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EXPO > SEC Filings for EXPO > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for EXPONENT INC

Form 10-Q for EXPONENT INC


2-Aug-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.

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RESULTS OF CONSOLIDATED OPERATIONS

Executive Summary

Revenues for the second quarter of 2013 increased 1% and revenues before reimbursements increased 5% as compared to the same period last year. The increase in revenues before reimbursements was due to an increase in billable hours, an increase in billing rates and revenues of $1.75 million related to services performed in prior periods for a foreign client for which we deferred revenue recognition until receipt of payments. 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 defects and tested new product reliability. In the oil and gas industry, we assessed environmental and health exposures and analyzed new drilling techniques.

The increase in revenues before reimbursements resulted in a 5% increase in net income during the second quarter of 2013 as compared to the same period last year. Net income increased to $10,848,000 during the second quarter of 2013 as compared to $10,327,000 during the same period last year. Diluted earnings per share increased to $0.77 per share as compared to $0.72 in the same period last year due to the increase in net income and our ongoing share repurchase program. The incremental revenue of $1.75 million related to services performed in prior periods for which we deferred revenue recognition until receipt of payments contributed $1,176,000 to operating income, $698,000 to net income, and $0.05 to diluted earnings per share during the second quarter of 2013.

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 June 28, 2013

During the second quarter of 2013, billable hours increased 3% to 280,000 as compared to 271,000 during the same period last year. The billable hours for the second quarter of 2013 included 6,446 hours related to the foreign client for which we recognized revenue upon receipt of payment. The remaining 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 75% during the second quarter of 2013 as compared to 76% 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 4% to 714 during the second quarter of 2013 as compared to 685 during the same period last year due to our recruiting and retention efforts. We continue to selectively hire key talent to expand our capabilities.

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Three Months Ended June 28, 2013 compared to Three Months Ended June 29, 2012

Revenues
                                        Three Months Ended
                                      June 28,      June 29,       Percent
(in thousands, except percentages)      2013          2012         Change

Engineering and other scientific     $   53,635     $  53,996          (0.7 )%
Percentage of total revenues               71.0 %        72.5 %
Environmental and health                 21,870        20,488           6.7 %
Percentage of total revenues               29.0 %        27.5 %

Total revenues                       $   75,505     $  74,484           1.4 %

The decrease in revenues for our engineering and other scientific segment was due to a decrease in reimbursable expenses partially offset by an increase in billable hours and an increase in billing rates. The decrease in reimbursable expenses was primarily due to a decrease in project-related costs in our defense technology development practice. During the second quarter of 2013, billable hours for this segment increased by 2% to 195,000 as compared to 191,000 during the same period last year. The increase in billable hours was due to strong demand for our services in our mechanical engineering, thermal sciences, human factors and buildings & structures practices. Technical full-time equivalent employees increased 5% to 493 during the second quarter of 2013 as compared to 470 for the same period last year due our continuing recruiting and retention efforts. Utilization decreased to 76% during the second quarter of 2013 as compared to 78% during the same period last year. The decrease in utilization was due to a step down from the elevated levels of activity on a number of major investigations and due to our investment in hiring technical consultants.

The increase in revenues for our environmental and health segment was due to revenues of $1.75 million that were recognized during the second quarter of 2013 related to services performed in prior quarters for a foreign client that were recognized as revenue upon receipt of payment. This was partially offset by 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. During the second quarter of 2013, billable hours for this segment increased by 6% to 85,000 as compared to 80,000 during the same period last year. The billable hours for the second quarter of 2013 included 6,446 hours related to the foreign client for which we recognized revenue upon receipt of payment. Utilization increased to 74% for the second quarter of 2013 as compared to 72% for the same period last year due to the increase in billable hours associated with the revenues recognized upon receipt of payment. Technical full-time equivalent employees increased by 3% to 221 during the second quarter of 2013 as compared to 215 for the same period last year due to our continuing recruiting and retention efforts.

Compensation and Related Expenses
                                        Three Months Ended
                                      June 28,      June 29,       Percent
(in thousands, except percentages)      2013          2012         Change

Compensation and related expenses    $   44,432     $  41,857           6.2 %
Percentage of total revenues               58.8 %        56.2 %

The increase in compensation and related expenses during the second quarter of 2013 was due to an increase in payroll expense and bonus expense, and the change in the value of assets associated with our deferred compensation plan. Payroll expense increased $1,279,000 due to a 4% increase in technical full-time equivalent employees and our annual salary increase on March 30, 2013. Bonus expense increased $459,000 due to a corresponding increase in profitability. During the second quarter of 2013, deferred compensation expense increased $723,000 with a corresponding increase to other income (expense), net, as compared to second 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 $168,000 during the second quarter of 2013 and a decrease in the value of the plan assets of $555,000 during the second quarter of 2012. We expect our compensation expense to increase as we selectively add new talent.

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Other Operating Expenses
                                         Three Months Ended
                                      June 28,        June 29,       Percent
(in thousands, except percentages)      2013            2012         Change

Other operating expenses             $    6,207      $    5,952           4.3 %
Percentage of total revenues                8.2 %           8.0 %

Other operating expenses include facilities-related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. The increase in other operating expenses during the second quarter of 2013 was due to several individually insignificant items associated with 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
                                      June 28,        June 29,      Percent
(in thousands, except percentages)      2013            2012         Change

Reimbursable expenses                $    3,586      $    6,166        (41.8 )%
Percentage of total revenues                4.7 %           8.3 %

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
                                       June 28,        June 29,       Percent
(in thousands, except percentages)       2013            2012         Change

General and administrative expenses   $    3,687      $    3,148          17.1 %
Percentage of total revenues                 4.9 %           4.2 %

The increase in general and administrative expenses during the second quarter of 2013 was due to an increase in travel expenses of $167,000, an increase in recruiting expenses of $122,000, an increase in relocation expenses of $83,000, an increase in legal fees of $75,000 and several individually insignificant items associated with the increase in technical full-time equivalent employees and our business development activities. The increase in travel expenses was due to an increase in technical full-time equivalent employees and business development activities. The increase in recruiting costs was due to our efforts to hire experienced consultants. The increase in relocation was due to the increase in technical full time equivalent employees. The increase in legal expenses was due to an increase in costs associated with legal claims during the second quarter of 2013 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
                                         Three Months Ended
                                     June 28,         June 29,        Percent
(in thousands, except percentages)     2013             2012          Change

Other income (expense), net          $     678       $     (113 )          700 %
Percentage of total revenues               0.9 %           (0.2 )%

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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 second quarter of 2013, other income (expense), net, increased $723,000 with a corresponding increase to deferred compensation expense, as compared to the second 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 $168,000 during the second quarter of 2013 and a decrease in the value of the plan assets of $555,000 during the second quarter of 2012. During the second quarter of 2013, rental income increased $115,000 as compared to the same period last year due to an increase in the occupancy rate for rental space in our Silicon Valley facility.

Income Taxes
                                         Three Months Ended
                                      June 28,        June 29,       Percent
(in thousands, except percentages)      2013            2012         Change

Income taxes                         $    7,423      $    6,921           7.3 %
Percentage of total revenues                9.8 %           9.3 %
Effective tax rate                         40.6 %          40.1 %

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

Six Months Ended June 28, 2013 compared to Six Months Ended June 29, 2012

Revenues
                                        Six Months Ended
                                     June 28,      June 29,       Percent
(in thousands, except percentages)     2013          2012         Change

Engineering and other scientific     $ 106,958     $ 105,713           1.2 %
Percentage of total revenues              72.2 %        72.2 %
Environmental and health                41,207        40,696           1.3 %
Percentage of total revenues              27.8 %        27.8 %

Total revenues                       $ 148,165     $ 146,409           1.2 %

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 reimbursable expenses and a decrease in product sales in our defense technology development practice. During the first six months of 2013, billable hours for this segment increased 3% to 385,000 as compared to 374,000 during the same period last year. The increase in billable hours was due to strong demand for our services. Technical full-time equivalent employees increased 4% to 488 during the first six months of 2013 as compared to 471 for the same period last year due to our continuing recruiting and retention efforts. Utilization was 76% for the first six months of 2013 and 2012. Product sales in defense technology development decreased to $486,000 during the first six months of 2013 as compared to $2,797,000 during the same period last year due to lower sales of surveillance systems to the United States Army.

The increase in revenues for our environmental and health segment was due to revenues of $1.4 million that were recognized during the second quarter of 2013 related to services performed in the fourth quarter of 2012 for a foreign client that were recognized as revenue upon receipt of payment. This was partially offset by 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. Billable hours were 160,000 during the first six months of 2013 and 2012. The billable hours for the first six months of 2013 included 5,017 hours related to the foreign client for which we recognized revenue upon receipt of payment. Utilization decreased to 69% for the first six months of 2013 as compared to 72% for the same period last year. The decrease in utilization was due to a step down from the elevated levels of activity on a number of major investigations and a decrease in demand for our services. Technical full-time equivalent employees increased by 4% to 222 during the first six months of 2013 as compared to 214 for the same period last year due to our continuing recruiting and retention efforts.

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Compensation and Related Expenses
                                        Six Months Ended
                                     June 28,      June 29,       Percent
(in thousands, except percentages)     2013          2012         Change

Compensation and related expenses    $  92,994     $  88,032           5.6 %
Percentage of total revenues              62.8 %        60.1 %

The increase in compensation and related expenses during the first six months of 2013 was due to an increase in payroll, stock-based compensation expense, bonus expense and the change in value of assets associated with our deferred compensation plan. Payroll increased by $2,020,000 due a 4% increase in technical full-time equivalent employees and our annual salary increase on March 30, 2013. Stock-based compensation expense increased $1,120,000 due to an increase in the value of unvested restricted stock units granted during the first six months of 2013. Bonuses increased by $666,000 due to a corresponding increase in profitability. During the first six months of 2013, deferred compensation expense increased $1,301,000 with a corresponding increase to other income (expense), net, as compared to the first six months 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 $2,234,000 during the first six months of 2013 as compared to an increase in the value of the plan assets of $933,000 during the first six months of 2012. We expect our compensation expense to increase as we selectively add new talent.

Other Operating Expenses
                                        Six Months Ended
                                     June 28,      June 29,       Percent
(in thousands, except percentages)     2013          2012         Change

Other operating expenses             $  12,354     $  11,514           7.3 %
Percentage of total revenues               8.3 %         7.9 %

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 first six months of 2013 was due to an increase in occupancy expense of $428,000 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
                                        Six Months Ended
                                     June 28,      June 29,      Percent
(in thousands, except percentages)     2013          2012         Change

Reimbursable expenses                $   7,254     $  11,621        (37.6 )%
Percentage of total revenues               4.9 %         7.9 %

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
                                          Six Months Ended
                                      June 28,       June 29,       Percent
(in thousands, except percentages)      2013           2012         Change

General and administrative expenses   $   7,119     $    6,065          17.4 %
Percentage of total revenues                4.8 %          4.1 %

- 20 -

The increase in general and administrative expenses during the first six months of 2013 was primarily due an increase in legal expense of $370,000, an increase in travel expenses of $305,000, and an increase in recruiting expenses of $276,000. The increase in legal expenses was due to an increase in costs associated with legal claims during the first six months of 2013 as compared to the same period last year. The increase in travel expenses was due to an increase technical full-time equivalent employees and business development activities. 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 (Expense), Net
                                         Six Months Ended
                                     June 28,       June 29,       Percent
(in thousands, except percentages)     2013           2012         Change

Other income (expense), net          $   3,332     $    1,804          84.7 %
Percentage of total revenues               2.2 %          1.2 %

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 first six months of 2013, other income (expense), net, increased $1,301,000 with a corresponding increase to deferred compensation expense as compared to the first six months 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 $2,234,000 during the first six months of 2013 as compared to an increase in the value of the plan assets of $933,000 during the first six months of 2012. During the first six months of 2013, rental income increased $208,000 as compared to the same period last year due to an increase in the occupancy rate for rental space in our Silicon Valley facility.

Income Taxes
                                        Six Months Ended
                                     June 28,      June 29,       Percent
(in thousands, except percentages)     2013          2012         Change

Income taxes                         $  12,952     $  12,453           4.0 %
Percentage of total revenues               8.7 %         8.5 %
Effective tax rate                        40.8 %        40.2 %

. . .

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