EXPO
#Thank you.
Thank you for joining us today for our discussion of Exponent's fourth-quarter and fiscal-year 2015 results.
For the quarter, net revenues increased slightly to $69.8 million from the same quarter in 2014.
Net income for the quarter increased 7% to $9.9 million, or $0.36 per diluted share.
For the fiscal year, net revenues were $295.7 million, a 2% increase from fiscal 2014.
Net income increased 7% to $43.6 million, or $1.60 per diluted share.
We were pleased to have closed out 2015 with strong earnings and cash flow in the fourth quarter.
We were able to expand our margins in 2015 as a result of a slight increase in utilization and low expense growth.
These results were especially good considering the impact of a major project wrapping up in the third quarter and a decline in defense technology development during the year, both of which we have discussed previously.
For the year, our underlying organic growth of net revenues was in the high-single digits.
During the year we had notable performances from our materials, polymer science, and biomedical practices, as well as our infrastructure group.
In materials and polymer science we experienced strong demand from the consumer electronics industry as they broaden their product offerings and need assistance with the use of new materials.
In biomedical we continue to assist clients with regulatory approvals and assessing field performance of their products.
Our infrastructure group benefited from increased commercial construction and infrastructure spending.
We maintained our diligent cash management focus, as well as stock repurchases and quarterly dividend payments, and closed the year with a very strong balance sheet.
In 2015 we generated over $60.5 million in cash from operating activities, and ended with $171.6 million in cash.
In 2015 we repurchased $23.3 million in common stock and paid $15.6 million in dividends.
Today we announced an increase in our quarterly dividend, from $0.15 to $0.18 per share, and reiterated our intent to continue paying dividends going forward.
We believe that the combination of stock repurchases and dividend payments reflects our commitment to delivering shareholder value and our confidence in the strength and long-term financial health of the Company.
While we had a challenging year-over-year comparison in the fourth quarter and we'll need to clear the first half of 2016 before we return to more normal year-over-year comparisons, we are optimistic about our growth opportunities and are confident in our ability to generate long-term 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 fourth quarter of 2015, revenues before reimbursements, or net revenues as I will refer to them from here on, were $69.8 million, up nominally from $69.6 million in the fourth quarter of 2014.
Total revenues for 2015 (sic - see press release) were $73.7 million, up slightly as compared to one year ago.
Net income for the fourth quarter increased 7% to $9.9 million, or $0.36 per diluted share, as compared to $9.2 million, or $0.34 per share, in the same quarter of 2014.
EBITDA for the fourth quarter was $17.4 million versus $17.2 million in the same period of 2014.
For fiscal year 2015 net revenues were $295.7 million, up 2% from $289.2 million in the prior year.
Total revenues for 2015 were $312.8 million as compared to $304.7 million one year ago.
Net income for the year increased 7% to $43.6 million as compared to $40.7 million in 2014.
Earnings per share increased 9% to $1.60 as compared to $1.47 in the prior year.
EBITDA increased 4% to $76.4 million versus $73.2 million one year ago.
For the full year our underlying revenue growth was in the high-single digits, but was offset by the impact of a major project which was approximately 5% of revenues ending in the third quarter of 2015 and a significant decline in defense technology development as a result of the withdrawal of troops from Afghanistan in the fourth quarter of 2014.
In the fourth quarter of 2015 net revenues for defense technology development were $700,000 as compared to $1.4 million in the same quarter last year.
For the full year net revenues for defense were $3.3 million as compared to $10.9 million a year ago.
For the fourth quarter billable hours declined 4% to 260,000 as compared to the same period last year.
For the year, billable hours increased 2% to 1,125,000.
Utilization in the fourth quarter and full year were consistent with our expectations of 66% and 72%, respectively.
The fourth quarter was down from the unusually high utilization we saw in the same period last year as a result of the factors discussed earlier and that our underlying business was very strong in the fourth quarter of 2014.
Utilization for the full year increased slightly to 72% as compared to 71.8% in the prior year.
For 2016 we expect utilization to be down 0.5% to 1% as compared to 2015, which is attributable to the major project stepping down during the third quarter of 2015.
Technical full-time-equivalent employees in the fourth quarter were 760, which is an increase of 1% as compared to last year.
For the full year FTEs were up 1.4% at 751.
We ended the year with approximately 755 FTEs.
For 2016 we expect quarterly sequential headcount growth to be approximately 1%.
In 2015 the realized rate was approximately 1.5%, but was partially offset by 0.5% from translating foreign currency for consolidated financial statements.
For 2016 we expect to return to more normal range and realize a rate increase of approximately 2% to 3%.
Despite the nominally flat revenues and decreased utilization in the fourth quarter, EBITDA margin for the quarter increased to 24.9% of net revenue as compared to 24.7% in the same period last year.
For the full year EBITDA margin increased 50 basis points to 25.8% as compared to 25.3% in 2014.
For the fourth quarter compensation expense, after adjusting for gains and losses and deferred compensation, was approximately flat.
Included in total compensation expense is a gain in deferred compensation of $1.1 million as compared to $1.2 million in the same quarter one year ago.
As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line.
For fiscal 2015 adjusted compensation expense increased 1.6% after adjusting for a loss in deferred compensation of $300,000 as compared to a gain of $2.5 million in the prior year.
Stock-based compensation expense was $2.4 million in the fourth quarter of 2015 and $13 million in fiscal 2015.
For 2016 we expect stock-based compensation expense to be approximately $13.5 million, with $5.5 million being expensed in the first quarter and $2.7 million in each of the remaining quarters.
Other operating expenses increased 2.8% to $7 million in the fourth quarter and 2.6% to $27 million for the full year.
Included in other operating expenses is depreciation expense of $1.4 million in the fourth quarter and $5.5 million for the full year.
For 2016 other operating expenses are expected to be $7 million to $7.5 million per quarter.
G&A expenses decreased by 6.8% to $3.8 million in the fourth quarter and 3.5% to $15.3 million for the full year.
The decrease was primarily the result of us having a smaller principals meeting in 2015 than the managers meeting we had in 2014, as well as lower professional service fees.
For 2016 G&A expenses are expected to be $3.9 million to $4.4 million per quarter.
Our fourth-quarter tax rate was 38.4%, down from 41.6% during the same period last year.
Our full-year 2015 tax rate was 38.7%, down from 40.1% during the prior year.
Our 2015 income tax rate came down due to restructuring of foreign entities that we completed in 2015.
For 2016 we expect our tax rate to be approximately 38.7%, in line with 2015.
For the fourth quarter, operating cash flow was $26.2 million.
Fiscal year 2015 operating cash flow was $60.5 million.
Capital expenditures were $630,000 in the fourth quarter and $5.4 million for the year.
In 2015 we repurchased $23.3 million of our stock for a total of 530,000 shares at an average price of $43.96.
We still have $46.8 million authorized and available for repurchases under our current repurchase program.
During the year we distributed $15.6 million to shareholders through dividend payments and today announced an increase in our quarterly dividend payment to $0.18 for the first quarter of 2016.
We closed 2015 with $171.6 million of cash and short-term investments.
Looking forward to fiscal 2016 we expect growth in revenues before reimbursements to be in the mid-single digits.
We believe our underlying growth will be in the high-single digits, but will be partially offset by the completion of a major project during the third quarter of 2015 which we have previously discussed.
We expect that 2016 EBITDA margin will decline approximately 50 to 100 basis points as compared to 2015 as a result of slightly lower utilization.
I will now turn the call back to <UNK> for closing remarks.
Thank you, Rich.
As we look into 2016 we are focused on further expanding our unique market position in assessing reliability, safety, human health effects, and environmental impacts of increasing complex technologies, products, and processes.
We will leverage our experience and reputation in reactive services to continue the development of our proactive services, such as design evaluations, risk management and regulatory consulting.
While the various factors we discussed in the last few calls created headwinds for the top-line growth in 2015 and the first half of 2016, we believe our strong bottom-line results and healthy capital structure demonstrate the resilience of our model.
Our long-term financial goals remain the same: Produce organic revenue growth; improve profitability; and maintain a solid balance sheet to deliver long-term shareholder value through our ongoing stock repurchases and dividend payments.
Operator, we are now ready for questions.
Yes.
As we indicated the last time we talked about Volkswagen, I indicated it was the kind of thing we would get involved in, but I wouldn't be able to comment unless such time we had a client who wanted us to comment on that.
But let me just say overall that in the auto area there is a significant amount of ongoing activity.
I mean, the reality is if you just go out there and look at the various news items, while Volkswagen may have eclipsed some other things recently, there's still a lot of discussion about airbags.
There's still some discussion about some of GM's former issues and some unintended acceleration cases and so forth going forward.
So I would say that that part of our business continues to be pretty robust.
Yes.
So, I mean, first of all I want to make sure that my comments don\
Yes.
So, look, I think from our standpoint we can look at a number of factors.
We've increased our rates every year, as we describe.
In January we increase our rates.
In terms of how much flows down to the rates we realize, there's a lot of different factors involved in that, including essentially the mix for us, how much of it is senior people versus more junior people and so forth.
And we've been going through a period where we've had a bit more leverage and more of the work is being done in some of the practices that would use up, on average, lower bill rate people.
That has made the realization rate appear low relative to some other years.
And we don't think that trend is going to continue in the same way that it has.
And so I think we feel that this year we should realize more out of our rate increases than we have in recent years.
Yes.
On a net revenue basis, for the fourth quarter our net revenues from environmental and health were $15.5 million and our net revenues from the engineering and other were $54.3 million.
On a total revenue basis environmental and health were $15.9 million and engineering was $57.8 million.
So those are the fourth-quarter two revenue numbers.
Yes.
I mean I think that we've generally thought that was sort of four to five year type process.
I think the reality is that there are moving parts to that.
The stock price moved up rather significantly in 2015.
And I think when the stock price is hitting new highs we tend to be lighter on our buybacks than we are if there's a little bit of a pullback in the stock.
So I think in a year like 2015 I think we bought back, what, about $23 million or so in stock but probably less than we would have had the stock price not moved up quite as much as it had.
So I think that's why it's sort of difficult to predict exactly.
We don't come out and say we're going to do a certain dollar volume automatically in a kind of an auto-trade kind of a situation.
We believe that on pullbacks we should be much more aggressive and when it reaches new highs we're going to be softer.
But we're always going to buy back, regardless of price, the amount of stock that we put out in our stock programs each year.
So that's kind of where it is.
And then on top of that, of course, we've made a 20% increase here in the dividend.
We want the dividend to play a little larger role.
And we've I think previously announced that we expect the dividend to grow for a period of time here at a rate faster than the growth in earnings.
Sure, <UNK>.
I mean, I think they'll be recruiting I think across the board in practices.
But there are clearly some that are very strong right now, and they're really the ones we talked about that were particularly strong in 2015, so our materials science, our polymer science practices, both of those, in addition to our biomedical and some of the areas in the infrastructure practices.
Those are the areas that showed the most growth and I think are the strongest.
But we certainly don't see limiting the hiring to those groups.
Well, yes and no, <UNK>.
I mean, the way I would say that is, I think it's important for us to keep in mind that the most common people we hire are some of the entry-level folks.
And those people are coming out of PhD programs.
And in order to get the best talent, we want to sign up for those six, nine months in advance.
So it's not a matter, okay, we've got a project, we've got to find somebody to support the project.
You have to think a little bit longer term.
But I think, having said that, there's lots of tools to work that into place.
I think that the practices that are strong usually stay strong for quite a period of time.
And that I think fits very well.
And then there's also a way to deal with if practices are really struggling.
There's probably some people who are underperforming there and one can cancel out some stuff there.
So there are various tools that we have.
But I wouldn't want you to think that we can kind of immediately turn it on and turn it off.
Yes.
Well, I think there's a give and take in both of those.
I mean, look, over the last two years we've had two areas that were challenging for us.
You know, we announced at the end of the third quarter that because of the end of the large project in the Gulf that there was clearly going to be an impact to our environmental group.
And as a part of that we did adjust down some headcount.
We did a similar thing the year before with the end of combat troops in Iraq and Afghanistan.
So, when we get those kinds of events you do make some adjustments.
But overall I think it generally moves a little bit slower than that.
But having said that, the areas that are hot stay hot for quite a while.
And we've got quite a lot of demand out there for bringing in new talent in our stronger practices.
No, <UNK>, not at this time.
We haven't what I'll call defined sort of a payout ratio or something like that.
Obviously as the dividend continues to rise here as a percentage of the profits in the Company, at some stage we'll need to define that.
But I think at this stage we don't feel like we ---+ we haven't defined that.
Well, first of all, acquisitions are not off the table.
It really is a matter of finding one that makes sense.
And it's really quite unpredictable because it just depends on what's out there in the marketplace and whether we think it fits a niche that we're looking for.
So it's really quite ---+ it's difficult for us to predict.
Most years we end up getting to a point where we make an offer on one or more companies.
And we did that last year.
But we didn't get to the point that we had a deal.
And we're not going to overpay.
And it'd have to be the right fit.
So they're not off the table.
We still have some areas we're looking in.
We've talked about them before as sort of the pharmaceutical, health area.
We've talked about in sort of the computer science and data analytics area.
These are areas we're still interested in.
So it's still my hope that one of these years I'll surprise you and we'll actually get something done.
So that's what I would say that that's not off the table.
Up until now we've not wanted to do a special dividend.
We don't think that that's the best way to go.
I understand as the cash reaches new heights here that that might be something we might have a discussion with our board about.
But it hasn't been something that's been support for in the past.
Yes.
I think some of it's stronger and some of it's weaker, so let me comment on that a little bit.
I think the weaker part is probably obvious.
There's no question that energy is tougher now.
That client base is hurting big time, and so it's more difficult.
And that doesn't come at a particularly good time for us, because we've historically done a lot of work for the energy sector in the reactive side and we expect to continue to do that as incidents happen.
But on the proactive side we've really only just been getting going on that.
And so I think that that's a little bit of a challenge for us.
But I would flip that around and there are some positive things I think going on for us.
We feel the medical device and consumer electronics world continues to be extremely strong and we think we're growing in that area.
Certain of the infrastructure practices, some of that's reactive work but there's a fair amount of that that's proactive work ---+ in the utility space, new projects, new development, and so forth.
And I think that that's positive.
I think our regulatory business in the UK continues to grow well.
It's been a little challenging for us this past year because obviously we've had a change in ---+ you know the dollar has strengthened relative to the pound and euro, so it's been a little bit of a challenge for us, not in terms of profitability but just in terms of demonstrating the growth that we are actually seeing over there.
So I think there's a bit of a mixed bag, but there are plenty of growth opportunities, just as some are not very good right now.
