Exponent Inc (EXPO) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Exponent Q2 2008 earnings call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Wednesday, July 16, 2008.

I would now like to turn the conference over to Brinlea Johnson of The Blueshirt Group. Please go ahead.

Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's second-quarter 2008 results.

Please note that this call is being simultaneously webcast on the Investor Relations section of the Company's corporate Web site 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 today's call are Mike Gaulke, Chairman and CEO, and Rich Schlenker, CFO of Exponent.

Before we start, 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 June 27, 2008. 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.

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

Thank you for joining us today. We are pleased to report strong financial results for the second quarter of 2008. For the quarter, net revenues increased 11% over the same period last year. Net income grew 16%, and earnings per share were $0.36, as compared with $0.30 in the second quarter of 2007.

During the quarter, we had strong performances in our biomechanics, human factors, defense technology development, and mechanics and materials practices, in addition to our Health Sciences Group. Project activity in the quarter included biomechanics practices work to help an orthopedic surgical device manufacturer defend its design of a product which a major competitor claimed infringed upon its intellectual property.

We continue to see demand from the energy sector, where we are currently assisting a major utility with an audit of maintenance procedures at its gas distribution stations. This assignment includes professionals from our electrical and semiconductors, thermal sciences, and mechanics and materials practices.

The Firm's Health Sciences Group is experiencing strong growth in Europe, assisting clients and complying with new regulations known as "REACH", which is short for registration, evaluation, authorization, and restriction of chemicals. More specifically, REACH is the new European Union chemicals policy that became effective throughout the EU in January 2007. REACH covers all chemical substances manufactured or imported into the EU in quantities greater than 1 ton per year.

During the quarter, we continued to support the US Army through the Rapid Equipping Force with development of technologies for deployment in Iraq and Afghanistan. We also supported the Army's Natick Soldier Center with the development of Future Force Warrior technologies and demonstrations. Additionally, we received a follow-on orders of $7.4 million for rapid deployment integrated surveillance systems, which we expect to generate approximately $2 million to $2.5 million of net revenue during the third quarter of 2008.

In the area of recruiting, we have started 2008 with strong hiring, increasing FTE 7% year-over-year and positioning the Company for future growth.

In summary, we are pleased with our results for the first half of the year and remain optimistic that we're well positioned to capture future growth opportunities.

I will now turn the call over to Rich for a detailed discussion of our financial results.

Thanks, Mike. As Mike discussed, we reported another quarter of strong results, including double-digit revenue growth and expanded margins. For the second quarter of 2008, revenues before reimbursements, or net revenues as I will refer to them from here on, increased 11% on over the prior year to $50.8 million. Total revenues increased 9% to $55 million.

Net income for the second quarter of 2008 increased 16% to $5.8 million or $0.36 per diluted share, as compared to $5 million or $0.30 per diluted share for the same period in 2007.

For the second quarter of 2008, EBITDAS increased 17% to $11.9 million as compared to $10.1 million in the prior-year period.

The average full-time equivalent employees in the quarter were 614, an increase of 7.2% versus the second quarter of last year. Utilization for the quarter was 69% versus 71% in the same period in 2007. We expect to continue to grow headcount 1% to 1.5% sequentially each of the next two quarters.

Operating margins for the second quarter improved to 17.3% of net revenues from 15.4% of net revenues last year. In the second quarter of 2008, our margins benefited from overall improvements in the operating model. Operating margins also benefited from a $380,000 swing in a deferred comp expense which was offset by a $380,000 loss taken against miscellaneous income.

Turning to more detail on the operating expenses in the second quarter, compensation expense increased 9.9% to $33.2 million. This increase is a result of growth in FTEs, the impact of annual raises, and the bonus accrual.

Stock-based compensation expense for the second quarter was $1.8 million, up from $1.3 million reported last year. We expect stock-based compensation will be between $7.5 million and $8 million for 2008.

Other operating expenses for the second quarter increased 5.3% to $5.6 million, including depreciation and amortization in the second quarter of $980,000.

G&A expense for the second quarter decreased slightly to $3.2 million. Reimbursable expenses for the second quarter decreased to $4.2 million, as compared to $4.8 million last year, when we had more reimbursable expenses related to the development of [ARDIS].

Our tax rate for the second quarter of 2008 was 39.8% as compared to 39.9% in the second quarter of 2007.

Turning to the balance sheet, we closed the quarter with cash and short-term investments of $60.2 million. During the quarter, we repurchased $11.2 million worth of common stock. We also recently announced that the Board approved an additional $35 million for future repurchases.

Overall, the first six months of the year -- I'm sorry, over the first six months of the year, we have generated $10.4 million in cash from operations and used $16 million for repurchase activity. Capital expenditures for the second quarter were $1.6 million. DSOs were 96 days.

In summary, we are pleased to report solid financial results for the second quarter, marking a good first half of 2008. We are optimistic about our ability to achieve the high single-digit to low double-digit revenue growth for the full year and continue to post solid bottom-line profits through the second half of 2008.

Now, I will turn the call back to Mike for concluding remarks.

Thanks, Rich. In the remainder of 2008, we will continue to pursue new opportunities in our strategic growth areas, including health sciences consulting, product design consulting, and energy consulting. We will work to position ourselves to capture future growth opportunities and follow-on contracts in our defense technology development business. We will focus on achieving solid revenue growth and profitability. Lastly, we will seek to enhance shareholder value by generating additional cash from operations, maintaining a strong balance sheet, and continuing to buy back stock through our recently refreshed share repurchase program.

We look forward to reporting more success to you in the coming quarters.

Now, I will turn the call back to the operator for your questions. Nicole?

Thank you. Ladies and gentlemen, at this time, we will conduct the question-and-answer session. (OPERATOR INSTRUCTIONS). David Gold, Sidoti & Co.

Good afternoon. A couple of questions for you -- one, on the hiring side, can you talk about, as for adding people over the next couple of quarters, which practices you are targeting? I know there was some commentary in the release on the practices where you've seen particular success, but if you could give a little more color there, too, that would be helpful.

Yes, David, this is Rich. We continue to actually focus -- have recruiting efforts in all of our practices. As we've said before, we tend to put together a plan that identifies the either region or technical area within those -- in client services within those that we think are growing, and try to target those [gross]. So we are continuing the recruiting effort across the board. Some of the practices where we are seeing some strength and think we've got some good efforts going forward do include some of those higher-growth areas. Mechanics & Materials has been doing a good job in bringing people on board, both in the failure analysis area but also in the area of trying to help clients in design consulting.

We continue our effort in recruiting in the health area. In particular, we've seen that we've got some people coming on board over in Europe to support our efforts in REACH, as Mike has discussed.

We believe both in biomechanics -- in biomechanics, both on the accident reconstruction side and the medical device side, that there's opportunities for hires there and have been seeing some good candidates as well. So those are just a few of the practices and the reasons that we see some opportunities for growth there.

Okay. Rich, from a utilization perspective, would you expect, in the second half of the year, to sort of catch up with some of the newer folk to work? In other words, would you expect utilization, second half year-to-year, to be may be flat to modestly up?

Based on -- I mean, I think we had great momentum coming out of the second quarter of last year, so at this point in time, what I'm expecting is utilization to trend off of sort of where we are. I wouldn't expect it to be higher than it was last year in the second half. I think we had some good activity going on there. We still are going to end up with this 6%, 7%, you know, 6% growth year-over-year growth there. I think, at the higher end of our growth range, we are going to see a little short-term impact on utilization, but at this point in time, I would be expecting utilization to be based on that and where we are in the second quarter. I would expect it to just be slightly down versus a year ago.

Okay, and can you just go over for me -- I think you said 614 was the average headcount?

Yes, it was.

Did you have a quarter-end number?

Quarter June had 619.

Terrific. Thanks so much.

Tim McHugh, William Blair & Co.

Yes, I just wanted to ask about first the technology development business, your comment about the incremental project you won for the third quarter. Any additional color there? As well as the $2 million to $2.5 million of net revenue, is that on top of the typical run rate for that business of about $2 million a quarter, or is that the total of what you were referring to for tech development in Q3?

Yes, first of all, the order is an order that came in under the ID/IQ that we won last year in the September/October time frame. That was a $25 million, $26 million ID/IQ for which they made first an original order of about $11 million last year.

We have gotten some follow-on orders for spares but we got a more substantial order during the quarter to deliver another 103 units, in addition to some spares for them here during the next quarter. So, that is the contract vehicle and what the units are for.

We do view that the product sales here of $2 million to $2.5 million out of this are part of what we have said in the past, where we would expect to have $0.5 million to $1 million of product sales in a quarter. That $1 million would come out of this figure as far as product sales go.

Okay. Then, actually in the second quarter, how did the tech development business perform? Were there any significant product sales that came in during the quarter?

Yes, those would be the ones that came in. It's typical that we don't -- you know, most of those tend to be ones that come in -- we don't deliver until the next quarter, so this fits into that.

We ended up, as Mike said, working primarily on the contracts that we had in-hand, the [RAF] Afghan support in Iraq, as well as the Future Force Warrior activity, in addition to our continuing work in the area of smart cards.

For the quarter, though, we ended up with about $640,000 of product sales, so that was some of the spares on the [ARDIS] systems. In addition, in total, including that $640,000, we did about $2.9 million in net revenues in technology development, which was about flat with the same quarter last year. Last year, we did $2.9 million as well.

Okay. Then on the share repurchases, you know, that picked up a little from the last few quarters but the share count was still up modestly, sequentially. Can you talk about were those purchases weighted towards the back half of the quarter? If so -- or what is the carryover impact that we should model in for Q3?

Yes, the purchases did tend to be on the second half of the quarter, and what -- we ended the quarter with about 200,000 shares less than the basic we have out there right now, so that would be where we would be starting off the quarter, going in.

You know, just a reminder, we do do our stock grants and distributions on March 15 of Q1, so that is a little why those -- on a weighted average basis, you've got the weight of the ones coming in from late in the first quarter, some of the late purchases here in the second quarter that need to balance into those numbers.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS). Tobey Sommer, SunTrust.

A question for you about -- maybe you could give some color on pockets of strength and/or weakness within your different end markets, just areas that have shown some more resilient growth and maybe others that are lagging a little bit. Thank you.

Sure, Tobey. The market areas where we have experienced the best demand here recently has been in the product design consulting arena. That, from a practice standpoint, probably has the biggest impact on [M&M's] revenues. Biomechanics has also been a good practice area. Medical devices in particular has been in good for us. We have every reason to believe that's going to continue to be an attractive area.

We've had this initiative to build in the energy sector, increase our activities there and this last quarter in particular, we are beginning to get real traction with some of the hiring decisions we've made over the last couple of years (inaudible) the work that I commented on in my earlier comments. This is a significant piece of work for us and we will continue to build on that.

Then, lastly, in terms of market drivers here, to come back to a comment on REACH again, REACH is a very extensive piece of legislation. It covers all of the EU and runs over multiple time periods, in terms of years, multiple years I should say in terms of a time period, as there's additional demands in future years, so this is not just a one-time Y2K kind of event. It will be a piece of legislation that I think is going to be a good driver for our business. We have seen a substantial pick-up in the activities of our staff in Europe in particular, and we are looking at ways to continue to be able to grow in that area.

Thank you. In terms of segments that may have shown less-robust growth, anything that stands out?

So I think our vehicle practice, while we haven't seen any pullback in that area, I would say that, based on the market out there, the fact that we are just holding flat in our performance in our vehicle or accident reconstruction area, we think is good. We've seen that here over the first half of the year, where we've been able to sort of hold it at that level.

Last year, in particular in the first half, we had a very strong performance in environmental. While we're not -- again, that practice area is holding sort of flat to slightly up and has a number of proposals that look like they're coming through and things should be picking back up, but that has been a little bit slower than we saw last year in the first half as well. So those would probably be the two areas, in addition to our civil engineering and structures. Last year, we were completing some work related to the Hawaii earthquake and had a few larger natural-disaster sort of projects going on. Right now, there are no large projects like that in the civil & structures area.

Thank you, very helpful. I will ask one other question and then get back in the queue. Just dovetailing kind of on your answer regarding pockets of strength, you cited prior hires and your initiative there to build up the energy practice. You said I think that, year-over-year, headcount up about 7%. Was there any particular focus, perhaps even a continued focus on that energy practice among others, and was there any change in the difficulty level of attracting talent to the Firm? Thanks.

Energy definitely had a position towards the top of our chart, and top of the priority list in terms of attracting talent, and so yes, it got attention. As I said, I think we are seeing some of the benefits of that.

As far as the overall competitiveness in the market, look, I think energy people with industry experience, there is a high demand for them. We seem to be able to make the hires that we've been wanting, but we're also having to work -- I would say we are probably working a lot harder at it, in that area, because it's a focus. But to this day, it is not a limiting factor for us in our growth.

Thank you very much, very helpful.

Jim [Gintrop], Meadowbrook Capital.

Good afternoon, gentlemen. The first question I have is in regards to your guidance. You've done I think 13% revenue growth for the first six months of the year, and the guidance still is kind of leading us to maybe 8% to 12% overall growth. Is this just being conservative or do you expect to have a slower second half as far as rate of growth?

Well, I think that one of the key things in looking at our year-over-year performance is that, last year, in the fourth quarter, we had a significant project come through for the first phase of building these [ARDIS] systems, which was that first $12 million order that came through on gross revenues, ended up producing $3 million, $3.5 million of net revenues for us out of that program. So we've continued to be trying to communicate to the market the last couple of quarters that we still have that hurdle in front of us out here in the fourth quarter, which we don't have enough of a backlog to -- or a length of time that we are able to predict if what we are going to be seeing in the products area out in the fourth quarter.

So, for us, the core business outside of that, we continue to think that we can grow that in high single to low double-digit growth. We've been doing that here over the last couple of quarters. That will continue. Where we come out on a year-over-year business, related to the sort of Defense product sales area, only time will tell. So that's a key reason for wanting to leave that guidance where it was.

In addition to that, our business is one that, when we talk to our business leaders, we can get a sense for the next sort of six weeks out. Reasonably, beyond that, it's just a matter of if it's trending upward trending down for the remainder of the quarter, but basically, those are the key reasons that we've stayed with that guidance at this point in time.

Very well. Thank you very much. Just to clarify, I don't think I understood this. The contribution from the product -- technology development products is normally $2 million to $2.5 million per quarter? Is that right?

From the product side, no. It's typically somewhere between $0.5 million and $1 million per quarter is what we've been talking about.

$0.5 million to $1 million, so --

So having $2 million to $2.5 million is a step up from there.

Okay, and the $2.9 million this quarter --?

That includes our consulting revenues of about $2.2 million plus the $640,000, $650,000 in product sales.

Okay. Then the next quarter, the gentleman asked I think before, the $2 million to $2.5 million that you expect from I think it was some of the [ARDIS] follow-on order -- is that correct?

Yes, that's correct.

Was that going to be incremental next quarter, or is that included in that?

That $2 million, $2.5 million is included in the estimate of -- the normal estimate of product sales.

Okay, all right. Then the last question I have is the fees that you charge, will you or are you seeing right now any pressure because of economic conditions for just -- seeing any pressure on the fees of what you ask for in the marketplace?

We are not seeing a pushback on our billing rates for our individuals. We increase those effective January 1 each year, and this past year, we increased overall about 5% to 6%, and we've been able to go out to the market and realize that.

David Gold, Sidoti & Co.

Just a quick follow-up -- uses of capital -- obviously you've expanded the buyback. I'm just curious. Do we read into anything on the acquisition landscape based on that, or do you still think maybe we do both?

David, the answer is that you shouldn't read anything into that relative to acquisitions. As you saw, we ended up with about the same level of cash, around $60 million, so the fact is we are generating a lot of free cash flow at this point in time, and so we think that continuing the buyback program makes a lot of sense for shareholders. Aside from that, parallel to that, we continue to very much look for the right acquisition candidates here.

I got you. Perfect. Thanks.

Rob Ammann, RK Capital.

Can you provide the revenue breakdown between health & environmental and engineering?

Yes, so the reportable revenue for the quarter here was $42.1 million for other sort of engineering and scientific, and environmental health was $12.8 million.

Okay. Do you happen to have the utilization FTE numbers as well?

I do. The utilization number for Health & Environmental was 66%, and Other was 70%. The FTEs were 161 for Environmental & Health and 453 for other engineering.

Okay. So other engineering was only up basically 1 or so in the quarter. Is that right? Sequentially?

That's correct.

Okay. From here, would you expect both processes to see similar sequential FTE growth of that kind of 1% to 1.5% sequentially or will environmental continue to grow a little bit faster?

There's no - -we've got a number of growth opportunities and recruiting efforts going on in both larger segments in the Company. I just think it's one quarter of data there of a net number of hires and terms and such, so at this point in time, I don't see it today it being very different across those two.

Okay. Anything competitively in any particular practice area where you are seeing more significant competition, or a little bit more pricing pressure?

I would say that nothing -- there has been no real change over the last couple of months or quarter. You know, we continue to find that the most price-sensitive and competitive markets that we are in include the environmental consulting area; our work for the insurance industry where they tend to be very price-sensitive, we tend to get involved in their higher-exposure issues.

Construction consulting, as we've talked before, is a much more broader, more competitors out there in that marketplace, but none of those things are any different than they were a year ago as far as I'm concerned.

Probably the only place that we felt a little bit is sort of in our sort of hydrology/geo-tech area where there's less development going on, and so there's a little more resources out there and that has some impact on our civil engineering practice.

Okay, and then following the [ARDIS] order this quarter that came off that ID/IQ, what does that leave left on that ID/IQ, about $5 million (multiple speakers)?

No, that's about all of it. Between the two orders and the work that we've done through that period of time, there might be about -- there's probably another $1.5 million to $2 million in gross but not a whole lot left.

Okay. Anything new on other technology development, whether it's covert denial or non-lethal vehicle or any new robot technology that is worth talking about?

I would just say that there are -- that there is work and discussions going on in all of those areas and there's nothing that we can talk about more concretely at this point.

Okay, but still a good pipeline of potential opportunities that have a chance of becoming something similar to [ARDIS], maybe not in size but in progress?

We believe so.

Great, thank you.

Tobey Sommer, SunTrust.

Just in terms of details, I wanted to ask you, any movement on the balance sheet or DSOs that you think is noteworthy?

No. You know, we had $1 million in an auction rate security that last quarter we, from year end to at the end of the first quarter, we moved that down into "other assets". We've actually continued to monitor that and actually have gotten notice that the issuer is actually going to restructure that. So we have not taken a discount but because of the illiquid market, we did move that down from cash to other assets -- or investments down to other assets.

Other than that, our CapEx for the quarter was a little bit higher than we would typically find. We are entering a new lease on a new facility -- moving facilities in the Boston area, and this landlord, instead of doing it turnkey, we actually did some of the TIs -- we did the TIs on the space. They are funding half of those TIs, but based on the accounting, the $0.5 million they're giving us for the TIs needs to go against rent expense versus against CapEx. So CapEx was a little bit higher in the quarter than we would have normally had.

Okay, thank you very much.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you so much for your participation. You may now disconnect.