Q2 2022 Exponent Inc Earnings Call

Please standby.

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 would like to turn the conference over to Joni constantly tell US. Please go ahead.

Okay.

Thank you good afternoon, ladies and gentlemen, thank you for joining us on exponents 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 Dot dot.

Dot Com question Baxter.

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, Edward 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 export market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.

All information that could cause actual results to differ from forward looking statements can be found an excellent periodic SEC filings, including those factors discussed under the caption risk factor in <unk>. Most recent Form 10-Q.

Forward looking statements and risks in this conference call are based on current expectations as of today and excellent assumes no obligation to update or revise them, whether as a result of new developments or otherwise.

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 second 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 solid second quarter results achieving year over year growth in revenue and EBITDA driven by continued demand for our scientific and engineering expertise.

Gross 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, our asset integrity and risk management engagements with utilities energy storage related work and machine learning data studies were key contributors.

During the quarter on.

On the reactive side litigation related work was robust and we saw increased demand for our services related to product safety and recall.

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 factor studies reflective of increased demand from our clients as they seek differentiated data to improve user experience and advanced product performance are.

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 health care products and treatments.

Our reactive business experienced an increase in litigation related work during the quarter, while our engagements around product safety and recall has 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 up tomorrow, we are well positioned across the business to capitalize on macro trends and safety health and environmental concerns.

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 lifestyle.

Answers 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 actually increasing head count, 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 continued to see strong demand for exponent 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 Expo in growing a 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 exponents unique market position and the durability of our business model.

We 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.

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 second quarter of 2022 total revenues increased eight 7% to $133 million and revenues before reimbursements or net revenues as I will refer to them from here on increased five 1% to 118 point too.

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As compared to the same period of 2021.

It should be noted.

Our growth was impacted by six tenths of a percentage point due to foreign currency translation.

Approximately 1%.

Cause 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 <unk> 49 per diluted share.

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.

<unk> consolidated tax rate was 27, 3% in the quarter.

Compared to 26, 7% in the same period of 2021.

EBIT for.

For the quarter increased two 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 372000, an increase of one 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 head count growth lagging behind demand.

Technical fulltime equivalent employees averaged 934 in the quarter, which is an increase of five 1% over the second quarter of 2021.

As Katherine 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 or losses and deferred compensation.

<unk> increased 4%.

Included in total compensation expense is a deferred compensation laws.

Point $3 million as compared to a gain of four 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 these accounting creates some noise it has no impact on EBIT or net income.

There is an offsetting entry and miscellaneous income.

Stock based compensation expense in the second quarter was $4 $6 billion.

Other operating expenses in the quarter were up seven 8% to eight $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.

Interesting job was 175000 in the quarter up from 12000 for the same period last year.

Miscellaneous income net of deferred compensation was $143 million for the quarter.

Moving to our cash flows during the quarter, we generated $32 million in cash from operations.

Capital expenditures were $3 $3 million.

In the second quarter, we distributed $12 $3 billion to shareholders through dividend payments and repurchased $63 3 million of common stock at an average price of 80 796.

At quarter end, the company had $165 $6 million in cash.

Turning to our outlook for the third quarter and full year 2022.

So the third quarter 2022.

We expect revenues before reimbursements to grow in the mid single digits and EBITDA margin decreased 300 to 375 basis points as compared to the prior year.

This decline in margin.

As a result of lower utilization in 2022 as compared to 2021, when utilization was elevated because head count.

With 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 fulltime 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 head count.

These mobley higher vacation and holiday time during the summer months and our managers meeting.

Our expectation for the full year utilization remains at 73%, 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 Seventy's 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 four four to $4 $8 million per quarter.

For the full year 2022, we expect stock based compensation to be $20 million to $21 million.

For the third quarter, we expect other operating expenses to be nine to $9 5 billion for the full year, we expect other operating expenses to be 35 $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 locations 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 input and in person managers meeting at the end of September .

While this meeting costs approximately $1 $5 million, we believe it is valuable to bring our teams together, especially after such a long period of physical separation.

We expect interest income to be approximately 200000 per quarter.

Or six.

600000 for the full year.

In addition, we expect miscellaneous income to be approximately 700000 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.

This difference will reduce net income by $4 million in.

And earnings per diluted share by eight.

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%.

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 2022 X when it had $106 $6 billion remaining on the share base for share repurchase authorization.

We delivered yet.

Another solid quarter.

We remain well positioned to continue our profitable growth.

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

Thank you Rex.

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.

Our societies expectations of safety health and the environment continue to be pushed to greater heights, we will help our clients find the clarity on 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 <unk> remains well positioned to build upon our growth trajectory ultimately driving long term shareholder value and profitability. Operator, we are now ready for questions.

Well. Thank you if you would like to signal with questions. Please press star one on your Touchtone telephone. If you are joining us today use a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Again that is star one if you would like to signal with questions Star one.

And our first question will come from Tobey Sommer with Truest Securities.

Okay.

Hi, Tobey.

Good afternoon.

Yes.

Could you.

The complexion and expected in.

In hiring I think you said it picked.

Picked up in recent months and you expect the back half two representing an increase even from there.

Yes.

Yeah. Thanks, Tobey so we absolutely are.

Continuing to put our foot on the gas with regard to hiring them. The the competitive environment is continues to be to be there, but we're finding that over the last several months and despite the inflationary pressures that we are continuing to see.

Good yield on our energy use 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 program 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.

Thanks.

The.

The macro uncertainty has evolved in recent months.

Has there been any.

Anything you could perceive in terms of changes in client behavior, and maybe approach it through the prism of reactive versus proactive work.

Okay.

Yeah. Thanks, Tobey I can 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.

Yes, that's driven primarily by litigation with a significant portion around product safety and recall those historically have been areas that have continued even during recessionary types of environments.

Surprisingly it does you no we don't see filings generally go down you know with that sort of environment to 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 Oh wait Oh nine we saw reactive work continue.

Are you through that period.

It really only impacted by clients actually going going bankrupt, which happened in the in the automotive industry back and back in a way 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 theyre selling fewer units and we've seen that that tendency that keep that design consulting work Sterling.

In the life Sciences Arena, we continue to see those fundamental market drivers like it the aging population and health equity challenges. You know these are big drivers for our business and that innovation driver.

Our risk work is it driven by things like climate change and extreme weather for utilities and so those drivers continue to be there on.

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 in 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 our freezing hiring on their end.

And so that you know for example, our chemical regulatory business continued to grow throughout that Oh wait Oh nine 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 you know our clients look very carefully at their budgets and particularly in <unk>.

In these types of environments, but what we found based on the nature of our market drivers.

And then on the history. We've got you know that we've got we've got some some immunity.

So to speak in our work you know our demand continues.

Okay.

Okay.

I just had a question we've rich into this perhaps could you describe.

In the current quarter or.

Curious what big project.

Risk it looks like versus history.

Thanks.

Yeah.

Yeah.

So as we've talked about over the very long term from time to time.

Exponent might have a individual project that he has a let's say a larger than normal normally we would think of a large project in our portfolio be.

It's something that might be two or 3% of revenues in the individual quarter Mike.

Might vary from that.

Future quarters, typically does it step off but as they get larger than that and getting that four 5%, 6% range like we had in.

In particular with the.

Macondo.

Accident and for BP in the Gulf and.

The unintended acceleration for Toyota or.

Or the San Bruno gas line for <unk> need those projects at times achieved that sort of 5% sort of level.

And we called that out for investors.

The other time, we've talked about it is where we've sort of built up.

Well, we had some particular.

Individual studies.

We were doing around machine learning or human participants studies.

But we're also a 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.

Ross our clients still good some concentration within the consumer products area within client.

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 total debt you know might approach a upward of about 10% of our business that we're doing in the area of machine learning and human participants studies, but it's.

Much different portfolio than it was maybe three or four years ago, when we talked about it but still an area that we have a sensitivity of 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 early.

Route.

Some of those studies and then the other area that again, we've built out a good portfolio is really around our work.

Or Pacific gas and electric where a lot of the work that initiated around the major fires there were very reactive in nature and very investigator.

And now we've diversified our what we're doing for them in that area of risk management.

<unk>.

A broad set of support as they try to move forward with their strategies. So yes, a large client.

But.

A more diversified portfolio than we had again three or four years ago.

Thank you very much.

Thank you as a reminder, if you would like to signal with questions. Please press star one on your Touchtone telephone.

Star One we'll pause for just a moment.

And that does conclude the question and answer session I will now turn the conference back over to you.

Okay. Thank you very much and we appreciate everybody being on the call and look forward to catching up with you.

Yoked between now and in our next earnings call.

Thank you and that does conclude today's conference. We do thank you for your participation have an excellent day.

Okay.

Yes.