Exponent, Inc. (NASDAQ:EXPO) Q4 2023 Earnings Call Transcript
Exponent, Inc. (NASDAQ:EXPO) Q4 2023 Earnings Call Transcript February 1, 2024
Exponent, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon and welcome to the Exponent Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos. Please go ahead.
Joni Konstantelos: Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent’s fourth quarter and fiscal year 2023 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?
Catherine Corrigan: Thank you, Joni and thank you everyone for joining us today. I will start off by reviewing our fourth quarter and fiscal year 2023 business performance. Rich will then provide a more detailed review of our financial results and outlook for 2024 and we will then open the call for questions. Exponent’s world class team of experts delivered a 7% increase in net revenues in 2023, showcasing the effectiveness of our highly diversified portfolio of services. Notably, our reactive business grew in the high-teens, driven by robust failure investigations and disease-related work primarily for the transportation and energy sectors. While proactive services for the consumer electronics sector declined year-over-year due to ongoing industry headwinds and product lifecycle timing, the remainder of our proactive portfolio grew in the mid single-digits for the year.
Turning to our engagements in more detail. Our roots in failure analysis and the leading market position that we have earned over the past 50 plus years continue to be important drivers of demand for our reactive services, Exponent is retained on some of the largest and highest profile matters around the world, spanning a wide array of issues from wildfires to advanced transportation and more. Our recent retention by General Motors Cruise unit to investigate the cause of their driverless vehicles collision with a pedestrian is but one recent public example. In the energy industry, our experts are advising on disputes around the world, involving everything from refinery explosions and liquefied natural gas facility operations to massive offshore wind farm construction and pump storage power plant performance, whether it’s a question of the integrity of longstanding infrastructure or the imperatives of the energy transition, pushing the limits of technology, one common thread is certain.
Complexity of bounds, it’s not going away and these are places where Exponent thrives. Our leading market position has continued to expand as we further differentiate our experience in this portion of the business. Our world class and highly diversified expertise combined with the vital nature of our insights in these high stake situations positions this part of the portfolio well to weather various economic cycles. In addition to our reactive work, our team’s ability to anticipate clients’ needs throughout the product lifecycle continues to be a significant differentiator for Exponent. Within our proactive services, demand was strong for our regulatory consulting activities in the chemicals industry, evaluating the effects of chemicals on human health and the environment.
We are pleased to be advising clients in this sector as they develop and bring to market increasingly complex technologies, such as RNA-based pesticides. We also saw increased engagements in product development and safety-related consulting for the life sciences sector, including medical devices and pharmaceuticals. As expected, we continue to face headwinds in the consumer electronics sector due in part to the timing of client product lifecycles as well as broader headwinds in the industry. We saw year-over-year declines in human subject research engagements as well as product development consulting as products moved out of the development stage and into the refinement stage. Excluding consumer electronics, net revenues for the firm increased 16% year-over-year.
In the fourth quarter, we noted an increased client sensitivity to budget concerns, which resulted in the slowing or pausing of some litigation activity. For example, we saw this in the chemical sector, which is currently responding to elevated levels of destocking post-pandemic. While this created a lower-than-expected growth rate of our reactive business in the quarter, all indications are that this activity will resume over time based on the demands of global litigation and arbitration dockets, which show no signs of easing. We remain actively engaged with our clients and are well positioned to help address their critical needs. Turning to our segments. Exponent’s engineering and other scientific segment represented 84% of revenues before reimbursements in the fourth quarter and 83% of revenues before reimbursements for the full year 2023.
Revenues before reimbursements in this segment increased 2% for the fourth quarter and 8% for the full year driven by demand for Exponent’s services across the transportation and energy sectors. Exponent’s environmental and health segment represented 16% of revenues before reimbursements in the fourth quarter and 17% of revenues before reimbursements for the full year 2023. Revenues before reimbursements in this segment decreased 3% for the fourth quarter and increased 5% for the full year. Fourth quarter revenue in this segment was impacted by the aforementioned client budget constraints, which resulted in delays in litigation work. Growth in this segment for the year was primarily driven by Exponent’s safety-related work evaluating the impacts of chemicals on human health and the environment.
As we expected, full-time equivalent employees in the fourth quarter decreased 3.4% compared to the third quarter, reflecting our ongoing focus on strategically aligning resources with demand across the business. At the same time, we continue to invest in growth areas of the business, developing our exceptional talent and expanding our differentiated capabilities to better meet the evolving needs of our clients. For example, we continue to position ourselves across a spectrum of challenges involving existing infrastructure, all the way to new investments and technologies to support the energy transition. While the automotive industry’s aspirational goals for electric vehicle growth has been tempered in part due to customer hesitation, it is precisely this heightened expectation of safety and performance of new and complex technologies that is a fundamental business driver for Exponent.
We are seeing evidence of this on the reactive side with Advanced Driver Assistance technologies, which are increasingly at issue in automotive disputes. As we look ahead to 2024, we are mindful that we are coming out of the year with higher than usual growth in our reactive business, creating a high hurdle rate for year-over-year comparisons. In the current environment, which I’ve described, we expect reactive revenues to remain in line with 2023 levels. We also expect some continued headwinds in the consumer electronics sector combined with constrained budgets and project delays that we are seeing with some clients in other pockets of the business. In this dynamic environment, we remain keenly focused on new business development and strategic investments in growth opportunities as well as aligning our resources and costs with anticipated demand.
We will continue to position Exponent on the forefront of innovation supported by our exceptional team, our reputation as a leader in high-profile failure analysis and our differentiated capabilities across the product life cycle. Our performance in 2023 with growth in all major industries we serve with the exception of electronics demonstrates the power of our portfolio and value proposition in a challenging environment and gives us confidence in our ability to deliver long-term profitable growth and value for our shareholders. I’ll now turn the call over to Rich to provide more detail on our fourth quarter and fiscal year 2023 results as well as discuss our outlook for the first quarter and the full year 2024.
Rich Schlenker: 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 fourth quarter of 2023, total revenues decreased 3.5% to $122.9 million and reimbursable – revenues before reimbursements or net revenues, as I will refer to them from here on, increased 1.1% to $113.9 million as compared to the same period in 2022. This includes a decline of approximately $9.6 million in our work for consumer electronics sector, which created an 8.5% headwind as compared to the fourth quarter of 2022. Please note that the decrease in total revenues in the fourth quarter is due to lower reimbursable expenses from human subject studies. Net income for the fourth quarter was $20.9 million or $0.41 per diluted share as compared to $22.5 million or $0.44 per diluted share in the prior year period.
Exponent’s consolidated tax rate was 30.4% in the fourth quarter as compared to 26.2% for the same period in 2022. The increase in our consolidated tax rate was primarily due to a onetime tax charge associated with the remeasurement of our deferred tax assets in connection with relocating one of our offices to a location designed as a tax exempt for state and local taxes. This onetime charge reduced the fourth quarter’s earnings per diluted share by $0.02. EBITDA for the quarter was $30.5 million, producing a margin of 26.8% of net revenues as compared to $31.1 million or 27.6% of net revenues in the same period of 2022. This year-over-year decline in margins was anticipated as expenses normalize post pandemic and utilization was lower.
Billable hours in the fourth quarter were approximately $341,000, a decrease of 3.7% year-over-year. This decrease was driven by the headwinds in our consumer electronics sectors. The average technical full-time equivalent employees in the fourth quarter were 1,012, which is an increase of 2.3% as compared to 1 year ago. Sequentially, full-time equivalent employees decreased 3.4% as compared to the third quarter of 2023, demonstrating our progress on strategically aligning our resources with demand. Utilization for the fourth quarter was 65% down from 69% in the same period of 2022. The realized rate increase was approximately 4.8% for the fourth quarter as compared to the same period a year ago. In the fourth quarter, after adjusting for gains and losses and deferred compensation expense, compensation expense increased 3.3%, included in total compensation expense is a gain in deferred compensation of $9 million as compared to a gain of $6.7 million in the same period of 2022.
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 fourth quarter was $3.2 million as compared to $4.3 million in the prior year period. Other operating expenses in the fourth quarter were up 14.3% to $10.7 million, driven primarily by increased employee engagement at our offices and investments in our infrastructure. Included in other operating expenses is depreciation and amortization expense of $2.4 million. G&A expenses declined 14.6% to $5.9 million for the fourth quarter. The decrease was primarily due to a reduction in the use of outsourced personnel and a smaller annual company meeting. Interest income increased to $1.9 million for the fourth quarter.
Higher interest income was driven by an increase in interest rates. Miscellaneous income, excluding the deferred compensation gain was approximately $700,000 for the fourth quarter. During the quarter, capital expenditures were $1.9 million. We distributed $13.1 million to shareholders through dividend payments and repurchased $7.2 million of common stock. Turning to the full year results. For the year 2023, total revenues increased 4.6% to $536.8 million, and net revenues increased 7.2% to $497.2 million as compared to 2022. This includes a decline of approximately $24 million in our work for the consumer electronics sector, which created a 5% headwind as compared to the full year 2022. For the year, we grew every other industry driven by strong demand for our reactive services.
Net income for the year decreased 1.9% to $100.3 million or $1.94 per diluted share as compared to $102.3 million or $1.96 per diluted share in 2022. The tax benefit associated with accounting for share-based awards for 2023 was $3.6 million or $0.07 per diluted share as compared to $5.8 million or $0.11 per diluted share in 2022. Inclusive of the tax benefit for share-based awards, Exponent’s consolidated tax rate was 26.2% for the full year as compared to 22.6% in 2022. For the year, EBITDA increased slightly to $137.7 million as compared to $137.2 million during 2022, producing a margin of 27.7% of net revenues, which is a decrease of 190 basis points as compared to 2022. This decline in margins was anticipated as expenses normalized post pandemic and utilization was lower due to the growth in headcount.
Billable hours for 2023 were approximately $1.495 million, an increase of 2% year-over-year. Utilization for the full year was 68.6%, down from 73.8% during 2022. Average full-time technical employees for the year were 1,048, an increase of 9.6% as compared to 2022. The realized rate increase was approximately 5.2% for the year 2023. Compensation expense after adjusting for gains and losses in deferred compensation increased 9.8%. Included in total compensation expense is a gain in deferred compensation of $14.3 million as compared to a loss of $14.1 million in 2022. This resulted in a $28.4 million change year-over-year. Stock-based compensation expense in 2023 was $20.4 million, which is the same as 2022. Other operating expenses were up 18.4% to $41.5 million, driven primarily by increased employee engagement at our offices, head count growth, investments in our infrastructure and inflation.
Included in other operating expenses is depreciation and amortization expense of $8.9 million for the year. G&A expenses were up 3.3% to $24.4 million in 2023. The increase in G&A expenses was primarily due to inflation in our return to in-person work, resulting in increased travel, recruiting and business development costs, which was primarily offset by a reduction in the use of outsourced personnel and a smaller annual company meeting. Interest income increased approximately $5.1 million to $7.2 million for the full year. Higher interest income was driven by an increase in interest rates. Miscellaneous income, excluding deferred compensation gain was $3.1 million for 2023. Moving to our cash flows. During 2023, we generated $127.4 million in cash from operations and capital expenditures were $16.4 million.
For the full year, we distributed $54 million to shareholders through dividend payments and $24.2 million in share repurchases. As of year-end, the company had $187.2 million in cash. Turning to our outlook for the first quarter and full year 2024. With a challenging comparison in our reactive business as well as ongoing headwinds in consumer electronics industry and macro-related uncertainty for the first quarter of 2024, we expect revenues before reimbursements to be flat to down in the low single digits and EBITDA margin to be 26% to 27% of revenues before reimbursements as compared to the same period in 2023. For fiscal year 2024, we expect revenues before reimbursements to also be flat to down the low single digits and EBITDA margin to be 25.75% to 26.5% of revenues before reimbursements as compared to 2023.
As Catherine mentioned, we are taking actionable steps to strategically align our resources with demand through targeted recruiting and ongoing performance management. As a result, we expect our average technical full-time equivalent employees to decline sequentially 1% in the first quarter of 2024, and 5% as compared to the first quarter of 2023. For the full year, we expect average full-time equivalent employees to be down 6% to 8% on a year-over-year basis. We expect utilization in the first quarter to be 69% to 71% as compared to 70.4% in the same quarter in the prior year. We expect the full year utilization to be 68% to 70% as compared to 68.6% in 2023. Additionally, we remain committed to our long-term target of sustained mid-70s utilization.
We expect the realized rate increase for the first quarter and full year to be 3% to 3.5%. For the first quarter, we expect stock-based compensation to be $7 million to $7.3 million in each of the remaining quarters to be $4.5 million to $5.5 million. For the full year 2024, we expect stock-based compensation to be $21.5 million to $22 million. For the first quarter, we expect other operating expenses to be $10.8 million to $11.3 million. For the full year, we expect other operating expenses to be $44.8 million to $45.8 million. For the first quarter, we expect G&A expenses to be $5.6 million to $6 million. For the full year 2024, we expect G&A expenses to be $24 million to $25 million. We expect interest income to be $1.8 million to $2 million per quarter in 2024.
In addition, we anticipate miscellaneous income to be approximately $750,000 per quarter in 2024. For the first quarter of 2024, we expect the tax rate inclusive of the tax benefit associated with share-based awards to be 28% as compared to 18% in the same quarter a year ago. For the full year, the tax rate is expected to be 28% as compared to 26.2% in 2023 as we will have less tax benefit from share-based awards. Capital expenditures for the full year are expected to be $10 million to $12 million. We are pleased with the strength and durability of our business model and remain confident in our ability to continue to grow profitably. I will now turn the call back to Catherine for closing remarks.
Catherine Corrigan: Thank you, Rich. As innovation drives complexity and safety expectation to new heights, the consequence of the failure will continue to escalate and our breakthrough insights will illuminate the path forward. While we do anticipate headwinds in 2024, which I’ve described, I firmly believe that our strong market drivers, coupled with the actions we are taking to expand our competitive moat and continue developing our exceptional talent position us to deliver long-term organic revenue growth averaging in the high single digits into the low double digits along with improved utilization and margin expansion. Operator, we are now ready for questions.
See also 12 Best Dividend Stocks Under $50 and 20 Leading Cities For Startups In The US.
To continue reading the Q&A session, please click here.
