Exponent Inc
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Exponent Inc
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Good day and welcome to the Exponent’s Fourth Quarter and Fiscal Year 2018 Earnings Call. As a reminder today’s conference is being recorded.
At this time, I would like to turn the call over to Ms. Whitney Kukulka. Please go ahead.
Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent’s fourth quarter and fiscal year 2018 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 development or otherwise.
And now, I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine?
Thank you and good afternoon everyone. Following my discussion of the results for the fourth quarter and full year 2018, Rich will provide a more detailed review of our financial performance and business outlook. Paul is also with us for the question-and-answer portion of the call.
2018 was another year of solid growth for Exponent, as we grew our business through strategic market expansion in several industries and geographies. In 2018, Exponent grew net revenues 8% to $355 million, expanded EBITDA margin 77 basis points to 27.3% of net revenues and delivered earnings of $1.33 per diluted share. Following this execution, we are pleased to announce a 23% increase in our quarterly dividend from $0.13 to $0.16 per share and $75 million addition to our stock repurchase program.
We believe these actions demonstrate our confidence in our long-term financial performance, the strength of our balance sheet and our commitment to deliver increasing value to our shareholders.
In the fourth quarter, net revenues increased 3% to $85 million and earnings per diluted share were $0.30. Our results reflect a strong performance in several business areas, partially offset by a challenging year-over-year comparison due to the large human factors project, which concluded during the third quarter of 2018.
While we do not anticipate another project of this scale in 2019, we expanded our human factors practice during the year and are currently engaged with a variety of clients in the consumer products industry. This is a strategic growth area with strong demand as clients want to better understand the interactivity between sophisticated products and their users.
Exponent also had strong demand for design consulting services as the consumer electronics industry continued to innovate and face manufacturability challenges. Increasingly clients from the energy mining and infrastructure sectors with technical and construction management issues on large capital projects engaged our interdisciplinary teams to evaluate these claims.
During the year our highly credentialed Scientists were engaged to assess the increasing concerns regarding the impact of chemicals on human health and the environment. We expect continued strength in these areas as we move through 2019.
Exponent engineering and other scientific segment represented approximately 80% of the Company’s fourth quarter and 2018 net revenue. Net revenues grew 4% in the fourth quarter and 8% in fiscal year 2018 as compared to 2017. For the quarter and year this segment had noteworthy performances in its human factors, material science, thermal science, polymer science and mechanical engineering practices.
The firm maintained, its leadership and failure analysis as it was called upon throughout the year to determine what happened when a disaster occurs. These events range from structural failures of major infrastructure to functional failure of nanoscale components.
Exponent also expanded its reputation as the go-to consultant for advice on creating more reliable products, especially in the area of battery technology. Exponent’s environmental and health segment represented approximately 20% of the Company’s fourth quarter and 2018 net revenue. Net revenues in this segment were approximately flat in the fourth quarter and grew 4% in fiscal year 2018 as compared to 2017.
Growth for the year was driven by work in the chemical regulation and food safety practice as the world focuses on human health and the environment. Chemical production and use are subject to significant safety evaluations and complicated regulatory processes. In addition, to advising clients as they navigate the complex and often changing regulatory landscape required for products to enter the market.
We saw increased reactive work in the U.S. involving questions of exposure and health effects of substances found in consumer and agricultural products. In 2018, we hired 145 consultants, which yielded a 7% growth in full-time equivalent employees.
Exponent engages the brightest scientists and engineers from an incredible range of disciplines. Our ability to attract and retain top talent allows us to leverage our vast historical knowledge and at the same time serve as thought leaders for the newest technology.
Recruitment of the best Ph.D.s is a lengthy process, and Exponent has entered the year with a healthy backlog of new hired commitments for 2019. These hires are concentrated in our high growth practice areas.
In summary, we are pleased with our results in 2018. Our financials demonstrate the strength of our unique market position, adaptable business model, and strong client relationships. We are enthusiastic about the opportunities before us in 2019 and our confident in our strategy to achieve long-term growth and value creation for our shareholders.
Rich will now provide a more detailed review of our financial performance and business outlook.
Thanks, Catherine. Let me start by saying that all comparisons will be on a year-over-year basis unless otherwise specified.
For the fourth quarter of 2018, total revenues were up 4% to $92.1 million. Revenues before reimbursements or net revenues as I will refer to them from hereon were up 3% to $85.4 million.
Our underlying growth in the fourth quarter was in the high-single digits, but was offset by the large human factors project, which was completed in the third quarter. This project was 5% of our net revenues in the fourth quarter of 2017.
Net income for the fourth quarter was $16 million or $0.30 per diluted share as compared to a loss of $3.7 million or $0.07 per share a year ago. During the fourth quarter of 2017, 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 $0.24 per share in the fourth quarter of 2017.
As a reminder, our 2018 net income benefited from the new tax legislation, which reduced our consolidated tax rate. I will provide more details on our tax rates shortly. EBITDA for the quarter increased 4% to $22.6 million. For the year, 2018 total revenues increased 9% to $379.5 million and net revenues grew 8% to $354.6 million.
Net income for 2018 was $72.3 million or $1.33 per diluted share, as compared to $41.3 million, or $0.77 per diluted share in the prior year. Excluding the one-time income tax expense, 2017 net income was $57.8 million or $1.07 per share.
As a reminder in 2016, Exponent adopted a new accounting standard for the classification of tax adjustments associated with share-based awards. The tax benefit realized for 2018 was $4.2 million, or $0.08 per diluted share, as compared to $6.5 million or $0.12 per share in 2017.
For the full year 2018, EBITDA increased 11% to $96.9 million. The large human factors project, which concluded in the third quarter, accounted for 4% of net revenues in fiscal year 2018, as compared to 6% in 2017. The 2018 quarterly net revenues from this project were 7.5% in the first, 4% in the second and 3% in the third and 0% in the fourth. This will create a significant hurdle for the first half of 2019. For the fourth quarter, billable hours were 302,000, which is equal to the prior year. For the year, billable hours increased 4.6% to 1.274 million.
For the fourth quarter, utilization was 68.0% as compared to 71.7% a year ago. For the full year 2018, utilization was 73.0%, down from 74.7% in the prior year. The utilization for the first quarter of 2019 is expected to be in the low 70s as compared to 76.6% in the first quarter of 2018, 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 of the quarter as school holidays are extending further into January.
Please note that in fiscal year 2019, we will have an extra week in the fourth quarter, which will increase net revenues by approximately 5% for the 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.
For the full year 2019, we expect utilization to be 71% to 72%, which includes the impact of the large project and the 53rd week. Although, our utilization will be down again 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 853, up 5.5% as compared to the same period in 2017. For the full year, FTEs were up 7% to 839. As a result of our strong recruiting backlog, we expect our 2019 hiring to be front-loaded with a sequential headcount growth of approximately 2% to 2.5% in the first quarter and then an additional 2.5% to 3% over the remainder of the year.
We will continue to selectively recruit top talent to meet current demand and position the company for future growth. The realized rate increase was approximately 2.75% for the quarter and year. For 2019, we expect the realized rate increase to be 2% to 3%. For the quarter, EBITDA margin increased 13 basis points to 26.5% of net revenue. For the full year 2018, EBITDA margin was 27.3% on an increase of 77 basis points over the prior year.
EBITDA margin increased, although utilization declined because we got greater leverage from more junior staff. For the quarter, compensation expense after adjusting for gains and losses in deferred compensation grew 4%. Included in total compensation expense is a loss in deferred compensation of $6.5 million, as compared to a gain of $1.3 million in 2017.
As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line. For the year, compensation expense increased 7% after adjusting for a loss in deferred compensation of $3.9 million as compared to a gain of $6.5 million in 2017.
Stock-based compensation expense was $3.4 million for the quarter and $17 million for the full year of 2018. For 2019, we expect stock-based compensation to be $6 million to $6.3 million for the first quarter and $3.6 million to $4 million in each of the remaining quarters. For a total of $17 million to $17.5 million for the full year.
Other operating expenses increased 2.2% to $7.7 million in the fourth quarter and increased 3.6% to $30.6 million for the full year. Included in other operating expenses is depreciation expense of $1.6 million for the fourth quarter and $6.3 million for the full year. For 2019, we expect other operating expenses to be in the range of $8 million to $8.6 million per quarter.
G&A expenses declined 3.1% to $4.4 million in the quarter and declined 1.4% to $17.5 million for the full year. 2018 G&A expenses were lower as we had a biannual managers meeting in 2017. For 2019 G&A expenses are expected to be in the range of $4.2 million to $5.2 million per quarter.
For 2018, the tax benefit from share-based awards was $4.2 million and $3.9 million in the first quarter. For 2019, we estimate based on the current stock price that our tax benefit associated with share-based awards will be approximately $3.9 million for the first quarter and year.
The tax benefit from shared-based awards is determined based on the change in the value of the shares, share-based awards between grant and issuance dates. Inclusive of the tax benefit for share-based awards, Exponent’s consolidated tax rate was 27% for the fourth quarter of 2018 and 22.6% for the full year. For the full year 2017, the tax rate was 49.9% or 29.9% excluding the onetime expense for the adoption of the new tax legislation. For 2019, we expect our tax rate to be approximately 9.5% for the first quarter and 23% for the full year.
Moving to our cash flow; operating cash flow was $44.4 million for the quarter and $91.2 million for the full year. Capital expenditures were $4.1 million for the quarter and $16.3 million for the year, of which $11.3 million went towards the development 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 year, Exponent paid $27.2 million in cash dividends, repurchased 562,000 shares for $27.9 million, and ended the year with $208.6 million in cash, cash equivalents and short-term investments. Today, we announced a 23% increase in our quarterly dividend from $0.13 to $0.16, and an additional $75 million for share repurchases, increasing our current authorization to approximately $92.5 million.
As we have previously discussed, Pacific Gas and Electric is a client of the firm. PG&E filed for Chapter 11 bankruptcy on Tuesday, but at the same time announced that it has secured financing for continued operations. For 2018, Exponent’s revenues from PG&E were approximately $22.9 million or 6.6% of our total revenues. We ended the year with $5.6 million of PG&E receivables.
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. As PG&E continues to request our services, we remain optimistic about future demand, but realized that some non-essential projects may be deferred.
For 2019, we expect revenues before reimbursements for the full year to grow in the mid to high single digits as compared to 2018. 2019 EBITDA margin is expected to decline by approximately 75 basis points to 125 basis points as compared to 2018. Our outlook for the full year 2019 reflects positive momentum in a number of business areas, partially offset by challenging year-over-year comparison due to the conclusion of the large human factors project.
I will now turn the call back to Catherine for closing remarks.
Thank you, Rich. When complex problems arise, whether it’s a technology failure, a product recall or liability issue, an international construction dispute or a natural or manmade disaster, clients around the world rely on Exponent for sound scientific advice. Our strong reputation in reactive services is unique and leaves us relatively insulated from industry downturns and macroeconomic changes.
On the proactive side, our design and regulatory consulting services have also proven to be relatively insensitive to economic cycles. For example, our design consulting clients in the consumer, electronics and medical device industries must continue to innovate and drive cost out of manufacturing to survive. On the regulatory side, our clients in the chemicals industry must be compliant independence of sales volume.
Exponent benefits from a diverse client base and a breadth of practice areas. Well, we face growth headwinds 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 are focused on positioning the company for success, delivering strong, sustainable financial results, and creating value for our stakeholders.
We will now open the call to questions. Operator?
Thank you. [Operator Instructions] And we will take our first caller, Joseph Foresi with Cantor Fitzgerald. Please go ahead.
Hi. I just wanted to ask a couple of different questions. First, we’ve dealt with this tough comp because of a large project rolling off before. And you’ve shown a fairly reasonable ability to kind of manage through that and even replace it with new revenues. How do you think about this one? Is there any reason to think that is different than in the past when you’ve had those large contracts roll off? And what is the pipeline look like for next year to fill that gap?
Yes, Joe – I mean, this is Catherine. I feel fairly strong with regard to our ability this time around to be able to sort of flow those folks back into the practices. I mean, the folks that we’re working on this particular project, it’s unusual from the standpoint of them having come from disciplines across the firm. That is different than when we’ve had these kinds of situations in the past, where those folks have been primarily concentrated in a particular area. You think about, for example, the BP work in the Gulf, which was focused primarily on our environmental side. In this instance, all of those folks who worked on that project also has a portfolio of projects that they’re working on at the same time. So as they come off of that large project, there is a baseline level of work that they are able to participate in within their technical areas.
So, as we look out and we sort of see the demand, the demand in the fourth quarter was a bit slower than we might have expected after that project fell off. We had a good size vehicle product recall projects, which hit a pause. Some construction disputes sort of gotten pushed into the early in the year as opposed to the fourth quarter. But generally as we look out to the marketplace, we feel as though the demand is relatively strong and we feel confident. As we said, we believe that despite the headwinds sort of in the first half of the year, that by the end of the year we’ll be able to deliver that mid to high single digit revenue growth.
Got it. And then Rich on your side, the original margin guidance. I’ve seen that before in past years, It sounds like actually with this particularly large project, maybe the resources are more fundable. Maybe you can give us a little insight as to what’s baked into the initial guidance. And your thoughts about sort of working diligently like you do every year to get utilization back to where it should be to exit the year.
Yes. So, what we’ve got in our guidance here is that, we – if you take into account the 4% of revenues that we had for the full year, that was in this project and we’re only – what we’re doing is talking about the utilization stepping down. If you exclude the impact of the 53rd week, we’re talking about utilization stopping, stepping down about 100 to 150 basis points. So we – well, what I think we’re going to start off the year here with a 7.5% a hurdle to overcome our headwind, and that will have a heavy impact.
As we move through the year, we think that we will gradually, come around to the utilization that we achieved this past year and the end. But we do see that at the beginning of the year, we’re going to have some pretty tough comparisons and we’re going to be – as we indicated, we think the first quarter’s UT will be in the low 70s. And that hopefully as we move forward excluding the impact of holidays and vacations that we can see that utilization improve and be at the levels that it was last year even. So, that’s what we have, we think there’ll be some heavy impact to UT in Q1, modest amount to Q2, a little bit in Q3, and hopefully non-exempt for the issue of the 53rd week, as we get into the fourth quarter of next year.
Okay. And then the last one for me, having known the company for a long period of time, there is built-in defensiveness to the business that I think becomes attractive during economically volatile times. But you also have more kind of proactive work than you’ve ever had, I think, at the same time. So, maybe you could just talk about, how your business reacts to economic volatility and what areas you’re focusing on the proactive side for 2019? Thanks.
Yes, sure. Joe. So, yes, with regard to the proactive side, I mean, look, I think it’s reasonable to expect that in an economic downturn, you know, clients are going to be looking across their businesses and their tightening their belts, right. And so we’ll certainly see some of that. But when you look at where our proactive services are concentrated, you look at things like our design consulting services. That’s something we deliver to the consumer electronics industry very, very strong area for us.
They have to continue to develop and innovate new products and put the new technologies out even if their sales have gone down, and they’re not selling as many units. And so it’s not a scenario where we envision our work necessarily scaling with our clients’ sales. They’re going to continue to have those rapid product cycles if they’re going to survive in that kind of environment.
And when I look at, let’s say, the medical device industry, another place where we’re doing that kind of design consulting and proactive work. And we have an increasing aging population. So when you think about the role of – and that’s independent of the economy. And so from a demand perspective there, again the innovation around those new products in order to be able to survive and also ensuring the quality, the reliability and the safety of those products. That has to happen, whether you’re selling a 100 of them or a 1000 of them. So, I really think those are kind of the principles that underlie our thinking around the proactive side of the business.
And with regard to the reactive side, stuff breaks, cars crash, there are natural and man-made disasters in those instances. We’ve had scenarios in the past where we’ve seen large litigation products – projects, product recalls, those sorts of things really don’t seem to flow with the economic cycle. So again, I mean is their belt tightening, they are watching their spend on the legal side. They certainly are. So we are not immune, but there is some installation there that I think we’ve shown in the past.
Yes, I would just add back. I mean, what we’ve seen back in 2009, 2010 time frame was that on the design consulting side, just like now, our growth rate is a double-digit growth rate here. Does that get impacted a little bit? It could, but we still continue to see that area grow through that time frame.
Also on the proactive side is the regulatory services that we provide in food – chemical and food safety services that we provide. And we – again, that was an area, even though that work was a lot – a good hold over in Europe which was really challenge. We continued to see year-in, year-out growth in the demand for our services, as there continues to be a focus around the safety of chemicals in our environment that there is really an ever-changing regulatory landscape and those things continued through the last economic cycles. And with so much change going on in the world relative to trade and regulation and such we don’t see at this time anything slowing down there. So those are things that we’ve seen over time and a lot of those factors continued to play today. And it’s really the businesses that we had nine, 10 years ago we’ve grown in those areas a lot, but they are still businesses that we – the biggest parts of what we had back then or make up the largest part of our proactive services today.
Thank you.
And we’ll take our next question from Tobey Sommer with SunTrust. Please go ahead.
Thanks. I was wondering if you could give us a little more color on your hiring, it sounded like a frontend loaded year, if we could talk to us about these are seasoned or junior folks, any differences compared to last year or historical hiring patterns and in which practices are the biggest recipient?
Yes. Thanks Tobey. So the percentage wise, I don’t have the numbers in front of me, most of those hires are going to be university recruiting. So these are folks coming out with Ph.D.s, we’re pulling them out of the top programs. They’re certainly are some mid and senior hires in there as well. But it’s focused on the junior staff that we’re bringing in. It’s interesting because the fall is typically the big recruiting season. When we go to Stanford, we go out to MIT. I was there in the fall, that’s the time when most of these folks are out, looking and they had the big programs.
And so what we’ve seen is a very successful focus that we had on university recruiting in the fall, which translates into a bumper crop of talent that is coming into the organization in the first quarter. So not really a change in philosophy so much, we are focused on hiring these folks into our high growth areas. So you think about folks who have done work in batteries, people who have done work around chemicals and a relationship to help in toxicology, people in polymer science, folks in mechanical engineering, thermal sciences. These are some of the areas – electrical engineering is another, where we are seeing good demand.
And of course, the paradigm here is that we take these folks and we develop them. So that they in fact are the ones who are not only working on the execution of the projects, but they are the ones growing the business, because they are developing and becoming famous in the marketplace. So the strategy remains the same, that paradigm of getting the best talent, developing them in, and then moving them up in the organization, so they can generate business.
Great. And I was wondering if you comment of couple of macro things and the global economy, whether you perceived any changes in customer behavior in Europe, where there has been some slowing economic data and whether the China trade issue either generates work for you or slows demand down to the extent you have customers impacted by that phenomenon?
Sure. So kind of taking the first – the last one first, with regard to sort of the tariff situation, it’s not something that we have seen really any kind of acute or direct effect. I mean, I would almost refer back to our discussion we had a couple of minutes ago around sort of things that affect the macro economy, and sort of the relative installation that we have in that regard. I’m not aware of a particular client. Certainly, they are feeling the effects. But not really seeing in our business.
Significant changes around projects that are either kind of coming in specifically because of that or projects that are taking a pause or coming off because of that. And with regard to Europe and some of the uncertainty over there, we are certainly monitoring the – in the UK, the Brexit situation. There’s clearly a lot of uncertainty. What the regulatory environment will look like, is unknown, but look if it turns out, there are – there is a new regulatory scheme that comes out of it, that’s certainly something that could be a potential plus to the business. So we continue to monitor developments in that regard.
Okay. Just two other questions for me. One, with respect to CapEx, the surge this year related to Boston, are there any notable build outs that you got maybe like beyond 2020. Just to review, that’s – really that’s kind of infrequent episode of CapEx lift. And then could you give us your expectations for PG&E revenue in 2019? To the extent you could provide us some color on what you think in that regard?
Yes. So on the CapEx side, at this time, we do not have any plans for a large – an unusual large CapEx spend there. We don’t view that building this facility in Boston area is something that we’re looking do sort of cookie-cutter and go repeat the number of other places. We’ve established our facility here in the Menlo Park, Silicon Valley area back in 1989 and have that facility here. We did acquire the warehouse, but storage behind this a few years back, but this is really because the operations has gotten large enough in the Boston area, the cost of putting in labs as you move from lease to lease. We feel that this is the right move, financial move for the company, and as such shareholders relative to it. Other things would really be something strategic that came along on the CapEx side, that right now we don’t have a schedule.
As far as PG&E, look we – PG&E is not any different than our other clients. Most of our engagements are reasonably short, but this is a client that we’ve got historically had a very diversed portfolio of work, both we really sunk our teeth in over there on the gas side relative to the issue that occurred in San Bruno with the gas line event and as such, we worked around the integrity and safety of their gas system really over the last decade and trying to assess that and help them in improving that.
We’ve done work on the some work on the electric side, a lot of our construction management work falls on that side of the business. We’ve clearly have work in our projects over on that side, but there obviously the attention and focus around safety and reliability in that organization is very much turned to that side. And as such, we have quite a vast set of capabilities across our practices to support a client that is evaluating their electric distribution system and transmission system.
So, we are hopeful, but we also at the same time have a client here that is going to be really assessing their organization and how they go forward. Right now, our expectation is that our business, some areas will go down a little bit, some will probably go up some. So for the short term, we’re expecting our business to be relatively at the same level of volume here as we look into the first quarter and really don’t have a different expectation for the year until we get different and until we learn something new from the client.
Thank you very much.
And our next question will come from Sam England with Berenberg. Please go ahead.
Hi, guys. Just wondering what is the wage inflation expectations are for 2019? And whether that 2 percentage point to 3 percentage point rate increase you talked about is mainly due to a desire to offset rising wages or whether it’s just opportunism?
Yes. So absolutely – look, we look at our pricing from the pricing of what we charge our clients, based on the market that is out there. A lot of that has to do with our clients’ realization of the value of our people and the value of engineers and scientists in the marketplace overall, which we think is clearly got yield raising. So that we said, based on it. When we look at our current employees that number is closer to 5% that we are increasing. But as you blend in your more junior staff into that on a year-over-year basis, that’s how you blend down to a realized rate increase of something in the 2% to 3% range.
The same actually occurs on your – for our employees. You end up coming around. We have our annual raises that are effective April 1. You’ve got that current group. They are rising fast, they are really improving. Those rises fall in. They tend to be at or below the average billing rate increases that we’ve put in place. But we’re hiring in on average more junior staff, which allows our average rate of increase of wages to be again at or below that level of 2% or 3% increase in wages.
So, if you take our headcount growth plus some increase for wages that’s where you fall relative to compensation. The wages increase depending on where profitability is. It will depend on what happens with the bonus, pull and other factors that go into it. But overall, what we’ve seen is we get a little better leverage out of the junior staff by being able to charge at a little higher rate still pay people well coming in and gain a little bit of leverage out of that price increase.
Okay, great. And then, following on from that, around sort of high amount of hiring in 2018. And should we read that as a sort of indication of a very strong pipeline or demand in 2019 and 2020? Or is it just the fact that there was decent people available, and so you felt that you have to hire them?
Yes. So, there is clearly the demand side of the marketplace that is driving that. When we look out to the electronics industry, chemicals, we look out to, let’s say, automated vehicles, emerging transportation technologies, we are seeing new areas emerge there; micro mobility, for example. If you’ve seen any of the price shooters around in a number of the urban areas, electric vehicles, many different components to that. And so the hiring really is because we see the pull of the marketplace. And we – you know, we certainly can’t perfectly match the PhD thesis of every candidate with the job right away, but we certainly orient ourselves toward those areas where we’re seeing the demand.
Yes, I would follow up on that to just say, look, I think as we’ve said, we think the underlying growth is solid. We clearly have this 4% headwind for the year and 7.5% for the first quarter. So, those are going to impact that underlying growth significantly. But that we still see the demand, the hiring part is really an issue of timing.
Sometimes as Catherine described you’re out there, you really see a lot of good candidates. You know you needed to be recruiting these people not only over six or nine months, but really over several years. You bring them in. We clearly wouldn’t be hiring them if we didn’t think there was demand in the future. But the exact timing on a quarter-to-quarter basis doesn’t work in our business. Recruiting is a long process. We’re hiring for the next year or two. We’re clearly not just hiring because we think there is some demand out there three or four years from now. We’ve got to – where profitability is important to us.
Okay, great. And then just last one from me, on the large human factors client that’s rolling off, are you expecting that to generate any further contracts of the back of it in 2019 or 2020 or should we expect that does just tail off to zero over the next few months?
Yes. So with respect to human factor studies of that type, we continue to have a portfolio of those. We have those types of studies from that clients, and frankly, a broader portfolio of human factor studies across – outside of that clients as well. So we don’t have a single engagement that we expect to reach the scale of the project that we’ve had over the last year or two, but absolutely we continue with that client and others to look at issues around the relationship between consumer products and their users.
And as it implies to our growth, I think the thing is that even in 2018 we had a portfolio of other clients and a project – other projects with this client. We think that those are growing. This is a high growth area. It is what is contributing to our underlying growth being in that high single-digit to low double-digit level. So the challenge we have is, this is a high growth area with this – it’s growing with this client, it’s growing with others. But this one project sort of laid on top of that and that’s why we have this as a difficult comparison.
Okay, great. Thanks.
And there are no further questions at this time. As of now, ladies and gentlemen, this does conclude today’s conference. Thank you all for your participation, and you may now disconnect.