Exponent Inc (EXPO) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Exponent third-quarter 2010 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 is being recorded today, Wednesday, October 20, 2010. 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 third-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\investors. This conference call is the property of Exponent and any taping or other reproductions is expressly prohibited without Exponent's [entire] written consent.

Joining me on today's call are Paul Johnston, President and Chief Executive Officer, and Rich Schlenker, Executive Vice President and 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 and 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 may 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 and Exponent's Form 10-Q for the quarter ended October 1, 2010.

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 a result of new developments or otherwise. And 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. Thank you for joining us today for our discussion of Exponent's third-quarter 2010 results. We are very pleased with our financial results in the quarter, with revenues before reimbursements increasing 12% to $56.9 million and total revenues increasing 20% to $66.3 million.

Net income was up 34% in the quarter to $7.8 million or $0.52 per share. EBITDA improved 33% to $14.3 million. The improved profitability resulted from especially strong utilization of 71%, increased defense technology development product sales of surveillance systems of $3 million in net revenues, and effective management of costs. Several business areas delivered strong performances, including defense technology development, mechanics and materials, environmental and health.

During the quarter, we continued to leverage our unique engineering and scientific consulting expertise to assist clients with significant technical health and environmental issues by helping to explain what happened and the potential long-term impact. Our multidisciplinary consulting staff allows us to address these issues from many different perspectives.

While we are not able to publicly discuss most of our engagements, we are pleased that our market position continues to result in us being called upon to investigate most high-profile events, where our engineering and scientific expertise can be of value.

In the quarter, we signed a contract with the United Kingdom Ministry of Defense, which was a significant part of our defense technology development work during the quarter. We anticipate that additional tasks will be added to the contract as the technology is deployed.

In summary, we are very pleased to have delivered strong financial results in the quarter, and are optimistic about our outlook for the remainder of 2010. I will now turn the call over to Rich for a detailed discussion of our financial results.

As Paul discussed, several key practice areas contributed to revenue growth in the quarter. Importantly, we also continued to closely manage expenses and post significant improvement in utilization, contributing to our very strong EBITDA and bottom-line performance in the quarter.

Revenues before reimbursements or net revenues, as I will refer to them from here on, increased 12% over the prior year to $56.9 million as compared to $50.7 million. Total revenues for the third quarter of 2010 increased 20% to $66.3 million as compared to $55.2 million in 2009.

Net income for the third quarter increased 34% to $7.8 million or $0.52 per diluted share from $5.8 million or $0.39 per diluted share reported in the previous year. EBITDA in the quarter increased 33% to $14.3 million.

In the third quarter of 2010, net revenues from our defense technology development business increased to $6.3 million as compared to $2.7 million last year. This includes $3 million of product sales in the third quarter of 2010 as compared to $465,000 in the same quarter last year.

For the nine months of 2010, net revenues increased 6% to $167.2 million. Total revenues for the first nine months of 2010 increased 6% as well to $186 million for the quarter -- I'm sorry, for the nine months. Net income for the first nine months of 2010 improved 21% to $21.3 million or $1.42 per diluted share. EBITDA in the first nine months of 2010 improved 22% to $39.1 million.

In the third quarter, billable hours increased to 26,000 as compared to 218,000 in the same period last year. Our average technical full-time equivalent employees for the third quarter were 614 as compared to 627 in the same period last year, but slightly up over the prior quarter. Based on our current level of accepted offers and ongoing recruiting activity, we expect FTEs to increase 1% to 2% sequentially in the fourth quarter.

We had especially strong utilization in the third quarter, which improved to 6 -- 71% (sic) as compared to 67% in the same period last year. As a reminder, fourth-quarter utilization steps down due to increased holidays and vacations. We now expect the full year 2010 utilization to be approximately 69%. The percentages I will reference hereafter are on a percentage of net revenue basis.

EBITDA margin for the third quarter improved to 25% from 21.1% in the same period last year as a result of higher utilization, increase product sales and effective expense management. Total compensation expense for the quarter was $37 million, up from $34.6 million in the prior year period. Compensation was up 6% after adjusting for deferred compensation gains and losses. Deferred compensation expense in the third quarter of 2010 was $1.2 million as compared to $885,000 in the same quarter last year. Both were offset in miscellaneous income and had no impact on the bottom line.

As a component of compensation, stock-based compensation expense for the third quarter was $2.2 million. For the full year, we expect stock-based compensation to be approximately $9 million.

Other operating expenses in the third quarter were up slightly to $5.4 million. As a component of other operating expense, depreciation was $1.1 million. We expect other operating expense to be approximately $5.5 million in the fourth quarter of 2010. G&A expenses in the third quarter were $3 million as compared to $2.4 million in the same period one year ago. In the fourth quarter of 2010, we expect G&A to be in the range of $3 million to $3.4 million.

As a reminder, G&A expenses are higher in the second half of this year, as a result of increased business development activity, a Companywide managers' meeting, and professional services to assist us with entering the European defense business.

Interest income was $36,000 as compared to $93,000 in 2009 due to the lower interest rate environment. Our tax rate for the third quarter of 2010 was 40.8% as compared to 39.8% in the same period last year. This increased tax rate is primarily related to lower tax-exempt investments.

Turning to the balance sheet, we closed the quarter with $92.1 million of cash. During the quarter, we repurchased $800,000 of stock. This leaves us $15 million available under our current stock repurchase authorization. Capital expenditures for the third quarter were $595,000 and DSOs were 92 days.

In summary, we are very pleased with our third-quarter results and are optimistic about the remainder of the year. Given our performance in the third quarter, we now expect our full year growth in revenues before reimbursements to be in the mid-single digits and growth in EBITDA margin to be approximately 250 basis points for the full year. These estimates include approximately $1 million in net revenues from product sales in the fourth quarter.

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

Thank you, Rich. We had a strong third quarter which demonstrates the strength of our business model. As we enter the last quarter of 2010, we will remain focused on providing our clients with in-depth scientific research and analysis to determine what happened and how to prevent failures or exposures in the future, on capitalizing on opportunities in our defense technology development practice and emerging growth areas, on selectively adding new talent to allow us to continue to expand our capabilities and grow revenues, on continuing to manage other operating and G&A expenses and, finally, on generating more cash from operations, maintaining a strong balance sheet, undertaking activities such as repurchasing shares to enhance shareholder value.

We have delivered strong results this year and remain optimistic about our long-term future as we continue to see our demand being driven by complex technology, product and process safety, human health concerns, and environmental issues.

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

(Operator Instructions). Tim McHugh with William Blair & Company.

Congratulations, first off, and secondly, I wanted to ask two questions. First, can you give us a little more color on that UK contract, how big of a component of the product sales was it this quarter and what's kind of the potential for that over the next couple of quarters?

And then secondly, can you talk a little bit about the discretionary spend environment? Are you seeing signs of improvement in that? Or is it big project-related? Just a more color on the revenue growth which was a bit stronger than I think you had previously forecasted.

Tim, thanks. Rich is going to address the UK contract and then I will talk about the non-litigation work.

Yes. So unfortunately, at this point in time, the UK has not given us permission to discuss the full contract value. But I want to be clear on a couple of points.

One, this is a development contract for them, and as such we are -- it is not part of our product sales for the quarter. So in defense technology development, we had a total of $6.3 million of which $3 million was product sales. That was our surveillance system work that we do.

The other $3.3 million was consulting development work, of which this program in the quarter was a significant part of that half of the technology development business. As we see going forward, this is like any other program. In the first four to six months it has a very strong development cycle and then has a longer tail over the next several quarters.

And that is about as much as I can tell you at this point in time.

And Tim, with regard to the more discretionary spending or sort of nonlitigation work -- nondefense and nonlitigation work, again, we continue to see a steady flow of those projects. But we have not seen what I will call an across-the-board change. We have some clients who are moving forward pretty aggressively with their projects and we still have some other clients that are holding back.

On the other hand, if I look at the work we are doing in regulatory support for chemical registration, that work continues to remain very strong.

What --? Just one follow-up. Can you talk a little bit about the hiring plans? You mentioned this next quarter but, really, as we look out to next year, given the utilization rate, are you satisfied almost with where they are at? And are you going to get more aggressive on hiring? Or will you continue to try and move that a little further and see better discretionary spend before you get more aggressive there?

Yes. I am going to answer that. If you can just mute your line in between that -- the background noise won't be there.

So related to our sort of planning in next year, Exponent has consistently -- we'll do our planning for 2011 here in the fourth quarter. We are just beginning that process as we go along.

What I can say is, clearly, utilization is strong now. We've ended -- the month of September had 621 FTEs in it. I expect that to step up slightly more in the fourth quarter. It is clearly part of our plan to continue to grow our headcount into the future.

What percentage that is exactly going to be next year, we don't know at this point in time. We are going to be sitting down with our teams, but we are continuing to actively do recruiting now. And, obviously, that recruiting reaches out into candidates for 2011.

So it is our plan to grow headcount next year. At this point in time, we are not prepared to put a number on that.

Okay. Thank you.

Tobey Sommer with SunTrust.

This is Frank, in for Tobey. Wanted to see if I could get the breakdown between environment and health and engineering and other scientific mix on the revenue side?

Yes. So on a total revenues basis, the revenues are between the segments where other scientific and engineering was $49.3 million, and that left environmental and health at $17 million, for a total of $66.3 million. That's about -- is that the number you were looking for?

: Yes. That's great. Thank you. And I also saw reimbursements ticked up a little bit in terms of a percent of total revenue and reimbursements. Can you talk to any color there?

Absolutely. So the reason for that is the high level of product sales that we have. As I think everybody is aware, when we have product sales in the quarter, there is a large amount of that balance that is outsourced. It is either materials or outsource work that we have.

So the total contribution to total revenues in the quarter were about $7.3 million of the $66 million was in gross revenues from product sales, resulting in $3 million of net revenues that we ended up with. So that is the major driver, that difference of -- you know, what is that? $4.3 million in there is the key to the driver.

And last year, for example, those numbers in the sector were $2.2 million gross and $465,000 net. So that is what gives you the large increase. So, you are almost -- on a year-over-year basis, you are a little over $5 million change in the gross revenue.

Great. That's very helpful. And I guess, in terms of the seasonality going into the 4Q for the utilization, you gave the full year number. I think it was 69% and we can do the math. But can you talk a little bit about the drivers there and any additional color you can give?

Yes. So, I think we had the utilization -- typically, we would have expected the utilization to trim off of the second quarter and stepped down a couple of percentage points into the third quarter. It ended up staying flat. We had very strong activity, not only in technology development where we had heavy activity going on on the UK contract, but we also had some other large engagements as well.

So that activity remains strong, and most of those engagements we expect to continue over the long term. But because of those projects being in the early stages it tends to be that we see our project lifecycles be very strong in the first quarter, step down a little bit, and then plateau at a slightly lower level going forward.

My anticipation is that if you just trended off of the 71% in the third quarter, you would get a number like 65% typically, sort of a 6 percentage point drop in utilization going to the fourth quarter. I think it will probably -- that's a little high. I think that we will probably do somewhere in the 63% to 64% utilization in the fourth quarter. That's obviously better than the 61% that we did a year ago in that same quarter.

So, not quite as -- at this point in time, I don't want to say that we are going to continue quite at the level that we were at in the third quarter, but clearly better than we were a year ago in the same quarter.

All right. Great. Thanks very much.

David Gold with Sidoti & Company.

Good afternoon. So, just a couple of things.

First, on the product sales side, particularly surveillance, can you speak a little bit more as the sort of status right now? I guess we were doing some add-on work and obviously came in a little better both during the quarter and you are looking for [$1 million exported]. But what's sort of the outlook for that as we go beyond that? Where are we? In other words, do you expect that that piece of the business -- I guess we are outside of contract to continue?

Yes. Well, what I can say is that there's really been sort of two parts to the surveillance system on our business that we have done. Two different groups within the Department of Defense. One of those has already begun to slow down, that sort of started earlier in this year and is gradually stepping [down]. The other one is continuing strong. That is what is feeding the fact that, one, we were able to get some things done that we thought would even fall over, from the order we had it back that we announced in July where we saw the second and third quarter -- or third and fourth quarters.

In addition to that, we have gotten some additional follow-on orders that are going to carry us for this net revenues of about $1 million in the fourth quarter. And I see already, based on those orders in hand, that we will probably be in the $0.5 million to $1 million range in the first quarter of next year.

There are other -- there's another proposal that we have got out there on another order that could fill in in the first part of next year, in Q1 and 2, that would add similar amounts. You know, another $1 million in net revenue or so if it came through. Those are hard to predict, but you know that's what -- there are other opportunities out there at this time.

Beyond that, I don't know where this is going. You know, as we get further out in this, I don't know how many more of these they are going to need and where to see really beyond the first half of next year.

Yes. And can you remind us of the margin that you see on those sales [numbers] being extremely high?

Yes, so, on the gross revenue basis, the margins aren't a lot different than the rest of the business, as you can imagine. But on a net revenue basis, we end up seeing somewhere in 60% margin range there because we've moved that $7.3 million down to $3 million and then have our sort of costs to go into that. So it is about 60% on the net revenues.

Okay. And then on that UK piece, so there won't be product sales on that one, or there could be later on?

At this point in time, we are -- we do not -- there's more development involved then there is product sales. It could lead to that in the future. But at this point in time, based on the type of contract it is, it will be recognized on a percentage complete basis as we do the work and deliver technology.

And you said you can't give numbers on it just yet, but can you tell us the [length] of the contract?

I am not able to disclose that. They are concerned about that fitting into their deployment schedule.

Okay. I appreciate it.

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

Rich, just going through what you said on the product sell side, it sounds like it's trending higher heading into next year than what we saw in 2010. Is that a fair assumption, I think, based on the visibility you have? I mean, maybe you can't go as far as the back half of 2011, but it seems like it is certainly trending a little bit higher.

I think it's only a matter of timing, to be honest. I mean, we just came out of a quarter that was extremely high in the third quarter, but had been very low at or below the $0.5 million level in the first two quarters. So I wouldn't read into it [that].

I think the answer is at this point in time maybe because there was a lull for a while, there's been an increased demand in the short term. But I'm -- I don't -- again, I think they are going to go through these procurements at this point in time. They will fill their orders and we may, depending on what happens over there, in Afghanistan, you know, we may begin to see it trend off in six months or it could hold there.

But I think even if you took the numbers, if you didn't have an exception year in the third quarter, the numbers would be at or around last year. 2009 was about $3 million in this and this year we'll end up at about $5 million net revenues.

Okay. Is there any increase or decrease versus the pipeline in prior years? I think you are pretty clear there on the (multiple speakers).

Yes. I think, actually, I think that the fact that there were two clients previously and there is one now. You know, my expectation is that the pipeline, while you can read it as a short term positively, it is a little less. I have always said that if we don't have any orders in there's really not a real ability, other than the fact that we have sold some in the past, to believe that our product sales should really be any more than $0.5 million a quarter beyond the time that we have [site].

And that has really played out I think quite well in setting expectations. Because we have gone some quarters where we've had $200,000 or $300,000 or $600,000. And then every once in a while we have a spike in activity here.

Again, this isn't the core of our business. It is something that I think we deliver a lot of value to our soldiers in and it produces some nice cash flow. But I think building out into the future, strong expectation for product sales in surveillance.

I don't know where GPR is going to go. We are in a development mode in some units out for different countries in that technology area that have been more -- as much development as they have been units delivered. So they have been treated more in a development contract mode for the US and others.

But in the future, if that becomes more fixed, maybe it will become a products revenue. But at this point in time, I think long term, I wouldn't build a long-term expectation index. Exponent is going to be a surveillance system sales company.

Right. And just kind of switching gears real quickly, on the utilization side, I mean that's a pretty strong utilization number. You know, is that based on purely on demand or how should we think about that? Obviously headcount has come down a little bit. But how should we think about it, just sort of in relation to this particular quarter?

I think that -- look, I think we had a few things going for us. You, I think everybody who has been around the story for a little while understands that we sort of viewed in the last year or two that our utilization needed to improve over the long term. We had been -- we had had 66% UT last year. 67% the year before that, as a full year. We felt that we had the ability to move our utilization up to 70% or into the low 70s for the full year.

Clearly we have made a leap forward with that this year in moving to what will probably be somewhere around 69% for the full year. I do think that -- so I think that we executed on that in the sense that we were managing, you know -- while we were still recruiting people, we were also managing headcount to try to see an improvement in utilization and clearly we have gotten that.

In addition to that, I think we've also gotten engaged in the third quarter in a few larger matters that the UK consulting task was -- is one of those, as well as some over on the sort of more reactive-based work. And I think that has provided some lift for us.

You know, I don't -- you never know how long the peaks of those will last, but the tails of those projects tend to last a long time. And so I expect it to settle down a little bit on a going-forward basis. And that is why I have sort of said in the fourth quarter expect 63% to 64% UT versus somewhere -- a couple of percentage higher.

And then just lastly for me, I know it's a little early and I know you are going into the planning process for 2011, but maybe you could just characterize what you are seeing in the demand environment? Obviously you haven't seen a full recovery on the discretionary side.

But is it safe to say that you've seen a steady improvement throughout the year in sort of the demand backdrop? Is that anticipated for next year or have things just been flat? I'm just trying to get a feel for sort of what the thought process is, kind of going into this.

I think that I think, Joe, it's been relatively flat. I can't say I've seen a steady improvement over the year. I really do feel that we have very different clients. We have clients who have actually improved during the year. We have clients who have been fairly strong almost all year. We have got other clients who have been kind of on the fence.

And the part that has really showed strength through this year has been more on the regulatory support and chemical registration side. So I don't think we've seen an overall effect from the underlying economy that has created a change for us.

Okay. And the headcount, remind me again the headcount additions that you are going to put through next year? Those are pretty consistent with the -- sort of the normal percentage increases, correct?

Yes. I mean we -- our comment before was that at this point in time, we don't have an exact number on what headcount we expect as the percentage grow next year. We are working through that.

But clearly, look, we are seeing an increase as we are coming to the back end of the year. That will carry over into the next year and we are continuing our recruiting efforts.

So we clearly expect to have headcount growth next year. What percentage that is will have to sharpen our pencils here over the next [month to quarters].

Thank you.

(Operator Instructions). Ladies and gentlemen, that does conclude the Exponent third-quarter 2010 earnings conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 and enter in the access code of 437-3839.

Thank you for your participation. You may now disconnect.