Business Context and Reporting Period
Exponent, Inc. is a multidisciplinary science and engineering consulting firm serving commercial, government, legal, insurance and other clients. It reports two segments: Engineering and Other Scientific, and Environmental and Health. This 10-K covers fiscal 2015, the 52 weeks ended January 1, 2016, with fiscal 2014 as the principal comparable period. Although the request metadata says “2014 Q4,” the filing is for fiscal 2015; its fourth-quarter results are for the quarter ended January 1, 2016.
Financial Performance and Position
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Revenue | $312.8 million | $304.7 million | +2.7% |
| Revenue before reimbursements | $295.7 million | $289.2 million | +2.2% |
| Operating income | $68.9 million | $63.5 million | +8.5% |
| Operating margin | 22.0% | 20.9% | +1.1 percentage points |
| Net income | $43.6 million | $40.7 million | +7.1% |
| Diluted EPS | $1.60 | $1.47 | +8.8% |
| Net margin | 13.9% | 13.4% | +0.5 percentage points |
| Operating cash flow | $60.5 million | $48.3 million | +$12.2 million |
Cash and cash equivalents were $125.8 million and short-term investments were $45.8 million at year-end, totaling $171.6 million, versus $154.4 million a year earlier. Working capital was $192.3 million; total assets were $387.5 million and stockholders’ equity was $262.8 million. No borrowings or funded debt are identified in the presented balance sheet; long-term liabilities were $44.2 million, including deferred compensation. Management said existing cash and investments should cover working capital, capital expenditures, commitments, repurchases and dividends for at least 12 months.
Cash used in investing activities was $27.0 million, mainly reflecting purchases of short-term investments; capital expenditures were $5.4 million. Cash used in financing activities was $36.9 million, including $23.3 million of share repurchases and $15.6 million of dividends. Fiscal 2015 dividends declared were $0.60 per share. The filing reports EBITDA of $76.4 million, or 25.8% of revenue before reimbursements, up from 25.3%; this is a non-GAAP measure.
Material Changes Versus the Prior Period
- Engineering and Other Scientific revenue rose 6.5% to $238.0 million; Environmental and Health revenue declined 7.9% to $74.9 million.
- Engineering growth reflected increased billable hours and rates, particularly in materials and corrosion engineering, biomedical engineering, polymer science and infrastructure. Environmental and Health was affected by a major investigation ending in July 2015 and weaker demand in health practices.
- Overall billable hours increased 1.6% to 1.125 million, while utilization remained 72%. Technical full-time-equivalent staff increased 1.3% to 751.
- Operating margin improved as revenue growth outpaced operating expense growth. Compensation and related expenses rose 0.5%; general and administrative expenses fell 3.5%, partly due to lower legal costs.
- Net income increased despite a sharp decline in other income, largely because deferred-compensation plan asset performance moved from a $2.5 million gain in 2014 to a $0.3 million loss in 2015. The related compensation expense moved correspondingly.
- Cash flow from operations increased from $48.3 million to $60.5 million, primarily due to higher client cash receipts. The prior year’s cash flow had been affected by increased receivables.
Outlook, Commentary, Risks and Unusual Items
Management gave no numerical revenue or earnings guidance. It plans to selectively recruit and develop talent, pursue emerging markets, manage expenses, generate operating cash and continue considering dividends and share repurchases. It expects compensation and other operating costs to rise as it adds staff and invests in infrastructure. The Board announced a $0.18-per-share dividend in February 2016, subject to the usual declaration conditions.
Key risks include the reactive, project-based nature of demand and limited predictive value of backlog; clients’ ability to postpone or terminate engagements; competition and pricing pressure; recruiting and retention; reliance on major client industries; professional liability and reputational exposure; regulatory or tort-reform changes; government budget and contract risks; client credit and collection risk; cybersecurity; economic cyclicality; and foreign-exchange exposure. The company reported no material legal proceedings, but noted ordinary-course claims and potential contingencies. A 10% currency movement on disclosed non-functional-currency net assets could produce an estimated $0.3 million gain or loss; the company does not hedge these exposures.
Other notable matters include a pending $8.25 million purchase of adjacent Menlo Park warehouse property, with contingencies released February 18, 2016 and closing expected within the following year; $21.6 million in future operating lease commitments and $0.4 million in purchase commitments; and $1.9 million of unrecognized tax benefits. Goodwill was $8.6 million, with no impairment recorded. Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Most Important Facts for Investors to Verify
- Whether Engineering and Other Scientific growth can continue and whether Environmental and Health utilization recovers after the large investigation ended.
- How much of reported growth and margin improvement reflects sustainable billing, utilization and cost trends versus project timing and deferred-compensation volatility.
- Cash conversion and collection trends, including unbilled receivables, client payment risk and future operating cash flow.
- Capital allocation: continued dividends and repurchases, remaining repurchase authorization of $46.8 million at year-end, and the warehouse purchase.
- Exposure to employee retention, professional liability, government spending, regulation, competition and international currency movements.
- Potential effects of the forthcoming revenue-recognition and lease-accounting standards; the company had not yet determined their financial-reporting impact.