Exponent, Inc. — Form 10-Q Summary
Reporting-period note: The request identifies 2016 Q1, but the filing itself covers the three months ended March 31, 2017, compared with the three months ended April 1, 2016. The summary below follows the filing.
Business context and period
Exponent is an engineering and scientific consulting firm operating through Engineering and Other Scientific, and Environmental and Health segments. Results are unaudited. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance
| Metric | Q1 2017 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $84.1 million | $83.2 million | +1.2% |
| Revenue before reimbursements | $80.5 million | $79.0 million | +1.9% |
| Operating income | $14.6 million | $16.4 million | -11.0% |
| Net income | $16.6 million | $15.4 million | +8.0% |
| Diluted EPS | $0.61 | $0.56 | +8.9% |
| Operating cash flow | $(1.8) million | $0.3 million | Lower |
| Capital expenditures | $1.3 million | $1.5 million | Lower |
- Operating margin on revenue before reimbursements was approximately 18.2%, versus 20.8% a year earlier. EBITDA was $18.7 million, or 23.3% of revenue before reimbursements, compared with $19.0 million, or 24.1%.
- Net income growth reflected lower income tax expense, not stronger operating income. The effective tax rate was 4.8%, versus 13.4%; excess tax benefits from share-based awards were $6.0 million ($0.22 per diluted share), compared with $4.5 million ($0.16 per share).
- Engineering and Other Scientific revenue increased 2.9% to $66.7 million; Environmental and Health revenue fell 4.9% to $17.4 million. Segment operating income rose in both, but corporate operating expense increased to $13.2 million from $9.9 million.
- Compensation and related expense rose 4.6% to $54.4 million; general and administrative expense rose 20.2% to $4.2 million, partly reflecting a managers’ meeting and 50th-anniversary marketing. Reimbursements fell 13.1% to $3.7 million.
Balance sheet, liquidity and capital returns
- At March 31, 2017, cash and cash equivalents were $87.1 million and short-term investments were $67.8 million, totaling $154.9 million, down from $173.7 million at December 30, 2016. Current assets were $263.6 million and current liabilities $57.4 million.
- Total liabilities were $113.5 million; the balance sheet presents no borrowings. Management said existing cash and investments should cover working capital, capital spending, commitments, repurchases and dividends for at least 12 months.
- Cash declined $27.9 million during the quarter. Operating activities used $1.8 million, investing activities used $10.3 million and financing activities used $15.9 million. The company cited first-quarter annual bonus payments as a typical operating cash requirement.
- The company paid dividends of $0.21 per share, up from $0.18 a year earlier, and declared another $0.21 dividend payable June 23, 2017, subject to the stated record date. It repurchased 22,666 shares for $1.3 million and had $56.0 million remaining under repurchase authorizations.
Changes, outlook and risks
- Management described demand as good across a diverse client base, citing strength in human factors, construction consulting, and polymer science and materials chemistry. This was partly offset by softness in oil and gas, industrial chemicals and health sciences. Billable hours were nearly flat at 296,000 versus 295,000; utilization was 74% in both periods.
- No quantified revenue or earnings guidance was provided. Management expects compensation costs, excluding deferred-compensation market movements, to rise with selective hiring and market pay adjustments; it also expects other operating expenses to grow with hiring and infrastructure investment.
- In April 2017, the company agreed to buy 2.9 acres in Natick, Massachusetts, for $5.2 million for planned office and laboratory facilities. The agreements are contingent on feasibility, environmental and government reviews and may be terminated if the site is unsuitable.
- Key stated risks include demand and engagement timing, economic and industry conditions, competition and pricing, lack of backlog, retaining key employees, regulation and claims. One customer accounted for 12% of quarterly revenue. Management said legal matters were not expected to materially affect the company, while acknowledging litigation uncertainty.
- The company identified foreign-exchange exposure and does not hedge it; a 10% change in relevant local currency value could result in an estimated $190,000 gain or loss on net assets denominated in non-functional currencies. It reported no material change in interest-rate risk.
- Adoption of the new revenue standard was expected to have no material impact; the company anticipated modified-retrospective adoption in fiscal 2018. The new lease standard, effective for the company in fiscal 2019, is expected to materially increase reported assets and liabilities.
Important facts for investors to verify
- Confirm the intended period: the request says 2016 Q1, while this filing reports Q1 2017.
- Assess how much earnings and EPS growth depended on share-based-award tax benefits and whether those benefits recur.
- Monitor operating margin, corporate costs and cash conversion, including the effect of annual bonus payments and receivable growth.
- Track segment demand, the 12% customer revenue concentration, and exposure to oil and gas, industrial chemicals and foreign currencies.
- Check conditions and execution of the proposed Natick land purchase and planned facilities, as well as future dividends and repurchases.