Exponent, Inc. Stock

Good day, and welcome to the Exponent, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Joni Konstantelos, Managing Director. Please go ahead.

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's Second Quarter 2026 Financial Results Conference Call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at www.investors.exponent.com. This conference call is the property of Exponent, and any taping or other reproduction is expressly prohibited without prior written consent.

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

Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic SEC filings, including those factors discussed under the caption Risk Factors in Exponent's most recent Form 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise.

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

Thank you, Joni, and thank you, everyone, for joining us today. I will start off by reviewing our second quarter 2026 business performance. John will share his perspective on innovation and market trends. Eric will then provide a more detailed review of our financial results and outlook, and we will then open the call for questions.

Exponent delivered another strong quarter with double-digit growth in revenues and earnings, reflecting the continued demand for our specialized expertise across industries. Our proactive work experienced strong growth in the quarter, led by demand for user research studies as clients accelerate the development of AI-enabled products across an increasingly diverse array of hardware form factors and applications with engagements continuing to expand in scope, scale and complexity.

Proactive activity was also supported by increased risk management and infrastructure-related engagements in the utility sector. Reactive work grew with strong demand for our dispute-related expertise from the consumer products, chemicals and transportation industries.

Turning to these engagements in more detail. Our proactive user research work continues to grow more diverse and complex, both across our client base and across the breadth of products and technologies that we support. This quarter also benefited from a large study that drove higher-than-expected revenue and utilization. These engagements increasingly call for a combination of human factors, biomechanics, engineering and data science expertise to elucidate how people interact with AI-enabled technologies in situations where standard research approaches are woefully inadequate.

While user research is often thought of as recruiting participants and gathering feedback, our work is far more sophisticated. We identify and articulate the right underlying scientific question, design a bespoke methodology capable of answering it, collect high-quality data in the real-world environment and interpret the results within a broader technical, regulatory and business context. The differentiated value lies not in data collection alone, but in the scientific judgment and multidisciplinary expertise required to design the study, execute the unique methodology and generate reliable, actionable conclusions.

As companies compete aggressively to integrate AI into an expanding array of smart devices, including glasses, immersive technologies, health and wellness wearables and more, the technical safety and usability challenges increased significantly and Exponent's differentiated position grows.

We also saw increased demand for risk management and infrastructure-related engagements in the utility sector as clients evaluate the resilience and reliability of critical systems amid rising power demand, more extreme weather events and the growing complexity of the electric grid.

Turning to our reactive engagements. We saw strong demand for dispute and failure analysis-related work across a range of industries, including consumer products, chemicals and transportation. We helped consumer products clients evaluate product safety and recalls, investigate incidents and address disputes as manufacturers face challenges surrounding performance, reliability and quality across an increasingly complex set of technologies.

In the chemical sector, we saw growing activity evaluating chemicals of concern ranging from legacy substances to emerging compounds. And in transportation, we saw greater failure analysis work related to advanced driver assistance systems as clients address performance, safety and reliability challenges.

As the pace of innovation accelerates and the consequences of failure rise, clients increasingly rely on Exponent's multidisciplinary ecosystem and long-standing reputation in failure analysis to address complex novel challenges. A recent engagement involving a satellite performance issue illustrates this demand.

The client required deep engineering expertise to investigate performance and risk in a highly technical and uncertain environment. This level of mastery across disciplines, whether applied to space systems, AI, energy storage, power infrastructure, cybersecurity or other domains, uniquely positions Exponent to help clients navigate both today's challenges and the inevitable disruptions that will accompany future technological advances.

We remain confident in the durability and long-term growth potential of our reactive work as organizations will continue to rely on independent, science-based expertise when critical systems fail or perform unexpectedly. Our results during the quarter reflect several powerful long-term trends shaping demand for Exponent services, including rapid technological innovation, increasing complexity, growing energy demand, investments in resilient power and digital infrastructure and rising expectations for safety, reliability and performance.

Clients turn to Exponent when they face high consequence challenges involving new technologies, complex systems and the interaction between people and products. Our multidisciplinary teams provide independent science-based insights that help clients innovate with confidence, reduce risk and make better decisions. Nowhere is this more relevant today than in the accelerating importance of artificial intelligence in products, which continues to be a significant force shaping demand across our business.

I'd like to turn it over to our President, John Pye, to share his perspective on this shift and where he sees innovation heading across our markets. John?

Thank you, Catherine. Across industries, we're seeing an accelerating shift. Artificial intelligence is expanding beyond the digital world and into physical products and systems that operate in the real world, whether that's a vehicle, a wearable device, a piece of infrastructure or a robotic system. As that shift unfolds, the standards these systems are held to is also changing.

The question is no longer simply whether a product functions as designed in a controlled setting, but whether it can be trusted to perform safely and reliably in the unpredictable conditions of everyday life, including the edge cases and complex interactions that fall outside of prior experience. This is where the human side of the equation becomes just as important as the technology itself.

As AI becomes embedded in the devices and systems people rely on throughout their daily lives, things like walking, driving, working or simply going about routine tasks at home, it inevitably competes for people's attention alongside everything else happening in their environment. There's a fine line between technology that supports human performance and technology that, if not designed thoughtfully, can degrade it. Getting that balance right requires specialized expertise across multiple disciplines.

Exponent has been at the forefront of this kind of human-machine interaction work for decades. It's not new for us, and it's an area where our differentiated expertise is increasingly important as more of our clients grapple with these same questions across a widening range of products and applications.

We're also seeing the same dynamic extend into new areas. They are still in relatively early stages, things like autonomous vehicles, robots in the wild and the infrastructure that supports them, such as data centers and battery storage systems. These are areas where complexity is only increasing and where our multidisciplinary approach, spanning: engineering, data sciences, human factors and the physical sciences position us well to support our clients as they navigate what comes next.

I'll now turn the call over to Eric, to provide more detail on our second quarter results as well as discuss our outlook for the third quarter and the full year 2026. Eric?

Thank you, John, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis, unless otherwise noted.

For the second quarter of 2026, total revenues increased 21% to $171.6 million and revenues before reimbursements or net revenues, as I will refer to them from here on, increased 12% to $148.9 million. Total revenues grew faster than net revenues due to a higher level of reimbursable expenses that are included in total revenues. These reimbursable expenses were due to an increase in user research studies. Because reimbursable expenses can fluctuate quarter-to-quarter based on the mix and nature of client engagements, we believe net revenue is a more meaningful measure of our underlying performance.

As Catherine mentioned, our results this quarter benefited from a large user research study that represented approximately 4% of net revenues, which was higher than the 2% of net revenues that we expected from this project.

Net income for the second quarter increased 11% to $29.4 million as compared to $26.6 million during the same period in 2025. Diluted earnings per share increased 15% to $0.60 per diluted share as compared to $0.52 per diluted share in the same period last year.

Over the last 12 months, we utilized $211 million for repurchases of our common stock, which resulted in a 5% decrease in our average diluted shares outstanding to 49 million shares during the second quarter of 2026, as compared to $51.5 million during the same period in 2025. These repurchases also reduced our interest income.

Exponent's consolidated tax rate was 27.9% in the second quarter of 2026, unchanged from the same period in 2025. The tax impact associated with share-based awards was immaterial in both the second quarter of 2026 and 2025. EBITDA for the quarter increased 16% to $42.7 million, producing a margin of 28.7% of net revenues as compared to $37 million or 27.8% of net revenues in the second quarter of 2025.

Billable hours in the second quarter of 2026 were approximately 390,000, an increase of 8% year-over-year. Average technical full-time employees in the second quarter were 1,012, up 6% as compared to the same period in 2025. This increase was due to our recruiting and retention efforts. Utilization in the second quarter was 74%, up from 72% in the same period of 2025. The realized rate increase during the second quarter of 2026 was approximately 4%.

In the second quarter, compensation expense after adjusting for gains and losses in deferred compensation increased 10%. Included in total compensation expense is a deferred compensation gain of $11.8 million as compared to a gain of $17.0 million in the same period of 2025. As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line.

Stock-based compensation expense in the quarter was $6.7 million as compared to $5.2 million during the same period in 2025. Other operating expenses in the second quarter were up 7% to $12.9 million due to investments in our corporate infrastructure. Included in other operating expenses is depreciation and amortization expense of $2.7 million.

G&A expenses increased 20% to $7.4 million for the second quarter. The increase in G&A expenses was primarily due to increases in travel and yields associated with business development, recruiting and people development activities and an increase in relocation costs. Interest income decreased to $716,000 for the second quarter, driven by a decrease in cash.

Regarding capital allocation, during the quarter, capital expenditures were $1.8 million. We distributed $14.8 million to shareholders through dividend payments while repurchasing $67.4 million of our common stock at an average price of $59.88. Over the past 12 months, we returned a combined $272 million to shareholders, which included $211 million in share repurchases and $61 million in dividend payments. Additionally, our Board approved a $50 million increase in our current stock repurchase program, which reflects our conviction in Exponent's long-term growth trajectory.

Turning to our segments. Exponent's Engineering and Other Scientific segment represented 85% of net revenues in the second quarter. Net revenues in this segment increased 13%, driven by strong user research study activity in consumer electronics, risk management and infrastructure-related work in the utility sector and reactive engagements across the consumer products, chemicals, and transportation industries.

Exponent's Environmental and Health segment represented 15% of net revenues in the second quarter. Net revenues in this segment increased 9%, driven by engagements evaluating the impact of chemicals on human health and the environment.

Turning to our outlook. Looking to the second half of the year, we expect to generate quarterly net revenue growth on top of the double-digit growth we delivered in the third and fourth quarters of 2025, when adjusted for the extra week in Q4 of fiscal 2024.

For the third quarter, as compared to 1 year prior, we expect net revenues to be up 8% to 10% and EBITDA to be 28.0% to 28.5% of net revenues. For 2026, we are raising our full year guidance. We now expect net revenues to grow 9% to 10% and EBITDA to be 27.8% to 28.1% of net revenues.

We expect our average technical full-time equivalent employees to increase approximately 4% to 5% year-over-year in the third quarter of 2026, and 4.5% to 5% for the full year. We expect utilization in the third quarter to be 74% to 75% as compared to 74% in the same quarter last year. We continue to expect the full year utilization to be 72.5% to 73% as compared to 72.5% in 2025. We expect the year-over-year realized rate increase to be 3% to 4% in the third quarter of 2026 and 3.5% to 4% for the full year 2026.

For the third quarter, we expect stock-based compensation to be $6.5 million to $6.7 million. For the full year of 2026, we expect stock-based compensation to be $27.9 million to $28.4 million. We continue to believe that our stock-based compensation program is a key element to how we effectively attract, motivate and retain our top talent.

For the third quarter, we expect other operating expenses to be $13.0 million to $13.5 million. For the full year, we expect other operating expenses to be $52.2 million to $52.7 million.

For the third quarter, we expect G&A expenses to be $8.2 million to $8.7 million. For the full year, we expect G&A expenses to be $29.5 million to $30 million.

We expect interest income to be $500,000 to $700,000 per quarter for the remainder of 2026. In addition, we anticipate miscellaneous income to be approximately $300,000 per quarter for the remainder of 2026.

For the remainder of 2026, we do not anticipate any additional tax benefit associated with share-based awards. For the third quarter of 2026, we expect our tax rate to be approximately 28% as compared to 27.4% in the same quarter 1 year ago. For the full year of 2026, the tax rate is expected to be 28.5% as compared to 28.0% in 2025. Capital expenditures for the full year 2026 are expected to be $12 million to $14 million.

We're pleased with our strong second quarter execution and confident in the underlying market dynamics that continue to support growth across our business.

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

Thank you, Eric. Exponent continues to benefit from powerful long-term trends that are increasing both the pace of innovation and the complexity of challenges facing our clients. As emerging technologies move from concept to real-world deployment, the need for independent science-based expertise becomes increasingly important. Whether helping clients innovate with confidence, understand how people interact with new technologies, strengthen critical infrastructure or investigate failures, Exponent is uniquely positioned at the intersection of technology, people and high-consequence decision-making. Supported by our exceptional talent, long-standing reputation and differentiated capabilities, we remain confident in our strategy and our ability to create long-term value for our shareholders.

Operator, we are now ready for questions.

[Operator Instructions] The first question today comes from Andrew Nicholas with William Blair.

I'm sorry. Can you hear me?

Yes.

Yes, we can now.

I wanted to start just in terms of the AI impact you've spent this quarter and last quarter kind of talking about all the different demand drivers that are potentially impacted positively by AI. I'm curious to what extent we should think about that being a proactive driver at the moment versus reactive? Or are you already seeing it kind of bubble up in litigation as well?

Yes. Thanks, Andrew. It's absolutely going to be in both the reactive and proactive domains. One of the places in reactive where we are probably seeing it the most is around advanced driver assistance technologies. All kinds of questions that are arising in automotive product liability litigation around the performance of those systems. And it's really growing in terms of the kinds of sort of allegations and design pieces that we're looking at. It's not just the sensors, it's not just the performance of the automated braking system, but it's now even going into the performance of the driver distraction and driver monitoring systems. So that human-machine interface is becoming very important.

Another area around reactive with an AI driver is going to be the data center work, the sort of digital infrastructure side of the AI equation. We're seeing failure analysis types of investigations in so many domains that apply to those data centers. It could be the cooling systems and their performance or contaminants in cooling systems, it's the power inverter performance, it's the battery energy storage system that either is it meeting code or was there a fire? Is it performing? So reactive for sure. And then, of course, that proactive side, particularly strong in the quarter around the user research domain. And these are products and systems that are having AI embedded into them.

So it's both the sort of physical product aspect of the human interface and also that performance of the algorithm that is at least in part dictated by the human factors piece. So it is a diverse set of things that we're doing that really covers both the reactive and proactive domains.

For my follow-up, you said in your release and in your prepared remarks, you talked about the scope, scale, and complexity of your work increasing. It's my impression that that tends to benefit Exponent as one of the only, if not the only kind of science and engineering firm that has that capability and the breadth of capability.

And so I'm wondering, one, competitively, if that's becoming more and more of an advantage for you? And relatedly, is that a potential opportunity on the pricing front as your differentiation, and scale and multidisciplinary expertise becomes kind of more evident relative to your peers?

Yes. Thanks, Andrew. Particularly when we talk about that scope, scale and complexity in the user research domain, that's a place where we are really seeing that competitive moat kind of broadening is what I would describe. And look, there will always be a commodity layer of things that are around data collection and surveys and things like that. But as these products become more complex, as the human machine interface becomes more challenging and sort of never seen before, what we offer is really -- it's not just like it's an increment over what the rest of the so-called competitors are offering. It truly is an offering unto itself.

When you think about what we are able to do that is designing the bespoke experiment, defining what that research question ought to be and getting all the way through to the regulatory and legal and business implications of that.

We are hiring very aggressively in this area, our human factors expertise, biomechanics, data science and the engineering side. So we differentiate in that way. And I absolutely am with you that the offering is becoming more and more distinct.

So it's important that we be delivering that value to the client and that we reflect the value that we are delivering in our pricing. I think as the aggressiveness of the competition that we see in the industry landscape, is helping in that sense because there is a speed of innovation that our clients are trying to achieve, and that helps us really articulate our value proposition as well.

So all in all, I think this will be a very healthy area for us to grow.

The next question comes from Tomo Sano with JPMorgan.

In your prepared remarks, you highlighted strong AI-enabled demand. So looking back on the first half, could you help us quantify what drove the surge like more engagement versus the larger engagements? And I wanted to get more color on like is that meaning like more utilization too? If you could talk about that in the first half as well as some expectation in second half, please?

Yes, Tomo, the user experience studies were a driver of growth in the second quarter. We talked a little bit about the large study. So we had expected that to be 2% of our net revenues. That study expanded in scope during the quarter and ended up representing about 4% of our net revenues. It's a study that continues. It moderated near the end of the quarter. So we expect to continue the next part of that study at a level of about 2% of revenues through the remainder of the year. So that's an area that -- it was one piece of this sort of user study area.

It's expanded not only in size, but the number of clients that we do the studies for, the number of projects has expanded and the number of types and complexity of devices has changed. So we're doing it now for more clients over more studies over a broader array of devices that our clients are looking to bring to the market.

And then on the follow-up utilization assumptions, if demand is surging, yet utilization assumption looks conservative [Technical Difficulty] half. What is the primary reason? Any seasonality factors, headcount ramp, mix onboarding and just conservatism? And if you could give us more color, I appreciate it.

Yes, definitely. A little bit to your last question, Tom, on the utilization, those studies did drive our higher utilization. So the 74% utilization in the second quarter did benefit from those studies and that large study in particular.

As far as the seasonality, the second quarter and third quarter are very similar as far as available working days, vacation holidays. So the 74% to 75% that we're expecting in the third quarter is a tick up from the 74% that we experienced in the second quarter. And then as you get into the fourth quarter, that one is significantly impacted by available working days with the holidays, and vacations and all that. So our standard utilization is lower in the fourth quarter every year.

The next question comes from Tobey Sommer with Truist.

Thank you. I wanted to ask you which industries and verticals have the greatest share of proactive work now? And do you expect the industries with the most proactive work to change over the next 12, 24 months?

Yes. Tobey, I can chime in here and Eric can add to it. So on our proactive side, consumer electronics is going to be one of the larger contributions as is the chemicals industry. In consumer electronics, as you know, we've got the user research side of what we do. We also have the hardware-related work that we do for that industry.

On the chemical side, it's really the proactive regulatory work for the industrial chemical manufacturers, the agricultural chemical manufacturers, biocides, pesticides and so forth. These are both areas where we saw good growth in the quarter.

The third vertical I would highlight is going to be the utilities space. This is where our risk modeling work comes in on the proactive side. So those are the 3, I would say, dominant industries there. And look, we've seen strong market drivers in all 3 of those areas over time. And in my view, those will continue to be the areas that will drive more of the proactive growth.

There are regulatory issues in the transportation industry that we do more of today than we did a number of years ago. As the automated vehicle population increases, the regulators are becoming much more active and so forth. So there is growth opportunity there.

Medical devices is the other place where regulatory is a piece of what we do. And again, you've got that complexity of products, you've got the safety-critical nature of those products, you've got the embedding of AI into those products, that makes the regulatory environment even more complex. So drivers across regulation, drivers across risk in asset-heavy industries and the driver around AI and innovation.

John, you may want to add a little bit to that?

Yes. So I started the company in '99, and there were traditional practices that maybe were heavily exposed on the reactive side where an incident had to occur before you called us, human factors, biomechanics, things like that. But over the years, that has changed. And as those issues become more important in the development of your product and we're engaged earlier in the life cycle during those development stages, there could easily be regulatory issues, there might be issues around sort of the technology integration itself.

You see practices like that, which historically were almost completely reactive really be a blend. And I think that is marching really through our organization as all of the disciplines that we offer become increasingly important to delivering that last nines of reliability or performance or whatever you're after as you're getting that next step out of your device or your product that you're working on or system.

So I don't think it's a static answer here. I think there is a trend to having both a reactive and a proactive component in really everything that we do. But Catherine is entirely correct that the current snapshot that I think the 3 verticals you mentioned are probably the strongest ones as opposed to [ proactive one ].

I think that what we have seen in history is where there is a drive for the consequence of safety or requirement for reliability increases, there's a higher demand for us to do that work upfront because the consequences on the back end are so severe. And clearly, that is what's driven work in the consumer electronics area, where there was a real drive not only for performance and reliability as those devices were in the wild, but you had an innovation drive going on over the last several decades around energy storage technologies in those devices, which we all saw across the world when Samsung Note 7 had their issue, but clients had been trying to address those issues over time.

So as we look and turn forward and we think about the complexity of the device that we're looking for people to wear on their bodies on a continuous basis, so that they can continuously interact with these AI applications, we're talking about putting batteries on people's heads and other parts of their bodies, having them sleep with them and do it, these things will evolve. As we bring robotics into homes and interfacing with people throughout their daily lives, we not only have the risk of injuries from mechanical devices, but also from the energy that's driving those devices in the field.

So I think that there will be in Exponent's world, sometimes we have to wait for people to pay the price on the failures and then get commitment to go to the gym, as I say, instead of the cardiologists. But I think these things are coming for us in a number of industries.

I wanted to see if I could get your perspective on reshoring to the United States as well as the evolution of data centers, which that's a theme that's been around now for several years, but the scope and scale of what is being discussed and planned right now is -- represents a material change, I think. And how do those trends interact with the company and impact your business, maybe create opportunities?

Yes. I would expand the reshoring comment to just the supply chain changes in general. When you are on the data center side, buying up every connector that there is and you've got to go to your second choice and your third choice, it might be related to reshoring or it might be just diversifying what that supply chain looks like. That drives opportunities for us to do the technology due diligence as you're maybe trying to do things on an accelerated time scale, the failure rates usually in those kind of circumstances go up, which is then a driver for us to come in and try to explain what the science and engineering is behind that.

There are regulatory demands. I have lots of exposure on the government side. And as you see things like drones having to be manufactured in the U.S. and things like that, that puts pressure on, well, where are you getting the motors for those drones from and looking at what that does for the local industry base. And there's opportunities in that as our clients come to us and say, help us manage that change, help us understand the impact of bringing some new supplier onto our platform. So onshoring, yes, supply chain variability in general, probably even larger.

When you're talking about data centers, I think it's sort of the same scenario maybe, but with gasoline poured all over it to really accelerate what's going on there. The capital influx that are driving the infrastructure spend from the building and where you're getting the concrete from all the way to the plating on the connector. All of those issues as you are continuing to invest, really touch on a huge diversity of what Exponent has to offer across really all of our disciplines.

So as you look at the increased capital spend there and you look at the claims of getting that third line reliability out of your data center, that's an engineering challenge to accomplish. So it's not good enough just to take the manufacture what's on the nameplate. The vendors are having to dig deeper and make sure they really understand the performance of that component in an individual piece. But then in that complex system that all has to be working together to deliver the kind of reliabilities that we're looking for out of these kind of investments.

So both of those drivers for us for growth and really long-term drivers as the supply chains start moving around the world.

If I could ask one last question for me. The supply of PhDs in the U.S. looks like it's going to be going down. Recent data says that I guess, the first year year-over-year change in admits for PhDs are down 15% with some prominent universities being down even bigger. How do you think a winnowing of young new talent in the economy would impact Exponent?

Yes. Thanks, Tobey. First of all, I'll kind of contextualize a little bit around that in terms of what level we're hiring at because we are really taking the cream of the crop of that class of PhDs, right? We're getting them from Stanford, and MIT, and Berkeley, and Caltech, and Michigan and all of those places.

It's important to recognize, I think, the PhDs in the U.S. are probably about half from the U.S. and half international students coming from around the globe. We have typically oriented our recruiting toward those who are authorized to work in the United States. We do hire some others as well, but there are risks associated with that. And so that's, I think, an important element of our strategy to understand.

And so, as we look back at the recruiting data over the last year or 2, which is really when this sort of pressure on scientific research funding has come to a head, we have continued to be able to attract that top layer of talent. I mean, this is about having the value proposition for that top layer of PhDs in the sense that compared with an academic route, you are working on things with sort of actionable decisions being made in real time.

I know for me personally, that was hugely attractive about Exponent. It's this ability to get away from the lab bench and work on a real problem that's going to have impact in that real time. And the ability to work on a lot of different things. You've spent so much time 5, 6, 7 years looking down a deep, deep tunnel of your specialty that's very narrow. And now you get to take that ability to solve an unstructured problem and put it across all kinds of different industries, products and issues. So that is pretty cool for a graduating PhD. And we just have to continue to expand our moat.

We need to continue to have professional development as a key element of our culture where we are going to take that talent and we are going to build it and mold it from day 1 into an impactful consultant that is making a real difference in the world. So that's the way I think about it.

Yes, I think the data on it is approximately 5% of our hires in a year or less need any sponsorship. So it gives you a sense of where -- as we are looking at the PhD classes of the future begin to change, it probably aligns more with how Exponent has recruited historically.

I think Catherine mentioned something really -- just one last follow-up on that one. I think Catherine mentioned something that was really important that differentiates in my mind, something that Exponent is really good at. And that is the continued growth through your career while here. And so while you may enter at that PhD, that's just where the journey begins for us. And so our model is really based on that continual increase in stature and growth as you become that expert and are really recognized at the top of your discipline for whatever the challenge might be.

So while the supply may change, we've got the engine behind it to make the most out of it as those candidates come to us.

[Operator Instructions] The next question comes from Josh Chan with UBS.

I think, Catherine, you mentioned the increased diversification of the user research practice. I guess I was wondering if you can give us a color on how diverse that is like applicability of this to a number of situations. Just could you frame for us how it's diversifying, whether it's customer base or applicability or however you want to think about that?

Yes. Yes, absolutely. It's really diversifying across multiple dimensions. So we are doing these types of studies for more clients and actually across more industries. We're doing it in consumer electronics. We are also more early days, but doing it around the life sciences arena.

When you think about the expanding array of health-related wearables, that is something that is one of the dimensions of this diversification. It's lifestyle devices, but it is also this transition into more sophisticated FDA-regulated medical devices, the algorithms that are looking to measure blood pressure, that are looking to measure blood oxygenation, some of these other more sophisticated measurements. If a life sciences company is wanting to use that in a clinical trial that is going to the FDA, it's a much higher standard of sort of benchmarking and understanding the ground truth and the human interface side of that.

So this is a place where Exponent thrives, right? We understand the regulatory environment, we understand the electronics, we understand the human factors. So there's the consumer, there's the health-related work, but just the different technologies. I think this is something that Eric mentioned. There are all kinds of ways that AI is being incorporated and is being delivered via these products, things with screens, things without screens, things that are interfaced through voice only, things that are interfacing through 3D video types of environment and other types of sophisticated sensors.

So there are as many technologies and areas of study as there are ideas for these kinds of devices. And so that's really what's behind this. There are more clients across more industries with more ideas about how to deliver AI and use that to either measure or provide information and do all the different things that AI is being asked to do.

And then maybe just one quick question on the repurchase. Could you talk about your willingness to continue to buy back stock at least on an annual level above any free cash flow? Just like how should we think about the willingness to buy stock, I guess, and at what pace?

Josh, this is Eric. I'll take that one. Our philosophy hasn't really changed on this. We've always committed to buy back enough stock to offset dilution from share-based awards. And then we've used excess cash in addition to that to do repurchases at times when the stock pulled back. So we've done that for many years.

Cash has built up. We've utilized it when the stock pulled back. We've done a fair bit of that recently over the last 12 months at $211 million. And our cash is down to a lower level, but it's down to a level we're comfortable with as far as running the business. We've communicated to investors that this sort of $50 million to $70 million range is a range we're happy to work within to pursue small strategic opportunities and to have sufficient operating capital.

So we're confident in the long-term growth trajectory of the business. We expect to generate free cash flow of over $100 million in the back half of the year, and that's really why our Board authorized that additional $50 million in share repurchases.

So we're going to continue to be more active when the stock pulls back, but it will be at a lower rate than it was at the first half of the year or even the back half of last year.

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

Good day, and welcome to the Exponent, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions]

Please note, this event is being recorded. I would now like to turn the conference over to Joni Konstantelos. Please go ahead.

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's First Quarter 2026 Financial Results Conference Call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at investors.exponent.com.

This conference call is the property of Exponent, and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer; Rich Schlenker, Executive Vice President and Chief Financial Officer; John Pye, incoming President; and Eric Anderson, incoming Chief Financial Officer.

Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic SEC filings, including those factors discussed under the caption Risk Factors in Exponent's most recent Form 10-K. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise.

And now I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine?

Thank you, Joni, and thank you, everyone, for joining us today. I will start off by reviewing our first quarter 2026 business performance and strategic positioning. Rich will then provide a more detailed review of our financial results and outlook, and we will then open the call for questions.

Exponent delivered double-digit revenue growth, growth in net revenues and earnings in the first quarter, reflecting the strength of our multidisciplinary portfolio and continued demand for our specialized expertise across a range of industries. Growth was driven by user research studies for consumer electronics clients who are integrating artificial intelligence into their devices. We are continuing to see diversification of this work, not only across our client base, but also across the breadth of products and underlying technologies we support. Growth was also driven by risk management work for utility clients evaluating asset performance under extreme weather conditions.

Reactive engagements also contributed to our growth with increased dispute-related and failure analysis demand across construction projects, energy facilities and medical devices. We saw increased activity from both domestic and international clients related to complex construction challenges and disputes. In energy, demand increased for work involving critical facilities where reliability, performance and the consequences of failure are paramount. We also saw increased activity involving medical devices with particular scrutiny of product safety, quality and performance. Trends in energy demand, infrastructure risk and technological innovation continue to support demand for our deep technical capabilities, reinforcing Exponent's essential role in helping clients navigate complex high-stakes decisions.

The integration of AI and other advanced technologies into performance-critical and physical systems, combined with the rising expectations for safety and reliability, is increasing reliance on Exponent's specialized expertise, both proactively and in response to failures. This is evident across a wide range of applications, from automated vehicles that must interpret complex real-world environments to avoid collisions, to health-related devices such as automated insulin delivery systems where performance directly affects patient safety, to utility systems using AI to anticipate asset risk and prevent wildfires and other high-consequence hazards. Engagements like these underscore the growing sophistication and interconnectedness of modern technologies as they move from concept to market. As a result, clients rely on Exponent to evaluate failure [ modes ], product performance, usability and risk as they work to develop and deploy these systems quickly and responsibly.

In these contexts, the question is no longer simply whether a system functions, but whether it can be trusted to perform reliably in high stakes, real-world conditions, raising the bar for performance across not just expected conditions, but also in edge cases, novel conditions and complex interactions that fall outside of prior experience. As clients accelerate development time lines, they increasingly rely on Exponent not only for the systems themselves, but also for the underlying data, testing and evaluation strategies that support them. This includes assessing training data and potential bias, evaluating system performance in both laboratory and in the wild environments and supporting the reliability of adjacent infrastructure such as battery energy storage systems and data centers.

Across these efforts, the common threads are rising technical complexity and the increasing consequences of failure. This is where Exponent stands apart. Our teams combine expertise in engineering, data science, human factors, health and the physical sciences to help clients navigate challenges that do not fit neatly within a single discipline. As these technologies continue to evolve, we expect demand for Exponent's independent multidisciplinary expertise to continue to grow.

I'll now turn the call over to Rich to provide more detail on our first quarter results, as well as discuss our outlook for the second quarter and the full year.

Thank you, Catherine, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis unless otherwise noted. For the first quarter of 2026, total revenues increased 14% to $166.3 million, and revenues before reimbursements, or net revenues, as I will refer to them from hereon, increased 10% to $151.8 million as compared to the same period in 2025. Net income for the first quarter increased 11% to $29.6 million as compared to $26.7 million a year ago. And earnings per diluted share increased 13% to $0.59 as compared to $0.52 in the prior year period.

During the quarter, we realized a negative tax impact associated with accounting for share-based awards of $900,000 as compared to $500,000 in the first quarter of 2025. The change in the tax impact associated with share-based awards was due to the difference of the value of the common stock between the grant date and the release date for the restricted stock units. Inclusive of the tax impact from share-based awards, Exponent's consolidated tax rate was 30.2% in the first quarter of 2026 as compared to 29.4% for the same period in 2025.

EBITDA for the quarter increased 15% to $43.1 million, producing a margin of 28.4% of net revenues as compared to $37.5 million or 27.3% of net revenues in the first quarter of 2025. Billable hours in the quarter were approximately 399,000, an increase of 6% year-over-year. Average technical full-time equivalent employees in the quarter were 1,013, which is an increase of 5% as compared to 1 year ago. This increase was due to our recruiting and retention efforts. Utilization in the first quarter was 76%, up from 75% in the same period of 2025. The realized rate increase was approximately 4% as compared to the same period a year ago.

In the first quarter, compensation expense after adjusting for gains and losses in deferred compensation increased 9%. Included in total compensation expense is a loss in deferred compensation of $1.1 million as compared to a loss of $9.3 million in the same period of 2025. As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line.

Stock-based compensation expense in the quarter was $9.1 million as compared to $8.2 million in the prior year period. Other operating expenses in the quarter were up 6% to $12.8 million due to an investment in our corporate infrastructure. Included in other operating expenses is depreciation and amortization expense of $2.5 million. G&A expenses increased 24% to $6.2 million for the first quarter. The increase in G&A expenses was primarily due to increases in travel and meals associated with business development, recruiting and people development activities. Interest income increased to $1.7 million for -- or decreased to $1.7 million for the first quarter, driven by a decrease in cash and lower interest rates.

Regarding capital allocation. During the quarter, capital expenditures were $2.5 million. We distributed $16.6 million to shareholders through dividend payments and repurchased $79 million of common stock at an average price of $68.09. Additionally, our Board approved a $50 million increase in our current stock repurchase program. This is in addition to the $17.7 million available for repurchases as of April 3, 2026, and reflects our conviction in Exponent's long-term growth trajectory.

Turning to our segments. Exponent's Engineering and Other Scientific segment represented 85% of revenues before reimbursements in the first quarter. Revenues before reimbursements in this segment increased 12% in the quarter. Growth during the quarter was driven by user research studies in consumer electronics and risk management in the utility sector, along with reactive engagements in energy and life science sectors.

Exponent's Environmental and Health segment represented 15% of revenues before reimbursements in the first quarter. Revenues before reimbursements in this segment increased 2% for the first quarter. Growth in this segment was driven primarily by regulatory consulting in the chemicals industry.

Turning to our outlook. For the second quarter, as compared to 1 year prior, we expect revenues before reimbursements to grow in the high single digits and EBITDA to be 27% to 27.8% of revenues before reimbursements. For fiscal year 2026, we are maintaining our revenue and margin guidance. We expect revenues before reimbursements to grow in the high single digits and EBITDA to be 27.6% to 28.1% of revenues before reimbursements. We expect our average technical full-time equivalent employees to increase approximately 5% year-over-year in the second quarter of 2026 and 4% to 5% for the full year 2026 as compared to 2025.

We expect utilization in the second quarter to be 72% to 73% as compared to 72% in the same quarter last year. We continue to expect the full year utilization to be 72.5% to 73% as compared to 72.5% in 2025. We expect year-over-year realized rate increase to be 3% to 3.5% for the second quarter and full year. For the second quarter of 2026, we expect stock-based compensation to be $6.5 million to $6.7 million. For the full year 2026, we expect stock-based compensation to be $27.9 million to $28.4 million. We continue to believe that our stock-based compensation program effectively attracts, motivates and retains our top talent.

For the second quarter, we expect other operating expenses to be $12.8 million to $13.3 million. For the full year, we expect other operating expenses to be $53 million to $53.5 million. For the second quarter, we expect G&A expenses to be $7.2 million to $7.7 million. For the full year, we expect G&A expenses to be $28.5 million to $29.5 million.

We expect interest income to be $700,000 to $900,000 per quarter during 2026. In addition, we anticipate miscellaneous income to be approximately $300,000 per quarter for the remainder of 2026. For the remainder of 2026, we do not expect any additional tax benefit or loss associated with share-based awards. For the second quarter of 2026, we expect our tax rate to be approximately 28% as compared to 27.9% in the same quarter 1 year ago. For the full year 2026, the tax rate is expected to be 28.5% as compared to 28.0% in 2025. Capital expenditures for the full year 2026 are expected to be $12 million to $14 million.

In closing, we are pleased with our performance this quarter and remain confident in the strength of our business. I will now turn the call back to Catherine for closing remarks.

Thank you, Rich. Exponent is well positioned to support the evolving needs of our clients as innovation accelerates and systems grow more complex and particularly as artificial intelligence becomes more deeply embedded in the physical world. These trends continue to drive demand for our differentiated multidisciplinary expertise, independent evaluation and trusted insight. Altogether, supported by our exceptional talent and unique position in the marketplace, we remain focused on helping clients navigate their most complex challenges while delivering long-term value for our shareholders.

Before opening the call for questions, I'd like to introduce our incoming President, John Pye; and our incoming Chief Financial Officer, Eric Anderson. John Pye will assume the role of President effective tomorrow, May 1. A 25-year veteran of the firm, John has played a central role in advancing our capabilities and innovation agenda, helping Exponent address increasingly complex client challenges as technologies evolve and systems become more sophisticated. John?

Thank you, Catherine. As the first time we're here, let me start by saying how honored and excited I am to step into this role, particularly at such a time of broad opportunity for the firm. Looking across the markets we serve, there is accelerating innovation, there is increasing technical complexity, and there are expectations that are only rising around safety, around health and around the environment, so much so that I can't imagine a better time to be an engineer or a scientist, and I can't imagine a better place to do that than here with my Exponent colleagues.

When our clients call us with their most challenging issues, they get our deep technical credibility, they get our multidisciplinary approach, and we put those together to help them navigate the challenges of emerging technologies and complex systems of systems, all while staying grounded in delivering real-world impact. I'm excited to work with my partners on this call, Catherine, Rich and you, Eric, as well as our entire leadership team and continuing to advance our capabilities and supporting the firm's long-term growth.

Thank you, John. Eric Anderson will assume the role of Chief Financial Officer, also effective tomorrow, May 1. Eric combines rigorous financial discipline with a deep understanding of our strategy and operations.

Before I turn to Eric, however, I want to take a moment to thank Rich for his many, many years of outstanding leadership as Chief Financial Officer. Rich will continue to play an important role as Executive Vice President, advancing Exponent's strategic priorities while remaining actively engaged with investors. We are grateful for his continued leadership and support.

With that, I will now turn the call to Eric.

Thank you, Catherine. I'm honored to step into this role as Exponent's Chief Financial Officer and excited about the opportunity to work alongside our leadership team. I have been a part of this incredible company for over 20 years as part of the finance organization, working closely with our consulting team. I look forward to continuing to support Exponent's long-term growth objectives, strong operating model and disciplined execution. I'm also excited to engage more with the investment community as we move forward.

Thank you, Eric. Operator, we are now ready for questions.

[Operator Instructions] We have the first question from the line of Tomo Sano from JPMorgan.

I would like to ask you about the macro trends such as accelerations of AI, innovation, rising energy demand impacting the nature of your projects, client base and competitive positioning. Compared to the traditional engagements, are you seeing changes in the required expertise of the complexity of projects in Q1? And could you talk about any more color for the second quarter and after, please?

Yes, sure. Thank you, Tomo. The macro trends you mentioned really are driving growth of the business in a number of different dimensions. You mentioned the energy sector. This is one place where we are seeing our engagements evolve across really all modalities of technology, from the traditional oil and gas issues that we see through to wind power, to solar power, even starting to look at things like small modular nuclear reactors. So you can imagine the different kinds of risk models, proactive as well as reactive work and the expertise that's required for that type of work.

We're also seeing that play into our data center offerings. These are places where the innovation around the cooling systems, so this is with regard to, say, our thermal scientists, the kinds of issues we're seeing around corrosion. And so this is on the material side and the metallurgy side, the connecting to power and the governance and specifications around that. So AI is fundamentally that driver that is pushing on energy, and we are seeing both reactive as well as proactive projects.

Another place where there's a real opportunity for more highly -- even more highly specialized expertise is in robotics. And this is actually a place where it would be wonderful to hear from John, as he is someone who has been active in growing our robotics efforts across military and across other clients. So John, why don't you say a few things about that opportunity to specialize around robotics?

Yes. Thanks, Catherine, and good to hear from you again, Tomo. So robotics have been around a long time. But what's interesting and novel now is the physical AI is getting applied to the robotic systems. And those robotic systems aren't just in the factories on our assembly lines, but they're in and amongst the people, interacting with them in our warehouses, in our homes. And maybe the biggest category are automated vehicles that are on our streets.

And so there's opportunity there for a number of our disciplines. Catherine mentioned many of them. You have our human factor side where the robots are interacting with the people and the understanding of their intent and where they are. You have our biomechanics that gets pulled in as the interaction becomes physical. You have our data sciences as they are interpreting the world around them and trying to make decisions. So it really pulls on the entire organization across the entire stack that Catherine mentioned, from the power that drives the data center that runs the algorithm that powers the robotic system. So I couldn't be more excited for what's happening there as those opportunities come our way.

And just one more. And then congratulations, everyone, for new opportunities and role. And this transition to new President and CFO, along with the changes to the Board, appears to mark an important new chapter for Exponent. So could you elaborate on why now, it's the right time for this leadership and governance refresh? And what is the significance of this timing? And how do you see that positioning the company for future growth and transformation, please?

Yes. Thank you, Tomo. The timing is -- really is strategic here with regard to how we are evolving the leadership team because we see the macro trends that you mentioned in your first question, right? The increases in the penetration of artificial intelligence into physical systems, right, which is really where Exponent lives, those physical systems that are high performance, high reliability, high risk, high consequence.

And so the opportunity that we see around these systems from sort of cradle to grave, the proactive in terms of building the data sets to train them, to the hardware that delivers them, to the consequences of them being in the wild. There's enormous opportunity. And so this evolution of leadership really reflects that in order to accelerate what the company is doing. We've been demonstrating our ability to execute and capitalize on those opportunities for the last few quarters, and we intend to sort of continue building that.

And like you said, we've got to build the talent base around that. We need to continue to widen our competitive moat and our differentiation. And with both John and Eric's deep experience with the company, John on the technical and on the innovation side, Eric on the financial side, and of course, with Rich continuing and becoming even more engaged on the governance side, I think this is going to position us extremely well to capitalize on all of these trends that we're talking about.

We have our next question from the line of Andrew Nicholas from William Blair.

Congratulations to everyone on the call on their new roles. I wanted to touch on, Catherine, your comment on consumer electronics specifically. I think you mentioned seeing kind of diversification or broadening of some of that demand across client types and products. Could you spend a little bit more time fleshing that out? And then if possible, I would love to hear what that broadening does to your conviction in continued growth in that part of your business.

Yes. Yes. Thanks, Andrew. So yes, there are a few sort of broad categories of products that we're seeing the diversification across. I mean, one is health-related products. This is a really important category that has been an important part of the growth that we're seeing in this kind of user research, human machine interaction type of engagement where there are algorithms that need to be benchmarked against ground truth.

There are questions we're being asked by clients who want to deploy these technologies and this hardware, maybe in their clinical trials of a new device or a new drug. And they are looking to us for advice, for independent objective advice on what are the best platforms and how can we be sure that what the device is telling us is, in fact, of quality in the data. And of course, you have all of the human-machine interaction aspects of that. So that's an important category.

I think another important category is devices that are sort of taking on novel form factors for the delivery of artificial intelligence. So it's no longer just your phone or your tablet. You're talking about glasses. You're talking about virtual reality, augmented reality systems. You're talking about unique hardware that doesn't have screens, but still needs to have that quality interaction with the human, whether that's through video, whether that's through audio and so forth. And so you've -- these may not be health related, but they are devices that are novel and that need to be performing and need to ensure that the training data sets are going to really drive the algorithm in the right way.

And so -- and then all of the hardware, another category of this is all the hardware associated with -- if you think of it as the data center stack, right? There is everything from the chip to the rack, all the way up to the full system that is going to be -- it's essential in that life cycle of the AI in order to be able to deliver that. And we're all seeing the demand on the compute that the hyperscalers and others are facing, the power requirements.

So these are all the things that kind of underlie the diversification that we're talking about, and we believe we'll continue to diversify. There is a push around innovation, that speed of innovation to get that next feature, that next technology. And that speed of innovation in addition to all of the safety and health and risk implications are the things that really make that perfect for Exponent.

That's super helpful. For my follow-up, I wanted to ask about the talent environment. Obviously, decent or quite good. Headcount growth year-over-year in the quarter, expectation for that to continue throughout the remainder of this year. Is it any harder in this environment to attract talent given kind of this Venn diagram between what you're doing and what maybe a lot of the fastest-growing companies in the world are also focused on with artificial intelligence? And I think part of the reason for the question is I think you raised the amount of share-based compensation you expect to pay this year. So wondering if there's any through line between those two themes?

Yes. Thanks for the question there, Andrew. Look, I think we are -- it has always been a highly competitive market to come into top universities and pursue the top quartile, if not the -- at times, we want to even think the top 10% of that PhD class that's there. So we've always found that, that talent has many opportunities, and it remains competitive.

But I think that Exponent, as Catherine and John have outlined here, we are coming at this in this multidisciplinary approach. It isn't about we can write a better algorithm than you. We're not competing with our clients at their core thing. What we're helping them do is understand that human interaction, understand that compute that is necessary to have that perform at the highest level and all the consequences that go around that, that are there.

So that allows us to be very active in recruiting all these adjacencies. We absolutely need to understand the algorithms. The question of why did the car make the decision to not stop or to turn left instead of right and all those things come down to analyzing the sensors and the software and doing all that. And we can play in that area, but it's not about writing the best code that's out there. It's about analysis and such.

So it will remain competitive. We think we're doing very well. Our acceptance rate on offers is as high as it's ever been. So -- and that's been going on over the last year or 2. So we're feeling good about when we want somebody, the opportunity for those people to lean in to Exponent and such. So I think from that standpoint, it's good.

We are always replenishing what we've got here. We're bringing in 150 to 200 new people a year that's bringing in the new talent that has been out doing research in the next advanced areas. And the great thing is they're using the newest tools in that activity as well. So they're coming in, having experimented with and used AI, machine learning and other things in their discipline of the way they're applying it. And those things are important for us in staying on top of our game and moving forward. So we're feeling pretty good about our ability to attract talent and be able to move forward.

[Operator Instructions] We have our next question from the line of Josh Chan from UBS.

Congrats, everybody, on their new roles as well. I guess on the consumer market improvement, could you talk about sort of the durability of these projects? I think in the past, consumer has been a bit more cyclical. And I'm just wondering about the pace of improvement here and the durability of this growth tailwind from consumer.

Yes. Look, we've seen definitely, a gradual step-up in the level of activity. We anticipated that early last year in 2025. If you remember, even in Q1 or 2, we were talking about where our clients were beginning to develop their projects, where they were talking to us about their road map. That really played out as anticipated in the -- beginning in the late third quarter and into the fourth quarter. That momentum and those developments have continued here into the first quarter and are continuing on into the second quarter and beyond.

Look, what each client and where they are in the product life cycle, there will be some cycles through that. We went through an extreme of that back in 2023. We don't see that as we look out across the clients in front of us. I can't predict what every quarter is going to be and where there might be a slight step down and then an acceleration forward.

But everything directionally over time is driving to the implementation of these algorithms and these AI into physical systems. And as they go there, what we are all -- what Exponent is seeing and acting upon and what we're all reading about is those systems then require a much higher reliability. They need a much stronger curated data set. They need to be tested against gold standards. Those are all the things that our clients are doing today. And they are continuing that development into the future.

And the applications they go after will be more sophisticated in the future. We saw this 5, 6 years ago, you were in -- or 10 years ago, fingerprints and facial recognition, and then beginning to have some applications, and then into AR and VR. Then we started moving into health applications as the clients gained more confidence and thought they can tackle things that were in the regulated world. So we think that the direction of things are very positive for the long term and especially as these integrate themselves into the robotic world of automated vehicles and humanoids in your home and in the retail environment you interact with and everything where humans are playing.

That's good to hear. And then on the repurchase side of things, could you just talk about the decision to repurchase that amount in Q1, what that means and kind of your willingness to continue to be aggressive on buybacks around the similar levels?

Yes. So look, we have always had a philosophy and conviction around really being willing to let some of that cash build up and have sort of an incremental amount we repurchase every year, but then being more aggressive on pullbacks. As you -- as the results speak for, we believe that the company has a very strong future and is producing a very strong profitability and cash flow. And we think that's going to result in good future performance.

And as such, on this pullback, really, what you look back is over the last 4 quarters or 12 months, the company had bought back $177 million of stock, almost 5% of our shares during that 12-month period of time. And we're feeling pretty good about that with where we sit today. And that's why the Board has given us additional authorization as we move forward.

We have our next question from the line of Tobey Sommer from Truist.

I was wondering if you could update us on the portfolio of larger projects that the firm has? And whether -- when you reflect upon prior substantial projects that were points of discussion over time, whether anything about AI or changes in the marketplace would change the scope of large projects going forward?

Yes. Why don't -- maybe I can start off on a little bit of reflection, and then I hand over to Catherine or John as they talk about how AI can increase the complexity of projects and the amount of data that you're handling. But as we -- Exponent has a very diverse portfolio of projects always ongoing. We do about 10,000 projects a year. We talk about, about 20% of those make up 80% of our revenues are really traditional model.

We have had -- the large projects typically for us are something that ranges in the 1% to 2% of revenues is a very large project in there. And at times, we've had a few projects where the size of them had gotten up into the 4% or 5% of revenues, and we had called those projects out when they had risen to that level. Those included the unintended acceleration issues for Toyota back in the early 2010s, PG&E's gas line explosion in San Bruno and the work that followed that, followed by the Camp Fire and the analysis around the wildfires that we did for PG&E and such.

But as we've moved forward, we've got large pieces of work, but none that elevate themselves to that level. But the portfolio is continuing to diversify, and clearly, the multidisciplinary nature of our firm is continuing to grow.

Yes. And I can tack on here on the question of AI and the products and how does that sort of change the scope of the engagements. And we are definitely seeing evolution of that. I mean, one example I think of is in the automotive product liability world. This is our dispute-related work, where that's moving from -- 10 or 20 years ago, it was a question about the airbag deploying, and was that timely and did that protect the occupant. And you had a sort of narrow set of issues.

But with the complexity of the product now where you have an AI algorithm making a decision about whether to put the brakes on or whether to have a steering input, these are complex algorithm choices that are being made. So having to go back and sort of trace that decision in the algorithm and the testing that goes along with that when you're looking at different scenarios or perhaps comparing to other products, this becomes a much more complex matrix of tests. When you maybe you used to have to run 1 test, now you're running 5 tests or 10 tests because you've got to run through a number of different scenarios with these different systems, right?

We're also seeing -- another place you see it is in our intellectual property matters. I mean, the complexity of products when they contain those AI algorithms, whether it's wireless communications equipment, whether it's a surgical robotics system. When you're looking in-depth in detail at those technologies, that complexity drives the -- not only the expertise level that you need, but it drives the complexity of the claims that need to be analyzed and the research that needs to be done in order to figure these things out. So look, as Rich said, we always have a diversity of sizes of projects, but those are at least a few examples to give you some flavor for how the incorporation of AI into the physical world is increasing the complexity and therefore, scope of the things that we're doing.

And if I could ask you to comment on two industry verticals for you. One is chemicals, what's the current and forecasted state of demand there? And then also the energy and utility sector, which, based on data center demand and other demand, seems to need to come to market with more supply, perhaps at a pace that the industry is unaccustomed to and dovetail nuclear being involved again. What's the future of the energy and utility outlook from Exponent's perspective?

Yes. So let me start with chemicals. And this is a place where we have both reactive as well as proactive work. If you think of the proactive side of that, this is a lot of regulatory type of work. And what we're seeing in the regulatory frameworks is that they continue to become more complex, and in fact, are relying more and more heavily on complex simulation technologies in lieu of animal testing, for example. So there's a trend over time.

And so being able to utilize effectively these high-end sophisticated models is a place where we are well positioned to capitalize as those technologies, for example, messenger RNA technologies and pesticides and other complex environments for the regulatory side, think of chemicals like PFAS, where there's increasing complexity around the regulatory environment. So we're absolutely seeing the growth opportunities there. The PFAS world, too, is driving dispute-related work, whether that is related to the OEM chemical manufacturers or the entities that are using PFAS in their products, consumer products, electronics, the drive to find substitutes for those chemicals that really do perform so well. So we see a lot of growth -- continuing growth opportunity there.

On the energy and utility side, you said it well, Tobey. The drive for more energy and really -- really hitting the -- we're sort of pegged at the levels of energy that we can create. And there is such an intense drive to push that, such that we can run the data centers, we can get the compute.

And so I mean, we're seeing data center operators who are building their own gas-powered turbines so that they can get the power themselves and they don't have to tap into the utility. So this drives -- first of all, it drives the disputes as those infrastructure investments are being made. We're seeing challenges with the backup power systems in terms of battery energy storage. We are super well positioned to capture that, the nuclear side. And so this is going to drive disputes.

It also is driving more inquiries about proactive risk modeling from the utility side. Novel sources of power generation create unanticipated failure modes. And so we are helping our clients try to understand those and trying to quantify those risks. So in both of these areas, both chemicals as well as energy and utilities, we're seeing those growth opportunities on both the proactive and reactive engagements.

Thank you. Ladies and gentlemen, that concludes the question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the Exponent, Inc. Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Joni Konstantelos, Managing Director at Riveron. Please go ahead.

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's Fourth Quarter and Fiscal Year 2025 Financial Results Conference Call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at www.exponent.com. This conference call is the property of Exponent, and any taping or other reproduction is expressly prohibited without prior written consent.

Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer; and Rich Schlenker, Executive Vice President and Chief Financial Officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.

Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic SEC filings, including those factors discussed under the caption Risk Factors in Exponent's most recent Form 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise. And now I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine?

Thank you, Joni, and thank you, everyone, for joining us today. I will start off by reviewing our fourth quarter and fiscal year 2025 business performance. Rich will then provide a more detailed review of our financial results and outlook for 2026, and we will then open the call for questions. We delivered a strong finish to 2025, reflecting the strength, diversification and resilience of our portfolio.

During the fourth quarter, we saw growth in proactive engagements, driven by increased demand for user research in consumer electronics, along with continued expansion of our risk management work in the utility sector. Growth in our reactive services was driven by failure analysis and dispute-related engagements across a broad range of industries, including energy, construction, transportation and life sciences. Turning to our engagements in more detail.

Growth in proactive engagements in the fourth quarter reflected continued diversification across a broader mix of clients and an expanding range of products and technologies. In consumer electronics, we saw increased demand for user research engagements, driven by the need to evaluate product performance and user interaction as artificial intelligence becomes increasingly embedded in both every day and novel devices.

We also saw continued growth in risk management and asset integrity services for utilities, supported by rising energy demand and increased focus on grid reliability. In Life Sciences, engagements increased across regulatory compliance, product performance and safety consulting for medical devices as these safety critical technologies continue to become more complex. Turning to our reactive engagements.

Demand for Exponent's failure analysis and dispute-related services drove growth in the fourth quarter, reflecting the essential role our engineers and scientists play when systems do not perform as expected. In transportation, we saw increased failure analysis work tied to electrification and battery systems in commercial vehicles as customers address performance, safety and reliability challenges.

We expanded our failure investigation work in data center infrastructure, for example, addressing board-level cooling and thermal management issues where multidisciplinary teams are required to determine the root cause of failure. Across the energy sector, we continue to see robust demand in dispute-related engagements spanning hydroelectric facilities, wildfire-related losses, battery energy storage systems and wind and solar projects.

Exponent continues to benefit from powerful long-term market drivers. As artificial intelligence and other complex technologies are increasingly incorporated into novel products, infrastructure and safety-critical systems, demand is growing for our science and engineering expertise to support and enhance algorithm performance. Sensor-based systems that demand the highest level of trust are also frequently found in the most challenging, disrupted or intermittent connectivity environments, creating settings where security and safety are inseparable.

While AI delivers value by learning and predicting based on historical data, many of the most consequential challenges arise in physical systems where edge cases, novel conditions and complex interactions fall outside of prior experience. Exponent thrives at the edge where AI meets the laws of physics in high-stakes environments where reliability, performance and security cannot be compromised. These dynamics underpin sustained long-term demand for Exponent's multidisciplinary expertise.

Our teams apply deep capabilities in engineering, physics, biology, chemistry, material science, cybersecurity, human behavior and more to help clients validate and enhance system performance, identify risk, ensure security at the asset level and apply scientific judgment where complexity and uncertainty exceed the limits of algorithms alone. As AI-enabled systems are deployed more broadly, failures, whether at the algorithm or the physical system level, are becoming more complex, more difficult to diagnose and more consequential.

Determining the root cause of these failures demands rigorous investigation that integrates physical sciences, engineering, data science and human factors to reconstruct real-world conditions and system behavior. Exponent's long-standing failure analysis expertise uniquely positions us to support clients as they navigate these situations, delivering independent science-based insight that informs remediation, accountability and innovation.

As artificial intelligence and other complex technologies increasingly intersect with performance and safety critical applications, this capability remains a core and differentiating component of the long-term value that we provide. At the same time, we are leveraging artificial intelligence within our operations to add value and support our teams as demand for our expertise continues to grow.

These tools enable our experts to work more effectively, focused on the highest value aspects of their work and deploy their capabilities where they matter most. Looking ahead, Exponent continues to benefit from powerful long-term market drivers, including increasing complexity, rapid technological innovation and rising expectations around safety, health and the environment.

As artificial intelligence and other advanced technologies become more deeply embedded in novel products and critical systems, clients are facing an expanding set of complex high stakes challenges. This environment is driving increasing demand for independent multidisciplinary expertise and is supporting continued diversifications across technologies, products and clients as reflected in our results.

Together, these dynamics position Exponent to deliver rigorous science-based insights across the full product life cycle and support long-term growth. I'll now turn the call over to Rich to provide more detail on our fourth quarter and fiscal year 2025 results as well as discuss our outlook for the first quarter and the full year 2026.

Thank you, Catherine, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis unless otherwise noted. I would like to remind everyone that we returned to a 13-week fourth quarter and a 52-week fiscal year in 2025 compared to a fiscal year 2024, which included an extra week that occurs every fifth or sixth year. The extra week poses a headwind to revenues of approximately 7% in the fourth quarter and 1.3% to the year.

For the fourth quarter 2025, total revenues increased 8% to $147.4 million and revenues before reimbursements or net revenues, as I will refer to them from here on, increased 5% to $129.4 million as compared to the same period in 2024. So if you adjust for the 1 week -- 1 less week, net revenues would have grown in the low double digits. Net income for the fourth quarter was $24.8 million or $0.49 per diluted share as compared to $23.6 million or $0.46 per diluted share in the prior year period.

The realized tax benefit associated with accounting for share-based awards in the fourth quarter was $99,000 as compared to $591,000 in the fourth quarter of 2024. Inclusive of the tax benefit for share-based awards, Exponent's consolidated tax rate was 27.4% in the fourth quarter as compared to 24.7% for the same period in 2024. EBITDA for the quarter was $34.7 million, producing a margin of 26.8% of net revenues as compared to $31.2 million or 25.2% of net revenues in the same period of 2024.

Billable hours in the fourth quarter were approximately 357,000, a decrease of 1% year-over-year. If you adjust for the 1 less week, billable hours would have been up approximately 6%. The average number of technical full-time equivalent employees in the fourth quarter was 992, which is an increase of 5% as compared to 1 year ago. This increase was due to our recruiting and retention efforts. Utilization in the fourth quarter was 69%, up from 68% in the same period of 2024.

The realized rate increase was approximately 5% for the fourth quarter as compared to the same period a year ago. This is a result of our premium position in the marketplace, unparalleled talent and differentiated interdisciplinary expertise. In the fourth quarter, compensation expense after adjusting for gains and losses and deferred compensation was approximately flat. Included in total compensation expense is a gain in deferred compensation of $2.7 million as compared to a gain of $629,000 in the same period of 2024.

As a reminder, gains and losses and deferred compensation are offset in miscellaneous income and have no impact on the bottom line. Stock-based compensation expense in the fourth quarter was $5 million as compared to $4.9 million in the prior year period. Other operating expenses in the fourth quarter were up 1% to $12.6 million. Included in other operating expenses is depreciation and amortization expense of $2.5 million.

G&A expenses increased 17% to $6.7 million for the fourth quarter due to an increase in travel and meals associated with business development, professional development and increased recruiting activity. Interest income decreased to $1.9 million for the fourth quarter, driven by a decrease in cash and lower interest rates. Miscellaneous income, excluding deferred compensation gain was approximately $296,000 for the fourth quarter. During the quarter, capital expenditures were $2.7 million.

We distributed $14.9 million to shareholders through dividend payments and repurchased $25.1 million of common stock at an average price of $70.57. Turning to the full year results. Total revenues increased -- total revenues and net revenues grew 4% to $582 million and $536.8 million, respectively, as compared to 2024. Net income for the year decreased 3% to $106 million or $2.07 per diluted share as compared to $109 million or $2.11 per diluted share in 2024.

During the year, we realized a negative tax impact associated with accounting for share-based awards of $255,000 as compared to a tax benefit of $2.8 million in 2024. Inclusive of the tax benefit for share-based awards, Exponent's consolidated tax rate was 28% for the full year as compared to 26% in 2024. For the year, EBITDA increased to $148.1 million as compared to $147.1 million during the prior year producing a margin of 27.6% of net revenues, which is a decrease of 80 basis points as compared to 2024.

This year-over-year decrease in margins was expected primarily due to the costs associated with our managers meeting during 2025 and the renewal of our Phoenix land lease in June of 2024. Billable hours for 2025 were approximately $1,468,000, a 2% decrease year-over-year. Utilization for the full year was 72.5%, down from 72.9% in the same period of 2024. Average technical full-time equivalent employees for the year were 973, an increase of 1% as compared to 2024.

The realized rate increase was approximately 5% for the year. Compensation expense after adjusting for gains and losses in deferred compensation increased 3%. Included in total compensation expense is a gain in deferred compensation of $17.4 million as compared to a gain of $14.9 million during 2024. Stock-based compensation expense in 2025 was $23.8 million as compared to $23.2 million in the prior year.

Other operating expenses were up 7% to $49.5 million, driven primarily by an increased noncash expense of our Phoenix lease renewal. Included in other operating expenses is depreciation and amortization expense of $10.1 million. G&A were up 12% to $25.5 million in 2025. The increase in G&A expenses was primarily due to an increase in travel and meals related to our in-person managers meeting in September, which was postponed in 2024.

Interest income decreased approximately $694,000 to $9.3 million for the full year. Lower interest income was driven by a decrease in cash and lower interest rates. Miscellaneous income, excluding the deferred compensation, was approximately $840,000 in 2025. Moving to our cash flows. During 2025, we generated $131.7 million from operations and capital expenditures were $9.4 million.

For the full year, we distributed $61.5 million to shareholders through dividend payments and repurchased $97.8 million of common stock at an average price of $72.22. As of year-end, the company had $221.9 million in cash and cash equivalents. Turning to our segments. Exponent's Engineering and other scientific segment represented 85% of net revenues during the fourth quarter and 84% for the year 2025.

Net revenues in this segment increased 7% for the fourth quarter and 4% for the full year, driven by proactive services, including risk management work for the utility industry as clients addressed energy infrastructure challenges stemming from rising power demands and extreme weather events, regulatory support services for medical device clients and user research services for clients in the consumer electronics industry.

Growth during the quarter was also driven by disputes-related services for the construction, energy and transportation industries as clients rely on Exponent in critical high-stake situations. Exponent's environmental & health segment represented 15% of net revenues during the fourth quarter and 16% of net revenues during fiscal year 2025. Revenues before reimbursements in this segment decreased 5% for the fourth quarter and were approximately flat for the full year.

The decline during the fourth quarter was primarily due to having 1 less week during the fourth quarter of fiscal year 2025 as compared to 2024. Turning to the outlook for the first quarter and full year 2026. We expect net revenues for the first quarter and full year 2026 to grow in the high single digits as compared to the same periods in 2025. For the first quarter of 2026, we expect EBITDA margin to be 27.5% to 28.5% of net revenues as compared to 27.3% in the first quarter of 2025.

For fiscal year 2026, we expect EBITDA margin to be 27.6% to 28.1% of net revenues as compared to 27.6% in 2025. We expect increased demand and corresponding recruiting to result in our average technical full-time equivalent employees increasing approximately 4% year-over-year in the first quarter of 2026 and 4% to 5% for the full year 2026 as compared to 2025. We expect utilization in the first quarter to be 75% to 76% as compared to 75% in the same quarter in the prior year.

And we expect the full year utilization to be 72.5% to 73% as compared to 72.5% in 2025. We still believe our long-term target of sustained mid-70s utilization is achievable as we continue to strategically manage headcount and balance utilization with market demand. We expect the realized rate increase for the first quarter to be 3.5% to 4% and for the full year to be 3% to 3.5%. The lower rate realization for the year is based on a historical trend as hiring rates increase.

For the first quarter, we expect stock-based compensation to be $8.6 million to $9 million and each of the remaining quarters to be $5.5 million to $6.3 million. For the full year 2026, we expect stock-based compensation to be $26 million to $26.5 million. We continue to believe that our stock-based compensation program effectively attracts, motivates and retains our top talent.

For the first quarter, we expect other operating expenses to be $12.7 million to $13.2 million. For the full year, we expect other operating expenses to be $53.5 million to $54 million. For the first quarter, we expect G&A expenses to be $5.4 million to $5.8 million. For the full year 2026, we expect G&A expenses to be $27.1 million to $28.1 million. We expect interest income to be $1.7 million to $1.9 million per quarter in 2026.

In addition, we anticipate miscellaneous income to be approximately $300,000 per quarter in 2026 or $1.2 million for the full year as compared to $840,000 in 2025. We expect our first quarter 2026 tax rate to be approximately 30.4% as compared to 29.4% in the same quarter a year ago. For the full year 2026, the tax rate is expected to be 28.5% as compared to 27.9% in 2025.

Capital expenditures for the full year 2026 are expected to be $12 million to $14 million. We remain encouraged by the opportunities across our markets and believe we are well positioned to drive improved growth in 2026 while executing against our long-term financial objectives of high single-digit to low double-digit organic growth and margin expansion. I will now turn the call back to Catherine for closing remarks.

Thank you, Rich. Looking ahead, we remain encouraged by the enduring market drivers that support Exponent's long-term opportunities. As the pace of innovation continues to accelerate and systems become more complex, expectations for safety, reliability and performance will only continue to rise.

With a differentiated multidisciplinary platform and a proven ability to support clients across both proactive and reactive engagements, Exponent is well positioned to navigate these trends and deliver sustainable growth and long-term value for our shareholders. Operator, we are now ready for questions.

[Operator Instructions] The first question comes from Andrew Nicholas with William Blair.

I guess, first, I was hoping you could hone in a little bit more on the consumer electronics piece of your proactive business. That was something that has been a little bit more challenged the past couple of years. I know last quarter, you spoke to some early signs of improvement there. So any additional commentary on how that business performed in the quarter and maybe what the near-term outlook looks like for that business in particular?

Yes. Thanks, Andrew. That particular part of the business is really primarily two-pronged. We've got a kind of a hardware product development consulting piece of that. And then we've got a user research-oriented piece of that, where we do work around human subject, human interaction with novel devices. And so one of the things we're really seeing is an uptick, particularly on the user research side.

A number of these applications and engagements relate to health-related products, for example. They also relate to products that are very novel where artificial intelligence is being delivered via novel form factor. So -- you can think of traditional screen-oriented devices, or you can think of things like glasses or headsets or even things that use primarily audio instead of having a screen or using a visual input.

So both the health side as well as the kind of consumer product side is a lot of what was driving that. There's diversification in the product base, and there's also diversification across the client base as more and more -- there are more and more entrants into this arena of trying to deliver artificial intelligence via these novel hardware platforms.

Very helpful. And then maybe a question for Rich on the guidance specifically. I think this quarter, second straight quarter of effectively like double-digit growth if you adjust for the extra week, last year, it looks like your outlook for utilization in the first quarter is as high as it's been, I think, in some time. So just curious on overall visibility and the achievability of guidance, how you think about some conservatism in there to the extent there is any and maybe areas of upside or downside to the outlook?

Yes. So our business, I think what we have good visibility into is these broader market demands and trends that Catherine has talked about in her comment. And I think we are actually seeing real work come in that are related to AI and novel technologies and continuing to see that the complexity of these issues is increasing. As we've said before, I mean, we go out to our business units all the way down to the individuals.

And as we're getting forecasts, I think our people have good visibility out over 6, 8 weeks, a little bit lighter after that. But the trends of what we're seeing are positive. As we enter 2026, the reason that we've landed on our guidance that we have here of high single-digit growth is really as we entered last year, we had good headcount growth. We had 2% sequential in the first quarter of last year, which is very strong. It came down a little bit in the second quarter, and then we closed out the year strong.

But we're feeling good about really where we can be in the headcount. We're feeling that, that demand is there. That's why we said the utilization will be slightly better than it was a year ago. But all those things combined landed us into that range that we have. Is there opportunity for upside? Yes, I think the demand environment is strong out there. But we -- at this time, this is the best estimate that we have, and we're delivering that with good growth and margin improvement, and we'll take it from there.

The next question comes from Tomo Sano with JPMorgan.

From management perspective, how would you characterize 2026 compared to 2025? And especially, what do you see as the most significant changes or drivers for revenue growth and margin improvement internally and externally, please?

Yes. Thanks for that, Tom. Clearly, we are seeing on a year-over-year basis, some acceleration of growth and of the demand environment that we have across a broad swath of the business. I think that the consumer electronics arena is an important one to call out in this regard. We saw strength in the fourth quarter. We do have a good -- pretty good outlook into Q1 that is helping to drive that. It gets a little less clear after that.

But again, with the diversification across the products, across clients and form factors and things, we do expect in that electronics arena, both for user research as well as the hardware side to be part of those drivers, especially as AI is being delivered and making decisions in safety-critical applications like health-related wearables, regulated medical devices and things like that. We also see the energy side as a really important driver for 2026.

And this was happening in 2025 to some extent, but we believe can continue to strengthen. This is around utility-related work. We mentioned the risk management work that we're doing. That continues to grow and diversify across clients. The regulatory environment continues to grow. The bar continues to go up in terms of that with relationship to grid resilience to extreme weather and things of that nature.

We're seeing it on the reactive side in energy, too, as the demand for power is driving the need for new technologies to be utilized in a lot of these capital projects, whether that's wind, whether that's solar, whether that's fuel cells. You've got data center operators building their own gas-powered plants. You have multiyear long waiting list for gas turbines.

And so the risk issues and the disputes that arise in the building out of those energy systems are a piece of this as well. And the data center piece, we're doing more and more failure analysis type work, whether it's around the cooling systems, whether it's around the backup battery supply systems, the performance-critical nature of those data centers really means that they need some powerful multidisciplinary expertise to diagnose some of those issues.

You can go over to the chemical side of the business, things like PFAS and its effects on human health and the environment are another area where we expect to continue to increase -- increasing demand as the year goes on. So that's a few examples. I think electrification and automation and transportation maybe kind of round out that collection of things that we see in 2026.

And follow-up on AI. You already touched in the prepared remarks, but I wanted to get your thoughts, especially potential risks of commoditization in certain litigation support or investigation services due to automations. But also you talked, I think, is the significant opportunity to leverage AI for new value-added offerings and margin improvement. Could you talk about that more specifically about the litigation support or investigation services, the space, please?

Yes, absolutely. So there are a number of tools clearly with large language models that we have been incorporating into our operations that are allowing our teams to engage with larger and larger data sets in an even more efficient sort of manner. Being able to have an AI application pull the data out of a police report, let's say, if you're reconstructing a vehicle accident, these are the types of things that can be further automated, and we're seeing more efficiency in that regard and really welcome that.

But what we're also seeing is, as you alluded to in your question, the higher value coming out at the other end. The ability to put a large language model application against an increasingly large data set of complex material, which is what we've seen happen over time. When I first started doing litigation work a couple of decades ago, you could fit everything in a black 3-ring binder that was a couple of inches thick. And now 20 or 25 years later, you've got gigabytes and terabytes of data.

If you think about that vehicle that's in that accident, the data coming off of all of those sensors create a very complex and large data environment that needs to be analyzed, right? So while we're gaining efficiencies at that sort of lower level, we're also unlocking the ability to differentiate ourselves even further because of the complexity and our ability with our PhD level talent to be able to break that down and understand in a hypothetical situation, if the design were changed, would the product have performed better.

So, so far, our reactive business continues to grow. The litigation support piece of the business continues to grow. Automotive is the place where we're seeing the most directly AI relevant work in our reactive business and the complexity there with the testing and those sorts of systems is continuing to grow. So -- and with our population of PhD entry-level talent, this is different than all of our competitors.

Many of our competitors have lower-level talent. They've invested perhaps in those lower-level commodity tasks as an important part of their value proposition. That hasn't been the direction that Exponent has taken. That's why we hire PhDs as our entry-level folks, people who know how to solve that unstructured problem, that edge case. So I really do believe that the use of these sorts of tools will make us more efficient, and it will unlock even greater value.

The next question comes from Tobey Sommer with Truist.

What are your expectations for net headcount growth in '26? And could you maybe highlight the areas where you expect to add the most and any areas that you may expect to have fewer heads throughout the year?

Yes. So our expectation is that in line with that guidance, we would expect that the headcount growth would be somewhere in the net 40 to 50 growth in what we're doing. You're going to acquire those over the year that we'd be in that range. It could get up as high as 60, but it's somewhere in that range.

Look, the areas of focus and the areas that are getting -- seeing the most net growth are really in these growth areas that Catherine highlighted earlier. Every one of our practices is actually recruiting and bringing people in just as part of our natural part of a consulting firm, we do have turnover that occurs.

And as such, we're always looking to bring in new talent, those PhDs that have just done their once never solved before issue that they did their PhD thesis in and integrating them into every single one of our practices every year. But the areas that we'll see the growth are in that higher growth will be in that transportation area, the energy area, battery storage, automation, cybersecurity and actually into that chemicals area that Catherine mentioned around PFAS.

And associated with that headcount, that pace of headcount growth, is it so much so as to have accompanying margin -- negative margin implications? Or since you revived growth in the not-too-distant past, is that behind us and not necessarily reflective of any requisite margin compression?

Yes. Our expectation is that we are going to have margins be flat or up, and that is because we expect to be able to do this level of hiring into the organization based on demand while seeing our utilization be maintained or improved in 2026.

Appreciate that. If I could, I appreciated your prepared remarks, Catherine, on AI with the discussion there. So clearly, it's topical. I want to just ask another simple question. Near term and recent actual results, do you think AI is a net benefit or drag to the total company's growth?

Yes. I think it is a net benefit. If you think about the failure analysis work around advanced driver assistance technologies and automated vehicles, that's directly driven by artificial intelligence making safety critical decisions.

The work that I highlighted early in the Q&A around the user research in the electronics industry, this is all about the data collection and benchmarking and validation for devices that are utilizing AI algorithms to make some kind of decision or have some kind of signal, whether it's to tell you your heart isn't beating properly or lots of other -- what your blood pressure is or so forth.

And the same on the hardware side and the data center side, right? AI is directly driving those increases in energy demand, which we believe is part of what's driving our energy sector in its growth and especially on the dispute side, but also on the proactive side with the risk management work in utilities. So it's not directly in the project perhaps, but it's a fundamental driver that need for energy in the setting of a crumbling infrastructure.

I mean just on that area, again, we're seeing it drive through if it is thermal management at the board level or it's heavy -- the change in demands that the amount of infrastructure on these racks have, they're all things that fit into Exponent's expertise that will -- that we are getting business related to.

So we're not seeing a change in demand for the amount of time or something that we're putting into, again, processing data or doing it. The datasets are growing so much that the clients just want to do more and learn more from it, and it's harder to understand why something made a decision that they are chasing. So that's what we've been seeing over 2025 and continued into the fourth quarter.

And I have one follow-up based on that. At what point in recent history do you think AI started becoming a net contributor to growth? And I might be asking an impossible second part of this. But of the low double-digit year-over-year growth in the quarter ex the extra week, is there a way to get a sense for how impactful AI factors are in that year-over-year growth?

Well, I think it's important to recognize that Exponent has been talking and working on systems that were leveraging the early parts of AI and machine learning and what we've been doing over the last decade or so when we were working with the automotive industry and its early days of steering control or braking or whatever may be coming into it to where we are today, we're all seeing the actual robotaxis on the road in doing it.

So it's definitely growing. It is driving growth in our transportation area, and we expect that to continue going forward. The same goes around user research. Back in the day, we had clients that were really trying to understand how to make sure that they were developing inclusive products around facial recognition and technology like that and then driving that into other technologies that is where we got into doing user research and such and then much more into its performance in other health or other applications.

But again, been at that for nearly 10 years that we've been doing it, but it's been growing. Same goes around what I would say in the utilities industry, is we've been developing in the risk model area, what's actually playing into why is that somewhat AI related now of our risk is actually that our clients have choices.

And some of them have chosen a, let's say, at times, a less expensive AI type model that isn't giving them a refined or accurate enough answer for them to rely upon or justify the actions they took or did not take in situations and are now asking our help in refining those and bringing physics and bringing that higher level of engineering so that we can move AI models to a level of reliability that can be in safety-critical environment.

So all those things are going on today, I think we've got a long way, a lot of upward ramp to go. Probably today, somewhere in the mid-teens as a percentage of our business is related to AI, probably either directly or one step removed, not saying all energy stuff or any of that, but really things that we can target in that close -- immediate or near vicinity that relates to that.

The next question comes from Josh Chan with UBS.

I guess following up on Rich's comment just now, I guess, have you seen any evidence of clients potentially trying to use AI themselves to solve problems? I know in some situations, it's completely impossible, but have you seen any evidence of that kind of occurring at your customer base?

Certainly, our -- look, I mean, our customers are absolutely looking to incorporate AI into their operations. There are situations, I mean, Rich just mentioned one where they've -- on the utility side, incorporated those into risk models and have found that AI alone simply is not good enough and so -- but we see that in the medical device environment with sort of software as a medical device.

There are -- we get pulled in on the regulatory side of that, right, where they're trying to get their -- develop their plan of attack for getting through the FDA in terms of approval on that. So, yes, I mean, our electronics clients are putting artificial intelligence into all kinds of different form factor devices, and they're asking us for our help in benchmarking and user research.

So it's really everywhere we turn. There are different levels of confidence that clients have in it. Some are more sort of skeptical. Others want to dive right in, but they're coming to us for advice and sort of reality checking, if you will, in a lot of these applications.

Okay. And then maybe just a quick follow-up on next year on 2026. Is there anything different about how free cash flow will work in '26 than it worked in '25? Anything to kind of flag there? Or is that a pretty normal conversion?

Our expectation is that we may be able to improve upon that conversion. The area -- we had sort of a heavy amount of reimbursables there at the end of the year tied in with the studies, which made DSOs a little bit higher than the average of where we would want to end the year.

So I would expect that, that would naturally and through some efforts we're making come into more balance, so they might be able to bring down DSOs by a few days, and that will help us move to a steady state and improve -- area to improve cash flows going forward.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the Exponent, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos, with Riveron Consultancy. Please go ahead.

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's Third Quarter 2025 Financial Results Conference Call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at www.investor.exponent.com.

This conference call is the property of Exponent, and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer; and Rich Schlenker, Executive Vice President and Chief Financial Officer.

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

Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent's periodic SEC filings, including those factors discussed under the caption Risk Factor in Exponent's most recent Form 10-Q.

The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise. And now I will turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine?

Thank you, Joni, and thank you, everyone, for joining us today. I will start off by reviewing our third quarter 2025 business performance. Rich will then provide a more detailed review of our financial results and outlook, and we will then open the call for questions.

Exponent delivered a strong third quarter with double-digit net revenue growth, demonstrating the strength of our diversified portfolio and our ability to deliver value across industries increasing demand for dispute-related work drove robust growth in reactive engagements across the energy, transportation, life sciences and construction sectors.

Proactive engagements were led by risk management and asset integrity projects in the utility sector and regulatory consulting in the chemicals sector. While these were offset by lower activity in consumer electronics, we are encouraged by improving demand trends in this space as we enter the fourth quarter.

Turning to our engagements in more detail, reactive engagements in the quarter were driven by increasing dispute-related activity across a broad range of industries. In the energy sector, we saw increased activity across generation, delivery and storage as clients seek failure analysis expertise for legacy systems as well as challenges with new technologies.

The convergence of energy transition initiatives, extreme weather events and rapid growth of data centers is accelerating opportunities for Exponent's specialized expertise around the globe. In transportation, disputes regarding the design and performance of advanced vehicle technologies are becoming more prevalent and increasingly complex and the consequences of failure continue to grow. In life sciences, we saw increased reactive engagements involving complex medical devices with particular scrutiny of product safety, quality and performance. We also saw increased demand from domestic and international clients related to complex construction challenges and disputes.

Our diversified portfolio and deep technical capabilities position us well to capture this demand and deliver meaningful value for our clients. Proactive engagements in the quarter were led by risk management and asset integrity projects in the utility sector, where we evaluate the resilience of critical infrastructure and help mitigate safety risks for consumers and communities.

In the chemical sector, we saw strong demand for regulatory consulting, supporting clients on issues related to the impact of chemicals on human health and the environment. These gains in the third quarter were offset by lower activity in consumer electronics. However, we are encouraged by improving demand trends in this sector as we enter the fourth quarter, particularly with our human machine interaction studies.

The pace of innovation is creating new opportunities for Exponent as companies seek trusted partners to help them ensure safety, reliability and performance. We are actively engaged in early-stage initiatives tied to transformative technologies that will define the next generation of products and systems. As artificial intelligence becomes increasingly delivered by a specialized hardware and integrated into safety-critical systems, complexity and risk rise just as rapidly.

With that acceleration comes a greater potential for new high-consequence failure modes. Our deep roots and failure analysis are driving growth as technical challenges become more novel and complex and clients increasingly turn to Exponent for specialized expertise when the stakes are highest.

We continue to advance and diversify our work evaluating human machine interaction and safety-critical systems from advanced medical devices and robotics to autonomous vehicles. The more complex the challenge, the greater the need for our expertise.

Our multidisciplinary team is uniquely positioned to help clients navigate this transformation by turning technological disruption into opportunity and driving sustained growth for our business. I'll now turn the call over to Rich to provide more detail on our third quarter results as well as discuss our outlook for the fourth quarter and the full year.

Thank you, Catherine, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis unless otherwise noted. For the third quarter of 2025, total revenues increased 8% to $147.1 million and revenues before reimbursements or net revenues, as I will refer to them from here on, increased 10% and to $137.1 million as compared to the same period of 2024.

Net income for the third quarter increased to $28 million or $0.55 per diluted share as compared to $26 million or $0.50 per diluted share in the prior year period. The realized tax benefit associated with accounting for share-based awards in the third quarter of 2025 was $141,000 as compared to $533,000 in the third quarter of 2024. Inclusive of the tax benefit for share-based awards, Exponent's consolidated tax rate was 27.4% in the third quarter of 2025 as compared to 27.5% for the same period in 2024.

EBITDA for the quarter increased 9% to $38.8 million, producing a margin of 28.3% of net revenues as compared to $35.8 million or 28.6% of net revenues in the same period of 2024. This year-over-year decrease in margins was primarily due to the costs associated with our managers meeting in September, which was partially offset by better utilization and a strong realized rate increase. Billable hours in the third quarter were approximately $376,000 an increase of 4% year-over-year.

The average number of technical full-time equivalent employees in the third quarter was 976, up 3% as compared to 1 year ago. This increase was due to our recruiting and retention efforts. Utilization in the third quarter was 74.1%, up from 73.4% in the same period of 2024. The realized rate increase was approximately 6% for the third quarter as compared to the same period a year ago. This is a result of our premium position in the marketplace, unparalleled talent and differentiated intradisciplinary expertise.

In the quarter, compensation expense after adjusting for gains and losses in deferred compensation, increased 8%. Included in total compensation expense is a gain in deferred compensation of $7 million as compared to a gain of $7.2 million in the third quarter of 2024. As a reminder, gains and losses in deferred compensation are offset to miscellaneous income and have no impact on the bottom line.

Stock-based compensation expense in the third quarter was $5.3 million as compared to $5.5 million in the prior year period. Other operating expenses in the third quarter were up 6% to $12.7 million. Included in other operating expenses is depreciation and amortization expense of $2.5 million for the third quarter. G&A expenses increased 44% to $7.7 million in the third quarter. The increase was primarily due to an increase in travel and meals associated with our in-person managers meeting, we did not have a firm-wide meeting during the third quarter of 2024.

Interest income decreased to $2.3 million for the third quarter, driven by lower interest rates. Miscellaneous income, excluding the deferred comp gain, was approximately $263,000 in the third quarter. During the quarter, capital expenditures were $2.7 million. We distributed $15.1 million to shareholders through dividend payments and repurchased $40 million of common stock at an average price of $70.45.

Additionally, our Board approved a $100 million increase in our current stock repurchase program. This is in addition to the $21.6 million available for repurchases as of October 3, 2025, and reflects our conviction in Exponent's long-term growth trajectory.

Turning to our segments. Exponent's engineering and other scientific segment represented 84% of net revenues in the third quarter. Net revenues in this segment increased 10%, driven by demand for Exponent's risk management and asset integrity management services in the utility industry and disputes related to services in the energy, automotive and medical device sectors. Exponent's environmental and health segment represented 16% of net revenues in the third quarter. Net revenues in this segment increased 9% due to an increase in regulatory consulting engagements in the chemicals industry.

Turning to our outlook. For the fourth quarter of 2025 as compared to 1 year prior, we expect revenues before reimbursements to grow in the low to mid-single digits, EBITDA to be 26% to 27% of revenues before reimbursements. We are maintaining our revenue guidance and raising our margin expectation for the full year 2025. We expect revenue before reimbursements to grow in the low single digits.

EBITDA to be 27.4% to 27.65% of revenues before reimbursements. As a reminder, the 13-week fourth quarter of this year will compare to a 14-week fourth quarter in fiscal year 2024. As a result, we will experience a year-over-year revenue headwind of approximately 7% due to the decrease in workdays in the fourth quarter of 2025. Our guidance represents a high single- to low double-digit growth rate when adjusted for the extra week during the fourth quarter of 2024. We expect year-over-year average technical full-time equivalent employees to be up approximately 4% in the fourth quarter. This growth in head count is a result of our recruiting activities and normalized turnover rate.

We expect utilization in the fourth quarter to be 68% to 70% as compared to 68% in the same quarter last year. As a reminder, utilization is seasonally lower in the fourth quarter due to more holidays and vacations compared to other quarters. For the full year, we expect utilization to be approximately 72.5% as compared to 73% in 2024. We expect the 2025 year-over-year realized rate increase to be 4% to 5% for the fourth quarter and full year.

For the fourth quarter, we expect stock-based compensation expense to be $4.9 million to $5.2 million. For the full year, we expect them to be $23.7 million to $24 million. For the fourth quarter, we expect other operating expenses to be $12.7 million to $13.2 million. For the full year, we expect other operating expenses to be $49.5 million to $50 million.

As noted in prior quarters, the year-over-year increase in the full year, other operating expenses is largely driven by the extension of our Phoenix lease. For the fourth quarter, we expect G&A expenses to be $6.1 million to $6.6 million. For the full year, we expect them to be $25 million to $25.5 million. The increase in G&A for the full year is primarily due to an expense of approximately $1.8 million for our firm-wide managers meeting held in September.

The meeting is an important investment in people development that brings together our multidisciplinary teams, develops our key talent and fosters the next generation of leaders and business generators. We expect interest income to be $1.5 million to $1.8 million in the fourth quarter. In addition, we anticipate miscellaneous income to be approximately $200,000 in the fourth quarter.

For the remainder of 2025, we do not anticipate any additional tax benefit associated with share-based awards. For the fourth quarter of 2025, we expect the tax rate to be approximately 28% as compared to 24.7% in the same quarter a year ago. For the full year 2025, the tax rate is expected to be 28.5% as compared to 26% in 2024. The increase in the tax rate is due to a decrease in the tax benefit for share-based awards. Capital expenditures for the full year 2025 are expected to be $10 million to $12 million.

In closing, we are pleased with the growth we delivered in this quarter and look forward to closing out the year strong. I will now turn the call back to Catherine for closing remarks.

Thank you, Rich. Exponent is thriving as innovation accelerates across industries. New products, connected systems and critical infrastructure are transforming how people live and work, and expectations for safety, health and the environment have never been higher. We help clients navigate this transformation and bring advancements to market responsibly, applying scientific rigor to ensure reliability, performance and trust. And when problems inevitably arise, our industry-leading expertise is increasingly sought to investigate failures, identify root causes and support litigation and regulatory matters with clear independent analysis.

Artificial intelligence is one of the most powerful forces reshaping this landscape, and we are helping clients integrate it thoughtfully and rigorously while managing the new dimensions of risk that it introduces. Looking ahead, we will continue to invest in talent to keep Exponent at the forefront of science and engineering. With strong momentum moving into the final quarter of 2025 and beyond, we remain focused on helping clients meet rising expectations while delivering sustainable growth and long-term value for our shareholders.

Operator, we are now ready for questions.

[Operator Instructions] First question comes from Andrew Nicholas with William Blair.

I appreciate you taking my questions. I guess, first, I wanted to ask, any early thoughts on 2026 in terms of hiring specifically? It sounds like demand has picked up some. Sequentially, utilization was good in the quarter. I know you're targeting 4% growth in headcount exiting the year, which is relatively consistent with how you've talked about the medium-term or long-term target. Just curious if there are any plans to go at the top end or exceed that normal range given the demand backdrop?

Yes. Thanks, Andrew. I can at least start in on that. I mean, we have strong momentum in recruiting right now, right? I mean we have to be recruiting now really for adding talent in the first half of 2026. And so it's a fantastic time of year. We have lots of events at our university recruiting program and things like that. And so -- look, our philosophy remains the same in terms of targeting the recruiting toward the areas where we are seeing the growth. So places like digital health, places like automated vehicles, places related to energy, whether that be legacy systems or new technologies.

And look, we are still in the planning process, of course, for 2026. But I think we will be back in a more historical range, right? We've been trailing on that over the last year or 2. But this year, to get into that 4 plus, maybe it's 4% to 6%, it's something like that. I think, is a reasonable place for us to be.

Great. For my second question, I wanted to just touch on the AI topic. A lot of good detail in terms of the ways that it's starting to kind of make its way throughout your business. Is there any way to size it today? Any thoughts on just how fast it could grow over time? And then somewhat relatedly, should we think about AI-related projects as coming first via the reactive business or would you expect it to be more balanced across proactive and reactive?

Yes. Yes. Thanks for that. So look, let me sort of give a little tour around the business and focus on the kinds of things that we are doing. I think that really helps to lay the groundwork for them seeing how much it's really penetrated into the business. Major ways that we're helping clients with AI is the way they are implementing AI into their systems and them wanting to do that successfully. And that's a big part of what we're doing. They're running into challenges. They're running into failures. They're running into disputes, right? So that's 1 category.

There's another category where we are really building tools, techniques and offerings that we're delivering to clients, right? These are like hybrid models and our utility risk work and things like that. If you kind of go by industry, you can see electronics, that how AI is being delivered through specialized hardware, right? So this is a key area, new form factors, new technologies on the hardware side.

They're getting into regulated medical devices in terms of digital health, right? There's benchmarking of the algorithms, what is the ground truth that they really need to compare with. What are the human-machine interface issues. The strategy is around collecting the data that are going to train the algorithm and getting that right, right?

You've got intellectual property issues, failure analysis. I mean over in energy, it's quantitative risk modeling. It's data center performance, driving performance critical issues on the generation side. Automotive, transportation, we're seeing continued increases in the litigation profiles for advanced driver assistance technologies and the allegations are getting more complicated. So you can kind of -- as you march down, I mean, those are our 3 biggest industries, right, consumer products, energy and transportation. And you can see how it touches in different ways. And so, to say exactly what the percentage is, is a little bit difficult, but it's clearly integrating its way into our work significantly, and it's around the product life cycle.

We continue to have opportunities to expand that, of course, especially as the technology continues to accelerate, but I really do think we are seeing it on both the reactive and proactive sides of our business. We're seeing the disputes in automotive. We're seeing some of those disputes on the medical device front, for example, in consumer products, but we're also using it proactively as we help our electronics clients get their algorithms right and get their training right. So I think it's pretty balanced. Difficult to quantify, but touching the business in a lot of different dimensions.

Very helpful. And if I might just squeeze one more in here for Rich. Year-to-date, just curious if there's anything you can do to quantify kind of growth between proactive and reactive, just want to kind of have our bearings for thinking about the comps next year.

Yes. So we've clearly seen the reactive side of the business play as the real growth drivers at least through the first 3 quarters here. We ended up really seeing the peak of that here in the third quarter where we ended up with around 18% growth in the proactive -- I mean, in the reactive business and we were approximately flat in proactive. Now that proactive part saw growth in both the regulatory consulting and the risk management work that was offset by a decrease year-over-year in the proactive work that we do in consumer electronics, primarily on the hardware side.

We are seeing -- we are optimistic about the activities in consumer electronics and life sciences around our work in human machine studies in the fourth quarter. So that is actually a real area of strength as we left the third quarter. So we're seeing that improving as well. So overall, I think that we are continuing to see strong demand on the disputes and reactive side and we've seen here in the third quarter already, the regulatory work year-over-year start to grow on that chemical side. And we're expecting to see growth as we get into the fourth quarter on the study side.

So those are the positive trends that we have going as we start to look towards 2026.

The next question comes from Tobey Sommer with Truist.

This is Tyler Barishaw on for Toby. Just wanted to start with on the regulators. 9 months into the Trump administration. Can you just discuss the data play with regulators? How has the nature of this work changed so far? And any trends you can extrapolate over the next 3 years?

Yes. Thanks for that question. We all know that there's a lot of dynamics going on around the regulatory environment and even within the regulators themselves, and as we look across the business, look, most of our regulatory work is in the chemical sector, it's in the medical device sector. So you're looking at EPA, you're looking at FDA, you're looking at automotive, which is going to be NHTSA and also Consumer Product Safety Commission.

And we have some scattered instances with clients on maybe particular projects where they might have some delays or a little bit of pause as they're waiting longer for, let's say, the FDA or EPA to get back to them with feedback around their submissions and things like that. But that has really been more around the edges. I mean, you can see that our chemical regulatory work, for example, was a good -- was a strong grower in the quarter.

And that is a business that is global. It has some of it in the U.S., but probably about 2/3 of it is represented by those global regulatory frameworks, which continue to raise the bar on issues related to safety and health. And so we're seeing it around the edges. But generally speaking, when it comes to things like regulatory enforcement, we continue to see that. And in some ways, seeing that be even stronger.

I mean there have been notices coming out of, for example, Consumer Product Safety Commission about how they are cracking down on various allegedly defective products and so forth. And so we see some of that in both consumer products. We're seeing that environment in FDA and medical device work. So all in all, we're watching it very closely, but the business continues to be driven by these health and safety and environmental issues.

Another one thing I'll add is that we have had an opportunity in a handful of cases to recruit some additional talent, because of some of the shakeups that have happened in some of those regulatory agencies. And so we've been able to bring over in a few instances, some folks who maybe thought they had lifetime careers at one of the regulators that are now really looking around and can really convert over into good consultants.

Just on the government shutdown, any impact so far from that or expected in guidance?

Yes. So our work, just to size it, we've got 2%, 3% of our work that is federal government contracts that we perform. We are fortunate that most of the work that we have ongoing are things that were under contract already. And we're in the form and areas that they were not paused in what we did, if anything, our clients wanted to ensure that our work continued even if some of them were furloughed.

So in the short term, we think that our revenues in the fourth quarter out of government will be similar to what they were in the third quarter. But obviously, if that continued or there were -- and as they work through the 2026 budget and such, we will have to see where all that falls out. But again, it's 2% to 3% of our business.

And then just one final one for me. I appreciate the commentary about headcount growth for next year, but any preliminary thoughts on revenue growth for next year that we can be thinking about at this time?

Yes. We are -- we'll be providing our 2026 guidance on revenues and margins on our call at the end of January, beginning of February. We're not in a position as we're still going through planning to give those numbers. But I think the -- we are very encouraged by the fact that we do have headcount growth going that's coming with sustained utilization here or solid utilization and such. So we think we're in a positive position to -- for growth in 2026 and beyond.

The next question comes from Josh Chan with UBS.

This is Karan Singhania on for Josh. So can you unpack for us how FTE growth trended in the quarter between proactive and reactive practices? You're just curious if there are like any notable differences in hiring behavior between the 2 of them?

Yes. So our hiring -- our practices are not organized really by proactive, reactive. We organized the firm, recruit our people and develop them in disciplines or what we call practice areas, but when you can think about environmental scientists or electrical engineers or mechanical engineers and such. Clearly, the market drivers for hiring in the areas help determine that. And that can be driven by proactive or reactive work as we stated earlier, we're seeing good demand in the reactive work and ability to really engage our staff pretty quickly as they're coming into the organization in that.

So I would say that the -- in the short term, the reactive work as far as demand and filling that, sure, there -- that is part that is pushing our teams along and feeling comfortable in the hiring. In the long term, which is what our, really, hiring horizon is, it's about looking out over the next several years and longer to see where we see technologies heading, where we see risk issues developing and doing that. And clearly, those lead themselves into focuses in hiring in electrical engineering and computer science and controls in that human -- both in our human factors, people with the psychology degrees, people and biomechanics and that human machine interaction. All of those areas we're hiring during the quarter.

Got it. That's helpful. So just as a follow-up to that. I think you highlighted some of the end markets that you're starting to hire in. So I'm just curious if the mix of your hiring of the end markets is having an impact on the rate increases? And is there any reason why the current rate increase of like 6% couldn't carry on going forward?

Yes. So a couple of factors contribute to the rate increase that we did. One, over the last several years, the overall rate that we've been being able to drive through has been benefited from really the demand environment and the sort of inflationary environment for engineers and scientists in particular, in the marketplace.

So one, I think we've had a very strong market driver for that. As we look to, in particular, to what's going on here in the third quarter and 2025, we've seen a strong demand in this reactive business. Our reactive business does draw upon our most seasoned people. It is about -- having a expert, a testifier, an experienced person who can go through deposition trial and all that with a strong support team along with them. But what we see is that, that, if anything, where do you see some of that utilization improvement coming. It comes at a little bit more senior level not dramatically, but just a little bit enough to make a difference in the billing rate.

The other thing that contributes is when hiring is at a more modest rate, which has been even this last year, that is a lower rate of new young people coming in at the bottom, which is also an impact to dilution or blend the mix that you have. So we've had all of those things working in a positive way that has allowed us to see the rate increase at 5%, 6% here in the first 3 quarters. As we move into the fourth quarter, where I've just mentioned that we're seeing good momentum with improvement in the proactive services that can draw upon.

And the good thing is really leverage our more junior entry-level consultants and as hiring continues to increase, that will bring in more entry-level people into the org. So those factors will weigh on what the realized rate is as we move forward and is why we have previously said, look, at this point in time, we're still working through each of the individual rates. But if I was to guess, I think we're going to be looking at a rate realization that's more in the historical normal range of 3%, 3.5% rate realization than we are, something that's 5% or 6% as we look at it because of all those factors.

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