Good day, and welcome to the Exponent Fourth Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Whitney Kukulka. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's fourth quarter and fiscal year 2017 financial results conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at www.exponent.com/investors. This conference call is the property of Exponent, and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Paul Johnston, Chief Executive Officer; Catherine Corrigan, President; and Rich Schlenker, Executive Vice President and Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent's market opportunities and future financial results that 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 Factors Affecting Operating Results and Market Price Stock in Exponent's most recent Form 10-K. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise. And now, I will turn the call over to Paul Johnston, Chief Executive Officer. Paul?

Thank you. Thank you for joining us today. Before discussing our strong performance in 2017 I would like to take a moment to discuss the succession plan that we announced in December. The CEO succession process and timeline we announced is consistent with the one we had nine years ago when I was appointed CEO after serving as President for two years. The Board intends to appoint Exponent’s President Dr. Catherine Corrigan as Chief Executive Officer and President on May 31. It is with great confidence and pleasure that I transition the Chief Executive role to Catherine. She has demonstrated tremendous leadership as she has risen through the organization. Catherine has earned the respect of our employees and clients. She is the right person to lead our firm into the future. I look forward to supporting Catherine, the Board and the rest of the leadership team at Exponent in my new role. It is expected that I will become Chairman of the Board at that time. In addition to assisting the transition, I will continue in an executive role on a half time basis for 12 months. Exponent’s current Chairman of the Board Mike Gaulke is planning to retire and will not stand for reelection in 2018. Additionally, Exponent’s Board intends to appoint Dr. John Shoven as lead independent Director in May. I will now review 2017. Then Rich will provide a more detailed review of our financial performance and business outlook. Catherine will follow with some closing remarks after which we will be available to answer your questions. We are pleased with our performance in the fourth quarter and full year 2017 as we delivered strong financial results, executed on our strategy and continued to position the company for long term success. For the year, we delivered 10% top…

Thanks, Paul. Let me start by saying that all comparisons will be on a year-over-year basis. For the fourth quarter of 2017 total revenues were up 15% to $88.3 million. Revenues before reimbursements or net revenues as I will refer to them from here on were up 14% to 82.7 million. For the fourth quarter, including the impact of the new tax legislation, the net loss was $3.7 million or $0.14 per diluted share. During the quarter the company recorded a one-time income tax expense of $16.5 million related to the new tax legislation. Excluding this expense, net income was $12.8 million or $0.47 per diluted share, an increase of 23% as compared to $10.4 million or $0.39 per diluted share in the same period of 2016. EBITDA for the quarter was up 20% to 21.8 million. For the year 2017, total revenues and net revenues increased 10% to 348 million and 330 million, respectively. For the year 2017, including the impact of the new tax legislation, net income was $41.3 million or $1.53 per diluted share. Excluding the income tax expense for the new tax legislation, net income for 2017 was $57.8 million or $2.14 per diluted share, an increase of 22% as compared to $47.5 million or a $1.75 per diluted share in the prior year. In 2016, Exponent adopted a new accounting standards for the classification of tax adjustments associated with share based awards. Tax benefit realized for 2017 was $6.5 million or $0.24 per diluted share as compared to $4.8 million or $0.18 per diluted share in 2016. For the full year 2017 EBITDA increased 17% to $87.5 million. Let me provide a little more detail about the impact of the new tax legislation on 2017. The company had $16.5 million of income tax expense in…

Thank you, Rich, and thank you for the introduction, Paul. Hello, everyone. I appreciate the Board’s confidence in me as the next CEO of this great firm. Over my 21 years with the firm, I've always known that I was part of a unique organization. I am thrilled to lead Exponent as we engage the brightest scientists and engineers to empower clients with solution for a safe, healthy, sustainable and technologically complex world. We will continue to evolve our inter-disciplinary teams to expand our differentiated market positions and capitalize on new opportunities. As President, one of my focus areas has been determining how we can accelerate our business developments. The great news is that Exponent has a diverse portfolio of over 2,000 clients each year and the vast majority of our engagements are for repeat clients. The opportunity here is that only 25 of these clients have more than $1 million at Exponent in 2017. In proactive services which are still in their infancy, we have a tremendous opportunity to adopt business development models which have been successful in other high end professional services firms such as management consulting. We are forming multi-disciplinary industry teams that will be accountable for expanding our key services. By going to market with an industry focus, we can leverage our existing industry relationships and drive the expansion of our proactive services. In reactive services, the opportunity is to leverage our premium reputation. We are launching an initiative focused on cross selling our services to top international law firms. By better harnessing the power of our existing networks, we can drive growth both geographically and in practices where significant opportunities exist. As we went through our planning process this year, it was clear that we have long term growth opportunities across all of our practice areas and industries. I am enthusiastic about working with our leadership team to capitalize on these opportunities. We of course remain committed to our long term financial goals, producing organic revenue growth, improving profitability, maintaining a strong balance sheet and increasing shareholder value. Thank you for joining today's call. I look forward to working with all of our stakeholders in the years to come. Operator, we are now ready for questions.

Thank you. [Operator Instructions] We will go to Joseph Foresi with Cantor Fitzgerald.

Hi, guys, this is Mike Reid on for Joe. I appreciate you taking our question and we want to say welcome to Catherine as well. You said that the large project was 6% of revenue for the full year. Did you say what it was for 4Q and I guess compared to the 6% expectation?

Yes, it ended up being just around 5% of our revenues for the fourth quarter.

Okay. And then the pace of it slowing would be maybe it will fall off by the end of the year or could continue into 2019?

I think Mike it's a little difficult for us to talk about 2019. We are in a situation with this client where we receive funding steps at a time and we generally have some understanding from the client about their longer term intent. And I think it's through that that we've given the guidance we have with regard to Q1 and the fact that it will step down from there going forward. There is certainly the opportunity for it to go into 2019 -- into fiscal ’19, but we have not -- we don't really have visibility on that at this point.

Okay. And then with the -- health and environmental had a really good quarter and partly I guess easier comp from the last quarter, but was there anything else to call out that drove that and with the I guess the project fading off and engineering a little bit next year, could we see these growth rates kind of begin to converge a little bit next year?

So I think with regard to the question about the health and environmental segment, I think there were a couple of things going on from that standpoint. One is this large human factors project we talk about. It has been -- it is leveraged at that segment quite significantly and so it certainly got some lift from that project. But in addition to that, we have seen some new business come into that segment that has made it quite a bit stronger here towards the end of the year and I think sort of the outlook for that is positive.

We’ll now hear from Tim McHugh with William Blair.

One point, just following up on that large project, so can you share with us Q1 assumption? Is there any -- I guess are you willing to share the full year assumption about how much that’s expected to contribute in 2018? It’s not clear what you mean by how much it'll trail off I guess as the year goes on.

Well, I mean at this time, as we indicated, we had expected that to be the primary impact to the utilization, which we expected to step down by about 150 basis points and so 150 basis point step down in our utilization converts to about a 2% step down in revenues. So, right now, we're thinking of something that would take us from approximately 6% of our business for the full year 2017 to something in the range of -- and again this is our -- just our estimate at this point in time in the range of maybe 4% of our business as we look to 2018.

And can you -- obviously it seems like besides and this project being a large part of it, but how big is human factors now as we think about the mix as well as give us an update on proactive versus reactive, given the growth you’ve this last year and what's the split at this point for the business?

Yeah. I mean the proactive reactive, I mean, clearly, since this large project is proactive, we’ve seen an increase in the percentage of the business that is proactive as a result of that. But I think the movements we've seen in proactive and reactive, while we've always said it's going to gradually become more proactive because we think that's going to expand faster than reactive, it's also a time period where we've had some really sort of important large reactive cases as well. We've talked about the international arbitration work, which of course is all reactive.

As far as the human factors area, so as we’ve talked about, this particular project in its size is leveraging across the firm. When we look within our human factors practice, independent of this project, we're looking at a practice that was doing approximately somewhere in the $13 million to $14 million of other human factors work in 2017.

Can I ask -- you mentioned -- the prior caller asked about environmental and health and you said you saw some strength right towards the end of the year in terms of new business. I know you mentioned a couple of topics, but was there any particular area where in particular you saw a pick up or improving trends late in the year?

Yeah. I mean I think I think we have some new work in sort of the environmentally contaminated sites. That has led to some new work and that have been flatter for a period of time. The food and camp side, as we indicated, continues to show growth in France, that’s the part of the business that’s sort of roughly little over 50% of that is in the UK and a little less than 50% in the US. That part of the business has been sort of steadily growing year-after-year and had another solid year this year. I think that the -- we had talked about the environmental business being a little bit difficult ever since the falloff in the work in the Gulf and I think what we saw now with our -- with some new work is that there is some new significant work starting to flow in there.

Tobey Sommer with SunTrust has the next question.

In terms of the margin decline that you're forecasting for this year, could you kind of quantify the impacts between some of the investments that you talked about, the new lab and the London expansion to the extent that that's quantifiable and the lower utilization from the large project. How would you kind of partition those impacts?

So first of all I think that the utilization impact that we're talking about here is somewhere call it around 110 basis points of that that you're going to associate with the utilization. The other 40 basis points is, as we're growing in that middle single digit range, it's hard to exceed your growth rate of your cost when you're growing employees sort of in that 4% to 5% range as well as what’s beginning to happen on inflation, where -- that's why we provided that margin for another, let's call it, anywhere from -- we've said 100 to 150 basis points. So if you take the midpoint of that at 125, you're talking about something that might be another 15 to 25 basis points that might be impacted by some of those activities.

Do the investments that you're making to institutionalize the sales process and leverage, law firm channels, et cetera, does that potentially hamper the company's -- achieving the company’s long term margin expansion goals over the year or medium term or can you achieve that kind of margin expansion over time, even with that effort.

Yes. So Tobey, I think we can continue to achieve that margin expansion. The idea is that we're going to be having more of our consultants more engaged from a sales perspective, but also having them engaged from an execution perspective. So we think that by leveraging our existing relationships, whether those be in industry proactively or they be with the law firm’s community reactively, we believe that because we have these strong existing relationships, we can get a fairly significant return on the additional investment in business development as we do that working properly.

With respect to large projects in the marketplace in terms of the opportunity that they represent as well as the experience ability to capture them, are there condition such that there may be more of them in that kind of greater frequency could translate into them being kind of less visible to us and having to dissect your individual largest project every quarter so many ways?

Yeah. Well I mean I think the challenge about larger projects is we are continuing at the moment our philosophy that projects -- large projects that are in the -- up to 3% of revenue and so forth, we don't feel like are out of the ordinary and in the sense that we don't feel any need to sort of especially identify them for the investment community, but we still believe that projects that get in 4%, 5%, 6% of revenues are infrequent enough even though in recent times we've -- more often than not we've had one, but we think that it does provide a bit more transparency into what’s our challenges here by disclosing those. I think the two things. I mean the firm is getting bigger, so projects to fall into that category have to become bigger, but at the same time I think we are finding through our very interdisciplinary and multidisciplinary approach that we can address very complex projects in a way that perhaps wouldn't have raised to that same value in the past and that combined with the fact that quite frankly I think large clients, many of our large clients are extremely large and getting bigger and I think that that certainly also leads to the idea that there are going to be some mega projects going forward, but there's just still not at a frequency that we can just automatically kind of include them in our normal portfolio. We have one of them identified at the moment but that’s it.

Okay. And then I have a question on capital deployment and balance sheet. Rich, could you refresh us on your goals for capital deployment and managing the level of cash on the balance sheet and kind of a trajectory or an expectation for when we might make progress in that direction?

Yes. So, just as a reminder, we are still of the mind that it is our target now, let's go it over the next four or five years here to bring that balance down into that $50 million to $70 million of cash on the balance sheet. It's not saying that it needs to stop there, but that's a pretty aggressive goal for us to achieve even over that period of time. As you heard today, we are increasing our effort in that distribution to shareholders by growing the dividend by 24%. We did -- we were a little lighter in our repurchases this past year than we've been lately. Part of that was that we just saw some nice movement up in the stock and as we've said before, we're going to repurchase more stock on pullbacks than we are on rises. We're not doing this to drive up the stock or support the stock. We're doing it in essence to continue to find opportunities where there is some pullback in doing that. So I think what we are able to do is repurchase that $11.9 million. In addition to that, we did utilize $9.5 million of our cash to take in exchange for with our employees when they were receiving their restricted stock units which they do every year in March, they could net those for payroll taxes. That net amount that people chose to net it for was 9.5 million. So essentially that was a repurchase of shares as well in that process. So putting those together, we were about $22 million there in stock that we brought -- took of the market and then we’re looking to grow the $21.8 million that we put out in dividends by 24% next year. We continue to look at acquisition opportunities. We wouldn't be doing it if we didn't think we're going to eventually get something done. We would say we -- again these are smaller tuck-ins. We came close on something this past year that ultimately didn't end up working out, but we're going to keep working at this. We think there's some good opportunities for growth in the future and if good seed in particular area would help us grow even faster.

Thank you. We'll continue to Marc Riddick with Sidoti.

Dr. Corrigan, I do want to welcome to the -- congratulations on the appointment and certainly look forward to working with you going forward. One of the things I wanted to touch on that you had mentioned on the opportunities on the proactive and reactive side, I was wondering if we should be thinking about this from the standpoint of potential investments that you're looking at there and should we be thinking about this as more along the lines of personnel or back in sort of maybe that are more used to doing the cross selling and working within those structures of maybe more so than existing personnel or how should we be thinking about that low hanging opportunity that you see there.

So I think, there were a couple of elements to this approach I think on the proactive side. So one, I talked a bit about a more industry oriented focus in our business development. So as opposed to a scenario where we would be going to market more on a disciplined basis, we are going to market on -- we are doing more activity going to market with specific industry oriented services, really targeting these using our client teams so that we can offer not just a single discipline to an industry, but we can offer services across the industry, whether it be health oriented services, whether it be manufacturing related, whether it be environmentally related, really thinking across the entire product life cycle of that client’s product in order to drive the services. And we are focused as well on additional training for our consultants, relative to business development and basically a type of infrastructure that would help us to leverage the existing relationships that we have. So I mean I think that using these elements, we will hopefully be able to leverage our relationships and grow that proactive revenues.

And one of the thing I wanted to touch on just going back to the experienced labs and the research centers, I was wondering if you can share a little more detail around that and sort of one of the -- sort of what you have in mind there and what type of scope we should be looking for and sort of how that plays out in the coming quarters?

Yeah. So our user experience capability is something that I believe can cross into just about all of our industry. Right now, our user experience work is primarily in the consumer products space. But I believe that we have opportunities to grow that into other industries, whether they be more manufacturing oriented, whether it be more energy, utility or oil and gas oriented, these are professionals who are experts in understanding the complicated relationship between a user and a technology whether, whether that technology is a display in a nuclear power plant or is a virtual reality headset or a video game. And I think that by investing in the user experience lab and in the recruiting of both junior and senior talents in cognitive neuroscience and other areas as Paul mentioned, we really have a unique offering to be able to spread that flagship service across a variety of different industries.

And then one last question for me, which is admittedly a bit vague, but I just wanted to get your general thoughts on this. If you're looking at some of the things that have sort of progressed and some of the opportunity sets that you have, be it automated vehicles, what have you, you think about the things that were announced even as recently as the Consumer Electronics Show around 5G, all types of things like that, I was wondering if you could sort of share how you feel about the progress of these key technologies and maybe the pace of them and how that kind of incorporates with your plan. Are these things sort of moving forward at the pace you expected a year ago or how should we think about how quickly some of these things are playing out compared to what you were originally looking at for the major drivers a little bit?

Yeah. So I mean taking automated vehicles as an example or what our experience has been with many of these new technologies is that our work tends to start relatively small and we've become engaged with clients potentially on smaller engagements they might be proactive but it’s as we’re able to penetrate into those client organizations and really execute on those initial projects that were able to really grow those relationships. So I feel as though in a number of areas, we have gotten a considerable amount of traction. On the reactive side for things like automated vehicles, that hasn't really come through yet right because the failures have not necessarily started to occur in large numbers. So, our work is primarily proactive in that area, but I do think that the outlook for those is very strong. I think we are at a place which is consistent with where I would like to be and I think we're getting traction across that industry

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.