EXPO
#Thank you for joining us today for our discussion of Exponent's first quarter.
For the quarter, net revenues increased 4% to $76.1 million from one year ago.
Net income for the quarter increased 13% to $10.3 million, or $0.75 per share.
For the first quarter, we delivered solid revenue growth, improved utilization, and strong profitability.
For the quarter, we had a notable performances from our materials science, mechanical engineering, polymer science, human factors, structural engineering, and construction consulting practices, as well as from our environmental groups.
We are pleased that clients continue to call upon us to assist them with their most significant litigation matters and product recalls, as well as to help them with risk management and new product development.
As we have discussed with you in prior quarters, our defense work has declined as expected year over year related to the drawdown of troops from Afghanistan.
However, we have started to leverage our experience in technology development to serve commercial clients in oil and gas and consumer electronics.
During the quarter, we continued to repurchase shares although at a slower pace than previously.
We have announced our intention to complete a 2-for-1 stock split, which is subject to shareholder approval at the annual meeting on May 28.
Should that be approved, our quarterly dividend will change from $0.30 per share to $0.15 per share to account for the split.
For the remainder of 2015, we expect underlying growth to be in the high-single digits, offset by the significant decline in defense work and the step down in a major project in the second half of the year.
As a result, our guidance remains unchanged as we continue to expect growth in net revenues to be in the low to mid-single digits and margins to be approximately flat with 2014.
Now <UNK> will provide a more detailed review of our financial performance.
Thanks, <UNK>.
For the first quarter of 2015, revenues before reimbursements, or net revenues, as I will refer to them from here on, were $76.1 million, up 4% from $73 million in the same period one year ago.
Total revenues for the first quarter of 2015 were $80.3 million or 6% over $76 million a year ago.
Net income for the first quarter increased 13% to $10.3 million, or $0.75 per share as compared to $9.2 million or $0.66 per share in the same quarter of 2014.
EBITDA for the first quarter increased 11% to $18.4 million versus $16.6 million in the same period of last year.
In the first quarter of 2015, net revenues from defense technology development were approximately $1.2 million, as compared to $3.2 million in the same quarter one year ago.
I'm sorry, we need to hear from a operator if we're live or not.
Operator.
This is <UNK> <UNK>.
I'm going to start back over at the beginning where I was.
I'm going to start at the beginning of my piece.
Again, sorry for repeating some of this, but to ensure that everybody heard it, again, I'm going to start over.
For the first quarter of 2015, revenues before reimbursements, or net revenues, as I will refer to them from here on, or $76.1 million, up 4% from $73 million in the same period one year ago.
Total revenues for the first quarter of 2015 were $80.3 million, up 6% over $76 million one year ago.
Net income for the first quarter increased 13% to $10.3 million, or $0.75 per share as compared to $9.2 million, or $0.66 per share in the same quarter of 2015.
EBITDA for the first quarter increased 11% to $18.4 million versus $16.6 million in the same period of last year.
In the first quarter of 2015, net revenues for defense technology development were approximately $1.2 million as compared to $3.2 million in the same quarter one year ago.
We expect revenues from defense technology development to be in the range of $500,000 to $1 million per quarter for the remainder of 2015, which will impact growth by approximately 3% year over year.
Billable hours increased 6% to 292,000 as compared to 274,000 in the first quarter of 2014.
Utilization in the first quarter rose to 75% from 72% one year ago.
For the full year 2015, we expect our utilization to be approximately the same as 2014, at 71.8%.
As a reminder, we have less work days in the second quarter than in the first quarter due to one more holiday and additional vacation days taken, which will result in utilization being approximately 3% lower than in the first quarter.
In the first quarter, we had a realized bill rate increase of approximately 1%, which was lower than usual due to an increase in billable hours from lower level staff.
This rate increase was offset by 0.08% for translating foreign currency for consolidated financial statements.
In the first quarter of 2014, we had an unusually high amount of write-ups on fixed-price projects in the amount of $1.4 million as compared to $200,000 in the first quarter of 2015.
And this impacted year-over-year growth by approximately 2%.
For the first quarter, technical full-time equivalent employees were up 2% to 745 as compared to the same quarter in 2014.
For the remainder of 2015, we expect year-over-year headcount growth to be approximately 2%.
EBITDA margin for the first quarter of 2015 increased 24.2% ---+ increased to 24.2% of net revenue as compared to 22.8% in the same period of 2014.
For the first quarter of 2015, compensation expense, after adjusting for gains and losses in deferred compensation, increased 3.3%.
Included in total compensation expense is a gain in deferred compensation of $1.4 million as compared to $730,000 in the same quarter of 2014.
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 first quarter of 2015 was $5.2 million.
For the remainder of 2015, we expect stock-based compensation to be approximately $2.8 million per quarter.
Other operating expenses in the first quarter increased 3% to $6.5 million.
Included in other operating expenses is $1.4 million of depreciation.
For the remainder of 2015, other operating expenses are expected to be $6.7 million to $7.3 million per quarter.
G&A expense in the first quarter decreased 6% to $3.5 million.
For the remainder of 2015, G&A expenses are expected to be $3.7 million to $4.3 million per quarter.
Our income tax rate in the quarter was 39.5% as compared to 40.4% in the first quarter of 2014.
For the full year of 2015, we expect our tax rate to be approximately 40%.
For the first quarter, operating cash flow was $1.7 million.
In the quarter, we repurchased $3.5 million of our stock.
We still have $31.6 million authorized and available for repurchases under the current repurchase program.
Additionally, during the quarter we distributed $4 million to shareholders through dividends.
We ended the quarter with $145 million of cash and short-term investments after repurchases, dividends, and paying out annual bonuses.
Capital expenditures were $630,000 in the first quarter.
For the full year of 2015, we continue to expect growth in revenues before reimbursements to be in the low to mid-single digits and the EBITDA margin to be approximately flat with the 25% we achieved in 2014.
Our underlying growth remains in the high-single digits, as <UNK> discussed earlier.
I will now turn the call back to <UNK> for closing remarks.
Thank you, <UNK>.
We remain focused on further expanding our unique market position and assessing the reliability, safety, human health, and environmental issues of increasingly complex technologies, products, and processes.
Our long-term financial goals are to produce strong organic revenue growth and improve profitability, which are expected to generate significant cash flow and allow us to continue to repurchase stock and pay dividends.
Operator, we are now ready for questions.
Yes.
First of all, what we saw last year in the first and a little bit in the second quarter, we had about $1.4 million in the first quarter and about $750,000 in the second quarter of 2014.
Those levels ---+ that would be unusual.
Typical for us is fixed-price projects tend to come in about equivalent to our TNM and as such don't really have a material difference.
It just ---+ so I would say that that was unusual for us.
What we would expect in the future and have seen in the past is really something that would be in this anywhere from $0 to maybe $100,000 or $200,000 in a quarter would be something that would be more typical for us.
And that's the level we saw in the fourth quarter and first quarter of this year in what we've done.
As far as what the flowthrough is, look at the end of the day write-up, if you have a write-up there, it's really offset by our bonus pool, which generates 33% of the pre-tax, pre-bonus profits.
And the remaining 67% of that level would flow through to the EBITDA margin and then obviously be tax affected and flow into the net income.
I think, <UNK>, what we've really done here is to ---+ we did end up over the period of the previous year of last year sort of reorientating and resizing the technology development practice that we had.
So from what I will call from a headcount standpoint and so forth, we're talking about a group that's roughly half the size of what it was a year ago.
We made that adjustment.
We believe that that adjustment was appropriate to where we saw the opportunities in the commercial marketplace.
And we've been moving forward with that.
It had proved out to worked well for us.
In other words, we're looking at a technology development practice that doesn't have ---+ is not sitting idle and doesn't have a low utilization level and so forth because the adjustments have been made.
And we're optimistic that that can continue and we hope that that would start to grow as we move forward in that mode.
So we're not looking at another step function either up or down from that standpoint.
Yes, we are.
There is no question that in the oil and gas sector there has been clearly some significant belt tightening going on.
Obviously, we see it the news with various kinds of layoffs in that industry and so forth.
We're not affected that directly but the reality is that we think that some of the opportunities we had looking forward are having budgets trimmed a little bit.
We think that in the near term there'll be some challenges there.
But we're still very bullish overall in the longer term about the role that we can play in that industry.
So yes, we're going through kind of a belt tightening time now but we don't think that should affect us from a long-term standpoint.
I'm not looking at it as a headwind per se, and the reason for that is the majority of our revenues in this sector are still in the reactive mode, follow up from some event that happened.
We're working in that area and as we've seen before, on the more reactive work tends to be not very much affected by the general economy or what's going on in that particular sector per se.
So from that standpoint I would say given the level of reactive work in that area, we don't think it should have a big influence.
It will have an influence on the proactive work, but we were seeing the proactive work as a strong growth opportunity for us and it's just not going to grow as quickly in the short term as we had hoped.
Overall, I think something closer to flat is probably reasonable in that sector.
So the FTE was 745.
Yes.
First of all, I think last year's G&A in the first quarter was a little bit higher.
We're through a number of different things had some sort of professional services that we were buying on an overhead basis around legal, accounting, system implementation and some things that were higher in the quarter and we were able to be at a more moderated level here in the first quarter of this year.
I still think that as we look at the remainder of the year, we will see that be a little bit up quarter over quarter, or year over year as we go through that, but I think that what you're looking at is it's something that's going to grow on a year-over-year basis when you look at each quarter at more of the call it 4% or 5% level versus the prior-year.
I would say that the stronger areas have actually ---+ it's been a sort of a little pattern here in recent times on this.
But the stronger areas for us would be some of these growth areas we have from an industry standpoint in consumer electronics and for the medical device arena.
We are still looking to grow our staff there sort of above average for what we're looking at for the Company as a whole.
I think the same thing would be true in food and chemicals area.
Those would be areas, the polymer science areas.
There are certain areas that we're looking to grow geographically also in Asia.
We need more people there.
So those are the areas that I think we see as being a stronger growth areas from a headcount standpoint.
Yes.
As I mentioned in my comments, from a bill rate standpoint, we had been realizing in the past year or two sort of around 2% to 2.5% realized bill rate increase.
That in it itself has been lower than maybe when the economy has been more robust and higher inflation where we've maybe gotten 3% to4%.
This year being a little bit lower came from a ---+ it really is reflecting some change in mix of the ---+ where the billable hours are coming from.
As we have improved the utilization, some of that is come from the staff, the lower level staff.
Our principles and senior managers tend to be quite well utilized and the real gains have come by both hiring as well as improving utilization of the younger staff.
We've also seen that we've had some good growth in our mix relative to work happening in Europe and Asia and in our construction consulting group and others where the average rate is a little bit lower than our average so that had some dampening as well and contributed to the mix.
I think we started to see some of this occur as our utilizations improved in the back half of 2015, and have seen that here in the first quarter.
I think we will likely as we go through 2015 see that stay in this range of more like 1% to 2% than be maybe up where we would have hoped in the 2% to 3% range.
But I think the real good news is that that had come both late last year as well as early this year with a strong utilization, which delivered good leverage and is widely bottom line has been able to grow in the double digits here in the first quarter.
So those are a few of the comments.
I think long term, we still see that we're able to get pricing increases.
We're able to look at the current staff we have and increase raises for those people in the 3.5%-4% range as we bring in new staff.
We've talked before that that gets blended down some by what happens around turnover.
That will draw it down into the 2% to 3% range, but that's what I would expect for us long term is that we will still be able to continue to realize long term, a pricing realization that's in that 2% to 3%-plus range.
There's a couple of different things.
I think there are two different effects here.
If I could pick out say the food and chemicals practice and the construction consulting practices as examples where on average the bill rates are not as high as in the regular health and engineering consulting rates.
Those just ---+ we've still have good margins and the profitability is good but those rates are typically a little bit lower across the board.
In other words, from the more junior staff to the more senior staff, they on average lower rates than in some of the engineering practices, for example.
However, you've that effect there.
If I look at polymer science, as an example or if I look at biomedical or some of these other areas that are growing faster than consumer electronics area, those rates are not low.
Those rates are generally at or above the average for the Company.
However, the growth has been happening by greater leverage so the growth has been happening by hiring a lot more of the more entry level junior staff.
And so that's the reason why we're seeing it there.
Senior people in those areas have bill rates that are very high and the junior people are high compared to other junior people perhaps but they are still junior people.
And so that spread out that leverage we're getting is causing that effect.
Let me address that first then <UNK> will get you the numbers.
We absolutely believe that over time we are ---+ the proportion of our work that is in more proactive space is going up.
Where we are today, we view that reactive work is about 60%, proactive about 35%, and about 5% government.
So that's where we ---+ some of the government is defense but it's by no means all defense.
That's how we view it today.
We think that mix is going to continue to change largely through growth.
We think both sides will grow but we think the proactive will grow faster.
Difficult to say exactly how soon will be before the proactive gets from 35% to 40% or 45%.
But it's a direction we're going and it probably increases, I don't know, this is a bit of a guesstimate.
Probably increases by maybe 1% or 2% proportionally per year, something of that order.
So over five years you increased by 5% or maybe 10%, something in that range.
I do think that's something that's going to happen over ---+ continue to happen for the next five years and beyond that we will have more proactive work.
I also think that proactive work in general creates, we think, better opportunities for leverage than reactive work.
It's not that there aren't some reactive matters that have great leverage, but in general I think the reactive space has more opportunity for leverage.
And I think that as a result of that, you may see some ongoing trend.
How much is very difficult to say but you may see some ongoing trend that affects this bill rate issue.
But I think to the extent it does, it will have a slight negative effect on top-line revenue growth and a positive effect on bottom-line profit growth because it just fills that page, as you might expect.
If you've got a lower bill rate increase then obviously it affects the top line but that lower bill rate increase is coming because you have more of the junior people doing the work, we obviously from a compensation standpoint and so forth, we get more leverage out of the younger staff then our principles, for example.
And so as a result on average, that's going to be a little bit more profitable.
I think those trends can happen over time.
I don't think there are big jumps.
The biggest one we've really sort of seen was what we've kind of described this quarter where we saw a little more than we might usually see.
So to give you the numbers that you were asking for, the total revenues, so gross revenues for our environmental and health segment were $20.5 million and the revenues for the other scientific were $59.8 million.
On a net revenue basis, or revenue before reimbursements, the environmental and health was $20.2 million and the other scientific was $55.9 million.
Not really.
I think ---+ first of all, what I would say is that in terms of what we've talked about as major assignments that we've talked about before, the ones that were more 4% to 5% of revenue as opposed to our typical large ones of 2% to 3%.
We haven't had another one of those.
And as we've previously indicated, two of the three larger ones have already stepped down and the final one we expect to step down later this year.
We certainly have some other engagements that I would put in our category of typical large projects.
But nothing that is at this time we would be in a position to describe.
Yes.
As a reminder, our international operations are about 7% of our business.
That means of off revenues generated in offices outside the United States, and then with the other revenues let's say a couple of percent that we do work in other countries from the US, that work is all done at US dollars.
So we're really primarily affected by currency exchange rates relative to our operations in the UK and a little bit in Germany.
The impact to the first quarter was 8/10% to the revenue, and we would expect that a similar percentage impact to the second quarter, and obviously a little less than that assuming rates stay where they are as we move through the year and catch up with where the big step downs were.
I think our range is going to be from this 8/10% down to let's say 5/10% by the end of the year.
