Exponent, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 29, 2012; year-to-date period covers six months ended June 29, 2012. Comparisons are with the quarter and six months ended July 1, 2011. The filing is unaudited.
Business context and performance
Exponent is an engineering and scientific consulting firm. Its two operating segments are engineering and other scientific services, and environmental and health services. Management attributed second-quarter growth to broad demand across practices, higher billing rates, increased utilization, and elevated activity on several large assignments.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $74.5 million | $65.1 million | $146.4 million | $138.6 million |
| Revenue before reimbursements | $68.3 million | $60.6 million | $134.8 million | $124.8 million |
| Operating income | $17.4 million | $13.4 million | $29.2 million | $25.7 million |
| Net income | $10.3 million | $8.2 million | $18.5 million | $16.2 million |
| Diluted EPS | $0.72 | $0.55 | $1.29 | $1.08 |
Financial condition, cash flow, and margins
- Second-quarter revenue rose 14.4% year over year; revenue before reimbursements increased 12.8%. Operating income increased about 30% and net income about 26%.
- Second-quarter operating margin was 23.3% of reported revenue (25.4% of revenue before reimbursements); EBITDA was $18.3 million, or 26.8% of revenue before reimbursements. The six-month EBITDA margin on that basis was 24.6%, versus 23.6% a year earlier.
- For the first six months, operating cash flow was $19.4 million, versus $13.3 million. Capital expenditures were $1.9 million; cash used in investing activities was $1.5 million and cash used in financing was $17.9 million, including $18.5 million of share repurchases.
- Cash and cash equivalents were $84.4 million and short-term investments $24.6 million at June 29, 2012, totaling approximately $109.0 million. Management said available liquidity and anticipated operating cash flow should meet requirements for at least 12 months.
- Total assets were $276.6 million; current liabilities were $54.7 million. The balance sheet reports no borrowings or debt line item. Deferred-compensation liabilities totaled $22.8 million, with related plan assets of $23.0 million.
Material changes and operating drivers
- Second-quarter segment revenue increased 13.0% in engineering and other scientific and 18.3% in environmental and health. For the six-month period, growth was 2.2% and 15.8%, respectively.
- Second-quarter billable hours rose 12% to 271,000, and utilization increased to 76% from 71%. Technical full-time equivalent employees rose 5% to 685.
- Six-month engineering and other scientific revenue growth was partly offset by defense technology product sales declining to $2.8 million from $6.4 million, reflecting lower surveillance-system sales to the U.S. Army.
- Compensation expense rose 8.7% in Q2 and 8.4% year to date, reflecting hiring, salary increases, bonuses, and stock-based compensation. Q2 reimbursable expenses rose 36%; year-to-date they fell 15.9%.
- The company repurchased 386,057 shares for $18.5 million in the first half and had $26.0 million of authorization remaining at June 29, 2012. Diluted weighted-average shares declined year over year.
Outlook, risks, and unusual items
- Management expected activity on several large projects to decline over the following quarters as they progressed through their life cycles. It planned selective hiring and continued investment, and said cash could also be used for repurchases or strategically complementary acquisitions. No specific earnings or revenue guidance was provided.
- Management cited demand and project timing, competition and pricing, lack of backlog, hiring and retention, regulation and tort reform, and claims against the company as risks. It noted that utilization benefited from a few large projects and may not persist.
- A former client’s 2008 writ relates to testimony allegedly contributing to an adverse verdict. The potential claims and loss cannot be estimated; the company said it has a strong defense, expects some claims may be insured, and does not believe resolution will materially harm its financial condition, results, or liquidity.
- Deferred-compensation investments are marked to market, with corresponding effects on compensation expense and other income or expense. Q2 market movements reduced both compensation expense and other income by $555,000 in 2012; the comparable 2011 movement increased compensation expense and other income by $221,000.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material changes to the risk factors in its prior annual report.
Important facts for investors to verify
- Whether the elevated utilization and large-project activity continued, given management’s expectation that major assignments would taper.
- Receivables and collections: net accounts receivable rose to $78.9 million, including unbilled receivables of $32.8 million.
- Defense-related sales and project exposure, including the impact of lower surveillance-system sales and the winding down of a ground-penetrating-radar project.
- Progress and remaining capacity under the share-repurchase authorization, alongside cash needs for hiring, investment, and potential acquisitions.
- Developments in the former-client matter and any changes to management’s assessment of potential liability or insurance coverage.