Q1 2024 Exponent Inc Earnings Call

Participants

Joni Konstantelos

Catherine Corrigan; President, Chief Executive Officer, Director; Exponent Inc

Richard Schlenker; Chief Financial Officer, Executive Vice President, Corporate Secretary; Exponent Inc

Dan Maxwell; Analyst; William Blair

Josh Chan; Analyst; UBS Investment Bank

Jack Willson; Analyst; Truist Securities

Presentation

Operator

Good day and welcome to the Exponent, Incorporated 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 Factors 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 Actuant 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, Jooni, 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 pursuit 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 surge 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 facing clients on the root causes of safety concerns related to medical devices and diagnostics, leveraging multidisciplinary approaches that include expertise in material 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 chemicals sector. We continue to see some of these clients pausing 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 utilities 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'm 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's services across the energy, vehicle and medical device sectors. Exponent's environmental and health segments 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 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.

Richard 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 hereon 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 this in the same period of 2023.
This year-over-year increase in margins was driven by higher revenues and in and an increase in utilization during the first quarter of 2024. Billable hours in the first quarter were approximately $392,000, an increase of 2% year over year. The average technical full-time equivalent employees of the first quarter were 1,003, which is increase -- 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 a lot 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, depreciation and amortization expense of $2.3 million for the first first quarter.
G&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 one year prior, we see that we expect revenues before reimbursements to be flat to up in the low single digits and EBITDA to be 27.25%. It's 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% have revenues before reimbursements. We expect the average term to go full-time equivalent employees declined 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 account 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 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 of option to extend our lease for our test and engineering center in Phoenix, Arizona.
Although our current lease does not expire until 2028, who wants 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, 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 and expect 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 buildings. 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 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 I'm encouraged by the market signals we are seeing, particularly in the reactive space.
Our recent failure analysis continue to strengthen and grow fortifying our leadership position as we branch into new untapped areas around the product lifecycle as industry 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.

Question and Answer Session

Operator

Thank you. We will now begin the question-and-answer session.(Operator Instructions)
Andrew Nicholas, William Blair.

Dan 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?

Richard 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 would two 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 our 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 in ER in the US during the second quarter.
And that is what is reflected in our guidance, still stronger than where we where we were feeling things where when we announced year-end results and provided our guidance for the year. So very positive on that, but not quite yet in that sustained level that we saw the surge be in the February, early March time.

Dan 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

Yes. Thanks Dan, look, we still have some degree of uncertainty as we look out later in the year. We're we're pleased with where we are Visa, the our various client relationships in consumer electronics, for example, and our discussions with those clients are ongoing but oftentimes, depending on the time and the product lifecycle, you know, 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.

Richard Schlenker

I think it's a big It adds something there. I just think that it's important that I feel everybody or that we all understand. I think that Exponent well, we are heavily invested 60% of our work is in the reactive area. A lot of those matters come in very quickly and 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, applied it across almost every industry who manufactures or processes. Something is a is a client in Europe, somewhere around 2000 different clients a year into the organization. That is what is provided this portfolio that has allowed us to be consistent in our 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.

Dan Maxwell

Great. Thanks again. Congrats on the strong quarter.

Operator

Josh Chan, UBS.

Josh Chan

Please go ahead and good afternoon, Catherine wrench, congrats on a good quarter. From things you. Yes. On the on the reactive business, could you just talk about was it really a few cases that drove the surprise this quarter are if it was more than just a few cases. Then then what was the theme that you noticed about the unexpected uptick in the quarter?

Catherine Corrigan

Yeah. Thanks, Josh. It was it was across a spectrum and 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 some of the larger disputes really getting into a ramped up phase around delivery of expert reports than actual testimony activity, even though these reactive engagements can often be characterized by a lot of ebbs and flows, 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 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 into the vehicle area as well as the life sciences and particularly medical devices and diagnostics arena. And you know, as medical devices have innovated and become more complex, the FCA as the watchdogs, and 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. And 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 coming off.
This was that this was a collection of those. They were larger than average for sure. But there was sort of a simultaneous intensification of that activity.

Richard Schlenker

In the rective area, I think the feel though that we're talking about a group of projects that were 0.5% to the maybe even 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, previously, we 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 was better?

Jack Willson

But no, it does include some positive step forward in that area. It, but at a 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 thought in the reactive area was that that area grew 20%- plus in Q2 and Q3 on a year-over-year basis in '23 and yet for Q2 and Q3. So we are 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

And I would add to that one of the things that we demonstrated in that first quarter is that we're positioned to research in response to the demand. And this is traditionally what happens in our reactive portfolio with these ebbs and flows. And so what we know 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 when the demand comes through. So we'll be ready and 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 and your full year margin guide is lower than what you achieved in Q1. Is that all because of revenue expectations and anything else that we should think about there in terms of the margin cadence?

Richard Schlenker

Yeah so a couple of things. One, we are not expecting 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 utilization's to step down just in the cyclical times of the years when we have more vacations and holidays, which occur in late second quarter into the third quarter for the summer and then our holidays that are around the at the end of the year.
So those tend to be lower utilization quarters for us. And 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. That's great.

Josh Chan

Thank you for the color, and congrats on the good quarter.

Richard Schlenker

Thank you.

Catherine Corrigan

Thanks, Dan.

Operator

Tobey Sommer, Truist Securities.
Yes, good evening.

Jack Willson

This is Jack willson on for Tobeyand Andre. Maybe just start out with sort of what's your what's your hiring posture going into sort of the back half of the year and sort of your on your views on the day of the availability of talent in the market right now?

Catherine Corrigan

Yes. Thanks, Jack. You know, 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, 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 and 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 a need to fill gaps in that talent.
So we're doing that strategically and expect to do to increase that headcount sequentially. We will still and we expect to end with a year over year it reduction of about 5% in our headcount. But sequentially we will be adding headcount in terms of the environment and we have what I believe is an exceptional employee value proposition.
We'd 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 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 for growth in the marketplace drove.

Richard Schlenker

The one one clarification on the 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 was approximately 8% down in the second, then things should improve on a year-over-year basis. There 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 Willson

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

Catherine Corrigan

Yeah, it's always in an election year, some folks raise questions around the regulatory environment. How will that impact our outlook and various things of that nature. And we certainly frac on the regulatory frameworks, whether that's at the state level, which drives a lot of our work as well as at the on 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 and we are not I'm not we haven't historically seen significant swings in one direction or another, whether we have sort of a more democratic administration and 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, you know, maybe we're building more pipelines and there's more infrastructure and we will get involved in those than that kind of work when those disputes arise. And also when safety regulations are the virus 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 shift and we feel based simply on a change of administration in the near term.

Jack Willson

Okay, thank you. And just one quick one. I might have missed it, but any change to sort of the full year CapEx dictation?

Richard Schlenker

No, I we feel 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.

Jack Willson

Okay. Thank you very much and congratulations on the strong results (multiple speakers)

Operator

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