Good day, ladies and gentlemen, thank you for standing by. Welcome to the Exponent Fourth Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, January 30, 2013. I would now like to turn the conference over to Matthew Hunt, Blueshirt Group, Investor Relations for Exponent. Please go ahead.

Good afternoon, ladies and gentlemen. Thank you for joining us on today's conference call to discuss Exponent's fourth quarter and fiscal year 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 a 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-K for the quarter ended December 28, 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. 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 2012 results. The fourth quarter concluded another good year of revenue growth and profitability for Exponent, especially considering the tough year-over-year comparisons. For the fourth quarter, net revenues increased 7% to $65 million and total revenues also increased 7% to $72.9 million. Net income grew 10% to $8.5 million or $0.60 per share. For the full year, net revenues increased 8% to $266.6 million and total revenues increased 7% to $292.7 million. Net income grew 14% to $37.2 million or $2.60 per share. We generated more than $48 million in cash from operations. During our fourth quarter, we experienced good demand for both proactive and reactive services and continued to benefit from activity related to a few major assignments, resulting in 69% utilization despite this being our seasonally lowest, slower quarter. Additionally, our defense technology development practice had strong surveillance system product sales. Throughout 2012, we assisted a wide range of clients in addressing significant technological, health and environmental matters, by leveraging our breadth of discipline and depth of engineering and scientific knowledge. For the year, we had notable contributions in our environmental and health segment from our environmental sciences, ecological sciences and chemical regulation and food safety practices. This work included the evaluation of human health exposure from processes and products. We also performed environmental risk assessments for historical, existing and future operations. In our engineering and other scientific segment, we had notable performances from our mechanics and materials, electrical, thermal and engineering management consulting practices. This work included the evaluation of a diverse set of battery technologies, utilized in a wide range of products, to assess their performance and safety. We also leverage the breadth and depth of our knowledge of material…

Thanks, Paul. We are pleased to have delivered another good year in 2012. For the fourth quarter, revenues before reimbursements, or net revenues, as I will refer to them from here on, increased 8% (sic) [7%] to $65 million as compared to $60.5 million in the prior-year period. Total revenues for the quarter increased 7% to $72.9 million as compared to $67.9 million in 2011. Net income for the fourth quarter increased 10% to $8.5 million or $0.60 per diluted share. EBITDA in the quarter increased 10% to $15.6 million. For the full year 2012, net revenues increased 8% to $266.6 million. Total revenues increased 7% to $292.7 million. Net income for the year improved 14% to $37.2 million or $2.60 per diluted share. EBITDA in 2012 improved 12% to $66.1 million. In our Defense Technology Development business, net revenues for the fourth quarter were $4.3 million. As we continued to support the U.S. Rapid Equipping Force's mobile labs in Afghanistan, as well as the U.K. in their ground penetrating radar program. During the quarter, we had $2 million in net revenues from product sales, largely related to the surveillance systems. For the full year, net revenues in Technology Development were $17.6 million, including $3.1 million from product sales. Looking into 2013, we expect surveillance system product sales will be significantly reduced as a result of the drawdown in forces in Afghanistan. We are expecting net revenues to be approximately $500,000 for the year. For the first quarter of 2013, this will be approximately $150,000 as compared to $860,000 in the first quarter of 2012. Utilization in the fourth quarter was 69%, equal to the exceptionally strong fourth quarter we had last year. For the year, utilization was 73%, up from 71% in 2011. In 2013, we expect utilization to…

Thank you, Rich. In summary, we are pleased to have delivered a strong 2012. As we move into 2013, we are prepared to manage our business to deliver long-term shareholder value. We will continue to provide the expertise and experience to address our clients' important technology, health and environmental questions. We will selectively add new talent to allow us to continue to expand our capabilities and strengthen our offerings while managing our overall headcount growth to reduce the impact of a step down in a few major assignments. We will manage operating expenses to provide the foundation for long-term growth in revenues and earnings. We will generate cash from operations, maintain a strong balance sheet and undertake activities such as share repurchase to enhance shareholder value. And finally, we previously communicated that we would reconsider our dividend policy in 2013, assuming that there was some clarity in U.S. tax regulations. This topic will be considered at our next board meeting. While we have some challenges ahead this year, we continue to be excited about our future. And we believe that we are well-positioned to deliver a long-term organic growth. 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.

I guess, first, I wanted to just add for a little more color on the large engagements. We tend to talk about these collectively as one, but I know there's a couple of different engagements. It sounds as though you have seen each of these step down? Is that fair? Or is it -- was the step down particularly significant in one area than the other? Just trying to get some more color on that.

Yes. Thanks, Tim. We consider that they're really sort of, excluding technology developments, there are really 3, 3 assignments that we're talking about here. And what's happened is that, in all of those assignments, there have been significant settlements. Now having said that, none of these are gone. They are all continuing and they're continuing at different levels. One of the projects still has a very major piece continuing. Other projects have splintered a bit more. In other words, there's some -- there are a lot of offshoots or different new assignments that are coming as a result of the interactions on that assignment. So I can't put them all in the same boat. But certainly, collectively, we see this step down.

Is there any risk of further step down? Or have you probably seen the biggest impact now from the anticipated step down of these at some point?

Yes. I mean, I think what we've talked about in the past was that the reason that we wanted our shareholders to be aware of these was because their size was sort of the 4%, 5% of revenues annually, as opposed to what we consider to be our normal large project. Every year we have projects in the 2%, 3%. So as these step down from that larger, sort of major assignment into sort of what I'll call a normal, large project. Still normal large projects come and go, but normal large projects usually get replaced by other large projects. And so, certainly these assignments, while they're not the major assignments we've talked about before, collectively, they're still large projects.

What type -- and maybe Rich, what type of headwind had you built-in, I guess, as we think about flat revenue guidance for the year? I'm assuming it's the underlying business growing at a higher rate, offset by a certain basis point impact from those projects.

Yes. Look, we've a view that not only these large assignments have a step down, but we also believe that, basically, the product sales that we had of about $3 million, a little over $3 million last year is also basically going away. Yes, well maybe they have $0.5 million of that left. In addition to that, we had a large U.S. GPR development program going on due to decisions to not reopen up that for a longer term, a bigger program by the Department of Defense. Then, we viewed that, that work is stepping down as well. So all of those things included are what we've sort of built into the fact that -- as to why we believe that revenues will be flat. We did, as I indicated in there, believe that we saw a slower start to the first quarter. Part of that is due to when the New Year's Day holiday was, and we definitely had more vacation in January than we normally have. But it was also just things seemed to be starting off a little slower. Part of it is that probably these major projects and some other things. But that's going to leave us with, as I mentioned before, a negative sort of 2% to 3% in revenues in the quarter. And as such, look, I think that the core underlying business is still growing, probably in the high single-digit range. We, I think, we've spent a lot of time looking at this and we feel very positive about the future. Unfortunately, we got this high hurdle to overcome. The business on the proactive side continued to be positive and good and more diverse and growing. And we continue to get hired on the large assignments and issues that come up. And we continue to be able to recruit good people. So I don't think we have any reason to believe that we're not going to be able to grow the business in the high single to low double-digit growth rate out as we look out over the next several years and into the future. That all still is here. Unfortunately, we've got to go through this adjustment period and move along. But I don't think that reflects at all on what how we feel about those sort of underlying business over multiple years.

Okay. And just to be clear, your comment about Q1. It's not just these costs are ending [ph] and its taking time to redeploy, but I guess you're also saying this January, for whatever reason, we haven't figure it out yet, it started a little slower in the core business?

Yes. I would -- I think that's absolutely what we're saying there.

Okay. And as we -- just a last question, if you think about the margins for this year. I think in the past, you kind of roughly said, each drop in utilization of 1 percentage point might be like 70 basis points to a margin. Is that a simplistic way of looking at the margins that the 400 basis point drop in utilization equating to the kind of the margin guidance you gave?

So the guidance for the full year, thinking about dropping from this past year being -- for the full year being 73% to approximately 69% range, I think your estimate, your ratio there is relatively right. It's somewhere between 60 and 70 basis points per utilization point. And then, you have a little bit of additional drop in the margin there. If you're on the low end of that, it's 60 per point. Then you also have about probably, 20 or 25 basis points per, sort of, million you're dropping in the product sales as well there. So those are how those sort of play in together to get you in the 250 to 300 basis points down for the year.

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

My first question here is just on the government work in the large projects. I mean, is it safe to say -- how would you characterize this year's guidance? Is that, pencils down, in large projects? Or just an aversion to a lower revenue run rate? And then I'll ask about the government, same question. But I'm wondering, have they just moderated and you're expecting them to continue to the end of the year? Or you just completely taken them out of your numbers?

No, we definitely had not taken them out of our numbers. Those major assignments are still large projects. And we anticipate revenues from those large projects over the course of the year. So we have not, they just moved from just what we've called major assignment category to large project assignments. So let me just characterized that and Rich will address the question on the government.

Yes, I think, the same, actually, plays out the on the government side. We view that we will continue to support the Rapid Equipping Force throughout the year. We don't have all that funding in place but we view that due to the fact that, that is tied into sort of a combat readiness and support that we will be able to continue with that work. We also believe that, where we do have contract and funding in place with the U.K., that we will continue to support them throughout the year. This past year was a little higher in that area because they did some uplift to their systems. We may not feel of that. And we actually expect that we will get additional work. It's just not going to be necessarily at the level that we were running at this past year.

Got it. Okay. So basically, in a way, we should think about it is that the 2 -- the large projects have moderated into large projects that are actually manageable. And the government work is reduced as well, but there is some potential for work going forward. This is just basically a moderation and that's kind of making its way through the numbers, as far as guidance is concerned, is that right?

That's correct. Yes. That is in -- the difference is, I think, in the past, we've sort of been looking out forward for that step down to occur. And I think as Paul indicated in his comments, due to some of the settlements that have occurred and things we've seen that happen. We are experiencing it clearly here in the first quarter.

You talked about it, I think, Rich, you said it is that the business is running high-single digits to low-double digits when, organically, I guess is the best way to kind of put it for lack of a better term. Is that when you strip out the lumpiness for the large projects and the lumpiness for the government work? How do you define that?

Yes, I think that's exactly right. I see that we are probably in this economic environment, I think we view that to be probably in the high single digits than in the low double-digits. So I would say over the last few years, that's where we've been running organically, is more in that range. And then when you take into effect these other hurdles, that's why it's been brought down to a flat year.

Got it. Okay, and then just 2 more quick ones. From a comp or a comparative perspective, when do we start to see the large projects in the government work being comped. I mean, do you have to go full four quarters or did it start to tail off third quarter heading into the fourth quarter?

No, we continue to -- those projects continue to be strong into the fourth quarter this past year. So again, we had strong product sales in the fourth quarter. And so, I think, you're going to see that lapping out throughout the year.

And then the last one for me, this 250 to 300 basis point decline over the year, is that -- maybe you could just break that out and I think you kind of answered it before, but can you give me some idea of like, what part of that is utilization? What part of that is -- I think, the product sales are higher margin? Maybe you could just give us some sort of breakdown on that.

Yes. What I had indicated before is that you're looking at something like 60 basis points per uti point drop. That's sort of how the model works. And that it's probably, call it, 20 basis points per million drop in net revenues from product sales, that we had going through there. Again, with the growth is sort of at our normal margins but because of the net, that's where it is. So if we look at sort of having that, that is how it plays through.

Got it. So utilization goes down from 69% to 61%, is that correct? And then the rest is...

Yes, the utilization is going from 73% to 69% for the year.

Okay. And then the remainder is made up by the government stuff.

Yes.

Our next question comes from the line of Tobey Sommer with SunTrust.

Question for you about the kind of sequential or quarterly progression of margins that you have. If I square your quarterly comment about where EBITDA margins start and where we end up for the full year, is there any peculiarity into the progression of margins throughout the year? Or is it a function of the normal seasonal patterns that you have with your expenses and federal taxes, 401(k), et cetera?

So, I think, clearly the first quarter is significantly impacted by the accelerated expensing that has happened each of the last few years, but accelerated expensing of the stock grants that go out. So that has had an impact in the past and will. Other than that, if you look across, at this time, all we can expect is a more normal seasonal trend in how the business goes. And that is that we tend to find the first quarter, the second quarter to be similar to the first quarter, maybe because we've got a little bit of a slow start. It will be a little -- be that flat or a little bit up. The summer steps back, usually the utilization steps back a point or so. And then as we get into the fourth quarter, we have the step down that clearly, we even saw this year. We averaged 69% in the fourth quarter but 73% for the year. So you clearly have the impact there, but it's normal seasonal trending that we would expect.

Okay. I think we've talked about that enough for my purposes. Just stepping back here from a competitive position, anything changed? Or for these large projects, for a customer to seek out an alternative to Exponent, are they likely to have to put together a synthetic team of alternatives, like a team of vendor suppliers to come close to replicating what you can provide at a one-stop shop?

Yes, we don't think there's any change in our leading market position here. It's not like anything that's happened here is because the client has moved work from us to somebody else or something like that. We don't believe that any of those changes are in place. It is clearly one of our strong selling points, that we have a very broad range of top talent under one roof that can help clients in these complex situations and that, clearly, part of our -- that's clearly a differentiator for our services, and we continue to see that.

From a hiring standpoint, if you gave this, I forgot, or I didn't catch it. Could you tell us what your plans are this year? Because I know you managed the business for more than a couple of quarters or even a year.

Yes. So we absolutely intend to continue to recruit top talent. We believe a firm like ours needs to continue to do that. As we have sort of described before, we're not a kind of a firm that sort of hires and fires for particular projects. We hire top talent for the long-term. But we also counsel our staff. And we track people's performance and as people are growing and performing well, that's great. But there are times when people probably don't have a longer-term future here and we have to, over time, counsel those people into different careers. So clearly, in these kinds of situations, we make sure that we're balancing those 2 appropriately. And as such this year, while we expect to clearly go out and bring new talent in, I think the guidance that Rich is giving you, is that we know, we expect our sort of sequential headcount to remain relatively flat.

Okay. And then my last question is, is there any implication for hiring and the availability of talent to the firm? From an element of, I guess, the debated immigration legislation that would increase available visas for highly educated individuals?

Yes. It really only has a potentially a very small effect at the margins. And the reason I say that is because, certainly, in the past, and even today, we do recruit people that need to get H1B visas. And we have run into the path occasionally where somebody have not been able to get a visa. But the reality is, that's not our main focus of recruiting. And the reason for that is that in the high-end consulting that we do, it's very important for our people to be able to communicate well with clients, to be able to meet with regulators, testify in litigation matters, and so forth. And in those situations, there is a premium on communication skills. And that tends to balance more in favor of, at least, of native speakers, native English speakers. It doesn't mean we don't hire other people occasionally, but there is certainly a focus toward that direction. So we don't think that, that's going to have a significant impact on us, one way or the other.

[Operator Instructions] And our next question comes from the line of David Gold with Sidoti.

So I hate to belabor the point, but just want to be sure that [indiscernible] you run it. So Rich, it sounded like your expectation on utilization, well, not example, like expectation is similar to a typical year. So is that basically saying -- let me go back a little bit. I think, at one point, we spoke about the projects being, call it, 2 years ago, about 10% to revenue, then maybe last year's 2012 down to 8%, 9% and the expectation was that they would may be half. Is that to say that sort of all of the big tail off basically happened at the end of the fourth quarter into the first quarter?

E First of all, yes, it did occur. A lot of things settled or changed with clients at that point in time. When -- just for clarity purposes, these were projects of 3 engagements that were all running in the 4% to 5% range. So these are things that were going to be more like 13% to 14% of the revenues, if you look across those engagements. So when we're talking about the step down, that's what we're stepping down from. But the answer is yes, when we look at the level of activity that we had, even during the fourth quarter, they remain to be strong. It just occurs that several parts of the use of it was a litigation case that settled the major part of it or was in something that's been bifurcated into multiple issues. Few of those issues have settled. Hearings in front of regulators have been completed on others. So there's been a number of things that have been going on. Most of it's been, some of it's been reported in the news or most or all of it has been. So I don't think that those things are any new news to anybody.

Right. Okay. What I'm trying to get a sense for sort of getting us out is, if we took, I don't know, the 13%, 14% down to, call it, 5% to 7%, did it all just sort of work out that, as we come in to the year, that's basically happened? Or should we expect, basically, the rest of that run through over the span of the next 12 months?

Yes. I think I'll try to hit that because I think Paul was imagining before. Look, we've seen a step down on these; it happened to be that they aligned up together instead of staggering over time like you would think a normal portfolio would do. But we saw more of that at once than we would have maybe expected. We do expect that each of these assignments will continue probably throughout the year at a lower level. There's still, as we have described, large assignments in our firm. But more -- probably more in the normal range, or getting there. As we've described, do we expect things like this to have tails that can last a few years? And we'll see what happens from there. But we would hope that this can -- other large assignments can step in and as these begin to tail off in the future.

Sure, sure, got you. Okay, that's helpful. And then one other question, presumably, as things were a little -- obviously, you guys have looked to rationalize the headcount by doing less hiring. But can you speak a little bit to the fungibility there of the folks who have been working on the projects? I mean, is it about, basically, replacing the worker or is there -- the potential that if things don't step back up, may actually lead to a little bit by way of reduction?

Yes. I mean, I think it's more, I would describe it as more that those consultants in our firm who do really good work usually find ways to get under other projects and move forward. And there's new work always coming in. I mean, Rich talked about how we do 7,000 projects last year. So I expect that the vast majority of people coming off of those projects will find their way onto new projects and that things will work fine for them. It's really more of those, whether they were working on these projects or working on other projects, who have just not progressed, they're being more at the margin and are more difficult to keep busy, that maybe aren't suited for a long term career here. And those are the individuals that we tend to counsel as we go through these kinds of processes. So I don't see that the way we handle our staffing here is really a different from -- for example, go back to 2009, which is, obviously, a very different issue then. I mean, the economy was bad and so forth, but we had to work our way through that year as well, from the standpoint of handling staffing issues. And so, we expect we can handle that.

Yes. I think in 2009, we probably recruited 70 or 80 new staff in, but we had flat to slightly down headcount through the year. So -- and I don't think any of that was, really, sort of some major process on one day. It's just a matter of continuing to run a good consulting organization where you hire people in and they -- you're hoping they develop up through the principal path. And sometimes they decide that academia is better for them or research organization is better for them, or other things of that type. And those things work themselves up.

Operator?

Ladies and gentlemen, this concludes the Exponent fourth quarter fiscal 2012 earnings conference call. This conference will be available for replay. You may access the replay system at anytime by dialing 1 (800) 406-7325 or (303) 590-3030 and entering the access code of 4588503. We thank you for your participation. You may now disconnect.