting standards for income taxes or related interpretations in response to the TCJA, or any updates or changes in estimates we have utilized to calculate the impacts, including impacts from changes to current year earnings estimates and foreign exchange rates.

Demand for our services is cyclical and vulnerable to economic downturns. If economic growth slows, government fiscal conditions worsen, or client spending declines further, then our revenue, profits and financial condition may deteriorate.

Demand for our services is cyclical, and vulnerable to economic downturns and reductions in government and private industry spending. Such downturns or reductions may result in clients delaying, curtailing or canceling proposed and existing projects. Our business traditionally lags the overall recovery in the economy; therefore, our business may not recover immediately when the economy improves. If economic growth slows, government fiscal conditions worsen, or client spending declines, then our revenue, profits and overall financial condition may deteriorate. Our government clients may face budget deficits that prohibit them from funding new or existing projects. In addition, our existing and potential clients may either postpone entering into new contracts or request price concessions. Difficult financing and economic conditions may cause some of our clients to demand better pricing terms or delay payments for services we perform, thereby increasing the average number of days our receivables are outstanding, and the potential of increased credit losses of uncollectible invoices. Further, these conditions may result in the inability of some of our clients to pay us for services that we have already performed. If we are not able to reduce our costs quickly enough to respond to the revenue decline from these clients, our operating results may be adversely affected. Accordingly, these factors affect our ability to forecast our future revenue and earnings from business areas that may be adversely impacted by market conditions.

Our international operations expose us to legal, political, and economic risks in different countries as well as currency exchange rate fluctuations that could harm our business and financial results.

In the first quarter of fiscal 2020, we generated 31.0% of our revenue from our international operations, primarily in Canada, Australia, the United Kingdom and from international clients for work that is performed by our domestic operations. International business is subject to a variety of risks, including:


•	imposition of governmental controls and changes in laws, regulations, or policies;


•	lack of developed legal systems to enforce contractual rights;


•	greater risk of uncollectible accounts and longer collection cycles;


•	currency exchange rate fluctuations, devaluations, and other conversion restrictions;


•	uncertain and changing tax rules, regulations, and rates;


•	the potential for civil unrest, acts of terrorism, force majeure, war or other armed conflict, and greater physical security risks, which may cause us to have to leave a country quickly;


•	logistical and communication challenges;


•	changes in regulatory practices, including tariffs and taxes;


•	changes in labor conditions;


•	general economic, political, and financial conditions in foreign markets; and


•	exposure to civil or criminal liability under the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act, the Canadian Corruption of Foreign Public Officials Act, the Brazilian Clean Companies Act, the anti-boycott rules, trade and export control regulations, as well as other international regulations.

For example, an ongoing government investigation into political corruption in Quebec contributed to the slow-down in procurements and business activity in that province, which adversely affected our business. The Province of Quebec has adopted legislation that requires businesses and individuals seeking contracts with governmental bodies be certified by a Quebec regulatory authority for contracts over a specified size. Our failure to maintain certification could adversely affect our business.

International risks and violations of international regulations may significantly reduce our revenue and profits, and subject us to criminal or civil enforcement actions, including fines, suspensions, or disqualification from future U.S. federal procurement contracting. Although we have policies and procedures to monitor legal and regulatory compliance, our employees, subcontractors, and agents could take actions that violate these requirements. As a result, our international risk exposure may be more or less than the percentage of revenue attributed to our international operations.

The United Kingdom's proposed withdrawal from the European Union could have an adverse effect on our business and financial results.

In March 2017, the United Kingdom government initiated a process to withdraw from the European Union ("Brexit") and began negotiating the terms of the separation. Brexit has created substantial economic and political uncertainty and volatility in currency exchange rates, and the terms of the United Kingdom's withdrawal from the European Union remain uncertain. The uncertainty created by Brexit may cause our customers to closely monitor their costs and reduce demand for our services and may ultimately result in new regulatory and cost challenges for our United Kingdom and global operations. Any of these events could adversely affect our United Kingdom, European and overall business and financial results.

We derive a substantial amount of our revenue from U.S. federal, state and local government agencies, and any disruption in government funding or in our relationship with those agencies could adversely affect our business.

In the first quarter of fiscal 2020, we generated 46.1% of our revenue from contracts with U.S. federal, and state and local government agencies. A significant amount of this revenue is derived under multi-year contracts, many of which are appropriated on an annual basis. As a result, at the beginning of a project, the related contract may be only partially funded, and additional funding is normally committed only as appropriations are made in each subsequent year. These appropriations, and the timing of payment of appropriated amounts, may be influenced by numerous factors as noted below. Our backlog includes only the projects that have funding appropriated.

The demand for our U.S. government-related services is generally driven by the level of government program funding. Accordingly, the success and further development of our business depends, in large part, upon the continued funding of these U.S. government programs, and upon our ability to obtain contracts and perform well under these programs. Under the Budget Control Act of 2011, an automatic sequestration process, or across-the-board budget cuts (a large portion of which was defense-related), was triggered. The sequestration began on March 1, 2013. Although the Bipartisan Budget Act of 2013 provided some sequester relief through the end of fiscal year 2015, the sequestration requires reduced U.S. federal government spending through fiscal year 2021. A significant reduction in federal government spending, the absence of a bipartisan agreement on the federal government budget, a partial or full federal government shutdown, or a change in budgetary priorities could reduce demand for our services, cancel or delay federal projects, result in the closure of federal facilities and significant personnel reductions, and have a material and adverse impact on our business, financial condition, results of operations and cash flows.

There are several additional factors that could materially affect our U.S. government contracting business, which could cause U.S. government agencies to delay or cancel programs, to reduce their orders under existing contracts, to exercise their

rights to terminate contracts or not to exercise contract options for renewals or extensions. Such factors, which include the following, could have a material adverse effect on our revenue or the timing of contract payments from U.S. government agencies:


•	the failure of the U.S. government to complete its budget and appropriations process before its fiscal year-end, which would result in the funding of government operations by means of a continuing resolution that authorizes agencies to continue to operate but does not authorize new spending initiatives. As a result, U.S. government agencies may delay the procurement of services;


•	changes in and delays or cancellations of government programs, requirements or appropriations;


•	budget constraints or policy changes resulting in delay or curtailment of expenditures related to the services we provide;


•	re-competes of government contracts;


•	the timing and amount of tax revenue received by federal, and state and local governments, and the overall level of government expenditures;


•	curtailment in the use of government contracting firms;


•	delays associated with insufficient numbers of government staff to oversee contracts;


•	the increasing preference by government agencies for contracting with small and disadvantaged businesses;


•	competing political priorities and changes in the political climate regarding the funding or operation of the services we provide;


•	the adoption of new laws or regulations affecting our contracting relationships with the federal, state or local governments;


•	unsatisfactory performance on government contracts by us or one of our subcontractors, negative government audits or other events that may impair our relationship with federal, state or local governments;


•	a dispute with or improper activity by any of our subcontractors; and


•	general economic or political conditions.

Our inability to win or renew U.S. government contracts during regulated procurement processes could harm our operations and significantly reduce or eliminate our profits.

U.S. government contracts are awarded through a regulated procurement process. The U.S. federal government has increasingly relied upon multi-year contracts with pre-established terms and conditions, such as indefinite delivery/indefinite quantity (“IDIQ”) contracts, which generally require those contractors who have previously been awarded the IDIQ to engage in an additional competitive bidding process before a task order is issued. As a result, new work awards tend to be smaller and of shorter duration, since the orders represent individual tasks rather than large, programmatic assignments. In addition, we believe that there has been an increase in the award of federal contracts based on a low-price, technically acceptable criteria emphasizing price over qualitative factors, such as past performance. As a result, pricing pressure may reduce our profit margins on future federal contracts. The increased competition and pricing pressure, in turn, may require us to make sustained efforts to reduce costs in order to realize revenue, and profits under government contracts. If we are not successful in reducing the amount of costs we incur, our profitability on government contracts will be negatively impacted. In addition, the U.S. federal government has scaled back outsourcing of services in favor of “insourcing” jobs to its employees, which could reduce our revenue. Moreover, even if we are qualified to work on a government contract, we may not be awarded the contract because of existing government policies designed to protect small businesses and under-represented minority contractors. Our inability to win or renew government contracts during regulated procurement processes could harm our operations and significantly reduce or eliminate our profits.

Each year, client funding for some of our U.S. government contracts may rely on government appropriations or public-supported financing. If adequate public funding is delayed or is not available, then our profits and revenue could decline.

Each year, client funding for some of our U.S. government contracts may directly or indirectly rely on government appropriations or public-supported financing. Legislatures may appropriate funds for a given project on a year-by-year basis, even though the project may take more than one year to perform. In addition, public-supported financing such as U.S. state and local municipal bonds may be only partially raised to support existing projects. Similarly, an economic downturn may make it more difficult for U.S. state and local governments to fund projects. In addition to the state of the economy and competing political priorities, public funds and the timing of payment of these funds may be influenced by, among other things, curtailments in the use of government contracting firms, increases in raw material costs, delays associated with insufficient numbers of government staff to oversee contracts, budget constraints, the timing and amount of tax receipts, and the overall level of government expenditures. If adequate public funding is not available or is delayed, then our profits and revenue could decline.

Our U.S. federal government contracts may give government agencies the right to modify, delay, curtail, renegotiate, or terminate existing contracts at their convenience at any time prior to their completion, which may result in a decline in our profits and revenue.

U.S. federal government projects in which we participate as a contractor or subcontractor may extend for several years. Generally, government contracts include the right to modify, delay, curtail, renegotiate, or terminate contracts and subcontracts at the government’s convenience any time prior to their completion. Any decision by a U.S. federal government client to modify, delay, curtail, renegotiate, or terminate our contracts at their convenience may result in a decline in our profits and revenue.

As a U.S. government contractor, we must comply with various procurement laws and regulations and are subject to regular government audits; a violation of any of these laws and regulations or the failure to pass a government audit could result in sanctions, contract termination, forfeiture of profit, harm to our reputation or loss of our status as an eligible government contractor and could reduce our profits and revenue.

We must comply with and are affected by U.S. federal, state, local, and foreign laws and regulations relating to the formation, administration and performance of government contracts. For example, we must comply with Federal Acquisition Regulation ("FAR"), the Truth in Negotiations Act, Cost Accounting Standards ("CAS"), the American Recovery and Reinvestment Act of 2009, the Services Contract Act, and the DoD security regulations, as well as many other rules and regulations. In addition, we must comply with other government regulations related to employment practices, environmental protection, health and safety, tax, accounting, and anti-fraud measures, as well as many other regulations in order to maintain our government contractor status. These laws and regulations affect how we do business with our clients and, in some instances, impose additional costs on our business operations. Although we take precautions to prevent and deter fraud, misconduct, and non-compliance, we face the risk that our employees or outside partners may engage in misconduct, fraud, or other improper activities. U.S. government agencies, such as the Defense Contract Audit Agency ("DCAA"), routinely audit and investigate government contractors. These government agencies review and audit a government contractor’s performance under its contracts and cost structure, and evaluate compliance with applicable laws, regulations, and standards. In addition, during the course of its audits, the DCAA may question our incurred project costs. If the DCAA believes we have accounted for such costs in a manner inconsistent with the requirements for FAR or CAS, the DCAA auditor may recommend to our U.S. government corporate administrative contracting officer that such costs be disallowed. Historically, we have not experienced significant disallowed costs as a result of government audits. However, we can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future. In addition, U.S. government contracts are subject to various other requirements relating to the formation, administration, performance, and accounting for these contracts. We may also be subject to qui tam litigation brought by private individuals on behalf of the U.S. government under the Federal Civil False Claims Act, which could include claims for treble damages. For example, as discussed elsewhere in this report, on January 14, 2019, the Civil Division of the United States Attorney's Office ("USAO") filed complaints in intervention in three qui tam actions filed against our subsidiary, Tetra Tech EC, Inc. ("TtEC"), in the U.S. District Court for the Northern District of California. The complaints allege False Claims Act violations and breach of contract related to TtEC's contracts to perform environmental remediation services at the former Hunters Point Naval Shipyard in San Francisco, California. TtEC disputes the claims and will defend this matter vigorously. U.S. government contract violations could result in the imposition of civil and criminal penalties or sanctions, contract termination, forfeiture of profit, and/or suspension of payment, any of which could make us lose our status as an eligible government contractor. We could also suffer serious harm to our reputation. Any interruption or termination of our U.S. government contractor status could reduce our profits and revenue significantly.

If we extend a significant portion of our credit to clients in a specific geographic area or industry, we may experience disproportionately high levels of collection risk and nonpayment if those clients are adversely affected by factors particular to their geographic area or industry.

Our clients include public and private entities that have been, and may continue to be, negatively impacted by the changing landscape in the global economy. While outside of the U.S. federal government no one client accounted for over 10% of our revenue for the first quarter of fiscal 2020, we face collection risk as a normal part of our business where we perform services and subsequently bill our clients for such services. In the event that we have concentrated credit risk from clients in a specific geographic area or industry, continuing negative trends or a worsening in the financial condition of that specific geographic area or industry could make us susceptible to disproportionately high levels of default by those clients. Such defaults could materially adversely impact our revenues and our results of operations.

We have made and expect to continue to make acquisitions. Acquisitions could disrupt our operations and adversely impact our business and operating results. Our failure to conduct due diligence effectively, or our inability to successfully integrate acquisitions, could impede us from realizing all of the benefits of the acquisitions, which could weaken our results of operations.

A key part of our growth strategy is to acquire other companies that complement our lines of business or that broaden our technical capabilities and geographic presence. We expect to continue to acquire companies as an element of our growth

strategy; however, our ability to make acquisitions is restricted under our credit agreement. Acquisitions involve certain known and unknown risks that could cause our actual growth or operating results to differ from our expectations or the expectations of securities analysts. For example:


•	we may not be able to identify suitable acquisition candidates or to acquire additional companies on acceptable terms;


•	we are pursuing international acquisitions, which inherently pose more risk than domestic acquisitions;


•	we compete with others to acquire companies, which may result in decreased availability of, or increased price for, suitable acquisition candidates;


•	we may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of our potential acquisitions;


•	we may ultimately fail to consummate an acquisition even if we announce that we plan to acquire a company; and


•	acquired companies may not perform as we expect, and we may fail to realize anticipated revenue and profits.

In addition, our acquisition strategy may divert management’s attention away from our existing businesses, resulting in the loss of key clients or key employees, and expose us to unanticipated problems or legal liabilities, including responsibility as a successor-in-interest for undisclosed or contingent liabilities of acquired businesses or assets.

If we fail to conduct due diligence on our potential targets effectively, we may, for example, not identify problems at target companies, or fail to recognize incompatibilities or other obstacles to successful integration. Our inability to successfully integrate future acquisitions could impede us from realizing all of the benefits of those acquisitions and could severely weaken our business operations. The integration process may disrupt our business and, if implemented ineffectively, may preclude realization of the full benefits expected by us and could harm our results of operations. In addition, the overall integration of the combining companies may result in unanticipated problems, expenses, liabilities, and competitive responses, and may cause our stock price to decline. The difficulties of integrating an acquisition include, among others:


•	issues in integrating information, communications, and other systems;


•	incompatibility of logistics, marketing, and administration methods;


•	maintaining employee morale and retaining key employees;


•	integrating the business cultures of both companies;


•	preserving important strategic client relationships;


•	consolidating corporate and administrative infrastructures, and eliminating duplicative operations; and


•	coordinating and integrating geographically separate organizations.

In addition, even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of the acquisition, including the synergies, cost savings or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all.

Further, acquisitions may cause us to:


•	issue common stock that would dilute our current stockholders’ ownership percentage;


•	use a substantial portion of our cash resources;


•	increase our interest expense, leverage, and debt service requirements (if we incur additional debt to fund an acquisition);


•	assume liabilities, including environmental liabilities, for which we do not have indemnification from the former owners. Further, indemnification obligations may be subject to dispute or concerns regarding the creditworthiness of the former owners;


•	record goodwill and non-amortizable intangible assets that are subject to impairment testing and potential impairment charges;


•	experience volatility in earnings due to changes in contingent consideration related to acquisition earn-out liability estimates;


•	incur amortization expenses related to certain intangible assets;


•	lose existing or potential contracts as a result of conflict of interest issues;


•	incur large and immediate write-offs; or


•	become subject to litigation.

Finally, acquired companies that derive a significant portion of their revenue from the U.S. federal government and do not follow the same cost accounting policies and billing practices that we follow may be subject to larger cost disallowances for greater periods than we typically encounter. If we fail to determine the existence of unallowable costs and do not establish appropriate

reserves at acquisition, we may be exposed to material unanticipated liabilities, which could have a material adverse effect on our business.

If our goodwill or intangible assets become impaired, then our profits may be significantly reduced.

Because we have historically acquired a significant number of companies, goodwill and intangible assets represent a substantial portion of our assets. As of December 29, 2019, our goodwill was $937.1 million and other intangible assets were $14.1 million. We are required to perform a goodwill impairment test for potential impairment at least on an annual basis. We also assess the recoverability of the unamortized balance of our intangible assets when indications of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. The goodwill impairment test requires us to determine the fair value of our reporting units, which are the components one level below our reportable segments. In determining fair value, we make significant judgments and estimates, including assumptions about our strategic plans with regard to our operations. We also analyze current economic indicators and market valuations to help determine fair value. To the extent economic conditions that would impact the future operations of our reporting units change, our goodwill may be deemed to be impaired, and we would be required to record a non-cash charge that could result in a material adverse effect on our financial position or results of operations. For example, we had goodwill impairment of $7.8 million in fiscal 2019. We had no goodwill impairment in fiscal 2017, fiscal 2018, or the first three months of fiscal 2020.

We could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws.

The FCPA and similar anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. The U.K. Bribery Act of 2010 prohibits both domestic and international bribery, as well as bribery across both private and public sectors. In addition, an organization that “fails to prevent bribery” by anyone associated with the organization can be charged under the U.K. Bribery Act unless the organization can establish the defense of having implemented “adequate procedures” to prevent bribery. Improper payments are also prohibited under the Canadian Corruption of Foreign Public Officials Act and the Brazilian Clean Companies Act. Local business practices in many countries outside the United States create a greater risk of government corruption than that found in the United States and other more developed countries. Our policies mandate compliance with anti-bribery laws, and we have established policies and procedures designed to monitor compliance with anti-bribery law requirements; however, we cannot ensure that our policies and procedures will protect us from potential reckless or criminal acts committed by individual employees or agents. If we are found to be liable for anti-bribery law violations, we could suffer from criminal or civil penalties or other sanctions that could have a material adverse effect on our business.

We could be adversely impacted if we fail to comply with domestic and international export laws.

To the extent we export technical services, data and products outside of the United States, we are subject to U.S. and international laws and regulations governing international trade and exports, including but not limited to the International Traffic in Arms Regulations, the Export Administration Regulations, and trade sanctions against embargoed countries. A failure to comply with these laws and regulations could result in civil or criminal sanctions, including the imposition of fines, the denial of export privileges, and suspension or debarment from participation in U.S. government contracts, which could have a material adverse effect on our business.

If we fail to complete a project in a timely manner, miss a required performance standard, or otherwise fail to adequately perform on a project, then we may incur a loss on that project, which may reduce or eliminate our overall profitability.

Our engagements often involve large-scale, complex projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our clients and our ability to effectively manage the project and deploy appropriate resources, including third-party contractors and our own personnel, in a timely manner. We may commit to a client that we will complete a project by a scheduled date. We may also commit that a project, when completed, will achieve specified performance standards. If the project is not completed by the scheduled date or fails to meet required performance standards, we may either incur significant additional costs or be held responsible for the costs incurred by the client to rectify damages due to late completion or failure to achieve the required performance standards. The uncertainty of the timing of a project can present difficulties in planning the amount of personnel needed for the project. If the project is delayed or canceled, we may bear the cost of an underutilized workforce that was dedicated to fulfilling the project. In addition, performance of projects can be affected by a number of factors beyond our control, including unavoidable delays from government inaction, public opposition, inability to obtain financing, weather conditions, unavailability of vendor materials, changes in the project scope of services requested by our clients, industrial accidents, environmental hazards, and labor disruptions. To the extent these events occur, the total costs of the project could exceed our estimates, and we could experience reduced profits or, in some cases, incur a loss on a project, which may reduce or eliminate our overall profitability. Further, any defects or errors, or failures to meet our clients’

expectations, could result in claims for damages against us. Failure to meet performance standards or complete performance on a timely basis could also adversely affect our reputation.

The loss of key personnel or our inability to attract and retain qualified personnel could impair our ability to provide services to our clients and otherwise conduct our business effectively.

As primarily a professional and technical services company, we are labor-intensive and, therefore, our ability to attract, retain, and expand our senior management and our professional and technical staff is an important factor in determining our future success. The market for qualified scientists and engineers is competitive and, from time to time, it may be difficult to attract and retain qualified individuals with the required expertise within the timeframe demanded by our clients. For example, some of our U.S. government contracts may require us to employ only individuals who have particular government security clearance levels. In addition, we rely heavily upon the expertise and leadership of our senior management. If we are unable to retain executives and other key personnel, the roles and responsibilities of those employees will need to be filled, which may require that we devote time and resources to identify, hire, and integrate new employees. With limited exceptions, we do not have employment agreements with any of our key personnel. The loss of the services of any of these key personnel could adversely affect our business. Although we have obtained non-compete agreements from certain principals and stockholders of companies we have acquired, we generally do not have non-compete or employment agreements with key employees who were once equity holders of these companies. Further, many of our non-compete agreements have expired. We do not maintain key-man life insurance policies on any of our executive officers or senior managers. Our failure to attract and retain key individuals could impair our ability to provide services to our clients and conduct our business effectively.

Our revenue and growth prospects may be harmed if we or our employees are unable to obtain government granted eligibility or other qualifications we and they need to perform services for our customers.

A number of government programs require contractors to have certain kinds of government granted eligibility, such as security clearance credentials. Depending on the project, eligibility can be difficult and time-consuming to obtain. If we or our employees are unable to obtain or retain the necessary eligibility, we may not be able to win new business, and our existing customers could terminate their contracts with us or decide not to renew them. To the extent we cannot obtain or maintain the required security clearances for our employees working on a particular contract, we may not derive the revenue or profit anticipated from such contract.

Our actual business and financial results could differ from the estimates and assumptions that we use to prepare our consolidated financial statements, which may significantly reduce or eliminate our profits.

To prepare consolidated financial statements in conformity with generally accepted accounting principles in the U.S. GAAP, management is required to make estimates and assumptions as of the date of the consolidated financial statements. These estimates and assumptions affect the reported values of assets, liabilities, revenue and expenses, as well as disclosures of contingent assets and liabilities. For example, we typically recognize revenue over the life of a contract based on the proportion of costs incurred to date compared to the total costs estimated to be incurred for the entire project. Areas requiring significant estimates by our management include:


•	the application of the percentage-of-completion method of accounting and revenue recognition on contracts, change orders, and contract claims, including related unbilled accounts receivable;


•	unbilled accounts receivable, including amounts related to requests for equitable adjustment to contracts that provide for price redetermination, primarily with the U.S. federal government. These amounts are recorded only when they can be reliably estimated, and realization is probable;


•	provisions for uncollectible receivables, client claims, and recoveries of costs from subcontractors, vendors, and others;


•	provisions for income taxes, research and development tax credits, valuation allowances, and unrecognized tax benefits;


•	value of goodwill and recoverability of intangible assets;


•	valuations of assets acquired and liabilities assumed in connection with business combinations;


•	valuation of contingent earn-out liabilities recorded in connection with business combinations;


•	valuation of employee benefit plans;


•	valuation of stock-based compensation expense; and


•	accruals for estimated liabilities, including litigation and insurance reserves.

Our actual business and financial results could differ from those estimates, which may significantly reduce or eliminate our profits.

Our profitability could suffer if we are not able to maintain adequate utilization of our workforce.

The cost of providing our services, including the extent to which we utilize our workforce, affects our profitability. The rate at which we utilize our workforce is affected by a number of factors, including:


•	our ability to transition employees from completed projects to new assignments and to hire and assimilate new employees;


•	our ability to forecast demand for our services and thereby maintain an appropriate headcount in each of our geographies and operating units;


•	our ability to manage attrition;


•	our need to devote time and resources to training, business development, professional development, and other non-chargeable activities; and


•	our ability to match the skill sets of our employees to the needs of the marketplace.

If we over-utilize our workforce, our employees may become disengaged, which could impact employee attrition. If we under-utilize our workforce, our profit margin and profitability could suffer.

Our use of the percentage-of-completion method of revenue recognition could result in a reduction or reversal of previously recorded revenue and profits.

We account for most of our contracts on the percentage-of-completion method of revenue recognition. Generally, our use of this method results in recognition of revenue and profit ratably over the life of the contract, based on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions to estimated revenue and costs, including the achievement of award fees and the impact of change orders and claims, are recorded when the amounts are known and can be reasonably estimated. Such revisions could occur in any period and their effects could be material. Although we have historically made reasonably reliable estimates of the progress towards completion of long-term contracts, the uncertainties inherent in the estimating process make it possible for actual costs to vary materially from estimates, including reductions or reversals of previously recorded revenue and profit.

If we are unable to accurately estimate and control our contract costs, then we may incur losses on our contracts, which could decrease our operating margins and reduce our profits. Specifically, our fixed-price contracts could increase the unpredictability of our earnings.

It is important for us to accurately estimate and control our contract costs so that we can maintain positive operating margins and profitability. We generally enter into three principal types of contracts with our clients: fixed-price, time-and-materials and cost-plus.

The U.S. federal government and certain other clients have increased the use of fixed-priced contracts. Under fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur and, consequently, we are exposed to a number of risks. We realize a profit on fixed-price contracts only if we can control our costs and prevent cost over-runs on our contracts. Fixed-price contracts require cost and scheduling estimates that are based on a number of assumptions, including those about future economic conditions, costs, and availability of labor, equipment and materials, and other exigencies. We could experience cost over-runs if these estimates are originally inaccurate as a result of errors or ambiguities in the contract specifications, or become inaccurate as a result of a change in circumstances following the submission of the estimate due to, among other things, unanticipated technical problems, difficulties in obtaining permits or approvals, changes in local laws or labor conditions, weather delays, changes in the costs of raw materials, or the inability of our vendors or subcontractors to perform. If cost overruns occur, we could experience reduced profits or, in some cases, a loss for that project. If a project is significant, or if there are one or more common issues that impact multiple projects, costs overruns could increase the unpredictability of our earnings, as well as have a material adverse impact on our business and earnings.

Under our time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and paid for other expenses. Profitability on these contracts is driven by billable headcount and cost control. Many of our time-and-materials contracts are subject to maximum contract values and, accordingly, revenue relating to these contracts is recognized as if these contracts were fixed-price contracts. Under our cost-plus contracts, some of which are subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be able to obtain reimbursement for all of the costs we incur.

Profitability on our contracts is driven by billable headcount and our ability to manage our subcontractors, vendors, and material suppliers. If we are unable to accurately estimate and manage our costs, we may incur losses on our contracts, which could decrease our operating margins and significantly reduce or eliminate our profits. Certain of our contracts require us to satisfy specific design, engineering, procurement, or construction milestones in order to receive payment for the work completed or equipment or supplies procured prior to achievement of the applicable milestone. As a result, under these types of arrangements, we may incur significant costs or perform significant amounts of services prior to receipt of payment. If a client determines not to proceed with the completion of the project or if the client defaults on its payment obligations, we may face difficulties in collecting payment of amounts due to us for the costs previously incurred or for the amounts previously expended to purchase equipment or supplies.

Accounting for a contract requires judgments relative to assessing the contract’s estimated risks, revenue, costs, and other technical issues. Due to the size and nature of many of our contracts, the estimation of overall risk, revenue, and cost at completion is complicated and subject to many variables. Changes in underlying assumptions, circumstances, or estimates may also adversely affect future period financial performance. If we are unable to accurately estimate the overall revenue or costs on a contract, then we may experience a lower profit or incur a loss on the contract.

Our failure to adequately recover on claims brought by us against clients for additional contract costs could have a negative impact on our liquidity and profitability.

We have brought claims against clients for additional costs exceeding the contract price or for amounts not included in the original contract price. These types of claims occur due to matters such as client-caused delays or changes from the initial project scope, both of which may result in additional cost. Often, these claims can be the subject of lengthy arbitration or litigation proceedings, and it is difficult to accurately predict when these claims will be fully resolved. When these types of events occur and unresolved claims are pending, we have used working capital in projects to cover cost overruns pending the resolution of the relevant claims. A failure to promptly recover on these types of claims could have a negative impact on our liquidity and profitability. Total accounts receivable at December 29, 2019 included approximately $14 million related to such claims.

Our failure to win new contracts and renew existing contracts with private and public sector clients could adversely affect our profitability.

Our business depends on our ability to win new contracts and renew existing contracts with private and public sector clients. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which is affected by a number of factors. These factors include market conditions, financing arrangements, and required governmental approvals. For example, a client may require us to provide a bond or letter of credit to protect the client should we fail to perform under the terms of the contract. If negative market conditions arise, or if we fail to secure adequate financial arrangements or the required government approval, we may not be able to pursue certain projects, which could adversely affect our profitability.

If we are not able to successfully manage our growth strategy, our business and results of operations may be adversely affected.

Our expected future growth presents numerous managerial, administrative, operational, and other challenges. Our ability to manage the growth of our operations will require us to continue to improve our management information systems and our other internal systems and controls. In addition, our growth will increase our need to attract, develop, motivate, and retain both our management and professional employees. The inability to effectively manage our growth or the inability of our employees to achieve anticipated performance could have a material adverse effect on our business.

Our backlog is subject to cancellation, unexpected adjustments and changing economic conditions, and is an uncertain indicator of future operating results.

Our backlog at December 29, 2019 was $3.2 billion, an increase of $73.9 million, or 2.4%, compared to the end of fiscal 2019. We include in backlog only those contracts for which funding has been provided and work authorizations have been received. We cannot guarantee that the revenue projected in our backlog will be realized or, if realized, will result in profits. In addition, project cancellations or scope adjustments may occur, from time to time, with respect to contracts reflected in our backlog. For example, certain of our contracts with the U.S. federal government and other clients are terminable at the discretion of the client, with or without cause. These types of backlog reductions could adversely affect our revenue and margins. As a result of these factors, our backlog as of any particular date is an uncertain indicator of our future earnings.

Cyber security breaches of our systems and information technology could adversely impact our ability to operate.

We develop, install and maintain information technology systems for ourselves, as well as for customers. Client contracts for the performance of information technology services, as well as various privacy and securities laws, require us to manage and protect sensitive and confidential information, including federal and other government information, from disclosure. We also need to protect our own internal trade secrets and other business confidential information, as well as personal data of our employees and contractors, from disclosure. For example, the European Union's General Data Protection Regulation, which became effective in May 2018, extends the scope of the European Union data protection laws to all companies processing data of European Union residents, regardless of the company's location. In addition, the California Consumer Privacy Act takes effect in January 2020, increasing the penalties for data privacy incidents. We face the threat to our computer systems of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks and other security problems and system disruptions, including possible unauthorized access to our and our clients' proprietary or classified information. We rely on industry-accepted security measures and technology to securely maintain all confidential and proprietary information on our information systems. In the ordinary course of business, we have been targeted by malicious cyber-attacks. We have devoted and will continue to devote significant resources to the security of our computer systems, but they may still be vulnerable to these threats. A user who circumvents security measures could misappropriate confidential or proprietary information, including information regarding us, our personnel and/or our clients, or cause interruptions or malfunctions in operations. As a result, we may be required to expend significant resources to protect against the threat of these system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches. We also rely in part on third-party software and information technology vendors to run our critical accounting, project management and financial information systems. We depend on our software and information technology vendors to provide long-term software and hardware support for our information systems. Our software and information technology vendors may decide to discontinue further development, integration or long-term software and hardware support for our information systems, in which case we may need to abandon one or more of our current information systems and migrate some or all of our accounting, project management and financial information to other systems, thus increasing our operational expense, as well as disrupting the management of our business operations. Any of these events could damage our reputation and have a material adverse effect on our business, financial condition, results of operations and cash flows.

If our business partners fail to perform their contractual obligations on a project, we could be exposed to legal liability, loss of reputation and profit reduction or loss on the project.

We routinely enter into subcontracts and, occasionally, joint ventures, teaming arrangements, and other contractual arrangements so that we can jointly bid and perform on a particular project. Success under these arrangements depends in large part on whether our business partners fulfill their contractual obligations satisfactorily. In addition, when we operate through a joint venture in which we are a minority holder, we have limited control over many project decisions, including decisions related to the joint venture’s internal controls, which may not be subject to the same internal control procedures that we employ. If these unaffiliated third parties do not fulfill their contract obligations, the partnerships or joint ventures may be unable to adequately perform and deliver their contracted services. Under these circumstances, we may be obligated to pay financial penalties, provide additional services to ensure the adequate performance and delivery of the contracted services, and may be jointly and severally liable for the other’s actions or contract performance. These additional obligations could result in reduced profits and revenues or, in some cases, significant losses for us with respect to the joint venture, which could also affect our reputation in the industries we serve.

If our contractors and subcontractors fail to satisfy their obligations to us or other parties, or if we are unable to maintain these relationships, our revenue, profitability, and growth prospects could be adversely affected.

We depend on contractors and subcontractors in conducting our business. There is a risk that we may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, client concerns about the subcontractor, or our failure to extend existing task orders or issue new task orders under a subcontract. In addition, if a subcontractor fails to deliver on a timely basis the agreed-upon supplies, fails to perform the agreed-upon services, or goes out of business, then we may be required to purchase the services or supplies from another source at a higher price, and our ability to fulfill our obligations as a prime contractor may be jeopardized. This may reduce the profit to be realized or result in a loss on a project for which the services or supplies are needed.

We also rely on relationships with other contractors when we act as their subcontractor or joint venture partner. The absence of qualified subcontractors with which we have a satisfactory relationship could adversely affect the quality of our service and our ability to perform under some of our contracts. Our future revenue and growth prospects could be adversely affected if other contractors eliminate or reduce their subcontracts or teaming arrangement relationships with us, or if a government agency terminates or reduces these other contractors’ programs, does not award them new contracts, or refuses to pay under a contract.

Our failure to meet contractual schedule or performance requirements that we have guaranteed could adversely affect our operating results.

In certain circumstances, we can incur liquidated or other damages if we do not achieve project completion by a scheduled date. If we or an entity for which we have provided a guarantee subsequently fails to complete the project as scheduled and the matter cannot be satisfactorily resolved with the client, we may be responsible for cost impacts to the client resulting from any delay or the cost to complete the project. Our costs generally increase from schedule delays and/or could exceed our projections for a particular project. In addition, project performance can be affected by a number of factors beyond our control, including unavoidable delays from governmental inaction, public opposition, inability to obtain financing, weather conditions, unavailability of vendor materials, changes in the project scope of services requested by our clients, industrial accidents, environmental hazards, labor disruptions and other factors. As a result, material performance problems for existing and future contracts could cause actual results of operations to differ from those anticipated by us and could cause us to suffer damage to our reputation within our industry and client base.

New legal requirements could adversely affect our operating results.

Our business and results of operations could be adversely affected by the passage of climate change, defense, environmental, infrastructure and other legislation, policies and regulations. Growing concerns about climate change may result in the imposition of additional environmental regulations. For example, legislation, international protocols, regulation or other restrictions on emissions could increase the costs of projects for our clients or, in some cases, prevent a project from going forward, thereby potentially reducing the need for our services. In addition, relaxation or repeal of laws and regulations, or changes in governmental policies regarding environmental, defense, infrastructure or other industries we serve could result in a decline in demand for our services, which could in turn negatively impact our revenues. We cannot predict when or whether any of these various proposals may be enacted or what their effect will be on us or on our customers.

Changes in resource management, environmental, or infrastructure industry laws, regulations, and programs could directly or indirectly reduce the demand for our services, which could in turn negatively impact our revenue.

Some of our services are directly or indirectly impacted by changes in U.S. federal, state, local or foreign laws and regulations pertaining to the resource management, environmental, and infrastructure industries. Accordingly, a relaxation or repeal of these laws and regulations, or changes in governmental policies regarding the funding, implementation or enforcement of these programs, could result in a decline in demand for our services, which could in turn negatively impact our revenue.

Changes in capital markets could adversely affect our access to capital and negatively impact our business.

Our results could be adversely affected by an inability to access the revolving credit facility under our credit agreement. Unfavorable financial or economic conditions could impact certain lenders' willingness or ability to fund our revolving credit facility. In addition, increases in interest rates or credit spreads, volatility in financial markets or the interest rate environment, significant political or economic events, defaults of significant issuers, and other market and economic factors, may negatively impact the general level of debt issuance, the debt issuance plans of certain categories of borrowers, the types of credit-sensitive products being offered, and/or a sustained period of market decline or weakness could have a material adverse effect on us.

Restrictive covenants in our credit agreement may restrict our ability to pursue certain business strategies.

Our credit agreement limits or restricts our ability to, among other things:


•	incur additional indebtedness;


•	create liens securing debt or other encumbrances on our assets;


•	make loans or advances;


•	pay dividends or make distributions to our stockholders;


•	purchase or redeem our stock;


•	repay indebtedness that is junior to indebtedness under our credit agreement;


•	acquire the assets of, or merge or consolidate with, other companies; and


•	sell, lease, or otherwise dispose of assets.

Our credit agreement also requires that we maintain certain financial ratios, which we may not be able to achieve. The covenants may impair our ability to finance future operations or capital needs or to engage in other favorable business activities.

Our industry is highly competitive, and we may be unable to compete effectively, which could result in reduced revenue, profitability and market share.

We are engaged in a highly competitive business. The markets we serve are highly fragmented and we compete with many regional, national and international companies. Certain of these competitors have greater financial and other resources than we do. Others are smaller and more specialized and concentrate their resources in particular areas of expertise. The extent of our competition varies according to certain markets and geographic area. In addition, the technical and professional aspects of some of our services generally do not require large upfront capital expenditures and provide limited barriers against new competitors. The degree and type of competition we face is also influenced by the type and scope of a particular project. Our clients make competitive determinations based upon qualifications, experience, performance, reputation, technology, customer relationships and ability to provide the relevant services in a timely, safe and cost-efficient manner. This competitive environment could force us to make price concessions or otherwise reduce prices for our services. If we are unable to maintain our competitiveness and win bids for future projects, our market share, revenue, and profits will decline.

Legal proceedings, investigations, and disputes could result in substantial monetary penalties and damages, especially if such penalties and damages exceed or are excluded from existing insurance coverage.

We engage in consulting, engineering, program management, construction management, construction, and technical services that can result in substantial injury or damages that may expose us to legal proceedings, investigations, and disputes. For example, in the ordinary course of our business, we may be involved in legal disputes regarding personal injury claims, employee or labor disputes, professional liability claims, and general commercial disputes involving project cost overruns and liquidated damages, as well as other claims. In addition, in the ordinary course of our business, we frequently make professional judgments and recommendations about environmental and engineering conditions of project sites for our clients, and we may be deemed to be responsible for these judgments and recommendations if they are later determined to be inaccurate. Any unfavorable legal ruling against us could result in substantial monetary damages or even criminal violations. We maintain insurance coverage as part of our overall legal and risk management strategy to minimize our potential liabilities; however, insurance coverage contains exclusions and other limitations that may not cover our potential liabilities. Generally, our insurance program covers workers’ compensation and employer’s liability, general liability, automobile liability, professional errors and omissions liability, property, and contractor’s pollution liability (in addition to other policies for specific projects). Our insurance program includes deductibles or self-insured retentions for each covered claim that may increase over time. In addition, our insurance policies contain exclusions that insurance providers may use to deny or restrict coverage. Excess liability and professional liability insurance policies provide for coverage on a “claims-made” basis, covering only claims actually made and reported during the policy period currently in effect. If we sustain liabilities that exceed or that are excluded from our insurance coverage, or for which we are not insured, it could have a material adverse impact on our financial condition, results of operations and cash flows.

Unavailability or cancellation of third-party insurance coverage would increase our overall risk exposure as well as disrupt the management of our business operations.

We maintain insurance coverage from third-party insurers as part of our overall risk management strategy and because some of our contracts require us to maintain specific insurance coverage limits. If any of our third-party insurers fail, suddenly cancel our coverage, or otherwise are unable to provide us with adequate insurance coverage, then our overall risk exposure and our operational expenses would increase, and the management of our business operations would be disrupted. In addition, there can be no assurance that any of our existing insurance coverage will be renewable upon the expiration of the coverage period or that future coverage will be affordable at the required limits.

Our inability to obtain adequate bonding could have a material adverse effect on our future revenue and business prospects.

Certain clients require bid bonds, and performance and payment bonds. These bonds indemnify the client should we fail to perform our obligations under a contract. If a bond is required for a certain project and we are unable to obtain an appropriate bond, we cannot pursue that project. In some instances, we are required to co-venture with a small or disadvantaged business to pursue certain U.S. federal or state government contracts. In connection with these ventures, we are sometimes required to utilize our bonding capacity to cover all of the payment and performance obligations under the contract with the client. We have a bonding facility but, as is typically the case, the issuance of bonds under that facility is at the surety’s sole discretion. Moreover, due to events that can negatively affect the insurance and bonding markets, bonding may be more difficult to obtain or may only be available at significant additional cost. There can be no assurance that bonds will continue to be available to us on reasonable terms. Our inability to obtain adequate bonding and, as a result, to bid on new work could have a material adverse effect on our future revenue and business prospects.

Employee, agent, or partner misconduct, or our failure to comply with anti-bribery and other laws or regulations, could harm our reputation, reduce our revenue and profits, and subject us to criminal and civil enforcement actions.

Misconduct, fraud, non-compliance with applicable laws and regulations, or other improper activities by one of our employees, agents, or partners could have a significant negative impact on our business and reputation. Such misconduct could include the failure to comply with government procurement regulations, regulations regarding the protection of classified information, regulations prohibiting bribery and other foreign corrupt practices, regulations regarding the pricing of labor and other costs in government contracts, regulations on lobbying or similar activities, regulations pertaining to the internal controls over financial reporting, environmental laws, and any other applicable laws or regulations. For example, as previously noted, the FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these regulations and laws, and we take precautions to prevent and detect misconduct. However, since our internal controls are subject to inherent limitations, including human error, it is possible that these controls could be intentionally circumvented or become inadequate because of changed conditions. As a result, we cannot assure that our controls will protect us from reckless or criminal acts committed by our employees or agents. Our failure to comply with applicable laws or regulations, or acts of misconduct could subject us to fines and penalties, loss of security clearances, and suspension or debarment from contracting, any or all of which could harm our reputation, reduce our revenue and profits, and subject us to criminal and civil enforcement actions.

Our business activities may require our employees to travel to and work in countries where there are high security risks, which may result in employee death or injury, repatriation costs or other unforeseen costs.

Certain of our contracts may require our employees travel to and work in high-risk countries that are undergoing political, social, and economic upheavals resulting from war, civil unrest, criminal activity, acts of terrorism, or public health crises. For example, we currently have employees working in high security risk countries such as Afghanistan and Iraq. As a result, we risk loss of or injury to our employees and may be subject to costs related to employee death or injury, repatriation, or other unforeseen circumstances. We may choose or be forced to leave a country with little or no warning due to physical security risks.

Our failure to implement and comply with our safety program could adversely affect our operating results or financial condition.

Our project sites often put our employees and others in close proximity with mechanized equipment, moving vehicles, chemical and manufacturing processes, and highly regulated materials. On some project sites, we may be responsible for safety, and, accordingly, we have an obligation to implement effective safety procedures. Our safety program is a fundamental element of our overall approach to risk management, and the implementation of the safety program is a significant issue in our dealings with our clients. We maintain an enterprise-wide group of health and safety professionals to help ensure that the services we provide are delivered safely and in accordance with standard work processes. Unsafe job sites and office environments have the potential to increase employee turnover, increase the cost of a project to our clients, expose us to types and levels of risk that are fundamentally unacceptable, and raise our operating costs. The implementation of our safety processes and procedures are monitored by various agencies, including the U.S. Mine Safety and Health Administration (“MSHA”), and rating bureaus, and may be evaluated by certain clients in cases in which safety requirements have been established in our contracts. Our failure to meet these requirements or our failure to properly implement and comply with our safety program could result in reduced profitability, the loss of projects or clients, or potential litigation, and could have a material adverse effect on our business, operating results, or financial condition.

We may be precluded from providing certain services due to conflict of interest issues.

Many of our clients are concerned about potential or actual conflicts of interest in retaining management consultants. U.S. federal government agencies have formal policies against continuing or awarding contracts that would create actual or potential conflicts of interest with other activities of a contractor. These policies, among other things, may prevent us from bidding for or performing government contracts resulting from or relating to certain work we have performed. In addition, services performed for a commercial or government client may create a conflict of interest that precludes or limits our ability to obtain work from other public or private organizations. We have, on occasion, declined to bid on projects due to conflict of interest issues.

If our reports and opinions are not in compliance with professional standards and other regulations, we could be subject to monetary damages and penalties.

We issue reports and opinions to clients based on our professional engineering expertise, as well as our other professional credentials. Our reports and opinions may need to comply with professional standards, licensing requirements, securities regulations, and other laws and rules governing the performance of professional services in the jurisdiction in which the services are performed. In addition, we could be liable to third parties who use or rely upon our reports or opinions even if we are not contractually bound to those third parties. For example, if we deliver an inaccurate report or one that is not in compliance with

the relevant standards, and that report is made available to a third party, we could be subject to third-party liability, resulting in monetary damages and penalties.

We may be subject to liabilities under environmental laws and regulations.

Our services are subject to numerous U.S. and international environmental protection laws and regulations that are complex and stringent. For example, we must comply with a number of U.S. federal government laws that strictly regulate the handling, removal, treatment, transportation, and disposal of toxic and hazardous substances. Under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (“CERCLA”), and comparable state laws, we may be required to investigate and remediate regulated hazardous materials. CERCLA and comparable state laws typically impose strict, joint and several liabilities without regard to whether a company knew of or caused the release of hazardous substances. The liability for the entire cost of clean-up could be imposed upon any responsible party. Other principal U.S. federal environmental, health, and safety laws affecting us include, but are not limited to, the Resource Conversation and Recovery Act, National Environmental Policy Act, the Clean Air Act, the Occupational Safety and Health Act, the Federal Mine Safety and Health Act of 1977 (the “Mine Act”), the Toxic Substances Control Act, and the Superfund Amendments and Reauthorization Act. Our business operations may also be subject to similar state and international laws relating to environmental protection. Further, past business practices at companies that we have acquired may also expose us to future unknown environmental liabilities. Liabilities related to environmental contamination or human exposure to hazardous substances, or a failure to comply with applicable regulations, could result in substantial costs to us, including clean-up costs, fines, civil or criminal sanctions, and third-party claims for property damage or personal injury or cessation of remediation activities. Our continuing work in the areas governed by these laws and regulations exposes us to the risk of substantial liability.

Force majeure events, including natural disasters and terrorist actions, could negatively impact the economies in which we operate or disrupt our operations, which may affect our financial condition, results of operations, or cash flows.

Force majeure or extraordinary events beyond the control of the contracting parties, such as natural and man-made disasters, as well as terrorist actions, could negatively impact the economies in which we operate by causing the closure of offices, interrupting projects, and forcing the relocation of employees. We typically remain obligated to perform our services after a terrorist action or natural disaster unless the contract contains a force majeure clause that relieves us of our contractual obligations in such an extraordinary event. If we are not able to react quickly to force majeure, our operations may be affected significantly, which would have a negative impact on our financial condition, results of operations, or cash flows.

We have only a limited ability to protect our intellectual property rights, and our failure to protect our intellectual property rights could adversely affect our competitive position.

We rely upon a combination of nondisclosure agreements and other contractual arrangements, as well as copyright, trademark, patent and trade secret laws to protect our proprietary information. We also enter into proprietary information and intellectual property agreements with employees, which require them to disclose any inventions created during employment, to convey such rights to inventions to us, and to restrict any disclosure of proprietary information. Trade secrets are generally difficult to protect. Although our employees are subject to confidentiality obligations, this protection may be inadequate to deter or prevent misappropriation of our confidential information and/or the infringement of our patents and copyrights. Further, we may be unable to detect unauthorized use of our intellectual property or otherwise take appropriate steps to enforce our rights. Failure to adequately protect, maintain, or enforce our intellectual property rights may adversely limit our competitive position.

Assertions by third parties of infringement, misappropriation or other violations by us of their intellectual property rights could result in significant costs and substantially harm our business, financial condition and operating results.

In recent years, there has been significant litigation involving intellectual property rights in technology industries. We may face from time to time, allegations that we or a supplier or customer have violated the rights of third parties, including patent, trademark, and other intellectual property rights. If, with respect to any claim against us for violation of third-party intellectual property rights, we are unable to prevail in the litigation or retain or obtain sufficient rights or develop non-infringing intellectual property or otherwise alter our business practices on a timely or cost-efficient basis, our business, financial condition or results of operations may be adversely affected.

Any infringement, misappropriation or related claims, whether or not meritorious, are time consuming, divert technical and management personnel, and are costly to resolve. As a result of any such dispute, we may have to develop non-infringing technology, pay damages, enter into royalty or licensing agreements, cease utilizing products or services, or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable to us.

Our stock price could become more volatile and stockholders’ investments could lose value.

In addition to the macroeconomic factors that have affected the prices of many securities generally, all of the factors discussed in this section could affect our stock price. Our common stock has previously experienced substantial price volatility. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies, and that have often been unrelated to the operating performance of these companies. The overall market and the price of our common stock may fluctuate greatly. The trading price of our common stock may be significantly affected by various factors, including quarter-to-quarter variations in our financial results, such as revenue, profits, days sales outstanding, backlog, and other measures of financial performance or financial condition (which factors may, themselves, be affected by the factors described below):


•	loss of key employees;


•	the number and significance of client contracts commenced and completed during a quarter;


•	creditworthiness and solvency of clients;


•	the ability of our clients to terminate contracts without penalties;


•	general economic or political conditions;


•	unanticipated changes in contract performance that may affect profitability, particularly with contracts that are fixed-price or have funding limits;


•	contract negotiations on change orders, requests for equitable adjustment, and collections of related billed and unbilled accounts receivable;


•	seasonality of the spending cycle of our public sector clients, notably the U.S. federal government, the spending patterns of our commercial sector clients, and weather conditions;


•	budget constraints experienced by our U.S. federal, and state and local government clients;


•	integration of acquired companies;


•	changes in contingent consideration related to acquisition earn-outs;


•	divestiture or discontinuance of operating units;


•	employee hiring, utilization and turnover rates;


•	delays incurred in connection with a contract;


•	the size, scope and payment terms of contracts;


•	the timing of expenses incurred for corporate initiatives;


•	reductions in the prices of services offered by our competitors;


•	threatened or pending litigation;


•	legislative and regulatory enforcement policy changes that may affect demand for our services;


•	the impairment of goodwill or identifiable intangible assets;


•	the fluctuation of a foreign currency exchange rate;


•	stock-based compensation expense;


•	actual events, circumstances, outcomes, and amounts differing from judgments, assumptions, and estimates used in determining the value of certain assets (including the amounts of related valuation allowances), liabilities, and other items reflected in our consolidated financial statements;


•	success in executing our strategy and operating plans;


•	changes in tax laws or regulations or accounting rules;


•	results of income tax examinations;


•	the timing of announcements in the public markets regarding new services or potential problems with the performance of services by us or our competitors, or any other material announcements;


•	speculation in the media and analyst community, changes in recommendations or earnings estimates by financial analysts, changes in investors’ or analysts’ valuation measures for our stock, and market trends unrelated to our stock;


•	our announcements concerning the payment of dividends or the repurchase of our shares;


•	resolution of threatened or pending litigation;


•	changes in investors’ and analysts’ perceptions of our business or any of our competitors’ businesses;


•	changes in environmental legislation;


•	broader market fluctuations; and


•	general economic or political conditions.

A significant drop in the price of our stock could expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert management’s attention and resources, which could adversely affect our business. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, many of whom are awarded equity securities, the value of which is dependent on the performance of our stock price.

Delaware law and our charter documents may impede or discourage a merger, takeover, or other business combination even if the business combination would have been in the short-term best interests of our stockholders.

We are a Delaware corporation and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our stockholders. In addition, our Board of Directors has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock, which could be used defensively if a takeover is threatened. Our incorporation under Delaware law, the ability of our Board of Directors to create and issue a new series of preferred stock, and provisions in our certificate of incorporation and bylaws, such as those relating to advance notice of certain stockholder proposals and nominations, could impede a merger, takeover, or other business combination involving us, or discourage a potential acquirer from making a tender offer for our common stock, even if the business combination would have been in the best interests of our current stockholders.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On November 5, 2018, the Board of Directors authorized a stock repurchase program under which we could repurchase up to $200 million of our common stock. This was in addition to the $25 million remaining as of fiscal 2018 year-end under the previous stock repurchase program. All repurchased shares were through open market purchases. The following table summarizes stock repurchase activity for fiscal 2019 and the first quarter of fiscal 2020:



Fiscal-Year Activity	Stock Repurchase Program	Shares Repurchased	Average Price Paid per Share		Total Cost (in thousands)
2019	2018 Program	430,559	$	58.06	$	25,000
2019	2019 Program	1,131,962	66.26		75,000
2019 Total		1,562,521	$	64.00	$	100,000

2020	2019 Program	244,438	$	86.64	$	21,177

A summary of the repurchase activity for the three months ended December 29, 2019 is as follows:



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value that May Yet be Purchased Under the Plans or Programs (in thousands)
September 30, 2019 – October 27, 2019	87,614	$	85.25	87,614	$	117,532
October 28, 2019 – November 24, 2019	88,030	87.80		88,030	109,803
November 25, 2019 – December 29, 2019	68,794	86.91		68,794	103,824

Item 4. Mine Safety Disclosure

Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires domestic mine operators to disclose violations and orders issued under the Mine Act by MSHA. We do not act as the owner of any mines, but we may act as a mining operator as defined under the Mine Act where we may be an independent contractor performing services or construction at such mine. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 Regulations S-K is included in Exhibit 95.

Item 6. Exhibits

The following documents are filed as Exhibits to this Report:




31.1	Chief Executive Officer Certification pursuant to Rule 13a-14(a)/15d-14(a).

31.2	Chief Financial Officer Certification pursuant to Rule 13a-14(a)/15d-14(a).

32.1	Certification of Chief Executive Officer pursuant to Section 1350.

32.2	Certification of Chief Financial Officer pursuant to Section 1350.

95	Mine Safety Disclosure.

101	The following financial information from our Company’s Quarterly Report on Form 10-Q, for the period ended December 29, 2019, formatted in Inline eXtensible Business Reporting Language: (i) Consolidated Balance Sheets (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Dated: January 31, 2020	TETRA TECH, INC.



	By:	/s/ Dan L. Batrack
		Dan L. Batrack
		Chairman, Chief Executive Officer and President
		(Principal Executive Officer)


	By:	/s/ Steven M. Burdick
		Steven M. Burdick
		Chief Financial Officer
		(Principal Financial Officer)


	By:	/s/ Brian N. Carter
		Brian N. Carter
		Senior Vice President, Corporate Controller
		(Principal Accounting Officer)