Business context and reporting period
Exponent, Inc. is an engineering and scientific consulting firm. This unaudited Form 10-Q covers the quarter ended October 3, 2014 and the first nine months of fiscal 2014, with comparisons to the corresponding 2013 periods. The request metadata says “2013 Q3,” but the filing itself reports 2014 Q3.
Financial highlights
Amounts below are in millions of dollars except per-share data. Revenue includes reimbursements; “revenue before reimbursements” is also shown because it better reflects consulting activity.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $78.6 | $75.2 | $231.1 | $223.4 |
| Revenue before reimbursements | $74.3 | $70.1 | $219.6 | $211.0 |
| Operating income | $19.2 | $15.2 | $49.4 | $43.6 |
| Net income | $11.0 | $11.1 | $31.5 | $29.9 |
| Diluted EPS | $0.80 | $0.79 | $2.26 | $2.13 |
| Operating margin, calculated on reported revenue | 24.5% | 20.2% | 21.4% | 19.5% |
- Q3 revenue increased 4.4% and revenue before reimbursements rose 5.9%; nine-month increases were 3.4% and 4.1%, respectively.
- Q3 operating income rose 26.9%, while net income edged down 0.5%; the difference primarily reflects a swing in other income/expense, including deferred-compensation investment effects. Nine-month operating income increased 13.3% and net income 5.1%.
- Q3 EBITDA was $19.7 million, or 26.5% of revenue before reimbursements, versus $18.8 million and 26.8% a year earlier. Nine-month EBITDA was $56.0 million, or 25.5%, versus $52.9 million and 25.1%. These are non-GAAP measures.
- Operating cash flow for the first nine months was $26.1 million, down from $33.8 million. Investing provided $2.6 million; financing used $35.6 million, mainly for share repurchases and dividends. Cash declined $7.3 million during the period.
- At October 3, cash and cash equivalents were $115.6 million and short-term investments were $26.0 million, totaling $141.6 million, versus $156.1 million at January 3. Current assets were $254.5 million and current liabilities $71.4 million. The balance sheet shows no debt.
- Cash dividends declared were $0.25 per share in Q3, versus $0.15 in the prior-year quarter. The company repurchased $27.9 million of stock during the first nine months and had $38.1 million remaining under repurchase authorizations at quarter-end.
Material changes and operating drivers
- Environmental and Health revenue grew 11.8% in Q3 and 4.1% for the first nine months; Engineering and Other Scientific revenue increased 1.9% and 3.2%, respectively.
- Management attributed growth to higher billable hours and realized billing rates, with demand across reactive and proactive consulting work. Q3 billable hours rose 4% and utilization improved to 74% from 72%.
- Compensation expense declined 1.9% in Q3, partly reflecting lower deferred-compensation plan asset values, but increased 0.8% for the nine-month period. Q3 G&A expense rose 18.1%, including travel and meals associated with a company-wide managers’ meeting.
- Accounts receivable, net, increased to $89.1 million from $77.0 million at fiscal year-end, including higher unbilled receivables; operating cash flow was also affected by a $13.3 million increase in receivables.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance was provided. Management said it expects some major investigations to step down as projects progress and anticipates lower activity in defense technology development amid U.S. force reductions in Afghanistan.
- Management expects compensation and other operating costs to rise as it adds talent and expands infrastructure. It said existing cash, investments, and expected operating cash flows should meet requirements for at least 12 months, including working capital, capital expenditures, repurchases, and dividends.
- Key stated risks include demand and economic conditions, engagement timing, competition and pricing, lack of backlog, recruiting and retaining key employees, regulation and tort reform, and claims against the company. The filing reported no material change to previously disclosed risk factors.
- Exponent reported no material legal proceedings and said ordinary-course claims are not expected to materially affect financial condition, results, or liquidity, although outcomes could differ from expectations. No material changes to contractual obligations were reported.
- Deferred-compensation assets are held in a rabbi trust and remain subject to creditors’ claims. Interest-rate sensitivity was described as not material for a 100-basis-point move; foreign-exchange exposure was characterized as limited.
- The company was evaluating the effect and transition method for the new revenue-recognition standard, effective for it December 31, 2016.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q3 2014, not Q3 2013.
- Track whether receivables—particularly unbilled receivables—and operating cash conversion improve.
- Assess whether revenue growth and utilization support margins as hiring, compensation, and facility costs increase.
- Separate recurring operating performance from deferred-compensation valuation effects and other non-operating items.
- Monitor project step-downs, defense technology exposure, and the pace of share repurchases and dividends relative to cash generation.