Exponent Inc (EXPO) 2011 Q2 法說會逐字稿

Good afternoon and welcome to Exponent second quarter 2011 earnings conference call. (Operator Instructions) This conference is being recorded today Wednesday, the 20th July, 2011. I would turn the conference over to Brinlea Johnson, of The Blueshirt Group.

Good afternoon ladies and gentlemen and thank you for joining us on the Exponent's second quarter 2011 results. Please note that this call is being simultaneously webcast on the investor relations website at 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 especially 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 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 the 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 July 1, 2011. The forward-looking statements and risk 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.

Thank you for joining us today for a discussion of Exponent's second quarter 2011 results. We're pleased with our performance in the quarter showing continued revenue growth and profitability. Total revenues increased 8% to $65.1 million and revenues before reimbursements were up 10% to $60.6 million. Net income grew 13% to $8.2 million or $0.55 per share.

During the quarter, our utilization was strong at 71% as we continue to see elevated levels of activity on a few major assignments. We are assisting clients with several high-profile investigations that engage consultants across many of our practices. A couple of major projects did step down from their levels of activity this quarter and we expect others will do the same over the back half of the year. However we anticipate these assignments will continue for several years to come albeit at a lower level.

We are also pleased with the progress that we made during the quarter in several of our strategic growth areas. In health science consulting, we added 12 new consultants in atmospheric sciences. The leader of this team is an internationally recognized expert. This enhanced capability is needed by many of our existing industrial clients facing air-quality issues as it will also help us expand our international client base.

In design consulting, we experienced increased demand from medical device companies, who request assistance of evaluating new designs assessing the performance of devices in the field and with the regulatory approval process. In energy consulting we have been engaged by several utilities and oil and gas clients to assist them with understanding why certain pipeline failures have occurred as well as the evaluation of their pipeline risk management program.

In defense technology development, we were recently awarded several new contracts. These include a contract from the US Army to develop the next generation ground penetrating radar for the detection of improvised explosive devices, a contract from the Department of Defense to continue technology assessments and reliability of smart cars, and a new product sales order for surveillance systems.

In summary, we are pleased with our financial results in the second quarter. We continue to capitalize on our growth opportunities and we are optimistic about our ability to post revenue and earnings growth into the future. I will now turn the call over to Rich for a detailed discussion of our financial results.

Thanks, Paul. We are very pleased with our financial performance in the quarter giving us a great start to the year. Total revenues for the second quarter increased 8% to $65.1 million as compared to $60.4 million in 2010. Revenues before reimbursements, or net revenues as I will refer to them from here on, increased 10% to $60.6 million as compared to $55.1 million in the prior year period. Net income for the second quarter increased 13% to $8.2 million or $0.55 per share. EBITDA in the quarter also increased 13% to $15 million.

For the first half of 2011, total revenues increased 16% to $139 million. Net revenues increased 13% to $125 million. Net income for the first half of 2011 improved 20% to $16.2 million or $1.08 per diluted share. EBITDA in the first half improved 18% to $29.4 million. For the quarter, net revenues from our defense technology development business decreased to $2.8 million from $3.7 million in the same quarter last year, which is primarily related to lower product sales. For the second quarter of 2011, net revenues from product sales was only $100,000 as compared to $800,000 in 2010.

We are completing the intense development and delivery phase of the United Kingdom down penetrating radar program. So this program will be stepping down as we move into the support phase. As a follow-up to Paul's comments about our new defense contracts, we now expect net revenues from product sales to be $500,000 in the third quarter and $1.25 million in the fourth quarter. We are pleased to be initiating a new technology development program to improve the detection of improvised explosive devices for the United States. Based on current funding for this program, we will recognize $6 million to $6.5 million of net revenues over the next nine months. Additionally, we have been awarded a three-year follow on contract for the Department of Defense that will continue our level of effort in smart card technology assessment. The initial funding of this contract will result in net revenues of approximately $1.1 million over the next 12 months.

Utilization in the second quarter remained strong at 71%, flat with the same period of last year. We expect utilization to moderate in the second half of the year as a result of a step down in a few major assignments as well as the typical impact from increased holidays and vacations that occur in the summer and year end holiday season. For the full year we expect utilization to average in the high 60s. Contributing to strong utilization was a 7% increase in billable hours to 242,000 as compared to 226,000 in the same period last year.

Our average full-time equivalent employees for the second quarter increased 7% to 653 as compared to 611 in the same period last year. We continue to selectively hire key talent to expand our capabilities. We are now expecting growth in FTEs of approximately 1% sequentially during the second half of the year.

The percentages I will reference hereafter are on a percentage of net revenue basis. EBITDA margin for the second quarter improved 60 basis points to 24.7% from 24.1% in the same period last year as a result of improved operating leverage. Total compensation expense includes a gain of $200,000 in the deferred compensation plan, as compared to a loss of $900,000 in the second quarter of 2010. Deferred compensation is offset in the miscellaneous income and has no impact on the bottom line. After adjusting for this $1.1 million swing of deferred compensation, total compensation for the quarter increased 10% as compared to the same quarter last year. This increase is a result of 7% headcount growth and annual compensation increases, which took effect in April.

As a component of compensation, stock-based compensation expense for the second quarter was $2.1 million. For the full year, 2011, we expect stock-based compensation to be approximately $10 million. Other operating expenses for the quarter increased 6% to $5.7 million. As a component of other operating expense, depreciation was $1.1 million, which was flat over the same quarter last year. We expect other operating expenses to be $5.7 million to $5.8 million a quarter for the remainder of 2011. G&A expense in the quarter, was $3 million, slightly up from $2.9 million in the same period one year ago. We expect G&A to be $3 million to $3.4 million a quarter for the remainder of 2011 as a result of increased business and professional development activities. Interest income, was $41,000 as compared to $66,000 in 2010, due to lower interest rate environment. Our tax rate for the second quarter, 2011 was 41.1% as compared to 40.7% in the same period last year. We expect our tax rate for the full year to be 40.6%.

Turning to the balance sheet. We closed the second quarter with $95 million of cash, cash equivalents and short-term investment. As compared to $92.2 million at the end of the first quarter. We were able to increase cash while also repurchasing $16 million of common stock in the quarter bringing our total year-to-date repurchases to $23 million. On the 1st of June we announced an additional stock repurchase authorization and now have $26.9 million available for repurchases. Capital expenditures in the second quarter were $866,000. DSOs were 93 days.

Looking forward, we are mindful of the comparisons against an unusually strong second half of 2010, where utilization and product sales were significantly higher than historical levels. Nevertheless given our strong performance in the first half of 2011, we are now raising our full year expectations for EBITDA margin to be only slightly down and for growth in revenues before reimbursements to be in the high single digits as compared to 2010. Now, I will turn the call back to Paul for concluding remarks.

Thank you, Rich. In summary, we delivered a strong second quarter. As we look to the second half of 2011, we will continue to provide the expertise and experience to answer our clients important technology, health and environmental questions, selectively add new talent to allow us to continue to expand our capabilities and grow revenues, capitalize on our new contracts in defense technology development and expand our portfolio defense projects, manage operating expenses to provide the foundation for future growth and revenues earnings, and finally, generate more cash from operations, maintain a strong balance sheet and undertake 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 and profitability. Now I will turn the call over to the operator for your questions.

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

Can you help us think through the various new contracts and then the contracts rolling off of the Technology Development business. You threw a couple of different numbers out there and on a -- you gave us the product sales but if you thought about the consulting side of that business how should we think about the run rate of that, from the 2.7 or so in Q2 going into the second half of the year?

Yes. I think that -- on the consulting side of that you are right. We did about $2.7 million in consulting revenues. I think that that will pick up as we go into the third and fourth quarter. My expectation is that we will see something in the -- probably in the $3.5 million to $4 million sort of range -- maybe it will pick up approximately $1 million in the run rate in that area.

Okay, that's helpful. Then on the headcount, can you give us what the ending headcount was - -

Yes, the last month's headcount was about 657. So slightly higher than the average of the quarter it was picking up through the quarter.

Okay. Then, just as you think about continuing to grow the business. You talked a little bit about G&A and basically, it was the continuation of the trends I guess, G&A and other operating costs. It was a continuation of the trends you've seen. Are you getting to the point where you think about having to invest in additional offices or other centralized functions to continue to grow the business to the next scale or as we look out more than just the next few quarters can you continue to hope that G&A line relatively flattish?

Yes. A couple of things. One, think we will continue to invest in the operation and we have over time. I don't see a step function occurring in the future. It is our expectations that we will probably open an office in the Southeast somewhere later in the year. Probably in Atlanta. And we'll do things like that. Again, we view that around sort of the growth in headcount, not that something that will necessarily be a step function. We clearly have been working on expanding our IT support for the projects that we have going on and have been investing there and will need to continue to invest in those. Again, I think that if we are able to grow revenues in the high single digit to low double-digit, it is our feeling that over time we will be able to manage the expense growth to be at or below that level.

Okay. One more question on the share count. Given the repurchases can you tell us what the ending share count was or what to expect for the future?

The ending share count on a diluted basis would have been approximately 14.75.

David Gold from the line of Sidoti & Co.

The two particular contracts that you've highlighted. Can you give us a sense of the longevity of presumably how long you expect those to go on for?

Yes. The first contract for the US Army around ground penetrating radar technology, we expect that that work is about a 9 month period of time, depending on how that development goes and towards the end of that will be some trials and evaluation. It will depend on what happens after that period of time as usual. There tends to be sometimes a gap there between the next program but we will just have to see as time develops. That is where that stands at this point in time and there is also opportunities on this contract vehicle to expand that work a little bit as we get later into this 9 month period of time.

As far as the work for the Department of Defense around smart card technologies, that is actually a program that is currently laid out to be on a fixed-price basis about $3.5 million in there. It is spread out over three years. The first year is funded and there is opportunities for other tasks to be added to that probably in the range of one $0.25 million to a $0.5 million additional amount each year, depending on other types of tasks that are identified as we work through these assessments. That is where that is.

On the UK front, it looks like there we have clearly extended our support for there. I would expect that will go out at least a year if not out over the next couple of years. We will continue to support that program with further incremental developments, field support as such. And we will see where that leads us far as where they go with the next generation of this technology in the future.

And other product sales side, as I mentioned, we did receive two new orders which are combined totaling up to this $1.75 million in net revenues. And we have those in hand so that is why we, at a minimum, expect that level through the rest of the year.

Okay. That's helpful. Then on the pure consulting side of the business. We go back a quarter ago. There was a comment about the investigatory phase of some of the larger, newer assignments starting to roll off. Just curious if you can put that together with the comments in the release sustained demand on a few major assignments. One, are we talking about the same assignments and two, how are things looking there?

What we have going on there, I think as you know, there are a number of these assignments that we unfortunately can't tell you what they are. Although many people are guessing. But, the fact of the matter is, we have a handful or so of very significant projects that we have talked about over time. And some of these have started to roll off. And, there are a couple of others that we expect to roll off from their peaks later this year. What we have found with all of them, is that they're sustained in the sense that they fall off their peaks but the projects don't go away. They continue on. It really hasn't seemed to matter which of these projects we are talking about because they are actually quite different projects. All of them seem to be sustaining at sort of the level that was let's call it something of the order of half of where it was during a [B] quarter for what appeared to be sort of a year, 2 years and so on continuing on. So I think from that standpoint we don't feel that there's any cliffs here. We feel good about how things have worked through this quarter because we have had a couple of projects scale down but yet the strength of the overall business has allowed us to maintain utilization levels consistent with the high levels we had last year in the second quarter and so we are really quite pleased with that.

Got you. That's helpful and then one last one if you can add a little more color as we reloaded and have been buying back shares pretty decently. And, curious from here obviously you have a bit of cash from the cash flow. Essentially uses of cash you have -- are buybacks at this point sort of top of the list?

Yes, David we are -- clearly I think that we felt at this point in time buy back was definitely a good thing for us to do as an ability to return value to shareholders. Not only in the short-term but very much in the long-term, based on the firm. We have as we talked about on these calls before, continuing to look for what we call seed acquisitions to something we can build in a -- some of these newer growth areas for us. We will continue to look at those. We think that with the amount of cash we have that we have the flexibility to both do a repurchase program as well as -- as what we -- if we fund the right strategic investment to make on -- to get those in place. And I think as far as dividends go, our feeling is that in discussions with our Board and with management, is that at this point in time we do think that that is a potential option a long-term but we think that waiting to see where the tax laws sort of settle out here over the next year and a half, and also to be able to provide a lot of flexibility that we would not implement something like that immediately but continue to monitor and assess that option as well.

Okay. And just -- and acquisitions, where do they fall in?

Where do they fall in?

As far as use of cash.

Acquisitions are at -- there will not be a situation where utilizing dollars for anything else gets in the way of doing the right acquisition. So in some ways you can say it is at the top. But I think based on our track record, clearly we haven't done one in 8, 9 years and we will continue to assess them. But we will do one in the future or several of them. But as far as -- we don't see that anything -- any other uses of cash will get in the way -- of having that available for us in the future.

Got you. Okay, that's helpful. Thank you both.

Joseph Foresi with Janney Montgomery Scott.

I think -- my first question, is just on the demand environment. Do you feel in general that it is improving? Maybe you can give us some context of where we stand, mid-2011 versus your expectations at the beginning of the year. Obviously utilizations held up a little bit better but I noticed the revenue guidance probably didn't move up. Just wondering if you could give us some context around that.

Joe, this is Paul. A couple of things. First of all we didn't move up our revenue guidance from mid- to high-single digits for the year. But I think with regard to demand, I would make sort of two comments. One is, with regard to the more proactive work, while it is still a little mixed it is definitely enough drivers that are making us feel better. I talked to my comments about some of the work we are getting in the medical device arena that really is sort of proactive in nature and clearly sort of discretionary in that sense. The demand there has been increasing. There is more risk studies being done in the oil and gas industry and that is sort of a positive. So we do see some examples of increased demand. I think from the more reactive side of our business, I guess what I would say there, is that we continue to be pleased that on sort of all of the major assignments that we would like to be involved in the we continue to get involved. And so we think the demand side continues to look better.

I think for us, one of the things that we also noticed around the reactive side is that clearly as we've continued to expand the disciplines that we have in the firm and offering, clearly we are playing a broader role in the a lot of these issues as well. Where we might have gotten involved in the environmental part of something or the health or the engineering and not the other in the past. We are starting to see multidisciplinary involvement in a lot of instances. So I think that is also helping us.

Okay. But what I am trying to get at is probably the change and the reason why you've increased the guidance is that are people now more comfortable with what is going on with their business and making decisions on the proactive side is that how we should think about -- demand being better than expected? Or is it coming from your present remedy base? I am wondering what is happening within your client base that is sort of giving you the confidence?

I think, Joe, it is across the board. I think it is both in the reactive side where there are significant issues to be dealt with and clients are kind of moving forward on all of those issues rather than holding back. And I think that on the proactive side, while I think the demand has increased, wouldn't say that it's sort of increased uniformly. Think there are still some companies, some sectors, some areas that are not quite as strong for us as others. Medical devices are strong and some of the areas of battery technology perhaps for example are not a strong. So it's not quite across the board but overall when we look at the overall portfolio, we feel like it is strengthening.

Very helpful. In regards to utilization, maybe you can just -- What are your expectations for that -- for utilization going forward? I know that it's kind of surprising and you clearly brought up the EBITDA guidance, but any thoughts on just sort of they utilization rate going forward?

Yes. Look, first of all I think, our utilization in the first half of the year here, at 73% in the first quarter and 71% and the second quarter, if we would follow the normal seasonality, that would have been -- 71% is equivalent to a 73% in the first quarter. That would then step down to probably 68% or 69% in the third quarter because the summer vacations and holidays. Then step down another 3 to 4 percentage points off of that in the fourth quarter. That is what the -- based on the number of workdays and such, what happens in the business on a seasonality basis. If we see a step down in utilization a little bit, a percent or 2, in the back half of the year because some of these major assignments back off a little bit, then we would expect the utilizations to just come off a little. So, the trend of 73% and 71% put us on pace for 70% for the year. We think that it may come off of that for a little bit. And that is why we have been talking about finishing the year in the high 60s. That is probably, say 69% it could be 70% it could be 68%. It is sort of in that give or take in that 69% range for the year and that will be made up of -- if we do 69% it will really probably be made up of 68%, 69% -- in the 69% in the third quarter and 64%, 65% in the fourth quarter.

Okay. Then my last question I think -- and thanks for those, very helpful. On the consultant side, I think if I remember in your opening remarks you talked about adding 12 consultants in healthcare. Maybe you can talk about what specific area you added and where they came from and what gave you the visibility to need to go to that particular area at this point.

Yes, Joe. So the 12 that we talked about just talk about them as being kind of a team that joined us in one particular area within health sciences. There are actually other hires we also made in and have made in the health sciences area. But, the interesting area of this, what we call atmospheric sciences. Relates to air quality issues which are very important for both sort of proactive assignments where you have new facilities being built, new permitting issues and so forth with regard to air quality from various industrial sites and power plants and things like that. It also it is very important with regard to certain unintended releases that occur. So it's also supports the reactive area. This is something where we already had a capability but this is a very much enhanced capability with a person who is a leading internationally recognized expert in this area. We were fortunate to have him join our team and frankly, as a result of him joining our team, we had a lot of people apply to come and be with his team. So it was -- you might say a little bit -- it was targeted in terms of obviously trying to build our capability in this area but a little opportunistic in the sense that as a result of him joining we had a lot of high-quality applications that we decided to build upon.

Does this individual come from another firm and are these air quality issues that you are dealing with are they regulatory driven?

The answer is yes and yes.

(Operator Instructions) Tobey Sommer with SunTrust Robinson Humphrey.

Can you describe how, if at all, the nuclear events in Japan unfolded in terms of driving some demand? You touched on it last quarter I wanted to get an update.

Yes. Thanks, Tobey, it's Paul. So, we are still in a mode where we have -- not a lot in fact has changed really in the quarter from our perspective in the sense that we aren't doing much more work in Japan. We did have a few assignments with regard to issues involving importing goods to the US from Japan and so we have been working on that. With regard to the opportunity to assist nuclear utilities in this country, in their various re-evaluations. That is still unfolding.

The Nuclear Regulatory Commission is trying to put this on what I will call a fast track. They talked about some proposals for certain kinds of new assessments they want. They would like to get feedback on that. They will want to try to get rule-making done in a 90 day period, which would be pretty short for them. And if that does happen, then we do think we are positioned to do some work there in assisting utilities on basically probabilistic risk analysis associated with a variety of different events. Specifically there has been a lot of focus on earthquakes in particular. It is too early to tell still exactly how that will unfold and while I think we will get some work out of it, I previously indicated that I don't think it is a big enough field to move the needle overall.

Could you also comment about what demand is like on that international side in your defense and product area?

Yes. As we've mentioned before, we have this program with the UK and we have had some work on with Sweden as well on a small program with Norway. We -- at this point in time, we are talking with a number of other nations about the IED detection technology and where their programs are going. I think that we definitely by having a program going on with the UK and the US, does put us in a good position to capitalize on those in the future. But, a lot of these other countries move slowly, and obviously have less dollars than our two current clients. So time will tell as to how big those opportunities will be, but clearly you know what I can say is that we have been to meet with and interact with not only international conferences, but have visited defense departments and are in discussions with some of the other defense players, contractors about teaming up around putting some technology that we have developed with our remote vehicles and such so that it is another sensor package to put together. But at this time I don't have -- we will have something next quarter but I wouldn't -- would be surprised if we didn't have something over the next year.

Okay. Thank you. Then, just two housekeeping questions. You may have talked about bill rates, but if so I did not quite get it during your prepared remarks so if you can give an update on that? And I'm just curious, if you had the gross revenues on a segment level also?

Yes. First of all, the -- we -- just to capture the 10% growth in the quarter we had a 7% increase of billable hours. A 4% increase in rates and that was offset by about a percentage point, a little more decrease in -- from the product sales. So that is how you get to the 10%. On a gross revenue basis, on the segments. Our Environmental and Health segment revenues gross revenues for the quarter were $17.3 million. And our other Scientific and Engineering segment was $47.8 [million].

That's perfect. Thanks a lot, Rich.

Thank you very much. Ladies and gentlemen this includes Exponent second quarter 2011 earnings conference call. This conference will be available for replay after 7PM Eastern standard time today through July 27 at midnight Eastern standard time. You may access the replay at any time by telling 1-800-406-7325 and entering the access code of 4456038. Thanks for your participation. You may now disconnect.