Exponent(EXPO) - 2018 Q4 - Annual Report

Part I Business Exponent is a science and engineering consulting firm with two operating segments serving diverse industries - Exponent is a science and engineering consulting firm with a multidisciplinary team covering over 90 technical disciplines[11] - The company operates through two reportable segments: Engineering and Other Scientific, and Environmental and Health, with 18 distinct practices[15] - Key client industries in fiscal 2018 were consumer products (27% of revenue), transportation (16%), and energy/utilities (15%)[13] - As of December 28, 2018, the company employed 1,122 staff, including 886 engineering and scientific personnel, of whom 584 hold a Ph.D., Sc.D., or M.D.[63] Services The company's services are structured within its Engineering and Environmental & Health segments - The Engineering and Other Scientific segment provides a wide range of services, including biomechanics, structural analysis, electrical engineering, human factors, materials science, mechanical engineering, and vehicle analysis[15][17] - The Environmental and Health segment focuses on chemical regulation, food safety, ecological sciences, environmental and earth sciences, and health sciences, addressing risks to human health and the environment[18] - The company is actively engaged in emerging technology areas, including Advanced Driver Assistive Systems (ADAS), automated vehicles, and evaluating fire risks of lithium-ion batteries[31][48] Competition The company operates in a fragmented and competitive market, differentiating on technical capability and reputation - The marketplace is fragmented, and the company believes barriers to entry are low, resulting in increasing competition[60][62] - Key competitive factors include technical capability, breadth of services, timely delivery, professional reputation, and knowledge of litigation/regulatory processes[61] Executive Officers The executive team consists of experienced leaders with advanced degrees in science and engineering - Dr. Catherine Ford Corrigan was named Chief Executive Officer in May 2018, succeeding Dr. Paul R. Johnston, who became Executive Chairman of the Board[67][68] - The executive team comprises individuals with extensive experience within the company and the industry, holding advanced degrees (primarily Ph.D.s) in various engineering and scientific fields[66] Risk Factors Key business risks include service unpredictability, talent retention, client concentration, and cybersecurity threats - Business is unpredictable and reactive, with engagements being terminable at any time, making backlog an unreliable indicator of future revenue[80] - Success is highly dependent on attracting and retaining key technical and managerial personnel in a competitive labor market[82] - The company faces risks from client concentration and financial instability, with the bankruptcy of PG&E noted for its $6.0 million in outstanding receivables[84][86] - International operations expose the company to risks including currency fluctuations, regulatory burdens, and compliance with laws like the FCPA and GDPR[102] - Cybersecurity is a risk, as security breaches could disrupt operations and lead to unauthorized disclosure of confidential client or employee data[98][99] Unresolved Staff Comments The company reports no unresolved comments from regulatory staff - None[116] Properties The company owns and leases various office, laboratory, and testing facilities across the US and internationally - The company owns its 153,738 sq. ft. Silicon Valley facility and an adjacent 27,000 sq. ft. warehouse in Menlo Park, CA[117] - A new 60,480 sq. ft. building is under construction on 2.9 acres of land purchased in Natick, Massachusetts during Q1 2018[119] - Aggregate lease expense for all leased properties in fiscal 2018 was $7,488,000[120] Legal Proceedings The company is not currently involved in any material legal proceedings - Exponent is not engaged in any material legal proceedings[121] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[123] Part II Market for Common Equity, Stockholder Matters, and Issuer Purchases The company's stock trades on NASDAQ under 'EXPO' with an active share repurchase program in place - The company's common stock is traded on the NASDAQ Global Select Market under the symbol 'EXPO'[124] - On January 31, 2019, the Board of Directors authorized an additional $75,000,000 for the repurchase of the Company's common stock[126] Share Repurchases for Q4 2018 (in thousands, except price per share) | Period | Total Shares Purchased | Average Price Paid | Remaining Authorization | |---|---|---|---| | Sep 29 - Dec 28, 2018 | 562 | $49.63 | $17,462 | Selected Financial Data A five-year summary of financial data highlights steady growth in revenues, net income, and total assets Selected Financial Data (2014-2018, in thousands, except per share data) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | |---|---|---|---|---|---| | Revenues | $379,523 | $347,799 | $315,076 | $312,832 | $304,704 | | Operating Income | $91,456 | $72,051 | $61,911 | $68,933 | $63,549 | | Net Income | $72,254 | $41,305 | $47,480 | $43,599 | $40,701 | | Diluted EPS | $1.33 | $0.77 | $0.87 | $0.80 | $0.74 | | Cash Dividends per Share | $0.52 | $0.42 | $0.36 | $0.30 | $0.25 | | Total Assets | $468,936 | $439,589 | $403,744 | $387,507 | $365,299 | | Total Stockholders' Equity | $313,909 | $289,088 | $273,346 | $262,804 | $244,288 | Management's Discussion and Analysis (MD&A) Revenues grew 9% in 2018, with net income surging 75% primarily due to a lower U.S. corporate tax rate - Revenues for 2018 increased 9% year-over-year, and revenues before reimbursements increased 8%, driven by increased billable hours and billing rates[139] - Net income for 2018 increased 74.9% to $72.3 million, and diluted EPS rose to $1.33 from $0.77 in 2017, significantly impacted by U.S. tax legislation[138][141] - Strong growth was noted in the human factors, materials & corrosion engineering, thermal sciences, polymer science & materials chemistry, mechanical engineering, and chemical regulation & food safety practices[140] - Total billable hours increased by 5% to 1,274,000 in 2018, while utilization decreased slightly to 73% from 75% in 2017[147] Results of Operations Revenue growth of 9.1% and a significantly lower effective tax rate drove a 74.9% increase in 2018 net income - The effective tax rate dropped to 22.6% in 2018 from 49.9% in 2017, with the 2017 rate including a one-time expense of $16.5 million from new U.S. tax legislation[158][159] Revenue by Segment (2018 vs. 2017, in thousands) | Segment | 2018 | 2017 | % Change | |---|---|---|---| | Engineering and Other Scientific | $306,265 | $277,603 | 10.3% | | Environmental and Health | $73,258 | $70,196 | 4.4% | | Total Revenues | $379,523 | $347,799 | 9.1% | Key Expense and Income Changes (2018 vs. 2017) | Item | 2018 (% of Rev) | 2017 (% of Rev) | % Change (Dollar) | |---|---|---|---| | Compensation & Related | 56.7% | 60.5% | 2.3% | | Operating Income | 24.0% | 20.7% | 26.9% | | Provision for Income Taxes | 5.5% | 11.8% | (48.9)% | | Net Income | 19.0% | 11.9% | 74.9% | Liquidity and Capital Resources Operations are financed by cash flows, with liquidity deemed sufficient for the upcoming year - Cash, cash equivalents, and short-term investments totaled $208.5 million at the end of 2018, up from $196.4 million at the end of 2017[172] - Significant investing activities in 2018 included a $5.2 million land purchase in Natick, MA, and $5.3 million in associated construction costs[176] - As of December 28, 2018, the company had total contractual commitments of $43.1 million, including $30.8 million in operating leases and $12.3 million in purchase obligations[180] Summary of Cash Flows (in thousands) | Activity | 2018 | 2017 | 2016 | |---|---|---|---| | Net cash provided by operating activities | $91,188 | $67,838 | $66,946 | | Net cash used in investing activities | $(25,820) | $(17,722) | $(27,443) | | Net cash used in financing activities | $(62,500) | $(41,261) | $(49,166) | Non-GAAP Financial Measures The company utilizes non-GAAP measures like EBITDA and EBITDAS to evaluate its operating performance - EBITDA as a percentage of revenues before reimbursements increased to 27.3% in 2018, compared to 26.5% in 2017 and 24.9% in 2016[186] Reconciliation of Net Income to EBITDA and EBITDAS (in thousands) | Metric | 2018 | 2017 | 2016 | |---|---|---|---| | Net Income | $72,254 | $41,305 | $47,480 | | Add: Income taxes | $21,063 | $41,204 | $21,642 | | Add: Deprec. & Amort. | $6,292 | $6,285 | $6,131 | | Subtract: Interest income, net | $(2,751) | $(1,294) | $(683) | | EBITDA | $96,858 | $87,500 | $74,570 | | Add: Stock-based comp. | $16,993 | $16,155 | $13,333 | | EBITDAS | $113,851 | $103,655 | $87,903 | Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risks from interest rate fluctuations and foreign currency exchange - The company is exposed to interest rate risk on its portfolio of cash, cash equivalents, and short-term investments, though a 100 basis point change would not have a material impact[190][191] - Foreign currency risk exists from revenues and expenses denominated in British Pounds, Euros, and Chinese Yuan, with net assets in these currencies each at approximately $5.4 million[192][193] - The company does not use derivative financial instruments or foreign exchange contracts to hedge its market risks[191][195] Financial Statements and Supplementary Data This section incorporates by reference the financial statements and data found in Item 15 - The required financial statements and supplementary data are located in Part IV, Item 15 of this Form 10-K[197] Changes in and Disagreements with Accountants No changes in or disagreements with the company's accountants on financial disclosure are reported - None[198] Controls and Procedures Management concluded that disclosure controls, procedures, and internal controls over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year 2018[200] - Management concluded that the company's internal control over financial reporting was effective as of December 28, 2018, based on the COSO 2013 framework[201] - KPMG LLP, the independent registered public accounting firm, audited and provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting[199][220] Other Information No other information is reported for this item - None[203] Part III Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the company's 2019 Proxy Statement[205] Executive Compensation Required information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the company's 2019 Proxy Statement[207] Security Ownership and Related Stockholder Matters Required information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the company's 2019 Proxy Statement[208] Certain Relationships, Related Transactions, and Director Independence Required information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the company's 2019 Proxy Statement[209] Principal Accounting Fees and Services Required information is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the company's 2019 Proxy Statement[210] Part IV Exhibits and Financial Statement Schedules This section includes the consolidated financial statements, auditor's report, and a list of exhibits Report of Independent Registered Public Accounting Firm KPMG LLP issued unqualified opinions on both the consolidated financial statements and internal controls - KPMG LLP issued an unqualified (clean) opinion, stating the financial statements are presented fairly in all material respects and conform with U.S. GAAP[220] - KPMG also opined that the Company maintained effective internal control over financial reporting as of December 28, 2018[220] Consolidated Financial Statements The financial statements detail strong 2018 performance with $379.5 million in revenue and $72.3 million in net income Consolidated Statement of Income Highlights (FY 2018, in thousands) | Line Item | Amount | |---|---| | Revenues | $379,523 | | Operating Income | $91,456 | | Net Income | $72,254 | | Diluted EPS | $1.33 | Consolidated Balance Sheet Highlights (As of Dec 28, 2018, in thousands) | Line Item | Amount | |---|---| | Cash and cash equivalents | $127,059 | | Total Current Assets | $326,612 | | Total Assets | $468,936 | | Total Liabilities | $155,027 | | Total Stockholders' Equity | $313,909 | Consolidated Statement of Cash Flows Highlights (FY 2018, in thousands) | Line Item | Amount | |---|---| | Net cash provided by operating activities | $91,188 | | Net cash used in investing activities | $(25,820) | | Net cash used in financing activities | $(62,500) | Notes to Consolidated Financial Statements Notes detail accounting policies, the impact of tax legislation, and risks from the PG&E bankruptcy - The company adopted the new revenue recognition standard (ASU 2014-09) in fiscal 2018 with no material cumulative effect adjustment[267] - The 2017 Tax Cuts and Jobs Act resulted in a one-time income tax expense increase of $16.5 million in 2017[300] - As a subsequent event, PG&E filed for bankruptcy on Jan 29, 2019, posing an uncertain collectability risk to $6.0 million in accounts receivable[350] - On Jan 31, 2019, the Board declared a quarterly dividend of $0.16 per share and authorized an additional $75 million for share repurchases[349] - One client accounted for 12% of revenues in 2018 and 14% in 2017[338]