Business Context and Reporting Period
Company: Exponent, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 2, 2009 (Third Quarter of Fiscal Year 2009)
Business Overview: Exponent is an engineering and scientific consulting firm providing solutions to complex problems in litigation support, technology development, and environmental/health sciences. The company operates on a 52-53 week fiscal year.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended Oct 2, 2009 | Nine Months Ended Oct 2, 2009 |
|---|---|---|
| Total Revenues | $55,245 | $175,903 |
| Operating Income | $8,385 | $26,500 |
| Net Income | $5,833 | $17,616 |
| Diluted EPS | $0.39 | $1.17 |
| Operating Cash Flow (9mo) | $6,678 | |
| Cash & Short-term Investments | $57,270 (as of Oct 2, 2009) | |
| Total Assets | $195,934 | |
| Total Liabilities | $49,650 |
Material Changes vs. Prior Period
- Revenue Trends:
- Quarterly: Total revenues decreased 5.9% to $55.2 million compared to the prior year quarter. Revenues before reimbursements decreased 2.1%.
- Year-to-Date: Total revenues increased 3.5% to $175.9 million compared to the prior year period.
- Segment Performance:
- Engineering & Other Scientific: Quarterly revenues declined 10.2% due to fewer billable hours and a 61% drop in product sales to the U.S. Army (surveillance systems). Year-to-date revenues increased 1.1%.
- Environmental & Health: Quarterly revenues increased 9.2% driven by higher billable hours in health sciences. Year-to-date revenues increased 11.7%.
- Expenses:
- Compensation: Increased 4.5% quarterly and 7.6% year-to-date, driven by annual salary increases and a $885,000 (quarterly) / $1.34 million (YTD) increase in the value of assets in the deferred compensation plan.
- General & Administrative: Decreased 28.9% quarterly and 13.7% year-to-date due to reduced travel, meals, and personnel expenses.
- Profitability: Net income decreased 1.8% for the quarter but remained relatively stable year-to-date (down 2.6%). Operating margins were impacted by the decline in high-margin product sales.
Outlook, Risks, and Management Commentary
- Management Commentary:
- Revenue declines in the engineering segment are attributed to the macroeconomic climate, softness in the automotive industry, and the winding down of support for the U.S. Army's Rapid Equipping Force labs in Iraq and Afghanistan.
- Utilization rates decreased to 67% for the quarter (from 69% prior year) and 69% year-to-date (from 70% prior year).
- Cost management efforts have successfully reduced travel, occupancy, and computer expenses.
- Liquidity and Capital Resources:
- The company maintains a strong liquidity position with $57.3 million in cash, cash equivalents, and short-term investments.
- Net cash provided by operating activities decreased significantly year-to-date ($6.7 million vs. $15.9 million prior year) due to timing of payroll payments and a decrease in accrued bonuses.
- Stock repurchases continued; $10.2 million was spent on 433,900 shares in the first nine months of 2009. Approximately $24.8 million remains authorized for repurchases.
- Risks and Contingencies:
- Legal: A former client served a writ in July 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: Risks include lack of sizable backlog, dependence on key employees, competition, and sensitivity to economic downturns and tort reform.
- Investments: The company holds investments in state and local government obligations. While no impairments were recorded, the company notes risks associated with liquidity and credit concerns in the current financial market.
Key Facts for Investor Verification
- Revenue Mix Shift: Verify the sustainability of the Environmental and Health segment growth versus the decline in the Engineering segment, specifically the impact of the U.S. Army contract wind-down.
- Deferred Compensation Volatility: Note that compensation expenses and other income are significantly impacted by the fair value changes of the deferred compensation plan assets ($885k impact in Q3 2009).
- Cash Flow Divergence: Investigate the sharp decline in operating cash flow ($6.7M vs $15.9M prior year) despite stable net income, driven by changes in accrued payroll and bonuses.
- Customer Concentration: Confirm that no single customer exceeded 10% of revenue in Q3 2009, though federal government agencies accounted for 10% of revenue year-to-date.
- Stock Repurchase Program: Monitor the remaining $24.8 million authorization and the company's commitment to returning capital to shareholders.