Business Context and Reporting Period
Company: Exponent, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 2, 1999 (Second Quarter of Fiscal 1999)
Business Overview: A multidisciplinary organization of scientists, engineers, and consultants providing scientific research and analysis in over 50 technical disciplines. Operations are divided into two segments: Environmental and Health Risk Analysis, and Scientific and Engineering Consulting.
Key Financial Metrics
| Metric | Q2 1999 | Q2 1998 | 6 Months 1999 | 6 Months 1998 |
|---|---|---|---|---|
| Revenues | $23.4 million | $19.4 million | $47.2 million | $40.7 million |
| Operating Income | $1.8 million | $0.7 million | $4.3 million | $3.0 million |
| Net Income | $1.3 million | $1.6 million | $2.6 million | $3.1 million |
| Diluted EPS (Continuing Ops) | $0.20 | $0.18 | $0.43 | $0.37 |
| Cash & Equivalents (End of Period) | $0 | $6.1 million (Jan 1) | $0 | $5.8 million (Jan 1) |
| Long-Term Debt | $9.1 million | $16.1 million (Jan 1) | $9.1 million | $16.1 million (Jan 1) |
Liquidity: Cash and cash equivalents were depleted to $0 by July 2, 1999, due to a policy change to use excess operating cash to pay down the mortgage on the headquarters building. The company maintains a $35.0 million total borrowing capacity ($5.0 million line of credit and $30.0 million revolving note).
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 20.6% in Q2 1999 and 16.0% for the six-month period compared to 1998. Growth was driven by higher billable hours and increased professional staff utilization.
- Profitability: Operating income increased significantly (171% in Q2) due to revenue growth outpacing expense increases. However, Net Income decreased slightly in Q2 ($1.3M vs $1.6M) primarily due to a $0.1M loss from discontinued operations (BCS Wireless) and a higher tax provision.
- Discontinued Operations: The company divested BCS Wireless, Inc. Effective April 2, 1999, results are reported as discontinued operations. BCS generated a loss of $95,000 in Q2 1999.
- Debt Reduction: Long-term obligations decreased from $16.2 million to $9.4 million during the first six months of 1999 following a refinancing and aggressive principal paydown.
- Expense Trends: Compensation expenses rose 16.2% in Q2 due to headcount increases and benefit standardization, though as a percentage of revenue, it decreased to 65.0%.
Guidance, Outlook, and Risks
- Management Commentary: Management expects existing credit facilities and operating cash flows to fund needs for the next 12 months. The company plans to sell BCS Wireless by the end of fiscal 1999 with no anticipated loss.
- Year 2000 (Y2K) Compliance: Remediation is approximately 95% complete, with completion expected in Q3 1999. Management believes Y2K will not have a material adverse effect, though risks remain regarding third-party vendors.
- Risks:
- Revenue Volatility: Lack of significant backlog; revenues depend on client requests and are terminable at any time.
- Competition: Low barriers to entry and high competition could lead to price reductions.
- Property Income: Sale of a Menlo Park property in May 1999 reduced future rental income, which previously contributed significantly to pre-tax income.
- Personnel: Success depends on retaining highly qualified technical staff in a competitive market.
Investor Verification Checklist
- Cash Position: Verify the sustainability of operations with $0 cash on hand and reliance on the $35M credit facility.
- Discontinued Operations: Confirm the timeline and terms for the sale of BCS Wireless, Inc.
- Y2K Status: Monitor the completion of Phase II remediation and the readiness of key third-party vendors.
- Rental Income Impact: Assess the long-term impact of the reduced rental income from the Menlo Park property sale on future operating margins.
- Debt Covenants: Review the terms of the new $30M revolving note and $5M line of credit for any restrictive covenants.