Exponent F1Q08 (Qtr End 3/28/08) Earnings Call Transcript

Apr.14.08 | About: Exponent, Inc. (EXPO)

Exponent, Inc. (NASDAQ:EXPO)

F1Q08 Earnings Call

April 14, 2008 4:30 pm ET


Brinlea Johnson - The Blue Shirt Group

Michael R. Gaulke - Chairman of the Board, Chief Executive Officer

Richard L. Schlenker Jr. - Chief Financial Officer, Corporate Secretary


David Gold - Sidoti & Company

Tim McHugh with William Blair & Company


Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Exponent first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Brinlea Johnson of The Blue Shirt Group. Please go ahead, Madam.

Brinlea Johnson

Good afternoon, ladies and gentlemen, and thank you for joining us on today’s conference call to discuss Exponent's first quarter 2008 results. Please note that this call is being simultaneously webcast on the investor relation 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 production is expressively prohibited without Exponent's prior written consent.

Joining me on the call today are Mike Gaulke, Chairman and CEO; and Rich Schlenker, CFO 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 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 Form 10-Q for the quarter ended March 28, 2008.

The forward-looking statements and risks stated 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 Mike Gaulke, Chairman and CEO of Exponent. Mike, please go ahead.

Michael R. Gaulke

Thank you for joining us today. We are pleased to report strong financial results for the first quarter of 2008. For the quarter, net revenues increased 15% over the same period last year, net income grew 26%, and earnings per share were $0.40.

During the quarter, we had strong performances in our electrical and semiconductors, thermal sciences, human factors, construction consulting, defense technology development, and mechanics and materials practices, in addition to our health group.

Project activity in the quarter included several of our core engineering practices working together to help a global consumer products manufacturer defend its design of a home appliance, which a major competitor claimed had infringed upon its intellectual property.

We continued to see strong demand for our product design consulting services from consumer electronics, battery technology, and medical device companies. These assignments typically include professionals from our electrical and semiconductors, thermal sciences, and mechanics and materials practices.

While Europe is still a small part of the firm’s total revenues, our health sciences group is experiencing strong growth from this geographic region. Several multi-national companies have retained us to help them comply with both EU and individual company regulations.

During the quarter, we continued the delivery of rapid deployment integrated surveillance systems and Markbots to the U.S. Army and renewed our contract with the rapid equipping force for another year of support in Iraq and Afghanistan. Additionally, we received a five-year follow-on contract from the Department of Defense to support their smart card program, as well as a contract to support the Natick Soldier Center, with the development of future force warrior technologies and demonstrations.

We started 2008 with strong hiring, increasing FTEs 7% year over year and positioning the company for future growth.

In summary, we are pleased with our results for the first quarter and remain optimistic that we are well-positioned to capture future growth opportunities. I’ll now turn the call over to Rich for a detailed discussion of our financial results.

Richard L. Schlenker Jr.

Thanks, Mike. As Mike discussed, we were pleased to begin the year with strong revenue growth and bottom line results. For the first quarter of 2008, total revenues increased 15% to $56.3 million. Revenues before reimbursements, or net revenues, as I will refer to them from here on, also increased 15% over the prior year to $52 million. Net income for the first quarter increased 26% to $6.3 million, or $0.40 per diluted share, as compared to $5.1 million or $0.31 per diluted share in 2007. This improvement is a result of leveraging our operating expenses, a slight improvement in utilization, and strong defense technology product sales. Additionally, EBITDAS increased 29% to $13.8 million in the first quarter of 2008.

Contributing to net revenue growth was a 7.6% increase in billable hours as compared to the first quarter of last year. This was the result -- this also benefited from a 7.2% increase in average full-time equivalent employees to 609 and utilization of 69.5%. We also realized an average bill rate increase of approximately 4.5% as a result of our annual pricing increase on January 1st.

Defense technology development net revenues were $3.5 million as compared to $2.2 million last year. This includes the delivery of RDISS and Markbots of $1.8 million in net revenues as compared to $500,000 last year.

Operating margin for the first quarter improved to 19.4% of net revenues from 16.4% in the same period last year. In the first quarter of 2008, our operating margin benefited from $1.3 million of incremental product sales, a slight improvement in utilization, and operating efficiencies. Operating margins also benefited from a $600,000 swing in deferred comp expense, which was offset by a $600,000 loss taken against miscellaneous income. This had no effect on the ultimate bottom line.

Turning to more detail on operating expenses in the first quarter, compensation expense increased 11.6% to $33.5 million. This increase is a result of our growth in FTEs and year-over-year salary increases. Additionally, the bonus accrual has increased in line with profits.

Exponent's salary adjustments for 2008 of approximately 5.5% took effect on April 1st of this year. Stock-based compensation expense for the first quarter was $2.9 million, up from $2 million last year. As a reminder, first quarter stock compensation expense carries a disproportionate share of our annual amortization and we expect it will be $7.5 million to $8 million for the full year.

Other operating expenses for the first quarter increased 5.7% over last year in the same period to $5.4 million. Depreciation in the first quarter was $940,000. G&A expense for the first quarter increased 6.2% from the same period in 2007 to $3 million.

Reimbursable expenses increased to $4.3 million as a result of increased defense technology product sales. Our tax rate for the first quarter of 2008 was 39.75% as compared to 39.4% in the first quarter of last year.

For the quarter, diluted share count was 15,991,000. For the second quarter, we expect diluted share count to be approximately 16.4 million as a result of our stock grants that normally occur in the first part of the year.

Turning to the balance sheet, we closed the quarter with cash and short-term investments of $61 million. During the quarter, we repurchased $4.8 million worth of common stock as part of our authorized stock repurchase program. Capital expenditures for the first quarter were $1.2 million.

At the end of the quarter, DSOs were 96 days as compared to $104 days at the end of the same period last year.

In summary, we are pleased to report strong financial results for the first quarter of 2008 and we expect to achieve high single digit to low double digit net revenue growth for the full year.

Now I will turn the call back to Mike for concluding remarks.

Michael R. Gaulke

Thanks, Rich. Throughout 2008, we will continue to pursue new opportunities in our strategic growth areas, including health sciences consulting, product design consulting, construction consulting, and energy consulting. We will seek to capture new growth opportunities in our defense technology development business. We will add selective, qualified talent to the team to drive long-term growth. We will maintain our focus on growing both revenues and earnings and lastly, we will strive to generate additional cash from operations, maintain a strong balance sheet, and undertake activities to enhance shareholder value.

We look forward to reporting more success to you in the coming quarters. Now I will turn the call over to the Operator for your questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of David Gold with Sidoti & Company. Please go ahead.

David Gold - Sidoti & Company

Good afternoon, a couple of questions for you. First, can you fill in some color on the contracts signed during the quarter, both the renewal on the Markbots and then the five-year follow-ons from DOD?

Richard L. Schlenker Jr.

The renewal of the contract with the rapid equipping force is really our base contract there to continue to provide support in Afghanistan and Iraq in technology development for the U.S. Army. We expect that they’ve continued to have our support, either maintained or be increased even. Currently we have four people in the field. They’ve allowed for us to include that to be up to five. In addition to that, that order or contract allows for them to come to us from time to time and pursue new technologies in the area. So that contract we expect to continue to operate as it has for the last several years and be at or about the same level.

The contract with DOD on the smart cards is one where we’ve had a contract with them for I think the last three to four years. They put out for a renewal there or a new contract. That again is something that has run a little less or around $1 million a year. That’s what we’d expect going forward. Again, there’s ability for them to order additional services under it but at this time, we are expecting that level of demand under that contract.

David Gold - Sidoti & Company

And then on the Navy one that you had mentioned, or was that tied in with the smart card?

Richard L. Schlenker Jr.

That’s our contract for Natick Solider Center. It’s not with actually the Navy. It’s with the Natick Soldier Center and that is for work that we started in the middle of last year for them more on a month-to-month contract, providing some support for their development they are working on for future force wear. That contract we expect to be about $2 million in net revenues over the next 12 months.

David Gold - Sidoti & Company

Okay. Perfect, thanks. And then another question -- you had commented, Rich, along the lines of experiencing about 4.5% price or average bill rate pick-up in the first quarter, but you point to 5.5% salary increases in the next quarter. Would we expect to see a little bit more price to offset that or is this year one where we lose a point maybe in price?

Richard L. Schlenker Jr.

No, I think that we should be -- they should come out about approximately the same. I mean, our -- for the same group of people that we did raises for effective April 1, is really our employee base that was here last year. It’s our rewards for last year and those were the individuals that we did the pricing increase -- we did pricing and our pricing increase was approximately the same at January 1. The amount of that that we realized in the first quarter through both new hires coming in as well as mix ended up at about 4.5%. So I would expect that the salary increases and bill rates to be about the same as we are in the -- as we go into the second quarter and beyond, sort of in that 4.5% to 5% range that we are able to realize.

David Gold - Sidoti & Company

Perfect. And then Mike, just one for you, my usual question about acquisition climate landscape and thinking, if it’s the same or changed any.

Michael R. Gaulke

I would say it hasn’t changed, David. We are still looking for the right acquisitions, tuck-ins probably the best way to describe them, and particularly in the area of health and construction.

In terms of landscape, the economic environment should be -- at least we’ve got the wind behind us and not in our face here at the moment, I think, and we’ll see how successful we are here as the year proceeds.

David Gold - Sidoti & Company

Perfect. Thank you both.


(Operator Instructions) Our next question comes from the line of Tim McHugh with William Blair & Company. Please go ahead.

Tim McHugh - William Blair & Company

Yes, first on that Navy contract -- can I ask if that is a time and materials contract or a product sales?

Richard L. Schlenker Jr.

It’s actually a project for the Department of Defense, not for Navy. It’s the Natick -- N-a-t-i-c-k -- Soldier Center, so that is a fixed price contract.

Tim McHugh - William Blair & Company

Okay. And then moving then to the incremental product sales that you described that came in the first quarter, what would be your expectation at this point at least in terms of projects you have on hand for the second quarter and as you kind of look out to the rest of the year? I know there’s still some funding left on that surveillance system contract.

Richard L. Schlenker Jr.

At this point in time, I would say the second -- what we’ve been able to get from the client at this point in time puts us somewhere between net revenues of $1 million to $1.2 million on the products part and there is definitely more room on the RDISS contract. It’s [a matter] of the timing of when those funds would be available to us, or ever if we end up getting other orders. But at this point in time, we really don’t have visibility out on the product side out beyond the second quarter.

Tim McHugh - William Blair & Company

Given that you -- it seems like that’s a pretty healthy rate of product sales for the second quarter still, what would be your expectations for margins this year? Do you have enough of those at this point that you could see margins expand even against the tough comparison in ’07?

Richard L. Schlenker Jr.

I think that while the first quarter was very strong, you know, to at this point in time -- you know, the fourth quarter included about $2 million of operating income from that incremental part of RDISS sales, not our sort of core Defense business, which we’ve always said sort of has $0.5 million to $1 million of product sales a quarter. Clearly the first quarter had some overflow of that contract and we seem to have some good momentum coming into the second quarter here.

I at this point in time, I still see that as a stretch, that we received about 110 to 120 basis points out of that one incremental contract in the fourth quarter for the full year, so we still have a little ways to go to be able to exceed those full year margins. But clearly the first quarter has put us in pretty good -- in good shape to try to make a charge of that.

Tim McHugh - William Blair & Company

Okay, and then any other contracts or opportunities beyond the surveillance systems in terms of product sales? What’s the traction there as you continue to sell that service?

Michael R. Gaulke

There’s conversations that we have on an ongoing basis with our clients there, Tim, but -- as we have in the past and those have resulted in things like Markbot and RDISS and I can tell you that there’s a series of candidates that we are continuing to explore as to whether or not those are low volume production that may make sense. But there is nothing that we can be specific about at this point.

Richard L. Schlenker Jr.

I think what’s important to realize is that most of those have come from work that we’ve done in trying to find the right technologies for them or integrated technologies for them on solutions and that’s -- we’re doing -- we’re working on ideas like that for them on an ongoing basis as part of our support contract. So hopefully, not always, a lot of times those are ideas we find for them that they can get right off the shelf or buy as existing military technologies to integrate into this solution. But sometimes they do turn around and come back to us for an integrated solution to the problem. So we’ve got a couple of technology areas that we have been working on for them over the last couple of quarters. Only time will tell if they need additional units.

Tim McHugh - William Blair & Company

Okay, and then lastly can you give -- what was the headcount at the end of the quarter, as well as what are the expectations for the remainder of the year in terms of hiring plans?

Richard L. Schlenker Jr.

Yeah, the last month of the quarter had 613, so a little bit higher than the average for the quarter. As we look out for the full year, we expect that for the full year our full-time equivalent employees, probably the average for the year will range in the 5%, 6% year-over-year gain when you bring the whole year together. So the first two quarters here last year were flat and so we’d expect that year over year FTEs in the second quarter will be in this 7% to 8% range.

Tim McHugh - William Blair & Company

Okay. Thank you very much.


Thank you, sir, and there are no further questions. Ladies and gentlemen, this concludes the Exponent first quarter 2008 conference call. If you would like to listen to a replay of today’s conference, please dial 1-800-405-2236 or 303-590-3000, entering pass code 11112058. Once again, if you’d like to listen to a replay of today’s conference, please dial 1-800-405-2236 or 303-590-3000, entering pass code 11112058. ACT would like to thank you for your participation. You may now disconnect. Have a pleasant day.

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