Business context and reporting period
Exponent, Inc. is a multidisciplinary science and engineering consulting firm serving commercial and government clients. This filing is the fiscal 2018 Form 10-K, for the year ended December 28, 2018 (52 weeks), not a 2017 Q4 filing. Fiscal 2017 is the prior comparable year. The company reports Engineering and Other Scientific and Environmental and Health segments.
Financial results and position
Unless noted, amounts are in millions of dollars. Revenues include client reimbursements; revenue before reimbursements is also shown because it better reflects consulting activity.
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $379.5 | $347.8 | +9.1% |
| Revenue before reimbursements | $354.6 | $329.7 | About +8% |
| Operating income | $91.5 | $72.1 | +26.9% |
| Operating margin | 24.1% | 20.7% | +3.4 percentage points |
| Net income | $72.3 | $41.3 | +74.9% |
| Diluted EPS | $1.33 | $0.77 | +$0.56 |
| Operating cash flow | $91.2 | $67.8 | +$23.4 |
- Engineering and Other Scientific revenue rose 10.3% to $306.3 million; Environmental and Health rose 4.4% to $73.3 million.
- Cash, cash equivalents, and short-term investments totaled $208.6 million at year-end, versus $196.4 million a year earlier. Working capital was $228.3 million; total assets were $468.9 million and stockholders’ equity was $313.9 million.
- The balance sheet reports no borrowings or interest-bearing debt line. Long-term liabilities were $56.7 million, including deferred compensation plan liabilities; verify the full notes for the composition of liabilities.
- Capital expenditures were $16.3 million in the cash-flow statement; cash used in investing was $25.8 million. Financing used $62.5 million, including $27.9 million of share repurchases and $27.2 million of dividends and dividend equivalents.
- Declared dividends were $0.52 per share in FY2018 versus $0.42 in FY2017. The January 2019 board announcement set a quarterly dividend of $0.16 per share and authorized an additional $75 million in repurchases.
Material changes versus FY2017
- Growth reflected higher billable hours and billing rates. Billable hours increased 5% to 1.274 million, while utilization fell to 73% from 75%; technical full-time equivalents rose 7% to 839.
- Operating margin improved as compensation and related expense fell to 56.7% of revenue from 60.5%, despite compensation expense rising 2.3% in dollars. Revenue growth and cost management contributed to improved operating income.
- Net income growth was amplified by taxes: FY2017 included a $16.5 million tax charge associated with the U.S. Tax Cuts and Jobs Act, including deferred-tax remeasurement and mandatory repatriation tax. FY2018’s effective tax rate was 22.6%, compared with 49.9% in FY2017; management gives adjusted rates excluding specified tax effects and stock-award benefits of 27.0% and 37.8%, respectively.
- Other income declined to $1.9 million from $10.5 million, largely reflecting a $3.9 million loss on deferred-compensation investments in 2018 versus a $6.5 million gain in 2017. Matching deferred-compensation expense movements partly offset the income-statement effect.
- One consumer-products human-factors project represented about 4% of revenue before reimbursements in 2018, down from 6% in 2017, and its completion contributed to lower utilization.
Outlook, risks, contingencies, and unusual items
- No specific revenue, earnings, or margin guidance is provided. Management describes continued demand across proactive product and regulatory consulting and reactive energy, mining, infrastructure, and health/environmental work. Fiscal 2019 has 53 weeks.
- Management expects compensation, other operating costs, and general and administrative expenses to rise as it selectively hires, invests in infrastructure, and expands business development and staff development.
- PG&E filed for Chapter 11 on January 29, 2019. Exponent reported $5.6 million of PG&E receivables at year-end; $2.1 million was collected before the filing, and the balance outstanding on the filing date was $6.0 million after further work. Recovery is uncertain; no impairment was recorded because a loss was not yet deemed probable and estimable.
- Client concentration is notable: one client generated 12% of 2018 revenue, compared with 14% in 2017. Consumer products, transportation, and energy and utilities represented approximately 27%, 16%, and 15% of 2018 revenue, respectively.
- Principal business risks include unpredictable project timing and limited backlog, client termination or delay, competition and pricing pressure, employee recruitment and retention, economic and regulatory changes, litigation and professional liability, data security and privacy, and international and currency exposure. The company does not hedge foreign currency exposures.
- Operating lease commitments were $30.8 million, and purchase obligations were $12.3 million, primarily for the Natick, Massachusetts office and laboratory project. The company expected adoption of the new lease standard to materially increase reported right-of-use assets and lease liabilities.
- The auditor expressed an unqualified opinion on the financial statements and internal control over financial reporting. The company reported no material legal proceedings and no goodwill impairment.
Most important facts for investors to verify
- How much of the PG&E receivable is ultimately recovered, and whether additional work increases exposure.
- Whether utilization and billable-hour trends recover after completion of the large project, and how the 53-week 2019 year affects comparisons.
- How sustainable operating-margin gains are as hiring and compensation costs increase.
- The extent to which future earnings comparisons reflect tax-rate changes rather than operating performance, and the realization of deferred tax assets and tax benefits.
- The lease liabilities recognized after adoption of the lease standard, and the remaining cost and timing of the Natick construction commitments.
- Whether client concentration, project timing, and the announced buyback and dividend levels remain consistent with cash generation and liquidity needs.