<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 1999
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 (I.R.S. Employer
of incorporation) 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 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 5, 1999
- ---------------------------- -------------------------------
Common Stock $.001 par value 6,684,170 shares
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 1, 1999 and January 1, 1999
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
October 1, January 1,
1999 1999
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................................... $ - $ 6,082
Accounts receivable, net....................................... 41,903 33,889
Prepaid expenses and other assets.............................. 4,704 5,126
-------- --------
Total current assets....................................... 46,607 45,097
Property, equipment and leasehold improvements, net................. 29,583 32,147
Goodwill............................................................ 8,035 8,584
Other assets........................................................ 1,267 1,157
-------- --------
$ 85,492 $ 86,985
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities...................... 3,670 2,151
Notes payable and current installments of long-term
obligations............................................... 1,652 1,709
Accrued payroll and employee benefits......................... 8,907 8,388
Income taxes payable.......................................... 173 278
-------- --------
Total current liabilities................................. 14,402 12,526
Long-term obligations, net of current installments.................. 11,554 16,144
-------- --------
Total liabilities......................................... 25,956 28,670
-------- --------
Stockholders' equity:
Common stock.................................................. 8 8
Additional paid-in capital.................................... 33,352 33,257
Accumulated other comprehensive losses........................ (42) (16)
Retained earnings............................................. 33,620 29,575
Treasury shares, at cost, 1,184,826 and 701,804 shares at
October 1, 1999 and January 1, 1999, respectively........... (7,402) (4,509)
-------- --------
Total stockholders' equity.............................. 59,536 58,315
-------- --------
$ 85,492 $ 86,985
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Quarters and Nine Months Ended October 1, 1999 and October 2, 1998
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
------------------------------ --------------------------------
October 1, October 2, October 1, October 2,
1999 1998 1999 1998
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 24,082 $ 19,350 $ 71,250 $ 60,012
--------- -------- -------- --------
Operating expenses:
Compensation and related expenses.................... 15,224 12,720 45,578 38,970
Other operating expenses............................. 3,935 4,009 11,862 11,671
General and administrative expenses.................. 2,421 2,056 7,055 5,841
--------- -------- -------- --------
21,580 18,785 64,495 56,482
--------- -------- -------- --------
Operating income............................... 2,502 565 6,755 3,530
Other income (expense).................................. 195 248 1,061 939
--------- -------- -------- --------
Income from continuing operations
before income taxes.......................... 2,697 813 7,816 4,469
Provision for income taxes.............................. 1,122 326 3,242 1,006
--------- -------- -------- --------
Income from continuing operations.............. 1,575 487 4,574 3,463
Discontinued operations:
Income (loss) from operation of BCS Wireless, Inc.
(net of taxes of $63, $83, ($205) and $191
respectively)..................................... 88 122 (289) 281
--------- -------- -------- --------
Net income $ 1,663 $ 609 $ 4,285 $ 3,744
========= ======== ======== ========
Income per share from continuing operations:
Basic $ 0.23 $ 0.07 $ 0.67 $ 0.47
Diluted $ 0.23 $ 0.07 $ 0.65 $ 0.44
Income (loss) per share from discontinued operations:
Basic $ 0.01 $ 0.02 $ (0.04) $ 0.04
Diluted $ 0.01 $ 0.02 $ (0.04) $ 0.04
Net income per share:
Basic $ 0.25 $ 0.08 $ 0.62 $ 0.50
Diluted $ 0.24 $ 0.08 $ 0.61 $ 0.48
Shares used in per share computations:
Basic 6,764 7,324 6,878 7,444
Diluted 6,953 7,480 7,017 7,840
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Quarters and Nine Months ended October 1, 1999 and October 2, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
----------------------------- ------------------------------
October 1, October 2, October 1, October 2,
1999 1998 1999 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income............................................. $ 1,663 $ 609 $ 4,285 $ 3,744
Other comprehensive income (losses):
Foreign currency translation adjustment............ 7 25 (26) 1
Unrealized gains on investments, net of
reclassification adjustment........................ - - - (11)
----------- ------------ ------------ ------------
Comprehensive income................................... $ 1,670 $ 634 $ 4,259 $ 3,734
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
EXPONENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended October 1, 1999 and October 2, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------
October 1, October 2,
1999 1998
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 4,285 $ 3,744
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................. 3,299 3,169
Gain on sale of building...................................... 213 -
Provision for doubtful accounts............................... 2,180 89
Changes in operating assets and liabilities:
Accounts receivable....................................... (10,642) (6,083)
Prepaid expenses and other assets......................... 100 (8)
Accounts payable and accrued liabilities.................. 1,822 403
Accrued payroll and employee benefits..................... 640 (1,575)
Income tax payable........................................ (105) (3,866)
Net operating activities of discontinued operations....... 398 (292)
------------- ------------
Net cash provided by (used in) operating activities.... 2,190 (4,419)
------------- ------------
Cash flows from investing activities:
Purchase of short-term investments................................... - (1,962)
Sales of short-term investments...................................... - 8,309
Gross proceeds from sale of building................................. 4,411 -
Capital expenditures................................................. (4,629) (4,485)
Other assets......................................................... (160) (389)
Net investing activities of discontinued operations.................. (38) (147)
------------- ------------
Net cash provided by (used in) investing activities.... (416) 1,326
------------- ------------
Cash flows from financing activities:
Proceeds from borrowings and issuance of
long-term obligations............................................ 20,020 -
Repayments of borrowings and long-term obligations................... (24,811) (1,344)
Repurchase of common stock........................................... (3,634) (2,819)
Issuance of common stock............................................. 569 756
------------- ------------
Net cash used in financing activities.................. (7,856) (3,407)
------------- ------------
Net decrease in cash and cash equivalents.......................................... (6,082) (6,500)
Cash and cash equivalents at beginning of period................................... 6,082 8,412
------------- ------------
Cash and cash equivalents at end of period......................................... $ - $ 1,912
============= ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
EXPONENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Quarters and Nine Months Ended
October 1, 1999 and October 2, 1998
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
Exponent, Inc., together with its subsidiaries (referred to as the
"Company"), is a multidisciplinary organization of scientists, physicians,
engineers and business consultants performing in-depth scientific research and
analysis in over 50 technical disciplines. The accompanying consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries, Exponent Failure Analysis Associates, Inc. ("FaAA"), Exponent
Health Group, Inc. ("EHG"), Exponent Environmental Group, Inc. ("EEG") and BCS
Wireless, Inc. ("BCS") whose results of operations have been accounted for as a
discontinued operation for the quarters and nine months ended October 1, 1999
and October 2, 1998. 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 generally accepted accounting principles and include
the accounts of Exponent and its subsidiaries. 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 month periods ended October 1, 1999 and October 2,
1998, are not necessarily representative of the results of future quarterly or
annual periods.
Note 2: Discontinued Operations
Effective April 2, 1999 the Company committed to a formal plan to
divest its wholly owned subsidiary, BCS Wireless, Inc. ("BCS"). Accordingly, the
results of operations for BCS for the quarters and nine months ended October 1,
1999 and October 2, 1998 have been recorded as a discontinued operation in the
condensed consolidated statements of income. The balance sheet of BCS as of
October 1, 1999 includes approximately $2.6 million in accounts receivable and
other assets, $620,000 in capital equipment, $3.1 million in an intercompany
payable to the Company and $249,000 in accounts payable and accrued liabilities
associated with BCS. The decision to divest BCS was made because the Company's
management believes the subsidiary is no longer a strategic fit for the Company.
The Company plans to sell BCS by no later than the end of fiscal year 1999 and
anticipates that there will be no loss on the sale.
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 potential common
shares outstanding, using the treasury stock method, even when antidilutive, if
their effect would be dilutive on the per share amount from continuing
operations.
The following schedule reconciles the denominator of the Company's
calculation for basic and diluted net income per share:
6
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
Quarters Ended Nine Months Ended
------------------------ ------------------------
October 1, October 2, October 1, October 2,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic earnings per share-
Weighted average shares outstanding 6,764 7,324 6,878 7,444
Diluted earnings per share-
Effect of dilutive common stock options outstanding 189 156 139 396
--------- -------- -------- -------
Denominator for diluted earnings per share 6,953 7,480 7,017 7,840
========= ======== ======== =======
</TABLE>
Common stock options to purchase 20,000 and 776,982 shares for the quarters
ended October 1, 1999 and October 2, 1998, respectively, were excluded from the
diluted per share calculation, due to their antidilutive effect. For the nine
months ended October 1, 1999 and October 2, 1998, respectively, common stock
options to purchase 216,200 and 115,510 shares, were excluded from the diluted
per share calculation, due to their antidilutive effect.
Note 4: Long-Term Obligations
Effective February 1, 1999, the Company refinanced its 15-year mortgage
note on the Company's headquarters building. The old note, which had an
outstanding principal balance of $16.2 million at the time of the refinancing,
had a floating rate of interest that was tied to LIBOR and was subject to
adjustment every month. Principal payments of $623,333 were due semi-annually on
February 1 and August 1 with the final principal payment and all accrued
interest due and payable on August 1, 2011.
The new note consists of a line of credit with a borrowing amount up to
$5.0 million and a revolving reducing note, secured by the Company's
headquarters building, up to $30.0 million for a total maximum borrowing amount
of $35.0 million. The $5.0 million line of credit is subject to two interest
rate options of either the prime rate in effect from time to time, or a fixed
rate determined by the bank to be 2.75% above LIBOR, with a term option of one
month, two months, three months, six months, nine months or twelve months. The
$30.0 million revolving reducing 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. Both notes have a ten-year term maturing February 1, 2009.
Interest will be paid on a monthly basis. Principal amounts subject to the prime
interest rate may be repaid at any time without penalty. Principal amounts
subject to the fixed LIBOR rate may also be repaid at any time but are subject
to a prepayment penalty if paid before the fixed rate term or additional
interest if paid after the fixed rate term. Additionally, the revolving reducing
note is subject to annual principal payments based on a 15-year amortization of
the initial commitment amount using an interest rate of 3 month LIBOR plus 1.25%
in effect on the date of the note.
7
<PAGE>
Note 5: Supplemental Cash Flow Information
The following is supplemental disclosure of cash flow information, in
thousands :
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------
October 1, 1999 October 2, 1998
--------------- ---------------
<S> <C> <C>
Cash paid during the period:
Interest $ 544 $ 891
------- -------
Income taxes $ 3,009 $ 5,025
------- -------
</TABLE>
Note 6: Segment Reporting
The Company is a multidisciplinary organization of scientists,
physicians, engineers and business consultants performing in-depth scientific
research and analysis in a number of technical disciplines. 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 scientific and engineering consulting in different practices and
primarily in the area of impending litigation.
Segment information for the quarters and nine months ended October 1, 1999 and
October 2, 1998 follows:
Revenues
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
------------------------------- ----------------------------------
October 1, October 2, October 1, October 2,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Environmental and health $ 5,780 $ 4,100 $ 15,901 $ 13,385
Other scientific and engineering 18,302 15,250 55,349 46,627
------------- -------------- --------------- --------------
Total revenue $ 24,082 $ 19,350 $ 71,250 $ 60,012
============= ============== =============== ==============
</TABLE>
Operating Income
<TABLE>
<CAPTION>
Quarters Ended* Nine Months Ended*
-------------------------------- ----------------------------------
October 1, October 2, October 1, October 2,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Environmental and health $ 1,348 $ 246 $ 2,786 $ 1,243
Other scientific and engineering 5,528 3,365 15,416 10,163
------------- -------------- --------------- --------------
Total segment operating income 6,876 3,611 18,202 11,406
Corporate operating expenses (4,374) (3,046) (11,447) (7,876)
------------- -------------- --------------- --------------
Total operating income from
continuing operations $ 2,502 $ 565 $ 6,755 $ 3,530
============= ============== =============== ==============
</TABLE>
8
<PAGE>
* Due to a Company reorganization and centralization of the Company's corporate
functions effective January 2, 1999, operating income for the periods presented
are not comparable. Included in the Company's corporate operating expenses for
the third quarter and first nine months of fiscal 1999 are corporate related
costs that had been included in the operating income of the environmental and
health segment for the third quarter and first nine months of fiscal 1998. The
Company has not restated segment information for the quarter and nine months
ending October 2, 1998 to be comparable with the quarter and nine months ending
October 1, 1999, as it would be impracticable to do so.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q (this "Report") for Exponent, Inc.
(the "Company" or "Exponent") contains, and incorporates by reference, 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 and in the documents incorporated herein by reference, 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 and in the documents incorporated
herein by reference. 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 recognizes most of its revenue from professional service
activities, generally at the time services are performed. The majority of these
activities are provided under a time and materials or fixed-price billing
arrangement with revenues consisting of professional fees and expenses and fees
for the use of the Company's equipment and facilities in connection with the
services provided. On fixed-price contracts, revenue is recognized on the basis
of the estimated percentage of completion of services rendered. Provision for
estimated losses on engagements is made during the period in which the loss
becomes probable and can be reasonably estimated. 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 January 1, 1999, which are contained in
the Company's fiscal 1998 Annual Report on Form 10-K.
1999 Fiscal Quarter and Nine Months Ended October 1, 1999 Compared to 1998
Fiscal Quarter and Nine Months Ended October 2, 1998
Revenues for the third quarter of fiscal 1999 were $24.1 million
compared to $19.4 million for the same quarter of fiscal 1998, an increase of
24.5%. The increase was a result of growth in both segments of the Company's
business
9
<PAGE>
during the quarter, especially in the Environmental and Health segment, which
had a 41.0% increase in revenues. Revenues increased by 18.7% for the nine
months ended October 1, 1999 to $71.3 million compared to $60.0 million for the
same period in fiscal 1998. This increase was a result of growth in both of the
Company's segments for the first nine months of 1999. This growth was due to the
effect of higher billable hours, which was the result of an increase in the
number of professional staff as well as higher utilization of existing
professional staff. In addition, several significant fixed price projects
contributed to the revenue growth for 1999.
Compensation and related expenses increased by 19.7% to $15.2 million
for the third quarter of fiscal 1999 compared to $12.7 million for the same
period in fiscal 1998. The increase was due to additions in headcount combined
with annual salary increases for all employees. In addition, in 1999 the Company
standardized its benefits plans for all Company segments, which resulted in
higher benefit costs. As a percentage of revenue, total compensation decreased
to 63.2% for the third quarter of fiscal 1999 compared to 65.7% for the same
period in fiscal 1998. This decrease was primarily due to increased utilization
rates in the third quarter of fiscal 1999 in a number of the Company's practice
areas. For the nine months ended October 1, 1999, compensation and related
expenses increased by 17.0% to $45.6 million as compared to $39.0 million for
the nine months ended October 2, 1998. As mentioned previously, this increase
resulted from company-wide salary and headcount increases and changes in
company-wide benefit plans as well as a stock-based compensation charge. As a
percentage of revenue, compensation and related expenses decreased slightly to
64.0% for the nine months ended October 1, 1999 as compared to 64.9% for the
nine months ended October 2, 1998.
Other operating expenses decreased by 1.8% to $3.9 million for the
third quarter of fiscal 1999 compared to $4.0 million for the same quarter in
fiscal 1998. A decrease in depreciation costs resulting from the sale of one of
the Company's buildings in May 1999 was partially offset by increased occupancy
expenses associated with rent increases in existing regional facilities along
with costs associated with the addition of a new regional office near San Diego
during the third quarter of 1999. Other operating expenses were 16.3% of total
revenues for the third quarter of fiscal 1999 compared to 20.7% for the
comparable quarter of fiscal 1998. Other operating expenses increased by 1.6% to
$11.9 million for the nine months ended October 1, 1999 compared to $11.7
million for the same period a year ago. The increase was attributable to the
increases in occupancy costs resulting from the opening of several new regional
offices in mid-1998 offset by reductions in technical supplies and office
expenses. As a percentage of revenue, operating expenses decreased overall to
16.6% for the nine month period ended October 1, 1999 as compared to 19.4% for
the nine month period ended October 2, 1998.
General and administrative expenses increased 17.7% to $2.4 million for
the third quarter of fiscal 1999 compared to $2.1 million for the same period in
fiscal 1998. This increase was primarily the result of an increase in the
provision for bad debt. General and administrative expenses as a percentage of
revenue decreased to 10.0% of total revenues for the third quarter of fiscal
1999 compared to 10.6% for the third quarter of fiscal 1998. For the nine months
ended October 1, 1999, general and administrative expenses increased 20.8% to
$7.1 million from $5.8 million for the nine month period ended October 2, 1998.
This was mainly due to an increase in the provision for bad debt expense,
increased personnel costs associated with the hiring of additional professional
staff, and legal expenses. As a percentage of revenue, general and
administrative expenses increased slightly to 9.9% for the nine months ended
October 1, 1999 from 9.7% for the same period a year ago.
Other income (expense) consists primarily of interest expense on the
Company's mortgage, net of investment income earned on available cash and short-
term investments and rental income from leasing excess space in the Company's
headquarters facility located in Menlo Park, California. Other income, net,
decreased to $195,000 for the third quarter of fiscal 1999 compared to $248,000
for same period in 1998. The decrease is due to lower rental income received as
a result of the sale of one of the Company's properties in Menlo Park,
California in the second quarter of 1999 partially offset by a decrease in
interest expense. Other income, net, for the first nine months if 1999 was $1.1
million as compared to $939,000 for the same period a year ago. The increase for
the nine month period ended October 1, 1999 was primarily due to a $213,000 gain
on the aforementioned sale of one of the Company's properties and decreased
interest expense on the Company's mortgage. These gains were partially offset by
a decrease in rental income derived from the sale of the aforementioned property
and a decrease in interest income due to the Company's lower cash and investment
balances during the first nine months of 1999 as compared to the same period of
1998 as a result of the change in the Company's cash management policy.
10
<PAGE>
The provision for income taxes for the quarter and nine months ended
October 1, 1999 was 41.5% of income from continuing operations. In the third
quarter of 1998, the provision for income taxes was 40.5% of income from
continuing operations. For the nine months ended October 2, 1998, the provision
for income taxes was 22.6% of income from continuing operations. The lower tax
provision for the first nine months of 1998 includes the removal during the
second quarter of a valuation allowance recorded against the $800,000 deferred
tax asset generated from a tax loss resulting from the sale of PLG, Inc. in
September 1997.
Liquidity and Capital Resources
1999 Fiscal Quarter and Nine Months Ended October 1, 1999 Compared to 1998
Fiscal Quarter and Nine Months Ended October 2, 1998
Effective February 1, 1999, the Company changed its cash management
policy to use all excess operating cash to pay down the mortgage on the
Company's headquarters building. As a result of this policy change, the Company
had no cash or cash equivalents at October 1, 1999. The balance on the Company's
mortgage, however, was reduced to $11.5 million at October 1, 1999 compared to
the $16.2 million balance at January 1, 1999. The Company financed its business
for the current period principally through cash received from operating
activities.
Net cash provided by operating activities was $2.2 million in the first
nine months of fiscal 1999, compared to net cash used in operating activities of
$4.4 million for the comparable period in fiscal 1998. The increase in cash
provided by operating activities was primarily attributable to timing
differences associated with the payment of the Company's corporate income taxes
in addition to an increase in accrued benefits associated with the Company's
increase in staff. The cash provided by these items was offset by an increase
in net accounts receivable. The increase in accounts receivable is due to the
Company's strong revenue growth in 1999.
Net cash used in investing activities was $416,000 for the first nine
months of fiscal 1999, compared to net cash provided by investing activities of
$1.3 million for the comparable period of fiscal 1998. This decrease was
primarily a result of the reduction in short-term investment proceeds for the
Company due to the change in cash management policy mentioned above. This was
offset by the funds provided by the sale of one of the Company's properties in
Menlo Park.
Net cash used in financing activities was $7.9 million for the first
nine months of fiscal 1999 compared to $3.4 million for the comparable period in
fiscal 1998. This increase in cash used in financing activities was primarily
due to the net payment of $4.8 million on the Company's $30.0 revolving mortgage
note. In addition, the Company repurchased $3.6 million of the Company's common
stock in the first nine months of fiscal 1999 compared to $2.8 million in shares
purchased during the same period a year ago.
The Company's long-term obligations at October 1, 1999 consisted
primarily of the $10.3 million long-term portion of the obligation on the
$30.0 million revolving mortgage note. There were no amounts borrowed against
the available $5.0 million line of credit.
Management believes that its existing credit line and 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.
11
<PAGE>
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 request or events that occur without notice, and engagements, generally
billed on a "time and expenses" basis, are terminable at any time by clients. As
a result, backlog at any particular time is small in relation to its 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 and timing and size of engagements.
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. 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.
Properties
The Company currently subleases excess facilities in its Menlo Park,
California headquarters that have lease terms that expire within the 2000 - 2001
time periods. In fiscal 1998 and 1997, miscellaneous rental income associated
with these facilities amounted to approximately 32% and 26%, respectively, of
income from continuing operations before income taxes. Through the first nine
months of 1999, rental income was approximately 16% of income from continuing
operations before income taxes. The sale of one of these excess facilities in
May of 1999 will reduce the amount of future rental income, however much of the
impact of this reduction will be offset by corresponding reductions in facility
operating costs and interest expense. Should the remaining subleases not be
extended, renewed or have their term options exercised, the loss of additional
miscellaneous rental income could have a material adverse effect on the
Company's operating results.
Year 2000 Compliance
General
- -------
The Year 2000 (Y2K) issue is the result of certain computer hardware,
operating system software and software application programs having been
developed using two digits rather than four to define a year. For example, the
clock circuit in the hardware may be incapable of holding a date beyond the year
1999; some operating systems may recognize a date using "00" as the year 1900
rather than 2000 and certain applications may have limited date processing
capabilities. These problems could result in the failure of major systems or
miscalculations, which could have a material adverse affect
12
<PAGE>
on companies through business interruption or shutdown, financial loss, damage
to reputation, and legal liability to third parties.
State of Readiness
- ------------------
The Company established a Year 2000 Readiness Project Team comprised of
senior executives of the Company in the areas of Management Information Systems,
Facilities and Operations, and Finance. The Project Team reports to the
President and Chief Executive Officer and the Audit Committee of the Board of
Directors.
The Project Team developed and manages the Company's Y2K Plan to
address the potential impact of Y2K on the Company's operations and business
processes. In particular, the Plan identified 8 principal areas that may be
impacted by the Y2K issue: Business Systems; Facility Systems; End-User
Community; Non-Production Suppliers; Financial Services; Communication
Providers; Outsourcing Vendors; and Business Partners / Joint Ventures. With
respect to the IT Systems and Non-IT Business Systems, the Y2K Plan consists of
two separate but overlapping phases: Phase I - Inventory and Risk Assessment;
and Phase II - Remediation.
Phase I - Inventory and Risk Assessment
This Phase required an inventory and assessment of the Non-IT Business
Systems used by the Company including systems with embedded technology, building
access systems, and health and safety systems. This Phase also included
inventory and assessment of IT Systems used by the Company, which include large
information technology systems, desktop hardware and software, and network
hardware and software. Each system was evaluated and a priority was assigned as
being High, Medium or Low Risk to the Company's business. Systems which are High
Risk are those which if uncorrected would cause an interruption or complete
failure to conduct the Company's business. Medium Risks are those that would
negatively impact the business but complete cessation could be avoided with some
inconvenience. Low Risks are those where the risk to business interruption or
cessation are remote. The Company has completed Phase I.
Phase II - Remediation
This Phase included the replacement or correction of the High and
Medium Risk Non-IT Business Systems and IT Systems. A detailed project plan for
the remediation was developed and implemented. This Phase was completed during
the third quarter of fiscal 1999.
Third Party Relationships
- -------------------------
The Company's business operations are dependent on third party
corporate service vendors, materials suppliers, out-sourced operations partners
and others. The Company is working with key external parties to identify and
attempt to mitigate the potential risks to it of Y2K. The failure of external
parties to resolve their own Y2K issues in a timely manner could result in a
material adverse financial risk to the Company. As part of its overall Y2K
program, the Company is actively communicating with third parties on an ongoing
basis to ascertain their state of readiness. Although numerous third parties
have indicated to the Company in writing that they are addressing their Y2K
issues on a timely basis, the readiness of third parties overall varies widely.
Because the Company's Y2K compliance is dependent on the timely Y2K compliance
of third parties, there can be no assurances that the Company's efforts alone
will resolve all Y2K issues.
13
<PAGE>
Cost to Address Y2K
- -------------------
The costs of the Y2K program were primarily costs associated with the
utilization of existing internal resources and minimal external spending. These
costs excluded the costs that could be incurred by the Company if one or more of
its significant third party service providers fail to achieve Y2K compliance.
The Company is not separately identifying Y2K costs incurred that are the result
of utilization of existing internal resources.
To date, the costs of remediation to address the Company's Y2K issues
have not been material and have been funded through working capital resources.
Risk Factors
- ------------
Based on current information, the Company believes the Y2K issue will
not have a material adverse effect on the Company, its consolidated financial
position, results of operations or cash flows. However, there can be no
assurance that the Y2K remediation by the Company or third parties will be
properly and timely completed, and the failure to do so could have a material
adverse effect on the company, its business, results of operations, and its
financial condition. In addition, important factors that could cause results to
differ materially include, but are not limited to, the ability of the Company to
successfully identify systems which have a Y2K issue, the nature and amount of
remediation effort required to fix the affected system, and the costs and
availability of labor and resources to successfully address the Y2K issues.
Contingency Plans
- -----------------
The Company's contingency plans, which will be based in part on the
assessment and the magnitude and probability of potential risk, will primarily
focus on steps to prevent Y2K failures from occurring, or if they should occur,
to detect them quickly, minimize their impact and expedite their repair.
A failure of the services provided by the Company's project and
accounting system could result in the loss of customer records which could
disrupt the ability to bill customers for a protracted time. The Company plans
to prepare electronic backup records of its project and accounting system prior
to the year 2000 to allow for data recovery.
Security and fire protection systems failures could leave facilities
vulnerable to intrusion and fire. The Company expects to return such systems to
normal functioning by turning the power off and then on again ("power off/on").
The Company also plans to have additional security staff on site. Also, certain
personal computers interface and control elevators, public access systems and
certain telephony systems. In the event such computers cease operating,
conducting a power off/on is expected to resume normal functioning. If a power
off/on does not resume normal functioning, the Company expects to resolve the
problem by resetting the computer to a pre-designated date that precedes the
year 2000.
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 implementing regulations affect nearly every industry, as well as the
agencies of federal, state and local governments charged with their enforcement.
To the extent changes in such laws, regulations and enforcement or other factors
significantly reduce the exposures of manufacturers, owners, service providers
and others to liability; the demand for 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.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to some interest rate risk associated with the
Company's long-term debt obligation on the Company's headquarters building,
which consists of a line of credit with a borrowing amount up to $5.0 million
and a revolving reducing note up to $30.0 million for a total maximum borrowing
amount of $35.0 million. The line of credit is subject to two interest rate
options of either the prime rate in effect from time to time, or a fixed rate
determined by the bank to be 2.75% above LIBOR, with a term option of one month,
two months, three months, six months, nine months or twelve months. The $30.0
million revolving reducing 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.
The Company's general policy for selecting among the interest rate
options and related terms will be to minimize interest expense. However, given
the risk of interest rate fluctuations, the Company cannot be certain that the
lowest rate option will always be obtained, therefore, consistently minimizing
the Company's interest expense. No sensitivity analysis was performed on the
Company's exposure to interest rate fluctuations, however, given the
historically low volatility of both the Prime and LIBOR interest rates, the
Company believes any exposure would be minimal.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
27.2 Restated Financial Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended October 1, 1999.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXPONENT, INC.
--------------
(Registrant)
Date: November 12, 1999 /s/ Richard L. Schlenker
-----------------------------------
Richard L. Schlenker, Chief Financial Officer
17
<PAGE>
Index to Exhibits
-----------------
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
REPORT ON 10-Q FOR THE QUARTER ENDED OCTOBER 1, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-03-1999 JAN-02-1999
<PERIOD-END> OCT-01-1999 OCT-01-1999
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 43,802 0
<ALLOWANCES> 1,899 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 46,607 0
<PP&E> 62,235 0
<DEPRECIATION> 32,652 0
<TOTAL-ASSETS> 85,492 0
<CURRENT-LIABILITIES> 14,402 0
<BONDS> 11,554 0
0 0
0 0
<COMMON> 8 0
<OTHER-SE> 59,528 0
<TOTAL-LIABILITY-AND-EQUITY> 85,492 0
<SALES> 0 0
<TOTAL-REVENUES> 24,082 71,250
<CGS> 0 0
<TOTAL-COSTS> 15,224 45,578
<OTHER-EXPENSES> 6,356 18,917
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 188 664
<INCOME-PRETAX> 2,697 7,816
<INCOME-TAX> 1,122 3,242
<INCOME-CONTINUING> 1,575 4,574
<DISCONTINUED> 88 (289)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,663 4,285
<EPS-BASIC> .25 .62
<EPS-DILUTED> .24 .61
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
REPORT ON 10-Q FOR THE QUARTER ENDED OCTOBER 2, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-01-1999 JAN-01-1999
<PERIOD-START> JUL-04-1998 JAN-03-1998
<PERIOD-END> OCT-02-1998 OCT-02-1998
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 0
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 0
<SALES> 0 0
<TOTAL-REVENUES> 19,350 60,012
<CGS> 0 0
<TOTAL-COSTS> 12,720 38,970
<OTHER-EXPENSES> 6,065 17,512
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 307 857
<INCOME-PRETAX> 813 4,469
<INCOME-TAX> 326 1,006
<INCOME-CONTINUING> 487 3,463
<DISCONTINUED> 122 281
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 609 3,744
<EPS-BASIC> .08 .50
<EPS-DILUTED> .08 .48
</TABLE>
