Paul Johnston - President and CEO Richard Schlenker - EVP and CFO.

Tim McHugh - William Blair Joseph Foresi - Janney Montgomery Scott Tobey Sommer - Suntrust David Gold - Sidoti.

Good day and welcome to the Exponent’s Third Quarter Financial 2014 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Samantha Press of The Blueshirt Group, please go ahead..

Thank you, Jessica. Good afternoon, ladies and gentlemen and thank you for joining us on today’s conference call to discuss Exponent’s third quarter 2014 financial results. Please note that this call will be 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 today 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 most recent Form 10-K.

The forward-looking statements and risks 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. .

Thank you for joining us today for our discussion of Exponent's third quarter 2014 results. For the quarter, net revenues increased 6% to 74.3 million from the same quarter last year. Net income for the quarter was 11 million or $0.80 per share.

Our performance in the third quarter delivered solid revenue growth and strong margins as a result of improved utilization. We continued our work for a broad set of clients with strong demand from the consumer electronics, oil and gas, agriculture and chemicals, utilities and biomedical industry.

During the quarter, we had notable contributions in our environmental and health segment from our environmental sciences, ecological sciences and chemical regulation and food safety practices.

In our engineering and other scientific segment, we had notable performances from our mechanics and materials, biomedical, human factors and structures practices. We continue to believe our underlying growth is currently in the high single digits, which has been offset by a step-down in a couple of major assignments.

In September, we held our two-day managers meeting just outside Washington DC. This meeting was attended by more than half of our consulting staff and occurs every two years. This meeting focused on growth opportunities and the development of our consulting staff.

I came away from this meeting pleased by the stronger emphasis on generating proactive business. We have also recently invested in additional equipment including a focused ion beam transmission and scanning electron microscope to enhance our ability to serve clients primarily in the consumer electronics industry.

These investments are already proving successful in attracting additional client business. Exponent continues to build upon its unique position in the marketplace as a multidisciplinary engineering and scientific consulting firm.

We believe our consulting staff’s in-depth technical knowledge and broad experience will allow us to continue to help clients solve their most important engineering, scientific and business problems. As a result, we continue to be excited about the opportunities in front of us.

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

Thanks Paul. For the third quarter of 2014, revenues before reimbursements, or net revenues as I will refer to them from here on, were up 6% to $74.3 million, as compared to $70.1 million in the same period of 2013. Total revenues were also up 4% to $78.6 million as compared to $75.5 million one year ago.

Net income for the quarter was 11 million or $0.80 per share as compared to $11.1 million or $0.79 per share in the same quarter last year. EBITDA for the third quarter increased 5% to $19.7 million versus $18.8 million one year ago.

For the first nine months of 2014, net revenues increased 4% to $219.6 million as compared to 211 million in the same period of 2013. Total revenues for the period increased 3% to $231.1 million as compared to $223.4 million one year ago.

Also for the first nine months, net income increased 5% to $31.5 million, or $2.26 per share, as compared to $29.9 million or $2.13 per share in the same period last year. EBITDA increased 6% to $56 million versus $52.9 million in 2013.

Turning to more details, for the quarter defense technology development had net revenues of $2.7 million as compared to 2.9 million in the same quarter last year. For the fourth quarter, we expect net revenues from defense to be approximately $1.5 million as a result of the withdrawal of troops from Afghanistan.

Defense will likely be less than 1 million per quarter in 2015. Utilization for the third quarter was 74%, better than expected and compared favorably against 72% in the same period last year. Year-to-date, utilization was 73%, unchanged from the prior year.

We expect fourth quarter utilization to be down sequentially to the mid to high 60s due to holidays and vacations. This will result in the full year utilization being approximately 71%. For the third quarter, billable hours increased 4% to 285,000. Year-to-date billable hours are up 2%.

For the third quarter, technical full-time equivalent employees, on a year-over-year basis, were up 2.3% to 743, year-to-date FTEs are up 3%. We expect fourth quarter FTEs to grow sequentially by approximately 1%. For the quarter and year-to-date, our realized rate increase was approximately 2%.

EBITDA margin for the third quarter was 26.5% of net revenue as compared to 26.8% in the third quarter of 2013. Year-to-date EBITDA margin improved to 25.5% from 25% in the same period one year ago. For the third quarter, compensation expense after adjusting for gains and losses in deferred comp increased 6%.

Included in total compensation expense for the third quarter of 2014 is a loss in deferred compensation of $1.3 million as compared to a gain of 1.9 million in the same quarter of 2013. Again, 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 third quarter was $2.7 million, which is up from $2.5 million in the same quarter last year. Year-to-date, this is $10.6 million versus 10.8 in the comparable period last year. We expect for the full year of 2014 stock compensation will be approximately the same as 2013 at $13 million.

Other operating expenses in the quarter increased 4% to $6.7 million as compared to the same quarter in 2013. Year-to-date, this increased 4% to $19.5 million from the same period one year ago. We expect fourth quarter other operating expenses to be approximately $7 million.

G&A expenses in the quarter increased 18% to $4.4 million, mostly related to the Company wide mangers meeting, as we discussed with you last quarter. Year-to-date, G&A increased 9% to $11.8 million. We expect fourth quarter G&A to return to a more normal level of approximately $4 million.

The effective tax rate for the third quarter of 2014 was 39.9% as compared to 36.7% in the same quarter in 2013, when we benefited from an increase in deductible expense. Year-to-date, our tax rate is 39.7% as compared to 39.3 million for the same period last year. We expect our fourth quarter tax rate to be approximately 40.5%.

At quarter end, our cash and short term investments were $141.6 million, down slightly over the prior quarter as we stepped up our buybacks in the quarter and continued our dividend program. In the first nine months of the year, we repurchased $27.9 million of our stock for a total of 384,000 shares.

We still have $38.1 million authorized and available for repurchases under our current repurchase authorization program. Additionally, during the first nine months of the year, we distributed $9.8 million to shareholders through dividend payments. Capital expenditures in the third quarter were $1.9 million.

Turning to our outlook for the full year 2014, we continue to believe the growth in revenues before reimbursements will be in the low single digits, but are raising our expectations for the EBITDA margin to be approximately flat with fiscal year 2013.

We have a challenging comparison in the fourth quarter as 2013 had an additional week, which equates to about 7% to 8% of net revenues. Additionally, our defense business will be significantly down as a result of the withdrawal from Afghanistan, which equates to an additional 2.5% of consolidated revenues.

While our underlying business is growing in the high single digits, these offsets were result in revenues before reimbursement for the fourth quarter of 2014 being slightly down as compared to the same period of 2013. I will now turn the call back to Paul for closing remarks..

Thank you, Rich. Our priorities for the remainder of 2014 and beyond are to build upon our reputation as the go to firm for engineering and scientific expertise when clients are facing potential product recalls or litigations.

We will also continue to develop our reputation for more proactive services such as design consulting, risk management, and regulatory support. We will continue to generate strong cash flow from operations which will allow us to continue to repurchase shares and pay dividends to shareholders. Operator, we are now ready for questions..

Thank you. (Operator Instructions) And we’ll first go to Tim McHugh from William Blair..

First, I want to ask about the chemical and health area which you kind were highlighting in this quarter, maybe it felt like a little more than the prior quarters, I am not sure if I am right, but is that regulatory driven or is there new regulations that are starting to drive better growth there or is there other things that you’d kind of point to driving that?.

Paul Johnston:.

Yes, I think, I mean there are some new regulations, but I frankly think that while we being -- what’s driving us is we’re just continuing to build our business. And we’re doing that both in the U.S. and in Europe.

As I think you know most of our operations in Europe are centered in the United Kingdom and are focused upon European regulations particularly for agricultural chemicals, but also for various other products including food. And that business drift is growing above the level of our business as a whole and continues to do well.

I think we’re increasing our market share there..

And there is no deadline or indicated type of activity there?.

Paul Johnston:.

No, we have in the past talked about REACH regulations. Those are the European regulations. The next deadline for REACH is actually I think is the end of May of 2018, so this is not some what I’ll call local peak or anything like that..

Okay what about -- you've talked about coming out of the meeting you encouraged the employee meeting, a stronger focus on proactive work coming out of there, so was that something that you were pushing or it was the comment that after meeting with the kind of consultants were pushing that idea more so towards you, I guess I just want to understand kind of the take way?.

Paul Johnston:.

Yes, so Tim, we’ve been very focused on growing the proactive side of our business. We are obviously very well-known and recognized in the more reactive side of sort of litigation and product recalls. I mean we still get growth there, but we’re very well known.

We’re not as well-known across many of the other industries in a proactive sense, so we do view that there are greater growth opportunities for us on the proactive side. We have been encouraging the firm, our staff, our practices to expand their efforts to generate business in those areas.

And so for example at this meeting, we arranged the meeting to have a lot of opportunities for breakout sessions on particular industries and where we believe we can provide services there are value to those industries and I think the reason that I’m encouraged is because I feel the firm is sort of rallying around that and we’ve had some successes obviously and I think that the success generate success as some industries taken off much better as you know we talked about consumer electronics and medical device industry for example.

But we’re seeing more opportunities in oil and gas and utilities and some of these other industries and I think what we’re seeing is that more of our consulting staff are buying into that model seeing opportunities, pursuing opportunities. So that’s the way I will describe it..

Okay. And are we at a point, you didn't even mention the large, kind of the large cases that we have talked about. Are they just at a steady state now on a year-over-year basis or maybe not -- it’s not a meaningful factor at this point going forward..

So when I would say, what I say Tim is that we’ve talked about three of those major ones before I’ve sort of indicated that in terms of comparing our current underlying growth rate in the high single digits that it’s been offset compared to a year ago by step down in a couple or maybe two of those major assignments that really have gotten back to being significant projects but not these major assignments that we’re talking about.

There is one that still remains at a very high cliff but there is really just one in that category today..

Okay. And then lastly, just the military step down, assuming this happened either very late in question three or I guess going into Q4 here? It seemed like not a big year-over-year change. .

That’s correct I mean the revenues are down from where we were in the third quarter, where we were in the second quarter as we indicated that we had begun to see some step down as a reminder Q2 we had nearly $3.7 million in revenues that step down to $2.7 million in Q3 and then as we had begun to get indications of coming into the third quarter that the activities would begin to diminish relative to our presence in Afghanistan and supporting those operations.

There is still what we know is there is still one more step to happen, big step happen in September the remainder we have another step to happen here around the beginning of December and that will be the last part of our activities that are directly tied into Afghanistan stepping down..

As I run the math, is 300 basis points as we think about 2015, I think you said $1 million or so a quarter for that business now, is that about the drag if we think about that on the overall Company's gross rate?.

Yes, I think that’s probably right, it’s somewhere in I think we’ll about 11 million this year and that put in in that range of let’s call 2.5% or so..

Okay, all right. Thank you..

Our next question comes from Joseph Foresi from Janney Montgomery Scott. .

Hi. I wanted to kind of continue with sort of that line of questioning. On the defensive side of the business, it sounds like that's replacing the two large cases as the headwind going forward.

Is that the only headwind that we see now? Or how should we think about the positives and the negatives?.

Yes, I mean I think that as we look to next year I think defense is what we can expect to be a big headwind as we just discuss here with Tim. So that’s kind of what we’re looking at. As we mentioned that one of the major assignment that still running at a very large cliff and that may reduce a little bit next year.

We don’t have a lot of the visibility yet on that and as you know we go through our planning process here in the fourth quarter where we just started being kicking that off and we will be getting through that. So that point we’ll be able to get better guidance. But that’s what we see as the headwind..

Okay. And then this year, we've had sort of better than expected results with utilization, perhaps better than what we originally expected.

What is driving that utilization from a catalyst standpoint? I know you named a couple of different businesses, but what surprised you and allowed you to kind of move the margin profile upward as we go through the year?.

Well, I think that what we’ve seen is a sort of strength in the business as we especially came through the third quarter here. I think the revenue performance was higher than we expected and that translated into utilization.

We continue to see strong activity in the consumer electronics area as our clients are continuing to bring new products to market and wanting get our assistance in hopefully continuing to develop high quality products and reduce their risk there.

We have also seen -- we continue to see the level of activity are relative to that one, a large project continue at a high level. We would have thought that would have been step-down a little bit and we had a little bit of step-down obviously in the defense business.

But those are things that are there but really we had good strength in what we had in particular consumer electronics and in our environmental business..

Okay.

And then as we look out to next year, what is manageable from a core growth rate perspective? And I'm also wondering if reactive or proactive is there a difference in those two growth rates within the firm? I'm just wondering if we can compensate for the defensive business going away, or what the catalyst might be on that side?.

As we indicated not only in this call but in the two previous ones, we feel that the underlying growth rate at the moment is 8% and then of course we’ve had some headwinds, but the underlying growth rate is about 8%. As Rich has indicated, there’s been some strength in some areas here recently.

I mean as we go through the planning process here this quarter, I think we’re going to essentially re-up what we believe that looks like for next year.

I mean we’re reporting what it’s been here in the last several quarters in terms of underlying growth, but we’ll get a chance to really spend time because as you know this is kind of a bottoms up process. We go through in the planning and we’ll get to sort of say what we think that’s going to be the next year.

I don’t think -- I think that the ratio between more proactive and reactive business, both are growing. We just think there is more opportunity in the proactive side, but there is percentage split between those. It’s kind of what I’ll call a slowly, gradually you get the proactive part growing. It’s relative percentage. It’s not a like sudden thing.

There is still plenty of activity in the reactive side in the reactive side of the business and we intend to remain sort of dominant player in our market place and that’s not going away..

And we’ll go to Tobey Sommer from Suntrust..

Thank you. Just want to focus on some of the building blocks of the business.

What's your expectation for as you are doing your planning for next year in terms of hiring? What sort of rate of growth do you think you're going to plan for, and maybe an area or two of focus?.

I mean I think we start with the idea that it’s likely to fall in the range of sort of 4% to 7%, that’s a fairly broad upon range. The reality is that is actually one of the absolute key elements that we get out of the planning process. We actually look for each of our 20 some practices to identity what level people they want.

How many of them they want to meet their goals and so forth, so that is one of the real building blocks of how we do our planning. So it’s too early to kind of predict what that’s going to look like for next year except I don’t see it any reason why would outside of that range that we would generally have..

Just a question about rates, now that we have had these large projects in the business for a while, and they are tapering, was there any benefit to the bill rates from the large projects, or were they really not influential in the hourly rates?.

No, they’re not influential in the hourly rate. We have a process here where each individual has an hourly rate that they charge all clients. We don’t negotiate different rates for different clients.

So the change in hourly rates really is related to sort of two things that are going on, one is as our people grown and become more valuable, they can charge a higher rate, and then the other is that there tends to be a blend down because overall you tend to hire mostly at the junior level and whereas people are more likely to leave or retire in a different levels across the board.

So on average the people coming in are more junior than the people going out and therefore on average the people coming in have a lower bill rates, so that’s what plan things down and Rich talked about 2% this past quarter here.

What we’re saying is it’s not that the rates only went up by 2%; rates would have gone up by more but because if you bring in the more junior staff it blends down. We don’t think the large projects really have a direct influence on that at all.

We see it being sort of two things, one is the marketplace and two is how fast our staff are growing to become more valuable..

Okay, thank you. That’s helpful.

Rich do you have the split between engineering and environment in health revenue?.

Yes I do. .

And if don’t we can get it offline after that..

No, I can give that. So on the total revenues, our growth revenues, the revenues for the third quarter was environmental and health was $21.1 million and in other scientific that was $57.5 million. If you do it on a revenues before reimbursements environmental and health for the quarter was $28.6 million and other scientific was $53.6 million..

Okay. Just curious on the defense side. With regards to the rapid equipping force and kind of your business there, we do have some special forces involved in Syria, and other locations.

Does it require a kind of more mainstream boots on the ground military engagement for the rapid equipping force to turn to someone like Exponent to provide services, or historically have you been involved when there's been smaller kind of nichier deployments of US forces?.

Most of our work has been for the core and not for Special Forces while our labs have been in the field though as part of the core we’ve absolutely worked with and served in provided technology advancement to the Special Forces.

Special Forces does have sort of a culture and organization already around developing, casually developing technologies for their individual missions or changes in the environment that they’re facing.

It is something that the types of things that we have provided to the core fit with a Special Forces but Exponent hasn’t been the primary provider of that service to Special Forces over the years more a secondary supplier of that..

Last question for me, do you have any specialties that you might highlight, that are building up the critical mass that allows them to kind of contribute a higher level of profitability to the firm, and/or any particular offices that you would say are approaching the staffing levels that can usually drive a little bit better utilization and profitability?.

I think that we’ve got a number of practices, in particular a number of the ones that were highlighted in the press release as well as in Paul’s comments, there are practices that all of those practices are growing, they’re growing maybe approaching double-digit level of growth I think that is allowing some of them have already reached critical mass and as such we see that those practices are performing strong and have utilizations that are into the high 70s or even into the low 80s on a sustain level.

We have practices where we are such as biomedical would be an area where we’re not quite to the critical mass level but we are continuing to build there pretty fast and I think you can look at that area I think you could look at our food and chem practice is continuing to build and getting critical mass and more people selling work across it and could build upon that.

Our office actually -- our office in the Boston area is an office that has continued for the last several years to see double-digit growth; it has its focus around primarily a multi-disciplinary engineering services.

It has a broad set of clients but a real strength around battery technology and such that is allowing it to continue to see strong growth.

So I think there is a number of places -- even our office that we just started couple of years ago in Atlanta with transferring one or two people and starting to build there as one already beginning to approach 20 people, and I think we’ll see a plan for next year that continues to grow very strong.

So I think we got a number of positive things going on in the practices. I also believe that in some ways proactive work will also continue to support a higher utilization and the reason for that is that while we do get assignments in bits and pieces, they’re not always huge long term assignments.

They’re assignments that are defined and have an endpoint. They don’t typically stop suddenly as what can happen in litigation matter or others. So I think that as you’re doing that work, you’re able to be more dedicated to it and know the completion and compliant for that a little bit better.

So I think a lot of the things that we’re doing and the areas we’re growing support our belief that over the long-term that we can see our utilization improve on for a full year basis and approached the mid-70s as we look out over the next let’s say five years..

(Operator Instructions) We’ll now go to David Gold from Sidoti..

Just wanted to follow up a little bit on the utilization question, particularly as it applies to the third quarter. I guess the history this year as we were taking down third quarter was super impressive, but fourth quarter again we're basically guiding to sort of flattish with last year.

So wanted to see if I could get a better handle on maybe what happened in the third quarter that you might be looking at as more one-timish in nature, or am I misinterpreting that?.

I think a little bit David. Basically, the way to look at our seasonality that comes with going from the third to fourth quarter is to look at last year we had a 72% utilization in the third quarter and our utilization for the fourth quarter was 66%. Our utilization here was 74% just trending at that same level would put us around 68%.

So a very high level in the third quarter, if that continues would put us sort of that 68 range. So as included in the guidance that I’ve provide there around utilization that’s why I indicated that utilization would be from the mid to high 60s in that range and what we have there.

So I do believe that activity has remained strong as we’ve entered the fourth quarter. We will see a difference in the level of activity in defense that will be there. And as I indicated, when you go from a year ago where revenues were $3.2 million in the fourth quarter for defense to about $1.5 million that difference is about 2.5%.

The other issue that we’re facing that isn’t a utilization impact but a revenue growth is this one week. And it’s not that we’re losing one week that had holidays or vacation. The same holidays and vacation are going to be in this quarter.

We lost one full week of productivity off of that and that’s why it’s a minimum sort of 7% there, so probably somewhere in the 7% to 8% that you’ll see in difference. So I think the activity level remains strong. I anticipate that will in the fourth quarter with defense being the one exception to that..

Got you. Okay. And just I guess looking at that another way, you noted the seasonality there, I guess if we think about the last couple of years, the sequential move from June to September in utilization has been a couple hundred basis points down. And this year, you have a nice couple hundred basis point increase.

So is it, I guess what I'm trying to get at, and maybe there's no simple answer, is were there any large projects that maybe we can't see from the outside that came in that really helped you there, or is it just blocking and tackling and maybe this is a new higher level of utilization that we could sustain?.

I do think that as I indicated, we did see a higher percentage of our business and so an increased revenues come from the consumer electronics area, in the third quarter at a higher level by a couple of percentage points than what we saw in the second quarter or where we’ve been a year in the third quarters.

So clearly saw an increased level of activity higher than we have had in the past by go on there. So that was not anticipated to be at that level, elevated level. In addition to that we saw an increase in the level of activity from Q2 to Q3 relative to in our environmental practice relative to one of the major assignments that we’re going on.

There was a big push to do a large set of data collection during the third quarter that level of activity has been completed but I do think that there is still as other -- it still remain strong but not quite as that elevated level.

So those were two things in particular that I think as we went from Q2 to Q3 we’re not anticipated to be at that elevated level..

Got you..

And what we’re seeing is as you into Q4 we’re continuing to see those things to be strong and other projects continue to be picking up as well. So that’s why we’re suggesting that the trend is close to on a seasonality adjusted basis close to what we were running at in the third quarter..

Perfect. Perfect.

One other that might be helpful, Rich, when we think about the three large projects, can you give us a sense for maybe in aggregate what percentage revenue they're making up?.

I mean I think that where we are at today is probably that these are sort of in 7% to 8% somewhere in that range..

Yes, we look out one that we think is in that sort of major area the sort of 4% to 5% range and we’ve got to that are really falling below what we would call a major assignment anymore they’re just sort of large project..

Perfect, that’s helpful. Thank you both..

Thanks David..

And that’s all the time we have for questions today. And that does conclude our presentation as well. If you would like to listen to the replay of today’s conference you may call 888-203-1112 again that’s 888-203-1112 and use pass code 7015768 again that pass code is 7015768. Thank you for your participation. You may now disconnect..