Q4 2023 Exponent Inc Earnings Call

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Operator: Good afternoon, and welcome to the Exponent 4th Quarter and Fiscal Year 2023 Earnings Conference Call. All participants will be in written-only mode.

Good afternoon, and welcome to the exponent fourth quarter and fiscal year 2023 earnings conference call.

All participants will be in listen only mode.

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Operator: To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Joni Constantelos. Please go ahead. Thank you.

Please note this event is being recorded.

I would now like to turn the conference over to Joni constant tell US. Please go ahead.

Joni Constantelos: Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's fourth quarter and fiscal year 2023 financial results conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at www.exponent.com backslash investors. This conference call is the property of Exponent, and any taping or other reproduction is expressly prohibited without prior written consent.

Thank you good afternoon, ladies and gentlemen, thank you for joining us on exponent fourth quarter and fiscal year 2023 financial results Conference call.

Note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at Www Dot exponent dotcom backslash investors.

This conference call is the property of exponent and any taping or other reproduction is expressly prohibited without prior written consent.

Joni Constantelos: Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer, and Richard Schlenker, Executive Vice President and Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic FDC filings, including those factors discussed under the caption, Risk Factor, in Exponent's most recent Form 10.2. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise. And now I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Dr. Catherine Corrigan?

Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer, and Rich Schlenker, Executive Vice President and Chief Financial Officer.

Before we start I would like to remind you that the following discussion contains forward looking statements, including but not limited to exponents market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.

General information that could cause actual results to differ from forward looking statements can be found in exponent periodic SEC filings, including those factors discussed under the caption risk factor in X Tony its most recent Form 10-Q.

The forward looking statements and risks in this conference call are based on current expectations as of today and exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise.

Now I will turn the call over to Doctor, Catherine Corrigan, Chief Executive Officer Catherine.

Catherine Ford Corrigan: Thank you, Tony. And thank you, everyone, for joining us today. I will start off by reviewing our fourth quarter and fiscal year 2023 business performance, which will then provide a more detailed review of our financial results and outlook for 2024. And we will then open the call to questions. Exponent's world-class team of experts delivered a 7% increase in net revenues in 2023, showcasing the effectiveness of our highly diversified portfolio of services. Notably, our reactive business grew in the high teens, driven by robust failure investigations and disputes-related work, primarily for the transportation and energy sectors. While proactive services for the consumer electronics sector declined year over year due to ongoing industry headwinds and product life cycle timing, the remainder of our proactive portfolio grew in the mid-single digits for the year.

Thank you Tony and thank you everyone for joining us today I will start off by reviewing our fourth quarter and fiscal year 2023 business performance Rich will then provide a more detailed review of our financial results and outlook for 2024, and we will then open the call for questions.

Exponents World class team of experts delivered a 7% increase in net revenues in 2023, showcasing the effectiveness of our highly diversified portfolio of services, notably our reactive business grew in the high teens driven by robust failure investigations and disc.

These related work, primarily for the transportation and energy sectors.

While proactive services for the consumer electronics sector declined year over year due to ongoing industry headwinds and product lifecycle timing the remainder of our proactive portfolio grew in the mid single digits for the year.

Catherine Ford Corrigan: Turning to our engagements in more detail, our roots in failure analysis and the leading market position that we have earned over the past 50 plus years continue to be important drivers of demand for our reactive services. Exponent is retained on some of the largest and highest-profile matters around the world, spanning a wide array of issues from wildfires to advanced transportation and more. Our recent retention by General Motors Cruise Unit to investigate the cause of their driverless vehicle collision with a pedestrian is but one recent public example.

Turning to our engagements in more detail.

Our roots in failure analysis, and our leading market position that we have earned over the past 50, plus years continues to be important drivers of demand for our reactive services exponent is retained on some of the largest and highest profile matters around the world.

A wide array of issues from wildfires to a desk transportation and more.

Our recent retention by general Motors cruise units to investigate the cause of their driverless vehicles collision with a pedestrian is but one recent public example.

Catherine Ford Corrigan: In the energy industry, our experts are advising on disputes around the world involving everything from refinery explosions and liquefied natural gas facility operations to massive offshore wind farm construction and pump storage power plant performance. Whether it's a question of the integrity of long-standing infrastructure or the imperatives of the energy transition pushing the limits of technology, one common thread is certain. Complexity abounds, it's not going away, and these are places where exponents thrive.

In the energy industry, our experts are advising on disputes around the world involving every time from refinery exploration and liquefied natural gas facility operations, two massive offshore wind farm construction and pump storage power plants performance.

Whether it's a question of the integrity of long standing infrastructure or the imperatives of the energy transition pushing the limits of technology. One common thread is certain complexity about it's not going away and these are places where exponent thrives.

Catherine Ford Corrigan: Our leading market position has continued to expand as we further differentiate our experience in this portion of the business. Our world-class and highly diversified expertise, combined with the vital nature of our insights in these high-stakes situations, positions this part of the portfolio well to weather Harriet's economic cycle. In addition to our reactive work, our team's ability to anticipate clients' needs throughout the product lifecycle continues to be a significant differentiator for Exponent. Among our proactive services, demand was strong for our regulatory consulting activities in the chemicals industry, evaluating the effects of chemicals on human health and the environment. We are pleased to be advising clients in this sector as they develop and bring to market increasingly complex technologies such as RNA-based pesticides.

Our leading market position has continued to expand as we further differentiate our experience in this portion of the business.

Our world class and highly diversified expertise combined with the vital nature of our insights in these high stake situations position.

Physicians this part of the portfolio well to weather various economic cycles.

In addition to our reactive work our team's ability to anticipate clients' needs throughout the product lifecycle continues to be a significant differentiator for Exxon.

Within our proactive services demand was strong for our regulatory consulting activities in the chemicals industry evaluating the effects of chemicals on human health and the environment.

We are pleased to be advising clients in this sector as they develop and bring to market increasingly complex technologies, such as RNA based pesticides. We also saw increased engagements and product development are safety related consulting for the life sciences sector, including medical devices and pharmaceuticals.

Catherine Ford Corrigan: We also saw increased engagements in product development and safety-related consulting for the life sciences sector, including medical devices and pharmaceuticals. As expected, we continue to face headwinds in the consumer electronics sector, due in part to the timing of client-product life cycles as well as broader headwinds in the industry. We saw year-over-year declines in human-subject research engagements, as well as product development consulting, as products moved out of the development stage and into the refinement stage. Excluding consumer electronics, net revenues for the firm increased 16% year-over-year.

As expected, we continued to face headwinds in the consumer electronics sector due in part to the timing of client product lifecycle as well as broader headwinds in the industry. We saw year over year declines in human subject research engagements as well as product development consulting as products moved out of the development stage and into the refinement.

Excluding consumer electronics net revenues for the firm increased 16% year over year.

In the fourth quarter, we noted an increased client sensitivity to budget concerns, which resulted in a slowing or pausing of some litigation activity. For example, we saw this in the chemical sector, which is currently responding to elevated levels of Destocking post pandemic. While this has created a lower than expected growth rate of.

Catherine Ford Corrigan: In the fourth quarter, we noted an increased client sensitivity to budget concerns, which resulted in the slowing or pausing of some litigation activity. For example, we saw this in the chemicals sector, which is currently responding to elevated levels of destocking post-pandemic. While this created a lower-than-expected growth rate for our reactive business in the quarter, all indications are that this activity will resume over time based on the demands of global litigation and arbitration dockets, which show no signs of easing. We remain actively engaged with our clients and are well positioned to help address their critical needs.

Our reactive business in the quarter all indications are that this activity will resume over time based on the demands of global litigation and arbitration Dockets, which show no signs of easing we've.

We remain actively engaged with our clients and are well positioned to help address their critical needs.

Turning to our segments exponents engineering and other scientific segment represented 84% of revenues before reimbursements in the fourth quarter and 83% of revenues before reimbursements for the full year 2023.

Revenues before reimbursements in this segment increased 2% for the fourth quarter and 8% for the full year driven by demand for exponent services across the transportation and energy sectors.

Catherine Ford Corrigan: TURNING TO OUR SEGMENT. Exponent's engineering and other scientific segment represented 84% of revenues before reimbursements in the fourth quarter and 83% of revenues before reimbursements for the full year 2023. Revenues before reimbursement in this segment increased 2% for the fourth quarter and 8% for the full year, driven by demand for Exponent services across the transportation and energy sectors. Exponent's environmental and health segment represented 16% of revenues before reimbursements in the fourth quarter and 17% of revenues before reimbursements for the full year 2023. Revenues before reimbursements in this segment decreased 3% for the fourth quarter and increased 5% for the full year. Fourth quarter revenue in this segment was impacted by the aforementioned client budget concerns which resulted in delays in litigation work.

Exponents environmental and health segment represented 16% of revenues before reimbursements in the fourth quarter and 17% of revenues before reimbursements for the full year 2023.

Revenues before reimbursements in this segment decreased 3% for the fourth quarter and increased 5% for the full year.

Fourth quarter revenue in this segment was impacted by the aforementioned clients' budget constraints, which resulted in delays in litigation work.

Growth in this segment for the year was primarily driven by exponential safety related work evaluating the impacts of chemicals on human health and the environment.

As we expected fulltime equivalent employees in the fourth quarter decreased three 4% compared to the third quarter, reflecting our ongoing focus on strategically aligning resources with demand across the business.

At the same time, we continue to invest in growth areas of the business developing our exceptional talent and expanding our differentiated capabilities to better meet the evolving needs of our clients. For example, we continue to position ourselves across the spectrum of challenges involving existing infrastructure, all the way to new investments.

Knowledge is to support the energy transition.

Catherine Ford Corrigan: Growth in this segment for the year was primarily driven by Exponent's safety-related work evaluating the impacts of chemicals on human health and the environment. As we expected, full-time equivalent employees in the fourth quarter decreased 3.4% compared to the third quarter, reflecting our ongoing focus on strategically aligning resources with demand across the business. At the same time, we continue to invest in growth areas of the district, developing our exceptional talent and expanding our differentiated capabilities to better meet the evolving needs of our clients. For example, we continue to position ourselves across a spectrum of challenges involving existing infrastructure, all the way to new investments and technologies to support the energy transition. While the automotive industry's aspirational goals for electric vehicle growth have been tempered in part due to customer hesitation, it is precisely this heightened expectation of safety and performance of new and complex technologies that is a fundamental business driver for Exponent. We are seeing evidence of this on the reactive side with advanced driver assistance technologies, which are increasingly at issue in automotive systems.

While the automotive industries aspirational goals for electric vehicle growth has been tempered in part due to customer hesitation. It is precisely this heightened expectation of safety and performance of new and complex technologies, but as a fundamental business driver for exponent.

We are seeing evidence of this on the reactive side with advanced driver assistance technologies, which are increasingly a issue in automotive to C. H.

As we look ahead to 2024, we are mindful that we are coming off a year with higher than usual growth in a reactive business, creating a high hurdle rate for year over year comparisons in the current environment, which I've described we expect reactive revenues to remain in line with 2023 levels. We also expect some continued headwinds.

In the consumer electronics sector, combined with constrained budgets and project delays that we are seeing with some clients in other pockets of the business.

In this dynamic environment, we remain keenly focused on new business development, and strategic investments and growth opportunities as well as aligning our resources and cost with anticipated demand.

We will continue to position excellent on the forefront of innovation supported by our exceptional team our reputation as a leader in high profile failure analysis, and our differentiated capabilities across the product lifecycle.

Our performance in 2023 with growth in all major industries, we serve with the exception of electronics demonstrates the power of our portfolio and value proposition in a challenging environment and gives us confidence in our ability to deliver long term profitable growth and value for our shareholders.

Catherine Ford Corrigan: If we look ahead to 2024, we are mindful that we are coming off of a year with higher than usual growth in our reactive business, creating a high hurdle rate for year-over-year comparisons. In the current environment, which I've described, we expect reactive revenues to remain in line with 2023 levels. We also expect some continued headwinds in the consumer electronics sector, combined with constrained budgets and project delays that we are seeing with some clients in other pockets of the business. In this dynamic environment, we remain keenly focused on new business developments and strategic investments and growth opportunities, as well as aligning our resources and costs with anticipated demands. We will continue to position Exponent at the forefront of innovation, supported by our exceptional team, a reputation as a leader in high-profile failure analysis, and our differentiated capabilities across the product's lifecycle.

I'll now turn the call over to rich to provide more detail on our fourth quarter and fiscal year 2023 results as well as discuss our outlook for the first quarter and the full year 2012.

Thank you Catherine and good afternoon, everyone.

Let me start by saying all comparisons will be on a year over year basis, unless otherwise noted.

For the fourth quarter of 2023 total revenues decreased three 5% to 122 $9 million in Reimbursable.

Revenues before reimbursements or net revenues as I will refer to them from hereon increased one 1% to $113 $9 million as compared to the same period in 2022.

This includes a decline of approximately $9.6 million and our work for consumer electronics sector, which created an eight 5% headwind as compared to the fourth quarter of 2022.

Catherine Ford Corrigan: Our performance in 2023, with growth in all major industries we serve with the exception of electronics, demonstrates the power of our portfolio and value proposition in a challenging environment and gives us confidence in our ability to deliver long-term profitable growth and value for our shareholders. I'll now turn the call over to Rich to provide more detail on our fourth quarter and fiscal year 2023 results, as well as discuss our outlook for the third quarter and the full year 2023. Thank you, Catherine, and good afternoon, everyone.

Please note that the decrease in total revenues in the fourth quarter is due to lower reimbursable expenses from human subjects studies.

Net income for the fourth quarter was $29 million or 41 cents per diluted share as compared to $22 5 million or <unk> 44 cents per diluted share in the prior year period.

Exponents consolidated tax rate was 34% in the fourth quarter as compared to 26, 2% for the same period in 2022.

The increase in our consolidated tax rate was primarily due to a onetime tax charge associated with the remeasurement of our deferred tax assets in connection with relocating one of our offices to a location designed as a tax exempt for state.

Richard L. Schlenker: Let me start by saying all comparisons will be on a year-over-year basis unless otherwise noted. For the fourth quarter of 2023, total revenues decreased 3.5% to $122.9 million, and reimbursable revenues before reimbursements, or net revenues, as I will refer to them from here on, increased 1.1% to $113.9 million as compared to the same period in 2022. This includes a decline of approximately $9.6 million in our work for the consumer electronics sector, which created an 8.5% headwind as compared to the fourth quarter of 2022. Please note that the decrease in total revenues in the fourth quarter is due to lower reimbursable expenses from human subject studies. Net income for the fourth quarter was $20.9 million, or $0.41 per diluted share, as compared to $22.5 million, or $0.44 per diluted share, in the prior year period.

And local taxes this onetime charge reduced the fourth quarter's earnings per diluted share by two cents.

EBITDA for the quarter was $35 million producing a margin of 26, 8% of net revenues as compared to $31 $1 million or 27, 6% of net revenues in the same period of 2022.

This year over year decline in margins was anticipated as expenses normalized post pandemic and utilization was lower.

Billable hours in the fourth quarter were approximately 341000, a decrease of three 7% year over year.

This decrease was driven by the headwinds in our consumer electronics sector.

The average technical fulltime equivalent employees in the fourth quarter 1012, which is an increase of two 3%.

As compared to one year ago sequentially fulltime equivalent employees decreased three 4% as compared to the third quarter of 2023.

Demonstrating our progress on strategically aligning our resources with demand utilization.

Utilization for the fourth quarter was 65% down from 69% in the same period in 2022.

The realized rate increase was approximately four 8% for the fourth quarter as compared to the same period a year ago.

Richard L. Schlenker: Exponent's consolidated tax rate was 30.4% in the fourth quarter, as compared to 26.2% for the same period in 2022. The increase in our consolidated tax rate was primarily due to a one-time tax charge associated with the remeasurement of our deferred tax assets in connection with relocating one of our offices to a location designed as a tax-exempt location for state and local taxes. This one-time charge reduced the fourth quarter's earnings per diluted share by two cents.

In the fourth quarter after adjusting for gains and losses and deferred compensation expense compensation expense increased three 3%.

Included in total compensation expense is a gain in deferred compensation of $9 million as compared to a gain of $6 7 million in the same period of 2022.

As a reminder gains and losses in deferred compensation are offset to miscellaneous income and have no impact on the bottom line.

Stock based compensation expense in the fourth quarter was $3 $2 million as compared to $4 3 million in the period in the prior year period.

Richard L. Schlenker: EBITDA for the quarter was $30.5 million, producing a margin of 26.8% of net revenues, as compared to $31.1 million, or 27.6% of net revenues in the same period of 2022. This year-over-year decline in margins was anticipated as expenses normalized post-pandemic and utilization was lower. Billable hours in the fourth quarter were approximately 341,000, a decrease of 3.7% year-over-year.

Other operating expenses in the fourth quarter were up 14, 3% the $10.7 million driven primarily by increased employee engagement at our offices and investments in our infrastructure.

Included in other operating expenses is depreciation and amortization expense of $2 4 million.

G&A expenses declined 14, 6% to $5 9 million for the fourth quarter. The decrease was primarily due to a reduction in the use of outsourced personnel and a smaller annual company meeting.

Interest income increased to one $9 million for the fourth quarter.

Richard L. Schlenker: This increase was driven by the headwinds in our consumer electronics sector. The average number of technical full-time equivalent employees in the fourth quarter was 1,012, which is an increase of 2.3% as compared to one year ago. sequentially, full-time equivalent employees decreased 3.4% as compared to the third quarter of 2023, demonstrating our progress on strategically aligning our resources with demand. Utilization for the fourth quarter was 65%, down from 69% in the same period of 2022.

Interest income was driven by an increase in interest rates missiles.

Miscellaneous income excluding the deferred compensation gain was approximately 700000 for the fourth quarter.

During the quarter capital expenditures were $1 $9 million, we distributed $13 1 million to shareholders through dividend payments and repurchased seven 2 million of common stock.

Turning to the full year results for the year 2023, total revenues increased four 6% to $536 $8 million and net revenues increased seven 2% to $497 $2 million as compared to 2022.

Richard L. Schlenker: The realized rate increase was approximately 4.8% for the fourth quarter as compared to the same period a year ago. In the fourth quarter, after adjusting for gains and losses in deferred compensation expense, compensation expense increased 3.3%. Included in total compensation expense is a gain in deferred compensation of $9 million, as compared to a gain of $6.7 million in the same period of 2022. As a reminder, gains and losses in deferred compensation are offsets to miscellaneous income and have no impact on the bottom line.

This includes a decline of approximately $24 million in our work for the consumer electronics sector, which created a 5% headwind as compared to the full year 2022.

For the year, we grew every other industry driven by strong demand for our reactive services.

Net income for the year decreased one 9% to $103 million or $1 94 per diluted share as compared to $102 3 million or $1.96 per diluted share in 2022.

<unk> benefit associated with accounting for share based awards for 2023 was $3 6 million or seven cents per diluted share as compared to $5 8 million or 11 cents per diluted share in 2022.

Richard L. Schlenker: Stock-based compensation expense in the fourth quarter was $3.2 million, as compared to $4.3 million in the prior year period. Other operating expenses in the fourth quarter were up 14.3% to $10.7 million, driven primarily by increased employee engagement at our offices and investments in our infrastructure. Included in other operating expenses is depreciation and amortization expense of $2.4 million. G&A expenses declined 14.6% to $5.9 million for the fourth quarter.

Inclusive of the tax benefit for share based awards <unk> consolidated tax rate was 26, 2% for the full year as compared to 22.6 in 2022.

Richard L. Schlenker: The decrease was primarily due to a reduction in the use of outsourced personnel in a smaller annual company meeting. Interest income increased to $1.9 million for the fourth quarter. Higher interest income was driven by an increase in interest rates. Miscellaneous income, excluding the deferred compensation gain, was approximately $700,000 for the fourth quarter.

For the year EBITDA increased slightly too.

$137.7 million as compared to $137 $2 million during 2020 do producing a margin of 27, 7% of net revenues, which is a decrease of 190 basis points as compared to 2022.

Richard L. Schlenker: During the quarter, capital expenditures were $1.9 million, we distributed $13.1 million to shareholders through dividend payments, and we repurchased $7.2 million of common stock. Now, let me give you the full year results. For the year 2023, total revenues increased 4.6% to $536.8 million, and net revenues increased 7.2% to $497.2 million as compared to 2022. This includes a decline of approximately $24 million in our work for the consumer electronics sector, which created a 5% headwind as compared to the full year 2022. For the year, we grouped every other industry driven by strong demand for our reactive service. Net income for the year decreased 1.9% to $100.3 million, or $1.94 per diluted share, as compared to $102.3 million, or $1.96 per diluted share in 2022. The tax benefit associated with accounting for share-based awards for 2023 was $3.6 million, or $0.07 per diluted share, as compared to $5.8 million, or $0.11 per diluted share, in 2022. Inclusive of the tax benefit for share-based awards, Exponent's consolidated tax rate was 26.2% for the full year as compared to 22.6% in 2022.

This decline in margins was anticipated as expenses normalized post pandemic and utilization was lower due to the growth in head count.

Billable hours for 2023 were approximately 1.495 million an increase of 2% year over year utilization for the full year was 68, 6% down from 73, 8% during 2022 <unk>.

Average full time technical employees for the year were 1048, an increase of nine 6% as compared to 2022.

The realized rate increase was approximately five 2% for the year 2023.

Compensation expense after adjusting for gains and losses in deferred compensation increased nine 8% included in total compensation expense is a gain in deferred compensation of 14.

$14.3 million as compared to a loss of $14 $1 million in 2022. This resulted in a $28 4 million dollar change year over year.

Stock based compensation expense in 2023 was $24 million, which is the same as 2022.

Other operating expenses were up 18, 4% to $41.5 million driven primarily by increased employee engagement at our offices head count growth investments in our infrastructure and inflation.

Included in other operating expenses is depreciation and amortization expense of $8 $9 million for the year.

G&A expenses were up three 3% to $24 $4 million in 'twenty to 'twenty three the increase in G&A expenses was primarily due to inflation and our return to in person work, resulting in increased travel recruiting and business development.

Richard L. Schlenker: For the year, EBITDA increased slightly to $137.7 million as compared to $137.2 million during 2022, producing a margin of 27.7% of net revenues, which is a decrease of 190 basis points as compared to 2022. This decline in margins was anticipated as expenses normalized post-pandemic and utilization was lowered due to the growth in headcount. Global hours for 2023 were approximately 1,495,000, an increase of 2% year-over-year. Utilization for the 4-year period was 68.6%, down from 73.8% during 2022.

Cost, which was primarily offset by a reduction in the use of outsourced personnel and a smaller annual company meeting.

Interest income increased approximately $5 $1 million to seven 2 million for the full year higher interest income was driven by an increase in interest rates miscellaneous income excluding deferred compensation gains was $3 1 million.

For 2023.

Richard L. Schlenker: Average full-time technical employees for the year were 1,048, an increase of 9.6% as compared to 2022. The realized rate increase was approximately 5.2% for the year 2023. Compensation expense, after adjusting for gains and losses in deferred compensation, increased 9.8 percent.

Moving to our cash flows during 2023, we generated 127 $4 million in cash from operations and capital expenditures were $16 $4 million.

For the full year, we distributed 54 million to shareholders through dividend payments and $24 2 million.

In share repurchases.

As of year end, the company had 187 $2 million in cash.

Richard L. Schlenker: Included in total compensation expense is a gain in deferred compensation of $14.3 million, as compared to a loss of $14.1 million in 2022. This resulted in a $28.4 million change year over year. Stock Base Compensation Expense in 2023 was $20.4 million, which is the same as 2022. Other operating expenses were up 18.4% to $41.5 million, driven primarily by increased employee engagement at our offices, headcount growth, investments in our infrastructure, and inflation, including depreciation and amortization expense of $8.9 million for the year. G&A expenses were up 3.3% to $24.4 million in 2023. The increase in G&A expenses was primarily due to inflation and our return to in-person work resulting in increased travel, recruiting, and business development costs, which were primarily offset by a reduction in the use of outsourced personnel and a smaller annual company meeting. Interest income increased approximately $5.1 million to $7.2 million for the full year. Higher interest income was driven by an increase in interest rates. Miscellaneous Income, excluding Deferred Compensation Gains, was $3.1 million for 2023.

Turning to our outlook for the first quarter and full year 2024.

With a challenging comparison in our reactive business as well as ongoing headwinds in consumer electronics industry and macro related uncertainty for the first quarter of 2024, we expect revenues before reimbursements to be flat to down in the low single digits.

EBITDA margin to be 26% to 27% of revenues before reimbursements as compared to the same period in 2023.

For fiscal year.

Year 2024, we expect revenues before reimbursements to also be flat to down low single digits and EBITDA margin to be 25.75 to 26, 5% of revenues before reimbursements as compared to 2023.

As Katherine mentioned, we are taking actionable steps to strategically align our resources with demand through targeted recruiting and ongoing performance management.

As a result, we expect our average technical fulltime equivalent employees did decline sequentially, 1% in the first quarter of 2024.

And 5% as compared to the first quarter of 2023.

For the full year, we expect average full time equivalent equivalent employees to be down 6% to 8% on a year over year basis.

We expect utilization in the first quarter to be 69% to 71% as compared to 74% in the same quarter in the prior year.

Richard L. Schlenker: Moving to our cash flow, during 2023, we generated $127.4 million in cash from operations, and capital expenditures were $16.4 million. For the full year, we distributed $54 million to shareholders through dividend payments and $24.2 million in share repurchases. As of year end, the company had $187.2 million in cash.

We expect the full year utilization to be 68% to 70% as compared to 68, 6% in 2023.

Additionally, we remain committed to our long term target of sustained mid seventies utilization.

We expect the realized rate increase for the first quarter and full year to be 3% to three 5%.

Richard L. Schlenker: Turning to our outlets for the first quarter and full year 2024, with a challenging comparison in our reactive business, as well as ongoing headwinds in the consumer electronics industry and macro-related uncertainty, for the first quarter of 2024, we expect revenues before reimbursement to be flat to down in the low single digits, and even draw margins to be 26-27% of revenues before reimbursement as compared to the same period in 2023. For fiscal year 2024, we expect revenues before reimbursement to also be flat to down the low single digits and EBITDA margin to be 25.75 to 26.5% of revenues before reimbursement as compared to 2023. As Catherine mentioned, we are taking actionable steps to strategically align our resources with demand through targeted recruiting and ongoing performance management. As a result, we expect our average technical full-time equivalent employee to decline sequentially 1% in the first quarter of 2024 and 5% as compared to the first quarter of 2023. For the full year, we expect average full-time equivalent employees to be down 6-8% on a year-over-year basis.

For the first quarter, we expect stock based compensation to be seven to seven $3 million in each of the remaining quarters to be four five to $5 $5 million.

For the full year of 2024, we expect stock based compensation to be 21, 5% to $22 million.

For the first quarter, we expect other operating expenses to be 10, eight to $11 $3 million for the full year, we expect other operating expenses to be 44.8 to $45 $8 million.

For the first quarter, we expect G&A expenses to be five $6 million to $6 million for the full year of 2024, we expect G&A expenses to be $24 million to $25 million.

We expect interest income to be one $8 million to $2 million per quarter. In 2024. In addition, we anticipate miscellaneous income to be approximately $750000 per quarter in 2024.

For the first quarter of 2024, we expect the tax rate inclusive of the tax benefit associated with share based awards to be 28% as compared to 18% in the same quarter a year ago.

For the full year the tax rate is expected to be 28% as compared to 26, 2% in 2023, as we will have less tax benefit from share based awards.

Richard L. Schlenker: We expect utilization in the first quarter to be 69-71% as compared to 70.4% in the same quarter of the prior year. We expect full-year utilization to be 68 to 70% as compared to 68.6% in 2023. Additionally, we remain committed to our long-term target of sustained mid-70s utilization. We expect the realized rate increase for the first quarter and full year to be between 3 and 3.5 percent. For the first quarter, we expect stock-based compensation to be $7 to $7.3 million, and each of the remaining quarters to be $4.5 to $5.5 million. For the full year 2024, we expect stock-based compensation to be $21.5 to $22 million. For the first quarter, we expect other operating expenses to be $10.8 to $11.3 million. For the full year, we expect other operating expenses to be $44.8 to $45.8 million. For the first quarter, we expect G&A expenses to be between $5.6 and $6 million.

Capital expenditures for the full year.

Are expected to be $10 million to $12 million.

We are pleased with the strength and durability of our business model and remain confident in our ability to continue to grow profitably.

I will now turn the call back to Catherine for closing remarks.

Thank you rich.

As innovation drives complexity and safety expectations to new heights, the consequences of failure will continues to escalate and our breakthrough insights will illuminate the path forward.

We do anticipate headwinds in 2024, which I've described I firmly believe that our strong market drivers coupled with the actions we are taking to expand our competitive moat and continue developing our exceptional talent position us to deliver long term long term organic revenue growth averaging in the high single digits.

Into the low double digits, along with improved utilization as margin expansion operator.

Operator, we are now ready for questions.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad. If you were using a speakerphone. Please pick up the handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

Richard L. Schlenker: For the full year 2024, we expect G&A expenses to be $24 to $25 million. We expect interest income to be $1.8 to $2 million per quarter in 2024. In addition, we anticipate this year's income to be approximately $750,000 per quarter in 2021. For the first quarter of 2024, we expect the tax rate, inclusive of the tax benefits associated with share-based awards, to be 28%, as compared to 18% in the same quarter a year ago. For the full year, the tax rate is expected to be 28% as compared to 26.2% in 2023, as we will have fewer tax benefits from share-based rewards.

Our first question today is from Andrew Nicholas with William Blair. Please go ahead.

Hi, good afternoon, thanks for taking my questions.

First one I had is just on the quarter specifically.

Got it to mid single digit top line growth came in a bit light of that it sounds like rich that consumer electronics was a couple of million short of of what you had previously assumed is there anything else that specifically.

Specifically deteriorated in the fourth quarter relative to your expectations. It sounds like there's some budget sensitivity in the chemical sector and in some litigation activity being installed by that but I'm just I'm trying to piece together the fourth quarter first before moving on to the guide.

Richard L. Schlenker: Capital expenditures for the full year are expected to be $10 to $12 million. We are pleased with the strength and durability of our business model and remain confident in our ability to continue to grow profitably. I will now turn the call back to Catherine for closing remarks. Thank you, Rich.

Yeah, well you I think you heard it pretty well there in the sense that yes, the consumer electronics being is still lower than we had expected with some of the work being pushed out into the next year.

Really but also you picked up on the point that we did see in the chemicals industry, which is very unusual for US you know normally litigation work.

Catherine Ford Corrigan: As innovation drives complexity and safety expectations to new heights, the consequences of failure will continue to escalate, and our breakthrough insights will illuminate the path forward. While we do anticipate headlines in 2024, which I've described, I firmly believe that our strong market drivers, coupled with the actions we are taking to expand our competitive moat and continue developing our exceptional talent, position us to deliver long-term organic revenue growth averaging in the high single digits to the low double digits, along with improved utilization and margin expansion. Operator, we are now ready. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up the handset before pressing the key. Draw your question. Please press the star, then 2.

Sort of just continues on an interrupted our what we did see there is that clients are you just at least over the short term.

Were willing for some of their longer term.

Butte issues that might not be going to trial for another couple of years are making a choice to at least a pause on that.

That work.

And such so that is did have an impact on that as well.

Okay. Thank you that's helpful. And then I guess, taking that a step further as we look to your 2024 guide first quarter growth.

On the topline relatively consistent or very consistent with what you expect for the full year I would've thought just given the tough comp that that maybe the first quarter or even first half was a little bit more challenge. So can you kind of help me understand the cadence of growth that you expect throughout the year and maybe what's embedded.

Operator: At this time, we will pause momentarily to assemble our roster. Our first question today is from Andrew Nicholas with William Blair. Please go ahead. Hi, good afternoon. Thanks for taking my questions. The first one I had is just on the quarter specifically.

Andrew Owen Nicholas: You got it to the mid-single digit top line growth, but came in a bit light of that. It sounds like, Rich, that consumer electronics was a couple million short of what you had previously assumed. Is there anything else that...

And in your guidance as it relates to the recovery of the consumer electronics business or even that that budget sensitivity you just touched on the answer to my last question.

Richard L. Schlenker: I'm trying to piece together the fourth quarter first before moving on to the guys. Yeah, well, you I think you heard it pretty well there, in the sense that, yes, the consumer electronics are still lower than we had expected, with some of the work being pushed out into the next year, hopefully. But also, you picked up on the point that we did see in the chemicals industry, which is very unusual for us. Normally, litigation work sort of just continues on uninterrupted.

Yeah, Thanks, Andrew I'll.

I'll come in here and.

Add a little more color in terms of the forward looking guidance.

With regard to consumer electronics in particular has to sort of start there you know we had talked in October about how we anticipated that these headwinds you know based on that the final lots of work that we had.

Insight into that we thought that would start to ease sort of coming into the first half of 2024 and that's what we're seeing so this is Scott I mean, there is it's not where it was last year in the first quarter.

Richard L. Schlenker: What we did see there is that clients, just at least over the short term, were willing for some of their longer-term dispute issues that might not be going to trial for another couple of years, making a choice to at least pause that work and such. So that did have an impact on that as well. Okay, thank you.

But we are seeing an improvement there and we're very pleased to be.

Working on those engagements and to see that momentum you know, we do have a funnel that we have some visibility into for Q2 and that you know it is looking looking positive in terms of continuing and you know, whereas normally we would have a bit more visibility into the later quarters in the year.

Catherine Ford Corrigan: That's helpful. And then, taking that a step further, as we look to your 2024 guide, first quarter growth on the top line should be relatively consistent or very consistent with what you expect for the full year. I would have thought, just given the tough comps, that maybe the first quarter or even first half would be a little bit more challenged, so can you kind of help me understand the cadence of growth that you expect throughout the year and maybe what's embedded in your guidance as it relates to, you know, the recovery of the consumer electronics business or even that budget sensitivity you just touched on here? Yeah, Andrew.

At this point, we have less visibility into that than we normally do you and so you know that is factoring in when we think about what that full year guidance is going to look like.

Some of that uncertainty you know how do we how do we think about the acceleration of that growth its tough to precisely predict 'twenty 'twenty four but.

You know what we are doing is we're <unk>.

Absolutely engaged with our clients we are getting their feedback we are hearing from them over and over about.

How much they value us and those partnerships and they are really engaging with us about the future and sharing with us what's coming around the band and the challenges that they have so we're really pleased to be.

Being able to position ourselves as a trusted advisors.

Catherine Ford Corrigan: And, you know, I'll come in here and add a little more color in terms of the forward-looking guidance. You know, with regard to consumer electronics in particular, to sort of start there, we had talked in October about how we anticipated that these headwinds, you know, based on the funnel of work that we had insight into, that we thought they would start to ease sort of coming into the first half of 2024, and that's what we're seeing. So, this is good.

On the litigation side, that's another one that where the timing is difficult to predict when I talk to clients and I hear about the environment generally around reactive and litigation work. It is.

It is a very litigious environment.

The verdicts that are coming in and around toxic torch and class actions and product liability lawsuits.

Continue to grow and concern our clients and so long term that you know, we really do see that.

There's a lot of opportunity to position ourselves and to grow in those areas, but you know what's happened is that the uncertainty of right now has caught up with some of our clients. They are tightening their belts until they start to see some signs of stability in that market and so as rich described you get some of those clauses and litigation.

Catherine Ford Corrigan: I mean, it's not where it was last year in the first quarter, but we are seeing an improvement there, and we're very pleased to be, you know, working on those engagements and pursuing that momentum. You know, we do have a funnel that we have some visibility into for Q2, and that, you know, is looking positive in terms of continuing. And, you know, whereas normally we would have a bit more visibility into the later quarters in the year, at this point, we have less visibility into that than we normally do.

Good news is we.

We are we are prepared to search and we have <unk>.

So the ability to do that over time.

Now as we manage the business through this and we strategically align these resources is very important for us to be able to respond to those clients demands.

Very quickly and we continue to have that capability. So I hope that additional color is helpful.

Catherine Ford Corrigan: And so, you know, that is factoring in when we think about what that full-year guidance is going to look like. You know, some of that uncertainty, you know; how do we think about the acceleration of that growth? It's tough to precisely predict 2024, but... You know, what we are doing is we're absolutely engaged with our clients, we get their feedback, we hear from them over and over about, you know, how much they value us in those partnerships, and they're really engaging with us about the future and sharing with us what's coming around the bend and the challenges that they have, so we're really pleased to be, you know, being able to You know, when I talk to clients and I hear about the environment generally around reactive and litigation work, it is... It is a very litigious environment.

It is thank you very much.

The next question is from Josh Chan with UBS. Please go ahead.

Hi, good afternoon, Catherine and rich thanks for taking my questions.

I guess, along the lines of what has changed type of thinking.

You mentioned chemicals and consumer electronics, it sounds like that that might be a few customers. So I guess are we to interpret the the change in growth trajectory is being driven by just a few large customers or are you seeing kind of a more broad based phenomenon.

Yeah. Thanks for that question Josh.

Look I think we you know the broad base a high hurdle you know the reactive business that we have is 60% approximately of our business today.

Catherine Ford Corrigan: The verdicts that are coming in around toxic courts and class actions and product liability lawsuits continue to grow and concern our clients. And so, long term, you know, we really do see that there's a lot of opportunity to position ourselves and grow in those areas. But, you know, what's happened is that the uncertainty of right now has caught up with some of our clients until they start to see some signs of stability in that market. And so, as Rich described, you get some of those clauses in litigation.

As Catherine mentioned that grew in the high teens for the full year and you know that.

That obviously is outsized outsized growth Oh, we're very encouraged not only about that performance for last year.

Does it clearly shows the demand for our services and and what value we offer in all of that but we're also encouraged about it for the long term because it means. This this is really a growing area and we've aligned our resources with the right issues, but we do.

Catherine Ford Corrigan: The good news is, you know, we are prepared to surge, and we have shown the ability to do that over time. As we manage the business through this, and we strategically align these resources, it's very important for us to be able to respond to those clients' demands very quickly, and we continue to have that capability. So I hope that the additional power is helpful. Thank you very much. The next question is from Josh Chan with UBS. Please go ahead.

We expect that that part of the business, yes through.

Tightening of the belt.

But also just sort of against such a high hurdle that we had there will be relatively flat for the you know over the next year.

Is what's playing in there.

Where you know where else do you find clients that are trying to reset their base as an overall organization.

You don't you have the automotive industry that is going through this challenge that Katherine mentioned, where maybe oh, they're aspirational goals around E vs are maybe being a more tempered at this point in time and they're trying to reset how their organization op.

Joshua K. Chan: Hi, good afternoon, Catherine and Richard, questions. Um, I guess along the lines of the "what has changed" type of thinking. I know you mentioned chemicals and consumer electronics. It sounds like that might be a few customers. So I guess, are we to interpret the change in growth trajectory as being driven by just a few large customers? Or are you seeing kind of a more broad-based phenomenon than that?

Rates and focuses on a going forward basis, but it doesn't eliminate.

Any of these disputes that come up are you know are the percept, Ian or or a fact that our people have claims that are out there and theyre going to have to address them, regardless of where they are financially or where some of these opportunities are.

Going for them. So hopefully that gives you a little more insight.

Richard L. Schlenker: Yeah, thanks for that question, Josh. Look, I think the broad-based high hurdle, the reactive business that we have, is 60% of our business today. As Catherine mentioned, that grew in the high teens for the full year.

Okay that makes sense, thanks rich I.

I guess as you guys talk with your customers is it more of a broad based cautiousness around spending in general does any.

Richard L. Schlenker: And that obviously is outsized growth. We're very encouraged not only about that performance for last year because it clearly shows the demand for our services and what value we offer and all that, but we're also encouraged about it for the long term because it means this is really a growing area and we've aligned our resources with the right issues. But we do expect that that part of the business, yes, through tightening up the belt, but also just sort of against such a high hurdle that we have there, will be relatively flat over the next year. And so that is what's playing in there.

Conversations revolve around pricing and weather.

They will give you more business if the price was lower or anything like that at all.

Yeah, So I'll chime in here John.

Look our clients yeah, that's not unusual at all in any environment for our clients to want to talk about price.

But the feedback that we get is that you know it's exactly strategically what we are looking for which is we are reaching to exponent.

For our most.

Notable challenges for the things that are difficult.

Difficult, where we know that we need to be a team I mean, you can always sell more at a higher price at a lower price excuse me, but it's not necessarily about the chasing of volume right. So strategically when I talk with clients and get their feedback and we are not in a mode of.

Richard L. Schlenker: Where else do you find clients that are trying to reset their base as an overall organization? You have the automotive industry that is going through this challenge that Catherine mentioned, where maybe their aspirational goals around EVs are maybe being more tempered at this point in time, and they're trying to reset how their organization operates and focuses on a going forward basis. But it doesn't eliminate any of these disputes that come up, the perception or fact that people have claims that are out there, and they're going to have to address them regardless of where they are financially or where some of these opportunities are going for them.

Well, we just can't use you guys anymore, because you're too expensive right. It is now we that we incredibly value.

What we are doing with you at our partnership we are absolutely going to continue to use you who do you have coming up in your pipeline.

That is a rising star that we can look to as part of the next generation. You know this is a way that we're able to bring our newer folks into those more lead roles. That's been led development paradigm of exponent over many many many decades.

Create those conversations with our clients really do create those opportunities and so I think that dynamic is very consistent with how its been but theyre facing uncertainty and if they have an opportunity to wait a few months before you know they have to submit their brief or submit their expert reports it.

Richard L. Schlenker: So hopefully, that gives you a little more insight. Okay, that makes sense. Thanks, Rich.

Catherine Ford Corrigan: I guess as you guys talk with your customers, is it more of a broad based cautiousness around spending in general? Does any conversation revolve around pricing and whether, They will give you more business if the price is lower, anything like that at all. Yeah, so I'll chime in here, Josh, you know, look, our clients, you know, it's not unusual at all in any environment for our clients to want to talk about price, you know, but the feedback that we get is that, you know, it's exactly strategically what we are looking for, which is we are reaching to exponents for our most formidable challenges, for the things that are the most difficult, where we know that we need the AP. I mean, you know, you can always sell more at a higher price, at a lower price, excuse me, but it's not necessarily about the chasing of volume, right, you know, so strategically when I talk with clients and get their feedback, you know, we are not in a mode of, you know, well, we just can't use you guys anymore because you're too expensive, right, it is, no, we incredibly value what we are doing with you and our partnership, we are absolutely going to continue to use you, who do you have coming?

That judge will let them take that delay there looking for those opportunities that is really where the rubber meets the road with that and if they can come back to us and say you know look the expert report isn't it isn't going to be do we just got it pushed by six months. We want you guys to ease back maybe on your burn rate and sell better than that.

Those are the kinds of things that work that we're dealing with.

Okay. That's really helpful color. Thank you Catherine.

And then I guess.

I guess the last one from me.

During the slower times like this I guess is there an opportunity for you to generate new business that you currently don't know about yet and maybe could you take this opportunity to talk about how new business generation works at excellent. Thank.

Thank you yeah, absolutely Josh so, let's say, it's a critically important focus that we have always a.

But even a sharpened focus now when we look toward you know what is what is that portfolio of services going to look like next year. After year. After one five years or 10 years right. So it's about.

Engaging with our clients, it's about having our teams sitting on.

Industry standards committees, it's about having them with their finger on the pulse at technical and scientific conferences, it's about them being thought leaders, who are up giving keynote addresses you know to those industry and technical conferences.

Catherine Ford Corrigan: Up in your pipeline, that is a rising star that we can look to as part of the next generation. This is a way that we are able to bring newer folks into those more lead roles. That's been the development paradigm of exponents over many, many, many decades, so it creates those conversations with our clients that really create those opportunities, and so I think that dynamic is very consistent with how it's been, you know, but they are If they have an opportunity to wait a few months before, you know, they have to submit their brief or submit their expert reports, if that judge will let them take that delay, they're looking for those opportunities. That is really where the rubber meets the road, and if they can come back to us and say, you know, look, the expert report isn't going to be due, we just got it pushed by six months, we want you guys So those are the kinds of things that we're doing. That's a very helpful color.

These are the ways that we are able to ensure we're staying ahead of the curve with our market positioning ourselves by developing people in these areas, we've been anticipating our clients' needs for decades.

We're doing now in advanced driver assistance systems is a wonderful example, we invested in research we saw the holes in the scientific data five to seven or eight years ago. We made those investments we did that testing we published it we took it on the road and now that the litigation curve in that particular area is accelerating our.

Experts are are the number one in the market for those particular areas. So this is a constant focus for us and with the advent of artificial intelligence and the increase of that in terms of its presence in products. These are areas, where artificial intelligence is asked to make decisions and these are safety.

Critical decisions that health critical decisions and we envision that they're going to be challenges with those decisions and they're not always going to be right and so this client base is going to need the kinds of insights that Exxon. It brings and we're focused on positioning ourselves to be the thought leaders in those areas.

So when I add in here.

It is important.

For everybody to understand that most of our our work or you know as a company. We don't run a backlog report, we don't have multi year contracts for which we are working off and doing it. So when we are developing are.

Catherine Ford Corrigan: Thank you, Catherine. Yeah, I guess the last one for me, during slower times like this, I guess, is there an opportunity for you to generate new business that you currently don't know about yet, and maybe, can you take this opportunity to talk about how new business generation works at Exponent? Thank you.

Our guidance and our forecast, we're going out to our employees and to our business units and getting a forecast for the next 10.

10 weeks, or so and certain areas might have visibility and a certain demand and things that are happening around certain projects beyond then but a lot of it is where is the market going yes, there seems to be elevated amount of litigation or.

Catherine Ford Corrigan: Yeah, absolutely, Josh. So, you know, it's a critically important focus that we always have, but, you know, even a sharpened focus now when we look toward, you know, what is that portfolio of services going to look like next year or the year after or in five years or ten years, right? So it's about engaging with our clients. It's about having our team sitting on industry standards committees. It's about having them with their finger on the pulse at technical and scientific conferences. It's about them being thought leaders who are giving keynote addresses at those industry and technical conferences.

Product launches or where they are in their product lifecycle, what are those trends and where are they going. We also then as Kathryn and I are trying to develop that guidance and looking forward need to be looking at the current market trends and doing that more than we are.

Looking at a particular backlog report on the other hand, you know this is a portfolio of projects to you know remember we do.

Catherine Ford Corrigan: These are the ways that we are able to ensure that we're staying ahead of the curve in our market, positioning ourselves by developing people in these areas. You know, we've been anticipating our clients' needs for decades, and what we're doing now in advanced driver assistance systems is a wonderful example. We invested in research. We saw holes in the scientific data five to seven or eight years ago. We made those investments. We did that testing.

8000, plus projects a year, 20% of those make up.

80% of our revenues very traditional model.

And so we are reliant upon that sort of nice broad portfolio across every sort of major industrial industry across a very diverse set of clients within each industry and then a a then multiple projects.

Catherine Ford Corrigan: We published it. We took it on the road, and now that the litigation curve in that particular area is accelerating, our experts are number one in the market for those particular areas. So this is a constant focus for us, you know, with the advent of artificial intelligence and the increase in that in terms of its presence in products. These are areas where artificial intelligence is asked to make decisions, and these are safety-critical decisions and health-critical decisions, and we anticipate that there are going to be challenges with those decisions, and they're not always going to be right. And so this client base is going to need the kinds of insights that Exponent brings, and we're focused on positioning ourselves to be the thought leaders in those areas. Joshua, I want to add here that it is important for everybody to understand that most of our work, as a company, we don't run a backlog report. We don't have multi-year contracts for which we are working off and doing it.

Within those clients had times within those industries and that is what makes it up.

And many of the projects we're working on today will definitely be going in the second third quarter and some in the fourth and on to 2025, but you know.

The ability that something could settle is always out there it will happen, but there is also the.

The regular flow of business coming in so we're needing to develop our guidance and as such based on that market knowledge that we're collecting in from or are people, who are out in front with our clients.

Okay makes a lot of sense. Thank you both for the color and for your time.

Youre welcome.

The next question is from Tobey Sommer with Truest. Please go ahead.

I was wondering if you could discuss.

Consumer electronics is a category overtime.

The extent to which it.

<unk> grew a to.

To be sort of a larger category in the industry vertical for the company.

Richard L. Schlenker: So when we are developing our guidance and our forecast, we go out to our employees and to our business units and get a forecast for the next, you know, 10 weeks or so. And, you know, certain areas might have visibility and certain demand and things that are happening around certain projects beyond then, but a lot of it is, where is the market going? Yes, there seems to be an elevated amount of litigation or product launches or where they are in their product life cycle. What are those trends, and where are they going?

And the extent to which it's normalized sort of if we could just talk about the the building and then maybe the Ark down as we read more and more about global tech firms.

<unk> on profitable growth and a little bit less of the.

Moonshot sort of characterized prior years.

Yeah, Thanks for that.

It is a it is a very.

Interesting evolution that's occurred in our firm you know it really started a little over 20 years ago that we started to get involved with that industry and that industry really started to evolve.

Richard L. Schlenker: We also, as Catherine and I are trying to develop that guidance and look forward, need to be looking at the current market trends and doing that more than we are looking at a particular backlog report. On the other hand, you know, this is a portfolio of projects to, you know, remember. We do 8,000 plus projects a year, 20% of those make up 80% of our revenues; a very traditional model. And so we are reliant upon that sort of nice, broad portfolio across every sort of major industrial industry, across a very diverse set of clients within each industry, and then multiple projects within those clients at times within those industries. And that is what makes it up.

And Oh, many of the issues that they initially had which is still a big part of what we do for them today is around our batteries or energy storage in those devices and that was one of their most complex challenges they had.

In the late nineties and early two thousands and it still remains there one of their most challenging components that they have today when.

When you think about how those components.

Components of the evolved but what we did in the early part was it was very focused in a complex area for which they inside their organization didn't really have the expertise in that new technology that was coming out and we could and we were experts in failure analysis.

Richard L. Schlenker: And many of the projects we're working on today will definitely be going in the second, third quarter and some in the fourth and on to 2025. But, you know, the ability that something could settle is always out there. It will happen, but there is also the regular flow of business coming in. So we're needing to develop our guidance and such based on that market knowledge that we're collecting from our people who are out in front with our clients. Thank you both for your time. You're welcome. The next question is from Tobey Sommer with Truist. Please go ahead.

And did it for them as they wanted to learn from that and build that back into their design cycle and do it pre launch and build that in the work started to grow into how we could.

Help clients and developing a more reliable and safe products through that period and that really was.

Was the acceleration of our that really allowed this to go from a couple of percent of our revenues are in.

In 2000, probably to.

Tobey Sommer: I was wondering if you could discuss... Consumer electronics as a category over time, the extent to which it... grew to be sort of a larger category, an industry vertical for the company to the extent to which it's normalized. Sort of if we could just talk about the building and then maybe the arc down as we read more and more about global tech firms focused on profitable growth with a little bit less of the moonshots that have characterized prior years. Yeah, thanks for that.

Begin to accelerating and grow to nearly a 10% probably parts of the business in the early 2000 tens and beyond that was there as we started to get into the other components of their device all of those questions about bringing in.

Our new types of ceramics, and glasses and in electronics and in doing all of that they began to realize the breath of ex bone its expertise and how we could again move upstream for them instead of just reacting on a failure analysis.

Richard L. Schlenker: It is a very interesting evolution that's occurred in our firm. You know, it really started a little over 20 years ago when we started to get involved with that industry, and that industry really started to evolve. And many of the issues that they initially had, which are still a big part of what we do for them today, are around batteries or energy storage in those devices.

And really at a bar over that over that sort of 10 year period of time, we really across the industry became a trusted adviser moved upstream we're helping them in their design process, helping them evaluate suppliers, helping them as products were being designed and developed a day.

Richard L. Schlenker: And that was one of their most complex challenges they had in the late 1990s and early 2000s, and it still remains one of their most challenging components that they have today when you think about how those components have evolved. But what we did in that early part was it was very focused on a complex area for which they, inside their organization, didn't really have the expertise in that new technology that was coming out, and we could, and we were experts in failure analysis and did it for them. As they wanted to learn from that and build that back into their design cycle and do it prelaunch, and build that in, the work started to grow into how we could help clients in developing a more reliable and safe product through that period.

<unk> failure modes, and all out are correct and address those as that evolves. We were very hardware driven at that point in time.

And as we got as clients wanted to begin and move in the early days of really using biometrics and other algorithms or AI at the early days there are into their products.

They needed to valid.

Left and validate the there debate you know these are these functions within their devices and to be able to do that and know that you could launch a product that was not gonna have any biases in it in the in the marketplace became a key driver.

Richard L. Schlenker: And that really was the acceleration of our, that really allowed this to go from a couple of percent of our revenues in 2000 to begin to accelerate and grow to nearly 10 percent, probably plus, of the business in the early 2010s and beyond. And that was there as we started to get into the other components of their device. All those questions about bringing in new types of ceramics and glasses and electronics and doing all that, they began to realize the breadth of exponents' expertise and how we could, again, move upstream for them instead of just reacting on a failure analysis basis. And really, over that sort of 10-year period of time, we really, across the industry, became a trusted advisor and moved upstream. We were helping them in their design process, helping them evaluate suppliers, helping them, as products were being designed and developed, identify failure modes and how to correct and address those. As that evolved, we were very hardware-driven at that point in time.

As you moved from you know a thumbprint recognition the facial recognition and beyond and that's where we are you know came to a client there really wasn't somebody else doing it and came up with how we could go out collect the information that would help them and validating their models.

And be able to go to market with.

These products that were highly reliable in that and so that work began in the mid teens.

<unk> 16, or a timeframe and since that time as you've heard us talk about our user study or human subjects studies, we help them as they have evolved their products to be so integrated with the human behavior and such in the human <unk>.

Firemen.

Go out and collect information and help them in that process.

Doing it both in the human factor side in the bio mechanical safety side.

As well as just great data that might not even be a human subject for there.

Richard L. Schlenker: And as we've got, as clients wanted to begin and move in the early days of really using biometrics and other, you know, algorithms or AI at the early stages there in their products, they needed to, you know, collect and validate these functions within their devices. And to be able to do that and know that you could launch a product that was not going to have any biases in it in the marketplace became a key driver as you moved from, you know, thumbprint recognition to facial recognition and beyond. And that's where we, you know, came to the client. There really wasn't anybody else doing it, so we came up with how we could go out, collect the information that would help them in validating their models, and be able to go to market with these products that were highly reliable in that. And so that work began in the mid-teens, you know, the 2016 or so timeframe.

For the machine learning that they were doing in developing that and that has you know.

Definitely gone from being none of our our business in two.

2015, let's say to being a.

Sort of mid single digit a high single digit percentage of the business are you know that we had you know in 2022 or so we did see as clients hit the this challenging market environment, but it also was very.

Much about where they just happen to be in their product life cycles that also impacted how much of that activity that they were engaging us with in 2023 and that is where we hit a lot of it yes, we did see tightening.

Richard L. Schlenker: And since that time, as you've heard us talk about our user study or human subject study, we've helped them as they have evolved their products to be so integrated with human behavior and such in the human environment to go out and collect information and help them in that process of doing it both on the human factor side, on the biomechanical safety side, as well as just great data that might not even be a human subject for their machine learning that they were doing in developing that And that has, you know, definitely gone from being none of our business in, you know, 2015, let's say, to being a, you know, sort of mid-single-digit, high-single-digit percentage of the business that we had in 2022 or so.

You would expect but it didn't go away on that hardware sort of failure analysis. We definitely if we just took that we worked down with clients, but not to the degree that some of this that was driven off of product lifecycle and probably the tightening of the belt that occurred really in this area.

Humans subject matter studies that we had in that period of time. So what we saw was you know that our business in our consumer electronics and in 2022 was a little over 20% of our business, 22% of our business in 2022.

And with this pullback that we described it became 16% of our business in 2023, and only 14% of our business in the fourth quarter. So that is the headwind that we're having in our in that area and sort of the evolution over the last 20 or 25 years.

<unk> of our business.

Richard L. Schlenker: We did see, as clients hit the, you know, challenging market environment, but it also was very much about where they just happened to be in their product life cycle that also impacted how much of that activity that they were engaging us with in 2023. And that is where we hit a lot of it. Yes, we did see tightening, as you would expect, but it didn't go away on that hardware sort of failure analysis.

Okay. Thanks for that expansive answer is it does that 14% represents.

In your view.

Normalized proportion.

I'm just trying to understand if there is a.

Kind of another leg to it.

To go in in this area.

And in maybe as an additional follow up to that and I'll get back in the queue. After this is there.

Richard L. Schlenker: We definitely, if we just took that, we were down with clients, but not to the degree that some of this was driven off a product life cycle and probably the tightening of the belt that occurred really in this area of human subject matter studies that we had at that period of time. What we saw was, you know, that our business in consumer electronics in 2022 was a little over 20% of our business, 22% of our business in 2022, and with this pullback that we described, it became 16% of our business in 2023 and only 14% of our business in the fourth quarter. So that is the headwind that we're having in that area and sort of the evolution of the last 20 to 25 years of our business. Okay, thanks for that extensive answer. Does that 14% represent..., in your view, a normalized proportion?

Another.

Industry vertical.

That has seen sort of extraordinarily extraordinary growth over the last two or three years that you would care to highlight exceptional.

Thanks, Tobey I'll I'll start to chime in and I appreciate it Richard.

You have the history, there, but in terms of forward looking growth opportunities in the electronic space, we absolutely believe.

That we can continue to achieve growth in this sector when we look at.

The evolution of the products when we look at the role of official intelligence and being able to create the kinds of user experiences.

And the kind of performance that is seeing demand demanded by these the other piece that I think is really important is the blurring of the line between what is a consumer electronic device and what is a medical device.

Tobey Sommer: I'm just trying to understand if there's kind of another leg to go in this area, and maybe as an additional follow-up to that, and I'll get back to you after. Is there another industry vertical that has seen sort of extraordinary growth over the last two or three years that you would care to highlight? Thanks, Toby. I'll sort of chime in. And I appreciated Rich's view of the history there.

This is a place where those lines really are blurring I'm you know when you're when you're doing it as a wellness feature it's one thing and when Youre, putting a a feature on your device. That's going to tell you. You know you are about to have a heart attack and those are two very different things in the FDA starts getting interested in that and so forth and so.

We are in an exceptional position with our experienced across life sciences, as well as electronics as well as our ability to do human subject testing that is sufficiently rigorous to be accepted by the food and drug administration, you know because of our knowledge of those.

Catherine Ford Corrigan: But in terms of forward-looking growth opportunities in the electronic space, we absolutely believe that we can continue to achieve growth in this sector. When we look at the evolution of products, when we look at the role of artificial intelligence in being able to create the kinds of user experiences and the kind of performance that is being demanded by these. The other piece that I think is really important is the blurring of the line between what is a consumer electronic device and what is a medical device. This is the place where those lines are really blurring.

Regulatory environments are able to do that which is an absolute competitive advantage.

All of these things we believe are great opportunities for us as we go forward. Despite what we have seen in terms of this you know this reduction in the overall percentage going forward. We are excited about the opportunities and we're positioning ourselves for us.

Tobey as of.

To answer the your last question, which was really about you know we've seen.

Catherine Ford Corrigan: You know, when you're doing it as a wellness feature, it's one thing, and when you're putting a feature on your device that's going to tell you, you know, you're about to have a heart attack, those are two very different things. And the FDA starts getting interested in that, and so forth. And so, we are in an exceptional position with our experience across life sciences as well as electronics, as well as our ability to do human subject testing that is sufficiently rigorous to be accepted by the Food and Drug Administration. You know, because of our knowledge of those regulatory environments, we are able to do that, which is an absolute competitive advantage. You know, all of these things, we believe, are great opportunities for us as we go forward. Despite what we have seen in terms of this, you know, this reduction in the overall percentage going forward, we are excited about the opportunities, and we're positioning ourselves for those.

Some other areas that have had some higher growth over the last couple of years, Yeah, we definitely saw as.

It was highlighted in Catherine's comments in the release that our transportation area and particularly.

That sector within the automotive was you.

It did grow in the mid Twenty's as a percentage of of our if that industry I'm sorry grew there. So that was strong in the ER and the last year that has a very diversified portfolio.

Of our clients industry clients and experts that we have there.

A lot of that Oh, good growth is being driven by the advanced driver assistance part of it not necessarily buy because clients were leaning in on just a V. Kathryn did the highlights are one of our recent engagements there, but but it is broad.

Catherine Ford Corrigan: Tobey, to answer your last question, which was really about, you know, we've seen some other areas that have had higher growth over the last couple of years, you know, we definitely saw, as was highlighted in Catherine's comments in the release, that our transportation and, particularly, that sector within the automotive industry did grow in the mid-20s as a percentage of our, that industry, I'm sorry, grew there, so that was strong in That is a very diversified portfolio of clients and experts that we have there. A lot of that, you know, good growth is being driven by the advanced driver assistance part of it, not necessarily because clients were leaning in on just AD.

Based we definitely have work in the E Bay area I would say is that didn't grow as much as we expected it to grow in the last year, which is consistent with what we're seeing from the industry and its challenges.

But we what we do know is that that fleet, a baby evs or electric vehicles.

It's going to grow and grow substantially it may not grow at the rate that every you know that the the numbers the industry was putting out but that is going to be a larger part of the fleet and what we're seeing is continued complications and recalls.

Across the client base in this area.

But again it still remains a small part of our total portfolio.

Catherine Ford Corrigan: Catherine did highlight one of our recent engagements there, but it is broad-based. We definitely have work in the EV area. I would say that didn't grow as much as we expected it to grow in the last year, which is consistent with what we're seeing from the industry and its challenges, you know, but what we do know is that that fleet of ADs, EVs, or electric vehicles, you know, is going to grow and grow substantially. It may not grow at the rates that every, you know, the numbers the industry was putting out, but that is going to be a larger part of the fleet, and what we're seeing is continued complications and recalls across the client base in this area, but again, it still remains a small part of our total portfolio that's in that area, and we would expect, even with the industry's slower growth, that it's going to be a growing area for us over the next several years to decades.

It's in that area and we would expect even with the industry slower growth than it's going to be a growing area for us over the next.

Several years decades.

Thank you.

This concludes our question and answer session and also the conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Richard L. Schlenker: Thank you. This concludes our question and answer session, and also the conference call has now concluded. Thank you for attending today's presentation.

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Operator: You may now disconnect, www.expo.com, Day. Day. Day. The Exponent, EXPO.EXPO.ORG EXPO EXPO, www.expo.com EXPO 2018 EXPO 2019, Expo Expo

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