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spk04: Good day and welcome to the Exponent, Inc. Second Quarter of Fiscal Year 2022 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Joni Constantelos. Please go ahead.
spk02: Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's Second Quarter 2022 Financial Results Conference Call. Please note that this call will be simultaneously webcast on the investor relations section of the company's corporate website at www.exponent.com backslash investors. This conference call is the property of Exponent and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Dr. Katherine Corrigan, President and Chief Executive Officer, and Rich Lenker, Executive Vice President and Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements including, but not limited to, exponents, market opportunities, and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in exponents periodic SEC filings including those factors discussed under the caption Risk Factor in Exponent's most recent Form 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or revise them, whether as the result of new developments or otherwise. And now I will turn the call over to Dr. Katherine Corrigan, Chief Executive Officer. Katherine?
spk01: Thank you, Joni, and thank you, everyone, for joining us today. I will start off by reviewing our second quarter 2022 business performance. Rich will then provide a more detailed review of our financial results and outlook, and we will then open the call for questions. Exponent delivered solid second quarter results, achieving year-over-year growth in revenue and EBITDA, driven by continued demand for our scientific and engineering expertise. Growth during the second quarter remained broad-based, supported by work related to the consumer products, utilities, automotive, and life sciences sectors. Within our proactive services are asset integrity and risk management engagements with utilities, energy storage-related work, and machine learning data studies were key contributors during the quarter. On the reactive side, litigation-related work was robust. and we saw increased demand for our services related to product safety and recalls. We are committed to growing our world-class team and are pleased with the increased recruiting momentum that we're experiencing. Importantly, the pace of new hires has increased over the past few months, which underscores our ability to attract the highest caliber engineering and scientific talent to the exponent team. Turning to our engagements in more detail, Within our proactive business, momentum is building with machine learning and human factors studies, reflective of increased demand from our clients as they seek differentiated data to improve user experience and advance product performance. Our work in batteries and energy storage continues to diversify across industries, and we are advising clients with regard to safety frameworks in the automotive space to mitigate risk. We are also seeing the demand for virtual and augmented reality work pick up as we help our consumer products clients better understand the cognitive impacts of these technologies. Our work around wearable technologies continues to be a core driver of growth as clients leverage our innovative thinking and technical expertise to monitor human health and evaluate the safety and efficacy of healthcare products and treatments. Our reactive business experienced an increase in litigation-related work during the quarter, while our engagements around product safety and recall have also picked up speed across a number of end markets, including transportation, medical devices, and pharmaceuticals. Exponent is primed to deliver solutions for the challenges of today and in anticipation of the challenges of tomorrow. We are well positioned across the business to capitalize on macro trends in safety, health, and environmental concerns that will have a significant impact on our overall business over the next several years. Our experience in energy storage and battery technology is fueling demand across a number of clients within the electric vehicle space, particularly around the performance and safety of battery packs of the future. We are also excited about the evolving opportunities related to wearables and digital health, and we are encouraged to see positive momentum in life sciences fueled by growing work with medical devices and pharmaceuticals. On the recruiting front, we continue to successfully attract the best and brightest scientists and engineers into our business. Despite a competitive job market for technical talent, our hiring pipeline remains strong as we are actively increasing headcount, which we anticipate will accelerate in the second half of the year. Turning to our segments, Exponents engineering and other scientific segment represented 83% of our net revenues in the second quarter, increasing 7% compared to the prior year period, as we continue to see strong demand for exponents services across the utilities, consumer products, automotive, and life sciences sectors. Exponents environmental and health segment represented 17% of the company's net revenues in the second quarter. Net revenues in this segment decreased 3% compared to the same period in the prior year. This was driven by the negative impact from foreign currency exchange rates, as well as investments in recruiting and marketing on the health side. As we move into the back half of the year, we will continue to leverage our core competencies as we deepen our client relationships, expand our reputation, and bring new talent to the firm. We are encouraged to see Exponent growing in new emerging verticals and constantly evolving to meet the needs and challenges of our clients while maintaining our reputation for technical excellence, objectivity, and disciplinary diversity. Overall, we are confident that Exponent's unique market position and the durability of our business model will continue to drive sustained growth and increased scale. I'll now turn the call over to Rich to provide more detail on our second quarter results as well as discuss our outlook for the third quarter and the full year 2022.
spk03: Thank you, Kathryn, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis unless otherwise noted. For the second quarter of 2022, total revenues increased 8.7 percent to $130.3 million, and revenues before reimbursements, or net revenues as I will refer to them from here on, increased 5.1% to $118.2 million as compared to the same period of 2021. It should be noted that our growth was impacted by six-tenths of a percentage point due to foreign currency translation and approximately 1% because our Shanghai office was closed for approximately eight weeks due to the pandemic restrictions in the city. Net income for the quarter increased slightly to $25.8 million, or 49 cents per diluted share, as compared to $25.4 million, or 48 cents per diluted share in the prior year period. The tax benefit associated with share-based awards was immaterial in the second quarters of 2022 and 2021. Exponents consolidated tax rate was 27.3% in the quarter as compared to 26.7% in the same period of 2021. EBITDA for the quarter increased 2.1% to $37.1 million, producing a margin of 31.4% of net revenues as compared to 32.3% in the second quarter of 2021. Billable hours in the quarter were $372,000, an increase of 1.8% year over year. Utilization in the quarter was 76.6%, down from 79.1% in the same period of 2021. Prior year utilization was elevated as a result of headcount growth lagging behind demand. Technical full-time equivalent employees averaged 934 in the quarter. which is an increase of 5.1% over the second quarter of 2021. As Catherine mentioned, we continue to prioritize adding top talent to our world-class team of experts. The realized rate increase was approximately 3% for the second quarter as compared to a year ago. In the second quarter, compensation expense after adjusting for gains and losses in deferred compensation increased 4%. Included in total compensation expense is a deferred compensation loss of $11.3 million as compared to a gain of $4.7 million in the same period of 2021. These gains and losses are driven by mark-to-market gains and losses on investments associated with certain deferred compensation plans. Although this accounting creates some noise, it has no impact on EBITDA or net income as there is an offsetting entry in miscellaneous income. Stock-based compensation expense in the second quarter was $4.6 million. Other operating expenses in the quarter were up 7.8% to $8.8 million, driven primarily by increased activity at our offices as employees continued to gradually return to in-person work. Included in other operating expenses is depreciation expense of $1.8 million for the quarter. G&A expenses were up 81.7% to $5.7 million for the quarter, as in-person activities increased during the quarter, including travel, recruiting, marketing, and business development. Interest income was $175,000 in the quarter, up from $12,000 for the same period last year. Miscellaneous income net of deferred compensation was $1.3 million for the quarter. Moving to our cash flows. During the quarter, we generated $30.2 million in cash from operations, and capital expenditures were $3.3 million. In the second quarter, we distributed $12.3 million to shareholders through dividend payments, and repurchased $63.3 million of common stock at an average price of $87.96. At the quarter end, the company had $165.6 million in cash. Turning to our outlook for the third quarter and full year 2022. For the third quarter 2022, we expect revenues before reimbursements to grow in the mid-single digits and EBITDA margin to decrease 300 to 375 basis points as compared to the prior year. This decline in margin is a result of lower utilization in 2022 as compared to 2021 when utilization was elevated because headcount was lagging behind demand. Additionally, we are having an in-person managers meeting for the first time since 2019 in September. For the full year 2022, we are maintaining our revenue guidance and improving our margin guidance. For the full year, we expect revenues before reimbursements to grow in the mid to high single digits and EBITDA margin to decrease 150 to 200 basis points as compared to 2021. We continue to benefit from the success of our recruiting efforts. As a result, we expect year-over-year growth of technical full-time equivalent employees to be 5 to 7% in the third and fourth quarters. We expect utilization in the third quarter to be 72 to 74%. as compared to 75.7% in the same quarter last year. Utilization in the third quarter will be tempered by increased headcount, seasonably higher vacation and holiday time during the summer months, and our managers meeting. Our expectation for the full year utilization remains at 73 to 74%. as compared to 75% in 2021. We continue to believe that as we build critical mass in our offices and practices and increase our proactive work, our average utilization will be sustained in the mid-70s range. For the third quarter, we expect year-over-year realized rate increase to be approximately 2% to 3%. As a result, the full year realized rate increase is expected to be 2.5 to 3%. For the remaining quarters, we expect stock-based compensation to be 4.4 to 4.8 million dollars per quarter. For the full year 2022, we expect stock-based compensation to be 20 to 21 million dollars. For the third quarter, we expect other operating expenses to be $9 to $9.5 million. For the full year, we expect other operating expenses to be $35 to $35.5 million. We are seeing an increase in these expenses as we return to the office on a regular basis. We believe working in person at our office location supports collaboration for our interdisciplinary teams and staff development, resulting in higher value for our clients and retention of our employees. G&A expenses will also gradually scale as recruiting, business development, and travel activities increase. For the third quarter of 2022, we expect G&A expenses to be $7 to $7.5 million. For the full year 2022, we expect G&A expenses to be $24 to $24.5 million. As a reminder, these expenses include an in-person manager's meeting at the end of September. While this meeting costs approximately $1.5 million, we believe it is valuable to bring our team together, especially after such a long period of physical separation. We expect interest income to be approximately $200,000 per quarter or $600,000 for the full year. In addition, we expect miscellaneous income to be approximately $700,000 per quarter or $3.5 million for the full year. For the remainder of 2022, we do not anticipate any additional tax benefit associated with Share Based Awards. So the full year tax benefit is estimated to be $6 million. As a reminder, we had $10 million of tax benefit from Share Based Awards in 2021. So this difference will reduce net income by $4 million. and earnings per diluted share by $0.08. The tax benefit from share-based awards is determined based on the change in value of the share-based awards between grant and issuance dates. For the second half of 2022, we expect our tax rate to be approximately 28%. For the full year 2022, The tax rate inclusive of the tax benefit for share-based awards is expected to be 23.1% as compared to 19.6% in 2021. CapEx for the full year 2021 is expected to be roughly $12 million. As of July 2nd, 2022, Exponent had $106.6 million remaining on the share repurchase authorization. We delivered yet another solid quarter and remain well positioned to continue our profitable growth. I will now turn the call back to Catherine for closing remarks.
spk01: Thank you, Rich. For over 55 years, Exponent has been committed to the advancement of science through the service of our employees to our clients and to the broader scientific community. As society's expectations of safety, health, and the environment continue to be pushed to greater heights, we will help our clients find the clarity and the confidence that they need to solve profoundly unique challenges. These market drivers have fueled the growth of Exponent over the past five decades. and will continue to fuel that growth for years to come. As our clients' needs continue to evolve and increase in complexity, Exmonit remains well positioned to build upon our growth trajectory, ultimately driving long-term shareholder value and profitability. Operator, we are now ready for questions.
spk04: Well, thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 if you would like to signal with questions, star 1. And our first question will come from Toby Somer with Truist Securities.
spk05: Hi, Toby. Good afternoon. Could you go ahead? the complexion and expected in hiring? I think you said it picked up in recent months, and you expect the back half to represent an increase even from there. Thanks.
spk01: Yeah, thanks, Toby. So we absolutely are, you know, continuing to put our foot on the gas with regard to hiring. You know, the competitive environment continues to be there, but we're finding that over the last several months, you know, despite the inflationary pressures, that we are continuing to see good yield on our interviews and good acceptance rates. We continue to hold those. So we are continuing to push on our university recruiting program. We are continuing on our mid-level and senior-level hiring programs, getting folks in for interviews, doing more in-person interviews now than we have been doing, and so that's been terrific, and really looking to accelerate as we get into the back half of this year. So there's a lot of momentum in that flywheel right now, and we're going to continue to push on that in order to meet the demand of our client work.
spk04: Thanks.
spk05: As the macro uncertainty has evolved in recent months, has there been anything you could perceive in terms of changes in client behavior and maybe approach it through the prism of reactive versus proactive work?
spk01: Yeah, thanks, Toby. I can touch on that one as well. So we are We are very much keeping an eye on the macroeconomic environment, both from the standpoint of the demand side with our clients as well as the talent side. You know, what we are finding thus far, I mean, if you look at our reactive business, that's driven primarily by litigation with a significant portion around product safety and recall. Those historically have been areas that have continued to even during recessionary types of environments. You know, not surprisingly, it does, you know, we don't see filings generally go down, you know, with that sort of environment. The pandemic was an exception because of the physical constraints associated with court closures. But in prior economic downturns, if you go back to maybe 08, 09, we saw reactive work continue through that period, really only impacted by clients actually going bankrupt, which happened in the automotive industry back in 2008. From the standpoint of our proactive work, what we really have seen in past recessionary environments is that the innovation driver continues to be strong. We find in the electronics industry or Now in the automotive industry, they continue to need to innovate their complex products, even if they're selling fewer units. And we've seen that tendency to keep that design consulting work going. In the life sciences arena, we continue to see those fundamental market drivers like the aging population and health equity challenges. These are big drivers for our business and that innovation driver. Our risk work is driven by things like climate change and extreme weather for utilities. And so those drivers continue to be there. You know, on the regulatory side, that's a significant portion of our proactive work. You know, our clients still need to get their products through those safety frameworks. And so, you know, those products are increasing in complexity and those regulatory frameworks are increasing in complexity. We've seen in the past that some of those clients do outsource less, but we've also seen some of those clients outsource more if they're slowing or freezing hiring on their end. And so that, you know, for example, our chemical regulatory business continued to grow throughout that 08, 09 timeframe. So look, we're keeping a close eye on that side as well as the talent side. And we're not immune by any stretch. Our clients look very carefully at their budgets, and particularly in these types of environments. But what we found, based on the nature of our market drivers and the history we've got, that we've got some immunity, so to speak, and our work, our demand continues.
spk05: And I just had a question we've rich into this perhaps. Could you describe in the current quarter or period what big project risk looks like versus history? Thanks.
spk03: Yeah. So as we've talked about over the very long term from time to time, uh exponent might have a a individual project that is uh let's say uh larger than normal and normally we would think of a large project in our portfolio being uh something that might be two or three percent of revenues in the individual quarter uh might vary from that uh in future quarters typically doesn't step off but as they get larger than that and getting that four or 5%, 6% range like we had in particular with the, you know, a condo, you know, accident in for BP in the Gulf and the unintended accelerations for Toyota or the San Bruno gas line for PG&E, those projects, at times achieved that sort of five percent sort of level uh and we called that out for uh investors um you know the other time we've talked about it is where we've sort of built up where we had some uh particular uh individual studies uh that we were doing around machine learning or human participant studies uh that were also uh larger that larger in size We've been very fortunate that we've been able to transition that business to a much more of a portfolio across clients. Still a good some concentration within the consumer products area within clients. But at least the number of projects is much more diverse than we've had in the past. So that is an area where, you know, we're seeing across a few clients a total that, you know, might approach upward of 8%, 10% of our business that we're doing in the area of machine learning and human participant studies. But it's a much different portfolio than it was maybe three or four years ago when we talked about it. But still, an area that we have sensitivity, the projects are larger on average than our normal projects, but that would be an area where we might have more sensitivity to it is really around some of those studies. And then the other area that, again, we've built out a good portfolio is really around our work for Pacific Gas and Electric, where A lot of the work that initiated around the major fires there were very reactive in nature and very investigative. And now we've diversified what we're doing for them in that area of risk management, investigations, and a broad set of support as they try to move forward with their strategy. So, yes, large clients. but a more diversified portfolio than we had, again, three or four years ago.
spk04: Thank you very much. Thank you. As a reminder, if you would like to signal with questions, please press star 1 on your touchtone telephone. Again, star 1. We'll pause for just a moment.
spk00: And that does conclude the question and answer session.
spk04: I'll now turn the conference back over to you.
spk03: Okay. Thank you very much. And we appreciate everybody being on the call and look forward to catching up with you between now and our next earnings call. Thank you.
spk04: And that does conclude today's conference. We do thank you for your participation. Have an excellent day.
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