Exponent, Inc. — Form 10-Q Summary
Period discrepancy: The request metadata identifies 2016 Q3, but the filing is for the quarter ended September 29, 2017, and compares results with the quarter ended September 30, 2016. The nine-month period is also reported for 2017 versus 2016.
Business context
Exponent is an engineering and scientific consulting firm with Engineering and Other Scientific and Environmental and Health segments. The unaudited financial statements cover the three and nine months ended September 29, 2017.
Key financial metrics
Amounts below are in millions of dollars except per-share data.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $87.6 | $77.6 | $259.5 | $238.1 |
| Revenue before reimbursements | $82.4 | $74.2 | $246.9 | $226.4 |
| Operating income | $19.3 | $15.6 | $54.3 | $47.0 |
| Net income | $14.6 | $11.3 | $45.0 | $37.1 |
| Diluted EPS | $0.54 | $0.42 | $1.67 | $1.36 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $27.0 | $37.2 |
Q3 revenue grew 12.8%, operating income 23.8%, and net income 29.7% year over year. Nine-month revenue rose 9.0%, operating income 15.5%, and net income 21.3%. Q3 operating margin was approximately 22.1% of total revenue, versus 20.1% a year earlier; the filing reports EBITDA at 28.2% of revenue before reimbursements, up from 26.1%.
At September 29, 2017, cash and cash equivalents were $89.8 million and short-term investments $75.8 million, totaling $165.6 million, down from $173.7 million at December 30, 2016. Current assets were $301.1 million and current liabilities $81.3 million. The balance sheet lists no debt line item. Total liabilities were $135.6 million. Nine-month operating cash flow declined to $27.0 million, principally due to a $39.1 million increase in accounts receivable. Capital expenditures were $3.4 million. Cash used for dividends was $16.4 million and share repurchases were $8.4 million.
Material changes and operating drivers
- Engineering and Other Scientific revenue rose 15.4% in Q3 and 10.8% for the first nine months; Environmental and Health revenue rose 3.1% and 2.6%, respectively.
- Management cited higher demand for proactive design and regulatory consulting, human factors work, international construction disputes, and lithium-ion battery consulting. Utilization increased to 76% in Q3 from 70%; billable hours increased 12% and technical full-time equivalent employees 3%.
- A large human factors assessment accounted for approximately 8% of Q3 revenue before reimbursements and 6% for the first nine months. One client represented 17% of Q3 revenue, 14% of nine-month revenue, and 29% of receivables at quarter-end.
- Q3 compensation expense rose 7.7%, slower than revenue growth, while general and administrative expense increased 8.4%. Nine-month G&A rose 16.4%, partly due to a biennial managers’ meeting and anniversary-related marketing.
- Q3 effective tax rate was 33.5%, versus 37.0%; the nine-month rate was 27.2%, versus 29.1%. Management attributed the lower rates to share-based award tax benefits and a $437,000 release of unrecognized tax benefits after two audits concluded.
Outlook, risks and unusual items
- No formal revenue or earnings guidance was provided. Management expects compensation, other operating costs, and G&A to rise as it selectively hires, adjusts pay, invests in infrastructure, and expands business-development and staff-development efforts.
- Management believes available cash, investments, and operating cash generation will meet working capital, capital expenditure, repurchase, dividend, and other needs for at least the next 12 months. It expects to continue dividends, subject to board approval; a $0.21-per-share dividend was declared for payment in December 2017.
- The company entered contingent agreements to buy 2.9 acres in Natick, Massachusetts, for $5.2 million for planned office and laboratory facilities. Purchases depend on feasibility, environmental, and government approvals; the company may terminate if the site is unsuitable.
- Key risks include variability in consulting demand and engagement timing, competition and pricing, the absence of backlog, employee retention, regulation and litigation exposure, and foreign currency movements. The company does not hedge foreign currency exposure; a 10% currency move on identified nonfunctional-currency net assets could produce an approximately $260,000 gain or loss.
- Legal proceedings in the ordinary course were not expected by management to materially affect financial condition, results, or liquidity. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- Revenue recognition guidance effective in fiscal 2018 was not expected to have a material impact. The forthcoming lease standard was expected to materially increase balance-sheet assets and liabilities.
Investor verification priorities
- Confirm the intended period: the supplied filing is 2017 Q3, not 2016 Q3.
- Track receivables, collections, and operating cash flow, given the substantial receivables increase and lower year-to-date operating cash flow.
- Assess reliance on the large human factors project and the client that represented 29% of quarter-end receivables.
- Monitor whether utilization and demand remain strong, especially in the face of weaker oil and gas and industrial chemical demand.
- Review the Natick land-purchase contingencies, capital plans, dividend policy, and future balance-sheet effects of lease accounting.