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 July 2, 2004
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
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 August 6, 2004 | |
| Common Stock $.001 par value |
7,830,356 shares |
PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements |
EXPONENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
July 2, 2004 and January 2, 2004
(in thousands, except share data)
(unaudited)
| July 2, 2004 |
January 2, 2004 |
|||||||
| Assets | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 8,662 | $ | 19,490 | ||||
| Short-term investments |
30,981 | 22,268 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $1,524 and $1,248 at July 2, 2004 and January 2, 2004, respectively |
47,627 | 35,844 | ||||||
| Prepaid expenses and other assets |
1,752 | 2,095 | ||||||
| Deferred income taxes |
2,540 | 2,052 | ||||||
| Total current assets |
91,562 | 81,749 | ||||||
| Property, equipment and leasehold improvements, net |
30,324 | 30,793 | ||||||
| Goodwill |
8,607 | 8,607 | ||||||
| Other assets |
731 | 693 | ||||||
| $ | 131,224 | $ | 121,842 | |||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: |
||||||||
| Accounts payable and accrued liabilities |
$ | 3,499 | $ | 4,838 | ||||
| Accrued payroll and employee benefits |
16,420 | 16,528 | ||||||
| Deferred revenues |
1,155 | 2,864 | ||||||
| Total current liabilities |
21,074 | 24,230 | ||||||
| Other liabilities |
370 | 169 | ||||||
| Deferred income taxes |
770 | 1,211 | ||||||
| Deferred rent |
1,079 | 1,031 | ||||||
| Total liabilities |
23,293 | 26,641 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock, $.001 par value; 20,000,000 shares authorized; 7,993,937 shares issued at July 2, 2004 and January 2, 2004, respectively |
8 | 8 | ||||||
| Additional paid-in capital |
37,093 | 34,153 | ||||||
| Deferred stock-based compensation |
(1,096 | ) | (69 | ) | ||||
| Accumulated other comprehensive income |
13 | 94 | ||||||
| Retained earnings |
73,365 | 66,464 | ||||||
| Treasury stock, at cost, 240,506 and 694,988 shares held at July 2, 2004 and January 2, 2004, respectively |
(1,452 | ) | (5,449 | ) | ||||
| Total stockholders’ equity |
107,931 | 95,201 | ||||||
| $ | 131,224 | $ | 121,842 | |||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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EXPONENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Quarters and Six Months Ended July 2, 2004 and July 4, 2003
(in thousands, except per share data)
(unaudited)
| Quarters Ended |
Six Months Ended | |||||||||||
| July 2, 2004 |
July 4, 2003 |
July 2, 2004 |
July 4, 2003 | |||||||||
| Revenues: |
||||||||||||
| Revenues before reimbursements |
$ | 35,574 | $ | 31,808 | $ | 71,499 | $ | 63,279 | ||||
| Reimbursements |
4,069 | 3,114 | 6,910 | 6,458 | ||||||||
| Revenues |
39,643 | 34,922 | 78,409 | 69,737 | ||||||||
| Operating expenses: |
||||||||||||
| Compensation and related expenses |
23,381 | 20,713 | 46,318 | 41,315 | ||||||||
| Other operating expenses |
4,386 | 4,458 | 9,227 | 9,051 | ||||||||
| Reimbursable expenses |
4,069 | 3,114 | 6,910 | 6,458 | ||||||||
| General and administrative expenses |
2,328 | 2,065 | 4,668 | 4,186 | ||||||||
| Total operating expenses |
34,164 | 30,350 | 67,123 | 61,010 | ||||||||
| Operating income |
5,479 | 4,572 | 11,286 | 8,727 | ||||||||
| Other income: |
||||||||||||
| Interest income, net |
96 | 13 | 189 | 24 | ||||||||
| Miscellaneous income, net |
150 | 145 | 221 | 350 | ||||||||
| Total other income |
246 | 158 | 410 | 374 | ||||||||
| Income before income taxes |
5,725 | 4,730 | 11,696 | 9,101 | ||||||||
| Income taxes |
2,345 | 2,056 | 4,795 | 3,958 | ||||||||
| Net income |
$ | 3,380 | $ | 2,674 | $ | 6,901 | $ | 5,143 | ||||
| Net income per share: |
||||||||||||
| Basic |
$ | 0.45 | $ | 0.37 | $ | 0.93 | $ | 0.72 | ||||
| Diluted |
$ | 0.40 | $ | 0.34 | $ | 0.82 | $ | 0.65 | ||||
| Shares used in per share computations: |
||||||||||||
| Basic |
7,562 | 7,215 | 7,444 | 7,164 | ||||||||
| Diluted |
8,493 | 7,932 | 8,378 | 7,862 | ||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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EXPONENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Quarters and Six Months Ended July 2, 2004 and July 4, 2003
(in thousands)
(unaudited)
| Quarters Ended |
Six Months Ended | |||||||||||||
| July 2, 2004 |
July 4, 2003 |
July 2, 2004 |
July 4, 2003 | |||||||||||
| Net income |
$ | 3,380 | $ | 2,674 | $ | 6,901 | $ | 5,143 | ||||||
| Other comprehensive income (loss): |
||||||||||||||
| Foreign currency translation adjustments |
(4 | ) | 52 | 7 | 59 | |||||||||
| Unrealized (loss) gain on investments |
(76 | ) | 8 | (88 | ) | 6 | ||||||||
| Comprehensive income |
$ | 3,300 | $ | 2,734 | $ | 6,820 | $ | 5,208 | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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EXPONENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended July 2, 2004 and July 4, 2003
(in thousands)
(unaudited)
| Six Months Ended |
||||||||
| July 2, 2004 |
July 4, 2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 6,901 | $ | 5,143 | ||||
| Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
1,645 | 1,702 | ||||||
| Deferred rent expense |
48 | 98 | ||||||
| Provision for doubtful accounts |
962 | 555 | ||||||
| Stock-based compensation |
107 | 50 | ||||||
| Deferred income tax provision |
(929 | ) | — | |||||
| Tax benefit for stock option plans |
1,615 | — | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
(12,745 | ) | (2,394 | ) | ||||
| Prepaid expenses and other assets |
343 | 1,774 | ||||||
| Accounts payable and accrued liabilities |
(1,334 | ) | (2,024 | ) | ||||
| Accrued payroll and employee benefits |
876 | (665 | ) | |||||
| Deferred revenues |
(1,709 | ) | (653 | ) | ||||
| Net cash (used in) provided by operating activities |
(4,220 | ) | 3,586 | |||||
| Cash flows from investing activities: |
||||||||
| Purchases of short-term investments |
(13,433 | ) | — | |||||
| Sales and maturities of short-term investments |
4,632 | — | ||||||
| Capital expenditures |
(1,147 | ) | (1,219 | ) | ||||
| Other assets |
163 | 1 | ||||||
| Net cash used in investing activities |
(9,785 | ) | (1,218 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Repayments of borrowings and long-term obligations |
(34 | ) | (44 | ) | ||||
| Proceeds from issuance of common stock |
3,204 | 1,230 | ||||||
| Net cash provided by financing activities |
3,170 | 1,186 | ||||||
| Effect of foreign currency exchange rates on cash and cash equivalents |
7 | 16 | ||||||
| Net (decrease) increase in cash and cash equivalents |
(10,828 | ) | 3,570 | |||||
| Cash and cash equivalents at beginning of period |
19,490 | 22,480 | ||||||
| Cash and cash equivalents at end of period |
$ | 8,662 | $ | 26,050 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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EXPONENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Quarters and Six Months Ended
July 2, 2004 and July 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 and six months ended July 2, 2004 and July 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 |