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 September 30, 2016March 31, 2017
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________________ to___________________________________ to________________
Commission File Number0-18655
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☒x No☐¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes☒x No☐¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company |
| (Do not check if a smallerreporting 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).
Yes☐¨ No☒x
As of OctoberApril 28, 2016,2017, the latest practicable date, the registrant had 25,592,53425,871,157 shares of common stock, $0.001 par value per share, outstanding.
EXPONENT, INC.
FORM 10-Q
TABLE OF CONTENTS
| - 2 - |
PART I – FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets
SeptemberMarch 31, 2017 and December 30, 2016 and January 1, 2016
(in thousands, except par value)
(unaudited)
| September 30, | January 1, | |||||||||||||||
| 2016 | 2016 | March 31, 2017 | December 30, 2016 | |||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 98,425 | $ | 125,751 | $ | 87,086 | $ | 114,967 | ||||||||
| Short-term investments | 51,993 | 45,842 | 67,817 | 58,755 | ||||||||||||
| Accounts receivable, net of allowance for contract losses and doubtful accounts of $3,805 and $2,792 at September 30, 2016 and January 1, 2016, respectively | 94,292 | 88,577 | ||||||||||||||
| Accounts receivable, net of allowance for contract losses and doubtful accounts of $3,661 and $3,417 at March 31, 2017 and December 30, 2016, respectively | 96,346 | 87,409 | ||||||||||||||
| Prepaid expenses and other assets | 12,596 | 12,616 | 12,368 | 12,913 | ||||||||||||
| Total current assets | 257,306 | 272,786 | 263,617 | 274,044 | ||||||||||||
| Property, equipment and leasehold improvements, net | 37,457 | 28,485 | 36,572 | 36,710 | ||||||||||||
| Goodwill | 8,607 | 8,607 | 8,607 | 8,607 | ||||||||||||
| Deferred income taxes | 40,751 | 39,456 | 41,715 | 42,166 | ||||||||||||
| Deferred compensation plan assets | 40,365 | 36,522 | 46,699 | 41,153 | ||||||||||||
| Other assets | 929 | 1,651 | 952 | 1,064 | ||||||||||||
| Total assets | $ | 385,415 | $ | 387,507 | $ | 398,162 | $ | 403,744 | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable and accrued liabilities | $ | 9,709 | $ | 10,580 | $ | 10,204 | $ | 10,073 | ||||||||
| Accrued payroll and employee benefits | 53,866 | 62,092 | 41,067 | 62,539 | ||||||||||||
| Deferred revenues | 5,590 | 7,802 | 6,145 | 7,624 | ||||||||||||
| Total current liabilities | 69,165 | 80,474 | 57,416 | 80,236 | ||||||||||||
| Other liabilities | 2,102 | 1,913 | 2,117 | 2,005 | ||||||||||||
| Deferred compensation | 45,662 | 40,322 | 52,399 | 46,503 | ||||||||||||
| Deferred rent | 1,664 | 1,994 | 1,525 | 1,654 | ||||||||||||
| Total liabilities | 118,593 | 124,703 | 113,457 | 130,398 | ||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Common stock, $0.001 par value; 80,000 shares authorized; | ||||||||||||||||
| 32,853 shares issued at September 30, 2016 and January 1, 2016 | 33 | 33 | ||||||||||||||
| Common stock, $0.001 par value; 80,000 shares authorized; 32,853 shares issued at March 31, 2017 and December 30, 2016 | 33 | 33 | ||||||||||||||
| Additional paid-in capital | 193,105 | 179,816 | 205,273 | 194,632 | ||||||||||||
| Accumulated other comprehensive income (loss) | ||||||||||||||||
| Investment securities, available-for-sale | - | (65 | ) | (110 | ) | (146 | ) | |||||||||
| Foreign currency translation adjustments | (2,436 | ) | (1,740 | ) | (2,844 | ) | (2,980 | ) | ||||||||
| (2,436 | ) | (1,805 | ) | (2,954 | ) | (3,126 | ) | |||||||||
| Retained earnings | 285,616 | 269,259 | 296,025 | 291,243 | ||||||||||||
| Treasury stock, at cost; 7,261 and 7,133 shares held at September 30, 2016 and January 1, 2016, respectively | (209,496 | ) | (184,499 | ) | ||||||||||||
| Treasury stock, at cost; 6,982 and 7,256 shares held at | ||||||||||||||||
| March 31, 2017 and December 30, 2016, respectively | (213,672 | ) | (209,436 | ) | ||||||||||||
| Total stockholders’ equity | 266,822 | 262,804 | 284,705 | 273,346 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 385,415 | $ | 387,507 | $ | 398,162 | $ | 403,744 | ||||||||
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
| - 3 - |
Condensed Consolidated Statements of Income
For the Three and Nine Months Ended September 30,March 31, 2017 and April 1, 2016 and October 2, 2015
(in thousands, except per share data)
(unaudited)
| Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
| September 30, 2016 | October 2, 2015 | September 30, 2016 | October 2, 2015 | March 31, 2017 | April 1, 2016 | |||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Revenues before reimbursements | $ | 74,160 | $ | 74,503 | $ | 226,444 | $ | 225,916 | $ | 80,467 | $ | 78,950 | ||||||||||||
| Reimbursements | 3,452 | 4,491 | 11,619 | 13,235 | 3,655 | 4,206 | ||||||||||||||||||
| Revenues | 77,612 | 78,994 | 238,063 | 239,151 | 84,122 | 83,156 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Compensation and related expenses | 47,797 | 42,853 | 146,854 | 139,745 | 54,418 | 52,017 | ||||||||||||||||||
| Other operating expenses | 7,020 | 6,766 | 21,221 | 19,979 | 7,191 | 6,983 | ||||||||||||||||||
| Reimbursable expenses | 3,452 | 4,491 | 11,619 | 13,235 | 3,655 | 4,206 | ||||||||||||||||||
| General and administrative expenses | 3,748 | 3,963 | 11,407 | 11,538 | 4,224 | 3,514 | ||||||||||||||||||
| Total operating expenses | 62,017 | 58,073 | 191,101 | 184,497 | 69,488 | 66,720 | ||||||||||||||||||
| Operating income | 15,595 | 20,921 | 46,962 | 54,654 | 14,634 | 16,436 | ||||||||||||||||||
| Other income (expense), net: | ||||||||||||||||||||||||
| Interest income (expense), net | 179 | 47 | 489 | 115 | ||||||||||||||||||||
| Miscellaneous income (expense), net | 2,146 | (2,195 | ) | 4,880 | 367 | |||||||||||||||||||
| Total other income (expense), net | 2,325 | (2,148 | ) | 5,369 | 482 | |||||||||||||||||||
| Other income, net: | ||||||||||||||||||||||||
| Interest income, net | 234 | 139 | ||||||||||||||||||||||
| Miscellaneous income, net | 2,542 | 1,159 | ||||||||||||||||||||||
| Total other income, net | 2,776 | 1,298 | ||||||||||||||||||||||
| Income before income taxes | 17,920 | 18,773 | 52,331 | 55,136 | 17,410 | 17,734 | ||||||||||||||||||
| Income taxes | 6,631 | 7,054 | 15,239 | 21,387 | 834 | 2,384 | ||||||||||||||||||
| Net income | $ | 11,289 | $ | 11,719 | $ | 37,092 | $ | 33,749 | $ | 16,576 | $ | 15,350 | ||||||||||||
| Net income per share: | ||||||||||||||||||||||||
| Basic | $ | 0.43 | $ | 0.44 | $ | 1.40 | $ | 1.27 | $ | 0.63 | $ | 0.58 | ||||||||||||
| Diluted | $ | 0.42 | $ | 0.43 | $ | 1.36 | $ | 1.23 | $ | 0.61 | $ | 0.56 | ||||||||||||
| Shares used in per share computations: | ||||||||||||||||||||||||
| Basic | 26,545 | 26,597 | 26,563 | 26,644 | 26,302 | 26,513 | ||||||||||||||||||
| Diluted | 27,185 | 27,268 | 27,234 | 27,350 | 26,981 | 27,239 | ||||||||||||||||||
| Cash dividends declared per common share | $ | 0.18 | $ | 0.15 | $ | 0.54 | $ | 0.45 | $ | 0.21 | $ | 0.18 | ||||||||||||
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements
| - 4 - |
Condensed Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended September 30,March 31, 2017 and April 1, 2016 and October 2, 2015
(in thousands)
(unaudited)
| Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
| September 30, 2016 | October 2, 2015 | September 30, 2016 | October 2, 2015 | March 31, 2017 | April 1, 2016 | |||||||||||||||||||
| Net income | $ | 11,289 | $ | 11,719 | $ | 37,092 | $ | 33,749 | $ | 16,576 | $ | 15,350 | ||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | (186 | ) | (199 | ) | (696 | ) | (535 | ) | 136 | (5 | ) | |||||||||||||
| Unrealized (losses) gains on available-for-sale investment securities arising during the period, net of tax | (19 | ) | 13 | 65 | (4 | ) | ||||||||||||||||||
| Unrealized gains on available-for-sale investment securities arising during the period, net of tax | 36 | 85 | ||||||||||||||||||||||
| Comprehensive income | $ | 11,084 | $ | 11,533 | $ | 36,461 | $ | 33,210 | $ | 16,748 | $ | 15,430 | ||||||||||||
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements
| - 5 - |
Condensed Consolidated Statements of Cash Flows
For the NineThree Months Ended September 30,March 31, 2017 and April 1, 2016 and October 2, 2015
(in thousands)
(unaudited)
| Nine Months Ended | Three Months Ended | |||||||||||||||
| September 30, 2016 | October 2, 2015 | March 31, 2017 | April 1, 2016 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income | $ | 37,092 | $ | 33,749 | $ | 16,576 | $ | 15,350 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||||||
| Depreciation and amortization of property, equipment and leasehold improvements | 4,509 | 4,034 | 1,566 | 1,403 | ||||||||||||
| Amortization of premiums and accretion of discounts on short-term investments | 7 | 515 | - | 22 | ||||||||||||
| Deferred rent | (330 | ) | (80 | ) | (129 | ) | (110 | ) | ||||||||
| Provision for contract losses and doubtful accounts | 1,688 | 785 | 458 | 434 | ||||||||||||
| Stock-based compensation | 10,659 | 10,536 | 5,655 | 5,220 | ||||||||||||
| Deferred income tax provision | (1,284 | ) | (869 | ) | 426 | (430 | ) | |||||||||
| Excess tax benefit from equity incentive plans | - | (4,983 | ) | |||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable | (7,403 | ) | (8,585 | ) | (9,395 | ) | (6,769 | ) | ||||||||
| Prepaid expenses and other assets | (342 | ) | 1,206 | (2,974 | ) | 728 | ||||||||||
| Accounts payable and accrued liabilities | (1,059 | ) | 4,236 | 3 | (2,300 | ) | ||||||||||
| Accrued payroll and employee benefits | (4,091 | ) | (3,900 | ) | (12,491 | ) | (11,944 | ) | ||||||||
| Deferred revenues | (2,212 | ) | (2,334 | ) | (1,479 | ) | (1,291 | ) | ||||||||
| Net cash provided by operating activities | 37,234 | 34,310 | ||||||||||||||
| Net cash (used in) provided by operating activities | (1,784 | ) | 313 | |||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Capital expenditures | (13,063 | ) | (4,355 | ) | (1,307 | ) | (1,481 | ) | ||||||||
| Purchase of short-term investments | (36,000 | ) | (16,000 | ) | (9,000 | ) | (12,000 | ) | ||||||||
| Maturity of short-term investments | 29,950 | 13,555 | - | 1,450 | ||||||||||||
| Net cash used in investing activities | (19,113 | ) | (6,800 | ) | (10,307 | ) | (12,031 | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Excess tax benefit from equity incentive plans | - | 4,983 | ||||||||||||||
| Payroll taxes for restricted stock units | (7,685 | ) | (7,365 | ) | (9,517 | ) | (7,613 | ) | ||||||||
| Repurchase of common stock | (24,456 | ) | (19,814 | ) | (1,304 | ) | (3,500 | ) | ||||||||
| Exercise of share-based payment awards | 1,499 | 1,547 | 287 | 305 | ||||||||||||
| Dividends and dividend equivalents rights | (14,174 | ) | (11,780 | ) | (5,374 | ) | (4,628 | ) | ||||||||
| Net cash used in financing activities | (44,816 | ) | (32,429 | ) | (15,908 | ) | (15,436 | ) | ||||||||
| Effect of foreign currency exchange rates on cash and cash equivalents | (631 | ) | (114 | ) | 118 | (62 | ) | |||||||||
| Net decrease in cash and cash equivalents | (27,326 | ) | (5,033 | ) | (27,881 | ) | (27,216 | ) | ||||||||
| Cash and cash equivalents at beginning of period | 125,751 | 129,490 | 114,967 | 125,751 | ||||||||||||
| Cash and cash equivalents at end of period | $ | 98,425 | $ | 124,457 | $ | 87,086 | $ | 98,535 | ||||||||
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
| - 6 - |
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 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 nine months ended September 30, 2016March 31, 2017 are not necessarily representative of the results of future quarterly or annual periods. The following information should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 1,December 30, 2016, which was filed with the U.S. Securities and Exchange Commission on February 26, 2016.24, 2017.
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.
Dividend. The Company declared and paid cash dividends per common share during the periods presented as follows:
| Fiscal Year 2016 | ||||||||||||||||
| Dividends | Amount | Fiscal Year 2017 | ||||||||||||||
| Per Share | (in thousands) | Dividends Per Share | Amount (in thousands) | |||||||||||||
| First Quarter | $ | 0.18 | $ | 4,628 | $ | 0.21 | $ | 5,374 | ||||||||
| Second Quarter | 0.18 | 4,675 | ||||||||||||||
| Third Quarter | 0.18 | 4,659 | ||||||||||||||
| Total | $ | 0.54 | $ | 13,962 | $ | 0.21 | $ | 5,374 | ||||||||
| Fiscal Year 2015 | ||||||||||||||||
| Dividends | Amount | Fiscal Year 2016 | ||||||||||||||
| Per Share | (in thousands) | Dividends Per Share | Amount (in thousands) | |||||||||||||
| First Quarter | $ | 0.15 | $ | 3,858 | $ | 0.18 | $ | 4,628 | ||||||||
| Second Quarter | 0.15 | 3,887 | 0.18 | 4,675 | ||||||||||||
| Third Quarter | 0.15 | 3,870 | 0.18 | 4,659 | ||||||||||||
| Fourth Quarter | 0.15 | 3,867 | 0.18 | 4,607 | ||||||||||||
| Total | $ | 0.60 | $ | 15,482 | $ | 0.72 | $ | 18,569 | ||||||||
On OctoberApril 19, 2016,2017, the Company’s Board of Directors announced a cash dividend of $0.18$0.21 per share of the Company’s common stock, payable DecemberJune 23, 2016,2017, to stockholders of record as of December 2, 2016.June 9, 2017. The Company expects to continue paying quarterly dividends in the future, subject to declaration by the Company’s Board of Directors.
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. Significant 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.
| - 7 - |
Recently AdoptedRecent Accounting Pronouncement.Pronouncements Not Yet Effective. On March 30, 2016,May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-09,Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standard Codification Topic 718,Compensation – Stock Compensation. ASU No. 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Under ASU No. 2016-09, entities will record all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement. Prior to ASU No. 2016-09, excess tax benefits were recognized in additional paid-in-capital on the balance sheet. Under ASU No. 2016-09, excess tax benefits will be classified as an operating activity in the statement of cash flows. Prior to ASU No. 2016-09, excess tax benefits were classified as a financing activity in the statement of cash flows. Under ASU No. 2016-09, entities will also elect an accounting policy to either estimate the number of forfeitures of share-based awards or account for forfeitures when they occur. Prior to ASU No. 2016-09, entities were required to estimate forfeitures. In addition, ASU No. 2016-09 allows entities to withhold from employees upon exercise or settlement of share-based awards up to the maximum individual statutory tax rate without classifying the awards as a liability.
ASU No. 2016-09 is effective for public business entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company elected to early adopt ASU No. 2016-09 as of the beginning of its first quarter of fiscal 2016.
During the third quarter of fiscal 2016 the Company recorded an excess tax benefit of $39,000 as an income tax benefit in the condensed consolidated statement of income and classified this excess tax benefit as an operating activity in the condensed consolidated statement of cash flows. Excluding the excess tax benefit, net income would have been $11,250,000 and diluted earnings per share would have been $0.41 per share during the third quarter of fiscal 2016. During the nine months ended September 30, 2016, the Company recorded an excess tax benefit of $4,827,000 as an income tax benefit in the condensed consolidated statement of income and classified this excess tax benefit as an operating activity in the condensed consolidated statement of cash flows. Excluding the excess tax benefit, net income would have been $32,265,000 and diluted earnings per share would have been $1.18 per share during the nine months ended September 30, 2016. The recognition of excess tax benefits and deficiencies was applied prospectively and thus prior periods were not adjusted. The formula for calculating diluted earnings per share under the treasury stock method no longer includes the estimated excess tax benefits that were recorded in additional paid-in capital. The impact of the adoption of ASU No. 2016-09 had an immaterial impact on weighted average diluted shares outstanding during the three and nine months ended September 30, 2016.
In connection with the early adoption of ASU No. 2016-09, the Company elected to account for forfeitures of share-based awards when they occur. This election is applied prospectively and thus prior periods were not adjusted. An adjustment of $78,000 was made during the nine months ended September 30, 2016 to reduce beginning retained earnings for estimated forfeitures previously recorded on outstanding share-based awards. The election to account for forfeitures of share-based awards when they occur did not have a material impact on stock-based compensation expense during the three and nine months ended September 30, 2016.
Recent Accounting Pronouncements Not Yet Effective. On May 28, 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles (“GAAP”) when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, which deferred by one year the effective date for the new revenue recognition standard for entities reporting under U.S. GAAP. In accordance with the deferral, theThe new standard will beis effective for the Company on the first day of fiscal 2018 (December 30, 2017). Early application isThe two permitted beginning fiscal 2017. Thetransition methods under the new standard permitsare the use of eitherfull retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective ormethod, in which case the cumulative effect transitionof applying the standard would be recognized at the date of initial application.
The impact of adopting the new standard is not expected to be material because the analysis of the Company’s contracts under the new revenue recognition standard supports the recognition of revenue over time, which is consistent with the Company’s current revenue recognition model.
Substantially all of the Company’s engagements are performed under time and material or fixed-price arrangements. For time and materials contracts the Company anticipates utilizing the practical expedient under the ASU which states, 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 or service provided), the entity may recognize revenue in the amount to which the entity has a right to invoice. Application of the practical expedient to time and material contracts is consistent with the Company’s current revenue recognition policy.
For fixed price contracts the Company will recognize revenue over time under the ASU 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. Input methods are an acceptable method of measuring progress towards completing under the ASU. This is consistent with the Company’s current policy of measuring progress towards completion based on the relationship of incurred labor hours at standard rates to its 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.
The Company anticipates adopting the standard using the modified retrospective method. The Company is currently evaluating the effect that ASU No. 2014-09 will have onrequired disclosures under the new standard and developing appropriate changes to its consolidated financial statementsprocess, systems and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.controls.
On February 25, 2016, the FASB issued ASU No. 2016-02,Leases, which requires lessees to recognize most leases on their balance sheet. The new standard will be effective for the Company on the first day of fiscal 2019 (December 29, 2018). Early adoption is permitted. The standard requires use of the modified retrospective transition method, with elective relief, which requires application of the guidance for all periods presented. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. The standard will require the Company to record a right of use asset and a lease liability that will materially gross up its balance sheet.
| - 8 - |
Note 2: Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale fixed income securities, trading fixed income and equity securities held in its deferred compensation plan and the liability associated with its deferred compensation plan. There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2016March 31, 2017 and October 2, 2015.April 1, 2016. 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 September 30, 2016:March 31, 2017:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| (In thousands) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Assets | ||||||||||||||||
| Money market | ||||||||||||||||
| securities(1) | $ | 13,138 | $ | 13,138 | $ | - | $ | - | ||||||||
| Fixed income available- | ||||||||||||||||
| for-sale securities(2) | 67,817 | - | 67,817 | - | ||||||||||||
| Fixed income trading | ||||||||||||||||
| securities held in deferred | ||||||||||||||||
| compensation plan(3) | 15,271 | 15,271 | - | - | ||||||||||||
| Equity trading securities | ||||||||||||||||
| held in deferred | ||||||||||||||||
| compensation plan(3) | 37,429 | 37,429 | - | - | ||||||||||||
| Total | $ | 133,655 | $ | 65,838 | $ | 67,817 | $ | - | ||||||||
| Liabilities | ||||||||||||||||
| Deferred compensation | ||||||||||||||||
| plan(4) | 58,320 | 58,320 | - | - | ||||||||||||
| Total | $ | 58,320 | $ | 58,320 | $ | - | $ | - | ||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| (In thousands) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant | ||||||||||||
| Assets | ||||||||||||||||
| Money market securities(1) | $ | 28,901 | $ | 28,901 | $ | - | $ | - | ||||||||
| Fixed income available- for-sale securities(2) | 51,993 | - | 51,993 | - | ||||||||||||
| Fixed income trading securities held in deferred compensation plan(3) | 12,020 | 12,020 | - | - | ||||||||||||
| Equity trading securities held in deferred compensation plan(3) | 34,528 | 34,528 | - | - | ||||||||||||
| Total | $ | 127,442 | $ | 75,449 | $ | 51,993 | $ | - | ||||||||
| Liabilities | ||||||||||||||||
| Deferred compensation plan(4) | 51,845 | 51,845 | - | - | ||||||||||||
| Total | $ | 51,845 | $ | 51,845 | $ | - | $ | - | ||||||||
| (1) | Included in cash and cash equivalents on the Company’s unaudited condensed consolidated balance sheet. |
| (2) | Included in short-term investments on the Company’s unaudited condensed consolidated balance sheet. |
| (3) | Included in prepaid expenses and other assets and deferred compensation plan assets on the Company’s unaudited condensed consolidated balance sheet. |
| (4) | Included in accrued payroll and employee benefits and deferred compensation on the Company’s unaudited condensed consolidated balance sheet. |
| - 9 - |
The fair value of these certain financial assets and liabilities was determined using the following inputs at January 1,December 30, 2016:
| Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||||
| (In thousands) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Money market securities(1) | $ | 10,530 | $ | 10,530 | $ | - | $ | - | ||||||||||||||||||||||||
| Money market | ||||||||||||||||||||||||||||||||
| securities(1) | $ | 21,918 | $ | 21,918 | $ | - | $ | - | ||||||||||||||||||||||||
| Fixed income available- for-sale securities(2) | 45,842 | - | 45,842 | - | ||||||||||||||||||||||||||||
| Fixed income available- | ||||||||||||||||||||||||||||||||
| for-sale securities(2) | 58,755 | - | 58,755 | - | ||||||||||||||||||||||||||||
| Fixed income trading securities held in deferred compensation plan(3) | 9,295 | 9,295 | - | - | ||||||||||||||||||||||||||||
| Fixed income trading | ||||||||||||||||||||||||||||||||
| securities held in deferred | ||||||||||||||||||||||||||||||||
| compensation plan(3) | 11,872 | 11,872 | - | - | ||||||||||||||||||||||||||||
| Equity trading securities held in deferred compensation plan(3) | 33,645 | 33,645 | - | - | ||||||||||||||||||||||||||||
| Equity trading securities | ||||||||||||||||||||||||||||||||
| held in deferred | ||||||||||||||||||||||||||||||||
| compensation plan(3) | 36,395 | 36,395 | - | - | ||||||||||||||||||||||||||||
| Total | $ | 99,312 | $ | 53,470 | $ | 45,842 | $ | - | $ | 128,940 | $ | 70,185 | $ | 58,755 | $ | - | ||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Deferred compensation plan(4) | 46,740 | 46,740 | - | - | ||||||||||||||||||||||||||||
| Deferred compensation | ||||||||||||||||||||||||||||||||
| plan(4) | 53,617 | 53,617 | - | - | ||||||||||||||||||||||||||||
| Total | $ | 46,740 | $ | 46,740 | $ | - | $ | - | $ | 53,617 | $ | 53,617 | $ | - | $ | - | ||||||||||||||||
| (1) | Included in cash and cash equivalents on the Company’s unaudited condensed consolidated balance sheet. |
| (2) | Included in short-term investments on the Company’s unaudited condensed consolidated balance sheet. |
| (3) | Included in prepaid expenses and other assets and deferred compensation plan assets on the Company’s unaudited condensed consolidated balance sheet. |
| (4) | Included in accrued payroll and employee benefits and deferred compensation on the Company’s unaudited condensed consolidated balance sheet. |
Fixed income available-for-sale securities as of SeptemberMarch 31, 2017 and December 30, 2016 and January 1, 2016 represent obligations of United States agencies and state and local government agencies. 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.
| - 10 - |
Cash, cash equivalents and short-term investments consisted of the following as of September 30, 2016:March 31, 2017:
| Amortized | Unrealized | Unrealized | Estimated | |||||||||||||||||||||||||||||
| (In thousands) | Cost | Gains | Losses | Fair Value | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||||
| Classified as current assets: | ||||||||||||||||||||||||||||||||
| Cash | $ | 69,524 | $ | - | $ | - | $ | 69,524 | $ | 73,948 | $ | - | $ | - | $ | 73,948 | ||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||||||||
| Money market securities | 28,901 | - | - | 28,901 | 13,138 | - | - | 13,138 | ||||||||||||||||||||||||
| Total cash equivalents | 28,901 | - | - | 28,901 | 13,138 | - | - | 13,138 | ||||||||||||||||||||||||
| Total cash and cash equivalents | 98,425 | - | - | 98,425 | 87,086 | - | - | 87,086 | ||||||||||||||||||||||||
| Short-term investments: | ||||||||||||||||||||||||||||||||
| U.S. agency securities | 51,994 | 14 | (15 | ) | 51,993 | 68,000 | 2 | (185 | ) | 67,817 | ||||||||||||||||||||||
| Total short-term investments | 51,994 | 14 | (15 | ) | 51,993 | 68,000 | 2 | (185 | ) | 67,817 | ||||||||||||||||||||||
| Total cash, cash equivalents and short-term investments | $ | 150,419 | $ | 14 | $ | (15 | ) | $ | 150,418 | $ | 155,086 | $ | 2 | $ | (185 | ) | $ | 154,903 | ||||||||||||||
Cash, cash equivalents and short-term investments consisted of the following as of January 1,December 30, 2016:
| Amortized | Unrealized | Unrealized | Estimated | |||||||||||||||||||||||||||||
| (In thousands) | Cost | Gains | Losses | Fair Value | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||||
| Classified as current assets: | ||||||||||||||||||||||||||||||||
| Cash | $ | 115,221 | $ | - | $ | - | $ | 115,221 | $ | 93,049 | $ | - | $ | - | $ | 93,049 | ||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||||||||
| Money market securities | 10,530 | - | - | 10,530 | 21,918 | - | - | 21,918 | ||||||||||||||||||||||||
| Total cash equivalents | 10,530 | - | - | 10,530 | 21,918 | - | - | 21,918 | ||||||||||||||||||||||||
| Total cash and cash equivalents | 125,751 | - | - | 125,751 | 114,967 | - | - | 114,967 | ||||||||||||||||||||||||
| Short-term investments: | ||||||||||||||||||||||||||||||||
| U.S. agency securities | 41,946 | 1 | (106 | ) | 41,841 | 59,000 | - | (245 | ) | 58,755 | ||||||||||||||||||||||
| State and municipal bonds | 4,002 | - | (1 | ) | 4,001 | |||||||||||||||||||||||||||
| Total short-term investments | 45,948 | 1 | (107 | ) | 45,842 | 59,000 | - | (245 | ) | 58,755 | ||||||||||||||||||||||
| Total cash, cash equivalents and short-term investments | $ | 171,699 | $ | 1 | $ | (107 | ) | $ | 171,593 | $ | 173,967 | $ | - | $ | (245 | ) | $ | 173,722 | ||||||||||||||
| - 11 - |
The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as short-term investments based on stated effective maturities as of September 30, 2016:March 31, 2017:
| Amortized | Estimated | Amortized | Estimated | |||||||||||||
| (In thousands) | Cost | Fair Value | Cost | Fair Value | ||||||||||||
| Due within one year | $ | 7,994 | $ | 8,003 | $ | 24,000 | $ | 23,971 | ||||||||
| Due between one and two years | 44,000 | 43,990 | 44,000 | 43,846 | ||||||||||||
| Total | $ | 51,994 | $ | 51,993 | $ | 68,000 | $ | 67,817 | ||||||||
At SeptemberMarch 31, 2017 and December 30, 2016 and January 1, 2016, 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 consolidated balance sheet at SeptemberMarch 31, 2017 and December 30, 2016 and January 1, 2016, but require disclosure of their fair values: accounts receivable, other assets and accounts payable. The estimated fair value of such instruments at SeptemberMarch 31, 2017 and December 30, 2016 and January 1, 2016 approximates their carrying value as reported on the consolidated balance sheet.
There were no other-than-temporary impairments or credit losses related to available-for-sale securities during the three and nine months ended September 30, 2016March 31, 2017 and October 2, 2015.April 1, 2016.
Note 3: Net Income Per Share
Basic per share amounts are computed using the weighted-average number of common shares outstanding during the period. Diluted per share amounts are calculated using the weighted-average number of common shares outstanding during the period and, when dilutive, the weighted-average number of potential common shares from the issuance of common stock to satisfy outstanding restricted stock units and the exercise of outstanding options to purchase common stock using the treasury stock method.
The following schedule reconciles the shares used to calculate basic and diluted net income per share:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (In thousands) | September 30, 2016 | October 2, 2015 | September 30, 2016 | October 2, 2015 | ||||||||||||
| Shares used in basic per share computation | 26,545 | 26,597 | 26,563 | 26,644 | ||||||||||||
| Effect of dilutive common stock options outstanding | 115 | 139 | 121 | 143 | ||||||||||||
| Effect of dilutive restricted stock units outstanding | 525 | 532 | 550 | 563 | ||||||||||||
| Shares used in diluted per share computation | 27,185 | 27,268 | 27,234 | 27,350 | ||||||||||||
| Three Months Ended | ||||||||
| (In thousands) | March 31, 2017 | April 1, 2016 | ||||||
| Shares used in basic per share computation | 26,302 | 26,513 | ||||||
| Effect of dilutive common stock options outstanding | 132 | 121 | ||||||
| Effect of dilutive restricted stock units outstanding | 547 | 605 | ||||||
| Shares used in diluted per share computation | 26,981 | 27,239 | ||||||
There were no options excluded from the diluted per share calculations for the three and nine months ended September 30,March 31, 2017 and April 1, 2016. Common stock options to purchase 40,000 shares were excluded from the diluted per share calculation for the three months ended October 2, 2015 due to their antidilutive effect. The weighted-average exercise price for the antidilutive shares was $44.20 for the three months ended October 2, 2015. Common stock options to purchase 33,993 shares were excluded from the diluted per share calculation for the nine months ended October 2, 2015 due to their antidilutive effect. The weighted-average exercise price for the antidilutive shares was $44.20 for the nine months ended October 2, 2015.
Note 4: Stock-Based Compensation
Restricted Stock Units
Restricted stock unit grants are designed to attract and retain employees, and to better align employee interests with those of the Company’s stockholders. For a select group of employees, up to 40% of their annual bonus is settled with fully vested restricted stock unit awards. Under these fully vested restricted stock unit awards, the holder of each award has the right to receive one share of the Company’s common stock for each fully vested restricted stock unit four years from the date of grant. Each individual who receives a fully vested restricted stock unit award is also granted a matching number of unvested restricted stock unit awards. Unvested restricted stock unit awards are also granted for select new hires and promotions. These unvested restricted stock unit awards generally cliff vest four years from the date of grant, at which time the holder of each award will have the right to receive one share of the Company’s common stock for each restricted stock unit award provided the holder of each award has met certain employment conditions. In the case of retirement at 59½ years or older, all unvested restricted stock unit awards will continue to vest, provided that the holder of each award does all consulting work through the Company and does not become an employee for a past or present client, beneficial party or competitor of the Company.
| - 12 - |
The value of these restricted stock unit awards is determined based on the market price of the Company’s common stock on the date of grant. The value of fully vested restricted stock unit awards issued is recorded as a reduction to accrued bonuses. The portion of bonus expense that the Company expects to settle with fully vested restricted stock unit awards is recorded as stock-based compensation during the period the bonus is earned. The Company recorded stock-based compensation expense associated with accrued bonus awards of $1,548,000$1,928,000 and $1,616,000$1,717,000 during the three months ended September 30,March 31, 2017 and April 1, 2016, and October 2, 2015, respectively. For the nine months ended September 30, 2016 and October 2, 2015, the Company recorded stock-based compensation expense associated with accrued bonus awards of $4,716,000 and $4,959,000, 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 $1,115,000$3,256,000 and $967,000$3,126,000 during the three months ended September 30,March 31, 2017 and April 1, 2016, and October 2, 2015, respectively. The Company recorded stock-based compensation expense associated with the unvested restricted stock unit awards of $5,447,000 and $5,078,000 during the nine months ended September 30, 2016 and October 2, 2015, 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 Company grants options at exercise prices equal to the fair value of the Company’s common stock on the date of grant. The Company recorded stock-based compensation expense associated with stock option grants of $67,000$471,000 and $51,000$377,000 during the three months ended September 30,March 31, 2017 and April 1, 2016, and October 2, 2015, respectively. The Company recorded stock-based compensation expense associated with stock option grants of $496,000 and $499,000 during the nine months ended September 30, 2016 and October 2, 2015, 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 and post-vesting forfeiture and 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.
With the adoption of ASU 2016-09 as of the beginning of the first quarter of fiscal 2016 (see Note 1 - Recently Adopted Accounting Pronouncement), theThe Company accounts for forfeitures of stock-based awards when they occur. All stock-based payment awards are recognized on a straight-line basis over the requisite service periods of the awards.
Note 5: Treasury Stock
On May 29, 2014,October 21, 2015, the Company’s Board of Directors authorized $35,000,000 for the repurchase of the Company’s common stock. On October 21, 2015,19, 2016, the Company’s Board of Directors authorized an additional $35,000,000 for the repurchase of the Company’s common stock.
The Company repurchased 491,31222,666 shares of its common stock for $24,456,000$1,304,000 during the ninethree months ended September 30, 2016.March 31, 2017. The Company repurchased 463,40272,724 shares of its common stock for $19,814,000$3,500,000 during the ninethree months ended October 2, 2015.April 1, 2016. As of September 30, 2016March 31, 2017 the Company had remaining authorization under its stock repurchase plans of $22,307,000$56,003,000 to repurchase shares of common stock.
| - 13 - |
On October 19, 2016, the Company announced that its Board of Directors had authorized an additional $35,000,000 in share repurchases, increasing the Company’s current authorization to $57,307,000.
Net losses related to the re-issuance of treasury stock to settle restricted stock unit and stock option awards of $5,791,000$5,667,000 and $4,943,000$5,791,000 were recorded as a reduction to retained earnings during the ninethree months ended September 30,March 31, 2017 and April 1, 2016, and October 2, 2015, respectively.
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 SeptemberMarch 31, 2017 and December 30, 2016 and January 1, 2016, the invested amounts under the plans totaled $46,548,000$52,700,000 and $42,940,000,$48,267,000, respectively. These assets are classified as trading securities and are recorded at fair value with changes recorded as adjustments to miscellaneous income, (expense), net.
As of SeptemberMarch 31, 2017 and December 30, 2016 and January 1, 2016, vested amounts due under the plans totaled $51,845,000$58,320,000 and $46,740,000,$53,617,000, respectively. Changes in the liability are recorded as adjustments to compensation expense. During the three months ended September 30,March 31, 2017 and April 1, 2016, and October 2, 2015, the Company recognized compensation expense of $1,458,000$1,898,000 and ($2,688,000),$427,000, respectively, as a result of changes in the market value of the trust assets with the same amount being recorded as income in miscellaneous income, (expense), net. During the nine months ended September 30, 2016 and October 2, 2015, the Company recognized compensation expense of $2,823,000 and ($1,379,000), respectively, as a result of changes in the market value of the trust assets with the same amount being recorded as income in miscellaneous income (expense), net.
Note 7: Supplemental Cash Flow Information
The following is supplemental disclosure of cash flow information:
| Nine Months Ended | ||||||||
| (In thousands) | September 30, 2016 | October 2, 2015 | ||||||
| Cash paid during period: | ||||||||
| Income taxes | $ | 13,375 | $ | 17,087 | ||||
| Non-cash investing and financing activities: | ||||||||
| Unrealized gain (loss) on short-term investments | $ | 65 | $ | (4 | ) | |||
| Vested stock unit awards issued to settle accrued bonuses | $ | 6,334 | $ | 6,169 | ||||
| Accrual for capital expenditures | $ | 739 | $ | 805 | ||||
| Three Months Ended | ||||||||
| (In thousands) | March 31, 2017 | April 1, 2016 | ||||||
| Cash paid during period: | ||||||||
| Income taxes | $ | 446 | $ | 1,001 | ||||
| Non-cash investing and financing activities: | ||||||||
| Unrealized gain on short-term investments | $ | 36 | $ | 85 | ||||
| Vested stock unit awards issued to settle accrued bonuses | $ | 6,910 | $ | 6,334 | ||||
| Accrual for capital expenditures | $ | 405 | $ | 223 | ||||
Note 8: Accounts Receivable, Net
At SeptemberMarch 31, 2017 and December 30, 2016 and January 1, 2016, accounts receivable, net, was comprised of the following:
| September 30, | January 1, | March 31, | December 30, | |||||||||||||
| (In thousands) | 2016 | 2016 | 2017 | 2016 | ||||||||||||
| Billed accounts receivable | $ | 63,676 | $ | 62,360 | $ | 62,655 | $ | 60,510 | ||||||||
| Unbilled accounts receivable | 34,421 | 29,009 | 37,352 | 30,316 | ||||||||||||
| Allowance for contract losses and doubtful accounts | (3,805 | ) | (2,792 | ) | (3,661 | ) | (3,417 | ) | ||||||||
| Total accounts receivable, net | $ | 94,292 | $ | 88,577 | $ | 96,346 | $ | 87,409 | ||||||||
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 area 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.
| - 14 - |
Segment information for the three and nine months ended September 30,March 31, 2017 and April 1, 2016 and October 2, 2015 follows:
| Revenues | ||||||||
| Three Months Ended | ||||||||
| (In thousands) | March 31, 2017 | April 1, 2016 | ||||||
| Engineering and Other Scientific | $ | 66,683 | $ | 64,810 | ||||
| Environmental and Health | 17,439 | 18,346 | ||||||
| Total revenues | $ | 84,122 | $ | 83,156 | ||||
| Operating Income | ||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
| (In thousands) | September 30, 2016 | October 2, 2015 | September 30, 2016 | October 2, 2015 | March 31, 2017 | April 1, 2016 | ||||||||||||||||||
| Engineering and Other Scientific | $ | 61,237 | $ | 61,052 | $ | 187,026 | $ | 180,212 | $ | 22,321 | $ | 21,138 | ||||||||||||
| Environmental and Health | 16,375 | 17,942 | 51,037 | 58,939 | 5,479 | 5,195 | ||||||||||||||||||
| Total revenues | $ | 77,612 | $ | 78,994 | $ | 238,063 | $ | 239,151 | ||||||||||||||||
| Total segment operating income | 27,800 | 26,333 | ||||||||||||||||||||||
| Corporate operating expense | (13,166 | ) | (9,897 | ) | ||||||||||||||||||||
| Total operating income | $ | 14,634 | $ | 16,436 | ||||||||||||||||||||
| Capital Expenditures | ||||||||
| Three Months Ended | ||||||||
| (In thousands) | March 31, 2017 | April 1, 2016 | ||||||
| Engineering and Other Scientific | $ | 1,008 | $ | 1,190 | ||||
| Environmental and Health | 42 | 23 | ||||||
| Total segment capital expenditures | 1,050 | 1,213 | ||||||
| Corporate capital expenditures | 257 | 268 | ||||||
| Total capital expenditures | $ | 1,307 | $ | 1,481 | ||||
| Depreciation and Amortization | ||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
| (In thousands) | September 30, 2016 | October 2, 2015 | September 30, 2016 | October 2, 2015 | March 31, 2017 | April 1, 2016 | ||||||||||||||||||
| Engineering and Other Scientific | $ | 19,933 | $ | 20,252 | $ | 60,632 | $ | 58,605 | $ | 1,115 | $ | 1,021 | ||||||||||||
| Environmental and Health | 4,758 | 5,039 | 13,981 | 18,134 | 41 | 43 | ||||||||||||||||||
| Total segment operating income | 24,691 | 25,291 | 74,613 | 76,739 | ||||||||||||||||||||
| Total segment depreciation and amortization | 1,156 | 1,064 | ||||||||||||||||||||||
| Corporate operating expense | (9,096 | ) | (4,370 | ) | (27,651 | ) | (22,085 | ) | ||||||||||||||||
| Corporate depreciation and amortization | 410 | 339 | ||||||||||||||||||||||
| Total operating income | $ | 15,595 | $ | 20,921 | $ | 46,962 | $ | 54,654 | ||||||||||||||||
| Total depreciation and amortization | $ | 1,566 | $ | 1,403 | ||||||||||||||||||||
| - 15 - |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (In thousands) | September 30, 2016 | October 2, 2015 | September 30, 2016 | October 2, 2015 | ||||||||||||
| Engineering and Other Scientific | $ | 902 | $ | 1,057 | $ | 3,365 | $ | 2,268 | ||||||||
| Environmental and Health | 33 | 52 | 94 | 123 | ||||||||||||
| Total segment capital expenditures | 935 | 1,109 | 3,459 | 2,391 | ||||||||||||
| Corporate capital expenditures | 8,746 | 1,532 | 9,604 | 1,964 | ||||||||||||
| Total capital expenditures | $ | 9,681 | $ | 2,641 | $ | 13,063 | $ | 4,355 | ||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (In thousands) | September 30, 2016 | October 2, 2015 | September 30, 2016 | October 2, 2015 | ||||||||||||
| Engineering and Other Scientific | $ | 1,136 | $ | 951 | $ | 3,273 | $ | 2,877 | ||||||||
| Environmental and Health | 45 | 46 | 133 | 133 | ||||||||||||
| Total segment depreciation and amortization | 1,181 | 997 | 3,406 | 3,010 | ||||||||||||
| Corporate depreciation and amortization | 401 | 332 | 1,103 | 1,024 | ||||||||||||
| Total depreciation and amortization | $ | 1,582 | $ | 1,329 | $ | 4,509 | $ | 4,034 | ||||||||
One customer comprised 12% of the Company’s revenues during the three months ended March 31, 2017. No other single customer comprised more than 10% of the Company’s revenues during the three months ended March 31, 2017. No single customer comprised more than 10% of the Company’s revenues during the three or nine months ended September 30, 2016 and October 2, 2015.April 1, 2016. No single customer comprised more than 10% of the Company’s accounts receivable at SeptemberMarch 31, 2017 and December 30, 2016 and January 1, 2016.
Note 10: Goodwill
Below is a breakdown of goodwill reported by segment as of September 30, 2016:
| Environmental | Engineering and | |||||||||||
| (In thousands) | and Health | Other Scientific | Total | |||||||||
| Goodwill | $ | 8,099 | $ | 508 | $ | 8,607 | ||||||
There were no acquisitions, dispositions, impairments or other changes in the carrying amount of goodwill, nor any changes in the composition of the Company’s reporting units, during the three and nine months ended September 30, 2016.
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: Related Party Transaction
On July 29, 2016, Exponent’s Board of Directors appointed Dr. Catherine Corrigan as its President. Dr. Paul Johnston continues to serve as the Company’s Chief Executive Officer. Dr. Corrigan relocated from the Company’s Philadelphia, Pennsylvania office to its Menlo Park, California office. In connection with the relocation, the Company purchased Dr. Corrigan’s primary residence in Pennsylvania for an appraised value of $1.25 million. The Company intends to resell the house as soon as practicable; therefore, the house is recorded in prepaid expenses and other assets.
Note 13:11: Subsequent Event
On October 19, 2016,During April, 2017, the Company announcedentered into two agreements to purchase a total of 2.9 acres of land in Natick, Massachusetts on which it intends to build office and laboratory facilities. The total purchase price is $5,200,000. The purchase agreements are contingent on several items including feasibility studies, environmental assessments, and government approvals. If the Company determines that the property is unsuitable for the planned project it can terminate the agreements to purchase the land at its Board of Directors had authorized an additional $35,000,000 in share repurchases, increasing the Company’s current authorization to $57,307,000.sole discretion.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herein and with our audited consolidated financial statements and notes thereto for the fiscal year ended January 1,December 30, 2016, which are contained in our fiscal 20152016 Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on February 26, 201624, 2017 (our “2015“2016 Annual Report”).
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain “forward-looking” statements (as such term is defined in the Private Securities Litigation Reform Act of 1995, and the rules promulgated pursuant to the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended) that are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. When used in this document, the words “intend,” “anticipate,” “believe,” “estimate,” “expect” and similar expressions, as they relate to the Company or its management, identify such forward-looking statements. Such statements reflect the current views of the Company or its management with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company’s actual results, performance, or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. Factors that could cause or contribute to such material differences include the 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 our 20152016 Annual Report under the heading “Risk Factors” and elsewhere in the report. The inclusion of such forward-looking information should not be regarded as a representation by the Company or any other person that the future events, plans, or expectations contemplated by the Company will be achieved. Due to such uncertainties and risks, you are warned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. The Company does not intend to release publicly any updates or revisions to any such forward-looking statements.
Business Overview
Exponent, Inc. is an engineering and scientific consulting firm that provides solutions to complex problems. Our multidisciplinary team of scientists, physicians, 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
In preparing our unaudited condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our consolidated balance sheet. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition and estimating the allowance for contract losses and doubtful accounts have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. Policies covering revenue recognition and estimating the allowance for contract losses and doubtful accounts are described in our 20152016 Annual Report under “Critical Accounting Estimates” and Note 1 (Summary of Significant Accounting Policies) of the Notes to Consolidated Financial Statements.
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RESULTS OF CONSOLIDATED OPERATIONS
Executive Summary
Revenues for the thirdfirst quarter of 2016 decreased 2%2017 increased 1% to $77,612,000$84,122,000 as compared to $78,994,000$83,156,000 during the same period last year. Revenues before reimbursements for the thirdfirst quarter of 2016 decreased slightly2017 increased 2% to $74,160,000$80,467,000 as compared to $74,503,000$78,950,000 during the same period last year. We experienced good demand for our consulting services from a diverse set of clients for both proactive and reactive projects. We continue to see demand for our proactive services in the areas of design and regulatory consulting, specifically related to consumer electronics and medical devices, and our reactive services in international construction disputes, consumer product recalls and product liability claims.
During the first quarter of 2017 we had strong growth in our human factors, construction consulting and polymer science & materials chemistry practices. This growth was partially offset by softness in the oil and gas and industrial chemicals industries. During the quarter we performed a large project for a client in the consumer products industry that contributed to the strength of our human factors practice. This project represented approximately 5% of our net revenues in the first quarter of 2017. During the quarter we also continued to expand our international construction disputes work with current mining, gas terminal and power plant projects. We also saw increased demand from the medical device industry for our multi-disciplinary team of material scientists and mechanical engineers to support product development and litigation matters.
Net income decreased 4%increased 8% to $11,289,000$16,576,000 during the thirdfirst quarter of 20162017 as compared to $11,719,000$15,350,000 during the same period last year. Diluted earnings per share decreasedincreased to $0.42$0.61 per share as compared to $0.43$0.56 in the same period last year.
The decreasesincrease in revenues and net income wereand diluted earnings per share was due to softeninga significant decrease in income tax expense during the first quarter of demand in a few industry sectors partially offset by2017 as compared to the same period last year. During the first quarter of 2016, we early adopted ASU No. 2016-09. Under ASU No. 2016-09 excess tax benefits associated with share-based awards are recorded as an increase in demand related to consumer products and construction. Recent shifts in market conditions have resulted in reduced revenues from the oil & gas and industrial chemicals industries and a slowdown in intellectual property cases. Additionally, after several years of growth, revenues from the automotive industry remained flatincome tax benefit in the third quarter. Duringcondensed consolidated statement of income. Prior to the thirdadoption of ASU No. 2016-09 excess tax benefits associated with share-based awards were recognized as additional paid-in capital. The excess tax benefit associated with share-based awards realized during the first quarter we did see increased activity relatedof fiscal 2017 was $6,019,000 or $0.22 per diluted share as compared to consumer product recalls and construction disputes.$4,461,000 or $0.16 per diluted share during the first quarter of fiscal 2016.
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 September 30, 2016March 31, 2017
During the thirdfirst quarter of 2016,2017, billable hours decreased 3%increased slightly to 278,000296,000 as compared to 286,000295,000 during the same period last year. Our utilization decreased to 70%was 74% during the thirdfirst quarter of 2016 as compared to 73% during the third quarter of 2015.2017 and 2016. Technical full-time equivalent employees increased 2%decreased slightly to 761767 during the thirdfirst quarter of 20162017 as compared to 749768 during the same period last year. We continue to selectively hire key talent to expand our capabilities.
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Three Months Ended September 30, 2016March 31, 2017 compared to Three Months Ended October 2, 2015April 1, 2016
Revenues
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| Revenues | ||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | March 31, 2017 | April 1, 2016 | Percent Change | ||||||||||||||||||
| Engineering and Other Scientific | $ | 61,237 | $ | 61,052 | 0.3 | % | $ | 66,683 | $ | 64,810 | 2.9 | % | ||||||||||||
| Percentage of total revenues | 78.9 | % | 77.3 | % | 79.3 | % | 77.9 | % | ||||||||||||||||
| Environmental and Health | 16,375 | 17,942 | (8.7 | )% | 17,439 | 18,346 | (4.9 | )% | ||||||||||||||||
| Percentage of total revenues | 21.1 | % | 22.7 | % | 20.7 | % | 22.1 | % | ||||||||||||||||
| Total revenues | $ | 77,612 | $ | 78,994 | (1.7 | )% | $ | 84,122 | $ | 83,156 | 1.2 | % | ||||||||||||
The increase in revenues for our Engineering and Other Scientific segment was primarily due to an increase in billable hours and an increase in billing rates. During the thirdfirst quarter of 2016,2017, billable hours for this segment decreasedincreased by 1% to 214,000226,000 as compared to 216,000224,000 during the same period last year. Utilization in this segment decreased to 73%75% during the thirdfirst quarter of 20162017 as compared to 77% during the same period last year. The decreasesincrease in billable hours and utilization werewas due to recent shiftsstrong growth in market conditions, such as reduced spendingour human factors, construction consulting and polymer science & materials chemistry practices. During the quarter we performed a large project for a client in the oil & gasconsumer products industry and lowercontinued to expand our international construction disputes work with current mining, gas terminal and power plant projects. We also saw increased demand related to intellectual property cases. Additionally, after several years of growth, revenues from the automotivemedical device industry were flat during the third quarterfor our multi-disciplinary team of 2016. These decreases were partially offset by increased activity relatedmaterial scientists and mechanical engineers to consumersupport product recallsdevelopment and construction disputes.litigation matters. Technical full-time equivalent employees in this segment increased 5%3% to 566577 during the thirdfirst quarter of 20162017 as compared to 538559 for the same period last year due to our continuing recruiting and retention efforts.
The decrease in revenues for our Environmental and Health segment was due to a decrease in billable hours and the impact of unfavorable foreign exchange rates, partially offset by an increase in billing rates. During the thirdfirst quarter of 2016,2017, billable hours for this segment decreased by 9%1% to 64,00070,000 as compared to 70,00071,000 during the same period last year. Utilization in this segment was 63% for the third quarter of 2016 and 2015. The decrease in billable hours was due to one ofweaker demand for our major investigations endingservices in the third quarter of 2015 and the impactour health sciences practice, including lower revenues from reduced spending in the oil &and gas and industrial chemicals industries. The weaker demand in our health sciences practice was partially offset by continued expansion in our food and chemicals practice which assisted clients with regulatory issues around the world. Utilization in this segment increased to 70% during the first quarter of 2017 as compared to 65% during the same period last year. Technical full-time equivalent employees in this segment decreased by 8%9% to 195190 during the thirdfirst quarter of 20162017 as compared to 211209 during the same period last yearyear. The increase in utilization and the decrease in technical full-time equivalent employees was due to our efforts to align resources with anticipated demand.
Compensation and Related Expenses
| Compensation and Related Expenses | ||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | March 31, 2017 | April 1, 2016 | Percent Change | ||||||||||||||||||
| Compensation and related expenses | $ | 47,797 | $ | 42,853 | 11.5 | % | $ | 54,418 | $ | 52,017 | 4.6 | % | ||||||||||||
| Percentage of total revenues | 61.6 | % | 54.2 | % | 64.7 | % | 62.6 | % | ||||||||||||||||
The increase in compensation and related expenses during the thirdfirst quarter of 20162017 was due to an increase in payroll expense and a change in the value of assets associated with our deferred compensation plan, partially offset by a decrease in bonus expense.plan. Payroll expense increased $1,295,000$466,000 due to the increase in technical full-time equivalent employees and our annual salary increases. During the thirdfirst quarter of 2016,2017, deferred compensation expense increased $4,146,000$1,471,000 with a corresponding increase to miscellaneousother income, (expense), net, as compared to the same period last year, due to the change in value of assets associated with our deferred compensation plan. This increase consisted of an increase in the value of the plan assets of $1,458,000$1,898,000 during the thirdfirst quarter of 20162017 as compared to a decreasean increase in the value of the plan assets of $2,688,000$427,000 during same period last year. BonusWe expect our compensation expense, decreased $353,000 duringexcluding the third quarterchange in value of 2016 duedeferred compensation plan assets, to a decrease in income before income taxes, before bonus expense,increase as we selectively add new talent and before stock-basedadjust compensation expense.to market conditions.
Other Operating Expenses
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| Three Months Ended | ||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | |||||||||
| Other operating expenses | $ | 7,020 | $ | 6,766 | 3.8 | % | ||||||
| Percentage of total revenues | 9.0 | % | 8.6 | % | ||||||||
| Other Operating Expenses | ||||||||||||
| Three Months Ended | ||||||||||||
| (in thousands, except percentages) | March 31, 2017 | April 1, 2016 | Percent Change | |||||||||
| Other operating expenses | $ | 7,191 | $ | 6,983 | 3.0 | % | ||||||
| Percentage of total revenues | 8.5 | % | 8.4 | % | ||||||||
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 thirdfirst quarter of 20162017 was primarily due to an increase in depreciation expense of $253,000$163,000 associated with investments in our corporate infrastructure. We expect other operating expenses to grow as we selectively add new talent and make investments in our corporate infrastructure.
Reimbursable Expenses
| Reimbursable Expenses | ||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | March 31, 2017 | April 1, 2016 | Percent Change | ||||||||||||||||||
| Reimbursable expenses | $ | 3,452 | $ | 4,491 | (23.1 | )% | $ | 3,655 | $ | 4,206 | (13.1 | )% | ||||||||||||
| Percentage of total revenues | 4.4 | % | 5.7 | % | 4.3 | % | 5.1 | % | ||||||||||||||||
The decrease in reimbursable expenses was primarily due to a decrease in project-related costs in our materials & corrosion engineering, thermal sciences, and biomedical engineering practices within our engineering and other scientific segment. The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects.
General and Administrative Expenses
| General and Administrative Expenses | ||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | March 31, 2017 | April 1, 2016 | Percent Change | ||||||||||||||||||
| General and administrative expenses | $ | 3,748 | $ | 3,963 | (5.4 | )% | $ | 4,224 | $ | 3,514 | 20.2 | % | ||||||||||||
| Percentage of total revenues | 4.8 | % | 5.0 | % | 5.0 | % | 4.2 | % | ||||||||||||||||
The decreaseincrease in general and administrative expenses during the thirdfirst quarter of 20162017 was primarily due to decreases in legal fees and travel & meals, partially offset by an increase in bad debt. We expect generaltravel and administrativemeals of $391,000 and an increase in marketing expenses of $110,000. The increase in travel and meals was due to a firm-wide managers’ meeting. The increase as we selectively add new talent, expand our business developmentin marketing expenses was due to several initiatives and pursue staff development initiatives.associated with the firm’s 50th anniversary.
Other Income (Expense), Net
| Other Income, Net | ||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | March 31, 2017 | April 1, 2016 | Percent Change | ||||||||||||||||||
| Other income (expense), net | $ | 2,325 | $ | (2,148 | ) | 208.2 | % | |||||||||||||||||
| Other income, net | $ | 2,776 | $ | 1,298 | 113.9 | % | ||||||||||||||||||
| Percentage of total revenues | 3.0 | % | (2.7 | )% | 3.3 | % | 1.6 | % | ||||||||||||||||
Other income, (expense), net, consists primarily of changes in the value of assets associated with our deferred compensation plan, interest income earned on available cash, cash equivalents and short-term investments, and rental income from leasing space in our Silicon Valley facility. During the thirdfirst quarter of 2016,2017, other income, (expense), net, increased $4,146,000$1,471,000 with a corresponding increase to deferred compensation expense, as compared to the same period last year, due to a change in the value of assets associated with our deferred compensation plan. This increase consisted of an increase in the value of the plan assets of $1,458,000 during the third quarter of 2016 as compared to a decrease in the value of the plan assets of $2,688,000 during the same period last year.
Income Taxes
| Three Months Ended | ||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | |||||||||
| Income taxes | $ | 6,631 | $ | 7,054 | (6.0 | )% | ||||||
| Percentage of total revenues | 8.5 | % | 8.9 | % | ||||||||
| Effective tax rate | 37.0 | % | 37.6 | % | ||||||||
The decrease in income taxes was due to a corresponding decrease in pre-tax income.
Nine Months Ended September 30, 2016 compared to Nine Months Ended October 2, 2015
| Nine Months Ended | ||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | |||||||||
| Engineering and Other Scientific | $ | 187,026 | $ | 180,212 | 3.8 | % | ||||||
| Percentage of total revenues | 78.6 | % | 75.4 | % | ||||||||
| Environmental and Health | 51,037 | 58,939 | (13.4 | )% | ||||||||
| Percentage of total revenues | 21.4 | % | 24.6 | % | ||||||||
| Total revenues | $ | 238,063 | $ | 239,151 | (0.5 | )% | ||||||
The increase in revenues for our Engineering and Other Scientific segment was primarily due to an increase in billable hours and billing rates. During the first nine months of 2016, billable hours for this segment increased 2% to 649,000 as compared to 635,000 during the same period last year. Utilization in this segment decreased to 74%$1,898,000 during the first nine monthsquarter of 20162017 as compared to 76% during the same period last year. The increase in billable hours was due to demand for our services in our civil engineering, polymer science & materials chemistry, and materials & corrosion engineering practices. The decrease in utilization was due to recent shifts in market conditions, such as reduced spending in the oil & gas industry and lower demand related to intellectual property cases. Technical full-time equivalent employees in this segment increased 6% to 563 during the first nine months of 2016 as compared to 533 for the same period last year due to our continuing recruiting and retention efforts.
The decrease in revenues for our Environmental and Health segment was due to a decrease in billable hours and the impact of unfavorable foreign exchange rates, partially offset by an increase in billing rates. During the first nine months of 2016, billable hours for this segment decreased by 13% to 199,000 as compared to 229,000 during the same period last year. Utilization in this segment decreased to 63% for the first nine months of 2016 as compared to 68% for the same period last year. The decrease in billable hours and utilization was due to one of our major investigations ending in the third quarter of 2015 and the impact from reduced spending in the oil & gas and industrial chemicals industries. Technical full-time equivalent employees in this segment decreased by 6% to 203 during the first nine months of 2016 as compared to 215 during the same period last year due to our efforts to align resources with anticipated demand.
Compensation and Related Expenses
| Nine Months Ended | ||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | |||||||||
| Compensation and related expenses | $ | 146,854 | $ | 139,745 | 5.1 | % | ||||||
| Percentage of total revenues | 61.7 | % | 58.4 | % | ||||||||
The increase in compensation and related expenses during the first nine months of 2016 was due to an increase in payroll expense and a change in the value of assets associated with our deferred compensation plan, partially offset by a decrease in bonus expense. Payroll expense increased $3,897,000 due to the increase in technical full-time equivalent employees and our annual salary increases. During the first nine months of 2016, deferred compensation expense increased $4,202,000 with a corresponding increase to miscellaneous income (expense), net, as compared to the same period last year, due to the change in value of assets associated with our deferred compensation plan. This increase consisted of an increase in the value of the plan assets of $2,823,000 during the first nine months of 2016 as compared to a decrease in the value of the plan assets of $1,379,000$427,000 during the same period last year. Bonus expense decreased $1,471,000 during the first nine months of 2016 due to a decrease in income before income taxes, before bonus expense, and before stock-based compensation expense.
Other Operating Expenses
| Nine Months Ended | ||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | |||||||||
| Other operating expenses | $ | 21,221 | $ | 19,979 | 6.2 | % | ||||||
| Percentage of total revenues | 8.9 | % | 8.4 | % | ||||||||
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 nine months of 2016 was primarily due to an increase in depreciation expense of $475,000, an increase in occupancy expense of $394,000, an increase in computer expense of $164,000 and several individually insignificant increases, all of which were associated with the increase in technical full-time equivalent employees and investments in our corporate infrastructure.
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Reimbursable Expenses
| Nine Months Ended | ||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | |||||||||
| Reimbursable expenses | $ | 11,619 | $ | 13,235 | (12.2 | )% | ||||||
| Percentage of total revenues | 4.9 | % | 5.5 | % | ||||||||
The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects.
General and Administrative Expenses
| Nine Months Ended | ||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | |||||||||
| General and administrative expenses | $ | 11,407 | $ | 11,538 | (1.1 | )% | ||||||
| Percentage of total revenues | 4.8 | % | 4.8 | % | ||||||||
The decrease in general and administrative expenses during the first nine months of 2016 was primarily due to a decrease in outside consulting services and legal fees, partially offset by an increase in bad debt.
Other Income (Expense), Net
| Nine Months Ended | ||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | |||||||||
| Other income (expense), net | $ | 5,369 | $ | 482 | 1,014 | % | ||||||
| Percentage of total revenues | 2.3 | % | 0.2 | % | ||||||||
Other income (expense), net, consists primarily of changes in the value of assets associated with our deferred compensation plan, interest income earned on available cash, cash equivalents and short-term investments, and rental income from leasing space in our Silicon Valley facility. During the first nine months of 2016, other income (expense), net, increased $4,202,000 with a corresponding increase to deferred compensation expense, as compared to the same period last year, due to a change in the value of assets associated with our deferred compensation plan. This increase consisted of an increase in the value of the plan assets of $2,823,000 during the first nine months of 2016 as compared to a decrease in the value of the plan assets of $1,379,000 during the same period last year. The increase in other income (expense), net, during the first nine months of 2016 was also due to an increase in interest income of $374,000 and an increase in rental income of $226,000.
Income Taxes
| Nine Months Ended | ||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | Percent Change | |||||||||
| Income taxes | $ | 15,239 | $ | 21,387 | (28.7 | )% | ||||||
| Percentage of total revenues | 6.4 | % | 8.9 | % | ||||||||
| Effective tax rate | 29.1 | % | 38.8 | % | ||||||||
| Income Taxes | ||||||||||||
| Three Months Ended | ||||||||||||
| (in thousands, except percentages) | March 31, 2017 | April 1, 2016 | Percent Change | |||||||||
| Income taxes | $ | 834 | $ | 2,384 | (65.0 | )% | ||||||
| Percentage of total revenues | 1.0 | % | 2.9 | % | ||||||||
| Effective tax rate | 4.8 | % | 13.4 | % | ||||||||
The decrease in income taxes and the decrease in our effective tax rate were primarily due to an increase in the early adoption of ASU No. 2016-09, on a prospective basis,excess tax benefit associated with share-based awards. The excess tax benefit associated with share-based awards was $6,019,000 during the first quarter of fiscal 2016. Under ASU No. 2016-09 excess tax benefits are recorded2017 as an income tax benefit in the condensed consolidated statement of income. Priorcompared to the adoption of ASU No. 2016-09, excess tax benefits were recognized in additional paid-in capital. The tax benefit realized$4,461,000 during the first nine months of fiscal 2016 was $4,827,000. Excluding the excess tax benefit, the effective tax rate would have been 38.3%. The decrease in our effective tax rate, excluding the impact of ASU No. 2016-09, was due to an increase in foreign earnings in jurisdictions with lower income tax rates.same period last year.
LIQUIDITY AND CAPITAL RESOURCES
| Nine Months Ended | Three Months Ended | |||||||||||||||
| (in thousands) | September 30, 2016 | October 2, 2015 | March 31, 2017 | April 1, 2016 | ||||||||||||
| Net cash provided by operating activities | $ | 37,234 | $ | 34,310 | ||||||||||||
| Net cash (used in)/provided by operating activities | $ | (1,784 | ) | $ | 313 | |||||||||||
| Net cash (used in) investing activities | (19,113 | ) | (6,800 | ) | (10,307 | ) | (12,031 | ) | ||||||||
| Net cash (used in) financing activities | (44,816 | ) | (32,429 | ) | (15,908 | ) | (15,436 | ) | ||||||||
We financed our business during the first nine monthsquarter of 20162017 through available cash. We invest our excess cash in cash equivalents and short-term investments. As of September 30, 2016,March 31, 2017, our cash, cash equivalents and short-term investments were $150.4$154.9 million compared to $171.6$173.7 million at January 1,December 30, 2016. We believe our existing balances of cash, cash equivalents and short-term investments 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.
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. Under ASU No. 2016-09, the excess tax benefit of $4,827,000 for the first nine months of 2016 was classified as an operating activity in the statement of cash flows. The excess tax benefit of $4,983,000 for the first nine months of 2015 was classified as a financing activity.
The increasedecrease in net cash used in investing activities during the first nine monthsquarter of 2016,2017, as compared to the same period last year, was due to a decrease in purchases of short-term investments.
The increase in net cash used in financing activities during the first quarter of 2017, as compared to the same period last year, was due to an increase in capital expenditurespayroll taxes for restricted stock units and an increase in the purchase of short-term investments. On August 12, 2016, we completed the purchase ofdividend payments, partially offset by a 1.1 acre parcel of land with 27,000 square feet of warehouse storage space in Menlo Park, California adjacent to our owned office and lab facilities. We had leased this warehouse storage space for the past 25 years. The total purchase price was $8,250,000.
The increase in net cash used in financing activities during the first nine months of 2016, as compared to the same period last year, was due to the early adoption of ASU No. 2016-09 on a prospective basis. Under ASU No. 2016-09, the excess tax benefit of $4,827,000 for the first nine months of 2016 was classified as an operating activity in the statement of cash flows. The excess tax benefit of $4,983,000 for the first nine months of 2015 was classified as a financing activity. The increase in net cash used in financing activities during the first nine months of 2016 was also due to an increasedecrease in repurchases of our common stock and dividends paid.stock.
We expect to continue our investing activities, including capital expenditures. Furthermore, cash reserves may be used to repurchase common stock under our stock repurchase programs, pay dividends or strategically acquire professional service firms that are complementary to our business.
For a summary of our commitments to make future payments under contractual obligations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in our 2016 Annual ReportReport.
During April, 2017, we entered into two agreements to purchase a total of 2.9 acres of land in Natick Massachusetts on Form 10-Kwhich we intend to build office and laboratory facilities. The total purchase price is $5,200,000. The purchase agreements are contingent on several items including feasibility studies, environmental assessments, and government approvals. If we determine that the property is unsuitable for the fiscal year ended January 1, 2016. planned project we can terminate the agreements to purchase the land at our sole discretion.
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There have been no other material changes in our contractual obligations since January 1,December 30, 2016.
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 $45,662,000$52,399,000 were recorded as a long-term liability on our unaudited condensed consolidated balance sheet at September 30, 2016.March 31, 2017. Company assets that are earmarked to pay benefits under the plan are held in a rabbi trust and are subject to the claims of our creditors. As of September 30, 2016,March 31, 2017, invested amounts under the plan of $40,365,000$46,699,000 were recorded as a long-term 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.Thecapacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime.Thelifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid.
Non-GAAP Financial Measures
Regulation G, Conditions for Use of Non-Generally Accepted Accounting Principles ("Non-GAAP") Financial Measures, and other 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 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 and nine months ended September 30, 2016March 31, 2017 and October 2, 2015:April 1, 2016:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (in thousands, except percentages) | September 30, 2016 | October 2, 2015 | September 30, 2016 | October 2, 2015 | ||||||||||||
| Revenues before reimbursements | $ | 74,160 | $ | 74,503 | $ | 226,444 | $ | 225,916 | ||||||||
| EBITDA | $ | 19,323 | $ | 20,055 | $ | 56,351 | $ | 59,055 | ||||||||
| EBITDA as a % of revenues before reimbursements | 26.1 | % | 26.9 | % | 24.9 | % | 26.1 | % | ||||||||
The decrease in EBITDA as a percentage of revenues before reimbursements during the third quarter of 2016 as compared to the same period last year was due to the decrease in utilization. Utilization for the third quarter of 2016 was 70% as compared to 73% during the same period last year. The decrease in utilization was due to the impact of the completion of a major project during the third quarter of 2015 and recent shifts in market conditions, such as reduced spending in the oil & gas industry and lower demand related to intellectual property cases. The decrease in utilization was also due to lower demand from the industrial chemicals industry.
| Three Months Ended | ||||||||
| (in thousands, except percentages) | March 31, 2017 | April 1, 2016 | ||||||
| Revenues before reimbursements | $ | 80,467 | $ | 78,950 | ||||
| EBITDA | $ | 18,742 | $ | 18,998 | ||||
| EBITDA as a % of revenues before reimbursements | 23.3 | % | 24.1 | % | ||||
The decrease in EBITDA as a percentage of revenues before reimbursements during the first nine monthsquarter of 20162017 as compared to the same period last year was primarily due to the decreaseincrease in utilization. Utilization for the first nine months of 2016 was 71% as compared to 74% during the same period last year. The decrease in utilization was duegeneral and administrative expenses associated with our firm-wide managers’ meeting and marketing initiatives related to the impact of the completion of a major project during the third quarter of 2015 and recent shifts in market conditions, such as reduced spending in the oil & gas industry and lower demand related to intellectual property cases. The decrease in utilization was also due to lower demand from the industrial chemicals industry.firm’s 50th anniversary.
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The following table is a reconciliation of EBITDA and EBITDAS to the most comparable GAAP measure, net income, for the three and nine months ended September 30, 2016March 31, 2017 and October 2, 2015:April 1, 2016:
| Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
| (in thousands) | September 30, 2016 | October 2, 2015 | September 30, 2016 | October 2, 2015 | March 31, 2017 | April 1, 2016 | ||||||||||||||||||
| Net income | $ | 11,289 | $ | 11,719 | $ | 37,092 | $ | 33,749 | $ | 16,576 | $ | 15,350 | ||||||||||||
| Add back (subtract): | ||||||||||||||||||||||||
| Income taxes | 6,631 | 7,054 | 15,239 | 21,387 | 834 | 2,384 | ||||||||||||||||||
| Interest income, net | (179 | ) | (47 | ) | (489 | ) | (115 | ) | (234 | ) | (139 | ) | ||||||||||||
| Depreciation and amortization | 1,582 | 1,329 | 4,509 | 4,034 | 1,566 | 1,403 | ||||||||||||||||||
| EBITDA | 19,323 | 20,055 | 56,351 | 59,055 | 18,742 | 18,998 | ||||||||||||||||||
| Stock-based compensation | 2,730 | 2,634 | 10,659 | 10,536 | 5,655 | 5,220 | ||||||||||||||||||
| EBITDAS | $ | 22,053 | $ | 22,689 | $ | 67,010 | $ | 69,591 | $ | 24,397 | $ | 24,218 | ||||||||||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk associated with our balances of cash, cash equivalents and short-term investments. We manage our interest rate risk by maintaining an investment portfolio primarily consisting of debt instruments with high credit quality and relatively short average effective maturities in accordance with our investment policy. The maximum effective maturity of any issue in our portfolio is 3 years and the maximum average effective maturity of the portfolio cannot exceed 12 months. If interest rates were to instantaneously increase or decrease by 100 basis points, the change in the fair market value of our portfolio of cash equivalents and short-term investments would not have a material impact on our financial statements. We do not use derivative financial instruments in our portfolio. There have not been any material changes during the period covered by this Quarterly Report on Form 10-Q to our interest rate risk exposures, or how these exposures are managed. Notwithstanding our efforts to manage interest rate risk, there can be no assurances that we will be adequately protected against the risks associated with interest rate fluctuations.
We have foreign currency risk related to our revenues and expenses denominated in currencies other than the U.S. dollar, primarily the British Pound, the Euro, and the Chinese Yuan. Accordingly, changes in exchange rates may negatively affect the revenues and net income of our foreign subsidiaries as expressed in U.S. dollars.
At September 30, 2016,March 31, 2017, we had net assets of approximately $6.9$6.2 million with a functional currency of the British Pound, net assets of approximately $2.7$2.8 million with a functional currency of the Euro, and net assets of approximately $3.0$3.2 million with a functional currency of the Chinese Yuan associated with our operations in the United Kingdom, Germany, and China, 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 September 30, 2016,March 31, 2017, we had net assets denominated in the non-functional currency of approximately $1.4$1.9 million. As such, a ten percent change in the value of the local currency would result in a $140,000$190,000 foreign currency gain or loss in our results of operations.
We do not use foreign exchange contracts to hedge any foreign currency exposures. To date, the impacts of foreign currency exchange rate changes on our consolidated revenues and consolidated net income have not been material. However, our continued international growth increases our exposure to exchange rate fluctuations and as a result such fluctuations could have a significant impact on our future results of operations.
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Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that, as of September 30, 2016,March 31, 2017, the Company’s disclosure controls and procedures were effective.
We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis, to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three month period ended September 30, 2016March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Exponent is not engaged in any material legal proceedings.
There have been no material changes from risk factors as previously discussed under the heading “Risk Factors” in the Company’s 2016 Annual Report on Form 10-K for the fiscal year ended January 1, 2016.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 September 30, 2016March 31, 2017 (in thousands, except price per share):
| Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs(1) | |||||||||||||
| July 2 to July 29 | - | $ | - | - | $ | 42,306 | ||||||||||
| July 30 to August 26 | 60 | 50.66 | 60 | $ | 39,266 | |||||||||||
| August 27 to September 30 | 341 | 49.76 | 341 | $ | 22,307 | |||||||||||
| Total | 401 | $ | 49.90 | 401 | $ | 22,307 | ||||||||||
| Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs(1) | |||||||||||||||
| December 31 to January 27 | - | $ | - | - | $ | 57,307 | ||||||||||||
| January 28 to February 24 | - | - | - | $ | 57,307 | |||||||||||||
| February 25 to March 31 | 23 | 57.53 | 23 | $ | 56,003 | |||||||||||||
| Total | 23 | $ | 57.53 | 23 | $ | 56,003 | ||||||||||||
| (1) |
| - |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Not applicable.
| (a) | Exhibit Index |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a – 14(a) under the Securities Exchange Act of 1934. |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a – 14(a) under the Securities Exchange Act of 1934. |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Schema Document |
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document |
| 101.DEF | XBRL Taxonomy Definition Linkbase Document |
| 101.LAB | XBRL Taxonomy Label Linkbase Document |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document |
| - |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| EXPONENT, INC. | |
| (Registrant) |
Date: November 4, 2016
| Date: May 5, 2017 | |
| /s/ Paul R. Johnston | |
| Paul R. Johnston, Ph.D., Chief Executive Officer | |
| /s/ Richard L. Schlenker | |
| Richard L. Schlenker, Chief Financial Officer |
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