EXPONENT INC - Quarter Report: 2020 July (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 3, 2020
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to___________
Commission File Number 0-18655
EXPONENT, INC.
(Exact name of registrant as specified in its charter)
delaware |
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77-0218904 |
(State or other jurisdiction of |
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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149 COMMONWEALTH DRIVE, MENLO PARK, California |
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94025 |
(Address of principal executive office) |
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(Zip Code) |
(650) 326-9400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes |
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☒ |
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No |
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes |
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☒ |
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No |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
☒ |
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Accelerated filer |
☐ |
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Non-accelerated filer |
☐ |
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Smaller reporting company |
☐ |
Emerging growth company |
☐ |
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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. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes |
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No |
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☒ |
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol |
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Name of each exchange on which registered |
Common Stock, par value $0.001 per share |
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EXPO |
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Nasdaq Global Select Market |
As of July 31, 2020, the latest practicable date, the registrant had 51,622,394 shares of common stock outstanding.
EXPONENT, INC.
FORM 10-Q
TABLE OF CONTENTS
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Item 1. |
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3 |
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Condensed Consolidated Balance Sheets as of July 3, 2020 and January 3, 2020 |
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3 |
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4 |
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5 |
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6 |
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8 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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9 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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21 |
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Item 3. |
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30 |
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Item 4. |
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31 |
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32 |
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Item 1. |
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32 |
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Item 1A. |
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32 |
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Item 2. |
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38 |
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Item 3. |
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38 |
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Item 4. |
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39 |
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Item 5. |
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39 |
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Item 6. |
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40 |
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41 |
- 2 -
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
EXPONENT, INC.
Condensed Consolidated Balance Sheets
July 3, 2020 and January 3, 2020
(in thousands, except par value)
(unaudited)
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July 3, 2020 |
|
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January 3, 2020 |
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Assets |
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|
|
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|
|
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Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
155,932 |
|
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$ |
176,436 |
|
Short-term investments |
|
|
34,220 |
|
|
|
55,165 |
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Accounts receivable, net of allowance for contract losses and doubtful accounts of $6,155 and $4,295 at July 3, 2020 and January 3, 2020, respectively |
|
|
109,341 |
|
|
|
120,138 |
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Prepaid expenses and other current assets |
|
|
14,777 |
|
|
|
12,305 |
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Total current assets |
|
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314,270 |
|
|
|
364,044 |
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Property, equipment and leasehold improvements, net |
|
|
60,301 |
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61,587 |
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Operating lease right-of-use assets |
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|
20,124 |
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|
|
23,003 |
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Goodwill |
|
|
8,607 |
|
|
|
8,607 |
|
Deferred income taxes |
|
|
37,233 |
|
|
|
36,821 |
|
Deferred compensation plan assets |
|
|
71,895 |
|
|
|
68,400 |
|
Other assets |
|
|
757 |
|
|
|
949 |
|
Total assets |
|
$ |
513,187 |
|
|
$ |
563,411 |
|
Liabilities and Stockholders’ Equity |
|
|
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Current liabilities: |
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|
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Accounts payable and accrued liabilities |
|
$ |
16,218 |
|
|
$ |
18,583 |
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Accrued payroll and employee benefits |
|
|
59,295 |
|
|
|
86,723 |
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Deferred revenues |
|
|
8,910 |
|
|
|
12,710 |
|
Operating lease liabilities |
|
|
5,360 |
|
|
|
5,944 |
|
Total current liabilities |
|
|
89,783 |
|
|
|
123,960 |
|
Other liabilities |
|
|
2,939 |
|
|
|
2,669 |
|
Deferred compensation plan liabilities |
|
|
72,564 |
|
|
|
68,373 |
|
Operating lease liabilities |
|
|
15,334 |
|
|
|
18,158 |
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Total liabilities |
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180,620 |
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213,160 |
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Stockholders’ equity: |
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Common stock, $0.001 par value; 120,000 shares authorized; 65,707 at July 3, 2020 and January 3, 2020 |
|
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66 |
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66 |
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Additional paid-in capital |
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259,617 |
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244,935 |
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Accumulated other comprehensive income (loss) |
|
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Investment securities, available-for-sale |
|
|
259 |
|
|
|
302 |
|
Foreign currency translation adjustments |
|
|
(3,664 |
) |
|
|
(2,062 |
) |
|
|
|
(3,405 |
) |
|
|
(1,760 |
) |
Retained earnings |
|
|
401,956 |
|
|
|
384,668 |
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Treasury stock, at cost; 14,084 and 13,951 shares held at July 3, 2020 and January 3, 2020, respectively |
|
|
(325,667 |
) |
|
|
(277,658 |
) |
Total stockholders’ equity |
|
|
332,567 |
|
|
|
350,251 |
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Total liabilities and stockholders’ equity |
|
$ |
513,187 |
|
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$ |
563,411 |
|
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
- 3 -
EXPONENT, INC.
Condensed Consolidated Statements of Income
For the Three and Six Months Ended July 3, 2020 and June 28, 2019
(in thousands, except per share data)
(unaudited)
|
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Three Months Ended |
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Six Months Ended |
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July 3, 2020 |
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June 28, 2019 |
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July 3, 2020 |
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June 28, 2019 |
|
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Revenues: |
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|
|
|
|
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Revenues before reimbursements |
|
$ |
87,863 |
|
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$ |
100,263 |
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$ |
187,583 |
|
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$ |
193,664 |
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Reimbursements |
|
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4,182 |
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|
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6,243 |
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10,415 |
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11,873 |
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Revenues |
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92,045 |
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106,506 |
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197,998 |
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205,537 |
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Operating expenses: |
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Compensation and related expenses |
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68,137 |
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61,997 |
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118,122 |
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127,090 |
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Other operating expenses |
|
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7,681 |
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8,095 |
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15,897 |
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|
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16,103 |
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Reimbursable expenses |
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4,182 |
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6,243 |
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10,415 |
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11,873 |
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General and administrative expenses |
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2,925 |
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5,348 |
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8,456 |
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9,894 |
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Total operating expenses |
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82,925 |
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81,683 |
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152,890 |
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164,960 |
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Operating income |
|
|
9,120 |
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|
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24,823 |
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45,108 |
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|
40,577 |
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Other income, net: |
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Interest income, net |
|
|
305 |
|
|
|
924 |
|
|
|
1,180 |
|
|
|
1,979 |
|
Miscellaneous income, net |
|
|
11,989 |
|
|
|
3,104 |
|
|
|
(819 |
) |
|
|
9,617 |
|
Total other income, net |
|
|
12,294 |
|
|
|
4,028 |
|
|
|
361 |
|
|
|
11,596 |
|
Income before income taxes |
|
|
21,414 |
|
|
|
28,851 |
|
|
|
45,469 |
|
|
|
52,173 |
|
Income taxes |
|
|
5,068 |
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|
|
7,857 |
|
|
|
2,841 |
|
|
|
8,467 |
|
Net income |
|
$ |
16,346 |
|
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$ |
20,994 |
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$ |
42,628 |
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$ |
43,706 |
|
Net income per share: |
|
|
|
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|
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Basic |
|
$ |
0.31 |
|
|
$ |
0.40 |
|
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$ |
0.81 |
|
|
$ |
0.83 |
|
Diluted |
|
$ |
0.31 |
|
|
$ |
0.39 |
|
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$ |
0.80 |
|
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$ |
0.81 |
|
Shares used in per share computations: |
|
|
|
|
|
|
|
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|
|
|
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|
|
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Basic |
|
|
52,259 |
|
|
|
52,745 |
|
|
|
52,417 |
|
|
|
52,641 |
|
Diluted |
|
|
53,139 |
|
|
|
53,872 |
|
|
|
53,404 |
|
|
|
53,849 |
|
Cash dividends declared per common share |
|
$ |
0.19 |
|
|
$ |
0.16 |
|
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$ |
0.38 |
|
|
$ |
0.32 |
|
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements
- 4 -
EXPONENT, INC.
Condensed Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended July 3, 2020 and June 28, 2019
(in thousands)
(unaudited)
|
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Three Months Ended |
|
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Six Months Ended |
|
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July 3, 2020 |
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June 28, 2019 |
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|
July 3, 2020 |
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June 28, 2019 |
|
||||
Net income |
|
$ |
16,346 |
|
|
$ |
20,994 |
|
|
$ |
42,628 |
|
|
$ |
43,706 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax |
|
|
71 |
|
|
|
(241 |
) |
|
|
(1,602 |
) |
|
|
(124 |
) |
Unrealized gains (losses) on available- for-sale investment securities arising during the period, net of tax |
|
|
(211 |
) |
|
|
249 |
|
|
|
(43 |
) |
|
|
403 |
|
Comprehensive income |
|
$ |
16,206 |
|
|
$ |
21,002 |
|
|
$ |
40,983 |
|
|
$ |
43,985 |
|
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements
- 5 -
EXPONENT, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(unaudited)
|
|
Three and Six Months Ended July 3, 2020 |
|
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Common Stock |
|
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Additional paid-in |
|
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Accumulated other comprehensive |
|
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Retained |
|
|
Treasury Stock |
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|||||||||||||
(In thousands) |
|
Shares |
|
|
Amount |
|
|
capital |
|
|
income (loss) |
|
|
earnings |
|
|
Shares |
|
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Amount |
|
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Total |
|
||||||||
Balance at January 3, 2020 |
|
|
65,707 |
|
|
$ |
66 |
|
|
$ |
244,935 |
|
|
$ |
(1,760 |
) |
|
$ |
384,668 |
|
|
|
13,951 |
|
|
$ |
(277,658 |
) |
|
$ |
350,251 |
|
Employee stock purchase plan |
|
|
- |
|
|
|
- |
|
|
|
400 |
|
|
|
- |
|
|
|
- |
|
|
|
(7 |
) |
|
|
73 |
|
|
|
473 |
|
Exercise of stock options |
|
|
- |
|
|
|
- |
|
|
|
64 |
|
|
|
- |
|
|
|
- |
|
|
|
(60 |
) |
|
|
608 |
|
|
|
672 |
|
Amortization of unrecognized stock-based compensation |
|
|
- |
|
|
|
- |
|
|
|
4,095 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,095 |
|
Purchase of treasury stock |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
636 |
|
|
|
(40,049 |
) |
|
|
(40,049 |
) |
Foreign currency translation adjustments |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,673 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,673 |
) |
Grant of restricted stock units to settle accrued bonus |
|
|
- |
|
|
|
- |
|
|
|
8,645 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,645 |
|
Settlement of restricted stock units |
|
|
- |
|
|
|
- |
|
|
|
(1,261 |
) |
|
|
- |
|
|
|
(4,538 |
) |
|
|
(359 |
) |
|
|
(9,313 |
) |
|
|
(15,112 |
) |
Unrealized gain on investments |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
168 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
168 |
|
Dividends and dividend equivalent rights |
|
|
- |
|
|
|
- |
|
|
|
511 |
|
|
|
- |
|
|
|
(10,766 |
) |
|
|
- |
|
|
|
- |
|
|
|
(10,255 |
) |
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,282 |
|
|
|
- |
|
|
|
- |
|
|
|
26,282 |
|
Balance at April 3, 2020 |
|
|
65,707 |
|
|
$ |
66 |
|
|
$ |
257,389 |
|
|
$ |
(3,265 |
) |
|
$ |
395,646 |
|
|
|
14,161 |
|
|
$ |
(326,339 |
) |
|
$ |
323,497 |
|
Employee stock purchase plan |
|
|
- |
|
|
|
- |
|
|
|
374 |
|
|
|
- |
|
|
|
- |
|
|
|
(6 |
) |
|
|
58 |
|
|
|
432 |
|
Exercise of stock options |
|
|
- |
|
|
|
- |
|
|
|
390 |
|
|
|
- |
|
|
|
- |
|
|
|
(54 |
) |
|
|
566 |
|
|
|
956 |
|
Amortization of unrecognized stock-based compensation |
|
|
- |
|
|
|
- |
|
|
|
1,663 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,663 |
|
Foreign currency translation adjustments |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
71 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
71 |
|
Settlement of restricted stock units |
|
|
- |
|
|
|
- |
|
|
|
(199 |
) |
|
|
- |
|
|
|
- |
|
|
|
(17 |
) |
|
|
48 |
|
|
|
(151 |
) |
Unrealized loss on investments |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(211 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(211 |
) |
Dividends and dividend equivalent rights |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(10,036 |
) |
|
|
- |
|
|
|
- |
|
|
|
(10,036 |
) |
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16,346 |
|
|
|
- |
|
|
|
- |
|
|
|
16,346 |
|
Balance at July 3, 2020 |
|
|
65,707 |
|
|
$ |
66 |
|
|
$ |
259,617 |
|
|
$ |
(3,405 |
) |
|
$ |
401,956 |
|
|
|
14,084 |
|
|
$ |
(325,667 |
) |
|
$ |
332,567 |
|
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. |
|
- 6 -
EXPONENT, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(unaudited)
|
|
Three and Six Months Ended June 28, 2019 |
|
|||||||||||||||||||||||||||||
|
|
Common Stock |
|
|
Additional paid-in |
|
|
Accumulated other comprehensive |
|
|
Retained |
|
|
Treasury Stock |
|
|
|
|
|
|||||||||||||
(In thousands) |
|
Shares |
|
|
Amount |
|
|
capital |
|
|
income (loss) |
|
|
earnings |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
||||||||
Balance at December 28, 2018 |
|
|
65,707 |
|
|
$ |
66 |
|
|
$ |
227,283 |
|
|
$ |
(2,853 |
) |
|
$ |
342,024 |
|
|
|
14,208 |
|
|
$ |
(252,611 |
) |
|
$ |
313,909 |
|
Employee stock purchase plan |
|
|
- |
|
|
|
- |
|
|
|
302 |
|
|
|
- |
|
|
|
- |
|
|
|
(7 |
) |
|
|
70 |
|
|
|
372 |
|
Amortization of unrecognized stock-based compensation |
|
|
- |
|
|
|
- |
|
|
|
3,663 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,663 |
|
Foreign currency translation adjustments |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
117 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
117 |
|
Grant of restricted stock units to settle accrued bonus |
|
|
- |
|
|
|
- |
|
|
|
7,947 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,947 |
|
Settlement of restricted stock units |
|
|
- |
|
|
|
- |
|
|
|
(860 |
) |
|
|
- |
|
|
|
(5,146 |
) |
|
|
(395 |
) |
|
|
(5,188 |
) |
|
|
(11,194 |
) |
Unrealized gain on investments |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
154 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
154 |
|
Dividends and dividend equivalent rights |
|
|
- |
|
|
|
- |
|
|
|
581 |
|
|
|
- |
|
|
|
(9,084 |
) |
|
|
- |
|
|
|
- |
|
|
|
(8,503 |
) |
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22,712 |
|
|
|
- |
|
|
|
- |
|
|
|
22,712 |
|
Balance at March 29, 2019 |
|
|
65,707 |
|
|
$ |
66 |
|
|
$ |
238,916 |
|
|
$ |
(2,582 |
) |
|
$ |
350,506 |
|
|
|
13,806 |
|
|
$ |
(257,729 |
) |
|
$ |
329,177 |
|
Employee stock purchase plan |
|
|
- |
|
|
|
- |
|
|
|
385 |
|
|
|
- |
|
|
|
- |
|
|
|
(8 |
) |
|
|
88 |
|
|
|
473 |
|
Amortization of unrecognized stock-based compensation |
|
|
- |
|
|
|
- |
|
|
|
1,685 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,685 |
|
Foreign currency translation adjustments |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(241 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(241 |
) |
Settlement of restricted stock units |
|
|
- |
|
|
|
- |
|
|
|
(101 |
) |
|
|
- |
|
|
|
- |
|
|
|
(10 |
) |
|
|
112 |
|
|
|
11 |
|
Unrealized gain on investments |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
249 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
249 |
|
Dividends and dividend equivalent rights |
|
|
- |
|
|
|
- |
|
|
|
45 |
|
|
|
- |
|
|
|
(8,541 |
) |
|
|
- |
|
|
|
- |
|
|
|
(8,496 |
) |
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
20,994 |
|
|
|
- |
|
|
|
- |
|
|
|
20,994 |
|
Balance at June 28, 2019 |
|
|
65,707 |
|
|
$ |
66 |
|
|
$ |
240,930 |
|
|
$ |
(2,574 |
) |
|
$ |
362,959 |
|
|
|
13,788 |
|
|
$ |
(257,529 |
) |
|
$ |
343,852 |
|
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
- 7 -
EXPONENT, INC.
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended July 3, 2020 and June 28, 2019
(in thousands)
(unaudited)
|
|
Six Months Ended |
|
|||||
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
42,628 |
|
|
$ |
43,706 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization of property, equipment and leasehold improvements |
|
|
3,487 |
|
|
|
3,232 |
|
Amortization of premiums and accretion of discounts on short-term investments |
|
|
(112 |
) |
|
|
(298 |
) |
Provision for contract losses and doubtful accounts |
|
|
2,817 |
|
|
|
1,786 |
|
Stock-based compensation |
|
|
9,600 |
|
|
|
9,741 |
|
Deferred income tax provision |
|
|
(398 |
) |
|
|
(141 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
7,980 |
|
|
|
(25,707 |
) |
Prepaid expenses and other current assets |
|
|
(10,666 |
) |
|
|
(1,760 |
) |
Change in operating leases |
|
|
(529 |
) |
|
|
(209 |
) |
Accounts payable and accrued liabilities |
|
|
(1,992 |
) |
|
|
6,846 |
|
Accrued payroll and employee benefits |
|
|
(14,816 |
) |
|
|
(11,761 |
) |
Deferred revenues |
|
|
(3,800 |
) |
|
|
(616 |
) |
Net cash provided by operating activities |
|
|
34,199 |
|
|
|
24,819 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(2,467 |
) |
|
|
(12,494 |
) |
Purchase of short-term investments |
|
|
- |
|
|
|
(38,693 |
) |
Maturity of short-term investments |
|
|
21,000 |
|
|
|
31,000 |
|
Net cash provided by/(used in) investing activities |
|
|
18,533 |
|
|
|
(20,187 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Payroll taxes for restricted stock units |
|
|
(15,263 |
) |
|
|
(11,183 |
) |
Repurchase of common stock |
|
|
(40,049 |
) |
|
|
- |
|
Exercise of stock-based payment awards |
|
|
2,534 |
|
|
|
845 |
|
Dividends and dividend equivalents rights |
|
|
(20,128 |
) |
|
|
(16,899 |
) |
Net cash used in financing activities |
|
|
(72,906 |
) |
|
|
(27,237 |
) |
Effect of foreign currency exchange rates on cash and cash equivalents |
|
|
(330 |
) |
|
|
(2 |
) |
Net decrease in cash and cash equivalents |
|
|
(20,504 |
) |
|
|
(22,607 |
) |
Cash and cash equivalents at beginning of period |
|
|
176,436 |
|
|
|
127,059 |
|
Cash and cash equivalents at end of period |
|
$ |
155,932 |
|
|
$ |
104,452 |
|
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
- 8 -
EXPONENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
Exponent, Inc. (referred to as the “Company” or “Exponent”) is an engineering and scientific consulting firm that provides solutions to complex problems. The Company operates on a 52-53 week fiscal year ending on the Friday closest to the last day of December.
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission. Accordingly, they do not contain all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments which are necessary for the fair presentation of the condensed consolidated financial statements have been included and all such adjustments are of a normal and recurring nature. The operating results for the three and six months ended July 3, 2020 are not necessarily representative of the results of future quarterly or annual periods. The following information should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2020, which was filed with the U.S. Securities and Exchange Commission on February 28, 2020.
The unaudited condensed consolidated financial statements include the accounts of Exponent, Inc. and its subsidiaries, which are all wholly owned. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Items subject to such estimates and assumptions include accounting for revenue recognition and estimating the allowance for contract losses and doubtful accounts. Actual results could differ from those estimates. The Company’s estimate of its allowance for contract losses and doubtful accounts takes into consideration the macroeconomic effect of global events such as the COVID-19 pandemic which may impact the ability of its customers to pay.
Recently Adopted Accounting Pronouncements. In June 2016, the Financial Accounting Standards Board (“FASB”) established Topic 326, Measurement of Credit Losses on Financial Instruments, by issuing Accounting Standard Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of the expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost where there is a contractual right to received cash, including, accounts receivables, loan receivables and held-to-maturity debt securities. The Company adopted ASU No. 2016-13 in the first quarter of 2020 and the impact of the adoption was not material the Company’s condensed consolidated financial statements.
Note 2: Revenue Recognition
Substantially all of the Company’s engagements are performed under time and materials or fixed-price arrangements. For time and materials contracts, the Company utilizes the practical expedient under Accounting Standards Codification 606 – Revenue from Contracts with Customers, which states, that if an entity has a right to consideration from a customer in an amount that corresponds directly with the value of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided), then the entity may recognize revenue in the amount to which the entity has a right to invoice.
The following table discloses the percent of the Company’s revenue generated from time and materials contracts:
- 9 -
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||||
Engineering & other scientific |
|
|
60 |
% |
|
|
67 |
% |
|
|
63 |
% |
|
|
67 |
% |
Environmental and health |
|
|
21 |
% |
|
|
18 |
% |
|
|
20 |
% |
|
|
18 |
% |
Total time and materials revenues |
|
|
81 |
% |
|
|
85 |
% |
|
|
83 |
% |
|
|
85 |
% |
For fixed-price contracts the Company recognizes revenue over time because of the continuous transfer of control to the customer. The customer typically controls the work in process as evidenced either by contractual termination clauses or by the Company’s rights to payment for work performed to date to deliver services that do not have an alternative use to the Company. Revenue for fixed-price contracts is recognized based on the relationship of incurred labor hours at standard rates to the Company’s estimate of the total labor hours at standard rates it expects to incur over the term of the contract. The Company believes this methodology achieves a reliable measure of the revenue from the consulting services it provides to its customers under fixed-price contracts given the nature of the consulting services the Company provides.
The following table discloses the percent of the Company’s revenue generated from fixed price contracts:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||||
Engineering & other scientific |
|
|
18 |
% |
|
|
14 |
% |
|
|
16 |
% |
|
|
14 |
% |
Environmental and health |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
Total fixed price revenues |
|
|
19 |
% |
|
|
15 |
% |
|
|
17 |
% |
|
|
15 |
% |
Deferred revenues represent amounts billed to clients in advance of services provided. During the second quarter of 2020, $3,466,000 of revenues were recognized that were included in the deferred revenue balance at April 3, 2020. During the first six months of 2020, $6,281,000 of revenues were recognized that were included in the deferred revenue balance at January 3, 2020.
Reimbursements, including those related to travel and other out-of-pocket expenses, and other similar third- party costs such as the cost of materials and certain subcontracts, are included in revenues, and an equivalent amount of reimbursable expenses are included in operating expenses. Any mark-up on reimbursable expenses is included in revenues before reimbursements. The Company reports revenues net of subcontractor fees for certain subcontracts where the Company has determined that it is acting as an agent because its performance obligation is to arrange for the provision of goods or services by another party. The total amount of subcontractor fees not included in revenues because the Company was acting as an agent were $3,590,000 and $6,157,000 during the second quarter of 2020 and 2019, respectively and $7,371,000 and $10,399,000 during the first six months of 2020 and 2019, respectively.
- 10 -
Note 3: Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale fixed income securities, trading fixed income and equity securities held in its deferred compensation plan and the liability associated with its deferred compensation plan. There were no transfers between fair value measurement levels during the three and six months ended July 3, 2020 and June 28, 2019. Any transfers between fair value measurement levels would be recorded on the actual date of the event or change in circumstances that caused the transfer. The fair value of these certain financial assets and liabilities was determined using the following inputs at July 3, 2020:
|
|
Fair Value Measurements at Reporting Date Using |
|
|||||||||||||
(In thousands) |
|
Total |
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market securities (1) |
|
$ |
63,024 |
|
|
$ |
63,024 |
|
|
$ |
- |
|
|
$ |
- |
|
Fixed income available-for-sale securities (2) |
|
|
34,220 |
|
|
|
- |
|
|
|
34,220 |
|
|
|
- |
|
Fixed income trading securities held in deferred compensation plan (3) |
|
|
26,524 |
|
|
|
26,524 |
|
|
|
- |
|
|
|
- |
|
Equity trading securities held in deferred compensation plan (3) |
|
|
48,614 |
|
|
|
48,614 |
|
|
|
- |
|
|
|
- |
|
Total |
|
$ |
172,382 |
|
|
$ |
138,162 |
|
|
$ |
34,220 |
|
|
$ |
- |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan (4) |
|
|
75,807 |
|
|
|
75,807 |
|
|
|
- |
|
|
|
- |
|
Total |
|
$ |
75,807 |
|
|
$ |
75,807 |
|
|
$ |
- |
|
|
$ |
- |
|
(1) |
Included in cash and cash equivalents on the Company’s unaudited condensed consolidated balance sheet. |
(2) |
Included in short-term investments on the Company’s unaudited condensed consolidated balance sheet. |
(3) |
Included in prepaid expenses and other current assets and deferred compensation plan assets on the Company’s unaudited condensed consolidated balance sheet. |
(4) |
Included in accrued payroll and employee benefits and deferred compensation plan liabilities on the Company’s unaudited condensed consolidated balance sheet. |
- 11 -
The fair value of these certain financial assets and liabilities was determined using the following inputs at January 3, 2020:
|
|
Fair Value Measurements at Reporting Date Using |
|
|||||||||||||
(In thousands) |
|
Total |
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market securities (1) |
|
$ |
41,211 |
|
|
$ |
41,211 |
|
|
$ |
- |
|
|
$ |
- |
|
Fixed income available for sale securities (2) |
|
|
55,165 |
|
|
|
- |
|
|
|
55,165 |
|
|
|
- |
|
Fixed income trading securities held in deferred compensation plan (3) |
|
|
22,010 |
|
|
|
22,010 |
|
|
|
- |
|
|
|
- |
|
Equity trading securities held in deferred compensation plan (3) |
|
|
53,924 |
|
|
|
53,924 |
|
|
|
- |
|
|
|
- |
|
Total |
|
$ |
172,310 |
|
|
$ |
117,145 |
|
|
$ |
55,165 |
|
|
$ |
- |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan (4) |
|
|
76,357 |
|
|
|
76,357 |
|
|
|
- |
|
|
|
- |
|
Total |
|
$ |
76,357 |
|
|
$ |
76,357 |
|
|
$ |
- |
|
|
$ |
- |
|
(1) |
Included in cash and cash equivalents on the Company’s unaudited condensed consolidated balance sheet. |
(2) |
Included in short-term investments on the Company’s unaudited condensed consolidated balance sheet. |
(3) |
Included in prepaid expenses and other current assets and deferred compensation plan assets on the Company’s unaudited condensed consolidated balance sheet. |
(4) |
Included in accrued payroll and employee benefits and deferred compensation plan liabilities on the Company’s unaudited condensed consolidated balance sheet. |
Fixed income available-for-sale securities as of July 3, 2020 and January 3, 2020 represent obligations of the United States Treasury. Fixed income and equity trading securities represent mutual funds held in the Company’s deferred compensation plan. See Note 7 for additional information about the Company’s deferred compensation plan.
Cash, cash equivalents and short-term investments consisted of the following as of July 3, 2020:
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
||
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
||||
(In thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||
Classified as current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
92,908 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
92,908 |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market securities |
|
|
63,024 |
|
|
|
- |
|
|
|
- |
|
|
|
63,024 |
|
Total cash equivalents |
|
|
63,024 |
|
|
|
- |
|
|
|
- |
|
|
|
63,024 |
|
Total cash and cash equivalents |
|
|
155,932 |
|
|
|
- |
|
|
|
- |
|
|
|
155,932 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
33,954 |
|
|
|
266 |
|
|
|
- |
|
|
|
34,220 |
|
Total short-term investments |
|
|
33,954 |
|
|
|
266 |
|
|
|
- |
|
|
|
34,220 |
|
Total cash, cash equivalents and short-term investments |
|
$ |
189,886 |
|
|
$ |
266 |
|
|
$ |
- |
|
|
$ |
190,152 |
|
- 12 -
Cash, cash equivalents and short-term investments consisted of the following as of January 3, 2020:
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
||||
(In thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||
Classified as current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
135,225 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
135,225 |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market securities |
|
|
41,211 |
|
|
|
- |
|
|
|
- |
|
|
|
41,211 |
|
Total cash equivalents |
|
|
41,211 |
|
|
|
- |
|
|
|
- |
|
|
|
41,211 |
|
Total cash and cash equivalents |
|
|
176,436 |
|
|
|
- |
|
|
|
- |
|
|
|
176,436 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities |
|
|
54,841 |
|
|
|
324 |
|
|
|
- |
|
|
|
55,165 |
|
Total short-term investments |
|
|
54,841 |
|
|
|
324 |
|
|
|
- |
|
|
|
55,165 |
|
Total cash, cash equivalents and short-term investments |
|
$ |
231,277 |
|
|
$ |
324 |
|
|
$ |
- |
|
|
$ |
231,601 |
|
At July 3, 2020 the stated effective maturities of all short-term fixed income securities classified as short-term investments were due within one year.
At July 3, 2020 and January 3, 2020, the Company did not have any assets or liabilities valued using significant unobservable inputs.
The following financial instruments are not measured at fair value on the Company's unaudited condensed consolidated balance sheet at July 3, 2020 and January 3, 2020 but require disclosure of their fair values: accounts receivable, other assets and accounts payable. The estimated fair value of such instruments at July 3, 2020 and January 3, 2020 approximates their carrying value as reported on the Company’s unaudited condensed consolidated balance sheet.
There were no other-than-temporary impairments or credit losses related to available-for-sale securities during the three and six months ended July 3, 2020 and June 28, 2019.
Note 4: Net Income Per Share
Basic per share amounts are computed using the weighted-average number of common shares outstanding during the period. Diluted per share amounts are calculated using the weighted-average number of common shares outstanding during the period and, when dilutive, the weighted-average number of potential common shares from the issuance of common stock to satisfy outstanding restricted stock units and the exercise of outstanding options to purchase common stock using the treasury stock method.
The following schedule reconciles the shares used to calculate basic and diluted net income per share:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
(In thousands) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||||
Shares used in basic per share computation |
|
|
52,259 |
|
|
|
52,745 |
|
|
|
52,417 |
|
|
|
52,641 |
|
Effect of dilutive common stock options outstanding |
|
|
340 |
|
|
|
470 |
|
|
|
360 |
|
|
|
463 |
|
Effect of dilutive restricted stock units outstanding |
|
|
540 |
|
|
|
657 |
|
|
|
627 |
|
|
|
745 |
|
Shares used in diluted per share computation |
|
|
53,139 |
|
|
|
53,872 |
|
|
|
53,404 |
|
|
|
53,849 |
|
- 13 -
Common stock options to purchase 40,000 shares were excluded from the diluted per share calculation for the three months ended July 3, 2020 due to their anti-dilutive effect. Common stock options to purchase 31,209 shares were excluded from the diluted per share calculation for the six months ended July 3, 2020 due to their anti-dilutive effect. There were no options excluded from the diluted per share calculations for the three and six months ended June 28, 2019.
Note 5: Stock-Based Compensation
Restricted Stock Units
Restricted stock unit grants are designed to attract and retain employees, and to better align employee interests with those of the Company’s stockholders. For a select group of employees, up to 40% of their annual bonus is settled with fully vested restricted stock unit awards. Under these fully vested restricted stock unit awards, the holder of each award has the right to receive one share of the Company’s common stock for each fully vested restricted stock unit four years from the date of grant. Each individual who receives a fully vested restricted stock unit award is also granted a matching number of unvested restricted stock unit awards. Unvested restricted stock unit awards are also granted for select new hires and promotions. These unvested restricted stock unit awards generally cliff vest four years from the date of grant, at which time the holder of each award will have the right to receive one share of the Company’s common stock for each restricted stock unit award provided the holder of each award has met certain employment conditions. In the case of retirement at 59½ years or older, all unvested restricted stock unit awards will continue to vest, provided that the holder of each award does all consulting work through the Company and does not become an employee for a past or present client, beneficial party or competitor of the Company.
The value of these restricted stock unit awards is determined based on the market price of the Company’s common stock on the date of grant. The value of fully vested restricted stock unit awards issued is recorded as a reduction to accrued bonuses. The portion of bonus expense that the Company expects to settle with fully vested restricted stock unit awards is recorded as stock-based compensation during the period the bonus is earned. The Company recorded stock-based compensation expense associated with accrued bonus awards of $1,799,000 and $2,325,000 during the three months ended July 3, 2020 and June 28, 2019, respectively. For the six months ended July 3, 2020 and June 28, 2019, the Company recorded stock-based compensation expense associated with accrued bonus awards of $3,842,000 and $4,393,000, respectively. The value of the unvested restricted stock unit awards granted is recognized on a straight-line basis over the shorter of the
vesting period or the period between the grant date and the date the award recipient turns 59½. If the award recipient is 59½ years or older on the date of grant, the value of the entire award is expensed upon grant. The Company recorded stock-based compensation expense associated with the unvested restricted stock unit awards of $1,476,000 and $1,535,000 during the three months ended July 3, 2020 and June 28, 2019, respectively. The Company recorded stock-based compensation expense associated with the unvested restricted stock unit awards of $5,403,000 and $5,065,000 during the six months ended July 3, 2020 and June 28, 2019, respectively.Stock Options
Stock options are granted for terms of ten years and generally vest 25% per year over a
period from the grant date. Unvested stock option awards will continue to vest in the case of retirement at 59½ years or older, provided that the holder of each award does all consulting work through the Company and does not become an employee for a past or present client, beneficial party or competitor of the Company. The value of the unvested stock option awards granted is recognized on a straight-line basis over the shorter of the four-year vesting period or the period between the grant date and the date the award recipient turns 59½. If the award recipient is 59½ years or older on the date of grant, the value of the entire award is expensed upon grant. The Company recorded stock-based compensation expense associated with stock option grants of $187,000 and $150,000 during the three months ended July 3, 2020 and June 28, 2019, respectively. The Company recorded stock-based compensation expense associated with stock option grants of $355,000 and $283,000 during the six months ended July 3, 2020 and June 28, 2019, respectively.- 14 -
The Company uses the Black-Scholes option-pricing model to determine the fair value of options granted. The determination of the fair value of stock option awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate and expected dividends.
The Company used historical exercise, forfeiture, and post-vesting expiration data to estimate the expected term of options granted. The historical volatility of the Company’s common stock over a period of time equal to the expected term of the options granted was used to estimate expected volatility. The risk-free interest rate used in the option-pricing model was based on United States Treasury zero-coupon issues with remaining terms similar to the expected term of the options. The dividend yield assumption considers the expectation of continued declaration of dividends, offset by option holders’ dividend equivalent rights.
The Company accounts for forfeitures of stock-based awards when they occur. All stock-based payment awards are recognized on a straight-line basis over the requisite service periods of the awards.
Note 6: Treasury Stock
On January 31, 2019, the Company’s Board of Directors announced $75,000,000 for the repurchase of shares of the Company’s common stock. On May 29, 2020, the Company’s Board of Directors announced an additional $45,000,000 for the repurchase of shares of the Company’s common stock. These repurchase programs have no expiration date.
The Company repurchased 636,000 of its common stock for $40,049,000 during the six months ended July 3, 2020. As of July 3, 2020, the Company had remaining authorization under its stock repurchase plans of $75,455,000 to repurchase shares of common stock.
Note 7: Deferred Compensation Plans
The Company maintains nonqualified deferred compensation plans for the benefit of a select group of highly compensated employees. Under these plans, participants may elect to defer up to 100% of their compensation. Company assets that are earmarked to pay benefits under the plans are held in a rabbi trust and are subject to the claims of the Company’s creditors. As of July 3, 2020, and January 3, 2020, the invested amounts under the plans totaled $75,138,000 and $75,934,000, respectively, and are recorded in prepaid expenses and other current assets and deferred compensation plan assets on the Company’s unaudited condensed consolidated balance sheet. These assets are classified as trading securities and are recorded at fair value with changes recorded as adjustments to miscellaneous income, net.
As of July 3, 2020, and January 3, 2020, vested amounts due under the plans totaled $75,807,000 and $76,357,000, respectively, and are recorded within accrued payroll and employee benefits and deferred compensation plan liabilities on the Company’s unaudited condensed consolidated balance sheet. Changes in the liability are recorded as adjustments to compensation expense. During the three months ended July 3, 2020 and June 28, 2019, the Company recognized compensation expense of $11,003,000 and $2,184,000, respectively, as a result of changes in the market value of the trust assets with the same amount being recorded as income in miscellaneous income, net. During the six months ended July 3, 2020 the Company recognized a reduction to compensation expense of $3,619,000. During the six months ended June 28, 2019, the Company recorded compensation expense of $8,053,000. The change in compensation expense was recorded due to changes in the market value of the trust assets with the same amount being recorded as income in miscellaneous income, net.
- 15 -
Note 8: Supplemental Cash Flow Information
The following is supplemental disclosure of cash flow information:
|
|
Six Months Ended |
|
|||||
(In thousands) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||
Cash paid during period: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
7,556 |
|
|
$ |
5,972 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Unrealized gain (loss) on short-term investments |
|
$ |
(43 |
) |
|
$ |
403 |
|
Vested stock unit awards issued to settle accrued bonuses |
|
$ |
8,645 |
|
|
$ |
7,947 |
|
Accrual for capital expenditures as of period end |
|
$ |
216 |
|
|
$ |
1,978 |
|
Right-of-use asset obtained in exchange for operating lease obligations |
|
$ |
492 |
|
|
$ |
26,152 |
|
Note 9: Accounts Receivable, Net
At July 3, 2020 and January 3, 2020, accounts receivable, net, was comprised of the following:
|
|
July 3, |
|
|
January 3, |
|
||
(In thousands) |
|
2020 |
|
|
2020 |
|
||
Billed accounts receivable |
|
$ |
73,242 |
|
|
$ |
85,579 |
|
Unbilled accounts receivable |
|
|
42,254 |
|
|
|
38,854 |
|
Allowance for contract losses and doubtful accounts |
|
|
(6,155 |
) |
|
|
(4,295 |
) |
Total accounts receivable, net |
|
$ |
109,341 |
|
|
$ |
120,138 |
|
The Company maintains allowances for estimated losses over the remaining contractual life of its receivables resulting from the inability of customers to meet their financial obligations or for disputes that affect the Company's ability to fully collect amounts due. In circumstances where the Company is aware of a specific customer's inability to meet its financial obligations or aware of a dispute with a specific customer, a specific allowance is recorded to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers the Company recognizes allowances for doubtful accounts based upon historical write-offs, customer concentration, customer creditworthiness, current economic conditions, aging of amounts due and future expectations.
A reconciliation of the beginning and ending amount of the contract losses and doubtful accounts is as follows (in thousands):
Balance at January 3, 2020 |
|
$ |
4,295 |
|
Provision for contract losses and doubtful accounts |
|
|
2,817 |
|
Write-offs |
|
|
(957 |
) |
Balance at July 3, 2020 |
|
$ |
6,155 |
|
The provision for contract losses as of July 3, 2020 includes approximately $1,450,000 as a result of the economic uncertainty associated with the COVID-19 pandemic. Recoveries of accounts receivable previously written-off were not material during the six months ended July 3, 2020.
- 16 -
On January 29, 2019, PG&E Corp. (“PG&E”) filed for bankruptcy under chapter 11 of the U.S. bankruptcy code. As of July 3, 2020, the Company’s total pre-bankruptcy outstanding accounts receivable from PG&E was $3.0 million. The Company currently expects to collect substantially all of the pre-bankruptcy accounts receivable from PG&E. However, due to the risks and uncertainties inherent in the bankruptcy process, the amount ultimately collected could differ from the Company’s current expectation. The Company continues to do work for PG&E post-bankruptcy filing and expects to be paid for this work in the ordinary course of business. Under the United States Bankruptcy code, PG&E is required to pay all post-bankruptcy expenses in the normal course of business. If they do not do so, the Company is eligible to have the post-bankruptcy obligation categorized as an administrative expense entitled to priority over most pre-bankruptcy creditors.
Note 10: Segment Reporting
The Company has two reportable operating segments based on two primary areas of service. The Engineering and Other Scientific segment is a broad service group providing technical consulting in different practices primarily in engineering. The Environmental and Health segment provides services in the areas of environmental, epidemiology and health risk analysis. This segment provides a wide range of consulting services relating to environmental hazards and risks and the impact on both human health and the environment. Our Chief Executive Officer, the chief operating decision maker, reviews revenues and operating income for each of our reportable segments but does not review total assets in evaluating segment performance and capital allocation.
Segment information for the three and six months ended July 3, 2020 and June 28, 2019 follows:
Revenues
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
(In thousands) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||||
Engineering and Other Scientific |
|
$ |
72,123 |
|
|
$ |
86,820 |
|
|
$ |
157,009 |
|
|
$ |
167,074 |
|
Environmental and Health |
|
|
19,922 |
|
|
|
19,686 |
|
|
|
40,989 |
|
|
|
38,463 |
|
Total revenues |
|
$ |
92,045 |
|
|
$ |
106,506 |
|
|
$ |
197,998 |
|
|
$ |
205,537 |
|
Operating Income
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
(In thousands) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||||
Engineering and Other Scientific |
|
$ |
20,807 |
|
|
$ |
29,252 |
|
|
$ |
47,448 |
|
|
$ |
55,226 |
|
Environmental and Health |
|
|
7,049 |
|
|
|
7,039 |
|
|
|
14,302 |
|
|
|
13,235 |
|
Total segment operating income |
|
|
27,856 |
|
|
|
36,291 |
|
|
|
61,750 |
|
|
|
68,461 |
|
Corporate operating expense |
|
|
(18,736 |
) |
|
|
(11,468 |
) |
|
|
(16,642 |
) |
|
|
(27,884 |
) |
Total operating income |
|
$ |
9,120 |
|
|
$ |
24,823 |
|
|
$ |
45,108 |
|
|
$ |
40,577 |
|
Capital Expenditures
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
(In thousands) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||||
Engineering and Other Scientific |
|
$ |
901 |
|
|
$ |
929 |
|
|
$ |
1,467 |
|
|
$ |
2,707 |
|
Environmental and Health |
|
|
19 |
|
|
|
13 |
|
|
|
81 |
|
|
|
56 |
|
Total segment capital expenditures |
|
|
920 |
|
|
|
942 |
|
|
|
1,548 |
|
|
|
2,763 |
|
Corporate capital expenditures |
|
|
724 |
|
|
|
5,958 |
|
|
|
1,135 |
|
|
|
10,478 |
|
Total capital expenditures |
|
$ |
1,644 |
|
|
$ |
6,900 |
|
|
$ |
2,683 |
|
|
$ |
13,241 |
|
- 17 -
Depreciation and Amortization
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
(In thousands) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||||
Engineering and Other Scientific |
|
$ |
1,068 |
|
|
$ |
1,170 |
|
|
$ |
2,205 |
|
|
$ |
2,291 |
|
Environmental and Health |
|
|
46 |
|
|
|
48 |
|
|
|
93 |
|
|
|
93 |
|
Total segment depreciation and amortization |
|
|
1,114 |
|
|
|
1,218 |
|
|
|
2,298 |
|
|
|
2,384 |
|
Corporate depreciation and amortization |
|
|
587 |
|
|
|
424 |
|
|
|
1,189 |
|
|
|
848 |
|
Total depreciation and amortization |
|
$ |
1,701 |
|
|
$ |
1,642 |
|
|
$ |
3,487 |
|
|
$ |
3,232 |
|
Two separate clients each comprised 11% of the Company’s revenues during the three months ended July 3, 2020. No single client comprised more than 10% of the Company’s revenues during the six months ended July 3, 2020. No other single client comprised more than 10% of the Company’s revenues during the three and six months ended July 3, 2020. No single client comprised more than 10% of the Company’s revenues during the three and six months ended June 28, 2019. No single client comprised more than 10% of the Company’s accounts receivable at July 3, 2020 and January 3, 2020.
Note 11: Leases
The Company determines if an arrangement is a lease at the inception of the arrangement. Operating leases are included in operating lease ROU assets, current operating lease liabilities, and long-term operating lease liabilities in the Company’s condensed consolidated balance sheet. The Company does not have any finance leases as of July 3, 2020.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s 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 the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, 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. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The amortization of operating lease ROU assets and the change in operating lease liabilities is disclosed as a single line item in the condensed consolidated statements of cash flows.
The Company leases office, laboratory, and storage space in 13 states and the District of Columbia, as well as in China, Hong Kong, Singapore, Switzerland and the United Kingdom. Leases for these office, laboratory, and storage facilities have terms generally ranging between one and ten years. Some of these leases include options to extend or terminate the lease, none of which are currently included in the lease term as the Company has determined that exercise of these options is not reasonably certain.
The Company has a Test and Engineering Center on 147 acres of land in Phoenix, Arizona. The Company leases this land from the state of Arizona under a 30-year lease agreement that expires in January of 2028 and has options to renew for two
periods. As of July 3, 2020, the Company has determined that exercise of the renewal options is not reasonably certain and thus the extension is not included in the lease term.- 18 -
The Company’s equipment leases are included in the ROU asset and liability balances but are not material.
The Company leases excess space in its Silicon Valley facility. Rental income of $869,000 and $741,000 was included in other income for the three months ended July 3, 2020 and June 28, 2019, respectively. Rental income of $1,861,000 and $1,482,000 was included in other income for the six months ended July 3, 2020 and June 28, 2019, respectively.
The components of lease expense included in other operating expenses on the condensed consolidated statements of income were as follows:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
(In thousands) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||||
Operating lease cost |
|
$ |
1,678 |
|
|
$ |
1,867 |
|
|
$ |
3,564 |
|
|
$ |
3,737 |
|
Variable lease cost |
|
|
312 |
|
|
|
404 |
|
|
|
602 |
|
|
|
784 |
|
Short-term lease cost |
|
|
163 |
|
|
|
134 |
|
|
|
288 |
|
|
|
229 |
|
Supplemental cash flow information related to operating leases was as follows:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
(In thousands) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||||
Cash paid for amounts included in the measurement of operating lease liabilities |
|
$ |
1,638 |
|
|
$ |
1,747 |
|
|
$ |
4,072 |
|
|
$ |
4,281 |
|
Supplemental balance sheet information related to operating leases was as follows:
|
|
July 3, 2020 |
|
|
January 3, 2020 |
|
Weighted Average Remaining Lease Term |
|
4.8 years |
|
|
5.2 years |
|
Weighted Average Discount Rate |
|
4.4% |
|
|
4.4% |
|
Maturities of operating lease liabilities as of July 3, 2020:
|
|
Operating |
|
|
(In thousands) |
|
Leases |
|
|
2020 (excluding the six months ended July 3, 2020) |
|
|
2,949 |
|
2021 |
|
|
6,118 |
|
2022 |
|
|
4,848 |
|
2023 |
|
|
3,235 |
|
2024 |
|
|
2,176 |
|
2025 |
|
|
1,491 |
|
2026 |
|
|
1,507 |
|
2027 |
|
|
1,466 |
|
Total lease payments |
|
$ |
23,790 |
|
Less imputed interest |
|
|
(3,096 |
) |
Total lease liability |
|
$ |
20,694 |
|
Note 12: Contingencies
The Company is a party to various legal actions from time to time and may be contingently liable in connection with claims and contracts arising in the normal course of business, the outcome of which the Company believes, after consultation with legal counsel, will not have a material adverse effect on its financial condition, results of operations or liquidity. However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expected results. All legal costs associated with litigation are expensed as incurred.
- 19 -
Note 13: Subsequent Events
On July 30, 2020, the Company’s Board of Directors announced a cash dividend of $0.19 per share of the Company’s common stock, payable September 25, 2020, to stockholders of record as of September 11, 2020. The Company expects to continue paying quarterly dividends in the future, subject to declaration by the Company’s Board of Directors.
- 20 -
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herein and with our audited consolidated financial statements and notes thereto for the fiscal year ended January 3, 2020, which are contained in our fiscal 2019 Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on February 28, 2020 (our “2019 Annual Report”).
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain “forward-looking” statements (as such term is defined in the Private Securities Litigation Reform Act of 1995, and the rules promulgated pursuant to the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended) that are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. When used in this document, the words “intend,” “anticipate,” “believe,” “estimate,” “expect” and similar expressions, as they relate to the Company or its management, identify such forward-looking statements. Such statements reflect the current views of the Company or its management with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company’s actual results, performance, or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. Factors that could cause or contribute to such material differences include the COVID-19 pandemic (including factors relating to measures implemented by governmental authorities or by us to promote the safety of our employees, vendors and clients; other direct and indirect impacts on our business and the businesses of our clients, vendors and other partners; impacts which may, among other things, adversely affect our clients’ ability to utilize our services at the levels they have previously; disruptions of access to our facilities or those of our clients or third parties; and increased and potentially significant economic uncertainty and volatility, including credit and collectability risks and potential disruptions of capital and credit markets), the possibility that the demand for our services may decline as a result of changes in general and industry specific economic conditions, the timing of engagements for our services, the effects of competitive services and pricing, the absence of backlog related to our business, our ability to attract and retain key employees, the effect of tort reform and government regulation on our business and liabilities resulting from claims made against us. Additional risks and uncertainties are discussed in this Quarterly Report under the heading “Risk Factors” and elsewhere in this report. The inclusion of such forward-looking information should not be regarded as a representation by the Company or any other person that the future events, plans, or expectations contemplated by the Company will be achieved. Due to such uncertainties and risks, you are warned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. The Company does not intend to release publicly any updates or revisions to any such forward-looking statements.
Business Overview
Exponent, Inc., is an engineering and scientific consulting firm that provides solutions to complex problems. Our multidisciplinary team of scientists, engineers and business consultants brings together more than 90 different technical disciplines to solve complicated issues facing industry and business today. Our services include analysis of product development, product recall, regulatory compliance, and the discovery of potential problems related to products, people, property and impending litigation.
CRITICAL ACCOUNTING ESTIMATES
There have been no significant changes in our critical accounting estimates during the six months ended July 3, 2020, as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Annual Report.
RESULTS OF CONSOLIDATED OPERATIONS
Executive Summary
Revenues for the second quarter of 2020 decreased 14% to $92,045,000 as compared to $106,506,000 during the same period last year. Revenues before reimbursements for the second quarter of 2020 decreased 12% to $87,863,000 as compared to $100,263,000 during the same period last year. Business restrictions associated with the COVID-19 pandemic caused project delays across multiple areas of our business. The most substantial impact occurred to our litigation support work with many projects paused due to court-related delays and closures. The
- 21 -
business restrictions associated with the COVID-19 pandemic also delayed field inspections of sites and products, laboratory testing, and human participant studies. These business restrictions had the most substantial impact to the transportation and oil and gas industries. We continued to see strength in integrity management advisory services for the utilities sector as our clients focus on power reliability. We also experienced growth in our chemical regulation and food safety practice as our scientists evaluated the effects of chemicals and new products on human health and the environment, including disinfectants for the novel coronavirus.
Net income decreased 22% to $16,346,000 during the second quarter of 2020 as compared to $20,994,000 during the same period last year. Diluted earnings per share decreased to $0.31 per share as compared to $0.39 in the same period last year. The decreases in net income and diluted earnings per share were primarily due to the 12% decrease in revenues before reimbursements.
COVID-19 Update
We responded quickly and carefully to address the unprecedented challenges created by the pandemic. We have successfully adapted and will continue to evolve our business development, recruiting and operational approaches, yielding benefits both during and after this crisis. We have accelerated our sharing of in-depth scientific and regulatory knowledge through webinars and thought leadership pieces, which has fostered new client relationships and projects. We have shifted all recruiting activities online, allowing us to reach a more geographically expansive set of candidates. The health and safety of our team remain top priorities, and therefore we have leveraged our internal expertise to establish protocols that allow us to safely continue laboratory activities and resume human participant studies. Our business continuity plan and robust infrastructure have empowered productive remote work, and employees continue to work from home unless they are performing laboratory testing or inspections. Our leadership team has responded with enhanced internal communications to encourage increased connectivity across the firm.
We are pleased that the Company has been able to address the majority of our clients’ needs with a mostly remote workforce. The relaxation of business restrictions in June allowed us to resume laboratory testing, inspections, and human participant studies for clients in non-essential industries. Field inspections of sites and products have increased due to lifting of travel restrictions, but are still occurring at a reduced level since many businesses are not fully operational.
We successfully completed multiple human participant studies in June, utilizing our enhanced health and safety protocols. Demand for these studies continues to grow, but some are delayed because of uncertainty surrounding COVID-19 related restrictions. We remain optimistic about the long-term growth of this area.
We continue to receive new retentions for litigation support, and work is ongoing for many existing matters. At the same time, trial dates continue to be delayed, removing imminent deadlines and causing some clients – in particular the automotive industry – to pause work. Courts have been experimenting with virtual bench trials as well as social distancing for in-person trials, so we expect trials will gradually increase.
We are pleased to be sharing our scientific and regulatory knowledge on health and safety issues related to the novel coronavirus through webinars and thought leadership pieces. We have been engaged by clients to provide regulatory support in the United States and Europe as they register their new or existing disinfectant products. We have also been advising clients on occupational health and safety concerns including COVID-19 testing, contact tracing, and disinfecting as they strive to protect their employees, customers, and students. Furthermore, we have leveraged our breadth of disciplines from chemists and physicists to engineers to evaluate disinfectant products from hand sanitizers to ultraviolet light.
Business Outlook
As society continues to raise its expectations for safety, health, sustainability and reliability, and products and processes continue to grow in their technological complexity, we will evolve to stay ahead of the curve. These market drivers have powered the Company’s growth for over 50 years and have led to increased demand for our interdisciplinary solutions despite periods of macroeconomic turbulence. As a result of the current business, travel and physical distancing restrictions caused by the COVID-19 pandemic, net revenues for the first three weeks of the third quarter declined approximately 5% to 8% as compared to the same period last year. While there are
- 22 -
opportunities for improvement, the high degree of uncertainty surrounding how and over what timeframe each region will impose or relax restrictions means that there could be further reduction to our revenues in the short term.
We remain focused on selectively adding top talent, developing the skills necessary to expand our market position and providing clients with in-depth scientific research and analysis to determine what happened and how to prevent failures or exposures in the future. We also remain focused on capitalizing on emerging growth areas, managing other operating expenses, generating cash from operations, maintaining a strong balance sheet and undertaking activities such as share repurchases and dividends to enhance shareholder value.
Overview of the Three Months Ended July 3, 2020
During the second quarter of 2020 billable hours decreased 15% to 299,000 as compared to 352,000 during the same period last year. Our utilization decreased to 64% during the second quarter of 2020 as compared to 76% during the same period last year. Technical full-time equivalent employees increased 1% to 899 during the second quarter of 2020 as compared to 890 during the same period last year. We continue to selectively hire key talent to expand our capabilities.
Three Months Ended July 3, 2020 compared to Three Months Ended June 28, 2019
Revenues
|
|
Three Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
Engineering and Other Scientific |
|
$ |
72,123 |
|
|
$ |
86,820 |
|
|
|
-16.9 |
% |
Percentage of total revenues |
|
|
78.4 |
% |
|
|
81.5 |
% |
|
|
|
|
Environmental and Health |
|
|
19,922 |
|
|
|
19,686 |
|
|
|
1.2 |
% |
Percentage of total revenues |
|
|
21.6 |
% |
|
|
18.5 |
% |
|
|
|
|
Total revenues |
|
$ |
92,045 |
|
|
$ |
106,506 |
|
|
|
-13.6 |
% |
The decrease in revenues for our Engineering and Other Scientific segment was due to a decrease in billable hours partially offset by an increase in billing rates. During the second quarter of 2020, billable hours for this segment decreased by 19% to 223,000 as compared to 277,000 during the same period last year. Utilization for this segment decreased to 62% during the second quarter of 2020 as compared to 77% during the same period last year. Business restrictions associated with the COVID-19 pandemic caused project delays across multiple practices within this segment. The most substantial impact was on our litigation support work with many projects paused due to court-related delays. The business restrictions associated with the COVID-19 pandemic also delayed field inspections of sites and products, laboratory testing, and human participant studies. These business restrictions had the most substantial impact on our work for the transportation and oil and gas industries. We continued to see strength in integrity management advisory services for the utilities sector as our clients focus on power reliability. Technical full-time equivalent employees in this segment increased 1% to 695 during the second quarter of 2020 as compared to 688 for the same period last year due to our continuing recruiting and retention efforts.
- 23 -
The increase in revenues for our Environmental and Health segment was due to an increase in billable hours. Billable hours for this segment increased by 1% to 76,000 as compared to 75,000 during the same period last year. Utilization in this segment was 71% for both the second quarter of 2020 and 2019. The increase in billable hours was due to growth in our chemical regulation and food safety practice, where our scientists evaluated the effects of chemicals and new products on human health and the environment, including disinfectants for the novel coronavirus. This growth was partially offset by delays in projects for the transportation and oil and gas industries due to COVID-19 business restrictions. Technical full-time equivalent employees in this segment increased to 204 during the second quarter of 2020 as compared to 202 during the same period last year.
Compensation and Related Expenses
|
|
Three Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
Compensation and related expenses |
|
$ |
68,137 |
|
|
$ |
61,997 |
|
|
|
9.9 |
% |
Percentage of total revenues |
|
|
74.0 |
% |
|
|
58.2 |
% |
|
|
|
|
The increase in compensation and related expenses during the second quarter of 2020 was due to an increase in the value of assets associated with our deferred compensation plan and an increase in payroll expense partially offset by decreases in bonus expense and fringe benefits. During the second quarter of 2020, deferred compensation expense increased $8,819,000 with a corresponding increase to other income, net, as compared to the same period last year, due to the change in value of assets associated with our deferred compensation plan. This increase consisted of an increase in the value of plan assets of $11,003,000 during the second quarter of 2020 as compared to an increase in the value of plan assets of $2,184,000 during the same period last year. Payroll expense increased $1,960,000 during the second quarter of 2020 due to the increase in technical full-time equivalent employees and the impact of our annual salary adjustments. Bonus expense decreased by $3,300,000 during the second quarter of 2020 due to a corresponding decrease to our bonus pool which is 33% of income before income taxes, interest income, bonus expense, and stock-based compensation. Fringe benefits decreased by $1,136,000 during the second quarter of 2020 due to an employee retention credit for $1,559,000 that we claimed under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). This employee retention credit under the CARES Act is a refundable tax credit which reduced our employer payroll taxes. The impact of the retention credit was partially offset by increases in fringe benefits associated with increases in technical full-time equivalent employees and our annual salary adjustments. We expect our compensation expense, excluding the change in value of deferred compensation plan assets, to increase as we selectively add new talent and adjust compensation to market conditions.
Other Operating Expenses
|
|
Three Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
Other operating expenses |
|
$ |
7,681 |
|
|
$ |
8,095 |
|
|
|
-5.1 |
% |
Percentage of total revenues |
|
|
8.3 |
% |
|
|
7.6 |
% |
|
|
|
|
Other operating expenses include facilities-related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. The decrease in other operating expenses during the second quarter of 2020 was primarily due to a decrease in occupancy expense of $236,000 and a decrease in technical materials of $181,000. These decreases were primarily due to COVID-19 business restrictions. We expect other operating expenses to grow as we selectively add new talent and make investments in our corporate infrastructure.
- 24 -
Reimbursable Expenses
|
|
Three Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
Reimbursable expenses |
|
$ |
4,182 |
|
|
$ |
6,243 |
|
|
|
-33.0 |
% |
Percentage of total revenues |
|
|
4.5 |
% |
|
|
5.9 |
% |
|
|
|
|
The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects. The decrease during the second quarter of 2020 was primarily due to COVID-19 business and travel restrictions.
General and Administrative Expenses
|
|
Three Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
General and administrative expenses |
|
$ |
2,925 |
|
|
$ |
5,348 |
|
|
|
-45.3 |
% |
Percentage of total revenues |
|
|
3.2 |
% |
|
|
5.0 |
% |
|
|
|
|
The decrease in general and administrative expenses during the second quarter of 2020 was primarily due to a decrease in travel and meals of $1,525,000, a decrease in personnel expenses of $543,000, and a decrease in marketing and business development expenses of $353,000. These decreases are all primarily due to COVID-19 business and travel restrictions. We expect general and administrative expenses to increase as we selectively add new talent and expand our business development and staff development initiatives.
Other Income, Net
|
|
Three Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
Other income, net |
|
$ |
12,294 |
|
|
$ |
4,028 |
|
|
|
205.2 |
% |
Percentage of total revenues |
|
|
13.4 |
% |
|
|
3.8 |
% |
|
|
|
|
Other income, net, consists primarily of changes in the value of assets associated with our deferred compensation plan, interest income earned on available cash, cash equivalents and short-term investments, and rental income from leasing space in our Silicon Valley facility. The increase in other income, net, was primarily due to a change in the value of assets associated with our deferred compensation plan partially offset by a decrease in interest income. During the second quarter of 2020, other income, net, increased $8,819,000 with a corresponding increase to deferred compensation expense, as compared to the same period last year, due to a change in the value of assets associated with our deferred compensation plan. This increase consisted of an increase in the value of the plan assets of $11,003,000 during the second quarter of 2020 as compared to an increase in the value of the plan assets of $2,184,000 during the same period last year. The decrease in interest income of $619,000 was due to lower interest rates for our cash equivalents and short-term investments.
Income Taxes
|
|
Three Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
Income taxes |
|
$ |
5,068 |
|
|
$ |
7,857 |
|
|
|
-35.5 |
% |
Percentage of total revenues |
|
|
5.5 |
% |
|
|
7.4 |
% |
|
|
|
|
Effective tax rate |
|
|
23.7 |
% |
|
|
27.2 |
% |
|
|
|
|
- 25 -
The decrease in the effective tax rate was due to an increase in the excess tax benefit associated with stock-based awards. The excess tax benefit associated with stock-based awards increased to $898,000 during the second quarter of 2020 as compared to $18,000 during the same period last year.
Six Months Ended July 3, 2020 compared to Six Months Ended June 28, 2019
Revenues
|
|
Six Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
Engineering and Other Scientific |
|
$ |
157,009 |
|
|
$ |
167,074 |
|
|
|
-6.0 |
% |
Percentage of total revenues |
|
|
79.3 |
% |
|
|
81.3 |
% |
|
|
|
|
Environmental and Health |
|
|
40,989 |
|
|
|
38,463 |
|
|
|
6.6 |
% |
Percentage of total revenues |
|
|
20.7 |
% |
|
|
18.7 |
% |
|
|
|
|
Total revenues |
|
$ |
197,998 |
|
|
$ |
205,537 |
|
|
|
-3.7 |
% |
The decrease in revenues for our Engineering and Other Scientific segment was due to a decrease in billable hours partially offset by an increase in billing rates. During the first six months of 2020, billable hours for this segment decreased by 8% to 494,000 as compared to 535,000 during the same period last year. Utilization for this segment decreased to 67% during the first six months of 2020 as compared to 75% during the same period last year. Business restrictions associated with the COVID-19 pandemic caused project delays across multiple practices within this segment. The most substantial impact occurred to our litigation support work with many projects paused due to court-related delays. The business restrictions associated with the COVID-19 pandemic also delayed field inspections of sites and products, laboratory testing, and human participant studies. These business restrictions had the most substantial impact to the transportation and oil and gas industries. We continued to see strength in integrity management advisory services for the utilities sector as our clients focus on power reliability. Technical full-time equivalent employees in this segment increased 4% to 713 during the first six months of 2019 as compared to 684 for the same period last year due to our continuing recruiting and retention efforts.
The increase in revenues for our Environmental and Health segment was due to an increase in billable hours and an increase in billing rates. During the first six months of 2020, billable hours for this segment increased by 5% to 153,000 as compared to 146,000 during the same period last year. Utilization in this segment increased to 72% during the first six months of 2020 as compared to 69% during the same period last year. The increase in billable hours and utilization was due to growth in our chemical regulation and food safety practice, where our scientists evaluated the effects of chemicals and new products on human health and the environment, including disinfectants for the novel coronavirus. This growth was partially offset by delays in projects for the transportation and oil and gas industries due to COVID-19 business restrictions. Technical full-time equivalent employees in this segment increased by 1% to 205 during the first six months of 2020 as compared to 203 during the same period last year due to our continuing recruiting and retention efforts.
Compensation and Related Expenses
|
|
Six Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
Compensation and related expenses |
|
$ |
118,122 |
|
|
$ |
127,090 |
|
|
|
-7.1 |
% |
Percentage of total revenues |
|
|
59.7 |
% |
|
|
61.8 |
% |
|
|
|
|
The decrease in compensation and related expenses during the first six months of 2020 was due to a change in the value of assets associated with our deferred compensation plan and a decrease in bonus expense partially offset by an increase in payroll expense. During the first six months of 2020, deferred compensation expense decreased $11,672,000 with a corresponding decrease to other income, net, as compared to the same period last year, due to the change in value of assets associated with our deferred compensation plan. This decrease consisted of a decrease in the value of plan assets of $3,619,000 during the first six months of 2020 as compared to an increase in the value of plan assets of $8,053,000 during the same period last year. Bonus expense decreased by $3,096,000 during the first six months of 2020 due to a corresponding decrease to our bonus pool which is 33% of income before income taxes, interest income, bonus expense, and stock-based compensation. Payroll expense increased $5,412,000 during the first six months of 2020 due to the increase in technical full-time equivalent employees and the impact of our annual salary adjustments. We expect our compensation expense, excluding the change in value of
- 26 -
deferred compensation plan assets, to increase as we selectively add new talent and adjust compensation to market conditions.
Other Operating Expenses
|
|
Six Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
Other operating expenses |
|
$ |
15,897 |
|
|
$ |
16,103 |
|
|
|
-1.3 |
% |
Percentage of total revenues |
|
|
8.0 |
% |
|
|
7.8 |
% |
|
|
|
|
Other operating expenses include facilities-related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. The decrease in other operating expenses during the first six months of 2020 was primarily due to a decrease in technical materials of $370,000 and a decrease in office expenses of $114,000 partially offset by an increase in depreciation expense of $255,000. The decreases in technical materials and office expenses were primarily due to COVID-19 business restrictions. The increase in depreciation expense was due to our increase in technical full-time equivalent employees and investments in our corporate infrastructure. We expect other operating expenses to grow as we selectively add new talent and make investments in our corporate infrastructure.
Reimbursable Expenses
|
|
Six Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
Reimbursable expenses |
|
$ |
10,415 |
|
|
$ |
11,873 |
|
|
|
-12.3 |
% |
Percentage of total revenues |
|
|
5.3 |
% |
|
|
5.8 |
% |
|
|
|
|
The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects. The decrease during the first six months of 2020 was primarily due to COVID-19 business and travel restrictions.
General and Administrative Expenses
|
|
Six Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
General and administrative expenses |
|
$ |
8,456 |
|
|
$ |
9,894 |
|
|
|
-14.5 |
% |
Percentage of total revenues |
|
|
4.3 |
% |
|
|
4.8 |
% |
|
|
|
|
The decrease in general and administrative expenses during the first six months of 2020 was primarily due to a decrease in travel and meals of $1,965,000 and a decrease in personnel expenses of $616,000, partially offset by an increase in bad debt expense of $1,223,000. These decreases in travel and meals and personnel expenses are primarily due to COVID-19 business and travel restrictions. The increase in bad debt was due to additional reserves we booked to our allowance for doubtful accounts as a result of the economic uncertainty associated with the COVID-19 pandemic. We expect general and administrative expenses to increase as we selectively add new talent and expand our business development and staff development initiatives.
- 27 -
Other Income, Net
|
|
Six Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
Other income, net |
|
$ |
361 |
|
|
$ |
11,596 |
|
|
|
-96.9 |
% |
Percentage of total revenues |
|
|
0.2 |
% |
|
|
5.6 |
% |
|
|
|
|
Other income, net, consists primarily of changes in the value of assets associated with our deferred compensation plan, interest income earned on available cash, cash equivalents and short-term investments, and rental income from leasing space in our Silicon Valley facility. The decrease in other income, net, was primarily due to a change in the value of assets associated with our deferred compensation plan and a decrease in interest income of $799,000 partially offset by an increase in the realized gain on foreign exchange of $863,000 and an increase in rental income of $379,000. During the first six months of 2020, other income, net, decreased $11,672,000 with a corresponding decrease to deferred compensation expense, as compared to the same period last year, due to a change in the value of assets associated with our deferred compensation plan. This decrease consisted of a decrease in the value of the plan assets of $3,619,000 during the first six months of 2020 as compared to an increase in the value of the plan assets of $8,053,000 during the same period last year. The decrease in interest income was due to lower interest rates for our cash equivalents and short-term investments. The increase in the realized gain on foreign exchange was due to an increase in the value of monetary assets denominated in non-functional currencies.
Income Taxes
|
|
Six Months Ended |
|
|
|
|
|
|||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
Percent Change |
|
|||
Income taxes |
|
$ |
2,841 |
|
|
$ |
8,467 |
|
|
|
(66.4 |
)% |
Percentage of total revenues |
|
|
1.4 |
% |
|
|
4.1 |
% |
|
|
|
|
Effective tax rate |
|
|
6.2 |
% |
|
|
16.2 |
% |
|
|
|
|
The decrease in the effective tax rate was due to an increase in the excess tax benefit associated with stock-based awards. The excess tax benefit associated with stock-based awards increased to $9,670,000 during the first six months of 2020 as compared to $5,688,000 during the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
We believe our existing balances of cash, cash equivalents, short-term investments and cash generated from operations will be sufficient to satisfy our working capital needs, capital expenditures, outstanding commitments, stock repurchases, dividends and other liquidity requirements over at least the next twelve months. However, we continue to monitor the impact of the COVID-19 pandemic on our cash flows and on the credit and financial markets.
|
|
Six Months Ended |
|
|||||
(in thousands) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||
Net cash provided by operating activities |
|
$ |
34,199 |
|
|
$ |
24,819 |
|
Net cash provided by/(used in) investing activities |
|
|
18,533 |
|
|
|
(20,187 |
) |
Net cash used in financing activities |
|
|
(72,906 |
) |
|
|
(27,237 |
) |
We financed our business during the first six months of 2020 through available cash. We invest our excess cash in cash equivalents and short-term investments. As of July 3, 2020, our cash, cash equivalents and short-term investments were $190,152,000 compared to $231,601,000 as of January 3, 2020. We believe our existing balances of cash, cash equivalents, short-term investments and cash generated from operations will be sufficient to satisfy our working capital needs, capital expenditures, outstanding commitments, stock repurchases, dividends and other liquidity requirements over at least the next twelve months.
- 28 -
Generally, our net cash provided by operating activities is used to fund our day to day operating activities. First quarter operating cash requirements are generally higher due to payment in the first quarter of our annual bonuses accrued during the prior year. Our largest source of operating cash flows is collections from our clients. Our primary uses of cash from operating activities are for employee related expenditures, leased facilities, taxes, and general operating expenses including marketing and travel.
The increase in net cash provided by investing activities during the first six months of 2020, as compared to the same period last year, was due to a decrease in the purchase of short-term investments, net of maturities and a decrease in capital expenditures. The decrease in capital expenditures was due to the completion of construction of our office and laboratory facilities in Natick, Massachusetts during 2019.
The increase in net cash used in financing activities during the first six months of 2020, as compared to the same period last year, was due to an increase in repurchases of our common stock, an increase in payroll taxes for restricted stock units and an increase in dividend payments.
We expect to continue our investing activities, including capital expenditures. Furthermore, cash reserves may be used to repurchase shares of common stock under our stock repurchase programs, pay dividends or strategically acquire professional service firms that are complementary to our business.
For a summary of our commitments to make future payments under contractual obligations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in our 2019 Annual Report. There have been no material changes in our contractual obligations since January 3, 2020.
We maintain a nonqualified deferred compensation plan for the benefit of a select group of highly compensated employees. Vested amounts due under the plan of $72,564,000 were recorded as a long-term liability on our unaudited condensed consolidated balance sheet at July 3, 2020. Vested amounts due under the plan of $3,243,000 were recorded as a current liability on our unaudited condensed consolidated balance sheet at July 3, 2020. Company assets that are earmarked to pay benefits under the plan are held in a rabbi trust and are subject to the claims of our creditors. As of July 3, 2020, invested amounts under the plan of $71,895,000 were recorded as a long-term asset on our unaudited condensed consolidated balance sheet. As of July 3, 2020, invested amounts under the plan of $3,243,000 were recorded as a current asset on our unaudited condensed consolidated balance sheet.
As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid.
Non-GAAP Financial Measures
Regulation G, Conditions for Use of Non-Generally Accepted Accounting Principles ("Non-GAAP") Financial Measures, and other U.S. Securities and Exchange Commission (“SEC”) rules and regulations define and prescribe the conditions for use of Non-GAAP financial information. Generally, a Non-GAAP financial measure is a numerical measure of a company's performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. We closely monitor two financial measures, EBITDA and EBITDAS, which meet the definition of Non-GAAP financial measures. We define EBITDA as net income before income taxes, net interest income, depreciation and amortization. We define EBITDAS as EBITDA before stock-based compensation. The Company regards EBITDA and EBITDAS as useful measures of operating performance to complement operating income, net income and other GAAP financial performance measures. Additionally, management believes that EBITDA and EBITDAS provide meaningful comparisons of past, present and future operating results. These measures are used to evaluate our financial results, develop budgets and determine employee compensation. These measures, however, should be considered in addition to, and not as a substitute for or superior to, operating income, cash flows, or other measures of financial performance prepared in accordance with GAAP. A reconciliation of the Non-GAAP measures to the nearest comparable GAAP measure is set forth below.
- 29 -
The following table shows EBITDA (determined as shown in the reconciliation table below) as a percentage of revenues before reimbursements for the three and six months ended July 3, 2020 and June 28, 2019:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
(in thousands, except percentages) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||||
Revenues before reimbursements |
|
$ |
87,863 |
|
|
$ |
100,263 |
|
|
$ |
187,583 |
|
|
$ |
193,664 |
|
EBITDA |
|
$ |
22,810 |
|
|
$ |
29,569 |
|
|
$ |
47,776 |
|
|
$ |
53,426 |
|
EBITDA as a % of revenues before reimbursements |
|
|
26.0 |
% |
|
|
29.5 |
% |
|
|
25.5 |
% |
|
|
27.6 |
% |
The decrease in EBITDA as a percentage of revenues before reimbursements during the second quarter of 2020 as compared to the same period last year was primarily due to the decrease in revenues caused by business restrictions associated with the COVID-19 pandemic.
The decrease in EBITDA as a percentage of revenues before reimbursements during the first six months of 2020 as compared to the same period last year was primarily due to the decrease in revenues caused by business restrictions associated with the COVID-19 pandemic.
The following table is a reconciliation of EBITDA and EBITDAS to the most comparable GAAP measure, net income, for the three and six months ended July 3, 2020:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
(in thousands) |
|
July 3, 2020 |
|
|
June 28, 2019 |
|
|
July 3, 2020 |
|
|
June 28, 2019 |
|
||||
Net income |
|
$ |
16,346 |
|
|
$ |
20,994 |
|
|
$ |
42,628 |
|
|
$ |
43,706 |
|
Add back (subtract): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
5,068 |
|
|
|
7,857 |
|
|
|
2,841 |
|
|
|
8,467 |
|
Interest income, net |
|
|
(305 |
) |
|
|
(924 |
) |
|
|
(1,180 |
) |
|
|
(1,979 |
) |
Depreciation and amortization |
|
|
1,701 |
|
|
|
1,642 |
|
|
|
3,487 |
|
|
|
3,232 |
|
EBITDA |
|
|
22,810 |
|
|
|
29,569 |
|
|
|
47,776 |
|
|
|
53,426 |
|
Stock-based compensation |
|
|
3,462 |
|
|
|
4,010 |
|
|
|
9,600 |
|
|
|
9,741 |
|
EBITDAS |
|
$ |
26,272 |
|
|
$ |
33,579 |
|
|
$ |
57,376 |
|
|
$ |
63,167 |
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk associated with our balances of cash, cash equivalents and short-term investments. We manage our interest rate risk by maintaining an investment portfolio primarily consisting of debt instruments with high credit quality and relatively short average effective maturities in accordance with our investment policy. The maximum effective maturity of any issue in our portfolio is 3 years and the maximum average effective maturity of the portfolio cannot exceed 12 months. If interest rates were to instantaneously increase or decrease by 100 basis points, the change in the fair market value of our portfolio of cash equivalents and short-term investments would not have a material impact on our financial statements. We do not use derivative financial instruments in our portfolio. There have not been any material changes during the period covered by this Quarterly Report on Form 10-Q to our interest rate risk exposures, or how these exposures are managed. Notwithstanding our efforts to manage interest rate risk, there can be no assurances that we will be adequately protected against the risks associated with interest rate fluctuations.
We have foreign currency risk related to our revenues and expenses denominated in currencies other than the U.S. dollar, primarily the British Pound, the Chinese Yuan, and the Hong Kong Dollar. Accordingly, changes in exchange rates may negatively affect the revenues and net income of our foreign subsidiaries as expressed in U.S. dollars.
At July 3, 2020, we had net assets of approximately $11,600,000 with a functional currency of the British Pound, net assets of approximately $4,400,000 with a functional currency of the Chinese Yuan, and net assets of
- 30 -
approximately $5,300,000 with a functional currency of the Hong Kong Dollar associated with our operations in the United Kingdom, China, and Hong Kong, respectively.
We also have foreign currency risk related to foreign currency transactions and monetary assets and liabilities denominated in currencies that are not the functional currency. We have experienced and will continue to experience fluctuations in our net income as a result of gains (losses) on these foreign currency transactions and the remeasurement of monetary assets and liabilities. At July 3, 2020, we had net assets denominated in the non-functional currency of approximately $2,400,000.
We do not use foreign exchange contracts to hedge any foreign currency exposures. To date, the impacts of foreign currency exchange rate changes on our consolidated revenues and consolidated net income have not been material. However, our continued international growth increases our exposure to exchange rate fluctuations and as a result such fluctuations could have a significant impact on our future results of operations.
Item 4. Controls and Procedures
|
(a) |
Evaluation of Disclosure Controls and Procedures |
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that, as of July 3, 2020, the Company’s disclosure controls and procedures were effective.
We review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis, to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.
|
(b) |
Changes in Internal Control over Financial Reporting |
There were no changes in our internal control over financial reporting during the three-month period ended July 3, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic.
- 31 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Exponent is not engaged in any material legal proceedings.
Item 1A. Risk Factors
Exponent operates in a rapidly changing environment that involves a number of uncertainties, some of which are beyond our control and may have a material adverse effect on our financial condition and results of operations. These uncertainties include, but are not limited to, those mentioned elsewhere in this report and those set forth below.
The effects of the COVID-19 pandemic have materially affected our operations and those of our clients. The duration and extent to which this will impact our future financial condition and results of operations remains uncertain.
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our financial condition and results of operations due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, compliance with these measures has impacted our operations.
The vast majority of our employees have been working remotely since the implementation of government measures to contain the virus. These remote working arrangements may result in inefficiencies, delays and additional costs and risks. In addition, most of our clients are also working remotely, which may delay the initiation of new projects and the execution of on-going work. We have seen slowing of a portion of our litigation support projects due to courthouse closures and associated legal delays. Travel restrictions are delaying work that requires inspection of a site or a product that cannot be shipped. The pandemic has also negatively impacted our ability to conduct user studies.
The COVID-19 pandemic also raises the possibility of an extended global economic downturn and has caused volatility in financial markets, which could affect demand for our services and impact our financial condition and results of operations even after the pandemic is contained and the containment measures are lifted. For example, we may be unable to collect receivables from those customers significantly impacted by COVID-19. We believe that our existing balances of cash, cash equivalents, short-term investments and cash generated from operations to be sufficient to satisfy our working capital needs, capital expenditures, outstanding commitments, stock repurchases, dividends and other liquidity requirements over at least the next twelve months. However, we continue to monitor the impact of the COVID-19 pandemic on our cash flows and on the credit and financial markets.
The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions, and the impact of these and other factors on our employees and clients. We will continue to evaluate the nature and extent of the impact of the COVID-19 pandemic to our business.
The unpredictable and reactive nature of our business can create uneven performance in any given quarter or fiscal year.
Revenues are primarily derived from services provided in response to client requests or events that occur without notice, and engagements, generally billed as services are performed, are terminable or subject to postponement or delay at any time by clients. As a result, backlog at any particular time is small in relation to our quarterly or annual revenues and is not a reliable indicator of revenues for any future periods. Revenues and operating margins for any particular quarter are generally affected by staffing mix, resource requirements and timing and size of engagements.
- 32 -
Our financial results could suffer if our clients’ needs change more rapidly than we are able to secure the appropriate mix of trained, skilled and experienced personnel.
As our clients’ needs change, new technologies develop, and legal and regulatory processes change, we may be unable to timely hire or train personnel with the appropriate new set of skills and experience which could negatively impact our growth and profitability.
Failure to attract and retain key employees may adversely affect our business.
Exponent’s business involves the delivery of professional services and is labor-intensive. Our success depends in large part upon our ability to attract, retain and motivate highly qualified technical and managerial personnel. Qualified personnel are in great demand and are likely to remain a limited resource for the foreseeable future. We cannot provide any assurance that we can continue to attract sufficient numbers of highly qualified technical and managerial personnel and retain existing employees. We have experienced and expect to continue to experience employee turnover. The loss of key managerial employees, business generators or any significant number of employees could have a material adverse impact on our business, including our ability to secure and complete engagements.
Competition could reduce our pricing and adversely affect our business.
The markets for our services are highly competitive. In addition, there are relatively low barriers to entry into our markets and we have faced, and expect to continue to face, additional competition from new entrants into our markets. Competitive pressure could reduce the market acceptance of our services and result in price reductions that could have a material adverse effect on our business, financial condition or results of operations.
The loss of a large client could adversely affect our business.
We currently derive a significant portion of our revenues from clients in the chemical, construction, consumer products, energy, life sciences, and transportation industries. The loss of any large client could have a material adverse effect on our business, financial condition or results of operations.
Our clients may be unable to pay for our services.
If a client's financial difficulties become severe, the client may be unwilling or unable to pay our invoices in the ordinary course of business, which could adversely affect collections of both our accounts receivable and unbilled services. The COVID-19 pandemic raises the possibility of an extended global economic downturn which may impact the ability of our customers to pay for our services. On occasion, some of our clients have entered bankruptcy, which has prevented us from collecting amounts owed to us. The bankruptcy of a client with substantial accounts receivable could have a material adverse effect on our financial condition and results of operations.
On January 29, 2019, PG&E Corp. (“PG&E”) filed for bankruptcy under chapter 11 of the U.S. bankruptcy code. As of July 3, 2020, our total pre-bankruptcy outstanding accounts receivable from PG&E was $3.0 million. We currently expect to collect substantially all of the pre-bankruptcy accounts receivable from PG&E. However, due to the risks and uncertainties inherent in the bankruptcy process, the amount ultimately collected could differ from our current expectation. We continue to do work for PG&E post-bankruptcy filing and expect to be paid for this work in the ordinary course of business. Under the United States Bankruptcy code, PG&E is required to pay all post-bankruptcy expenses in the normal course of business. If they do not do so, we are eligible to have the post-bankruptcy obligation categorized as an administrative expense entitled to priority over most pre-bankruptcy creditors.
We hold substantial investments that could present liquidity risks.
Our cash equivalent and short-term investment portfolio as of July 3, 2020, consisted primarily of obligations of the U.S. Treasury. We follow an established investment policy to monitor, manage and limit our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.
- 33 -
Investments in some financial instruments may pose risks arising from liquidity and credit concerns. As of July 3, 2020, we had no impairment charge associated with our investment portfolio relating to such adverse financial market conditions. Although we believe our current investment portfolio has a low risk of impairment, we cannot predict future market conditions or market liquidity and can provide no assurance that our investment portfolio will remain unimpaired.
Our business is dependent on our professional reputation.
The professional reputation of Exponent and its consultants is critical to our ability to successfully compete for new client engagements and attract or retain professionals. Proven or unproven allegations against us may damage our professional reputation. Any factors that damage our professional reputation could have a material adverse effect on our business.
Our business can be adversely impacted by deregulation or reduced regulatory enforcement.
Public concern over health, safety and preservation of the environment has resulted in the enactment of a broad range of environmental and/or other laws and regulations by local, state and federal lawmakers and agencies. These laws and the implementation of new regulations affect nearly every industry, as well as the agencies of federal, state and local governments charged with their enforcement. To the extent changes in such laws, regulations and enforcement or other factors significantly reduce the exposures of manufacturers, owners, service providers and others to liability, the demand for our services may be significantly reduced.
Tort reform can reduce demand for our services.
Several of our practices have a significant concentration in litigation support consulting services. To the extent tort reform reduces the exposure of manufacturers, owners, service providers and others to liability, the demand for our litigation support consulting services may be significantly reduced.
Our engagements may result in professional or other liability.
Our services typically involve difficult engineering and scientific assignments and carry risks of professional and other liability. Many of our engagements involve matters that could have a severe impact on a client's business, cause a client to lose significant amounts of money, or prevent a client from pursuing desirable business opportunities. Accordingly, if a client is dissatisfied with our performance, the client could threaten or bring litigation in order to recover damages or to contest its obligation to pay our fees. Litigation alleging that we performed negligently, disclosed client confidential information, lost or damaged evidence, infringed on patents, were forced to withdraw from a legal matter due to a conflict or otherwise breached our obligations to a client could expose us to significant liabilities to our clients or other third parties or tarnish our reputation.
Potential conflicts of interest may preclude us from accepting some engagements.
We provide litigation support consulting and other services primarily in connection with significant disputes, or other matters that are usually adversarial or that involve sensitive client information. The nature of our consulting services has and will continue to preclude us from accepting engagements with other potential clients because of conflicts. Accordingly, the nature of our business limits the number of both potential clients and potential engagements.
We are subject to unpredictable risks of litigation.
Although we seek to avoid litigation whenever possible, from time to time we are party to various lawsuits and claims. Disputes may arise, for example, from employment issues, regulatory actions, business acquisitions and real estate and other commercial transactions. There can be no assurances that any lawsuits or claims will be immaterial in the future. Any material lawsuits or claims could adversely affect our business and reputation.
- 34 -
We are subject to security breaches that may disrupt our operations and/or lead to the inability to protect confidential information.
We have experienced, and expect to continue to be subjected to, security breaches and threats, none of which have been material to us to date. Despite the implementation of security and business continuity measures, our information technology infrastructure and networks are vulnerable to electronic breaches of security. Such breaches could lead to disruptions of our operations and potential unauthorized disclosure of confidential and/or personal information, which could result in legal claims or proceedings. While we have taken reasonable steps to prevent and mitigate the damage of a security breach by continuously improving our design and coordination of security controls across our business, those steps may not be effective and there can be no assurance that any such steps can be effective against all possible risks.
Failure to protect client and employee data may have an adverse effect on our business.
We manage, utilize, and store sensitive or confidential client or employee data, including personal data and protected health information. As a result, we are subject to numerous laws and regulations designed to protect this information, such as the U.S. federal and state laws governing the protection of health or other personally identifiable information, including the Health Insurance Portability and Accountability Act, and international laws such as the European Union General Data Protection Regulation. In addition, many states, U.S. federal governmental authorities and non-U.S. jurisdictions have adopted, proposed, or are considering adopting or proposing, additional data security and/or data privacy statutes or regulations such as the California Consumer Privacy Act. These laws and regulations are increasing in complexity and number. If any person, including any of our employees, negligently disregards or intentionally breaches our established controls with respect to client or employee data, or otherwise mismanages or misappropriates that data, we could be subject to significant monetary damages, regulatory enforcement actions, fines, and/or criminal prosecution. In addition, unauthorized disclosure of sensitive or confidential client or employee data, whether through systems failure, employee negligence, fraud, or misappropriation, could damage our reputation and cause us to lose clients and their related revenue in the future. Our remote working arrangements due to the COVID-19 pandemic may increase the risks associated with protecting client and employee data.
Impairment of goodwill may require us to record a significant charge to earnings.
On our balance sheet, we have $8,607,000 of goodwill subject to periodic evaluation for impairment. Failure to achieve sufficient levels of cash flow at reporting units, the loss of key employees, changes to the scope of operations of our business or a significant and sustained decline in our stock price could result in goodwill impairment charges. The COVID-19 pandemic raises the possibility of an extended global economic downturn which increase the risk of goodwill impairment charges. During times of financial market volatility, significant judgment is required to determine the underlying cause of the decline and whether stock price declines are short-term in nature or indicative of an event or change in circumstances.
Impairment of long-lived assets or restructuring activities may require us to record a significant charge to earnings.
Our long-lived assets, including our office, laboratory and warehouse space in Menlo Park, California, our test and engineering center in Phoenix, Arizona, and our office and laboratory facilities in Natick, Massachusetts, are subject to periodic testing for impairment. Failure to achieve sufficient levels of cash flow at the asset group level could result in impairment of our long-lived assets. In addition, we have operating lease right-of-use assets for office and laboratory space. Changes in the business environment could lead to changes in the scope of operations of our business. These changes, including the closure of one or more offices, could result in restructuring and/or asset impairment charges. The COVID-19 pandemic raises the possibility of an extended global economic downturn which increase the risk of long-lived asset impairment charges.
Our international operations create special risks that could adversely affect our business.
In addition to our offices in the United States, we have physical offices in the United Kingdom, Switzerland, Hong Kong, China, Singapore, Ireland, and Canada, and conduct business in several other countries. We expect to continue to expand globally and our international revenues may account for an increasing portion of
- 35 -
our revenues in the future. Our international operations carry special financial, business and legal risks, including cultural and language differences; employment laws and related factors that could result in lower utilization, higher staffing costs, and cyclical fluctuations of utilization and revenues; currency fluctuations that adversely affect our financial position and operating results; burdensome regulatory requirements and other barriers to conducting business; tariffs and other trade barriers including the United Kingdom’s decision to leave the European Union; managing the risks associated with engagements with foreign officials and governmental agencies, including the risks arising from the United States Foreign Corrupt Practices Act and the United Kingdom Bribery Act of 2010; managing the risks associated with global privacy and data security laws and regulations including the General Data Protection Regulation in Europe; greater difficulties in managing and staffing foreign operations; successful entry and execution in new markets; restrictions on the repatriation of earnings; potentially adverse tax consequences; other impending legislation that could add additional risks to the business; and the COVID-19 pandemic and resulting restrictions on business activity which vary significantly by region.
Inherent risks related to government contracts may adversely affect our business.
We work for various United States and foreign governmental entities and agencies. Government entities reserve the right to audit our contracts and conduct inquiries and investigations of our business practices with respect to government contracts. Findings from an audit may result in fees being refunded to the government or prospective adjustment to previously agreed upon rates that will affect future margins. If a government client discovers improper or illegal activities in the course of audits or investigations, we may become subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with other agencies of the government. The inherent limitations of internal controls may not prevent or detect all improper or illegal activities, regardless of the adequacy of such controls. Government contracts, and the proceedings surrounding them, are often subject to more extensive scrutiny and publicity than other commercial contracts. Negative publicity related to our government contracts, regardless of whether it is accurate, may further damage our business by affecting our ability to compete for new contracts.
Governments may terminate, cancel, modify or curtail our contracts at any time prior to their completion.
Under our government contracts, the client generally has the right not to exercise options to extend or expand our contracts and may otherwise terminate, cancel, modify or curtail our contracts at its convenience. Any decision by the client not to exercise contract options or to terminate, cancel, modify or curtail our programs or contracts would adversely affect our revenues, revenue growth and profitability.
We could incur significant liabilities and suffer negative publicity if people or properties are harmed by the products and systems we sell or the services we offer.
We, on occasion, design, develop, manufacture, sell, service and maintain various products and systems. In some instances, we also train operators of such products and systems. Many of these products and systems utilize software algorithms that are probabilistic in nature and subject to significant technical limitations. There are many factors, some of which are beyond our control, which could result in the failure of our products or systems. The failure of our products or systems could lead to injury, death, or extensive property damage and may lead to product liability, professional liability, or other claims against us. Further, if our products or systems fail, or are perceived to have failed, the negative publicity from such incident could have a material adverse effect on our business.
Changes in, or interpretations of, accounting principles could have a significant impact on our financial position and results of operations.
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and controls.
- 36 -
Our business can be adversely affected by downturns in the overall economy.
The markets that we serve are cyclical and subject to general economic conditions. The direction and relative strength of the global economy continues to be uncertain. If economic growth in the United States, where we primarily operate, slows, our clients may consolidate or go out of business and thus demand for our services could be reduced significantly.
Our quarterly results may vary.
Variations in our revenues and operating results occur from time to time, as a result of a number of factors, such as the significance of client engagements commenced and completed during a quarter, the timing of engagements, the number of working days in a quarter, employee hiring and utilization rates, and integration of companies acquired. Because a high percentage of our expenses, particularly personnel and facilities related expenses, are relatively fixed in advance of any particular quarter, a variation in the timing of the initiation or the completion of our client assignments can cause significant variations in operating results from quarter to quarter.
The market price of our common stock may be volatile.
Many factors could cause the market price of our common stock to rise and fall. These include the risk factors listed above and below; changes in estimates of our performance or recommendations by securities analysts; future sales of shares of common stock in the public market; market conditions in the industry and economy as a whole; acquisitions or strategic alliances involving us or our competitors; restatement of financial results; and changes in accounting principles or methods. In addition, the stock market often experiences significant price fluctuations. These fluctuations are often unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock. When the market price of a company's stock drops significantly, shareholders often institute securities class action litigation against that company. Any litigation against us could cause us to incur substantial costs, divert the time and attention of our management and other resources, or otherwise harm our business.
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There can be no assurance that we will continue to declare cash dividends or repurchase our shares at all or in any particular amounts.
Our Board of Directors has declared quarterly dividends since March 2013. Our intent to continue to pay quarterly dividends and to repurchase our shares is subject to capital availability and, in the case of dividends, periodic determinations by our Board of Directors that cash dividends are in the best interest of our stockholders and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends by us. Future dividends and share repurchases may also be affected by, among other factors: our views on potential future capital requirements for investments, including acquisitions; legal risks; stock repurchase programs; changes in federal and state income tax laws or corporate laws; contractual restrictions; and changes to our business model. Our dividend payments and share repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends or repurchase shares at all or in any particular amounts. A reduction or suspension in our dividend payments or share repurchase activity could have a negative effect on our stock price.
Catastrophic events may disrupt our business.
We rely on our network infrastructure and certain third-party hosted services to support our operations. Despite the implementation of business continuity measures, disruption or failure of these systems in the event of a major earthquake, fire, flood, tsunami or other weather event, power loss, telecommunications failure, software or hardware malfunctions, pandemics, or epidemics where we have operations, cyber-attack, war, terrorist attack or other catastrophic event that our disaster recovery plans do not adequately address, could have a material adverse effect on our business, financial condition or results of operations.
Climate change may have a long-term impact on our business.
The areas where we conduct business are vulnerable to the effects of climate change. For example, in California, wildfire danger increases the probability of planned power outages which may impact our employees’ abilities to commute to work and to stay connected. Climate-related events, including the increasing frequency of extreme weather events and their impact on critical infrastructure, have the potential to disrupt our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information on the Company’s repurchases of the Company’s common stock for the three months ended July 3, 2020 (in thousands, except price per share):
|
|
Total Number of Shares Purchased |
|
|
Average Price Paid Per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Programs |
|
|
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs (1) |
|
||||
April 4 to May 1 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
30,455 |
|
May 2 to May 29 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
75,455 |
|
May 30 to July 3 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
75,455 |
|
Total |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
75,455 |
|
(1) |
On January 31, 2019, the Company’s Board of Directors announced $75.0 million for the repurchase of the Company’s common stock. On May 29, 2020 the Company’s Board of Directors announced an additional $45.0 million for the repurchase of the Company’s common stock. These repurchase programs have no expiration date. |
Item 3. Defaults Upon Senior Securities
Not applicable.
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Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
(a) |
Exhibit Index |
31.1 |
|
|
|
31.2 |
|
|
|
32.1 |
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
|
|
32.2 |
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
|
|
101.INS |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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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.
|
|
EXPONENT, INC. |
|
|
(Registrant) |
|
|
|
Date: August 7, 2020 |
|
|
|
|
/s/ Catherine Ford Corrigan |
|
|
Catherine Ford Corrigan, Ph.D., Chief Executive Officer |
|
|
|
|
|
/s/ Richard L. Schlenker, Jr. |
|
|
Richard L. Schlenker, Jr., Chief Financial Officer |
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