Exponent, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2018 Q2, but the supplied filing is for the quarter ended June 28, 2019, with comparisons to 2018. This summary covers the filing provided.
Business context and reporting period
Exponent provides multidisciplinary engineering and scientific consulting services. Its two reportable segments are Engineering and Other Scientific, and Environmental and Health. The filing reports unaudited results for the three and six months ended June 28, 2019; the comparable 2018 period ended June 29, 2018.
Financial performance and liquidity
- Q2 revenue: $106.5 million, up 11.4%; revenue before reimbursements was $100.3 million, up 11.4%. Engineering and Other Scientific revenue grew 12.6%; Environmental and Health grew 6.2%.
- Q2 earnings: Operating income was $24.8 million, up 10.4%; net income was $21.0 million, up 13.9%. Diluted EPS rose to $0.39 from $0.34. Operating margin on revenue before reimbursements was approximately 24.8%, versus 25.0% in Q2 2018.
- Six-month results: Revenue was $205.5 million, up 7.0%; operating income was $40.6 million, down 7.9%; net income was $43.7 million, up 12.7%; diluted EPS was $0.81 versus $0.72. The earnings increase was supported by higher other income and a lower effective tax rate.
- Cash flow: Six-month operating cash flow was $24.8 million, compared with $27.9 million. Capital expenditures were $12.5 million in the cash-flow statement (including $2.0 million accrued at period end); investing cash outflow was $20.2 million. Financing cash outflow was $27.2 million, including $16.9 million of dividends and dividend equivalents.
- Liquidity and debt: Cash and cash equivalents were $104.5 million and short-term investments $90.0 million, totaling $194.5 million, down from $208.6 million at year-end 2018. Current assets were $334.7 million and current liabilities $92.9 million. The balance sheet reports no debt; operating lease liabilities totaled $23.4 million.
- Shareholder returns: Dividends declared were $0.16 per share for Q2, versus $0.13 a year earlier. No shares were repurchased in the first half; $92.5 million remained authorized. The board declared a further $0.16-per-share dividend payable in September 2019, subject to stated record-date terms.
Material changes and management commentary
- Management cited broad client demand, including safety and integrity assessments of electric utility infrastructure, large international capital projects, and work in human factors, engineering, biomedical, and environmental practices. Billable hours rose 9% and utilization was 76% in Q2; technical FTEs increased 7% to 890.
- A wildfire-related utility project contributed approximately 4% of Q2 revenue before reimbursements. Management expects this work to continue but step down over time. A large consumer-products human-factors project that supported 2018 comparisons was completed in Q3 2018.
- Six-month operating income fell despite higher revenue, with corporate operating expense increasing to $27.9 million from $20.4 million. Compensation, other operating costs, and general and administrative expenses also rose.
- Other income increased substantially, partly reflecting interest income and deferred-compensation-plan investment gains. The plan’s asset-value changes were offset by corresponding compensation expense; this is not equivalent to recurring operating growth.
- Capital spending increased, primarily due to construction of an office and laboratory facility in Natick, Massachusetts. Management expects continued investment and expects compensation and other operating costs to rise as it hires and expands infrastructure.
Outlook, risks, contingencies, and unusual items
- Management stated that existing cash, investments, and operating cash generation should cover working capital, capital expenditures, commitments, repurchases, dividends, and other liquidity needs for at least the next 12 months. No quantified revenue or earnings guidance was provided.
- Engagements can be delayed or terminated by clients; backlog is small relative to revenue and is not a reliable forecast indicator. Results may vary with project timing, staffing, utilization, and hiring and retention of skilled personnel.
- PG&E filed for Chapter 11 bankruptcy. Exponent reported $3.0 million in pre-bankruptcy receivables and expected to collect substantially all of it, while acknowledging uncertainty. It continued post-petition work and expected payment in the ordinary course.
- The company adopted lease accounting in 2019, recognizing operating lease right-of-use assets of $22.7 million and lease liabilities totaling $23.4 million at June 28. Management said adoption materially affected the balance sheet but not the income statement.
- Other disclosed risks include competition and pricing pressure, client credit risk, professional liability and litigation, regulatory or tort-reform changes, data security and privacy, international and foreign-exchange exposure, and economic downturns. Management reported no material legal proceedings and said ordinary-course legal matters were not expected to materially affect the company.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q2 2019, not Q2 2018.
- Track whether utility wildfire-related work continues or steps down as management expects, and monitor project concentration and client demand.
- Review receivable collections, particularly the $3.0 million PG&E pre-bankruptcy balance, and the increase in unbilled receivables and the allowance for losses and doubtful accounts.
- Assess whether operating cash flow recovers from the prior-year level and whether Natick construction spending, dividends, and any repurchases remain supported by liquidity.
- Separate recurring operating performance from deferred-compensation investment gains and stock-based tax benefits when evaluating earnings growth.