Exponent
Annual Report 2016

Plain-text annual report

2016 Annual Report  Dear Fellow Stockholders: 2016 was a productive year for Exponent. During the year, we continued to grow revenues, produce good margins, maintain an active share repurchase program and increase our quarterly cash dividend. Total revenues for the year grew to $315,076,000 and revenues before reimbursements reached $299,197,000. The revenue growth was tempered by a challenging year over year comparison in the first half of the year and softness in a few industry sectors, especially in oil and gas. During the second half of 2016, we began to see an increase in demand, especially for our expertise in the consumer products and construction industry sectors. We generated $66.9 million in cash from operating activities, repurchased $24.5 million of common stock, paid dividends of $18.8 million and closed the year with $173.7 million in cash, cash equivalents and short-term investments. Our ability to deliver solid results and maintain a healthy balance sheet amid softer market conditions speaks to the resilience of our model. After 50 years, the Exponent brand is growing globally, as illustrated by recent high-profile engagements with companies in the automotive industry for issues related to unintended acceleration and airbags; in the consumer electronics industry for battery fires; and international construction disputes related to mines, gas terminals and power plants. In 2017, we will continue to leverage our experience and reputation in reactive services to drive growth and development of our proactive services globally. Although market conditions tempered our underlying growth in 2016, we remain confident in our value proposition. Our diversified portfolio of clients, world-class team of highly skilled professionals, unique market position and expanding international profile leave us well-positioned for long-term growth. Our financial goals are unchanged: produce organic revenue growth, improve profitability and maintain a healthy balance sheet. We believe that our share repurchase program and ongoing quarterly dividend payments demonstrate our confidence in the model and our commitment to deliver long-term shareholder value. We would like to thank the Exponent team for their dedication in 2016, and our clients and investors for their continued support. With Regards, Paul R. Johnston, Ph.D. 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 December 30, 2016. 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 X No 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. [X] 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 [X] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) 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 common stock held by non-affiliates of the registrant based on the closing sales price of the common stock as reported on the NASDAQ Global Select Market on July 1, 2016, the last business day of the registrant’s most recently completed second quarter, was $1,315,000,349. 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 July 1, 2016 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 registrant’s common stock outstanding as of February 17, 2017 was 25,597,038. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Definitive Proxy Statement for the registrant’s 2017 Annual Meeting of Stockholders to be held on June 1, 2017 are incorporated by reference into Part III of this Annual Report on Form 10-K. 2 EXPONENT, INC. FORM 10-K ANNUAL REPORT FISCAL YEAR ENDED DECEMBER 30, 2016 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 14 18 18 18 18 19 21 21 31 32 32 32 32 PART III 32 Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation 33 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 33 33 Item 13. Certain Relationships and Related Transactions, and Director Independence 33 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 34 64 65 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,” “continue”, “could”, “may”, “plan”, “expect” and similar expressions, as they relate to the Company or its identify certain of such forward- management, looking statements. Such statements reflect the current views of the Company or its management with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company’s or results, achievements could differ materially from those expressed in, or implied by, any such forward- performance, actual looking statements. Factors that could cause or contribute to such material differences include the possibility that the demand for our services may decline as a result of changes in general and industry specific economic conditions, timing of the the effects of for our services, engagements competitive services and pricing, the absence of backlog related to our business, our ability to attract and retain key employees, the effect of tort reform and government regulation on our business, and liabilities resulting from claims made against us. Additional risks and uncertainties are discussed in this Annual Report under the heading “Risk Factors” and elsewhere. The inclusion of such forward-looking information should not be regarded as a representation by the Company or any other person that the future events, plans, or expectations contemplated by the Company will be achieved. The Company undertakes no obligation to update or revise any such forward- looking statements. PART I Item 1. Business Inc., GENERAL Exponent, its subsidiaries, together with (“Exponent”, the “Company”, “we”, “us” and “our”) is a science and engineering consulting firm that to complex problems. Our provides solutions multidisciplinary team of scientists, 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 product development, product recall, regulatory compliance, and the discovery of potential problems related to products, people, property and impending litigation. 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. CLIENTS General Exponent serves clients in chemical, construction, consumer products, energy, food, beverage and technology, life sciences, insurance, nutrition, government, manufacturing, industrial equipment, transportation and other sectors of the economy. Many of our engagements are initiated directly by large corporations or by 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. lawyers or 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 $170 to $750 per hour. Our engagement agreements typically provide for monthly billing, require payment of our invoices within 30 days of receipt and permit clients time. Clients to normally agree to indemnify us and our personnel against liabilities arising out of the use or application of the results of our work or recommendations. terminate engagements at any SERVICES Exponent provides high quality engineering and scientific consulting services to clients around the world. Our service offerings are provided on a project-by-project basis. Many projects require support from multiple practices. We currently operate 19 practices in two reportable operating segments, Engineering and Other Scientific and Environmental and Health: ENGINEERING AND OTHER SCIENTIFIC • Biomechanics • Biomedical Engineering • Buildings & Structures • Civil Engineering • Construction Consulting • 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 4 ENVIRONMENTAL AND HEALTH • Chemical Regulation & Food Safety • Ecological & Biological Sciences • Environmental & Earth Sciences • Health Sciences ENGINEERING AND OTHER SCIENTIFIC Biomechanics Our Biomechanics Practice 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 injuries which occurred while individuals were utilizing a variety of products recreational vehicles, sporting goods, including 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 because one or more aspect(s) of the building design 5 its to perform intended or construction failed function. Our architects, structural engineers, and material scientists have been investigating such failures for decades, and we use this experience to solve problems with building and components, including finding the best repair options and mitigating the risk of future failures. systems 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, laboratory or on site 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, pipeline 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. fires, Over the past year, our consultants have been engaged in a number of investigations related to retaining wall and wildland large construction claims, foundation flooding and sediment transport. This practice provided services for property owners, contractors, design professionals, attorneys and insurance carriers. landslides, failures, Construction Consulting Our Construction Consulting Practice provides project advisory, risk analysis, strategic planning, dispute resolution, delay analysis and financial damages services. During the past year, we expanded the practice by leveraging key client relationships in including utilities, several construction sectors mining, and oil and gas. The practice has expanded to Asia by hiring senior personnel based in Exponent’s Hong Kong office and has been retained on numerous complex international arbitrations. Our multi-disciplinary staff, which includes engineers, architects, schedulers, construction managers, 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 which include power plants, transmission and distribution facilities, petrochemical facilities, water treatment plants, bridges and roads, rail systems, tunnels, airports, sporting arenas and gaming facilities. We provide services to firms involved in the engineering and construction industry including corporate clients, public agencies, lending agencies, engineering and construction contractors, subcontractors, attorneys and insurance carriers. Electrical Engineering & Computer Science Our 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 works on failure analysis, product robustness and reliability for consumer and industrial electronics. Our computer engineers and scientists work with controlled and high-tech applications to evaluate product safety and software reliability. The computer engineering and science expertise we offer encompasses a breadth of areas sciences, information and numerical including 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 industries computer security ranging Over the past year, we performed a wide array of from assessing electrical investigations 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. Engineering Management Consulting Our Engineering Management Consulting Practice provides multi-disciplinary expertise and rapid response to assist clients with management consulting services related to technical issues. Our consultants provide services in the areas of asset strategy, technology strategy, regulatory strategy, asset planning, project management, engineering, risk construction, maintenance, operations, and management. This practice primarily services the electric and gas utility including transmission, distribution, fossil fuel generation, nuclear generation, and renewable generation. industries, include services Risk management unique capabilities in the areas of risk and reliability assessment and mitigation. Our scientists and engineers assist our clients in minimizing losses related to asset failures and/or business 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 Our Human Factors Practice evaluates human 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. We support clients, including manufacturers, by assessing the usability and manner in which consumers may be expected to interact with products and how this may relate to safety and users’ experiences with the product. In addition, we assist manufacturers with compliance with regulatory guidelines related to products and work with them regarding analysis of adverse event reports and consumer complaints in publicly available databases overseen by the Consumer Product Safety Commission and the Food 6 and Drug Administration. We also provide support assessing alleged for false advertising claims consumer products, foods and pharmaceuticals. Industrial Structures Our in Industrial Structures Practice, based Düsseldorf, Germany with offices in Hamburg and Berlin, provides specialized engineering expertise required for industrial structures subject to extreme conditions. We have provided planning, condition assessment, rehabilitation design and engineered demolition and dismantling for more than 1,000 industrial facilities around the world. Much of our Industrial Structures Practice centers on three types of facilities: antenna masts and towers, power plants, and such as against high process refractories potentially containing temperatures dangerous product. Each year we provide quality assurance, including both inspection and engineering analysis, on almost 1,000 tower structures for a variety of facilities including telecommunications, wind energy, and industrial chimneys. In addition, our consultants provide inspection services to assist our clients with on-time, quality construction on their projects. to protect tanks specialized structures industrial or We have developed in-house, specialized computer software for non-linear material behavior that can provide realistic performance assessment of a wide variety of specialized structures such as cracked reinforced components, multi-layer refractories and masonry towers. In addition, our staff regularly participates in the creation of consensus engineering standards for assessment and design of industrial facilities. concrete Materials & Corrosion Engineering Our in-depth knowledge of materials science, corrosion, and metallurgical engineering, combined with the breadth of our collective experience across many industries and disciplines gives our Materials and Corrosion Engineering Practice a unique ability to efficiently provide our clients with solutions to their complex materials-based problems. We use our knowledge and experience to understand how and why materials, products, and processes may not perform their intended function, as well as to prevent future problems. In the past year, our Materials and Corrosion Engineering Practice helped clients solve critical materials-related issues in the consumer electronics, medical device, chemical processing, transportation, energy, utilities, and aerospace fields, among others. Mechanical Engineering to designs alternative We provide clients with a thorough comprehension of current identify and vulnerabilities before failures occur, develop appropriate risk mitigation methods, and provide post-failure investigations. Our consultants review the safety and reliability of industrial processes, manufactured products, and engineered systems, and we determine the root cause of failures. We assist in legal and insurance matters, failure investigations, product recall investigations, internal compliance programs, product development, workplace safety evaluations, and intellectual property matters. Our staff members develop and utilize detailed and validated computational models and laboratory experimental methods to evaluate products, systems, and equipment. We perform field inspections, rely on industry standards, and utilize operational data to inform our analyses. We have performed these activities in a broad range of industries including transportation, heavy equipment, building systems, medical devices, energy, and consumer products. During the past year, our mechanical engineers worked on a wide variety of projects ranging from high-profile consumer product recall investigations to oilfield equipment failures and workplace safety issues. Polymer Science & Materials Chemistry Our Polymer Science and Materials Chemistry Practice consults with industrial, government, legal, insurance and individual clients regarding polymers and textiles used in diverse applications as well as 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, reactive chemical systems, and electrochemical energy storage systems when challenged by physical, chemical, operational and includes customized stressors. Our work also chemical, electrochemical and rheological testing and leverages significant internal electron microscopy and computerized tomography imaging capabilities. thermal other Our consultants participate in product development programs, perform failure analyses and provide support to clients involved in regulatory and legal intellectual proceedings and property. Clients value our technical expertise related to chemistry, formulation, manufacturing and materials performance, our understanding of the the protection of 7 sporting goods, history and evolution of these materials, and our ability to assist them in identifying and incorporating emerging materials and manufacturing technologies into their businesses. During the past year, significant program activities addressed aspects of automotive materials, battery systems, consumer electronics, wearable devices, implantable medical devices, combination drug delivery systems, historical components, textiles, manufacturing performance apparel, building materials, technology scouting, materials science aspects of health risk, service life prediction, sustainability, and intellectual property related to consumer, recreational, medical, pharmaceutical and other products, including trade secrets. and industrial formulations technology, Statistical & Data Sciences working frequently The Statistical and Data Sciences Practice comprises our core capabilities in methods for the collection, management, visualization, and inferential analysis of in a breadth of data. Drawing on experience engineering, science, health, and environmental applications—and in collaboration with other practices—we assist clients at all stages of the product or process life cycle: designing and analyzing product development studies; improving and controlling manufacturing process and product quality; and monitoring the safety, reliability, and performance of products in use by customers. We design sample surveys and experiments, create value-added databases through synthesis of client-supplied and public data, and implement for machine learning and predictive analytics. Our approach to studies is intended to support data-driven decision making and to help clients measure their risks and benefits to determine appropriate courses of action. techniques innovative and legal clients. During the past year, our statisticians and data scientists worked on diverse projects for government, industry, We performed assessments of manufacturing quality systems, evaluated the durability and reliability of smart cards for identity management and credentialing, applied data mining methods in reinterpreting the results of medical device clinical trials, examined the field reliability of consumer electronic equipment, and integrated and analyzed data to support the launch of an environmental remediation program. to small insurance installations fire protection, and mechanical engineering. We have investigated and analyzed thousands of fires and explosions ranging from high loss disasters at manufacturing facilities, energy facilities and oil and gas claims. Information gained from these analyses has helped us assist clients with preventive measures related to the design of their facilities and products. We assist clients in minimizing the risk of fires and explosions, we provide regulatory consulting for permitting new industrial facilities, and we assist manufacturers in addressing the risk of fires associated with consumer products. Our engineers use fire modeling and other computational fluid 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. In recent years, the Thermal Sciences Practice has developed tools to evaluate fire and explosion risks of lithium-ion batteries. We have consulted with a variety of clients to evaluate and mitigate fire and explosion hazards of batteries in applications including consumer products, vehicles and energy storage. During the past year, our work in oil and gas exploration and production, Liquefied Natural Gas (LNG) and downstream oil and gas sectors has include continued. Our services assessing new oil well control technologies, assessing potential fire and explosion risks and consequences, investigating incidents and loss of containment assessing the integrity of fixed assets. these areas in 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 the understanding of product manufacturers 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 Thermal Sciences Our Thermal Sciences Practice provides multi- disciplinary expertise to assist clients in chemical, Our Test and Engineering Center located in Phoenix, Arizona, is used for our most complex testing and analysis. We have gained a worldwide reputation for our ability to mobilize resources expeditiously and 8 advances efficiently, integrate a broad array of technical disciplines, and provide valuable insight that 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, clients 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. transportation Current technologies and concepts allow the multi-discipline team of scientists, engineers, and analysts across numerous practices to focus on the development and implementation of connected vehicles, automated vehicles, connected/smart cities, and data analyses. Whether the objective is design analysis, component testing, failure analysis, or accident reconstruction, our knowledge of vehicle systems and engineering from principles coupled with our experience conducting full-scale tests aim to add insight and proficiency to every project. emerging in ENVIRONMENTAL AND HEALTH SCIENCES Chemical Regulation & Food Safety Our Chemical Regulation and Food Safety Practice includes both technical and regulatory specialists who are experienced in dealing with foods, food ingredients, cosmetics, dietary supplements, and with pesticide and non-pesticide products including conventional chemicals, biochemicals, microbials, antimicrobials/biocides, of biotechnology, 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. products and During the past year our Chemical Regulation and Food Safety staff have conducted a wide array of work. The European and U.S. sides of the practice were jointly involved with the ongoing support of multiple new pesticide active ingredients and end-use products. The European side of our business was involved with many projects to plant protection regulatory and submissions, from new active substances and those for under individual European member states. In addition, we provided many specialist assessments relating to human and environmental exposure and product efficacy and national and international Maximum Residue Limit/import tolerance submissions. In Europe and the U.S., we continued to provide clients with regulatory compliance support for food contact to product-specific dossiers biocidal product related review materials, food additives, novel foods, nutrition- related analyses, as well as undertaking safety assessments for food and cosmetics products. We also provided proactive and reactive product safety and litigation support. For industrial chemicals we continued to provide full regulatory support for our clients who prepared and submitted registrations and risk assessments. In the U.S. we continued to provide services related to new pesticide active ingredients and end-use product development and registrations in the U.S., Canada, and Mexico, registration review under EPA, import tolerances in the U.S. and Canada, due diligence related to product and/or business sales, and data compensation, as well as the approval of new pesticide inert ingredients and new non-pesticide active ingredient approvals. 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 risk assessment, ecotoxicology, novel remediation methods, restoration of wetlands and other natural resources, large development projects, resource utilization (mineral mining, oil and gas, wood pulp), genomic assessments, and the use of chemicals and other products in commerce. The practice specializes the effects of chemical, biological, and physical stressors on aquatic and terrestrial ecosystems. Many of these assessments utilize a causal analysis approach to systematically and transparently determine causation in complex and interrelated situations. The practice is comprised of nationally recognized experts that cover disciplines related to the ecological implications and risks associated with these projects. in assessing 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 oil and gas, mining and minerals, chemicals, forest products, railroads, aerospace, and trade associations, and to municipal and government clients. Our consultants specialize in transport, the areas of environmental fate and environmental forensics, hydrogeology, air toxics, modeling and monitoring, water quality and water supply, data analytics, remediation consulting, environmental engineering impacts, and and waste management, climate chemistry and 9 evaluation of environmental and social risks. Our work often involves complex and high visibility environmental problems and issues, often the focus of environmental or tort claims, where toxic evaluation of contamination, historical reconstruction of events, releases, and doses, and water resource issues are central to problem resolution. We provide case-specific strategic and advisory consulting on risk mitigation, planning, and regulatory issues, as well as high-level technical strategic consulting for complex matters where understanding the long-term implications of early technical actions is critical to managing overall liability. Health Sciences Our health scientists, epidemiologists, toxicologists, industrial hygienists, biostatisticians, risk assessors, and physicians apply epidemiology, exposure assessment, and toxicology principles to examine and address complex health-related risk issues in a variety of settings. The members of our staff are recognized nationally and internationally for their outstanding credentials and decades of experience from government, academia and industry. Our research work has included numerous community health assessments, disease cluster investigations, survey research, occupational cohort and case-control studies, exposure assessment and simulation studies, cancer modeling, meta-analyses, and state-of-the-art reviews. We have addressed issues for clients on industrial chemicals, pesticides, drugs, medical devices, nanotechnology, and other agents. Our multidisciplinary team has extensive experience investigating a broad variety of health concerns such as claims of illnesses from exposures to ionizing radiation and electromagnetic fields, chemicals, dusts and other airborne particulates, smoke and fumes, nanoparticles, molds and other micro-organisms. Our atmospheric scientists provide air quality and meteorological modeling, permitting, and licensing support services. Our environmental and health scientists investigate accidental releases of chemicals, evaluate fate and transport of chemical substances, simulate home and workplace exposures, develop measures of prevention and exposure control, and assist clients with emergency preparedness and response. 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- those clients. Clients the house by capability to perform such services themselves will retain Exponent or other independent consultants because of independence concerns. that have In each of our practices, 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 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. BUSINESS SEGMENTS AND GEOGRAPHIC OPERATIONS OVERVIEW in and health epidemiology and Environmental We report two operating segments based on two primary areas of service: Engineering and Other and Health. Scientific, Engineering and Other Scientific is a broad service group providing technical consulting in different practices primarily in engineering. Environmental and Health provides services the area of risk environmental, analysis. This 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.” For information about the Company’s operations in different geographical areas, please see “Note 16: Segment Reporting” of our Notes to Consolidated Financial Statements. For information about the Company’s disclosures regarding foreign currency exchange rate risk, please see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.” EMPLOYEES As of December 30, 2016, we employed 1,023 full- time, part-time and hourly employees, including 790 engineering and scientific staff, 66 technical support staff and 167 administrative and support staff. Our staff includes 716 employees with advanced degrees, 10 of which 502 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 or furnish the reports with the SEC. Additionally, copies of materials filed or furnished 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 at http://www.sec.gov. For information about the SEC’s Public Reference Room, the public may contact 1- 800-SEC-0330. Copies of material filed or furnished 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. 11 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of Exponent and their ages as of February 24, 2017 are as follows: Name Age Position Paul R. Johnston, Ph.D. Catherine Ford Corrigan, Ph.D. Robert I. Haddad, Ph.D. Harri K. Kytomaa, Ph.D. Steven J. Murray, Ph.D. John D. Osteraas, Ph.D. John D. Pye, Ph.D. Richard Reiss, Sc.D. Richard L. Schlenker, Jr. Sally B. Shepard 63 48 59 58 42 62 46 50 51 56 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 the Health 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 2003 he was appointed Chief Operating Officer and added 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. Catherine Ford Corrigan, Ph.D., the Company in 1996. She was promoted to Principal in the Biomechanics practice in 2002 and was appointed joined 12 Chief Executive Officer and Director President Group Vice President Group Vice President Group Vice President Group Vice President Group Vice President Group Vice President Executive Vice President, Chief Financial Officer and Corporate Secretary Vice President – Human Resources Group Vice President in May 2012. Dr. Corrigan was named President in July 2016. She earned her Ph.D. (1996) in Medical Engineering and Medical Physics and M.S. (1992) in Mechanical Engineering from the Massachusetts Institute of Technology and her B.S. from in Bioengineering of the University joining Exponent, Dr. Pennsylvania. Prior to Corrigan was a researcher the Orthopaedic Biomechanics Laboratory at Beth Israel Hospital and Harvard Medical School. in Robert I. Haddad, Ph.D., joined the Company in May 2016 as a Corporate Vice President and Principal Scientist. He was promoted to Group Vice President in October 2016. Prior to joining the Company, Dr. Haddad was Chief, Assessment & Restoration Division, Office of Response & Restoration at the National Oceanic and Atmospheric Administration from 2007 to 2016 where he was responsible for the strategic evaluation and tactical resolution of environmental problems. From 2002 to 2007, Dr. Haddad was President and Principal Scientist at Applied Geochemical Strategies, Inc. where he was responsible for providing litigation support and expertise in environmental forensics, human health and ecological risk assessments, and natural resource damage assessments to regional, national, and international clients. Dr. Haddad received his Ph.D. (1989) in Chemical Oceanography from the University of North Carolina, Chapel Hill and B.S. (1979) in Geology from the University of California, Los Angeles. Dr. Haddad has published in peer-reviewed technical publications and scientific journals, and has authored over 300 technical reports and confidential documents for a variety of projects. Harri K. Kytomaa, Ph.D., joined the Company in 1994. He was promoted to Principal Engineer in 1999 and was appointed Corporate Vice President in 2006. Dr. Kytomaa was appointed Group Vice President in October 2016. Dr. Kytomaa received his Ph.D. (1986) in Mechanical Engineering and M.S. (1981) in Mechanical Engineering from the California Institute of Technology, and B.Sc. (1979) in Engineering Science from Durham University, England. He is a Registered Professional Engineer in 9 states and a Certified Fire and Explosion in accordance with the National Association of Fire Investigators National Certification Board. Prior to joining Exponent, Dr. Kytomaa was Assistant Professor and Associate Professor of Mechanical Institute of Engineering at Technology, where he was head of the Fluid Mechanics Laboratory. the Massachusetts Investigator Steven J. Murray, Ph.D., joined the Company in 2001. He was promoted to Principal Engineer in 2008. Dr. Murray was promoted to Corporate Vice President in May 2014 and Group Vice President in January 2015. Dr. Murray received his Ph.D. (2000) in Materials Science and Engineering (Electronic Materials Panel) from the Massachusetts Institute of Technology, B.S. (1996) in Materials Science and Mineral Engineering and B.S. (1996) in Mechanical the University of California, Engineering from Berkeley. He is a Registered Professional Electrical Engineer in the State of Oregon and 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 Wisconsin. Dr. Osteraas is a Registered Professional Engineer in 17 states and is a Fellow of the American Society of Civil Engineers. John D. Pye, Ph.D., joined the Company in 1999. He was promoted to Principal Engineer in 2006 and was appointed Corporate Vice President in 2009. Dr. Pye was appointed Group Vice President in January 2014. Dr. Pye received his Ph.D. (1999) in Aerospace Engineering, M.S. (1993) in Aerospace Engineering from Stanford University, and B.A.Sc. (1992) in Engineering Science from the University of Toronto, Canada. He is a Registered Professional Mechanical Engineer in the State of California. Prior to joining Exponent, Dr. Pye held a research position in the Aerospace Fluid Mechanics Lab at Stanford University where he was the renovation and redesign of the Stanford Low-Speed wind tunnel as well as managing the Stanford experimental facilities for the Stanford/NASA Ames Joint Institute for Aeronautics and Astronautics. responsible for Richard Reiss, Sc.D., joined the Company in 2006 as a Principal Scientist. He was promoted to Group Vice President in January 2015. Dr. Reiss earned his Sc.D. (1994) in Environmental Health from the Harvard University School of Public Health, M.S. from (1991) in Environmental Engineering in Northwestern University and B.S. Chemical Engineering the University of California, Santa Barbara. Prior to joining Exponent he was a Vice President with Sciences International. Dr. Reiss is a Fellow of the Society of Risk Analysis. (1989) from 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 July 1999 and Secretary of in 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. Sally B. Shepard, rejoined the Company in 2014 as Vice President - Human Resources. From 2012 to 2014 she served as Vice President Human Resources at 41st Parameter. From 2002 to 2009 she served as Vice President Human Resources at CoWare, Inc., which was acquired by Synopsys. From 2000 to 2001 Ms. Shepard served as Vice President Human Resources at Lutris Technologies. She also provided Human Resources consulting services for a variety of companies between roles. From 1981 to 1999 Ms. 13 Shepard held a variety of roles at Exponent including Managing Engineer, Business Manager, Director of Human Resources and Information Technology, and Vice President of Corporate Human Resources. Ms. Shepard holds a B.S. in Mechanical Engineering from Stanford University. (1982) Item 1A. Risk Factors Exponent operates in a rapidly changing environment that involves a number of uncertainties, some of which are beyond our control and may have a material adverse effect on our financial condition and results of operations. 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. 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 chemical, consumer electronics, energy, insurance, 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 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 Our cash equivalent and short-term investment portfolio as of December 30, 2016, consisted primarily of obligations of U.S. 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 14 exposure to any one issuer, as well as our maximum exposure to various asset classes. Our engagements may result in professional or other liability. Investments in some financial instruments may pose risks arising from liquidity and credit concerns. As of December 30, 2016, 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 implementation of new regulations affect nearly every industry, as well as the agencies of federal, state and local governments the extent charged with 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. their enforcement. To 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 services typically involve difficult engineering and scientific assignments and carry risks of liability. Many of our professional and other 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, were forced to withdraw from a legal matter due to a conflict 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 to protect confidential lead 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, 15 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, laboratory and warehouse 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 the asset group level could result in impairment of our long- lived assets. In addition, we have operating lease commitments for office, warehouse and laboratory space of $21,055,000 as of December 30, 2016. 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. Our international operations create special risks that could adversely affect our business. In addition to our offices in the United States, we the United Kingdom, in have physical offices Germany, Switzerland, Hong Kong 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 future. Our portion of our international operations carry special financial, business and legal risks, including cultural and revenues the in regulatory 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; requirements and other burdensome barriers to conducting business; managing the risks associated with engagements with foreign officials and governmental agencies, the risks arising from the United States Foreign Corrupt Practices Act and the United Kingdom Bribery Act of 2010; 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. including Inherent risks related to government contracts may adversely affect our business. to and criminal sanctions, which may 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 include administrative 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 other commercial contracts. Negative publicity related to our government contracts, regardless of whether it is accurate, may further damage our business by affecting our ability to compete for new contracts. penalties A decline in the U.S. Government defense budget, changes in budgetary priorities or timing of contract awards may adversely affect our business. 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. 16 levels for Current U.S. Government spending 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, changes the DoD acquisition system and 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 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. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and controls. Our business can be adversely affected by downturns in the overall economy. 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, slows, our clients may consolidate or go out of business and thus demand reduced significantly. services could be for our 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 acquired. Because a high percentage of our 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 17 Item 1B. Unresolved Staff Comments None. Item 2. Properties 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 warehouse storage space that we also own. 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, Hong Kong, 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 leased properties was $6,478,000. fiscal 2016 for all Item 3. Legal Proceedings Exponent is not engaged in any material legal proceedings. Item 4. Mine Safety Disclosures Not applicable. 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 These fluctuations are often unrelated the to operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock. When the market price of stock drops 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 There can be no assurance that we will continue to declare cash dividends or repurchase our shares at all or in any particular amounts. Our Board of Directors has declared quarterly dividends since March 2013. Our intent to continue to pay quarterly dividends and to repurchase our shares is subject to capital availability and, in the case of dividends, periodic determinations by our Board of Directors that cash dividends are in the best interest of our stockholders and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends by us. Future dividends and share repurchases may also be affected by, among other factors: our views on potential future capital requirements for investments, including acquisitions; legal risks; stock repurchase programs; changes in federal and state income tax laws or corporate laws; contractual restrictions; and changes to our business model. Our dividend payments and share repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends or repurchase shares at all or in any particular amounts. A reduction or suspension in our dividend payments or share repurchase activity could have a negative effect on our stock price. 18 As of February 17, 2017, there were 189 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 $18.6 million, $15.5 million and $13.0 million of dividends during fiscal 2016, 2015 and 2014, respectively. Total dividends paid per share were $0.72, $0.60 and $0.50 during fiscal 2016, 2015 and 2014, respectively. On February 1, 2017, our Board of Directors announced a quarterly cash dividend of $0.21 per share of the Company’s common stock, payable March 24, 2017, to stockholders of record as of March 3, 2017. We anticipate paying quarterly dividends each year in March, June, September and December, subject to declaration by our Board of Directors. See Part II, “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” PART II 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 Fiscal Year Ended January 1, 2016: First Quarter Second Quarter Third Quarter Fourth Quarter High Low $ 45.95 $ 48.50 $ 46.74 $ 54.73 $ 39.20 $ 41.50 $ 40.58 $ 45.66 Fiscal Year Ended December 30, 2016: First Quarter Second Quarter Third Quarter Fourth Quarter $ 51.99 $ 44.82 $ 58.65 $ 48.39 $ 59.71 $ 45.00 $ 64.80 $ 48.42 19 The following table provides information on the Company’s share repurchases (of Company common stock) for the quarter ended December 30, 2016 (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 October 1 to October 28 Additional funds authorized for share repurchases October 29 to November 25 November 26 to December 30 Total - - - - $ - - - - $ $ - - - - $22,307 $35,000 $57,307 $57,307 Repurchases of the Company’s common stock were effected pursuant to a repurchase program authorized by the Company’s Board of Directors. On May 29, 2014, the Company’s Board of Directors authorized $35,000,000 for the repurchase of the Company’s common stock. On October 20, 2015, the Company’s Board of Directors authorized $35,000,000 for the repurchase of the Company’s common stock. On October 18, 2016, the Company’s Board of Directors authorized $35,000,000 for the repurchase of the Company’s common stock. These repurchase programs have no expiration dates. As of December 30, 2016, there remained $57,307,000 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 2011 through 2016 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 2011. 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 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Years Ending S&P 500 Index S&P SmallCap 600 Index Exponent, Inc. 20 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) 2016 2015 Fiscal Year 2014 2013 2012 Consolidated Statements of Income Data: Revenues before reimbursements Revenues Operating income Net income Net income per share: Basic Diluted $ 299,197 $ 315,076 $ 61,911 $ 47,480 $ 295,705 $ 312,832 $ 68,933 $ 43,599 $ 289,209 $ 304,704 $ 63,549 $ 40,701 $ 280,043 $ 296,168 $ 55,946 $ 38,640 $ 266,562 $ 292,653 $ 57,620 $ 37,225 $ $ 1.79 1.75 $ $ 1.64 1.60 $ $ 1.51 1.47 $ $ 1.42 1.38 $ $ 1.35 1.30 Cash dividends declared per share $ 0.72 $ 0.60 $ 0.50 $ 0.30 $ - Consolidated Balance Sheet Data: Cash and cash equivalents Short-term investments Working capital Total assets Long-term liabilities Total stockholders’ equity $ 114,967 $ 58,755 $ 193,808 $ 403,744 $ 50,162 $ 273,346 $ 125,751 $ 45,842 $ 192,312 $ 387,507 $ 44,229 $ 262,804 $ 129,490 $ 24,913 $ 176,153 $ 365,299 $ 41,666 $ 244,288 $ 122,948 $ 33,171 $ 171,402 $ 344,166 $ 36,960 $ 235,059 $ 113,268 $ 20,881 $ 156,016 $ 315,417 $ 27,217 $ 216,429 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, 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 product development, product recall, regulatory compliance, and the discovery of potential problems related to products, people, property and impending litigation. CRITICAL ACCOUNTING ESTIMATES In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, 21 balance sheet. We operating income and net income, as well as on the liabilities on our value of certain assets and consolidated our base 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 contract losses and doubtful accounts have the greatest impact on our consolidated financial potential statements, so we consider these to be our critical accounting policies. We discuss below the assumptions, judgments and estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our critical the assumptions, in accounting involved that for 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, which the 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 contract losses and 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 or for disputes with customers that affect our ability to fully collect our accounts receivable and unbilled work-in- process, we record a specific allowance to reduce the net the amount we reasonably believe will be collected. For all other customers we recognize allowances for contract losses into consideration factors such as historical write-offs, customer concentration, customer credit-worthiness, current economic conditions, and aging of amounts due. recognized receivable accounts doubtful taking and to accounting policies, see “Note 1: Summary of Significant Accounting Policies” of our Notes to Consolidated Financial Statements. Revenue recognition. We derive our revenues primarily from professional fees earned on consulting engagements, 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 the services are performed. For recognized as 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 project. If we made different judgments or utilized 22 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 2015 2016 2014 PERIOD TO PERIOD CHANGE 2016 vs. 2015 2015 vs. 2014 Revenues 100.0% 100.0% 100.0% 0.7% 2.7% 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 61.4 9.0 5.0 4.9 80.3 19.7 2.3 22.0 6.9 59.0 8.6 5.5 4.9 78.0 22.0 0.7 22.7 8.8 60.2 8.6 5.1 5.2 79.1 20.9 1.4 22.3 8.9 4.8 5.3 (7.3) 1.3 3.8 (10.2) 0.5 2.6 10.5 (3.5) 1.1 8.5 227.8 (50.2) (2.8) (21.4) 4.7 1.0 Net income 15.1% 13.9% 13.4% 8.9% 7.1% EXECUTIVE SUMMARY reimbursements also Revenues for fiscal 2016 increased 1% and revenues before increased 1% as compared to the prior year. The increase in revenues before reimbursements was due to an increase in billing rates. Billable hours for fiscal 2016 decreased 1% as compared to the prior year. The low revenue growth and the decrease in billable hours during fiscal 2016 was due to a challenging year over year comparison due to the completion of a major project during the third quarter of fiscal 2015 and lower revenues from the oil and gas and industrial chemicals industries. impacts of products, During 2016 we were retained to investigate many significant accidents and product recalls and to reliability, safety, human health and evaluate environmental increasingly complex processes. We technologies, experienced strong demand for our multi-disciplinary battery consulting services to investigate product performance for potential recalls as well as to assist the product development and clients during manufacturing process. and corrosion engineering During fiscal 2016, we had notable performances in several practices including materials & corrosion engineering, polymer science & materials chemistry, biomedical engineering, and human factors. The materials & practice experienced growth from the utilities industry in failure analyses of systems and proactive services in asset integrity management. The polymer science & materials chemistry practice experienced growth in biomedical battery engineering practice realized growth in design consulting and product liability claims support. The human factors practice realized growth in user study services for the consumer products industry. services. The consulting Net income increased to $47,480,000 during fiscal 2016 as compared to $43,599,000 during fiscal 2015. Diluted earnings per share increased to $1.75 for fiscal 2016 as compared to $1.60 for fiscal 2015. The increase in net income and diluted earnings per share was due to the early adoption of ASU No. 2016-09, on a prospective basis, during the first quarter of fiscal 2016. Under ASU No. 2016-09 excess tax benefits are recorded as an income tax benefit in the consolidated statement of income. Prior to the adoption of ASU No. 2016-09 excess tax benefits were recognized in additional paid-in capital. 23 The tax benefit realized during fiscal 2016 was $4,827,000 or $0.18 per diluted share. Excluding the excess tax benefit, net income would have been $42,653,000 for fiscal 2016 representing a decrease of 2% as compared to fiscal 2015. Excluding the excess tax benefit, diluted earnings per share would have been $1.57 per share during fiscal 2016. 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. We also remain focused on capitalizing on emerging growth areas, managing other operating expenses, operations, maintaining a strong balance sheet and undertaking activities such as share repurchases and dividends to enhance shareholder value. generating from cash OVERVIEW OF THE YEAR ENDED DECEMBER 30, 2016 Our revenues consist of professional fees earned on consulting engagements, for use of our equipment and facilities, and reimbursements for outside direct expenses associated with the services performed that are billed to our clients. fees We operate on a 52-53 week fiscal year with each year ending on the Friday closest to December 31st. The fiscal years ended December 30, 2016, January 1, 2016 and January 2, 2015 included 52 weeks of activity. Fiscal 2017 will end on Friday, December 29, 2017. During fiscal 2016, billable hours decreased 0.6% to 1,118,000 as compared to 1,125,000 during fiscal 2015. Our utilization decreased to 70% for fiscal 2016 as compared to 72% for fiscal 2015. Technical full-time equivalent employees increased 1.7% to 764 during fiscal 2016 as compared to 751 during fiscal 2015 due to our recruiting and retention efforts. We continue to selectively hire key talent to expand our capabilities. FISCAL YEARS ENDED DECEMBER 30, 2016, AND JANUARY 1, 2016 Revenues (In thousands except percentages) Fiscal Years 2016 2015 Percent Change Engineering and Other Scientific $ 248,297 $ 237,959 Percentage of 4.3% total revenues Environmental and Health Percentage of total revenues 78.8% 76.1% 66,779 74,873 (10.8)% 21.2% 23.9% Total revenues $ 315,076 $ 312,832 0.7% corrosion engineering 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. During fiscal 2016, billable hours for this segment increased by 2.5% to 856,000 as compared to 835,000 during fiscal 2015. The increase was due to demand for services in our materials & corrosion engineering, polymer science & materials chemistry, biomedical engineering, and human factors practices. The practice materials & experienced growth from the utilities industry in failure analyses of systems and proactive services in asset integrity management. The polymer science & materials chemistry practice experienced growth in biomedical battery engineering practice realized growth in design consulting and product liability claims support. The human factors practice realized growth in user study services for the consumer products industry. This growth was partially offset by shifts in market conditions, such as reduced spending in the oil and gas industry and a slowdown in intellectual property litigation. Utilization decreased to 73% for fiscal 2016 as compared to 75% for fiscal 2015. Technical full-time equivalents increased 5.0% to 564 for fiscal 2016 from 537 for fiscal 2015 due to our recruiting and retention efforts. services. The consulting The decrease in revenues from our Environmental and Health segment was due to a decrease in billable hours. During fiscal 2016, billable hours for this segment decreased by 9.7% to 262,000 as compared to 290,000 during fiscal 2015. Utilization decreased to 63% for fiscal 2016 as compared to 65% for fiscal 2015. The decrease in billable hours and utilization was due to completion of a major project during the third quarter of fiscal 2015 and lower revenues from the oil and gas and industrial chemicals industries. Technical full-time equivalents decreased 6.5% to 24 200 during fiscal 2016 as compared to 214 for fiscal 2015 due to our efforts to align resources with anticipated demand. 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 2016 2015 Percent Change Compensation and related expenses Percentage of total revenues $ 193,397 $ 184,502 4.8% 61.4% 59.0% The increase in compensation and related expenses during fiscal 2016 was due to an increase in payroll and a change in the value of assets associated with our deferred compensation plan. During fiscal 2016 payroll increased $4,730,000 due to the increase in technical full-time equivalent employees and our annual salary increase. During fiscal 2016, deferred compensation expense increased $4,186,000 with a corresponding increase to other income 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 $3,861,000 during fiscal 2016 as compared to a decrease in the value of the plan assets of $325,000 during fiscal 2015. We expect our compensation expense, excluding the change in value of deferred compensation plan assets, to increase as we selectively add new talent and adjust compensation to market conditions. Other Operating Expenses (In thousands except percentages) Fiscal Years 2016 2015 Percent Change Other operating Expenses Percentage of total revenues $ 28,397 $ 26,975 5.3% 9.0% 8.6% 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 25 increase in depreciation expense of $652,000, an increase in occupancy expense of $344,000, an increase in computer expense of $250,000, and several individually insignificant increases, which were associated with the increase in technical full- time equivalent employees and investments in our corporate infrastructure. We expect other operating expense to grow as we selectively add new talent and make investments in our corporate infrastructure. Reimbursable Expenses (In thousands except percentages) Fiscal Years 2016 2015 Percent Change Reimbursable expenses Percentage of $ 15,879 $ 17,127 (7.3)% total revenues 5.0% 5.5% The decrease in reimbursable expenses was primarily due to a decrease in project-related costs in our materials & corrosion engineering, polymer science & materials chemistry, and mechanical engineering practices within our Engineering and Other Scientific segment. 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 2016 2015 Percent Change General and administrative expenses $ 15,492 Percentage of $ 15,295 1.3% total revenues 4.9% 4.9% The increase in general and administrative expenses during fiscal 2016 was primarily due to an increase in travel and meals and bad debt partially offset by a decrease in outside consulting. We expect general and administrative expenses to increase as we selectively add new talent, expand our business development efforts, pursue staff development initiatives and hold a firm-wide managers’ meeting during fiscal 2017. Other Income (In thousands except percentages) Fiscal Years 2016 2015 Percent Change Other income Percentage of total revenues $ 7,211 $ 2,200 227.8% 2.3% 0.7% Other income 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. The increase in other income was primarily due to the change in value of assets associated with our deferred compensation plan. During increased $4,186,000 with a corresponding increase to deferred compensation expense as compared to fiscal 2015. This change consisted of an increase in the value of the plan assets of $3,861,000 during fiscal 2016 as compared to a decrease in the value of the plan assets of $325,000 during fiscal 2015. The increase in other income during fiscal 2016 was also due to an increase in interest income of $476,000 and an increase in rental income of $420,000. fiscal 2016, other income Income Taxes (In thousands except percentages) Fiscal Years 2016 2015 Percent Change Income taxes Percentage of total revenues Effective tax rate $ 21,642 $ 27,534 (21.4)% 6.9% 31.3% 8.8% 38.7% The decrease in income taxes and the decrease in our effective tax rate were primarily due to the early adoption of ASU No. 2016-09, on a prospective basis, during the first quarter of fiscal 2016. Under ASU No. 2016-09 excess tax benefits are recorded as an income tax benefit in the consolidated statement of income. Prior to the adoption of ASU No. 2016- 09 excess tax benefits were recognized in additional paid-in capital. The tax benefit realized during fiscal 2016 was $4,827,000. Excluding the excess tax benefit, the effective tax rate would have been 38.3% for fiscal 2016. FISCAL YEARS ENDED JANUARY 1, 2016, AND JANUARY 2, 2015 Revenues (In thousands except percentages) Fiscal Years 2015 2014 Percent Change Engineering and Other Scientific $ 237,959 $ 223,384 Percentage of 6.5% total revenues Environmental and Health Percentage of total revenues 76.1% 73.3% 74,873 81,320 (7.9)% 23.9% 26.7% Total revenues $ 312,832 $ 304,704 2.7% The increase in revenues for our Engineering and Other Scientific segment was due to an increase in billable hours and an increase in billing rates. During fiscal 2015, billable hours for this segment increased by 5.2% to 835,000 as compared to 794,000 during fiscal 2014. The increase was due to demand for services in our materials & corrosion engineering, biomedical engineering, polymer science & materials chemistry practices, as well as our infrastructure group. Utilization increased to 75% for fiscal 2015 as compared to 74% for fiscal 2014. Technical full-time equivalents increased 3.5% to 537 for fiscal 2015 from 519 for fiscal 2014 due to our recruiting and retention efforts. The decrease in revenues from our Environmental and Health segment was due to a decrease in billable hours. During fiscal 2015, billable hours for this segment decreased by 7.3% to 290,000 as compared to 313,000 during fiscal 2014. Utilization decreased to 65% for fiscal 2015 as compared to 68% for fiscal 2014. The decrease in billable hours and utilization was due to one of our major investigations ending in July of 2015 and weaker demand for our services in our health centers. Technical full-time equivalents decreased 3.6% to 214 during fiscal 2015 as compared to 222 for fiscal 2014 due to our efforts to align resources with anticipated demand. Compensation and Related Expenses (In thousands except percentages) Fiscal Years 2015 2014 Percent Change Compensation and related expenses Percentage of total revenues $ 184,502 $ 183,533 0.5% 59.0% 60.2% 26 to the increase The increase in compensation and related expenses during fiscal 2015 was due to an increase in payroll, fringe benefits, and bonus expense partially offset by a change in the value of assets associated with our deferred compensation plan. During fiscal 2015 payroll and fringe benefits increased $1,683,000 and $971,000, respectively, due in technical full-time equivalent employees, our annual salary increase and, an increase in health insurance to a rates. Bonuses corresponding increase in income before income taxes, before bonus expense, and before stock-based compensation expense. During fiscal 2015, deferred compensation expense decreased $2,850,000 with a corresponding decrease to other income as compared with the prior year due to the change in value of assets associated with our deferred compensation plan. This decrease consisted of a decrease in the value of the plan assets of $325,000 during fiscal 2015 as compared to an increase in the value of the plan assets of $2,525,000 during fiscal 2014. increased $1,204,000 due Other Operating Expenses 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 2015 2014 Percent Change General and administrative expenses $ 15,295 Percentage of $ 15,842 (3.5)% total revenues 4.9% 5.2% The decrease in general and administrative expenses during fiscal 2015 was primarily due to a decrease in legal fees of $566,000 and a decrease in charitable contributions of $507,000, partially offset by an increase in outside consulting services of $218,000 and an increase in accounting fees of $164,000. The decrease in legal fees was due to a decrease in costs associated with legal claims during fiscal 2015 as compared to fiscal 2014. The increase in outside consulting services was due to investments in our corporate infrastructure. (In thousands except percentages) Fiscal Years 2015 2014 Percent Change Other Income Other operating Expenses Percentage of total revenues $ 26,975 $ 26,285 2.6% 8.6% 8.6% 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 computer expense of $274,000, an increase in office expense of $167,000, an increase in technical materials of $150,000, and several increases, which were individually associated with the increase in technical full-time equivalent employees and in our corporate infrastructure. insignificant investments Reimbursable Expenses (In thousands except percentages) Fiscal Years 2015 2014 Percent Change (In thousands except percentages) Fiscal Years 2015 2014 Percent Change Other income Percentage of total revenues $ 2,200 $ 4,416 (50.2)% 0.7% 1.4% Other income 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. The decrease in other income was primarily due to the change in value of assets associated with our deferred compensation plan. During income decreased $2,850,000 with a corresponding decrease to deferred compensation expense as compared to fiscal 2014. This change consisted of a decrease in the value of the plan assets of $325,000 during fiscal 2015 as compared to an increase in the value of the plan assets of $2,525,000 during fiscal 2014. fiscal 2015, other Reimbursable expenses Percentage of $ 17,127 $ 15,495 10.5% Income Taxes total revenues 5.5% 5.1% (In thousands except percentages) Fiscal Years 2015 2014 Percent Change The increase in reimbursable expenses was primarily due to an increase in project-related costs in our materials & corrosion engineering practice within our Engineering and Other Scientific segment. The Income taxes Percentage of total revenues Effective tax rate $ 27,534 $ 27,264 1.0% 8.8% 38.7% 8.9% 40.1% 27 excess tax benefit of $4,827,000 for fiscal 2016 was classified as an operating activity in the statement of cash flows. The excess tax benefit of $6,396,000 for fiscal 2015 was classified as a financing activity. The increase in net cash provided by operating activities during fiscal 2015 as compared to fiscal 2014 was primarily due to an increase in cash receipts from clients. During fiscal 2016, 2015 and 2014, net cash provided by (used in) investing activities was primarily related to the purchase and sale or maturity of short-term investments. During fiscal 2016 we completed the purchase of a 1.1 acre parcel of land with 27,000 square feet of warehouse storage space in Menlo Park, California adjacent to our owned office and lab facilities. We had leased this warehouse storage space for the past 25 years. The total purchase price was $8,250,000. The increase in net cash used in financing activities during fiscal 2016, as compared to fiscal 2015, was primarily due to the early adoption of ASU No. 2016- 09. Under ASU No. 2016-09, the excess tax benefit of $4,827,000 for fiscal 2016 was classified as an operating activity in the statement of cash flows. The excess tax benefit of $6,396,000 for fiscal 2015 was classified as a financing activity. The increase in net cash used in financing activities during fiscal 2016 was also due to an increase in our quarterly dividend payments. The decrease in net cash used in financing activities during fiscal 2015, as compared to fiscal 2014, was due to a decrease in repurchases of our common stock partially offset by an increase in our quarterly dividend payments. 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, procure facilities and equipment or strategically acquire professional are service complementary to our business. firms that The decrease in our effective tax rate was due to an increase in foreign earnings in jurisdictions with lower income tax rates and a decrease in state income taxes. LIQUIDITY AND CAPITAL RESOURCES (In thousands) 2016 Fiscal Years 2015 2014 Net cash provided by (used in): Operating activities $ 66,946 $ 60,489 $ 48,252 Investing activities $ (27,443) $ (27,035) $ 2,435 Financing activities $ (49,166) $ (36,916) $ (43,128) invest our excess cash We financed our business in fiscal 2016 through available cash and cash flows from operating in cash activities. We equivalents and short-term investments. As of December 30, 2016, our cash, cash equivalents and short-term investments were $173,722,000 compared to $171,593,000 at January 1, 2016. We believe our existing balances of cash, cash equivalents and short- term investments will be sufficient to satisfy our expenditures, working repurchases, outstanding dividends and other liquidity requirements over at least the next 12 months. capital stock commitments, capital needs, Approximately 6% of our cash, cash equivalents, and short-term investments was held by our foreign subsidiaries and subject to repatriation tax effects. Our intent is to permanently reinvest our earnings from foreign operations, and current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. Generally, our net cash provided by operating activities is used to fund our day-to-day operating activities. First quarter operating cash requirements are generally higher due to payment 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 operating employee-related are expenditures, leased facilities, taxes, and general operating expenses including marketing and travel. activities for Net cash provided by operating activities was $66.9 million for fiscal 2016 as compared to $60.5 million and $48.3 million fiscal 2015 and 2014, respectively. The increase in net cash provided by operating activities during fiscal 2016 as compared to fiscal 2015 was primarily due to the early adoption of ASU No. 2016-09. Under ASU No. 2016-09, the in 28 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 relationships with generate transactions 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 December 30, 2016 (in thousands): Fiscal year 2017 2018 2019 2020 2021 Thereafter Operating lease Purchase commitments Obligations $ 7,227 5,597 3,480 2,480 1,921 1,058 $ 21,763 $ 583 - - - - - $ 583 Total $ 7,810 5,597 3,480 2,480 1,921 1,058 $ 22,346 The above table does not reflect unrecognized tax benefits of $1,956,000, the timing of which is uncertain. Refer to “Note 7: Income Taxes” of the Notes to Consolidated Financial Statements for additional discussion on unrecognized tax benefits. We maintain nonqualified deferred compensation plans for the benefit of a select group of highly compensated employees. Vested amounts due under the plans of $46,503,000 were recorded as a long- term liability on our consolidated balance sheet at that are December 30, 2016. Company assets earmarked to pay benefits under the plans are held in a rabbi trust and are subject to the claims of our creditors. As of December 30, 2016, invested the plans of $41,153,000 were amounts under recorded as a long-term asset on our consolidated balance sheet. 29 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 2016, 2015 and 2014: (in thousands, except percentages) 2016 Fiscal Years 2015 2014 Revenues before reimbursements $ 299,197 $ 295,705 $ 289,209 EBITDA $ 74,570 $ 76,405 $ 73,219 EBITDA as a % of revenues before reimbursements 24.9% 25.8% 25.3% The decrease in EBITDA as a percentage of revenues before reimbursements for fiscal 2016 as compared to fiscal 2015 was due to a decrease in utilization. Utilization for fiscal 2016 was 70% as compared to 72% during fiscal 2015. The decrease in utilization was due to the completion of a major project during the third quarter of fiscal 2015 and lower revenues from the oil and gas and industrial chemicals industries. The increase in EBITDA as a percentage of revenues before reimbursements for fiscal 2015 as compared to fiscal 2014 was primarily due to the increase in revenues before reimbursements and low expense growth. 30 The following table is a reconciliation of EBITDA and EBITDAS to the most comparable GAAP measure, net income, for fiscal 2016, 2015 and 2014: (in thousands) 2016 Fiscal Years 2015 2014 Net Income $ 47,480 $ 43,599 $ 40,701 Add back (subtract): Income taxes Interest income, net Depreciation and amortization EBITDA Stock-based compensation 21,642 (683) 6,131 74,570 13,333 27,534 (207) 5,479 76,405 12,959 27,264 (150) 5,404 73,219 13,079 EBITDAS $ 87,903 $ 89,364 $ 86,298 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 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 have foreign currency risk related to our revenues and expenses denominated in currencies other than the U.S. dollar, primarily the British Pound, the Euro, and the Chinese Yuan. Accordingly, changes in exchange rates may negatively affect the revenues and net income of our foreign subsidiaries as expressed in U.S. dollars. Our foreign currency risk is primarily in our Environmental and Health operating segment. At December 30, 2016, we had net assets of functional approximately $6.2 million with a the British Pound, net assets of currency of approximately $2.8 million with a functional currency of the Euro, and net assets of approximately $3.4 million with a functional currency of the Chinese Yuan associated with our operations in the United Kingdom, Germany, and China, respectively. We also have foreign currency risk related to foreign transactions and monetary assets and currency liabilities denominated in currencies that are not the functional currency. We have experienced and will continue to experience fluctuations in our net income as a result of gains (losses) on these foreign currency transactions and the re-measurement of monetary assets and liabilities. At December 30, 2016, we had net assets denominated the non-functional currency of approximately $1.8 million. in We do not use foreign exchange contracts to hedge any foreign currency exposures. To date, the impacts of foreign currency exchange rate changes on our consolidated revenues and consolidated net income have not been material. However, our continued international expansion increases our exposure to exchange rate fluctuations and as a result such 31 fluctuations could have a significant impact on our future results of operations. Item 8. Financial Statements and Supplementary Data 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 internal control over financial reporting of Exponent, Inc., 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 disclosure controls and procedures were effective as of the end of the period covered by this annual report. (b) Management’s Report on Internal Control Over Financial Reporting. to provide is designed 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). Our internal control over financial reporting reasonable assurance, but not absolute assurance, regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. There are inherent limitations to the effectiveness of any system of internal control over financial reporting. These limitations include the possibility of human error, the circumvention or overriding of the system and reasonable resource constraints. Because of its internal control over inherent limitations, our that in conditions, or 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 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 the officer, we conducted an evaluation of effectiveness of our internal control over financial reporting based on the framework in Internal Control the - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective at the reasonable assurance level as of December 30, 2016. (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. PART III 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. Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference to the Company’s definitive Proxy Statement its 2017 Annual Meeting of Stockholders (the "Proxy Statement"). See Item 1 for information regarding the executive officers of the Company. for 32 Item 11. Executive Compensation The information required by this item is incorporated by reference to the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Related Stockholder Matters and Management The information required by this item is incorporated by reference to the Proxy Statement. See also the table on the Company’s share repurchases in Part II, Item 5 above. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference to the Proxy Statement. Item 14. Principal Accounting Fees and Services The information required by this item is incorporated by reference to the Proxy Statement. 33 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 December 30, 2016, January 1, 2016 and January 2, 2015 Consolidated Statements of Comprehensive Income for the years ended December 30, 2016, January 1, 2016 and January 2, 2015 Consolidated Balance Sheets as of December 30, 2016 and January 1, 2016 Consolidated Statements of Stockholders’ Equity for the years ended December 30, 2016, January 1, 2016 and January 2, 2015 Consolidated Statements of Cash Flows for the years ended December 30, 2016, January 1, 2016 and January 2, 2015 Notes to Consolidated Financial Statements 2. Financial Statement Schedules Page 35 37 38 39 40 42 43 The following financial statement schedule of Exponent, Inc. for the years ended December 30, 2016, January 1, 2016 and January 2, 2015 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 62 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 65 34 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 as of December 30, 2016 and January 1, 2016, 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 December 30, 2016. 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 internal control over financial reporting of Exponent, Inc. as of December 30, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The management of Exponent, Inc. is responsible for these consolidated financial statements, the financial statement schedule, 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 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, and an opinion on the internal control over financial reporting of Exponent, Inc. 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 December 30, 2016 and January 1, 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended December 30, 2016, 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 in all material respects, the information set forth herein. Also in our opinion, Exponent, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 30, 2016, based on criteria established in 35 Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for excess tax benefits and tax deficiencies related to stock-based compensation as well as forfeitures of share-based awards as of January 2, 2016 due to the adoption of Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting. /s/ KPMG LLP San Francisco, California February 24, 2017 36 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 2016 Fiscal Years 2015 2014 $ 299,197 15,879 315,076 $ 295,705 17,127 312,832 $ 289,209 15,495 304,704 193,397 28,397 15,879 15,492 253,165 61,911 184,502 26,975 17,127 15,295 243,899 68,933 183,533 26,285 15,495 15,842 241,155 63,549 683 6,528 69,122 207 1,993 71,133 150 4,266 67,965 21,642 $ 47,480 27,534 $ 43,599 27,264 $ 40,701 $ $ 1.79 1.75 $ $ 1.64 1.60 $ $ 1.51 1.47 26,488 27,166 26,606 27,298 26,910 27,666 Cash dividends declared per common share $ 0.72 $ 0.60 $ 0.50 See accompanying notes to the Consolidated Financial Statements. 37 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 $0, $(38), and $304, respectively Unrealized gain (loss) arising during the period on investments, net of tax of $53, $53, and $(3), respectively Comprehensive income See accompanying notes to the Consolidated Financial Statements. 2016 Fiscal Years 2015 2014 $ 47,480 $ 43,599 $ 40,701 (1,240) (822) (1,017) (81) $ 46,159 (79) $ 42,698 4 $ 39,688 38 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 $3,417 and $2,792, respectively Prepaid expenses and other assets 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 12) Stockholders’ equity: Preferred stock, $.001 par value; 2,000 shares authorized; no shares outstanding Common stock, $.001 par value; 80,000 shares authorized; 32,853 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: 7,256 and 7,133 shares held, respectively Total stockholders’ equity See accompanying notes to the Consolidated Financial Statements. 39 December 30, 2016 January 1, 2016 $ 114,967 58,755 $ 125,751 45,842 87,409 12,913 274,044 36,710 8,607 42,166 41,153 1,064 $ 403,744 $ 10,073 62,539 7,624 80,236 2,005 46,503 1,654 130,398 88,577 12,616 272,786 28,485 8,607 39,456 36,522 1,651 $ 387,507 $ 10,580 62,092 7,802 80,474 1,913 40,322 1,994 124,703 - - 33 194,632 33 179,816 (146) (2,980) (3,126) 291,243 (209,436) 273,346 $ 403,744 (65) (1,740) (1,805) 269,259 (184,499) 262,804 $ 387,507 Exponent, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity (In thousands) Balance at January 3, 2014 Employee stock purchase plan Exercise of stock options, net of swaps Excess tax benefit for equity incentive 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 Dividends and dividend equivalent rights Net income Balance at January 2, 2015 Employee stock purchase plan Exercise of stock options, net of swaps Excess tax benefit for equity incentive 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 1, 2016 Additional Accumulated other Common Stock Shares Amount paid-in capital Treasury Stock comprehensive Retained income (loss) earnings Shares Amount Total 32,853 $ 33 $141,233 $ 109 $ 226,040 6,727 $ (132,356) $ 235,059 - - - - - - - - - - - - - - - - - - - - - - 810 67 5,100 6,792 - - - - - - - (1,017) 6,008 (343) - 541 - - - 4 - - - - - - - - (32) (84) - - 850 - - 337 1,147 893 960 - 5,100 - (30,921) 6,792 (30,921) - - (1,017) 6,008 (6,050) (350) 37 (6,356) - (13,730) 40,701 - - - - - - 4 (13,189) 40,701 32,853 $ 33 $160,208 $ (904) $ 246,961 7,111 $ (162,010) $ 244,288 - - - - - - - - - - - - - - - - - - - - - - 836 (94) 6,396 6,618 - - - - - - - (822) - - 6,169 (975) - 658 - - - - - - - (27) 350 1,186 (150) 1,922 1,828 - - 530 - - - 6,396 - (23,314) 6,618 (23,314) - - (822) 6,169 (4,943) (331) (1,447) (7,365) (79) - - - (16,358) 43,599 - - - - - - (79) (15,700) 43,599 32,853 $ 33 $179,816 $ (1,805) $ 269,259 7,133 $ (184,499) $ 262,804 See accompanying notes to the Consolidated Financial Statements. 40 (In thousands) Balance at January 1, 2016 Employee stock purchase plan Exercise of stock options, net of swaps 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 Other Net income Balance at December 30, 2016 Additional Accumulated other Common Stock Shares Amount paid-in capital comprehensive Retained Treasury Stock income (loss) earnings Shares Amount Total 32,853 $ 33 $179,816 $ (1,805) $ 269,259 7,133 $ (184,499) $ 262,804 - - - - - - - - - - - - - - - - - - - - - - 883 161 7,152 - - - - - - (1,240) - - 6,334 (701) - 854 133 - - - - - - (23) (30) 307 1,190 405 566 - 491 - (24,456) 7,152 (24,456) - - - - (1,240) 6,334 (5,791) (315) (1,193) (7,685) (81) - - - - (19,627) (78) 47,480 - - - - - - - - (81) (18,773) 55 47,480 32,853 $ 33 $194,632 $ (3,126) $291,243 7,256 $ (209,436) $ 273,346 See accompanying notes to the Consolidated Financial Statements. 41 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: 2016 Fiscal Years 2015 2014 $ 47,480 $ 43,599 $ 40,701 Depreciation and amortization of property, equipment and leasehold improvements 6,131 5,479 5,404 Amortization of premiums and accretion of discounts on short-term investments Deferred rent expense Provision for contract losses and doubtful accounts Stock-based compensation Deferred income tax provision Excess tax benefit for equity incentive 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 Net cash (used in) provided by investing activities Cash flows from financing activities: Excess tax benefit for equity incentive plans Payroll taxes for restricted stock units Repurchase of common stock Exercise of share-based payment awards Dividends and dividend equivalent rights Net cash used in financing activities 2 (340) 2,452 13,333 (2,602) - (1,284) (598) (370) 2,920 (178) 66,946 595 (65) 929 12,959 (3,827) (6,396) (3,138) 421 7,718 2,639 (424) 60,489 885 (273) 1,718 13,079 (6,077) (5,100) (11,106) (5,320) 6,142 6,744 1,455 48,252 (14,393) (51,000) 37,950 - (5,379) (43,946) 22,290 - (4,947) (5,260) 11,642 1,000 (27,443) (27,035) 2,435 - (7,685) (24,456) 1,756 (18,781) (49,166) 6,396 (7,365) (23,314) 3,014 (15,647) (36,916) 5,100 (6,356) (30,921) 2,107 (13,058) (43,128) Effect of foreign currency exchange rates on cash and cash equivalents (1,121) (277) (1,017) Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year (10,784) 125,751 $ 114,967 (3,739) 129,490 $ 125,751 6,542 122,948 $ 129,490 See accompanying notes to the Consolidated Financial Statements. 42 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. significant statements 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 periods 2016, 2015 and 2014 included 52 weeks of activity and ended on December 30, 2016, January 1, 2016 and January 2, 2015, respectively. Fiscal period 2017 will end on December 29, 2017. incorporation Stock Split On May 28, 2015, the Company’s stockholders approved an amendment to the Company’s certificate of the number of to (i) amend authorized shares of common stock to 80,000,000, (ii) amend the number of authorized shares of preferred stock to 2,000,000, and (iii) effect a two- for-one stock split. As a result of the stock split, each shareholder of record at the close of business on May 28, 2015, received one additional share of common stock. Restricted stock unit awards and stock option awards have also been adjusted to reflect the two-for- one stock split. For periods prior to the stock split, all share and per share data the Company’s consolidated financial statements and related notes have been retroactively adjusted to reflect the stock split. in 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 liabilities and reported amounts of assets 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. 43 Revenue Recognition The Company derives its revenues primarily from professional fees earned on consulting engagements, fees earned for the use of its equipment and facilities, and 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. 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 fixed-price engagements, it 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 this methodology achieves a reliable measure of the revenue from the consulting services it provides to its customers under fixed-price contracts given the nature of the consulting services the Company provides and the following additional considerations: • • 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; 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 fiscal years 2016, 2015 and 2014, respectively, were: (In thousands) Fiscal Years 2015 2014 2016 Gross revenues Less: Subcontractor fees Revenues $ 322,293 $ 320,404 $ 313,723 9,019 315,076 312,832 304,704 7,217 7,572 Reimbursements: Out-of-pocket reimbursements 5,474 5,967 5,862 Other outside direct expenses Revenues before 10,405 11,160 9,633 15,879 17,127 15,495 reimbursements $ 299,197 $ 295,705 $ 289,209 Significant management judgments and estimates must be made in connection with the revenues in any accounting period. These recognized 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 44 in 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 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 more likely than not it will be required to sell the investment before recovery of the investment’s cost basis. Allowances for Contract Losses and Doubtful Accounts The Company maintains allowances for estimated losses resulting from the inability of customers to meet their financial obligations or for disputes that affect the Company’s ability to fully collect amounts due. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations or aware of a dispute with a specific customer, a specific allowance is recorded to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For recognizes all other customers the Company for doubtful accounts based upon allowances concentration, historical write-offs, 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 45 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 years 2016, 2015 or 2014. the to perform 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 goodwill for each reporting unit for impairment by assessing qualitative factors to determine whether it is necessary 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. limited cost 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 The Company completed its annual assessment for all reporting units with goodwill for fiscal 2016 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 totality of Company did not recognize any goodwill impairment losses in fiscal years 2016, 2015 or 2014. Deferred Revenues Deferred revenues represent amounts billed to clients in advance of services provided. 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. 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 the U.S. An uncertain tax position is recognized if it is determined that it is to be sustained upon more 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 December 30, 2016 and January 1, 2016. than not likely 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. 46 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 shares outstanding and number of common potentially dilutive securities, using the treasury stock method if their effect would be dilutive. common 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 2015 2016 2014 per share computation 26,488 26,606 26,910 Effect of dilutive common stock options outstanding 124 135 136 Effect of unvested restricted stock units outstanding Shares used in diluted 554 557 620 per share computation 27,166 27,298 27,666 There were no equity awards excluded from the diluted per share calculation for fiscal years 2016, 2015 and 2014. intended (“ASU”) No. ASU No. 2016-09 Recently Adopted Accounting Pronouncement. On March 30, 2016, the Financial Accounting issued Accounting (“FASB”) Standards Board Standard Update 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standard Codification Topic 718, Compensation – Stock Compensation. includes provisions to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Under ASU No. 2016-09, entities will record all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement. Prior to ASU No. 2016-09, excess tax benefits were recognized in the balance sheet. additional paid-in-capital on Under ASU No. 2016-09, excess tax benefits will be classified as an operating activity in the statement of cash flows. Prior to ASU No. 2016-09, excess tax benefits were classified as a financing activity in the statement of cash flows. Under ASU No. 2016-09, entities will also elect an accounting policy to either estimate the number of forfeitures of share-based awards or account for forfeitures when they occur. Prior to ASU No. 2016-09, entities were required to estimate forfeitures. In addition, ASU No. 2016-09 allows entities to withhold from employees upon exercise or settlement of share-based awards up to the maximum individual statutory tax rate without classifying the awards as a liability. ASU No. 2016-09 is effective for public business entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company elected to early adopt ASU No. 2016-09 as of the beginning of its first quarter of fiscal 2016. During fiscal 2016, the Company recorded an excess tax benefit of $4,827,000 as an income tax benefit in the consolidated statement of income and classified this excess tax benefit as an operating activity in the consolidated statement of cash flows. Excluding the excess tax benefit, net income would have been $42,653,000 and diluted earnings per share would have been $1.57 per share during fiscal 2016. The recognition of excess tax benefits and deficiencies was applied prospectively and thus prior periods were not adjusted. The formula for calculating diluted earnings per share under the treasury stock method no longer includes the estimated excess tax benefits that were recorded in additional paid-in capital. The impact of the adoption of ASU No. 2016-09 had an immaterial impact on weighted average diluted shares outstanding during fiscal 2016. the Company elected In connection with the early adoption of ASU No. 2016-09, to account for forfeitures of share-based awards when they occur. This election is applied prospectively and thus prior periods were not adjusted. An adjustment of $78,000 was made fiscal 2016 to reduce beginning retained earnings for estimated forfeitures previously recorded on outstanding share-based awards. The election to account for forfeitures of share-based awards when they occur did not have a material impact on stock- based compensation expense during fiscal 2016. Recent Accounting Pronouncements Not Yet Effective. On May 28, 2014, the FASB issued ASU No. 2014- 09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles (“GAAP”) when it becomes effective. The new standard is effective for the Company on the first day of fiscal 2018 (December 30, 2017). The two 47 permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. During 2016, the Company made progress toward completing an evaluation of the potential changes from adopting the new standard on future financial reporting and disclosures. The impact of adopting the new standard is not expected to be material because the analysis of the Company’s contracts under the new revenue recognition standard supports the recognition of revenue over time, which is consistent with the Company’s current revenue recognition model. Substantially all of the Company’s engagements are performed under time and material or fixed-price arrangements. For time and materials contracts the Company anticipates utilizing the practical expedient under the ASU which states, if an entity has a right to consideration from a customer in an amount that corresponds directly with the value of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour or service provided), the entity may recognize revenue in the amount to which the entity has a right to invoice. Application of the practical expedient to time and material contracts is consistent with the Company’s current revenue recognition policy. For fixed price contracts the Company will recognize revenue over time under the ASU because of the continuous transfer of control to the customer. The customer typically controls the work in process as evidenced either by contractual termination clauses or by the Company’s rights to payment for work performed to date to deliver services that do not have an alternative use to the Company. Input methods are an acceptable method of measuring progress towards completing under the ASU. This is consistent with the Company’s current policy of measuring progress towards completion 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 it provides to its customers under fixed price contracts. financial which requires application of the guidance for all periods presented. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. The standard will require the Company to record a right of use asset and a lease liability that will materially gross up its balance sheet. statements and The Company anticipates adopting the standard using the modified retrospective method. The Company is currently evaluating the required disclosures under the new standard and developing appropriate changes to its process, systems and controls. On February 25, 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize most leases on their balance sheet. The new standard will be effective for the Company on the first day of fiscal 2019 (December 29, 2018). Early adoption is permitted. The standard requires use of the modified retrospective transition method, with elective relief, 48 Note 2: Cash, cash equivalents and short-term investments Cash, cash equivalents and short-term investments consisted of the following as of December 30, 2016: (In thousands) Classified as current assets: Cash Cash equivalents: Money market securities Total cash equivalents Total cash and cash equivalents Short-term investments: U.S. Agency securities Total short-term investments Total cash, cash equivalents and short-term investments Amortized Unrealized Unrealized Estimated Fair Value Losses Gains Cost $ 93,049 $ - $ - $ 93,049 21,918 21,918 114,967 59,000 59,000 - - - - - - - - 21,918 21,918 114,967 (245) (245) 58,755 58,755 $ 173,967 $ - $ (245) $ 173,722 Cash, cash equivalents and short-term investments consisted of the following as of January 1, 2016: (In thousands) Classified as current assets: Cash Cash equivalents: Money market securities Total cash equivalents Total cash and cash equivalents Short-term investments: U.S. Agency securities 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 $ 115,221 $ - $ - $ 115,221 10,530 10,530 125,751 41,946 4,002 45,948 - - - 1 - 1 - - - 10,530 10,530 125,751 (106) (1) (107) 41,841 4,001 45,842 $ 171,699 $ 1 $ (107) $ 171,593 49 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 fiscal years 2016, 2015 and 2014. 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 December 30, 2016 (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 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) $ 21,918 $ 21,918 $ - $ 58,755 - 58,755 11,872 11,872 36,395 36,395 - - Total $ 128,940 $ 70,185 $ 58,755 $ Liabilities Deferred compensation plan (4) 53,617 53,617 Total $ 53,617 $ 53,617 $ - - $ - - - - - - - (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. 50 The fair value of these certain financial assets and liabilities was determined using the following inputs at January 1, 2016 (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 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) $ 10,530 $ 10,530 $ - $ 45,842 - 45,842 9,295 9,295 33,645 33,645 - - Total $ 99,312 $ 53,470 $ 45,842 $ Liabilities Deferred compensation plan (4) 46,740 46,740 Total $ 46,740 $ 46,740 $ - - $ - - - - - - - (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 December 30, 2016 and January 1, 2016 represent primarily obligations of United States agencies and state and local government agencies. Fixed income and equity trading securities represent mutual funds held in the Company’s deferred compensation plan. See Note 11 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 December 30, 2016: (In thousands) Due within one year Due between one and two years Total Amortized Cost $ $ 16,000 43,000 59,000 Estimated Fair Value $ 15,992 42,763 $ 58,755 51 At December 30, 2016 and January 1, 2016, 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 December 30, 2016, but require disclosure of their fair values: accounts receivable, other assets and accounts payable. The estimated fair value of such instruments at December 30, 2016 approximates their carrying value as reported on the consolidated balance sheet. There were no other-than-temporary impairments or credit losses related to available-for-sale securities during fiscal years 2016, 2015 and 2014. 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 2016 2015 $ 11,888 37,883 67 40,440 9,669 14,464 114,411 77,701 $ 36,710 $ 4,450 35,817 1,457 37,520 7,824 13,580 100,648 72,163 $ 28,485 Depreciation and amortization for fiscal years 2016, 2015 and 2014 was $6,131,000, $5,479,000 and $5,404,000, respectively. Note 5: Goodwill Below is a breakdown of goodwill, reported by segment as of December 30, 2016 and January 1, 2016: (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 fiscal years 2016, 2015 and 2014. There were no goodwill impairments or gains or losses on disposals for any portion of the Company’s reporting units during fiscal years 2016, 2015 and 2014. 52 Note 6: Other Significant Balance Sheet Components Total income tax expense for fiscal years 2016, 2015 and 2014 consisted of the following: (In thousands) 2016 Fiscal Years 2015 2014 Current Federal Foreign State Deferred Federal State Total $ 18,877 1,085 4,282 24,244 $ 25,081 1,385 4,895 31,361 $ 26,647 896 5,798 33,341 (555) (2,047) (3,411) (416) (2,602) (3,827) $ 27,534 $ 21,642 (5,059) (1,018) (6,077) $ 27,264 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 2015 2014 2016 2,910 (23) 261 2,423 (7) 274 Tax at federal statutory rate $24,193 $24,897 $23,788 State taxes, net of federal benefit Tax exempt interest income Non-deductible expenses Non-deductible stock-based compensation Excess tax benefit from equity incentive plans Difference between statutory rate and foreign effective tax rate 3,226 (44) 289 (4,321) (42) 11 - - - (889) (42) (174) 179 $21,642 $27,534 $27,264 (897) 428 Other Tax expense Effective tax rate 31.3% 38.7% 40.1% Account receivable, net (In thousands) Billed accounts receivable Unbilled accounts receivable Allowance for contract losses and doubtful accounts Total accounts Fiscal Years 2016 2015 $ 60,510 30,316 $ 62,360 29,009 (3,417) (2,792) receivable, net $ 87,409 $ 88,577 Accounts payable and accrued liabilities (In thousands) Fiscal Years 2016 2015 Accounts payable Accrued liabilities Total accounts payable and other accrued liabilities $ 3,193 6,880 $ 3,622 6,958 $ 10,073 $ 10,580 Accrued payroll and employee benefits (In thousands) Accrued bonuses payable Accrued 401(k) contributions Accrued vacation Deferred compensation Other accrued payroll and employee benefits Total accrued payroll and employee benefits Fiscal Years 2016 2015 $ 37,120 7,440 9,177 7,114 $ 38,042 7,323 8,836 6,418 1,688 1,473 $ 62,539 $ 62,092 Other accrued payroll and employee benefits consist primarily of accrued wages, payroll taxes and disability insurance programs. A portion of accrued bonuses payable will be settled by issuing fully vested restricted stock units. See Note 9 and Note 15 for additional information. Note 7: Income Taxes Income before income taxes includes income from foreign operations of $5,616,000, $6,656,000 and $4,157,000 for fiscal years 2016, 2015 and 2014, respectively. 53 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 30, 2016 and January 1, 2016 are presented in the following schedule: non-United States income tax examination by tax authorities for years prior to 2012. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: (In thousands) Deferred tax assets: Accrued liabilities and allowances Deferred compensation Other Total deferred tax assets Fiscal Years 2016 2015 $ 18,335 30,603 97 49,035 $ 17,780 27,425 43 45,248 Deferred tax liabilities: State taxes Deductible goodwill Property, equipment and leasehold improvements Unrealized gain of deferred compensation plan assets Total deferred tax liabilities Net deferred tax assets (1,958) (3,075) (1,850) (3,014) (195) (205) (1,641) (6,869) $ 42,166 (723) (5,792) $ 39,456 results of Management believes it is more likely than not that the 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 recorded as an income tax benefit for fiscal year 2016 in accordance with the early adoption of ASU No. 2016-09. See “Note 1: Recently Adopted Accounting Pronouncements” of our Notes to Consolidated Financial Statements for additional information. The net deduction in taxes otherwise payable arising from that deduction was credited to additional paid-in capital for fiscal years 2015 and 2014. For fiscal years 2016, 2015 and 2014, the net deduction in tax payable arising from employees’ stock award activity was $4,827,000, $6,396,000 and $5,100,000, 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 2013. The Company is no longer subject to California franchise tax examinations for years prior to 2012. With few exceptions, the Company is no longer subject to state and local or Balance at January 2, 2015 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 January 1, 2016 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 $ 1,546,000 406,000 80,000 (154,000) - - $ 1,878,000 502,000 6,000 (430,000) - - Balance at December 30, 2016 $ 1,956,000 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 by $1,347,000 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 in the United Kingdom, Germany, China and Hong Kong. The amount of such earnings at December 30, 2016 was $11,783,000. 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 $2,368,000. Note 8: Stockholders’ Equity Preferred Stock The Company has authorized 2,000,000 shares of undesignated preferred stock with a par value of $0.001 per share. None of the preferred shares were 54 issued and outstanding at December 30, 2016 and January 1, 2016. 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 First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year 2016 Dividends Per Share $ 0.18 $ 0.18 $ 0.18 $ 0.18 Amount (in thousands) $ 4,628 4,675 4,659 4,607 $ 18,569 Fiscal Year 2015 Dividends Per Share $ 0.15 $ 0.15 $ 0.15 $ 0.15 Amount (in thousands) $ 3,858 3,887 3,870 3,867 $ 15,482 On February 1, 2017 the Company’s Board of Directors announced a cash dividend of $0.21 per share of the Company’s common stock, payable March 24, 2017, to stockholders of record as of March 3, 2017. 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 $5,791,000, $4,943,000 and $6,050,000 were recorded as a reduction to retained earnings during fiscal 2016, 2015 and 2014, respectively. Repurchase of Common Stock The Company repurchased 491,000 shares of its common stock for $24,456,000 during fiscal year 2016. The Company repurchased 530,000 shares of its common stock for $23,314,000 during fiscal year 2015. The Company repurchased 850,000 shares of its common stock for $30,921,000 during fiscal year 2014. On October 18, 2016 the Board of Directors authorized $35,000,000 repurchase of Exponent’s common stock. On October 20, 2015 the Board of Directors authorized $35,000,000 for the repurchase of Exponent’s common stock. On May the Board of Directors authorized 29, 2014 $35,000,000 for the repurchase of Exponent’s common stock. These repurchase programs have no the for expiration dates. As of December 30, 2016, the Company had remaining authorization under its stock repurchase plan of $57,307,000 to repurchase shares of common stock. Note 9: 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 was 4,828,150 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 receipt of Company’s stock effected without consideration by the Company. As of December 30, 2016, 709,918 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 400,000 shares of common stock. As of December 30, 2016, 43,123 shares were available for grant. Weighted average purchase prices for shares sold under the ESPP plan in fiscal 2016, 2015 and 2014 were $51.97, $43.88 and $35.68, respectively. 55 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 and are forfeited if the underlying shares are forfeited. 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 fiscal years 2016, 2015 and 2014, the Company recorded stock- based compensation expense associated with accrued bonus awards of $6,181,000, $6,341,000 and $6,287,000, respectively. The Company recorded stock-based compensation expense associated with the unvested restricted stock and awards of $6,583,000, $6,066,000 unit $6,103,000 during fiscal years 2016, 2015 and 2014, respectively. The total fair value of restricted stock unit awards vested during fiscal years 2016, 2015 and 2014 was $18.5 million, $18.6 million and $16.5 million, respectively. The weighted-average grant date fair values of restricted stock unit awards granted during fiscal years 2016, 2015 and 2014 were $48.29, $43.76 and $37.29, respectively. The number of unvested restricted stock unit awards outstanding as of December 30, 2016 is as follows (1): Number Weighted-average of awards outstanding grant date fair value Weighted-average remaining contractual term (years) Aggregate intrinsic value (in thousands) (2) Balance as of January 1, 2016 Awards granted Awards vested Awards forfeited 779,977 302,672 (384,822) (2,513) $ 31.88 48.29 34.02 39.26 Balance as of December 30, 2016 695,314 $ 37.82 1.5 $ 41,927 (1) Does not include employee stock purchase plans or stock option plans. (2) The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market value as of December 30, 2016 was $60.30. 56 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 Option activity is as follows(1): holders of common stock. DER are subject to the same vesting terms as the corresponding stock options. DER are accumulated and paid in cash when the underlying stock options vest and are forfeited if the underlying stock options do not vest. During fiscal years 2016, 2015 and 2014, the Company recorded stock-based compensation expense of $569,000, $552,000 and $689,000, respectively, associated with stock options. Number of shares outstanding Weighted- average exercise price Weighted- average remaining contractual term (years) Aggregate intrinsic value (in thousands) Balance as of January 1, 2016 Options granted Options forfeited and expired Options exercised 285,000 64,000 - (30,000) $ 26.42 48.59 - 18.86 Balance as of December 30, 2016 319,000 $ 31.58 6.47 $ 9,162 Exercisable at December 30, 2016 188,750 $ 23.83 5.20 $ 6,884 (1) Does not include restricted stock or employee stock purchase plans. The total intrinsic value of options exercised during fiscal years 2016, 2015 and 2014 was $999,000, respectively. The $5,524,000 and $1,975,000, 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 December 30, 2016, 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 December 30, 2016. This amount changes based on the fair-value of the Company’s stock. 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 dividend yield assumption considers the expectation of continued declaration of dividends, offset by option holders’ dividend equivalent rights. All share- based payment awards are recognized on a straight- line basis over the requisite service periods of the awards. 57 The assumptions used to value option grants for fiscal years 2016, 2015 and 2014 are as follows: Expected term (in years) Risk-free interest rate Volatility Dividend yield 2016 6.0 1.28% 25% 0% Stock Option Plan 2015 6.1 1.69% 27% 0% 2014 6.1 1.8% 32% 0% The weighted-average grant date fair value of options granted during fiscal years 2016, 2015 and 2014 were $13.08, $13.30 and $12.23, respectively. The amount of stock-based compensation expense and the related income tax benefit recognized in the Company’s consolidated statements of income for fiscal years 2016, 2015 and 2014 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 $ 2016 2015 2014 12,225 569 12,794 539 539 13,333 $ $ 11,907 552 12,459 500 500 12,959 $ $ 11,889 689 12,578 501 501 13,079 Income tax benefit $ 5,214 $ 5,068 $ 5,141 As of December 30, 2016, there was $7,220,000 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 $633,000 of unrecognized compensation cost, expected to be recognized over a weighted average period of 2.9 years, related to unvested stock options. Note 10: Retirement Plans Note 11: Deferred Compensation 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 thereafter. The Company’s expenses related to this plan were $7,761,000, $7,317,000, and $6,954,000 in fiscal years 2016, 2015, and 2014, respectively. immediately The Company maintains nonqualified deferred compensation plans for the benefit of a select group of highly compensated employees. Under these plans, participants may elect to defer up to 100% of their compensation. Company assets that are earmarked to pay benefits under the plans are held in a rabbi trust and are subject to the claims of the Company’s creditors. As of December 30, 2016 and January 1, 2016 the invested amounts under the plans totaled $48,267,000 and $42,940,000, respectively. These assets are classified as trading securities and are recorded at fair market value with changes recorded as adjustments to other income. As of December 30, 2016 and January 1, 2016, vested amounts due under totaled $53,617,000 and $46,740,000, respectively. Changes in the liability are recorded as adjustments to the plans 58 and 2014, the Company compensation expense. During fiscal years 2016, 2015 recognized compensation expense of $3,861,000, $(325,000), and $2,525,000, respectively, as a result of changes in the market value of the trust assets with the same amount being recorded as other income. Note 12: 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 December 30, 2016: (In thousands) Fiscal year 2017 2018 2019 2020 2021 Thereafter $ Lease commitments 7,227 5,597 3,480 2,480 1,921 1,058 $ 21,763 Total rent expense from property leases in fiscal 2016, 2015, and 2014 was $6,478,000, $6,202,000 and $5,951,000, respectively. Total expense from other operating leases in fiscal 2016, 2015, and 2014 and $1,965,000, was $1,749,000, $1,794,000 in respectively. The Company had $583,000 outstanding purchase commitments as of December 30, 2016. These commitments are expected to be fulfilled by the end of fiscal 2017. The Company is a party to various 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 outcome of which the Company believes, after consultation with legal counsel, will not have a material adverse effect on its financial condition, results of operations or liquidity. 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 13: Miscellaneous Income, Net Miscellaneous income, net, consisted of the following: (In thousands) Rental income Gain (loss) on deferred compensation investments Gain (loss) on foreign exchange Other Total Fiscal Years 2015 2016 2014 2,435 2,015 2,003 3,861 (325) 2,525 224 8 $ 6,528 255 48 $ 1,993 (293) 31 $ 4,266 Note 14: Industry and Client Credit Risk The Company serves clients in various segments of the economy. During fiscal 2016 the Company provided services representing approximately 20% of revenues to clients in the consumer products industry. During fiscal 2016 the Company provided services representing approximately 17% of revenues to clients in the energy and utilities industries. During fiscal 2016 services representing approximately 15% of revenues to clients in the transportation industry. the Company provided No single customer comprised more than 10% of the Company’s revenues for fiscal years 2016, 2015 and 2014. No single customer comprised more than 10% of the Company’s accounts receivable at December 30, 2016 and January 1, 2016. Note 15: Supplemental Cash Flow Information The following is supplemental disclosure of cash flow information: (In thousands) Cash paid during the year: Fiscal Years 2015 2014 2016 Income taxes $22,280 $24,651 $27,421 Non-cash investing and financing activities: Unrealized gain (loss) on Investments $ (81) $ (79) $ 4 Vested stock unit awards granted to settle accrued bonus Accrual for capital expenditures $ 6,334 $ 6,169 $ 6,008 $ 284 $ 321 $ - 59 Note 16: Segment Reporting technical consulting The Company has two reportable operating segments based on two primary areas of service. The Engineering and Other Scientific segment is a broad in service group providing different practices primarily in engineering. The Environmental and Health segment provides services in the area of environmental, epidemiology and health risk analysis. This 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 2016, 2015 and 2014. Segment information for selected data from the balance sheets is presented for the fiscal years ended December 30, 2016 and January 1, 2016. Our CEO, the chief operating decision maker, does not review total assets in his evaluation of segment performance and capital allocation. Revenues (In thousands) Engineering and Other Scientific Environmental and Health Fiscal Years 2015 2014 2016 $ 248,297 $ 237,959 $ 223,384 81,320 66,779 74,873 Total revenues $ 315,076 $ 312,832 $ 304,704 Operating Income (In thousands) Fiscal Years 2015 2014 2016 Engineering and Other Scientific Environmental and Health $ 80,494 $ 76,817 $ 72,207 25,145 21,810 18,650 Total segment operating income 99,144 98,627 97,352 Corporate operating expense Total operating income (37,233) (29,694) (33,803) $ 61,911 $ 68,933 $ 63,549 Capital Expenditures (In thousands) Engineering and Other Scientific Environmental and Health Total segment capital expenditures Corporate capital expenditures Total capital expenditures Fiscal Years 2015 2014 2016 $ 4,309 $ 3,197 $ 3,719 211 124 164 4,433 3,361 3,930 9,960 2,018 1,017 $ 14,393 $ 5,379 $ 4,947 Depreciation and Amortization (In thousands) Engineering and Other Scientific Environmental and Health Total segment depreciation and amortization Corporate depreciation and amortization Fiscal Years 2015 2014 2016 $ 4,429 $ 3,919 $ 3,637 197 181 182 4,610 4,101 3,834 1,521 1,378 1,570 Total depreciation and amortization $ 6,131 $ 5,479 $ 5,404 Information regarding the Company’s operations in different geographical areas: Property, Equipment and Leasehold Improvements, net (In thousands) Fiscal Years 2016 2015 United States Foreign Countries $ 35,746 964 $ 27,775 710 Total $ 36,710 $ 28,485 Revenues (1) (In thousands) United States Foreign Countries 2016 Fiscal Years 2015 2014 $ 281,223 $ 281,618 $ 273,635 31,069 33,853 31,214 Total $ 315,076 $ 312,832 $ 304,704 (1) Geographic revenues are allocated based on location of the client. the 60 Note 17: Related Party Transaction On July 29, 2016, Exponent’s Board of Directors appointed Dr. Catherine Corrigan as its President. Dr. Paul Johnston continues to serve as the Company’s Chief Executive Officer. Dr. Corrigan relocated from the Company’s Philadelphia, Pennsylvania office to its Menlo Park, California office. In connection with relocation, the Company purchased Dr. the Corrigan’s primary residence in Pennsylvania for an appraised value of $1.25 million. The Company intends to resell the house as soon as practicable; therefore, the house is recorded in prepaid expenses and other assets. 61 Comparative Quarterly Financial Data (unaudited) Summarized quarterly financial data is as follows: Fiscal 2016 (In thousands, except per share data) April 1, 2016 July 1, 2016 September 30, December 30, 2016 2016 Revenues before reimbursements Revenues Operating income Income before income taxes $ 78,950 83,156 16,436 17,734 $ 73,334 77,295 14,931 16,677 $ 74,160 77,612 15,595 17,920 $ 72,753 77,013 14,949 16,791 Net income $ 15,350 $ 10,453 $ 11,289 $ 10,388 Net income per share Basic Diluted Shares used in per share computations Basic Diluted $ $ 0.58 0.56 $ $ 0.39 0.38 $ $ 0.43 0.42 $ $ 0.40 0.39 26,513 27,239 26,631 27,264 26,545 27,185 26,262 26,955 Fiscal 2015 (In thousands, except per share data) April 3, 2015 July 3, 2015 October 2, 2015 January 1, 2016 Revenues before reimbursements Revenues Operating income Income before income taxes $ 76,141 80,293 15,028 17,071 $ 75,272 79,864 18,705 19,292 $ 74,503 78,994 20,921 18,773 $ 69,789 73,681 14,279 15,997 Net income $ 10,333 $ 11,697 $ 11,719 $ 9,850 Net income per share Basic Diluted Shares used in per share computations Basic Diluted $ $ 0.39 0.38 $ $ 0.44 0.43 $ $ 0.44 0.43 $ $ 0.37 0.36 26,622 27,390 26,714 27,368 26,597 27,268 26,491 27,133 62 Schedule II Valuation and Qualifying Accounts (In thousands) Year Ended December 30, 2016 Allowance for bad debt Allowance for contract losses Year Ended January 1, 2016 Allowance for bad debt Allowance for contract losses Year Ended January 2, 2015 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 $ 838 $ 1,954 $ $ 443 - $ - $ 2,009 $ (358) $ (1,469) $ 923 $ 2,494 $ 1,016 $ 2,370 $ $ 284 - $ $ - 645 $ (462) $ (1,061) $ 838 $ 1,954 $ 942 $ 1,829 $ $ 264 - $ - $ 1,454 $ $ (190) (913) $ 1,016 $ 2,370 (1) Balance includes currency translation adjustments. Recoveries of accounts receivable previously written off were $114,000, $7,000 and $135,000 for fiscal years 2016, 2015 and 2014, 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. 63 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 24, 2017 /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. Chief Executive Officer and Director (Principal Executive Officer) /s/ Richard L. Schlenker, Jr. Richard L. Schlenker, Jr. Executive Vice President, Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) February 24, 2017 February 24, 2017 /s/ Michael R. Gaulke Michael R. Gaulke /s/ Carol Lindstrom Carol Lindstrom /s/ Karen A. Richardson Karen A. Richardson /s/ Stephen C. Riggins Stephen C. Riggins /s/ John B. Shoven John B. Shoven, Ph.D. /s/ Debra L. Zumwalt Debra L. Zumwalt Chairman of the Board of Directors February 24, 2017 February 24, 2017 February 24, 2017 February 24, 2017 February 24, 2017 February 24, 2017 Director Director Director Director Director 64 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. Unless otherwise indicated all filings are under SEC File Number 000-18655: 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). 3.1(iii) 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 28, 2015). 3.2(i) Amended and Restated Bylaws of the Company, as amended and restated May 29, 2014 (incorporated by reference from the Company’s Current Report on Form 8-K as filed on May 30, 2014). 4.1 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). *10.24 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). 65  *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) (incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2014). *10.45 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 Current Report on Form 8- K as filed on May 30, 2014). 66  *10.46 Executive Compensation Clawback Policy (incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the fiscal period ended September 30, 2016). 21.1 List of subsidiaries. 23.1 Consent of Independent Registered Public Accounting Firm. 31.1 31.2 Certification of Chief Executive Officer pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934. 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 67 

Continue reading text version or see original annual report in PDF format above