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Exponent, Inc. (EXPO)

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Exponent (EXPO)

Q2 2013 Earnings Call

July 23, 2013 4:30 pm ET

Executives

Erica Abrams - Co-Founder and Managing Director

Paul R. Johnston - Chief Executive Officer, President and Director

Richard L. Schlenker - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary

Analysts

Timothy McHugh - William Blair & Company L.L.C., Research Division

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

David Gold - Sidoti & Company, LLC

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Exponent's Second Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, July 23, 2013.

I would now like to turn the conference over to Erica Abrams with The Blueshirt Group. Please go ahead.

Erica Abrams

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's second quarter 2013 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 the property of Exponent, and any taping or other reproduction is expressly prohibited without Exponent's prior written consent.

Joining me on the call are Paul Johnston, President and Chief Executive Officer; and Rich Schlenker, Executive Vice President and Chief Financial Officer of Exponent.

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.

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 June quarter of 2013.

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.

And now, I would like to turn the call over to Paul Johnston, President and Chief Executive Officer of Exponent. Paul, please go ahead.

Paul R. Johnston

Thank you for joining us today for our discussion of Exponent's second quarter of fiscal year 2013 results. We are pleased to report revenue, utilization and EBITDA performance that were better than expected.

Net revenues increased 5% to $71.9 million. Total revenues were $75.5 million. Net income in the second quarter was $10.8 million or $0.77 per diluted share. Our EBITDA was $19.5 million.

During the quarter, we had notable performances in our mechanical, electrical, thermal sciences, human factors and chemical regulation and food safety practices, as well as our infrastructure group.

Our revenues before reimbursements during the second quarter of 2013 included $1.75 million related to services performed for a foreign client in prior periods, which was recognized upon receipt of payment.

As we discussed with you last quarter, we are experiencing the anticipated step-down in major assignments and we are feeling the impact of the sequestration and the planned reduction of forces in Afghanistan in our technology development business.

More than offsetting these headwinds, we continued to see a steady flow of reactive engagements to investigate accidents, product recalls and health and environmental exposure. Additionally, we are seeing growth in our more proactive services, including product design consulting, regulatory consulting and risk management.

Now Rich will provide a more detailed review of our second quarter financial performance.

Richard L. Schlenker

Thanks, Paul. We are pleased to have delivered another solid quarter. Revenues before reimbursements or net revenues, as I will refer to them from here on, were $71.9 million, up 5% from $68.3 million in the same period of 2012. Total revenues for the quarter were $75.5 million as compared to $74.5 million 1 year ago.

Net income for the second quarter was $10.8 million or $0.77 per share as compared to $10.3 million or $0.72 per share reported 1 year ago.

EBITDA for the second quarter was $19.5 million, an increase of 6% over $18.2 million 1 year ago. EBITDA margin on a percentage of net revenue basis was 27.1%.

Our diluted share count decreased to 14 million from 14.3 million in the same period last year as a result of our ongoing repurchase program.

In the second quarter, we recognized revenue -- I mean, we recognized $1.75 million in revenue related to a contract in our health and environmental segment for work performed primarily in the fourth quarter of 2012 and some in the first quarter of 2013. Due to concerns about collectibility, we waited to recognize revenue until we received the cash, which occurred during the second quarter. This incremental revenue contributed $1.75 million to revenues before reimbursements, $1.2 million to EBITDA, $700,000 to net income, $0.05 to EPS and 2 percentage points to utilization.

In our defense technology development business, net revenues were $3.1 million. We had no revenues from product sales in the quarter. As Paul discussed, we are continuing to feel the impact of defense budget cuts and the plan to reduce forces in Afghanistan. At this time, we do not expect any additional product sales, and as such, the comparison to the fourth quarter of 2012 will be difficult as we had $2 million of net revenues from product sales in that quarter, which also contributed significantly to margins.

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