Samantha Press - The Blueshirt Group Paul Johnston - President and Chief Executive Officer Rich Schlenker - Executive Vice President and Chief Financial Officer of Exponent.

Tim McHugh - William Blair David Gold - Sidoti Tobey Sommer - SunTrust Robert Simmons - Janney.

Good day, and welcome to the Exponent First Quarter Fiscal 2015 Results Conference Call. Please note, today’s conference is being recorded. At this time, I would like to turn the conference over to Miss Samantha Press of The Blueshirt Group. Please go ahead, ma’am..

Thank you, Joshua. Good afternoon, ladies and gentlemen and thank you for joining us on today’s conference call to discuss Exponent’s first quarter 2015 results. Please note that this will call will be simultaneously webcast on the Investor Relation section on 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 filing 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’d like to turn the call over to Paul Johnston, President and Chief Executive Officer of Exponent.

Paul?.

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 performance from our Material Science, Mechanical Engineering, Polymer Science, Human Factors, Structural Engineering, and Construction consulting practices as well as from our environmental group.

We are pleased that clients continue to call up on 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’ve 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’ve announced our intention to complete a two-for-one 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 and net revenue to be in the low- to mid-single digits and margins to be approximately flat with 2014. Now, Rich will provide a more detailed review of our financial performance..

Thanks, Paul. 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. We….

Ladies and gentlemen, please standby..

Who is the operator?.

I’m sorry, we need to hear from the operator if we’re live or not.

Operator?.

All right, sir, go ahead..

Okay, I’m going to - this is Rich Schlenker, I’m going to start back over at the beginning where I was. So I’m going to start at the beginning of my piece. So, 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, 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, up 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 [ph]. 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.

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 of 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 0.8% for translating foreign currency for consolidated financial statements.

In the first quarter of 2014, we had an unusually high amount of write-outs 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 and 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 and 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 expense 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 expenses 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 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 our 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 Paul discussed earlier.

I will now turn the call back to Paul for closing remarks..

Thank you, Rich. 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 like to produce strong organic growth, improve profitability which we’re expected to generate significant cash flow and allow us to continue to repurchase stock and pay dividends. Operator, we are now ready for questions..

Thank you so much. [Operator Instructions] We’ll take our first question from Tim McHugh with William Blair..

Yes. Rich, first I want to ask about the timing around fixed price deals and kind of the write-ups on those.

Can you talk about I guess what drove those and I know you gave the year-over-year, but I guess how out of the norm and maybe lastly, just what’s the flow through when you do that to the profits?.

Yeah, so 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 T&M, and as such don’t really have 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 zero to maybe a $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 flow through 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..

Okay. And then just following up, you talked about the technology development group having some success, I guess moving into the commercial sector.

Is that - how meaningful is that or I guess how optimistic are you about that being meaningful I guess over the next year or two years?.

I think, Tim, I think what we’ve really done here is to -- we did end up over the period of previous year last year sort of re-orientating and resizing the technology development sort of practice that we had.

And so, from what I’ll 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 sort of appropriate to where we saw the opportunities in the commercial marketplace, and we’ve been kind of moving forward with that.

It has proved out to work well for us, in other words, we’re looking at a technology development practice that doesn’t have - it’s not sitting idle, it doesn’t have a low utilization level and so forth because adjustments have been made. And we’re optimistic that that can continue and we hope that that 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..

And I guess you probably talked about a little bit of their success in the oil and gas market, but I guess more broadly, I think you had said in the last call maybe 8% or 9% revenue from that sector, given the macro environment I guess just an update there.

Are you seeing any sensitivity to spending levels from clients in that sector?.

Yes, we are. There is no question that in the oil and gas sector there has been clearly some significant type - bell-tightening going on. And obviously, we see it in the news with various kinds of layoffs from 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, and so we think that that in the near term, some - 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..

Is that an area of business that can be flat in this environment, so I mean does it constrain your growth or is it the type of thing that that piece of the business that would be shrinking and something we should think about as a headwind though, kind of underlying the overall growth rate?.

Yeah. I’m not looking at the 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 and we’re working in that area.

And as we’ve seen before on the more reactive work, it 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, but we’ll 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.

So it’s, overall, I think something closer to flat is probably reasonable in that sector..

Okay and Rich just one number. I’ve missed the headcount, the kind of ending headcount or FTE number.

Can you do that again?.

Yeah, so the FTE was 745..

Okay, thanks..

And our next question comes from David Gold with Sidoti..

Hey, good afternoon. So just a couple of questions to go over. First, Rich, you noted on the G&A side, presumably had made some progress, but then embedded in your guidance is maybe a pick up from there.

So I was just curious how we should think about both the first quarter and what’s happening there?.

Yeah.

First of all, I think last year’s G&A in the first quarter was little bit higher, we were 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, 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 the - call it 4% or 5% level versus the prior year..

Got you, okay. And then so think about spots where, you called out just at least from the release a number of spots where you’re seeing some strengths but as a follow through areas where you’re doing kind of what you expect to do some of that adding.

Are there areas where you’re particularly “understand” for the demand right now or is it really across the board?.

Well, I would say that the stronger areas have actually is been the several 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 sort of consumer electronics and for the medical device arena, we’re 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 were the areas at polymer science areas. So 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 the sort of stronger growth areas from a headcount standpoint..

Got you, perfect that’s helpful..

Thank you. And next we’ll move on to Tobey Sommer with SunTrust..

Thanks. Rich, could I start out on the net realized bill rate increase, could you walkthrough how that came in a little bit lower than your expectation and is that something that is temporary or represents a change? Thanks..

Yes. So 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 and itself is been lower than maybe when the economy is been robust in higher inflation where we’ve maybe gotten 3% to 4%.

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’ve improved the utilization, some of that has 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, in Asia and in maybe 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 data 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 the strong utilization which delivered good leverage and it’s why the bottom line has been able to grow in the double digits here in the first quarter.

So those are 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 rates for those people in 3.5%, 4% range, as we bring in new staff we’ve talked before that that gets blended down some but what happens around turnover that will drive 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 pricing realization that’s in that to 3% plus range..

Thank you. And probably questions that prompted, I think you mentioned food and chemicals, polymer sciences areas where maybe they get a little bit faster headcount growth in as you said Asia too as geography.

Are the bill rates in the areas that maybe filled with a little bit faster headcount growth and/or geographies? How would the compare to the current mix?.

Yeah, so there is a couple of different things, I think there are sort of two different facts 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 sort of the regular health and engineering consulting rate.

So that was just - I mean we still got 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 are on average lower rates than in some of the engineering practices for example. However, so you got 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 in 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 sort of entry level junior staff, and so that’s the reason why we’re seeing it there.

So the 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’re still junior people. And so that spread out, that leverage we’re getting is causing that effect..

Thank you. Paul, one last question for you and Rich I was hoping that I could just get numbers here as well, the revenue for environmental and health versus engineering and scientific.

And then Paul, from a longer term standpoint, do you have an expectation for there to be even a slight mix shift between the reactive and proactive work and how might a significant shift might that be over say five years? Thanks..

Yeah, so let me address that first and the Rich will get you the numbers. So, we absolutely believe that overtime 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 it depends but it by in all means it all depends. So that’s how we view it today.

We think that mix is going to continue to change, largely some growth, we think both sides will grow but we think the proactive will grow faster.

Difficult to say exactly how it’s suitable maybe for the proactive get some 35% to 40% or 45%, but it’s a direction we’re going and that probably increases, I don’t know this is a bit of like estimate, probably increases by maybe 1% or 2% proportionally per year something in that order, so over five year to increase by 5% or maybe 10% something in that range.

So I do think that something that’s going to happen, although 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 a 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 it’s very difficult to say but you may see some ongoing trend that affects this bill rate issue.

But I think to the extent of times 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 effects 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 competition standpoint and so forth we get more leverage out of the younger staff than the - than principles for example.

And so as a result on average that’s going to be a little bit more profitable. So I think those trend can happen overtime, I don’t think they’re big jumps. The biggest one we’ve released that have seen was while we’ve kind of just slide this quarter where we saw little more than we might usually see..

Thank you very much..

So, to give you the numbers that you’re asking for are the total revenues, so growth revenues for our environmental and health segment were $20.5 million and our - the revenues for the other scientific were $59.8 million.

On a net revenue basis the revenue before reimbursements, the environmental and health was $20.2 million and the other scientific was $55.9 million..

Thank you very much, perfect..

Fantastic. [Operator Instructions] We’ll take our next question from Robert Simmons with Janney..

Hey guys, thanks for taking the question. So, we were wondering if there are any large engagements entered into the side that you can disclose..

So, not really. No, I mean I think - I mean first of all what I would say is that in terms of what we’ve talked about as major assignments that we talked about before the ones that were 4% to 5% of revenue as oppose to our typical large ones of 2% to 3%. We haven’t had another one of those.

And as we’ve previously indicated, the 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 at this time we would be in a position to describe..

Okay, great. And can you talk just how much effect disclosure you guys have that would be great..

Yes. So as a reminder our international operations are about 7% of our business that means of 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 U.S. that work is all done at U.S. dollars.

So we’re really primarily affected by currency exchange rates to our operations in the UK and a little bit in Germany.

The impact to the first quarter was eight tenths of a percent 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 what are the big step downs were.

So, I think our range is going to be from this eight tenths down let’s say half five tenths by the end of the year..

Okay, thanks guys..

Thank you. And that does conclude our presentation for today. The replay of today’s presentation will begin at 6:30 PM Central Time and end on April 29 at 6:30 PM Central Time. You may access the replay by dialing the phone number 1-888-203-1112 and enter the code of 7905988. Thank you for your participation. You may now disconnect..