EXPONENT INC - 10-Q 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 April 2, 2004

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

For the transition period from to

Commission File Number 0-18655

EXPONENT, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		77-0218904
(State or other jurisdiction of incorporation)		(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 May 7, 2004
Common Stock $.001 par value		7,520,927 shares

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

EXPONENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

April 2, 2004 and January 2, 2004

(in thousands, except share data)

(unaudited)


	April 2, 2004			January 2, 2004
Assets
Current assets:
Cash and cash equivalents	$	6,416		$	19,490
Short-term investments		32,240			22,268
Accounts receivable, net of allowance for doubtful accounts of $1,609 and $1,248 at April 2, 2004 and January 2, 2004, respectively		41,204			35,844
Prepaid expenses and other assets		1,608			2,095
Deferred income taxes		2,052			2,052

Total current assets		83,520			81,749

Property, equipment and leasehold improvements, net		30,441			30,793
Goodwill		8,607			8,607
Other assets		441			693

	$	123,009		$	121,842

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	4,938		$	4,783
Current installments of long-term obligations		51			55
Accrued payroll and employee benefits		13,755			16,528
Deferred revenues		1,275			2,864

Total current liabilities		20,019			24,230

Long-term obligations, net of current installments		154			169
Deferred income taxes		1,211			1,211
Deferred rent		1,087			1,031

Total liabilities		22,471			26,641

Stockholders’ equity:
Common stock, $.001 par value; 20,000,000 shares authorized; 7,993,937 shares issued at April 2, 2004 and January 2, 2004, respectively		8			8
Additional paid-in capital		36,309			34,153
Deferred stock-based compensation		(1,026	)		(69	)
Accumulated other comprehensive income		93			94
Retained earnings		69,985			66,464
Treasury stock, at cost, 601,045 and 694,988 shares held at April 2, 2004 and January 2, 2004, respectively		(4,831	)		(5,449	)

Total stockholders’ equity		100,538			95,201

	$	123,009		$	121,842

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

- 2 -

EXPONENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Quarters Ended April 2, 2004 and April 4, 2003

(in thousands, except per share data)

(unaudited)


	Quarters Ended
	April 2, 2004		April 4, 2003
Revenues:
Revenues before reimbursements	$	35,925	$	31,471
Reimbursements		2,841		3,344

Revenues		38,766		34,815

Operating expenses:
Compensation and related expenses		22,937		20,602
Other operating expenses		4,841		4,593
Reimbursable expenses		2,841		3,344
General and administrative expenses		2,340		2,121

		32,959		30,660

Operating income		5,807		4,155

Other income:
Interest income, net		93		11
Miscellaneous income, net		71		205

		164		216

Income before income taxes		5,971		4,371
Income taxes		2,450		1,902

Net income	$	3,521	$	2,469

Net income per share:
Basic	$	0.48	$	0.35
Diluted	$	0.43	$	0.32

Shares used in per share computations:
Basic		7,326		7,113
Diluted		8,265		7,790

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

- 3 -

EXPONENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Quarters Ended April 2, 2004 and April 4, 2003

(in thousands)

(unaudited)


	Quarters Ended
	April 2, 2004			April 4, 2003
Net income	$	3,521		$	2,469
Other comprehensive income (loss):
Foreign currency translation adjustments		12			7
Unrealized loss on short-term investments		(13	)		(2	)

Comprehensive income	$	3,520		$	2,474

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

- 4 -

EXPONENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Quarters Ended April 2, 2004 and April 4, 2003

(in thousands)

(unaudited)


	Quarters Ended
	April 2, 2004			April 4, 2003
Cash flows from operating activities:
Net income	$	3,521		$	2,469
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		823			864
Deferred rent expense		56			56
Provision for doubtful accounts		553			173
Stock-based compensation		27			25
Changes in operating assets and liabilities:
Accounts receivable		(5,913	)		(1,153	)
Prepaid expenses and other assets		501			(586	)
Accounts payable and accrued liabilities		155			1,031
Accrued payroll and employee benefits		(1,789	)		(2,536	)
Deferred revenues		(1,589	)		(957	)

Net cash used in operating activities		(3,655	)		(614	)

Cash flows from investing activities:
Purchases of short-term investments		(10,487	)		—
Sales of short-term investments		502			—
Capital expenditures		(457	)		(721	)
Other assets		238			(14	)

Net cash used in investing activities		(10,204	)		(735	)

Cash flows from financing activities:
Repayments of borrowings and long-term obligations		(19	)		(38	)
Proceeds from issuance of common stock		806			317

Net cash provided by financing activities		787			279

Effect of foreign currency exchange rates on cash and cash equivalents		(2	)		(6	)

Net decrease in cash and cash equivalents		(13,074	)		(1,076	)
Cash and cash equivalents at beginning of period		19,490			22,480

Cash and cash equivalents at end of period	$	6,416		$	21,404

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

- 5 -

EXPONENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Fiscal Quarters Ended April 2, 2004 and April 4, 2003

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 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 ended April 2, 2004 and April 4, 2003, 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.

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.

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.

Substantially all 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:

•

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;

- 6 -

•

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 ended April 2, 2004 and April 4, 2003 are as follows:


	Quarters Ended
(In thousands)	April 2, 2004		April 4, 2003
Gross revenues	$	40,593	$	37,937
Less: Subcontractor fees		1,827		3,122

Revenues		38,766		34,815

Reimbursements:
Out-of-pocket travel reimbursements		1,003		1,074
Other outside direct expenses		1,838		2,270

		2,841		3,344

Revenues before reimbursements	$	35,925	$	31,471

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.

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.

- 7 -

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


	Quarters Ended
(In thousands)	April 2, 2004	April 4, 2003
Shares used in basic per share computation	7,326	7,113
Effect of dilutive common stock options outstanding	939	677

Shares used in diluted per share computation	8,265	7,790

There were no options excluded from the diluted per share calculation for the fiscal quarter ended April 2, 2004. Common stock options to purchase 98,877 shares were excluded from the diluted per share calculation for the fiscal quarter ended April 4, 2003, due to their antidilutive effect. The weighted-average exercise price for the antidilutive shares was $14.02 for the quarter ended April 4, 2003.

Note 4: Stock-Based Compensation

During the first quarter of fiscal 2004, the Company implemented certain changes to its employee compensation designed to continue to attract and retain the best employees, and to better align employee interests with those of the Company’s stockholders. Up to 30% of a select group of principals’ and officers’ fiscal 2003 bonus was settled with fully vested restricted stock unit awards. Under these fully vested restricted stock unit awards, the holder of each award has the right to receive one share of the Company’s common stock for each fully vested restricted stock unit four years from the date of grant. On March 12, 2004, fully vested restricted stock unit awards representing 43,273 shares of the Company’s common stock were granted to a select group of principals and officers as a part of their bonus distribution for fiscal 2003. The value of these fully vested restricted stock unit awards as measured on March 12, 2004 was $984,000.

In addition to the fully vested restricted stock unit awards a matching number of unvested restricted stock unit awards were granted. These unvested restricted stock unit awards will vest on March 12, 2008 at which time the holder of each award will have the right to receive one share of the Company’s common stock for each restricted stock unit award provided the holder of each award has met certain employment conditions. Unvested restricted stock unit awards representing 43,273 shares of the Company’s common stock were granted to a select group of principals and officers on March 12, 2004. The value of these unvested restricted stock unit awards as measured on March 12, 2004 was $984,000 and was recorded as deferred stock-based compensation. This deferred stock-based compensation is being amortized over the four-year vesting period of the awards.

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