Exponent Inc (EXPO) 2013 Q4 法說會逐字稿

Welcome to the Exponent fourth-quarter and FY13 earnings conference call. During today's presentation, all parties will be a listen-only mode. Following the presentation the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, February 5, 2014. Would now like to turn the conference over to Erica Abrams of The Blueshirt Group. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's fourth-quarter and FY13 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 any 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 risks and uncertainties, and that actual results may vary materially from those discussed here.

Additional information concerning factors that could cause actual results to differ from the 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-K for FY13. 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. Paul, please go ahead.

Thank you for joining us today for our discussion of Exponent's fourth-quarter and FY13 results. For the quarter, we increased net revenues by 6% to $69 million, and net income by 3% to $8.7 million, or $0.63 per share. For the year, we increased revenues by 5% to $280 million, net income by 4% to $38.6 million or $2.76 per share, and generated operating cash flow of $61.8 million.

We are pleased to have delivered solid financial results in 2013, with continued revenue and net income growth, and strong cash flow from operations. This performance allowed us to continue to return value to shareholders, through share repurchases and the initiation of dividend payments. Over the year, we had notable performances from our polymer science, mechanical engineering, biomedical, engineering management, and construction consulting practices.

During 2013, we continue to build upon our leading position in reactive services, where we investigated accidents ranging from the collapse of a major industrial facility to a home fire, evaluated potential product recalls, including home appliances and food products, and assessed the health and environmental exposures for oil and gas operations. Additionally, we expanded our market recognition in proactive services, where we provided design consulting for products ranging from tablet computers to drug delivery systems, assisted clients with regulatory matters involving toilets and cosmetics, and worked with clients to develop risk management programs for gas distribution systems. We are pleased that the underlying growth in 2013 was in the high single digits, although this was partially offset by a gradual step-down in a few major assignments, and reduced defense consulting and product sales.

In summary, we delivered a solid fourth quarter and fiscal year. We are excited about our growth opportunities in both reactive and proactive services for 2014 and beyond. Now, Rich will provide a more detailed review of the financial performance.

Thanks, Paul. For the 14-week fourth quarter of 2013, revenues before reimbursements, or net revenues, as I will refer to them from here on, were $69 million, up 6% from $65 million in the 13-week fourth quarter of 2012. Total revenues for the quarter were $72.8 million, as compared to $72.9 million one year ago.

Net income for the fourth quarter was $8.7 million, or $0.63 per share, as compared to $8.5 million, or $0.60 per share in the fourth quarter 2012. EBITDA for the fourth quarter was $15.9 million, versus $15.6 million in 2012. Diluted share count decreased to 13.9 million, from 14.2 million in the same period last year, as the result of our ongoing repurchase activity.

For the 53-week FY13, revenues before reimbursements were $280 million, up 5% from $266.6 million in the 52-week FY12. Total revenues for 2013 were $296.2 million, as compared to $292.7 million in 2012.

Net income for 2013 was $38.6 million, or $2.76 per diluted share, an increase of 4%, as compared to $37.2 million, or $2.60 per diluted share reported in 2012. EBITDA increased 4% to $68.8 million, versus $66.1 million one year ago.

Turning to more details of the quarter and year, in the fourth quarter of 2013, defense technology development had net revenues of $3.2 million, and no product sales. In comparison, in the fourth quarter of 2012, net revenues were $4.3 million, of which $2 million was product sales.

For the full year 2013, net revenues in defense technology development were $13.1 million, of which $200,000 was product sales. In comparison, for the full year of 2012, net revenues were $17.6 million, of which $3.1 million were product sales.

For 2014, we expect revenues from defense to be lower than in 2013, due to constraints on defense spending, and the reduction of forces in Afghanistan. Utilization in the fourth quarter was 66%, which is in line with what we expected for our seasonally slower quarter.

The extra week we picked up in the quarter included the New Year's holiday and vacations, which further impacted utilization. This compares to 69% in the fourth quarter 2012.

Utilization for the full-year of 2013 was 71%, as compared to 73% in the prior year, reflecting a step down in a few major assignments, and a decline in our defense business. For 2014, we expect our utilization to be slightly lower than in 2013, as we continue to see a step down in major assignments in defense spending.

For the fourth quarter of 2013, billable hours increased 7.4% to 269,000. For the year, billable hours increased 3.4%, to 1.079 million.

For the fourth quarter, technical full-time equivalent employees on a year over year basis were up 3.8% to 731. For the full year, we are up 4% to 719. For 2014, we expect year over year headcount growth to be approximately 3%.

Our realized rate increase was approximately 2.5% for 2013. For 2014, we expect to realize a rate increase of between 2% and 2.5%. EBITDA margin for the fourth quarter was 23% of net revenue, as compared to 24% in 2012. For the full-year 2013, it was 24.6%, as compared to 24.8% in 2012. The year over year decline is related to lower product sales and utilization.

For the fourth quarter, compensation expense, after adjusting for gains and losses in deferred compensation, increased 8%, including the extra week. Included in total compensation expense is a gain in deferred compensation of $1.9 million, as compared to $130,000 in the same quarter of 2012.

Gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line. For the year, adjusted compensation expense increased 7%, with a gain in deferred compensation of $6 million, as compared to $2.2 million in the prior year. Stock-based compensation expense in the fourth quarter was $2.3 million, and the full year was $13.2 million. For 2014, we expect this to be approximately the same.

Other operating expenses in the fourth quarter increased 6% to $6.5 million. Included in other operating expenses is $1.3 million of depreciation. For 2014, other operating expenses are expected to be $6.5 million to $7 million per quarter.

G&A expenses in the quarter were $3.9 million, as compared to $4 million in the same quarter in 2012. For 2014, G&A expenses are expected to be $3.7 million to $4.2 million per quarter. Our income tax rate in the quarter was 40.5%. For the full year 2013, the tax rate was 39.7%, as we benefited from a one-time tax deduction in the third quarter, which creates a tough comparison for 2014, as we expect our tax rate to be approximately 40.5%.

For the quarter, operating cash flow was $28 million, and for the year, it was $61.8 million. At year-end, our cash and short-term investments were $156.1 million. In 2013, we repurchased $25 million of our stock, for a total of 438,000 shares, at an average price of $57.10. We still have $31 million authorized and available for repurchases under our current repurchase program. Additionally, during the year, we distributed $7.9 million to shareholders through dividends.

Capital expenditures in the fourth quarter were $1.6 million, and $6.2 million for the year. DSOs at year-end were at 83 days. For 2014, we expect growth in revenues before reimbursements to be in the low single digits, and EBITDA margin to be down approximately 100 basis points from 24.6% in 2013. As we have previously communicated, we anticipate a further step down in a few major assignments in 2014. Additionally, in 2014, we expect the reduction of forces in Afghanistan will impact our defense business.

Furthermore, our growth in 2014 will be reduced, because of having one less week, as we return to a 52-week year. As a reminder, in the second quarter of 2013, we recognized net revenues of $1.4 million related to services performed for a foreign client in the prior-year, which was recognized upon receipt of payment. I will now turn the call back to Paul for closing remarks.

Thank you, Rich. In summary, we posted a solid fiscal year overall. While we have a difficult comparable ahead in 2014, we remain optimistic about our ability to grow the business at a steady level, continue to hire talented professionals in order to strengthen and diversify our consulting practices, and address our clients' most important engineering and scientific business issues.

We remain focused on generating cash flow, maintaining a strong balance sheet, and enhancing shareholder value through stock repurchases and dividends. In turn, we announced today that the Board of Directors has increased our quarterly dividend from $0.15 to $0.25 per share.

Finally, I want to thank our shareholders for taking the time to understand and appreciate our uniquely-positioned firm. Operator, we are now ready for questions.

(Operator Instructions)

Tim McHugh with William Blair & Company.

This is Matt Hill in for Tim McHugh this afternoon.

My first question had to do with the expected step-down in margins next year. Is this a result of some of those unique items in 2013 that boosted revenue the extra week, and then that extra revenue that slid into the year? I'm trying to get at is the underlying business -- what are your expectations there for margins?

Yes. This is Rich Schlenker.

There are two things that are really the impact on margins. First is absolutely the one-time recognition of $1.4 million that we had in the second quarter. Those revenues came through to the firm, where the expense for them and the performance of the work occurred back in 2012, and just the revenue recognition was taken into the second quarter.

By the way that our bonus plan works, one-third of all pretax pre-bonus profits are going to a bonus pool, so the number that flowed down to EBITDA is more like two-thirds of that $1.4 million.

The other factor in impacting margins is a step down in utilization from, let's say, approximately 71%, down to around 70% in 2014. The reason that we feel that step down is occurring is that, as we step down in some of these larger projects, and continue to develop the underlying business, we feel that utilization, that we could get a slight step down in the utilization here. That also has some of the impact on margins.

Okay. Thanks.

In the press release, I think you called out some notable performances in some of the segments for the year. I was just wondering how those finished up at the end of the year?

Were they still pretty strong? Are you seeing any different trends, or any emerging areas where you are seeing some strength coming through?

No. I think that those -- the ones that we noted -- polymer science, mechanical engineering, biomedical, engineering management, and construction consulting practices -- those have continued strong through the year, and I think they are still strong. But, I don't see a change from that standpoint.

Okay. Then just one more.

On the large projects, did those come in what you were expecting, with the step down in the fourth quarter? Or did any of them end up being a little stronger than you thought?

Well, I think, as we went into 2013, we were expecting more like an average of a couple of percent in revenue of each to step down. They had stepped down a little bit, but we expected more step down.

They did all step down some during the year, at different stages. But they didn't step down as much last year as we had anticipated, which is why we still feel there's a little bit of residual step down that is left for 2014, and has affected our guidance.

Okay. Thank you very much.

David Gold with Sidoti.

Just a little bit of follow-up there, particularly on the three big assignments.

Can you give some sense -- I know there were obviously different drivers for each, and it seems like at least one of them was maybe nearing its natural end, while some others picked up new life. I'm not sure if you can speak specifically to them or not, but can you speak about a couple of things?

One, give us a sense for -- even broadly -- where the three are? And how much of revenue they made up for you in 2013? And what you think they will do for you in 2014?

So, I think what we are seeing is that, overall, these three areas -- three particular things -- are still making up something like -- it's probably right around, I would say, 12% of our revenues, somewhere in that range; maybe a little bit less.

So, as we've said before, we would think on average, these projects, large projects, tend to be 2% to 3% of revenues. We've seen them step down into the 3% to 4% of revenues range, and we are continuing to see levels of activity, I think.

In general, what I would say is, the matters that are -- let's call it, in litigation -- a lot of them are public. And what you see is that there is continual -- matters that get resolved, either through the court process, or settlements that come along. So, things have continued to, I would say, step down over time in those areas.

I don't know if you have any further thoughts, Paul?

Yes. I think one of those projects we've really -- it's almost difficult to decide how much is part of the assignment, because a lot of our revenues have diversified out from matters related to what I might generally call the event itself. But, in the other two, I think they fit more into what Rich is describing.

They all have multiple litigations in multiple forums. And some of them have settled, and some of them haven't; and there's ongoing work. I think from that standpoint, we are just expecting that overall, that group will go down by 1% each this year.

You said 1% each this year?

About 1% each, on average.

Got you. Essentially, we would exit the year with them representing closer to 9% of revenue?

Yes, less. I think Paul is right. Probably, as I'm describing it, it's really -- those percentages include the fact that we've diversified within those clients.

As such, over time, what is related to the individual matter becomes less clear. But I think that if the numbers, let's say, are in that, let's call it somewhere between 10% and 12%, that are more directly tied in there, you will see something that's probably more directly tied, that would be down in the high single-digit range -- 7% or so, when you look at it a year later.

Got you, all right. Let me ask it a different way.

Are we exiting the year -- did we exit 2013 with those projects at a 12%, let's say, revenue run rate?

No. We exited the year with these projects that are more in what I would describe as being around 10% range.

Okay. All right.

Maybe a little less; maybe a little bit less than that. The challenge is, David, things become splintered off, which is the good news. Just a reminder to everybody, what we've talked about over a long period of time is that, clearly, you have large matters that have very intense periods of time. They begin to move along.

Examples that we've used before is that, when you look at work that we've done in the automotive industry, where there is a big, large investigation, that issue tends to be a central issue for that industry and that client for many years to come. As such, our work in that area continues, and hopefully our relationship with those clients continues going forward -- maybe not at the same level it was during the intense matter, but it continues on.

On the environmental side, we were working on Exxon Valdez issues 15, 20 years later. Not at the level that we would have been at the onset, or in the early years; but again, there are long tails to these matters.

In the utility market, it's really about not only helping people with an individual incident, but identifying areas for where they can improve their processes and systems, and being able to help them with that. In each of these areas, we are in different points of transition there. It just means that, while it's not going to go from where it was to zero, it's going to settle somewhere in between.

Got you, okay.

Then, looking at it a different way -- I guess, to your point, Rich, the step down is something that has come up on these conference calls for, I want to say, the last two years. How much confidence do you have that could we see some run-off versus maybe more conservatism, as you think about this year's guidance?

Obviously, you are already seeing some movement there. But, do you think, is it more a function of being conservative? Or are we pretty confident we are going to see that run-off?

I think -- look, we were confident last year we were going to see a certain amount of run-off. It turned out we didn't see as much as we had originally thought.

But, I view that -- look, we try to give our best estimate when we start out the year. Things can change over the year. We tried to do that last year; there were some things that changed, like the step down didn't occur as much as we thought.

So, I'm not going to attribute this guidance to us being especially conservative. I think it just follows our normal pattern of us calling it the way we see it. In hindsight, we appear to have been conservative. But it's just based on our judgment.

Sure. I mean, to clarify, certainly not a complaint. We generally rather you prepare us as you have, and if there's upside, that's terrific.

One last one, and I will turn it over.

As you think about the business today, reactive pursues proactive, can you give us a sense of how much -- what the split is? And how much that has changed over the last year?

I think it's actually difficult to measure this change quarter by quarter or even one year, a year to the next year, just because of projects coming and going. I would say, we still very much believe that the proactive side of the business is growing faster than the reactive side of the business.

We are not yet ready to change the split that we've recently described, which was 60% reactive and 30% proactive. But it's not that long ago that we were 65%/25%. So it has moved and I think it's continuing to move, and we feel that, that's the right direction.

We feel there's a huge amount of untapped opportunity on the more proactive side. The reality of Exponent is that it's actually, really, I would say, very well-known among many of the large companies and law firms that deal with reactive issues, whether they be product recalls or whether they be litigation.

On the more proactive side, we are still working on getting our market recognition. We are well-recognized among certain clients, but we've got a long way to go. So, we feel like there's definitely more potential on that side.

I can't give you just a change over a short period of time.

Sure. Perfect. All right. Thank you both.

Joseph Foresi with Janney.

I wonder if you could talk about -- if we break down the mid single-digit growth versus what you're giving for guidance, it sounds like there's a couple of different puts and takes. I'm wondering, how much -- if you could quantify, how much is defense creating headwind? How much is what we just talked about, with the step down in large projects creating a headwind? I wonder we could get a feel for both of those pieces in the present guidance that's out there.

Yes. It is what it is. We think that the underlying business is growing in the high single digits. I think that's what we shared throughout last year, and we continue to feel that way today, and as we look at the opportunities going forward.

The offset to that is that we had an extra week in the year. That wasn't a full robust week, because it had some holidays in it. So I look at that week as about 1 1/4% of revenues type of thing that we won't have this next year; so that's part of the offset. It's also part of the gain that we had in the 5% this year.

We also had $1.4 million from this one-time revenue recognition in the second quarter. That's a half a percent of our revenues. So, those together, let's call it 1.75% to 2%.

We expect that each of defense, as well as the three major engagements that we've talked about that are stepping down -- so, four different components that are each coming down about 1% of our revenue. So, somewhere around -- it's stepping down about maybe $3 million each, as you look at it in that vein.

So that's on average of what it will be. That's how we are looking at it. So that's how you end up getting from the high single digits down to the low single digits -- by taking into account that with approximately 6% differential there.

So, essentially --

If you look at 2013, you would take off the 53rd week, take off the extra $1.4 million, you are somewhere around -- you are in the 3% to 3.5% range. And that came relative to, again, the fact that we feel we were growing in the high single digits. We ended up having defense in some of these other few areas step down, let's call it, 4%, 5% in the year.

So, essentially, a 6% headwind from the extra week, the revenue recognition; and then the remaining 4% from the defense and the major engagements. Is that fair?

Yes.

Okay. Then, you make up maybe 2% or 3%, because the core business is growing in the high single digits, which gets you to where the guidance is. Is that right?

That's correct.

Got it. That's helpful.

On the product business side, we have talked about maybe rebuilding the pipeline there. But now it sounds like defense is maybe a little bit more of a headwind than it was before. Have you revisited the military product business at all? Are there any expectations for that going forward? Or given where defense is, we shouldn't expect that to pick up?

Again, the majority of the revenue that we recognized as products revenue over the last several years had been related to the surveillance system that we had developed as part of our work for the rapid equipping force. I don't see that coming back. That has stepped down, as they are beginning to pull out of Afghanistan and not needing to replenish their supplies there, and such.

We still are engaged in the ground-penetrating radar technology area. That has been an area where more of our work has been around development. While there are systems in place that are being used, our work in those areas has been more on a percent complete or consulting basis, even though we might deliver one or two here or there.

What I would say is that technology has become adopted by the UK. There are other ministries of defense in Europe and other parts of the world, that are looking at that technology, and how they should use ground-penetrating radar going forward, for IED detection.

But while we expect to continue to support the UK, and continue to be a recognized consultant in IED detection, and in specifically in ground-penetrating radar, I am not, at this time, building anything into expectations about product sales there.

Could something change in that area? Is there an opportunity? Absolutely there is. But it is a little uncertain and lumpy to build that into the expectations at this time.

Okay. Just lastly for me, maybe you could talk a little bit -- we've been talking about where the [dregs] are coming from.

Could you talk about the areas that you are excited about? It sounds like your pro-cyclical business has started to pick up, and maybe it was growing faster than what was expected. Maybe you could just talk a little bit about what drivers you see out there, outside of what you called out in the quarter?

I think that we continue to be excited about what we're doing in biomedical engineering and medical devices. That area grew really quite fast last year, and we expect continued growth there.

We are optimistic about spreading more of our engineering management consulting practice, a lot of which is focused toward utilities. And much of that is being focused towards one large utility in California here, where we had a major assignment. But we have some opportunities, we think, in expanding that more broadly to other utilities. So we are certainly excited about that.

We continue to be excited about what we are doing in the area of consumer electronics, and we think that there are some further opportunities geographically with regard to what we do there. I think you are aware that we are in China in order to support US companies having products manufactured in China.

But they also run into problems in Europe, and other places where the products are being used, and they've got a desire for us to help them more broadly. So, we think that is exciting.

Going back to the health side, which wasn't a strong year for us in health. But we are excited about a particular new hire that we've made, that will help lead us in the direction we've been talking about for some time, with regard to the pharmaceutical industry and the health outcomes research. I don't expect that all to click in first quarter, but I think is the year develops, we may be able to do some things there.

So, continued to have a lot of good opportunities that aren't just really set up for this year. They're set up for this year and beyond.

Okay. Thank you.

Tobey Sommer with SunTrust.

Could you describe what your hiring plans are in 2014?

Sure. I think that you probably are aware our preferred focus on hiring, from a long-term standpoint, is that we hire people either straight out of school, coming out of PhD programs, or people a little further along than that, that maybe have got some experience in either industry or government.

From there, we hope to grow them from an entry engineer or scientist position, all the way up through becoming a principal in the firm. That's our model. We are very active on about 10 campuses around the country, and focusing on getting some of that top talent.

We think that we've got a reasonable backlog of acceptances here as we head into this year. So we are very much -- even though the overall growth rate for the firm might only be in low single digits, I think we're looking beyond that with regard to the way we are hiring, which is part of why -- I think Rich mentioned our utilization may drop a point.

Then, on the senior end, we are always looking for senior people who have got a consulting background or book of business who might come in as sort of a lateral into the partnership level, or principal level, we call it here. We have actually some retained searches. We've got some particular niches we are looking for there.

We've made a couple of hires through that, one of which has already started, one of which will be starting in March. And we will continue to look for some of those senior hires. So, we have, I would say, a solid hiring plan in place for this year.

Thank you.

Rich, just a numbers question, if you happen to have it handy. If not, we can do it off-line.

Do you happen to have the revenues by segment?

Yes, I do. So, did you want the net revenues or the gross revenues?

Gross, I believe.

Okay. I will give both, so everybody on the call can have it. On the total revenues, or gross revenue level -- for the quarter, is that you wanted? Or the year?

Quarter, please.

Okay. For the quarter, the gross revenues were, in the environmental and health area, they were $20.2 million; and in the engineering and other sciences, it was $52.6 million. On a net revenue basis, environmental and health was $19.6 million; and the engineering area was $49.4 million.

Thank you. I had a question for you.

In prior calls, you described one of the areas that you might want to add some folks was software, because more and more of, whether it's autos, or other industries, were relying more heavily on that.

I was curious if you could describe what you feel like your capabilities are in that area? If you've improved them over the course of 2013?

Then, what your capabilities may be in helping customers deal with cyber-related issues.

Yes. We really don't call it just software, we really call it computer science. It certainly includes software issues, but includes things beyond just what we would generally consider to be software.

Where we are on that is that we believe we have substantial capability, in terms of evaluating embedded software in products, and how that might relate to any alleged failures that might be associated with that. For example, the unintended acceleration issues with regard to Toyota. That was one of the key areas.

So, we think that's an area that we have substantial expertise in. However, we think that, that's very much a growing field, just because more and more products are controlled from a computer science and software standpoint. So we continue to be looking to add and grow in that area.

In things like cyber security, the reality is, we do certain amounts of security work associated with some of the work we do for the US government, with regard to smart cards and some other things. So we do have some capability there. We would like to build, and we are trying to build a much more comprehensive service offering there.

Again, to be clear, we don't have in mind trying to, as it were, create software products or services that we would sell. We are really interested in providing consulting help in those fields. This is also one of the areas where we have retained search, and we are looking for some senior people in this area to help jumpstart that area.

Thank you, that was helpful. My last question is another numerical one for Rich.

I have to apologize if I missed it -- did you give the bill rate growth, and maybe what your expectation would be embedded in your guidance? Thanks.

The average rate, the increase that we realized on the year, was about 2.5%. And we felt that this year, that we would realize somewhere between 2% and 2 1/2% again. The way that works for us is that we do have one rate for each employee, for the entire year; so we've gone through that evaluation of rates in the fourth quarter, and set our rates for 2014 in January.

The average rate that is increased for our existing employees was about 4%. As you bring in more junior people on average than the ones that are rolling out, that blends down to a realized rate of 2%, 2 1/2% for the overall year.

Operator?

I apologize. At this time, there are no further questions in the queue. This does conclude our conference for today.

If you'd like to listen to a replay of today's conference, please dial 303-590-3030, or 800-406-7325, and enter the access code 4662005. We would like to thank you for your participation, and you may now disconnect.