Samantha Press - The Blueshirt Group, Investor Relations Paul Johnston - President and CEO Rich Schlenker - Executive Vice President and CFO.

Tim McHugh - William Blair Tobey Sommer - Suntrust David Gold - Sidoti & Company Robert Simmons - Janney.

Please standby, we are about to begin. Good day, ladies and gentlemen. And welcome to the Exponent Fourth Quarter and Fiscal Year 2014 Earnings Conference Call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Ms. Samantha Press. Please go ahead, ma’am..

Thank you, Greg. Good afternoon, ladies and gentlemen. And thank you for joining us on today’s conference call to discuss Exponent’s fourth quarter and fiscal year 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 fourth quarter and fiscal year 2014 results. For the quarter, net revenues increased 1% to $69.6 million from the same quarter in 2013. Net income for the quarter increased 6% to $9.2 million or $0.68 per share.

For the fiscal year net revenues increased 3% to $289.2 million as compared to 2013. Net income increased 5% to $40.7 million or $2.94 per share.

We are pleased to have delivered revenue growth, increased profitability and improved utilization for the quarter and fiscal year, particularly considering there was one less week of activity in 2014 than in the comparable period in 2013.

For the year, we had notable performances from our material science, biomedical, polymer science, human factors, and construction consulting practices, as well as our environmental group.

In 2014, we saw our reactive business grow as we were called upon to perform high profile accident and failure investigations, as well as evaluate potentially significant product recalls.

We also continue to see expansion of our proactive business in design evaluations of consumer electronics and medical devices, in addition to regulatory consulting for the chemicals and food industries During the year we returned value to shareholders through stock repurchases and dividend payments.

In total, we repurchased 30.9 million of stock and pay dividends of -- of $13.1 million.

We closed the year with $154 million in cash and today announced an increase in our quarterly dividend to $0.30… Looking forward to 2015 and as we’ve previously discussed, our underlying growth remains in the high single digits but will be partially offset by a significant decline in defense work which corresponds with the fall of U.S.

combat troops from Afghanistan. We’re also expecting a major project to step down in the second half of the year as it moves into the next phase of its project lifecycle.

As we enter 2015, we remained optimistic about our business and believe we can continue to expand our unique market position in accepting the liability, safety, human health and environmental issues of increasingly complex technologies, products and processes. We are confident in our ability to generate long-term shareholder value.

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

Thanks Paul. For the 13-week fourth quarter of 2014, revenues before reimbursements, or net revenues as I will refer to them from here on, were $69.6 million, up 1% from $69 million in the 14-week fourth quarter of 2013. Total revenues for 2014 were $73.6 million as compared to $72.8 million one year ago.

Net income for the fourth quarter increased 6% to $9.2 million or $0.68 per share as compared to $8.7 million or $0.63 per share in the same quarter of 2013. EBITDA for the fourth quarter was $17.2 million versus $15.9 million in the same period of 2013.

With the 52-week fiscal year 2014, revenues before reimbursements were $289.2 million, up 3% from $280 million in the 53-week fiscal year 2013. Total revenues for 2014 were $304.7 million as compared to $296.2 million in 2013.

Net income for 2014 was $40.7 million or $2.94 per diluted share, an increase of 5% as compared to $38.6 million or $2.76 per diluted share in 2013. EBITDA increased 6% to $73.2 million versus $68.8 million one year ago. Diluted share count decrease to 13.8 million from 14 million shares in the same period last year.

Turning to more detail of the quarter and year. As a reminder, we had a challenging comparison in 2014 versus 2013.

Our growth in revenues before reimbursements were reduced because of a step-down in a few major assignments, lower defense spending, an extra week in the fourth quarter of fiscal 2013 and $1.4 million of revenue recognized upon payment in 2013 for work performed in the prior year.

In the fourth quarter of 2014, Defense Technology Development had net revenues of $1.4 million as compared to $3.2 million in the same quarter one year ago. For the full year, net revenues in Defense Technology Development were $10.9 million, with no product sales as compared to $13.1 million with $200,000 of product sales.

As we discussed with you last quarter, we expect revenues from the Defense Technology Development to be in the range of $500,000 to $1 million per quarter in 2015, which will impact our growth in 2015 by approximately 3% on a year-over-year basis.

While we have reduced our staff in this area over the past year, we have also been successful in leveraging our experience and expertise for landing some work from commercial clients.

Utilization in the fourth quarter was 69%, which was a couple of points higher than we had expected as a result of strength in some of our engineering practices as well as our environmental group. This compares to 66% in the same quarter in 2013. Utilization for the full year 2014 was 71.8%, as compared to 71.3% in the prior year.

For 2015, we expect our utilization to be approximately the same as 2014. For the fourth quarter of 2014, billable hours increased 1% to 271,000 in the 13-week quarter, as compared to 269,000 in the 14-week quarter in 2013. For the year, billable hours increased 2% to $1.1 million.

For the fourth quarter, technical full-time equivalent employees were up 3% to 754. For the full year, FTEs were also up 3% to 741. For 2015, we expect year-over-year headcount growth to be approximately 2%. Our realized rate increase was approximately 2% in 2014. For 2015, we also expect to realize a rate increase of approximately 2%.

EBITDA margin for the fourth quarter was 24.7% of net revenues as compared to 23% in 2013. For the full year 2014, EBITDA margin was 25.3% as compared to 24.6% in 2013. For fourth quarter of 2014, compensation expense after adjusting for gains and losses in deferred comp decreased 2%, reflecting one month’s week.

Included in total compensation expense is a gain in deferred compensation of $1.2 million as compared to $1.9 million in the same quarter in 2013. As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line.

For fiscal year 2014, adjusted compensation expense increased 2%, with a gain in deferred compensation of $2.5 million as compared to $6 million in the prior year. Stock-based compensation expense in the fourth quarter of 2014 was $2.5 million. In fiscal 2014, it was $13.1 million.

For 2015, we expect stock-based compensation to be approximately $13.75 million. Of which, $5.75 million will be expensed in the first quarter. And the remaining $2.75 million in each of these remaining quarters. Other operating expenses in the fourth quarter increased 5% to $6.8 million.

Included in other operating expenses is $1.4 million of depreciation. For 2015, other operating expenses are expected to be $6.7 million to $7.3 million per quarter. G&A expenses in the fourth quarter increased 3% to $4 million. For 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 41.6%, as compared to 40.5% in the fourth quarter of 2013. Our full year 2014, tax rate was 40.1%, as compared to 39.6% in the prior year. For 2015, we expect our tax rate to be approximately 40.25%. For the fourth quarter, operating cash flow was $22.2 million. And for the year, it was $48.3 million.

At year-end 2014, our cash and short-term investments were $154.4 million. In 2014, we repurchased $30.9 million of stock for a total of 425,000 shares at an average price of $72.72. We still have $35.1 million authorized and available for repurchases under our current repurchase program.

Additionally, during the year, we distributed $13.1 million to shareholders through dividends and today announced an increase in our quarterly dividend payment to $0.30 for the first quarter of 2015. Capital expenditures were $1 million in the fourth quarter and $5.3 million for the year.

DSOs at year end were 90 days as compared to 83 days at the end of 2013 when they were unusually low. Looking forward, we expect 2015 growth in revenues before reimbursements to be in the low to mid single digits and EBITDA margin to be approximately flat with the 25% we achieved in 2014.

Our underlying growth remains in the high-single digits, but will be partially offset by significant decline in defense work and major projects stepping down in the second half of 2015.

Additionally, although our UK and European operations are only approximately 5% of our revenues, our revenues and expenses will be one-half percent lower in 2015 due to the change in foreign exchange rates. I will now turn the call back to Paul for closing remarks..

Thank you, Rich. As we look into 2015, we remain focused on our priorities to build upon our reputation as the go-to-firm for engineering and scientific expertise when clients want to know what happened, as they are facing a product recall, litigation, regulatory enforcement.

We will leverage our experience and reputation in reactive services to continue to develop our proactive services such as design evaluations, risk management and regulatory consulting.

As always, our priorities continue to be revenue growth, profitability, and strong cash flow from operations, which will enable us to deliver long-term shareholder value. Operator, we are now ready for questions..

[Operator Instructions] And first, we will take Tim McHugh with William Blair. Mr. McHugh, your line is open, your phone maybe on mute..

I am sorry, yes.

Just want to ask about the large project first and the expectation that’s getting down in the second half, are there specific deliverables that you expect, or are you just trying to hit options by the likelihood at some point that [indiscernible]?.

There are specific deliverables and timeframe that is laid out for that step down..

Okay.

And as we think about the kind of the high-single digit you talk about for next year, are there certain practices that at this point of the year you would kind of expect faster growth out of another one?.

Well, certainly as we talked about the practices that were strong in the fourth quarter, many of those really represent some of the areas that are growing fastest in the firm. So certainly our material science, biomedical, polymer science, those areas are extremely strong.

There is a reactive work in that space, but there is also a lot of proactive work that continues to grow, particularly in the consumer electronics and medical device space. So we expect those to grow, as we look into next year at a rate that’s double-digit..

Okay. And I am sorry if I missed this earlier, I joined a little late.

What’s your hiring expectation as you think about next year?.

Yeah, Tim, as indicated that we expected full time equivalent employees will grow approximately 2% next year..

Okay.

And I guess, is that a reflection of just wanted to push utilization up, that’s lower than you normally I guess target?.

Yes. As we indicated, we ended up the fourth quarter with about 754 FTEs, but due to the fact that we had a step down in defense as well as just some other things, we ended up starting the year at about 741 FTEs, so about flat with last year’s average for the year.

So the net hiring during the year will be about what we have normally done, so our hiring is anticipated to continue but the carryover -- normally, we have a carryover from the prior year where we end the year at 1% or 2% higher than the average of the year because we’ve been hiring throughout the year.

This year, we’ll be starting EOS even with the average for last year and as such, we think that will be slightly dampened. Obviously, we’ve indicated that with the step down with the substantial reduction in defense, as well as the step down in the major projects.

We think that’s a prudent way so that we are able to maintain around the same utilization as we have this past year..

Okay. So, Q1, your headcount probably -- average headcount is down sequentially and you are both back up across the year..

Yeah. We’ll be -- well, the Q1 will be higher than it was last year and Q1 will be approximately 1.5%, 2%, still up from the first quarter of last year. It will just be down, compared to the fourth quarter..

Okay. Great. Thank you..

Yes..

Next with Suntrust, we’ll move to Tobey Sommer..

Hi. This is Michael in for Tobey..

Yes..

Just had a couple of question here.

Can you talk a little bit more about growth trends and demand from clients in the proactive business and what feedback you're hearing from clients there?.

Sure. I mean, I think that -- the proactive business is, we would still say is a part that’s growing faster than the reactive side. This past year, we had a significant growth in what we did in the consumer electronics area and the biomedical area. We expect that to continue to grow this year. I think we've got a pretty unique service offering.

So what we’re offering there is not really competing with other firms. It might to some extent be competing with some resources that they might have in-house, but we offer a kind of a specialty service that makes them want to go outside to get that. So, I expect that to continue.

The other area that is sort of strong for us and that we expect to continue to grow next year is the regulatory consulting, particularly in the food and chemicals area. So we would expect that to continue to grow.

And the final area that we've been sort of seeing some good growth in is from proactive services in the oil and gas space, how successful we’ll be in continuing to grow that, given where oil prices are today. Might be a little uncertain but the fact is we have been growing that business quite significantly..

Okay. Great.

Are you seeing any changes in pricing trends? And kind of more broadly, what sort of changes are you seeing in the competitive landscape?.

Yeah. On the pricing side, I think what we’re seeing is that pricing increases are approximately the same as it been in the last couple of years. So we’re not seeing a big change there. For us that means that our -- the rates for our individuals who work here on January 1, they went up by about 3.5% to 4% is what it went up.

As we blend that in with more junior staff that we hire throughout the year, we will end up realizing about 2% indoor pricing increase out of that. That’s similar to what we have done in the last couple of years, but still is substantially below where it was for us in the 2006, ‘07 even in the ‘08 years where that realization was closer to 3.5%.

So clearly, the lower inflation environment has had some impact on where we go on a pricing standpoint. From a competitive landscape, I don't think we have seen any significant changes.

We continue to have a dominant position in reactive services, working on litigation matters, product recalls, regulatory enforcements where I think we are a recognized as sort of the go-to firm at the top of the pyramid in that market place and clearly have a substantially different size and scale than any of our competitors in that area.

On the more proactive side, there is -- continues to be a competitive environment on the regulatory support side, regulatory consulting area, but more on the design consulting area that we are working in, we don’t -- there isn’t really somebody we point to as the other firm.

We are, as Paul mentioned earlier, we’re really providing something that a lot of our clients might otherwise do in-house or just not have that capability to draw upon. There just really isn’t another firm with our experiences about how products perform and how they fail and how to bring that understanding to these rapidly developing market places.

So hopefully that gives you a little bit of insight as to what’s going on today..

That was great. Thank you..

Next we have David Gold with Sidoti & Company..

Hi. Good afternoon..

Hey David..

Couple of things, the tiny bit color on.

One is, that I could really ask is, we think about their three major projects that have been in through different stages to tail off, I guess, for a couple of years now? And want to say that last quarter you get updated to say it was 8% revenue down from that 12% a year before? Was curious if you could give similar metrics as we set now and maybe give a little bit probably an update on each of the projects?.

Well, let me just, David make some overall comments and then Rich may give you some numbers. So the way I see it as going back some years, we’ve had these three major assignments that we’ve called out because they were sort of maybe each of them maybe 4% or 5% of revenue as opposed to our normal larger projects which might be 2% or 3% of revenue.

And that’s why we’ve had the focus on them as they tail off. Now, where we sit today is of those three projects, we have stepped down in all, but one of them. And there’s just one remaining project that we’ve got a little bit better clarity on in terms of expectation of stepping down as I responded to and to Tim McHugh earlier.

And so that’s the last of these major assignments to be in this mode of stepping down. Now this doesn’t mean that these assignments have completely gone away. It just means they stepped down to at or below a normal large project level. And so in that vein, we don’t typically talk about step downs from our normal large projects.

So that’s where we stand, we just got one remaining, and we expect that to step down in the latter half of the year. Rich may want to give a little bit more metrics on that..

Yeah. I think that where we are today is that those projects are sitting somewhere in the -- probably about -- probably 7% somewhere in that range. It’s probably where we are maybe 7% to 8% as to where they sit today as Paul said.

We still have one engagement that is still in that 4%, 5% range and the other is step down to at or below what we would consider to be a normal large engagement, which we have a fewer quarter of which would be in the 2%, 3% of revenue range. So these are clearly at or below those levels at this point in time..

Perfect. That’s helpful.

And then you speak about on the repurchase, one, during the quarter on average price? And two, I know there were some commentary in the release when you commented there, but just how far are you thinking about that, how much capital you want to allocate or is it more a function of price?.

Yeah. So -- we -- as I mentioned on the -- in my other points, we repurchased for the year the 30.9 and 72, 72 in the quarter We were only able to pick up $3 million in that. That was at a price of 72, 17. So the price sort of moved up, a lot of things moved up around the -- in the marketplace through -- in the quarter.

But the things moved up pretty substantially and as such as we have indicated in the past, we believe over the long-term that we can through a combination of dividend and repurchases work our cash down over the next four to five years. To the point that is in $50 million to $70 million range, hopefully, here.

And we expect to be able to do that by repurchasing, if there is pullback in the stock or just settles down a little bit lower than it’s been.

On average those are times that we are going to step in and be more aggressive and try to repurchase what we can for shareholders and as it sort of rises at points in times, so we will be a little bit lighter on that.

But what we will do overtime and we are committed too is that, at a minimum we are going to repurchase back more than we are putting out in our stock plans and clearly, we have far exceeded that this year and would expect to going forward. On the dividend side, we expect, we have just increased the dividend another $0.05 a quarter.

That’s a 20% increase. We would expect that the dividend would increase at a rate that is even faster than our earnings growth over the next several years and hopefully, that as well can bring value to shareholders..

Perfect. That’s helpful. Thank you both..

Thanks, David..

[Operator Instructions] Next we will move to Joe Foresi with Janney..

Hi. This is Robert Simmons on for Joe.

So can you give me color on where you are guys are looking to hire?.

Paul, what he said?.

Where we are looking to hire?.

Yes, I think, this is -- the majority of our hiring is close to entry level and our ideal entry level hire is somebody who has got a PhD either directly out of school or with a couple years experience. And we are looking to do that top engineering and public health schools. And we are quite frankly looking to do that pretty much across the Board.

So all the groups we have and all the practices we have in the firm, we are certainly looking to continue to bring in top talent, that just sort of the fundamental feeding stock of the firm. So we are not going to stop doing that. In addition to that, we certainly look for some mid-level and some senior level hires.

The sort of lateral senior hires are difficult to come by. We don’t typically hire that many here. I think we hired nine principals last year and we will see if we can do that again this year.

But those are -- they are more opportunistic because it’s a matter of to find good people, you have got to find somebody who is in -- who has got the right resume and got some book of business and usually they will be well carried for wherever else they are, but sometimes there is an upside in their business, so there is an acquisition or something and they are not happy with way the situation is.

So we keep our ear to the ground and we are looking to hire senior people as well. Clearly, there are some targeted areas beyond that that we have been focused on. I mean, we are doing more work in the computer science arena and we definitely are looking for people there.

There are aspects of health that we have talked about and health outcome research and the pharma side of health that we are -- that we have made some hires in, but we are looking to make more hires in. So those would be examples of some, if I’ll call some special areas. And certainly, we are also expecting to grow our two offices in Asia.

They’ve been particularly busy. The office in Shanghai and Hong Kong, they are still small, but we looking to grow those. And then in the U.K. we continue to have a very strong regulatory business there and we expect that to continue to grow. So hiring is pretty broad based with some focused areas..

Great. Thank you very much..

And with no remaining questions in the queue, ladies and gentlemen that does conclude today’s conference. A replay of today’s conference will be available beginning tonight at 6:30 p.m. Central Time for one week. The phone number to access that replay is 1 (888) 203-1112, again that’s 1 (888) 203-1112. Again, that does conclude today’s conference.

We thank you all for your participation..