Exponent Inc (EXPO) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Exponent third quarter 2009 earnings conference call. (Operator instructions). This conference has been recorded today, Wednesday, October 21st of 2009.

It is now my pleasure to turn the call over to Brinlea Johnson of the Blueshirt Group. Please go ahead, ma'am.

Good afternoon, ladies and gentlemen, and thank you for joining us on today's conference call to discuss Exponent's third quarter 2009 results. Please note that this call is being simultaneously webcast on the investor relations section of the Company's corporate website at www.exponent.com/investors.

This conference call is the property of Exponent, and any taping or other reproduction is expressively prohibited without Exponent's prior written consent.

Joining me on the call today are Mike Gaulke, Executive Chairman, Paul Johnston, President and Chief Executive Officer, and Rich Schlenker, Chief Financial Officer of Exponent.

Before we start, I would like to remind you that the following discussion contains forward-looking statements, including statements about Exponent's market opportunities and future financial results that involve risks and uncertainties, and that Exponent's actual results may differ 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 periodic 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 2, 2009.

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 a result of new developments or otherwise.

And now I'd like to turn the call over to Paul Johnston, President and Chief Executive Officer of Exponent. Paul, please go ahead.

Thank you for joining us today as we report financial results for the third quarter of 2009. As we reported in our press release, total revenues in the third quarter were $55.2 million. Revenues before reimbursement, or net revenues, were $50.7 million. Net revenues excluding product sales increased slightly over the same period last year.

We are satisfied with this performance considering the general macroeconomic climate, ongoing softness in the automotive industry, and the winding down of our support of the U.S. Army's Rapid Equipping Force labs in Iraq and Afghanistan.

Net income in the third quarter was $0.39 per share, and EBITDA was $10.7 million. We are pleased to have delivered higher earnings per share and EBITDA margin as a result of effectively managing costs and repurchasing shares.

During the quarter, our business continued to be relatively resilient to the economic downturn, with the one major exception being the automotive industry. We have little business from both GM and Chrysler, and other clients in the automotive industry continue to focus on cost reduction.

In the remainder of our that is tied to litigation and insurance claims, we continue to have a steady flow of projects. In the portion of our business that is made up of more proactive services, we continue to get new engagements from most of our clients, but the tight corporate spending environment has had some effect on the size and volume of projects in this area.

As I discussed on last quarter's call, Exponent's contract with the Army's Rapid Equipping Force was due to expire at the end of September. During the second quarter, we responded to a request for proposal for future services using our commercial rates consistent with our prior contract. We were subsequently informed that the Army intended to issue a cost-plus-fixed-fee contract and to restrict the contractor from bidding on follow-on product sales. As a result, we informed the Army that we were not interested in performing the work under these terms.

In August, the REF awarded a new contract to another contractor. During the month of September, we wound down our support of the REF labs. We continue to get very positive feedback from the REF and other members of the Army about our work in support of our soldiers.

As a result, the REF has continued to contract with Exponent for the development of the vehicle-mounted ground-penetrating radar system to detect buried improvised explosive devices. In addition to the development, we have four engineers in Iraq and Afghanistan providing field support for the deployed GPR systems. We are pleased to be continuing our work with the Rapid Equipping Force on this important program.

Turning back to our third quarter performance, several business units performed well, including mechanics and materials, electric, human factors, and health sciences. The primary market drivers for these areas were products liability or regulatory compliance.

In summary, we posted a solid third quarter. And while our near-term outlook remains cautious, we are optimistic about the long-term opportunities that we are pursuing.

I'll now turn the call over to Rich for a detailed discussion of our financial results.

Thanks, Paul. As Paul discussed, we are satisfied with our overall performance in the third quarter considering the market environment. Total revenues for the third quarter were $55.2 million, as compared to $58.7 million in the third quarter of 2008. Revenues before reimbursements, or net revenues, as I will refer to them from here on, were $50.7 million, as compared to $51.8 million in the prior year period.

In the third quarter of 2009, net revenues from product sales in defense technology development were $500,000, as compared to $2.1 million last year. So, excluding product sales, third quarter net revenues increased 1%.

Net income for the third quarter of 2009 was $5.8 million, or $0.39 per share, based on 15 million diluted shares. This compares to net income of $5.9 million, or $0.38 per share, based on 15.7 million shares in 2008. EBITDA in the quarter was $10.7 million, flat with last year.

Our average technical, full-time equivalent employees in the third quarter were 627, flat with last year. We expect our headcount to be approximately the same in the fourth quarter.

In the third quarter, billable hours were 218,000, compared to 224, 000 in the same period last year. We realized an average billing rate increase of approximately 3.5% year over year. Utilization in the quarter was 67%, as compared to 69% in the same period last year.

As a reminder, utilization in the fourth quarter tends to be lower due to the number of holidays and vacation days taken. Based on our third quarter utilization and historical trends, we would expect our fourth quarter utilization to be approximately 61%. This will result in our full-year utilization being approximately 66%.

Net revenues in our defense technology development business were $2.7 million, as compared to $4.2 million in the third quarter of 2008. As mentioned earlier, product sales were down $1.6 million. Based on our current business outlook for this area, we expect fourth quarter net revenues for technology development to be greater than in the third quarter.

Hereafter, the percentages I will reference are on a percentage of net revenue basis.

EBITDA margin for the quarter improved to 21.1%, from 20.7% last year. We are pleased to have brought a greater percentage of revenue to our operating model. Total compensation expense for the quarter increased to $34.6 million. Adjusting for a deferred compensation gain, which is offset in miscellaneous income, compensation was only up 2%.

As a component of compensation, stock-based compensation expense for the third quarter was $1.7 million, slightly lower than the same period last year. We expect stock-based compensation to be between 7.5 and $8 million for the full year. Other operating expenses for the second quarter decreased 5% to $5.3 million as compared to the same period last year. As a component of other operating expense, depreciation expense was $1.1 million.

G&A expense in the third quarter decreased 29% to $2.4 million from the same period last year. These savings were the result of our continuing effort to effectively manage spending, and we benefited from approximately $200,000 of a bad debt recovery. We expect G&A expense to be approximately $3 million in the fourth quarter, which will continue our trend of significant year-over-year savings.

Reimbursable expenses for the third quarter decreased to $4.6 million as a result of lower product sales. Interest income for the third quarter was $93,000, as compared to $397,000 in the same period last year. Interest rates remain at a very low level, and we expect our interest income to continue to reflect these rates even with higher cash balances. Our tax rate for the third quarter 2009 was 39.9%, as compared to 40.8% in the same period last year.

Turning to the balance sheet, we closed the quarter with cash, cash equivalents and short-term investments of $57.3 million. We repurchased $4.7 million of common stock in the quarter. We have approximately $24.8 million still available for stock repurchases. Capital expenditures for the third quarter were $500,000. DSOs were 99 days. We expect this to be in the low to mid 90s by year-end.

In summary, we are pleased with our ability to manage our cost structure to adjust to the lower revenue growth we have experienced to date.

For the fourth quarter of 2009, we believe the demand for our services will remain relatively stable. However, we continue to see a tight corporate spending environment, especially in the automotive industry.

As a result of these factors, we are still expecting revenues before reimbursement for the full year 2009 to be approximately flat with last year. As a reminder, in 2008 we had high product sales in technology development, a favorable foreign currency exchange rate environment, and an extra week in the fourth quarter.

Now, I will turn the call back to Paul for concluding remarks.

Thank you, Rich. We are pleased that our unique position as a leader in assisting clients solve their most challenging engineering and scientific problems has allowed our business to remain relatively resilient through this economic downturn.

As we look to close out 2009, we will remain focused on delivering more value to our clients as we address their most complex technical issues, pursuing strategic growth initiatives -- including health sciences, product design, energy and defense technology development -- collectively adding new talent, managing staff and growing net headcount consistent with revenue growth, continuing to tightly manage our other operating and G&A expenses, and, finally, generating additional cash from operations, maintaining a strong balance sheet, and undertaking activities such as share repurchases to enhance shareholder value.

We remain confident in our ability to grow over the long term as we build upon our strong market position and add capabilities that allow us to help our clients with their future technological, health and environmental challenges.

Mike Gaulke is also joining us today for our Q&A session, and he continues to be actively engaged as Executive Chairman.

Now, I will turn the call over to the operator for your questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator instructions). Our first question comes from David Gold with Sidoti & Company. Please go ahead.

Hi. Good afternoon.

Hi, David.

A couple of question. One, first, Rich, can you walk us through the miscellaneous? I think you referenced it had to do with deferred comp, but can you just talk us through that a little bit?

Yeah. So, just a reminder, Exponent, like a lot of other firms, has a deferred comp plan that employees can defer compensation into. It has no effect on the bottom line, but when there are gains in the marketplace where those investments are directed, there's an expense to compensation. In this quarter, that was an expense of $880,000. And likewise, because there was a gain, that is offset by income down -- or a gain down in miscellaneous income. So, $880,000 of expense in compensation offset by $880,000 of gain down in miscellaneous income.

Last year, the market was down in the third quarter, so -- it was down by $440,000. And as such, there was a decrease to our expenses last year of 440 and a decrease to our miscellaneous income of -- or a loss there on that of 440. So, the swing over a -- from year to year is over $1.2 million -- $1.3 million, sorry. So, those are the numbers. Unfortunately, they make the accounting look a little weird, but they have no effect on the bottom line.

So, just -- I'm not completely clear. Okay, so I understand that it's presumably non-cash and really just a shift accounting wise, but what are we measuring? This is actual stock price?

Employees direct those funds -- what funds those are invested in just like any 401(k) plan or other. So, they're picking from a list of mutual funds that those are to be invested in, and those funds are invested in those mutual funds. And as those go up and down, that is reflected in compensation and miscellaneous income.

I see. I see. Okay. All right, so at the end of the day, to you guys it's neutral.

That's correct.

That's sort of an odd event, but it's just from an accounting perspective we should be conscious. Okay. And then, speak a little bit more on the REF. I think last conversation or maybe last call, the view was that you might have up to six more months of work on it.

Yes, David, this is Paul. I think what I'd like to do is have Mike describe what's going on with the REF in terms of follow-along work here.

Perfect. Thanks.

So, hello, David.

Hi, Mike.

Let me see if I can give a little more color here on our technology development business. The first observation I would make is that, although we saw a dip in tech dev revenues in the third quarter, that we are very encouraged with new pieces of work that we've landed and with both the near-term and longer-term opportunities we're pursuing.

Our contract for the support of REF's labs in Iraq and Afghanistan has ended, but our relationship with the REF as a client certainly has not. Paul and I recently met with the leadership of the REF and received very positive feedback on the work that we've been doing for them.

The REF has continued to fund our in theater support of GPR units to date, and we've been told to expect this work to continue. The GPR units in theater are working, finding IEDs, and most importantly, saving lives. Although we do not yet have a signed contract for the development of the next generation of GPR, active discussions are in progress.

In addition to this activity at the REF, we have recently received three new awards. The first is from the Natick Soldier Center for support of their future Warrior technology integration program. The second is for a redesign and updating of the MarkBot and supply of units to the Land Warrior program. And the third is for the Defense Manpower Data Center, DMDC, for additional work on smart cards.

Looking out on the near horizon, we are currently in discussions with several potential clients regarding their interest in ground-penetrating radar. These include, in the U.S., the Joint IED Defeat Organization, commonly known as JEIDDO, and the Special Operations Command, SOCA, and overseas with the British military, where I can tell you we have talks going on this week as well as with three other Northern European countries.

So, in summary, we're optimistic about the future of our technology development business. For the fourth quarter, we expect our revenues to be greater than they were in the third quarter, and we're definitely encouraged about the long-term opportunities for Exponent in this marketplace.

Okay. Then, sort of drilling that down a little bit more -- I mean, obviously prospects are fairly positive, then, it sounds like. As we sort of think about the roll-off based on what sort of (inaudible). The contract formally ended the end of the quarter. It felt like a less talk -- the new folks weren't ready maybe, weren't quite ready to get off the ground all that quickly, and so it felt like there would be some transition, to your point, in the fourth quarter. You said business -- you'll do more than you did in the third quarter. Is that something, though, from here we still think carries maybe through the March quarter, or is it just too hard to say?

This is Rich. Let me try to explain where we are with some of the contracting. While it was our understanding at the time that the REF would only fund things on our current work both for the labs and for the GPR system through the current contract through the end of September, well, our work in the labs did come to an end probably about the first week of October. Under that same contract or delivery orders, the REF and their contracting people have determined that they can continue to fund us for the GPR work, both having people in theater as well as continuing development, under that contract for about six more months.

Now, we've gotten some direction, obviously, to keep people working here in early October. And as Mike mentioned, the REF is currently indicating that they want to continue the field support out into 2010, at least through the first quarter, and they are talking about some significant amounts of work to continue the development of that program. So, while we don't have all those delivery orders and funding in hand, we are funded to continue doing the work we are for right now, with indications that in the matter of weeks to the next month or so, we would expect to be getting that turned on even further to do additional work.

I see. I see. Okay. So, from what maybe has become a new base, if you will, there'd definitely be some potential for -- even just on this contract or on the old contract, for business to pick up some or to lift.

Yes.

Okay. Okay. And then, just one other and then I'll let you be. I guess there was an announcement of late of some bids for Petroperu's refinery upgrade. And presumably, you guys were named as one of six there on the bidding front. A, I just wanted to see if you can sort of verify that, and then, B, presumably if there's color -- and I know it's hard, and I know you're one of six, but if there's color as to how significant that could be to you if your group won the bid on it.

David, this is Paul. You know, I don't think at this stage we're in a position to comment further really on the public information.

Okay. All right, fair enough. Thank you all.

Thanks.

Thank you. Our next question comes from Tim McHugh with William Blair & Company. Please go ahead.

Yes. First, following up on the technology development, some of these new contracts that you've won recently. Is it mostly consulting type of work? And what's the mix of product sales in there or the opportunity for product sales coming out of these? Anything in the near term you can see? And then, also, if you can touch on what you're expecting for Q4 for product sales.

Yes. This is Rich. First of all, in those pieces of work, I think they're a combination of things. The work for the Land Warrior program is some further development work in the robotics area around the MarkBot systems that we had done in the past, but these are some additional development in those and delivery of some units. So, those will really be more on a, call it, time and materials consulting basis, while there will be the delivery of some units that will really be treated in that way.

The other two pieces for work, for Natick Soldier Center and DMDC in the smart card area, are both primarily -- they will be treated as consulting work, as well. We've worked with both of those entities in the past, and this will be a continuation of that type of work.

As far as the overall product sales, we expect to see somewhere in the 500 to $750,000 in net revenues from product sales in the fourth quarter.

Okay. And then, on the weakness in the auto companies still, I guess it's not surprising it's still continuing at this point, but do you see any light at the end of the tunnel, any things you see in terms of litigation claims or other changes that suggest to you you'll see a pick up in that over the next six months or something like that?

Tim, this is Paul. You know, I think what we're seeing is that there's kind of a -- some kind of a shift, to some degree. Much of the work we do for the auto companies is, obviously, products liability litigation, and the focus of those lawsuits is also a moving target, because essentially the -- those who are engaged in suing companies where they can't collect anymore in terms of past claims, like GM and Chrysler and so forth, are in the process of redirecting their efforts.

And I think that what we find is that when you look at a broader set of clients, including the trucking industry, including the regular automotive industry with foreign and domestic manufacturers, and then you include the off-road vehicle manufacturers and then you include their supplier chain and dealers, what you find is that there's essentially emerging maybe a new set of -- or a new paradigm with regard to how some of this products liability litigation is going to be handled.

So, when we look at a broad range of -- if we think broadly about our automotive business in terms, as I say, including trucking suppliers and off-road vehicles and so forth, we have had actually remarkable stability in the area. But, we have to recognize that some of our longer-term clients have -- we've had a reduction in the amount of work we receive from them.

Okay, thank you.

Thank you. Our next question comes from Frank Atkins with SunTrust Robinson Humphrey. Please go ahead.

Hi, this is Frank in for Tobey. Good afternoon.

Hi, Frank.

Hi. Quick question. Could you -- I guess in your prepared remarks, you talked a little bit about the bill rate up, I guess, 3.5% year over year. Could you give a little more color in terms of is that some mix shift in there or halving of rates? Kind of any color you could give there would be great.

This is primarily out of bill rate increases that we put in place at the beginning of the year of 2009. So, we evaluate the market for each one of our consultants during the fourth quarter of each year and put in place rate increases based on those individual consultants' growth as well as the market they're serving and put those in place as of January 1. So, these have been reflected in our first three quarters' performance, where we've been able to realize this bill rate increase and continue to realize it in the third quarter.

Okay, great. And could you -- quick numbers question. Could you give us a breakout of engineering and scientific versus environmental and health?

Yes. You want that on a gross revenue basis? What are you looking for, segment sort of data?

Yeah, gross revenue is fine.

Okay. In the — for the third — let me see here. Pardon me, just getting my sheet. So, for the third quarter, we had — I'm sorry. Yes, I had $41 million for other scientific and engineering and $14.2 million for environmental and health.

Okay, great. And can you give us a quick update on the Europe REACH business? How is that faring? Kind of what's going on there?

Frank, this is Paul. That's continuing to move forward quite nicely. Most of the REACH services we do are out of our sort of food and chemicals practice and mostly from our work in the United Kingdom, and that's one of the faster growing areas at the moment. It's one of the areas that we have sort of indicated is in the strong performance area within the sectors that we talk about.

Okay, great. And I guess one final question. Could you talk a little bit about the competitive landscape and how you're viewing either consolidation in the space or your use of cash looking forward?

Well, let me just talk about sort of the competitive landscape. I think that from the standpoint of our firm, first of all, I think one needs to recognize that we are really rather unique. We don't have -- there aren't other companies that have the same mix of disciplines across as broad a range as we have. And so, as a result, we kind of provide potentially a different service that there are not many -- really no others to compete directly at that level.

However, within individual practices, certainly there is competition. But, having said that, I don't think there's been a big change from that standpoint this year or in the past quarter. The one place where that might be a little different would be among those experts who tend to support the automotive industry, where clearly there's been a reduction of work, particularly with the big three domestic auto suppliers. And as a result of that, I think there is certainly more difficulty with regard to pricing and so forth in that area.

But, other than that, Rich has described overall our pricing increase, and I think that's a reflection of where we stand in the competitive environment.

All right, great. Thank you very much.

Thank you. Our next question comes from Joseph Foresi with Janney Montgomery Scott. Please go ahead.

Hi, guys. My question here is, what can you tell us about the other bidder on the REF labs contract? Is that someone that you're familiar with seeing on deals, and have you seen them on more deals? Just maybe some color on what the competitive landscape is there.

Well, the winner on that contract, Joe, was a firm called I3, Innovative -- Ideal Innovations?

Innovative, Inc. Innovations.

Yeah, Innovation, Inc. And they have been a contractor for the REF, so they're known to the REF. We know them, as well. And they are a typical contractor to organizations that you would see of the REF size in government. I think that's about all I can say about them.

Yeah. I mean, just have you seen them more on deals, or do you -- I mean, I'm just trying to get a feel for -- or was this a one off, or is it not unusual to see something like this happen?

No, I would say it's not unusual in the sense that they have a relationship and know of the services that we've been providing to the REF, so they were in, from that standpoint, a good position to be an alternative to us being a service provider.

But, I don't know of us seeing them as competitors in other work that we've gone after, no.

Okay. And then, just kind of -- I know that your service offerings are kind of different than the competitors and it's sort of a unique company in general, but it seems like at least the stock market would tell you that things are maybe getting a little bit more stable and a little bit better. If you could just talk a little bit about any improvements you might be seeing in the business. I know that -- you know, we could talk about it ex maybe the auto work that you do. Any signs that we could point to that might tell us the direction of things heading into next year?

Yeah. So, Joe, this is Paul. I mean, I think -- first of all, I think it's important to recognize that, unlike a lot of other companies, we didn't go really down through this big dip, and so we've been sort of -- as Rich has indicated, we expect to have sort of flat revenues for the year. So, for us, there's not -- we don't see such big turns as you might see in other companies, where you see it really turn down and you see it really turn back up again. For us, it's certainly a little bit more stable.

Certainly the auto, as you've indicated, is sort of an example on that side. I think there are some signs of other areas that have shown improvement for us. Probably the best one to look at would be what we see on the civil construction structures side. That's an area that we talked about in previous calls and being affected by just the downturn in construction, downturn in activity. And I think from our standpoint, we certainly feel that the corner has turned with regard to that area of our firm.

Aside from that, that was -- I mean, really that and the auto industry are the main two things we pointed to before. I think you sort of see things a little bit more selectively in certain industries maybe coming back a little bit before others. There's some evidence of upturn in medical devices, as an example.

Has litigation picked up at all in the construction side of things?

Yes, I would say so. I mean, certainly from our standpoint, our construction business has significantly improved this quarter.

And then, just lastly, maybe you could remind us. I think we talked about the area of the auto business and what you saw as potentially being affected. Maybe you could just talk about the percentage of revenue that you get from the auto companies, the percentage that was potentially affected, and maybe what you think is probably still at risk from that particular area.

Yep. This is Rich. As we have indicated before, we were doing 2% to 3% of our revenues for GM and Chrysler combined prior to the bankruptcy, so that part of the business has been sort of taken out, at least in the short term. As Paul has indicated, as client -- or as plaintiffs change their approach to where they might go after and do litigation against suppliers and others, that work may shift around.

Also, I would say, overall we do in the automotive industry -- a high single digit percentage of our business overall is for the sort of automotive transportation industry in those broader sectors that Paul described earlier.

And then, just one last question I'm going to sneak in. As we look to next year -- and this may be premature, and stop me if it is, but do you still plan on sort of the standard rate increases at the beginning of the year and the focus on utilization, or is it still sort of too early to kind of take a look at that?

Yeah. What we are doing, and we do every year, is during the fourth quarter of the year, we do a bottoms-up planning approach to the following year. And actually, that really starts with rates and looking at the individuals we have in our organization and where they are in the marketplace. We're going through that right now, and we'll be working through that the rest of the quarter in looking at where we can realize some price increases. Clearly, there's a lot of different individual performances as well as markets there.

Based on the market out there, general feeling at this point in time is we'll end up being able to realize overall a price increase. It'll probably be a little less than we've been able to do in the past, but I do believe there are areas that we're going to be able to realize that just because of the growth of our staff and our market position.

As far as what we will end up doing, clearly one of the focuses during this planning process is -- because we did see our utilization step down this year, one of the focuses for the practices as they go through their planning is how can we manage the business to see improvement in our utilization, so we do -- our expectation going in or the expectations we're sitting on now is that we would like to see a slight improvement in utilization next year.

And then, we'll have to -- the third factor really in there is can we do that with headcount growth, and we are, at least at this point in time, early in planning. There are clear plans by our practices to grow their headcount next year. How fast that is, we still need to sit down and work through with each of them, but we are getting indications that there will be some price increase, some improvement in utilization, and some improvement in headcount. But, I don't want to speculate at this time how strong each one of those will be. We need to sit down, and we do with each of our 20 different practice or center leaders, and go through where their business is and the timing of those additions here in the next couple of months.

Thank you. Our next question is a follow-up question from the line of Frank Atkins. Please go ahead.

Hi. Three quick numbers questions. Do you have CapEx, cash flows from operations and bad debt for the quarter? And any comments on the collections environment?

Yes. So, the first question was -- let me see if I got it. CapEx was $500,000, cash flow from operations was $7.5 million, and the bad debt expense that flowed through G&A was approximately -- was about $50,000 in expense.

And as far as the collections environment, I -- look, I think it's -- I tell our people I think we've definitely got to be on our game more and keep an eye on things. Fortunately, our work has tended to be for top law firms, Fortune 500, 100 type companies typically, but clearly there are places that we get involved with many others in industry, and sometimes [imbed] your company type of matters.

So, we are and have spent time with our principals. We had our principals meeting a few weeks ago, and just reminding them of the need to continue to monitor the clients' status as they are going through the projects, and to don't just assume -- that's usually been in the past -- that we'll eventually get paid, because it tends to be a slow payment process in this litigation business, which means you sort of need -- I think today you just need to stay on top of it more.

But, if we do that, I think we'll -- right now, my feeling is we'll be all right. We've seen a few more bankruptcies and a few more people who are slower paying, but it hasn't been material.

Great. Thanks so much.

Thank you. (Operator instructions). One moment, please, for the next question. Our next question comes from Sean Jackson with Avondale Partners. Please go ahead.

Yeah, good afternoon. The question I have is, as you look forward, I mean, what needs to take place, either within your business or macro related, for you to get back to historical growth rates? And if, in fact, it's just a better macro environment, when would you need to see that?

Well, this is Paul, Sean. I think that we've always -- we've sort of talked about our historical growth as being high single digit to low double digit, and as Rich sort of described, we're not yet sort of done with our planning for next year, so it's a little early to say exactly where we're going to come out next year. We certainly expect to get back into a growing environment next year based on where we see things now.

I think that what we see is that there -- as I described earlier, I think the first signs of some of these changes -- we've seen the change in the construction and the building industry already starting to occur. We've seen some other industries change. The medical device was just sort of an example of that. I think we're still looking for some of the other mainline clients, like utilities and automotive work, to get back -- to kind of get over the current situation. And so, from that standpoint, I think it really does come back to sort of corporate spending.

Our litigation work is really already there, apart from the automotive industry, so I don't think there's really a very big change we're looking for there. We're just looking for corporate earnings to kind of be at a point where their spending is more in a traditional way as opposed to the way it's been for the past several quarters.

Okay. Are there any specific areas that you can point to that you're doing work in that has the potential at least to increase irrespective of the macro environment?

Well, I think the -- yeah, the regulatory compliance work is -- we've seen that continue to be strong. I talked a little bit earlier about what we're doing with REACH, but that's only an example of the sort of regulatory compliance area that we think is growing, not just there, but throughout health and the environmental business.

So, I think that there are opportunities there from a regulatory standpoint that can come about. I mean, that gets driven by what I talked about previously in terms of greater funding for regulatory agencies and greater enforcement.

Okay, thank you. That was helpful. And lastly, just real quick on your G&A expense for the quarter, remind us again why it was down for the quarter and expect it to be up again.

Yeah. Sean, we were in a position that's sort of been, across the board for us, a little bit less in almost all categories. If it was our recruiting sort of expenditures, we just had -- obviously net headcount is lower, so recruiting expense was lower. Clearly, we've been more careful about spending money on overnight travel. Not only have people been trying to be very careful about the dollars they're spending when they do travel, but minimizing that where possible, trying not to leave off business development, but clearly being much more conscientious of the expenses.

In addition to that, several of our service vendors we've been able to negotiate to keep the prices either flat or down with last year, so we've been able to cut some costs there. And then, lastly, we were able to -- the bad debt expense was $50,000 versus about $250,000 last year. So, it really was across many different categories that we were able to realize that gain.

Okay. Now, fourth quarter, I think you said, was going to go up sequentially to $3.0 million. Is that right?

Yeah. We tend to find -- if you take a look, we tend to see that the fourth quarter, for just a matter of what's going on in the business area -- conferences, other events and such, and just the timing of expenses -- we tend to find that the fourth quarter tends to step up. I wouldn't expect that we'll have bad debt be quite as low, because that was only $50,000 instead of, let's say, $250,000. So, if you bring the normalized more up to -- last quarter up to 26, you talk about $400,000 to $600,000 more in expense in there. That's what we would typically find going from Q3 to Q4. So, last year I think we were at $3.8 million. We'll still be down $600,000 to $800,000 below that level.

Okay. Thank you.

Yep.

Thank you. Our next question comes from the line of Rob Ammann with RK Capital. Please go ahead.

Yeah, just a housekeeping question. I'm wondering if I could get the FTE split between engineering and scientific and environmental and health.

Sure, Rob. Turning to that, let's see, FTEs for the quarter were -- we've got in other scientific 457, and in -- that leaves us with 170 in environmental health.

And then, hours as well, if you have it, or utilization?

Yeah. So, the hours for engineering and scientific were 161,000, and the hours for the environmental health were 57,000.

Okay, great. Thank you.

Thank you. And at this time, I'm showing no further audio questions. This does conclude the Exponent third quarter 2009 earnings conference call. You may access the replay system anytime by dialing 303-590-3030 or 1-800-406-7325 and entering the access code 4171146. We thank you for your participation, and you may now disconnect.