Business Context and Reporting Period
Exponent, Inc. is a multidisciplinary organization of scientists, engineers, and consultants providing scientific research and analysis. This Form 10-Q covers the quarterly period ended April 2, 1999. The Company operates on a 52-53 week fiscal calendar. As of May 7, 1999, there were 6,796,032 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q1 1999 | Q1 1998 |
|---|---|---|
| Revenues | $24,705,000 | $21,888,000 |
| Operating Income | $2,431,000 | $2,291,000 |
| Net Income | $1,349,000 | $1,560,000 |
| Diluted EPS (Net Income) | $0.19 | $0.20 |
| Cash and Cash Equivalents (End of Period) | $0 | $3,331,000 |
| Total Debt (Current + Long-term) | $15,343,000 | $17,853,000 |
| Net Cash Used in Operating Activities | ($886,000) | ($5,418,000) |
Margins: Operating margin was approximately 9.8% for Q1 1999. Compensation and related expenses represented 61.4% of revenue.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 12.9% to $24.7 million, driven primarily by the "Other scientific and engineering" segment due to increased headcount and billable hours.
- Discontinued Operations: The Company committed to divest its subsidiary, BCS Wireless, Inc., effective April 2, 1999. BCS results are reported as discontinued operations, contributing a loss of $282,000 in Q1 1999 compared to income of $48,000 in Q1 1998.
- Debt Refinancing: On February 1, 1999, the Company refinanced its 15-year mortgage. The new facility includes a $5.0 million line of credit and a $30.0 million revolving reducing note. The mortgage balance was reduced to $13.9 million by the end of the quarter.
- Cash Position: Cash and cash equivalents dropped to $0 from $6.082 million at the start of the period. Management changed cash management policy to use excess operating cash to pay down the mortgage.
- Stock Repurchases: The Company repurchased $1.764 million of its common stock during the quarter.
Guidance, Outlook, and Risks
- Liquidity: Management believes existing credit lines and funds from operations will provide adequate cash for the next twelve months despite the zero cash balance.
- Year 2000 (Y2K) Compliance: The Company is approximately 80% complete with Y2K remediation, with completion anticipated in the third quarter of fiscal 1999. Costs to date have not been material. Risks remain regarding third-party vendor compliance.
- Segment Reorganization: Corporate functions were centralized effective January 2, 1999, making segment operating income for Q1 1999 not directly comparable to Q1 1998.
- Key Risks:
- Employee Retention: Success depends on attracting and retaining qualified technical personnel.
- Backlog: The Company has no significant backlog; revenues are driven by client requests and are terminable at any time.
- Competition: Low barriers to entry and high competition could lead to price reductions.
- Sublease Income: A significant portion of income from continuing operations (approx. 32% in 1998) is derived from subleasing excess headquarters space, which expires in 2000-2001.
Investor Verification Checklist
- Verify the status of the BCS Wireless, Inc. divestiture and confirm no loss on sale as anticipated.
- Monitor the Company's cash flow management given the $0 cash balance and reliance on credit lines.
- Assess the impact of the centralized corporate functions on future segment profitability comparisons.
- Review the renewal status of the Menlo Park headquarters subleases, which contribute significantly to operating income.
- Confirm the completion of Y2K remediation for both internal systems and critical third-party vendors by Q3 1999.