Exponent, Inc. — Form 10-Q Summary
Reporting-period discrepancy: The request metadata says 2015 Q2, but this filing covers the three and six months ended July 1, 2016 (compared with periods ended July 3, 2015). The filing is for 2016 Q2.
Business context and reporting period
Exponent is an engineering and scientific consulting firm. It reports two segments: Engineering and Other Scientific, and Environmental and Health. The financial statements are unaudited.
Financial results and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $77.3 | $79.9 | $160.5 | $160.2 |
| Revenue before reimbursements | $73.3 | $75.3 | $152.3 | $151.4 |
| Operating income | $14.9 | $18.7 | $31.4 | $33.7 |
| Net income | $10.5 | $11.7 | $25.8 | $22.0 |
| Diluted EPS | $0.38 | $0.43 | $0.95 | $0.80 |
| Operating margin | 19.3% | 23.4% | 19.5% | 21.1% |
| Net margin | 13.5% | 14.6% | 16.1% | 13.8% |
| EBITDA margin on revenue before reimbursements | 24.6% | 27.3% | 24.3% | 25.8% |
Q2 revenue declined 3.2% and net income declined 10.6% year over year. First-half revenue was nearly flat, while net income rose 17.1%; the comparison benefited significantly from $4.788 million in excess tax benefits recognized in 2016 under early adoption of ASU 2016-09. Excluding that benefit, first-half net income was $21.015 million and diluted EPS was $0.77. The Q2 excess tax benefit was $0.327 million; excluding it, diluted EPS was $0.37.
- Cash flow: First-half operating cash flow was $14.5 million versus $14.8 million. Investing activities used $5.9 million, including $3.4 million of capital expenditures; financing activities used $20.4 million, including $9.5 million of dividends, $4.5 million of stock repurchases, and $7.6 million of payroll taxes on restricted stock units. Cash and cash equivalents declined $12.2 million.
- Liquidity and debt: Cash, cash equivalents, and short-term investments totaled $162.1 million at July 1, 2016, versus $171.6 million at January 1, 2016. The balance sheet reports no debt. Current assets were $272.6 million and current liabilities $62.0 million. Management said available funds should meet working capital, capital expenditure, repurchase, dividend, and other needs for at least 12 months.
- Capital returns: The company declared $0.36 per share in dividends during the first half. A further $0.18-per-share dividend was announced July 19, payable September 23, subject to the stated record date. Remaining share-repurchase authorization was $42.3 million.
Material changes and management commentary
- Q2 billable hours fell 5% to 273,000 and utilization declined to 69% from 74%; technical FTEs rose 2% to 765. Management attributed weaker results to softer demand in some sectors and a tough comparison following a major project completed in 2015.
- Q2 Engineering and Other Scientific revenue increased 2.7% to $61.0 million, primarily from higher billing rates. Environmental and Health revenue fell 20.4% to $16.3 million, reflecting fewer billable hours, the end of a major investigation, reduced oil-and-gas spending, and lower demand amid industrial-chemical consolidation.
- For the first half, Engineering and Other Scientific revenue rose 5.6% to $125.8 million, while Environmental and Health revenue fell 15.5% to $34.7 million. Segment operating income declined in both segments, with the sharper reduction in Environmental and Health.
- Q2 compensation expense increased 2.8%, other operating expense 7.7%, and general and administrative expense 1.4%. Management expects other operating and general and administrative expenses to grow as it selectively adds talent and invests in infrastructure and business development.
- Q2 operating income and margins weakened despite higher other income. The filing attributes much of the operating deterioration to lower utilization. Deferred-compensation plan market-value changes affected both compensation expense and other income.
Outlook, risks, contingencies, and unusual items
- The filing provides no numerical revenue or earnings guidance. Management emphasized selective hiring, developing new growth areas, expense management, cash generation, and shareholder returns.
- Risks cited include weaker economic or industry demand, engagement timing, competition and pricing, lack of backlog, attracting and retaining key employees, tort reform and regulation, and claims against the company. Management noted demand softness tied to oil and gas, intellectual-property case rulings, and industry consolidation.
- Management considered pending legal matters and ordinary-course claims not expected to have a material adverse effect, while noting outcomes could differ. No material legal proceedings were reported; no material changes to previously disclosed risk factors or contractual obligations were reported.
- Exponent early adopted ASU 2016-09 in fiscal 2016, changing the income-statement and cash-flow treatment of excess tax benefits; prior periods were not restated. The new lease standard is expected to materially increase reported assets and liabilities when adopted. The company was evaluating the revenue-recognition standard and had not determined its effect or transition method.
- The company reported interest-rate and foreign-currency exposures, does not use derivatives to hedge them, and cautioned that greater international growth could make currency fluctuations more significant. Disclosure controls were assessed as effective, with no material changes in internal control reported.
Important facts for investors to verify
- Confirm the intended filing year: the supplied filing is 2016 Q2, not 2015 Q2.
- Assess whether utilization and Environmental and Health demand recover, and how much Q2 weakness reflects temporary project timing versus sustained sector softness.
- Separate underlying earnings from the $4.788 million first-half excess tax benefit; consider its prospective accounting treatment when comparing periods.
- Monitor operating cash flow against dividends, repurchases, capital spending, and the company’s stated liquidity needs.
- Review the eventual balance-sheet impact of the lease standard and any material effects from adoption of the revenue-recognition standard.