EXPO 10-Q Quarter ended Oct. 3, 2014

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended October 3, 2014

OR

For the transition period from to

Commission File Number 0-18655

EXPONENT, INC.

(Exact name of registrant as specified in its charter)

(650) 326-9400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of October 31, 2014, the latest practicable date, the registrant had 12,866,600 shares of common stock, $0.001 par value per share, outstanding.

EXPONENT, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

EXPONENT, INC.

October 3, 2014 and January 3, 2014

(in thousands, except par value)

(unaudited)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

EXPONENT, INC.

Condensed Consolidated Statements of Income

For the Three and Nine Months Ended October 3, 2014 and September 27, 2013

(in thousands, except per share data)

(unaudited)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements

EXPONENT, INC.

For the Three and Nine Months Ended October 3, 2014 and September 27, 2013

(in thousands)

(unaudited)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements

EXPONENT, INC.

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended October 3, 2014 and September 27, 2013

(in thousands)

(unaudited)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

EXPONENT, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Exponent, Inc. (referred to as the “Company” or “Exponent”) is an engineering and scientific consulting firm that provides solutions to complex problems. The Company operates on a 52-53 week fiscal year ending on the Friday closest to the last day of December.

The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not contain all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments which are necessary for the fair presentation of the condensed consolidated financial statements have been included and all such adjustments are of a normal and recurring nature. The operating results for the three and nine months ended October 3, 2014 are not necessarily representative of the results of future quarterly or annual periods. The following information should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2014 which was filed with the U.S. Securities and Exchange Commission on February 28, 2014.

The unaudited condensed consolidated financial statements include the accounts of Exponent, Inc. and its subsidiaries, which are all wholly owned. All intercompany accounts and transactions have been eliminated in consolidation.

Authorized Capital Stock. In a letter dated May 23, 2006, the Company committed to stockholders to limit its use of authorized capital stock to 40 million common shares, and 2 million preferred shares, unless the approval of the Company’s stockholders is subsequently obtained, such as through a further amendment to the Company’s authorized capital stock.

Dividend. The Company declared and paid cash dividends per common share during the periods presented as follows:

Prior to 2013 the Company had never paid cash dividends on its common stock. On October 22, 2014 the Company’s Board of Directors announced a cash dividend of $0.25 per share of the Company’s common stock, payable December 19, 2014, to stockholders of record as of November 28, 2014. The Company expects to continue paying quarterly dividends in the future, subject to declaration by the Company’s Board of Directors.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include accounting for revenue recognition and estimating the allowance for doubtful accounts. Actual results could differ from those estimates.

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale fixed income securities, trading fixed income and equity securities held in its deferred compensation plan and the liability associated with its deferred compensation plan. There have been no transfers between fair value measurement levels during the nine months ended October 3, 2014 and September 27, 2013. Any transfers between fair value measurement levels would be recorded on the actual date of the event or change in circumstances that caused the transfer. The fair value of these certain financial assets and liabilities was determined using the following inputs at October 3, 2014:

The fair value of these certain financial assets and liabilities was determined using the following inputs at January 3, 2014:

Fixed income available-for-sale securities as of October 3, 2014 and January 3, 2014 represent primarily obligations of state and local government agencies. Fixed income and equity trading securities represent mutual funds held in the Company’s deferred compensation plan. See Note 6 for additional information about the Company’s deferred compensation plan.

Cash, cash equivalents and short-term investments consisted of the following as of October 3, 2014:

Cash, cash equivalents and short-term investments consisted of the following as of January 3, 2014:

The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as short-term investments based on stated effective maturities as of October 3, 2014:

At October 3, 2014 and January 3, 2014, the Company did not have any assets or liabilities valued using significant unobservable inputs.

The following financial instruments are not measured at fair value on the Company's consolidated balance sheet at October 3, 2014 and January 3, 2014, but require disclosure of their fair values: accounts receivable, other assets and accounts payable. The estimated fair value of such instruments at October 3, 2014 and January 3, 2014 approximates their carrying value as reported on the consolidated balance sheet due to their generally short maturities. If measured at fair value in the financial statements, these instruments would be categorized as Level 2 on the fair value hierarchy.

There were no other-than-temporary impairments or credit losses related to available-for-sale securities during the three and nine months ended October 3, 2014 and September 27, 2013.

Basic per share amounts are computed using the weighted-average number of common shares outstanding during the period. Diluted per share amounts are calculated using the weighted-average number of common shares outstanding during the period and, when dilutive, the weighted-average number of potential common shares from the issuance of common stock to satisfy outstanding restricted stock units and the exercise of outstanding options to purchase common stock using the treasury stock method.

The following schedule reconciles the shares used to calculate basic and diluted net income per share:

There were no options excluded from the diluted per share calculations for the three and nine months ended October 3, 2014 and September 27, 2013.

Note 4: Stock-Based Compensation

Restricted Stock Units

Restricted stock unit grants are designed to attract and retain employees, and to better align employee interests with those of the Company’s stockholders. For a select group of employees, up to 40% of their annual bonus is settled with fully vested restricted stock unit awards. Under these fully vested restricted stock unit awards, the holder of each award has the right to receive one share of the Company’s common stock for each fully vested restricted stock unit four years from the date of grant. Each individual who receives a fully vested restricted stock unit award is also granted a matching number of unvested restricted stock unit awards. Unvested restricted stock unit awards are also granted for select new hires and promotions. These unvested restricted stock unit awards generally cliff vest four years from the date of grant, at which time the holder of each award will have the right to receive one share of the Company’s common stock for each restricted stock unit award provided the holder of each award has met certain employment conditions. In the case of retirement at 59½ years or older, all unvested restricted stock unit awards will continue to vest, provided that the holder of each award does all consulting work through the Company and does not become an employee for a past or present client, beneficial party or competitor of the Company.

The value of these restricted stock unit awards is determined based on the market price of the Company’s common stock on the date of grant. The value of fully vested restricted stock unit awards issued is recorded as a reduction to accrued bonuses. The portion of bonus expense that the Company expects to settle with fully vested restricted stock unit awards is recorded as stock-based compensation during the period the bonus is earned. The Company recorded stock-based compensation expense associated with accrued bonus awards of $1,657,000 and $1,557,000 during the three months ended October 3, 2014 and September 27, 2013, respectively. For the nine months ended October 3, 2014 and September 27, 2013, the Company recorded stock-based compensation expense associated with accrued bonus awards of $4,825,000 and $4,695,000, respectively. The value of the unvested restricted stock unit awards granted is recognized on a straight-line basis over the shorter of the four-year vesting period or the period between the grant date and the date the award recipient turns 59½. If the award recipient is 59½ years or older on the date of grant, the value of the entire award is expensed upon grant. The Company recorded stock-based compensation expense associated with the unvested restricted stock unit awards of $982,000 and $844,000 during the three months ended October 3, 2014 and September 27, 2013, respectively. The Company recorded stock-based compensation expense associated with the unvested restricted stock unit awards of $5,145,000 and $5,169,000 during the nine months ended October 3, 2014 and September 27, 2013, respectively.

Stock Options

Stock options are granted for terms of ten years and generally vest 25% per year over a four-year period from the grant date. For options granted on or after January 1, 2012, all unvested stock option awards will continue to vest in the case of retirement at 59½ or older, provided that the holder of each award does all consulting work through the Company and does not become an employee for a past or present client, beneficial party or competitor of the Company. The Company grants options at exercise prices equal to the fair value of the Company’s common stock on the date of grant. The Company recorded stock-based compensation expense of $71,000 and $100,000 during the three months ended October 3, 2014 and September 27, 2013, respectively, associated with stock option grants. The Company recorded stock-based compensation expense of $615,000 and $969,000 during the nine months ended October 3, 2014 and September 27, 2013, respectively, associated with stock option grants.

The Company uses the Black-Scholes option-pricing model to determine the fair value of options granted. The determination of the fair value of stock-based awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate and expected dividends.

The Company used historical exercise and post-vesting forfeiture and expiration data to estimate the expected term of options granted. The historical volatility of the Company’s common stock over a period of time equal to the expected term of the options granted was used to estimate expected volatility. The risk-free interest rate used in the option-pricing model was based on United States Treasury zero-coupon issues with remaining terms similar to the expected term on the options. The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Historical data was used to estimate pre-vesting option forfeitures and stock-based compensation expense was recorded only for those awards that are expected to vest. All share-based payment awards are recognized on a straight-line basis over the requisite service periods of the awards.

On February 9, 2012, the Company’s Board of Directors authorized $35,000,000 for the repurchase of the Company’s common stock. On February 15, 2013, the Company’s Board of Directors authorized an additional $35,000,000 for the repurchase of the Company’s common stock. On May 29, 2014, the Company’s Board of Directors authorized an additional $35,000,000 for the repurchase of the Company’s common stock.

The Company repurchased 383,639 shares of its common stock for $27,923,000 during the nine months ended October 3, 2014.  The Company repurchased 388,604 shares of its common stock for $21,211,000 during the nine months ended September 27, 2013.  As of October 3, 2014, the Company had remaining authorization under its stock repurchase plans of $38,077,000 to repurchase shares of its common stock.

Net losses related to the re-issuance of treasury stock to settle restricted stock unit and stock option awards of $0 and $140,000 were recorded as a reduction to retained earnings during the three months ended October 3, 2014 and September 27, 2013, respectively. Net losses related to the re-issuance of treasury stock to settle restricted stock unit and stock option awards of $6,050,000 and $10,253,000 were recorded as a reduction to retained earnings during the nine months ended October 3, 2014 and September 27, 2013, respectively.

The Company maintains a nonqualified deferred compensation plan for the benefit of a select group of highly compensated employees. Under this plan, participants may elect to defer up to 100% of their compensation. Company assets that are earmarked to pay benefits under the plan are held in a rabbi trust and are subject to the claims of the Company’s creditors. As of October 3, 2014 and January 3, 2014, the invested amounts under the plan totaled $42,098,000 and $37,979,000, respectively. These assets are classified as trading securities and are recorded at fair value with changes recorded as adjustments to other income and expense.

As of October 3, 2014 and January 3, 2014, vested amounts due under the plan totaled $43,832,000 and $37,926,000, respectively. Changes in the liability are recorded as adjustments to compensation expense. During the three months ended October 3, 2014 and September 27, 2013, the Company recognized compensation expense of ($1,331,000) and $1,893,000, respectively, as a result of changes in the market value of the trust assets with the same amount being recorded as expense/income in other income (expense), net. During the nine months ended October 3, 2014 and September 27, 2013, the Company recognized compensation expense of $1,351,000 and $4,128,000, respectively, as a result of changes in the market value of the trust assets with the same amount being recorded as income in other income (expense), net.

Note 7: Supplemental Cash Flow Information

The following is supplemental disclosure of cash flow information:

Note 8: Accounts Receivable, Net

At October 3, 2014 and January 3, 2014, accounts receivable, net, was comprised of the following:

Note 9: Segment Reporting

The Company has two operating segments based on two primary areas of service. The Engineering and Other Scientific operating segment is a broad service group providing technical consulting in different practices primarily in the areas of engineering and technology development. The Environmental and Health operating segment provides services in the area of environmental, epidemiology and health risk analysis. This operating segment provides a wide range of consulting services relating to environmental hazards and risks and the impact on both human health and the environment.

Segment information for the three and nine months ended October 3, 2014 and September 27, 2013 follows:

Revenues

Operating Income

Capital Expenditures

Depreciation and Amortization

No single customer comprised more than 10% of the Company’s revenues during the three or nine months ended October 3, 2014 and September 27, 2013. No single customer comprised more than 10% of the Company’s accounts receivable at October 3, 2014 and January 3, 2014.

Note 10: Goodwill

Below is a breakdown of goodwill reported by segment as of October 3, 2014:

There were no acquisitions, dispositions, impairments or other changes in the carrying amount of goodwill, nor any changes in the composition of the Company’s reporting units, during the three and nine months ended October 3, 2014.

The Company is a party to various legal actions from time to time and may be contingently liable in connection with claims and contracts arising in the normal course of business, the outcome of which the Company believes, after consultation with legal counsel, will not have a material adverse effect on its financial condition, results of operations or liquidity. However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expected results. All legal costs associated with litigation are expensed as incurred.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herein and with our audited consolidated financial statements and notes thereto for the fiscal year ended January 3, 2014, which are contained in our fiscal 2013 Annual Report on Form 10-K which was filed with the U.S. Securities and Exchange Commission on February 28, 2014.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain “forward-looking” statements (as such term is defined in the Private Securities Litigation Reform Act of 1995, and the rules promulgated pursuant to the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended) that are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. When used in this document the words “anticipate,” “believe,” “estimate,” “expect” and similar expressions, as they relate to the Company or its management, identify such forward-looking statements. Such statements reflect the current views of the Company or its management with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company’s actual results, performance, or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. Factors that could cause or contribute to such material differences include the possibility that the demand for our services may decline as a result of changes in general and industry specific economic conditions, the timing of engagements for our services, the effects of competitive services and pricing, the absence of backlog related to our business, our ability to attract and retain key employees, the effect of tort reform and government regulation on our business and liabilities resulting from claims made against us. Additional risks and uncertainties are discussed in our fiscal 2013 Annual Report on Form 10-K under the heading “Risk Factors” and elsewhere in the report. The inclusion of such forward-looking information should not be regarded as a representation by the Company or any other person that the future events, plans, or expectations contemplated by the Company will be achieved. Due to such uncertainties and risks, you are warned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. The Company does not intend to release publicly any updates or revisions to any such forward-looking statements.

Business Overview

Exponent, Inc. is an engineering and scientific consulting firm that provides solutions to complex problems. Our multidisciplinary team of scientists, physicians, engineers and business consultants brings together more than 90 different technical disciplines to solve complicated issues facing industry and business today. Our services include analysis of product development, product recall, regulatory compliance, and discovery of potential problems related to products, people or property and impending litigation.

CRITICAL ACCOUNTING ESTIMATES

In preparing our unaudited condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our consolidated balance sheet. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition and estimating the allowance for doubtful accounts have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. Policies covering revenue recognition and estimating the allowance for doubtful accounts are described in our fiscal 2013 Annual Report on Form 10-K under “Critical Accounting Estimates” and Note 1 (Summary of Significant Accounting Policies) of the Notes to Consolidated Financial Statements.

RESULTS OF CONSOLIDATED OPERATIONS

Executive Summary

Revenues for the third quarter of 2014 increased 4% and revenues before reimbursements increased 6% as compared to the same period last year. The increase in revenues and revenues before reimbursements was due to an increase in billable hours and an increase in realized billing rates. We experienced strong demand for our consulting services from a diverse set of clients for both reactive and proactive projects. We had a steady pace of reactive projects assisting clients in litigation matters and product recall evaluations. We experienced strong demand for our proactive consulting services from the consumer electronics, oil and gas, agricultural chemicals, utilities, and biomedical industries.

For the quarter we had notable performances in several practices including our mechanics and materials, biomedical, human factors, buildings and structures, environmental sciences, ecological sciences, and chemical regulation and food safety practices.

Net income decreased to $11,040,000 during the third quarter of 2014 as compared to $11,094,000 during the same period last year. Diluted earnings per share increased to $0.80 per share as compared to $0.79 in the same period last year due to our ongoing share repurchase program.

We remain focused on selectively adding top talent and developing the skills necessary to expand our market position, providing clients with in-depth scientific research and analysis to determine what happened and how to prevent failures or exposures in the future, capitalizing on emerging growth areas, managing other operating expenses, generating cash from operations, maintaining a strong balance sheet and undertaking activities such as share repurchases and dividends to enhance shareholder value. We continue to expect some of our major investigations to step down from their elevated levels of activity as they move through their project life cycle. We also continue to expect a step down in the level of activity in our defense technology development practice due to the reduction of forces in Afghanistan by the United States federal government.

Overview of the Three Months Ended October 3, 2014

During the third quarter of 2014, billable hours increased 4% to 285,000 as compared to 273,000 during the same period last year due to continued demand for our proactive and reactive consulting services. Our utilization increased to 74% during the third quarter of 2014 as compared to 72% during the third quarter of 2013. Technical full-time equivalent employees increased 2% to 743 during the third quarter of 2014 as compared to 726 during the same period last year due to our recruiting and retention efforts. We continue to selectively hire key talent to expand our capabilities.

Three Months Ended October 3, 2014 compared to Three Months Ended September 27, 2013

Revenues

The increase in revenues for our Engineering and Other Scientific segment was due to an increase in billable hours and an increase in realized billing rates. During the third quarter of 2014, billable hours for this segment increased by 1% to 202,000 as compared to 200,000 during the same period last year. Technical full-time equivalent employees increased 3% to 520 during the third quarter of 2014 as compared to 504 for the same period last year due to our continuing recruiting and retention efforts. Utilization decreased to 75% during the third quarter of 2014 as compared to 76% during the same period last year. The decrease in utilization was due to our investment in hiring technical consultants.

The increase in revenues for our Environmental and Health segment was due to an increase in billable hours. During the third quarter of 2014, billable hours for this segment increased by 12% to 82,000 as compared to 73,000 during the same period last year. Utilization increased to 71% for the third quarter of 2014 as compared to 64% for the same period last year. The increase in billable hours and utilization was due to strong demand for our services in our environmental sciences, ecological sciences, and chemical regulation and food safety practices. Technical full-time equivalent employees increased to 223 during the third quarter of 2014 as compared to 222 during the same period last year.

Compensation and Related Expenses

The decrease in compensation and related expenses during the third quarter of 2014 was due to the change in the value of assets associated with our deferred compensation plan partially offset by an increase in payroll expense, fringe benefits and bonus expense. During the third quarter of 2014, deferred compensation expense decreased $3,224,000 with a corresponding decrease to other income (expense), net, as compared to the third quarter of 2013 due to the change in value of assets associated with our deferred compensation plan. This decrease consisted of a decrease in the value of the plan assets of $1,331,000 during the third quarter of 2014 as compared to an increase in the value of the plan assets of $1,893,000 during same period last year. Payroll expense increased $1,081,000 and fringe benefits increased $280,000 due to the increase in technical full-time equivalent employees and our annual salary increase on March 29, 2014. Bonus expense increased $1,030,000 due to an increase in income before income taxes, before bonus expense, and before stock-based compensation expense. 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

Other operating expenses include facilities-related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. The increase in other operating expenses during the third quarter of 2014 was due to an increase in occupancy expense of $227,000 and an increase in depreciation expense of $65,000. The increases in occupancy expense and depreciation expense were due to the continued expansion of our facilities to accommodate the increase in technical full-time equivalent employees. We expect other operating expenses to grow as we selectively add new talent and make investments in our corporate infrastructure.

Reimbursable Expenses

The decrease in reimbursable expenses was primarily due to a decrease in project-related costs in our defense technology development practice within our Engineering and Other Scientific segment. The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects.

General and Administrative Expenses

The increase in general and administrative expenses during the third quarter of 2014 was due to an increase in travel and meals of $706,000 and an increase in charitable contributions of $200,000 partially offset by a decrease in legal fees of $291,000. The increase in travel and meals was due to a firm-wide managers’ meeting held during the third quarter of 2014. The decrease in legal expenses was due to a decrease in costs associated with legal claims during the third quarter of 2014 as compared to the same period last year.

Other Income (Expense), Net

Other income (expense), net, consists primarily of interest income earned on available cash, cash equivalents and short-term investments, changes in the value of assets associated with our deferred compensation plan and rental income from leasing space in our Silicon Valley facility. During the third quarter of 2014, other income (expense), net, decreased $3,224,000 with a corresponding decrease to deferred compensation expense, as compared to the third quarter in 2013 due to a change in the value of assets associated with our deferred compensation plan. This decrease consisted of a decrease in the value of the plan assets of $1,331,000 during the third quarter of 2014 as compared to an increase in the value of the plan assets of $1,893,000 during the third quarter of 2013.

Income Taxes

The increase in income taxes and the effective tax rate was primarily due to higher deductions during the third quarter of 2013.

Nine Months Ended October 3, 2014 compared to Nine Months Ended September 27, 2013

Revenues

The increase in revenues for our Engineering and Other Scientific segment was due to an increase in billable hours and an increase in billing rates. During the first nine months of 2014, billable hours for this segment increased 2% to 594,000 as compared to 584,000 during the same period last year. The increase in billable hours was due to strong demand for our services. Technical full-time equivalent employees increased 4% to 513 during the first nine months of 2014 as compared to 493 for the same period last year due to our continuing recruiting and retention efforts. Utilization was 74% for the first nine months of 2014 as compared to 76% during the same period last year. The decrease in utilization was due to our investment in hiring technical consultants.

The increase in revenues for our Environmental and Health segment was due to an increase in billable hours and an increase in billing rates. During the first nine months of 2014, billable hours for this segment increased 3% to 241,000 as compared to 233,000 during the same period last year. Utilization increased to 69% for the first nine months of 2014 as compared to 67% for the same period last year. The increase in billable hours and utilization was due to strong demand for our services. Technical full-time equivalent employees increased to 223 during the first nine months of 2014 as compared to 222 during the same period last year.

Compensation and Related Expenses

The increase in compensation and related expenses during the first nine months of 2014 was due to an increase in payroll expense and an increase in bonus expense partially offset by the change in value of assets associated with our deferred compensation plan. Payroll expense increased by $2,743,000 due to the increase in technical full-time equivalent employees and our annual salary increase on March 29, 2014. Bonus expense increased $1,062,000 due to an increase in income before income taxes, before bonus expense, and before stock-based compensation expense. During the first nine months of 2014, deferred compensation expense decreased $2,777,000 with a corresponding decrease to other income (expense), net, as compared to the first nine months of 2013 due to the change in value of assets associated with our deferred compensation plan. This decrease consisted of an increase in the value of the plan assets of $1,351,000 during the first nine months of 2014 as compared to an increase in the value of the plan assets of $4,128,000 during the first nine months of 2013.

Other Operating Expenses

Other operating expenses include facilities-related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. The increase in other operating expenses during the first nine months of 2014 was due to an increase in occupancy expense of $359,000 and an increase in depreciation expense of $319,000. The increases in occupancy expense and depreciation expense were due to the continued expansion of our facilities to accommodate the increase in technical full-time equivalent employees.

Reimbursable Expenses

The decrease in reimbursable expenses was primarily due to a decrease in project-related costs in our defense technology development practice within our Engineering and Other Scientific segment. The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects.

General and Administrative Expenses

The increase in general and administrative expenses during the first nine months of 2014 was due to an increase in travel and meals of $638,000 and an increase in charitable contributions of $200,000. The increase in travel and meals was primarily due to a firm-wide managers’ meeting held during the third quarter of 2014.

Other Income (Expense), Net

Other income (expense), net, consists primarily of interest income earned on available cash, cash equivalents and short-term investments, changes in the value of assets associated with our deferred compensation plan and rental income from leasing space in our Silicon Valley facility. During the first nine months of 2014, other income (expense), net, decreased $2,777,000 with a corresponding decrease to deferred compensation expense as compared to the first nine months of 2013 due to the change in value of assets associated with our deferred compensation plan. This decrease consisted of an increase in the value of the plan assets of $1,351,000 during the first nine months of 2014 as compared to an increase in the value of the plan assets of $4,128,000 during the first nine months of 2013.

Income Taxes

The increase in income taxes and the effective tax rate was primarily due to higher deductions during the third quarter of 2013.

RECENT ACCOUNTING PRONOUNCEMENTS

On May 28, 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, Revenue from Contracts with Customers , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles (“GAAP”) when it becomes effective. The new standard is effective for us on December 31, 2016.

Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU No. 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

LIQUIDITY AND CAPITAL RESOURCES

We financed our business during the first nine months of 2014 through available cash. We invest our excess cash in cash equivalents and short-term investments. As of October 3, 2014, our cash, cash equivalents and short-term investments were $141.6 million compared to $156.1 million at January 3, 2014. 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 during the next twelve 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 in the first quarter of our annual bonuses accrued during the prior year. Our largest source of operating cash flows is 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.

The increase in net cash used in financing activities during the first nine months of 2014 as compared to the same period last year was due to an increase in repurchases of common stock and an increase in our quarterly dividend payments.

We expect to continue our investing activities, including capital expenditures. Furthermore, cash reserves may be used to repurchase common stock under our stock repurchase programs, pay dividends or strategically acquire professional service firms that are complementary to our business.

For a summary of our commitments to make future payments under contractual obligations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in our Annual Report on Form 10-K for the year ended January 3, 2014. There have been no material changes in our contractual obligations since January 3, 2014.

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 $36,384,000 were recorded as a long-term liability on our unaudited condensed consolidated balance sheet at October 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 October 3, 2014 invested amounts under the plan of $34,634,000 were recorded as a long-term asset on our unaudited condensed 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 that our existing cash, cash equivalents, short-term investments and our anticipated cash flows from operations will be sufficient to meet our anticipated operating requirements for at least the next twelve months.

Non-GAAP Financial Measures

Regulation G, Conditions for Use of Non-Generally Accepted Accounting Principles ("Non-GAAP") Financial Measures, and other SEC rules and regulations define and prescribe the conditions for use of 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, net interest income, depreciation and amortization. We define EBITDAS as EBITDA before stock-based compensation. The Company regards EBITDA and EBITDAS as useful measures of operating performance 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 the three and nine months ended October 3, 2014 and September 27, 2013: