Exponent(EXPO) - 2023 Q4 - Annual Report

Part I Business Exponent, Inc. is a science and engineering consulting firm providing solutions to complex problems across various industries through two segments: Engineering and Other Scientific, and Environmental and Health - Exponent is a science and engineering consulting firm with over 50 years of experience, organized into two reportable operating segments: (i) Engineering and Other Scientific and (ii) Environmental and Health[8][12] - Services are provided on either a fixed-price or time and material basis, with professional rates ranging from $200 to $985 per hour[11] - In 2023, the number of technical full-time equivalent employees increased by 10% to 1,048[78] Revenue by Client Industry (2023) | Industry | Percentage of Revenue | | :--- | :--- | | Consumer Products | ~22% | | Energy and Utilities | ~18% | | Transportation | ~17% | | Chemical | ~11% | Employee Statistics (as of Dec 29, 2023) | Category | Number | | :--- | :--- | | Total Employees | 1,320 | | Engineering & Scientific Staff | 1,047 | | Employees with Advanced Degrees | 955 | | Employees with Doctorate Degrees | 746 | Services The company's services are divided into two main segments, encompassing 12 practices in Engineering and Other Scientific, and 4 practices in Environmental and Health Sciences - The Engineering and Other Scientific segment includes practices like Biomechanics, Buildings & Structures, Data Sciences, Electrical Engineering & Computer Science, Materials & Corrosion Engineering, Thermal Sciences, and Vehicle Engineering[13] - The Environmental and Health segment includes practices such as Chemical Regulation & Food Safety, Ecological & Biological Sciences, Environmental & Earth Sciences, and Health Sciences[14] Competition Exponent operates in a fragmented and competitive marketplace with low barriers to entry, where technical capability and professional reputation are key competitive factors - The market for Exponent's services is fragmented and highly competitive, with low barriers to entry[67][69] - Principal competitive factors are technical capability, breadth of services, timely delivery, professional reputation, and knowledge of litigation and regulatory processes[68] Human Capital The company's success relies on attracting and retaining exceptional scientific and engineering talent, with a significant portion of staff holding advanced degrees - Attracting, developing, and rewarding exceptional people is central to the company's mission and success[71] - The company's Diversity, Equity, and Inclusion (DE&I) strategy is built on four pillars: communication, development, outreach, and recruiting[74] Employee Composition (as of Dec 29, 2023) | Category | Count | | :--- | :--- | | Total Employees | 1,320 | | Engineering and Scientific Staff | 1,047 | | Employees with Doctorate Degrees | 746 | | U.S. Employees | ~89% | | International Employees | ~11% | Executive Officers This section lists the executive officers of Exponent, Inc. as of February 23, 2024, including their names, ages, and positions Key Executive Officers (as of Feb 23, 2024) | Name | Age | Position | | :--- | :--- | :--- | | Catherine Ford Corrigan, Ph.D. | 55 | President and Chief Executive Officer | | Richard L. Schlenker, Jr. | 58 | Executive Vice President, Chief Financial Officer and Corporate Secretary | | Sally B. Shepard | 63 | Chief Human Resources Officer | Risk Factors The company identifies several risk factors categorized into three main areas: client and demand, operational, and general risks - Client & Demand Risks: The business is unpredictable and reactive, with a small backlog, making performance uneven. A significant portion of revenue comes from clients in the chemical, construction, consumer products, energy, life sciences, and transportation industries, and the loss of a large client could be detrimental[92][95] - Operational Risks: Success depends on attracting and retaining highly qualified technical and managerial personnel. The company is also subject to risks from professional liability, litigation, and security breaches that could disrupt operations or lead to unauthorized disclosure of confidential information[103][105][107] - General Risks: The market is highly competitive with low barriers to entry, which could pressure pricing. The company is also exposed to risks from economic and political uncertainty, potential impairment of goodwill and long-lived assets, and volatility in its common stock price[115][119][122] Unresolved Staff Comments The company reports that there are no unresolved staff comments from the SEC - None[132] Cybersecurity Exponent has implemented a comprehensive cybersecurity and data privacy program aligned with ISO 27001:2013 and 27701:2019 standards, with governance provided by the Board of Directors and a dedicated management committee - The company has developed cybersecurity and data privacy programs in accordance with ISO standards 27001:2013 and 27701:2019[134] - The cybersecurity incident response plan is based on the NIST 800-61r2 "Computer Security Incident Handling Guide"[135] - Oversight is provided by the Board of Directors, with a Security and Privacy Management Committee (SPMC) tasked with ensuring risks are adequately addressed[138] Properties Exponent owns key properties in California and Massachusetts, and leases a 147-acre Test and Engineering Center in Arizona, along with 21 other leased locations globally - The company owns its Silicon Valley office, laboratory, and warehouse facilities in Menlo Park, California[141] - The company leases a 147-acre Test and Engineering Center in Phoenix, Arizona, under a 30-year lease agreement expiring in January 2028[142] - The company owns its office and laboratory facilities in Natick, Massachusetts[143] - Exponent leases additional office and laboratory space in 21 other locations across 13 states, the District of Columbia, and internationally in China, Hong Kong, Singapore, Switzerland, and the United Kingdom[144] Legal Proceedings The company states that it is not engaged in any material legal proceedings - Exponent is not engaged in any material legal proceedings[145] Mine Safety Disclosures This item is not applicable to the company - Not applicable[146] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Exponent's common stock trades on the NASDAQ Global Select Market under "EXPO," with the company repurchasing 98,000 shares for approximately $7.2 million in Q4 2023 and authorizing an additional $61.6 million for its repurchase program in February 2024 - The company's common stock is traded on the NASDAQ Global Select Market under the symbol "EXPO"[148] - As of the end of Q4 2023, approximately $38.4 million remained available for share repurchases. On February 1, 2024, the Board authorized an additional $61.6 million for the program[149] Share Repurchases (Q4 2023) | Period | Total Shares Purchased (thousands) | Average Price Paid Per Share | | :--- | :--- | :--- | | Sep 30 - Oct 27 | 44 | $73.51 | | Oct 28 - Nov 24 | 54 | $73.73 | | Nov 25 - Dec 29 | - | - | | Total | 98 | $73.63 | (Reserved) This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2023, Exponent's revenues increased by 4.6% to $536.8 million, driven by higher billable hours and rates, while net income decreased by 1.9% to $100.3 million due to increased compensation expenses and a smaller excess tax benefit - Revenues for 2023 increased 5% (7% before reimbursements) compared to 2022, driven by higher billable hours and billing rates. Growth was strong in the reactive business, particularly in the transportation and energy sectors[161] - Net income decreased to $100.3 million ($1.94 per diluted share) in 2023 from $102.3 million ($1.96 per diluted share) in 2022. The decrease was partly due to a smaller excess tax benefit from stock-based awards ($3.6 million in 2023 vs. $5.8 million in 2022)[163] Consolidated Statements of Income Highlights (% of Revenues) | | 2023 | 2022 | | :--- | :--- | :--- | | Revenues | 100.0% | 100.0% | | Compensation and related expenses | 59.6% | 51.5% | | Operating income | 20.7% | 27.4% | | Net income | 18.7% | 19.9% | Key Operational Metrics (2023 vs 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Billable Hours (thousands) | 1,495 | 1,465 | +2% | | Utilization | 69% | 74% | -5 p.p. | | Technical FTEs | 1,047 | 955 | +10% | Results of Operations For fiscal year 2023, total revenues grew 4.6% to $536.8 million, but operating income decreased 21.0% to $111.3 million, primarily due to a 21.1% increase in compensation expenses driven by deferred compensation plan asset value changes - Compensation and related expenses increased by 21.1% in 2023, primarily due to a $28.5 million increase in deferred compensation expense resulting from changes in the value of associated plan assets[171][172] - The effective tax rate increased to 26.2% in 2023 from 22.6% in 2022, mainly due to a smaller excess tax benefit from stock-based awards[184] Revenues by Segment (in thousands) | Segment | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Engineering and Other Scientific | $446,888 | $427,796 | 4.5% | | Environmental and Health | $89,878 | $85,497 | 5.1% | | Total revenues | $536,766 | $513,293 | 4.6% | Operating Income by Segment (in thousands) | Segment | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Engineering and Other Scientific | $153,918 | $152,679 | 0.8% | | Environmental and Health | $28,432 | $27,340 | 4.0% | | Corporate operating expense | ($71,028) | ($39,177) | 81.3% | | Total operating income | $111,322 | $140,842 | (21.0)% | Liquidity and Capital Resources The company maintained strong liquidity, with cash and cash equivalents increasing to $187.2 million at the end of 2023, and net cash from operating activities at $127.4 million, while cash used in financing activities decreased significantly due to reduced share repurchases - Cash and cash equivalents increased to $187.2 million as of December 29, 2023, compared to $161.5 million at the end of 2022[185] - The decrease in cash used for financing activities was mainly due to lower common stock repurchases in 2023 compared to 2022[188] Summary of Cash Flows (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by Operating activities | $127,352 | $93,807 | | Net cash used in Investing activities | ($16,356) | ($12,043) | | Net cash used in Financing activities | ($86,009) | ($215,977) | Non-GAAP Financial Measures The company uses non-GAAP measures EBITDA and EBITDAS to evaluate operating performance, with EBITDA for 2023 at $137.7 million, nearly flat compared to 2022, and EBITDAS at $158.0 million - EBITDA as a percentage of revenues before reimbursements decreased to 27.7% in 2023 from 29.6% in 2022, attributed to lower utilization (69% vs. 74%) and increased operating expenses[194] EBITDA and EBITDAS Reconciliation (in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Net income | $100,339 | $102,330 | | Add back: Income taxes | 35,557 | 29,904 | | Subtract: Interest income | (7,150) | (2,096) | | Add back: Depreciation and amortization | 8,916 | 7,079 | | EBITDA | $137,662 | $137,217 | | Add back: Stock-based compensation | 20,357 | 20,364 | | EBITDAS | $158,019 | $157,581 | Quantitative and Qualitative Disclosures about Market Risk Exponent manages interest rate risk through conservative investment policies and faces foreign currency risk from international operations, primarily in British Pounds, Chinese Yuan, and Hong Kong Dollars, without using derivative instruments for hedging - The company is exposed to interest rate risk on its cash and cash equivalents, managed by investing in high-credit-quality debt instruments with short maturities[196] - Foreign currency risk exists for revenues and expenses denominated in currencies other than the U.S. dollar, mainly the British Pound, Chinese Yuan, and Hong Kong Dollar[198] - As of December 29, 2023, the company held net assets with functional currencies of approximately $17.2 million in British Pounds, $2.7 million in Hong Kong Dollars, and $2.4 million in Chinese Yuan[199] - The company does not use foreign exchange contracts to hedge currency exposures, and to date, the impact of exchange rate changes has not been material[201] Financial Statements and Supplementary Data This section presents the company's consolidated financial statements for the past three fiscal years, along with KPMG LLP's unqualified audit opinion and identification of "Collectibility of accounts receivable" as a critical audit matter - The independent auditor, KPMG LLP, issued an unqualified opinion, stating the financial statements are presented fairly and the company maintained effective internal control over financial reporting as of December 29, 2023[222] - The audit identified the 'Collectibility of accounts receivable' as a Critical Audit Matter, as the estimate for the specific allowance involves subjective judgment regarding the likelihood of collection[231] Consolidated Income Statement (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenues | $536,766 | $513,293 | $466,269 | | Operating income | $111,322 | $140,842 | $108,927 | | Net income | $100,339 | $102,330 | $101,202 | | Diluted EPS | $1.94 | $1.96 | $1.90 | Consolidated Balance Sheet (in thousands) | | Dec 29, 2023 | Dec 30, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $187,150 | $161,458 | | Total Assets | $646,777 | $586,662 | | Total Liabilities | $290,692 | $265,910 | | Total Stockholders' Equity | $356,085 | $320,752 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[203] Controls and Procedures Management concluded that the company's disclosure controls and procedures, as well as internal control over financial reporting, were effective as of December 29, 2023, with no material changes reported during the most recent fiscal quarter - Management, including the principal executive officer and principal financial officer, concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year[205] - Management concluded that the company's internal control over financial reporting was effective as of December 29, 2023, based on the framework in Internal Control - Integrated Framework (2013) issued by COSO[206] - There were no changes in internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[207] Other Information The company reports that no directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fourth fiscal quarter of 2023 - No directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement during the fourth fiscal quarter of 2023[208] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[209] Part III Part III of the Form 10-K incorporates information by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders, covering directors, executive officers, corporate governance, executive compensation, security ownership, certain relationships and transactions, and principal accounting fees and services Directors, Executive Officers and Corporate Governance Information required by this item is incorporated by reference from the company's definitive Proxy Statement for its 2024 Annual Meeting of Stockholders - The information for this item is incorporated by reference from the company's definitive Proxy Statement[211] Executive Compensation Information required by this item is incorporated by reference from the company's definitive Proxy Statement - The information for this item is incorporated by reference from the company's definitive Proxy Statement[212] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item is incorporated by reference from the company's definitive Proxy Statement - The information for this item is incorporated by reference from the company's definitive Proxy Statement[213] Certain Relationships and Related Transactions, and Director Independence Information required by this item is incorporated by reference from the company's definitive Proxy Statement - The information for this item is incorporated by reference from the company's definitive Proxy Statement[214] Principal Accounting Fees and Services Information required by this item is incorporated by reference from the company's definitive Proxy Statement - The information for this item is incorporated by reference from the company's definitive Proxy Statement[215] Part IV Exhibits, Financial Statement Schedules This section includes the consolidated financial statements of Exponent, Inc., the Report of Independent Registered Public Accounting Firm (KPMG LLP), financial statement schedules, and a comprehensive index of all exhibits filed with the report - This item contains the consolidated financial statements, the Report of Independent Registered Public Accounting Firm, and financial statement schedules[217] - An index of exhibits filed as part of the Annual Report on Form 10-K is provided, including governance documents, material contracts, and certifications[328][329]