UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-18655
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EXPONENT, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0218904
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(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
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Former name, former address and former fiscal year, if changed since last report N/A
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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
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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 August 3, 2001
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Common Stock $.001 par value 6,606,474 shares
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 29, 2001 and December 29, 2000
(in thousands, except share data)
(unaudited)
June 29, December 29,
2001 2000
-------------- -------------
Assets
Current assets:
Cash and cash equivalents..................................... $ 189 $ 6,379
Accounts receivable, net...................................... 38,654 32,257
Prepaid expenses and other assets............................. 3,433 2,892
Deferred income taxes......................................... 1,908 1,908
-------------- --------------
Total current assets...................................... 44,184 43,436
Property, equipment and leasehold improvements, net................. 33,709 34,007
Goodwill............................................................ 6,840 7,250
Other assets........................................................ 848 933
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$ 85,581 $ 85,626
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities...................... $ 2,783 $ 4,232
Current installments of long-term obligations................. 304 839
Accrued payroll and employee benefits......................... 12,329 13,275
Deferred revenues............................................. 637 1,057
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Total current liabilities................................. 16,053 19,403
Long-term obligations, net of current installments.................. 96 227
Other obligations................................................... 646 659
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Total liabilities......................................... 16,795 20,289
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Stockholders' equity:
Common stock.................................................. 8 8
Additional paid-in capital.................................... 32,559 33,016
Accumulated other comprehensive losses........................ (123) (97)
Retained earnings............................................. 45,630 42,252
Treasury shares, at cost, 1,344,459 and 1,454,741 shares at
June 29, 2001 and December 29, 2000, respectively........... (9,288) (9,842)
-------------- --------------
Total stockholders' equity................................ 68,786 65,337
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$ 85,581 $ 85,626
============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Quarters and Six Months Ended June 29, 2001 and June 30, 2000
(in thousands, except per share data)
(unaudited)
Quarters Ended Six Months Ended
------------------------------- -------------------------------
June 29, 2001 June 30, 2000 June 29, 2001 June 30, 2000
------------- ------------- ------------- -------------
Revenues.................................................... $ 25,326 $ 25,619 $ 53,187 $ 51,745
------------- ------------- ------------- -------------
Operating expenses:
Compensation and related expenses......................... 16,702 16,345 34,881 32,587
Other operating expenses.................................. 4,647 4,139 8,717 8,142
General and administrative expenses....................... 2,521 2,289 4,420 4,881
------------- ------------- ------------- -------------
23,870 22,773 48,018 45,610
------------- ------------- ------------- -------------
Operating income....................................... 1,456 2,846 5,169 6,135
Other income (expense):
Interest income (expense), net............................ (11) 9 53 (24)
Miscellaneous income, net................................. 212 519 630 921
------------- ------------- ------------- -------------
201 528 683 897
Income from continuing operations
before income taxes.................................. 1,657 3,374 5,852 7,032
Income taxes................................................ 704 1,396 2,474 2,913
------------- ------------- ------------- -------------
Income from continuing operations...................... 953 1,978 3,378 4,119
Discontinued operations:
Loss from operation of BCS Wireless, Inc.
(net of taxes of ($109) and ($69), respectively)......... - (153) - (97)
Gain on disposition of BCS Wireless, Inc.
(net of taxes of $320)................................... - 451 - 451
------------- ------------- ------------- -------------
- 298 - 354
------------- ------------- ------------- -------------
Net income............................................. $ 953 $ 2,276 $ 3,378 $ 4,473
============= ============= ============= =============
Income per share from continuing operations:
Basic..................................................... $ 0.15 $ 0.30 $ 0.52 $ 0.62
Diluted................................................... $ 0.13 $ 0.28 $ 0.47 $ 0.58
Income per share from discontinued operations:
Basic..................................................... $ - $ 0.04 $ - $ 0.05
Diluted................................................... $ - $ 0.04 $ - $ 0.05
Net income per share:
Basic..................................................... $ 0.15 $ 0.34 $ 0.52 $ 0.67
Diluted................................................... $ 0.13 $ 0.32 $ 0.47 $ 0.63
Shares used in per share computations:
Basic..................................................... 6,560 6,690 6,516 6,685
Diluted................................................... 7,312 7,105 7,244 7,090
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Quarters and Six Months Ended June 29, 2001 and June 30, 2000
(in thousands)
(unaudited)
Quarters Ended Six Months Ended
-------------------------------- ---------------------------------
June 29, 2001 June 30, 2000 June 29, 2001 June 30, 2000
------------- -------------- -------------- ---------------
Net income................................... $ 953 $ 2,276 $ 3,378 $ 4,473
Other comprehensive income (loss) -
foreign currency translation adjustments.... (1) 7 (26) (7)
------------- -------------- -------------- ---------------
Comprehensive income......................... $ 952 $ 2,283 $ 3,352 $ 4,466
============= ============== ============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 29, 2001 and June 30, 2000
(in thousands)
(unaudited)
Six Months Ended
---------------------------------
June 29, 2001 June 30, 2000
---------------- ---------------
Cash flows from operating activities:
Net income........................................................ $ 3,378 $ 4,473
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization............................... 2,342 2,190
Gain on sale of BCS Wireless, Inc........................... - (451)
Provision for doubtful accounts............................. 100 1,381
Changes in operating assets and liabilities:
Accounts receivable...................................... (6,497) (5,264)
Prepaid expenses and other assets........................ (1,229) (400)
Accounts payable and accrued liabilities................. (1,449) (1,263)
Accrued payroll and employee benefits.................... (946) 1,022
Deferred revenues........................................ (420) 5,491
Other obligations........................................ (72) (126)
Net operating activities of discontinued operations...... - 693
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Net cash (used in) provided by operating activities.. (4,793) 7,746
-------- --------
Cash flows from investing activities:
Capital expenditures.............................................. (1,507) (4,451)
Sale of BCS Wireless, Inc......................................... - 1,870
Other assets...................................................... 36 (433)
Net investing activities of discontinued operations............... - (34)
-------- --------
Net cash used in investing activities................ (1,471) (3,048)
-------- --------
Cash flows from financing activities:
Repayments of borrowings and long-term obligations................ (18) (3,882)
Repurchase of common stock........................................ (1,788) (1,372)
Issuance of common stock.......................................... 1,880 1,026
Net financing activities of discontinued operations............... - 15
-------- --------
Net cash provided by (used in) financing activities.. 74 (4,213)
-------- --------
Net (decrease) increase in cash and cash equivalents.................... (6,190) 485
Cash and cash equivalents at beginning of period........................ 6,379 -
-------- --------
Cash and cash equivalents at end of period.............................. $ 189 $ 485
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
EXPONENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Quarters and Six Months Ended
June 29, 2001 and June 30, 2000
Note 1: Summary of Significant Accounting Policies
Basis of Presentation:
Exponent, Inc. (referred to as the "Company") is a science and engineering
consulting firm that provides solutions to complex problems. Our
multidisciplinary team of scientists, physicians, engineers and business
consultants perform in-depth scientific research in over 70 different
disciplines to solve complicated issues facing industry and business. In
December 2000, the Company merged its wholly owned subsidiaries, Exponent
Failure Analysis Associates, Inc. ("FaAA"), Exponent Health Group, Inc. ("EHG")
and Exponent Environmental Group, Inc. ("EEG") into Exponent, Inc., the parent
company. This change will have no effect on the reporting of the Company's
operating segments. 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 six
months ended June 29, 2001 and June 30, 2000, are not necessarily representative
of the results of future quarterly or annual periods.
Note 2: Discontinued Operations
In May 2000, the Company sold certain assets of its wholly owned
subsidiary, BCS Wireless, Inc. ("BCS"). The Company committed to a formal plan
to divest BCS effective April 2, 1999. Accordingly, the results of operations
for BCS for the fiscal quarter and six months ended June 30, 2000 have been
recorded as a discontinued operation, net of taxes.
Note 3: Net Income Per Share
Basic per share amounts are computed using the weighted average number of
common shares outstanding during the period. Dilutive per share amounts are
computed using the weighted-average number of common shares and potentially
dilutive securities, using the treasury stock method, even when antidilutive, if
their effect would be dilutive on the per share amount of income from continuing
operations.
The following schedule reconciles the shares used to calculate basic and
diluted net income per share:
Quarters Ended Six Months Ended
------------------- ---------------------
June 29, June 30, June 29, June 30,
(In thousands) 2001 2000 2001 2000
-------- -------- ------- --------
Shares used in basic per share computation 6,560 6,690 6,516 6,685
Effect of dilutive common stock options outstanding 752 415 728 405
-------- -------- ------- -------
Shares used in diluted per share computation 7,312 7,105 7,244 7,090
======== ======== ======= =======
Common stock options to purchase 142,566 and 261,291 shares for the quarters
ended June 29, 2001 and June 30, 2000, respectively, were excluded from the
diluted per share calculation, due to their antidilutive effect. For the six
months
6
ended June 29, 2001 and June 30, 2000, respectively, common stock options to
purchase 89,978 and 218,570 shares, were excluded from the diluted per share
calculation, due to their antidilutive effect.
Note 4: Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets".
SFAS No. 141 addresses the accounting for and reporting of business
combinations. SFAS No. 141 requires that all business combinations be
accounted for using the purchase method of accounting for acquisitions and
eliminates the use of the pooling method. This Statement applies to all
business combinations initiated after June 30, 2001. The Company does not
anticipate that the adoption of SFAS No.141 will have a material effect on its
consolidated financial statements.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only method. The
amortization of goodwill, including goodwill recorded in past business
combinations will cease upon adoption of the statement, which will begin with
the Company's fiscal year beginning December 29, 2001. However, goodwill and
other intangible assets acquired after June 30, 2001 will be subject to
immediate adoption of the statement. The Company will continue to amortize its
existing goodwill and other intangible assets during the remainder of fiscal
2001, the amount of which will be approximately $437,000 for the second half of
the year. The resulting balance for existing goodwill and other intangible
assets as of December 28, 2001 subject to periodic impairment testing will be
approximately $6,800,000. If in a future period, the Company determines that
goodwill or another intangible asset is impaired, the impairment could have a
material impact on earnings for that period.
Note 5: Supplemental Cash Flow Information
The following is supplemental disclosure of cash flow information:
Six Months Ended
----------------------------
(In thousands) June 29, 2001 June 30, 2000
------------- -------------
Cash paid during period:
Interest $ 82 $ 107
Income taxes $ 3,092 $ 3,648
Non-cash investing and financing activities:
Capital lease for equipment $ 41 $ -
7
Note 6: 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
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.
Segment information for the quarters and six months ended June 29, 2001 and
June 30, 2000 follows:
Revenues
- --------
Quarters Ended Six Months Ended
------------------------------------------- -------------------------------------------
(In thousands) June 29, 2001 June 30, 2000 June 29, 2001 June 30, 2000
------------------- --------------------- -------------------- --------------------
Environmental and health $ 6,292 $ 5,662 $ 12,407 $ 11,129
Other scientific and engineering 19,034 19,957 40,780 40,616
------------------- --------------------- -------------------- --------------------
Total revenues $ 25,326 $ 25,619 $ 53,187 $ 51,745
=================== ===================== ==================== ====================
Operating Income
- ----------------
Quarters Ended Six Months Ended
------------------------------------------- -------------------------------------------
(In thousands) June 29, 2001 June 30, 2000 June 29, 2001 June 30, 2000
------------------- --------------------- -------------------- --------------------
Environmental and health $ 1,752 $ 1,257 $ 3,158 $ 2,264
Other scientific and engineering 3,608 4,901 8,708 10,796
------------------- --------------------- -------------------- --------------------
Total segment operating income 5,360 6,158 11,866 13,060
Corporate operating loss (3,904) (3,312) (6,697) (6,925)
------------------- --------------------- -------------------- --------------------
Total operating income $ 1,456 $ 2,846 $ 5,169 $ 6,135
=================== ===================== ==================== ====================
8
Capital Expenditures
- --------------------
Six Months Ended
-----------------------------------------------
(In thousands) June 29, 2001 June 30, 2000
---------------------- ----------------------
Environmental and health $ 42 $ 108
Other scientific and engineering 929 4,231
---------------------- ----------------------
Total segment capital expenditures 971 4,339
Corporate capital expenditures 536 112
---------------------- ----------------------
Total capital expenditures $ 1,507 $ 4,451
====================== ======================
Depreciation and Amortization
- -----------------------------
Six Months Ended
-----------------------------------------------
(In thousands) June 29, 2001 June 30, 2000
---------------------- ----------------------
Environmental and health $ 118 $ 117
Other scientific and engineering 1,289 1,143
---------------------- ----------------------
Total segment depreciation and
amortization 1,407 1,260
Corporate depreciation and
amortization 935 930
---------------------- ----------------------
Total depreciation and
amortization $ 2,342 $ 2,190
====================== ======================
9
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 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, are intended to 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
those discussed elsewhere in this Report including under the caption "Factors
Affecting Operating Results and Market Price of Stock". The inclusion of such
forward-looking information should not be regarded as a representation by the
Company or any other person that the future events, plans, or expectations
contemplated by the Company will be achieved. The Company undertakes no
obligation to release publicly any updates or revisions to any such forward-
looking statements that may reflect events or circumstances occurring after the
date of this report.
General
The Company's revenues consist of professional fee services, fees for use
of the Company's equipment and facilities, as well as third party expenses
directly associated with the services performed that are billed to the client.
Third party expenses are included in revenues net of the related costs. The
majority of these activities are provided under time and materials or fixed-
price billing arrangements. On time and materials arrangements, revenue is
recognized generally at the time services are performed. On fixed-price
contracts, revenue is recognized on the basis of the estimated percentage of
completion of services rendered. The Company's principal expenses are
professional compensation and related expenses.
Results of Operations
The following discussion should be read in conjunction with the attached
unaudited condensed consolidated financial statements and notes thereto and with
the Company's audited consolidated financial statements and notes thereto for
the fiscal year ended December 29, 2000, which are contained in the Company's
fiscal 2000 Annual Report on Form 10-K.
2001 Fiscal Quarter and Six Months Ended June 29, 2001 compared to 2000 Fiscal
Quarter and Six Months Ended June 30, 2000
Revenues for the second quarter of fiscal 2001 were $25.3 million compared
to $25.6 million for the same quarter in fiscal 2000, a decrease of 1.1%. The
primary reason for the decrease was the result of a lower run rate for the
follow-on contract for the U.S. Army Land Warrior program, which was signed
during the quarter. Additionally, the Company's Vehicle Analysis practice
experienced declines as a result of slowdowns in the Automotive industry. This
decrease was partially offset by revenue growth in the Company's Environmental
and Health segment, which grew by 11.1% during the second quarter of fiscal 2001
as compared to the same quarter in fiscal 2000. In addition, revenues for the
Company's Other Scientific and Engineering segment, excluding Technology
Development and Vehicle Analysis business, grew by 10.6% during the second
quarter of fiscal 2001 as compared to the same quarter of fiscal 2000. Revenues
for the six months ended June 29, 2001 were $53.2 million compared to $51.7
million for the same period in fiscal 2000, an increase of 2.8%. The increase
was largely a result of growth in the Company's Environmental and Health
segment, which increased by 11.5% for the six month period ended June 29, 2001
as compared to the six month period ended June 30, 2000. For the six months
ended June 29, 2001, revenues for the Company's Other Scientific and Engineering
segment, excluding Technology Development and Vehicle Analysis business, grew by
5.6% as compared to the same period ended June 30, 2000.
10
Compensation and related expenses increased by 2.2% to $16.7 million for
the second quarter of fiscal 2001 compared to $16.3 million for the same period
in fiscal 2000. As a percentage of revenue, total compensation and related
expenses increased to 66.0% for the second quarter of fiscal 2001 compared to
63.8% for the same period in fiscal 2000. The increase was due to annual salary
increases and increased utilization of contract labor on the Land Warrior
project. Expense increases were partially offset by decreases in the Company's
bonus accrual as a result of reduced profitability in the second quarter of
fiscal 2001 as compared to the same quarter in fiscal 2000. The Company
recorded approximately $74,000 in severance costs related to the reduction in
labor force of seventeen full-time and nine contract employees on June 1, 2001,
however management anticipates a cost savings of approximately $800,000 during
the second half of fiscal 2001 as a result of this reduction in force. For the
six months ended June 29, 2001, compensation and related expenses increased by
7.0% to $34.9 million as compared to $32.6 million for the six months ended June
30, 2000. As a percentage of revenue, compensation and related expenses
increased to 65.6% for the six months ended June 29, 2001 as compared to 63.0%
for the six months ended June 30, 2000. As discussed above, this increase
resulted from annual salary increases for all employees and increased
utilization of contract labor on the Land Warrior project.
Other operating expenses increased by 12.3% to $4.6 million for the second
quarter of fiscal 2001 compared to $4.1 million for the same quarter in fiscal
2000. As a percentage of revenue, other operating expenses increased to 18.3%
in fiscal 2001 from 16.2% in the same period of fiscal 2000. Increases were due
to higher occupancy and office related expenses. The growth in occupancy
expenses is primarily the result of the addition of six small office
"workspaces" during the second half of fiscal 2000 and costs associated with the
lease agreement for the Company's warehouse facility in Silicon Valley, which
began in June 2000. In addition, the Company relocated its Orange County, CA
office to a larger facility in Irvine, CA. Other operating expenses increased
by 7.1% to $8.7 million for the six months ended June 29, 2001 compared to $8.1
million for the same period a year ago. As a percentage of revenue, other
operating expenses increased to 16.4% for the six month period ended June 29,
2001 as compared to 15.7% for the six month period ended June 30, 2000. This
increase was attributable to occupancy and office related expenses. The
occupancy increase was primarily the result of the new workspaces and warehouse
facility mentioned above. Additionally, the Company experienced increases
related to utilities and repair and maintenance costs at its Silicon Valley
building.
General and administrative expenses increased by 10.1% to $2.5 million for
the second quarter of fiscal 2001 compared to $2.3 million for the same period
in fiscal 2000. As a percentage of revenue general and administrative expenses
increased to 10.0% of total revenues for the second quarter of fiscal 2001
compared to 8.9% for the second quarter of fiscal 2000. This increase was
primarily a result of increased expenses for travel, employee relocation,
training and recruiting. These costs were partially offset by decreases in
legal expense. Travel expense increases were related to increased business
development efforts. Increased expenses for training were related to business
development and employee mentoring. The decrease in legal expense was primarily
a result of nonrecurring costs in fiscal 2000 related to the employment of a
senior executive. For the six months ended June 29, 2001, general and
administrative expenses decreased to $4.4 million from $4.9 million for the six
month period ended June 30, 2000. As a percentage of revenue, general and
administrative expenses decreased to 8.3% for the six months ended June 29, 2001
from 9.4% for the same period a year ago. The decrease for the first six months
of fiscal 2001 as compared to the same period of fiscal 2000 was primarily a
result of decreases in legal and bad debt expenses. As mentioned above, the
decrease in legal expense was primarily a result of nonrecurring costs in fiscal
2000 related to the employment of a senior executive. Bad debt expense decreased
due to improved aging of receivables at June 29, 2001 as compared to the same
period end a year ago. These decreases were partially offset by increases in
business development travel, and travel and outside consulting services related
to an employee mentoring program.
Other income, net, consists primarily of investment income earned on
available cash and cash equivalents and rental income from leasing excess space
in the Company's headquarters facility located in Silicon Valley, California,
net of interest expense on the Company's mortgage. Other income, net, decreased
61.9% to $201,000 for the second quarter of fiscal 2001 compared to $528,000 for
the same period of 2000. This decrease was due to a reduction in rental income
from the Company's facility in Silicon Valley. Also in the second quarter of
fiscal 2000, the Company had other income from a tax refund and proceeds from
insurance-based investments of approximately $65,000 and $63,000, respectively.
Other income, net, decreased to $683,000 for the six months ended June 29, 2001
compared to $897,000 during the same period a year ago. This decrease was due
to reduced rental income from the Company's facility in Silicon Valley partially
offset by reduced interest expense from lower borrowings on the Company's
revolving reducing note as
11
compared to the same period in the prior year. Also in first six months of
fiscal 2000, the Company had other income from tax refunds and proceeds from
insurance based investments of approximately $141,000 and $63,000, respectively.
Liquidity and Capital Resources
2001 Fiscal Quarter and Six Months Ended June 29, 2001 Compared to 2000 Fiscal
Quarter and Six Months Ended June 30, 2000
The Company uses all excess operating cash to pay down borrowings on the
revolving reducing mortgage on its headquarters building. The balance on the
Company's mortgage was zero as of June 29, 2001. The Company invests excess cash
in cash equivalents and had $189,000 in cash and cash equivalents as of June 29,
2001. The Company financed its business for the current period principally
through cash available and cash generated from operating activities.
Net cash used by operating activities was $4.8 million in the first six
months of fiscal 2001, compared to net cash provided of $7.7 million for the
comparable period in fiscal 2000. This change from net cash provided, to net
cash used by, operating activities was primarily attributable to the decrease in
net income and the changes in operating assets and liabilities, especially the
decrease in deferred revenues. Deferred revenues are recorded for billings
prior to work performed on fixed price contracts.
Net cash used in investing activities was $1.5 million for the first six
months of fiscal 2001, compared to net cash used of $3.0 million for the
comparable period of fiscal 2000. The decrease in cash used was primarily a
result of reduced capital expenditures related to the completion, in October
2000, of an engineering and test preparation building at the Company's Test and
Engineering Center in Phoenix. The Company disposed of BCS Wireless, Inc. during
the first six months of fiscal 2000 and had $1.9 million in funds provided by
the sale. The Company had no significant dispositions in the first six months of
fiscal 2001.
Net cash provided by financing activities was $74,000 for the first six
months of fiscal 2001 compared to net cash used of $4.2 million for the
comparable period in fiscal 2000. This change from net cash used, to net cash
provided by, financing activities was primarily due to lower funds necessary to
repay outstanding debt. The Company used $18,000 in funds to pay down net
borrowings during the first six months of fiscal 2001 as compared to net
repayments of $3.9 million during the same period of fiscal 2000. Additionally,
the Company repurchased $1.8 million in common shares during the first six
months of fiscal 2001 as compared to $1.4 million repurchased during the same
period of 2000. The Company's repurchase of outstanding common shares was offset
by common shares issued of $1.9 million in the first six months of fiscal 2001
as compared to common shares issued of $1.0 million for the same period in
fiscal 2000.
The Company's long-term obligations at June 29, 2001 consist of the long-
term portion of capital leases for office equipment in the amount of $96,000.
Management believes that its revolving note, together with funds generated
from operations, will provide adequate cash to fund the Company's anticipated
cash needs through at least the next twelve-month period.
Additionally, management believes that its revolving note, together with
funds generated from operations, will provide adequate cash to fund the
Company's anticipated long-term cash needs beyond the next twelve-month period;
however, management intends to grow the business by pursuing potential
acquisitions, the funding of which could increase the need for additional
sources of funds over the long-term.
12
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 the Company's control. These
uncertainties include, but are not limited to, those mentioned elsewhere in this
report, and the following:
Attraction and Retention of Key Employees
The Company's business involves the delivery of professional services and
is labor intensive. The Company's success depends in large part upon its
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. There can be no assurance
that the Company 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 the Company's employees could have a material adverse
impact on the Company, including its ability to secure and complete engagements.
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 at any time by clients. As a result,
backlog at any particular time is small in relation to the Company's quarterly
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, timing and size of engagements.
Customer Concentration
The Company currently derives, and believes that it will continue to
derive, a significant portion of its revenues from clients, organizations and
insurers related to the transportation industry and the government sector. The
loss of any large client, organization or insurer related to either the
transportation industry or government sector could have a material adverse
effect on the Company's business, financial condition or results of operations.
Competition
The markets for the Company's services are highly competitive. In addition,
there are relatively low barriers to entry into the Company's markets and the
Company has faced and expects to continue to face, additional competition from
new entrants into its markets. The Company's various disciplines face
competition ranging from individual consultants to multi-national scientific and
engineering firms. Competitive pressure could reduce the market acceptance of
the Company's services and result in price reductions that could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Economic Uncertainty
The markets that the Company serves are cyclical and subject to general
economic conditions. If the economy in which the Company operates, which is
predominately in the United States, were to experience a slowdown then demand
for the Company's services could be reduced considerably.
13
Other Income
The Company currently leases excess facilities, primarily in its Silicon
Valley headquarters building in Menlo Park, California, which have lease terms
that expire between 2001 and 2003. In the first six months of fiscal 2001 and
2000, miscellaneous rental income associated with these facilities amounted to
approximately 17.4% and 9.2%, respectively, of income from continuing operations
before income taxes. In the quarter ended March 30, 2001, the Company's largest
lease, consisting of 24,000 square feet in its Silicon Valley building, was not
renewed. To date, the available space has not been rented. If the Company is
not able to rent the available space in a timely manner, the loss of rental
income could have a material adverse effect on the Company's income.
Regulation
Public concern over health, safety and preservation of the environment has
resulted in the enactment of a broad range of environmental laws and regulations
by local, state and federal lawmakers and agencies. These laws and the related
regulations affect nearly every industry, as well as the agencies of federal,
state and local governments charged with their enforcement. To the extent that
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 environmental services may be significantly reduced.
Variability of Quarterly Financial Results
Variations in the Company's 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 the Company's 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 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
The Company is exposed to some interest rate risk associated with the long-
term debt obligation on its headquarters building. The mortgage note consists
of a revolving reducing note, secured by the Company's headquarters building,
with a borrowing amount up to $30.0 million. The $30.0 million revolving
reducing note is subject to automatic annual reductions in the amount available
to be borrowed of approximately $1.3 million to $2.1 million per year until
January 31, 2008. As of June 29, 2001, $27.4 million was available to be
borrowed. The Company has no other material borrowings. Any outstanding
amounts on the revolving reducing note are due and payable in full on January
31, 2009. The Company may from time to time during the term of the note borrow,
partially or wholly repay its outstanding borrowings and re-borrow up to the
maximum principal amounts, subject to the reductions in availability contained
in the note. The note is also subject to two interest rate options of either
prime less 1.5% or the 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 payable 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.
The Company's general policy for selecting among the interest rate options
and related terms is to minimize interest expense. However, given the risk of
interest rate fluctuations, the Company cannot be certain that the lowest rate
option will always be obtained. The Company has not performed any sensitivity
analysis on its exposure to interest rate fluctuations. However, given the
historical low volatility of both the prime and LIBOR interest rates, management
believes any exposure would be minimal.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's 2001 Annual Meeting of Stockholders held on May 24,
2001 (the "Annual Meeting"), the following individuals were elected to the Board
of Directors:
BROKER
FOR WITHELD NON-VOTES
--------- ------- ---------
Samuel H. Armacost 5,521,629 411,185 N/A
Barbara M. Barrett 5,521,529 411,285 N/A
Leslie G. Denend, Ph.D. 5,521,229 411,585 N/A
Michael R. Gaulke 5,507,037 425,777 N/A
Jon R. Katzenbach 5,519,211 413,603 N/A
Edward J. Keith 5,497,769 435,045 N/A
Subbaiah V. Malladi, Ph.D. 5,504,211 428,603 N/A
Roger L. McCarthy, Ph.D. 5,518,669 414,145 N/A
The stockholders at the Company's Annual Meeting approved the following
proposal:
BROKER
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
1. The appointment of KPMG LLP
as independent auditors for
the period ending
December 28, 2001. 5,866,028 49,008 17,778 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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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: August 10, 2001 /s/ Richard L. Schlenker
------------------------
Richard L. Schlenker, Chief Financial Officer
16