Exponent Inc (EXPO) 2015 Q2 法說會逐字稿

Good day and welcome to the Exponent second quarter of fiscal year 2015 financial results conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to Erica Abrams. Please go ahead, ma'am.

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on today's conference call to discuss Exponent's second quarter 2015 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 prior written consent.

Joining me on the call today are Paul Johnston, President and Chief Executive Officer, and Rich Shlenker, 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 with 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 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 will turn the call over to Paul Johnston, President and Chief Executive Officer, go ahead.

Thank you, for joining us today for our discussion of Exponent's second quarter financial results. For the quarter net revenues increased 4%, to $75.3 million, from the same period a year ago. Net income for the quarter also increased 4% to $11.7 million, or $0.43 per share.

We are pleased with our results in the first half of the year, delivering revenue and profit growth along with improved margins and utilization. Even as we increased headcount in order to drive long-term progress in both our proactive and reactive services. Our underlying business continue to grow in the high single digits, but as expected, was partially offset by a decline in defense work.

We are pleased that during the quarter we continue to be retained to investigate the most significant accidents and failures and we continue to see strong demand for our proactive services in consumer electronics and medical devices. We had notable performances from our materials, biomedical, polymer science, structural engineering, thermal sciences, biomechanics and construction consulting practices, as well as from our environmental group.

As we had previously indicated, we expected the last of our three major assignments, which has been approximately 4% to 5% of our revenues, the step-down in the second half of 2015 to approximately half that run rate. However, as a result of a proposed resolution of this matter, our efforts going forward will be de minimis. Rich will elaborate on the details of our forecast in a few minutes. During the second quarter we continue to repurchase common stock in the open market and completed our two for one stock split.

We also paid shareholders a dividend and we'll continue the payment of a dividend of $0.15 per share in the coming period. We are focused on ways to continue to deliver shareholder value. Now Rich will provide a more detailed review of our financial performance and outlook.

Thanks, Paul. For the second quarter of 2015, revenues before reimbursements, or net revenues as I will refer to them from here on, were $75.3 million, up 4% from $72.3 million in the same period of 2014. Total revenues for the second quarter of 2015 were $79.9 million, up 4% over $76.61 million one year ago.

Net income for the second quarter increased 4% to $11.7 million or $0.43 per share, as compared to $11.3 million or $0.41 per share in the same quarter of 2014. EBITDA margin or EBITDA for the second quarter increased 5% to $20.6 million versus $19.7 million last year. For the first half of 2015, net revenues also increased 4% to $151.4 million and total revenues increased 5%, to $160.2 million. Net income increased 8% to $22 million or $0.80 per share. EBITDA increased 7% to $39 million over the same period of last year.

In the second quarter of 2015 net revenues from defense technology development were approximately $800,000, as compared to $3.7 million in the same quarter last year. For the first half, net revenues from defense were $2 million, as compared to $6.9 million in the same period of 2014.

We continue to expect revenues from defense to be in the range of $500,000 to $1 million per quarter for the remainder of 2015. For the second quarter, billable hours in the second quarter increased 4% to $287,000 as compared to $276,000 in the second quarter of 2014. For the first half, billable hours increased 5%, to $579,000 from $550,000. Utilization in the second quarter rose to 74% from 72% 1 year ago. For the first half utilization was 75%, up from 72% in the same period one year ago.

As we look to the second half of 2015, and considering the step-down in revenue from the major project that Paul discussed, we expect utilization in the third and fourth quarters to be approximately down three to four percentage points as compared to the same period in 2014. This will result in the full year's utilization being approximately 71% as compared to 72% in 2014.

In the second quarter the realized bill rate increase was approximately 1%, which is lower than normal as the increased billable hours were a result of better leverage of lower-level staff. This rate increase was offset by 0.6% from translating foreign currency for consolidated financial statement. For the second quarter, technical full-time equivalent employees were up 2%, to 750, as compared to the same quarter in 2014.

While we have a nice pipeline of new hires that will join over the next couple of quarters, but as we adjust to the impact of the sudden step-down in a major project, we are likely to see our headcount remain flat. EBITDA margin was slightly up for the second quarter to 27.3% of net revenue as compared to the same period of 2014.

For the first half, EBITDA margin was 25.8% as compared to 25% in the same period one year ago. For the second quarter of 2015 compensation expense, after adjusting for gains and losses in deferred compensation, increased 4%. Included in the total compensation is a loss in deferred compensation of $72,000, as compared to a gain of $2 million in the same quarter of 2014. 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 of 2015 was $2.7 million. For the remainder of 2015, we expect stock-based compensation to be between $2.3 million and $2.6 million a quarter. Other operating expenses in the second quarter increased 4%, to $6.7 million. Included in other operating expenses is $1.3 million of depreciation. For the remainder of 2015, other operating expenses are expected to be $7 million to $7.3 million per quarter.

G&A expenses in the second quarter increased 9% to $4.1 million. For the remainder of 2015, G&A expenses are expected to be $4.2 million to $4.5 million per quarter. Our income tax rate in the quarter was 39.4% as compared to 38.8% in the same period of 2014. For the full year of 2015, we expect our tax rate to be approximately 39.5%.

For the second quarter operating cash flow was $13.1 million. Year-to-date operating cash flow was $14.8 million. In the first half of the year, we repurchased $7 million of common stock. We still have $28.1 million authorized and available for repurchases. Also during the first half, we distributed $8 million to shareholders through dividends. We ended the quarter with $150 million of cash and short-term investments after repurchases and dividends. Capital expenditures were $1.1 million in the second quarter and $1.7 million year-to-date.

Turning to our outlook for the remainder of 2015, as Paul discussed, and we have previously indicated, we expected a major project to step down in the second half of 2015 to approximately half its run rate, but as a result of a proposed resolution of this matter, our efforts going forward will be very little. While our underlying growth remains in the high single digits, it will be partially offset by the significant decline in this major project as well as our defense work.

As a result, we expect full year 2015 growth in revenues before reimbursements to be in the low single digits and EBITDA margin to be down approximately 50 basis points from the 25% we achieved in 2014. We remain optimistic about our business and our long-term prospects.

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

Thank you, Rich. For the remainder of 2015, we are focused on further expanding our unique market position and assessing the reliability, safety, human health, and environmental issues of increasingly complex technologies, products, and processes.

While we grow at a slower rate than we might like in 2015, our long-term financial goals remain the same, to produce strong organic revenue growth and improved profitability, which are expected to generate significant cash flow and allow us to continue to repurchase stock and pay dividends.

Operator, we are now ready for questions.

Thank you. (Operator Instructions). And we'll take our first question from Tim McHugh with William Blair.

Hi. Yes, thanks. First, I just wanted to ask about the plans for headcount. You mentioned it was pretty flattish as you adjusted for the project, but would you cut back on headcount, do you expect to just try to grow into this?

And I guess more numerically, trying to think about the 50 basis points be in market headwind, I guess that's a half year impact, so trying to think about the following year, what you think about (inaudible).

Yeah, Tim, thanks. Well, I think it's a bit of both of those. Look, if you look forward realistically, the level of utilization that we had in the environmental side of our business was certainly beyond what we normally would be sustaining but for the fact that we had a very large, large client, large matter to investigate and provide services for.

So, you know, I think from a steady state, when you have the right level of workflow and the right level of people, the utilization rate would come down some, anyway, just because of the effect of what I'll call a very large project. I think over time we will tackle that from both sides. There's no question that what we would look to do is to increase revenue from other projects.

I think there's some opportunity to do that already, just because there's so many demand on much of our staff that there are other opportunities that maybe we could push forward with a little faster. We will clearly be looking to fill gaps with new work and new opportunities, some of which we're beginning to identify, some of which we haven't identified.

But inevitably there will probably be some impact on staff over time. The reality is, when a group is as busy as it is, the turnover rate tends to be smaller than when the group isn't so busy. So we would expect that there would be some, you know, some change in headcount over time as well. As we've sign in other parts of the business where we've gone through some reasonably significant changes.

Okay. That's helpful. And then, if technology development, is there, I think the past year you talked about, well, you signaled that it would be down, that there were some opportunities or at least, you know, some things you were trying to pursue, I guess.

Where does that practice fit? Is there anything on the horizon that could reaccelerate the growth of that piece of the business or are we likely to stay in this range for a while?

Yeah, so, I think from the standpoint of what I'll call defense work, we don't see necessarily a lot of change. I mean, there are always some, you know, reasonable size, smaller reasonably sized projects that we're pursuing, investigating, whatever, that may come to fruition, but nothing of the magnitude that would put us back in the mode when we had combat troops in Iraq and Afghanistan.

If we look at what we did, Tim, in going from last year to this year, is, we knew we'd have a significant drop in defense revenues, but we also thought there was an opportunity to reposition part of that group.

We did have a fairly significant change in headcount throughout last year in that group, recognizing that these changes were coming. I think the part of that group that is moving to what I'll call commercial technology development projects have had some success, and we've had some good projects, but probably not running at a level where we would say we've sort of completely settled that group into a, sort of a new diet of commercial technology development projects. But we're still optimistic.

You know, the projects we've been involved in have been successful projects. I think we're starting to get some recognition in that space. But certainly that is not going to be of the size that it was during the time period when there were combat troops in Iraq and Afghanistan.

Yes, and, just to be clear, the numbers that I provided around defense were just the change in defense revenues. It doesn't include any commercial work that may have come in that partially offset that. That would be in the underlying growth numbers.

Okay. Thank you.

We'll go next to Joseph Foresi with Janney Montgomery Scott.

Hi. So, I was curious about the ending of the large project. Can you bring us up to speed on what's left out there for large projects and maybe you could talk a little bit about anything that might be in the pipeline that could reach that level?

Yeah. So, just as sort of a recap here, Joe, on some of the history, setting aside defense, which is a different thing, you know, we've talked for quite a few years now, actually, about three large assignments which, over time, got identified as being the activities regarding the oil spill in the Gulf, unintended acceleration with Toyota, and a large PG&E gas explosion. And this is the last of those three to step down from what I would call an abnormal level to back into normal range.

So we've described in the past that each of these three projects have been, each one of them have been in the 4% to 5% of revenues of the entire firm, and that what we've also described is, normally our large projects, you know, that would last from a few quarters to a year or so, might be in the order of 2% to 3%, you know, 2.5% of revenue let's say and they would step down into something lower.

And so it was because these ones were above that let's call it 2.5%, up in the 4.5%, 5%, we felt it appropriate to share with shareholders the potential impact of a slowdown in those. So we've previously indicated that two of those matters which have been identified as the unintended acceleration matter and the gas explosion matter, have indeed moved out of being what we'd call a major assignment, out of being beyond this, you know, 2%, 3% of, I beg your pardon, out of the 4%, 5% of revenue down to below 2% of revenue.

Now, those are a little different in the sense that it doesn't mean that revenue from those clients necessarily isn't still fairly significant. We have, both of those are clients we've had for a long time and we do various other projects for them, but the projects related to those two events have fallen out of what we would call a major assignment into what we'd call our normal mix of business. So the only one that was remaining was the matter that's been identified as being in the Gulf, and that's what we have sort of indicated was sort of this 4.5% of the company's revenues.

Now, that one, we had explained earlier in the year, based on when court deadlines were and so forth, based on the information we had, we had explained earlier in the year that we expected the second half of the year, that would drop at roughly in half. Well, it turns out that, you know, a major settlement was announced.

Now, that has to be approved by the court and so forth and it's not completely over, but the result of that is that this project has dropped to, essentially ended, which it's actually abnormal for us. Normally large projects step down over time, and they tend to have long tails.

You know, we've talked about that in the context of previous large projects like, you know, sort of the Exon Valdez or we've talked about where there were, you know, rollover issues with regards to SUVs that had a very long tail on them and so forth. This one has ended more abruptly than we would have expected. And, you know, there may be a few little things we're still working on to finish up, but they're truly little in comparison to the original size.

It's not like dropping in half, it's much more like just disappearing. So in that sense, it's been more dramatic. And therefore will take, you know, a little bit of time here in the back half of the year for us to adjust to that in terms of filling other work in and dealing with headcount and so forth, whereas normally we say these step downs occur in a more gradual way, and as a result, you know, just have an effect of being a headwind against our organic growth over time but don't really cause anything beyond that.

So if that answers your question, Joe, did not, you know, please follow up.

Yeah, no, it sounds like what you're saying is that this effectively ends our conversations about, you know, headwinds from large deals slowing down and that going forward, although the numbers will correct themselves, you don't have any other large deals effectively out there.

That's correct. We don't have other projects that represent, you know, more than this sort of 2%, 2.5%, maybe 3% of revenue that we identify, and so that's not the mode that we're in. We've obviously got, you know, large clients, we do a diversified portfolio of work for and things but we don't have anything that fits in this category that we have been talking about for some time in terms of either the three major assignments or the defense work.

Okay. And then if we look at the present, you know, I guess, customer base and projects, we've been, you know, surprised in the past by the strength of the work that you did in defense. Obviously there was a step-up of these contracts when they came into the business.

Perhaps, is there anything in the current client or customer base or project base that you think has the ability to step up and be a catalyst now that you've seen the tail-end of the larger projects you were working on?

Yeah, so, I mean, I'm going to give kind of a yes and no answer to that. You know, if I was specifically put on sort of narrow blinders and I said, do we have other projects today that we think could grow to the 4% or 5% of revenue, the answer would be no on that.

But, you know, we do have new matters coming in, but we don't see that they're going to be of that size. But if you ask the question in terms of more broadly, do we see a very strong flow of good activity out there, both in the reactive and proactive space, the answer is absolutely yes.

You know, we've talked for some time about how we've tried to be careful in describing this each quarter, about what's going on in the underlying business versus these three large projects and defense. And we've always tried to separate that. And we're still in that exact same mode, we've been in pretty much constantly over this time period, which is that the underlying growth separated from that is in the high single digits.

We had this bump from this coming in and it's gone. It's gone away here. So we still feel very good about the underlying flow. The proactive part of the business is clearly growing from our standpoint. We see that running at, you know, probably about 40% of the business today.

And the reactive side, I mean, you know, if you've listened to the news over sort of recent times, there's a variety of different, you know, fairly significant events that have made national news involving what I would call sort of engineering-related projects.

And, you know, there's a confidentiality, I can't kind of go into all of them. But basically we still feel that, very much, if it's on the national news, we're retained. And I think we feel, you know, as good about that today as we've ever felt about that.

Got it. Okay. And then the last one for me, as you look at the proactive versus the counter cyclical, can you give us any sense of the growth rates that you expect in those businesses? Is one going to, and the size of them. is one going to complement the other and grow faster and add maybe, we've talked about historically this usual mid to high since the growth rate. Is there anything that might cause that to tweak up once we get to better comps?

Yes. I think, look, our expectation, long-term, remains to be a high single to low double-digit organically grown firm. We think, you know, history plays that out. You can play out the last 10 years, the last five years, 20 years, whatever it may be, on average, we've been right around 10% as the growth.

What we are definitely seeing is that, you know, we see here over the next several years to maybe even much longer that the proactive work will be a double-digit grower. We think we are making good progress, but we are still very early in our development there. It is a huge market opportunity.

When you look across the different industries and services we have to offer from design consulting to regulatory consulting to risk management type of matters. All of those play out across almost all of the, what I will call industrial businesses, people who make things and either you're processing or selling products, it fits across that spectrum.

So we are, have a long-term optimism here around our ability to be able to grow in that area. The reactive business, for which we've been in for 50 years almost now, we think we've got a leading position there, but it's one that we're likely to be growing sort of middle, single digits, you know, with certain matters and things clearly we get the great visibility on, but that that's sort of a mid to high single-digit growth area for us.

Okay. Thank you.

We'll go next to Tobey Sommer with SunTrust.

Thanks. On the headcount for the balance of the year headed into next year, I just wanted to make sure I understood because I think I missed part of it. You kind of conveyed flattish even though you have some new people, you know, slated to onboard.

So does that imply that some people associated with the large project will be kind of leaving the firm or maybe you could just give some color on whether all that work was being done with full-time staff or there might have been some contractors involved or something. Thanks.

Yeah, so, first of all, the work that we were doing was almost entirely done by our staff, the revenues are not, net revenues are not focused on other staff. So it is our staff. As I indicated, they were running at, you know, a much higher utilization than would be maybe normal for a group in that market slice. And so some of that will just get taken care of from that standpoint.

Look, you know, I think with regard to staff, you know, usually for one reason or another when there's a significant change in the workflow, there does end up being some change in staff. It's not that we're going to, you know, we're always looking for new opportunities. We're not going to stop hiring in that area. But needs change.

And so the people you hire in one subspecialty that you think is sort of important and maybe you've got too much staff in another specialty, and I think it's sort of offsetting all of those effects that, you know, Rich indicated that, you know, our staff outlook going forward might be overall more flat.

Okay. That's helpful. And then I wanted to talk about, maybe expand on the implications of slightly faster growth over a period of time in the proactive side of the business. What metrics that we're used to talking about for the business might change, and if so, how, and as an example, you know, does leverage of folks go up and maybe the bill rate growth slow because of that? Those just being examples, I'll let you speak as to which metrics (inaudible).

Yes, so let me sort of describe a few things that are going on there, and this runs a fairly broad range. I mean, one aspect of it is that we've talked before about the challenges associated with growth in parts of, particularly in our design consulting area where our clients are very focused on confidentiality, it's very difficult to market to new clients in the sense because they don't know what your, you know, what you're doing because you've got to be confidential about the work you're doing.

Over time, I think that that tends to open up a little bit in part because people who have worked with you at one company move and go to another company and there just becomes more and more knowledge out that Exponent is a major player in certain areas.

And so we think that that is sort of accelerating, in a sense, some of the opportunities for growth and from that standpoint I think we're optimistic about that aspect of it. I think we have gone through a time period, this kind of goes back to sort of the billing rates and the issue with regard to that sort of change in rate that Rich had talked about, the fact that our average billing rate has not gone up much, it's because in the proactive space, there is probably greater leverage, both proactive and large project reactive tend to have the most leverage in the business.

And as a result of that, you tend to get a higher proportion of more junior people working on the program so that while that's not a problem at all, obviously, from a profitability standpoint, but nevertheless when you look at it from the standpoint of growth in our bill rates, you kind of end up concluding, wait, the bill rates aren't going up much even though we're increasing them, you know, each year. So I think there's an effect there.

And then the final area I think is just continuing to expand the breadth of what we do in the more proactive spaces. You know, I think one of the things that makes us really valuable in that space is the range of technologies that are involved and, you know, whether it's in polymer science or whether it's in electrical engineering or, you know, battery technology or whatever, there's, we've got a very broad, broad range.

And, you know, part of that range we're continuing to work on, continuing to try to build upon. You know, we see some opportunities in data analytics, we're just scratching the surface at the moment. So the range of opportunity out there beyond just what we're in right now, this firm has always got part of its growth by expanding the range of what we do. And we still see opportunities to do that, both in the health arena, for example, you know, pharmaceutical area, but also in the engineering space as it gets more into some of these sort of analytical areas that we can provide (inaudible) the clients on.

Thank you very much, Paul. One numerical question for Rich, I just want to make sure I caught it. Is the number, the amount of share authorization that you have remaining at this stage?

Yes. That is just over $28 million.

Thank you so much.

(Operator Instructions). We'll go next to David Gold with Sidoti.

Hey, good afternoon.

Hi, David.

Just a couple of points of follow-up. Rich, you'd commented that you have a strong pine of professionals coming in, and I know you talked a little bit about, you know, expecting a flattish headcount. Just curious there on the professional management. One, can you speak to which practices you're likely adding to and then, two, just, you know, how one manages that balance or has some management of the balance already taken place.

Yes, David, this is Paul. So, you know, I think that we've certainly had certain areas of the firm that are growing faster that we expect more headcount growth in. I would include that as being on the health side and the chemical regulation, food safety area. There's a strong pipeline there.

I think if you look to the engineering side, the practices that tend to provide services to these more proactive growth areas we've talked about. So, you know, that includes materials, it includes polymer science, it includes biomedical. Those would be examples of some of the areas that would be growing as we feel it would be growing at a faster rate. I'm sorry, I think there was a second part of that, David?

Just as far as, you know, sort of managing the headcount that goes in versus the goes out.

Yes. I mean, I think the other aspect I would say, you know, about that, in addition to the comments that I've already made, I mean, I think that you're all aware that, you know, we're not a, what I call a traditional project engineering firm that hires and fires people for, you know, because they have, you know, certain projects.

We hire and develop staff over a long period of time. We attract very qualified staff. More than half our people have Ph.D.s. And so, you know, one of the effects of that is that when there are significant changes in the marketplace, whether it be in what happened to defense or whether it might be what happened here recently with this project, there's going to be a little bit of time to digest that and make sort of what I'll call appropriate adjustments, considering where we want to go, you know, and where we've got strength in staff and so forth.

So that's why you don't, you know, it would be easy for me if it was a situation where I could say, yes, we're going to make exactly this change, but that's sort of not really the way that the business works. Having said that, you know, you can look back over time, whether you look at the challenges in 2009 or whether you look at how we've handled the situation in defense, you know, we do find a way to make the adjustments that need to be made and, again, we will do that here, but it's in the context, this broader context that I'm describing of having a very high end workforce. And so, you know, those matters have to satisfy that body of constraints.

Got you. That makes good sense. Also, can you speak to, at this point, uses of cash, the cash position builds, I mean, repurchases, obviously, a little bit during the quarter, but is that still high on your list and was there anything else we should be thinking about there?

Yeah, I mean, I think, really, three areas that we've talked about, you know, we've been, you know, conservative probably over the long term in all three, but, really look to, over the next four to five years, to be able to see that our cash balance is coming down into the $50 million to $70 million range, and we expect to get there, really, across our continual look for acquisition opportunities that would be a growth into one of these adjacent areas, as Paul has discussed earlier, where we continue to look at that.

It's clear that we haven't done anything since 2002. That doesn't mean that we don't continue to look and evaluate things. But, you know, we feel that, you know, it's a matter of identifying the right opportunity that we think is of good value to shareholders in that process.

So we'll continue with that, but outside of that, it is our intent to continue to grow the dividends at a rate that is, you know, a little faster than earnings growth here, at least in the near term, and to complement that with a repurchase program that takes advantage of stepbacks in the stock and over time we think that hopefully that will achieve the long-term goal of delivering a good return on equity to shareholders.

Perfect. Perfect. That's helpful. Thank you both.

Right.

Thank you. Follow-up from Tobey Sommer with SunTrust.

Thank you. Rich, you gave a, I think, a billable hours number. Could you repeat that and the comparison?

Yes. The second quarter billable hours increased 4%, to $287,000, as compared to $276,000 in the circumstance of last year. This brings the year-to-date billable hours up to $579,000 versus $550,000 last year.

Okay. I guess that does it for me. Thanks for your help.

Thanks.

Thanks.

(Operator Instructions). And it appears there are no further questions at this time. This does conclude today's conference. A replay will be available later today to hear the conference dial 1(888)203-1112 and enter the passcode 6997907. Thank you for your participation.