The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
1.
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Organization and Basis of Presentation
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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 8 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 more than 50,000 projects for a wide variety of clients in more than 120 countries, providing environmental solutions in nearly every ecosystem on the planet.
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. Restricted cash balances of $0.1 million were reclassified from investment securities available for sale to cash, cash equivalents and restricted cash at July 31, 2016 to conform to the consolidated financial statement presentation for fiscal year ended July 31, 2017.
2.
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Recent Accounting Pronouncements
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Accounting Pronouncements Adopted During Fiscal Year 2017
In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 to be applied prospectively to adjustments to provisional amounts that occur after the effective date. The Company adopted the provisions of ASU 2015-16 effective August 1, 2016. The Company did not complete any business combination transactions during the fiscal years ended July 31, 2017, 2016 or 2015. Therefore, adoption of this standard did not have any 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 (“NAV”) per share practical expedient; and 2) make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient. The amendment is to be applied retrospectively. The Company adopted ASU 2015-07 effective August 1, 2016. Other than the changes to disclosures noted above, adoption of this standard did not have any impact on the Company’s consolidated financial statements. Refer to Note 6 of these consolidated financial statements for additional disclosures regarding the Company’s investments in available for sale securities that are valued using the NAV practical expedient.
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 obligations, and management’s plans that are intended to mitigate those conditions or events. The Company adopted ASU 2014-15 effective August 1, 2016. Adoption of this standard did not have any impact on the Company’s consolidated financial statements.
In November 2016, FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash – a consensus of the FASB Emerging Issues Task Force (“ASU 2016-18”). The amendments included in this update require that amounts described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the provisions of ASU 2016-18 effective August 1, 2016. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements. Refer to Note 5 of these consolidated financial statements for additional disclosures regarding the Company’s cash, cash equivalents and restricted cash.
Accounting Pronouncements Not Yet Adopted as of July 31, 2017
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.
Subsequent to the issuance of ASU 2014-09, FASB issued 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 (the “modified retrospective approach”), and includes a number of optional practical expedients that entities may elect to apply. The Company expects to adopt the revenue recognition guidance using the modified retrospective approach.
ASU 2014-09
will be effective for the Company beginning
August 1, 2018. The Company is comparing historical accounting policies and practices to the new standard, has made substantial progress on its detailed review of contracts for its operations in the United States, and has begun the evaluation at all of its foreign subsidiaries. Management continues to assess the impact of ASU 2014-09.
In January 2016, FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and 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.
This accounting standard update will be effective for the Company beginning
August 1, 2018. 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. 2016-02, Leases (Topic 842) (“ASU 2016-02”). 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. 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. ASU 2016-02 will be effective for the Company beginning August 1, 2019. Early adoption is permitted. Management is currently assessing the provisions of ASU 2016-02. The Company anticipates that adoption of ASU 2016-02 will result in the addition of material right-of-use assets and lease liabilities to the Company’s consolidated balance sheet in addition to expanding required disclosures. Management has not yet estimated the impact of ASU 2016-02 on the Company's consolidated statements of operations and cash flows.
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.
This accounting standard update was adopted by the Company 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 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. ASU No. 2016-13 will be effective for the Company beginning August 1, 2020. Early adoption is permitted for the Company beginning August 1, 2019. Management is currently assessing the provisions of ASU 2016-13 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.
This accounting standard update will be effective for the Company beginning
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 January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805) – Clarifying the Definition of a Business (“ASU 2017-01”). The amendments included in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisition, disposals, goodwill and consolidation.
This accounting standard update will be effective for the Company beginning
August 1, 2018. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2017, FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 232) – Amendments to SEC Paragraphs Pursuant to staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (“ASU 2017-03”). The amendments included in this update expand required qualitative disclosures when registrants cannot reasonably estimate the impact that adoption of the ASU will have on the financial statements. Such qualitative disclosures would include a comparison of the registrant’s new accounting policies, if determined, to current accounting policies, a description of the status of the registrant’s process to implement the new standard and a description of the significant implementation matters yet to be addressed by the registrant. Other than enhancements to the qualitative disclosures regarding future adoption of new ASUs, adoption of the provisions of this standard is not expected to have any impact on the Company’s consolidated financial statements.
In January 2017, FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). The amendments included in this update simplify the subsequent measurement of goodwill by revising the steps required during the registrant’s annual goodwill impairment test.
This accounting standard update will be effective for the Company beginning
August 1, 2021. Management is currently assessing the provisions of ASU 2017-04 and has not yet estimated its impact on the Company’s consolidated financial statements.
In February 2017, FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) – Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). The amendments included in this update clarify the scope of current U.S. GAAP and add guidance for partial sales of nonfinancial assets. ASU 2017-05 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.
This accounting standard update will be effective for the Company beginning
August 1, 2018. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2017, FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718) – Scope of Modification Accounting (“ASU 2017-09”). The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date.
This accounting standard update will be effective for the Company beginning
August 1, 2018. Adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
3.
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Summary of Significant Accounting Policies
|
Consolidation
The consolidated financial statements include the accounts of 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 consolidated balance sheets and 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 consolidated statements of operations.
Investment securities available for sale include mutual funds that are valued at the 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
The Company derives substantially all of its revenue from environmental consulting work, principally from the sale of labor hours. The consulting work is performed under a mix of time and materials, fixed price and cost-plus, and contracts. Contracts are required from all customers. Revenue is recognized as follows:
Contract Type
|
Work Type
|
Revenue Recognition Policy
|
|
|
|
Time and materials
|
Consulting
|
As incurred at contract rates.
|
|
|
|
Fixed price
|
Consulting
|
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.
|
|
|
|
Cost-plus
|
Consulting
|
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 that the Company has elected to subcontract to other contractors.
The Company accounts for time and material contracts 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 2014. The Company records an allowance for project disallowances in other accrued liabilities for potential disallowances resulting from government audits (refer to Note 13 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. The Company recognizes costs related to change orders and claims 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.
The Company expenses all bid and proposal and other pre-contract costs as incurred. Out of pocket expenses such as travel, meals, field supplies, and other costs billed direct to contracts are included in both revenues and cost of professional services. Sales and cost of sales at the Company’s South American subsidiaries exclude tax assessments by governmental authorities, which the Company collects from its customers and remits to governmental authorities.
Billed contract receivables represent amounts billed to clients in accordance with contracted terms but not collected as of the end of the reporting period. Billed contract receivables may include: (i) amounts billed for revenues from incurred costs and fees that have been earned in accordance with contractual terms; and (ii) 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. The Company records such contract adjustments 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
|
Straight-line
|
32-40 Years
|
Building Improvements
|
Straight-line
|
7-15 Years
|
Field Equipment
|
Straight-line
|
3-7 Years
|
Computer equipment
|
Straight-line and Accelerated
|
3-7 Years
|
Computer software
|
Straight-line
|
10 Years
|
Office furniture and equipment
|
Straight-line
|
3-7 Years
|
Vehicles
|
Straight-line
|
3-5 Years
|
Leasehold improvements
|
Straight-line
|
(1)
|
|
(1)
|
Leasehold improvements are amortized for book purposes over the terms of the leases or the estimated useful lives of the assets, whichever is shorter.
|
Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for improvements are capitalized when either the value or useful life of the related asset have been increased. When property or equipment is retired or sold, any gain or loss on the transaction is reflected in the current year's earnings.
The Company capitalizes costs of software acquisition and development projects, including costs related to software design, configuration, coding, installation, testing and parallel processing. Capitalized software costs are recorded in fixed assets, net of accumulated amortization, on the consolidated balance sheets. Capitalized software development costs generally include:
|
·
|
external direct costs of materials and services consumed to obtain or develop software for internal use;
|
|
·
|
payroll and payroll-related costs for employees who are directly associated with and who devote time to the project, to the extent of time spent directly on the project;
|
|
·
|
costs to obtain or develop software that allows for access or conversion of old data by new systems;
|
|
·
|
costs of upgrades and/or enhancements that result in additional functionality for existing software; and
|
|
·
|
interest costs incurred while developing internal-use software that could have been avoided if the expenditures had not been made.
|
The costs of computer software obtained or developed for internal use is amortized on a straight-line basis over the estimated useful life of the software. Amortization begins when the software and all related software modules on which it is functionally dependent are ready for their intended use. Amortization expense is recorded in depreciation and amortization in the consolidated statements of operations.
The 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;
|
|
·
|
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.
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 net operating loss carryforwards, and a deferred tax liability is recognized for all taxable temporary differences.
The Company’s deferred tax assets principally result 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 filing 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. 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, 2017, two founders, their spouses 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.
Refer to Note 17 of these consolidated financial statements for additional disclosures regarding the Company’s defined contribution plans.
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.
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.
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 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 additional disclosures regarding the Company’s earnings per share.
Comprehensive Income
Comprehensive income represents the change in shareholders’ equity during a period, excluding changes arising from transactions with shareholders. Comprehensive income includes net income from the consolidated statements of operations, plus other comprehensive income during a reporting period.
Other comprehensive income (loss) represents the net effect of accounting transactions that are recognized directly in shareholders’ equity, such as unrealized net income or losses resulting from currency translation adjustments from foreign operations and unrealized gains or 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 net foreign exchange (loss) gain in the consolidated statements of operations as incurred.
The financial statements of foreign subsidiaries located in highly inflationary economies are remeasured as if the functional currency were the U.S. dollar. The remeasurement of local currencies into U.S. dollars creates transaction adjustments which are included in net income. The Company did not record any highly inflationary economy translation adjustments during fiscal years 2017, 2016 or 2015.
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 Transactions and Adjustments During Fiscal Year 2017
|
Reduction in Allowance for Project Disallowances
The Company records an allowance for project disallowances in other accrued liabilities for potential disallowances resulting from government audits.
During fiscal year 2017, as a result of final settlements of allowances originally recorded in prior years, the Company reduced its allowance for project disallowances by $1.1 million, which was recorded as an addition to revenue, net on the consolidated statement of operations. The settlements resulted in cash payments of less than $0.1 million during fiscal year 2017.
Refer to Note 13 of these consolidated financial statements for additional information regarding the Company’s allowance for project disallowances.
Adjustments Related to Activities of Dormant Subsidiaries
During fiscal year 2017, the Company completed a review of historical project activity recorded in certain subsidiaries that have been dormant for several years. During fiscal year 2017, as a result of this review, the Company reversed $0.7 million of amounts previously recorded as reserves against contract receivables. The resulting increases to revenue, net for fiscal year 2017 were corrections of amounts recorded prior to the fiscal years presented in the accompanying financial statements. The Company determined that these corrections were not material to the current or any prior period.
During fiscal year 2017, the Company reversed $0.6 million of amounts previously recorded as liabilities to subcontractors that were no longer deemed to be necessary to record on the Company’s consolidated balance sheet. These amounts were associated with fully-reserved contract receivable balances that were written-off during fiscal year 2017. This adjustment was recorded as a $0.6 million decrease to subcontract costs on the consolidated statement of operations for the fiscal year ended July 31, 2017.
Proxy Contest Costs
Prior to the Company’s Annual Meeting of Shareholders held in April 2017, a significant Class A shareholder contested the Company’s two nominees for Class A directors. As a result of the ensuing election contest, which was settled amicably among the parties prior to the Annual Meeting of Shareholders, the Company recorded $0.4 million of net legal and consulting expenses during fiscal year 2017.
Adjustments of Deferred Taxes and
Capital in Excess of Par Value
Related to Purchases of Noncontrolling Interests in Prior Years
The Company identified and recorded adjustments to deferred tax assets and liabilities
and capital in excess of par value
related to the purchases of noncontrolling interests during periods prior to fiscal year 2016. The Company determined that these amounts are not material to the current or any prior period. The adjustments resulted in a $0.7 million increase in deferred tax assets, a
$0.3 million
decrease in deferred tax liabilities
, and a $1.0 million increase in capital in excess of par value at July 31, 2017. There was no impact to net income or cash flows as a result of these adjustments.
Adjustments Related to Prior Year Tax Filings of a South American Subsidiary
The Company identified and recorded adjustments of income tax liability related to errors in the tax filings of a South American subsidiary for calendar years 2013 through 2016. The Company determined that these amounts are not material to the current or any prior period. The adjustments resulted in a $0.3 million balance sheet reclassification from deferred income tax liability to current income tax liability, and $0.1 million of interest and penalties expense recorded in administrative and indirect operating expenses on the consolidated statements of operations during the fiscal year ended July 31, 2017.
5.
|
Cash, Cash Equivalents and Restricted Cash
|
Cash, cash equivalents and restricted cash are summarized in the following table.
|
|
Balance at July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
13,029
|
|
|
$
|
9,902
|
|
Restricted cash
|
|
|
314
|
|
|
|
259
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
13,343
|
|
|
$
|
10,161
|
|
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 $0.2 million and $0.3 million were included in cash and cash equivalents in the table above at July 31, 2017 and 2016, respectively.
The Company is required to maintain restricted cash on deposit in Brazil as collateral for pending litigation matters.
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 Company classifies assets and liabilities within the fair value hierarchy 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 Company monitors the availability of observable market data 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 2017, 2016 or 2015.
The carrying amount of cash, cash equivalents and restricted cash approximated fair value at July 31, 2017 and 2016. These assets were classified as level 1 instruments at both dates.
Investment securities available for sale of $1.5 million at July 31, 2017 and 2016 primarily included mutual funds invested in U.S. municipal bonds, which the Company may immediately redeem without prior notice. These mutual funds are valued at the NAV of shares held by the Company at period end as a practical expedient to estimate fair value. These mutual funds are deemed to be actively traded, are required to publish their daily NAV and are required to transact at that price.
The Company recorded gross unrealized gains of less than $0.1 million related to investment securities available for sale in accumulated other comprehensive loss at July 31, 2017 and 2016. The Company did not record any sales of investment securities during the twelve months ended July 31, 2017.
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, 2017 and 2016. 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 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,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Contract Receivables:
|
|
|
|
|
|
|
Billed
|
|
$
|
16,033
|
|
|
$
|
20,415
|
|
Unbilled
|
|
|
21,199
|
|
|
|
20,696
|
|
|
|
|
37,232
|
|
|
|
41,111
|
|
Allowance for doubtful accounts and contract adjustments
|
|
|
(2,125
|
)
|
|
|
(6,792
|
)
|
Contract receivables, net
|
|
$
|
35,107
|
|
|
$
|
34,319
|
|
Billed contract receivables included contractual retainage balances of $0.9 million at each of July 31, 2017 and 2016. Management anticipates that unbilled contract receivables and retainage balances at July 31, 2017 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, 2017
|
|
|
Balance at July 31, 2016
|
|
Region
|
|
Contract
Receivables
|
|
|
Allowance for
Doubtful
Accounts and
Contract
Adjustments
|
|
|
Contract
Receivables
|
|
|
Allowance for
Doubtful
Accounts and
Contract
Adjustments
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EEI and its subsidiaries located in the U.S.
|
|
$
|
25,528
|
|
|
$
|
797
|
|
|
$
|
29,027
|
|
|
$
|
5,809
|
|
Subsidiaries located in South America
|
|
|
11,704
|
|
|
|
1,328
|
|
|
|
11,659
|
|
|
|
983
|
|
Other foreign subsidiaries
|
|
|
---
|
|
|
|
---
|
|
|
|
425
|
|
|
|
---
|
|
Totals
|
|
$
|
37,232
|
|
|
$
|
2,125
|
|
|
$
|
41,111
|
|
|
$
|
6,792
|
|
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.
The allowance for doubtful accounts and contract adjustments as a percentage of contract receivables at the Company’s subsidiaries located in South America was 11% and 8% at July 31, 2017 and 2016, respectively. During fiscal year 2017, local South American economies continued to adversely impact certain of our local clients. 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. Management is monitoring any adverse trends or events that may impact the realizability of recorded receivables from our South American clients.
During fiscal year 2017, the Company wrote-off $4.9 million of aged and fully reserved contract receivable balances at EEI related to a specific project in the Middle East, based on management’s assessment that the client is unlikely to approve payment.
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
6,792
|
|
|
$
|
6,817
|
|
|
$
|
7,371
|
|
Net increase (decrease) due to adjustments in the allowance for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract adjustments (1)
|
|
|
(4,941
|
)
|
|
|
(577
|
)
|
|
|
(263
|
)
|
Doubtful accounts (2)
|
|
|
274
|
|
|
|
552
|
|
|
|
(291
|
)
|
Balance at end of period
|
|
$
|
2,125
|
|
|
$
|
6,792
|
|
|
$
|
6,817
|
|
|
(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.
During fiscal year 2017, the Company reversed $4.9 million of allowance related to a specific project in the Middle East, for which a corresponding $4.9 million contract receivable balance was also written off during the period.
|
|
(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.
|
During fiscal year 2017, the South American economies continue to adversely impact some of our local clients. Management is monitoring any adverse trends or events that may impact the realizability of the recorded net book value of contract receivables from our South American clients.
8.
|
Property, Buildings and Equipment, net
|
Property, buildings and equipment is summarized in the following table.
|
|
Balance at July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
393
|
|
|
$
|
393
|
|
Buildings and building improvements
|
|
|
7,338
|
|
|
|
9,700
|
|
Field equipment
|
|
|
2,267
|
|
|
|
2,222
|
|
Computer equipment
|
|
|
4,339
|
|
|
|
4,439
|
|
Computer software
|
|
|
3,107
|
|
|
|
3,105
|
|
Office furniture and equipment
|
|
|
2,264
|
|
|
|
2,683
|
|
Vehicles
|
|
|
1,331
|
|
|
|
1,333
|
|
Other
|
|
|
383
|
|
|
|
543
|
|
|
|
|
21,422
|
|
|
|
24,418
|
|
Accumulated depreciation and amortization
|
|
|
(16,994
|
)
|
|
|
(18,324
|
)
|
Property, buildings and equipment, net
|
|
$
|
4,428
|
|
|
$
|
6,094
|
|
During fiscal year 2017, the Company consummated the sale of land, a vacant building, related building improvements and fixtures, and warehouse space to a non-affiliated third party for approximately $1.5 million. After closing costs, the Company recorded a gain on sale of $0.1 million from this transaction in other (expense) income in the consolidated statements of income during fiscal year 2017.
Goodwill of $1.1 million is included in other assets on the accompanying consolidated balance sheets at July 31, 2017 and 2016. The Company’s most recent annual impairment assessment for goodwill was completed at July 31, 2017. 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.
Unsecured lines of credit are summarized in the following table.
|
|
Balance at July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Outstanding cash draws, recorded as lines of credit on the accompanying consolidated balance sheets
|
|
$
|
581
|
|
|
$
|
312
|
|
Term loan
|
|
|
200
|
|
|
|
---
|
|
Outstanding letters of credit to support operations
|
|
|
2,511
|
|
|
|
2,187
|
|
Total amounts used under lines of credit
|
|
|
3,292
|
|
|
|
2,499
|
|
Remaining amounts available under lines of credit
|
|
|
36,227
|
|
|
|
36,496
|
|
Total approved unsecured lines of credit
|
|
$
|
39,519
|
|
|
$
|
38,995
|
|
As of July 31, 2017, contractual interest rates for lines of credit ranged from 3.25% to 3.50% for the Company’s U.S. operations and 9.12% to 9.75% for the Company’s South American operations. 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,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Various loans and advances (interest rates ranging from 5.75% to 6.58%)
|
|
$
|
328
|
|
|
$
|
217
|
|
Capital lease obligations (interest rates ranging from 7.36% to 15.09%)
|
|
|
120
|
|
|
|
240
|
|
|
|
|
448
|
|
|
|
457
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
(382
|
)
|
|
|
(240
|
)
|
Long-term debt and capital lease obligations
|
|
$
|
66
|
|
|
$
|
217
|
|
The aggregate maturities of long-term debt and capital lease obligations as of July 31, 2017 are summarized in the following table.
Fiscal Year Ending
July 31,
|
|
Amount
|
|
|
|
(in thousands)
|
|
|
|
|
|
2018
|
|
$
|
382
|
|
2019
|
|
|
37
|
|
2020
|
|
|
23
|
|
2021
|
|
|
6
|
|
Total
|
|
$
|
448
|
|
Income (loss) before income tax provision is summarized in the following table.
|
Fiscal Year Ended July 31,
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
5,432
|
|
|
$
|
4,558
|
|
|
$
|
3,500
|
|
Foreign
|
|
|
(7
|
)
|
|
|
(191
|
)
|
|
|
4,469
|
|
|
|
$
|
5,425
|
|
|
$
|
4,367
|
|
|
$
|
7,969
|
|
The income tax provision is summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(149
|
)
|
|
$
|
1,155
|
|
|
$
|
488
|
|
State
|
|
|
42
|
|
|
|
177
|
|
|
|
80
|
|
Foreign
|
|
|
655
|
|
|
|
730
|
|
|
|
2,047
|
|
Total current
|
|
|
548
|
|
|
|
2,062
|
|
|
|
2,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,075
|
|
|
|
587
|
|
|
|
1,379
|
|
State
|
|
|
308
|
|
|
|
269
|
|
|
|
172
|
|
Foreign
|
|
|
(459
|
)
|
|
|
841
|
|
|
|
(397
|
)
|
Total deferred
|
|
|
1,924
|
|
|
|
1,697
|
|
|
|
1,154
|
|
Total income tax provision
|
|
$
|
2,472
|
|
|
$
|
3,759
|
|
|
$
|
3,769
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision at the U.S. federal statutory income tax rate
|
|
$
|
1,845
|
|
|
$
|
1,485
|
|
|
$
|
2,709
|
|
Foreign dividend income
|
|
|
240
|
|
|
|
263
|
|
|
|
508
|
|
State taxes, net of federal benefit
|
|
|
200
|
|
|
|
312
|
|
|
|
166
|
|
Brazil valuation allowance
|
|
|
137
|
|
|
|
1,582
|
|
|
|
---
|
|
Other permanent differences
|
|
|
54
|
|
|
|
88
|
|
|
|
209
|
|
Peru non-deductible expenses
|
|
|
53
|
|
|
|
59
|
|
|
|
167
|
|
Other foreign taxes, net of federal benefit
|
|
|
14
|
|
|
|
153
|
|
|
|
161
|
|
International rate differences
|
|
|
2
|
|
|
|
(145
|
)
|
|
|
(338
|
)
|
Income from "pass-through" entities taxable to noncontrolling partners
|
|
|
(1
|
)
|
|
|
(39
|
)
|
|
|
31
|
|
Re-evaluation and settlements of tax contingencies
|
|
|
(33
|
)
|
|
|
---
|
|
|
|
---
|
|
Canada and China valuation allowance
|
|
|
(39
|
)
|
|
|
1
|
|
|
|
156
|
|
Income tax provision, as reported on the consolidated statements of operations
|
|
$
|
2,472
|
|
|
$
|
3,759
|
|
|
$
|
3,769
|
|
The significant components of deferred tax assets and liabilities are summarized in the following table.
|
|
Balance at July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Contract and other reserves
|
|
$
|
520
|
|
|
$
|
3,023
|
|
Accrued compensation and expenses
|
|
|
752
|
|
|
|
734
|
|
Net operating loss carryforwards
|
|
|
1,470
|
|
|
|
1,265
|
|
Foreign and state income taxes
|
|
|
17
|
|
|
|
59
|
|
Foreign tax credit
|
|
|
296
|
|
|
|
296
|
|
Federal benefit from foreign tax audits
|
|
|
---
|
|
|
|
157
|
|
Other
|
|
|
714
|
|
|
|
(26
|
)
|
Deferred tax assets
|
|
|
3,769
|
|
|
|
5,508
|
|
Less: valuation allowance
|
|
|
(2,020
|
)
|
|
|
(2,278
|
)
|
Net deferred tax assets
|
|
$
|
1,749
|
|
|
$
|
3,230
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Federal expense on state deferred taxes
|
|
$
|
(73
|
)
|
|
$
|
(133
|
)
|
Fixed assets and intangibles
|
|
|
(144
|
)
|
|
|
(759
|
)
|
Federal expense from foreign accounting differences
|
|
|
(332
|
)
|
|
|
(213
|
)
|
Net deferred tax liabilities
|
|
$
|
(549
|
)
|
|
$
|
(1,105
|
)
|
As of July 31, 2017, net operating losses attributable to operations in Brazil, Peru, Chili and Canada and net operating losses for U.S. federal and state income tax purposes exist. The U.S. federal net operating loss at July 31, 2017 is approximately $0.8 million.
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.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
2,278
|
|
|
$
|
560
|
|
Additions during the period
|
|
|
2
|
|
|
|
1,765
|
|
Reductions during period
|
|
|
(260
|
)
|
|
|
(47
|
)
|
Balance at end of period
|
|
$
|
2,020
|
|
|
$
|
2,278
|
|
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 fiscal year 2017 primarily related to a deferred tax asset that resulted from net operating loss carryforwards from the Company’s Brazilian operations. During fiscal year 2017, 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.
During the fiscal years ended July 31, 2017, 2016 and 2015, the Company recorded $0.3 million, $0.1 million and $0, respectively, of income taxes applicable to undistributed earnings of foreign subsidiaries that will not be indefinitely reinvested in those operations. At July 31, 2017, the Company’s operations in Chile, Peru and Ecuador had $7.1 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 U.S. federal tax matters for fiscal years 2014 through 2017 remain subject to examination by the IRS. The Company’s state, local and foreign tax matters for fiscal years 2013 through 2017 remain subject to examination by the respective tax authorities. No waivers have been executed that would extend the period subject to examination beyond the period prescribed by statute.
The Company had approximately $0.3 million, $0.1 million and $0.1 million of uncertain tax positions (“UTPs”) at July 31, 2017, 2016 and 2015, respectively. For the year ended July 31, 2017, the company reversed a previously recorded uncertain tax position and associated penalties and interest for approximately $0.1 and recorded additional UTPs of approximately $0.3 with additional interest and penalties of $0.1 million. 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 accrued 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 for $0.1 million during fiscal year ended July 31, 2017 and less than $0.1 million for fiscal years 2016 and 2015.
13.
|
Other Accrued Liabilities
|
Other accrued liabilities are summarized in the following table.
|
|
Balance at July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Allowance for project disallowances
|
|
$
|
687
|
|
|
$
|
1,819
|
|
Other
|
|
|
1,958
|
|
|
|
1,626
|
|
Total other accrued liabilities
|
|
$
|
2,645
|
|
|
$
|
3,445
|
|
Activity within the allowance for project disallowances is summarized in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
1,819
|
|
|
$
|
2,243
|
|
|
$
|
2,393
|
|
Reduction of reserves recorded in prior fiscal years
|
|
|
(1,132
|
)
|
|
|
(424
|
)
|
|
|
(150
|
)
|
Balance at end of period
|
|
$
|
687
|
|
|
$
|
1,819
|
|
|
$
|
2,243
|
|
The reductions in the allowance for project disallowances during fiscal years 2017, 2016 and 2015, which were recorded as additions to revenue, net on the consolidated statements of operations, resulted from final settlements of allowances recorded in prior fiscal years. The settlements resulted in cash payments of less than $0.1 million during fiscal years 2017, 2016 and 2015.
14.
|
Incentive Compensation
|
Cash Bonuses
EEI and its subsidiaries may, at the discretion of their respective Boards of Directors, award incentive compensation to Directors, senior management and other employees in the form of cash bonuses. The Company recorded $1.1 million, $1.7 million and $3.0 million of cash bonus awards as incentive compensation expense during fiscal years 2017, 2016 and 2015, 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, are referred to as the “Stock Award Plan”. The Stock Award Plan is not a qualified plan under 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 which expired in October 2016, the Company issued 21,836 shares of Class A Common Stock under the Stock Award Plan, all of which are fully vested and expensed as of July 31, 2017. 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.
In July 2017, the Company issued a total of 7,502 Class A shares under the 2016 Stock Award Plan, valued at less than $0.1 million, to four directors as a portion of their annual compensation.
These shares will fully vest in April 2018 upon expration of certain restrictions regarding transfer of the shares.
In September 2016, EEI issued 4,450 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. These stock awards vested immediately upon issuance, subject to certain restrictions regarding transfer of the shares that expire one year after issuance.
EEI recorded non-cash compensation expense of less than $0.1 million during the twelve months ended July 31, 2017, 2016 and 2015, respectively, in connection with outstanding stock compensation awards.
The "pool" of excess tax benefits accumulated in Capital in Excess of Par Value was $0.1 million at July 31, 2017 and 2016.
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 $1.7 million, $1.9 million and $2.1 million during
fiscal years 2017, 2016 and 2015, respectively
. The Company paid cash dividends of $1.7 million during fiscal year 2017 and $2.1 million during
fiscal years 2016 and 2015
. The Company paid cash dividends of $0.9 million in August 2017 and 2016 and $1.0 million in August 2015 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, 2017, 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 2017, 2016 or 2015.
Noncontrolling Interests
The Company did not purchase additional shares of any its majority owned subsidiaries during fiscal years 2017 or 2016.
During fiscal year 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 fiscal years 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.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are summarized in the following table.
|
|
Balance at July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Unrealized net foreign currency translation losses
|
|
$
|
(2,033
|
)
|
|
$
|
(2,176
|
)
|
Unrealized net investment gains on available for sale investments
|
|
|
15
|
|
|
|
33
|
|
Total accumulated other comprehensive loss
|
|
$
|
(2,018
|
)
|
|
$
|
(2,143
|
)
|
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 $3.4 million in fiscal year 2017 and $3.5 million in fiscal years 2016 and 2015.
Future minimum rental commitments under operating leases as of July 31, 2017 are summarized in the following table.
Fiscal Year Ending
July 31,
|
|
Amount
|
|
|
|
(in thousands)
|
|
|
|
|
|
2018
|
|
$
|
2,635
|
|
2019
|
|
|
1,999
|
|
2020
|
|
|
1,367
|
|
2021
|
|
|
1,209
|
|
2022
|
|
|
774
|
|
Thereafter
|
|
|
516
|
|
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 total expense under this plan was $1.5 million, $1.4 million, and $1.2 million for fiscal years 2017, 2016 and 2015, respectively.
The computation of basic and diluted EPS is included in the following table.
|
|
Fiscal Year Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Ecology and Environment, Inc.
|
|
$
|
3,015
|
|
|
$
|
886
|
|
|
$
|
3,396
|
|
Dividend declared
|
|
|
1,719
|
|
|
|
1,895
|
|
|
|
2,067
|
|
Undistributed earnings (distributions in excess of earnings)
|
|
$
|
1,296
|
|
|
$
|
(1,009
|
)
|
|
$
|
1,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic and diluted
|
|
|
4,294,501
|
|
|
|
4,289,993
|
|
|
|
4,287,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings per share
|
|
$
|
0.40
|
|
|
$
|
0.44
|
|
|
$
|
0.48
|
|
Undistributed earnings (distributions in excess of earnings) per share
|
|
|
0.30
|
|
|
|
(0.23
|
)
|
|
|
0.31
|
|
Total earnings per share
|
|
$
|
0.70
|
|
|
$
|
0.21
|
|
|
$
|
0.79
|
|
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.
|
|
Fiscal Years Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Revenue, net, by Business Segment:
|
|
|
|
|
|
|
|
|
|
EEI and its subsidiaries located in the United States
|
|
$
|
82,094
|
|
|
$
|
83,095
|
|
|
$
|
88,715
|
|
Subsidiaries located in South America (1)
|
|
|
22,408
|
|
|
|
22,722
|
|
|
|
38,220
|
|
|
(1)
|
Significant South American revenues included revenues from subsidiaries located in Peru ($6.3 million, $9.7 million and $22.8 million for fiscal years 2017, 2016 and 2015, respectively), Brazil ($8.2 million, $5.0 million and $8.0 million for fiscal years 2017, 2016 and 2015, respectively) and Chile ($7.7 million, $7.5 million and $6.5 million for fiscal years 2017, 2016 and 2015, respectively).
|
|
|
Balance at July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Long-lived assets by geographic location:
|
|
|
|
|
|
|
EEI and its subsidiaries located in the United States
|
|
$
|
3,293
|
|
|
$
|
4,916
|
|
Subsidiaries located in South America
|
|
|
1,135
|
|
|
|
1,178
|
|
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 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, 2017, the Company recorded a reserve of approximately $0.4 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 2017 or 2016.