Exponent Inc (EXPO) 2015 Q3 法說會逐字稿

Good day, and welcome to the Exponent third quarter of FY15 results conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Whitney Kukulka. Please go ahead, ma'am.

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's third-quarter 2015 financial results conference call.

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 Schlenker, Executive Vice President and Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements including but not limited to Exponent's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ 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 SEC filings including those factors discussed under the caption factors affecting operating results and market price stock in Exponent's most recent Form 10K. 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. Paul?

Thank you for joining us today for our discussion of Exponent's third-quarter financial results. For the quarter, net revenues increased slightly to $74.5 million. Net income for the quarter increased 6% to $11.7 million or $0.43 per diluted share.

We are pleased with our bottom-line results for the first nine months of the year. We achieved growth in profits and improved margins despite the modest revenue growth. Our third quarter and nine months results also demonstrate our ability to effectively generate cash from operations. Our underlining business continues to grow in the high-single digits. But as expected, our results were impacted by the decline in defense work and a major project ramping up.

Exponent continues to be retained to investigate the most significant accidents and failures. We are also seeing strong demand for our proactive services in design consulting for the consumer electronics and medical devices industries. We had notable third-quarter performances in our materials, polymer science, biomedical, and vehicle engineering practices, as well as our infrastructure group.

As we have previously indicated, the last of our three major assignments wound down early in the third quarter as the result of a proposed settlement. This project had represented approximately 5% of our revenue. We have made some adjustments to headcount and have increased our business development focus, but still expect to see a short-term impact to utilization.

We are now back to a more normal project portfolio with no current project representing more than 2% to 3% of our revenue. Rich will elaborate on the details of our forecast in a few minutes.

We continue to repurchase common stock in the open market. We repurchased $12.8 million in the third quarter and $19.8 million year-to-date. As we announced today, the Board of Directors has authorized an additional $35 million in share repurchases increasing the Company's current authorization to approximately $50 million.

We paid shareholders a $0.15 per share dividend in September, and we intend to continue paying dividends going forward. We believe that the combination of stock repurchases and dividend payments not only reflects our confidence in the Company and the strength and stability of our long-term financial position, but also our commitment to delivering value to shareholders.

While we have a challenging year-over-year comparison in Q4, and will need to clear the first half of 2016 to get past year-over-year comparisons that include the last of the major assignments, we are well positioned to deliver strong results in the years to come and believe that we are making the appropriate investments necessary to grow our business. We are excited about our growth opportunities and are committed to providing the best scientific advice to our clients.

Now I will turn the call over to Rich for a more detailed review of our financial performance and business outlook.

Thanks, Paul. For the third quarter of 2015, revenues before reimbursements, or net revenues as I will refer to them from here on, were $74.5 million, up nominally from $74.3 million in the same period of 2014. Total revenues for the third quarter were $79 million, also up nominally over $78.6 million one year ago.

Net income for the third quarter increased 6% to $11.7 million or $0.43 per diluted share as compared to $11 million or $0.40 per diluted share in the same quarter of 2014. EBITDA for the third quarter increased 2% to $20.1 million versus $19.7 million last year.

For the nine-month period, net revenues increased 3% to $225.9 million, and total revenues increased 4% to $239.2 million. Net income increased 7% to $33.7 million or $1.23 per diluted share. EBITDA increased 5% to $59.1 million over the same period of last year.

In the third quarter of 2015, net revenues for defense technology development were approximately $500,000 as compared to approximately $2.7 million in the same quarter last year. Year-to-date, net revenues for defense were $2.5 million as compared to $9.6 million in the same period of 2014. We expect revenues from defense to be approximately $500,000 in the fourth quarter of 2015.

We had 286,000 billable hours in the third quarter, a slight increase as compared to 285,000 in the third quarter of 2014. Year to date, billable hours increased 3.5% to 865,000 from 835,000 a year ago.

Utilization for the third quarter was 73%, which was better than we expected but down from the 74% one year ago. The year-to-date utilization was 74%, up from the 73% in the same period one year ago.

We expect utilization to be down approximately 2 to 3 percentage points from the 69% we achieved last year in the fourth quarter. It is consistent with our third-quarter run rate after adjusting for additional holidays and vacation days in the fourth quarter. This reflects the factors discussed earlier but also that our underlying work was very strong last year in the fourth quarter. We now expect full-year 2015 utilization to be approximately even with the 72% achieved in 2014.

In the third quarter, the realized bill rate increase was approximately 1% year-over-year but was offset by translating foreign currency for consolidated financial statements. For the third quarter, technical full-time equivalent employees were up 1% to 749 As compared to the same quarter in 2014. And is sequentially flat with the second quarter of 2015. We expect FTEs in the fourth quarter to be slightly up sequentially.

Despite the modest revenue growth, EBITDA margin was up for the third quarter to 26.9% of net revenues as compared to 26.5% for the same period of 2014. For the first nine months, EBITDA margin improved to 26.1% as compared to 25.5% in the same period one year ago.

For the third quarter of 2015, compensation expense, after adjusting for gains and losses in deferred compensation, increased 1%. Included in the total compensation is a loss in deferred compensation of $2.7 million as compared to a loss of $1.3 million in the same quarter of 2014. As a reminder, 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 third quarter of 2015 was $2.6 million. We expect stock-based compensation to be between $2.3 million and $2.5 million for the fourth quarter and between $10.8 million and $11 million for the full-year 2015.

Other operating expenses in the third quarter increased less than 1% to $6.8 million. Included in other operating expenses is $1.3 million of depreciation. For the fourth quarter, other operating expenses are expected to be $7 million to $7.3 million and between $27 million and $27.3 million for the full year of 2015.

SG&A expenses in the third quarter decreased 9% to $4 million. The decrease was the result of us having a smaller principals meeting in 2015 than the managers meeting we had in 2014. For the fourth quarter of 2015, G&A expenses are expected to be $4.1 million to $4.5 million and between $15.6 million and $16 million for the full year of 2015.

Capital expenditures were $2.6 million in the third quarter and $4.4 million year-to-date. Our income tax rate in the quarter was 37.6% as compared to 39.9% in the same period of 2014. Our income tax rate for the year-to-date period was 38.8% as compared to 39.7% during the same period last year. For the fourth quarter and full year of 2015, we expect our tax rate to be approximately 39%.

For the third quarter, operating cash flow was $19.5 million. Year-to-date operating cash flow was $34.3 million.

In the first nine months of the year, we repurchased $19.8 million of common stock at an average price of $42.70, $12.8 million of which was repurchased in the third quarter. As Paul noted, our Board of Directors once again authorized an increase to our share repurchase plan. In total, we now have approximately $50 million available for repurchases. Year-to-date, we distributed $11.8 million to shareholders through dividend payments. We ended the quarter with $151.3 million of cash and short-term investments after the repurchases and dividends.

Turning to our outlook for the full year of 2015. As previously indicated, our underlying growth has been in the high-single digits, but has been offset by a significant decline in defense work and the end of a major project. Based on our year-to-date results, we are reiterating our expectations for the growth of revenues before reimbursements to be in the low-single digits for FY15. We expect EBITDA margin to be essentially flat with the 25% we achieved in 2014, a slight improvement to our prior outlook.

We remain optimistic about our business and our long-term prospects. And now I will turn the call back to Paul for closing remarks.

Thank you, Rich. For the remainder of 2015 and into 2016, we are focused on further expanding our unique market position in assessing reliability, safety, human health effects, and environmental impacts of increasingly complex technologies, products, and processes. While we are growing at a slower rate than we might like in 2015 due to the various factors we discussed in the last few calls, we are pleased with our strong bottom-line results which demonstrate the resilience of our model.

Our long-term financial goals remain the same. Reduce organic revenue growth, improve profitability, and generate significant cash flow to allow us to continue to repurchase stock and pay dividends.

Operator, we are now ready for questions.

(Operator Instructions)

We'll go first to Tobey Sommer of SunTrust Robinson Humphrey.

Thank you. I want to start out by asking a question about utilization. With the wind-down of the large projects and the shifting around of resources associated with those, and the defense work, do you think, as we look into next year, or maybe you can make it a medium-term thing -- it doesn't have to be specific about next year -- do you have an opportunity with the existing mix of talent to get a couple points better utilization? Or do you need to add talent in certain areas that maybe aren't as well developed, in order to achieve better Company-wide utilization? Thanks.

Tobey, this is Paul. Our view of utilization is that in the short term you get some bouncing around, a little bit some ups and downs, depending from quarter to quarter and various things like that -- obviously, seasonally. We still believe that over the long term that -- when I say long term, I'll say mid-term, over the next few years -- we believe that utilization rates should be able to increase. And as Richard indicated, we expect this year to be about 72% by the end of the year for the full year. And we think that that should be able to move up into the mid-70%s. And we base that on the fact that our larger practices and offices tend to run at higher utilization levels than those that are smaller. So we have larger practices running in the high-70%s to low-80%s fairly consistently. So we believe there is an opportunity for that to rise simply because of sort of an increase over time in critical mass, and for the fact that in larger offices, the sharing of work works out a little bit better, and you get a little bit higher utilization.

We don't feel like we're in a mode where we can kind of project a -- sort of a 2% change in one year. That's not the kind of thing that we think we can project. We just think that over a period of years, we can gain something of the order of, on average, 0.5% a year. And some years it will be up a little bit more. Some years it will be down. But we still believe that what we described to the market over the past several years about moving our utilization from where it was in the high-60%s now into the low-70%s, we believe that that can continue up into the mid-70%s.

Thank you very much. A question about FTEs and headcount: If I were to see the underlying numbers, absent the cessation of the large project, would there be a slightly higher rate of growth? I'm just trying to think about, as we go into next year, maybe what's a reasonable range for growth in headcount. Thank you.

Yes, we, in 2014, as we moved through the year last year, we did end up reducing the amount of staff that we had that were individuals that were more focused on the defense industry. And we made some changes in that area, and that probably reflected a couple of percent of our total full-time equivalent billable staff at that time. As we've worked through the adjustments to staffing relative to our environmental group that was the primary group working on this major project, we are, at least to date, that adjustment somewhere probably 1.5% of the total full-time equivalent employees. So clearly over the last 12 to 18 months, we have been -- had that headwind against it. The rest of -- so that provides some information for you relative to the -- what's been going on the last few years.

I do think that as we look going forward, we will see a sequential headcount growth that begins to get back into the more normal range, which, for us, will reflect an annualized increase that should run somewhere in the 4% to 7% headcount growth. I think that will be obviously as we're moving through the next nine months, getting back to the transition we made over the major project, that will be somewhat dampened by 1% to 2%. But I think that as we look forward, we do believe that the underlying model will support a 4% to 7%, 4% to 8% headcount growth.

Thank you, Rich. Just two last questions for me: The capital deployments between repurchase and dividends has come close to tracking operating cash flow. Is that what we should be looking for going forward, or is there an intent to utilize some of the cash that's accumulated on the balance sheet, such that maybe you're returning more cash to shareholders than the cash generated from operations.

Absolutely, we intend to reduce our cash on the balance sheet over the next several years. We've talked about over the next four to five years of bringing back down into the $50 million to $70 million range on the balance sheet. So it is our intent to, through repurchases as well as dividends, and there may, over time, be some smaller acquisitions in there that we do, but to bring that cash down to approximately $50 million by deploying that excess amount back to shareholders.

Thank you. Last question is: You mentioned some -- redeploying some resources into business development. Could you give us some context for how we might see the effects of those additional business development efforts, if they are material? Thank you.

Yes. I mean, these are not big-ticket items. They are relatively small. We do -- historically, our business development is -- it's largely a reputation business, and essentially we keep our profile up by attending various conferences and things like that. But the reality is, most of the work comes in through clients calling us back.

I think as we move to proactive work, there is a little bit more focus on some particular industries, and as such, we've made some investments that focus a little bit more on those industries. These are not big-dollar investments.

Clearly, the senior leadership in our environmental practice was very focused on the work and the goal is -- obviously has more time now to -- and demand to focus on business development in that particular area to refill the backlog.

I appreciate the answers. Very helpful.

We will go next to Tim McHugh of William Blair & Company.

Yes, thanks. I'm sure you're limited somewhat in what you can say, but obviously there is a major auto company in the news with issues in the past. That sort of thing has driven large projects for you, and I know I've gotten a number of questions about it. In terms of what you can say about your positioning relative to that or credentials or whether -- any color you can give us in terms of involvement or potential involvement in that set of issues.

Sure. You're right. There is limits to what we can say. Look, the major news items involving automotive players, whether it be unintended acceleration with Toyota or ignition switches with GM or the airbag situation with a number of manufacturers, these are all things that clients have announced that we've be involved in, and we were able to confirm that. Obviously, a couple of them are in the past. One of those is still -- involving airbags -- is still obviously very active.

At the present time, consistent with our normal approach, which is we can't indicate whether we are retained or not until our client decides to disclose that, we are not in a position to say anything about VW at the moment. But it's -- just looking at the track record, it would be surprising if it was something that we didn't get involved in, or that we are not already involved in, whichever way you want to look at it.

Okay. Fair enough. And then, we haven't talked about pricing in a while. Can you just give us an update in terms of -- how sticky are your bill rates? Is there any pressure on them in the market right now -- just the general context for discussions with clients around bill rates at this point.

Yes, so our normal process, of course, is that we go through our planning here in the fourth quarter where we are right now, and during that process we set the bill rates that will become effective in January. We are slightly unusual in the marketplace in that we operate where each individual has a billing rate that they will charge all clients next year. And we don't negotiate bill rates. That way, everybody gets the best bill rate, and so that's kind of the philosophy that we have.

There's no question that with major clients there tends to be some pressure to control rates, but the reality is the rates we set for them are the rates we set for everybody, and they also have come to understand that. And so we don't have any kind of a preferential way of treating long-standing client -- long-standing large clients different from other ones. So in the end, we have to make some decisions. I think our viewpoint has been that bill rates have -- continue to increase every year. Even in 2009, we put in bill rate increases, and we expect that to continue. So I don't see a lot of change in that.

I will comment a little further on what I will call the realized bill rate or the mix of our bill rates at the end, because we are in a mode where our realized bill rate increase is very low compared to history. And we think that's occurred because of the mix of projects we have -- more projects with higher leverage, some of the busiest practices being ones where the average bill rate might be lower than some others and so forth. The reality is we don't expect that to remain where it is. We expect that the realized bill rates that we get going forward should be moving back toward more of a normal historical rate.

Okay. Thank you.

(Operator Instructions)

We will go next to David Gold of Sidoti & Company. Mr. Gold, your line is open. Please go ahead.

Rich, can you give a little bit of a sense -- on the headcount adjustment that we've done so far to manage, essentially, coming in sort of flattish doesn't give us a great sense for where we've maybe trimmed versus where we've added. Can you give a sense on what the [goes in's and goes out's] have been as you adjust headcount there?

We had approximately 10 people that we separated from in the middle of the quarter relative -- primarily related to the ending of the project that we had ongoing. That would have been primarily -- that would've all been in our environmental and health segment in that period of time. So it had an impact of approximately five FTEs in the quarter because it occurred in the middle of the quarter.

Perfect. That's helpful. And then, as we think about next year, and maybe the addition that you mentioned -- as we think about that, is there much -- did you say it was just 1% dampening that you expect to bleed into next year?

Yes, I think that the impact to the top line will be approximately 5% of revenues in each of the first and second quarters, for a full-year impact of about 2.5%. What I had discussed before was that I thought the -- obviously, the impact from two FTEs in particular was approximately 1.5% because that's what 10 of the 750 staff that we have, I guess 1.3% or so, in that range being the impact to headcount growth as we move into 2016. That's how I see things happening there.

Perfect. Just one last question -- also, if we can get a sense for how that translates, presumably on the bill rate side, the larger projects ramp obviously without calling them out individually. One would assume that you get some pretty decent rate there. Would we see any impact from the pull-back as well?

I think the rates that we were achieving relative to the work that we were doing on that project were approximately at the average of the Company. I don't see that that will have any impact on rate.

Perfect. Thank you so much.

It will have some impact. Obviously, you had that in the utilization or billable hours, and we've adjusted for part of that, but not for all of it, as Paul indicated last quarter. Part of this is you make some adjustments to staff, you do some more -- really double down on your business development. And you also realize that, in this business area, you're not going to return all the way to the level of utilization you have when you have a major project like that. And that area will operate at a more steady state, lower level once it gets the business development going and adjusts the staff appropriately.

Perfect. Thank you so much.

And with no questions remaining, this will conclude today's conference. We thank you all for your participation, and you may now disconnect.