Business context and reporting period
Exponent, Inc. provides engineering and scientific consulting services through its Engineering and Other Scientific and Environmental and Health segments. The filing covers the three months ended April 3, 2020, compared with the three months ended March 29, 2019. This differs from the request metadata identifying 2019 Q1; the filing itself reports 2020 Q1.
Financial performance and position
- Revenue was $106.0 million, up 7.0%; revenue before reimbursements was $99.7 million, also up 7.0%.
- Operating income was $36.0 million versus $15.8 million. Net income rose 16% to $26.3 million, and diluted EPS increased to $0.49 from $0.42. Reported operating income and profit comparisons were materially affected by market-value changes in the deferred compensation plan; see below.
- Operating margin was 34.0% of revenue, compared with 15.9%. EBITDA was $25.0 million versus $23.9 million, while EBITDA as a percentage of revenue before reimbursements declined to 25.0% from 25.5%.
- Cash and cash equivalents were $105.6 million and short-term investments were $46.4 million at April 3, 2020, totaling $152.0 million, down from $231.6 million at January 3, 2020. Current assets were $293.4 million and current liabilities $77.1 million.
- Operating cash flow was a use of $13.8 million, versus a use of $12.3 million. Investing activities provided $7.7 million; financing activities used $64.3 million, including $40.0 million of share repurchases and $10.3 million of dividends and dividend equivalents.
- The balance sheet reports no interest-bearing debt. Operating lease liabilities totaled $21.9 million. Stockholders’ equity was $323.5 million.
Material changes and notable items
- Engineering and Other Scientific revenue increased 5.8% to $84.9 million; Environmental and Health revenue increased 12.2% to $21.1 million. Growth reflected higher billable hours and billing rates.
- Compensation expense fell to $50.0 million from $65.1 million, while other income shifted to a net loss of $11.9 million from income of $7.6 million. The company attributed a $20.5 million year-over-year swing across these lines to deferred compensation plan asset-value changes: a $14.6 million asset-value decline in Q1 2020 versus a $5.9 million increase in Q1 2019, with a corresponding compensation-expense adjustment. This largely offsets across the two lines and is important when assessing reported operating performance.
- The tax benefit was $2.2 million, versus tax expense of $0.6 million. The company cited $8.8 million of excess tax benefits from stock-based awards, compared with $5.7 million; excluding that benefit, the effective tax rate was 27.2% versus 26.9%.
- The allowance for contract losses and doubtful accounts increased to $6.2 million from $4.3 million. The quarter’s $2.4 million provision included approximately $1.5 million related to COVID-19 economic uncertainty.
- Utilization declined to 71% from 72%; billable hours rose 6% to 348,000 and technical full-time equivalent employees increased 6% to 938.
Outlook, risks and contingencies
- Management said demand remained strong in areas including utility integrity management, chemical regulation and food safety, but the rate of new project engagements had slowed. Litigation support work, site inspections requiring travel, and user studies were affected by courthouse closures, travel limits and pandemic restrictions.
- Revenue for the first three weeks of Q2 was approximately 15%–20% below the comparable prior-year period. Management warned that continued restrictions could further reduce near-term revenue; no full-year numerical guidance was provided.
- Management believed cash, investments and expected operating cash generation would cover working capital, capital expenditures, commitments, repurchases, dividends and other liquidity needs for at least 12 months, while continuing to monitor pandemic effects.
- At April 3, the company had $3.0 million of pre-bankruptcy receivables from PG&E and expected to collect substantially all of it, while noting bankruptcy-related uncertainty. Management reported no material legal proceedings and believed existing legal matters would not materially affect the company, though outcomes remain uncertain.
- Other risks include reduced client demand, collections and credit risk, employee retention, competition and pricing, project timing, and market volatility. The company said disclosure controls were effective and remote work had not materially affected internal controls.
- The board announced a $0.19-per-share dividend payable June 26, 2020. The filing gives June 12, 2019 as the record date; investors should verify this apparent date inconsistency.
Important facts for investors to verify
- Confirm the reporting period: the filing is for Q1 2020, not Q1 2019 as the request metadata indicates.
- Assess underlying operating performance separately from deferred-compensation valuation effects and the unusually large stock-based compensation tax benefit.
- Monitor Q2 revenue trends, new engagement rates, utilization, and the duration of COVID-19-related restrictions.
- Track receivables and allowance adequacy, including the PG&E balance and pandemic-related customer credit risk.
- Verify the dividend record date, and consider the pace of repurchases and dividends alongside the decline in cash and investments.