10-K 1 v368946_10k.htm FORM 10-K
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
________________________________
 
FORM 10-K
________________________________
 
x
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended January 3, 2014.
OR
 
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to _________.
 
Commission File Number 0-18655
________________________________
 
EXPONENT, INC.
(Exact name of registrant as specified in its charter)
________________________________
 
Delaware
77-0218904
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
149 Commonwealth Drive, Menlo Park, California
94025
(Address of principal executive offices)
(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
 
Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per share
 
The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨        No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨        No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x        No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Yes x        No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
 
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
 
 
(Do not check if a smaller
reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes ¨        No x
 
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant based on the closing sales price of the Common Stock as reported on the NASDAQ National Market on June 28, 2013, the last business day of the registrant’s most recently completed second quarter, was $543,857,810.  Shares of the registrant’s common stock held by each executive officer and director and by each entity or person that, to the registrant’s knowledge, owned 10% or more of registrant’s outstanding common stock as of June 28, 2013 have been excluded in that such persons may be deemed to be affiliates of the registrant.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.
 
The number of shares of the issuer’s Common Stock outstanding as of February 21, 2014 was 13,063,216.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Registrant’s Definitive Proxy Statement for the Registrant’s 2014 Annual Meeting of Stockholders to be held on May 29, 2014 are incorporated by reference into Part III of this Form 10-K.
 
 
 
EXPONENT, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED JANUARY 3, 2014

TABLE OF CONTENTS

 

 
    Page
PART I    
Item 1. Business 3
Item 1A. Risk Factors 15
Item 1B. Unresolved Staff Comments 19
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Mine Safety Disclosures 19
     
PART II    
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  20
Item 6. Selected Financial Data 23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35
Item 9A. Controls and Procedures 35
Item 9B. Other Information 36
     
PART III    
Item 10. Directors, Executive Officers and Corporate Governance 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 37
Item 13. Certain Relationships and Related Transactions, and Director Independence 37
Item 14. Principal Accounting Fees and Services 37
     
PART IV    
Item 15. Exhibits, Financial Statement Schedules 38
     
Signatures 72
Exhibit Index 73
 
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, revenue, margins, 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 Reform Act of 1995.  When used in this document and in the documents incorporated herein by reference, statements other than statements of current or historical fact are forward-looking statements.  The words “anticipate,” “believe,” “estimate,” “expect” and similar expressions, as they relate to the Company or its management, identify certain of such forward-looking statements.  Such statements reflect the current views of the Company or its management with respect to future events and are subject to certain risks, uncertainties and assumptions.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company’s actual results, performance, or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements.  Factors that could cause or contribute to such material differences include the possibility that the demand for our services may decline as a result of changes in general and industry specific economic conditions, the timing of engagements for our services, the effects of competitive services and pricing, tort reform and liabilities resulting from claims made against us.  Additional risks and uncertainties are discussed in this Report under the heading “Risk Factors” and elsewhere.  The inclusion of such forward-looking information 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.
 
 
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PART I
 
Item 1.  Business
 
GENERAL
 
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.  Exponent, Inc., together with its subsidiaries, (“Exponent” or the “Company”) is a science and engineering consulting firm that provides solutions to complex problems.  Our multidisciplinary team of scientists, physicians, engineers, business and regulatory consultants brings together more than 90 different technical disciplines to solve complicated issues facing industry and government today.  Our professional staff can perform in-depth scientific research and analysis, or very rapid-response evaluations to provide our clients with the critical information they need.
 
CLIENTS
 
General
 
Exponent serves clients in automotive, aviation, chemical, construction, consumer products, energy, government, health, insurance, manufacturing, technology and other sectors of the economy.  Many of our engagements are initiated directly by large corporations or by lawyers or insurance companies whose clients anticipate, or are engaged in, litigation related to their products, equipment, processes or services.  The scope of our services in failure prevention and technology evaluation has grown as the technological complexity of products has increased over the years. 
 
Pricing and Terms of Engagements
 
We provide our services on either a fixed-price basis or on a time and material basis, charging in the latter case hourly rates for each staff member involved in a project, based on his or her skills and experience.  Our standard rates for professionals range from $155 to $600 per hour.  Our engagement agreements typically provide for monthly billing, require payment of our invoices within 30 days of receipt and permit clients to terminate engagements at any time.  Clients normally agree to indemnify us and our personnel against liabilities arising out of the use or application of the results of our work or recommendations.
 
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 23 practices and centers in two operating segments, Engineering and Other Scientific and Environmental and Health:
 
ENGINEERING AND OTHER SCIENTIFIC
 
· Biomechanics
· Biomedical Engineering
· Buildings & Structures
· Civil Engineering
· Construction Consulting
 
 
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· Defense Technology Development
· Electrical Engineering & Computer Science
· Engineering Management Consulting
· Human Factors
· Industrial Structures
· Materials & Corrosion Engineering
· Mechanical Engineering
· Polymer Science & Materials Chemistry
· Statistical & Data Sciences
· Thermal Sciences
· Vehicle Analysis
 
ENVIRONMENTAL AND HEALTH
 
· Chemical Regulation & Food Safety
· Ecological & Biological Sciences
· Environmental & Earth Sciences
· Epidemiology, Biostatistics & Computational Biology
· Exposure Assessment & Dose Reconstruction
· Occupational & Environmental Health
· Toxicology & Mechanistic Biology
 
ENGINEERING AND OTHER SCIENTIFIC
 
Biomechanics
 
Our biomechanics staff uses engineering and biomedical science to solve complex problems at the intersection of biology and engineering. Our expertise is used to understand and evaluate the interaction between the human body as a biological system and the physical environment to explore the cause, nature, and severity of injuries.
 
During the past year, our biomechanics staff performed analyses of human injury related to a variety of products including recreational vehicles, sporting goods, trucks, trains, aircraft, industrial equipment, and automobiles. They also looked at the implications of using protective devices (such as restraint systems, airbags, and helmets) on reducing the potential for injury, and assessed injuries in the workplace, in the home, and during recreational activities.
 
Biomedical Engineering
 
Our Biomedical Engineering Practice applies engineering principles to the medical field, including the evaluation of designs and performance of medical devices and biologics.  Our engineers and scientists assist clients with characterization of cells, tissues, biomaterials, and medical devices. As part of our regulatory compliance, we can perform preclinical testing and formulate a related regulatory strategy, conduct design verification and validation, as well as design and manufacturing failure analyses, recall management, and medical device explant analysis.  In addition, our staff can perform analysis of clinical outcomes for medical devices using administrative claims databases.  Our expertise is also utilized in product liability, intellectual property litigation, technology acquisition and due diligence matters.
 
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 or construction failed to perform its intended function.  Our architects, engineers, and scientists have been investigating such failures for decades, and we use this experience to solve problems with building systems and components, including finding the best repair options and mitigating the risk of future failures.
 
 
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During the past year, we have evaluated numerous problems with residential, commercial and industrial structures for insurers, attorneys and owners.  Our evaluations often include property inspections, testing, engineering analysis and the development of repair recommendations. In addition, we have worked with owners to assess and mitigate the risk of failure associated with hazards such as hurricanes, earthquakes, tsunamis and aging infrastructure.  We have assessed these risks to high-rise buildings, industrial facilities, pipelines and nuclear power plant structures. 
 
Civil Engineering
 
Our Civil Engineering Practice provides broad expertise that includes geotechnical engineering, geological engineering, engineering geology, and geology to address a host of geo-failures, including landslides, foundation and retaining wall failures, dam and levee failures and construction claims.  We also provide peer review services for complicated structures.  Our Water Resources staff specializes in the application of proven hydrologic, hydraulic, hydrodynamic, and sediment transport research and science to provide scientifically sound and cost-effective solutions to our clients.  These modelling capabilities have expanded to include environmental fluid dynamics including reactive flow and transport in surface water and groundwater systems.
 
Over the past year, our consultants have been engaged in a number of investigations related to landslides, retaining wall and foundation failures, large construction claims, flooding and sediment transport, and peer review of large retaining wall designs.  This practice has had a diverse portfolio of projects and clients that represent a broad spectrum of industries.
 
Construction Consulting
 
Our Construction Consulting Practice provides project advisory, risk analysis, strategic planning, dispute resolution, and financial damages services.  During the past year, we expanded the practice by leveraging key client relationships in several construction sectors including energy and oil and gas.  Our multi-disciplinary staff, which includes engineers, architects, construction managers, schedulers, accountants, and technical specialists, provides these services to both the public and private sectors for clients who represent a diverse mix of companies and agencies.
 
Our projects include many sectors of the construction and engineering industry as well as facilities and systems which include power plants, transmission and distribution facilities, petrochemical facilities, water/wastewater treatment plants, bridges and roads, marine structures, rail systems, tunnels, airports, detention facilities, commercial buildings, institutional buildings, industrial and manufacturing facilities, sporting arenas and gaming facilities. We provide services to construction, aerospace and defense industry participants: owners, lending agencies, prime contractors, subcontractors, designers, attorneys and insurance carriers.
 
Defense Technology Development
 
Drawing on our multidisciplinary science, engineering, testing, failure analysis and failure prevention expertise, our Defense Technology Development Practice specializes in harnessing advanced technologies and practices from the commercial world to deliver innovation to our clients.  We identify and leverage the best in off-the-shelf technologies combined with custom development to deliver solutions ranging from fully integrated systems to supporting modules and components.  Our focus is on a close collaboration with the end user, cost effectiveness, ease of use, reliability, high quality and speed of engineering design and execution.  For our defense customers, our engineers and scientists continue to work in Afghanistan war zone laboratories embedded with U.S. and NATO military personnel to ensure we understand their problems and can rapidly deliver solutions to high priority technology capability gaps.
 
During the past year we continued to advance our subsurface threat detection system to provide a real-time Improvised Explosive Device (IED) and mine detection capability for a range of ground vehicles.  We continued to develop our IED detection system for the U.K. Ministry of Defence for their operationally deployed route clearance capability.  We have continued our deployed engineer presence by operating the U.S. Army Rapid Equipping Force mobile expeditionary laboratories – or Ex-Labs — and are helping many operational units prepare for a safe drawdown and redeployment while continuing to enhance the labs by adding new additive manufacturing modules. We are operating an additional Ex-Lab in the U.S. to demonstrate shared development (Co-Creation) with soldiers at U.S. Army bases.  Also over the past year, we have continued our support and technology evaluation services in the areas of personnel identification, radio-frequency identification, physical and logical access control, biometrics, smart credentials, and data analytics for cyber security.
 
 
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Electrical Engineering & Computer Science
 
The Electrical Engineering and Computer Science Practice offers a broad range of expertise to address complex issues for industrial, government and private clients. Our power engineers advise and offer guidance to clients on problems relating to electrical systems including power generation, transmission and distribution. Our team of electrical engineers works on failure analysis, product robustness and reliability for consumer and industrial electronics. Our computer engineers and scientists work with high-tech industries and computer controlled applications to evaluate product safety and software reliability.  The computer engineering and science expertise we offer encompasses a breadth of areas including information and numerical sciences, algorithms and data structures, computer graphics, computer architecture, networking and communications, as well as security and cryptography. We operate laboratories for testing heavy equipment and electronics and we have a broad capability in analyzing computer software.
 
Over the past year, we performed a wide array of investigations ranging from assessing electrical damage to infrastructure from the effect of weather related events to working with clients to develop sophisticated machine learning algorithms applied to large quantities of unstructured data. We continue to work with consumer electronics manufacturers and the transportation industry on the reliability and robustness of computer controlled equipment for user safety. We have also provided our expertise to clients in intellectual property advising them on matters of integrated circuit design, semiconductor fabrication and computer software implementations.
 
Engineering Management Consulting
 
This practice provides multi-disciplinary expertise and rapid response to assist clients with technical and management consulting services, often in extremely short time frames.  Our consultants provide services in the areas of asset strategy and planning, project management, engineering, construction, maintenance, operations, environmental, and risk analysis.  This practice primarily services the electric and gas utility industries, focusing on transmission and distribution as well as fossil fuel and nuclear generation.
 
We provide unique and advanced services in performing risk and reliability assessments.  Our scientists and engineers assist our clients in minimizing losses in their business or operations.  Accidents, unanticipated events, and system failures are the primary causes of deferred or lost production interruptions and may lead to loss of life, injury, property damage, and undesired releases.  Our multi-disciplinary staff has also performed diverse technical, business interruption, and compliance-related risk and reliability assessments for chemical, petrochemical, petroleum, and manufacturing clients worldwide.
 
Human Factors
 
Our Human Factors staff 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.  In addition, we assist manufacturers with compliance of 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 and Drug Administration.  We also provide support assessing alleged false advertising claims for consumer products, foods and pharmaceuticals.
 
 
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Industrial Structures
 
Our Industrial Structures Practice, based in Düsseldorf and Berlin, Germany, specializes in design and assessment of industrial structures subject to extreme conditions.  Our Düsseldorf office has provided design reviews and assessments on more than 1,000 structures around the world, and our staff has participated in the creation of several engineering standards.
 
Our Industrial Structures Practice provides planning, assessment, rehabilitation and dismantling analysis of bearing structures in four particular areas:  antenna masts, power plants, buildings and special structures like refractories or tanks.  One service we provide in over 900 locations throughout the year is quality assurance of antenna masts for a variety of facilities including telecommunications, wind energy and industrial chimneys. Our consultants provide inspection services related to new construction and assess design deficiencies related to new and existing facilities, as well as assist our clients with on-time, quality construction on their projects.
 
With the use of our self-developed computer software for non-linear material behavior, we provide close-to-reality assessment of a wide variety of structures such as cracked reinforced concrete structures, multi-layer refractories or masonry towers. Beyond industrial structures, more and more commercial property projects are becoming part of this practice.
 
Materials & Corrosion Engineering
 
Our in-depth knowledge of materials and electrochemistry, combined with the breadth of our collective expertise in many areas of engineering and science, is used to understand how and why materials fail, as well as to prevent future failures.  Our engineers and scientists use their broad background in field investigations, root-cause assessments, and materials engineering to solve complex problems for both industrial and legal clients.  During the past year we conducted failure analysis, failure prevention, and integrity assessment investigations for a wide variety of clients including medical, aerospace, chemical processing, pipeline, automotive, construction, consumer electronics, recreational, and other industries.
 
Mechanical Engineering
 
We provide clients with a thorough comprehension of current or alternative designs to determine potential vulnerabilities before failures occur, develop appropriate risk mitigation methods, and provide post failure investigations.  Our consultants review the safety and reliability of processes and products.  We assist in performing product recall investigations and reviewing internal compliance programs as part of the implementation of corrective action plans. We have performed these activities in the transportation, heavy industry, energy, and consumer product areas.
 
Our staff develop and utilize detailed, validated computational models to evaluate equipment, consumer products and medical devices to solve a variety of technical challenges associated with their design and optimization. Our scientists and engineers also provide services in the area of intellectual property and are often asked to interpret the language of a patent from a scientific and engineering perspective and provide insight regarding the proper technical interpretation of patent claims.  During the past year our mechanical engineers worked on a wide variety of projects ranging from high profile consumer product recall investigations to pipeline integrity evaluations and worker safety issues.
 
Polymer Science & Materials Chemistry
 
Our Polymer Science and Materials Chemistry staff consults with industrial, government, and insurance clients, as well as their outside counsels, regarding polymers and textiles used in diverse applications and chemical aspects of batteries, drug delivery systems, and other products that depend on highly controlled manufacturing environments.  We assist clients in understanding the short- and long-term performance of plastic, rubber, adhesive, coating, composite and power systems when challenged by physical, chemical, thermal and other operational stresses.
 
 
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Our consultants participate in product development programs, perform failure analyses and provide support to clients involved in regulatory and legal proceedings. During the past year, significant program activities addressed implantable medical devices, combination drug delivery systems, consumer electronics, numerous battery-related applications, industrial and performance textiles, building materials, technical due diligence, technology scouting, and materials science aspects of health risk, service life prediction, sustainability, and polymer-related intellectual property, including trade secrets.
 
Statistical & Data Sciences
 
Our Statistical & Data Sciences staff comprises our company’s core capabilities in statistical methodology and offers its expertise to serve clients at any and all stages of the empirical research process including product development, manufacturing, and regulatory stages. The practice specializes in determining whether a particular activity or product poses an unreasonable risk.  Risk estimation involves establishing a reference period and then collecting information about the number of injuries (or other adverse events) suffered and the amount of exposure during this period.  Through analysis and synthesis of client-supplied data, combined with information from public sources, we help clients measure their own risk in the context of similar risks and determine appropriate courses of action.  During the past year, we worked on a variety of engineering, health, and environmental projects for government, industry, and legal clients.  Our statisticians and data scientists performed assessments of manufacturing quality systems, investigated data mining methods to improve classification tools, examined the field reliability of electronic networks and computer equipment, and analyzed the extent of environmental pollution and its effects on natural resources and human health.
 
Thermal Sciences
 
Our Thermal Sciences staff comprises our core capabilities in the practice of fluid-thermal sciences with expertise in chemical engineering, fire protection engineering, and mechanical engineering.  We have investigated and analyzed thousands of fires and explosions ranging from high loss disasters at manufacturing facilities to small insurance claims. Information gained from these analyses has helped us assist clients with preventive measures related to the design of their products.  We also assist industry in minimizing risk of fires and explosions, provide regulatory consulting for permitting new industrial facilities, and assist manufacturers in addressing the risk of fires associated with consumer products.  Our engineers use fire modeling and other computational fire dynamics modeling tools to supplement our analytical, experimental, and field-based activities.  Preventive services include process safety hazard analysis for the chemical and oil and gas industries, fire protection engineering and dust explosion consulting.
 
During the past year, our work in the Liquefied Natural Gas (LNG) sector has continued to remain active.  Our services in this area include assessing the potential risks posed by LNG or flammable refrigerant releases at LNG facilities to populations.  We also perform hazard and risk analyses to identify and mitigate the likelihood and consequences of these potential releases.  We have seen growth in our non-litigation fire protection engineering services.  In addition, the Thermal Sciences Practice continues to develop tools to assist in the evaluation of fire risk of lithium-ion batteries, and their performance in consumer products.
 
Vehicle Analysis
 
We have performed thousands of investigations for the automotive, trucking, recreational vehicle, marine, aerospace, and rail industries.  Internal research programs and client projects have resulted in technological contributions that have assisted manufacturers in the understanding of product performance and provided insight to government agencies in establishing policy and regulations.  Information gained from these analyses has also assisted clients in assessing preventive measures related to the design of their products, as well as evaluating failures.
 
Our Test and Engineering Center located in Phoenix, Arizona, is the setting for our most complex tests, along with rigorous analysis of results.  We have gained a worldwide reputation for our ability to mobilize resources expeditiously and efficiently, integrate a broad array of technical disciplines, and provide valuable 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, they also want us to assess what could have been done to reduce the severity of the accident or to mitigate occupant injuries to those involved.  Whether the objective is design analysis, component testing, or accident reconstruction, our knowledge of vehicle systems and engineering principles coupled with our experience from conducting full-scale tests add insight and proficiency to every project.
 
 
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ENVIRONMENTAL AND HEALTH
 
Chemical Regulation & Food Safety
 
Our Center for Chemical Regulation and Food Safety includes experienced staff of both technical and regulatory specialists who are experienced in dealing with foods, and with pesticide and non-pesticide products including conventional chemicals, biochemicals, antimicrobials/biocides, products of biotechnology, cosmetics and industrial chemicals.  We provide practical, scientific and regulatory support to meet global business objectives at every stage of the product cycle, from research and development to retail and beyond.
 
During the past year our chemical regulation & food safety staff have conducted a wide array of work.  The European and U.S. sides of the Center were jointly involved with the ongoing support of a new pesticide active ingredient and end-use product.  The European side of our business was involved with many projects related to plant protection product regulatory submissions, from new active substances to product-specific dossiers for individual member states.  In addition, we provided many specialist assessments relating to human and environmental exposure and product efficacy.  We continue to support safety assessments for food and cosmetics products.  In the U.S. we continued to provide services related to pesticide active ingredient and end-use product development and registrations in the U.S. and Canada, registration review, import tolerances in the U.S. and Canada, due diligence, and data compensation, as well as the approval of new pesticide inert ingredients and new non-pesticide chemical approvals.  Our food safety consultants assisted clients with food additives, food contact notifications, and nutrition-related analyses, as well as product safety proactive and reactive support services, recall and litigation support.
 
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, novel remediation methods, restoration of wetlands and other natural resources, large development projects, resource utilization (mineral mining, oil and gas, wood pulp), and the use of chemicals and other products in commerce.  The practice specializes in assessing the fate and effects of chemical, biological, and physical stressors on aquatic and terrestrial ecosystems.  The practice is comprised of nationally recognized experts that cover disciplines related to the ecological implications and risks associated with these projects.
 
Environmental & Earth Sciences
 
Our environmental scientists and engineers provide cost-effective, scientifically defensible and realistic assessments and solutions to complex environmental issues.  We offer technical, regulatory and litigation support to industries that include manufacturing, mining and minerals, oil and gas, chemicals, forest products, railroads, aerospace, and trade associations.  Our consultants specialize in the areas of environmental chemistry and forensics, hydrogeology, air toxics, modeling and monitoring, remediation consulting, environmental engineering and waste management, and evaluation of environmental and social risks for large international capital projects.  Our work often involves complex and high visibility environmental scenarios, claims, or toxic tort matters, where evaluation of contamination and historical reconstruction of events, releases, and doses are central to problem resolution.
 
Epidemiology, Biostatistics & Computational Biology
 
Our health scientists apply epidemiology to examine and address complex health issues in a variety of settings.  Through the principles of epidemiology, we analyze the interaction of host, agent, and environment to reach conclusions about the causes and occurrence of disease in human populations.
 
 
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Our consultants combine the expertise of several medical specialties, exposure assessment professionals, and other scientists who have advanced degrees in statistics and public health.  All of our physicians have graduate training in epidemiology and biostatistics.  Our research work has included numerous community health assessments, disease cluster investigations, survey research, occupational cohort and case-control studies, exposure assessment studies, cancer modeling, meta-analyses, and state-of-the-art reviews.
 
Exposure Assessment & Dose Reconstruction
 
Exposure assessment is the science of estimating human exposure to chemical, physical, and biological agents, accounting for the frequency, magnitude, and duration of the exposure events.  Exposure estimates can be compared to toxicity benchmarks or guidelines to assess potential risks to human health, and provide critical inputs to human epidemiology studies, risk assessment, and regulatory compliance.
 
Our staff characterize potential exposures to evaluate health risks posed by chemical or physical agents. We are skilled in estimating multiple routes of exposure from consumer products, indoor air releases, and environmental releases of chemicals.  We apply these skills in support of evaluations of a variety of potential sources of exposure including consumer products, indoor air releases, ambient air releases, and contaminated soil and water. We apply these evaluations to help companies evaluate product safety questions and evaluate compliance with the growing number of product safety and other environmental regulations.  
 
Our atmospheric scientists provide air quality and meteorological modeling, permitting, and licensing support services.  Scientists in our Center investigate potential and accidental releases of chemicals to the atmosphere, simulate transport and fate of chemical substances, and develop measures of prevention and control, such as emergency preparedness and response.  We also apply our skills to helping clients evaluate health risks associated with contaminated soil and groundwater. 
 
Occupational & Environmental Health
 
This Center is composed of industrial hygienists, safety professionals, physicians, a veterinarian and other scientists with specialized training in the anticipation, recognition, evaluation, risk assessment, and control of health hazards in occupational and environmental settings.
 
Our staff assists and responds to clients facing health-related exposure issues or allegations of past exposures.  Chemical and biological exposures may involve workers or the public, take place in industrial or office environments, retail centers, single family residences or multi-tenant buildings, or at government or private institutions, including health care facilities.  Exposures may also involve consumer products or manufacturing processes.  We investigate a broad variety of health concerns such as claims of illnesses from exposures to chemicals, dusts, smoke, nanoparticles, molds and other micro-organisms.  We develop strategies to aid in controlling such exposures, when needed.  In addition, our staff has extensive experience in addressing health issues related to medical devices, consumer products, and sanitation.  We have assisted companies with their preventive health and safety program needs in the workplace and can provide external verification of health services performance.
 
Toxicology & Mechanistic Biology
 
We have exceptional expertise and depth in toxicology and mechanistic biology.  We provide knowledge and experience that improve decisions affecting the regulation of important substances in commerce.  We work with our clients to resolve important issues that affect the safe use of a wide variety of substances.  We evaluate the mechanisms by which substances can affect complex biological systems, provide perspectives on potential effects at realistic human and environmental exposure levels, and develop strategies to manage human health and environmental risks.  We are recognized for our outstanding credentials and decades of experience from government, academia and industry.
 
 
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We have assisted clients on industrial chemicals, pesticides, drugs, and other agents.  During the past year we continued to provide toxicology and clinical toxicology support in nearly all phases of pharmaceutical and combination drug development from preclinical studies to post-marketing safety assessments.  We reviewed existing data and developed new studies on potential endocrine toxicity of various chemical substances.  We continue to be very active in developing and reviewing data for the U.S. Environmental Protection Agency Endocrine Disruptor Screening Program.  We are also extremely active in the research related to the identification, assessment, and prioritization of risks (the probability of adverse effects) associated with engineered nanomaterial development and manufacturing processes.  We also have developed various detailed reviews on toxicity mode of action assessments, specifically how substances cause harm and whether or not laboratory data are relevant to human risks.
 
COMPETITION
 
The marketplace for our services is fragmented and we face different sources of competition in providing various services.  In addition, the services that we provide to some of our clients can be performed in-house by those clients.  Clients that have the capability to perform such services themselves will retain Exponent or other independent consultants because of independence concerns.
 
In each of our practices and centers, we believe that the principal competitive factors are:  technical capability and breadth of services, ability to deliver services on a timely basis, professional reputation and knowledge of the litigation and regulatory processes.  Although we believe that we generally compete favorably in each of these areas, some of our competitors may be able to provide services acceptable to our clients at lower prices.
 
We believe that the barriers to entry are low and that for many of our technical disciplines, competition is increasing.  In response to competitive forces in the marketplace, we continue to look for new markets for our various technical disciplines.
 
 
11

 
BUSINESS SEGMENTS OVERVIEW
 
We report two operating segments based on two primary areas of service.  One operating segment is a broad service group providing technical consulting in different practices primarily in the areas of engineering and technology development.  Our other operating segment provides services in the area of environmental, epidemiology and health risk analysis.  This operating segment provides a wide range of consulting services relating to environmental hazards and risks and the impact on both human health and the environment.  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.”
 
EMPLOYEES
 
As of January 3, 2014, we employed 984 full-time and part-time employees, including 754 engineering and scientific staff, 72 technical support staff and 158 administrative and support staff.  Our staff includes 670 employees with advanced degrees, of which 447 employees have achieved the level of Ph.D., Sc.D. or M.D.
 
ADDITIONAL INFORMATION
 
The address of our Internet website is www.exponent.com.  We make available, free of charge through our website, access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other periodic and current Securities and Exchange Commission (SEC) reports, along with amendments to all of those reports, as soon as reasonably practicable after we file the reports with the SEC.  Additionally, copies of materials filed by us with the SEC may be accessed at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. or at the SEC’s website 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 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.
 
 
12

 
EXECUTIVE OFFICERS
 
The executive officers of Exponent and their ages as of February 28, 2014 are as follows:
 
Name
 
Age
 
Position
 
 
 
 
 
Paul R. Johnston, Ph.D.
 
60
 
President, Chief Executive Officer and Director
 
 
 
 
 
Elizabeth L. Anderson, Ph.D.
 
73
 
Group Vice President
 
 
 
 
 
Paul D. Boehm, Ph.D.
 
65
 
Group Vice President
 
 
 
 
 
Robert D. Caligiuri, Ph.D.
 
62
 
Group Vice President
 
 
 
 
 
Catherine Ford Corrigan, Ph.D.
 
45
 
Group Vice President
 
 
 
 
 
Subbaiah V. Malladi, Ph.D.
 
67
 
Chief Technical Officer
 
 
 
 
 
John D. Osteraas, Ph.D.
 
59
 
Group Vice President
 
 
 
 
 
Richard L. Schlenker, Jr.
  
48
  
Executive Vice President, Chief Financial Officer and Corporate Secretary
 
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.
 
Paul R. Johnston, Ph.D., joined the Company in 1981, was promoted to Principal Engineer in 1987, and to Vice President in 1996.  In 1997, he assumed responsibility for the firm’s network of offices.  In July 2003, he was appointed Chief Operating Officer and added responsibility for the Health and Environmental Groups.  In 2006, he assumed line responsibility for all of the firm’s consulting groups.  Dr. Johnston was named President in May 2007.  He was named Chief Executive Officer and elected to the Board of Directors in May 2009.  Dr. Johnston received his Ph.D. (1981) in Civil Engineering and M.S. (1977) in Structural Engineering from Stanford University.  He received his B.A.I. (1976) in Civil Engineering with First Class Honors from Trinity College, University of Dublin, Ireland where he was elected a Foundation Scholar in 1975.  Dr. Johnston is a Registered Professional Civil Engineer in the State of California and a Chartered Engineer in Ireland.
 
 
13

 
Elizabeth L. Anderson, Ph.D., joined the Company in June 2006 as a Group Vice President and Principal Scientist.  Prior to joining Exponent, Dr. Anderson was President and CEO of Sciences International, a health and environmental consulting firm.  Dr. Anderson received her Ph.D. (1970) in Organic Chemistry from The American University, M.S. (1964) in Organic Chemistry from the University of Virginia and B.S. (1962) in Chemistry from the College of William and Mary.  Dr. Anderson is a Fellow of the Academy of Toxicological Sciences, a founder and past-President of the Society for Risk Analysis and former Editor-in-Chief of the journal, Risk Analysis: An International Journal.
 
Paul D. Boehm, Ph.D., joined the Company in April 2004 as a Group Vice President and Principal Scientist.  Prior to joining the Company, Dr. Boehm was Vice President and Market Manager, Oil and Gas Sector, at Battelle Memorial Institute from 2001 to 2004.  From 1999 to 2001, Dr. Boehm was Vice President and Managing Director, Environmental Health and Safety Consulting at Arthur D. Little, Inc.  Dr. Boehm received his Ph.D. (1977) and M.S. (1973) in Oceanography from the University of Rhode Island and B.S. (1970) in Chemical Engineering from the University of Rochester.  Dr. Boehm has published more than 100 articles in peer-reviewed journals and authored numerous reports on environmental forensics and impact assessments.  Dr. Boehm has been chosen to serve on several National Research Council panels.
 
Robert D. Caligiuri, Ph.D., joined the Company in 1987.  He was promoted to Principal Engineer in 1990 and Group Vice President in 1999.  Dr. Caligiuri received his Ph.D. (1977) and M.S. (1974) in Materials Science and Engineering from Stanford University and B.S. (1973) in Mechanical Engineering from the University of California, Davis.  Prior to joining the Company he was a Program Manager and Materials Scientist for SRI International.  He is a Registered Professional Metallurgical Engineer in the States of California, Utah, Michigan and North Carolina and a Fellow of the American Society for Materials.
 
Catherine Ford Corrigan, Ph.D., joined the Company in 1996.  She was promoted to Principal in the Biomechanics practice in 2002, and was appointed Group Vice President in May 2012.  Dr. Corrigan 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. in Bioengineering from the University of Pennsylvania.  Prior to joining Exponent, Dr. Corrigan was a researcher in the Orthopaedic Biomechanics Laboratory at Beth Israel Hospital and Harvard Medical School.
 
Subbaiah V. Malladi, Ph.D., joined the Company in 1982 as a Senior Engineer, becoming a Senior Vice President in January 1988 and a Corporate Vice President in September 1993.  In October 1998, Dr. Malladi was appointed Chief Technical Officer of the Company.  Dr. Malladi also served as a Director of the Company from March 1991 through September 1993.  He was re-appointed as a Director in April 1996 and served on the Board until May 2005.  He received a Ph.D. (1980) in Mechanical Engineering from the California Institute of Technology, M.Tech (1972) in Mechanical Engineering from the Indian Institute of Technology, B.E. (1970) in Mechanical Engineering from SRI Venkateswara University, India and B.S. (1966) in Physics, Chemistry and Mathematics from Osmania University, India.  Dr. Malladi is a Registered Professional Mechanical Engineer in the State of California.
 
John D. Osteraas, Ph.D., worked for the Company from 1982 to 1985 as a Senior Engineer.  He rejoined the Company in 1990 as a Managing Engineer.  He was promoted to Principal Engineer in 1992 and Group Vice President in 2006.  Dr. Osteraas received his Ph.D. (1990) in Civil Engineering, M.S. (1977) in Civil Engineering: Structural Engineering from Stanford University and B.S. (1976) in Civil and Environmental Engineering from the University of Wisconsin.  Dr. Osteraas is a Registered Professional Engineer in 17 states and is a Fellow of the American Society of Civil Engineers.
 
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 the Company 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.
 
 
14

 
Item 1A.  Risk Factors
 
Exponent operates in a rapidly changing environment that involves a number of uncertainties, some of which are beyond our control.  These uncertainties include, but are not limited to, those mentioned elsewhere in this report and those set forth below. 
 
The unpredictable and reactive nature of our business can create uneven performance in any given quarter or fiscal year.
 
Revenues are primarily derived from services provided in response to client requests or events that occur without notice, and engagements, generally billed as services are performed, are terminable or subject to postponement or delay at any time by clients.  As a result, backlog at any particular time is small in relation to our quarterly or annual revenues and is not a reliable indicator of revenues for any future periods.  Revenues and operating margins for any particular quarter are generally affected by staffing mix, resource requirements and timing and size of engagements.
 
Our financial results could suffer if our clients’ needs change more rapidly than we are able to secure the appropriate mix of trained, skilled and experienced personnel.
 
As our clients’ needs change, new technologies develop, and legal and regulatory processes change, we may be unable to timely hire or train personnel with the appropriate new set of skills and experience which could negatively impact our growth and profitability.
 
Failure to attract and retain key employees may adversely affect our business.
 
Exponent’s business involves the delivery of professional services and is labor-intensive.  Our success depends in large part upon our ability to attract, retain and motivate highly qualified technical and managerial personnel.  Qualified personnel are in great demand and are likely to remain a limited resource for the foreseeable future.  We cannot provide any assurance that we can continue to attract sufficient numbers of highly qualified technical and managerial personnel and to 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.
 

Competition could reduce our pricing and adversely affect our business.

 
The markets for our services are highly competitive.  In addition, there are relatively low barriers to entry into our markets and we have faced, and expect to continue to face, additional competition from new entrants into our markets.  Competitive pressure could reduce the market acceptance of our services and result in price reductions that could have a material adverse effect on our business, financial condition or results of operations.
 

The loss of a large client could adversely affect our business.

 
We currently derive a significant portion of our revenues from clients in the consumer electronics, insurance, petrochemical, transportation and utilities industries and the government sector.  The loss of any large client, organization or insurer could have a material adverse effect on our business, financial condition or results of operations.
 
Our clients may be unable to pay for our services.
 
If a client's financial difficulties become severe, the client may be unwilling or unable to pay our invoices in the ordinary course of business, which could adversely affect collections of both our accounts receivable and unbilled services.  On occasion, some of our clients have entered bankruptcy, which has prevented us from collecting amounts owed to us.  The bankruptcy of a client with substantial accounts receivable could have a material adverse effect on our financial condition and results of operations.
 
We hold substantial investments that could present liquidity risks.
 
Our cash equivalent and short-term investment portfolio as of January 3, 2014, consisted primarily of obligations of state and local government agencies and the U.S. Treasury.  We follow an established investment policy to monitor, manage and limit our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.
 
 
15

 
Investments in some financial instruments may pose risks arising from liquidity and credit concerns.  As of January 3, 2014, we had no impairment charge associated with our investment portfolio relating to such adverse financial market conditions. Although we believe our current investment portfolio has a low risk of impairment, we cannot predict future market conditions or market liquidity and can provide no assurance that our investment portfolio will remain unimpaired.
 
Our business is dependent on our professional reputation.
 
The professional reputation of Exponent and its consultants is critical to our ability to successfully compete for new client engagements and attract or retain professionals.  Proven or unproven allegations against us may damage our professional reputation.  Any factors that damage our professional reputation could have a material adverse effect on our business.
 
Our business can be adversely impacted by deregulation or reduced regulatory enforcement.
 
Public concern over health, safety and preservation of the environment has resulted in the enactment of a broad range of environmental and/or other laws and regulations by local, state and federal lawmakers and agencies.  These laws and the implementing of new regulations affect nearly every industry, as well as the agencies of federal, state and local governments charged with their enforcement.  To the extent changes in such laws, regulations and enforcement or other factors significantly reduce the exposures of manufacturers, owners, service providers and others to liability, the demand for our services may be significantly reduced.
 
Tort reform can reduce demand for our services.
 
Several of our practices have a significant concentration in litigation support consulting services.  To the extent tort reform reduces the exposure of manufacturers, owners, service providers and others to liability, the demand for our litigation support consulting services may be significantly reduced. 
 
Our engagements may result in professional or other liability.
 
Our services typically involve difficult engineering and scientific assignments and carry risks of professional and other liability. Many of our engagements involve matters that could have a severe impact on a client's business, cause a client to lose significant amounts of money, or prevent a client from pursuing desirable business opportunities.  Accordingly, if a client is dissatisfied with our performance, the client could threaten or bring litigation in order to recover damages or to contest its obligation to pay our fees.  Litigation alleging that we performed negligently, disclosed client confidential information, lost or damaged evidence, infringed on patents, or otherwise breached our obligations to a client could expose us to significant liabilities to our clients or other third parties or tarnish our reputation.
 
Potential conflicts of interest may preclude us from accepting some engagements.
 
We provide litigation support consulting and other services primarily in connection with significant disputes, or other matters that are usually adversarial or that involve sensitive client information. The nature of our consulting services may preclude us from accepting engagements with other potential clients because of conflicts.  Accordingly, the nature of our business limits the number of both potential clients and potential engagements.
 
 
16

 
We are subject to unpredictable risks of litigation.
 
Although we seek to avoid litigation whenever possible, from time to time we are party to various lawsuits and claims. Disputes may arise, for example, from employment issues, regulatory actions, business acquisitions and real estate and other commercial transactions. There can be no assurances that any lawsuits or claims will be immaterial in the future. Any material lawsuits or claims could adversely affect our business and reputation.
 
We may experience security breaches that could lead to the inability to protect confidential information.
 
Despite the implementation of security measures, our operating systems are vulnerable to electronic breaches of security. Such breaches could lead to disruptions of our operations and potential unauthorized disclosure of confidential information, which could result in legal claims or proceedings. While we have taken reasonable steps to prevent and mitigate the damage of a security breach by continuously improving our design and coordination of security controls across our business, those steps may not be effective and there can be no assurance that any such steps can be effective against all possible risks.
 
Impairment of goodwill may require us to record a significant charge to earnings.
 
On our balance sheet, we have $8,607,000 of goodwill subject to periodic evaluation for impairment.  Failure to achieve sufficient levels of cash flow at reporting units, the loss of key employees, changes to the scope of operations of our business or a significant and sustained decline in our stock price could result in goodwill impairment charges.  During times of financial market volatility, significant judgment is required to determine the underlying cause of the decline and whether stock price declines are short-term in nature or indicative of an event or change in circumstances. 
 
Impairment of long-lived assets or restructuring activities may require us to record a significant charge to earnings.
 
Our long-lived assets, including our office and laboratory space in Menlo Park, California and our test and engineering center in Phoenix, Arizona, are subject to periodic testing for impairment.  Failure to achieve sufficient levels of cash flow at reporting units could result in impairment of our long-lived assets.  In addition, we have operating lease commitments for office, warehouse and laboratory space of $22,464,000 as of January 3, 2014.  Changes in the business environment could lead to changes in the scope of operations of our business.  These changes, including the closure of one or more offices, could result in restructuring and/or asset impairment charges. 
 
Our international operations create special risks that could adversely affect our business.
 
In addition to our offices in the United States, we have physical offices in the United Kingdom, Germany, Switzerland and China and conduct business in several other countries.  We expect to continue to expand globally and our international revenues may account for an increasing portion of our revenues in the future.  Our international operations carry special financial, business and legal risks, including cultural and language differences; employment laws and related factors that could result in lower utilization, higher staffing costs, and cyclical fluctuations of utilization and revenues; currency fluctuations that adversely affect our financial position and operating results; burdensome regulatory requirements and other barriers to conducting business; managing the risks associated with engagements with foreign officials and governmental agencies, including the risks arising from the Foreign Corrupt Practices Act; greater difficulties in managing and staffing foreign operations; successful entry and execution in new markets; restrictions on the repatriation of earnings; and potentially adverse tax consequences.
 
Inherent risks related to government contracts may adversely affect our business.
 
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 to 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 various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with other agencies of the government.  The inherent limitations of internal controls may not prevent or detect all improper or illegal activities, regardless of the adequacy of such controls.  Government contracts, and the proceedings surrounding them, are often subject to more extensive scrutiny and publicity than 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.
 
 
17

 
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. Current U.S. Government spending levels for defense-related programs may not be sustained and future spending and program authorizations may not increase or may decrease or shift to programs in areas in which we do not provide services or are less likely to be awarded contracts. Such changes in spending authorizations and budgetary priorities may occur as a result of the rapid growth of the federal budget deficit, increasing political pressure and legislation.  The U.S. Government also conducts periodic reviews of U.S. defense strategies and priorities, which may shift DoD budgetary priorities, reduce overall U.S. Government spending or delay contract or task order awards for defense-related programs. In addition, changes to 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.
 
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.
 
Changes in, or interpretations of, accounting principles could have a significant impact on our financial position and results of operations.
 
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions.
 
For example, the U.S.-based Financial Accounting Standards Board (“FASB”) is currently working together with the International Accounting Standards Board (“IASB”) on several projects to further align accounting principles and facilitate more comparable financial reporting between companies who are required to follow GAAP under SEC regulations and those who are required to follow International Financial Reporting Standards outside of the U.S. These efforts by the FASB and IASB may result in different accounting principles under GAAP that may result in materially different financial results for us in areas including, but not limited to, principles for recognizing revenue and lease accounting.
 

Our 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, continues to be slow and not improve, our clients may consolidate or go out of business and thus demand for our services could be reduced significantly.
 
Our quarterly results may vary.
 
Variations in our revenues and operating results occur from time to time, as a result of a number of factors, such as the significance of 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 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 often experiences significant price fluctuations.  These fluctuations are often unrelated to the operating performance of particular companies.  These broad market fluctuations may adversely affect the market price of our common stock.  When the market price of a company's stock drops significantly, shareholders often institute securities class action litigation against that company.  Any litigation against us could cause us to incur substantial costs, divert the time and attention of our management and other resources, or otherwise harm our business.
 
 
18

 
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 leased warehouse storage space.
 
Our Test and Engineering Center (TEC) occupies 147 acres in Phoenix, Arizona.  We lease this land from the state of Arizona under a 30-year lease agreement that expires in January 2028 and have options to renew for two fifteen-year periods.  We constructed an indoor test facility as well as an engineering and test preparation building at the TEC.
 
In addition, we lease office, warehouse and laboratory space in 18 other locations in 13 states and the District of Columbia, as well as in Germany, China, Switzerland and the United Kingdom.  Leases for these offices, warehouse and laboratory facilities have terms generally ranging between one and ten years.  Aggregate lease expense in fiscal 2013 for all leased properties was $5,929,000.
 
Item 3.  Legal Proceedings
 
Exponent is not engaged in any material legal proceedings.
 
Item 4.  Mine Safety Disclosures
 
Not applicable.
 
 
19

 
PART II
 
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Exponent’s common stock is traded on the NASDAQ Global Select Market, under the symbol “EXPO.”  The following table sets forth for the fiscal periods indicated the high and low sales prices for our common stock.
 
Stock prices by quarter
 
High
 
Low
 
 
 
 
 
 
 
 
 
Fiscal Year Ended December 28, 2012:
 
 
 
 
 
 
 
First Quarter
 
$
53.31
 
$
45.09
 
Second Quarter
 
$
52.84
 
$
45.56
 
Third Quarter
 
$
57.16
 
$
49.04
 
Fourth Quarter
 
$
58.92
 
$
47.50
 
 
 
 
 
 
 
 
 
Fiscal Year Ended January 3, 2014:
 
 
 
 
 
 
 
First Quarter
 
$
57.23
 
$
47.17
 
Second Quarter
 
$
59.78
 
$
50.42
 
Third Quarter
 
$
72.62
 
$
59.13
 
Fourth Quarter
 
$
80.50
 
$
67.81
 
 
As of February 21, 2014, there were 225 holders of record of our common stock.  Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we believe that there are considerably more beneficial holders of our common stock than record holders.
 
 
20

 
We paid $7.9 million of dividends during fiscal 2013 and paid no dividends during fiscal 2012.  On February 5, 2014, our Board of Directors announced a cash dividend of $0.25 per share of the Company’s common stock, payable March 28, 2014, to stockholders of record as of March 7, 2014.  We anticipate paying quarterly dividends each year in March, June, September and December, subject to declaration by our Board of Directors.  See Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
 
 
21

 
The following table provides information on the Company’s share repurchases (of Company common stock) for the quarter ended January 3, 2014 (in thousands, except price per share):
 
 
 
 
 
 
 
 
Total Number of
 
Approximate Dollar
 
 
 
 
 
 
 
 
Shares Purchased
 
Value of Shares That
 
 
 
Total Number
 
Average
 
as Part of Publicly
 
May Yet Be Purchased
 
 
 
of Shares
 
Price Paid
 
Announced Plans
 
Under the Plan or
 
 
 
Purchased
 
Per Share
 
or Programs
 
Program
 
 
 
 
 
 
 
 
 
 
 
 
 
September 28 to October 25
 
-
 
$
-
 
-
 
$
34,800
 
October 26 to November 22
 
-
 
 
-
 
-
 
$
34,800
 
November 23 to January 3
 
49
 
$
76.94
 
49
 
$
31,000
 
Total
 
49
 
$
76.94
 
49
 
 
 
 
 
The foregoing repurchases of the Company’s common stock were effected pursuant to a repurchase program authorized by the Company’s Board of Directors.  On February 9, 2012, the Board of Directors authorized $35,000,000 of repurchases, and on February 15, 2013, the Board of Directors authorized an additional $35,000,000 for repurchases.  As of January 3, 2014, there remained $31,000,000 available for repurchases under these authorizations.
 
COMPANY STOCK PRICE PERFORMANCE GRAPH
 
The graph compares the Company’s cumulative total stockholder return calculated on a dividend-reinvested basis from 2008 through 2013 with those of the Standard & Poor’s (“S&P”) 500 Index and the S&P SmallCap 600 Index.  The Company does not have a comparable peer group and thus has selected the S&P Small Cap 600 Index.  The graph assumes that $100 was invested on the last day of 2008.  Note that the historic stock price performance is not necessarily indicative of future stock price performance.
 
 
 
22

 
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.” 
 
 
 
Fiscal Year
 
(In thousands, except per share data)
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Income Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues before reimbursements
 
$
280,043
 
$
266,562
 
$
246,667
 
$
221,860
 
$
205,714
 
Revenues
 
$
296,168
 
$
292,653
 
$
272,446
 
$
248,753
 
$
227,882
 
Operating income
 
$
55,946
 
$
57,620
 
$
53,460
 
$
43,241
 
$
33,262
 
Net income
 
$
38,640
 
$
37,225
 
$
32,695
 
$
27,521
 
$
22,127
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
2.84
 
$
2.70
 
$
2.31
 
$
1.92
 
$
1.56
 
Diluted
 
$
2.76
 
$
2.60
 
$
2.22
 
$
1.83
 
$
1.47
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared per share
 
$
0.60
 
$
-
 
$
-
 
$
-
 
$
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
122,948
 
$
113,268
 
$
84,439
 
$
106,549
 
$
67,895
 
Short-term investments
 
$
33,171
 
$
20,881
 
$
25,260
 
$
-
 
$
7,490
 
Working capital
 
$
179,537
 
$
163,673
 
$
137,803
 
$
136,860
 
$
103,253
 
Total assets
 
$
344,166
 
$
315,417
 
$
268,788
 
$
258,892
 
$
206,481
 
Long-term liabilities
 
$
36,960
 
$
27,217
 
$
21,298
 
$
17,358
 
$
11,333
 
Total stockholders’ equity
 
$
235,059
 
$
216,429
 
$
186,715
 
$
183,800
 
$
150,071
 
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
OVERVIEW
 
Exponent, Inc. is a science and engineering consulting firm that provides solutions to complex problems.  Our multidisciplinary team of scientists, physicians, engineers, business and regulatory consultants brings together more than 90 different technical disciplines to solve complicated issues facing industry and government today.  Our services include analysis of products, people, property, processes and finances related to litigation, product recall, regulatory compliance, research, development and design.
 
CRITICAL ACCOUNTING ESTIMATES
 
In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our consolidated balance sheet.  We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances.  Actual results could differ materially from these estimates under different assumptions or conditions.  On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly.  We believe that the assumptions, judgments and estimates involved in accounting for revenue recognition and estimating the allowance for doubtful accounts have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies.  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 accounting policies, see Note 1 of our Notes to Consolidated Financial Statements.
 
 
23

 
Revenue recognition.  We derive our revenues primarily from professional fees earned on consulting engagements, product sales in our defense technology development practice, fees earned for the use of our equipment and facilities, as well as reimbursements for outside direct expenses associated with the services that are billed to our clients.
 
Substantially all of our engagements are service contracts performed under time and material or fixed-price billing arrangements.  For time and material and fixed-price service projects, revenue is generally recognized as the services are performed.  For substantially all of our fixed-price 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 different estimates, the amount and timing of our revenue for any period could be materially different.
 
All contracts are subject to review by management, which requires a positive assessment of the collectability of contract amounts.  If, during the course of the contract, we determine that collection of revenue is not reasonably assured, we do not recognize the revenue until its collection becomes reasonably assured, which in those situations would generally be upon receipt of cash.  We assess collectability based on a number of factors, including past transaction history with the client, as well as the credit-worthiness of the client.  Losses on fixed-price contracts are recognized during the period in which the loss first becomes evident.  Contract losses are determined to be the amount by which the estimated total costs of the contract exceeds the total fixed price of the contract.
 
Estimating the allowance for doubtful accounts.  We make estimates of our ability to collect accounts receivable and our unbilled but recognized work-in-process.  In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, we record a specific allowance to reduce the net recognized receivable to the amount we reasonably believe will be collected.  For all other customers we recognize allowances for doubtful accounts taking into consideration factors such as historical bad debts, customer concentration, customer credit-worthiness, current economic conditions, and aging of amounts due. 
 
24

 
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
 
 
PERIOD TO
 
 
 
FOR FISCAL YEARS
 
 
PERIOD CHANGE
 
 
 
2013
 
 
2012
 
 
2011
 
 
2013 vs. 2012
 
 
2012 vs. 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
100.0
%
 
100.0
%
 
100.0
%
 
1.2
%
 
7.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and related expenses
 
62.2
 
 
58.7
 
 
57.6
 
 
7.1
 
 
9.5
 
Other operating expenses
 
8.5
 
 
8.1
 
 
8.5
 
 
7.3
 
 
1.4
 
Reimbursable expenses
 
5.4
 
 
8.9
 
 
9.5
 
 
(38.2)
 
 
1.2
 
General and administrative expenses
 
5.0
 
 
4.6
 
 
4.8
 
 
8.5
 
 
3.4
 
 
 
81.1
 
 
80.3
 
 
80.4
 
 
2.2
 
 
7.3
 
Operating income
 
18.9
 
 
19.7
 
 
19.6
 
 
(2.9)
 
 
7.8
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income, net
 
2.7
 
 
1.4
 
 
0.5
 
 
93.7
 
 
203.8
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
21.6
 
 
21.1
 
 
20.1
 
 
3.6
 
 
12.6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
8.5
 
 
8.4
 
 
8.1
 
 
3.2
 
 
10.8
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
13.0
%
 
12.7
%
 
12.0
%
 
3.8
%
 
13.9
%
 
EXECUTIVE SUMMARY
 
Revenues for fiscal 2013 increased 1% and revenues before reimbursements increased 5% as compared to the prior year. The increase in revenues before reimbursements was due to an increase in billable hours, an increase in billing rates, and revenues of $1.4 million related to services performed in prior periods for a foreign client for which we deferred revenue recognition until receipt of payment.  The increase in revenues before reimbursements was also due to fiscal 2013 having one additional week of activity than fiscal 2012. We experienced strong demand for our consulting services from a diverse set of clients for both reactive and proactive projects and received some follow-on activities related to several major investigations.  This was partially offset by the expected decline in the level of activity for some of these major investigations and a decrease in product sales in our defense technology development practice.
 
During 2013, we experienced strong demand for our reactive services, where we investigated accidents ranging from the collapse of a major industrial facility to a home fire, evaluated potential product recalls including home appliances and food products, and assessed the health and environmental exposures for oil and gas operations.
 
We also experienced strong demand for our proactive services where we provided design consulting for products ranging from tablet computers to drug delivery systems, assisted clients with regulatory matters involving toilets and cosmetics, and worked with clients to develop risk management programs for gas distribution systems.
 
The increase in revenues before reimbursements resulted in a 4% increase in net income to $38,640,000 during fiscal 2013 as compared to $37,225,000 during the prior year.  Diluted earnings per share increased to $2.76 per share as compared to $2.60 during the prior year due to the increase in net income and our ongoing share repurchase program.
 
 
25

 
We remain focused on selectively adding top talent and developing the skills necessary to expand upon our market position, providing clients with in-depth scientific research and analysis to determine what happened and how to prevent failures or exposures in the future, capitalizing on emerging growth areas, managing other operating expenses, generating cash from operations, maintaining a strong balance sheet and undertaking activities such as share repurchases and dividends to enhance shareholder value.  We continue to expect some of our major investigations to step down from their elevated levels of activity as they move through their project life cycle.  We also continue to expect a step down in the level of activity in our defense technology development practice due to the constraints on defense spending and reduction of forces in Afghanistan by the United States federal government.
 
OVERVIEW OF THE YEAR ENDED
JANUARY 3, 2014
 
Our revenues consist of professional fees earned on consulting engagements, product sales in our defense technology development practice, fees for use of our equipment and facilities, and reimbursements for outside direct expenses associated with the services performed that are billed to our clients. 
 
We operate on a 52-53 week fiscal year with each year ending on the Friday closest to December 31st.  The fiscal year ended January 3, 2014 included 53 weeks of activity.  The fiscal years ended December 28, 2012 and December 30, 2011 included 52 weeks of activity.  Fiscal 2014 will end on Friday, January 2, 2015.
 
During fiscal 2013, billable hours increased 3.3% to 1,087,000 as compared to 1,052,000 during fiscal 2012. The increase in billable hours was due to follow-on activities related to major investigations and continued demand for our proactive and reactive consulting services.  The increase in billable hours was also due to fiscal 2013 having one additional week of activity than fiscal 2012.  Total billable hours during the 53rd week of fiscal 2013 were 9,804 which contributed approximately $2.5 million to the increase in revenues before reimbursements. 
 
Our utilization decreased to 71% for fiscal 2013 as compared to 73% during fiscal 2012 due to the anticipated step down in our elevated levels of activity on several major investigations, the anticipated step down in the level of activity in our defense technology development practice due to the constraints on defense spending and reduction of forces in Afghanistan by the United States Government, and due to our investment in hiring technical consultants. Technical full-time equivalent employees increased 3.9% to 719 during fiscal 2013 as compared to 692 during the fiscal 2012 due to our recruiting and retention efforts. We continue to selectively hire key talent to expand our capabilities. 
 
Product sales in defense technology development decreased to $486,000 during fiscal 2013 as compared to $9,213,000 during fiscal 2012 due to lower sales of surveillance systems to the United States Army. We do not expect any additional sales of surveillance systems during fiscal 2014 as a result of the reduction of forces in Afghanistan.
 
FISCAL YEARS ENDED JANUARY 3, 2014, AND DECEMBER 28, 2012
 
Revenues
 
(In thousands except
 
Fiscal Years
 
 
Percent
 
percentages)
 
2013
 
 
2012
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
Engineering and Other Scientific
 
$
215,972
 
 
$
213,304
 
 
1.3
%
Percentage of total revenues
 
 
72.9
%
 
 
72.9
%
 
 
 
Environmental and Health
 
 
80,196
 
 
 
79,349
 
 
1.1
%
Percentage of total revenues
 
 
27.1
%
 
 
27.1
%
 
 
 
Total revenues
 
$
296,168
 
 
$
292,653
 
 
1.2
%
 
 
26

 
The increase in revenues for our Engineering and Other Scientific segment was due to an increase in billable hours and an increase in billing rates partially offset by a decrease in reimbursable expenses and a decrease in product sales in our defense technology development practice. During fiscal 2013, billable hours for this segment increased by 5.4% to 778,000 as compared to 738,000 during fiscal 2012. The increase was due to strong demand for services in our polymer science, mechanical engineering, biomedical engineering, engineering management, and construction consulting practices. The increase in billable hours was also due to fiscal 2013 having one additional week of activity than fiscal 2012. Utilization decreased to 74% for fiscal 2013 as compared to 75% during fiscal 2012 due to the anticipated step down in our elevated levels of activity on several major investigations. Technical full-time equivalents increased 4.6% to 496 for fiscal 2013 from 474 for fiscal 2012 due to our recruiting and retention efforts. Product sales in defense technology development decreased to $486,000 during fiscal 2013 as compared to $9,213,000 during fiscal 2012 due to lower sales of surveillance systems to the United States Army.
 
The increase in revenues from our Environmental and Health segment was due to an increase in billing rates, revenues of $1.4 million related to services performed in prior periods for a foreign client for which we deferred revenue until receipt of payment, and fiscal 2013 having one additional week of activity than fiscal 2012, partially offset by a decrease in billable hours. During fiscal 2013, billable hours for this segment decreased by 1.6% to 309,000 as compared to 314,000 during fiscal 2012.  Utilization decreased to 65% for fiscal 2013 as compared to 69% for fiscal 2012. The decrease in billable hours and utilization was due to a step down from the elevated levels of activity on a number of major investigations that engage consultants across many of our environmental and health practices and centers.  The decrease in utilization was also due to our investment in hiring experienced consultants.  Technical full-time equivalents increased by 2.3% to 223 during fiscal 2013 as compared to 218 for fiscal 2012 due to our recruiting and retention efforts.
 
Revenues are primarily derived from services provided in response to client requests or events that occur without notice and engagements are generally terminable or subject to postponement or delay at any time by our clients.  As a result, backlog at any particular time is small in relation to our quarterly or annual revenues and is not a reliable indicator of revenues for any future periods.
 
Compensation and Related Expenses
 
(In thousands except
 
Fiscal Years
 
 
Percent
 
 
percentages)
 
2013
 
 
2012
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and related expenses
 
$
184,084
 
 
$
171,809
 
 
7.1
%
 
Percentage of total revenues
 
 
62.2
%
 
 
58.7
%
 
 
 
 
 
The increase in compensation and related expenses during fiscal 2013 was due to an increase in payroll, bonuses, fringe benefits and a change in the value of assets associated with our deferred compensation plan. Payroll increased $5,719,000 and fringe benefits increased $730,000 due to a 3.9% increase in technical full-time equivalent employees, the impact of our annual salary increases, and fiscal 2013 having one additional week of activity than fiscal 2012. Bonuses increased $992,000 due to a corresponding increase in profitability. During fiscal 2013, deferred compensation expense increased $3,886,000 with a corresponding increase to other income (expense), net, as compared with the prior year due to the change in value of assets associated with our deferred compensation plan. This increase consisted of an increase in the value of the plan assets of $6,044,000 during fiscal 2013 as compared to an increase in the value of the plan assets of $2,158,000 during fiscal 2012.  We expect our compensation expense, excluding the change in value of deferred compensation plan assets,  to increase as we selectively add new talent.
 

Other Operating Expenses

 
(In thousands except
 
Fiscal Years
 
 
Percent
 
 
percentages)
 
2013
 
 
2012
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating expenses
 
$
25,299
 
 
$
23,574
 
 
7.3
%
 
Percentage of total revenues
 
 
8.5
%
 
 
8.1
%
 
 
 
 
 
 
27

 
Other operating expenses include facilities-related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. The increase in other operating expenses was primarily due to an increase in occupancy expenses of $579,000, an increase in computer expenses of $359,000, an increase in technical materials of $275,000, an increase in depreciation and amortization of $241,000, and an increase in office expenses of $223,000. The increase in occupancy expenses, computer expenses, technical materials, depreciation and amortization, and office expenses were due to costs associated with the increase in technical full-time equivalent employees and the extra week of activity during fiscal 2013. We expect other operating expense to grow as we selectively add new talent and make investments in our corporate infrastructure.
 

Reimbursable Expenses

 
(In thousands except
 
Fiscal Years
 
 
Percent
 
 
percentages)
 
2013
 
 
2012
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reimbursable expenses
 
$
16,125
 
 
$
26,091
 
 
(38.2)
%
 
Percentage of total revenues
 
 
5.4
%
 
 
8.9
%
 
 
 
 
 
The decrease in reimbursable expenses was primarily due to a decrease in project-related costs in our defense technology development practice in our Engineering and Other Scientific segment. The amount of reimbursable expenses will vary from year to year depending on the nature of our projects.

 

General and Administrative Expenses

 
(In thousands except
 
Fiscal Years
 
 
Percent
 
 
percentages)
 
2013
 
 
2012
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses
 
$
14,714
 
 
$
13,559
 
 
8.5
%
 
Percentage of total revenues
 
 
5.0
%
 
 
4.6
%
 
 
 
 
 
The increase in general and administrative expenses during fiscal 2013 was primarily due to an increase in legal expense of $857,000 and an increase in recruiting expenses of $259,000. The increase in legal expenses was due to an increase in costs associated with legal claims during fiscal 2013 as compared to the same period last year.  The increase in recruiting costs was due to our efforts to hire experienced consultants. We expect general and administrative expenses to increase as we selectively add new talent, expand our business development efforts, and pursue staff development initiatives.
 
Other Income (Expense), Net
 
(In thousands except
 
Fiscal Years
 
 
Percent
 
 
percentages)
 
2013
 
 
2012
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income and expense, net
 
$
7,999
 
 
$
4,129
 
 
93.7
%
 
Percentage of total revenues
 
 
2.7
%
 
 
1.4
%
 
 
 
 
 
Other income (expense), net, consists primarily of interest income earned on available cash, cash equivalents and short-term investments, changes in the value of assets associated with our deferred compensation plan and rental income from leasing excess space in our Silicon Valley facility. During fiscal 2013, other income (expense), net, increased $3,886,000 with a corresponding increase to deferred compensation expense as compared to fiscal 2012 due to the change in value of assets associated with our deferred compensation plan. This year-over-year increase consisted of an increase in the value of the plan assets of $6,044,000 during fiscal 2013 as compared to an increase in the value of the plan assets of $2,158,000 during fiscal 2012.
 
 
28

 
Income Taxes
 
(In thousands except
 
Fiscal Years
 
 
Percent
 
 
percentages)
 
2013
 
 
2012
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes
 
$
25,305
 
 
$
24,524
 
 
3.2
%
 
Percentage of total revenues
 
 
8.5
%
 
 
8.4
%
 
 
 
 
Effective tax rate
 
 
39.6
%
 
 
39.7
%
 
 
 
 
 
The increase in income taxes was due to a corresponding increase in pre-tax income. During fiscal 2011 our effective tax rate was 40.4%.  The decrease in our effective tax rate for fiscal 2012 was primarily due to a change in estimate associated with the Company’s apportionment of income between the states.  Our effective tax rate for fiscal 2013 remained below our historical average due to manufacturing deductions claimed.  Both the change in apportionment between the states and the manufacturing deductions were non-recurring.  As such we expect our tax rate to increase during 2014 and approximate our historical average.
 
 
29

 
FISCAL YEARS ENDED DECEMBER 28, 2012, AND DECEMBER 30, 2011
 
Revenues
 
(In thousands except percentages)
 
Fiscal Years
 
 
Percent
 
 
 
 
2012
 
 
2011
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Engineering and Other Scientific
 
$
213,304
 
 
$
199,772
 
 
6.8
%
 
Percentage of total revenues
 
 
72.9
%
 
 
73.3
%
 
 
 
 
Environmental and Health
 
 
79,349
 
 
 
72,674
 
 
9.2
%
 
Percentage of total revenues
 
 
27.1
%
 
 
26.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
292,653
 
 
$
272,446
 
 
7.4
%
 
 
The increase in revenues for our Engineering and Other Scientific segment was due to an increase in billable hours. During fiscal 2012, billable hours for this segment increased by 6.5% to 738,000 as compared to 693,000 during fiscal 2011. The increase was due to strong demand for services in our mechanics and materials, electrical, thermal and engineering management consulting practices. Utilization increased to 75% for fiscal 2012 as compared to 73% for fiscal 2011 due in part to elevated levels of activity on a number of major assignments that engaged consultants across many of our engineering and other scientific practices and our management of headcount to align resources with anticipated demand. Technical full-time equivalents increased 3.5% to 474 for fiscal 2012 from 458 for fiscal 2011 due to our recruiting and retention efforts. Product sales in defense technology development decreased to $9,213,000 during fiscal 2012 as compared to $12,300,000 during fiscal 2011 due to lower sales of surveillance systems to the United States Army.
 
The increase in revenues from our Environmental and Health segment was due to an increase in billable hours. During fiscal 2012, billable hours for this segment increased by 9.0% to 314,000 as compared to 288,000 during fiscal 2011. The increase in billable hours was due to strong demand for services in our environmental sciences, ecological sciences, and chemical regulation and food safety practices. Utilization increased to 69% for fiscal 2012 as compared to 68% for fiscal 2011 due to elevated levels of activity on a number of major assignments that engage consultants across many of our environmental and health practices and centers. Technical full-time equivalents increased by 7.4% to 218 during fiscal 2012 as compared to 203 for fiscal 2011 due to our recruiting and retention efforts.
 
Compensation and Related Expenses
 
(In thousands except percentages)
 
Fiscal Years
 
 
Percent
 
 
 
 
2012
 
 
2011
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and related expenses
 
$
171,809
 
 
$
156,853
 
 
9.5
%
 
Percentage of total revenues
 
 
58.7
%
 
 
57.6
%
 
 
 
 
 
The increase in compensation and related expenses during fiscal 2012 was due to an increase in payroll, bonuses, fringe benefits and a change in the value of assets associated with our deferred compensation plan. Payroll increased $6,387,000 and fringe benefits increased $841,000 due to a 4.7% increase in technical full time equivalent employees and our annual salary increases. Bonuses increased $4,102,000 due to a corresponding increase in profitability. During fiscal 2012, deferred compensation expense increased $2,431,000 with a corresponding increase to other income (expense), net, as compared to the prior year due to the change in value of assets associated with our deferred compensation plan. This increase consisted of an increase in the value of the plan assets of $2,158,000 during fiscal 2012 and a decrease in the value of the plan assets of $273,000 during fiscal 2011.
 
 
30

 

Other Operating Expenses

 
(In thousands except percentages)
 
Fiscal Years
 
 
Percent
 
 
 
 
2012
 
 
2011
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other operating expenses
 
$
23,574
 
 
$
23,238
 
 
1.4
%
 
Percentage of total revenues
 
 
8.1
%
 
 
8.5
%
 
 
 
 
 
Other operating expenses include facilities-related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. The increase in other operating expenses was primarily due to an increase in occupancy expenses of $509,000 partially offset by a decrease in technical materials of $240,000. The increase in occupancy expenses was due to planned maintenance activities for our owned facilities and costs associated with the increase in technical full-time equivalent employees. The decrease in technical materials was due to a decrease in development activities for our defense technology development practice.
 

Reimbursable Expenses

 
(In thousands except percentages)
 
Fiscal Years
 
 
Percent
 
 
 
 
2012
 
 
2011
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reimbursable expenses
 
$
26,091
 
 
$
25,779
 
 
1.2
%
 
Percentage of total revenues
 
 
8.9
%
 
 
9.5
%
 
 
 
 
 
Reimbursable expenses for fiscal 2012 remained relatively consistent with fiscal 2011.  The amount of reimbursable expenses will vary from year to year depending on the nature of our projects.

 

General and Administrative Expenses

 
(In thousands except percentages)
 
Fiscal Years
 
 
Percent
 
 
 
 
2012
 
 
2011
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses
 
$
13,559
 
 
$
13,116
 
 
3.4
%
 
Percentage of total revenues
 
 
4.6
%
 
 
4.8
%
 
 
 
 
 
The increase in general and administrative expenses during fiscal 2012 was primarily due to an increase in travel and meals of $689,000 partially offset by a decrease in legal fees of $336,000. The increase in travel and meals was related to a bi-annual firm-wide managers’ meeting that was held at the end of the third quarter of 2012. The decrease in legal fees was primarily due to legal claims in the prior year.
 
Other Income (Expense), Net
 
(In thousands except percentages)
 
Fiscal Years
 
 
Percent
 
 
 
 
2012
 
 
2011
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income and expense, net
 
$
4,129
 
 
$
1,359
 
 
203.8
%
 
Percentage of total revenues
 
 
1.4
%
 
 
0.5
%
 
 
 
 
 
 
31

 
Other income (expense), net, consists primarily of interest income earned on available cash, cash equivalents and short-term investments, changes in the value of assets associated with our deferred compensation plan and rental income from leasing excess space in our Silicon Valley facility. During fiscal 2012, other income (expense), net increased $2,431,000 with a corresponding increase to deferred compensation expense as compared to fiscal 2011 due to the change in value of assets associated with our deferred compensation plan. This year-over-year increase consisted of an increase in the value of the plan assets of $2,158,000 during fiscal 2012 and a decrease in the value of the plan assets of $273,000 during fiscal 2011. During fiscal 2012, rental income increased $361,000 as compared to fiscal 2011 due to an increase in the occupancy rate for rental space in our Silicon Valley facility.
 
Income Taxes
 
(In thousands except
 
Fiscal Years
 
 
Percent
 
 
percentages)
 
2012
 
 
2011
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes
 
$
24,524
 
 
$
22,124
 
 
10.8
%
 
Percentage of total revenues
 
 
8.4
%
 
 
8.1
%
 
 
 
 
Effective tax rate
 
 
39.7
%
 
 
40.4
%
 
 
 
 
 
The increase in income taxes was due to a corresponding increase in pre-tax income. The decrease in the effective tax rate was primarily due to a change in estimate associated with the Company’s apportionment of income between the states.
 
LIQUIDITY AND CAPITAL RESOURCES
 
 
 
Fiscal Years
 
(In thousands)
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
61,792
 
$
48,505
 
$
46,596
 
Investing activities
 
$
(18,880)
 
$
(1,169)
 
$
(29,354)
 
Financing activities
 
$
(33,769)
 
$
(18,859)
 
$
(39,344)
 
 
We financed our business in fiscal 2013 through available cash and cash flows from operating activities.  We invest our excess cash in cash equivalents and short-term investments. As of January 3, 2014, our cash, cash equivalents and short-term investments were $156,119,000 compared to $134,149,000 at December 28, 2012.  We believe our existing balances of cash, cash equivalents and short-term investments will be sufficient to satisfy our working capital needs, capital expenditures, outstanding commitments, stock repurchases, dividends and other liquidity requirements over the next 12 months.
 
Generally, our net cash provided by operating activities is used to fund our day-to-day operating activities. First quarter operating cash requirements are generally higher due to payment 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 activities are for employee-related expenditures, leased facilities, taxes, and general operating expenses including marketing and travel.
 
Net cash provided by operating activities was $61.8 million for fiscal 2013 as compared to $48.5 million and $46.6 million in fiscal 2012 and 2011, respectively. The increase in net cash provided by operating activities during fiscal 2013 as compared to fiscal 2012 was primarily due to an increase in cash receipts from clients.  Accounts receivable decreased during fiscal 2013 as compared to an increase during fiscal 2012. The increases in net cash provided by operating activities during fiscal 2012, as compared to fiscal 2011, was due to an increase in net income, an increase in accrued bonuses which are paid in the year subsequent to the year accrued, and an increase in non-cash compensation expense partially offset by higher accounts receivable.
 
During fiscal 2013, 2012 and 2011, net cash used in investing activities was primarily related to the purchase and sale or maturity of short-term investments.
 
 
32

 
The increase in net cash used in financing activities during fiscal 2013, as compared to fiscal 2012, was due to our quarterly dividend payments which started in the first quarter of 2013, an increase in repurchases of common stock, and an increase in payroll taxes for restricted stock units.  The decrease in net cash used in financing activities during fiscal 2012, as compared to fiscal 2011, was due to a decrease in repurchases of our common stock.
 
We expect to continue our investing activities, including capital expenditures. Furthermore, cash reserves may be used to repurchase common stock under our stock repurchase programs, pay dividends or strategically acquire professional service firms that are complementary to our business. 
 
The following schedule summarizes our principal contractual commitments as of January 3, 2014 (in thousands):
 
 
 
Operating
 
 
 
 
 
 
 
 
 
 
Fiscal
 
lease
 
Capital
 
Purchase
 
 
 
 
year
 
commitments
 
leases
 
Obligations
 
Total
 
2014
 
$
7,718
 
$
48
 
$
350
 
$
8,116
 
2015
 
 
6,411
 
 
-
 
 
-
 
 
6,411
 
2016
 
 
4,489
 
 
-
 
 
-
 
 
4,489
 
2017
 
 
2,736
 
 
-
 
 
-
 
 
2,736
 
2018
 
 
1,354
 
 
-
 
 
-
 
 
1,354
 
Thereafter
 
 
2,795
 
 
-
 
 
-
 
 
2,795
 
 
 
$
25,503
 
$
48
 
$
350
 
$
25,901
 
 
The above table does not reflect unrecognized tax benefits of $1,147,000, the timing of which is uncertain.  Refer to Note 8 of the Notes to Consolidated Financial Statements for additional discussion on unrecognized tax benefits.
 
We maintain a nonqualified deferred compensation plan for the benefit of a select group of highly compensated employees.  Vested amounts due under the plan of $33,447,000 were recorded as a long-term liability on our consolidated balance sheet at January 3, 2014.  Company assets that are earmarked to pay benefits under the plan are held in a rabbi trust and are subject to the claims of our creditors.  As of January 3, 2014, invested amounts under the plan of $33,501,000 were recorded as a long-term asset on our consolidated balance sheet.
 
As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity.  The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime.  The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid.  We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.
 
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not engage in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.
 
 
33

 
Non-GAAP Financial Measures
 
Regulation G, conditions for use of Non-Generally Accepted Accounting Principles ("Non-GAAP") financial measures, and other SEC regulations define and prescribe the conditions for use of certain Non-GAAP financial information.  Generally, a Non-GAAP financial measure is a numerical measure of a company's performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP.  We closely monitor two financial measures, EBITDA and EBITDAS, which meet the definition of Non-GAAP financial measures. We define EBITDA as net income before income taxes, interest income, depreciation and amortization.  We define EBITDAS as EBITDA before stock-based compensation.  We regard EBITDA and EBITDAS as useful measures of operating performance and cash flow to complement operating income, net income and other GAAP financial performance measures.  Additionally, management believes that EBITDA and EBITDAS provide meaningful comparisons of past, present and future operating results.  These measures are used to evaluate our financial results, develop budgets and determine employee compensation.  These measures, however, should be considered in addition to, and not as a substitute or superior to, operating income, cash flows, or other measures of financial performance prepared in accordance with GAAP. A reconciliation of the Non-GAAP measures to the nearest comparable GAAP measure is set forth below.
 
The following table shows EBITDA as a percentage of revenues before reimbursements for fiscal years 2013, 2012 and 2011:
 
(in thousands, except percentages)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal Years
 
 
 
 
2013
 
 
2012
 
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues before reimbursements
 
$
280,043
 
 
$
266,562
 
 
$
246,667
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA
 
$
68,769
 
 
$
66,132
 
 
$
58,994
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA as a % of revenues before reimbursements
 
 
24.6
%
 
 
24.8
%
 
 
23.9
%
 
 
The decrease in EBITDA as a percentage of revenues before reimbursements was primarily due to a decrease in utilization and a decrease in product sales in our defense technology development practice.  Our utilization decreased to 71% during fiscal 2013 as compared to 73% during fiscal 2012 due to the anticipated step down in our elevated levels of activity on several major investigations and due to our investment in hiring technical consultants.
 
The increase in EBITDA as a percentage of revenues before reimbursements for fiscal 2012 as compared to fiscal 2011 was primarily due to an increase in utilization, combined with other operating and general and administrative expenses growing at a slower rate than revenues.  Utilization during fiscal 2012 was strong due to broad based demand for our services and the continuing benefit from a few major assignments.  Utilization for fiscal 2012 increased to 73% as compared to 71% during fiscal 2011. 
 
 
34

 
The following table is a reconciliation of EBITDA and EBITDAS to the most comparable GAAP measure, net income, for fiscal 2013, 2012 and 2011:
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal Years
 
 
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
$
38,640
 
$
37,225
 
$
32,695
 
 
 
 
 
 
 
 
 
 
 
 
Add back (subtract):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes
 
 
25,305
 
 
24,524
 
 
22,124
 
Interest income, net
 
 
(127)
 
 
(328)
 
 
(236)
 
Depreciation and amortization
 
 
4,951
 
 
4,711
 
 
4,411
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA
 
 
68,769
 
 
66,132
 
 
58,994
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation
 
 
13,168
 
 
12,378
 
 
10,340
 
 
 
 
 
 
 
 
 
 
 
 
EBITDAS
 
$
81,937
 
$
78,510
 
$
69,334
 
 
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 quality and relatively short average effective maturities in accordance with 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.
 
If interest rates were to instantaneously increase or decrease by 100 basis points, the change in the fair value of our portfolio of cash equivalents and short-term investments would not have a material impact on our financial statements.  We do not use derivative financial instruments in our investment portfolio.  Notwithstanding our efforts to manage interest rate risk, there can be no assurances that we will be adequately protected against the risks associated with interest rate fluctuations.
 
We are exposed to some foreign currency exchange rate risk associated with our foreign operations.  Given the limited nature of these operations, we believe that any exposure would be minimal.
 
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 Company’s internal control over financial reporting, as stated in their report which is included in Part IV, Item 15 of this Form 10-K.
 
 
35

 
(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.
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are 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.  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation under the framework in Internal Control - Integrated Framework (1992), our management concluded that our internal control over financial reporting was effective as of January 3, 2014.
 
(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.
 
 
36

 
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 with respect to our directors, code of ethics and compliance with section 16(a) of the Exchange Act is incorporated by reference to the sections of the Company’s definitive Proxy Statement for its 2014 Annual Meeting of Stockholders (the "Proxy Statement") entitled "Proposal No. 1: Election of Directors," "Code of Business Conduct and Corporate Governance" and "Compliance with Section 16(a) of the Exchange Act."  See Item 1 for information regarding the executive officers of the Company.
 
Item 11.  Executive Compensation
 
The information required by this item is incorporated by reference to the section of the Proxy Statement entitled "Executive Officer Compensation."
 
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information required by this item is incorporated by reference to the sections of the Proxy Statement entitled "Stock Ownership” and “Equity Compensation Plan Information."
 
Item 13.  Certain Relationships and Related Transactions, and Director Independence
 
The information required by this item is incorporated by reference to the sections of the Proxy Statement entitled "Related Party Transactions" and “Proposal No. 1 – Election of Directors.”
 
Item 14.  Principal Accounting Fees and Services
 
The information required by this item is incorporated by reference to the section of the Proxy Statement entitled "Principal Accounting Fees and Services."
 
 
37

 
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:
 
 
Page
 
 
Report of Independent Registered Public Accounting Firm
39
 
 
Consolidated Statements of Income for the years ended January 3, 2014, December 28, 2012 and December 30, 2011
41
 
 
Consolidated Statements of Comprehensive Income for the years ended January 3, 2014, December 28, 2012 and December 30, 2011
42
 
 
Consolidated Balance Sheets as of January 3, 2014 and December 28, 2012
43
 
 
Consolidated Statements of Stockholders’ Equity for the years ended January 3, 2014, December 28, 2012 and December 30, 2011
44
 
 
Consolidated Statements of Cash Flows for the years ended January 3, 2014, December 28, 2012 and December 30, 2011
46
 
 
Notes to Consolidated Financial Statements
47
 
2.     Financial Statement Schedules
 
The following financial statement schedule of Exponent, Inc. for the years ended January 3, 2014, December 28, 2012 and December 30, 2011 is filed as part of this Report and should be read in conjunction with the consolidated financial statements of Exponent, Inc. and subsidiaries:
 
 
Page
 
 
Schedule II - Valuation and Qualifying Accounts
71
 
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
 
 
 
Page
 
 
 
 
 
(a)
Exhibit Index
73
 
 
38

 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
Exponent, Inc.:
 
We have audited the accompanying consolidated balance sheets of Exponent, Inc. and subsidiaries (the Company) as of January 3, 2014 and December 28, 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended January 3, 2014.  In connection with our audits of the consolidated financial statements, we have also audited the accompanying financial statement schedule II. We also have audited the Company’s internal control over financial reporting as of January 3, 2014, based on the criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting, appearing under Item 9A(b). Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule II, and an opinion on the Company’s internal control over financial reporting based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 
39

 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Exponent, Inc. and subsidiaries as of January 3, 2014 and December 28, 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended January 3, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.  Also, in our opinion, Exponent, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 3, 2014, based on the criteria established in Internal Control – Integrated Framework (1992) issued by COSO .
 
KPMG LLP
San Francisco, California
February 28, 2014
 
 
40

 
Exponent, Inc. and Subsidiaries

Consolidated Statements of Income

 
 
 
Fiscal Years
 
(In thousands, except per share data)
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
Revenues before reimbursements
 
$
280,043
 
$
266,562
 
$
246,667
 
Reimbursements
 
 
16,125
 
 
26,091
 
 
25,779
 
Revenues
 
 
296,168
 
 
292,653
 
 
272,446
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
Compensation and related expenses
 
 
184,084
 
 
171,809
 
 
156,853
 
Other operating expenses
 
 
25,299
 
 
23,574
 
 
23,238
 
Reimbursable expenses
 
 
16,125
 
 
26,091
 
 
25,779
 
General and administrative expenses
 
 
14,714
 
 
13,559
 
 
13,116
 
 
 
 
240,222
 
 
235,033
 
 
218,986
 
Operating income
 
 
55,946
 
 
57,620
 
 
53,460
 
 
 
 
 
 
 
 
 
 
 
 
Other income:
 
 
 
 
 
 
 
 
 
 
Interest income
 
 
127
 
 
328
 
 
236
 
Miscellaneous income, net
 
 
7,872
 
 
3,801
 
 
1,123
 
Income before income taxes
 
 
63,945
 
 
61,749
 
 
54,819
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
 
25,305
 
 
24,524
 
 
22,124
 
Net income
 
$
38,640
 
$
37,225
 
$
32,695
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
2.84
 
$
2.70
 
$
2.31
 
Diluted
 
$
2.76
 
$
2.60
 
$
2.22
 
Shares used in per share computations:
 
 
 
 
 
 
 
 
 
 
Basic
 
 
13,616
 
 
13,780
 
 
14,181
 
Diluted
 
 
14,025
 
 
14,293
 
 
14,751
 
 
See accompanying notes to the Consolidated Financial Statements.
 
 
41

 
Exponent, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

 
 
 
Fiscal Years
 
(In thousands)
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
38,640
 
$
37,225
 
$
32,695
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax of
     $(187), $(184), and $(8), respectively
 
 
373
 
 
249
 
 
(72)
 
Unrealized (loss) gain arising during the period
     on investments, net of tax of
     $10, $19, and $(36), respectively
 
 
(14)
 
 
(28)
 
 
52
 
Comprehensive income
 
$
38,999
 
$
37,446
 
$
32,675
 
 
See accompanying notes to the Consolidated Financial Statements.
 
 
42

 
 
Exponent, Inc. and Subsidiaries
Consolidated Balance Sheets
 
 
 
Fiscal Years
 
(In thousands, except par value)
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
122,948
 
$
113,268
 
Short-term investments
 
 
33,171
 
 
20,881
 
Accounts receivable, net of allowance for contract losses and
   doubtful accounts of $2,771 and $2,666, respectively
 
 
76,980
 
 
85,361
 
Prepaid expenses and other assets
 
 
10,450
 
 
8,277
 
Deferred income taxes
 
 
8,135
 
 
7,657
 
Total current assets
 
 
251,684
 
 
235,444
 
 
 
 
 
 
 
 
 
Property, equipment and leasehold improvements, net
 
 
28,721
 
 
27,446
 
Goodwill
 
 
8,607
 
 
8,607
 
Deferred income taxes
 
 
21,102
 
 
18,359
 
Deferred compensation plan assets
 
 
33,501
 
 
24,801
 
Other assets
 
 
551
 
 
760