EXPONENT, INC. OVERVIEW
Exponent is an engineering and scientific consulting firm providing solutions to complex problems. Exponent's interdisciplinary organization of scientists, physicians, engineers, and business consultants draws from more than 90 technical disciplines to solve the most pressing and complicated challenges facing stakeholders today. The firm leverages over 50 years of experience in analyzing accidents and failures to advise clients as they innovate their technologically complex products and processes, ensure the safety and health of their users, and address the challenges of sustainability.
CRITICAL ACCOUNTING ESTIMATES
In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our consolidated balance sheet. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in accounting for revenue recognition and estimating the allowance for contract losses and doubtful accounts have a potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the assumptions, judgments and estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our critical accounting policies, see "Note 1: Summary of Significant Accounting Policies" of our Notes to Consolidated Financial Statements.
Revenue recognition. We derive our revenues primarily from professional fees earned on consulting engagements, fees earned for the use of our equipment and facilities, as well as reimbursements for outside direct expenses associated with the services that are billed to our clients.
Substantially all of our engagements are service contracts performed under time and material or fixed-price billing arrangements. For time and material and fixed-price service projects, revenue is generally recognized as the services are performed. For substantially all of our fixed-price service engagements, we recognize revenue based on the relationship of incurred labor hours at standard rates to our estimate of the total labor hours at standard rates we expect to incur over the term of the contract. Our estimate of total labor hours we expect to incur over the term of the contract is based on the nature of the project and our past experience on similar projects. We believe this methodology achieves a reliable measure of the revenue from the consulting services we provide to our customers under fixed-price contracts.
Management judgments and estimates must be made and used in connection with the revenues recognized in any accounting period. These judgments and estimates include an assessment of the estimate as to the total effort required to complete fixed-price projects.
Estimating the allowance for contract losses and doubtful accounts. We make estimates of our ability to collect accounts receivable and our unbilled but recognized work-in-process. In circumstances where we are aware of a specific customer's inability to meet its financial obligations to us or for disputes with customers that affect our ability to fully collect our accounts receivable and unbilled work-in-process, we record a specific allowance to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers we recognize allowances for contract losses and doubtful accounts taking into consideration factors such as historical write-offs, customer concentration, customer credit-worthiness, current economic conditions, and aging of amounts due.
21
--------------------------------------------------------------------------------
The following table sets forth, for the periods indicated, the percentage of revenues of certain items in our consolidated statements of income and the percentage increase (decrease) in the dollar amount of such items year to year:
Percentage of Revenues for Period to
Fiscal Years Period Change
2019 2018 2017 2019 v 2018 2018 v 2017
Revenues 100.0 % 100.0 % 100.0 % 9.9 % 9.1 %
Operating expenses:
Compensation and
related expenses 60.5 56.7 60.5 17.3 2.3
Other operating
expenses 8.0 8.1 8.5 9.7 3.6
Reimbursable expenses 6.2 6.6 5.2 3.7 37.2
General and
administrative expenses 4.9 4.6 5.1 17.0 (1.4 )
79.6 76.0 79.3 15.3 4.5
Operating income 20.4 24.0 20.7 (6.9 ) 26.9
Other income, net 4.6 0.5 3.0 925.2 (82.2 )
Income before income
taxes 25.0 24.5 23.7 11.7 13.1
Provision for income
taxes 5.2 5.5 11.8 3.2 (48.9 )
Net income 19.8 % 19.0 % 11.9 % 14.1 % 74.9 %
EXECUTIVE SUMMARY
Revenues for 2019 increased 10% and revenues before reimbursements also increased 10% as compared to the prior year. The increase in revenues before reimbursements was due to an increase in billable hours and an increase in billing rates. We experienced strong demand for our consulting services from a diverse set of clients for both proactive and reactive projects. During 2019 we experienced demand from a broad set of industries involving energy storage and battery technologies, continued our integrity management assessments related to the utilities industry, and saw our international arbitration work expand geographically. Our human factors product studies continue to provide unique insights into the operability, usability and safety of human-machine systems.
We were engaged by clients throughout the year to determine what happened when a disaster occurs. These events ranged from structural failures on major infrastructure to nanoscale components. We also continued to see demand for our scientists to assess increasing concerns regarding the impact of chemicals on human health and the environment. During 2019, we had strong growth in our biomedical engineering, buildings & structures, chemical regulation & food safety, construction consulting, human factors, materials & corrosion engineering, thermal sciences, and polymer science & materials chemistry practices.
Net income increased 14% to
We remain focused on selectively adding top talent and developing the skills necessary to expand upon our market position, providing clients with in-depth scientific research and analysis to determine what happened and how to prevent failures or exposures in the future. We also remain focused on capitalizing on emerging growth areas, managing other operating expenses, generating cash from operations, maintaining a strong balance sheet and undertaking activities such as share repurchases and dividends to enhance shareholder value.
22
--------------------------------------------------------------------------------
OVERVIEW OF THE YEAR ENDED
Our revenues consist of professional fees earned on consulting engagements, fees for use of our equipment and facilities, and reimbursements for outside direct expenses associated with the services performed that are billed to our clients.
We operate on a 52-53 week fiscal year with each year ending on the Friday
closest to
During 2019, billable hours increased 8% to 1,376,000 as compared to 1,274,000 during 2018. Our utilization decreased to 72% for 2019 as compared to 73% for 2018. Technical full-time equivalent employees increased 7% to 901 for 2019 as compared to 839 for 2018 as a result of our recruiting and retention efforts. We continue to selectively hire key talent to expand our capabilities.
FISCAL YEARS ENDED
Revenues
(In thousands except percentages) Fiscal Years Percent
2019 2018 Change
Engineering and Other Scientific $ 339,796 $ 306,265 10.9 %
Percentage of total revenues 81.4 % 80.7 %
Environmental and Health 77,403 73,258 5.7 %
Percentage of total revenues 18.6 % 19.3 %
Total revenues $ 417,199 $ 379,523 9.9 %
The increase in revenues for our Engineering and Other Scientific segment was due to an increase in billable hours and an increase in billing rates. During 2019, billable hours for this segment increased by 9.3% to 1,084,000 as compared to 992,000 during 2018. This segment had strong growth in its biomedical engineering, buildings & structures, construction consulting, human factors, materials & corrosion engineering, thermal sciences, and polymer science & materials chemistry practices. We continued to see strong demand from multinational companies for our scientific expertise and advice regarding their products. Safety concerns regarding energy storage systems drove increased demand for risk assessments in the consumer products, transportation, utility and medical device industries. The increase in billable hours was also due to fiscal 2019 having one additional week of activity than fiscal 2018. Utilization decreased to 73% for 2019 as compared to 75% for 2018. The decrease in utilization was due to the completion of a large human factors assessment in the third quarter of 2018. Technical full-time equivalents increased 9.2% to 699 for 2019 as compared to 640 for 2018 due to our recruiting and retention efforts.
The increase in revenues from our Environmental and Health segment was due to an increase in billable hours and an increase in billing rates. During 2019, billable hours for this segment increased by 3.5% to 292,000 as compared to 282,000 during 2018. The increase in billable hours was due to growth in our chemical regulation & food safety practice where we expanded our proactive services. The increase in billable hours was also due to fiscal 2019 having one additional week of activity than fiscal 2018. Utilization was 68% for both 2019 and 2018. Technical full-time equivalents increased 1.5% to 202 during 2019 as compared to 199 for 2018 due to our recruiting and retention efforts.
Revenues are primarily derived from services provided in response to client requests or events that occur without notice and engagements are generally terminable or subject to postponement or delay at any time by our clients. As a result, backlog at any particular time is small in relation to our quarterly or annual revenues and is not a reliable indicator of revenues for any future periods.
23
--------------------------------------------------------------------------------
Compensation and Related Expenses
(In thousands except percentages) Fiscal Years Percent
2019 2018 Change
Compensation and related expenses
60.5 % 56.7 %
The increase in compensation and related expenses during 2019 was due to an
increase in payroll expense, an increase in bonus expense, an increase in fringe
benefits, and a change in the value of assets associated with our deferred
compensation plan. During 2019, payroll and fringe benefits increased
Other Operating Expenses
(In thousands except percentages) Fiscal Years Percent
2019 2018 Change
Other operating Expenses $ 33,562 $ 30,599 9.7 %
Percentage of total revenues 8.0 % 8.1 %
Other operating expenses include facilities-related costs, technical materials,
computer-related expenses and depreciation and amortization of property,
equipment and leasehold improvements. The increase in other operating expenses
was primarily due to an increase in occupancy expense of
Reimbursable Expenses
(In thousands except percentages) Fiscal Years Percent
2019 2018 Change
Reimbursable expenses $ 25,809 $ 24,884 3.7 %
Percentage of total revenues 6.2 % 6.6 %
The amount of reimbursable expenses will vary from year to year depending on the nature of our projects.
General and Administrative Expenses
(In thousands except percentages) Fiscal Years Percent
2019 2018 Change
General and administrative expenses $ 20,520 $ 17,532 17.0 %
Percentage of total revenues 4.9 % 4.6 %
24
--------------------------------------------------------------------------------
The increase in general and administrative expenses during 2019 was primarily
due to an increase in travel and meals of
Other Income
(In thousands except percentages) Fiscal Years Percent
2019 2018 Change
Other income $ 19,079 $ 1,861 925.2 %
Percentage of total revenues 4.6 % 0.5 %
Other income consists primarily of interest income earned on available cash,
cash equivalents and short-term investments, changes in the value of assets
associated with our deferred compensation plan and rental income from leasing
excess space in our
Income Taxes
(In thousands except percentages) Fiscal Years Percent
2019 2018 Change
Income taxes $ 21,730 $ 21,063 3.2 %
Percentage of total revenues 5.2 % 5.5 %
Effective tax rate 20.9 % 22.6 %
The decrease in our effective tax rate was due to an increase in the excess tax
benefit associated with stock-based awards partially offset by a tax charge
associated with the planned divestiture of our German subsidiary. The excess tax
benefit associated with stock-based awards increased to
FISCAL YEARS ENDED
Revenues
(In thousands except percentages) Fiscal Years Percent
2018 2017 Change
Engineering and Other Scientific $ 306,265 $ 277,603 10.3 %
Percentage of total revenues 80.7 % 79.8 %
Environmental and Health 73,258 70,196 4.4 %
Percentage of total revenues 19.3 % 20.2 %
Total revenues $ 379,523 $ 347,799 9.1 %
The increase in revenues for our Engineering and Other Scientific segment was due to an increase in billable hours and an increase in billing rates. During 2018, billable hours for this segment increased by 5.4% to 992,000 as
25
--------------------------------------------------------------------------------
compared to 941,000 during 2017. This segment had strong growth in its human factors, materials & corrosion engineering, thermal sciences, polymer science & materials chemistry and mechanical engineering practices during 2018. We continued to see strong demand for our services related to product recalls including assignments from the consumer products and automotive industries. Proactive services continued to expand as companies seek our interdisciplinary advice throughout the product life cycle, consistent with the increased importance placed on understanding how users interact with complex technologies. Utilization decreased to 75% for 2018 as compared to 77% for 2017. The decrease in utilization was partially due to the completion of a large human factors assessment for a client in the consumer products industry during the third quarter of 2018. This project represented approximately 4% of our revenues before reimbursements during 2018 as compared to 6% during 2017. Technical full-time equivalents increased 8.3% to 640 for 2018 as compared to 591 for 2017 due to our recruiting and retention efforts.
The increase in revenues from our Environmental and Health segment was due to an increase in billable hours and an increase in billing rates. During 2018, billable hours for this segment increased by 1.8% to 282,000 as compared to 277,000 during 2017. The increase in billable hours was due to growth in our chemical regulation and food safety practice where we expanded our proactive services. Utilization decreased to 68% for 2018 as compared to 69% for 2017. The decrease in utilization was partially due to the completion of a large human factors assessment for a client in the consumer products industry during the third quarter of 2018. Technical full-time equivalents increased 3.1% to 199 during 2018 as compared to 193 for 2017 due to our recruiting and retention efforts.
Revenues are primarily derived from services provided in response to client requests or events that occur without notice and engagements are generally terminable or subject to postponement or delay at any time by our clients. As a result, backlog at any particular time is small in relation to our quarterly or annual revenues and is not a reliable indicator of revenues for any future periods.
Compensation and Related Expenses
(In thousands except percentages) Fiscal Years Percent
2018 2017 Change
Compensation and related expenses $ 215,052 $ 210,289 2.3 %
Percentage of total revenues 56.7 % 60.5 %
The increase in compensation and related expenses during 2018 was due to an
increase in payroll expense, an increase in fringe benefits, an increase in
bonus expense, and an increase in stock-based compensation expense partially
offset by a change in the value of assets associated with our deferred
compensation plan. During 2018, payroll and fringe benefits increased
Other Operating Expenses
(In thousands except percentages) Fiscal Years Percent
2018 2017 Change
Other operating Expenses $ 30,599 $ 29,544 3.6 %
Percentage of total revenues 8.1 % 8.5 %
Other operating expenses include facilities-related costs, technical materials,
computer-related expenses and depreciation and amortization of property,
equipment and leasehold improvements. The increase in other operating expenses
was primarily due to an increase in occupancy expense of
26
--------------------------------------------------------------------------------
time equivalent employees. We expect other operating expense to grow as we selectively add new talent and make investments in our corporate infrastructure.
Reimbursable Expenses
(In thousands except percentages) Fiscal Years Percent
2018 2017 Change
Reimbursable expenses $ 24,884 $ 18,135 37.2 %
Percentage of total revenues 6.6 % 5.2 %
The increase in reimbursable expenses was primarily due to an increase in travel related costs associated with our large human factors assessment project. The amount of reimbursable expenses will vary from year to year depending on the nature of our projects.
General and Administrative Expenses
(In thousands except percentages) Fiscal Years Percent
2018 2017 Change
General and administrative expenses
4.6 % 5.1 %
The decrease in general and administrative expenses during 2018 was primarily
due to a decrease in travel and meals of
Other Income
(In thousands except percentages) Fiscal Years Percent
2018 2017 Change
Other income $ 1,861 $ 10,458 -82.2 %
Percentage of total revenues 0.5 % 3.0 %
Other income consists primarily of interest income earned on available cash,
cash equivalents and short-term investments, changes in the value of assets
associated with our deferred compensation plan and rental income from leasing
excess space in our
Income Taxes
(In thousands except percentages) Fiscal Years Percent
2018 2017 Change
Income taxes $ 21,063 $ 41,204 -48.9 %
Percentage of total revenues 5.5 % 11.8 %
Effective tax rate 22.6 % 49.9 %
The decrease in income tax expense was due to the impact of the
27
--------------------------------------------------------------------------------
and stock-based compensation program, which were previously valued at the
federal corporate income tax rate of 35%. Our deferred tax assets were
re-measured at the lower enacted corporate tax rate of 21% which contributed
The excess tax benefit associated with share-based payment awards decreased to
Excluding the impact of the 2017 tax expense associated with the tax legislation
and excluding the excess tax benefit, the effective tax rate would have been
27.0% for 2018 as compared to 37.8% for 2017. This decrease was due to the
decrease in the
LIQUIDITY AND CAPITAL RESOURCES
Fiscal Years
(In thousands) 2019 2018 2017
Net cash provided by (used in):
Operating activities $ 108,059 $ 91,188 $ 67,838
Investing activities $ 4,269 $ (25,820 ) $ (17,722 )
Financing activities $ (63,414 ) $ (62,500 ) $ (41,261 ) We financed our business in 2019 through available cash and cash flows from
operating activities. We invest our excess cash in cash equivalents and
short-term investments. As of
Generally, our net cash provided by operating activities is used to fund our day-to-day operating activities. First quarter operating cash requirements are generally higher due to payment of our annual bonuses accrued during the prior year. Our largest source of operating cash flows is cash collections from our clients. Our primary uses of cash from operating activities are for employee-related expenditures, leased facilities, taxes, and general operating expenses including marketing and travel.
Net cash provided by operating activities was
During 2019, 2018 and 2017, net cash provided by/used in investing activities
was primarily related to the purchase and maturity of short-term investments and
capital expenditures. During 2019 we completed construction of our office and
laboratory facilities in
The increase in net cash used in financing activities during 2019 as compared to 2018 was due to an increase in our quarterly dividend payment partially offset by a decrease in repurchases of our common stock. The increase in net cash used in financing activities during 2018 as compared to 2017 was due to an increase in our quarterly dividend payments and an increase in repurchases of our common stock.
28
--------------------------------------------------------------------------------
We expect to continue our investing activities, including capital expenditures. Furthermore, cash reserves may be used to repurchase common stock under our stock repurchase programs, pay dividends, procure facilities and equipment or strategically acquire professional service firms that are complementary to our business.
The following schedule summarizes our principal contractual commitments as of
Operating
Fiscal lease
year commitments
2020 $ 6,938
2021 5,993
2022 4,773
2023 3,187
2024 2,176
Thereafter 4,464
$ 27,531 The above table does not reflect unrecognized tax benefits of
We maintain nonqualified deferred compensation plans for the benefit of a select
group of highly compensated employees. Vested amounts due under the plans of
As permitted under
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not engage in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.
Non-GAAP Financial Measures
Regulation G, conditions for use of Non-Generally Accepted Accounting Principles
("Non-GAAP") financial measures, and other
29
--------------------------------------------------------------------------------
The following table shows EBITDA as a percentage of revenues before reimbursements for 2019, 2018 and 2017:
(in thousands, except percentages) Fiscal Years
2019 2018 2017
Revenues before reimbursements $ 391,390 $ 354,639 $ 329,664
EBITDA $ 107,084 $ 96,858 $ 87,500 EBITDA as a % of revenues before reimbursements 27.4 % 27.3 % 26.5 %
The slight increase in EBITDA as a percentage of revenues before reimbursements for 2019 as compared to 2018 was due to 10% growth in revenues before reimbursements partially offset by a 17% increase in general and administrative expenses primarily due to a firm-wide managers' meeting during 2019.
The increase in EBITDA as a percentage of revenues before reimbursements for 2018 as compared to 2017 was due to 8% growth in revenues before reimbursements, a 1% decrease in general and administrative expenses and a 4% increase in other operating expenses. The decrease in general and administrative expenses was due to a firm-wide managers' meeting during 2017. Other operating expenses increased at a lower rate than our revenues before reimbursements due to the leverage of our corporate infrastructure.
The following table is a reconciliation of EBITDA and EBITDAS to the most comparable GAAP measure, net income, for 2019, 2018 and 2017:
(in thousands) Fiscal Years
2019 2018 2017
Net Income $ 82,460 $ 72,254 $ 41,305
Add back (subtract):
Income taxes 21,730 21,063 41,204
Interest income, net (3,912 ) (2,751 ) (1,294 )
Depreciation and amortization 6,806 6,292 6,285
EBITDA 107,084 96,858 87,500
Stock-based compensation 17,466 16,993 16,155
EBITDAS $ 124,550 $ 113,851 $ 103,655 © Edgar Online, source
