Exponent CEO Speaks About His Company

| About: Exponent, Inc. (EXPO)

On February 18, The Wall Street Transcript interviewed Michael R. Gaulke, Chairman and CEO of Exponent, Inc. (NASDAQ:EXPO). Key excerpts follow:

TWST: Please begin with a brief historical sketch of the company, and a picture of the things you are doing right now.

Mr. Gaulke: We just celebrated our 40th anniversary. We started out in 1967 as a firm named Failure Analysis Associates, and changed our name in 1998 to Exponent, as we continued to add new disciplines in the health and environmental arenas. We are a professional services firm that's best known for engineering and scientific consulting. Our early years started out with expertise in analyzing accidents and failures. From a client standpoint we most often work for corporations, law firms, associations and do some of our work for the government. Our value proposition is to help those clients solve their high exposure problems. One of the key differentiators of our firm from our competitors is the very broad set of disciplines that we have within our firm. Today, we have some 90 different engineering and scientific disciplines represented on our staff. We have a very talented consulting and technical staff of approximately 600, representing those 90 different disciplines. Internally, we are organized into 20 different practices and centers. The way we manage the firm on a daily basis is around the project. Over the years we have become particularly good at bringing together all of these different disciplines, as needed, to help solve our clients' problems.

TWST: You said that 65% of your work is related to failures and accidents. Would you tell us about the other 35%?

Mr. Gaulke: Of the other 35%, roughly 10% is government. We've been active with the U.S. Army. We had the opportunity to assist them with getting robots into Afghanistan in 2002. The success of that effort led the Army to create a new unit called the Rapid Equipping Force. Over the past several years, we have provided technical support to the REF and we have a small team that is embedded with the Army in both Afghanistan and Iraq today. Perhaps the most visible evidence of our contribution in Iraq has been the development of a low cost robot called the MARCbot that is used in Iraq to help identify IEDs. There are about 1,000 MARCbots being used in Iraq today. The remaining 25% of our business is more proactive in nature where we are assisting companies with the design of products. We've had particular success in two segments to date: medical devices and consumer electronics. We've been very involved in the design of implants such as knees, hips, stents, and spinal implants — things that go into the body. In the consumer electronics area, we have developed particular expertise in battery technology. As an example, we've worked with a number of companies looking at battery failures and have been very involved in many of the high profile Li-Ion battery recalls. That has led us to develop real expertise in the whole are of portable power. We have about 50 consumer electronics firms today that are coming to us with new designs incorporating batteries into their devices — laptops, cell phones and other devices. These are examples of the more proactive side of our business, which has been growing.

TWST: What are the main opportunities that seem to lie ahead for you?

Mr. Gaulke: Our strategic growth opportunities are health consulting, construction consulting, product design, energy consulting and the defense technology development work that we've been doing for the military. I have touched on two of those: product design, and defense. Let me just quickly address the other three. Health consulting is an area that we're very excited about. We got involved in it just about 10 years ago, and we have continued to grow in this area. This is not health care; it's health science consulting. We have a health practice that encompasses an epidemiology center, one for toxicology, another for exposure assessment, one in both public health and industrial hygiene, and a center for food and chemical safety. We see opportunities to continue to grow in this market. One of the attractive aspects about this area is that many of our traditional clients that we've served on the engineering side also end up having major health exposures. Secondly, to date, there is not a firm servicing areas in health sciences that is the equivalent of what we have been doing on the engineering side of our business. Or said another way, the absence of any major competitors makes this an attractive market. We believe this health sciences consulting opportunity could grow to become as large as our engineering practices. Construction consulting is another area where there are very big financial exposures. We began to move into this market in 2002. We've been involved with engineering failures for 40 years, but this new opportunity is focused on construction dispute. Our first involvement was with the Big Dig in Boston, the most expensive construction project in the US. We've also been working on a number of projects in Las Vegas since that time. From a ground zero start in 2002, through organic growth we've been able to grow our construction consulting area into a $5 million business in 2007, and we see the opportunity to continue to grow. Basically in construction, almost every large capital project ends up with some form of dispute. We think that we're able to compete in this marketplace that does have many competitors, by differentiating ourselves through the technical depth we can offer where there are technical issues at the heart of the dispute. The third area is energy. It is obviously a large part of our economy. We've been involved in energy during our 40 years, but we feel there's an opportunity to play a much larger role. We've targeted three particular areas in the energy market: LNG (liquefied natural gas), nuclear energy and electrical power. LNG involves environmental and health risks associated with the transport of LNG, the terminals, regasification and other technical questions. The second area in the energy market that we see real opportunity is nuclear power. We have worked on problems in the nuclear industry in this country over the last 20-30 years. Our work has been with operating plants and the equipment in those plants. No new plants have been built in this country for several decades. That's about to change in the next decade, with a number of new nuclear plants in the planning stage. We have a technical depth of problem-solving in this industry and I think it will allow us to participate in the expansion of nuclear power in this country over the next many years. The third area in energy is electric power, which we been involved with our entire 40 years. One of our first clients at Failure Analysis Associates was the Electric Power Research Institute. Our electric power industry and infrastructure is aging and over-taxed in many areas. We believe there are opportunities for us to better serve the electric power industry and have made some recent senior hires in this area. That portion of our business is growing again, and we expect to continue to see additional growth.

TWST: What is the picture that you would hope to see for the company in three to four years?

Mr. Gaulke: We have a firm that today enjoys a very strong market position, and I believe that if we execute well we will be able to further strengthen that position in the marketplace. These five growth initiatives that I've touched on are ones that create real opportunity for us. We are a firm that has developed a good track record of growth and execution. We've just come out of a year that was a record year for us. We now move into 2008 with a lot of momentum and I believe that we can continue to do that for the next several years. I say that because we have built a model for growth that is not overly reliant upon having to make acquisitions in order to grow. Our belief is that there is, over time, higher risk in having to rely upon a model in which you must make an acquisition to make your numbers. It makes a lot more sense to be able to do that by growing organically, and we believe that we have the opportunity to do that. We have demonstrated our ability to do that over the last decade, and if we execute right, we'll be able to do it for the next decade.

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