Exponent, Inc. (Nasdaq: EXPO) — Form 10-K Summary
Period clarification: The supplied filing is for the fiscal year ended January 3, 2020, not 2018 Q4. Fiscal 2019 comprised 53 weeks versus 52 weeks in fiscal 2018; the filing also reports quarterly results.
Business context and reporting period
Exponent is a multidisciplinary science and engineering consulting firm serving commercial and government clients across two segments: Engineering and Other Scientific, and Environmental and Health. Its project-based services include failure analysis, product safety, regulatory advice, and litigation support. No client generated more than 10% of 2019 revenue; consumer products, transportation, and energy and utilities represented approximately 24%, 17%, and 17%, respectively.
Key financial metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $417.2 million | $379.5 million | +9.9% |
| Revenue before reimbursements | $391.4 million | $354.6 million | +10.4% |
| Operating income | $85.1 million | $91.5 million | -6.9% |
| Operating margin | 20.4% | 24.1% | Down 3.7 percentage points |
| Net income | $82.5 million | $72.3 million | +14.1% |
| Diluted EPS | $1.53 | $1.33 | +15.0% |
| Operating cash flow | $108.1 million | $91.2 million | +18.5% |
| Cash, cash equivalents and short-term investments | $231.6 million | $208.6 million | +$23.0 million |
| Working capital | $240.1 million | $228.3 million | +$11.8 million |
| Total assets / stockholders’ equity | $563.4 million / $350.3 million | $468.9 million / $313.9 million |
EBITDA was $107.1 million, or 27.4% of revenue before reimbursements, compared with $96.9 million, or 27.3%, in 2018. The filing reports no borrowings; liabilities include operating lease obligations and deferred-compensation liabilities. FY2019 dividends declared were $0.64 per share, up from $0.52.
Quarterly Q4 results: revenue was $110.1 million versus $92.1 million in Q4 2018; operating income was $21.4 million versus $26.8 million; net income was $19.1 million versus $16.0 million; diluted EPS was $0.36 versus $0.30.
Material changes versus prior period
- Revenue growth reflected higher billable hours and billing rates, broad demand, and one additional fiscal week. Billable hours rose 8% to 1.376 million; technical FTEs increased 7% to 901, while utilization eased to 72% from 73%.
- Engineering and Other Scientific revenue increased 10.9% to $339.8 million; Environmental and Health revenue rose 5.7% to $77.4 million.
- Operating income fell despite revenue growth, as compensation and related expense rose 17.3% to $252.2 million and general and administrative expense rose 17.0% to $20.5 million. Compensation expense included a higher deferred-compensation plan charge.
- Net income benefited from higher revenue, a lower effective tax rate (20.9% versus 22.6%), and a substantial swing in deferred-compensation investment results recorded in both other income and compensation expense. Excess tax benefits on stock awards were $8.1 million versus $4.2 million.
- Operating cash flow increased to $108.1 million. Capital expenditures were approximately $23.0 million, including completion of the Natick, Massachusetts office and laboratory facility. The company repurchased $22.0 million of stock and paid $33.5 million in dividends.
Outlook, risks, contingencies and unusual items
- Management cited demand across a diverse set of industries and practices, including energy storage and battery technologies, utilities integrity assessments, international arbitration, human factors, and chemical and environmental health work. It plans selective hiring and continued investment in infrastructure. No specific revenue or earnings guidance was provided.
- Management expected 2020 results to be adversely affected by the coronavirus outbreak. Shanghai and Hong Kong offices temporarily closed in January 2020 and had reopened by the filing date; duration and financial impact were uncertain.
- PG&E filed for bankruptcy in January 2019. Exponent had $3.0 million of pre-bankruptcy receivables at year-end and expected substantially full collection, subject to bankruptcy-process uncertainty.
- The company was pursuing divestiture of its German subsidiary, considered non-strategic; the filing records a $0.6 million foreign-exchange loss and a $1.0 million tax charge associated with the planned divestiture.
- Key risks include unpredictable timing and cancellation of engagements, limited backlog visibility, employee recruitment and retention, competition and pricing pressure, client payment risk, professional liability and reputational damage, litigation-related demand changes, cybersecurity and privacy, international and foreign-exchange exposure, and economic or catastrophic disruptions.
- Operating lease accounting was adopted in 2019, adding $23.0 million of right-of-use assets and lease liabilities to the balance sheet. The auditor issued an unqualified opinion and identified accounts-receivable collectibility as a critical audit matter. Management and the auditor reported effective internal controls.
- The filing states there were no material legal proceedings. It reports $4.3 million in allowances for contract losses and doubtful accounts, and $1.9 million of unrecognized tax benefits; timing of the latter is uncertain.
Most important facts for investors to verify
- Confirm the intended period: the provided document is the FY2019 10-K, despite the request metadata stating 2018 Q4.
- Assess whether revenue growth can continue and whether utilization and operating margins recover as hiring and compensation costs rise.
- Review the composition of the large deferred-compensation plan assets and liabilities and the effect of their market-value changes on reported earnings.
- Track collection of the PG&E receivable and the outcome and financial impact of the German subsidiary divestiture.
- Evaluate the actual effect of the coronavirus disruption and other demand, staffing, client-concentration, litigation, and regulatory risks on subsequent results.
- Verify cash deployment, capital spending, lease commitments, dividends, and share repurchases against future cash generation; the board declared a subsequent quarterly dividend of $0.19 per share.