Good day, and welcome to the Exponent Third Quarter Fiscal Year 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos of Investor Relations. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's third quarter 2023 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.expone.com/investors. 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 and 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?

Thank you, Joni, and thank you, everyone, for joining us today. I will start off by reviewing our third quarter 2023 business performance. Rich will then provide a more detailed review of our financial results and outlook, and we will now open the call for questions. During the third quarter, we once again delivered broad-based revenue growth and earnings with our diversified portfolio of services supporting growth across nearly all industries we serve. The deliberate investments we've made to expand capabilities and stay ahead of the pace of innovation continue to pay off. Our ability to anticipate client needs throughout the product or assets or technology life cycle is and will continue to be a significant differentiator for Exponent. Of course, uncertainty exists in the broader markets we serve, but our exceptional team of integrated experts and our expansive capabilities provide us the ability to remain nimble and adapt our business to align with these dynamic market trends. Turning to our third quarter in a bit more detail. Growth in the quarter was driven by continued strong demand for our reactive services. Our proactive engagements were driven by increased demand in the chemicals and life sciences sectors, offset by continued moderation in the consumer electronics sector. Overall, I am pleased with the strength we are seeing across the majority of the business. Within our reactive services, we continue to see robust demand for domestic and international dispute-related offerings involving large capital projects in the energy, utilities, and transportation sectors spanning various geographic regions. Additionally, consumer and automotive product liability and recall-related work increased in the quarter. Our proactive engagements were driven by increased demand for regulatory consulting work in the chemicals industry and engagements in the life sciences sector. This was offset by ongoing moderation in the consumer electronics industry due in part to the timing of product life cycles as well as ongoing macroeconomic headwinds. As a result, we saw declines in data collection and human subject research engagements as well as product development consulting. While we do expect this moderation to continue, we are optimistic about the long-term market drivers in this sector, and we remain well-positioned to support our clients as these challenges begin to abate in 2024. With regard to our segments, Exponent's engineering and other scientific segment represented 83% of our net revenues in the third quarter, increasing 8% in the third quarter and 10% for the first three quarters compared to the prior year. Growth in the quarter was driven by strong demand for Exponent services across the transportation, energy, and construction sectors. Exponent's Environmental & Health segment represented 17% of our net revenues in the third quarter, increasing 13% in the third quarter and 7% for the first three quarters compared to the prior year. Evolving regulatory requirements drove increased safety-related engagements, evaluating the impacts of chemicals on human health and the environment, and we also saw increased activity in the life sciences sector. As we close out the year, we remain focused on excellence and execution and expanding our differentiated capabilities to meet the dynamic needs of our clients. The investments I mentioned earlier will continue to be a priority to drive organic growth and development within Exponent and to foster the essential trust our clients place in our team of experts to address their most complex needs. Further, managing resources in line with the growth of the business remains top of mind. To that end, as we expected, full-time equivalent employees in the third quarter decreased 2.5% compared to the second quarter as we continue to strategically realign our resources with demand across the business. We are taking a two-pronged approach to ensuring our headcount is aligned with not only current demand but also with the longer-term demand and opportunities we are seeing. First, we are focused on recruiting in areas of the business where resources are constrained, but where we see opportunity to meet current and future market demand. Second, we continue to focus on performance management to ensure that our retained consultants are on a strong development path that will contribute to the future growth of the firm. In summary, Exponent continues to position itself at the forefront of innovation as a trusted adviser to our clients across the product life cycle. Market drivers, including the increasing complexities around safety, health, and the environment remain strong and continue to drive opportunity across our business. We remain focused on expanding our capabilities, strengthening our relationships, and driving profitable growth and value for our shareholders. I'll now turn the call over to Rich to provide more detail on our third quarter results as well as discuss our outlook for the fourth quarter and the full year 2023.

Thank you, Catherine, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis unless otherwise noted. For the third quarter of 2023, total revenues increased 4.8% to $133.3 million and revenues before reimbursements or net revenues, as I will refer to them from year on, increased 8.5% to $125 million as compared to the same period of 2022. This includes a decline of approximately $8 million in our consumer electronics business, which created a 6% to 7% headwind as compared to the third quarter of 2022. Net income for the third quarter was $24.5 million, or $0.48 per diluted share as compared to $24.4 million, or $0.47 per diluted share in the prior year period. Exponent's consolidated tax rate was 27.9% in the third quarter as compared to 27.0% for the same period in 2022. EBITDA for the quarter was $34.5 million, producing a margin of 27.6% of net revenues as compared to $34.6 million or 30% of net revenues in the same period of 2022. This year-over-year decline in margins was anticipated as expenses normalize post-pandemic, and utilization was lower due to the growth in headcount. Billable hours in the third quarter were approximately $380,000, an increase of 4.1% year-over-year, which is significant considering the headwinds in electronics. The average technical full-time equivalent employees in the third quarter were 1,050, which is an increase of 9.6% as compared to one year ago. This was the result of successful recruiting efforts in the second half of 2022, coupled with improved retention in 2023. As Catherine mentioned, full-time equivalent employees decreased 2.5% compared to the second quarter of 2023, reflecting our progress on strategically aligning our resources with the current and long-term demand opportunities. Utilization in the third quarter was 70%, down from 73% in the same period of 2022. The realized rate increase was approximately 4.4% in the third quarter as compared to the same period a year ago. In the third quarter, after adjusting for gains and losses and deferred compensation expense, compensation expense increased 13.4%. Included in total compensation expense is a loss in deferred compensation of $2.8 million as compared to a loss of $4.9 million in the third quarter of 2022. As a reminder, gains and losses in deferred compensation are offset to miscellaneous income and have no impact on the bottom line. Stock-based compensation expense in the third quarter was $4.9 million as compared to $4.6 million in the prior year period. Other operating expenses in the third quarter were up 24.7% to $11 million driven primarily by increased employee engagement at our offices. Included in other operating expenses is depreciation and amortization expense of $2.4 million for the third quarter. G&A expenses declined 10.6% to $6 million for the third quarter. This decrease was due to a reduction in the use of outsourced personnel and a smaller annual company meeting. Interest income increased to $1.9 million for the third quarter, driven by an increase in interest rates. Miscellaneous expenses, excluding deferred compensation loss, were approximately $1 million. During the quarter, capital expenditures were $3.3 million, we distributed $13.2 million to shareholders through dividend payments and repurchased $17 million in common stock. We ended the third quarter with $137.1 million in cash and cash equivalents. Turning to our outlook. For the fourth quarter of 2023 as compared to one year prior, we expect revenues before reimbursements to grow in the middle single digits and EBITDA margin to be 26% to 27% of revenue before reimbursements. For the full year 2023 as compared to one year prior, we expect revenue before reimbursements to grow in the high single digits and EBITDA margin to be 27.4% to 27.8% of revenues before reimbursements. This assumes approximately the same headwinds of 6% to 7% from consumer electronics business in the fourth quarter as we experienced in the third quarter. The full-year margins remain at or above pre-pandemic levels. As Catherine mentioned, we are taking actionable steps to strategically align our resources with the current and long-term demand trends within our business through targeted recruiting and ongoing performance management. As a result, we expect our average technical full-time equivalent employees to decline sequentially 2% in the fourth quarter. We expect utilization in the fourth quarter to be 66% to 68% as compared to 69% in the same quarter last year. As a reminder, utilization is seasonally lower in the fourth quarter due to more holidays and vacations compared to other quarters. Our expectations for full-year utilization is in the range of 69% to 69.5% as compared to 73.8% in 2022. 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 demands. We expect the 2023 year-over-year realized rate increase to be 4.75% to 5.25%. For the fourth quarter, we expect stock-based compensation to be $4.5 million to $5 million. For the full year, we expect stock-based compensation to be $21.5 million to $22 million. For the fourth quarter, we expect other operating expenses to be $11.2 million to $11.7 million. For the full year, we expect other operating expenses to be $42 million to $42.5 million as in-office activities continue to pick up. For the fourth quarter of 2023, we expect G&A expenses to be $6.6 million to $7 million. For the full year, we expect G&A expenses to be $25.1 million to $25.5 million. We expect interest income to be approximately $1.8 million for the fourth quarter. In addition, we expect miscellaneous income to be approximately $750,000 in the fourth quarter. For the remainder of 2023, we do not anticipate any additional tax benefit from share-based awards. So the year-over-year tax benefit associated with share-based awards is expected to be $2.4 million lower than they were in 2022, which is a $0.05 per diluted share impact to EPS. For the fourth quarter 2023, we expect our tax rate to be approximately 28.2% as compared to 26.2% in the same quarter a year ago. For the full year 2023, the tax rate, inclusive of the tax benefit from share-based awards, is expected to be 25.7% as compared to 26% in 2022.

In closing, we continue to be confident in the strength of the business and our ability to drive further profitable growth. I will now turn the call back to Catherine for closing remarks.

We will now begin the question-answer session. First question comes from Tobey Sommer from Truist.

Thank you. What sort of run rate do you think that the company may be on in terms of billable headcount growth as you exit the fourth quarter into next year?

Yes. I expect that we will finish the year with a headcount close to 1,025. I believe this will put us in a solid position for growth throughout 2024. We are currently in the planning phase, with our business units developing their plans for next year. The executive team will meet with each unit later this quarter. Based on the demand environment in several of our industries, we believe we are well-positioned to grow in areas where demand is increasing.

And Catherine, the company doesn't often miss expectations. And I was wondering if you could describe changes in demand throughout the quarter, whether it was just sort of a bit at a time in each of the months and into perhaps October as well? Or was there sort of an episode or a month at which many things changed and then sort of levelled off from there.

It's important to look at this from a portfolio perspective. We're very focused on the challenges in the consumer electronics sector, as Rich described, particularly regarding the human subject work related to data collection and machine learning. This is closely tied to product life cycle timing and some macroeconomic challenges. However, as I assess the business, I'm seeing a portfolio that is performing well. We have designed it to be diverse across industries, and we're seeing growth in almost all of those sectors, including strong performance in transportation, life sciences, energy, and construction. Achieving an 8.5% increase despite the challenges highlights the strength of our portfolio and our ability to maintain profitability at or above pre-pandemic levels, even with all expenses reinstated. While we do expect some moderation in Q4, we're also seeing positive activity in our pipeline, with incoming requests for scopes of work and proposals. This suggests that the headwinds may start to lessen as we enter Q1 of 2024 and continue to improve throughout the year.

Yes. I would like to provide more detail on those numbers. We encountered about $8 million in headwinds, which we initially estimated would be closer to $6 million in July when we prepared for the quarter. Additionally, we expected those headwinds to be slightly lower in the fourth quarter, but based on our understanding of the project timelines, we now believe that some projects that were anticipated to start in Q4 will actually begin in the first quarter. This has contributed to the additional headwinds in the fourth quarter.

Could you elaborate on the visibility you have into new projects as you approach 2024? Specifically, how much insight do you have into customer planning and their future projections? It would be helpful to understand how you can form a perspective for 2024 in the consumer electronics sector, which has shown some signs of weakness.

Yes. Across the business, there is quite a bit of variability. The reactive work has a lot less visibility, while proactive work, like product development consulting, can be influenced by unexpected issues such as early field failures. Clients may not always foresee these challenges as they prepare for a product launch, which can limit our ability to predict the pipeline. Even in areas like machine learning and human data collection, they are often making adjustments during the product life cycle based on factors that may not be clear to them. Ultimately, we're doing our best to understand our clients' directions and maintain communication, but some aspects of our work are inherently uncertain.

Switching gears. I just have 2 more questions, and I'll get back in the queue. In your business, could you talk to the PFAS opportunity and what you see there? And then I'm curious what the composition of your project book looks like relative to large projects, a question that I often ask about on these calls to assess whether there's sort of upside large project risk or represents neutral or downside risk.

Yes, thank you, Toby. I'll discuss PFAS first, and then I'll let Rich talk about the large project aspect. We are definitely noticing increased activity regarding forever chemicals, specifically PFAS, which are perfluorinated substances. This issue primarily originates with the original chemical manufacturers, but it is now impacting the supply chain as well. These chemicals are present in consumer products like clothing, food packaging, carpeting, Teflon pans, and more. We are observing this issue cascading down into the supply chain and manifesting in a reactive way, particularly in the context of litigation. Additionally, we see implications in the regulatory realm concerning the chemicals industry. Proactively, we are getting involved even earlier in the product lifecycle, where clients are evaluating potential PFAS substitutes for their products. We are witnessing a rise in these kinds of engagements. This presents a significant opportunity for us to mobilize our interdisciplinary team of health scientists, environmental scientists, exposure chemists, and material scientists to effectively assist our clients in this area.

Yes. Toby, regarding the large projects, we currently do not have any that fall into the typical 4% to 5% range we have discussed in the past. Our portfolio this past quarter consists mostly of projects that are 2% or less, which is normal for us. Some of these are tied to a litigation matter and will conclude this quarter, while we anticipate new projects emerging to take their place. Overall, we are operating with a more standard portfolio of projects at this time.

The next question comes from Josh Chan from UBS.

Thanks for giving the color on the consumer electronics impact. I guess, conceptually, if you did 8.5% growth in Q3 with $8 million headwind. And then I guess with the same amount of headwind, you're now expecting mid-single-digit growth in Q4. So something else outside of consumer electronics slowing? Maybe could you talk about the demand outside of that sector, I guess?

Yes. Maybe I'll start off and Catherine can fill in. Really, the difference, let's say, there, pick your midpoint on that of a 3-point difference is really a combination of where the business was last year in the fourth quarter as what that level of hurdle was, which was pretty strong that the business was flowing out at that time, and just in the mix. I mean, last year, that headcount was very much ramping in the fourth quarter that utilization was holding together extremely strong. So overall, I'd say we're not seeing any material difference in other parts of the business. But Catherine, maybe you want to double-click on that.

Yes, thanks, Rich, and thanks, Josh, for that question. I'll refer to the portfolio. We experience fluctuations when we ask our team about their observations regarding the dispute landscape and the types of projects that are either exiting or entering. Comparing to the fourth quarter of last year, we maintain our current position. Broadly speaking, the business remains strong, with transportation being a prime example of robust performance. We are examining the litigation related to advanced driver assistance as well as inquiries about electric vehicles. Additionally, we are focused on developments in Life Sciences and our risk work in utilities. Overall, I feel good about the long-term health of the portfolio, but we must navigate the quarterly fluctuations.

And then on the staffing levels, given the little bit slower demand than expected, do you still expect to achieve this back to normal or desired utilization levels around the start of the year next year? Or does that timeline get pushed out a little bit?

I think our objective is to align our headcount with the demand in the environment. As a result, we are starting to see an improvement in utilization. While we are not yet finished with our plan and are not ready to provide specific guidance for the first quarter or next year, our main focus is to see our utilization improve in 2024.

Next question comes from Andrew Nicholas from William Blair.

I want to revisit the discussion on consumer products and attempt to quantify the various segments of that business. In your K, you mentioned how much of the revenue is related to consumer or consumer products. Is this fairly consistent with what I believe was the 31% mix? Or is there a portion that has decreased significantly? I'm just trying to understand all the different aspects involved, and I would appreciate your insights on this.

Yes, the focus is primarily on the consumer electronics sector. We are not experiencing a decline in the broader consumer product area. The emphasis is on the data collection and human subject study aspects. This relates closely to where our clients are within their product life cycle. However, there has been some impact based on the organizational decisions clients are making regarding which projects to continue, staffing, and cost management in response to market changes. The majority of our attention remains on consumer electronics, especially in the data collection user study area, which is directly linked to their position in the product life cycle.

Can you explain the difference between the reduced revenue guidance and the lower margin guidance? It seems like you're still expecting high single-digit growth for the full year in 2023 on the revenue side, which is below your previous midpoint but still within the annual range. However, the margin guidance is also lower than before, if I'm correct. Have there been any unexpected expenses since we last discussed this? Is there anything else to mention? Or is this largely due to managing fixed costs and labor in the consumer products sector, with the hope that things will improve next year?

Yes. It's primarily due to a few million dollars less in revenue. We are achieving the staffing levels we anticipated and have made the necessary adjustments. The decrease in revenue has resulted in lower utilization, which significantly impacts our performance. If we consider the last quarter, if that $8 million had been around $6 million to $6.5 million, I would have expected about $1 million of that to improve the margin, placing us in the upper half of our EBITDA margin. The same expectation applies to the fourth quarter, where we anticipate more revenues that could add $3 million or $4 million, potentially bringing us into the high single digits range. Consequently, this would result in a couple of million dollars more in EBITDA and an increase of 50 to 80 basis points.

This concludes our question-and-answer session, and the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.