Exponent, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2010 Q2, but the filing is for the quarter ended July 1, 2011, with comparisons to the quarter ended July 2, 2010. The filing also reports six-month results.
Business context and reporting period
Exponent is an engineering and scientific consulting firm. Its two reportable segments are Engineering and Other Scientific, and Environmental and Health. The interim financial statements are unaudited.
Key financial metrics
| Metric | Three months ended July 1, 2011 | Three months ended July 2, 2010 | Six months ended July 1, 2011 | Six months ended July 2, 2010 |
|---|---|---|---|---|
| Revenue | $65.1 million | $60.4 million | $138.6 million | $119.8 million |
| Revenue before reimbursements | $60.6 million | $55.1 million | $124.8 million | $110.3 million |
| Operating income | $13.4 million | $12.8 million | $25.7 million | $22.3 million |
| Net income | $8.2 million | $7.3 million | $16.2 million | $13.5 million |
| Diluted EPS | $0.55 | $0.48 | $1.08 | $0.90 |
| Operating margin | 20.5% | 21.1% | 18.6% | 18.6% |
- Second-quarter revenue rose 7.7%; revenue before reimbursements increased 9.9%. Six-month revenue rose 15.6%, and revenue before reimbursements increased 13.1%.
- Second-quarter net income grew 13%; diluted EPS rose about 15%. Six-month net income increased 20%.
- Six-month operating cash flow was $13.3 million, versus $6.6 million a year earlier. Capital expenditures were $1.7 million.
- Cash and cash equivalents were $69.5 million and short-term investments $25.6 million at July 1, 2011, totaling $95.0 million, versus $106.5 million in cash and cash equivalents at year-end 2010. Current assets were $186.8 million and current liabilities $49.9 million. The filing reports no debt.
- For the first six months, investing activities used $27.2 million, including $25.6 million of short-term investment purchases; financing activities used $23.4 million, primarily reflecting $23.1 million of share repurchases.
Material changes versus the prior comparable period
- Quarterly growth reflected increased billable hours and higher realized billing rates, partly offset by an 88% decline in defense technology product sales to $0.2 million. Billable hours rose 7% and technical full-time-equivalent employees rose 7% to 653.
- Engineering and Other Scientific revenue grew 8.7% in the quarter; Environmental and Health revenue grew 5.2%. The latter segment’s operating income declined to $4.8 million from $5.4 million, with management citing lower utilization and investment in hiring, including 12 atmospheric-sciences consultants.
- Compensation expense increased 13.1% in the quarter, faster than revenue, while operating margin eased to 20.5% from 21.1%. Management attributed earnings growth overall to improved cost leverage.
- Six-month operating cash flow improved, supported by higher earnings and lower growth in receivables. Days sales outstanding was 94, compared with 95 a year earlier.
Outlook, risks, contingencies, and unusual items
- No quantified financial guidance is provided. Management expected activity to decrease as several major assignments stepped down from elevated second-quarter levels; it planned selective hiring, expense management, cash generation, and potential share repurchases or strategic acquisitions.
- Management said existing cash, cash equivalents, investments, and expected operating cash flows should cover anticipated operating requirements for at least the next 12 months.
- Management identified risks including changes in demand and economic conditions, engagement timing, competition and pricing, lack of backlog, attracting and retaining key employees, regulatory or tort-reform changes, and claims against the company.
- A former client had raised potential claims relating to employee testimony; the company said a loss estimate could not be determined, asserted it had a strong defense, and did not expect a material adverse effect based on information then available. A separate California labor-related suit had a preliminary settlement whose financial impact was reported as immaterial.
- The company repurchased 566,727 shares for $23.1 million in the first half and had $26.9 million of authorization remaining at July 1. The board authorized an additional $35 million for repurchases in May 2011.
- Deferred compensation plan assets and liabilities rose with market values; related changes affect compensation expense and other income in offsetting amounts. No goodwill impairment was reported.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q2 2011, not Q2 2010.
- Assess whether expected reductions in major-assignment activity could affect utilization and revenue after the quarter.
- Track hiring, compensation growth, and utilization—particularly in Environmental and Health—and their effect on margins.
- Review cash conversion, receivables, deferred revenue, and the scale of share repurchases relative to operating cash flow.
- Follow the unresolved former-client claim and labor settlement developments; the former-client exposure is not estimable in the filing.