# Exponent Inc: Form 10-Q for the period ended Jun 30, 2023

- Company: [Exponent Inc](/companies/expo.md) (CIK 851520)
- Form: 10-Q
- Filed: 2023-08-07
- Accepted by EDGAR: Aug 4, 2023, 18:20 ET
- Period: 2023-06-30
- Accession: 0000950170-23-038668
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/851520/000095017023038668/expo-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/851520/000095017023038668/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $140.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2022-12-31 to 2023-06-30 | $280.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | $29.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-12-31 to 2023-06-30 | $59.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $10.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-12-31 to 2023-06-30 | $16.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $25.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $54.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.50 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-12-31 to 2023-06-30 | $1.06 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.50 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-12-31 to 2023-06-30 | $1.07 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 51,692,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-12-31 to 2023-06-30 | 51,694,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-12-31 to 2023-06-30 | $33.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-12-31 to 2023-06-30 | $11.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2022-12-31 to 2023-06-30 | $27.7m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2023-06-30 | $148.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $344.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $604.3m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $124.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $247.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-06-30 | $357.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 36,860 characters.

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 30, 2022, which are contained in our fiscal 2022 Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on February 24, 2023 (our “2022 Annual Report”).

### Forward-Looking Statements

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 2022 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.

### Business Overview

Exponent, Inc., is an engineering and scientific consulting firm that provides solutions to complex problems. Our multidisciplinary team of scientists, engineers and business consultants brings together more than 90 different technical disciplines to solve complicated issues facing industry and business today. Our services include analysis of product development, product recall, regulatory compliance, and the discovery of potential problems related to products, people, property and impending litigation.

### CRITICAL ACCOUNTING ESTIMATES

There have been no significant changes in our critical accounting estimates during the six months ended June 30, 2023, as compared to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2022 Annual Report.

### RESULTS OF CONSOLIDATED OPERATIONS

### Executive Summary

Revenues for the second quarter of 2023 increased 8% to $140,221,000 as compared to $130,281,000 during the same period last year. Revenues before reimbursements for the second quarter of 2023 increased 10% to $129,653,000 as compared to $118,218,000 during the same period last year.

Growth during the second quarter of 2023 was driven by robust demand for our reactive services, which included product safety engagements and disputes-related work spanning multiple industries. Our proactive engagements benefited from increased demand in the chemicals and life sciences sectors, offset by some moderation in the electronics sector.

Net income decreased slightly to $25,748,000 during the second quarter of 2023 as compared to $25,755,000 during the same period last year. Diluted earnings per share increased to $0.50 per share as compared to $0.49 in the same period last year.

We remain focused on selectively adding top talent and developing the skills necessary to expand our market position and providing clients with in-depth scientific research and analysis to determine what happened and how to prevent failures or exposures in the future. 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.

### Overview of the Three Months Ended June 30, 2023

During the second quarter of 2023, billable hours increased 4% to 388,000 as compared to 372,000 during the same period last year. Our utilization decreased to 69% during the second quarter of 2023 as compared to 77% during the same period last year. Technical full-time equivalent employees increased 15% to 1,077 during the second quarter of 2023 as compared to 934 during the same period last year. Our accelerated recruiting efforts over the last year combined with lower-than-expected turnover drove a 15% increase in headcount compared to a year ago, highlighting the strength of our employee value proposition. While these investments in our future are critical, we are focused on strategically aligning our resources with the growth of the business and our pursuit of future opportunities over the long-term.

### Three Months Ended June 30, 2023 compared to Three Months Ended July 1, 2022

### Revenues

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Engineering and Other Scientific | $116,647 | $109,150 | 6.9% |
| Percentage of total revenues | 83.2% | 83.8% |  |
| Environmental and Health | 23,574 | 21,131 | 11.6% |
| Percentage of total revenues | 16.8% | 16.2% |  |
| Total revenues | $140,221 | $130,281 | 7.6% |

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 second quarter of 2023, billable hours for this segment increased by 5% to 308,000 as compared to 293,000 during the same period last year. Utilization for this segment decreased to 70% during the second quarter of 2023 as compared to 79% during the same period last year. The increase in billable hours was driven by broad-based growth, with continued strong demand for our services across the transportation and construction sectors. Technical full-time equivalent employees in this segment increased 18% to 842 during the second quarter of 2023 as compared to 715 for the same period last year due to our recruiting and retention efforts. The decrease in utilization was due to the 18% increase in technical full-time equivalent employees and historically strong utilization during the second quarter of 2022.

The increase in revenues for our Environmental and Health segment was due to an increase in billable hours and an increase in billing rates. During the second quarter of 2023, billable hours for this segment increased by 1% to 80,000 as compared to 79,000 during the same period last year. Utilization for this segment decreased to 65% during the second quarter of 2023 as compared to 69% during the same period last year. The increase in billable hours was due to evolving regulatory requirements which drove safety-related engagements evaluating the impacts of chemicals on human health and the environment. Technical full-time equivalent employees in this segment increased 7% to 235 as compared to 219 during the same period last year due to our recruiting and retention efforts. The decrease in utilization was due to the 7% increase in technical full-time equivalent employees.

### Compensation and Related Expenses

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Compensation and related expenses | $82,836 | $58,446 | 41.7% |
| Percentage of total revenues | 59.1% | 44.9% |  |

The increase in compensation and related expenses during the second quarter of 2023 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 stock-based compensation. During the second quarter of 2023, deferred compensation expense increased by $15,381,000 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 $4,122,000 during the second quarter of 2023 as compared to a decrease in the value of plan assets of $11,259,000 during the same period last year. Payroll expense increased by $6,509,000 and fringe benefits increased by $1,592,000 during the second quarter of 2023 due to the impact of our annual salary adjustments and an increase in technical full-time equivalent employees. Stock-based compensation expense increased $583,000 during the second quarter of 2023 due to an increase in unvested restricted stock unit grants. We expect our compensation expense, excluding the change in value of deferred compensation plan assets, to decrease as we align our resources with expected demand for our services.

### Other Operating Expenses

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Other operating expenses | $10,305 | $8,755 | 17.7% |
| Percentage of total revenues | 7.3% | 6.7% |  |

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 2023 was primarily due to an increase in occupancy expense of $507,000 an increase in depreciation expense of $373,000, and an increase in information technology related expenses of $386,000. The increase in occupancy expenses was due to growth in technical full-time equivalent employees and the transition back to our offices from a remote work environment. The increase 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 make investments in our corporate infrastructure and continue to transition our workforce back to our offices.

### Reimbursable Expenses

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Reimbursable expenses | $10,568 | $12,063 | -12.4% |
| Percentage of total revenues | 7.5% | 9.3% |  |

The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects.

### General and Administrative Expenses

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| General and administrative expenses | $6,637 | $5,740 | 15.6% |
| Percentage of total revenues | 4.7% | 4.4% |  |

The increase in general and administrative expenses was primarily due to an increase in travel and meals of $608,000 and an increase in bad debt expense of $302,000. The increase in travel and meals was due to the easing of

COVID-19 pandemic-related business and travel restrictions. The increase in bad debt expense was due to an increase in write-offs. We expect general and administrative expenses to increase as we expand our business development and staff development initiatives.

### Operating Income

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Engineering and Other Scientific | $38,711 | $40,032 | -3.3% |
| Environmental and Health | 7,521 | 6,846 | 9.9% |
| Total segment operating income | 46,232 | 46,878 | -1.4% |
| Corporate operating expense | (16,357) | (1,601) | 921.7% |
| Total operating income | $29,875 | $45,277 | -34.0% |

The decrease in operating income for our Engineering and Other Scientific segment during the second quarter of 2023 as compared to the same period last year was due to an increase in technical full-time equivalent employees partially offset by an increase in revenues. The increase in operating income for our Environmental and Health segment was due to an increase in revenues partially offset by an increase in technical full-time equivalent employees.

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.

The increase in corporate operating expenses during the second quarter of 2023 as compared to the same period last year was primarily due to an increase in deferred compensation expense. During the second quarter of 2023, deferred compensation expense increased $15,381,000, 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 $4,122,000 during the second quarter of 2023 as compared to a decrease in the value of plan assets of $11,259,000 during the same period last year.

### Other Income, Net

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Other income / (loss), net | $6,378 | $(9,845) | -164.8% |
| Percentage of total revenues | 4.5% | -7.6% |  |

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 partially offset by a decrease in gain on foreign exchange. During the second quarter of 2023, other income, net, increased by $15,381,000 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 $4,122,000 during the second quarter of 2023 as compared to a decrease in the value of the plan assets of $11,259,000 during the same period last year. The increase in interest income of $1,418,000 was due to an increase in interest rates. The decrease in the gain on foreign exchange of $639,000 was due to a decrease in the value of assets denominated in currencies that are not our functional currency.

### Income Taxes

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Income taxes | $10,505 | $9,677 | 8.6% |
| Percentage of total revenues | 7.5% | 7.4% |  |
| Effective tax rate | 29.0% | 27.3% |  |

The increase in income tax expense was due to an increase in pre-tax income and an increase in our effective tax rate. The increase in our effective tax rate was due primarily to a decrease in our foreign rate benefit and an increase in non-deductible expenses.

### Six Months Ended June 30, 2023 compared to Six Months Ended July 1, 2022

### Revenues

*(in thousands, except percentages)*

|  | Six Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Engineering and Other Scientific | $233,695 | $213,765 | 9.3% |
| Percentage of total revenues | 83.3% | 82.6% |  |
| Environmental and Health | 46,835 | 44,994 | 4.1% |
| Percentage of total revenues | 16.7% | 17.4% |  |
| Total revenues | $280,530 | $258,759 | 8.4% |

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 2023, billable hours for this segment increased by 5% to 614,000 as compared to 583,000 during the same period last year. Utilization for this segment decreased to 71% during the first six months of 2023 as compared to 78% during the same period last year. The increase in billable hours was driven by broad-based growth with continued strong demand for our services across the transportation and construction sectors. Technical full-time equivalent employees in this segment increased 16% to 830 during the first six months of 2023 as compared to 716 for the same period last year due to our recruiting and retention efforts. The decrease in utilization was due to the 16% increase in technical full-time equivalent employees and historically strong utilization during the first six months of 2022.

The increase in revenues for our Environmental and Health segment was due to an increase in our realized billing rate partially offset by a decrease in billable hours. During the first six months of 2023, billable hours for this segment decreased by 2% to 159,000 as compared to 163,000 during the same period last year. Utilization in this segment decreased to 65% during the first six months of 2023 as compared to 71% during the same period last year. Technical full-time equivalent employees in this segment increased by 6% to 234 during the first six months of 2023 as compared to 220 during the same period last year due to our recruiting and retention efforts. The decrease in utilization was due to the 6% increase in technical full-time equivalent employees.

### Compensation and Related Expenses

*(in thousands, except percentages)*

|  | Six Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Compensation and related expenses | $167,017 | $127,203 | 31.3% |
| Percentage of total revenues | 59.5% | 49.2% |  |

The increase in compensation and related expenses during the first six months of 2023 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, an increase in bonus expense and an increase in stock-based compensation. During the first six months of 2023, deferred compensation expense increased $23,998,000 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 $8,039,000 during the first six months of 2023 as compared to a decrease in the value of plan assets of $15,959,000 during the same period last year.

Payroll expense increased $11,390,000 during the first six months of 2023 due to the increase in technical full-time equivalent employees and the impact of our annual salary adjustments. Fringe benefits increased by $2,070,000 during the first six months of 2023 due to the increase in technical full-time equivalent employees and the impact of our annual salary adjustments. Bonus expense increased by $1,382,000 during the first six months of 2023 due to a corresponding increase to our bonus pool which is equal to 33% of income before income taxes, interest income, bonus expense, and stock-based compensation. Stock-based compensation expense increased $716,000 during the first six months of 2023 due to an increase in unvested restricted stock unit grants. We expect our compensation expense, excluding the change in value of deferred compensation plan assets, to decrease as we align our resources with expected demand for our services.

### Other Operating Expenses

*(in thousands, except percentages)*

|  | Six Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Other operating expenses | $19,866 | $16,920 | 17.4% |
| Percentage of total revenues | 7.1% | 6.5% |  |

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 six months of 2023 was primarily due to an increase in occupancy expense of $948,000, an increase in information technology related expenses of $885,000 and an increase in depreciation expense of $673,000. The increase in occupancy expenses was due to growth in technical full-time equivalent employees and the transition back to our offices from a remote work environment. The increases in information technology related expenses and depreciation expense were due to continued investment in our corporate infrastructure. We expect other operating expenses to grow as we make investments in our corporate infrastructure and continue to transition our workforce back to our offices as COVID-19 pandemic-related business restrictions are lifted.

### Reimbursable Expenses

*(in thousands, except percentages)*

|  | Six Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Reimbursable expenses | $22,172 | $22,671 | -2.2% |
| Percentage of total revenues | 7.9% | 8.8% |  |

The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects.

### General and Administrative Expenses

*(in thousands, except percentages)*

|  | Six Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| General and administrative expenses | $12,480 | $9,971 | 25.2% |
| Percentage of total revenues | 4.4% | 3.9% |  |

The increase in general and administrative expenses was primarily due to an increase in travel and meals of $1,362,000, an increase in bad debt of $346,000, an increase in marketing and business development expenses of $329,000, an increase in other professional services of $286,000 and several other individually insignificant increases. The increase in travel and meals was due to the easing of COVID-19 pandemic-related business and travel restrictions. The increase in bad debt was due to an increase in write-offs. The increase in marketing and business development was due to an increase in our business development activities. The increase in other professional services was due to several ongoing projects associated with investments in our corporate infrastructure. We expect general and administrative expenses to increase as we expand our business development and staff development initiatives.

### Operating Income

*(in thousands, except percentages)*

|  | Six Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Engineering and Other Scientific | $82,330 | $78,522 | 4.8% |
| Environmental and Health | 15,075 | 14,681 | 2.7% |
| Total segment operating income | 97,405 | 93,203 | 4.5% |
| Corporate operating expense | (38,410) | (11,209) | 242.7% |
| Total operating income | $58,995 | $81,994 | -28.0% |

The increase in operating income for our Engineering and Other Scientific segment during the first six months of 2023 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 was driven by strong demand for our services across the transportation and construction sectors. The increase in operating income for our Environmental and Health segment was due to an increase in our realized billing rate.

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.

The increase in corporate operating expenses during the first six months of 2023 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 six months of 2023, deferred compensation expense increased $23,998,000, 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 $8,039,000 during the first six months of 2023 as compared to a decrease in the value of plan assets of $15,959,000 during the same period last year.

### Other Income, Net

*(in thousands, except percentages)*

|  | Six Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Other income (loss), net | $12,796 | $(13,755) | 193.0% |
| Percentage of total revenues | 4.6% | -5.3% |  |

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 six months of 2023, other income, net, increased $23,998,000 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 $8,039,000 during the first six months of 2023 as compared to a decrease in the value of the plan assets of $15,959,000 during the same period last year. During the first six months of 2023, interest income increased by $3,167,000 as compared to the same period last year due to an increase in interest rates.

### Income Taxes

*(in thousands, except percentages)*

|  | Six Months Ended June 30, 2023 | July 1, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Income taxes | $16,919 | $12,875 | 31.4% |
| Percentage of total revenues | 6.0% | 5.0% |  |
| Effective tax rate | 23.6% | 18.9% |  |

The excess tax benefit associated with stock-based awards was $3,639,000 during the first six months of 2023 as compared to $6,040,000 during the same period last year. Excluding the impact of the excess tax benefit, the effective tax rate would have been 28.6% during the first six months of 2023 as compared to 27.7% during the same period last year. The increase in our effective tax rate, excluding the impact of the excess tax benefit, was due primarily to a decrease in our foreign rate benefit and an increase in non-deductible expenses.

### LIQUIDITY AND CAPITAL RESOURCES

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.

*(in thousands)*

|  | Six Months Ended June 30, 2023 | July 1, 2022 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $33,842 | $23,816 |
| Net cash used in by investing activities | (11,116) | (5,914) |
| Net cash used in financing activities | (36,394) | (148,536) |

We financed our business during the first six months of 2023 through available cash. As of June 30, 2023, our cash and cash equivalents were $148,174,000 as compared to $161,458,000 at December 30, 2022.

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 including marketing and travel.

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

The decrease in net cash used in financing activities during the first six months of 2023, as compared to the same period last year, was due to a decrease in repurchases of our common stock and a reduction in payroll taxes for restricted stock units partially offset by an increase in dividends.

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 maintain a nonqualified deferred compensation plan for the benefit of a select group of highly compensated employees. Vested amounts due under the plan of $96,412,000 were recorded as a long-term liability on our unaudited condensed consolidated balance sheet at June 30, 2023. Vested amounts due under the plan of $13,781,000 were recorded as a current liability on our unaudited condensed consolidated balance sheet at June 30, 2023. 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 30, 2023, invested amounts under the plan of $94,067,000 were recorded as a long-term asset on our unaudited condensed consolidated balance sheet. As of June 30, 2023, invested amounts under the plan of $14,073,000 were recorded as a current asset on our unaudited condensed 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.

### Non-GAAP Financial Measures

Regulation G, Conditions for Use of Non-Generally Accepted Accounting Principles ("Non-GAAP") Financial Measures, and other U.S. Securities and Exchange Commission (“SEC”) rules and regulations define and prescribe the conditions for use of 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, net interest income, depreciation and amortization. We define EBITDAS as EBITDA before stock-based compensation. The Company regards EBITDA and EBITDAS as useful measures of operating performance 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 for 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 (determined as shown in the reconciliation table below) as a percentage of revenues before reimbursements for the three months ended June 30, 2023 and July 1, 2022:

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | July 1, 2022 | Six Months Ended June 30, 2023 | July 1, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Revenues before reimbursements | $129,653 | $118,218 | $258,358 | $236,088 |
| EBITDA | $36,846 | $37,069 | $72,602 | $71,544 |
| EBITDA as a % of revenues before reimbursements | 28.4% | 31.4% | 28.1% | 30.3% |

The decrease in EBITDA as a percentage of revenues before reimbursements during the second quarter of 2023 as compared to the same period last year was primarily due to the decrease in utilization and an increase in other operating and general and administrative expenses. Our utilization decreased to 69% during the second quarter of 2023 as compared to 77% during the same period last year. The decrease in utilization was due to a 15% increase in technical full-time equivalent employees and historically strong utilization during the second quarter of 2022. Other operating and general and administrative expenses increased during the second quarter of 2023 due to an increase in travel and meals associated with the easing of COVID-19 pandemic-related business and travel restrictions, an increase in technical full-time equivalent employees, investments in our corporate infrastructure, and an increase in marketing and business development activities.

The decrease in EBITDA as a percentage of revenues before reimbursements during the first six months of 2023 as compared to the same period last year was primarily due to the decrease in utilization and an increase in other operating and general and administrative expenses. Our utilization decreased to 70% during the first six month of 2023 as compared to 77% during the same period last year. The decrease in utilization was due to a 14% increase in technical full-time equivalent employees and historically strong utilization during the first six months of 2022. Other operating and general and administrative expenses increased during the first six months of 2023 due to an increase in travel and meals associated with the easing of COVID-19 pandemic-related business and travel restrictions, an increase in technical full-time equivalent employees, investments in our corporate infrastructure, and an increase in marketing and business development activities.

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 30, 2023 and July 1, 2022:

*(in thousands)*

|  | Three Months Ended June 30, 2023 | July 1, 2022 | Six Months Ended June 30, 2023 | July 1, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $25,748 | $25,755 | $54,872 | $55,364 |
| Add back (subtract): |  |  |  |  |
| Income taxes | 10,505 | 9,677 | 16,919 | 12,875 |
| Interest income, net | (1,593) | (175) | (3,363) | (196) |
| Depreciation and amortization | 2,186 | 1,812 | 4,174 | 3,501 |
| EBITDA | 36,846 | 37,069 | 72,602 | 71,544 |
| Stock-based compensation | 5,223 | 4,597 | 12,286 | 11,467 |
| EBITDAS | $42,069 | $41,666 | $84,888 | $83,011 |

- 29 -

## Market risk

As filed, 2,915 characters.

We are exposed to interest rate risk associated with our balances of cash and cash equivalents. We manage our interest rate risk by maintaining an investment portfolio primarily consisting of debt instruments with high credit quality and relatively short average effective maturities in accordance with our investment policy. The maximum effective maturity of any issue in our portfolio is 3 years and the maximum average effective maturity of the portfolio cannot exceed 12 months. If interest rates were to instantaneously increase or decrease by 100 basis points, the change in the fair market value of our portfolio of cash equivalents would not have a material impact on our financial statements. We do not use derivative financial instruments in our portfolio. There have not been any material changes during the period covered by this Quarterly Report on Form 10-Q to our interest rate risk exposures, or how these exposures are managed. Notwithstanding our efforts to manage interest rate risk, there can be no assurances that we will be adequately protected against the risks associated with interest rate fluctuations.

We have foreign currency risk related to our revenues and expenses denominated in currencies other than the U.S. dollar, primarily the British Pound, the Sinagpore Dollar, the Chinese Yuan, and the Hong Kong Dollar. Accordingly, changes in exchange rates may negatively affect the revenues and net income of our foreign subsidiaries as expressed in U.S. dollars.

At June 30, 2023, we had net assets of approximately $12.7 million with a functional currency of the British Pound, net assets of approximately $2.1 million with a functional currency of the Singapore Dollar, net assets of approximately $1.8 million with a functional currency of the Chinese Yuan, and net assets of approximately $1.4 million with a functional currency of the Hong Kong Dollar associated with our operations in the United Kingdom, Singapore, China, and Hong Kong, respectively.

We also have foreign currency risk related to foreign currency transactions and monetary assets and liabilities denominated in currencies that are not the functional currency. We have experienced and will continue to experience fluctuations in our net income as a result of gains (losses) on these foreign currency transactions and the remeasurement of monetary assets and liabilities. At June 30, 2023, we had net assets denominated in the non-functional currency of approximately $6.8 million.

We do not use foreign exchange contracts to hedge any foreign currency exposures. To date, the impacts of foreign currency exchange rate changes on our consolidated revenues and consolidated net income have not been significant. However, our continued international growth increases our exposure to exchange rate fluctuations and as a result such fluctuations could have a significant impact on our future results of operations.

## Controls and procedures

As filed, 1,708 characters.

(a) Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that, as of June 30, 2023, the Company’s disclosure controls and procedures were effective.

We review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis, to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three-month period ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 147 characters.

There have been no material changes from risk factors as previously discussed under the heading “Risk Factors” in the Company’s 2022 Annual Report.

Filed Aug 7, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-038668. Last ingested by Listed: Nov 4, 2026, 12:40 ET. No prices; not investment advice.