Good day, and welcome to the Exponent's First Quarter of Fiscal 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Whitney Kukulka, Investor Relations. Please go ahead, ma’am.

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's first quarter 2018 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, and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Paul Johnston, Chief Executive Officer; Catherine Corrigan, President; 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 include 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 Factors Affecting Operating Results and Market Price Stock in Exponent's most recent Form 10-K. 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 Paul Johnston, Chief Executive Officer. Paul?

Thank you. Thank you for joining us today. Following my discussion of the first quarter 2018 results, Rich will provide a more detailed review of our financial performance and business outlook. Then Catherine will provide her thoughts and closing remarks, after which, we will open the call to your questions. Exponent continued its strong momentum from 2017, into the first quarter of 2018. We delivered strong financial results, while positioning the company for long-term success. We grew first quarter net revenues by 13%, and expanded our EBITDA margin by 260 basis points to 26% of net revenues as compared to the same period last year. Our first quarter results benefited from positive market trends across several industries, practices and geographies, as well as the ongoing large shipment factors project, which we began discussing in the first quarter of 2017. We are seeing good demand for interdisciplinary advice related to battery technology from several industries including consumer products, automotive, medical device and energy. We are being retained for both reactive and proactive services. We have been engaged to support clients with product recalls and litigation in addition to providing technology assessments and design consulting. Our battery expertise located in North America, Asia and Europe has been invaluable declines as their products are manufactured and sold around the globe. We continue to be called upon by clients in the automotive industry to analyze their most significant product recall issues. These engagements are leveraging our multidisciplinary team and our Phoenix test and Engineering Center. We're also seeing growth opportunities to support the development and deployment of electric and automated vehicles. The large human factors project for a client in the consumer products industry continued at a high rate in the first quarter, representing between 7% and 8% of net revenues as compared to…

Thanks, Paul. Let me start by saying that all comparisons will be on a year-over-year basis unless otherwise specified. For the first quarter of 2018, total revenues were up 15% to $96.5 million, revenues before reimbursements or net revenues as I will refer to them from here on were up 13% to $90.7 million. Net income increased 23% to $20.3 million, or $0.75 per diluted share as compared to $16.6 million or $0.61 per diluted share. In 2016, Exponent adopted a new accounting standard for the classification of tax adjustments associated with shared based awards. The first quarter tax benefit from gains realized upon the issuance of share-based awards was $3.9 million, or $0.14 per share, in 2018 as compared to $6 million or $0.22 per share in 2017. As a reminder, our net income also benefited from the new tax legislation, which reduced our consolidated tax rate, which I will discuss later. EBITDA for the quarter increased 25% to $23.5 million. For the first quarter, billable hours increased 11.2% to 329,000. For the first quarter, utilization was 76.6% as compared to 74.2% in the same period last year and approximately flat with the fourth quarter after adjusting for vocations and holidays. The large human factors project was approximately 7.5% of net revenues in the first quarter as compared to approximately 5% in the same period last year. This project will step down to approximately 4% to 5% of revenues in the second quarter. Based on current discussions, we except an increase in the third quarter and then for this project to step down again in the fourth quarter. Based on this level of activity and the seasonal increase in vacations we expect in the second quarter, utilization will be down 2 to 3 percentage points from the first quarter.…

Thank you, Rich. As our results indicate Exponent is experiencing increased demand for its services as products and processes become more complex. Clients are seeking integrated solutions for their most challenging, safety, health, environmental and reliability issues. Exponent’s multidisciplinary capabilities and graphical reach have created a differentiated market offering. Over the last fifty plus years, Exponent has hired and developed some of the brightest engineers and scientists. We continue to broaden and deepen our capabilities by hiring the top Ph.D. students from the best universities as well as attracting recognized experts from industry, government and consulting firms. This combination of new Ph.D.s and mature experts allows us to leverage our experience and also remain as a cutting edge of technology. Interdisciplinary teams are critical as we provide innovative solutions and are recognized as providing high value. As I spent time with a broader set of clients and our internal industry teams, I see more and more opportunities for growth. We work with over 2,000 clients per year, which provides us with tremendous opportunities for cross-selling. I am working with our industry and client team to capitalize on these opportunities. We are focused on positioning the company for long-term success delivering strong financial results and creating value for our stakeholders. I am excited to lead Exponent as we engage the brightest scientists and engineers to empower clients with solutions for a safe, healthy, sustainable and technologically complex world. I also want to take a moment to thank Paul for his tremendous leadership over the last nine years and look forward to working with him in the years to come. Thank you for joining today's call. Operator, we are ready for questions.

Thank you. [Operator Instructions] And we'll take our first question today from Tobey Sommer with SunTrust.

Thank you. I was wondering you cite international expansion in the press release, and I was wondering if you could comment on what you think that big expansion in your total addressable market is just trying to get a sense for what that implies to the company's opportunity over the longer-term kind of more international business.

Yes, so, let me talk about Asia and Europe with regard to that. So in Asia, the primary opportunity we've had in Asia is that so much of what we – consumer products and consumer electronics that we use in the United States are manufactured in Asia. The companies that are selling the products are and the designing of the products are American companies, primarily at least most of what we do is. And we've been expanding that fairly rapidly. It's still fairly small, but we think there is huge opportunity there. Our offices, we could get additional offices and they can grow substantially because we're still very much in our infancy in what we do over there. Today, it's a very small percentage of the company, but it's a very fast growing part of the company. I think when I look at Europe, it's a little different. I think that you know that we've had a very, very solid and growing part of our business in Europe that's been focused on the regulatory environment around chemicals, the food and chemicals practice that we talk about that more than half of that is located in – primarily in the UK, a little bit on the Continental Europe and that continues to be a double-digit grower for us. But what we're doing more recently is bringing our engineering services to Europe. And I think that – that gives a lot of opportunity. For many years, we didn't think – we didn't think that opportunity was so great because we always thought about litigation as being the reactive services as being stronger in America, but the reality is as we get into the new product development things around consumer products, consumer electronics, medical devices, all of these kinds of products it turns out that our clients are very interested in help in Europe and Asia as well as here in the United States and so we see that as a great opportunity to expand our engineering into Europe. So we've always had a little bit of difficult time addressing our overall – how big the market is that we're in, in part because our business has always been about creating new services that really didn't exist before we were there or existed in a very different way. I've talked in the past about how on the reactive side, how clients used to use university professors before companies like Exponent or formerly Federal Analysis Associates were created. I think we're seeing the same kind of thing with the kind of quality of expertise we have to provide to some of the new industries, things involving consumer electronics and data products and so forth where we have a level of expertise given the quality of our stuff that can assist major companies on a whole range of areas. So expanding that more globally and getting out of the United States is a very big, we think a very big opportunity for the firm.

Thanks. What has been the impact on the business in different practices where you’ve rolled out your new kind of coordinated enterprise-wide sales effort? I was wondering for the industries for which you've already rolled it out, do you have any way to kind of describe what the impact has been on as of the growth sort of the profitability. And if you don't have specific examples yet, how long do you think it may take for it to gestate for you to be able to describe those kinds of effects for us?

Yeah, so I would say that from the standpoint of you know kind of how far along we are on that, I would describe it as we are in our infancy with this effort. Consumer electronics is an area where we are probably the furthest along, although still very much in the beginning of this process. But I do believe that you know it's difficult to quantify at this time because there is a lot of increasing demand in that marketplace. We believe we're doing a better job of capturing that demands and executing with regard to our offerings because of the sort of industry team approach that we're using. However as we – what we're learning is that for each industry where we deploy this, things are different, and there is not a one size fits all. So I think what we're doing here is a learning process and one where we can take the best practices from let's say the consumer electronics side, apply those into let's say the medical device and let's say the utility side and we are in the process of doing that. I feel as though we are learning a great deal from that process and we are continuing to identify the – really focused on identifying what the trends are in those industries and translating those trends into development of capabilities and actionable marketing opportunities for us. So I am excited about that and do believe that it will be having an impact on the business. Tough to, very tough to quantify at this point.

Thank you, Catherine. If you were to assess your expectations for the impact, could you delineate, at this point, between greater impact on the reactive side or the proactive side from this initiative?

Yes so this initiative really is not exclusively, but I would say, primarily oriented toward our proactive services. Now bear in mind that part of the process here is, of course, that we leverage our reactive experience to build that proactive work. So in terms of the client relationship, there certainly is an involvement of the reactive side. But this is really a tool that we see primarily driving the proactive side of the business. It's a side of the business where we need to be very intentional and proactive with regards to understanding those industry trends and identifying what the service offerings look like. And it is very different, I believe, from the way we have historically gone to market on the reactive side. So it's very much a focus to try to drive that proactive

Thank you. Last question from me. Given the large project that you have, I was curious, what's the capacity for you to take on other similar projects, if they emerge? And could you describe the outlook for other large projects, and so much as you're able to delineate them? Thanks.

Yes, so we don't feel that we are capacity limited to respond to a client request. I think that's one of the hallmarks of the company is, that we are very responsive. If a client comes along with something, we clearly respond. Over time obviously, you have to add more people, but we are a very responsive company. And I sometimes do like to say that, while the work we might be theoretically 40 hours, it's typically not for consultants, it's longer for that. But it's certainly not 168 hours. I mean 168 hours in a week. So in a short time period, we can always spike up. I think with regard to the likelihood of large projects, there are several things at play here. We know, over the last nine years that I have been leading the company that, more quarters or not, we've had our large project, but we don't always have them. I think there are some things that make large projects more likely, like the fact that issues around the products going wrong in terms quickly you have to respond because of social media and everything, much faster than it used to be in the past. The large companies are getting bigger, so their problems are bigger. The number of – the amount of product they have out there is huge. So when you're responding in a reactive way, I think, that, that tends to drive bigger things. The fact that the company, we, Exponent has become more and more interdisciplinary and we have more and more capability, I think, means that we can tackle broader issues. And then finally, I think, some of the reputation aspect of it. Companies are really spending more on making sure they design their products. And the interaction between their customers and their products are really evaluated very carefully, ahead of time. And I think that leads to a lot of human factors opportunities, for example. So I think, all of those bode for more larger projects. At the same time, you have to balance that. The company is getting bigger. So the projects have to get quite a bit bigger to continue to be at 5% of the firm. But we certainly feel that we have a very special client base involving very high-performing companies that have the – sometimes have the needs and the abilities to engage us on the large projects. So we think large projects will continue to be something that is important to us for a long time to come. It's just we may get many more 1%, 2%, 3% of revenue project then we get right now the more on, off 5% of revenue project.

Thank you very much.

Next we’ll hear from Tim McHugh with William Blair & Company.

Hi, thanks. Not to harp on the large projects, but just to follow up a little bit on that. The comment about stepping back up in Q3 and stepping down again in Q4. Do you have any sense at this point from the client and degrees of magnitude relative to, I guess, what you're saying for the second quarter or where you're at for the first quarter?

Well, I think what we've done, and Tim, just to give you kind of an idea about exactly kind of where we are on this. We have contracts through much of the second quarter. And so we have a pretty good idea that it will be in that 4% to 5% that we have indicated. Of course, sometimes we have a contract and based on the data people are getting, they might stall or delay something or things can change, but we have got really pretty good visibility on what it is in the second quarter. In the discussions with the clients, we know that they have plans to ramp this up in the third quarter, not third quarter going forward forever, but in the third quarter they are looking to get quite a lot of data, which is why we think it will fall back again in the fourth quarter. So the outlook we're giving in third and fourth quarter is sort of based on our understanding of the discussions we've had with the client, which have been extensive, but they're not contracts.

Yes, and as far as scale, I would say that at this point in time, probably don't expect it to be quite as much as in the first quarter. Something relative to what we did. The third quarter was very strong last year on this study work, and it will be somewhere – it will be somewhere in between this 4% or 5% and really the 7% or 8% that Paul was talking about in there. And as we look out to beyond that, I think, our feeling is that this particular area that – or particular project that we're working on, we know eventually, it will step down and eventually tail off. We think there are other – many other opportunities out there for this client and the broader consumer products industry. But we do expect that there will be a step down. Is that going to be 3%, 4% or 5%? We're not certain at this point in time.

And I guess, to elaborate a little bit on that, do you have a sense of whether there – I know you probably can't guess the size for next year. But is this a project now that you feel differently about whether or not it's likely runs to a close this year? Or does it start to say like more of the sustainable project?

I think there is a very good chance that it won't run to a close in next year. But I don't think it will be in the 5% area. I think it may be a large project, but not in the 3% to 5%, where we've typically called out projects that as we side size that may fall below that.

Okay. I guess on autonomous driven vehicles, given some of the accidents that happen. I guess, historically, I would've thought about accident as we having a personal impact being positive for your business. Given the proactive nature of what you're doing as well around those vehicles, I guess, can you talk – when we see these things, is that opportunity or is that a challenge decline spending, when we think about your business?

So it's absolutely an opportunity. I mean, not commenting on any particular event, but recently there has been very high-profile incidents involving driver-assistance technologies, involving autonomous vehicle and that is driving a lot of conversation in the client community. It's driving conversation with the regulators and it's driving conversation across all of those stakeholders. And we are finding – we are part of those conversations. And then we are finding that it is raising questions around how the – how policy should be rolled out? What are the implications with regard to safety driver? What are the implications with regard to our clients’ ability to test their vehicles on public roadways? And what are the ways in which the manufacturer community is going to be able to prove out the safety of their technologies. And these questions all fall extremely well within our real house in terms of our interdisciplinary capabilities. We have the regulatory piece of that in terms of expertise, we have the sensor-related expertise, we have the accident reconstruction-related expertise, et cetera. And so, yes, I mean, as a general proposition, these kinds of events, while incredibly unfortunate, do drive activity that is helpful to our business.

Got it. And then lastly, I guess just given, I guess, if I add up the number, it seems like, this large project is going to be – and that would be like 200 basis points more favorable than, I previously, would've thought of the revenue this year. I guess, is that – how did you view, excluding this large project, is your review for the underlying business different than three or four months ago, I guess, has the environment improved. Or I'm trying to understand how much the guidance changed, I guess, with the large project versus some other changes, I guess that you're describing sort of broader market versus your expectation?

I think it has a lot to do with the broader market. If you take away – if you do the comparison of what the big project was, a large project was in the first quarter of 2018 versus the first quarter of 2017, I think, Rich mentioned that was 2.5% difference in the size of that project. And the growth rate – the growth was a little shy of 13%. So I think, you can see that we feel really quite good about the underlying business. The underlying business is, I think growing well. And I think we have, certainly, a degree of confidence around the momentum we have there.

Okay. Thank you.

Yes, just to follow-up on that I know sometimes we almost talk too much about the big project, but actually, really, this quarter, the story is not the big project. It is a part of the story, but it is not the focus of the story.

Next, we'll have from Joseph Foresi from Cantor Fitzgerald.

Hi. Paul, it's been great working with you and Catherine congratulations, again.

Thanks Joe.

Just on the guidance side of things, I think, you're kind of alluding to it in your previous answer. What drove the upside to the revenue? I mean, the natural conclusion would be those human factors work, but you seem to be implying that may be demand has strengthened across-the-board and that was part of the surprise in the quarter. So maybe you can talk a little bit about what exactly the surprise was?

Look, our expectation coming into the first quarter was that first of all, the first quarter last year, if you were to compare the four quarters was, on a relative basis, was the weakest of the four quarters that we had. So with the momentum that we had coming through, the back half of last year, our expectation was, as we enter 2018, was that the first quarter was going to be on a year-over-year basis comparison be our strongest quarter. We expected that to be high single to low double digit sort of that range up in there. We clearly ended up with the large human factors project being a couple of percent larger than we had expected coming into the quarter. We thought it would be – for the year, we knew it was going to be stepping down, but we knew the first quarter there, even was going to be little bit stronger. So we had some of that built-in. We did get a fair share of the beat on expectations out of the large project and we ended up carrying good momentum on the underlying business through there. So it was shared relative to what we had going on between large projects and the underlying business.

Got it. And so how should we think about margins for this year? The – will margin and where they end up at the end of year be dictated from the quality and size of the revenues and costs are fairly static or is there any other way to think about it, because obviously, you've brought the margin guidance. But I just wanted to see, if upside the margins solely based on our performance of the top line?

Yes a large part of the margin is driven by the utilization. You can go and add a bunch of staff, huge amount of stuff and not have them utilized and get your revenue number, but kill your margins there. So what we've indicated is that we think that the margins will be down that 50 to 100 basis points that will be driven out of the fact that we believe that we are going to have 1% to 1.5% decline in our utilization that would play out there. So that – we did end up with a little over cost like what you saw in the first quarter here, because we had a managers’ meeting last year. We will end up having a principals meeting in between the third and fourth quarter of this year, which will rise those quarters a little bit, but not as much as the managers meeting we had a year ago, in the first and second quarter. So those are playing a few, call it, 10 basis points of swing into it. But it really has driven out of that utilization expectation that it will be down 1 to 1.5 percentage points.

Got it. And then the last question on my side, technology seems to be red-hot and some of your sweet spots are showing up in the news and those came up with other questions. The automatic driving cars, and obviously, the recent accidents and even natural disasters seem to have picked up. So I guess, my question is, you talked about how you get involved in the self driving cars. Are there other projects that you're working on that you think may become larger projects may become larger projects? I know we talked about them rolling on and off. And if so, can you describe them may be a better way of asking that is, how are you looking to step up and what areas are looking to step up because you see the largest demand? Thanks.

I’ll just start off briefly and then maybe Paul or Catherine want to add on. But I don't see any projects today that are going to fuel that 4% or 5% of revenues in a quarter in the near term. I don't see that changing. I see lots of other positives going on in the organization. I think what we had going on in the first quarter here, on a year-over-year basis, the react, your observant is that there are a lot of activity going on in the world still in the reactive side. And we are seeing that in our business. Our reactive business was growing in line with the proactive business. So pretty robustly. And that is quite diverse. It's everything from natural disasters that are leading to floods and fires. It is construction issues on bridge collapses and buildings and other things that are around the world. We've got automobile accidents. It's across-the-board that we continue to see these activities. The products and processes out there are continuing to get more and more complex, which drives many challenges to reliability and really the question of what happens. So those questions just like 50 years ago when – plus years ago that this firm was founded, still remain out there, what happen. And we think those will continue and become more complex as technology continues to get more complex over time.

Thank you.

Our final question will come from Marc Riddick with Sidoti.

Hi good evening.

Good evening.

Hi Marc.

I wanted to touch on one of the comments around the product recall activity. I was wondering if you could spend a little time talking about that. I wanted to just sort of get a general sense of where we looking at just an increase in magnitude of product recalls and/or I suppose maybe what drove that? Are people being a little bit more cautious and proactive in instigating product recall given product complexity or I'm wondering if there's any underlying threat seen around that?

So I think that what is driving that really is the desire for these clients to manage these events in the best possible way. I mean, one of the things that really drives this particular part of our business is the desire for these clients to manage very well the potential damage to their reputation that arises as a consequence of these recalls. And I think that by engaging us earlier in that process we are able to engage and get to the bottom of the issues in terms of the root cause of both technically. And then also be able to advise these clients, once the root cause is ferreted out, assist them with the process of advising them through the process, with regard we have as a company we have an outstanding reputation with the various regulatory authorities. So you talk about the National Highway Traffic Safety Administration, you talk about the Consumer Product Safety Commission, you know we are known within those entities very positively and we are sought out by the client community for those kinds of relationships, but also because of the technical skill that we bring to the root cause analysis. So I think that those two things, plus the clients’ desire to manage their reputation as best they can and in an age of 24-four-hour news cycles and social media, those are the things that drive them to us.

Okay. And in that sense I guess maybe now versus maybe five years ago, 10 years ago does that end up being initiated by different area of sea suite if you will? I mean does that basically work in a way that expand your relationship deeper with even existing clients or new ones?

I think actually what happened is these things have clearly hit the sea suite, but the sea suite is changing the culture of those firms. And I think it's pretty well understood all up and down the organization that these issues need to be addressed. And pretty compressively we've also come through a series of very big events. You can think about the Samsung Note 7 recalls, you can think about GM ignition switch, there’s a variety of things that got huge publicity in this country, not just in social media, but in Congress, and so on. And I think that there's been from some cultural shift in the way in which, as Catherine described, companies want to deal with us.

Okay, excellent. And then one last thing from me and a different one. I was wondering if you could sort of – and this is more broad-based if you will. But I was wondering if you could sort of share some general thoughts as to the opportunities that present itself from deteriorating infrastructure. I mean I know that’s kind of a big picture kind of question, but folks talking about the infrastructure needs in our country for quite some time, I was wondering if you could sort of shared maybe some of the things that you might see from that? Thank you.

Yes, well I mean I think – I certainly think that when new infrastructure is being built it leads to a fair amount of work for us because while we don't design them, new infrastructure projects the large ones invariably have their own problems, failures in them. They certainly have delays, and cost overruns and so we very much get involved in that. The reality is that for all that is said about deteriorating infrastructure, deteriorating infrastructure is actually not really killing very many people. And I know it's kind of cruel to say it. But that's sort of the reality. So it's much more just a general potholes and various roads having limited capability with regard to much load they can carry. So while this infrastructure is deteriorating, we don't get a lot of work out of the deterioration. We get work when there is really a replacement project.

And I would say the one area that we have seen work on some infrastructure is really in the gas distribution area that's going on. But not all of those are not necessarily related to an aging infrastructure, but has to do with an increased level of construction activity and other activities that are around – that are much closer to where we had thought we could burry pipelines and have those structures over time.

Okay. Thank you very much.

Thanks.

And that will conclude today's conference call. Thank you for your participation. You may now disconnect.