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EXPO > SEC Filings for EXPO > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for EXPONENT INC

Form 10-Q for EXPONENT INC


1-Nov-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 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.

RESULTS OF CONSOLIDATED OPERATIONS

Executive Summary

Revenues for the third quarter of 2013 increased 3% 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 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 worked on 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 an 8% increase in net income during the third quarter of 2013 as compared to the same period last year. Net income increased to $11,094,000 during the third quarter of 2013 as compared to $10,225,000 during the same period last year. Diluted earnings per share increased to $0.79 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.

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 September 27, 2013

During the third quarter of 2013, billable hours increased 2% to 273,000 as compared to 267,000 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 third 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 5% to 726 during the third quarter of 2013 as compared to 694 during the same period last year due to our recruiting and retention efforts. We continue to selectively hire key talent to expand our capabilities.

Three Months Ended September 27, 2013 compared to Three Months Ended September

28, 2012

Revenues
                                          Three Months Ended
                                    September 27,    September 28,     Percent
(In thousands, except percentages)      2013              2012         Change

Engineering and other scientific   $        56,395   $        53,071       6.3 %
Percentage of total revenues                  75.0 %            72.4 %
Environmental and health                    18,836            20,227     (6.9) %
Percentage of total revenues                  25.0 %            27.6 %

Total revenues                     $        75,231   $        73,298       2.6 %

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. During the third quarter of 2013, billable hours for this segment increased by 8% to 200,000 as compared to 186,000 during the same period last year. The increase in billable hours was due to strong demand for our services in our polymer sciences, mechanical engineering, biomedical and construction consulting practices. Technical full-time equivalent employees increased 7% to 504 during the third quarter of 2013 as compared to 473 for the same period last year due our continuing recruiting and retention efforts. Utilization was 76% during the third quarter of 2013 and 2012. The decrease in reimbursable expenses was primarily due to a decrease in project-related costs in our defense technology development practice.

The decrease in revenues for our Environmental and health segment was due 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. During the third quarter of 2013, billable hours for this segment decreased by 10% to 73,000 as compared to 81,000 during the same period last year. Utilization decreased to 64% for the third quarter of 2013 as compared to 71% for the same period last year due to a step down from the elevated levels of activity on a number of major investigations and a decrease in the demand for our services. Technical full-time equivalent employees were 222 during the third quarter of 2013 as compared to 221 during the third quarter of 2012.

Compensation and Related Expenses
                                              Three Months Ended
                                      September 27,        September 28,      Percent
(In thousands, except percentages)         2013                2012           Change

Compensation and related expenses    $         44,801     $        42,589         5.2 %
Percentage of total revenues                     59.6 %              58.1 %

The increase in compensation and related expenses during the third quarter of 2013 was due to an increase in payroll expense and fringe benefits, and the change in the value of assets associated with our deferred compensation plan. Payroll expense increased $1,238,000 and fringe benefits increased $294,000 due to a 5% increase in technical full-time equivalent employees and our annual salary increase on March 30, 2013. During the third quarter of 2013, deferred compensation expense increased $799,000 with a corresponding increase to other income, net, as compared to the third 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 $1,893,000 during the third quarter of 2013 as compared to an increase in the value of the plan assets of $1,094,000 during the third quarter of 2012. We expect our compensation expense to increase as we selectively add new talent.

Other Operating Expenses
                                              Three Months Ended
                                      September 27,        September 28,      Percent
(In thousands, except percentages)        2013                 2012           Change

Other operating expenses             $         6,440      $         5,908         9.0 %
Percentage of total revenues                     8.6 %                8.1 %

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 2013 was due to an increase in occupancy expense of $154,000, an increase in depreciation and amortization of $148,000 and several individually insignificant items. These increases were associated with the increase in technical full-time equivalent employees during the third quarter of 2013. 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
                                    September 27,      September 28,    Percent
(In thousands, except percentages)      2013               2012         Change

Reimbursable expenses              $         5,135    $         6,573    (21.9) %
Percentage of total revenues                   6.8 %              9.0 %

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
                                       September 27,        September 28,       Percent
(In thousands, except percentages)         2013                  2012           Change

General and administrative expenses   $         3,695      $          3,500         5.6 %
Percentage of total revenues                      4.9 %                 4.8 %

The increase in general and administrative expenses during the third quarter of 2013 was due to an increase in legal expenses of $343,000 partially offset by a decrease in charitable contributions of $152,000. The increase in legal expenses was due to an increase in costs associated with legal claims during the third 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, Net
                                              Three Months Ended
                                      September 27,        September 28,       Percent
(In thousands, except percentages)        2013                  2012           Change

Other income, net                    $         2,355      $          1,602        47.0 %
Percentage of total revenues                     3.1 %                 2.2 %

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 third quarter of 2013, other income, net, increased $799,000 with a corresponding increase to deferred compensation expense, as compared to the third 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 $1,893,000 during the third quarter of 2013 as compared to an increase in the value of the plan assets of $1,094,000 during the third quarter of 2012.

Income Taxes
                                              Three Months Ended
                                      September 27,        September 28,       Percent
(In thousands, except percentages)        2013                  2012           Change

Income taxes                         $         6,421      $          6,105         5.2 %
Percentage of total revenues                     8.5 %                 8.3 %
Effective tax rate                              36.7 %                37.4 %

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 an increase in deductions.

Nine Months Ended September 27, 2013 compared to Nine Months Ended September 28,

2012

Revenues
                                              Nine Months Ended
                                      September 27,       September 28,       Percent
(In thousands, except percentages)        2013                 2012           Change

Engineering and other scientific     $       163,353     $        158,784         2.9 %
Percentage of total revenues                    73.1 %               72.3 %
Environmental and health                      60,043               60,923       (1.4) %
Percentage of total revenues                    26.9 %               27.7 %

Total revenues                       $       223,396     $        219,707         1.7 %

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 nine months of 2013, billable hours for this segment increased 4% to 584,000 as compared to 560,000 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 493 during the first nine months of 2013 as compared to 472 for the same period last year due to our continuing recruiting and retention efforts. Utilization was 76% for the first nine months of 2013 and 2012. Product sales in defense technology development decreased to $486,000 during the first nine months of 2013 as compared to $2,866,000 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 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 partially offset by revenues of $1.4 million that were recognized during the first nine months of 2013, upon receipt of payment, related to services performed in the fourth quarter of 2012 for a foreign client. Billable hours decreased 4% to 233,000 during the first nine months of 2013 as compared to 242,000 during the same period last year. The billable hours for the first nine months of 2013 included 5,017 hours related to the foreign client for which we recognized revenue upon receipt of payment. Utilization decreased to 67% for the first nine 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 3% to 222 during the first nine months of 2013 as compared to 216 for the same period last year due to our continuing recruiting and retention efforts.

Compensation and Related Expenses
                                              Nine Months Ended
                                      September 27,        September 28,      Percent
(In thousands, except percentages)         2013                2012           Change

Compensation and related expenses    $        137,795     $       130,621         5.5 %
Percentage of total revenues                     61.7 %              59.5 %

The increase in compensation and related expenses during the first nine 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 $3,257,000 due to a 4% increase in technical full-time equivalent employees and our annual salary increase on March 30, 2013. Stock-based compensation expense increased $888,000 due to an increase in the value of unvested restricted stock units granted during the first nine months of 2013. Bonuses increased by $732,000 due to a corresponding increase in profitability. During the first nine months of 2013, deferred compensation expense increased $2,101,000 with a corresponding increase to other income, net, as compared to the first nine 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 $4,128,000 during the first nine months of 2013 as compared to an increase in the value of the plan assets of $2,027,000 during the first nine months of 2012. We expect our compensation expense to increase as we selectively add new talent.

Other Operating Expenses
                                              Nine Months Ended
                                      September 27,        September 28,      Percent
(In thousands, except percentages)         2013                2012           Change

Other operating expenses             $         18,794     $        17,422         7.9 %
Percentage of total revenues                      8.4 %               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 nine months of 2013 was due to an increase in occupancy expense of $582,000, an increase in depreciation and amortization of $201,000 and several individually insignificant items associated with the increase in technical full-time equivalent employees. The increases in occupancy expense and depreciation and amortization were 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
                                              Nine Months Ended
                                      September 27,        September 28,      Percent
(In thousands, except percentages)         2013                2012           Change

Reimbursable expenses                $         12,389     $        18,194      (31.9) %
Percentage of total revenues                      5.5 %               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
                                               Nine Months Ended
                                       September 27,       September 28,       Percent
(In thousands, except percentages)         2013                 2012           Change

General and administrative expenses   $        10,814     $          9,565        13.1 %
Percentage of total revenues                      4.8 %                4.4 %

The increase in general and administrative expenses during the first nine months of 2013 was primarily due an increase in legal expense of $714,000, an increase in travel expenses of $378,000, and an increase in recruiting expenses of $336,000, partially offset by a decrease in charitable contributions of $306,000. The increase in legal expenses was due to an increase in costs associated with legal claims during the first nine months of 2013 as compared to the same period last year. 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. 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
                                              Nine Months Ended
                                      September 27,       September 28,       Percent
(In thousands, except percentages)        2013                 2012           Change

Other income, net                    $         5,687     $          3,406        67.0 %
Percentage of total revenues                     2.5 %                1.6 %

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 nine months of 2013, other income, net, increased $2,101,000 with a corresponding increase to deferred compensation expense as compared to the first nine 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 $4,128,000 during the first nine months of 2013 as compared to an increase in the value of the plan assets of $2,027,000 during the first nine months of 2012.

Income Taxes
                                              Nine Months Ended
                                      September 27,       September 28,      Percent
(In thousands, except percentages)        2013                2012           Change

Income taxes                         $        19,373     $        18,558         4.4 %
Percentage of total revenues                     8.7 %               8.4 %
Effective tax rate                              39.3 %              39.2 %

The increase in income taxes was due to a corresponding increase in pre-tax income.

LIQUIDITY AND CAPITAL RESOURCES

                                                                   Nine Months Ended
                                                            September 27,     September 28,
(In thousands)                                                  2013              2012

Net cash provided by operating activities                  $        33,818   $        21,634
Net cash provided by (used in) investing activities                  2,784             (687)
Net cash used in financing activities                             (28,232)          (18,135)

We financed our business during the first nine months of 2013 through available cash. We invest our excess cash in cash equivalents and short-term investments. As of September 27, 2013, our cash, cash equivalents and short-term investments were $135.0 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 . . .

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