Q3 2022 Exponent Inc Earnings Call

October 27, 2022

Okay.

Hum.

[music].

Hum.

[music].

Please standby.

Good day, everyone and welcome to the exponent incorporated third quarter of fiscal year, 2020 two financial results Conference today's call is being recorded and now at this time I would like to turn the call over to Joni constant tell US. Please go ahead.

Thank you operator, good afternoon, ladies and gentlemen, thank you for joining us on X. One in third 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 Dot exponent dot com backslash investors.

The 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. Catherine Corrigan, President and Chief Executive Officer, and Rich Slanker 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 excellent 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 excellent. Its most recent Form 10-Q. The forward looking statements and risks in this conference call are based on current expectations as.

Thank you Tony and thank you everyone for joining us today.

I'll start off by reviewing our third quarter 2020 to 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 another solid quarter with year over year growth in revenue EBITDA and diluted earnings per share. These results demonstrate the strength and resiliency of exponents business model and our ability to grow as an organization despite ever evolving macroeconomic challenges and uncertainty.

As companies push forward innovations with increasing attention to safety health and the environment.

Exponent remains a necessary and critical adviser as they leverage our differentiated data analytics and unrivaled subject matter expertise to help solve their most profound challenges.

Man for our scientific and engineering expertise remains strong with broad based growth driven by work related to the consumer products utilities automotive and life sciences sectors.

Within our proactive services, we saw strong demand for our work related to virtual reality wearable technologies and energy storage on the reactive side, we benefited from a robust litigation activity and also a diversified portfolio of product safety and recall related work, particularly in the life Sciences space.

Overall traction across our multi disciplinary offerings showcases the strength of our long term strategy.

Turning to our engagements in more detail on the proactive side, we saw increased demand for virtual and augmented reality work driven by our clients' need to better understand the cognitive impacts of these technologies. We also saw increased engagements related to machine learning and human participants studies as clients remain.

Reliance on exponents data driven insights to improve user experience and product performance importantly, the increasing need for scientific data regarding the safety and its value of health care products and treatments has furthered our work in the life Sciences sector.

Within the automotive space, we are supporting clients through our work in batteries and energy storage advising them on safety frameworks to mitigate risk while still in the early stages, we see long term growth opportunities related to electric vehicles, driven by societies ongoing focus on sustainability.

Our reactive business remains healthy and we experienced another quarter of growth driven by additional litigation related work reactive engagements in the quarter included domestic litigation and international Arbitrations, which are ahead of 2019 levels as well as product safety and recall work spanning several industry.

Including automotive pharmaceutical and medical devices.

Overall, we remain encouraged by the evolving opportunities related to energy storage advanced vehicles, consumer electronics, and digital health, which we expect to deliver a growing impact over time as we execute our long term strategy.

Turning to our segments excellent engineering and other scientific segment represented 84% of our net revenues in the third quarter net revenues increased six 9% compared to the prior year period, as we experienced strong demand for exponents services across several industries, including consumer products.

<unk> energy and transportation as well as robust litigation activity.

Exponents environmental and health segment represented 16% of the company's net revenues in the third quarter net revenues in this segment increased two 7% compared to the same period in the prior year driven by exports expanding scope of work and health data science and year over year growth in the life Sciences.

Base, driven by increased engagements with within pharmaceuticals.

Excluding the impact of foreign exchange net revenue for the environmental and health segment increased seven 5% in the third quarter of 2022 as compared to the prior year period.

We also remain committed to recruiting and retaining a world class team here at exponent.

While the demand for engineering and scientific talent is competitive in any market. We've continued to improve our processes for attracting and retaining talent to ensure we have the best and the brightest on our team our turnover is decreasing our hiring pipeline is robust and we are seeing exceptional candidates that add both depth and.

Breadth of experience to our roster we continue to show our ability to not only acquire but also retain talent in this ever evolving environment.

As we look to the future. It is evidenced that society will keep raising the bar on health and safety of the environment. All pillars of exponent successful strategy that has persevered through business cycles, and ongoing macroeconomic volatility and uncertainty.

We remain a strategic advisor to clients, providing services that are imperative to their operations, whether they need to gather data and conduct technical analysis respond to regulatory frameworks or trying to understand in market product performance and risk this along with our ability to attract and maintain a top.

Tier team of talent across an expanding portfolio of competencies gives us confidence in our business as we navigate through the end of the year.

I'll now turn the call over to rich to provide more detail on our third quarter results as well as discuss our outlook for the fourth quarter and the full year of 2022.

Thank you Catherine and good afternoon, everyone.

Let me start by saying all comparisons will be on a year over year basis, unless otherwise noted.

For the third quarter of 2022 total revenues increased nine 3% to $127 2 million.

And revenues before reimbursements or net revenues as I will refer to them from here on increased six 2% to $115 1 million.

As compared to the third quarter of 2021.

It should be noted that the third quarter net revenue growth was impacted by eight tenths of a percent from foreign exchange.

Net income for the third quarter.

Decreased slightly to $24 4 million as compared to $24 6 million in the prior year period.

On the other hand earnings per diluted share increased to 47.

Third to 40 <unk> per share as our share count was down year over year as a result of our share repurchases.

EBITDA for the quarter increased one 6% to $34 $6 million producing a margin of 30% of net revenues, which is a decrease of 140 basis points as compared to the third quarter of 2021.

EBITDA margin exceeded our expectations as expenses were slightly lower than anticipated.

Billable hours in the third quarter were 365000, an increase of four 8% year over year.

Definitely go full time equivalent employees in the third quarter were 958 up eight 4% as compared to the same period one year ago.

Utilization in the third quarter was 73% down from 76% in the same quarter of 2021.

As expected utilization in the quarter was lower than a year ago, as we continued to balance headcount growth and utilization.

The realized bill rate increase was approximately two 5% for the third quarter, which was slightly offset by the foreign exchange conversion for consolidation purposes.

Compensation expense after adjusting for gains and losses in deferred compensation increased five 1%.

Included in total compensation expense is a loss in deferred compensation.

$4 9 million.

As compared to a loss of $250000 in the third quarter of 2021.

Miscellaneous income and have no impact on the bottom line.

Stock based compensation expense in the third quarter was $4 $6 million as compared to $4 4 million a year ago.

Other operating expenses were up 10% to $8 $8 million driven primarily.

Primarily by increased employee engagement at our offices.

Included in other operating expenses is depreciation and amortization expense of $1 7 million for the quarter.

As expected G&A expenses were up 16% to $6 7 million for the third quarter.

The increase in G&A expenses was generated by higher marketing and recruiting.

As well as the in person managers meeting held at the end of September .

Interest income increased to $638000 for the third quarter.

Higher interest income was driven by an increase in interest rates.

Miscellaneous expenses net of deferred compensation loss was approximately 950000.

Inclusive of the tax benefit of share based awards <unk> consolidated tax rate was 27% for the quarter as compared to 24, 1% in the third quarter of 2021.

Moving to our cash flows.

During the third quarter, we generated $29 4 million in cash from operations.

Capital expenditures were $3 2 million.

In the third quarter, we distributed $12 $2 million to shareholders through dividend payments and repurchased $34 million of common stock.

Year to date, we have repurchased $142 6 million of common stock at an average price of $88 78.

At quarter's end the company had $148 $4 million of cash and cash equivalents.

Turning to our outlook for the fourth quarter of 2022 as compared to the same period one year prior.

We anticipate that revenues before reimbursements will grow in the mid to high single digits.

<unk> EBITDA margin will decrease 175% to 275 basis points.

As a result for the full year 2022 as compared to 2021, we are narrowing our revenue guidance and improving our margin guidance. We now anticipate that revenues before reimbursements will grow 6% to 7% and EBITDA margin will.

Decrease 100 to 125 basis points.

Utilization is expected to be 68% to 70%.

In the fourth quarter as compared to 70% in the same quarter last year.

As a result, we expect full year utilization to be 73, five to <unk>, 74% as compared to 75% in 2021.

As a reminder, utilization is seasonally lower in the fourth quarter due to more holidays and vacations compared to other quarters.

In the fourth quarter, we expect Tac to go full time equivalent employees to sequentially grow 2% as compared to the third quarter.

Throughout 2022, we continue to accelerate our recruiting efforts.

While we continue to navigate this uncertain and volatile macro environment recruiting and retention of our top tier talent remains a priority.

In the fourth quarter, we expect the year over year realized bill rate increase to be between 2% to 3%.

We expect stock based compensation to be four four to $4 7 million in the quarter.

25% to 20.

$8 million million dollars for the full year.

For the fourth quarter, we expect other operating expenses to be nine to $9 $5 million.

For the full year, we expect other operating expenses to be 34, 8% to $35 3 million.

Collaboration is key to the success of our interdisciplinary teams.

Is <unk>.

Ongoing development, which is enhanced by continuing to work from our offices on a regular basis.

For the fourth quarter 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 $23 seven to $24 2 million.

G&A expenses will continue to gradually scale as recruiting business development and travel activities increase.

As a reminder, these expenses include approximately half of our in person managers meeting, which straddled the end of the third quarter and the beginning of the fourth quarter.

As interest rates remain elevated relative to prior year period, we expect fourth quarter interest income to be approximately $400000.

In addition, we anticipate.

<unk> income to be approximately $700000 for the quarter.

For the fourth quarter of 2022, we expect our tax rate to be approximately 27, 5% as compared to 28, 9% in the same quarter a year ago.

This.

This implies a full year 2022 tax rate of.

Of 23% as compared to 19, 6% in 2021.

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 eight a share for the full year.

The tax benefit from share based awards is determined by the change in value of the share based awards between grant and issuance dates.

Capital expenditures for the full year 2022 is expected to be $12 million.

We are pleased to have delivered yet another quarter of solid results and are confident in our ability to drive sustainable profitability and long term value for shareholders.

I'll now turn the call back to Catherine for closing remarks.

Thank you rich.

As clients rapidly innovate and respond to ever changing market dynamics exponent is primed and ready to deliver data driven insights that support our clients on the critical path of their business strategy.

We will continue to build upon our 55 year history by growing and maintaining our high quality talent pool, all the while maintaining a strong flow of new engagements across industries on both proactive and reactive sides of the business overall.

Overall, we remain confidence that exponents vital service offerings will continue to drive strong profitable growth and long term value for our shareholders.

Operator, we are now ready for questions.

Thank you if you would like to ask a question simply press the star key followed by the digit one on your telephone keypad also if you're using a speaker phone. Please make sure. Your mute function is turned off to a layer signal to reach our equipment.

Once again press star one at this time, we will pause for a moment.

Again its star one if you would like to ask a question or make a comment.

It appears there are no questions at this time.

This also concludes today's conference. Thank you all for your participation you may now disconnect.

[music].

Thank you operator, good afternoon, ladies and gentlemen, thank you for joining us on Exxon in third 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 Dot exponent dot com backslash investors. This.

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. Catherine Corrigan, President and Chief Executive Officer, and Register Slinker 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.

Of today and exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise and now I will turn the call over to Dr. Catherine Corrigan Chief Executive Officer Catherine.

Thank you Tony and thank you everyone for joining us today I will start off by reviewing our third quarter 2020 to 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.

As companies push forward innovations with increasing attention to safety health and the environment.

<unk> remains a necessary and critical adviser as they leverage our differentiated data analytics and unrivaled subject matter expertise to help solve their most profound challenges.

Demand for our scientific and engineering expertise remains strong with broad based growth driven by work related to the consumer products utilities automotive and life sciences sectors within our proactive services, we saw strong demand for our work related to virtual reality wearable technologies and energy.

Storage on the reactive side, we benefited from a robust litigation activity and also a diversified portfolio of product safety and recall related work, particularly in the life Sciences space.

Overall traction across our multi disciplinary offerings showcases the strength of our long term strategy.

Reliance on exponents data driven insights to improve user experience and product performance.

<unk>, the increasing need for scientific data regarding the safety and the value of health care products and treatments has furthered our work in the life Sciences sector.

Including automotive pharmaceutical and medical devices.

Turning to our segments excellent engineering and other scientific segment represented 84% of our net revenues in the third quarter.

Net revenues increased six 9% compared to the prior year period, as we experienced strong demand for exponents services across several industries, including consumer products energy and transportation as well as robust litigation activity.

<unk> environmental and health segment represented 16% of the company's net revenues in the third quarter net revenues in this segment increased two 7% compared to the same period in the prior year driven by exponent is expanding scope of work and health data science and year over year growth in the life Sciences.

Driven by increased engagements with within pharmaceuticals, excluding the impact of foreign exchange net revenue for the environmental and health segment increased seven 5% in the third quarter of 2022 as compared to the prior year period.

We also remain committed to recruiting and retaining a world class team here at exponent.

The demand for engineering and scientific talent is competitive in any market. We have continued to improve our processes for attracting and retaining talent to ensure we have the best and the brightest on our team our turnover is decreasing our hiring pipeline is robust and we are seeing exceptional candidates that add both depth and.

Breadth of experience to our roster we continue to show our ability to not only acquire but also retain talent in this ever evolving environment.

As we look to the future. It is evidenced that society will keep raising the bar on health safety and the environment. All pillars of exponent successful strategy that has persevered through business cycles, and ongoing macroeconomic volatility and uncertainty.

Tier team of talent across an expanding portfolio of competencies gives us confidence in our business as we navigate through the end of the year.

I'll now turn the call over to rich to provide more detail on our third quarter results as well as discuss our outlook for the fourth quarter and the full year of 2022.

Thank you Catherine and good afternoon, everyone.

Let me start by saying all comparisons will be on a year over year basis, unless otherwise noted.

For the third quarter of 2022 total revenues increased nine 3% to $127 2 million and revenues before reimbursements or net revenues as I will refer to them from here on increased six 2% to $115 $1 million.

Compared to the third quarter of 2021.

It should be noted that the third quarter net revenue growth was impacted by an eight tenths of a percent from foreign exchange.

Net income for the third quarter.

Decreased slightly to $24 4 million as compared to $24 6 million in the prior year period.

On the other hand earnings per diluted share increased to 47.

Third to <unk> 46 per share as our share count was down year over year as a result of our share repurchases.

EBITDA for the quarter increased one 6% to $34 $6 million producing a margin of 30% of net revenues, which is a decrease of 140 basis points as compared to the third quarter of 2021.

EBITDA margin exceeded our expectations as expenses were slightly lower than anticipated.

Billable hours in the third quarter were 365000, an increase of four 8% year over year.

Technical fulltime equivalent employees in the third quarter were 958 up eight 4% as compared to the same period one year ago.

Utilization in the third quarter was 73% down from 76% in the same quarter of 2021.

As expected utilization in the quarter was lower than a year ago, as we continued to balance headcount growth and utilization.

The realized bill rate increase was approximately two 5% for the third quarter, which was slightly offset by the foreign exchange conversion for consolidation purposes.

Compensation.

<unk> expense after adjusting for gains and losses in deferred compensation increased five 1%.

Included in total compensation expense is a loss in deferred compensation.

$4 9 million as compared to a loss of $250000 in the third quarter of 2021.

As a reminder gains and losses in deferred compensation are offset to.

Miscellaneous income and have no impact on the bottom line.

Stock based compensation expense in the third quarter was $4 $6 million as compared to $4 4 million a year ago.

Other operating expenses were up 10% to $8 $8 million driven primarily by increased employee engagement at our offices.

Included in other operating expenses is depreciation and amortization expense of $1 7 million for the quarter.

As expected G&A expenses were up 16%.

$6 7 million for the third quarter.

The increase in G&A expenses was generated by higher marketing and recruiting.

As well as the in person managers meeting held at the end of September .

Interest income increased to $638000 for the third quarter.

Higher interest income was driven by an increase in interest rates.

Miscellaneous expenses net of deferred compensation loss was approximately 950000.

Inclusive of the tax benefit of share based awards <unk> consolidated tax rate was 27% for the quarter as compared to 24, 1% in the third quarter of 2021.

Moving to our cash flows.

During the third quarter, we generated $29 $4 million in cash from operations and capital expenditures were $3 2 million.

In the third quarter, we distributed $12 $2 million to shareholders through dividend payments and repurchased $34 million of common stock.

Year to date, we have repurchased $142 6 million of common stock at an average price of $88 78.

At quarter's end the company had $148 $4 million of cash and cash equivalents.

Turning to our outlook for the fourth quarter of 2022 as compared to the same period one year prior.

We anticipate that revenues before reimbursements will grow in the mid to high single digits in.

<unk> EBITDA margin will decrease 175 to 275 basis points.

Decrease 100 to 125 basis points.

Utilization is expected to be 68% to 70%.

In the fourth quarter as compared to 70% in the same quarter last year.

As a result, we expect full year utilization to be $73, 5% to 74% as compared to 75% in 2021.

As a reminder, utilization is seasonally lower in the fourth quarter due to more holidays and vacations compared to other quarters.

In the fourth quarter, we expect Tac to go full time equivalent employees to sequentially grow 2% as compared to the third quarter.

Throughout 2022, we continue to accelerate our recruiting efforts.

We continue to navigate this uncertain and volatile macro environment recruiting and retention of our top tier talent remains a priority.

In the fourth quarter, we expect the year over year realized bill rate increase to be between 2% to 3%.

We expect stock based compensation to be four four to $4 7 million in the quarter and 25% to 20.

$8 million million dollars for the full year.

For the fourth quarter, we expect other operating expenses to be nine to $9 5 million.

For the full year, we expect other operating expenses to be 34, 8% to $35 $3 million.

Collaboration is key to the success of our interdisciplinary teams as is.

Ongoing development, which is enhanced by continuing to work from our offices on a regular basis.

For the fourth quarter 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 $23 seven to $24 2 million.

G&A expenses will continue to gradually scale as recruiting business development and travel activities increase.

As a reminder, these expenses include approximately half of our inverse managers meeting, which straddled the end of the third quarter and the beginning of the fourth quarter.

As interest rates remain elevated relative to prior year period, we expect fourth quarter interest income to be approximately $400000.

In addition, we anticipate.

<unk> income to be approximately $700000 for the quarter.

For the fourth quarter of 2022, we expect our tax rate to be approximately 27, 5% as compared to 28, 9% in the same quarter a year ago.

This this implies a full year 2022 tax rate of.

Of 23% as compared to 19, 6% in 2021.

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 eight a share for the full year.

The tax benefit from share based awards is determined by the change in value of the share based awards between grant and issuance dates.

Capital expenditures for the full year 2022 is expected to be $12 million.

We are pleased to have delivered yet another quarter of solid results and are confident in our ability to drive sustainable profitability and long term value for shareholders.

I'll now turn the call back to Catherine for closing remarks.

Thank you rich.

Overall, we remain confident that exponents vital service offerings will continue to drive strong profitable growth and long term value for our shareholders.

Operator, we are now ready for questions.

Yes.

Once again press star one at this time, we will pause for a moment.

Again, Thats Star one if you would like to ask a question or make a comment.

It appears there are no questions at this time.

This also concludes today's conference. Thank you all for your participation you may now disconnect.

Q3 2022 Exponent Inc Earnings Call

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