Exponent, Inc. — Form 10-Q Summary
Period: Quarter ended March 29, 2019. The request metadata says “2018 Q1,” but the filing is for the first quarter of 2019; its comparable quarter ended March 30, 2018. Amounts below are in U.S. dollars.
Business context and reporting period
Exponent is an engineering and scientific consulting firm with two reportable segments: Engineering and Other Scientific, and Environmental and Health. Its work is primarily performed under time-and-materials or fixed-price arrangements, generally terminable or postponable by clients. The unaudited quarterly statements are prepared under U.S. GAAP.
Financial performance and liquidity
| Metric | Q1 2019 | Comparable period | Change |
|---|---|---|---|
| Revenue | $99.0 million | $96.5 million | +2.7% |
| Revenue before reimbursements | $93.4 million | $90.7 million | +3.0% |
| Operating income | $15.8 million | $21.6 million | −27.1% |
| Net income | $22.7 million | $20.3 million | +11.7% |
| Diluted EPS | $0.42 | $0.38 | +10.5% |
| Operating cash flow | −$12.3 million | +$3.7 million | Turned negative |
Operating margin on reported revenue was approximately 15.9%, down from 22.4%. EBITDA as a percentage of revenue before reimbursements was 25.5%, versus 25.9%; management attributed the decline primarily to lower utilization. The effective tax rate was 2.6%, compared with 9.4%; excluding excess tax benefits on stock-based awards, management said the rates were 26.9% and 26.8%, respectively.
Cash and cash equivalents were $79.1 million and short-term investments were $92.7 million at March 29, 2019, totaling $171.8 million versus $208.6 million at December 28, 2018. Cash declined by $48.0 million during the quarter. The company reported no debt balance in the presented balance sheet. Current assets were $304.6 million and current liabilities were $72.2 million.
Investing cash outflow was $16.5 million, including net purchases of short-term investments; financing cash outflow was $19.4 million, primarily reflecting taxes on restricted stock units and dividends. Capital expenditures were $6.3 million. The company said cash, investments, and expected operating cash generation should meet needs for at least the next 12 months.
Material changes versus the prior comparable period
- Engineering and Other Scientific revenue increased 4.2% to $80.3 million; Environmental and Health revenue declined 3.3% to $18.8 million.
- Operating expenses rose 11.2% to $83.3 million, led by compensation and related expenses, up 13.0% to $65.1 million. Corporate operating expense increased to $16.4 million from $10.9 million.
- Revenue grew, but operating income fell as costs increased and utilization declined to 72% from 77%. Billable hours were unchanged at 329,000; technical full-time-equivalent employees increased 7% to 883.
- Net income increased despite lower operating income, supported by lower income taxes and higher other income. Other income included gains on deferred-compensation plan assets that were substantially offset by compensation expense.
- Operating cash flow weakened, primarily due to a larger increase in accounts receivable and a larger reduction in accrued payroll and employee benefits.
- Adoption of the new lease standard added $23.9 million of operating lease right-of-use assets and $24.3 million of lease liabilities. The company said adoption materially affected the balance sheet but not income.
Outlook, commentary, risks, and unusual items
- Management described demand as strong across a diverse client base, citing human factors, materials and corrosion engineering, thermal sciences, structural engineering, construction consulting, chemical regulation and food safety, and infrastructure integrity work. No quantitative earnings or revenue guidance was provided.
- Management expects compensation costs, excluding deferred-compensation valuation changes, to rise as it adds talent and adjusts pay; it also expects other operating and general and administrative expenses to increase with hiring, infrastructure investment, business development, and staff development.
- Q1 2018 included a large human-factors assessment, about 8% of revenue before reimbursements, completed in 2018. Management said it did not anticipate another project of that scale. Its completion contributed to lower utilization and billable hours in the affected practices.
- The $5.7 million excess tax benefit from stock-based awards reduced the reported tax rate; management’s adjusted effective-tax-rate comparison was broadly stable year over year.
- PG&E filed for bankruptcy in January 2019. Exponent had $6.0 million of receivables outstanding at filing and expects to collect substantially all pre-bankruptcy amounts, but notes that ultimate collection is uncertain. The company continued post-bankruptcy work and expects payment in the ordinary course.
- The board authorized an additional $75 million for share repurchases in January. No shares were repurchased in the quarter; remaining authorization was $92.5 million. A $0.16-per-share dividend was declared after quarter-end, payable June 21, 2019. Future dividends remain subject to board declaration.
- Risks include uneven, reactive engagement timing and limited backlog visibility; hiring and retention constraints; competition and pricing pressure; client credit risk; professional liability and litigation; regulatory or tort-reform changes; cybersecurity and data privacy; international and foreign-exchange exposure; and economic downturns. The filing reported no material legal proceedings and no material changes in contractual obligations.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: this filing covers Q1 2019, not Q1 2018.
- Monitor utilization, staffing growth, compensation costs, and whether revenue gains convert into operating income.
- Track collections and ultimate recovery of PG&E receivables, along with working-capital movements and operating cash flow.
- Distinguish recurring operating performance from deferred-compensation market movements and stock-based-award tax benefits.
- Review the use of the repurchase authorization and the sustainability of dividends against cash generation and investment needs.