Business Context and Reporting Period
Exponent, Inc. is an engineering and scientific consulting firm serving clients across technical consulting, environmental, and health-risk disciplines. The supplied filing is a Form 10-Q for the quarter ended September 30, 2011—not 2010 Q3 as stated in the request metadata. Comparative periods are the three and nine months ended October 1, 2010. Amounts below are in millions except per-share data.
Financial Performance and Liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $65.95 | $66.31 | $204.53 | $186.15 |
| Revenue before reimbursements | $61.39 | $56.91 | $186.14 | $167.24 |
| Operating income | $16.52 | $11.57 | $42.27 | $33.85 |
| Net income | $8.74 | $7.82 | $24.96 | $21.34 |
| Diluted EPS | $0.60 | $0.52 | $1.67 | $1.42 |
| Operating margin on reported revenue | 25.1% | 17.5% | 20.7% | 18.2% |
Q3 reported revenue declined 0.5%, while revenue before reimbursements increased 7.9%; nine-month reported revenue rose 9.9%. Q3 net income increased 11.8% and diluted EPS increased to $0.60. The company reported Q3 EBITDA of $15.45 million, or 25.2% of revenue before reimbursements, versus $14.25 million and 25.0% a year earlier.
Operating cash flow for the first nine months was $25.42 million, compared with $23.05 million. Capital expenditures were $2.64 million. Cash and cash equivalents were $65.25 million and short-term investments $25.40 million at September 30, 2011, totaling $90.65 million, versus $106.55 million in cash and cash equivalents at year-end 2010. Current assets were $178.80 million and current liabilities $49.44 million. No borrowings are shown on the balance sheet. The company said available cash, investments, and expected operating cash flows should meet operating needs for at least 12 months.
Material Changes and Management Commentary
- Q3 consulting growth was offset in reported revenue by lower defense-technology product sales and reimbursable project costs. Product sales fell to $0.63 million from $7.30 million, largely due to lower surveillance-system sales to the U.S. Army.
- Billable hours rose 11% to 250,000; utilization was 72%, described as exceptionally strong for a summer quarter. Technical full-time-equivalent employees increased 8% to 664.
- For the first nine months, both segments grew: engineering and other scientific revenue increased 9.6%, and environmental and health revenue increased 10.7%.
- Management cited strong, diversified consulting demand and progress in energy, design, and health-sciences growth areas. It expects some major assignments to decline from elevated activity as they advance through their project life cycles.
- Cash declined primarily amid investment purchases and share repurchases. The company repurchased 971,615 shares for $39.33 million in the first nine months and had $10.65 million of authorization remaining at September 30.
Outlook, Risks, Contingencies, and Unusual Items
- No quantitative revenue or earnings guidance is provided. Management expects compensation and other operating costs to rise as it selectively hires and invests in infrastructure; it also expects continued investment purchases and capital expenditures, with cash potentially used for repurchases or complementary acquisitions.
- Reported other expense was $2.12 million in Q3, compared with other income of $1.63 million a year earlier. The change primarily reflected deferred-compensation-plan asset valuation movements, which also affected compensation expense. This volatility makes the quarter’s reported non-operating result less indicative of core consulting performance.
- Risks identified include weaker demand due to economic conditions, engagement timing, competition and pricing, lack of backlog, retention of key employees, regulation and tort reform, and claims against the company. The filing reports no material change to previously disclosed risk factors.
- A former client’s potential claims relating to employee testimony remain unresolved; the company says a loss estimate cannot be determined, believes it has a strong defense, and does not expect a material adverse effect based on information available. A separate California labor-related lawsuit had a preliminary settlement agreement in March 2011, with no material financial effect reported.
- The company reported no material goodwill impairment, no material impact from adopting the 2011 revenue-recognition standards, and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the intended reporting period: the supplied filing covers Q3 2011, despite the request’s “2010 Q3” metadata.
- Assess how much growth in consulting revenue and utilization can offset the timing-sensitive decline in defense product sales and reimbursable costs.
- Monitor activity and utilization as major assignments step down, alongside hiring, compensation costs, and segment-level margins.
- Review cash deployment, remaining repurchase authorization, and the effect of buybacks on liquidity and share count.
- Track deferred-compensation investment volatility and the status and potential exposure of unresolved legal matters.