Good day and welcome to the Exponent, Inc. Second Quarter of Fiscal Year 2022 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Joni Konstantelos. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's second quarter 2022 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 revise them, whether as a result of new developments or otherwise. And now, I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine?

Thank you, Joni. And thank you, everyone, for joining us today. I will start off by reviewing our second quarter 2022 business performance. Rich will then provide a more detailed review of our financial results and outlook and we will then open the call for questions. Exponent delivered solid second quarter results, achieving year-over-year growth in revenue and EBITDA, driven by continued demand for our scientific and engineering expertise. Growth during the second quarter remained broad based, supported by work related to the consumer products, utilities, automotive and life sciences sectors. Within our proactive services, our asset integrity and risk management engagements with utilities, energy storage related work and machine learning data studies were key contributors during the quarter. On the reactive side, litigation-related work was robust, and we saw increased demand for our services related to product safety and recalls. We are committed to growing our world class team and are pleased with the increased recruiting momentum that we're experiencing. Importantly, the pace of new hires has increased over the past few months, which underscores our ability to attract the highest caliber engineering and scientific talent to the Exponent team. Turning to our engagements in more detail. Within our proactive business, momentum is building with machine learning and human factors studies, reflective of increased demand from our clients as they seek differentiated data to improve user experience and advanced product performance. Our work in batteries and energy storage continues to diversify across industries, and we are advising clients with regard to safety frameworks in the automotive space to mitigate risk. We are also seeing the demand for virtual and augmented reality work pickup as we help our consumer products clients better understand the cognitive impacts of these technologies. Our work around wearable technologies continues to be a core driver…

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 of 2022, total revenues increased 8.7% to $130.3 million. And revenues before reimbursements, or net revenues, as I will refer to them from here on, increased 5.1% to $118.2 million as compared to the same period of 2021. It should be noted that our growth was impacted by six-tenths of a percentage point due to foreign currency translation and approximately 1% because our Shanghai office was closed for approximately eight weeks due to the pandemic restrictions in the city. Net income for the quarter increased slightly to $25.8 million or $0.49 per diluted share as compared to $25.4 million or $0.48 per diluted share in the prior-year period. The tax benefit associated with share-based awards was immaterial in the second quarters of 2022 and 2021. Exponent's consolidated tax rate was 27.3% in the quarter as compared to 26.7% in the same period of 2021. EBITDA for the quarter increased 2.1% to $37.1 million, producing a margin of 31.4% of net revenues as compared to 32.3% in the second quarter of 2021. Billable hours in the quarter were 372,000, an increase of 1.8% year-over-year. Utilization in the quarter with 76.6%, down from 79.1% in the same period of 2021. Prior-year utilization was elevated as a result of headcount growth lagging behind demand. Technical full time equivalent employees averaged 934 in the quarter, which is an increase of 5.1% over the second quarter of 2021. As Catherine mentioned, we continue to prioritize adding top talent to our world class team of experts. The realized rate increase was approximately 3% for the second quarter as compared to a year ago. In the second quarter, compensation expense…

Thank you, Rich. For over 55 years, Exponent has been committed to the advancement of science through the service of our employees to our clients and to the broader scientific community. As society's expectations of safety, health and the environment continue to be pushed to greater heights, we will help our clients find the clarity and the confidence that they need to solve profoundly unique challenges. These market drivers have fueled the growth of Exponent over the past five decades, and will continue to fuel that growth for years to come. As our clients' needs continue to evolve and increase in complexity, Exponent remains well positioned to build upon our growth trajectory, ultimately driving long-term shareholder value and profitability. Operator, we are now ready for questions.

[Operator Instructions]. And our first question will come from Tobey Sommer with Truist Securities.

[Technical Difficulty] the complexion and expected [Technical Difficulty] in hiring. I think it picked up in recent months and you expect the back half to represent an increase even from there.

We absolutely are continuing to put our foot on the gas with regard to hiring. The competitive environment continues to be there. But we're finding that, over the last several months, despite the inflationary pressures that we are continuing to see good yield on our interviews and good acceptance rates. We continue to hold those. So we are continuing to push on our university recruiting program. We are continuing on our mid-level and senior level hires programs, getting folks in for interviews, doing more in-person interviews now than we have been doing, and so that's been terrific. And really looking to accelerate as we get into the back half of this year. So there's a lot of momentum in that flywheel right now. And we're going to continue to push on that in order to meet the demand of our client work.

Macro uncertainty has evolved in recent months. Has there been anything you could perceive in terms of changes in client behavior and maybe approach it through the prism of reactive versus proactive work?

I can touch on that one as well. So, we are we are very much keeping an eye on the macroeconomic environment, both from the standpoint of the demand side with our clients, as well as the talent side. What we are finding thus far, if you look at our reactive business, that's driven primarily by litigation with a significant portion around product safety and recall. Those historically have been areas that have continued even during recessionary types of environments. Not surprisingly. We don't see filings generally go down with that sort of environment. The pandemic was an exception because of the physical constraints associated with court closures. But in prior economic downturns, if you go back to maybe 2008, 2009, we saw reactive work continue through that period, really only impacted by clients actually going bankrupt, which happened in the automotive industry back in 2008. From the standpoint of our proactive work, what we really have seen in past recessionary environments is that the innovation driver continues to be strong. We find in the electronics industry, or now in the automotive industry, they continue to need to innovate their complex products, even if they're selling fewer units. And we've seen that tendency to keep that design consulting work going. In the life sciences arena, we continue to see those fundamental market drivers, like the aging population and health equity challenges. These are big drivers for our business and that innovation driver. Our risk work is driven by things like climate change and extreme weather for utilities. And so, those drivers continue to be there. On the regulatory side, that's a significant portion of our proactive work. Our clients still need to get their products through those safety frameworks. And so, those products are increasing in complexity, and those regulatory frameworks are increasing in complexity. We've seen in the past that some of those clients do outsource less, but we've also seen some of those clients outsource more if they're slowing or freezing hiring on their end. And so, for example, our chemical regulatory business continued to grow throughout that 2008-2009 timeframe. So, look, we're keeping a close eye on that side, as well as the talent side. And we're not immune by any stretch. Our clients look very carefully at their budgets, and particularly in these types of environments. But what we found, based on the nature of our market drivers and the history we've got, we've got some immunity, so to speak, on our work. Our demand continues.

And I just had a question – weave Rich into this, perhaps – could you describe, in the current quarter or period, what big product risk looks like versus history?

As we've talked about over the very long term, from time to time, Exponent might have an individual project that is, let's say, larger than normal. And normally, we would think of a large project in our portfolio being something that might be 2% or 3% of revenues in the individual quarter, might vary from that in future quarters, typically doesn't step off. But as they get larger than that and getting that 4%, 5%, 6% range, like we had, in particular with the Macondo accident for BP in the Gulf and the unintended accelerations for Toyota or the San Bruno gas line for PG&E, those projects, at times, achieved that sort of 5% sort of level. And we called that out for investors. The other time we've talked about it is where we had some particular individual studies that we were doing around machine learning or human participant studies that were also larger – that larger in size. We've been very fortunate that we've been able to transition that business to a much more of a portfolio across clients. Still a good – some concentration within clients. But at least the number of projects is much more diverse than we've had in the past. So that is an area, where we're seeing across a few clients, a total that might approach upward of 8%, 10% of our business that we're doing in the area of machine learning and human participants studies. But it's a much different portfolio than it was maybe three or four years ago when we talked about it, but still an area that we have sensitivity. The projects are larger, on average, than our normal projects. But that would be an area where we might have more sensitivity to it is really around some of those studies. And then, the other area that, again, we built out a good portfolio is really around our work for Pacific Gas & Electric where a lot of the work that initiated around the major fires there were very reactive in nature and very investigative. And now, we've diversified what we're doing for them in that area of risk management investigations and a broad set of support as they try to move forward with their strategy. So, yes, large client, but a more diversified portfolio than we had, again, three or four years ago.

[Operator Instructions]. And that does conclude the question-and-answer session. I'll now turn the conference back over to you.

Okay, thank you very much. And we appreciate everybody being on the call and look forward to catching up with you between now and our next earnings call.

Thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.