Notes to Consolidated Financial Statements
Summary of Operations and Basis of Presentation
The consolidated financial statements included herein have been prepared by Ecology and Environment, Inc. ("E&E" or the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information. All such adjustments are of a normal recurring nature. The Company follows the same accounting policies in preparation of interim reports. Although E&E believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in E&E's 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The consolidated results of operations for the three months ended October 31, 2012 are not necessarily indicative of the results for any subsequent period or the entire fiscal year ending July 31, 2013.
1.
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Summary of Significant Accounting Policies
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The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. Also reflected in the consolidated financial statements is the 50% ownership in the Chinese operating joint venture, The Tianjin Green Engineering Company. This joint venture is accounted for under the equity method. All intercompany transactions and balances have been eliminated.
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The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions as of the date of the financial statements, which affect the reported values of assets and liabilities and revenues and expenses and disclosures of contingent assets and liabilities. Actual results may differ from those estimates.
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Substantially all of the Company's revenue is derived from environmental consulting work. The consulting revenue is principally derived from the sale of labor hours. The consulting work is performed under a mix of fixed price, cost-type, and time and material contracts. Contracts are required from all customers. Revenue is recognized as follows:
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Contract Type
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Work Type
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Revenue Recognition Policy
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Time and Materials
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Consulting
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As incurred at contract rates.
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Fixed Price
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Consulting
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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.
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Cost-Type
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Consulting
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Costs as incurred. Fixed fee portion is recognized using percentage of completion determined by the percentage of LOE hours incurred to total LOE hours in the respective contracts.
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Substantially all of the Company's cost-type work is with federal governmental agencies and, as such, is subject to audits after contract completion. Under these cost-type contracts, provisions for adjustments to accrued revenue are recognized on a quarterly basis and based on past audit settlement history. Government audits have been completed and final rates have been negotiated through fiscal year 2005. The Company records an allowance for contract adjustments which is recorded in other accrued liabilities principally represents a reserve for contract adjustments for the fiscal years 1996-2013.
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We reduce our contract receivables and costs and estimated earnings in excess of billings on contracts in process by establishing an allowance for amounts that, in the future, may become uncollectible or unrealizable, respectively. We determine our estimated allowance for uncollectible amounts based on management’s judgments regarding our operating performance related to the adequacy of the services performed, the status of change orders and claims, our experience settling change orders and claims and the financial condition of our clients, which may be dependent on the type of client and current economic conditions that the client may be subject to.
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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, estimatable and reasonable support from the customer exists.
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All bid and proposal and other pre-contract costs are expensed as incurred. Out of pocket expenses such as travel, meals, field supplies, and other costs billed direct to contracts are included in both revenues and cost of professional services. Sales and cost of sales at the Company’s South American subsidiaries exclude tax assessments by governmental authorities, which are collected by the Company from its customers and then remitted to governmental authorities.
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Investment securities have been classified as available for sale and are stated at fair value. Unrealized gains or losses related to investment securities available for sale are reflected in accumulated other comprehensive income, net of applicable income taxes in the consolidated balance sheets and statements of changes in shareholders' equity. The cost basis of securities sold is based on the specific identification method. The Company had gross unrealized gains of approximately $83,000 and $42,000 at October 31, 2012 and July 31, 2012, respectively.
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e.
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Fair value of financial instruments
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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:
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Level 1 Inputs
– Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Generally this includes debt and equity securities and derivative contracts that are traded on an active exchange market (e.g., New York Stock Exchange) as well as certain U.S. Treasury and U.S. Government and agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets. The Company’s investment securities classified as Level 1 are comprised of mutual funds.
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Level 2 Inputs
– Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, credit risks, etc.) or can be corroborated by observable market data. The Company’s investment securities classified as Level 2 are comprised of international and domestic corporate and municipal bonds.
Level 3 Inputs
– Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.
The following table presents the level within the fair value hierarchy at which the Company’s financial assets are measured on a recurring basis.
Financial assets as of October 31, 2012:
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Level 1
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Level 2
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Level 3
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Total
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Assets
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Investment securities available for sale
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$
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1,445,042
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$
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1,592,764
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$
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---
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|
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$
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3,037,806
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Financial assets as of July 31, 2012:
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Level 1
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Level 2
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Level 3
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Total
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Assets
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|
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Investment securities available for sale
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$
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1,353,365
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$
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51,217
|
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|
$
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---
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$
|
1,404,582
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The carrying amount of cash and cash equivalents at October 31, 2012 and July 31, 2012 were classified as level 1 and approximate fair value. Long-term debt consists of bank loans and capitalized equipment leases. The demand loan payable consists of borrowings against the Company’s line of credit 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 the liabilities at October 31, 2012 and July 31, 2012 were classified as level 2 and approximates fair value. There were no financial instruments classified as level 3.
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. The Company evaluated the significance of transfers between levels based upon the nature of the financial instrument. For the three months ended October 31, 2012 and fiscal year ended July 31, 2012 there were no transfers in or out of levels 1, 2 or 3, respectively.
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 approximately $(45,000) and $3,000 for the three months ended October 31, 2012 and October 29, 2011, respectively.
The financial statements of foreign subsidiaries located in highly inflationary economies are remeasured as if the functional currency were the U.S. dollar. The remeasurement of local currencies into U.S. dollars creates transaction adjustments which are included in net income. There were no highly inflationary economy translation adjustments for fiscal year 2012 and through the first quarter of fiscal year 2013.
The Company follows the asset and liability approach to account for income taxes. This approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Although realization is not assured, management believes it is more likely than not that the recorded net deferred tax assets will be realized. Since in some cases management has utilized estimates, the amount of the net deferred tax asset considered realizable could be reduced in the near term. No provision has been made for United States income taxes applicable to undistributed earnings of foreign subsidiaries as it is the intention of the Company to indefinitely reinvest those earnings in the operations of those entities.
Income tax expense includes U.S. and international income taxes, determined using the applicable statutory rates. A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences and net operating loss carryforwards.
The Company has significant deferred tax assets, resulting principally from contract reserves and accrued expenses. The Company periodically evaluates the likelihood of realization of deferred tax assets, and provides for a valuation allowance when necessary.
Additionally, the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic Income Taxes prescribes a recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. A tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions shall be recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position will be sustained. Tax positions that meet the more likely than not threshold should be measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a tax position, is a matter of judgment based on 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.
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h.
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Earnings Per Share (EPS)
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Basic and diluted EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. The Company allocates undistributed earnings between the classes on a one-to-one basis when computing earnings per share. As a result, basic and fully diluted earnings per Class A and Class B shares are equal amounts. See Note 11 to Consolidated Financial Statements for additional information.
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Comprehensive income is defined as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources." The term "comprehensive income" is used to describe the total net earnings plus other comprehensive income. Other comprehensive income includes currency translation adjustments on foreign subsidiaries and unrealized gains or losses on available-for-sale securities.
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j.
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Impairment of Long-Lived Assets
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The Company assesses recoverability of the carrying value of long-lived assets by estimating the future net cash flows (undiscounted) expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value. The Company identified no events or changes in circumstances that necessitated an evaluation for an impairment of long lived assets.
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The total goodwill of approximately $1.2 million is subject to an annual assessment for impairment. The Company’s most recent annual impairment assessment for goodwill was completed during the fourth quarter of fiscal year 2012. The results of this assessment showed that the fair values of the reporting units, using a discounted cash flow method, to which goodwill is assigned was in excess of the book values of the respective reporting units, resulting in the identification of no goodwill impairment. Goodwill is also assessed for impairment between annual assessments whenever events or circumstances make it more likely than not that an impairment may have occurred. The Company identified no events or changes in circumstances during the year that necessitated an evaluation for an impairment of goodwill.
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2.
Cash and Cash Equivalents
The Company's policy is to invest cash in excess of operating requirements in income-producing short-term investments. At October 31, 2012 and July 31, 2012, short-term investments consisting of money market funds are reflected in the accompanying consolidated balance sheets and statements of cash flows in cash and cash equivalents which amounted to approximately $2.4 million and $2.2 million, respectively.
3.
Contract Receivables, net
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October 31,
2012
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July 31,
2012
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Billed
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$
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40,781,996
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$
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42,977,016
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Unbilled
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31,193,272
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28,829,818
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71,975,268
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71,806,834
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Allowance for doubtful accounts and contract adjustments
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(11,322,000
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)
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(10,238,391
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)
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$
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60,653,268
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$
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61,568,443
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Unbilled receivables result from revenues which have been earned, but are not billed as of period-end. The above unbilled balances are comprised of incurred costs plus fees not yet processed and billed; and differences between year-to-date provisional billings and year-to-date actual contract costs incurred. Management anticipates that the October 31, 2012 unbilled receivables will be substantially billed and collected within one year. Within the above billed balances are contractual retainages in the amount of approximately $246,000 and $248,000 at October 31, 2012 and July 31, 2012. Management anticipates that the July 31, 2012 retainage balance will be substantially collected within one year. For the three months ended October 31, 2012 and October 29, 2011, the quarter provision for allowance for doubtful accounts and contract adjustments was approximately $1.1 million and $.2 million, respectively.
Included in the balance of receivables are receivables due under the contracts with organizations in Kuwait of $14.5 million at October 31, 2012 and July 31, 2012. Of the outstanding balances due from Kuwait, approximately $1.7 million and $1.9 million were included in billings in excess of revenue as of October 31, 2012 and July 31, 2012, respectively. Included in the balance of unbilled receivables are receivables due under certain contracts with organizations in China of $4.7 million and $2.8 million at October 31, 2012 and July 31, 2012, respectively.
The Company maintains unsecured lines of credit available for working capital and letters of credit of $32.5 million at the parent company with interest rates ranging from 2.5% to 3% at July 31, 2012 and an additional $1.6 million in lines of credit at the Company’s subsidiaries with interest rates ranging from 4.5% to 5% at July 31, 2012. The Company guarantees the lines of credit of Walsh Environmental Scientists and Engineers, LLC (Walsh). Its lenders have reaffirmed the Company’s lines of credit within the past twelve months. At October 31, 2012 and July 31, 2012, the Company had letters of credit and amounts outstanding under the lines of credit totaling approximately $16.1 million and $14.9 million,
which is inclusive of outstanding letters of credit of $1.5 million and $4.1 million, respectively.
After letters of credit and amounts outstanding under the lines of credit, there was $18.0 million of availability under the lines of credit at October 31, 2012.
5.
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Debt and Capital Lease Obligations
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Debt inclusive of capital lease obligations consists of the following:
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October 31,
2012
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July 31,
2012
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|
|
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Various bank loans and advances at interest rates ranging from 5% to 14%
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|
$
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324,296
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$
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372,744
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Capital lease obligations at varying interest rates averaging 11%
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|
216,560
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|
|
|
218,351
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|
|
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540,856
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|
|
|
591,095
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|
|
|
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|
|
|
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|
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Current portion of long-term debt and capital lease obligations
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|
|
(453,611
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)
|
|
|
(488,460
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)
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|
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|
|
|
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|
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Long-term debt and capital lease obligations
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|
$
|
87,245
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|
|
$
|
102,635
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The aggregate maturities of long-term debt and capital lease obligations at October 31, 2012 are as follows:
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Amount
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November 2012 – October 2013
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$
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453,611
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November 2013 – October 2014
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69,945
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|
November 2014 – October 2015
|
|
|
17,300
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|
November 2015 – October 2016
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|
---
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November 2016 – October 2017
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---
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Thereafter
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|
---
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|
|
|
$
|
540,856
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|
The estimated effective tax rate for the three months ended October 31, 2012 and October 29, 2011 was 39.5% and 32.6% respectively. The increase is mainly a result of decreased income from foreign entities in countries with a lower effective tax rate than in the U.S, decreased income from U.S. partnerships, recognition of nondeductible expenses in a foreign jurisdiction and additional foreign taxes.
7.
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Other Accrued Liabilities
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|
|
October 31,
2012
|
|
|
July 31,
2012
|
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|
|
|
|
|
|
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Allowance for contract adjustments
|
|
$
|
2,723,974
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|
|
$
|
2,724,474
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Other
|
|
|
1,105,699
|
|
|
|
1,208,114
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,829,673
|
|
|
$
|
3,932,588
|
|
Included in other accrued liabilities is an allowance for contract adjustments relating to potential cost disallowances on amounts billed and collected in current and prior years' projects. The allowance for contract adjustments is recorded for contract disputes and government audits when the amounts are estimatable.
Ecology and Environment, Inc. has adopted a 1998 Stock Award Plan effective March 16, 1998 (1998 Plan). To supplement the 1998 Plan, a 2003 Stock Award Plan (2003 Plan) was approved by the shareholders at the Annual Meeting held in January 2004 and a 2007 Stock Award Plan (2007 Plan) was approved by the shareholders at the Annual Meeting held in January of 2008 (the 1998 Plan, 2003 Plan and the 2007 Plan collectively referred to as the Award Plan). The 2003 Plan was approved retroactive to October 16, 2003 and terminated on October 15, 2008 and the 2007 Plan was approved retroactive to October 18, 2007 and terminated on October 17, 2012.
The Company awarded 62,099 shares valued at approximately $.9 million in October 2011 pursuant to the Award Plan. These awards issued have a three year vesting period. The "pool" of excess tax benefits accumulated in Capital in Excess of Par Value was $330,000 at October 31, 2012 and July 31, 2012. Total gross compensation expense is recognized over the vesting period. Unrecognized compensation expense was approximately $.7 million and $.8 million at October 31, 2012 and July 31, 2012, respectively.
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a.
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Class A and Class B common stock
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The relative rights, preferences and limitations of the Company's Class A and Class B common stock can be 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.
The Company declared cash dividends of approximately $2.0 million in fiscal year 2012. No cash dividends have been declared as of October 31, 2012. Within accounts payable, the Company recorded outstanding dividend payables at July 31, 2012 of approximately $1.0 million which was paid in August 2012.
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The Company’s Board of Directors approved a 200,000 share repurchase program in August 2010 in which 93,173 shares remain available for repurchase.
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|
d.
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Noncontrolling Interest
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The Company’s noncontrolling interest is disclosed as a separate component of the Company’s consolidated equity on the balance sheets. Earnings and other comprehensive income are separately attributed to both the controlling and noncontrolling interests. Earnings per share is calculated based on net income attributable to the Company’s controlling interest.
There was a purchase of noncontrolling interest in the three months ending October 31, 2012 for which the Company paid cash of approximately $30,000.
On January 4, 2012, the Company purchased an additional 1.3% of Walsh from noncontrolling shareholders for approximately $254,000. Two thirds of the purchase price was paid in cash while the remaining one third was paid for with E&E stock. On December 14, 2011, the Company purchased an additional 4.0% of Ecology and Environment do Brasil LTDA from noncontrolling shareholders for approximately $180,000. The entire purchase price was paid in cash. On November 18, 2011, the Company purchased an additional 3.9% of Walsh Peru from noncontrolling shareholders for approximately $432,000. The entire purchase price was paid in cash. There were three additional purchases of noncontrolling interest in fiscal year 2012 for which the Company paid cash of approximately $128,000.
Most transactions with noncontrolling shareholders for the three months ended October 31, 2012 and fiscal year ended July 31, 2012 were made at book value, which management believes approximates fair value. The purchase of the Walsh Peru and E&E Brasil shares, were at a calculated value in excess of book value which management believes approximated the fair value.
Effects of changes in E&E’s ownership interest in its subsidiaries on E&E’s equity:
|
Three months ended
October 31, 2012
|
|
|
Fiscal year ended
July 31, 2012
|
|
Transfers to noncontrolling interest:
|
|
|
|
|
|
|
|
Sale of 600 Gustavson common shares
|
$
|
---
|
|
|
$
|
41,634
|
|
Total transfers to noncontrolling interest
|
|
---
|
|
|
|
41,634
|
|
|
|
|
|
|
|
|
|
Transfers from noncontrolling interest:
|
|
|
|
|
|
|
|
Purchase of 152 Walsh common shares
|
|
---
|
|
|
|
(73,748
|
)
|
Purchase of 496 Walsh common shares
|
|
---
|
|
|
|
(269,064
|
)
|
Purchase of 5,389 Brazil common shares
|
|
---
|
|
|
|
77,539
|
|
Purchase of 26,482 Walsh Peru common shares
|
|
---
|
|
|
|
(213,917
|
)
|
Purchase of 166 Walsh common shares
|
|
---
|
|
|
|
(94,601
|
)
|
Purchase of 25 Gestion Ambiental Consultores common shares
|
|
---
|
|
|
|
(7,452
|
)
|
Purchase of 75 Lowham common shares
|
|
(30,002
|
)
|
|
|
---
|
|
Total transfers from noncontrolling interest
|
|
(30,002
|
)
|
|
|
(581,243
|
)
|
|
|
|
|
|
|
|
|
Transfers to (from) noncontrolling interest
|
$
|
(30,002
|
)
|
|
$
|
(539,609
|
)
|
10.
|
Shareholders' Equity - Restrictive Agreement
|
Messrs. Gerhard J. Neumaier, Silvestro, Frank, and Strobel entered into a Stockholders’ Agreement dated May 12, 1970, as amended January 24, 2011, which governs the sale of certain shares of common stock owned by them and the children of those individuals. The Agreement provides that prior to accepting a bona fide offer to purchase the certain covered part of their shares, each party must first allow the other members to the Agreement the opportunity to acquire on a pro rata basis, with right of over-allotment, all of such shares covered by the offer on the same terms and conditions proposed by the offer.
The computation of basic earnings per share reconciled to diluted earnings per share follows:
|
|
Three months ended
|
|
|
|
October 31,
2012
|
|
|
October 29,
2011
|
|
|
|
|
|
|
|
|
Total income available to common stockholders
|
|
$
|
242,527
|
|
|
$
|
1,159,777
|
|
Dividend declared
|
|
|
---
|
|
|
|
---
|
|
Undistributed earnings
|
|
|
242,527
|
|
|
|
1,159,777
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (basic)
|
|
|
4,244,010
|
|
|
|
4,203,445
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings per share
|
|
$
|
---
|
|
|
$
|
---
|
|
Undistributed earnings per share
|
|
|
.06
|
|
|
|
.28
|
|
Total earnings per share
|
|
$
|
.06
|
|
|
$
|
.28
|
|
After consideration of all the rights and privileges of the Class A and Class B stockholders discussed in Note 9, in particular the right of the holders of the Class B common stock to elect no less than 75% of the Board of Directors making it highly unlikely that the Company will pay a dividend on Class A common stock in excess of Class B common stock, the Company allocates undistributed earnings between the classes on a one-to-one basis when computing earnings per share. As a result, basic and fully diluted earnings per Class A and Class B share are equal amounts.
The Company has determined that its unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities. These securities shall be included in the computation of earnings per share pursuant to the two-class method. The resulting impact was to include unvested restricted shares in the basic weighted average shares outstanding calculation.
Segment information as of October 31, 2012 approximates the following:
Geographic information:
|
|
Revenue
|
|
|
Gross Long-
Lived Assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
24,810,000
|
|
|
$
|
29,899,000
|
|
Foreign countries
|
|
|
12,012,000
|
|
|
|
5,440,000
|
|
(1) Revenue is attributed to countries based on the location of the customers. Revenues in the most significant foreign countries include $3.5 million in Peru, $4.1 million in Brazil and $2.5 million in Chile.
Segment information as of October 29, 2011 approximates the following:
Geographic information:
|
|
Revenue
|
|
|
Gross Long-
Lived Assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
28,430,000
|
|
|
$
|
26,470,000
|
|
Foreign countries
|
|
|
13,882,000
|
|
|
|
5,187,000
|
|
(1) Revenue is attributed to countries based on the location of the customers. Revenues in the most significant foreign countries include $3.6 million in Peru, $4.1 million in Brazil and $2.5 million in Chile.
13.
|
Commitments and Contingencies
|
From time to time, the Company is a named defendant in legal actions arising out of the normal course of business. The Company is not a party to any pending legal proceeding the resolution of which the management of the Company believes will have a material adverse effect on the Company’s results of operations, financial condition, cash flows, or to any other pending legal proceedings other than ordinary, routine litigation incidental to its business. The Company maintains liability insurance against risks arising out of the normal course of business.
Certain contracts contain termination provisions under which the customer may, without penalty, terminate the contracts upon written notice to the Company. In the event of termination, the Company would be paid only termination costs in accordance with the particular contract. Generally, termination costs include unpaid costs incurred to date, earned fees and any additional costs directly allocable to the termination.
On September 21, 2012 the Colorado Department of Public Health and Environment (the “Department”) issued a proposed Compliance Order on Consent (the “Consent Order”) to the City and County of Denver (“Denver”) and to Walsh. Walsh is a majority-owned subsidiary of Ecology and Environment, Inc. The proposed Consent Order concerns construction improvement activities of certain property owned by Denver which was the subject of asbestos remediation. Denver had entered into a contract with Walsh for Walsh to provide certain environmental consulting services (asbestos monitoring services) in connection with the asbestos containment and/or removal performed by other contractors at Denver’s real property. The Consent Order, among other provisions, proposes a violation penalty of $216,000, jointly and severally to be paid by Denver and Walsh. Under Walsh’s environmental consulting contract with Denver, Walsh has agreed to indemnify Denver for certain liabilities which would include the imposition of this proposed penalty. Walsh has put its professional liability carrier on notice of this claimed penalty. At this time, neither Walsh nor Denver has filed a response to the September 21, 2012 draft Consent Order. It is the position of Walsh that it has fully complied with all applicable Colorado laws, regulations and statutes in connection with its role as an environmental consultant to Denver and the claimed violations are not applicable to the activities of Walsh in connection with its environmental consulting contract with Denver. The Company believes that this administrative proceeding involving Walsh will not have an adverse material effect upon the operations of the Company.
On February 4, 2011 the Chico Mendes Institute of Biodiversity Conservation of Brazil (the “Institute”) issued a Notice of Infraction to E & E Brasil. E & E Brasil is a majority-owned subsidiary of Ecology and Environment, Inc. The Notice of Infraction concerns the taking and collecting species of wild animal specimens without authorization by the competent authority and imposes a fine of 520,000 Reais, which has a value of approximately $256,000 at October 31, 2012. No claim has been made against Ecology and Environment, Inc. The Institute has also filed Notices of Infraction against four employees of E & E Brasil alleging the same claims and has imposed fines against those individuals that, in the aggregate, are equal to the fine imposed against E & E Brasil. E & E Brasil has filed administrative responses with the Institute for itself and its employees that: (a) denies the jurisdiction of the Institute, (b) states that the Notice of Infraction is constitutionally vague and (c) affirmatively stated that E & E Brasil had obtained the necessary permits for the surveys and collections of specimens under applicable Brazilian regulations and that the protected conservation area is not clearly marked to show its boundaries. At this time, E & E Brasil has attended one meeting where depositions were taken. The Company believes that these administrative proceedings in Brazil will not have an adverse material effect upon the operations of the Company.
14.
|
Supplemental Cash Flow Information Disclosure
|
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. Cash paid for interest amounted to approximately $82,000 and $73,000 for the three months ended October 31, 2012 and October 29, 2011, respectively. Cash paid for income taxes amounted to approximately $.6 million and $.9 million for the three months ended October 31, 2012 and October 29, 2011, respectively. The $1.0 million in dividends paid by the Company for the three months ended October 31, 2012 was accrued in accounts payable as of July 31, 2012 and paid in August 2012. The $1.0 million in dividends paid by the Company for the three months ended October 29, 2011 was accrued in accounts payable as of July 31, 2011 and paid in August 2011.
15.
|
Recent Accounting Pronouncements
|
The FASB and the International Accounting Standards Board (IASB) have issued common disclosure requirements related to offsetting arrangements. Specifically, the FASB issued Accounting Standards Update (ASU) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company has not yet assessed the impact that these provisions will have on its consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05
Comprehensive Income (Topic 220): Presentation of Comprehensive Income
(“ASU 2011-05”). ASU 2011-05 increases the prominence of other comprehensive income in financial statements. Under ASU 2011-05, companies will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. ASU 2011-05 eliminates the option to present other comprehensive income in the statement of changes in equity and is applied retrospectively. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU provides a consistent definition of fair value to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. This standard changes certain fair value measurement principles and enhances the disclosure requirements. ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and should be applied prospectively. The Company early adopted this ASU and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
The Company’s majority owned subsidiary Walsh Environmental Scientists and Engineers, LLC (Walsh), at its most recent board meeting approved purchasing an additional 7% of its majority owned subsidiary Gustavson Associates, LLC (Gustavson) from a minority shareholder. The share purchase with take place prior to December 31, 2012, and with this purchase Walsh will increase its ownership percentage of Gustavson to 78%.