Exponent Inc (EXPO) 2016 Q1 法說會逐字稿

Good day and welcome to the Exponent first-quarter fiscal 2016 results conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Whitney Kukulka.

Thank you, Operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's first quarter of fiscal year 2016 financial results conference call. Please note that this call will be simultaneously webcast over the investor relations section of the Company's corporate website at www.Exponent.com/investors.

This conference call is the property of Exponent and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Paul Johnston, President and Chief Executive Officer, and Rich Schlenker, Executive Vice President and Chief Financial Officer.

Before we start I would like to remind you that the following discussion contains forward-looking statements including, but not limited to, Exponent's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic SEC filings, including those factors discussed under the caption factors affecting operating results and market price stock in Exponent's most recent Form 10-K.

The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise. Now I will turn the call over to Paul Johnston, President and Chief Executive Officer. Paul?

Thank you. Thank you for joining us today for our discussion of Exponent's first-quarter 2016 results. For the quarter, net revenues were $79 million, a 4% increase as compared to $76.1 million for the same period last year. Net income was $15.4 million, or $0.50 per diluted share, in the first quarter of 2016, which includes $4.5 million, or $0.16 per share, attributable to the adoption of the new accounting standard for tax adjustments associated with share-based awards. Rich will elaborate on the details shortly.

We are pleased to have grown revenues and earnings during the quarter despite the challenging year-over-year comparison. Our underlying organic growth rate of net revenues was in the high single digits, offset by the completion of a major project in the third quarter of 2015. This project had represented approximately 5% of our revenue in the first half of last year and will partially offset growth again in the second quarter. We have a typical project portfolio today with no current project representing more than 2.5% of our revenues. We will return to more normal year-over-year comparisons in the second half of 2016.

In the first quarter, we had notable performances from our materials, polymer science, electrical, thermal sciences, human factors and biomedical practices. We were engaged in a broad range of investigations and disputes involving environmental and health issues, equipment failures and interruptions at manufacturing facilities. We continue to be called upon to assist clients with a diverse set of product recalls ranging from vehicles to toys. We also supported clients in evaluating potential new products for performance, reliability and safety.

We repurchased $3.5 million in common stock, paid $4.6 million in dividends and ended the quarter with $155 million in cash equivalents. Today we announced a quarterly dividend payment of $0.18 per share and reiterated our intent to continue to pay dividends going forward. We are confident in the strength and long-term financial health of the Company and believe that the combination of stock repurchases and dividend payments reflects our commitment to delivering shareholder value. Now I will turn the call over to Rich for a more detailed review of our financial performance and business outlook.

Thanks, Paul. For the first quarter of 2016, revenues before reimbursements, or net revenues, as I will refer to them from here on, were $79 million, up 4% from $76.1 million in the first quarter of 2015. Total revenues for the first quarter were $83.2 million, up 4% from $80.3 million one year ago. Our underlying revenue growth was in the high single digits but was offset by the impact of a major project which ended in the third quarter of 2015.

In the first quarter of 2016, Exponent early adopted a new accounting standard for the classification of tax adjustments associated with share-based awards, which was applied prospectively. The tax benefit realized was $4.5 million, or $0.16 per diluted share, in the first quarter of 2016. Including the tax benefit, the first quarter's net income was $15.4 million as compared to $10.3 million in the same period last year. For comparison purposes, excluding the tax benefit, net income would have been $10.9 million in the first quarter, representing an increase of 5% year over year.

Earnings per diluted share increased to $0.56, inclusive of the $0.16 per share tax benefit, as compared to $0.38 in the first quarter of last year. EBITDA for the first quarter was $19 million, up from $18.4 million in the same period of 2015.

For the first quarter, billable hours were 295,000, an increase of 1.2% as compared to the same period last year. Consistent with our expectations, utilization was 74% in the first quarter, down approximately 1.3 percentage points from the same period last year, primarily due to the impact of the major project which ended in the third quarter of 2015.

As a reminder, we have less workdays in the second quarter than we had in the first quarter due to additional holidays and vacation days taken, which will result in utilization being approximately 2% lower in the second quarter than it was in the first quarter. For the full year 2016, we continue to expect utilization to be down approximately 1% as compared to 2015.

Technical full-time equivalent employees in the first quarter were 768, which is an increase of 3% as compared to last year. For the remainder of 2016, we expect quarterly sequential headcount growth of approximately 1%. In the first quarter, the realized rate increase was approximately 2.7% but was partially offset by 0.2% from translating foreign currency for consolidated financial statements. For the remainder of 2016, we expect to realize a rate increase of 2% to 3%.

EBITDA margin for the quarter was 24.1% of net revenue, a slight decline as compared to 24.2% in the same period last year. For the second quarter of 2016, we expect EBITDA margin to be down approximately 200 basis points as compared to the unusually high level in the second quarter of last year, which was 27.3%.

For the first quarter, compensation expense after adjusting for gains and losses and deferred compensation increased 3.6%. Included in total compensation expense is a gain in deferred compensation of $430,000 as compared to a gain of $1.4 million in the same quarter one year ago. As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line.

Consistent with prior years, our salary increases are effective April 1 and we expect the average realized wage rates to increase equivalent to, or less than, our realized bill rates, which are expected to be between 2% to 3%. Stock-based compensation expense was $5.2 million in the first quarter of both 2015 and 2016. For the remainder of 2016, we expect stock-based compensation to be approximately $2.8 million a quarter.

Other operating expenses increased 7% to $7 million in the first quarter. Included in other operating expenses is depreciation expense of $1.4 million. For the remainder of 2016, other operating expenses are expected to be $7 million to $7.5 million per quarter. G&A expenses were $3.5 million in the first quarter, nearly flat with the one-year-ago period. For the remainder of 2016, G&A expenses are expected to be $4 million to $4.4 million per quarter.

Let me spend a moment and further explain the new accounting standard I mentioned earlier. Prior to the adoption of the new accounting standard, tax benefits from gains on share-based awards from the grant date to the issuance date were adjustments that ran through the balance sheet in additional paid in capital and not the income statement. Additionally, the same value was reflected on the cash flow statement in the financing section and will now be reflected in the operating section of the cash flow statement. For Exponent, the tax benefit is primarily a first-quarter event.

RSUs, or restricted stock units, from our annual stock compensation program are granted in March of each year and are issued four years later. The amount of benefit realized each year depends on the gain in the stock price over that prior four years. Over the past four years, the realized tax benefit on RSUs has been between $3.8 million and $4.5 million in the first quarter of 2013 through 2016. Based on the current stock price and the number of RSUs granted three years ago, which will vest in the first quarter of 2017, the realized tax benefit would be approximately $4.5 million in the first quarter of 2017. What this actually ends up being is entirely dependent on the stock price on the day of issuance.

Our first-quarter tax rate was 13.4%, impacted significantly by the adoption of the new accounting standard that I outlined earlier. For comparison purposes, exclusive of the tax benefit, our tax rate would have been 38.6% in the first quarter. To reiterate, this is a first-quarter event and we expect a more normal tax rate of approximately 38.6% during the remaining quarters of 2016, consistent with 2015 levels.

For the first quarter, operating cash flows were approximately zero as a result of paying out bonuses in the quarter and capital expenditures were $1.5 million. We repurchased $3.5 million of our common stock for a total of 73,000 shares at an average price of $48.13 during the first quarter. We still have $43.3 million authorized and available for repurchases under our current repurchase program.

Additionally, we distributed $4.6 million to shareholders through dividend payments and today announced another quarterly dividend payment of $0.18 for the second quarter of 2016. After repurchases, dividends and annual bonuses, we ended the quarter with $155 million of cash and short-term investments.

We are reiterating our expectations for 2016 and expect growth and revenues before reimbursements to be in the mid single digits. We believe our underlying growth will be in the high single digits but will be partially offset by the completion of a major project during the third quarter of 2015. As we previously discussed, we expect that 2016 EBITDA margin will decline approximately 50 to 100 basis points as compared to 2015 as a result of slightly lower utilization. I will now turn the call back to Paul for closing remarks.

Thank you, Rich. We are retained to investigate some of the most significant accidents and product recalls and to evaluate reliability, safety and environmental impacts of increasingly complex technologies, products and processes in an environment that is rapidly changing. We intend to leverage our experience and reputation in reactive services to continue the growth and development of our proactive services, such as design evaluations, risk management and regulatory consulting. While the previously articulated project completion continues to create headwinds for top-line growth in the first half of 2016, we are optimistic about our opportunity to leverage our unique market position to generate long-term growth.

Our long-term financial goals remain the same, produce organic revenue growth, improve profitability and maintain a solid balance sheet. We believe our strong bottom-line results and healthy capital structure demonstrate the resilience of our model. Finally, our ongoing stock repurchases and dividend payments reflect our commitment to delivering long-term shareholder value. Operator, we are now ready for questions.

(Operator Instructions)

We will take a question from David Gold of Sidoti.

Good afternoon. A couple of questions for you. First, as we think about the headcount adds over the next few quarters, can you speak to a couple of spots? One, any particular areas -- obviously you called a few where you've been having success -- where you're looking to most aggressively add, number one?

Number two, are there newer areas of expertise that are being developed along the lines of your core business that you might want to speak about as well?

Sure. Certainly when we look at the areas that have been growing in headcount, they are not, as you might expect, they are not uniform across the Company. We have areas that are pushing stronger.

We are continuing to see a trend we've seen for quite some time now, quite a number of quarters, where we are seeing much of that growth in the area that is some of the -- what I will call traditional engineering practices, materials, polymer science, electrical engineering and thermal sciences. Those practices, for example, were very solid in Q1, have been growing and we expect to get -- to make more of what I will call our entry-level hires in those spaces.

That also laps over to the growth of our still relatively small offices in Asia, in Shanghai and Hong Kong, where we continue to see a fair amount of demand. Again, on the health and environmental segment, the area that continues to grow the fastest is what we call the food and chemical center, which is really associated with food safety and chemical regulations for the pesticide regulations and so forth. Those areas, I think, are the ones we see really sort of the strongest growth in.

Within that, I would say areas that are a little bit newer for us, we're finding a lot of growth and demand for what I'm going to call chemistry. Our polymer sciences -- actually the full name of the practices polymer science and materials chemistry and there is quite a lot of demand in that area.

We've been growing the sort of service range that we provide to clients in that area both from an equipment standpoint, we do a certain amount of testing work to support our consulting and so we've been active in that area as well as finding new people to grow out the chemistry side of what used to be more focused on what I will call the materials side. That represents a new -- certainly a growing new area for us.

We continue to look at areas related more to computer science and pharmaceutical consulting but those areas have not, as of yet, grown at a rate that we are looking to get for the future.

Got you, perfect. As you've gone out and hired, have you seen any change in ability to hire? Is it any more difficult maybe than it's been or status quo and you're still able to hire as necessary?

I don't -- look, I think it is always a little bit difficult but I think we actually have great success in our entry-level hiring. I think we have a focus on hiring from top schools and we have sort of active programs in recruiting PhDs from those schools. I think that program continues to work well.

There is no question there is more competition there than there was, let's say, 5 to 10 years ago, certainly in just about all of the high-tech areas. Whether you are talking about electrical, computer science, any of the materials-related areas, whether it be polymer materials or other areas, biomedical, a lot of these areas are very, very strong right now just because of the high-tech industry both in medical devices, consumer electronics and so forth. Many of our, frankly, good clients are also hiring people in that space.

So there is certainly a lot of competition, but we still feel we can get our share and I think that we don't feel like our growth is limited by our ability to find qualified entry-level people. I think growing organically in the high single digits is, in the current economy, is about where we think we can be and we think we can find those.

To branch into new areas, we do need to recruit at the more senior level -- not more senior, at the very senior level. I think if you are looking for solid leadership in developing new areas, and that space is always difficult to recruit in because really talented people and well-known people with good reputations in those spaces are typically cared for well in doing what they are doing now.

But every now and again we get an opportunity because of some kind of an upset at that company or in the marketplace and we certainly take those opportunities. We've made some good senior-level hires this year and we hope it's going to take some time obviously for that to consolidate and build out from there but we've had, I think, a little bit more success so far this year than we had last year. But hiring the senior people has always been the more difficult challenge for us.

Got you, perfect. One or two other quick ones. Paul, as we think about uses of cash, obviously you bought back a little bit of stock during the quarter, but the cash position continues to be quite strong. Any thoughts there aside from dividend as to acquisitions, hiring and repurchases when you think about the use of that cash?

Certainly we do continue to look at acquisitions. But we have been what we consider to be very disciplined. Some people might say very conservative but we certainly have been very disciplined about trying to find what we are looking for. We found a couple of good opportunities that we weren't able to close on but -- so we're going to continue to look there.

We don't expect that even if we are successful in that area that it would take a huge amount of our cash because we are looking for acquisitions that are closer to seed than they are of a significant percentage of the size of our Company, plus the fact, I think, if we were going to do something we would want the people joining us to have an interest in our stock so there would probably be some split between stock and cash that we would do the deal on.

So yes, we need to have some money available for that but that's not -- we don't think that obviously requires what we've got right now. I think we are pretty comfortable with the approach of an increasing dividend. That, I think, we've had a good track record of since we introduced it a few years back.

I think just to reiterate what we have generally said about stock repurchases, which is that we, regardless of the price, we expect to buy back enough to make sure we offset any stock that we are putting out during the year, but for more significant buybacks, they are more likely to happen on those times when there is a bit of a pullback in the stock. And I think again, we've -- our track record over time has sort of demonstrated that that's the approach we've taken.

Sure, perfect. One last one. Rich, can you give either the number of shares repurchased or average share price? I know you gave the aggregate dollar value.

Yes, it was -- just one second. The number of shares was 73,000 shares at $48.13.

$48.13, you said, and 73,000? Perfect. Thank you both.

Our next question is from Tobey Sommer of SunTrust.

Hi, this is Kwan Kim on for Tobey. Thanks for taking my questions. First off, regarding the auto segment, could you give us an update on the activity level in that area? I know you can't give us specific names but if you could elaborate on what types of work are driving this segment right now and whether the business is as it was last quarter? Thank you.

Sure. I think what we have been able to say as you know, I think, in this area, there are times when we can announce what we are working on and there are times when our client hasn't yet disclosed that and so we can't. The two things that have obviously been more in the news of late continue to be the issues around airbags that we've described that we are involved in working for the automotive manufacturers for.

We've also indicated, the other issue that is out there obviously is the Volkswagen emissions issue. We've not been able to say that we've been retained there. We've basically been in a position of being able to describe that no disclosures will be made but also let people know that Volkswagen is a client of the firm on other matters.

I don't really have any special update to describe there with regard to what is going on in the recall side of the business. I think it continues to be pretty strong. There is a lot of activity in that area but it has been strong for some time so I wouldn't describe that as being a big change.

I do think -- I would say that I do think we are finding more opportunities to work in the electric vehicle space. We are a pretty well-known firm for especially consulting on battery technology and battery reliability and everything from sort of reliability, safety, puncture resistance, even to the point of how you put out a fire that started with batteries, those kinds of issues. We have been doing quite a lot of work in that area and we continue -- that area continues, I feel, to grow for us.

Got it. My second question is regarding returning capital to shareholders. You said in the last conference call that it will be a four- to five-year process in getting that net cash level down to smaller rates. Do you still see it as a four- to five-year process now or is there a shortened timeframe?

No, I think we still -- that's kind of our goal. I think as I described in answer to David's question, depending upon what kind of pullbacks you got in the stock, we are not looking for pullbacks in the stock but the reality is they do happen from time to time and when they do that will create a bigger opportunity for us to buy back more stock.

In a slightly strange way, it is actually difficult for us to predict how long it will take to get our cash back to the more normal level that we've described. I wouldn't say normal, the sort of target level we have talked about in the $50 million, $70 million kind of range. We don't expect to do that all in a year but we would expect over a period of the few years we would get those opportunities.

Okay. On the proactive side, could you give us some color on the areas of increased activity? Where are you seeing increased demand compared to last year? Maybe give us an update on your energy client base.

Yes, so a few different things. The areas that are strong for us in the proactive space, we continue to do well in consumer electronics and medical devices. There is also a fair amount of activity in the construction area -- construction management area that we are involved in. There is definitely in the regulatory consulting, we see opportunities there. We are doing quite a bit of work associated with utility clients, I think, would continue.

I think the area that is a little bit weaker in terms of the proactive work would be the oil and gas sector and I think probably not surprising, given the price of oil of late. We continue to get retained when there are event-driven activities in the reactive space there, but I think the proactive space has been quieter as a result of the drop in the price of oil.

My last question is numerical. What is the revenue breakdown between engineering and environmental and health?

The revenue on a total revenue basis, the revenues for the first quarter were $64.8 million in the engineering area and $18.3 million for the environmental and health. On a net revenue or revenues before reimbursement, those were $61 million for engineering and $18 million for environmental and health.

Got it. Thank you very much.

Our next question is from Tim McHugh of William Blair.

Hi, guys. Just quickly, I guess, on the product recalls area, because you highlighted that. I guess it has been strong for a while but I would assume there is some inherent volatility in that. What's -- I recognize maybe on the other hand there is a long-term trend towards complexity in projects that's going to drive maybe more product recalls over the long term.

How do you think about weighing those two things on a -- I guess where we are at in terms of the level of work from product recalls versus if you look over 5 or 10 years for you guys? Are we elevated? Is that sustainable, or is this kind of a different form of bigger project risk that at some point inevitably will have its ups and downs?

Tim, I would look at that in a couple of different ways. I think the product recalls that get the most publicity are the vehicle ones that are controlled by NHTSA. But I think there is another whole set of recalls from the Consumer Product Safety Commission, CPSC.

Our view is that the recall activity from the CPSC, or just consulting related to recall issues in the CPSC has clearly been increased. There have been some regulatory changes there that have toughened up the rules there and we clearly see more activity associated with product safety separate from the automotive space.

We think that, that's a growing business and it runs the whole gamut from fairly big things like off-road vehicles that wouldn't necessarily be under NHTSA to toys and all kinds of other consumer products. We are seeing more work in that area and we anticipate and we are kind of adding some staff to address some opportunities in that particular space.

If I come back to the NHTSA side, there is no question we have seen a number of very high profile ones over the last several years. When you think back to unintended acceleration, ignition switches, emissions and air bags and so forth, there has been a lot of sort of publicity over very large matters.

I don't think I'm in a position to say that we think that, that's going to get less over time. Vehicles get safer over time but vehicles get more complex over time, so the range of issues that come up is just continuing to expand.

If you think about it, vehicles used to be very sort of mechanical devices. You look at unintended acceleration, it was really a lot of work on electronics and software. We are now looking at recall issues, if you think about the airbags on safety equipment.

Well, think about where the automotive industry is going. It is all about software and cars that will automatically stop when there is a vehicle in front. Lane departure guidance, all kinds of new safety equipment tied up mostly in electronics and software.

People are going to be relying on those kinds of devices in the future. There is a whole new range of things that while they'll keep us safer, from time to time will have a problem. I think it's changing a little bit in that it's not just mechanical devices anymore but I don't really have any basis to believe that there won't continue to be significant issues.

Again, people's expectations about safety of vehicles are pretty extraordinary. Here we are, we've reduced in America the number of fatalities in a year from 50,000-plus per year to whatever is now, in the 30,000s. Let's call it 35,000 -- sorry, to 35,000 a year but yet recalls haven't reduced. We're going to reduce the fatalities further but again, it's just expectations keep going up so we don't really see that going away.

Okay, that's helpful. Rich, on the tax rate, this is an accounting change, right? It doesn't change the cash flows or effectively your cash tax rate in any way. Is that fair?

It does not change our cash tax rate. Previously, you were required to flow this tax benefit through the financing section of your cash flow statement and since now it will be running through the income statement, it will be moved and reflected in the operating cash flow of the Company. The Company's operating cash flow will increase by the amount of this tax benefit but the overall cash flow will not, and the balance sheet will, in net, not change.

Okay, and it's not something that is spread through the year in future years, it will all be a Q1 event?

It will, for Exponent, because of the timing of the vast majority of stock put out at our Company is done one time each year in March when we distribute our RSUs, it will primarily be focused then. There will be other times during the year that it can or will come out. Our Board of Directors gets their amount of -- their stock in the second quarter. That is sort of a less material amount and I don't think will really make a material difference.

The other timing that can affect it which is totally variable is that you do get the same benefit on an exercise of a stock option that is exercised and the taxes realized on that. The timing of when stock options are exercised obviously is not forced into a certain period of time. So those will just be at the time that those are traded.

Exponent doesn't have a large number of options outstanding, so that number will be less for us but it can come along. For instance, last year, related to other things, it was a material amount. If you go back, our -- in 2015, we -- in the first quarter we had $4.4 million of tax benefit and during the rest of the year we had another $2 million.

The prior two years to that we only had something approximating $0.5 million of benefit in addition to what we had in the first quarter. It will vary and the timing of it will vary as well but I wouldn't -- there is not an ability to plan for that at this time.

Okay, great. Thank you.

There are no further questions at this time. This concludes today's Exponent first-quarter fiscal 2016 results conference call. Thank you for participating. You may now disconnect your lines and everyone, have a great day.