Exponent, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended January 2, 2015 (52 weeks). The filing is an annual report for fiscal 2014, not a 2013 Q4 filing; the prior fiscal year ended January 3, 2014 and included 53 weeks. Unless noted, amounts below are in millions of dollars.
Business context and reporting period
Exponent is a science and engineering consulting firm serving industry and government through more than 90 technical disciplines. It operates two segments: Engineering and Other Scientific, and Environmental and Health. Work includes reactive investigations and litigation support as well as proactive design, regulatory and risk consulting. Client engagements are generally terminable or postponable, and management cautions that backlog is not a reliable revenue indicator.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $304.7 | $296.2 | +2.9% |
| Revenue before reimbursements | $289.2 | $280.0 | +3.3% |
| Operating income | $63.5 | $55.9 | +13.6% |
| Net income | $40.7 | $38.6 | +5.3% |
| Diluted EPS | $2.94 | $2.76 | +6.5% |
| Operating margin | 20.9% | 18.9% | +2.0 percentage points |
| Net margin | 13.4% | 13.0% | +0.4 percentage points |
| Operating cash flow | $48.3 | $61.8 | Down $13.5 |
Management attributed revenue growth to higher billable hours and billing rates, partly offset by one fewer week of activity. Billable hours rose 1.8%, utilization increased to 72% from 71%, and technical full-time equivalent employees increased 3.1% to 741. EBITDA was $73.2 million, or 25.3% of revenue before reimbursements, versus 24.6% in FY2013.
Engineering and Other Scientific revenue was $223.4 million (+3.4%), with segment operating income of $72.2 million. Environmental and Health revenue was $81.3 million (+1.4%), with segment operating income of $25.1 million. Segment operating income is before corporate operating expenses.
Cash, cash equivalents and short-term investments totaled $154.4 million at year-end; working capital was $187.2 million. Operating cash flow fell primarily because client cash receipts declined and accounts receivable increased. Capital expenditures were $4.9 million. The filing reports no borrowings or debt balance; total liabilities were $121.0 million, including $37.7 million of deferred compensation liabilities. Operating lease commitments totaled $22.7 million, plus $0.3 million of purchase obligations.
Material changes versus the prior comparable period
- Operating income improved despite modest revenue growth, with operating margin rising to 20.9% from 18.9%; compensation expense declined slightly while revenue increased.
- Net income increased 5.3%, but other income, net, declined 44.8% to $4.4 million, principally because gains on deferred-compensation plan assets were lower than in FY2013.
- Operating cash flow decreased from $61.8 million to $48.3 million as receivables rose; year-end net accounts receivable increased to $86.4 million from $77.0 million.
- Cash dividends paid rose to $13.0 million from $7.9 million. The company repurchased $30.9 million of shares versus $25.0 million in FY2013.
- Comparisons are affected by the prior year having 53 weeks and FY2014 having 52 weeks.
Outlook, management commentary and risks
Management gave no quantified revenue or earnings guidance. It expected a major investigation to step down from elevated activity as it progressed through its project life cycle, and anticipated lower Technology Development activity due to constrained defense spending and the withdrawal of U.S. and U.K. combat troops from Afghanistan. It planned to selectively recruit talent, invest in infrastructure and emerging growth areas, manage expenses, and continue considering dividends and repurchases. A $0.30-per-share dividend payable in March 2015 had been announced after year-end; future dividends and buybacks remain subject to board approval and capital needs.
Key risks include uneven project timing and client cancellations, competition and pricing pressure, dependence on attracting and retaining skilled staff, client credit and collection risk, concentration in certain industries and government work, reduced regulatory enforcement or tort reform, professional liability and reputational exposure, cybersecurity incidents, international and foreign-exchange exposure, and changes in government defense priorities or contract awards. The company had $1.5 million of unrecognized tax benefits; management did not expect uncertain tax positions to materially affect results in the next 12 months. It reported no material legal proceedings, while noting ordinary-course claims that it believed would not materially affect its financial condition, results or liquidity. No goodwill or long-lived-asset impairment was recorded. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Confirm the period being analyzed: this 10-K covers FY2014 ended January 2, 2015, not 2013 Q4; compare on a week-adjusted basis where appropriate.
- Track accounts receivable, collections and operating cash flow, given the year-over-year cash-flow decline and higher receivables.
- Assess the earnings and utilization impact if the major investigation and defense-related Technology Development work decline as management expected.
- Review the sustainability of margins and shareholder returns alongside hiring, infrastructure spending, lease commitments and the board’s discretion over dividends and repurchases.
- Check subsequent filings for developments in tax positions, client claims, government contract activity, foreign-exchange exposure and adoption of the new revenue-recognition standard.