Exponent Inc (EXPO) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Exponent fourth quarter 2009 earnings conference call. (Operator Instructions). This conference is being recorded today, Wednesday, February 3, 2010. I would now like to turn the conference over to Brinlea Johnson with 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 fourth quarter and fiscal year 2009 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/investors. This conference call is the property of Exponent and other keeping or other reproduction is expressively prohibited without Exponent's prior written consent.

Joining me on the call today are Mike Gaulke, Executive Chairman, Paul Johnston, President and Chief Executive 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 Exponent's period filings with the SEC, including those factors discussed under the caption, "Factors Affecting Operating Results and Market Price of the Stock," in Exponent's form 10-Q for the quarter ended January 1, 2010.

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 result of new developments or otherwise. And now, I'd like to turn the call over to Paul Johnston, President and Chief Executive Officer of Exponent. Paul, please go ahead.

Thank you for joining us today as we report financial results for the fourth quarter and fiscal year 2009. As we reported in our press release, total revenues in the fourth quarter were 52 million. Revenues before reimbursements, or net revenues, were 47.7 million. For the full year, total revenues were 227.9 million, and net revenues were 205.7 million.

Net income in the fourth quarter was 4.5 million, or $0.30 per share, and EBITDA was 8.7 million. For the year, we reported net income of 22.1 million, or $1.47 per share, and EBITDA of 40.8 million. We were able to maintain our EBITDA margin for the year, as a result of effectively managing the business model end costs. We are pleased with our ability to report solid results in a period with one less week than in the prior year's period, considering the difficult macroeconomic climate which especially affected our automotive and infrastructure clients.

For the fourth quarter and full year, we had strong performances in our electrical practice, where we assisted clients on a broad range of issues, from an intellectual property claims in front of the international trade commission, to an explosion in an electric power substation.

And in our human factors practice, where our work ranged from evaluating warning labels on toys, to understanding vehicle driver behaviors while interacting with onboard technologies. And also in our health group, where we addressed scientific issues related to chemical exposure and food safety.

Reflecting on 2009, we feel good about the way we managed the business and were able to post stable revenue and earnings. We did see some reduction in our businesses that are more dependent on discretionary spending, such as design, energy, and infrastructure consulting. In addition, we saw some lumpiness in our defense business, due to the size and nature of the projects.

The areas of our business that are related to litigation and insurance matters performed well, and we have maintained our leading market position and enjoyed a steady flow of projects throughout the year. We believe that we have continued to demonstrate our value to customers by leveraging our differentiated market position as a multi-disciplinary consulting firm.

While our technology development revenues were slightly down versus a year ago, we are optimistic about our future in this business area, as we expect to be awarded a follow-on contract from the US Army to continue our development of our ground-penetrating radar system. We have also recently obtained two small contracts to evaluate ground-penetrating radar technology, one from the United Kingdom and one from Norway. In summary, we are optimistic about the long-term opportunities that we are pursuing and look forward to a successful and productive 2010. I'll now turn the call over to Rich for a detailed discussion of our financial results.

Thanks, Paul. Before I walk through the details, I want to remind you that our results for the fourth quarter of 2009 include 13 weeks of activity, as compared to 14 weeks in 2008. For the full year, 2009 was 52 weeks versus 53 weeks in '08. Total revenues for the fourth quarter were $52 million, as compared to $58.9 million in 2008. Revenues before reimbursements, or net revenues, as I will refer to them from here on, were 47.7 million, as compared to 51.6 million in the prior year period.

In the fourth quarter of 2009, net revenues from product sales and defense technology development were $850,000, as compared to $1,050,000 last year. For the full year, 2009, total revenues were 227.9 million, as compared to 228.8 million in 2008. Net revenues for 2009 were 205.7 million, as 206.2 million in the prior year period. These results are noteworthy, considering the macroeconomic environment, the loss of approximately 2% of our revenues as a result of GM and Chrysler bankruptcies, one week less in 2009, and a less favorable foreign exchange rate.

In 2009, net revenues from product sales and defense technology development were 3.2 million as compared to 5.6 million in 2008. We expect product sales to be approximately 250,000 in the first quarter of 2010, and are encouraged by the prospects of future sales. Net income for the fourth quarter was $4.5 million, or $0.30 per share based on 15 million diluted shares. This compares to net income of $5.1 million, or $0.34 per share based on 15.1 million shares a year ago.

EBITDA in the quarter was 8.7 million, as compared to 9.1 million last year. For fiscal year 2009, net income was $22.1 million, or $1.47 per share, based on 15 million diluted shares, as compared to $23.2 million, or $1.47 again, based on 15.7 million diluted shares in the prior year. EBITDA was 40.8 million in 2009, as compared to 40.9 million in 2008.

We are pleased to have hired 80 new consultants in the firm in 2009, which was offset by appropriate turnover. Our average technical, full-time-equivalent employees for the year were 631, in the fourth quarter was 625. We expect FTs to be approximately flat in the first half of the year, and then grow slightly in the back half. In the fourth quarter, billable hours were 197,000, which brings the full year to a total of 867,000 hours as compared to 888,000 in 2008. This 2% decrease is equivalent to one less week in 2009

We realized an average billing rate increase of approximately 3% over the prior year. Utilization in the fourth quarter was 60%, as expected, due to the number of holidays and vacation days taken in the period, and compares to 62% in the same period last year. The lower utilization was affected by the fact that we last one fully productive work week in 2009 in the fourth quarter.

The full-year utilization was 66%, as compared to 67% last year. For 2010, we expect utilization to improve. Since the first quarter of 2009 was 70%, I do not expect that improvement to necessarily come on a year-over-year basis in the first quarter. Hereafter, the percentages I will reference are on a percentage of net revenue basis. EBITDA margin for the fourth quarter improved to 18.3% from 17.6% last year. EBITDA margin for the year was 19.8%, and it remained flat with the year before.

This is notable, considering our 2008 margin benefited from approximately 100 basis points from the higher level of product sales in that year. Total compensation expense for the quarter was 32.7 million, adjusting for deferred compensation gains, which is offset in miscellaneous income, compensation as down 7% over the prior year. Total compensation expense for the full year was $140.1 million. And after adjusting for deferred compensation, was only up 2%.

As a component of compensation, stock-based compensation expense for the fourth quarter was 1.7 million, and for the full year was 7.9 million. In 2010, we expect stock-based compensation to be approximately $9.5 million for the full year. 3.2 million will be in the first quarter, as in the past, there is a requirement for accelerated expensing of RSU grants to employees who are over the age of 59.5.

Other operating expenses, for the fourth quarter, decreased 9% over the prior year period to 5.4 million, as we were able to negotiate favorable agreements with our vendors. As a component of other operating expenses, depreciation was 1.1 million. For the full year, other operating expenses decreased 6% to $12.3 million. Depreciation expense was 4.4 million for 2009. We expect other operating expenses to remain between $5.4 million and $5.5 million a quarter in 2010.

G&A expenses in the fourth quarter decreased 28% to $2.8 million over the same quarter last year. These savings were the result of our continuing effort to effectively manage spending. For the year, G&A decreased 22% to 10.9 million. We expect G&A expense to remain at approximately the $2.8 million a quarter for 2010.

For the year, interest income was $614,000, as compared to $1,700,000 in 2008, due to the lower interest rate environment that we had in 2009. This $1.1 million difference in tax exempt income is the primary reason net income was down was EBITDA was approximately flat. Our tax rate for the fourth quarter of 2009 was 41.6%, as compared to 38.8% in the same period last year. For 2009, our tax rate was 40.2%, compared to 39.8% in 2008. We expect our tax rate for 2010 to be approximately 40.2% again.

Turning to the balance sheet, cash was up $18 million over last year to $75.4 million. We generated $26.8 million in operating cash flow, and offset that with some spending of cash towards $13.1 million of stock repurchases in the year. We still have approximately $21.9 million available for stock repurchase. Capital expenditures for the fourth quarter were $350,000, and were $2 million for the full year. DSOs were 96 days at the end of the year.

And in summary, we are pleased with our ability to report solid revenues and maintain EBITDA margins. Based on the current market environment, we expect revenues before reimbursements in 2010 to grow in the low single digits, and to maintain EBITDA margins. We believe that our market position, and our business model, will allow us to deliver shareholder value in the short-term, and allow us to capitalize on opportunities that will allow us to grow and perform in the long-term. Now, I will turn the call back to Paul for concluding remarks.

Thank you, Rich. We are pleased that our unique position as a leader in assisting clients to solve their most challenging engineering and scientific problems, has allowed our business to remain resilient through this past year's economic downturn. As we head into 2010, we will remain focused on delivering more value to our clients, as we address their most complex technical issues.

Posting improvement in our more proactive businesses, such as design, energy, and infrastructure consulting, as the economy improves, selectively adding new talent that can add capabilities and provide growth, continuing to tightly manage our other operating and G&A expenses, and, finally, generating additional cash from operations, maintaining a strong balance sheet, and undertaking activities such as share repurchases to enhance shareholder value.

We remain confident in our ability to grow over the long-term, as we build upon our strong market position and add capabilities that allow us to help our clients with their future technological health and environmental challenges. Mike Gaulke is also joining us today for our Q&A session, as he continues to be actively engaged as Executive Chairman. Now I will turn the call over the operator for your questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of David Gold with Sidoti. Please go ahead.

Hi, good afternoon.

Hey, David.

Two questions for you that'll maybe help us think about next year. And Rich, thanks for the sort of line-by-line on 2010. Let me start somewhere else. Paul, you mentioned a follow-on tech dev contract. Can you tell us more about that as to what maybe an expected size is, A, and B, is that baked into your revenue forecast already?

David, it's Mike Gaulke. Let me--.

--Hey, Mike--.

--Take a crack at that question. So, I might start, actually, with GPR as that's really the basis here of what Paul mentioned. And by way of background, just to say that we continue to work with the rep at Equipping Force in the fourth quarter of last year and into this year. We're not operating, as I think you know, their field labs, as we have over the past several years. But, we continue to have Exponent employees in Afghanistan and Iraq supporting the use of GPR in those war zones.

Over the last four months, we've done some limited development, focused on improvements to the existing systems in the field, as well as some early work on what a next generation GPR system could look like, which really brings me now to your question. So, as Paul indicated in his remarks, we anticipate receiving a follow-on GPR development contract in the near future. The first phase of that would be for $4.7 million, of which roughly $3 million would be in the form of net revenues.

The total proposal is for 14.5 million, which would have approximately 9.5 million in the form of net revenues. The first phase would run over the first half of the year, and consists of two major tasks, the first task representing roughly $2 million in net revenues, would be to make improvements to existing systems. And then, the second task, represented by the $1 million in net revenues would be to begin the development of the next generation system. As Paul also mentioned, we've secured two contracts in Europe for GPR work.

The first is with the UK to provide a demonstration of the system. And the second is with Norway to provide an evaluation copy of the GPR software. Although these are relatively small contracts, we believe they could lead to more significant business opportunities with these customers, as well as NATO members that have contacted us to date and expressed interest in our system. So, those are the major dimensions of the work around GPR. Let me, since I'm on the topic here of tech dev, just round out quick here what else is of note since our last call.

We have received a follow-on contract from Land Warrior to develop the next generation version of the MARCbot, which will integrate the Land Warrior data feed. In the area of SmartCards, we continue to work with both the Department of Defense and Department of State on contracts to support the use of SmartCard technology.

And just conclude my comments by saying that on the area of product sales, we are encouraged by the prospects for future product sales of RDISS, which is our Rapid Deployment Integrated Surveillance System, and our Lapeer system, which is, I think you know, designed to help prevent the use of culverts as a location for placing IEDs.

David, this is Paul. If I could just sort of follow up on Mike here just a little bit with regard to what's baked in and what's not, I think with regard to the Phase I of this contract that Mike referred to, we are expecting that. I would say that is included within our estimates. By the time you get out to Phase II and deal with timing and so forth, it's not maybe quite such a clear picture, exactly, how you view the revenues a little bit further out. But, let me just at least say that Phase I is baked in.

Okay, all right, perfect. And then, something that else that maybe will help us sort of think about things, where are we on the REF, I think? At last talk, you thought you had, say, six months left of run-off work that's, I don't know, four months ago. So, do we still have, say, two months left, or are we done? Or where are we?

Yes. David, what we've seen happen is that the work with the labs and such were completed there at the end of September. What we continued on is--remember, our GPR work was under that same contract. All of what we're talking about here under GPR is with the REF.

Okay.

So, they continued. They found a way to extend things under our contract to allow our people to stay in theater and move over to GPR support. They, later in the quarter, about December, moved that support part off to another contract vehicle they had. And the extended, Mike mentioned, a lower level of activity on GPR in the fourth quarter.

That continued as an extension of the old contract at a lower level. And the new work will come in through them, some of the funding through them and some of the funding through the joint IED organization. But, that's where we expect the management of this, for now, to be through the REF.

Okay, all right. And then one other, Rich, as we think about year-to-year, can you remind or tally sort of how much revenue the REF contract was responsible for in '09?

Yes.

Basically what I'm trying to get at is what sort of quote-unquote organic growth have pulled that out?

We pulled out the REF--.

--So, in other words, presumably, that's masking things a little bit, right? It's run-off and you're looking at a year of lower single-digit, presumably, you have to make up for some of that--.

--Yes. Some, and obviously the GPR work was a large part of the work we were doing last year with them. And if that continues on, then that will fill in that space there. But, I don't have the exact number. Our total net revenues for all of defense technology development ended up being $15 million last year, of which $3.2 million of that net revenues were for the product sales. And of the remaining balance, it was, of the remaining, approximately, probably about $9 million was related to the REF.

Okay, perfect. And one last, if I might, you guys have been a little slower, I guess, this year, on the share repurchase front, but you have a boatload of cash, presumably, so just thoughts there with the stock, where it is.

I think where we are is that both management and the board are still behind our stock repurchase program as an effective way to return value to shareholders and, at least with this plan, time we plan to continue forward with that. If there was some expectations, I would expect it to be at a higher level than it was in 2009, just because of the increased level of cash that we have available to do that with.

Perfect, thank you all.

Thank you. Our next question comes from the line of Tim McHugh with William Blair. Please go ahead.

Yes. Just, Rich, I first want to clarify on your comment about flat EBITDA margins, and I apologize if I missed it, but--.

--Yes--.

--Wanted to understand, given the deferred top expense that was--or, the miscellaneous expense that was reflected down below in 2009 for several quarters, are you adjusting for that when you're saying, "Flat margins," and if not, then the question becomes, how should we kind of model forward that sort of miscellaneous line?

Tim, I'm sorry, yes. That is already taken out on the EBITDA. That's already netted in that, because EBITDA takes the net income there and then just adds back the interest and other things. So, it's already been netted out in that process.

Okay, yes. I was looking at it a different way. Okay, that makes sense. And then, the cash balance here, obviously, at year-end, there's a portion that, I guess, is bonus-reflected. Can you give us a sense how big that is and what's kind of the true, kind of, extra cash at this point?

So, you're asking for how much the accrued bonus is?

Yes.

Okay. Well, the cash portion of the bonus payout will be approximately 15 million, somewhere around there, 14, 15. I think that's where it was last year, and it'll be similar this year.

Okay. And then, the last question, in just kind of a bigger picture, it sounds like, from your comments, going into 2010, what are you seeing in terms of just, kind of, the more discretionary spending patterns by your clients? It sounds like you may have seen modest signs of improvement, but nothing of significance. Just want to clearly understand what you're seeing there. And then, if you're planning or hoping for any improvement, or if you've just kind of assumed that it stays relatively muted as we go through 2010.

Yes. So, Tim, I think what we've seen is a situation where there are certainly examples of some improvement, but there are also almost an equal number of examples of not improvement. So, it's very client-specific, with regard to whether things have eased up or not. I think, on the infrastructure side, in our sort of civil engineering and construction side, there's been a little improvement. But, there are other places that have not--in the energy area--that have not turned around from what we see.

So, as you know, that's only a portion of our business. And so, we've been able to remain fairly resilient. We have not baked into our projections a significant turn in the economy. I think the economy has not had a significant turn, and our projections do not assume some significant turn.

Okay, thank you.

Thank you. Our next question comes from the line of Tobey Sommer with SunTrust Robinson Humphrey. Please go ahead.

Hi, this is Frank in for Tobey. Quick question, I guess, a numbers question up front. Can you give us a breakdown of engineering and other scientific and environmental and health?

Yes. You'd like which of the--which numbers would you like me to provide for you?

On the revenue side, just.

Okay. So, on the gross or reportable revenue side, you want the quarters or the year?

Quarter would be fine.

Okay. The fourth quarter of 2009, for the gross revenues, in the other engineering and science, we were at 38.96 million, or 38.86 million, I'm sorry. And environmental and health were 13.1 million.

Okay, great. And in terms of, kind of, the client mix for the revenue, any large projects in the quarter, in terms of the mix of large versus small?

I think that the overall mix has really stayed about the same. I mean, the majority of our work is--well, as you know, we have a very large number of projects. We do about 5,000 projects a year, or maybe a little bit more than that. And typically about, sort of, 80% of our revenue comes from about 20% of the projects.

But, if you leave aside the defense technology development projects, which we've sort of described a little bit more fully here in terms of data, what we typically find is that we might only have--our biggest projects would be of the order of 400,000 in the quarter. So, it's not dominated by some giant projects.

Okay, great. And if you could just repeat the product sales for the quarter, and I guess my last question would be, can you speak a little bit to the hiring environment, what you're seeing out there, and kind of your thoughts? You said relatively flat in the first half in terms of your view on how hiring is going to be, going forward.

Yes. This is Rich. Product sales in the fourth quarter were 880,000. Is that what you were asking, in the fourth quarter?

Yes, that was it.

Okay. And Paul maybe can talk about our hiring activity. The comment I had made about that has some offset for [unintelligible].

Yes. So, the situation, Frank, with regard to hiring is that, at the more junior levels, the market's very good for hiring. There's a lot of talent available. And I think what we are doing from the more junior-level hiring is that we are just making sure that we maintain a healthy business model in terms of continuing to bring in bright new talent, at the same time that we need to make sure that those consultants we have on-staff are being effective and working well, and so we generate some turnover, as well.

So, there's a robust market there for hiring bright, new talent, and we will continue to be in that marketplace this year, just as we were last year, as Rich talked about the 80 consultants we brought onboard. At the more senior level, it is always challenging to bring in senior-level talent. Senior-level talent that have a book of business are in high demand. We had some good successes last year in that area. And we are continuing to work on that area as we look forward to this year.

Okay. If I could sneak one more in, I guess, this talk of Toyota's issues, do you expect that to have any impact on the business going forward?

Well, I think our situation is that we don't talk about any cases, unless we've been retained, and our retention becomes public. So, I wouldn't want to speculate about a particular case.

All right, great. Thanks so much.

Thank you. (Operator Instructions). Our next question comes from the line of Joe Foresi with Janney Montgomery Scott. Please go ahead.

Hi, good afternoon. This is Jeff. I'm calling on behalf of Joe Foresi. Just wanted to follow up on the question regarding discretionary spending and proactive services, I believe you stated that it was customer-specific. But, are there any other indicators that you're looking at as a sign of a pickup in discretionary spending aside from a general pickup in the economy?

Yes. I think that in the short-term, I wouldn't say so. It's more client-specific. Over a longer term, a lot of our discretionary spending is driven by the regulatory environment. And from that standpoint, in a sense, the discretionary spending becomes not so discretionary. And certainly, in some of the non-litigation work, for example, that we're doing in Europe with the REACH program, which is all regulatory-driven, we're continuing to see sort of a flow of work that comes in as a result of that regulation.

Okay, thanks. And then, guidance for 2010, just related to insurance and litigation, that just assumes a steady business there and maybe a little bit of an improvement?

Yes. I think that's fair.

Okay, thank you very much.

Okay.

Thank you. Ladies and gentlemen, I don't show any further questions at this time. This does conclude the conference call for today. If you would like to listen to a replay of today's conference, please dial 303-590-3030, or 1-800-406-7325 using the access code 4199746. Thank you for your participation. You may now disconnect.