EXPO
#Thank you, <UNK>.
Thank you for joining us today for our discussion of Exponent's First Quarter 2017 Financial Results.
Exponent's first quarter results were better than our prior outlook and benefited from continued growth in our human factors, construction consulting and polymer science practices.
With continued softness in the fuel industry sectors and a difficult year-over-year comparison, we are pleased to have delivered growth in the first quarter.
Net revenues were $80.5 million, a 2% increase as compared to the $78.9 million for the same period last year.
Net income was $16.6 million or $0.61 per diluted share in the first quarter of 2017 compared to $15.4 million or $0.56 per diluted share in the same period last year.
This net income is inclusive of a $6 million or $0.22 per share tax benefit realized in the first quarter compared to a $4.5 million or $0.16 per share tax benefit realized in the same period last year.
Our engineering and other scientific segments, which represented approximately 79% of the company's first quarter net revenues, grew 4% year-over-year.
In the first quarter, we performed a large project for a client in the consumer products industry that contributed to the strength of our human factors practice.
This project represented approximately 5% of our net revenues in the first quarter, and we anticipate a contribution of approximately 3% to 4% of net revenues in the second quarter.
For purposes of context, we had a similar project of approximately half the size in the first quarter of 2016.
We expect to return to a more normal project portfolio in the second half of the year and are, therefore, reiterating our expectations of modest top line growth for fiscal year 2017.
We believe that we are well positioned to capitalize on our clients' needs to better understand what happens as people intersect with complex products and processes.
We have assembled a unique human factors team, which includes staff with Ph.
D.
level degrees in a variety of disciplines, including experimental psychology, cognitive neuroscience, industrials and systems engineering and kinesiology.
We continue to expand our international construction disputes work with current mining, gas terminal and power plant projects.
We also saw increased demand from the medical device industry for our multidisciplinary team of material scientists and mechanical engineers to support product development and litigation matters.
Our environmental and health segments, which represented approximately 21% of the company's first quarter net revenues, declined 5% year-over-year.
Exponent's food and chemicals practice expanded as it assisted clients with regulatory issues around the world.
Lower revenues from oil and gas and the industrial chemicals industries have created a challenging year-over-year comparison for this segment.
While our results continue to be impacted by softness in a few industry sectors, we are confident in the strength and long-term financial health of the company.
This year, we are proud to celebrate Exponent's 50th anniversary, a testament to the strength of our multidisciplinary team and the resiliency of our business model.
We held our Biannual Managers Meeting <UNK>h 31 and April 1, where we gathered for 2 highly productive days, to plan for the future and focus on improving our growth.
In the first quarter, we paid $5.4 million in dividends, repurchased $1.3 million in common stock and ended the quarter with $154.9 million in cash equivalents.
Today, we announced another quarterly dividend payment of $0.21 per share and reiterated our intent to continue to pay dividends going forward.
We believe that our long-term value proposition, along with our regular quarterly dividend payments and stock repurchase program, demonstrates our continued commitment to deliver shareholder value.
Now I will turn the call over to Rich for a more detailed review of our financial performance and business outlook.
Thanks, <UNK>.
For the first quarter of 2017, revenues before reimbursements or net revenues, as I will refer to them from here on, were $80.5 million, up 2% from $79 million in the first quarter of 2016.
Total revenues for the first quarter were $84.1 million, up 1% from $83.2 million a year ago.
Our revenue continued to be impacted by softness in a few industry sectors, but benefited from the large project that <UNK> previously mentioned.
Net income was $16.6 million or $0.61 per diluted share in the first quarter of 2017 as compared to $15.4 million or $0.56 per diluted share in the same period last year.
In the first quarter of 2016, Exponent early adopted a new accounting standard for the classification of tax adjustments associated with share-based awards.
The tax benefit realized in the first quarter of 2017 was $6 million or $0.22 per diluted share as compared to $4.5 million or $0.16 per share in the first quarter of 2016.
For comparison purposes, excluding the tax benefit, net income declined 3% to $10.6 million.
EBITDA for the first quarter was $18.7 million, down 1% from 2016.
For the first quarter, billable hours were 296,000, a slight increase as compared to the same period last year.
Our utilization was 74.2% in the first quarter, up from 74.0% in the same period last year and better than our previous expectations.
The utilization benefited from the major project engagement and international construction consulting.
This was partially offset by the New Year holiday, which was a first quarter event this year, and the Managers Meeting that <UNK> discussed.
While we expect utilization in the second quarter to be better than the same period last year, it will be down as compared to the first quarter of 2017 by approximately 2 percentage points as the activity on the large human factors project will continue, but at a lower level.
For the full year 2017, we continue to expect utilization to be flat to slightly up as compared to the 70% achieved in the full year 2016.
Technical full-time equivalent employees in the first quarter were 767, up 2% from year-end, but was approximately even with the first quarter of 2016.
With a strong first quarter headcount growth, we would expect FTEs to remain at the same level in the second quarter and then grow approximately 1% per quarter in the second half of the year.
In the first quarter, the realized bill rate increase was approximately 2.5%, but was partially offset by 0.6% from translating foreign currency for consolidated financial statements.
For the remainder of 2017, we expect to realize a rate increase of 2% to 2.5% and the impact of FX to be approximately 0.3% based on current rates.
EBITDA margin for the quarter was 23.3% of net revenues, down from 24.1% in the same period last year.
For the first quarter, compensation expense, after adjusting for gains and losses and deferred compensation, increased 2%.
Included in total compensation expense is a gain in deferred compensation of $1.9 million as compared to a gain of $430,000 in the same quarter 1 year ago.
As a reminder, gains and losses and deferred compensation are offset in miscellaneous income and have no impact on the bottom line.
2017 salary increases were effective April 1.
The rises in salaries will be similar to the rise in bill rates.
Stock-based compensation expense was $5.7 million in the first quarter as compared to $5.2 million in 2016.
For the remainder of 2017, we expect stock-based compensation to be approximately $2.7 million to $3 million per quarter.
Other operating expenses increased 3% to $7.2 million in the first quarter.
Included in other operating expenses is depreciation expense of $1.6 million.
For the remainder of 2017, we expect other operating expenses to be approximately $7.4 million to $7.6 million per quarter.
G&A expenses were $4.2 million in the first quarter, up 20% from $3.5 million last year, due primarily to our Managers Meeting and marketing materials, which leverage our 50th anniversary.
Half of these expenses were realized in the first quarter and the remainder will be expensed in the second quarter.
As such, we expect the second quarter G&A expenses to be $4.8 million to $5 million.
And for the second half of the year, G&A expenses are expected to be $4 million to $4.4 million per quarter.
As I previously mentioned, we realized a tax benefit of $6 million in the first quarter.
The tax benefit is primarily a first quarter event for Exponent.
As a reminder, our issues from our annual compensation program are granted in <UNK>h of each year and are issued 4 years later.
The tax deduction for the gains realized upon issuance generated the tax benefit.
Our first quarter tax rate was 4.8%, which was reduced significantly by the adoption of the new accounting standard we implemented 1 year ago.
For comparison purposes, exclusive of the tax benefit, our tax rate would have been 39.4% in the first quarter.
We expect a tax rate of approximately 39% during the remainder of 2017.
For the first quarter, operating cash flow were a negative $1.8 million as a result of paying bonuses, dividends and taxes in the quarter.
DSOs did increase, but we believe this will be temporary.
Capital expenditures were $1.3 million.
We repurchased $1.3 million of common stock for a total of 23,000 shares at an average price of $57.63 during the first quarter.
We still have approximately $56 million authorized and available for repurchases under our current repurchase program.
Additionally, we distributed $5.4 million to shareholders through dividend payments and today, announced another quarterly dividend payment of $0.21 for the second quarter of 2017.
After repurchases, dividends and annual bonuses, we ended the quarter with $155 million of cash and short-term investments.
While our first quarter results were better than expected, we continued to expect modest top line growth due to the adjustments in headcount during the second half of 2016 and market conditions in a few industry sectors.
As we previously discussed, we expect 2017 revenues before reimbursements to grow in the low to mid-single digits and EBITDA margin to decline by approximately 25 to 75 basis points as compared to 2017.
I will now turn the call back to <UNK> for closing remarks.
Thank you, Rich.
Exponent continues to be retained by a diversified portfolio of marquee clients for an engagement spanning a wide range of industry sectors.
Our unique multidisciplinary team provides solutions to improve the reliability and safety of technologically complex products and processes.
We are optimistic about our opportunity to leverage our unique market position on a more global basis and are confident in our ability to generate long-term growth.
While our 2017 growth will be modest, our value proposition remains strong and our long-term financial goals remain the same: to produce organic revenue growth, improved profitability and maintain a solid balance sheet.
Operator, we are now ready for questions.
So Joe, it was right around 5% for the quarter.
And I think you know that in the past, we've indicated when projects are more than in the sort of 2% to 3% range, which is normally the size of a typical large project.
When they get to 4% or 5%, we've indicated we would let the investor community know.
And so this was right around 5%.
And so we wanted to alert everybody to that.
We do have some visibility with regard to the second quarter for this.
And that's why we've indicated that we think that it will be of the order of 3% to 4% of our revenues in the second quarter.
We don't have any visibility beyond that.
And we think it's reasonably likely that it could end, although it's possible it could continue.
The one thing I would just say about this, this is a proactive engagement.
It's not a litigation-based engagement.
And as such, it's a ---+ it's work in that vein, so it's not something that we anticipate will extend for a very long time.
Well, first of all, in the oil and gas area, the core part of that, we did see some growth in that, and it was only related to the fact that we had one of our international construction consulting jobs that was in the oil and gas industry.
We had mentioned before that we were seeing that our business in oil and gas was approximately 5% of our business that is closer to ---+ it's in the 6% to 7% range because one of these projects is ---+ sort of ---+ couple of the projects are in that range, they brought that up to the ---+ about the 7% level.
But it hasn't really been a change in overall demand, though, from that industry, because this is a disputes-related project.
It's a project that the client had obviously going for years before we got involved.
And as such, it's not an indication of any real change in our ---+ in what we're seeing in the market for our ---+ in demand for our services in oil and gas.
As far as the automotive industry, that remains at around 9% to 10% of our business.
It has been flat on a year-over-year basis.
And at least at this point in time, there is some pretty exciting things going on in the broader automotive industry around autonomous vehicles and such and electric vehicles that we are getting engaged on.
But at this point in time, it has not led to a significant change in that business or growth in that business for us yet.
Yes.
Go ahead, Joe.
No.
The other industry that we've commented on before is really in the broader chemicals area, which, again, we haven't seen really a change in that environment yet.
I think a number of the larger mergers that are going on appear to be progressing through the regulatory approval process.
And as they go through that, and these organizations begin to go through their integration, we would expect to be able to get a better read on how work ---+ that we might ---+ that we might provide services and will flow through those new organizations.
Yes.
As far as the margins go, I mean, we ---+ our margins were still down here in the first quarter about 77 basis points.
So at the sort of low end of that range on our 25 to 75 basis points.
We still expect our utilization to be flat to slightly up for the year, that hasn't changed much.
I mean, this was just 1 quarter of utilization being a little bit better than we'd expected.
We don't, at this time, believe that that's going to push us out of the range that we were expecting coming into the quarter.
And as such, we aren't looking ---+ expecting to change that range at this time.
Yes.
Tim, let me describe the broad area that we operate in, in these ---+ on these kinds of studies.
They range from ---+ everything from sort of kids interaction with toys and appliances and washing machines and things at sort of one end of the scale all the way through to issues with regard to sort of health-orientated type things at the other end of the scale interacting with various technology and so forth.
There's a very broad range of things.
Unfortunately, the thing that is most confidential in our business are our large proactive projects.
Because it's not just the client that's ---+ that is confidential, but the type of work we're doing for the client is extremely confidential because these obviously relate to potential new products.
And so from that standpoint, Tim, I'm sorry, but I really can't describe more.
No, it wasn't the same project.
I just said, we had a similar kind of project last year that was about half the size.
What I really want to sort of explain in that in a sense is, we do get these projects from time to time.
This particular one being of the 5% revenue was one that we felt we needed to flag as we've told you that we will do that when we get something up in the 5% kind of range.
But we've had a number of these projects in the past that would be less than that from, let's say, 2% to 3% down to 1% down to much smaller projects.
And so it wasn't that we have not ---+ I didn't want you to feel like we had a 5% project in this quarter in an area that we never had a project even similar to it before; that's not the case.
We have these projects quite frequently, but this one just happened to be a lot bigger.
So we knew we had the project.
We didn't know it was going to be this size.
That was the average for the quarter.
We ended right about at that number.
It might have been ---+ I think, we were 7 ---+ we were probably down by 1 from that.
So I think we average 767, I think we were 766 at the quarter-end.
Yes.
I mean, Tim, I think there's a couple of things going on.
I think one is where we are in headcount.
We're not in a position where we're lapping headcount at the rate of growth that we would expect in a normal environment.
We've been in this situation as you recall that second quarter of last year was very poor for us.
As a result, we had actually a falling headcount as we rolled out the rest of last year.
We ended, I think, lower than our peak.
And so now we're turning that around, and we're coming back.
But trying to lap where we were there, we haven't had sort of 4 quarters of normal headcount growth to get back to enough distance above that to get the growth numbers where we'd like them to be.
So I think there's a headcount lapping situation that we need to continue to work on.
There are also other sectors that are just not doing as well as we would like.
I mean, oil and gas is certainly one of them.
Automotive is certainly flat, but we have a lot of optimism around automotive with regards to some of the new technologies.
Well, a couple of things.
I mean, I think what we knew was, I said it was going to be a pretty good size project, but we just didn't know it was going to be at the level that we have a history now of sort of letting the investor community know when we have a project of around 5% and that's what we do.
In terms of the profitability of the project, we don't see this as being different profitability.
I think we've described in the past that all of our consultants in the firm have one bill rate that they use for all of the different work they do.
And therefore, when we have work in one type of field versus another type of field or sort of one client versus another client, we don't see that as having an impact on our profitability.
The impact on the profitability comes when the utilization obviously goes up, but not because it's a particular type of work.
Yes, it was.
And when we're giving guidance around what level of utilization we expected to be at in the quarter, we had indicated that we thought that utilization would be down about 2% versus where it was in the same quarter last year, primarily because of the additional holiday and our Managers Meeting in the quarter.
Clearly, this project made up for that delta there, which was that sort of 2% difference in utilization.
So I would say that ---+ I will talk in generally and then I'll give you sort of more specific answer.
But relative to this project, I think that, in general, there is sort of 2 ways that things convert.
There is where you have a particular project on why something failed.
And then as a result, you, for example, get follow-on work to try to help make sure it doesn't happen again.
And so the proactive work comes virtually immediately following the reactive work and is often in the same kind of area.
But the other scenario simply is that you do some piece of proactive work for a client and sometimes, years later, they come back to you because they've got another issue they want us to look at before they end up in trouble again.
And so they bring us back in.
There isn't often ---+ there isn't always a nexus between when we do the proactive work versus when we do the reactive work.
The reactive work often leads just in terms of from a reputation standpoint.
However, there are other clients where the majority of our work we do is more proactive in nature.
And this particular client is a client we do other work with.
And it didn't really result from some specific project that we had done before ---+ some reactive project we had done before.
Well, I certainly would hope we can ---+ we've obviously given guidance for this year.
And we don't currently expect us to be able to achieve that this year.
We've talked about low- to mid-single-digit growth rather than high-single-digit or above growth.
So obviously, we're not projecting that for this year.
I think what we do need to do is we need to get to a point where we aren't trying to overcome some setback.
The setbacks traditionally have been more, you have a big project when that comes off, then you've got to overcome that.
We had the unusual situation in the second quarter of last year, where for a number of different reasons we talked about at the time, we had a particularly bad quarter, which did lead to a challenge from the standpoint of growing headcount.
And so we're still trying to get that history behind us.
And I think that's why, I think, it's going to take through this year before we can start looking to the following year.
No.
I think that this is sort of in the middle.
There isn't another sort of obviously project that is beyond our 2% to 3% range.
But I think the portfolio looks similar to what it has in the past, when we take out the unusually large jobs.
Well, I think it is disproportionally driven by consumer products broadly, including consumer electronics.
But it also, I think, the other area of growth that we talk about on the proactive side is the regulatory work that we do in the food and chemicals practice, which continues to grow.
And now part of that, you don't see quite as much growth there.
There is a little bit of offset on that because of foreign exchange, because the majority of that work is run out of the U.K. But those are the areas, along with medical devices, that are probably continue to be the strongest areas on the proactive side.
So I mean, I think ---+ first of all, I guess, the comments that I have made before with regard to this election, I think still hold true, which is that we, as a firm, have been successful in administrations with Democrat presidents and Republican presidents.
I think that the wheels of government change or turn very slowly.
The idea that we're going to have some dramatic change in government in spite of all the rhetoric and all the news, I guess I don't quite see it that way.
What I see is that the direction we're going in, the slope has changed a little bit or is likely to change a little bit.
In other words, I don't think regulations have done nothing but get more strict, if you want to call it that ---+ use that term over time through Democrat and Republican administrations.
And we have a kind of a little bit of a love-hate with that, because on the one hand a lot of our work comes out of those regulations and that's good.
On the other hand, if they're so severe that they choke business, then that's bad.
So we're in that ---+ in sort of inflection point as well.
And I think it may very well turn out to be the case that there just aren't as many regulations put in place during the current administration.
But in terms of the main things that we work on or the main things that drive a lot of the regulatory work we do, we think it's unlikely that there's going to be a significant change.
There is no ---+ what we do, I think, as you know, from the food and chemicals side, we do a lot of work in the regulatory area around pesticides.
We don't see any move to change any of those regulations.
You look at the new head of the EPA.
He doesn't talk about that at all.
We don't think that's a changing environment.
So I think these changes are likely to be slow and a little bit different to discern.
I think the one thing the change sometimes does is puts a halt to things.
People who are thinking about going forward to the project that they think the rules might change, maybe they delay.
And so I think you can get some of that.
It's a little bit the same effect that Rich talked about earlier with regard to mergers in the industrial chemicals area.
If a merger is going on, that's not the time you kind of get the next project from and they're trying to sort out who is in charge and what division is going to do that and so on.
So I think you can get into that kind of a situation.
But we don't ---+ certainly we don't sit here worrying that all of our regulatory practices will come to an end, because we don't think they will at all.
No.
<UNK>, we don't ---+ our view of that has not changed, both management and the board.
We have always said that it's a longer-term approach to get to that $50 million to $70 million level over a 4- to 5-year period of time.
So we're trying to be patient and take the right opportunities to utilize the cash, may it be for repurchases, increases in dividends, appropriate capital uses for the business otherwise.
But overall, there hasn't been a change.
Yes.
It's a little bit difficult, because this does spread across a number of our practices.
We have a construction consulting practice that is running, let's see, it's running about a little over 6% of our revenues, that is purely around construction consulting.
I'd say about half of that business for them is proactive in nature.
They involved in project management activities, clients.
And the other half is really around the disputes area.
But the really unique market position we've been in is that, that team has been able to leverage people from other practices and bring in specialized discipline for different projects.
So it's a very different team that is working on a project at a power plant than at a LNG terminal, than at a mine location.
So it is a mixture of people across our firm that are coming together on these projects.
But again, this is still overall something that is less than 10% of our business that's around this area.
Yes.
Well, that's kind of a timely question because we ---+ at the end of <UNK>h or beginning of April, we just recognized that we've been in business for 50 years.
And we're using that as a kind of a lever point or an opportunity to go out with some new materials.
We have a kind of a book that highlights a lot of our work that I think people find is a very interesting book for ---+ that we give to our clients.
We did the similar thing when we turn 40 years.
And so that is sort of driving a new thrust of our folks going to meet with clients and continue to tell the story.
As I think I've sort of explained in the past, I mean, the kinds of services that we offer to clients are not ones that are typically sold through a ---+ what I'll call a sales staff.
They really need to be sold through our experts because that's who we are really selling.
And we're not sort of in the commodity work business.
And so through that, I think this is an opportunity for us to sort of leverage client engagement in that.
