Exponent, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended January 3, 2014 (53 weeks), compared with fiscal 2012 ended December 28, 2012 (52 weeks). The request metadata says “2012 Q4,” but the filing is an annual report for fiscal 2013; quarterly results are separately reported below.
Business context
Exponent is a multidisciplinary science and engineering consulting firm serving commercial, legal, insurance and government clients. It reports two segments: Engineering and Other Scientific, and Environmental and Health. Results depend on client-requested engagements, staffing and utilization; management says backlog is not a reliable predictor of future revenue.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $296.2 million | $292.7 million | +1.2% |
| Revenue before reimbursements | $280.0 million | $266.6 million | +5.1% |
| Operating income | $55.9 million | $57.6 million | -2.9% |
| Operating margin | 18.9% | 19.7% | -0.8 percentage points |
| Net income | $38.6 million | $37.2 million | +3.8% |
| Diluted EPS | $2.76 | $2.60 | +6.2% |
| Operating cash flow | $61.8 million | $48.5 million | +$13.3 million |
- Net margin was 13.0%, versus 12.7% in FY2012. EBITDA was $68.8 million, or 24.6% of revenue before reimbursements, compared with 24.8%.
- Compensation expense rose 7.1% to $184.1 million and increased to 62.2% of revenue from 58.7%; utilization fell to 71% from 73%. Management attributed pressure partly to hiring and lower activity on major investigations.
- Engineering and Other Scientific revenue grew 1.3% to $216.0 million; Environmental and Health revenue grew 1.1% to $80.2 million. Segment operating income was $67.1 million and $25.1 million, respectively, before corporate operating expense.
- Cash, cash equivalents and short-term investments totaled $156.1 million at year-end, up from $134.1 million. Working capital was $179.5 million. The filing lists no conventional borrowings; liabilities include $33.4 million of deferred compensation and $2.3 million of deferred rent.
- Capital expenditures were $6.2 million. Financing cash outflow was $33.8 million, including $25.5 million of share repurchases and $7.9 million of dividends. Fiscal 2013 dividends were $0.60 per share; a $0.25-per-share dividend was declared for March 2014.
Material changes and unusual items
- Revenue before reimbursements benefited from higher billable hours and rates, an additional fiscal week, and $1.4 million of revenue recognized for prior-period work for a foreign client after payment was received.
- Defense technology product sales fell to $0.5 million from $9.2 million, primarily due to lower U.S. Army surveillance-system sales. Management did not expect further surveillance-system sales in fiscal 2014.
- Reimbursements declined 38.2% to $16.1 million, mainly because of lower project-related defense costs; these costs are also recorded as operating expenses.
- Other income included a $6.0 million gain in deferred-compensation plan assets, matched by compensation expense. Net income growth therefore exceeded operating income growth.
- Fiscal 2013’s reported effective tax rate was 39.6%. Management expected the fiscal 2014 rate to increase toward its historical average, as prior-period state apportionment and manufacturing deductions were nonrecurring.
Outlook, risks and contingencies
- No quantitative revenue or earnings guidance is provided. Management expected activity on several major investigations to step down and anticipated reduced defense practice activity amid defense-spending constraints and the Afghanistan drawdown. It also expected compensation and other operating costs to rise as it selectively hires and invests in infrastructure.
- Key business risks include uneven engagement timing, client cancellation or delay, utilization and staffing challenges, competition and pricing pressure, dependence on professional reputation, client nonpayment, and possible reduced demand from tort reform or weaker regulatory enforcement.
- Government-contract risks include audits, contract termination or modification, award delays and changing defense budgets. International operations also carry currency, regulatory, staffing and compliance risks.
- The company disclosed a lawsuit brought by a former employer of employees hired by Exponent, alleging interference, software-license breach, trade-secret misappropriation and related claims. No specific damages were alleged; the case was in discovery. Management believed resolution would not materially adversely affect financial condition, but noted litigation uncertainty. The filing’s general legal-proceedings section says there were no material proceedings.
- Operating lease commitments totaled $25.5 million, with $7.7 million due in fiscal 2014. Unrecognized tax benefits were $1.1 million; timing of any payment was uncertain.
Quarterly context and investor verification
For the quarter ended January 3, 2014, revenue was $72.8 million, operating income $12.3 million, net income $8.7 million and diluted EPS $0.63. Against the prior-year fourth quarter, revenue was $72.9 million, operating income $13.7 million, net income $8.5 million and diluted EPS $0.60.
- Verify whether growth in underlying consulting revenue can continue as major investigations wind down, and assess the impact of the extra fiscal week and deferred foreign-client revenue.
- Track utilization, hiring and compensation costs, especially in Environmental and Health and the defense technology practice.
- Assess operating-margin trends separately from deferred-compensation investment gains and matched compensation expense.
- Review cash conversion, receivables and collections, capital spending, dividends and repurchases against the company’s substantial cash and short-term investment balance.
- Monitor the disclosed lawsuit, tax uncertainties, lease commitments and government-contract exposure.