Good day, ladies and gentlemen, thank you for standing by. Welcome to the Exponent's Second Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, July 18, 2012. I would now like to turn the conference over to Matthew Hunt [ph] of Investor Relations. Please go ahead, sir.

Good afternoon, ladies and gentlemen. Thank you for joining us on today's conference call to discuss Exponent's second quarter 2012 results. Please note 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 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 Form 10-Q for the quarter ended June 29, 2012. 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. 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 second quarter 2012 results. The second quarter net revenues increased 13% to $68.3 million, and total revenues were up 14% to $74.5 million. Net income grew by 26% to $10.3 million or $0.72 per share compared with $0.55 per share a year ago. We are pleased with our second quarter performance having produced double-digit revenue growth and increased profitability. We continue to benefit from the strong demand across the broad range of our services, both proactive and reactive. We experienced high utilization as we continue to benefit from new work in key areas, as well as a few major projects. In the 50% of our business that is reactive in nature, we continue to see a steady flow of new retentions related to litigation, insurance claims and product recalls from a diverse set of clients. In the 30% of the business that is proactive in nature, we continue to see an increase in new assignments related to design consulting, regulatory consulting and engineering management consulting. The defense technology development business saw an increase in activity, supporting the U.S. Army's Rapid Equipping Force, which was offset by the winding down of our current U.S. ground penetrating radar development contract. In our environmental and health segment, we had notable contributions from our environmental sciences, ecological sciences, chemical registration and food safety and exposure assessment practices. In our engineering and other scientific segment, we had notable performances from our mechanics and materials, electrical, biomedical, vehicle and engineering management consulting practices. Broad-based demand for our services, the addition to the continuation of a few large projects, led to a strong utilization of 76% in the quarter. Which, along with the moderate growth in expenses and lower share count, resulted in 31% growth in earnings per share. Only 6% of our revenues are generated from our international offices. We continue to see good demand. In the U.K. and EU, we are seeing increased demand for our chemical and pesticide registration services. In China, business remains strong, driven by our work addressing clients quality-control issue from their suppliers and contract manufacturers. We are pleased with our performance to date and are optimistic about our ability to weather a difficult economic environment. Since our project work, both in the U.S. and internationally, is in areas that we believe are less sensitive to the economic slowdown. Thus, we are increasing our full year expectations. I'll now turn the call over to Rich for a detailed discussion of our financial results.

Thanks, Paul. The second quarter, total revenues increased 14% to $74.5 million from $65.1 million in the same period last year. Revenues before reimbursements or net revenues, as I will refer to them from here on, increased 13% to $68.3 million in the quarter. That's compared to $60.6 million in the prior year period. Net income for the second quarter increased 26% to $10.3 million or $0.72 per diluted share as compared to $8.2 million or $0.55 per diluted share reported in the prior year period. EBITDA in the second quarter increased 22% to $18.3 million as compared to $15 million in the same period last year. For the first half of 2012, total revenues increased 6% to $146.4 million, net revenues increased 8% to $134.8 million. Net income for the first half of 2012 grew 14% to $18.5 million or $1.29 per diluted share. EBITDA in the first half of the year improved 13% to $33.1 million. Overall, we are quite pleased with our financial performance for the second quarter, which together with the first quarter, have set us up to have a good year in 2012, especially considering the high hurdle established in 2011. In the second quarter of 2012, net revenues from our defense technology development business were $4.5 million as compared to $2.8 million in the same quarter last year. Net revenues from product sales in the second quarter of 2012 were $188,000 as compared to $105,000 in the same period last year. We have recently been awarded a new contract for surveillance system product sales and believe we are going to get a second contract soon. If we receive both contracts, we expect net revenues from product sales to be approximately $250,000 in the third quarter and $1.25 million in the fourth quarter. As Paul…

Thank you, Rich. In summary, we are pleased to have delivered a strong second quarter of 2012. As we look ahead, we will continue to provide the expertise and experience to address our client's important technology, health and environmental questions. We will manage operating expenses and utilization to provide the foundation for continued growth in revenues and earnings, we will selectively add new talent to allow us to continue to expand our capabilities and strengthen our offerings and finally, we will generate cash from operations, maintain a strong balance sheet and undertake activities such as repurchasing shares to enhance shareholder value. In summary, we remain optimistic that we can continue to drive growth in our business by leveraging our multidisciplinary capabilities and expertise to capitalize on new market opportunities. Now I will turn the call over to the operator for your questions.

[Operator Instructions] Our first question is from the line of Matt Hill with William Blair & Company.

This is Matt Hill in for Tim McHugh today. A couple of questions. Given the strong results you saw this quarter, specifically in regard to large cases winding down, it sounds like they're not rolling off as fast as you initially expected. I was wondering if do you still expect the same amount of roll-off in the future or if you think it's going to push a little bit longer now?

Yes. I think it's fair to say that they -- that they've continued at a stronger level for longer than we had maybe originally thought. We expect them -- I mean, the project life cycle is such that they will step down here, it really is just a matter of the timing. As we look back on the last quarter, what we actually -- we began to see 2 of our larger projects has stepped down in certain aspects of the activities that we're engaged with there. And we expect them to continue to do so over the next several quarters. It also turned out that one of our projects, that large project actually stepped up in activity during the quarter, which kind of masks what was happening with the other 2. So we still do believe that there's going to step down, as Rich has described over the next several quarters.

Okay. And then in regard to recent hires, can you talk about how over the past year, the head you've added, how they are ramping up? And then also given your expectations for sequential headcount growth, what the current recruiting environment for the consultants looks like?

Well, let me talk about the sort of the recruiting environment, then Rich can maybe add some data for you. From our perspective, the recruiting environment, we always break into sort of 2 pieces. One is the sort of the more entry-level or junior staff. And at our firm that's often a typically sort of a Ph.D. level person coming out of a top school. That's where we recruit our sort of entry-level people. And while the economic environment has made recruiting on college campuses, in general, a little easier, hasn't really changed much for us. The top candidates we are looking for always have multiple offers. So it's still a competitive field. However, I don't think that in terms of getting entry-level staff, we're kind of restricted by supply per se. With regard to the more senior staff that we recruit, finding people who will fit in well to the firm, often having a book of business and so forth, is always difficult in good times and in tough economic times because they control their own destiny. And that just continues to be a hard thing to do.

Related to the integration of staff and what have we seen around the ramp up there, again, breaking them off into these 2 buckets that Paul has mentioned here. Clearly, the ability to integrate our staff at the more entry-level is made easier when the utilization of the firm is higher, actually. I mean, there's more work to be done and the demand levels on others is high. So the ability for people to naturally spin off work to others comes much easier in that environment. So I would say that from that standpoint, that's gone quite well over the last year. At the more senior level, I think, we continue to see the same level of timing around integration. It varies from consulting staff, who have been consultants in a prior life, where they have some clients that they've worked for. Those clients want to work with them in the future. And so when staff joins a different firm, you tend to find that those clients find them wherever they land on their feet. And as such, their ramp up time is measured probably over a few months in time frame as they begin to ramp up. Whereas staff that you hire either out of government or academia or industry, while over the long term they may become a very successful consultant, the ramp up time is gradual probably over a period of a year that they're gradually building up into that and establishing themselves in the marketplace. So I think we really haven't seen a change in that. That's just more natural behavior.

Okay. And if I can get in one more. Thinking your prepared marks, there's a comment about the macroeconomic environment wasn't having quite the impact you thought it was? Is this just a change in your client's attitude with regard to proactive projects or is it just...

I think it's more a reflection on the nature of our business. We have consistently seen with our business seems to be quite resilient in tough economic times. We can reflect back, obviously, going through sort of end of 2008, 2009, when our business held together very, very, very well. So I think it's more a reflection of the kind of work we do on the reactive side and the claims of clients and the specialty nature of our services on the proactive side. Clearly in tough economic times, clients are maybe more cost sensitive. But the demand for our services, we have historically seen and we believe we're continuing to see, it remains good.

The next question is from the line of Joe Foresi with Janney Montgomery Scott.

This is Jeff Rossetti in for Joe. Paul, I just wanted to see if I could get a little bit more detail, I know you're just talking about proactive, but it seems like it may have grown at a faster pace than the reactive portion. Could you give a little bit more detail on what was maybe driving those design consulting, regulatory consulting and engineering management consulting engagements you referred to?

Sure. I think on the sort of design consulting side, we are seeing very strong demand in the consumer electronics area. We are seeing growing demand in medical device area. So those areas are definitely very strong or hot sort of right now. I think from the regulatory standpoint, the work we do in our chemical registration and food safety practice in terms of registering new products and so forth, that continues to be very, very strong. So it's those kinds of projects that I think have really made the proactive work come through so well for us.

And Jeff, I would just add that I think on both of those areas, it's very broad-based. A lot of different projects and quite diverse in the disciplines that it's drawing upon.

Okay. And just on the front side, Rich, you said maybe you were anticipating a decision on 2 contracts within the next few months. Is that correct?

This is just related to the product sales of the surveillance systems that we've sold before. One of them we already have in hand just in the last day or 2, and the other, we would expect in the -- probably even in the next few weeks. And as such, those are built into the estimates I've provided relative to the product sales part.

Okay, great. And the final questions, just on the, you have a balance sheet, looks stronger, I mean, any plans outside of the share repurchase program that you talked about for uses of cash?

Yes. I think, look, we've expressed previously that on the 2 other real uses here, one is on acquisitions that we continue to have a primary growth, organic growth but that we believe that and continue to look for the opportunity for some key seed acquisitions in important areas for us to expand in. In particular, in the computer science and software consulting area and in the pharmaceutical consulting area in particular. While we haven't found the right match in those areas, we'll -- in the meantime, we'll continue to do recruiting in those areas and try to build it out as we've done with some others over the last decade. But over time, we will do something because otherwise we shouldn't be spending our time looking. But I don't expect that to be anything major, but it will make a major difference in the long run. We've also indicated to the market that we -- earlier in the year, late last year's had discussions with our Board about dividends. The conclusion from those discussions was that we should wait until out into 2013 when we see what's happened with the tax regulations after the election. So those -- it's clearly an option out there. It's something we will revisit when there's a better clarity about where the tax regulations are going.

The next question is from the line of Tobey Sommer with SunTrust.

Rich, I was wondering if you could give us a breakdown of revenue by segment.

Yes. So revenues before reimbursements or net revenues were, for the second quarter in other engineering and scientific, it was $48.3 million. And for the environmental and health segment, it was $20 million. And on a gross revenue, GAAP revenue basis, they were -- engineering and scientific was $54 million and the environmental and health was $20.5 million.

Okay. In terms of the kind of medium-term outlook for the defense business, you've got some visibility into the, I guess, surveillance system sales this quarter and next. But with the potential wind down of operations in Afghanistan and at least for now, not another theater emerging, do you anticipate that over the next couple of years that your sales in that area to diminish?

Yes. So let me -- I'll break it down. I think this is an important topic even though it's 6%, 7% of our business. I think it's something good to talk about here. So, first of all, in response around the product sales, let's call it the surveillance system product sales, I would look based on the numbers that I just gave for the third and fourth quarter, that will put us somewhere around $2.5 million, maybe we'll have a little bit more come in, maybe we'll be $2.5 million to $3 million in net revenues from product sales this year. That will be -- end up being down from the $4.2 million that we did last year. It is our expectation that over the next couple of years during the wind down in Afghanistan, that we will continue to get some sales, but it will -- it would probably diminish some in that area. So wherein, I think, that's what you should expect around the surveillance system product sales. There may be other things that we do, as I talked here about how our activities have been picking up with the Rapid Equipping Force. That has been an area that has generated the new product requirements that the Army has, and as such, could generate other opportunities. But we don't have that identified at this period, point in time. What we have been seeing happen is that we were brought back in last year fourth quarter for the Rapid Equipping Force. That work has been gradually picking up over the last 3 quarters. And now not only are we supporting 2 fixed labs in Afghanistan, but we have just begun supporting the Rapid Equipping Force's first mobile lab. This is a concept that we developed with them and that…

I had another question about your proactive services. I'm just kind of wondering in your perspective, you've had good progress there, increasing traction and I'm just wondering if you've noticed or have an opinion that your customers may not have the capabilities resident inside their firms to kind of deal with the matters at hand and if there's something kind of structural changing there, where they're increasingly more reliant on a firm like Exponent for their product development.

Yes, I think there are number of things at play here and there's certainly no question that most of our clients or basically our clients, in general, don't have the range of capability that we have. Their capability is more focused in certain areas and when they run into problems, that fall outside their area, they clearly need to go outside. But I think that a significant reason for the gains we're seeing on the proactive side do relate to the concern that clients have over putting products in the marketplace that end up needing to be recalled or taken back in some way. It's not just a costly activity, it's a very significant issue for their reputation. And so I think some of the best names in the business want to spend a little more up front to make sure they really have the best product. And so we find that -- that's just a very good flow of business. And as a result of that, while we have been growing as a firm, this part of our business has been growing faster than the firm as a whole.

Last question. Rich, do you have an expectation for what share repurchase is going to look like for the year as a whole?

We continue to be of a mind that we would like to be able to buy back in the $40 million to $50 million range. As we've discussed before, we buy more when there's some pull back in the stock and a little bit less on the -- as it advances. And sometimes, you get caught where you have a MV51 [ph] plan in or something and it moves beyond even the price you have. But our current feeling is that we'd like to be in that $40 million to $50 million range if the circumstances allow us to be there.

How does that $40 million or $50 million compare to your cash flow expectations in '12?

It's in -- at the low end of that, it's probably in line. At the high end of that range it will allow us to bring down the cash balance slightly.

[Operator Instructions] Next question is from the line of David Gold with Sidoti & Company.

So just a couple of questions for you. First, on the utilization, it's 76%. Aside from, I guess, the natural seasonality we'll see in the next couple of quarters, what's thinking there as to sort of sustainability in the mid-70s?

Yes. Well, I mind -- naturally, just out of the fact that we vacations and holidays, we would expect a 76% in the second quarter would look like 73% -- somewhere in the 73% range in the third quarter and approach 69%, 70% in the fourth quarter. So that's without taking into any account, any step down in the level of activity relative to the larger projects. So I think we will see the impact by 1% or 2% from the step down in level of activity. So I think that sort of provides the range for each of the next couple of quarters. I think that will leave us for the full year still above our full year performance of last year, but we'll definitely be stepping back from our level right now. I mean, long term, I think when you look at what 76% in the second quarter looks like, we've always said long term, as we build the -- out the critical mass in practices and in offices, we expect that our utilization over the long term could grow into that mid -- 73%, 74%, 75% for the full year. And that would leave you at a sort of 75%, 76% UT in the second quarter. But we're clearly getting some of the benefit right now from a few of the larger projects. And hopefully, over the long term, we can build that out across the business and be able to perform at this level on a regular basis.

Got you. Got you. Okay. And then, Richard, if you can speak a little bit about the changing guidance, I'm sort of looking at it from a couple of different angles. One, obviously, we've stepped it up to its sort of a higher side of the range. We saw some good strength certainly as we came through the second quarter in the first half. Same time, maybe we do have some runoff from those projects, the larger projects. And, I guess, broadly speaking, though, it suggests, I'm glad that you get some seasonality, it suggests a little bit of slowdown in the second half of the year versus the first half. So is that entirely seasonal? Is it -- the runoff probably does start to effect us? Is it both -- or does something else happen?

Yes. Look, I think when you start looking at year-over-year, the seasonality is somewhat taken out of it. But I think the fact is that we expect that the growth on a year-over-year basis in the second half of the year is going to be below, obviously, the 8% that revenue growth that we have today for the first half of the year. The reason for that is not -- basically, we think that a lot of this core activity is going to continue to be strong. But we think that, one, the high hurdle that we created last year where utilization went up from the Q2 to Q3 and we saw high utilization in the fourth quarter, those levels are more like the level we just performed at in the second quarter relatively, adjusting for seasonality. So where our expectation is that we are going to see a step down in that level relative to some of the larger projects and the fact that that's going on. So it's just a matter of saying high hurdle last year, utilization already for this -- last year for this third quarter was 72%. I think that that's a very good utilization. I just said 76% would be a 73%. So we'd have to literally hold at where we were to beat that out on the UT basis. So and I -- I said, we probably have come down a percentage point or 2. So if we're down in the 71%, 72% range and you got a headcount growth in the mid-single digits, you're looking at something that puts you in that range there that's growing year-over-year in the middle single digits for both the third and fourth quarters. And that's why, I think, you see a little draw down on the 8%. I mean, our general feeling is we weren't going to do better in the second half than we did on the first half. And as such, we couldn't really come out and say we're going to be in the high single -- mid- to high single digits because that would draw us up above that number. At least at this point in time, we don't see that happening.

Got you. Got you. Okay. And just one last one if I can. The couple of new contracts that you had referenced. That seem to ramp up between -- yes, for fourth quarter versus third. Can you give us a sense for how the entire value of the contracts and the terms in them? I presume they're not just for the third and fourth quarter, right?

They're primarily will be for the third and fourth quarters. There's a little bit of that, a little trick, but it will roll out probably to the first quarter, but it's primarily a third, fourth quarter, probably it might end up being the same amount that we're seeing in the third quarter out into the first quarter.

I see. Okay. And just one more, I said that was my last, but it won't be. The buyback, can you give us a sense for average -- give us your number of shares or average share price?

Yes, we repurchased 302,000 shares during the quarter for an average price of $47.70, $47.80 -- $47.75.

There are no further questions at this time. Ladies and gentlemen, this does conclude the Exponent's Second Quarter Fiscal 2012 Earnings 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 in the access code of 4551395. Thank you for your participation. You may now disconnect.