E C O L O G Y A N D
ENVIRONMENT, INC.
2016
A N N U A L
R E P O R T
From Our President and CEO
In fiscal year 2016, E & E responded and adjusted to an
economic downturn in South America and retooled
our North American operations for future market
opportunities and growth. E & E remains financially strong
and committed to our vision of working on the major
environmental challenges of our time, and there are many.
The positive impact of our reorganizational strategy
implemented over the past two years helped E & E to
weather a challenging economic year in the U.S. and
South America. In fiscal year 2016, we saw some of
the positive results of our actions. Higher net income
from U.S. operations was due primarily to the positive
impact of disposing of a majority-owned U.S. subsidiary,
and initiatives to integrate certain wholly-owned U.S.
subsidiaries with other U.S. operations. Each of the
disposed or integrated subsidiaries experienced operating
losses during recent fiscal years, which were reduced or
eliminated during fiscal year 2016. Reduced revenue from
these initiatives was more than offset by the elimination
of significant operating expenses, resulting in a combined
improvement of $2.1 million in net income for U.S.
operations during fiscal year 2016.
Faced with unfavorable political and economic conditions
in Brazil and an election in Peru, E & E took the opportunity
to review our South American operations, which typically
account for about a third of our revenue. Although
revenues and net income from South American operations
decreased, we believe the long-term prospects for these
operations are good. We have taken steps to restore
profitability in Brazil. In Peru, significant energy sector
project work was completed late in fiscal year 2015 and
early in fiscal year 2016, which was not replaced during
fiscal year 2016. As a result, we are adjusting our costs of
operations. The Company’s Chilean operations experienced
revenue and earnings growth during fiscal year 2016 as
a result of higher energy sector revenues. With strong
technical capabilities and enhanced competitiveness, our
South American offices are poised for success as economic
conditions improve on the continent.
Major investment initiatives toward growth were underway
in fiscal year 2016, and we continue to make investments.
Our strategic plan targets growth in various sectors of our
business through acquisitions and through strengthening
key technical competencies that will improve our
competitiveness. Efforts to recruit top talent who will
advance our growth aspirations have been fruitful. The
Company’s corporate development team continues to
explore and meet with companies of various sizes and
specialties as potential targets for acquisition, and it is
expected that investments in this area will be instrumental
in securing new work opportunities and achieving our
long-term growth objectives.
Gerard A. Gallagher III
President and CEO
Photo credit: Rossachs National Park, Scotland by Weston Hodges, Client Relationship Management
Chairman’s Observations
The past year was a challenging one for E & E. Economic
and political uncertainties stalled energy and development
projects in the U.S. and corporate revenue was reduced by
the deep decline of the business environment in several
South American countries. An unusually high effective
tax rate drastically reduced the bottom line and masked
improving internal operations.
If judged solely by the after-tax bottom line, fiscal year 2016
was not a stellar business year. But if judged by operations
improvement and pre-tax earnings, E & E management
achieved credible results despite the unfavorable business
environment. Management demonstrated its capability to
navigate business as well as environmental challenges.
encourage growth and development initiatives. In the 46
years since our company’s founding, sound, science-based
environmental, ecological, and health considerations
have become an integral and key part of business and
government planning. The drivers: science, law, and the
public demand. Global warming is yet another, perhaps
over-arching, issue to challenge our clients’ development
initiatives.
The breadth of issues and potential responses are complex
and often controversial. Our clients and potential clients
must address them and ultimately be judged in the court
of public opinion. E & E offers focused, expert, and science-
based services to help.
My outlook for the coming calendar year is cautiously
optimistic. The profound change in the political landscape
has produced a new economic outlook that should
Frank B. Silvestro
Chairman of the Board
1
E & E is working collaboratively with clients to address the
leading environmental challenges of our time.
CAMPS/NetZero Planner Collaboration, Texas
E & E worked with the United States Army Corps of Engineers Fort
Worth District and the Fort Hood Army Base Department of Real
Property and Planning to develop its Comprehensive Asset Master
Planning Solution (CAMPS), a software tool that helps evaluate
and prioritize the sustainability and energy efficiency needs of
an installation. The effort earned the 2016 GreenGov Presidential
Award for Green Innovation. We are currently working with USACE
Fort Worth and the Army to integrate CAMPS with their Net Zero
Planning system at Fort Hood and Joint Base Pearl Harbor-Hickam.
East Bay Living Shoreline Project, Santa Rosa County, Florida
E & E is working with The Nature Conservancy (TNC) to monitor a 6.5-mile
site proposed for restoration of oyster habitat along Escribano Point in
Pensacola East Bay. For this project, E & E is conducting baseline (pre-
construction) data monitoring using universal metrics and restoration goal-
based metrics developed by TNC and partners for any oyster restoration
project, for evaluating the success of the project.
Anta-Cusco and Quillabamba Natural Gas Pipelines, Peru
This Peruvian South Pipeline Consortium project includes construction,
operation, and maintenance of a 1,086-km natural gas pipeline. Walsh
Peru developed the Environmental and Social Impact Assessment (ESIA)
for a 100-km line in the Cusco region and conducted environmental
baseline studies of the Puno (300+ km), Arequipa (10 km), Moquegua
(100+ km), and Tacna (200 km) pipeline segments.
U.S. Navy Solar Environmental Assessments, Navy and Marine
Corps. installations in the U.S., Cuba, Italy, and Spain
E & E completed 19 Environmental Assessments (EAs) at potential
solar and wind sites on Navy and Marine Corps. installations to
help the Navy exceed their goal for 1 gigawatt of renewable energy
capacity. 13 projects are moving forward to construction to provide
the Navy with over 300 megawatts of renewable energy, providing
a secure, reliable energy source critical to defense operations and
national security.
Rio Grande LNG and Magnolia LNG Projects
E & E is at the forefront of critical LNG energy projects in the U.S. In 2016,
the Federal Energy Regulatory Commission (FERC) gave authorization
for the Magnolia LNG export facility in the Port of Lake Charles, Louisiana
to move forward. E & E continues to assist during the execution/
implementation phase of the project. The NextDecade Rio Grande LNG
project in Brownsville, Texas also reached a critical milestone with its
formal FERC filing in May 2016.
2
Plains & Eastern Clean Line Project,
Arkansas, Oklahoma, Tennessee, and Texas
E & E is Clean Line’s lead environmental
consultant on the ±600 kV, 720-mile overhead
HVDC transmission line designed to deliver
4,000 megawatts of wind energy from the
Oklahoma Panhandle to the southeastern U.S.
We led a tiered routing and siting process that
included more than 100 large-group stakeholder
meetings. The collaborative approach allowed
us to address regulatory concerns early in the
project. The Final EIS was published in 2015 and
DOE issued a Record of Decision in March 2016.
Cascadia Rising 2016 Exercise, Oregon
For the Oregon Office of Emergency Management, E & E provided statewide
technical assistance to all Oregon jurisdictions participating in a multi-state
exercise simulating response to a 9.0 magnitude Cascadia Subduction Zone
earthquake and subsequent tsunami. The event was the largest functional
exercise in Oregon history.
Water Quality Monitoring at the Santo Antônio Dam Reservoir, Brazil
Using the high flow of the Amazon’s largest tributary, the Santo Antonio
Energia (SAE) Santo Antônio hydroelectric plant will be one of the largest
power generators in Brazil and one of the 15 largest dams in the world once
complete. From 2009 through 2016, Ecology Brasil implemented water quality
monitoring programs, including limnology and macrophytes studies, during
filling and post-stabilization of the reservoir.
USACE Times Beach Aquatic Invasive Species and Habitat
Restoration Demonstration Project, New York
E & E brought this five-year demonstration project from concept
through implementation, demonstrating to stakeholders and
funders the efficacy of our adaptive management strategy for
investigating, mapping, treating, and monitoring invasive species,
and applying habitat restoration measures. The project earned a
2016 ACEC Gold Award and serves as a resource around the Great
Lakes for groups seeking to implement similar projects.
3
Fiscal Year 2016 Operations Overview*
Consolidated net income attributable to EEI decreased to $0.9
million for the fiscal year ended July 31, 2016, a 74% reduction from
the prior fiscal year. Selected financial information by business
segment is summarized in the following table.
Fiscal Year Ended July 31,
(in thousands)
2016
2015
2014
EEI and its subsidiaries located in the United States:
Net revenue less
subcontract costs (1)
Direct operating
expenses (2)
Indirect operating
expenses (3)
Income (loss) before
income tax provision
Net income (loss)
attributable to EEI
$69,724
$73,264
$ 73,764
30,363
32,278
30,731
34,130
35,602
42,102
4,652
2,026
4,592
1,039
(2,790)
(2,805)
Subsidiaries located in South America:
Net revenue less
subcontract costs
Direct operating
expenses
Indirect operating
expenses
Income before
income tax provision
Net (loss) income
attributable to EEI
Other foreign subsidiaries:
Net revenue less
subcontract costs
Direct operating
expenses
Indirect operating
expenses
Loss before income
tax provision
Net loss attributable
to EEI
$ 17,543
$ 30,344
$ 33,432
9,149
8,245
(189)
(1,081)
—
—
95
(96)
(59)
15,214
10,288
4,444
2,988
—
8
18,537
10,872
3,613
2,058
402
181
1,147
1,506
(1,067)
(1,270)
(631)
(636)
(1) Net revenue less subcontract costs represents the net of revenue, net, and
subcontract costs from the consolidated statements of operations.
(2) Direct operating expenses consist of cost of professional services and
other direct operating expenses from the consolidated statements of
operations.
(3) Indirect operating expenses consist of administrative and indirect
operating expenses and marketing and related costs from the
consolidated statements of operations.
Dispositions of Subsidiaries
During fiscal year 2014, EEI management initiated a long-term
strategy to assess the operations of all subsidiaries with the goal of
improving consolidated financial performance by selling, winding
down or reorganizing unprofitable subsidiaries. During fiscal year
2016, EEI completed the following transactions or activities related
to subsidiaries that experienced operating losses during prior fiscal
years:
• EEI consummated the sale of a majority owned subsidiary
located in Kentucky.
• EEI curtailed the operations of a wholly owned subsidiary
located in Colorado, and combined its remaining operations
into EEI’s corporate headquarters in Buffalo, New York.
• Other foreign operations has historically included operations
in the Middle East, northern Africa and Asia. During fiscal year
2014, due to growing operational risks, management decided
to wind down existing operations and not to seek or accept
any new work within these regions. During fiscal year 2016,
management successfully terminated all remaining contracts
and operations within these regions.
Lower net revenues were more than offset by lower operating
expenses during fiscal year 2016 as a result of this activity.
U.S. Operations
Excluding disposition of subsidiaries noted above, net income
attributable to EEI from U.S. operations decreased 34% during fis-
cal year 2016, as compared with the prior year. Global economic
trends in oil, gas and commodity prices continued to have a nega-
tive impact on revenues from energy and mining sectors in the
U.S. EEI also experienced a distinct shift of direct labor hours during
fiscal year 2016 from commercial projects, for which selling rates are
openly negotiated from project to project, to government projects,
for which selling rates tend to be lower than commercial rates. In
addition, competitive pricing pressure continues to have a negative
impact on revenues for many of EEI’s market sectors.
South American Operations
We have significant majority-owned operating subsidiaries in Chile,
Brazil and Peru, and a smaller subsidiary in Ecuador. Our Chilean
operations experienced strong revenue and earnings growth
during fiscal year 2016.
Significant energy sector project work was completed in Peru
late in fiscal year 2015 and early in fiscal year 2016, which was not
replaced during fiscal year 2016. Revenues and net income from
Peruvian operations decreased 59% and 98%, respectively, during
fiscal year 2016.
Brazilian revenues and earnings continue to be adversely affected
by a broad economic downturn and political upheaval. Brazilian
revenues decreased 42% during fiscal year 2016. Additionally, as a
result of recurring losses during recent years and in fiscal year 2016,
our Brazilian subsidiary recorded a $0.9 million valuation reserve
related to deferred tax assets recorded in prior years and was
unable to recognize any tax benefit from fiscal year 2016 operating
losses. The net loss from Brazilian operations increased $1.4 million
to a loss of $1.7 million for fiscal year 2016. EEI management
continues to work closely with management in Brazil to implement
a business development strategy that is responsive to current
economic conditions while also reducing operating costs and
improving operating efficiency.
Liquidity and Capital Resources
Cash and cash equivalents increased $1.4 million during fiscal year
2016. Excluding the payment of $2.1 million of cash dividends,
which were approved on a discretionary basis by the Company’s
Board of Directors, cash generated from operations exceeded cash
*References to “EEI” refer to Ecology and Environment, Inc. a New York corporation. References to “the Company,” “we,” “us,” “our,” or similar terms, refer to EEI together with
its consolidated subsidiaries.
4
required to fund investing and financing activities by $3.7 million
during the year. Combined net repayments of borrowings under
lines of credit and long-term debt were $0.9 million during fiscal
year 2016. Combined borrowings under lines of credit and long-
term debt were $0.7 and $1.6 million at July 31, 2016 and 2015,
respectively.
Unsecured lines of credit of $39.0 million and $32.8 million were
available for working capital and letters of credit at July 31, 2016 and
2015, respectively. Total amounts used under lines of credit were
$2.5 million and $1.8 million at July 31, 2016 and 2015, respectively.
Contractual interest rates ranged from 3.50% to 15.60% at July 31,
2016. Our lenders have reaffirmed the lines of credit within the past
twelve months.
We believe that available cash balances in our domestic companies,
anticipated cash flows from U.S. operations, and our available 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.
Historically, our foreign subsidiaries have generated adequate
cash flow to fund their operations. In recent months, our Brazilian
subsidiary has been adversely affected by an economic downturn
and weakening of the Brazilian Real in relation to the U.S. dollar. The
total scope and duration of the downturn and the ultimate impact
that it will have on our Brazilian operations are uncertain. In the
event that our Brazilian subsidiary is unable to generate adequate
cash flow to fund its operations, additional funding from EEI, other
subsidiaries or lending institutions will be considered.
We intend to reinvest net cash generated from undistributed
foreign earnings into operations and business expansion
opportunities outside the U.S. Excess cash accumulated by any
foreign subsidiary, beyond that necessary to fund operations or
business expansion, may be repatriated to the U.S. at the discretion
of the Boards of Directors of the respective entities. We would be
required to accrue and pay taxes on any amounts repatriated to the
U.S. from foreign subsidiaries. During fiscal year 2016, two of the
Company’s majority owned subsidiaries in South America declared
a total of $1.1 million of dividends to its shareholders. After local tax
withholdings, $0.3 million was paid to minority shareholders and
$0.7 million was repatriated to the U.S. during the second half of
fiscal year 2016.
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, 2016
(in thousands)
Region
United States, Canada and
South America
Middle East and Africa
Asia
Totals
Allowance
for Doubtful
Accounts
and Contract
Adjustments
Contract
Receivables
$35,266
4,921
61
$1,034
4,895
—
$40,248
$5,929
Balance at July 31, 2015
(in thousands)
Region
United States, Canada and
South America
Middle East and Africa
Asia
Totals
Allowance
for Doubtful
Accounts
and Contract
Adjustments
Contract
Receivables
$43,629
$ 1,043
5,067
124
$48,820
4,894
17
$5,954
Contract adjustments related to projects in the United States,
Canada and South America typically result from cost overruns
related to current or recently completed projects, or from recoveries
of cost overruns recorded as contract adjustments in prior reporting
periods. Contract adjustments related to projects in the Middle
East, Africa and Asia typically result from difficulties encountered
while attempting to settle and close-out claims that may be several
years old.
Combined contract receivables related to projects in the Middle
East, Africa and Asia represented 12% and 11% of total contract
receivables at July 31, 2016 and 2015, respectively, while the
combined allowance for doubtful accounts and contract
adjustments related to these projects represented 83% and 82%,
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.
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,
(in thousands)
2016 2015
2014
$5,954
$6,508
$5,969
(577)
552
(263)
(291)
—
—
474
95
(30)
Balance at beginning of
period
Net increase (decrease)
due to adjustments in
the allowance for:
Contract adjustments
Doubtful accounts
Transfer of reserves (to)
from allowance for
project disallowances
Balance at end of period
$5,929
$5,954
$6,508
During fiscal year 2016, the Company’s Brazilian operations
continued to be adversely affected by an economic downturn, the
total scope and duration of which are uncertain. Management
is monitoring any adverse trends or events that may impact the
5
realizability of the recorded net book value of contract receivables
from customers in Brazil. The Company recorded $0.8 million and
$0.4 million of allowance for doubtful accounts at July 31, 2016 and
2015, respectively, related to the Company’s Brazilian operations.
Results of Operations
We report segment information based on the geographic location
of EEI and its principal operating subsidiaries. Management
generally assesses operating performance and makes strategic
decisions for the following groups of entities, each of which is
deemed to be a business segment for financial reporting purposes:
• EEI and its subsidiaries located in the U.S.;
• Subsidiaries located in South America; and
• Other foreign subsidiaries
The following tables and commentary address our results of
operations within these three business segments.
Revenue, net
Revenue, net and revenue, net less subcontract costs, by business
entity, are summarized in the following table.
Fiscal Year Ended July 31,
(in thousands)
2016
2015
2014
Revenue, net, by business segment:
EEI and its subsidiaries
located in the U.S.
$83,095
$88,715
$85,456
Subsidiaries located in South America:
Walsh Peru, S.A. Ingenieros y
Cientificos Consultores
(“Walsh Peru”)
Gestion Ambiental
Consultores S.A. (“GAC”)
Ecology & Environment do
Brasil, Ltda (“E&E Brasil”)
Other
Other foreign
subsidiaries
Total
9,718
22,797
19,512
7,530
6,545
8,808
5,009
465
8,010
13,811
868
438
$22,722
$38,220
$42,569
—
—
402
$105,817
$126,935
$128,427
Revenue, net less subcontract costs, by business segment:
EEI and its subsidiaries
located in the U.S.
$69,724
$73,264
$73,764
Subsidiaries located in South America:
Walsh Peru
GAC
E&E Brasil
Other
6,675
6,237
4,235
396
16,447
14,116
5,849
7,353
695
6,958
12,014
344
17,543
30,344
33,432
Other foreign subsidiaries
—
—
402
Total
6
$87,267
$ 103,608
$107,598
Revenue, net less subcontract costs is a key performance
measurement for our business. References to “revenue” in the
following commentary refer to revenue, net less subcontract costs.
Fiscal Year 2016 Versus 2015
Revenue from EEI and its U.S. subsidiaries decreased 6% during
fiscal year 2016. As described earlier in this Annual Report, EEI sold
its investment in a majority owned Kentucky-based subsidiary in
October 2015, which led to a $1.8 million reduction in revenue
during fiscal year 2016. A lower selling rate per hour of service
provided to our clients also contributed to lower revenue during
fiscal year 2016, as EEI experienced a distinct shift of direct labor
hours from commercial projects for which selling rates are openly
negotiated from project to project, to government projects for
which selling rates tend to be lower than commercial rates. In
addition, competitive pricing pressure continues to have a negative
impact on revenues for many of EEI’s market sectors.
Global economic factors, such a depressed oil and commodities
prices, had a negative impact on Walsh Peru’s operations during
fiscal year 2016. Walsh Peru’s revenue decreased 57% during fiscal
year 2016 due mainly to significantly reduced energy sector sales
volume, as mining projects completed during fiscal year 2015 and
early in fiscal year 2016 were not renewed or replaced. Peruvian
results were also negatively impacted by a 10% decline in the
average exchange rate for the Peruvian Sol in relation to the U.S.
dollar.
GAC revenue increased 15% during fiscal year 2016, as higher
transmission and renewable energy sector revenues were partially
offset by a 12% decline in the average exchange rate for the Chilean
Peso in relation to the U.S. dollar.
A broad economic downturn in Brazil continues to have a negative
impact on our Brazilian operations and earnings. E&E Brasil
revenues decreased 37% during fiscal year 2016, mainly due to
generally lower energy transmission sector revenues and a 31%
decline in the average exchange rate for the Brazilian Real in
relation to the U.S. dollar.
Fiscal Year 2015 Versus 2014
Higher revenue from EEI and its U.S. subsidiaries resulted from
higher Department of Defense and energy sector revenues, which
was partially offset by lower government, commercial and mining
sector revenues generally, and by the impact of a strategic decision
to wind down existing asbestos remediation contracts and forego
any new asbestos business.
Higher revenue from our Peruvian operations resulted from in-
creased energy sector sales volume.
Lower GAC revenue was primarily due to lower mining sector rev-
enues, as mining projects completed during fiscal years 2015 and
2014 were not renewed or replaced.
Lower E&E Brasil revenue was primarily due to lower sales volume in
the energy transmission sector, as transmission projects completed
during fiscal years 2015 and 2014 were not renewed or replaced. A
weaker Brazilian economy and a weaker Real in relation to the U.S.
dollar also contributed to the overall decrease in revenues.
Direct Operating Expenses
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. We refer to
these expenses as “direct operating expenses.” These costs, and
fluctuations in these costs, generally correlate directly with related
project work volumes and revenues. Direct operating expenses, by
business entity, are summarized in the following table.
Fiscal Year Ended July 31,
(in thousands)
EEI and its subsidiaries
located in the U.S.
2016
2015
2014
$30,363
$32,278
$30,731
Subsidiaries located in South America:
Walsh Peru
GAC
E & E Brasil
Other
Other foreign
subsidiaries
Total direct operating
expenses
2,829
3,339
2,772
209
6,921
3,820
6,374
5,133
4,037
6,503
436
527
9,149
15,214
18,537
—
8
181
$39,512
$47,500
$49,449
Fiscal Year 2016 Versus 2015
Total direct operating expenses decreased 17% during fiscal
year 2016 compared with the prior year. With the exception of
GAC’s operations, lower direct expenses resulted directly from
lower project revenue for each of our business segments. Our
consolidated project revenue and related costs were generally lower
in all of our business segments during fiscal year 2016. The sale of
the Company’s majority investment in a Kentucky-based subsidiary
during the first quarter of fiscal year 2016 also contributed to lower
direct operating expenses during fiscal year 2016.
Fiscal Year 2015 Versus 2014
Direct operating expenses decreased 4% during fiscal year 2015, as
compared with the prior year. Lower project-related sales volumes
and related costs in our Brazilian and Chilean operations were
partially offset by higher project service levels and costs in our
domestic and Peruvian operations.
Indirect Operating Expenses
Administrative and indirect operating expenses and marketing and
related costs represent administrative and other operating costs
not directly associated with the generation of revenue. We refer
to these costs as “indirect operating expenses.” Indirect operating
expenses by business entity are summarized in the following table.
Fiscal Year Ended July 31,
(in thousands)
2016
2015
2014
$34,130
$35,602
$42,102
EEI and its subsidiaries
located in the U.S.
Subsidiaries located in South America:
Walsh Peru
GAC
E & E Brasil
Other
3,505
1,647
2,923
170
8,245
4,896
1,294
3,841
257
4,430
1,377
4,946
119
10,288
10,872
Other foreign
subsidiaries
Total indirect operating
expenses
95
1,147
1,506
$42,470
$47,037
$54,480
EEI and its subsidiaries may, at the discretion of their respective
Board of Directors, award incentive compensation to Directors,
senior management and other employees in the form of cash
bonuses. Cash bonus expense may vary significantly from year to
year depending on company financial performance. The Company
recorded $1.0 million, $2.8 million and $1.2 million of incentive
compensation expense in indirect operating expenses during
fiscal years 2016, 2015 and 2014, respectively, as a result of cash
bonus awards.
In October 2015, EEI sold its majority interest in a Kentucky-
based subsidiary. EEI recognized a loss on its investment in this
subsidiary of approximately $0.4 million in administrative and
indirect operating expenses during the fourth quarter of fiscal year
2015. Also during fiscal year 2015, management completed an
assessment of goodwill recorded on the acquisition date of this
subsidiary, and recorded $0.1 million of goodwill impairment loss in
administrative and indirect operating expenses.
Fiscal Year 2016 Versus 2015
Excluding the effects of bonuses and sale of a subsidiary noted
above, total indirect operating expenses decreased $2.4 million
(6%) during fiscal year 2016, as compared with the prior fiscal year.
With the exception of GAC in South America, indirect operating
expenses generally decreased within all of our operating segments.
During fiscal year 2016, management continued its critical review of
indirect staffing levels and key administrative processes at EEI and
all of its significant domestic and foreign subsidiaries, resulting in
improved operating efficiency and cost reductions. The Company
also realized a full year benefit of efficiencies and cost reductions
initiated in prior fiscal years.
Fiscal Year 2015 Versus 2014
Excluding higher expenses associated with cash bonuses and the
sale of ECSI noted above, indirect operating expenses decreased
$9.5 million (18%) during fiscal year 2015. During fiscal year 2015,
management continued its critical review of indirect staffing levels
and key administrative processes at EEI and all of its significant
domestic and foreign subsidiaries, resulting in improved operating
efficiency and cost reductions. The Company also realized a full
year benefit of efficiencies and cost reductions initiated in prior
fiscal years.
7
Depreciation and Amortization
Fiscal Year 2016 Versus 2015
Depreciation and amortization expense decreased $0.3 million
(22%) during fiscal year 2016, primarily due to sale or wind-down of
certain subsidiaries located in the U.S.
Fiscal Year 2015 Versus 2014
Depreciation and amortization expense decreased $2.7 million
(65%) during fiscal year 2015, primarily due to lower amortization
of the Company’s principal operating software. The Company
acquired and developed new operating system software during
fiscal year 2014, and began utilizing the new software effective
August 1, 2014 for its U.S. operations. 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 $0.1 million
and $2.7 million for fiscal years 2015 and 2014, respectively.
Income Taxes
The income tax provision (benefit) resulting from domestic and
foreign operations is summarized in the following table.
Fiscal Year Ended July 31,
(in thousands)
2016
2015
2014
Income tax provision (benefit) from:
Domestic operations
$ 2,158
$ 2,119
$ (802)
Foreign operations
1,601
1,650
1,145
Consolidated operations
$ 3,759
$ 3,769
$ 343
Consolidated effective tax rate from:
Domestic operations
46.4%
67.8%
Foreign operations
* %
31.3%
17.6%
28.5%
Consolidated operations
86.1%
47.3%
(76.7)%
* percentage based on minimal pre-tax income not meaningful.
Fiscal Year 2016 Versus 2015
The consolidated effective tax rate increased to 86.1% for fiscal year
2016 from 47.3% for the prior year, primarily due to a higher tax
rate for our South American operations. Despite a fiscal year 2016
operating loss, E&E Brasil recorded a significant tax provision for
the year. Based on recent cumulative operating losses and other
available evidence, management determined that it was more likely
than not that $0.9 million of deferred tax assets recorded at October
31, 2015 will not be realized. As a result, E&E Brasil recorded a
valuation allowance of $0.9 million as a reduction of deferred tax
assets on the consolidated balance sheets and as an addition to
income tax expense on the consolidated statements of operations.
In addition, operating losses were incurred by E&E Brazil during
fiscal year 2016 for which no tax benefit was recognized in the
Company’s consolidated tax provision. During the previous year,
the Company realized a tax benefit for operating losses in Brazil.
8
Other discrete tax provision items recorded by Walsh Peru and GAC
were offset by lower dividends repatriated to the U.S. from South
American operations during fiscal year 2016.
Fiscal Year 2015 Versus 2014
The consolidated effective tax rate increased to 47.3% for fiscal year
2016 from (76.7)% for the prior year, primarily due to higher taxable
income from U.S. operations, which increased to income of $3.5
million for fiscal year 2015 from a loss of $4.3 million for the prior
year. Higher foreign sourced taxable income and higher book to
tax differences from U.S. and foreign sources also contributed to the
overall increase in tax provision for fiscal year 2015.
Recent Accounting Pronouncements
A summary of recent accounting pronouncements is provided in
the consolidated financial statements included in Item 8 of this
Annual Report.
Critical Accounting Policies
The preceding discussion and analysis of financial condition
and results of operating results are based on our consolidated
financial statements, which have been prepared in conformity
with accounting principles generally accepted in the United States.
The significant accounting policies used in the preparation of our
consolidated financial statements are more fully described in the
consolidated financial statements included in this Annual Report.
Many of our significant accounting policies require complex
judgments to estimate values of assets and liabilities. In making
these judgments, management must make certain estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Because changes in such estimates
and assumptions could significantly affect our reported financial
position and results of operations, detailed policies and control
procedures have been established to ensure that valuation
methods, including judgments made as part of such methods,
are well controlled, independently reviewed, and are applied
consistently from period to period.
On an on-going basis, we evaluate our estimates to ensure that
they are based on assumptions that we believe to be reasonable
under current circumstances. Our actual results may differ from
these estimates and assumptions.
Of the significant policies used to prepare our consolidated financial
statements, the items discussed below require critical accounting
estimates involving a high degree of judgment and complexity.
For all of these critical policies, we caution that future events rarely
develop exactly as forecasted, and the best estimates routinely
require adjustment. This information should be read in conjunction
with our consolidated financial statements included herein.
Revenue Recognition
Substantially all of the Company’s revenue is derived from
environmental consulting work, which is principally derived from
the sale of labor hours. 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. 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.
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
Consulting
As incurred at contract rates.
Time and
Materials
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.
Revenue, net associated with these contract types is summarized in
the following table.
Twelve Months Ended July 31,
(in thousands)
2016
2015
2014
Time and materials
$ 52,741
$ 61,444
$ 69,137
Fixed price
Cost-plus
40,951
12,125
55,108
10,383
50,078
9,212
Total revenue
$ 105,817
$126,935
$128,427
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 cost at completion for 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.
9
We maintain an allowance for project disallowances in other
accrued liabilities for potential cost disallowances resulting from
government audits and project close-outs. Government audits
have been completed and final rates have been negotiated
for fiscal years through 2010. 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 our 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.
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
10
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 were less
than $0.1 million at July 31, 2016 and 2015.
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, 2016 and 2015, 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 maintain total valuation allowances of $2.3 million
and $0.6 million as a reduction of deferred tax assets at July 31,
2016 and 2015, respectively.
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, 2016, 2015 and 2014,
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 had outstanding letters of credit drawn under our letters of
credit to support operations of $2.2 million and $1.1 million at July
31, 2016 and 2015, respectively. Other than these letters of credit,
we did not have any off-balance sheet arrangements as of July 31,
2016 or 2015.
Principal Market for the Company’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.
Quarterly high and low prices for the Company’s Class A Common
Stock, as reported by NASDAQ, are summarized in the following
table.
As of September 30, 2016, 3,000,956 shares of the Company’s Class
A Common Stock were outstanding and there were 296 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, 2016, 1,293,146 shares of the Company’s Class
B Common Stock were outstanding and there were 52 holders of
record of the Class B Common Stock.
Including the fiscal year ended July 31, 2016, the Company has
declared semi-annual dividends for 30 consecutive years. The
Company declared dividends totaling $0.44, $0.48 and $0.48 per
common share during the fiscal years ended July 31, 2016, 2015
and 2014, respectively.
Fiscal Year Ended July 31, 2016
First Quarter (August 1, 2015 - October 31, 2015)
Second Quarter (November 1, 2015 - January 31, 2016)
Third Quarter (February 1, 2016 - April 30, 2016)
Fourth Quarter (May 1, 2016 - July 31, 2016)
Fiscal Year Ended July 31, 2015
First Quarter (August 1, 2014 - October 31, 2014)
Second Quarter (November 1, 2014 - January 31, 2015)
Third Quarter (February 1, 2015 - April 30, 2015)
Fourth Quarter (May 1, 2015 - July 31, 2015)
High
Low
$11.99
11.53
11.19
11.20
$10.25
8.51
9.21
9.70
High
Low
$10.72
11.34
10.79
11.40
$9.42
8.35
8.28
8.66
Photo credit: Capitol Reef National Park, by Paul Fuhrmann, Restoration Specialist
11
Annual Report on Form 10-K
The information included within this Annual Report, including the audited financial statements that follow, 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. Additional information
regarding the Company’s financial position and results of operations may be obtained from the Company’s Annual Report on Form 10-K filed
with the Securities and Exchange Commission on November 15, 2016.
The Company’s Securities and Exchange Commission filings may be obtained without charge by accessing the Investor Relations section of
the Company’s website at http://ene.com/investor-relations, at http://sec.gov or by sending a written request to:
Mr. H. John Mye III, Chief Financial Officer
Ecology and Environment, Inc.
368 Pleasant View Drive
Lancaster, NY 14086-1397
Audited Financial Statements
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 sheet of Ecology and Environment, Inc. as of July 31, 2016, and the related
consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for the year ended July 31, 2016.
These financial statements are the responsibility of the Company’s management. 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 financial statements are free of
material misstatement. We were not engaged to perform an audit of the Company’s 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 the 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 financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ecology
and Environment, Inc. at July 31, 2016, and the consolidated results of its operations and its cash flows for year ended July 31, 2016, in
conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of presenting deferred tax assets and
liabilities in the consolidated balance sheet as a result of the adoption of the amendments to the FASB Accounting Standards Codification
resulting from Accounting Standards Update No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” (“2015-17”) effective November 1,
2015, and elected to adopt the guidance retrospectively.
We also have audited the change in presentation of deferred tax assets and liabilities in the consolidated balance sheet as of July 31, 2015 as a
result of the adoption of 2015-17, as discussed in Note 2 to the consolidated financial statements. In our opinion, the changes are appropriate
and have been properly presented. We were not engaged to audit, review, or apply any procedures to the 2015 consolidated financial
statements of the Company other than with respect to the change in presentation and, accordingly, we do not express an opinion or any
other form of assurance on the 2015 consolidated financial statements taken as a whole.
Buffalo, New York
November 15, 2016
12
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Ecology and Environment, Inc.
We have audited, before the effects of the adjustments to retrospectively apply the change in accounting described in Note 2, the
accompanying consolidated balance sheet of Ecology and Environment, Inc. and its subsidiaries (collectively, the Company) as of July 31, 2015,
and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each
of the years in the two-year period ended July 31, 2015. (The 2015 consolidated financial statements before the effects of the adjustments
discussed in Note 2 are not presented herein.) The 2015 financial statements are the responsibility of the Company’s management. 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 audits 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 audits 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 2015 consolidated financial statements, before the effects of the adjustments to retrospectively apply the change in
accounting described in Note 2, and the 2014 consolidated statements of operations, changes in shareholders’ equity and cash flows,
present fairly, in all material respects, the financial position of the Company as of July 31, 2015, and the results of its operations and its cash
flows for each of the years in the two-year period ended July 31, 2015 in conformity with accounting principles generally accepted in the
United States of America.
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the change in accounting
described in Note 2 and accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are
appropriate and have been properly applied. Those adjustments were audited by Ernst and Young LLP.
Pittsburgh, Pennsylvania
October 29, 2015
Photo credit: Ruddy Turnstone, by Greg Coniglio, GIS Programmer/Analyst
13
Consolidated Balance Sheets
Balance at July 31,
(amounts in thousands, except share data)
2016
2015
Assets
Current assets:
Cash and cash equivalents
Investment securities available for sale
Contract receivables, net of allowance for doubtful accounts and
contract adjustments of $5,929 and $5,954, respectively
Income tax receivable
Other current assets
Total current assets
Property, buildings and equipment, net of accumulated depreciation of
$18,324 and $23,438 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 19)
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; 3,035,778 and 3,023,206 shares issued)
Class B common stock, par value $.01 per share;
(10,000,000 shares authorized; 1,357,947 and 1,370,519 shares issued)
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost (Class A common: 39,272 and 42,245 shares;
Class B common: 64,801 shares)
Total Ecology and Environment, Inc., shareholders’ equity
Noncontrolling interests
Total shareholders’ equity
Total liabilities and shareholders’ equity
14
$ 10,062
1,598
34,319
916
2,104
48,999
6,094
2,650
1,769
$ 8,703
1,434
42,866
297
1,331
54,631
7,114
4,812
1,932
$ 59,512
$ 68,489
$ 6,874
$ 10,410
312
6,590
240
3,297
3,445
20,758
107
525
217
—
—
30
14
16,606
22,237
(2,143)
(1,172)
35,572
2,333
37,905
672
8,688
551
2,618
3,931
26,870
107
632
395
—
—
30
14
16,575
23,246
(1,726)
(1,224)
36,915
3,570
40,485
The accompanying notes are an integral part of these consolidated financial statements.
$ 59,512
$ 68,489
Consolidated Statements of Operations
Fiscal Year Ended July 31,
(amounts in thousands, except share data)
Revenue, net
Cost of professional services and other direct operating expenses
Subcontract costs
Administrative and indirect operating expenses
Marketing and related costs
Depreciation and amortization
Income (loss) from operations
Interest income
Interest expense
Gain on Insurance Settlement
Gain on sale of assets and investment securities
Net foreign exchange gain (loss)
Other income
Income (loss) before income tax provision
Income tax provision
Net income (loss)
Net loss (income) attributable to the noncontrolling interest
2016
2015
2014
$ 105,817
$ 126,935
$ 128,427
39,512
18,550
31,169
11,301
1,143
4,142
83
(156)
358
(135)
44
31
4,367
3,759
47,500
23,327
35,604
11,433
1,467
7,604
85
(116)
—
186
134
76
7,969
3,769
49,449
20,829
41,464
13,016
4,176
(507)
154
(150)
—
13
(25)
68
(447)
343
$ 608
$ 4,200
$ (790)
278
(804)
(593)
Net income (loss) attributable to Ecology and Environment, Inc.
$ 886
$ 3,396
$ (1,383)
Net income (loss) per common share: basic and diluted
$ 0.21
$ 0.79
$ (0.32)
Weighted average common shares outstanding: basic and diluted
4,289,993
4,287,775
4,283,984
The accompanying notes are an integral part of these consolidated financial statements.
Photo credit: Grand Teton National Park, by Janice Gardner, Wildlife Biologist
15
Consolidated Statements of Comprehensive Income (Loss)
Net income (loss) including noncontrolling interests
Foreign currency translation adjustments
Unrealized investment gains, net
Comprehensive income (loss)
Comprehensive loss (income) attributable to noncontrolling interests
Comprehensive income (loss) attributable to Ecology and Environment, Inc.
Fiscal Year Ended July 31,
(amounts in thousands)
2016
2015
2014
$ 608
(557)
21
72
397
$ 469
$ 4,200
(2,152)
(4)
2,044
(192)
$ (790)
(298)
1
(1,087)
(458)
$ 1,852
$ (1,545)
The accompanying notes are an integral part of these consolidated financial statements.
Photo credit: 12 Apostles National Park, by Matthew Gelb, Environmental Specialist
16
Consolidated Statements of Cash Flows
Fiscal Year Ended July 31,
(amounts in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment of long-lived assets
Impairment of goodwill
Impairment of investment in ECSI
Depreciation and amortization
Deferred income tax benefit
Share based compensation expense
Tax impact of share-based compensation
Loss (gain) on sale of assets and investment securities
Net provision for (recovery of ) contract adjustments and doubtful accounts
Net bad debt (recovery) 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 operating activities
Cash flows from investing activities:
Acquisition of noncontrolling interest of subsidiaries
Proceeds from sale of subsidiary
Purchase of property, building and equipment
Proceeds from sale of property, building and equipment
Proceeds from maturity of investments
Purchase of investment securities
Net cash used in investing activities
Cash flows from financing activities:
Dividends paid
Proceeds from debt
Repayment of debt
Net (repayments of ) borrowings under lines of credit
Distributions to noncontrolling interests
Purchase of treasury stock
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) 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 (received) 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 receivable and stock)
Sale of subsidiary (loans receivable)
Proceeds from capital lease obligations
2016
2015
2014
$ 608
$ 4,200
$ (790)
375
—
—
1,143
1,697
37
—
135
(910)
453
7,394
(400)
(329)
42
(3,157)
(1,909)
40
607
(29)
5,797
—
150
(722)
5
26
(154)
(695)
—
104
355
1,467
1,154
59
(92)
(186)
(413)
(326)
(934)
(440)
270
48
1,052
1,805
132
(1,909)
202
6,548
(50)
—
(735)
255
—
(33)
(563)
(2,066)
(2,066)
6
(547)
(380)
(530)
—
(3,517)
(226)
1,359
8,703
384
(753)
(870)
(537)
—
(3,842)
(329)
1,814
6,889
—
—
—
4,176
(818)
353
(32)
(13)
174
90
1,855
192
3,247
29
24
630
(41)
(1,419)
446
8,103
(689)
—
(1,965)
—
—
53
(2,601)
(2,054)
544
(710)
(4,956)
(665)
(173)
(8,014)
(43)
(2,555)
9,444
$ 10,062
$ 8,703
$ 6,889
$ 151
2,742
861
—
75
$ 110
1,542
1,033
233
—
$ 146
(2,303)
1,033
1,073
—
69
The accompanying notes are an integral part of these consolidated financial statements.
322
43
17
Consolidated Statements of Changes in Shareholders’ Equity
(amounts in thousands, except share data)
Common Stock
Class
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, 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
A
B
2,685,151
1,708,574
$27
}
$17
$20,017
$25,366
$ (85)
143,911
$(1,798)
$3,095
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(194)
353
(32)
—
(2,414)
(606)
—
(1,383)
—
(2,066)
—
—
—
—
—
—
—
—
—
—
(164)
—
2
—
—
—
—
—
—
64
—
—
—
—
—
16,091
(16,387)
—
—
—
—
(44,260)
5,999
—
—
—
—
(173)
194
—
—
—
—
553
—
592
(133)
—
—
—
—
—
—
(665)
2,382
(1,157)
—
A
B
2,685,151
1,708,574
$27
}
$17
$17 ,124
$21,917
$ (183)
105,354
$(1,224)
$4,114
Net income
Foreign currency translation adjustment
Cash dividends declared ($0.48 per share)
Unrealized investment loss, net
—
—
—
—
—
—
—
—
Conversion of Class B common stock
to Class A common stock
A
B
338,055
(338,055)
3
}
(3)
—
—
—
—
—
59
(92)
(428)
—
(88)
—
(3,396)
—
(2,067)
—
—
—
—
—
—
—
—
—
(1,540)
—
(3)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,692
—
804
(611)
—
—
—
—
—
—
(537)
(200)
—
—
—
—
—
—
—
—
—
—
—
—
—
A
B
3,023,206
1,370,519
$30
}
$14
$16,575
$23,246
$ (1,726)
107,046
$(1,224)
$3,570
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(6)
37
—
—
—
887
—
(1,895)
—
—
—
—
—
—
—
—
(438)
—
21
—
—
—
—
—
—
—
—
—
—
—
(4,533)
—
—
—
1,560
—
—
—
—
—
52
—
—
—
—
(278)
(119)
—
—
—
—
—
(530)
(310)
—
A
B
3,035,778
1,357,947
$30
}
$14
$16,606
$22,238
$(2,143)
104,073
$(1,172)
$2,333
The accompanying notes are an integral part of these consolidated financial statements.
Share-based compensation expense
Tax impact of share-based compensation
Tax impact of noncontrolling interests
Distributions to noncontrolling interests
Purchase of additional noncontrolling
interests
Stock award plan forfeitures
Balance at July 31, 2015
Net Income
Foreign currency translation adjustment
Cash dividends declared ($0.44 per share)
Unrealized investment gains, net
Issuance of stock under stock award plan
Share-based compensation expense
Distributions to noncontrolling interests
Sale of majority-owned subsidiary
Stock award plan forfeitures
Balance at July 31, 2016
18
Conversion of Class B common stock
to Class A common stock
A
B
12,572
(12,572)
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
Ecology and Environment, Inc., (“EEI” or the “Parent Company”)
was incorporated in 1970 as a global broad-based environmental
consulting firm whose underlying philosophy is to provide
professional services worldwide so that sustainable economic
and human development may proceed with acceptable impact
on the environment. Together with its subsidiaries (collectively,
the “Company”), EEI has direct and indirect ownership in 7 active
wholly-owned and majority-owned operating subsidiaries in
5 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
thousands of projects for a wide variety of clients in more than
120 countries, providing environmental solutions in nearly every
ecosystem on the planet.
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 (“U.S. GAAP”). 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 fiscal year ended July 31, 2016.
2. Recent Accounting Pronouncements
Accounting Pronouncements Adopted During
the Fiscal Year Ended July 31, 2016
In November 2015, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17,
Income Taxes (Topic 740) – Balance Sheet Classification of Deferred
Taxes (“ASU 2015-17”). ASU 2015-17 requires entities to classify
deferred tax liabilities and assets as noncurrent in a classified
balance sheet. This differs from current U.S. GAAP which requires
that deferred income tax liabilities and assets be separated into
current and noncurrent amounts in a classified balance sheet. The
amendments in ASU 2015-17 are effective for financial statements
issued for annual periods beginning after December 15, 2016, and
interim periods within those annual periods. Earlier application is
permitted as of the beginning of an interim or annual reporting
period. ASU 2015-17 may be applied either prospectively to all
deferred tax liabilities and assets or retrospectively to all periods
presented. The Company adopted the provisions of ASU 2015-17
effective November 1, 2015, and elected to adopt the guidance
retrospectively. As a result of adopting ASU 2015-17, deferred tax
assets of $3.9 million were reclassified from current assets to non-
current assets on the consolidated balance sheet at July 31, 2015.
Refer to Note 12 of these consolidated financial statements for
disclosures regarding deferred tax assets and liabilities.
Accounting Pronouncements Not Yet Adopted
as of July 31, 2016
In September 2015, FASB issued ASU No. 2015-16, Business
Combinations (Topic 805) – Simplifying the Accounting for
Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-
16 requires an acquirer to recognize adjustments to provisional
amounts that are identified during the measurement period in the
reporting period in which the adjustment amounts are determined.
In addition, the amendments in ASU 2015-16 require an acquirer
to record, in the same period’s financial statements, the effect on
earnings of changes in depreciation, amortization, or other income
effects, if any, as a result of the change to the provisional amounts,
calculated as if the accounting had been completed at the
acquisition date. The amendments in ASU 2015-16 also require an
entity to present separately on the face of the income statement,
or disclose in the notes to the financial statements, the portion of
the amount recorded in current-period earnings by line item that
would have been recorded in previous reporting periods if the
adjustment to the provisional amounts had been recognized at the
acquisition date. The amendments in ASU 2015-16 are effective
for fiscal years beginning after December 15, 2015, including
interim periods within those fiscal years, and are to be applied
prospectively to adjustments to provisional amounts that occur
after the effective date. Earlier application is permitted for financial
statements that have not yet been made available for issuance.
The Company adopted the provisions of ASU 2015-16 effective
August 1, 2016. The adoption of this standard is not expected to
have a material impact on the Company’s consolidated financial
statements.
In May 2015, FASB issued ASU No. 2015-07, Fair Value Measurement
(Topic 820): Disclosures for Investments in Certain Entities that
Calculate Net Asset Value Per Share (Or its Equivalent) (“ASU 2015-
07”). ASU 2015-07 removes the requirements to: 1) categorize
within the fair value hierarchy all investments for which fair value
is measured using the net asset value per practical expedient; and
2) make certain disclosures for all investments that are eligible
to be measured at fair value using the net asset value per share
practical expedient. The amendments in ASU 2015-07 are effective
for public entities for fiscal years beginning after December 15,
2015, and interim periods within those fiscal years. The amendment
is required to be applied retrospectively and early adoption is
permitted. The Company adopted ASU 2015-07 effective August
1, 2016. Other than the changes to disclosures noted above, the
adoption of ASU 2015-07 is not expected to have a material impact
on the Company’s consolidated financial statements.
In August 2014, FASB issued ASU No. 2014-15, Presentation of
Financial Statements – Going Concern (Subtopic 205-40) (“ASU
2014-15”). ASU 2014-15 requires an entity’s management to
evaluate whether there are conditions or events, considered in the
aggregate, that raise substantial doubt about the entity’s ability to
continue as a going concern within one year after the date that
the financial statements are issued (or within one year after the
date that the financial statements are available to be issued when
applicable). ASU 2014-15 provides guidance for management’s
evaluation, including guidance regarding when substantial doubt
about an entity’s ability to continue as a going concern exists, and
when such doubt may be alleviated by management’s plans that
are intended to mitigate those relevant conditions or events. ASU
2014-15 also provides guidance regarding appropriate financial
statement disclosures regarding conditions or events that raised
substantial doubt about the entity’s ability to continue as a going
concern, management’s evaluation of the significance of those
conditions or events in relation to the entity’s ability to meet its
19
obligations, and management’s plans that are intended to mitigate
those conditions or events. The provisions of ASU 2014-15 are
effective for the annual period ending after December 15, 2016,
and for annual periods and interim periods thereafter. Earlier
application is permitted. The Company adopted ASU 2014-15
effective August 1, 2016. The adoption of this standard is not
expected to have a material impact on the Company’s consolidated
financial statements.
In March 2016, FASB issued ASU No. 2016-09, Compensation –
Stock Compensation (Topic 718) – Improvements to Employee
Share-Based Payment Accounting (“ASU 2016-09”). The objective
of ASU 2016-09 is to simplify several aspects of the accounting
for share-based payment transactions, including the income
tax consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. The
amendments in ASU 2016-09 are effective for fiscal years beginning
after December 15, 2016, including interim periods within those
fiscal years. Early adoption is permitted in any interim or annual
period, subject to transition requirements. The Company intends
to adopt the provisions of ASU 2016-09 effective August 1,
2017. Management is currently assessing the provisions of ASU
2016-09 and has not yet estimated its 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
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 was to be effective for annual reporting periods
beginning after December 15, 2016, including interim periods
within the annual reporting period. In August 2015, FASB issued
ASU No. 2015-14, Revenue from Contracts with Customers
(Topic 606), Deferral of the Effective Date (“ASU 2015-14”). The
amendments in ASU 2015-14 defer the effective date of ASU 2014-
09 for all entities by one year. The Company intends to adopt the
provisions of ASU 2014-09 effective August 1, 2018.
During the year ended July 31, 2016, FASB issued four additional
ASUs that provide clarification for specific aspects of ASU 2014-09.
The effective dates and transition requirements for these ASUs
are the same as the effective dates and transition requirements
included in ASU 2014-09 and ASU 2015-14.
ASU 2014-09 requires retrospective application by either restating
each prior period presented in the financial statements, or 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 its impact or selected a
transition method.
In January 2016, FASB issued ASU No. 2016-01, Financial
Instruments – Overall (Subtopic 825-10) – Recognition and
20
Measurement of Financial Assets and Financial Liabilities (“ASU
2016-01”). The amendments included in this update make targeted
improvements to U.S. GAAP. Entities are required to apply the
amendments included in ASU 2016-01 by means of a cumulative-
effect adjustment to the balance sheet as of the beginning of
the fiscal year of adoption. The amendments related to equity
securities without readily determinable fair values (including
disclosure requirements) should be applied prospectively to
equity investments that exist as of the date of adoption. For
public entities, the amendments included in ASU 2016-01 are
effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The Company
intends to adopt the provisions of ASU 2016-01 effective August
1, 2018. Management is currently assessing the provisions of ASU
2016-01 and has not yet estimated its impact on the Company’s
consolidated financial statements.
In August 2016, FASB issued ASU No. 2016-15, Statement of Cash
Flows (Topic 230) – Classification of Certain Cash Receipts and
Cash Payments (“ASU 2016-15”). The amendments included in
this update provide guidance regarding eight specific cash flow
classification issues that are not specifically addressed in previous
U.S. GAAP. For public entities, the amendments included in ASU
2016-01 are effective for fiscal years beginning after December
15, 2017, including interim periods within those fiscal years. The
Company intends to adopt the provisions of ASU 2016-01 effective
August 1, 2018. Management is currently assessing the provisions
of ASU 2016-15 and has not yet estimated its impact on the
Company’s consolidated financial statements.
In March 2016, FASB issued ASU No. 2016-02, Leases (Topic 842)
(“ASU 2016-02”). ASU 2016-02 requires lessees to recognize
the assets and liabilities that arise from most leases. The main
difference between previous U.S. GAAP and ASU 2016-02 is the
recognition of lease assets and lease liabilities by lessees for those
leases classified as operating leases under previous U.S. GAAP.
For lessors, the guidance included in ASU 2016-02 modifies the
classification criteria and the accounting for sales-type and direct
financing leases. ASU 2016-02 provides specific guidance for
determining whether a contractual arrangement contains a lease,
lease classification by lessees and lessors, initial and subsequent
measurement of leases by lessees and lessors, sale and leaseback
transactions, transition, and financial statement disclosures. ASU
2016-02 requires entities to use a modified retrospective approach
to apply its guidance, and includes a number of optional practical
expedients that entities may elect to apply. For public entities, the
amendments included in ASU 2016-02 are effective for fiscal years
beginning after December 15, 2018, including interim periods
within those fiscal years. The Company intends to adopt the
provisions of ASU 2016-02 effective August 1, 2019. Early adoption
of the amendments included in ASU 2016-02 is permitted.
Management is currently assessing the provisions of ASU 2016-
02 and has not yet estimated its impact on the Company’s
consolidated financial statements.
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments
– Credit Losses (Topic 326) (“ASU 2016-13”). The amendments
included in this update affect entities holding financial assets,
including trade receivables and investment securities available
for sale, that are not accounted for at fair value through net
income. ASU 2016-13 requires a financial asset (or a group of
financial assets) measured at amortized cost basis to be presented
at the net amount expected to be collected. The amendments
included in this update also provide guidance for measurement
of expected credit losses and for presentation of increases or
decreases of expected credit losses on the statement of operations.
For public entities, the amendments included in ASU 2016-13
are effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. The Company
intends to adopt the provisions of ASU 2016-01 effective August
1, 2020. Management is currently assessing the provisions of ASU
2016-15 and has not yet estimated its impact on the Company’s
consolidated financial statements.
3. Summary of Significant
Accounting Policies
Consolidation
The consolidated financial statements include the accounts of
the EEI and its wholly owned and majority owned subsidiaries. All
intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S.
GAAP 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.
Investment Securities Available for Sale
Investment securities available for sale 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
condensed consolidated balance sheets and condensed
consolidated statements of changes in shareholders’ equity. The
cost basis of securities sold is based on the specific identification
method. Reclassification adjustments out of accumulated other
comprehensive income resulting from disposition of investment
securities available for sale are included within other income
(expense) in the condensed consolidated statements of operations.
Investment securities available for sale include mutual funds that
are valued at the net asset value (“NAV”) of shares 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. The mutual funds held by
the Company are deemed to be actively traded.
Refer to Note 6 of these consolidated financial statements for
additional disclosures regarding the Company’s investment
securities available for sale.
Revenue Recognition and Contract
Receivables, Net
Substantially all of the Company’s revenue is derived from
environmental consulting work, which 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
Consulting
As incurred at contract rates.
Time and
Materials
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 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 2010. The Company records an allowance
for project disallowances in other accrued liabilities for potential
disallowances resulting from government audits (refer to Note 12
of these consolidated financial statements). Allowances for project
disallowances are recorded as adjustments to revenue when the
amounts are estimable. Resolution of these amounts is dependent
upon the results of government audits and other formal contract
close-out procedures.
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
21
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 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.
The Company also reduces contract receivables by recording an
allowance for doubtful accounts to account for the estimated
impact of collection issues resulting from a client’s inability or
unwillingness to pay valid obligations to the Company. The
resulting provision for bad debts is recorded within administrative
and indirect operating expenses on the consolidated statements of
operations.
Refer to Note 7 of these consolidated financial statements
for additional disclosures regarding the Company’s contract
receivables, net.
Property, Buildings and Equipment,
Depreciation, and Amortization
Property, buildings 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.
22
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 following software-related costs are 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;
net operating loss carryforwards, and a deferred tax liability is
recognized for all taxable temporary differences.
• 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 8 of these consolidated financial statements for
additional disclosures regarding the Company’s property, buildings
and equipment.
Goodwill
Goodwill 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
to the recorded book value of the respective reporting units.
The estimated fair value of reporting units is calculated using a
discounted cash flows methodology. 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.
Refer to Note 9 of these consolidated financial statements for
additional disclosures regarding the Company’s recorded goodwill.
Impairment of Long-Lived Assets
The Company assesses recoverability of the carrying value of long-
lived assets by estimating the future net cash flows (undiscounted)
expected to result from the asset, including eventual disposition.
If the future net cash flows are less than the carrying value of
the asset, an impairment loss is recorded equal to the difference
between the asset’s carrying value and fair value.
Refer to Note 8 of these consolidated financial statements for
additional disclosures regarding impairment of property, buildings
and equipment.
Income Taxes
The Company follows the asset and liability approach to account for
income taxes. This approach requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the
tax basis 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.
The Company does not record United States income taxes
applicable to undistributed earnings of foreign subsidiaries that
the Company intends to indefinitely reinvest in the operations of
those entities. Excess cash accumulated by any foreign subsidiary,
beyond that necessary to fund operations or business expansion,
may be repatriated to the U.S. at the discretion of Board of Directors
of the respective entities. The Company would be required to
accrue and pay taxes on any amounts repatriated to the U.S. from
foreign subsidiaries.
Income tax expense includes U.S. and international income taxes,
determined using the applicable statutory rates. A deferred tax
asset is recognized for all deductible temporary differences and
The Company has deferred tax assets, resulting principally from
timing differences in the recognition of entity operating losses,
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.
U.S. GAAP prescribes a recognition threshold and measurement
principles for financial statement disclosure of tax positions taken
or expected to be taken on a tax return. A tax position is a position
in a previously filed tax return or a position expected to be taken in
a future tax filing that is reflected in measuring current or deferred
income tax assets and liabilities. Tax positions shall be recognized
only when it is more likely than not (likelihood of greater than
50%), based on technical merits, that the position will be sustained.
Tax positions that meet the more likely than not threshold should
be measured using a probability weighted approach as the
largest amount of tax benefit that is greater than 50% likely of
being realized upon settlement. Whether the more-likely-than-
not recognition threshold is met for a tax position, is a matter of
judgment based on 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 12 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 “EEI
Defined Contribution Plan”). The annual expense of the EEI Defined
Contribution Plan is based on a percentage of eligible wages as
authorized by EEI’s Board of Directors.
EEI also has a supplemental retirement plan that provides post-
retirement health care coverage for EEI’s founders and their
spouses. As of July 31, 2016, one founder, his spouse and the
spouse of a deceased founder were receiving healthcare coverage
under this plan. The annual expense associated with this plan is
determined based on discounted annual cost estimates over the
estimated life expectancy of the founders and their spouses.
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 and the
employees of two if its majority owned subsidiaries (the “Walsh
Defined Contribution Plan”). The respective entities contribute a
percentage of eligible wages up to a maximum of 4%.
Refer to Note 17 of these consolidated financial statements
for additional disclosures regarding the Company’s defined
contribution plans.
Incentive Compensation
The Company expenses cash bonuses during the performance
period to which they relate. The value of stock awards is expensed
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.
23
Refer to Note 14 of these consolidated financial statements
for additional disclosures regarding the Company’s incentive
compensation awards.
Earnings per Share
Basic and diluted earnings per share (“EPS”) are computed
by dividing the net income (loss) 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 (refer to Note 14 of these consolidated financial
statements), 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 computation of
earnings per share pursuant to the two-class method. As a result,
unvested restricted shares are included in the weighted average
shares outstanding calculation.
Refer to Note 18 of these consolidated financial statements for
addtional disclosures regarding the Company’s earnings per share
Comprehensive Income (Loss)
Comprehensive income or loss represents the change in
shareholders’ equity during a period, excluding changes arising
from transactions with shareholders. Comprehensive income or
loss includes net income (loss) from the consolidated statements of
operations, plus (less) other comprehensive income (loss) during a
reporting period.
Other comprehensive income (loss) represents the net effect
of accounting transactions that are recognized directly in
shareholders’ equity, such as the unrealized net impact of currency
translation adjustments from foreign operations and unrealized
gains (losses) on available-for-sale securities. Refer to Note 15 of
these consolidated financial statements for additional disclosures
regarding accumulated other comprehensive income (loss).
Foreign Currencies and Inflation
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 gains (losses) of less than
$0.1 million, $0.1 million and less than $(0.1) million for the fiscal
years ended July 31, 2016, 2015 and 2014, respectively.
The financial statements of foreign subsidiaries located in highly
inflationary economies are remeasured as if the functional currency
24
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,
2016, 2015 or 2014.
Noncontrolling Interests
Earnings and other comprehensive income (loss) are separately
attributed to both the controlling and noncontrolling interests.
Purchases of noncontrolling interests are recorded as reductions
of shareholders’ equity on the consolidated statements of
shareholders’ equity. EPS is calculated based on net income (loss)
attributable to the Company’s controlling interests.
4. Significant Adjustments During the
Three Months Ended July 31, 2016
During the three months ended July 31, 2016, the Company
identified and recorded the following adjustments of amounts
previously reported during periods prior to 2016. The Company
determined that these amounts are not material to the current or
any prior period:
• Accrued severance liabilities maintained by the Company’s
South American subsidiaries, which were reported in accrued
payroll costs on the consolidated balance sheet at July 31,
2015, were reversed, resulting in a reduction of $0.6 million
of administrative and indirect operating expenses, and an
increase of $0.1 million in income tax provision for the three
and twelve month periods ended July 31, 2016. Net income
attributable to EEI increased $0.3 million as a result of these
adjustments for the three and twelve month periods ended
July 31, 2016.
• Correction of deferred tax assets and liabilities reported as of
July 31, 2015 related to U.S. and South American operations
resulted in a net increase in income tax provision of $0.4
million for the three and twelve month periods ended July 31,
2016. Net income attributable to EEI decreased $0.2 million as
a result of these adjustments for the three and twelve month
periods ended July 31, 2016.
5. 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 less than $0.1 million were included in cash and
cash equivalents in the accompanying consolidated balance sheets
and consolidated statements of cash flows at July 31, 2016 and
2015, respectively.
6. 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 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.
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.
There were no transfers in or out of levels 1, 2 or 3 during fiscal
years 2016, 2015 or 2014.
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.
Balance at July 31, 2016
(in thousands)
Assets
Level 1
Level 2
Level 3
Total
regarding the Company’s lines of credit, debt and capital lease
obligations.
7. Contract Receivables, net
Contract receivables, net are summarized in the following table.
Balance at July 31,
(in thousands)
2016
2015
Contract Receivables:
Billed
Unbilled
Allowance for doubtful accounts and
contract adjustments
Contract receivables, net
$19,552
20,696
40,248
(5,929)
$34,319
$22,916
25,904
48,820
(5,954)
$42,866
Billed contract receivables included contractual retainage
balances of $0.9 million and $0.5 million at July 31, 2016 and 2015,
respectively. Management anticipates that unbilled contract
receivables and retainage balances at July 31, 2016 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, 2016
(in thousands)
Investment
securities available
for sale
$1,598
$ —
$ —
$1,598
Region
Balance at July 31, 2015
(in thousands)
United States, Canada, and
South America
Assets
Level 1
Level 2
Level 3
Total
Middle East and Africa
Investment
securities available
for sale
$1,434
$ —
$ —
$1,434
Asia
Totals
Allowance
for Doubtful
Accounts
and Contract
Adjustments
$ 1,034
4,895
—
Contract
Receivables
$ 35,266
4,921
61
$ 40,248
$ 5,929
The Company recorded gross unrealized gains (losses) of less than
$0.1 million related to investment securities available for sale in
accumulated other comprehensive income (loss) at July 31, 2016
and 2015 and 2014. The Company did not record any sales of
investment securities during the twelve months ended July 31,
2016.
The carrying amount of cash and cash equivalents approximated
fair value at July 31, 2016 and 2015. 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, 2016 and 2015. These liabilities were classified as level
2 instruments at both dates. Refer to Note 10 and Note 11 of
these consolidated financial statements for additional disclosures
Balance at July 31, 2015
(in thousands)
Region
United States, Canada, and
South America
Middle East and Africa
Asia
Totals
Allowance
for Doubtful
Accounts
and Contract
Adjustments
Contract
Receivables
$ 43,629
$ 1,043
5,067
124
4,894
17
$ 48,820
$ 5,954
Contract adjustments related to projects in the United States,
Canada and South America typically result from cost overruns
related to current or recently completed projects, or from
recoveries of cost overruns recorded as contract adjustments in
25
prior reporting periods. Contract adjustments related to projects
in the Middle East, Africa and Asia typically result from difficulties
encountered while attempting to settle and close-out claims that
may be several years old.
Combined contract receivables related to projects in the Middle
East, Africa and Asia represented 12% and 11% of total contract
receivables at July 31, 2016 and 2015, respectively, while the
combined allowance for doubtful accounts and contract
adjustments related to these projects represented 83% and 82%,
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.
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,
(in thousands)
2016
2015
2014
$ 5,954
$ 6,508
$ 5,969
(577)
552
(263)
(291)
474
95
—
—
(30)
Balance at beginning of
period
Net increase (decrease)
due to adjustments in
the allowance for:
Contract adjustments (1)
Doubtful accounts (2)
Transfer of reserves (to)
from allowance for
project disallowances (3)
Balance at end of period
$ 5,929
$ 5,954
$ 6,508
(1) Increases (decreases) to the allowance for contract adjustments on the
consolidated balance sheets are 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 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 13 of these consolidated
financial statements.
During fiscal year 2016, the Company’s Brazilian operations
continued to be adversely affected by an economic downturn, the
total scope and duration of which are uncertain. Management
is monitoring any adverse trends or events that may impact the
realizability of the recorded net book value of contract receivables
from customers in Brazil. The Company maintained $0.8 million and
26
$0.4 million of allowance for doubtful accounts at July 31, 2016 and
2015, respectively, related to the Company’s Brazilian operations.
8. Property, Buildings and Equipment, net
Property, buildings and equipment is summarized in the following
table.
Balance at July 31,
(in thousands)
2016
2015
Land and land improvements
$ 393
Buildings and building improvements
Field equipment
Computer equipment
Computer software
Office furniture and equipment
Vehicles
Other
Accumulated depreciation and
amortization.
$ 393
10,368
2,786
4,685
6,112
4,076
1,439
693
9,700
2,222
4,439
3,105
2,683
1,333
543
24,418
30,552
(18,324)
(23,438)
Property, building, and equipment, net
$ 6,094
$ 7,114
During the three months ended April 30, 2016, the Company’s
Board of Directors directed management to sell vacant buildings
owned by the Company. The buildings had a recorded net book
value of $1.9 million at April 30, 2016. Management assessed the
recoverability of the net book value of the buildings based on its
plan to sell the buildings, expected future use of the buildings,
and the buildings’ appraised market value. Based upon this
assessment, management determined that the net book value of
the buildings was impaired as of April 30, 2016. As a result, during
the three months ended April 30, 2016, the Company recorded
an impairment loss of approximately $0.4 million as a reduction of
property, buildings and equipment, net in the consolidated balance
sheet and as additional administrative and indirect operating
expenses in the consolidated statement of operations.
Also during the three months ended April 30, 2016, the
Company received net insurance proceeds of approximately $0.4
million related to storm damage to two of its buildings. These
proceeds were recorded as a gain on insurance settlement in the
consolidated statement of operations.
9. Goodwill
Goodwill of $1.1 million is included in other assets on the
accompanying consolidated balance sheets at July 31, 2016 and
2015. The Company’s most recent annual impairment assessment
for goodwill was completed during the fourth quarter of fiscal year
2016. Based on this assessment, the fair values of the reporting
units to which goodwill is assigned exceeded the book values
of the respective reporting units. As a result, no impairment of
goodwill was identified.
10. Lines of Credit
Unsecured lines of credit are summarized in the following table.
Balance at July 31,
(in thousands)
Outstanding cash draws, recorded as
lines of credit on the accompanying
consolidated balance sheets
Outstanding letters of credit to support
operations
Total amounts used under lines of credit
Remaining amounts available under lines
of credit
2016 2015
$ 312
$ 672
2,187
2,499
36,496
1,144
1,816
30,993
$32,809
Total approved unsecured lines of credit
$38,995
Contractual interest rates ranged from 3.50% to 15.60% at July 31,
2016. The Company’s lenders have reaffirmed the lines of credit
within the past twelve months.
11. Debt and Capital Lease Obligations
Debt and capital lease obligations are summarized in the following
table.
Balance at July 31,
(in thousands)
2016 2015
Various loans and advances (interest rates
ranging from 3.25% to 12%)
Capital lease obligations (interest rates
ranging from 7.36% to 14%)
Current portion of long-term debt and
capital lease obligations
Long-term debt and capital lease
obligations
$ 217
$ 635
240
457
311
946
(240)
(551)
$ 217
$ 395
The aggregate maturities of long-term debt and capital lease
obligations as of July 31, 2016 are summarized in the following table.
Fiscal Year Ended
July 31,
Amount
(in thousands)
2017
2018
2019
2020
Thereafter
Total
240
171
27
13
6
$ 457
12. Income Taxes
Income (loss) before income tax provision is summarized in the
following table.
Domestic
Foreign
Fiscal Year Ended July 31,
(in thousands)
2016
2015
2014
$ 4,558
(191)
$ 4,367
$ 3,500
4,469
$ 7,969
$ (4,305)
3,858
$ (447)
The income tax provision is summarized in the following table.
Fiscal Year Ended July 31,
(in thousands)
2016
2015
2014
$ 1,155
$ 488
177
730
2,062
587
269
841
1,697
80
2,047
2,615
1,379
172
(397)
1,154
$ 86
63
1,012
1,161
(975)
24
133
(818)
$ 3,759
$ 3,769
$ 343
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Total income
tax provsion
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,
(in thousands)
2016 2015
2014
Income tax (benefit) provision
at the U.S. federal statutory
income tax rate
$ 1,485
$ 2,709
$ (152)
Brazil valuation allowance
1,582
—
—
Income from “pass-through”
entities taxable to
noncontrolling partners
International rate differences
Other foreign taxes, net of
federal benefit
Foreign dividend income
State taxes, net of federal
benefit
Re-evaluation and settlements
of tax contingencies
Peru non-deductible
expenses
Canada and China valuation
allowance
Other permanent differences
Income tax provision, as
reported on the consolidated
statements of operations
(39)
(145)
153
263
312
—
59
1
88
31
(338)
161
508
166
—
167
156
209
35
(144)
(34)
597
28
(20)
44
(83)
72
$ 3,759
$ 3,769
$ 343
The Company adopted the provisions of ASU 2015-17 effective
November 1, 2015, and elected to adopt the guidance
retrospectively. As a result of adopting ASU 2015-17, deferred
income tax assets of $3.9 million were reclassified from current
assets and included in non-current deferred income tax assets on
the consolidated balance sheet at July 31, 2015. The significant
27
components of deferred tax assets and liabilities are summarized in
the following table.
Balance at July 31, 2016
(in thousands)
2016
2015
Deferred tax assets:
Contract and other reserves
$ 3,023
$ 3,257
Acrued compensation and
expenses
Net operating loss
carryforwards
Foreign and state income
taxes
Foreign tax credit
Federal benefit from foreign
tax audits
Other
Deferred tax assets
Less: valuation allowance
734
1,265
59
296
157
(26)
5,508
(2,278)
836
737
57
296
212
$ 454
5,849
(560)
Net deferred tax assets
$ 3,230
$ 5,289
Deferred tax liabilities:
Federal expense on state
deferred taxes
Fixed assets and intangibles
Federal expense from foreign
accounting differences
Net deferred tax liabilities
$ (133)
(759)
(213)
$ (1,105)
$ (225)
(341)
(542)
$(1,108)
During the fiscal year ended July 31, 2014, the Company generated
a net operating loss in the U.S. of $1.7 million, which was carried
forward and fully utilized in fiscal year 2015. As of July 31, 2016, net
operating losses attributable to operations in Brazil, Canada and
China and net operating losses for state income tax purposes still
exist.
The Company periodically evaluates the likelihood of realization
of deferred tax assets, and provides for a valuation allowance
when necessary. Activity within the deferred tax asset valuation
allowance is summarized in the following table.
(in thousands)
Fiscal Year Ended July 31,
Balance at beginning of period
Additions during the period
Reductions during period
Balance at end of period
2016
2015
$ 560
1,765
(47)
$ 2,278
$ 398
176
(14)
$ 560
The valuation allowance maintained by the Company primarily
relates to: (i) net operating losses in Brazil and Canada, the
utilization of which is dependent on future earnings; (ii) excess
foreign tax credit carryforwards, the utilization of which is
dependent on future foreign source income; and (iii) capital loss
carryforwards, the utilization of which is dependent on future
capital gains. Additions to the valuation allowance during the
fiscal year ended July 31, 2016 primarily related to a deferred tax
asset that resulted from net operating loss carryforwards from the
Company’s Brazilian operations. During the fiscal year ended July
28
31, 2016, based on available evidence including recent cumulative
operating losses, management determined that it is more likely
than not that these deferred tax assets will not be realized.
The Company has recorded $0.1 million and $0 of income taxes
applicable to undistributed earnings of foreign subsidiaries that
will not be indefinitely reinvested in those operations. At July 31,
2016, the Company’s operations in Chile, Peru and Ecuador had $6.9
million of combined undistributed earnings that were indefinitely
reinvested in those operations.
The Company files numerous consolidated and separate income tax
returns in U.S. federal, state and foreign jurisdictions. The Company’s
tax matters for the fiscal years 2013 through 2016 remain subject
to examination by the IRS. 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.
At July 31, 2016, 2015 and 2014, the Company had $0.1 million of
uncertain tax positions (“UTPs”) resulting from gross unrecognized
tax benefits 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 recognizes interest and penalties related to liabilities
for UTPs in other accrued liabilities on the consolidated balance
sheets and in administrative and indirect operating expenses on
the consolidated statements of operations. The Company recorded
interest and penalties expense related to liabilities for UTPs of less
than $0.1 million during the fiscal years ended July 31, 2016, 2015
and 2014. The Company had $0.1 million of accrued interest and
penalties recorded at July 31, 2016 and 2015.
13. Other Accrued Liabilities
Other accrued liabilities are summarized in the following table.
Balance at July 31,
(in thousands)
Allowance for project disallowances
Other
Total other accrued liabilities
2016
2015
$ 1,819
1,626
$ 3,445
$ 2,243
1,688
$ 3,931
Activity within the allowance for project disallowances is
summarized in the following table.
Fiscal Year Ended July 31,
(in thousands)
2016
2015
2014
$ 2,243
$ 2,393
$ 2,663
(424)
(150)
(300)
—
—
30
Balance at beginning of
period
Reduction of reserves
recorded in prior fiscal years
Net change during the
period, recorded as a
transfer of reserves from
allowance for doubtful
accounts and contract
adjustments
Balance at end of period
$ 1,819
$ 2,243
$ 2,393
The reductions in the allowance for project disallowances during
fiscal years 2016, 2015 and 2014, which were recorded as additions
to revenue, net on the consolidated statements of operations,
resulted from settlements of allowances recorded in prior fiscal
years. The settlements resulted in cash payments of less than $0.1
million during fiscal years 2016, 2015 and 2014.
14. Incentive Compensation
EEI and its subsidiaries may, at the discretion of their respective
Boards of Directors, award incentive compensation to Directors,
senior management and other employees based on the respective
company’s financial performance and the individual’s job
performance. Incentive compensation may be awarded as cash
bonuses, Class A Common Stock issued under EEI’s Stock Award
Plan (defined below), or a combination of both cash and stock.
Cash Bonuses
The Company recorded $1.7 million, $3.0 million and $1.4 million of
cash bonus awards as incentive compensation expense during the
fiscal years ended July 31, 2016, 2015 and 2014, respectively.
Stock Award Plan
EEI adopted the 1998 Stock Award Plan effective March 16,
1998. This plan, together with supplemental plans that were
subsequently adopted by the Company’s Board of Directors, is
referred to as the “Stock Award Plan”. The Stock Award Plan is not a
qualified plan Section 401(a) of the Internal Revenue Code. Under
the Stock Award Plan, Directors, officers and other key employees
of EEI or any of its subsidiaries may be awarded Class A Common
Stock as a bonus for services rendered to the Company or its
subsidiaries, based upon the fair market value of the common stock
at the time of the award. The Stock Award Plan authorizes the
Company’s Board of Directors to determine the vesting period and
the circumstances under which the awards may be forfeited.
Under the supplemental plan in place as of July 31, 2016, which
expired in October 2016, the Company issued 17,386 shares of
Class A Common Stock under the Stock Award Plan, all of which
were fully vested at July 31, 2016. In October 2016, the Company’s
Board of Directors adopted the current supplemental plan, the
2016 Stock Award Plan. This plan permits awards of up to 200,000
shares of Class A Common Stock for a period of up to five years
until its termination in October 2021.
EEI recorded non-cash compensation expense of less than $0.1
million during the twelve months ended July 31, 2016 and 2015
and $0.4 million during the twelve months ended July 31, 2014
in connection with outstanding stock compensation awards. As
of July 31, 2016, all previous stock awards were fully expensed.
The “pool” of excess tax benefits accumulated in Capital in Excess
of Par Value was $0 and $0.1 million at July 31, 2016 and 2015,
respectively.
In September 2015, EEI issued 4,533 Class A shares from the Stock
Award Plan, which were valued at less than $0.1 million, to three
directors as additional compensation for their roles as Chairman
and members of EEI’s Audit Committee. In September 2016, the
Company issued an additional 4,450 Class A shares, valued at less
than $0.1 million, to the Chairman and members of the Company’s
Audit Committee. These stock awards vested immediately upon
issuance, subject to certain restrictions regarding transfer of the
shares that expire one year after issuance.
15. 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 cash dividends of $1.9 million, $2.1 million
and $2.1 million during the fiscal years ended July 31, 2016, 2015
and 2014. The Company paid cash dividends of $2.1 million during
the fiscal years ended July 31, 2016, 2015 and 2014. The Company
paid cash dividends of $0.9 million, $1.0 million and $1.0 million in
August 2016, 2015 and 2014, respectively, that were declared and
accrued in prior periods.
Stock Repurchase Program
In August 2010, the Company’s Board of Directors approved a
program for repurchase of 200,000 shares of Class A Common
Stock (the “Stock Repurchase Program”). As of July 31, 2016, the
Company repurchased 122,918 shares of Class A stock, and 77,082
shares had yet to be repurchased under the Stock Repurchase
Program. The Company did not acquire any Class A shares under
the Stock Repurchase Program during fiscal years 2016 or 2015. The
Company acquired 16,091 shares of Class A stock under the Stock
Repurchase Program during fiscal year 2014 for a total acquisition
cost of approximately $0.2 million.
29
Noncontrolling Interests
During the fiscal year ended July 31, 2015, Gustavson Associates,
LLC (“Gustavson”), a majority owned indirect subsidiary of EEI,
purchased an additional 7.2% of its outstanding common shares
from noncontrolling shareholders for $0.3 million, paid as follows:
(i) $0.1 million of cash paid on the transaction date; and (ii) $0.2
million payable in 3 annual installments during the fiscal years
ended July 31, 2016, 2017 and 2018, plus interest accrued at 6% per
annum. EEI’s indirect ownership of Gustavson increased to 83.6% as
a result of this transaction.
During the fiscal year ended July 31, 2014, in three separate
transactions, EEI purchased a combined 10.5% of outstanding Walsh
Environmental, LLC (“Walsh”) common shares from noncontrolling
shareholders for $1.8 million, paid as follows: (i) $0.8 million in cash
paid on the purchase transaction dates; (ii) $0.5 million EEI Class A
Common Stock issued on one of the transaction dates; and (iii) $0.5
million of cash payable in two annual installments during the fiscal
years ended July 31, 2015 and 2016, plus interest accrued at 3.25%
per annum. EEI’s direct ownership of Walsh increased to 100% as a
result of these transactions.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are
summarized in the following table.
(in thousands)
Balance at July 31,
Unrealized net foreign currency
translation losses
Unrealized net investment gains on
available for sale investments
Total accumulated other
comprehensive loss
2016
2015
$ (2,176)
$ (1,738)
33
12
$ (2,143)
$ (1,726)
16. Operating 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. 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 $3.5 million, $3.5 million and $3.9 million
for the fiscal years ended July 31, 2016, 2015 and 2014, respectively.
Future minimum rental commitments under operating leases as of
July 31, 2016 are summarized in the following table.
Fiscal Year Ended
July 31, Amount
(in thousands)
2017
2018
2019
2020
2021
Thereafter
30
$2,565
2,289
1,813
1,278
1,134
886
17. Defined Contribution Plans
Contributions to the EEI Defined Contribution Plan and EEI
Supplemental Retirement Plan are discretionary and determined
annually by its Board of Directors. The Walsh 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 these plans was $1.4
million, $1.2 million, and $1.7 million for fiscal years 2016, 2015 and
2014, respectively.
18. Earnings Per Share
The computation of basic and diluted EPS is included in the
following table.
Fiscal Year Ended July 31,
(in thousands, except share and per share amounts)
2016
2015
2014
Net (loss) income
attributable to
Ecology and
Environment, Inc.
$ 886
$ 3,396
$ (1,383)
Dividend declared
1,895
2,066
2,066
Undistributed
earnings
Weighted-average
common shares
outstanding (basic
and diluted)
Distributed earnings
per share
Undistributed
earnings per share
Total earnings per
share
$ (1,009)
$1,330
$ (3,449)
4,289,993
4,287,775
4,283,984
$ 0.44
$ 0.48
$ 0.48
(0.23)
0.31
(0.80)
$ 0.21
$ 0.79
$ (0.32)
19. Segment Reporting
The Company reports segment information based on the
geographic location of EEI and its direct and indirect subsidiaries.
Revenue, net and long-lived assets by business segment are
summarized in the following tables.
(in thousands)
Fiscal Years Ended July 31,
2016
2015 2014
Revenue, net, by Business Segment:
EEI and its subsidiaries located
in the United States
Subsidiaries located in
South America (1)
Other foreign subsidiaries
$83,095 $88,715 $85,456
22,722
38,220
42,569
—
—
402
(1) Significant South American revenues included revenues from subsidiaries
located in Peru ($9.7 million, $22.8 million and $19.5 million for fiscal years
2016, 2015 and 2014, respectively), Brazil ($5.0 million, $8.0 million and $13.8
million for fiscal years 2016, 2015 and 2014, respectively) and Chile ($7.5
million, $6.5 million and $8.8 million for fiscal years 2016, 2014 and 2014,
respectively).
Balance at July 31,
(in thousands)
2016
2015 2014
Long-lived assets by geographic location:
EEI and its subsidiaries located
in the United States
Subsidiaries located in
South America
Other foreign subsidiaries
$4,916
$5,901
$6,566
1,178
1,213
1,374
—
—
1
20. Commitments and Contingencies
Legal Proceedings
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.
On February 4, 2011, the Chico Mendes Institute of Biodiversity
Conservation of Brazil (the “Institute”) issued a Notice of Infraction
to ecology and environment do brasil Ltda (“E&E Brasil”), a majority-
owned subsidiary of EEI. The Notice of Infraction concerned the
taking and collecting wild animal specimens without authorization
by the competent authority and imposed a fine of 520,000 Reais
against E&E Brazil. The Institute also filed Notices of Infraction
against four employees of E&E Brasil alleging the same claims and
imposed fines against those individuals that, in the aggregate, were
equal to the fine imposed against E&E Brasil. No claim has been
made against EEI.
E&E Brasil has filed court claims appealing the administrative
decisions of the Institute for E & E Brasil’s employees that: (a)
deny the jurisdiction of the Institute; (b) state that the Notice of
Infraction is constitutionally vague; and (c) affirmatively state 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. The claim of violations against one of the four
employees was dismissed. The remaining three employees have
fines assessed against them that are being appealed through the
federal courts. Violations against E&E Brasil are pending agency
determination. At July 31, 2016, the Company recorded a reserve
of approximately $0.3 million in other accrued liabilities related to
these claims.
Contract Termination Provisions
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. The Company did not experience
early termination of any material contracts during fiscal years 2016
or 2015.
21. Sale of Subsidiary
In October 2015, EEI sold its majority interest in ECSI, LLC
(“ECSI”), an engineering and environmental consulting company
headquartered in Kentucky, to ECSI’s minority shareholders for
$0.3 million. EEI recognized a loss on valuation of its investment
in ECSI of approximately $0.4 million in administrative and
indirect operating expenses on the accompanying consolidated
statements of operations during the fourth quarter of the fiscal
year ended July 31, 2015. The offsetting allowance for loss on
valuation of investment in ECSI was recorded in other assets on
the accompanying consolidated balance sheets at July 31, 2015.
Effective with consummation of the sale in October 2015, ECSI
and its owners are no longer related parties to EEI or any of its
consolidated subsidiaries.
Photo credit: Pronghorn Antelope, Utah by Janice Gardner, Wildlife Biologist
31
32
Photo credit: Yosemite National Park, by Doug Heatwole
Frank B. Silvestro
Founder, Chairman of the Board
Gerald A. Strobel, P.E.
Founder
Ronald L. Frank
Founder
BOARD OF DIRECTORS
as of January 1, 2017
Gerard A. Gallagher, Jr.
Retired Company Officer
Michael C. Gross
Insurance Broker and
NYS Tax Auditor
CORPORATE OFFICERS
Gerard A. Gallagher III
President and Chief Executive Officer
Cheryl A. Karpowicz, AICP
Senior Vice President
Fred J. McKosky, P.E.
Chief Operating Officer,
Senior Vice President
Ronald L. Frank
Executive Vice President, Secretary
H. John Mye III, P.E.
Vice President, Treasurer
and Chief Financial Officer
Kevin Donovan
Senior Vice President
Nancy Aungst
Senior Vice President
Timothy J. Grady, P.E.
Senior Vice President
George A. Rusk, Esq.
Vice President
Carmine A. Tronolone
Vice President
CORPORATE HEADQUARTERS
Buffalo Corporate Center
368 Pleasant View Drive
Lancaster, NY 14086-1397
TEL: 1 (716) 684-8060
FAX: 1 (716) 684-0844
E-MAIL: jmye@ene.com
WEB: www.ene.com
STOCK TRANSFER AGENT
American Stock Transfer & Trust Co.
40 Wall Street
New York, NY 10005
TEL: 1 (212) 936-5100
EXCHANGE LISTING
NASDAQ® Global Market
Ticker Symbol: EEI
Michael R. Cellino, MD
Partner, Buffalo Medical Group
Michael S. Betrus, CPA
Retired CFO, Senior Vice President
of Power Drives, Inc.
Daniel R. Castle, AICP
Vice President
Michael L. Donnelly
Vice President
Michael F. Kane
Vice President
Daniel I. Sewall
Vice President
Colleen C. Mullaney-Westfall, Esq.
Assistant Secretary
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
Suite 1500
50 Fountain Plaza
Buffalo, NY 14202
LEGAL COUNSEL
Gross, Shuman, Brizdle & Gilfillan, P.C.
465 Main Street, Suite 600
Buffalo, NY 14203
ACTIVE SUBSIDIARIES
Ecology & Environment Engineering, Inc.
Lowham-Walsh Engineering & Environment Services, LLC
ecology and environment do brasil Ltda. (Brazil)
Servicios Ambientales Walsh, S.A. (Ecuador)
Gestión Ambiental Consultores S.A. (Chile)
Gustavson Associates, LLC
Walsh Environmental, LLC
Walsh Peru, S.A. (Peru)
Photo credit: Yosemite National Park, by Doug Heatwole
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.
33
www.ene.com
Photo credit: Grand Tetons by Cindy Castoire, On-Call Environmental Scientist