Business Context and Reporting Period
Company: Exponent, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 2, 2010 (Second Quarter of Fiscal Year 2010)
Business Overview: Exponent is an engineering and scientific consulting firm providing solutions to complex problems in litigation support, product development, regulatory compliance, and environmental/health sciences. The company operates on a 52-53 week fiscal year.
Key Financial Metrics
| Metric | Three Months Ended July 2, 2010 | Six Months Ended July 2, 2010 |
|---|---|---|
| Total Revenues | $60.4 million | $119.8 million |
| Revenues Before Reimbursements | $55.1 million | $110.3 million |
| Operating Income | $12.8 million | $22.3 million |
| Net Income | $7.3 million | $13.5 million |
| Diluted EPS | $0.48 | $0.90 |
| Cash and Cash Equivalents | $74.1 million (Balance Sheet) | N/A |
| Operating Cash Flow (6mo) | N/A | $6.6 million |
| Total Debt | None reported | None reported |
Note: The company reports no long-term debt. Liquidity is supported by cash, cash equivalents, and short-term investments totaling approximately $76.4 million as of July 2, 2010.
Material Changes vs. Prior Period
- Revenue: Total revenue decreased 1% in Q2 2010 compared to Q2 2009. This was driven by a 37% decrease in reimbursable expenses (materials, travel) partially offset by a 5% increase in revenues before reimbursements.
- Profitability: Net income increased 21% year-over-year in Q2, and operating income increased 43%. Margins improved due to better headcount management and higher utilization rates (71% in Q2 2010 vs. 67% in Q2 2009).
- Segment Performance:
- Engineering & Other Scientific: Revenue decreased 5.6% due to a 71% drop in product sales (surveillance systems to the U.S. Army), offset by higher billable hours in litigation and insurance matters.
- Environmental & Health: Revenue increased 15.5% driven by higher billable hours and rates in litigation, insurance, and regulatory compliance.
- Expenses: Compensation expenses decreased 2.6% due to lower headcount and favorable changes in deferred compensation plan asset values. General and administrative expenses decreased 10% primarily due to lower bad debt provisions compared to the prior year (which included Chrysler/GM bankruptcies).
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Management expects continued improvement in areas dependent on discretionary spending (design, energy, infrastructure) as the economy recovers.
- Focus for the remainder of 2010 includes selective hiring to maintain utilization, managing operating expenses, and generating cash from operations.
- The company intends to continue share repurchases to enhance shareholder value.
Risks and Contingencies:
- Legal: A former client served a writ in 2008 regarding testimony that allegedly contributed to an adverse verdict. The company believes it has a strong defense and that the matter will not have a material adverse effect.
- Market Risk: Exposure to interest rate fluctuations on short-term investments and minimal foreign currency exchange risk.
- Operational: Lack of a sizable backlog makes future revenues less predictable. The business is sensitive to economic downturns and tort reform.
Investor Verification Checklist
- Revenue Composition: Verify the sustainability of the 5% growth in "revenues before reimbursements" given the 37% drop in reimbursable revenue.
- Product Sales Volatility: Assess the impact of the 71% decline in product sales (surveillance systems) on the Engineering segment's future outlook.
- Deferred Compensation Plan: Review the volatility in "Other income/expense" driven by changes in the fair value of the deferred compensation plan assets ($881k decrease in Q2 2010).
- Utilization Rates: Confirm if the 71% utilization rate is sustainable as the company plans to selectively hire new talent.
- Stock Repurchases: Monitor the remaining $15.8 million authorization under the stock repurchase program and its execution.