A N N U A L R E P O R T 2 0 1 3
ecology and
environment, inc.
Global Environmental Specialists
ecology and
environment, inc.
Global Environmental Specialists
Financial Highlights
2013
Fiscal year ending July 31,
2011
2012
2010
2009
(In thousands, except per share amounts)
Revenue
$ 134,937
$ 155,410
$ 169,173
$ 144,098
$ 146,081
Net (loss) income attributable to Ecology and Environment, Inc. $ (2,130)
$ 774
$ 6,960
$ 4,258
$ 5,221
Net (loss) income per common share:
basic and diluted
$ (0.50)
$ 0.18
$ 1.65
$ 1.02
$ 1.27
The table above reflects the difficulties that Ecology and Environment, Inc. (“EnE” or the “Company”) faced in fiscal year 2012
and especially 2013. But it only tells part of the story. Your company is a solid, capable organization of talented professionals
with good business prospects in a challenging and evolving world.
Balance Sheet Data
Working capital
Total assets
2013
2012
As of July 31,
2011
(In thousands)
2010
2009
$ 34,288
$ 38,511
$ 41,979
$ 38,950
$ 36,142
81,682
97,512
94,268
79,959
77,808
Long-term debt and capital lease obligations
451
591
2,138
1,695
815
Ecology and Environment, Inc. shareholders’ equity
43,544
48,146
50,034
44,864
41,051
Cash Dividends Paid
$ 2,037
$ 2,047
$ 1,815
$ 1,684
$ 1,546
From Our CEO
I face the future with confidence. We have a technically broad professional staff and
skilled managers at all levels. I know this first-hand because I have worked with them
over the decades to develop and prove this capability. Our project experience is
vast, diverse, and relevant. It spans tens-of-thousands of assignments, successfully
completed.
Our business model is simple: provide our clients with insights and value for their
dollars. We work with our clients so they can realize that value. This I believe is the
recipe for success.
Your Company In Transition
For the second consecutive year EnE reported declining financial results. A loss of
$2.1 million for fiscal year 2013 (FY13) was due primarily to a $6.3 million increase
in reserves for a doubtful China contract receivable and a $0.8 million software
impairment charge.
As outlined in the Chairman’s letter sent to shareholders September 24, 2013, the
Board of Directors took decisive remedial action designed to improve operating
efficiency. The new management team is continuing an aggressive cost reduction
review initiated late in the fiscal year by fiat from the Board to the previous
management. Mr. Strobel, then Executive Vice President of Technical Services, led
the initial effort, which continues into fiscal year 2014. Several non-performing
programs were discontinued, one was sold, our staffing numbers have been
reduced, and costs are being contained. The benefits of lower costs will be realized
in the coming fiscal year.
The structure and efficiency of management is under review. We expect that in the
coming months responsibilities will be re-aligned to better utilize our resources for
evolving market opportunities.
1
EnE offers a broad scope of services.
Our mission: helping our clients in making a better world.
Our company’s markets are evolving. Climate change, linkage to extreme weather
events, and global economics are shaping public debate. Wind, solar, and other low
carbon energy sources and their infrastructure are altering the traditional global
energy market. Concomitantly, acceptance of projects by public and political
entities is trending toward meeting a higher standard of a “Social License.”
Global warming concern, albeit controversial, has shifted the energy market to low-
carbon and no-carbon sources and retrofitting or replacing high carbon sources for
energy generation.
Cheryl A. Karpowicz, AICP
A senior vice president and certified
planner, Cheryl has 35 years of
experience with EnE.
EnE has helped solar developers permit
and build projects powering 4,400 MWs
of clean, renewable energy in 15 states.
This includes our current work on the
Solar Star project in California which,
when completed in 2015, will be the
world’s largest solar power plant.
2
New energy sources require new
transmission infrastructure to
connect to consumers. Our electric
transmission work nearly tripled in
FY2013. EnE has now worked on
11,000 miles of electric transmission
projects. We are engaging
stakeholders and soliciting input on
siting opportunities and constraints
for the 750-mile, +600 kilovolt
high voltage direct current Plains &
Eastern Clean Line Project.
EnE has been involved in 200
pipeline projects around the
world totalling over 60,000
miles of pipeline. In FY 2013, our
pipeline sector grew by 50%.
EnE has worked on more than
400 wind energy projects in 37
states and helped clients develop
facilities that can produce 5,821
MWs of renewable electricity.
3
In states such as California and New York, with the Monterey and Marcellus
shale deposits, we are working with both government and industry to frame
best practices for natural gas and oil extraction and bring solid science to these
emerging issues.
For the US Department of Energy (DOE) National Energy Technology Laboratory,
EnE is preparing an environmental impact statement for DOE’s proposed cost-
shared funding of the Lake Charles Carbon Capture and Sequestration (CCS)
project, which captures carbon dioxide from an industrial facility in Louisiana for
use in enhanced oil recovery in Texas.
EnE’s Brazilian subsidiary has permitted 2,970 MWs of clean hydropower to help meet
Brazil’s growing energy needs while protecting sensitive ecosystems.
Traditional nuclear energy generation and new small modular reactors (SMRs) are
part of the low carbon mix. EnE is providing environmental services for license renewal
of operating reactors—including Callaway and Braidwood—and licensing of the
proposed Fermi 3 nuclear power plant.
4
EnE has been involved in preventing and countering natural and
potential man-made extreme events for over 30 years.
EnE was awarded a seven-year contract by the United States Environmental
Protection Agency (EPA) in July of 2013. EnE will provide technical assistance
for emergency response to spills, extreme events, and remedial actions, as well
as preventative and preparedness activity. The service area includes Alaska,
Washington, Oregon, Idaho, Hawaii, and Pacific Ocean territories.
Tim Grady, P.E., vice president (26 years) and regional manager Dave Albers, P.E.,
(24 years) have led positive impact projects as part of EnE engineering support
services, fourteen of which have received awards for excellence from the ACEC,
American Council of Engineering Companies. They are posed with the award
for a river project that: “Is a pioneering effort that integrated environmental
restoration with economic growth along the shoreline.” In 2013 we received the
ACEC’s highest level Diamond Award for innovation for the Golden Triangle
Natural Gas Storage Project in Beaumont, Texas.
Dhroov M. Shivjiani, P.E.
Dhroov, a 27-year employee, is
the program manager for the
EPA contract in Seattle.
5
Global scale extreme events, along with practical economic
considerations, test the resiliency, adaptability, and sustainability
of human and environmental communities.
EnE served as lead planning consultant for the development of four regional
sustainability plans as part of New York State’s pioneering Cleaner, Greener
Communities program. This represents a cornerstone of economic development
initiatives that will build sustainable and resilient communities across New York
that capitalize on the interconnectedness of energy, economy, jobs, environmental
quality, and quality of both urban and rural life. We received three planning awards
for our work.
Gerard A. Gallagher, III
A senior vice president, Gerard has
worked at EnE for 33 years.
6
EnE leads the preparation of five community reconstruction zone plans as part of
the New York Rising Community Reconstruction Program, which helps communities
affected by Superstorm Sandy, Hurricane Irene, and Tropical Storm Lee to build
more resilient communities to better withstand future storms. Our extensive
community engagement program supports communities as they seek to reinvent
themselves; and not just rebuild, only to face disaster again with the next storm.
NAVY is particularly sensitive to addressing
the social concerns of the community.
For the United States Navy, we prepared environmental assessments to address
emergency shoreline erosion control and beach repair at Joint Expeditionary Base
Little Creek-Fort Story, Virginia and repairs to the shoreline protection system at
Naval Air Station Oceana, Dam Neck Annex, Virginia. Our shoreline protection work
is helping NAVY to protect the public’s military assets.
We support NAVY bases on both coasts with innovative planning and
environmental management programs. We work with our NAVY clients to prepare
planning studies that address emerging encroachment challenges both at sea and
at shore-based facilities. Our work in encroachment planning has helped NAVY to
sustain and preserve military readiness.
EnE is preparing five environmental impact statements (EISs) for the NAVY. Projects
in California, Rhode Island, and Pennsylvania involve the disposal of excess property
and reuse by a local redevelopment authority using smart-growth principles.
Peggy Farrell
A regional manager, based
in Virginia Beach, with EnE
for 27 years.
7
EnE’s mission is to help our clients in making a better world and,
importantly, to engage and communicate concepts in language
that the community understands.
In a study of 190 projects by the Goldman Sachs Investment Group, 73% of delays
were the result of environment, politics, and/or stakeholder-related issues. Affected
communities and stakeholders take for granted that an applicant should minimize
potential negative impacts. They want more. They want the project to make a
positive impact on their world.
For large actions and projects, the permit process can, in effect, morph into
a social license to operate. Because of global interconnectedness clients are
finding that outreach
and accommodation can
enhance their reputation
in the world financial and
political communities.
EnE, especially its South
American subsidiaries, is
experienced in helping
clients accommodate this
developing trend.
We help clients shape
project concepts into
strategies that dovetail
a social license to the
in-field activities needed
to acquire environmental
permits and approvals.
For Alcatel Lucent Submarine Networks (ASN), EnE
planned and conducted public outreach prior to the
cable landing in Playa Salgar, Colombia. Our team
delivered an interactive, user-friendly presentation that
was praised by meeting attendees and gave ASN and
its customer proof of compliance with this condition
of approval.
Nermin Ahmad
Nermin, a senior policy analyst
and 29-year employee, manages
our New York City operations.
8
In Ecuador, we prepared a sociocultural investigation for a proposed mining
exploration project that intersects the territories of two important indigenous
communities: the Shuar and Saraguro. The investigation followed the
International Finance Corporation’s performance standards and provided an
ethnographic description of the traditional and ancestral characteristics of the
social and economic organization of the indigenous communities.
In Uganda, we work on archaeological, paleontological, anthropological, paleo-
biological cadastral, and social investigations for oil and gas exploration initiatives.
Investigations are conducted to a high standard of care since much of the project
area is in national parks and wildlife refuges.
Development proponents are devoting greater attention to health, as well as
environmental and social issues. Our work under a RESPOND (response and
capacity-building) contract with the United States Agency for International
Development (USAID) provides technical services that build local capacities to
respond to pandemic and zoonotic disease outbreaks in hot-spot locations in
Africa, South America, India, and Southeast Asia. We provide expertise in outbreak
response and help to develop public/private partnerships with extractive, mining,
and oil and gas industries to establish disease monitoring and response programs.
EnE subsidiary Gustavson
employees examining drilling
core samples. Subsurface
resource evaluation and
reserve evaluations are key
parts of mega-extractive
developments. Gustavson’s
experience spans the globe.
9
EnE subsidiaries encompass Spanish- and
Portuguese-speaking South America.
“To unite the Americas in bonds of prosperity and peace.”
– Theme of the Pan-American Exposition, 1901 – Buffalo, New York
Ricardo Katz
Gestion Ambiental
Consultores (GAC), Chile
Our presence in South America is squarely in
some of the most attractive markets in the world.
Projects in our Brazilian offices range from electric
transmission – notably high voltage, long distance
lines connecting hydropower to the electric grid –
to mining and offshore oil development. In Chile, we
are preeminent in mining. In Peru, we work closely
with industry to sensitively develop the country’s oil
and gas resources, as well as to develop mining and
other infrastructure projects. We have planned and
permitted several telecommunications systems in
countries ringing the continent.
Maria C. Mato
Maria is international business
development manager focused on
South America and Africa.
Gonzalo Morante
Walsh Peru, S.A.
Ivan Telles
Ecology and Environment
do Brasil, Ltda.
Paulo Mario Correia
de Araứjo
Ecology and Environment
do Brasil, Ltda.
Mark Thurber
Walsh Ecuador
10
Gran Condor Hotel at
the Quito International
Airport - Ecuador
Environmental and
socio-economic
impact assessment.
Kuntur Gas Transporter, Peru
Impact assessment involving
the broadest, most complex,
and sensitive citizen
participation program to
date in Peru.
North America
Population: 528.7 million
Area: 9.54 million sq. miles
South America
Population: 387.5 million
Area: 6.88 million sq. miles
AMX Submarine Fiber Optic
Cable System- Brazil, Mexico,
Colombia, and Dominican Republic
Feasibility study and permitting
support for increased demand for social
communication networks.
Andina Expansion Project, Chile
Environmental impact statement
to expand copper production
in the Valparaiso and Santiago
Metropolitan Regions.
11
Chairman’s Observations
Times, they are a changing. We are in the midst of a sea change of social,
political, and economic reality driven by science, public awareness, and economic
uncertainty. To our company and clients it means significant challenge but also
opportunity.
Concepts that are at the forefront of public discourse, such as the scope of the
energy landscape, global warming (a.k.a. climate change), extreme natural and
man-made events, sustainability, resiliency, adaptation, and social license, are
increasingly influencing our clients’ planning and decision-making. Presented
briefly in this report are “snapshots” of our corporate and government contract
activity that illustrate our capabilities to address the evolving needs of our clients.
For the first time in this Annual Report, we include the faces of several of our
operating managers. These folks represent the future of EnE. We have a solid core
of leaders, fully capable of guiding our company as we continue to evolve to meet
today’s challenges.
It is our mission to support and help our clients in making a better world, and we
appreciate the support of our shareholders. We have a history of dividends that
demonstrate our commitment that our shareholders should also share in our
successes.
Frank Silvestro
Chairman of the Board
12
Selected Consolidated Financial Data
Operating data:
Revenues, net
(Loss) Income from operations
(Loss) Income before income tax (benefit) provision
2013
Fiscal Year Ended July 31,
2011
2012
2010
2009
(In thousands, except per share amounts)
$ 134,937
$ 155,410
$ 169,173
$ 144,098
$ 146,081
(898)
(968)
4,784
12,386
9,893
9,445
4,398
12,755
10,459
9,450
Net (loss) income attributable to Ecology and Environment, Inc.
(2,130)
774
6,960
4,258
5,221
Net (loss) income per common share (basic and diluted)
(0.50)
0.18
1.65
1.02
1.27
Cash dividends declared per common share
(basic and diluted)
Weighted average common shares outstanding
(basic and diluted)
$ 0.48
$ 0.48
$ 0.46
$ 0.42
$ 0.39
4,247,821
4,233,883
4,222,688
4,160,816
4,115,921
Fiscal Year 2013 Operations Summary
Overview
Our income before income tax provision decreased $5.4 million
(122%) to a loss of $1.0 million for fiscal year 2013. Revenue less
subcontract costs, which is a key performance measurement for
our business, decreased $13.2 million (11%) during fiscal year 2013,
due mainly to:
• lower project work volumes in energy and mining sectors
within our domestic and certain of our foreign markets; and
• higher net reserves for contract adjustments recorded as a
reduction of revenue, which were required for projects in
China and northern Africa.
During the fourth quarter of fiscal year 2013, we recorded a $0.8
million software impairment charge related to certain software
modules that do not meet the needs of users that rely on the
system and will not provide any future service potential. The
software impairment charge is further described in Item 1 of this
Annual Report.
Lower revenue less subcontract costs and the software impairment
charge noted above were partially offset by:
• lower professional service costs and other direct project
expenses as a result of lower project work volumes and other
managed reductions in technical staff levels; and
• lower indirect expenses due primarily to managed
reductions of staff levels in various administrative, marketing
and other indirect departments.
13
Liquidity and Capital Resources
Despite an operating loss for the fiscal year ended July 31,
2013, we maintained a strong liquidity position during the year.
Cash generated from operations was $11.9 million, which was
adequate to fund investing and financing activities required to
maintain our operations. Cash and cash equivalents decreased
$1.0 million during fiscal year 2013 primarily due to $2.0 million in
dividend payments paid to shareholders during the year, which
were not required for operations, but which were approved on a
discretionary basis by the Board of Directors.
During fiscal years prior to 2013, we expended significant resources
and working capital on contracts in the Middle East and China,
which resulted in significant billed contract receivables that were
not collected during those years, and which required additional
borrowings from our existing lines of credit. During January 2013,
we collected $7.1 million of cash related to contract receivables in
the Middle East, which enabled us to reduce amounts outstanding
under our lines of credit.
We believe that cash flows from U.S. operations, available cash
and cash equivalent balances in our domestic subsidiaries and
remaining amounts available under lines of credit will be sufficient
to cover working capital requirements of our U.S. operations during
the next twelve months and the foreseeable future.
Our foreign subsidiaries generate adequate cash flow to fund their
operations. We intend to reinvest foreign cash balances, net of
any dividends paid from our foreign subsidiaries from time to time,
into opportunities outside the U.S. If the foreign cash and cash
equivalents were needed to fund domestic operations, we would
be required to accrue and pay taxes on any amounts repatriated.
Cash and cash equivalents activity and balances are summarized in
the following table.
Fiscal Year Ended July 31,
2013
2012
2011
Cash provided by (used in):
Operating activities
$11,943,124 $ (360,288)
$ 1,010,791
Investing activities
(2,557,656)
(5,533,398)
(2,822,924)
Financing activities
(9,950,867)
7,988,123
(4,057,705)
For the fiscal year ended July 31, 2013, cash provided by operations
resulted primarily from the following net activity:
• Net income (after adjustment for non-cash items) provided
$4.8 million of operating cash;
• Lower net contract receivables provided $7.2 million of
operating cash, which resulted primarily from $7.1 million of
cash received on aged outstanding receivables in the Middle
East; and
• Other working capital activity resulted in a net use of $0.4
million of operating cash, due primarily to lower work levels
associated with lower revenue and to general reductions of
current liabilities as a result of an improved liquidity position
at the Parent Company.
Net cash used in investment activities during the fiscal year ended
July 31, 2013 primarily resulted from the following activity:
• Purchases of property, building and equipment resulted in a
use of $1.8 million of cash; and
• Acquisitions of noncontrolling interests in two majority-
owned subsidiaries, Walsh Environmental Scientists &
Engineers, LLC (“Walsh”) and Gustavson Associates, LLC
(“Gustavson”) resulted in a use of $0.6 million of cash.
Net cash used in financing activities during the fiscal year ended
July 31, 2013 primarily resulted from the following activity:
• Net repayment of borrowings against our lines of credit
of $5.8 million, which was made possible by the receipt of
$7.1 million of cash on aged outstanding receivables in the
Middle East;
• Repayments of debt and capital lease obligations of $0.9
million,
• Dividend payments to common shareholders of $2.0 million;
and
• Distributions to non-controlling interests of $1.5 million.
We maintain unsecured lines of credit available for working capital
and letters of credit. Contractual interest rates ranged from 2.5% to
5% at July 31, 2013 and July 31, 2012. Our lenders have reaffirmed
the lines of credit within the past twelve months. Our lines of credit
are summarized in the following table.
Effect of exchange
rate changes on
cash and cash
equivalents
Net (decrease)
increase in cash and
cash equivalents
(457,711)
(156,509)
52,486
Balance at July 31,
$(1,023,110)
$ 1,937,928
$(5,817,352)
Cash and cash equivalents, by locaion:
U.S. operations
$ 6,244,053 $ 4,398,921
$ 5,602,946
2013
2012
Outstanding cash draws (recorded as
lines of credit on the accompanying
consolidated balance sheets)
Outstanding letters of credit to support
operations
$ 6,528,691
$12,309,335
3,080,938
2,615,415
Foreign operations
3,200,607
6,068,849
2,926,896
Total amounts used under lines of credit
9,609,629 14,924,750
Total cash and
cash equivalents
$ 9,440,660
$10,467,770
$ 8,529,842
Remaining amounts available under
lines of credit
24,759,371 19,444,250
Total approved unsecured lines of credit $34,369,000 $34,369,000
14
Revenue, net
Revenue, net and revenue, net less subcontract costs, by business
entity, are summarized in the following table.
Fiscal Year Ended July 31,
2013
2012
2011
Gross revenue by entity:
EEI and all of its
wholly owned
subsidiaries
$ 82,358,140 $ 85,150,365 $108,596,221
EEI’s majority-owned subsidiaries:
Walsh Environmental
Scientists &
Engineers, LLC
(“Walsh”)
Ecology &
Environment do
Brasil, Ltda
(“E & E Brasil”)
Gestion Ambiental
Consultores S.A.
(“GAC”)
28,263,579
39,295,981
39,230,040
15,125,046
15,702,130
11,740,335
10,640,382
11,298,271
8,112,753
ECSI, LLC (“ECSI”)
4,869,394
5,539,993
5,299,482
• Lower E & E Brasil revenue was primarily due to weakening
of the local currency (Reais) against the U.S. dollar. In the
local currency, revenue for E & E Brasil increased 9% during
the fiscal year ended July 31, 2013, primarily due to higher
revenues in the energy transmission sector.
• Higher GAC revenue less subcontract costs was primarily
due to a significant decrease in subcontract costs, which was
partially offset by lower sales volume in the mining sector, as
a mining project completed during fiscal year 2012 was not
renewed or replaced during fiscal year 2013.
• Lower ECSI revenue primarily resulted from lower sales
volume in the mining sector, as a mining project completed
during fiscal year 2012 were not renewed or replaced during
fiscal year 2013.
Net reserves for contract adjustments recorded as an offset to
revenue are summarized by region in the following table.
Fiscal Year Ended July 31,
Region
2013
2012
2011
United States, Canada
and South America
$ 73,534 $ (355,643) $ (326,678)
Total
141,256,541 156,986,740 172,978,831
Middle East/Africa
(72,024)
1,314,058 3,669,649
Less: Net reserves for
contract adjustments
recorded during the
period
(6,319, 650)
(1,576,641)
(3,805,971)
Asia
Totals
6,318,140
618,226
463,000
$ 6,319,650
$ 1,576,641 $3,805,971
Revenue, net per
consolidated
statements of income $134,936,891 $155,410,099 $169,172,860
During fiscal year 2013 we recorded $6.3 million of resources for
contract adjustments related to project in China.
Revenue, net less subcontract costs, by entity:
EEI and all of its
wholly owned
subsidiaries
$ 69,691,641 $ 72,290,708 $ 97,255,198
EEI’s majority-owned subsidiaries:
Walsh
20,796,180
26,003,190
23,739,544
E & E Brasil
13,778,136
14,433,459
9,967,276
GAC
ECSI
Total
7,327,335
6,620,988
6,112,245
4,621,818
5,323,216
4,578,631
$116,215,110 $124,671,561 $141,652,894
Fiscal Year 2013 Versus 2012
The overall decrease in consolidated revenue less subcontract costs
for the fiscal year ended July 31, 2013, as compared with the prior
fiscal year, resulted from the net impact of the following entity
activity:
• Lower Parent Company and wholly-owned subsidiary
revenue resulted from lower sales volume, particularly within
domestic state and federal government markets.
• Lower Walsh revenue primarily resulted from lower sales
volume, particularly within the energy and mining sectors in
its U.S. and foreign markets.
Operating Expenses
Overview
The cost of professional services and other direct operating
expenses represent labor and other direct costs of providing
services to our clients under our project agreements. These costs,
and fluctuations in these costs, generally correlate directly with
related project revenues. The cost of professional services and
other direct operating expenses, by business entity, are summarized
in the following table.
Fiscal Year Ended July 31,
2013
2012
2011
EEI and all of its wholly
owned subsidiaries
$29,408,179 $33,152,707 $46,194,644
EEI’s majority-owned subsidiaries:
Walsh
6,034,926
7,709,299
7,887,484
E & E Brasil
7,524,216
8,413,975
5,909,552
GAC
ECSI
5,258,000
4,499,132
4,332,206
1,529,296
1,857,168
1,591,101
Total cost of professional
services and other direct
operating expenses
$49,754,617 $55,632,281 $65,914,987
15
Indirect operating expenses include administrative and indirect
operating expenses, as well as marketing and related costs.
Combined indirect operating expenses, by business entity, are
summarized in the following table.
Income Taxes
The income tax provision (benefit) resulting from domestic and
foreign operations is summarized in the following table.
Fiscal Year Ended July 31,
2013
2012
2011
Fiscal Year Ended July 31,
2013
2012
2011
EEI and all of its wholly
owned subsidiaries
$36,239,243 $38,957,028 $37,081,202
EEI’s majority-owned subsidiaries:
Income tax (benefit) provision from:
Domestic operations
$ (782,672) $ 65,885 $ 3,299,857
Foreign operations
1,036,906
1,292,031
1,331,378
Walsh
12,707,123
12,953,357 11,677,740
E & E Brasil
5,480,397
4,847,879
5,765,816
Income tax provision, as
reported on the
consolidated statements
of operations
$ 254,234 $ 1,357,916 $ 4,631,235
GAC
ECSI
1,161,575
923,723
790,257
3,021,712
2,836,756
2,470,453
Total indirect operating
expenses
$58,610,050 $60,518,743 $57,785,468
Fiscal Year 2013 Versus 2012
During fiscal year 2013, management at EEI and our U.S. subsidiaries
critically reviewed technical and indirect staffing levels, other
expenses necessary to support current project work levels and key
administrative processes, particularly in our domestic subsidiaries
and operations. As a result of this review, the number of full time
employees in various technical and indirect departments at EEI
and its U.S. subsidiaries decreased by a combined 10% in fiscal
year 2013. Utilization of contracted services was also reviewed
and reduced. Management continues to critically evaluate its
organizational and cost structure to identify ways to operate more
efficiently and cost effectively.
Consolidated expenses directly associated with services provided
under contracts decreased $5.9 million (11%) during fiscal year
2013. This net decrease was primarily due to lower consolidated
revenues at EEI and its U.S. subsidiaries, which resulted from lower
service levels provided during the year and to managed reductions
in technical staff levels. Expense reductions in the U.S. were
partially offset by a higher volume of project activity and related
expenses in South American subsidiaries.
Consolidated administrative, marketing and other indirect expenses
decreased $1.9 million (3%) during fiscal year 2013. During the
year, management at EEI and its U.S. subsidiaries critically reviewed
indirect staffing levels and key administrative processes, and
reduced staff counts and utilization of contracted services in
certain indirect departments. These cost reductions in the U.S.
were partially offset by higher indirect expenses to support growth
in South American subsidiaries and by a $0.8 million software
impairment charge recorded by EEI during the fourth quarter of
fiscal year 2013 (refer to Item 1 of this Annual Report).
Depreciation and amortization expense increased $0.3 million
(12%) during fiscal year 2013, which resulted from acquisitions of
depreciable assets of $1.8 million and $4.4 million during fiscal
years 2013 and 2012, respectively.
A reconciliation of the income tax provision using the statutory
U.S. income tax rate compared with the actual income tax
provision reported on the consolidated statements of operations is
summarized in the following table.
Income tax provision at
the U.S. federal statutory
income tax rate
Income from “pass-
through” entities taxable
to noncontrolling
partners
International rate
differences
Other foreign taxes, net
of federal benefit
Fiscal Year Ended July 31,
2013
2012
2011
$ (329,057) $ 1,495,206 $ 4,336,758
(102,933)
(255,065)
(293,369)
(197,217)
(329,825)
(267,859)
94,528
211,088
114,797
Foreign dividend income
481,287
329,825
420,921
Domestic manufacturing
deduction
—
—
(229,593)
State taxes, net of
federal benefit
Re-evaluation and
settlements of tax
contingencies
Peru non-deductible
expenses
Canada valuation
allowance
Other permanent
differences
Income tax provision, as
reported on the
consolidated statements
of operations
3,871
13,193
433,676
(58,105)
(180,304)
173,707
211,000
130,950
—
—
—
—
57,203
(137,202)
115,904
$ 254,234 $ 1,357,916 $ 4,631,235
16
Fiscal Year 2013 Versus 2012
The majority of the income or loss generated by the Company
occurs in tax jurisdictions with combined income tax rates between
30 percent and 40 percent. However, the mix of domestic and
foreign earnings that created a small consolidated pre-tax loss,
and the impact of permanent book-to-tax differences that are
recognized regardless of pre-tax income or loss, resulted in an
unusual negative effective income tax rate for fiscal year 2013.
These permanent differences primarily include non-deductible
expenses in the U.S. and Peru, the establishment of a valuation
allowance for losses in Canada and foreign dividend income that is
taxed in the U.S. as a result of a reduced foreign tax credit created
from the Company’s overall foreign loss.
The income tax provision decreased $1.1 million (81%) during
fiscal year 2013, primarily as a result of decreased pre-tax income in
both foreign and domestic operations. Lower pre-tax income was
partially offset by higher dividends from our foreign subsidiaries,
for which we did not receive a foreign tax credit that we benefited
from in prior years, and establishment of a valuation allowance for
losses in Canada.
At July 31, 2013, U.S. net operating losses were approximately $3.8
million, which management intends on carrying back to the July 31,
2011 fiscal year to obtain a refund. As of July 31, 2013, the foreign
tax credit carryforwards were $0.5 million, which will start expiring
in fiscal year 2021.
Critical Accounting Policies
The preceding discussion and analysis of our financial condition
and results of operating results are based on our consolidated
financial statements, which have been prepared in conformity
with accounting principles generally accepted in the United States.
The significant accounting policies used in the preparation of our
consolidated financial statements are more fully described in the
consolidated financial statements included in Item 8 of this Annual
Report.
Many of our significant accounting policies require complex
judgments to estimate values of assets and liabilities. In making
these judgments, management must make certain estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Because changes in such estimates
and assumptions could significantly affect our reported financial
position and results of operations, detailed policies and control
procedures have been established to ensure that valuation
methods, including judgments made as part of such methods,
are well controlled, independently reviewed, and are applied
consistently from period to period.
On an on-going basis, we evaluate our estimates to ensure that
they are based on assumptions that we believe to be reasonable
under current circumstances. Our actual results may differ from
these estimates and assumptions.
Of the significant policies used to prepare our consolidated financial
statements, the items discussed below require critical accounting
estimates involving a high degree of judgment and complexity.
For all of these critical policies, we caution that future events rarely
develop exactly as forecasted, and the best estimates routinely
require adjustment. This information should be read in conjunction
with our consolidated financial statements included herein.
Revenue Recognition
Our revenues are derived primarily from the professional and
technical services performed by its employees or, in certain
cases, by subcontractors engaged to perform on under contracts
entered into with our clients. The revenues recognized, therefore,
are derived from our ability to charge clients for those services
under the contracts. Sales and cost of sales at our South American
subsidiaries exclude tax assessments by governmental authorities,
which are collected by us from its customers and then remitted to
governmental authorities.
Substantially all of our revenue is derived from environmental
consulting work. The consulting revenue is principally derived from
the sale of labor hours. The consulting work is performed under
a mix of fixed price, cost-type, and time and material contracts.
Contracts are required from all customers. Revenue is recognized
as follows:
Contract Type
Work Type
Revenue Recognition Policy
Time and
Materials
Consulting
As incurred at contract rates.
Fixed Price
Consulting
Cost-Type
Consulting
Percentage of completion,
approximating the ratio of either
total costs or Level of Effort (LOE)
hours incurred to date to total
estimated costs or LOE hours.
Costs as incurred. Fixed fee portion
is recognized using percentage
of completion determined by the
percentage of level of effort (LOE)
hours incurred to total LOE hours in
the respective contracts.
Revenues associated with these contract types are summarized in
the following table.
Fiscal Year Ended July 31,
2013
2012
2011
Time and materials $ 64,522,639 $ 76,889,583 $ 92,980,325
Fixed price
Cost-plus
58,244,072
67,638,479
66,987,437
12,170,180
10,882,037
9,205,098
Total revenue
$134,936,891 $155,410,099 $169,172,860
Fixed-price contracts generally present the highest level of financial
and performance risk, but often also provide the highest potential
financial returns. Cost-plus contracts present a lower risk, but
generally provide lower returns and often include more onerous
terms and conditions. Time-and-materials contracts generally
represent the time spent by our professional staff at stated or
negotiated billing rates.
Fixed price contracts are accounted for using the “percentage-of-
completion” method, wherein revenue is recognized as project
progress occurs. Time and material contracts are accounted for
over the period of performance, in proportion to the costs of
performance, predominately based on labor hours incurred. If an
estimate of costs at completion on any contract indicates that a loss
will be incurred, the entire estimated loss is charged to operations
in the period the loss becomes evident.
17
The percentage of completion revenue recognition method
requires the use of estimates and judgment regarding a project’s
expected revenues, costs and the extent of progress towards
completion. We have a history of making reasonably dependable
estimates of the extent of progress towards completion, contract
revenue and contract completion costs. However, due to
uncertainties inherent in the estimation process, actual completion
costs may vary significantly from estimates.
Most of our percentage-of-completion projects follow a method
which approximates the “cost-to-cost” method of determining
the percentage of completion. Under the cost-to-cost method,
we make periodic estimates of our progress towards project
completion by analyzing costs incurred to date, plus an estimate of
the amount of costs that we expect to incur until the completion
of the project. Revenue is then calculated on a cumulative basis
(project-to-date) as the total contract value multiplied by the
current percentage-of-completion. The revenue for the current
period is calculated as cumulative revenues less project revenues
already recognized. The recognition of revenues and profit is
dependent upon a variety of estimates which can be difficult to
accurately determine until a project is significantly underway.
For projects where the cost-to-cost method does not appropriately
reflect the progress on the projects, we use alternative methods
such as actual labor hours, for measuring progress on the project
and recognize revenue accordingly. For instance, in a project where
a large amount of equipment is purchased or an extensive amount
of mobilization is involved, including these costs in calculating the
percentage-of-completion may overstate the actual progress on
the project. For these types of projects, actual labor hours spent on
the project may be a more appropriate measure of the progress on
the project.
Our contracts with the U.S. government contain provisions
requiring compliance with the Federal Acquisition Regulation
(“FAR”), and the Cost Accounting Standards (“CAS”). These
regulations are generally applicable to all of our federal
government contracts and are partially or fully incorporated in
many local and state agency contracts. They limit the recovery
of certain specified indirect costs on contracts subject to the
FAR. Cost-plus contracts covered by the FAR provide for upward
or downward adjustments if actual recoverable costs differ from
the estimate billed. Most of our federal government contracts are
subject to termination at the convenience of the client. Contracts
typically provide for reimbursement of costs incurred and payment
of fees earned through the date of such termination.
Federal government contracts are subject to the FAR and some
state and local governmental agencies require audits, which are
performed for the most part by the Defense Contract Audit Agency
(“DCAA”). The DCAA audits overhead rates, cost proposals, incurred
government contract costs, and internal control systems. During
the course of its audits, the DCAA may question incurred costs if it
believes we have accounted for such costs in a manner inconsistent
with the requirements of the FAR or CAS and recommend that
our U.S. government financial administrative contracting officer
disallow such costs. Historically, we have not experienced
significant disallowed costs as a result of such audits. However, we
can provide no assurance that such audits will not result in material
disallowances of incurred costs in the future.
We maintain an allowance for project disallowances in other
accrued liabilities for potential cost disallowances resulting from
government audits and project close-outs. Government audits
have been completed for fiscal years through 2007 and final rates
have been negotiated for fiscal years through 2005. We have
estimated our exposure based on completed audits, historical
experience and discussions with the government auditors. If these
estimates or their related assumptions change, we may be required
to adjust its recorded allowance for project disallowances.
Allowance for Doubtful Accounts and Contract
Adjustments
We reduce our contract receivables by recording an allowance
for doubtful accounts for estimated credit losses resulting from a
client’s inability or unwillingness to pay valid obligations to us. The
resulting provision for bad debts is recorded within administrative
and indirect operating expenses on the consolidated statements of
income. The likelihood that the customer will pay is based on the
judgment of those closest to the related project and the customer.
At a minimum, management considers the following factors to
determine the collectability of contract receivables for any specific
project:
• Customer acknowledgment of amount owed to us;
• Customer liquidity/ability to pay;
• Historical experience with collections from the customer;
• Amount of time elapsed since last payment; and
• Economic, geopolitical and cultural considerations for the
home country of the customer.
We recognize that there is a high degree of subjectivity and
imprecision inherent in the process of estimating future credit
losses that are based on historical trends and customer data. As a
result, actual credit losses can differ from these estimates.
We also reduce contract receivables by establishing an
allowance for billed and earned contract revenues that have
become unrealizable, or may become unrealizable in the future.
Management reviews contract receivables and determines
allowances amounts based on:
• our operating performance related to the adequacy of the
services performed;
• the status of change orders and claims;
• our historical experience with the customer settling change
orders and claims; and
• economic, geopolitical and cultural considerations for the
home country of the customer.
We recognize that there is a high degree of subjectivity and
imprecision inherent in the process of estimating contract
allowances that are based on historical trends and customer data.
As a result, actual contract losses can differ from these estimates.
Goodwill
Goodwill of $1.2 million on our consolidated balance sheets
represents the excess of purchase price over the fair value of
identifiable net assets acquired in various business acquisitions.
Goodwill is not amortized, but is reviewed for impairment annually
18
tax purposes using enacted tax rates expected to be in effect
for the year in which the temporary differences are expected to
reverse. Our policy is to establish a valuation allowance if it is
“more likely than not” that the related tax benefits will not be
realized. At July 31, 2013 and 2012, we determined based on
available evidence, including historical financial results for the last
three years and forecasts of future results, that it is “more likely than
not” that a portion of these items may not be recoverable in the
future. Accordingly, we recorded total valuation allowances of $0.6
million and $0.3 million at July 31, 2013 and 2012, respectively, as a
reduction of deferred tax assets.
The valuation allowance related to deferred tax assets is considered
to be a critical estimate because, in assessing the likelihood of
realization of deferred tax assets, management considers taxable
income trends and forecasts. Actual income taxes expensed and/
or paid could vary from estimated amounts due to the impacts of
various factors, including:
• changes to tax laws enacted by taxing authorities;
• final review of filed tax returns by taxing authorities; and
• actual financial condition and results of operations for future
periods that could differ from forecasted amounts.
Inflation
During the fiscal years ended July 31, 2013, 2012 and 2011,
inflation did not have a material impact on our business because a
significant amount of our contracts are either cost based or contain
commercial rates for services that are adjusted annually.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of July 31,
2013 or 2012.
during the fourth quarter of our fiscal year, or more frequently
if events, transactions or changes in circumstances indicate
that the carrying amount may not be recoverable. We utilize a
discounted cash flows methodology for determining the fair value
of the business units to which goodwill has been assigned. Our
discounted cash flows methodology includes the following critical
assumptions:
• Growth rates applied to projected earnings
• Discount rates and terminal year growth rates applied to
future cash flow projections
Our impairment testing of goodwill is considered to be a critical
accounting estimate due to the significant judgment required
for certain assumptions utilized in the models to determine fair
value. Assumptions used involve a high degree of subjectivity
that is based on historical experience and internal forecasts of
future results. Actual results in future periods may not necessarily
approximate historical experience or forecasts.
We completed our annual goodwill impairment test as of July 31,
2013, and concluded that our recorded goodwill was not at risk for
impairment as of that date. As of July 31, 2013, the estimated fair
values of each of the individual business units to which goodwill
has been assigned exceeded their carrying values by at least $0.7
million.
Income Taxes
We operate within multiple tax jurisdictions in the United States
and in foreign countries. The calculations of income tax expense or
benefit and related balance sheet amounts involve a high degree
of management judgment regarding estimates of the timing
and probability of recognition of revenue and deductions. The
interpretation of tax laws involves uncertainty, since tax authorities
may interpret laws differently than we do. We are subject to audit
in all of our tax jurisdictions, which may involve complex issues
and may require an extended period of time to resolve. Ultimate
resolution of tax matters may result in favorable or unfavorable
impacts to our net income and/or cash flows. In management’s
opinion, adequate reserves have been recorded for any future taxes
that may be owed as a result of examination by any taxing authority.
A tax position is a position in a previously filed tax return or a
position expected to be taken in a future tax filing that is reflected
in measuring current or deferred income tax assets and liabilities.
Tax positions shall be recognized only when it is more likely than
not (likelihood of greater than 50%), based on technical merits, that
the position will be sustained. Tax positions that meet the more
likely than not threshold should be measured using a probability
weighted approach as the largest amount of tax benefit that is
greater than 50% likely of being realized upon settlement. We
recognize interest accrued related to unrecognized tax benefits
in interest expense and penalties in administrative and indirect
operating expenses. Whether the more-likely-than-not recognition
threshold is met for a tax position, is a matter of judgment based on
the individual facts and circumstances of that position evaluated
in light of all available evidence. Based on evidence available,
management has determined that we did not have any uncertain
tax positions at July 31, 2013 or 2012.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income
19
Report of Independent Registered
Public Accounting Firm
To the Board of Directors and Shareholders of
Ecology and Environment, Inc.
We have audited the accompanying consolidated balance
sheets of Ecology and Environment, Inc. and its subsidiaries
(collectively, the Company) as of July 31, 2013 and 2012,
and the related consolidated statements of operations,
comprehensive (loss) income, changes in shareholders’
equity, and cash flows for each of the years in the three-year
period ended July 31, 2013. The Company’s management is
responsible for these financial statements. Our responsibility is
to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as of July 31, 2013 and 2012, and the
results of its operations and its cash flows for each of the years
in the three-year period ended July 31, 2013 in conformity with
accounting principles generally accepted in the United States
of America.
Pittsburgh, Pennsylvania
November 13, 2013
Management’s Report on Internal Control
Over Financial Reporting
The Board of Directors and Stockholders of
Ecology and Environment, Inc.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. As defined
in Exchange Act Rule 13a-15(f ), internal control over financial
reporting is a process designed by, or under the supervision of,
our principal executive and principal financial officer and effected
by our Board of Directors, management and other personnel to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements
for external purposes in accordance with U.S. GAAP. Internal
controls include those policies and procedures that (i) pertain to
the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in
accordance with U.S. GAAP and that our receipts and expenditures
are being made only in accordance with authorizations of our
management and directors; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a
material effect on our consolidated financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate. Accordingly, even
effective internal control over financial reporting can only provide
reasonable assurance of achieving their control objectives.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we assessed the effectiveness of our internal
control over financial reporting as of July 31, 2013 based on the
criteria in Internal Control—Integrated Framework issued by the
COSO. Based upon this assessment, management has concluded
that our internal control over financial reporting was effective as of
July 31, 2013.
This annual report does not include an attestation report of the
Company’s registered public accounting firm regarding internal
control over financial reporting.
By:
Gerald A. Strobel
Chief Executive Officer
By:
H. John Mye III
Chief Financial and Accounting Officer
20
Consolidated Balance Sheets
Assets
Current assets:
Cash and cash equivalents
Investment securities available for sale
Contract receivables, net of allowance for doubtful accounts and contract adjustments of
$5,592,800 and $10,238,391, respectively
Deferred income taxes
Income tax receivable
Other current assets
Total current assets
Property, building and equipment, net of accumulated depreciation of
$24,569,139 and $22,584,958, respectively
Deferred income taxes
Other assets
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
Line of credit
Accrued payroll costs
Current portion of long-term debt and capital lease obligations
Billings in excess of revenue
Other accrued liabilities
Total current liabilities
Income taxes payable
Deferred income taxes
Long-term debt and capital lease obligations
Commitments and contingencies (Note 18)
Shareholders’ equity:
Preferred stock, par value $.01 per share
(2,000,000 shares authorized; no shares issued)
Class A common stock, par value $.01 per share
(6,000,000 shares authorized; 2,685,151 shares issued)
Class B common stock, par value $.01 per share;
(10,000,000 shares authorized; 1,708,574 shares issued)
Capital in excess of par value
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost (Class A common:
79,110 and 84,730 shares; Class B common: 64,801 shares)
Total Ecology and Environment, Inc., shareholders’ equity
Noncontrolling interests
Total shareholders’ equity
July 31, 2013
July 31, 2012
$ 9,444,660
$10,467,770
1,463,864
1,404,582
47,134,007
61,568,443
4,308,538
4,355,260
1,784,826
4,799,724
2,502,431
1,802,843
68,491,155
82,545,793
10,122,801
12,112,078
1,089,060
1,978,668
860,499
1,993,785
$81,681,684
$97,512,155
$ 9,864,138
$11,492,602
6,528,691
7,102,910
199,658
6,437,730
4,070,073
12,309,335
7,529,728
488,460
8,281,919
3,932,588
34,203,200
44,034,632
124,793
462,787
251,614
—
—
194,023
423,324
102,635
—
—
26,851
26,851
17,087
20,016,873
25,365,853
(84,527)
(1,798,233)
43,543,904
3,095,386
46,639,290
17,087
19,751,992
29,534,783
711,842
(1,897,032)
48,145,523
4,612,018
52,757,541
Total liabilities and shareholders’ equity
$81,681,684
$97,512,155
The accompanying notes are an integral part of these consolidated financial statements
21
Consolidated Statements of Operations
Fiscal Year Ended July 31,
2012
2013
2011
Revenue, net
$134,936,891 $155,410,099 $169,172,860
Cost of professional services and other direct operating expenses
49,754,617
55,632,281
65,914,987
Subcontract costs
25,041,431
32,315,179
31,325,937
Administrative and indirect operating expenses
44,563,873
44,917,631
42,534,303
Marketing and related costs
Depreciation and amortization
(Loss) Income from operations
Interest expense
Interest income
Other (expense) income
14,046,177
15,601,112
15,251,165
2,428,844
2,160,062
1,760,763
(898,051)
4,783,834
12,385,705
(303,403)
(364,305)
(355,766)
244,191
174,743
85,771
(40,127)
206,813
64,524
Gain on sale of assets and investment securities
80,415
—
290,526
Net foreign currency exchange (loss) gain
(50,839)
(403,419)
284,411
(Loss) Income before income tax provision
(967,814)
4,397,666
12,755,171
Income tax provision
Net (loss) income
254,234
1,357,916
4,631,235
$ (1,222,048) $ 3,039,750 $ 8,123,936
Net income attributable to the noncontrolling interest
(908,386)
(2,266,171)
(1,163,673)
Net (loss) income attributable to Ecology and Environment, Inc.
$ (2,130,434) $ 773,579 $ 6,960,263
Net (loss) income per common share: basic and diluted
$ (0.50) $ 0.18 $ 1.65
Weighted average common shares outstanding: basic and diluted
$ 4,247,821 $ 4,233,883 $ 4,222,688
The accompanying notes are an integral part of these consolidated financial statements
22
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Impairment of long-lived assets
Depreciation and amortization expense
(Provision) benefit for deferred income taxes
Share based compensation expense
Tax impact of share-based compensation
Gain on sale of assets and investment securities
Provision for contract adjustments
Bad debt expense
Decrease (increase) in:
- contract receivables
- other current assets
- income tax receivable
- other non-current assets
Decrease (increase) in:
- accounts payable
- accrued payroll costs
- income taxes payable
- billings in excess of revenue
- other accrued liabilities
Net cash provided by (used in) operating activities
Cash flows (used in) provided by investing activities:
Acquisition of noncontrolling interest of subsidiaries
Purchase of Engineering Consulting Services, Inc., net of cash equivalents of $309,487
Purchase of property, building and equipment
Change in accounts payable due to purchase of equipment
Proceeds from sale of property and equipment
Proceeds from sale of investments
Purchase of investment securities
Net cash used in investing activities
Cash flows (used in) provided by financing activities:
Dividends paid
Proceeds from debt
Repayment of debt and capital lease obligations
Net (payments on) proceeds from line of credit
Distributions to noncontrolling interests
Proceeds from sale of subsidiary shares to noncontrolling interests
Purchase of treasury stock
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net decrease (increase) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid during the year for:
- Interest
- Income Taxes
Supplemental disclosure of non-cash items:
Dividends declared and not paid
Acquistion of noncontrolling interest of subsidiaries - Loan
Change in accounts payable due to equipment purchases
Fiscal Year Ended July 31,
2012
2013
2011
$(1,222,048)
$ 3,039,750
$ 8,123,936
846,000
—
2,428,844
2,160,062
203,165
507,796
(74,429)
(80,415)
113,717
731,583
105,988
—
6,319,650
1,810,557
(287,426)
514,411
—
1,760,763
(910,413)
541,175
—
(290,526)
2,943,470
450,000
7,228,782
(2,287,607)
(18,286,613)
(97,563)
314,587
(114,402)
(1,832,096)
(2,502,431)
6,951
31,973
—
42,082
(628,189)
(1,859,530)
822,701
(172,087)
(1,458,928)
1,545,961
(69,230)
(1,375,614)
(1,430,143)
1,237,329
295,562
11,943,124
(936,135)
(360,288)
(595,556)
(908,892)
—
—
(98,721)
3,396,873
1,084,505
1,010,791
(637,745)
(790,513)
(1,845,241)
(4,443,962)
(2,476,059)
1,554,425
(283,071)
—
953,749
322,807
(1,671,284)
102,527
(195,163)
(2,557,656)
(5,533,398)
(2,822,924)
(2,037,323)
(2,046,657)
(1,814,839)
255,487
(853,127)
145,401
(974,644)
(5,782,992)
12,309,335
795,795
(945,320)
—
(1,532,912)
(1,123,896)
(847,749)
—
—
41,634
90,368
(363,050)
(1,335,960)
(9,950,867)
7,988,123
(4,057,705)
(457,711)
(156,509)
52,486
(1,023,110)
1,937,928
(5,817,352)
10,467,770
8,529,842
14,347,194
$ 9,444,660
$10,467,770
$ 8,529,842
$ 301,154
$ 395,146
$ 342,778
1,596,760
6,510,514
5,559,378
1,018,783
1,028,881
212,401
670,678
795,856
(283,071)
880,417
458,224
953,749
The accompanying notes are an integral part of these consolidated financial statements
23
Consolidated Statements of Changes in Shareholders’ Equity
Common Stock
Class
Shares
Amount
Capital in Excess
of Par Value
Retained
Earnings
Accumulated Other
Comprehensive
Income (loss)
Treasury Stock
Shares
Amount
Noncontrolling
Interests
2,685,072
$26,850
1,708,653
$17,088
}
$20,059,200
$25,800,803
$ 815,906
201,262
$(1,855,466)
$4,369,641
6,960,263
—
—
686,380
A
B
A
B
Balance at July 31, 2010
Net income
Foreign currency translation adjustment
Cash dividends paid ($.46 per share)
Unrealized investment gain, net
Conversion of common stock - B to A
Repurchase of Class A common stock
Issuance of stock under stock award plan
Share-based compensation expense
Sale of subsidiary shares to noncontrolling interests
Issuance of shares to noncontrolling interests
Distributions to noncontrolling interests
Purchase of additional noncontrolling interests
Stock award plan forfeitures
Balance at July 31, 2011
Net income
Foreign currency translation adjustment
Cash dividends paid ($.48 per share)
Unrealized investment gain, net
Repurchase of Class A common stock
Issuance of stock under stock award plan
Share-based compensation expense
Tax impact of share based compensation
Sale of subsidiary shares to noncontrolling interests
Distributions to noncontrolling interests
Purchase of additional noncontrolling interests
Stock award plan forfeitures
Balance at July 31, 2012
Net (loss) Income
Foreign currency translation adjustment
Cash dividends paid ($.48 per share)
Unrealized investment loss, net
Share-based compensation expense
Tax impact of share based compensation
Distributions to noncontrolling interests
Purchase of additional noncontrolling interests
Stock award plan forfeitures
Balance at July 31, 2013
24
—
—
—
—
79
(79)
—
—
—
—
—
—
—
—
—
—
—
1
(1)
}
—
—
—
—
—
—
—
—
—
—
—
—
(482,061)
541,175
—
—
—
(135,285)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(716,662)
731,583
105,988
—
—
(351,946)
—
(1,963,303)
—
—
—
—
—
—
—
—
—
(2,036,559)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
84,002
(1,335,960)
(55,041)
482,061
—
—
—
—
—
—
—
—
1,163,673
12,119
—
—
—
—
—
90,368
667,000
(847,749)
—
—
—
—
—
—
—
—
22,825
(363,050)
(62,099)
716,662
—
—
—
—
—
—
—
—
2,266,171
124,455
—
—
—
—
—
—
41,634
(1,123,896)
—
(11,189)
—
—
—
—
—
—
—
17,597
—
—
—
—
—
—
A
B
2,685,151
$26,851
1,708,574
$17,087
}
$19,983,029
$30,797,763
$1,527,189
190,724
$(2,317,515)
$3,923,429
36,092
—
(39,895)
391,850
(1,531,623)
396
—
—
773,579
—
—
(871,476)
38,532
—
(5,208)
3,289
66,871
(619,775)
A
B
2,685,151
1,708,574
$26,851
$17,087
}
$19,751,992
$29,534,783
$ 711,842
149,531
$(1,897,032)
$4,612,018
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
507,796
(74,429)
—
(168,486)
—
(2,130,434)
—
—
(790,464)
(2,038,496)
—
—
—
—
—
—
—
(28,675)
—
—
—
22,770
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
908,386
(116,171)
—
—
—
—
(1,532,912)
(7,804)
2,184
98,799
(775,935)
—
—
A
B
2,685,151
1,708,574
$26,851
$17,087
}
$20,016,873
$25,365,853
$ (84,527)
143,911
$(1,798,233)
$3,095,386
The accompanying notes are an integral part of these consolidated financial statements
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
Ecology and Environment, Inc., (“EEI” or the “Parent Company”)
was incorporated in 1970 as a global broad-based environmental
consulting firm whose underlying philosophy is to provide
professional services worldwide so that sustainable economic and
human development may proceed with acceptable impact on
the environment. Together with its subsidiaries (collectively, the
“Company”), EEI has direct and indirect ownership in 19 wholly
owned and majority owned operating subsidiaries in 12 countries.
The Company’s staff is comprised of individuals representing
more than 80 scientific, engineering, health, and social disciplines
working together in multidisciplinary teams to provide innovative
environmental solutions. The Company has completed more
than 50,000 projects for a wide variety of clients in more than
120 countries, providing environmental solutions in nearly every
ecosystem on the planet.
Certain prior year amounts were reclassified to conform to the
consolidated financial statement presentation for the fiscal year
ended July 31, 2013.
2. Recent Accounting Pronouncements
Accounting Pronouncements Adopted During
the Fiscal Year Ended July 31, 2013
In February 2013, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-
02, Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income (“ASU 2013-02”). ASU 2013-02 requires
entities to provide information about amounts reclassified out of
accumulated other comprehensive income (“AOCI”) by component.
In addition, entities are required to present, either on the face of the
financial statements or in the notes, significant amounts reclassified
out of AOCI by the respective line items of net income, but only if
the amount reclassified is required to be reclassified in its entirety
in the same reporting period. For amounts that are not required to
be reclassified in their entirety to net income, an entity is required
to cross-reference to other disclosures that provide additional
details about those amounts. The Company adopted ASU 2013-12
effective February 1, 2013 and applied its provisions prospectively.
The adoption of this standard did not have a material impact on the
Company’s consolidated financial statements.
In June 2011, FASB issued ASU No. 2011-05 Comprehensive
Income (Topic 220): Presentation of Comprehensive Income
(“ASU 2011-05”). ASU 2011-05 increases the prominence of other
comprehensive income in financial statements. Under ASU
2011-05, companies have the option to present the components
of net income and comprehensive income in either one or two
consecutive financial statements. The Company adopted ASU
2011-05 effective August 1, 2012 and applied its provisions
retrospectively. The adoption of this standard did not have
a material impact on the Company’s consolidated financial
statements.
Accounting Pronouncements Not Yet Adopted
as of July 31, 2013
In July 2013, FASB issued ASU No. 2013-11 Income Taxes (Topic 740):
Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward
Exists (“ASU 2013-11”). ASU 2013-11 requires that an unrecognized
tax benefit, or a portion of an unrecognized tax benefit, should be
presented in the financial statements as a reduction to a deferred
tax asset for a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward, except as follows. To the extent a
net operating loss carryforward, a similar tax loss, or a tax credit
carryforward is not available at the reporting date under the tax law
of the applicable jurisdiction to settle any additional income taxes
that would result from the disallowance of a tax position or the tax
law of the applicable jurisdiction does not require the entity to use,
and the entity does not intend to use, the deferred tax asset for
such purpose, the unrecognized tax benefit should be presented in
the financial statements as a liability and should not be combined
with deferred tax assets. The Company intends to adopt the
provisions of ASU 2013-11 effective August 1, 2014 and apply its
provisions retrospectively. The adoption of this standard is not
expected to have a material impact on the Company’s consolidated
financial statements.
3. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of
the EEI and its wholly owned and majority owned subsidiaries. All
intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
as of the date of the financial statements, which affect the reported
values of assets and liabilities and revenues and expenses and
disclosures of contingent assets and liabilities. Actual results may
differ from those estimates.
Revenue Recognition and Contract Receivables, Net
Substantially all of the Company’s revenue is derived from
environmental consulting work. The consulting revenue is
principally derived from the sale of labor hours. The consulting
work is performed under a mix of fixed price, cost-type, and time
and material contracts. Contracts are required from all customers.
Revenue is recognized as follows:
Contract Type
Work Type
Revenue Recognition Policy
Time and
Materials
Consulting
As incurred at contract rates.
Fixed Price
Consulting
Cost-Type
Consulting
Percentage of completion,
approximating the ratio of either
total costs or Level of Effort (LOE)
hours incurred to date to total
estimated costs or LOE hours.
Costs as incurred. Fixed fee portion
is recognized using percentage
of completion determined by the
percentage of level of effort (LOE)
hours incurred to total LOE hours in
the respective contracts.
Revenues reflected in the Company’s consolidated statements of
operations represent services rendered for which the Company
maintains a primary contractual relationship with its customers.
25
Included in revenues are certain services outside the Company’s
normal operations which the Company has elected to subcontract
to other contractors.
probability of payment. Such contract adjustments are recorded
as direct adjustments to revenue in the consolidated statements of
operations.
Substantially all of the Company’s cost-type work is with federal
governmental agencies and, as such, is subject to audits after
contract completion. Under these cost-type contracts, provisions
for adjustments to accrued revenue are recognized on a quarterly
basis and based on past audit settlement history. Government
audits have been completed and final rates have been negotiated
through fiscal year 2005. The Company records an allowance
for project disallowances in other accrued liabilities for potential
disallowances resulting from government audits (refer to Note 11 of
these consolidated financial statements).
Change orders can occur when changes in scope are made
after project work has begun, and can be initiated by either the
Company or its clients. Claims are amounts in excess of the agreed
contract price which the Company seeks to recover from a client
for customer delays and /or errors or unapproved change orders
that are in dispute. Costs related to change orders and claims are
recognized as incurred. Revenues and profit are recognized on
change orders when it is probable that the change order will be
approved and the amount can be reasonably estimated. Revenues
are recognized only up to the amount of costs incurred on contract
claims when realization is probable, estimable and reasonable
support from the customer exists.
All bid and proposal and other pre-contract costs are expensed
as incurred. Out of pocket expenses such as travel, meals, field
supplies, and other costs billed direct to contracts are included
in both revenues and cost of professional services. Sales and
cost of sales at the Company’s South American subsidiaries
exclude tax assessments by governmental authorities, which are
collected by the Company from its customers and then remitted to
governmental authorities.
Billed contract receivables represent amounts billed to clients in
accordance with contracted terms, which have not been collected
from clients as of the end of the reporting period. Billed contract
receivables may include: (1) amounts billed for revenues from
incurred costs and fees that have been earned in accordance with
contractual terms; and (2) progress billings in accordance with
contractual terms that include revenue not yet earned as of the end
of the reporting period.
Unbilled contract receivables result from: (i) revenues from incurred
costs and fees which have been earned, but are not billed as of
period-end; and (ii) differences between year-to-date provisional
billings and year-to-date actual contract costs incurred.
The Company reduces contract receivables by recording an
allowance for doubtful accounts to account for the estimated
impact of collection issues resulting from a client’s inability or
unwillingness to pay valid obligations to the Company. The
resulting provision for bad debts is recorded within administrative
and indirect operating expenses on the consolidated statements of
operations.
The Company also reduces contract receivables by establishing
an allowance for billed and earned contract revenues that have
become unrealizable, or may become unrealizable in the future.
Management reviews contract receivables and determines
allowance amounts based on historical experience, geopolitical
considerations, client acknowledgment of the amount owed,
client ability to pay, relationship history with the client and the
26
Investment Securities, Available for Sale
Investment securities have been classified as available for sale
and are stated at fair value. Unrealized gains or losses related to
investment securities available for sale are recorded in accumulated
other comprehensive income, net of applicable income taxes in
the accompanying consolidated balance sheets and consolidated
statements of changes in shareholders’ equity. The cost basis of
securities sold is based on the specific identification method.
Property, Building and Equipment, Depreciation and
Amortization
Property, building and equipment are stated at the lower of
depreciated or amortized cost or fair market value. Land and land
improvements are not depreciated or amortized. Methods of
depreciation or amortization and useful lives for all other long-lived
assets are summarized in the following table.
Depreciation/Amortization Method Useful Lives
Buildings
Building
Improvements
Straight-line
Straight-line
32-40 Years
7-15 Years
Field Equipment
Straight-line
3-7 Years
Computer equipment
Straight-line and Accelerated
3-7 Years
Computer software
Office furniture and
equipment
Vehicles
Leasehold
improvements
Straight-line
Straight-line
Straight-line
Straight-line
10 Years
3-7 Years
3-5 Years
(1)
(1) Leasehold improvements are amortized for book purposes over the terms of the
leases or the estimated useful lives of the assets, whichever is shorter.
Expenditures for maintenance and repairs are charged to expense
as incurred. Expenditures for improvements are capitalized
when either the value or useful life of the related asset have been
increased. When property or equipment is retired or sold, any gain
or loss on the transaction is reflected in the current year’s earnings.
The Company capitalizes costs of software acquisition and
development projects, including costs related to software design,
configuration, coding, installation, testing and parallel processing.
Capitalized software costs are recorded in fixed assets, net of
accumulated amortization, on the consolidated balance sheets.
Capitalized software development costs generally include:
• external direct costs of materials and services consumed to
obtain or develop software for internal use;
• payroll and payroll-related costs for employees who are
directly associated with and who devote time to the project,
to the extent of time spent directly on the project;
• costs to obtain or develop software that allows for access or
conversion of old data by new systems;
• costs of upgrades and/or enhancements that result in
additional functionality for existing software; and
• interest costs incurred while developing internal-use
software that could have been avoided if the expenditures
had not been made.
The costs of computer software obtained or developed for internal
use is amortized on a straight-line basis over the estimated useful
life of the software. Amortization begins when the software and
all related software modules on which it is functionally dependent
are ready for their intended use. Amortization expense is recorded
in depreciation and amortization in the consolidated statements of
operations. The Company’s amortization period does not exceed
ten years for any capitalized software project.
The following software-related costs are generally expensed as
incurred and recorded in general and administrative expenses on
the consolidated statements of operations:
• research costs, such as costs related to the determination
of needed technology and the formulation, evaluation and
selection of alternatives;
• costs to determine system performance requirements for a
proposed software project;
• costs of selecting a vendor for acquired software;
• costs of selecting a consultant to assist in the development
or installation of new software;
• internal or external training costs related to software;
• internal or external maintenance costs related to software;
• costs associated with the process of converting data from old
to new systems, including purging or cleansing existing data,
reconciling or balancing of data in the old and new systems
and creation of new data;
• updates and minor modifications; and
• fees paid for general systems consulting and overall
control reviews that are not directly associated with the
development of software.
Capitalized software costs are evaluated for recoverability/
impairment whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable, including when:
• existing software is not expected to provide future service
potential;
• it is no longer probable that software under development
will be completed and placed in service; and
• costs of developing or modifying internal-use software
significantly exceed expected development costs or costs of
comparable third-party software.
Refer to Note 7 of these consolidated financial statements for
additional disclosures regarding the Company’s property, plant and
equipment.
Fair Value of Financial Instruments
The Company’s financial assets or liabilities are measured using
inputs from the three levels of the fair value hierarchy. The asset’s
or liability’s classification within the fair value hierarchy is based
on the lowest level of any input that is significant to the fair value
measurement. Valuation techniques used need to maximize the
use of observable inputs and minimize the use of unobservable
inputs. The Company has not elected a fair value option on any
assets or liabilities. The three levels of the hierarchy are as follows:
Level 1 Inputs – Unadjusted quoted prices in active markets that
are accessible at the measurement date for identical, unrestricted
assets or liabilities. Generally this includes debt and equity securities
and derivative contracts that are traded on an active exchange
market (e.g., New York Stock Exchange) as well as certain U.S.
Treasury and U.S. Government and agency mortgage-backed
securities that are highly liquid and are actively traded in over-the-
counter markets.
Level 2 Inputs – Quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities
in inactive markets; or valuations based on models where the
significant inputs are observable (e.g., interest rates, yield curves,
credit risks, etc.) or can be corroborated by observable market
data. The Company’s investment securities classified as Level 2 are
comprised of international and domestic corporate and municipal
bonds.
Level 3 Inputs – Valuations based on models where significant inputs
are not observable. The unobservable inputs reflect the Company’s
own assumptions about the assumptions that market participants
would use.
The availability of observable market data is monitored to assess
the appropriate classification of financial instruments within the
fair value hierarchy. Changes in economic conditions or model-
based valuation techniques may require the transfer of financial
instruments from one fair value level to another. In such instances,
the transfer is reported at the beginning of the reporting period.
Refer to Note 5 of these consolidated financial statements for
additional disclosures regarding the fair value of the Company’s
financial instruments.
Goodwill
Goodwill of $1.2 million is included in other assets on the
accompanying consolidated balance sheets. Goodwill is subject to
an annual assessment for impairment by comparing the estimated
fair values of reporting units to which Goodwill has been assigned,
as calculated using a discounted cash flow method, to the recorded
book value of the respective reporting units. The Company’s most
recent annual impairment assessment for goodwill was completed
during the fourth quarter of fiscal year 2013. The results of this
assessment showed that the fair values of the reporting units to
which goodwill is assigned was in excess of the book values of
the respective reporting units, resulting in the identification of no
goodwill impairment.
Goodwill is also assessed for impairment between annual
assessments whenever events or circumstances make it more likely
than not that an impairment may have occurred. The Company
identified no events or changes in circumstances during the
fiscal year ended July 31, 2013 that necessitated an evaluation for
impairment of goodwill.
Impairment of Long-Lived Assets
The Company assesses recoverability of the carrying value of long-
lived assets by estimating the future net cash flows (undiscounted)
expected to result from the asset, including eventual disposition.
If the future net cash flows are less than the carrying value of
the asset, an impairment loss is recorded equal to the difference
between the asset’s carrying value and fair value. The Company
identified no events or changes in circumstances that necessitated
an evaluation for an impairment of long lived assets during the
fiscal year ended July 31, 2013.
27
Foreign Currencies
The financial statements of foreign subsidiaries where the local
currency is the functional currency are translated into U.S. dollars
using exchange rates in effect at period end for assets and
liabilities and average exchange rates during each reporting period
for results of operations. Translation adjustments are deferred
in accumulated other comprehensive income. Transaction
gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred. The
Company recorded foreign currency transaction (losses) gains of
approximately $(0.1) million, $(0.4) million and $0.3 million for the
fiscal years ended July 31, 2013, 2012 and 2011, respectively.
The financial statements of foreign subsidiaries located in highly
inflationary economies are remeasured as if the functional currency
were the U.S. dollar. The remeasurement of local currencies into
U.S. dollars creates transaction adjustments which are included in
net income. The Company did not record any highly inflationary
economy translation adjustments for the fiscal years ended July 31,
2013, 2012 or 2011.
Income Taxes
The Company follows the asset and liability approach to account for
income taxes. This approach requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences
of temporary differences between the carrying amounts and
the tax bases of assets and liabilities. Although realization is not
assured, management believes it is more likely than not that the
recorded net deferred tax assets will be realized. Since in some
cases management has utilized estimates, the amount of the net
deferred tax asset considered realizable could be reduced in the
near term. No provision has been made for United States income
taxes applicable to undistributed earnings of foreign subsidiaries
as it is the intention of the Company to indefinitely reinvest those
earnings in the operations of those entities.
Income tax expense includes U.S. and international income taxes,
determined using the applicable statutory rates. A deferred tax
liability is recognized for all taxable temporary differences, and
a deferred tax asset is recognized for all deductible temporary
differences and net operating loss carryforwards.
The Company has significant deferred tax assets, resulting
principally from contract reserves and accrued expenses. The
Company periodically evaluates the likelihood of realization of
deferred tax assets, and provides for a valuation allowance when
necessary.
Additionally, the Financial Accounting Standards Board (“FASB”)
Accounting Standard Codification (“ASC”) Topic Income Taxes,
prescribes a recognition threshold and measurement principles for
financial statement disclosure of tax positions taken or expected to
be taken on a tax return. A tax position is a position in a previously
filed tax return or a position expected to be taken in a future tax
filing that is reflected in measuring current or deferred income tax
assets and liabilities. Tax positions shall be recognized only when
it is more likely than not (likelihood of greater than 50%), based on
technical merits, that the position will be sustained. Tax positions
that meet the more likely than not threshold should be measured
using a probability weighted approach as the largest amount
of tax benefit that is greater than 50% likely of being realized
upon settlement. Whether the more-likely-than-not recognition
threshold is met for a tax position, is a matter of judgment based on
28
the individual facts and circumstances of that position evaluated
in light of all available evidence. The Company recognizes interest
accrued related to unrecognized tax benefits in interest expense
and penalties in administrative and indirect operating expenses.
Refer to Note 10 of these consolidated financial statements for
additional disclosures regarding income taxes.
Defined Contribution Plans
EEI has a non-contributory defined contribution plan providing
deferred benefits for substantially all of its employees. The annual
expense of the defined contribution plan is based on a percentage
of eligible wages as authorized by EEI’s Board of Directors.
Walsh Environmental Scientists & Engineers, LLC (“Walsh”), a majority
owned subsidiary of EEI, has a defined contribution plan providing
deferred benefits for substantially all of its employees. Walsh
contributes a percentage of eligible wages up to a maximum of 4%.
Refer to Note 15 of these consolidated financial statements
for additional disclosures regarding the Company’s defined
contribution plans.
Stock-Based Compensation
The company expenses the value of employee stock awards over
the vesting period of the respective award. Share-based awards
are measured at fair value on the respective grant date, based
on the estimated number of awards that are expected to vest.
Compensation cost for awards that vest is not reversed if the
awards expire without being exercised.
Refer to Note 12 of these consolidated financial statements for
additional disclosures regarding stock-based compensation.
Earnings Per Share
Basic and diluted earnings per share (“EPS”) is computed by dividing
income available to common shareholders by the weighted
average number of common shares outstanding for the reporting
period. The Company allocates undistributed earnings between
the classes on a one-to-one basis when computing EPS. As a result,
basic and fully diluted earnings per Class A and Class B shares are
equal amounts. Refer to Notes 13 and 16 of these consolidated
financial statements for additional disclosures regarding EPS.
Comprehensive (Loss) Income
Comprehensive (loss) income is defined as “the change in equity
of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources.”
Comprehensive (loss) income includes total net earnings plus
other comprehensive (loss) income during a reporting period.
Other comprehensive (loss) income includes currency translation
adjustments on foreign subsidiaries and unrealized gains or losses
on available-for-sale securities.
4. Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased
with a maturity of three months or less to be cash equivalents.
The Company invests cash in excess of operating requirements
in income-producing short-term investments. At July 31, 2013
and 2012, money market funds of $1.5 million and $2.0 million,
respectively, were included in cash and cash equivalents in the
accompanying consolidated balance sheets and consolidated
statements of cash flows. Approximately $0.7 million of bank
overdrafts were classified as accounts payable at July 31, 2013.
5. Fair Value of Financial Instruments
The fair value of the Company’s assets and liabilities that are
measured at fair value on a recurring basis is summarized by level
within the fair value hierarchy in the following table.
Contract Receivable Concentrations
Significant concentrations of contract receivables and the
allowance for doubtful accounts and contract adjustments are
summarized in the following table.
Assets
Level 1
Level 2
Level 3
Total
Balance at July 31, 2013
Balance at July 31, 2013:
Investment
securities, available
for sale
$1,463,864 $ — $ — $1,463,864
Region
Allowance
for Doubtful
Accounts
and Contract
Adjustments
Contract
Receivables
Balance at July 31, 2012:
Investment
securities, available
for sale
$ 1,353,365 $51,217
$ — $1,404,582
Investment securities, available for sale includes mutual funds
that are valued at the net asset value of shares (“NAV”) held by
the Company at period end. Mutual funds held by the Company
are open-end mutual funds that are registered with the Securities
and Exchange Commission. These funds are required to publish
their daily NAV and to transact at that price, and are deemed to be
actively traded. The Company recorded gross unrealized gains of
less than $0.1 million related to these funds in accumulated other
comprehensive income at July 31, 2013 and 2012.
The carrying amount of cash and cash equivalents approximated
fair value at July 31, 2013 and 2012. These assets were classified as
level 1 instruments at both dates.
Long-term debt consists of bank loans and capitalized equipment
leases. Lines of credit consist of borrowings for working capital
requirements. Based on the Company’s assessment of the current
financial market and corresponding risks associated with the
debt and line of credit borrowings, management believes that
the carrying amount of these liabilities approximated fair value at
July 31, 2013 and 2012. These liabilities were classified as level 2
instruments at both dates.
There were no financial instruments classified as level 3 at July 31,
2013 or 2012.
6. Contract Receivables, net
Contract receivables, net are summarized in the following table.
Balance at July 31,
Contract Receivables:
Billed
Unbilled
2013
2012
$36,284,950 $42,977,016
16,441,857
28,829,818
52,726,807
71,806,834
Allowance for doubtful accounts and
contract adjustments
(5,592,800)
(10,238,391)
Total contract receivables, net
$47,134,007 $61,568,443
Billed contract receivables include contractual retainage balances
of $0 and $0.2 million at July 31, 2013 and 2012, respectively.
Management anticipates that the July 31, 2013 unbilled receivables
will be substantially billed and collected within one year.
United States, Canada and
South America
$41,302,180
$ 1,576,746
Middle East/Africa
10,876,151
3,886,508
Asia
Totals
548,476
129,546
$52,726,807
$ 5,592,800
Balance at July 31, 2012
Region
United States, Canada and
South America
Allowance
for Doubtful
Accounts
and Contract
Adjustments
Contract
Receivables
$46,064,299
$ 1,729,515
Middle East/Africa
21,224,062
7,377,650
Asia
Totals
4,518,473
1,131,226
$71,806,834
$10,238,391
During the three months ended July 31, 2013, the Company
recorded $10.7 million of specific write-offs of aged and
uncollectible contract receivables related to projects in China,
the Middle East and northern Africa, which resulted in equivalent
reductions in contract receivables and the allowance for doubtful
accounts and contract adjustments. The decision to write-off
these contract receivable balances was based on management’s
assessment that cash collections are not likely.
Prior to these write-off adjustments, combined contract receivables
related to projects in the Middle East, Africa and Asia represented
35% and 36% of total contract receivables at July 31, 2013 and
2012, while the combined allowance for doubtful accounts and
contract adjustments related to these projects represented 90%
and 83%, respectively, of the total allowance for doubtful accounts
and contract adjustments at those same period end dates. These
allowance percentages highlight the Company’s experience of
heightened operating risks (i.e., political, regulatory and cultural
risks) within these foreign regions in comparison with similar risks
in the United States, Canada and South America. These heightened
operating risks have ultimately resulted in increased collection risks
as well as the expending of resources that the Company may not
recover for several months, or at all.
Middle East/Africa
As of July 31, 2012, the Company recorded $14.8 million of contract
receivables and $3.9 million of allowance for doubtful accounts and
contract adjustments related to specific projects in the Middle East.
During the quarter ended January 31, 2013, the Company received
$7.1 million of cash related to one of these projects, which resulted
29
in reductions in contract receivables and the allowance for doubtful
accounts and contract adjustments of $7.1 million and $1.7 million,
respectively. This reduction in the allowance for doubtful accounts
and contract adjustments was partially offset by $0.4 million of
contract adjustments recorded in response to continued aging of
contract receivables related to other projects in the Middle East.
During fiscal year 2013, the Company recorded $0.9 million of
contract adjustments related to work completed for a project in
northern Africa, for which the client has not yet approved the
project tasks as of July 31, 2013.
During the three months ended July 31, 2013, the Company
recorded $3.4 million of specific write-offs of aged, uncollectible
and fully reserved contract receivables related to projects in the
Middle East and Africa, which resulted in equivalent reductions in
contract receivables and the allowance for doubtful accounts and
contract adjustments.
Asia
In January 2013, the Company announced that it had entered into a
contract to provide environmental consulting services to a client in
China. This contract replaced a previous agreement from fiscal year
2011. Through July 31, 2013, the Company recorded $6.8 million
of contract receivables related to these agreements in China.
Since inception of these agreements, the Company encountered
significant transitional issues and delays in collecting payments due
to us.
After considering the age of the related contract receivables, non-
payment of advanced payments owed to the Company and the
lack of any other cash collections to date, management concluded
during the fourth quarter of fiscal year 2013 that the contract
receivables from the client in China were uncollectible, and the
Company recorded $4.8 million of contract adjustments during
the quarter, of which $3.8 million related to revenue and contract
receivables recorded during fiscal year 2013. For all of fiscal year
2013, the Company recorded $6.3 million of contract adjustments
related to these contract receivables. The total allowance for
doubtful accounts and contract adjustments related to these
contracts was $6.8 million at July 31, 2013, which represented 100%
of the related contract receivable balances. During the fourth
quarter of fiscal year 2013, management suspended all project
activity related to these contracts.
During the three months ended July 31, 2013, the Company
recorded $7.3 million of specific write-offs of aged, uncollectible
and fully reserved contract receivables related to projects in China,
which resulted in equivalent reductions in contract receivables and
the allowance for doubtful accounts and contract adjustments.
Allowance for Doubtful Accounts and
Contract Adjustments
Activity within the allowance for doubtful accounts and contract
adjustments is summarized in the following table.
Fiscal Year Ended July 31,
2013
2012
2011
$10,238,391 $ 6,755,087 $3,373,673
Balance at beginning of
period
Net increase (decrease)
due to adjustments in the
allowance for:
Contract adjustments (1)
6,319,650
1,635,311
3,355,971
Doubtful accounts (2)
(287,426)
689,657
424,377
Transfer of reserves to
(from) allowance for
doubtful accounts and
contract adjustments
from (to) allowance for
project disallowances (3)
Specific write-off of
contract receivables and
reserves during the
period
61,123
1,158,336
(398,934)
(10,738,938)
—
—
Balance at end of period
$ 5,592,800 $10,238,391 $6,755,087
(1) Increases (decreases) to the allowance for contract adjustments on the
consolidated balance sheets are also recorded as (decreases) increases to revenue on
the consolidated statements of operations.
(2) Increases (decreases) to the allowance for doubtful accounts on the consolidated
balance sheets are also recorded as increases (decreases) to administrative and other
indirect operating expenses on the consolidated statements of operations.
(3) The allowance for project disallowances is included in other accrued liabilities on
the consolidated balance sheets. Refer to Note 11 of these consolidated financial
statements.
7. Property, Building and Equipment, Net
Property, plant and equipment is summarized in the following
table.
Balance at July 31,
2013
2012
Land and land improvements
$ 393,051
$ 393,051
Buildings and building improvements
12,231,788
12,231,788
Field Equipment
Computer equipment
Computer software
3,128,859
3,214,319
8,931,030
8,533,890
3,617,527
4,057,531
Office furniture and equipment
4,023,004
3,898,444
Vehicles
Other
Accumulated depreciation and
amortization.
1,548,901
1,511,742
817,780
856,271
34,691,940
34,697,036
(24,569,139)
(22,584,958)
$10,122,801
$12,112,078
30
During fiscal years 2012 and 2013, the Company acquired and
developed a new operating and financial software system for
use by EEI and its U.S. and foreign subsidiaries. Through July 31,
2013, the Company capitalized $4.1 million of expenditures for
the acquisition and development of this system, which was being
amortized over a 10 year useful life. During the quarter ended July
31, 2013, management assessed the utility and effectiveness of
various modules included in the software package, and determined
that certain software modules do not meet the needs of users that
rely on the system and will not provide any future service potential.
As a result, the Company recorded a software impairment charge
of $0.8 million during the three months ended July 31, 2013, which
was included in administrative and indirect operating expenses on
the accompanying consolidated statements of operations.
In November 2013, after an extensive assessment process,
management decided to abandon its existing operating and financial
software system and migrate to new system software. The Company
currently plans to acquire and develop the new software during
fiscal year 2014, with a target go-live date of August 1, 2014. The
Company will continue to utilize the current software system until
the new system go-live date, at which time the current system will be
abandoned. As a result, management anticipates that unamortized
software development costs for the current system of $2.7 million as
of July 31, 2013 will be completely amortized by July 31, 2014.
8. Lines of Credit
Unsecured lines of credit are summarized in the following table.
Balance at July 31,
2013
2012
Outstanding cash draws, recorded as
lines of credit on the accompanying
consolidated balance sheets
Outstanding letters of credit to support
operations
3,080,938
2,615,415
Total amounts used under lines of credit
9,609,629 14,924,750
Remaining amounts available under
lines of credit
24,759,371 19,444,250
Total approved unsecured lines of credit $34,369,000 $34,369,000
Contractual interest rates ranged from 2.5% to 5.0% at July 31, 2013
and 2012. The Company’s lenders have reaffirmed the lines of
credit within the past twelve months.
9. Debt and Capital Lease Obligations
Debt and capital lease obligations are summarized in the following
table.
July 31,
Various bank loans and advances at
interest rates ranging from 5% to 14%
Capital lease obligations at varying
interest rates averaging 11%
2013
2012
$ 276,934
$ 372,744
174,338
218,351
451,272
591,095
Current portion of long-term debt and
capital lease obligations
Long-term debt and capital lease
obligations
(199,658)
(488,460)
$ 251,614
$ 102,635
The aggregate maturities of long-term debt and capital lease
obligations as of July 31, 2013 are summarized in the following
table.
August 2013 – July 2014
$199,658
August 2014 – July 2015
177,024
August 2015 – July 2016
74,590
August 2016 – July 2017
August 2017 – July 2018
Thereafter
—
—
—
Total
$451,272
10. Income Taxes
Income (loss) from continuing operations before provision (benefit)
for income taxes and noncontrolling interest is summarized in the
following table.
Domestic
Foreign
Fiscal Year Ended July 31,
2013
2012
2011
$(3,055,338)
$ (993,959)
$ 7,212,154
2,087,524
5,391,625
5,543,017
$ (967,814)
$4,397,666
$12,755,171
The income tax provision is summarized in the following table.
Fiscal Year Ended July 31,
2013
2012
2011
State
Foreign
Deferred:
Federal
State
Foreign
181,434
855,500
(232,800)
786,651
1,652,202
1,740,867
51,069
1,244,199
5,541,648
200,197
(178,438)
181,406
509,161
(409,268)
(35,273)
(91,656)
(360,171)
(409,489)
203,165
113,717
(910,413)
$ 254,234
$1,357,916
$ 4,631,235
31
$ 6,528,691
$12,309,335
Federal
$(985,865)
$ (175,203)
$ 3,014,130
Current:
A reconciliation of the income tax provision using the statutory
U.S. income tax rate compared with the actual income tax
provision reported on the consolidated statements of operations is
summarized in the following table.
Balane at July 31, 2012
Current
Noncurrent
Contract and other reserves
$4,004,631
$ —
Fiscal Year Ended July 31,
2013
2012
2011
$(329,057) $1,495,206 $4,336,758
Accrued compensation and
expenses
Net operating loss
carryforwards
Foreign and state income
taxes
Federal benefit on state
deferred taxes
(102,933)
(255,065)
(293,369)
Foreign tax credit
Income tax provision at the
U.S. federal statutory income
tax rate
Income from “pass-through”
entities taxable to noncontrol-
ling partners
International rate differences
(197,217)
(329,825)
(267,859)
Valuation Allowance
1,267,004
531,386
—
—
(192,927)
—
(258,831)
—
555,437
65,274
(41,259)
295,674
(61,406)
95,325
94,528
211,088
114,797
Net deferred tax assets
$4,819,877
$ 1,440,431
Other
Foreign dividend income
481,287
329,825
420,921
Fixed assets and intangibles
$ —
$ (579,932)
Other
(20,153)
(423,324)
—
— (229,593)
Net deferred tax liabilities
$ (20,153)
$ (1,003,256)
Other foreign taxes, net of
federal benefit
Domestic manufacturing
deduction
State taxes, net of federal
benefit
Re-evaluation and settle-
ments of tax contingencies
3,871
13,193
433,676
(58,105)
(180,304)
—
—
—
Peru non-deductible expenses
173,707
211,000
Canada valuation allowance
130,950
—
Other permanent differences
57,203
(137,202)
115,904
Income tax provision, as
reported on the consolidated
statements of operations
$ 254,234 $1,357,916 $ 4,631,235
The significant components of deferred tax assets (liabilities) are
summarized in the following table.
Balane at July 31, 2013
Current
Noncurrent
Contract and other reserves
$3,273,465
$ —
Accrued compensation and
expenses
Net operating loss
carryforwards
Foreign and state income
taxes
Federal benefit on state
deferred taxes
Foreign tax credit
Valuation Allowance
Other
1,349,318
476,214
—
—
(183,987)
—
(343,245)
—
613,097
52,375
(110,520)
461,154
(287,751)
89,208
Net deferred tax assets
$4,095,551
$1,293,777
Fixed assets and intangibles
$ —
$ (308,845)
Other
212,987
(358,659)
Net deferred tax liabilities
$ 212,987
$ (667,504)
32
For fiscal years 2013 and 2012, there was no one item that
significantly impacted the change in the deferred tax assets and
liabilities. A valuation allowance of approximately $0.6 million and
$0.3 million was recorded at July 31, 2013 and 2012, respectively,
which was primarily related to excess foreign tax credit
carryforwards, the utilization of which is dependent on future
foreign source income, and to operating losses in Asia and Canada.
The Company has not recorded income taxes applicable
to undistributed earnings of all foreign subsidiaries that are
indefinitely reinvested in those operations. At July 31, 2013,
undistributed earnings of foreign subsidiaries that are indefinitely
reinvested in those operations of approximately $5.2 million related
primarily to operations in Saudi Arabia, Chile, Peru and Ecuador.
The Company files numerous consolidated and separate income
tax returns in the U.S. federal jurisdiction and in many state and
foreign jurisdictions. During fiscal year 2011, the IRS completed the
audit for fiscal year 2009 with no proposed changes. During fiscal
year 2013, the IRS completed an examination of the fiscal year
2010 and 2011 income tax returns, which were settled without
material adjustment. The Company’s tax matters for the fiscal years
2012 and 2013 remain subject to examination by the IRS. During
fiscal year 2012, the Company was audited by New York State for
fiscal years 2008 through 2010, which resulted in no adjustments.
The Company’s tax matters in other material jurisdictions remain
subject to examination by the respective state, local, and foreign
tax jurisdiction authorities. No waivers have been executed that
would extend the period subject to examination beyond the
period prescribed by statute.
During the fiscal year ended July 31, 2013 and 2012, the Company
generated operating losses in the U.S. of $1.8 million and $0.2
million, respectively. These net operating losses will be carried
back to an earlier year and be fully utilized. Net operating losses
still exist pertaining to operations in Brazil, Canada and China, and
for state income tax purposes.
At July 31, 2013, 2012 and 2011, the Company had $0.1 million,
$0.1 million and $0.5 million, respectively, of gross unrecognized
tax benefits (“UTPs”) that if realized, would favorably affect the
effective income tax rate in future periods. It is reasonably possible
that the liability associated with UTPs will increase or decrease
within the next twelve months. At this time, an estimate of the
range of the reasonably possible outcomes cannot be made. The
Company’s UTPs are summarized in the following table.
Balance at beginning of period
$131,300 $530,500
$240,900
Fiscal Year Ended July 31,
2013
2012
2011
Additions for tax positions
during the current year
Additions for tax positions of
prior years
Reductions for tax positions of
prior years for:
—
— 280,700
— 23,100
40,300
- Changes in judgment
(23,100)
—
—
- Settlements during the
(29,000)
(422,300)
(31,400)
period
- Changes in non-controlling
11,900
—
—
interests
Balance at end of period
$ 91,100 $131,300
$530,500
The net liability for UTPs and associated interest and penalties
are included in noncurrent income taxes payable on the
accompanying consolidated balance sheets. The Company
recognized interest and penalties expense of approximately
$0.1million related to liabilities for UTPs during fiscal years 2013,
2012 and 2011. The Company had approximately $0.1 million of
accrued interest and penalties at July 31, 2013 and 2012.
11. Other Accrued Liabilities
Other accrued liabilities are summarized in the following table.
Balance at July 31,
2013
2012
Allowance for project disallowances
$ 2,663,351
$ 2,724,474
Other
1,406,722
1,208,114
Total other accrued liabilities
$ 4,070,073
$ 3,932,588
The allowance for project disallowances represents potential
disallowances of amounts billed and collected resulting from
contract close-outs and government audits. Allowances for
project disallowances are recorded when the amounts are
estimable. Activity within the allowance for project disallowances is
summarized in the following table.
Balance at beginning of
period
Net change due to
government audits during
the period, recorded as a
transfer of reserves (to)
from allowance for
doubtful accounts and
contract adjustments
Fiscal Year Ended July 31,
2013
2012
2011
$ 2,724,474 $ 3,882,810 $ 3,483,876
(61,123)
(1,158,336)
398,934
Balance at end of period
$ 2,663,351 $ 2,724,474 $ 3,882,810
12. Stock Award Plan
EEI adopted the 1998 Stock Award Plan effective March 16, 1998
(the “1998 Plan”). To supplement the 1998 Plan, the 2003 Stock
Award Plan (the “2003 Plan”) was approved by the shareholders
at the Annual Meeting held in January 2004 and the 2007 Stock
Award Plan (the “2007 Plan”) was approved by the shareholders at
the Annual Meeting held in January of 2008. The 1998 Plan, 2003
Plan and the 2007 Plan are collectively referred to as the “Award
Plan”. The 2003 Plan was approved retroactive to October 16, 2003
and terminated on October 15, 2008. The 2007 Plan was approved
retroactive to October 18, 2007 and terminated on October 17, 2012.
The Company awarded 62,099 shares valued at $0.9 million in
October 2011 pursuant to the Award Plan. These awards have
a three year vesting period. The “pool” of excess tax benefits
accumulated in Capital in Excess of Par Value was $0.2 million and
$0.3 million at July 31, 2013 and 2012, respectively.
The Company recorded $0.5 million, $0.7 million and $0.5 million
of non-cash compensation expense during the fiscal years ended
July 31, 2013, 2012 and 2011, respectively, in connection with
outstanding stock compensation awards. The Company expects
to record approximately $0.3 million of non-cash compensation
expense related to outstanding stock compensation awards during
the fiscal year ended June 30, 2014.
13. Shareholders’ Equity
Class A and Class B Common Stock
The relative rights, preferences and limitations of the Company’s
Class A and Class B common stock are summarized as follows:
Holders of Class A shares are entitled to elect 25% of the Board of
Directors so long as the number of outstanding Class A shares is at
least 10% of the combined total number of outstanding Class A and
Class B common shares. Holders of Class A common shares have
one-tenth the voting power of Class B common shares with respect
to most other matters.
In addition, Class A shares are eligible to receive dividends in
excess of (and not less than) those paid to holders of Class B shares.
Holders of Class B shares have the option to convert at any time,
each share of Class B common stock into one share of Class A
common stock. Upon sale or transfer, shares of Class B common
stock will automatically convert into an equal number of shares
of Class A common stock, except that sales or transfers of Class
B common stock to an existing holder of Class B common stock
or to an immediate family member will not cause such shares to
automatically convert into Class A common stock.
Restrictive Shareholder Agreement
Messrs. Gerhard J. Neumaier, Silvestro, Frank, and Strobel entered
into a Stockholders’ Agreement dated May 12, 1970, as amended
January 24, 2011 (the “Stockholders’ Agreement”), which governs
the sale of certain shares of common stock owned by them and
the children of those individuals. The Stockholders’ Agreement
provides that prior to accepting a bona fide offer to purchase the
certain covered part of their shares, each party must first allow
the other members to the Agreement the opportunity to acquire
on a pro rata basis, with right of over-allotment, all of such shares
covered by the offer on the same terms and conditions proposed
by the offer.
Cash Dividends
The Company declared and paid cash dividends of $2.0 million
during the fiscal years ended July 31, 2013 and 2012, respectively.
The Company recorded dividends payable of $1.0 million in other
accrued liabilities at July 31, 2013 and 2012, which were paid in
August 2013 and 2012, respectively.
33
Fiscal Year ended July 31,
2013
2012
2011
Transfers to noncontrolling interest:
Sale of 600 Gustavson
common shares (1)
Sale of 900 Gustavson
common shares
Issuance of 667 ECSI
common shares
Sale of 75 Lowham – Walsh
common shares
Total transfers to
noncontrolling interest
$ — $ 41,634 $ —
—
—
—
—
—
—
—
62,451
667,000
27,917
41,634
757,368
Transfers from noncontrolling interest:
Purchase of 50 Walsh
common shares (2)
Purchase of 25 Lowham
common shares (3)
Purchase of 495 Walsh
common shares (4)
(18,316)
(8,737)
(243,653)
Purchase of 2,800 Gustavson
common shares (5)
(293,102)
(182,125)
(30,002)
—
—
—
—
—
—
Purchase of 370 Walsh
common shares (6)
Purchase of 75 Lowham
common shares (7)
Purchase of 25 Gestion
Ambiental Consultores
common shares (8)
Purchase of 166 Walsh
common shares (9)
Purchase of 496 Walsh
common shares (10)
Purchase of 5,389 Brazil
common shares (11)
Purchase of 26,482 Walsh
Peru common shares (12)
Purchase of 152 Walsh
common shares (13)
Purchase of 20 Walsh
common shares
Purchase of 496 Walsh
common shares
Purchase of 2,205 Walsh
common shares
Purchase of 243 Walsh
common shares
Purchase of 426 Walsh
common shares
Purchase of 100 Walsh
common shares
Total transfers from
noncontrolling interest
Net transfers from
noncontrolling interest
—
(7,452)
— (97,634)
— (277,514)
—
77,539
— (238,677)
— (76,037)
—
—
—
—
—
—
—
(7,776)
— (208,156)
— (974,750)
— (101,905)
— (197,945)
—
(41,091)
(775,935)
(619,775)
(1,531,623)
$ (775,935) $(578,141) $ (774,255)
—
—
—
—
—
—
—
—
—
—
—
—
Stock Repurchase
In August 2010, the Company’s Board of Directors approved a
program for repurchase of 200,000 shares of Class A common stock.
As of July 31, 2013, 93,173 shares remain available for repurchase.
Noncontrolling Interests
Noncontrolling interests are disclosed as a separate component
of consolidated shareholders’ equity on the accompanying
consolidated balance sheets. Earnings and other comprehensive
(loss) income are separately attributed to both the controlling and
noncontrolling interests. Earnings per share is calculated based
on net (loss) income attributable to the Company’s controlling
interests.
Transactions with noncontrolling shareholders for the fiscal years
ended July 31, 2013, 2012 and 2011 were recorded at amounts that
approximated fair value. Effects on shareholders’ equity resulting
from changes in EEI’s ownership interest in its subsidiaries are
summarized in the following table (shown on the right).
(1) On August 1, 2011, the noncontrolling shareholders of Gustavson
Associates, LLC (“Gustavson”), a subsidiary of Walsh Environmental
Scientists and Engineers, LLC (“Walsh”) purchased an additional 1.5% of
newly issued shares of the company for less than $0.1 million in cash.
(2) On April 22, 2013, EEI purchased an additional 0.1% of Walsh from
noncontrolling shareholders for less than $0.1 million in cash.
(3) On March 13, 2013, Lowham-Walsh Engineering & Environment
Services LLC (“Lowham”), a subsidiary of Walsh, purchased shares from
noncontrolling shareholders for less than $0.1 million in cash.
(4) On January 28, 2013, EEI purchased an additional 1.3% of Walsh from
noncontrolling shareholders for $0.2 million. Two thirds of the purchase
price was paid in cash while the remaining one third was paid for with
EEI stock.
(5) On December 28, 2012, Gustavson purchased an additional 6.7% of its
shares from noncontrolling shareholders for $0.4 million. Half of the
purchase price was paid in cash and Gustavson issued a three year note
for the other half.
(6) On December 17, 2012, EEI purchased an additional 0.9% of Walsh from
noncontrolling shareholders for $0.2 million in cash.
(7) During the three months ending October 31, 2012, Lowham purchased
shares from noncontrolling shareholders for less than $0.1 million in
cash.
(8) On May 1, 2012, Gestion Ambiental Consultores S.A. (“GAC”), a
subsidiary of EEI, purchased 2.5% of its stock back from noncontrolling
shareholders for less than $0.1 million in cash.
(9) On April 23, 2012, EEI purchased an additional 0.4% of Walsh from
noncontrolling shareholders for $0.1 million in cash.
(10) On January 4, 2012, EEI purchased an additional 1.3% of Walsh from
noncontrolling shareholders for $0.3 million. Two thirds of the purchase
price was paid in cash while the remaining one third was paid for with
EEI stock.
(11) On December 14, 2011, EEI purchased an additional 4.0% of Ecology
and Environment do Brasil LTDA (E & E Brasil) from noncontrolling
shareholders for $0.2 million cash.
(12) On November 18, 2011, Walsh Peru S.A. Ingenieros y Cientificos
Consultores (“Walsh Peru”), a subsidiary of Walsh, purchased an
additional 3.9% of its shares from noncontrolling shareholders for $0.4
million in cash.
(13) On October 24, 2011, EEI purchased an additional 0.4% of Walsh from
noncontrolling shareholders for $0.1 million in cash.
34
In October 2013, EEI consummated the following transactions with
noncontrolling interests:
The computation of basic earnings per share is included in the
following table.
• An additional 9.4% of Walsh was purchased from a
noncontrolling shareholder for $1.6 million. The purchase
price was paid as follows: (i) one third in cash; (ii) one third
with EEI common stock; and (iii) one third with a promissory
note payable in two annual installments of one half the
principal plus interest accrued at 3.25% per annum.
• An additional 0.2% of Walsh was purchased from a
noncontrolling shareholder for less than $0.1 million in cash.
EEI held a cumulative total of 99.1% of outstanding Walsh shares
after consummation of these transactions.
14. Lease Commitments
The Company rents certain office facilities and equipment under
non-cancelable operating leases and certain other facilities for
servicing project sites over the term of the related long-term
government contracts. Future minimum rental commitments
under these leases as of July 31, 2013 are summarized in the
following table.
Fiscal Year Ended July 31,
2014
2015
2016
2017
2018
Thereafter
Amount
$2,079,109
1,686,810
1,509,876
1,553,782
1,197,714
2,325,910
Lease agreements may contain step rent provisions and/or
free rent concessions. Lease payments based on a price index
have rent expense recognized on a straight line or substantially
equivalent basis, and are included in the calculation of minimum
lease payments. Gross rental expense associated with lease
commitments was $4.2 million, $4.2 million and $3.6 million for the
fiscal years ended July 31, 2013, 2012 and 2011, respectively.
15. Defined Contribution Plans
Contributions to EEI’s defined contribution plan and supplemental
retirement plan are discretionary and determined annually by its
Board of Directors. Walsh’s defined contribution plan provides for
mandatory employer contributions to match 100% of employee
contributions up to 4% of each participant’s compensation. The
total expense under the plans was $2.2 million, $1.8 million, and
$2.2 million for the fiscal years ended July 31, 2013, 2012 and 2011,
respectively.
16. Earnings Per Share
Basic and diluted EPS is computed by dividing the net (loss)
income attributable to Ecology and Environment, Inc. common
shareholders by the weighted average number of common shares
outstanding for the period. The Company allocates undistributed
earnings between the classes on a one-to-one basis when
computing earnings per share. As a result, basic and fully diluted
earnings per Class A and Class B shares are equal amounts.
Fiscal Year Ended July 31,
2013
2012
2011
Net (loss) income
attributable to Ecology
and Environment, Inc.
$(2,130,434) $ 773,579 $6,960,263
Dividend declared
2,038,496
2,036,559
1,963,303
Undistributed earnings
$(4,168,930)
$(1,262,980) $4,996,960
Weighted-average
common shares
outstanding (basic and
diluted)
Distributed earnings per
share
Undistributed earnings
per share
4,247,821
4,233,883
4,222,688
$0.48
$ 0.48
$0.46
(0.98)
(0.30)
1.19
Total earnings per share $ (0.50)
$ 0.18 $ 1.65
After consideration of all the rights and privileges of the Class A
and Class B stockholders summarized in Note 13, in particular the
right of the holders of the Class B common stock to elect no less
than 75% of the Board of Directors making it highly unlikely that the
Company will pay a dividend on Class A common stock in excess
of Class B common stock, the Company allocates undistributed
earnings between the classes on a one-to-one basis when
computing earnings per share. As a result, basic and fully diluted
earnings per Class A and Class B share are equal amounts.
The Company has determined that its unvested share-based
payment awards that contain non-forfeitable rights to dividends
or dividend equivalents (whether paid or unpaid) are participating
securities. These securities shall be included in the computation of
earnings per share pursuant to the two-class method. The resulting
impact was to include unvested restricted shares in the basic
weighted average shares outstanding calculation.
17. Segment Reporting
The Company reports segment information based on the
geographic location of its customers (for revenues) and the location
of its offices (for long-lived assets). Revenue and long-lived assets
by business segment are summarized in the following tables.
Fiscal Years Ended July 31,
2013
2012
2011
Revenue by geographic location:
United States
$91,451,247 $98,558,099 $115,040,860
Foreign countries
43,485,644
56,852,000
54,132,000
(1) Significant foreign revenues included revenues in Peru ($11.5 million, $17.2 million
and $15.9 million for fiscal years 2013, 2012 and 2011, respectively), Brazil ($15.1 million,
$15.7 million and $11.8 million for fiscal years 2013, 2012 and 2011, respectively) and
Chile ($10.6 million, $11.3 million and $8.3 million for fiscal years 2013, 2012 and 2011,
respectively).
35
On February 4, 2011, the Chico Mendes Institute of Biodiversity
Conservation of Brazil (the “Institute”) issued a Notice of Infraction
to E & E Brasil. E & E Brasil is a majority-owned subsidiary of Ecology
and Environment, Inc. The Notice of Infraction concerns the
taking and collecting species of wild animal specimens without
authorization by the competent authority and imposes a fine of
520,000 Reais, which has a value of approximately $0.2 million
at April 30, 2013. No claim has been made against Ecology and
Environment, Inc. The Institute has also filed Notices of Infraction
against four employees of E & E Brasil alleging the same claims and
has imposed fines against those individuals that, in the aggregate,
are equal to the fine imposed against E & E Brasil. E & E Brasil has
filed administrative responses with the Institute for itself and its
employees that: (a) denies the jurisdiction of the Institute, (b)
states that the Notice of Infraction is constitutionally vague and
(c) affirmatively stated that E & E Brasil had obtained the necessary
permits for the surveys and collections of specimens under
applicable Brazilian regulations and that the protected conservation
area is not clearly marked to show its boundaries. At this time, E & E
Brasil has attended one meeting where depositions were taken. The
Company believes that these administrative proceedings in Brazil
will not have an adverse material effect upon the operations of the
Company.
Balance at July 31,
2013
2012
2011
Long-Lived Assets by geographic location:
United States
$29,508,055 $29,506,036
$27,871,726
Foreign countries
5,183,885
5,191,000
5,062,000
18. Commitments and Contingencies
From time to time, the Company is a named defendant in legal
actions arising out of the normal course of business. The Company
is not a party to any pending legal proceeding, the resolution of
which the management believes will have a material adverse effect
on the Company’s results of operations, financial condition or
cash flows, or to any other pending legal proceedings other than
ordinary, routine litigation incidental to its business. The Company
maintains liability insurance against risks arising out of the normal
course of business.
Certain contracts contain termination provisions under which the
customer may, without penalty, terminate the contracts upon
written notice to the Company. In the event of termination, the
Company would be paid only termination costs in accordance with
the particular contract. Generally, termination costs include unpaid
costs incurred to date, earned fees and any additional costs directly
allocable to the termination.
On September 21, 2012, the Colorado Department of Public
Health and Environment (the “Department”) issued a proposed
Compliance Order on Consent (the “ Proposed Consent Order”)
to the City and County of Denver (“Denver”) and to Walsh
Environmental Scientists and Engineers, LLC (“Walsh”). Walsh is a
majority-owned subsidiary of Ecology and Environment, Inc. The
Proposed Consent Order concerns construction improvement
activities of certain property owned by Denver which was the
subject of asbestos remediation. Denver had entered into a
contract with Walsh for Walsh to provide certain environmental
consulting services (asbestos monitoring services) in connection
with the asbestos containment and/or removal performed by other
contractors at Denver’s real property. Without admitting liability or
the Department’s version of the underlying facts, Walsh on February
13, 2013 entered into a Compliance Order on Consent with the
Department and paid a penalty of less than $0.1 million and paid
for a Supplemental Environmental Project to benefit the public
at large in an amount less than $0.1 million. Denver was served
with a final Compliance Order and Assessment of Administrative
Penalty against Denver alone for approximately $0.2 million. Under
Walsh’s environmental consulting contract with Denver, Walsh
has agreed to indemnify Denver for certain liabilities where Walsh
could potentially be held responsible for a portion of the penalty
imposed upon Denver. Walsh has put its professional liability and
general liability carriers on notice of this indemnification claim by
Denver. The Company believes that this administrative proceeding
involving Walsh will not have an adverse material effect upon the
operations of the Company.
36
19. Selected Quarterly Financial Data (unaudited)
Fiscal Year Ended July 31, 2013
October 31
January 31
April 30
July 31
Revenue
$ 36,822
$ 36,151
$ 32,219
$ 29,745
Fiscal Quarter Ended (In thousands, except per share information)
Income (loss) from operations
Income (loss) before income tax (benefit) provision
Net Income (loss) attributable to
Ecology and Environment, Inc.
Net Income (loss) per common share (basic and diluted)
974
898
243
0.05
3,355
3,257
1,911
0.45
(44)
(26)
(441)
(0.10)
(5,183)
(5,097)
(3,843)
(0.90)
Fiscal Year Ended July 31, 2012
October 31
January 31
April 30
July 31
Revenue
Income from operations
Income before income tax provision
Net Income (loss) attributable to
Ecology and Environment, Inc.
Net Income (loss) per common share (basic and diluted)
$ 42,312
$ 40,173
$ 36,011
$ 36,914
2,040
2,084
1,160
.28
1,867
1,685
503
.12
574
503
56
.01
303
126
(945)
(.23)
Fiscal Year Ended July 31, 2011
October 31
January 31
April 30
July 31
Revenue
Income from operations
Income before income tax provision
Net Income attributable to Ecology and Environment, Inc.
1,859
Net Income per common share (basic and diluted)
0.44
$ 42,026
$ 41,866
$ 41,120
$ 44,161
4,008
3,941
3,204
3,238
1,758
0.42
2,199
2,587
1,429
0.34
2,975
2,989
1,914
0.45
Market for EnE’s Common Equity and Related Stockholder Matters
The Company’s Class A Common Stock is listed on NASDAQ. There is no separate market for the Company’s Class B Common Stock. The
range of high and low prices for the Company’s Class A Common Stock, as reported by NASDAQ, are summarized in the following table.
Fiscal Year Ended July 31, 2013
High
Low
Per Share Dividend Declared
First Quarter (commencing August 1, 2012 - October 31, 2012)
$ 13.00
$ 11.60
Second Quarter (commencing November 1, 2012 - January 31, 2013)
Third Quarter (commencing February 1, 2013 - April 30, 2013)
Fourth Quarter (commencing May 1, 2013 - July 31, 2013)
13.36
14.42
13.00
10.70
11.75
10.05
—
$ 0.24
—
$ 0.24
Fiscal Year Ended July 31, 2012
High
Low
Per Share Dividend Declared
First Quarter (commencing August 1, 2011 - October 29, 2011)
$ 17.65
$ 14.95
Second Quarter (commencing October 30, 2011 - January 31, 2012)
Third Quarter (commencing February 1, 2012 - April 30, 2012)
Fourth Quarter (commencing May 1, 2012 - July 31, 2012)
17.50
17.00
15.19
15.64
14.60
11.26
—
$ 0.24
—
$ 0.24
As of October 31, 2013, 2,646,110 shares of the Company’s Class A Common Stock were outstanding and there were 375 holders of record
of the Company’s Class A Common Stock. We estimate that the Company has a significantly greater number of Class A Common Stock
shareholders because a substantial number of the Company’s shares are held in street name.
37
Frank B. Silvestro
Chairman of the Board
Gerald A. Strobel, P.E.
Ronald L. Frank
Gerald A. Strobel, P.E.
Chief Executive Officer,
Executive Vice President
Frank B. Silvestro
Executive Vice President
Kevin S. Neumaier, P.E.
President
Ronald L. Frank
Executive Vice President, Secretary
Laurence M. Brickman, Ph.D.
Senior Vice President
Kevin Donovan
Senior Vice President
Gerard A. Gallagher, III
Senior Vice President
CORPORATE HEADQUARTERS
Buffalo Corporate Center
368 Pleasant View Drive
Lancaster, NY 14086-1397
TEL: 1 (716) 684-8060
FAX: 1 (716) 684-0844
E-MAIL: jmye@ene.com
WEB: www.ene.com
STOCK TRANSFER AGENT
American Stock Transfer & Trust Co.
40 Wall Street
New York, NY 10005
TEL: 1 (212) 936-5100
BOARD OF DIRECTORS
as of October 31, 2013
Gerard A. Gallagher, Jr.
Retired Company Officer
Michael C. Gross
Insurance Broker and
NYS Tax Auditor
CORPORATE OFFICERS
Fred J. McKosky, P.E.
Senior Vice President
Cheryl A. Karpowicz, AICP
Senior Vice President
Nancy Aungst
Vice President
Timothy J. Grady, P.E.
Vice President
Robert J. King
Vice President
H. John Mye, P.E.
Vice President, Treasurer
and Chief Financial Officer
EXCHANGE LISTING
NASDAQ® Global Market
Ticker Symbol: EEI
INDEPENDENT REGISTERED
ACCOUNTING FIRM
Schneider Downs & Co., Inc.
One PPG Place
Suite 1700
Pittsburgh, PA 15222
LEGAL COUNSEL
Gross, Shuman, Brizdle & Gilfillan, P.C.
465 Main Street, Suite 600
Buffalo, NY 14203
SUBSIDIARIES
Ross M. Cellino
Attorney
Timothy Butler
Retired Bank Executive
Richard Rudy, P.G., C.P.G.
Vice President
George A. Rusk, Esq.
Vice President
Carmine A. Tronolone
Vice President
George W. Welsh
Vice President
Colleen C. Mullaney-Westfall, Esq.
Assistant Secretary
Peter Sorci
Controller
FORM 10-K
EnE’s Annual Report including financial
statements is for the general information
of the Company’s shareholders. It is
not intended to be used in connection
with any sale or purchase of securities.
Shareholders may obtain from the
Company without charge a copy of its
Annual Report on Form 10-K as filed with
the Securities and Exchange Commission,
including financial schedules, by sending
a written request to:
Mr. H. John Mye, Chief Financial Officer
Ecology and Environment, Inc.
368 Pleasant View Drive
Lancaster, NY 14086-1397
Ecology & Environment Engineering, Inc.
Gustavson Associates, LLC
Inactive Subsidiaries:
ecology and environment do brasil Ltda. (Brazil)
Ecology and Environment International
Services, Inc. (EEIS)
ECSI, LLC
Lowham-Walsh Engineering & Environment
Services, LLC
Canada, Germany, Mexico, Venezuela,
Saudi Arabia, Cayman Islands, Tianjin
Servicios Ambientales Walsh, S.A. (Ecuador)
Walsh Environmental Scientist & Engineers, LLC
China, YiYi China
E.E.I.S. (SARL) (Morocco)
Walsh Peru, S.A. (Peru)
Gestión Ambiental Consultores S.A. (Chile)
ecology and
environment, inc.
Global Environmental Specialists
www.ene.com
E & E has printed on 100% recycled paper since 1971. The paper used for this annual report is 100% recycled, 100% post consumer waste,
processed chlorine free, manufactured using biogas energy, printed with soy-based inks, and certified by FSC.