EXPONENT INC. 10-Q Summary: Quarter Ended June 29, 2001
Business Context and Reporting Period
This report covers the quarterly period ended June 29, 2001, and the six months ended June 29, 2001, for Exponent, Inc., a science and engineering consulting firm. The company operates on a 52-53 week fiscal calendar. As of August 3, 2001, there were 6,606,474 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q2 2001 | Q2 2000 | 6 Months 2001 | 6 Months 2000 |
|---|---|---|---|---|
| Revenues | $25.3 million | $25.6 million | $53.2 million | $51.7 million |
| Operating Income | $1.5 million | $2.8 million | $5.2 million | $6.1 million |
| Net Income | $0.95 million | $2.3 million | $3.4 million | $4.5 million |
| Diluted EPS | $0.13 | $0.32 | $0.47 | $0.63 |
| Cash & Equivalents | $0.19 million | $6.4 million (Dec 2000) | $0.19 million | $0.49 million (Dec 2000) |
| Long-Term Debt | $0.10 million | $0.23 million | $0.10 million | $0.23 million |
Liquidity: Cash and cash equivalents decreased significantly from $6.4 million at year-end 2000 to $0.19 million at June 29, 2001. The company has a revolving credit facility with $27.4 million available.
Material Changes vs. Prior Period
- Revenue Decline (Q2): Revenues decreased 1.1% year-over-year in Q2 2001. This was driven by a lower run rate on the U.S. Army Land Warrior program and a slowdown in the Automotive industry affecting the Vehicle Analysis practice.
- Revenue Growth (6 Months): Revenues increased 2.8% for the six-month period, primarily due to an 11.5% growth in the Environmental and Health segment.
- Profitability Compression: Operating income dropped 49% in Q2 and 16% for the six months. Net income fell 58% in Q2 and 24% for the six months.
- Expense Increases: Compensation expenses rose to 66.0% of revenue in Q2 (from 63.8% in 2000) due to salary increases and contract labor on the Land Warrior project. Other operating expenses increased 12.3% due to higher occupancy costs from new office spaces and a warehouse lease.
- Cash Flow Deterioration: Net cash used in operating activities was $4.8 million for the six months ended June 29, 2001, compared to $7.7 million provided in the prior year. This shift was caused by lower net income and a decrease in deferred revenues.
Outlook, Risks, and Management Commentary
- Cost Reductions: On June 1, 2001, the company reduced its workforce by 17 full-time and 9 contract employees, incurring $74,000 in severance but anticipating $800,000 in savings for the second half of 2001.
- Accounting Changes: The company noted the upcoming adoption of SFAS No. 142, which will cease goodwill amortization starting in fiscal 2002, replacing it with an impairment-only model.
- Rental Income Risk: A significant lease for 24,000 square feet in the Silicon Valley headquarters was not renewed in Q1 2001. The space remains unrented, and the loss of this rental income (which previously contributed ~17% of pre-tax income) poses a risk to future earnings.
- Market Risks: The company faces risks related to customer concentration (transportation and government sectors), economic uncertainty, and the inability to attract/retain key technical personnel.
- Capital Needs: Management believes current cash and the revolving note are sufficient for the next 12 months but may require additional funding for potential acquisitions.
Investor Verification Checklist
- Cash Position: Verify the sustainability of operations with only $189,000 in cash on hand despite a $27.4 million credit line.
- Rental Vacancy: Confirm the status of the 24,000 sq. ft. Silicon Valley space and the timeline for re-leasing to mitigate income loss.
- Land Warrior Contract: Assess the long-term impact of the reduced run rate on the U.S. Army Land Warrior program.
- Workforce Efficiency: Monitor whether the anticipated $800,000 in cost savings from the June 1 reduction in force materializes in Q3 and Q4.
- Deferred Revenue: Analyze the trend in deferred revenues, which contributed significantly to the negative operating cash flow.