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EXPO > SEC Filings for EXPO > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for EXPONENT INC

Form 10-Q for EXPONENT INC


5-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herein and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 30, 2011, which are contained in our fiscal 2011 Annual Report on Form 10-K which was filed with the U.S. Securities and Exchange Commission on February 27, 2012.

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 thereto) 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 "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 fiscal 2011 Annual Report on Form 10-K 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 discovery of potential problems related to products, people or property and impending litigation, as well as the development of highly technical new products.

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 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 doubtful accounts are described in our fiscal 2011 Annual Report on Form 10-K 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 third quarter of 2012 increased 11% and revenues before reimbursements increased 9% as compared to the same period last year. This growth was due to solid overall demand for our consulting services from a diverse set of clients for both reactive and proactive projects and elevated levels of activity on a few major assignments. We continued to work on a steady flow of reactive projects related to litigation, insurance claims and product recalls for a diverse set of clients, with significant projects in the chemical, energy and automotive sectors. We continued to see an increase in proactive projects related to design consulting, regulatory consulting, and engineering management consulting. We assisted consumer electronics and medical device clients in their design and manufacturing efforts. In defense technology development, we continued to work on several projects related to the detection of improvised explosive devices. Utilization in the quarter was strong due to broad-based demand for our services and the continuing benefit from a few large projects. We continue to expect these projects to decline from their level of activity over the next several quarters as they move through their project life cycle.

During the quarter, we assisted clients with several high-profile investigations that engaged consultants across many of our practices. The growth in consulting revenue and the increase in utilization combined with moderate growth in other operating and general and administrative expenses resulted in a 13% increase in income before taxes as compared to the same period last year. Net income increased to $10,225,000 during the third quarter of 2012 as compared to $8,744,000 during the same period last year. Diluted earnings per share increased to $0.72 per share as compared to $0.60 in the same period last year due to the increase in net income and our ongoing share repurchase program.

We remain focused on selectively adding top talent and developing the skills necessary to expand our market position, providing clients with in-depth scientific research and analysis to determine what happened and how to prevent failures or exposures in the future, capitalizing on opportunities in emerging growth areas, managing other operating expenses, generating cash from operations, maintaining a strong balance sheet and undertaking activities such as share repurchases to enhance shareholder value.

Overview of the Three Months Ended September 28, 2012

During the third quarter of 2012, billable hours increased 7% to 267,000 as compared to 250,000 during the same period last year. The increase in billable hours was due to strong demand for our consulting services across a broad set of practices and continued elevated levels of activity on several major assignments. Technical full-time equivalent employees increased 5% to 694 during the third quarter of 2012 as compared to 664 during the same period last year due to our recruiting and retention efforts. Our utilization was 74% during the third quarter of 2012 as compared to 72% during the same period last year. We continue to selectively hire key talent to expand our capabilities and have managed our headcount to align with anticipated demand.

Three Months Ended September 28, 2012 compared to Three Months Ended September 30, 2011

Revenues
                                             Three Months Ended
                                      September 28,       September 30,       Percent
(in thousands, except percentages)        2012                2011            Change

Engineering and other scientific     $        53,071     $        47,785          11.1 %
 Percentage of total revenues                   72.4 %              72.5 %
Environmental and health                      20,227              18,166          11.3 %
 Percentage of total revenues                   27.6 %              27.5 %

 Total revenues                      $        73,298     $        65,951          11.1 %

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The increase in revenues for our engineering and other scientific segment was due to an increase in billable hours, higher billing rates and an increase in reimbursable project-related costs. During the third quarter of 2012, billable hours for this segment increased 5% to 186,000 as compared to 177,000 during the same period last year. The increase in billable hours was due to strong demand for our services in our mechanics and materials, electrical, thermal, human factors, and engineering management consulting practices. Technical full-time equivalent employees increased 4% to 473 during the third quarter of 2012 as compared to 457 for the same period last year due to our continuing recruiting and retention efforts. Utilization increased to 76% for the third quarter of 2012 as compared to 74% for the same period last year due to new work in key areas and elevated levels of activity on a number of major assignments. Reimbursable project-related costs for consulting projects in defense technology development increased to $3,572,000 during the third quarter of 2012 as compared to $1,586,000 during the same period last year due to the timing of reimbursable expenses on these projects.

The increase in revenues for our environmental and health segment was due to an increase in billable hours. During the third quarter of 2012, billable hours for this segment increased by 11% to 81,000 as compared to 73,000 during the same period last year. The increase in billable hours was due to strong demand for our services in our environmental sciences, ecological sciences, chemical registration and food safety practices. Utilization increased to 71% for the third quarter of 2012 as compared to 68% for the same period last year due to new work in key areas and elevated levels of activity on a number of major assignments. Technical full-time equivalent employees increased by 7% to 221 during the third quarter of 2012 as compared to 207 for the same period last year due to our continuing recruiting and retention efforts.

Compensation and Related Expenses
                                             Three Months Ended
                                      September 28,       September 30,       Percent
(in thousands, except percentages)        2012                2011            Change

Compensation and related expenses    $        42,589     $        36,051          18.1 %
 Percentage of total revenues                   58.1 %              54.7 %

The increase in compensation and related expenses during the third quarter of 2012 was due to an increase in payroll, fringe benefits, stock-based compensation, bonus expense, and the change in value of assets associated with our deferred compensation plan. Payroll increased by $1,361,000 and fringe benefits increased by $111,000 due to the increase in technical full-time equivalent employees and the impact of our annual salary increase on March 31, 2012. Stock based compensation expense increased $222,000 due to an increase in the value of unvested restricted stock units granted during the first nine months of 2012 as compared to the value of unvested restricted stock units granted during the same period last year. Bonuses increased by $1,220,000 due to a corresponding increase in profitability. During the third quarter of 2012, deferred compensation expense increased $3,617,000 with a corresponding increase to other income (expense), net, as compared to the third quarter of 2011 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 $1,094,000 during the third quarter of 2012 and a decrease in the value of the plan assets of $2,523,000 during the third quarter of 2011. We expect our compensation expense to increase as we selectively add new talent.

Other Operating Expenses
                                              Three Months Ended
                                      September 28,        September 30,       Percent
(in thousands, except percentages)        2012                 2011            Change

Other operating expenses             $         5,908      $         5,858           0.9 %
 Percentage of total revenues                    8.1 %                8.9 %

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 third quarter of 2012 was primarily due to an increase in occupancy expense of $43,000. The increase in occupancy expense was due to planned maintenance activities for our owned facilities and costs associated with the increase in technical full-time equivalent employees during the third quarter of 2012.

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Reimbursable Expenses
                                              Three Months Ended
                                      September 28,        September 30,       Percent
(in thousands, except percentages)        2012                 2011            Change

Reimbursable expenses                $         6,573      $         4,564          44.0 %
 Percentage of total revenues                    9.0 %                6.9 %

The increase in reimbursable expenses was primarily due to an increase in project-related costs in our defense technology development practice 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
                                               Three Months Ended
                                       September 28,        September 30,       Percent
(in thousands, except percentages)         2012                 2011            Change

General and administrative expenses   $         3,500      $         2,954          18.5 %
 Percentage of total revenues                     4.8 %                4.5 %

The increase in general and administrative expenses was primarily due to $426,000 of expenses related to a firm-wide managers' meeting that was held at the end of the third quarter of 2012. We expect general and administrative expenses to increase as we selectively add new talent, expand our business development efforts and pursue staff development initiatives.

Other Income (Expense), Net
                                              Three Months Ended
                                      September 28,        September 30,       Percent
(in thousands, except percentages)        2012                 2011             Change

Other income (expense), net          $         1,602      $        (2,124 )       175.4 %
 Percentage of total revenues                    2.2 %               (3.2 )%

Other income (expense), net, consists primarily of interest income earned on available cash, cash equivalents and short-term investments, changes in the value of assets associated with our deferred compensation plan and rental income from leasing space in our Silicon Valley facility. During the third quarter of 2012, other income (expense), net increased $3,617,000 with a corresponding increase to deferred compensation expense as compared to third quarter of 2011 due to the change in value of assets associated with our deferred compensation plan. This year-over-year increase consisted of an increase in the value of the plan assets of $1,094,000 during the third quarter of 2012 and a decrease in the value of the plan assets of $2,523,000 during the third quarter of 2011.

Income Taxes
                                              Three Months Ended
                                      September 28,        September 30,       Percent
(in thousands, except percentages)        2012                 2011            Change

Income taxes                         $         6,105      $         5,656           7.9 %
 Percentage of total revenues                    8.3 %                8.6 %
Effective tax rate                              37.4 %               39.3 %

The increase in income taxes was due to a corresponding increase in pre-tax income. The decrease in the effective tax rate was primarily due to a change in estimate associated with the Company's apportionment of income between the states.

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Nine Months Ended September 28, 2012 compared to Nine Months Ended September 30, 2011

Revenues
                                              Nine Months Ended
                                      September 28,       September 30,       Percent
(in thousands, except percentages)        2012                2011            Change

Engineering and other scientific     $       158,784     $       151,233           5.0 %
 Percentage of total revenues                   72.3 %              73.9 %
Environmental and health                      60,923              53,297          14.3 %
 Percentage of total revenues                   27.7 %              26.1 %

 Total revenues                      $       219,707     $       204,530           7.4 %

The increase in revenues for our engineering and other scientific segment was due to an increase in billable hours and higher billing rates, partially offset by the decrease in product sales in defense technology development. During the first nine months of 2012, billable hours for this segment increased 6% to 560,000 as compared to 527,000 during the same period last year. The increase in billable hours was due to strong demand for our services. Product sales in defense technology development decreased to $2,866,000 for the first nine months of 2012 as compared to $6,999,000 during the same period last year due to lower sales of surveillance systems to the United States Army. Technical full-time equivalent employees increased 4% to 472 during the first nine months of 2012 as compared to 456 for the same period last year due to our continuing recruiting and retention efforts. Utilization increased to 76% for the first nine months of 2012 as compared to 74% for the same period last year due to new work in key areas, elevated levels of activity on a number of major assignments, and our management of headcount to align resources with anticipated demand.

The increase in revenues for our environmental and health segment was also due to an increase in billable hours. During the first nine months of 2012, billable hours for this segment increased by 15% to 242,000 as compared to 211,000 during the same period last year. The increase in billable hours was due to strong demand for our services. Utilization increased to 72% for the first nine months of 2012 as compared to 68% for the same period last year due to new work in key areas, elevated levels of activity on a number of major assignments, and our management of headcount to align resources with anticipated demand. Technical full-time equivalent employees increased by 8% to 216 during the nine months of 2012 as compared to 200 for the same period last year due to our continuing recruiting and retention efforts.

Compensation and Related Expenses
                                              Nine Months Ended
                                      September 28,       September 30,       Percent
(in thousands, except percentages)        2012                2011            Change

Compensation and related expenses    $       130,621     $       117,259          11.4 %
 Percentage of total revenues                   59.5 %              57.3 %

The increase in compensation and related expenses during the first nine months of 2012 was due to an increase in payroll, fringe benefits, bonus expense, stock-based compensation expense and the change in value of assets associated with our deferred compensation plan. Payroll increased by $4,647,000 and fringe benefits increased by $649,000 due an increase in technical full-time equivalent employees and our annual salary increase on March 31, 2012. Bonuses increased by $3,374,000 due to a corresponding increase in profitability. Stock-based compensation expense increased $1,045,000 due to an increase in the value of unvested restricted stock units granted during the first nine months of 2012 as compared to the value of unvested restricted stock units granted during the same period last year. During the first nine months of 2012, deferred compensation expense increased $3,679,000 with a corresponding increase to other income (expense), net, as compared to the first nine months of 2011 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 $2,027,000 during the first nine months of 2012 as compared to a decrease in the value of the plan assets of $1,652,000 during the first nine months of 2011. We expect our compensation expense to increase as we selectively add new talent.

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Other Operating Expenses
                                              Nine Months Ended
                                      September 28,       September 30,       Percent
(in thousands, except percentages)        2012                2011            Change

Other operating expenses             $        17,422     $        17,344           0.4 %
 Percentage of total revenues                    7.9 %               8.5 %

Other operating expenses include facilities-related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. Other operating expenses remained relatively consistent with the same period last year due to our continuing efforts to manage our cost structure by reducing discretionary spending and negotiating favorable agreements with our vendors. We expect other operating expenses to grow as we selectively add new talent and make investments in our corporate infrastructure.

Reimbursable Expenses
                                              Nine Months Ended
                                      September 28,       September 30,       Percent
(in thousands, except percentages)        2012                2011            Change

Reimbursable expenses                $        18,194     $        18,387          (1.0 )%
 Percentage of total revenues                    8.3 %               9.0 %

Reimbursable expenses remained relatively consistent with the same period last year. 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
                                       September 28,       September 30,       Percent
(in thousands, except percentages)         2012                2011            Change

General and administrative expenses   $         9,565     $         9,273           3.1 %
 Percentage of total revenues                     4.4 %               4.5 %

The increase in general and administrative expenses during the first nine months of 2012 was primarily due to $426,000 of expenses related to a firm-wide managers' meeting that was held at the end of the third quarter of 2012 and several individually insignificant increases in other general and administrative expenses, partially offset by a decrease in legal expense of $545,000. The decrease in legal expenses was due to a decrease in costs associated with legal claims during the first nine months of 2012 as compared to the same period last year. We expect general and administrative expenses to increase as we selectively add new talent, expand our business development efforts and pursue staff development initiatives.

Other Income (Expense), Net
                                              Nine Months Ended
                                      September 28,        September 30,       Percent
(in thousands, except percentages)        2012                 2011             Change

Other income (expense), net          $         3,406      $          (528 )       745.1 %
 Percentage of total revenues                    1.6 %               (0.3 )%

-20-

Other income (expense), net, consists primarily of interest income earned on available cash, cash equivalents and short-term investments, changes in the value of assets associated with our deferred compensation plan and rental income from leasing space in our Silicon Valley facility. During the first nine month of 2012, other income (expense), net, increased $3,679,000 with a corresponding increase to deferred compensation expense as compared to the first nine months of 2011 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 $2,027,000 during the first nine months of 2012 as compared to a decrease in the value of the plan assets of $1,652,000 during the first nine months of 2011.

Income Taxes
                                              Nine Months Ended
                                      September 28,       September 30,       Percent
(in thousands, except percentages)        2012                2011            Change

Income taxes                         $        18,558     $        16,775          10.6 %
 Percentage of total revenues                    8.4 %               8.2 %
Effective tax rate                              39.2 %              40.2 %

The increase in income taxes was due to a corresponding increase in pre-tax income. The decrease in the effective tax rate was primarily due to a change in estimate associated with the Company's apportionment of income between the states.

LIQUIDITY AND CAPITAL RESOURCES

As of September 28, 2012 and December 30, 2011, our cash, cash equivalents and short-term investments were $109.7 million. The following table summarizes our cash flows (in thousands):

                                                     Nine Months Ended
                                             September 28,       September 30,
                                                 2012                2011

Net cash provided by operating activities   $        21,634     $        25,415
Net cash used in investing activities                  (687 )           (28,157 )
Net cash used in financing activities               (18,135 )           (38,660 )

The decrease in net cash provided by operating activities during the first nine months of 2012 as compared to the same period last year was due to a larger . . .

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