Good day, and welcome to the Exponent, Inc. Third Quarter 2025 Earnings Conference Call. 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 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 in 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% 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 interdisciplinary 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 headcount 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.

The 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?

Thank you, Andrew. I can start by saying that we are experiencing strong momentum in recruiting right now. We need to focus on recruiting talent for the first half of 2026, and this is an excellent time of year for our university recruiting program with many events planned. Our approach remains consistent; we are targeting our recruitment in areas where we see growth, such as digital health, automated vehicles, and energy technologies, both legacy and new. We are still in the planning stages for 2026, but I believe we will return to a more historical range. We have been trailing in recruitment over the last couple of years, but this year, aiming for a growth rate of around 4% to 6% seems reasonable for us.

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?

Thanks for that. Let me provide an overview of the business and highlight what we're doing. This will help illustrate how deeply AI is integrated into our operations. One major way we assist clients with AI is by helping them implement it successfully in their systems, which is crucial. They often encounter challenges, failures, and disputes in this process. Additionally, we are developing tools, techniques, and offerings for our clients, such as hybrid models and utility risk work. In the electronics sector, AI is being delivered through specialized hardware, which is an important focus area involving new technologies. In the realm of regulated medical devices related to digital health, there are benchmarking needs for algorithms and considerations around human-machine interfaces. The strategy focuses on collecting the right data for training algorithms, while also addressing intellectual property and failure analysis. In energy, we see quantitative risk modeling and performance issues related to data centers, especially on the generation side. In the automotive and transportation sectors, litigation related to advanced driver assistance technologies is on the rise, with increasingly complex allegations. Our largest industries—consumer products, energy, and transportation—are seeing the effects of AI in various ways. While it's difficult to specify an exact percentage, it's evident that AI is becoming significantly integrated into our work throughout the product lifecycle. We continue to find opportunities for expansion, especially as technology advances. We observe AI's impact on both reactive and proactive aspects of our business. For example, we see disputes related to automotive and medical devices, but we are also proactively helping our electronics clients refine their algorithms and training processes. Overall, the influence of AI is broad and multifaceted, making it challenging to quantify but clearly present in many dimensions of our operations.

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. We have clearly observed that the reactive part of the business has been the main growth driver during the first three quarters. We experienced significant growth in this area, peaking in the third quarter with around 18% growth in our reactive business, while our proactive business remained relatively flat. The proactive segment did see some growth in regulatory consulting and risk management, but this was offset by a decline in our proactive work in consumer electronics, mainly on the hardware side. We are optimistic about the potential in consumer electronics and life sciences, particularly related to our human-machine studies in the fourth quarter, which we view as a strong area as we exit the third quarter. Overall, we continue to see robust demand in disputes and the reactive sector, and we have already noted a year-over-year increase in regulatory work related to chemicals in the third quarter. We anticipate further growth in the fourth quarter in our study segment. These are the positive trends we are noting as we look toward 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. Nine 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 three years?

Thank you for the question. There are many dynamics at play in the regulatory environment and among the regulators themselves. Most of our regulatory work focuses on the chemical and medical device sectors, which involve agencies such as the EPA, FDA, NHTSA, and the Consumer Product Safety Commission. We do have some situations where clients may experience delays or pauses as they await feedback on their submissions from the FDA or EPA. However, this is mostly minor. For instance, our chemical regulatory work has been strong this quarter. This business operates globally, with about two-thirds influenced by international regulatory frameworks that emphasize safety and health. Overall, while we're keeping a close eye on regulatory enforcement, we see it continuing and even strengthening. There have been notices from the Consumer Product Safety Commission about addressing defective products, and we observe similar trends in consumer products and medical devices from the FDA. In summary, while we remain vigilant, the business is still thriving due to ongoing health, safety, and environmental concerns. Additionally, we've had the chance to recruit some talent due to recent changes within regulatory agencies, which has allowed us to bring in professionals seeking new opportunities.

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 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 will be providing our 2026 guidance on revenues and margins during our call at the end of January or the beginning of February. We are currently not able to provide those numbers as we are still in the planning phase. However, we are encouraged by our headcount growth, which is accompanied by solid utilization. We believe we are in a positive position 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 two of them?

Our hiring practices are not categorized as proactive or reactive. We organize the firm, recruit our staff, and develop them in specific disciplines or practice areas, such as environmental scientists or electrical engineers. The market drivers for hiring in these fields influence our decisions. Currently, we are seeing strong demand for reactive work, allowing us to quickly engage new staff as they join the organization. In the short term, demand for reactive work is indeed motivating our teams and making them comfortable with hiring. In the long term, our hiring outlook extends over several years, focusing on emerging technologies and the development of risk issues. This approach naturally influences our hiring priorities, particularly in electrical engineering, computer science, and human factors, including individuals with psychology degrees and expertise in biomechanics and human-machine interaction. We are actively hiring in these areas this 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?

Several factors have contributed to our rate increase. Firstly, over the past few years, we've benefited from a strong demand environment and inflationary pressures affecting engineers and scientists. This has created a robust market driver for our growth. Specifically, in the third quarter and looking ahead to 2025, we have noticed strong demand in our reactive business, which relies on our most experienced personnel. It requires highly skilled experts who can navigate depositions and trials, supported by a dedicated team. While we've observed some improvement in utilization, it has primarily been among senior staff, not significantly enough to cause dramatic changes but sufficient to impact billing rates positively. Another factor at play is our modest hiring rate this past year, which has resulted in fewer entry-level hires. This decrease affects our overall blend and leads to less dilution. All these elements have worked in our favor, allowing us to achieve a rate increase of around 5% to 6% in the first three quarters. As we enter the fourth quarter, we are seeing positive momentum with improvements in proactive services that leverage our junior consultants. As our hiring increases, this will allow for more entry-level employees within the organization. These dynamics will influence our realized rates moving forward. Looking ahead, I expect our rate realization to be closer to the historical range of 3% to 3.5%, rather than the 5% to 6% we’ve been experiencing, due to these contributing 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.