Exponent Inc (EXPO) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Exponent fourth-quarter and fiscal-year 2014 earnings conference call. Today's conference is being recorded. And at this time I would like to turn the conference over to Ms. Samantha Press. Please go ahead, ma'am.

Thank you, Greg. Good afternoon ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's fourth-quarter and fiscal-year 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 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 upon current expectations as of today and Exponent assumes no obligation to update or revise them, whether as the 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 fourth-quarter and fiscal-year 2014 results.

For the quarter, net revenues increased 1% to $69.6 million from the same quarter in 2013. Net income for the quarter increased 6% to $9.2 million, or $0.68 per share.

For the fiscal year, net revenues increased 3% to $289.2 million as compared to 2013. Net income increased 5% to $40.7 million, or $2.94 per share.

We are pleased to have delivered revenue growth, increased profitability, and improved utilization for the quarter and fiscal year, particularly considering there was one less week of activity in 2014 than in the comparable periods in 2013.

For the year we had notable performances from our material sciences, biomedical, polymer science, human factors, and construction consulting practices, as well as our environmental group.

In 2014 we saw our reactive business grow as we were called upon to perform high profile accident and failure investigations, as well as evaluate potentially significant product recalls. We also continued to see expansion of our proactive business in design evaluations of consumer electronics and medical devices, in addition to regulatory consulting for the chemicals and food industries.

During the year we returned value to shareholders through stock repurchases and dividend payments. In total we repurchased $30.9 million of stock and paid dividends of $13.1 million. We closed the year with $154 million in cash and today announced an increase in our quarterly dividend to $0.30.

Looking forward to 2015, and as we previously discussed, our underlying growth remains in the high-single digits but will be partially offset by a significant decline in defense work which corresponds with the withdrawal of US combat troops from Afghanistan. We are also expecting a major project to step down in the second half of the year, as it moves into the next phase of its project lifecycle.

As we enter 2015 we remain optimistic about our business and believe we can continue to expand our unique market position in assessing the reliability, safety, human health, and environmental issues of increasingly complex technologies, products, and processes. We are confident in our ability to generate long-term shareholder value.

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

Thanks, Paul

For the 13-week fourth quarter of 2014 revenues before reimbursements, or net revenues, as I will refer to them from here on, were $69.6 million, up 1% from $69 million in the 14-week fourth quarter of 2013.

Total revenues for 2014 were $73.6 million as compared to $72.8 million one year ago.

Net income for the fourth quarter increased 6% to $9.2 million, or $0.68 per share, as compared to $8.7 million, or $0.63 per share, in the same quarter of 2013. EBITDA for the fourth quarter was $17.2 million versus $15.9 million in the same period of 2013.

For the 52-week fiscal year 2014 revenues before reimbursements were $289.2 million, up 3% from $280 million in the 53-week fiscal year 2013. Total revenues for 2014 were $304.7 million as compared to $296.2 million in 2013.

Net income for 2014 was $40.7 million, or $2.94 per diluted share, an increase of 5% as compared to $38.6 million, or $2.76 per diluted share in 2013. EBITDA increased 6% to $73.2 million versus $68.8 million one year ago.

Diluted shares count decreased to 13.8 million from 14 million shares in the same period last year.

Turning to more detail of the quarter and year, as a reminder, we had a challenging comparison in 2014 versus 2013. Our growth in revenues before reimbursements were reduced because of a step-down in a few major assignments, lower defense spending, an extra week in the fourth quarter of fiscal 2013, and $1.4 million of revenue recognized upon payment in 2013 for work performed in the prior year.

In the fourth quarter of 2014 defense technology development had net revenues of $1.4 million as compared to $3.2 million in the same quarter one year ago. For the full year, net revenues in defense technology development were $10.9 million, with no product sales, as compared to $13.1 million, with $200,000 of product sales.

As we discussed with you last quarter, we expect revenues from defense technology development to be in the range of $500,000 to $1 million per quarter in 2015, which will impact our growth in 2015 by approximately 3% on a year-over-year basis. While we have reduced our staff in this area over the past year, we have also been successful in leveraging our experience and expertise to landing some work from commercial clients.

Utilization in the fourth quarter was 69%, which was a couple of points higher than we had expected as a result of strength in some of our engineering practices, as well as our environmental group. This compares to 66% in the same quarter in 2013. Utilization for the full year 2014 was 71.8% as compared to 71.3% in the prior year. For 2015, we expect our utilization to be approximately the same as 2014.

For the fourth quarter of 2014, billable hours increased 1% to 271,000 in the 13-week quarter as compared to 269,000 in the 14-week quarter in 2013. For the year, billable hours increased 2% to 1.1 million.

For the fourth quarter, technical full-time-equivalent employees were up 3% to 754. For the full year, FTEs were also up 3% to 741. For 2015 we expect year-over-year headcount growth to be approximately 2%.

Our realized rate increase was approximately 2% in 2014. For 2015 we also expect to realize a rate increase of approximately 2%.

EBITDA margin for the fourth quarter was 24.7% of net revenues as compared to 23% in 2013. For the full year 2014 EBITDA margin was 25.3% as compared to 24.6% in 2013.

For fourth quarter of 2014 compensation expense after adjusting for gains and losses in deferred comp decreased 2%, reflecting one less week. Included in total compensation expense is a gain in deferred compensation of $1.2 million as compared to $1.9 million in the same quarter in 2013.

As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line. For fiscal year 2014 adjusted compensation expense increased 2% with a gain in deferred compensation of $2.5 million as compared to $6 million in the prior year.

Stock-based compensation expense in the fourth quarter of 2014 was $2.5 million and fiscal 2014 was $13.1 million. For 2015 we expect stock-based compensation to be approximately $13.75 million, of which $5.75 million will be expensed in the first quarter and the remaining $2.75 million in each of this remaining quarters.

Other operating expenses in the fourth quarter increased 5% to $6.8 million. Included in other operating expense is $1.4 million of depreciation. For 2015 other operating expenses are expected to be $6.7 million to $7.3 million per quarter.

G&A expenses in the fourth quarter increased 3% to $4 million. For 2015 G&A expenses are expected to be $3.7 million to $4.3 million per quarter.

Our income tax rate in the quarter was 41.6% as compared to 40.5% in the fourth quarter of 2013. Our full-year 2014 tax rate was 40.1% as compared to 39.6% in the prior year. For 2015 we expect our tax rate to be approximately 40.25%.

For the fourth quarter operating cash flow was $22.2 million, and for the year it was $48.3 million. At year end 2014 our cash and short-term investments were $154.4 million.

In 2014 we repurchased $30.9 million of stock for a total of 425,000 shares at an average price of $72.72. We still have $35.1 million authorized and available for repurchases under our current repurchase program. Additionally, during the year we distributed $13.1 million to shareholders through dividends, and today announced an increase in our quarterly dividend payment to $0.30 for the first quarter of 2015.

Capital expenditures were $1 million in the fourth quarter and $5.3 million for the year.

DSOs at year end were 90 days as compared to 83 days at the end of 2013 when they were unusually low.

Looking forward, we expect 2015 growth in revenues before reimbursements to be in the low- to mid-single digits and the EBITDA margin to be approximately flat with the 25% we achieved in 2014. Our underlying growth remains in the high-single digits, but will be partially offset by significant decline in defense work and a major project stepping down in the second half of 2015.

Additionally, although our UK and European operations are only approximately 5% of our revenues, our revenues and expenses will be 0.5% lower in 2015 due to the change in foreign exchange rates.

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

Thank you, Rich.

As we look into 2015, we remain focused on our priorities to build upon our reputation as the go-to firm for engineering and scientific expertise when clients want to know what happened as they are facing a product recall, litigation, or regulatory enforcement. We will leverage our experience and reputation in reactive services to continue the development of our proactive services, such as design evaluations, risk management, and regulatory consulting.

As always, our priorities continue to be revenue growth, profitability, and strong cash flow from operations, which will enable us to deliver long-term shareholder value.

Operator, we are now ready for questions.

(Operator Instructions) Tim McHugh; William Blair.

Just want to ask about the large project first and the expectation that it's stepping down in the second half. Are there specific deliverables that you expect that for? Or are you just trying to be cautious about the likelihood at some point that (inaudible) --

There are specific deliverables and a timeframe that is laid out for that step-down.

Okay. And as we think about kind of the high-single digit you talk about for next year, are there certain practices that at this point in the year you would kind of expect faster growth out of than other ones?

Well, certainly, as we've talked about, the practices that were strong in the fourth quarter, many of those really represent some of the areas that are growing fastest in the Firm. So certainly our materials science, biomedical, polymer science, those areas are extremely strong. There's reactive work in that space. But, there's also a lot of proactive work that continues to grow, particularly in the consumer electronics and medical device space. So we expect those to grow as we look into next year at a rate that's double digit.

Okay. And I'm sorry if I missed this earlier; I joined a little late. What's your hiring expectation as you think about next year?

Yes, Tim. I had indicated that we expect that full-time equivalent employees will grow approximately 2% next year.

Okay. And, I guess, is that a reflection of just wanting to push utilization up? That's lower than you normally I guess target.

Yes. As we had indicated, we ended up -- the fourth quarter was about 754 FTEs. But due to the fact that we had a step-down in defense as well as just some other things, we ended up starting the year at about 741 FTEs, so about flat with last year's average for the year. So the net hiring during the year will be about what we have normally done. So our hiring is anticipated to continue. But normally we have a carryover from the prior year, where we end the year at 1% or 2% higher than the average of the year, because we've been hiring throughout the year.

This year we will be starting off even with the average for last year and, as such, we think that will be slightly dampened. Obviously we've indicated that with the step-down, with the substantial reduction in defense, as well as the step-down in the major project, we think that's a prudent way so that we are able to maintain around the same utilization as we had this past year.

Okay. So Q1 your headcount is probably -- average headcount is down sequentially and you'll build back up across the year.

Yes. It will be -- still, the Q1 will be higher than it was last year in Q1, will be approximately 1.5%, 2% still up from the first quarter of last year. It will just be down compared to the fourth quarter.

Okay. Great. Thank you.

Tobey Sommer; SunTrust.

This is Michael in for Tobey. Can you talk a little bit more about growth trends and demand from clients in the proactive business, and what feedback you're hearing from clients there?

Sure. I think that the proactive business we would still say is a part that's growing faster than the reactive side. This past year we had a significant growth in what we did in the consumer electronics area and the biomedical area. We expect that to continue to grow this year. I think we've got a pretty unique service offering, so what we're offering there is not really competing with other firms. It might to some extent be competing with some resources that they might have in house, but we offer a kind of specialty service that makes them want to go outside to get that. So I expect that to continue.

The other area that is sort of strong for us and that we expect to continue to grow next year is the regulatory consulting, particularly in the food and chemicals area. So we would expect that to continue to grow.

And the final area that we've been sort of seeing some good growth in is some proactive services in the oil and gas space. How successful we'll be in continuing to grow that, given where oil prices are today, might be a little uncertain. But the fact is, we have been growing that business quite significantly.

Okay, great. And are you seeing any changes in pricing trends? And kind of more broadly, what sort of changes are you seeing in the competitive landscape?

Yes. On the pricing side, I think what we're seeing is that pricing increases are approximately the same as they've been the last couple of years. So we're not seeing a big change there. For us that means that the rates for our individuals who were here on January 1, they went up by about 3.5% to 4%, is what it went up. As we blend that in with new, more junior staff that we hired throughout the year, we'll end up realizing about 2% in pricing increase out of that.

That's similar to what we have done the last couple of years, but still is substantially below where it was for us in the 2006, 2007, even into 2008 years, where that realization was closer to 3.5%. So, clearly the lower inflation environment has had some impact on where we go on a pricing standpoint.

From a competitive landscape, I don't think we have seen any significant changes. We continue to have a dominant position in reactive services, working on litigation matters, product recalls, regulatory enforcements, where I think we are recognized as sort of the go-to firm at the top of the pyramid in that marketplace, and clearly have a substantially different size and scale than any of our competitors in that area.

On the more proactive side, there continues to be a competitive environment on the regulatory support side, or regulatory consulting area. But more on the design consulting area that we're working in, we don't -- there isn't really somebody we point to as the other firm. As Paul mentioned earlier, we are really providing something that a lot of our clients might otherwise do in house, or just not have that capability to draw upon. There just really isn't another firm with our experiences about how products perform and how they fail and how to bring that understanding to these rapidly developing marketplaces.

So, hopefully that gives you a little bit of insight into what's going on today.

That was great; thank you.

David Gold; Sidoti & Company.

Couple of things I'd love a tiny bit of color on. One is -- maybe a good way to ask is, we think about there are three major projects that have been in different stages of tail-off I guess for a couple of years now. And I want to say last quarter I think you had updated to say it was, call it, 8% of revenue, down from about 12% the year before. Was curious if you could give similar metrics as we sit now and maybe give a little bit by way of update on each of the projects.

Well, let me just, David, make some overall comments and then Rich may give you some numbers. So the way I see it is going back some years we've had these three major assignments that we've called out because they were, each of them, maybe 4% or 5% of revenue as opposed to our normal larger projects, which might be 2% or 3% of revenue. And that's why we've had this focus on them as they tail off.

Now, where we sit today is, of those three projects we have stepped down in all but one of them. And there's this one remaining project that we've got a little bit better clarity on in terms of expectations of stepping down, as I responded to Tim McHugh earlier. And so that's the last of these major assignments to be in this mode of stepping down.

Now, this doesn't mean that these assignments have completely gone away. It just means they've stepped down to at or below a normal large project level. And so in that vein, we don't typically talk about step-downs from our normal large projects. So that's where we stand. We've just got one remaining. And we expect that to step down in the latter half of the year. Rich may want to give a little bit more metrics on that.

Yes. I think that where we are today is that those projects are sitting somewhere in the probably about -- I'm going to ask -- but probably 7%, somewhere in that range is probably where we are, maybe 7%, 8% as to where they sit today. As Paul said, we still have one engagement that is still in that 4%, 5% range and the others have stepped down to at or below what we would consider to be a normal large engagement, which we have a few a quarter of, which would be in the 2%, 3% of revenue range. So these are clearly at or below those levels at this point in time.

Perfect; that's helpful. And then, could you speak about on the repurchase, one, during the quarter an average price and, two, I know there was some commentary in the release and your comments there and how you're thinking about that, how much capital you want to allocate or is it more a function of price.

Yes. So, as I mentioned in our points, we repurchased for the year the $30.9 million at $72.72. In the quarter we were only able to pick up $3 million in that. That was at a price of $72.17. So the price sort of moved up; a lot of things moved up in the marketplace in the quarter. But things moved up pretty substantially.

And, as such, as we've indicated in the past, we believe over the long term that we can, through a combination of dividends and repurchases, work our cash down over the next four to five years to the point that it is in the $50 million to $70 million range hopefully here. And we expect to be able to do that by repurchasing, if there's pullbacks in the stock or it just settles down a bit lower than it's been. On average, those are times that we're going to step in and be more aggressive and try to repurchase what we can for shareholders. And as it sort of rises at points in time we'll be a little bit lighter on that.

But what we will do over time and we're committed to is that, at a minimum, we're going to repurchase back more than we're putting out in our stock plans. And clearly we've far exceeded that this year and would expect to going forward.

On the dividend side, we expect -- we've just increased the dividend another $0.05 a quarter. That's a 20% increase. We would expect that the dividend would increase at a rate that is even faster than earnings growth over the next several years. And hopefully that as well can bring value to shareholders.

Perfect. That's helpful. Thank you both.

(Operator Instructions) Joe Foresi; Janney.

This is Robert [Stippins] on for Joe. So could you give any color on where you're looking to hire?

Yes. I think the -- look, the majority of our hiring is close to entry level. And our ideal entry-level hire is somebody who's got a PhD, either directly out of school or with a couple of years' experience. And we're looking to do that from top engineering and public health schools. And we're, quite frankly, looking to do that pretty much across the board. So, all the groups we have and all the practices we have in the Firm, we're certainly looking to continue to bring in top talent. That's just sort of the fundamental feeding stock of the Firm, so we're not going to stop doing that.

In addition to that, we certainly look for some midlevel and some senior level hires, the sort of lateral senior hires that are difficult to come by. We don't typically hire that many of them in a year. I think we hired nine principals last year and we'll see if we can do that again this year. But those are more opportunistic because it's a matter of to find good people you've got to find somebody who's got the right resume and got some book of business. And usually they're being well cared for wherever else they are. But sometimes there's an upset in their business or there's an acquisition or something and they are not happy with where the situation is. So we keep our ear to the ground and we're looking to hire senior people as well.

Clearly there are some targeted areas beyond that that we've been focused on. We're doing more work in the computer science arena and we definitely are looking for people there. There are aspects of health that we've talked about, in health outcomes research in the pharma side of health that we've made some hires in, but we're looking to make more hires in. So those would be examples of what I'll call some special areas.

And certainly we're also expecting to grow our two offices in Asia. They've been particularly busy, the office in Shanghai and Hong Kong. They're still small, but we're looking to grow those. And then, in the UK we continue to have a very strong regulatory business there and we expect that to continue to grow.

So hiring is pretty broad-based, with some focused areas.

Great. Thank you very much.

And with no remaining questions in the queue, ladies and gentlemen, that does conclude today's conference. A replay of today's conference will be available beginning tonight at 6:30 p.m. Central Time for one week. The phone number to access that replay is 1-888-203-1112. Again, that's 1-888-203-1112.

Again, that does conclude today's conference. We thank you all for your participation.