Exponent Inc (EXPO) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Exponent First Quarter Fiscal 2014 Financial Results Conference Call. During today's presentation all participants 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, Tuesday April 23rd, 2014. So now I'd like to turn the conference over Erica Abrams. Please go ahead.

Thank you, Katya. Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's first quarter 2014 results. Please note that this call will be simultaneously webcast on the Investor Relation section of the Company's corporate website at www.exponent.com\investors.

This conference call is the property of Exponent and any taping or other reproduction is expressly prohibited without Exponent's prior written consent. Joining me on the call today are Paul Johnston, President and Chief Executive Officer, and Rich Schlenker, Executive Vice President and Chief Financial Officer of Exponent.

Before we start, I 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 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 most recent Form 10-K. The forward-looking statements and risks 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 would like to turn the call over to Paul Johnston, President and Chief Executive Officer of Exponent. Paul, please go ahead.

Thank you. Thank you for joining us today for our discussion of Exponent's first quarter 2014 results.

For the quarter we increased net revenues by 6% to $73 million and net income by 15% to $9.2 million or $0.66 per share. We are pleased to have delivered solid financial results in the quarter with continued revenue and net income growth.

For the quarter we had notable performances in several practices. In our polymer science practice we evaluated materials for medical devices, consumer electronics and textiles. In our biomedical engineering practice we assisted clients with addressing issues of compatibility between their devices and MRI and RF equipment. In our environmental practice we continued our work on assessing the impact on an oil spill and in our construction consulting practice we helped clients manage significant capital projects.

During the quarter, two of our three major assignments stepped down into normal range for large projects of 2% to 3% of revenue with the remaining major assignment being in the 3% to 4% of revenue.

In summary, we delivered a solid first quarter. We are focused on returning more value to shareholders through share repurchases and the continuation of a quarterly dividend of $0.25 per share.

We remain optimistic about our long-term ability to build upon our differentiated market position as a leading multi-disciplinary engineering and scientific consulting firm.

Now, Rich will provide a more detailed review of our financial performance.

Thanks, Paul. For the first quarter of 2014 revenues before reimbursements or net revenues, as I will refer to them from here on, were $73 million, up 6% from $69 million in the same period of 2013.

Total revenues for the quarter were $76 million as compared to $72.7 million one year ago.

Net income increased 15% to $9.2 million or $0.66 per share as compared to $8 million or $0.56 per share in the same quarter last year.

EBITDA for the first quarter was $16.6 million versus $14.6 million in 2013. Diluted share count decreased to 13.9 million from 14.1 million in the same period last year as a result for our ongoing repurchase activity.

Turning to more details of the quarter, defense technology development had net revenues of $3.2 million and no product sales. In comparison, in the first quarter of 2013 net revenues were $3.9 million of which $200,000 was product sales.

For the full year of 2014 we continue to expect revenues from defense to be lower than in 2013 due to constraints on defense spending and the reduction of forces in Afghanistan.

Utilization was 72%, which is equal to the same quarter last year. For the full year of 2014 we expect our utilization to be slightly lower than in 2013, as we continue to see a step down in major assignments and defense business.

For the quarter billable hours increased 3.5% to 274,000. Technical full-time equivalent employees on a year-over-year basis were up 3.4% to 732. For the full year of 2014 we expect year-over-year headcount growth to be approximately 3%.

Our realized rate increase was approximately 2.5%. For the full year of 2014 we expect to realize a rate increase of 2% to 2.5%.

EBITDA margin for the quarter was 22.8% of net revenue as compared to 21.2% in the first quarter of 2013.

For the quarter compensation expense after adjusting for gains and losses in deferred compensation increased 4%. Included in total compensation expense is a gain in deferred compensation of $700,000 as compared to $2.1 million in the same quarter of 2013.

Gains and losses in deferred comp are offset in miscellaneous income and have no impact on the bottom line.

Stock-based compensation expense was $5.3 million, which is flat with the same quarter last year. For the full year of 2014 we expect this to be approximately the same as 2013 at $13 million.

Other operating expenses increased 3% to $6.3 million as compared to $6.1 million in the same quarter of 2013. Included in other operating expenses is $1.3 million of depreciation. For the remainder of 2014 other operating expenses are expected to be $6.5 million to $7 million per quarter.

G&A expenses increased 8% to $3.7 million as compared to $3.4 million in the same quarter in 2013. For the remainder of 2014, G&A expenses are expected to be $3.9 million to $4.2 million per quarter.

Our income tax rate was 40.4% as compared to 40.9% in the same quarter in 2013. For the full year of 2014 we expect our tax rate to be approximately 40.5%.

At quarter end our cash and short-term investments were $137.5 million. As a reminder, we pay out our prior year accrued bonuses in the first quarter of the year. In the first quarter we repurchased $7.6 million of our stock for a total of 103,000 shares. We still have $23 million authorized and available for repurchases under our current repurchase program. Additionally during the quarter we distributed $3.3 million to shareholders through dividends.

Capital expenditures in the quarter were $915,000. For 2014 we continue to 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 a reminder, fiscal 2013 was a 53-week year and as such included an extra week of activity. For the second quarter and full year of growth in revenues before reimbursements will be reduced because of a step down in a few major assignments and lower defense spending.

Additionally, in the second quarter of last year we recognize $1.75 million in revenues related to a contract in our Health and Environmental segment of which $1.4 million of work was performed in the fourth quarter of 2012 and $350,000 of work was performed in the first quarter of 2013. Due to concerns about collectability, we waited to recognize revenue until we received cash, which occurred during the second quarter of 2013. This incremental revenue contributed $1.75 million to revenues before reimbursements, $1.2 million to EBITDA, $700,000 to net income, $0.05 to EPS and 2 percentage points to utilization.

An additional challenge for the second quarter comparison is the fact that this year's second quarter includes the July 4th holiday and associated vacations while last year this was part of the third quarter. This will further depress utilization two to three percentage points.

Altogether this will result in the second quarter's utilization being down four to five percentage points from 75% in the same quarter last year. As a result, revenues in the second quarter will be slightly lower than last year.

I will now turn the call back to Paul for closing remarks.

Thank you, Rich. In summary, we posed a solid first quarter. While we have a difficult comparable ahead in 2014 and particularly in the second quarter, we will continue to hire talented professionals in order to strengthen and diversify our consulting practices and address our client's 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.

Operator, we are now ready for questions.

Thank you, sir. (Operator Instructions). Our first question comes from the line of Tim McHugh with William Blair & Company

This is Matt Hill in for Tim this afternoon. Well, I won't specifically ask you about the large auto recall going on. Just kind of setting the scene, talking to the clients is there any concerns out there of regulators and law makers taking the more stringent approach to some of these recalls that maybe that could generate some incremental work going forward for you guys?

Well, I think that that sort of already happened to some degree with what happened with the unintended acceleration issues with Toyota. So I do think there is what one might call a sort of a change in the level of scrutiny, oversight, whatever you might want to call either that has happened or is happening as a result of this.

That by itself doesn't necessarily immediately lead to additional work. It really just depends on the auto manufacturers deciding that they want to hire us to look at a particular problem or to assist them on particular litigation. But it certainly -- I think it's fair to say that the regulatory environment is stiffening.

Okay, and then on the recruiting front, just wondering if you can give an update on any changes you're seeing in the market and then specifically maybe a little bit more detail on kind of building out the software piece of the business?

Yes, so let me sort of describe the recruiting as kind of we see it. We typically divide the recruiting activity into what we call sort of senior recruits and people that are more junior to that but senior recruits typically being principals or very close to principal level and the balance scaling down from that point.

The majority of our more junior recruits are people coming out of PhD programs that we hire into the Firm. I'd say that program is continuing to move forward well, particularly in the engineering side of our business. We continue to have a very active university recruiting program. We find that the environment is certainly competitive out there but we're still in the position of being able to get well over 50% of the people we make offers to accept positions here.

So I think from that standpoint we feel that we can handle the sort of the improvement in the outlook there from the standpoint of graduates coming out of PhD programs.

At the more senior level there are a number of areas that we are continuing to try to focus and try to identify some recruits in. One is in the computer science area that you mentioned that is one of our longer term sort of goals to improve that area. We haven't found what I will call a lead for that area here. We've make some recruits in that area but not a lead.

A couple of other areas we have found more senior people to lead them, one in the engineering management consulting practice and another in the health sciences area that we will continue to work to build out these areas that we believe represent good opportunities for growth for the Firm.

Okay great; thank you very much.

David Gold, CFA, Sidoti & Company.

I was curious if we go over a little bit where you were seeing upside in this first quarter by way of if presumably I guess from a revenue perspective revenue is pretty much in line presumably where you were picking up the upside with perhaps some of the higher margin practices which helped the bottom line. So I was just hopeful that you could speak about some of the practices that are seeing the benefit there and where presumably you're able to get some better margins and better rate.

Well, I think when I look at the first quarter I would say, David, that first of all I think the underlying growth that we've talked about, for example on the last call, as being sort of the high single-digit level we believe that's continuing. Obviously we're stepping down from that with regard to the large project we've talked about in defense and so forth but we still feel that that's there. We think that the -- particularly on the proactive side we feel that the demand is very solid in the consumer electronics area.

The medical device area we talked about our biomedical engineering practice being strong in the quarter but also on the regulatory front where we talk about our food and chemicals practice on the regulatory front also being fairly strong. So I think those continue to be some of the lead areas from the standpoint of growth.

Perfect and then on the three larger projects, so I guess the channels like if I remember right we finished the year and our run rate was about 10-ish percent and it sounds like we're now running about 8%. Is the tail off there in line with what you were expecting or it seems to me like it might be just a touch faster than where it came a quarter or so but I thought my memory could be off.

No I think it's actually pretty much in line, David. I mean I think your memory is right about the sort of the step down, a couple of percent step down, from where we were when we talked last and we think that that's sort of consistent with what we expect as we kind of came into this year. I think we felt like that there were sort of maybe three more points to step down to get those projects into -- there's a time and fit into the sort of the normal level for large projects and we haven't gotten them all down into that level but two of them are at this stage and so I think that's pretty consistent with what we had expected.

Got you, perfect. Thank you much.

Joseph Foresi, Janney Montgomery Scott.

My first question is just on the hiring. I think you said there was 3% increase to headcount. Can you be more specific in what particular verticals and/or businesses that you're looking to add those 3%?

Yes well, I mean I think if we're looking back, the 3% this year over last year that you were describing there, that headcount increase in the first quarter, I mean I think that the areas where we've seen sort of the majority of the growth is clearly being in the engineering practices. We've talked about how that's the area that we are most successful in being able to attract people out of PhD programs and grow them from there, so I think that the largest focus of hires by numbers are clearly in that area, Joe.

Okay was there any specific skillset you were looking for though? Is it healthcare oriented or auto as you'd compare it to last year?

So I would say on the engineering side it's essentially materials, mechanical engineering, electrical engineering, computer science, biomedical, all of those, less so in the auto area I would describe. And in the health sciences among the regulatory people it's sort of growth kind of what I'll call more across the board but outside of the regulatory part I think we're really looking for more strategic senior hiring in that particular area.

As we've talked before, on the engineering side most of our principals by hiring them and growing them up through the organization, whereas with the health side we tend to get most of our principals by hiring in at a senior level and so the numbers aren't so high but that tends to be what we are going to be a bit more focused on.

Got it. So I think I just to make sure that we're clear about this. I mean, given all the auto regulatory changes and stuff that we've seen in the news, it would probably be unfair to think of that business as accelerating dramatically for you as these changes take place.

I think that's a good observation, Joe, because let me sort of basically sort of describe it through a -- perhaps the way I see it. Over a number of years here what's happened is that the auto industry as a whole has, if anything, had sort of lower case counts of their typical litigation cases. However, there have been some major events that have, as it were, kept the volume up, if I could describe it that way. So things like the unintended acceleration issues or some of these major issues do bring a sort of a flurry of cases in a particular area. But the underlying number of cases that most of the auto industry seems to have has been declining over the years.

Okay that's fair. I'm glad it's clear. Just two more quick ones from me; from a headwind perspective with two of the three large deals becoming more normalized, is it fair to say that once we exit tough comps this year that you think the majority of that headwind is behind you?

Yes I do. I mean as we -- as Paul laid out I think two are moving into that 2% to 3% range. One is a little bit larger than that still and again we expect that these will continue to have long tails to them obviously at lower levels. The one other area that we've talked about that will -- that has stepped down and will continue to step down through the year is in the defense area but we believe that the underlying business here has been growing in the high single-digits.

We continue to believe that if we're growing in the high single-digit to low double-digit that we can improve our margins 30 to 50 basis points and be able to continue to grow the bottom line faster than the top line. It's just the headwinds that are there so, as we look out beyond 2014, we continue to be positive about the drivers of our business, sort of the fact that society as we've been talking about here on this call is really pressing for higher and higher standards for health, safety and the environment and technologies keep getting more and more complex that drive our business and we think those things are positive.

We think we're in a good market position. It does take good execution to achieve all this but we're encouraged about the long-term and our ability to grow both the top line and the bottom line here.

Okay and then the last one I want to sneak in just on the defense side, will we get a more normalized level as we head into 2015 and how do you feel about the products business at this point? What should we -- I know we're not assuming anything going forward but have you seen any signs of life in that business? Thanks.

First of all, I think that we are likely to sort of get to a normalized level by 2015 because I actually think that we're looking at this point in a draw down in Afghanistan through the end here in the back half of 2014, so our expectation is that our work relative to that will have normalized at that point in time.

Related to the topic of products, again you're right. We don't -- we're not building anything in there. The only thing going on at this point in time that long term could provide some upside at a certain point in time is really around ground penetrating radar and really in particular around IED mine detection that obviously throughout the world there's a lot of issues and focus around and how the technology and methods that we've applied and integrated with the UK, Ministry of Defense over the last several years and is becoming part of their core program. How that spreads into the future that will depend if there is a greater opportunity around products around IED detection. It may be just that we're doing consulting in the area but there are opportunities.

Joseph Foresi. Thank you.

(Operator Instructions). Tobey Sommer, SunTrust Robinson Humphrey.

This is Frank in for Tobey. I wanted to ask if you had the breakdown between engineering and scientific and environment in local and health.

Yes sure. I can get the metrics here as well as the revenues. So for the -- for billable hours we had 77,000 hours in Environmental Health segment and 197,000 hours for the Engineering segment. For the utilization was 66% in the Environmental Health and 75% in the Engineering. The FTEs were 224 in Environmental Health and 508 in the Engineering.

On a net revenue basis the net revenues for Environmental Health were $19.7 million and the net revenues for Engineering were $53.3 million and the gross revenues or reportable revenues were $20.1 million for Environmental and Health and $55.8 million for the Engineering.

Okay great and I appreciate the detail. Could you just update us on the percentage of the business at this point that is kind of proactive versus reactive and what you see in that proactive portion?

Yes so this is something that we don't have a -- it's not easy to get a very precise measure that is something that we do track over time but that we don't spit out as sort of a quarterly number on it. We're still in that mode where we would say that our proactive revenues are something a little north of 30%, reactive about 60% and government including defense but including other government somewhat less than 10%. So we're still in that mode. I do believe that the proactive revenues are -- continue to grow faster than the reactive but we haven't got to the point where we've changed it to a sort of a 55%, 35% ratio yet, so that's probably about as good as I could give.

In terms of the areas that are strong proactively, it's what I've talked about earlier in terms of consumer electronics and medical devices and the health regulatory area for chemicals.

Okay that's helpful and this is just a quick one. It is was there any significant weather impact during the quarter in your clients?

No I don't think that we did. I mean, like everybody else, we'll be as a consulting firm in preparing for these things we try to if our, which a lot of it did impact people's ability to get into the office, but you hope that they can work from remotely and continue to serve clients so we did not see it impacting the work flow from clients to us and I think we managed through it from our staff standpoint pretty well.

Okay and my last question is in G&A. As we look forward, I guess you guided at 3.9 to 4.2. Is that impacted in any way by step down of the large projects or what leverage do you have to change that SG&A going forward and do you expect some incremental margin from that?

So first of all I don't -- I think in the let's say the short-term sure there are things you can turn down. I think there are things that we wouldn't want to turn down because our G&A expenses include recruiting cost and marketing cost and those are -- and then of course you have audit fees and legal and insurance and all those other things but what I would call variable costs are things like marketing, recruiting, professional development, all things that we think are important to developing people, getting out there and marketing and getting new talent. So I think that what you'll see with us is that that will continue to gradually grow over time.

I think we've demonstrated over a very long period of time though that what you can expect from us is that expenses if we're growing the top line in the high single, the low double digits, that the other operating and G&A together will end up growing a little slower than revenues. And we've been able to do that over a substantial time period and we still believe that we have leverage and getting leverage out of building more critical mass at our offices by the fact that we're a small public Company and you can get leverage out of that infrastructure cost, those things can come along and allow us to improve margins over the long term.

All right great. Thanks so much.

Thank you. And, ladies and gentlemen, that does conclude our conference for today. If you would like to listen to a replay of today's call, please dial 303 590-3030 or 1 800 406-7325 with access code 4677897.

Thank you for your participation. You may now disconnect.