Exponent, Inc. — FY2012 Form 10-K Summary
Period note: Request metadata says “2011 Q4,” but the filing is the annual report for the 52-week fiscal year ended December 28, 2012, with FY2011 as the main comparable period. Dollar amounts below are USD unless stated otherwise.
Business context and reporting period
Exponent is a science and engineering consulting firm, with two operating segments: Engineering and other scientific, and Environmental and health. Its project-based work includes consulting, defense technology product sales, and related reimbursements. The company reported 960 employees at year-end. KPMG issued an unqualified audit opinion on the financial statements and internal controls.
Financial performance and liquidity
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $292.7m | $272.4m | +7.4% |
| Revenue before reimbursements | $266.6m | $246.7m | +8.1% |
| Operating income | $57.6m | $53.5m | +7.8% |
| Net income | $37.2m | $32.7m | +13.9% |
| Diluted EPS | $2.60 | $2.22 | +17.1% |
| Operating margin / net margin | 19.7% / 12.7% | 19.6% / 12.0% | Higher |
| Operating cash flow | $48.5m | $46.6m | +4.1% |
| Cash, equivalents and short-term investments | $134.1m | $109.7m | +$24.5m |
| Working capital | $163.7m | $137.8m | +$25.9m |
EBITDA was $66.1m, or 24.8% of revenue before reimbursements, versus $59.0m and 23.9% in FY2011; these are non-GAAP measures. Capital expenditures were $4.9m. Financing activities used $18.9m, including $22.9m of share repurchases. The balance sheet reports no borrowings; total liabilities were $99.0m, including $24.7m of deferred compensation. The company said available cash and investments should cover expected needs over the next 12 months.
Material changes versus FY2011
- Revenue grew in both segments: Engineering and other scientific rose 6.8% to $213.3m; Environmental and health rose 9.2% to $79.3m.
- Billable hours increased 7.2%, technical full-time equivalents increased 4.7%, and utilization rose to 73% from 71%.
- Defense technology product sales fell to $9.2m from $12.3m, mainly because of lower U.S. Army surveillance-system sales.
- Compensation expense increased 9.5% to $171.8m, faster than revenue, while other operating and G&A expenses grew more slowly.
- Accounts receivable, net, increased to $85.4m from $73.1m, including unbilled receivables of $33.4m, up from $25.1m.
Outlook, risks, contingencies and unusual items
Management gave no quantified revenue or earnings guidance. It expected activity on some major assignments to step down as projects progress, a significant decrease in defense surveillance-system sales in FY2013, and slower headcount growth. It planned selective hiring and investment in business development and infrastructure. A first quarterly cash dividend of $0.15 per share was declared in February 2013, payable March 29; future quarterly dividends are subject to board approval. The board also authorized an additional $35m for share repurchases in February 2013.
Key risks include the small and unpredictable backlog, client termination or delay of engagements, competition and pricing pressure, dependence on attracting and retaining specialist staff, economic and client-credit conditions, and exposure to litigation and professional liability. Federal budget reductions, sequestration, delayed government awards, and reduced activity in Afghanistan may pressure defense-related work. Management identified revenue recognition and doubtful-account estimates as critical accounting judgments.
A former client may pursue claims related to employee testimony; the potential loss cannot be estimated. Management believes the matter is not expected to have a material adverse effect and says some claims may be insured. The company reported no material legal proceedings. Unrecognized tax benefits were $0.9m, with no resolution in the next 12 months expected to materially affect results. FY2012 other income included a $2.2m gain on deferred-compensation plan assets, offset by corresponding compensation expense, and $1.7m of rental income.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the supplied request says 2011 Q4, while the filing covers FY2012.
- Track utilization, staffing, and whether elevated major-project activity recedes as management expects.
- Assess the potential effect of lower defense sales and federal spending constraints on segment results.
- Monitor receivables and unbilled work for collection risk, particularly as revenue grows.
- Review developments in the former-client claim, tax positions, repurchases, and the newly initiated dividend.