Exponent's (EXPO) CEO Paul Johnston on Q2 2014 Results - Earnings Call Transcript

Jul.22.14 | About: Exponent, Inc. (EXPO)

Exponent, Inc. (NASDAQ:EXPO)

Q2 2014 Earnings Conference Call

July 22, 2014 4:30 PM ET

Executives

Erica Abrams – Co-Founder and Managing Director

Paul R. Johnston – President and Chief Executive Officer

Richard L. Schlenker, Jr. – Executive Vice President, Chief Financial Officer and Corporate Secretary

Analysts

Timothy McHugh –William Blair & Company, L.L.C.

Joseph D. Foresi – Janney Montgomery Scott LLC

Frank Fannon – Suntrust Mortgage, Inc.

David Gold – Sidoti & Co., LLC

Operator

Good day and welcome to the Exponent’s Second Quarter 2014 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Erica Abrams. Ms. Abram.

Erica Abrams

Thank you, Greg. Good afternoon, ladies and gentlemen and thank you for joining us on today’s conference call to discuss Exponent’s second quarter 2014 results. Please note that this call will be simultaneously webcast on the Investor Relations section of the company’s corporate website at www.exponent.com/investors. This conference call is the property of Exponent, and any taping or any 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 on current expectations as of today, and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise.

And now, I would like to turn the call over to Paul Johnston, President and Chief Executive Officer of Exponent. Paul, please go ahead.

Paul R. Johnston

Thank you for joining us today for our discussion of Exponent's second quarter 2014 results. For the quarter, net revenue is increased 1% to $72.3 million from the same quarter last year. Net income for the quarter increased 4% to $11.3 million or $0.81 per share. These results are particularly notable considering the difficult year-over-year comparable. As we indicated in our previous guidance, last year’s second quarter included $1.75 million of net revenue from work performed in prior quarter. And this year second quarter had an extra holiday at July 4 as the last day of the quarter.

During the quarter, we experienced a steady pace of reactive project work. As we assisted clients in litigation matters and product recall evaluations. We had good demand for our proactive consulting services from a number of industries. In the consumer electronic industry, we help clients assess new product design. In the medical device industry, we assisted clients in the evaluation of new material and finally in the utility industries we provide a construction consulting services for new infrastructure project. We are pleased to be able to leverage our experience in steady analysis to help clients build more reliable products. While we’re the leading engineering and scientific firm providing reactive services, we are continuing to build our reputation as they go to firm for more proactive service.

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

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

Richard L. Schlenker

Thanks Paul. For the second quarter of 2014, revenues before reimbursements, or net revenues as I will refer to them from here on, were up 1% to $72.3 million, as compared to $71.9 million in the same period of 2013. Total revenues for the quarter were also up 1% to $76.6 million as compared to $75.5 million one year ago.

Net income increased 4% to a $11.3 million or $0.81 per share as compared to $10.8 million or $0.77 per share in the same quarter last year. EBITDA for the second quarter was $19.7 million versus $19.5 million in 2013. Diluted share count decreased to $13.9 million from $14 million in the same period last year

For the first six months of 2014, net revenues increased 3% to $145.3 million as compared to $140.9 million in the same period of 2013. Total revenues year-to-date were $152.5 million as compared to $148.2 million one year ago. Also for the first six months net income increased 8% to $20.4 million, or $1.47 per share, as compared to $18.8 million or $1.34 per share in the same period last year. EBITDA for the first half of 2014 increased nearly 7% to $36.3 million versus $34.1 million in 2013.

Turning to more details, as a reminder in the second quarter of 2013, we’ve recognized $1.75 million in revenue related to a contract in our health and environmental segment for which work was performed in prior periods. Due to concerns about collectability we waited to recognize revenue until we receive the cash, which occurred during the second quarter of 2013. This incremental revenue contributed $1.75 million to revenues before reimbursements $1.2 million to EBITDA 700,000 to net income $0.05 to EPS and two percentage points to utilization in the second quarter of 2013.

Through the second quarter of 2014, Defense Technology Development had net revenues of $3.7 million has compared to $3.1 million in the same quarter last year. Neither quarter had product sales. For the full year 2014, we continue to expect revenues from Defense to be lower than in 2013 due to constraints on defense spending and the reduction of forces in Afghanistan.

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

For the second quarter, billable hours decreased 1.3% to 276,000. Year-to-date billable hours are up 1.1%. In the second quarter, technical full-time equivalent employees, on a year-over-year basis, were up 2.7% to 733, year-to-date FTEs are up 3.2% inline with our expectations for the full-year of 2014. Our realized rate increase was approximately 2%.

EBITDA margin for the second quarter was 27.2% of net revenue as compared to 27.1% in the second quarter of 2013. Year-to-date EBITDA margin improved to 25% from 24.2% in the same period one year ago.

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

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

Other operating expenses in the quarter increased 4% to $6.5 million as compared to the same quarter in 2013. Year-to-date other operating expenses increased 3% to $12.8 million from the same period one year ago.

For the remainder of 2014 other operating expenses are expected to be approximately $6.8 million per quarter. G&A expenses in the quarter increased 2% to $3.75 million, year-to-date G&A increased 5% to $7.4 million. For the third quarter, G&A expenses will be approximately $4.5 million. This elevated level is the results of a companywide manager meeting is being held in September.

In the fourth quarter, G&A expenses will be approximately $4 million. Our income tax rate in the quarter was 38.8% as compared to 40.6% in the same quarter of 2013, reflecting a one-time tax credit up $340,000. Our tax rate in the third and fourth quarters is expected to be approximately 40.5%.

At quarter end, our cash and short-term investments were $144.5 million as compared to $137.5 million in the prior quarter. In the first half of the year, we've repurchased $14.4 million of our stock for a total of 198,000 shares. We still have $51.6 million authorized and available for repurchases under our current repurchase program. Additionally, during the first half of the year, we distributed $6.6 million to shareholders through dividend payments. Capital expenditures in the second quarter were $1.1 million. Our DSOs were 95-days at the end of the second quarter.

The second quarter wraps up a solid first half of 2014, putting Exponent in a position to achieve growth and revenues before reimbursement in the low single-digits for the fiscal year. Considering, our performance in the first half, we are improving our 2014 outlook on EBITDA margin by 75 basis points to being down by approximately 25 basis points from 24.6% margin in 2013.

As a reminder fiscal 2013 was a 53-week year and as such included an extra week of activity in the fourth quarter. In addition 2014 growth and revenues before reimbursements will be reduced, because of a step down in a few major assignments and lower defense spending as well as the $1.4 million of revenue recognized in the second quarter of 2013 for work performed in the fourth quarter of 2012.

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

Paul R. Johnston

Thank you, Rich. In summary, we have now closed a solid first half of 2014. For the remainder of the year, we will continue to hire talented professionals to strengthen and diversify our business and ultimately drive higher levels of growth overtime. We will remain focus on our key financial priorities of revenue growth, cash flow generation, EBITDA improvements and long-term shareholder value.

Operator, we are now ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question today comes from Tim McHugh with William Blair.

Timothy McHugh –William Blair & Company, L.L.C.

Yes, thank you. I guess just on the margins are obviously extremely strong. Your revenue was kind of inline with expectations. So what surprised you from an expense standpoint year-to-date that cost you can I guess to revised your full-year expectation - it doesn’t seem like you are hiring a lot or less, but I guess just what’s the cost that I guess if you’re trying to do differently that’s makes you more positive for the full-year?

Paul R. Johnston

Yeah, I think we had a couple of things. I think that the operating costs growth was a little bit more in line, a little bit lower here being in the low-to-mid single-digits in those categories. In addition to that, I think that we the compensation side also has been growing as fast because we the blend of the employees that we’ve hired has brought in some younger people, but we still been able to keep it solid utilization through that period of time.

So I think that our margin there continues to be strong. So those for some other contributing factors with cost being sort of flat year-over-year for the second quarter with just slightly higher with only 1% revenue growth, but it’s in a little bit better shape than we would have thought.

Timothy McHugh –William Blair & Company, LLC

And is there a chance of that the getting more junior I guess consultants I guess is that kind of a new trend or is it a longer-term plan I guess and I guess why are is there something about that where the growth is coming that you can have a bigger or wider staffing pyramid to support it?

Paul R. Johnston

Yeah, I think there is a couple of things Tim in that area, one is we‘ve been continuing to build on our university of recruiting program this is something where we get what we call our junior staff which are mostly people coming out with Ph.D from a top school. We’ve been you know hiring a greater percentage of people from that program then we did maybe in the past.

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

A lot of litigation projects is focused on the senior person and for the smaller cases are very small team of junior people, but for the larger cases they also get a good size pyramid going, but really the move toward more proactive services, which are growing faster than the reactive and the expansion of our university recruiting program I think have both helped in that regard.

Timothy McHugh –William Blair & Company, LLC

Okay and I guess how much more room is that maybe just in the context, not as much for this year, but the adjusted EBITDA margin kind of excluding stock comp approaching 30%, I know that’s another full-year target, but you have kind of been there for the first half. I don’t see many consulting companies get a lot beyond that. I guess do you feel like you can continue to improve from that level and is this one of the factors, I know you talked about utilization as well, but is this a structural shift that’s could really adds moment for the next couple years?

Richard L. Schlenker, Jr.

Yes. I look, I think our margin this year for the full-year will be in the 24% range to 24%, 24.5% some around there, and we’re going to achieve that about 70% utilization, we think that utilization can improve from that level, we’ve had utilization in last few years perform upward of 73% and we've talked about the fact that over a longer period of time we could see that approaching to 70s. We see that coming as we continue to build better critical mass and certain practices in offices and as Paul has laid out here with some of the proactive services.

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

So with all that said, as we look out over the next few years, as your question enquired, we still think that there is room for a 30 basis to 50 basis point improvement on average over the next let’s call four or five years that would still leave us somewhere at the low-end of that of let’s say it 26, 17 somewhere around there on a full-year basis even in that range is something that we think is achievable over let’s say the next five years.

Timothy McHugh –William Blair & Company, LLC.

Okay. Great. Well thanks congrats on a great quarter.

Paul R. Johnston

Thank you.

Operator

And next we move to Joseph Foresi with Janney Montgomery Scott.

Joseph D. Foresi – Janney Montgomery Scott LLC

Hi, I was worrying if we could start by kind of backing up just a second and taking a look at some of those large projects, it seems like we sort of move forward to none but maybe we could talk about the impact for large projects and when we start to get to some better comps from those projects, I think someone had a tail so if you could get some idea what that tail has been as well would be helpful.

Paul R. Johnston

Yeah, Joe this is Paul. I think where we’re you know we’ve talked about they’re being start of three of these larger assignments that we’ve had over a period of time. I think on the last call, I indicated that a couple of those some of the step down into the sort of the normal range of large projects. I think there are probably stepping down it maybe even a little further on that. We’re really now in the mode where just one of those three projects is still what we would call as truly a major assignment at this point of time. And that’s kind of how we look at the large projects.

Joseph D. Foresi – Janney Montgomery Scott LLC

Got it. So just to be clear and then maybe Rich you could step in here. Are we starting to hit next quarter a better comparative, or do we have to actually until next year or not?

Paul R. Johnston

Let me just follow-up on that, I mean I think that from the standpoint of two of the three large projects we’re in that sort of better comparison standpoint, but from – but we have won that’s not and you know we never know exactly how long those are going to continue, but we have the expectation that will continue at something approaching its current level for a reasonable number of quarters beyond where we’re today.

Richard L. Schlenker, Jr.

Yeah, I think in the comparative sense when you look at year from now yes I mean looking back we still talked about these projects being major assignments a year ago as we went through the third and fourth quarters of last year. And so the step down there I think the other area that we’ve talked about in our comments in the release is just that we still are facing our defense business is the majority of that work is very highly tightly tied into activities in Afghanistan for the U.K. Ministry of Defense as well as the U.S. Department and Defense. And those are going to began to step down here in the next couple of quarters. We’ll see that began to see the impact of that. So that we have out there at this time.

Joseph D. Foresi – Janney Montgomery Scott LLC

Got it. Okay and then just on the margin side of things are there any practices or because I know you guys have a lot of different project we wants but are there any particular projects that have better more margin profiles and others and maybe you can just give us feel of how much that contributed to that the increase in the margin profile for this year?

Richard L. Schlenker, Jr.

Yes, I don’t think that there – its not that we had some individual practices significantly change, I think we’ve seen an increase where we’ve seen improved utilization in activities a couple of those would be in our construction consulting practice, where we’ve clearly seen a pickup in the level of activity in that group.

So, we have strong utilization, we’ve been recruiting in that area and as such that was an area that during the sort of more difficult economic times things tightened, the infrastructure were not necessarily performing as well. So, we did see an improvement in particular in that area, we did see some year-ago, I think we had a little improvement in a few of the engineering areas, where we’ve had more of the proactive activities ongoing, we did see some improvement in that area as well.

Joseph D. Foresi – Janney Montgomery Scott LLC

Got it. And then last one for me, so obviously we’re well aware the goings on in the military practice going forward. Can you give us a sense of sort of what do you think the impact to numbers will be there. And are there any offsets in your present business to kind of observe to tail off of that business?

Richard L. Schlenker, Jr.

Yes, so, again I don’t think that it will necessarily all go away, but there is probably 70% of the revenues that we are doing 70% or 75% or something are the revenues that we are doing in the second quarter that have a tie into understand. So you’re talking of that $3.73 [ph] million or so in the quarter.

I see that it probably won’t be all, but it could be the majority of that revenues that steps down over the next couple of quarters is really going to depend on the timing of when each the U.S. and the U.K. pulls out and when they want the support of our labs that are over there to pullout with that. I would expect that there will continue to be a some activity with each of the organization lets say the Rapid Equipping Force or the UK Ministry of Defense that has the GPR system, there will be some activity that continues on beyond that but the majority of it would step-off at that time.

Joseph D. Foresi – Janney Montgomery Scott LLC

Okay, thank you.

Operator

And next from SunTrust will hear from Tobey Sommer.

Frank Fannon – Suntrust Mortgage, Inc.

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

Paul R. Johnston

So that’s an area that still we consider it sort of part of our – it sort of spread between a couple of areas within the firm one is our electrical engineering practice and the other is in technology development. We have activities in both those places. We’ve certainly got more hiring going on in those areas. We have not been able to hire principals yet in that area we have people that are sort of senior manager and more junior in that area. So my feeling is that it’s growing, it’s broadening but it’s not what I call taken off yet but its growing.

Frank Fannon – Suntrust Mortgage, Inc.

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

Paul R. Johnston

Yes, so I mean we’ve generally described our proactive work is being something a little bit north of 30% of the business and I sort of see that as continuing to grow, we are not I think quite ready at say it’s now 35% you know we kind of report it when we getting the feel like the increment is up to the next five and we are not probably quite there yet.

But there’s clearly a lot of the growth across the engineering and health practices continue to come in these more proactive services and the health arena it’s around food issues and around agricultural chemical issues and reach basically for the chemical regulation issues helping our clients with their processes are getting approvals on new application or new chemicals.

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

So it pretty broad-based when we look at the – at the proactive work and we are still in the mode that we’ve talked about before which is that the pace is getting new clients is not as fast as we would like, but when we get new clients what we find is we get a lot of projects from those new clients, we get great return revenue as it where by having those clients come back to us across maybe all of the facilities across United States or across more of their product line and so forth. And so that’s part of what – what we find very rewarding and very exciting because it is clearly a demonstrated to appetite and need for the services we provide.

Frank Fannon – Suntrust Mortgage, Inc.

Okay. And two last ones. One, are you seeking any changes in the competitive landscape any other smaller boutiques that are gaining scale in multiple areas. And then two, if you could give the breakout of revenues in engineering and environmental and health that would be great?

Paul R. Johnston

Yeah. I think on the competitive side the only comment I would make there is that on some of the insurance type of work that tends to be much more rate sensitive then some of the other work, there is that area is become quite competitive from the standpoint of other firms been willing to have lower prices to get that work. So that sort of the only things that I would say has been a change over the past few years in terms of that competitive landscape.

Richard L. Schlenker, Jr.

And to give you the some numbers by the two segment. So on the revenue side the growth revenue side, revenues in the environmental and health were $21.3 million and in the engineering was $55.3 million, on a net revenue basis environmental and health was $20.8 million and then in engineering $51.6 million or what did you want another components of it.

Frank Fannon – Suntrust Mortgage, Inc.

Yeah. If you want to give another, that would be great.

Richard L. Schlenker, Jr.

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

Frank Fannon – Suntrust Mortgage, Inc.

Okay. Great thank you very much.

Operator

Our next question comes from David Gold with Sidoti & Co.

David Gold – Sidoti & Co., LLC

Hi, good afternoon.

Richard L. Schlenker, Jr.

Good afternoon.

Paul R. Johnston

Good afternoon, David.

David Gold – Sidoti & Co., LLC

Just a little bit of follow-up you spoke on a little bit of say the margin upside, I guess the possible would like a little bit more clarity, I guess to the extent of – I think the comment on release was your revenue was basically in lined with what you had expected, certainly what we expected it always, presumably good upside there. So I understand the leverage point, but was curious if you can offer color on basically what a biggest variance was versus what you were expecting or sort of your model where the upside came from there presumably the leverage you likely...

Paul R. Johnston

Yes, so I mean I think we ended up probably a percent maybe a little a bit more lower on headcount than we had expected and a percentage point maybe higher on utilization of that group, so 72% versus 71% in the utilization that we had there, I think we had indicated in our guidance that utilization could be down 4% to 5% and we were only down 3% over what it was there.

That played into their – I think the rest of the numbers are smaller in a sense that both G&A and other operating were down couple of $100,000 each, but again those play in to be our smaller numbers in the equation it really comes out of the ability to grow compensation inline with or just slightly below the growth in the revenues that played into it.

David Gold – Sidoti & Co., LLC

Gotcha and to that end, can you give us a sense for thinking on the headcount side both today and sort of maybe for year end.

Paul R. Johnston

Yes. We have a good number of people that are scheduled and signed up to come in here in the third and fourth quarters with a little bit of – we would have expected it in the past, it’s been a little smoother, last year we saw a little bit of this as we’ll coming a little later in the year. So we would expect the headcount is going to step-up here from I think we’re 733 in the quarter I would expect that to be somewhere between 745 and 750 in the second quarter and probably somewhere between 750 and 755 for the fourth quarter. I’m sorry, the third quarter and fourth quarter I meant to say there.

David Gold – Sidoti & Co., LLC

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

Paul R. Johnston

Yes, I mean we had instead of having people coming in the second quarter, I think we might have had 15-people on the first two weeks of the third quarter for example. So it’s just instead of coming in six weeks ago or something, they were in now sort of – just a little bit of timing.

David Gold – Sidoti & Co., LLC

Gotcha, gotcha. Okay, perfect. And then one last one, presumably ample room left on the repurchase authorization, but roughly current thoughts on uses of cash?

Paul R. Johnston

Yes, we continue to be committed over the long-term year over the next four years to five years to continue to work on bringing our cash balance down by returning that to shareholders through repurchase and dividends. We target to be somewhere in $50 million to $70 million on the balance sheet out four years or five years from now, which we think means that we need to use both the dividend and repurchases over that period of time to deploy that back to shareholders. We think that will allow us to continue to have the flexibility on the balance sheet to do what we need to do from an operational standpoint and be opportunistic if things come along.

David Gold – Sidoti & Co., LLC

Perfect. That was helpful. Thank you both.

Richard L. Schlenker, Jr.

Thank you.

Operator

(Operator Instructions) And it appears we have no further questions at this time. That does conclude today’s conference. We thank you for your participation. And should you need to access the reply of today’s conference, you can dial 1888-203-1112 that’s 1888-203-1112 and the replay of today’s call will be available until a week from today that’s July 29. Again we thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!