Exponent Inc (EXPO) 2006 Q4 法說會逐字稿

Good afternoon. My name is Michael and I will be your conference operator today. At this time, I would like to welcome everyone to the Exponent Q4 earnings and fiscal year 2006 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). Thank you. I would now like to turn the call over to Ms. Brinlea Johnson of the Blur Shirt Group. Ma'am, you may begin.

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 2006 results. Please note that this call is being simultaneously web cast on the investor relations section of the Company's corporate Web site at www.exponent.com. 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 Michael Gaulke, President 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 periodic filings with the SEC, including those factors discussed under the caption Factors Affecting Operating Results and Market Price of the Stock in Exponent's From 10-Q for the quarter ended December 29, 2006.

Forward-looking statements and risk 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 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 our results for the fourth quarter and fiscal year 2006.

For the fourth quarter, net revenue increased 10% over the same period last year and earnings per share were $0.18. For the full year, net revenue was also up 10% over the prior year and earnings per share were $0.83.

Throughout 2006, we focused on hiring and were successful increasing technical FTEs by 9.6%. While this aggressive hiring did have an impact on our utilization, we believe that this will position us for long-term growth.

In particular, we're pleased to have attracted two new business leaders to the firm. In June, we hired Dr. Elizabeth Anderson as Group Vice President for our Health Group, and in December, Dr. Charles [Mimsey] joined us as Practice Director of our Ecological Sciences Practice.

During 2006, we had strong performances in our Biotechs, Civil Engineering, Construction Consulting, Electrical, Thermal Sciences and Mechanics and Materials practices. In our Biomechanics practice, we focused on analyzing injuries related to automotive accidents with growth being driven by product liability cases. Additionally, we have been capitalizing on the growing medical device industry, supporting clients with product design services and helping clients handle regulatory issues.

In our Civil Engineering and Construction Consulting practices, we were involved in a variety of projects, including work on major construction dispute issues, such as the Big Dig in Boston. We also assisted clients by evaluating the impact on facilities and infrastructure of the magnitude 6.7 earthquake that hit Hawaii in October.

In our Electrical, Thermal Sciences and Mechanics and Materials practices, we have continued to build our highly experienced team and are seeing increased demand from the energy sector. This work has involved a risk analysis of a pipeline in South America and the investigation at a major weld issue in an oil and gas production facility in Central Asia. Additionally, these practices have come together to offer a unique multidisciplinary team to assist clients with issues related to safety of power supplies and batteries, with a particular focus on the use of lithium ion batteries in laptops. Some of this work has been conducted out of our China office, which we opened in 2005.

In our Defense Technology Development practice, we did see an increase in demand for MARCbots from the U.S. Army, completed the development of a prototype system to support maritime security operations for the U.S. Navy and continued to identify and develop new technologies for deployment in Iraq and Afghanistan. Although 2006 was not a growth year for this practice, we are actively pursuing follow-on phases of projects with the U.S. Navy and U.S. Army and believe our Defense Technology Development business is well positioned for 2007.

In summary, we are pleased with the results for the fourth quarter, which ended a strong year for Exponent. We look to 2007 with continued optimism that we are positioned to expand our business and improve our operating performance. I will now turn the call over to Rich for a detailed discussion of our financial results.

Thanks, Mike. We are pleased to report strong results for both the fourth quarter and fiscal year where we posted double-digit revenue growth. Revenues before reimbursements, or net revenues as I will refer to them from here on, for the fourth quarter increased 10% to $38 million. Total revenues increased 6% to $41.5 million. For the full year, net revenues increased 10% to $156.7 million, total revenues increased 9% to $168.5 million. The reason that total revenues grew more slowly than net revenues is because we had less subcontracting in our Technology Development practice.

EBITDAS for the fourth quarter increased 34% to $6.8 billion. For the year, EBITDAS increased 10% to $29.7 million. Of this increase, $684,000 was related to a reduction in cash bonuses for principals and officers, offset by an equal amount of restricted stock unit compensation, which had no impact on net income or earnings per share in 2000. Since this decision was made at year end, the full-year amount hit the fourth order. In future years, this will be spread more evenly throughout the year.

Net income for the fourth quarter increased 10.2% to $3 million, or $0.18 per diluted share, as compared to $0.15 in the fourth quarter of 2005. Excluding the implementation of FAS 123R, net income was $3.1 million, or $0.19 per diluted share. Our tax rate for the fourth quarter was 39.4% as compared to 34.8% in the fourth quarter of 2005. For the full year, net income was $14.2 million, or $0.83 per diluted share, as compared to $0.81 in 2005. Excluding the implementation of FAS 123R, 2006 net income was $15 million, or $0.87 per diluted share. Our tax rate for the year was 39.8% as compared to 37.3% in 2005.

Compensation expense in the fourth quarter increased 11.4% to $26.2 million. Compensation expense was impacted by a 7.4% increase in FTEs in the fourth quarter versus the same period in 2005. For the full year, compensation expense increased 12.7% from the prior year to $105.9 million, or 67.5% of net revenue. Compensation expense was impacted by a 9.6% increase in FTEs for the year. Additionally, 2006 included $1.2 million related to the implementation of FAS 123R.

Utilization for the fourth quarter of 2006 was 61% as compared to 64% in the same period of 2005. For the full year, utilization was 64% as compared to 66% in 2005.

Other operating expenses for the fourth quarter increased 12.8% to $5.3 million. For the full year, we were able to leverage other operating expenses by only having an increase of 6.8% to $19.9 million, or 12.7% of net revenues.

Depreciation in the fourth quarter of 2006 was $928,000. Depreciation for the full year was $3.6 million.

G&A expense for the fourth quarter decreased 9.8% to $2.7 million. For the full year, G&A expense increased 9.2% to $10.8 million, or 6.9% of net revenues.

Stock-based compensation expense for the fourth quarter was $1.4 million. For the full year, stock-based compensation expense was $4.4 million. We estimate that our stock-based compensation will be between $5 million and $5.5 million in 2007, of which between $2 million and $2.2 million will be expensed in the first quarter.

Reimbursable expenses for the fourth quarter decreased to $3.5 million. For the full year, reimbursable expenses decreased to $11.8 million because of the less subcontracting at our Technology Development practice. In the fourth quarter, we reported total interest income of $466,000, up from $388,000 one year ago, bringing our total for the year to $1.9 million. This reflects a stronger interest rate environment.

We generated $9.9 million in cash from operations during the quarter, bringing our total to $19.6 million for the year. During the quarter, we repurchased $4.9 million worth of stock, bringing our total repurchase activity to $30.1 million for the year. We closed the year with cash and short-term investments of $58.1 million.

DSOs this quarter were 94 days, down from 104 days at the end of the third quarter. Capital expenditures for the quarter were $734,000, and for the full year were $3.2 million.

The fourth quarter marks a good conclusion to a strong year of growth and progress at Exponent. We're pleased with our financial results and believe that we are well positioned to continue to post high-single-digit to low-double-digit revenue growth in 2007. Effective January 1, we increased our billing rates by approximately 6% and would expect to realize approximately 4% after the hiring of junior staff. It is our objective to improve EBITDAS margin by 30 basis points on a year-over-year basis in 2007.

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

Thanks, Rich. We are optimistic about our opportunities for 2007. Our key focus will be to capitalize on strategic growth initiatives, including health, construction, product design, energy, electric utilities and Defense Technology development; to continue to seek new talent to drive further growth, while being cognizant of its impact on current year margins; to increase profitability through improved utilization and operating leverage; and finally, to generate additional cash from operations, maintain a strong balance sheet and to undertake activities such as share repurchases to enhance shareholder value.

We look forward to reporting more success to you in the coming quarters. And now, I will turn the call over to the operator for your questions.

(OPERATOR INSTRUCTIONS). Kevin Liu, B. Riley & Company.

I had a quick housekeeping question. First, on the stock comp expense, could you break out how much of that was in cost of services, versus OpEx?

Actually, 98% of that is -- you can just consider all of it to be in compensation line. There's only a small portion of it that's down in G&A, less than -- a few tens of thousands.

Okay. And then looking at the repurchase activity in the quarter, it looks like you guys slowed down some amount relative to the prior two quarters. Just wondering is that a function of lower trading volumes that you could repurchase, or was that a discretionary items?

It's both. The volume has clearly been less, and based on plans we had in-place and what was happening in the marketplace, there were some restrictions associated with that as well.

Should we expect that, I think, by my calculations, you guys have a little over $5 million left, so would we (MULTIPLE SPEAKERS).

We continued to be in the market up to this point in the quarter through our [10B51].

And then moving to your recruiting activities in '07, '06 was a year of building up that base. Do you guys -- how aggressive will you be in recruiting additional associates? And are you having any trouble either attracting talent or finding qualified candidates?

We plan to be active in the recruiting arena, so there's really no change in our focus in that regard. The overall target for this year will slightly come in slightly below where we were this past year, but we are still going to be very active recruiting. We have not seen any real change in terms of the supply side of the market, if you will, in terms of candidates that we're going after, so it's pretty much business as usual finding the right ones that fit our needs.

Alright. In terms of attrition, have you noticed any change in that number?

As we discussed at the middle of the year, we had pretty low turnover rate in the first half of the year, historically low. And because of where -- that was having impact on utilization and things, we did work in the back half of the year on identifying underperformers and such, an in turn, our turnover rate was a little bit higher than average in the second half of the year. But we don't anticipate anything out of the norm. As we go into 2007, we would expect to be approximately 15%.

And then last question. Just in terms of your strategic initiatives for '07, one avenue for that could be acquisitions. I was just wondering if there's been any change, are you guys getting any closer to any acquisitions, or is that not an area you're paying attention to right now?

Just as a matter of policy, we won't comment on anything that's about to happen if it was. I can tell you that we continue to look for the right acquisition, so from that standpoint, there's been no change in our appetite. But we also have built a business model that does not rely upon the periodic completion of acquisitions in order to meet our expectations. So what we're looking for are really acquisitions that end up complementing our business here or end up putting us into new areas and just enhance our growth opportunities. And from that standpoint, we will continue to be in the market in 2007.

Thank you, good luck in '07.

Mike Crawford, Barrington Partners.

Thanks. I suspect if you give me two of these three numbers, I could back out the third. But could you give the average FTE for the quarter, the utilization rate and the average bill rate?

Yes. Mike, the average UT for the quarter was 61% for the fourth quarter, and the average FTEs for the quarter were 572. And actually, because I looked at bill rate in a different form, I don't have the bill rate right in front of me.

I can calculate it. And do you have expectations for where you would like to see average -- the average professional number cycling through in '07?

Are you referring to --.

Would you like to add about five people on average a quarter, or what is your (MULTIPLE SPEAKERS)?

Our sort of model is, we have talked about on an optimizing basis would have us growing in the 4% to 7%, sort of 4% to 8%, if you want to broaden it, to each end a little bit in headcount each quarter. In a perfect world, it would be right in the midpoint of that every single quarter. As I look out over this next year, it's probably in that. Because we had such high growth last year, it will probably be in the lower end of that range, let's say between the 4 and the 6 in variation. So that is what we're looking at.

Okay, great. And then maybe more out of personal curiosity, but can you describe in a little bit more detail what you're doing on the lithium ion side? Is that trying to figure out where the contamination came between the cathode and the anode, or was that in the winding process, or do you even know?

There has been a number, if you're referring to the recalls, have been publicly announced. There has been a lot of focus on the manufacturing process. We have been actively involved with several of our clients in terms of not only testing up front for inclusion of new batteries into new designs, but from a failure analysis standpoint as well where some of those have ended up in product recalls. So it is actually a very broad capability and we are fortunate to have a number of clients that use our services and have recognized capabilities we have put together over the last few years in this area.

Thank you. Last question relates to the Defense or the Technology segment. Are there any kind of milestones or decision points that you are currently looking toward? I know that it can be a little lumpy business at times.

There has been none that I would point out relative to awards that are upcoming or where we're currently on projects where there's a big date coming. As I commented during my remarks, Mike, we are engaged in a number of conversations about follow-on work with the services, the Army and the Navy in particular, that we have been engaged in, in projects. And that is about all I can say in terms of the prospects right at this point.

Alright, great. Thanks a lot.

Colin Gillis, Canaccord Adams.

It is there any business opportunities that have come out of the December earthquakes that caused so much telecommunications disruption in the Pac Rim in December?

Potentially. I wouldn't say we have a big piece of work there, but it does focus some of the attention on it. We are not engaged, at least to my knowledge, on any of the brakes, cable brakes themselves at this juncture, however.

Mike, to sort of dot into your comments a little more on the work you're doing for Defense, can you just comment, are you finding that the appetite for products within the military remain strong, or that the value offering in terms of your leveraging of the existing technology, there's a good appetite for that type of product?

I would say that the excitement that we continued to experience from our clients in both the Army and the Navy is that the value that we get to add, the value we add to the solution set that they are seeking basically for proper problems, be it in the battlefield or the -- in the case of the Navy, on the surface or undersurface, in the case of submarines. We have captured their imagination several times by coming in with ideas that are simply out of the box that others were not thinking about. And so we have not competed necessarily on price or trying to be the lowest-cost producer, but rather with superior ideas, superior input and then the ability to very quickly, certainly in the case of the rapid equipping force, be able to get that into the hands of soldiers in theater where it can make a difference. We are approaching 600 robots now being used in Iraq, and those are clearly making a difference. I can show you photographs of the MARCbots that did not survive in IED, and those are just heartwarming, because otherwise, that would be a soldier. So it's ideas like that that are continuing to have the clients come back to us.

Great, makes sense. Nice quarter.

Brad Evans, Heartland.

Solid results. Could you give us the CTE count as we speak today, or at the end of the fiscal year?

Yes, it was 572.

So that the average and the quarter and?

That's correct.

Could you just talk about what your utilization goals are for the year, in terms of what is embedded in that mid- to -- I guess high-single-digit to low-double-digit revenue growth and 30 basis points of EBITDAS margin expansion. What kind of utilization rate are you assuming?

I think as you can tell from Mike's comments, we clearly believe that there is over the long-term here or over the near-term let's call it, there's a real opportunity to improve margins through improving our utilization. In 2007, or any year in stepping out, we believe if we want to continue -- we can accelerate the improvement in UT if we just stop the hiring, and we don't want to do that. We don't think that's best for the long-term growth of the firm, or for the environment within the firm. So what we have said is that expectations ought to be that we'll improve utilization between 1% and 2% annually. It's probably going to range -- if you spread it out over a three- or four-year period of time, you're probably going to be looking at more like 1%-1.5% a year. So those ought to be the expectations as we march forward over the next couple of years.

Within your guidance, or I guess your outlook for the year, is there a range for operating expense growth that we could sink our teeth into?

Yes. In 2007, I would expect that operating expenses will probably grow in the range of 9 to 10%.

Okay, thank you very much.

Gerry Heffernan, Lord Abbett.

Thank you for the results. I guess where the last couple of questions were around UT is where I wanted to concentrate. Also I guess, could we just review what I guess the average FTE was by quarter for the year?

Yes. The average FTEs for the first quarter were 549, the second quarter was 568, the third quarter was 576, and the fourth quarter was 572.

Okay. So the fourth was a little bit of a consolidation period here?

Yes, which is what we talked about on the third quarter call, that we were focused on continuing to recruit, but also some balancing.

Okay. The focus on the FTE growth as your primary organic growth vehicle, your primary overall business growth vehicle, you know over the years you have had -- you have worked on new ways, you have hired additional or different people just to work on the recruiting. Has anything changed there? There was a mention that the supply side of the equation is basically no change, and I presume that means things are still pretty good. But please comment to that. But any new or different ideas, going back to the thinking outside of the box mentality for the recruitment of FTEs?

Why don't I start off there. First of all, I think that we have demonstrated in the last year, year-and-a-half, that we have a system that can produce sort of high-single-digit growth in FTEs on a year-over-year basis and we have talked about the fact that on an ongoing basis, that's sort of above what would be sort of our sort of standard model, which would be more in this 4% to 8% broad range. So I think that we do -- we have to continue to refine our work. We do that on a regular basis, if that's in our HR department, figuring now which recruiting methods, what universities we're getting the highest production out of at the junior staff level, if that's getting the support of outside recruiters on senior level people. We go through a number of those people and try to figure which ones work. And then as we have met with each of our practices and offices here in the fourth quarter in planning for 2007, we have had a particular focus around recruiting in those discussions and the plan of implementation of how to get there. So I would say that we continue to refine a lot of the activities that we've been doing in the past and hopefully learn from those experiences. But on the other hand, we have had the productivity in the last year, year-and-a-half, that should allow us to grow in the middle of that range.

Okay. And I'm just looking at the quarterly numbers that you provided. So somewhere in this 565 range would be the average for the year? I don't know that you actually gave the FTE year average.

Yes. For the full -- the average for the year was 568.

And how does that compare to '05?

That's a 9.6% increase.

And that refers to the statement that you just talked about, saying the growth rate of that level is above normal, but that really reflects the efforts of 18 months ago going to a full-fledged recruiting effort?

That's right.

Now bringing that into utilization, does the -- understanding that utilization is not the method that you want to concentrate on because, as you said, there's various ways you could affect that number to make it to say whatever you want it to. But it is an important metric, as far as the profitability, the revenues generated, a la operating income generated. You're looking to balance an increase of the FTE's with an increase to the utilization? (MULTIPLE SPEAKERS)

The answer is yes. Yes I think that, if we continue to organically grow at, let's call it 10%, I think we will have -- it would be more challenging for us to increase the utilization rate. We should be able to sort of maintain it down at this level if we've been doing a 10% increase this past year. But that's why when we say, if we can operate down in a middle-single-digit growth rate in FTEs, that in that model, we believe that we can gradually increase the utilization over the next several years. So that is why our objective was, we fell short on the FTE growth two years ago. We felt that we needed to really turn that up. We have that energy going, and it's our job as management to try to find that balance between UT growth and improvement and growing the FTEs. And we think we can do both of those.

Being the pain in the butt Easterner, East Coaster here, as far as gradually increasing the UT while going back to this mid-single-digit of FTE growth, what would be a reasonable increase [in] expectation there? 61 for -- well, 61 was for the fourth quarter, but should we expect an overall level of 64% for the year '07, 66?

Yes. Gerry, the expectation I believe on the utilization should be that we will increase utilization between 1 and 2% in 2007. So we've completed this year, the full year, as 64. So we'll see a 1% to 2% increase in this next year.

Okay, so over the year average of 64%.

That's correct.

Okay. And one last thing. You made comment in your preamble regarding rates. Could you review that and indicate in any way which that may be different from the normal annual cadence?

Our billing rate, what I indicated in my comments was that our billing rate increase was approximately 6% for the staff that we had here on January 1, that the ineffectiveness of once you higher in people typically at a lower level, your average billing rate for the year will be blended down to about a 4% increase on an absolute bill rate increase. If you have a substantially higher growth in junior staff, then that will be blended down further. But with this middle-single-digit growth in staff, we would expect to realize about a 4% bill rate increase over the year. This is -- the overall 6% -- approximately 6% bill rate increase that we just did effective January 1 is in our normal range that we have done over the last five to 10 years of 5% to 6%.

Okay. One last question if I may. The topic of turnover was discussed, the review first half was low, second half made everyone really go back and review things, and you want to weed out the underperformers. Any items within that number of turnover where it was more skewed to the more junior FTE versus the more senior FTE, particularly --? I guess to a certain extent, I want to get you guys to give a grading of the recruits that you have brought in. is there a higher than expected turnover at the low end, or do we have the reverse situation where we have a lot of starts coming in and some of the more senior people are looking around at the lack of grey hair and deciding to leave?

On the quantitative basis, the number, I don't think that any of the turnover is necessarily unexpected. There is the normal rate of turnover that we get as any professional service firm does. I would say that our turnover has always been and continues to be higher at the more junior level. People join the firm with high expectations, figuring out coming out of school if you want to in the long-term be a consultant or if you want to go back into being a professor at a university or go and do product design. Those are choices people go through. So we do see a higher turnover at the lower levels and we don't see the ratios being very much different than we have seen in the past.

Okay, great. Thank you very much. I will get back in queue.

Brad Evans, Heartland.

Just a couple of follow-ups if you don't mind. Rich, what was ending share count?

From an outstanding?

Yes, that will be on the face of the K?

Well, that is obviously, depending on what we repurchase in between, but it's -- the outstanding is 4.7, 4.7, 4.8, okay?

I'm sorry --.

We'll get you an absolute number, hold on (MULTIPLE SPEAKERS).

The outstanding is 4.7 million. I mean -- sorry -- 14.7 million, no wonder you are confused.

Thank you. 14.7, okay.

We did not quite have that much repurchase activity.

I was a little confused there. Your capital budget for 2007, CapEx-wise?

It has historically and will continue to be about 2% of revenues.

Okay. And help us understand the magnitude of working capital use or source as we think about '07 at this point? I realize you're going to be growing here, so there might be -- I'm just curious -- is there a range for working capital?

The factors to include there, really from a business model standpoint, there are no material changes than what we have seen here in 2006. We would continue to hope to bring down DSOs by a couple of days. And other than that, there are no significant changes, or there's no -- any material changes in our plans, as far as use from an operating standpoint.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS). Gerry Heffernan, Lord Abbett.

Two quick questions. One, are there any big projects that you're currently working on that you see coming to an end, products that have been large revenue generators that would be an issue to replicate or replace in the upcoming year?

That is always the $64 question for us. Just in context, we do 4000 to 5000 projects. A number of those end up being large projects. In any quarter that the number that's sort of the top 10 list continues to rotate as we go through the projects coming on and others going off that list at a pretty good velocity. So the answer is, yes, there's a number that will come off that list, and there is a number that will come on it that I cannot tell you what they will be. The reason that Rich and I have been able to sleep at night here over the last few years is because the overall business flow, the number of cases coming in and out has continued to grow. And so we in a sense end up having just some comfort as a result of that flow and the larger numbers of cases that happen. So I don't know if that directly answers your question.

It does. I recall I think it might have been two quarters ago we were talking about the Boston Tunnel, and that just seeming to be a big project, and if there's anything else that you know of that becomes difficult to anniversary as far as when you're looking at revenue growth.

In regards to the share purchase, repurchase, I believe the statement was that there was -- they are ongoing as we speak. There was 5 million left in the authorization. Can you give us any indication as to your impressions as to where the Board's mind is at regarding a renewal of the reauthorization, and/or any ideas on a direct dividend or instituting a dividend program?

At this point, there's no indication I can give you in terms of the Board, other than the comments that were made in the introductory sense. We clearly expect to be generating cash, as Rich has indicated this next year. You can take by what we did this year and basically not a lot of change from a cash generating standpoint, other than if we continued to be able to improve our margins. We have actually been quite pleased with the way the share repurchases has gone this year. I am not going to attempt to speak for the Board that when this authorization is up, we will end up having further conversations with the Board about uses of cash going forward.

Very good. Thank you very much.

There are no further questions at this time. Thank you for participating in today's conference call. You may now disconnect.

Thank you all.