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Edited Transcript of EXPO earnings conference call or presentation 17-Oct-19 8:30pm GMT

Q3 2019 Exponent Inc Earnings Call

Menlo Park Oct 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Exponent Inc earnings conference call or presentation Thursday, October 17, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Catherine Ford Corrigan

Exponent, Inc. - President, CEO & Director

* Richard L. Schlenker

Exponent, Inc. - Executive VP, CFO & Corporate Secretary

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Conference Call Participants

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* Alexis Magee Huseby

D.A. Davidson & Co., Research Division - Senior Research Associate

* Andrew Owen Nicholas

William Blair & Company L.L.C., Research Division - Analyst

* Joseph Dean Foresi

Cantor Fitzgerald & Co., Research Division - Analyst

* Samuel England

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Tobey O'Brien Sommer

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Whitney Kukulka

The Blueshirt Group, LLC - MD

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Presentation

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Operator [1]

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Good day, and welcome to the Exponent Third Quarter of Fiscal 2019 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Whitney Kukulka. Please go ahead.

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Whitney Kukulka, The Blueshirt Group, LLC - MD [2]

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Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's Third Quarter 2019 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, President and Chief Executive Officer. Catherine?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [3]

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Thank you, and good afternoon, everyone. I will start of today by discussing our third quarter performance, Rich will then provide a more detailed review of our financial results and expectations for the rest of 2019, and then we will open the call for questions.

Exponent reported high single-digit net revenue growth during the third quarter, representing continued execution driven by positive market trends, while wrapping the large human factor study that concluded during the third quarter of 2018.

We are reiterating our prior revenue guidance for the full year, but as a result of our strong performance year-to-date, we are increasing our EBITDA margin outlook and remain confident in our continued execution this year and beyond.

Net revenues in the quarter grew 8%, year-over-year, to $95.5 million. Net income increased 13% to $19.6 million, and EBITDA increased 5% to $26 million.

Our results demonstrate the markets growing demand for world-class engineering and scientific advice. We continue to grow our reactive services as clients called upon Exponent to answer the question, why did this happen? These questions ranged from why did the building collapse? To, why did the Advanced Driver Assistance features not stop the car? Our proactive services also continued to expand as clients faced the challenge of how to build safe and highly reliable products as their technologies grow in complexity.

We also continue to benefit from multifaceted and global regulatory framework. During the quarter, we continued our work for Pacific Gas and Electric, to evaluate the integrity of their electric infrastructure and to help mitigate safety risks for customers and communities related to wildfires.

In aggregate, this work contributed approximately 4% of revenues in the third quarter. We anticipate these projects will continue, but they will step down over time.

Our international arbitration work related to large capital projects expanded geographically as we had projects in Asia, Australia, Europe, the Middle East and North America.

Our human factors and product studies continue to provide unique insights into the operability, usability and safety of human-machine systems across the diverse set of focus areas.

While we are not currently conducting an individual study of the same scale as our large human factors study of 2017 and 2018, we have expanded the portfolio of use cases and technologies that we are evaluating for this client and for other clients.

As we look forward, human factors is among the most exciting capabilities that will drive growth across multiple markets for Exponent. Exponent's engineering and other scientific segments represented approximately 81% of the company's third quarter and year-to-date net revenues.

Net revenues in this segment grew approximately 8% in the third quarter and in the first 9 months as compared to last year.

For the third quarter, this segment had noteworthy performances in its human factors, Material Sciences, Polymer Sciences, Thermal Sciences, biomedical and construction practices. Clients continue to demand Exponent's interdisciplinary solutions for increasingly sophisticated systems and devices. We are broadening our reach across the product life cycle, improving the safety and the performance of both new and existing technologies.

These engagements cover a breadth of industries that includes consumer products, energy, transportation, construction and Life Sciences.

Exponent's Environmental and health segments represented approximately 19% of the company's third quarter and year-to-date net revenues. Net revenues in this segment grew 6% in the third quarter and 4% year-to-date as compared to last year. Within this segment, 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.

Our interdisciplinary teams of experts are earning Exponent's increasing international recognition as a top engineering and scientific consulting firm. The large capital prospects, we are uniquely positioned to provide experts for multiple engineering disciplines as well as construction delay and damages.

For clients who must meet health and safety regulations, as they distribute products globally, our scientific and regulatory expertise in North America, Europe and Asia is invaluable. Exponent is capitalizing on long-term trends, and we are confident in the future growth of the business.

Rich will now provide a more detailed review of our financial performance and business outlook.

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [4]

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Thanks, Catherine. Let me start by saying that all comparisons will be on a year-over-year basis unless otherwise specified.

For the Third Quarter of 2019, total revenues were up 7% to $101.5 million. Revenues before reimbursements, or net revenues, as I will refer to them from hereon, were up 8% to $95.5 million. Net income for the third quarter increased 13% to $19.6 million or $0.36 per diluted share as compared to $17.5 million or $0.32 per diluted share.

For the third quarter, the tax benefit associated with accounting per share-based awards was $1.7 million or $0.03 per diluted share as compared to $100,000 or $0.00 per diluted share last year.

EBITDA for the quarter increased 5% to $26 million, up from $24.8 million a year ago.

For the first 9 months of 2019, total revenues and net revenues increased 7% to $307.1 million and $289.2 million, respectively. Year-to-date, net income increased 13% to $63.3 million, and earnings per diluted share were $1.17 as compared to $56.2 million and $1.04 per diluted share.

Year-to-date, the tax benefit associated with accounting per share-based awards was $7.4 million or $0.14 per diluted share as compared to $4.2 million or $0.08 per diluted share last year.

Year-to-date, EBITDA increased 7% to $79.4 million as compared to $74.3 million. Billable hours in the third quarter increased 5.4% to 37,000. For the 9-month period, billable hours increased 4.6% to 1,018,000. For the third quarter, utilization was 71.6%, which is down from 73% in the same quarter last year. Year-to-date, utilization was 73%, down from 74.8% last year. Utilization declined due to a challenging year-over-year comparison due to a large project that concluded in the third quarter last year.

For the full year 2019, we expect utilization to be 71% to 72%, which includes the impact of the large project and a 53rd week, which will be an extra week in the fourth quarter. This additional week will increase net revenues by approximately 5% for the fourth quarter, and 1.25% for the year. The additional week will include the 2020 New Year's holiday and associated vacations, which will reduce utilization for the fourth quarter by 200 basis points and the full year by 50 basis points.

So for the fourth quarter, we expect a 4 to 5 percentage point decline in utilization from the third quarter, due to the additional holidays and vacations. We continue to expect our long-term utilization to increase as we build more critical mass in our offices and practices and grow our proactive services.

Technical full-time equivalent employees in the quarter were 906, up 7.4%, year-over-year. We expect FTEs to grow sequentially in the fourth quarter by approximately 1%.

The realized rate increase was approximately 2.5% for the quarter. We expect a year-over-year realized rate increase of approximately 2% to 3% in the fourth quarter.

For the third quarter, EBITDA margin decreased 78 basis points to 27.2% of net revenues. Year-to-date, EBITDA margin has decreased 11 basis points to 27.5%. For the quarter, compensation expense, after adjusting for gains and losses in deferred compensation, grew 8%. Included in the total compensation expense is a gain and deferred compensation of $360,000 as compared to a gain of $1.84 million in the third quarter of 2018.

As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line.

Stock-based compensation expense in the quarter was $3.8 million as compared to $3.6 million last year. We expect stock-based compensation to be approximately $3.7 million to $3.9 million in the fourth quarter.

Other operating expenses increased 7% to $8.3 million in the third quarter. Included in other operating expenses is depreciation expense of $1.7 million. For the fourth quarter, we expect other operating expenses to be in the range of $8.4 million to $8.6 million. G&A expenses were $5.5 million in the quarter, up 17%. G&A expenses are expected to be in the range of $5.4 million to $5.6 million in the fourth quarter. As a reminder, expenses related to our biannual managers meeting are split between the third and fourth quarters and are what has really driven the, larger than normal, increase in G&A expenses.

Exponent's consolidated tax rate was 22.1% for the quarter as compared to 27.2% in the same period last year.

Year-to-date, inclusive of tax benefit of share-based awards, Exponent's consolidated tax rate was 18.2% as compared to 21.2%. We expect consolidated tax rate to be approximately 27.5% in the fourth quarter, and our full year tax rate to be approximately 20.6%.

Moving to our cash flows. Year-to-date, operating cash flow was $52.3 million. Capital expenditures were $4.5 million for the quarter. We expect CapEx to be $20 million to $22 million in 2019. CapEx should return to approximately $6 million to $8 million annually, after the completion of the new building in Boston.

Year-to-date, we distributed $25.2 million to shareholders through dividend payment and closed the period with $210 million in cash and short-term investments. Today, we announced a fourth quarter dividend payment of $0.16 and reiterated our intent to continue to pay quarterly dividends.

While the third quarter and first 9 months of 2019 reflected some difficult year-over-year comparisons, we are pleased with the strength of the business. We are also pleased that margins are only slightly down, considering the completion of the large project and the biannual managers meeting.

As we look forward, we continue to expect revenue before reimbursements for the full year 2019 to grow in the high single digits as compared to last year. We expect fourth quarter revenue growth in the low to mid-teens, which includes the impact of the additional week in the fourth quarter of 2019.

Due to our strong performance year-to-date and expectations for continued positive momentum, we are increasing our EBITDA margin guidance for the full year 2019. We now expect EBITDA margin for the full year to be down approximately 25 basis points from the 27.3% achieved in 2018.

This includes EBITDA margin declining 25 to 75 basis points in the fourth quarter as compared to the same period a year ago.

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

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [5]

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Thanks, Rich. For over 50 years, Exponent has focused on being ready to address our clients in tending technological challenges. By leveraging our leadership position in failure analysis, our industry experience and the constant influx of the best and brightest talent from top universities, we position ourselves ahead of the curve. We are prepared to advise our clients on the causes of failures as well as how to produce safer, healthier, sustainable and more reliable products and processes.

These market drivers, combined with Exponent's world-class team, will fuel long-term growth.

We will now open the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question today from Joseph Foresi with Cantor Fitzgerald.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [2]

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My first question is just, if you can give us an update on any large projects that you still have, either going on or in the pipeline? And specifically, color on PG&E, both on the bankruptcy side and the continuing work and other some potential power outages on the West Coast?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [3]

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Yes. So we do expect, Joe, that the work with PG&E will continue. As we said, it represented, in aggregate, about 4% of our revenue in the quarter. It's clear to us that from an engineering and from a safety standpoint, this client has some very challenging problems. There's tremendous public pressure, obviously, being brought to bear upon them, with respect to their infrastructure. We're not into the details of everything that we're doing, but I think that the good news is we do have a long-standing history of working on very tough issues with this client, issues that we are uniquely qualified to address. And so, while it's difficult to really have a crystal ball on how that will step down over time. Their priorities can shift quite rapidly in a situations like this. It makes it difficult for us to predict. But if the San Bruno explosion, back a number of years ago, was any indicator, we had a lot of acute activities following that event. And then a level of ongoing work in the integrity-management arena, that continues to this day. And really, this area of Integrity Management, I think, represents an opportunity, really, for growth across the industry. So we are very pleased with, sort of, where we are with regard to our technical capabilities and services.

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [4]

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I said it before, we have about $3 million of receivables outstanding that are pre-bankruptcy dollars. It turns out that, as we've indicated before, we anticipate being paid in full on all of that. What we understand from the legal analysis of PG&E's proposal for restructuring as well as the 2 alternative proposals that the judges allowed to bring forward that under -- both -- all 3 of those scenarios, it is expected that the unsecured holders will be paid out in full, so we continue to anticipate that payment. We do have about a 5% reserve on that, just call it being on a conservative nature.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [5]

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Got it. Okay. And my second question is as we look at -- and I'm not asking for guidance for next year yet, although it's about to sound that way, but if we look at the next year's trajectory for the business, you did a very good job of kind of filling the hole on margins this year. How should we think about growth rates and margins as we head into 2020? Are we returning to the normal expansion from the exit-year levels on the margin side? Are we going back to sort of the mid-single-digit growth rates? Anything to point out from the seasonality perspective? I know it's early, but I am just trying to get a sense of -- because we are in the fourth quarter, how that's going to start to...?

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [6]

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Yes. So look, we're just initiating our annual process that we go through on our planning. We go out to each of our business units as well as our industry teams and are going through that planning process as we speak, but we're still early on. So we're not in a position to be able to give full guidance as it relates to 2020, and we'll bring that forward when we have it, at the conclusion of the fourth quarter. What I would say is that, look, we are continuing to feel good about the market trends, our position in the market and what we're building upon. Our expectations over the long term continue to be that we can grow the business in the high single to low double-digit growth. As we look at 2020, we will clearly have, immediately, a 1.25% headwind from having that extra week in 2019, the 53rd week that we won't have next year, will provide that. In addition to that, as Catherine has just gone over, about 4% of our work is tied into the wildfire and Integrity Management work for PG&E, and at this point in time, we don't know what level that will likely step down to. But we could end up with a little bit of headwind related to that work stepping down, but overall, at least right now, we've -- we feel good about where our business is, and we'll be able to provide more color when we get to the fourth quarter earnings announcement.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [7]

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Got it. Okay. And then the last one for me. You already talked about high single-digits versus low-single digits. Maybe you could just qualify for us, what opportunities you have in front of you? Like autonomous driving and other areas that would take you from that high single-digit to that low double-digit area code? And maybe, if you could just crystallize for us where the demand would come from if that did indeed take place.

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [8]

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Yes. So Joe, I mean, there are a number of areas of strength that, I think -- that we expect are going to, sort of, drive the growth or fuel the growth that we're talking about. You've heard me talk about human factors, this is one of our most exciting capabilities that we have. We are expanding what we're doing with regard to the types of technologies that we're addressing from a human factor's perspective. And one of the most exciting things there is really that it goes across quite a few industries. We've got the top talent in that area. Work in consumer electronics, in consumer products more broadly, this goes over into opportunities around Life Sciences and medical devices. We are seeing demand on the transportation's side, with everything we're doing around Advanced Driver Assistance and autonomy, as you mentioned. We're getting traction to some extent in oil and gas and in utilities with regard to human factors, even when you're thinking about things like worker fatigue and optimizing the human performance side of that. So this is as we use our industry teams to really penetrate at a client level into those phases, human factors is very much, what I call, at the tip of the spear, it's something that we can really use to get into those markets. Another area that I'll point to, that -- where we use that tip of the spear approach is batteries. This is something that we've been traditionally strong in on the electronic side, but there's more traction coming with regards to transportation. There's more traction coming with regard to grid scale, storage and the utility space. So that's another area where we really have opportunities to penetrate more broadly across industries. And then, of course, the international disputes, the geographic expansion there, we are in engagements that truly are global and around the world. Our reputation, we were not a name in this space 2 years ago, at all. We have scratched the surface. But there remains a quite a bit of opportunity, and we are very focused on the recruiting side there, being able to bring the premium expertise to the marketplace on construction delay, around the engineering side and then, of course, around the damages side. So I -- those are things that I really see as drivers of that growth going forward.

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Operator [9]

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Our next question comes from Alexis Huseby from D.A. Davidson.

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Alexis Magee Huseby, D.A. Davidson & Co., Research Division - Senior Research Associate [10]

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So just jumping back to PG&E, and thanks for the more information on that. I was wondering if you are able to provide us with more of a specific timeline for any expectation on the step-down and revenue contribution from that?

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [11]

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No. Look, the -- we're not able to do that. What we can say is that it's quite a dynamic situation. We work on -- for a number of different groups, on a variety of issues related to not only the failure analysis, sort of, acute situation, but a number of different things related to Integrity Management going forward. So we have a very flexible and dynamic work environment with them and it's just a little bit hard to tell where that will go. What we know, from the past, as Catherine said before, is that historically the tail has been long, when we move into not just doing the analysis of the event but really start to help clients, and in particular this client, look at how to manage that risk going forward.

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Alexis Magee Huseby, D.A. Davidson & Co., Research Division - Senior Research Associate [12]

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Got it. And we've talked high level in the past about events like Brexit being essential. Benefit or opportunity for the company due to an increased delivery regulatory uncertainty or changes. And with it coming into effect in a couple of weeks, I was wondering if you are seeing that coming to fruition at all?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [13]

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Yes. So we are monitoring, of course, the situation. I talked about dynamic situations, that is certainly one of them. In the near-term, it's certainly conceivable that the regulatory framework could become more complex as a result of this. Are there more filings that will be required around that? We don't exactly know what those details are. We do know that our clients are clearly monitoring it. They're asking us about it. We are prepared for it. We continue to focus in that area of the business, on bringing a global offering to our clients in that space, which we are prepared to do with or without Brexit. We're assuring that we have the ability to execute on the client needs in that way, and to the extent that there is in an additional regulatory framework that emerges from this, there could be more opportunity. We certainly haven't seen any kind of material something on this point, with regard to any changes in that business over on the regulatory side.

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Alexis Magee Huseby, D.A. Davidson & Co., Research Division - Senior Research Associate [14]

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Okay. That makes sense. And then something -- just lastly, you had any more granular breakout impact on third quarter utilization coming from vacation time versus the biannual meeting?

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [15]

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Yes. I mean our vacation, the biannual meeting probably had 0.5% impact on the utilization. 0.5% to a 1%, in that range that had an impact stepping down form the second quarter to the third quarter. The remainder of the change is related to the vacation and holiday changes.

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Operator [16]

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And our next question comes from Andrew Nicholas with William Blair.

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Andrew Owen Nicholas, William Blair & Company L.L.C., Research Division - Analyst [17]

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And what we've actually seen in your prepared remarks, you mentioned on multiple occasions, the pilot's momentum, internationally. Particularly, with respect to disputes. I just want to drill down on that a little bit. I was hoping you could, maybe, talk a little bit more about your plans to capitalize on that opportunity? What it might mean in terms of hiring plans, internationally? And then, maybe, if you could provide a little bit more color on the competitive environment there? And how you plan to differentiate your services versus the competition and international disputes?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [18]

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Yes. So thanks for that. We are definitely building on our international reputation, as I mentioned. And this is -- it's very much focused on -- it has been very much focused on the engineering and dispute side, as you mentioned. Although, there is more recently traction around the -- in the Life Sciences and medical device arena as well. So happy about that, but with regard to your question about, sort of, the competitive landscape, and how we will differentiate ourselves. We already have and will continue to do that. And the way that we have done that is by bringing not only the construction delay and damages expertise to the party, but what we are also bringing is the deep engineering subject matter expertise. And that is something that is completely unique in this marketplace. The competitors in that space, whether that's in FDI, whether that's in Quora, and others as well, they are not able to bring that depth and breadth of engineering expertise. So actually what happens, is that the customer's law firm needs to go out to, say a local university, for a professor or something like that. They're not able to have that coordinated and integrated work product from their expert advisors. And that is something that we have found in a number of these engagements to be a true differentiator for us and something that this marketplace is very hungry for. Not only, just that you can do one-stop shopping and find all of your experts in one place, but there is in fact an additional advisory service that we're providing by integrating all of this together. So it really does become an exciting area. And we are focused on building that brick by brick, with bringing the challenge into the organization. We have a small London operation. We are focused on bringing top talent into that area, with boots on the ground, that is a small but multidisciplinary office. We are in Singapore as well, which is a focus for these particular international arbitrations. And we're able to leverage our Hong Kong facility in order to, sort of, deliver in that geographic region. So as far as the geography and as far as the disciplines are concerned, we're very much focused on really meeting the needs of that marketplace in a differentiated way.

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Andrew Owen Nicholas, William Blair & Company L.L.C., Research Division - Analyst [19]

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Great. That's very helpful. Appreciate that. And then, maybe, one more for me. Just wanted to ask about your expectations for headcount growth in the next quarters and maybe, in to 2020, given the amount of demand you're seeing in the market?

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [20]

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Yes. So what we indicated in my comments was that we expected that headcount growth would be -- sequentially grow about 1% into the fourth quarter. That tends to be a quarter that the net growth is a little bit slower, just in the sense that we don't higher that many people in late November, into the December timeframe. As we -- again, a very important part of our planning process is going to our business units, getting there business development plan, matching that with what resources that they're going to need from a specialty headcount growth, geographic headcount growth, to put that together. So at this point in time, we don't have that yet. But what I would say is our expectations continue to be that headcount will grow over time in the 4% to 7% range. That's what we think is a very healthy headcount growth that can support our ability to grow the business in that high single to low double-digit overall growth rate.

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Operator [21]

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And our next question comes from Tobey Sommer with SunTrust.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [22]

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Could you describe the progress you're making on some of your more recent failed strategies and go-to-market approach in the recent years and kind of, assess where we are and what impact those strategies have had versus, prospectively, what kind of impacts they may have in the future?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [23]

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Sure. Yes, so in addition to doing our planning process in the fall around our internal business units, we are also very focused right now on the business development planning process for our industry teams. And this going across electronics and utilities, Life Sciences as well as oil and gas and emerging transportation technologies. We are focused on defining the services and the capabilities that we can bring across industries as well as across 2 clients within an industry. So I mentioned before, the, sort of, tip of the spear approach with certain of our capabilities. And lately, I've been pleased with what I'm seeing with regard to being able to win early work with a new client, let's say, in the battery space. That's an offering that tends to be, kind of, at the tip of our spear and then being able to spread out. With regard to emerging transportation and autonomous vehicles, that tip of the spear can be laser safety and light related work. So this approach, us being able to get in with that small engagement and then expand that across that client and that industry, is one that I am seeing progress in. I mean, I'm encouraged by the long term opportunities that we see here. I think that our managers meeting was an opportunity, really, to put some energy around this. We spent a great deal of time at the managers meeting focused on our marketplace, the capabilities that we're delivering to that marketplace and it's that team of managers -- as you know, that is our sales force. So as I went around and touched base with consultants in these key markets, both on the industrial side as well as the legal side, I'm feeling very positive when I hear their perspectives on the different capabilities that we have. I think they all walked out of there, better educated on our opportunities to cross-sell. So there is a lot of energy around this in the company. It's our job, obviously, to execute, and we've got to do that client by client, and we've got to do that meeting my meeting. And these relationships take time to develop. But I do think that we are seeing that there is a positive outlook from my perspective in terms of what we're doing here.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]

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This is, kind of, a follow-up question, I think to one that was asked previously. Have you ever had reactive work and thinking of the PG&E example here, specifically, that has then led to proactive work within the same industry? You've been around for a while and active in many industries and have been -- have a long history. So I thought that, maybe -- situations or examples that, maybe, you could point out to us?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [25]

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Yes, yes, absolutely. So this is -- the answer is a resounding yes. There are many examples. And this is -- this can be an important part of the sales process. The one very public example that I will talk about is the Samsung Galaxy Note 7. This was an example of a serious collection of battery-related issues. It was very public. It was a huge reputational hit on the part of Samsung. And what we saw across the industry in electronics and even into other industries was a heightened concern because of the problems that Samsung had encountered with their product. It was a very heightened concern around batteries, around the electronic controls, around overheating issues, around charging issues. And so that drove a substantial increase in demand around proactive services related to safety and performance of batteries that we continue to capitalize on across industries. And so failure is a great motivator for trying to really come up with ways to improve, whether that's reliability, whether that's performance, et cetera. So that is a pathway that we routinely try to leverage, and I think, really gives us a good position in the marketplace because who better to help you moving forward than the ones who've figured out why it happened in the first place.

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [26]

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I mean, Tobey, this is -- this has been everything from clients in the appliances white goods area, having fires in their, maybe, in a refrigerator or a washer/dryer situation that led them to an audit of their -- not them -- their process of design into their manufacturing processes, into their maintenance modes, and things of that type. It goes over into -- all the way back to the utility work that we did for PG&E on the gas line explosion here in San Bruno, that has led to the Integrity Management work that we've done over the last 5, 6, 7 years with them, related to that infrastructure and looking at it. So sometimes, it is a matter of that client whirring in and trying to make those improvements. We see this in the refinery industry, where there is an incident that one of our oil and gas client's refining operations, if it turns out that they identified an issue there. Then they bring this into go and help them identify, if those issues might occur at other operations that they have, not only around the U.S., but globally. So these have definitely -- failure analysis and our reputation there and our entries into clients, have led to these opportunities on the more proactive side.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [27]

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Right. And I guess, it would seem that the utility industry might be right for a new kind of best practice to go with managing their assets to failure. With respect to your geographic expansion that you have already talked about, what areas did you expand into geographically? And how big a geographic footprint could you expand into? So what's, kind of, the ongoing opportunity?

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [28]

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So why don' t I start off there and then let Catherine pick it up. Look, today we're growing internationally in 2 different ways. One is what we've got in, what I'll call boots on the ground. In Hong Kong and in Shanghai, we've got offices there. These offices were originally put in place to serve our consumer electronics clients and other consumer products clients. We're having products manufactured in Asia and assisting them into developing more reliable and safe products out of that. That has expanded in Hong Kong to include work-related to litigation or arbitration work and such. Today, in Asia, we do have a couple of people in Singapore as well, as Catherine has indicated, that are focused around these capital project international arbitrations, that are related to that. Those, what we view is that the ground basis, we will see not only as clients continue to find the right place to manufacture products over in Asia, that movement occur, but we will also continue to see that there are more disputes that are being held in Singapore and Hong Kong as well. And we will grow along with that. What we also are seeing over in the U.K., primarily, our growth, not only to support the regulatory environment around chemicals and the environment and such, but also as was described we are expanding into the engineering disciplines now. Again, still small operations but growing there. And we expect that London is going to be one of the leading places for our engineering practice because it will cover proactive services around Europe where we're out working, as Catherine described, in the Life Sciences and medical device industry as they bring products to market and helping them as we do here in the U.S. But it also is a hub for about 80% of, probably, the international arbitrations that go on to come in that marketplace. So we need to have a core group on the ground. So that today is still why overall Asia and Europe is still less than 10% of our work of boots on the ground. We actually pushed that over into the low teens as a percentage of our business when we add-on the draw of our experts that are here in the U.S., We've got worldwide recognized experts that are brought in on these engineering disciplines to form these teams to bring them together. We actually expect that demand to continue to grow as well. And it will grow faster as we give and get better expertise on the ground in Europe and in Asia because as the right people on the ground, who are our lead sales, they will end up drawing those experts that we have here in the U.S. to these global matters.

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Operator [29]

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And our next question comes from Sam England with Berenberg.

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Samuel England, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [30]

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Just a couple for me. The first one, could you talk a little bit more some of the markets you're having success in with battery technology outside of mobile devices? And how big the opportunity is in mobile devices versus other areas of battery technology?

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Catherine Ford Corrigan, Exponent, Inc. - President, CEO & Director [31]

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Yes. So one of the big areas, Sam, that has really increased traction over the last couple of quarters has been in the transportation space, specifically around micro mobility. So think scooters, think electric bicycles. These are the transportation logistics providers, sort of, getting into the hardware business. And it has created a fair bit of demand, both reactively as well as proactively. And it gets back to Tobey's question about how do the reactive opportunities create pathways for proactive work? This is another great example of that, specifically, in the battery space. So these scooters are -- run around all day, they're abused in the city and they come back to the charging place late at night and they're lined up and there is a fire, let's say, and there could be a variety of reasons for that. And so we'll go in, and we'll be able to handle the route cause analysis for that and also be able to engage proactively with this client in a preventive sense, to try to ensure that, that sort of motor failure is not something that they're going to see. And so micro mobility is a good one, another one is around large-scale energy storage. So there are increasing numbers of utilities that are utilizing large-scale batteries in order to, sort of, broaden their capabilities around their electrical delivery. And so these large-scale batteries create new issues, but the fundamental physical principles -- and this is where our people are so strong, are the same in that large-scale battery as they are in that small-scale battery, in that mobile phone, for example. And so, we've been able to really leverage the expertise that we have at that small-scale into being able to do both reactive as well as proactive work. There have been related instances large-scale battery storage facilities. We've been engaged in those and that has in fact led to safety-related design reviews and functional safety reviews and things like that. So we hope, again, to really use this battery capability at the tip of the spear, so to speak, in multiple industries to be able to, sort of, drive more of that industrial work.

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [32]

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Yes, I think you're seeing it even in data centers where -- what the fire safety people have determined as now that more and more battery backup and batteries that are in these server farms and environment, they're realizing the risk that they run in these very large facilities when the load of batteries continues to increase in those environments. So there are some new standards that have come out. And they're in development in other jurisdictions that are impacting that to just give you -- it's now touching us everywhere.

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Samuel England, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [33]

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Right. Thanks. Then the next one on capital allocation, just wanted to know if there is any, sort of, change in plans there? Whether we should expect any further buybacks in the rest of the year?

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Richard L. Schlenker, Exponent, Inc. - Executive VP, CFO & Corporate Secretary [34]

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Again, we continue to have an open repurchase program. We obviously have not done any activity in the first 9 months of the year. That doesn't mean we won't do some in the fourth quarter. We are trying to, on average, at least be buying back what we're putting out. There is no guarantee of the exact timing of that fitting in to an exact calendar year or such. But we continue to do -- see that as a way that we're going to return value to shareholders. And that continues to be open for the fourth quarter.

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Operator [35]

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And it appears there are no further questions in the queue at this time. So this will conclude today's call. We would like to thank you for your participation. And you may now disconnect.