Exponent Inc (EXPO) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Exponent fourth-quarter and fiscal year-end financial results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, January 29th, 2004.

I would now like to turn the conference over to Annie Palmore. Please go ahead, ma'am.

Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's fourth-quarter and fiscal-year 2003 results. Please note that this call is being simultaneously webcast on 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 Exponent's prior written consent.

Joining me on the call today are Mike Gaulke, President and CEO, and Rich Schlenker, CFO of Exponent.

Before we get started, I would like to remind you that the following discussion contains forward-looking statements, including statements about Exponent's market opportunities and future financial results, that involve risks and uncertainties and that Exponent's actual results may vary materially from those discussed here. Additional information concerning factors that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic filings with the SEC, including those factors discussed under the caption Factors Affecting Operating Results and Market Price of Stock in Exponent's Form 10-Q for the quarter ended October 3rd, 2003, as filed with the SEC on November 14, 2003. The forward-looking statements and risks stated 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 would like to turn the call over to Mike Gaulke, President and CEO of Exponent. Mike, please go ahead.

Thank you, Annie. Hello, and thank you all for joining us today as we report solid fourth quarter performance and a good year of revenue and earnings growth for Exponent. For the fourth quarter, we reported revenue of $34.3 million, an increase of 4 percent over the prior year, and net income that increased 23 percent to $2.2 million or 27 cents per share. For the full fiscal year, revenue increased 11 percent to 140 million, and net income increased 28 percent to $10.2 million or a $1.27 cents per share.

During the fourth quarter, we posted good results in some of our key practice areas, and continued to make progress in furthering our position in other strategic areas. We had a strong quarter in defense technology development, where we completed a substantial portion of our work on the Advanced Robotic Controller. We believe that there will be follow-on work with this project, and continue to work on building our portfolio of defense technology development projects.

In the food and chemicals practice in the quarter, we signed a long-term contract with a leading chemical company to assist them with their product stewardship. We continue to work on projects related to exposure and health evaluation of workers involved with products containing asbestos.

Our vehicle practice performed well in the fourth quarter, where we were active in performing accident reconstruction for litigation and worked on current automobile recall issues.

Finally, as we discussed with you last quarter, we continue to see good growth opportunities in the construction dispute area, and believe this is both nearer- and longer-term a market opportunity for Exponent. We put resources in behind this opportunity this quarter, and hired key personnel who we believe will help us grow in this practice area.

Now I will turn the call over to Rich for a detailed financial review.

Thanks, Mike, and thank you to everyone for joining us today. Total revenues for the fourth quarter were $34.3 million, up 4 percent over the fourth quarter of 2002. And net revenues were $30.7 million, up 3 percent over the prior year. Net income increased 23 percent to $2.2 million, or 27 cents per diluted share. We're pleased with these results, especially considering that we only had 13 weeks in the quarter as compared to 14 weeks in the prior year.

For the year, total revenues increased 11 percent to $140 million, up from $126 million in 2002. Net revenues rose 9 percent over the prior year, and net income increased 28 percent to $10.2 million from $7.9 million in 2002. We are particularly pleased with our net income growth for the year, which is a results of generating more billable hours, increasing billing rates, leveraging operating expenses, and realizing tax benefits. For comparison purposes, we will use net revenues excluding reimbursables.

Operating income increased 25 percent in the fourth quarter to $3.5 million from $2.8 million in 2002. The operating margin improved to 11 percent from 9 percent for the same period. For the fourth quarter, technical full-time equivalent employees increased 5 percent to 480 compared to the same period in 2002. Compensation expense improved to 20.4 million dollars, or 66.4 percent of net revenues as compared to 67.1 percent in the same period last year.

As expected, fourth-quarter utilization was 61 percent, slightly lower than 63 percent in the prior year, but as a result of having one less week in 2003. For the full year, utilization was 66 percent as compared to 67 percent in the prior year, which is an area of opportunity in 2004.

Other operating expenses declined to $4.5 million, or 14.5 percent of revenue, as compared to $4.6 million, or 15.6 percent in the same period a year ago. G&A expense remained flat at $2.4 million, or 7.7 percent of net revenues, which is in line with our expectations, and compares to 7.9 percent of net revenues in the same period a year ago.

Reimbursable expenses were $3.5 million, as compared to 3.1 million in 2002, and our tax rate in the quarter, as expected, was 41.5 percent, which demonstrates the benefit of our tax-exempt investments. In the coming year, we believe that we may get more favorable tax treatment, which will reduce our tax rate at approximately 41 percent.

Shares used to calculate net income per diluted share of 27 cents were 8,173,000.

Turning to the balance sheet -- we closed the quarter with cash and short-term investments of $41.8 million, an increase of $13.6 million over the third quarter. We generated $13.4 million in operating cash flow. Capital spending was approximately $550,000 for the quarter. Accounts receivable were $35.8 million at the end of the quarter, and DSOs were 82 days, which is 16 days less than last year at this time. Looking ahead, we continue to plan for revenue growth in the high single digits to low double digits, and expect operating margin to improve 50 basis points.

Now I will turn over the call to Mike for closing comments.

Thank you, Rich. 2003 was an important year for Exponent. We continued to post solid growth in revenue, and were able to improve both our operating and net income performance. We continue to be recognized by our clients and industry peers as one of the leading scientific and engineering consulting firms in the country. We continue to build a solid market position in defense technology development. We grew our practice and presence in health sciences, pursuing new opportunities in food and chemicals, toxicology, and epidemiology. In addition, we are developing and name and opportunity for ourselves in the medical device market. And lastly, we launched a profitable new business centered around construction disputes and leveraged our civil engineering expertise in this new market segment.

In summary, we continue to identify opportunities in the marketplace, develop strategies for approaching these markets, and capitalize on our uniquely talented workforce. We believe we are well-positioned for 2004, and feel confident that we will be able to continue to post solid financial results. At this point, let me ask the operator to open up the conference line and see if there are any questions that we can handle.

Mike Crawford, B. Riley.

Regarding the 50 basis point improvement in operating margins -- (indiscernible) possible next year, what's the underlying consultant utilization assumption with that analysis?

Mike, we think that we can achieve that in the sort of 67 percent utilization range, even -- so that still gives us some further upside.

Okay, great. And then regarding technology development -- what are some -- could you just update us on some of the other contracts that are out for bid, or that you may bid on?

SOCOM contract -- Special Operations Command contract -- that we've referenced in the past is one that we are still expecting to hear on either late in this quarter -- the first quarter -- or early second quarter. I think we have -- all indications have been that will be a late March announcement. So that's the largest non-REF (ph) contract that we are currently in the process of going after.

The night vision contract -- night vision lamps contract -- we have been awarded a position on the team for that work. And we will continue to go after specific pieces of work in that ID/IQ, and definite delivery and definite quantity contract. We are continuing to work with the Defense Manpower Data Agency on Smartcards. That is a contract that is going forward. And (multiple speakers) we are also on a team doing some work for Boeing on future combat systems. And that work will be getting underway in 2004.

We are continuing to do work in addition to those with the Rapid Equipping Force on projects that come to us from the field. And that work -- it is our expectation will continue as well in 2004.

So Mike, if you were to win, say, your fair share of some of this new business, plus your existing technology development business, do you think that would be kind of a larger practice than vehicles, which I believe is still your largest current practice?

Over time, the answer is yes. I believe it has the opportunity to grow to be our single largest practice.

Okay, great. And final question -- Rich, could you just give the segment breakdown of revenues and operating income?

Yes -- do you want the year?

Just for the quarter.

Just for the quarter -- okay. For environmental, the environmental and health segment revenues were 8.3 million. For other scientific, it was 26 million. The operating income for environmental and health was 1 million, and for other scientific and engineering was 5.4.

Steve Gish, Roth Capital Partners.

Mike, you talked about the Advanced Robotic Controller that you have completed a substantial portion of that work. Could you give us a sense of how much of your revenue this quarter came from defense technology? And then you had mentioned you saw potential follow-on engagements with that opportunity. Can you help quantify that? How much opportunity is there in terms of dollars?

Let me ask Rich here to give you first (ph) numbers.

Yes, in the quarter, on a net revenue basis, Steve, we had $3.6 million come from our technology development type projects.

And going forward -- I can't quantify the opportunity for you at this point, because it's going to be very dependent upon actual business that does come to us. The nature of the work we're doing for the rapid equipping force is fast turn. And so there will be projects -- at least it's our expectation that there will be projects that we have no visibility on at this point that will take place in 2004. And so I would only be guessing if I were throwing out numbers here. It's -- let me say it's our expectation that we should be able to see growth in this area. So we're looking for -- overall for technology development to continue to grow.

And in this area of construction disputes, you know, you're building up your cash balances. I know it always comes off as -- how are you going to effectively deploy that cash? Is that an area where you potentially might make acquisitions in '04 as well?

I would say that that's certainly on our shopping list, and an area that we are spending time looking at opportunities in, yes.

Mike Warner (ph), Kennedy Capital.

Congratulations on a good year. I had just actually one quick question and one follow-up to a prior comment. Did you -- are you still authorized to purchase shares? Is that something that you're continuing to think about? Or is it more what you just mentioned, to deploy that capital to the construction dispute area, or something else --?

Yes, this is Rich Schlenker. No, we are still authorized -- have authorization under our stock repurchase program. And it is our feeling that we have the cash to be able to pursue multiple ways of sort of trying to figure out how to leverage this cash for the benefit of our shareholders. So we're looking at this very broadly to see how to use this $42 million.

How much do you have left on your authorization?

We have about $4 million.

Could you give me a little bit more color on the construction dispute area -- what exactly is that?

Sure, the construction dispute area is, more broadly, construction consulting. The practice that we are building here is one that is assisting clients principally in large projects. To give you an example, we are actively involved in the Metropolitan Transit Authority -- MTA Big Dig in Boston project. And there are a substantial claims at stake there -- at dispute between parties. And our expertise is assisting the one or other parties in substantiating the claims or defending claims. And we work on both sides -- depends on the nature of the project.

They tend to be high dollar value, which is a trademark of most of the work that we do -- that is, the client ends up with a large exposure. And our expertise and the reputation of our firm over the years has been one of helping clients make a difference in the outcome of those kinds of exposures.

(OPERATOR INSTRUCTIONS) Mike Crawford, B. Riley.

Just one final question. Could you just comment a little bit more on the magnitude of the long-term project you have in the food and chemicals area?

Sure. This is a project that is somewhat different than what we have had before. It is one that is centered around assisting the client with what we call product stewardship. It's really -- their product is in the marketplace -- some of their products is in the marketplace. And this is their worldwide market -- and assisting them to make sure that from a regulatory compliance standpoint, all the scientific work and support is being properly presented to authorities such that these chemicals remain active and registered, as is the appropriate term in their countries of use. This is a contract that could run as long as ten years, and has different levels of activity at different times. But it will roughly be $1 million a year revenue for our food and chemicals practice.

David Wright (ph), Henry Investments (ph).

I recall that you own your building. And I wonder -- I don't recall -- have you had some excess space that you have been trying to sublease, etc., etc.?

Yes, we do own our building here in Menlo Park, California right on Highway 101. And it's a 153,000 square foot building that we have had approximately 50,000 square feet available for rent out on the market. We continue to actively market that. We are nibbling away at that. We have signed up some smaller tenants during 2003, and have a couple of other small tenants looking at space right now.

So the good news is we see activity. This is still a very depressed real estate market out here. But I think, actually, we've seen a little bit more activity or interest in our particular building over the last three or four months.

That's great. What is office space going for in your neighborhood these days?

We are seeing rates, give or take, right around $2 a month for our space. That's full-service. West cost auction (ph) generally --

24 a year.

(multiple speakers) dollars per month. But obviously, the math is easy to do -- $24 a year per square foot.

There are no further questions. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.