Exponent, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2019 Q2, but the supplied filing is Exponent’s unaudited Form 10-Q for the quarter ended July 3, 2020, comparing results with the quarter ended June 28, 2019. The filing was signed August 7, 2020. Dollar amounts below are rounded to millions unless noted.
Business context and reporting period
Exponent is an engineering and scientific consulting firm. It reports two segments: Engineering and Other Scientific, and Environmental and Health. The filing covers the three and six months ended July 3, 2020.
Financial performance and position
- Second-quarter revenue: $92.0 million, down 13.6% year over year. Revenue before reimbursements was $87.9 million, down 12.4%.
- Segment revenue: Engineering and Other Scientific revenue fell 16.9% to $72.1 million; Environmental and Health revenue rose 1.2% to $19.9 million.
- Second-quarter profit: Operating income was $9.1 million versus $24.8 million; net income was $16.3 million versus $21.0 million. Diluted EPS was $0.31 versus $0.39. The reported operating margin was approximately 9.9%, compared with 23.3% a year earlier.
- First-half results: Revenue was $198.0 million, down 3.7%; operating income was $45.1 million versus $40.6 million; net income was $42.6 million versus $43.7 million; diluted EPS was $0.80 versus $0.81.
- Cash flow: First-half operating cash flow was $34.2 million versus $24.8 million. Investing activities provided $18.5 million, primarily reflecting investment maturities and lower capital expenditures. Financing used $72.9 million, including $40.0 million of stock repurchases and $20.1 million of dividends and dividend equivalents.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $190.2 million at July 3, down from $231.6 million at January 3. Current assets were $314.3 million and current liabilities $89.8 million. The filing reports no borrowings; it does report operating lease liabilities totaling $20.7 million.
- Shareholder returns: The company repurchased 636,000 shares for $40.0 million in the first half and had $75.5 million of authorization remaining at July 3. The board subsequently declared a $0.19-per-share dividend, payable September 25, 2020.
Material changes and management commentary
- COVID-19 restrictions delayed litigation support projects, field inspections, laboratory testing and human participant studies. Management identified transportation and oil and gas work as particularly affected; utility integrity-management work and chemical regulation and food safety showed relative strength.
- Second-quarter billable hours declined 15% to 299,000, and utilization fell to 64% from 76%. Technical full-time equivalent employees increased 1% to 899.
- Management attributed much of the first-half revenue and margin pressure to pandemic-related delays. It reported that net revenues in the first three weeks of Q3 were approximately 5%–8% below the comparable prior-year period and cautioned that further short-term declines were possible.
- Second-quarter other income included a substantial deferred-compensation-plan investment gain, with a corresponding compensation expense. The plan-related income and expense largely offset; this volatility makes reported other income and compensation less representative of underlying operating trends.
- The first-half effective tax rate was 6.2% versus 16.2%, primarily reflecting a higher excess tax benefit from stock-based awards. The CARES Act employee retention credit reduced second-quarter employer payroll taxes by $1.6 million.
Risks, contingencies and outlook
- Management said available cash, investments and expected operating cash flow should fund working capital, capital expenditures, commitments, repurchases and dividends for at least the next twelve months, while noting continued monitoring of pandemic effects and credit markets.
- The company increased its allowance for contract losses and doubtful accounts to $6.2 million, including approximately $1.45 million related to COVID-19 uncertainty. It had $3.0 million of pre-bankruptcy receivables from PG&E and expected to collect substantially all, while acknowledging bankruptcy-related uncertainty.
- Two clients each represented 11% of second-quarter revenue. No single client exceeded 10% of first-half revenue or period-end accounts receivable.
- Management cited pandemic duration and client demand, delayed court proceedings, employee retention, utilization, collections, competition and the variable timing of engagements as key risks. The company said its engagements generally are terminable or postponable and backlog is not a reliable indicator of future revenue.
- The company reported no material legal proceedings and stated that its disclosure controls were effective as of July 3, 2020. No material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Confirm the period: the supplied filing reports Q2 2020, not Q2 2019.
- Track whether the Q3 revenue decline and COVID-related project delays persisted, particularly in litigation support, transportation and oil and gas.
- Assess whether receivable reserves, including the COVID-related allowance and PG&E exposure, remain adequate as collections develop.
- Separate deferred-compensation investment gains and losses and stock-based tax benefits from recurring operating performance.
- Monitor cash and investment balances alongside dividends, repurchases and any changes to the board’s capital-return decisions.