Exponent Inc (EXPO) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Exponent fourth-quarter and full-year 2010 earnings conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Wednesday, February 2, 2011.

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

Good afternoon, ladies and gentlemen. Thank you for joining us on today's conference call to discuss Exponent's fourth-quarter and full-year 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 taping or other reproduction is expressly prohibited without Exponent's prior written consent.

Joining me on the call today are Paul Johnston, President and Chief Executive Officer, and Rich Schlenker, Executive Vice President and Chief Financial Officer of Exponent.

Before we start, I'd 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 December 31, 2010. The forward-looking statements and (technical difficulty) 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'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 for our discussion of Exponent's fourth-quarter and full-year 2010 results.

We are very pleased with our financial results for the quarter, which concluded a strong year for Exponent. In the fourth quarter, total revenues increased 20% to $62.6 million, and revenues before reimbursements were up 15% to $54.6 million. Net income grew 37% to $6.2 million, or $0.41 per share. For the full year, total revenues increased 9% to $248.8 million, and revenues before reimbursements were up 8% to $221.9 million. Net income grew 24% to $27.5 million, or $1.83 per share.

We had notable performances in the quarter and the full year in our defense technology development, Mechanics and Materials, and human factors practices, as well as our Environmental and Health group. We entered the year with a focus on managing headcount towards the goal of improving utilization 1 percentage point. But with the addition of some large assignments, we realized a significant improvement in utilization from 66% in 2009 to 70% in 2010. On these major investigations, we were able to leverage our unique engineering and scientific consulting expertise to address the key technical issues as well as the potential health and environmental impacts. These engagements are continuing into 2011 and some will likely last for years.

During the fourth quarter, in our technology development practice, our work for the United Kingdom's Ministry of Defense continue to expand, and we started a new program for Sweden's Ministry of Defense. Both of these programs, as well as existing orders for surveillance systems, will make significant contributions to the first half of 2011.

We continue to pursue a number of very interesting opportunities, both in the United States and abroad, in the area of detecting improvised explosive devices. Throughout the year, we had a big push forward in regulatory compliance services in our Health group as we helped clients complete the necessary scientific studies to meet the first major milestone in complying with the REACH regulations in the European Union.

In addition to the growth in regulatory consulting for the chemicals industry, we're beginning to see some improvement in our more proactive consulting activities. We are pleased to have attracted some very strong talent during the back half of the year with 3% sequential growth of full-time equivalent employees in the fourth quarter. Recruiting continues to be a high priority for our firm as we continue to assess the future needs of our clients and pursue new PhDs as well as more senior hires that expand our capabilities.

In summary, we're pleased to have delivered strong financial results in the quarter and the year, and we are optimistic about our business opportunities into 2011 but realize that 2010 created a high hurdle to clear, especially in the back half of the year.

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

Thanks Paul. As Paul discussed, overall, we had a strong quarter, posting double-digit revenue growth and considerably improving our utilization, both of which contributed to the significant expansion of our bottom line.

Total revenues for the fourth quarter of 2010 increased 20% to $62.6 million as compared to $52 million in 2009. Revenues before reimbursements, or net revenues as I will refer to them from here on, increased 15% to $54.6 million as compared to $47.7 million in the prior-year period.

In the fourth quarter of 2010, net revenues in Defense Technology Development or $4.1 million as compared to $3.1 million in the same period of 2009. The fourth quarter of 2010 included net revenues from product sales of surveillance systems of $600,000 as compared to $850,000 in the same period last year.

For the full year 2010, total revenues increased 9% to $248.8 million as compared to $227.9 million in 2009. Net revenues for 2010 increased 8% to $221.9 million as compared to $205.7 million in the prior year. For the full year 2010, net revenues in Defense Technology Development were $16.2 million as compared to $15 million in 2009. 2010 included net revenues from product sales of surveillance systems of $4.6 million as compared to $3.2 million in 2009.

For the first quarter of 2011, we expect net revenues from product sales of surveillance systems to be in the range of $1.5 million to $2 million, and the remaining three quarters of the year to be approximately $500,000 to $1 million.

Net income for the fourth quarter of 2010 grew 37% to $6.2 million, or $0.41 per share, as compared to $4.5 million or $0.30 per share in 2009.

EBITDA in the fourth quarter of 2010 grew 35% to $11.7 million as compared to $8.7 million last year. For the year, net income increased 24% to $27.5 million, or $1.83 per share, as compared to $22.1 million or $1.47 per share. EBITDA for 2010 increased 25% to $50.8 million as compared to $40.8 million in 2009.

Our average technical full-time equivalent employees for the fourth quarter of 2010 increased to 634 from 625 in the fourth quarter of 2009. For the year, FTEs were 620, down from 631 in the prior year. During 2011, we expect sequential quarterly growth of FTEs to be approximately 1% per quarter.

In the fourth quarter, billable hours were 220,000, which brings the full-year total to 900,000 hours, as compared to 867,000 in 2009. We realized an average billing rate increase of approximately 2.5% over the prior year. For 2011, our new billing rates took effect on January 1. We expect to realize a billing rate increase of approximately 3% based on an average billing rate increase for our existing staff of approximately 4.5%, which has been -- historically been reduced by hiring of more junior staff throughout the year.

Utilization in the fourth quarter, which is seasonally slower due to holidays and vacations, was exceptionally strong at 67% as compared to 61% in the same period last year. The fourth quarter closed out a very strong full-year utilization of 70% compared to 66% in 2009. This annual increase of 4% is a result of strong performances from a number of practices as well as some significant engagements which Paul discussed earlier.

For the full year 2011, we expect utilization to be in the high 60s% as we move to the next phase of these projects and continue to expand our capabilities. For the first quarter, we expect utilization to be in the low 70s%. Hereafter, the percentages I will reference are on a percentage of net revenue basis.

EBITDA margin for the fourth quarter improved 320 basis points to 21.5% from 18.3% last year. EBITDA margin for the year was up 310 basis points to 22.9% from 19.8% in 2009. This notable increase was a result of management of headcount, high utilization, and effective cost management.

Total compensation expense for the quarter was $36 million, which includes deferred compensation expense of $1 million as compared to $550,000 in the same quarter last year. Total compensation expense for the year was $144.8 million, which includes deferred compensation expense of $1.9 million, which was the same in 2009.

As a reminder, deferred compensation expense is offset in miscellaneous income and has no impact on the bottom line.

As in component of compensation, stock-based compensation expense for the fourth quarter was $1.9 million, and the full year was $9.3 million. In 2011, we expect stock-based compensation to be approximately $9.5 million for the full year. Approximately $3.75 million will be in the first quarter. Consistent with prior years, we are required to accelerate expensing of our matching RSU grants to employees over the age of 59.5.

Other operating expenses for the fourth quarter were $5.4 million, flat with the prior year. As a component of other operating expense, depreciation expense was $1.1 million. For the full year, other operating expenses were $21.4 million, in line with the prior year. Depreciation expense was $4.3 million in 2010, approximately flat with 2009. We expect 2011 operating expenses to be in the range of $5.5 million to $5.8 million a quarter.

G&A expenses in the fourth quarter increased to $3.8 million compared to $2.8 million in the same quarter last year. For the year, G&A expenses increased to $12.4 million as compared to $11 million in 2009. The increase in G&A is a result of being unusually low in 2009, and in 2010 a companywide managers meeting increased business development expenses related to international sales and defense technology development, more professional development, and higher legal costs. We expect 2011 G&A expenses to be in the range of $3 million to $3.4 million a quarter for 2011.

For the year, interest income was $198,000 as compared to $614,000 in 2009 due to the lower interest rate environment.

Our tax rate for the fourth quarter of 2010 was 42.2% as compared to 41.6% in the same period last year. For 2010, our tax rate was 41.1% compared to 40.2% for 2009. This increased tax rate is primarily related to lower tax-exempt investments. We expect our tax rate for 2011 to be approximately 41%.

Turning to the balance sheet, cash, cash equivalents, and short-term investments were up $38.7 million over last year to $106.5 million. We were able to increase our cash position while repurchasing $6.9 million of common stock this year. We still have approximately $15 million available for stock repurchases and plan to actively repurchase shares in 2011.

Capital expenditures for the fourth quarter were $725,000 and were $2.5 million for the full year. DSOs were 92 days at the end of the year.

In summary, we are pleased with our ability to report strong revenue, EBITDA, and EPS in the quarter and the year. As we look forward at 2011, we expect growth in revenues before reimbursements for the first half of the year to be in the high single to low double digits, and the full-year growth to be in the middle single digits. This takes into consideration the high hurdle created by the strong performance we had in the back half of 2010 as the result of some exceptionally large projects. As we move to the next phase of these projects and continue to expand our capabilities, we expect utilization for 2011 to be in the high 60s. As a result, we expect a slight decrease in the EBITDA margin.

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

Thank you Rich. In summary, the fourth quarter wrapped up a very strong year for Exponent. As we enter the first quarter of 2011, we remain focused on selectively adding new talent to allow us to continue to expand our capabilities and grow revenues 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 continuing to manage our other operating expenses; and finally, on generating more cash from operations, maintaining a strong balance sheet and undertaking activities such as repurchasing shares to enhance shareholder value. We delivered strong results this year, and we are excited about our opportunities going forward. We remain optimistic about our long-term future as we continue to see our demand being driven by increasingly complex technology, the need for 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). David Gold, Sidoti & Co.

Good afternoon. A couple of questions actually -- the new work you're doing, both the I guess existing work in the UK and the new work, the new contract for Sweden, can you give some more color? I know, in the past, on UK, you haven't been able to give a rev number. But if there's some way to give some sense that would be helpful. And then also what the longevity of these contracts might be. Is it safe to say, based on the guidance, that they end in the middle of the year?

This is Rich. Unfortunately, the UK is continuing to be restrictive as far as a saying pretty much anything about that program, including the size and length of it. But what I think is that -- I can say is that the work there continues to go on at a strong rate here in the first quarter and will continue out into the second quarter, I think are at the level of volume from there on out is less certain, although clearly the discussions that are ongoing and what we are hearing is that we would expect to continue to have an involvement in this program into the future, so throughout 2011 and probably beyond.

Now, that isn't all under contract, but we would expect to be involved. I think it will be at a lower rate than we are at right now, unless it moves into a substantially different type of program, but it still will be a significant part of our teched out business in the future, we believe.

As it relates to Sweden, that program actually I expect to -- this phase with the contract we are under right now to be completed either late first quarter or early second quarter. It probably will be -- will have a gap between then and when we see additional revenues there. In that case, the ground penetrating radar technology is being -- they've bought a number of systems to evaluate in a test environment in drills and such over several quarters. Then the opportunity hopefully is for that to pick back up in the future. We continue to be in discussions with a number of other international clients, and also believe that hopefully out of doing good work here for the UK that we can continue to expand our presence there.

Got you, certainly helpful there as far as giving some color. Then a couple of other things -- Rich, can you give an attrition number? I have to guess it's pretty low?

Yes, so, for the year, our attrition rate was approximately 15% during -- for that period of time on the consulting staff. We -- just under that, I guess it was about 14% actually for the full year, and the fourth quarter was definitely lower than that, closer to I think about 10%. Is that right Paul?

Yes, fourth quarter is usually [a little] low on that.

So I think, considering the times and what we were -- we were focusing on managing headcount and things, we are pleased with those numbers.

Then just one last one. Give us some sense of how you're thinking about or how you're weighing acquisitions versus share repurchases in your mind these days and just an update if there is any acquisition landscape.

Yes, I don't see them as an either/or.

Mutually exclusive.

They are [not] mutually exclusive at all. I think we do intend to continue with share repurchases as we've done before, so I think that program is not affected by our current thinking on acquisitions. We continue to look at acquisitions, and we always have some candidates we are looking at. We continue to do that. They continue to be focused in the areas that I have described before, which tend to be in the pharmaceutical consulting area, software consulting area, and then some potentially geographic issues around the southeast of this country in the UK. So -- but we would expect those acquisitions to be of a size that would not have an impact on our share repurchase.

Tim McHugh, William Blair & Co.

The first one to ask, you mentioned the tough comparisons in the second half of next year from the large contracts this year. Can you help us in any way understand what perhaps the growth rate might have been this year without those contracts, or in any way frame them? I know you said for the tech (inaudible) some of those you can't comment on specifically, but maybe the other stuff, if you can frame the size of them for us.

I'll start off and then hand over to Paul. So I mean, overall, I think what we've indicated before -- and this is excluding the tech dev work actually, because we've have large projects in that area before in the past. But in the other parts of the business, we have tended to see that our large projects, a couple of them that we have in the quarter or the year, tend to run around 2% of our revenues in that period. I think what we saw this year was that we had those projects, two, three, four of them, sort of running in the range of 3% to 4% of revenues at times during the year. So, I think that it clearly had a few percentage points difference. I think that's probably clear from what we -- we started off the year with expectations sort of in the low single digits. I think things overall improved upon that, independent of these large projects. Then we moved our expectations up to the middle single digits. I think, by touching here into the high single digits, we've clearly exceeded that here by 3, 4 percentage points overall. So I think that clearly it's made a difference, and obviously a bigger impact even here in the fourth quarter.

So 3 to 4 percentage points overall for the year, and so if we look at mid single digit overall for '11, if we added that back -- I mean, that's kind of back to your normal type of growth patterns [as] you think about it. Is that the right way to think of it?

I think that's pretty close.

Okay --

Tim, I think that is -- while we are -- I mean we see the first half of the year being in high single to low double-digit growth. Yes, it's probably going to push when we have the product sales in the first quarter onto the higher end of that. We do see that some of these projects came on first and second, third quarter of the year. They were spread out, but all of them more active in the second half. That's why I think we are able to on a more reasonable basis here show high single to low double-digit growth in the first half.

Okay. On the product development side, you mentioned that you will have a good first quarter and then you said the typical $0.5 million to $1 million of product sales for the rest of the year. Is that because you don't have line of sight into things and you're just trying to be conservative as usual? Or is there any sort of I guess hole in the pipeline that would make you think that there wouldn't be some new things that come on? Another way to say it -- do you have things in the pipeline that you're just not including in there and could hit and therefore keep those products (inaudible) at a higher level as you get to the second half of the year?

Yes. I think what we -- what we have in there is this year we did $4.6 million. The range there that I gave through those quarters is sort of 3% to 5%. I think it's probably more likely that we're going to be in the upper half of that range than the lower.

Are there some larger opportunities out there? Potentially, but I actually see them maybe coming in the end of the year or pushing out into 2012. The US government is actually -- has put out a significant solicitation for what I would call base or surveillance security systems. Some of the capabilities that we have are -- could be a component of that future system. Other people could fill that role as well.

I think, to date, we've really been -- this system got developed on a reactive basis. It's continued to be supported in two different ways out in the field, one just as a regular security system that you'd expect somebody sitting in a single position looking at multi-cameras and sensors around, and the other being related to a more high-intensity security system that could see things at night and in other conditions. We've sort of seen ups and downs in both of those, but they have gone along. But again, it's really been more of a reactive basis and we've been continuing to fill that need. If we are able to become a component of the larger opportunity, then we may be able to get more visibility in the future, but I don't see that being awarded until probably late 2011. In the meantime, I think we'll continue to fill sort of the needs as they come along in theater here, in Afghanistan primarily nowadays.

Then Rich, can you just -- you mentioned for the margins that they would be down I think a touch or a little bit. I forget the exact phrase.

(inaudible)

But is there any more specificity around that in terms of -- are you 20, 30 basis points, 50 basis points? What was (multiple speakers)

I see the range probably being somewhere between 50, and it could be even 100 basis points if we are at the lower end of the range on both the utilization and maybe even in sort of the lower half on the product sales.

Thank you.

Joseph Foresi, Janney Montgomery Scott.

Hi gentlemen. My first question here is I just -- maybe you could frame for us, as you head into sort of 2011, maybe you could give us a comparison to where we stand heading into this year from a demand environment perspective, versus 2010. Obviously, we know about the commentary regarding some of the tough comps. But anything from you're hearing from your clients (inaudible) pickup relative pipeline visibility, things of that nature?

Sure. This is Paul. I think heading into 2011, clearly from my standpoint, the demand is significantly stronger than it was a year ago heading into 2010. I would describe that from a number of different aspects. First, I think you can see, in sort of reflecting back on our results for 2010, that the strength kind of built quarter after quarter through the year and our utilizations picked up, even though the utilizations in the fourth quarter were a little bit lower. That's because of the seasonality. They were actually very strong for our fourth quarter for us. So we are entering this year with strong utilization, which obviously follows demand. So, we feel that it is strong from that standpoint.

Now, quite a bit of that is driven, as Rich has indicated, from some of these larger assignments, but I would also say that, on the more proactive side of things, for many quarters I've been essentially answering questions with regard to how we see the proactive business and the economy affecting our business in saying that, on a proactive side, our clients -- it's very client specific, very spotty, there wasn't really any discernible trend. I would say that I think we've seen that shift a little bit. It's still a little bit client by client, but the number of clients that are coming forward with new assignments has clearly picked up. So, I think we feel we are entering 2011 in a stronger demand area than we were in 2010.

So just kind of building on that question, so if it is a stronger demand environment, is the opportunity for outperformance, or upside the numbers, greater this year than it was last year?

I don't -- I think we have raised the bar here, not only -- we entered 2010 with a communication one year ago today saying that we expected 2010 to be a sort of low single-digit growth year. Ultimately, that continued to build. I think we've raised that bar here in the guidance that we have provided for this year, including the fact that we think the first half of the year is going to be in the high-single to low double-digit growth here on a more reasonable comparison, and obviously slightly lower than that in the second half. But I think that to think that we are going to come out and let's call it more than double the expectations that we're lying at now, I don't see that as a reasonable forecast, I think. We are pleased to have exceeded our earlier expectations, but I don't want to make people feel that means we can double any expectations we set at the beginning of each year. I don't think that's probably reasonable.

Sure, that's fair. Then just the last question from my side -- any potential areas that you can highlight for us heading into next year that could be sort of a swing variable, something that you're seeing as a catalyst and something you didn't see as much of in 2010? I'm just looking to get a little bit more specific.

I mean, I think that the largest variable that we have in our business continues to be in Defense Technology Development. I think, as all of you have been following us for some time are aware the projects and the contracts are significant. While the overall revenues there are still in that 7%, 8%, they tend to be made up of a handful of projects. In one quarter, one of the contracts makes up even the majority of the revenue in that period of time for that practice area. So I think that it always provides the risk that, the next quarter or two or three out, we won't have that one large project, and we'll run into some challenges. But I think it also provides the opportunity where we can have multiple of them going in a quarter or a year, and the upside can be significant as well.

I think what we're looking at here, even starting the first quarter, is that we've got strong activity in the UK, Sweden, and the product sales going on. So I think we are starting off the year strong. But as usual with us, we don't have the contracts in place for the back half of the year, even in our defense business. So that's probably the area that provides the largest swing.

I think other let's call it bluebirds flying in and doing it -- I don't know if you have any other comments there. I think it's pretty much we're focusing on growing in our strategic areas. We are continuing to build. We are continuing to look at acquisitions in pharma, but we are also at the same time, as we've done in other business areas, just moving forward with hiring a number of what we think are strong professionals in the health consulting area that can continue to build back. I see that activity related to medical devices is starting to pick up some, but again, I don't think these are going to be the huge move-the-needle in one quarter. Those type of things come from a large reactive project happening, or a couple of them. Again, those tend to be 2% and in big times it's 3% or 4% of our revenues. So, I don't necessarily going to put those up as something that's going to sort of move us up 5%, 6%.

Thanks Rich.

(Operator Instructions). Tobey Sommer, SunTrust.

This is Frank in for Tobey. A quick question on the proactive side. You indicated as you're starting to see a little bit of pickup. How much is that in terms of the size of the business?

Well, the proactive side of the business we consider to be 25% of our revenues. We consider sort of reactive part which is insurance claims, litigation, product recall, to be about 65%, and about 25% the proactive side and about 10% defense -- or not defense, but government of which (inaudible).

And a quick numbers question. Could I get the segment breakdown for environmental and health versus engineering and other scientific, and maybe revenues and utilization?

Yes, I can provide that. Do you want the gross revenues or the net revenues?

Gross revenues would be great.

For the quarter, revenues for the Other Scientific and Engineering segment were $46.1 million, and the Environmental and Health was $16.5 million. The utilization for those areas were that the utilization in Other Scientific was 66%, and the utilization in Environmental and Health was 68%.

Great. Could you remind us a little bit about seasonality moving from 4Q to 1Q? Any particular factors there that we should keep in mind?

Yes. What I can -- look. The historical model of the Firm primarily is that Q1, I view that Q1 is our best. As I indicated earlier in my comments, I expect Q1 of 2011 to be in the low 70s%. I think that pace is not quite as a trail off of the fourth quarter, but it's close. I think you can expect typically for that to step down 1 or 2 percentage points in the second quarter, typically about 1 if everything is sort of on the same pace. Then if we move into Q3, it steps down another 1, maybe 2 percentage points. And then as we go into the fourth quarter, another sequential step down of 4 to 6 percentage points. So what you tend to have is something in the low 70s%, maybe 69%, 70% in the second quarter into the high 60s% over the summer, and then into the low or mid 60s% in the fourth quarter.

Great, that's helpful. The last question I guess -- are you seeing any indications of more health or demand in automotive related sectors or related work?

I think, in the automotive area there, the demand for our services has stayed relatively stable. It's not an area that we have indicated that we've had strong growth in, but it's been very stable. It's just a mix of different clients. We are still in a mode that when the bankruptcies occurred earlier last year -- last year, 2009, in GM and Chrysler, we had clearly a reduction in the flow of litigation work from those two companies. That takes a while to build back. But we've been able to backfill that area with work from other clients. So, I would describe that as being fairly stable.

I am showing no further questions at this time. I will now turn it back over to management.

Thank you very much for joining us today.

Ladies and gentlemen, this concludes the 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 entering the access code of 4401721. Thank you for your participation. You may now disconnect.