EXPO
#Thank you.
Thank you for joining us today.
Following my discussion of the first quarter 2018 results, Rich will provide a more detailed review of our financial performance and business outlook.
Then <UNK> will provide her thoughts and closing remarks, after which we will open the call to your questions.
Exponent continued its strong momentum from 2017 into the first quarter of 2018.
We delivered strong financial results, while positioning the company for long-term success.
We grew first quarter net revenues by 13% and expanded our EBITDA margin by 260 basis points to 26% of net revenues as compared to the same period last year.
Our first quarter results benefited from positive market trends across several industries, practices and geographies as well as the ongoing large human factors project, which we began discussing in the first quarter of 2017.
We are seeing good demand for interdisciplinary advice related to battery technology from several industries, including consumer products, automotive, medical device and energy.
We are being retained for both reactive and proactive services.
We've been engaged to support clients with product recalls and litigation in addition to providing technology assessments and design consulting.
Our battery expertise, located in North America, Asia and Europe, has been invaluable to clients as their products are manufactured and sold around the globe.
We continue to be called upon by clients in the automotive industry to analyze their most significant product recall issues.
These engagements are leveraging our multidisciplinary team and our Phoenix Test and Engineering Center.
We are also seeing growth opportunities to support the development and deployment of electric and automated vehicles.
The large human factors project for a client in the consumer products industry continued at a high rate in the first quarter, representing between 7% and 8% of net revenues as compared to approximately 5% in the first quarter last year.
This project will step down to between 4% and 5% of net revenues in the second quarter and is expected to increase again during the third quarter.
We are very pleased that this client is signing significant value in the data that we are delivering.
Additionally, we've been engaged to perform human factors assessments by automotive companies, appliance manufacturers, consumer electronics companies, medical device firms and video game developers, including work in augmented reality.
These capabilities are a source of strength and future opportunity for Exponent.
Exponent's engineering and other scientific segment grew 13% year-over-year and represented approximately 79% of the company's first quarter net revenues.
During the quarter, this segment had notable performances in its human factors, vehicle engineering, electrical engineering and polymer science practices.
We continued to see strong demand for our services related to product recalls, including assignments from the consumer products and automotive industries.
Proactive services continued to expand as companies seek Exponent's interdisciplinary advice throughout the product life cycle.
Exponent's environmental and health segment grew 10% year-over-year and represented approximately 21% of the company's first quarter net revenues.
Exponent's scientists were engaged in human health and environmental assessments and advised clients with regulatory issues around the world.
Exponent's chemical regulation and food safety practice expanded its proactive services as society remains concerned about chemicals affecting ecosystems and human health.
Consultants from this segment also continue to support the large human factors project.
We paid $6.7 million in dividends in the first quarter and today announced a regular quarterly dividend payment of $0.26 per share.
We believe that our regular quarterly dividend payments demonstrates our confidence in the model long term and our commitment to build shareholder value.
As we announced in December, on May 31, we will promote Dr.
<UNK> <UNK>, our current President, to the role of CEO and President.
As Chairman, I look forward to supporting <UNK> as I'm certain that she is the right person to lead our firm into the future.
Before I turn the call over to Rich, I would like to say that it's been an honor and privilege to serve as Chief Executive of this great company, which is committed to excellence.
I would like to take this opportunity to thank you, our shareholders, for your loyalty and support, the entire Exponent staff for their continued dedication and our clients for the trust they put in our ability to deliver sound scientific advice.
Thanks, <UNK>.
Let me start by saying that all comparisons will be on a year-over-year basis unless otherwise specified.
For the first quarter of 2018, total revenues were up 15% to $96.5 million.
Revenues before reimbursements or net revenues, as I will refer to them from hereon, were up 13% to $90.7 million.
Net income increased 23% to $20.3 million or $0.75 per diluted share as compared to $16.6 million or $0.61 per diluted share.
In 2016, Exponent adopted a new accounting standard for the classification of tax adjustments associated with share-based awards.
The first quarter tax benefit from gains realized upon the issuance of share-based awards was $3.9 million or $0.14 per share in 2018 as compared to $6 million or $0.22 per share in 2017.
As a reminder, our net income also benefited from the new tax legislation, which reduced our consolidated tax rate, which I will discuss later.
EBITDA for the quarter increased 25% to $23.5 million.
For the first quarter, billable hours increased 11.2% to 329,000.
For the first quarter, utilization was 76.6% as compared to 74.2% in the same period last year and approximately flat with the fourth quarter after adjusting for vacations and holidays.
The large human factors project was approximately 7.5% of net revenues in the first quarter as compared to approximately 5% in the same period last year.
This project was step down to approximately 4% to 5% of revenues in the second quarter.
Based on current discussions, we are ---+ we expect an increase in the third quarter and then for this project to step down again in the fourth quarter.
Based on this level of activity and the seasonal increase in vacations we expect in the second quarter, utilization will be down 2 to 3 percentage points for ---+ from the first quarter.
For the full year of 2018, we expect utilization to be down by approximately 1 to 1.5 percentage points from last year's 74.7%.
Technical full-time equivalent employees in the quarter were 825, up 7.6% from the same period last year.
For the remainder of 2018, we expect quarterly sequential headcount growth to be approximately 1%.
The realized rate increase was approximately 1.5% in the first quarter.
For the remainder of 2018, we expect the realized rate increase to be approximately 2%.
For the first quarter, EBITDA margin was 25.9%, an increase of 260 basis points.
As a result of the strong first quarter profitability, we are improving our margin expectations by 50 basis points.
For the full year 2018, the EBITDA margin is now expected to be down 50 to 100 basis points from 2017, primarily related to the anticipated decline in utilization.
For the quarter, compensation expense, after adjusting for gains and losses in deferred compensation, increased by 10.3%.
Included in total compensation expense is a loss in deferred compensation of $300,000 as compared to a gain of $1.9 million.
As a reminder, gains and losses in deferred compensation are offset miscellaneous income and has no impact on the bottom line.
2018 salary increases are effective April 1.
The rise in salaries will be approximately the same as the realized bill rate increase.
Stock-based compensation expense was $6.3 million in the quarter as compared to $5.7 million in 2017.
We expect stock-based compensation to be $3.5 million to $3.8 million in each of the remaining quarters of the year.
Other operating expenses increased approximately 3.8% to $7.5 million in the first quarter.
Included in other operating expenses is depreciation expense of $1.6 million.
For the remainder of 2018, other operating expenses are expected to be in the range of $7.6 million to $8.2 million per quarter.
G&A expenses decreased approximately 4.3% to $4 million in the first quarter.
For the first quarter of 2017, G&A expenses were higher due to our managers' meeting and 50th anniversary marketing expenses.
For the remainder of 2018, G&A expenses are expected to be in the range of $4.6 million to $5 million per quarter.
I will expand on our Q1 taxes and our expectations for the remainder of 2018.
We realized a $3.9 million tax benefit from share-based awards in the quarter.
As a reminder, these shares are granted annually in <UNK>h as part of our compensation program and released 4 years later.
Therefore, the tax benefit is primarily a first quarter event for Exponent.
Inclusive of the tax benefit, Exponent's consolidated tax rate was 9.4% in the quarter compared to 4.8% for the same period last year.
Prior to the enactment of the new tax legislation, we had already expected tax ---+ the tax benefit from share-based awards to be down as compared to 2017.
But it was further reduced by the lower federal tax rate.
For the ---+ for comparison purposes, exclusive of the tax benefit for share-based awards, our tax rate would have been 26.8% in the first quarter of 2018 as compared to 39.4% in the same period last year.
We expect our consolidated tax rate to be approximately 26% to 27% during the remainder of the year and our full year tax rate to be approximately 22% to 23%, which is 10 basis points lower than it would have been as a result of the new tax legislation.
This lower tax rate will generate an additional $8 million to $9 million of net income.
Moving to our cash flows.
Operating cash flows were $3.7 million for the quarter, which is lower than other quarters as a result of paying out annual bonuses.
Capital expenditures were $6.8 million, of which $5.2 million was used for the purchase of land in the Boston area for the construction of a new facility, which we have previously discussed.
We distributed $6.7 million to shareholders through dividend payments in the first quarter.
And today, we announced a quarterly dividend payment of $0.26 for the second quarter of 2018.
After dividends and annual bonuses, we ended the quarter with $179 million of cash and short-term investments.
We have $45 million authorized and available for repurchases under our current repurchase program.
As we look forward, our outlook reflects positive momentum in the business as well as the expected deceleration of the ongoing human factors assessment project in 2018.
We are improving our expectations for the full year 2018.
We now expect revenues before reimbursements to grow in the mid- to high single digits and EBITDA margin to decline by approximately 50 to 100 basis points as compared to 2017.
I will now turn the call over to Dr.
<UNK> <UNK>.
Thank you, Rich.
As our results indicate, Exponent is experiencing increased demand for its services as products and processes become more complex.
Clients are seeking integrated solutions for their most challenging safety, health, environmental and reliability issues.
Exponent's multidisciplinary capabilities and geographic reach have created a differentiated market offering.
Over the last 50-plus years, Exponent has hired and developed some of the brightest engineers and scientists.
We continued to broaden and deepen our capabilities by hiring the top Ph.
D.
students from the best universities as well as attracting recognized experts from industry, government and consulting firms.
This combination of new Ph.
s and mature experts allows us to leverage our experience and also remain as a cutting edge of technology.
Interdisciplinary teams are critical as we provide innovative solutions and are recognized as providing high value.
As I spend time with a broader set of clients and our internal industry teams, I see more and more opportunities for growth.
We work with over 2,000 clients per year, which provides us with tremendous opportunities for cross-selling.
I am working with our industry and client teams to capitalize on these opportunities.
We are focused on positioning the company for long-term success, delivering strong financial results and creating value for our stakeholders.
I am excited to lead Exponent as we engage the brightest scientists and engineers to empower clients with solutions for a safe, healthy, sustainable and technologically complex world.
I also want to take a moment to thank <UNK> for his tremendous leadership over the last 9 years and look forward to working with him in the years to come.
Thank you for joining today's call.
Operator, we are ready for questions.
So yes, so let me talk about Asia and Europe with regard to that.
So in Asia ---+ the primary opportunity we've had in Asia is that so much of what we ---+ in consumer products and consumer electronics in ---+ that we use in the United States are manufactured in Asia.
The companies that are selling the products are ---+ and designing the products are American companies, primarily, at least most of what we do is.
And we've been expanding that certainly rapidly.
It's still fairly small, but we think there's huge opportunity there.
Our offices ---+ we could get additional offices, and they can grow substantially because we're still pretty much in our infancy in what we do over there.
Today, it's a very small percentage of the company, but it's a very fast growing part of the company.
I think when I look at Europe, it's a little different.
I think that you know that we've had a very solid and growing part of our business in Europe that's been focused on the regulatory environment around chemicals, the food and chemical practice that we talk about.
The ---+ more than half of that is located in ---+ primarily in the U.K., a little bit on the Continental Europe and that continues to be a double-digit grower for us.
But what's ---+ what we're doing more recently is bringing our engineering services to Europe.
And I think that gives a lot of opportunity.
For many years, we didn't think that opportunity was so great because we always thought about litigation as being ---+ the reactive services as being stronger in America.
But the reality is, as we get into the new product development, things around consumer products, consumer electronics, medical devices, all of these kinds of products, it turns out that our clients are very interested in help in Europe and Asia as well as here in United States.
And so we see that as a great opportunity to expand our engineering into Europe.
So we've always had a little bit of difficult time addressing our overall ---+ how big the market is that we're in.
In part because our business has always been about creating new services that really didn't exist before we were there or existed in a very different way.
I've talked in the past about how, on the reactive side, how clients used to use university professors before companies like Exponent or formerly Failure Analysis Associates were created.
I think we're seeing the same kind of thing.
With the kind of quality of expertise we have to provide to some of the new industries, things involving consumer electronics and data products and so forth where we have a level of expertise given the quality of our staff that can assist major companies in a whole range of areas.
So expanding that more globally and getting out of the United States is a very big, we think, a very big opportunity for the firm.
Yes, so I would say that from the standpoint of kind of how far along we are on that, I would describe it as we are in our infancy with these efforts.
Consumer electronics is an area where we are probably the furthest along, although we're still very much in the beginning of this process.
But I do believe it's difficult to quantify at this time because there is a lot of increasing demand in that marketplace.
We believe we're doing a better job of capturing that demand and executing with regard to our offerings because of the sort of industry-team approach that we're using.
However, as we ---+ what we're learning is that for each industry where we deploy this, things are different, and there's not a one size fits all.
So I think what we're doing here is a learning process and one where we can take the best practices from, let's say, the consumer electronics side, apply those into, let's say, the medical device, I must say, the utilities side.
And we are in the process of doing that.
I feel as though we are learning a great deal from that process, and we are continuing to identify the ---+ really focus on identifying what the trends are in those industries and translating those trends into development of capabilities and actionable marketing opportunities for us.
So I am excited about that and do believe that it will ---+ we will be having an impact on the business.
Tough to ---+ very tough to quantify at this point.
Yes, so this initiative really is not exclusively but I would say, primarily oriented toward our proactive services.
Now bear in mind that part of the process here is, of course, that we leverage our reactive experience to build that proactive work.
So in terms of the client relationship, there certainly is an involvement of the reactive side.
But this is really a tool that we see primarily driving the proactive side of the business.
It's a side of the business where we need to be very intentional and proactive with regard to understanding those industry trends and identifying what those service offerings look like.
And it is very different, I believe, from the way we have historically gone to market on the reactive side.
So it's very much a focus to try to drive that proactive side of the business.
Yes, so we don't feel that we are capacity limited to respond to a client request.
I think that's one of the hallmarks of the company is that we are very responsive.
If a client comes along with something, we clearly respond.
Over time, obviously, you have to add more people, but we are a very responsive company.
And I sometimes do like to say that, while the work week might be theoretically 40 hours, it's typically not for consultants, it's longer than that, but it's certainly not 168 hours.
There are 168 hours in a week.
So in a short-term period, we can always spike up.
I think with regard to the likelihood of large projects, there are several things at play here.
We know over the last 9 years that I've been leading the company that, more quarters or not, we've had a large project, but we don't always have them.
I think there were some things that make large projects more likely, like the fact that issues around products going wrong in terms of how quickly you have to respond because of social media and everything, much faster than it used to be in the past.
The large companies are getting bigger, so their problems are bigger.
The number of ---+ the amount of product they have out there is huge.
So when you're responding in a reactive way, I think that that tends to drive bigger things.
The fact that the company, we, Exponent, has become more and more interdisciplinary, and we have more and more capability.
I think means that we can tackle broader issues.
And then finally, I think some of the reputation aspect of it, companies are really spending more on making sure they design their products, and the interaction between their customers and their products are really evaluated very carefully ahead of time.
And I think that leads to a lot of human factors opportunities, for example.
So I think all of those bode for more larger projects.
At the same time, you have to balance that.
The company is getting bigger.
So the projects have to get quite a bit bigger to continue to be at 5% of the firm.
But we certainly feel that we have a very special client base involving very high-performing companies that have the ---+ sometimes have the needs and the abilities to engage us on large projects.
So we think large projects will continue to be something that is important to us for a long time to come.
It's just we may get many more 1%, 2%, 3% revenue projects than we get right now, the more on/off 5% of revenue project.
So I think what we've done ---+ and Tim, just to give you kind of an idea about exactly kind of where we are on this.
We have contracts through much of the second quarter.
And so we have a pretty good idea that it will be in that 4% to 5% that we have indicated.
Of course, sometimes we have a contract and based on the data people are getting, they might stall or delay something or things can change, but we've got really pretty good visibility on what it is in the second quarter.
In the discussions with the clients, we know that they have plans to ramp this up in the third quarter, not third quarter going forward forever, but in the third quarter, they are looking to get quite a lot of data, which is why we think it will fall back again in the fourth quarter.
So our ---+ the outlook we're giving in third and fourth quarter is sort of based on our understanding of the discussions we've had with the client, which have been extensive, but they're not contracts.
Yes, and as far as scale, I would say that, at this point in time, probably don't expect it to be quite as much as in the first quarter.
Something relative to what we did at ---+ the third quarter was very strong last year on this study work, and it will be somewhere in between this 4% or 5% and really the 7% or 8% that <UNK> was talking about in there.
And as we look out to beyond that, I think our feeling is that this particular area that ---+ or particular project that we're working on, we know eventually it will step down and eventually tail off.
We think there are other ---+ many other opportunities out there for this client and the broader consumer products industry.
But we do expect that there will be a step down.
Is that going to be 3%, 4% or 5%.
We're not certain at this point in time.
I think there's a very good chance it won't run to a close in next year.
But I don't think it will be in the 5% area.
I think it may be a large project but not in the 3% to 5% where we've typically called out projects that are at least that size that may fall below that.
So it's absolutely an opportunity.
I mean, not commenting on any particular event, but recently there has been very high-profile incidents involving driver-assistance technologies, involving autonomous vehicles, and that is driving a lot of conversation in the client community.
It's driving conversation with the regulators, and it's driving conversation across all of those stakeholders.
And we are finding ---+ we are part of those conversations.
I mean, we're finding that it is raising questions around how the ---+ how policy should be rolled out.
What are the implications with regard to the safety driver.
What are the implications with regard to our clients\xe2\x80\x99 ability to test their vehicles on public roadways.
And what are the ways in which the manufacturer community is going to be able to prove out the safety of their technologies.
And these questions all fall extremely well within our real house in terms of our interdisciplinary capabilities.
We have the regulatory piece of that in terms of expertise.
We have the sensor-related expertise.
We have the accident reconstruction-related expertise, et cetera.
And so, yes, I mean, as a general proposition, these kinds of events, while incredibly unfortunate, do drive activity that is helpful to our business.
So I think it has a lot to do with the broader market.
If you take away ---+ if you do the comparison of what the big project was ---+ a large project was in the first quarter of 2018 versus the first quarter of 2017, I think Rich mentioned that was a 2.5% difference in the size of that project.
And the growth rate ---+ the growth was a little shy of 13%.
So I think you can see that we feel really quite good about the underlying business.
The underlying business is, I think, growing well.
And I think we have, certainly, a degree of confidence around the momentum we have there.
Yes, just a follow-up on that.
I know sometimes we almost talk too much about the big project, but actually, really, this quarter, the story is not the big project, it is a part of the story, but it's not the focus of the story.
Yes.
Look, our expectation coming into the first quarter was that, first of all, the first quarter last year ---+ if you were to compare the 4 quarters was, on a relative basis, was the weakest of the 4 quarters that we had.
So with the momentum that we had coming through the back half of last year, our expectation was, as we entered 2018, was that the first quarter was going to be, on a year-over-year basis comparison, be our strongest quarter.
We expected that to be high single to low double digit, sort of high ---+ that range up in there.
We clearly ended up with the large human factors project being a couple of percent larger than we had expected coming into the quarter.
We thought it would be ---+ for the year, we knew it was going to be stepping down, but we knew the first quarter there, even, was going to be a little bit stronger.
So we had some of that built-in.
We did get a fair share of the beat on expectations out of the large project, and we ended up carrying good momentum on the underlying business through there.
So it was shared relative to what we had going on between the large projects and the underlying business.
Yes, a large part of the margin is driven by the utilization.
You can go and add a bunch of staff ---+ huge amount of staff and not have them utilized and get your revenue number but kill your margins there.
So what we've indicated is that we think that the margins will be down that 50 to 100 basis points, that will be driven out of the fact that we believe that we're going to have 1% to 1.5% decline in our utilization that would play out there.
So that ---+ we did end up with a little over cost like what you saw in the first quarter here because we had a managers' meeting last year.
We will end up having a principals' meeting in the ---+ in between the third and fourth quarter of this year, which will rise those quarters a little bit but not as much as the managers' meeting we had a year ago in the first and second quarter.
So those are playing a few, call it, 10 basis points of swinger into it, but it really is driven out of that utilization expectation that it will be down 1 to 1.5 percentage points.
Let me ---+ I'll just start off briefly and then maybe <UNK> or <UNK> want to add on.
But I don't see any projects today that are going to fuel that 4% or 5% of revenues in a quarter in the near term.
I don't see that changing.
I see lots of other positives going on in the organization.
I think what we had going on in the first quarter here on a year-over-year basis, the ---+ you're observant that there are a lot of activity going on in the world still in the reactive side.
And we're seeing that in our business.
Our reactive business was growing in line with the proactive business.
So pretty robustly.
And that is quite diverse.
It's everything from natural disasters that are leading to floods and fires.
It is construction issues on bridge collapses and buildings and other things that are around the world.
We've got automobile accidents.
It's across-the-board that we continue to see these activities.
The products and processes out there are continuing to get more and more complex, which drives many challenges to reliability and really the question of what happens.
So those questions, just like 50 years ago when ---+ plus years ago that this firm was founded, still remain out there, what happened.
And we think those will continue and become more complex as technology continues to get more complex over time.
So I think that what is driving that really is the desire for these clients to manage these events in the best possible way.
I mean, one of the things that really drives this particular part of our business is the desire for these clients to manage very well the potential damage to their reputations that arises as a consequence of these recalls.
And I think that by engaging us earlier in that process, we are able to engage and get to the bottom of issues in terms of the root cause of those technically.
And then also be able to advise these clients, once the root cause is sort of ferreted out, assist them with the process of advising them through the process, with regard ---+ we have ---+ as a company, we have an outstanding reputation with the various regulatory authorities.
So you talk about the National Highway Traffic Safety Administration, you talk about the Consumer Product Safety Commission, we are known within those entities very positively, and we are sought out by the client community for those kinds of relationships but also because of the technical skill that we bring to the root cause analysis.
So I think that those 2 things plus the clients' desire to manage their reputation as best they can in an age of 24-hour news cycles and social media, those are the things that drive them to us.
No, I think actually what happened is, these things have clearly hit the C-suite, but the C-suite is changing the culture of those firms.
And I think it's pretty well understood up and down the organization that these issues need to be addressed and pretty comprehensively.
We've also come through a series of very big events.
You can think about the Samsung Note 7 recall, you can think about GM ignition switch.
There's a variety of things that got huge publicity in this country, not just in social media but in Congress and so on.
And I think that there's been some cultural shift in the way in which, as <UNK> described, companies want to deal with us.
Yes.
Well, I mean, I think ---+ I certainly think that when new infrastructure is being built, it leads to a fair amount of work for us because, while we don't design them, new infrastructure projects or large ones invariably have their own problems, failures in them.
They certainly have delays and cost overruns, and so we very much get involved in that.
The reality is that for all that is said about deteriorating infrastructure, deteriorating infrastructure is actually not really killing very many people, and I know it's kind of cruel to say it, but that's sort of the reality.
So it's much more a ---+ just a general potholes and various roads having limited capability with regard to much load they can carry.
So while this infrastructure is deteriorating, we don't get a lot of work out of that deterioration.
We get work when there is really a replacement project.
And yes, I would say the one area that we have seen work on some infrastructure is really in the gas distribution area that's going on, but not ---+ all of those are not necessarily related to an aging infrastructure but has to do with an increased level of construction activity and other activities that are around ---+ that are much closer to where we had thought we could bury pipelines and have those structures over time.
