Exponent Inc (EXPO) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Exponent first-quarter 2009 earnings conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference call is being recorded today, Wednesday, April 22, 2009.

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

Good afternoon, ladies and gentlemen. Thank you for joining us on today's conference call to discuss Exponent's first-quarter 2009 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 the call today are Mike Gaulke, Chairman and Chief Executive Officer; Paul Johnston, President and Chief Operating Officer; and Rich Schlenker, Chief Financial Officer 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 April 3, 2009. 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 another good quarter of financial performance.

For the first quarter, revenues increased 6% over the same period last year. Revenues before reimbursements grew approximately 10%, excluding the higher cost of product sales and technology development and the favorable foreign exchange rate environment during the first quarter of 2008. Earnings per share were $0.38 and EBITDA was $10.4 million.

We are pleased with our operational execution and revenue growth, particularly considering the overall economic environment. We effectively managed our cost structure as well as maintained strong utilization. We also showed good performance in our electrical technology development and human factors practices in addition to our health and environmental sciences groups.

During the quarter, we continued a significant consulting project for the U.S. Army's Rapid equipping Force to develop a vehicle-mounted ground-penetrating radar system to detect buried improvised explosive devices. Our major defense contracts with the rapid equipping force and a future warrior technology integration program have been funded for an additional three months as both organizations complete their request for proposal process for follow-on contracts.

Let me now comment on how the current economy is affecting Exponent. To date, we have experienced little change in the 65% of our business that is tied to litigation and insurance claims related to products as well as health and environmental issues. However, we have seen some impact on our business in work related to the construction industry. In the 25% of our business that is made up of more proactive services, we're experiencing a mixed market.

While we are continuing to get new projects for most of our consumer electronics clients, they are being more conservative in their approach. In our Health Sciences group, some clients are delaying work while others are asking us for more help as they no longer have all of the internal resources needed to meet regulatory deadlines.

So in summary, we are pleased with our first-quarter results and we continue to be cautious cautiously optimistic about our prospects for 2009.

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

Thanks Mike. As Mike discussed, we were pleased with our operational execution and revenue growth reported in the first quarter.

In the first quarter of 2009, total revenues increased 6% to $59.8 million as compared to $56.3 million in 2008. Revenues before reimbursements, or net revenues as I will refer to them from here on, were $54.9 million as compared to $52 million in the period a year ago.

Net income for the first quarter of 2009 was $5.8 million or $0.38 per share based on 14.975 million shares. This compares to net income of $6.3 million or $0.40 per share based on 15.990 million shares in the first quarter of 2008. EBITDA in the first quarter of 2009 was $10.4 million.

Our average full-time equivalent employees in the first quarter of 2009 were 642, an increase of 5.4% as compared to the first quarter of last year. During the quarter, we continued to hire top talent with 27 new consultants joining the Firm. This was offset by 31 consultants leaving the Firm. The majority of these separations were the result of our ongoing process of identifying underperformers. Additionally, 11 technical support staff were terminated because of long-term underutilization. As a result, full-time equivalent employees in the second quarter of this year will be approximately 625 to 630. We expect to grow headcount in the third and fourth quarters and as such continue to expect 2009 year-over-year FTE growth to be in the range of 3% to 5%.

Billable hours increased by 5.8% to 234,000. As a result, utilization improved to 70% from 69.5% in the first quarter of last year. It should be noted the second quarter of 2009 will have two holidays as compared to one in the first quarter of 2009 and in the second quarter of 2008. We continue to believe utilization will be flat to slightly down for the full year 2009 as compared to 67% in 2008.

Hereafter, the percentages I will refer to are on a percentage of net revenue basis. Overall, in the quarter, technology developments net revenues were $4.3 million as compared to $3.5 million in the same period last year, of which net revenues from product sales were $400,000 as compared to $1.8 million in the same period last year. Over the next two quarters, we expect to realize net revenues from product sales of approximately $2 million to $2.5 million, the majority of which will be recognized during the second quarter and the balance in the third quarter.

Compensation expense increased 12.9% year-over-year to $37.8 million. As a component of compensation, stock-based compensation expense for the first quarter was $3.1 million as compared to $2.9 million in the same period last year. The first quarter is higher because the accounting rules require us to accelerate amortization on restricted stock units that are granted to employees over the age of 59.5. For the full year of 2009, we expect stock-based compensation to be between $8 million and $8.5 million.

In an effort to manage our cost structure in these uncertain times, we have been more aggressive in counseling underperformers out of the Firm than conservative in our hiring and significantly reduced our raises that took effect at the beginning of April. Additionally, stock-based compensation is lower in the last three quarters of the year.

Other operating expenses for the first quarter decreased 3% to $5.3 million. As a component of other operating expense, depreciation in the first quarter was $1.1 million.

G&A expense for the first quarter decreased 12% to $2.6 million. We continue to believe we can manage other operating and G&A expenses so they grow slower than revenues in 2009.

Reimbursable expenses for the first quarter increased to $4.8 million as compared to $4.2 million in the same period last year.

EBITDA for the first quarter was $10.4 million, down slightly compared to the same period last year. This decline was expected as our 2009 results reflect a lower mix of revenues in defense technology development practice related to product sales.

EBITDA margin for the first quarter of 2009 was 19% as compared to 21.1% in the same period of 2008. We expect EBITDA margin to be lower in 2009 as a result of lower product sales.

Interest income for the first quarter was $234,000. Due to a lower interest rate environment, we expect interest income to be approximately $175,000 per quarter in the last three quarters of the year.

Our tax rate for the first quarter of 2009 was 39.8%.

Turning to the balance sheet, we closed the quarter with cash and cash equivalents and short-term investments of $44.7 million. During the first quarter, we purchased $5.5 million worth of common stock and replenished our shares with our share repurchase program. At the end of the quarter, we have $30.6 million available for repurchase activity.

Capital expenditures for the first quarter were $421,000. DSOs at the end of the first quarter were 98 days.

In summary, we were pleased with the first-quarter results posting strong operational execution and solid revenue growth. For 2009, we continue to expect our underlying business to grow revenues before reimbursements in the mid to high single digits. In addition, our growth will be reduced by approximately 3% to 4% because, in 2008, we had high product sales in technology development, a favorable foreign currency exchange rate environment and an extra week in the fiscal year. This will result in overall growth being in the low to mid single digits.

Now, I would turn the call back to Mike.

Thanks, Rich.

In February, we informed investors of an upcoming leadership change at Exponent when we announced that the Board intends to appoint Dr. Paul Johnston as the Firm's Chief Executive Officer following our annual meeting on May 28 this year and that I will stay on for a year in a part-time role as Executive Chairman. I want you to know that this change is not prompted by current economic conditions but is rather the result of a succession plan that I've been working on with the Board for the last several years.

I am confident that Paul is the right choice to be my successor and that he will be an excellent Chief Executive Officer. Paul has been with our firm for 28 years, graduating from Stanford in 1981 with a PhD in civil engineering. He joined Failure Analysis Associates and developed a successful consulting practice specializing in the failure analysis of mechanical components and structures.

It was about 12 years ago that I recognize that Paul, in addition to being a talented engineer, also possessed an unusually good business acumen and began to get him involved in corporate management issues. Initially, he ran our network of offices and worked with me in reorganizing the Firm from a geographic-based structure into the practice-based structure we use today. In 2003, he became Chief Operating officer was given responsibility for our environmental and health groups. In 2007, he assumed responsibility for all consulting groups and became President of Exponent.

I will now ask Paul to say a few words about strategic direction.

Thank you Mike. Let me start by saying that I am very excited and privileged to have the opportunity to lead this unique organization into the future. My approach will be to build upon the foundation that has been laid over the past 42 years, during which time Exponent has established itself as a leader in engineering and scientific consulting. The strategic direction of the Firm will remain unchanged as we expand our services to assist our clients with their most difficult engineering, scientific and business challenges.

As Mike indicated, I worked with him very closely over the past 12 years and I don't believe there has been any major decision in that time in which I did not participate. I am particularly pleased that Mike will be staying on as Executive Chairman for the next year to ensure a smooth transition.

We will continue our focus on organic growth with the expectation that we will return to high single-digit to low double-digit net revenue growth once the macroeconomic environment improves. Our organic growth is dependent upon our ability to attract exceptionally talented staff at all levels, develop staff into successful principles and retained our key staff. Our growth is also dependent on our reputation for delivering excellent quality work to our clients.

We will continue to look at small acquisitions to see new growth in disciplines and businesses that we want to enter. Since our last acquisition was in 2002, you can expect that acquisitions will not be frequent.

Our primary strategy of returning cash to shareholders through a stock buyback program will continue. In the past couple of months, I have traveled with Mike and Rich to meet many of our institutional investors. If I have not yet met with you, I look forward to doing so in the coming months, as I will continue our practice of getting on the road to meet with investors on a quarterly basis.

Now, I will turn the call over to the operator and we will all be available to answer your questions.

(Operator Instructions). David Gold, Sidoti & Company.

A couple of questions for you -- to start, Rich, on the G&A side where you made just a ton of progress and you commented on it. How should we, for modeling purposes, be thinking about that? What will the trend be? Was there anything special in this quarter or can we model off of what you did in the first quarter?

In general, we can model somewhat off of the first quarter. The first quarter of all years tends to be lower than the others. It is just the way, the flow of things, but just this last year I think G&A came up maybe about $300,000 as we moved from Q1 to Q2, so we would expect this quarter will be somewhere around the $3 million range.

Okay. Can you talk for a second there about, on the G&A side, what you did during the quarter to yield the savings?

Yes. It was sort of we tried to send a broad message to the organization here about just trying to be as prudent as possible about where they were spending the money. Clearly, we wanted to keep the recruiting effort going and the marketing effort, which are key to both short-term and long-term growth. So while we didn't hold back in those areas from an activity base, we clearly were able to at least keep our costs under control in those areas. We also have been engaged with some of our vendors in providing us services. In this market environment where we could reduce costs, we did. So we did a little bit everywhere and not a whole bunch in one any particular place.

Okay, that's helpful. If you have it handy, the number of shares repurchased during the quarter?

Yes. The number was -- let me get back to you, David. I just don't (multiple speakers).

Easy enough, sure. Then I had a question actually for Paul. So, we know obviously you have worked both with the Firm and with Mike very closely for a number of years and from your comments, it sounds like you have a lot of the same priorities, say that Mike has had. But is there anything in particular? As you take over the role of CEO, is there any one area where you might be focused on maybe looking at making some changes or will it be a lot of things have run pretty well and so it is just a matter of keeping the engine running?

Well I think --

difficult question.

I don't think there is a particular area that I am going to focus on. I think, with this organization, it is always more than just keeping the engine running. We obviously want to continue to move the organization forward and to continue to expand into new areas. But the approach we're taking to that will be unchanged from where we have been.

I got you. Terrific. I appreciate it and congratulations on the promotion and it certainly has been a pleasure working closely with you, Mike, as well. I expect I'm sure we will still be talking over the next year.

Thanks, David.

David, in response to your question of number of shares, 255,000.

Tim McHugh, William Blair & Co.

I was wondering if you could give us a little more color on the product sales that you said you expect over the next one to two quarters here. What is that related to as well as the technology development, the strength there and the consulting revenue? Is this product [sale] related to that at all our I guess, down the road, do you see opportunities for product sales from that work you are doing on the ground penetrating radar?

Yes, this is Rich. I will start off and then I'm sure Mike might want to step in and add some color.

First of all, related to the first quarter, we did have, in that $4.3 million of net revenues there and the step-up in consulting revenues, it was just as it was in the fourth quarter. We continued a significant effort around developing some technology around identifying IEDs with a ground-penetrating radar system. That activity continues on here into the second quarter. Will it be at that higher rate? Time will tell, but so far, it has been successful and we expect the program to continue in some form going forward.

As it relates to the product sales that we discussed -- that I discussed earlier, we are -- over a two-quarter period of time, we expect somewhere between $2 million and $2.5 million. That is primarily related to our surveillance systems that we have an ID/IQ for. This is both some additional systems parts for the existing systems that are out there and some new sensor packages that we have been working on with the Army to implement into these systems based on their new environment that they are in. So, that is then what has been pulled together. We would expect the majority of that. We have got some things going. The majority of it will happen in this quarter because we know about it and part of it will contribute to our -- probably contribute to our normal product sales in the third quarter.

I think, as you know, our visibility longer-term on product sales is challenging at the best as we end up basically seeing our products come out of activities being involved in supporting our war fighters in theatre. The project that we have been working on is a ground-penetrating radar. Whether or not that will result in some significant product sales down the road, it is really too early to say.

Thus far, the development project has been promising and we are proceeding to develop this alternative approach for our client. To the extent that it is successful, there may be opportunities there for us.

Is the nature of the solution that you are working on consistent with your past ones where it is taking off-the-shelf technology such that -- I guess what I'm getting at -- is it within the realm of possibility that whatever the answer you are coming up with for the Army is something you could do or is that a more complex solution that isn't going to fit into what they typically would look for you to do? I know you cannot predict exactly what they will decide, but is it within the realm?

In limited production, limited quantities, it could well be something they would look for us to do. That would be the likely way I think that it would roll out here in the near-term, over the long-term. If it is ultimately a solution that is broadly deployed then it would probably go out to a more formal form of procurement.

Okay, great. That's helpful. Rich, thinking about the second quarter here, you mentioned the impact of the headcount reductions and how that will flow through in the second quarter as well as the extra holiday. But yet we also have these product sales come through. Sequentially and I think historically, you are down a little in the second quarter versus the first quarter, at least you were last year. Can you give any direction on what you would expect maybe revenue and profit wise based on those factors?

Yes. On the top line, I think that we definitely would see that coming from Q1 to Q2, last year actually there was two holidays in Q1 and one in Q2. So it was a little bit flatter when you took out the product sales last year. I think there will be a slight step-down related to that.

Again, we are talking a couple of a percent when we -- from Q1 to Q2 related to that. I think, in the step-down in FTEs, I think that part of that step-down we will be able to capture some of those billable hours with other people. We are not going to -- because most of that is related to technical support staff where we are able to transition probably half, three-quarters of the hours over other people and still be able to get it done. I don't think that of that will be lost in there. So, we will see a couple of percent step-down there but then we will have, clearly, some offset here from the product sales. So, overall, it will probably be down from Q1 to Q2 but not significantly.

Okay. Then lastly, can I ask about the -- general and administrative expenses were much lower than I would have thought -- the gross margin was also a little lower than we thought. Were there any severance or anything associated with the people that were let go or is this kind of once we strip out the product sales, that is kind of the underlying I call it gross margin but your compensation relative to your revenue?

Yes. There wasn't in a number of -- year-over-year, that number wasn't anything significant at all. There is always some timing dollars that go into that, but the majority there would be related to a swing of the $1.4 million difference in net revenues from product sales at year-over-year that make up the primary difference there in the margins.

Okay, thank you.

Tobey Sommer, SunTrust Robinson Humphrey.

Thank you. I wonder if you could give us a little bit more color on some of the areas of strength and maybe an example or two of some of the projects that you are rather engaged on in the first quarter and help solve problems for your customers or maybe prospectively ones that are extending into the second quarter? Thanks.

Yes, well, this is Paul. I think Rich and Mike have already spoken a little bit to the strength in technology development. I think that the other areas that we have strength that we've talked about are in electrical where we continue to just have high utilization across that practice, a number of different engagements, some of them related to Intellectual Property, which continues to be -- our IP work continues to run fairly strong.

I think, with regard to human factors, there is a fair amount of work. Possibly some of the motivation for that is some -- in essence some outflow from the Consumer Product Safety Commission. There's been some new rulings there and our work has continued very strong in that particular area.

Environmental and Health Sciences -- there are just a number of reasonably large projects proceeding at the moment. I can't, unfortunately, go into detail on those individual projects. It just kept that group, those groups, pretty busy generally on the litigation side.

Thank you. Could I get your updated thoughts on the potential impact over multiple quarters and your current thoughts on the stimulus and what that could mean for the Company?

Sure. I think that, if you look at the stimulus from the standpoint of infrastructure spending, we certainly believe that is something that could help our civil and construction groups. We would want to caution, however, that we are not typically on the front end of those projects. We are not involved in the design process for those kinds of projects but if more money is spent on infrastructure, there inevitably become schedule issues and disputes of one kind or another that we think will assist those groups, which has been an area that we have had -- we have been hurt up until recently as a result of the downturn in the economy.

In terms of other things in the stimulus package, most of them, I wouldn't say they are pointing directly at us. I do think that more money and more focus going to the regulatory organizations, agencies such as Consumer Product Safety Commission, the FDA, the EPA, those are all organizations that require our clients to comply with various rulemaking and that are in fact drivers for our business. I think both additional rulemaking and increased enforcement, as we are seeing with the stimulus in the new budget proposals, are both things that should help our business there.

Thanks. Just to follow up one more time on that, in terms of the ramped-up regulatory agencies in terms of both rules and potentially the staff to enforce that, do you think that we need to see not only the rules but perhaps enough time pass so they can put more bodies behind the effort for that to materially start to show up in terms of more work for you?

Yes, and I completely agree with that. This is not an instant outcome -- it's sort of an instant outcome. Clearly, as the regulations stiffen over time and there's more enforcement over time, there will be more issues for our clients to deal with.

Then lastly I would like to ask you a question about the ability that you are seeing out in the marketplace to attract sort of more experienced people. I know that your pattern has historically been to hire people right out of school and nurture them internally, but in this kind of labor market, maybe you've got an opportunity to do something, hire people with the opportunity to create a book of business in short order?

Yes, we do see that as an opportunity for the Firm. We have had some positive impact from that in the first quarter. We brought on some senior people very late last year and into the first quarter and that has been a positive. We're going to continue to have some further focus on that as an opportunity.

You are correct that our primary model is one of bringing people into the organization and growing them up through the organization. But this is a special opportunity to try to attract some more seasoned principles.

Thank you very much.

(Operator Instructions). Joseph Foresi, Janney Montgomery Scott.

Hi, guys. My first question here is just if you could maybe update us on sort of your thought process for the movement and some of the metrics on an annual basis. What are you looking to grow headcount? How is bill rates increasing and maybe what you're thinking on the utilization line on sort of an annual basis?

On the headcount area, we continue to believe that, for the full year, we will end up with a full-time equivalent employee growth of somewhere between 3% and 5% over the full year. We expect that we will end up recruiting and having a net headcount growth in the back half of the year in the third and fourth quarter. As Paul mentioned, we do have a focus around recruiting and bringing in people and we intend to continue down that path.

Our utilization front for the full year in this environment [is] changing. We have set expectations that we are -- our goal here is to hold our utilization flat with last year but we realize that there is a chance that could be down 1% to 2%, down slightly. But we, I think as you can tell by some of the actions we took in the first quarter, are trying to make sure that we have taken actions ahead of time that can help that remain flat for the full year.

The other area was bill rates. In the first quarter, we realized bill rate increases of approximately 4%. We think that has, as in past, that steps down as we hire new people in through the years. So we continue to expect that we will have a realized bill rate increase of somewhere between 3% and 3.5% for the full year.

Maybe you could update us on what contracts you currently have in the product sales area and just maybe the timeframe of those contracts and rough size? I know it is probably little bit more elaborate but just on a very high level?

At the highest level, we have an open ID/IQ which goes through in both for [La Pier] systems which are covert denial systems, and a separate one for our surveillance systems. Under those, really the only orders that we have or are in discussion on at this point in time are the ones that we discussed earlier that applied to the second and third quarters there. So, that is where we stand as of today.

People do come to us from time to time for some of the robot technology that we have done before but we don't have an open ID/IQ contract around that. The remainder of any product sales are typically some other one-off item that we might have done where somebody wants a couple of things from us.

So would you consider the pipeline to be basically the same in that business? It doesn't sound like there is -- the change it is just more of a random event?

If you recall, the guidance that we came into this year -- given my earlier comments about visibility here. What you ought to think about is roughly $0.5 million a quarter or a couple million dollars a year.

Where we are right now is in fact running the first quarter and what Rich has told you about the current pipeline, we're actually running ahead of that for the three quarters visibility, the quarter we just had and then the next couple of quarters which are, if you use half $0.5 million a quarter, that would, say, through that time period, ought to have $1.5 million and will be in access of $2 million through that time period.

Okay. Then just lastly, talking about the defense ability of your revenue base, maybe you could talk to what you are still seeing? Has revenues held up the way that you expected them in the downturn and what do you think maybe your level of exposure is at this point to discretionary projects that could get cut or reduced?

Well, I think we are pleased with the results we have had. We think the level of work has held up well.

In terms of our further exposure, it depends a little bit on what industry you're looking at. If we look at our -- the part that is more discretionary is the part where we do sort of design-related work assisting clients in the medical device arena and assisting clients in consumer electronics. I think, in those areas, as we have indicated, we continue to get work. In some cases, it is not as strong as it has been in the past and in other cases we're getting some new work. So it has held up reasonably well.

I think from the standpoint of the automobile industry, which is another industry that people typically would ask us about, there the difference is almost all of our work there is litigation related. In that area, we continue to see the manufacturers being very focused on cost control. That is not a new thing but it continues to get tighter. But at the same time, we continue to get retained on new assignments. There is no shut down from that standpoint.

Okay, thank you.

David Gold.

Rich was actually cut off when you were giving the number of shares repurchased. I'm curious if you could go over that again and the average share price?

Yes. The number of shares was 255,000 and so that is average of about $21.70.

Okay, some pretty good (inaudible) and you said $30 million left on the authorization?

Yes.

One last -- on the $2 million to $2.5 million product sales, can you give us a sense for what type of margin we might expect on that?

I think that, over these two quarters as we have discussed before, the first $0.5 million sort of fits into the margin discussions that we have had overall and we run the overall business. The increment above that, on a net revenue basis, we are seeing that, because that is just the increment is about 60% there whereas on a gross revenue basis the margins are similar to the rest of our business. So we do -- while that business runs normal, because there's so much products in it or materials in it, the net revenue number for that increment is about 60%.

Okay, I think you lost me. Can you go over that again? Essentially, the gross basis you said 60%?

No on net revenue. So David, if in Q2 we were -- had expected to have $0.5 million, our margins would be at a normal rate. But for the next increment, let's say $1 million, we would expect the impact to EBITDA or any of the other margins to be about an increment of $600,000.

I got you.

So 60% of that $1 million you are putting into net revenues.

Okay, perfect. I appreciate it. Thank you all.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. If you would like to listen to a replay of today's conference, please dial into 303-590-3000 or 1-800-405-2236 and enter the access code of 11130291#.

We thank you for your participation in today's conference. At this time, you may disconnect. Have a nice day.