EXPONENT INC quarterly report, Q1 FY2015

Business context and reporting period

Exponent, Inc. is an engineering and scientific consulting firm. This Form 10-Q covers the three months ended April 3, 2015, compared with the three months ended April 4, 2014. The request labels the period “2014 Q1,” but the filing reports first-quarter 2015 results.

Financial performance and position

Unless noted otherwise, amounts are in millions of dollars.

Operating margin was approximately 18.7% of revenue, versus 18.6% a year earlier. EBITDA was $18.4 million, or 24.2% of revenue before reimbursements, compared with $16.6 million and 22.8%. The effective tax rate was 39.5%, down from 40.4%.

At April 3, 2015, cash and cash equivalents were $123.7 million and short-term investments were $21.4 million, totaling $145.0 million, down from $154.4 million at January 2, 2015. Total assets were $357.2 million and total liabilities $103.4 million. The filing does not report borrowings or provide a clear debt balance. The company said existing liquid resources should cover working capital, capital expenditures, commitments, repurchases, dividends, and other needs for at least 12 months.

Material changes and operating trends

• Revenue growth was led by Engineering and Other Scientific, up 7.1% to $59.8 million; Environmental and Health increased 1.8% to $20.5 million. Segment operating income increased in both groups.
• Billable hours rose 7% to 292,000 and utilization increased to 75% from 72%. Technical full-time-equivalent employees increased 2% to 745.
• Compensation expense rose 4.6% to $51.1 million, while other operating expenses rose 3.1% to $6.5 million. General and administrative expense declined 5.7% to $3.5 million, primarily due to lower legal costs.
• Cash from operations improved from a use of $6.1 million to a source of $1.7 million. First-quarter operating cash needs typically reflect payment of prior-year bonuses. Financing used $10.1 million, including dividends, payroll taxes on restricted stock units, and $3.5 million of share repurchases.
• Cash dividends declared per share increased to $0.30 from $0.25. The company repurchased 40,483 shares for $3.5 million and had $31.6 million remaining under its repurchase authorizations.

Outlook, risks, and unusual items

Management cited strong demand across a diverse client base and plans to selectively hire talent, develop capabilities, manage expenses, and pursue emerging growth areas. It expected one major investigation to step down from elevated activity and anticipated lower technology-development activity amid defense-spending constraints and the withdrawal of U.S. and U.K. combat troops from Afghanistan. Management expected compensation, other operating expenses, and general and administrative expenses to rise as the company hires and invests; no numerical earnings or revenue guidance was provided.

Deferred-compensation plan asset value changes increased compensation expense by $1.381 million and were offset by the same amount in other income. Other income also benefited from this matching plan-related amount; it should not be treated as equivalent to recurring consulting operating income. Foreign-exchange movements affected the Environmental and Health segment, and the company noted that international expansion increases currency exposure. It does not hedge foreign-currency exposure with contracts.

Risks identified include weaker demand due to economic or industry conditions, engagement timing, competition and pricing, lack of backlog, retention of key employees, regulation and tort reform, and claims against the company. Management said legal matters were not expected to materially affect financial condition, results, or liquidity; actual outcomes could differ. No material legal proceedings or material risk-factor changes were reported. Disclosure controls were deemed effective, with no material changes to internal control over financial reporting.

Subsequent to quarter-end, the board proposed a two-for-one stock split and corresponding changes to authorized shares, subject to shareholder approval at the May 28, 2015 annual meeting. It also declared a June dividend of $0.15 per share if the split is approved, or $0.30 if it is not.

Important facts for investors to verify

• Confirm the reporting period: the filing is for Q1 2015, despite the request’s Q1 2014 label.
• Assess whether improved utilization and billable hours can offset the expected step-down in major investigation and technology-development work.
• Review operating cash conversion, including seasonal bonus payments and changes in accrued payroll and deferred revenue.
• Distinguish recurring consulting performance from deferred-compensation valuation effects in other income and expense.
• Confirm shareholder approval and implementation of the proposed stock split and authorized-share changes, and the resulting dividend per share.
• Monitor foreign-currency exposure, client demand, employee retention, and the outcome of ordinary-course legal claims.