Business Context and Reporting Period
Company: Exponent, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 3, 2009
Business Overview: Exponent is an engineering and scientific consulting firm providing solutions to complex problems across two primary segments: Engineering and other scientific services, and Environmental and health services. The company operates on a 52-53 week fiscal year.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $59,796,000 | $56,260,000 |
| Operating Income | $9,176,000 | $10,095,000 |
| Net Income | $5,758,000 | $6,347,000 |
| Diluted EPS | $0.38 | $0.40 |
| Cash and Cash Equivalents | $22,400,000 | $11,972,000 (End of Q1 2008) |
| Short-term Investments | $22,287,000 | $24,772,000 (Jan 2, 2009) |
| Total Current Assets | $124,145,000 | $130,308,000 |
| Total Current Liabilities | $36,512,000 | $48,235,000 |
| Net Cash Used in Operating Activities | ($6,406,000) | ($361,000) |
Margins: Operating margin decreased to approximately 15.3% in Q1 2009 from 17.9% in Q1 2008. Net income margin decreased to 9.6% from 11.3%.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 6.3% year-over-year, driven by a 6.3% increase in billable hours and higher billing rates. The Environmental and health segment saw a 14.8% revenue increase, while Engineering and other scientific grew 3.8%.
- Profitability Decline: Despite revenue growth, Operating Income decreased 9.1% and Net Income decreased 9.3%. This was primarily due to a 12.9% increase in compensation and related expenses (driven by payroll increases and fringe benefits) and a 73% drop in product sales within the technology development practice.
- Cash Flow: Net cash used in operating activities increased significantly to $6.4 million (from $0.4 million used in the prior year). This was caused by a larger decrease in accrued payroll (due to bonus payments) and slower collections leading to a higher increase in accounts receivable.
- Days Sales Outstanding (DSO): DSO increased to 99 days from 96 days, indicating slower collections.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects a slight decrease in payroll expense in Q2 2009 due to a projected sequential decrease in technical full-time equivalents and increased vacation time, partially offset by an annual salary increase. No specific financial guidance for the full year was provided in this text.
- Stock Repurchases: The company repurchased 254,861 shares for approximately $5.5 million during the quarter. As of April 3, 2009, approximately $29.5 million remained authorized for repurchases.
- Contingencies:
- Legal: A former client served a writ in July 2008 related to an adverse verdict. The company believes it has a strong defense and that the resolution will not have a material adverse effect.
- Chrysler Bankruptcy: Following Chrysler LLC's Chapter 11 filing on April 30, 2009, Exponent identified approximately $740,000 in receivables (1.1% of total receivables). The company believes the ultimate loss, if any, will not be material.
- Investment Risk: The company holds a $1 million student loan secured auction rate security valued at $810,000 due to a failed auction. A cumulative unrealized loss of $190,000 is recorded in other comprehensive income. The company does not expect this to impact liquidity.
Key Facts for Investor Verification
- Revenue Quality: Verify the sustainability of the 6.3% revenue growth given the 73% decline in product sales and the reliance on billable hours.
- Collections: Monitor the increase in Days Sales Outstanding (99 days) and the $7.4 million increase in accounts receivable to assess potential credit risks.
- Cost Structure: Track the trend in compensation expenses, which rose 12.9% and now represent 63.3% of total revenues, impacting operating margins.
- Liquidity: Confirm the impact of the $6.4 million cash outflow from operations on the company's ability to fund future stock repurchases or acquisitions without drawing down cash reserves significantly.
- Chrysler Exposure: Watch for updates on the collectability of the $740,000 receivable from Chrysler following its bankruptcy filing.