Business context and reporting period
Exponent, Inc. is an engineering and scientific consulting firm. This filing reports the quarter ended July 4, 2014, and the six months then ended, compared with the periods ended June 28, 2013. The request metadata says “2013 Q2,” but the filing itself is for 2014 Q2.
All financial amounts below are in U.S. dollars; amounts are in millions unless otherwise noted. Financial statements are unaudited.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $76.6 | $75.5 | $152.5 | $148.2 |
| Revenue before reimbursements | $72.3 | $71.9 | $145.3 | $140.9 |
| Operating income | $16.1 | $17.6 | $30.2 | $28.4 |
| Net income | $11.3 | $10.8 | $20.4 | $18.8 |
| Diluted EPS | $0.81 | $0.77 | $1.47 | $1.34 |
| Operating cash flow | Not separately stated | Not separately stated | $10.7 | $16.4 |
- Q2 revenue rose 1.4%; net income rose 3.8%. Operating income declined 8.6%, with operating margin falling to about 21.0% from 23.3%.
- For the first six months, revenue grew 3.0%, operating income 6.1%, and net income 8.5%. EBITDA was $36.3 million, or 25.0% of revenue before reimbursements, versus $34.1 million and 24.2% a year earlier.
- Cash, cash equivalents, and short-term investments totaled $144.5 million at July 4, 2014, down from $156.1 million at January 3. Current assets were $255.2 million and current liabilities $64.5 million. The filing reports no debt.
- Six-month operating cash flow declined despite higher net income, principally reflecting increased accounts receivable and other working-capital movements. Investing cash flow was a use of $0.9 million; financing cash flow was a use of $20.6 million.
- Quarterly dividend declared and paid was $0.25 per share, versus $0.15 in Q2 2013. The board declared another $0.25 dividend payable September 26, 2014, subject to standard record-date terms.
Material changes versus comparable periods
- Q2 revenue before reimbursements grew modestly as higher realized billing rates partly offset lower billable hours. Billable hours decreased 1% to 276,000, and utilization declined to 72% from 75%.
- Engineering and Other Scientific revenue rose 3.1% in Q2; Environmental and Health revenue fell 2.7%. For the six months, the two segments grew 3.9% and 0.5%, respectively.
- Q2 operating expenses increased 4.5%, faster than revenue. Compensation rose 3.6%; other operating expenses 3.9%; reimbursable expenses 18.3%.
- Q2 other income increased to $2.3 million from $0.7 million, substantially reflecting a rise in deferred-compensation plan asset values. A corresponding expense was recorded in compensation, so this market-value movement substantially offset in operating results.
- The effective tax rate was 38.8% for Q2 and 39.5% for the six months, compared with 40.6% and 40.8%. The reduction included an approximately $0.34 million tax benefit related to undistributed foreign earnings now intended to be indefinitely reinvested abroad.
Outlook, risks, contingencies, and unusual items
- No quantified revenue or earnings guidance was provided. Management expected some major investigations to step down from elevated activity and anticipated lower activity in defense technology development due to defense-spending constraints and the U.S. drawdown in Afghanistan.
- Management said it would selectively hire technical talent and invest in facilities and infrastructure, with compensation, other operating, and general and administrative expenses expected to grow as a result. It described demand during the quarter as strong across a diverse client base and across reactive and proactive projects.
- The company said existing cash, investments, and expected operating cash flows should meet operating needs and other liquidity requirements for at least the next 12 months. Cash may also fund repurchases, dividends, capital expenditures, or strategic acquisitions.
- Six-month share repurchases were $14.4 million; remaining authorization was $51.6 million after a new $35 million authorization in May 2014. No expiration date applies to the repurchase plans.
- Management identified risks including demand and economic conditions, engagement timing, competition and pricing, lack of backlog, attracting and retaining employees, regulation and tort reform, and claims against the company. It reported no material legal proceedings and believed ordinary-course claims would not materially adversely affect financial condition, results, or liquidity, while noting litigation outcomes remain uncertain.
- The company was evaluating the impact and transition method for the new revenue-recognition standard, effective for it December 31, 2016. It reported no material changes to contractual obligations or risk factors from its prior annual report.
- Interest-rate exposure was managed through high-quality, short-maturity investments; management said a 100-basis-point rate change would not materially affect the portfolio’s fair value. Foreign-currency exposure was described as limited, with no hedging program.
Investor verification points
- Confirm the reporting-period mismatch: the filing is for Q2 2014, although the request metadata specifies Q2 2013.
- Assess whether lower Q2 utilization and billable hours, including the anticipated step-down in major investigations, persist or recover.
- Review receivables growth and the decline in operating cash flow relative to net income.
- Separate recurring operating performance from deferred-compensation plan market movements and the one-time tax benefit.
- Monitor the effect of hiring, facility investment, dividends, and repurchases on margins and cash balances, and review developments in legal claims and the new revenue-recognition standard.