Q2 2021 Exponent Inc Earnings Call
Good day and welcome to the exponent, Inc. Second quarter of fiscal year 2021 financial results Conference call. Today's conference is being recorded at this time I would like to turn the call.
To Joni cost and tell US. Please go ahead ma'am.
Thank you operator, good afternoon, ladies and gentlemen, thank you for joining us on exponent second quarter of fiscal year 2021 financial results conference call.
Note that this call will be simultaneously webcast on the Investor Relations section of the company.
And he is corporate web site at Www Dot exponent dot com slash investors.
This conference call is the property of exponent and any taping or other reproduction is expressly prohibited without prior written consent joining.
Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer and.
And rich Schlenker, 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.
And materially from those discussed here.
Additional information that could cause actual results to differ from forward looking statements can be found and exponent periodic SEC filings, including those factors discussed under the caption risk factor and Expo and its most recent form 10-Q.
The forward looking statements and risk.
Just on 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.
And now I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer Catherine.
Thank you Tony and thank you everyone and Fritz.
Joining us today I will start off by reviewing our second quarter 2021 business performance and Rich will then provide a more detailed review of our financial results and outlook and we will then open the call for questions.
And the second quarter of 2021, and our business continues to gain momentum driving strong results with.
And our prior expectations and.
And the second quarter net revenues grew 28% and EBITDA margin increased 630 basis points from the prior year period.
These results continue to be bolstered by increased activity and litigation projects and human participants studies.
As pandemic related restrictions eased and vaccinations became more widely available.
We have also experienced a higher level of new engagements year over year, winning new assignments daily and gradually re engaging on projects that were paused due to COVID-19 restrictions and or court closures and.
I'm pleased to note.
And our revenues in the quarter from a reactive engagements returned to pre COVID-19 levels as seen in the second quarter of 2019, while our revenues from proactive projects grew significantly compared to the same period underscoring our long term growth strategy.
The increased activity across the business is broad based.
Note that I include and climate vulnerability assessments with utilities risk assessments, and chemicals and ongoing energy storage related work as well as a number of engagements and the automotive and consumer products spaces within the automotive Arena. For example, we continued to see demand and the second quarter for both proactive and reactive.
This work related to advanced vehicles.
We are developing cutting edge testing capabilities to answer important questions surrounding the safety and performance of electric vehicles as well as advanced driver assistance system. We believe this proactive and reactive work will continue to strengthen and through 2021 and be on at.
These technologies evolve and become more prevalent and the fleet.
Utilization and the second quarter reached a record levels supported by strong demand Herculean participants studies increased litigation work and lower head count, which drove improved profitability. However, it is important to note that we do expect utilization.
Utilization to normalize somewhat in the second half of 2021 as human participants studies and moderate head count growth and we see typical seasonality.
Exponent engineering and other scientific segments represented 82% of the company's net revenues and the second quarter net.
Net revenues.
Revenues in this segment increased 33% in the second quarter as compared to the prior year period in.
In line with the first quarter growth was driven by strong demand for exponent services across a broad range of industries and use cases and <unk>.
And to the steady increase and litigation support and human participants studies.
And our multidisciplinary battery team continues to see demand for its solutions across industries, including consumer products transportation utilities and medical devices.
Our work and international Arbitrations, and integrity management and advisory services continued at strong levels.
Ex bonus environmental and.
Health segment represented 18% of the company's net revenues and the second quarter net revenues in this segment increased 9% in the second quarter as compared to the prior year period. This segment also benefited from increased activity and litigation related projects and support of human participants studies.
And chemical regulation and food safety practice continued to grow as exponent scientists evaluated the effects of chemicals and new products on human health and the environment.
As our clients' needs evolve and to increase and complexity. Our team is positioning exponent to deliver unique solutions for the challenges of today.
And in anticipation of the challenges up tomorrow, wearable technology autonomous and electric vehicles virtual reality energy storage and pharmaceuticals and medical devices are just a handful of the innovations that are driving a safer healthier and more sustainable world.
Ex bonuses and exceptional.
Channel partner to help on rabbit, the complexities of these innovations and stayed there.
Come reality and as society continues to raise expectations for safety health sustainability and reliability.
We look forward, we remain focused on key hires across the business through our accelerated recruiting process we have achieved.
A healthy pipeline of candidates.
On the senior recruiting side I was pleased to announce the hiring of Dr. John Doyle This quarter as group Vice President for Health Sciences, John will be teaming with multiple stakeholders to accelerate our growth and the life sciences sector, leveraging exponent powerful multi disciplinary approach data.
And to help expertise and cross industry reputation as a leader in the analysis of real world product safety and performance.
While a degree of uncertainty remains and surrounding COVID-19, and the second half of 2021, we remain confident that our strong reputation and diversity of engineering and scientific.
And to silence World class team of experts and the durability of our market drivers and uniquely position us for continued profitable growth.
I'll now turn the call over to rich to provide more detail on our second quarter 2021 results as well as discussed on our outlook for the third quarter and the full year 2021.
Disappointed you Catherine and good afternoon, everyone.
Let me start by saying all comparisons will be on a year over year basis and law.
And otherwise noted from.
And the second quarter.
And in 'twenty, 1 total revenues and revenues before reimbursements or net revenues as I will refer.
And from here on increased 30% to $119.9 million and.
And 28% to $112.5 million, respectively, as compared to the second quarter of 2020.
Net income for the second quarter increased to $25.4 million or.
<unk> per diluted share.
And the $16.3 million or <unk> 31 cents per diluted share and the prior year period.
EBITDA for the quarter increased 59% to $36.3 million producing a margin of 32, 3% of net revenues.
Which is an increase of 630 basis points as compared to the second quarter of 2020.
Billable hours and the second quarter were 365000 and increase of 22% year over year.
Utilization.
In the second quarter.
And 40, 79%.
Moving to 64% and the.
Same quarter of 2020.
Utilization in the quarter was it was ahead of our prior expectations.
And Denmark related restrictions were relaxed and.
And Baxter Nations increased wood.
Celebrated the timing of human participants studies and litigation support.
Turning to gross fulltime equivalent employees and the second quarter were 888 down 1% as compared to the same period 1 year ago.
The realized rate increase was approximately 4% year.
And with fear.
Compensation expense after adjusting for gains and losses and deferred compensation increased 18%.
Included in total compensation expense is a gain and deferred compensation of $4.7 million as compared to a gain of 11.
Year over $1 million and the second quarter of 2020.
And as a reminder, gains and losses and deferred compensation are offset to miscellaneous income and have no impact on the bottom line.
Stock based compensation expense and the second quarter was $4.6 million.
I love it as compared to $3.5 million a year ago.
Other operating expenses were up 6% to $8.1 million driven primarily by increased activities at our offices as our employees gradually return.
Included in other operating expenses is depreciation.
On expense of $1.6 million for the quarter.
G&A expenses were up 8% to $3.2 million for the second quarter.
Kris and G&A expenses was primarily due to higher marketing and recruiting activities somewhat offset by lower travel and costs.
Interest income decreased by approximately 293000 to 12000 for the second quarter.
Lower interest income as a result of a steep decline and interest rates.
Miscellaneous income net of deferred compensation game.
She was approximately 600000.
Inclusive of the tax benefit for share based awards.
Exponent is consolidated tax rate was 26, 7% for the second quarter as compared to 23, 7 and the prior year period.
Moving to our cash flows during the second quarter, we generated $44.2 million and cash from operations and.
Capital expenditures were $1.7 million.
And the second quarter, we distributed 10.4 million to shareholders through dividend payments.
In addition, we repurchased $7 million of stock on an average price of 80.889.
At the quarter and the company on $240 million and cash and short term investments.
Looking forward based on continued strong demand for our.
Our services, we expect to maintain our positive momentum, but recognize there maybe on the.
Moving along unevenness, along the way.
Turning to the outlook for the third quarter and full year 2021 day.
Year over year improvement and staff utilization.
And the lower than normal operating and G&A expenses are resulting in significant margin improvements.
As a result of the positive momentum across our business and the easier year over year comparisons, we expect the third quarter 2020.1 revenues before reimbursement.
Instruments to grow and the low double digits and EBITDA margin to increase 100 to 150 basis points as compared to the same period in 2020.
For the full year 2021, we expect revenues before reimbursements to grow and the low double digits.
And EBITDA margin increased 225 to 250 basis points as compared to 2020.
For the third quarter and full year 2021, we expect utilization to be 73% to 75%.
<unk>.
266% and 67%, respectively in 2020.
And as Catherine mentioned, we do expect utilization to normalize somewhat and the second half of 2021 as human participant studies moderate head count growth.
And we see typical seasonality.
And the third quarter, we expect full time equivalent employees to be flat sequentially, and then and the fourth quarter to grow 2% sequentially.
As we have previously stated we intentionally tempered our recruiting.
Rose and activities during 2020 to ensure that we could deliver strong earnings.
We have accelerated and our recruiting and 2021, but it takes several months and Joe candidates start.
And you would expect we had lower than normal voluntary turnover during 2000.
Accrued and any due to the pandemic, but saw an increase during the past quarter.
For the second half of the year, we expect the year over year realized rate increase to be approximately 2.5% to 3%.
As a result, the full year realized rate increase.
<unk> is expected to be 4 to 4.5%.
We expect stock based compensation to be 3.9 to $4.4 million and each of the remaining quarters.
And 19% to $19.5 million for the full year.
And each 1 quarter, we expect other operating expenses to be 8.3 to $8.5 million.
For the full year 2021, we expect the operating expenses to be 32.5% to $33 million.
Driven by a gradual return to our offices during the third quarter.
For the third.
As we stated previously we believe our office environment provides long term value as it's important collaboration for our interdisciplinary teams and staff development, which results in a higher value for our clients and retention of our employees.
Quarter, we anticipate.
Associated expenses to be at historic levels as we exit the year.
G&A expenses will also gradually scale as travel activities resume for the third quarter of 2021, we expect G&A expenses to be 3.
8% to $4.2 million for the full year 2020..1 we expect G&A expenses to be 15 to $15.5 million as a result of marketing and recruiting activities increasing during the year.
For 2021, we expect interest income.
<unk> to be approximately $10000 per quarter or $60000 for the full year.
In addition, we anticipate miscellaneous income to be approximately 750000 for each of the remaining quarters or $2.5 million for the full year.
For the second half.
2021, we expect our tax rate to be approximately 27%.
Capex for the full year 2021 is expected to be roughly $10 million.
We delivered another strong quarter and are confident.
And our ability to continue to grow.
I will now turn the call back to Catherine for closing remarks.
Thank you rich.
And the importance of scientific excellence and disciplinary diversity and advancing solutions to clients challenges has never been higher and the COVID-19 pandemic has only.
Mike highlighted the fact that the world needs science now more than ever.
For over 50 years exponent has been committed to the advancement of science and has leveraged its expertise to advise clients on the causes of failures as well as how to produce safer healthier and more sustainable and more reliable products and processes. We will continue.
And on to advance science with the same consistency accuracy and from efficiency, our clients' trust from the brightest scientists engineers and physicians and regulatory consultants in the world.
As our clients' needs evolve and increase in complexity exponent is well positioned to stay ahead of the curve utilizing our deep knowledge.
<unk> and multidisciplinary capabilities to deliver unique solutions and ultimately to drive long term shareholder value on.
<unk>, we are now ready for questions.
Thank you if you would like to ask a question. Please signal by pressing star 1 on your <unk>.
Telephone keypad, if you were using a speaker phone please make sure your mute function.
Change is turned off to allow your signal to reach our equipment and for star 1 to ask a question.
Our first question comes from Tobey Sommer true Securities.
Thank you.
And I'm curious, how you would parse gross and maybe into 2 buckets.
Function as the first being catching up on pent up demand from work delayed by the pandemic and another bucket of Neogen.
Newly generated work if you can if you can do it and that and those terms.
Yeah. Thanks Tobey.
And there there is a combination of those 2 things we still have.
And buckets.
And when.
And I look at the sort of litigation side. You know this is a this is an area that continues to have projects be on pause. We've got in a sort of back to 2019 levels with that but there's still more head space there.
Things for us to evolve into and so it's really a combination of projects that are becoming on pause and we expect that to continue but also we're seeing quite a bit in terms of new filings and new matters and so you know on that litigation side. It's a combination of those 2 things when I when I look at the proactive.
Active side.
It's again, a combination and it's sort of it's progressively less each quarter and.
In terms of how much of it is becoming on pause if you will but there still is an element of that that we're seeing and whether that's in our human participants studies.
And some of our Wearables work and things like that but we're absolutely seeing a significant amount and I think by far the larger bucket is that's driving demand is around the the new matters, whether that's in the litigation side or around the proactive side.
Thank you.
And <unk>.
Is the bison administration's regulatory posture, Inc.
Moving from trends in the business at this stage and researching kick timed appropriately.
It does take time to percolate I mean, there is no doubt that over long periods of time as we look.
Look at the way the bar gets raised whether it's around chemicals, whether it's around human health or the environment.
We continue to see globally that that bar is raised and clearly the bite and administration is looking to raise it even further when you when you look at the climate related drivers.
And in particular, you know those are.
And those are already manifesting.
Thing themselves as drivers and the business for us when we look at the climate and vulnerability work that we're doing we look at the state level regulatory environment around utilities, we look at the regulatory environment around and chemicals et cetera. So there's really there's continuous path.
Half of raising of the bar, if you will but the fight and the administration's policies and particular haven't moved the needle yet, but I think our just reflective of the fact that we expect to that bar to continue to be raised across the board.
Thanks.
On the various.
Appropriations are under consideration and Congress and I'd guess I'd include infrastructure Bill was from their prominent news. This week Oh regular way budget, which maybe comes later in the year and then just.
Reconciliation package measured in trillions.
Which.
And in theory, the the most important to your business should they become the facts rather than bills under consideration.
Yeah. So I mean, the infrastructure piece as you know I mean, we've been doing infrastructure work for years and years and although we tend.
And would get involved and sort of the failure analysis side of that.
And so that's not something that relates directly to the to the existing packages that are kind of moving their way through but if you think about over the longer term you know that kind of investment on the infrastructure side.
And I think that will certainly create opportunities for disputes.
That arise and and <unk>.
Fact, we're seeing that and other global you know areas of the world, where we've had some very large engagements related to construction disputes and sort of root cause assessments that our engineering team is doing so you know if you.
You look over kind of a longer term again, we're not going to see that move the needle immediately but as the as infrastructure plays through it certainly creates more opportunity for work on that.
Of that the speed side of the business. So I do think theres and influence there.
Okay last question from me can I get your comments.
Syed inflation, both internally and your cost structure as well as.
Any external manifestation and it could be a.
And sort of bill rates or something like that.
Yes.
So look you know what we've seen historically is.
Is that.
And inflation rises and particular the cost of labor.
It goes up a bit.
Good news for US is the most of our clients are also hiring engineering and scientific talent within their organization.
Nation and have a real a real.
Real time barometer on on the fact that those costs are going up and as such.
We've been able to historically do is as those rates go up we're able to raise pricing equal.
And <unk> to be able to you know.
Cover that cost so that has been what we've been able to do over several decades is on a regular basis be able to see that clearly went inflations at its lows our realized rate and compensation increases.
We'll be at the lower end of our range and then move on.
At the upper end of the range when that demand environment is very high.
You know our other cost.
Other compensation is such a large component of it but clearly there will be some.
Gradually increase.
Rates are and the cost of travel and and real estate and some of those things as well, but I would hope that again, because we're able to rise raise pricing in that environment. Because it is tied into that demand side of engineers and scientists.
Uh huh.
<unk> expect that we will be able to maintain.
Maintain margins.
Thank you.
Our next question comes from Sam England Bahrenburg.
Hi, guys. Thanks for taking the questions and the first 1 I was wondering if you could talk.
I wouldn't worry about the life Science day expansion that you mentioned and I suppose maybe touching on 1 of the main areas of opportunity you see going forward and.
And also do you require so slightly different people on.
And on that business and you you have in house at the moment and do you need to acquire additional staff in that area.
But Matt Thanks, Sam So there we're very excited about the opportunities and life science and as you know we've been you know we've been historically strong on the medical device side, both prudent and proactive.
And reactive work, but less so on and on the pharma side.
And what we're really seeing.
And in that industry is a desire to them to really push the the paradigm of digital health and and that's a very broad.
Very broad area, but if you look at our experience around technology, and now being able to marry that.
You know allergy, whether that's wearable technology and you know.
And whether that's a you know human.
<unk> research type of technology, and we can marry that with the impact of therapeutic interventions, whether those are drug this or whether those are and actual.
Technology related.
Tech and like like virtual reality.
And we bring in our data sciences expertise and our on our expertise and really understanding the real world impact of you know in terms of performance and safety of consumer products.
And that's where we've really believe that we.
And those have rich our expertise in this area of digital health. If you think about some of the complexities and life sciences around personalized medicine around cell and gene therapy around the push around and real world evidence to really understand and unique ways and the V.
Value of medicines.
And and so 1 of the areas. How you. Your second question was sort of thought about different types of people to help us to expand that and.
And look we start with our base, that's very strong around epidemiology, and we've had that for decades and we are now hiring in the pharma co epidemiology so that is.
You know what.
And I and adjacent area that we are becoming stronger and stronger and and from that base. We start to bring in some of the health economics expertise and real world evidence expertise and data sciences expertise that is very very specific to things like electronics.
Chronic health records and and other areas of health related data science. So those are those are different kinds of folks that we havent had before that we're already hiring and that we are continuing to look to hire and so there is a you know a.
A bit of a of and expansion in terms of you know being different from the traditional.
And all hires but on you know, we're gonna be able to really bring that that differentiated team by covering those areas, you know facing and and epidemiology and then sort of branching out from there.
Okay, great. Thanks, and then could you talk a bit about the international business at the moment as well and specifically no.
And of opportunity that you see as we move out of the pandemic.
And then any of the international markets, either Asia or Europe.
Yeah, Yeah, sure so look that the chemical regulatory environment.
Around both agricultural chemicals, as well as industrial chemicals.
She used to be a strong grower for us and it has been historically, it's been a double digit grower and.
And we have a lot of confidence in that area continuing to grow you know that is mostly centered on and.
In terms of our international operations, and that's gonna be U K and EU based and there's an interesting opportunity.
<unk> I think to leverage that expertise and chemical regulation into what we're doing with pharma that's on longer term sort of outlook, but there are definitely opportunities there and overlap there.
And you know over in Asia. The much of the work has centered around and consumer electronics.
And work around energy storage and also around international Arbitrations and really the international disputes work is global.
We continue to see a lot of strength and opportunity there, particularly in the construction disputes area. When you think about all of the delay.
And for latest that happened because of COVID-19.
Those are already starting to manifest themselves trying to sort of pick apart what the root causes of that are on our health Sciences expertise is very very helpful. In that regard to sort of combined with our construction delay and and engineering expertise.
So we think globally. Those are those are a few of the areas that are that are looking promising for us going forward.
Okay, Great and then maybe.
1.4 and it won't put from rich on in terms of capital allocation.
The occasion and I, just wondered how you're thinking about things heading into the second half.
And so to speak from them.
And maybe.
You are assuming Tonight, and she did step up.
And child is going towards.
Yeah, I mean, I definitely think that we continue to look for the opportunity to return.
You know cash to shareholders through the dividend.
As well as repurchases are we did dip back in to the market here and in the second quarter I would expect that to continue.
Throughout the rest of the year and and clearly beyond.
And with our goal of really bringing that cash balance down into that over the long term here ended up $50 million to $70 million range. So.
I think we're in a great position to be able to put that to work here.
Over the next couple of years.
Great. Thank you Mike.
Just a reminder, if you would like to ask a question. Please press star 1 now.
Our next question comes from Andrew Nicholas William Blair.
Hi, Good evening, everyone. On this is actually Trevor Romeo on for Andrew Thanks for taking.
Questions.
First I just wanted to follow up on the the topic of kind of climate vulnerability and energy storage types of projects.
Just wondering if you could give us sort of a ballpark order of magnitude and how much of your current you know pre.
<unk> base of revenue is related in some way to.
Energy transition or climate change.
And mitigation is broadly defined and then would you expect those types of projects to kind of be accretive to the company's overall growth over the next few years.
Yeah, So look exponent business related to energy storage overall, both at the at the device level.
Taking that all the way up to the grid.
Grid scale storage level that type of work today.
And today is probably a high single digit percentage.
Of our work, it's somewhere in and that in that range of work that we do across many different industries as we look at.
<unk> arc that we're doing on in particular.
And if you're looking around energy the energy market and grid scale storage that is actually a small portion of the work that we're doing today and would probably be measured in the low single digit percentage.
The award of the job of our total revenues that's in that area today.
As it pertains to the work that we're doing related to risk climate related risk that goes into this into again, primarily around the work that we're doing and the utility area.
Area around integrity management.
Work, that's ongoing I would put that work in the range of being in a you know somewhere in the mid single digit percentage of our work today.
Where we're doing that level of activity.
Okay, great. Thanks, that's really helpful rich.
And maybe just kind of wanted to touch on the margin guide increase given and it was.
Fairly significant and you mentioned.
Improving utilization and some lower operating expenses.
It's just kind of more of a current year phenomenon or are there kind of more permanent structural.
Factors and those improving margins that you'd call out.
Look I the 2 big contributors to the margin increase.
It is first being driven by the fact that we ended up with Oh about.
<unk> 2 million lower than we were on the same quarter of 'twenty, and 19, and G&A and about flat with where we were and our other operating expenses. So those together.
And you would have expected them to be slightly higher and then maybe 2 years ago. So you can view that as contributing.
And sort of the 250 basis points to what's going on there and that area. The other area. That's made a significant contribution to it is around the utilization there. We do think that the day you know the 79% utilization.
<unk> is an all time high for us.
You know the second quarter is a strong quarter for US. We are you know at 1 time about 4 years ago, we and the second quarter, we achieved 77% utilization so as our annual utilization.
Nation moves from being and that sort of load low seventies 70, 273% towards the mid Seventy's over time, we would expect that utilization.
Parroting Willie would've been proved historically, but I think that.
The 79% is pulling at the top end of the utilization, we would expect to see and a quarter and expecting that to pull back by a couple of percent.
Where we look forward if you just look forward into our third quarter as a comparison. This next.
Third quarter, when we look back we're going to end up having a 1 additional holiday and employees take probably 2 additional vacation days each so right aware way and there is 3 days out of a 65 day quarter.
And that are going into.
You know holidays and vacation and so you can see the impact that that would just have on a sequential basis moving from Q2 to Q3 and addition to that we did see an elevated level of a human.
<unk> studies I would expect that to moderate.
By and per center 2 of our on the utilization as well and so that's why we provided the guidance and the 73% to 75% range.
For the third quarter and full year.
Okay understood that makes a lot of sense it looks like and just sneak 1 more quick 1 and and.
And you touched on capital allocation already but it looked like the short term investments on the balance sheet drop to zero for the first time and a while I was there any particular reason for that and the quarter.
Yes. So the reason is it's just the you know we've had a ladder and.
And portfolio over time.
As interest rates have hit their very low bottom, we put that in and we felt that the appropriate place to put that was really more on overnights and and very and.
Investments and then we will.
Redeploy that back into.
And.
Securities as interest rates begin to rise.
Okay, great. Thanks, Thanks, very much for the detail.
We have no further questions in the queue. This concludes today's call. Thank you for your participation you may now disconnect.
Yeah.
[music].
Okay.
Oh.