Exponent, Inc. Stock

Good afternoon, and welcome to the Exponent, Inc. Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Joni Konstantelos with Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent's Third 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; Dr. John Pye, President; Richard 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 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 2026 business performance. John will then share his perspective on innovation and market trends, and Eric will then provide a more detailed review of our financial results and outlook, and we will then open the call for questions.

Before I get into our results, I want to thank those of you who joined us in Phoenix last month for our first Investor Day. We focus that day on a theme that is increasingly central to our business. The convergence of technology, infrastructure and humans and the opportunities for Exponent that emerge where they intersect. For those of you who are not able to join us, you can view the non-demonstration portions of the Investor Day on the Investors section of Exponent's website. Our goal in Phoenix was not simply to tell you what makes Exponent different, but to bring that differentiation to life and to make it memorable. And in many ways, our third quarter results provide another illustration of that story.

Exponent delivered a strong third quarter with double-digit growth in revenues and earnings, reflecting continued demand for our specialized integrated engineering and scientific expertise. User research continued to be a strong contributor to our growth. And importantly, that work continues to broaden across clients, products and real-world environments. We also saw growth on top of a strong prior year quarter in disputes, failure analysis and product safety-related work across chemicals, consumer products and transportation.

While these engagements span broad areas of our business, they increasingly reflect the same underlying forces we discussed at our Investor Day. Technology is advancing rapidly, becoming more deeply embedded in physical products and systems and interacting with people in increasingly complex and consequential ways. We see that convergence particularly clearly in our user research work. As organizations bring new technologies to market, they increasingly need to understand not only whether the technology works, but how it performs when people actually use it in the real world. That is making our studies both more diverse and more technically complex.

Wearable devices, for example, are becoming much more sophisticated. A watch cannot directly measure many of the health variables we care about. Instead, it measures signals that it can directly access at the wrist and increasingly uses sophisticated analytics and machine learning to make predictions about things like cardiovascular health. That raises a much more complex question than whether the sensor itself works. Can those predictions be trusted as a basis for health decisions? Answering that question requires novel methodologies, benchmarking performance against clinical reference standards and an understanding of how performance changes across different people and real-world conditions.

In consumer electronics, we are increasingly evaluating technology outside of controlled environments. Device users may be riding a bike or driving a car or navigating an airport. Our work in sensory perception is also expanding, analyzing how devices communicate information when users are already processing a complex physical environment. These are not simply questions about a device or algorithm. They are questions about the interaction among technology, human behavior and the physical world. Answering them takes a broader mix of expertise and requires us to design novel ways to measure both human performance and device behavior and then interpret the results within the safety, regulatory and business context our clients face.

We see a similar convergence from a different vantage point when products and systems do not perform as intended. During the quarter, we saw increased dispute and failure analysis work across consumer products, chemicals and transportation. In consumer products, this helps clients assess potential and actual product recalls tied to safety concerns as expectations from consumers, regulators and society continue to rise. As the race to embed AI into physical systems accelerates, the interaction among software, hardware, materials, human behavior and the surrounding environment becomes more complex. A single product safety investigation, for example, can bring together thermal scientists, mechanical engineers and materials and polymer experts working together as one team. This is where Exponent's differentiated position stands out.

In transportation, we continue to see increased failure analysis work related to advanced driver assistance systems, another area where sophisticated technology must interact reliably with people and the physical environment. And in chemicals, we saw increased demand for dispute work tied to chemicals of concern where evolving science, regulation and societal expectations are creating increasingly complex questions for our clients.

Across all these matters, the underlying need is remarkably consistent. Clients need confidence that increasingly complex products, technologies and infrastructure will perform safely and reliably in the real world. When they fall short, the consequences of failure are high and they rely on Exponent for independent evidence-based analysis and expert judgment that can withstand scrutiny, whether in a courtroom before a regulator or in the boardroom. That is why the people and capabilities we highlighted at our Investor Day really matter. We showed you firsthand what sets us apart, our integrated ecosystem of highly talented scientists and engineers and our ability to bring the right combination of expertise together to solve complex, high-consequence challenges.

I would now like to turn it over to our President, John Pye, to share his perspective on how AI is moving into the physical world and where he sees innovation heading across our markets. John?

Thank you, Catherine. At Investor Day, we described AI as a stack with 5 layers, starting at the bottom with the electrons that power everything, the chips, the data centers that house them, the models and at the top, the applications where AI interprets and acts on the physical world. Exxon has worked at every layer of this stack. We draw upon our 60 years of science and engineering experience to help our clients extract the highest level of reliability out of supply chains that are under immense stress, delivering traditional products like generators, connectors, cables, even the concrete going into the buildings that make up a data center. We are also helping those same clients deliver the innovative products that stretch the performance of technology in things like sensor network switches and advanced cooling systems.

Today, however, most of our AI-related work sits at the top of the stack in the applications where we deliver the data that trains these systems and where we test how they perform in real-world conditions. In total, we estimate that AI is a direct element of roughly 15% to 20% of our business this year. That figure is an estimate because AI is embedded in so much of the technology our clients build that its influence reaches well beyond those engagements. What we are seeing today is that questions that were hypothetical a year ago are becoming real projects.

Clients using AI to design new materials and formulations are then asking us to evaluate those AI-generated recommendations that raise real safety questions. Others want to understand why an AI system made a particular decision in a vehicle, a device or a piece of equipment. These engagements are still early, but they are real work and the inquiries are growing. As AI moves into the physical world, the question is no longer whether it works, it is what happened, why it happened and now more than ever, whether the answer can be trusted. When intelligent products behave unexpectedly, people turn to Exponent for explainability, clarity and trust.

I'll now turn the call over to Eric to provide more detail on our third quarter results as well as discuss our outlook for the fourth 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 third quarter of 2026, total revenues increased 18% to $173.7 million and revenues before reimbursements or net revenues, as I will refer to them from here on, increased 12% to $153.1 million as compared to the same period of 2025. Total revenues grew faster than net revenues due to a higher level of reimbursable expenses that are included in total revenues. Because reimbursable expenses can fluctuate quarter-to-quarter based on the mix and nature of client engagements, we believe that net revenue is a more meaningful measure of our underlying performance.

Net income for the third quarter increased 10% to $30.9 million as compared to $28 million during the same period in 2025. Diluted earnings per share increased 16% to $0.64 per share as compared to $0.55 per share during the same period last year. Over the past 12 months, we utilized $171 million for repurchases of our common stock, which resulted in a 5% decrease in our average diluted shares outstanding of 48.4 million shares during the third quarter of 2026 as compared to 51.2 million shares during the same period in 2025. These repurchases also reduced our interest income. We did not repurchase any of our common stock during the third quarter of 2026.

Exponent's consolidated tax rate was 28% in the third quarter of 2026 compared to 27.4% for the same period in 2025. The tax impact associated with share-based awards was immaterial in both the third quarter of 2026 and 2025. EBITDA for the quarter increased 16% to $45 million, producing a margin of 29.4% of net revenues as compared to $38.8 million or 28.3% of net revenues in the same period of 2025. Billable hours in the third quarter were approximately $405,000, an increase of 8% year-over-year. Average technical full-time equivalent employees in the third quarter were 1,016, up 4% as compared to 1 year ago. This increase was a result of our recruiting and retention efforts. Utilization in the third quarter was 76.7%, up from 74.1% in the same period of 2025. The realized rate increase during the third quarter was approximately 4%.

In the third quarter, compensation expense after adjusting for gains and losses in deferred compensation increased 11%. Included in total compensation expense is a deferred compensation gain of $159,000 as compared to a gain of $7 million in the third quarter of 2025. 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 $6.7 million as compared to $5.3 million in the prior year period.

Other operating expenses in the third quarter were up 9% to $13.8 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 decreased 4% to $7.3 million for the third quarter, primarily reflecting lower travel and meal expenses associated with the smaller firm-wide principles meeting held during the third quarter of 2026 as compared to the larger managers meeting held during the third quarter of 2025. Interest income decreased to $668,000 for the third quarter, driven by a decrease in cash. Regarding capital allocation, during the quarter, capital expenditures were $1.2 million, and we distributed $14.7 million to shareholders through dividend payments.

Turning to our segments. Exponent's Engineering and Other Scientific segment represented 85% of net revenues in the third quarter. Net revenues in this segment increased 13%, driven by strong user research activity spanning a broad set of challenges, including health applications, dynamic and unstructured real-world environments and sensory perception, along with dispute-related services involving chemical facilities, consumer products and advanced transportation technologies.

Exponent's Environmental and Health segment represented 15% of net revenues in the third quarter. Net revenues in this segment increased 3%, driven by increased projects assessing the effects of chemicals on human health and the environment.

Turning to our outlook. For the fourth quarter of 2026, as compared to 1 year prior, we expect net revenues to grow 8% to 10% and EBITDA to be 26.3% to 26.8% of net revenues. For the full year of 2026, we are raising our net revenue and margin guidance. We now expect net revenue growth of 10% to 11% and EBITDA to be 28% to 28.3% of net revenues as compared to 27.6% in 2025. We expect our average technical full-time equivalent employees to increase approximately 4% to 5% year-over-year in the fourth quarter of 2026 and 4.7% to 5% for the full year. We expect utilization in the fourth quarter to be 69% to 70% as compared to 69% 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. We expect the full year utilization to be 73.5% to 74% as compared to 72.5% in 2025.

We expect the year-over-year realized rate increase to be 3% to 3.5% for the fourth quarter of 2026 and 3.7% to 4% for the full year. For the fourth quarter, we expect stock-based compensation to be $5.7 million to $5.9 million. For the full year 2026, we expect stock-based compensation to be $28.1 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 fourth quarter, we expect other operating expenses to be $13.5 million to $14 million. For the full year, we expect other operating expenses to be $53 million to $53.5 million. For the fourth quarter, we expect G&A expense to be $7.2 million to $7.7 million. And for the full year, we expect G&A expenses to be $28.1 million to $28.6 million.

We expect interest income to be $700,000 to $900,000 for the fourth quarter. In addition, we anticipate miscellaneous income to be approximately $300,000. For the remainder of 2026, we do not anticipate any additional tax benefit associated with share-based awards. For the fourth quarter of 2026, we expect our tax rate to be approximately 28% as compared to 27.4% in the same quarter a year ago. For the full year 2026, the tax rate is expected to be 28.5% as compared to 28% in 2025. Capital expenditures for the full year 2026 are expected to be $10 million to $12 million. We are pleased with the momentum we are carrying into the fourth quarter, and we are well positioned to finish 2026 on a strong note.

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

Thank you, Eric. At Investor Day, we asked you to keep 3 questions in mind. Why is this market growing? Why does Exponent win? And why can Exponent continue to grow with it? This quarter's results reinforce the answers to those questions. The market is growing because more is being asked of technology, infrastructure and the people who depend on them. Artificial intelligence and other digital technologies are moving into the physical world, demand for power and critical infrastructure is rising and expectations for safety, reliability and performance continue to grow. As these worlds converge, our clients' questions are getting harder, not easier. And Exponent wins because we are built for hard questions.

Our approximately 1,000 consultants, more than 700 of whom hold doctoral degrees, work as an integrated ecosystem across engineering and the sciences. We start with real-world evidence, bring together the expertise each problem requires and apply independent judgment to deliver conclusions that stand up to scrutiny. And that same complexity gives us confidence in the opportunity ahead. The forces driving demand for our expertise are strengthening. The range of problems our clients bring to us continues to expand, and our investments in talent and capabilities keep us at the leading edge. That is the foundation of our long-term growth framework and our confidence in Exponent's ability to deliver sustainable long-term value for our shareholders.

Operator, we are now ready for questions.

[Operator Instructions] Today's first question comes from Josh Chan at UBS.

I guess utilization was really strong in Q3, even though it's usually a strong quarter anyways. Is it a function of kind of a structural productivity that you've been able to generate? Or is there some calendar effects that kind of contributed into the utilization in the quarter?

Yes, Josh, this is Eric. There wasn't -- it wasn't really a structural calendar type thing. It was really just broad-based demand across the business. So the third quarter had very few holidays and vacations like we have in the fourth quarter. So that utilization really just reflected dispute-related services across a broad set of industries, the ones we talked about in the press release, consumer products, chemicals, transportation and just good business flow across most areas of our business.

On the proactive side, on the studies, we did a little bit better than expected there. We had talked about a large project that represented 4% of revenues in the second quarter. That project stepped down to 2.5% of revenues in the third quarter. We were expecting it to drop below 2%. So a little bit better than expected there, but that's really what's driving it. So it's not associated with the calendar holiday vacations, just the business flow.

Okay. That's helpful. And then I think you made a comment on the prepared remarks about 15% to 20% of your business being directly related to AI now. I was wondering what that percentage would have been like a few years ago? And just kind of curious how the trajectory of this business has been kind of evolving?

I'm going to defer to Eric on the few years ago since I'm newer to the seat here. But I can tell you, as you look into the future, you talk about the 5 layers of the stack, all of those layers are growing, Josh, whether it's the traditional work where it's coding or a building catching on fire or an HVAC system not working, or whether it's the newer stuff that you're pressing on the technology, all of that is working. And then, of course, our user research work that Catherine talked about fits in there, too, where we're delivering the data and helping think about what is the right data to push forward on those new applications. So looking forward, you see continued growth there and perhaps even some accelerated growth in certain areas. But I'll defer to Eric on the looking backward piece of what that might be.

Yes. Looking back, Josh, we've been doing work in this area for a number of years. So it wasn't a small number 2, 3, 4, 5 years ago. Our work with advanced driver assistance systems and autonomous vehicles, we've been doing that for many years. And our risk management work for the utilities, machine learning, that's also a flow of work that's been going on for probably the last 5 to 10 years. So I don't have a number to give you, but it wasn't something close to 0. We've been doing this work and building these capabilities over time.

Sure. That's make a lot sense. Congrats on the quarter.

And our next question today comes from Andrew Nicholas at William Blair.

I wanted to circle back to the utilization number in the quarter. I think the highest you've had for several years, if I'm not mistaken. Curious on kind of how you view that from a headcount growth ambitions perspective or maybe even a pricing perspective. Obviously, demand is really good. Your challenge is in demand as are the specialties that you focused on. Just wondering if this is an opportunity to really lean into the higher end of your kind of headcount growth aspirations or maybe lean a little bit further into pricing in '27. Any comments on kind of the interplay of utilization and pricing and headcount growth would be great.

Yes. Thank you, Andrew. And I think you've really hit the nail on the head. I mean you can see the demand that is pushing on the business, and you see that in the utilization. And that's very typically the first place where it shows up. But we are -- what we say about the drivers is not a short-term thing, right? We see the demand drivers continuing to be strong. And so we're absolutely pushing that recruiting effort, those hiring efforts. We always want to balance the headcount growth with the demand. In a perfect world, you sort of bring them along perfectly calibrated together.

But look, our practices and our teams are very motivated to hire right now, as you might imagine. They are very busy, and they see even more opportunity on the horizon. So it does give us an opportunity to say, hey, as we go into planning and as we're doing now, we're bringing the people in for the interviews. We're out at the schools, especially in the fall recruiting season. This is a very important time of year for us when we talk about our university recruiting. We are looking at lateral type of hires from competitors, from industry, from the regulators. And so it's really all those facets of our recruiting strategy. We are -- we have turned up the dials on those and so are working to sort of balance those things.

And I think, look, we're still heading into the -- we're in the midst of the planning process. We will obviously have more to say about things like pricing and specific headcount growth. But those are things that we are working very hard with our different business units on and look forward to sharing with you in another quarter.

Very helpful. And then I was hoping you could maybe break out the growth between proactive and reactive in the quarter, at least at a high level quantitatively. I think, as you mentioned in the release, it was a pretty tough comp on reactive in particular. So any color on how both of those parts of your business grew would be helpful.

Yes. I can give you a little color on that. So on the proactive side, it grew in the, call it, the high teens and the reactive side in the high single digits. And like you said and Catherine said in her prepared remarks, that number on the reactive side was on top of a very strong quarter in Q3 of last year.

Yes. And I would add, Andrew, the reactive work, the disputes work, it's not a scenario where we had sort of one big project or 2 big projects. It really was kind of diversified across a number of these different areas and seeing that strong utilization in our disputes folks.

Our next question today comes from Tobey Sommer at Truist.

I want to start with just a small tactical question. The 4% project that went to 2.5%, what's the assumption in 4Q for the contribution from that project?

Yes. Tobey, that project, we expect to wind down to under 1% of revenues in the fourth quarter. So it's not a big part of our forecast.

Sure. I appreciate that. I wanted to ask a question about AI-specific work in reactive engagements that looked like -- at the Investor Day, it sounded like more opportunity currently exists and at least we heard more examples about sort of proactive opportunities. But on the reactive side, AI breaks something in the physical world and causes damages and creates exposures. Is that already out there in the market? Is that something you're involved in? Or is that a prospective opportunity?

Tobey, this is John. No, I think AI has been in products in one shape or form for several years now. You saw it probably most early in the transportation industry as you started getting into advanced driver assistance systems and then in automated vehicles. And there's a large portion of what we do in that industry that is reactive. And so what did the machine do? When did it see what it was supposed to see? Did it do the right thing upon seeing that? Did it turn right or left? As Catherine always respond to saying in her examples. So that part of the work is not a future-looking expectation. That's here right now.

And then as AI makes it into other areas where decisions are being made and their safety consequences, the example I gave around chemical formulations and things like that. Those are examples that are happening right now. Have they moved into the litigation stage where there's a dispute around them? Well, that's maybe a little bit early, but you can continue to see the pace of that moving forward.

Yes. And I would just add that the next place where we're starting to see more is going to be the medical device arena. When you think about that wearable or that technology, that's giving a health-related decision. That is not at the level of the advanced driver assistance piece that John was talking about, but that's kind of as I see it on the reactive side, maybe the next kind of sort of ramp that we have to think about.

Yes. Tobey, this is Rich. Just a little bit to add here that's really the related part that we've been talking of traditional parts of the AI stack, which are that we are already seeing construction disputes related to AI systems. We are already working on significant events that have occurred fires and at data centers around the world. We are being called in to help clients on failure analysis of components. So that's everything from corrosion on related to liquid cooling systems. It is failures of routers. Those have really been helping people at that level just get over the hump and push the thing aside and get the feedback into their vendors.

History would tell us eventually, those end up with -- when people slow down a little, they end up with the dispute between the supplier and the OEM that needs to be worked out as where the finances get paid for those corrections. We saw that across almost every automotive manufacturer in the electric vehicle area. Every one of them had product recalls around the battery systems that were out there, eventually worked through it. Many of them ended up having to work things out financially with their suppliers related to that. So these are the things that are in the early days that are building up, but they're all the things that we've been working on, as John said, for 60 years.

Is there much of a track record of examples of reactive projects where the actual AI firms developing the models and new models as those models sometimes go rogue or do something unintended? Is that kind of stuff percolating in the judicial system or in the regulatory environment?

Well, I mean, it's every news article you read these days, and that makes it certainly through the regulatory side as you try to figure out where it's going and ultimately, into the disputes world. I think it shows up in all of those things, Tobey. Our exposure to that is, I think, more on the earlier stages rather than in the dispute that will ultimately come up when the AI shuts down your travel reservation system or the cybersecurity is maybe not where you wanted it to and something happens there. But I think that's just a matter of time how it works its way into more significant portion of our workflow.

And I think, look, the perfect example, which Exponent has been executing on here for a number of years, but is now cases that are related to fully autonomous is in the vehicle area. This is where these systems have come in. There is actual product liability suits. There are actual regulatory investigations into each of these questions of why the vehicle didn't stop? Or why did the cruise vehicle make the decision it made nearly 2 years ago in San Francisco? Those are the questions Exponent being asked to answer. We've written the reports that are public in some of these matters. Others are maybe a litigation matter and might not be out there, but some of these are out there in the public. So that is what's happened in that environment. It will play out across the rest of the product areas over time.

You've been generous of your time. I just like to ask one more. In your hiring outlook, what either areas of the business or practices or even scientific specialties do you expect to hire the most in?

Yes, I can jump in on that. Look, it's a lot of different areas. Human factors is one example. When you think about the human machine interface and that convergence that we've been talking about, that's going to pull in your human factors. It's pulling in your biomechanics as well. When you think about the data center infrastructure side of what's going on and also the energy side of the market drivers for us, there, you're talking about your thermal scientists. You're talking about your polymer folks. You're talking about your metallurgists. You're also talking about people with energy storage type of experience.

And look, we also have to think about that Health and Environmental side. This has been a place where we have invested in senior talent, and we will continue to do that when you think about things like PFAS. You think about other emerging chemicals. And those are places where we not only are hiring in Health and Environmental, but we're hiring on the engineering side and the material side because it's those questions of where are the replacements for these materials, and why are they useful in products are the kinds of questions that are arising. So those are some of the examples of places where when we're at the universities, we're looking at the different laboratories, the different departments where we're very focused.

And our next question today comes from Tomo Sano at JPMorgan.

Maybe on the Q4 outlook, you're guiding to 8% to 10% growth versus 12% in Q3 despite the easier year-over-year comp. Could you talk about what's driving that moderation? Is it project timing? Or are there any areas that where you are assuming some slowing in demand?

Yes. Tomo, on a sequential basis, it's not really moderating. So we guided to 69% to 70% utilization. Josh earlier asked a question about the holidays and vacation sort of the structural part of that. That 69% to 70% utilization in the fourth quarter is roughly equivalent to the 77% that we just did in the third quarter. So we're expecting this robust level of activity to continue into the fourth quarter. When I look back at the fourth quarter last year, that was also a very busy quarter, 69.2% utilization in the fourth quarter is strong. So we've got a tough comparable is why you're seeing that at 8% to 10% versus low double digits like we just did in the third quarter.

And if we could talk about Environmental and Health, that was actually up 3%, well below Engineering and Scientific. What would you say that need to change for the growth in that segment to reaccelerate? Are you seeing any early signs of that today?

Yes. Thanks, Tomo. And I was alluding to that a little bit in my comments just a minute ago. This is a place where we are very focused on recruiting and in particular, senior recruiting. We've brought on some principal level folks in the last 12 to 18 months. They continue to ramp, and we continue to make those investments. So that's a key element of making sure that we can see sustainable growth over time because what you can then do when you have those principles is you are building additional teams underneath of them, you're able to expand your capabilities maybe across to different emerging chemicals and different issues, both on the reactive and the proactive side.

And look, this business very much splits across those 2 pieces, right? We have the dispute-related work around chemicals in the environment, but there's also the proactive regulatory piece of that business. And that is a place where, again, we continue to seed with hires. We are taking those out of regulators, for example, and we continue to work with clients on what their latest technologies are. So look, it's about building the capability, envisioning what the emerging trends are and positioning ourselves with the talent to then capture that work.

And if I could squeeze just one more on capital allocation. So you repurchased about $146 million of the stock year-to-date. How are you thinking about the pace of buybacks from here versus preserving capital for investment or M&A?

Yes. So our philosophy on that hasn't changed. We are going to continue to pay a dividend. We're going to buy back shares when there's pullbacks in the stock price like we did during the first half of this year. We've still got that $50 million that the Board authorized for share repurchases. So going forward, our philosophy is not going to change. We're obviously going to evaluate opportunities for maybe a small acquisition here or there and other investments that we can make into the business and deploy cash consistent with how we have in the past.

Thank you. Thanks, everyone. That concludes today's question-and-answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

But look, so this is a really big milestone for Exponent because this is our first Investor Day that we have done. And you may reasonably ask the question, well, why now? And look, there candidly is a lot of noise out there right now about professional services firms, about AI and what AI ultimately means for businesses like ours. And candidly, it is very difficult to address those issues and explain what makes Exponent different in a 30-minute or a 60-minute investor meeting.

We're meeting with you virtually. We're maybe sitting in a hotel room or in a conference room. But this is why we've asked you to come to Phoenix specifically. We didn't bring you to our corporate headquarters in California. It's a little bit nicer. There's no sled rails to have to climb over. We're not spending today in a conference room in New York. we brought you here because we don't want to just tell you why Exponent is different. We want to show you. And we brought you where the literal rubber meets the road, and you're going to see that later.

We want you to better understand our value proposition. We want to know -- have you know when you walk out of here what truly differentiates it because you have experienced it and why we see so much opportunity ahead. So at the very core of Exponent, it's the laws of physics, right? Today, you are going to see those laws of physics come to life. You're going to see it, you're going to hear it, you're going to touch it.

And yes, if Nick is able to do his battery demo and the rain holds out, you're probably going to smell it as well, okay? And by the end of today, I really hope you're going to have an evolved understanding of Exponent and why this company is a compelling investment for the future. So science and engineering, they are at the heart of Exponent. That is very personal to me. I am an engineer. It is how I was trained, and it's how I think. At our core, engineers and scientists are driven to understand the world around us. We use our knowledge of fundamental scientific and engineering principles to answer really important questions. Why did this happen? Will this work? It doesn't always, as you saw this morning. Is it safe? What could go wrong? And how can we make it better? We follow the evidence.

We challenge assumptions. We look for answers that can withstand scrutiny, particularly when the questions are difficult and the stakes are high. That is in my DNA, and that is in Exponent's DNA. Science and engineering are not just services that we provide. Science and engineering define who we are. They shape the people we hire, like all of the people that you're going to meet here today. They shape how we approach problems, how we work together across disciplines and ultimately, the value that we bring to our clients. And there are a couple of people who aren't going to be presenters here today, but I want to point out, one is Rich Schlenker, who I think you all know. He's going to be sort of moderating our Q&A sessions in here.

And I also want to let you know that our Chairman of the Board, Karen Richardson, is here with us today as well. And I'm going to be introducing speakers other than those folks as we go. But listen, the premise I want to put forward for today is really simple. The world needs this kind of scientific and engineering thinking more now than ever before. And Exponent is uniquely built to deliver it. And today, we're going to show you why and how. So the world is increasingly defined by science and engineering and the consequences of failure, the expectations of safety and reliability and performance, they have never been higher. The products and the systems around us are more complex. They are more connected. They are more automated, more software-enabled, more AI-enabled, more dependent on vast networks of infrastructure and legacy systems, and they are evolving at a dizzying pace that would have been hard to imagine just a generation ago.

When products and systems fail, organizations need answers that are grounded in rigorous science and engineering. When they innovate, they need confidence that new technologies will perform safely, reliably and as intended. And when high consequence decisions are made, organizations need evidence that can withstand the absolute highest levels of scrutiny. These are the reasons why Exponent exists. So my thesis for why our opportunities continue to grow, it's simple. Technological advancement is accelerating, and it will be one of the most powerful forces shaping our collective future. Advances in science and engineering are redefining what is possible. They are transforming the systems that we depend on, and they are challenging long-held assumptions about safety and reliability and risk and even human performance itself.

I think of this through 3 closely connected domains. So the first, of course, is technology. We're seeing extraordinary advances in artificial intelligence, autonomy, robotics, software, connectivity, increasingly sophisticated products and systems. The second piece is the infrastructure because all of this technology depends on physical systems, right? -- power generation, energy storage, data centers, communications networks, transportation systems, not to mention the earth itself. This is the ultimate environment in which all of these systems operate.

These systems are being asked to support growing demand while becoming more resilient to challenges like climate change, extreme weather, cybersecurity threats, aging infrastructure. And then the third domain, of course, is the humans. Ultimately, technology and infrastructure only matter because of the people who use them. How do people interact with these systems? Do they trust these systems? Should they trust these systems? Exponent operates in all 3 of these domains and increasingly at the intersections between them. That's where so many of the most exciting opportunities are emerging that we're seeing.

So the opportunity is expanding. We're going to double-click on many of these today in terms of specific opportunities. The drivers are strong. But what I want to do now is turn to why Exponent is built to meet this moment. I like to think of Exponent like a neural network, okay? For over almost 6 decades, we have assembled an extraordinary depth and breadth across science and engineering, about 1,000 consultants with over 700 doctoral level professionals. This is to scale. by the way, just so you can get a sense for that. They are leaders in their fields. They are people who shape industry standards. They keynote major technical and industry conferences.

They are the leaders of professional societies. They publish in peer-reviewed journals. They push the boundaries of their disciplines. But Exponent is not just a collection of brilliant individual experts. The talent is in the nodes, but the real advantage is in the connections between them. Our people reach across disciplines, industries and geographies. They challenge one another. They learn from one another. They come together around the problem, assembling precisely the expertise that the client needs. And they do this all around the product and asset life cycle. Leveraging those lessons of past failure to produce tomorrow's solution. That's our multidisciplinary model, but it's more than a business model. It's a culture that we have at Exponent.

I've purposely put in this neural network, it looks like there are clusters of nodes in this rendering that's very intentional. These are our disciplines or our practices that we organize ourselves by. You can think of this cluster here as maybe being our Thermal sciences practice. This next cluster could be our polymers and chemistry practice. This one is -- can be electrical engineering. You sort of get the idea. But where it gets really interesting, where the magic happens is how we go to market and form project teams. Those boundaries disappear between practices. Think of this as our focus on the life sciences industry, right? It goes across. There's a focus in our biomedical engineering practice and in our health sciences practice, but it bridges to so many others like electrical engineering, environmental and so forth. You can think of this as what we do for the automotive industry, heavily focused in vehicle engineering, biomechanics, human factors, but there are so many other practices that get networked in and brought into that work. And this is increasing, particularly in the automotive space as that industry continues to transform with electrification and automation.

In addition to industries that cut across practices, there are cross-cutting capabilities as well. You're going to see some of that today. You can think of this as the part of the network that works on energy storage and battery systems, highly multidisciplinary work. But there's another really critical dimension to this ecosystem, and it's about building and strengthening and evolving. This is not static. For nearly 6 decades, Exponent has built a culture that is around technical excellence, intellectual curiosity, collaboration and rigor. Our reputation wasn't created by a marketing campaign. It was earned engagement by engagement by engagement, by the excellence of our work. That same culture is why developing people matters so much to us.

We bring exceptional engineers and scientists into Exponent. We surround them with extraordinary colleagues. We give them exposure to incredibly different problems, and we teach them how to apply their expertise in increasingly consequential settings. And then they do the same for the generation that follows behind them. So the ecosystem continually grows, it evolves. We add new nodes. We add and strengthen the connections. We develop new expertise in anticipation of what is next. We accumulate experience and we extend that reputation for excellence. That is why I believe that the Exponent ecosystem is much more than the sum of its parts.

This is a competitive advantage that has been nearly 6 decades in the making. It is extraordinarily difficult to replicate, and it becomes increasingly valuable as the problems our clients face become more complex and more consequential. So as I mentioned at the outset, there's a lot of discussion today about what AI means for professional services and knowledge work. And it's fair to ask, if AI can automate that kind of work, what does that mean for Exponent? We are increasingly demonstrating that the question itself misses the point because it misses the bigger opportunity. AI is not simply a force that acts on Exponent. AI is creating an entirely new class of opportunities for Exponent.

Our role has never been to provide answers in areas where the answers are already known. Our role is to operate at the edge, at the point where new technologies encounter uncertainty, where innovation encounters risk, where difficult scientific and engineering questions have not yet been answered or they continue to be in dispute and that edge is expanding. Ultimately, AI still operates within the laws of physics. It interacts with physical systems. It influences human behavior. It introduces new failure modes. It needs infrastructure. It creates new questions about safety, reliability, security, trust and performance.

And those questions, they play directly to Exponent's strengths, that intersection, technology, infrastructure and humans. This is where some of the most difficult and consequential questions are emerging. Those are Exponent questions. So we don't see AI as simply substitution risk. We see it as an incredibly powerful tool that not only amplifies our breakthrough insights, but also as a powerful force expanding the frontier of problems that our clients need us to solve. So everything I've talked about so far this is the thesis that I've put in front of you. The rest of the day is going to be the evidence, and that's why we brought you here. It's just like what we do every day at Exponent.

A scientific method, you have a hypothesis and then you test it and you prove it with the data, right? We didn't bring you to Phoenix simply to tell you why we think Exponent is different. We brought you here to prove it, all right? Our first proof points are going to be here on the main stage. We'll have a series of growth opportunity presentations where we see particularly compelling and growing demand and where Exponent's differentiation really, really matters. We are going to hear directly from our technical leaders in these areas.

So I'm going to sit down and let our scientists and engineers give you those presentations. And then we're going to get you up and moving around the facility where you'll see even more of our people and our capabilities in action. You're going to see how multidisciplinary teams come together. You're going to see the real-world problems. You're going to see why this integrated ecosystem of science and engineering that is at the core is so difficult to replicate. So as you listen today, I'm encouraging all of you to keep 3 questions in mind. Why is this market growing? Why does Exponent win? And why can Exponent continue to grow with it? So we're going to start with one of the most powerful forces we've been talking about this morning, which is AI and the digital infrastructure that supports it.

To take us through this opportunity, I'm going to introduce and turn it over to Dr. John Pai, Exponent's new President. John has spent more than 25 years at the intersection of advanced technology and complex physical systems. He's led the development, the testing, the integration of technologies ranging from robotics and autonomous systems to sensors and other very high reliability applications. This makes John very well suited to talk about what happens as AI moves beyond the digital realm and into the physical realm and the enormous infrastructure that's required to support it. John, take it away.

Thanks, Catherine. For a minute there, I thought you were going somewhere completely different with your powerful force comment, but that's all right. We'll talk about AI instead here.

I want to pick up where Catherine left off and talk about one of the first examples here. I'm going to talk a little bit more about how we think about AI at Exponent. And then I'm going to work that through a data center example about the impact that has on our company. I'm going to put this slide up first. So this is about where AI touches us. This is an exciting area because if you look at technology, infrastructure and humans, that covers the built world. When you think about physical AI, this is how we experience the world.

We experience it through the technology that's in our pockets, that's on our wrists that we use on our way to work, on our computers, in our cars. That technology relies on infrastructure to be able to deliver that capability. We are the recipients of that at the end of the day as well. We control it. We derive value from it. So why are we excited about AI? Well, how do we think about AI in the physical world, it's because it touches everything we do. But this is a little bit of an interesting way to think about it. As an engineer, you like to know how things impact you, but you also want to think about how you deliver that capability. So there's another paradigm that I want to show here and engineers love a stack. This is about delivering capability. This stack a year ago, when I was trying to draw it had 13 layers.

Now it has 5 layers. I have to give a head no to NVIDIA. They're driving a little bit about the thinking of how you might want to organize the delivery of AI. How do you go from electrons at the bottom where you're generating the energy through to the bits and bites in the middle as it moves through the chips and the models and turns that into insight.

And then finally, the applications at the top where that insight and the interpretation of the physical world around you and your ability to act on that physical world turns into applications. And at all layers of that stack, there are opportunities for Exponent. Down at the bottom, when you're delivering the electrons that run the data center, the chips that are in the data center, the building that the chips and the racks and the air conditioning is housed within, those all play on the mechanical, the electrical, the thermal challenges that Exponent has been dealing with over the last 60 years. So you put all those together and then you get to the model.

The model and when you wrap the model with a harness that lets that model act on the outside world is where safety comes into the picture. So a company that's been dealing with safety and safety implications, your health, the environment, all of the ways, whether it's acting on you or the world around you, this is the sweet spot for Exponent. So you've heard a lot maybe in the news lately about different AI safety things going on, whether it's coming from the regulatory end of what the government is trying to do with some of their activities, maybe it's industry coming together as a sort of a consortium and a consensus-based standard of what AI safety means. Maybe it's an individual company that says, actually, AI is a product. You should think of this as product liability, don't ship your product until it's ready to go.

All of those are areas where Exponent plays. We play at that government level regulatory sort of research and development activity. We play at the industry consortium level. Sometimes it doesn't go as well as you might hope it would go. That's a very difficult one to push forward. And then we play at the product liability level where individual companies like GM Cruise, when they were having issues in San Francisco, come to us to say, help us understand our AI system through the lens of safety and what we can deliver there. Are we doing it right? What does our liability position look like?

All of that are opportunities for Exponent. We're an investor meeting. We got to show a chart here. There are at least a couple of numbers on this chart. This is roughly to scale. So when you think about AI and all those opportunities across the stack, interacting with Exponent, what that means, take that chunk, the big green circle is our revenue. There's 15% to 20% in this year, roughly. It's a little bit squishy because AI is in everything. So these are areas where we can really peel that back and talk about where it affects our business.

And then on the right, you have those 5 stack layers. So you can see how that 15% to 20% that we've talked about as having AI impact on our business splits out. Most of it is on the application side. This is where we're collecting the data to drive that new application, that new thing your consumer device does. It's where we are working on the transportation side as your vehicles are navigating the road and you're trying to figure out what that means. Below that, it's the models. This is the harness. This is trying to understand sort of that safety lens or that connection between the bits and bites and that outside world.

And then maybe below that, sort of the last 3 infrastructure chips and energy, that's kind of data centers in different ways you might look at that. Those are how Exponent is impacted by AI currently. And I want to drill into the bottom 3 now. Actually, I want to do one more thing we do there. Across that stack and in each of those layers, this isn't just sort of opportunity for us. This is project work for us. And so if you look at the stack and some things going on, I picked a few of my favorite examples from the last couple of years of where we are working.

At the top level, we've done a project where the issue was how do you create an environment at Catherine's edge that she described, where you're teasing out what those signals look like to build an application that says, "Oh, my car is crashed. How do you do that? How do you collect that data with this sort of hopefully remote event that happens every once in a while and turn it into enough information that you can train your AI model on it, put it in your device and reliably call 911 when a crash is detected. That's what I'm showing in the upper right corner. Upper left corner, this is a little bit different.

This is a project, but for AI would be difficult for us to take the approach that we did. We're building an emission system for a vehicle. This is a huge multiyear project. This goes across multiple languages, multiple continents. You bring big engineering teams together to build a system like this. All that generates engineering data. Our job was to look through that engineering data for that sort of needle in a haystack. And normally, what you'd have to do is you'd have to read all those documents and try to find where that issue might live.

By using AI here, we were able to throw all those documents in to actually build a model of what that looks like, an engineering model. So I'm not acting with documents anymore. I'm interacting with the engineering system that I can use to guide my line of investigation and then open up what happens next. So very interesting here. This is us using AI to go and take a different approach on a project that we never would have been able to do the way we did in that case. Bottom left, we're starting getting in the data center world. You put enough heat in a very small spot. You can't get the heat out by just blowing on it anymore. And so you got to pump water through these systems. When you pump water through electronics, interesting things start to happen.

So we get all kinds of phone calls these days about what's in the water or maybe the water is leaking and now it's starting to fire. How do you take -- how do you maintain that? How do you control that so that you get the advantage of that thermal management, but also the performance that you're looking for. And then, of course, the energy has got to get or the heat has got to get out of these data centers somehow through the cooling systems that are in the building and in the environment around it.

So let's zoom in on that. And we're going to start at that data center level from the very smallest bit. We're going to talk about the chip and then we're going to build our way up from there. And at each level, we'll talk about what the opportunities look like for Exponent that are driving us here. So with your chip, you start with maybe packaging integrity. Is this the chip you wanted to have in your manufacturing line? Does the package around it, the polymer package around it, provide the integrity protection that you need for that chip. chip goes on a board. You might think it's very small. Why would I worry about forces and loads on this thing? Is that really important to the reliability of it? It turns out it is.

When you put the board into the raft or into the computer, when it heats up or cools down, stresses occur, and that then maybe affects the thaugher performance, which at the end of the day, causes the board to fail. You can zoom out from the chip. Now we're looking at the board. If you can get the heat off of the chip, you now need to get it off the board. This is the old way of doing it. You blew air over it. We're going to show you what the fluid approach looks like in a minute. But you also have to bring power to all of the things that are on that board.

The last time I did one of these projects, the board is an inch thick. I don't know if there's any engineering circuit board fans here, but that's like usually, there are 10 stacks of paper or kind of something like that, an inch thick. This is now a composite structure that you're building in order to support what's going on, on top of that board with the GPUs or whatever it is that you have.

Then of course, there's other things on the board. There's capacitors and power supplies and things like that. And as you jam them all together, they create an interference environment that might affect the performance of what's going on. Zoom further out, okay? If I can't get it out with air, I've got to get the heat out with water. Fluid contamination in water is the additives that I put in the coolant loop, the right additives to run for however long the loop is supposed to go. Is there bacteria growing in that loop? What kind of bacteria? How did it get there? What happens over time as the fluid ages? These are -- these data centers are enormous. You've got to -- this is a closed-loop system that you don't really want to maintain if you don't have to, that drives cost up, drives the reliability down if you have to turn that off to replace the fluid. So fluid aging. -- material compatibility.

The semiconductor vendors up there, they know how to work with lead. They know how to work with copper. They know how to put the composite structures together. But when you start pumping fluid through a computer, you got to worry about this wishy stuff. Now you got to worry about the polymers, and Maureen is going to talk a little bit about that. You got to worry about seals, oings, leakage, all the things that computer vendors didn't really think about when they were or don't have that in-house experience that they've built up over the years of understanding how to build the PC on your desk, now all important.

Bring it out to the rack. At the rack, power distribution. So these are -- you don't even measure data centers and megaflops anymore. It's about energy consumed. It's megawatts, gigawatts that are driving things. And that energy has to get into each of these blades that are in the rack and they have to do it reliably because if it doesn't do it reliably, and that's where the fire starts, and then you're in trouble. -- airflow optimization. It's a good time to be a thermal engineer. So if you're trying to build one of these systems, you're trying to get a lot happening in a very small package and you have to get that heat out somehow. You have to get it out of the chip, into the board, out of the board, into the server, out of the server, into the server rack, out of the server rack into the room that it sits in the data hall.

And then there's things that connect these together. So there's the switches. There's the routers that wrap all around this. There are also important elements in the overall reliability equation that you need to hit if you're going to keep that data running. Data runs through wires or maybe it's an optical interconnect. Wires have connectors on the end of them. They need to be reliable. Data center uptime is measured in 5 minutes a year kind of downtime would be a bad thing for a data center to happen.

So if you're trying to hit that level of reliability, everything has to work. It's not good enough just that the operating system isn't crashing. The connectors have to work. But the protective cabling or the protective jacket on the cables have to do their job. When they're exposed to UV or they're bending or pulled on or whatever, that can't be a failure point. 5 minutes downtime in a year, everything has to work if that's the number that you're trying to hit. A lot of connectors. And so when you've got these many connectors that you're trying to put this giant data center together, your first tier supply is probably now going into your second tier supply into your third tier supply.

All of those components in your supply chain need to work together as you're trying to deliver the product. And so you need to understand what that looks like. Zoom out even further into your data hall, Again, you're worried about the heat getting through there. You're worried about the controls to do that. Here, it's 72 degrees or whatever it is in this building. If it was 74, we wouldn't really care. Maybe we would. Some of us are more sensitive than others. But you've got to get that right.

And then at the end of the day, this is a huge asset that you're protecting. So the fire protection systems and these kinds of things because things happen, there's -- look at all the different server racks in there. When an event happens, you want it to be contained and then you want to be able to recover from that quickly. So the fire protection systems were presenting new challenges at this scale. As you continue to zoom out to the building itself, -- now you've got the cooling plant in the environment. You're tying it into on-site power generation.

If you read the news these days, everybody's Caterpillar stock is going crazy because everybody is delivering a diesel generator or a gas turbine right on the site to run these data centers. You're now not just a data center operator, you're an energy generator, and that energy needs power backup. So we've got batteries. Nick is going to show us some of that later if all goes well. And then you still need the utility interconnect at the end of the day, but it doesn't always go right.

And so then you end up in the dispute territory. Maybe the building didn't get built on time, maybe you weren't able to connect it up the right way, but you get construction disputes when you're working at this scale and at this speed, which is what's going on right now. At the neighborhood level, data centers need water to run those cooling plants. I showed you on the previous slide. So now you're impacting the water supply for the neighborhood. You're bringing in the environmental people to understand am I -- what's going on the groundwater? What am I taking from it? And then am I putting interesting things in it that we might not want in our community. There's noise that comes from the data center as well. So you've got environmental impact there. You've got new power generation to meet the demand. If you can't do it all with your generators on site, the utility now needs to make an investment to drive. That's an area of work that Exponent can support as well.

And of course, it's not just at the community level. This is a whole or a national issue as well. And at the national level, you start getting into bigger environmental risk buyers, whether you're on the West Coast with fire or you're on the East Coast with hurricanes or maybe you're up in Chicago with the ice storm coming in or tornadoes down in Texas. All of these are areas where you have to understand that risk and you need to know how that translates into your data center operation. You're going to hear from Brian a little later on today about sort of our quantitative risk work that we do, which is taking these environmental forces or maybe other forces and translating them into system consequences with some behaviors. And so all of that is important at the data center level.

There's a regulatory environment that comes up. And that regulatory environment is not uniform. It is different at the local level than it is at the state level than it is at the national level. And my colors in the background here are meant to show that there's a political dimension of that as well that comes into play. So as you're navigating that complex regulatory process, that brings up all kinds of issues of how you might want to structure your approach to the community that you're building it in. This is roughly where all the data centers are in the U.S.

There's a lot of them. So it's not an East Coast problem or a West Coast problem. It's everywhere. And not just at a national scale, but at a global scale. And then if you go and zoom out far enough and you read the news and believe what Elon is saying or what's coming out of Amazon, you even have the satellite data center concept that's out there. So Exponent is excited about what we do there because at the smallest scale, the chips at nanometer level up to tens of thousands of kilometers where you're working on satellite constellations and what that means. 14 orders of magnitude. That's a huge engineering span, if you want to think about things that way. But nanometers to tens of thousands of kilometers, the scale for Exponent is enormous.

The areas where we can play and where our multidisciplinary approach has value span really what the entirety of the company does. And as Catherine said, cutting through the noise, AI is really something that is energizing the company and driving growth as we move forward.

So thank you. I'm going to stop there and hand it to Eric or Catherine to introduce Eric.

All set. Am I on? Okay. John has just shown you one really powerful example of the opportunity ahead for Exponent. But of course, opportunity alone does not create shareholder value. And that's why I want to bring up Eric at this point before we continue with some of the growth opportunity presentations. So Eric has been part of Exponent for more than 20 years. He joined us as Controller in 2003. He served most recently as Vice President of Finance and Accounting before becoming our Chief Financial Officer in May.

He brings deep financial and operational expertise together with an exceptional understanding of Exponent's business strategy and culture. And he's the perfect person to take you through how we translate the opportunities that we're going to tell you even more about today into long-term value for our shareholders.

All right. Thank you, Catherine. I'm very excited to be here today and see all of you here in person. I'm going to be talking about how we translate all these exciting market opportunities that you're going to hear about into shareholder value.

Before I get started, I need to remind everyone that this presentation is going to include forward-looking statements, which are subject to risks, uncertainty and assumptions, and actual results can differ from what's discussed here today. Exponent is entering this very dynamic period from a position of strength, strategically, financially and operationally. Our strategy is focused. We concentrate on high-value work where deep scientific and engineering expertise matters.

What makes this strategy particularly powerful is the distinctive ecosystem Catherine described earlier. We have consistently demonstrated an ability to recruit, develop and deploy talent where demand is strongest and scale up those resources to meet this demand. Exponent has a proven track record of converting that demand into strong profitable organic growth, and we generate strong cash flows and have a healthy balance sheet with no debt.

Over the past 5 years, we've grown net revenues at a compound annual growth rate of 7% from $378 million in 2020 to $537 million in 2025. Based on our most recent guidance, we expect to increase net revenues 9% to 10% in 2026. And going forward, we expect to increase net revenues on average in the high single to low double digits. This isn't just growth. This is profitable growth. We generate strong EBITDA margins and have demonstrated an ability to expand margins over time. Based on our recent guidance, our -- we expect EBITDA margins for 2026 to be between 27.8% and 28.1% as compared to 27.6% in 2025. Going forward, we expect to increase EBITDA margins 20 to 30 basis points per year on average as we improve utilization from current levels of 72.5% to 73% towards the mid-70s and leverage our corporate infrastructure.

I will point out that 2021 and '22 were unusual years. Margins were higher than historical norms due to the COVID-19 pandemic restrictions, reducing travel and other expenses.

Moving on to dividends. We paid a quarterly dividend since 2013 and have increased that dividend every year since inception. We plan to continue to increase dividends in line with earnings growth going forward. Exponent also generates strong cash flow. Our free cash flow in each of the last 3 years was well in excess of $100 million. These strong cash flows guide our capital allocation strategy. Since the beginning of 2021, we have returned $734 million to shareholders, which includes $298 million in dividend payments and $436 million of share repurchases. These share repurchases have allowed us to buy back 5.8 million shares of our common stock, which is over 10% of the shares outstanding at the beginning of 2021.

Exponent is very well diversified across engagements, clients and industries. During 2025, we worked on over 10,000 engagements for over 2,000 clients. Most of our clients are corporations and law firms, and we do about 5% of our work for the government. We're also diversified across industries. We work for most major industries. This diversification broadens our growth opportunities, reduces volatility and provides protection during challenging economic cycles.

I'm going to go into a little bit more detail about the diversified portfolio of industries that we work for, and I'm going to link those industries to some of the growth opportunities that you're going to hear about today. Consumer products is our largest industry and represents approximately 1/4 of our net revenues, of which approximately 2/3 is proactive work for consumer electronics clients. You're going to hear about our business opportunities in this area when we talk about human factors and user research and human technology systems.

Energy is our next largest industry and represents approximately 1/3 of our net revenues. This approximately 60% of the revenues in this industry is proactive work for our utilities clients. And you're going to hear about our business opportunities in this area during our presentation on energy -- sorry, during our presentation on utility risk and wildfires.

Transportation is our next largest industry and the transportation industry's percentage of Exponent's net revenues is in the mid-teens. Most -- the predominant majority of our work in this industry is reactive work, and you're going to hear about our capabilities and growth opportunities in this industry when we talk about robotics and transportation. We're also going to talk about our capabilities and growth opportunities in energy storage and batteries. And this is an area that cuts across all 3 of our largest industries. Chemicals represents approximately 1/10 of our net revenues and life sciences percentage of our net revenues is in the high single digits.

Both of these industries have a mix of reactive and proactive work, and you're going to hear more about the work we do for our clients and our growth opportunities in these industries when we talk about chemicals of concern. Going forward, we believe that Exponent is exceptionally well positioned to capitalize on these exciting market opportunities. We have a proven ability to generate organic growth, attract, develop and retain top talent, expand margins and generate cash flow. We have a resilient and diversified portfolio of work and a disciplined approach to capital allocation. Together, these attributes give us confidence in our ability to deliver profitable growth and sustainable long-term value for our shareholders. Thank you.

All right. At this point, we're going to pause if there are a few questions, either Rich is going to sort of moderate for us. John will be up as well, but we are...

So if you have a question, if you could just grab the mic on your table and use that mic to do it. So Tobey, you seem to be reaching forward. So I'll let you have -- take the floor first, and then please -- then we'll just look for hands and take a few questions before we go on to the other growth opportunities. So go ahead, Tobey.

Tobey Sommer with Truist. What is the rate of growth in the 15% to 20% of your work that you're grouping in AI? And maybe in your answer, could you talk about what the pipeline looks like and how it informs a potential change in that rate of growth and the industry silos that are maybe driving the impact.

Go ahead Eric.

Let me talk about the rate of growth -- all these business opportunities that we're talking about today, including the opportunities in AI, we expect to grow at or better than our -- for long-term guidance of high single to low double digits. So there are areas that we think we can grow at that rate or slightly better than that. And then when you get to the data centers, that's an area where we do 1% to 2% of our revenues in data centers now. So that's an area that we think we can grow even higher than that given the opportunity and the small base that we're starting from.

Yes. And Tobey, to put a little bit of an industry spin on Eric's comment, automotive has been a place where we see that sort of higher-than-average growth. This has been around more of a reactive component of the business initially, which continues to grow at that accelerated rate, but there's also increasing traction around sort of the safety case, the proactive risk assessment type thing. There are applications in robotics and in particular, humanoid robotics, where we are starting to take the things that we do in the automotive realm to inform what we're doing in that humanoid robotics realm. That's very early days. But again, it's small, but I think will be one of those much higher pace of growth kinds of applications.

Maybe the third one that I would cite from an industry perspective is going to be this wearable technology and health-related applications. These are places where things have moved from being a lifestyle device that counts your steps to that wearable that predicts whether you're in a car crash or that is providing very pertinent information about your blood pressure or your heart arrhythmia or things like that. So that's another area that I see as kind of one of that more higher than that average sort of growth pace.

Yes. I think anywhere where you can have AI coupled with the physical domain because that brings in safety, that brings in cybersecurity as a sort of the other side of safety. As those pieces come together, transportation is a great one, the consumer products as they move into different form factors and can deliver some of those more safety-related applications or health-related applications, I think that also fits in the same bucket.

Any other questions at this point in time? Yes. Go ahead, Andrew.

Andrew Nicholas with William Blair. I just wanted to hone in on the EBITDA margin piece. I think you said 20 to 30 basis points. How much of that is like leveraging the fixed cost base of corporate SG&A versus an expectation around utilization improvement? Just want to kind of understand what the levers would be over the next couple of years.

Yes. The primary driver is the improvement in utilization. We do leverage the corporate infrastructure and get some additional EBITDA margin out of that, but bringing our utilization up to that mid-70s is really what's going to get us that 20 to 30 basis points per year.

Any other questions at this time?

Great. Well. Go ahead. Move on to the next topic.

All right. So one of the enduring themes behind growth at Exponent is that as technology advances, expectations rise. And in the world of chemicals, society wants the benefits of innovation, but it has little tolerance for the unintended health or environmental consequences. This tension has been rising for decades, whether a legacy chemical like asbestos or PCBs or newer substance like PFAS or microplastics, navigating that tension requires far more than just understanding a molecule.

It requires understanding the entire ecosystem around that molecule, right? Manufacturing and supply chains, exposure pathways, regulation, human and environmental impacts. And that's exactly where Exponent's multidisciplinary model stands apart. And Dr. Maureen Reitman brings a particularly powerful perspective to this challenge.

Maureen is a material scientist whose career has spanned everything from product development and materials performance to failure analysis and end-use risk. Before joining Exponent, she worked in research and management at 3M. And in 2024, Maureen was recognized with election to the prestigious U.S. National Academy of Engineering for her understanding of the selection, the performance and the durability of polymeric materials in consumer and medical and industrial applications. She understands both sides of this story, why we put these materials into products in the first place and how a chemical of purpose can ultimately become a chemical of concern. So I'm going to hand it off to Maureen.

Thank you, Catherine, and good morning, everyone. What happens when chemicals with purpose become chemicals of concern, this is a question of increasing urgency for our clients across industries and a major driver of work for Exponent because our world is made of chemicals, made in nature or made by humans, chemical substances are essential to the function of human, environmental and engineered systems. They determine how we experience the world. But how and why we use chemicals and how they behave and what happens when we're done with them. These are complex questions and answers may evolve over time.

Exponent helps clients turn the scientific complexity into action and value. So are chemicals good or bad. And how do we know? Because in chemistry, the function and the performance is directly related to the structure. Many of these targeted chemicals were intentionally created to have the very properties that drive the concerns. They're chemicals with purpose. So it's not just as simple as eliminating what we're talking about.

We can see this in the example of PFAS. These are per and polyfluorinated alkyl substances, which are also called forever chemicals. These chemicals were designed to resist fire, fire and enable hazardous chemical processing. And they can do this because of a specific chemical bond that won't break under these conditions. They support life-saving therapies, innovative research. They enable the high-tech infrastructure that John was just talking about. electronics, the ability to withstand that temperature, that heat flow, that's this stuff. They also contribute to our enjoyment of extreme environments. But not breaking down means not breaking down, which means after use, they can persist in the environment, and we do see that.

We see them on ski slopes. We see them in landfills. We see them in water, we see them in blood. This is not good. It was not expected, and it led to lots of questions from regulators, from communities and from companies who are looking for alternatives. It's also generated large-scale litigation and understanding of the chemicals and their sources. These are not simple questions. And that is why clients come to Exponent. PFAS and other chemicals, they're in the news every day with big numbers, big implications for enterprises of all sizes.

Pressure is not only constant, it is increasing. And this is because as much as society wants the benefit of this technology, the willingness to take on the companion risk is in the decline. For example, as I said, many of these chemicals are essential to our modern world. The things like computing, defense, food supply, health care, these are things that are not considered optional. And though decisions about risk should be grounded in good science, such as understanding the biological mechanisms and the strength of causal relationships, this is not always the case. This tension is part of what's driving the demand for Exponent's expertise.

Clients need us to provide state-of-the-art understanding of alternative technologies of measurement capabilities, exposure significance, dose sponsor relationships and so much more. Chemicals and chemical risk I'm sorry, so these chemicals here, the regulatory pressure. Regulatory pressure for compliance and reporting is also on the increase. But in some cases, like for PFAS, the regulation is ahead of the science. Essential questions related to what can be measured compared to what matters for risk. These are still the subject of study and hot debate.

Also driving the debate is the accelerating push of questionable information from social media and perhaps a little of AI slap. Companies need reliable information and they need the ability to put it in context. This is where Exponent's multidisciplinary capabilities stand out. So Exponent has a long history of providing insights, analysis and expert testimony related to chemicals such as these, -- and the demand for our services is growing. For example, for decades, we have worked with clients facing claims in asbestos, and this has expanded to talc.

Early cases were related to occupational exposure then to the consumer space, and the work continues to evolve as claims focus on products and new defendants. And even though most of the basic science related to asbestos is settled, this creates a shift that means new questions and new work, a cycle that provides literally decades worth of work for our technical experts.

For asbestos and other chemicals, we provide value that our competitors cannot because we have capabilities that they do not. Not only do we help clients address exposure and epidemiology, toxicology and causation, eco and environmental aspects of risk, we help them understand historical uses. and how past operations are relevant to current claims. We've been addressing chemical risk for decades, and the workflow is not diminishing. Why? Because plaintiffs are literally scanning for chemicals that might be of concern in earth, wind, water and fire and like microplastics, which you heard about, but also chemical soups, some of which might have been AI identified, but we are seeing actual claims where the combination is hypothesized to be the issue.

And we are actively advancing the science in this area. So even more notably, plaintiffs are using AI to accelerate for the growth. Plaintiffs are using AI to accelerate their ability to work up claims and therefore, file more cases. AI means that there is a lower barrier for them to hypothesize a problem, and this magnifies the work needed to respond. Our work in this area is growing as exemplified by PFAS or forever chemicals, which have roughly been classified by the Interstate Technology and Regulatory Council in this way. Each group here has different properties.

Remember, properties come from structure. These are all different chemicals. The 2 at the top, well, they've been studied and regulated and litigated and still our work continues. The next ones, that's the next group, new client-specific research analysis across our organization. And all these others, well, sometimes they're tracked, sometimes they're studied, and they may or may not be part of claims, but they are increasingly part of regulations that our industrial clients across essentially all industries are trying to get ready for.

So when thinking about these chemicals of concern, consider this. while benzene is one substance and asbestos is maybe 3 or 4 PFAS is nearly 10,000. So if you ask me what's the next PFAS, well, it's the next PFAS. And that means the need for our expertise is expanding. First, there's a question of what are we actually talking about and what are its properties.

Then there's a question of use and supply, especially in a multi-tiered supply chain. And with global connectivity, PFAS that are banned as raw materials in one region can still enter another in the form of products, which has major implications for allocating liability and costs. And there's evolving regulation. The rules are changing. The scientific basis is not always clear and who's rules.

With PFAS, states and local jurisdictions are taking numerous and inconsistent actions to regulate all or some of the substances in ways that go beyond the federal level. And that doesn't even speak to what's happening in Europe. So then you have a question of detection. Our clients need to know if what is reported really responds to the chemical -- corresponds to the chemical of interest because sampling and test methods, they can actually change that answer. And also, there's no easy solution to the persistence of craver chemicals because remediation technology is evolving, too. For now, there is no accepted way to fully destroy the most concerning PFAS. So then we get back to purpose.

There is no obvious answer for what to do next because the essential function of still in demand and alternatives are in short supply. Indeed, substitute chemicals are currently being litigated themselves. So clients in every part of every industry, they need us to help them understand what the real risks are so that they can make decisions. We expect this will be true for decades to come. So we get these questions and more because of our deep and broad expertise related to human, environmental and engineered systems. This is about more than molecules.

Exponent is different because we in isolation. We understand the product it enables, the system in which it operates, the pathways that it might move through to create risk and the decisions our clients must make. In fact, it's not unusual for clients to come and try other ways to get their answers, including via AI. Our hands-on experience and our multidisciplinary teams, they position us to provide insights that others cannot. For example, PFAS of various types are used in more consumer product applications than you can imagine.

But we have firsthand knowledge of what goes to designing and manufacturing these types of products. We understand the nuances of their global multilayered supply chain as well as the implications of uncontrolled disposal. And while PFAS have been removed from some of these applications, at least in the U.S. and Europe, because of historical norms, many companies do not even know that their products contain PFAS until they are served with a violation or a complaint. Increasingly, clients are turning to us to help them understand if there are alternatives for their products and their processes and to help them address the risks that they face. We're also deeply knowledgeable in the medical space where biocompatibility and health risk assessments are standard.

And PFAS actually have a decades-long history of beneficial use. Certain PFAS are essential to medical devices and cutting off the supply would reverse the advances in health care that we have come to depend on. Notably, the FDA is not regulating or restricting the use of PFAS in qualified medical devices. But as the production of these key materials is stopped upstream or in other industries, the impacts are felt here as well. These chemicals, they have a purpose, and that means pressures to ban them have far-reaching consequences, and that means clients need our help.

PFAS have also been described as miracle materials since they were discovered because they do have unique properties that come exactly from their chemical structure. They are central to innovation. They improve the quality of life. This is still true from laboratories to lithography, from batteries to blades, fluoropolymers and fluorochemicals because the PFAS, the F is fluoro, anything with fluorine. They provide essential functions that have not been replicated by other chemicals. This drives demands for our work. And to bring this all together, chemicals of concern, they're often chemicals with purpose, which means chemical-related risk is a strategic business issue.

Major drivers include detection methods, the supply chain, regulations, litigation, alternatives. We are unmatched in our ability to understand how these all connect and to translate this to sound advice. And so as new chemicals emerge and legacy concerns persist and expectations continue to rise, we believe the need for excellence, integrated objective expertise will continue to grow. Thank you.

Can we get the mics Thanks. So what we'll do is if anybody has any questions of Maureen or around this topic for the rest of the management team, we'll take any of those now. If anybody has anything they want to engage in on this topic or ask Maureen.

All right. Great. Tobey Summer Truist. What's -- with your geographic exposure, do you do this in Europe as well? And where in the world is the regulatory sort of or the market around PFAS most well developed? And does it -- does the development and maturation of a geography influence the opportunity for Exponent?

Maureen, do you want to start off and Catherine, maybe...

Global is important here. For about the last 6 years, there's been a strong regulatory push in the European Union for a complete ban, lots of dialogue. It's actually drawing out a lot of the critical issues related to essential uses and replacement. Europe works on a precautionary principle. They are typically the ones to drive regulation first in the chemical space. In the United States, we see a lot of litigation. The driver early is the dispute. That continues to be very active. There is a lot going on, more things being filed all the time.

The United States regulatory environment is variable at the present time. And as a result, we see people trying to react. There's uncertainty there that's actually leading to ebb and flow of work, but we're seeing the pipeline fill because everybody knows that something is coming. They just don't know what it is yet. So we have work that is happening. We have more work that is queuing, and we see lots and lots of questions. The 10,000 chemical question is the biggest issue, right? If we're just talking about the first 6, people know how to work through that. But if we are talking about everything else, it's really going to be a problem.

Geographically, we also see that there's a significant influence of Asia and sort of the BRIC countries in terms of supply. There are active chemical supply situations there. They are actually feeding many of these chemicals into the global supply chain in a way that is causing concern and work and questions to us. From our global position, our footprint, we do have a global perspective. We have on-the-ground work in North America, Europe and Asia. We see the highest project flow in North America, but part of our value is because of our footprint globally.

Anything else? Go ahead, Andrew.

Earlier, you mentioned that it's not uncommon for clients to come to Exponent after they've tried to come to a solution themselves. Can you -- I think you made a comment there about using AI as well. Can you kind of flesh that out a little bit? Like what's an example of a client trying something, figuring out they don't have the expertise or maybe they go down the wrong path and then they eventually come to you?

So we see this in a number of different domains. One of my favorite conversations with my colleague, Dr. Vargas, is about the attempt to have AI replace scientists in formulation and development of new compositions. We see an alarming number of recommendations that are explosive and dangerous. But even if you were to have good models that were to develop good things, keep in mind the model that I just told you about PFAS.

These molecules were developed for this purpose, and yet we did not pick up on the consequences. So we are seeing clients coming to us with those sorts of questions. We are seeing attempts to create new materials. We are seeing clients who are attempting to use agentic tools to look at many more options, but they don't have any more understanding when they get all this data, and that's why they come to us.

Also a question on AI. You mentioned that it has lowered the barriers sort of to file. Can you just provide more color on that? And also, how has AI impacted your own work so far?

So just a very recent conversation with one of the attorneys that I work up with in the asbestos space. He was saying, we're getting a 4x on the number of claims because what we're seeing is, for example, in asbestos, mesothelioma is a specific thing. Lung cancer is a more general thing. We used to see the meso cases.

Now we see multiple lung cancers coming in because the plaintiffs don't have to put in the work or the cost if they just run it through. So that's a very specific example from just a week ago. We're seeing more cases. It requires us to do more work up. In terms of AI Obviously, it can be used in many ways, but I tend to use it more for administrative purposes.

The actual value that we bring to clients is our knowledge, the things that we've done. We do things that the models don't know. We are ahead of the models. We see connections that haven't been captured in that, and that is part of how we help our clients. So it's a nice tool to do a QC check or to organize some information, but the real value that we bring to clients is what we know and the models can want because of that connection to the physical world, because of the complexity of the science involved because we are constantly pushing borders.

I just want to follow up on that point about the 4x and the number of claims that they're seeing. Is like a claim in and of itself enough to catalyze more work for Exponent -- or kind of to your point about a lot of AI slot being out there, like are these -- Yes, like at what point does more claims become sophisticated enough to actually drive an acceleration like expert testimony work?

Yes. And I can hop in on that. I mean there's absolutely sort of a level that something has to get to before Exponent is typically going to be brought in, right? But the reality is that it's not only the ability to file the claim. I mean there is the technical literature even that you see where that's what's being relied upon in order to provide a basis for that claim, right? And so we see work from the standpoint of evaluating the quality of that scientific literature, right? There's been a lot of challenges associated with that with AI being utilized in that domain as well. So you see the slop in sort of the claims side. You also see the slop a little bit in the science and engineering side. But yes, I mean, typically, when we're brought in, it's because there is a higher exposure. But look, everything gets sort of supported from the bottom and pushed up. And the reality is that the -- look, the plaintiffs lawyers, they haven't changed their business model. They are coming after clients. They are finding new pathways. It's quite lucrative for them, and they continue to push for that reason.

That was part of the chemical soup, right? So well, this chemical is bad, this chemical is bad. This one affects immune, this one affects reproductive, -- what if I put them all together. And that's all it takes to file a case. The defendant then has to break down the argument, explain through the literature, do the work, construct an argument that can be defended, provide objective information. It's a lot of work for us. And even though there is a low -- there is this barrier, we are doing the premium work, we're getting these calls from clients that we're already working with saying, "Hey, I've been working with you on this. I now need help here, too. So we have those relationships. We have that foundation. It provides access to the immediate expanse.

Great. I think we're going to move on.

All right. Thank you, Maureen. So we're going to switch gears a little bit. But none of the opportunities that we're going to see and we're going to demo for you today, they don't happen without power. The growth of AI, electrification of transportation, the digital infrastructure that John talked about, it's driving unprecedented demand for reliable power at a time when utilities are managing aging infrastructure, more extreme weather and the growing threat of catastrophic events like wildfires. So for decades, Exponent has been known for helping clients across industries answer a vexing but really sounds like a simple question, and that's how safe is safe enough? Safe is a relative term.

Today, in the utility space, that means helping clients understand where risk matters most, where investment will have the greatest impact and how to balance reliability, affordability and public safety. So there is no one better equipped to tackle those questions than Dr. Brian McDonald. Brian is one of the country's leading experts in quantitative risk assessment. His career has spanned some of the most consequential infrastructure from nuclear facilities to the electric grid. Following the catastrophic camp fire in 2018, Brian brought the rigor of nuclear risk assessment to wildfire risk, developing a framework that has since been applied across major utilities and roughly 1 million transmission structures in the Western United States.

Brian was recently recognized by his peers with the American Society of Civil Engineers prestigious Bechtel Energy Award. This is for advancing risk assessments for power utilities. And he was also recognized as the 2025 ASCE Forensic Engineer of the Year. His work is a great example of Exponent at its best, deep technical expertise applied to a rapidly evolving and high-consequence problem.

Go ahead Brian.

Thank you, Catherine. This is self explanatory. It's what I need. Thanks, everyone. Like Catherine said, the question, how safe is safe enough is really at the heart of what I've been doing here at Exponent for 35 years. I am going to talk about a specific line of business where we address that question directly using science and engineering and help our clients make better risk-informed decisions. We call it quantitative risk assessment.

And before I talk about the business part of this, I thought it would be good if I tell you a little bit about what from a -- and the best way to do that is look at each letter of the Quantitative means we use actual numbers. We apply science and engineering, and we don't produce what you've probably seen a lot of these risk matrices that have red, yellow and green boxes and risk scores. We actually put numbers to this. The other thing is we look at risk. Risk is a term of art in engineering. It is an equation for it. It's the probability that something is going to fail times the consequence of that failure. That equation appears in all of our work. And the consequence is very important. And here's an example.

If your daughter was thinking of jumping out of an airplane, you would look at the parachute and maybe the gear she was wearing and think, wow, the probability of failure looks pretty high here. But you have to consider the consequence. And maybe in this case, it's a go rather than a no-go for the jump. And then the A is assessment. By attaching numbers to these, it's sort of a common currency you can use across different assets and different lines of business to compare the risk and compare how much risk buydown you're getting for different investments.

And part of the work that I'm going to talk about today really started with the horrific camp fire in California, which was occurred in November of 2018, burned 150,000 acres, destroyed 18,000 structures, caused between $20 billion and $30 billion worth billion worth of damage and unfortunately, caused 85 deaths, many of them in the town of Paradise, which is if you see that black spot right in the middle surrounded by flains, that's where that town was. Why did the fire start? -- it started in an overhead power line failure.

So it started at a component that looks a lot like this, not this one specifically, but just like this. So you can see at the bottom, there's a live conductor being suspended by an insulator. You need the insulator so the current doesn't get up into the tower. And that insulator is hung by hook, a hook inside of a plate. Now when the wind blows on that conductor, the conductor swings back and forth and it saws through the plate, just like sawing through a log. And so over decades, it had all the way through this plate and dropped the live conductor, which lit the fire. It was a Pacific Gas and Electric component, and they filed for bankruptcy and ended up settling with the plaintiffs for about $13.5 billion.

So I'm going to talk about the tool that PG&E had at their disposal to deal with this risk of fire ignition, and it's called Public Safety Power Shutoff, or PSPS. This is a tool where PG&E can address the question, how safe is safe enough and deenergize circuits in fire conditions, high winds, dry conditions, hot weather. They can deenergize those if they think they're too risky. It ends up according to the press, PG&E considered deenergizing the lines around Paradise the day before and the day of the ignition.

So the dark shaded areas are where they were going to deenergize. They looked at the lines. They thought about the risk of deenergizing because you're deenergizing hospitals, you're deenergizing fire stations at a time when the -- when it's wildfire season. So there's risks associated with deenergizing as well. They decided it's safe enough. Let's leave it energized for this storm, and it did not work out well for them. So they, after this came out, we were under incredible pressure, tremendous pressure from regulators and from the public to improve their PSPS system and specifically to consider the risks associated with aging infrastructure and the notion that there could be something about to wear out on the lines. There was no blueprint for how to do this.

There's no textbook you can go to and say, how do I apply QRA to overhead transmission lines. And so we stepped up and showed them a framework that would work. So why did they accept our framework? A couple of reasons. One is it was a framework that had already been accepted in the nuclear industry, like Catherine was saying, this was already in place for decades. We were adapting that framework for this. Secondly, we were already sort of trusted advisers there. Third was we were the only company that had the multidisciplinary horsepower to do this. And I want to show that with an example.

Like I said, live conductor hung under an insulator. The insulator protects the power from being -- the tower from being energized. That's a nice, pristine brand-new AI image of an insulator. What happens if you build these towers by the ocean, you get salt deposits. If you build them in farmland, you get dust and you get fertilizers and whatnot depositing on them, you could get pollen. There's all sorts of contaminants that will land on the bells of the insulator. Okay, fine. It looks bad. But if those -- if that contamination gets wet, it provides a conductor. So now you can get what's called flash over. This is perhaps the most common harking event that you'll see in overhead power lines.

I think about all of the things that go into this flashover. You have deposition of these particles. How many particles are there in the air? What's the wind like here? Is it really going to deposit? Is it going to stick to these bells? Or is it going to blow off? Do we just have a rain event that was intense enough to wash it? As a structural engineer, these are not questions for me. I have to turn to my colleagues, environmental science and meteorology transport phenomena for the particles. When these things -- given the type of particles and the thickness of the layer and what the condensation is like, how much water, is there enough of a pathway that you're going to get arc in? Well, that's thermodynamics and electrical engineering.

And then all of this has to be done in a risk context, and we have to make sure that our models match the data that's already out there. So there's data science and risk science. There's no other firms that can do this -- can bring PhD level science to each of these things that you need to develop a model like this. We now have a model like this that is being used by 2 or 3 different utilities to determine where they need to go out and wash the insulators, which insulators are at most risk.

So other utilities heard about this. It reverberated in Western U.S. And now like Catherine said, our model is being used not just at PG&E and elsewhere, probably close to 50,000 miles of transmission lines are being assessed by some of our models. So we've seen very good growth since the camp fire. But there's still tremendous growth opportunity. And I want to talk about 2 dimensions of this growth opportunity. One is spreading to new clients, new utilities, particularly moving eastward as regulators out east start to adopt the so-called risk-informed regulation and start requiring quantitative risk assessment. And just picking up new utilities in general.

Last year, you might remember some horrific wildfires in Southern California in the Los Angeles area. They had a system in place to assess their risk. It didn't work out well for them. So it's right after that fire, our phone rang, and we have now stood up a nice QRA system for that utility. So there's -- we're still growing to new utilities, and we are also expanding the scope of the QRAs beyond just overhead power lines. I'll talk about what we're doing up in the north as an example, I'm going to talk more about this later in the talk. but consequence. So up in Oregon, they decided they're very concerned about environmental and ecological consequences of wildfires, the damage it does. Put that into the consequence variable in your equation. Also health concerns.

So we are now doing a risk assessment of the health effects of the smoke from the fires. So growing into different aspects of different assets and different aspects of failure. Coming back now to that swing through the hanger plate that caused the campfire. I want to talk a little bit about AI. So we could have done that in the using science and engineering, you see some beautiful equations up in the top left. Those aren't made up. Those are the actual equations where we calculate how far out the conductor blows in the wind, how dusty the wind is in any given tower, given the surface roughness of the ground and that sort of thing. Those are the equations that govern the physics of that.

But PG&E had a lot of other data. They had data on how much they had inspection data where people had seen things that had wear. They had repair tags for when crews had gone out and repaired warn hangar and warn hooks. And so we wanted to include that data in our model. And we thought the best way to do that was with a machine learning model, use AI. So we incorporated AI into our risk model. So we created an ML model that had not only all of PG&E's data, but it was informed by the physics and the engineering. So built that into the model. And what we came up with was a way for PG&E -- back up a little bit. PG&E had 20,000 miles of transmission lines. They had these hanger plates scattered throughout their system. They decided we're going to go replace them all. Where do we start? So they want to reduce as much risk as possible early on.

So we show them where we think the hangar plates are most likely to be problematic and they can send the crews out there. First, they end up mitigating a large portion of them during the very first inspections and replacements. Looking at risk for time. I'm here for time. Okay. All right. This is a slide I could talk for 30 minutes on or 30 seconds. So I'll wrap it up with this slide. I mentioned before that we are expanding the QRA work into other areas, not just overhead power lines for utilities. And so I want to talk about a few of them, small modular reactors, so the next-generation nuclear power.

Like wildfire risk mitigation for utilities, that is an industry where the regulators say, Dow must do QRA. Any new nuclear reactor, any next-generation nuclear reactor has to be designed using QRA. It's in the law. And so we are working with developers of next-generation utilities and doing QRA for them. Hydroelectric dams is another place where QRA is applied because the consequences are so great of a dam failure and you think about the devastation downstream.

So we do it for pipelines. You can see there pipelines, particularly on slopes where they're in high seismicity, the slope can fail, the lines can break. That has consequences not only big explosions, but also not much redundancy to get gas to people's houses. Environmental and social justice, I talked about the environmental one. We're doing some social justice where we are using QRA to show if there is a systemic problem with where lines are built and where things are rerouted to put undue risk into vulnerable communities. So you can use QRA to see if there's a systemic problem there.

This is a line that's being designed to go through a U.S. historical site. Battery energy storage systems, we're doing a job on that, that we expect that to grow just as the best systems and then data centers, of course. John already talked about that. I saw an interesting headline that said data centers are built out of reinforced concrete and steel. So as a structural engineer, I like that headline.

Any questions for Brian, our risk work and such?

Real quick. Brendan Sha, JPMorgan. So you talked about the SMRs. Just curious if you're also doing just larger reactors, the AP1000 can do Monarch, whatever it is. Just thoughts on larger reactors as well in addition to the SMRs.

Yes. So that's where I cut my teeth was on the larger reactors, and that's where the regulations from the NRC required the QRA. So I am now chairing the committee at ASCE that talks about -- that sets out the standards and codes and standards for design of reactors all the way up to the new larger reactors.

And Joe is going to -- when Joe gets up, we're going to talk about one of our projects in this area that we're doing as well.

All the activity now is with the smaller ones rather than the big ones. So I think that's where the real market is, is everybody and their brothers is developing the next-generation micro or small modular reactor, they're all going to need QRA help with those peer reviews and getting past the ever-changing regulatory environment out there. So...

Go ahead.

You mentioned the use of your models on a continuous basis by the utilities. How do you guys, if at all, monetize that going forward? Like once you've built that model for them, is there a monetization model?

Yes. Yes, I can speak to that. So one thing that's really important to recognize with these is that for each utility, there is a very bespoke model, right? So this isn't kind of like, okay, we did it once for PG&E. Now let's just lift that and kind of pop it down over here, right? And so these are -- tend to be engagements that we do on a time and materials basis.

So using our standard rates and so forth and understanding the scope. they very much have a tendency to grow. We'll have sort of a first step of those. And then as they see the value and the decision support that comes from those, they will then expand. What's happening now with individual clients is they're going from that transmission infrastructure and saying, "Hey, well, can you guys do this framework for our gas pipelines, right?

And so again, it's that very bespoke. -- those equations are different, whether you're talking about the sway in the wind or you're talking about the tree touching the line or whatever that hazard is. So it's not something you can just say, okay, this is $1 million and sort of pop it over there. It's a very bespoke kind of time and materials.

I'm glad Catherine took that one because I'm good with numbers until there's dollar signs in...

You talked about the growth opportunity kind of expanding east from mainly California. Are you driving that from a dialogue with regulators or trying to kind of prevent the proactive failure?

Yes. I mean this is something that we don't work with the regulators per se as clients, but they are clearly entities that influence the opportunity, right, depending on how -- I mean, look what got PG&E to finally do this. It was a tragedy. Sometimes the regulators are enough to sort of get you there. But what's happening here is the drivers -- once everybody sees it happened to PG&E and then SoCal Edison and then Hawaiian Electric, right?

It begins to change the level of motivation that comes from the utilities themselves, right? And so I think that's a big part of the driver and us being on the ground floor as the trusted advisers to clients who have had such tragic things they have seen the consequences. That's a big part of the value proposition and how we're able to really build those relationships going eastward.

And if I could add one more dimension to that. Utilities, when they want to increase their rates, let's say, to get some money to put some lines underground to reduce the risk of wildfire, they need to go to the regulators and state their case. This is our rate case. We're going to spend this much, and we're going to drive down the risk of wildfire by X. And X needs to be a number now. X can't be -- we're going to really do a good job driving down risk.

The regulators want to see this number, and then you have to go to the regulators and defend it to the regulators and the intervenors. When we show that we can do that, we have a framework that works and we can defend it. Other utilities hear about that or we go to conferences and tell them about that and then the phone rings.

Thanks a lot. Let's go ahead and move on to our last presentation in the room here before John comes up and tells us about our tour.

All right. Joe is going to take us home here. So while Brian's presentation was about managing risk on the grid, the next one is going to be around the unprecedented investment that's behind that. So -- the race to build more power, I mean, this is one of the most significant industrial investments of our time, driven by electrification, AI, that explosive growth of data centers, capital is flowing into every form of power generation, right? Conventional energy sources, nuclear renewables, battery storage.

But when innovation and speed and capital collide, things do not always go according to plan and the consequences are very big. So helping clients understand and address those challenges is where Exponent has excelled for nearly 60 years. Joe is going to talk about the multidisciplinary expertise in those decades of failure analysis experience to solve some of these really complex problems.

There are a few people better equipped to take us through this opportunity than Dr. Joe Raya. Joe is an aerospace engineer and physicist by training. He is a fellow of the American Society of Mechanical Engineers. He is one of Exponent's leading experts in failure analysis. His experience spans gas, steam, wind turbines, a remarkable range of other complex engineering systems. But importantly, Joe's expertise is not tied to any one technology. It's grounded in the fundamental science and engineering that govern all of them. And so that's exactly the kind of expertise that positions Exponent so well as the world races to build more power faster. There you go.

All right. So this race involves every form of power generation available. And Exponent already has experience working on every form of power generation available, okay? So whether you're talking about fossil fuels, you're talking about renewables, whether that's solar or wind or hydro, geothermal, or biofuels. Each one of these modes Exponent has experience -- already has experience working into the nuclear space as well.

We already have experience working on that. So not just applicable expertise, but authoritative experience that we can bring to that engagement. That's a trend that's a part of this space, and so we're already well positioned on that. The race involves a few new things that really are characteristic of the types of situations that create engagements for us, right? We have new companies doing new things, doing new designs, utilizing new combinations. -- technology. doing things in new ways.

We have companies that are not traditionally energy generation companies becoming energy generation companies, right? We have these companies and others bringing their own power, right, coming off the grid, creating their own power facilities with all the uncertainty that comes along with that, all the new management that's in place to manage that and to make those decisions, that all creates a chance for problems, for uncertainty, for challenges to be navigated. And like any race, this race involves speed, right?

And with speed, you're naturally going to run into problems. Anybody that's run a race or cycle the race or anything, you always run into things that you didn't expect, maybe the microphone doesn't work or things that you don't expect, right? Those challenges come up and you need the expertise to navigate that. You want to plan for those challenges, there's uncertainty in that plan, and you need that expertise to navigate that. But probably what's most important in this race is that the consequences of failure are high, right? Those consequences can be financial, but they can also be strategic. They can be competitive. They can be related to health, safety and the environment.

So you've got to get it right so that you can get there first or at least among the first and so that you can operate well once you get there. And so why does -- just historically, in our 60 years, why does the market turn to us when uncertainty is high. Why does the market turn to us for every form of power generation available, right? And why does the market turn to us when the consequences are high? The reason we've been able to be in that position is because our home base is in the first principles of how the physical world works. That's where we sit. That's our place in the world.

We have the deepest and broadest expertise on the first principles about how that -- how the physical world works. And so you just apply those first principles to whatever problem is at hand. Now the people applying those first principles are the top shelf people. They are the PhDs from the top schools in the country that really know how to apply these principles through their disciplines. And then those people are people, and they're humans, and they bring that human element.

And by being those people in humans and having that judgment on board, they can exercise human judgment along the way that the stakeholders then trust, right? So it's that expertise, human judgment and trust that really creates a work product that's attractive to the marketplace as you're navigating a race like this. And so I'm going to give you a few examples, very specific examples, so you can see kind of how this plays out. There are 3 examples from the power generation industry. We're going to start out with solar farms and go through something that's really a very specific failure and a very specific issue, but sort of illustrates how this all works.

So behind every solar panel in the world is a set of electrical connectors, okay? Just a simple device. It's the type of thing that you'd have -- that we all have in our homes, type of thing maybe if you look at the back of your TV, maybe you're going to see something like this, where you've got wires that are coming together and these wires are insulated with rubber, just like all the wires in our houses, insulated with rubber and the connector brings those wires together, connects them together and sends it out to the substation at the facility and then ultimately to the grid, right? Old technology, okay? The industry was plagued with an issue where -- in those connectors, that rubber insulation on the wires would -- what they call -- would do an action of what they call shrink back, right? So it would pull out of the connector. And what you see there circled on the bottom right, you can actually see the electrical conductor.

So the actual conducting part of the wire and that black insulation has shrunk back and exposed that wire. So that creates a few hazards. It creates a hazard of fire. It creates a hazard of electrical shock and it creates a hazard of accelerated degradation over time. We were retained to address this issue to figure this out. And we brought together a team of multidisciplinary experts, right, an integrated team, people with deep expertise in first principles, able to apply it through their disciplines. That team consisted of material scientists, mechanical engineers, thermal scientists and electrical engineers. They examined all the documented evidence that's available, right? And we can get AI to help us with that.

But they also did some additional activity that really was the meat of the work. They went out and conducted physical inspections on solar panels all around the country. They went out and conducted physical inspections of facilities that are making the connectors that are making the wires, right? And they designed and executed physical tests of these connectors, testing facilities like you're going to see today and in our other labs around the country. And they took all that documented information, all that physical testing and ended up proving out a root cause where this issue was just driven by a manufacturing defect from one of the major suppliers in the industry, okay? And they were able to help our clients navigate that issue. That issue, that small little thing, a little bit of rubber backing out, something that maybe if you saw it around your house, you might not even think it's that big a deal, right?

But that small little issue took tremendous expertise to navigate and then ultimately solved a problem that affected the entire footprint of solar power in the United States. And I should accurately say a notable percentage of the entire footprint of solar power in the United States, okay? It's an example -- it's a good example of a small thing that affects a lot that requires that expertise. I'm going to give you 2 more examples.

One, it comes from oil and gas and a network of offshore platforms that were all integrated into one facility adjacent to the Strait of forms. This was before the war of this engagement. This was a dispute and the dispute centered around how good was the maintenance of this facility since the time it was built up until a certain point in time because the dispute alleged that the maintenance had been substandard, that it was not up to industry standard. So how does the maintenance compare to industry standard?

And then how does that maintenance affect the future integrity of that facility as you go forward. And so again, we put together an integrated team of multidisciplinary experts. You've got chemical engineers, material scientists, thermal scientists, electrical engineers, mechanical engineers, about 7 -- ended up being about 7 different disciplines, right? Of course, they reviewed all -- maintenance, there's a lot of documents. Of course, all that gets reviewed, and we've got tools that help us accelerate that. But they also went out and did the physical inspections of virtually every system on these platforms.

And combined with their expertise, all the information available, the inspections, they were able to then render judgment as to which things were at standard, which things were above standard, which things were below standard and the reasons why. And then this dispute was in an arbitration. And so that team takes their findings and then goes and sits in front of an arbitration panel of 3 individuals and delivers their findings. And in that situation, after all the analysis and the human judgment, they've got to develop the trust with the tribunal. They've got to sit in front of the tribunal, deliver their findings, and then they have to sit and be subjected to cross-examination by other folks that are just trying -- really working hard to undermine their findings.

And the tribunal sits and watches that cross-examination. And if we do our job well, at the end of that cross-examination, the tribunal maintains the trust in us. And so they have trust in our expertise, trust in our methods, trust in our findings and trust in us as individuals. And that's a big part of that work product that comes out of these sorts of engagements, okay? Then we get to one final example. We're getting kind of more and more complex. This example comes from nuclear fusion, okay, which is the technology that promises to end the power generation race. This is technology that promises to give us limitless clean power for eternity, right? Exponent was retained to work on the largest nuclear fusion facility in the world. This is called the International Thermonuclear Experimental Reactor. It's not online yet. It's been built for the last 10 years. It's going to be built for the next 10 years or more. It's in the south of France. It's a facility that's about 445 acres in size.

And what you're looking at here is an image of the central core of that facility, where the fusion reaction is going to occur. And in that core, there's going to be a plasma. And that plasma, so plasma is like an ionized gas. You heat up the gas until the electrons start coming off and then the nuclei are able to impact each other. So this is where that occurs, but that occurs at a temperature that is 10x the temperature of the center of the sun. Pretty cool, humans are creating this, right? Well, as you can imagine, if you're going to operate at that temperature, you need a lot of cooling around the facility. And that's the aspect that we worked on.

We worked on the cooling facility around this nuclear fusion reactor. And it was all the same issues that we see everywhere else in our work. It was cracks and pipes. It was equipment not being aligned. It was leaks. It was motors vibrating, all the basic stuff that we work on, but in a very advanced sophisticated facility. And so what you see with these 3 examples is that whether you're talking about sort of a seemingly innocuous problem in a very old technology and something that we might see around our house, very simple thing.

Whether you're talking about something simple like that or you're talking about the potential future of power generation, our first principles expertise and our ability to apply that and to develop the relationships with the stakeholders that are interested in what those results are, that work product is applicable from the small little thing in old technology all the way up to the newest, most advanced technology. That's it.

Any questions here for Joe before we move on to our facility tour.

Maybe just on the topic of data centers. Obviously, there was an article recently about Oracle like exercising their right to force majeure. And I know you guys talked about construction disputes in data centers. So I guess the question generally is, are you seeing an uptick of work? Like is that an example of something that you might work on? And are you seeing an uptick in work from litigation between data center lessors, the actual owner of the site and the developers themselves?

Yes. I would say that we are. And I think one way to think about the disputes really is that they tend to lag by multiple years, right? So we are seeing an uptick. I think when you look at 2, 3 years down the line from now, you're going to see an even more significant uptick, especially -- and it really comes down from the ones that don't work out for various reasons. And it might even be a change in sort of a macroeconomic situation that then ends up has everybody look back and go, "Oh, well, things didn't work out the way we expected, what can we blame it on those sorts of things. So you want to think about it as sort of a multiyear delay.

Anything else?

All right. Up here and get our legs moving -- all right. Here you go. I knew which one to keep turned on.

I knew which one to keep turned on. All right. I just looked out the door, it's sunny outside. So I had 2 versions of this ready to go. I need the controller though. We'll go with the sunny version of this, which is good because it's much more exciting. So we're in Phoenix. Thank you all for coming again. Phoenix is one of our main test facilities that Exponent has around the U.S. claim to fame is it's the biggest. You came through our tunnel. That tunnel goes under a 2-mile track, which just fits in the 150 acres here that we call our campus.

So we're going to spend some time now seeing some demonstrations in Phoenix. But before we do that, I want to say one other reason because there was a question that came up at the table earlier about, oh, you just do automotive things here in Phoenix. And maybe 15, 20 years ago, 25 years ago, that would have been true. But this is one of my favorite charts that talks about Exponent and all the different disciplines and domains that we bring to run our projects.

But when you press the button here, these are all the ones that are in our Phoenix facility. So we've really got all of the multidisciplinary things that we've been talking about today, all the interest there, all that's present at this facility. There are some things missing on the sciences side that's distributed in some other locations around the U.S. But if you look at the main engineering activities where you interact with those physical systems, those are all here. All right.

So we are in where it says #17 on this map. And I'm going to show you the map because it's really important we all stay together. Jess Vargas here in the corner, is our Office Director for Phoenix. If anybody gets lost, look for Jess. She will be the keeper of the strays and make sure we're all together here. But we're going to start in our -- what we call our indoor test facility, 20,000 square feet here. We're going to show what happens on this blue rail behind us and some other interesting things as we go forward. But this is where we do our indoor work, which is fantastic because when it's raining outside or it's hot outside, you can come in and you can get your car ready to go or you can crush it in some of the features that we see down the way here as we walk around.

But we get ready for things in our indoor test facility. And then a lot of times, we go outside and take advantage of those 150 acres. And you can see on this chart here, some of the things we have available to us. We've got that 2-mile track. We've had NASCAR here. That was a pretty cool day. I think the last time we had somebody visiting us from the investor front, they were around. In the middle, where it says 22 there, take a lap around the track. You come to the middle of the facility and now you can do interesting maneuvers around that track. You can do interesting turns and see whether your car will roll stability of that, all kinds of things set up there.

On the far end, where it's 23, we won't go out that far today. But when the energy gets really big and you need to stand further back and maybe the battery is a little bigger than the one we'll hopefully see today, we'll go and test that out in the far end of the facility. And then we have a little complex around where we're standing now, where we have different kinds of test cells and things that we set up. for the football fans among us. This is where we did the deflate gate work. We thought this was a neutral territory somewhere between San Francisco and Boston there. But one of our thermal chambers that you can drive a vehicle into is what we set up as a fake football field to work on the footballs for that.

But we have set up in the following locations. We have -- Nick is going to do a battery storage or a battery fire. We brought actually some of the props for Nick inside. So we'll start inside. Nick will show us sort of what a battery system looks like from the small scale to the big scale, and we'll see inside what that -- if you have an electric vehicle, what that looks like underneath your car. And then we'll go outside, and it might actually look like that in the picture when we show you what happens when those systems fail. We've got a biomechanic setup.

So the Catherine said there's this blue rail behind you. We'll show you what that looks like. So there's a slide that rides on this rail. Sarah Sharp, one of our individuals here, our principals will show you how we have outfitted that with various different electronic devices, augmented reality goggles, wearables, things you might find in a car to see what the interaction of sort of technology in the vehicle looks like.

User sciences will still be in this area in the corner. Rachel Kelly will talk us through some of the work we've talked about studies. You might have heard us mention that in the past as we collect data to try to get an understanding of how you build that application, how the user interacts with it. We'll take you through that demonstration.

We'll finish up the tour in our transportation and robotics area. So we'll walk out to the handling pad in the middle, and we'll bring some of our robots into play, crash through a few things for you before we come back in here for lunch and for questions. So again, safety, stay together, watch out for the blue rails are walking around. If you get lost, guess in the corner over here will wrangle us back together. We do have golf carts to move between the outside locations. So you got a driver for that. They'll take you to where you need to go. But with that, let's get up and get moving.

Okay. So I thought what we would do is if there's any follow-up questions for anybody that you met today or saw their presentation or doing that, please feel free. We'll also -- if there's questions that should pivot to those people. Catherine, John and Eric are obviously up on the stage, but that doesn't mean that limits the questions or other speakers will grab the mic and answer something if you have it. If there isn't many, we'll just enjoy our lunch and go on from there. But I thought we might take a few questions to end up the day as you're wrapping things up. So anybody have something to want? Go ahead.

I knew which one to keep turned on.

That would be great. Can you hear me?

Yes.

I guess I'm curious how you guys are thinking about utilization. With all of these growth drivers, do you want to make sure that you have enough capable employees ready but you can't predict when customers are necessarily coming to you. And so you don't want them waiting around for projects. So how are you kind of thinking about that with all of the growth opportunities in front of you?

Yes. I mean I can start and then Eric may want to weigh in here. But we have always, throughout our history, demonstrated an ability to surge, right? We've always had this kind of -- we don't have a funnel of work that we know exactly what we're going to be doing in 6 months or even 3 months. Maybe it's out sort of 6 weeks. So culturally, our people very much and we incentivize them to be able to surge to meet that client demand. That's not necessarily a long-term sustainable thing, but we have practices, some of our larger practices that run significantly above our average. If we're running at 72% or 73% as an entity, you might have a larger practice that's running at 79% or 80%, right? Because you've got that critical mass of principles to draw that work from the marketplace.

It can tend to even things out. But look, it comes down to having the portfolio effect that gives you the ability to kind of smooth that out. People tend to be working on multiple projects, multiple engagements. When they do their time sheet at the end of the week, they might have 2 or 3 or 5 or even 10 engagements that they are kind of shuttling between. So when something goes away, let's say, litigation case suddenly settles, they may go from being 95% to being 70%, right? They're not completely dropping off. So we've got a history of being able to manage in the short term with that surge.

But then over the long term, that becomes our ability to attract talent, right, and really intensifying that. And we have to always be recruiting. We are always in the talent market. So you're always talking to those candidates. You know where they are, but you can dial up your actual hiring of those candidates, but you're ready to do that. And that's an important skill that we've developed as an organization over time as well and to sort of manage that.

Yes, it ties into our growth algorithm, right? So we want to bring in 4% to 8% headcount a year. When people start, they got to ramp up. So they're going to have lower UTs. We've got to make investment hires, things like that. But that's where we set that long-term target of 75%. That allows our people to do business development, to do professional development, to do recruiting to ramp up to make strategic hires. But like Catherine said, there's projects where we get going in surge and people are working at much higher UTs. So that's really just an average across all of those.

Yes. I think Eric's comment about sort of our long-term growth target is really important because you come to Exponent and you're expected to grow through your entire career. So if we set that at 100%, where is the growth coming from, right? We want to be able to stay at that premium offering, not just when you come into the firm, but all through your career. So maybe 75% is right, wrong, maybe it's 76%, I don't know, but it's not 100%. You need the time there to continue to reinvest in the value that you bring to the market. And then because you run at that level, you get to Katherine's surge comment as well that you can step it up when that big project comes through or the opportunities in front of you.

Yes. Go ahead, Jonathan. I am sorry...

I'm glad you mentioned that last piece because is it fair to kind of connect what you said with Catherine, the node map, whatever that where this is one group, this is another group, but then obviously, there's the interconnections between the groups. is there any way that we can think about when somebody starts, they're really only in one group as they get more experienced, they cross into 4 groups, just naturally increasing their utilization over time. Is there any way we can think about that?

Yes. So when someone comes in, I mean, they have their home base, which is their practice. They come into Morning's group and they're in the biomedical engineering practice or into Joe's group, they're in the mechanical engineering practice. That is their home. But from day 1, they are encouraged to network. I mean it's kind of like they are building an internal client base is the reality. So those are going to be the principles in their own practice. But projects are multidisciplinary. You heard about so many examples of that.

So Joe may have a new mechanical engineer in his group, but they want to learn more about working on batteries, and they're going to go knock on Nick Senza's door because they are out there knowing that they need to build relationships and they can contribute to that project as a mechanical engineer, right? So they're learning business development internally from that very first day. We want them all over that neural network map. So absolutely. And they get the more internal clients you have kind of banging on your door. You have more demand as a person, your utilization is going to rise. If you're doing the research and making the investments in publishing, then your price is going to rise because you're more valuable in the marketplace. So we want to be pushing on all of those things.

It seems like maybe a big theme today was just the amount of physical testing that you actually have to do. And I think there's probably some level of misconception about a lot of the work that you do and its ability to be disrupted by AI because it maybe doesn't include a physical component. Have you guys talked at all about how much of -- if you just look at your 10,000 -- I think it was 10,000 engagements, like how many of those include some sort of physical component?

To think of that. Not the majority. So yes, I mean, the majority of what you saw here, I mean, this is why we brought you to Phoenix, right, because you can really get the sense of the importance of those physical systems. Rich, I don't know if you have a ballpark of that.

So I would say that what is the case is that the -- about 20% of our projects make up 80% of our revenues. on those major -- on those engagements. So we're now at -- it's still a couple of thousand projects. I would say more than half of those engagements are going to really involve a physical engagement, some testing, getting out in the field, doing that type of work. There can be parts of that, that doesn't. It's truly a historical environmental matter or a health matter or something of that type, but it's in there. It actually doesn't mean that the small projects don't. A lot of our work for clients in the consumer electronics business around hardware is actually -- a majority of that is lab testing work.

We do that work typically in tens of thousands of dollars per engagement, but they're very quick, they're burned. They are clients trying to understand the performance of their product, either in development, in prelaunch and a lot of times in the marketplace, trying to understand what that -- why it failed, what happened, what might have the consumer done in interacting with that so that they can understand, do I have something that's on a path to recall or do I have something that we need to warn for better? Or do we -- this is just an anomaly that's there.

So it spreads both ends actually of what we do, but it -- but you're going to find that where we differentiate ourselves in some of those large matters, we are out there, as Joe showed earlier, you went out to -- you go to the platform, you go to the facility, you do it.

And then I guess maybe just a quick follow-up. A lot of like exciting themes and megatrends that you've highlighted. I think you might have said during your presentation earlier that you grew at about 7% CAGR over the course of the last decade.

That's correct. Over the course year.

So just maybe like to put an underline on how you guys are thinking about growth. Obviously, you have your algorithm out there. But do the megatrends that you're seeing and the product innovation on the proactive side and the litigation that's arising because of AI, does that make the growth environment more attractive over the next 5 years as opposed to the last 5?

I absolutely believe that -- sorry, 100%. We see the speed of innovation, the complexity of the products, the interconnectedness, all those drivers around making sure things are performing safely, reliably, like those drivers are to me, I mean, I just had my 30th anniversary at Exponent last week. I believe those drivers are stronger than they've ever been. I think AI is a driver around that, but I also think the expectations. I mean Maureen talk about chemicals, PFAS, there are 10,000 of those. And we haven't even started to talk about microplastics, right?

So the human health and environment drivers, the technology drivers, the interfaces between the human and the machine, I mean, that is a place -- we are differentiated in a lot of ways, but there is a place where it's really dramatic, and there's just more and more of that. So yes, I mean, we believe these drivers are going to allow us to -- we talk about high single to low double-digit growth, and we're all about moving that up from that 7% up much more solidly into that algorithm range.

Can you talk about if the drivers for whatever reason, slowed down, it's tracking towards mid-single or whatever. What levers do you have operationally to kind of increase growth if you need to offset something?

So the question is around if we're seeing them at that level, what can we do to accelerate growth?

Outside of just the end markets are really strong.

I think the big things that are in our control is our market engagement. So what you heard about our experts here today, it's about how do we get out and really connect with that. It is about when you're busy, people -- the work is coming in and flowing. When the -- when you're feeling that not only we can be busy in another area, but one of our consultants can feel a little bit slower or brought on new teams and the growth rate is pretty high.

And their ability to engage with the marketplace and getting out there and making those calls and doing all the right things that you should be doing every day on your business development list are there. And that's really where we've seen differences. And we get to watch that and push on that every day because there are parts of the organization where somebody is -- their market has changed or there -- or just they brought on a new team.

And the way you're going to solve this is get out there and engage with the client in the marketplace. And that's the big way that we can make a difference. And when we've had it in the past, that's exactly what we do. That's what we're doing when we get our managers or our partner principles together and talk about market engagement and how you need to consistently do it. We try to train our people on how do you do that within projects, how do you do that in new markets and what we're doing.

Go ahead, Andrew.

I think it was Joe earlier on the topic of data centers made a comment that typically, litigation will be kind of a multiyear delay. I'm curious if that is something you could say about the majority of your reactive kind of end markets? And just because I'm thinking about how you layer on this growth over the next 3 to 5 years, is that something that reactive growing mid-singles can really accelerate as that starts to come to fruition? Or is more of the portfolio on the reactive side, maybe a little bit quicker on the come? I'm just curious if data centers are unique.

I think on the data center piece, there's an important point because it does take time for actual disputes to develop. But what we are seeing now and have been seeing over the last year to 2 years is the failure analysis work that is independent of the dispute, right? So when a data center is being built like this need for speed and making sure that things are performing, they're almost putting the dispute part of it aside because they've got to get it working.

Like that's the imperative and the driver that we're dealing with right now. It's less about, okay, now this hyperscaler is suing this contractor. That's the part that has the sort of delay to it where they're going to have to bring people in. They're both reactive, but they're sort of different parts of the life cycle of reactive, right? If their cooling system isn't up to snuff and what was promised, they just -- they need to make it work, and they're going to worry about the lawsuit later.

And I think what Catherine just hit on there is what we're seeing a lot of. We've got switchgear companies and chip companies and full stack AI companies just saying, "Hey, that coolant, I've got a problem there. What is it? How do I solve it? What do I do? -- if that ends up being something that propagates across their whole thing that they weren't able to stop it and get their vendor to respond quick, they'll deal with that financial consequence down the line.

They've got to keep the production line going and get there. It varies from -- that's what goes on when people are moving real fast. We saw this in the EV world. Clients just wanted to get those products to market. Almost every one of them of the majors, go back and look at it, had a major product recall in the following couple of years because of the speed at which they were moving, the reliability wasn't there. Now Nick talked to you about the reliability of the system, maturity of the regulations, all of those things that are happening, that then moves you into the one-off incident of something happening versus an overall system.

And then when you apply that to technologies that are more gradually evolving like automation, what we've seen -- you just got to see today. We've been working on ADAS systems over the last 10 years. Those systems started off very remedial once braking, steering, going through. Now we've got -- and then 2 years ago, it's publicly known, we got called by GM around the Cruise technology and its whole environment out there and really making an overall system and business decision that they made to bring that business unit offline and redirect their efforts in that area. So it evolves over time.

We're just early and not fully moving into the autonomous vehicle area. These things will continue to evolve. And then eventually, that's going to dominate what's out on the market. And every single accident that happens out there is going to be about a machine and a corporation who put that on the market.

Very helpful. And maybe just a follow-up that's somewhat unrelated. So it sounds to me like demand environment is exceptionally strong, multiyear demand environment. The competitive differentiation is evident today or at least in the way that you talked about the business. And so that should support price increases. And so like for me, the delta becomes a conversation on like how fast you can grow headcount at a certain point.

And I'm just -- Catherine, I asked you separately about kind of talent and attraction, but like how reliably can you grow, assuming these demand trends persist in like the upper half of that 4% to 8% range. Is that something that at a certain size, it becomes difficult to kind of stay in the upper half? Is it necessary to stay in the upper half to hit your targets? Just kind of that variable would be.

Yes. Yes. And you're right. I mean the importance of us being able to attract talent, you can't overstate that, right? And it goes a little bit to my comment before about making -- and it's a little bit of Rich's comment about business development. You're always in that talent market. So this is about -- we know how to do this, being at the top universities, ensuring that we have those relationships through their career offices, through the actual professors that are the heads of the labs that we pull people out of. They're the ones doing the battery work at MIT.

They're the ones doing the automotive work at -- in Michigan or what have you, right? Those -- that's how ultimately, recruiting is about recruiters, but it's almost more about what that relationship is because there has to be a trust for someone, whether they're a junior person, a mid-level person that we're pulling over from industry or a very senior person that we might be pulling from a competitor, right? So we work hard every day on ensuring we are out in that market.

And look, to get to those higher levels of growth, yes, we have to be up at that 6%, 7%, 8%. We've shown the ability to do that before. We are a top employer. We have a very attractive path of compensation to kind of illustrate to these folks. We have to compete at that entry level. We compete with our clients and others. But for those who are -- like our principals who are here today, who have really become those trusted advisers to the clients, that's a very attractive sort of financial value for those folks as well. So it's working on amazingly cool things with unbelievably extraordinary people. That value proposition has always been there, and we've got to always be in that market.

I think the other thing I'd say, Catherine, is that as you grow your platform and you get to a certain size and your UT goes up and you're in the market and the work is there and it's coming through the door, your ability to absorb a stronger flow from industry, the doer side of the equation, bring them in and then bring them into that seller-doer model, so they're connected in with the Exponent platform, take that out further. I think that goes up, too. So if your primary channel now is you're a PhD graduate from your top-tier university, that's great. But as that continues to accelerate, you can pull more on the industry side as you get bigger as well because you absorb more there. And then the platform itself starts providing some of the seller side of the equation. Go ahead.

Maybe just one more quickly on the consumer electronics side. We obviously saw AR glasses today, and that's been a big theme. Just anything you guys would -- I presume you're probably still doing work in that space, but like that seems like it was the theme of the last 12 months, I don't know, right, for consumer electronics. Like what excites you in consumer electronics for the next 12 to 24 months that people are starting to sort of bring to market that we kind of know about?

Yes. Look, I mean, this is -- again, that human machine component really is where a lot of that excitement is. When you think about AI, and the ability to deliver AI through a device to a human, right? So that could be the AR glasses, that could be the wearable that's sitting on your wrist, other things that are hardware-based that do or don't have screens. They might use different modes of communication, involve 3-dimensional environments, all kinds -- without going into too much detail, but all kinds of interesting and novel ways of interfacing with humans that need very unusual and sometimes difficult to acquire data to drive the algorithms.

But then also because you have these novel form factors, you need the hardware side of that as well, right? You've got the energy in a smaller space. It might be sitting on your face. It's got those thermal properties. You don't want what happened outside on our burn pad there to happen with one of these devices. And so to me, it's both the human machine interface piece, the user sciences, et cetera, but it's also those novel hardware factors.

And it's -- look, I mean, where you're seeing AI and robotics develop into is these clients, what we can say is these clients want to be interacting with you in your environment 24/7. You read -- you're seeing a lot of this around sleep -- that's covering all those hours you're sleeping. They want to be able to engage with you, yes, when you're out and about and walking and doing that, and that's wearing glasses or listening devices or your wearable. They want to interact with you when you are watching TV and playing games and doing all that. They want to interact with you when you are in the kitchen and cooking and all -- and doing that. They want to be there to help you and have your life accelerate, but all that means that there are many -- going to be many different devices that you are wearing or having around you in that home environment is going to be where you're stationary and watching something, that device may be very different than the one that you're active on in writing your bike out doing.

So that's what we're seeing. That's where the human factors, that's what Rachel and Sarah are doing. Clients are wanting to understand how their device and interaction is when you're walking. That's sort of the first step. Then we put people on a bike and say, okay, what are they doing? Then we put them in the car and we say, "Oh, okay, what does that do? And it just keeps going. Then it gets into much more aggressive activities that you can measure and do all those things on. So it really is about the total ecosystem. It's not anymore about the eaches. It's about how can you continue that continuum 24/7.

I'd add one thing to that. And there's a thesis that says AI starts with sort of interpreting reality and then providing that information or the information sphere and distilling it and giving it to you through some kind of information channel. And that's kind of where we are now with all these devices, right? The device is looking through the goggles and knows where you are or something like that, and it's giving you the direction on the screen. I think there's a whole case to say there as AI gets smarter, it's doing more of the thinking, which means that the interaction that it has to have with you is tighter. It's smaller. It's taking up less of your attention. You can use the lower bandwidth channels that you as a human have. It doesn't have to come to your eyes. It could talk to you. It could vibrate and mean very different things.

And I think that's good, and there's growth there, and it's very exciting. But honestly, I'm not even sure that's the biggest piece. The piece that I'm really interested in is -- now that AI put the harness around it and connect it up to the thing that can do something in that environment, not just interpret it for you and describe what it's seeing or make your life easier, but it's the robot demonstration or the discussion we were having with Michelle, put hands on AI. Now what have you got? Well, now it's full near laundry. Now it's -- I know it's making the dinner. It's not just reading the recipe for you in your kitchen.

We're not there yet, but as you look where the investment dollars are going and why we're excited about things like batteries and robotics and the safety, the physical aspect of AI, it's that next step that lets the AI not just interpret what it's seeing and provide some view of that to you, but effect what it's seeing. You see it already in cars. Now shrink that down and put it on in your desk or in your kitchen or in your laundry, really the laundry robot. So...

I mentioned it every chance.

We put money into that.

Well, if there is anybody you have anything else? If not?

All right. Well, look, I want to thank all of you for making the trip to Phoenix. I hope that this was helpful in even developing a better understanding of Exponent, our differentiation, our value proposition and our opportunities. So look, we look forward to continuing to engage with all of you. We are always available for follow-up, as you know. And we'll be seeing you out on the road, I'm sure, in the near future. So safe travels, and thank you again. Thank you for coming.

Thank you.

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.