Exponent, Inc. — Form 10-Q Summary
Period clarification: The filing covers the three months ended March 30, 2012, compared with the three months ended April 1, 2011. This conflicts with the request metadata identifying 2011 Q1; the filing itself is for 2012 Q1. Unaudited results; amounts below are in millions unless stated otherwise.
Business context and results
Exponent is an engineering and scientific consulting firm with two operating segments: Engineering and Other Scientific, and Environmental and Health. Total revenue declined 2.1% to $71.9 million, while revenue before reimbursements increased 3.6% to $66.5 million. Management attributed the divergence largely to lower defense technology product sales and project reimbursements, offset by growth in consulting.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $71.9 | $73.5 |
| Revenue before reimbursements | $66.5 | $64.2 |
| Operating income | $11.8 | $12.4 |
| Net income | $8.2 | $8.0 |
| Diluted EPS | $0.57 | $0.53 |
| Operating cash flow | $(1.4) | $(6.0) |
| Capital expenditures | $1.3 | $0.8 |
Financial position, margins and cash flow
- Operating margin on revenue before reimbursements was approximately 17.8%, versus 19.3% a year earlier. EBITDA was $14.8 million, or 22.3% of revenue before reimbursements, compared with $14.4 million and 22.5%. Net income rose 2.5%; diluted EPS increased 7.5%, helped by share repurchases and fewer weighted-average shares.
- Cash and cash equivalents were $78.5 million and short-term investments $25.2 million at March 30, for $103.7 million combined. Total assets were $267.3 million, total liabilities $67.8 million, and stockholders’ equity $199.5 million. The balance sheet reports no debt balance.
- Operating cash use improved year over year, primarily with better collections: days sales outstanding fell to 88 from 96. Cash use still reflected a $16.2 million decrease in accrued payroll and benefits, including bonus payments. Cash declined $5.9 million during the quarter.
- Current assets were $190.9 million and current liabilities $40.9 million. Contractual commitments totaled $22.9 million, principally operating leases. The company said existing liquidity and expected operating cash flows should cover requirements for at least 12 months.
Material changes and management commentary
- Engineering and Other Scientific revenue fell 7.1% to $51.7 million, while Environmental and Health revenue rose 13.5% to $20.2 million. Segment operating income was $14.9 million and $6.8 million, respectively, before corporate operating expense.
- Defense technology product sales declined to $2.4 million from $6.1 million, mainly due to lower U.S. Army surveillance-system sales. Product sales and reimbursements can vary with contract and delivery timing.
- Billable hours rose 7% to 263,000; utilization increased to 74% from 73%; technical FTEs increased 6% to 686. Management noted elevated activity on several large assignments but expected activity on some of those projects to decline over coming quarters.
- Compensation expense rose 8.1% to $46.2 million, reflecting higher payroll, stock-based compensation and deferred-compensation-plan remeasurement. Management expected compensation expense to rise with hiring and annual salary increases. Other operating expense declined 3.8%, and G&A declined 12.5%, mainly due to lower legal costs.
- Repurchased 84,174 shares for approximately $4.0 million during the quarter; $40.4 million remained authorized. Management may also use cash for capital investment, short-term investments, repurchases or complementary acquisitions.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided. Management described strong, broad demand for consulting and continued selective hiring, but cautioned that large-project activity may ease and defense product revenue is timing-sensitive. Cited risks include weaker demand or economic conditions, engagement timing, competition and pricing, lack of backlog, retaining key employees, regulation and tort reform, and claims against the company.
A former client’s potential claims relating to employee testimony remain unresolved; the company cannot estimate a loss, believes it has a strong defense, and says some claims may be insured. Management does not expect the matter to materially affect financial condition, results or liquidity. Other routine legal matters were not expected to have a material adverse effect. Deferred-compensation assets and liabilities increased with market values, with corresponding expense and other income substantially offsetting. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- Confirm the reporting period: the filing is Q1 2012, notwithstanding the request metadata.
- Assess whether consulting growth can offset lower defense product sales and the anticipated fade in major-project activity.
- Track compensation growth, utilization, billable hours, collections and operating cash conversion, including seasonal bonus payments.
- Review the unresolved former-client matter and any subsequent updates to the company’s loss assessment or insurance coverage.
- Check the effects of continued repurchases and potential acquisitions on liquidity and share count; the cover reports 13,410,825 shares outstanding as of April 27, 2012.