Business context and reporting period
Exponent, Inc. is an engineering and scientific consulting firm with Engineering and Other Scientific and Environmental and Health segments. The supplied filing is a Form 10-Q for the quarter ended September 28, 2018—not 2017 Q3 as stated in the request. It compares Q3 and the first nine months of 2018 with the corresponding 2017 periods. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $95.3 | $87.6 | $287.4 | $259.5 |
| Revenue before reimbursements | $88.7 | $82.4 | $269.4 | $246.9 |
| Operating income | $20.6 | $19.3 | $64.7 | $54.3 |
| Net income | $17.5 | $14.6 | $56.2 | $45.0 |
| Diluted EPS | $0.32 | $0.27 | $1.04 | $0.83 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $46.8 | $27.0 |
- Q3 revenue grew 8.8%; revenue before reimbursements grew 7.7%. Net income rose 19.2%. Nine-month revenue grew 10.7% and net income rose 24.9%.
- Q3 operating margin was approximately 21.6% of reported revenue, versus 22.0% a year earlier; nine-month operating margin was approximately 22.5%, versus 20.9%. EBITDA as a percentage of revenue before reimbursements was 28.0% in Q3 and 27.6% year to date, compared with 28.2% and 26.6%, respectively.
- At September 28, 2018, cash and cash equivalents were $121.0 million and short-term investments were $81.4 million, totaling $202.4 million. Current assets were $336.5 million and current liabilities $88.1 million. No borrowings or debt balance are shown in the supplied balance sheet.
- Nine-month investing cash use was $22.0 million, including $12.2 million of capital expenditures; financing cash use was $28.3 million, mainly dividends and payroll taxes on restricted stock units. Cash declined $3.8 million from year-end 2017.
- Total assets were $480.9 million, liabilities $150.3 million, and stockholders’ equity $330.6 million. The company declared dividends of $0.13 per share in each 2018 quarter; a further $0.13 dividend was announced for payment in December 2018.
Material changes versus prior periods
- Engineering and Other Scientific revenue increased 10.2% in Q3 and 12.0% year to date; Environmental and Health revenue increased 3.3% and 5.8%, respectively. Management attributed growth to higher billing rates and, primarily in Engineering, increased billable hours and demand across several practices.
- Q3 billable hours rose 3%, while utilization fell to 73% from 76%; technical full-time equivalent employees increased 7% to 843. Management linked lower utilization partly to completion of a large human-factors assessment during the quarter. That project contributed about 3% of Q3 revenue before reimbursements, versus 8% a year earlier.
- Compensation expense rose 8.1% in Q3 and 7.1% year to date, reflecting staffing, benefits, bonuses and stock compensation. Reimbursable expenses grew 26.8% in Q3 and 43.3% year to date. Nine-month G&A declined slightly, while other operating expenses increased.
- The effective tax rate fell to 27.2% in Q3 from 33.5%, and to 21.2% for nine months from 27.2%, principally reflecting the lower U.S. federal tax rate. The year-to-date rate also benefited from share-based award tax benefits.
- Capital expenditures were $12.2 million in the cash flow statement for the first nine months, compared with $3.4 million a year earlier. The company purchased land in Natick, Massachusetts for $5.2 million and is building office and laboratory facilities.
Outlook, risks and unusual items
- No numeric revenue or earnings guidance is provided. Management said it expects compensation costs to rise as it hires selectively and adjusts pay, and expects additional operating and G&A spending as it adds talent and invests in infrastructure. It expects cash resources and operating cash generation to cover needs for at least the next 12 months.
- Management described strong demand in several practices and industries, but cautioned that client engagements can be delayed or terminated, backlog is small relative to revenue and is not a reliable predictor, and quarterly results can fluctuate with project timing, staffing and utilization.
- One client accounted for 12% of Q3 revenue, 14% of nine-month revenue and 17% of accounts receivable at September 28, 2018. Client concentration and collection risk warrant attention.
- Key risks include hiring and retaining qualified staff, competition and pricing, economic or regulatory changes affecting demand, professional liability and litigation, data security and privacy, international currency exposure, and dependence on large clients. The company reported no material legal proceedings; routine claims are not expected by management to materially affect results, though outcomes remain uncertain.
- The company adopted the new revenue standard in 2018 with no material cumulative adjustment. It expected the new lease standard to take effect at the start of fiscal 2019 and said it would materially increase reported assets and liabilities. Interest-rate sensitivity was described as not material for a 100-basis-point move; the company does not hedge foreign currency exposure.
Important facts for investors to verify
- Confirm the intended period: this source is a 2018 Q3 10-Q, despite the request’s 2017 Q3 label.
- Assess whether lower Q3 utilization and completion of the large human-factors project affect subsequent billable hours, revenue growth and margins.
- Review the Natick construction spending, remaining capital requirements and the balance-sheet impact of lease accounting adoption.
- Monitor the largest client’s share of revenue and receivables, collections, and any changes in client concentration.
- Evaluate the sustainability of earnings growth, including the effects of tax-rate changes and deferred-compensation investment gains and matching expenses.
- Check subsequent dividend declarations, share repurchases and any updates to management’s outlook or identified risks.