Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Exponent Third Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, October 17, 2012. I would now like to turn the conference over to Matthew Hunt with Blueshirt Group, Investor Relations for Exponent. Please go ahead.

Thank you, and good afternoon, ladies and gentlemen. Thank you for joining us on today's conference call to discuss Exponent's third quarter 2012 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 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 Richard 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 September 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 would 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 third quarter 2012 results. For the third quarter, total revenues were up 11% to $73.3 million, and net revenues increased 9% to $66.7 million. Net income grew by 17% to $10.2 million or $0.72 per share compared with $0.60 per share in the same period a year ago. We again delivered strong revenue growth and profitability in the third quarter and are pleased with our performance. Demand in our proactive and reactive businesses was strong. And actively -- and activity levels on a few major projects remained high. As a result, utilization was 74%, which is an increase over the same period last year. We also grew our consulting staff by 5% over the past 12 months. In the 60% of our business that is reactive in nature, we continue to support a steady flow of business related to litigation, insurance claims and product recalls from a diverse set of clients with significant assignments in the chemical, energy and automotive sectors. In the 30% of the business that is proactive in nature, we assisted clients, such as consumer electronics and medical device manufacturers, in their design and manufacturing efforts. In our environmental and health segment, we had notable contributions from our environmental sciences, ecological sciences and chemical registration and food safety practices. In our engineering and other scientific segment, we had notable performances from our mechanics and materials, electrical, thermal, human factors and engineering management consulting practices. Additionally, despite some expected surveillance system product sales pushing into the fourth quarter, defense technology development also made a meaningful contribution from the several projects related to the detection of improvised explosive devices. In summary, we are pleased with our performance year-to-date, which positions Exponent for a strong 2012. As a result, we are increasing our full year expectations for net revenue and EBITDA margin growth. We are encouraged about the business opportunities ahead and believe our unique scientific and engineering capabilities make us well-positioned to capitalize on them. I'll now turn the call over to Rich for a detailed discussion of our financial results.

Thanks, Paul. For the third quarter, total revenues increased 11% to $73.3 million, from $66 million in 2011. Revenues before reimbursements, or net revenues as I will refer to them from here on, increased 9% to $66.7 million in the quarter as compared to $61.4 million in the prior year period. Net income for the third quarter increased 17% to $10.2 million or $0.72 per diluted share as compared to $8.7 million or $0.60 per diluted share in the prior year period. EBITDA in the third quarter increased 13% to $17.4 million as compared to $15.4 million in the same period last year. For the first 9 months of 2012, total revenues increased 7% to $219.7 million. Net revenues increased 8% to $201.5 million. Net income for the first 9 months of 2012 improved 15% to $28.8 million or $2.01 per diluted share. EBITDA in the first 9 months of the year improved 13% to $50.5 million. Overall, we are pleased with our third quarter and year-to-date performance. This performance sets up for a strong 2012, which is especially noteworthy considering the high hit -- hurdle we established in 2011. Turning back to the details of our third quarter performance. Net revenues from our defense technology development business were $4.4 million as compared to $3.6 million in the same quarter last year. We saw an increase in activities from our U.K. ground penetrating radar program, while we worked on completing the current round of development of U.S. GPR. Additionally, we continued to support the Rapid Equipping Force's new mobile labs in Afghanistan. Net revenues from product sales in the third quarter of 2012 were $48,000 as compared to $253,000 in the same period last year. We now expect net revenues from product sales to be approximately $2 million in the…

Thank you, Rich. In summary, we are pleased to have again delivered strong results in the third quarter of 2012. As we look forward, we will continue to provide the expertise and experience to address our client's 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. We will manage operating expenses and utilization to provide the foundation for continued growth in revenues and earnings. And finally, we will generate cash from operations, maintain a strong balance sheet and undertake activities, such as repurchasing shares to enhance shareholder value. Exponent is well-positioned to deliver a long-term organic growth and profitability, which in turn will create more value for shareholders. Now I will turn the call over to the operator for your questions.

[Operator Instructions] Our first question is from the line of Tim McHugh with William Blair.

First, I just want to ask about kind of the utilization that you're able to sustain. Can you give us a little more color? I think usually, you see somewhat of a seasonal impact during the third quarter from summer vacations and so on. Is it fair to say you just didn't see that normal type activity because demand was so strong? Any more color on that?

Yes, Tim. I think you've pretty accurately presented that. I mean, the fact is we do have -- see a normal step down in utilization by a couple of percentage points as we go into the summer. We continue to see strong demand as we went through the quarter and it was pretty broadly-based. While we continued to see strong activity in several major projects, we also continue to see a good flow of new projects during the quarter as well. So things -- utilization stayed strong, while people were still taking pretty much a normal level of vacations and holidays.

And on those large projects, is there any more visibility in terms of the risk of them winding down? I know it's something you've been careful about all year, but you just haven't seen it yet. Is there any more visibility in terms of when that -- those will slow down, or is it still hard to tell?

Well, I'll make first comment and Paul may have some additional. I think, clearly, we've been involved in a number of these issues over a few years. We're clearly at a point that we're seeing that our clients are either if it's a litigation matter, those litigation activities are occurring; if they're depositions or other trial, moving through the litigation process. So that is moving along if it isn't more of a regulatory matter or also includes that. We're clearly seeing that the regulatory hearings are happening or interchanges between the parties are occurring. So I would say that we are seeing progress along the product -- project life cycle.

Yes, Tim, I would say that it's a couple of things. One, this particular quarter, the larger projects were very strong. Some of the earlier signs of cutting back a little bit, it didn't materialize at all at this time, and it continued very, very strong. But the reality is that there are sort of more and more dates that are on the calendar when trials are starting and things like that, or our efforts with regard to settlement on some parts of them -- parts of these cases. So we know for sure these things can't go on forever, and we're obviously closer to the end than we were before.

And as we think -- I'm sorry. As we just -- as we think about 2013, I know it's a little early for you to usually give guidance, but is the larger than normal contribution from those cases, still, is it a couple of percentage points the right way to think about that as we go into next year?

Yes. Look, you're right in the sense that Exponent has a pretty regular process to planning for the following year in the sense that we work with all of our practice leaders during the fourth quarter and spent time with them putting together plans for the following year. And we're just at the beginning of that process now so we don't have the outcome from that. But I think responding to your question about the larger projects, I do think that, now look, we've got 3 or 4 of these on the commercial side, we've also got the larger projects for the U.S. in the federal government side, where these projects are running on, especially on the commercial side, a couple of percent larger than what we've seen large projects run in the past. And as such, that headwind that we see going into 2013 is probably something like 4% to 6%. It's a couple of percent per engagement there that -- until we prove out this over the long term that we're going to get engagements that are of this size consistently. We continue to rely on the past, engaging that really we ought to expect a replacement type of projects to be more or less call it a 2%, 3% than a 4%, 5% size engagement. So we view that, that headwind that we have is probably in that 4% to 6% relative to these commercial engagements .

But it sounds like, at least for this past quarter, were they actually up a little or...

No, I would say when we looked at Q2 to Q3, they were pretty flat with that in essence as we look at that. A few of them were, as we had mentioned, the second quarter was strong when we had that. We had seen some pickup in a few of them. And that's sustained through the third quarter. But I think as Paul has indicated, a number of these are working towards some definite dates. They may last for quite a while, and we do think it will be hopefully a gradual step down, but we view that the headwind ahead of us is strong, but the businesses -- underlying businesses is strong as well. So we're just going to have to -- we've been talking about it for a long time, but we're just going to have to work hard to bring in other engagements and deal with it as it comes on.

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

My question here, first, is it seems like by the tone of the earlier part of the call that are you seeing a pickup in the demand environment on both sides of the business? And has there been a change in maybe the decision-making on that front? Maybe you could just provide some color. Because it seems like both parts of the business, both reactive and proactive, seem to be running pretty well.

Joe, I think that's correct. They are running very well. We have a good flow of new projects coming in. On the proactive side, certainly, the sort of the depth and breadth of them continues to be very strong, bigger assignments from -- not the same as we were talking about some of the reactive cases, but assignments seem to be getting bigger, stronger relationships with a number of clients. So certainly do think that the proactive side is definitely building in spite of where the economy is. I mean, we're in a fortunate position that most of the clients that we're serving on that side are clients that are actually performing very well even in this economy.

And could you then -- go ahead, Rich.

Joe, one comment on that I would say is these are clients who our faced with either a strong regulatory environment demand that is pressing them to really get it right the first time or if they don't, they'll need our help as well there. But we really are seeing that. And it's clients that are -- a lot of the focus is around the design. And then there is offshore manufacturing that goes on that we're able to help them in getting better reliability out of those things. So on the -- I think those are 2 big drivers that we're seeing from clients on the proactive side.

Okay. So if you could just characterize it. I mean, are you seeing some pent-up demand? Are you seeing a return to sort of normal steady state? Or are you seeing an increase in demand because of some of the regulatory stuff that you were talking about, Rich?

Well, I think on the proactive side, I think it is getting stronger. Remember, I think we've talked in the past about how over time we see the proactive side of our business growing faster than the reactive side. And I think that's part of what we're seeing here. We're seeing more new growth in those areas, which is very consistent with what we expect to be sort of the long term direction of the company.

And just on 2013, I know -- I'm not asking for guidance, but is it -- I mean, the company in the past has talked about a desire to expand margins and to continue to push to move that utilization rate higher. How should we think about those sort of longer-term goals in the face of that 4% to 6% headwind that you're talking about from larger contracts?

Yes. Look, I think that when we think longer term as a steady-state out in the -- let's call it the 3 to 5 years, I think that this is a firm that can run in the mid 70s here. This year will probably be, whatever, 72%, 73% overall, and I think that as we see good performance from bigger groups. On the other hand, as we've indicated before, I think as we see a step down in the level of revenues from some of these larger assignments, we would expect that in the short term, we would see a step down in utilization by a couple of percentage points. And clearly, in the short term, that will have some potential impact to margins. But I think fundamentally, what we're proving out is that our larger groups, where we've got more critical mass, as we build the ability to offer more disciplines to clients on each initiative, we're able to effectively get a higher utilization. But I think the short-term expectations as we look out into 2013 or more importantly, as these projects begin to step down, we may see utilization step down a couple of percentage points, which in the short term will mean we have to grow through that.

Okay. One last question for me. On the products business, it seems like it's coming in a little stronger than what we expected for the fourth quarter. Could you just give us an update on what the pipeline looks in that business heading into 2013?

Yes. Look, at this point, we have no additional orders that would, for surveillance systems, this really what it's related to. These have all gone in the past into Iraq originally and then into Afghanistan. They're surveillance systems that allow them to deploy efficiently systems in forward operating bases in places like that, where the more traditional heavy systems were more cumbersome to set up. We've had sort of a consistent -- we didn't know what quarter they come in and such, but when you look back over the last couple of years, it's been pretty consistent. This year will be a little bit lower. I think we did about $4.4 million of -- $4.3 million of net revenue from product sales in 2011. This year, we'll probably be in the low 3s from this. But next year, we'll have to see. We don't have a read right now on what the needs will be. Clearly, there is, I would say, going to be pressure, downward pressure against this as the U.S. begins to pull out of Afghanistan over time. So this is an area that we've got our defense technology development team trying to get some better intelligence on. But I think we've seen some downward pressure, as far as step down in revenues this year, and it would -- it may be further again when we look to 2013.

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

Just a housekeeping question. I'll ask it and then get in a little more substantial stuff. Do you have the segment revenue detail?

Yes. So gross -- sort of total revenue numbers?

Sure.

So for the quarter, that is for other scientific and engineering, it's $53.1 million. And for environmental and health, it is $20.3 million -- or $20.2 million.

And I wanted to ask a question on the business that may be driven by government investigations and so forth. Are you seeing much in the way of a pause at all when it comes to government-driven business? I don't mean government as your end customer, I mean government as the catalyst for a private corporation engaging it.

Yes. So my comments here don't refer to Technology Development. That's obviously a different business where we get money directly from government agencies to do certain work. But if we look at the parts of our business that are driven by regulatory matters, for the kinds of things that we're involved in, I don't really see a pause. I think a lot of those regulations take a long time to get into place and sort of reside for a long time. So the kinds of things that we're dealing with there, I don't think anybody is sort of waiting for next year, or election results or something like that, just on the nature of the kind of evaluation of chemicals and things like that, that we do through that process.

And Tobey, I would say because they're more health and safety driven, they tend to again, like a lot of our business, not quite have as much of the cyclical nature to them. If you're going to get a medical device through or drug through and you're developing it, you got to still deal with it. If you had a explosion at a plant, then you've got to deal with the regulatory side. If you -- if there's been regulations in for many years for a matter, well, then it's ongoing and it's not sort of stepping back.

I wanted to ask a question about your headcount growth, which at a touch under 5% even, it's pretty good. Where do you -- is that kind of a sweet spot for the rate of growth of consultants or do you feel that you could sustain a higher level of growth over a period of time?

So I think that our view is that we would like to see that number higher. I think that we have been in a mode here over the last couple of years, where -- last few years, where we felt that we were running the company with utilization levels that were lower than we should be running the company with. And so some of our growth sort of got channeled into higher utilization and some got channeled into increasing headcount. I think with the gains on utilization that we've made, that the ratio of how much of the new revenue will go into -- as it were a new headcount, versus further increases in utilization, will tilt more toward -- toward more headcount. So we would like to see that 5% move. It's always going to vary some, but we'd like to see if we could move that up some.

I understand. So to achieve the same growth in EBITDA and EPS, given that the potential pressures on utilization, the headcount engine is an area that you are looking to expand?

Yes, I mean, I think that as Paul said, if you're going to grow in -- if you're going to grow the billable headcount, or the billability there, then we're going to have to have the headcount in the, let's call it the 5%-8% range instead of the 4%-5% range.

Right. And could you comment about supply and the competitive market for talent, particularly new graduates? Are you able to attract talent more easily, or is the market just kind of as competitive as it has been recently?

Well, I think for us, it hasn't changed that much. I mean, certainly, there is -- there are a lot of people coming out of school that give you a lot of choice from that standpoint. But our experience has been the people we recruit out of school are mostly Ph.D. level people. They're mostly from top schools. The people that we make offers to invariably have multiple offers. So do we feel like we can get our share? Yes, we do. So we're not -- we don't feel like we're blocked from growth by not being able to find people. But the market is competitive for the top talent, and it continues to be very much that way. When you look at the other end of recruiting and you look at the sort of more experienced people or people who might join the firm for the transfer in from other places that are established consultants, those individuals are always difficult to find and very difficult to predict when you will be successful in attracting a few more principals versus when you're not. It's just a matter of staying connected to people and capitalizing on opportunities when they appear. But it's difficult to set out a program and know exactly how many of those kinds of people you can recruit, whereas at the university level, you can say, "Okay, we want to recruit this many". And we can, it's just that the people we're getting, top talent and they're going to be priced like top talent and -- but we're happy with the share we're getting.

Last question for me. Do you have an expectation for free cash flow this year?

Yes. I think that -- look, if we're expecting here, but if we can get these Tech Dev projects billed and collected in the year, get that back. If that comes back to a more normalized level, which is going to be closest to you if we get paid in December or January on those, that's why I'm hedging a little bit here. But if we do, I think that this will return, we'll be able to be in the mid-30s here.

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

A couple of things. One, Rich, picking up on the free cash flow question. I guess, one area that you spoke about a bit and pretty active throughout the year using that has been repurchases. Third quarter a little slower. So I was curious there if you can give us some insight in how you're thinking about that going forward.

Yes. So what we did was we had an active program. We had -- we put in a 10b5-1 trading plan and the price moved through that in the quarter there. So we weren't -- we didn't end up buying as much as we would have expected during the quarter just because when we had the purchase plan in place, it had -- it then moved up, the price moved up pretty well. So we continue to think that -- I can't predict from quarter-to-quarter, but what I would say is that it still our philosophy that if you look out over the next 12 months, we would expect to buy back $40 million to $50 million in stock. We're going to be a little above or below that from time to time, sure, but that right now, it's there. As we said in addition to that, hopefully, we can get some more clarity to the tax situation as we move into 2013. And as we do that, we will also look to evaluate if we should put in place a dividend program. But we are waiting to see if there can become some more clarity around taxation on dividends and capital gains.

Perfect. And then I guess one of the things I guess we're all trying to get some clarity on, it sounds like you guys as well, basically it's just real difficult to time the runoff on some of the larger projects. Can you give us a sense, from where you sit, how are you managing that process? So I mean, translation, it seems like things have runoff a little more slowly than expected, yet you sort of have to be ready on a dime to move people off and on to other jobs. Are folks out aggressively selling already in anticipation? Or how do you manage that to make sure we don't get a big step down in utilization?

Well, I think that that's not the easiest thing to do in a firm like ours. I think you know, David, that in our firm, we don't hire and fire people for projects. That's not the way we manage the professional staff here. I think that if these projects step down slowly, then everything will work fine. As new work comes in, people will stay utilized and will have a nice smooth transition. If it turns out that several of these larger projects all take significant steps down at the same time, there inevitably will be a few points change in utilizations for a period of time as we work through it. So we have -- over time, we absolutely have the ability to manage our staffing, manage our recruiting, managing our counseling of staff and so forth, to make the business model work well over time as we proved in the past. But in the short term, when you get a -- if you get a rapid change in business over a short period of time, that will show up in the numbers.

Got you. From where you sit now, I think a year ago at this time, your thinking was the 2 larger projects that were good for maybe 10% to revenue last year would come in -- would have this year. Do you still see the tail off as, as gradual?

I still see it as gradual in part because that's always been our history. It's just that history is that large cases don't completely go away. And the reason they don't is because the fact that they're large means they have many different aspects to them. They have certain regulatory aspects to them, they have certain litigation aspects to them, sometimes with different sets of parties, certain classes of individuals, certain states or the federal government or state governments and so forth that may be involved in it. And so as a result, there are -- these large events result in issues having to be resolved in multiple jurisdictions. And so that's why our history is they don't just go away. Furthermore, there are often long tales that are either associated in the environmental area with continuing to monitor the environment over a period of time or with other matters where there are other similar facilities that need to be monitored to evaluate what they might do. In the auto industry when there's sort of a major event, there is a very long tail of individual litigation associated with that particular alleged defect. So all of -- we do expect all of these matters that we're involved in to have significant tails, but where they take the steps as they move down that tail is what is very difficult to predict.

Got you. Got you. Fair enough. Okay. And then just one last, the product sales, I think when you spoke about them a quarter ago, the expectation was that a little bit of it would run into first quarter. Given the delay, is there an entire catch-up now in the fourth quarter, or do we still have -- do we have some additional run off into the first quarter?

There could be some right now. I think most of this will happen -- that we have right now will happen this quarter. I don't have, at this point in time, an estimate for the first quarter.

And ladies and gentlemen, that is the final question. This does conclude our conference for today. If you'd like to listen to a replay of today's conference, please dial 1 (303) 590-3030 or toll-free (800) 406-7325 and enter the access code 4568755. We'd like to thank you for your participation, and you may now disconnect.