Exponent, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2017 (52 weeks). Although the request metadata says “2016 Q4,” the supplied filing is the 2017 annual report; it also includes unaudited fourth-quarter 2017 results. Dollar amounts below are in millions unless otherwise indicated.
Business context and reporting period
Exponent is a science and engineering consulting firm serving commercial and government clients through more than 90 technical disciplines. Its two reportable segments are Engineering and Other Scientific, and Environmental and Health. Work is project-based and includes both proactive consulting and reactive investigations, litigation support, and product recall work. One client contributed 14% of 2017 revenue; no client exceeded 10% in 2016 or 2015.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 | Change / note |
|---|---|---|---|
| Revenue | $347.8 | $315.1 | +10.4% |
| Revenue before reimbursements | $329.7 | $299.2 | +10.2% |
| Operating income | $72.1 | $61.9 | +16.4%; operating margin 20.7% vs. 19.7% |
| Income before taxes | $82.5 | $69.1 | +19.4% |
| Net income | $41.3 | $47.5 | -13.0%; net margin 11.9% vs. 15.1% |
| Diluted EPS | $1.53 | $1.75 | Down 12.6% |
| Operating cash flow | $67.8 | $66.9 | Capital expenditures were $4.7; derived operating cash flow less capex was $63.1 |
| Cash, equivalents and short-term investments | $196.4 | $173.7 | At fiscal year-end |
| Working capital | $222.4 | $193.8 | At fiscal year-end |
The company reported no interest-bearing debt on its balance sheet. Total liabilities were $150.5 million, including $59.1 million of deferred compensation obligations. Total assets were $439.6 million and stockholders’ equity was $289.1 million. Cash flows from investing and financing activities were uses of $17.7 million and $41.3 million, respectively; financing outflows included $21.8 million of dividends and $11.9 million of share repurchases.
Engineering and Other Scientific revenue rose 11.8% to $277.6 million; Environmental and Health revenue rose 5.1% to $70.2 million. Segment operating income was $93.5 million and $22.3 million, respectively, before corporate operating expense.
Material changes versus the prior comparable period
- Growth reflected increased billable hours and billing rates. Billable hours rose 9% to 1.218 million, and utilization increased to 75% from 70%. Management cited strength in construction consulting, human factors, mechanical engineering, polymer science and materials chemistry, and chemical regulation and food safety.
- Operating income and pre-tax income improved, while net income and EPS fell because of a $16.5 million tax expense related to the Tax Cuts and Jobs Act. This included $15.1 million from remeasuring deferred tax assets at the lower enacted federal rate and $1.4 million of net mandatory repatriation tax.
- The effective tax rate increased to 49.9% from 31.3%. Excluding the tax-law charge and excess tax benefits from share-based awards, management said the 2017 effective rate would have been 37.8%, versus 38.3% in 2016.
- Accounts receivable increased to $110.1 million from $87.4 million. Operating cash flow was broadly stable despite a $25.2 million cash use from the increase in accounts receivable.
- FY 2017 quarterly results included a fourth-quarter net loss of $3.7 million, compared with fourth-quarter 2016 net income of $10.4 million, principally due to the tax-law charge. Fourth-quarter 2017 revenue was $88.3 million and operating income was $17.8 million.
Outlook, risks, contingencies and unusual items
- Management expected an effective tax rate of approximately 22%–23% for fiscal 2018, reflecting the new tax law. It also noted that its analysis of the law’s GILTI provisions was ongoing.
- Management described continued selective hiring, investment in emerging growth areas and infrastructure, cash generation, and dividends and repurchases as priorities. It expects compensation, other operating expenses, and general and administrative expenses to rise as it adds talent and invests in the business. No revenue or earnings guidance was provided.
- Revenue visibility is limited: engagements are generally terminable or postponable by clients, and backlog is small relative to annual revenue and not a reliable forecast indicator. Results can vary with engagement timing, staffing and utilization.
- Key risks include competition and pricing pressure, retaining skilled staff, client concentration and collection risk, economic or regulatory changes affecting demand, professional liability and litigation, conflicts that restrict engagements, government contract scrutiny and foreign currency exposure. One client represented 24% of year-end accounts receivable.
- The company reported no material legal proceedings, but disclosed ordinary-course claims and contingencies. Operating lease commitments totaled $30.0 million, with $1.7 million of purchase obligations. A proposed $5.2 million purchase of land in Massachusetts was conditional on feasibility, environmental and government approvals.
- The company reported $1.8 million of unrecognized tax benefits; management did not expect resolution in the next 12 months to materially affect results. The company also noted that adoption of the lease accounting standard was expected to materially increase reported assets and liabilities.
- Auditor KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- How recurring and sustainable 2017’s utilization and billable-hour improvement is, particularly given the large human-factors project that represented approximately 6% of revenue before reimbursements.
- Whether the 2018 tax-rate outlook of 22%–23% is achieved, and the eventual effects of GILTI and the mandatory repatriation tax.
- Collection of the larger receivables balance, especially the major client’s 24% share of year-end receivables.
- Whether client and industry concentration, engagement timing, and the lack of meaningful backlog create material revenue volatility.
- The impact of lease accounting adoption, planned Massachusetts facilities investment, and continued dividends and repurchases on future liquidity and capital allocation.