Business context and reporting period
Exponent, Inc. is an engineering and scientific consulting firm. This is its unaudited Form 10-Q for the quarter ended September 30, 2016, with comparisons to the three and nine months ended October 2, 2015. The filing does not match the request metadata’s “2015 Q3” period.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $77.6m | $79.0m | $238.1m | $239.2m |
| Revenue before reimbursements | $74.2m | $74.5m | $226.4m | $225.9m |
| Operating income | $15.6m | $20.9m | $47.0m | $54.7m |
| Net income | $11.3m | $11.7m | $37.1m | $33.7m |
| Diluted EPS | $0.42 | $0.43 | $1.36 | $1.23 |
Q3 operating margin was approximately 20.1%, compared with 26.5% a year earlier; nine-month operating margin was approximately 19.7%, versus 22.9%. Nine-month net income increased despite slightly lower revenue, aided in part by lower income taxes. Q3 income before taxes was $17.9m, versus $18.8m.
- Engineering and Other Scientific revenue was $61.2m in Q3, up 0.3%; nine-month revenue was $187.0m, up 3.8%.
- Environmental and Health revenue was $16.4m in Q3, down 8.7%; nine-month revenue was $51.0m, down 13.4%.
- Q3 compensation and related expenses rose 11.5% to $47.8m. The filing attributes the rise to payroll and deferred-compensation-plan movements, partly offset by lower bonuses.
- Cash from operations was $37.2m for the first nine months, versus $34.3m. Capital expenditures were $13.1m, versus $4.4m. Cash used in investing was $19.1m; cash used in financing was $44.8m.
Liquidity, debt and capital allocation
At September 30, cash and cash equivalents were $98.4m and short-term investments were $52.0m, totaling $150.4m, down from $171.6m at January 1, 2016. Current assets were $257.3m and current liabilities $69.2m. The balance sheet reports no debt. Management said available cash and investments should cover working capital, capital expenditures, commitments, repurchases, dividends and other needs for at least 12 months.
The company paid $14.2m in dividends and repurchased $24.5m of stock during the nine-month period. It purchased adjacent Menlo Park property for $8.25m in August. On October 19, 2016, the board authorized an additional $35m of repurchases, bringing remaining authorization to $57.3m. A quarterly dividend of $0.18 per share was also declared, payable December 23, 2016.
Changes, outlook, risks and unusual items
- Management cited softening demand in oil and gas and industrial chemicals, fewer intellectual-property cases, and flat automotive revenue; consumer-product recalls and construction disputes partly offset weakness. Q3 billable hours fell 3% and utilization fell to 70% from 73%, while technical full-time-equivalent employees increased 2% to 761.
- Nine-month effective tax rate was 29.1%, versus 38.8%, reflecting early adoption of ASU 2016-09 and a $4.827m excess tax benefit. Excluding that benefit, the company reported a 38.3% effective tax rate and net income of $32.265m for the nine-month period. Q3 excess tax benefit was $39,000.
- Deferred-compensation plan market movements increased both compensation expense and miscellaneous income; the paired effects substantially offset. Q3 other income was $2.3m, compared with a $2.1m expense in the prior-year quarter.
- Management expects operating expenses to rise as it adds talent and invests in infrastructure and business development. No quantified revenue or earnings guidance is provided. The company said it may use cash for repurchases, dividends, capital spending or complementary acquisitions.
- Key disclosed risks include weaker service demand and economic conditions, engagement timing, competition and pricing, lack of backlog, recruiting and retention, regulation and tort reform, claims, and foreign-exchange exposure. The company does not hedge foreign currency; it estimated a 10% currency move on specified non-functional-currency net assets could cause a $140,000 gain or loss.
- Management said ordinary-course legal matters were not expected to materially affect results, liquidity or financial condition; no material legal proceeding was reported. The company bought the Pennsylvania home of its incoming president for its appraised $1.25m value and intended to resell it. The filing says the new lease standard is expected to materially increase reported assets and liabilities when adopted.
Important facts for investors to verify
- Confirm the intended filing period: the supplied filing is for Q3 2016, not Q3 2015.
- Track utilization, billable hours and segment trends, especially Environmental and Health and demand in oil and gas, industrial chemicals, intellectual property and automotive markets.
- Assess how much reported earnings and the lower nine-month tax rate reflect the $4.827m share-based-compensation tax benefit; prior-year periods were not adjusted.
- Review the effect of elevated capital expenditures, ongoing buybacks and dividends on cash balances, and the expected balance-sheet impact of lease accounting.
- Monitor accounts receivable and allowances: net receivables were $94.3m, including $34.4m unbilled, and the allowance rose to $3.8m from $2.8m.