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Operator: Good afternoon and welcome to the Exponent, Inc. Quarter One 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos. Please go ahead.

Joni Konstantelos: Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent’s first quarter 2024 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 investors.exponent.com. 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 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, Exponent’s 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 Exponent’s periodic SEC filings, including those factors discussed under the caption Risk Factor in Exponent’s most recent Form 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise. And now, I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine?

Catherine Corrigan: Thank you, Joni and thank you everyone for joining us today. I will start off by reviewing our first quarter 2024 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’s unparalleled reputation and decades-long expertise in failure analysis drove better than expected results in the first quarter. Despite a slow start, our reactive business grew in the mid-teens, driven by robust failure analysis and dispute-related work, spanning a wide spectrum of industries. Partway through the quarter, we experienced accelerated activity across a number of substantial engagements, contributing to our strong results in the quarter.

These matters required active, real-time regulatory and safety-related insights to inform decision-making, and our exceptionally well-qualified team surged to meet time-sensitive regulatory enforcement deadlines. While many of these matters will continue in the second quarter, we do not expect the same level of activity. In our proactive business, excluding consumer electronics, which continues to experience cyclical impacts, we achieved year-over-year growth, driven by strong activity in the transportation and utilities sectors. Turning to our engagements in more detail, in our reactive services within transportation, we continue to see robust activity in automotive product liability and regulatory matters; for example, evaluating the performance and safety implications of advanced driver assistance technologies and battery systems.

In life sciences, our experts are advising clients on the root causes of safety concerns related to medical devices and diagnostics, leveraging multidisciplinary approaches that include expertise in materials science, manufacturing, human factors and health sciences. In the energy industry, our failure analysis expertise continues to be leveraged across a range of projects from traditional oil and gas to renewables. More broadly, we are playing an increasing role in helping clients navigate the challenges of an ongoing and ever-evolving energy transition. Clients around the world rely on Exponent in renewables disputes involving wind, solar and large-scale energy storage, including technology performance challenges and life expectancy of infrastructure investments.

During the quarter, we did see ongoing budget constraints with some clients, particularly in the chemical sector. We continue to see some of these clients causing litigation work in the near term. However, we did see an uptick in momentum during the quarter, and we expect that activity to return to normalized levels. Within our proactive services, we saw strong demand in transportation, evaluating vehicle emissions issues, as well as in the utility sector, advising clients on asset integrity and risk mitigation. We continue to see strong demand in the chemical sector for our regulatory work, evaluating the impacts of chemicals on human health and the environment. Headwinds in the consumer electronics sector persisted due in part to the timing of product life cycles, as well as broader impacts in the industry and as a result, human subject research engagements decreased year-over-year.

Excluding consumer electronics, proactive revenues were up low single digits in the quarter. Our ongoing efforts to align resources with demand, coupled with our strategic investments in the growth areas of the business, contributed to 75% utilization in the first quarter. I am grateful to our world-class team, which responded with agility to the surge in client demand that we experienced in the quarter. As always, we will continue to closely monitor the market and focus on developing our top-tier talent while broadening our capabilities and continuously adapting to an evolving landscape. Turning to our segments, Exponent’s engineering and other scientific segment represented 84% of revenues before reimbursements in the first quarter. Revenues before reimbursements in this segment increased 8% for the first quarter, driven by demand for Exponent services across the energy, vehicle, and medical device sectors.

Exponent’s environmental and health segment represented 16% of revenues before reimbursements in the first quarter. Revenues before reimbursements in this segment increased 1% for the first quarter. Work in this sector was primarily driven by regulatory engagements for the chemicals industry. Looking ahead, we have raised our revenue and margin expectations for the full year 2024. However, we still face consumer electronics and macro headwinds, as well as a high hurdle rate for year-over-year comparisons due to the significant growth of our reactive business in 2023. Over the last few quarters, we’ve demonstrated the commitment and agility needed to adapt to challenging dynamics in both our consulting and talent marketplaces. Our first quarter results reflect this agility, as well as the strength of our fundamental market drivers.

In this dynamic environment, we maintain an emphasis on advancing new business development, strategically investing in growth opportunities, while aligning our resources and costs with the anticipated demand. As we look to the future, our value proposition is as strong as ever, and I am confident in our ability to accelerate and drive long-term revenue growth in the high single to low double digits. I’ll now turn the call over to Rich to provide more detail on our first quarter results, as well as discuss our outlook for the second quarter and the full year 2024.

Rich Schlenker: 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 first quarter of 2024, total revenues increased 3.3% to $144.9 million, and revenues before reimbursements, or net revenues as I will refer to them from here on, increased 6.6% to $137.2 million as compared to the same period in 2023. Net income for the first quarter increased to $30.1 million or $0.59 per diluted share, as compared to $29.1 million, or $0.56 per diluted share in the prior year period. The realized tax benefit associated with accounting for share-based awards in the first quarter of 2024 was $900,000 or $0.02 per diluted share, as compared to $3.6 million, or $0.07 per diluted share in the first quarter of 2023.

Inclusive of the tax benefit for share-based awards, Exponent’s consolidated tax rate was 25.4% in the first quarter of 2024, as compared to 18% for the same period in 2023. EBITDA for the quarter increased 12.2% to $40.1 million, producing a margin of 29.2% of net revenues, as compared to $35.8 million, or 27.8% of net revenues in the same period of 2023. This year-over-year increase in margins was driven by higher revenues and an increase in utilization during the first quarter of 2024. Fillable hours in the first quarter were approximately 392,000, an increase of 2% year-over-year. The average technical full-time equivalent employees in the first quarter were 1,003, which is a decrease of 5% as compared to one year ago. Sequentially, full-time equivalent employees decreased 1% as compared to the fourth quarter of 2023, as we strategically aligned our resources with demand.

Utilization in the first quarter was 75%, up from 70% in the same period of 2023. The realized rate increase was approximately 5% for the first quarter of 2024, as compared to the same period a year ago. In the first quarter, after adjusting for gains and losses in deferred compensation expense, compensation expense increased 4.7%. Included in total compensation expense is a gain in deferred compensation of $6.3 million, as compared to a gain of $3.9 million in the same period of 2023. As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line. Stock-based compensation expense in the first quarter was $7.3 million, as compared to $7.1 million in the prior year period. Other operating expenses in the first quarter were up 10.1% to $10.5 million, driven primarily by increased engagement at our offices and investments in our infrastructure.

Included in other operating expenses is depreciation and amortization expense of $2.3 million for the first quarter. D&A expenses declined 3.5% to $5.6 million for the first quarter. This decrease was primarily due to a reduction in use of outsourced personnel and a decrease in recruiting expenses. Interest income increased to $2.6 million for the first quarter, driven by an increase in interest rates. Miscellaneous income, excluding the deferred compensation gain, was approximately $800,000 for the first quarter. During the quarter, capital expenditures were $1.5 million. We distributed $15.6 million to shareholders through dividend payments and repurchased $5.5 million of common stock at an average price of $77.13. Turning to our outlook, for the second quarter, as compared to one year prior, we expect revenues before reimbursements to be flat to up in the low single digits, and EBITDA to be 27.25% to 28.25% of revenues before reimbursements.

For the fiscal year 2024, we are increasing our revenue and margin guidance. We expect revenues before reimbursements to grow in the low single digits and EBITDA to be 26.25% to 27% of revenues before reimbursements. We expect the average technical full-time equivalent employees to decline sequentially 1% to 1.5% in the second quarter of 2024, as we recently completed our annual performance review process. As a result, average FTEs for the second quarter will be down approximately 8% year-over-year. We expect sequential headcount growth in the back half of the year and as a result, our full-year average full-time equivalents will be down approximately 5% to 6% on a year-over-year basis. We expect utilization in the second quarter to be 71% to 73% as compared to 69.4% in the same quarter last year.

We expect the full-year utilization to be 69.5% to 71.5% as compared to 69.9% in 2023. We still believe our long-term target of sustained mid-70s utilization is achievable as we continue to strategically manage headcount and balance utilization based on market demand. We expect our year-over-year realized rate increase to be 4% to 4.5% for the second quarter and full year. For the second quarter of 2024, we expect stock-based compensation to be $5.3 million to $5.6 million. For the full year of 2024, we expect stock-based compensation to be $22.5 million to $23.3 million. For the second quarter, we expect other operating expenses to be $11.3 million to $11.8 million. For the full year, we expect other operating expenses to be $46.5 million to $47.5 million.

It should be noted that we expect that during the second quarter, we are going to take the opportunity to early exercise an option to extend our lease for our test and engineering center in Phoenix, Arizona. Although our current lease does not expire until 2028, we want to lock in the pricing at this time. Although we will not pay any higher rent until 2028, the new lease accounting rules require us to recalculate the rent expense for the length of the new lease period. This will result in an immediate increase in our non-cash rent expense of $400,000 during Q2 of 2024 and an increase of $1.1 million during each of Q3 and Q4 of 2024. We are very excited to secure this facility as we believe it will continue to be an integral part of our future growth.

For the second quarter, we expect G&A expenses to be $6.5 million to $7 million. For the full year, we expect G&A expenses to be $24 million to $25 million. We expect interest income to be $1.8 million to $2 million per quarter for the remainder of 2024. In addition, we anticipate miscellaneous income to be approximately $700,000 to $800,000 for the second quarter of 2024. For the full year, we expect miscellaneous income to be approximately $2 million to $2.2 million. This includes an expected decrease in rental income of $400,000 in Q3 and $600,000 in Q4 due to the loss of a tenant in Menlo Park, California, where we own our building. For the remainder of 2024, we do not expect any additional tax benefit associated with share-based awards.

For the second quarter of 2024, we expect our tax rate to be approximately 28% as compared to 29% in the same quarter one year ago. For the full year 2024, the tax rate is expected to be 27.2% to 27.3% as compared to 26.2% in 2023. The increase in tax rate is due to less tax benefit from share-based awards in the first quarter. In closing, we are pleased to have delivered a profitable growth. I will now turn the call back to Catherine for closing remarks.

Catherine Corrigan: Thank you, Rich. I am pleased with our performance in the first quarter and am encouraged by the market signals we are seeing, particularly in the reactive space. Our roots in failure analysis continue to strengthen and grow, fortifying our leadership position as we branch into new, untapped areas around the product’s lifecycle. As industries transform at breakneck speed, I am confident in our ability to capitalize on these strong market drivers to accelerate our growth. Operator, we are now ready for questions.

Operator: [Operator instructions] The first question comes from Andrew Nicholas with William Blair. Please go ahead.

Daniel Maxwell: Hi. Good afternoon. This is Dan Maxwell on for Andrew today. Just to start, I know you mentioned and called out in the press release that January got off to a bit of a slow start, but any more detail you can give on how demand progressed over the course of the quarter, maybe on a month-by-month basis? And then on top of that, anything you can call out since the end of the quarter and if those trends have continued?

Rich Schlenker: Yeah. So, we definitely felt things being slow in coming around after the New Year, and that continued in through the first four weeks of the quarter. What we did, we expected at least the feedback from our business units, things would pick up some, but what we saw beginning in February was a real step up in a number of our engagements, especially in the reactive area. And as Catherine noted in her comments, these were litigation matters that really required a lot of attention, as well as regulatory investigations that a number of our clients were going through. So, we were able to turn those up. What we saw was those sort of peak in the late February, early March. We know that a number of those matters, either the trial or arbitration has occurred, or they’ve moved into a later phase of the regulatory investigation and as such, the level of activity has stepped down or will be stepping down during the second quarter and that is what is reflected in our guidance.

Still stronger than where we were feeling things were when we announced yearend results and provided our guidance for the year. So, very positive on that, but not quite yet seeing that sustained level that we saw the surge be in the February, early March time.

Daniel Maxwell: Great. Very helpful. Thanks, Rich. And just for my follow-up, would you say that your visibility into the demand pipeline has improved at all from last quarter’s sort of uncertainty when you look at the second quarter and into the back half of the year?

Catherine Corrigan: Yeah, thanks, Dan. Look, we still have some degree of uncertainty as we look out later in the year. We’re pleased with where we are vis à vis our various client relationships in consumer electronics, for example, and our discussions with those clients are ongoing. But oftentimes, depending on the time in the product life cycle, they are still looking to gauge what the data look like that we are collecting for them before they can actually really develop their roadmap into the future and so, part of what’s reflected in our guidance is a continuing level of uncertainty around that as we get out further into Q3 and Q4, especially in the electronics sector.

Rich Schlenker: I think it’s — if I could add something there. I just think that it’s important that everybody or that we all understand. I think that Exponent, while we are heavily invested, 60% of our work is in the reactive area. A lot of those matters come in very quickly and it could end at any time, but over the decades, we have demonstrated that our portfolio of those projects, thousands of them, we do about 10,000 projects a year, provide across almost every industry who manufactures or processes something is a client and somewhere around 2,000 different clients a year into the organization. That is what has provided this portfolio that has allowed us to be consistent in our ability to predict the trend, the direction that our business and the demand in the marketplace is going.

So, I think we’ve demonstrated over a long period of time that that has worked out well. The last couple of quarters, we’ve seen more variability in that, but I do believe fundamentally the model is the same, a very diverse client base, a very diverse set of services and a pretty resilient demand environment where clients are focused on the issues of safety, health and the environment as they continue to innovate.

Daniel Maxwell: Thanks again, and congrats on the strong quarter.

Operator: The next question comes from Josh Chan with UBS. Please go ahead.

Josh Chan: Hi. Good afternoon. Catherine and Rich. Congrats on the good quarter. Yeah, on the reactive business, could you just talk about was it really a few cases that drove the surprise this quarter, or if it was more than just a few cases, then what was the theme that you noticed about the unexpected uptick in the quarter?

Catherine Corrigan: Thanks, Josh. It was across a spectrum. It wasn’t one particular theme necessarily and Rich highlighted that a little bit, but we were seeing it in the energy sector in particular around some of the larger disputes really getting into a ramped-up phase around delivery of expert reports and actual testimony activity. Now these reactive engagements can often be characterized by a lot of ebb and flow, right? And so we had a lot of flow across a number of them sort of simultaneously in that February and March timeframe, but in addition to the dispute side, there was a theme around the sort of recall and regulatory action side of the equation. This is heading more over into the vehicle area as well as the life sciences and particularly medical devices and diagnostics arena.

As medical devices have innovated and become more complex, the FDA as the watchdog, that’s an agency that can become active almost at any moment. Our clients don’t necessarily see it coming. We don’t necessarily see it coming. But the good news from my perspective is that when these clients were tapped on the shoulder by those regulators, we were their first call and we were positioned to deliver for them the kinds of insights they needed to be able to go to the regulators and present their findings and work through that decision-making process. I was really proud of our teams to be able to do that. So it wasn’t one big matter. We’ll often talk about a big matter coming off. This was a collection of those. They were larger than average for sure, but there was sort of a simultaneous intensification of that activity.

Rich Schlenker: Yeah. In the reactive area, I think that we’re talking about a group of projects that were a 0.5% to maybe up to 1.5% of our revenues on individual projects, but it was across a diverse set of clients and industries and services as Catherine has described, which is probably the most encouraging thing that, again, we’ve continued to see over the last year and a half here is that the demand for our services in this reactive area that we’ve been in for over five decades is stronger than ever and I think that’s a very promising message for the future.

Josh Chan: That’s really helpful color. Thank you both for that. So I think on the reactive side, you previously expected that business to be flat for the year. Obviously, Q1 was better, but does the full year guidance now incorporate a better outlook for the rest of the year, too? Or is it just Q1 that was better?

Rich Schlenker: No, it does include some positive step forward in that area, but not quite at the level that we experienced there in the first quarter. Additionally, the hurdle that we are overcoming of how strong the demand was last year in the reactive area was that that area grew 20% plus in Q2 and Q3 on a year-over-year basis in ’23 for Q2 and Q3. So that’s a little higher even hurdle than we had here in Q1 and so we’ve got a little bit of that as well that might be dampening the year-over-year growth, but we still are very positive about the market overall.

Catherine Corrigan: Well, and I would add, too, one of the things that we demonstrated in that first quarter is that we’re positioned to surge in response to the demand. And this is traditionally what happens in our reactive portfolio with these ebbs and flows. And so as we’ve aligned our resources with demand, we’re ensuring that we have the capacity to be able to surge. Our teams culturally are ready to do that. They’re eager to do that when the demand comes through. So we’ll be ready for any of those ebbs and flows that come in the next few quarters.

Josh Chan: That sounds great. And then if I can ask a question about margins. Your full-year margin guide is lower than what you achieved in Q1. Is that all because of revenue expectations? Is there anything else that we should think about there in terms of the margin cadence?

Rich Schlenker: Yeah. So a couple of things. One, we are not expecting the utilization to be quite at the level that it was in Q1. For one, the reason that we just explained about that demand environment, but also that utilizations do step down just in the cyclical times of the year. So when we have more vacations and holidays, which occur in late second quarter, end of third quarter for the summer, and then our holidays that are around the end of the year. So those tend to be lower utilization quarters for us. So margins do step down in that period of time historically. And as I had outlined, we do have some increase in the expenses there related to the amortization of the rent expense.

Josh Chan: That’s great. Thank you for the color and congrats on the good quarter.

Operator: [Operator instructions] The next question comes from Tobey Sommer with Truist Securities. Please go ahead.

Jack Wilson: Yeah, good evening. This is Jack Wilson on for Toby. Maybe just start out with what’s your hiring posture going into sort of the back half of the year and sort of your views on the availability of talent in the market right now?

Catherine Corrigan: Yeah, thanks, Jack. Our human capital obviously is the driving force behind the growth. And as Rich alluded to in his comments, we expect in the back half of the year that we will be sequentially increasing our headcount. That has been stepping down over the last several quarters as we have adjusted our model to drive that utilization to the right level, but going forward, our growth engine is in our people. It’s in the hiring of that exceptional talent and the development of that exceptional talent. And so, we are working with every one of our business unit leaders to really ensure that we are executing and developing the right recruiting plans based on the demand pull up the market, in very specific areas of places where we truly are developing new capabilities and need to fill gaps in that talent.

So we’re doing that strategically and expect to increase that headcount sequentially. We will still end, we expect to end with a year-over-year reduction of about 5% in our headcount, but sequentially we will be adding headcount. In terms of the environment, we have what I believe is an exceptional employee value proposition. We hire the best and the brightest from doctoral programs and graduate programs in engineering science around the United States and as well as globally and, we feel, I’m very encouraged by the landscape right now in terms of our ability to compete because we do compete with our clients. So it’s always a challenging environment because engineering and scientific expertise is always in demand. But I see ourselves as well positioned to accelerate our recruiting as we see the demand pull grow in the marketplace.

Rich Schlenker: Jeff, just one clarification. When I spoke about the full year average FTEs, it is across all four periods, the average there. So obviously we were down 5% in the first quarter, we’ll have approximately 8% down in the second. Then things should improve on a year-over-year basis. They will still be down, but be improving in the back half of the year being at a lower year-over-year decline and that should come out at, an average of 5% to 6% for the full year.

Jack Wilson: Okay. Thank you for that color there. And then are there any sort of particular regulations you’re tracking sort of in light of it being election year or that your clients are tracking, especially in the energy space that we should be aware of?

Catherine Corrigan: Yeah, it’s always in an election year, folks raise questions around the regulatory environment, how will that impact our outlook and various things of that nature. And, we certainly track the regulatory frameworks, whether that’s at the state level, which drives a lot of our work, as well as at the national level and the global level, because a lot of our chemical regulatory work, for example, is global. So we’re looking at all of those frameworks. We are not — we haven’t historically seen significant swings in one direction or another, whether we have sort of a more democratic administration, a more regulation-friendly administration or more of an anti-regulatory administration. In a scenario where there’s less appetite for regulation, we’ll often see, maybe we’re building more pipelines and there’s more infrastructure and we’ll get involved in that kind of work when those disputes arise and also when safety regulations are the bar is raised, which we see continuously over time.

Clearly, that’s good for us from the standpoint of our disputes work, from the standpoint of our regulatory work. So, while we’re certainly paying attention to this, I am not anticipating that we will have any real material shifts, based simply on a change of administration in the near term.

Jack Wilson: Okay. Thank you and just one quick one. I might have missed it, but any change to sort of the full year CapEx expectation?

Rich Schlenker: No. While the first quarter was lower than the sort of average there, we still should be expecting CapEx to be in that give or take, $15 million range.

Jack Wilson: Okay. Thank you very much. Congratulations on the strong results.

Operator: This concludes our question-and-answer session, as well as conference. Thank you for attending today’s presentation. You may now disconnect.