Good day, and welcome to the Exponent, Inc. Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. 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 everyday 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. I want to begin by stating that all comparisons will be on a year-over-year basis unless mentioned otherwise. I would like to remind everyone that we returned to a 13-week fourth quarter and a 52-week fiscal year in 2025, differing from the fiscal year 2024, which had an additional week occurring every fifth or sixth year. This extra week creates a revenue headwind of about 7% in the fourth quarter and 1.3% for the year. In the fourth quarter of 2025, total revenues rose by 8% to $147.4 million, while net revenues increased by 5% to $129.4 million compared to the same period in 2024. Adjusting for the one less week, net revenues would have grown in the low double digits. Net income for the fourth quarter reached $24.8 million or $0.49 per diluted share, an increase from $23.6 million or $0.46 per diluted share in the prior year. The tax benefit related to share-based awards in the fourth quarter was $99,000 compared to $591,000 in the fourth quarter of 2024. Including this tax benefit, Exponent's consolidated tax rate in the fourth quarter was 27.4%, up from 24.7% in the same period of 2024. EBITDA for the quarter was $34.7 million, leading to a margin of 26.8% of net revenues compared to $31.2 million or 25.2% in the same period of 2024. Billable hours in the fourth quarter stood at approximately 357,000, reflecting a 1% year-over-year decrease. Adjusting for the one less week, billable hours would have increased by about 6%. The average number of technical full-time equivalent employees in the fourth quarter was 992, a 5% increase compared to the previous year, due to our recruiting and retention efforts. Utilization in the fourth quarter was 69%, slightly up from 68% in the same period of 2024. The realized rate increase was approximately 5% for the fourth quarter compared to the same period a year ago, driven by our premium market position, exceptional talent, and unique interdisciplinary expertise. In the fourth quarter, compensation expense after adjustments for gains and losses and deferred compensation remained approximately flat. The total compensation expense included a deferred compensation gain of $2.7 million compared to $629,000 in the same period of 2024. Remember that gains and losses in deferred compensation are offset in miscellaneous income and do not affect the overall results. Stock-based compensation expense in the fourth quarter was $5 million, slightly higher than $4.9 million in the prior year. Other operating expenses increased by 1% to $12.6 million, which includes $2.5 million for depreciation and amortization. General and administrative expenses rose by 17% to $6.7 million for the fourth quarter, largely due to heightened travel and meals linked to business development, professional development, and increased recruiting efforts. Interest income fell to $1.9 million for the fourth quarter, influenced by reduced cash and lower interest rates. Miscellaneous income, not including the deferred compensation gain, was around $296,000 in the fourth quarter. During the quarter, capital expenditures amounted to $2.7 million. We returned $14.9 million to shareholders through dividends and repurchased $25.1 million of common stock at an average price of $70.57. Looking at the full year results, total revenues and net revenues grew by 4% to $582 million and $536.8 million, respectively, compared to 2024. Net income for the year fell by 3% to $106 million or $2.07 per diluted share, down from $109 million or $2.11 per diluted share in 2024. Throughout the year, we experienced a negative tax impact related to accounting for share-based awards of $255,000, compared to a tax benefit of $2.8 million in 2024. Including the tax benefit from share-based awards, Exponent's consolidated tax rate for the full year was 28%, up from 26% in 2024. For the year, EBITDA rose to $148.1 million compared to $147.1 million in the previous year, resulting in a margin of 27.6% of net revenues, which reflects an 80 basis point decrease compared to 2024. This decline in margins was expected, primarily due to costs associated with our managers meeting in 2025 and the renewal of our Phoenix land lease in June 2024. Billable hours for 2025 totaled approximately 1,468,000, representing a 2% decrease year-over-year. Full-year utilization was 72.5%, slightly down from 72.9% in 2024. The average number of technical full-time equivalent employees for the year was 973, a 1% increase compared to 2024. The realized rate increase was approximately 5% for the year. The compensation expense, after adjusting for gains and losses in deferred compensation, went up by 3%. Within the total compensation expense, there was a deferred compensation gain of $17.4 million compared to a gain of $14.9 million in 2024. Stock-based compensation expense in 2025 amounted to $23.8 million, slightly higher than $23.2 million the previous year. Other operating expenses climbed 7% to $49.5 million, primarily driven by increased noncash expenses from the Phoenix lease renewal. This includes $10.1 million for depreciation and amortization. General and administrative expenses grew by 12% to $25.5 million in 2025, mainly due to a rise in travel and meals associated with our in-person managers meeting held in September, which was postponed in 2024. Interest income dropped by approximately $694,000 to $9.3 million for the full year, resulting from lower cash levels and interest rates. Miscellaneous income, not including deferred compensation, was around $840,000 in 2025. Regarding cash flows, in 2025, we generated $131.7 million from operations and capital expenditures totaled $9.4 million. For the full year, we returned $61.5 million to shareholders through dividends and repurchased $97.8 million of common stock at an average price of $72.22. By year-end, the company had $221.9 million in cash and cash equivalents. Delving into our segments, Exponent's Engineering and other scientific segment accounted for 85% of net revenues in the fourth quarter and 84% for the full year 2025. Revenues in this segment grew by 7% for the fourth quarter and 4% for the full year, fueled by proactive services like risk management for the utility sector addressing energy infrastructure challenges due to rising demand and extreme weather, regulatory support for medical device clients, and user research for consumer electronics. The quarter's growth was also bolstered by disputes-related services in the construction, energy, and transportation sectors, where clients depend on Exponent during critical situations. Exponent's environmental and health segment constituted 15% of net revenues in the fourth quarter and 16% for the fiscal year 2025, with revenues before reimbursements declining by 5% in the fourth quarter and being approximately flat for the full year. The decrease in the fourth quarter was mainly due to having one less week compared to 2024. Now, regarding the outlook for the first quarter and full year 2026, we anticipate net revenues to grow in the high single digits for both the first quarter and full year compared to the same periods in 2025. For the first quarter of 2026, we expect the EBITDA margin to be between 27.5% and 28.5% of net revenues, up from 27.3% in the first quarter of 2025. For 2026, we project the EBITDA margin to be between 27.6% and 28.1%, consistent with 27.6% in 2025. We foresee increased demand leading to a rise in our average technical full-time equivalent employees by about 4% year-over-year in the first quarter of 2026, and 4% to 5% for the full year. For the first quarter, we expect utilization to be between 75% and 76%, compared to 75% during the same quarter last year. The full year utilization is projected to be between 72.5% and 73%, consistent with 72.5% in 2025. We remain confident in our long-term target for a sustained mid-70s utilization, as we strategically manage our workforce and balance utilization with market demand. We anticipate a realized rate increase of 3.5% to 4% for the first quarter, and 3% to 3.5% for the full year. The expected lower rate realization for the year is based on historical trends as hiring rates rise. For the first quarter, we expect stock-based compensation to be between $8.6 million and $9 million, with each subsequent quarter anticipated to have between $5.5 million and $6.3 million in expenses. For the full year of 2026, stock-based compensation is expected to reach between $26 million and $26.5 million, as we continue to believe our program effectively attracts, motivates, and retains top talent. For operating expenses, we project them to be between $12.7 million and $13.2 million in the first quarter, and from $53.5 million to $54 million for the full year. We expect G&A expenses to be between $5.4 million and $5.8 million for the first quarter and between $27.1 million and $28.1 million for the full year 2026. Interest income is anticipated to be between $1.7 million and $1.9 million per quarter in 2026. Additionally, we project miscellaneous income to be around $300,000 per quarter in 2026, totaling approximately $1.2 million for the year, compared to $840,000 in 2025. Our expected tax rate for the first quarter of 2026 is approximately 30.4%, up from 29.4% in the same quarter last year, and for the full year 2026, it is anticipated to be 28.5%, compared to 27.9% in 2025. We project capital expenditures for the full year 2026 to be between $12 million and $14 million. We remain optimistic about the opportunities across our markets and believe we are well positioned for improved growth in 2026 while achieving our long-term financial goals of high single-digit to low double-digit organic growth and margin expansion.

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.

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 a 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 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?

Thank you for that, Tom. We are seeing a year-over-year acceleration in growth and demand across a broad range of our business. The consumer electronics sector is particularly noteworthy. We experienced strong performance in the fourth quarter and have a favorable outlook for the first quarter, which is contributing to this growth. However, the outlook becomes less certain beyond that. With our diversified product offerings, clients, and form factors, we expect the electronics sector to remain a driver, especially as AI is integrated into safety-critical applications like health wearables and regulated medical devices. The energy sector is also poised to be a significant driver for 2026, having begun to strengthen in 2025 as well. This encompasses utility-related projects and our ongoing risk management initiatives, which are expanding across various clients. The regulatory landscape is evolving, raising the standards for grid resilience in the face of extreme weather. We are seeing increased demand in the energy sector as new technologies are needed for capital projects involving wind, solar, and fuel cells. Data center operators are also investing heavily in gas-powered plants, and there are lengthy waiting lists for gas turbines. This presents risks and disputes associated with the development of these energy systems. We are increasingly involved in failure analysis for data centers, focusing on cooling systems and backup battery supply systems, which require specialized multidisciplinary expertise for effective diagnosis. Additionally, on the chemical side, demand related to PFAS and its implications for human health and the environment is also expected to rise. Electrification and automation in transportation further round out the key areas we expect to impact our performance 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?

Our expectation is that we will see headcount growth in the range of 40 to 50 for the year. It could potentially increase to as high as 60, but we anticipate staying within that range. The primary areas experiencing the most growth, as highlighted earlier, include transportation, energy, battery storage, automation, cybersecurity, and chemicals related to PFAS. Each of our practices is actively recruiting to incorporate new talent, especially those PhDs who have tackled unique challenges in their doctoral research, as part of our consultants' natural process. Given the turnover we experience, we are consistently on the lookout for fresh expertise.

Is the pace of headcount growth leading to negative margin implications, or is the return to growth in the recent past no longer causing any necessary 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 believe it is a net benefit. If you consider the failure analysis related to advanced driver assistance systems and automated vehicles, it is directly influenced by artificial intelligence making critical safety decisions. The user research I mentioned earlier in the electronics industry focuses on data collection, benchmarking, and validating devices that use AI algorithms for decision-making, such as monitoring heart rates or blood pressure. On the hardware and data center sides, AI is contributing to increased energy demand, which we see as a key factor in the growth of our energy sector, particularly regarding disputes and proactive risk management in utilities. While it may not be directly part of the projects, the need for energy stemming from a deteriorating infrastructure is a fundamental driver.

In that area, we're observing growth whether it's related to thermal management at the board level or the increased demands from the infrastructure on these racks. These aspects align with Exponent's expertise, and we are seeing related business opportunities. There hasn't been a change in the demand regarding the time or resources we dedicate to processing data. The datasets are expanding significantly, leading clients to seek deeper insights and understanding of their decisions, which can be complex. This trend has been evident throughout 2025 and continues 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?

I believe it's crucial to acknowledge that Exponent has been engaged in developing systems that utilize the early stages of AI and machine learning. Over the past decade, especially while working with the automotive industry during its initial phases of steering control, braking, and other technologies, we've seen advancements like robotaxis now operating on the roads. This expansion is indeed fuelling growth in our transportation sector, and we anticipate this trend will continue. Similarly, user research has evolved; in the past, our clients aimed to create inclusive products, particularly in areas like facial recognition, which eventually led us to conduct more user research and analyze performance across various applications, including health tech. We've been actively involved in this for nearly ten years, and it has been on the rise. In the utilities sector, we have made strides in risk modeling, particularly as some clients have opted for less sophisticated AI models that lack the precision necessary for critical decisions. These clients are now seeking our assistance in refining those models, incorporating physics and advanced engineering practices to enhance the reliability of AI in safety-critical contexts. Overall, we are currently at a point where approximately mid-teens percentage of our business relates to AI, whether directly or tangentially, focusing on areas that align closely with this technology. There remains significant potential for growth ahead.

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 customers are definitely looking to integrate AI into their operations. There are instances, like the one Rich mentioned, where they have included AI in risk models and discovered that it alone is insufficient. We also observe this in the medical device sector, particularly with software classified as medical devices. We are involved on the regulatory front, aiding them in developing their strategies to navigate the FDA approval process. Our electronics clients are implementing artificial intelligence across various devices and are seeking our assistance with benchmarking and user research. This trend is pervasive. Clients display varying levels of confidence; some are skeptical while others are eager to dive in, but they are reaching out to us for guidance and validation in many 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 improve our conversion rates. We experienced a significant amount of reimbursables at the end of the year related to the studies, which caused our Days Sales Outstanding to be higher than our ideal year-end target. I anticipate that through our ongoing efforts, we will achieve a better balance, potentially reducing DSOs by a few days. This will aid in achieving a steady state and enhance our cash flows moving forward.

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