Exponent, Inc. — Form 10-Q Summary
Period discrepancy: The request identifies 2017 Q1, but the supplied filing is for the three months ended March 30, 2018, with comparison to the three months ended March 31, 2017. This summary covers the filing provided. Unless noted otherwise, amounts are in U.S. dollars.
Business context and reporting period
Exponent is an engineering and scientific consulting firm serving clients through two reportable segments: Engineering and Other Scientific, and Environmental and Health. The financial statements are unaudited and cover the first quarter of fiscal 2018.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $96.5 million | $84.1 million | +14.7% |
| Revenue before reimbursements | $90.7 million | $80.5 million | +12.7% |
| Operating income | $21.6 million | $14.6 million | +47.6% |
| Net income | $20.3 million | $16.6 million | +22.7% |
| Diluted EPS | $0.75 | $0.61 | +23.0% |
| Operating cash flow | $3.7 million | $(1.8) million | Improved |
- Operating margin was approximately 22.4%, up from 17.4%; net margin was approximately 21.1%, compared with 19.7%.
- EBITDA was $23.5 million, or 25.9% of revenue before reimbursements, versus $18.7 million, or 23.3%, in Q1 2017. These are non-GAAP measures.
- Engineering and Other Scientific revenue grew 15.5% to $77.0 million; Environmental and Health revenue grew 11.3% to $19.4 million.
- Billable hours rose 11%, utilization increased to 77% from 74%, and technical full-time equivalent employees increased 8% to 825.
- At March 30, 2018, cash and cash equivalents were $103.2 million and short-term investments were $75.5 million, totaling $178.6 million. Current assets were $305.5 million and current liabilities were $69.6 million. The balance sheet does not show borrowings or debt.
- Cash declined $21.6 million during the quarter. Investing used $10.7 million, including $6.8 million of capital expenditures; financing used $15.3 million, including $7.0 million of dividends and equivalents and $8.6 million of payroll taxes on restricted stock units.
Material changes and unusual items
- Growth reflected higher billable hours and billing rates, stronger demand across several practices, and a large consumer-products human factors assessment. That project represented about 8% of revenue before reimbursements, compared with 5% a year earlier.
- Management attributed improved profitability partly to higher utilization, effective headcount management, and operating leverage from the large project.
- Other income fell to $0.9 million from $2.8 million, primarily because deferred-compensation plan investment values decreased in 2018 versus increased in 2017. This was substantially offset by corresponding compensation expense changes.
- The effective tax rate was 9.4%, versus 4.8%. Management cited lower excess tax benefits from share-based awards; excluding those benefits, the rates were 26.8% and 39.4%, respectively.
- Capital expenditures rose from $1.3 million to $6.8 million. The company purchased 2.9 acres in Natick, Massachusetts, for $5.2 million, intending to build office and laboratory facilities.
- The company adopted the new revenue recognition standard in Q1 2018; management reported no material cumulative adjustment and no change to its over-time recognition model. The new lease standard, effective for the company in fiscal 2019, is expected to materially increase reported assets and liabilities.
Outlook, risks, and contingencies
No quantified revenue or earnings guidance is provided. Management described strong demand and plans to selectively hire, invest in infrastructure, and pursue growth opportunities. It expects compensation, other operating expenses, and general and administrative expenses to increase with hiring and investment. Management said available cash, investments, and operating cash generation should fund needs for at least the next 12 months, including capital expenditures, dividends, and share repurchases.
- Demand, engagement timing, competition and pricing, the absence of backlog, and the ability to attract and retain key employees may affect results. Management also cites regulation, tort reform, and claims exposure.
- A single client generated 16% of Q1 2018 revenue and represented 21% of accounts receivable at March 30, 2018, creating customer concentration exposure.
- The company has foreign-currency exposure and does not hedge with foreign-exchange contracts. A 10% currency movement on disclosed non-functional-currency net assets would result in an estimated $330,000 gain or loss.
- Various legal matters arise in the ordinary course; management does not expect them to materially affect financial condition, results, or liquidity. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q1 2018, not Q1 2017.
- Assess how much growth and margin improvement depends on the large human factors project and whether elevated utilization is sustainable.
- Monitor the 16% revenue concentration and the same client’s 21% share of receivables.
- Review the Natick facility investment, future capital spending, and the expected balance-sheet impact of lease accounting.
- Distinguish recurring operating performance from deferred-compensation valuation changes and unusually large share-based tax benefits.