# EXPONENT INC (EXPO) FY 2025 MD&A

Verbatim Item 7 Management's Discussion and Analysis from EXPONENT INC's 10-K for fiscal year 2025.

SEC filing source: https://www.sec.gov/Archives/edgar/data/851520/000095017025030001/expo-20250103.htm
Accession: 0000950170-25-030001
Filing date: 2025-02-28
Report date: 2025-01-03
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/EXPO/
All MD&A years: /company/EXPO/mda/
Previous year: /company/EXPO/mda/fy2023/ (FY 2023)
Next year: /company/EXPO/mda/fy2026/ (FY 2026)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section of this Annual Report on Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2023 and year-to-year comparisons between 2023 and 2022 that are not included in this Annual Report form 10-K can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2023.

OVERVIEW

Exponent is an engineering and scientific consulting firm providing solutions to complex problems. Exponent's interdisciplinary organization of scientists, physicians, engineers, and business consultants draws from more than 90 technical disciplines to solve the most pressing and complicated challenges facing stakeholders today. The firm leverages over 50 years of experience in analyzing accidents and failures to advise clients as they innovate their technologically complex products and processes, ensure the safety and health of their users, and address the challenges of sustainability.

CRITICAL ACCOUNTING ESTIMATES

In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our consolidated balance sheet. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in accounting for revenue recognition and estimating the allowance for contract losses and doubtful accounts have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the assumptions, judgments and estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our critical accounting policies, see Note 1 of our Notes to Consolidated Financial Statements.

Revenue recognition. We derive our revenues primarily from professional fees earned on consulting engagements, fees earned for the use of our equipment and facilities, as well as reimbursements for outside direct expenses associated with the services that are billed to our clients.

Substantially all of our engagements are service contracts performed under time and material or fixed-price billing arrangements. For time and material and fixed-price service projects, revenue is generally recognized as the services are performed. For substantially all of our fixed-price service engagements, we recognize revenue based on the relationship of incurred labor hours at standard rates to our estimate of the total labor hours at standard rates we expect to incur over the term of the contract. Our estimate of total labor hours we expect to incur over the term of the contract is based on the nature of the project and our past experience on similar projects. We believe this methodology achieves a reliable measure of the revenue from the consulting services we provide to our customers under fixed-price contracts.

Management judgments and estimates must be made and used in connection with the revenues recognized in any accounting period. These judgments and estimates include an assessment of the estimate as to the total effort required to complete fixed-price projects.

Estimating the allowance for contract losses and doubtful accounts. We make estimates of our ability to collect accounts receivable and our unbilled but recognized work-in-process. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us or for disputes with customers that affect our ability to fully collect our accounts receivable and unbilled work-in-process, we record a specific allowance to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers we recognize allowances for contract losses and doubtful accounts taking into consideration factors such as historical write-offs, customer concentration, customer creditworthiness, current and forecasts of future economic conditions, and aging of amounts due.

27

The following table sets forth, for the periods indicated, the percentage of revenues of certain items in our consolidated statements of income and the percentage increase (decrease) in the dollar amount of such items year to year:

[[GREPCENT_TABLE]]
[["","","Percentage of Revenues for","","","Period to"],["","","Fiscal Years","","","Period Change"],["","","2024","","","2023","","","2024 v 2023"],["Revenues","","","100.0","%","","","100.0","%","","","4.1","%"],["Operating expenses:"],["Compensation and related expenses","","","59.1","","","","59.6","","","","3.2"],["Other operating expenses","","","8.3","","","","7.7","","","","11.2"],["Reimbursable expenses","","","7.2","","","","7.4","","","","1.1"],["General and administrative expenses","","","4.1","","","","4.6","","","","(7.0",")"],["","","","78.6","","","","79.3","","","","3.2"],["Operating income","","","21.4","","","","20.7","","","","7.4"],["Other income, net","","","5.0","","","","4.6","","","","13.2"],["Income before income taxes","","","26.4","","","","25.3","","","","8.4"],["Provision for income taxes","","","6.9","","","","6.6","","","","7.9"],["Net income","","","19.5","%","","","18.7","%","","","8.6","%"]]
[[/GREPCENT_TABLE]]

EXECUTIVE SUMMARY

Revenues and revenues before reimbursements for 2024 increased 4% as compared to the prior year. Our focus on effective resource management drove significant improvement in utilization. Demand for our proactive services strengthened during the year driven by the consumer electronics and utilities industries. We saw increased activity in user research studies and product development consulting in the consumer electronics sector and strong demand for our risk-related work in utilities. Growth in reactive services was supported by strong activity in the utilities and medical device industries. With increasing global demand for energy and the related investments in infrastructure, we are actively involved in failure analysis and dispute-related projects around the world. Our multidisciplinary team of scientists and engineers continues to provide critical data, analyses and insights for our clients.

Society is raising the bar for safety, health, sustainability and reliability, and clients are increasingly seeking our interdisciplinary proactive solutions. As our suite of offerings and key markets expands, so does the demand for our multidisciplinary services. We continue to expand our client relationships and enhance our reputation and capabilities across the firm. As innovation and technology become increasingly complex, the critical nature of our insights uniquely positions Exponent to address our clients’ needs throughout the product lifecycle.

Net income increased 9% to $109,002,000 during 2024 as compared to $100,339,000 during 2023. Diluted earnings per share increased to $2.11 for 2024 as compared to $1.94 for 2023. The increase in profitability was due to our continued efforts to better align resources with demand. Net income and diluted earnings per share for 2024 and 2023 benefited from the excess tax benefit associated with stock-based awards. The excess tax benefit associated with stock-based awards decreased to $2,793,000 during 2024 as compared to $3,620,000 during 2023. The decrease in the excess tax benefit was due to a smaller increase in value of our common stock between the grant date and the release date for the restricted stock units released during 2024 as compared to 2023.

We remain focused on building our world-class engineering and scientific team to position Exponent at the forefront of innovation and meet the ever-changing needs of our clients and the market. We also remain focused on capitalizing on emerging growth areas, managing other operating expenses, generating cash from operations, maintaining a strong balance sheet and undertaking activities such as share repurchases and dividends to enhance shareholder value.

28

OVERVIEW OF THE YEAR ENDED January 3, 2025

Our revenues consist of professional fees earned on consulting engagements, fees for use of our equipment and facilities, and reimbursements for outside direct expenses associated with the services performed that are billed to our clients.

We operate on a 52-53 week fiscal year with each year ending on the Friday closest to December 31st. Fiscal period 2024 included 53 weeks of activity and ended on January 3, 2025. Fiscal period 2023 included 52 weeks of activity and ended on December 29, 2023. Fiscal period 2022 included 52 weeks of activity and ended on December 30, 2022. Fiscal period 2025 is 52 weeks and will end on January 2, 2026.

Billable hours were 1,495,000 during both 2024 and 2023. Our utilization increased to 73% for 2024 as compared to 69% for 2023. The increase in utilization during 2024 was due to our efforts to align resources with demand. Technical full-time equivalent employees decreased 8% to 967 for 2024 as compared to 1,047 for 2023.

FISCAL YEARS ENDED January 3, 2025 AND December 29, 2023

Revenues

[[GREPCENT_TABLE]]
[["(In thousands except percentages)","","Fiscal Years","","","Percent"],["","","2024","","","2023","","","Change"],["Engineering and Other Scientific","","$","469,544","","","$","446,888","","","","5.1","%"],["Percentage of total revenues","","","84.1","%","","","83.3","%"],["Environmental and Health","","","88,970","","","","89,878","","","","(1.0",")%"],["Percentage of total revenues","","","15.9","%","","","16.7","%"],["Total revenues","","$","558,514","","","$","536,766","","","","4.1","%"]]
[[/GREPCENT_TABLE]]

The increase in revenues for our Engineering and Other Scientific segment was due to an increase in billing rates and an increase in billable hours. Growth in this segment during 2024 was primary driven by demand for our services across the consumer products and utilities industries. In the consumer electronics sector we advised clients on projects related to digital health and wearables, such as advanced sensors in health applications and engagements in augmented and virtual reality. During 2024, billable hours for this segment increased by 1% to 1,199,000 as compared to 1,188,000 during 2023. Utilization for this segment increased to 75% for 2024 as compared to 70% for 2023 due to our continued efforts to align resources with demand. Technical full-time equivalent employees in this segment decreased 7% to 759 during 2024 as compared to 818 for 2023.

The decrease in revenues from our Environmental and Health segment was due to a decrease in billable hours partially offset by an increase in billing rates. During 2024, billable hours for this segment decreased by 4% to 296,000 as compared to 307,000 during 2023. The decrease in billable hours was related to headwinds in the chemical and life sciences sectors. Utilization for this segment increased to 67% for 2024 as compared to 64% for 2023 due to our continued efforts to align resources with demand. Technical full-time equivalents decreased 9% to 208 during 2024 as compared to 229 for 2023.

Revenues are primarily derived from services provided in response to client requests or events that occur without notice and engagements are generally terminable or subject to postponement or delay at any time by our clients. As a result, backlog at any particular time is small in relation to our quarterly or annual revenues and is not a reliable indicator of revenues for any future periods.

Compensation and Related Expenses

[[GREPCENT_TABLE]]
[["(In thousands except percentages)","","Fiscal Years","","","Percent"],["","","2024","","","2023","","","Change"],["Compensation and related expenses","","$","330,011","","","$","319,886","","","","3.2","%"],["Percentage of total revenues","","","59.1","%","","","59.6","%"]]
[[/GREPCENT_TABLE]]

29

The increase in compensation and related expenses during 2024 was due an increase in payroll expense, an increase in bonus expense and an increase in stock-based compensation. During 2024, payroll expense increased $3,771,000 due to the impact of our annual salary increase partially offset by a decrease in technical full-time equivalent employees. During 2024, bonus expense increased by $5,096,000 due to a corresponding increase in our bonus pool. Stock-based compensation increased $1,150,000 during 2024 due to an increase in unvested restricted stock unit grants. We expect 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.

Other Operating Expenses

[[GREPCENT_TABLE]]
[["(In thousands except percentages)","","Fiscal Years","","","Percent"],["","","2024","","","2023","","","Change"],["Other operating expenses","","$","46,196","","","$","41,541","","","","11.2","%"],["Percentage of total revenues","","","8.3","%","","","7.7","%"]]
[[/GREPCENT_TABLE]]

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 was primarily due to an increase in occupancy expense of $3,437,000, an increase in information technology related expenses of $839,000 and an increase in depreciation expense of $773,000. Our land lease with the State of Arizona was extended on June 19, 2024. This extension resulted in additional non-cash rent expense of approximately $2,316,000 during 2024. The remainder of the increase in occupancy expense was due to investments in our office and laboratory facilities. The increases in depreciation and information technology related expenses were due to continued investment in our corporate infrastructure. We expect other operating expenses to grow as we selectively add new talent and continue to make investments in our corporate infrastructure.

Reimbursable Expenses

[[GREPCENT_TABLE]]
[["(In thousands except percentages)","","Fiscal Years","","","Percent"],["","","2024","","","2023","","","Change"],["Reimbursable expenses","","$","40,024","","","$","39,577","","","","1.1","%"],["Percentage of total revenues","","","7.2","%","","","7.4","%"]]
[[/GREPCENT_TABLE]]

The amount of reimbursable expenses will vary from year to year depending on the nature of our projects. The increase in reimbursable expenses as compared to 2023 was due to an increase in proactive projects for the consumer electronics sector.

General and Administrative Expenses

[[GREPCENT_TABLE]]
[["(In thousands except percentages)","","Fiscal Years","","","Percent"],["","","2024","","","2023","","","Change"],["General and administrative expenses","","$","22,726","","","$","24,440","","","","(7.0",")%"],["Percentage of total revenues","","","4.1","%","","","4.6","%"]]
[[/GREPCENT_TABLE]]

30

The decrease in general and administrative expenses during 2024 was primarily due to a decrease in outside consulting expenses of $1,304,000, a decrease in travel and meals of $844,000 and a decrease in personnel expenses of $673,000. Outside consulting decreased primarily due to activity associated with content creation for our external website during 2023. The decrease in travel and meals was due to the decrease in technical full-time equivalent employees and a firm-wide principals' meeting which was held in 2023.We did not have any firm-wide meetings during 2024. The decrease in personnel expenses was due to lower relocation and recruiting costs. We expect general and administrative expenses to increase as we expand our business development and staff development initiatives.

Operating Income

[[GREPCENT_TABLE]]
[["(In thousands except percentages)","","Fiscal Years","","","Percent"],["","","2024","","","2023","","","Change"],["Engineering and Other Scientific","","$","164,883","","","$","153,918","","","","7.1","%"],["Environmental and Health","","","29,995","","","","28,432","","","","5.5","%"],["Total segment operating income","","","194,878","","","","182,350","","","","6.9","%"],["Corporate operating expense","","","(75,321",")","","","(71,028",")","","","6.0","%"],["Total operating income","","$","119,557","","","$","111,322","","","","7.4","%"]]
[[/GREPCENT_TABLE]]

The increase in operating income for our Engineering and Other Scientific segment during 2024 as compared to 2023 was due to an increase in revenues and an increase in utilization. The increase in revenues was due to an increase in billing rates and an increase in billable hours driven by demand for our services across the consumer products and utilities industries. The increase in utilization was due to our efforts to align resources with demand. The increase in operating income for our Environmental and Health segment was due to an increase in utilization due to our efforts to align resources with demand.

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, corporate, 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. The increase in corporate operating expenses was due to an increase in stock-based compensation and an increase in the provision for contract losses and doubtful accounts.

Other Income

[[GREPCENT_TABLE]]
[["(In thousands except percentages)","","Fiscal Years","","","Percent"],["","","2024","","","2023","","","Change"],["Other income","","$","27,813","","","$","24,574","","","","13.2","%"],["Percentage of total revenues","","","5.0","%","","","4.6","%"]]
[[/GREPCENT_TABLE]]

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 an increase in interest income of $2,851,000 due to an increase in cash and cash equivalents.

Income Taxes

[[GREPCENT_TABLE]]
[["(In thousands except percentages)","","Fiscal Years","","","Percent"],["","","2024","","","2023","","","Change"],["Income taxes","","$","38,368","","","$","35,557","","","","7.9","%"],["Percentage of total revenues","","","6.9","%","","","6.6","%"],["Effective tax rate","","","26.0","%","","","26.2","%"]]
[[/GREPCENT_TABLE]]

The excess tax benefit associated with stock-based awards decreased to $2,793,000 during 2024 as compared to $3,620,000 during 2023. 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 in 2024 as compared to restricted stock units released in 2023. Excluding the impact of the excess tax benefit, the effective tax rate would have been 27.9% and 28.8% for 2024 and 2023, respectively. The decrease in our effective tax rate, excluding the

31

impact of the excess tax benefit, was primarily due to a re-measurement that reduced the value of our deferred tax assets in connection with relocating one of our offices to a location designated as tax exempt for all state and local taxes during 2023.

LIQUIDITY AND CAPITAL RESOURCES

[[GREPCENT_TABLE]]
[["","","Fiscal Years"],["(In thousands)","","2024","","","2023"],["Net cash provided by (used in):"],["Operating activities","","$","144,537","","","$","127,352"],["Investing activities","","$","(6,939",")","","$","(16,356",")"],["Financing activities","","$","(65,108",")","","$","(86,009",")"]]
[[/GREPCENT_TABLE]]

We financed our business in 2024 through available cash and cash flows from operating activities. We invest our excess cash in cash equivalents. As of January 3, 2025, our cash and cash equivalents were $258,901,000 as compared to $187,150,000 at December 29, 2023. We believe our existing balances of cash and cash equivalents 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 12 months.

Generally, our net cash provided by operating activities is used to fund our day to day operating activities. First quarter operating cash requirements are generally higher due to payment in the first quarter of our annual bonuses accrued during the prior year. Our largest source of operating cash flows is collections from our clients. Our primary uses of cash from operating activities are for employee related expenditures, leased facilities, taxes, and general operating expenses.

The decrease in net cash used in investing activities during 2024 as compared to 2023 was due to a decrease in capital expenditures primarily due to leasehold improvements during 2023 associated with our office and lab space in Philadelphia.

The decrease in net cash used in financing activities during 2024 as compared to 2023 was primarily due to a decrease in repurchases of our common stock, a reduction in payroll taxes for restricted stock units, and an increase in exercise of stock-based payment awards, partially offset by an increase in dividends.

We lease office, laboratory, and storage space in 13 states and the District of Columbia, as well as in China, Germany, Hong Kong, Ireland, Singapore, Switzerland, and the United Kingdom under non-cancellable operating lease arrangements that expire at various dates through 2033. On June 19, 2024, we entered into an agreement with the State of Arizona to extend our land lease for 15 years beginning on January 17, 2028. We are currently obligated to make payments under the lease of $1,009,000 per year, which obligation will continue at that level until January 16, 2028. Beginning on January 17, 2028, our payments under the lease will increase to approximately $6,183,000 per year for the 15-year extension term with adjustments to the annual rent payment in 2033 and 2038 based on the consumer price index. As a result of this extension, we added an additional right-of-use asset in exchange for an operating lease liability of $48,683,000 during the second quarter of 2024. As of January 3, 2025, the value of our obligations under operating leases was $81,477,000. See Note 12 of our Notes to Consolidated Financial Statements for additional information regarding our lease obligations. The value of our non-cancellable unconditional purchase obligations was not material at January 3, 2025.

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

We maintain nonqualified deferred compensation plans for the benefit of a select group of highly compensated employees. Vested amounts due under the plans of $112,646,000 were recorded as a long-term liability on our consolidated balance sheet at January 3, 2025. Vested amounts due under the plans of $14,976,000 were recorded as a current liability on our consolidated balance sheet at January 3, 2025. Company assets that are designated to fund the benefits under the plans are held in a rabbi trust and are subject to the claims of our creditors. As of January 3, 2025, invested amounts under the plans of $110,259,000 were recorded as a non-current asset on our consolidated

32

balance sheet. As of January 3, 2025, invested amounts under the plans of $17,578,000 were recorded as other current assets on our consolidated balance sheet.

As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

Non-GAAP Financial Measures

Regulation G, conditions for use of Non-Generally Accepted Accounting Principles (“Non-GAAP”) financial measures, and other SEC regulations define and prescribe the conditions for use of certain Non-GAAP financial information. Generally, a Non-GAAP financial measure is a numerical measure of a company's performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. We closely monitor two financial measures, EBITDA and EBITDAS, which meet the definition of Non-GAAP financial measures. We define EBITDA as net income before income taxes, interest income, depreciation and amortization. We define EBITDAS as EBITDA before stock-based compensation. We regard EBITDA and EBITDAS as useful measures of operating performance and cash flow to complement operating income, net income and other GAAP financial performance measures. Additionally, management believes that EBITDA and EBITDAS provide meaningful comparisons of past, present and future operating results. These measures are used to evaluate our financial results, develop budgets and determine employee compensation. These measures, however, should be considered in addition to, and not as a substitute or superior to, operating income, cash flows, or other measures of financial performance prepared in accordance with GAAP. A reconciliation of the Non-GAAP measures to the nearest comparable GAAP measure is set forth below.

The following table shows EBITDA as a percentage of revenues before reimbursements for 2024 and 2023:

[[GREPCENT_TABLE]]
[["(In thousands, except percentages)","","Fiscal Years"],["","","2024","","","2023"],["Revenues before reimbursements","","$","518,490","","","$","497,189"],["EBITDA","","$","147,058","","","$","137,662"],["EBITDA as a % of revenues before reimbursements","","","28.4","%","","","27.7","%"]]
[[/GREPCENT_TABLE]]

The increase in EBITDA as a percentage of revenues before reimbursements during 2024 as compared to 2023 was primarily due to the increase in utilization and a decrease in general and administrative expenses, partially offset by an increase in other operating expenses. Our utilization increased to 73% during 2024 as compared to 69% during 2023. The increase in utilization was due to demand for proactive services in the consumer electronics and utilities

33

industries, demand for reactive services in the utilities and medical device industries and our efforts to align resources with demand.

The following table is a reconciliation of EBITDA and EBITDAS to the most comparable GAAP measure, net income, for 2024 and 2023:

[[GREPCENT_TABLE]]
[["(In thousands)","","Fiscal Years"],["","","2024","","","2023"],["Net income","","$","109,002","","","$","100,339"],["Add back (subtract):"],["Income taxes","","","38,368","","","","35,557"],["Interest income","","","(10,001",")","","","(7,150",")"],["Depreciation and amortization","","","9,689","","","","8,916"],["EBITDA","","","147,058","","","","137,662"],["Stock-based compensation","","","23,239","","","","20,357"],["EBITDAS","","$","170,297","","","$","158,019"]]
[[/GREPCENT_TABLE]]