Exponent, Inc. — Form 10-Q Summary
Period: Fiscal quarter and six months ended June 29, 2018; comparative periods ended June 30, 2017. The request metadata says “2017 Q2,” but the filing itself reports 2018 Q2.
Business context and results
Exponent provides multidisciplinary engineering and scientific consulting. Its reportable segments are Engineering and Other Scientific, and Environmental and Health. Results below are unaudited; dollar amounts are in millions except per-share data.
| Metric | Q2 2018 | Q2 2017 | First six months 2018 | First six months 2017 |
|---|---|---|---|---|
| Revenue | $95.6 | $87.8 | $192.1 | $172.0 |
| Revenue before reimbursements | $90.0 | $84.1 | $180.7 | $164.6 |
| Operating income | $22.5 | $20.3 | $44.1 | $35.0 |
| Net income | $18.4 | $13.8 | $38.8 | $30.4 |
| Diluted EPS | $0.34 | $0.26 | $0.72 | $0.56 |
| Operating margin, based on reported revenue | 23.5% | 23.1% | 22.9% | 20.3% |
| Net margin, based on reported revenue | 19.3% | 15.7% | 20.2% | 17.7% |
Financial position and cash flow
- At June 29, 2018, cash and cash equivalents were $117.8 million and short-term investments were $75.5 million, totaling $193.3 million, versus $196.4 million at year-end 2017. Current assets were $319.0 million and current liabilities $77.3 million.
- Total liabilities were $136.9 million and stockholders’ equity $318.8 million. The balance sheet presents no borrowings or debt line item.
- First-half operating cash flow was $27.9 million, versus $17.2 million a year earlier. Investing cash outflow was $12.9 million, including $8.9 million of capital expenditures; financing cash outflow was $21.7 million, including $13.7 million of dividends and dividend equivalents. Cash declined $7.0 million over the period.
- The company purchased 2.9 acres in Natick, Massachusetts, for $5.2 million, intending to develop office and laboratory facilities. It reported $45.4 million of remaining stock-repurchase authorization and no repurchases in the first half of 2018.
Changes, drivers, and management outlook
- Q2 revenue increased 8.9%; revenue before reimbursements rose 7%. First-half revenue increased 11.7%. Engineering and Other Scientific revenue rose 10.4% in Q2 and 12.9% for the half; Environmental and Health grew 2.7% and 7.0%, respectively.
- Management attributed growth to higher billable hours and billing rates, demand for proactive design consulting, product-recall work, battery technology, and chemical regulation and food safety. Q2 billable hours rose 5%, while utilization declined to 75% from 77%; technical full-time equivalent employees increased 8% to 834.
- Q2 net income rose 34%, aided in part by a lower effective tax rate: 26.1% versus 38.3%. The first-half effective rate was 18.2% versus 23.6%, reflecting the lower U.S. federal tax rate and excess tax benefits from share-based awards. Excluding those excess benefits, the first-half effective tax rate was 26.7% versus 38.8%.
- First-half EBITDA was $49.4 million, or 27.4% of revenue before reimbursements, versus $42.5 million, or 25.8%, in 2017. This is a company-defined non-GAAP measure.
- Management expects compensation, other operating, and general and administrative expenses to rise as it hires, adjusts compensation, invests in infrastructure, and expands business-development and staff-development initiatives. It expects existing liquidity and operating cash generation to meet needs for at least the next 12 months. The board declared a $0.13-per-share dividend payable September 21, 2018; future dividends remain subject to board declaration. No numerical earnings or revenue guidance is provided.
Risks, contingencies, and unusual items
- One client represented 12% of Q2 revenue and 14% of first-half revenue; that client accounted for 18% of accounts receivable at June 29, 2018. Management notes that the business has no backlog and that engagement timing, demand, competition, and retention of key employees may affect results.
- The company disclosed foreign-currency exposure and does not hedge it with foreign-exchange contracts. A 10% currency move on identified non-functional-currency net assets could result in an approximately $0.36 million gain or loss. Management said interest-rate sensitivity was not material under a 100-basis-point change.
- Management expects adoption of the leases standard in fiscal 2019 to materially increase reported assets and liabilities. The company adopted the new revenue standard in 2018; adoption had no material cumulative effect.
- Legal actions arise in the ordinary course, but management believes they will not materially adversely affect financial condition, results, or liquidity. The filing reports no material legal proceedings and no material changes to previously disclosed risk factors.
- Stockholders approved a two-for-one stock split effective May 31, 2018; share and per-share data for prior periods were retroactively adjusted.
Key facts for investors to verify
- Whether growth in billable hours and rates can continue while utilization has softened and staffing expands.
- The sustainability of major-client work, including the large human-factors project, and the exposure from client revenue and receivable concentration.
- How much earnings growth reflects operating performance versus lower tax rates and share-based-award tax benefits.
- Capital spending plans for the Natick facilities, and the effect of dividends, potential repurchases, and future hiring on cash balances.
- The quantified balance-sheet and expense effects of lease-standard adoption; this filing says the balance sheet will be materially grossed up but does not provide a clear amount.