Good afternoon. And welcome to the Exponent First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Joni Konstantelos with Investor Relations. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent’s first quarter 2023 financial results conference call. Please note that this call will simultaneously be webcast on the Investor Relations section of the company’s corporate website at www.exponent.com/investors. This conference call is the property of Exponent and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer; and Rich Schlenker, Executive Vice President and Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent’s market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent’s periodic SEC filings, including those factors discussed under the caption Risk Factor in Exponent’s most recent Form 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise. And now, I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine?

Thank you, Joni, and thank you everyone for joining us today. I will start off by reviewing our first quarter 2023 business performance. Rich will then provide a more detailed review of our financial results and outlook and we will then open the call for questions. We are pleased to report another solid quarter, growing net revenues by over 9%, despite evolving macroeconomic challenges and uncertainty. Our results demonstrate the strength of our business with a diversified portfolio of offerings, serving a broad range of industries across the entirety of the product life cycle. Safety, health and the environment are increasingly important as companies deliver innovation and push the envelope with new technologies. Exponent remains uniquely positioned as a trusted adviser, harnessing the power of technical excellence, objectivity and disciplinary diversity to help our clients solve their toughest science engineering and business challenges. Increased demand for our reactive services, which have been foundational to Exponent from our inception, bolstered our growth in the first quarter. In the quarter, we saw an influx of litigation-related activity, as well as product safety and recall related work that spans multiple industries. On the proactive side, activity in the quarter was driven primarily by work in the consumer products, chemicals, utilities, automotive and life sciences sectors. Turning to our engagements in more detail. Within our reactive business, we saw strong demand for both our domestic litigation and international arbitration related work, particularly involving the transportation and energy sectors, as well as intellectual property disputes. We also saw increased engagements around product safety and recall across a number of end markets, including transportation and life sciences. Within our proactive business, engagements in the quarter were primarily driven by regulatory issues across multiple industries, product design consulting in the electronics and medical device spaces and asset…

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. The first quarter of 2023 total revenues and revenues before reimbursements or net revenues, as I will refer to them from here on, increased 9.2% to $140.3 million and $128.7 million, respectively, as compared to the same period of 2022. The quarter’s revenue growth was negatively impacted by 0.5% from foreign exchange. Net income for the first quarter decreased 1.6% to $29.1 million or $0.56 per diluted share, as compared to $29.6 million or $0.56 per diluted share in the prior year period. The realized tax benefit associated with accounting for share-based awards in the first quarter of 2023 was $3.6 million or $0.07 per diluted share, as compared to $6 million or $0.11 per diluted share in the first quarter of 2022. Inclusive of the tax benefit for share-based awards, Exponent’s consolidated tax rate was 18% in the first quarter, as compared to 9.7% for the same period in 2022. EBITDA for the quarter -- first quarter increased 3.7% to $35.8 million, producing a margin of 27.8% of net revenues. Billable hours in the first quarter were approximately 385,000, an increase of 3.1% over the prior year. The average technical full-time equivalent employees in the first quarter were 1,052, which is an increase of 12% as compared to one year ago. This exceeded our expectations as recruiting has been very successful and our retention rate has improved. Utilization in the first quarter was 70.4%, down from 76.5% in the same period of 2022. We expected utilization to step down from its elevated level in the first quarter of last year. Utilization was lower due to the very strong headcount growth, which resulted in corresponding decline in…

Thank you, Rich. Exponent stands at the cornerstone of engineering and scientific excellence, connecting the lessons of past failures with tomorrow solutions to create a safer, healthier and more sustainable world. Our first quarter results demonstrate Exponent’s leading position in the market, as well as our financial strength. Backed by our world-class team, multidisciplinary capabilities and diverse client relationships, we remain confident in our ability to grow Exponent profitably and drive long-term value for our shareholders. Operator, we are now ready for questions.

[Operator Instructions] Our first question is from Andrew Nicholas with William Blair. Please go ahead.

Hi. Good afternoon. Thanks for taking my question. I wanted to start with one on headcount growth. Just maybe more broadly, it seems like you hired a little bit stronger than even you had expected. Could you unpack why you think that was in the quarter, did attrition come in lower than you thought, is there particularly strong demand for working in Exponent now relative to previous quarters? Just any other color on the recruiting environment and what has driven your success there would be great?

Yeah. Why don’t I will start off there and give you back. So, look, we knew that we are coming into what we thought was a strong quarter for headcount growth. We had good momentum in the back half of 2022 and part of that carries over to those people you already have lined up coming in. But what we ended up seeing is, a couple of percentage point contribution from both sides of the net headcount equation and that included the fact that we were seeing strong acceptance rates and good access to top talent, which led to a little bit higher inbound level of people based on the quality of what we are getting on that side. And the same occurred in the retention sort of side, we saw that pulling back to levels that approximate the rate that we were seeing in the first quarter to now four months of 2019. So back to a more normalized level to pre-COVID than, obviously, what we saw, which was a new levels during 2021 and 2022, especially in those first four months as we pay out our bonuses in the middle of March and we provide reviews and communicate our salary increases that would take effect April 1, we had seen more higher turnover, and again, it’s been a short period of time. We will see how the next couple of quarters go, but we are optimistic that we are in a good position in both of these areas.

Yeah. And Andrew, I would just add a little bit color on top of what Rich provided for us and that really just is around our -- the strength of our employee value proposition. I think it’s quite strong. It always has been. But we are in an environment of some level of uncertainty. And I think that this engineering and scientific talent perceives Exponent as a company with a strong foundation with a diverse portfolio of exciting and interesting work that they want to be a part of. So I think there are absolutely the quantitative aspects that Rich cited, but just also that overall value proposition that we feel is quite strong.

Makes sense. Thank you. And then for my follow-up, I wanted to ask about the proactive business. It seems like, and correct me if I am wrong, that the reactive side was a bit stronger than the proactive side this quarter. If that is true and that was the case, what would you attribute that to and kind of related to the market uncertainty, has there been any change in demand from your proactive clients in the current environment?

Yeah. Thanks, Andrew, for that. Like you said, the reactive side of the business very strong in the quarter, both internationally, as well as domestically. This is our litigation portfolio. It’s our recall related work, some of the defect investigations very strong around automotive, life sciences, some of the toxic tort areas. On the proactive side, we are finding it to be pretty variable across clients. We have got a lot of critical work that we are doing around the regulatory environment. The regulations don’t go away when you have sort of uncertainty in the macroeconomic environment that need for innovation in industries like consumer electronics, or let’s say, medical devices, that’s still there. But what we are seeing with some clients is their they are getting themselves oriented around the uncertainty. Maybe they have had some layoffs. Their teams are resetting themselves and saying, okay, look, we have got to do this work, but it’s going to be maybe next quarter, not this quarter. So we are seeing a little bit of that sort of behavior from some clients, but the reality is that, that critical work is still moving forward, right? So we have got a few areas where there may be a pause or we are going to start that in another month or two kind of thing, but we are seeing the workflow of those critical items continue to be part of that demand equation for us.

Very helpful. Thank you.

You are welcome.

The next question is from Tobey Sommer with Truist Securities. Please go ahead.

Thanks. I want to start out with a sort of numbers question in terms of pricing. What was the nominal rate increase in January and how has realized rate impacted the model? I wasn’t sure if there would be any nuances, because of the better kind of retention and acceptance rate, how that -- what the puts and takes are there?

Yeah. So our rate increase for our employees who were here on the January 1 timeframe was approximately 10% that the realization of that was approximately 6% that we realized out of that and that is based on mix and what you mentioned there. So we have always had this in our portfolio. It’s not because we are having. As you are quite aware, Tobey, each of our employees have a single rate for the calendar year, each of them individually based on their experience and credentials and position in the marketplace is how that’s set for all clients in all work and that remains that way and we have been able to continue to push that through in 2023. But as we are hiring in new people, which we had a lot of in the first quarter here, that is blended down and is why I have that stepping down a little bit further as we move through the year and it provided that guidance on where the rate would be. But we are quite pleased with where that realization is, realize that a little higher headcount, especially because we are hiring in typically at the entry level, which is for us, typically, a new PhD out of a top school, bringing them in and then growing them up over their career to hopefully achieve the level of principal in our organization. So that is what we are seeing at this time.

Great. I am curious, do you see a connection in demand for EXPO services when we have seen in recent months, layoff announcements either in TMT, consumer electronics, I guess, it’s not uniquely in those verticals, but they are sort of top of mind these days?

Yeah. So, Tobey, clearly, the environment for hiring with regard to engineering and scientific talent that has shifted with the sort of larger picture that we see in tech -- the tech sector and other sectors. So we are always having to compete with those entities for our talent. And this really goes back to the sort of employee value proposition that I was talking about before. We do have an ability to sort of acquire that talent. But at the same time, in the past, we have seen situations where because clients are unable to hire or are laying off that there’s an impact on our demand, needing more help from consultants. We have seen that in the past in the regulatory world. We haven’t seen so much of that thus far around the technology side, but certainly seeing that shift from the standpoint of sort of our talent acquisition. I think it is early. These teams, as I said before, are sort of resetting after a series of layoffs in technology and so we are going to continue to develop those relationships and develop our people to ensure that we can serve all of the needs that they have got around innovation.

And I am curious if based on the better retention and higher acceptance rate, does it change your assumptions for those metrics throughout the year, and if so, do you tap the brakes on gross external hires based on how you see the marketplace and the opportunity to grow revenue?

Yeah. Thanks, Tobey. So it’s really all about the portfolio and hiring strategically where we are seeing the need and the demand in the marketplace, right? So it’s less about, okay, we are going to take a flat cut in our efforts across the Board, right? We have got to be looking at every one of our business units, every one of our capabilities and industries. For example, electric vehicles is a great example. This is an area where we are looking to acquire more talent, because of the opportunity that we see and so we are not tapping the brakes there. But in other areas where there is more softness, we can do different things, right? So I have got multiple dials on my dashboard that I can say, all right, we have got to ramp up here, we have got to pull back and it’s very strategic according to the market.

Thanks. And maybe it’s been too short a period of time, but since the banking turmoil commenced. Is there -- is that a long enough stretch of time to notice whether it has mattered in the marketplace and I suspect if it did, it would matter more on the proactive side. But does that represent sort of a breakpoint in the year-to-date calendar before SVB and after?

Tobey, we have really -- we haven’t seen a change relative to that event and I think that is that most of Exponent’s engagements are not with startup organizations, while I realize that SVB clearly had mature entities or their competitors have mature entities banking with them. We have not seen that impact and I have had those discussions with our employees that are engaged in the tech area and I don’t think where we see clients that are sort of a little bit slower to move forward and such, I don’t think it’s relative to them waiting on funding or not having funding and such that’s just hasn’t been our market in the past. But as you say, it hasn’t been that long. Time will tell. But I actually suspect where our mature clients, which make up the vast majority of our revenues, if anything this creates more open market for them.

Okay. Last question for me. Rich, any change in the composition of big projects versus last time we heard from you in the portfolio and in the P&Ls?

No. We sort of have what I will call a more normalized portfolio at this point in time. The large projects are 2% of revenue or such and going on across quarters and such and we will expect it to be more normal in that range. No outsized projects like we have had in prior years where something might be in that 4% or 5% of revenue range. So right now no.

Thank you very much.

This concludes our question-and-answer session and the conference is also now concluded. Thank you for attending today’s presentation. You may now disconnect.