Exponent(EXPO) - 2020 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for Exponent, Inc Item 1. Financial Statements This section presents Exponent, Inc.'s unaudited condensed consolidated financial statements and detailed notes Condensed Consolidated Balance Sheets This table provides a snapshot of Exponent, Inc.'s financial position at specific dates Condensed Consolidated Balance Sheets (in thousands) | Metric | October 2, 2020 | January 3, 2020 | | :------------------------------------------------------------------------------------------------------------------------------------ | :-------------- | :-------------- | | Assets | | | | Total current assets | $328,649 | $364,044 | | Property, equipment and leasehold improvements, net | $60,395 | $61,587 | | Operating lease right-of-use assets | $20,085 | $23,003 | | Goodwill | $8,607 | $8,607 | | Deferred income taxes | $39,383 | $36,821 | | Deferred compensation plan assets | $76,204 | $68,400 | | Other assets | $1,343 | $949 | | Total assets | $534,666 | $563,411 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $96,371 | $123,960 | | Other liabilities | $3,251 | $2,669 | | Deferred compensation plan liabilities | $76,683 | $68,373 | | Operating lease liabilities (long-term) | $15,164 | $18,158 | | Total liabilities | $191,469 | $213,160 | | Stockholders' equity | | | | Total stockholders' equity | $343,197 | $350,251 | | Total liabilities and stockholders' equity | $534,666 | $563,411 | Condensed Consolidated Statements of Income This table details Exponent, Inc.'s revenues, expenses, and net income over specified periods Condensed Consolidated Statements of Income (in thousands, except per share data) | Metric | Three Months Ended Oct 2, 2020 | Three Months Ended Sep 27, 2019 | Nine Months Ended Oct 2, 2020 | Nine Months Ended Sep 27, 2019 | | :--------------------------------- | :----------------------------- | :------------------------------ | :---------------------------- | :----------------------------- | | Revenues | $98,663 | $101,548 | $296,661 | $307,085 | | Operating expenses | $78,256 | $78,364 | $231,146 | $243,324 | | Operating income | $20,407 | $23,184 | $65,515 | $63,761 | | Total other income, net | $4,231 | $2,027 | $4,592 | $13,623 | | Income before income taxes | $24,638 | $25,211 | $70,107 | $77,384 | | Income taxes | $6,554 | $5,578 | $9,395 | $14,045 | | Net income | $18,084 | $19,633 | $60,712 | $63,339 | | Net income per share: | | | | | | Basic | $0.35 | $0.37 | $1.16 | $1.20 | | Diluted | $0.34 | $0.36 | $1.14 | $1.17 | | Cash dividends declared per common share | $0.19 | $0.16 | $0.57 | $0.48 | Condensed Consolidated Statements of Comprehensive Income This table presents Exponent, Inc.'s net income and other comprehensive income components Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric | Three Months Ended Oct 2, 2020 | Three Months Ended Sep 27, 2019 | Nine Months Ended Oct 2, 2020 | Nine Months Ended Sep 27, 2019 | | :----------------------------------------------------------------------------------------------------------------------------------- | :----------------------------- | :------------------------------ | :---------------------------- | :----------------------------- | | Net income | $18,084 | $19,633 | $60,712 | $63,339 | | Other comprehensive income (loss): | | | | | | Foreign currency translation adjustments, net of tax | $550 | $(533) | $(1,052) | $(657) | | Unrealized gains (losses) on available-for-sale investment securities arising during the period, net of tax | $(129) | $(30) | $(172) | $373 | | Comprehensive income | $18,505 | $19,070 | $59,488 | $63,055 | Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in Exponent, Inc.'s equity accounts over the period Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Balance at Jan 3, 2020 | Balance at Oct 2, 2020 | | :------------------------------------------------------------------------------------------------------------------------------------ | :--------------------- | :--------------------- | | Common Stock Amount | $66 | $66 | | Additional paid-in capital | $244,935 | $261,713 | | Accumulated other comprehensive income (loss) | $(1,760) | $(2,984) | | Retained earnings | $384,668 | $409,995 | | Treasury Stock Amount | $(277,658) | $(325,593) | | Total Stockholders' Equity | $350,251 | $343,197 | - Total stockholders' equity decreased from $350,251 thousand at January 3, 2020, to $343,197 thousand at October 2, 2020, primarily due to treasury stock repurchases and dividend payments, partially offset by net income and stock-based compensation[18] Condensed Consolidated Statements of Cash Flows This section details Exponent, Inc.'s cash flows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Nine Months Ended Oct 2, 2020 | Nine Months Ended Sep 27, 2019 | | :------------------------------------------------------------------------------------------------------------------------------------ | :---------------------------- | :----------------------------- | | Net cash provided by operating activities | $62,447 | $52,293 | | Net cash provided by/(used in) investing activities | $30,856 | $(11,717) | | Net cash used in financing activities | $(82,235) | $(34,437) | | Effect of foreign currency exchange rates on cash and cash equivalents | $128 | $(355) | | Net increase in cash and cash equivalents | $11,196 | $5,784 | | Cash and cash equivalents at beginning of period | $176,436 | $127,059 | | Cash and cash equivalents at end of period | $187,632 | $132,843 | - Net cash provided by operating activities increased by $10,154 thousand (19.4%) for the nine months ended October 2, 2020, compared to the same period in 2019[27] - Net cash from investing activities significantly improved, moving from a net outflow of $11,717 thousand in 2019 to a net inflow of $30,856 thousand in 2020, primarily due to decreased capital expenditures and short-term investment purchases[27] - Net cash used in financing activities increased by $47,798 thousand (138.8%) due to higher common stock repurchases, increased payroll taxes for restricted stock units, and higher dividend payments[27] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the unaudited consolidated financial statements Note 1: Basis of Presentation This note describes the accounting principles and fiscal year structure used for the financial statements - Exponent, Inc. operates on a 52-53 week fiscal year, ending on the Friday closest to the last day of December[28] - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and SEC regulations, with all necessary adjustments included and of a normal, recurring nature[29] - The Company adopted ASU No. 2016-13 (CECL methodology) in Q1 2020, with no material impact on its financial statements[32] Note 2: Revenue Recognition This note details the Company's policies and breakdown for recognizing revenue from contracts - Substantially all engagements are time and materials or fixed-price contracts[33] Revenue from Time and Materials Contracts | Segment | Three Months Ended Oct 2, 2020 | Three Months Ended Sep 27, 2019 | Nine Months Ended Oct 2, 2020 | Nine Months Ended Sep 27, 2019 | | :-------------------------- | :----------------------------- | :------------------------------ | :---------------------------- | :----------------------------- | | Engineering & other scientific | 59% | 68% | 62% | 67% | | Environmental and health | 19% | 17% | 20% | 18% | | Total time and materials revenues | 78% | 85% | 82% | 85% | Revenue from Fixed Price Contracts | Segment | Three Months Ended Oct 2, 2020 | Three Months Ended Sep 27, 2019 | Nine Months Ended Oct 2, 2020 | Nine Months Ended Sep 27, 2019 | | :-------------------------- | :----------------------------- | :------------------------------ | :---------------------------- | :----------------------------- | | Engineering & other scientific | 21% | 14% | 17% | 14% | | Environmental and health | 1% | 1% | 1% | 1% | | Total fixed price revenues | 22% | 15% | 18% | 15% | - Deferred revenues recognized: $3,491,000 in Q3 2020 and $7,864,000 in the first nine months of 2020[36] Note 3: Fair Value Measurements This note describes the fair value measurement of financial instruments and related assets/liabilities - The Company measures available-for-sale fixed income securities, trading fixed income and equity securities in its deferred compensation plan, and the associated deferred compensation plan liability at fair value on a recurring basis[39] Fair Value Measurements at October 2, 2020 (in thousands) | Asset/Liability | Fair Value Total | Level 1 (Quoted Prices) | Level 2 (Observable Inputs) | Level 3 (Unobservable Inputs) | | :------------------------------------------------------------------- | :--------------- | :---------------------- | :-------------------------- | :---------------------------- | | Assets | | | | | | Money market securities | $76,290 | $76,290 | $- | $- | | Fixed income available-for-sale securities | $20,086 | $- | $20,086 | $- | | Fixed income trading securities (deferred comp plan) | $26,470 | $26,470 | $- | $- | | Equity trading securities (deferred comp plan) | $53,103 | $53,103 | $- | $- | | Total Assets | $175,949 | $155,863 | $20,086 | $- | | Liabilities | | | | | | Deferred compensation plan | $80,052 | $80,052 | $- | $- | | Total Liabilities | $80,052 | $80,052 | $- | $- | - Cash, cash equivalents, and short-term investments totaled $207,718 thousand at October 2, 2020, compared to $231,601 thousand at January 3, 2020[42][44] Note 4: Net Income Per Share This note explains the calculation of basic and diluted net income per share, including share counts - Basic EPS is computed using weighted-average common shares outstanding, while diluted EPS includes potential common shares from restricted stock units and stock options[48] Shares Used in Per Share Computations (in thousands) | Metric | Three Months Ended Oct 2, 2020 | Three Months Ended Sep 27, 2019 | Nine Months Ended Oct 2, 2020 | Nine Months Ended Sep 27, 2019 | | :-------------------------------------- | :----------------------------- | :------------------------------ | :---------------------------- | :----------------------------- | | Shares used in basic per share computation | 52,316 | 52,802 | 52,383 | 52,694 | | Effect of dilutive common stock options outstanding | 331 | 491 | 351 | 475 | | Effect of dilutive restricted stock units outstanding | 562 | 709 | 608 | 737 | | Shares used in diluted per share computation | 53,209 | 54,002 | 53,342 | 53,906 | - Anti-dilutive stock options excluded from diluted EPS calculation: 40,000 shares for the three months and 34,139 shares for the nine months ended October 2, 2020[51] Note 5: Stock-Based Compensation This note details the types of stock-based awards and the associated compensation expense - Restricted stock unit (RSU) grants are used for employee attraction and retention, with up to 40% of annual bonuses settled with fully vested RSUs and matching unvested RSUs[52] Stock-Based Compensation Expense (in thousands) | Type of Award | Three Months Ended Oct 2, 2020 | Three Months Ended Sep 27, 2019 | Nine Months Ended Oct 2, 2020 | Nine Months Ended Sep 27, 2019 | | :-------------------------------- | :----------------------------- | :------------------------------ | :---------------------------- | :----------------------------- | | Accrued bonus awards (RSUs) | $2,035 | $2,096 | $5,876 | $6,489 | | Unvested RSU awards | $1,519 | $1,598 | $6,922 | $6,663 | | Stock option grants | $173 | $150 | $528 | $433 | | Total | $3,727 | $3,844 | $13,326 | $13,585 | - Stock options generally vest 25% per year over four years and are valued using the Black-Scholes option-pricing model[54][56] Note 6: Treasury Stock This note outlines the Company's share repurchase programs and remaining authorization - The Board of Directors authorized $75,000,000 for share repurchases on January 31, 2019, and an additional $45,000,000 on May 29, 2020, with no expiration date[59] - The Company repurchased 636,000 shares for $40,049,000 during the nine months ended October 2, 2020[60] - As of October 2, 2020, $75,455,000 remained authorized for stock repurchases[60] Note 7: Deferred Compensation Plans This note describes the nonqualified deferred compensation plans for highly compensated employees - The Company maintains nonqualified deferred compensation plans for highly compensated employees, allowing deferral of up to 100% of compensation[61] - Invested amounts under the plans totaled $79,573,000 at October 2, 2020, and $75,934,000 at January 3, 2020, recorded as trading securities at fair value[61] - Vested amounts due under the plans totaled $80,052,000 at October 2, 2020, and $76,357,000 at January 3, 2020, recorded as liabilities[62] - Changes in the market value of trust assets resulted in compensation expense of $3,220,000 for the three months ended October 2, 2020, and a reduction to compensation expense of $399,000 for the nine months ended October 2, 2020[62] Note 8: Supplemental Cash Flow Information This note provides additional details on non-cash activities and cash paid for taxes Supplemental Cash Flow Information (in thousands) | Metric | Nine Months Ended Oct 2, 2020 | Nine Months Ended Sep 27, 2019 | | :-------------------------------------------------------------------- | :---------------------------- | :----------------------------- | | Cash paid for income taxes | $9,370 | $14,884 | | Unrealized gain (loss) on short-term investments | $(172) | $373 | | Vested stock unit awards issued to settle accrued bonuses | $8,645 | $7,947 | | Accrual for capital expenditures as of period end | $322 | $2,326 | | Right-of-use asset obtained in exchange for operating lease obligations | $1,802 | $28,678 | Note 9: Accounts Receivable, Net This note details the composition of accounts receivable and the allowance for doubtful accounts Accounts Receivable, Net (in thousands) | Metric | October 2, 2020 | January 3, 2020 | | :------------------------------------------------ | :-------------- | :-------------- | | Billed accounts receivable | $75,520 | $85,579 | | Unbilled accounts receivable | $40,278 | $38,854 | | Allowance for contract losses and doubtful accounts | $(5,834) | $(4,295) | | Total accounts receivable, net | $109,964 | $120,138 | - The allowance for contract losses and doubtful accounts increased from $4,295 thousand at January 3, 2020, to $5,834 thousand at October 2, 2020, with a provision of $2,890 thousand during the nine-month period[65][66] - The provision for contract losses includes approximately $1,269,000 due to economic uncertainty from the COVID-19 pandemic[66] Note 10: Segment Reporting This note presents financial information for the Company's two reportable operating segments - The Company operates in two reportable segments: Engineering and Other Scientific, and Environmental and Health[68] Segment Revenues (in thousands) | Segment | Three Months Ended Oct 2, 2020 | Three Months Ended Sep 27, 2019 | Nine Months Ended Oct 2, 2020 | Nine Months Ended Sep 27, 2019 | | :-------------------------- | :----------------------------- | :------------------------------ | :---------------------------- | :----------------------------- | | Engineering and Other Scientific | $79,230 | $83,060 | $236,239 | $250,134 | | Environmental and Health | $19,433 | $18,488 | $60,422 | $56,951 | | Total revenues | $98,663 | $101,548 | $296,661 | $307,085 | Segment Operating Income (in thousands) | Segment | Three Months Ended Oct 2, 2020 | Three Months Ended Sep 27, 2019 | Nine Months Ended Oct 2, 2020 | Nine Months Ended Sep 27, 2019 | | :-------------------------- | :----------------------------- | :------------------------------ | :---------------------------- | :----------------------------- | | Engineering and Other Scientific | $25,952 | $27,925 | $73,400 | $83,151 | | Environmental and Health | $6,449 | $6,175 | $20,751 | $19,410 | | Corporate operating expense | $(11,994) | $(10,916) | $(28,636) | $(38,800) | | Total operating income | $20,407 | $23,184 | $65,515 | $63,761 | - No single client accounted for more than 10% of the Company's revenues during the reported periods[72] Note 11: Leases This note describes the Company's operating lease arrangements for various facilities - The Company has operating leases for office, laboratory, and storage space in 13 states, D.C., and internationally (China, Hong Kong, Singapore, Switzerland, UK), with terms generally ranging from one to ten years[75] Lease Expense Components (in thousands) | Expense Type | Three Months Ended Oct 2, 2020 | Three Months Ended Sep 27, 2019 | Nine Months Ended Oct 2, 2020 | Nine Months Ended Sep 27, 2019 | | :------------------ | :----------------------------- | :------------------------------ | :---------------------------- | :----------------------------- | | Operating lease cost | $1,706 | $1,849 | $5,162 | $5,586 | | Variable lease cost | $280 | $389 | $882 | $1,173 | | Short-term lease cost | $146 | $98 | $434 | $327 | - Rental income from leasing excess Silicon Valley facility space was $750,000 for the three months and $2,611,000 for the nine months ended October 2, 2020[78] - As of October 2, 2020, the weighted average remaining lease term was 4.6 years, and the weighted average discount rate was 4.2%[79] Note 12: Contingencies This note addresses potential legal actions and claims, assessing their financial impact - The Company is involved in various legal actions and claims in the normal course of business, but management believes the outcome will not have a material adverse effect on its financial condition, results of operations, or liquidity[80] Note 13: Subsequent Events This note discloses significant events occurring after the balance sheet date - On October 29, 2020, the Board of Directors declared a cash dividend of $0.19 per share, payable December 18, 2020[82] - The Company expects to continue paying quarterly dividends, subject to Board declaration[82] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operational results, and COVID-19 impact, including non-GAAP metrics Forward-Looking Statements This section highlights the inherent risks and uncertainties associated with future business projections - The report contains forward-looking statements subject to risks and uncertainties, including the COVID-19 pandemic's impact on demand, client utilization, facility access, economic uncertainty, and credit risks[85] - Other factors influencing future results include changes in economic conditions, timing of engagements, competition, ability to attract and retain key employees, tort reform, and government regulation[85] Business Overview This section describes Exponent, Inc. as an engineering and scientific consulting firm - Exponent, Inc. is an engineering and scientific consulting firm offering multidisciplinary solutions to complex problems, including product development, recall, regulatory compliance, and litigation support[86] CRITICAL ACCOUNTING ESTIMATES This section confirms no significant changes in critical accounting estimates from the prior annual report - There have been no significant changes in critical accounting estimates during the nine months ended October 2, 2020, compared to those disclosed in the 2019 Annual Report on Form 10-K[87] RESULTS OF CONSOLIDATED OPERATIONS This section analyzes the Company's consolidated financial performance, including revenue and expense trends Executive Summary This summary highlights key financial performance metrics and the primary drivers of change Key Financial Highlights (Q3 2020 vs. Q3 2019) | Metric | Q3 2020 | Q3 2019 | Change (%) | | :-------------------------- | :------ | :------ | :--------- | | Revenues | $98,663,000 | $101,548,000 | -2.8% | | Revenues before reimbursements | $93,499,000 | $95,506,000 | -2.1% | | Net income | $18,084,000 | $19,633,000 | -7.9% | | Diluted earnings per share | $0.34 | $0.36 | -5.6% | - Revenue decrease was primarily due to COVID-19 pandemic business restrictions, causing project delays in litigation support and human participant studies[88][90] - Strength was observed in integrity management advisory services for the utilities sector and growth in chemical regulation and food safety practice[90] - Net income and diluted EPS decreased mainly due to an increase in the effective tax rate, driven by a decrease in excess tax benefits from stock-based awards[91] COVID-19 Update This section details the Company's operational adaptations and business impacts from the COVID-19 pandemic - The Company adapted to the pandemic by accelerating scientific knowledge sharing through webinars, shifting recruiting online, and establishing protocols for safe laboratory activities and human participant studies[92] - Most of the workforce operates remotely, with increased field inspections and laboratory testing resuming as business restrictions eased[93] - Litigation support projects continue to face delays due to court closures, but new retentions are ongoing, and virtual trials are being explored[94] - Exponent is advising clients on COVID-19 related health and safety issues, including disinfectant products, testing, contact tracing, and occupational health, and is engaged by the U.S. Army and Navy for wearable technology deployment for risk monitoring[95] Business Outlook This section provides forward-looking statements on revenue trends and strategic priorities - Net revenues for the first three weeks of Q4 declined approximately 5% to 7% YoY due to COVID-19 restrictions, with continued uncertainty regarding future revenue impacts[96] - The Company remains focused on attracting top talent, expanding market position, providing scientific analysis, managing operating expenses, generating cash, maintaining a strong balance sheet, and enhancing shareholder value through share repurchases and dividends[98] Overview of the Three Months Ended October 2, 2020 This section summarizes key operational metrics for the third quarter, including billable hours and utilization Operational Metrics (Q3 2020 vs. Q3 2019) | Metric | Q3 2020 | Q3 2019 | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | | Billable hours | 308,000 | 337,000 | -8.6% | | Utilization | 66% | 72% | -6.0 pp | | Technical full-time equivalent employees | 901 | 906 | -0.6% | - The Company continues to selectively hire key talent to expand capabilities despite a slight decrease in technical FTEs[99] Three Months Ended October 2, 2020 compared to Three Months Ended September 27, 2019 This section provides a detailed comparative analysis of financial performance for the third quarter Revenues This subsection analyzes revenue performance by segment for the third quarter Segment Revenues (Q3 2020 vs. Q3 2019) | Segment | Q3 2020 (in thousands) | Q3 2019 (in thousands) | Percent Change | | :-------------------------- | :--------------------- | :--------------------- | :------------- | | Engineering and Other Scientific | $79,230 | $83,060 | -4.6% | | Environmental and Health | $19,433 | $18,488 | 5.1% | | Total revenues | $98,663 | $101,548 | -2.8% | - Engineering and Other Scientific segment revenue decreased due to an 11% decrease in billable hours, primarily from COVID-19 related project delays in litigation support and human participant studies, despite increased billing rates[101] - Environmental and Health segment revenue increased due to a 1% increase in billable hours and higher billing rates, driven by growth in chemical regulation and food safety practice, partially offset by delays in transportation and oil & gas projects[102] Compensation and Related Expenses This subsection examines changes in compensation and related expenses for the third quarter Compensation and Related Expenses (Q3 2020 vs. Q3 2019) | Metric | Q3 2020 (in thousands) | Q3 2019 (in thousands) | Percent Change | | :-------------------------------- | :--------------------- | :--------------------- | :------------- | | Compensation and related expenses | $62,419 | $58,526 | 6.7% | | Percentage of total revenues | 63.3% | 57.6% | 5.7 pp | | Deferred compensation expense increase | $2,859 | N/A | N/A | | Payroll expense increase | $1,486 | N/A | N/A | | Bonus expense decrease | $367 | N/A | N/A | - The increase was driven by a $2,859,000 increase in deferred compensation expense (due to asset value changes) and a $1,486,000 increase in payroll expense from annual salary adjustments, partially offset by a $367,000 decrease in bonus expense[105] Other Operating Expenses This subsection analyzes the trends and drivers of other operating expenses for the third quarter Other Operating Expenses (Q3 2020 vs. Q3 2019) | Metric | Q3 2020 (in thousands) | Q3 2019 (in thousands) | Percent Change | | :-------------------------- | :--------------------- | :--------------------- | :------------- | | Other operating expenses | $7,839 | $8,345 | -6.1% | | Percentage of total revenues | 7.9% | 8.2% | -0.3 pp | | Occupancy expense decrease | $385 | N/A | N/A | | Office expenses decrease | $76 | N/A | N/A | - The decrease was primarily due to COVID-19 business restrictions, leading to lower occupancy expense ($385,000) and office expenses ($76,000)[106] Reimbursable Expenses This subsection details the changes in reimbursable expenses for the third quarter Reimbursable Expenses (Q3 2020 vs. Q3 2019) | Metric | Q3 2020 (in thousands) | Q3 2019 (in thousands) | Percent Change | | :------------------ | :--------------------- | :--------------------- | :------------- | | Reimbursable expenses | $5,164 | $6,042 | -14.5% | | Percentage of total revenues | 5.2% | 5.9% | -0.7 pp | - The decrease was primarily due to COVID-19 business and travel restrictions[107] General and Administrative Expenses This subsection analyzes the changes in general and administrative expenses for the third quarter General and Administrative Expenses (Q3 2020 vs. Q3 2019) | Metric | Q3 2020 (in thousands) | Q3 2019 (in thousands) | Percent Change | | :-------------------------------- | :--------------------- | :--------------------- | :------------- | | General and administrative expenses | $2,834 | $5,451 | -48.0% | | Percentage of total revenues | 2.9% | 5.4% | -2.5 pp | | Travel and meals decrease | $2,127 | N/A | N/A | | Bad debt expense decrease | $218 | N/A | N/A | | Marketing and business development decrease | $206 | N/A | N/A | - The decrease was primarily due to COVID-19 business and travel restrictions, leading to significant reductions in travel and meals ($2,127,000), bad debt expense ($218,000), and marketing/business development expenses ($206,000)[108] Other Income, Net This subsection details the components and changes in other income, net, for the third quarter Other Income, Net (Q3 2020 vs. Q3 2019) | Metric | Q3 2020 (in thousands) | Q3 2019 (in thousands) | Percent Change | | :----------------- | :--------------------- | :--------------------- | :------------- | | Other income, net | $4,231 | $2,027 | 108.7% | | Percentage of total revenues | 4.3% | 2.0% | 2.3 pp | | Deferred compensation plan asset value change | +$3,220 | +$361 | N/A | | Interest income decrease | $599 | N/A | N/A | - The increase was primarily due to a $2,859,000 positive change in the value of deferred compensation plan assets, partially offset by a $599,000 decrease in interest income due to lower interest rates[110] Income Taxes This subsection analyzes income tax expense and the effective tax rate for the third quarter Income Taxes (Q3 2020 vs. Q3 2019) | Metric | Q3 2020 (in thousands) | Q3 2019 (in thousands) | Percent Change | | :-------------------------- | :--------------------- | :--------------------- | :------------- | | Income taxes | $6,554 | $5,578 | 17.5% | | Percentage of total revenues | 6.6% | 5.5% | 1.1 pp | | Effective tax rate | 26.6% | 22.1% | 4.5 pp | | Excess tax benefit from stock-based awards | $0 | $1,666 | -100% | - The effective tax rate increased due to a decrease in the excess tax benefit associated with stock-based awards, which fell to $0 in Q3 2020 from $1,666,000 in Q3 2019[111] Nine Months Ended October 2, 2020 compared to Nine Months Ended September 27, 2019 This section provides a detailed comparative analysis of financial performance for the nine-month period Revenues This subsection analyzes revenue performance by segment for the nine-month period Segment Revenues (9M 2020 vs. 9M 2019) | Segment | 9M 2020 (in thousands) | 9M 2019 (in thousands) | Percent Change | | :-------------------------- | :--------------------- | :--------------------- | :------------- | | Engineering and Other Scientific | $236,239 | $250,134 | -5.6% | | Environmental and Health | $60,422 | $56,951 | 6.1% | | Total revenues | $296,661 | $307,085 | -3.4% | - Engineering and Other Scientific segment revenue decreased due to a 9% decrease in billable hours, primarily from COVID-19 related project delays in litigation support, field inspections, laboratory testing, and human participant studies, despite increased billing rates[112] - Environmental and Health segment revenue increased due to a 4% increase in billable hours and higher billing rates, driven by growth in chemical regulation and food safety practice, partially offset by delays in transportation and oil & gas industries[114] Compensation and Related Expenses This subsection examines changes in compensation and related expenses for the nine-month period Compensation and Related Expenses (9M 2020 vs. 9M 2019) | Metric | 9M 2020 (in thousands) | 9M 2019 (in thousands) | Percent Change | | :-------------------------------- | :--------------------- | :--------------------- | :------------- | | Compensation and related expenses | $180,541 | $185,616 | -2.7% | | Percentage of total revenues | 60.9% | 60.4% | 0.5 pp | | Deferred compensation expense decrease | $8,814 | N/A | N/A | | Bonus expense decrease | $3,464 | N/A | N/A | | Payroll expense increase | $6,898 | N/A | N/A | - The decrease was due to an $8,814,000 decrease in deferred compensation expense (due to asset value changes) and a $3,464,000 decrease in bonus expense, partially offset by a $6,898,000 increase in payroll expense from increased technical FTEs and salary adjustments[115] Other Operating Expenses This subsection analyzes the trends and drivers of other operating expenses for the nine-month period Other Operating Expenses (9M 2020 vs. 9M 2019) | Metric | 9M 2020 (in thousands) | 9M 2019 (in thousands) | Percent Change | | :-------------------------- | :--------------------- | :--------------------- | :------------- | | Other operating expenses | $23,736 | $24,448 | -2.9% | | Percentage of total revenues | 8.0% | 8.0% | 0.0 pp | | Occupancy expense decrease | $497 | N/A | N/A | | Technical materials decrease | $416 | N/A | N/A | - The decrease was primarily due to COVID-19 business restrictions, leading to lower occupancy expense ($497,000) and technical materials ($416,000)[116] Reimbursable Expenses This subsection details the changes in reimbursable expenses for the nine-month period Reimbursable Expenses (9M 2020 vs. 9M 2019) | Metric | 9M 2020 (in thousands) | 9M 2019 (in thousands) | Percent Change | | :------------------ | :--------------------- | :--------------------- | :------------- | | Reimbursable expenses | $15,579 | $17,915 | -13.0% | | Percentage of total revenues | 5.3% | 5.8% | -0.5 pp | - The decrease was primarily due to COVID-19 business and travel restrictions[119] General and Administrative Expenses This subsection analyzes the changes in general and administrative expenses for the nine-month period General and Administrative Expenses (9M 2020 vs. 9M 2019) | Metric | 9M 2020 (in thousands) | 9M 2019 (in thousands) | Percent Change | | :-------------------------------- | :--------------------- | :--------------------- | :------------- | | General and administrative expenses | $11,290 | $15,345 | -26.4% | | Percentage of total revenues | 3.8% | 5.0% | -1.2 pp | | Travel and meals decrease | $4,092 | N/A | N/A | | Personnel expenses decrease | $942 | N/A | N/A | | Bad debt expense increase | $1,005 | N/A | N/A | - The decrease was primarily due to COVID-19 business and travel restrictions, leading to significant reductions in travel and meals ($4,092,000) and personnel expenses ($942,000), partially offset by a $1,005,000 increase in bad debt expense due to COVID-19 economic uncertainty[120] Other Income, Net This subsection details the components and changes in other income, net, for the nine-month period Other Income, Net (9M 2020 vs. 9M 2019) | Metric | 9M 2020 (in thousands) | 9M 2019 (in thousands) | Percent Change | | :----------------- | :--------------------- | :--------------------- | :------------- | | Other income, net | $4,592 | $13,623 | -66.3% | | Percentage of total revenues | 1.5% | 4.4% | -2.9 pp | | Deferred compensation plan asset value change | -$8,814 | N/A | N/A | | Interest income decrease | $1,398 | N/A | N/A | | Realized gain on foreign exchange increase | $785 | N/A | N/A | | Rental income increase | $409 | N/A | N/A | - The decrease was primarily due to an $8,814,000 negative change in the value of deferred compensation plan assets and a $1,398,000 decrease in interest income, partially offset by a $785,000 increase in realized foreign exchange gains and a $409,000 increase in rental income[121] Income Taxes This subsection analyzes income tax expense and the effective tax rate for the nine-month period Income Taxes (9M 2020 vs. 9M 2019) | Metric | 9M 2020 (in thousands) | 9M 2019 (in thousands) | Percent Change | | :-------------------------- | :--------------------- | :--------------------- | :------------- | | Income taxes | $9,395 | $14,045 | -33.1% | | Percentage of total revenues | 3.2% | 4.6% | -1.4 pp | | Effective tax rate | 13.4% | 18.1% | -4.7 pp | | Excess tax benefit from stock-based awards | $9,670 | $7,354 | 31.5% | - The effective tax rate decreased due to an increase in the excess tax benefit associated with stock-based awards, which rose to $9,670,000 in 9M 2020 from $7,354,000 in 9M 2019[122] LIQUIDITY AND CAPITAL RESOURCES This section assesses the Company's ability to meet short-term and long-term financial obligations - The Company believes existing cash, cash equivalents, short-term investments, and operating cash flow will be sufficient for working capital, capital expenditures, commitments, stock repurchases, and dividends for at least the next twelve months[124][125] Cash Flow Summary (in thousands) | Metric | Nine Months Ended Oct 2, 2020 | Nine Months Ended Sep 27, 2019 | | :-------------------------------------- | :---------------------------- | :----------------------------- | | Net cash provided by operating activities | $62,447 | $52,293 | | Net cash provided by/(used in) investing activities | $30,856 | $(11,717) | | Net cash used in financing activities | $(82,235) | $(34,437) | - Cash, cash equivalents, and short-term investments were $207.7 million as of October 2, 2020, down from $231.6 million at January 3, 2020[125] - The increase in net cash from investing activities was due to decreased capital expenditures and short-term investment purchases, while the increase in net cash used in financing activities was due to higher stock repurchases, payroll taxes for RSUs, and dividend payments[127][128] Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures like EBITDA and EBITDAS - The Company uses Non-GAAP financial measures EBITDA (Net income before income taxes, net interest income, depreciation and amortization) and EBITDAS (EBITDA before stock-based compensation) to evaluate operating performance[134] EBITDA and EBITDAS Reconciliation (in thousands) | Metric | Three Months Ended Oct 2, 2020 | Three Months Ended Sep 27, 2019 | Nine Months Ended Oct 2, 2020 | Nine Months Ended Sep 27, 2019 | | :-------------------------- | :----------------------------- | :------------------------------ | :---------------------------- | :----------------------------- | | Net income | $18,084 | $19,633 | $60,712 | $63,339 | | Add back (subtract): | | | | | | Income taxes | $6,554 | $5,578 | $9,395 | $14,045 | | Interest income, net | $(316) | $(915) | $(1,496) | $(2,894) | | Depreciation and amortization | $1,689 | $1,672 | $5,176 | $4,904 | | EBITDA | $26,011 | $25,968 | $73,787 | $79,394 | | Stock-based compensation | $3,726 | $3,844 | $13,326 | $13,585 | | EBITDAS | $29,737 | $29,812 | $87,113 | $92,979 | - EBITDA as a percentage of revenues before reimbursements increased to 27.8% in Q3 2020 (from 27.2% in Q3 2019) due to a larger decrease in operating expenses (excluding deferred compensation plan asset value changes) compared to the revenue decrease[135][137] - EBITDA as a percentage of revenues before reimbursements decreased to 26.3% for the first nine months of 2020 (from 27.5% in 2019) due to a larger decrease in revenues before reimbursements, partially offset by decreased operating expenses, both impacted by COVID-19[135][138] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the Company's exposure to market risks, primarily interest rate and foreign currency - The Company is exposed to interest rate risk from cash, cash equivalents, and short-term investments, managed by investing in high-credit quality debt instruments with short average effective maturities (max 12 months)[140] - Foreign currency risk arises from revenues and expenses denominated in non-U.S. dollar currencies (primarily British Pound, Chinese Yuan, Hong Kong Dollar), affecting foreign subsidiaries' net income when expressed in USD[141] - As of October 2, 2020, net assets with functional currencies of British Pound, Chinese Yuan, and Hong Kong Dollar were approximately $14.4 million, $3.5 million, and $6.0 million, respectively[142] - The Company does not use derivative financial instruments or foreign exchange contracts to hedge these exposures, and while impacts have not been material to date, continued international growth increases exposure[140][145] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and reports no material changes in internal controls - As of October 2, 2020, management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective[146] - No material changes in internal control over financial reporting occurred during the three-month period ended October 2, 2020, despite most employees working remotely due to the COVID-19 pandemic[147] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and other miscellaneous disclosures Item 1. Legal Proceedings This section states that Exponent is not currently involved in any material legal proceedings - Exponent is not engaged in any material legal proceedings[149] Item 1A. Risk Factors This section details various risks, including COVID-19 impacts, business unpredictability, talent, competition, and operational challenges - The COVID-19 pandemic has materially affected operations, causing project delays, impacting human participant studies, and creating economic uncertainty, with its full duration and extent of impact remaining unpredictable[151][152][153][154][155] - The unpredictable and reactive nature of the business, with engagements terminable at any time, can lead to uneven quarterly or fiscal year performance, as backlog is not a reliable indicator of future revenues[156][157] - Failure to attract and retain highly qualified technical and managerial personnel, or the loss of key employees, could materially adversely impact the business due to its labor-intensive nature and high demand for talent[159][160] - The Company faces risks from intense competition, potential loss of large clients (especially in key industries like chemical, construction, energy, transportation), and clients' inability to pay for services, exacerbated by economic downturns[161][162][163] - Operational risks include professional liability from difficult assignments, potential conflicts of interest limiting engagements, unpredictable litigation, security breaches, and failure to protect client/employee data, which could damage reputation and incur significant costs[170][171][172][174][175] - International operations (UK, Switzerland, Hong Kong, China, Singapore, Ireland, Canada) introduce special financial, business, and legal risks, including currency fluctuations, regulatory burdens, trade disputes, and managing risks related to foreign officials and data privacy laws[178][179] - Other risks include impairment of goodwill and long-lived assets, inherent risks of government contracts (audits, termination), liabilities from products/systems designed or sold, changes in accounting principles, general economic downturns, and volatility in the market price of common stock[176][177][180][181][182][184][187][188][189] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides information on the Company's common stock repurchase programs and remaining authorization - The Board of Directors authorized $75.0 million for common stock repurchases on January 31, 2019, and an additional $45.0 million on May 29, 2020, with no expiration date[195] - As of October 2, 2020, the approximate value of shares yet to be purchased under the programs was $75,455,000[197] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities to report - Not applicable[197] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the Company - Not applicable[199] Item 5. Other Information This section states that there is no other information to report - Not applicable[200] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and XBRL documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer (Rule 13a-14(a) and 18 U.S.C. Section 1350) and various Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents, and Cover Page Interactive Data File)[202] SIGNATURES This section contains the official signatures of the Company's executive officers - The report was signed on November 6, 2020, by Catherine Ford Corrigan, Ph.D., Chief Executive Officer, and Richard L. Schlenker, Jr., Chief Financial Officer[205]