Exponent Inc (EXPO) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Exponent first-quarter fiscal year 2012 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, April 18, 2012. And 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 first-quarter 2012 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 expressively 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 this 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 March 30, 2012. 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. And now, I'd like to turn the call over to Paul Johnston, President and Chief Executive, excuse me, 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 2012 results. For the first quarter, net revenues increased 4% to $66.5 million, and total revenues were $71.9 million. Net income grew to $8.2 million, or $0.57 per share compared with $0.53 per share a year ago. We are pleased with our performance in the first quarter, considering the difficult comparison to same quarter last year when we had significant Defense product sales.

Notable performances in the quarter included our Mechanics and Materials, Electrical and Thermal Sciences practices as well as our Health and Environmental groups. During the quarter we experienced good demand for both reactive and proactive services. In proactive services we continued to grow our design consulting offerings to the consumer electronics industry. We also expanded our regulatory consulting services to clients in both the United States and the European Union.

Utilization in the quarter was better than expected, even while we increased headcount by 6% year over year. Our utilization continued to benefit from a few large projects and we continue to expect these projects to decline in their level of activity over the next several quarters.

In our Defense Technology Development practice, we continued our development of Ground Penetrating Radar technology for the US Department of Defense. Our work with the US Army's Rapid Equipping Force continued to expand as we supported our two engineering labs in Afghanistan and had new technology assessment assignments in the United States. As a result, we are optimistic that this, beg your pardon, as a result we are optimistic that this will lead to additional contracts over time. Overall the first quarter was a solid start to the year, and we are encouraged about our business opportunities in 2012. I will now turn the call over to Rich for a detailed discussion of our financial results.

Thanks, Paul. For the quarter, revenues before reimbursements, or net revenues as I will refer to them from here on, increased 4% to $66.5 million as compared to $64.2 million in the prior-year period. Total revenues for the quarter were $71.9 million as compared to $73.5 million in 2011. This decline in total revenues is the result of a $3.8 million less of technology development product sales, and $2.2 million less of reimbursable expenses in technology development. Net income for the first quarter increased 2% to $8.2 million, or $0.57 per diluted share. EBITDA in the quarter increased 3% to $14.8 million.

We are pleased with these modest levels of growth considering the high hurdle created by an unusually strong performance in Defense Technology Development in the first quarter of 2011. During the first quarter of 2011, we had two large contributions from technology development. The first being significant surveillance system product sales, and the second being a substantial amount of reimbursable expenses for the UK GPR project. As a result, net revenues for tech dev in the first quarter were $4.4 million including $860,000 of product sales. This compares to net revenues of $6.5 million and $2.5 million in product sales in the same period one year ago.

Looking forward, we expect net revenues from product sales in the second quarter to be approximately $200,000 as compared to $100,000 in the second quarter of 2011. For the full year of 2012, we expect net revenues from product sales to be approximately the same as we had for the full year of 2011. As Paul discussed, utilization in the first quarter was strong at 74% compared to 73% in the same quarter last year. Contributing to strong utilization was a 7% increase in billable hours, totaling 263,000. Our average technical full time equivalent employees increased 6% to 686, from 650 in the same period last year. We continued to selectively hire talent to expand our capabilities. For 2012, we expect sequential quarterly growth of FTs to be approximately 1% per quarter.

During the first quarter of 2012, we realized an average billing rate increase of approximately 2.5% over the prior year. This was the result of new billing rates, which took effect on January 1. We expect to realize a billing rate increase of about 2.5% for the full year as well. The percentages I will reference hereafter on a percentage of net revenue basis. EBITDA margin for the first quarter was 22.3% as compared to 22.5% in the first quarter last year. We are pleased to have held this within 20 basis points as a result of increased utilization and effective cost management to offset last year's high technology development product sales and handling fees on the extra materials.

For the first quarter, compensation expense after adjusting for gains and losses and deferred compensation, increased 6% to $44.7 million. This increase is the result of a 6% headcount growth. Included in total compensation in the first quarter is a gain in deferred compensation of $1.5 million, as compared to $650,000 in the same quarter last year. As a reminder, deferred compensation gains and losses are offset in miscellaneous income and have no impact on the bottom line.

Additionally, our annual salary increases took effect at the beginning of April, and the overall increase is in line with the billing rate increases mentioned before. As a component of compensation, stock-based compensation expense for the first quarter was $4.5 million. This is higher in the first quarter, when we grant stock as part of our annual bonus payout. For 2012, we expect stock-based compensation to be approximately $11.5 million.

Other operating expenses for the first quarter decreased 3% over the prior year to $5.6 million. As a component of other operating expense, depreciation was $1.1 million. For the remainder of the year, we expect other operating expenses to be in the range of $6 million to $6.5 million per quarter.

G&A expenses in the first quarter decreased 13% to $2.9 million compared to $3.3 million in the same quarter last year. We expect G&A expense to be in the range of $3.1 million to $3.4 million in the next two quarters, and then approximately $3.8 million in the fourth quarter. Interesting income in the first quarter was $77,000. Our tax rate for the first quarter of 2012 was 40.3% as compared to 40.2% in the same period last year. For 2012, we expect our tax rate to remain approximately 40.3%.

Turning to the balance sheet, cash, cash equivalents and short-term investments were $103.7 million as compared $109.7 million at the end of the fourth quarter. As expected, cash was down at the end of the first quarter following bonus payouts in March. Additionally, we repurchased $4 million of common stock in the quarter, and still have approximately $40.4 million available for stock repurchase and plan to actively repurchase shares during 2012.

Capital expenditures for the first quarter were $1.3 million. DSOs were 88 days at the end of the quarter. For the first quarter-- the first quarter was a solid start to fiscal 2012 for which we continue to expect growth in revenues before reimbursements in the low to mid-single digits. This growth has been tempered by the fact that our largest projects in 2011 accounted for a greater percentage of our revenues than in a typical year. We expect these projects will step down in their level of activity over the next several quarters. As a result, we expect 2012 utilization to be lower by a percentage point or two as compared to last year and EBITDA margins will be down slightly. Now, I will turn the call back to Paul for concluding remarks.

Thank you, Rich. In summary, we are pleased to have delivered a solid first quarter of 2012. As we look ahead, we will continue to provide the expertise and experience to address our client's important technology, health and environmental questions. We will selectively add new talent to allow us to continue to expand our capabilities and strengthen our offerings. We will manage operating expenses and utilization to provide the foundation for continued growth in revenues and earnings. And finally we will generate cash from operations maintain a strong balance sheet and undertake activities such as repurchasing shares to enhance shareholder value. Looking ahead, we remain optimistic about our ability to leverage our multidisciplinary approach and expertise to capitalize on new market opportunities as we expand our business. Now I will turn the call over to the Operator for your questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Tim McHugh with William Blair & Company.

Yes, thanks, guys. First want to ask Rich, last quarter you gave us a little more color on what you mean by a slight decline in margins, I think you had said 50 to 100 basis points last quarter, is that still the right range or are you any more optimistic given the first quarter?

No, at this point in time I think that's still the range that we're looking at. I think we need to see things progress through the year a little bit further at this point before making any adjustment to that. But right now that's sort of the range we're looking at.

Okay. And you mentioned the guidance obviously reflects that some of the big projects will scale down given that the utilization in Q1. It sounds like that is something you're still talking about prospectively; it hasn't happened yet. So are there signs that's actually happening, is that something just you expect will happen at some point?

Yes, I think, Tim, I think that there is some signs that that's happening a little bit. Some of these projects are in the news and you hear about various portions of them being settled, that does result in some change to our work assignments. But in general these larger projects have a number of different elements to them that cause them to continue over an extended period of time, but inevitably they do gradually step down. But we haven't seen much step down yet. Probably only a little bit, and what we saw was pretty nicely backfilled by other projects so far.

Okay. And then lastly, Rich, can you talk about the SG&A spend, I guess if you lump together those two lines. It was obviously-- it was-- you managed that very well. Is that-- but I guess the question is, was there anything unusual in there and is there as-- is that as good as it-- can you still get better than that, 11% revenue, if I add those two together and take out D&A, is a pretty efficient operation? So I guess just talk about where you're at --

Yes, couple of things. Well a couple of things. One, I think that they were -- first of all, last year they were a little bit high. We had a few things running through there. We had some legal costs going through G&A in the first quarter of last year that we don't typically have and such, so that's why I think last year's was a little bit higher in the first quarter than what we saw here in this quarter. On the other hand, I think the first quarter tends to be our lowest level of spend in these areas. We tend to have more conferences that really -- tied into marketing activity in the second quarter and such. We have tend to have -- we have more Management meetings around the third and the fourth quarter in our organization, that's when we hold either our Manager's meeting or Principal's meeting at that point in time, and we do again this year have that planned. So I do expect them to be higher as indicated in my comments.

But there wasn't any unusual, let's call it, offset to an expense that we had in there or anything. Do I expect them to be lower? No. And I think the first quarter's revenues are always sort of the highest, and the first quarter's expenses are the lowest. So I do think that's a little bit as sort of in the year as good as it gets, but at long term, I think we continue to believe that if we can grow the Firm in the high-single to low-double digits that expenses will -- we still have ability to get some leverage out of our organization long term. So we'll continue to try to manage things, and sure, if you have some special projects or whatever, you're not going push those through when you're at a little bit lower revenue growth if it's appropriate to wait on them. And then in essence if you have some stronger performances, maybe you can get some of those things through. So we do try to manage it a little bit. But the majority of the expenses is there. It's going to be there no matter what the quarter is.

Okay. And if I could just flip one or two numbers, ones in there. Can you give us the cash flow and CapEx? I apologize if I missed that. And then the ending headcount?

Yes. So operating cash flow was a negative $1.4 million, and CapEx was $1.3 million.

And the headcount?

And then the ending headcount was just about at where we averaged there in the quarter at the -- I think we were one or two above that, the 686, I think we were at 687.

Okay, great. Thank you.

Yes.

Joseph Foresi with Janney Montgomery Scott.

Hi, my first question here, and I know that you've kind of talked about this and forgive me if I missed it, but when do you expect the large contracts to grandfather? In other words, what's the run rate or the tail on them and when you think that you'll start to see some better comps?

Yes, Joe, so I think that we've generally described these things as, when we have larger jobs that they sort of scale down to sort of half their size when they start scaling down over a period of a year or so and then can have a tail that can go out beyond that, depending on the situation. I think we've seen the beginning of some of that step down as I mentioned. Not really big enough to have an impact here, but because of -- we were able to backfill the business, but I think we just expect that to, each quarter to be another little bit down, but we're not looking here. We don't have visibility as to any cliffs or anything like that. We expect this to be a fairly gradual step down.

Okay, so --

I mean, Joe, around that area, I think what tends to happen in the work that we're involved in that are in litigation or regulatory processes is that those are the dictating events that occur, is that you have litigation events occur of trials or settlements or other things and the same goes around regulatory compliance events that are met or agreed upon at times. And then usually there is activities even around and beyond those events to meet the agreed upon terms of those events.

So I mean just to -- so I can conceptualize it, no drop off, a gradual step down, and I would assume later this year sort of towards the back half you would expect the numbers to sort of normalize. Is that a fair characterization?

I think that's fairly reasonable.

Okay.

To the extent that we have that visibility, Joe. I mean these are -- these processes are a little bit unpredictable, I think, as you know, but that's the way we see it.

Okay. I wonder if you could, just to switch gears, talk about maybe some of the areas that you talked about as being strong for you? As you look to add headcount in 2012, what areas are you looking to add that headcount? And maybe you could give us some framework around where the demand is really strong right now?

Sure. I think a couple of them are areas that I mentioned. The sort of regulatory area around chemicals, pesticides, food issues and so forth. That's an area, the REACH regulations in the EU, that whole area both in the EU and the US, except obviously not REACH in the US, is an area that is growing well for us. We have strong demand. We expect to continue to be able to add headcount there.

I think in some of the other proactive areas we mentioned that sort of consumer electronics area is strong. We think that there's sort of a range of projects that include consumer electronics, it includes medical devices, it includes various kinds of computer technology and so forth. And I think that those represent areas that we would -- we feel are strong and we're looking to grow. And then that's sort of on top of areas that we've sort of described I think over sort of a broader time period, areas that we are interested in continuing to expand, sort of more broadly in design consulting and more broadly in a variety of health services. And then finally I think that the utilities area and pipeline safety and some of those areas are things that we're also seeing work being driven toward.

Okay. As-- if you would take out some of the larger projects, how would you describe the fundamental, the growth trend and the fundamentals behind your core practice? Are we seeing a normalization, are we seeing an acceleration just as we've seen some stabilization in the economy? I know there's been some puts and takes from a macro level.

Yes, so I'd say that there are some sector effects here. I think that in the practices that are driven off of infrastructure for us in sort of construction and building construction, civil engineering, those kinds of areas, those tended to be more flat for us. We still have not been able to see sort of an increasing demand there, at least not in a sustained way. So I would say that that's sort of more flat. I think some of the more traditional areas in some of the vehicle litigation is not as active as it was in some past years. But all of that is being more than made up for by the areas that are strong in the Company.

Okay. And then just going to sneak one last one in here, Rich, maybe you could just talk about a little bit in the pipeline in the products business? I know you've given us some color in your prepared remarks and maybe you could just refresh us on sort of what your expectations are from that pipeline over the next maybe 12 to 18 months?

Yes, so as I indicated because we have very little in hand just some carry over from the projects of last quarter, we actually expect to have only a small amount of product fills; $200,000 here in the second quarter. We are -- we've got a number of, or let's call it a handful of proposals in right now with clients who we've historically gotten work from where they've come and made a request for us to provide them a proposal on surveillance systems, so that does give us some hope that we should see that pick up in the third and fourth quarters.

We have also a vehicle stopping technology product that we did a small lot production on and was part of our product sales in the first quarter and some in the fourth, but was there. We'll see how those get traction over in Afghanistan going forward. But again that's a small amount right now. Our feeling about finishing out the year is that I think we could see revenues in the somewhere between $1 million and $1.5 million per quarter in the third and fourth quarters, which then would give us numbers for the full year that would be close to where we were last year, about $4 million.

Perfect. Thank you.

Tobey Sommer with SunTrust Robinson Humphrey.

Thank you. I was wounding if you could comment on the demand on the proactive side of your business? In the prepared comments I think you cited consumer electronics but just from a broad perspective, what are you feeling like in terms of product launches and other things that might indicate increasing demand in that area?

Well I think, Tobey, the reason that we have had strong support in that area is because it is so fast moving there are practically continuous product launches. The amount of new technology that's being driven into consumer electronics and the new versions of things that come out that there's just sort of a constant flow of that business. And so I think as we look ahead, we don't see any particular, what I'll call overall change in that dynamic. We think that the clients that we have that want to continue to stay ahead and enhance their positions in the marketplace are always spending a substantial amount of revenue on -- or a substantial amount of money on new product development and that's what feeds our services that just continues to be very robust.

I think -- this is Rich, I think when you look over on the work that we do in regulatory support, which is also around clients either putting new products into marketplaces or meeting the increased regulatory scrutiny or clamp down here, that's where client -- because of the regulatory environment that is seen around controlling these both in the European Union and in the US, clients are in need of more sophisticated help. People who really do understand the science and can do the scientific studies that are necessary to go out in and do the -- get those submissions done and explain the results to regulators and the scientists that are on the government side. So as the regulatory environment picks up, as they get more -- as that gets to be more complicated, it lends itself well to needing more technical consultants involved just as versus pure people with regulatory experience only.

Thank you, that's very helpful. And then I wanted to ask a question about demand in the energy practice and in kind of in that arena. Have you seen much in the way of business either stemming from concerns about -- stemming from I guess the event in Japan and I was wondering if the massive amount of natural gas that we're developing in the US is stimulating any demand as well in terms of infrastructure and so forth?

Yes, good questions. With regard to Japan first, I think as we've indicated before, we've had some work over there, but not a significant amount that has really been driven by, directly by the events in Japan. It would be very different if an event like that happened in the United States, but hopefully it won't.

With regard to sort of shale gas and sort of the expansion of gas over here, the answer is that we do see that as a significant opportunity. The sort of technology around fracking and some of the issues that are out there and issues and concerns that various parties have with regard to ground water contamination and various other risks associated with fracking, we do think that that represents an opportunity. That opportunity hasn't really played out yet. It's I think still developing. We are participating in that. I think we're recognized in that marketplace, but that marketplace has not really blossomed yet. So it's really a little bit early to tell, but it's certainly something that we feel we're engaged in.

Thank you very much.

(Operator Instructions) David Gold with Sidoti & Company.

Just a couple to follow up with you on. So Rich, on the Defense side, it sounds like basically the big variance you look for year to year would be -- would come in the third quarter, basically the pick up from maybe what we didn't quite see in the first quarter, it sounds like it comes in the third, is that right?

Yes, I think it would come across the third and fourth quarters, hopefully we don't have anything in hand at this point in time, but we would hopefully see something there in the -- coming into play in the third quarter, yes.

Okay. And then on the proactive business side, presumably, I mean you've been working I guess for some time pretty successfully at growing that portion of your business, has it changed enough where the metrics or the percentage are any different from the historical or is it just on its way still?

I would say that it's on its way, but it's not something where we've come out now and been in a position to say that we're -- now have it at 40% of the market versus 25% before. I think we feel that it is -- it was growing faster than the reactive side of the business prior to the downturn in the economy. It grew slower than the reactive side during the slower time in the economy and we're beginning to see that pick back up where our expectations are that it can grow at a higher rate than the reactive business. So I think we've sort of stepped in and stepped back, but I think we didn't -- the amazing thing-- the good news for us is that it's not that we saw a big decline in that area, which most companies who are doing proactive work saw in the downturn, but we didn't see it keeping up with our reactive side.

Yes, okay. So then on the flip side, in fact it sort of, it held pretty well but you're now starting to see at least the signs or the indications of early pick up. Would you attribute that-- what would you read through either for the economy or for your business as a whole?

I think for our business, this is the types of things we need to have to be able to continue to believe that we have a business model that's going to allow us to hopefully be able to see high single and preferably low double-digit organic growth in our business here. We think we've done pretty well over the last few years pulling through on with the reactive sides of the -- holding on the proactive and building on the reactive side. And we're encouraged that as we look out over the next several years, hopefully as we work through this, we'll be able to see the proactive side of our business grow as a percentage of the business and grow fast -- and as such, grow faster than the other parts. But -- and we think by the clients that we're working with, that are only going to stay on their game if they advance technology as things -- you either bring electronics into traditional products, such as vehicles and such, or if it is consumer electronics where clients are trying to make things smaller and faster and as such generate a lot more energy, you run into a technology challenges there.

And probably the last is really how do we continue to advance technologies that are being put in the human body as medical devices or pharmaceutical delivery systems. So we're encouraged by those marketplaces being ones that are going to advance here in the short term and over the long term, and we think we've got some of the right people and can build upon that to see our business grow.

Got you, perfect. Thank you.

Thank you. There are no further questions at this time. Ladies and gentlemen, this concludes the Exponent's first-quarter fiscal 2012 earnings conference call. If you would like listen to a replay of today's conference, you can dial 303-590-3030 or 1-800-406-7325 and enter the access code of 4531659 followed by the pound sign. We thank you for your participation, you may now disconnect.