Good day, and welcome to the Exponent First Quarter 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..

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's first 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; Rich Schlenker, Executive Vice President and Chief Financial Officer; and Dr. Paul Johnston, Executive Chairman.

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'll turn the call over to Dr. Catherine Corrigan, Chief Executive Officer.

Catherine?.

Thank you, Whitney, and good afternoon, everyone. I will start off today by discussing our first quarter performance. Rich will provide a more detailed review of our financial results and expectations for 2019, and then we will open the call for questions. Paul will be joining us for the question-and-answer portion of today's call.

In the first quarter of 2019, Exponent grew net revenues 3% to $93 million and delivered earnings of $0.42 per diluted share. The first quarter of 2019 built on our positive momentum from 2018. We are executing on our strategies to drive growth across industries, practices, and geographies.

In line with our prior expectations, we achieved low single-digit revenue growth despite the challenging year-over-year comparison due to the large user study, which concluded in the third quarter last year. For over 50 years, data analysis has formed the foundation of what we do at Exponent.

Of course, systems now are dramatically more complex and the volume of data we can leverage has increased exponentially. The trends we are seeing today and the initiatives that we have underway are a continuum that builds upon our history of solutions driven by both data and deep subject matter expertise.

Decades ago, Exponent was a pioneer in accident data analysis and risk assessments. We continue to be a market leader in these areas. As we expand our reach, we are capitalizing on a broad set of opportunities involving the interactivity between humans and increasingly complex technologies.

We are leveraging the success of our large user study led by our human factors practice, and expanding our reach across new use cases as our clients look to unlock the power of data to inform artificial intelligence systems.

Clients rely on these data as they seek to create exceptional experiences for humans through technology at home, in the workplace, and while on the move. Our expertise in battery technologies in the consumer products industry continues to be a source of strength for Exponent.

This expertise is being leveraged for new and old clients in the transportation industry, who have a growing need for advice as they integrate batteries into mobile platforms, including scooters, bikes, robots, drones, cars, trucks and planes.

Exponent supplements its interdisciplinary battery team with deep industry knowledge in transportation and consumer products to provide unparalleled solutions for clients. Exponent’s engineering and other scientific segment represents that approximately 80% of the Company's first quarter net revenues.

Net revenues in this segment grew 4% in the first quarter as compared to the same period in 2018. During the quarter, this segment had noteworthy performances in its human factors, material science, thermal science, structural engineering, and construction consulting practices.

The human factors practice is leveraging the user research laboratory in Phoenix as well as the Company’s global footprint to collect diverse datasets for clients. Exponent’s interdisciplinary team of materials scientists, thermal scientists and structural engineers are advising utility clients regarding infrastructure integrity management.

Our construction consulting practice is teaming with several of our engineering practices to support international arbitrations related to issues on large capital projects. Exponent’s Environmental and Health segment represented at approximately 20% of the Company’s first quarter net revenues.

Net revenues in this segment declined 2% in the first quarter as compared to the same period in 2018. Within this segment, the chemical regulation and food safety practice continued to grow as Exponent’s highly credentialed scientists assessed the impact of chemicals on human health and the environment.

Growth in both segments was offset as there were fewer billable hours supporting user studies led by our human factors practice. Recruitment of the best PhDs is a priority for Exponent and engaging the brightest scientists and engineers from a wide range of disciplines is a key differentiator.

We entered the year with a healthy backlog of new hire commitments and successfully grew headcounts in our high growth practices during the first quarter. This combination of new PhDs and mature experts allows us to leverage our experience and remain at the cutting edge of technology. Our interdisciplinary teams are becoming more industry centric.

Over time, this go-to-market strategy will create even stronger client teams and deliver higher value. Exponent increasingly deploys its interdisciplinary teams across multiple client domains from R&D to design from manufacturing to quality assurance, from environmental health and safety to legal.

This approach to client relationships allows us to address the complex problems associated with integrated technologies across the entire product lifecycle. Our unique capabilities and adaptable business model shape Exponent’s leading market position. We look forward to working with our clients to address their most complex technical issues.

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

Rich?.

Thanks, Catherine. Let me start by saying that all comparisons will be on a year-over-year basis, unless otherwise specified. For the first quarter of 2019, total revenues and revenues before reimbursements or net revenues, as I will refer to them from hereon, were up 3%. Total revenues were $99 million, and net revenues were $93.4 million.

As expected, our growth in the first quarter was impacted by the large human factors project, which was completed in the third quarter of 2018. This project was 7.5% of our net revenues in the first quarter of 2018, which created a challenging year-over-year comparison.

Net income for the first quarter was $22.7 million or $0.42 per diluted share, as compared to $20.3 million or $0.38 per diluted share in the same period last year.

The first quarter, the tax benefit from gains, realized upon the issuance of share-based awards was $5.7 million or $0.11 per share in 2019, as compared to $3.9 million or $0.07 per share in 2018. As a reminder, these shares are granted annually in March as part of our compensation program and released four years later.

The tax benefit is primarily in first quarter event for us. EBITDA for the quarter increased 2% to $23.9 million. The large human factors project accounted for 4% of net revenues in the full-year 2018. The quarterly net revenues from this project were 7.5% in the first, 4% in the second, 3% in the third, and zero in the fourth quarter.

This creates a significant hurdle for the first nine months of 2019. For the first quarter, billable hours were 328,000 flat with the prior year. In line with our previous expectations, our utilization for the first quarter was 71.6% as compared to 76.6% a year-ago.

This change in utilization is partially as a result of the conclusion of the large project. Additionally, we experienced a slower than normal start to the year as employees and clients took more vacation time during the first week or two as school holidays extended further into January.

For the full-year 2019, we expect utilization to be 71% to 72%, which includes the impact on the large project and a 53 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.

This 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.

Although, our utilization will be down this year, we continue to expect our long-term utilization to increase as we build more critical mass in our offices and practices and grow proactive services. Technical full-time equivalent employees in the quarter were 883, up 7.1%.

We expect sequential headcount growth to be approximately 1% per quarter for the remainder of the year. The realized rate increase was approximately 3% for the quarter. This was the result of our annual bill rate increases and a change in billable hours mix as the majority of the study hours last year were from more junior staff.

For the full-year 2019, we expect the year-over-year realized rate increase to be 2% to 3%. For the first quarter, EBITDA margin decreased 34 basis points to 25.6% of net revenue. For the full-year 2019, EBITDA margin is expected to be down 75 basis points to 125 basis points, primarily related to the anticipated year-over-year decline in utilization.

For the quarter, compensation expense after adjusting for gains and losses in deferred compensation grew 2%, included in total compensation expenses, a gain in deferred compensation of $5.9 million, as compared to a loss of $300,000 in the first 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. 2019 salary increases were effective April 1. The rise in salaries will be approximately the same as the realized bill rate increase.

Stock-based compensation expense was $5.7 million for the quarter as compared to $6.3 million in 2018. For 2019, we expect stock-based compensation to be $3.6 million to $4 million in each of the remaining quarters. Other operating expenses increased 7.3% to $8 million in the first quarter.

Included in other operating expenses is depreciation expense of $1.6 million. For the remainder of 2019, we expect other operating expenses to be in the range of $8.2 million to $8.7 million per quarter. G&A expenses increased 12.5% to $4.5 million in the first quarter.

For 2019, G&A expenses are expected to be in the range of $4.8 million to $5.6 million a quarter. G&A will be at the higher end of the range in the second half of the year as we have our biennial managers meeting this year.

Inclusive of the tax benefit for share-based awards, Exponent's consolidated tax rate was 2.7% for the first quarter of 2019, as compared to 9.4% for the same period last year. We expect our consolidated tax rate to be approximately 27.5% for the remainder of 2019, and our full-year tax rate to be approximately 22%. Moving to our cash flows.

Operating cash flow was a negative $12 million for the quarter as a result of paying out bonuses and taxes. Capital expenditures were $5.7 million for the quarter, of which $4.4 million went towards the construction of our new Boston area building. We expect CapEx to be approximately $18 million in 2019 as we complete the new building.

CapEx should return to approximately $6 million in 2020. During the first quarter, Exponent paid $8.2 million in dividends and ended the quarter with $171.8 million in cash and cash equivalents and short-term investments. Today, we announced a $0.16 for a quarterly dividend payment and reiterated our intent to continue to pay quarterly dividends.

As we have previously discussed, Pacific Gas and Electric is a client of the firm. PG&E filed for Chapter 11 bankruptcy on January 28, 2019. But at the same time, announced that it has secured financing for continued operations.

Exponent believes that substantially all of our $6 million of accounts receivables at the end – at the time of the bankruptcy will be paid. Exponent primarily provides PG&E with integrity management, safety assessment, and construction management services.

We believe Exponent services are critical to PG&E's mission to provide safe and reliable power to the community. In the first quarter, our work for PG&E increased year-over-year.

Our outlook reflects positive momentum across the business, which will be partially offset by a challenging year-over-year comparison due to the conclusion of the large project last year.

For the full-year, we continue to expect revenues before reimbursements to grow in the mid-to-high single-digits and EBITDA margin to decline by approximately 75 basis points to 125 basis points as compared to 2019. I will now turn the call back to Catherine for closing remarks..

As we look ahead, clients will continue to be confronted with a broad range of safety, health, environmental and reliability issues. Exponent will engage top scientists and engineers from an extensive array of disciplines and strengthen our industry teams through market intelligence, capability development and thought leadership.

We have an adaptable business model and a long history of anticipating changing client needs. We will continue to leverage these qualities as we deliver valuable solutions to clients and to create new opportunities for our firm.

While we face challenging year-over-year comparisons in 2019 due to the completion of the large user study, we are confident in our ability to generate sustainable long-term growth and profitability. We will now open the call to questions.

Operator?.

Thank you. [Operator Instructions] We'll go first to Tim McHugh with William Blair..

Hi. Just want to follow-up on – you’re talking a bit about the, I guess, kind of facility you created for the user study and trying to capitalize on the success of the engagement last year.

So can you elaborate a bit more, how do you – when you walk into a client, how do you differentiate that business? At a high level, user studies wouldn't be – seem to be as specialized as a lot of the things that I would have thought Exponent does.

But maybe can you kind of tell us how that is differentiated versus what competitors were trying to go in there and do?.

Yes. Tim, so let me try to address that. I think the first thing that I would cite is the capabilities specifically within our human factors practice. These are folks who are exceptionally well credentialed with regard to the science that underlies user experience. So this is cognitive psychology, this is neuroscience.

And what they're doing is basically understanding not only how the machine is responding to the person, but having a deep understanding of how the person is reacting to the technology. And so while there are – there are plenty of entities out there who will talk about offering user studies, generally speaking.

We truly are in a differentiated area there because of the credentials of the individuals that are doing that work. And we are focused specifically in areas where we also have exceptionally deep industry knowledge. So for example, electronics. This is an area where we have been growing our work, where we have deep expertise across multiple domains.

And so we're able to bring our human factors experience in there to compliment the electronics expertise, and therefore, deliver to the client a multidisciplinary offering.

So in virtual reality for example, not only is it about the user experience and the health and safety surrounding the use of those products, but it’s issues around the electronics themselves, the batteries – the behavior of the batteries that affects the health and safety of the user as well.

So we're able to achieve – it's not about just having a laboratory, for example, where we can bring companies into do user studies. We really do see it as a highly differentiated space. Another example would be automated vehicles, right.

We're able to leverage not only our exceptional human factors expertise to understand that human-machine interface, let's say, with the safety driver, but we're also able to then bring our transportation industry expertise and our safety expertise to deliver that sort of interdisciplinary offering..

Okay. That's helpful.

And then can I just ask Rich, you mentioned that the quarter started slowly because of the timing of vacations, but the overall result was good, so it doesn't imply, I guess was there a significant difference in the way it ended versus the way it started? Or was it just a week or two of slow starts? Just trying to understand if there was a meaningful change..

Yes. So it did pick up from what we were seeing in the first couple of weeks of January. And that even I would say the third and fourth week of January were much better than the first two weeks, but still we're not – still we're not at a strong level. So it built up as we move through the quarter.

And I think that we still have a challenging hurdle to overcome in comparison to where we were last year because of the large user study. But I think that the other activities definitely picked up as we move through the quarter..

Okay. And then can you help me just think about the margins, I guess, with headcount up 6% or 7% and utilization down, I guess compensation only being up, the expense only being up 2% or 3%, and margins, I guess, fairly flattish maybe down a little bit. Those two data points there, such data points, usually wouldn't be connected in my mind.

And so what – why are they holding up so much better?.

Yes. So look, I think the first quarter we ended up having some benefit from last year's first quarter, maybe the compensation number being a little higher, and a few things flowing through. We also ended up with stock-based compensation being down year-over-year in the first quarter.

The reason for that being is just some timings of when some of our – we've talked before about some of our stock-based compensation being amortized at the time of grant because of the clause we have related to age and things of that type in that. So that ended up making, let's call all together, maybe $0.5 million difference in the quarter combined.

There are a few other things that were in our favor, so I would expect that compensation as we look out to the second and third quarter would grow that 1% to 2% more than headcount growth.

Meaning that we're going to realize a little bit of benefit from the mix that we're getting through that, it'll probably grow in the by 8% – let's say, if headcount growth is 7% then or 6%, you're going to find that you'll have 8% or 9% growth in what you'll find on the compensation side relative to wages.

That can vary depending on how profitable we are and the bonus that goes in and things of that type. But the first quarter is 2% is definitely lower than we would expect going forward..

Okay. That’s helpful. Thank you..

But at the same time, we are saying that as we're hiring more junior staff that blended rate increase on salaries is also flowing through on the compensation side as we sometimes see on the bill rate side..

Okay. Thank you..

And we’ll go next to Tobey Sommer with SunTrust..

Thanks. As I've done for the last couple of quarters, I wanted to ask about the impact on your business that you're seeing from your industry client teams that you're getting together periodically? Where you are in the rollout of that? And what your aspirations are for an impact on growth and profitability? Thanks..

Yes. Hi, Tobey. So just laying a little groundwork for that. This sort of client management industry approach that we have is very much oriented and focused toward the proactive side of the business where we're selling directly into these industry clients in contrast to our legal work.

And what we're finding is that in the industries where we are better known for proactive work, so look at electronics, look at chemicals, maybe even look at utilities. What I'm seeing is that, this approach to client relationship management is supporting, I believe, supporting some of the growth we're seeing proactively in those areas.

This is through our efforts to expand really the domains within those client entities where we are offering our services. And in contrast to industries that know us really well on the reactive side, but less so on the proactive side.

So this could be let's say a transportation or an oil and gas, for example, these are areas where historically have a very strong reputation reactively. That's been a little different stage of the process. That's more of a relationship development, reputation development phase on the proactive side.

We're very focused on trying to broaden our reputation in those proactive areas. So think about leadership, think about our folks out on the Standards Committees for these various technologies, and so we're seeing traction. I'm pleased to give an example in transportation.

I'm pleased to see what we're doing to take our battery expertise to bring that across into micro mobility. And I think the client team approach that we're using is really helping us to develop trust with those client entities. So we're actively managing clients. We are seeing some growth and some more opportunities in those relationships.

Some of these are more in the phase of that relationship development and we're getting closer to actually turning that into engagements. I feel good about that, and that's basically the lay of the land as I see it..

Thank you. You did reference batteries additional amount in your prepared remarks in the press release. Could you talk about how big a business that is as it stretches across, I guess, different applications and maybe what you think it could be? Is it early stages or is it, sort of closer to more fully developed? Thanks..

Yes. So look batteries, we don't have an account – accountability for just the batteries work because it typically integrates with a number of other activities or even in a single project with clients that we do.

But we're finding is that batteries is in an area that we're probably touching on something in the high single to low double-digit percentage of our work that we're doing in where touches some of the work or a larger chunk of that it plays in. Maybe on the high single-digit sort of side of that.

But that's how I would generally – that's a general feel of where it is then it is a number that we've been pin down. But I think Catherine we can probably talk a little bit more about how we've established that in different areas and why it's a good platform for growth into new industries..

Yes, exactly right, Rich. So the battery technology, because of the depth of the expertise, what we're seeing is that as an entry point into new areas. So I mean I talked a little bit about micro mobility and I think that's a great example of where a challenge is that some of the companies are having with regard to batteries in that space.

Who perhaps didn't know of us in other areas, we're able to bring that battery expertise as our potentially first engagement with those entities. And so it's what I think of as sort of a door opener. And the more we're able to sort of grow a reputation in that area.

We're very much focused on keeping ourselves ahead of the curve in the technology, right? Because many of these entities, they have battery teams. But what we've been able to do in electronics and that we're doing in transportation is keeping ourselves truly ahead of the curve on the technology.

So that we are able to anticipate what the changing needs will be. And again it's related to our ability to offer the multidisciplinary approach. So it's not only that the battery is – their issues with the electronics, but then what are the implications of that vis-à-vis the safety issues.

What are the implications vis-à-vis the regulatory issues and we’re able to sort of grow that offering with batteries being the initial entry points..

Thank you. More questions for you to get back to the queue. Catherine, could you describe for us where we sit as far as large project exposure at this juncture relative to how you've seen the business over a longer period of years if we're kind of in the middle or lower end of a range.

And then Rich, could you come in on the tax rates for 2019 and maybe a long-term expectation as well? Thanks..

Yes, sure Tobey. So with regards to your question about sort of project size and our exposure to these sorts of very large projects. I mean, I still view the recently ended large project as something that is relatively rare. That was something that I would see as exceptionally large. It certainly is conceivable that we could get another of those.

But it's not something that I necessarily anticipate or have a view into. We are expanding our reach with regard to various areas that we're looking at.

I mean when you think about the amount of data that drives various systems that could potentially open opportunities where engagements can be larger, whether that's data relative to the home environment that's going to drive home automation technology or the data around virtual reality technology, the driving scenario data that's going to drive safety and automated vehicles.

I mean, I can certainly envision kind of large scale data, obviously driving more work, but look we still have a philosophy where we would intends to anytime something gets into that say 4% or 5% in any given quarter, that we would call that out, because we do think that that's important.

But I'm not necessarily thinking that we are clearly going to have an increased frequency of those..

Okay..

Related to your question on the tax rate for 2019, again we anticipate the tax rate for the remaining three quarters to be 27.5% for those three quarters. That will bring us to a full-year tax rate of approximately 22%..

Thank you..

And we'll go next to Joseph Foresi with Cantor Fitzgerald..

Hi. My first question is just on PG&E. Maybe you could give us some color on – are you currently, I'm not sure if I understood this. It sounds like you have $6 million in accounts receivables just still doing work.

Are you currently getting paid on that account? How does the payment process work going forward because I know – I understand you're doing more work and still doing work in 1Q.

How should we think about that? Is that accumulating in accounts receivables, and you're going to get paid out by the lawyers or, however we should – I'm just trying to get a context..

Yes. So there are two buckets of receivables. There is your bucket of receivables that are those – that were outstanding at the date of the bankruptcy. So that was on January 28. We had $6 million of receivables outstanding on January 28. Those receivables are in the – are handled as part of the bankruptcy.

There are two ways that PG&E that those get paid. One is that PG&E has been allocated some dollars for paying critical vendors and they are going through a process of paying out some of that amount to critical vendors and that process is ongoing. We would hope that we would participate in that, but can’t – don't have anything to announce today.

On the other hand, I would expect that some of our receivables that we wouldn't receive all $6 million in that process.

The remainder of it would be then paid out in the normal bankruptcy process based on what has been said by PG&E and the financial, what is being reflected in the financial markets as to the value of those receivables out there is why we still believe that we are going to collect substantially all of that $6 million over time.

So we think that some of it is likely. We're hopeful to get paid sooner than later as a critical vendor. And we expect that some of it will take a little bit longer and be paid out through the normal bankruptcy process. But eventually get paid..

Go ahead Rich..

Yes. For our work going forward, from January 29 forward, those receivables are in the normal course of business. They are being paid on a sort of in a regular course of business in receivables. PG&E has a lot on their plate.

There's been a few weeks of sort of delay just as the fact that the same accounts payable department and everything is dealing with a number of things around vendors. But overall, we're starting to see that start to come around. So right now our receivables are elevated because we have the $6 million outstanding that would have been paid by now.

And then we have the rest of our receivables that are about in the normal course of business for us as we move forward. So that's the best way to view it..

Got it. But the $6 million, that's obviously not included in revenue and that would be a one quarter hit or could – once you receive it, it will then be recorded..

We have recorded substantially all of that into revenue. So some of those receivables are accounts that we had outstanding from – even back in 2018 and some of those were receivables that were generated through work done in January. We recognized the revenue for those.

We've taken a small reserve against those for the probability of at least a small amount not being collected through the bankruptcy process, but essentially the majority of it has been recognized as revenue..

Got it. And just to be clear, but the work that you're doing now, which is accelerating is being paid in normal course of business.

Is that right?.

That is correct..

Okay. And then just one other question before I get to my other two, I just want to make sure I fully understand this.

Is there a reason why the work is accelerating? Is there a part in the process that would require it to pickup and then maybe tail off at the end of the year? Or is this just normal course of business work anyways? I'm just trying to get a sense as a deal with other legal issues – anything else?.

Yes. So Exponent, the services that we've provided that to Pacific Gas and Electric over a long period of time has been around integrity management, sort of the integrity of their gas and some into the electric system over their safety issues as well as construction management services.

The majority of our integrity management services and safety work has been on the gas side of the business, although we've done some work on the electric side. The focus had been on the gas side.

The reason that that work had been drawn up over the last decade is PG&E had a significant incident on their gas lines in San Bruno, California back in 2011, I believe was the year. And as such, there's been a lot of focus around the integrity and management of that system and Exponent has worked with PG&E to improve that system over time.

In fact, we've done more work around from some of our construction management practices on the electric side and a little bit of safety and integrity management on the electric side over the years.

Clearly that entity has really gotten the focus on the electric side with what it occurred in the last fall related to wildfires, and that area of – concern of the integrity of that system and wildfire risk is something that Exponent has a lot of expertise in.

We've done a lot of work in the electric utility industry back over 50 years that we've been working in that, and we've worked on a lot of major wildfire events over the years as well. So we feel that we're in a good position to support the utility industry and PG&E particularly around these types of services..

Got it. Okay. Then just two other quick ones, the comps get better from here. This was kind of the toughest one. I think you said from 7.5% to 4% to 3% to zero.

Should we expect the numbers to kind of gradually lift through the back half of the year in accordance with those comps? Is that a fair way of looking at it?.

Yes, so that would be a fair way to look at it..

Okay. And then the last question I have, we have nine months left in the year, and this is only 1Q, and I know that you tend to be conservative to start years out.

Is there anything that you would add outside of seasonality around how you think about utilization and driving kind of more business through the back half of the year, because it seems like there's a long way to go and you haven't touched the margin guidance, but you've gone through the most difficult quarter, I think from a comp perspective? So I'm just wondering how we should think about utilization and margins..

Yes. Look, when we look at the utilization that we had in the first quarter and take that into account with the seasonality that goes through. We still need to improve our utilization what I'll call adjusted for holidays and vacation as we move through the year to achieve the 71% to 72% that we've laid out there.

As you're aware the first quarter tends to be our best utilized quarter. We've had times where there's been work that's come along that's made the second or third quarter batter, but expectation is that the second is typically similar to the first quarter. We think we're improving here a little bit.

As we mentioned, the first quarter started off a little slow. But we also view that normally that should step down a little bit over the summer months and then further in the fourth quarter as we get into the holidays and vacations in that period. Again, we think that things improved from January coming into as we move through the quarter.

But we've still got the headwinds in year-over-year comparisons to the work that we add on the large study. So those things are still ahead of us. We think that yes, the first quarter’s margins were good.

As I mentioned before, they benefited from some – there's a lot of noise in the compensation numbers in the first quarter was stock-based compensation coming through in a number of things that we think that those will step up a little bit.

So we think that the guidance that we've given is in line with the utilization guidance that we've given as well..

Okay. Thank you..

And we’ll go next to Sam England with Berenberg..

Hi, guys.

Just a couple of me, firstly, could you give us an idea at the mix of specialisms amongst the new hires that you had in Q1, I suppose, which bits of the business you've been hiring into so far this year?.

Yes, we've been really focused, particularly in areas where we're seeing increased demand, right? So if you think about – I've talked a lot about human factors, but that is an area that is very important for us from a recruiting standpoint. The battery area is yet another one.

Now that one goes across multiple disciplines, right? So when I think practice wise, that's going to be my polymer sciences folks. That's going to be my thermal sciences folks. That's going to be some of my electrical folks. Those are examples there. We're finding in mechanical, that's another area where we see a lot of demand.

I would also point you across in our infrastructure group, particularly around construction consulting. I mentioned I think in my prepared remarks about the strength that we're seeing in the marketplace around international arbitrations and this is really where our unique offering combines construction consulting expertise.

So that's as around the delay associated with large infrastructure projects, combining that with a deep engineering expertise across mechanical, electrical, et cetera. That is a practice that is doing a whole lot of hiring right now. So those are some of the areas, where I think we've done the most hiring.

Not just in Q1, but broadly as we're seeing demand in those areas..

Okay. Thanks.

I suppose you got a couple of big quarters now for hiring, how quickly are you getting these guys out on projects, the people that you're bringing in?.

Yes. Well, these folks can be on projects starting their first couple of days. I mean I remember back 20 plus years ago when I first came in and it was literally a project on the first day. Now obviously, we're not – we don't have them ramped up to their sort of steady state utilization immediately.

But it is very much – they come in with deep subject matter expertise from their PhDs, but they gain a great deal of exposure to issues through working on projects.

And so we look to bring them in and to develop them quickly by putting them in projects, putting them in multidisciplinary projects even better, giving them an opportunity to work across perhaps multiple principles in the firm with different types of projects, so we get them engaged relatively early..

Okay. Thanks. And then just last one for me. I just wondered how the international business is developing in 2019 and how you're thinking about growth in that business this year..

Yes. So one area that I would cite for you there is our chemical regulation and food safety work. So that is – a lot of that is proactive work that relates to all of the regulatory issues around pesticides, around industrial chemicals.

And so the client mix for that really is global, whether they're in Asia, whether they're in Europe and we have that work in the U.S. as well. But the regulatory environment, when Europe in particular with various regulations around chemicals, the direction that, that is going as we see it, it’s becoming more and more stringent.

The regulatory framework is not getting less stringent and it's definitely getting more stringent so that is driving that business. And then the other thing I would cite for you, again, is the international arbitrations.

I described that before, but we're seeing expansion of the reputation of some of our top people on the engineering side on a much more global scale.

We're seeing demand even though those consultants may not be based in Europe or in Asia, that the demand is such that they're being brought over on these large capital projects disputes because of the exposure and the value of those disputes, and the expertise that we're able to deliver.

So that's been an area of strength, and I think will continue to be an area of strength for us internationally..

Great. Thanks very much. That’s all from me..

You're welcome..

We have time for one more question. So we'll take our last question from Tobey Sommer with SunTrust..

Thanks. Just a numerical follow-up for Rich. What’s underlying growth at the topline in the quarter if we strip out the large project a year-ago? I apologize if you stated it..

No. So yes, the large project was 7.5% of our revenues in the first quarter a year-ago, so that would bring our underlying business growth to the 10% level..

That concludes today's call. Thank you for your participation..