Exponent Inc (EXPO) 2011 Q1 法說會逐字稿

Welcome to the Exponent first quarter 2011 earnings conference call. (Operator Instructions). This conference is being recorded today Wednesday, April 20, 2011. I would now like to turn the conference over to Matt Hunt of the Blueshirt Group.

Good afternoon, ladies and gentlemen. Thank you for joining us on today's conference call to discuss Exponent's first-quarter 2011 results. Please note 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 of 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 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 risk and uncertainties and that Exponents' 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 1, 2011. 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 2011 results. We are pleased to report another strong performance of both growth and profitability. Total revenues increased 24% to $73.5 million and revenues before reimbursements were up 16% to $64.2 million. Net income grew 28% to $8 million or $0.53 per share. We had notable contributions from our defense technology development biomechanics, biomedical engineering and thermal sciences practices, as well as our environmental and health group. In defense technology development we continued our work in improvised explosive device detection technology with the Ministries of Defense of the United Kingdom and Sweden. Additionally, during the quarter we had significant year-over-year growth in product sales of the rapidly deployed surveillance systems. In biomechanics we added several new experienced consultants who specialize in engineering analysis. In biomedical engineering, we had significant activity related to implants including litigation matters, recalls and new technology assessments. In thermal sciences, our work includes a major intellectual property litigation related to aircraft engines and several feather analysis projects for the energy sector. And in our environmental health groups, we performed in-depth scientific studies to understand both the short and long-term impact of chemicals in the environment.

During the quarter, we continued to see elevated levels of activity on a number of major assignments that engage consultants across many of our practices. As a result utilization was 73% as compared to 71% in the same period a year ago. Some of our major assignments are now moving beyond the initial intent stage of investigation. We anticipate activity levels to gradually step down, but most likely continue for several quarters or years at a lower level of activity. We had strong net headcount growth with nearly 3% sequential growth in FTEs. With the addition of biomechanics group which I mentioned earlier as well as some higher to support clients in the pharmaceutical industry. While these hires will take some time to get integrated, we are excited out these midterm growth opportunities.

In summary, we are pleased with our strong results from the first quarter and have kicked off what we believe will be a good year for Exponent. While the year over year growth numbers may not be impressive in the second half, due to the unusually large assignments in product sales that we had in 2010, we believe the underlying business is strong and we are optimistic about our future business. I will now turn the call over to Rich for a detailed discussion of our financial results.

Thanks, Paul. As Paul discussed, we again posted double-digit revenue growth and improved utilization in the first quarter, both of which contributed to our strong bottom-line performance. Total revenues for the first quarter increased 24% to $73.5 million as compared to $59.4 million in the prior-year. Revenue before reimbursements or net revenues as I will refer to them from here on increased 16% to $64.2 million as compared to $55.2 million in the prior year period. Net income for the first quarter of 2011 grew 28% to $8 million or $0.53 per share. As compared to $6.2 million or $0.42 per share in 2010. EBITDA in the first quarter of 2011 grew 25% to $14.4 million as compared to $11.5 million last year. Total revenues in defense technology development were $13.2 million of which $6.1 million was product sales. Net revenues in defense technology development were $6.5 billion as compared to $2.2 million in the same period of 2010.

As Paul discussed, the expansion in this business was related to projects with the UK and Sweden, Ministries of Defense as well as strong product sales of surveillance systems which represent net revenues of $2.5 million as compared to $215,000 in the same period last year. The reason that product sales exceeded our expectations in the quarter, by $500,000 to $1 million is that most of -- some of the second quarter deliveries were pulled forward which will result in second quarter net revenues from product sales being approximately $100,000. While we do not have product sales orders for the third and fourth quarter, at this time, we do still expect net revenues to be $500,000 to $1 million per quarter in the last two quarters of the year.

In the first quarter, billable hours increased 8.1% to $246,000, as compared to $228,000 in the same quarter last year. Utilization in the first quarter was strong at 73% as compared to 71% in the same period last year. This improvement is a result of strong performance from a number of practices primarily related to our continued work on major investigations. As we indicated last quarter and Paul discussed earlier, we do expect some of these projects to step down in activity beginning in the second quarter. Also, as a reminder, the first quarter is seasonally our strongest. And each of the next three quarters, will have lower utilization due to increased vacation and holidays. For the full year, we expect utilization to average in the high 60%s.

Our average technical full-time equivalent employees for the first quarter increased 4.7% to 650 from 621 in the same period last year. We have been selectively hiring key talent to staff current and future opportunities and are targeting gross in FTEs of approximately 1% sequentially per quarter during the rest of the year. We realized an average rate increase of approximately 4.1% over the prior year, this is largely the result of our new billing rates which took effect on January 1. As well as some strong performances on fixed price projects. We expect to realize a rate increase between 3% and 4% for the full year.

Hereafter the percentages I will reference are on a percentage of net revenue basis. EBITDA margins for the first quarter improved 160 basis points to 22.5% from 20.9% last year. This performance was a result of high utilization and strong product sales. Total compensation expense for the quarter increased 13% to $42.7 million. This increase is a result of a 4.7% growth in headcount, raises from a year ago, and increased bonus and stock expense related to higher profits. This includes deferred compensation expense of $659,000 as compared to $559,000 in the same quarter last year. As a reminder deferred compensation expenses offset miscellaneous income and had no impact on the bottom line. Additionally, our annual salary raises took effect at the beginning of April and are approximately 3.3%. As a component of compensation, stock-based compensation expense for the first quarter was $3.8 million as expected. As a reminder, stock compensation expense is higher in the first quarter when we grant stock as part of our annual bonus payoff. Accounting rules require accelerated expensing of grants to employees over the age of 59.5. And in 2011, we expect stock-based compensation expense to be $9.5 million to $10 million for the full year.

Other operating expenses for the first quarter were $5.8 million as compared to $5.2 million in the same quarter last year. As a component of other operating expenses depreciation expense was $1.1 million which is flat over the same quarter last year. We continue to expect other operating expense in 2011 to be in the range of $5.5 million to $5.8 million a quarter. G&A expense in the first quarter increased to $3.3 million compared to $2.7 million in the same quarter last year. The increase in G&A is a result of increased business development, professional development and legal costs. We continue to expect 2011 G&A expense to be in the range of $3 million to $3.4 million per quarter for 2011. Interest income in the first quarter was $21,000. Our tax rate for the first quarter was 40.1% as compared to 40.8% in the same period last year. We expect our tax rate for the full year to be 40.3%.

Turning to the balance sheet. Cash, cash equivalents, short-term investments were $92.3 million as compared to $106.5 million at the end of the fourth quarter. As expected, cash is down at the end of the first quarter following bonus payouts in March. Additionally, we repurchased $7.1 million of common stock in the quarter. We still have approximately $7 million available for stock repurchases, and plan to actively repurchase shares in 2011. Capital expenditures for the first quarter, were $800,000. DSOs were 96 days, the close of the quarter. I

In summary, we are pleased with our strong revenue, EBITDA and EPS results in the first quarter. We continue to expect revenue growth before reimbursements for 2011 to be in the middle single digits. This takes into consideration an unusually strong second half of 2010. During which, we reported revenue growth utilization and product sales which were higher than historical levels. We expect utilization for the year to be in the high 60%s and as a result a slight decrease in EBITDA margins. Now, I will turn the call back to Paul for concluding remarks.

Thank you, Rich. In summary, the first quarter was a strong start to the year. As we look forward into 2011, we remain focused on adding the best engineers and scientists and developing the skills necessary to expand upon our unique market position, in 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 opportunities in our defense technology development practice, and emerging growth areas, on continuing to manage 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 are excited about our future and we believe that we are well-positioned to deliver long-term organic growth in the high single digits to low double digits. Now I will turn the call over to the operator for your questions.

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

I first want to ask a little bit on the spending environment. You talked last quarter about how discretionary spending was improving. Wondering if you could give us a little more color on exactly how much improvement you are seeing at this point?

Tim, I think we do feel that it's improving. I'm not sure that I can really exactly quantify that for you, given all the various parameters involved. But I think that we feel as though the flow of discretionary projects is more consistent then it has been. In the past I sort of described as being very much Company by Company dependent. Some companies were continuing to engage in some projects and others were holding back. As we went through this quarter, I just didn't hear the same, the same feeling from our staff that there were projects being held back. Things seem to be moving forward and getting funded.

Does it feel like you're back to a normal environment? Or does it still feel like there is at least some hesitation?

I don't think it is normal environment in the sense that -- I think everyone is watching the bottom line very carefully. And clearly things come out in smaller chunks then they came out before. I wouldn't quite call it a normal environment. But I do think it's better.

Okay, and then there's obviously been a -- given the recent natural disasters in Asia -- a lot of focus and discussion around nuclear technology and you have a lot of experience there. Can you talk about what you're hearing about from some of your utility clients lately and what the opportunity is as you see it there, given the recent events in that sector.

Yes. So, I think there's a lot going on in that sector right now. Although I think it's going to take a while for, as it were, the dust to settle to really figure out where things are truly going. Tim, from our standpoint and first of all with regards to the more direct result of what's happened in Japan. We have now started a number of engagements on projects where we have clients who -- the primary issue is if clients who are importing products from Japan, and concerns with regard to contamination, radiation and so forth. And so those projects have started. And so, we now actually have revenue from that stream.

What we are seeing in the US with regard to nuclear projects is still, I would describe it, mixed. There were some Japanese investments in a nuclear facility over here that have been withdrawn. So there is some, as it were, cutbacks in some work related to that. But at the same time, it is very clear that there are going to be significant reviews done by many utilities with regard to their existing nuclear plants in further reviewing the safety, and particularly the safety with regard to natural hazards. So that can be -- it can be hurricanes, it can be tornadoes, it can be, obviously, tsunamis and earthquakes. And so that work I think is not really underway yet as we see it. Because I think people are trying to sort out where the -- exactly how comprehensive those reviews are going to need to be. But there's certainly more and more discussion of that.

So, is it fair -- is it just too difficult to predict the timing of those now? Or -- are they not large enough that they would change how you think about the growth over the next year, especially in the back half of the year in 2012?

It's difficult for us to see that this is a big enough item to really move the needle overall. As you know, we are a Company that does 5,000 projects a year, we are very diversified. The projects to date would run into the hundreds of thousands of dollars rather than millions. And so it's not something at this point that we would say is, as it were, a needle mover, but it's obviously something that we want to follow and will want to be continuing to offer our services and we believe there will be a play there.

Joseph Foresi from Janney Montgomery Scott.

Hi guys. My first question, it seems like this is obviously a strong start to the year, and I know that you kept the mid-single digit commentary on the revenue. I wonder if you could explain, it sounded like the environment is getting a little bit better, obviously we are off to a great start. And I know you pretty much talked -- I sort of understand the trajectory to the business in the back half of the year. But is there a potential -- are you more comfortable with the year and that guidance going forward? And maybe you could talk about anything that might push the numbers above that?

Yes. This is Rich. We definitely feel more comfortable with the business in that middle single digit range. But in reviewing, what we would normally expect in the business -- we started the year at 73%. On a seasonality basis, that would result in a year of about 70% UT, which is what we did last year. We do expect utilizations to step down from there, as Paul indicated, due to larger projects moving to different part of their project life cycle. And as such, when you go and compare that against the elevated level that we saw last year in the back half and then, just as importantly, you take a look at the fact that in the -- Remember that in the third quarter of last year, we had product sales of $3 million net revenues, and followed that up with another $600,000 of net revenues in product sales in the fourth quarter.

We just believe that while clearly this has made us more comfortable at the middle or upper end of that range, it didn't lead us to be able to move in and say we think that we ought to put an estimate out that we think we would move into the high single digits. We just -- based on where those things are, we are just not what we think it is. We think if you look at last year as a year that really, from where we were on our estimate in the start or middle of the year at this time last year, was that last year was still going to be low to mid single digit performance. We came in 3%, 4% above that level. Look at this year and we think things are -- the underlying business is doing well, but we've sort of got that hurdle to overcome. And it means that the underlying business is starting to build back up and do our normal range of high single to low double-digit performance, probably not at the upper end of that range but high single. We just, we've got to deal with what good performance we had last year and good performance we had here in the first quarter. But that is the numbers that they are. And the types of -- the things that are moved the needle are you get a number of things that go well on the -- in the defense side where the projects are larger. You can have a large incident occur in a higher demand of activity that we have seen in some of the areas over the last year or two. But at this time we can't predict that those are going to occur and as such that is why we put the estimate that we had.

I know you guys don't publish a number, but your feel for the backlog at this point, this year versus last year, is the backlog ahead of where we were last year? I know we burned through a little of the product business but how would you characterize visibility and backlog? I know you talked about the demand environment this year versus what you saw last year at this time.

Yes. So I think -- let me take a couple of areas. There's probably not one total answer here. But when I look at the defense business, I would say at this point in time last year we still hadn't signed our contract with the UK. We were tailing off -- we did have a US development contract. But those -- and I think in some ways we're a little bit in the same position right now in defense. We've -- we are finishing up the development deployment phase here with the UK in the second quarter. We are -- have a proposal into them. We have already started support for them a long-term basis, which will include people and systems. We've -- we don't know the magnitude of that at this point in time but we've initiated that.

On the US side, we have a proposal in on the next development of the next generation of GPR but we haven't been awarded that. So, it's sort of mixed bag, we're always -- the portfolio is not large enough to give comfort. I think, in the other areas, I think we feel that we've got some -- at this point we've had some large projects that were going very hot and we knew we'd continue on for a while that were there. Today our feeling is they are not going to be quite running at that level, but we can actually see that there are some long-term tails to these issues and that could be good for long-term business. So I think there were some pretty exciting short-term opportunities at this time last year. Today, I would say, I think there are some pretty committed long-term programs that we have with some of the larger major projects we have, both in defense and for -- in some of the major incidences occurred over the last couple of years.

Sure, very helpful. One last quick one for me. Maybe you could talk about price increases, what you got this year and maybe -- I think I haven't looked at it over last year. Is it what you normally put through, how pricing trended?

Yes. So, we have -- believe that we're going to have bill rate increase realization for the full year of about 3.5%. So give or take, last year we got about 3%. And prior to the downturn in the economy, we were probably realizing closer to 4%, a little bit above that. It's still a little bit down, clearly there are -- we have to be delivering additional value to be able to raise prices. And on top of that there's clearly certain industries that are still very price sensitive. Let's say infrastructure area. The insurance industry where [Charterson] and a few companies have gone under tough times, and the auto industry. But we are able to get in some of those areas and be able to realize more of increase in some of the high growth areas that we've got going on in the technology area.

(Operator Instructions) Tobey Sommer with SunTrust Robinson Humphrey.

Thank you. I was wondering if you could describe some additional color on the hiring environment. The level to which your new hires are experienced people from industry versus the new graduates in school and any color you can give us there. Thanks.

Toby, this is Paul. I think, first of all the hiring environment, the environment isn't a lot different than what I describe recently so I will go over that very quickly and talk a little bit about where we see we are going within that. The hiring environment in terms of senior people, for us it's always challenging to find senior people that have a consulting background, and that can step in. That's always a challenge. And I think -- so, the entry level, there's certainly plenty of talent available. Although the top talent will continue to have multiple offers. All the people we give job offers to have multiple offers. So that environment has stayed very much the same for a number of quarters, here. I think where we see it and we are hiring in both areas. We're hiring at the entry level, I mean, again, entry-level for us is typically somebody with a PhD from a good school. But, so we continue to do that.

At the more senior levels, the people that we are hiring fit into kind of a mixture of a couple of things. One is really targeted toward new industries. When I say new industries I mean that from the standpoint of our portfolio, the consulting we do. We talked for some time, for example, about how we believe we under-serve the pharmaceutical industry and believe that's a good opportunity for us. We've, in the last couple of quarters we've definitely targeted some hiring in that area and people we've hired are often going to take a little while to get solidly going because they tend to come directly out of industry -- out of the pharmaceutical industry. Some of them have consulting experience but they are not basically lateral transfers from other consulting companies. So that's one example of where we're targeted. We're also targeted -- we also target people who've got a consulting book of business who are recognized testifiers, recognized people out in the marketplace, who find our platform to be a platform they'd like to -- would like to work from. And so, what we did in the bio-mechanics area we talked about earlier, is an example of that type of hire.

Okay thanks. Then, I was just curious, on the proactive product development side, broadly on the commercial area as opposed to the military. Is that something that you're seeing discretionary spending come back in a meaningful way? Is that consistent with your initial comments, I think to the first questioner you said yes, people are loosening up and the spending is coming, just in smaller chunks?

Yes, I think that's correct. That's what I was really referring to and that runs across a variety of different areas. I mean it certainly includes areas in consumer electronics. It includes areas in medical device. It includes areas in product registrations. Working also in the pharmaceutical industry, there's a variety of those projects. And it's not completely uniform that everything is go-go, and that's why I said it is not quite back to I would call a normal economic environment. I think it is better, but we still have some parts that are lagging a little bit, but it is, we believe, better than it was.

Then my last question is, some of the big complex failure projects that you've worked on over the last couple of years. Have some of them converted into proactive product development work over the course of the lifecycle of the litigation side?

I think that some of those projects have changed shape over time. But I wouldn't really describe it as going from investigative work to product development work. I think that those projects run a range of things. Some of our larger projects have been in the automotive area. They've been in the utility area. They've been in the environmental and health area. And so it's not easy to say that they move from an investigative stage to a product development stage. Often what they do is they change over time to an investigative stage at the beginning. Often there is a lot of what I would call derivative litigation that follows, and that there's a fair amount of work to organize that. The thing that's probably closest to product development is -- it's not really product development but it's moving to a stage of really taking a fresh look at why some of the problems occurred and what other -- what could be done in terms of process improvement or how you might move forward to better prepare yourself for a future situation that might be like that. But I couldn't quite call it product development.

This is Rich. One comment around that. It clearly doesn't happen on the large -- what I would say -- what we described as our majors. But clearly, in the consumer electronics area and the medical device area, is really where we see clients come to us where they've moved along their design and they've got a product in marketplace and they're seeing challenges. May it be glass issues, or thermal issues, or battery issues in electronics. Or it may be a recall or material failure on an implant. Those clients clearly then begin to use us on design reviews going forward. Helping them better understand the materials they're bringing into play, and do a lot of finite element analysis for them on future products. And not just what has happened. So that's where we continue to see people and I hear from our engineers -- you talk to them about a failure project that just came in from a certain electronics firm. And the next thing they say is well, we've wrapped that up, but it looks like they are going to involve us in their next design review.

There are no further questions at this time. Ladies and gentlemen, this does conclude the Exponent first quarter 2011 earnings conference call. You may now disconnect, and thank you for your participation.