UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
_________________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission File Number 0-18655
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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
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(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 November 2, 2001
- ---------------------------- -------------------------------
Common Stock $.001 par value 6,470,960 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 28, 2001 and December 29, 2000
(in thousands, except share data)
(unaudited)
September 28, December 29,
2001 2000
------------- ------------
Assets
Current assets:
Cash and cash equivalents ......................................... $ - $ 6,379
Accounts receivable, net .......................................... 41,654 32,257
Prepaid expenses and other assets ................................. 3,282 2,892
Deferred income taxes ............................................. 1,908 1,908
----------- -----------
Total current assets .......................................... 46,844 43,436
Property, equipment and leasehold improvements, net ................... 33,212 34,007
Goodwill .............................................................. 6,634 7,250
Other assets .......................................................... 800 933
----------- -----------
$ 87,490 $ 85,626
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities .......................... $ 4,522 $ 4,232
Current installments of long-term obligations ..................... 534 839
Accrued payroll and employee benefits ............................. 10,182 13,275
Deferred revenues ................................................. 670 1,057
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Total current liabilities ..................................... 15,908 19,403
Long-term obligations, net of current installments .................... 1,799 227
Other obligations ..................................................... 691 659
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Total liabilities ............................................. 18,398 20,289
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Stockholders' equity:
Common stock ...................................................... 8 8
Additional paid-in capital ........................................ 32,351 33,016
Accumulated other comprehensive losses ............................ (115) (97)
Retained earnings ................................................. 47,243 42,252
Treasury shares, at cost, 1,451,058 and 1,454,741 shares at
September 28, 2001 and December 29, 2000, respectively .......... (10,395) (9,842)
----------- -----------
Total stockholders' equity .................................... 69,092 65,337
----------- -----------
$ 87,490 $ 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 Nine Months Ended September 28, 2001 and September 29, 2000
(in thousands, except per share data)
(unaudited)
Quarters Ended Nine Months Ended
--------------------------------- ---------------------------------
September 28, September 29, September 28, September 29,
2001 2000 2001 2000
--------------- ---------------- --------------- ---------------
Revenues .............................................. $ 26,446 $ 25,474 $ 79,633 $ 77,219
--------------- ---------------- --------------- ---------------
Operating expenses:
Compensation and related expenses ................ 16,834 16,071 51,715 48,658
Other operating expenses ......................... 4,517 4,231 13,234 12,373
General and administrative expenses .............. 2,475 2,266 6,895 7,147
--------------- ---------------- --------------- ---------------
23,826 22,568 71,844 68,178
--------------- ---------------- --------------- ---------------
Operating income ............................... 2,620 2,906 7,789 9,041
Other income (expense):
Interest income (expense), net ................... (3) 4 50 (19)
Miscellaneous income, net ........................ 175 447 805 1,368
--------------- ---------------- --------------- ---------------
172 451 855 1,349
Income from continuing operations
before income taxes .......................... 2,792 3,357 8,644 10,390
Income taxes .......................................... 1,179 1,391 3,653 4,304
--------------- ---------------- --------------- ---------------
Income from continuing operations .............. 1,613 1,966 4,991 6,086
Discontinued operations:
Loss from operation of BCS Wireless, Inc.
(net of taxes of ($69)) ........................ - - - (97)
Gain on disposition of BCS Wireless, Inc.
(net of taxes of $320) ......................... - - - 451
--------------- ---------------- --------------- ---------------
- - - 354
--------------- ---------------- --------------- ---------------
Net income $ 1,613 $ 1,966 $ 4,991 $ 6,440
=============== ================ =============== ===============
Income per share from continuing operations:
Basic ............................................ $ 0.25 $ 0.30 $ 0.77 $ 0.91
Diluted .......................................... $ 0.23 $ 0.28 $ 0.69 $ 0.86
Income per share from discontinued operations:
Basic ............................................ $ - $ - $ - $ 0.05
Diluted .......................................... $ - $ - $ - $ 0.05
Net income per share:
Basic ............................................ $ 0.25 $ 0.30 $ 0.77 $ 0.97
Diluted .......................................... $ 0.23 $ 0.28 $ 0.69 $ 0.91
Shares used in per share computations:
Basic ............................................ 6,527 6,606 6,519 6,659
Diluted .......................................... 7,148 7,104 7,217 7,096
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 Nine months Ended September 28, 2001 and September 29, 2000
(in thousands)
(unaudited)
Quarters Ended Nine months Ended
--------------------------------- ---------------------------------
September 28, September 29, September 28, September 29,
2001 2000 2001 2000
---------------- --------------- ---------------- ---------------
Net income ............................................ $ 1,613 $ 1,966 $ 4,991 $ 6,440
Other comprehensive income (loss) -
foreign currency translation adjustments .......... 8 (13) (18) (20)
---------------- --------------- ---------------- ---------------
Comprehensive income .................................. $ 1,621 $ 1,953 $ 4,973 $ 6,420
================ =============== ================ ===============
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 Nine Months Ended September 28, 2001 and September 29, 2000
(in thousands)
(unaudited)
Nine Months Ended
---------------------------------
September 28, September 29,
2001 2000
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Cash flows from operating activities:
Net income ........................................................... $ 4,991 $ 6,440
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................. 3,516 3,290
Gain on sale of BCS Wireless, Inc. ............................ - (451)
Provision for doubtful accounts ............................... 767 1,639
Changes in operating assets and liabilities:
Accounts receivable ....................................... (10,164) (1,819)
Prepaid expenses and other assets ......................... (862) (457)
Accounts payable and accrued liabilities .................. 290 (860)
Accrued payroll and employee benefits ..................... (3,093) (658)
Deferred revenues ......................................... (387) 2,365
Income tax payable ........................................ - (905)
Other obligations ......................................... (79) (123)
Net operating activities of discontinued operations ....... - 693
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Net cash provided by (used in) operating activities .... (5,021) 9,154
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Cash flows from investing activities:
Capital expenditures ................................................. (1,914) (6,416)
Sale of BCS Wireless, Inc. ........................................... - 1,870
Other assets ......................................................... 77 (437)
Net investing activities of discontinued operations .................. - (34)
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Net cash used in investing activities .................. (1,837) (5,017)
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Cash flows from financing activities:
Proceeds from borrowing and issuance of long-term obligations ........ 1,726 -
Repayments of borrowings and long-term obligations ................... (26) (2,781)
Repurchase of common stock ........................................... (3,646) (2,609)
Issuance of common stock ............................................. 2,425 1,238
Net financing activities of discontinued operations .................. - 15
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Net cash provided by (used in) financing activities .... 479 (4,137)
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Net decrease in cash and cash equivalents .......................................... (6,379) -
Cash and cash equivalents at beginning of period ................................... 6,379 -
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Cash and cash equivalents at end of period ......................................... $ - $ -
============= =============
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 Nine Months Ended
September 28, 2001 and September 29, 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 nine months ended September 28, 2001 and September 29, 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 nine months ended September 29, 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 Nine Months Ended
------------------------------ ------------------------------
September 28, September 29, September 28, September 29,
(In thousands) 2001 2000 2001 2000
------------- ------------- ------------- -------------
Shares used in basic per share computation 6,527 6,606 6,519 6,659
Effect of dilutive common stock options outstanding 621 498 698 437
------------- ------------- ------------- -------------
Shares used in diluted per share computation 7,148 7,104 7,217 7,096
============= ============= ============= =============
Common stock options to purchase 197,750 and 117,048 shares for the quarters
ended September 28, 2001 and September 29, 2000, respectively, were excluded
from the diluted per share calculation, due to their antidilutive effect. For
the nine months ended September 28, 2001 and September 29, 2000, respectively,
common stock options to purchase 125,455 and 247,607 shares, were excluded from
the diluted per share calculation, due to their antidilutive effect.
6
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
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 and is effective immediately. 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 from business combinations taking place after June 30,
2001 are 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 $232,000
for the fourth quarter of fiscal 2001. The resulting balance for existing
goodwill and other intangible assets as of December 28, 2001 subject to periodic
impairment testing will be approximately $6,900,000. 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.
In October 2001, SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", was issued. SFAS No. 144 applies to all
long-lived assets (including discontinued operations). SFAS No. 144 develops one
accounting model for long-lived assets that are to be disposed of by sale. SFAS
No. 144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value less the costs to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 will be
effective for the Company in fiscal 2002. The Company has not yet determined the
impact this standard will have on its consolidated financial statements.
Note 5: Supplemental Cash Flow Information
The following is supplemental disclosure of cash flow information:
Nine Months Ended
-------------------------------
(In thousands) September 28, September 29,
2001 2000
------------- -------------
Cash paid during period:
Interest $ 95 $ 144
Income taxes $ 3,473 $ 6,269
Non-cash investing and financing activities:
Issuance of debt for financing of insurance policies $ 437 $ 977
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 nine months ended September 28,
2001 and September 29, 2000 follows:
Revenues
- --------
Quarters Ended Nine Months Ended
------------------------------- -------------------------------
(In thousands) September 28, September 29, September 28, September 29,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Environmental and health $ 6,452 $ 6,099 $ 18,860 $ 17,228
Other scientific and engineering 19,994 19,375 60,773 59,991
------------- ------------- ------------- -------------
Total revenues $ 26,446 $ 25,474 $ 79,633 $ 77,219
============= ============= ============= =============
Operating Income
- ----------------
Quarters Ended Nine Months Ended
------------------------------- -------------------------------
(In thousands) September 28, September 29, September 28, September 29,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Environmental and health $ 1,868 $ 1,606 $ 5,026 $ 3,870
Other scientific and engineering 4,208 4,461 12,916 15,257
------------- ------------- ------------- -------------
Total segment operating income 6,076 6,067 17,942 19,127
Corporate operating expense (3,456) (3,161) (10,153) (10,086)
------------- ------------- ------------- -------------
Total operating income $ 2,620 $ 2,906 $ 7,789 $ 9,041
============= ============= ============= =============
8
Capital Expenditures
- --------------------
Nine Months Ended
---------------------------------
(In thousands) September 28, September 29,
2001 2000
--------------- ---------------
Environmental and health $ 50 $ 185
Other scientific and engineering 1,328 6,047
--------------- ---------------
Total segment capital expenditures 1,378 6,232
Corporate capital expenditures 536 184
--------------- ---------------
Total capital expenditures $ 1,914 $ 6,416
=============== ===============
Depreciation and Amortization
- ------------------------------
Nine Months Ended
---------------------------------
(In thousands) September 28, September 29,
2001 2000
--------------- ---------------
Environmental and health $ 173 $ 181
Other scientific and engineering 1,947 1,722
--------------- ---------------
Total segment depreciation and
amortization 2,120 1,903
Corporate depreciation and
amortization 1,396 1,387
--------------- ---------------
Total depreciation and
amortization $ 3,516 $ 3,290
=============== ===============
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 Nine Months Ended September 28, 2001 compared to 2000
Fiscal Quarter and Nine Months Ended September 29, 2000
Revenues for the third quarter of fiscal 2001 increased 3.8% to $26.4
million compared to $25.5 million for the same period in fiscal 2000. This
increase was the result of growth in both the environmental and health, and
other scientific and engineering segments during the quarter. Revenues for the
Company's environmental and health segment grew by 5.8% and revenues for its
other scientific and engineering segment grew by 3.2%. This revenue growth in
both segments was due to the effect of an increase in the number of professional
staff and bill rate increases. Revenues for the quarter for projects other than
technology development and vehicle analysis increased by 15%. The Company's
technology development and vehicle analysis project revenues decreased by $1.9
million compared to the same period in the prior year. The primary reason for
the decrease in technology development project revenues resulted from smaller
contracts in the current year compared to the same period in the prior year for
the U.S. Army Land Warrior program. Revenues increased by 3.1% for the nine
months ended September 28, 2001 to $79.6 million compared to $77.2 million for
the same period in fiscal 2000. This increase was also a result of revenue
growth in both of the Company's segments for the first nine months of fiscal
2001. Revenues for the Company's environmental and health segment grew by 9.5%
and revenues for its other scientific and engineering segment grew by 1.3%. The
revenue growth in both segments was due to the effect of an increase in the
number of professional staff and bill rate increases. Revenues for the nine
months ended September 28, 2001 for projects other than technology development
and vehicle analysis increased by 10%. The
10
Company's technology development and vehicle analysis project revenues decreased
by $3.3 million compared to the same period in the prior year. The primary
reason for the decrease in technology development project revenues resulted from
smaller contracts in the current year for the U.S. Army Land Warrior program, as
mentioned above. The decrease in vehicle analysis project revenues resulted from
declines in the automotive industry.
Compensation and related expenses increased 4.7% to $16.8 million for
the third quarter of fiscal 2001 compared to $16.1 million for the same period
in fiscal 2000. As a percentage of revenue, total compensation increased to
63.7% for the third quarter of fiscal 2001 compared to 63.1% for the same period
in fiscal 2000. The increase was due to annual salary increases for all
employees, as well as increased insurance costs. These increases were partially
offset by a reduction in the Company's accrued bonus, which is determined based
on profitability. For the nine months ended September 28, 2001, compensation and
related expenses increased by 6.3% to $51.7 million compared to $48.7 million
for the same period in fiscal 2000. As a percentage of revenue, compensation and
related expenses increased to 64.9% for the nine months ended September 28, 2001
as compared to 63.0% for the same period in fiscal 2000. As mentioned
previously, this increase resulted from company-wide annual salary increases, as
well as increased insurance costs. These increases were partially offset by a
decrease in the Company's accrued bonus, which is determined based on
profitability.
Other operating expenses increased 6.8% to $4.5 million for the third
quarter of fiscal 2001 compared to $4.2 million for the same period in fiscal
2000. As a percentage of revenue, other operating expenses increased to 17.1%
for the third quarter of fiscal 2001 compared to 16.6% for the same period in
fiscal 2000. The increase was primarily due to increases in occupancy costs and
computer expenses, partially offset by a decrease in office expenses. The
Company relocated its Orange County office to a larger facility in Irvine and
added additional space in its Bellevue and San Diego locations. Additionally,
the Company experienced increases in its utility costs, primarily in its Menlo
Park and Phoenix locations. Office expenses decreased as a result of reduced
spending primarily in the areas of office furniture, supplies and shipping.
Other operating expenses increased by 7.0% to $13.2 million for the nine months
ended September 28, 2001 compared to $12.4 million for the same period a year
ago. As a percentage of revenue, other operating expenses increased to 16.6% for
the nine months ended September 28, 2001 as compared to 16.0% for the same
period in fiscal 2000. The increase was attributable to the previously mentioned
increases in occupancy costs and computer expenses. Additionally, the Company's
engineering and test preparation building located in Phoenix was completed in
the fourth quarter of fiscal 2000 and depreciation commenced at that time.
General and administrative expenses increased 9.2% to $2.5 million for
the third 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 9.4% of revenues for the third quarter of fiscal 2001 compared to
8.9% for the third quarter of fiscal 2000. This increase was primarily a result
of increases in bad debt expense, employee relocation costs and business
development costs. Increased bad debt expense is consistent with increasing
revenues for the quarter as compared to the same period a year ago. An offset to
these increases resulted from a lower accrual for sales tax in fiscal 2001 as
compared to the prior year. Due to a state tax authority determination, the
Company accrued a liability in the third quarter of fiscal 2000 for sales tax in
Texas, which was related to prior periods. General and administrative expenses
decreased 3.5% to $6.9 million for the nine months ended September 28, 2001 as
compared to $7.1 million for the same period ended September 29, 2000. As a
percentage of revenue, general and administrative expenses decreased to 8.7% for
the nine months ended September 28, 2001 from 9.3% for the same period in fiscal
2000. Decreased general and administrative expenses resulted from reductions in
bad debt expense, legal and sales tax expenses. These decreases were partially
offset by increases in travel costs, outside consulting and recruiting expenses.
Bad debt expense decreased as a result of the reversal of reserves related to
accounts receivable for BCS Wireless, which were subsequently collected. The
decrease in legal expense was primarily the result of costs in fiscal 2000
related to the employment of a senior executive. Also, as mentioned previously
sales tax expense decreased in the first nine months of fiscal 2001 as compared
to the same period of fiscal 2000 due to an accrual in the third quarter of
fiscal 2000. These decreases were partially offset by increased travel and
outside consulting costs, which are related to increased business development
efforts. Additionally, the Company continues its efforts to attract key
employees and has stepped up its recruiting efforts.
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 $172,000 for the third quarter of fiscal 2001 compared to $451,000 for
the same period of 2000. This decrease was primarily due to a reduction in
rental income from the Company's facility in Silicon Valley. Other income, net,
decreased 36.6% to $855,000 for the nine months ended September 28, 2001
compared to $1,349,000 during the same period in fiscal 2000. This decrease
11
was primarily due to a reduction in 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 compared to the same
period in the prior year.
Liquidity and Capital Resources
2001 Fiscal Quarter and Nine Months Ended September 28, 2001 Compared to 2000
Fiscal Quarter and Nine Months Ended September 29, 2000
The Company's cash management policy is to use all excess operating
cash to pay down borrowings on the revolving reducing mortgage on its
headquarters building. As a result, the Company had no cash or cash equivalents
as of September 28, 2001. The balance on the Company's mortgage was $1.7 million
at September 28, 2001. The Company financed its business for the current period
principally through cash available, cash generated from operating activities and
borrowings on its revolving reducing mortgage note.
Net cash used in operating activities was $5.0 million in the first
nine months of fiscal 2001, compared to cash provided of $9.2 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 an
increase in accounts receivable. In addition, the Company funded its 401(k)
liability in the amount of $2.9 million during the third quarter of fiscal 2001.
The increase in accounts receivable is related to increasing revenues and
delayed billings on fixed-price government contracts.
Net cash used in investing activities was $1.8 million for the first
nine months of fiscal 2001, compared to net cash used of $5.0 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 during the first nine
months of fiscal 2000 and had $1.9 million in funds provided by the sale. The
Company had no significant dispositions in the first nine months of fiscal 2001.
Net cash provided by financing activities was $479,000 for the first
nine months of fiscal 2001, compared to net cash used of $4.1 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 repayments of
outstanding debt and additional borrowings. The Company used $26,000 in funds to
pay down net borrowings during the first nine months of fiscal 2001 as compared
to net repayments of $2.8 million during the same period of fiscal 2000.
Additionally, the Company borrowed $1.7 million in fiscal 2001 as compared to $0
in the comparable period in fiscal 2000. The Company repurchased $3.6 million in
common shares during the first nine months of fiscal 2001 as compared to $2.6
million repurchased during the same period of 2000; however, the Company's
repurchase of outstanding common shares was offset by common shares issued of
$2.4 million in the first nine months of fiscal 2001 as compared to common
shares issued of $1.2 million for the same period in fiscal 2000.
The Company's long-term obligations at September 28, 2001 consisted
primarily of the obligation on the revolving mortgage note of $1.7 million and
the long-term portion of capital leases for office equipment in the amount of
$74,000.
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.
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FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
The Company 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 prolonged slowdown then
demand for the Company's services could be reduced considerably. The terrorist
attacks of September 11, 2001 and the subsequent United States military campaign
has not resulted in any significant current economic impact to the firm. The
Company is unable to predict the economic effect that these events will have on
its business over the long-term.
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 nine months of fiscal 2001
and 2000, miscellaneous rental income associated with these facilities amounted
to approximately 8.6% and 10.2%, 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
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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 September 28, 2001, $25.7 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 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.
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(Registrant)
Date: November 9, 2001 /s/ Richard L. Schlenker
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Richard L. Schlenker, Chief Financial Officer
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