Exponent (EXPO) 10-Q 2004 Q3 Quarterly report

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 3, 2003

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 Number0-18655

EXPONENT, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	77-0218904
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification Number)

149 COMMONWEALTH DRIVE, MENLO PARK, CALIFORNIA	94025
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code (650) 326-9400

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 is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at November 7, 2003
Common Stock $.001 par value	7,271,151 shares

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

EXPONENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

October 3, 2003 and January 3, 2003

(in thousands, except share data)

(unaudited)

	October 3, 2003			January 3, 2003
Assets
Current assets:
Cash and cash equivalents	$	17,228		$	22,480
Short-term investments		10,957			—
Accounts receivable, net of allowance for doubtful accounts of $1,964 and $1,493 respectively		42,894			38,404
Prepaid expenses and other assets		2,225			3,450
Deferred income taxes		1,928			1,928
Total current assets		75,232			66,262
Property, equipment and leasehold improvements, net		31,064			31,712
Goodwill		8,573			8,567
Other assets		736			675
	$	115,605		$	107,216
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	5,532		$	5,325
Current installments of long-term obligations		59			63
Accrued payroll and employee benefits		14,913			14,667
Deferred revenues		1,723			1,511
Total current liabilities		22,227			21,566
Long-term obligations, net of current installments		183			167
Deferred income taxes		860			860
Deferred rent		974			837
Total liabilities		24,244			23,430
Stockholders’ equity:
Common stock, $.001 par value; 20,000,000 shares authorized; 7,993,937 and 7,992,728 shares issued at October 3, 2003 and January 3, 2003, respectively		8			8
Additional paid-in capital		33,705			33,898
Accumulated other comprehensive income/(loss)		19			(39	)
Retained earnings		64,289			56,298
Treasury stock, at cost, 767,036 and 888,353 shares held at October 3, 2003 and January 3, 2003, respectively		(6,660	)		(6,379	)
Total stockholders’ equity		91,361			83,786
	$	115,605		$	107,216

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

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EXPONENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Quarters and Nine Months Ended October 3, 2003 and September 27, 2002

(in thousands, except per share data)

(unaudited)

	Quarters Ended				Nine Months Ended
	October 3, 2003		September 27, 2002		October 3, 2003		September 27, 2002
Revenues:
Revenues before reimbursements	$	31,950	$	28,467	$	95,229	$	85,592
Reimbursements		3,707		2,495		10,165		7,614
Revenues		35,657		30,962		105,394		93,206
Operating expenses:
Compensation and related expenses		20,573		18,366		61,888		55,767
Other operating expenses		4,473		4,560		13,654		12,914
Reimbursable expenses		3,707		2,495		10,165		7,614
General and administrative expenses		2,283		1,853		6,469		5,703
Total operating expenses		31,036		27,274		92,176		81,998
Operating income		4,621		3,688		13,218		11,208
Other income:
Interest income, net		35		33		59		92
Miscellaneous income, net		218		20		698		210
Total other income		253		53		757		302
Income before income taxes		4,874		3,741		13,975		11,510
Income taxes		2,026		1,626		5,984		5,353
Net income	$	2,848	$	2,115	$	7,991	$	6,157
Net income per share:
Basic	$	0.39	$	0.31	$	1.11	$	0.91
Diluted	$	0.36	$	0.28	$	1.01	$	0.82
Shares used in per share computations:
Basic		7,212		6,932		7,180		6,739
Diluted		7,986		7,581		7,907		7,478

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

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EXPONENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Quarters and Nine Months Ended October 3, 2003 and September 27, 2002

(in thousands)

(unaudited)

	Quarters Ended						Nine Months Ended
	October 3, 2003			September 27, 2002			October 3, 2003			September 27, 2002
Net income	$	2,848		$	2,115		$	7,991		$	6,157
Other comprehensive income/(loss):
Foreign currency translation adjustments		3			(13	)		62			47
Unrealized loss on short-term investments		(10	)		—			(4	)		—
Comprehensive income	$	2,841		$	2,102		$	8,049		$	6,204

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

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EXPONENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended October 3, 2003 and September 27, 2002

(in thousands)

(unaudited)

	Nine Months Ended
	October 3, 2003			September 27, 2002
Cash flows from operating activities:
Net income	$	7,991		$	6,157
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,538			2,567
Deferred rent expense		137			160
Provision for doubtful accounts		1,232			(105	)
Stock-based compensation		69			134
Change in deferred income taxes		—			349
Changes in operating assets and liabilities:
Accounts receivable		(5,722	)		430
Prepaid expenses and other assets		1,241			607
Accounts payable and accrued liabilities		207			(1,593	)
Accrued payroll and employee benefits		246			(946	)
Deferred revenues		212			(855	)
Net cash provided by operating activities		8,151			6,905
Cash flows from investing activities:
Purchase of short-term investments		(10,961	)		—
Acquisition of Novigen Sciences, Inc., net		—			(2,191	)
Capital expenditures		(1,773	)		(1,100	)
Other assets		(128	)		(83	)
Net cash used in investing activities		(12,862	)		(3,374	)
Cash flows from financing activities:
Repayments of borrowings and long-term obligations		(60	)		(331	)
Repurchase of common stock		(2,454	)		(748	)
Issuance of common stock		1,911			3,206
Net cash (used in)/provided by financing activities		(603	)		2,127
Effect of foreign currency exchange rates on cash and cash equivalents		62			47
Net (decrease)/increase in cash and cash equivalents		(5,252	)		5,705
Cash and cash equivalents at beginning of period		22,480			7,815
Cash and cash equivalents at end of period	$	17,228		$	13,520

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

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EXPONENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Fiscal Quarters and Nine Months Ended

October 3, 2003 and September 27, 2002

Note 1: Basis of Presentation

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 calendar year ending on the Friday closest to the last day of December.

The accompanying condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. All significant intercompany transactions and balances have been eliminated in consolidation. 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 fiscal quarters and nine months ended October 3, 2003 and September 27, 2002, are not necessarily representative of the results of future quarterly or annual periods.

Reclassifications.Certain prior period balances have been reclassified to conform to the current period presentation.

Note 2: Revenue Recognition

The Company derives its revenues primarily from professional fees earned on consulting engagements and fees earned for the use of its equipment and facilities, as well as reimbursements for outside direct expenses associated with the services that are billed to its clients.

In accordance with EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”, Exponent reports revenues net of subcontractor fees. The Company has determined that it is not the primary obligor with respect to its subcontractors because:

• its clients are directly involved in the subcontractor selection process;

• the subcontractor is responsible for fulfilling the scope of work; and

• the Company passes through the costs of subcontractor agreements with only a minimal fixed percentage mark-up to compensate it for processing the transactions.

In accordance with EITF 01-14, “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred”, reimbursements, including those related to travel and other out-of-pocket expenses, and other similar third party costs such as the cost of materials, are included in revenues, and an equivalent amount of reimbursable expenses are included in operating expenses. Any mark-up on reimbursable expenses is included in revenues.

The majority of the Company’s engagements are performed under time and material or fixed-price billing arrangements. On time and material and fixed-price projects, revenue is generally recognized as the services are performed. For the Company’s fixed-price engagements, it recognizes revenue based on the relationship of incurred labor hours at standard rates to its estimate of the total labor hours at standard rates it expects to incur over the term of the contract. The Company believes this methodology achieves a reliable measure of the revenue from the consulting services it provides to its customers under fixed-price contracts given the nature of the consulting services the Company provides and the following additional considerations:

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• the Company considers labor hours at standard rates and expenses to be incurred when pricing its contracts;

• the Company generally does not incur set up costs on its contracts;

• the Company does not believe that there are reliable milestones to measure progress toward completion;

• if either party terminates the contract early, the customer is required to pay the Company for time at standard rates plus materials incurred to date;

• the Company does not recognize revenue for award fees or bonuses until specific contractual criteria are met;

• the Company does not include revenue for unpriced change orders until the customer agrees with the changes;

• historically the Company has not had significant accounts receivable write-offs or cost overruns; and

• its contracts are typically progress billed on a monthly basis.

Gross revenues and reimbursements for the quarters and nine months ended October 3, 2003 and September 27, 2002 are as follows:

	Quarters Ended				Nine Months Ended
(In thousands)	October 3, 2003		September 27, 2002		October 3, 2003		September 27, 2002
Gross revenues	$	37,184	$	32,744	$	112,342	$	98,019
Less: Subcontractor fees		1,527		1,782		6,948		4,813
Revenues		35,657		30,962		105,394		93,206
Reimbursements:
Out-of-pocket travel reimbursements		928		918		3,002		2,679
Other outside direct expenses		2,779		1,577		7,163		4,935
		3,707		2,495		10,165		7,614
Revenues before reimbursements	$	31,950	$	28,467	$	95,229	$	85,592

Significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. These judgments and estimates include an assessment of collectibility and, for fixed-price engagements, an estimate as to the total effort required to complete the project. If the Company made different judgments or utilized different estimates, the amount and timing of its revenue for any period could be materially different.

At inception all consulting contracts are subject to review by management, which requires a positive assessment of the collectibility of contract amounts. If, during the course of the contract, the Company determines that collection of revenue is not reasonably assured, it does not recognize the revenue until its collection becomes reasonably assured, which is generally upon receipt of cash. The Company assesses collectibility based on a number of factors, including past transaction history with the client and project manager, 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.

Note 3: Net Income Per Share

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 exercise of outstanding options to purchase common stock using the treasury stock method.

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

	Quarters Ended		Nine Months Ended
(In thousands)	October 3, 2003	September 27, 2002	October 3, 2003	September 27, 2002
Shares used in basic per share computation	7,212	6,932	7,180	6,739
Effect of dilutive common stock options outstanding	774	649	727	739
Shares used in diluted per share computation	7,986	7,581	7,907	7,478

Common stock options to purchase 305,732 shares were excluded from the diluted per share calculation for the fiscal quarter ended September 27, 2002, due to their antidilutive effect. There were no options excluded from the diluted per share calculation for the fiscal quarter ended October 3, 2003. The weighted average exercise price for the antidilutive shares was $12.94 for the quarter ended September 27, 2002. Common stock options to purchase 8,663 and 215,158 shares were excluded from the diluted per share calculation for the nine months ended October 3, 2003 and September 27, 2002, respectively, due to their antidilutive effect. Weighted average exercise prices for the antidilutive shares were $15.34 and $12.91 for the nine months ended October 3, 2003 and September 27, 2002, respectively.

Note 4: Stock Based Compensation

The Company uses the intrinsic value method of accounting for its Employee Stock Purchase Plan and Stock Option Plans, collectively called “Options”. The Options are generally granted at exercise prices equal to the fair value of the Company’s common stock on the date of the grant. Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”, requires the Company to disclose pro-forma information regarding net income and net income per share as if the Company had accounted for its Options under the fair value method. Under the fair value method, compensation expense is calculated for options granted using a defined valuation technique. The Company uses the Black-Scholes option-pricing model to calculate the fair value of its options. Had the Company determined compensation cost based on the estimated fair value at the grant date for its Options under SFAS No. 123, the Company’s net income would have been adjusted to the pro-forma amounts indicated in the following table:

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	Quarters Ended						Nine Months Ended
(In thousands, except per share data)	October 3, 2003			September 27, 2002			October 3, 2003			September 27, 2002
Net income, as reported:	$	2,848		$	2,115		$	7,991		$	6,157
Add back: Intrinsic value stock-based compensation expense, net of tax		11			38			39			72
Deduct: Fair value stock-based compensation expense, net of tax		(512	)		(532	)		(1,566	)		(1,306	)
Net income, pro-forma:	$	2,347		$	1,621		$	6,464		$	4,923
Net income per share:
As reported:
Basic	$	0.39		$	0.31		$	1.11		$	0.91
Diluted	$	0.36		$	0.28		$	1.01		$	0.82
Pro-forma:
Basic	$	0.33		$	0.23		$	0.90		$	0.73
Diluted	$	0.30		$	0.22		$	0.84		$	0.68
Shares used in per share calculations:
As reported:
Basic		7,212			6,932			7,180			6,739
Diluted		7,986			7,581			7,907			7,478
Pro-forma:
Basic		7,212			6,932			7,180			6,739
Diluted		7,731			7,416			7,721			7,276

Note 5: Short-Term Investments

Short-term investments consist of debt securities classified as available for sale and are carried at their fair value as of the balance sheet date. Short-term investments generally mature between three months and three years from the purchase date. Investments with maturities beyond one year are classified as short-term based on their highly liquid nature and because such marketable securities represent investment of cash that is available for current operations. The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains or losses are determined on the specific identification method and are reflected in interest income. Net unrealized gains or losses are recorded directly in stockholders’ equity except for unrealized losses that are deemed to be other than temporary, which are reflected in net income.

Note 6: Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that asset retirement obligations that are identifiable upon acquisition, construction or development and during the operating life of a long-lived asset be recorded as a liability using the present value of the estimated cash flows. A corresponding amount would be capitalized as part of the asset’s carrying amount and amortized to expense over the asset’s useful life. The Company adopted the provisions of SFAS No. 143 effective January 4, 2003. The adoption of SFAS No. 143 did not have a material impact on the Company’s financial position and results of operations for the quarter and nine months ended October 3, 2003.

In July 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” was issued. SFAS No. 146 addresses financial accounting and reporting associated with exit or disposal activities. Under SFAS No. 146, costs associated with an exit or disposal activity shall be recognized and measured at their fair value in the period in which the liability is incurred rather than at the date of a commitment to an exit or disposal

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plan. The Company adopted the provisions of SFAS No. 146 effective January 4, 2003. The adoption of SFAS No. 146 did not have a material impact on the Company’s financial position and results of operations for the quarter and nine months ended October 3, 2003.

In November 2002, the FASB issued Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The interpretation elaborates on existing disclosure requirements related to certain guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of FIN No. 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in the interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company generally does not offer guarantees or indemnification to its clients or other third parties and the adoption of the recognition and measurement provisions of FIN No. 45 during the nine months ended October 3, 2003 did not have a material impact on its financial position and results of operations.

In January 2003, the FASB issued Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities”. FIN No. 46 is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, and addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN No. 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003. The Company does not currently have any ownership in any variable interest entities.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The Company generally does not enter into derivative instruments or hedging activities and the adoption of SFAS No. 149 did not have a material impact on its financial position or results of operations for the quarter and nine months ended October 3, 2003.

In November 2002, the EITF reached a consensus on Issue 00-21, “Revenue Arrangements with Multiple Deliverables”, addressing how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of undelivered items; and (3) delivery or performance of any undelivered item is considered probable and substantially in the control of the vendor. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions. The final consensus is applicable to agreements entered into in fiscal periods beginning after June 15, 2003 with early adoption permitted. The Company adopted the provisions of this consensus effective July 5, 2003. The adoption of this consensus did not have a material impact on the Company’s financial position and results of operations for the quarter and nine months ended October 3, 2003.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS No. 150 effective July 5, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial position and results of operations for the quarter and nine months ended October 3, 2003.

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Note 7: Supplemental Cash Flow Information

The following is supplemental disclosure of cash flow information:

	Nine Months Ended
(In thousands)	October 3, 2003			September 27, 2002
Cash paid during period:
Interest	$	33		$	51
Income taxes	$	3,183		$	3,912
Non-cash investing and financing activities:
Capital lease for equipment	$	72		$	—
Common stock issued for acquisition	$	—		$	725
Unrealized loss on short-term investments	$	(4	)	$	—

Note 8: Accounts Receivable, Net

At October 3, 2003 and January 3, 2003, accounts receivable, net was comprised of the following:

(In thousands)	October 3, 2003			January 3, 2003
Billed accounts receivable	$	30,845		$	26,867
Unbilled accounts receivable		14,013			13,030
Allowance for doubtful accounts		(1,964	)		(1,493	)
Total accounts receivable, net	$	42,894		$	38,404

Note 9: Segment Reporting

The Company has two operating segments based on two primary areas of service. One 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. The Company’s other operating segment is a broader service group providing technical consulting in different practices and primarily in the areas of impending litigation and technology development.

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Segment information for the quarters and nine months ended October 3, 2003 and September 27, 2002 follows:

Revenues
	Quarters Ended						Nine Months Ended
(In thousands)	October 3, 2003			September 27, 2002			October 3, 2003			September 27, 2002
Environmental and health	$	9,577		$	8,402		$	28,126		$	23,801
Other scientific and engineering		26,080			22,560			77,268			69,405
Total revenues	$	35,657		$	30,962		$	105,394		$	93,206
Operating income
	Quarters Ended						Nine Months Ended
(In thousands)	October 3, 2003			September 27, 2002			October 3, 2003			September 27, 2002
Environmental and health	$	2,447		$	1,541		$	6,780		$	4,940
Other scientific and engineering		5,274			4,517			15,530			14,395
Total segment operating income		7,721			6,058			22,310			19,335
Corporate operating expense		(3,100	)		(2,370	)		(9,092	)		(8,127	)
Total operating income	$	4,621		$	3,688		$	13,218		$	11,208
Capital Expenditures
	Quarters Ended						Nine Months Ended
(In thousands)	October 3, 2003			September 27, 2002			October 3, 2003			September 27, 2002
Environmental and health	$	47		$	74		$	107		$	121
Other scientific and engineering		462			117			1,495			712
Total segment capital expenditures		509			191			1,602			833
Corporate capital expenditures		45			192			171			267
Total capital expenditures	$	554		$	383		$	1,773		$	1,100

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Depreciation and Amortization
	Quarters Ended				Nine Months Ended
(In thousands)	October 3, 2003		September 27, 2002		October 3, 2003		September 27, 2002
Environmental and health	$	44	$	60	$	153	$	158
Other scientific and engineering		545		566		1,658		1,737
Total segment depreciation and amortization		589		626		1,811		1,895
Corporate depreciation and amortization		247		235		727		672
Total depreciation and amortization	$	836	$	861	$	2,538	$	2,567

Note 10: Acquisition of Novigen Sciences, Inc.

On May 20, 2002, the Company acquired all of the outstanding capital stock of Novigen Sciences, Inc. (“Novigen”) for $2.2 million in cash and Company common stock valued at $725,000. Novigen provides services that address complex safety and regulatory issues regarding food and pesticides. Exponent acquired Novigen in continuation of its strategic focus of growing consulting services related to health issues. Following the acquisition, the net assets and staff of Novigen became a new practice, called Food and Chemicals, within the Company’s environmental and health segment. The results of operations for Novigen have been included in the Company’s condensed consolidated financial statements since the date of acquisition.

The following pro-forma results of operations reflect the combined results of Exponent and Novigen for the quarters and nine months ended October 3, 2003 and September 27, 2002, as if the business combination occurred as of the beginning of Exponent’s fiscal year ended January 3, 2003. The information used for this pro-forma disclosure was obtained from unaudited internal financial reports prepared by Novigen from January 1, 2002 through the date of acquisition, May 20, 2002. Although Novigen’s fiscal quarters do not coincide with Exponent’s fiscal quarters, their monthly financial reports were used to combine their results of operations with Exponent’s quarterly financial statements to arrive at the pro-forma amounts disclosed in the following schedule. The pro-forma amounts do not include $412,812 in non-recurring bonus payments made by Novigen prior to the acquisition.

	Quarters Ended				Nine Months Ended
(In thousands)	October 3, 2003		September 27, 2002		October 3, 2003		September 27, 2002
Revenues	$	35,657	$	30,962	$	105,394	$	95,403
Net income	$	2,848	$	2,115	$	7,991	$	6,328
Net income per share:
Basic	$	0.39	$	0.31	$	1.11	$	0.94
Diluted	$	0.36	$	0.28	$	1.01	$	0.84
Shares used in per share computations:
Basic		7,212		6,932		7,180		6,768
Diluted		7,986		7,581		7,907		7,507

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Note 11: Related Party Transactions

Novigen has a contract for software licensing from Durango Software LLC. The husband of Dr. Barbara Peterson, the former president of Novigen, owns Durango Software. Dr. Peterson is now a practice director in the Exponent organization. Exponent recorded software licensing expenses related to this contract for the quarter and nine months ended October 3, 2003 of approximately $24,000 and $72,000, respectively. For the quarter and nine months ended September 27, 2002, Exponent recorded approximately $22,000 and $29,000, respectively, in software licensing expenses related to this contract.

Note 12: Goodwill and Other Intangible Assets

At October 3, 2003 and January 3, 2003, goodwill and other intangible assets were comprised of the following:

(In thousands)	October 3, 2003			January 3, 2003
Intangible assets subject to amortization:
Non-competition agreements	$	236		$	236
Less accumulated amortization		(121	)		(76	)
		115			160
Goodwill		8,573			8,567
Total goodwill and intangible assets	$	8,688		$	8,727

Intangible assets subject to amortization are included in other assets in the accompanying condensed consolidated balance sheets.

Amortization expense for intangible assets for the quarter and nine months ended October 3, 2003 was approximately $15,000 and $45,000, respectively. Amortization expense for the quarter and nine months ended September 27, 2002 was approximately $15,000 and $30,000, respectively. Amortization expense for intangible assets is projected to be approximately $59,000, $53,000, $34,000 and $14,000 in fiscal 2003 through fiscal 2006, respectively.

Changes in the carrying amount of goodwill by operating segment for the nine months ended October 3, 2003 (in thousands):

	Environmental and health		Other scientific and engineering		Total
Balance at January 3, 2003	$	8,059	$	508	$	8,567
Goodwill acquired:
Novigen acquisition adjustments		6		—		6
Balance at October 3, 2003	$	8,065	$	508	$	8,573

During the nine months ended October 3, 2003, there was an increase of $6,000 in goodwill due to an adjustment to the acquisition balance sheet for the Novigen acquisition. There were no goodwill impairments or gains or losses on disposals for any portion of the Company’s reporting units during the nine months ended October 3, 2003.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Quarterly Report on Form 10-Q contains certain “forward-looking” statements (as the 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. 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 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 forward-looking statements. Factors that could cause or contribute to material differences include those discussed elsewhere in this Report including under the caption “Factors Affecting Operating Results and Market Price of Stock”. The inclusion of 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 release publicly any updates or revisions to any forward-looking statements that may reflect events or circumstances occurring after the date of this Report.

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 70 different technical disciplines to solve complicated issues facing industry and business today. Our services include analysis of product development or product recall, regulatory compliance, discovery of potential problems related to products, people or property and impending litigation, as well as the development of highly technical new products.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires that we make estimates and judgments, which affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, bad debts, income taxes, and contingencies such as litigation. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We have identified the following as our critical accounting policies:

• revenue recognition;

• estimating the allowance for doubtful accounts;

• accounting for income taxes;

• valuing long-lived assets under SFAS No. 144;

• valuing goodwill under SFAS No. 142; and

• accounting for stock-based compensation.

Revenue recognition.We derive our revenues primarily from professional fees earned on consulting engagements and 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.

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In accordance with EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”, we report revenue net of subcontractor fees. We have determined that we are not the primary obligors with respect to our subcontractors because:

• our clients are directly involved in the subcontractor selection process;

• the subcontractor is responsible for fulfilling the scope of work; and

• we pass through the costs of subcontractor agreements with only a minimal fixed percentage mark-up to compensate us for processing the transactions.

In accordance with EITF 01-14, “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred,” reimbursements, including those related to travel and other out-of-pocket expenses, and other similar third party costs such as the cost of materials, are included in revenues, and an equivalent amount of reimbursable expenses are included in operating expenses. Any mark-up on reimbursable expenses is included in revenues.

The majority of our engagements are performed under time and material or fixed-price billing arrangements. On time and material and fixed-price projects, revenue is generally recognized as the services are performed. For our fixed-price 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. We believe this methodology achieves a reliable measure of the revenue from the consulting services we provide to our customers under fixed-price contracts given the nature of the consulting services we provide and the following additional considerations:

• we consider labor hours at standard rates and expenses to be incurred when pricing our contracts;

• we generally do not incur set up costs on our contracts;

• we do not believe that there are reliable milestones to measure progress toward completion;

• if either party terminates the contract early, the customer is required to pay us for time at standard rates plus materials incurred to date;

• we do not recognize revenue for award fees or bonuses until specific contractual criteria are met;

• we do not include revenue for unpriced change orders until the customer agrees with the changes;

• historically we have not had significant accounts receivable write-offs or cost overruns; and

• our contracts are typically progress billed on a monthly basis.

Significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. These judgments and estimates include an assessment of collectibility 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.

At inception all consulting contracts are subject to review by management, which requires a positive assessment of the collectibility 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 is generally upon receipt of cash. We assess collectibility based on a number of factors, including past transaction history with the client and project manager, 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.

Allowance for doubtful accounts.We must make estimates of our ability to collect accounts receivable and our unbilled work-in-process. Specifically, we analyze billed accounts receivable and unbilled work-in-process based upon historical write-offs, customer concentration, customer credit-worthiness, current economic conditions and changes in customer payment terms when determining the allowance for doubtful accounts. As of October 3, 2003, our accounts receivable balance was $42.9 million, net of an allowance for doubtful accounts of $2.0 million.

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Accounting for income taxes.In preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions where we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent that we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance, we must include an expense within the tax provision of the statement of income in each period in which the allowance is increased.

Significant judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance against our deferred tax assets. In the event that actual results differ from these estimates or the estimates are adjusted in future periods, then we may need to establish an additional valuation allowance, which could materially impact our financial position and results of operations. Based on our current financial projections and operating plan for fiscal 2003, we currently believe that we will be able to utilize our deferred tax asset. As of October 3, 2003, we had net deferred tax assets of $1,928,000 and net long-term deferred tax liabilities of $860,000 for a net deferred tax asset of $1.1 million and a valuation allowance of $0.

Valuing long-lived assets under Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Long-lived assets are reviewed whenever indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the carrying amount of the related asset. For long-lived assets to be held and used, an impairment loss is recognized if the carrying amount of an asset is not recoverable from its undiscounted cash flows. The loss is measured as the difference between the carrying amount and the fair value of the assets. For long-lived assets to be disposed of other than by sale, an impairment loss is recognized at the date the long-lived asset is exchanged. Long-lived assets that are to be disposed of by sale are classified as held for sale, depreciation ceases and such assets are valued at the lower of carrying amount or fair value less cost to sell. As of October 3, 2003, we did not have any long-lived assets to be disposed of by sale or other than by sale and there has been no indication of impairments to our long-lived assets. Our long-lived assets, consisting primarily of net property, equipment and leasehold improvements, totaled $31.1 million at October 3, 2003.

Valuing goodwill under SFAS No. 142, “Goodwill and Other Intangible Assets”. We assess the impairment of goodwill annually in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount may be impaired. Factors that we consider when evaluating for possible impairment include the following:

• significant under-performance relative to expected historical or projected future operating results;

• significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and

• significant negative economic trends.

When evaluating the Company’s goodwill for impairment, based upon the existence of one or more of the above factors, we determine the existence of an impairment by assessing the fair value of the applicable reporting unit, including goodwill, using expected future cash flows to be generated by the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then an impairment loss is recognized. As of October 3, 2003, goodwill totaled $8.6 million.

Accounting for Stock-Based Compensation. SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” amends SFAS No. 123 “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The additional disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The Company has elected to continue to follow the intrinsic value method of accounting as prescribed by Accounting Principles Board

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Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” to account for employee stock options. See Note 4 to the Condensed Consolidated Financial Statements for a disclosure of pro-forma net income as if we had adopted the fair value method under SFAS No. 123.

RESULTS OF CONSOLIDATED OPERATIONS

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto and with our audited consolidated financial statements and notes thereto for the fiscal year ended January 3, 2003, which are contained in our fiscal 2002 Annual Report on Form 10-K.

Fiscal Quarter Ended October 3, 2003 compared to Fiscal Quarter Ended September 27, 2002

Revenues for the third quarter of fiscal 2003 were $35.7 million, an increase of $4.7 million or 15% over the same quarter in fiscal 2002. This revenue increase was the result of growth in both of our business segments. Our environmental and health segment contributed $1.2 million to the increase and our other scientific and engineering segment contributed $3.5 million. Growth in our environmental and health segment was primarily the result of an increase in billable hours and higher billing rates. Billable hours in our environmental and health segment increased to 48,795 for the third quarter of fiscal 2003 compared to 46,167 for the same quarter in fiscal 2002. Growth in our other scientific and engineering segment was the result of increased billable hours and higher billing rates. Billable hours in our other scientific and engineering segment increased to 118,772 for the third quarter of fiscal 2003 compared to 111,879 for the same quarter in fiscal 2002. An increase in reimbursable expenses associated with several of our defense technology projects also contributed to the growth in our other scientific and engineering segment.

Compensation and related expenses increased 12% to $20.6 million for the third quarter of fiscal 2003 compared to $18.4 million for the same quarter in fiscal 2002. The increase was due to the effects of annual salary increases for all employees, increases in headcount, and an increase in accrued bonuses. The bonus accrual is based on our profitability, which increased during the quarter. As a percentage of revenues, total compensation decreased to 57.7% for the third quarter of fiscal 2003 compared to 59.3% for the same quarter in fiscal 2002.

Other operating expenses decreased 2% to $4.5 million for the third quarter of fiscal 2003 compared to $4.6 million for the same quarter in fiscal 2002. The decrease was due to expense management resulting in decreases in technical material costs, computer expenses and office expenses offset by an increase in occupancy expense associated with the increase in our headcount and continued expansion at several of our smaller locations. As a percentage of revenues, other operating expenses decreased to 12.5% for the third quarter of fiscal 2003 compared to 14.7% for the same quarter in fiscal 2002.

Reimbursable expenses were $3.7 million for the third quarter of fiscal 2003, an increase of 49% over reimbursable expenses of $2.5 million for the same quarter in fiscal 2002. The increase in reimbursable expenses was primarily due to increases in outside direct expenses for technical supplies related to projects in our defense technology practice. The most significant of these projects is our contract with the Army’s Rapid Equipping Force to develop an Advanced Robotic Controller which we began work on during the third quarter of fiscal 2003. As a percentage of revenues, reimbursable expenses increased to 10.4% for the third quarter of fiscal 2003 compared to 8.1% for the same quarter in fiscal 2002.

General and administrative expenses increased 23% to $2.3 million for the third quarter of fiscal 2003 compared to $1.9 million for the same quarter in fiscal 2002. The increase in general and administrative expenses was due to a non-recurring credit of $310,000 recorded during the third quarter of 2002 related to the favorable completion of a sales tax audit. General and administrative expenses as a percentage of revenues increased to 6.4% for the third quarter of fiscal 2003 compared to 6.0% for the same quarter in fiscal 2002.

Other income and expense consists primarily of investment income earned on available short-term investments, cash and cash equivalents and rental income from leasing excess space. Other income and expense increased 377% to $253,000, for the third quarter in fiscal 2003 compared to $53,000 for the same quarter in fiscal 2002. The increase was due to a reserve taken on a note receivable during the fiscal quarter ended September 27, 2002. The increase was also due to increased rental income.

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Our income tax provision for the third quarter of fiscal 2003 was $2.0 million, representing a 41.5% effective tax rate. Our income tax provision for the third quarter of fiscal 2002 was $1.6 million, representing a 43.5% effective tax rate. The lower effective tax rate in the third quarter of 2003 is due to our expectation that some portion of our fiscal 2003 income will be subject to a lower income tax rate.

Nine Months Ended October 3, 2003 compared to Nine Months Ended September 27, 2002

Revenues for the nine months ended October 3, 2003 were $105.4 million, an increase of $12.2 million or 13% over the same period in fiscal 2002. This revenue increase was the result of growth in both of our business segments. Our environmental and health segment contributed $4.3 million to the increase and our other scientific and engineering segment contributed $7.9 million. Growth in our environmental and health segment was primarily the result of increased billable hours, higher billing rates and the acquisition of Novigen Sciences, Inc. (“Novigen”) on May 20, 2002. Billable hours in our environmental and health segment increased to 144,588 for the nine months ended October 3, 2003 compared to 133,529 for the same period in fiscal 2002. The Novigen acquisition, which took place during the second quarter of fiscal 2002, contributed an incremental $2.3 million to this segment’s revenues for the nine months ended October 3, 2003 as compared to the same period in fiscal 2002. Growth in our other scientific and engineering segment was the result of increased billable hours and higher billing rates. Billable hours in our other scientific and engineering segment increased to 353,318 for the nine months ended October 3, 2003 compared to 330,950 for the same period in fiscal 2002.

Compensation and related expenses increased 11% to $61.9 million for the nine months ended October 3, 2003 compared to $55.8 million for the same period in fiscal 2002. The increase was due to the effects of annual salary increases for all employees, and an increase in accrued bonuses, increases in headcount plus the effect of the Novigen acquisition. The Novigen acquisition contributed an incremental $1.1 million of the increase in compensation and related expenses for the nine months ended October 3, 2003 as compared to the same period in fiscal 2002. The bonus accrual is based on our profitability, which increased during the nine months ended October 3, 2003 as compared to the same period in fiscal 2002. As a percentage of revenues, total compensation and related expenses decreased to 58.7% for the nine months ended October 3, 2003 compared to 59.8% for the same period in fiscal 2002.

Other operating expenses increased 6% to $13.7 million for the nine months ended October 3, 2003 compared to $12.9 million for the same period in fiscal 2002. The increase in other operating expenses was primarily due to higher occupancy costs and increases in the cost of technical supplies. Occupancy costs increased by $705,000 for the nine months ended October 3, 2003 compared to the same period in fiscal 2002. The Novigen acquisition contributed an incremental $206,000 of occupancy costs for the nine months ended October 3, 2003 as compared to the same period in fiscal 2002. The remaining increase in occupancy costs was largely due to new lease agreements for our Philadelphia and New York offices. Our Philadelphia office relocated to a larger facility in December 2002. The cost of technical supplies increased by $101,000 for the nine months ended October 3, 2003, primarily due to costs related to activities by our defense technology practice. As a percentage of revenues, other operating expenses decreased to 13.0% for the nine months ended October 3, 2003 compared to 13.9% for the same period in fiscal 2002.

Reimbursable expenses were $10.2 million for the nine months ended October 3, 2003, an increase of 34% compared to $7.6 million for the same period in fiscal 2002. The increase in reimbursable expenses was primarily due to increases in outside direct expenses for technical supplies related to projects in our defense technology practice. These expenses were related to several projects to develop integrated robots and controllers for the U.S. Army during the nine months ended October 3, 2003. As a percentage of revenues, reimbursable expenses increased to 9.6% for the nine months ended October 3, 2003 compared to 8.2% for the same period in fiscal 2002.

General and administrative expenses increased 13% to $6.5 million for the nine months ended October 3, 2003 compared to $5.7 million for the same period in fiscal 2002. The increase in general and administrative expenses was due to a non-recurring credit of $310,000 recorded during the third quarter of 2002 related to the

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favorable completion of a sales tax audit. The increase in general and administrative expenses was also due to an increase of $245,000 in travel and travel related expenses. Travel and travel related expenses were higher during the nine months ended October 3, 2003 as compared to the same period in fiscal 2002 due to increased travel for marketing and business development and our employee-mentoring program. General and administrative expenses as a percentage of revenues were 6.1% for the nine months ended October 3, 2003 and September 27, 2002.

Other income and expense consists primarily of investment income earned on available short-term investments, cash and cash equivalents and rental income from leasing excess space. Other income and expense increased 151% to $757,000 for the nine months ended October 3, 2003 compared to $302,000 for the same period in fiscal 2002. The increase was due to increased rental income during the nine months ended October 3, 2003 and a reserve taken on a note receivable during the nine months ended September 27, 2002.

Our income tax provision for the nine months ended October 3, 2003 was $6.0 million, representing a 42.8% effective income tax rate. The income tax provision for the nine months ended September 27, 2002 was $5.4 million, representing a 46.5% effective income tax rate. The lower effective rate for the nine months ended October 3, 2003 was due to our expectation that some portion of our fiscal 2003 income will be subject to a lower income tax rate. Also contributing to the lower tax rate was the effect of a $349,000 deferred tax asset write-off, related to an expiring capital loss carryforward, which we determined would not be realized before it expired in fiscal 2002. This write-off was recognized during the first quarter of fiscal 2002.

LIQUIDITY AND CAPITAL RESOURCES

As of October 3, 2003, our cash, cash equivalents, and short-term investments were $28.2 million compared to $22.5 million at January 3, 2003. We financed our business for the current period principally through operating cash.

Net cash provided by operating activities was $8.2 million for the nine months ended October 3, 2003, compared to $6.9 million for the same period in fiscal 2002. The increase in cash provided by operating activities was attributable to an increase in net income of $1.8 million and an increase in our provision for doubtful accounts of $1.3 million offset by the net change in operating assets and liabilities during the nine months ended October 3, 2003 as compared to the same period in fiscal 2002. The gross changes in operating assets and liabilities for the nine months ended October 3, 2003 and for the same period in fiscal 2002 were as follows; accounts receivable increased by $5.7 million during the nine months ended October 3, 2003 compared to a decrease of $430,000 for the same period in fiscal 2002. The increase in accounts receivable during the nine months ended October 3, 2003 was due to increased revenues partially offset by a decrease in our days sales outstanding to 111 days for the nine months ended October 3, 2003 compared to 113 days during the same period in fiscal 2002. Prepaid expenses and other assets decreased by $1.2 million during the nine months ended October 3, 2003 compared to a decrease of $607,000 for the same period in fiscal 2002. This change was primarily due to the timing of our pre-payments. Accounts payable and accrued liabilities increased $207,000 during the nine months ended October 3, 2003 compared to a decrease of $1.6 million for the same period in fiscal 2002. This change was primarily due to the timing of payments to vendors and subcontractors. Accrued payroll and employee benefits increased by $246,000 during the nine months ended October 3, 2003 compared to a decrease of $946,000 for the same period in fiscal 2002. This change was due to the timing of the bi-weekly payroll cycle and an increase in accrued bonus during the nine months ended October 3, 2003. Deferred revenues increased $212,000 during the nine months ended October 3, 2003 compared to a decrease of $855,000 for the same period in fiscal 2002. Deferred revenue changes are primarily related to the timing of billings for our fixed-price projects.

Net cash used in investing activities was $12.9 million for the nine months ended October 3, 2003, compared to net cash used in investing activities of $3.4 million for the same period in fiscal 2002. Cash used in investing activities increased during the nine months ended October 3, 2003 as compared to the same period in fiscal 2002 as a result of $11.0 million in purchases of short-term investments during the nine months ended October 3, 2003. The increase in purchases of short-term investments was offset by $2.2 million paid in connection with our acquisition of Novigen Sciences, Inc. during the nine months ended September 27, 2002.

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Net cash used in financing activities was $603,000 for the nine month period ended October 3, 2003, compared to net cash provided of $2.1 million for the same period in fiscal 2002. The decrease in net cash provided by financing activities was due primarily to an increase in repurchases of our common stock of $1.7 million and a decrease of $1.3 million in proceeds from the issuance of common stock under our employee stock purchase plan and stock option plans during the nine month period ended October 3, 2003, as compared to the same period in fiscal 2002.

At October 3, 2003, our long-term obligations were $183,000, which consisted primarily of the long-term portion of capital leases for equipment.

Exponent has a revolving reducing mortgage note with a total available borrowing amount of $24.5 million and an outstanding balance of $0 as of October 3, 2003. We believe that our existing revolving note, together with funds generated from operations, will provide adequate cash to fund our anticipated operating cash needs through at least the next twelve-month period, however, we may pursue potential acquisitions to grow our business, which could increase the need for additional sources of funds over the long-term.

FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK

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 the following:

Absence of Backlog

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.

Attraction and Retention of Key Employees

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 a significant number of our employees could have a material adverse impact on our business, including our ability to secure and complete engagements.

Competition

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.

Customer Concentration

We currently derive, and believe that we will continue to derive, a significant portion of our revenues from clients, organizations and insurers related to the transportation industry 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.

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Economic Uncertainty

The markets that we serve are cyclical and subject to general economic conditions. If the economy in which we operate, which is predominately in the U.S., were to experience a prolonged slowdown, demand for our services could be reduced considerably.

Regulation

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 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

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.

Variability of Quarterly Financial Results

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 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, are relatively fixed in advance of any particular quarter, a variation in the timing of the initiation or the completion of our client assignments, at or near the end of any quarter, can cause significant variations in operating results from quarter to quarter.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Exponent has a revolving reducing mortgage note (the “Mortgage Note”) secured by its Silicon Valley headquarters building. The Mortgage Note, which had an initial borrowing amount up to $30.0 million, is subject to automatic annual reductions in the amount available to be borrowed of between $1.3 million to $2.1 million per year until January 31, 2008, as scheduled in the Mortgage Note agreement. As of October 3, 2003, we had $0 outstanding and available borrowings of $24.5 million under the Mortgage Note. Any outstanding amounts on the Mortgage Note are due and payable in full on January 31, 2009. We may from time to time during the term of the Mortgage Note borrow, partially or wholly repay outstanding borrowings and re-borrow up to the maximum principal amounts, subject to the reductions in availability contained in the Mortgage Note. The Mortgage Note is also subject to two interest rate options of either prime less 1.5% or fixed LIBOR plus 1.25% with a term option of one month, two months, three months, six months, nine months, or twelve months. Interest is to be paid on a monthly basis. Principal amounts subject to the prime interest rate may be repaid at any time without penalty. Principal amounts subject to the fixed LIBOR rate may also be repaid at any time but are subject to a prepayment penalty if paid before the fixed rate term, or additional interest if paid after the fixed rate term.

Exponent is exposed to some interest rate risk associated with our revolving reducing mortgage note secured by our headquarters building. Our general policy for selecting among the interest rate options and related terms will be to minimize interest expense. However, given the risk of interest rate fluctuations, we cannot be certain that the lowest rate option will always be obtained, thereby consistently minimizing our interest expense.

Exponent is exposed to some interest rate risk associated with our balances of cash and cash equivalents and short-term investments. Our exposure to market rate risk for changes in interest rates relates primarily to our short-term investments. We do not use derivative financial instruments in our short-term investment portfolio. We manage our interest rate risk by maintaining an investment portfolio primarily consisting of debt instruments with high credit quality and relatively short average maturities in accordance with the Company’s investment policy. The maximum maturity of any issue in the portfolio is 3 years and the maximum average maturity of the portfolio cannot exceed 18 months. The policy also limits the amount of credit exposure to any one issuer. 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.

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Exponent is exposed to some foreign currency exchange rate risk associated with our foreign operations. Given the limited nature of these activities, we believe that any exposure would be minimal.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer, and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer, and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.

PART II – OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit 31.1	Certifications pursuant to Rule 13a – 14(a) under the Securities Exchange Act of 1934.
Exhibit 32.1	Certifications pursuant to 18 U.S.C. Section 1350.

(b) Reports on Form 8-K

On July 21, 2003, the registrant filed a Current Report on Form 8-K furnishing under Item 12 of Form 8-K its Press Release, dated July 21, 2003, announcing second quarter results.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	EXPONENT, INC.
	(Registrant)
Date: November 14, 2003
	/s/ Michael R. Gaulke
	Michael R. Gaulke, President and Chief Executive Officer
	/s/ Richard L. Schlenker
	Richard L. Schlenker, Chief Financial Officer

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