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Exponent Inc (NASDAQ:EXPO)
Q2 2021 Earnings Call
Jul 29, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Exponent Inc. Second Quarter of Fiscal Year 2021 Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the call over to Joni Konstantinos [Phonetic]. Please go ahead ma'am.

Unidentified Speaker

Thank you, operator. Good afternoon ladies and gentlemen, thank you for joining us on Exponent's Second Quarter of Fiscal Year 2021 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. This conference call is the property of Exponent's 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 Richard L. 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 and Chief Executive Officer. Catherine?

Catherine Corrigan -- President & Chief Executive Officer

Thank you, Joni [Phonetic]. And thank you everyone for joining us today. I will start off by reviewing our second quarter 2021 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.

In the second quarter of 2021, our business continue to gain momentum driving strong results which exceeded our prior expectations. In the second quarter, net revenues grew 28% and EBITDA margin increased 630 basis points from the prior year period. These results continue to be bolstered by increased activity in litigation projects and human participant studies as pandemic related restrictions eased and vaccinations became more widely available. We have also experienced a higher level of new engagements year-over-year winning new assignments daily and gradually reengaging on projects that were paused due to COVID-19 restrictions and/or court closures.

I'm pleased to note that our revenues in the quarter from a reactive engagements returned to pre-COVID levels as seen in the second quarter of 2019, while our revenues for proactive projects grew significantly compared to the same period underscoring our long-term growth strategy. The increased activity across the business is broad base including climate vulnerability assessments with utilities, risk assessments in chemicals and ongoing energy storage related work as well as a number of engagements in the automotive and consumer products basis. Within the automotive arena, for example, we continued to see demand in the second quarter for both proactive and reactive work related to advanced vehicles. We are developing cutting edge testing capabilities to answer important questions surrounding the safety and performance of electric vehicles, as well as advanced driver assistance system. We believe this proactive and reactive work will continue to strengthen through 2021 and beyond as these technologies evolve and become more prevalent in the fleet.

Utilization in the second quarter reached record levels, supported by strong demand for human participant studies, increased litigation work and lower head count which drove improved profitability. However, it is important to note that we do expect utilization to normalize somewhat in the second half of 2021 as human participant studies moderate, head count grows and we see typical seasonality. Exponent's engineering and other scientific segments represented 82% of the company's net revenues in the second quarter. Net revenues in this segment increased 33% in the second quarter as compared to the prior year period. In line with the first quarter, growth was driven by strong demand for Exponent services across a broad range of industries and use cases. In addition to the steady increase in litigation support and human participant studies, our multidisciplinary battery team continues to see demand for its solutions across industries including consumer products, transportation, utilities and medical devices.

Our work in international arbitrations and integrity management advisory services continued at strong levels. Exponent's environmental and health segment represented 18% of the company's net revenues in the second quarter. Net revenues in this segment increase 9% in the second quarter as compared to the prior year period. This segment also benefited from increased activity in litigation-related projects and support of human participant studies. The chemical regulation and food safety practice continued to grow as Exponent's scientists evaluated the effects of chemicals and new products on human health and the environment. As our client's needs evolve and increase in complexity, our team is positioning Exponent to deliver unique solutions for the challenges of today and in anticipation of the challenges of tomorrow. Variable technology, autonomous and electric vehicles, virtual reality, energy storage, pharmaceuticals and medical devices are just a handful of the innovations that are driving a safer, healthier and more sustainable world.

Exponent is an exceptional partner to help unravel the complexities of these innovations as they become reality and as society continues to raise expectations for safety, health, sustainability and reliability. As we look forward, we remain focused on key hires across the business. Through our accelerated recruiting process, we have achieved a healthy pipeline of candidates. On the senior recruiting side, I was pleased to announce the hiring of Dr. John Doyle this quarter as Group Vice President for Health Sciences. John will be teaming with multiple stakeholders to accelerate our growth in the Life Sciences sector leveraging Exponent's powerful multi-disciplinary approach, data science expertise and cross industry reputation as a leader in the analysis of real world product safety and performance.

While a degree of uncertainty remains surrounding COVID-19 in the second half of 2021, we remain confident that our strong reputation, diversity of engineering and scientific disciplines, world-class team of experts and the durability of our market drivers uniquely position us for continued profitable growth.

I'll now turn the call over to Rich to provide more detail on our second quarter 2021 results as well as discuss our outlook for the third quarter and the full year 2021.

Rich Schlenker -- Executive Vice President & Chief Financial Officer

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 second quarter 2021, total revenues and revenues before reimbursements or net revenues as I will refer to them from here on, increased 30% to $119.9 million and 28% to $112.5 million respectively as compared to the second quarter of 2020.

Net income for the second quarter increased to $25.4 million or $0.48 per diluted share as compared to $16.3 million or $0.31 per diluted share in the prior year period. EBITDA for the quarter increased 59% to $36.3 million producing a margin of 32.3% of net revenues, which is an increase of 630 basis points as compared to the second quarter of 2020. Billable hours in the second quarter were 365,000, an increase of 22% year-over-year. Utilization in the second quarter was 79% as compared to 64% in the same quarter of 2020. Utilization in the quarter, was ahead of our prior expectations as pandemic related restrictions were relaxed and vaccinations increased which accelerated the timing of human participant studies and litigation support. Technical full-time equivalent employees in the second quarter were 888, down 1% as compared to the same period one year ago.

The realized rate increase was approximately 4% year-over-year. Compensation expense, after adjusting for gains and losses in deferred compensation increased 18% included in total compensation expenses a gain and deferred compensation of $4.7 million as compared to a gain of $11 million in the second quarter of 2020. As a reminder, gains and losses and deferred compensation are offset to miscellaneous income and have no impact on the bottom line. Stock-based compensation expense in the second quarter was $4.6 million as compared to $3.5 million a year ago. Other operating expenses were up 6% to $8.1 million driven primarily by increased activities at our offices, as our employees gradually return. Included in other operating expenses is depreciation expense of $1.6 million for the quarter.

G&A expenses were up 8% to $3.2 million for the second quarter. The increase in G&A expenses was primarily due to higher marketing and recruiting activities, somewhat offset by lower travel cost, interest income decreased by approximately $293,000 to $12,000 for the second quarter. Lower interest income as a result of a steep decline in interest rates. Miscellaneous income net of deferred compensation gain was approximately $600,000. Inclusive of the tax benefit for share based awards, Exponent's consolidated tax rate was 26.7% for the second quarter as compared to 23.7% in the prior year period.

Moving to our cash flows, during the second quarter, we generated $44.2 million in cash from operations and capital expenditures were $1.7 million. In the second quarter, we distributed $10.4 million to shareholders through dividend payments. In addition, we repurchased $7 million of stock at an average price of $88 to $89. At the quarter end, the company had $240 million in cash and short-term investments. Looking forward based on continued strong demand for our services, we expect to maintain our positive momentum but recognize there may be unevenness along the way.

Turning to the outlook for the third quarter and full year 2021. The year-over-year improvement and staff utilization and the lower-than-normal operating and G&A expenses are resulting in significant margin improvements. As a result of the positive momentum across our business and the easier year-over-year comparisons, we expect the third quarter 2021. revenues before reimbursements to grow in the low double digits and EBITDA margin to increase 100 basis points to 150 basis points as compared to the same period in 2020.

For the full year 2021, we expect revenues before reimbursements to grow in the low double-digits and EBITDA margin increased 225 basis points to 250 basis points as compared to 2020. For the third quarter and full year 2021, we expect utilization to be 73% to 75% as compared to 66% and 67% respectively in 2020. As Catherine mentioned, we do expect utilization to normalize somewhat in the second half of 2021 as human participant studies moderate, head count grows and we see typical seasonality.

In the third quarter, we expect full-time equivalent employees to be flat sequentially and then in the fourth quarter to grow 2% sequentially. As we have previously stated, we intentionally tempered our recruiting activities during 2020 to ensure that we could deliver strong earnings. We have accelerated our recruiting in 2021, but it takes several months until candidate start. As you would expect, we had lower than normal voluntary turnover during 2020 due to the pandemic, but it is on increase during the past quarter.

For the second half of the year, we expect the year-over-year realized rate increase to be approximately 2.5% to 3% as a result, the full-year realized rate increase is expected to be 4% to 4.5%. We expect stock-based compensation to be $3.9 million to $4.4 million in each of the remaining quarters and $19 million to $19.5 million for the full year.

For the third quarter, we expect other operating expenses to be $8.3 million to $8.5 million. For the full year 2021, we expect the operating expenses to be $32.5 million to $33 million driven by a gradual return to our offices during the third quarter. As we stated previously, we believe our office environment provides long-term value as it supports collaboration for our interdisciplinary teams and staff development, which results in a higher value for our clients and retention of our employees. We anticipate associated expenses to be at historic levels as we exit the year.

G&A expenses will also gradually scale as travel activities resume. For the third quarter of 2021, we expect G&A expenses to be $3.8 million to $4.2 million. For the full year 2021, we expect G&A expenses to be $15 million to $15.5 million as a result of marketing and recruiting activities increasing during the year. For 2021, we expect interest income to be approximately $10,000 per quarter or $60,000 for the full year. In addition, we anticipate miscellaneous income to be approximately $750,000 for each of the remaining quarters or $2.5 million for the full year. For the second half of 2021, we expect our tax rate to be approximately 27%. Capex for the full year 2021 is expected to be roughly $10 million. We delivered another strong quarter and are confident in our ability to continue to grow.

I will now turn the call back to Catherine for closing remarks.

Catherine Corrigan -- President & Chief Executive Officer

Thank you, Rich. The importance of scientific excellence and disciplinary diversity in advancing solutions to client's challenges has never been higher and the COVID-19 pandemic has only highlighted the fact that the world needs science now more than ever. For over 50 years, Exponent has been committed to the advancement of science and has leveraged its expertise to advise clients on the causes of failures, as well as how to produce, safer, healthier more sustainable and more reliable products and processes. We will continue to advance science with the same consistency, accuracy and proficiency our clients trust from the brightest scientists engineers physicians and regulatory consultants in the world. As our clients' needs evolve and increase in complexity, Exponent is well positioned to stay ahead of the curve utilizing our deep knowledge and multi-disciplinary capabilities to deliver unique solutions and ultimately to drive long-term shareholder value.

Operator, we are now ready for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Tobey Sommer, Truist Securities.

Tobey Sommer -- Truist Securities -- Analyst

Thank you. I'm curious how you would parse growth maybe into two buckets, the first being catching up on pent-up demand from work delayed by the pandemic and another bucket of newly generated work. If you can do it in those terms?

Catherine Corrigan -- President & Chief Executive Officer

Yes thanks. Tobey there is a combination of those two things. We still have things in buckets--when I look at the sort of litigation side, this is an area that continues to have projects be unpaused. We've gotten a sort of back to 2019 levels with that, but there is still more head space there for us to evolve into and so it's really a combination of projects that are becoming unpaused. We expect that to continue but also we're seeing quite a bit in terms of new filings and new matters and so on that litigation side, it's a combination of those two things. When I look at the proactive side, it's again a combination--It's sort--it's progressively less each quarter in terms of how much of it is becoming unpaused if you will, but there still is an element of that we're seeing whether that's in our human participant studies -- some of our wearables work and things like that but we're absolutely seeing a significant amount. And I think that by far the larger bucket is that's driving demand is around the new matters whether that's in the litigation side or around the proactive side.

Tobey Sommer -- Truist Securities -- Analyst

Thank you. Is the Biden's administrations regulatory posture influencing trends in the business at this stage or is that take time to percolate?

Catherine Corrigan -- President & Chief Executive Officer

It does take time to percolate, I mean there is no doubt that over long periods of time as we look at the way the bar gets raised, whether it's around chemicals, whether it's around human health or the environment, we continue to see globally that bar has raised. Clearly, the Biden administration is looking to raise even further when you look at the climate related drivers in particular, those are already manifesting themselves drivers in the business for us. When we look at the climate vulnerability work that we're doing, we look at the state level regulatory environment around utilities, we look at the regulatory environment around chemicals, et cetera. So there is really this continuous path of raising over the bar, if you will, but the Biden administration's policies in particular haven't moved to the needle yet, but I think our just reflective of the fact that we expect to that bar to continue to be raised across the board.

Tobey Sommer -- Truist Securities -- Analyst

Thanks. Various appropriations under consideration in Congress and I guess that include the infrastructure bill as the more prominent and as this week of regular way budget which may become later in the year and then this reconciliation package measured in trillions, which would be in theory, the most important to your business? Should they become tax rather than bills under consideration?

Catherine Corrigan -- President & Chief Executive Officer

Yes, so I mean, the infrastructure piece as you know, I mean we've been doing infrastructure work for years and years, although we tend to get involved in sort of the failure analysis side of that. So that's not something that relates directly to the existing packages that are kind of moving their way through but if you think about over the longer term that kind of investment on the infrastructure side that will certainly create opportunities for disputes that arise and in fact we're seeing that in other global areas of the world where we've had some very large engagements related to construction disputes and sort of root cause assessment there engineering team is doing. So if you look over kind of a longer-term, again, we're not going to see that move the needle immediately but as the infrastructure place through, it's certainly creates more opportunity for work on that sort of that's dispute side of the business. So I do think there is an influence there.

Tobey Sommer -- Truist Securities -- Analyst

Last question from me, Can I get your comments on inflation both internally and your cost structure as well as any external manifestations that could be sort of bill rates or something like that? Thank you.

Rich Schlenker -- Executive Vice President & Chief Financial Officer

Yes. So look what we've seen historically is that as inflation rises in particular, the cost of labor, it goes up. The good news for us is that most of our clients are also hiring engineering and scientific talent within their organization and have a real time barometer on the fact that those costs are going up and as such what we've been able to historically do is as those rates go up, we're able to raise pricing equally to be able to cover that cost. So, that has been what we've been able to do over several decades is on a regular basis be able to see that clearly when inflation is at its lows our realized rate in compensation increases might be at the lower end of our range and then move at the upper end of the range when that demand environment is very high. Our other cost other compensation is such a large component of it, but clearly there will be some gradual increase in the cost of travel and in real estate into some of those things as well. But I would hope that again because we're able to raise pricing in that environment because it's tied into that demand side of engineers and scientists, I would expect that we will be able to maintain margins.

Tobey Sommer -- Truist Securities -- Analyst

Thank you.

Operator

Our next question comes from Sam England, Berenberg.

Sam England -- Berenberg -- Analyst

Hi guys, thanks for taking the questions. The first one, I was wondering if you could talk a bit more about the Life Science expansion that you mentioned, I suppose maybe touching on where the main areas of opportunity be going forward? And so do you require slightly different people to expand that business than you have in-house at the moment. And do you need to hire additional staff in that area?

Catherine Corrigan -- President & Chief Executive Officer

Yes, thanks, Sam. So there we're very excited about the opportunities in life science and as you know, we've been historically strong on the medical device side both in both proactive and reactive work but less so on the pharma side and what we're really seeing in that industry is a desire to--It's a really push the paradigm of digital health and that's a very broad--very broad area but if you look at our experience around technology and now being able to marry that technology whether that's wearable technology, whether that's human factors research type of technology, we can marry that with the impact of therapeutic interventions you know whether those are drugs, whether those are actual technology related interventions like virtual reality and we bring in our data sciences expertise and our expertise and really understanding the real world impact of in terms of performance and safety of consumer products-- that's where we really believe that we can leverage our expertise in this area of digital health. If you think about some of the complexities in life sciences around personalized medicine around cell and gene therapy, the push around real world evidence to really understand in unique ways, the value of medicine. And so one of the areas. Your second question was sort of about different types of people to help us to expand that and look, we start with our base, that's a very strong around epidemiology, we've had that for decades. We are now hiring in the pharmaco-epidemiology.

So, that is an adjacent area that we are becoming stronger and stronger in and from that base we start to bring in some of the health economics expertise and real world evidence expertise and data sciences expertise but is very specific to things like electronic health records and other areas of health-related data science. So, those are different kinds of folks that we haven't had before that were already hiring and that we are continuing to look to hire and so there is a bit of an expansion in terms of being different from the traditional hires but we're going to be able to really bring that differentiated team by covering those area--basing epidemiology and then sort of branching out from there.

Sam England -- Berenberg -- Analyst

Okay, great. Thanks. And then, could you talk a bit about the international business at the moment as well and specifically any areas of opportunity that as you see as we move out of the pandemic, within any of the international market either year-on-year?

Catherine Corrigan -- President & Chief Executive Officer

Yes, sure. So, look the chemical regulatory environment around both agricultural chemicals as well as industrial chemicals continues to be a strong grower for us. It has been historically, it's been a double-digit grower and we have a lot of confidence in that area, continuing to grow that is mostly centered. In terms of our international operations, that's going to be UK and EU-based. There is an interesting opportunity I think to leverage that expertise in chemical regulation into what we're doing with pharma -- that's a longer term sort of outlook, but there are definitely opportunities there an overlap there. Over in Asia, much of the work is centered around consumer electronics related work, around energy storage and also around international arbitrations. And really, the international disputes work is global. So we continue to see a lot of strength and opportunity there, particularly in the construction disputes area when you think about all of the delays that happened because of COVID-19. Those are already starting to manifest themselves, trying to sort of pick apart, what the root causes of that are.

Our Health Sciences expertise is very helpful in that regard to sort of combine with our construction delay and engineering expertise. So we think globally, those are a few of the areas that are looking promising for us going forward.

Sam England -- Berenberg -- Analyst

Okay, great. Thanks. And then maybe just one final one for, Rich, I mean in terms of Capital Allocation. I just wondered how you're thinking about things heading into the second half -- is the uncertainties in the pandemic may be reduced it, do you have this inclination to step up the capital returns to shareholders going forward?

Rich Schlenker -- Executive Vice President & Chief Financial Officer

Yes, I definitely think that we continue to look for opportunity to return cash to shareholders through the dividend as well as repurchases. We did dip back in to the market here in the second quarter. I would expect that to continue throughout the rest of the year and clearly beyond with our goal of really bringing that cash balance down into that over the long term here into that $50 million to $70 million range. So, I think we're in a great position to be able to put that to work here over the next couple of years.

Sam England -- Berenberg -- Analyst

Great, thanks very much. I'll hop off.

Operator

[Operator Instructions] Our next question comes from Andrew Nicholas with William Blair.

Trevor Romeo -- William Blair -- Analyst

Hi. Good evening, everyone. This is actually Trevor Romeo in for Andrew. Thanks for taking the question. Firstly, can I just wanted to follow up on the topic of kind of climate vulnerability and energy storage types of projects just wondering if you could give us sort of a ballpark, order magnitude, how much of your current project base or revenue is related in some way to energy transition climate change mitigation is broadly defined. and then would you expect those types of projects to kind of be accretive to the company's overall growth over next few days?

Rich Schlenker -- Executive Vice President & Chief Financial Officer

Yes. So look Exponent's business related to energy storage overall both at the device level all the way up to the grid scale storage level that type of work today is probably a high single-digit percentage of our work, it's somewhere in that range of work that we do across many different industries. As we look at the work that we're doing in particular, if you are looking around energy the energy market in grid scale storage that is actually a small portion of the work that we're doing today. And would probably be measured in the low single digit percentage of our total revenues, that's in that area today, as it pertains to the work that we're doing related to risk--climate related risk that goes into again primarily around the work that we're doing in the utility area around integrity management work that's ongoing. I would put that work in the range of being in somewhere in the mid-single digit percentage of our work today where we're doing that level of activity.

Trevor Romeo -- William Blair -- Analyst

Okay, great, thanks. That's really helpful, Rich. And maybe just kind of wanted to touch on the margin guide increase given that it was fairly significant. I know you mentioned improving utilization and some lower operating expenses, is just kind of more of the current year phenomenon or the kind of more permanent structural factors in those improving margins that would you call out?

Rich Schlenker -- Executive Vice President & Chief Financial Officer

Look, the big contributors to the margin increase is first being driven by the fact that we ended up with about $2 million lower than we were in the same quarter of 2019 in G&A and about flat with where we were in our other operating expenses. So those together you would have expected them to be slightly higher than maybe two years ago. So you can view that as contributing sort of the 250 basis points to what's going on there in that area. The other area that's made a significant contribution to it is around the utilization there. We do think that the 79% utilization is an all-time high for us. The second quarter is a strong quarter for us. We've one time about 4 years ago, we in the second quarter we achieved 77% utilization. So as our annual utilization moves from being in that sort of low 70s, 72% to 73% toward the mid-70s overtime we would expect that utilization comparatively would have improved historically, but I think that the 79% is pulling at the top end of the utilization we would expect to see in a quarter and expecting that to pull back by a couple of percent.

Where we look forward is if you just look forward into our third quarter as a comparison, this third quarter when we look back, we're going to end up having one additional holiday and employees paid probably two additional vacation days each. So right away way, there is three days out of a 65 day quarter that are going into holidays and vacations. So you can see the impact that, that would just have on a sequential basis moving from Q2 to Q3. In addition to that, we did see an elevated level of human participant studies. I would expect that to moderate by a percent or two on the utilization as well. And so that's why we provided the guidance in the 73% to 75% range for the third quarter and full year.

Trevor Romeo -- William Blair -- Analyst

Understood, that makes a lot of sense. If I could just sneak one more quick one in, I know you touched on capital allocation already, but like the short-term investments on the balance sheet dropped to 0 for the first time in a while, was there any particular reason for that in the quarter?

Rich Schlenker -- Executive Vice President & Chief Financial Officer

Yes. So the reason is just the -- we've had a laddered investment portfolio over time as interest rates have hit there very low bottom we put that in. We felt that the appropriate place to put that was really more an overnight in very investments and then we will redeploy that back into securities as interest rates begin to rise.

Trevor Romeo -- William Blair -- Analyst

Okay, great. Thanks. Thanks very much for the detail.

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Unidentified Speaker

Catherine Corrigan -- President & Chief Executive Officer

Rich Schlenker -- Executive Vice President & Chief Financial Officer

Tobey Sommer -- Truist Securities -- Analyst

Sam England -- Berenberg -- Analyst

Trevor Romeo -- William Blair -- Analyst

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