Exponent 10Q 2023 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to___________

Commission File Number 0-18655

EXPONENT, INC.

(Exact name of registrant as specified in its charter)


delaware		77-0218904
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

149 COMMONWEALTH DRIVE, MENLO PARK, California		94025
(Address of principal executive office)		(Zip Code)

(650) 326-9400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.001 per share	EXPO	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes		☒		No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).


Yes		☒		No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes				No		☒

As of October 27, 2023, the latest practicable date, the registrant had 50,622,438 shares of common stock outstanding.

EXPONENT, INC.

FORM 10-Q

TABLE OF CONTENTS


		Page

PART I – FINANCIAL INFORMATION		3

Item 1.	Financial Statements (unaudited):	3

	Condensed Consolidated Balance Sheets September 29, 2023 and December 30, 2022	3

	Condensed Consolidated Statements of Income For the Three and Nine Months Ended September 29, 2023 and September 30, 2022	4

	Condensed Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 29, 2023 and September 30, 2022	5

	Condensed Consolidated Statements of Stockholders’ Equity For the Three and Nine Months Ended September 29, 2023 and September 30, 2022	6

	Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 29, 2023 and September 30, 2022	8

	Notes to Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	30

PART II – OTHER INFORMATION		31

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	31

Item 6.	Exhibits	32

	Signatures	33

- 2 -

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

EXPONENT, INC.

Condensed Consolidated Balance Sheets

September 29, 2023 and December 30, 2022

(in thousands, except par value)

(unaudited)


	September 29, 2023			December 30, 2022
Assets
Current assets:
Cash and cash equivalents	$	137,099		$	161,458
Accounts receivable, net of allowance for contract losses and doubtful accounts of $6,400 and $6,193 at September 29, 2023 and December 30, 2022, respectively		181,754			170,114
Prepaid expenses and other current assets		24,463			17,585
Total current assets		343,316			349,157

Property, equipment and leasehold improvements, net of accumulated depreciation and amortization of $109,435 and $103,034 at September 29, 2023 and December 30, 2022, respectively		76,246			65,539
Operating lease right-of-use assets		24,302			18,007
Goodwill		8,607			8,607
Deferred income taxes		54,448			53,909
Deferred compensation plan assets		90,727			89,437
Other assets		4,816			2,006
Total assets	$	602,462		$	586,662

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	19,640		$	29,115
Accrued payroll and employee benefits		93,828			105,822
Deferred revenues		10,489			18,834
Operating lease liabilities		5,700			5,258
Total current liabilities		129,657			159,029

Other liabilities		4,136			2,355
Deferred compensation plan liabilities		93,070			91,183
Operating lease liabilities		21,964			13,343
Total liabilities		248,827			265,910
Stockholders’ equity:
Common stock, $0.001 par value; 120,000 shares authorized; 65,707 shares issued at September 29, 2023 and December 30, 2022		66			66
Additional paid-in capital		320,152			301,002
Accumulated other comprehensive loss
Foreign currency translation adjustments		(3,775	)		(3,587	)
Retained earnings		566,518			528,810
Treasury stock, at cost; 15,040 and 15,064 shares held at September 29, 2023 and December 30, 2022, respectively		(529,326	)		(505,539	)
Total stockholders’ equity		353,635			320,752
Total liabilities and stockholders’ equity	$	602,462		$	586,662

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

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EXPONENT, INC.

Condensed Consolidated Statements of Income

For the Three and Nine Months Ended September 29, 2023 and September 30, 2022

(in thousands, except per share data)

(unaudited)


	Three Months Ended						Nine Months Ended
	September 29, 2023			September 30, 2022			September 29, 2023		September 30, 2022
Revenues:
Revenues before reimbursements	$	124,959		$	115,143		$	383,317	$	351,231
Reimbursements		8,377			12,036			30,549		34,707
Revenues		133,336			127,179			413,866		385,938
Operating expenses:
Compensation and related expenses		74,011			62,779			241,028		189,982
Other operating expenses		10,997			8,822			30,863		25,742
Reimbursable expenses		8,377			12,036			30,549		34,707
General and administrative expenses		6,018			6,729			18,498		16,700
Total operating expenses		99,403			90,366			320,938		267,131
Operating income		33,933			36,813			92,928		118,807
Other income, net:
Interest income, net		1,858			638			5,221		834
Miscellaneous income (expense), net		(1,774	)		(3,975	)		7,659		(17,926	)
Total other income (expense), net		84			(3,337	)		12,880		(17,092	)
Income before income taxes		34,017			33,476			105,808		101,715
Income taxes		9,479			9,034			26,398		21,909
Net income	$	24,538		$	24,442		$	79,410	$	79,806
Net income per share:
Basic	$	0.48		$	0.47		$	1.55	$	1.54
Diluted	$	0.48		$	0.47		$	1.54	$	1.52
Shares used in per share computations:
Basic		51,203			51,492			51,197		51,934
Diluted		51,645			52,008			51,680		52,489
Cash dividends declared per common share	$	0.26		$	0.24		$	0.78	$	0.72

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements

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EXPONENT, INC.

Condensed Consolidated Statements of Comprehensive Income

For the Three and Nine Months Ended September 29, 2023 and September 30, 2022

(in thousands)

(unaudited)


	Three Months Ended						Nine Months Ended
	September 29, 2023			September 30, 2022			September 29, 2023			September 30, 2022
Net income	$	24,538		$	24,442		$	79,410		$	79,806
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax		(515	)		(1,493	)		(188	)		(3,153	)
Comprehensive income	$	24,023		$	22,949		$	79,222		$	76,653

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements

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EXPONENT, INC

Condensed Consolidated Statements of Stockholders’ Equity

For the Three and Nine Months Ended September 29, 2023 and September 30, 2022

(in thousands)

(unaudited)


	Three and Nine Months Ended September 29, 2023
	Common Stock				Additional paid-in			Accumulated other comprehensive			Retained			Treasury Stock
	Shares		Amount		capital			loss			earnings			Shares			Amount			Total
Balance at December 30, 2022		65,707	$	66	$	301,002		$	(3,587	)	$	528,810			15,064		$	(505,539	)	$	320,752
Employee stock purchase plan		-		-		1,015			-			-			(12	)		128			1,143
Amortization of unrecognized stock-based compensation		-		-		6,627			-			-			-			-			6,627
Foreign currency translation adjustments		-		-		-			327			-			-			-			327
Grant of restricted stock units to settle accrued bonus		-		-		10,497			-			-			-			-			10,497
Settlement of restricted stock units		-		-		(1,817	)		-			(1,009	)		(186	)		(7,094	)		(9,920	)
Exercise of stock options						22									(8	)		78			100
Dividends and dividend equivalent rights		-		-		-			-			(27,319	)		-			-			(27,319	)
Net income		-		-		-			-			54,872			-			-			54,872
Balance at June 30, 2023		65,707	$	66	$	317,346		$	(3,260	)	$	555,354			14,858		$	(512,427	)	$	357,079
Employee stock purchase plan		-		-		498			-			-			(7	)		71			569
Amortization of unrecognized stock-based compensation		-		-		2,308			-			-			-			-			2,308
Purchase of treasury stock		-		-		-			-			-			189			(16,970	)		(16,970	)
Foreign currency translation adjustments		-		-		-			(515	)		-			-			-			(515	)
Dividends and dividend equivalent rights		-		-		-			-			(13,374	)		-			-			(13,374	)
Net income		-		-		-			-			24,538			-			-			24,538
Balance at September 29, 2023		65,707	$	66	$	320,152		$	(3,775	)	$	566,518			15,040		$	(529,326	)	$	353,635

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

- 6 -

EXPONENT, INC

Condensed Consolidated Statements of Stockholders’ Equity

For the Three and Nine Months Ended September 29, 2023 and September 30, 2022

(in thousands)

(unaudited)


	Three and Nine Months Ended September 30, 2022
	Common Stock				Additional paid-in			Accumulated other comprehensive			Retained			Treasury Stock
	Shares		Amount		capital			income (loss)			earnings			Shares			Amount			Total
Balance at December 31, 2021		65,707	$	66	$	281,419		$	(1,983	)	$	478,370			13,591		$	(340,807	)	$	417,065
Employee stock purchase plan		-		-		961			-			-			(12	)		109			1,070
Amortization of unrecognized stock-based compensation		-		-		5,939			-			-			-			-			5,939
Purchase of treasury stock		-		-		-			-			-			1,273			(111,843	)		(111,843	)
Foreign currency translation adjustments		-		-		-			(1,660	)		-			-			-			(1,660	)
Grant of restricted stock units to settle accrued bonus		-		-		10,200			-			-			-			-			10,200
Settlement of restricted stock units		-		-		(2,421	)		-			(1,392	)		(262	)		(9,091	)		(12,904	)
Unrealized gain on investments																					-
Dividends and dividend equivalent rights		-		-		-			-			(25,737	)		-			-			(25,737	)
Net income		-		-		-			-			55,364			-			-			55,364
Balance at July 1, 2022		65,707		66		296,098			(3,643	)		506,605			14,590			(461,632	)		337,494
Employee stock purchase plan		-		-		492			-			-			(7	)		65			557
Amortization of unrecognized stock-based compensation		-		-		1,999			-			-			-			-			1,999
Purchase of treasury stock		-		-		-			-			-			335			(30,783	)		(30,783	)
Foreign currency translation adjustments		-		-		-			(1,493	)		-			-			-			(1,493	)
Dividends and dividend equivalent rights		-		-		-			-			(12,416	)		-			-			(12,416	)
Net income		-		-		-			-			24,442			-			-			24,442
Balance at September 30, 2022		65,707	$	66	$	298,589		$	(5,136	)	$	518,631		$	14,918		$	(492,350	)	$	319,800

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

- 7 -

EXPONENT, INC.

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 29, 2023 and September 30, 2022

(in thousands)

(unaudited)


	Nine Months Ended
	September 29, 2023			September 30, 2022
Cash flows from operating activities:
Net income	$	79,410		$	79,806
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, equipment and leasehold improvements		6,535			5,224
Provision for contract losses and doubtful accounts		1,911			2,112
Stock-based compensation		17,177			16,072
Deferred income tax provision		(539	)		(3,955	)
Changes in operating assets and liabilities:
Accounts receivable		(13,551	)		(28,265	)
Prepaid expenses and other current assets		(5,886	)		(7,583	)
Change in operating leases		(451	)		(132	)
Accounts payable and accrued liabilities		(7,094	)		5,140
Accrued payroll and employee benefits		(13,124	)		(11,211	)
Deferred revenues		(8,345	)		(3,971	)
Net cash provided by operating activities		56,043			53,237
Cash flows from investing activities:
Capital expenditures		(14,422	)		(9,108	)
Net cash used in investing activities		(14,422	)		(9,108	)
Cash flows from financing activities:
Payroll taxes for restricted stock units		(9,920	)		(12,904	)
Repurchase of common stock		(16,970	)		(142,195	)
Exercise of stock-based payment awards		1,812			1,627
Dividends and dividend equivalents rights		(40,894	)		(37,084	)
Net cash used in financing activities		(65,972	)		(190,556	)
Effect of foreign currency exchange rates on cash and cash equivalents		(8	)		(2,817	)
Net change in cash and cash equivalents		(24,359	)		(149,244	)
Cash and cash equivalents at beginning of period		161,458			297,687
Cash and cash equivalents at end of period	$	137,099		$	148,443

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

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EXPONENT, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Presentation

Exponent, Inc. (referred to as the “Company” or “Exponent”) is an engineering and scientific consulting firm that provides solutions to complex problems. The Company operates on a 52-53 week fiscal year ending on the Friday closest to the last day of December.

The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission. Accordingly, they do not contain all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments which are necessary for the fair presentation of the condensed consolidated financial statements have been included and all such adjustments are of a normal and recurring nature. The operating results for the three and nine months ended September 29, 2023 are not necessarily representative of the results of future quarterly or annual periods. The following information should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2022, which was filed with the U.S. Securities and Exchange Commission on February 24, 2023.

The unaudited condensed consolidated financial statements include the accounts of Exponent and its subsidiaries, which are all wholly owned. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Items subject to such estimates and assumptions include accounting for revenue recognition and estimating the allowance for contract losses and doubtful accounts. Actual results could differ from those estimates.

Note 2: Revenue Recognition

Substantially all of the Company’s engagements are performed under time and materials or fixed-price arrangements. For time and materials contracts, the Company utilizes the practical expedient under Accounting Standards Codification 606 – Revenue from Contracts with Customers, which states that if an entity has a right to consideration from a customer in an amount that corresponds directly with the value of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided) then the entity may recognize revenue in the amount to which the entity has a right to invoice.

The following table discloses the percentage of the Company’s revenue generated from time and materials contracts:


	Three Months Ended						Nine Months Ended
	September 29, 2023			September 30, 2022			September 29, 2023			September 30, 2022
Engineering & Other Scientific		61	%		64	%		63	%		63	%
Environmental and Health		15	%		14	%		15	%		16	%
Total time and materials revenues		76	%		78	%		78	%		79	%

For fixed-price contracts, the Company recognizes revenue over time because of the continuous transfer of control to the customer. The customer typically controls the work in process as evidenced either by contractual termination clauses or by the Company’s rights to payment for work performed to date to deliver services that do not have an alternative use to the Company. Revenue for fixed-price contracts is recognized based on the relationship of incurred labor hours at standard rates to the Company’s estimate of the total labor hours at standard rates it expects to incur over the term of the contract. The Company believes this methodology achieves a reliable measure of the revenue

- 9 -

from the consulting services it provides to its customers under fixed-price contracts given the nature of the consulting services the Company provides.

The following table discloses the percentage of the Company’s revenue generated from fixed price contracts:


	Three Months Ended						Nine Months Ended
	September 29, 2023			September 30, 2022			September 29, 2023			September 30, 2022
Engineering & Other Scientific		23	%		21	%		20	%		20	%
Environmental and Health		1	%		1	%		2	%		1	%
Total fixed price revenues		24	%		22	%		22	%		21	%

Deferred revenues represent amounts billed to clients in advance of services provided. During the third quarter of 2023, $4,045,000 of revenues were recognized that were included in the deferred revenue balance at June 30, 2023. During the first nine months of 2023, $13,393,000 of revenues were recognized that were included in the deferred revenue balance at December 30, 2022.

Reimbursements, including those related to travel and other out-of-pocket expenses, and other similar third- party costs such as the cost of materials and certain subcontracts, are included in revenues, and an equivalent amount of reimbursable expenses are included in operating expenses. Any mark-up on reimbursable expenses is included in revenues before reimbursements. The Company reports revenues net of subcontractor fees for certain subcontracts where the Company has determined that it is acting as an agent because its performance obligation is to arrange for the provision of goods or services by another party. The total amount of subcontractor fees not included in revenues because the Company was acting as an agent were $2,379,000 and $6,996,000 during the third quarter of 2023 and 2022, respectively, and $10,727,000 and $18,040,000 during the first nine months of 2023 and 2022, respectively.

- 10 -

Note 3: Fair Value Measurements

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including money market securities, trading fixed income and equity securities held in its deferred compensation plan and the liability associated with its deferred compensation plan. There were no transfers between fair value measurement levels during the three and nine months ended September 29, 2023 and September 30, 2022. Any transfers between fair value measurement levels would be recorded on the actual date of the event or change in circumstances that caused the transfer. The fair value of these certain financial assets and liabilities was determined using the following inputs at September 29, 2023:


	Fair Value Measurements at Reporting Date Using
(In thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market securities (1)	$	53,978	$	53,978	$	-	$	-
Fixed income trading securities held in deferred compensation plan (2)		33,928		33,928		-		-
Equity trading securities held in deferred compensation plan (2)		71,921		71,921		-		-
Total	$	159,827	$	159,827	$	-	$	-
Liabilities
Deferred compensation plan (3)		107,223		107,223		-		-
Total	$	107,223	$	107,223	$	-	$	-

(1)

Included in cash and cash equivalents on the Company’s unaudited condensed consolidated balance sheet.

(2)

Included in prepaid expenses and other current assets and deferred compensation plan assets on the Company’s unaudited condensed consolidated balance sheet.

(3)

Included in accrued payroll and employee benefits and deferred compensation plan liabilities on the Company’s unaudited condensed consolidated balance sheet.

- 11 -

The fair value of these certain financial assets and liabilities was determined using the following inputs at December 30, 2022:


	Fair Value Measurements at Reporting Date Using
(In thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market securities (1)	$	52,159	$	52,159	$	-	$	-
Fixed income trading securities held in deferred compensation plan (2)		32,851		32,851		-		-
Equity trading securities held in deferred compensation plan (2)		67,880		67,880		-		-
Total	$	152,890	$	152,890	$	-	$	-
Liabilities
Deferred compensation plan (3)		101,354		101,354		-		-
Total	$	101,354	$	101,354	$	-	$	-

(1)

Included in cash and cash equivalents on the Company’s unaudited condensed consolidated balance sheet.

(2)

Included in prepaid expenses and other current assets and deferred compensation plan assets on the Company’s unaudited condensed consolidated balance sheet.

(3)

Included in accrued payroll and employee benefits and deferred compensation plan liabilities on the Company’s unaudited condensed consolidated balance sheet.

Money market securities as of September 29, 2023 and December 30, 2022 represent obligations of the United States Treasury. Fixed income and equity trading securities represent mutual funds held in the Company’s deferred compensation plan. See Note 6 for additional information about the Company’s deferred compensation plan.

Cash and cash equivalents consisted of the following as of September 29, 2023:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
(In thousands)	Cost		Gains		Losses		Fair Value
Classified as current assets:
Cash	$	83,121	$	-	$	-	$	83,121
Cash equivalents:
Money market securities		53,978		-		-		53,978
Total cash equivalents		53,978		-		-		53,978
Total cash and cash equivalents		137,099		-		-		137,099

Cash and cash equivalents consisted of the following as of December 30, 2022:


	Amortized		Unrealized		Unrealized		Estimated
(In thousands)	Cost		Gains		Losses		Fair Value
Classified as current assets:
Cash	$	109,299	$	-	$	-	$	109,299
Cash equivalents:
Money market securities		52,159		-		-		52,159
Total cash equivalents		52,159		-		-		52,159
Total cash and cash equivalents	$	161,458	$	-	$	-	$	161,458

- 12 -

At September 29, 2023 and December 30, 2022, the Company did not have any assets or liabilities valued using significant unobservable inputs.

The following financial instruments are not measured at fair value on the Company's unaudited condensed consolidated balance sheet at September 29, 2023 and December 30, 2022, but require disclosure of their fair values: accounts receivable, other assets and accounts payable. The estimated fair value of such instruments at September 29, 2023 and December 30, 2022 approximates their carrying value as reported on the Company’s unaudited condensed consolidated balance sheet.

Note 4: Net Income Per Share

Basic per share amounts are computed using the weighted-average number of common shares outstanding during the period. Diluted per share amounts are calculated using the weighted-average number of common shares outstanding during the period and, when dilutive, the weighted-average number of potential common shares from the issuance of common stock to satisfy outstanding restricted stock units and the exercise of outstanding options to purchase common stock using the treasury stock method.

The following schedule reconciles the shares used to calculate basic and diluted net income per share:


	Three Months Ended				Nine Months Ended
(In thousands)	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Shares used in basic per share computation		51,203		51,492		51,197		51,934
Effect of dilutive common stock options outstanding		183		202		195		202
Effect of dilutive restricted stock units outstanding		259		314		288		353
Shares used in diluted per share computation		51,645		52,008		51,680		52,489

Common stock options to purchase 63,333 shares were excluded from the diluted per share calculation for the three months ended September 29, 2023 due to their anti-dilutive effect. Common stock options to purchase 24,835 shares were excluded from the diluted per share calculation for the nine months ended September 29, 2023, due to their anti-dilutive effect. There were no equity awards excluded from the diluted per share calculation for the three and nine months ended September 30, 2022.

Note 5: Stock-Based Compensation

Restricted Stock Units

Restricted stock unit grants are designed to attract and retain employees, and to better align employee interests with those of the Company’s stockholders. For a select group of employees, up to 40% of their annual bonus is settled with fully vested restricted stock unit awards. Under these fully vested restricted stock unit awards, the holder of each award has the right to receive one share of the Company’s common stock for each fully vested restricted stock unit four years from the date of grant. Each individual who receives a fully vested restricted stock unit award is also granted a matching number of unvested restricted stock unit awards. Unvested restricted stock unit awards are also granted for select new hires and promotions. These unvested restricted stock unit awards generally cliff vest four years from the date of grant, at which time the holder of each award will have the right to receive one share of the Company’s common stock for each restricted stock unit award provided the holder of each award has met certain employment conditions. In the case of retirement at 59½ years or older, all unvested restricted stock unit awards will continue to vest, provided that the holder of each award does all consulting work through the Company and does not become an employee for a past or present client, beneficial party or competitor of the Company.

The value of these restricted stock unit awards is determined based on the market price of the Company’s common stock on the date of grant. The value of fully vested restricted stock unit awards issued is recorded as a reduction to accrued bonuses. The portion of bonus expense that the Company expects to settle with fully vested restricted stock unit awards is recorded as stock-based compensation during the period the bonus is earned. The

- 13 -

Company recorded stock-based compensation expense associated with accrued bonus awards of $2,583,000 and $2,606,000 during the three months ended September 29, 2023 and September 30, 2022, respectively. For the nine months ended September 29, 2023 and September 30, 2022, the Company recorded stock-based compensation expense associated with accrued bonus awards of $8,242,000 and $8,133,000, respectively. The value of the unvested restricted stock unit awards granted is recognized on a straight-line basis over the shorter of the four-year vesting period or the period between the grant date and the date the award recipient turns 59½. If the award recipient is 59½ years or older on the date of grant, the value of the entire award is expensed upon grant. The Company recorded stock-based compensation expense associated with the unvested restricted stock unit awards of $2,038,000 and $1,787,000 during the three months ended September 29, 2023 and September 30, 2022, respectively. The Company recorded stock-based compensation expense associated with the unvested restricted stock unit awards of $8,124,000 and $7,315,000 during the nine months ended September 29, 2023 and September 30, 2022, respectively.

Stock Options

Stock options are granted for terms of ten years and generally vest 25% per year over a four-year period from the grant date. Unvested stock option awards will continue to vest in the case of retirement at 59½ years or older, provided that the holder of each award does all consulting work through the Company and does not become an employee for a past or present client, beneficial party or competitor of the Company. The value of the unvested stock option awards granted is recognized on a straight-line basis over the shorter of the four-year vesting period or the period between the grant date and the date the award recipient turns 59½. If the award recipient is 59½ years or older on the date of grant, the value of the entire award is expensed upon grant. The Company recorded stock-based compensation expense associated with stock option grants of $270,000 and $212,000 during the three months ended September 29, 2023 and September 30, 2022, respectively. The Company recorded stock-based compensation expense associated with stock option grants of $811,000 and $623,000 during the nine months ended September 29, 2023 and September 30, 2022, respectively.

The Company uses the Black-Scholes option-pricing model to determine the fair value of options granted. The determination of the fair value of stock option awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate and expected dividends.

The Company used historical exercise, forfeiture, and post-vesting expiration data to estimate the expected term of options granted. The historical volatility of the Company’s common stock over a period of time equal to the expected term of the options granted was used to estimate expected volatility. The risk-free interest rate used in the option-pricing model was based on United States Treasury zero-coupon issues with remaining terms similar to the expected term of the options. The dividend yield assumption considers the expectation of continued declaration of dividends, offset by option holders’ dividend equivalent rights.

The Company accounts for forfeitures of stock-based awards when they occur. All stock-based payment awards are recognized on a straight-line basis over the requisite service periods of the awards.

Note 6: Deferred Compensation Plans

The Company maintains nonqualified deferred compensation plans for the benefit of a select group of highly compensated employees. Under these plans, participants may elect to defer up to 100% of their compensation. Company assets that are earmarked to pay benefits under the plans are held in a rabbi trust and are subject to the claims of the Company’s creditors. As of September 29, 2023 and December 30, 2022, the invested amounts under the plans totaled $105,849,000 and $100,731,000, respectively, and are recorded in prepaid expenses and other current assets and deferred compensation plan assets on the Company’s unaudited condensed consolidated balance sheet. These assets are classified as trading securities and are recorded at fair value with changes recorded as adjustments to miscellaneous income (loss), net.

As of September 29, 2023 and December 30, 2022, vested amounts due under the plans totaled $107,223,000 and $101,354,000, respectively, and are recorded within accrued payroll and employee benefits and deferred compensation plan liabilities on the Company’s unaudited condensed consolidated balance sheets. Changes in the liability are recorded as adjustments to compensation expense. During the three months ended September 29, 2023,

- 14 -

the Company recognized a reduction to compensation expense of $2,769,000 as a result of changes in the market value of the trust assets with the same amount being recorded as gain in miscellaneous income (loss), net. During the three months ended September 30, 2022, the Company recognized a reduction to compensation expense of $4,925,000 as a result of changes in the market value of the trust assets with the same amount being recorded as a loss in miscellaneous income (loss), net. During the nine months ended September 29, 2023, the Company recognized additional compensation expense of $5,271,000 as a result of changes in the market value of the trust assets with the same amount being recorded as income in miscellaneous income, net. During the nine months ended September 30, 2022, the Company recognized a reduction in compensation expense of $20,884,000 as a result of changes in the market value of the trust assets with the same amount being recorded as a loss in miscellaneous income (loss), net.

Note 7: Supplemental Cash Flow Information

The following is supplemental disclosure of cash flow information:


	Nine Months Ended
(In thousands)	September 29, 2023		September 30, 2022
Cash paid during period:
Income taxes	$	27,753	$	24,349
Non-cash investing and financing activities:
Vested stock unit awards issued to settle accrued bonuses		10,497		10,200
Right-of-use asset obtained in exchange for operating lease obligations		13,803		8,090
Leasehold improvements obtained in exchange for right-of-use asset		3,219		-
Accrual for capital expenditures as of period end		618		846

Note 8: Accounts Receivable, Net

At September 29, 2023 and December 30, 2022, accounts receivable, net, was comprised of the following:


	September 29,			December 30,
(In thousands)	2023			2022
Billed accounts receivable	$	135,076		$	120,212
Unbilled accounts receivable		53,078			56,095
Allowance for contract losses and doubtful accounts		(6,400	)		(6,193	)
Total accounts receivable, net	$	181,754		$	170,114

The Company maintains allowances for estimated losses over the remaining contractual life of its receivables resulting from the inability of customers to meet their financial obligations or for disputes that affect the Company’s ability to fully collect amounts due. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations or aware of a dispute with a specific customer, a specific allowance is recorded to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers the Company recognizes allowances for doubtful accounts based upon historical write-offs, customer concentration, customer creditworthiness, current economic conditions, aging of amounts due and future expectations.

A reconciliation of the beginning and ending amount of the allowance for contract losses and doubtful accounts is as follows (in thousands):


Balance at December 30, 2022	$	6,193
Provision for contract losses and doubtful accounts		1,911
Write-offs		(1,704	)
Balance at September 29, 2023	$	6,400

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Note 9: Segment Reporting

The Company has two reportable operating segments based on two primary areas of service. The Engineering and Other Scientific segment is a broad service group providing technical consulting in different practices primarily in engineering. The Environmental and Health segment provides services in the areas of environmental, epidemiology and health risk analysis. This segment provides a wide range of consulting services relating to environmental hazards and risks and the impact on both human health and the environment. Our Chief Executive Officer, the chief operating decision maker, reviews revenues and operating income for each of our reportable segments, but does not review total assets in evaluating segment performance and capital allocation.

Segment information for the three and nine months ended September 29, 2023 and September 30, 2022 follows:

Revenues


	Three Months Ended				Nine Months Ended
(In thousands)	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Engineering and Other Scientific	$	110,857	$	107,403	$	344,552	$	321,168
Environmental and Health		22,479		19,776		69,314		64,770
Total revenues	$	133,336	$	127,179	$	413,866	$	385,938

Operating Income


	Three Months Ended						Nine Months Ended
(In thousands)	September 29, 2023			September 30, 2022			September 29, 2023			September 30, 2022
Engineering and Other Scientific	$	38,734		$	39,385		$	121,064		$	117,907
Environmental and Health		7,475			6,378			22,550			21,059
Total segment operating income		46,209			45,763			143,614			138,966
Corporate operating expense		(12,276	)		(8,950	)		(50,686	)		(20,159	)
Total operating income	$	33,933		$	36,813		$	92,928		$	118,807

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

Capital Expenditures


	Three Months Ended				Nine Months Ended
(In thousands)	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Engineering and Other Scientific	$	541	$	870	$	3,210	$	3,050
Environmental and Health		25		48		139		104
Total segment capital expenditures		566		918		3,349		3,154
Corporate capital expenditures		1,248		1,172		13,893		6,387
Total capital expenditures	$	1,814	$	2,090	$	17,242	$	9,541

Certain capital expenditures associated with the Company’s corporate cost centers and the related depreciation are excluded from the Company’s segment information.

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Depreciation and Amortization


	Three Months Ended				Nine Months Ended
(In thousands)	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Engineering and Other Scientific	$	1,750	$	1,108	$	4,428	$	3,301
Environmental and Health		53		41		155		124
Total segment depreciation and amortization		1,803		1,149		4,583		3,425
Corporate depreciation and amortization		558		574		1,952		1,799
Total depreciation and amortization	$	2,361	$	1,723	$	6,535	$	5,224

No single client comprised more than 10% of the Company’s revenues during the three and nine months ended September 29, 2023. One client comprised 16% of the Company’s revenues during the three months ended September 30, 2022. The same client comprised 15% of the Company's revenue during the nine months ended September 30, 2022.

Note 10: Leases

The Company determines if an arrangement is a lease at the inception of the arrangement. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and long-term operating lease liabilities in the Company’s condensed consolidated balance sheet. The Company does not have any finance leases as of September 29, 2023.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, based on the information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The amortization of operating lease ROU assets and the change in operating lease liabilities is disclosed as a single line item in the condensed consolidated statements of cash flows.

The Company leases office, laboratory, and storage space in 13 states and the District of Columbia, as well as in China, Hong Kong, Singapore, Switzerland, and the United Kingdom. Leases for these office, laboratory, and storage facilities have terms generally ranging between one and ten years. Some of these leases include options to extend or terminate the lease, none of which are currently included in the lease term as the Company has determined that exercise of these options is not reasonably certain.

The Company has a Test and Engineering Center on 147 acres of land in Phoenix, Arizona. The Company leases this land from the state of Arizona under a 30-year lease agreement that expires in January of 2028 and has options to renew for two fifteen-year periods. As of September 29, 2023, the Company has determined that exercise of the renewal options is not reasonably certain and thus the extension is not included in the lease term.

The Company’s equipment leases are included in the ROU asset and liability balances, but are not material.

The Company leases excess space in its Silicon Valley and Natick facilities. Rental income of $882,000 and $739,000 was included in other income for the three months ended September 29, 2023 and September 30, 2022, respectively. Rental income of $2,491,000 and $2,157,000 was included in other income for the nine months ended September 29, 2023 and September 30, 2022, respectively.

- 17 -

The components of lease expense included in other operating expenses on the condensed consolidated statements of income were as follows:


	Three Months Ended				Nine Months Ended
(In thousands)	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Operating lease cost	$	2,094	$	1,681	$	5,659	$	5,247
Variable lease cost		378		274		1,251		913
Short-term lease cost		256		194		937		425

Supplemental cash flow information related to operating leases was as follows:


	Three Months Ended				Nine Months Ended
(In thousands)	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Cash paid for amounts included in the measurement of operating lease liabilities	$	1,715	$	1,518	$	5,516	$	5,083

Supplemental balance sheet information related to operating leases was as follows:


	September 29, 2023	December 30, 2022
Weighted Average Remaining Lease Term	6.4 years	4.1 years
Weighted Average Discount Rate	5.1%	4.3%

Maturities of operating lease liabilities as of September 29, 2023:


	Operating
(In thousands)	Leases
2023 (excluding the nine months ended September 29, 2023)		1,699
2024		6,669
2025		5,763
2026		4,945
2027		4,336
2028		1,860
Thereafter		8,099
Total lease payments	$	33,371
Less imputed interest		(5,707	)
Total lease liability	$	27,664

Note 11: Contingencies

During the second quarter of 2023, a client requested a concession in the amount of $2 million related to the Company’s performance on a project. The Company disagrees with the basis for this request for concession and has responded to the client as such. At this time the Company is unable to determine the outcome of this issue, but management believes that it is probable that this matter will not have a material adverse effect on the Company’s business or the condensed consolidated financial statements.

The Company is a party to various legal actions from time to time and may be contingently liable in connection with claims and contracts arising in the normal course of business, the outcome of which the Company believes, after consultation with legal counsel, will not have a material adverse effect on its financial condition, results

- 18 -

of operations or liquidity. However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expected results. All legal costs associated with litigation are expensed as incurred.

Note 12: Subsequent Events

On October 26, 2023, the Company’s Board of Directors announced a cash dividend of $0.26 per share of the Company’s common stock, payable December 22, 2023, to stockholders of record as of December 8, 2023.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 nine months ended September 29, 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 third quarter of 2023 increased 5% to $133,336,000 as compared to $127,179,000 during the same period last year. Revenues before reimbursements for the third quarter of 2023 increased 9% to $124,959,000 as compared to $115,143,000 during the same period last year.

During the third quarter, strong demand for our reactive services drove increased domestic and international disputes-related work across multiple industries. Our proactive services were bolstered by strong year-over-year growth for regulatory consulting services in the chemicals sector, offset by continued moderation in the consumer electronics sector.

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Net income increased slightly to $24,538,000 during the third quarter of 2023 as compared to $24,442,000 during the same period last year. Diluted earnings per share increased to $0.48 per share as compared to $0.47 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 September 29, 2023

During the third quarter of 2023, billable hours increased 4% to 380,000 as compared to 365,000 during the same period last year. Our utilization decreased to 70% during the third quarter of 2023 as compared to 73% during the same period last year. Technical full-time equivalent employees increased 10% to 1,050 during the third quarter of 2023 as compared to 958 during the same period last year. Our accelerated recruiting efforts over the last year combined with lower-than-expected turnover drove a 10% 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 September 29, 2023 compared to Three Months Ended September 30, 2022

Revenues


	Three Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Engineering and Other Scientific	$	110,857		$	107,403			3.2	%
Percentage of total revenues		83.1	%		84.5	%
Environmental and Health		22,479			19,776			13.7	%
Percentage of total revenues		16.9	%		15.5	%
Total revenues	$	133,336		$	127,179			4.8	%

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 third quarter of 2023, billable hours for this segment increased by 3% to 301,000 as compared to 291,000 during the same period last year. Utilization for this segment decreased to 71% during the third quarter of 2023 as compared to 76% 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, energy, and construction sectors. Technical full-time equivalent employees in this segment increased 11% to 821 during the third quarter of 2023 as compared to 742 for the same period last year due to our recruiting and retention efforts. The decrease in utilization was due to the 11% increase in technical full-time equivalent employees and historically strong utilization during the third 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 third quarter of 2023, billable hours for this segment increased by 7% to 79,000 as compared to 74,000 during the same period last year. Utilization for this segment was 66% during the third quarter of 2023 and 2022. 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 6% to 229 as compared to 216 during the same period last year due to our recruiting and retention efforts.

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Compensation and Related Expenses


	Three Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Compensation and related expenses	$	74,011		$	62,779			17.9	%
Percentage of total revenues		55.5	%		49.4	%

The increase in compensation and related expenses during the third 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 third quarter of 2023, deferred compensation expense increased by $2,156,000 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 a decrease in the value of plan assets of $2,769,000 during the third quarter of 2023 as compared to a decrease in the value of plan assets of $4,925,000 during the same period last year. Payroll expense increased by $6,382,000 and fringe benefits increased by $2,033,000 during the third 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 $287,000 during the third quarter of 2023 due to an increase in unvested restricted stock unit grants.

Other Operating Expenses


	Three Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Other operating expenses	$	10,997		$	8,822			24.7	%
Percentage of total revenues		8.2	%		6.9	%

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 third quarter of 2023 was primarily due to an increase in occupancy expense of $719,000 an increase in depreciation expense of $638,000, and an increase in information technology related expenses of $467,000. 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 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.

Reimbursable Expenses


	Three Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Reimbursable expenses	$	8,377		$	12,036			-30.4	%
Percentage of total revenues		6.3	%		9.5	%

The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects. The decrease in reimbursable expenses during the third quarter of 2023 as compared to the same period last year was due to a decrease in proactive projects for the consumer electronics sector.

General and Administrative Expenses


	Three Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
General and administrative expenses	$	6,018		$	6,729			-10.6	%
Percentage of total revenues		4.5	%		5.3	%

The decrease in general and administrative expenses was primarily due to a decrease in outside consulting expenses of $484,000 and a decrease in travel and meals of $165,000. The decrease in outside consulting expenses was due to a lower level of activity associated with content creation for our external website. The decrease in travel

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and meals was due to a firm-wide managers' meeting held during the third quarter of 2022. We expect general and administrative expenses to increase as we expand our business development and staff development initiatives.

Operating Income


	Three Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Engineering and Other Scientific	$	38,734		$	39,385			-1.7	%
Environmental and Health		7,475			6,378			17.2	%
Total segment operating income		46,209			45,763			1.0	%
Corporate operating expense		(12,276	)		(8,950	)		37.2	%
Total operating income	$	33,933		$	36,813			-7.8	%

The decrease in operating income for our Engineering and Other Scientific segment during the third 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 third quarter 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 third quarter of 2023, deferred compensation expense increased $2,156,000, 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 a decrease in the value of plan assets of $2,769,000 during the third quarter of 2023 as compared to a decrease in the value of plan assets of $4,925,000 during the same period last year.

Other Income, Net


	Three Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Other income (expense), net	$	84		$	(3,337	)		102.5	%
Percentage of total revenues		0.1	%		-2.6	%

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. During the third quarter of 2023, other income, net, increased by $2,156,000 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 a decrease in the value of the plan assets of $2,769,000 during the third quarter of 2023 as compared to a decrease in the value of the plan assets of $4,925,000 during the same period last year. The increase in interest income of $1,220,000 was due to an increase in interest rates.

Income Taxes


	Three Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Income taxes	$	9,479		$	9,034			4.9	%
Percentage of total revenues		7.1	%		7.1	%
Effective tax rate		27.9	%		27.0	%

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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.

Nine Months Ended September 29, 2023 compared to Nine Months Ended September 30, 2022

Revenues


	Nine Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Engineering and Other Scientific	$	344,552		$	321,168			7.3	%
Percentage of total revenues		83.3	%		83.2	%
Environmental and Health		69,314			64,770			7.0	%
Percentage of total revenues		16.7	%		16.8	%
Total revenues	$	413,866		$	385,938			7.2	%

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 nine months of 2023, billable hours for this segment increased by 5% to 916,000 as compared to 874,000 during the same period last year. Utilization for this segment decreased to 71% during the first nine months of 2023 as compared to 77% 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, energy, and construction sectors. Technical full-time equivalent employees in this segment increased 14% to 827 during the first nine months of 2023 as compared to 725 for the same period last year due to our recruiting and retention efforts. The decrease in utilization was due to the 14% increase in technical full-time equivalent employees and historically strong utilization during the first nine months 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 first nine months of 2023, billable hours for this segment increased by 1% to 238,000 as compared to 236,000 during the same period last year. Utilization in this segment decreased to 66% during the first nine months 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 by 6% to 232 during the first nine months of 2023 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 6% increase in technical full-time equivalent employees.

Compensation and Related Expenses


	Nine Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Compensation and related expenses	$	241,028		$	189,982			26.9	%
Percentage of total revenues		58.2	%		49.2	%

The increase in compensation and related expenses during the first nine 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 nine months of 2023, deferred compensation expense increased $26,155,000 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 $5,271,000 during the first nine months of 2023 as compared to a decrease in the value of plan assets of $20,884,000 during the same period last year. Payroll expense increased $17,772,000 during the first nine 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 $4,104,000 during the first nine 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 $1,608,000 during the first nine months of 2023 due to a corresponding increase to our bonus pool which is equal to 33% of income before income taxes, interest income,

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bonus expense, and stock-based compensation. Stock-based compensation expense increased $1,002,000 during the first nine months of 2023 due to an increase in unvested restricted stock unit grants.

Other Operating Expenses


	Nine Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Other operating expenses	$	30,863		$	25,742			19.9	%
Percentage of total revenues		7.5	%		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 first nine months of 2023 was primarily due to an increase in occupancy expense of $1,667,000, an increase in information technology related expenses of $1,352,000 and an increase in depreciation expense of $1,311,000. 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.

Reimbursable Expenses


	Nine Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Reimbursable expenses	$	30,549		$	34,707			-12.0	%
Percentage of total revenues		7.4	%		9.0	%

The amount of reimbursable expenses will vary from quarter to quarter depending on the nature of our projects. The decrease in reimbursable expenses during the first nine months of 2023 as compared to the same period last year was due to a decrease in proactive projects for the consumer electronics sector.

General and Administrative Expenses


	Nine Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
General and administrative expenses	$	18,498		$	16,700			10.8	%
Percentage of total revenues		4.5	%		4.3	%

The increase in general and administrative expenses was primarily due to an increase in travel and meals of $1,197,000, an increase in bad debt of $339,000, and an increase in marketing and business development expenses of $288,000. 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 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. We expect general and administrative expenses to increase as we expand our business development and staff development initiatives.

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Operating Income


	Nine Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Engineering and Other Scientific	$	121,064		$	117,907			2.7	%
Environmental and Health		22,550			21,059			7.1	%
Total segment operating income		143,614			138,966			3.3	%
Corporate operating expense		(50,686	)		(20,159	)		151.4	%
Total operating income	$	92,928		$	118,807			-21.8	%

The increase in operating income for our Engineering and Other Scientific segment during the first nine 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, energy, and construction sectors. The increase in operating income for our Environmental and Health segment 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 evolving regulatory requirements which drove safety-related engagements evaluating the impacts of chemicals on human health and the environment.

The increase in corporate operating expenses during the first nine 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 nine months of 2023, deferred compensation expense increased $26,155,000, 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 $5,271,000 during the first nine months of 2023 as compared to a decrease in the value of plan assets of $20,884,000 during the same period last year.

Other Income, Net


	Nine Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Other income (expense), net	$	12,880		$	(17,092	)		175.4	%
Percentage of total revenues		3.1	%		-4.4	%

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 nine months of 2023, other income, net, increased $26,155,000 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 $5,271,000 during the first nine months of 2023 as compared to a decrease in the value of the plan assets of $20,884,000 during the same period last year. During the first nine months of 2023, interest income increased by $4,387,000 as compared to the same period last year due to an increase in interest rates.

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Income Taxes


	Nine Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			Percent Change
Income taxes	$	26,398		$	21,909			20.5	%
Percentage of total revenues		6.4	%		5.7	%
Effective tax rate		24.9	%		21.5	%

The excess tax benefit associated with stock-based awards was $3,639,000 during the first nine 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 28.4% during the first nine months of 2023 as compared to 27.5% 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.


	Nine Months Ended
(in thousands)	September 29, 2023			September 30, 2022
Net cash provided by operating activities	$	56,043		$	53,237
Net cash (used in) / provided by investing activities		(14,422	)		(9,108	)
Net cash used in financing activities		(65,972	)		(190,556	)

We financed our business during the first nine months of 2023 through available cash. As of September 29, 2023, our cash and cash equivalents were $137,099,000 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 nine 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 nine 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 $93,070,000 were recorded as a long-term liability on our unaudited condensed consolidated balance sheet at September 29, 2023. Vested amounts due under the plan of $14,153,000 were recorded as a current liability on our unaudited condensed consolidated balance sheet at September 29, 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 September 29, 2023, invested amounts under the plan of $90,727,000 were recorded as a long-term asset on our unaudited condensed consolidated balance sheet. As of September 29, 2023, invested amounts

- 27 -

under the plan of $15,122,000 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 September 29, 2023 and September 30, 2022:


	Three Months Ended						Nine Months Ended
(in thousands, except percentages)	September 29, 2023			September 30, 2022			September 29, 2023			September 30, 2022
Revenues before reimbursements	$	124,959		$	115,143		$	383,317		$	351,231
EBITDA	$	34,520		$	34,561		$	107,122		$	106,105
EBITDA as a % of revenues before reimbursements		27.6	%		30.0	%		27.9	%		30.2	%

The decrease in EBITDA as a percentage of revenues before reimbursements during the third 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 expenses. Our utilization decreased to 70% during the third quarter of 2023 as compared to 73% during the same period last year. The decrease in utilization was due to a 10% increase in technical full-time equivalent employees and historically strong utilization during the third quarter of 2022. Other operating expenses increased during the third quarter of 2023 due to an increase in technical full-time equivalent employees and investments in our corporate infrastructure.

The decrease in EBITDA as a percentage of revenues before reimbursements during the first nine 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 nine months of 2023 as compared to 75% during the same period last year. The decrease in utilization was due to a 12% increase in technical full-time equivalent employees and historically strong utilization during the first nine months of 2022. Other operating and general and administrative expenses increased during the first nine 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.

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The following table is a reconciliation of EBITDA and EBITDAS to the most comparable GAAP measure, net income, for the three and nine months ended September 29, 2023 and September 30, 2022:


	Three Months Ended						Nine Months Ended
(in thousands)	September 29, 2023			September 30, 2022			September 29, 2023			September 30, 2022
Net income	$	24,538		$	24,442		$	79,410		$	79,806
Add back (subtract):
Income taxes		9,479			9,034			26,398			21,909
Interest income, net		(1,858	)		(638	)		(5,221	)		(834	)
Depreciation and amortization		2,361			1,723			6,535			5,224
EBITDA		34,520			34,561			107,122			106,105
Stock-based compensation		4,891			4,605			17,177			16,072
EBITDAS	$	39,411		$	39,166		$	124,299		$	122,177

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 Singapore 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 September 29, 2023, we had net assets of approximately $14.3 million with a functional currency of the British Pound, net assets of approximately $2.8 million with a functional currency of the Hong Kong Dollar, net assets of approximately $2.3 million with a functional currency of the Chinese Yuan, and net assets of approximately $2.2 million with a functional currency of the Singapore Dollar associated with our operations in the United Kingdom, Hong Kong, China, and Singapore, 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 September 29, 2023, we had net assets denominated in the non-functional currency of approximately $8.4 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.

Item 4. Controls and Procedures

(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 September 29, 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 September 29, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Exponent is not engaged in any material legal proceedings.

Item 1A. Risk Factors

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information on the Company’s repurchases of the Company’s common stock for the three months ended September 29, 2023 (in thousands, except price per share):


	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs (1)
July 1 to July 28		22	$	87.83		22	$	60,628
July 29 to August 25		-		-		-	$	60,628
August 26 to September 29		167		89.65		167	$	45,628
Total		189	$	89.43		189	$	45,628

(1)

On February 22, 2022, the Company’s Board of Directors announced an additional $150,000,000 for repurchase of the Company’s common stock. This repurchase program does not have an expiration date.

Repurchases of the Company’s common stock were affected pursuant to a repurchase program authorized by the Company’s Board of Directors.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Rule 10b5-1 Plans None of the Company’s directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the Company’s fiscal quarter ended September 29, 2023.

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Item 6. Exhibits

(a)

Exhibit Index


31.1	Certification of Chief Executive Officer pursuant to Rule 13a – 14(a) under the Securities Exchange Act of 1934.

31.2	Certification of Chief Financial Officer pursuant to Rule 13a – 14(a) under the Securities Exchange Act of 1934.

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

101.INS	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH	Inline XBRL Taxonomy Extension Schema Document

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		EXPONENT, INC.
		(Registrant)

Date: November 3, 2023
		/s/ Catherine Ford Corrigan
		Catherine Ford Corrigan, Ph.D., Chief Executive Officer


		/s/ Richard L. Schlenker
		Richard L. Schlenker, Chief Financial Officer

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Exponent (EXPO) 10-Q2023 Q3 Quarterly report

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