Exponent Inc (EXPO) 2004 Q3 法說會逐字稿

Good afternoon. My name is Edward, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Exponent Q3 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. Ms. Johnson, you may begin your conference.

Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's third quarter of 2004. Please note that this call is being simultaneously webcast on the Investor Relations section of the company's corporate web site at www.Exponent.com. This conference call in the property of Exponent, and any taping or other reproduction is expressly prohibited without Exponent's prior written consent.

Joining me on the call today are Mike Gaulke, President and CEO, and Rich Schlenker, CFO of Exponent. Before we get started, I would like to remind you the following discussion includes forward-looking statements, including statements upon Exponent's market opportunities and future financial results that involve risks and uncertainties that Exponent's actual results may vary materially from those discussed here. Additional information concerning factors that could cause actual results to differ from forward-looking statements can be found in Exponent's periodical filings with the SEC, including those factors discussed under the caption, "Factors Affecting Operating Results and Market Price of Stock" in Exponent's Form 10-Q for the quarter ended October 1, 2004.

The forward-looking statements and risks stated in this conference call are based on current expectations as of today. And Exponent assumes no obligation to update or revise them, whether as the result of new developments or otherwise.

And now, I would like to turn the call over to Mike Gaulke, President and CEO of Exponent. Mike, please go ahead.

Thank you for joining us today for another good quarter report. For the third quarter, revenues increased 7 percent over the same period last year to $38 million, while revenues net of reimbursables grew 10 percent to 35 million. Net income was up 11 percent over the third quarter of last year to 3.2 million or 37 cents per share.

We have strong performance in many of our core practices, including mechanics and materials, electrical, thermal sciences, human factors, and biomechanics, where we worked on a mix of both litigation and design consulting projects.

Our defense technology development practice continued to do well in the third quarter. We performed assessments of the U.S. Army's Advanced Robotic Controller, which included a field evaluation by U.S. forces in Afghanistan.

We have been able to expand our technology development work to a second service, the U.S. Navy, where we have been working on two contracts. The first is a follow-on phase to the project that we mentioned in last quarter's investor conference call.

In the third quarter, we commenced phase 2 of a U.S. Navy program to develop and demonstrate the effectiveness of a novel submarine detection technique for anti-submarine warfare. This $3.8 million phase will be completed in the fourth quarter. Exponent anticipates it will realize approximately $2 million in net revenues for our work on phase 2.

The second contract, which was substantially completed during the quarter, was a Navy project to develop a plan for the rapid development of a robotic boat system to counter the threat from maritime improvised explosive devices, or IEDs.

As we had expected, we did not have any contracts with the Special Operations command in the quarter. But we continue to believe that this will present revenue opportunities for us in 2005 and beyond.

We continue to make investments in personnel and marketing in our environmental, health, and construction consulting areas and expect to be able to capitalize on these opportunities in the coming year.

In summary, we are pleased with our overall progress and results for the quarter as we continue to build on our leadership position in both our core and emerging practices. We're proud of the progress that we're making in several areas, most notably in defense technology development, where we have added the Navy as a new client. We look forward to identifying more opportunities for future growth.

With that, I'll turn the call over to Rich for a detailed discussion of our financial results in the third quarter.

Thanks, Mike. As Mike discussed, we're pleased with our financial performance in the third quarter. Revenues were $38 million, up 7 percent over the third quarter of 2003. Net revenues were $35.2 million, up 10 percent over the same period a year ago. Net income increased 11 percent to $3.2 million, or 37 cents per diluted share, as compared to 36 cents per diluted share in the third quarter of 2003.

For the first 9 months of 2004, revenues were $116.4 million, up 10 percent over 2003. Net revenues were $106.7 million, up 12 percent over the prior year. Net income increased 26 percent to $10.1 million, or $1.19 per diluted share, as compared to $1.01 per diluted share for the first 9 months of 2003.

We attribute our 10 percent increase in net revenues in the third quarter to 2 factors -- 1, an annual bill rate increase of approximately 6 percent which occurred in January, and 2, a shift in contracts mix to higher bill rate practices.

Our technical, full-time equivalent employees in the third quarter were 503, an increase of 6 percent versus the same period last year. And billable hours were essentially flat at 168,000. These factors and 1 additional holiday in the quarter versus last year resulted in utilization decreasing to 64 percent versus 68 percent last year.

For the quarter, compensation expenses increased to $23 million, or 65.5 percent of net revenues from $20.6 million or 64.4 percent of net revenues in the same period last year. Compensation expense increasing as a percentage of revenue is primarily the result of an additional holiday in the period.

In the third quarter, other operating expenses were $4.7 million or 13.3 percent of net revenues, down slightly from 13.7 percent of net revenues last year. G&A expenses increased to $2.3 million, or 6.7 percent of net revenues, which is slightly down from 7.1 percent in 2003. Reimbursements were $2.9 million as compared to $3.7 million in the same period last year as a result of lower reimbursements on technology development projects this year.

We generated operating income of $5.1 million, an increase over $4.7 million generated in the third quarter of 2003. Operating margin in the quarter was 14.5 percent versus 14.7 in the third quarter last year.

Miscellaneous and other income in the quarter was $267,000. Our effective tax rate in the quarter was 41 percent down from 41.5 percent the prior year, as we have taken advantage of tax exempt securities.

Shares used to calculate net income per diluted share were 8,645,000, an increase of 152,000 over the second quarter. Due to options exercised, we expect shares used to increase approximately 125,000 in the coming quarter.

Turning to the balance sheet -- we closed the quarter with cash and short-term investments of $42.7 million, up $3.1 million from the prior quarter. Accounts receivables were $50 million, and DSOs were 119 days.

The good news is that since the end of the quarter, we have already been able to reduce DSOs to 103 days and expect to end the year at 95 days or less.

For the fourth quarter, we expect to experience year-over-year revenue growth in the high single digits to low double digits range, and year-over-year operating margin improvement of at least 50 basis points.

Now I will turn over the call to Mike for closing comments.

Thanks, Rich. With three quarters behind us, I think it's fair to say that 2004 is shaping up to be a very good year for Exponent. We're pleased with the growth that we have been able to achieve in our core engineering practices and the progress we've made in expanding our portfolio of defense technology development programs.

In addition, we have been able to leverage our infrastructure which has resulted in continuing improvement in our operating and bottom-line margins. And we believe that our investments and marketing and personnel in the environmental, health, and construction consulting areas will pay off the future.

My concluding messages we remain optimistic about the long-term opportunities for our business. We look forward to talking with many of you in the coming quarter or early next year when we report the results for 2004. With that, I will turn the call over to the operator for your questions.

(OPERATOR INSTRUCTIONS) Mike Niehuser.

Looked like another fine quarter. Rich, can you tell me what depreciation was in the quarter?

Yes. Our depreciation was $820,000.

For the quarter.

Yes.

And what -- you mentioned that there's a high bill rate for certain types of business. What business is that you're referring to?

Our bill rates vary across our practices and the levels within our organization. What I'm referring to here is that we saw an increase in billable hours in some of our core engineering practices where we have a slightly higher bill rate than we do in, let's say, our environmental practice. And that is consistent with the marketplace.

And it's just a matter of that we saw growth in one area and not in the others. So that mix of hours did make a difference, even though our overall number of billable hours was flat versus a year ago.

And outside of technology development, there was no other projects mentioned with engineering, thermal sciences, etc. Is that pretty much still a business spread out over a wide number of projects, or is there anything in particular in there worth noting?

We end up doing some 4 to 5,000 projects a year, Mike. We're able to talk much less openly about those projects because they tend to be confidential in nature with the clients. Occasionally, there are projects of a broad scope like the collapse of the World Trade Center or some specific broad industry problems, like asbestos, for example. But relative to specific client assignment, we generally don't comment on those.

You mentioned the evaluation by the troops of the robotics in Afghanistan. Is there anything that you can share about their feelings about how that is working out?

Well, I wasn't there. But I have gotten some feedback, that being that the reports are good in terms of the acceptance by the troops that used them. I think there's also a feeling that there's probably one more round of work needed. So I mean it wasn't a final signoff in any sense.

But there was very good feedback coming from the field, certainly in terms of the functionality. I think there were some concerns about perhaps some of the form factor, which we knew might be a concern. But those can clearly be dealt with.

And you mentioned the U.S. Navy. I remember you mentioned it in the last call. But I don't recall specifically the rapid development of a robotic boat system. I'm kind of picturing something like what you did in Afghanistan in the caves, but instead, on the water.

And the follow-on to that is -- is that the first of several contracts, do you think, with the U.S. Navy about robotics?

Well, there are two programs, as I mentioned in my remarks. What we did mention about the Navy was actually the first phase of the anti-submarine warfare work that we're doing. And the second phase -- the first phase is really a small phase that we had mentioned in the second quarter.

Late in the third quarter, we started this work on the second phase, this $3.8 million phase. The majority of that work will, in fact, take place in the fourth quarter.

And this is one of potentially many follow-on phases. It's a program that is in essence based upon the success as it goes along. So to the extent that the program continues to be successful in what we are demonstrating, then it has a good chance of moving on to a following phase.

The second contract, which was done in the third quarter here, was to develop a plan for the development of a robotic boat system to deal with IEDs. That work has essentially been done, and I would say at this point may or may not result with follow-on work in that particular area. We obviously would hope that it might. But we don't know that at this point.

I hope so, too. And you continue to build cash. Is there talk about seeing that more in the way of using that for acquisitions or as a possibility of a buyback or dividends?

I think the cash is there, and we are seriously evaluating all 3 of those options. We will continue as we have over the last several years to evaluate acquisitions that in the marketplace. We do tend to be conservative about them. It's a people business, and we want to make sure the assets we acquire in an acquisition are ones that are going to stay here and be productive. So we are selective in doing that. We at the same time are evaluating other ways to utilize that, both through repurchase as well as a number of options in the dividend area.

Okay. And lastly, it looked like there was a small dip in the operating margin compared to same quarter last year. What do you attribute that to?

When we had the second-quarter conference call, I'd indicated that we expected to have basically flat operating margin. I think within 20 basis points is within that range.

The reason for that is last year's operating margin was extremely high for that quarter in particular. We had strong utilization. We had 1 less holiday in that quarter, which probably makes up the difference in itself. So with the same amount of holidays, we would have seen the same or better margins in this quarter.

Mike Crawford, B. Riley.

Yes, on the DSOs, was that related to technology development?

The recent collection activity was primarily related to them. It also had some other activity. We've been pressing on this hard. We know that it had gotten a little bit ahead of us, primarily in technology development, where there just happened to be some slow pain. We have gotten that turned around. We have got over 5 or $6 million in just from the U.S. government in the last two weeks. And then we also had payback for some of the collection activity going on in the third quarter.

And we think -- well, we know that we've got some of the contracts structured here in the fourth quarter with the government in a better lease (ph) collections model, or cash flow model, that will help us stay more in line with the rest of our business.

Okay, great. And then a further question on the submarine detection with the VSC. So how did you get that contract? Was that -- did VSC find you, or did you find them, or did the Navy introduce you? How did that come about?

Let me start off on the front end, and maybe Mike has something to add. But VSC is really just -- has a contract vehicle. They are not the marketer or the developer of this program. It's just -- SEACOM within the Army actually has a rapid response contract vehicle in place. It's an ID/IQ that allows any Defense Department program to run through it for a fee.

And that's the only reason that VSC is involved. They're not doing any technical or project management work. They're doing contract administration.

The way that the program came about is that we were working with another one of our subcontractors during the ARC program. They were, in addition, working with the Navy. And that opened the door for us to have an opportunity to meet with 1 or 2 of the Admirals within the Navy on what their key issues were. The firm that we were -- subcontract to us (ph) was a company called Sensoria who was doing some radio technology. And that brought us into the mix. And they were excited about how fast we have been able to turn some prototypes and develop technologies and the mass network development that we had done. And they clearly identified ASW as one of their area's biggest technical challenges. And we came back to them with an idea of how to approach it, and as such, got the first phase where we wrote a concept plan. They bought into it, at least to the level of wanting to spend another $3.8 million in some early development. And we will see where it goes from there.

Don't (ph) most of the other revenues go to Sensoria?

No, it's a mixture of companies. Sensoria probably $0.75 million of that. But we have a number of other subcontractors involved.

Great. And then changing gears, if you look at your 154,000 square foot building, your 6.3 acres in Menlo Park, what's the last appraisal price of those assets?

The last time we had it appraised was in, I think, late '98/early '99. It was sort of before the market went crazy here. And at that point in time (multiple speakers)

Went crazy going up.

(multiple speakers) And then it came back down. So it's probably back in that range. The lease vacancies are probably hired now than they were at that point in time. But the evaluation at that point in time was between 35 million and 45 million. I think the ultimate assessment came out at $43 million, I believe.

So something like 25, 30 million would be pretty safe today. Is that a good estimate?

I believe that that would be on the very low end.

Okay, great. And then the other thing you've talked about in the last few quarters is your efforts to get on the front of some of these challenges with these customers to help them design things before problems occur. So have you made any further progress on that front? And if you were to try to loop that type of work as a total percent of revenue compared with just coming in after something went wrong, what percent of total revenues before reimbursements would that type of a business be running at today?

In fact, I would put that number at approximately 20 percent of our revenues today. It's hard to capture it, because it's happening across a lot of practices and it's multidisciplinary.

But we believe that we've made good progress in this area so far this year. We continue to see growth in the medical device industry, where we are able to bring a multidisciplinary approach, both biomechanics as well as materials engineering and science to it, which tend to be some of the skillsets that even some of the top medical device manufacturers are lacking. So we are able to help them there.

We have probably seen the largest growth occur in our business with some of the computer and electronics manufacturers today. They tend to be trying to get products out to market faster, smaller, and generating a lot more heat than they were a couple of years ago. So those create issues that we can help them solve, both from our mechanics and materials practice, our electrical practice, and our thermal science practice are working actively with those clients. So that gives you a few examples of what we are working on.

Okay, great. And then finally, with your -- I guess I'd call it initial guidance for '05, you're talking about similar type of revenue growth as you've experienced in the past. But the EBIT improvement seems on the conservative side. Did you say just 50 basis points off of this year?

I think it's been the same guidance that we have expected in the past. I think we expect that 2005 and beyond would result in high single-digit to low double-digit revenue growth on a net revenue basis, with at least -- if we are in that range, at least a 50-basis-point improvement in operating margin. So that's the message that we have said to the market over the last couple of years and I think have been able to deliver on.

Actually, I might have one final question. Do you have any comments on this newly public consulting company, Huron, that went public last week?

No. It is a succinct answer, but they are really not a firm that we bump into at all in the marketplace, Mike. So we don't really know them.

Sandra Notardonato, Adams, Harkness & Hill.

If I could just follow-up on the question about the outlook for 2005, what kind of bill rate, headcount, and utilization assumptions does the outlook assume?

We have not completed our detailed operating plan for 2005. That's something that we do during the fourth quarter working with each of our practice areas.

But in general, the assumption is that we will achieve a 5 to 6 percent bill rate increase in our business, that we can achieve a 5 percent plus growth in technical full-time equivalents over the year, and hopefully, in that, achieve at least a 1 percent increase in our average utilization for the year.

So would that mean utilization of -- what would that mean -- 65 percent, 69 percent?

That would be at least an improvement -- this year should end up somewhere between 65 and 66 percent. And we would hope to begin to improve upon that.

What is a good level of utilization for a company like yours operating at target? Is this it, or can you get into the low 70s?

We think that -- an area that we have operated in has been the low 70s -- 72, 73 percent over the last -- I guess it was about in the 5- to 6-year period of time. We believe by looking at our model that that is something that we can get back up to over time.

At this point in time, we have really tried to work on recruiting both senior people as well as junior people, and bringing them in, especially since we've been able to get the operating leverage out of those investments at least over the last several years.

And what is the ratio of senior to junior people currently?

We currently have just over 70 principals in the firm of the 500 technical FTEs.

Sandra -- (multiple speakers)

Yes, Mike?

Just a comment on utilization. I think you're aware, but you need to be careful with the definitions. Because we base our utilization based upon a 2,080-hour year. And some others in the same space use -- I think it's an 1,850-hour (multiple speakers)

Right -- they use a lower number.

Right. So obviously, if we used 1,850, the numbers go up.

And do you give out a turnover number on an annualized basis for the quarter?

We don't have one for the quarter. What we can tell you is that for the year, we're running in the low teens.

Low teens -- anything significant at the principal level?

We have had a couple of individuals turn over, but nothing out of the ordinary. Just as a firm, you're going to have a couple turn over, but nothing of a major significant (multiple speakers)

No significant rainmakers.

Okay. And I'm not sure if you covered this, but what drove the DSO number down to 103 days from the 119 so far this quarter, and how are you going to get it below 95?

We ended up having about 2 or 3 bills that totaled up to approximately $6 million with the U.S. Army. And those bills ended up getting held up for one reason or another -- people not getting a process in done (ph). The group that we are working with, the Rapid Equipping Forces, they knew our organization with improving or changing business environment.

So those things have been straightened out. And that was the primary turnaround.

The reason that we believe that we can continue to bring it down is we have a couple of other outstanding invoices for the U.S. government. And based on the activity that we have seen in our core business, we just believe there are a few areas that we haven't put the focus in those practice areas that we should. And we believe the activity in the third quarter that we have had will turn that around and we'll be able to see the improvement.

Okay. And just a moment ago, you had mentioned some work you're doing in the medical device area. Is there any opportunity for you to get involved with with Merck and what's happening with their product Vioxx and work with other pharmaceutical companies?

Nothing I can say that we are engaged in at the moment. But we are exploring opportunities there

Can you talk hypothetically what role Exponent could play in something like that?

I think the general area of technical consulting and what I would describe as products liability action is really the hallmark of what we do. (multiple speakers) 70 (ph) percent of our revenues come from assisting clients in these very high exposure -- and certainly Vioxx for Merck is going to be in that arena. We are just very skilled at being able to look at these kinds of issues and assist clients with how to deal with them in a regulatory and legal environment.

We have skills in what we call our health and health risk practices, as well as our food and chemical practice that include epidemiology and human health toxicology. The other area that in this particular case would be probably be relevant is we've got some outstanding statisticians, mathematicians. Our ability to deal with very large data sets is almost second-to-none in terms of being able to take millions of records and analyze them for meaningful output.

So would this be potentially a project that Merck calls on you for, or do you think that the law firms that Merck is associated with would call on you to provide the analysis?

All of our work that we do in the products liability area is from a legal standpoint, done through their (ph) outside law firm. So that's where the retention would be. Whether it would actually be at the direction of Merck or at the suggestion of the law firm -- you know, it could be either.

Okay, and it doesn't necessarily mean that you would have to have a relationship with the existing counsel (ph) of Merck in order to get the business.

No.

Richard Hyon, Roth Capital Partners.

(technical difficulty) breakdown for your 2 segments?

I'm sorry; can you repeat the question?

Yes, could you provide a breakdown of your gross revenue between your 2 segments?

The gross revenues for the other scientific and engineering segment was 29,271,000, and the environmental and health segment was 8,770,000.

Okay, great. And also, I know that haven't received any task orders yet for the Booz Allen program, but just wondering if you can provide any more details about it. It looks like the companies that are in contention were awarded about a $250,000 initial order. Do you expect to down-select after this initial order is fulfilled?

No. Each of the teams that were selected -- there were 4 of them -- each of them ended up with a $250,000 task order. And as such, we have got a small part of that in our role with the Booz Allen team.

We do not expect there to then be a down-select from that. Each of those teams ends up having an indefinite delivery, indefinite quantity contract, for which SOCOM and other agencies can make orders from. And at this point in time, it's going to either depend on those organizations coming directly to us, but even more importantly, us going out and marketing to them and getting them to match up their needs with what we have to offer and go from there.

So this is just the beginning of the process. It is a good contract vehicle to work through, but it's not the only contract vehicle. So it's going to take some getting out there and marketing. And we didn't have that door open for us previously with Special Ops, so this helps us.

Jeffrey Meyers, Intrepid Capital.

Just a couple of questions. First one is a balance sheet question. I see that prepaids were up over the last quarter. Just wondering what that was?

The prepaids are primarily up associated with prepaid taxes. With the way that our year runs, with the first quarter being so strong in the bottom-line, it ends up resulting in -- to be conservative, you need to pay on an average basis to the IRS. So it drives a high prepaid in the tax area.

In addition to that, we did enter into a couple of new leases for some of our offices. And as such, some of that ends up getting front loaded, as well.

Got you -- okay. Then my second question was just in regards to guidance for next quarter. I guess you guys have that $2 million contract in work (ph) in there. And wondering why -- obviously, there are holidays. But just wondering why it would be coming down sequentially so much versus this quarter?

And then I guess the other part of the question is -- even if it does come down, you'd need a significant rise in personnel cost to just get 50 basis points over last year. So maybe -- if you guys are just being conservative, you know, you could say that. But maybe I'm just thinking the wrong way.

First of all, we do have seasonality in our business, and equally -- an equal quarter in performance, hours produced to (ph) revenue produced on a daily basis would go down in the fourth quarter. We end up with 3 additional days of holidays, and then at least an equal amount, if not more, of vacation taken in the fourth quarter. So it ends up with 3 or 4 additional days that we don't have the productivity of our staff that we had in the third quarter. So that's from a trending down.

We do incorporate the Navy contract into our numbers there. Last quarter, we had a lot of activity on the ARC program. Right now, we don't have as much going on there. We have a few small tasks at this point in time. So there is just a flow of projects that come through that keep that balance going.

Operating margin-wise, any decrease in overall utilization with the less productivity that I talked about because of the seasonality will decrease the operating margin that we achieve. So that's why we see it going in that direction.

Michael Zinn (ph), Rockdale (ph).

I may have missed it -- I didn't quite get the specific fourth-quarter guidance, if you provided any. I thought that any guidance that you talked about was really in the context of the full year for 2005. So if you could just repeat any specifics around the fourth quarter, that would be appreciated.

Maybe I misspoke, because the direction I was giving was really over the fourth quarter -- that we expected to experience year-over-year revenue growth in the fourth quarter in the high single-digit to low double-digit range and year-over-year operating margin improvement of at least 50 basis points. So it's really come around -- giving guidance just at a general range that we have held to over the last couple of years in the revenue growth, and that we do expect to see an operating margin improvement over last year.

So essentially what you're saying for the fourth quarter also holds for what your goals are for the entire 2005.

Yes.

Okay. You gave revenue breakdown for each of your business segments. Could you give us an operating margin breakdown for each one of those segments?

Yes, I can give you -- I didn't have the percents right here, but I can give you the (multiple speakers)

Operating income? (multiple speakers)

I have got the income here. The operating income for other scientific and engineering was 7 million 373 (ph) and for environmental and health was 1 million 409 (ph).

Okay, great. One more. Could you just again quickly go over the decline in the utilization rate from 68 percent a year ago to 64 percent? I think you had mentioned that there was an additional vacation day in there or a holiday. And I don't know, just the various factors as to what the variance was there?

Yes, there are 2 macro areas that impacted. The first was the fact that our Fourth of July holiday in 2003 landed in the second quarter. And this year, it landed in the third quarter. That has about a 1 to 2 percentage point impact on our utilization. So that would have -- if it was in the same quarter last year, would have taken last year to 67 or 66 percent. And then the other 2 to 3 percentage points is related to the fact that our full-time equivalent employees grew by 6 percent over last year with a flat billable hours.

Brian Horey, Equity Growth Management.

Did you give average billing rates?

I didn't, but I can give you an average billing rate. Our average billing rate is about 210.

Okay, and how did that change year to year?

That was an increase of 10 percent.

Okay. And you said billable heads grew 6 percent, but utilization was down. Is there any particular reason why those additional people weren't utilized at a higher rate?

Yes, well, it's a mix of where they land. The big plus about us is how we differentiate ourselves in the market is really being a multidisciplinary organization. On the other hand, that means that not every individual can just be absorbed over into another project that's real busy in another practice at all times.

So what we saw was growth in full-time equivalent employees in a number of practices that were quite busy. And we mentioned some of those in our press release -- electrical, thermal, human factors, biomechanics, and mechanics and materials. In some of the other practices that aren't as busy, on the other hand, we don't just all of a sudden tell our people to stop recruiting.

The key to this business is finding good people out there and, over time, making sure that you cancel out the underperformers. As any high-end professional consulting firm needs to do, you try to make the right choice when you're bringing people in. But over time, you need to evaluate them and determine if they are going to be successful and proceed forward to be a principal in the organization, or if it's better that maybe they go out and work in industry (ph).

So we try to do that. We don't manage that right from one quarter to the next. So as we have a little downturn in business or we are investing in a particular area, we are going to get a little lower utilization.

So there weren't any big projects that rolled off for either competitive issues or anything like that would speak to (multiple speakers)

No. The area that we have seen some challenges in in late 2003 and into 2004 is really in our environmental area. And then, the one place that we had a major project last year where we had significant revenues in was really in our civil engineering area, where we were working on the World Trade Center project in the first 6 to 9 months of last year. And we had another huge project that was a construction technology project going on.

So that practice is down. But we think we have the right people there, and business will come back around over time.

(OPERATOR INSTRUCTIONS) Mike Niehuser.

It seems like there was a lot of press about procurement in the military and needing to collapse the time to get stuff to the front-line troops that still isn't quite happening after decades of the Pentagon struggling with this. And it just seems to me -- I just wondered -- pick your brain on your thoughts about how well-suited Exponent is to exploit this niche. And I guess it's a softball, because I think pretty well. But if I could get you to comment on that, if it is possible.

Well, that has been the basis of the work that we have done for the Rapid Equipping Force the last few years, Mike. The opportunity to get technology into the battlefield, into the hands of soldiers in a much expedited mode is where we have really created a market for ourselves.

I would say that, looking forward, the success that we have had -- the success the Army has had with Rapid Equipping Force will be recognized. And it's entirely possible in future evolutions of the Army's organization that that will become, if anything, more mainstream. But that tends to be the nature of our business -- more mainstream being that, in fact, it is incorporated in a broader way across the services.

But what we have -- what we continue to excel at is pushing the envelope on the front-end of programs. To the extent that this is just another program in the long-term, its real success will be if, in fact, it was not just a one-off program, but actually gets incorporated in a way that does benefit the Army in a broad way.

Well, I guess -- I felt like it's a simple question -- it's kind of a dumb one, I guess. But I guess what we have known in theory, that you have been well-suited for it, is now evidencing itself in you being able to meet deadlines and deliver innovative plans and systems and products as opposed to some of the bad press some of the other -- very real, not theoretical, very real experience that others are experiencing.

So anyway, thanks for your good work.

At this time, there are no further questions. And this concludes today's Exponent Q3 earnings call. You may now disconnect. Thank you.