Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Exponent Fourth Quarter and Fiscal Year 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, February 1, 2012. I would now like to turn the conference over to Brinlea Johnson of The Blueshirt Group. Please go ahead.

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 2011 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. 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 Form 10-K for the quarter ended December 30, 2011. 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'd like to turn the call over to Paul Johnston, President and Chief Executive Officer of Exponent. Paul, please go ahead.

Thank you for joining us today for our discussion of Exponent's fourth quarter and fiscal year 2011 results. We are very pleased with our performance in the quarter. This wrapped up a strong 2011 despite an uncertain economy, where Exponent posted double-digit growth in both revenues and profits. For the fourth quarter, net revenues increased 11% to $60.5 million and total revenues increased 8% to $67.9 million. Net income grew 25% to $7.7 million or $0.54 per share, reflecting strong utilization and product sales. For fiscal year 2011, net revenues increased 11% to $246.7 million, and total revenues increased 10% to $272.4 million. Net income grew 19% to $32.7 million or $2.22 per share. For the fourth quarter, we experienced good demand for our consulting services across a broad set of our practices, including notable performances from our mechanics and materials, electrical, thermal sciences, human factors and engineering management consulting practices, as well as our health and environmental groups. We continue to experience solid demand for reactive services, while demand for proactive services seems to be client specific. During the quarter, our business continued to benefit from a few major assignments. And as a result, we achieved 69% utilization in the quarter, in spite of this being our seasonally slower period. These projects will be stepping down in their level of activity over the next several quarters, but will likely continue with lower levels of activity for several years. As discussed last quarter, our defense technology development practice was awarded a contract to support the United States Army's Rapid Equipping Force. We are currently operating 2 engineering labs in Afghanistan, as well as providing technology assessments in the United States. We are pleased with the initial progress we've made in the labs, and are hopeful that this will lead to additional assignments. As we review 2011, we are pleased that we leveraged our breadth of disciplines and depth of engineering and scientific knowledge to assist our clients in addressing significant technological health and environmental matters. In particular, we were retained on the most high-profile events. We delivered a new IED detection capability to United Kingdom's Ministry of Defense, and continue to generate solid product sales in surveillance systems. In addition, we secured important new contracts to support the Rapid Equipping Force and to continue the development of ground penetrating radar technology for the United States Department of Defense. We grew our headcount by 7%. We also expanded our capabilities, which we expect will provide opportunities for additional growth over the long-term. We improved our margins by improving utilization to 71% and by carefully managing expenses. All of these activities contributed to our strong performance for the year and we are excited about our progress. We are optimistic about our business opportunities in 2012, but realize that 2011 created a high hurdle to clear. I will now turn the call over to Rich for a detailed discussion of our financial results.

Thanks, Paul. We are very pleased with our financial results for the fourth quarter, closing another strong year in 2011. For the fourth quarter, revenues before reimbursements or net revenues, as I will refer to them from hereon, increased 11% to $60.5 million as compared to $54.6 million in the prior year period. Total revenues for the quarter increased 8% to $67.9 million as compared to $62.6 million in 2010. Net income for the fourth quarter increased 25% to $7.7 million or $0.54 per diluted share. EBITDA in the quarter increased 20% to $14.1 million. For the full year 2011, net revenues increased 11% to $246.7 million. Total revenues increased 10% to $272.4 million. Net income for the year improved 19% to $32.7 million or $2.22 per diluted share. EBITDA in 2011 improved 16% to $59 million. In our defense technology development business, net revenues for the fourth quarter were $4.4 million, including $1.3 million for product sales. For the full year, net revenues were $17.3 million, including $4.2 million for product sales. In 2012, we expect net revenues from product sales to be approximately the same as in 2011. But as a reminder, product sales are very lumpy in nature and vary significantly from quarter-to-quarter. For the first quarter of 2012, we expect net revenues from product sales to be $650,000 as compared to $2.5 million in the first quarter of 2011. As Paul discussed, utilization in the fourth quarter was 69%, which was exceptionally strong considering the impact of holidays and vacations have on the quarter. For the year, utilization was 71%. In 2012, we expect utilization to be lower by a percentage point or 2 as a result of several major assignments stepping down in their level of activity over the next several quarters. Contributing to strong…

Thank you, Rich. In summary, we are pleased to have delivered a very strong 2011. As we look into 2012, we will continue to provide the expertise and experience to address our client's important technology, health and environmental questions; selectively add new talent to allow us to continue to expand our capabilities and strengthen our offerings; capitalize on our expertise to secure new contracts in defense technology development; manage operating expenses and utilization to provide the foundation for continued growth in revenues and earnings; and finally, generate cash from operations, maintain a strong balance sheet and undertake activities such as repurchasing shares to enhance shareholder value. We are excited about our future and we believe that we are well positioned to deliver long-term organic growth in the high single to low double-digit range. Now I will turn the call over to the operator for your questions.

. [Operator Instructions] And our first question comes from the line of Tim McHugh with William Blair & Company.

The commentary around the large cases is something we've always talked about throughout the year. Can you update us kind of where you're at in terms of, are you actually seeing the work start to decline in those cases yet or is it still your expectation that it will happen at some point, but you haven't really seen that start to matriculate to your work yet?

Yes. So Tim, where we are right now is, I don't believe that the work has actually tailed off yet. What we do see is some specific talk around certain deadlines for submittals and various kinds of things like that, that would have me believe that the start of the tail would probably come late in the first quarter. And then would continue over a period of quarters for the balance of the year. And so what we're looking at here, we believe, is something like about 5% of our business is based on -- would potentially drop down over that time period based on the large project.

Okay. Is this still like -- is this 1 project or 2 projects we're talking about? It sounded like you're...

Well, let me -- Tim, this is a little bit of a sensitive issue because of litigation reasons on these projects. I don't want to be specific and nail revenue directly to any particular project. It is more than one project though.

Okay. And then on the discretionary spending, the proactive work, your commentary about it being kind of client-specific, maybe I'm reading between the lines too much, but it sounded a little less positive than you were last quarter.

No. It's actually interesting because I think, Tim, the way I see it is the flow of work we have from the client group that are providing us work at the moment is actually fairly significantly up. It's actually quite positive. But it's just -- there are still clients we sort of expect maybe to get some work from that we haven't, and that's why I say it's client-specific. But it's not as though the clients we're getting work from are just barely ticking along, they're actually providing us with more work.

Okay. And then, Rich, 2 questions I had for you. One is, can you give us the quarter end headcount, and second is, you're helpful in giving specific kind of commentary around margins for Q1? Can you be any more specific about margins being down slightly for the full year in terms of -- just kind of the range of what you're expecting?

Yes. So the end-of-the-year actually was about -- was at, at where we were for the quarter at the average, because we had some good hiring at the beginning and then some tail off at the end. So we were -- that 677 is a good number to use as the starting place, it was 676, 677, somewhere in that range at year end. As far as slightly down, I view that, that is something that's -- let's call it 50 to 100 basis points, I mean, I think it's a little hard to bracket because obviously for you to see some things stepping down, you're going to try to manage that, but I think it's in that range, 100 basis points.

And our next question comes from the line of Joseph Foresi with Janney Montgomery Scott.

First question here is just taking a step back, if we look at the general demand environment. I think you might have alluded to it. How would you compare or what you're seeing in the pipeline this year versus last year, I guess, x the large projects that could tail off?

Yes, Joe. The pipeline, as you know, we don't have a lot of visibility into sort of what I'll call pipeline here, because we don't have a sort of a backlog measure. But in terms of the -- sort of the project activity in general, I think this year continues to be strong like last year, but like we indicated, we think, maybe it's a larger projects that will be tailing off. But recognize that a huge vast majority of the firm is not working on this large projects. The underlying strength -- and I think that's also can be seen from the fact that so many of our practices and groups had a strong year. And it wasn't just those that were involved in the larger activities, and we see that level of activity continuing.

So -- I mean, I think, Tim might have asked this as well, just on the discretionary side of things and the overall litigation demand, would you say that the trends are better than they were last year x the large project?

I think that, sort of, the demand side is somewhat similar, but we continue to expand our range of capabilities and bring more people in. And as such, grow our revenues. So I would describe it more that way rather than just that the demand is a whole lot different. We've got new people in the system now that have their own client bases, and through that process, we grow the revenues.

Rich, on the products business, maybe you guys could give us just a little bit more detail on what you're competing for, and a better breakdown of just how that makes its way into what you're guiding to on that line?

Yes. Well, as I mentioned before, the real piece we have in hand is really about 650,000 for the first quarter. And historically, that number wouldn't go up much because you need to have it in hand by now to be able to execute it in the first quarter. That can be small things, but nothing big. We have in the surveillance area, we've worked with a couple of different clients over time. There's been one side of the client group that's -- ties in our surveillance system into more of a thermal weapon sites and other more integrated systems that we have done most of our sales around over the last 1 year, 1.5 years. Historically, we've also sold the surveillance system, as sort of individual units that are useful out in port operating bases and sort of perimeter control. And we've been recently asked to bid on some work back in that area as well. And so that's why we have a couple of proposals out there. Not sure that we'll get back into the general perimeter security area. But clearly, they've come back to us on that side. I think we have a niche in some of the other areas that are more specialty related. But again, this isn't a very proprietary technology that we've got. It's -- I think we can do it effectively, and we have been good in delivering it, and it's lasted for quite a while. I think in addition to that, we are putting out a few units around a system that would be used at -- it's not a surveillance system, it's actually a system to stop vehicles at entry point if you have a vehicle that proceeds unauthorized through the entry point, you can deploy this device to stop the vehicle as it goes through. We are in the process of delivering 10 or 20 of those over to theater over the next quarter, and depending on what level of acceptance they get will determine if we end up starting to do more in that particular area. And then there could be as we look at the ground penetrating radar area where the development work that we've been done last year for the U.K., they began to look at things of replenishment or others, you could see something in that area as well. So those are the types of things that are out there, we'll have to see where it takes itself.

Okay. And just one last for me. I don't know, did you give a headcount hiring target, and on those large projects, maybe you could just give us some color. I know that your skill sets aren't necessarily fungible. But are any of those skill sets fungible when they do end? How long do you think it would take to get them back on to newer projects?

Let me start off with the first question. On the guidance on headcount growth, what we said is that from year-end numbers, we would expect that we can grow headcount on average about 1% per quarter, sequentially through the year. And so that would be on top of the carryforward that we've got from last year. I'll let Paul talk a little bit about how some of the staff that we've got out on some of these projects and how fungible that is.

Yes. I would say that the staff we have on these larger projects are very much in the core areas of the kind of consulting we do. And so it's not so very specialized that if this project goes away, they won't have any work to do because these are pretty core disciplines for our company.

[Operator Instructions] And the next question comes from the line of Tobey Sommer with SunTrust.

This is actually Frank in for Tobey. Wanted to -- quick numbers question. Could you give us the breakdown between engineering and other scientific and environmental and health?

Yes. Which numbers -- what numbers would you like?

Revenue, including reimbursements if you could?

Okay. So total revenues, or gross revenues for the -- you like them for the quarter?

Yes, that would be great.

Okay. So for the fourth quarter, total revenues for the environmental and health practice were $19.4 million. And the remaining balance of $48.5 million were in the other scientific. On a net revenue basis, or revenues before reimbursements, environmental and health were at $18.8 million and other scientific was $41.7 million.

Okay, great. And wanted to ask a little bit more about the product revenue. I guess it was guided to flat year-over-year. Can you talk a little bit about that environment? Is that an area that you're gaining some market share, and the end market is kind of under pressure a little bit or relatively flat in terms of -- where do you see the opportunity set for the market, as well as kind of your place in it?

Well, look, the product sales again as I think most -- all of you know is not a core part of our business. This is an outflow of our consulting -- our Technology Development consulting, our work when previously have labs over in Afghanistan and Iraq, and there would be a development of a need over there, we would develop 1 or 2 or 3 of something, people would try it out, we then modify that and give them 10. And then if the idea, it had a broader need, then the Rapid Equipping Force or other operating groups within the Army would choose to procure that, either sometimes through us, but a lot of times outside. That has generated opportunities over the years: MARCbot's, culvert denial system, surveillance systems, these surveillance systems tied into thermal sights, you've got this car stop technology, those types of ideas. And I would say in most of those over time, they have been more commoditized or taken over by -- either they run their course and been done or in the robotic side, you've had some of the larger players come in and sort of take that, that part of the market over a number of years. That doesn't mean they don't come back to us for a different type or -- because those organizations are good at doing the same thing over and over, but when the threat changes, it brings them back to us. But that is how that market is developed. So I think over time, yes, there is always pressure. In the surveillance area in particular, the more standard system we did, we sold several hundreds of them over years, eventually one of the bigger players out there or smaller players even you get into an area, try to…

Okay, great. And looking at kind of the majority of your business. In terms of utilization, you gave us some nice color in the quarter and your expectations for kind of next year with some of those projects running off. Could you talk a little bit about kind of your goal for longer term, a couple of years out? Where do you think that utilization could go?

Sure. I think we've been describing our change of utilization over a number of years here now saying that -- going back to when we were a couple of years ago, we were 66 and then last year, we were -- when I say last year, 2010, we were 70, and then we were 71 here in 2011. We've been describing that we believe that we can get into the mid-70s, low- to mid-70s for sure and when we get there, we'll see where we can go beyond that. I think that the reason that we've talked about why we feel confident about over a period of time continuing to move up is because, when we look at our larger practices, and particularly those that are in larger offices, we see that they run consistently at higher levels of utilization, and the smaller offices, smaller practices tend to run at lower utilizations. And so as the company grows and builds out the network of offices and builds out the practices and we gain even more critical mass than we have, we expect the utilization numbers to go up. Now, it won't necessarily will be monotonic, some years we might take a little dip back like we think might happen next year, but over a period of time, we expect to go up from where we are.

Okay, great. And my last question is kind of what are your thoughts about potential dividend policy? You did some buybacks this year and kind of how your thoughts are balancing that going forward?

What we have -- what we've said is that we think the current buyback process we're doing works quite nicely. We intend to reevaluate that approach in 2013 with regard to whether we should move to a dividend or have a dividend and buybacks, exactly what strategy dividends might play in that. And the reason we've kind of left it till then is because we just think there's just a huge amount of uncertainty with regard to taxes and we think some things need to settle down before we make a decision, so -- but we do plan to be able to sort of answer that question with a truly fresh update sometime during 2013.

And our next question comes from the line of David Gold with Sidoti.

Just a quick one, I actually joined a little bit late, so you might have hit on it. But basically, as the larger projects wind down, do we typically see more work sort of towards the end and then the slow down? Or is it more of just a slow ramp down?

Yes, I think for the -- there's a sort of a difference between what I will call a typical large project and these rather atypical larger projects. A typical large project for us often, can indeed end at some hearing or trial and could, in some cases, come to an end although often there is residual work beyond that. In these much larger matters, they tend not to come to an end in sort of, with one hearing, because in a sense they're multidimensional. There are issues that are before multiple regulatory bodies playing out in multiple courtrooms, and so they tend to go on for a much longer time. There's an investigation and safe when the work is really hot, and then it kind of comes to a point, okay, now we've really done all the investigation, but we still got a work through all these different regulatory proceedings and different litigations and so forth. And in some cases, particularly those involving environmental, there are often a lot of follow-up studies because people want to understand what might be happening in the future. We've talked in the past about how the Exxon Valdez tail, which happened in '89, went on a good 20 years. So the tails can be quite long, but we know that those tails once you get through the main body of work, they tend to step down to about half their level, and then continue over a period of time, gradually maybe going down from there.

And I think that in -- where we've seen large issues on the products liability side of the world historically, then that typically, even though the issue maybe -- have been settled with regulators and even in class or whatever you see a tail of -- a continuum of those type of cases or around that particular issue, if it may be SUV rollovers or other areas that I would just say society becomes more sensitive to for that period forward, and as such, we tend to see a long-term impact of those type of projects.

And I'm showing no further questions. Ladies and gentlemen, this concludes today's conference call. If you would like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030, and enter the access code of 4505400. Thank you for your participation. You may now disconnect.