A N N U A L R E P O R T 2 0 1 4
Chairman’s Observations
This past year was a year of transition for Ecology and Environment, Inc. (E & E),
during which we set a course for growth and profitability. Management and staff
met the transition challenge with energy and fortitude; operations were streamlined,
and costs were reduced. Hence, despite absorbing several millions of dollars of
non-recurring transition costs, the bottom line loss compared to fiscal year 2013 was
reduced substantially and the benefits will also accrue in the coming year.
Management set ambitious goals for fiscal year 2014. While not all were fully
achieved, many important goals were realized and E & E has positive momentum
going into fiscal year 2015. Management will continue to focus on organizational
efficiency and client service. E & E’s improving situation, its capability and
reputation, and a growing market points to growth opportunity.
Frank B. Silvestro
Chairman of the Board
ii
The Board of Directors is also transitioning. The number of board seats was reduced
to seven with the resignation without replacement of one of the four founders.
Sadly, the death of another director, Tim Butler, necessitated another change.
Mr. Michael Betrus was subsequently appointed director and now chairs the Audit
Committee.
Given reduced costs and a brightening market, I look for positive results in fiscal
year 2015. E & E is well positioned to provide services in the growing western
hemisphere marketplace. But if E & E is to realize its full potential for revenue
growth and profitability, resources and a revised strategy may be required. There are
several doable paths that are open to E & E. As Chairman, my priority is improving
shareholder value. I am working with the Board to define and evaluate strategic
paths to take this company forward.
1
CEO and President Reflections
on Fiscal Year 2014
In the first quarter of fiscal year 2014, E & E began a process of unprecedented
actions for instituting leadership changes in the firm as well as retooling the
organization for achieving sound financial performance, stability, and growth.
Our commitment to change, and the actions that would affect transformation,
were sustained through the year and continue today. We’re proud of what we’ve
accomplished and are excited about our future.
We have refreshed our vision as a company, and have reaffirmed our commitment
to support clients in making a better and safer world, and in bringing value to
the communities in which we work, serve, and live. E & E will continue to strive
to a higher level of consulting, and provide honorable employment to dedicated
professionals.
We are identifying and making inroads to new markets and services. The markets
we work in are inherently dynamic. Our extensive experience and wide presence
gives us the insight to understand developing markets, anticipate client needs, and
move forward in new areas. In fiscal year 2014, we advanced strategic efforts on
emerging issues surrounding water scarcity and resiliency planning. Those strategic
efforts will continue and expand in the current fiscal year.
We have renewed our emphasis on fostering a business development culture
at E & E. We have stepped up a variety of strategic initiatives for engaging emerging
environmental trends across a range of sectors, including energy development,
transportation, climate adaptation and community resiliency, and water resources
Gerald A. Strobel, P.E.
Chief Executive Officer
2
management, among others. Our business development activities take place
everywhere we work. Technical staff plays an integral role in developing business
by building and maintaining strong client relationships through our responsiveness
and providing quality results.
Our organizational structure and business processes continue to evolve. We
have accomplished our goal of successfully moving E & E to a new management
information system (MIS) by the end of the last fiscal year. The new system is
designed to support our specific needs as an international consulting services
business.
We reduced total operating expenses $8.7 million (8%) in fiscal year 2014,
while at the same time we have been hiring staff in strategic areas for aligning
our technical disciplines and skill sets with our changing markets and new
opportunities. We put operational efficiencies in place as we strive toward meeting
our goals for revenue growth and increased profitability. Our newly deployed MIS
was designed to guide and assist our efforts for achieving these cost efficiencies.
We have developed and put in place a new quality program initiative. E & E
has always had a strong commitment to quality. In fiscal year 2014, we undertook
a critical review of our quality strategies and processes. The first initiative in that
ongoing review process is a Project Quality Management Protocol, which provides
specific actions aimed at providing a high level of performance in the services we
provide to clients.
Gerard A. Gallagher III
President
3
Engaged in the Leading
Environmental Challenges of Our Time
Mounting challenges facing the human condition on our planet have heightened
public, corporate, and government awareness of the interrelationship of energy
and natural resources needs, climate change, accidents and disastrous events,
environmental impact, economics, living standards and quality of life — the
implications of which can profoundly affect public policy, economic development,
important development projects, and their proponents and stakeholders. This is our
business milieu and we foresee an increasing need for our services.
Our aim is to be at the forefront of meeting the new challenges our clients face.
Because of our breadth of experience, demonstrated capability, and effectiveness,
we have the comprehensive view to fulfill this essential societal role. E & E’s vision
is to help our clients in making a better and safer world through developing
technically sound solutions to the leading environmental challenges of our time.
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1 Disease Outbreak Capacity Building – E & E has been working
with USAID since 2009, providing technical services to support
building local capacities to respond to disease outbreaks in hot-
spot locations.
2 Flood Response and Recovery – E & E’s flood-response team
worked with both local and federal agencies to provide river
restoration concepts, design details, and construction oversight
services when Colorado’s Front Range was pummeled by a
rainstorm last year that dropped up to 20 inches of rain in less
than 48 hours.
3 Energy Infrastructure Leadership – E & E’s Electric Transmission
Sector Lead joined other transmission industry leaders in
Washington, DC as a presenter at The High-Voltage Grid: Its
Operations, Challenges, and Benefits, a Congressional briefing on
emerging issues facing electric transmission developers.
4 Coastal Restoration Solutions – E & E is collaborating with
The Nature Conservancy’s North American Freshwater Team to
pursue ecological restoration and habitat enhancement projects
in the Great Lakes and other river basins creating shared solutions
for some of the nation’s most significant freshwater conservation
challenges protecting drinking water, reducing flood risk, and
building smarter infrastructure.
5 Resilient Communities Planning – E & E developed award-
winning reconstruction plans for communities impacted by
Hurricane Sandy, Tropical Storm Irene and Tropical Storm Lee,
working with local steering committees to record historic storm
damage, develop asset inventories, assess risk, and identify
specific strategies and actions to mitigate future flood damage
to allow the communities to quickly and efficiently recover from
storm events.
6 Emergency Operations Planning – Since 2006, E & E has been
assisting the State of Oregon, including all 36 counties, all nine
federally recognized tribes, and over 100 cities in developing
comprehensive, all-hazard emergency operations plans. E & E’s plans
have become the statewide model for compliant and community-
based emergency planning, establishing a common approach to
enhance coordination and mutual support during a disaster.
7 Social Impact Assessment – We work with clients and stakeholders
around the world to strengthen projects to add genuine value and
contribute to an area’s quality of life. In preparing an Environmental
Impact Assessment of the 220 kV TL Machupicchu-Quencoro-
Onocoro-Tintaya Transmission Line in Peru, for example, we built
community understanding and addressed local issues through 252
information workshops in 84 communities.
8 Legacy Site Contamination Cleanup – For the Hudson River PCBs
site, E & E demonstrated how both regulatory agencies and potentially
responsible parties can effectively address large-scale sediment
remediation projects. We developed precedent-setting standards for
river remediation that protect public interest and provided EPA with
vital services throughout the project lifecycle, from award-winning
facility siting studies to the development of an expansive and inclusive
community involvement and education plan, to helping the EPA
develop a new sampling program resulting in more targeted, less
costly dredge operations.
9 Renewable Energy Development – E & E has been awarded $3.8
million in contracts with the US Navy to help plan for and locate solar
facilities at 12 Naval and 2 Marine Corps installations in the US and
at Naval stations in Cuba, Italy, and Spain. When constructed, these
high-profile projects will produce approximately 400 megawatts of
renewable energy.
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The Evolving Energy Market
Dynamic changes in the energy market have created substantial demand for our
environmental services. We work with both public and private sector clients as
valued advisers to help them take advantage of the opportunities the changing
market presents. Building on our historic position as an energy leader, we develop
sound strategies to plan and permit new energy infrastructure and work with
clients throughout the full project lifecycle.
We have seen growth in our electric transmission, liquefied natural gas, solar, and
pipeline work in fiscal year 2014, and we see opportunities to sustain that growth
for future years.
Our renewable energy portfolio is outstanding. The knowledge and relationships
we have gained from working with regulators and communities in energy-
producing states enhances our ability to tackle other project work.
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Plains & Eastern Clean Line Project, Arkansas, Oklahoma, and
Tennessee. Since June 2010, E & E has served as environmental
consultant for this key 700-mile overhead +600 kilovolt high voltage
direct current (HVDC) transmission line, which will deliver 3,500
megawatts of low-cost wind power from the Oklahoma Panhandle
to utilities and customers in the Mid-South and Southeast.
E & E technical and public involvement specialists assisted Clean Line
in siting converter stations and an HVDC transmission line using our
proprietary Correlate software and an iterative process, involving
more than 100 large group stakeholder meetings to solicit feedback
on routing.
Solar Star Project, Kern and Los Angeles Counties, California.
Developing the world’s largest photovoltaic project is inevitably fraught
with some difficulties. SunPower faced major compliance challenges
because its two-part, 579-MW project is being built on 3,000 acres in
both Kern and Los Angeles Counties. E & E stepped in to help the client
sort out each county’s requirements and prioritize needs to facilitate
project implementation and maintain compliance under each
county’s CUP. E & E is now providing compliance monitoring during
construction; the project is on track to be in operation by 2015.
Atlantic Wind Connection Project, Offshore Virginia to New York.
E & E worked with the AWC team on numerous studies and permits to
facilitate development of the 7,000-MW high-voltage direct current,
subsea transmission system in the Outer-Continental shelf, making
landfall in five states along the mid-Atlantic seaboard intended to
provide service for planned wind farms to be located off the coasts of
Virginia, Delaware, Maryland, and New Jersey.
Transco Rockaway Delivery Lateral Project, Rockaway, New York.
The Rockaway Lateral is an important addition to the Transco pipeline,
the nation’s largest capacity interstate natural gas pipeline system and
a major supplier of natural gas to New York City. Since the projects
inception in 2009, E & E has provided comprehensive environmental
review, agency coordination, permit development, and compliance
plan implementation services.
The AWC project was the first right-of-way application filed by any
developer under new renewable energy regulations and the “Smart from
the Start” DOI initiative, and the first federal approval/determination
received by an applicant under the new regulations.
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Sustainability, Resiliency, and
Climate Adaptation
The world is changing at a rapid pace that is increasing the need for plans and
policies, social and economic systems, and built infrastructure that are resilient
and adaptable. Whether it be shifting market needs or increasing threat of climate
change to our natural, human and built systems, E & E works with communities
and organizations to plan for changing conditions and reduce vulnerabilities.
Long-term severe drought in western states, for example, is impacting every
aspect of community planning from agriculture and energy use to soil erosion and
emergency response.
Our multidisciplinary teams engage community stakeholders to first understand
and prioritize concerns, then develop integrated solutions that provide multiple
benefits and lasting returns. Our goal is to help clients plan and build stronger,
more resilient communities.
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The Nature Conservancy Gulf Coast Restoration. E & E is working with The Nature Conservancy to provide planning, engineering, design, and
implementation services for marine conservation projects in the Gulf of Mexico. As part of the Five-year contract, E & E will work collaboratively with
The Nature Conservancy on ecosystem restoration, natural infrastructure, and community resiliency projects to be funded by the National Fish and
Wildlife Foundation, the RESTORE Act, and other sources.
Colorado Flood Corridor Master Planning. To prepare flood-impacted
streams for the 2014 runoff season, E & E engineers teamed with local
and national agency experts to rapidly assess, design, and implement
temporary stabilization measures for immediate threat areas along the
Big Thompson River and its tributaries above the Olympus Dam in Estes
Park. The result of these proactive efforts was successful performance
during the subsequent runoff season with only minor, localized damage
reported in vulnerable flood-affected areas.
New York Rising Community Reconstruction Plans, Capital and
North Country Regions, New York State. The New York Rising
Community Reconstruction Program (NYRCRP) is a bottom-up planning
process designed to empower communities that suffered significant
damage from Superstorm Sandy, Hurricane Irene, and Tropical Storm
Lee. E & E led the development of community reconstruction and
resilience plans for five community groupings within the Capital and
North Country regions of New York.
E & E worked with local steering committees from each community to
record historic storm damage, develop an asset inventory, assess the
risk to priority assets and identify specific strategies, programs, and
actions to mitigate future flood damage and to promote quick and
efficient community recovery. E & E helped develop plans for the Towns
of Jay and Keene and the Village of Waterford that were presented with
prestigious NY Rising to the Top awards, providing the communities
with additional state funding to implement critical projects.
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Growth in Global Markets
Our U.S. and South American subsidiary companies are bringing increasing value
to E & E and represent an important and growing part of our business. Our South
American companies, in particular, are at the forefront of important work in offshore
and onshore energy development, telecommunications infrastructure permitting,
and environmental and social impact assessment projects for the extractive industry.
In North Africa, our continuing efforts in developing a Green City and Technical
University Campus are setting new standards for sustainability on the continent.
As new global markets develop, we are guided by a thoughtful approach to growth
that places us in the most attractive markets, maximizing opportunity and managing
exposure to risk. As new opportunities emerge, operational improvements are
making collaboration between our companies even more efficient.
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1 Cardones-Polpaico Transmission Line, Central Chile. Gestion
Ambiental Consultores, S.A., E & E’s Chilean subsidiary, is working
to help develop this high profile 753-kilometer transmission line
(500 kV) that will reinforce Chile’s Central Interconnected System
between Cardones’ substation located south of the city of Copiapó
and Polpaico’s substation located north of the city of Santiago. The
estimated investment is more than $1 Billion USD.
5 Environmental Impact Assessment, Loreto Region, Peru. In
Peru, our subsidiary company performed the Environmental Impact
Assessment for Block 64 Situche Northwestern Area for the Gran Tierra
Energy Project. The project involves the construction and operation of
production facilities and energy generation in floating concrete barges,
and the construction of access roads, four production platforms with
14 production wells, and nine re-injector wells.
2 GlobeNet Submarine Fiber Optic Cable System Extension,
Colombia. E & E recently completed studies that enabled
environmental permitting for installation of a sub-sea fiber-
optic cable connecting to telecommunications networks linking
Colombia to the Carribbean countries.
3 Ville Verte Mohammed VI (VVM6) Green City and Technical
University Campus, Morocco. E & E is providing sustainable
design and planning services to support the development of
the VVM6 Green City and a new Technical University Campus in
Morocco. The Green City is intended to set a new standard for
sustainable urban design in the country.
4 Streamgaging Program / Agricultural Use Protection
Monitoring, Powder River Basin, Wyoming. We designed,
installed, and continue to monitor an expansive streamgaging
network in several watersheds of the Powder River Basin. The
innovative streamgaging program serves industry reporting needs
for multiple gas clients, and streamlines necessary data collection
to meet state regulation requirements.
6 Environmental and Social Impact Assessment, Ecuador. E & E’s
subsidiary company in Ecuador, undertook an Environmental and
Social Impact Assessment (ESIA) on behalf of Petroamazonas, EP in
primary rainforest in the Ecuadorian Amazon on the boundary of
Sumaco Napo-Gallera National Park that intersects the territories of
two rainforest indigenous communities.
7 Steve Gardner, P.E., President and CEO of ECSI, LLC, an
E & E company, was named 2015 President-Elect of the Society of
Mining, Metallurgy, and Exploration (SME), a professional society
with more than 15,000 members in 100 countries who represent all
professions serving the minerals and mining industries.
8 Extractive Industry Infectious Disease Risk Assessment, Katanga
Province, DRC (Congo). The Extractive Industry Infectious Disease
Risk Assessment Management (IDEAM) Initiative is part of the United
States Agency for International Development (USAID) Emerging
Pandemic Threats Program, which aims to pre-empt or combat at
their source, emerging infectious disease of animal origin that pose a
threat to human health. In support of the IDRAM initiative, E & E has
worked with FHI 360, a non-profit human development organization,
to develop a toolkit that resource companies can use to examine
vulnerabilities to disease and consider mitigation measures to reduce
the vulnerability.
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Fiscal Year 2014 at Ecology and Environment, Inc.
Fiscal year 2014 was one of transition for E & E. Our net loss of $1.4 million or $0.32 per share for the year reflected a 35%
improvement from the net loss reported for the prior fiscal year. We successfully completed our conversion to a new software
operating system. As a result of abandoning our former system, we incurred $2.2 million of incremental software amortization
during 2014, which was a primary reason for our fiscal year 2014 loss. This non-cash and non-recurring expense was necessary for
us to convert to a more efficient and effective operating system that will support our operations for years to come.
Net contract adjustments recorded as reductions of revenue decreased more than $6 million during 2014. We have developed
an improved risk management approach toward assessing project opportunities in foreign markets, which has resulted in lower
reserves against contract receivables in these markets. Although we will continue to consider projects around the world, our
current business development strategy focuses on our core markets in the United States and South America.
Excluding project-related and depreciation expenses, our operating expenses for fiscal year 2014 were 7% lower than the prior year
due to a concerted effort by all of our U.S.-based companies to reduce operating expenses and develop a leaner organizational
structure. Management will continue to evaluate and improve our organization and cost structures in fiscal year 2015.
The sequester of the federal government last October had a prolonged adverse effect on volume of available project opportunities
during fiscal year 2014. Other factors in the economy delayed the timing of project work orders received under our contracts. New
orders increased in the fourth quarter of fiscal year 2014, a trend that has continued into the first quarter of the current fiscal year.
Our experienced business development team is continually assessing and re-focusing its efforts to maximize opportunities to win
new work and retain existing customers.
Despite net losses over the past two fiscal years, our line of credit and debt balances are low and our liquidity position remains
strong. During 2014, we continued our history of consistent dividends paid to our shareholders. We believe we are well positioned
to support operational growth without significant increases in expenses or detrimental impacts on our liquidity position.
Financial Highlights
2014
Fiscal year ending July 31,
2012
2011
2013
2010
(In thousands, except per share amounts)
Revenue, net
$ 128,427
$ 134,937
$ 155,410
$ 169,173
$ 144,098
Loss (income) from operations
(507)
(898)
4,784
12,386
9,893
Net (loss) income attributable to Ecology and Environment, Inc.
(1,383)
(2,130)
774
6,960
4,258
Net (loss) income per common share
(0.32)
(0.50)
0.18
1.65
1.02
Balance Sheet Data
Working capital
Total assets
Outstanding advances under lines of credit
Long-term debt and capital lease obligations
2014
2013
As of July 31,
2012
(In thousands)
2011
2010
$ 31,203
$ 34,288
$ 38,511
$ 41,979
$ 38,950
71,708
81,682
1,572
842
6,529
451
97,512
12,309
94,268
79,959
–
–
591
2,138
1,695
Ecology and Environment, Inc. shareholders’ equity
37,678
43,544
48,146
50,034
44,864
Book value per share
Cash dividends paid
12
8.80
10.25
11.37
11.85
10.78
2,054
2,037
2,047
1,815
1,684
Fiscal Year 2014 Operations Summary
Overview
For fiscal year 2014, we incurred a loss before income tax provision
of $0.4 million, which was $0.5 million lower than the $0.9 million
loss incurred during the previous fiscal year. Lower revenues and
higher software amortization costs were offset by lower contract
adjustments recorded as net reductions from revenue, lower direct
project-related costs and lower indirect expenses during fiscal year
2014.
Gross revenue less subcontract costs (refer to table on page 14),
which is a key performance measurement for us, decreased $12.7
million (11%) for fiscal year 2014. Lower project work volumes in
domestic government, energy, mining and asbestos inspection
market sectors were partially offset by growth in mining and energy
sectors in our South American operations. We also recorded lower
revenue from certain projects in the Middle East for which the
Company had minimal project activity during fiscal year 2014.
Net contract adjustments (refer to table on page 15) recorded
as a reduction of revenue decreased $6.1 million (97%) during
fiscal year 2014, as compared with the prior fiscal year. During
fiscal year 2013, we recorded $6.3 million of contract adjustments
related to projects in China. During the fourth quarter of fiscal year
2013, management suspended all project activity related to these
contracts, and no revenue or contract adjustments were recorded
during fiscal year 2014.
Abandonment and Conversion
of Operating Software
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 these software modules did not meet the needs
of users that rely on the system and would 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 consolidated statements of operations.
In November 2013, after an extensive assessment process,
management decided to abandon the Company’s existing
operating and financial software system and migrate to new system
software. The Company acquired and developed the new software
during fiscal year 2014, and began utilizing the new software
effective August 1, 2014 for the Company’s U.S. operations. The
process to evaluate, select and develop new operating and financial
software systems for the Company’s significant foreign operations
is expected to be completed in January 2015. The total capitalized
cost of the new software system, when fully developed, is expected
to approximate $1.7 million for the Company’s U.S. operations
and $0.2 million for its foreign operations. The Company recorded
software development costs of $1.4 million in property, plant and
equipment during the fiscal year ended July 31, 2014.
The Company continued to utilize the previous software system
through July 31, 2014, at which time the previous system was
abandoned. As a result, amortization of software development
costs capitalized for the previous system was accelerated so that
the system was completely amortized by July 31, 2014. Total
software amortization expense was $2.6 million, $0.4 million, and
$0.2 million for the fiscal years ended July 31, 2014, 2013 and 2012,
respectively.
Liquidity and Capital Resources
Cash and cash equivalents decreased $2.6 million during fiscal year
2014, primarily due to the following non-operating expenditures
that were approved by the Board of Directors on a discretionary
basis:
• $2.1 million for dividend payments to shareholders;
• $0.7 million for acquisition of all remaining minority interests in
Walsh Environmental Scientists & Engineers, LLC (“Walsh”); and
• $0.2 million for purchases of treasury stock.
Excluding these discretionary cash outflows, net cash generated
from operations of $8.1 million during fiscal year 2014 was
adequate to fund investing and financing activities required to
maintain our current operations and to reduce our outstanding
lines of credit by $5.0 million during the period.
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 typically generate adequate cash flow to fund
their operations. We intend to reinvest net cash generated from
undistributed foreign earnings 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.
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Contract Receivables, net
Contract receivables, net are summarized in the following table.
Balance at July 31,
Contract Receivables:
Billed
Unbilled
2014
2013
$26,863,708
$36,284,950
23,694,451
16,441,857
50,558,159
52,726,807
Allowance for doubtful accounts and
contract adjustments
(6,126,854)
(5,592,800)
Contract receivables, net
$44,431,305
$47,134,007
Significant concentrations of contract receivables and the
allowance for doubtful accounts and contract adjustments are
summarized in the following table.
Balance at July 31, 2014
Region
United States, Canada and
South America
Allowance
for Doubtful
Accounts
and Contract
Adjustments
Contract
Receivables
$43,394,442
$1,611,068
Middle East and Africa
7,010,225
4,386,240
Asia
Totals
153,492
129,546
$50,558,159
$6,126,854
Fiscal Year Ended July 31,
2014
2013
2012
Revenue by entity:
EEI and its wholly
owned subsidiaries
(excluding Walsh)
$ 69,446,427 $ 82,358,140 $ 85,150,365
Walsh and EEI’s majority-owned subsidiaries:
Walsh
33,168,180
28,263,579
39,295,981
Ecology &
Environment do
Brasil, Ltda
(“E & E Brasil”)
Gestion Ambiental
Consultores S.A.
(“GAC”)
13,811,391
15,125,046
15,702,130
8,808,052
10,640,382
11,298,271
ECSI, LLC (“ECSI”)
3,366,793
4,869,394
5,539,993
Total gross revenue
128,600,843 141,256,541 156,986,740
Net contract
adjustments recorded
as a reduction from
revenue
Revenue, net per
consolidated
statements of
operations
(173,967)
(6,319, 650)
(1,576,641)
$128,426,876 $134,936,891 $155,410,099
Gross revenue less subcontract costs, by entity:
EEI and its wholly
owned subsidiaries
(excluding Walsh)
$ 59,627,259 $ 69,691,641 $ 72,290,708
Balance at July 31, 2013
Walsh and EEI’s majority-owned subsidiaries:
Region
United States, Canada and
South America
Allowance
for Doubtful
Accounts
and Contract
Adjustments
Contract
Receivables
$41,302,180
$ 1,576,746
Middle East and Africa
10,876,151
3,886,508
Asia
Totals
548,476
129,546
$52,726,807
$ 5,592,800
Combined contract receivables related to projects in the Middle
East, Africa and Asia represented 14% and 22% of total contract
receivables at July 31, 2014 and 2013, respectively, while the
combined allowance for doubtful accounts and contract
adjustments related to these projects represented 74% and 72%,
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 resulted in increased collection risks and the
Company expending resources that it may not recover for several
months, or at all.
Walsh
20,796,673
20,796,180
26,003,190
E & E Brasil
12,833,626
13,778,136
14,433,459
GAC
ECSI
Total
6,958,103
7,327,335
6,620,988
3,272,119
4,621,818
5,323,216
$103,487,780 $116,215,110 $124,671,561
Revenue, net
Revenue, net and revenue less subcontract costs, by business entity,
are summarized in the following table.
Fiscal Year 2014 Versus 2013
The decrease in consolidated gross revenue for fiscal year 2014, as
compared with the prior fiscal year, primarily resulted from the net
impact of the following activity:
• Lower revenue for EEI and its wholly-owned subsidiaries
(excluding Walsh) for fiscal year 2014 resulted primarily from the
following activity:
- EEI recorded $3.8 million of gross revenue related to
projects in China during fiscal year 2013. All project activity
related to these contracts was suspended during the fourth
quarter of fiscal year 2013, and no revenue related to these
projects was recorded during fiscal year 2014; and
- generally lower sales volume, particularly within domestic
state and federal government markets, as expired contracts
were not renewed or replaced with new work.
14
• Consolidated Walsh revenue for fiscal year 2014 was relatively
unchanged from the prior fiscal year, which was the net result
of the following activity:
- higher energy sector revenues from Walsh’s South American
operations; which was partially offset by
- lower sales volumes from asbestos inspection, energy and
mining sectors in the U.S., as expiring contracts were not
renewed or replaced by new work.
• Lower E & E Brasil revenue for fiscal year 2014 was primarily due
to lower sales volumes in the energy transmission sector and
weakening of the local currency (Reais) against the U.S. dollar.
• Lower GAC revenue for fiscal year 2014 mainly resulted from the
following net activity:
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 16% and 9% during fiscal years 2014 and 2013,
respectively. Utilization of contracted services was also reviewed
and reduced at EEI. Management continues to critically evaluate its
organizational and cost structure to identify ways to operate more
efficiently and cost effectively.
The cost of professional services and other direct operating
expenses represents 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.
- lower sales volume from the commercial mining market,
mainly due to a general decline in the Chilean economy;
and
- a decline in the value of the Chilean Peso against the U.S.
dollar throughout the year; which were partially offset by
- lower utilization of subcontracted labor, which resulted in
higher utilization of GAC employees.
• Lower ECSI revenue during fiscal year 2014 mainly resulted from
lower sales volumes in the mining sector, as projects completed
during fiscal year 2013 were not renewed or replaced during
the current year.
Contract Adjustments
Net contract adjustments recorded as reductions from revenue are
summarized by region in the following table.
Fiscal Year Ended July 31,
Region
2014
2013
2012
United States, Canada
and South America
$ 309,651 $ (73,534)
$ 355,643
Middle East and Africa
(483,618)
72,024
(1,314,058)
Asia
Totals
— (6,318,140)
(618,226)
$ (173,967) $(6,319,650) $ (1,576,641)
Fiscal Year 2014 Activity
Net contract adjustments recorded for projects in the U.S., Canada
and South America includes net adjustments resulting from
revenues that are deemed to be unrealizable or that may become
unrealizable in the future, as well as adjustments to estimated
liabilities for project disallowances that are recorded in other
accrued liabilities. During fiscal year 2014, as a result of a revised
estimate of a settlement liability recorded in a prior fiscal year,
we recorded a $0.3 million reduction on our reserves for project
disallowances recorded in other accrued liabilities.
Net contract adjustments recorded for projects in the Middle East
and Africa mainly resulted from a $1.5 million increase in the reserve
for contract adjustments associated with a specific project in the
Middle East, which was partially offset by $1.0 million of reserve
reversals resulting from cash receipts or approvals of task orders
related to receivables that had been previously reserved
Operating Expenses
During fiscal years 2014 and 2013, management at EEI and its
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
Fiscal Year Ended July 31,
2014
2013
2012
$26,407,023 $29,408,179 $33,152,707
EEI and all of its wholly
owned subsidiaries
(excluding Walsh)
Walsh and EEI’s majority-owned subsidiaries:
Walsh
5,118,715
6,034,926
7,709,299
E & E Brasil
7,322,385
7,524,216
8,413,975
GAC
ECSI
5,133,125
5,258,000
4,499,132
1,183,785
1,529,296
1,857,168
Total cost of professional
services and other direct
operating expenses
$45,165,033 $49,754,617 $55,632,281
Indirect operating expenses include administrative and indirect
operating expenses, as well as marketing and related costs.
Combined indirect operating expenses by business entity,
excluding depreciation and amortization expenses, are summarized
in the following table.
Fiscal Year Ended July 31,
2014
2013
2012
$32,907,360 $36,239,243 $38,957,028
EEI and all of its wholly
owned subsidiaries
(excluding Walsh)
Walsh and EEI’s majority-owned subsidiaries:
Walsh
12,690,944
12,707,123
12,953,357
E & E Brasil
4,946,171
5,480,397
4,847,879
GAC
ECSI
1,376,842
1,161,575
923,723
2,559,021
3,021,712
2,836,756
Total administrative and
indirect operating
expenses and marketing
and related costs
$54,480,338 $58,610,050 $60,518,743
Fiscal Year 2014 Versus 2013
The consolidated cost of professional services and other direct
operating expenses decreased $4.6 million (9%) during fiscal year
2014, as compared with the prior fiscal year. These net decreases
were primarily due to lower consolidated revenues and lower
service levels provided during the current year, and managed
reductions in technical staff levels in U.S. operations. Expense
reductions in the U.S. were partially offset by a higher volume of
15
project activity and related expenses in certain South American
subsidiaries.
Consolidated administrative and indirect operating expenses and
marketing and related costs decreased $4.1 million (7%) during
fiscal year 2014. During fiscal years 2013 and 2014, management
at EEI and its U.S. subsidiaries critically reviewed key administrative
processes, reduced indirect staffing levels, and reduced 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 certain South American subsidiaries.
Depreciation and amortization expense increased $1.7 million
(72%) during fiscal year 2014 primarily due to accelerated
amortization of the Company’s previous operating software system,
which was abandoned at the end of fiscal year 2014 in favor of a
new software system.
Income Taxes
The income tax provision (benefit) resulting from domestic and
foreign operations is summarized in the following table.
Fiscal Year Ended July 31,
2014
2013
2012
Income tax (benefit) provision from:
Domestic operations
$ (802,558) $ (782,672) $ 65,885
Foreign operations
1,145,621
1,036,906
1,292,031
Income tax provision, as
reported on the
consolidated statements
of operations
$ 343,063 $ 254,234 $ 1,357,916
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.
Fiscal Year Ended July 31,
2014
2013
2012
Income tax (benefit)provision
at the U.S. federal statutory
income tax rate
Income from “pass-through”
entities taxable to
noncontrolling partners
$(152,113) $(329,057) $1,495,206
35,309
(102,933)
(255,065)
International rate differences
(143,493)
(197,217)
(329,825)
Other foreign taxes, net of
federal benefit
(34,419)
94,528
211,088
Foreign dividend income
596,631
481,287
329,825
State taxes, net of federal
benefit
Re-evaluation and settlements
of tax contingencies
27,739
3,871
13,193
(19,533)
(58,105)
(180,304)
Peru non-deductible expenses
44,077
173,707
211,000
Canada valuation allowance
(83,257)
130,950
—
Other permanent differences
72,122
57,203
(137,202)
Income tax provision, as
reported on the consolidated
statements of operations
$343,063 $254,234 $1,357,916
16
Fiscal Year 2014 Versus 2013
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 2014. The
most significant of these permanent differences resulted from
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.
During the fiscal year ended July 31, 2014 and 2013, the Company
generated operating losses in the U.S. of $1.7 million and $3.8
million, respectively. The net operating loss from fiscal year 2014
will be carried forward to future fiscal years. The net operating loss
from fiscal year 2013 was carried back to an earlier year and was
fully utilized. As of July 31, 2014, net operating losses attributable
to operations in Brazil, Canada and China and net operating losses
for state income tax purposes still exist.
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. 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 from clients 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 clients. 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-plus
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 plus fees.
Fees are recognized as revenue
using percentage of completion
determined by the percentage of
LOE hours incurred to total LOE
hours in the respective contracts.
Revenues associated with these contract types are summarized in
the following table.
Twelve Months Ended July 31,
2014
2013
2012
Time and materials $ 69,136,988 $ 64,522,639 $ 76,889,583
Fixed price
Cost-plus
50,077,507
58,244,072
67,638,479
9,212,381
12,170,180
10,882,037
Total revenue
$128,426,876 $134,936,891 $155,410,099
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. Time and materials
contracts generally represent the time spent by our professional
staff at stated or negotiated billing rates, plus materials used during
project work. Many time and materials contracts contain “not to
exceed” provisions that effectively cap the amount of revenue that
we can bill to the client. In order to record revenue that exceeds
the billing cap, we must obtain written approval from the client for
expanded scope or increased pricing.
Fixed price contracts are accounted for using the percentage-of-
completion method, wherein revenue is recognized as project
progress occurs. 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 provide for payment of allowable incurred
costs, to the extent prescribed in the contract, plus fees that we
record as revenue. These contracts establish an estimate of total
cost and an invoicing ceiling that the contractor may not exceed
without the approval of the client. Cost-plus contracts present a
lower risk, but generally provide lower returns and often include
more onerous terms and conditions.
Our project management teams continuously monitor the budgets,
costs to date and estimated costs to complete project work. If the
estimated costs at completion on any contract indicates that a loss
will be incurred, the entire estimated loss is charged to operations
as a reduction of revenue in the period the loss becomes evident.
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
17
government audits and project close-outs. Government audits
have been completed and final rates have been negotiated
for fiscal years through 2007. 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 operations. The likelihood that the client will pay is based on
the judgment of those closest to the related project and the client.
At a minimum, management considers the following factors to
determine the collectability of contract receivables for any specific
project:
• Client acknowledgment of amount owed to us;
• Client liquidity/ability to pay;
• Historical experience with collections from the client;
• Amount of time elapsed since last payment; and
• Economic, geopolitical and cultural considerations for the
home country of the client.
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 client data. As a
result, actual credit losses can differ from these estimates.
We also reduce contract receivables by establishing an allowance
for contract adjustments related to revenues that are deemed to
be unrealizable, or that 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 under the contract;
• The status of change orders and claims;
• Our historical experience with the client for settling change
orders and claims; and
• Economic, geopolitical and cultural considerations for the
home country of the client.
Because of the high degree of subjectivity and imprecision inherent
in the process of estimating allowances that are based on historical
trends and client data, 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
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
18
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,
2014, and concluded that our recorded goodwill was not at risk
for impairment as of that date. As of July 31, 2014, the estimated
fair values exceeded the carrying values of each of the individual
business units to which goodwill has been assigned.
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 available evidence,
management has estimated that uncertain tax positions did not
exceed $0.1 million at July 31, 2014 or 2013.
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
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, 2014 and 2013, 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 $0.4
million and $0.6 million at July 31, 2014 and 2013, 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, 2014, 2013 and 2012,
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,
2014 or 2013.
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, 2014 and 2013,
and the related consolidated statements of operations,
comprehensive income (loss), changes in shareholders’
equity, and cash flows for each of the years in the three-year
period ended July 31, 2014. 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, 2014 and 2013, and the
results of its operations and its cash flows for each of the years
in the three-year period ended July 31, 2014 in conformity with
accounting principles generally accepted in the United States
of America.
Pittsburgh, Pennsylvania
October 29, 2014
19
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 $6,126,854 and $5,592,800, respectively
Deferred income taxes
Income tax receivable
Other current assets
Total current assets
Property, building and equipment, net of accumulated depreciation of
$28,615,915 and $24,569,139, 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: 40,553 and 79,110 shares,
respectively; Class B common: 64,801 shares)
Total Ecology and Environment, Inc., shareholders’ equity
Noncontrolling interests
Total shareholders’ equity
Total liabilities and shareholders’ equity
20
Balance at July 31,
2014
2013
$ 6,889,243
$ 9,444,660
1,407,277
1,463,864
44,431,305
47,134,007
4,534,437
1,107,983
1,589,646
4,308,538
4,355,260
1,784,826
59,959,891
68,491,155
7,941,455
1,865,798
1,941,178
10,122,801
1,089,060
1,978,668
$71,708,322
$81,681,684
$9,874,649
$ 9,864,138
1,572,466
7,650,077
420,737
5,003,413
4,235,262
6,528,691
7,102,910
199,658
6,437,730
4,070,073
28,756,604
34,203,200
107,035
631,083
421,769
—
—
124,793
462,787
251,614
—
—
26,851
26,851
17,087
17,087
17,124,339
20,016,873
21,916,575
25,365,853
(182,735)
(84,527)
(1,223,899)
(1,798,233)
37,678,218
43,543,904
4,113,613
3,095,386
41,791,831
46,639,290
$71,708,322
$81,681,684
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Operations
Fiscal Year Ended July 31,
2013
2014
2012
Revenue, net
$128,426,876
$134,936,891
$155,410,099
Cost of professional services and other direct operating expenses
45,165,033
49,754,617
55,632,281
Subcontract costs
25,113,063
25,041,431
32,315,179
Administrative and indirect operating expenses
41,464,204
44,563,873
44,917,631
Marketing and related costs
Depreciation and amortization
(Loss) Income from operations
Interest income
Interest expense
13,016,134
14,046,177
15,601,112
4,175,801
2,428,844
2,160,062
(507,359)
(898,051)
4,783,834
154,441
244,191
174,743
(150,315)
(303,403)
(364,305)
Other income (expense)
67,587
(40,127)
206,813
Gain on sale of assets and investment securities
13,045
80,415
—
Net foreign exchange loss
(24,789)
(50,839)
(403,419)
(Loss) Income before income tax provision
(447,390)
(967,814)
4,397,666
Income tax provision
Net (loss) income
343,063
254,234
1,357,916
$ (790,453)
$ (1,222,048)
$ 3,039,750
Net income attributable to the noncontrolling interest
(592,203)
(908,386)
(2,266,171)
Net (loss) income attributable to Ecology and Environment, Inc.
$ (1,382,656)
$ (2,130,434)
$ 773,579
Net (loss) income per common share: basic and diluted
$ (0.32)
$ (0.50)
$ 0.18
Weighted average common shares outstanding: basic and diluted
$ 4,283,984
$ 4,247,821
$ 4,233,883
The accompanying notes are an integral part of these consolidated financial statements
21
Consolidated Statements of Comprehensive Income (Loss)
Comprehensive (loss) income
Net (loss) income including noncontrolling interests
Foreign currency translation adjustments
Unrealized investment gains, net
Comprehensive (loss) income
Fiscal Year Ended July 31,
2014
2013
2012
$ (790,453)
$(1,222,048)
$ 3,039,750
(298,200)
(883,865)
(708,489)
1,412
(28,675)
17,597
(1,087,241)
(2,134,588)
2,348,858
Comprehensive income attributable to noncontrolling interests
(457,916)
(792,215)
(2,390,626)
Comprehensive loss attributable to Ecology and Environment, Inc.
$(1,545,157)
$(2,926,803)
$ (41,768)
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 (loss) income to net cash provided by (used in) operating activities:
Impairment of long-lived assets
Depreciation and amortization
(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 and doubtful accounts
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 from investing activities:
Acquisition of noncontrolling interest of subsidiaries
Purchase of property, building and equipment
Proceeds from sale of investments
Sale (purchase) of investment securities
Net cash used in investing activities
Cash flows from financing activities:
Dividends paid
Proceeds from debt
Repayment of debt and capital lease obligations
Net (repayments of) borrowings under of lines 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 period for:
- Interest
- Income Taxes
Supplemental disclosure of non-cash items:
Dividends declared and not paid
Acquistion of noncontrolling interest of subsidiaries (loans and stock)
Change in accounts payable due to equipment purchases
Fiscal Year Ended July 31,
2013
2014
2012
$(790,453)
$(1,222,048)
$ 3,039,750
—
846,000
—
4,175,801
2,428,844
2,160,062
(817,896)
353,295
(31,695)
(13,045)
173,967
90,087
203,165
507,796
(74,429)
(80,415)
113,717
731,583
105,988
—
6,319,650
1,635,311
(287,426)
689,657
1,855,027
7,228,782
(2,287,607)
192,013
(97,563)
314,587
3,247,277
(1,832,096)
(2,502,431)
29,656
6,951
31,973
23,739
630,156
(41,155)
(628,189)
(172,087)
(69,230)
(1,419,481)
(1,430,143)
445,505
295,562
8,102,798
11,943,124
(1,859,530)
(1,458,928)
(1,375,614)
1,237,329
(936,135)
(360,288)
(689,361)
(595,556)
(908,892)
(1,964,663)
(1,845,241)
(4,727,033)
—
1,554,425
52,675
(1,671,284)
138,141
(35,614)
(2,601,349)
(2,557,656)
(5,533,398)
(2,053,506)
(2,037,323)
(2,046,657)
544,027
(710,009)
255,487
(853,127)
(4,956,225)
(5,782,992)
(664,703)
(1,532,912)
—
(173,278)
—
—
(8,013,694)
(9,950,867)
(43,172)
(457,711)
(2,555,417)
(1,023,110)
9,444,660
10,467,770
145,401
(974,644)
12,309,335
(1,123,896)
41,634
(363,050)
7,988,123
(156,509)
1,937,928
8,529,842
$6,889,243
$ 9,444,660
$10,467,770
$145,880
$ 301,154
$ 395,146
(2,303,231)
1,596,760
6,510,514
1,033,071
1,072,944
—
1,018,783
1,028,881
212,401
670,678
795,856
(283,071)
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
Balance at July 31, 2011
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
—
—
773,579
—
—
(871,476)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— (2,036,559)
—
—
(716,662)
731,583
105,988
—
—
(351,946)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
22,825
(363,050)
(62,099)
716,662
—
—
—
—
—
—
—
—
2,266,171
124,455
—
—
—
—
—
—
41,634
(1,123,896)
—
17,597
—
—
—
—
—
—
38,532
—
(5,208)
3,289
66,871
(619,775)
—
—
A
B
2,685,151
$26,851
1,708,574
$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
$26,851
1,708,574
$17,087
}
$20,016,873
$25,365,853
$(84,527)
143,911
$(1,798,233)
$3,095,386
(1,382,656)
—
—
(163,913)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(194,454)
353,295
(31,695)
—
(2,414,027)
(605,653)
—
(2,066,622)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
16,091
(173,278)
(16,387)
194,454
—
—
—
—
—
—
—
—
592,203
(134,287)
—
—
—
—
—
—
(664,703)
2,381,666
—
1,412
—
—
—
—
—
—
64,293
(44,260)
553,158
(1,156,652)
—
5,999
—
—
A
B
2,685,151
1,708,574
$26,851
$17,087
}
$17,124,339
$21,916,575
$(182,735)
105,354
$(1,223,899)
$4,113,613
The accompanying notes are an integral part of these consolidated financial statements
Net income
Foreign currency translation adjustment
Cash dividends paid ($0.48 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 ($0.48 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
Net (loss) Income
Foreign currency translation adjustment
Cash dividends declared ($0.48 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
Distributions to noncontrolling interests
Reclassification adjustment for prior period
acquisitions of noncontrolling interests
Purchase of additional noncontrolling interests
Stock award plan forfeitures
Balance at July 31, 2014
24
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 or 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.
and to develop a common revenue standard for use in the U.S and
internationally. ASU 2014-09 supersedes the revenue recognition
requirements in Topic 605 of FASB’s Accounting Standards
Codification (the “Codification”) and most industry-specific
guidance throughout the Industry Topics of the Codification. ASU
2014-09 enhances comparability of revenue recognition practices
across entities, industries, jurisdictions and capital markets,
reduces the number of requirements an entity must consider for
recognizing revenue, and requires improved disclosures to help
users of financial statements better understand the nature, amount,
timing, and uncertainty of revenue that is recognized. ASU 2014-09
is effective for annual reporting periods beginning after December
15, 2016, including interim periods within the annual reporting
period. The Company intends to implement the provisions of
ASU 2014-09 effective August 1, 2017. ASU 2014-09 requires
either retrospective application by restating each prior period
presented in the financial statements, or retrospective application
by recording the cumulative effect on prior reporting periods to
beginning retained earnings in the year that the standard becomes
effective. Management is currently assessing the provisions of ASU
2014-09 and has not yet estimated the impact of this ASU.
The consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission and in accordance with
accounting principles generally accepted in the United States of
America. The financial statements reflect all adjustments that are,
in the opinion of management, necessary for a fair presentation of
such information. All such adjustments are of a normal recurring
nature. Certain prior year amounts were reclassified to conform to
the consolidated financial statement presentation for the fiscal year
ended July 31, 2014.
2. Recent Accounting Pronouncements
Accounting Pronouncements Not Yet Adopted
as of July 31, 2014
In July 2013, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“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 adopted the provisions of ASU 2013-11 effective August
1, 2014 and applied its provisions retrospectively. The adoption
of this standard did not have a material impact on the Company’s
consolidated financial statements.
In May 2014, FASB issued ASU No. 2014-09 Revenue from Contracts
with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 is the
result of a joint project of FASB and the International Accounting
Standards Board to clarify the principles for recognizing revenue
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-plus
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 plus fees.
Fees are recognized as revenue
using percentage of completion
determined by the percentage of
LOE hours incurred to total LOE
hours in the respective contracts.
25
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.
Included in revenues are certain services outside the Company’s
normal operations which the Company has elected to subcontract
to other contractors.
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. Revenue earned
from fixed price and cost-plus contracts is recognized using
the “percentage-of-completion” method, wherein revenue is
recognized as project progress occurs. 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.
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 2007. 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
26
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 contract adjustments related to revenues that
are deemed to be unrealizable, or that may become unrealizable
in the future. Management reviews contract receivables and
determines allowance amounts based on the adequacy of the
Company’s performance under the contract, the status of change
orders and claims, historical experience with the client for settling
change orders and claims, and economic, geopolitical and cultural
considerations for the home country of the client. Such contract
adjustments are recorded as direct adjustments to revenue in the
consolidated statements of operations.
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 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, building
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
2014. 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, 2014 that necessitated an evaluation for
impairment of goodwill.
27
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.
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 less than $(0.1) million, $(0.1)
million and $(0.4) million for the fiscal years ended July 31, 2014,
2013 and 2012, 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,
2014, 2013 or 2012.
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
28
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
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 wholly-
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 the Company’s stock-based
compensation plans.
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 Note 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. Money market funds
of $0.3 million and $1.5 million were included in cash and cash
equivalents in the accompanying consolidated balance sheets
and consolidated statements of cash flows at July 31, 2014 and
2013, respectively. Bank overdrafts of $0.7 million 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.
Assets
Level 1
Level 2
Level 3
Total
Balance at July 31, 2014:
Investment
securities available
for sale
$1,407,277
$ —
$ — $1,407,277
Balance at July 31, 2013:
Investment
securities available
for sale
$1,463,864
$ —
$ — $1,463,864
Investment securities available for sale includes mutual funds
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. Reclassification adjustments out of accumulated
other comprehensive (loss) income resulting from realized gains
or losses from the sale of investment securities available for sale
are included in gain on sale of assets and investment securities on
the accompanying consolidated statements of operations. The
Company recorded gross unrealized gains of less than $0.1 million
related to these funds in accumulated other comprehensive (loss)
income at July 31, 2014 and 2013.
The carrying amount of cash and cash equivalents approximated
fair value at July 31, 2014 and 2013. 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, 2014 and 2013. These liabilities were classified as level 2
instruments at both dates.
There were no financial instruments classified as level 3 at July 31,
2014 or 2013.
6. Contract Receivables, net
Contract receivables, net are summarized in the following table.
Balance at July 31,
Contract Receivables:
Billed
Unbilled
2014
2013
$26,863,708
$36,284,950
23,694,451
16,441,857
50,558,159
52,726,807
Allowance for doubtful accounts and
contract adjustments
(6,126,854)
(5,592,800)
Contract receivables, net
$44,431,305
$47,134,007
Billed contract receivables did not include any contractual retainage
balances at July 31, 2014 or 2013. Management anticipates that the
July 31, 2014 unbilled receivables will be substantially billed and
collected within one year.
Contract Receivable Concentrations
Significant concentrations of contract receivables and the
allowance for doubtful accounts and contract adjustments are
summarized in the following table.
Balance at July 31, 2014
Region
United States, Canada and
South America
Allowance
for Doubtful
Accounts
and Contract
Adjustments
Contract
Receivables
$43,394,442
$1,611,068
Middle East and Africa
7,010,225
4,386,240
Asia
Totals
153,492
129,546
$50,558,159
$6,126,068
Balance at July 31, 2013
Region
United States, Canada and
South America
Allowance
for Doubtful
Accounts
and Contract
Adjustments
Contract
Receivables
$41,302,180
$ 1,576,746
Middle East and Africa
10,876,151
3,886,508
Asia
Totals
548,476
129,546
$52,726,807
$ 5,592,800
Combined contract receivables related to projects in the Middle
East, Africa and Asia represented 14% and 22% of total contract
receivables at July 31, 2014 and 2013, respectively, while the
combined allowance for doubtful accounts and contract
adjustments related to these projects represented 74% and 72%,
respectively, of the total allowance for doubtful accounts and
contract adjustments at those same period end dates. These
29
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 resulted in increased collection risks and the
Company expending resources that it may not recover for several
months, or at all.
Middle East and Africa
During fiscal year 2014, the Company collected $4.1 million of cash
related to aged receivables in the Middle East and Africa. However,
the Company also recorded net increases of $0.5 million to the
allowance for contract adjustments due mainly to continued issues
with a specific problem project in the Middle East.
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,
2014
2013
2012
$5,592,800 $10,238,391 $ 6,755,087
Balance at beginning of
period
Net increase (decrease)
due to adjustments in the
allowance for:
Contract adjustments (1)
473,967
6,319,650
1,635,311
Doubtful accounts (2)
90,087
(287,426)
689,657
Transfer of reserves (to)
from allowance for
project disallowances (3)
Specific write-off of
contract receivables and
reserves during the
period (4)
(30,000)
61,123
1,158,336
— (10,738,938)
—
Balance at end of period
$ 6,126,854 $ 5,592,800 $10,238,391
(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.
(4) Approximately $7.3 million of contract receivables related to projects in China
and $3.4 million of contract receivables from projects in the Middle East and Africa
were fully reserved and written off during the last quarter of fiscal year 2013, resulting
in corresponding decreases in contract receivables and the allowance for contract
adjustments during fiscal year 2013.
7. Property, Building and Equipment, net
Property, plant and equipment is summarized in the following
table.
Balance at July 31,
2014
2013
Land and land improvements
$ 393,051 $ 393,051
Buildings and building improvements
12,231,788
12,231,788
Field Equipment
Computer equipment
Computer software
3,273,725
3,128,859
9,128,027
8,931,030
5,030,472
3,617,527
Office furniture and equipment
4,095,659
4,023,004
Vehicles
Other
Accumulated depreciation and
amortization.
1,658,273
1,548,901
746,375
817,780
36,557,370
34,691,940
(28,615,915)
(24,569,139)
Property, building and equipment, net $ 7,941,455 $10,122,801
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 the Company’s existing
operating and financial software system and migrate to new system
software. The Company acquired and developed the new software
during fiscal year 2014, and began utilizing the new software
effective August 1, 2014 for the Company’s U.S. operations. The
process to evaluate, select and develop new operating and financial
software systems for the Company’s significant foreign operations
is expected to be completed in January 2015. The Company
recorded software development costs of $1.4 million in property,
plant and equipment during the fiscal year ended July 31, 2014.
The Company continued to utilize the previous software system
through July 31, 2014, at which time the previous system was
abandoned. As a result, amortization of software development
costs capitalized for the previous system was accelerated so that
the system was completely amortized by July 31, 2014. Total
software amortization expense was $2.6 million, $0.4 million, and
$0.2 million for the fiscal years ended July 31, 2014, 2013 and 2012,
respectively.
30
8. Lines of Credit
Unsecured lines of credit are summarized in the following table.
Balance at July 31,
The income tax provision is summarized in the following table.
Fiscal Year Ended July 31,
2014
2013
2012
2014
2013
Current:
Outstanding cash draws, recorded as
lines of credit on the accompanying
consolidated balance sheets
Outstanding letters of credit to support
operations
Federal
$ 86,062
$(985,865)
$ (175,203)
$ 1,572,466
$ 6,528,691
State
62,761
Foreign
1,012,136
181,434
855,500
1,944,994
3,080,938
Total current
1,160,959
51,069
(232,800)
1,652,202
1,244,199
Total amounts used under lines of credit
3,517,460
9,609,629
Deferred:
Federal
(975,519)
200,197
509,161
State
24,138
(178,438)
Foreign
133,485
181,406
Total deferred
(817,896)
203,165
(35,273)
(360,171)
113,717
Total income tax
provsion
$ 343,063
$ 254,234
$1,357,916
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.
Fiscal Year Ended July 31,
2014
2013
2012
Income tax (benefit) provision
at the U.S. federal statutory
income tax rate
Income from “pass-through”
entities taxable to
noncontrolling partners
$ (152,113) $(329,057)
$1,495,206
35,309 (102,933)
(255,065)
International rate differences
(143,493)
(197,217)
(329,825)
Other foreign taxes, net of
federal benefit
(34,419)
94,528
211,088
Foreign dividend income
596,631
481,287
329,825
State taxes, net of federal
benefit
Re-evaluation and settlements
of tax contingencies
27,739
3,871
13,193
(19,533)
(58,105)
(180,304)
Peru non-deductible expenses
44,077
173,707
211,000
Canada valuation allowance
(83,257)
130,950
—
Other permanent differences
72,122
57,203
(137,202)
Income tax provision, as
reported on the consolidated
statements of operations
$ 343,063 $ 254,234
$1,357,916
Remaining amounts available under
lines of credit
30,851,540
24,759,371
Total approved unsecured lines of credit $34,369,000 $34,369,000
Contractual interest rates ranged from 2.50% to 3.00% at July 31,
2014. 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.
Balance at July 31,
Various loans and advances at interest
rates ranging from 3.25% to 14%
Capital lease obligations at varying
interest rates averaging 11%
Current portion of long-term debt and
capital lease obligations
Long-term debt and capital lease
obligations
2014
2013
$ 676,874
$ 276,934
165,632
174,338
842,506
451,272
(420,737)
(199,658)
$ 421,769
$ 251,614
The aggregate maturities of long-term debt and capital lease
obligations as of July 31, 2014 are summarized in the following
table.
August 2014 – July 2015
$420,737
August 2015 – July 2016
August 2016 – July 2017
August 2017 – July 2018
Thereafter
375,724
35,697
10,348
—
Total
$842,506
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,
2014
2013
2012
$(4,305,768)
$(3,055,338)
$ (993,959)
3,858,378
2,087,524
5,391,625
$ (447,390)
$ (967,814)
$4,397,666
31
Company’s operations in Chile, Peru and Ecuador had $5.4 million
of undistributed earnings that were indefinitely reinvested in those
operations.
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 2013, the IRS completed
the examination of fiscal year 2010 and 2011 income tax returns,
which were settled without material adjustment. The Company’s
tax matters for the fiscal years 2012, 2013 and 2014 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, 2014 and 2013, the Company
generated operating losses in the U.S. of $1.7 million and $3.8
million, respectively. The net operating loss from fiscal year 2014
will be carried forward to future fiscal years. The net operating loss
from fiscal year 2013 was carried back to an earlier year and was
fully utilized. As of July 31, 2014, net operating losses attributable to
operations in Brazil, Canada and China and net operating losses for
state income tax purposes still exist.
At July 31, 2014, 2013 and 2012, the Company had $0.1 million
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
$ 91,100
$131,300 $530,500
Fiscal Year Ended July 31,
2014
2013
2012
Additions for tax positions of
prior years
Reductions for tax positions of
prior years for:
—
— 23,100
- Changes in judgment
—
(23,100)
—
- Settlements during the
(17,700)
(29,000)
(422,300)
period
- Changes in non-controlling
—
11,900
—
interests
Balance at end of period
$ 73,400
$ 91,100 $131,300
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 2014,
2013 and 2012. The Company had approximately $0.1 million of
accrued interest and penalties at July 31, 2014 and 2013.
The significant components of deferred tax assets and liabilities are
summarized in the following table.
Balane at July 31, 2014
Current
Noncurrent
Deferred tax assets:
Contract and other reserves
$ 3,409,234
$ —
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
1,250,286
378,632
—
—
(184,523)
—
(192,213)
—
1,213,010
54,398
(103,098)
296,326
(206,070)
74,370
Net deferred tax assets
$ 4,282,784
$1,707,568
Deferred tax liabilities:
Fixed assets and intangibles
$ —
$ 58,934
Other
251,678
(531,812)
Net deferred tax liabilities
$ 251,678
$ (472,878)
Balane at July 31, 2013
Current
Noncurrent
Deferred tax assets:
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
Deferred tax liabilities:
Fixed assets and intangibles
$ —
$ (308,845)
Other
212,987
(358,659)
Net deferred tax liabilities
$ 212,987
$ (667,504)
For fiscal years 2014 and 2013, there was no one item that
significantly impacted the change in the deferred tax assets and
liabilities. The Company recorded a valuation allowance of $0.4
million and $0.6 million at July 31, 2014 and 2013, 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, 2014, the
32
11. Other Accrued Liabilities
Other accrued liabilities are summarized in the following table.
Balance at July 31,
2014
2013
Allowance for project disallowances
$ 2,393,351
$ 2,663,351
Other
1,841,911
1,406,722
Total other accrued liabilities
$ 4,235,262
$ 4,070,073
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.
Fiscal Year Ended July 31,
2014
2013
2012
$ 2,663,351 $ 2,724,474 $ 3,882,810
(300,000)
—
—
30,000
(61,123)
(1,158,336)
$ 2,393,351 $ 2,663,351 $ 2,724,474
Balance at beginning of
period
Reduction of reserves
recorded in prior fiscal
years
Net change due to
government audits
during the period,
recorded as a transfer of
reserves (to) from
allowance for doubtful
accounts and contract
adjustments
Balance at end of
period
12. Stock Award Plan
EEI adopted the 1998 Stock Award Plan effective March 16, 1998
(the “1998 Award Plan”). The following supplemental plans were
adopted subsequent to adoption of the 1998 Award Plan:
• The 2003 Stock Award Plan (the “2003 Award Plan”), which was
adopted by the Board of Directors in October 2004, approved by
shareholders in January 2004, and terminated in October 2008;
• The 2007 Stock Award Plan (the “2007 Award Plan”), which was
adopted by the Board of Directors in October 2007, approved
by shareholders in January 2008, and terminated in October
2012; and
• The 2011 Stock Award Plan (the “2011 Award Plan”), which was
adopted by the Board of Directors in October 2011, approved
by shareholders in January 2012, and will terminate in October
2016.
The 1998 Award Plan and all supplemental plans are collectively
referred to as the “Award Plan”. The Award Plan permits grants of
the award for a period of five (5) years from the date of adoption
by the Board of Directors. The Award Plan is not a qualified plan
Section 401(a) of the Internal Revenue Code.
The Company awarded 62,099 Class A shares valued at $0.9 million
in October 2011 and 16,387 Class A shares valued at $0.2 million
in July 2013 pursuant to the Award Plan. These awards have a
three year vesting period. Total gross compensation expense is
recognized over the vesting period. The Company recorded non-
cash compensation expense of $0.4 million, $0.5 million and $0.7
million during the fiscal years ended July 31, 2014, 2013 and 2012,
respectively, in connection with outstanding stock compensation
awards. The Company expects to record less than $0.1 million of
non-cash compensation expense during the fiscal year ended July
31, 2015. The “pool” of excess tax benefits accumulated in Capital in
Excess of Par Value was $0.1 million and $0.2 million at July 31, 2014
and 2013, respectively.
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 (deceased), Frank B. Silvestro, Ronald L.
Frank, and Gerald A. Strobel entered into a Stockholders’ Agreement
dated May 12, 1970, as amended January 24, 2011, which governs
the sale of certain shares of Ecology and Environment, Inc.
common stock (now classified as Class B Common Stock) owned
by them, certain children of those individuals and any such shares
subsequently transferred to their spouses and/or children outright
or in trust for their benefit upon the demise of a signatory to the
Agreement (“Permitted Transferees”). The Agreement provides
that prior to accepting a bona fide offer to purchase some or all of
their shares of Class B Common Stock governed by the Agreement,
that the selling party must first allow the other signatories to
the Agreement (not including any Permitted Transferee) 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, 2014, 2013 and 2012. The
Company paid dividends of $1.0 million in August 2014 and 2013
that were declared and accrued in prior periods.
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.
During the fiscal year ended July 31, 2014, the Company acquired
16,091 shares of Class A stock under this program for a total
acquisition cost of approximately $0.2 million. As of July 31, 2014,
122,918 Class A shares were repurchased and 77,082 shares had yet
to be repurchased under this program.
33
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, 2014, 2013 and 2012 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.
Fiscal Year ended July 31,
2014
2013
2012
Sales of noncontrolling interest:
Sale of 600 Gustavson
common shares
Total sales of noncontrolling
interests (10)
$ — $ — $ 41,634
—
— $ 41,634
Purchases of noncontrolling interests:
Purchase of 344 Walsh
common shares (1)
Purchase of 3,705 Walsh
common shares (2)
Purchase of 100 Walsh
common shares (3)
Purchase of 50 Walsh
common shares (4)
Purchase of 25 Lowham
common shares (5)
Purchase of 495 Walsh
common shares (6)
Purchase of 2,800 Gustavson
common shares (7)
Purchase of 370 Walsh
common shares (8)
Purchase of 75 Lowham
common shares (9)
Purchase of 25 Gestion
Ambiental Consultores
common shares
Purchase of 166 Walsh
common shares
Purchase of 496 Walsh
common shares
Purchase of 5,389 Brazil
common shares
Purchase of 26,482 Walsh
Peru common shares
Purchase of 152 Walsh
common shares
Total purchases of
noncontrolling interests (10)
Net transfers from
noncontrolling interests
(5,653)
(1,120,749)
(30,250)
—
—
—
— (18,316)
— (8,737)
— (243,653)
— (293,102)
— (182,125)
— (30,002)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(7,452)
(97,634)
— (277,514)
—
77,539
— (238,677)
—
(76,037)
(1,156,652)
(775,935)
(619,775)
$(1,156,652) $ (775,935) $(578,141)
34
(1) In January 2014, EEI purchased an additional 0.9% of Walsh
Environmental Scientists and Engineers, LLC (“Walsh”) from noncontrolling
shareholders for $0.1 million in cash. Walsh became a wholly-owned
subsidiary of EEI as a result of these transactions.
(2) In October 2013, EEI purchased an additional 9.4% of Walsh for $1.6
million. The purchase price was paid as follows: (i) one third in cash payable
on the transaction consummation date; (ii) one third payable with EEI
Common Stock on the transaction consummation date; 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.
(3) In October 2013, EEI purchased an additional 0.2% of Walsh for less than
$0.1 million in cash.
(4) In April 2013, EEI purchased an additional 0.1% of Walsh from
noncontrolling shareholders for less than $0.1 million in cash.
(5) In March 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.
(6) In January 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.
(7) In December 2012, Gustavson Associates, LLC (“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.
(8) In December 2012, EEI purchased an additional 0.9% of Walsh from
noncontrolling shareholders for $0.2 million in cash.
(9) During the three months ending October 31, 2012, Lowham purchased
shares from noncontrolling shareholders for less than $0.1 million in cash.
(10) Sales (purchases) of additional noncontrolling interests are recorded
as additions (reductions) of shareholders’ equity on the consolidated
statements of changes in shareholders’ equity.
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, 2014 are summarized in the
following table.
Fiscal Year Ended July 31,
2015
2016
2017
2018
2019
Thereafter
Amount
$2,546,713
1,916,230
1,680,192
1,642,781
1,283,343
2,426,378
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 $3.9 million, $4.2 million and $3.6 million for the
fiscal years ended July 31, 2014, 2013 and 2012, 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 $1.7 million, $2.2 million, and
$1.8 million for the fiscal years ended July 31, 2014, 2013 and 2012,
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. 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 are included in the weighted average
shares outstanding calculation.
The computation of basic earnings per share is included in the
following table.
Fiscal Year Ended July 31,
2014
2013
2012
Net (loss) income
attributable to Ecology
and Environment, Inc. $(1,382,656) $(2,130,434) $ 773,579
Dividend declared
2,066,622
2,038,496
2,036,559
Undistributed earnings $(3,449,278) $(4,168,930)
$(1,262,980)
Weighted-average
common shares
outstanding (basic
and diluted)
Distributed earnings
per share
Undistributed earnings
per share
Total earnings per
share
4,283,984
4,247,821
4,233,883
$ 0.48 $ 0.48
$ 0.48
(0.80)
(0.98)
(0.30)
$ (0.32) $ (0.50)
$ 0.18
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,
2014
2013
2012
Revenue by geographic location:
United States
$82,370,480 $91,451,247
$98,558,099
Foreign countries
46,056,396
43,485,644
56,852,000
(1) Significant foreign revenues included revenues in Peru ($19.5 million,
$11.5 million and $17.2 million for fiscal years 2014, 2013 and 2012,
respectively), Brazil ($13.8 million, $15.1 million and $15.7 million for fiscal
years 2014, 2013 and 2012, respectively) and Chile ($8.8 million, $10.6 million
and $11.3 million for fiscal years 2014, 2013 and 2012, respectively).
Balance at July 31,
2014
2013
2012
Long-Lived Assets by geographic location:
United States
$31,170,634 $29,508,055
$29,506,036
Foreign countries
5,386,736
5,183,885
5,191,000
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
35
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.
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 had a value of approximately $0.2 million
at July 31, 2014. 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.
Market for E & E’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, 2014
High
First Quarter (commencing August 1, 2013 - October 31, 2013)
$ 12.25
Second Quarter (commencing November 1, 2013 - January 31, 2014)
Third Quarter (commencing February 1, 2014 - April 30, 2014)
Fourth Quarter (commencing May 1, 2014 - July 31, 2014)
11.88
12.78
11.25
Fiscal Year Ended July 31, 2013
High
First Quarter (commencing August 1, 2012 - October 31, 2012)
$ 13.00
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
Low
$ 10.52
10.41
9.02
9.49
Low
$ 11.60
10.70
11.75
10.05
Per Share Dividend Declared
—
$ 0.24
—
$ 0.24
Per Share Dividend Declared
—
$ 0.24
—
$ 0.24
As of September 30, 2014, 2,659,174 shares of the Company’s Class A Common Stock were outstanding and there were 345 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.
As of September 30, 2014, 1,629,197 shares of the Company’s Class B Common Stock were outstanding and there were 57 holders of record
of the Class B Common Stock.
Changes to the composition of the E & E Board of Directors in fiscal year 2014. Gerhard J. Neumaier resigned from the E & E
Board of Directors in September 2013. Timothy Butler, who served on E & E’s Board since 2003, passed away in April 2014. He served
on the Audit Committee as the designated financial expert. Michael S. Betrus, CPA, joined the Board of Directors as a member of
the Audit Committee in May 2014. Mr. Betrus has over 35 years of experience in accounting, financial management, contractual
oversight, and budget forecasting. He is currently the Senior Vice President and Chief Financial Officer of Power Drives, Inc.
36
Frank B. Silvestro
Founder, Chairman of the Board
Gerald A. Strobel, P.E.
Founder
Ronald L. Frank
Founder
Gerald A. Strobel, P.E.
Chief Executive Officer,
Executive Vice President
Gerard A. Gallagher III
President
Fred J. McKosky, P.E.
Chief Operating Officer,
Senior Vice President
Frank B. Silvestro
Executive Vice President
Ronald L. Frank
Executive Vice President, Secretary
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, 2014
Gerard A. Gallagher, Jr.
Retired Company Officer
Michael C. Gross
Insurance Broker and
NYS Tax Auditor
CORPORATE OFFICERS
H. John Mye, P.E.
Vice President, Treasurer
and Chief Financial Officer
Laurence M. Brickman, Ph.D.
Senior Vice President
Kevin Donovan
Senior Vice President
Cheryl A. Karpowicz, AICP
Senior Vice President
Nancy Aungst
Vice President
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
ACTIVE SUBSIDIARIES
Ross M. Cellino
Attorney
Michael S. Betrus
CFO, Senior Vice President of
Power Drives, Inc.
Timothy J. Grady, P.E.
Vice President
George A. Rusk, Esq.
Vice President
Carmine A. Tronolone
Vice President
Colleen C. Mullaney-Westfall, Esq.
Assistant Secretary
FORM 10-K
E & E’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
ecology and environment do brasil Ltda. (Brazil)
Lowham-Walsh Engineering & Environment Services, LLC
Ecology and Environment International Services, Inc. (EEIS)
Servicios Ambientales Walsh, S.A. (Ecuador)
ECSI, LLC
E.E.I.S. (SARL) (Morocco)
Gestión Ambiental Consultores S.A. (Chile)
Walsh Environmental Scientist & Engineers, LLC
Walsh Peru, S.A. (Peru)
ecology and
environment, inc.
Global Environmental Specialists
www.ene.com
E & E has printed on recycled paper since 1971. This annual report is printed with soy-based inks, and certified by SFI, PEFC, and FSC.
37