Exponent Inc (EXPO) 2017 Q2 法說會逐字稿

Good day, and welcome to Exponent's Q2 2017 Earnings Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Ms. Whitney Kukulka of the Blueshirt Group.

Please go ahead, ma'am.

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's Second Quarter 2017 Financial Results Conference Call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at www.exponent.com/investors. This conference call is a 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, Chief Executive Officer; and Rich Schlenker, Executive Vice President and Chief Financial Officer.

Before we start, I would like to remind you 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.

And now, I'll turn the call over to Paul Johnston, Chief Executive Officer. Paul?

Thank you. Thank you for joining us today for our discussion of Exponent's second quarter 2017 financial results.

Exponent's second quarter results exceeded our prior outlook, and we are raising our guidance for the year. As you've seen in our press release, we achieved double-digit revenue growth in the quarter. Our strong results were due in part to the continuation of a large human factors assessment project for a client in the consumer products industry as well as strengthen our biomedical, construction consulting, electrical engineering and polymer science practices.

For the quarter, net revenues were $84.1 million, an increase of 15% as compared to the second quarter last year. Net income in the second quarter of 2017 was $13.8 million or $0.51 per share compared with $10.5 million or $0.38 per diluted share in the same period last year.

Comparative growth rates for the quarter were aided by the unusually soft results in the year-ago period. While we are still experiencing softness in the oil and gas and the industrial chemical industries, we are encouraged by positive trends that we are seeing across the business.

Regarding the large project in the consumer products industry, we had previously expected this project to decelerate during the second quarter. The project, however, continued at the same level, and as a result, this project represented approximately 5% of our net revenue for both the first and second quarters.

We now anticipate this project will continue with about 3% to 4% of net revenues in the third quarter. We expect to return to a more normal project portfolio in the fourth quarter with no projects exceeding 2% to 3% of net revenues.

Net revenues in our engineering and other scientific segment represented approximately 79% of net revenues in the second quarter. Net revenues in this segment grew 16% in the second quarter and 10% year-to-date as compared to last year.

Year-to-date, we have had significant growth from our proactive design and regulatory consulting services. Specifically related to ongoing projects with clients in the consumer products industry.

Demand from the medical device industry continue to grow during the quarter, as clients called upon our multidisciplinary teams for supporting product development and litigation matters. We continue to expand our international construction dispute work with ongoing mining, gas terminal and power plant projects. We believe we have gained a competitive advantage through our integrated team of experts by delivering solutions to complex capital projects.

Additionally, after several quarters of flat revenue from the automotive industry, revenue grew in the second quarter, as we were called upon to evaluate safety and human performance issues for new transportation technologies.

The balance or 21% of Exponent's second quarter net revenue is from our environmental and health segment. After several quarters of decline, we are pleased that this segment returned to year-over-year growth in the second quarter.

Net revenues grew approximately 11% in the second quarter and 2% year-to-date. Exponent's food and chemicals and environmental sciences practice areas also benefited from our increased global presence.

During the first half of the year, our food and chemicals practice continue to expand, as it assisted clients with regulatory issues around the world. Revenues from oil and gas and industrial chemical industries remain flat, as clients continued to adjust to the price of oil.

As our second quarter results indicate, Exponent continues to be retained by a diversified portfolio of high profile clients, expanding a wide range of practice areas. In the first half of the year, we paid $10.8 million in dividends, repurchased $7 million worth of common stock and ended the quarter with $162 million in cash equivalents.

Today, we announced another quarterly dividend payment of $0.21 per share and reiterated our intent to continue to pay dividends going forward. We believe that our second quarter results demonstrate the resilience of our business model and our regular quarterly dividend payments. And stock repurchase program demonstrates our commitment to deliver 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 second quarter of 2017, revenues before reimbursements or net revenues, as I will refer to them from here on, were $84.1 million, up 15% from $73.3 million in the same period last year. Total revenues for the quarter were $87.8 million, up 14% from $77.3 million 1 year ago.

As Paul mentioned, our strong second quarter results were driven by the large project combined with sustained demand in international construction disputes and product development and litigation matters in the medical device industry.

Net income for the second quarter increased 32% to $13.8 million or $0.51 per diluted share, as compared to $10.5 million or $0.38 per diluted share in the same period last year.

EBITDA for the quarter was $23.7 million, up 32% from the $18 million in the year-ago period. For the first half of 2017, net revenues increased 8% to $164.6 million and a total revenues increased 7% to $172 million. Net income was $30.4 million or $1.13 per diluted share in the first half of 2017, as compared to $25.8 million or $0.95 per diluted share in the same period a year ago.

In the first quarter of 2016, Exponent early adopted a new accounting standard for the classification of tax adjustments associated with share-based awards. The tax benefit realized in the first half of 2017 was $6.1 million or $0.22 per share as compared to $4.8 million or $0.18 per diluted share in the first half of 2016.

For the first half of 2017, EBITDA increased 15% to $42.5 million. For the quarter, billable hours increased 13.5% to 310,000 as compared to the same quarter a year ago. For the first half of the year, billable hours increased 6.6% to 605,000 as compared to the same period last year.

Utilization in the quarter increased to 77%, up from 69% in the same quarter last year and exceeded our previous expectations. For the first half of the year, utilization was 75.6%, up from 71% 1 year ago. Utilization benefited from the large project and strong demand in many parts of our business. While we expect utilization in the third quarter to be better than it was in the same period last year, it will be down sequentially from the second quarter by approximately 4 to 5 percentage points due to an additional holiday and vacations in the third quarter, which will reduce UT by 2.5 to 3 percentage points. And the lower level of activity on the large human factors project, which will result in an additional 2-percentage-point reduction in UT. For the fourth quarter, utilization typically steps down 4 to 5 percentage points from the third quarter based on additional holidays and vacations. As a result, we expect full year utilization to be 72% to 73%.

Technical full-time equivalent employees in the quarter were 774, which is an increase of approximately 1%, as compared to both the first quarter of 2017 and the second quarter 1 year ago. We expect FTEs to grow 1% sequentially in each of the next 2 quarters.

In the second quarter, the realized bill rate increase was approximately 1% year-over-year, but was partially offset by 0.3% from translating foreign currencies for consolidated financial statement. The reason for the lower bill rate increase is the increased utilization of junior staff as the firm gets busier. For the remainder of 2017, we expect to realize rate increase of approximately 1% to 2%.

EBITDA margin for the quarter was 28.2% of net revenue as compared to 24.6% in the same period last year. For the first half, EBITDA margin was 25.8%, as compared to 24.3% in the same period 1 year ago. For the quarter, compensation expense after adjusting for gains and losses and deferred compensation increased 10%. Included in total compensation expense is a gain in deferred compensation of $1.1 million, as compared to a gain of $940,000 in the same quarter 1 year ago. As a reminder, gains and losses and deferred compensation are offset in miscellaneous income and have no impact on the bottom line.

2017 salary increases were effective April 1. The rise in salaries will be similar to the bill rates. Stock-based compensation expense increased 30% to $3.5 million in the quarter, which is attributable to the increase in the bonus pool, which is in line with the growth in profitability. We expect stock-based compensation to be approximately $3 million in each of the remaining 2 quarters.

Other operating expenses increased 1% to $7.3 million in the second quarter. Included in other operating expense is depreciation expense of $1.6 million. For the remainder of the year, we expect other operating expenses to be approximately $7.4 million to $7.6 million per quarter.

G&A expenses were $5 million in the quarter, up 20% due primarily to our managers meeting and marketing materials that leverage our 50th anniversary.

These expenses were realized in the first and second quarters. For the remainder of 2017, G&A expenses are expected to be $4.2 million to $4.5 million per quarter. Our tax rate for the quarter was 38.3% as compared to 37.3% in the second quarter last year. Our tax rate for the first half of the year was 23.6%, down slightly from 25% in the same period last year. The year-to-date tax rate was impacted significantly by the adoption of the new accounting standard, which was primarily a first quarter event for Exponent. We expect a tax rate of approximately 39% during the remainder of the year.

For the quarter, operating cash flows were $18.8 million and capital expenditures were $1.2 million. We repurchased $5.7 million in common stock in the second quarter. Year-to-date, we have repurchased $7 million of common stock for a total of 118,000 shares at an average price of $59.57.

We still have $50 million authorized and available for repurchases under the current repurchase program. We distributed $5.4 million to shareholders through dividend payments in the second quarter and $10.8 million so far this year. Today, we also announced another quarterly dividend payment of $0.21 for the third quarter and reiterated our intent to continue to pay quarterly dividends. After repurchases and dividends, we ended the quarter with $162 million of cash and short-term investments.

We are increasing our fiscal year 2017 expectations to reflect our strong performance in the first half of the year, and our expectations for near-term market trend. We expect 2017 revenues before reimbursements to grow in the mid- to high-single digits and EBITDA margin to grow between 40 and 80 basis points as compared to 2016.

I will now turn the call back to Paul for closing remarks.

Thank you, Rich. Exponent's market position in international capital project disputes, consumer product recalls and product liability claims continues to generate brand awareness on an international scale. Our global presence continues to trade additional opportunities for proactive engagements, specifically in design and regulatory consulting. Our first half results demonstrate the growing demand for our diverse expertise to address complex business issues.

We are pleased with our ability to expand our business in both reactive and proactive services, as demonstrated in construction disputes and human factors assessments. We believe we are well positioned for long-term growth, as we provide our clients with solutions to address technological complexity, safety, human health and the environment.

Operator, we are now ready for questions.

(Operator Instructions) And we'll take our first question from Tim McHugh with William Blair & Company.

First, can I ask about the environmental and health. What changed there, I guess, certainly there is easier comparisons that you're coming up against on that part of the business in terms of large projects. But is there something about the marketplace that feels differently, I guess, or success with building something out. Can you just elaborate more on the changing growth rate on that piece?

So Tim, a significant part of that change is the fact that we have been able to leverage some of the staff in that area of the business on to some of the projects that -- some of the international projects that we have that would not necessarily be pegged as being overly focused in our traditional environmental and health space. So I think the global footprint that we're getting with more and more international projects has allowed us to increase the utilization in that area. So that's sort of the first item. The second item really is the more traditional one, which is, as you recall, the part of that business that has been growing nicely is our food safety and chemical regulation practice that is largely based in, in Europe and also in the U.S. And that business continue to perform very well in this quarter.

Okay. And how should this large project in the consumer products area, how should we think about that? I know you're -- it's a long ways off, but I'm trying to think of, comparing against this now as we get to 2018. Is this -- would -- that's everything that could reoccur at this point? Or how should we think about, I guess, from growing on top of it?

Yes, so I think it would be fair to say that an individual project of the scale of the, sort of, 5% per quarter, we've had in the first 2 quarters. In this particular area of business, it is likely to be very rare. Having said that, I would say, we have a number of projects in this area that are quite large, not large enough to be singled out, but quite large. And the number of projects we have in this area is definitely being growing fairly rapidly over the last couple of years. So we believe this area of, sort of, human factors assessments is on, sort of, product development type projects is very much kind of a growing business for us. It is something where we feel we have a pretty strong competitive advantage in this area. There aren't really many other firms that are even in this area. And I think that we see this is something that's going to continue to grow. Whether -- when this project ends, we'll be able to completely offset those revenues immediately by other projects in the space is not clear. But certainly, we'll be offsetting a significant portion of the large project with other projects at the time that this -- we believe at the time that this project comes to an end.

Okay. And of the -- maybe given that comments, if I look at the proactive work, which I think you said is 40%. How much of that at this point would be these types of human factors -- projects, even a ballpark there?

Gosh, yes, yes.

I mean, 10% overall.

Yes, probably 10% of that. Yes, I don't think it's even at that number. Yes, it's probably about that number. Yes, it's really sort of maybe a high single-digit percentage of our business to 10%, somewhere around there at this point in time.

Okay. And then, I'm sorry, just one numbers question. Rich, did you say 774 for the FTE count?

Yes, 774.

(Operator Instructions) We'll go next to Joseph Foresi with Cantor Fitzgerald.

This is Mike Reid on for Joe. So you noted that the growth came off sort of a softer second quarter last year. But I guess, the third quarter was a little bit soft as well. So could we see maybe the same kind of growth next period. And then in 4Q see the annual growth rate maybe slow down a little bit. Is that maybe what we're looking at seasonally?

We definitely, I mean, last year in the third quarter, we did see revenues a little bit stronger than we had seen in the second quarter. We normally see our utilization step down, as I mentioned in my comments, from the second to third quarter. But last year, actually utilization was up 1% going from the second to third quarter. So that was unusual to see that step up in utilization, obviously off of a lower base in the second quarter last year, where we are disappointed. In the fourth quarter, definitely had an even stronger utilization relative there, it had 68%, but considering the amount of holidays and vacations in the fourth quarter, that's a high utilization for the fourth quarter. So I think it is a more challenging comparison in the fourth quarter than the third. But it wouldn't -- it wasn't that last year's third quarter was necessarily sort of low.

Okay. And this period, was there any difference in the mix of maybe reactive and proactive compared to recent periods? Or are they both kind of growing pretty much in line and stayed the same?

We haven't seen a material difference in the mix. I mean, as we mentioned 2 of the growing areas for us are these human factors assessments, which are proactive in nature. And then the other area that we called out, in particular, was our work in the large capital project disputes, and that area is entirely reactive. So we are seeing growth in both areas as we move forward.

Okay. And then one last one on the large project again. You said it would be down to 3 to 4 this quarter and then likely kind of go back to less than 2, where it wouldn't be called out. Would that kind of roll off right away? Or you think it'll gradually decrease once it starts to get smaller?

I think that it will -- we think it will decrease as we are going -- even going through the third quarter. And we would expect that, at least at this point in time, we would expect that it will be at a lower level as we -- lower level or be completely out. We think there will be some more, but there isn't any commitment at this time into the fourth quarter. But we do, based on where it is in the product life cycle, we would expect that it would -- that it would begin to tail off in the third quarter.

We'll take our next question from Marc Riddick with Sidoti & Company.

I wanted to touch on -- you had mentioned earlier in the year some of the marketing efforts or some revisions to sort of your go-to-market approach a little bit and I was wondering, if you could spend a little bit time on how that's shaping up and maybe this is connected to some -- in some way, but how this might have manifested itself from the management meetings that you had earlier in the year. Just want to get a sense of, if you've kind of started in that path of sort of the go-to-market and making adjustments, so you go-to-market strategy and whether or not it’s had an impact already so far, or if we're looking for that to be something down the road?

So I'd like to think that it had an impact already. We feel like we had a very successful meeting. And I -- just to kind of recap a little bit, organizationally we've tended to organize around disciplines. Our practices are largely organized around disciplines. It follows a little bit of sort of a -- the university sort of department model a little bit, just so you got like minds in different areas. But as we kind of go-to-market more and more, it's really focused around industries. And I think those who have listened to our calls over the years will definitely have noticed a gradual shift where we talk more and more about industries. And I think that's because of our sort of expansion largely, in many cases in the proactive area, where an industry approach to marketing is just more important. There can also be approaches to marketing on things that aren't proactive, I mean, we had a very focused marketing activity around developing international capital project work of those capital disputes and that was certainly extremely successful. We believe that we're not done in the gradual move toward a much more focused strategy around industries. We do think that the kinds of projects that we're talking about in this case. I'm not going to give full credit to our managers meeting for this project, we've obviously started before them. But clearly our focus around industries is giving us more lead streams into the proactive business. So we do think that we're on the right track there and we intend to continue to focus more on that.

Okay, great. And I wanted to circle back to the conversation around food safety and the chemicals practice. And wanted to get a sense of, is there any -- was there any changes as far as regulations or anything that externally that kind of stimulated? You mentioned some of the internal efforts. I was wondering, if there was any external factors that might have played a role in some of the pickup in business there as well?

Well, there are a number of regulatory processes that sort of require the step through the different years. So for example, REACH just as an example, they have a deadline, which may seem like pretty far away in 2018. But the reality is that there is so many applications that have to get in for that time period. That now is kind of on people's doorstep. But also in the pesticide area, there are continual challenges in Europe in terms of addressing their regulatory environment. So I think that we are very well known in that business and we're kind of the go-to folks. And I -- it just continues to be a very strong business for us. So I don't think there's has been, what I'll say, a dramatic shift. It's not like there was, from new European administration that sort of drove things in a different direction. But this is consistent with our overall view of the world, which is that safety, health and the environment are things that are going to continue to get more focus on, and the result of that, is that pesticide as an example, are going to continue to have to go under a lot of regulatory scrutiny and a huge portion of what is done in our food safety and chemical regulation practice is around pesticides.

Okay. And then one last thing from me. You mentioned that there was the return of growth in the automotive area. And I was wondering if you could sort of, I guess, I'm trying to figure out a good way to ask this. I mean, was that return of growth in auto space, was that sort of balanced between proactive and reactive in a similar way to the rest of the company? Or where was that growth from, I guess?

Yes, so I think one of the things that's a little bit newer is, if you think of all of the more technology-orientated companies that are entering into the automotive marketplace. We have got very strong relationships, as we have reported on over time, with most of the major automotive manufacturers, not just the U.S. ones, but the Japanese ones, the Korean ones, the European ones and so forth. And more traditional work we've done around recall work, around accident work and so forth. What's happening with the new technologies that are coming in, is there are obviously lots of issues with batteries -- with lithium-ion battery issues. There are also issues with the new -- with all the new technologies that are coming together to ultimately lead to fully autonomous vehicles. And those -- so with those, you're getting a -- sort of an influx of what we see as sort of mostly may be more proactive work coming in that vein. We do think that will also will, as those technologies get in place, there will necessarily be reactive work that flows out of that as well. But what we're seeing that's exciting for us, I think, is the opportunity to get to work with more and more of the new -- more technology-orientated companies that are trying to enter the or are entering the automotive space.

And with that, that is our final question for today. It does conclude our conference as well. Thank you for your participation.