Exponent Inc (EXPO) 2014 Q3 法說會逐字稿

Good day, and welcome to the Exponent third quarter fiscal 2014 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Ms. Samantha Press of The Blueshirt Group. Please go ahead.

Thank you Jessica. Good afternoon ladies and gentlemen. Thank you for joining us on today's conference call to discuss Exponent's third quarter 2014 financial 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 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 second. Including those factors discussed under the caption factors affecting operating results and market price of the 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.

Thank you for joining us today for our discussion of Exponent's third quarter 2014 results. For the quarter net revenues increased 6% to $74.3 million from the same quarter of last year. Net income for the quarter was $11 million, or $0.80 per share. Our performance in the third quarter delivered solid revenue growth and strong margins as a result of improved utilization. We continued our work for a broad set of clients, with strong demand from the consumer electronics, oil and gas, agricultural chemicals, utilities and biomedical industries. During the quarter we had notable contributions in our environmental and health segment, from our environmental sciences, ecological sciences, and chemical regulation and food safety practices. In our engineering and other scientific segment, we had notable performances from our Mechanics and material, biomedical, human factors, and structures practices.

We continued to believe our underlying growth is currently in the high single digits, which has been offset by a step-down in a couple of major assignments. In September, we held our two day manager's meeting just outside Washington DC This meeting was attended by more than half of our consulting staff, and occurs every two-years. This meeting focused on growth opportunities, and the development of our consulting staff. I came away from this meeting pleased by the stronger emphasis on generating proactive business.

We have also recently invested in additional equipment, including a focused ion beam transmission and scanning electron microscope, to enhance our ability to serve clients, primarily in the consumer electronics industry. These investments are already proving successful in attracting client business. Exponent continues to build upon its unique position in the marketplace as a multi-disciplinary engineering and scientific consulting firm. We believe our consulting staff's in-depth technical knowledge and brought experience will allow us to continue to help clients solve their most important engineering, scientific, and business problems.

As a result, we continue to be excited about the opportunities in front of us. Now Rich will provide a more detailed review of our financial performance.

Thanks Paul. For the third quarter of 2014, revenues before reimbursements, or net revenues as I will refer to them from here on, were up 6%, to $74.3 million, as compared to $70.1 million in the same period of 2013. Total revenues were also up 4%, to $78.6 million, as compared to $75.5 million one year ago. Net income for the quarter was $11 million, or $0.80 per share, as compared to $11.1 million, or $0.79 per share in the same quarter last year. EBITDA for the third quarter increased 5% to $19.7 million, versus $18.8 million one year ago.

For the first nine months of 2014, net revenues increased 4% to $219.6 million, as compared to $211 million in the same period of 2013. Total revenues for the period increased 3% to $231.1 million, as compared to $223.4 million one year ago. Also for the first nine months, net income increased 5% to $31.5 million, or $2.26 per share, as compared to $29.9 million, or $2.13 per share in the same period last year. EBITDA increased 6% to $56 million versus $52.9 million in 2013. Turning to more details, for the quarter defense technology development had net revenues of $2.7 million, as compared to $2.9 million in the same quarter last year.

For the fourth quarter, we expect net revenues from defense to be approximately $1.5 million, as a result of the withdrawal of troops from Afghanistan. Defense will likely be less than $1 million per quarter in 2015. Utilization for the third quarter was 74%, better than expected and compared favorably against 72% in the same period last year. Year-to-date utilization was 73%, unchanged from the prior year. We expect fourth quarter utilization to be down sequentially to the mid to high-60s due to holidays and vacations. This will result in the full year utilization being approximately 71%. For the third quarter, billable hours increased 4% to $285,000. Year-to-date, billable hours are up 2%.

For the third quarter, technical full-time equivalent employees on a year-over-year basis were up 2.3% to 743. Year-to-date, FTEs are up 3%. We expect fourth quarter FTEs to grow sequentially by approximately 1%. For the quarter and year-to-date, our realized rate increase was approximately 2%. EBITDA margin for the third quarter was 26.5% of net revenues, as compared to 26.8% in the third quarter of 2013. Year-to-date EBITDA margin improved to 25.5% from 25% in the same period one year ago. For the third quarter, compensation expense after adjusting for gains and losses in deferred comp increased 6%. Included in total compensation expense for the third quarter of 2014 is a loss in deferred compensation of $1.3 million, as compared to a gain of $1.9 million 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 first quarter was $2.7 million, which is up from $2.5 million in the same quarter last year. Year-to-date this is $10.6 million, versus $10.8 million in the comparable period last year. We expect for the full year of 2014 stock based compensation will be approximately the same as 2013 at $13 million. Other operating expenses in the quarter increased 4% to $6.7 million, as compared to the same quarter in 2013. Year-to-date these increased 4% to $19.5 million from the same period one year ago. We expect fourth quarter other operating expenses to be approximately $7 million. G&A expenses in the quarter increased 18% to $4.4 million, mostly related to the Company-wide manager's meeting, as we discussed with you last quarter. Year-to-date G&A increased 9% to $11.8 million. We expect fourth quarter G&A to return to a more normal level of approximately $4 million. The effective tax rate for the third quarter of 2014 was 39.9%, as compared to 36.7% in the same quarter in 2013, when we benefited from an increase in deductible expenses. Year-to-date our tax rate is 39.7%, as compared to 39.3% for the same period last year. We expect our fourth quarter tax rate to be approximately 40.5%. At quarter end our cash and short-term investments were $141.6 million, down slightly over the prior quarter, as we stepped up our buybacks in the quarter and continued our dividend program. In the first nine months of the year, we repurchased $27.9 million of our stock, for a total of 384,000 shares. We still have $38.1 million authorized and available for repurchases under our current repurchase authorization program. Additionally, during the first nine months of the year, we distributed $9.8 million to shareholders through dividend payments. Capital expenditures in the third quarter were $1.9 million.

Turning to our outlook for the full year 2014, we continue to believe the growth in revenues before reimbursements will be in the low single digits, but are raising our expectations for the EBITDA margin to be approximately flat with fiscal year 2013. We have a challenging comparison in the fourth quarter, as 2013 had an additional week which equates to about 7% to 8% of net revenues. Additionally, our defense business will be significantly down as a result of the withdrawal from Afghanistan, which equates to an additional 2.5% of consolidated revenues. While our underlying business is growing in the high single digits, these offsets will result in revenues before reimbursements for the fourth quarter of 2014 being slightly down as compared to the same period of 2013. I will now turn the call back to Paul for closing remarks.

Thank you Rich. Our priorities for the remainder of 2014 and beyond are to build upon our reputation as the go-to for engineering and scientific expertise, when clients are facing potential product recalls or litigation. We will also continue to develop our reputation for more proactive services, such as design consulting, risk management, and regulatory support. We will continue to generate strong cash flow from operations, which will allow us to continue to repurchase shares and pay dividends to shareholders. Operator, we are now ready for questions.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). And we'll first go to Tim McHugh from William Blair.

Yes. Thank you. First wanted to ask about the chemical and health area, which you kind of were highlighting this quarter, it felt like a little more than the prior quarters, I'm not sure if I'm right. But is that regulatory driven? Are there new regulations that are starting to drive better growth there, or are there other things that you would kind of point to driving that?

Yes, there are some new regulations, but I frankly think that what we've been, what is driving us is we're just continuing to build our business, and we're doing that both in the US and in Europe, as I think you know, most of our operations in Europe are centered in the United Kingdom, and are focused upon European regulations, particularly for agricultural chemicals, but also for various other products, including food. And that business just is growing above the level of our business as a whole, and continues to do well. I think we're increasing our market share there.

There's no deadline or indicated type of activity that--?

No, we have in the past talked about REACH regulations, those are the European regulations. The next deadline for REACH is actually, I think the end of May of 2018, so this is not what I'll call some local peak, or anything like that.

Okay. You talked about coming out of the meeting, you were encouraged, the employee meeting, a stronger focus on proactive work coming out of there. Was that something that you were pushing, or was the comment that after meeting with the kind of consultants work were pushing that idea more so towards you? I guess I just want to understand kind of the take away?

Yes, Tim, we've been very focused on growing the proactive side of our business. We are obviously very well-known and recognized in the more reactive side of the litigation and product recalls. We have still got growth there, but we're very well known. We're not as well known across many of the other industries in the proactive sense. So we do view that there are greater growth opportunities for us on the proactive side. We have been encouraging the firm, our staff, our practices, to expand their efforts to generate business in those areas. And so for example, at this meeting we would, we arranged the meeting to have a lot of opportunities for break out sessions on particular industries, and where we believe we can provide services that there are of value to those industries.

And I think the reason that I'm encouraged is because I feel as though the firm is sort of rallying around that, and we've had some successes obviously, and I think that the success generates success. As some industries have taken off much better, as you know we talked about consumer electronics and the medical device industries, for example. But we're seeing more opportunities in oil and gas and utilities than some of these other industries, and I think what we are seeing is that more of our consulting staff are buying into that model, seeing opportunities, pursuing opportunities. So that's the way I would describe it.

Okay. And are we at a point, you didn't even mention the large, kind of the large cases that we have talked about. Are they just at a steady state now, on a year-over-year basis?

Yes --

It's not a meaningful factor at this point going forward?

What I would say, what I would say, Tim, is that, we had talked about three of those major ones before. I sort of indicated that, in terms of compare comparing our current underlying growth rate in the high single digits, that it's been overset compared to a year ago by a step-down in a couple, or maybe two of those major assignments that really have gotten back to being significant projects, but not these major assignments that we're talking about. There is one that still remains, that remains at a very high clip, but there is really just one in that category today.

Okay. And then lastly, just the military step down, assuming this happened either very late in question three or I guess going into Q4 here? It seemed like not a big year-over-year change?

Yes, that's correct. I mean, the revenues are down from where we were in the third quarter, where we were in the second quarter, as we indicated that we had begun to see some step-down, as a reminder too we had nearly $3.7 million in revenues. That stepped down to $2.7 million in Q3, and then as we had begun to get indications of coming into the third quarter, that the activities would begin to diminish relative to our presence in Afghanistan and supporting those operations. There is still what we know is there is still one more step to happen, a big step happening in September. The remainder we have another step to happen here around the beginning of December. That will be the last part of our activities that are directly tied in to Afghanistan stepping down.

As I run the math, is 300 basis points as we think about 2015, I think you said $1 million or so a quarter for that business now, is that about the drag if we think about that on the overall Company's gross rate?

Yes, I think that is probably right. It's somewhere in that, I think we'll do about $11 million this year, and that puts you in that range of let's call it 2.5% or so.

Okay. Alright. Thank you.

Our next question comes from Joseph Foresi from Janney Montgomery Scott.

Hi. I wanted to kind of continue with sort of that line of questioning. On the defensive side of the business, it sounds like that's replacing the two large cases as the headwind going forward. Is that the only headwind that we see now? Or how should we think about the positives and the negatives?

Yes, I mean I think that as we look to next year, I think the defense is what we can expect to be a big headwind, as we just discussed here with Tim. So that's kind of what we're looking at. As we mentioned it's one of the major assignments that is still running at a very large clip, and that may reduce a little bit next year. We don't have a lot of the visibility yet on that. And as you know, we go through our planning process here in the fourth quarter, we have just sort of been kicking that off. And we will be getting through that. So with that point we'll be able to give better guidance. But that's what we see as the headwind.

Okay. And then this year, we've had sort of better than expected results with utilization, perhaps better than what we originally expected. What is driving that utilization from a catalyst standpoint? I know you named a couple of different businesses, but what surprised you and allowed you to kind of move the margin profile upward as we go through the year?

Well, I think that what we have seen is a sort of strength in the business, as we especially came through the third quarter here. I think the revenue performance was higher than we expected, and that translated into utilization. We continued to see strong activity in the consumer electronics area, as our clients are continuing to bring new products to market, and wanting to get our assistance, and hopefully continuing to develop high quality products, and reduce the risk there. We've also seen, we continued to see level of activity relative to that one large project continue at a high level, we would have thought that would have been stepped down a little bit. And we had a little bit of step-down obviously in the defense business, but those are the things that are there. But really, we had good strength in what we had, in particular consumer electronics and in our environmental business.

Okay. And then as we look out to next year, what is manageable from a core growth rate perspective? And I'm also wondering if reactive or proactive is there a difference in those two growth rates within the firm? I'm just wondering if we can compensate for the defensive business going away, or what the catalyst might be on that side?

Yes. So I mean, as we sort of indicated not only in this call, but in the two previous ones, we feel that the underlying growth rate at the moment is sort of 8%, and then of course, we've had some headwinds, but the underlying growth rate is about 8%. As Rich has indicated, there's been some strength in some areas here recently. As we go through the planning process here this quarter, I think we're going to essentially re-up what we believe that looks like for next year. I mean, we're reporting what it's been here in the last several quarters in terms of the underlying growth, but we'll get a chance to really spend time, because this is kind of a bottoms-up process we go through in the planning, and we'll get to sort of say what we think that's going to be for next year. I think that the ratio between the more proactive and the reactive business both are growing, we just think there's more opportunity in the proactive side, but the percentage split between those is kind of what I'll call a slowly gradually you get the proactive part growing, its relative percentage. It's not like a sudden thing. There is still plenty of activity in the reactive side of the business, and we intend to remain sort of the dominant player in our marketplace in that, and that's not going away.

Thank you.

We'll now go to Tobey Sommer from SunTrust.

Thank you. Just want to focus on some of the building blocks of the business. What's your expectation for as you are doing your planning for next year in terms of hiring? What sort of rate of growth do you think you're going to plan for, and maybe an area or two of focus?

So I mean I think we start with the idea that it's likely to fall in the range of sort of 4% to 7%. That's a fairly broad range. The reality is that is actually one of the absolute key elements that we get out of the planning process. We actually look for each of our 20-some practices to identify what level people they want, how many of them they want to meet their goals, and so forth. So that is one of the real building blocks of how we do our planning. So it's too early to kind of predict what that's going to look like for next year, except I don't see any reason why it would be outside of that range that we would generally have.

Just a question about rates, now that we have had these large projects in the business for a while, and they are tapering, was there any benefit to the bill rates from the large projects, or were they really not influential in the hourly rates?

No, they're not influential in the hourly rates. We have a process here where each individual has an hourly rate that they charge all clients. We don't negotiate different rates for different clients. So the change in hourly rates really is related to two things that are going on. One is as our people grow and become more valuable, they can charge a higher rate, and then the other is, that there tends to be a blend down because overall you tend to hire mostly at the junior level. And where as people are more likely to leave or retire at different levels across the board. So on average the people coming in are more junior than the people going out, and therefore on average the people coming in have a lower bill rate. So that is what blends things down. So when Rich talked about 2% this past quarter here, what we're really saying is, it's not that rates only went up by 2%, rates would have gone up by more, but because as you bring in the more junior staff it blends down. We don't think the large projects really have a direct influence on that at all. We see it being sort of two things. One is the market place, and two is how fast our staff are growing to become more valuable.

Okay. Thank you. That's helpful. Rich, do you have the split between engineering and environment in health revenue?

Yes, I do.

If you don't we can get it offline after that.

No, I can give that. So on the total revenues or gross revenues, the revenues for the third quarter was in environmental and health was $21.1 million, and in other scientific that was $57.5 million. If you do it on revenues before reimbursements, environmental and health for the quarter was $20.6 million, and other scientific was $53.6 million.

Okay. Just curious on the defense side. With regards to the rapid equipping force and kind of your business there, we do have some special forces involved in Syria, and other locations. Does it require a kind of more mainstream boots on the ground military engagement for the rapid equipping force to turn to someone like Exponent to provide services, or historically have you been involved when there's been smaller kind of nichier deployments of US forces?

Yes, most of our work has been for the Corps, and not for special forces. While our labs have been in the field though, as part of the Corps we've absolutely worked with and served and provided technology advancement to the special forces. They do, special forces does have sort of a culture and an organization already around adjually developing technologies for their individual missions, or changes in the environment that they're facing. It is something that the types of things that we have provided to the Corps fit with our special forces, but Exponent hasn't been the primary provider of that service to special forces over the years, more a secondary supplier of that.

Last question for me, do you have any specialties that you might highlight, that are building up the critical mass that allows them to kind of contribute a higher level of profitability to the firm, and/or any particular offices that you would say are approaching the staffing levels that can usually drive a little bit better utilization and profitability?

I think that we've got a number of practices, in particular a number of the ones that were highlighted in the press releases, as well as in Paul's comments, that our practices that all of those practices are growing, they're growing, maybe approaching double-digit level of growth. I think that is allowing, some of them have already reached critical mass and as such we see that those practices are performing strong, and have utilizations that are into the high-70s or even into the low 80s on a sustained level. We have practices where we are, such as biomedical would be an area where we're not quite to the critical mass level, but we are continuing to build there pretty fast, and I think you could look at that area. I think you could look at our food and chem practice is continuing to build and getting critical mass, and more people selling work across it and can build upon that. Our office actually, our office in the Boston area is an office that has continued for the last several years to see double-digit growth.

It has its focus around primarily a multidisciplinary engineering services. It has a broad set of clients, but a real strength around battery technology and such, that is allowing it to continue to see strong growth. So I think there are a number of places, even our office that we just started a couple of years back in Atlanta, with transferring one or two people and starting to build there, is one that is already beginning to approach 20 people, and I think we'll see a plan for next year that continues to grow very strong.

So I think we've got a number of positive things going on in the practices. I also believe that, in some ways proactive work will also continue to support a higher utilization, and the reason for that is that while we do get assignments in bits and pieces, they're not always huge long term assignments, they're assignments that are defined and have an end point. They don't typically stop suddenly, as what can happen in a litigation matter or others. So I think that as you're doing that work, you're able to be more dedicated to it, and can know the completion and plan for that a little bit better. I think a lot of things that we're doing and the areas that we're growing, support our belief that over the long-term that we can see our utilization improve for a full year basis and approach the mid-70s, as we look out over the next let's say five years.

Thank you Rich.

(Operator Instructions). We'll now go to David Gold from Sidoti.

Hey, good afternoon.

Good afternoon, David.

Just wanted to follow up a little bit on the utilization question, particularly as it applies to the third quarter. I guess the history this year as we were taking down third quarter was super impressive, but fourth quarter again we're basically guiding to sort of flattish with last year. So wanted to see if I could get a better handle on maybe what happened in the third quarter that you might be looking at as more one-timish in nature, or am I misinterpreting that?

I think a little bit David, basically the way to look at our seasonality that comes with going from the third to fourth quarter is to look at last year we had a 72% utilization in the third quarter, and our utilization for the fourth quarter was 66%. Our utilization here was 74%, just trending at that same level would put us around 68%. So a very high level in the third quarter, if that continues would put us sort of at that 68 range. So included in the guidance that I provided there around utilization, that's why I indicated that utilization would be from the mid to high-60s in that range in what we have there. So I do believe that activity has remained strong, as we've entered the fourth quarter. We will see a difference in the level of activity in defense. That will be there.

And as I indicated, when you go from a year ago where revenues were $3.2 million in the fourth quarter for defense, to about $1.5 million, that difference is about 2.5%. The other issue that we're facing that isn't a utilization impact but a revenue growth is this one week. And it's not that we're losing one week that had holidays and vacation in it, the same holidays and vacation are going to be in this quarter. We lost one full week of productivity off of that, and that's why it's a minimum sort of 7% there, so probably somewhere in the 7% to 8% that you'll see in difference. I think the activity level remains strong. I anticipate that it will in the fourth quarter, with defense being the one exception to that.

Got you. Okay. And just I guess looking at that another way, you noted the seasonality there, I guess if we think about the last couple of years, the sequential move from June to September in utilization has been a couple hundred basis points down. And this year, you have a nice couple hundred basis point increase. So is it, I guess what I'm trying to get at, and maybe there's no simple answer, is were there any large projects that maybe we can't see from the outside that came in that really helped you there, or is it just blocking and tackling and maybe this is a new higher level of utilization that we could sustain?

I do think that as I indicated we did see a higher percentage of our business, and so an increased revenues come from the consumer electronics area in the third quarter at a higher level by a couple of percentage points than what we saw in the second quarter, or where we had been a year ago in the third quarter. So we clearly saw an increase level of activity higher than we have had in the past go on there. So that was not anticipated to be at that level, elevated level. In addition to that, we saw an increase in the level of activity from Q2 to Q3 relative to in our environmental practice, relative to one of the major assignments that's we had going on.

There was a big push to do a large set of data collection during the third quarter. That level of activity has been completed, but I do think that there still are other, it still remains strong, but not quite at that elevated level. So those were two things in particular that I think as we went from Q2 to Q3 were not anticipated to be at that elevated level. And what we're seeing is as you go into Q4 we're continuing to see those things be strong, and other projects continue to be picking up as well. So that's why we're suggesting that the trend is close to on a seasonality adjusted basis, close to what we were running at in the third quarter.

Perfect. Perfect. One other that might be helpful, Rich, when we think about the three large projects, can you give us a sense for maybe in aggregate what percentage revenue they're making up?

Yes. I mean, I think that where we are at today is probably that these are sort of in the, what, 7% to 8%, somewhere in that range.

Yes, we still got one that we think is in that sort of major area of sort of the 4% to 5% range, and we've got two that have really fallen below what we would call a major assignment anymore, they're just sort of a large project.

Perfect. Perfect. That is helpful. Thank you both.

Okay. Thanks, David.

And that's all the time we have for questions today, and that does conclusion our presentation as well. If you would like to listen to the replay of today's conference, you may call (888)203-1112. Again that's (888)203-1112. And use passcode 7015768. Again, that passcode is 7015768. Thank you for your participation. You may now disconnect.