Exponent Inc

NASDAQ:EXPO

Earnings Call Transcript 2020-Q2

[Operator]

Good day and welcome to the Exponent’s Second Quarter of Fiscal Year 2020 Earnings Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Whitney Kukulka. Please go ahead.

[Whitney Kukulka, IR]

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent’s second quarter of fiscal 2020 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/investors. This conference call is the property of Exponent and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Dr. Catherine Corrigan, President and Chief Executive Officer and Rich Schlenker, Executive Vice President and Chief Financial Officer.

Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to Exponent’s market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.

Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent’s periodic SEC filings, including those factors discussed under the caption Risk Factor in Exponent’s most recent Form 10-Q. The forward-looking statements and risks in this conference call are based on current expectations as of today and Exponent assumes no obligation to update or revise them, whether as a result of new developments or otherwise.

And I’d now turn the call over to Dr. Catherine Corrigan, Chief Executive Officer. Catherine?

[Catherine Corrigan, President & CEO]

Thank you, Whitney and good afternoon, everyone. Thank you for joining our call today. I hope that all of you and your loved ones are staying healthy and safe. When we last spoke at the end of April, Exponent was in its fifth week of most employees working remotely. And now we've entered our fifth month. We are pleased with the responsiveness of our employees and the adaptiveness of our company to today's uncertain environment.

Clients continue to call upon Exponent to address their challenges and to evaluate their opportunities despite the rapid change and unpredictability that the pandemic has infused into their operating plans. The fundamentals of our business remain strong, and we continue to operate in a position of financial strength. While net revenues declined 12% in the second quarter, we were able to deliver earnings per share of $0.31, ends the quarter with $190 million in cash and no debt and to reiterate our intent to continue quarterly dividends.

The demand for Exponent’s interdisciplinary solutions is adorable. As company continue to innovate and deploy increasingly complex products and systems. At the same time, society is focused on safety, health, sustainability and reliability requires a rigorous science and data driven analysis, which are hallmarks of Exponent’s more than 50 years of service. Our agility in assembling and deploying diversely skilled teams, drawing upon more than 800 highly credentialed consultants across a vast array of disciplines has manifested itself yet again, as we advise clients on a variety of issues prompted by COVID-19. Exponent has a long history and strong track record of delivering for all of our stakeholders, as we are confident in the resilience of our business and in our ability to deliver growth over the long-term.

Exponent’s, engineering and other scientific segments represented 78% of the company's second quarter net revenues. Net revenues in this segment decreased 15% in the second quarter as compared to 2019. Business restrictions associated with COVID-19 caused project delays across multiple areas of this segment. The most substantial impact occurred to our litigation support work for the transportation industry, with most assignments paused due to court related delays. At the same time, we continue to see strengthen integrity management advisory services for the utility sector, as clients focus on power reliability, in particular during the impending fire season in the Western United States.

Exponent’s environmental and health segment represented 22% of the company's second quarter net revenues. Net revenues in this segment decreased to 2% in the second quarter as compared to 2019. This segment also experienced delays in projects for the transportation industry, as well as the oil and gas industry. Within these segments to chemical regulation and food safety practice continued to grow in both the United States and Europe, as our scientists evaluated the effects of chemicals and new products on human health and the environment, including disinfectants for the novel coronavirus.

Exponent responded quickly and carefully to address the unprecedented challenges created by the pandemic. We have successfully adapted and will continue to evolve our business development, recruiting and operational approaches yielding benefits both during and after this crisis. We have accelerated our sharing of in-depth scientific and regulatory knowledge through webinars and thought leadership pieces, which has fostered new client relationships and projects.

We have shifted all recruiting activities online, allowing us to reach a more geographically expansive set of candidates. The health and safety of our team remained top priorities and therefore we have leveraged our internal expertise to start this protocols that allow us to safely continue laboratory activities and resume human participants studies.

Our business continuity plan and robust infrastructure have empowered productive remote work and employees continue to work from home unless they are performing laboratory testing or inspections. Our leadership team has responded with enhanced internal communications to encouraged increased productivity across the firm. We are pleased that Exponent has been able to effectively address client's needs with a mostly remote workforce. The relaxation of business restrictions in June allowed us to resume laboratory testing, inspections and human participant studies for clients in non-essential industry.

Field inspections of sites and products have increased due to lifting of travel restrictions, but are still occurring at a reduced level since many businesses are not fully operational. We successfully completed multiple human participant studies in June, utilizing our enhanced health and safety protocols. Demand for these studies continues to grow, but some are delayed because of uncertainty surrounding COVID-19 related restrictions. We remain optimistic about the long-term growth of this area.

We continue to receive new retention for litigation support, and work is ongoing for many existing matters. At the same time, trial dates continue to be delayed, removing imminent deadlines and causing some clients in particular the automotive industry to pause work. Courts have been experimenting with virtual bench trials as well as social distancing for in person trials. So we expect trials will gradually increase overtime.

We are pleased to be sharing our scientific and regulatory knowledge on health and safety issues related to the novel coronavirus. We have been engaged by clients to provide regulatory support in the United States and Europe as they register their new or existing biocide products. We have also been advising clients on occupational health and safety concerns including COVID-19 testing, contact tracing and disinfecting as they strive to protect their employees, customers and students.

Furthermore, we have leveraged our breadth of disciplines from chemists and physicists to engineers to evaluate decontamination products from hand sanitizers to ultraviolet light. The world is in the midst of the most widespread and formidable health crisis in modern history. Yet organizations around the globe recognize the imperative to move forward. Exponent’s unparalleled expertise, innovative capabilities, and geographic coverage position us as a go to resource for answers in this complex environment.

I'll now turn the call over to Rich to provide more detail on our first quarter financial results and to discuss business activity in the first three weeks of the third quarter. Rich.

[Rich Schlenker, EVP & CFO]

Thanks, Catherine, and good afternoon, everyone. As I did last quarter, I will start by providing details of Exponent’s financial results for the second quarter. And then, I will pivot to discussing our performance in the first three weeks of the third quarter. At this time, we cannot reliably provide revenue and earnings guidance due to the high degree of uncertainty as a result of business, travel, social distancing in court system restrictions imposed due to COVID-19. Please note that all comparisons will be on a year-over-year basis unless otherwise specified.

For the second quarter of 2020, total revenues were $92 million down 14% and revenues before reimbursements or net revenues as I’ll refer to them from here on were $87.9 million down 12%.

During the second quarter, our work for PG&E, related to the wildfires and integrity management of their electric power infrastructure remain to be 4% to 5% of net revenues. We expect this work for PG&E to continue in the third quarter at the same or slightly lower level, and then step down gradually overtime.

In the second quarter, our work related to the coronavirus was approximately 1% to 2% of net revenues. For the first half of 2020, total revenues decreased 4% to $198 million and net revenues decreased 3% to $187.6 million. Net income for the second quarter was $16.3 million or $0.31 per diluted share as compared to $21 million or $0.39 per share in the same period last year.

In the second quarter, Exponent recognized a tax benefit from share based awards of $900,000 as compared to no tax benefits for share based awards in the same period last year. EBITDA in the quarter was $22.8 million or 26% of net revenues as compared to $29.6 million or 29.5% of net revenues last year.

For the first half of 2020, net income decreased 2% to $42.6 million and earnings per diluted share were $0.80 as compared to $0.81 per share in the first half of 2019. Year-to-date, the tax benefit from share based awards was $9.7 million as compared to $5.7 million in the same period last year. Year-to-date, EBITDA was $47.8 million or 25.5% of net revenues as compared to $53.4 million or 27.6% of net revenues in the first half of 2019.

Turning to some of the key metrics, for the second quarter, billable hours decreased 15% to 299,000. Year-to-date, billable hours decreased 5% to 647,000. Utilization in the second quarter was 64%, which is down 12 percentage points from 76% in the same period last year. In April and May, our utilization was approximately 60%. As business and travel restrictions were relaxed in early June, our utilization rose to the mid-60s.

During the final three weeks of the quarter, we had a large human participant study, which increased the utilization to the low to mid-70s. This study was completed by the end of the quarter, and at this time, we do not have an equivalent size study scheduled for the third quarter. For the first half of the year, utilization was 68%, which is down 6 percentage points from 74% in the same period last year.

We continue to expect our long-term annual utilization to be in the mid-70s. As we build more critical mass in our offices and practices and expand our service offerings. Technical full time equivalent employees in the quarter were 899, which is up 1% year-over-year and down 4% sequentially. This sequential decline in FTEs was primarily due to the divestiture of our German entity, which accounted for 3% of our headcount in 2019 and in the first quarter of 2020.

We continue to have strong employee retention and are building a backlog of qualified candidates, some of whom will begin work in the third quarter. We will continue to focus hiring where there is strong demand in areas of strategic growth. In the third quarter, we expect sequential headcount growth to be 1% to 2%.

For the quarter, the realize rate increase was 2.5%. For the quarter compensation expense after adjusting for gains and losses in deferred comp, declined 4%. Included in total compensation expense is a gain in deferred compensation of $11 million as compared to a gain of $2.2 million in the second quarter of 2019. As a reminder, gains and losses in deferred compensation are offset miscellaneous income and have no impact on the bottom line.

The primary reason compensation declined is the bonus accrual was $3.3 million less, which is consistent with the fact that our bonus accrual is 33% of pre-tax pre-bonus income. Additionally, as our business has been partially impacted by government imposed COVID-19 restrictions, we were eligible for an employer payroll tax credit of $1.6 million through the employee retention program in the CARES Act.

For the third quarter, the payroll tax credit is expected to be substantially less as restrictions have been relaxed. Stock-based compensation expense in the quarter was $3.5 million as compared to $4 million in the second quarter of 2019. Other operating expenses decreased 5% to $7.7 million in the second quarter. Included in these expenses is depreciation expense of $1.7 million. The primary reason these expenses declined is we have reduced activities in our offices and labs.

For the third quarter, as lab activities have increased, other operating expenses are expected to be approximately $8.3 million or equivalent to the same period last year. While we are uncertain when our employees will return to the office full-time, we do believe our office environment provides long-term value as it supports collaboration of our interdisciplinary teams and staff development, which results in higher value for clients and retention of employees.

In the second quarter, G&A expenses were $2.9 million, which is a year-over-year decrease of 45%. These lower expenses are primarily the result of less travel related to marketing and recruiting. For the third quarter, as we increase online marketing, recruiting and development activities, we expect G&A expenses to be $3.3 million to $3.6 million as compared to $5.5 million in the third quarter of last year.

Interest income was $300,000 as compared to $920,000 in the same period of 2019. The lower interest income is due to a steep decline in interest rates. For the third quarter, we expect interest income to be approximately $250,000.

Miscellaneous income for the quarter after adjusting for deferred compensation was $990,000 as compared to $920,000 in the same period last year. For the third quarter, we expect miscellaneous income to be approximately $800,000. Inclusive of the tax benefits per share based awards, Exponent’s consolidated tax rate for the second quarter was 23.7% as compared to 27.2% in the same period last year. For the first half of 2020, the tax rate was 6.2% as compared to 16.2% a year ago. For the third quarter, we expect our consolidated tax rate to be approximately 27.5%. In the second quarter, operating cash flow was $48 million capital expenditures were $1.2 million.

During the quarter our accounts receivables improved to $109 million on July 3, as compared to $127 million on April 3. Exponent has not experienced a material deterioration and our receivables, our collections due to the current crisis. Additionally, we expect the remaining $3 million of PG&E accounts receivables related to the bankruptcy to be paid in the third quarter of 2020.

Year-to-date, we distributed to shareholders $20.1 million through dividend payments, repurchased $40 million in common stock at an average price of $62.91 and closed the period with $190 million in cash and short-term investments and no debt. In late May, Exponent announced that its Board of Directors authorized an additional $45 million in share repurchases, increasing the company's current authorization to approximately $75 million. We have a strong balance sheet, active repurchase program and intend to continue to pay quarterly dividends.

Turning to the current activities. Again, at this point, we cannot reliably provide revenue and earnings guidance due to the high degree of uncertainty as a result of business, travel, social distancing and court system restrictions imposed due to COVID-19.

Well, it is a limited data set. This preliminary average utilization for the first three weeks of July was 68% as compared to 75%, for the same period in 2019. For the three week period, we estimate this year-over-year change in utilization equates to a 5% to 8% decline in net revenues. Assuming the estimated third quarter operating expenses I have provided and if net revenues for the entire third quarter were decline year-over-year 5% to 8%. Then EBITDA margin as a percentage of net revenues would be approximately 24% to 26% as compared to 27.2% in the same period last year.

For the third quarter modeling purposes, we estimate that a $1 million increase or decrease in net revenues which is equivalent to approximately 1% of last year's third quarter net revenues would generate a correspondingly 30 basis point to 40 basis point change in EBITDA margin.

It should be noted that Exponent’s bonus accrual is one-third of pre-tax and bonus income, and as such employees and shareholders are aligned in their desire to maintain profitability. Despite the unprecedented drop -- backdrop, Exponent has retained its employees, remained profitable and ended the quarter with $190 million in cash and no debt.

Exponent has a sustainable business model and intends to continue our quarterly cash dividend payments. While we cannot predict the magnitude or the duration of the disruption caused by the pandemic, we believe we are in a position of strength.

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

[Catherine Corrigan, President & CEO]

Thanks, Rich. As society continues to raise its expectations for safety, health, sustainability and reliability and products and processes continue to grow in their technological complexity, Exponent will evolve to stay ahead of the curve. These market drivers have powered Exponent’s growth for over 50 years and has led to increased demand for our interdisciplinary solutions despite periods of macroeconomic turbulence.

We have been nimble and pragmatic in our response to new market dynamics under the unpredictable and rapidly evolving backdrop associated with COVID-19. I am proud of our employees for responding with the same seriousness, intellectual rigor and fast paced analysis that we have employed for over 50 years. We remain focused on three things health and safety of our people, demonstrating leadership by continuing to solve our client's most pressing problems and delivering value to shareholders.

Operator, we're ready for questions.

[Operator]

Thank you. [Operator Instructions]. And we'll take our first question from Tobey Sommer from SunTrust. Please go ahead.

[Tobey Sommer, SunTrust]

Thanks. [Indiscernible] different kind of impact on those from the closures and the travel restrictions, just trying to understand how that some of the factors impacting the business might be disparate across the [indiscernible]? Thanks.

[Rich Schlenker, EVP & CFO]

Yes. When I start-off with a few quantitative numbers and then give a comment and then Catherine could step in. So there is a difference definitely here because of the strength in our chemical regulation and food safety practice as well as the long-term nature of the litigation sort of in the environmental segment. That segment, the revenue -- net revenues were down 1.8% versus the net revenues in the other scientific and engineering segment being down 14.9%. So I definitely had a different impact across that those areas. So wanted to let turn it over to Catherine, she might have some further comments about how the litigation environment has affected the business and why that's different across the segments.

[Catherine Corrigan, President & CEO]

Yes, thanks, Rich. What we see vis-à-vis the litigation side is a couple of things. So the engineering side of the house is definitely impacted in a more significant way by that and one of the reasons for that is the nature of the work being driven to some extent by site and product inspections.

So those due occur on the environmental and health side, but they're not nearly as prevalent as part of the workflow. And so the travel restrictions and the scheduling delays in -- let's say product liability litigation, so this is going to impact our vehicle engineering practice. This is impacting our biomechanics practice, in touch with human factors practice, these are all going to come into that engineering and other scientific segments.

In addition to that the courts themselves, it's interesting, they are starting to experiment with withholding trials. But the trial side of the equation is probably at least based on my own experience, only about 1 in 20 cases or so maybe it's going to get to trial. But what really drives the activity is the setting of a trial date. And we've seen an interesting trends over the course of the quarter, where judges are definitely putting the trial dates onto the calendar, they're a little ways out but we're seeing those and that is driving the schedules.

That will drive the discovery schedule that will drive the product inspection schedule and things like that. So some of the trends we've seen on the engineering side overtime is that we are able to get out and do more of those inspections. We are also seeing an improved flow of depositions of our experts that are occurring. This has been kind of a key breakthrough.

Three months ago when we spoke, the idea of doing virtual depositions was not very well received by the legal community, they didn't like the idea of not being in the room with their expert when those depositions happened. But now the idea of a virtual expert deposition is very much accepted.

I've even got one on my calendar that I've got to do in the next month. And so we do anticipate on that engineering side, because the inspections are being unlocked, because the depositions are being unlocked, because the trial dates are being put on the calendar that were -- we're optimistic that we will continue to see that the gradual improvement that we saw over Q2 and that that's going to continue into Q3.

[Tobey Sommer, SunTrust]

Could I ask you from a broad perspective, what's your current assessment of demand deferral versus destruction and how does it compare to when we spoke with 1Q result?

[Catherine Corrigan, President & CEO]

Yes. Thanks, Tobey. So I think that the data we're seeing now in terms of workflow, really is consistent with the observations that we made three months ago. We were early on back then in that first three weeks or so we haven't seen much in the way of outright cancellation of work what we did see was the pause button being hit in a significant way.

And we talked about a few particular areas, we talked about our human participant studies, we talked about things related to litigation that I just described, we talked about lab works for non-essential businesses. And so what's happened over the course of the quarter and even into the first three weeks of Q3 is that we've seen the demand that pause button if you will being led up on more and more in each one of those areas.

So like when I think of our user experience research, there's quite a bit of demand that we're seeing now that we have been able to resume activity in our Phoenix User Research Center. We've worked very hard with our internal teams to develop the health and safety protocols that we need in order to have human participants into our facility to take an advantage of the fact that we have expertise in disinfection and in the chemistry and in the human factors and in the material that we need to be able to use in terms of PPE and things like that.

And so, we're seeing clients continue to open new projects in that area. We had certainly a reduction last quarter in the sort of new projects inquiry flow. But what we've seen over the course of the last three months is that that is gradually improving. So I continue to believe that what's going on now is fundamentally and primarily due to this pausing effect as opposed to necessarily a canceling effect. It's different across different industries. There's some difference across even different clients. If you think about in the consumer electronics space, this is considered a non-essential industry in many of the restrictions, we are able to get back in the lab now some of those restrictions have been lifted, but you find that different clients are coming back into that at somewhat different speeds in terms of what they're doing, but we are seeing continued demand.

[Tobey Sommer, SunTrust]

Perfect. If you could just elaborate a little bit more on kind of projects that the industry and customers are pausing reactive, proactive -- any kind of color you can give us there. And then I'm curious if you could also make a comment on M&A which is not been a frequent occurrence at the firm but you would see like disruption of this nature could [honor some of them]? Thanks.

[Catherine Corrigan, President & CEO]

Yes, great. So first let me address the little more specifics on the automotive industry. So the majority of the work that we do for the auto industry is on the reactive side, product liability litigation as well as defect investigation recall related work. The area that has been most impacted is the product liability litigation.

And there it's interesting because what we're seeing is that those clients are taking advantage of the delays in the trial schedule. As we know, there are a number of the automotive manufacturers were manufacturing cars for a substantial period of time. And so they're taking advantage of the opportunity to delay their legal spend. And so if the court is not pushing with a trial date, what they have done is asked us to pause the technical workup on the matters that were engaged in.

We have not seen any rush to settle cases at any different rate. They still fully intend to take cases to trial where they believe they should be taking them to trial. It seems to be strategically making those decisions in the same ways. But they are taking advantage of the delays because of the court system. And then you had asked about M&A as the second part of that. Richard, so something perhaps that you want to comment on it little bit.

[Rich Schlenker, EVP & CFO]

Yes. So look, I think it is from an M&A standpoint still a little bit early on in entities figuring out where they've settled down and how things are looking. We're not necessarily seeing a distressed sale going on at this time, we know that depending on where people's business are they've been more impacted than others by the pauses or restrictions that have been put in place.

What we are seeing though is opportunities to do senior recruiting. We're working very hard at that. We've hired one or two that's not necessarily going to move the needle, but we are putting as much effort into that as we ever have into the senior recruiting area, because we know that people who are normally been the star in their organization, if that organization is not performing as well, there tends to be a plan to sort of treat everybody equally in some of those organizations in and what we're looking to do is engage with those individuals that maybe we've been following or talking due for a while. But we're comfortable where they were and now maybe come less comfortable and so that has led to more open discussions which we hope will materialize themselves over the next 12 months.

[Tobey Sommer, SunTrust]

Thank you very much.

[Operator]

We will now take our next question from Alexis Huseby from D.A. Davidson. Please go ahead.

[Alexis Huseby, D.A. Davidson]

Hi, Rich. Hi, Catherine. Thank you so much for taking my questions.

[Catherine Corrigan, President & CEO]

Thanks, Alexis.

[Alexis Huseby, D.A. Davidson]

So on the German entity divestiture, I just wanted to make sure I have this right. It accounted for 1% of revenue but 3% of headcount, is that correct?

[Rich Schlenker, EVP & CFO]

Yes, those are the – that was approximately right. That was the business that had lower, a lower revenue per headcount than our core business. It's one of the reasons that it didn't really have a good long-term fit for us it was more in the design engineering business which tends to have a much lower rate per employee. So that's why those differentiated from each other.

[Alexis Huseby, D.A. Davidson]

Got it, okay. And then in the past you've alluded to the possibility of cross-selling your integrity management services to other utilities and so with fire season approaching now, are you seeing that become a reality?

[Catherine Corrigan, President & CEO]

Yes, thanks, Alexis. So we are -- it's interesting just this morning our team did a very successful webinar on this exact topic .We had about -- it was definitely over 100 attendees from across quite a few of the major utilities. So we are seeing -- we are scratching the surface on that I would say in terms of what we are offering and what we are winning with other utilities.

There is some ongoing work that has benefited outside of the PG&E work that we have been successful in selling. I look forward to this team really doubling them on those marketing efforts. It has been a focus from the standpoint of our business development and our renewed virtual marketing efforts, if you will, and this webinar today is a perfect example of that. So getting some traction, getting the word out and hoping that we can increase that over time.

[Alexis Huseby, D.A. Davidson]

Great. Okay, thank you. And then just one more for me, on the hiring pipeline and probably you could kind of talk about -- thank you for the co-insight on the pipeline right now and also for the next quarter. I was looking to compare the pipeline as it stands today to make up the size, I know you generally recruit over some of your [indiscernible] compare as it stands today to may be the end of 2019?

[Catherine Corrigan, President & CEO]

Yes, thanks, Alexis. It's interesting, what we have been doing is undergoing a process of conversion into the virtual recruiting environment. So our pipeline, it's fairly good. I mean, what we've seen vis-à-vis our recruiting events, which we have had to pivot to doing virtually is that the attendance at those runs well into the hundreds, which is substantially more than we would typically get in a single university recruiting events. So we're able to have a sort of a more expansive geographic outreach. We're being very careful however, with regard to decisions about who we are going to formally interview.

We're very focused on ensuring that the interviews are happening and the hiring is happening in areas where we've got good demand in the business and our strategic area going forward. We've had good success with that. I would say from the standpoint of just the overall competitiveness of the job environment. There are -- folks are coming out of universities, they're coming out of PhD programs, they are actively looking. So I think our pipeline is quite healthy. We've not really seen a reduction relative to 2019 in the sort of interest level vis-à-vis the top of that funnel, but what we are doing is applying a bit more of a filter to ensure that we are optimizing the amount of interviewing and hiring that we are doing.

[Alexis Huseby, D.A. Davidson]

Okay, thank you so much.

[Operator]

We will now take our next question from Sam England from Berenberg. Please go ahead.

[Sam England, Berenberg]

Hi, guys, thanks for taking my questions. And the first one you mentioned and you've seen 1% to 2% of revenues coming directly from COVID-19 so far. I just wondered how you're expecting that to grow in the second half if you expect it to grow from here.

[Catherine Corrigan, President & CEO]

Yes.

[Rich Schlenker, EVP & CFO]

Yes, I think -- go ahead Catherine. Go ahead.

[Catherine Corrigan, President & CEO]

I think that, we're going to be dealing with COVID-19 for a long time. And I think there are some different areas, that the initial area where we've seen the biggest amount of activity is absolutely on the chemical regulation side, this is all of the registration work, and things like that, as well as the health and safety advisory, we’re interpreting the various guidance and regulations, helping our clients with contact tracing sort of those immediate things, as well as products related issues.

So this could be devices that are using ultraviolet light for decontamination, or these can be diagnostic devices that are being used for COVID-19 testing. Those are the types of things we're seeing now, but I believe that overtime for example, we're going to see the litigation ramp up substantially that that takes time to get going.

We're already seeing activity around some of the class actions. We’re seeing trends in the legal arena around business interruption type of disputes. So there are some trends that we're seeing that we believe are going to drive that, if it was 1%, 1.5%, 2% of revenue in Q2, I do think that we're going to see is an increase overtime.

I don't think we're going to be at 10% of revenues related to COVID. But I think a couple of percent of revenue -- certainly -- I think there is just possibility to get to a low to mid single-digit kind of area and as we track it, but that will take some time and it will take the litigation to develop, I believe an order for that to happen.

[Rich Schlenker, EVP & CFO]

Yes, I also think -- I think that is as over the near-term, I think where some of that will come from is that, it's really on the occupational medicine side and related to contact tracing and sort of behavioral management and trying to keep people social distancing at work. So those are a combination of integration of technologies, data management and analysis. And obviously, the health science around it and how that's changing, so I do expect and we are seeing an increased demand in that areas clients are trying to find where they are going to actually get a -- be able to make a safer environment for their employees, customers and students in the academic environment.

[Sam England, Berenberg]

Great. Thanks so much. And then on the international business, I just wondered whether the recovery that you've seen there has been similar to the curve you've been in the U.S., they've been slower they’ve been faster to come back from the [indiscernible] differences?

[Rich Schlenker, EVP & CFO]

Yes, so, it was interesting. I think we said on the first quarter call that in Asia, clearly our employees had been working from home and that operation had been really impacted in the February, March timeframe only being 3% of our business over in Asia wasn't a major impact. But it was an indicator. We have seen those employees returning to the office and labs in the middle late March and we're starting to see activities pick up in April.

By late April and into May, we were -- especially in Shanghai saw that business at a full level of activity exceeding where we were at even in late 2019. Our clients are unable to travel over there. They were in the process of restarting operations. And so the demand in our services picked up at that time, and has been holding at a pretty strong level ever since.

In Hong Kong, which is about a third of the revenues over in Asia that activity is well picked up a little bit slower because their activities there due support a lot of manufacturing that goes in -- on in southern China, which means transit in and out of -- into Shenzhen and back, which is not permitted at this time. But still we saw business picked up substantially in those areas.

So that's Asia responded well, it was a good indication of what happens when non-essential businesses came back. And what we did see is that occurred when we began to be able to do work for non-essential businesses in our labs and travel in June in our business here.

So it did replicate itself over we saw those activities sort of bounce back in early June and that was similar to what we had seen over in Asia. In Europe, our business is primarily related to the chemical regulation and food safety business. Those employees not only -- they're not out in the field that much, they're going to go to a meeting or something of that type.

So they were -- first able to continue all of their business working remotely. There they were also then seeing increased demand for emergency use registration on disinfectants and other things that were coming into the market in Europe. And so that area actually saw strength in what they were doing in Europe. And we have not seen really any led up of that over that period of time.

So that's what we're seeing from our international offices, I would say and it was interesting is that European operation is one where no matter how hard the U.K. or Europe got hit during the last recession in -- beginning in ‘08 and moving through that area continued to show us double-digit growth back through that period of time. So it's good to see that their strength is holding together again.

[Sam England, Berenberg]

Great. And thank you so much. I’ll leave it there. Thanks.

[Operator]

[Operator Instructions]. And we will now take our next question from Marc Riddick from Sidoti. Please go ahead.

[Marc Riddick, Sidoti]

Hi, good afternoon.

[Rich Schlenker, EVP & CFO]

Hey, Mark.

[Marc Riddick, Sidoti]

I wanted to – first I want to thank you for the detailed and color that you provided around some of the things that you are experiencing. Can you tell us what if you can follow up a little bit more on some of the commentary you had around the court activity and the timing of how now getting the docket that seems to jumpstart certain things so and wanted to share a little bit of detail around. Are there any particular jurisdictions that have been more active than others? And sort of it and how far out are we looking at [trial dates] being set, then seeing set other activity and maybe a little bit of setting a finish line, I guess, putting others into motion?

[Catherine Corrigan, President & CEO]

Yes, thanks, Mark. So it's a bit, it's a bit all over the map. And that's -- I mean, that almost literally because there are 50 States. And a significant portion of the litigation work that we do is for cases that are venued in at the State Court level. There are some that are at the Federal level. But I would say at least three quarters maybe more are going to be at that State level.

So we see a range, there are some that have fair look, we don't anticipate getting back to jury trials until, let's say, January. But there are others were a name you've got trial dates that are on the calendar that are official, that are going to be in September or that are going to be in October.

And so we were seeing that you know, that might be -- Texas, for example is generally more aggressive than maybe some of the northeastern states and things like that.

Now, whether those dates will actually hold is a real question. I mean, these are places where there were jury files that were listed for July. That -- I mean judges are famous for holding on to their trial dates and not getting that continuance until literally the day before.

And actually that's a good news for us, because it's the setting of the date for the trial that drives the activity. And what very often happens is that the settlement happens on the courthouse steps.

And so we're monitoring, literally state-by-state, so that we can get a sense of when we think these various cases are going to go, the Federal Courts are a little more -- a little more on the conservative side, but from what I'm seeing you're seeing dates that are being pushed later into the Fall maybe the early 2021, but they're going to be driving activity back because once you set your trial date, okay, your exhibits are going to be due a month before that, and there's going to be a settlement conference a month before that, and then the expert deposition deadline is three months before that, and so we can drive activity back for three to six months.

[Marc Riddick, Sidoti]

Okay, that's really, really helpful. Thank you. I wanted to switch gears on the back -- I want to go back to the commentary around the 1% to 2% of revenue. And I'm assuming that was for specifically for 2Q, as far as the percentage of revenue related to COVID, correct. That was for Q2 --?

[Rich Schlenker, EVP & CFO]

That's correct. That was for Q2, that’s correct.

[Marc Riddick, Sidoti]

Okay. So, I was wondering how those types of opportunities developed. I was wondering if you could share some thoughts as to how that might shape your view as to current practice areas. Are there the practice areas that you think will develop from what you're seeing here? And are there things and opportunities that you – you think you're well suited for or things that that might drive your recruitment accrued, other practice areas is too like sort of think along those lines too early as you say decline [indiscernible]?

[Catherine Corrigan, President & CEO]

Yes, so I think that in terms of developing a new practice, I mean, we -- when we think about our practices those are really based on folks training and scientific experience. But I do think COVID-19 opens up sort of market opportunities. And one of the things that Rich mentioned is something that's definitely worth reiterating and is an area that we have -- had already been active in even before COVID-19 hit.

And that is this area of health monitoring. Rich mentioned some of the contact tracing and sort of behavioral proximity monitoring, kinds of opportunities that wearable technology presents, but it also presents an opportunity to get early signal for symptom tracking and for physiological signs tracking.

And so with our experience around large scale data, data strategies, large scale data collection, data analytics, health sciences, we believe that we can pull together a differentiated expertise and offering that would incorporate not only the proximity monitoring, the contact tracing, but also the health component.

We're unique in that, we've got the health sciences expertise, we've got the occupational medicine expertise. We've also got the electronics expertise, we've got the data analytics expertise, so that's been an area one thing that we're -- I mentioned a lot about doing webinar on an increased digital marketing presence. And that's one example of an area specifically around COVID-19 where the need has become more acute and we believe that we -- that we have opportunity.

[Rich Schlenker, EVP & CFO]

Yes, I think Mark that, that's, that's probably as we look at our society and where it's going probably one of the biggest opportunities is we're clearly going to be pretty much all of us wearing wearables monitoring our health in the future and it's an area that Exponent has been getting some work in, but viewed as a large business opportunity before we knew anything about COVID-19 and is to be insight.

So we are very fortunate there to reiterate what Catherine said of what we had already been doing in the area, how we can hire in and data analytics, human factors and in the health area to continue to -- in this time, what you'd love -- where you want to be is for strategic areas are getting supported, so that you can continue to hire and do that.

And we do have that market support to be able to do that. I do think another area is that I -- we always talk about how society is continuing to grow is demand for a safer, healthier environment for especially around human health. And this just brings them real microscope on to the issues of human health and such and I think people are going to be more interested in how businesses if that's the airline industry, the cruise industry or hotel any if were – in the hospitality industry is going about disinfecting its environment and protecting it, those people who come into it.

So as we've mentioned, Exponent has some of the top experts in those areas of biologic chemistry, human health and so this is an area that we are continuing to recruit in. And I think even beyond coronavirus here we're going to see increased demand from society to I have companies focused in this area.

[Marc Riddick, Sidoti]

Okay, that's great. Thank you. And then one last one for me. I was thinking about the food regulatory part of the offerings and overseas and I was wondering is there anything that you're the working on there or that you've seen there that you think might be transferable to around other places in the world, particularly, I was sort of thinking along the lines of some of the COVID-19 related impacts in food safety and global supply chain and protein, some of the things that you've seen and warehouses that I think I wonder if there's anything that you think is as transferable to other portions of the world that you're already working on over there? Thanks.

[Rich Schlenker, EVP & CFO]

Yes, so just to be clear, our chemical regulation and food safety practices probably one of our strongest from a global footprint standpoint, we have equally strong team in the U.S. and a few people in Asia. So we are doing the work I described about going on in Europe. We're also doing here in the U.S. as well. I do -- absolutely a long-term focus of society is protecting the quality of our food system. And Exponent views that as an area of growth. Catherine, you may want to talk about even from a supply chain standpoint some of the webinars and thought leadership that's been around that from our team.

[Catherine Corrigan, President & CEO]

Yes. I think that's right, Rich. I mean, that's one of the areas not just in food but supply chain issues, even more broadly are an area of impact clearly across multiple industries. And by way of example, one of the things that we're seeing in Asia is clearly disruptions to the supply chain and our ability to have boots on the ground in Asia, when our clients are not able to travel over there, we've been able to help them vis-à-vis their supply chains, whether that's from the standpoint of going into their suppliers factories, identifying quality issues, there are issues particularly with food when your ingredients.

They only have a certain shelf lives and your -- if your supply chain has been impacted and things are delayed how do you even think about managing that to ensure that you're utilizing an ingredient that's going to be safe and -- or if it's a drug, and that it's going to be effective and things like that.

And so, we've been able to engage in that in the – across a variety of industries that could be a battery manufacturer, there's a certain chemistry that needs to be used and the sort of robustness of the supply chain becomes very important.

Supply chain becomes very important vis-à-vis COVID-19 testing and COVID-19 vaccine development, yes, you can develop a vaccine. But if you don't have a billion glass vials to put it in or if you don't have the billions of slobs that you're 3D printing or any sort of disruption anywhere along that supply chain can create -- can really wreak havoc on the delivery of the final product. And so that is an area that we are involved in across a variety of industries.

[Marc Riddick, Sidoti]

Thanks. And I really appreciate all the color. Thank you very much.

[Catherine Corrigan, President & CEO]

You're welcome.

[Operator]

And we have no further questions. This does conclude today's call. Thank you for your participation. You may now disconnect.