Exponent Inc (EXPO) 2006 Q1 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the Exponent Q1 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). Ms. Johnson you may begin your conference.

Good afternoon ladies and gentlemen. Thank you for joining us on today's conference call to discuss Exponent's first quarter 2006 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 involves 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 Exponent's periodical filings with the SEC, including those factors discussed under the caption Factors Affecting Operating Results and Market Price of the Stock and Exponent's Form 10-Q for the quarter ended March 31st, 2006.

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. Now I would like to turn the call over to Mike Gaulke, President and CEO of Exponent. Mike, please go ahead.

Thank you for joining us today as we report solid results for the first quarter of 2006. For the first quarter, total revenues increased 7% over the same period last year to 42 million. And net revenues also increased 7% to 39.6 million. Excluding defense technology development, we reported net revenue growth of 11%, which was in our expected range for the quarter.

Net income including stock based compensation was $3.8 million or $0.43 per diluted share as compared to 3.9 million or $0.45 per diluted share last year. First quarter 2006 net income excluding the impact of stock based compensation under 123R was 4.3 million or $0.48 per diluted share.

We had strong performance in several practice areas. The civil engineering and construction and consulting practices were the top performers in the quarter as we worked on projects related to last year's hurricanes on the Gulf Coast, on ground movement projects in California and Hawaii resulting from a very wet winter, and several major construction dispute issues.

Our biomechanics practice had a strong quarter as well, with growth being driven by projects in the [entry] biomechanics area including the steady case increase in cases in products liability, railroad accidents and other accidental injuries.

In addition, we've been actively involved in two new areas of work. The first of these involves an auto glazing issue dealing with the allegation that all side window glass and vehicles should be laminated to reduce the number of ejections and severe injuries. The second area of new work involves non-lethal stun guns and the controversy surrounding their safety.

Our food and chemicals practice had a strong quarter driven by work on projects in nutritional labeling and Prop 65 issues in California. We also had solid growth in our largest practice, mechanics and materials, which experienced a broad base of business activity.

In defense technology development during the first quarter, we continued our efforts to strengthen our portfolio of programs. Reports back from Iraq say that our MarcBot robots are performing their mission of identifying improvised explosive devices well, and most importantly helping to save soldiers' lives. We believe it is likely that we will receive a follow on order for more MarcBots in the next couple of weeks.

Last quarter, we discussed emerging opportunities in energy. During the first quarter, we worked on -- we worked for a consortium of LNG companies to assess the marine impact from LNG regasification. We are encouraged by the number of discussions we're having with major energy companies and intend to continue our efforts to grow this area in 2006.

Also in the first quarter, we were successful at increasing our technical full-time equivalents by more than 8% across 13 practices. As you know, recruitment of professionals has been a key focus for Exponent in the recent quarters and we expect to be able to continue to expand our professional ranks over the year.

And finally, and very importantly, in an announcement separate from our earnings release today, we announced that our Board of Directors has approved a two-for-one stock split subject to shareholder approval, as well as a stock repurchase program for up to $35 million of common stock. We are pleased to report both of these initiatives to you today and believe that they demonstrate our continued commitment of increasing shareholder value.

In summary, we are pleased of our results for the first quarter and optimistic about our outlook for 2006. With that, I will turn the call over to Rich for a detailed discussion of our financial results for the quarter.

Thanks, Mike. As Mike discussed, we are pleased with our first quarter results. Total revenues for the first quarter increased 7% from the prior year period to $42 million. And revenues before reimbursements, or net revenues as I will refer to them from here on out, also increased 7% to $39.6 million.

Net revenues excluding defense technology development increased 11% as compared to the first quarter of 2005. Net income for the first quarter was $3.8 million or $0.43 per diluted share as compared to $3.9 million or $0.45 per diluted share reported in the first quarter of 2005. As discussed in the press release, this is the first quarter that Exponent began expensing stock based compensation in accordance with FAS 123R. First quarter 2006 net income excluding 123R was approximately $4.3 million or $0.48 per diluted share.

This quarter, for the first time, we are starting to report EBITDAS, which is EBITDA less stock based compensation expense. We believe that EBITDAS will provide investors a meaningful measure of our operating performance each quarter. EBITDAS for the first quarter of 2006 increased to $7.9 million. During the first quarter of 2005, the Company signed a follow-on contract with the US Navy and realized approximately 430,000 in revenues and pre-tax income for work performed and expensed during the fourth quarter of 2004. Excluding this pre-tax income, EBITDAS in the first quarter of 2005 would have been $7.1 million.

EBITDAS as a percentage of net revenues was 20% as compared to 19.4% in the same period a year ago, excluding the benefit of the US Navy revenues. Hereafter, I will compare all results on a percentage of net revenue basis.

Billable hours for the first quarter were up 6% versus the same period last year. Technical FTEs increased 8% versus last year. Utilization for the first quarter of 2006 decreased slightly to 68% as compared to 69% in the same period of last year. Compensation expense for the first quarter increased 9.1% over the period -- prior year to $25.5 million or 64.4% of net revenue as a result of growth in FTEs. This compares to $23.4 million or 63.3% reported in the first quarter of 2005.

As we do each year, we implement an annual salary increase of approximately 5% effective April 1 which will impact the second quarter of 2006. Other operating expenses in the first quarter were $4.8 million or 12% of net revenues, versus 12.6% of net revenues reported in the same period one year ago.

Depreciation in the first quarter of 2006 was $882,000. G&A expense for the first quarter increased to $2.7 million or 6.8% of net revenue versus 6.3% reported in the same quarter one year ago. G&A expense in the first quarter of last year was lowered by the reclassification of $216,000 in subcontractor expenses that moved from G&A to direct expense. This is associated with the signing of the US Navy contract.

Stock based compensation expense for the first quarter was $1.3 million. We expect stock based compensation to be approximately $900,000 in the second quarter. Reimbursable expenses for the quarter were $2.4 million as compared to $2.3 million in the first quarter of 2005. In the first quarter, we reported total interest income of $498,000, up from $234,000 one year ago.

Our tax rate was 39% as compared to 39.6% in the first quarter of 2005. For the first quarter, shares used to calculate net income per diluted share were 8,894,000. Capital expenditures for the quarter were $860,000. DSOs this quarter declined to 97 days from 101 days in the fourth quarter of 2005. We closed the quarter with cash and short-term investments of $70.7 million.

For the quarter -- for the first quarter results, we're as expected with revenue growth in the mid single digits as compared to the same period last year. Excluding technology development, we had a low double-digit growth. Although it is likely we're going to continue to see some softness in defense technology development in the second quarter, we expect to achieve high single digit to low double-digit growth for the full-year. Now, I will turn the call to Mike for closing comments.

Thanks Rich. Our success in the first quarter sets the stage for a strong 2006. During the coming year, you should expect Exponent to continue to report strong results in our more traditional failure analysis practices -- civil engineering, biomechanics, and mechanics and materials. To achieve additional growth in our newer areas, including construction consulting, design consulting, and health consulting as well as penetrating emerging areas such as energy. To continue momentum in our recruitment efforts, increasing FTEs and adding to our experienced team. To further improve operations and generate cash from the business, and to actively repurchase our stock and seek out areas of growth were we can invest to measurably increase shareholder returns.

We are optimistic about our ability to generate high single digit to low double-digit growth in our business during 2006. We look forward to reporting more success you in coming quarters. Now, I will turn the call over to the operator for your questions.

(OPERATOR INSTRUCTIONS). Colin Gillis, Cannacord Adams.

Pleasure to be on the call. Do you think you could discuss a little bit about the -- any type of trend in terms of utilization in the quarter -- give us a sense as to how January looked versus March looked and maybe give us a sense also of utilization between the United States and Europe?

Yes. We started off the -- in January strong and I would say held our utilization throughout the quarter. We feel that we exited the quarter with strong performance. It did, although utilization was down 1% versus a year ago, with 8% growth in the basis there, we feel that that's a -- provided us a good start to the year. Our utilization as we break it out between Europe and the US, the Europe -- our European operations ended up having [UTs] in the high 70s versus -- which is a small part of our business. It doesn't have -- if we exclude that, the US would have been 67%. If we include it, the overall is 68. So it has just under 0.5% or just under a full percent change in our utilization overall by adding Europe.

Okay great. And then do the [continuing] resolution, sort of budget delays -- did that impact the defense practice? Would that have any quantifiable impact on UTs?

Not really. The activities that we're involved in are not line item funded at this point in time. And so the impact on our business here is more specific project-related and delays as opposed to -- when I say that, it's principally the Navy project that has gotten delayed, and those are more operational problems with the Navy as supposed to funding problems.

Just turning the hiring front, is there any color you can wrap around what sort of the hiring cycle is, the time to bring people onboard and then any changes to the programs to sort of -- to ramp that process faster?

Well, we've devoted a lot of attention to recruiting and hiring here over this last year. I think it's fair to say there is a reasonable lag time for the kind of talent that we want to go after in terms of starting that effort and actually seeing the results of that. But we've invested that time principally this last year in ramping up some additional resources. We've specifically invested in bringing on a full-time senior recruiter onto the staff, and that is already paying good dividends for us. It's -- it has been quite helpful in the hiring -- pickup and hiring activity.

We've also been using contract recruiters on the outside and have -- are paying more attention to our college recruiting program. So the combination of all of those have been evidenced in results here that you see toward the end of last year and carried on over into the first quarter and we've got good momentum going here with recruiting. I think that we will be able to continue to look forward to growth during the year.

Great. Thank you for taking my questions.

(OPERATOR INSTRUCTIONS). Mike Crawford, Barrington Partners.

Could you just confirm the average number of full-time equivalents US and also maybe break it out in UK and China?

Yes, so for the total Company number, it is -- for the quarter, the average was 549. In the US, that was 521 -- or sorry, 520 with -- for those FTEs being in China that are the international ones.

Okay. And then the salary -- salaries go up 5% -- well, they went up on April 1st, but your bill rates -- did they increase on January 1st?

Yes, our bill rates did go up January 1.

Okay.

As they have in previous years.

And is it just a mix issue? Because I think the average bill rate was similar to last quarter even though the bill rates were up.

It's -- well, the -- versus a year ago, the bill rate increase is just around -- the yielded was just around 2% happened to be for this quarter. It is more of a mix issue than anything else. On average, for the people we were moving to this year, we increased rates between 5 and 6% on average.

But the mix of what we had in this quarter with increased growth in our civil engineering, construction and consulting, environmental areas as well as strong recruiting in this past year has brought in more junior people, so the blend of the bill rate has come down slightly. Some of those people were realized coming in in the fourth quarter and we netted a number of people again in the first quarter. So that did have -- impact the average bill rate for which we're billing to jobs.

Okay great. And then one final question on the robots and the MarcBots. Is that the same program that's run out of Point Loma with SPAWAR system center or is that a different robot program that they have there?

That's a different program, Mike. The effort that we have is in combination with rapid equipping force and the Joint Program Office for Robotic Systems.

Okay. Is there some cross-fertilization between those two efforts or are those just really competing efforts within the DoD?

The answer is I don't think they're competing so much. I don't know if they were -- I don't know what collaboration they have with the Joint Robotics Program Office.

Okay.

But we have not had interaction with those folks on this program.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). [Jeff Myers], Intrepid Capital.

Congratulations, both on the quarter and also on the stock buyback. I think you guys have thought a lot about it and are doing the right thing. So I know people on the call previously have always asked you that question, and I think you deserve a little bit of feedback for following through. So my question is just in terms of guidance, next quarter is kind of the -- we should think about it the same way as this quarter given the defense spending. Is that the right way to think about it?

Yes, I think that is a fair way to look at it.

Okay. And I guess if you're going to end up doing sort of high single digits, low double-digits for the whole year, the second half is going to be meaningfully stronger. I'm just wondering, is that a result of continued recruitment? Is that defense programs of starting to come on-line at the end of the year? Or -- what are the bigger factors that go into that?

A couple of things. One is the fact is that technology development in the first half of last year was generating on average $2.7 million of net revenues for us per quarter. That stepped down in the second half of the year to -- I think the average for the second half would have been about 2 million a quarter and the back half maybe a little bit more, 2.1. So one, there's a little less of a hurdle to overcome in the back end of the year.

Two, we have -- if you exclude technology development from our performance here in the first half, we're already -- in the first quarter here we're traveling at 11% year-over-year. So with those -- combination as well as the fact that we expect in the second half of the year to be able to recognize -- hopefully we'll get contracts for additional robots as well as we will be able to finally do the testing that we want to do on our Navy project. And both of those hopefully can help in contributing to a positive back end of the year.

Great. Thanks again.

There seem to be no further questions. This concludes today's conference call. You may now disconnect.

Thank you all for joining us.