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00:20 00:20 Thank you, operator. Good afternoon, ladies and gentlemen.

Thank you for joining us on Exponent's third quarter of fiscal year twenty twenty one 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.exponent.com/investors.

00:42 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. 00:59 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.

01:45 And now, I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer.

Catherine?

01:51 Thank you, Joni, and thank you everyone for joining us today. I will start off by reviewing our third quarter twenty twenty one 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.

02:07 In the third quarter of tewenty twenty one, we continue to deliver exceptional results. For the quarter, net revenues grew sixteen percent, while EBITDA margin increased over three hundred and fifty basis points from the prior year period.

We saw robust demand across our diverse business lines, in large part, driven by our differentiated value proposition, which brings together high-quality data analytics with unrivaled subject matter expertise. 02:37 Importantly, while momentum in litigation continued, the proactive side of the business continue to drive growth through a significant increase in user and machine learning data studies, outpacing twenty nineteen levels.

Additionally, the velocity of new starts over the last several months and the caliber of that talent underscores our ability to attract the best and the brightest talent to our team. 03:04 Turning to our engagements in more detail.

Our momentum continued into the third quarter as we won new assignments while reengaging projects on the reactive side of the business. As we highlighted last quarter, our litigation work has been in a mode of recovery, hovering near twenty nineteen levels.

As the throughput of litigation in our United States courts continues to accelerate, we will be positioned to capture the stickiness and inertia around the backlog of trials making their way through the system. 03:35 Globally, delays in international arbitrations have the potential to recover with eased COVID restrictions, facilitating more in-person meetings.

Exponent is well positioned to capture these growth tailwinds, while also leveraging expansion into new end-markets, such as pharmaceutical and software litigation and increasing our brand recognition in the international arbitration arena. 04:00 Within our proactive business, we are seeing a strong increase in user studies spanning across various end markets, particularly as it relates to artificial intelligence and machine learning for wearables and other devices.

This increase is driven by rising demand, as well as the accessibility of human participants and the ability to conduct on-site work as COVID restrictions eased over the year. 04:27 Overall, our proactive engagements remained robust and diverse, fulfilling complex customer requirements related to user experience as well as product optimization and performance, while leveraging data analytics to further mitigate risk for our clients.

Our traction across our multi-disciplinary offering continues to demonstrate the strength of our long-term strategy and our commitment to providing customers with the tools and analysis needed to drive optimal decision making. 04:57 Utilization in the third quarter saw improvement year-over-year, supported by strong demand for human participant studies, increased litigation work and lower headcount, which drove improved profitability.

However, as we have said over the last few quarters, we do expect utilization to normalize somewhat in the fourth quarter of twenty twenty one as human participant studies moderate, headcount growth and we see typical seasonality. 05:26 Recruiting a world-class team remains a top priority for us, and we have accelerated our efforts during the second and third quarters of twenty twenty one.

While the market for engineering and scientific talent remains competitive and voluntary turnover has increased relative to last year, we are seeing exceptional candidates and adding depth and experience to our already world-class team. 05:50 Turning to our segments.

Exponent's engineering and other scientific segment represented eighty three percent of our net revenues in the third quarter, increasing twenty percent year-over-year. Our growth was driven by strong demand for Exponent services across a broad range of industries and used cases.

In addition to the steady increase in litigation support and human participant studies for the consumer products segment, our work around wearable technologies and asset integrity and risk management for utilities was a core driver of growth over the period. 06:25 On the automotive side, we continue to see strong reactive-based demand for our unrivaled and state-of-the-art testing and analysis capabilities for advanced driver assistance systems.

On the proactive side of automotive, we continue to engage clients in implementing safety frameworks in the automated connected electric and shared vehicles space, while also gaining traction on battery work for electric vehicles and energy storage systems. 06:53 Exponent's environmental and health segment represented seventeen percent of the company's net revenues in the third quarter.

Net revenues in this segment were largely flat compared to the prior year period. The pharmaceutical industry remains a significant opportunity for Exponent, as we leverage our multidisciplinary approach and data landscape across the full product life cycle from pharmacoepidemiology and real-world evidence to health economics and outcomes research and market access.

07:23 As mentioned last quarter, our focused efforts in the pharmaceutical industry continue to materialize with an emphasis on recruitment and business development initiatives supporting new client engagements. Overall, we are very encouraged by the influx of new engagements and key hires across the business.

We are already seeing our accelerated recruitment efforts materialize with a strong pipeline of high-quality talent, positioning Exponent for a record year of hiring to close out the year. 07:53 As we move through the remainder of fiscal year twenty twenty one, we remain confident that our strong reputation, multi-disciplinary capabilities, industry-leading expertise and market-driven durability will propel Exponent forward towards sustained growth and increased scale.

08:11 I'll now turn the call over to Rich to provide more detail on our third quarter twenty twenty one results, as well as discuss our outlook for the fourth quarter and the full year twenty twenty one.

08:23 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.

08:33 For the third quarter of twenty twenty one, total revenues increased eighteen percent to one hundred and sixteen point four million dollars, and revenues before reimbursements or net revenues as I will refer to them from here on, increased sixteen percent to one hundred and eight point five million dollars as compared to the third quarter of twenty twenty. 08:54 Net income for the third quarter increased to twenty four point six million dollars or zero point four six dollars per diluted share as compared to eighteen point one million dollars or zero point three four dollars per diluted share in the prior year period.

09:09 EBITDA for the quarter increased thirty one percent to thirty four million dollars, producing a margin of thirty one point four percent of net revenues, which is an increase of three fifty five basis points as compared to the third quarter of twenty twenty. 09:29 Billable hours in the third quarter were three hundred and forty eight thousand, an increase of thirteen percent year over year.

Utilization in the third quarter was seventy six percent, up from sixty six percent in the same quarter of twenty twenty. Utilization in the quarter remained above expectations driven by lower FTEs or full time equivalents, and strong demand for our human participant and machine learning studies as well as litigation support.

10:02 Technical full time equivalent employees in the third quarter were eight eighty three, down two percent as compared to the same period one year ago. The realized rate increase was approximately three percent for the third quarter.

Compensation expense after adjusting for gains and losses in deferred compensation increased nine percent, included in total compensation expense is a loss in deferred compensation of three hundred thousand as compared to a gain of three point two million dollars in the third quarter of twenty twenty. 10:41 As a reminder, gains and losses and deferred compensation are offset set to miscellaneous income and have no impact on the bottom line.

Stock based compensation expense in the third quarter was four point four million dollars as compared to three point seven million dollars a year ago. 11:02 Other operating expenses were up two percent to eight million dollars driven primarily by increased activities at our offices as our employees gradually return.

Included in other operating expenses is depreciation expense of one point six million dollars for the quarter. G&A expenses were up forty eight percent to four point two million dollars for the third quarter, the increase in G&A expense was primarily due to higher marketing and recruiting activities.

Interest income decreased three hundred thousand to thirteen thousand for the third quarter. Lower interest income is the result of a steep decline in interest rates.

11:50 Miscellaneous income net of deferred compensation loss was approximately three hundred thousand. Included -- inclusive of tax benefit from share based awards, Exponent’s consolidated tax rate was twenty four point one percent for the third quarter as compared to twenty six point six percent in the prior year period.

12:15 Moving to our cash flows during the third quarter, we generated twenty four point nine million dollars in cash from operations and capital expenditures were one point two million dollars. In the third quarter, we distributed ten point four million dollars to shareholders through dividend payments.

At quarter end, the company had two fifty five million dollars in cash and short term investment. 12:40 Turning to the outlook for the fourth quarter and full year twenty twenty one.

We now expect fourth quarter twenty twenty one revenues before reimbursements to grow in the mid-single digits and EBITDA margin to decrease one hundred and seventy five basis points to two twenty five basis points as compared to the same period in twenty twenty. 13:04 For the full year twenty twenty one we expect revenues before reimbursements to grow in the mid-teens and EBITDA margin to increase two ninety basis points to three ten basis points as compared to twenty twenty.

We expect utilization in the fourth quarter to be sixty seven percent to sixteen nine percent as compared to sixty six percent in the same quarter last year. As a result, we expect a full year utilization of seventy four percent to seventy five percent as compared to sixty seven percent in twenty twenty.

13:40 As a reminder, utilization is lower in the fourth quarter due to more holidays and vacations. In particular, we expect more vacations in the fourth quarter as compared to last year even.

In the fourth quarter, we expect full time equivalent employees to reach approximately nine ten to nine twenty which is a sequential growth of three percent to four percent from the third quarter of twenty twenty one. This will place us slightly ahead of where we were in the fourth quarter of last year.

14:17 As we progress through -- progress through twenty twenty one, we have accelerated our recruiting efforts, while the job market remains highly competitive, which has resulted in increased voluntary turnover over prior year. We continue to demonstrate our ability to attract high quality talent.

We have had a significant number of new starts over the last several months, which will temper utilization slightly in the fourth quarter. 14:49 In the fourth quarter, we do expect year over year realized rate increase of two point five percent to three percent.

As a result, the full year realized rate increase is expected to be four percent to four point five percent. We expect stock based compensation to be three point eight million dollars to four point two million dollars in the quarter and nineteen million dollars to nineteen point four million dollars for the full year.

15:16 We expect operating expenses for the fourth quarter to be eight point four million dollars to eight point seven million dollars and for the full year, we expect other operating expenses to be thirty two point two million dollars to thirty two point five million dollars as we gradually return to the offices. We believe our office environment provides long term value as it supports collaboration for interdisciplinary teams and staff development, which results in higher value for our clients and retention of our employees.

15:51 We anticipate associated expenses to be at historic levels as we enter twenty twenty two. G&A expenses will also gradually scale as recruiting, business development and travel activities increase.

For the fourth quarter of twenty twenty one, we expect G&A expenses to be four point five million dollars to four point eight million dollars. For the full year twenty twenty one, we expect G&A expenses to me fifteen point two million dollars to fifteen point five million dollars.

16:25 For the quarter, we expect interest income to be approximately ten thousand dollars and sixty thousand dollars for the full year. In addition, we anticipate miscellaneous income being approximately five hundred thousand dollars for the quarter and two point one million dollars for the full year.

16:45 For the fourth quarter of twenty twenty one, we expect our tax rate to be approximately twenty seven percent as compared to eighteen point six percent in the same quarter last year. As a result, we expect the full year twenty twenty one tax rate to be nineteen percent as compared to fourteen point eight percent in twenty twenty.

17:12 CapEx for the full year twenty twenty one is expected to be eight million dollars to nine million dollars. We are pleased to have delivered another strong quarter with significant margin improvement year over year.

And we are confident in our ability to continue to grow. 17:31 I will now turn the call back to Catherine for closing remarks.

17:36 Thank you, Rich. For over fifty years, Exponent has partnered with thousands of clients to address their most complex challenges.

As society continues to raise expectations for safety, health, sustainability and reliability and our clients' needs evolve and increase in complexity, Exponent remains uniquely qualified to deliver groundbreaking solutions for the challenges of today and to help unravel the complexities of innovations for tomorrow. 18:04 We are confident that the increased level of new engagements across our broad-based portfolio, as well as new hires across the business will support consistent profitable growth and will ultimately drive long-term value for our shareholders.

18:18 Operator, we are now ready for questions.

18:56 Thank you. I was hoping you could give us some more color about the sort of record headcount and hiring additions that you've made and expect to continue to make this year.

And then maybe if you could frame that in the context of what you think you could achieve on an ongoing basis as we look to model future periods. Thanks.

19:25 Yes. Thanks, Tobey.

So, we've certainly accelerated our efforts around recruiting just in the last few months and we're particularly encouraged by how we've been able to continue to attract the best and the brightest talent in the brightest talent in the organization. There is no doubt that we're seeing a competitive marketplace for that talent as we always have, but we feel very good about what we've been able to do in terms of bringing them on board and getting them into the flow of engagements quickly so that they can be contributing and having an impact relatively quickly in their tenure.

20:09 So, we've got our foot on the pedal there. We intend to keep our foot on the pedal there with a goal really as we come back into sort of a more normalized type of situation to be growing headcount annually and with sort of a goal of four percent to seven percent range.

That really has not changed in terms of what we're looking to do in a steady state over the long term. What we're dealing with now is still some transience that are in the system.

We've demonstrated our ability to ramp up and really surge in order to meet client demand. So that's been great.

20:53 But over the long term, we need these folks that are coming on board to be able to make their investments in professional development and business development and all of those things that require their time. So as we get back on a more long-term normalized basis, we do expect that the utilization will moderate a bit as we increase the headcount and sort of balance those things out.

21:25 Thank you. Good afternoon.

The first question I wanted to ask was just on the proactive and reactive businesses as kind of a component of mix here. It sounds like proactive has been gaining momentum for some time post-pandemic.

So, I was wondering if you can kind of help us think about the growth rates for those two pieces, both immediately following the pandemic and maybe how it's progressed over the course of the past couple of quarters.

21:55 Yes, thanks. And things are a little bit different depending on which side of the business you're looking at.

When we look at reactive and particularly litigation, we are continuing along, what I would call a fairly steady gradual path in terms of the pace of the engagements, right? 22:16 It's -- there is an increasing rate of activity that's going on through the domestic court system.

There were still some impacts related to restrictions. There were still some challenges that we're -- they're seeing in the courts in terms of in-person engagements, bringing juries in and that sort of thing, but it's getting there.

We're continuing to see this sort of steady increase. 22:42 As we look forward, we certainly see activities in the reactive space for growth.

Although, as I look forward, I really do believe that the proactive side will grow faster. If I think about the drivers on the proactive side, there are lots of drivers around the regulatory frameworks that -- things like chemical regulatory work, that continue to grow through the pandemic and we expect it to continue to grow as we kind of get away from the pandemic.

23:17 Think about the design-related and reliability-related consulting that we're doing for the consumer products industry, that's something that's been a very strong driver lately. And if you look at the kinds of innovation that are happening, things like virtual reality, augmented reality, consumer electronics, these are all important drivers.

We're doing a lot of work around machine learning, data curation and data collection studies, that's being driven by that sort of innovation landscape. 23:51 Climate change is driving work for the utilities industry and around infrastructure in general.

Assessing the vulnerability of our infrastructure, we're seeing work in batteries and energy storage. If you just think about the demand sort of tipping point that we're getting to around electric vehicles, General Motors has announced additional expenditures over the last month.

Ford is building a couple of extra battery plants. I think even Lamborghini is announcing, they're going to electrify their fleet, right?

So, there are lots of drivers for this proactive sort of safety-driven and complexity-driven work on that proactive side. 24:34 So the reactive will grow as well.

We mentioned pharmaceutical litigation, software litigation. International disputes is an area where we continue to build our brand.

So, we've got good drivers on -- really on both sides of the house.

24:51 That's really helpful. Actually, Catherine, you made note of the second question I was going to ask, which is around software litigation.

I don't know if that's a new name for a practice that -- or a new reference to practice that you've had for some time. But I don't believe that's something that you called out in prior calls.

Can you talk a little bit about that opportunity? It certainly makes sense as the world gets eaten by software.

25:15 I was just wondering what that opportunity looks like, how new that is? And maybe what the ramp schedule looks like for a practice like that, particularly given, I would imagine sourcing talent and adding new people to be able to service that is incredibly tough in this environment?

25:32 Yes, yes. Thanks.

And so this is work that we have been doing, but are seeing some stronger growth drivers. So some of it is in the intellectual property type of space.

Other software litigation is around embedded systems in particular. We've had a lot of expertise in embedded systems within our Electrical Engineering and Computer Science Practice for many years.

26:02 Think about the systems that are driving control systems for automotive electronics, that's a big area, or control systems around advanced manufacturing. These types of areas can lead to either IP litigation, they can lead to sort of product quality related litigation, it could lead to the types of litigation where OEMs are trying to recover from their suppliers.

It sort of comes in a lot of different forms. But it's something we've been seeing more of.

26:35 It is -- that as well as pharmaceutical litigation are areas where we were getting more traction. And so that along with all of the other areas of litigation like product liability, like human health-related litigation, like environmental litigation, we see the ability to continue increasing sort of across this broad portfolio as we go forward.

27:04 Perfect. Thanks so much for the color.

27:06 You're welcome.

27:17 Hi, guys. Thanks for taking the questions.

And the first one I had, could you talk a bit about which end markets have bounced back most strongly over the last couple of quarters? And then which end markets is still below pre-pandemic levels and whether there is sort of a recovery opportunity over the next few quarters?

27:35 Yes. Thanks, Sam.

One area that I mentioned that I would highlight in this context is our proactive work around consumer products and consumer electronics being a significant part of that. This is a lot of the motivation for the human participant work for the machine learning data type of studies that we've been doing for our user experience capability, where we're doing research, really understanding that sort of cognitive effects of the use of technologies like virtual reality and augmented reality.

That end market is quite strong. 28:18 The utility sector is another one where we're really bringing our subject matter expertise in engineering and marrying that with our sophisticated data analytics capabilities in a very unique way.

Not only can we sort of run the algorithm and crunch the numbers to utilize sort of that artificial intelligence, but we also have the engineering expertise to lay over that. And we're finding that to be very valuable as we're assessing asset integrity, as we're looking at climate vulnerability and resilience in the utility sector.

29:01 And so those are some of the stronger ones. Some of the ones where we're seeing maybe a little more slowness, if I go back over to the reactive side, the litigation markets are sort of recovering at different paces.

One of them that's may be slower than the others is around transportation and product liability. This is one that got hit particularly hard back in twenty twenty.

And part of the reason for that, I believe, is because of its dependence not only on the court system, but also on our ability to travel, to do site inspections, to do vehicle inspections, to bring people on site to do vehicle testing. There's a lot of that type of work in that arena.

29:46 And so not to mention the impact that the pandemic had on the client base in that area being very dramatic and so it's taking some time, but we're absolutely sort of on that path. But that, for example, has been slower than if you look at sort of the health and environmental-related litigation, which was stronger through twenty twenty, wasn't impacted as much.

30:13 So a little bit of variability there that we're still looking to kind of bring that transportation work back in litigation. But part of what's doing that right now is the work in advanced driver assistance systems.

That is a -- in terms of prospects for recovery, that is a particular litigation area where we are being sought out for a really unique set of expertise that we've got, both around how these systems have been deployed and also how to test them in real sort of limit type of environments. So, we are seeing a lot of encouraging trends in that particular sector.

30:53 Okay. Great.

Thanks. And then the next one I had, you touched in your remarks on the higher staff attritions theme.

But just firstly, how much of that do you think is just driven by the fact that you had lower attrition in twenty twenty? And then what are you doing as a business to try and improve staff retention in light of the implied market?

31:13 Yes, yes. Thanks, Sam.

I think there is definitely a piece of this that is sort of pent-up from twenty twenty. I don't think it explains everything, but I do think it explain some.

You're in an environment in twenty twenty, where folks are maybe less certain about wanting to sort of change course. Whereas as we started coming out in twenty twenty one, they see sort of more opportunity for that.

31:41 As a company, one of the things that is so incredibly important to the retention of our consultants is our emphasis on professional development. When we hire folks in, especially the junior staff, which is a big percentage of our hiring, we want to put them on a path that is going to help them to publish, help them to become famous, help them to find a niche and be engaged with clients and ultimately become a lead consultant someday.

32:14 So, our efforts around retention are very much focused on those types of programs. They're focused on mentoring, they're focused on sponsorship, they're are focused on ensuring that we are creating opportunities for those staff to have client engagement directly and really be able to see the impact of the work that they're doing.

These are things that we always do. That's been part of our growth paradigm as a company for many years.

But we're placing particular emphasis on that sort of development path for our team, as well as some of the simple things. 32:53 When we're in a virtual environment, ensuring that we're checking in on our team, ensuring that we're focused on their mental health and well-being, because they are very busy.

Our utilization is sort of hitting records here, right? And so there are those aspects as well, where we're really looking to our leadership, our directors, our managers, all the way down to our supervisors to really find ways to foster engagement with the staff directly.

33:24 Okay. Great.

Thanks. I'll leave it there.

33:27 Thanks, Sam.

33:36 Thanks. Sorry about my technical difficulty.

Could you talk about what you would expect realized pricing to be of inflation broadly and wage inflation kind of up and down, the labor market picks up and persists for a period of time? How would you realize pricing react?

34:02 Yes. Thanks for the question, Tobey.

Look, we at Exponent have seen our pricing increases on a year-over-year basis sort of range in that two percent to three point five percent level over a couple of decades here as we've moved through different economic cycles in. And in particular, the demand environment for high-end engineering and scientific talent.

34:35 Probably the most important thing that goes on in our sector is what is that demand for that -- those engineers and scientists. What our clients who tend to also hire engineers and scientists realizing in the employment market that the price for talent is going up?

It will increase and do that. So, I think right now we're in a strong demand environment.

And as such -- and we may get some inflation here in things, but I'm expecting us to be in the upper part of that range in the rate that we realize as we go into twenty twenty two.

35:28 Thanks. And I apologize if I missed something.

But could you expand on your utility work on the resiliency in -- I'm kind of interested not just on the current work, but whether or not other utilities in other geographies are building up projects as well?

35:55 Thanks, Tobey. Yeah.

So, we are seeing sort of expansion of the work that we're doing in the utility sector. Of course, the western utilities have a big driver around wanting to prevent wildfire.

That has been an important driver for the work that we've done around risk-related to electrical assets over the last -- certainly over the last several years. And so that has been a strong area of growth.

36:29 But there are -- what's wonderful about what we're doing is that, the methodology and algorithms that we have developed to apply diverse data sources and engineering to look at the probability of failure, you can do this not only for wind, knocking down transmission lines, you can apply the same paradigm to vegetation risks. You can apply the same paradigm to bird strike risk, you can apply this paradigm to flooding risk, there is sort of Bayesian updating concept that's used statistically and this overall framework.

37:13 And so, what's exciting to me about this is, that we have an opportunity to really broaden beyond and are already broadening beyond simply the peril of wins and electrical transmission lines into a broader set of assets that include gas infrastructure that includes water-related infrastructure, et cetera. So if there is a nice set of opportunities.

I think for us as we build out our capabilities that marry these data analytics with that subject matter expertise.

37:48 Thank you for that answer. Last question from me is of the multiple appropriations bills being juggled in Congress currently from the regular way budget eventually the soft and hard infrastructure packages or is there anything that we should watch for in terms of the potential inclusion in those bills that's being relevant for growth in your marketplace understanding that you're typically working with commercial clients, but these government initiatives can be so biggest influence trends in the commercial markets too.

38:28 Yes, Tobey. I think you're right there in the sense of trends.

We -- historically, we have not seen a sort of immediate impact of -- come from a one-year budget. But I will bring your attention to some areas that we've been talking about here.

First of all, the funds that are going in, it sounds like around climate change and energy and all that are focusing along incentivizing electric vehicles, which, obviously, Exponent has a lot of expertise around and incentivizing the increased demand -- driving more demand of that, that would be where -- continues to be positive for us and any encouragement of that would be good. 39:22 The other area is alternative energy.

As you move into, I think, currently the lease that's out there is a lot around wind and technology. We do a lot around the technologies and reliability of those wind systems, both turbines as well as blades and other things that come into your traditional engineering.

But more volume and energy into that would be positive. Focus around really the understanding in the health care area around real-world data and real-world data evidence and the drive in that direction to have the accountability for the value being delivered there.

That's very much centered to what we are trying to build in our go-to-market for the pharmaceuticals industry and such. So, those are a couple that I at least have.

40:33 Thank you very much. I appreciate that.