2013
Annual Report
Dear Fellow Stockholders:
We are pleased to have delivered solid financial results in 2013, with continued revenue and net
income growth, and strong cash flow from operations. This performance allowed us to continue
to return value to shareholders through share repurchases and the initiation of dividend
payments.
For the full year, revenues before reimbursements were up 5% to $280 million and total revenues
increased 1% to $296 million. Net income improved 4% to $38.6 million, or $2.76 per diluted
share, and EBITDA grew 4% to $68.8 million. During 2013, we generated $61.8 million in cash
flow from operations, repurchased $25.0 million of common stock, paid dividends of $7.9
million and closed the year with $156.1 million in cash, cash equivalents and short-term
investments.
During 2013, we continued to build upon our leading position in reactive services, where we
investigated accidents ranging from the collapse of a major industrial facility to a home fire;
evaluated potential product recalls including home appliances and food products; and assessed
the health and environmental exposures for oil and gas operations. Additionally, we expanded
our market recognition in proactive services, where we provided design consulting for products
ranging from tablet computers to drug delivery systems; assisted clients with regulatory matters
involving bathroom fixtures and cosmetics; and worked with clients to develop risk management
programs for gas distribution systems.
As we enter 2014, we remain optimistic about our business and believe we can continue to
expand our unique market position in assessing the reliability, safety, human health and
environmental issues of increasingly complex technologies, products, and processes. While we
expect major assignments to step down this year, we remain focused on growing the remainder
of our business. Our top financial priorities will be generating substantial cash flow from
operations; maintaining a strong balance sheet; and enhancing shareholder value through stock
repurchases and dividends.
In summary, we are pleased with our underlying growth and appreciate our employees for their
significant contributions. We also thank our clients and investors for their continued support of
Exponent. We remain optimistic about our future and look forward to translating our
opportunities into long-term shareholder value in the years to come.
With regards,
Paul R. Johnston, Ph.D.
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
FORM 10-K
________________________________
[X]
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal
year ended January 3, 2014.
OR
[ ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
transition period from ________ to _________.
Commission File Number 0-18655
________________________________
EXPONENT, INC.
(Exact name of registrant as specified in its charter)
________________________________
(State or other jurisdiction of incorporation or organization)
Delaware
77-0218904
(I.R.S. Employer Identification No.)
149 Commonwealth Drive, Menlo Park, California
(Address of principal executive offices)
94025
(Zip Code)
(650) 326-9400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 par value per share
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.
No X
Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Act during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Smaller reporting company [ ]
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No X
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant based on the
closing sales price of the Common Stock as reported on the NASDAQ National Market on June 28, 2013, the last
business day of the registrant’s most recently completed second quarter, was $543,857,810. Shares of the
registrant’s common stock held by each executive officer and director and by each entity or person that, to the
registrant’s knowledge, owned 10% or more of registrant’s outstanding common stock as of June 28, 2013 have
been excluded in that such persons may be deemed to be affiliates of the registrant. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
The number of shares of the issuer’s Common Stock outstanding as of February 21, 2014 was 13,063,216.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement for the Registrant’s 2014 Annual Meeting of Stockholders to
be held on May 29, 2014 are incorporated by reference into Part III of this Form 10-K.
2
EXPONENT, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED JANUARY 3, 2014
TABLE OF CONTENTS
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Page
4
13
17
18
18
18
18
20
20
30
30
30
30
31
PART III
31
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
31
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 31
31
Item 13. Certain Relationships and Related Transactions, and Director Independence
31
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Signatures
Exhibit Index
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains, and
incorporates by reference, 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), including but not limited to
statements regarding future growth and market
opportunities,
headcount,
utilization and operating expenses, 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
revenue, margins,
3
32
61
62
in
the documents
Reform Act of 1995. When used in this document
and
incorporated herein by
reference, statements other than statements of current
or historical fact are forward-looking statements.
The words “anticipate,” “believe,” “estimate,”
“expect” and similar expressions, as they relate to the
Company or its management, identify certain of 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
or
results,
Company’s
achievements could differ materially from those
expressed in, or implied by, any such forward-
looking statements. Factors that could cause or
performance,
actual
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
the
specific economic conditions,
timing of
engagements
the effects of
for our services,
competitive services and pricing, tort reform and
liabilities resulting from claims made against us.
Additional risks and uncertainties are discussed in
this Report under the heading “Risk Factors” and
elsewhere. The inclusion of such forward-looking
information
a
representation by the Company or any other person
that
future events, plans, or expectations
contemplated by the Company will be achieved. The
Company undertakes no obligation to update or
revise any such forward-looking statements.
should not be
regarded
the
as
PART I
Item 1. Business
GENERAL
Inc.,
The history of Exponent, Inc. goes back to 1967, with
the founding of the partnership Failure Analysis
Associates, which was incorporated the following
year in California and reincorporated in Delaware as
Failure Analysis Associates, Inc. in 1988. The
Failure Group, Inc. was organized in 1989 as a
holding company for Failure Analysis Associates,
Inc. and changed its name to Exponent, Inc. in 1998.
its subsidiaries,
together with
Exponent,
(“Exponent” or the “Company”) is a science and
engineering consulting firm that provides solutions to
complex problems. Our multidisciplinary team of
scientists, physicians, engineers, business and
regulatory consultants brings together more than 90
different technical disciplines to solve complicated
issues facing industry and government today. Our
professional staff can perform in-depth scientific
research and analysis, or very
rapid-response
evaluations to provide our clients with the critical
information they need.
CLIENTS
General
health,
Exponent serves clients in automotive, aviation,
chemical, construction, consumer products, energy,
government,
insurance, manufacturing,
technology and other sectors of the economy. Many
of our engagements are initiated directly by large
corporations or by lawyers or insurance companies
whose clients anticipate, or are engaged in, litigation
related to their products, equipment, processes or
services. The scope of our services in failure
prevention and technology evaluation has grown as
the
technological complexity of products has
increased over the years.
Pricing and Terms of Engagements
We provide our services on either a fixed-price basis
or on a time and material basis, charging in the latter
case hourly rates for each staff member involved in a
project, based on his or her skills and experience.
Our standard rates for professionals range from $155
to $600 per hour. Our engagement agreements
require
typically provide
payment of our invoices within 30 days of receipt and
permit clients to terminate engagements at any time.
Clients normally agree to indemnify us and our
personnel against liabilities arising out of the use or
results of our work or
application of
recommendations.
for monthly billing,
the
SERVICES
Exponent provides high quality engineering and
scientific consulting services to clients around the
world. Our service offerings are provided on a
Many projects require
project-by-project basis.
support from multiple practices.
We currently
operate 23 practices and centers in two operating
segments, Engineering and Other Scientific and
Environmental and Health:
ENGINEERING AND OTHER SCIENTIFIC
Biomechanics
Biomedical Engineering
Buildings & Structures
Civil Engineering
Construction Consulting
Defense Technology Development
Electrical Engineering & Computer Science
Engineering Management Consulting
Human Factors
Materials & Corrosion Engineering
Mechanical Engineering
Polymer Science & Materials Chemistry
Statistical & Data Sciences
Thermal Sciences
Vehicle Analysis
Industrial Structures
ENVIRONMENTAL AND HEALTH
Chemical Regulation & Food Safety
Ecological & Biological Sciences
4
Environmental & Earth Sciences
Epidemiology, Biostatistics &
Computational Biology
Exposure Assessment & Dose
Reconstruction
Occupational & Environmental Health
Toxicology & Mechanistic Biology
ENGINEERING AND OTHER SCIENTIFIC
Biomechanics
Our biomechanics staff uses engineering and
biomedical science to solve complex problems at the
intersection of biology and engineering. Our
expertise is used to understand and evaluate the
interaction between the human body as a biological
system and the physical environment to explore the
cause, nature, and severity of injuries.
During
the past year, our biomechanics staff
performed analyses of human injury related to a
variety of products including recreational vehicles,
sporting goods, trucks, trains, aircraft, industrial
equipment, and automobiles. They also looked at the
implications of using protective devices (such as
restraint systems, airbags, and helmets) on reducing
the potential for injury, and assessed injuries in the
workplace, in the home, and during recreational
activities.
Biomedical Engineering
Our Biomedical Engineering Practice applies
engineering principles to the medical field, including
the evaluation of designs and performance of medical
devices and biologics. Our engineers and scientists
assist clients with characterization of cells, tissues,
biomaterials, and medical devices. As part of our
regulatory compliance, we can perform preclinical
testing and formulate a related regulatory strategy,
conduct design verification and validation, as well as
design and manufacturing failure analyses, recall
management, and medical device explant analysis. In
addition, our staff can perform analysis of clinical
outcomes for medical devices using administrative
claims databases. Our expertise is also utilized in
product
litigation,
technology acquisition and due diligence matters.
intellectual property
liability,
Buildings & Structures
The basic function of a building is to provide
structurally sound, durable and environmentally
controlled space to house and protect occupants and
contents. If this basic function is not achieved, it is
5
its
to perform
because one or more aspect(s) of the building design
or construction failed
intended
function. Our architects, engineers, and scientists
have been investigating such failures for decades, and
we use this experience to solve problems with
building systems and components, including finding
the best repair options and mitigating the risk of
future failures.
include property
During the past year, we have evaluated numerous
problems with residential, commercial and industrial
structures for insurers, attorneys and owners. Our
evaluations often
inspections,
testing, engineering analysis and the development of
repair recommendations. In addition, we have
worked with owners to assess and mitigate the risk of
failure associated with hazards such as hurricanes,
earthquakes, tsunamis and aging infrastructure. We
have assessed these risks to high-rise buildings,
industrial facilities, pipelines and nuclear power plant
structures.
Civil Engineering
Our Civil Engineering Practice provides broad
expertise that includes geotechnical engineering,
geological engineering, engineering geology, and
geology to address a host of geo-failures, including
landslides, foundation and retaining wall failures,
dam and levee failures and construction claims. We
also provide peer review services for complicated
structures. Our Water Resources staff specializes in
the application of proven hydrologic, hydraulic,
hydrodynamic, and sediment transport research and
science to provide scientifically sound and cost-
effective solutions to our clients. These modelling
capabilities have expanded to include environmental
fluid dynamics including reactive flow and transport
in surface water and groundwater systems.
Over the past year, our consultants have been
engaged in a number of investigations related to
landslides, retaining wall and foundation failures,
large construction claims, flooding and sediment
transport, and peer review of large retaining wall
designs. This practice has had a diverse portfolio of
projects and clients that represent a broad spectrum
of industries.
Construction Consulting
Our Construction Consulting Practice provides
project advisory, risk analysis, strategic planning,
dispute resolution, and financial damages services.
During the past year, we expanded the practice by
in several
leveraging key client
relationships
construction sectors including energy and oil and gas.
staff, which
Our multi-disciplinary
includes
engineers,
construction managers,
architects,
schedulers, accountants, and technical specialists,
provides these services to both the public and private
sectors for clients who represent a diverse mix of
companies and agencies.
Our projects include many sectors of the construction
and engineering industry as well as facilities and
systems which include power plants, transmission
and distribution facilities, petrochemical facilities,
water/wastewater treatment plants, bridges and roads,
marine structures, rail systems, tunnels, airports,
detention
buildings,
institutional buildings, industrial and manufacturing
facilities, sporting arenas and gaming facilities. We
provide services to construction, aerospace and
lending
industry participants: owners,
defense
agencies,
subcontractors,
designers, attorneys and insurance carriers.
commercial
contractors,
facilities,
prime
Defense Technology Development
on
technologies
combined with
our multidisciplinary
Drawing
science,
engineering, testing, failure analysis and failure
prevention expertise, our Defense Technology
in harnessing
Development Practice specializes
advanced
the
from
technologies and practices
commercial world to deliver innovation to our
clients. We identify and leverage the best in off-the-
custom
shelf
development to deliver solutions ranging from fully
integrated systems
to supporting modules and
components. Our focus is on a close collaboration
with the end user, cost effectiveness, ease of use,
reliability, high quality and speed of engineering
design and execution. For our defense customers,
our engineers and scientists continue to work in
Afghanistan war zone laboratories embedded with
U.S. and NATO military personnel to ensure we
understand their problems and can rapidly deliver
solutions to high priority technology capability gaps.
the U.K. Ministry of Defence
During the past year we continued to advance our
subsurface threat detection system to provide a real-
time Improvised Explosive Device (IED) and mine
detection capability for a range of ground vehicles.
We continued to develop our IED detection system
for
their
operationally deployed route clearance capability.
We have continued our deployed engineer presence
by operating the U.S. Army Rapid Equipping Force
mobile expeditionary laboratories – or Ex-Labs —
and are helping many operational units prepare for a
safe drawdown and redeployment while continuing to
for
adding new
additive
labs by
the
enhance
manufacturing modules.
We are operating an
additional Ex-Lab in the U.S. to demonstrate shared
development (Co-Creation) with soldiers at U.S.
Army bases. Also over the past year, we have
continued our support and technology evaluation
services in the areas of personnel identification,
radio-frequency identification, physical and logical
access control, biometrics, smart credentials, and data
analytics for cyber security.
Electrical Engineering & Computer Science
for
consumer
The Electrical Engineering and Computer Science
Practice offers a broad range of expertise to address
complex issues for industrial, government and private
clients. Our power engineers advise and offer
guidance to clients on problems relating to electrical
systems including power generation, transmission
and distribution. Our team of electrical engineers
robustness
failure analysis, product
works on
and reliability
industrial
and
electronics. Our computer engineers and scientists
work with high-tech
industries and computer
controlled applications to evaluate product safety and
software reliability. The computer engineering and
science expertise we offer encompasses a breadth of
areas including information and numerical sciences,
algorithms and data structures, computer graphics,
and
computer
communications,
and
cryptography. We operate laboratories for testing
heavy equipment and electronics and we have a
broad capability in analyzing computer software.
networking
as
architecture,
as well
security
Over the past year, we performed a wide array of
investigations ranging
from assessing electrical
damage to infrastructure from the effect of weather
related events to working with clients to develop
sophisticated machine learning algorithms applied to
large quantities of unstructured data. We continue to
work with consumer electronics manufacturers and
the transportation industry on the reliability and
robustness of computer controlled equipment for user
safety. We have also provided our expertise to
clients in intellectual property advising them on
matters of integrated circuit design, semiconductor
fabrication and computer software implementations.
Engineering Management Consulting
This practice provides multi-disciplinary expertise
and rapid response to assist clients with technical and
management consulting services, often in extremely
short time frames. Our consultants provide services
in the areas of asset strategy and planning, project
6
management, engineering, construction, maintenance,
operations, environmental, and risk analysis. This
practice primarily services the electric and gas utility
industries, focusing on transmission and distribution
as well as fossil fuel and nuclear generation.
We provide unique and advanced services
in
performing risk and reliability assessments. Our
scientists and engineers assist our clients
in
minimizing losses in their business or operations.
Accidents, unanticipated events, and system failures
are the primary causes of deferred or lost production
interruptions and may lead to loss of life, injury,
property damage, and undesired releases. Our multi-
disciplinary staff has also performed diverse
technical, business interruption, and compliance-
related risk and reliability assessments for chemical,
petrochemical, petroleum, and manufacturing clients
worldwide.
Human Factors
staff
evaluates human
Our Human Factors
performance and safety in product and system use.
Our consultants study how the limitations and
capabilities of people, including memory, perception,
reaction time, judgment, physical size and dexterity,
affect the way they use a product, interact with an
organization or environment, process information or
participate in an activity.
We address the reliability of human memory and
retrospective reporting in the gathering of fact-based
evidence. We review warnings and labeling issues
related to consumer products, pharmaceuticals, motor
vehicles, medical devices and industrial products. In
addition, we assist manufacturers with compliance of
regulatory guidelines related to products and work
with them regarding analysis of adverse event reports
in publicly available
and consumer complaints
databases overseen by the Consumer Product Safety
Commission and the Food and Drug Administration.
We also provide support assessing alleged false
advertising claims for consumer products, foods and
pharmaceuticals.
Industrial Structures
in
Industrial Structures Practice, based
Our
Düsseldorf and Berlin, Germany, specializes in
design and assessment of industrial structures subject
to extreme conditions. Our Düsseldorf office has
provided design reviews and assessments on more
than 1,000 structures around the world, and our staff
has participated in the creation of several engineering
standards.
Our Industrial Structures Practice provides planning,
assessment, rehabilitation and dismantling analysis of
bearing structures in four particular areas: antenna
masts, power plants, buildings and special structures
like refractories or tanks. One service we provide in
over 900 locations throughout the year is quality
assurance of antenna masts for a variety of facilities
telecommunications, wind energy and
including
industrial chimneys.
Our consultants provide
inspection services related to new construction and
assess design deficiencies related to new and existing
facilities, as well as assist our clients with on-time,
quality construction on their projects.
With the use of our self-developed computer software
for non-linear material behavior, we provide close-to-
reality assessment of a wide variety of structures such
as cracked reinforced concrete structures, multi-layer
refractories or masonry towers. Beyond industrial
structures, more and more commercial property
projects are becoming part of this practice.
Materials & Corrosion Engineering
in-depth
knowledge
of materials
Our
and
electrochemistry, combined with the breadth of our
collective expertise in many areas of engineering and
science, is used to understand how and why materials
fail, as well as to prevent future failures. Our
engineers and scientists use their broad background
in field investigations, root-cause assessments, and
materials engineering to solve complex problems for
both industrial and legal clients. During the past year
we conducted failure analysis, failure prevention, and
integrity assessment investigations for a wide variety
of clients including medical, aerospace, chemical
construction,
processing, pipeline,
consumer
and other
electronics,
industries.
automotive,
recreational,
Mechanical Engineering
We provide clients with a thorough comprehension of
current or alternative designs to determine potential
failures occur, develop
vulnerabilities before
appropriate risk mitigation methods, and provide post
failure investigations. Our consultants review the
safety and reliability of processes and products. We
assist in performing product recall investigations and
reviewing internal compliance programs as part of
the implementation of corrective action plans. We
have performed these activities in the transportation,
heavy industry, energy, and consumer product areas.
Our staff develop and utilize detailed, validated
to evaluate equipment,
computational models
7
consumer products and medical devices to solve a
variety of technical challenges associated with their
design and optimization.
Our scientists and
engineers also provide services in the area of
intellectual property and are often asked to interpret
the language of a patent from a scientific and
engineering perspective and provide insight regarding
the proper technical interpretation of patent claims.
During the past year our mechanical engineers
worked on a wide variety of projects ranging from
high profile consumer product recall investigations to
pipeline integrity evaluations and worker safety
issues.
Polymer Science & Materials Chemistry
Our Polymer Science and Materials Chemistry staff
consults with industrial, government, and insurance
clients, as well as their outside counsels, regarding
polymers and textiles used in diverse applications and
chemical aspects of batteries, drug delivery systems,
and other products that depend on highly controlled
manufacturing environments. We assist clients in
understanding the short- and long-term performance
of plastic, rubber, adhesive, coating, composite and
power systems when challenged by physical,
chemical, thermal and other operational stresses.
Our consultants participate in product development
programs, perform failure analyses and provide
support to clients involved in regulatory and legal
During the past year, significant
proceedings.
implantable medical
program activities addressed
devices,
systems,
combination drug delivery
consumer electronics, numerous battery-related
applications, industrial and performance textiles,
building materials,
diligence,
technology scouting, and materials science aspects of
health risk, service life prediction, sustainability, and
polymer-related intellectual property, including trade
secrets.
technical
due
Statistical & Data Sciences
in
core
capabilities
Our Statistical & Data Sciences staff comprises our
company’s
statistical
methodology and offers its expertise to serve clients
at any and all stages of the empirical research process
including product development, manufacturing, and
regulatory stages.
in
determining whether a particular activity or product
poses an unreasonable risk. Risk estimation involves
establishing a reference period and then collecting
information about the number of injuries (or other
adverse events) suffered and the amount of exposure
during this period. Through analysis and synthesis of
The practice specializes
client-supplied data, combined with information from
public sources, we help clients measure their own
risk in the context of similar risks and determine
appropriate courses of action. During the past year,
we worked on a variety of engineering, health, and
environmental projects for government, industry, and
legal clients. Our statisticians and data scientists
performed assessments of manufacturing quality
systems,
to
improve classification tools, examined the field
reliability of electronic networks and computer
equipment, and analyzed the extent of environmental
pollution and its effects on natural resources and
human health.
investigated data mining methods
Thermal Sciences
in chemical engineering,
Our Thermal Sciences staff comprises our core
capabilities in the practice of fluid-thermal sciences
with expertise
fire
protection engineering, and mechanical engineering.
We have investigated and analyzed thousands of fires
and explosions ranging from high loss disasters at
manufacturing facilities to small insurance claims.
Information gained from these analyses has helped us
assist clients with preventive measures related to the
design of their products. We also assist industry in
minimizing risk of fires and explosions, provide
regulatory consulting for permitting new industrial
facilities, and assist manufacturers in addressing the
risk of fires associated with consumer products. Our
engineers use fire modeling and other computational
fire dynamics modeling tools to supplement our
analytical, experimental, and field-based activities.
Preventive services include process safety hazard
analysis for the chemical and oil and gas industries,
fire protection engineering and dust explosion
consulting.
During the past year, our work in the Liquefied
Natural Gas (LNG) sector has continued to remain
active. Our services in this area include assessing the
potential
flammable
risks posed by LNG or
refrigerant releases at LNG facilities to populations.
We also perform hazard and risk analyses to identify
and mitigate the likelihood and consequences of these
potential releases. We have seen growth in our non-
litigation fire protection engineering services. In
addition, the Thermal Sciences Practice continues to
develop tools to assist in the evaluation of fire risk of
lithium-ion batteries, and
in
consumer products.
their performance
8
Vehicle Analysis
trucking,
We have performed thousands of investigations for
recreational vehicle,
the automotive,
marine, aerospace, and rail industries.
Internal
research programs and client projects have resulted in
technological contributions
that have assisted
manufacturers
the understanding of product
performance and provided insight to government
agencies in establishing policy and regulations.
Information gained from these analyses has also
assisted clients in assessing preventive measures
related to the design of their products, as well as
evaluating failures.
in
that
insight
Our Test and Engineering Center located in Phoenix,
Arizona, is the setting for our most complex tests,
along with rigorous analysis of results. We have
gained a worldwide reputation for our ability to
mobilize resources expeditiously and efficiently,
integrate a broad array of technical disciplines, and
provide valuable
is objective and
withstands rigorous scrutiny. Many of our projects
involve addressing the cause of accidents and our
clients rely on us to determine what happened in an
accident and why it happened. In many cases, they
also want us to assess what could have been done to
reduce the severity of the accident or to mitigate
occupant injuries to those involved. Whether the
objective is design analysis, component testing, or
accident reconstruction, our knowledge of vehicle
systems and engineering principles coupled with our
experience from conducting full-scale tests add
insight and proficiency to every project.
ENVIRONMENTAL AND HEALTH
Chemical Regulation & Food Safety
including
Our Center for Chemical Regulation and Food Safety
includes experienced staff of both technical and
regulatory specialists who are experienced in dealing
with foods, and with pesticide and non-pesticide
products
chemicals,
biochemicals, antimicrobials/biocides, products of
biotechnology, cosmetics and industrial chemicals.
We provide practical, scientific and regulatory
support to meet global business objectives at every
stage of the product cycle, from research and
development to retail and beyond.
conventional
During the past year our chemical regulation & food
safety staff have conducted a wide array of work.
The European and U.S. sides of the Center were
jointly involved with the ongoing support of a new
pesticide active ingredient and end-use product. The
9
European side of our business was involved with
many projects related to plant protection product
regulatory submissions, from new active substances
to product-specific dossiers for individual member
states. In addition, we provided many specialist
assessments relating to human and environmental
exposure and product efficacy. We continue to
support safety assessments for food and cosmetics
products. In the U.S. we continued to provide
services related to pesticide active ingredient and
end-use product development and registrations in the
U.S. and Canada,
import
tolerances in the U.S. and Canada, due diligence, and
data compensation, as well as the approval of new
pesticide inert ingredients and new non-pesticide
chemical approvals. Our food safety consultants
assisted clients with food additives, food contact
notifications, and nutrition-related analyses, as well
as product safety proactive and reactive support
services, recall and litigation support.
registration
review,
Ecological & Biological Sciences
Our ecological and biological scientists provide
strategic support on issues related to natural resources
damages associated with chemicals and forest fires,
international environmental disputes, ecosystem
service assessments for businesses, climate change,
ecological
remediation
risk assessment, novel
methods, restoration of wetlands and other natural
resources,
large development projects, resource
utilization (mineral mining, oil and gas, wood pulp),
and the use of chemicals and other products in
commerce. The practice specializes in assessing the
fate and effects of chemical, biological, and physical
stressors on aquatic and terrestrial ecosystems. The
practice
is comprised of nationally recognized
experts that cover disciplines related to the ecological
implications and risks associated with these projects.
Environmental & Earth Sciences
Our environmental scientists and engineers provide
cost-effective, scientifically defensible and realistic
assessments and solutions to complex environmental
issues. We offer technical, regulatory and litigation
support to industries that include manufacturing,
mining and minerals, oil and gas, chemicals, forest
products, railroads, aerospace, and trade associations.
the areas of
Our consultants
environmental
forensics,
hydrogeology, air toxics, modeling and monitoring,
remediation consulting, environmental engineering
and waste management,
evaluation of
environmental and social risks for large international
capital projects. Our work often involves complex
specialize
chemistry
and
and
in
toxic
and high visibility environmental scenarios, claims,
or
tort matters, where evaluation of
contamination and historical reconstruction of events,
releases, and doses are central to problem resolution.
Epidemiology, Biostatistics & Computational
Biology
Our health scientists apply epidemiology to examine
and address complex health issues in a variety of
settings. Through the principles of epidemiology, we
analyze
interaction of host, agent, and
environment to reach conclusions about the causes
and occurrence of disease in human populations.
the
exposure
specialties,
Our consultants combine the expertise of several
medical
assessment
professionals, and other scientists who have advanced
degrees in statistics and public health. All of our
physicians have graduate training in epidemiology
and biostatistics. Our research work has included
numerous community health assessments, disease
cluster investigations, survey research, occupational
cohort and case-control studies, exposure assessment
studies, cancer modeling, meta-analyses, and state-
of-the-art reviews.
Exposure Assessment & Dose Reconstruction
Exposure assessment is the science of estimating
human exposure to chemical, physical, and biological
agents, accounting for the frequency, magnitude, and
duration of the exposure events. Exposure estimates
can be compared
toxicity benchmarks or
guidelines to assess potential risks to human health,
and provide critical inputs to human epidemiology
studies, risk assessment, and regulatory compliance.
to
from consumer products,
Our staff characterize potential exposures to evaluate
health risks posed by chemical or physical agents.
We are skilled in estimating multiple routes of
exposure
indoor air
releases, and environmental releases of chemicals.
We apply these skills in support of evaluations of a
variety of potential sources of exposure including
consumer products, indoor air releases, ambient air
releases, and contaminated soil and water. We apply
these evaluations to help companies evaluate product
safety questions and evaluate compliance with the
growing number of product safety and other
environmental regulations.
Our atmospheric scientists provide air quality and
meteorological modeling, permitting, and licensing
support services. Scientists in our Center investigate
potential and accidental releases of chemicals to the
10
atmosphere, simulate transport and fate of chemical
substances, and develop measures of prevention and
control, such as emergency preparedness and
response. We also apply our skills to helping clients
evaluate health risks associated with contaminated
soil and groundwater.
Occupational & Environmental Health
This Center is composed of industrial hygienists,
safety professionals, physicians, a veterinarian and
other scientists with specialized training in the
anticipation, recognition, evaluation, risk assessment,
and control of health hazards in occupational and
environmental settings.
Our staff assists and responds to clients facing health-
related exposure
issues or allegations of past
exposures. Chemical and biological exposures may
involve workers or the public, take place in industrial
or office environments, retail centers, single family
residences or multi-tenant buildings, or
at
government or private institutions, including health
care facilities. Exposures may also involve consumer
products or manufacturing processes. We investigate
a broad variety of health concerns such as claims of
illnesses from exposures to chemicals, dusts, smoke,
nanoparticles, molds and other micro-organisms. We
develop strategies
in controlling such
exposures, when needed. In addition, our staff has
extensive experience in addressing health issues
related to medical devices, consumer products, and
sanitation. We have assisted companies with their
preventive health and safety program needs in the
workplace and can provide external verification of
health services performance.
to aid
Toxicology & Mechanistic Biology
in
We have exceptional expertise and depth
toxicology and mechanistic biology. We provide
knowledge and experience that improve decisions
affecting the regulation of important substances in
commerce. We work with our clients to resolve
important issues that affect the safe use of a wide
variety of substances. We evaluate the mechanisms
by which substances can affect complex biological
systems, provide perspectives on potential effects at
realistic human and environmental exposure levels,
and develop strategies to manage human health and
environmental risks. We are recognized for our
outstanding credentials and decades of experience
from government, academia and industry.
We have assisted clients on industrial chemicals,
pesticides, drugs, and other agents. During the past
support
year we continued to provide toxicology and clinical
toxicology
in nearly all phases of
pharmaceutical and combination drug development
from preclinical studies to post-marketing safety
assessments.
We reviewed existing data and
developed new studies on potential endocrine
toxicity of various chemical substances.
We
continue to be very active in developing and
reviewing data
the U.S. Environmental
Protection Agency Endocrine Disruptor Screening
Program. We are also extremely active in the
research related to the identification, assessment,
and prioritization of risks (the probability of adverse
effects) associated with engineered nanomaterial
development and manufacturing processes. We also
have developed various detailed reviews on toxicity
mode of action assessments, specifically how
substances cause harm and whether or not laboratory
data are relevant to human risks.
for
COMPETITION
The marketplace for our services is fragmented and
we face different sources of competition in providing
various services. In addition, the services that we
provide to some of our clients can be performed in-
house by those clients. Clients that have the
capability to perform such services themselves will
retain Exponent or other independent consultants
because of independence concerns.
In each of our practices and centers, we believe that
the principal competitive factors are: technical
capability and breadth of services, ability to deliver
services on a timely basis, professional reputation
and knowledge of the litigation and regulatory
processes. Although we believe that we generally
compete favorably in each of these areas, some of our
competitors may be able
to provide services
acceptable to our clients at lower prices.
We believe that the barriers to entry are low and that
for many of our technical disciplines, competition is
increasing. In response to competitive forces in the
marketplace, we continue to look for new markets for
our various technical disciplines.
11
BUSINESS SEGMENTS OVERVIEW
in
epidemiology
We report two operating segments based on two
primary areas of service. One operating segment is a
broad service group providing technical consulting in
the areas of
different practices primarily
engineering and technology development. Our other
operating segment provides services in the area of
environmental,
risk
analysis. This operating segment provides a wide
range of consulting services relating to environmental
hazards and risks and the impact on both human
health and the environment. For more information
about the financial condition and results of operations
of each segment, please see Part II - “Item 7:
Management's Discussion and Analysis of Financial
Condition and Results of Operations” and “Item 8:
Financial Statements and Supplementary Data.”
and health
EMPLOYEES
As of January 3, 2014, we employed 984 full-time
and part-time employees, including 754 engineering
and scientific staff, 72 technical support staff and 158
administrative and support staff. Our staff includes
670 employees with advanced degrees, of which 447
employees have achieved the level of Ph.D., Sc.D. or
M.D.
ADDITIONAL INFORMATION
of
our
address
Internet website
is
The
www.exponent.com. We make available, free of
charge through our website, access to our Annual
Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and other
periodic and current Securities and Exchange
Commission (SEC) reports, along with amendments
to all of those reports, as soon as reasonably
practicable after we file the reports with the SEC.
Additionally, copies of materials filed by us with the
SEC may be accessed at the SEC’s Public Reference
Room at 100 F Street NE, Washington, D.C. or at the
SEC’s website
For
information about the SEC’s Public Reference Room,
the public may contact 1-800-SEC-0330. Copies of
material filed by us with the SEC may also be
obtained by writing
to us at our corporate
headquarters, Exponent, Inc., Attention: Investor
Relations, 149 Commonwealth Drive, Menlo Park,
CA 94025, or by calling (650) 326-9400. The
content of our Internet website is not incorporated
into and is not part of this Annual Report on Form
10-K.
http://www.sec.gov.
at
EXECUTIVE OFFICERS
The executive officers of Exponent and their ages as of February 28, 2014 are as follows:
Name
Age
Position
Paul R. Johnston, Ph.D.
Elizabeth L. Anderson, Ph.D.
Paul D. Boehm, Ph.D.
Robert D. Caligiuri, Ph.D.
Catherine Ford Corrigan, Ph.D.
Subbaiah V. Malladi, Ph.D.
John D. Osteraas, Ph.D.
Richard L. Schlenker, Jr.
60
73
65
62
45
67
59
48
Executive officers of Exponent are appointed by the
Board of Directors and serve at the discretion of the
Board or until the appointment of their successors.
There is no family relationship between any of the
directors and officers of the Company.
for
responsibility
Paul R. Johnston, Ph.D., joined the Company in
1981, was promoted to Principal Engineer in 1987,
and to Vice President in 1996. In 1997, he assumed
responsibility for the firm’s network of offices. In
July 2003, he was appointed Chief Operating Officer
and added
the Health and
Environmental Groups. In 2006, he assumed line
responsibility for all of the firm’s consulting groups.
Dr. Johnston was named President in May 2007. He
was named Chief Executive Officer and elected to
the Board of Directors in May 2009. Dr. Johnston
received his Ph.D. (1981) in Civil Engineering and
M.S. (1977) in Structural Engineering from Stanford
University. He received his B.A.I. (1976) in Civil
Engineering with First Class Honors from Trinity
College, University of Dublin, Ireland where he was
elected a Foundation Scholar in 1975. Dr. Johnston
is a Registered Professional Civil Engineer in the
State of California and a Chartered Engineer in
Ireland.
President, Chief Executive Officer and Director
Group Vice President
Group Vice President
Group Vice President
Group Vice President
Chief Technical Officer
Group Vice President
Executive Vice President, Chief Financial Officer and
Corporate Secretary
Elizabeth L. Anderson, Ph.D., joined the Company
in June 2006 as a Group Vice President and Principal
Scientist. Prior to joining Exponent, Dr. Anderson
was President and CEO of Sciences International, a
health and environmental consulting firm.
Dr.
Anderson received her Ph.D. (1970) in Organic
Chemistry from The American University, M.S.
(1964) in Organic Chemistry from the University of
Virginia and B.S. (1962) in Chemistry from the
College of William and Mary. Dr. Anderson is a
Fellow of the Academy of Toxicological Sciences, a
founder and past-President of the Society for Risk
Analysis and former Editor-in-Chief of the journal,
Risk Analysis: An International Journal.
Paul D. Boehm, Ph.D., joined the Company in April
2004 as a Group Vice President and Principal
Scientist. Prior to joining the Company, Dr. Boehm
was Vice President and Market Manager, Oil and Gas
Sector, at Battelle Memorial Institute from 2001 to
2004. From 1999 to 2001, Dr. Boehm was Vice
President and Managing Director, Environmental
Health and Safety Consulting at Arthur D. Little, Inc.
Dr. Boehm received his Ph.D. (1977) and M.S.
(1973) in Oceanography from the University of
in Chemical
Rhode
Engineering from the University of Rochester. Dr.
Boehm has published more than 100 articles in peer-
reviewed journals and authored numerous reports on
environmental forensics and impact assessments. Dr.
Boehm has been chosen to serve on several National
Research Council panels.
Island and B.S.
(1970)
12
and B.S.
Robert D. Caligiuri, Ph.D., joined the Company in
1987. He was promoted to Principal Engineer in
1990 and Group Vice President in 1999. Dr.
Caligiuri received his Ph.D. (1977) and M.S. (1974)
in Materials Science and Engineering from Stanford
in Mechanical
University
Engineering from the University of California, Davis.
Prior to joining the Company he was a Program
Manager
for SRI
and Materials Scientist
He is a Registered Professional
International.
Metallurgical Engineer in the States of California,
Utah, Michigan and North Carolina and a Fellow of
the American Society for Materials.
(1973)
joined
Catherine Ford Corrigan, Ph.D.,
the
Company in 1996. She was promoted to Principal in
the Biomechanics practice
in 2002, and was
appointed Group Vice President in May 2012. Dr.
in Medical
Corrigan earned her Ph.D. (1996)
Engineering and Medical Physics and M.S. (1992) in
Mechanical Engineering from the Massachusetts
Institute
in
Bioengineering from the University of Pennsylvania.
Prior to joining Exponent, Dr. Corrigan was a
researcher
the Orthopaedic Biomechanics
Laboratory at Beth Israel Hospital and Harvard
Medical School.
of Technology
her B.S.
and
in
Subbaiah V. Malladi, Ph.D., joined the Company in
1982 as a Senior Engineer, becoming a Senior Vice
President in January 1988 and a Corporate Vice
President in September 1993. In October 1998, Dr.
Malladi was appointed Chief Technical Officer of the
Company. Dr. Malladi also served as a Director of
the Company from March 1991 through September
1993. He was re-appointed as a Director in April
1996 and served on the Board until May 2005. He
received a Ph.D. (1980) in Mechanical Engineering
from the California Institute of Technology, M.Tech
(1972) in Mechanical Engineering from the Indian
Institute of Technology, B.E. (1970) in Mechanical
Engineering from SRI Venkateswara University,
India and B.S. (1966) in Physics, Chemistry and
Mathematics from Osmania University, India. Dr.
Malladi is a Registered Professional Mechanical
Engineer in the State of California.
John D. Osteraas, Ph.D., worked for the Company
from 1982 to 1985 as a Senior Engineer. He rejoined
the Company in 1990 as a Managing Engineer. He
was promoted to Principal Engineer in 1992 and
Group Vice President in 2006. Dr. Osteraas received
his Ph.D. (1990) in Civil Engineering, M.S. (1977) in
Civil Engineering: Structural Engineering
from
Stanford University and B.S. (1976) in Civil and
Environmental Engineering from the University of
13
Wisconsin. Dr. Osteraas is a Registered Professional
Engineer in 17 states and is a Fellow of the American
Society of Civil Engineers.
the Company
Richard L. Schlenker, Jr. joined the Company in
1990. Mr. Schlenker is the Executive Vice President,
Chief Financial Officer and Corporate Secretary of
the Company. He was appointed Executive Vice
President in April 2010, Chief Financial Officer in
in
July 1999 and Secretary of
November 1997. Mr. Schlenker was the Director of
Human Resources from 1998 until his appointment as
Chief Financial Officer. He was the Manager of
Corporate Development from 1996 until 1998. From
1993 to 1996, Mr. Schlenker was a Business
Manager, where he managed the business activities
for multiple consulting practices within
the
Company. Prior to 1993, he held several different
positions in finance and accounting within the
Company. Mr. Schlenker holds a B.S. in Finance
from the University of Southern California.
Item 1A. Risk Factors
Exponent operates in a rapidly changing environment
that involves a number of uncertainties, some of
which are beyond our control. These uncertainties
include, but are not limited to, those mentioned
elsewhere in this report and those set forth below.
The unpredictable and reactive nature of our
business can create uneven performance in any
given quarter or fiscal year.
Revenues are primarily derived
from services
provided in response to client requests or events that
occur without notice, and engagements, generally
billed as services are performed, are terminable or
subject to postponement or delay at any time by
clients. As a result, backlog at any particular time is
small in relation to our quarterly or annual revenues
and is not a reliable indicator of revenues for any
future periods. Revenues and operating margins for
any particular quarter are generally affected by
staffing mix, resource requirements and timing and
size of engagements.
Our financial results could suffer if our clients’
needs change more rapidly than we are able to
secure the appropriate mix of trained, skilled and
experienced personnel.
As our clients’ needs change, new technologies
develop, and legal and regulatory processes change,
we may be unable to timely hire or train personnel
with the appropriate new set of skills and experience
which could negatively impact our growth and
profitability.
receivable could have a material adverse effect on our
financial condition and results of operations.
Failure to attract and retain key employees may
adversely affect our business.
We hold substantial investments that could present
liquidity risks.
involves
Exponent’s business
the delivery of
professional services and is labor-intensive. Our
success depends in large part upon our ability to
attract, retain and motivate highly qualified technical
and managerial personnel. Qualified personnel are in
great demand and are likely to remain a limited
resource for the foreseeable future. We cannot
provide any assurance that we can continue to attract
sufficient numbers of highly qualified technical and
managerial personnel and
retain existing
employees. The loss of key managerial employees,
business generators or any significant number of
employees could have a material adverse impact on
our business, including our ability to secure and
complete engagements.
to
Competition could reduce our pricing and adversely
affect our business.
The markets for our services are highly competitive.
In addition, there are relatively low barriers to entry
into our markets and we have faced, and expect to
continue to face, additional competition from new
entrants into our markets. Competitive pressure
could reduce the market acceptance of our services
and result in price reductions that could have a
material adverse effect on our business, financial
condition or results of operations.
The loss of a large client could adversely affect our
business.
We currently derive a significant portion of our
revenues from clients in the consumer electronics,
insurance, petrochemical, transportation and utilities
industries and the government sector. The loss of
any large client, organization or insurer could have a
material adverse effect on our business, financial
condition or results of operations.
Our clients may be unable to pay for our services.
If a client's financial difficulties become severe, the
client may be unwilling or unable to pay our invoices
in the ordinary course of business, which could
adversely affect collections of both our accounts
receivable and unbilled services. On occasion, some
of our clients have entered bankruptcy, which has
prevented us from collecting amounts owed to us.
The bankruptcy of a client with substantial accounts
14
Our cash equivalent and short-term
investment
portfolio as of January 3, 2014, consisted primarily of
obligations of state and local government agencies
and the U.S. Treasury. We follow an established
investment policy to monitor, manage and limit our
exposure to interest rate and credit risk. The policy
sets forth credit quality standards and limits our
exposure to any one issuer, as well as our maximum
exposure to various asset classes.
Investments in some financial instruments may pose
risks arising from liquidity and credit concerns. As
of January 3, 2014, we had no impairment charge
associated with our investment portfolio relating to
such adverse financial market conditions. Although
we believe our current investment portfolio has a low
risk of impairment, we cannot predict future market
conditions or market liquidity and can provide no
assurance that our investment portfolio will remain
unimpaired.
Our business is dependent on our professional
reputation.
The professional reputation of Exponent and its
consultants is critical to our ability to successfully
compete for new client engagements and attract or
retain professionals. Proven or unproven allegations
against us may damage our professional reputation.
Any factors that damage our professional reputation
could have a material adverse effect on our business.
Our business can be adversely
deregulation or reduced regulatory enforcement.
impacted by
Public concern over health, safety and preservation of
the environment has resulted in the enactment of a
broad range of environmental and/or other laws and
regulations by local, state and federal lawmakers and
agencies. These laws and the implementing of new
regulations affect nearly every industry, as well as the
agencies of federal, state and local governments
charged with their enforcement. To the extent
changes in such laws, regulations and enforcement or
other factors significantly reduce the exposures of
manufacturers, owners, service providers and others
to liability, the demand for our services may be
significantly reduced.
Tort reform can reduce demand for our services.
in
significant
Several of our practices have a
concentration
consulting
support
litigation
services. To the extent tort reform reduces the
exposure of manufacturers, owners, service providers
and others to liability, the demand for our litigation
support consulting services may be significantly
reduced.
Our engagements may result in professional or
other liability.
Our services typically involve difficult engineering
and scientific assignments and carry risks of
professional and other
liability. Many of our
engagements involve matters that could have a severe
impact on a client's business, cause a client to lose
significant amounts of money, or prevent a client
from pursuing desirable business opportunities.
Accordingly, if a client is dissatisfied with our
performance, the client could threaten or bring
litigation in order to recover damages or to contest its
obligation to pay our fees. Litigation alleging that we
performed negligently, disclosed client confidential
information, lost or damaged evidence, infringed on
patents, or otherwise breached our obligations to a
client could expose us to significant liabilities to our
clients or other third parties or tarnish our reputation.
Potential conflicts of interest may preclude us from
accepting some engagements.
We provide litigation support consulting and other
services primarily in connection with significant
disputes, or other matters that are usually adversarial
or that involve sensitive client information. The
nature of our consulting services may preclude us
from accepting engagements with other potential
clients because of conflicts. Accordingly, the nature
of our business limits the number of both potential
clients and potential engagements.
We are subject to unpredictable risks of litigation.
Although we seek to avoid litigation whenever
possible, from time to time we are party to various
lawsuits and claims. Disputes may arise, for example,
from employment issues, regulatory actions, business
acquisitions and real estate and other commercial
transactions. There can be no assurances that any
lawsuits or claims will be immaterial in the future.
Any material lawsuits or claims could adversely
affect our business and reputation.
We may experience security breaches that could
lead
to protect confidential
information.
inability
the
to
Despite the implementation of security measures, our
to electronic
operating systems are vulnerable
breaches of security. Such breaches could lead to
disruptions of our operations
and potential
unauthorized disclosure of confidential information,
which could result in legal claims or proceedings.
While we have taken reasonable steps to prevent and
mitigate
the damage of a security breach by
continuously improving our design and coordination
of security controls across our business, those steps
may not be effective and there can be no assurance
that any such steps can be effective against all
possible risks.
Impairment of goodwill may require us to record a
significant charge to earnings.
subject
evaluation
to periodic
On our balance sheet, we have $8,607,000 of
for
goodwill
impairment. Failure to achieve sufficient levels of
cash flow at reporting units, the loss of key
employees, changes to the scope of operations of our
business or a significant and sustained decline in our
stock price could result in goodwill impairment
charges. During times of financial market volatility,
significant judgment is required to determine the
underlying cause of the decline and whether stock
price declines are short-term in nature or indicative of
an event or change in circumstances.
Impairment of long-lived assets or restructuring
activities may require us to record a significant
charge to earnings.
Our long-lived assets, including our office and
laboratory space in Menlo Park, California and our
test and engineering center in Phoenix, Arizona, are
subject to periodic testing for impairment. Failure to
achieve sufficient levels of cash flow at reporting
units could result in impairment of our long-lived
lease
In addition, we have operating
assets.
commitments for office, warehouse and laboratory
space of $22,464,000 as of January 3, 2014. Changes
in the business environment could lead to changes in
the scope of operations of our business. These
changes, including the closure of one or more offices,
could result in restructuring and/or asset impairment
charges.
15
Our international operations create special risks
that could adversely affect our business.
business by affecting our ability to compete for new
contracts.
In addition to our offices in the United States, we
have physical offices
the United Kingdom,
in
Germany, Switzerland and China and conduct
business in several other countries. We expect to
continue to expand globally and our international
revenues may account for an increasing portion of
Our international
our revenues in the future.
operations carry special financial, business and legal
risks, including cultural and language differences;
employment laws and related factors that could result
in lower utilization, higher staffing costs, and cyclical
fluctuations of utilization and revenues; currency
fluctuations
that adversely affect our financial
position and operating results; burdensome regulatory
requirements and other barriers
to conducting
risks associated with
business; managing
engagements with foreign officials and governmental
agencies, including the risks arising from the Foreign
Corrupt Practices Act; greater difficulties
in
managing and staffing foreign operations; successful
entry and execution in new markets; restrictions on
the repatriation of earnings; and potentially adverse
tax consequences.
the
Inherent risks related to government contracts may
adversely affect our business.
to
We work for various United States and foreign
governmental entities and agencies. Government
entities reserve the right to audit our contracts and
conduct inquiries and investigations of our business
practices with respect to government contracts.
Findings from an audit may result in fees being
refunded
the government or prospective
adjustment to previously agreed upon rates that will
affect future margins.
If a government client
discovers improper or illegal activities in the course
of audits or investigations, we may become subject to
and
various
civil
administrative
include
termination of contracts,
forfeiture of profits,
suspension of payments, fines and suspensions or
debarment from doing business with other agencies
of the government. The inherent limitations of
internal controls may not prevent or detect all
improper or illegal activities, regardless of the
adequacy of such controls. Government contracts,
and the proceedings surrounding them, are often
subject to more extensive scrutiny and publicity than
Negative publicity
other commercial contracts.
related to our government contracts, regardless of
whether it is accurate, may further damage our
criminal
sanctions, which may
penalties
and
A decline in the U.S. Government defense budget,
changes in budgetary priorities or timing of contract
awards may adversely affect our business.
levels
Our operating results could be adversely affected by
spending caps or changes in the budgetary priorities
of the U.S. Government or the Department of
Defense (DoD), as well as delays in program starts or
the award of contracts or task orders under contracts.
Current U.S. Government spending
for
defense-related programs may not be sustained and
future spending and program authorizations may not
increase or may decrease or shift to programs in areas
in which we do not provide services or are less likely
to be awarded contracts. Such changes in spending
authorizations and budgetary priorities may occur as
a result of the rapid growth of the federal budget
deficit, increasing political pressure and legislation.
The U.S. Government also conducts periodic reviews
of U.S. defense strategies and priorities, which may
shift DoD budgetary priorities, reduce overall U.S.
Government spending or delay contract or task order
awards for defense-related programs. In addition,
the DoD acquisition system and
changes
contracting models could affect whether and how we
pursue certain opportunities and the terms under
which we are able to do so. A significant decline in
overall U.S. Government spending, the substantial
reduction or elimination of particular defense-related
programs or significant delays in contract or task
order awards could adversely affect our business.
to
Governments may terminate, cancel, modify or
curtail our contracts at any time prior to their
completion.
Under our government contracts, the client generally
has the right not to exercise options to extend or
expand our contracts and may otherwise terminate,
cancel, modify or curtail our contracts at
its
convenience. Any decision by the client not to
exercise contract options or to terminate, cancel,
modify or curtail our programs or contracts would
adversely affect our revenues, revenue growth and
profitability.
We could incur significant liabilities and suffer
negative publicity if people or properties are harmed
by the products and systems we sell or the services
we offer.
We design, develop, manufacture, sell, service and
maintain various products and systems. In some
16
instances, we also train operators of such products
and systems. Many of these products and systems
utilize software algorithms that are probabilistic in
nature and subject to significant technical limitations.
There are many factors, some of which are beyond
our control, which could result in the failure of our
products or systems. The failure of our products or
systems could lead to injury, death, or extensive
property damage and may lead to product liability,
professional liability, or other claims against us.
Further, if our products or systems fail, or are
perceived to have failed, the negative publicity from
such incident could have a material adverse effect on
our business.
in, or
Changes
interpretations of, accounting
principles could have a significant impact on our
financial position and results of operations.
We prepare our consolidated financial statements in
accordance with accounting principles generally
accepted in the United States of America (“GAAP”).
These principles are subject to interpretation by the
SEC and various bodies formed to interpret and
create appropriate accounting principles. A change in
these principles can have a significant effect on our
reported results and may even retroactively affect
previously reported transactions.
For example, the U.S.-based Financial Accounting
Standards Board (“FASB”) is currently working
together with the International Accounting Standards
Board (“IASB”) on several projects to further align
accounting principles and facilitate more comparable
financial reporting between companies who are
required to follow GAAP under SEC regulations and
those who are required to follow International
Financial Reporting Standards outside of the U.S.
These efforts by the FASB and IASB may result in
different accounting principles under GAAP that may
result in materially different financial results for us in
areas including, but not limited to, principles for
recognizing revenue and lease accounting.
Our quarterly results may vary.
as
the
such
significance of
Variations in our revenues and operating results
occur from time to time, as a result of a number of
factors,
client
engagements commenced and completed during a
quarter, the timing of engagements, the number of
working days in a quarter, employee hiring and
utilization rates, and
integration of companies
Because a high percentage of our
acquired.
expenses, particularly personnel and facilities related
expenses, are relatively fixed in advance of any
particular quarter, a variation in the timing of the
initiation or the completion of our client assignments
can cause significant variations in operating results
from quarter to quarter.
The market price of our common stock may be
volatile.
Many factors could cause the market price of our
common stock to rise and fall. These include the risk
factors listed above and below; changes in estimates
of our performance or recommendations by securities
analysts; future sales of shares of common stock in
the public market; market conditions in the industry
and economy as a whole; acquisitions or strategic
alliances involving us or our competitors; restatement
of financial results; and changes in accounting
principles or methods. In addition, the stock market
fluctuations.
often experiences significant price
the
to
These fluctuations are often unrelated
operating performance of particular companies.
These broad market fluctuations may adversely affect
the market price of our common stock. When the
stock drops
market price of
significantly, shareholders often institute securities
class action litigation against that company. Any
litigation against us could cause us
incur
substantial costs, divert the time and attention of our
management and other resources, or otherwise harm
our business.
company's
to
a
Our business can be adversely affected by
downturns in the overall economy.
None.
Item 1B. Unresolved Staff Comments
The markets that we serve are cyclical and subject to
general economic conditions. The direction and
relative strength of the global economy continues to
be uncertain. If economic growth in the United
States, where we primarily operate, continues to be
slow and not improve, our clients may consolidate or
go out of business and thus demand for our services
could be reduced significantly.
17
Item 2. Properties
PART II
Our Silicon Valley office facilities consist of a
153,738 square foot building, with office and
laboratory space located on a 6.3-acre tract of land
we own in Menlo Park, California and an adjacent
27,000 square feet of leased warehouse storage space.
Our Test and Engineering Center (TEC) occupies 147
acres in Phoenix, Arizona. We lease this land from
the state of Arizona under a 30-year lease agreement
that expires in January 2028 and have options to
renew for two fifteen-year periods. We constructed
an indoor test facility as well as an engineering and
test preparation building at the TEC.
In addition, we
lease office, warehouse and
laboratory space in 18 other locations in 13 states and
the District of Columbia, as well as in Germany,
China, Switzerland and the United Kingdom. Leases
for these offices, warehouse and laboratory facilities
have terms generally ranging between one and ten
years. Aggregate lease expense in fiscal 2013 for all
leased properties was $5,929,000.
Item 3. Legal Proceedings
Exponent is not engaged in any material legal
proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Market for Registrant’s Common Equity,
Related
Issuer
Purchases of Equity Securities
Stockholder Matters
and
Exponent’s common stock is traded on the NASDAQ
Global Select Market, under the symbol “EXPO.”
The following table sets forth for the fiscal periods
indicated the high and low sales prices for our
common stock.
Stock prices by quarter
High
Low
Fiscal Year Ended December 28, 2012:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 53.31
$ 52.84
$ 57.16
$ 58.92
$ 45.09
$ 45.56
$ 49.04
$ 47.50
Fiscal Year Ended January 3, 2014:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 57.23
$ 59.78
$ 72.62
$ 80.50
$ 47.17
$ 50.42
$ 59.13
$ 67.81
As of February 21, 2014, there were 225 holders of
record of our common stock. Because many of the
shares of our common stock are held by brokers and
other institutions on behalf of stockholders, we
believe that there are considerably more beneficial
holders of our common stock than record holders.
We paid $7.9 million of dividends during fiscal 2013
and paid no dividends during fiscal 2012. On
February 5, 2014, our Board of Directors announced
a cash dividend of $0.25 per share of the Company’s
common stock, payable March 28, 2014,
to
stockholders of record as of March 7, 2014. We
anticipate paying quarterly dividends each year in
March, June, September and December, subject to
declaration by our Board of Directors. See Item 7 of
Part II, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations –
Liquidity and Capital Resources.”
18
The following table provides information on the Company’s share repurchases (of Company common stock) for the
quarter ended January 3, 2014 (in thousands, except price per share):
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Approximate Dollar
Value of Shares That
May Yet Be Purchased
Under the Plan or
Program
September 28 to October 25
October 26 to November 22
November 23 to January 3
Total
-
-
49
49
$
-
-
$ 76.94
$ 76.94
-
-
49
49
$34,800
$34,800
$31,000
The foregoing repurchases of the Company’s common stock were effected pursuant to a repurchase program
authorized by the Company’s Board of Directors. On February 9, 2012, the Board of Directors authorized
$35,000,000 of repurchases, and on February 15, 2013, the Board of Directors authorized an additional $35,000,000
for repurchases. As of January 3, 2014, there remained $31,000,000 available for repurchases under these
authorizations.
COMPANY STOCK PRICE PERFORMANCE GRAPH
The graph compares the Company’s cumulative total stockholder return calculated on a dividend-reinvested basis
from 2008 through 2013 with those of the Standard & Poor’s (“S&P”) 500 Index and the S&P SmallCap 600 Index.
The Company does not have a comparable peer group and thus has selected the S&P Small Cap 600 Index. The
graph assumes that $100 was invested on the last day of 2008. Note that the historic stock price performance is not
necessarily indicative of future stock price performance.
TOTAL SHAREHOLDER RETURNS
300
250
200
150
100
50
s
r
a
l
l
o
D
0
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Years Ending
S&P 500 Index
S&P SmallCap 600 Index
Exponent, Inc.
19
Item 6. Selected Financial Data
The following selected consolidated financial data are derived from our consolidated financial statements. This data
should be read in conjunction with the consolidated financial statements and notes thereto, and with Part II - “Item
7: Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(In thousands, except per share data)
2013
2012
Fiscal Year
2011
2010
2009
Consolidated Statements of Income Data:
Revenues before reimbursements
Revenues
Operating income
Net income
Net income per share:
Basic
Diluted
$ 280,043
$ 296,168
$ 55,946
$ 38,640
$ 266,562
$ 292,653
$ 57,620
$ 37,225
$ 246,667
$ 272,446
$ 53,460
$ 32,695
$ 221,860
$ 248,753
$ 43,241
$ 27,521
$ 205,714
$ 227,882
$ 33,262
$ 22,127
Cash dividends declared per share
$
0.60
$
-
$
-
$
-
$
$
2.84
2.76
$
$
2.70
2.60
$
$
2.31
2.22
$
$
1.92
1.83
$
$
$
1.56
1.47
-
Consolidated Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Working capital
Total assets
Long-term liabilities
Total stockholders’ equity
$ 122,948
$ 33,171
$ 179,537
$ 344,166
$ 36,960
$ 235,059
$ 113,268
$ 20,881
$ 163,673
$ 315,417
$ 27,217
$ 216,429
$ 84,439
$ 25,260
$ 137,803
$ 268,788
$ 21,298
$ 186,715
$ 106,549
-
$
$ 136,860
$ 258,892
$ 17,358
$ 183,800
$ 67,895
$ 7,490
$ 103,253
$ 206,481
$ 11,333
$ 150,071
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
Inc.
is a science and engineering
Exponent,
consulting firm that provides solutions to complex
problems. Our multidisciplinary team of scientists,
physicians, engineers, business and
regulatory
consultants brings together more than 90 different
technical disciplines to solve complicated issues
facing industry and government today. Our services
include analysis of products, people, property,
processes and finances related to litigation, product
recall, regulatory compliance, research, development
and design.
CRITICAL ACCOUNTING ESTIMATES
In preparing our consolidated financial statements,
we make assumptions, judgments and estimates that
can have a significant impact on our revenue,
20
operating income and net income, as well as on the
liabilities on our
value of certain assets and
consolidated balance
We base our
sheet.
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
judgments and
believe
estimates
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. We
discuss below
judgments and
the assumptions,
estimates associated with these policies. Historically,
our assumptions, judgments and estimates relative to
our critical accounting policies have not differed
materially
further
information on our critical accounting policies, see
the assumptions,
in accounting
from actual
involved
results.
For
that
for
project. If we made different judgments or utilized
different estimates, the amount and timing of our
revenue for any period could be materially different.
requires a positive assessment of
All contracts are subject to review by management,
the
which
collectability of contract amounts. If, during the
course of the contract, we determine that collection of
revenue is not reasonably assured, we do not
recognize the revenue until its collection becomes
reasonably assured, which in those situations would
generally be upon receipt of cash. We assess
collectability based on a number of factors, including
past transaction history with the client, as well as the
credit-worthiness of the client. Losses on fixed-price
contracts are recognized during the period in which
the loss first becomes evident. Contract losses are
determined to be the amount by which the estimated
total costs of the contract exceeds the total fixed price
of the contract.
Estimating the allowance for doubtful accounts.
We make estimates of our ability to collect accounts
receivable and our unbilled but recognized work-in-
process. In circumstances where we are aware of a
specific customer’s inability to meet its financial
obligations to us, we record a specific allowance to
reduce the net recognized receivable to the amount
we reasonably believe will be collected. For all other
customers we recognize allowances for doubtful
accounts taking into consideration factors such as
concentration,
historical bad debts,
customer
economic
conditions, and aging of amounts due.
credit-worthiness,
customer
current
Note 1 of our Notes to Consolidated Financial
Statements.
Revenue recognition. We derive our revenues
primarily from professional fees earned on consulting
engagements, product sales in our defense technology
development practice, fees earned for the use of our
equipment and facilities, as well as reimbursements
for outside direct expenses associated with the
services that are billed to our clients.
fixed-price
all of our
Substantially all of our engagements are service
contracts performed under time and material or fixed-
price billing arrangements. For time and material and
fixed-price service projects, revenue is generally
recognized as the services are performed. For
substantially
service
engagements, we recognize revenue based on the
relationship of incurred labor hours at standard rates
to our estimate of the total labor hours at standard
rates we expect to incur over the term of the contract.
Our estimate of total labor hours we expect to incur
over the term of the contract is based on the nature of
the project and our past experience on similar
projects. We believe this methodology achieves a
reliable measure of the revenue from the consulting
services we provide to our customers under fixed-
price contracts.
Significant management judgments and estimates
must be made and used in connection with the
revenues recognized in any accounting period. These
judgments and estimates include an assessment of
collectability and, for fixed-price engagements, an
estimate as to the total effort required to complete the
21
The following table sets forth, for the periods indicated, the percentage of revenues of certain items in our
consolidated statements of income and the percentage increase (decrease) in the dollar amount of such items year to
year:
PERCENTAGE OF REVENUES
FOR FISCAL YEARS
2012
2011
2013
PERIOD TO
PERIOD CHANGE
2013 vs. 2012 2012 vs. 2011
Revenues
100.0%
100.0%
100.0%
1.2%
7.4%
Operating expenses:
Compensation and related expenses
Other operating expenses
Reimbursable expenses
General and administrative expenses
Operating income
Other income, net
Income before income taxes
Provision for income taxes
62.2
8.5
5.4
5.0
81.1
18.9
2.7
21.6
8.5
58.7
8.1
8.9
4.6
80.3
19.7
1.4
21.1
8.4
57.6
8.5
9.5
4.8
80.4
19.6
0.5
20.1
8.1
7.1
7.3
(38.2)
8.5
2.2
(2.9)
9.5
1.4
1.2
3.4
7.3
7.8
93.7
203.8
3.6
3.2
12.6
10.8
Net income
13.0%
12.7%
12.0%
3.8%
13.9%
EXECUTIVE SUMMARY
Revenues for fiscal 2013 increased 1% and revenues
before reimbursements increased 5% as compared to
the prior year. The increase in revenues before
reimbursements was due to an increase in billable
hours, an increase in billing rates, and revenues of
$1.4 million related to services performed in prior
periods for a foreign client for which we deferred
revenue recognition until receipt of payment. The
increase in revenues before reimbursements was also
due to fiscal 2013 having one additional week of
activity than fiscal 2012. 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 and a decrease in product
sales
technology development
practice.
in our defense
During 2013, we experienced strong demand for our
reactive services, where we investigated accidents
ranging from the collapse of a major industrial
facility to a home fire, evaluated potential product
recalls including home appliances and food products,
and assessed the health and environmental exposures
for oil and gas operations.
We also experienced strong demand for our proactive
services where we provided design consulting for
products ranging from tablet computers to drug
delivery systems, assisted clients with regulatory
matters involving toilets and cosmetics, and worked
with clients to develop risk management programs
for gas distribution systems.
in net
in a 4%
The increase in revenues before reimbursements
resulted
to
increase
$38,640,000 during fiscal 2013 as compared to
$37,225,000 during the prior year. Diluted earnings
per share increased to $2.76 per share as compared to
$2.60 during the prior year due to the increase in net
income and our ongoing share repurchase program.
income
We remain focused on selectively adding top talent
and developing the skills necessary to expand upon
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
22
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 federal
government.
to $486,000 during
Product sales in defense technology development
decreased
fiscal 2013 as
compared to $9,213,000 during fiscal 2012 due to
lower sales of surveillance systems to the United
States Army. We do not expect any additional sales
of surveillance systems during fiscal 2014 as a result
of the reduction of forces in Afghanistan.
FISCAL YEARS ENDED JANUARY 3, 2014,
AND DECEMBER 28, 2012
OVERVIEW OF THE YEAR ENDED
JANUARY 3, 2014
Revenues
Our revenues consist of professional fees earned on
consulting engagements, product sales in our defense
technology development practice, fees for use of our
equipment and facilities, and reimbursements for
outside direct expenses associated with the services
performed that are billed to our clients.
We operate on a 52-53 week fiscal year with each
year ending on the Friday closest to December 31st.
The fiscal year ended January 3, 2014 included 53
weeks of activity. The fiscal years ended December
28, 2012 and December 30, 2011 included 52 weeks
of activity. Fiscal 2014 will end on Friday, January
2, 2015.
During fiscal 2013, billable hours increased 3.3% to
1,087,000 as compared to 1,052,000 during fiscal
2012. 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. The increase in billable hours
was also due to fiscal 2013 having one additional
week of activity than fiscal 2012. Total billable
hours during the 53rd week of fiscal 2013 were 9,804
which contributed approximately $2.5 million to the
increase in revenues before reimbursements.
investigations,
several major
Our utilization decreased to 71% for fiscal 2013 as
compared to 73% during fiscal 2012 due to the
anticipated step down in our elevated levels of
the
activity on
anticipated step down in the level of activity in our
defense technology development practice due to the
constraints on defense spending and reduction of
the United States
forces
Government, and due to our investment in hiring
technical consultants. Technical full-time equivalent
employees increased 3.9% to 719 during fiscal 2013
as compared to 692 during the fiscal 2012 due to our
recruiting and retention efforts. We continue to
selectively hire key talent to expand our capabilities.
in Afghanistan by
(In thousands except
percentages)
Fiscal Years
2013
2012
Percent
Change
Engineering
and Other Scientific $ 215,972 $ 213,304
Percentage of
1.3%
total revenues
Environmental
and Health
Percentage of
total revenues
72.9%
72.9%
80,196
79,349
1.1%
27.1%
27.1%
Total revenues
$ 296,168 $ 292,653
1.2%
engineering management,
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 fiscal 2013, billable
hours for this segment increased by 5.4% to 778,000
as compared to 738,000 during fiscal 2012. The
increase was due to strong demand for services in our
polymer science, mechanical engineering, biomedical
and
engineering,
construction consulting practices. The increase in
billable hours was also due to fiscal 2013 having one
additional week of activity
fiscal 2012.
Utilization decreased to 74% for fiscal 2013 as
compared to 75% during fiscal 2012 due to the
anticipated step down in our elevated levels of
activity on several major investigations. Technical
full-time equivalents increased 4.6% to 496 for fiscal
2013 from 474 for fiscal 2012 due to our recruiting
and retention efforts. Product sales in defense
technology development decreased
to $486,000
during fiscal 2013 as compared to $9,213,000 during
fiscal 2012 due to lower sales of surveillance systems
to the United States Army.
than
The increase in revenues from our Environmental and
Health segment was due to an increase in billing
rates, revenues of $1.4 million related to services
performed in prior periods for a foreign client for
which we deferred revenue until receipt of payment,
23
and fiscal 2013 having one additional week of
activity than fiscal 2012, partially offset by a
decrease in billable hours. During fiscal 2013,
billable hours for this segment decreased by 1.6% to
309,000 as compared to 314,000 during fiscal 2012.
Utilization decreased to 65% for fiscal 2013 as
compared to 69% for fiscal 2012. The decrease in
billable hours and utilization 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. The decrease in utilization was also due to
our investment in hiring experienced consultants.
Technical full-time equivalents increased by 2.3% to
223 during fiscal 2013 as compared to 218 for fiscal
2012 due to our recruiting and retention efforts.
Revenues are primarily derived
from services
provided in response to client requests or events that
occur without notice and engagements are generally
terminable or subject to postponement or delay at any
time by our clients. As a result, backlog at any
particular time is small in relation to our quarterly or
annual revenues and is not a reliable indicator of
revenues for any future periods.
Compensation and Related Expenses
(In thousands except
percentages)
Fiscal Years
2013
2012
Percent
Change
Compensation
and related expenses
Percentage of
total revenues
$ 184,084 $ 171,809
7.1%
62.2%
58.7%
increased $5,719,000 and
The increase in compensation and related expenses
during fiscal 2013 was due to an increase in payroll,
bonuses, fringe benefits and a change in the value of
assets associated with our deferred compensation
fringe
plan. Payroll
benefits increased $730,000 due to a 3.9% increase in
technical full-time equivalent employees, the impact
of our annual salary increases, and fiscal 2013 having
one additional week of activity than fiscal 2012.
Bonuses increased $992,000 due to a corresponding
increase in profitability. During fiscal 2013, deferred
compensation expense increased $3,886,000 with a
corresponding increase to other income (expense),
net, as compared with the prior year due to the
change in value of assets associated with our deferred
compensation plan. This increase consisted of an
increase in the value of the plan assets of $6,044,000
during fiscal 2013 as compared to an increase in the
value of the plan assets of $2,158,000 during fiscal
We expect our compensation expense,
2012.
in value of deferred
excluding
the change
compensation plan assets,
selectively add new talent.
to
increase as we
Other Operating Expenses
(In thousands except
percentages)
Fiscal Years
2013
2012
Percent
Change
Other operating
expenses
Percentage of
total revenues
$ 25,299
$ 23,574
7.3%
8.5%
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 was primarily due to an
increase in occupancy expenses of $579,000, an
increase in computer expenses of $359,000, an
increase in technical materials of $275,000, an
increase
in depreciation and amortization of
$241,000, and an increase in office expenses of
$223,000. The increase in occupancy expenses,
computer expenses, technical materials, depreciation
and amortization, and office expenses were due to
costs associated with the increase in technical full-
time equivalent employees and the extra week of
activity during
fiscal 2013. We expect other
operating expense to grow as we selectively add new
talent and make
in our corporate
investments
infrastructure.
Reimbursable Expenses
(In thousands except
percentages)
Fiscal Years
2013
2012
Percent
Change
Reimbursable expenses
Percentage of
$ 16,125
$ 26,091
(38.2)%
total revenues
5.4%
8.9%
The decrease in reimbursable expenses was primarily
due to a decrease in project-related costs in our
defense technology development practice in our
Engineering and Other Scientific segment. The
amount of reimbursable expenses will vary from year
to year depending on the nature of our projects.
24
General and Administrative Expenses
(In thousands except
percentages)
Fiscal Years
2013
2012
Percent
Change
General and
administrative expenses $ 14,714
Percentage of
$ 13,559
8.5%
total revenues
5.0%
4.6%
The increase in general and administrative expenses
during fiscal 2013 was primarily due to an increase in
legal expense of $857,000 and an increase in
recruiting expenses of $259,000. The increase in
legal expenses was due to an increase in costs
associated with legal claims during fiscal 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 (Expense), Net
(In thousands except
percentages)
Fiscal Years
2013
2012
Percent
Change
Other income
and expense, net
Percentage of
total revenues
$ 7,999
$ 4,129
93.7%
in
income
increase
taxes was due
to a
The
corresponding increase in pre-tax income. During
fiscal 2011 our effective tax rate was 40.4%. The
decrease in our effective tax rate for fiscal 2012 was
primarily due to a change in estimate associated with
the Company’s apportionmbent of income between
the states. Our effective tax rate for fiscal 2013
remained below our historical average due
to
manufacturing deductions claimed. Both the change
the
in apportionment between
manufacturing deductions were non-recurring. As
such we expect our tax rate to increase during 2014
and approximate our historical average.
the states and
FISCAL YEARS ENDED DECEMBER 28, 2012,
AND DECEMBER 30, 2011
Revenues
(In thousands except
percentages)
Fiscal Years
2012
2011
Percent
Change
Engineering
and Other Scientific $ 213,304 $ 199,772
Percentage of
6.8%
total revenues
Environmental
and Health
Percentage of
total revenues
72.9%
73.3%
79,349
72,674
9.2%
27.1%
26.7%
2.7%
1.4%
Total revenues
$ 292,653 $ 272,446
7.4%
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
excess space in our Silicon Valley facility. During
fiscal 2013, other income (expense), net, increased
$3,886,000 with a corresponding increase to deferred
compensation expense as compared to fiscal 2012
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 $6,044,000 during fiscal 2013 as
compared to an increase in the value of the plan
assets of $2,158,000 during fiscal 2012.
Income Taxes
(In thousands except
percentages)
Fiscal Years
2013
2012
Percent
Change
Income taxes
Percentage of
total revenues
Effective tax rate
$ 25,305 $ 24,524
3.2%
8.5%
39.6%
8.4%
39.7%
consulting
The increase in revenues for our Engineering and
Other Scientific segment was due to an increase in
billable hours. During fiscal 2012, billable hours for
this segment increased by 6.5% to 738,000 as
compared to 693,000 during fiscal 2011. The increase
was due to strong demand for services in our
mechanics and materials, electrical, thermal and
engineering management
practices.
Utilization increased to 75% for fiscal 2012 as
compared to 73% for fiscal 2011 due in part to
elevated levels of activity on a number of major
assignments that engaged consultants across many of
our engineering and other scientific practices and our
management of headcount to align resources with
anticipated demand. Technical full-time equivalents
increased 3.5% to 474 for fiscal 2012 from 458 for
fiscal 2011 due to our recruiting and retention efforts.
Product sales in defense technology development
decreased to $9,213,000 during fiscal 2012 as
compared to $12,300,000 during fiscal 2011 due to
lower sales of surveillance systems to the United
States Army.
The increase in revenues from our Environmental and
Health segment was due to an increase in billable
25
hours. During fiscal 2012, billable hours for this
segment increased by 9.0% to 314,000 as compared
to 288,000 during fiscal 2011. The increase in
billable hours was due to strong demand for services
in our environmental sciences, ecological sciences,
and chemical regulation and food safety practices.
Utilization increased to 69% for fiscal 2012 as
compared to 68% for fiscal 2011 due to elevated
levels of activity on a number of major assignments
that engage consultants across many of our
environmental and health practices and centers.
Technical full-time equivalents increased by 7.4% to
218 during fiscal 2012 as compared to 203 for fiscal
2011 due to our recruiting and retention efforts.
Compensation and Related Expenses
(In thousands except
percentages)
Fiscal Years
2012
2011
Percent
Change
Compensation
and related expenses
Percentage of
total revenues
$ 171,809 $ 156,853
9.5%
58.7%
57.6%
salary
increases. Bonuses
increased $6,387,000 and
The increase in compensation and related expenses
during fiscal 2012 was due to an increase in payroll,
bonuses, fringe benefits and a change in the value of
assets associated with our deferred compensation
plan. Payroll
fringe
benefits increased $841,000 due to a 4.7% increase in
technical full time equivalent employees and our
increased
annual
$4,102,000 due to a corresponding increase in
profitability. During
deferred
compensation expense increased $2,431,000 with a
corresponding increase to other income (expense),
net, as compared to the prior year due to the change
in value of assets associated with our deferred
compensation plan. This increase consisted of an
increase in the value of the plan assets of $2,158,000
during fiscal 2012 and a decrease in the value of the
plan assets of $273,000 during fiscal 2011.
2012,
fiscal
Other Operating Expenses
(In thousands except
percentages)
Fiscal Years
2012
2011
Percent
Change
Other operating
expenses
Percentage of
total revenues
$ 23,574
$ 23,238
1.4%
8.1%
8.5%
Other operating expenses include facilities-related
costs, technical materials, computer-related expenses
and depreciation and amortization of property,
equipment and leasehold improvements. The increase
26
in other operating expenses was primarily due to an
increase in occupancy expenses of $509,000 partially
offset by a decrease
in technical materials of
$240,000. The increase in occupancy expenses was
due to planned maintenance activities for our owned
facilities and costs associated with the increase in
technical
full-time equivalent employees. The
decrease in technical materials was due to a decrease
in development activities for our defense technology
development practice.
Reimbursable Expenses
(In thousands except
percentages)
Fiscal Years
2012
2011
Percent
Change
Reimbursable expenses
Percentage of
$ 26,091
$ 25,779
1.2%
total revenues
8.9%
9.5%
Reimbursable expenses for fiscal 2012 remained
relatively consistent with fiscal 2011. The amount of
reimbursable expenses will vary from year to year
depending on the nature of our projects.
General and Administrative Expenses
(In thousands except
percentages)
Fiscal Years
2012
2011
Percent
Change
General and
administrative expenses $ 13,559
Percentage of
$ 13,116
3.4%
total revenues
4.6%
4.8%
The increase in general and administrative expenses
during fiscal 2012 was primarily due to an increase in
travel and meals of $689,000 partially offset by a
decrease in legal fees of $336,000. The increase in
travel and meals was related to a bi-annual firm-wide
managers’ meeting that was held at the end of the
third quarter of 2012. The decrease in legal fees was
primarily due to legal claims in the prior year.
Other Income (Expense), Net
(In thousands except
percentages)
Fiscal Years
2012
2011
Percent
Change
Other income
and expense, net
Percentage of
total revenues
$ 4,129
$ 1,359
203.8%
1.4%
0.5%
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
activities. First quarter operating cash requirements
are generally higher due to payment of our annual
bonuses accrued during the prior year. Our largest
source of operating cash flows is cash collections
from our clients. Our primary uses of cash from
employee-related
are
operating
expenditures, leased facilities, taxes, and general
operating expenses including marketing and travel.
activities
for
in
Net cash provided by operating activities was $61.8
million for fiscal 2013 as compared to $48.5 million
and $46.6 million
fiscal 2012 and 2011,
respectively. The increase in net cash provided by
operating activities during fiscal 2013 as compared to
fiscal 2012 was primarily due to an increase in cash
receipts from clients. Accounts receivable decreased
during fiscal 2013 as compared to an increase during
fiscal 2012. The increases in net cash provided by
operating activities during fiscal 2012, as compared
to fiscal 2011, was due to an increase in net income,
an increase in accrued bonuses which are paid in the
year subsequent to the year accrued, and an increase
in non-cash compensation expense partially offset by
higher accounts receivable.
During fiscal 2013, 2012 and 2011, net cash used in
investing activities was primarily related to the
purchase and sale or maturity of short-term
investments.
The increase in net cash used in financing activities
during fiscal 2013, as compared to fiscal 2012, was
due to our quarterly dividend payments which started
in the first quarter of 2013, an increase in repurchases
of common stock, and an increase in payroll taxes for
restricted stock units. The decrease in net cash used
in
fiscal 2012, as
compared to fiscal 2011, was due to a decrease in
repurchases of our common stock.
financing activities during
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.
excess space in our Silicon Valley facility. During
fiscal 2012, other income (expense), net increased
$2,431,000 with a corresponding increase to deferred
compensation expense as compared to fiscal 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 $2,158,000 during fiscal 2012 and a
decrease in the value of the plan assets of $273,000
during fiscal 2011. During fiscal 2012, rental income
increased $361,000 as compared to fiscal 2011 due to
an increase in the occupancy rate for rental space in
our Silicon Valley facility.
Income Taxes
(In thousands except
percentages)
Fiscal Years
2012
2011
Percent
Change
Income taxes
Percentage of
total revenues
Effective tax rate
$ 24,524 $ 22,124
10.8%
8.4%
39.7%
8.1%
40.4%
income
taxes was due
in
increase
to a
The
increase
corresponding
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.
in pre-tax
LIQUIDITY AND CAPITAL RESOURCES
(In thousands)
2013
Fiscal Years
2012
2011
Net cash provided
by (used in):
Operating activities $ 61,792 $ 48,505 $ 46,596
Investing activities
$ (18,880) $ (1,169) $ (29,354)
Financing activities $ (33,769) $ (18,859) $ (39,344)
We financed our business in fiscal 2013 through
available cash and cash flows from operating
activities. We invest our excess cash in cash
equivalents and short-term
investments. As of
January 3, 2014, our cash, cash equivalents and short-
term investments were $156,119,000 compared to
$134,149,000 at December 28, 2012. We believe our
existing balances of cash, cash equivalents and short-
term investments will be sufficient to satisfy our
expenditures,
working
outstanding
repurchases,
dividends and other liquidity requirements over the
next 12 months.
capital
stock
commitments,
capital
needs,
Generally, our net cash provided by operating
activities is used to fund our day-to-day operating
27
are subject to the claims of our creditors. As of
January 3, 2014, invested amounts under the plan of
$33,501,000 were recorded as a long-term asset on
our consolidated balance sheet.
law, we have
As permitted under Delaware
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 the estimated fair value of these
indemnification agreements in excess of applicable
insurance coverage is minimal.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not engage in
transactions
relationships with
generate
unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance or
special purpose entities.
that
The following schedule summarizes our principal
contractual commitments as of January 3, 2014 (in
thousands):
Fiscal
year
2014
2015
2016
2017
2018
Thereafter
Operating
lease
commitments
$ 7,718
6,411
4,489
2,736
1,354
2,795
$ 25,503
Capital Purchase
leases Obligations Total
$
$
48 $ 350
-
-
-
-
-
48 $ 350
-
-
-
-
-
$ 8,116
6,411
4,489
2,736
1,354
2,795
$ 25,901
The above table does not reflect unrecognized tax
benefits of $1,147,000, the timing of which is
Refer to Note 8 of the Notes to
uncertain.
Consolidated Financial Statements for additional
discussion on unrecognized tax benefits.
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 $33,447,000 were recorded as a long-term
liability on our consolidated balance sheet at January
3, 2014. Company assets that are earmarked to pay
benefits under the plan are held in a rabbi trust and
28
Non-GAAP Financial Measures
Regulation G, conditions for use of Non-Generally Accepted Accounting Principles ("Non-GAAP") financial
measures, and other SEC regulations define and prescribe the conditions for use of certain 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, interest income, depreciation and amortization. We define
EBITDAS as EBITDA before stock-based compensation. We regard EBITDA and EBITDAS as useful measures of
operating performance and cash flow to complement operating income, net income and other GAAP financial
performance measures. Additionally, management believes that EBITDA and EBITDAS provide meaningful
comparisons of past, present and future operating results. These measures are used to evaluate our financial results,
develop budgets and determine employee compensation. These measures, however, should be considered in
addition to, and not as a substitute or superior to, operating income, cash flows, or other measures of financial
performance prepared in accordance with GAAP. A reconciliation of the Non-GAAP measures to the nearest
comparable GAAP measure is set forth below.
The following table shows EBITDA as a percentage of revenues before reimbursements for fiscal years 2013, 2012
and 2011:
(in thousands, except percentages)
2013
Fiscal Years
2012
2011
Revenues before reimbursements
$ 280,043
$ 266,562
$ 246,667
EBITDA
$ 68,769
$ 66,132
$ 58,994
EBITDA as a % of revenues
before reimbursements
24.6%
24.8%
23.9%
The decrease in EBITDA as a percentage of revenues before reimbursements was primarily due to a decrease in
utilization and a decrease in product sales in our defense technology development practice. Our utilization
decreased to 71% during fiscal 2013 as compared to 73% during fiscal 2012 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 increase in EBITDA as a percentage of revenues before reimbursements for fiscal 2012 as compared to fiscal
2011 was primarily due to an increase in utilization, combined with other operating and general and administrative
expenses growing at a slower rate than revenues. Utilization during fiscal 2012 was strong due to broad based
demand for our services and the continuing benefit from a few major assignments. Utilization for fiscal 2012
increased to 73% as compared to 71% during fiscal 2011.
29
The following table is a reconciliation of EBITDA and EBITDAS to the most comparable GAAP measure, net
income, for fiscal 2013, 2012 and 2011:
(in thousands)
2013
Fiscal Years
2012
2011
Net Income
$
38,640
$
37,225
$
32,695
Add back (subtract):
Income taxes
Interest income, net
Depreciation and
amortization
EBITDA
Stock-based compensation
25,305
(127)
4,951
68,769
13,168
24,524
(328)
4,711
66,132
12,378
22,124
(236)
4,411
58,994
10,340
EBITDAS
$
81,937
$
78,510
$
69,334
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk
Item 8. Financial Statements and Supplementary
Data
Exponent is exposed to interest rate risk associated
with our balances of cash, cash equivalents and short-
term investments. We manage our interest rate risk
by maintaining an investment portfolio primarily
consisting of debt instruments with high credit
relatively short average effective
quality and
maturities
the Company’s
investment policy. The maximum effective maturity
of any issue in our portfolio of cash equivalents and
short-term investments is 3 years and the maximum
average effective maturity of the portfolio cannot
exceed 12 months.
in accordance with
If interest rates were to instantaneously increase or
decrease by 100 basis points, the change in the fair
value of our portfolio of cash equivalents and short-
term investments would not have a material impact
on our financial statements. We do not use derivative
financial instruments in our investment portfolio.
Notwithstanding our efforts to manage interest rate
risk, there can be no assurances that we will be
adequately protected against the risks associated with
interest rate fluctuations.
We are exposed to some foreign currency exchange
rate risk associated with our foreign operations.
Given the limited nature of these operations, we
believe that any exposure would be minimal.
See Item 15 of this Form 10-K for required financial
statements and supplementary data.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
KPMG LLP, an
independent registered public
accounting firm, has audited the Company’s internal
control over financial reporting, as stated in their
report which is included in Part IV, Item 15 of this
Form 10-K.
(a) Conclusion Regarding the Effectiveness of
Disclosure Controls and Procedures.
Under the supervision and with the participation of
our management, including our principal executive
officer and principal financial officer, we conducted
an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13(a)-
15(e) promulgated under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). Based
on this evaluation, our principal executive officer and
our principal financial officer concluded that our
30
disclosure controls and procedures were effective as
of the end of the period covered by this annual report.
PART III
(b) Management’s Report on Internal Control
Over Financial Reporting.
to
the risk
Our management is responsible for establishing and
maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Because of its inherent limitations,
internal control over financial reporting may not
prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are
that controls may become
subject
inadequate because of changes in conditions, or that
the degree of compliance with the policies or
procedures may deteriorate. Under the supervision
and with the participation of our management,
including our principal executive officer and
principal
financial officer, we conducted an
evaluation of the effectiveness of our internal control
over financial reporting based on the framework in
Internal Control - Integrated Framework (1992)
issued
Sponsoring
Organizations of the Treadway Commission. Based
on our evaluation under the framework in Internal
(1992), our
Integrated Framework
Control
management concluded that our internal control over
financial reporting was effective as of January 3,
2014.
the Committee
by
of
-
(c) Changes in Internal Control Over Financial
Reporting.
There have not been any changes in the Company’s
internal control over financial reporting, as such term
is defined in Rule 13a-15(f) under the Exchange Act,
during the most recent fiscal quarter that have
materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
Item 9B. Other Information
None.
Certain information required by Part III is omitted
from this Annual Report on Form 10-K. We intend
to file a definitive Proxy Statement pursuant to
Regulation 14A not later than 120 days after the end
of the fiscal year covered by this Annual Report on
Form 10-K, and certain information included therein
is incorporated herein by reference.
Item 10.
Corporate Governance
Directors, Executive Officers and
The information required by this item with respect to
our directors, code of ethics and compliance with
section 16(a) of the Exchange Act is incorporated by
reference to the sections of the Company’s definitive
Proxy Statement for its 2014 Annual Meeting of
"Proxy Statement") entitled
Stockholders
"Proposal No. 1: Election of Directors," "Code of
Business Conduct and Corporate Governance" and
"Compliance with Section 16(a) of the Exchange
Act." See Item 1 for information regarding the
executive officers of the Company.
(the
Item 11. Executive Compensation
The information required by this item is incorporated
by reference to the section of the Proxy Statement
entitled "Executive Officer Compensation."
Security Ownership of Certain
Item 12.
Beneficial Owners and Management and Related
Stockholder Matters
The information required by this item is incorporated
by reference to the sections of the Proxy Statement
entitled
“Equity
"Stock Ownership”
Compensation Plan Information."
and
Item 13. Certain Relationships and Related
Transactions, and Director Independence
The information required by this item is incorporated
by reference to the sections of the Proxy Statement
entitled "Related Party Transactions" and “Proposal
No. 1 – Election of Directors.”
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated
by reference to the section of the Proxy Statement
entitled "Principal Accounting Fees and Services."
31
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K.
1. Financial Statements
The following consolidated financial statements of Exponent, Inc. and subsidiaries and the
Report of Independent Registered Public Accounting Firm are included herewith:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended January 3, 2014,
December 28, 2012 and December 30, 2011
Consolidated Statements of Comprehensive Income for the years ended
January 3, 2014, December 28, 2012 and December 30, 2011
Consolidated Balance Sheets as of January 3, 2014 and December 28, 2012
Consolidated Statements of Stockholders’ Equity for the years ended January 3, 2014,
December 28, 2012 and December 30, 2011
Consolidated Statements of Cash Flows for the years ended January 3, 2014,
December 28, 2012 and December 30, 2011
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Page
33
35
36
37
38
40
41
The following financial statement schedule of Exponent, Inc. for the years ended January 3, 2014,
December 28, 2012 and December 30, 2011 is filed as part of this Report and should be read in conjunction
with the consolidated financial statements of Exponent, Inc. and subsidiaries:
Schedule II - Valuation and Qualifying Accounts
Page
60
Schedules other than those listed above have been omitted since they are either not required, not applicable,
or the information is otherwise included elsewhere in the report.
3. Exhibits
(a)
Exhibit Index
Page
62
32
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Exponent, Inc.:
We have audited the accompanying consolidated balance sheets of Exponent, Inc. and subsidiaries (the Company) as
of January 3, 2014 and December 28, 2012, and the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the years in the three-year period ended January 3, 2014. In
connection with our audits of the consolidated financial statements, we have also audited the accompanying financial
statement schedule II. We also have audited the Company’s internal control over financial reporting as of January 3,
2014, based on the criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for
these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting, appearing under Item 9A(b). Our responsibility is
to express an opinion on these consolidated financial statements and financial statement schedule II, and an opinion on
the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Exponent, Inc. and subsidiaries as of January 3, 2014 and December 28, 2012, and the results of
their operations and their cash flows for each of the years in the three-year period ended January 3, 2014, in
conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly,
33
in all material respects, the information set forth therein. Also, in our opinion, Exponent, Inc. and subsidiaries
maintained, in all material respects, effective internal control over financial reporting as of January 3, 2014, based on
the criteria established in Internal Control – Integrated Framework (1992) issued by COSO .
KPMG LLP
San Francisco, California
February 28, 2014
34
Exponent, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
Revenues:
Revenues before reimbursements
Reimbursements
Revenues
Operating expenses:
Compensation and related expenses
Other operating expenses
Reimbursable expenses
General and administrative expenses
Operating income
Other income:
Interest income
Miscellaneous income, net
Income before income taxes
Provision for income taxes
Net income
Net income per share:
Basic
Diluted
Shares used in per share computations:
Basic
Diluted
See accompanying notes to the Consolidated Financial Statements.
2013
Fiscal Years
2012
2011
$ 280,043
16,125
296,168
$ 266,562
26,091
292,653
$ 246,667
25,779
272,446
184,084
25,299
16,125
14,714
240,222
55,946
171,809
23,574
26,091
13,559
235,033
57,620
156,853
23,238
25,779
13,116
218,986
53,460
127
7,872
63,945
328
3,801
61,749
236
1,123
54,819
25,305
$ 38,640
24,524
$ 37,225
22,124
$ 32,695
$
$
2.84
2.76
$
$
2.70
2.60
$
$
2.31
2.22
13,616
14,025
13,780
14,293
14,181
14,751
35
Exponent, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax
of $(187), $(184), and $(8), respectively
Unrealized (loss) gain arising during the period
on investments, net of tax of $10, $19, and
$(36), respectively
Comprehensive income
See accompanying notes to the Consolidated Financial Statements.
2013
Fiscal Years
2012
2011
$ 38,640
$ 37,225
$ 32,695
373
249
(72)
(14)
$ 38,999
(28)
$ 37,446
52
$ 32,675
36
Exponent, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except par value)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance for contract losses and
doubtful accounts of $2,771 and $2,666, respectively
Prepaid expenses and other assets
Deferred income taxes
Total current assets
Property, equipment and leasehold improvements, net
Goodwill
Deferred income taxes
Deferred compensation plan assets
Other assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities
Accrued payroll and employee benefits
Deferred revenues
Total current liabilities
Other liabilities
Deferred compensation
Deferred rent
Total liabilities
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $.001 par value; 5,000 shares authorized;
no shares outstanding
Common stock, $.001 par value; 100,000 shares authorized;
16,427 shares issued
Additional paid-in capital
Accumulated other comprehensive income (loss)
Investment securities, available for sale
Foreign currency translation adjustments
Retained earnings
Treasury stock, at cost: 3,363 and 3,221 shares held, respectively
Total stockholders’ equity
See accompanying notes to the Consolidated Financial Statements.
37
Fiscal Years
2013
2012
$ 122,948
33,171
$ 113,268
20,881
76,980
10,450
8,135
251,684
28,721
8,607
21,102
33,501
551
$ 344,166
$
8,442
56,934
6,771
72,147
1,181
33,447
2,332
109,107
85,361
8,277
7,657
235,444
27,446
8,607
18,359
24,801
760
$ 315,417
$ 10,386
54,720
6,665
71,771
988
24,697
1,532
98,988
-
-
16
141,250
16
123,693
10
99
109
226,040
(132,356)
235,059
$ 344,166
24
(274)
(250)
206,057
(113,087)
216,429
$ 315,417
Exponent, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In thousands)
Balance at
December 31, 2010
Employee stock
purchase plan
Exercise of stock options,
net of swaps
Tax benefit for
stock option plans
Amortization of unrecognized
stock-based compensation
Purchase of treasury shares
Foreign currency translation
adjustments
Grant of restricted stock units
to settle accrued bonus
Settlement of restricted
stock units
Unrealized gain
on investments
Net income
Balance at
December 30, 2011
Employee stock
purchase plan
Exercise of stock options,
net of swaps
Tax benefit for
stock option plans
Amortization of unrecognized
stock-based compensation
Purchase of treasury shares
Foreign currency translation
adjustments
Grant of restricted stock units
to settle accrued bonus
Settlement of restricted
stock units
Unrealized loss
on investments
Net income
Balance at
December 28, 2012
Additional
Accumulated
other
Common Stock
Shares Amount
paid-in
capital
Treasury Stock
comprehensive Retained
income (loss) earnings Shares Amount
Total
16,427 $
16 $ 96,089
$
(451)
$ 156,086
2,431 $ (67,940) $ 183,800
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
222
(162)
2,378
5,044
-
-
-
-
-
-
-
(72)
4,538
(38)
-
-
-
-
52
-
-
(21)
672
894
(1,484)
(102)
2,982
1,336
-
-
-
-
-
-
-
-
-
1,002
(40,573)
2,378
5,044
(40,573)
-
-
-
-
(72)
4,538
(7,865)
(183)
4,526
(3,377)
-
32,695
-
-
-
-
52
32,695
16,427 $
16 $108,071
$
(471)
$ 179,432
3,127 $ (100,333) $ 186,715
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
400
(358)
3,948
6,289
-
-
-
-
-
-
-
249
-
-
5,343
-
-
-
-
(20)
608
1,008
(3,123)
(200)
6,088
2,607
-
-
-
-
-
-
-
480
-
-
-
3,948
-
(23,395)
6,289
(23,395)
-
-
249
5,343
(7,477)
(166)
3,945
(3,532)
(28)
-
-
37,225
-
-
-
-
(28)
37,225
16,427 $
16 $123,693
$
(250)
$ 206,057
3,221 $ (113,087) $ 216,429
See accompanying notes to the Consolidated Financial Statements.
38
(In thousands)
Balance at
December 28, 2012
Employee stock
purchase plan
Exercise of stock options,
net of swaps
Tax benefit for
stock option plans
Amortization of unrecognized
stock-based compensation
Purchase of treasury shares
Foreign currency translation
adjustments
Grant of restricted stock units
to settle accrued bonus
Settlement of restricted
stock units
Unrealized loss
on investments
Dividends and
dividend equivalent rights
Net income
Balance at
January 3, 2014
Additional
Accumulated
other
Common Stock
Shares Amount
paid-in
capital
comprehensive Retained
Treasury Stock
income (loss) earnings Shares Amount
Total
16,427 $
16 $123,693
$
(250)
$ 206,057
3,221 $ (113,087) $ 216,429
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
648
(302)
4,267
7,107
-
-
-
-
-
-
-
373
-
-
5,807
(273)
-
303
-
-
(19)
518
1,166
(1,031)
(61)
1,627
294
-
-
-
-
-
-
438
-
-
-
4,267
-
(25,011)
7,107
(25,011)
-
-
373
5,807
(9,352)
(216)
3,597
(6,028)
(14)
-
-
-
(8,274)
38,640
-
-
-
-
-
-
(14)
(7,971)
38,640
16,427 $
16 $141,250
$
109
$ 226,040
3,363 $ (132,356) $ 235,059
See accompanying notes to the Consolidated Financial Statements.
39
Exponent, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
2013
Fiscal Years
2012
2011
$ 38,640
$ 37,225
$ 32,695
Depreciation and amortization of property, equipment
and leasehold improvements
4,951
4,711
4,411
Amortization of premiums and accretion of discounts
on short-term investments
Deferred rent expense
Provision for doubtful accounts
Stock-based compensation
Deferred income tax provision
Tax benefit for stock option plans
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Accrued payroll and employee benefits
Deferred revenues
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Purchase of short-term investments
Maturity of short-term investments
Sale of short-term investments
4,930
Net cash used in investing activities
,354)
Cash flows from financing activities:
Tax benefit for stock option plans
Payroll taxes for restricted stock units
Repurchase of common stock
Exercise of share-based payment awards
Dividends and dividend equivalent rights
(39,344)
Net cash used in financing activities
340
800
1,705
13,168
(3,398)
(4,267)
6,676
(4,596)
3,002
4,665
106
61,792
(6,226)
(33,422)
19,190
1,578
(18,880)
560
(310)
1,763
12,378
(4,194)
(3,948)
(14,059)
(3,379)
7,374
9,667
717
48,505
344
(417)
1,987
10,340
(3,663)
(2,378)
(3,018)
(1,929)
(997)
9,404
(183)
46,596
(4,942)
(515)
3,770
518
(1,169)
(3,835)
(26,599)
-
1,080
(29,354)
4,267
(6,402)
(25,519)
1,812
(7,927)
(33,769)
3,948
(3,531)
(22,887)
3,611
-
(18,859)
2,378
(3,527)
(40,573)
2,378
-
(39,344)
Effect of foreign currency exchange rates on cash
and cash equivalents
537
352
(8)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
9,680
113,268
$ 122,948
28,829
84,439
(22,110)
106,549
$ 113,268 $ 84,439
See accompanying notes to the Consolidated Financial Statements.
40
Exponent, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting
Policies
its
Inc.
Basis of Presentation
Exponent,
subsidiaries
together with
(collectively referred to as the “Company”) is a
science and engineering consulting firm that provides
solutions to complex problems. The accompanying
consolidated
the
accounts of the Company and its wholly owned
intercompany
subsidiaries.
transactions and balances have been eliminated in
consolidation.
statements
significant
financial
include
All
The Company operates on a 52-53 week fiscal year
with each year ending on the Friday closest to
December 31st. Fiscal period 2013 included 53
weeks of activity and ended on January 3, 2014.
Fiscal periods 2012 and 2011 included 52 weeks of
activity and ended on December 28, 2012 and
December 30, 2011, respectively. Fiscal period 2014
will end on January 2, 2015.
Authorized Capital Stock
The Company committed to stockholders in a letter
dated May 23, 2006 to limit its use of the increased
authorized capital stock to 40 million common
shares, and 2 million preferred shares, unless the
approval of the Company’s stockholders is obtained
subsequently, such as through a further amendment
to the Company’s authorized capital stock.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States of America requires management to
make estimates and assumptions that affect the
reported amounts of assets and
liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues primarily from
professional fees earned on consulting engagements,
product sales in its defense technology development
practice, fees earned for the use of its equipment and
facilities, as well as reimbursements for outside direct
expenses associated with the services that are billed
to its clients. Any taxes assessed on revenues
relating to services provided to its clients are
recorded on a net basis.
The Company reports service revenues net of
subcontractor fees. The Company has determined
that it is not the primary obligor with respect to these
subcontractors because:
its clients are directly involved in the
subcontractor selection process;
the subcontractor is responsible for fulfilling
the scope of work; and
the Company passes through the costs of
subcontractor agreements with only a
minimal fixed percentage mark-up to
compensate it for processing the
transactions.
Reimbursements, including those related to travel and
other out-of-pocket expenses, and other similar third
party costs such as the cost of materials, are included
in
revenues, and an equivalent amount of
reimbursable expenses are included in operating
expenses. Any mark-up on reimbursable expenses is
included in revenues.
engagements,
Substantially all of the Company’s engagements are
performed under time and material or fixed-price
billing arrangements. On time and material and
fixed-price projects, revenue is generally recognized
as the services are performed. For substantially all of
the Company’s
it
fixed-price
recognizes revenue based on the relationship of
incurred labor hours at standard rates to its estimate
of the total labor hours at standard rates it expects to
incur over the term of the contract. The Company
believes
reliable
this methodology achieves a
measure of the revenue from the consulting services
its customers under fixed-price
it provides
contracts given the nature of the consulting services
the Company provides and the following additional
considerations:
to
the Company considers labor hours at
standard rates and expenses to be incurred
when pricing its contracts;
the Company generally does not incur set up
costs on its contracts;
the Company does not believe that there are
reliable milestones to measure progress
toward completion;
if the contract is terminated early, the
customer is required to pay the Company for
time at standard rates plus materials incurred
to date;
the Company does not recognize revenue for
award fees or bonuses until specific
contractual criteria are met;
41
the Company does not include revenue for
unpriced change orders until the customer
agrees with the changes;
historically the Company has not had
significant accounts receivable write-offs or
cost overruns; and
its contracts are typically progress billed on
a monthly basis.
Product revenue is recognized when both title and
risk of loss transfer to the customer and customer
acceptance has occurred, provided that no significant
obligations remain.
Gross revenues and reimbursements for the fiscal
years ended January 3, 2014, December 28, 2012 and
December 30, 2011, respectively, were:
(In thousands)
Fiscal Years
2012
2011
2013
Gross revenues
Less: Subcontractor fees
Revenues
$ 302,742 $ 298,818 $ 280,671
8,225
296,168 292,653 272,446
6,574
6,165
Reimbursements:
Out-of-pocket
reimbursements
6,619
6,426
6,162
Other outside
direct expenses
Revenues before
9,506 19,665 19,617
16,125 26,091 25,779
reimbursements
$ 280,043 $ 266,562 $ 246,667
in any accounting period.
Significant management judgments and estimates
must be made in connection with the revenues
recognized
These
judgments and estimates include an assessment of
collectability and, for fixed-price engagements, an
estimate as to the total effort required to complete the
project. If the Company made different judgments or
utilized different estimates, the amount and timing of
its revenue for any period could be materially
different.
All consulting contracts are subject to review by
management, which requires a positive assessment of
the collectability of contract amounts. If, during the
course of the contract, the Company determines that
collection of revenue is not reasonably assured, it
does not recognize the revenue until its collection
becomes
those
reasonably assured, which
situations would generally be upon receipt of cash.
The Company assesses collectability based on a
number of factors, including past transaction history
with the client, as well as the credit-worthiness of the
client. Losses on fixed-price contracts are recognized
in
during the period in which the loss first becomes
evident. Contract losses are determined to be the
amount by which the estimated total costs of the
contract exceeds the total fixed price of the contract.
Foreign Currency Translation
The Company translates the assets and liabilities of
foreign subsidiaries, whose functional currency is the
local currency, at exchange rates in effect at the
balance sheet date. Revenues and expenses are
translated at the average rates of exchange prevailing
during the year. The adjustment resulting from
translating the financial statements of such foreign
in accumulated other
subsidiaries
comprehensive income, which is reflected as a
separate component of stockholders’ equity.
included
is
Cash Equivalents
Cash equivalents consist of highly liquid investments
such as money market mutual funds, commercial
paper and debt securities with original remaining
maturities of three months or less from the date of
purchase.
Short-term Investments
Short-term investments consist of debt securities
classified as available-for-sale and are carried at their
fair value as of the balance sheet date. Short-term
investments generally mature between three months
and three years from the purchase date. Investments
with maturities beyond one year are classified as
short-term based on their highly liquid nature and
because
represent
investments readily available for current operations.
such marketable
securities
The amortized cost of securities is adjusted for
amortization of premiums and accretion of discounts
to maturity. Such amortization is included in interest
income. Realized gains or losses are determined on
the specific identification method and are reflected in
other income. Net unrealized gains and losses are
recorded
other
in
comprehensive income except for unrealized losses
that are deemed to be other-than-temporary, which
are reflected in net income.
accumulated
directly
investments
Investments are reviewed on a regular basis to
evaluate whether or not any security has experienced
an other-than temporary decline in fair value. When
assessing
for other-than-temporary
declines in fair value, the Company considers the
significance of the decline in value as a percentage of
the original cost, how long the market value of the
investment has been less than its original cost, any
news that has been released specific to the investee,
and the Company’s intent to sell, or whether it is
42
more likely than not it will be required to sell the
investment before recovery of the investments cost
basis.
to meet
Allowances for Doubtful Accounts
The Company maintains allowances for doubtful
accounts for estimated losses resulting from the
inability of customers
their financial
obligations. In circumstances where the Company is
aware of a specific customer’s inability to meet its
financial obligations a specific allowance is recorded
to reduce the net recognized receivable to the amount
the Company reasonably believes will be collected.
For all other customers the Company recognizes
for doubtful accounts based upon
allowances
concentration,
historical bad debts,
customer
economic
conditions, aging of amounts due and changes in
customer payment terms.
credit-worthiness,
customer
current
Property, Equipment and Leasehold
Improvements
Property, equipment and leasehold improvements are
stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are
recognized using the straight-line method. Buildings
are depreciated over their estimated useful lives
ranging from thirty to forty years. Equipment is
depreciated over its estimated useful life, which
generally ranges from two to seven years. Leasehold
improvements are amortized over the shorter of their
estimated useful lives, generally seven years, or the
term of the related lease.
events or
long-lived assets
changes
Impairment of Long-Lived Assets
for
The Company evaluates
impairment whenever
in
circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of
assets to be held and used is measured by a
comparison of the carrying amount of the assets to
future undiscounted cash flows to be generated by the
asset. If such assets are considered to be impaired,
the impairment to be recognized is measured as the
amount by which the carrying amount of the assets
exceeds the fair value of the assets. The Company
has not recognized impairment losses on any long-
lived assets in fiscal 2013, 2012 or 2011.
Goodwill
The Company assesses the impairment of goodwill
annually and whenever events or changes
in
circumstances indicate that the carrying amount may
be impaired. The Company’s annual goodwill
impairment review is completed during the fourth
quarter of each year. The Company evaluates
43
cost
limited
goodwill for each reporting unit for impairment by
assessing qualitative factors to determine whether it
is necessary to perform the
two-step goodwill
impairment test. The Company considers events and
circumstances,
to,
including but not
industry and market
macroeconomic conditions,
factors, overall
considerations,
financial
performance, changes
in management or key
personnel, changes in strategy, changes in customers,
a change in the composition or carrying amount of a
reporting unit’s net assets and changes in the price of
its common stock. If, after assessing the totality of
events or circumstances, the Company determines
that it is more likely than not that the fair value of a
reporting unit is greater than its carrying amount,
then the two-step goodwill impairment test is not
performed.
If the two-step goodwill test is performed, the
Company determines the existence of impairment by
assessing the fair value of the applicable reporting
unit, including goodwill, using expected future cash
flows to be generated by the reporting unit. If the
carrying amount of a reporting unit exceeds its fair
value, an impairment loss is recognized for any
excess of the carrying amount of the reporting unit’s
goodwill over the implied fair value of the goodwill.
The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a
manner similar to a purchase price allocation. The
residual fair value after this allocation is the implied
value of the reporting unit goodwill.
the
totality of
The Company completed its annual assessment for all
reporting units with goodwill for fiscal 2013 and
the
determined, after assessing
qualitative factors, that it is more likely than not that
the fair value of each reporting unit is greater than its
respective carrying amount. Accordingly there was
no indication of impairment of goodwill for any of
the Company’s reporting units and the two-step
goodwill impairment test was not performed. The
Company did not recognize any goodwill impairment
losses in fiscal years 2013, 2012 or 2011.
Deferred Revenues
Deferred revenues represent amounts billed to clients
in advance of services provided, primarily on fixed-
price projects.
Income Taxes
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities
are recognized for the expected tax consequences of
temporary differences between the tax basis and the
financial reporting basis of assets and liabilities.
The following schedule reconciles the denominators
of the Company’s calculation for basic and diluted
net income per share:
(In thousands)
Shares used in basic
Fiscal Years
2012
2013
2011
per share computation
13,616 13,780 14,181
Effect of dilutive common
stock options outstanding
82
150
184
Effect of unvested restricted
stock units outstanding
Shares used in diluted
327
363
386
per share computation
14,025 14,293 14,751
There were no options excluded from the diluted per
share calculation for the fiscal years ended January 3,
2014, December 28, 2012 and December 30, 2011.
Recently Adopted Accounting Pronouncements
In February 2013,
the Financial Accounting
Standards Board (“FASB”) issued a new accounting
standard for reporting of amounts reclassified out of
accumulated other comprehensive income. The new
standard does not change the current requirements for
reporting net income or comprehensive income in
financial statements. However, the new standard
requires an entity to provide information about the
amounts reclassified out of accumulated other
comprehensive income by component. In addition,
an entity is required to present, either on the face of
the statement where net income is presented or in the
notes, significant amounts
reclassified out of
accumulated other comprehensive income by the
respective line items of net income, but only if the
amount reclassified is required under U.S. GAAP to
be reclassified to net income in its entirety in the
same reporting period. Effective December 29, 2012,
the Company adopted this standard. There were no
accumulated other
from
amounts
comprehensive income to net income during the
fiscal year ended January 3, 2014.
reclassified
Deferred tax assets and liabilities are measured using
the enacted tax rates and laws in effect when the
differences are expected to reverse. The effect on
deferred tax assets and liabilities from changes in tax
rates is recognized in income in the period that
includes the enactment date. A valuation allowance
is recorded for deferred tax assets if it is more likely
than not that some portion or all of the deferred tax
assets will not be realized. U.S. income taxes are
provided on the earnings of foreign subsidiaries
unless the subsidiaries’ earnings are considered
permanently reinvested outside
An
uncertain tax position is recognized if it is determined
that it is more likely than not to be sustained upon
examination. The tax position is measured as the
largest amount of benefit that is greater than fifty
percent
likely of being realized upon ultimate
settlement. The Company’s policy is to recognize
interest and penalties related to unrecognized tax
benefits as income tax expense. Accrued interest and
penalties are insignificant at January 3, 2014 and
December 28, 2012.
the U.S.
short-term
investments,
Fair Value of Financial Instruments
Financial instruments consist of cash and cash
equivalents,
accounts
receivable, other assets and accounts payable. Cash,
cash equivalents and short-term investments are
recorded at fair value. The carrying amount of the
Company’s accounts receivable, other assets and
accounts payable approximates their fair values due
to their short maturities.
Stock-Based Compensation
Stock-based compensation is measured at the grant
date based on the fair value of the award and is
recognized as expense on a straight-line basis over
the requisite service period of the entire award. The
Company estimates the number of awards that are
expected to vest and revises the estimate as actual
forfeitures differ from that estimate. Estimated
forfeiture rates are based on the Company’s historical
experience.
Net Income Per Share
Basic per share amounts are computed using the
weighted-average number of
shares
outstanding during the period. Dilutive per share
amounts are computed using the weighted-average
number of common
shares outstanding and
potentially dilutive securities, using the treasury stock
method if their effect would be dilutive.
common
44
Note 2: Cash, cash equivalents and short-term investments
Cash, cash equivalents and short-term investments consisted of the following as of January 3, 2014:
(In thousands)
Classified as current assets:
Cash
Cash equivalents:
Money market securities
Total cash equivalents
Total cash and cash equivalents
Short-term investments:
State and municipal bonds
Total short-term investments
Total cash, cash equivalents
and short-term investments
Amortized Unrealized Unrealized Estimated
Fair Value
Losses
Gains
Cost
$ 85,849
$
-
$
-
$ 85,849
37,099
37,099
122,948
33,155
33,155
-
-
-
25
25
-
-
-
37,099
37,099
122,948
(9)
(9)
33,171
33,171
$ 156,103
$
25
$
(9)
$ 156,119
Cash, cash equivalents and short-term investments consisted of the following as of December 28, 2012:
(In thousands)
Classified as current assets:
Cash
Cash equivalents:
Money market securities
Total cash equivalents
Total cash and cash equivalents
Short-term investments:
State and municipal bonds
Total short-term investments
Total cash, cash equivalents
and short-term investments
Amortized Unrealized Unrealized Estimated
Fair Value
Losses
Gains
Cost
$ 64,134
$
-
$
-
$ 64,134
49,134
49,134
113,268
20,841
20,841
-
-
-
41
41
-
-
-
49,134
49,134
113,268
(1)
(1)
20,881
20,881
$ 134,109
$
41
$
(1)
$ 134,149
45
Note 3: Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including available-
for-sale fixed income securities, trading fixed income and equity securities held in its deferred compensation plan
and the liability associated with its deferred compensation plan. There have been no transfers between fair value
measurement levels during the years ended January 3, 2014 and December 28, 2012. Any transfers between fair
value measurement levels would be recorded on the actual date of the event or change in circumstances that caused
the transfer. The fair value of these certain financial assets and liabilities was determined using the following inputs
at January 3, 2014 (in thousands):
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
37,099
$
37,099
$
-
$
-
Assets
Money market
securities (1)
Fixed income available
for sale securities (2)
Fixed income trading
securities held in deferred
compensation plan (3)
Equity trading securities
held in deferred
compensation plan (3)
33,171
-
33,171
9,535
9,535
28,444
28,444
-
-
Total
$ 108,249
$
75,078
$
33,171
$
Liabilities
Deferred compensation
plan (4)
37,926
37,926
Total
$
37,926
$
37,926
$
-
-
$
(1) Included in cash and cash equivalents on the Company’s consolidated balance sheet.
(2) Included in short-term investments on the Company’s consolidated balance sheet.
(3) Included in other current assets and deferred compensation plan assets on the Company’s consolidated balance
sheet.
(4) Included in accrued liabilities and deferred compensation on the Company’s consolidated balance sheet.
46
-
-
-
-
-
-
-
-
-
-
-
-
The fair value of these certain financial assets and liabilities was determined using the following inputs at December
28, 2012 (in thousands):
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
49,134
$
49,134
$
-
$
-
Assets
Money market
securities (1)
Fixed income available
for sale securities (2)
Fixed income trading
securities held in deferred
compensation plan (3)
Equity trading securities
held in deferred
compensation plan (3)
20,881
-
20,881
9,911
9,911
17,178
17,178
-
-
Total
$
97,104
$
76,223
$
20,881
$
Liabilities
Deferred compensation
plan (4)
26,984
26,984
Total
$
26,984
$
26,984
$
-
-
$
(1) Included in cash and cash equivalents on the Company’s consolidated balance sheet.
(2) Included in short-term investments on the Company’s consolidated balance sheet.
(3) Included in other current assets and deferred compensation plan assets on the Company’s consolidated balance
sheet.
(4) Included in accrued liabilities and deferred compensation on the Company’s consolidated balance sheet.
Fixed income available-for-sale securities as of January 3, 2014 and December 28, 2012 represent primarily
obligations of state and local government agencies. Fixed income and equity trading securities represent mutual
funds held in the Company’s deferred compensation plan. See Note 12 for additional information about the
Company’s deferred compensation plan.
The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as
short-term investments based on remaining effective maturities as of January 3, 2014:
(In thousands)
Due within one year
Due between one and two years
Total
Amortized
Cost
$
$
12,740
20,415
33,155
Estimated
Fair Value
$ 12,744
20,427
$ 33,171
47
At January 3, 2014 and December 28, 2012, the Company did not have any assets or liabilities valued using
significant unobservable inputs.
The following financial instruments are not measured at fair value on the Company's consolidated balance sheet at
January 3, 2014, but require disclosure of their fair values: accounts receivable, other assets and accounts payable.
The estimated fair value of such instruments at January 3, 2014 approximates their carrying value as reported on the
consolidated balance sheet. The fair values of such financial instruments are determined using the income approach
based on the present value of estimated future cash flows. There have been no changes in the Company’s valuation
technique during fiscal 2013. The fair value of all of these instruments would be categorized as Level 2 of the fair
value hierarchy.
There were no other-than-temporary impairments or credit losses related to available-for-sale securities during the
years ended January 3, 2014, December 28, 2012 and December 30, 2011.
Note 4: Property, Equipment and Leasehold Improvements
(In thousands)
Property:
Land
Buildings
Construction in progress
Equipment:
Machinery and equipment
Office furniture and equipment
Leasehold improvements
Less accumulated depreciation and amortization
Property, equipment and leasehold improvements, net
Fiscal Years
2013
2012
$ 4,450
34,928
51
32,046
7,542
12,745
91,762
63,041
$ 28,721
$ 4,450
34,491
706
29,687
7,067
9,724
86,125
58,679
$ 27,446
Depreciation and amortization for the fiscal years ended January 3, 2014, December 28, 2012 and December 30,
2011, was $4,951,000, $4,711,000 and $4,411,000, respectively.
Note 5: Goodwill
Below is a breakdown of goodwill, reported by segment as of January 3, 2014 and December 28, 2012:
(In thousands)
Goodwill
Environmental
and Health
Engineering and
Other Scientific
Total
$ 8,099
$
508
$ 8,607
There were no changes in the carrying amount of goodwill for the fiscal years ended January 3, 2014, December 28,
2012 and December 30, 2011. There were no goodwill impairments or gains or losses on disposals for any portion
of the Company’s reporting units during the fiscal years ended January 3, 2014, December 28, 2012 and December
30, 2011.
48
Note 6: Inventory
Note 8: Income Taxes
Income before income taxes includes income from
foreign operations of $6,007,000, $3,423,000 and
$2,361,000
fiscal 2013, 2012 and 2011,
respectively.
for
Total income tax expense for the fiscal years ended
January 3, 2014, December 28, 2012 and December
30, 2011 consisted of the following:
(In thousands)
2013
Fiscal Years
2012
2011
Current
Federal
Foreign
State
Deferred
Federal
State
Total
$ 22,468
1,411
4,824
28,703
$ 23,562
852
4,304
28,718
$ 20,544
656
4,587
25,787
(695)
(2,703)
(3,378)
(816)
(3,398) (4,194)
$ 24,524
$ 25,305
(3,013)
(650)
(3,663)
$ 22,124
(3,353)
(3,353)
(3,353)
The Company’s effective tax rate differs from the
statutory federal tax rate of 35% as shown in the
following schedule:
(In thousands)
Fiscal Years
2012
2011
2013
Tax at federal statutory rate $22,381 $21,612 $19,187
State taxes, net of federal
benefit
Tax exempt interest income
Non-deductible expenses
Non-deductible
stock-based compensation
Other
Tax expense
12
191
$25,305 $24,524 $22,124
2,819
(36)
226
2,409
(104)
296
2,568
(74)
240
(40)
351
(79)
(6)
6,584
6,523
Effective tax rate
39.6% 39.7% 40.4%
$ 56,934
$ 54,720
The Company did not have any inventory at January
3, 2014. At December 28, 2012 the Company had
$374,000 of finished goods inventory included in
prepaid expenses and other current assets on its
consolidated balance sheet.
Note 7: Other Significant Balance Sheet
Components
Account receivable, net
(In thousands)
Billed accounts receivable
Unbilled accounts receivable
Allowance for contract losses
and doubtful accounts
Total accounts
Fiscal Years
2013
2012
$ 52,674
27,077
$ 54,653
33,374
(2,771)
(2,666)
receivable, net
$ 76,980
$ 85,361
Accounts payable and accrued liabilities
(In thousands)
Fiscal Years
2013
2012
Accounts payable
Accrued liabilities
Total accounts payable and
other accrued liabilities
$ 2,798
5,644
$ 7,010
3,376
$ 8,442
$ 10,386
Accrued payroll and employee benefits
Fiscal Years
2013
2012
$ 35,370
6,976
8,004
$ 33,885
6,304
8,008
(In thousands)
Accrued bonuses payable
Accrued 401(k) contributions
Accrued vacation
Other accrued payroll
and employee benefits
Total accrued payroll and
employee benefits
Other accrued payroll and employee benefits consist
primarily of accrued wages, payroll taxes and
disability insurance programs.
49
income tax returns. A reconciliation of the beginning
and ending amount of unrecognized tax benefits is as
follows:
Balance at December 30, 2011
Additions based on tax positions
related to the current year
Additions for tax positions
of prior years
Reductions due to lapse of
statute of limitations
Reductions due to change in
accounting method
Settlements
Balance at December 28, 2012
Additions based on tax positions
related to the current year
Additions for tax positions
of prior years
Reductions due to lapse of
statute of limitations
Reductions due to change in
accounting method
Settlements
$ 388,000
275,000
317,000
(72,000)
-
-
$ 908,000
316,000
-
(77,000)
-
-
Balance at January 3, 2014
$1,147,000
Unrecognized tax benefits are included in other
liabilities in the accompanying balance sheet. To the
extent these unrecognized tax benefits are ultimately
recognized, they will impact the effective tax rate in a
future period. There are no uncertain tax positions
whose resolution in the next 12 months is expected to
materially affect operating results.
Deferred income taxes have not been provided on the
undistributed earnings of foreign subsidiaries. The
amount of such earnings at January 3, 2014 was
$2,379,000. These earnings have been permanently
reinvested and the Company does not plan to initiate
any action that would precipitate the payment of
income taxes thereon. The unrecognized deferred tax
liability for these earnings is estimated
to be
approximately $118,000.
The tax effects of temporary differences that give rise
to significant portions of the deferred tax assets and
deferred tax liabilities at January 3, 2014 and
December 28, 2012 are presented in the following
schedule:
(In thousands)
Deferred tax assets:
Accrued liabilities
and allowances
Deferred compensation
Total deferred tax assets
Fiscal Years
2013
2012
$ 15,539
22,373
37,912
$ 14,503
17,252
31,755
Deferred tax liabilities:
State taxes
Deductible goodwill
Property, equipment and
leasehold improvements
Unrealized gain of deferred
compensation plan assets
Other
Total deferred tax liabilities
Net deferred tax assets
(1,519)
(2,925)
(1,099)
(2,829)
(622)
(500)
(3,215)
(394)
(8,675)
$ 29,237
(1,095)
(216)
(5,739)
$ 26,016
Management believes it is more likely than not that
the
results of future operations will generate
sufficient taxable income to realize the net deferred
tax assets.
The Company is entitled to a deduction for federal
and state tax purposes with respect to employees’
stock award activity. The net deduction in taxes
otherwise payable arising from that deduction has
been credited to additional paid-in capital. For the
fiscal years ended January 3, 2014, December 28,
2012 and December 30, 2011, the net deduction in
tax payable arising from employees’ stock award
activity was $4,267,000, $3,948,000 and $2,378,000,
respectively.
The Company and its subsidiaries file income tax
returns in the United States federal jurisdiction,
California and various other state and foreign
jurisdictions. The Company is no longer subject to
United States federal income tax examination for
years prior to 2010. The Company is no longer
subject to California franchise tax examinations for
years prior to 2009. With few exceptions, the
Company is no longer subject to state and local or
non-United States income tax examination by tax
authorities for years prior to 2009.
At January 3, 2014, the Company had unrecognized
tax benefits of $1,147,000, which primarily related to
uncertainty regarding the sustainability of certain
deductions taken on the Company’s federal and state
50
Note 9: Stockholders’ Equity
Preferred Stock
The Company has authorized 5,000,000 shares of
undesignated preferred stock with a par value of
$0.001 per share. The Company committed to
stockholders in a letter dated May 23, 2006 to limit
its use to 2,000,000 preferred shares, unless the
approval of the Company’s stockholders is obtained
subsequently, such as through a further amendment
to the Company’s authorized capital stock. None of
the preferred shares were issued and outstanding at
January 3, 2014 and December 28, 2012.
Dividends
The Company declared and paid cash dividends per
common share during the periods presented as
follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year 2013
Dividends
Per Share
$ 0.15
$ 0.15
$ 0.15
$ 0.15
Amount
(in thousands)
$ 1,969
1,998
1,945
1,965
$ 7,877
Prior to 2013 the Company had never paid cash
dividends on its common stock. On February 5, 2014
the Company’s Board of Directors announced a cash
dividend of $0.25 per share of the Company’s
common stock, payable March 28, 2014,
to
stockholders of record as of March 7, 2014. The
Company expects
to continue paying quarterly
dividends in the future, subject to declaration by the
Company’s Board of Directors.
Treasury Stock
Net losses related to the re-issuance of treasury stock
to settle restricted stock unit and stock option awards
of $10,383,000, $10,600,000, and $9,349,000 were
recorded as a reduction to retained earnings during
fiscal 2013, 2012 and 2011, respectively.
Repurchase of Common Stock
The Company repurchased 438,000 shares of its
common stock for $25,011,000 during the fiscal year
ended January 3, 2014. The Company repurchased
480,000 shares of its common stock for $23,395,000
during the fiscal year ended December 28, 2012. The
Company
its
common stock for $40,573,000 during the fiscal year
ended December 30, 2011. On February 15, 2013 the
Board of Directors authorized an additional
the repurchase of Exponent’s
$35,000,000 for
repurchased 1,002,000 shares of
51
common stock. On February 9, 2012 the Board of
Directors authorized $35,000,000 for the repurchase
of Exponent’s common stock. As of January 3, 2014,
the Company had remaining authorization under its
stock repurchase plan of $31,000,000 to repurchase
shares of common stock.
Note 10: Stock-Based Compensation
On May 29, 2008, the Company’s stockholders
approved the 2008 Equity Incentive Plan and the
2008 Employee Stock Purchase Plan (“ESPP”). The
2008 Equity
Incentive Plan and ESPP were
previously adopted by the Company’s Board of
Directors on April 8, 2008, subject to stockholder
approval. Upon stockholder approval of the 2008
Equity Incentive Plan and ESPP each of
the
following plans were terminated: the 1999 Stock
Option Plan, the Restricted Stock Award Plan, the
1998 Stock Option Plan and the Employee Stock
Purchase Plan established in 1992.
The 2008 Equity Incentive Plan allows for the award
of stock options, stock awards (including stock units,
stock grants and stock appreciation rights or other
similar equity awards) and cash awards to officers,
employees, consultants and non-employee members
of the Board of Directors. The total number of shares
reserved for issuance under the 2008 Equity Incentive
Plan is 2,414,075 shares of common stock, subject to
adjustment resulting from a stock split or the
payment of a stock dividend or any other increase or
decrease in the number of issued shares of the
Company’s stock effected without
receipt of
consideration by the Company. As of January 3,
2014, 925,926 shares were available for grant under
the 2008 Equity Incentive Plan.
The ESPP allows for officers and employees to
purchase common stock through payroll deductions
of up to 15% of a participant’s eligible compensation.
Shares of common stock are purchased under the
ESPP at 95% of the fair market value of the
Company’s common stock on each purchase date.
Subject to adjustment resulting from a stock split or
the payment of a stock dividend or any other increase
or decrease in the number of issued shares of the
Company’s stock effected without
receipt of
consideration by the Company, the total number of
shares reserved for issuance under the ESPP was
200,000 shares of common stock. As of January 3,
2014, 62,579 shares were available for grant.
Weighted average purchase prices for shares sold
under the ESPP plan in fiscal 2013, 2012 and 2011
were $60.64, $50.26 and $41.70, respectively.
Restricted Stock Units
The Company grants restricted stock units
to
employees and outside directors. These restricted
stock unit grants are designed to attract and retain
employees, and to better align employee interests
with those of the Company’s stockholders. For a
select group of employees, up to 40% of their annual
bonus is settled with fully vested restricted stock unit
awards. Under these fully vested restricted stock unit
awards, the holder of each award has the right to
receive one share of the Company’s common stock
for each fully vested restricted stock unit four years
from the date of grant. Each individual who received
a fully vested restricted stock unit award is granted a
matching number of unvested restricted stock unit
awards. These unvested restricted stock unit awards
cliff vest four years from the date of grant, at which
time the holder of each award will have the right to
receive one share of the Company’s common stock
for each restricted stock unit award, provided the
holder of each award has met certain employment
conditions. In the case of retirement at 59 ½ years or
older, all unvested restricted stock unit awards will
continue to vest provided the holder of each award
does all consulting work through the Company and
does not become an employee for a past or present
client, beneficial party or competitor of the Company.
All restricted stock units granted have dividend
equivalent rights (“DER”), which entitle holders of
restricted stock units to the same dividend value per
share as holders of common stock. DER are subject
to the same vesting and other terms and conditions as
the corresponding unvested RSUs.
DER are
accumulated and paid in additional restricted stock
units when the underlying shares vest.
the market price of
The value of these restricted stock unit awards is
determined based on
the
Company’s common stock on the date of grant. The
value of fully vested restricted stock unit awards
issued is recorded as a reduction to accrued bonuses.
The portion of bonus expense that the Company
expects to settle with fully vested restricted stock unit
awards is recorded as stock-based compensation
during the period the bonus is earned. For the fiscal
years ended January 3, 2014, December 28, 2012,
and December 30, 2011, the Company recorded
stock-based compensation expense associated with
accrued bonus awards of $6,061,000, $6,089,000 and
$5,295,000, respectively.
The Company recorded stock-based compensation
expense associated with the unvested restricted stock
unit
and
awards of $6,030,000, $5,650,000
$4,464,000 during the fiscal years ended January 3,
2014, December 28, 2012 and December 30, 2011,
respectively.
The number of restricted stock unit awards outstanding as of January 3, 2014 is as follows(1):
Number
of awards
outstanding
Weighted-
average
fair value
555,382
249,997
(260,064)
(2,981)
542,334
235,506
(235,912)
(5,321)
536,607
235,865
(285,661)
(8,464)
478,347
$
$
$
25.64
38.59
28.29
29.58
30.32
48.04
39.69
32.69
33.95
54.17
36.74
40.67
$
42.14
Balance as of December 31, 2010
Awards granted
Awards vested
Awards cancelled
Balance as of December 30, 2011
Awards granted
Awards vested
Awards cancelled
Balance as of December 28, 2012
Awards granted
Awards vested
Awards cancelled
Balance as of January 3, 2014
(1) Does not include employee stock purchase or stock option plans.
52
Stock Options
The Company currently grants stock options under
the 2008 Equity Incentive Plan. Options are granted
for terms of ten years and generally vest ratably over
a four-year period from the grant date. The Company
grants options at exercise prices equal to the fair
value of the Company’s common stock on the date of
grant. All stock options have dividend equivalent
rights (“DER”), which entitle holders of stock
options to the same dividend value per share as
holders of common stock. DER are subject to the
same vesting terms as the corresponding stock
options. DER are accumulated and paid in cash
Option activity is as follows(1):
when the underlying stock options vest. During the
fiscal years ended January 3, 2014, December 28,
2012 and December 30, 2011, the Company recorded
stock-based compensation expense of $48,000,
$37,000 and $34,000, respectively, associated with
stock options granted prior to, but not yet vested as of
December 30, 2005. During the fiscal years ended
January 3, 2014, December 28, 2012 and December
30, 2011,
recorded stock-based
compensation expense of $1,029,000, $602,000 and
$547,000, respectively, associated with stock options
granted after December 30, 2005.
the Company
Balance as of December 31, 2010
Options granted
Options cancelled
Options exercised
Balance as of December 30, 2011
Options granted
Options cancelled
Options exercised
Balance as of December 28, 2012
Options granted
Options cancelled
Options exercised
Balance as of January 3, 2014
Vested and expected to vest
as of January 3, 2014
Weighted-
average
exercise
price
Weighted-
average
remaining
contractual
term (years)
Aggregate
intrinsic
value
(in
thousands)
$ 15.69
37.72
-
14.07
$ 17.60
48.27
6.50
13.01
$ 24.21
50.03
-
9.76
Number
of shares
outstanding
511,140
30,000
-
(105,744)
435,396
25,000
(2,000)
(200,268)
258,128
27,500
-
(68,628)
217,000
$ 32.06
5.85
$ 9,835
213,512
$ 31.95
5.83
$ 9,700
Exercisable at January 3, 2014
141,125
$ 26.81
4.91
$ 7,136
(1) Does not include restricted stock or employee stock purchase plans
The total intrinsic value of options exercised during
the fiscal years ended January 3, 2014, December 28,
2012 and December 30, 2011 was $3,177,000,
$7,484,000 and $2,995,000, respectively.
The
aggregate intrinsic value in the table above represents
the total pre-tax intrinsic value (the difference
between the Company’s closing stock price on the
last trading day of the fiscal year ended January 3,
2014, and the exercise price, multiplied by the
number of in-the-money options) that would have
been received by the option holders had all option
holders exercised their options on January 3, 2014.
This amount changes based on the fair-value of the
Company’s stock.
53
Information regarding options outstanding at January 3, 2014 is summarized below:
Range of
exercise price
$12.42-18.37
$23.07-31.01
$37.72-37.72
$48.27-50.03
Outstanding
Weighted-
average
remaining
life in years
2.08
5.22
7.11
8.63
5.85
Weighted-
Average
Exercise
Price
$ 16.14
$ 26.59
$ 37.72
$ 49.19
$ 32.06
Number
of
options
32,000
102,500
30,000
52,500
217,000
Exercisable
Number
of
shares
28,000
91,875
15,000
6,250
141,125
Weighted
average
exercise
price
$ 16.67
$ 26.67
$ 37.72
$ 48.27
$ 26.81
The Company uses the Black-Scholes option-pricing
model to determine the fair value of options granted.
The determination of the fair value of stock-based
payment awards on the date of grant using an option-
pricing model is affected by the Company’s stock
price as well as assumptions regarding a number of
complex and subjective variables. These variables
include expected stock price volatility over the term
of the award, actual and projected employee stock
option exercise behaviors, the risk-free interest rate
and expected dividends.
The Company used historical exercise and post-
vesting forfeiture and expiration data to estimate the
expected term of options granted. The historical
volatility of the Company’s common stock over a
period of time equal to the expected term of the
options granted was used to estimate expected
volatility. The risk-free interest rate used in the
option-pricing model was based on United States
Treasury zero coupon issues with remaining terms
similar to the expected term on the options. The
Company is required to estimate forfeitures at the
time of grant and revise those estimates in subsequent
periods
those
if actual forfeitures differ from
estimates. Historical data was used to estimate pre-
vesting
stock-based
forfeitures
compensation expense was recorded only for those
awards that are expected to vest. All share-based
payment awards are recognized on a straight-line
basis over the requisite service periods of the awards.
option
and
The assumptions used to value option grants for the fiscal years ended January 3, 2014, December 28, 2012 and
December 30, 2011 are as follows:
Expected life (in years)
Risk-free interest rate
Volatility
Dividend yield
2013
6.4
1.4%
36%
0%
Stock Option Plan
2012
6.4
1.4%
39%
0%
2011
6.5
3.1%
39%
0%
The weighted-average fair value of options granted during the fiscal years ended January 3, 2014, December 28,
2012 and December 30, 2011 were $18.78, $19.51 and $16.51, respectively.
54
The amount of stock-based compensation expense recognized in the Company’s consolidated statements of income
for the fiscal years ended January 3, 2014, December 28, 2012 and December 30, 2011 is as follows:
(In thousands)
Compensation and related expenses:
Restricted stock units
Stock option grants
Sub-total
General and administrative expenses:
Restricted stock units
Sub-total
$
Total stock-based compensation expense
$
2013
2012
2011
11,680
1,077
12,757
411
411
13,168
$
$
11,345
639
11,984
394
394
12,378
$
9,402
581
9,983
357
357
10,340
$
As of January 3, 2014, there was $5,233,000 of unrecognized compensation cost, expected to be recognized over a
weighted average period of 2.4 years, related to unvested restricted stock unit awards and $486,000 of unrecognized
compensation cost, expected to be recognized over a weighted average period of 1.8 years, related to unvested stock
options. Total unrecognized compensation costs will be adjusted for future changes in estimated forfeitures.
A summary of the Company’s unvested stock options is as follows:
Balance of unvested stock options as of December 31, 2010
Options granted
Options vested
Options forfeited
Balance of unvested stock options as of December 30, 2011
Options granted
Options vested
Options forfeited
Balance of unvested stock options as of December 28, 2012
Options granted
Options vested
Options forfeited
Balance of unvested stock options as of January 3, 2014
Unvested
options
outstanding
136,000
30,000
(62,122)
-
103,878
25,000
(44,624)
-
84,254
27,500
(35,879)
-
75,875
Weighted-
average
fair value
$ 10.64
16.51
10.23
-
$ 12.58
19.51
12.27
-
$ 14.80
18.78
13.30
-
$ 16.95
Note 11: Retirement Plans
The Company provides a defined contribution
retirement plan for its employees whereby the
Company contributes to each eligible employee’s
account 7% of the employee’s eligible base salary
plus overtime. The employee does not need to make
a contribution to the plan to be eligible for the
Company’s 7% contribution. To be eligible under
the plan, an employee must be at least 21 years of age
and be either a full-time or part-time salaried
employee. The 7% Company contribution will vest
20% per year for the first 5 years of employment and
then
The Company’s
thereafter.
expenses related to this plan were $6,564,000,
immediately
$6,573,000, and $6,148,000 in fiscal 2013, 2012, and
2011, respectively.
Note 12: Deferred Compensation Plan
The Company maintains a nonqualified deferred
compensation plan for the benefit of a select group of
highly compensated employees. Under this plan,
participants may elect to defer up to 100% of their
compensation. Company assets that are earmarked to
pay benefits under the plan are held in a rabbi trust
and are subject to the claims of the Company’s
creditors. As of January 3, 2014 and December 28,
2012 the invested amounts under the plan totaled
$37,979,000 and $27,089,000, respectively. These
55
assets are classified as trading securities and are
recorded at fair market value with changes recorded
as adjustments to other income and expense.
the plan
As of January 3, 2014 and December 28, 2012,
totaled
vested amounts due under
$37,926,000 and $26,984,000, respectively. Changes
in the liability are recorded as adjustments to
compensation expense. During the fiscal years 2013,
recognized
2012
compensation expense of $6,044,000, $2,158,000,
and $(273,000), respectively, as a result of changes in
the market value of the trust assets with the same
amount being recorded as other income, net.
the Company
2011,
and
Note 13: Commitments and Contingencies
The following is a summary of the future minimum
payments, required under non-cancelable operating
leases, with terms in excess of one year, as of January
3, 2014:
(In thousands)
Fiscal year
2014
2015
2016
2017
2018
Thereafter
$
Lease
commitments
7,718
6,411
4,489
2,736
1,354
2,795
$ 25,503
Total rent expense from property leases in fiscal
2013, 2012, and 2011 was $5,929,000, $5,481,000
and $5,180,000, respectively. Total expense from
other operating leases in fiscal 2013, 2012, and 2011
and $1,477,000,
was $1,704,000, $1,754,000
respectively.
in
outstanding purchase commitments as of January 3,
2014. These commitments are expected to be
fulfilled by the end of fiscal 2014.
The Company had $350,000
The Company is party to a lawsuit arising from the
Company’s hiring of employees from another
consulting firm. Their former employer alleges that
the Company aided and abetted the employees’
breach of duties owed to their former employer,
wrongfully interfered with the former employer’s
economic relationships, and breached a software
license agreement. The lawsuit also alleges that the
Company misappropriated the former employer’s
trade secrets and violated unfair trade practice laws.
The lawsuit does not allege a specific dollar amount
of damages. The case is currently in discovery and
no trial date has been set. The Company intends to
vigorously defend itself. Although the Company’s
ultimate liability in this matter cannot be determined
based on the information currently available, the
Company believes, after consultation with legal
counsel, the ultimate resolution of this claim will not
have a material adverse effect on its financial
condition.
risks and
uncertainties inherent in legal proceedings, actual
results could differ from current expected results.
However, due
the
to
the outcome of which
In addition to the above matters, the Company is a
party to various other legal actions from time to time
and may be contingently liable in connection with
claims and contracts arising in the normal course of
business,
the Company
believes, after consultation with legal counsel, will
not have a material adverse effect on its financial
liquidity.
results of operations or
condition,
However, due to the risks and uncertainties inherent
in legal proceedings, actual results could differ from
current expected results. All legal costs associated
with litigation are expensed as incurred.
Note 14: Miscellaneous Income, Net
Miscellaneous income, net, consisted of the
following:
(In thousands)
Rental income
Gain (loss) on deferred
compensation
investments
(Loss) gain on foreign
exchange
Other
Total
Fiscal Years
2012
2013
2011
1,913
1,671
1,310
6,044
2,158
(273)
(89)
4
$ 7,872
(61)
33
$ 3,801
70
16
$ 1,123
Note 15: Industry and Client Credit Risk
services
provided
The Company serves clients in various segments of
the economy. During fiscal 2013, 2012 and 2011 the
representing
Company
approximately 9%, 10% and 10%, respectively, of
revenues to clients and to organizations and insurers
acting on behalf of clients in the transportation
industry. During fiscal 2013, 2012 and 2011 the
Company derived approximately 8%, 13% and 15%,
respectively, of revenues from government agencies
and contractors.
No single customer comprised more than 10% of the
Company’s revenues for the years ended January 3,
2014, December 28, 2012 and December 30, 2011.
56
No single customer comprised more than 10% of the
Company’s accounts receivable at January 3, 2014.
Agencies of the U.S. federal government comprised
11% of the Company’s accounts receivable at
December 28, 2012.
Note 16: Supplemental Cash Flow Information
The following is supplemental disclosure of cash
flow information:
(In thousands)
Cash paid during the year:
Fiscal Years
2012
2011
2013
Income taxes
$24,701 $24,104 $21,669
Non-cash investing and
financing activities:
Capital leases for
equipment
Unrealized (loss) gain on
$
- $
- $ 142
investments
$
(14) $
(28) $
52
Vested stock unit awards
granted to settle
accrued bonus
Stock repurchases payable
$ 5,807 $ 5,343 $ 4,538
to broker
$
- $ 508 $
-
Note 17: Segment Reporting
The Company has two operating segments based on
two primary areas of service. The Engineering and
Other Scientific operating segment is a broad service
group providing technical consulting in different
practices primarily in the areas of engineering and
technology development. The Environmental and
Health operating segment provides services in the
area of environmental, epidemiology and health risk
analysis. This operating segment provides a wide
range of consulting services relating to environmental
hazards and risks and the impact on both human
health and the environment.
Segment information is presented for selected data
from the statements of income and statements of cash
flows for fiscal years 2013, 2012, and 2011.
Segment information for selected data from the
balance sheets is presented for the fiscal years ended
January 3, 2014 and December 28, 2012. The chief
operating decision maker does not review total assets
in his evaluation of segment performance and capital
allocation.
Revenues
(In thousands)
Fiscal Years
2012
2011
2013
Engineering and
$ 215,972 $ 213,304 $ 199,772
Other Scientific
Environmental and Health 80,196 79,349 72,674
Total revenues
$ 296,168 $ 292,653 $ 272,446
Operating Income
(In thousands)
Fiscal Years
2012
2011
2013
Engineering and
Other Scientific
Environmental and Health
$ 67,070 $ 62,852 $ 57,779
22,367
25,072
25,752
Total segment operating
income
92,142
88,604
80,146
Corporate operating
expense
Total operating
income
Capital Expenditures
(In thousands)
(36,196)
(30,984)
(26,686)
$ 55,946 $ 57,620 $ 53,460
Fiscal Years
2012
2011
2013
Engineering and
Other Scientific
Environmental and Health
$ 5,180 $ 3,264 $ 2,489
313
289
148
Total segment capital
expenditures
Corporate capital
expenditures
Total capital
5,328
3,553
2,802
898
1,389
1,033
expenditures
$ 6,226 $ 4,942 $ 3,835
Depreciation and Amortization
(In thousands)
Engineering and
Other Scientific
Environmental and Health
Total segment depreciation
and amortization
Corporate depreciation and
amortization
Fiscal Years
2012
2013
2011
$ 3,097
299
$ 2,831 $ 2,700
227
286
3,396
3,117 2,927
1,555
1,594 1,484
Total depreciation and
amortization
$ 4,951
$ 4,711 $ 4,411
57
Information regarding the Company’s operations in
different geographical areas:
Property, Equipment and Leasehold Improvements, net
(In thousands)
Fiscal Years
2013
2012
Revenues (1)
(In thousands)
United States
Foreign Countries
Fiscal Years
2012
2013
2011
$ 263,341 $ 260,760 $ 239,994
32,452
32,827
31,893
United States
Foreign Countries
$ 28,076
645
$ 26,857
589
Total
$ 28,721
$ 27,446
Total
$ 296,168 $ 292,653 $ 272,446
(1) Geographic revenues are allocated based on
location of the client.
the
58
Comparative Quarterly Financial Data (unaudited)
Summarized quarterly financial data is as follows:
Fiscal 2013
(In thousands, except per share data)
March 29,
2013
June 28,
2013
September 27,
2013
January 3,
2014
Revenues before reimbursements
Revenues
Operating income
Income before income taxes
$ 68,992
72,660
10,851
13,505
$ 71,919
75,505
17,593
18,271
$ 70,096
75,231
15,160
17,515
$ 69,036
72,772
12,342
14,654
Net income
$ 7,976
$ 10,848
$ 11,094
$ 8,722
Net income per share
Basic
Diluted
Shares used in per share computations
Basic
Diluted
$
$
0.58
0.56
$
$
0.80
0.77
$
$
0.82
0.79
$
$
0.64
0.63
13,667
14,125
13,637
14,007
13,598
13,993
13,556
13,949
Fiscal 2012
(In thousands, except per share data)
March 30,
2012
June 29,
2012
September 28, December 28,
2012
2012
Revenues before reimbursements
Revenues
Operating income
Income before income taxes
$ 66,470
71,925
11,816
13,733
$ 68,318
74,484
17,361
17,248
$ 66,725
73,298
14,728
16,330
$ 65,049
72,946
13,715
14,438
Net income
$ 8,201
$ 10,327
$ 10,225
$ 8,472
Net income per share
Basic
Diluted
Shares used in per share computations
Basic
Diluted
$
$
0.59
0.57
$
$
0.75
0.72
$
$
0.75
0.72
$
$
0.62
0.60
13,859
14,419
13,835
14,316
13,694
14,196
13,733
14,208
59
Schedule II
Valuation and Qualifying Accounts
(In thousands)
Year Ended January 3, 2014
Allowance for bad debt
Allowance for contract losses
Year Ended December 28, 2012
Allowance for bad debt
Allowance for contract losses
Year Ended December 30, 2011
Allowance for bad debt
Allowance for contract losses
Additions
Balance at
Provision
Provision
Beginning of Charged to Charged to
Revenues
Expense
Year
Deletions (1)
Accounts
Written-off
Net of
Recoveries
Balance
at End of
Year
$
933
$ 1,733
$
$
515
-
$
-
$ 1,189
$
(506)
$ (1,093)
$
942
$ 1,829
$
819
$ 1,520
$
$
483
-
$
-
$ 1,280
$
(369)
$ (1,067)
$
933
$ 1,733
$
702
$ 1,424
$
$
709
-
$
-
$ 1,278
$
(592)
$ (1,182)
$
819
$ 1,520
(1) Balance includes currency translation adjustments.
Recoveries of accounts receivable previously written off were $50,000, $110,000 and $105,000 for the years ended
January 3, 2014, December 28, 2012 and December 30, 2011, respectively.
Schedules other than above have been omitted since they are either not required, not applicable, or the information is
otherwise included in the Report.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EXPONENT, INC.
(Registrant)
Date: February 28, 2014
/s/ Richard L. Schlenker, Jr.
Richard L. Schlenker, Jr., Executive Vice President,
Chief Financial Officer and Corporate Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Paul R. Johnston
Paul R. Johnston, Ph.D.
/s/ Richard L. Schlenker, Jr.
Richard L. Schlenker, Jr.
/s/ Michael R. Gaulke
Michael R. Gaulke
/s/ Samuel H. Armacost
Samuel H. Armacost
/s/ Mary B. Cranston
Mary B. Cranston
/s/ Karen A. Richardson
Karen A. Richardson
/s/ Stephen C. Riggins
Stephen C. Riggins
/s/ John B. Shoven
John B. Shoven, Ph.D.
President, Chief Executive Officer and Director
February 28, 2014
Executive Vice President, Chief Financial Officer and
Corporate Secretary (Principal Financial and
Accounting Officer)
February 28, 2014
Chairman of the Board of Directors
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
February 28, 2014
Director
Director
Director
Director
Director
61
EXHIBIT INDEX
The following exhibits are filed as part of, or incorporated by reference into (as indicated parenthetically),
the Annual Report on Form 10-K:
3.1(i) Restated Certificate of Incorporation of the Company (incorporated by reference from the Company’s
Registration Statement on Form S-1 as filed on June 25, 1990, registration number 33-35562).
3.1(ii) Certificate of Amendment of Restated Certificate of Incorporation of the Company (incorporated by
reference from the Company’s Current Report on Form 8-K filed on May 24, 2006).
3.2
4.1
Amended and Restated Bylaws of the Company (incorporated by reference from the Company’s Current
Report on Form 8-K as filed on February 14, 2012).
Specimen copy of Common Stock Certificate of the Company (incorporated by reference from the
Company’s Registration Statement on Forms S-1 as filed on June 25, 1990, registration number 33-
35562).
*10.6
Exponent, Inc. 1998 Non Statutory Stock Option Plan dated October 24, 1998 (incorporated by reference
from the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 1999).
10.10 Exponent, Inc. 1999 Stock Option Plan (incorporated by reference from the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 1999).
*10.11 Exponent, Inc. 1999 Restricted Stock Plan (incorporated by reference from the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 1999).
10.15 Commercial Lease No. 03-53542 between the Company and the Arizona State Land Department,
effective January 17, 1998 (incorporated by reference from the Company’s Annual Report on Form 10-K
for the fiscal year ended January 3, 2003).
*10.17 Exponent Nonqualified Deferred Compensation Plan (incorporated by reference from the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
*10.19
Form of Indemnification Agreement entered into or proposed to be entered into between the Company
and its officers and directors (incorporated by reference from the Company’s Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 2006).
10.20
Services Agreement between the Company and Exponent Engineering P.C. (incorporated by reference
from the Company’s Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2006).
*10.21 Employment Offer Letter between the Company and Dr. Elizabeth Anderson (incorporated by reference
from the Company’s Current Report on Form 8-K filed on August 9, 2006).
10.24 Amendment No. 1 to Exponent, Inc. 1998 Nonstatutory Stock Option Plan dated January 29, 2007
(incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended
December 29, 2006).
10.25 Amendment No. 1 to Exponent, Inc. 1999 Stock Option Plan dated January 29, 2007 (incorporated by
reference from the Company’s Annual Report on Form 10-K for the fiscal year ended December 29,
2006).
10.26 Amendment No. 1 to Exponent, Inc. 1999 Restricted Stock Plan dated January 29, 2007 (incorporated by
reference from the Company’s Annual Report on Form 10-K for the fiscal year ended December 29,
2006).
10.28
2008 Employee Stock Purchase Plan (incorporated by reference from the Company’s Annual Report on
Form 10-K for the fiscal year ended January 1, 2009).
62
*10.31
*10.32
*10.33
Form of Restricted Stock Unit Employee Bonus Grant Agreement under the 2008 Equity Incentive Plan
(incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended
January 1, 2009).
Form of Restricted Stock Unit Employee Matching Grant Agreement under the 2008 Equity Incentive
Plan (incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year
ended January 1, 2009).
Form of Restricted Stock Unit Director Grant Agreement under the 2008 Equity Incentive Plan
(incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended
January 1, 2009).
*10.34 Amended and Restated Restricted Stock Unit Bonus Grant Agreement under the 1999 Restricted Stock
Plan (incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year
ended January 1, 2009).
*10.35 Amended and Restated Restricted Stock Unit Matching Grant Agreement under the 1999 Restricted
Stock Plan (incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal
year ended January 1, 2009).
*10.36 Amended and Restated Restricted Stock Unit Director Grant Agreement under the 1999 Restricted Stock
Plan (incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year
ended January 1, 2009).
*10.37 Exponent, Inc. Amended and Restated 2008 Equity Incentive Plan (filed as Appendix A to the
Company’s Schedule 14A filed on April 19, 2012).
10.38
10.39
10.40
Exponent, Inc. 401(k) Savings Plan, as amended and restated effective January 1, 2010 (incorporated by
reference from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2010).
First Amendment to the Exponent, Inc. 401(k) Savings Plan (as amended and restated January 1, 2010)
(incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the fiscal period
ended July 1, 2011).
Second Amendment to the Exponent, Inc. 401(k) Savings Plan (as amended and restated January 1,
2010) (incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year
ended December 30, 2011).
*10.41
Form of Stock Option Agreement under the 2008 Equity Incentive Plan (incorporated by reference from
the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2011).
10.42 Third Amendment to the Exponent, Inc. 401(k) Savings Plan (as amended and restated January 1, 2010)
(incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended
December 28, 2012).
*10.43 Amendment to Form of Stock Option Agreement under the 2008 Equity Incentive Plan (incorporated by
reference from the Company’s Annual Report on Form 10-K for the fiscal year ended December 28,
2012).
10.44
Fourth Amendment to the Exponent, Inc. 401(k) Savings Plan (as amended and restated January 1,
2010).
21.1
List of subsidiaries.
23.1
Consent of Independent Registered Public Accounting Firm.
31.1
Certification of Chief Executive Officer pursuant to Rule 13a – 14(a) of the Securities Exchange Act of
1934.
63
31.2
Certification of Chief Financial Officer pursuant to Rule 13a – 14(a) of the Securities Exchange Act of
1934.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Schema Document
101.CAL XBRL Taxonomy Calculation Linkbase Document
101.LAB XBRL Taxonomy Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
101.DEF XBRL Taxonomy Definition Linkbase Document
* Indicates management compensatory plan, contract or arrangement
64