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 April 2, 2021
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
77-0218904
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
149 COMMONWEALTH DRIVE,
MENLO PARK, California
94025
(Address of principal executive office)
(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
No
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).
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
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.001 per share
EXPO
Nasdaq Global Select Market
As of April 30, 2021, the latest practicable date, the registrant had 52,122,879 shares of common stock outstanding.
TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
3
Item 1.
Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of April 2, 2021 and January 1, 2021
Condensed Consolidated Statements of Income for the Three Months Ended April 2, 2021 and April 3, 2020
4
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended April 2, 2021 and April 3, 2020
5
Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended April 2, 2021 and April 3, 2020
6
Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 2, 2021 and April 3, 2020
7
Notes to Unaudited Condensed Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
26
Item 4.
Controls and Procedures
27
PART II – OTHER INFORMATION
28
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
29
Signatures
30
- 2 -
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
April 2, 2021 and January 1, 2021
(in thousands, except par value)
(unaudited)
April 2,
2021
January 1,
Assets
Current assets:
Cash and cash equivalents
$
184,521
197,525
Short-term investments
29,999
45,001
Accounts receivable, net of allowance for contract losses and doubtful accounts
of $4,481 and $3,995 at April 2, 2021 and January 1, 2021, respectively
124,211
111,565
Prepaid expenses and other current assets
14,824
12,741
Total current assets
353,555
366,832
Property, equipment and leasehold improvements, net
60,473
59,823
Operating lease right-of-use assets
18,467
19,322
Goodwill
8,607
Deferred income taxes
39,315
40,539
Deferred compensation plan assets
94,395
83,731
Other assets
2,210
1,242
Total assets
577,022
580,096
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities
18,411
16,327
Accrued payroll and employee benefits
54,490
83,194
Deferred revenues
8,906
11,800
Operating lease liabilities
6,135
5,987
Total current liabilities
87,942
117,308
Other liabilities
3,470
2,986
Deferred compensation plan liabilities
95,289
83,961
12,713
14,343
Total liabilities
199,414
218,598
Stockholders’ equity:
Common stock, $0.001 par value; 120,000 shares authorized; 65,707 shares
issued at April 2, 2021 and January 1, 2021
66
Additional paid-in capital
274,012
265,328
Accumulated other comprehensive income (loss)
Investment securities, available-for-sale
61
65
Foreign currency translation adjustments
(1,754
)
(1,997
(1,693
(1,932
Retained earnings
439,717
421,809
Treasury stock, at cost; 13,584 and 13,903 shares held at April 2, 2021 and January 1, 2021, respectively
(334,494
(323,773
Total stockholders’ equity
377,608
361,498
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
- 3 -
Condensed Consolidated Statements of Income
For the Three Months Ended April 2, 2021 and April 3, 2020
(in thousands, except per share data)
Three Months Ended
April 3,
2020
Revenues:
Revenues before reimbursements
109,579
99,720
Reimbursements
6,902
6,233
Revenues
116,481
105,953
Operating expenses:
Compensation and related expenses
74,538
49,985
Other operating expenses
7,710
8,216
Reimbursable expenses
General and administrative expenses
3,273
5,531
Total operating expenses
92,423
69,965
Operating income
24,058
35,988
Other income, net:
Interest income, net
875
Miscellaneous income (loss), net
6,039
(12,808
Total other income (loss), net
6,068
(11,933
Income before income taxes
30,126
24,055
Income taxes
(722
(2,227
Net income
30,848
26,282
Net income per share:
Basic
0.59
0.50
Diluted
0.58
0.49
Shares used in per share computations:
52,536
52,575
53,333
53,657
Cash dividends declared per common share
0.20
0.19
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements
- 4 -
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
Other comprehensive income (loss):
Foreign currency translation
adjustments, net of tax
243
(1,673
Unrealized gain/(loss) on available-for-sale
investment securities arising during
the period, net of tax
(4
168
Comprehensive income
31,087
24,777
- 5 -
EXPONENT, INCCondensed Consolidated Statements of Stockholders’ Equity
Three Months Ended April 2, 2021
Common Stock
Additional
paid-in
Accumulated
other
comprehensive
Retained
Treasury Stock
Shares
Amount
capital
income (loss)
earnings
Total
Balance at January 1, 2021
65,707
13,903
Employee stock purchase plan
-
485
(6
58
543
Amortization of unrecognized stock-based
compensation
3,738
Grant of restricted stock units to settle accrued
bonus
7,637
Settlement of restricted stock units
(3,176
(1,679
(313
(10,779
(15,634
Unrealized gain on investments
Dividends and dividend equivalent rights
(11,261
Balance at April 2, 2021
13,584
Three Months Ended April 3, 2020
(In thousands)
Balance at January 3, 2020
244,935
(1,760
384,668
13,951
(277,658
350,251
400
(7
73
473
Exercise of stock options
64
(60
608
672
4,095
Purchase of treasury shares
636
(40,049
8,645
(1,261
(4,538
(359
(9,313
(15,112
511
(10,766
(10,255
Balance at April 3, 2020
257,389
(3,265
395,646
14,161
(326,339
323,497
- 6 -
Condensed Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization of property, equipment and
leasehold improvements
1,656
1,786
Amortization of premiums and accretion of discounts on short-term
investments
Provision for contract losses and doubtful accounts
645
2,383
Stock-based compensation
6,282
6,138
Deferred income tax provision
1,226
1,614
Changes in operating assets and liabilities:
Accounts receivable
(13,291
(9,457
(8,142
(12,561
Change in operating leases
(627
(707
3,451
(4,110
(17,862
(24,117
(2,894
(1,026
Net cash provided by (used in) operating activities
1,285
(13,835
Cash flows from investing activities:
Capital expenditures
(2,515
(1,293
Purchase of short-term investments
(9,997
Maturity of short-term investments
25,000
9,000
Net cash provided by investing activities
12,488
7,707
Cash flows from financing activities:
Payroll taxes for restricted stock units
Repurchase of common stock
Exercise of stock-based payment awards
1,145
Dividends and dividend equivalents rights
(11,935
(10,308
Net cash used in financing activities
(27,026
(64,324
Effect of foreign currency exchange rates on cash and cash equivalents
249
(390
Net decrease in cash and cash equivalents
(13,004
(70,842
Cash and cash equivalents at beginning of period
176,436
Cash and cash equivalents at end of period
105,594
- 7 -
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 months ended April 2, 2021 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 1, 2021, which was filed with the U.S. Securities and Exchange Commission on February 26, 2021.
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.
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 percentage of the Company’s revenue generated from time and materials contracts:
Engineering & other scientific
%
Environmental and health
18
Total time and materials revenues
79
85
- 8 -
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 percentage of the Company’s revenue generated from fixed price contracts:
20
14
1
Total fixed price revenues
21
15
Deferred revenues represent amounts billed to clients in advance of services provided. During the first quarter of 2021, $6,015,000 of revenues were recognized that were included in the deferred revenue balance at January 1, 2021. During the first quarter of 2020, $4,791,000 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 $3,644,000 and $3,781,000 during the first quarter of 2021 and 2020, respectively.
- 9 -
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 months ended April 2, 2021 and April 3, 2020. 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 April 2, 2021 (in thousands):
Fair Value Measurements at Reporting Date Using
Quoted
Prices in
Active
Markets
for
Identical
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Unobservable
(Level 3)
Money market securities (1)
71,569
Fixed income available-for-sale securities (2)
Fixed income trading securities held in deferred
compensation plan (3)
30,559
Equity trading securities held in deferred compensation
plan (3)
71,135
203,262
173,263
Liabilities
Deferred compensation plan (4)
102,488
(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.
- 10 -
The fair value of these certain financial assets and liabilities was determined using the following inputs at January 1, 2021 (in thousands):
51,442
Fixed income available for sale securities (2)
26,274
62,473
185,190
140,189
88,977
Fixed income available-for-sale securities as of April 2, 2021 and January 1, 2021 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 6 for additional information about the Company’s deferred compensation plan.
Cash, cash equivalents and short-term investments consisted of the following as of April 2, 2021 (in thousands):
Gross
Amortized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
Classified as current assets:
Cash
112,952
Cash equivalents:
Money market securities
Total cash equivalents
Total cash and cash equivalents
Short-term investments:
U.S. Treasury and agency securities
29,997
2
Total short-term investments
Total cash, cash equivalents and short-term investments
214,518
214,520
- 11 -
Cash, cash equivalents and short-term investments consisted of the following as of January 1, 2021 (in thousands):
146,083
44,993
242,518
242,526
At April 2, 2021 the stated effective maturities of all short-term fixed income securities classified as short-term investments were due within one year.
At April 2, 2021 and January 1, 2021, 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 April 2, 2021 and January 1, 2021 but require disclosure of their fair values: accounts receivable, other assets and accounts payable. The estimated fair value of such instruments at April 2, 2021 and January 1, 2021 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 months ended April 2, 2021 and April 3, 2020.
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:
Shares used in basic per share computation
Effect of dilutive common stock options
outstanding
236
379
Effect of dilutive restricted stock units
561
703
Shares used in diluted per share
computation
- 12 -
Common stock options to purchase 18,742 shares and 22,418 shares were excluded from the diluted per share calculation for the three months ended April 2, 2021 and April 3, 2020, respectively, due to their anti-dilutive effect.
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 $2,544,000 and $2,043,000 during the three months ended April 2, 2021 and April 3, 2020, respectively. The value of the unvested restricted stock unit 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 the unvested restricted stock unit awards of $3,562,000 and $3,927,000 during the three months ended April 2, 2021 and April 3, 2020, respectively.
Stock Options
Stock options are granted for terms of ten years and generally vest 25% per year over a four-year 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 $176,000 and $168,000 during the three months ended April 2, 2021 and April 3, 2020, respectively.
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.
- 13 -
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: 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 April 2, 2021, and January 1, 2021, the invested amounts under the plans totaled $101,694,000 and $88,747,000, 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 (loss), net.
As of April 2, 2021, and January 1, 2021, vested amounts due under the plans totaled $102,488,000 and $88,977,000, respectively, and are recorded within accrued payroll and employee benefits and deferred compensation plan liabilities on the Company’s unaudited condensed consolidated balance sheets. Changes in the liability are recorded as adjustments to compensation expense. During the three months ended April 2, 2021, the Company recognized additional compensation expense of $5,579,000 as a result of changes in the market value of the trust assets with the same amount being recorded as income in miscellaneous income (loss), net. During the three months ended April 3, 2020 the Company recognized a reduction to compensation expense of $(14,622,000) as a result of changes in the market value of the trust assets with the same amount being recorded as a loss in miscellaneous income (loss), net.
Note 7: Supplemental Cash Flow Information
The following is supplemental disclosure of cash flow information:
Cash paid during period:
381
1,231
Non-cash investing and financing activities:
Unrealized (loss)/gain on short-term investments
Vested stock unit awards issued to settle accrued bonuses
Accrual for capital expenditures
393
229
Right-of-use asset obtained in exchange for operating lease obligations
573
Note 8: Accounts Receivable, Net
At April 2, 2021 and January 1, 2021, accounts receivable, net, was comprised of the following:
Billed accounts receivable
78,805
80,298
Unbilled accounts receivable
49,887
35,262
Allowance for contract losses and doubtful accounts
(4,481
(3,995
Total accounts receivable, net
- 14 -
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 allowance for contract losses and doubtful accounts is as follows (in thousands):
3,995
Write-offs
(159
4,481
Note 9: 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 months ended April 2, 2021 and April 3, 2020 follows:
Engineering and Other Scientific
93,609
84,887
Environmental and Health
22,872
21,066
Total revenues
Operating Income
34,057
26,641
7,918
7,253
Total segment operating income
41,975
33,894
Corporate operating expense
(17,917
2,094
Total operating income
Certain operating expenses are excluded from the Company’s measure of segment operating income. These expenses include costs associated with its human resources, finance, information technology, and business development groups; the deferred compensation expense/benefit due to the change in value of assets associated with its deferred compensation plan; stock-based compensation associated with restricted stock unit and stock option awards; and the change in its allowance for contract losses and doubtful accounts.
- 15 -
Capital Expenditures
604
566
49
62
Total segment capital expenditures
653
628
Corporate capital expenditures
1,653
411
Total capital expenditures
2,306
1,039
Certain capital expenditures associated with the Company’s corporate cost centers and the related depreciation are excluded from the Company’s segment information. The high level of corporate capital expenditures during the three months ended April 2, 2021 was due to construction costs associated with the Company’s office and laboratory facilities in Natick, Massachusetts.
Depreciation and Amortization
1,010
1,137
46
47
Total segment depreciation and
amortization
1,056
1,184
Corporate depreciation and amortization
600
602
Total depreciation and amortization
One client comprised 10% of the Company’s revenues during the three months ended April 2, 2021. No other single client comprised more than 10% of the Company’s revenues during the three months ended April 2, 2021. No single client comprised more than 10% of the Company’s revenues at April 3, 2020.
Note 10: 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 April 2, 2021.
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 statement 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.
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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 fifteen-year periods. As of April 2, 2021, 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.
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 and Natick facilities. Rental income of $791,000 and $991,000 was included in other income for the three months ended April 2, 2021 and April 3, 2020, respectively.
The components of lease expense included in other operating expenses on the condensed consolidated statement of income were as follows:
Operating lease cost
1,638
1,778
Variable lease cost
292
290
Short-term lease cost
146
125
Supplemental cash flow information related to operating leases was as follows:
Cash paid for amounts included in the measurement of
operating lease liabilities
2,279
2,434
Supplemental balance sheet information related to operating leases was as follows:
Weighted Average Remaining Lease Term
4.2 years
5.0 years
Weighted Average Discount Rate
4.1%
4.4%
Maturities of operating lease liabilities as of April 2, 2021:
Operating Leases
2021 (excluding the three months ended April 2, 2021)
4,658
2022
5,748
2023
3,957
2024
2,304
2025
1,543
2026
1,507
2027
1,466
Total lease payments
21,183
Less imputed interest
(2,335
Total lease liability
18,848
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Note 11: 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.
Note 12: Subsequent Events
On April 29, 2021, the Company’s Board of Directors announced a cash dividend of $0.20 per share of the Company’s common stock, payable June 25, 2021, to stockholders of record as of June 11, 2021.
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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 1, 2021, which are contained in our fiscal 2020 Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on February 26, 2021 (our “2020 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 three months ended April 2, 2021, as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Annual Report.
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RESULTS OF CONSOLIDATED OPERATIONS
Executive Summary
Revenues for the first quarter 2021 increased 10% to $116,481,000 as compared to $105,953,000 during the same period last year. Revenues before reimbursements for the first quarter of 2021 increased 10% to $109,579,000 as compared to $99,720,000 during the same period last year.
During the first quarter of 2021, our results were bolstered by increased activity in human participant studies and litigation projects. We are initiating new projects daily, and at the same time are gradually reengaging on projects that were paused due to coronavirus restrictions and court closures. The pandemic has altered many aspects of our lives, but one trend that has not abated is the growing complexity of our world. We continue to leverage our expertise to understand and enhance human-machine interactions for technologies including wearables, medical devices and advanced vehicles. We advised industry and governments on their most pressing engineering and scientific challenges as society continues to raise expectations for safety, health, sustainability and reliability. These long-term trends that existed prior to the pandemic are now only strengthening, driving increased demand for our services. We continued our work related to physiological monitoring through wearable technology platforms for the U.S. Army and Navy and expanded the engagement to include a coordinated effort in the Department of Defense. We are uniquely positioned to advise clients as they leverage technology to improve human health and enhance human performance.
Net income increased 17% to $30,848,000 during the first quarter of 2021 as compared to $26,282,000 during the same period last year. Diluted earnings per share increased to $0.58 per share as compared to $0.49 in the same period last year. The increases in net income and diluted earnings per share were primarily due to the 10% increase in revenues before reimbursements and decreases in other operating expenses and general and administrative expenses.
We remain focused on selectively adding top talent and 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.
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 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 of 2020 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.
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 continue to advise clients with respect to COVID-19 testing, contract tracing, and occupational health and safety.
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Overview of the Three Months Ended April 2, 2021
During the first quarter of 2021 billable hours increased 2% to 356,000 as compared to 348,000 during the same period last year. Our utilization increased to 76% during the first quarter of 2021 as compared to 71% during the same period last year. Technical full-time equivalent employees decreased 3% to 906 during the first quarter of 2021 as compared to 938 during the same period last year. The decrease in technical full-time equivalent employees was due to the divestiture of our German subsidiary in April of 2020. We continue to selectively hire key talent to expand our capabilities.
Three Months Ended April 2, 2021 compared to Three Months Ended April 3, 2020
(in thousands, except percentages)
Percent
Change
10.3
Percentage of total revenues
80.4
80.1
8.6
19.6
19.9
9.9
The increase in revenues for our Engineering and Other Scientific segment was due to an increase in billable hours and an increase in billing rates. During the first quarter of 2021, billable hours for this segment increased by 2% to 276,000 as compared to 271,000 during the same period last year. Utilization for this segment increased to 77% during the first quarter of 2021 as compared to 71% during the same period last year. The increase in billable hours and utilization was driven by strong demand for our proactive and reactive services across a broad range of industries and use cases. In addition to the steady increase in litigation support and human participant studies, our multidisciplinary battery team continued to see demand for its solutions in electric vehicles and energy storage. Our work in international arbitrations and integrity management advisory services continued at strong levels. Technical full-time equivalent employees in this segment decreased 5% to 692 during the first quarter of 2021 as compared to 731 for the same period last year. The decrease in technical full-time equivalent employees was due to the divestiture of our German subsidiary in April of 2020.
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 quarter of 2021, billable hours for this segment increased by 4% to 80,000 as compared to 77,000 during the same period last year. Utilization in this segment increased to 73% during the first quarter of 2021 as compared to 72% 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. This segment also benefitted from increased activity in litigation related projects and support of human participant studies. Technical full-time equivalent employees in this segment increased 3% to 214 during the first quarter of 2021 as compared to 207 during the same period last year due to our recruiting and retention efforts.
Compensation and Related Expenses
49.1
64.0
47.2
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The increase in compensation and related expenses during the first quarter of 2021 was due to a change in the value of assets associated with our deferred compensation plan, an increase in payroll expense and an increase in bonus expense. During the first quarter of 2021, deferred compensation expense increased by $20,201,000 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 $5,579,000 during the first quarter of 2021 as compared to a decrease in the value of plan assets of $14,622,000 during the same period last year. Payroll expense increased by $1,022,000 during the first quarter of 2021 due to the impact of our annual salary adjustments partially offset by a decrease in technical full-time equivalent employees. During the first quarter of 2021 bonus expense increased by $3,781,000 due to a corresponding increase in income before income taxes, before bonus expense, and before stock-based compensation. 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
-6.2
6.6
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 quarter of 2021 was primarily due to a decrease in occupancy expense of $307,000 and a decrease in office expenses of $212,000. The decreases in occupancy and office expenses were primarily due to COVID-19 pandemic related business restrictions. We expect other operating expenses to grow as we selectively add new talent, make investments in our corporate infrastructure, and transition our workforce back to our offices as COVID-19 pandemic related business restrictions are lifted.
Reimbursable Expenses
10.7
5.9
The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects.
General and Administrative Expenses
-40.8
2.8
5.2
The decrease in general and administrative expenses was primarily due to a decrease in bad debt expense of $1,366,000 and a decrease in travel and meals of $853,000. The decrease in bad debt was due to additional reserves we booked to our allowance for doubtful accounts during the first quarter of 2020 as a result of the economic uncertainty associated with the COVID-19 pandemic. The decrease in travel and meals was due to the travel restrictions put in place due to the COVID-19 pandemic. We expect general and administrative expenses to increase as we selectively add new talent, expand our business development and staff development initiatives, and increase travel and meal expenses as COVID-19 pandemic related business restrictions are lifted.
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27.8
9.2
23.8
955.6
-33.1
The increase in operating income for our Engineering and Other Scientific segment during the first quarter of 2021 as compared to the same period last year was due to an increase in revenues. The increase in revenues was driven by strong demand for our proactive and reactive services across a broad range of industries and use cases. In addition to the steady increase in litigation support and human participant studies, our multidisciplinary battery team continued to see demand for its solutions in electric vehicles and energy storage. Our work in international arbitrations and integrity management advisory services continued at strong levels.
The increase in operating income for our Environmental and Health segment during the first quarter of 2021 as compared to the same period last year was due to an increase in revenues. The increase in revenues 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. This segment also benefitted from increased activity in litigation related projects and support of human participant studies.
Certain operating expenses are excluded from the Company’s measure of segment operating income. These expenses include the costs associated with our human resources, finance, information technology, and business development groups; the deferred compensation expense/benefit due to the change in value of assets associated with our deferred compensation plan; stock-based compensation associated with restricted stock unit and stock option awards; and the change in our allowance for contract losses and doubtful accounts.
The increase in corporate operating expenses during the first quarter of 2021 as compared to the same period last year was primarily due to an increase in deferred compensation expense. During the first quarter of 2021, deferred compensation expense increased $20,201,000, 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 $5,579,000 during the first quarter of 2021 as compared to a decrease in the value of plan assets of $14,622,000 during the same period last year.
Other Income, Net
Other income, net
-150.9
-11.3
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 and Natick facilities. 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 change in the realized gain/loss on foreign exchange and a decrease in interest income of $846,000. During the first quarter of 2021, other income, net, increased by $20,201,000 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 $5,579,000 during the first quarter of 2021 as compared to a decrease in the value of the plan assets of $14,622,000
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during the same period last year. During the first quarter of 2021, other income, net, decreased by $1,155,000 as compared to the same period last year due to a change in the realized gain/loss on foreign exchange. This decrease consisted of a realized loss on foreign exchange of $334,000 during the first quarter of 2021 as compared to a realized gain on foreign exchange of $821,000 during the first quarter of 2020. The decrease in interest income was due to lower interest rates for our cash equivalents and short-term investments.
Income Taxes
-67.6
-0.6
-2.1
Effective tax rate
-2.4
-9.3
The excess tax benefit associated with stock-based awards was $8,782,000 during the first quarter of 2021 as compared to $8,772,000 during the same period last year. Excluding the impact of the excess tax benefit, the effective tax rate would have been 26.8% during the first quarter of 2021 as compared to 27.2% 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.
We financed our business during the first three months of 2021 through available cash. We invest our excess cash in cash equivalents and short-term investments. As of April 2, 2021, our cash, cash equivalents and short-term investments were $214,520,000 as compared to $242,526,000 at January 1, 2021.
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 operating activities during the first three months of 2021, as compared to the same period last year, was due to an increase in net income and changes in operating assets and liabilities.
The increase in net cash provided by investing activities during the first three months of 2021, as compared to the same period last year, was due to an increase in the maturity of short-term investments, partially offset by an increase in the purchase of short-term investments.
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The decrease in net cash used in financing activities during the first three months of 2021, as compared to the same period last year, was due to a decrease in repurchases of our common stock.
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 2020 Annual Report. There have been no material changes in our contractual obligations since January 1, 2021.
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 $95,289,000 were recorded as a long-term liability on our unaudited condensed consolidated balance sheet at April 2, 2021. Vested amounts due under the plan of $7,199,000 were recorded as a current liability on our unaudited condensed consolidated balance sheet at April 2, 2021. 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 April 2, 2021, invested amounts under the plan of $94,395,000 were recorded as a long-term asset on our unaudited condensed consolidated balance sheet. As of April 2, 2021, invested amounts under the plan of $7,299,000 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.
The following table shows EBITDA (determined as shown in the reconciliation table below) as a percentage of revenues before reimbursements for the three months ended April 2, 2021 and April 3, 2020:
EBITDA
31,753
24,966
EBITDA as a % of revenues before
reimbursements
29.0
25.0
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The increase in EBITDA as a percentage of revenues before reimbursements during the first quarter of 2021 as compared to the same period last year was primarily due to 10% growth in revenues before reimbursements and decreases in other operating expenses and general and administrative expenses. The increase in revenues was due to increased activity in human participant studies and litigation projects. The decreases in other operating expenses and general and administrative expenses were primarily due to the business and travel restrictions associated with the COVID-19 pandemic. We expect other operating expenses and general and administrative expenses to increase as COVID-19 pandemic related business restrictions are lifted
The following table is a reconciliation of EBITDA and EBITDAS to the most comparable GAAP measure, net income, for the three months ended April 2, 2021:
Add back (subtract):
(29
(875
Depreciation and amortization
EBITDAS
38,035
31,104
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 Euro, 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 April 2, 2021, we had net assets of approximately $17.9 million with a functional currency of the British Pound, net assets of approximately $6.1 million with a functional currency of the Chinese Yuan, and net assets of approximately $4.8 million 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 April 2, 2021, we had net assets denominated in the non-functional currency of approximately $8.0 million.
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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 significant. 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 April 2, 2021, 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 April 2, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Exponent is not engaged in any material legal proceedings.
Item 1A. Risk Factors
There have been no material changes from risk factors as previously discussed under the heading “Risk Factors” in the Company’s 2020 Annual Report.
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 April 2, 2021 (in thousands, except price per share):
Number
of Shares
Purchased
Average
Price
Paid Per
Share
Number of
as Part of
Publicly
Announced
Programs
Approximate
Dollar Value
of Shares That
May Yet Be
Under the
January 2 to January 29
75,455
January 30 to February 26
February 27 to April 2
Repurchases of the Company’s common stock were affected pursuant to a repurchase program authorized by the Company’s Board of Directors. On January 31, 2019, the Company’s Board of Directors announced $75,000,000 for the repurchase of the Company’s common stock. On May 29, 2020, the Company’s Board of Directors announced an additional $45,000,000 for repurchase of the Company’s stock. These repurchase programs have no expiration dates.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Item 5. Other Information
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Item 6. Exhibits
Exhibit Index
31.1
Certification of Chief Executive Officer pursuant to Rule 13a – 14(a) under the Securities Exchange Act of 1934.
31.2
Certification of Chief Financial Officer pursuant to Rule 13a – 14(a) under the Securities Exchange Act of 1934.
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
Exhibit 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.
(Registrant)
Date: May 7, 2021
/s/ Catherine Ford Corrigan
Catherine Ford Corrigan, Ph.D., Chief Executive Officer
/s/ Richard L. Schlenker
Richard L. Schlenker, Chief Financial Officer
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