Exponent Inc (EXPO) 2014 Q2 法說會逐字稿

Good day and welcome to the Exponent second-quarter 2014 financial results conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Erica Abrams.

Ms. Abrams?

Thank you, Greg.

Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's second-quarter 2014 results.

Please note that this call will be 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 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 filing 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 for joining us today for our discussion of Exponent's Second-Quarter 2014 Results.

For the quarter, net revenues increased 1% to $72.3 million from the same quarter last year. Net income for the quarter increased 4% to $11.3 million, or $0.81 per share. These results are particularly notable considering the difficult year-over-year comparables.

As we indicated in our previous guidance, last year's second quarter included $1.75 million of net revenue from work performed in prior quarters. And this year's second quarter had an extra holiday, as July 4 was the last day of the quarter.

During the quarter, we experienced a steady pace of reactive project work as we assisted clients in litigation matters and product recall evaluations. We had good demand for our proactive consulting services from a number of industries.

In the consumer electronics industry, we helped clients access new product designs. In the medical device industry, we assisted clients in the evaluation of new materials. And finally, in the utility industry, we provided construction consulting services for new infrastructure projects.

We are pleased to be able to leverage our experience in cellular analysis to help clients build more reliable products. While we are the leading engineering and scientific firm providing reactive services, we are continuing to build our reputation as the go-to firm for more proactive services.

In summary, the second quarter wrapped up a solid first half. We remain focused on returning more value to shareholders through share repurchases and the payment of our quarterly dividend.

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

Thanks, Paul.

For the second quarter of 2014, revenues before reimbursements, or net revenues as I will refer to them from here on, were up 1% to $72.3 million as compared to $71.9 million in the same period of 2013.

Total revenues for the quarter were also up 1%, to $76.6 million, as compared to $75.5 million one year ago. Net income increased 4% to $11.3 million, or $0.81 per share, as compared to $10.8 million, or $0.77 per share, in the same quarter last year.

EBITDA for the second quarter was $19.7 million versus $19.5 million in 2013. Diluted share count decreased to 13.9 million from 14 million in the same period last year.

For the first six months of 2014, net revenues increased 3% to $145.3 million, as compared to $140.9 million in the same period of 2013. Total revenues year to date were $152.5 million, as compared to $148.2 million one year ago.

Also for the first six months, net income increased 8% to $20.4 million or $1.47 per share. As compared to $18.8 million or $1.34 per share in the same period last year. EBITDA for the first half of 2014 increased nearly 7% to $36.3 million versus $34.1 million in 2013.

Turning to more details. As a reminder, in the second quarter of 2013, we recognized $1.75 million in revenue related to a contract in our health and environmental segment for which work was performed in prior periods.

Due to concerns about collectability, we waited to recognize revenue until we received the 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 two percentage points to utilization in the second quarter of 2013.

For the second quarter of 2014, defense technology development had net revenues of $3.7 million, as compared to $3.1 million in the same quarter last year. Neither quarter had product sales.

For the full-year 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 for the second quarter was 72%, as compared to 75% in the same quarter last year. Year to date, utilization was 72%, as compared to 74% in the first six months of last year. We expect the third quarter's utilization to be sequentially down one to two percentage points due to summer vacations. As is typical, the fourth-quarter utilization will be in the mid-60s due to holidays and vacations. This will result in a full-year utilization of approximately 70% in 2014.

For the second quarter, billable hours decreased 1.3% to $276,000. Year to date, billable hours are up 1.1%. In the second quarter, technical full-time equivalent employees, on a year-over-year basis, were up 2.7% to 733. Year to date, FTEs are up 3.2%, in line with our expectations for the full year of 2014.

Our realized rate increase was approximately 2%. EBITDA margin for the second quarter was 27.2% of net revenue, as compared to 27.1% in the second quarter of 2013. Year to date, EBITDA margin improved to 25% from 24.2% in the same period one year ago.

For the second quarter, compensation expense, after adjusting for gains and losses and deferred compensation, was approximately flat with the same quarter in 2013. Included in total compensation expense is a gain in deferred compensation of $1.96 million, as compared to $170,000 in the same quarter of 2013. Again, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line.

Stock-based compensation expense in the second quarter was $2.6 million, which is down from $3 million in the same quarter last year. Year to date, this is $7.9 million versus $8.3 million in the comparable period. For the full year of 2014, we expect stock compensation to be approximately the same as 2013 at $13 million.

Other operating expenses in the quarter increased 4% to $6.5 million, as compared to the same quarter in 2013. Year to date, Other operating expenses increased 3% to $12.8 million from the same period one year ago. For the remainder of 2014, Other operating expenses are expected to be approximately $6.8 million per quarter.

G&A expenses in the quarter increased 2% to $3.75 million. Year to date, G&A increased 5% to $7.4 million. For the third quarter, G&A expenses will be approximately $4.5 million. This elevated level is the result of a Company-wide manager meeting being held in September. In the fourth quarter, G&A expenses will be approximately $4 million.

Our income tax rate in the quarter was 38.8%, as compared to 40.6% in the same quarter of 2013, reflecting a one-time tax credit of $340,000. Our tax rate in the third and fourth quarters is expected to be approximately 40.5%.

At quarter end, our cash and short-term investments were $144.5 million, as compared to $137.5 million in the prior quarter.

In the first half of the year, we have repurchased $14.4 million of our stock for a total of 198,000 shares. We still have $51.6 million authorized and available for repurchases under our current repurchase program. Additionally, during the first half of the year, we distributed $6.6 million to shareholders through dividend payments.

Capital expenditures in the second quarter were $1.1 million. Our DSOs were 95 days at the end of the second quarter.

The second quarter wraps up a solid first half of 2014. Putting Exponent in a position to achieve growth in revenues before reimbursements in the low-single digits for the fiscal year.

Considering our performance in the first half, we are improving our 2014 outlook on EBITDA margins by 75 basis points to being down by approximately 25 basis points from 24.6% margin in 2013. As a reminder, fiscal 2013 was a 53-week year. And as such included an extra week of activity in the fourth quarter.

In addition, 2014 growth in revenues before reimbursements will be reduced because of a step down in a few major assignments and lower defense spending, as well as the $1.4 million of revenue recognized in the second quarter of 2013 for work performed in the fourth quarter of 2012.

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

Thank you, Rich.

In summary, we have now closed a solid first half of 2014. For the remainder of the year, we will continue to hire talented professionals to strengthen and diversify our business and ultimately drive higher levels of growth over time.

We will remain focused on our key financial priorities of revenue growth, cash flow generation, EBITDA improvement, and long-term shareholder value.

Operator, we are now ready for questions.

(Operator Instructions)

Tim McHugh, with William Blair.

Yes, thank you. I guess just on the margin side, obviously extremely strong.

Your revenue was in line with expectations, so what surprised you from an expense standpoint year-to-date that caused you to revise your full-year expectation? It doesn't seem like you're hiring a lot less, but I guess just what's the cost of trying differently that makes it more positive for the full-year?

Yes, I think we had a couple of things. I think that the operating costs growth was a little bit more in line, a little bit lower here being in the low- to mid-single digits in those categories. In addition to that I think that we -- the compensation side also hasn't been growing as fast. Because the blend of employees that we've hired has brought in some younger people.

But we've still been able to keep a solid utilization through that period of time. So I think that our margin there continues to be strong.

Those were some of the contributing factors with comp being flat year-over-year for the second quarter. With just slightly higher -- with only 1% revenue growth put us in a little bit better shape than we would have thought.

As has that changed the more junior consultants I guess, is that a new trend -- is that a longer-term plan I guess? And I guess why? Is there something about where the growth is coming that you can have a bigger -- a wider staffing pyramid to support it?

Yes, I think there are a couple of things, Tim, in that area. One is we've been continuing to build him on our university recruiting program. This is something where we get what we call our junior staff, which are mostly people coming out with a PhD from a top school. We've been hiring a greater percentage of people from that program that we did maybe in the past.

The other aspect of it is I think the more proactive services allow you to have a slightly different pyramid, the way you were suggesting maybe in your question. Allow you to have a broader pyramid in terms of the size of the junior staff engagement on a particular project relative to the senior staff engagement.

A lot of the litigation projects is focused on the senior person and for the smaller cases, a very small team of junior people, but for the larger cases they also get a good-sized pyramid going.

But clearly the move toward more proactive services, which are growing faster than the reactives. And the expansion of our university recruiting program, I think has both helped in that regard.

Okay and I guess how much more room is that? Maybe just in the context of not as much for this year, but the adjusted EBITDA margin excluded stock comp approaching 30%. I know that is not the full-year target, but you've been there for the first half.

I don't see many consulting companies get a lot beyond that. Do feel like you can continue to improve from that level? Is this one of the factors?

I know you wanted to talk about utilization as well. Is this a structural shift that could really add some momentum for the next couple years?

Yes, look. I think our margin this year for the full-year will be in the 24% range. 24%, 24.5%, somewhere around there.

And we're going to achieve that at about a 70% utilization. We think that utilization can improve from that level.

We've had utilization in the last few years perform upward of 73% and we've talked about the fact that over a longer period of time we could see that approaching the mid-70%s. We see that coming as we continue to build better critical mass in certain practices and offices. And as Paul has laid out here with some of the proactive services.

I think that there is room to improve utilization. I think that we also demonstrated over a long period of time that if we're growing the firm in the high-single to low-double digits, that the other foundational expenses in both corporate as well as infrastructure, can grow at or little bit below that level so we can continue to get some leverage out of it.

So with all that said, as we look out over the next few years as your question implied, we still think that there is room for a 30 basis points to 50 basis point improvement on average over the next, let's call it four or five years.

That will still leave us somewhere at the low-end of that of let's say 26%, 27%, somewhere in there on a full-year basis. Even in that range. Is something that we think is achievable over let's say the next five years.

Okay great, thanks and congrats on a great quarter.

Thank you.

Joseph Foresi, with Janney Montgomery Scott.

Hi. I was wondering if we could start by backing up just a second and taking a look at some of those large projects. It seems like we move forward from them, but maybe we could talk about the impact the large projects and when we start to get to some better comps, from those projects. I think some of them had a tale so if we could get some idea of what that tale has been as well it would be helpful.

Yes, Joe this is Paul. I think where we are -- we've talked about there being the three of these larger assignments that we've had over a period of time. I think on the last call I indicated that a couple of those had sort of stepped down into the normal range of large projects.

I think they're probably stepping down, maybe even a little further than that. We're really now in the mode were just one of those three projects is still what we would call truly a major assignment at this point in time. And that's how we look at the large projects.

Just to be clear, maybe Rich you could step in here, are we starting to hit next quarter a better comparative or do we have to actually wait until next year?

Let me follow-up on that. I think from the standpoint of two of the three large projects, we're in that better comparison standpoint, but we have one that's not.

And you never know exactly how long those are going to continue. But we have the expectation that will continue at something approaching its current level for a reasonable number of quarters beyond where we are today.

I think in the comparative sense, when you look out a year from now, yes, looking back we still talked about these projects being major assignments a year ago. As we went through the third and fourth quarters of last year. And saw the step down there.

I think the other area that we've talked about in our comments and in the release is just that we still are facing -- our defense business is the majority of that. Our defense work is very tightly tied into activities in Afghanistan. For the UK Ministry of Defence as well as the US Department of Defense.

And those are going to begin to step down here in the next couple of quarters. We will see that begin to see the impact of that. That's what we have out there at this time.

Got it. Okay. And just on the margin side of things, are there any practices or -- I know you guys have a lot of different projects going on at once.

But are there any particular projects that have better margin profiles than others? Maybe you could just give us a feel of how much that contributed to the increase in the margin profile for this year.

Yes. I don't think that there -- it's not that we had some individual practices significantly change.

I think we've seen -- where we've seen improved utilization in activities, a couple of those would be in our construction consulting practice. Where we've clearly seen a pickup in the level of activity in that group. So we have a strong utilization.

We've been recruiting in that area and as such, we've -- that was an area in the more difficult economic times, things tied to infrastructure were not necessarily performing as well. So we did see an improvement in particular in that area. We did see some a year ago.

I think we had a little improvement in a few -- in a few of the engineering areas where we've had more of the proactive activities ongoing. We did see some improvement in that area as well.

Got it. The last one for me.

Obviously, we're well aware of the goings-on in the military practice going forward. Can you give us a sense of what you're -- you think the impact to numbers will be there? Are there any offset in your present business to absorb the tail off of that business?

Yes. Look, again, I don't think that it will necessarily all go away. But there's probably 70% of the revenues that we are doing, 70%, 75% or something of the revenues that we are doing in the second quarter that are -- have a tie into Afghanistan. So you're talking of that 3.7, $3 million or so in a quarter.

I see that it probably won't be all, but it could be the majority of that revenues. That steps down over the next couple of quarters. It's really going to depend on the timing of when the each -- the US and the UK pulls out and when they want the support of our labs that are over there to pull out with that.

I would expect that there will continue to be some activity with each of the organizations, let's say the rapid equipping force or the UK Ministry of Defence that has the GPR system, there'll be some activity that continues on beyond that. But the majority of it would step off at that time.

Okay, thank you.

From SunTrust, Tobey Sommer.

Hi this is Frank in for Tobey. Wanted to see if I could get an update on the software and computer science business. Where does that stand and what is the pace of growth been there?

That's an area that still, we consider it a part of our -- it's sort of spread between a couple of areas within the firm. One is our electrical engineering practice and the other is in technology development. We have activities in both those places.

We've certainly got more hiring going on in those areas. We have not been able to hire principles yet in that area. We have people that are senior manager and more junior in that area.

So my feeling is that it's growing, it's broadening. But it's -- it's not what I'd call taken off yet. But it's growing.

Okay and could you describe a little bit the pace and maybe the size of proactive work as it stands right now?

Yes. We've generally describe our proactive work as being something a little bit north of 30% of the business. And I sort of see that as continuing to grow.

We're not quite ready yet to say it's now 35%. We've reported when we feel like the increment is up to the next five. We're not probably quite there yet.

But there's clearly a lot of the growth across the engineering and health practices continue to come in these more proactive services. In the health arena, it's around food issues and around agricultural chemical issues. And reach basically chemical regulation issues. Helping our clients with their process of getting approvals on new applications or new chemicals.

And then on the engineering side, it's involved in the industries we talked about. The utility industry, the consumer electronics industry, the medical device industry continue to be the leading industries. But we're also doing more in the chemicals area, petrochemical area, oil and gas facilities, risk analysis for facilities, and those kinds of projects.

So it's pretty broad-based when we look at the proactive work. And we're still in the mode that we've talked about before, which is that the pace of getting new clients is not as fast as we would like. But when we get new clients, what we find is we get a lot of projects from those new clients.

We get great return revenue as it were by having those clients come back to us. Across maybe all of their facilities. Across the United States or more of their product line and so forth.

And so that's a part of what we find very rewarding and very exciting. Because it's clearly a demonstrated appetite and need for the services we provide.

Okay and two last ones. One, are you seeing any changes in the competitive landscape? Any other smaller boutiques that are gaining scale in multiple areas?

And then two if you could give the breakout of revenues in engineering and environmental and health, that would be great.

I think on the competitive side, the only comment I would make there is that on some of the insurance type of work that tends to be much more rate sensitive, than some of the other work, there's -- that area has become quite competitive.

From the standpoint of other firms being willing to have lower prices to get that work. So that's the only thing that I would say has been a change over the past few years in terms of the competitive landscape.

And to give you some numbers by the two segments. So on the revenue side -- the gross revenue side, revenues in the environmental and health were $21.3 million and in the engineering was $55.3 million.

On a net revenue basis, environmental and health was $20.8 million and then in engineering, $51.6 million. Did you want other components of it?

Yes, if you want to give them out, that would be great.

So the operating income level for those two are, for environmental and health, was actually -- I'm sorry, let me get the net income. The net income level there was -- I think we've got $3.4 million for environmental health and $8.3 million for the engineering part. And I think that's it.

Great, thank you very much.

David Gold with Sidoti & Company.

Hi, good afternoon.

Good afternoon, David.

Just a little bit a follow-up. You spoke on a little bit of say the margin upside. But I guess if possible, would like a little bit more clarity there. I guess to the extent I think the comment in the release was revenue was basically in line with what you had expected. Certainly what we expected, presumably good upside there.

So I understand the leverage point. But was curious if you can offer color on basically what the biggest variance was versus what you were expecting? Or sort of your model, where the upside came from there? Presumably the leverage you likely saw.

Yes. I think we ended up probably a percent maybe a little bit more lower on headcount than we had expected. And a percentage point may be higher on utilization of that group.

So 72% versus 71% in the utilization that we had there. I think we had indicated in our guidance that utilization could be down 4% to 5% and we' wee only down 3% over what it was there.

That played into there. I think the rest of the numbers are smaller in the sense that both G&A and other operating were down a couple hundred thousand dollars each. But again those play to be smaller numbers in the equation. It really comes out of ability to grow compensation in line with or just slightly below the growth in the revenues that played into it.

Got you. And to that end can you give us a sense for thinking on the headcount side, both today and maybe for year end?

Yes. We have a good number of people that are scheduled and signed up to come in here in the third and fourth quarters. That's a little bit of -- we would have expected it in the past, it's been a little smoother. Last year we saw little bit of this as well coming a little later in the year.

So we would expect that headcount is going to step up here from, I think we were 733 in the quarter, I'd expect that to be somewhere between 745 and 750 in the second quarter. And probably somewhere between 750 and 755 for the fourth quarter. I'm sorry, the third and fourth quarters I meant to say that.

Sure. Perfect. Okay, so I guess the hiring maybe in the second quarter was a little bit slower, more a function of timing.

Yes. We had instead of having people coming in the second quarter I think we might have had 15 people in the first two weeks of the third quarter, for example.

So it's just instead of coming in six weeks ago or something, they were in now. So just a little bit of timing.

Got you. Perfect. And then one last one. Presumably ample room left on the repurchase authorization, but broadly current thoughts on uses of cash.

Yes. We continue to be committed over the long-term here over the next four to five years to continue to work on bringing our cash balance down, by returning that to shareholders through repurchase and dividends. We target to be somewhere in the $50 million to $70 million on the balance sheet out four or five years from now.

Which we think puts -- means that we need to use both the dividend and repurchases over that period of time to deploy that back to shareholders. We think that will allow us to continue to have the flexibility on the balance sheet to do what we need to do from an operational standpoint and be opportunistic if things come along.

Perfect. That is helpful. Thank you both.

Thank you.

(Operator Instructions)

It appears we have no further questions at this time. That does conclude today's conference. We thank you for your participation.

Should you need to access the replay of today's conference, you can dial 1-888-203-1112. That's 1-888-203-1112. And the replay of today's call will be available until a week from today, that's July 29, 2014.

Again, we thank you for your participation. You may now disconnect.