Exponent Inc (EXPO) 2005 Q4 法說會逐字稿

Good afternoon. My name is Amy and I will be your conference operator. At this time, I would like to welcome everyone to the Exponent Quarter Four Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

[OPERATOR INSTRUCTIONS.]

I would now like to turn the conference over to Ms. Brinlea Johnson. 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 2005 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. This conference call is the property of Exponent and any taping or other reproduction is expressively 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 includes forward-looking statements, including statements about Exponent's market opportunities and future financial results that involve risks and uncertainties, 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 periodical filings with the SEC, including those factors discussed under the caption "Factors Affecting Operating Results And Market Price Of The Stock" in Exponent's Form 10Q for the quarter ended December 30, 2005. The forward-looking statements and risks today stated in this 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'd like to turn the call over to Mike Gaulke, President and CEO of Exponent. Mike, please go ahead.

Thank you, Brinlea. And thank you for joining us today as we report our fourth quarter and fiscal year 2005 results. We are pleased with our financial results for both the fourth quarter and fiscal year 2005. For the fourth quarter, net income increased 38% to $2.7 million or $0.31 a share as compared to $2 million and $0.22 a share for the same period in 2004. Total revenues for the fourth quarter increased 11% over the same period last year of $39 million-- sorry, total revenues increased to $39 million, 11% over last year. And net revenues increased 8% to 34.6 million.

We experienced a 10% increase in net revenues in the fourth quarter, excluding revenues from technology development, which was soft, as expected. Our civil engineering practice had a strong fourth quarter as we assisted our clients with the aftermath of Hurricanes Katrina and Rita. Exponent was uniquely positioned to help clients in the assessment of structural, wind and water damage, as well as mold. In our biomechanics practice, we continued to expand our business in the quarter. Among other things, we help clients with their development of medical devices, such as implants. Additionally, our business continues to grow in conducting injury analysis for transportation accidents.

In defense technology development during the fourth quarter, we completed the delivery of 332 Markbots for the army's rapid equipping force. These robots help in the identification of deadly improvised explosive devices, commonly referred to as IEDs. The robots are currently being deployed in Iraq, where they are receiving positive feedback from our troops. Our antisubmarine warfare work for the navy is in a demonstration phase, which is scheduled to run through the first half of 2006. We remain focused on growing our defense technology development business and securing new contracts with the Department of Defense.

For the full year of 2005, we had strong performance in civil engineering, biomechanics and food and chemicals. We improved net income by 18% over the prior year to 14.2 million or $1.62 a share. Revenues increased 2% to 155.2 million while revenues before reimbursables increased 3% to $142.9 million.

Our strong net income performance was the result of our focus on improving our operating model. We made progress in recruiting during the year, adding a number of key hires to our team and ending the year with a 5% increase in technical full time equivalent employees, which is an important foundation for our future success.

As we look at 2006 and beyond, we believe our diversified offerings uniquely position us for additional growth. We remain committed to recruiting top caliber talent and focusing on strategic areas for growth, including health sciences, construction consulting and design consulting. Additionally, we are targeting the energy business as a market opportunity where we can grow. As an example of a project in this area, we've recently been involved in assessing the environmental impact of using seawater in open-loop vaporization systems proposed for LNG terminals in the Gulf of Mexico.

In summary, we are pleased with the progress we made in 2005 and believe we are positioned to maintain our leading stance in engineering and scientific consulting in the years ahead.

With that, I will turn the call over to Rich for a detailed discussion of our financial results for the fourth quarter and fiscal year 2005.

Thanks, Mike. As Mike discussed, we are pleased with our fourth quarter results. Net income improved 38% to $2.7 million or $0.31 per diluted share compared to net income of 2 million or $0.22 per diluted share reported in the fourth quarter of 2004. Total revenues for the fourth quarter increased 11% from the prior year period to $39 million and revenues before reimbursements or net revenues, as I will defer to them from here on out, increased 8% from the prior year period to $34.6 million.

For the year, net income increased 18% to $14.2 million or $1.62 per diluted share. Total revenues increased more than 2% to $155.2 million and net revenues increased 3% to $142.9 million. Hereafter, I will compare all results on a percentage of net revenue basis.

For the fourth quarter, we reported an increase in operating income of 17% to $3.4 million, up from $2.9 million reported in the fourth quarter of 2004. Our operating margin was 9.9% versus 9.1% reported in the same period last year. For the full year 2005, operating income increased 6% to $20.4 million and the operating margin for the period was 14.3% as compared to 13.9% in the same period of 2004. We are pleased to have realized a 40 basis point improvement in our operating margin in 2005.

Utilization for the fourth quarter of 2005 improved to 63% as compared to 60% in the same period of last year. On an annual basis, we saw a .5% increase in utilization to 66%. Technical full time equivalent employees were 535 in December 2005 as compared to 511 in December of 2004. Compensation expense for the fourth quarter increased 9.8% over the prior year to $23.5 million or 68% of net revenue as compared to $21.4 million or 66.8% reported in the fourth quarter of 2004.

This was the result of the increase in FTEs as well as a 4.5% increase in annual salaries that occurred last April. Additionally, $530,000 in labor cost incurred for the Markbot program in the second and third quarters was expensed from inventory in the fourth quarter upon delivery of the robots. For the full year, compensation expense increased to $94 million or 65.8% of net revenue versus $90.8 million or 65.4% reported in 2004.

Other operating expenses in the fourth quarter were $4.7 million or 13.5% of net revenues as compared to $4.9 million or 15.2% of net revenue reported in the same period one year ago. Depreciation in the fourth quarter of 2005 was $880,000. For the full year, other operating expenses decreased to $18.6 million or 13% of net revenue as compared to 13.6% of net revenue in 2004.

For the full year, depreciation was $3.4 million. G&A expense for the fourth quarter increased to $3 million or 8.6% of net revenue as compared to $2.8 million or 8.8% of net revenue reported in the same quarter one year ago. For the full year, G&A increased by less than 1% to $9.9 million or 6.9% of net revenue as compared to $9.8 million or 7.1% in 2004.

Reimbursable expenses for the quarter were $4.4 million as compared to $3 million in the fourth quarter of 2004. This increase is associated with the Markbot contract. In the fourth quarter, we benefited from an improvement in interest income, which totaled $388,000, up from $172,000 one year ago. Our tax rate was 34.8% as compared to 41% in the fourth quarter of 2004. For the full year, our tax rate was 37.3%, which includes the benefit of the $272,000 reported in the third quarter. Going forward, we expect our annual rate in 2006 to be approximately 39%.

For the fourth quarter, shares used to calculate net income per diluted share of $0.31 were 8,845,000. Capital expenditures for the quarter were $660,000. Capital expenditures for the full year were $3 million and stock repurchase for the year was $4.3 million. At the end of 2005, accounts receivables net were $46.2 million as compared to 38.6 million at the end of 2004. We generated $13.8 million in cash from operations and closed the year with cash and short-term investments of $68.9 million, an increase of approximately $8.9 million over the prior year.

Beginning in the first quarter, we will break out stock based compensation expense as a separate line item on our press release table. While we currently have vested and unvested restricted stock charges as spelled out in our 10K, we will add stock option expense as required by FAS123R. Stock option expense is expected to be approximately $880,000 in 2006. Additionally, the amortization of unvested restricted stock will increase by approximately $250,000 in 2006.

For 2006, we expect to post revenue growth in the high single digit to low double digits and to improve operating margins by approximately 50 basis points excluding stock based compensation. For the first quarter, due to the timing of projects in defense technology development, we expect to show more modest growth in the mid single digits as compared to the same period last year and operating margins will be flat to slightly down for the quarter.

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

Thanks, Rich. 2005 was an important year for Exponent. First, we made significant progress in each of our strategic growth areas. In health consulting, we saw our business grow in Europe. In construction consulting, we expanded to the point where we decided to make a formal practice of construction consulting in the 2006 year. And in design consulting, we added capabilities to better serve our clients with the opening of our office in China this past June.

Second, in 2005 we increased net income by 18% and meaningfully improved our operating model as we had planned. Third, we generated $13.8 million in cash from operations and closed the year with $69 million in cash. And fourth, we demonstrated progress in our recruitment efforts, increasing FTEs by 5% and continuing to successfully add to our talented team.

As we look to 2006, we remain focused on recruiting key personnel, expanding our business offerings, pursuing our strategic initiatives and positioning Exponent for higher levels of growth.

With that, I'll turn the call over to the Operator for your questions.

[OPERATOR INSTRUCTIONS.] Patrick Elgerbly with Next Generation Equity Research.

I was wondering if you had available the utilization rate during the quarter excluding the defense practice?

Yes, I do, Patrick. The utilization for the quarter was, they're basically about the same with tech or without in the fourth quarter because we had the-- that's when we recognized the robot revenue, so that utilization was incorporated into that. So, the utilization's the same. 63% in the fourth quarter.

And so, I guess related to that, what was the revenue, the total revenue dollars from that practice during the quarter?

Our technology development business for all the contracts related to that area were about 2.5, $2.6 million.

And how does that compare to the year ago period?

It was $2.8 million a year ago. So, it's down $270,000.

Okay. And then, I was also wondering if it was possible to quantify the impact on utilization or on revenue during the quarter from business related to hurricanes. And to follow up to that, has there been any significant new business or contracts won in related areas since the last update?

Yeah, why don't I answer the first part of that and Mike might want to follow up on the back end. The revenues in the quarter, net revenues in the quarter associated with Katrina and Rita are approximately $1.2 million.

The work from Katrina, Patrick, is continuing. We will-- it's our expectation that we will continue to see work throughout 2006, likely carrying on over into 2007. These natural events, like hurricanes and earthquakes on the West Coast, in particular, tend to have, from our experience, very long tails associated with them. So, where you have a major disaster, and Katrina certainly qualifies as that, we will likely have business from that for some period of time. And as I say, our expectations are that will clearly continue throughout 2006. We're working on it now and we have-- as far as we can see, we will continue to be working on multiple kinds of assignments, but all one way or another linked back to that event.

Okay. And then, relating to-- I was wondering if you could provide any more detail on what you're seeing out there related to the energy business and the opportunity that's out there.

Well, energy is a marketplace that we have under-participated in. Our firm, it's almost going on four decades of practice has had a number of projects in the energy field. But, relative to the size of the market, we think that there's still a substantial growth opportunity there.

One of the areas, in particular, that we have been investing in, investing in the sense of doing research and trying to get ourselves more widely exposed to the marketplace, is the LNG market. We've done some significant work in LNG, particularly one of the major LNG explosions in Africa last year-- actually the year before that, I think it was. But, that really focused our, focused the opportunity for us as LNG became then a technology that is one that is being seriously considered and implemented in the US.

So, the example that I cited in terms of the environmental work of open vaporizers in the Gulf is one. We're doing-- we've done another significant piece of LNG research on, again on vaporization techniques. So, we will continue to look at that market, LNG in particular, and more broadly as we do that to try to get ourselves better positioned to serve energy companies. The-- Katrina is, also plays into the energy field. We are serving some of the larger energy clients there with losses that they experienced or in some cases, litigation ensuing from spills. And so, that will also help broaden our reach in energy.

Okay. And then, if I could, one last set of questions on headcount. Was the increase-- I believe it was the FTE headcount was 535. Is that right?

At the end of the year, yeah.

At the end of the year. Was that increase a result of additional hires done in the fourth quarter or was that the third quarter hires basically rolling through on an average basis?

Yes. They were both. We had a-- I think we ended the third quarter with FTEs of 528, 529, somewhere in there. And so, we did have a net increase in the hires, as well as what we saw coming in through the middle of the third quarter and hires in January-- in October and November. A few in December, but you tend not to get many once you roll into the holidays.

Okay. And last question. What sort of expectation should we have on headcount and hiring for '06 and maybe you can discuss the availability of qualified talent that you're seeing out there. Thanks a lot.

Yeah. Why don't I start off and Mike can talk a little bit about our discussions recently with many of our practice directors. What we're seeing and expecting for 2006 is that we should see a, somewhere between a 5 to 7% increase in our full time equivalent employees. We think that we've really got the right focus in this area and started seeing the results of that focus in the back half of this year. That should help us as we enter the front end of 2006. But, I think the momentum is continuing with, I know, a number of new hires actually coming on board here in January alone. So, we are on our way to a good year, I think, from a recruiting standpoint.

In terms of what we're seeing in the marketplace, I think it's a reasonably good market for talent. It's certainly much better than it was in the, right around the-- the '99, 2000 market was the most difficult market for us just because of all the other activity associated with .com that was going on that had bright talent looking at perhaps other opportunities. But, that time has passed. It certainly passed at Silicon Valley. But, I would say across the country in terms of good talent coming out of the schools.

So, we're looking hard at both doing college recruiting and more selectively with senior hires. I think we talked in a prior call that we made the investment to bring in house some of our senior recruiting. We have a senior, a full time senior recruiter that really does nothing but work on our senior employment needs. And that's-- we're quite pleased with how that portfolio of potential candidates is developing as a result of that investment.

Mike Crawford with Barrington Partners.

First, a clarification on the full time equivalents. It sounds like you're giving international employee count including UK and China now versus before, I think you were just giving the US numbers. Is that maybe right?

Yeah, I changed up to international, including international about two quarters ago, I believe.

Okay. And regarding growth, it sounds like looking more so maybe than in the past weighted towards just this organic growth versus piecing together an opportunistic group out there to add in.

No, I-- as far as-- we are very focused on trying to continue to look for acquisition candidates, as well as finding senior hires that might bring work in a sense that we can support a number of others. So, we're heavily pursuing both of those avenues.

Okay. And also, with your company owned headquarters, are you still trying to sublease out some of that space or what's the status of the excess space there?

Yes. We still have 20,000 plus, 25,000 square feet available for rent. We have continued to be active in marketing that. We have Cushman and Wakefield that's acting as our broker in that. We've brought on a couple of new tenants during this past year. Probably most recently, about four or five months ago, for about 7,000 square feet.

Okay. And regarding-- also, you said $4.3 million I think you spent buying back stock during the year. Was there any in the last quarter?

No, there was none in the last quarter.

Okay. So, based on your free cash flow generation, it sounds like cash is headed up around, I don't know, $15 million next year, which puts you at around 85 million. At some point do you get more aggressive in trying to re-deploy that capital into something earning a higher return?

Yes. That's the answer. Short answer, Mike. We have been asked, as you've been a participant here on these conference calls for the last couple of years, as our cash balance has grown, what we intend to do with that. We have responded in the past that we are exploring the opportunities here probably in three areas. The continued success that we have in terms of the strong cash flow and 13.8 million this last year and prospects of a good year going forward here and growing cash balance, I can tell you that we are committed to doing something with that cash this year. That's all I can say at this point.

Okay, great. And then the final question is more specific to China. So, could you talk a little bit more specifically about how many people you have working there now and kind of what kind of customer base they're supporting or serving?

Yeah. We've currently got maybe about, I think there's about five technical people over there. So, it's still a very small group. The clients that we've been working with over the last six months as we've done business development and being able to move forward have been primarily multinational companies, usually US based multinationals who are having manufacturing activities and design activities going on in China and have retained Exponent to assist them in ensuring the quality of the design process and the manufacturing process for their products. We have also done some issues related to intellectual property.

Okay. And then actually, maybe one final question is just on the navy demo phase. So, that's going to go through the next six months or so. And then, is there a potential for a big step up in level of award there, assuming they like what they see? Or does that open it up to others coming in or how exactly is that process expected to work at this time?

If the demonstration phase goes well, although we don't have any firm commitments at this point, it would be our expectation that we would then go on to a follow on phase. That is contingent upon how the demonstration goes. And so, at this point in time, we really can't provide any more guidance than this work will continue through the second quarter for us.

Okay. All right. Thanks a lot.

Jeff Myers with Intrepid Capital.

So, question for you just in terms of timing of revenue and projects for next year. It sounds like some of the growth is going to be more back-end loaded, I guess, with specific either projects are practices are going to be, I guess, coming, having revenue come more in the second half of the year. And what sort of visibility do you guys have on that?

Yeah. Let me be clear on what I had said earlier. We do still-- we do think that we can get back up into our, what we consider our normal steady state growth area of a high single to low double digit growth for the year. The reason that the we feel that the first quarter is going to be lower than that is primarily related to technology development. Last year, in the first quarter, we had $2.8 million in technology development. That was-- if you remember right, we had some activity in actually the fourth quarter of 2003 that we didn't get to recognize revenue yet until the first quarter of 2004. We brought over about $700,000 worth of revenue over there that's included in that 2.8 million that we did in the first quarter last year.

We expect to be off of that by between 1 million and $1.5 million in the first quarter. And so, that has obviously some dampening effect on our year-over-year growth and as such, would hurt a little bit on improving our margins. We think that with the prospects that are out there in technology development and the fact that we didn't perform great in there in Q2 and Q3 of 2005, that we can end up seeing technology development make up for its year-over-year shortfall in Q1 as we go through the back end of the year. And we expect that in, from what we see from our practices right now and the remainder of the business, we would expect those to perform in that high single to low double digit range here in the first quarter and out through the rest of the year.

Got you. Okay. Thank you.

[OPERATOR INSTRUCTIONS.] Mark Robins with the Robins Group.

Help remind me if you would, please. Did you sell your building a few years ago and lease it back?

No.

Okay. So, you still own that facility?

Yes. It's on the books for about 16 million.

Have we got a guess as to what it might be worth?

It's hard. We're at the bottom of the real estate cycle here in Silicon Valley at the moment.

You still are, aren't you?

We still are. But, it's probably in the 30 to 40 million range. It's some place in there.

Right. Let's talk a little bit about your energy business, energy. It sounds to me like that's more safety and environmental work. Is that correct? Is that how you would characterize it or am I being a little too specific?

No. It tends to be focused in risk management. Also, our thermal practice has been very active and that's our hard-core engineering and science relative to-- well, particularly in the case of LNG, there's a lot of unknown or at least concern as to what happens if an LNG vessel is ruptured.

Yeah. You have a [blanom], I think they're called, and nobody really knows how those things transform.

Yeah. And we've actually done a fair amount of work in that area. So, we think we understand the fluid mechanics of LNG and what kind of hazards that it actually would create. We've also been working in conjunction with risk. The environmental area is an area where we think that we've got a particularly good skill set.

Just out of curiosity-- I guess it's morbid curiosity-- are you at all involved with the Texas City explosion, refinery explosion that happened earlier in '05?

Yes, we've been working on that.

Okay.

Mark, just really to round out because I didn't mention probably the part of our business that has been involved in energy longer than the rest of the firm, which is our more traditional mechanical engineering activities, we-- back in, a couple of decades ago, we really got involved in failure of diesel engines, backup at nuclear power plants and the like. And so, questions of mechanics and materials continue to be an active area. We've worked on a number of pipeline failures this last year, both onshore and offshore.

So, you would actually be working on the mechanical material failures and why that would happen and how to fix them and prevent them and so forth and so on. Is that a correct assumption?

Yes.

Okay. Just a question-- we were talking about full time equivalence and I was just curious. How long does it take to fully employ and utilize a new FTE?

It depends on what level we're bringing them in at. But, if we're bringing in a junior staff, it's probably something like three, call it at least a quarter to get them integrated and get them up to speed working, one to two quarters for senior hires that we hire out of industry or academia that it's going to take maybe six to nine months to bring them up and get them fully integrated.

Obviously, if you hire somebody who's got an existing consulting practice, depending on how much of their-- it varies from them being able to come over and have a lot of their current projects and clients follow them just by the nature of our business. And other times, their projects stay behind at their existing company. And then, it is more up in that six to nine month time to integrate them.

Okay. All right. And then lastly, just out of curiosity, years ago your traffic and auto business legal work used to be just a huge part of the overall pie. What is it now and how would you characterize that part of the business, that traditional section of the business?

Yeah, it is still there and if you look at it as a percentage of our total revenues, it has declined. But, it has grown in absolute dollars. It has declined because we--.

Everything else has grown.

Everything else has grown. And some of that has grown at a faster rate. And as we've moved into environmental and health over the years, which combined today is 25% of our revenues, the transportation auto-centric businesses, vehicle centric businesses overall have become some place down in the teens. Rich is look at the numbers here. I don't know exactly what number he's going to give you. But, my estimate is it's in the high teens. But, where it was grew into sort of the mid 20's a few years back--.

I think what we've seen over the last four or five years and it's continued through this year is that we used to be the traditional failure analysis, some design support, recall work for the auto industry and some of the broader transportation companies. What we've been able to do over the last four or five years is grow that more broadly servicing them. One of our faster growing groups has been mild mechanics. Looking at the injuries involved in these same accidents that we would normally look at the performance of the vehicle in those situations, we also are looking at the occupant, were they belted or not, how did the safety system work or not in a particular situation.

Additionally, we've been able to cross-sell ourselves to that industry addressing their issues around asbestos and other health and environmental issues as we've grown a stronger practice in that area.

Uh-huh, okay. Percentage change. I'm just wondering if you have found--.

Yeah, we're-- I don’t have the exact numbers right now. But, it's at, for that industry, including some of the health and environmental issues, it's in the teens.

Okay. And then, that would have been down from the late '90s, early '00. What would it have been then?

It probably crept over 20, but it was more focused on just one company, but on the design and reconstruction on the vehicle side and less on these broader areas.

Design and everything, yeah.

So, as we've grown the firm, it's proportionally gone down a little bit, but we've been able to continue to cross-sale into some of the, basically our best client base that we had back in the '90s. The firm's broadened since then in its industries that it serves.

Really good. Thanks, fellows.

Jerry Heffernan with Lord Abbett.

Hey, I'd like to ask you about the-- I know that on a longer-term basis, you have always said that we are keeping our eye out for acquisitions. And not that you are doing anything right now, but just wondering if there's anything in the market and if you can give me any kind of range for pricing of acquisitions in the market?

Let me talk about the first piece. We have actively over the last few years been looking for the right businesses to really complement or extend the practice areas that we're in. The focus has most recently been in the health sciences arena, in the construction arena, as well, construction marketplace. The-- on an annual basis, we probably take, have conversations, take somewhat of a look at 20, 20 plus firms. Most of those-- this is a low yield process for us. Most of those, we conclude, aren't exactly the right fit for us. But, we very much are in the market trying to find the ideal candidates.

Yeah. The pricing out there, I hate to give a vague or a broad answer here, but it really varies with what you're looking at, especially when we're looking at very small firms, what you're talking here of, let's say 2 to $15 million in revenues, you're dealing with a small number of principals or partners in these firms. And the value of those firms has a lot to do with the longevity of the service of the people that you're acquiring. So, the multiple that we would be willing to pay or the market would be willing to pay for somebody who is near retirement either taking a business over are very different than somebody who you really believe has 10 or 15 year expectation in the business.

So, they also vary significantly in their profitability. What we have done historically at Exponent and we're continuing to work towards are acquisitions, which we believe will provide, be accretive to shareholders in the near term, maybe not immediately. But, we're not looking to just do something that only pays off in the long, long term here. So, you're going to find sort of single digit multiples on EBITDA. Sometimes, you can get something that's about ready to crest and you're going to pay more than that. But, it does vary based on a lot of variables that go on associated with these people businesses.

Okay. Correct me if I'm wrong. Over the last couple of years, you've actually started up some new segments, new discipline segments by organic hiring, let's call it. Is that correct?

Yes. Go ahead.

To somewhat challenge you here and doing this purely on a friendly intellectual basis, at what point do you step back and say, you know something, we've been working hard here, not finding any on the acquisition side, having some success here on the organic side of developing things. In regards to this cash balance that we're sitting on and with all true efforts of trying to put this to work, perhaps we should start segmenting this money and saying, you know something, let's apply half of this to a dividend, half of this to an acquisition effort or buyback acquisition or something like that. Just, at some point we say, okay, let's kind of divvy up the mindset for this cash balance.

Yeah. Jerry, I can assure you that we believe that it is important for us to evaluate all of the opportunities to deploy that cash, that there isn't necessarily one right answer or one place. It's a matter of looking at all of them and deciding if one just completely outweighs the other, then great. But, it's not-- we have not sort of put one thing ahead of the other at this point in time.

Okay, okay. On a different effort here, not to nitpick because certainly you guys have a very clean income model here-- the accounts receivable jumped up by about 20% year-to-year.

Yeah.

Just an explanation of what's going on there.

Yeah. What I can tell you is this is sort of a shorter-term blip. I think in the fourth quarter, we ended up having a couple of projects where we ended up not being able to bill until closer to the end of the quarter. The robots are a good example of that where we've been doing the work, incurring the cost and then generating the revenue. We bill it, but we didn't get the collections in before year-end. The navy contract is another one that's over a million plus that's outstanding there on that.

In addition to that, we had some slower payments from one particular insurance company where we've been working through their bureaucratic process of wanting to hold onto money as long as they possibly can and work through those. So, we had-- unfortunately we had a couple of those aligned in the fourth quarter. And because of the size we are, 3, $4 million less and everybody, we'd all be jumping up and down saying we had a great year and operating cash flow would be 3 or 4. I think it's right around net income at 13.8. It could have been substantially above that with a few key collections.

Uh-huh. Yeah, certainly. And certainly, you collect more. It just adds more fuel to my earlier challenge, though.

Well, let me make you comfortable. It is not our intention to--we want to work that number down. We think that in 2006, that will return back down to approximately 90 days DSO. So, we should benefit from some of that as-- it'll be in the low 90's, lets say, in 2006. So, we should benefit from that going forward.

Sounds good. I'd like to follow up on something you gave, a piece of information you gave regarding the options expense and the new accounting rules here. You said 880,000 for one aspect and another 200,000 for another. Could you just repeat what you said there?

Yeah. Let me bring a little even further clarity than that. As the investors who have been with us for a while, but for those who are newer, if-- in 2004, at the beginning of 2004, we instituted a restricted stock unit program for our principals, officers and directors at that point in time as a way of restructuring sort of what we were doing, primarily in options in prior years.

And what we did there is we took what was an existing bonus program-- Exponent has returned 33% of its pretax profits into a bonus program each year for probably about a decade now. We took some of those dollars-- we didn't spend any more than that-- we took some of those dollars for the principals and we started paying that out in restricted stock units. That probably will be about, oh, $1.5 million here from 2005's bonus pool that will be paid out in RSUs. So, that's one component that could be, that is sort of a stock based comp.

In addition to that, when we put that program in place, that really was just part of paying bonus differently. What we went and also did is whatever we took out and paid in their bonus RSUs, we also went and put a matching amount in that was sort of our equity compensation with those principals. So, the ones that were out of the bonus are fully vested shares, which the employee doesn't receive for four years. The matching units were paid-- have a clip vest four years out and those are amortized over a four-year period of time.

So, the amortization of the grants that we made in March of 2004 and March of 2005 for '03 and '04 performances, that amortization in 2005 was 600,000. That will be about 850,000 in 2006 because as we build this program in over four years, that will grow. So, that's the increment going from 600 to 850 that's in the matching.

And then, the last component is really our options. And historically, we had more options bid out. This past year, I think that the total grant was down to about 55,000 shares that were granted in '05. Those historical shares that were granted that haven't fully been amortized, as well as any new shares, we estimate that that cost will be about 880,000 in 2006. So, you'll end up between the bonus, the portion that comes out of the bonus pool, the portion that is on the matching of 850, plus the stock options of 880, end up with a combination of about $3.5 million that would be total stock based compensation in 2006.

Okay. And the 880 would compare to nothing that's in the current year?

Yeah, the 880 compares to nothing that's in there. If we would have had to expense that in 2005, it would have been an expense of about 1.47, something like that, almost $1.5 million. So, you can tell that that's working its way down from what would have been 1.5 in 2005 down to 880 because of a couple of years ago us instituting this RSU program.

Right. Okay. And one final item, a much smaller item. Other assets increased by 4 million. What was that?

Yeah. The other assets, we implemented a deferred comp program, which doesn't have the expense to shareholders. But, we instituted a deferred comp program in the middle of 2004. So, we only had it in for six months and then, had it in in 2000-- I mean, we instituted in middle of 2004 and in 2005, that's just the incremental difference in people's deferrals.

The deferred comp pool?

Yes.

Primarily.

And that's out of people's existing salaries or bonus. It’s not any additional new expense by the company.

Got you. Okay. Thank you very much, guys.

Mark Robins with the Robins Group.

Thank you. Let's go through the numbers, the bonus numbers for last year. It would have been-- we talked about-- Jerry asked you to compare '06 versus '05. And for '05, it would have been 1.0-- 1.47 and then, 880 for '06. And then, the 880 match would have been what last year?

Mark, the-- oh, the 880, which is the, associated with stock options?

Yeah, that's compared to 1.47--.

Yeah--.

Yeah, if you do apples-to-apples.

Yeah. In the portion that is, it comes out of our bonus pool that was 1.5 million in 2005--.

Uh-huh--.

That will, assuming we growing the profits, that will grow up to 1.75 million looks so, between 1.75 million and 1.8 million.

Okay. And then that match?

The matching part was 600 in '05. It'll go up to 850 in '06.

Then, I only missed the one number. Okay. And-- oh, one other question that Jerry opened up and I think makes a lot of sense to ask. When you're looking at the realm of prospects, purchase prospects, acquisition prospects, did I hear you correctly in saying that they're usually run between 2 and $15 million in size?

Yes. That generally is-- if we are to take that pool, as Mike said, of 20 to 25 prospects, they're generally going to fit into that size. Now, that makes up a lot of the universe of high-end professional service firms.

Okay, great. I was just wondering if you're going to change the name to Exponent First Bank. All right, guys, thanks. Have a good afternoon.

There are no further questions at this time. Mr. Gaulke, are there any closing remarks?

No. Thank you all for joining us and appreciate your support and look forward to speaking with you in the days ahead.

This concludes today's Exponent conference call. You may now disconnect.