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 1, 2022
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 July 29, 2022, the latest practicable date, the registrant had 51,116,758 shares of common stock outstanding.
TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
3
Item 1.
Financial Statements (unaudited):
Condensed Consolidated Balance Sheets July 1, 2022 and December 31, 2021
Condensed Consolidated Statements of Income For the Three and Six Months Ended July 1, 2022 and July 2, 2021
4
Condensed Consolidated Statements of Comprehensive Income For the Three and Six Months Ended July 1, 2022 and July 2, 2021
5
Condensed Consolidated Statements of Stockholders’ Equity For the Three and Six Months Ended July 1, 2022 and July 2, 2021
6
Condensed Consolidated Statements of Cash Flows For the Six Months Ended July 1, 2022 and July 2, 2021
8
Notes to Unaudited Condensed Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
32
Item 4.
Controls and Procedures
PART II – OTHER INFORMATION
33
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
34
Signatures
35
- 2 -
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
July 1, 2022 and December 31, 2021
(in thousands, except par value)
(unaudited)
July 1, 2022
December 31, 2021
Assets
Current assets:
Cash and cash equivalents
$
165,619
297,687
Accounts receivable, net of allowance for contract losses and doubtful accounts of $5,540 and $4,423 at July 1, 2022 and December 31, 2021, respectively
161,774
139,861
Prepaid expenses and other current assets
15,141
15,214
Total current assets
342,534
452,762
Property, equipment and leasehold improvements, net
63,921
59,971
Operating lease right-of-use assets
16,139
14,370
Goodwill
8,607
Deferred income taxes
46,968
46,546
Deferred compensation plan assets
87,163
99,962
Other assets
1,372
1,521
Total assets
566,704
683,739
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities
26,668
24,504
Accrued payroll and employee benefits
80,603
103,552
Deferred revenues
15,225
19,762
Operating lease liabilities
5,038
5,164
Total current liabilities
127,534
152,982
Other liabilities
2,554
2,886
Deferred compensation plan liabilities
87,639
100,999
11,483
9,807
Total liabilities
229,210
266,674
Stockholders’ equity:
Common stock, $0.001 par value; 120,000 shares authorized; 65,707 shares issued at July 1, 2022 and December 31, 2021
66
Additional paid-in capital
296,098
281,419
Accumulated other comprehensive loss
Foreign currency translation adjustments
(3,643
)
(1,983
Retained earnings
506,605
478,370
Treasury stock, at cost; 14,590 and 13,591 shares held at July 1, 2022 and December 31, 2021, respectively
(461,632
(340,807
Total stockholders’ equity
337,494
417,065
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 and Six Months Ended July 1, 2022 and July 2, 2021
(in thousands, except per share data)
Three Months Ended
Six Months Ended
July 2, 2021
Revenues:
Revenues before reimbursements
118,218
112,468
236,088
222,047
Reimbursements
12,063
7,409
22,671
14,311
Revenues
130,281
119,877
258,759
236,358
Operating expenses:
Compensation and related expenses
58,446
71,815
127,203
146,353
Other operating expenses
8,755
8,121
16,920
15,831
Reimbursable expenses
General and administrative expenses
5,740
3,160
9,971
6,433
Total operating expenses
85,004
90,505
176,765
182,928
Operating income
45,277
29,372
81,994
53,430
Other income, net:
Interest income, net
175
12
196
41
Miscellaneous income (expense), net
(10,020
5,283
(13,951
11,322
Total other income, net
(9,845
5,295
(13,755
11,363
Income before income taxes
35,432
34,667
68,239
64,793
Income taxes
9,677
9,267
12,875
8,545
Net income
25,755
25,400
55,364
56,248
Net income per share:
Basic
0.50
0.48
1.06
1.07
Diluted
0.49
1.05
Shares used in per share computations:
51,890
52,637
52,154
52,587
52,394
53,285
52,725
53,313
Cash dividends declared per common share
0.24
0.20
0.40
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
(1,350
(32
(1,660
211
Unrealized losses on available- for-sale investment securities arising during the period, net of tax
-
(61
(65
Comprehensive income
24,405
25,307
53,704
56,394
- 5 -
EXPONENT, INC
Condensed Consolidated Statements of Stockholders’ Equity
Three and Six Months Ended July 1, 2022
Common Stock
Additionalpaid-in
Accumulatedothercomprehensive
Retained
Treasury Stock
(In thousands)
Shares
Amount
capital
loss
earnings
Total
Balance at December 31, 2021
65,707
13,591
Employee stock purchase plan
511
(6
53
564
Amortization of unrecognized stock-based compensation
4,094
Purchase of treasury stock
553
(48,554
(310
Grant of restricted stock units to settle accrued bonus
10,200
Settlement of restricted stock units
(2,335
(1,392
(253
(9,177
(12,904
Dividends and dividend equivalent rights
(13,200
29,609
Balance at April 1, 2022
293,889
(2,293
493,387
13,885
(398,485
386,564
450
56
506
1,845
720
(63,289
(86
(9
86
(12,537
Balance at July 1, 2022
14,590
- 6 -
Three and Six Months Ended July 2, 2021
income (loss)
Balance at January 1, 2021
265,328
(1,932
421,809
13,903
(323,773
361,498
485
58
543
3,738
243
7,637
(3,176
(1,679
(313
(10,779
(15,634
Unrealized gain on investments
(4
(11,261
30,848
Balance at April 2, 2021
274,012
(1,693
439,717
13,584
(334,494
377,608
424
480
1,938
79
(7,000
(93
61
Unrealized loss on investments
(10,595
Balance at July 2, 2021
276,281
(1,786
454,583
13,648
(341,377
387,767
- 7 -
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended July 1, 2022 and July 2, 2021
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, equipment and leasehold improvements
3,501
3,298
Amortization of premiums and accretion of discounts on short-term investments
(10
Provision for contract losses and doubtful accounts
1,470
932
Stock-based compensation
11,467
10,874
Deferred income tax provision
(422
(549
Changes in operating assets and liabilities:
Accounts receivable
(23,383
(32,110
(3,163
(1,161
Change in operating leases
(219
(540
(582
11,724
(15,680
(2,438
(4,537
(816
Net cash provided by operating activities
23,816
45,452
Cash flows from investing activities:
Capital expenditures
(5,914
(4,246
Purchase of short-term investments
(9,997
Maturity of short-term investments
55,000
Net cash (used in) provided by investing activities
40,757
Cash flows from financing activities:
Payroll taxes for restricted stock units
(15,666
Repurchase of common stock
(111,843
Exercise of stock-based payment awards
1,070
1,023
Dividends and dividend equivalents rights
(24,859
(22,354
Net cash used in financing activities
(148,536
(43,997
Effect of foreign currency exchange rates on cash and cash equivalents
(1,434
216
Net change in cash and cash equivalents
(132,068
42,428
Cash and cash equivalents at beginning of period
197,525
Cash and cash equivalents at end of period
239,953
- 8 -
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 1, 2022 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 December 31, 2021, which was filed with the U.S. Securities and Exchange Commission on February 25, 2022.
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
64
%
62
63
Environmental and Health
15
17
16
18
Total time and materials revenues
- 9 -
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:
1
Total fixed price revenues
21
Deferred revenues represent amounts billed to clients in advance of services provided. During the second quarter of 2022, $6,701,000 of revenues were recognized that were included in the deferred revenue balance at April 1, 2022. During the first six months of 2022, $12,885,000 of revenues were recognized that were included in the deferred revenue balance at December 31, 2021.
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 $4,727,000 and $5,059,000 during the second quarter of 2022 and 2021, respectively, and $11,044,000 and $7,394,000 during the first six months of 2022 and 2021, respectively.
- 10 -
Note 3: Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including money market 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 1, 2022 and July 2, 2021. 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 1, 2022:
Fair Value Measurements at Reporting Date Using
Quoted Prices inActive Marketsfor IdenticalAssets (Level 1)
Significant OtherObservable Inputs(Level 2)
SignificantUnobservableInputs(Level 3)
Money market securities (1)
51,621
Fixed income trading securities held in deferred compensation plan (2)
32,410
Equity trading securities held in deferred compensation plan (2)
65,338
149,369
Liabilities
Deferred compensation plan (3)
98,224
- 11 -
The fair value of these certain financial assets and liabilities was determined using the following inputs at December 31, 2021:
101,581
25,275
84,067
210,923
110,379
Money market securities as of July 1, 2022 and December 31, 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 and cash equivalents consisted of the following as of July 1, 2022:
Gross
Amortized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
Classified as current assets:
Cash
113,998
Cash equivalents:
Money market securities
Total cash equivalents
Total cash and cash equivalents
- 12 -
Cash and cash equivalents consisted of the following as of December 31, 2021:
196,106
At July 1, 2022 and December 31, 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 July 1, 2022 and December 31, 2021, but require disclosure of their fair values: accounts receivable, other assets and accounts payable. The estimated fair value of such instruments at July 1, 2022 and December 31, 2021 approximates their carrying value as reported on the Company’s unaudited condensed consolidated balance sheet.
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
198
232
202
234
Effect of dilutive restricted stock units outstanding
306
416
369
492
Shares used in diluted per share computation
Common stock options to purchase 33,333 shares and 33,333 shares were excluded from the diluted per share calculation for the three months ended July 1, 2022 and July 2, 2021, respectively, due to their anti-dilutive effect. There were no equity awards excluded from the diluted per share calculation for the six months ended July 1, 2022. Common stock options to purchase 26,007 shares were excluded from the diluted per share calculation for the six months July 2, 2021, 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
- 13 -
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 $2,752,000 and $2,654,000 during the three months ended July 1, 2022 and July 2, 2021, respectively. For the six months ended July 1, 2022 and July 2, 2021, the Company recorded stock-based compensation expense associated with accrued bonus awards of $5,528,000 and $5,198,000, 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 $1,633,000 and $1,751,000 during the three months ended July 1, 2022 and July 2, 2021, respectively. The Company recorded stock-based compensation expense associated with the unvested restricted stock unit awards of $5,528,000 and $5,313,000 during the six months ended July 1, 2022 and July 2, 2021, 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 $212,000 and $187,000 during the three months ended July 1, 2022 and July 2, 2021, respectively. The Company recorded stock-based compensation expense associated with stock option grants of $411,000 and $363,000 during the six months ended July 1, 2022 and July 2, 2021, 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.
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.
- 14 -
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 July 1, 2022, and December 31, 2021 the invested amounts under the plans totaled $97,748,000 and $109,342,000, 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 July 1, 2022, and December 31, 2021 vested amounts due under the plans totaled $98,224,000 and $110,379,000, 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 July 1, 2022, the Company recognized a reduction to compensation expense of $11,259,000 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. During the three months ended July 2, 2021, the Company recognized additional compensation expense of $4,676,000 as a result of changes in the market value of the trust assets with the same amount being recorded as gain in miscellaneous income (loss), net. During the six months ended July 1, 2022, the Company recognized a reduction in compensation expense of $15,959,000 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. During the six months ended July 2, 2021, the Company recognized additional compensation expense of $10,255,000 as a result of changes in the market value of the trust assets with the same amount being recorded as income in miscellaneous income, net.
Note 7: Supplemental Cash Flow Information
The following is supplemental disclosure of cash flow information:
Cash paid during period:
13,763
5,503
Non-cash investing and financing activities:
Unrealized loss on short-term investments
Vested stock unit awards issued to settle accrued bonuses
Accrual for capital expenditures as of period end
1,950
161
Right-of-use asset obtained in exchange for operating lease obligations
4,820
573
Note 8: Accounts Receivable, Net
At July 1, 2022 and December 31, 2021, accounts receivable, net, was comprised of the following:
July 1,
December 31,
2022
2021
Billed accounts receivable
115,622
102,028
Unbilled accounts receivable
51,692
42,256
Allowance for contract losses and doubtful accounts
(5,540
(4,423
Total accounts receivable, net
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
- 15 -
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):
4,423
Write-offs
(353
5,540
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 and six months ended July 1, 2022 and July 2, 2021 follows:
Engineering and Other Scientific
109,150
98,139
213,765
191,748
21,131
21,738
44,994
44,610
Total revenues
Operating Income
40,032
37,914
78,522
71,970
6,846
7,495
14,681
15,414
Total segment operating income
46,878
45,409
93,203
87,384
Corporate operating expense
(1,601
(16,037
(11,209
(33,954
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.
- 16 -
Capital Expenditures
1,616
814
2,180
1,418
30
Total segment capital expenditures
1,622
844
2,236
1,497
Corporate capital expenditures
3,034
655
5,215
2,308
Total capital expenditures
4,656
1,499
7,451
3,805
Certain capital expenditures associated with the Company’s corporate cost centers and the related depreciation are excluded from the Company’s segment information.
Depreciation and Amortization
1,154
976
2,193
1,986
47
83
93
Total segment depreciation and amortization
1,195
2,276
2,079
Corporate depreciation and amortization
617
619
1,225
1,219
Total depreciation and amortization
1,812
1,642
One client comprised 15% and 14% of the Company’s revenues during the three months ended July 1, 2022 and July 2, 2021, respectively. The same client comprised 14% and 12% of the Company's revenue during the six months ended July 1, 2022 and July 2, 2021, respectively.
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 right-of-use (“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 1, 2022.
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.
- 17 -
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 July 1, 2022, 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 $774,000 and $615,000 was included in other income for the three months ended July 1, 2022 and July 2, 2021, respectively. Rental income of $1,418,000 and $1,407,000 was included in other income for the six months ended July 1, 2022 and July 2, 2021, respectively.
The components of lease expense included in other operating expenses on the condensed consolidated statements of income were as follows:
Operating lease cost
1,799
1,623
3,566
3,261
Variable lease cost
327
255
639
547
Short-term lease cost
102
105
231
251
Supplemental cash flow information related to operating leases was as follows:
Cash paid for amounts included in the measurement of operating lease liabilities
1,364
1,535
3,565
3,814
Supplemental balance sheet information related to operating leases was as follows:
Weighted Average Remaining Lease Term
4.2 years
4.1 years
Weighted Average Discount Rate
3.9%
4.2%
Maturities of operating lease liabilities as of July 1, 2022:
Operating
Leases
2022 (excluding the six months ended July 1, 2022)
2,753
2023
5,103
2024
3,382
2025
2,551
2026
2,589
2027
2,071
Total lease payments
18,449
Less imputed interest
(1,928
Total lease liability
16,521
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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 July 28, 2022, the Company’s Board of Directors announced a cash dividend of $0.24 per share of the Company’s common stock, payable September 23, 2022, to stockholders of record as of September 9, 2022.
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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 December 31, 2021, which are contained in our fiscal 2021 Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on February 25, 2022 (our “2021 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 our management, as well as assumptions made by and information currently available to our 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 us or our management, identify such forward-looking statements. Such statements reflect the current views of us or our 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, our 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 us or any other person that the future events, plans, or expectations we contemplated 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. We do 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 1, 2022, as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 Annual Report.
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RESULTS OF CONSOLIDATED OPERATIONS
Executive Summary
Revenues for the second quarter of 2022 increased 9% to $130,281,000 as compared to $119,877,000 during the same period last year. Revenues before reimbursements for the second quarter of 2022 increased 5% to $118,218,000 as compared to $112,468,000 during the same period last year.
During the second quarter of 2022, growth continued across several industries, with work in the consumer products, chemicals, automotive and life sciences sectors driving a number of engagements. On the proactive side, our asset integrity and risk assessments with utilities and energy storage-related work continued to be strong, in addition to machine learning data studies. Among our reactive services, litigation-related work was robust and we saw increased demand for our services related to product safety and recalls.
Net income increased 1% to $25,755,000 during the second quarter of 2022 as compared to $25,400,000 during the same period last year. Diluted earnings per share increased to $0.49 per share as compared to $0.48 in the same period last year. The increases in net income and diluted earnings per share were primarily due to the increase in revenues before reimbursements.
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.
Overview of the Three Months Ended July 1, 2022
During the second quarter of 2022, billable hours increased 2% to 372,000 as compared to 365,000 during the same period last year. Our utilization decreased to 77% during the second quarter of 2022 as compared to 79% during the same period last year. Technical full-time equivalent employees increased 5% to 934 during the second quarter of 2022 as compared to 888 during the same period last year. We continue to selectively hire key talent to expand our capabilities.
Three Months Ended July 1, 2022 compared to Three Months Ended July 2, 2021
(in thousands, except percentages)
PercentChange
11.2
Percentage of total revenues
83.8
81.9
-2.8
16.2
18.1
8.7
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 second quarter of 2022, billable hours for this segment increased by 2% to 293,000 as compared to 287,000 during the same period last year. Utilization for this segment decreased to 79% during the second quarter of 2022 as compared to 82% during the same period last year. The increase in billable hours was driven by broad-based growth, with continued strong demand for our services across the utilities, consumer products, automotive, and life sciences sectors. Utilization during the second quarter of 2021 was historically strong. Technical full-time equivalent employees in this segment increased 6% to 715 during the second quarter of 2022 as compared to 677 for the same period last year due to our recruiting and retention efforts.
The decrease in revenues for our Environmental and Health segment was due to a decrease in our realized billing rate. The decrease in our realized billing rate was primarily due to the decrease in the value of the British Pound
- 21 -
as compared to the U.S. Dollar. During the second quarter of 2022, billable hours for this segment increased by 1% to 79,000 as compared to 78,000 during the same period last year. Utilization in this segment decreased to 69% during the second quarter of 2022 as compared to 71% during the same period last year. The decrease in utilization was due to investments in recruiting and marketing in our Health Practice. Technical full-time equivalent employees in this segment increased 4% to 219 during the second quarter of 2022 as compared to 211 during the same period last year due to our recruiting and retention efforts.
Compensation and Related Expenses
-18.6
44.9
59.9
The decrease in compensation and related expenses during the second quarter of 2022 was due to a change in the value of assets associated with our deferred compensation plan, partially offset by an increase in payroll expense and an increase in fringe benefits. During the second quarter of 2022, deferred compensation expense decreased by $15,935,000 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 $11,259,000 during the second quarter of 2022 as compared to an increase in the value of plan assets of $4,676,000 during the same period last year. Payroll expense increased by $2,228,000 and fringe benefits increased by $276,000 during the second quarter of 2022 due to the impact of our annual salary adjustments and an increase in technical full-time equivalent employees. 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
7.8
6.7
6.8
Other operating expenses include facilities-related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. The increase in other operating expenses during the second quarter of 2022 was primarily due to an increase in occupancy expense of $283,000, an increase in depreciation expense of $170,000, and an increase in information technology related expenses of $169,000. The increases in occupancy expenses was due to growth in technical full-time equivalent employees and the transition back to our offices from a remote work environment. The increases in depreciation and information technology related expenses were due to continued investment in our corporate infrastructure. 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
62.8
9.3
6.2
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The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects. The increase in reimbursable expenses during the second quarter of 2022 was primarily due to an increase in project-related travel and other project-related expenses as COVID-19 pandemic-related business and travel restrictions eased.
General and Administrative Expenses
81.6
4.4
2.6
The increase in general and administrative expenses was primarily due to an increase in travel and meals of $1,133,000, an increase in outside consulting expense of $548,000, an increase in recruiting expenses of 304,000, an increase in marketing and business development expenses of $222,000 and several other individually insignificant increases. The increase in travel and meals was due to the easing of COVID-19 pandemic-related business and travel restrictions. The increase in outside consulting expense was due to several ongoing projects associated with investments in our corporate infrastructure. The increases in recruiting expenses was due to the increase in technical full-time equivalent employees. The increase in marketing and business development was due to an increase in our business development activities. 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 eased.
5.6
-8.7
3.2
-90.0
54.2
The increase in operating income for our Engineering and Other Scientific segment during the second quarter of 2022 as compared to the same period last year was due to an increase in revenues. The increase in revenues was driven by broad-based growth, with continued strong demand for our services across the utilities, consumer products, automotive, and life sciences sectors. The decrease in operating income for our Environmental and Health segment was due to investments in recruiting and marketing in our Health Practice.
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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 decrease in corporate operating expenses during the second quarter of 2022 as compared to the same period last year was primarily due to a decrease in deferred compensation expense partially offset by an increase in the costs associated with our human resources, finance, information technology and business development groups. During the second quarter of 2022, deferred compensation expense decreased $15,935,000, 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 $11,259,000 during the second quarter of 2022 as compared to an increase in the value of plan assets of $4,676,000 during the same period last year.
Other Income, Net
Other income, net
-285.9
-7.6
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 and Natick facilities. The decrease in other income, net, was primarily due to a change in the value of assets associated with our deferred compensation plan partially offset by an increase in the gain on foreign exchange, an increase in interest income and an increase in rental income. During the second quarter of 2022, other income, net, decreased by $15,935,000 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 $11,259,000 during the second quarter of 2022 as compared to an increase in the value of the plan assets of $4,676,000 during the same period last year. The increase in the gain on foreign exchange of $451,000 was due to an increase in the value of assets denominated in currencies that are not our functional currency. The increase in interest income of $161,000 was due to an increase in interest rates. The increase in rental income of $159,000 was due to a decrease in our vacancy rate.
Income Taxes
7.4
7.7
Effective tax rate
27.3
26.7
The increase in income tax expense was due to an increase in pre-tax income and an increase in our effective tax rate. The increase in our effective tax rate was due primarily to an increase in non-deductible officer compensation.
Six Months Ended July 1, 2022 compared to Six Months Ended July 2, 2021
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11.5
82.6
81.1
0.9
17.4
18.9
9.5
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 six months of 2022, billable hours for this segment increased by 4% to 583,000 as compared to 563,000 during the same period last year. Utilization for this segment decreased to 78% during the first six months of 2022 as compared to 79% during the same period last year. Growth was driven by strong demand for Exponent’s 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 increased 5% to 716 during the first six months of 2022 as compared to 684 for the same period last year due to our recruiting and retention efforts.
The increase in revenues for our Environmental and Health segment was due to an increase in billable hours partially offset by a decrease in our realized billing rate. During the first six months of 2022, billable hours for this segment increased by 3% to 163,000 as compared to 159,000 during the same period last year. Utilization in this segment decreased to 71% during the first six months of 2022 as compared to 72% during the same period last year. This segment benefited from increased activity in litigation-related projects and support of human participant studies. The decrease in our realized billing rate was primarily due to the decrease in the value of the British Pound as compared to the U.S. Dollar. Technical full-time equivalent employees in this segment increased by 4% to 220 during the first six months of 2022 as compared to 212 during the same period last year due to our recruiting and retention efforts.
-13.1
49.2
61.9
The decrease in compensation and related expenses during the first six months of 2022 was due to a change in the value of assets associated with our deferred compensation plan partially offset by an increase in payroll expense, an increase in fringe benefits, and an increase in bonus expense. During the first six months of 2022, deferred compensation expense decreased $26,214,000 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 $15,959,000 during the first six months of 2022 as compared to an increase in the value of plan assets of $10,255,000 during the same period last year. Payroll expense increased $4,468,000 during the first six months of 2022 due to the increase in technical full-time equivalent employees and the impact of our annual salary adjustments. Fringe benefits increased by $1,059,000 during the first six months of 2022 due to the increase in technical full-time equivalent employees and the impact of our annual salary adjustments. Bonus expense increased by $1,179,000 during the first six months of 2022 due to a corresponding increase to our bonus pool which is equal to 33% of income before income taxes, interest income, bonus expense, and 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.
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6.9
6.5
Other operating expenses include facilities-related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. The increase in other operating expenses during the first six months of 2022 was primarily due to an increase in occupancy expense of $364,000, an increase in information technology related expenses of $325,000 and an increase in depreciation expense of $202,000. The increase in occupancy expenses was due to growth in technical full-time equivalent employees and the transition back to our offices from a remote work environment. The increases in information technology related expenses and depreciation expense were due to continued investment in our corporate infrastructure. 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.
58.4
8.8
6.1
The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects. The increase in reimbursable expenses during the first six months of 2022 was primarily due to an increase in project-related travel and other project-related expenses as COVID-19 business and travel restrictions eased.
55.0
3.9
2.7
The increase in general and administrative expenses was primarily due to an increase in travel and meals of $1,592,000, an increase in outside consulting expense of $573,000, an increase in recruiting expenses of $395,000, an increase in marketing and business development expenses of $189,000 and several other individually insignificant increases. The increase in travel and meals was due to the easing of COVID-19 pandemic-related business and travel restrictions. The increase in outside consulting expense was due to several ongoing projects associated with investments in our corporate infrastructure. The increases in recruiting expenses was due to the increase in technical full-time equivalent employees. The increase in marketing and business development was due to an increase in our business development activities. 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 eased.
9.1
-4.8
-67.0
53.5
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The increase in operating income for our Engineering and Other Scientific segment during the first six months of 2021 as compared to the same period last year was due to an increase in revenues. The increase in revenues was due to an increase in billable hours and an increase in billing rates. Growth was driven by strong demand for Exponent’s 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 decrease in operating income for our Environmental and Health segment was due to investments in recruiting and marketing in our Health Practice.
Certain operating expenses are excluded from our 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 decrease in corporate operating expenses during the first six months of 2022 as compared to the same period last year was primarily due to a decrease in deferred compensation expense partially offset by an increase in the costs associated with our human resources, finance, information technology and business development groups. During the first six months of 2022, deferred compensation expense decreased $26,214,000, 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 $15,959,000 during the first six months of 2022 as compared to an increase in the value of plan assets of $10,255,000 during the same period last year.
-221.1
-5.3
4.8
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 and Natick facilities. The decrease in other income, net, was primarily due to a change in the value of assets associated with our deferred compensation plan partially offset by an increase in the realized gain on foreign exchange and an increase in interest income. During the first six months of 2022, other income, net, decreased $26,214,000 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 $15,959,000 during the first six months of 2022 as compared to an increase in the value of the plan assets of $10,255,000 during the same period last year. During the first six months of 2022, other income, net, increased by $893,000 as compared to the same period last year due to a change in the realized gain/loss on foreign exchange. This increase consisted of a realized gain on foreign exchange of $562,000 during the first six months of 2022 as compared to a realized loss on foreign exchange of $331,000 during the same period last year. During the first six months of 2022, interest income increased by $155,000 as compared to the same period last year due to an increase in interest rates.
50.7
5.0
3.6
13.2
- 27 -
The excess tax benefit associated with stock-based awards was $6,040,000 during the first six months of 2022 as compared to $8,823,000 during the same period last year. Excluding the impact of the excess tax benefit, the effective tax rate would have been 27.7% during the first six months of 2022 as compared to 26.8% during the same period last year. The increase in our effective tax rate, excluding the impact of the excess tax benefit, was due primarily to an increase in non-deductible officer compensation.
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LIQUIDITY AND CAPITAL RESOURCES
We believe our existing balances of cash, cash equivalents, 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.
Net cash (used in) / provided by investing activities
We financed our business during the first six months of 2022 through available cash. As of July 1, 2022, our cash and cash equivalents were $165,619,000 as compared to $297,687,000 at December 31, 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 used in investing activities during the first six months of 2022, as compared to the net cash provided by investing activities during the same period last year, was due to a decrease in the maturity of short-term investments partially offset by a decrease in the purchase of short-term investments.
The increase in net cash used in financing activities during the first six months of 2022, as compared to the same period last year, was due to an increase in repurchases of our common stock and an increase in dividends partially offset by a reduction in payroll taxes for restricted stock units.
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.
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 $87,639,000 were recorded as a long-term liability on our unaudited condensed consolidated balance sheet at July 1, 2022. Vested amounts due under the plan of $10,585,000 were recorded as a current liability on our unaudited condensed consolidated balance sheet at July 1, 2022. Our 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 1, 2022, invested amounts under the plan of $87,163,000 were recorded as a long-term asset on our unaudited condensed consolidated balance sheet. As of July 1, 2022, invested amounts under the plan of $10,585,000 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.
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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 July 1, 2022 and July 2, 2021:
EBITDA
37,069
36,297
71,544
68,050
EBITDA as a % of revenues before reimbursements
31.4
32.3
30.3
30.6
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The decrease in EBITDA as a percentage of revenues before reimbursements during the second quarter of 2022 as compared to the same period last year was primarily due to the decrease in utilization and an increase in other operating and general and administrative expenses. Our utilization decreased to 77% during the second quarter of 2022 as compared to 79% during the same period last year. Utilization during the second quarter of 2021 was historically strong. Other operating and general and administrative expenses increased during the second quarter of 2022 due to an increase in travel and meals associated with the easing of COVID-19 pandemic-related business and travel restrictions, an increase in technical full-time equivalent employees, investments in our corporate infrastructure, and an increase in marketing and business development activities.
The decrease in EBITDA as a percentage of revenues before reimbursements during the first six months of 2022 as compared to the same period last year was primarily due to an increase in other operating and general and administrative expenses. Other operating and general and administrative expenses increased during the first six months of 2022 due to an increase in travel and meals associated with the easing of COVID-19 pandemic-related business and travel restrictions, an increase in technical full-time equivalent employees, investments in our corporate infrastructure, and an increase in marketing and business development activities.
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 1, 2022 and July 2, 2021:
Add back (subtract):
(175
(12
(196
(41
Depreciation and amortization
4,597
4,592
EBITDAS
41,666
40,889
83,011
78,924
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk associated with our balances of cash and cash equivalents. 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 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 July 1, 2022, we had net assets of approximately $13.5 million with a functional currency of the British Pound, net assets of approximately $4.8 million with a functional currency of the Chinese Yuan, and net assets of approximately $6.0 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 July 1, 2022, we had net assets denominated in the non-functional currency of approximately $7.4 million.
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
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 1, 2022, 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.
There were no changes in our internal control over financial reporting during the three-month period ended July 1, 2022 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 2021 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 July 1, 2022 (in thousands, except price per share):
TotalNumberof SharesPurchased
AveragePricePaid PerShare
TotalNumber ofSharesPurchasedas Part ofPubliclyAnnouncedPrograms
ApproximateDollar Valueof Shares ThatMay Yet BePurchasedUnder thePrograms (1)
April 2 to April 29
169,901
April 30 to May 27
638
88.76
113,274
May 28 to July 1
82
81.72
106,611
87.96
Repurchases of the Company’s common stock were affected pursuant to a repurchase program authorized by the Company’s Board of Directors.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Item 5. Other Information
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Item 6. Exhibits
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: August 5, 2022
/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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