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Acquisitions | 6 Months Ended
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Mar. 31, 2024
Business Combination and Asset Acquisition [Abstract] |
Acquisitions | Acquisitions In the second quarter of fiscal 2024, we acquired LS Technologies ("LST"), an innovative U.S. federal enterprise technology services and management consulting firm based in Fairfax, Virginia. LST provides high-end consulting and engineering services including advanced data analytics, cybersecurity and digital transformation solutions to U.S. government clients. LST is included in our Government Services Group ("GSG") segment. The total fair value of the purchase price of LST was $102 million. This amount was comprised of $76 million in initial cash payments, $4 million of cash holdback related to a tax reserve, and $22 million for the estimated fair value of contingent earn-out obligations, with a maximum of $45 million, based upon the achievement of specified operating income targets in each of the three years following the acquisition date. The purchase price for LST of $102 million was allocated $10 million to net tangible assets, $21 million to identifiable intangible assets, and $71 million to goodwill. This allocation is preliminary and subject to adjustment as the estimates, assumptions, valuations and other analyses have not yet been finalized in order to make a definitive allocation. LST was not considered significant to our consolidated financial statements. As a result, no pro forma information has been provided. On September 23, 2022, we made an all cash offer to acquire all of the outstanding shares of RPS Group plc ("RPS"), a publicly traded company on the London Stock Exchange for 222 pence per share, through a scheme of arrangement, which was unanimously recommended by RPS' Board of Directors. On November 3, 2022, RPS' shareholders approved the scheme of arrangement. On January 19, 2023, the court-sanctioned scheme of arrangement to purchase RPS was approved, and we completed the acquisition on January 23, 2023. RPS employs approximately 5,000 associates in the United Kingdom, Europe, Asia Pacific and North America, delivering high-end solutions, especially in energy transformation, water and program management for government and commercial clients. Substantially all of RPS is included in our Commercial/International Services Group ("CIG") segment. The total purchase price for RPS was approximately £633 million ($784 million). In the second quarter and first half of fiscal 2023, we incurred $19.9 million and $23.7 million, respectively, related to acquisition and integration costs primarily for professional fees, substantially all of which were paid as of the end of the second quarter of fiscal 2023. On January 23, 2023, we also settled a foreign exchange forward contract that was integral to our plan to finance the RPS acquisition. The cash gain of $109.3 million did not qualify for hedge accounting. As a result, the gain was recognized as non-operating income over the life of the contract and not included in the purchase price allocation below. However, the cash proceeds of $109.3 million economically reduced the purchase price for the shares of RPS to approximately $675 million. This forward contract is explained further in Note 16, "Derivative Financial Instruments". The table below represents the purchase price allocation for RPS based on estimates, assumptions, valuations and other analyses as of January 23, 2023. The all cash purchase consideration, excluding the aforementioned forward contract gain, was allocated to the tangible and intangible assets, and liabilities of RPS based on their estimated fair values, with any excess purchase consideration allocated to goodwill as follows (in thousands):
| Amount
Cash and cash equivalents | $ | 32,093 |
Accounts receivable and contract assets | 202,303 |
Prepaid expenses and other current assets | 45,999 |
Income taxes receivables | 1,999 |
Property and equipment | 38,435 |
Right-of-use assets, operating leases | 40,179 |
Intangible assets | 174,094 |
Deferred income taxes | 35,084 |
Other long-term assets | 1,061 |
Total assets acquired | 571,247 |
Accounts payable | $ | (44,376) |
Accrued compensation | (19,073) |
Contract liabilities | (46,287) |
Income tax payable | (7,083) |
Short-term lease liabilities, operating leases | (13,477) |
Other current liabilities | (135,474) |
Current portion of long-term debt | (91,973) |
Long-term lease liabilities, operating leases | (26,702) |
Other long-term liabilities | (13,742) |
Deferred tax liabilities | (41,613) |
Total liabilities assumed | (439,800) |
Fair value of net assets acquired | 131,447 |
Goodwill | 652,762 |
Total purchase consideration | $ | 784,209 |
The following table summarizes the estimated fair values that were assigned to intangible assets at the acquisition date:
| Fair Value |  | Weighted-Average Estimated Useful Life
| (in thousands) |  | (in years)
Backlog | $ | 27,880 |  |  | 1.6
Trade names | 27,260 |  |  | 3.0
Client relations | 118,954 |  |  | 11.1
Total intangible assets acquired | $ | 174,094 |  |  | 8.3
Estimated fair value measurements for the intangible assets related to the RPS acquisition were made using Level 3 inputs including discounted cash flow techniques. Fair value was estimated using a multi-period excess earnings method for backlog and client relations and a relief from royalty method for trade names. The significant assumptions used in estimating fair value of backlog and client relations include (i) the estimated life the asset will contribute to cash flows, such as remaining contractual terms, (ii) revenue growth rates and EBITDA margins, (iii) attrition rate of customers, and (iv) the estimated discount rates that reflect the level of risk associated with receiving future cash flows. The significant assumptions used in estimating fair value of trade names include the royalty rates and discount rates. Supplemental Pro Forma Information (Unaudited) Following are the supplemental consolidated financial results of Tetra Tech and RPS for the second quarter and first half of fiscal 2023 on an unaudited pro forma basis, as if the RPS acquisition had been consummated at the beginning of fiscal 2022 (in thousands):
| Three Months Ended |  | Six Months Ended
| April 2, 2023 |  | April 2, 2023
Revenue | $ | 1,203,538 |  |  | $ | 2,310,839 |
Net Income including noncontrolling interests | 40,200 |  |  | 103,901 |
In fiscal 2023, we also acquired Amyx, Inc. (“Amyx”), an enterprise technology services, cybersecurity and management consulting firm based in Reston, Virginia. With over 500 employees, Amyx provides application modernization, cybersecurity, systems engineering, financial management and program management support on over 30 Federal Government programs. Amyx is included in our GSG segment. The total fair value of the purchase price of Amyx was $120.9 million, comprised of a $100.0 million payable in a promissory note issued to the sellers (paid subsequent to closing), $8.7 million of payables related to estimated post-closing adjustments, and $12.2 million for the estimated fair value of contingent earn-out obligations, with a maximum of $25.0 million, based upon the achievement of specified operating income targets in each of the three years following the acquisition date. Amyx was not considered significant to our consolidated financial statements. As a result, no pro forma information has been provided. The fiscal 2024 goodwill addition from LST is deductible for tax purposes, while the majority of the goodwill from the fiscal 2023 acquisitions is not deductible for tax purposes. The results of fiscal 2024 and 2023 acquisitions were included in our consolidated financial statements beginning on their respective closing dates. Our fiscal 2024 goodwill addition from the LST acquisition reflects the extensive technical knowledge of LST's workforce, the anticipated synergies in data analytics, cybersecurity and digital transformation services, and LST’s reputation in providing mission critical solutions to both commercial and government customers. The goodwill additions from fiscal 2023 business combinations are primarily attributable to the significant technical expertise residing in embedded workforces that are sought out by clients, synergies expected to arise after the acquisitions in the areas of enterprise technology services, data management, energy transformation, water, program management, and data analytics and the long-standing reputations of RPS and Amyx. These acquisitions further expand and complement our market-leading positions in water, renewable energy and sustainable infrastructure; enhanced by a combined suite of differentiated data analytics and digital technologies, and expansion into existing and new geographies. Intangible assets with finite lives arise from business acquisitions and are amortized based on the period over which the contractual or economic benefit of the intangible assets are expected to be realized on a straight-line basis over the useful lives of the underlying assets, ranging from one to twelve years. These consist of client relations, backlog and trade names. For detailed information regarding our intangible assets, see Note 5, “Goodwill and Intangible Assets”. Most of our acquisition agreements include contingent earn-out agreements, which are generally based on the achievement of future operating income thresholds. The contingent earn-out arrangements are based on our valuations of the acquired companies and reduce the risk of overpaying for acquisitions if the projected financial results are not achieved. The fair values of any earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in “Current contingent earn-out liabilities” and “Non-current contingent earn-out liabilities” on the consolidated balance sheets. We consider several factors when determining that contingent earn-out liabilities are part of the purchase price, including the following: (1) the valuation of our acquisitions is not supported solely by the initial consideration paid, and the contingent earn-out formula is a critical and material component of the valuation approach to determining the purchase price; and (2) the former owners of acquired companies that remain as key employees receive compensation other than contingent earn-out payments at a reasonable level compared with the compensation of our other key employees. The contingent earn-out payments are not affected by employment termination. We measure our contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. We use a probability-weighted discounted income approach as a valuation technique to convert future estimated cash flows to a single present value amount. The significant unobservable inputs used in the fair value measurements are operating income projections over the earn-out period (generally three to five years), and the probability outcome percentages we assign to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability, with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the contingent earn-out liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows. Any amount paid in excess of the contingent earn-out liability on the acquisition date is reflected as cash used in operating activities in our consolidated statements of cash flows. We review and reassess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in interest expense. A djustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income. In the first half of fiscal 2024, we evaluated our estimates for contingent consideration liabilities for the remaining earn-out periods for each individual acquisition, which included a review of their financial results to-date, the status of ongoing projects in their RUPO, and the inventory of prospective new contract awards. During the second quarter and first half of fiscal 2024, we recorded immaterial adjustments, individually and in aggregate, to our contingent earn-out liabilities and included the corresponding amount in our operating income. During the first half of fiscal 2023, we recorded adjustments to our contingent earn-out liabilities and reported a related net loss in operating income of $8.5 million (largely in the second quarter). The net loss primarily resulted from increased valuation of the contingent consideration liabilities for our prior acquisitions of Segue Technologies, Inc., Hoare Lea, LLP and The Integration Group of Americas, Inc., reflecting financial performance that exceeded our previous expectations. The following table summarizes the changes in the fair value of estimated contingent consideration for the second quarters and first halves of fiscal 2024 and 2023 (in thousands):
| Three Months Ended |  | Six Months Ended
| March 31, 2024 |  | April 2, 2023 |  | March 31, 2024 |  | April 2, 2023
Beginning balance | $ | 55,604 |  |  | $ | 69,029 |  |  | $ | 73,422 |  |  | $ | 65,566 |
Estimated earn-out liabilities for acquisitions | 21,900 |  |  | 12,248 |  |  | 21,900 |  |  | 12,248 |
Payments of contingent consideration | (3,250) |  |  | (2,000) |  |  | (22,112) |  |  | (2,000) |
Adjustments to fair value recorded in earnings | 14 |  |  | 7,544 |  |  | (22) |  |  | 8,477 |
Interest accretion expense | 444 |  |  | 697 |  |  | 915 |  |  | 1,212 |
Effect of foreign currency exchange rate changes | (133) |  |  | 564 |  |  | 476 |  |  | 2,579 |
Ending balance | $ | 74,579 |  |  | $ | 88,082 |  |  | $ | 74,579 |  |  | $ | 88,082 |
Maximum potential payout at end of period | $ | 129,253 |  |  | $ | 143,882 |  |  | $ | 129,253 |  |  | $ | 143,882 |

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 805 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//805/tableOfContent Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 205 -SubTopic 20 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//205-20/tableOfContent + Details
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