EXPONENT INC Q4 FY2024 earnings call

• Exponent delivered Q4 results above expectations, with improved utilization and EBITDA margin. Demand for proactive services strengthened in the second half of 2024, driven by consumer electronics and utilities; reactive services were robust in utilities and medical devices. - Chemical industry activity improved in Q4 with increased litigation and regulatory engagement. - Work for the federal government (approximately 3% of business) involves advanced technology evaluations for DoD and State. - Proactive chemical regulatory work represents 5% of business, with two-thirds performed outside the US. - Anticipate heightened FDA scrutiny in chemicals and processed foods; PFAS work driven by litigation. - Successfully aligned resources over 18 months, though starting 2025 with a 5%-6% headwind in headcount, but recruiting activity began to bear fruit. - Industries facing transformation due to extreme weather, energy needs, AI, etc., with Exponent's expertise needed to navigate uncertainties.

Exponent's Engineering and other scientific segment represented 83% of net revenues in the fourth quarter and 84% for the full year 2024. Revenues before reimbursements in this segment increased 8% for the fourteen-week fourth quarter and 5% for the fifty-three-week full year, driven by demand in consumer products and utilities industries. The Environmental and Health segment represented 17% of net revenues in the fourth quarter and 16% for the full year. Net revenues in this segment increased 11% in the fourteen-week fourth quarter and were approximately flat for the fifty-three-week full year, with growth in the fourth quarter primarily due to a resurgence in chemicals industry engagements.

• Q1 2025: Net revenues expected to be down in low single digits vs same period 2024; EBITDA margin 25%-26% of net revenues; utilization 74%-75%; realized rate increase 3%-3.5%; stock-based compensation $8.2-$8.5M in Q1, $4.6-$5.6M in other quarters. - Full year 2025: Net revenues expected to grow in low single digits; EBITDA margin 25.25%-27% of net revenues; utilization 72%-73%; realized rate increase 3%-3.5%; stock-based compensation $24-$24.5M; other operating expenses $50.5-$51.5M; G&A expenses $25.7-$26.7M; interest income $2-$2.2M per quarter; tax rate expected to be 28%; capital expenditures $10-$12M.

• Uncertainty at EPA could slow chemical regulatory decision-making but may shift emphasis to litigation. - Potential heightened FDA scrutiny in chemicals and processed foods. - Loss of tenant in Menlo Park facility. - Increased non-cash expenses from Arizona lease renewal and other factors impacting margins.

Q: How confident are you in the near-term pipeline and how to think about the conservatism of guidance given dynamics?

A: Catherine mentioned enthusiasm about broad market drivers, but starting 2025 with a 5%-6% headcount deficit, with sequential headcount growth expected in 2025 quarters.

Q: Talk about the energy infrastructure business performance and outlook?

A: Energy sector includes utility and generation sides, with proactive work in risk and safety, reactive work in failure analysis and disputes across various energy forms globally.

Q: What percentage of revenue helps clients address regulatory concerns?

A: Rich said approximately 10% of work is in proactive regulatory process help and reactive regulatory investigations across agencies like EPA, FDA, etc.

Q: Opportunity to accelerate recruiting and impact on growth?

A: Catherine said they have the ability to surge, with recruiting activity yielding 1%-2% quarterly growth, aiming for high single-digit to low double-digit growth long-term.

Q: Size of chemicals business and momentum?

A: Chemicals business is low single to low double digits of total business, Q4 growth in low to mid-teens, with projects of variable length and activity returning after a delay.

Q: Thoughts on AI helping and hurting the company with regulatory work?

A: Catherine said AI is involved in safety-critical decisions, but courts will heavily scrutinize AI-based data, and Exponent is well-positioned to withstand such scrutiny