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EXPO > SEC Filings for EXPO > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for EXPONENT INC


3-May-2013

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 28, 2012, which are contained in our fiscal 2012 Annual Report on Form 10-K which was filed with the U.S. Securities and Exchange Commission on February 28, 2013.

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 2012 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 2012 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.

-17-

RESULTS OF CONSOLIDATED OPERATIONS

Executive Summary

Revenues for the first quarter of 2013 increased 1% and revenues before reimbursements increased 4% as compared to the same period last year. The increase in revenues before reimbursements was due to an increase in billable hours and an increase in billing rates. We experienced strong demand for our consulting services from a diverse set of clients for both reactive and proactive projects and received some follow-on activities related to several major investigations. This was partially offset by the expected decline in the level of activity for some of these major investigations. In the utility industry, we investigated pipeline failures and helped improve our clients' integrity management processes. In the consumer electronics industry, we testified in intellectual property cases and evaluated new designs. In the medical device industry, we evaluated claims of product defect and tested new product reliability. In the oil and gas industry, we assessed environmental and health exposures and analyzed new drilling techniques.

A decrease in utilization, a decrease in product sales, and increases in other operating and general and administrative expenses resulted in a 3% decrease in net income during the first quarter of 2013 as compared to the same period last year. Diluted earnings per share decreased to $0.56 per share as compared to $0.57 in the same period last year due to the decrease in net income.

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 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. We continue to expect some of our major investigations to step down from their elevated levels of activity as they move through their project life cycle. We also continue to expect a step down in the level of activity in our defense technology development practice due to the constraints on defense spending and reduction of forces in Afghanistan by the United States Government.

Overview of the Three Months Ended March 29, 2013

During the first quarter of 2013, billable hours increased 1% to 265,000 as compared to 263,000 during the same period last year. The increase in billable hours was due to follow-on activities related to major investigations and continued demand for our proactive and reactive consulting services. Our utilization decreased to 72% during the first quarter of 2013 as compared to 74% during the same period last year due to the anticipated step down in our elevated levels of activity on several major investigations and due to our investment in hiring technical consultants. Technical full-time equivalent employees increased 3% to 708 during the first quarter of 2013 as compared to 686 during the same period last year due to our recruiting and retention efforts. We continue to selectively hire key talent to expand our capabilities. Product sales in defense technology development decreased to $486,000 for the first quarter of 2013 as compared to $2,386,000 during the same period last year due to lower sales of surveillance systems to the United States Army. We continue to expect a significant decrease in the sales of surveillance systems during fiscal 2013 as a result of the reduction of forces in Afghanistan.

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Three Months Ended March 29, 2013 compared to Three Months Ended March 30, 2012

Revenues
                                       Three Months Ended
                                   March 29,       March 30,       Percent
(In thousands)                        2013           2012          Change

Engineering and other scientific   $   53,323     $    51,717           3.1 %
Percentage of total revenues             73.4 %          71.9 %
Environmental and health               19,337          20,208          (4.3 )%
Percentage of total revenues             26.6 %          28.1 %

Total revenues                     $   72,660     $    71,925           1.0 %

The increase in revenues for our engineering and other scientific segment was due to an increase in billable hours and an increase in billing rates, partially offset by a decrease in product sales in defense technology development. During the first quarter of 2013, billable hours for this segment increased by 2% to 187,000 as compared to 183,000 during the same period last year. The increase in billable hours was due to strong demand for our services in our electrical engineering and computer science, thermal sciences, biomedical engineering, human factors, and engineering management and construction consulting practices. Technical full-time equivalent employees increased 2% to 484 during the first quarter of 2013 as compared to 473 for the same period last year due our continuing recruiting and retention efforts. Utilization increased to 75% during the first quarter of 2013 as compared to 74% during the same period last year. Product sales in defense technology development decreased to $486,000 for the first quarter of 2013 as compared to $2,386,000 during the same period last year due to lower sales of surveillance systems to the United States Army.

The decrease in revenues for our environmental and health segment was due to a decrease in billable hours. During the first quarter of 2013, billable hours for this segment decreased by 3% to 78,000 as compared to 80,000 during the same period last year. Utilization decreased to 67% for the first quarter of 2013 as compared to 72% for the same period last year. The decrease in billable hours and utilization was due in part to a step down from the elevated levels of activity on a number of major investigations that engage consultants across many of our environmental and health practices and centers. The decrease in utilization was also due to our investment in hiring experienced consultants. Technical full-time equivalent employees increased by 5% to 224 during the first quarter of 2013 as compared to 213 for the same period last year.

Compensation and Related Expenses
                                        Three Months Ended
                                    March 29,       March 30,       Percent
(In thousands)                         2013           2012          Change

Compensation and related expenses   $   48,562     $    46,175           5.2 %
Percentage of total revenues              66.8 %          64.2 %

The increase in compensation and related expenses during the first quarter of 2013 was due to an increase in payroll expense, an increase in stock-based compensation expense and the change in the value of assets associated with our deferred compensation plan. Payroll expense increased $740,000 due to a 3% increase in technical full-time equivalent employees and our annual salary increase on March 31, 2012. Stock-based compensation expense increased $780,000 due to an increase in the value of unvested restricted stock units granted during the first quarter of 2013. During the first quarter of 2013, deferred compensation expense increased $578,000 with a corresponding increase to other income, net, as compared to first quarter of 2012 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 $2,066,000 during the first quarter of 2013 and an increase in the value of the plan assets of $1,488,000 during the first quarter of 2012. We expect our compensation expense to increase as we selectively add new talent and our annual salary increases take effect at the beginning of the second quarter of 2013.

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Other Operating Expenses
                                   Three Months Ended
                               March 29,        March 30,       Percent
(In thousands)                    2013            2012          Change

Other operating expenses       $    6,147      $     5,562          10.5 %
Percentage of total revenues          8.5 %            7.7 %

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 quarter of 2013 was due to an increase in occupancy expense of $424,000 and several individually insignificant items associated with the increase in technical full-time equivalent employees. The increase in occupancy expense was due to the continued expansion of our facilities to accommodate the increase in technical full-time equivalent employees. We expect other operating expenses to grow as we selectively add new talent and make investments in our corporate infrastructure.

Reimbursable Expenses
                                   Three Months Ended
                               March 29,        March 30,      Percent
(In thousands)                    2013            2012          Change

Reimbursable expenses          $    3,668      $     5,455        (32.8 )%
Percentage of total revenues          5.0 %            7.6 %

The decrease in reimbursable expenses was primarily due to a decrease 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
                                      March 29,        March 30,       Percent
(In thousands)                           2013            2012          Change

General and administrative expenses   $    3,432      $     2,917          17.7 %
Percentage of total revenues                 4.7 %            4.1 %

The increase in general and administrative expenses during the first quarter of 2013 was due to an increase in legal expenses of $296,000, an increase in recruiting expenses of $148,000 and several individually insignificant items associated with the increase in technical full-time equivalent employees and our business development activities. The increase in legal expenses was due to an increase in costs associated with legal claims during the first quarter of 2013 as compared to the same period last year. The increase in recruiting costs was due to our efforts to hire experienced consultants. 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, Net
                                   Three Months Ended
                               March 29,        March 30,       Percent
(In thousands)                    2013            2012          Change

Other income, net              $    2,654      $     1,917          38.4 %
Percentage of total revenues          3.7 %            2.7 %

Other income, 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 quarter of 2013, other income, net, increased $578,000 with a corresponding increase to deferred compensation expense, as compared to the first quarter in 2012 due to a 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 $2,066,000 during the first quarter of 2013 and an increase in the value of the plan assets of $1,488,000 during the first quarter of 2012. During the first quarter of 2013, rental income increased $93,000 as compared to the same period last year due to an increase in the occupancy rate for rental space in our Silicon Valley facility.

-20-

Income Taxes
                                   Three Months Ended
                               March 29,        March 30,       Percent
(In thousands)                    2013            2012          Change

Income taxes                   $    5,529      $     5,532          (0.1 )%
Percentage of total revenues          7.6 %            7.7 %
Effective tax rate                   40.9 %           40.3 %

The increase in the effective tax rate was primarily due to an increase in non-deductible expenses.

LIQUIDITY AND CAPITAL RESOURCES



                                                          Three Months Ended
                                                      March 29,       March 30,
                                                         2013           2012

Net cash used in operating activities                 $   (5,182 )   $    (1,399 )
Net cash provided by (used in) investing activities        9,281          (1,294 )
Net cash used in financing activities                    (15,192 )        (3,480 )

We financed our business during the first quarter of 2013 through available cash. We invest our excess cash in cash equivalents and short-term investments. As of March 29, 2013, our cash, cash equivalents and short-term investments were $111.0 million compared to $134.1 million at December 28, 2012. 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 during the next 12 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.

Net cash used in operating activities was $5.2 million for the first quarter of 2013 as compared to $1.4 million during the same period last year. The increase in net cash used in operating activities was due to the timing of payments to vendors partially offset by a decrease in accounts receivable.

Net cash provided by (used in) investing activities is primarily related to the purchase and sale or maturity of short-term investments.

The increase in cash used in financing activities during the first quarter of 2013 as compared to the same period last year was due to an increase in repurchases of our common stock under our stock repurchase programs and payment of our declared dividend.

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.

-21-

The following schedule summarizes our principal contractual commitments as of March 29, 2013 (in thousands):

                            Operating
         Fiscal               lease          Capital        Purchase
          year             commitments       leases        obligations       Total
2013 (remaining portion)   $      5,411     $      36     $       2,673     $  8,120
2014                              6,202            48                 -        6,250
2015                              4,795             -                 -        4,795
2016                              3,355             -                 -        3,355
2017                              2,645             -                 -        2,645
Thereafter                        4,095             -                 -        4,095
                           $     26,503     $      84     $       2,673     $ 29,260

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 $31,377,000 were recorded as a long-term liability on our unaudited condensed consolidated balance sheet at March 29, 2013. 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 March 29, 2013 invested amounts under the plan of $31,469,000 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. The indemnification period covers all pertinent events and occurrences during the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid.

We believe that our existing cash, cash equivalents, short-term investments and our anticipated cash flows from operations will be sufficient to meet our anticipated operating requirements for at least the next twelve months.

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.

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The following table shows EBITDA as a percentage of revenues before reimbursements for the three months ended March 29, 2013 and March 30, 2012:

                                                      Three Months Ended
(in thousands, except percentages)                March 29,       March 30,
                                                     2013           2012

Revenues before reimbursements                    $   68,992     $    66,470

EBITDA                                            $   14,609     $    14,800

EBITDA as a % of revenues before reimbursements         21.2 %          22.3 %

The decrease in EBITDA as a percentage of revenues before reimbursements was primarily due to a decrease in utilization and an increase in other operating and general administrative expenses. Our utilization decreased to 72% during the first quarter of 2013 as compared to 74% during the same period last year due to the anticipated step down in our elevated levels of activity on several major investigations and due to our investment in hiring technical consultants.

The following table is a reconciliation of EBITDA and EBITDAS to the most comparable GAAP measure, net income, for the three months ended March 29, 2013 and March 30, 2012:

                                    Three Months Ended
(in thousands)                  March 29,       March 30,
                                   2013           2012

Net income                      $    7,976     $     8,201

Add back (subtract):

Income taxes                         5,529           5,532
Interest income, net                   (45 )           (77 )
Depreciation and amortization        1,149           1,144

EBITDA                              14,609          14,800

Stock-based compensation             5,291           4,457

EBITDAS                         $   19,900     $    19,257

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