Exponent Inc (EXPO) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Exponent first quarter 2010 or 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 is being recorded today, Wednesday, April 21 of 2010. I would now like to turn the conference over to Ms. Brinlea Johnson, Investor Relations. Please go ahead, ma'am.

Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's first quarter 2010 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 any other taping or other reproduction is expressly 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 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 2, 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 as a result of new developments or otherwise.

Now I would 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 for our discussion of Exponent's first quarter 2010 results.

As we reported, total revenues in the first quarter were $59.4 million. Revenues before reimbursements or net revenues increased to $55.2 million. Net income in the first quarter increased 8% over the prior year period to $6.2 million or $0.42 per share, and EBITDA improved 11% to $11.5 million.

We are pleased to have improved our profitability by effectively managing headcount over the past year to align our resources with anticipated demand, which resulted in improved utilization and lower cost. Additionally, our combined other operating and G&A expenses remained flat with the low level achieved in the first quarter of 2009.

The areas of our business that are related to litigation and insurance matters continued to perform well during the quarter. The areas that are more dependent on discretionary spending continued to get mixed results with some clients providing a good flow of projects and others constrained by their budget situation.

We had strong performances in our mechanics and materials and our buildings and structures practices. In our mechanics and materials practice, we worked on a broad portfolio of projects in both failure analysis as well as design consulting for a cross-section of industries including consumer products, medical devices, transportation and energy. In our buildings and structures practice we continued to work on disputes related to the performance of mobile homes, bridges and other types of structures.

While our technology development revenues were down versus a year ago, we are optimistic about our future in this business area, as we have recently been awarded some new contracts. As expected, we did receive a follow-on contract in March to continue our development of the Ground Penetrating Radar System. In April we received a new order for rapid deployment integrated surveillance systems which will be delivered over the balance of the year.

In summary, we are pleased to have delivered record net revenues and earnings per share. I'll now turn the call over to Rich for a detailed discussion of our financial results.

Total revenues for the first quarter of 2010 were $59.4 million as compared to $59.8 million in 2009. Revenues before reimbursements, or net revenues as I will refer to them from here on, were $55.2 million as compared to $54.9 million in the prior period last year.

In the first quarter of 2010 net revenues from our defense technology development business decreased to $2.2 million as compared to $4.3 million last year. This includes $220,000 of product sales in the first quarter of 2010 and $380,000 in 2009.

Net income for the first quarter was $6.2 million or $0.42 per share. This compares to net income of $5.8 million or $0.38 per share a year ago. EBITDA in the quarter increased to $11.6 million compared to $10.4 million last year.

In the first quarter billable hours were 228,000 as compared to 234,000 in the same period last year. Our average technical full-time equivalent employees for the first quarter were 621 as compared to 642 in the same period last year. Based on our current level of accepted offers and ongoing recruiting activity, we expect to be able to be sequentially flat in the second quarter and then grow slightly in the back half of the year.

Utilization in the first quarter improved to 70.6% as compared to 70.1% in the same period last year. We continue to believe the full-year 2010 utilization will improve 50 to 100 basis points over last year.

Hereafter, the percentages I will reference are on a percentage of net revenue basis. EBITDA margin for the first-quarter improved to 20.9% from 19.0% in the same period last year as a result of our higher utilization. Total compensation expense for the quarter was down slightly over the prior year period to $37.7 million. Adjusting for a $700,000 deferred comp gain, which is offset in miscellaneous income, compensation was down 4%. As a component of compensation, stock-based compensation expense for the first quarter was $3.1 million. As a reminder, this is typically higher in the first quarter when we grant stock as part of our annual bonus program. Accounting rules require accelerated expense for grants to employees over the age of 59.5. For the full year, we expect stock-based compensation to be approximately $8.5 million.

Other operating expense for the first quarter decreased over the prior-year period to $5.2 million. As a component of other operating expense, depreciation was $1.1 million. We expect other operating expenses to be $5.4 million to $5.6 million a quarter for the remainder of 2010. G&A expense in the first quarter was $2.7 million. Going forward, we expect G&A to be $2.8 million to $3 million a quarter for 2010.

Interest income was $63,000 as compared to $234,000 in 2009, due to the lower interest rate environment. Our tax rate for the first quarter of 2010 was 40.7% as compared to 39.8% in the same period last year. This increased tax rate is primarily related to the lower tax-exempt interest income.

Turning to the balance sheet, we closed the period with $72.6 million of cash. During the quarter we repurchased $3.8 million of stock. This leaves us $18 million available under our current stock repurchase authorization. Capital expenditures for the first quarter was $725,000. DSOs were 96 days.

As a follow-up to Paul's comment about us receiving two new contracts in technology development, I want to provide you some of the values. The U.S. Army's Rapid Equipping Force awarded us a follow-on contract for further development of the Ground Penetrating Radar System. This contract is for a total of $14.6 million but is being incrementally funded. The initial tasks which have been funded are for $4.7 million, of which we expect to recognize net revenues of $3 million.

The second contract was for surveillance systems, which has a total value of $9.1 million, and we expect to realize net revenues of approximately $3.5 million. The net revenues will be recognized over the next three quarters. We expect $700,000 in the second quarter, $2.1 million in the third quarter and an additional $700,000 in the fourth quarter, all of these being related to this new contract of surveillance systems.

Looking ahead, we expect revenues before reimbursements in 2010 to grow in the low-single digits and to improve EBITDA margins by approximately 50 basis points.

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

Thank you, Rich. I believe our staple top-line and strong bottom-line performance over the last year is a reflection of our unique position as a leader in assisting clients to solve their most challenging engineering and scientific problems and our strong business model. We are confident that these factors have positioned us for growth in both revenues and earnings in 2010. We are optimistic about our long-term future as we continue to see our demand being driven by product failures, human health issues and environmental concerns.

Over the longer term our consulting services will continue to be driven by products and processes becoming more technologically complex and geographically dispersed. We believe that Exponent's differentiated market position as a multidisciplinary engineering and scientific consulting firm with unparalleled technical expertise and experience will allow us to translate these opportunities and market drivers into long-term shareholder value.

Mike Gaulke is also joining us today for our Q&A session, as he has remained actively engaged as Executive Chairman. As you will recall, we announced a leadership transition in February of 2009. In keeping with this plan, Mike's retirement is on June 3. And as such, this is Mike's last investor conference call. For those of you who have not yet seen the proxy statement, the Board has put forward Mike as a candidate for continuing service on the board.

Now I will turn the call over to the operator for your questions.

(Operator instructions) David Gold, Sidoti & Company.

The Army ref contract, the $4.7 million or $3 million, do you expect that over the next three quarters?

Those initial tasks -- we expect that we'll get the majority of the completed by the end of the second quarter. We did about between $600,000 and $700,000 of that net revenues in the first quarter, and most of the remaining balance will be in the second quarter, maybe a little bit of it falls over into the third quarter.

I think you had given numbers for product sales in the first quarter were $220,000?

That's correct.

And then, I know it may be a difficult question, but by way of margin, how should we think about the two contracts that you spoke about as far as margin contribution?

I think that the margins, the technology development/development job is similar to what we've been doing in that area over the last couple of years. That will fit into our business at our normal rates and be in that fashion.

As far as the product sales side, we are viewing that the amount that we are talking about having in the second quarter falls pretty close in line with what we've said before of $0.5 million, approximately, of that revenue we would expect in any normal quarter. Once it goes beyond that, it does have some positive impact on it. It's usually -- on a gross revenue basis, the margins aren't very different than any other part of our business. But on a net revenue basis it comes out in that 50% to 60% range for that incremental amount above, let's say, $0.5 million.

Got you; a couple of others. Can you give a sense for -- you got a lot of headlines from Toyota, but can you give a sense for how significant that was in the quarter?

Since Toyota has disclosed our engagement, I certainly can confirm that Exponent has been retained and, indeed, that we continue to work on the matter. However, since it's an ongoing investigation, I don't want to comment either on the size of the engagement or on the nature of the work. Sorry, David, but I feel constrained here.

No, that's fair. Can you give a sense for how long it might be ongoing, or is that still a wildcard?

That's a wildcard.

And then one or two others, if I might -- Rich, just by way of reminder, on the other income, the shift, if I remember correctly, that basically is a recapture. In other words, on a net basis it doesn't add or subtract; it's just a different line item on the comp?

Yes, in the miscellaneous income -- the interest income is interest income, and the miscellaneous income, about $560,000 of that in the quarter was related to -- $570,000 was related to deferred comp. The remaining balance there is rental income we get from excess space we have, or other things. So that's how the numbers work out -- about $400,000 from ongoing business, and the remaining balance is just the net out against comp up above.

And then, that actually brings me to my last one. The filing out there from Geron Corp. -- that presumably is the renter -- it says that you have 93,000 shares or so that they are registering. Have those been recognized over time as lease income, A? And, B, plans for that, if you can say?

Geron is a tenant in our building. They've been a tenant for a few years. This is a renewal of a lease. The last time we did this was about 2.5, three years ago. And they, at that time, paid us in stock and we turned that around and sold it in the quarter that it was provided to us and registered. In our current lease, we actually -- they are, again, paying us in advance for their rent. And we split the into two payments in advance, one being that we received in the first quarter. We received those shares about 93,000-94,000. They were registered and sold basically at about the balance that we received from them, not a big gain or loss on that.

A second set of shares of 93,000 shares was, we received at the beginning of the second quarter, and again we will just end up selling those sometime during the quarter. Again, we don't expect it to be material gain or loss on them. But we do tend to hold them for 20-30 days as they are being registered and processed through, so we do have some short-term exposure.

Okay, and then you recognize that over time?

And then, that's just the cash in the bank, and then we recognize the rental income over the period of the lease.

Got you, so this is basically prepaid rent, so to speak?

Yes, it's exactly prepaid rent.

Tobey Sommer, SunTrust.

Thank you. I was wondering if you could comment a bit on the proactive side of your business and see with the last several months of improving broad economic data whether you've seen indications that product development and introductions out on the horizon may be resuming at a more typical pace after the recession?

I think, with regard to that, as I sort of indicated in my comments, they really are very dependent on individual clients. It's even difficult for us to look at it in segments of the economy, of which are up and which are down. We have examples that are moving very positively. We have a consumer electronics company that is providing more work than we've had in the past. We have a utility company that we do a fair amount of this proactive work for that is producing less work than we have in the past. We've had medical device companies that we thought were really coming back at the beginning of the quarter and that slowed at the end.

It's very difficult to get a clear global picture on this, and I know that's frustrating for you. It's frustrating for us, I can assure you. But it's just this mixed bag. We have some real positive indicators, and then we have others that, clearly, they want to provide work to us but they just are budget constrained.

And then maybe stepping back and thinking about broadly the base part of the business, the litigation-driven business, exiting the cash flow concerns of last year that many litigants probably felt, have you sensed, either through them, or law firms with which you work, that broadly speaking people are proceeding more in the normal course of business? Or is that still a reticence of the customers as well?

I would describe that as proceeding more closely to the normal way that litigation has proceeded more historically. Clearly, everybody holds onto their checkbook a little tighter than they used to. Cost control has been important for every company, and it's also important for companies that have litigation matters that they have to deal with. But I do believe that there's not any sort of fundamental shift there and that the litigation and insurance claims business is robust.

Maybe a question for Rich about EBITDA margins. The commentary in the press release suggests they'd be up. I was just wondering, has anything changed about your perspective on the margin range for the business? Is it possible we could revisit that 20% margin of 2008? Or, what are your thoughts?

I believe that I think that in 2010 here, we are going to see our margins build and improve approximately 50 basis points here, which I think will get us up above that 20 range as you compare that to net revenues. So I think we, what, 19.8 or so in 2009 -- that we can see that improvement as we go through 2010.

And any guidance or refresher you can give us on the seasonality of the earnings stream as we look at our models for 2Q? Thanks.

What I think is important to understand about Exponent's business in most consulting models is that our business -- the first quarter tends to be our strongest utilization quarter. We just had sort of 70.6 UT. That tends in the second quarter to step down from there, usually approximately 2 percentage points that we see it step down as we go into there, 1.5, 2, somewhere in that range. We see that step down a little bit further in the third quarter, typically, to another percent or half a percent in that period of time.

And then that is followed by, obviously, a more dramatic step down in the fourth quarter, where we have Thanksgiving and the holiday season in December that comes through, and vacations, where we tend to see utilizations in the low 60s. Last year was 61%. I think the year before that was maybe 62% utilization. So it gives you an idea of the dramatic step-down that we see as we go into the fourth quarter.

So those basically give you an idea of how the business trends from Q1 through Q4.

Timothy McHugh, William Blair.

Rich, you made some comments about the G&A and other expenses lines and how you expected them to be up a little bit in the second half of the year. Are you guys making some specific investments in terms of new offices or sales and marketing? What are you looking forward to that you would expect that to go up a little bit?

In, I think, a couple areas -- one, I think we are looking to actually work in continuing our recruiting and trying to add staff as we go into the back part of the year. So that activity has been at a slightly lower rate, so we would expect that to pick up. We also were conservative in some of our training programs that we had ongoing prior to 2009. We took sort of a break on some of those in 2009, and we are trying to build those back up. We don't think it's good in a professional service environment to take a several-year break on those programs as well.

And so those are some of the key reasons, recruiting staff and building staff, that we think are important. And we need to spend a little bit of money. They are not significantly different than where we were in 2009, but they are a step up.

And then you mentioned you hoped to start growing again sequentially in the second half of the year in hiring. Are you at a point where you think the environment is going to start to improve more significantly, where that will be fairly aggressive growth? Or are you going to be pretty gradual as you bring people back on? What's your approach to that hiring front at this point?

I see that more as being pretty gradual, consistent with our overall guidance for the year.

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

You talked a little bit about litigation returning back to a normal pace. Is that a phenomenon of this quarter? And maybe could you talk about how you see that trajectory going forward?

I don't really so much as see it as a phenomenon of the quarter per se. I just think that there were a couple of different things going on during a part of last year where people felt that not only was there a little bit more cost control that I've talked about continuing to some degree, but there was a sense that, some cases were just getting settled very quickly. There were concerns about companies going bankrupt and whether there would be money there or not. They just seemed to be more settlement activity, perhaps, than we've typically seen. And as a result, maybe cases ended earlier than we might normally see. I mean, most cases, obviously, settled. But it just seemed like that dynamic was working a little bit differently than it has historically worked. And I think it drifted back to a more normal environment.

I think you talked about it a little bit in the press release, but you said you haven't seen a full return in discretionary spending. Maybe you could talk about what areas have come back and which ones are still a little bit stalled?

As I indicated, it's very difficult for us to look at that from a sector basis or an industry basis with regard to companies coming back. Some consumer electronics companies are giving us a lot of work, and others have cut back some on their work. And it's the same if you look at a medical device arena.

So it really does seem to be so individual company-based at this stage, and maybe that's just the early signs of a return, that not everybody comes back at the same time. But from our outlook, we just don't really see it as being very much dependent on the industry sectors. It's more uniquely based on the individual client.

Have you seen any changes in maybe the length of the contracts, the size of the contract, or even the pricing?

No; our pricing stayed the same. As you know, we adjust pricing at the beginning of the year. So when I say it's stayed the same, it's been consistent with that normal process we have. I can't say I've really seen a difference in the other two.

As you look at what you've been talking about on the EBITDA side and also on the revenue as far as guidance, could you think about a scenario that would provide maybe upside to present estimates? Is there anything that you haven't accounted for that could surprise you; in other words, if there's a better than expected or a faster than expected recovery in some of these discretionary areas?

Yes. Perhaps what I ought to do is ask Mike Gaulke, who has been overseeing our technology development side of our business, to comment on some of the opportunities there.

Sure. The balance of the year, as we look at it here, is one that I think does have some upside associated with this award of the GPR. Rich is giving you the numbers here -- $14.6 million in terms of total, of which $4.7 million has been funded.

So we are working right at the moment on what is really the first phase of that total award, which is focused on really upgrading the existing GPR units that are out there and delivering some additional units. The remaining $10 million here that our client is actively engaged in securing the follow-on funding for -- and hopefully we'll have that in place by the end of this quarter -- is for a whole new approach at GPR, a whole new technical approach, and therefore, enhanced capabilities.

If that funding, when that funding comes, I think that potentially lays the basis here for a very substantial, ongoing business in GPR. And that is both in the US -- I can tell you that we are a finalist in the UK. We've mentioned before that we've had some overseas discussions. We are a finalist in a procurement process that the UK is going through, and we expect that award decision to come here very shortly, most likely in this quarter as well. Discussions we are having with other overseas potential GPR customers continue to advance.

So I think there's some real upside here in this tech-dev portion of our business. In addition to the second contract that Rich and Paul referred to in surveillance systems, we are also in discussion with another customer, apart from what has been awarded, that would add to that base. So technology development, to answer your question in terms of potential upside, I think has some.

Just to be clear, so some of this, the $10 million or the UK contract -- that could fall into 2010 results essentially?

Yes, yes.

Rob Ammann, RK Capital.

I just wondered if I could get the breakdown by segment for revenues, FTEs, utilization and hours.

Yes. So by segment on the gross revenue basis, other scientific and engineering was $44.7 million and environmental and health were $14.7 million. And on the billable hours side of it, the other scientific was $168,000 and the environmental and health was $60,000.

The utilization between those was, other scientific was 72 and environmental and health was 67. And the breakdown between FTEs with other scientific was 447, and the environmental/health was 174.

Okay, great, thank you. Mike, enjoy your retirement and I've enjoyed talking with you over the years, and you'll be missed.

David Gold, Sidoti & Company.

Two other quick questions; one, the shares repurchased during the quarter -- Rich, can you give an average price?

Yes. It was approximately $27.20.

And, part two and sort of hand in hand there, is thoughts or what you're seeing on the acquisition front.

The acquisition front -- we don't have anything new to report. We continue to follow the strategy we've looked at as I've described recently, which is to continue to look for what I would call seat acquisitions in some new areas. And we just don't have anything new to report.

Has pricing come in any, as far as, are many things more reasonable out there? Or just no change?

Well, I think there may be a little bit of change in pricing. But it's that combination of pricing and fit. There's a lot of companies out there, but fit is not that easy. And then when you get to fit you've got to get the pricing. But we're still working on it.

Got you, perfect. Mike, I'd echo Rob's sentiments. It's definitely been a pleasure working with you.

Thank you, David; likewise.

Joseph Foresi, Janney Montgomery Scott.

As far as the government work is concerned, and particularly some of the stuff that you do, I know the baseline has typically been $500,000 a quarter. Has that been raised at all, or should we be thinking about that any higher going forward?

Well, I think that we did -- in 2009, we did a total of -- in product sales, again, we did a total of $3.2 million in net revenues. And that spread from $380,000 in the first quarter to $1.5 million in the second quarter, $500,000 third and $850,000 in the fourth. So you can see it bounces around.

I think what we just laid out, of $3.5 million plus the $200,000 we did in the first quarter -- that spread there obviously has us a little bit higher for 2010. And we'll have to see from there. I think it's too early at this point in time to project out product sales beyond the levels we've seen in the last two years -- or 2009 and 2010 into 2011.

There are no further questions in the queue. I'll turn it back over to management for closing comments.

Well, thank you very much. I appreciate you joining us on the call.

Ladies and gentlemen, that does conclude today's Exponent first quarter 2010 earnings conference call. If you would like to listen to a replay of today's call, please dial 303-590-3030 or 1-800-406-7325, enter the passcode 428-3200. (Operator instructions).

Thank you for your participation. You may now disconnect.