EXPONENT INC

Previous wording

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herein and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2023, which are contained in our fiscal 2023 Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on February 23, 2024 (our “2023 Annual Report”).

Current wording

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herein and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2023, which are contained in our fiscal 2023 Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on February 23, 2024 and amended on April 17, 2024 (our “2023 Annual Report”).

Previous wording

This Quarterly Report on Form 10-Q contains certain “forward-looking” statements (as such term is defined in the Private Securities Litigation Reform Act of 1995, and the rules promulgated pursuant to the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended) that are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. When used in this document, the words “intend,” “anticipate,” “believe,” “estimate,” “expect” and similar expressions, as they relate to us or our management, identify such forward-looking statements. Such statements reflect the current views of us or our management with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results, performance, or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. Factors that could cause or contribute to such material differences include the possibility that the demand for our services may decline as a result of changes in general and industry specific economic conditions, the timing of engagements for our services, the effects of competitive services and pricing, the absence of backlog related to our business, our ability to attract and retain key employees, the effect of tort reform and government regulation on our business and liabilities resulting from claims made against us. Additional risks and uncertainties are discussed in our 2023 Annual Report under the heading “Risk Factors” and elsewhere in this report. The inclusion of such forward-looking information should not be regarded as a representation by the us or any other person that the future events, plans, or expectations we contemplated will be achieved. Due to such uncertainties and risks, you are warned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We do not intend to release publicly any updates or revisions to any such forward-looking statements.

Current wording

This Quarterly Report on Form 10-Q contains certain “forward-looking” statements (as such term is defined in the Private Securities Litigation Reform Act of 1995, and the rules promulgated pursuant to the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended) that are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. When used in this document, the words “intend,” “anticipate,” “believe,” “estimate,” “expect” and similar expressions, as they relate to us or our management, identify such forward-looking statements. Such statements reflect the current views of us or our management with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results, performance, or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. Factors that could cause or contribute to such material differences include the possibility that the demand for our services may decline as a result of changes in general and industry specific economic conditions, the timing of engagements for our services, the effects of competitive services and pricing, the absence of backlog related to our business, our ability to attract and retain key employees, the effect of tort reform and government regulation on our business and liabilities resulting from claims made against us. Additional risks and uncertainties are discussed in our 2023 Annual Report under the heading “Risk Factors”. The inclusion of such forward-looking information should not be regarded as a representation by the us or any other person that the future events, plans, or expectations we contemplated will be achieved. Due to such uncertainties and risks, you are warned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We do not intend to release publicly any updates or revisions to any such forward-looking statements.

Previous wording

There have been no significant changes in our critical accounting estimates during the three months ended March 29, 2024, as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2023 Annual Report.

Current wording

There have been no significant changes in our critical accounting estimates during the six months ended June 28, 2024, as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2023 Annual Report.

Previous wording

Revenues for the first quarter of 2024 increased 3% to $144,933,000 as compared to $140,309,000 during the same period last year. Revenues before reimbursements for the first quarter of 2024 increased 7% to $137,207,000 as compared to $128,705,000 during the same period last year.

Current wording

Revenues for the second quarter of 2024 were to $140,536,000 as compared to $140,221,000 during the same period last year. Revenues before reimbursements for the second quarter of 2024 increased 2% to $132,434,000 as compared to $129,653,000 during the same period last year.

Previous wording

During the first quarter of 2024, billable hours increased 2% to 392,000 as compared to 385,000 during the same period last year. Our utilization increased to 75% during the first quarter of 2024 as compared to 70% during the same period last year. Technical full-time equivalent employees decreased 5% to 1,003 during the first quarter of 2024 as compared to 1,052 during the same period last year. We expect a small sequential decline in average technical full-time equivalent employees during the second quarter of 2024. We expect sequential headcount growth during the second half of 2024 as we continue to selectively hire key talent to expand our capabilities.

Current wording

During the second quarter of 2024, billable hours decreased 2% to 381,000 as compared to 388,000 during the same period last year. Our utilization increased to 75% during the second quarter of 2024 as compared to 69% during the same period last year. Technical full-time equivalent employees decreased 9% to 975 during the second quarter of 2024 as compared to 1,077 during the same period last year.

Previous wording

The increase in compensation and related expenses during the first quarter of 2024 was due to a change in the value of assets associated with our deferred compensation plan, an increase in payroll expense, an increase in fringe benefits, and an increase in bonus expense. During the first quarter of 2024, deferred compensation expense increased by $2,349,000 with a corresponding increase to other income, net, as compared to the same period last year, due to the change in value of assets associated with our deferred compensation plan. This increase consisted of an increase in the value of plan assets of $6,267,000 during the first quarter of 2024 as compared to an increase in the value of plan assets of 3,918,000 during the same period last year. Payroll expense increased by $1,955,000 and fringe benefits increased by $928,000 during the first quarter of 2024 due to our annual salary adjustments. During the first quarter of 2024, bonus expense increased by $1,114,000 due to a corresponding increase in income before income taxes, before bonus expense and before stock-based compensation. We expect our compensation expense, excluding the change in value of deferred compensation plan assets, to increase as we selectively add new talent and adjust compensation to market conditions.

Current wording

The decrease in compensation and related expenses during the second quarter of 2024 was due to a change in the value of assets associated with our deferred compensation plan. During the second quarter of 2024, deferred compensation expense decreased by $3,247,000 with a corresponding decrease to other income, net, as compared to the same period last year, due to the change in value of assets associated with our deferred compensation plan. This decrease consisted of an increase in the value of plan assets of $875,000 during the second quarter of 2024 as compared to an increase in the value of plan assets of $4,122,000 during the same period last year. We expect our compensation expense, excluding the change in value of deferred compensation plan assets, to increase as we selectively add new talent and adjust compensation to market conditions.

Previous wording

Other operating expenses include facilities-related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. The increase in other operating expenses during the first quarter of 2024 was primarily due to an increase in occupancy expense of $477,000 and an increase in depreciation and amortization expense of $336,000. The increases in occupancy expenses and depreciation and amortization were due to continued investment in our corporate infrastructure. During the second quarter of 2024 we expect to extend our land lease with the State of Arizona to January of 2043, resulting in an additional non-cash rent expense of $360,000 in the second quarter of 2024 and $1,080,000 in each of the third and fourth quarters of 2024. This increased level of rent expense will continue through the extended lease term with adjustments in 2033 and 2038 based on the consumer price index. We also expect other operating expenses to grow as we selectively add new talent and make investments in our corporate infrastructure.

Current wording

Other operating expenses include facilities-related costs, technical materials, computer-related expenses and depreciation and amortization of property, equipment and leasehold improvements. The increase in other operating expenses during the second quarter of 2024 was primarily due to an increase in occupancy expense of $527,000 and an increase in depreciation and amortization expense of $300,000. The increases in occupancy expense and depreciation and amortization were primarily due to investment in our corporate infrastructure. Our land lease with the State of Arizona was extended on June 19, 2024. This extension will result in additional non-cash rent expense of approximately $1,085,000 in each of the third and fourth quarters of 2024. This increased level of rent expense will continue through the extended lease term ending in January of 2043 with adjustments in 2033 and 2038 based on the consumer price index. We also expect other operating expenses to grow as we selectively add new talent and make investments in our corporate infrastructure.

Previous wording

The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects. The decrease in reimbursable expenses during the first quarter of 2024 was due to a decrease in proactive projects for the consumer electronics sector.

Current wording

The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects. The decrease in reimbursable expenses during the second quarter of 2024 was due to a decrease in proactive projects for the consumer electronics sector.

Previous wording

The decrease in general and administrative expenses was primarily due to a decrease in recruiting expenses of $212,000. The decrease in recruiting expenses was due to a decrease in recruiting activity associated with our efforts to align resources with demand. We expect general and administrative expenses to increase as we selectively add new talent and expand our business development and staff development initiatives.

Current wording

The decrease in general and administrative expenses was primarily due to a decrease in travel and meals of $357,000 and a decrease in bad debt expense of $173,000. The decrease in travel and meals was due to the decrease in technical full-time equivalent employees. The decrease in bad debt expense was due to a decrease in write-offs. We expect general and administrative expenses to increase as we selectively add new talent and expand our business development and staff development initiatives.

Previous wording

The increase in operating income for our Environmental and Health segment during the first quarter of 2024 was driven by our regulatory consulting in the chemical industry.

Current wording

The increase in operating income for our Engineering and Other Scientific segment during the second quarter of 2024 as compared to the same period last year was due to an increase in revenues and an increase in utilization. The increase in revenues was due to an increase in billing rates partially offset by a decrease in billable hours. Growth during the second quarter of 2024 was driven by our reactive services across the transportation and energy sectors. The increase in utilization was due to our efforts to align resources with demand. The decrease in operating income for our Environmental and Health segment during the second quarter of 2024 was due to ongoing headwinds in the chemical industry.

Previous wording

Certain operating expenses are excluded from our measure of segment operating income. These expenses include the costs associated with our human resources, finance, information technology, and business development groups; the deferred compensation expense/benefit due to the change in value of assets associated with our deferred compensation plan; stock-based compensation associated with restricted stock unit and stock option awards; and the change in our allowance for contract losses and doubtful accounts.

Current wording

Certain operating expenses are excluded from our measure of segment operating income. These expenses include the costs associated with our human resources, legal, finance, information technology, and business development groups; the deferred compensation expense/benefit due to the change in value of assets associated with our deferred compensation plan; stock-based compensation associated with restricted stock unit and stock option awards; and the change in our allowance for contract losses and doubtful accounts.

Previous wording

The increase in corporate operating expenses during the first quarter of 2024 as compared to the same period last year was primarily due to an increase in deferred compensation expense and an increase in the costs associated with our human resources, finance, information technology and business development groups. During the first quarter of 2024, deferred compensation expense increased $2,349,000, with a corresponding increase to other income, net, as compared to the same period last year, due to the change in value of assets associated with our deferred compensation plan. This increase consisted of an increase in the value of plan assets of $6,267,000 during the first quarter of 2024 as compared to an increase in the value of plan assets of $3,918,000 during the same period last year.

Current wording

The decrease in corporate operating expenses during the second quarter of 2024 as compared to the same period last year was primarily due to a decrease in deferred compensation expense partially offset by an increase in the costs associated with our human resources, legal, finance, information technology and business development groups. During the second quarter of 2024, deferred compensation expense decreased $3,247,000, with a corresponding decrease to other income, net, as compared to the same period last year, due to the change in value of assets associated with our deferred compensation plan. This decrease consisted of an increase in the value of plan assets of $875,000 during the second quarter of 2024 as compared to an increase in the value of plan assets of $4,122,000 during the same period last year.

Previous wording

Other income, net, consists primarily of changes in the value of assets associated with our deferred compensation plan, interest income earned on available cash, cash equivalents and short-term investments, and rental income from leasing space in our Silicon Valley and Natick facilities. The increase in other income, net, was primarily due to a change in the value of assets associated with our deferred compensation plan and an increase in interest income. During the first quarter of 2024, other income, net, increased by $2,349,000 with a corresponding increase to deferred compensation expense, as compared to the same period last year, due to a change in the value of assets associated with our deferred compensation plan. This increase consisted of an increase in the value of the plan assets of $6,267,000 during the first quarter of 2024 as compared to an increase in the value of the plan assets of $3,918,000 during the same period last year. During the first quarter of 2024 interest income increased by $856,000 due to higher interest rates.

Current wording

Other income, net, consists primarily of changes in the value of assets associated with our deferred compensation plan, interest income earned on available cash, cash equivalents and short-term investments, and rental income from leasing space in our Silicon Valley and Natick facilities. The decrease in other income, net, was primarily due to a change in the value of assets associated with our deferred compensation plan partially offset by an increase in interest income. During the second quarter of 2024, other income, net, decreased by $3,247,000 with a corresponding decrease to deferred compensation expense, as compared to the same period last year, due to a change in the value of assets associated with our deferred compensation plan. This decrease consisted of an increase in the value of the plan assets of $875,000 during the second quarter of 2024 as compared to an increase in the value of the plan assets of $4,122,000 during the same period last year. The increase in interest income of $638,000 was due to higher interest rates.

Previous wording

The increase in revenues for our Engineering and Other Scientific segment was due to an increase in billable hours and an increase in billing rates. During the first quarter of 2024, billable hours for this segment increased by 3% to 315,000 as compared to 306,000 during the same period last year. The increase in billable hours was driven by continued strong demand for our services from the energy, vehicle and medical device industries. Utilization for this segment increased to 77% during the first quarter of 2024 as compared to 72% during the same period last year. Technical full-time equivalent employees in this segment decreased 4% to 785 during the first quarter of 2024 as compared to 819 for the same period last year.

Current wording

The increase in revenues for our Engineering and Other Scientific segment was due to an increase in billable hours and an increase in billing rates. During the first six months of 2024, billable hours for this segment increased by 1% to 620,000 as compared to 614,000 during the same period last year. Utilization for this segment increased to 77% during the first six months of 2024 as compared to 71% during the same period last year. The increase in billable hours was driven by continued strong demand from the energy, vehicle and medical device industries. Technical full-time equivalent employees in this segment decreased 7% to 775 during the first six months of 2024 as compared to 830 for the same period last year.

Previous wording

The increase in revenues for our Environmental and Health segment was due to an increase in billing rates partially offset by a decrease in billable hours. During the first quarter of 2024, billable hours for this segment decreased by 3% to 77,000 as compared to 79,000 during the same period last year. Utilization in this segment increased to 68% during the first quarter of 2024 as compared to 66% during the same period last year. Work in this segment was primarily driven by our regulatory consulting in chemical industry. Technical full-time equivalent

Current wording

The decrease in revenues for our Environmental and Health segment was due to a decrease in billable hours partially offset by an increase in our realized billing rate. During the first six months of 2024, billable hours for this segment decreased by 4% to 152,000 as compared to 159,000 during the same period last year. Utilization in this segment increased to 68% during the first six months of 2024 as compared to 65% during the same period last year. The decrease in revenues for this segment was related to ongoing headwinds in the chemical sector. Technical full-time equivalent employees in this segment decreased by 8% to 214 during the first six months of 2024 as compared to 234 during the same period last year.

Previous wording

The increase in operating income for our Engineering and Other Scientific Segment during the first quarter of 2024 as compared to the same period last year was due to an increase in revenues. The increase in revenues was due to an increase in billable hours and an increase in billing rates. Growth during the first quarter of 2024 was driven by continued strong demand for our services across the energy, vehicle and medical device sectors.

Current wording

The increase in operating income for our Engineering and Other Scientific segment during the first six months of 2024 as compared to the same period last year was due to an increase in revenues and an increase in utilization. The increase in revenues was primarily due to an increase in billing rates. The increase in utilization was due to our efforts to align resources with demand. Growth was driven by demand for our services across the energy, vehicle and medical device industries. The increase in operating income for our Environmental and Health segment was driven by our regulatory consulting services.

Previous wording

The excess tax benefit associated with stock-based awards was $946,000 during the first quarter of 2024 as compared to $3,627,000 during the same period last year. The decrease in the excess tax benefit was due to a smaller increase in the value of our common stock between the grant date and the release date for the restricted stock units released during the first quarter of 2024 as compared to the first quarter of 2023. Excluding the impact of the excess tax benefit, the effective tax rate would have been 27.8% during the first quarter of 2024 as compared to 28.3% during the same period last year.

Current wording

The excess tax benefit associated with stock-based awards was $1,672,000 during the first six months of 2024 as compared to $3,639,000 during the same period last year. Excluding the impact of the excess tax benefit, the effective tax rate would have been 28.0% during the first six months of 2024 as compared to 28.6% during the same period last year.

Previous wording

We believe our existing balances of cash, cash equivalents, short-term investments and cash generated from operations will be sufficient to satisfy our working capital needs, capital expenditures, outstanding commitments, stock repurchases, dividends and other liquidity requirements over at least the next twelve months.

Current wording

We believe our existing balances of cash, cash equivalents, and cash generated from operations will be sufficient to satisfy our working capital needs, capital expenditures, outstanding commitments, stock repurchases, dividends and other liquidity requirements over at least the next twelve months.

Previous wording

We financed our business during the first three months of 2024 through available cash. As of March 29, 2024, our cash and cash equivalents were $168,665,000 as compared to $187,150,000 at December 29, 2023.

Current wording

We financed our business during the first six months of 2024 through available cash. As of June 28, 2024, our cash and cash equivalents were $203,262,000 as compared to $187,150,000 at December 29, 2023.

Previous wording

The decrease in net cash used in investing activities during the first three months of 2024, as compared to the same period last year, was due to a decrease in capital expenditures. The decrease in capital expenditures was due to a decrease in investment in our corporate infrastructure.

Current wording

The decrease in net cash used in investing activities during the first six months of 2024, as compared to the same period last year, was due to a decrease in capital expenditures primarily due to leasehold improvements during 2023 associated with our office and lab space in Philadelphia.

Previous wording

The increase in net cash used in financing activities during the first three months of 2024, as compared to the same period last year, was due to an increase in repurchases of our common stock and an increase in dividends partially offset by a decrease in payroll taxes for restricted stock units.

Current wording

The increase in net cash used in financing activities during the first six months of 2024, as compared to the same period last year, was due to an increase in repurchases of our common stock and an increase in dividends partially offset by a reduction in payroll taxes for restricted stock units.

Previous wording

We expect to continue our investing activities, including capital expenditures. Furthermore, cash reserves may be used to repurchase shares of common stock under our stock repurchase programs, pay dividends, or strategically acquire professional service firms that are complementary to our business. We expect to finalize a 15- year extension of our land lease with the state of Arizona during the second quarter of 2024. Payments under the lease are currently $1 million per year and will continue at that level until the expiration of the current lease in January of 2028. We expect annual rent payments of $6.2 million during the extended term of the lease beginning in 2028 with adjustments in 2033 and 2038 based on the consumer price index. We are currently finalizing negotiations with the lessor, and as of the date of this filing the lease extension has not been executed.

Current wording

We expect to continue our investing activities, including capital expenditures. Furthermore, cash reserves may be used to repurchase shares of common stock under our stock repurchase programs, pay dividends, or strategically acquire professional service firms that are complementary to our business.

Previous wording

We maintain a nonqualified deferred compensation plan for the benefit of a select group of highly compensated employees. Vested amounts due under the plan of $116,005,000 were recorded as a long-term liability on our unaudited condensed consolidated balance sheet at March 29, 2024. Vested amounts due under the plan of $13,134,000 were recorded as a current liability on our unaudited condensed consolidated balance sheet at March 29, 2024. Our assets that are earmarked to pay benefits under the plan are held in a rabbi trust and are subject to the claims of our creditors. As of March 29, 2024, invested amounts under the plan of $113,844,000 were recorded as a long-term asset on our unaudited condensed consolidated balance sheet. As of March 29, 2024, invested amounts under the plan of $14,291,000 were recorded as a current asset on our unaudited condensed consolidated balance sheet.

Current wording

We maintain a nonqualified deferred compensation plan for the benefit of a select group of highly compensated employees. Vested amounts due under the plan of $108,588,000 were recorded as a long-term liability on our unaudited condensed consolidated balance sheet at June 28, 2024. Vested amounts due under the plan of $11,535,000 were recorded as a current liability on our unaudited condensed consolidated balance sheet at June 28, 2024. Our assets that are earmarked to pay benefits under the plan are held in a rabbi trust and are subject to the claims of our creditors. As of June 28, 2024, invested amounts under the plan of $106,295,000 were recorded as a long-term asset on our unaudited condensed consolidated balance sheet. As of June 28, 2024, invested amounts under the plan of $12,501,000 were recorded as a current asset on our unaudited condensed consolidated balance sheet.

Previous wording

The following table shows EBITDA (determined as shown in the reconciliation table below) as a percentage of revenues before reimbursements for the three months ended March 29, 2024 and March 31, 2023:

Current wording

The following table shows EBITDA (determined as shown in the reconciliation table below) as a percentage of revenues before reimbursements for the three and six months ended June 28, 2024 and June 30, 2023:

Previous wording

The increase in EBITDA as a percentage of revenues before reimbursements, during the first quarter of 2024 as compared to the same period last year, was primarily due to an increase in utilization and a decrease in general and administrative expenses. Our utilization increased to 75% during the first quarter of 2024 as compared to 70% during the same period last year. The increase in utilization was due to strong business activity for our reactive service offerings and our successful efforts to align resources with demand. The decrease in general and administrative expenses was due to a decrease in recruiting expenses due to the decrease in technical full-time equivalent employees.

Current wording

The increase in EBITDA as a percentage of revenues before reimbursements during the second quarter of 2024 as compared to the same period last year was primarily due an increase in utilization and a decrease in general and administrative expenses. Our utilization increased to 75% during the second quarter of 2024 as compared to 69% during the same period last year. The increase in utilization was due to strong business activity for our reactive service offerings and our successful efforts to align resources with demand. The decrease in general and administrative expenses was due to a decrease in outside consulting expenses associated with a lower level of activity of content creation for our external website and a decrease in travel and meals due to the decrease in technical full-time equivalent employees.

Previous wording

The following table is a reconciliation of EBITDA and EBITDAS to the most comparable GAAP measure, net income, for the three months ended March 29, 2024 and March 31, 2023:

Current wording

The following table is a reconciliation of EBITDA and EBITDAS to the most comparable GAAP measure, net income, for the three and six months ended June 28, 2024 and June 30, 2023: