Exponent, Inc. — Form 10-Q Summary
Period: Quarter ended September 28, 2012; comparative quarter ended September 30, 2011. Nine-month figures cover the periods ended on those dates. The request metadata says “2011 Q3,” but the supplied filing is for 2012 Q3.
Business context and financial performance
Exponent is an engineering and scientific consulting firm. It reports two operating segments: Engineering and other scientific, and Environmental and health. Financial statements are unaudited; amounts below are in millions except per-share data.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue, including reimbursements | $73.3 | $66.0 | $219.7 | $204.5 |
| Revenue before reimbursements | $66.7 | $61.4 | $201.5 | $186.1 |
| Operating income | $14.7 | $16.5 | $43.9 | $42.3 |
| Net income | $10.2 | $8.7 | $28.8 | $25.0 |
| Diluted EPS | $0.72 | $0.60 | $2.01 | $1.67 |
| Operating margin (operating income/revenue) | 20.1% | 25.1% | 20.0% | 20.7% |
Quarterly revenue rose 11.1% (9% before reimbursements), while operating income declined 10.9%. The quarterly net-income increase reflected a swing in other income, primarily from market-value changes in deferred-compensation plan assets, which were offset by corresponding compensation expense. For the nine months, revenue increased 7.4%, operating income 3.9%, and net income 15.2%.
Both segments grew in Q3: Engineering and other scientific revenue increased 11.1% to $53.1 million, and Environmental and health revenue increased 11.3% to $20.2 million. For the first nine months, those segments grew 5.0% and 14.3%, respectively. Nine-month defense technology product sales fell to $2.9 million from $7.0 million, primarily due to lower surveillance-system sales to the U.S. Army.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $21.6 million, down from $25.4 million. Management attributed the decline principally to a $16.6 million increase in accounts receivable, including unbilled defense-project revenue.
- Investing cash use was $0.7 million, versus $28.2 million, largely because purchases of short-term investments were lower. Financing cash use was $18.1 million, compared with $38.7 million, reflecting lower share repurchases.
- Cash and cash equivalents were $87.7 million, and short-term investments were $22.1 million at September 28, 2012—$109.7 million combined. The company reported no debt in the supplied balance sheet. Current assets were $215.4 million and current liabilities $58.6 million.
- Capital expenditures were $3.4 million for the nine months. The company repurchased 404,948 shares for $19.4 million; $25.0 million remained authorized under its repurchase plans.
- Management said existing cash, investments and anticipated operating cash flows should meet operating requirements for at least the next 12 months. Contractual commitments totaled $32.8 million, primarily operating leases.
Outlook, commentary and risks
Management cited broad-based demand, strong utilization and elevated activity on several major assignments. It expects activity on some large projects to decline over the next several quarters as they progress through their life cycles. The company plans selective hiring and continued investment; compensation, other operating and general and administrative expenses may increase. Cash may also be used for repurchases or complementary acquisitions. No quantified earnings or revenue guidance was provided.
Risks identified include weaker demand due to economic or industry conditions, engagement timing, competition and pricing, lack of backlog, retaining key employees, tort reform and regulation, and claims against the company. A former client’s potential claims related to employee testimony remain unresolved; management said a loss estimate could not be determined, but believes the matter will not materially affect financial condition, results or liquidity and intends to defend the company. Other legal matters were described as not expected to have a material adverse effect. Management reported effective disclosure controls and no material changes in internal control during the quarter.
Key facts for investors to verify
- Confirm the requested 2011 Q3 period against the filing’s actual reporting period: quarter ended September 28, 2012.
- Track the large-project contribution and management’s expectation that activity on some assignments will taper.
- Monitor receivables and unbilled revenue, given their increase and the resulting pressure on operating cash flow.
- Assess whether revenue growth can offset rising compensation costs and the quarterly decline in operating income.
- Review the potential former-client claims, repurchase authorization and use of cash for acquisitions or buybacks.