Good day, and welcome to the Exponent Inc. Quarter 1 2024 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Joni Konstantelos. Please go ahead.

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?

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 continued 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 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 continued 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 utility sector advising clients on asset integrity and risk mitigation. We continued to see strong demand in the chemicals sector for our regulatory work evaluating the impact 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 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.

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 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. Billable 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 1 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. G&A expenses declined 3.5% to $5.6 million for the first quarter. This decrease was primarily due to a reduction in the 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 1 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 head count 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 head count 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 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 noncash 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 profitable growth. I will now turn the call back to Catherine for closing remarks.

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 roots in failure analysis continue to strengthen and grow, fortifying our leadership position as we branch into new untapped areas around the product life cycle. 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.

The first question comes from Andrew Nicholas with William Blair.

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.

Yes. We definitely noticed a slow start after the new year, which continued through the first four weeks of the quarter. We anticipated some improvement based on feedback from our business units, and what we experienced starting in February was a significant increase in our engagements, particularly in the reactive area. As Catherine mentioned, these involved litigation matters that required substantial attention, along with regulatory investigations that many of our clients were facing. We were able to ramp those up, and we observed that they peaked in late February and early March. Several of these matters have either gone to trial or arbitration or progressed to a later phase of the regulatory investigation. Consequently, the level of activity has decreased or is set to decrease during the second quarter. This is reflected in our guidance, which remains stronger than our expectations when we announced year-end results and provided our guidance for the year. While we are positive about this, we have not yet seen the sustained level of activity that occurred during the surge in February and early March.

Great. Very helpful. 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?

Yes. 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-a-vis 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 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 road map into the future. And so a 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.

I believe it's important for everyone to understand that while we are heavily invested, 60% of our work is in the reactive area, with many matters arriving quickly and potentially concluding at any time. However, over the decades, we have shown that our portfolio of these projects, totaling around 10,000 each year, services almost every industry that manufactures or processes something. We engage with approximately 2,000 different clients annually. This diverse portfolio has enabled us to consistently predict trends and the direction of our business and market demands. We have demonstrated success over a long period, though the last couple of quarters have shown more variability. Nevertheless, I fundamentally believe our model remains consistent, featuring a very diverse client base, a wide range of services, and a resilient demand environment where clients prioritize safety, health, and environmental issues while continuing to innovate.

The next question comes from Josh Chan with UBS.

Congrats on a good quarter. Yes, 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?

Yes. 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. 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. 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. This was a collection of those. They were larger than average for sure, but there was sort of a simultaneous intensification of that activity.

Yes. In the reactive area, I think we're talking about a group of projects that were 0.5% to maybe even 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 1.5 years here is that the demand for our services in this reactive area that we've been in for over 5 decades is stronger than ever. And I think that's a very promising message for the future.

That's really helpful color. 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?

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 area grew 20-plus percent in Q2 and Q3 on a year-over-year basis in '23 for Q2 and 3. 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.

I would add that in the first quarter, we showed our ability to respond to demand. This is typically how our reactive portfolio works with its ups and downs. As we align our resources with demand, we ensure we have the capacity to mobilize our teams, who are culturally ready and eager to respond when the demand arises. We will be prepared for any fluctuations that may occur in the coming quarters.

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? Anything else that we should think about there in terms of the margin cadence?

Yes, we are not expecting utilization to reach the same levels as in Q1. This is due to the demand environment we previously discussed, as well as the typical seasonal decline in utilization. During periods with more vacations and holidays, particularly from late second quarter into the summer and around the end of the year, we generally experience lower utilization. Historically, margins also decrease during these times. Additionally, as I mentioned, we are seeing some increased expenses due to the amortization of rent costs.

The next question comes from Tobey Sommer with Truist Securities.

This is Jack Wilson on for Tobey. Maybe just start out with what's your hiring costs you're 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?

Thank you, Jack. Our workforce is clearly the key factor driving our growth. As Rich mentioned, we anticipate that in the latter half of the year, we will be gradually increasing our headcount. This has been on a decline over the past few quarters as we've refined our model to optimize utilization. Moving forward, our focus is on our people and the recruitment and development of top talent. We are collaborating with our business unit leaders to implement effective recruiting strategies that align with market demand and to address specific areas where we are enhancing capabilities and need to fill talent gaps. We are taking a strategic approach and expect to see an increase in headcount sequentially. Although we project a year-over-year reduction of about 5% in our total headcount, we will be adding more employees in the short term. Regarding the current market conditions, I believe we offer an exceptional employee value proposition. We attract top talent from doctoral and graduate engineering programs in the U.S. and worldwide. I am optimistic about our competitive position, as we are constantly vying with our clients for talent. The demand for engineering and scientific expertise remains high, but I believe we are well-equipped to enhance our recruitment efforts as market demand increases.

Yes. Jack, 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.

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

It's always the case in an election year that people raise questions about the regulatory environment and its potential impact on our outlook and similar issues. We keep a close watch on the regulatory frameworks at the state, national, and global levels since much of our work in chemical regulation is international. Historically, we haven’t observed significant shifts regardless of whether the administration is more democratic, regulation-friendly, or anti-regulatory. In situations with less regulatory appetite, we often see an increase in pipeline construction and infrastructure projects, which we engage with when those opportunities arise. Additionally, as safety regulations become more stringent over time, it benefits us in terms of our disputes and regulatory work. While we are monitoring this closely, I do not expect any substantial changes simply due to a shift in administration in the near future.

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

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.

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