Apr 18, 2012
Operator
Good day, ladies and gentlemen, and welcome to the Exponent First Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, April 18, 2012.
And I would now like to turn the conference over to Brinlea Johnson of The Blueshirt Group. Please go ahead.
Brinlea Johnson
Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's first quarter 2012 results. Please note that this call is being simultaneously webcast on the Investor Relations section of the company's corporate website at www.exponent.com/investors.
This conference call is a property of Exponent, and any taping or other reproduction is expressively prohibited without Exponent's prior written consent.
Brinlea Johnson
Joining me on the call today are Paul Johnston, President and Chief Executive Officer; and Rich Schlenker, Executive Vice President and Chief Financial Officer of Exponent.
Brinlea Johnson
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 that Exponent's actual results may vary materially from those discussed here.
Brinlea Johnson
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 30, 2012.
Brinlea Johnson
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.
Brinlea Johnson
And now I'd like to turn the call over to Paul Johnston, President and Chief Executive Officer of Exponent. Paul, please go ahead.
Paulk Johnston
Thank you for joining us today for our discussion of Exponent's first quarter 2012 results. For the first quarter, net revenues increased 4% to $66.5 million, and total revenues were $71.9 million.
Net income grew to $8.2 million or $0.57 per share compared with $0.53 per share a year ago.
Paulk Johnston
We are pleased with our performance in the first quarter considering the difficult comparison to the same quarter last year when we had significant defense product sales. Notable performances in the quarter included our mechanics and materials, electrical and thermal sciences practices, as well as our health and environmental group.
Paulk Johnston
During the quarter, we experienced good demand for both reactive and proactive services. In proactive services, we continue to grow our design consulting offerings to the consumer electronics industry.
We also expanded our regulatory consulting services to clients in both United States and the European Union.
Paulk Johnston
Utilization in the quarter was better than expected even while we increased headcount by 6% year-over-year. Our utilization continue to benefit from a few large projects, and we continue to expect these projects to decline in their level of activity over the next several quarters.
Paulk Johnston
In our defense technology development practice, we continued our development of ground penetrating radar technology for the U.S. Department of Defense period our work with the U.S.
Army's Rapid Equipping Force continued to expand as we supported our 2 engineering labs in Afghanistan and had new technology assessment assignments in the United States. As a result, we are optimistic that the -- as a result, we are optimistic that this will lead to additional contracts over time.
Paulk Johnston
Overall the first quarter was a solid start to the year, and we are encouraged about our business opportunities in 2012.
Paulk Johnston
I will now turn the call over to Rich for a detailed discussion of our financial results.
Richard Schlenker
Thanks, Paul. During the quarter, revenues before reimbursements or net revenues, as I will refer to them from here on, increased 4% to $66.5 million as compared to $64.2 million in the prior year period.
Total revenues for the quarter were $71.9 million as compared to $73.5 million in 2011. This decline in total revenues is the result of a $3.8 million less of Technology Development product sales and $2.2 million less of reimbursable expenses in Technology Development.
Richard Schlenker
Net income for the first quarter increased 2% to $8.2 million or $0.57 per diluted share. EBITDA in the quarter increased 3% to $14.8 million.
We are pleased with these modest levels of growth considering the high hurdle created by an unusually strong performance in defense technology development in the first quarter of 2011.
Richard Schlenker
During the first quarter of 2011, we had 2 large contributions from Technology Development, the first being significant surveillance system product sales and the second being a substantial amount of reimbursable expenses for the U.K. GPR project.
As a result, net revenues for Tech Dev in the first quarter were $4.4 million, including $860,000 of product sales. This compares to net revenues of $6.5 million and $2.5 million in product sales in the same period 1 year ago.
Richard Schlenker
Looking forward, we expect net revenues from product sales in the second quarter to be approximately $200,000 as compared to $100,000 in the second quarter of 2011. For the full year of 2012, we expect net revenues from product sales to be approximately the same as we had for the full year of 2011.
Richard Schlenker
As Paul discussed, utilization in the first quarter was strong at 74% compared to 73% in the same quarter last year. Contributing to strong utilization was a 7% increase in billable hours, totaling $263,000.
Richard Schlenker
Our average technical full-time equivalent employees increased 6% to 686 from 650 in the same period last year. We continue to selectively hire talent to expand our capabilities.
For 2012, we expect sequential quarterly growth of FTEs to be approximately 1% per quarter.
Richard Schlenker
During the first quarter of 2012, we realized an average billing rate increase of approximately 2.5% over the prior year. This was a result of new billing rate which took effect on January 1.
We expect to realize a billing rate increase of about 2.5% for the full year as well.
Richard Schlenker
The percentages I will reference hereafter are on a percentage of net revenue basis. EBITDA margin for the first quarter was 22.3% as compared to 22.5% in the first quarter last year.
We are pleased to have held this within 20 basis points as a result of the increased utilization and effective cost management to offset last year's high Technology Development product sales and handling fees on the extra materials.
Richard Schlenker
For the first quarter, compensation expense after adjusting for gains, losses and deferred compensation increased 6% to $44.7 million. This increase is the result of a 6% headcount growth.
Included in total compensation in the first quarter is a gain in deferred compensation of $1.5 million as compared to $650,000 in the same quarter last year. As a reminder, deferred compensation gains and losses are offset in miscellaneous income and have no impact on the bottom line.
Richard Schlenker
Additionally, our annual salary increases took effect at the beginning of April, and the overall increase is in line with the billing rate increases mentioned before.
Richard Schlenker
As a component of compensation, stock-based compensation expense for the first quarter was $4.5 million. This is higher in the first quarter when we grant stock as part of our annual bonus payout.
For 2012, we expect stock-based compensation to be approximately $11.5 million.
Richard Schlenker
Other operating expenses for the first quarter decreased 3% over the prior year to $5.6 million. As a component of other operating expense, depreciation was $1.1 million.
For the remainder of the year, we expect other operating expenses to be in the range of $6 million to $6.5 million per quarter.
Richard Schlenker
G&A expenses in the first quarter decreased 13% to $2.9 million compared to $3.3 million in the same quarter last year. We expect G&A expense to be in the range of $3.1 million to $3.4 million in the next 2 quarters and then approximately $3.8 million in the fourth quarter.
Richard Schlenker
Interest income in the first quarter was $77,000. Our tax rate for the first quarter of 2012 was 40.3% as compared to 40.2% in the same period last year.
For 2012, we expect our tax rate to remain approximately 40.3%.
Richard Schlenker
Turning to the balance sheet. Cash, cash equivalents and short-term investments were $103.7 million as compared to $109.7 million at the end of the fourth quarter.
As expected, cash was down at the end of the first quarter following bonus payout in March. Additionally, we repurchased $4 million of common stock in the quarter and still have approximately $40.4 million available for stock repurchase and plan to actively repurchase shares during 2012.
Richard Schlenker
Capital expenditures for the first quarter were $1.3 million. DSOs were 88 days at the end of the quarter.
Richard Schlenker
For the first quarter -- the first quarter was a solid start to fiscal 2012 from which we have continued to expect growth in revenues before reimbursements in the low- to mid-single digits. This growth has been tempered by the fact that our largest projects in 2011 accounted for a greater percentage of our revenues than in a typical year.
We expect these projects will step down in their level of activity over the next several quarters. As a result, we expect 2012 utilization to be lower by a percentage point or 2 as compared to last year, and EBITDA margins will be down slightly.
Richard Schlenker
Now I will turn the call back to Paul for concluding remarks.
Paulk Johnston
Thank you, Rich. In summary, we are pleased to have delivered a solid first quarter of 2012.
As we look ahead, we will continue to provide the expertise and experience to address our client's important technology, health and environmental questions. We will selectively add new talent to allow us to continue to expand our capabilities and strengthen our offerings.
We will manage operating expenses and utilization to provide the foundation for continued growth in revenues and earnings. And finally, we will generate cash from operations, maintain a strong balance sheet and undertake activities such as repurchasing shares to enhance shareholder value.
Paulk Johnston
Looking ahead, we remain optimistic about our ability to leverage our multidisciplinary approach and expertise to capitalize on new market opportunities as we expand our business.
Paulk Johnston
Now I will turn the call over to the operator for your questions.
Operator
[Operator Instructions] Our first question comes from the line of Tim McHugh with William Blair & Company.
Timothy McHugh
First one, Rich, last quarter, you gave us a little more color on what you mean by a slight decline in margins. I think you had said 50 to 100 basis points last quarter.
Is that still the right range? Or are you any more optimistic given the first quarter?
Richard Schlenker
No. At this point in time, I think that's still the range that we're looking at.
I think we need to see things progress for the year a little bit further at this point before making any adjustment to that. But right now, that's sort of the range we're looking at.
Timothy McHugh
Okay. And you mentioned -- the guidance obviously reflects it from the big projects that will scale down given the utilization in Q1.
It sounds like that is something you're still talking about prospectively. It hasn't happened yet.
So are there signs that's actually happening? Or is it still something just you expect will happen at some point?
Paulk Johnston
Yes. I think, Tim, I think that there are some signs that, that's happening a little bit.
Some of these projects are in the news, and you hear about various portions of them being settled. That does result in some change to our work assignments.
But in general, these larger projects have a number of different elements to them that caused them to continue over an extended period of time. But inevitably, they do gradually step down.
But we haven't seen much step-down yet, probably only a little bit. And what we saw was pretty nicely back filled by other projects so far.
Timothy McHugh
And then lastly, Rich, can you talk about the SG&A spend, I guess, if you want together for those 2 lines? It was obviously -- you managed that very well.
Is that -- but I guess, the question is, was there anything unusual in there? And is there -- is that as good as it can -- can you still get better than that?
The 11% of revenue if I add those 2 together and take out G&A is a pretty efficient operation? So I guess just talk about where you're at now.
Richard Schlenker
Well, a couple of things. One, I think that they were -- first of all, last year, they were a little bit high.
We had a few things running through there. We have some legal cost going through G&A in the first quarter of last year that we don't typically have and such.
So that's why I think last year, it was a little bit higher in the first quarter than what we saw here in this quarter. On the other hand, I think the first quarter tends to be our lowest level of spend in these areas.
We tend to -- I have more conferences that tied into marketing activity in the second quarter and such. We tend to have -- we have more management meetings around the third and the fourth quarter in our organization.
That's when we hold either our managers' meeting or principals' meeting at that point in time. And we do, again this year, have that planned.
So I do expect them to be higher, as indicated in the -- in my comments. But there wasn't any unusual, let's call it, offset to an expense that we had in there or anything.
Do I expect them to be lower? No.
And I think the first quarter's revenues are always sort of the highest, and the first quarter's expenses are the lowest. So I do think that's a little bit sort of, in the year, as good as it gets.
But long term, I think we continue to believe that we can grow the firm in the high-single to low-double digits, that expenses will -- we still have ability to get some leverage out of our organization long term. So we'll continue to try to manage things.
And sure, if you have some special projects or whatever, you're not going to push those through when you're at a little bit lower revenue growth if it's appropriate to the weight of them. And then in essence, if you have some stronger performances, maybe you can get some of those things through.
So we do try to manage it a little bit. But the majority of the expenses is there.
It's going to be there not matter what the quarter is.
Timothy McHugh
Okay. And if I could just slip on a few numbers in there.
I wanted to -- can you give us the cash flow and CapEx? I apologize if I missed that.
And then the ending headcount.
Richard Schlenker
Yes. So operating cash flow was a negative $1.4 million, and CapEx was $1.3 million.
And then the ending headcount was just about at where we averaged there in the quarter at the -- I think, we're at 1 or 2 above that, to 680. I think we're at 687.
Operator
Our next question comes from the line of Joseph Foresi with Janney Montgomery Scott.
Joseph Foresi
My first question here, and I know that you've kind of talked about this, and forgive me if I missed it. But when do you expect the large contracts to grandfather?
In other words, what's the run rate of the tail on them? And when do you think that you'll start to see some better comps?
Paulk Johnston
Yes. Joe, so I think that we've generally described these things as when we have larger jobs, that they sort of scale down.
They're sort of half their size, when they start scaling down over a period of a year and so and then going to have a tail that can go out beyond that depending on the situation. I think we've seen the beginning of some of that step-down, as I mentioned.
Not really big enough to have an impact here, but because of the -- we were back fill the business. But I think we just expect that to, each quarter, to be another a little bit down.
But we're not looking here. We don't have visibility as to any clips or anything like that.
We expect this to be a fairly gradual step-down.
Richard Schlenker
I mean, Joe, around that area, I think what tends to happen in work that we're involved in that are in litigation or regulatory process is those are the dictating events that occur is that you have litigation invents occur, trials or settlements or other things. And the same goes around regulatory compliance events that are met or agreed upon at times.
And then usually, there is activity even around and beyond those events to meet the agreed-upon terms of those events.
Joseph Foresi
So let me just -- so I can conceptualize it, I know the drop off, the gradual step-down, and I would assume that later this year, sort of towards the back half, you would expect the numbers to sort of normalize. Is that a fair characterization?
Paulk Johnston
I think that's fairly reasonable to the extent that we have that visibility, Joe. I mean, these are -- these processes are a little bit unpredictable, I think, as you know.
But that's the way we see it.
Joseph Foresi
Okay. I wonder if you could -- just to switch gears and talk about maybe some of the areas that you talked about as being strong for you.
As you look to add headcount in 2012, what areas are you looking to add that headcount? And maybe you could give us some framework around where the demand is really strong right now.
Paulk Johnston
Sure. I think a couple of them are areas that I mentioned, the sort of regulatory area around chemicals, pesticides, food issues and so forth.
That's an area, the REACH regulations in the EU. That whole area, both in the EU and the U.S., except, obviously, not REACH in the U.S., is an area that is growing well for us.
We have strong demand. We expect to continue to be able to add headcount there.
I think in some of the other proactive areas, we mentioned the sort of consumer electronics area is strong. We think that there's a sort of a range of projects that include consumer electronics, that includes medical devices, that includes various kinds of computer technology and so forth.
And I think that those represent areas that we feel are strong, and we're looking to grow. And then that's sort of on top of areas that we've sort of described, I think, over sort of a broader time period, areas that we are interested in, in continuing to expand for the more broadly in design consulting and more broadly in a variety of health services.
And then finally, I think that the utilities area and pipeline safety and some of those areas are the things that we're also seeing work being driven towards.
Joseph Foresi
Okay. If you would take out some of the larger projects, how would you describe the fundamental -- the growth trends, the fundamentals behind your core practice?
Are we seeing a normalization? Are we seeing an acceleration just as we've seen some stabilization in the economy?
I know there's been puts and takes from the macro level.
Paulk Johnston
Yes. So I'd say, there are some sector effects here.
I think that in the practices that are driven off of infrastructure for us in sort of construction and building constructions, civil engineering, those kinds of areas, those tended to be more flat for us. We still have not been able to see sort of an increase in demand there, at least not in a sustained way.
So I would say that, that's sort of more flat. I think some of the more traditional areas and some of the vehicle litigation is not as active as it was in some past years.
But all of that is being more than made up for by the areas that are strong in the company.
Joseph Foresi
Okay. And if I could just sneak last one here, Rich.
Maybe you can just talk about a little bit of a pipeline in the products business? I know you've given us some color in your prepared remarks.
And maybe you could just refresh us on sort of what your expectations are from that pipeline over the next maybe 12 to 18 months.
Richard Schlenker
Yes. So as I indicated, because we have very little in hand, just some carryover from the projects last quarter, we actually expect to have only a small amount of product sales, $200,000 here in the second quarter.
We are -- we've got a number of -- that's got a handful of proposals in right now with clients who we've historically gotten work from, where they've come and made a request for us to provide them our proposal on surveillance systems. So that does give us some hope that we should see that pick up in the third and fourth quarters.
We have also a vehicle stopping technology product that we did a small lot production on and was part of our product sales in the first quarter and some in the fourth. But was there -- we'll see how those get traction over in Afghanistan going forward.
But again, that's a small amount right now. Our feeling about finishing out the year is that I think we could see revenues in somewhere between $1 million and $1.5 million per quarter in the third and fourth quarters, which then would give us numbers for the full year that would be close to where we were last year, about $4 million.
Operator
Our next question comes from the line of Tobey Sommer with SunTrust Robinson Humphrey.
Tobey Sommer
I was wondering if you could comment on the demand on the proactive side of your business. In the prepared comments, I think you said consumer electronics.
But just for a broad perspective, what are you feeling like in terms of product launches and other things that might indicate increasing demand in that area?
Paulk Johnston
Well, I think, Tobey, the reason that we have had strong support in that area is because it is so fast moving. There are practically continuous product launches.
The amount of new technology that's been driven into consumer electronics, and the new versions of things that come out. There's just sort of a constant flow of that business.
And so I think as we look ahead, we don't see any particular, what I'll call, overall change in that dynamic. We think that the clients that we have that want to continue to stay ahead and enhance their positions in the marketplace are always spending a substantial amount of revenue on -- a substantial amount of money on new product development, and that's what feeds our services.
That just continues to be very robust.
Richard Schlenker
I think --this is Rich. I think when you look over on the work that we do in regulatory support, which is also around clients, either putting new products into marketplaces or meeting the increased regulatory scrutiny or clamp down here, that's where clients -- because of the regulatory environment that is seen around controlling these, both in the European Union and then the U.S., clients are in need of more sophisticated help.
People who really do understand the science and can do the scientific studies that are necessary to go out and do the -- get those submissions done and explain the results to regulators and the scientists that are on the government side. So as the regulatory environment picks up, as they get more -- as that gets to be more complicated, it lends itself well to meeting more technical consultants involved just as -- versus people with regulatory experience only.
Tobey Sommer
That's very helpful. And then I wanted to ask a question about demand in the energy practice and kind of in that arena.
Have you seen much in the way of business either stemming from concerns about -- stemming from, I guess, the event in Japan? And I was wondering if the massive amount of natural gas that we're developing in the U.S.
is stimulating any demand as well in terms of infrastructure and so forth.
Paulk Johnston
Yes. Good questions.
With regard to Japan first, I think as we've indicated before, we've had some work over there, but not a significant amount that is really being driven directly by the events in Japan. It would be very different if an event like that happen in the United States, but hopefully, it won't.
With regard to the sort of shale gas and sort of the expansion of gas over here, the answer is that we do see that as a significant opportunity. They -- the sort of technology around fracking and some of the issues that are out there and issues and concerns that various parties have with regard to groundwork contamination and various other risks associated with fracking.
We do think that, that represents an opportunity. That opportunity hasn't really played out yet.
It's, I think, still developing. We are participating in that.
I think we've -- I think we're recognized in that marketplace, but that marketplace has not clearly blossomed yet. So it's really a little bit early to tell.
But it's really something that we feel we're engaged in.
Operator
[Operator Instructions] Our next question comes from the line of David Gold with Sidoti & Company.
David Gold
Just a couple to follow up with you. So Rich, on the defense side, it sounds like basically the big variance for year-to-year would be -- would come in the third quarter, basically the pickup from maybe what we didn't quite see in the first quarter sounds like it comes from the third.
Is that right?
Richard Schlenker
I think it would come across the third and fourth quarters. Hopefully, we don't have anything in hand at this point in time.
But we would hopefully see something there in the -- coming into play in the third quarter, yes.
David Gold
Okay. And then on the proactive business side, presumably, I mean, you've been working, I guess, for some time, pretty successfully at growing that portion of your business.
Has it changed enough where the metrics or the percentage are any different than the historical? Or is it just on it's way still?
Paulk Johnston
I would say that it's on its way, but it's not that something where we've come out now and then in a position to say that we're -- now have it at 40% of the market versus 25% before. I think we feel that it is.
We -- it was growing faster than the reactive side of the business prior to the downturn in the economy. It grew slower than the reactive side during the slower time in the economy, and we're beginning to see that pick back up where our expectations are that it can grow at a higher rate than the reactive business.
So I think we've sort of stepped in and stepped back, but I think we did an amazing thing. The good news for us is that it's not that we saw a big decline in that area, which most companies who were doing proactive work saw in the downturn.
But we didn't say it keeping up with our reactive side.
David Gold
Okay. So on the flip side, in fact, it sort of -- it helped held up pretty well, but you're now starting to see at least the signs or the indications or early pickup.
Would you attribute that -- what would you read through either for the economy or for your business as a whole?
Richard Schlenker
I think for our business, it misses the types of things we need to have to be able to continue to believe that we have a business model that's going to allow us to hopefully be able to see high-single and preferably low-double digit organic growth in our business here. We think we've done pretty well over the last 3 years pulling through on -- with the reactive sides of the -- holding on the proactive and building on the reactive side.
And we're encouraged that as we look out over the next several years, hopefully, as we work through this, we'll be able to see the proactive side of our business grow as a percentage of the business, and as such, grow faster than the other parts. And we think by the clients that we're working with that are only going to stay on their game as they advance technology, as things -- you either bring electronics into traditional products such as vehicles and such, or if it is consumer electronics where clients are trying to make things smaller and faster, and as such, generate a lot more energy, you'll run into technology challenges there.
And probably the last is really how do we continue to advance technologies that are being put in, in the human body as medical devices or pharmaceutical delivery systems. So we're encouraged by those marketplaces being ones that are going to advance here in the short term and over the long term.
And we think we've got some of the right people and can build upon that to see our business grow.
Operator
There are no further questions at this time. Ladies and gentlemen, this concludes the Exponent's first quarter fiscal 2012 earnings conference call.
If you would like to listen to a replay of today's conference, you can dial (303) 590-3030 or 1 (800) 406-7325 and enter the access code of 453-1659 followed by the #. We thank you for your participation.
You may now disconnect.