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 ]. Please go ahead, ma'am.

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, and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer; and Rich Schlenker, Executive Vice President and Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic SEC filings, including those factors discussed under the caption Risk Factor in Exponent's most recent Form 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or realize them, whether as a result of new developments or otherwise. And now I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine?

Thank you, Joni, and thank you, everyone, for joining us today. I will start off by reviewing our 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 continued 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 re-engaging 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 reactive engagements returned to pre-COVID levels as seen in the second quarter of 2019, while our revenues from proactive projects grew significantly compared to the same period, underscoring our long-term growth strategy. The increased activity across the business is broad-based, 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 spaces. Within the automotive arena, for example, we continue 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 systems. 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…

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 1 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 expense is a gain in 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 in 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…

Thank you, Rich. The importance of scientific excellence and disciplinary diversity in advancing solutions to clients' 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 multidisciplinary capabilities to deliver unique solutions and ultimately, to drive long-term shareholder value. Operator, we are now ready for questions.

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

Curious how you would parse growth maybe into 2 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 that in those terms?

Yes. Thanks, Tobey. There is a combination of those 2 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 sort of back to 2019 levels with that, but there's still more headspace 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 2 things. When I look at the proactive side, it's again a combination. It's sort of -- 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, 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.

Is the Biden administration's regulatory posture influencing trends in the business at this stage? Or does that take time to percolate?

It does take time to percolate. I mean there's 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, that bar is raised. Clearly, the Biden administration is looking to raise it even further. When you look at the climate-related drivers, in particular, those are already manifesting themselves as 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's really this continuous path of raising of the bar, if you will. But the Biden administration's policies, in particular, haven't moved the needle yet, but I think are just reflective of the fact that we expect that bar to continue to be raised across the board.

Of the various appropriations under consideration in Congress. And I guess that includes the infrastructure bill, is the more prominent news this week, a regular way of budget, which maybe comes 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 facts rather than bills under consideration?

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 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 assessments that our 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 infrastructure plays through, it certainly creates more opportunity for work on that sort of that dispute side of the business. So I do think there's an influence there.

Okay. Last question for 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 build rates or something like that?

Yes. So look, what we've seen historically is that as inflation rises, in particular, the cost of labor 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, and 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, compensation is such a large component of it. But clearly, there will be some gradual increase in the cost of travel and real estate and some of those things as well. But I would hope that, again, because we're able to rise -- 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.

Our next question comes from Sam England, Berenberg.

The first one, I was wondering if you could talk a bit more about the life sciences expansion that you mentioned, I suppose maybe touching on what are the main areas of opportunities you see going forward? And as such do you require sort of slightly different people to expand that business than you have in-house at the moment? And do you need sort of higher additional staff in that area?

Yes. Thanks, Sam. So 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 proactive and reactive work, but less so on the pharma side. And what we're really seeing in that industry is a desire to really push the paradigm of digital health. And that's a 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, 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 in 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, around the push around real-world evidence to really understand in unique ways the value of medicines. 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 very strong around epidemiology. We've had that for decades. We are now hiring in pharmacoepidemiology. 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 that is very, 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 we're 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 areas, basing it in epidemiology, and then sort of branching out from there.

Okay. Great. And then could you talk a bit about the international business at the moment as well? And specifically, any areas of opportunity that you see as we move out of the pandemic within any of the international markets, either Asia or Europe?

Yes. 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. 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 U.K. and EU based. There's 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 and overlap there. Over in Asia, the -- 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, China sort of pick apart what the root causes of that are, our health sciences expertise is very, 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.

Okay. Great. And then maybe just one final one for Rich. In terms of capital allocation, I just wondered how you're thinking about seeing heading into the second half. Is there the uncertainty from the pandemic or maybe reduce it? Do you have the sort of inclination to step up the capital returns to shareholders going forward?

Yes. I mean, I definitely think that we continue to look for the 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.

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

This is actually Trevor Romeo in for Andrew. First, I kind of just wanted to follow-up on the topic of kind of climate vulnerability and energy storage type of projects. Just wondering if you could give us sort of a ballpark order of magnitude, how much of your current project base or revenue is related in some way to energy transition or 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 the next few years?

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're 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.

Okay. Great. 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 this kind of more of a current year phenomenon? Or are there kind of more permanent structural factors in those improving margins that you'd call out?

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 2 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%, 73% towards the mid-70s over time, 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, if you just look forward into our third quarter as a comparison, this next -- this third quarter, when we look back, we're going to end up having one additional holiday, and employees take probably 2 additional vacation days each. So right away, there's 3 days out of a 65-day quarter that are going into holidays and vacation. 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 1% or 2% of our -- on the utilization as well. And so that's why we've provided the guidance in the 73% to 75% range for the third quarter and full year.

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 it looked 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?

Yes. So the reason is, it's just the -- we've had a laddered investment portfolio over time. As interest rates have hit their 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.

Okay, great.

We have no further questions in the queue. This concludes today's call. Thank you for your participation. You may now disconnect.