Notes to Condensed Consolidated Financial Statements
1.
|
Organization and Basis of Presentation
|
Ecology and Environment Inc., (“EEI”) 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. During the quarter ended October 27, 2018, EEI
and its subsidiaries (collectively, the “Company”) included six active wholly-owned and majority-owned operating subsidiaries located in four countries (the United States of America (the “U.S.”), Brazil, Peru, and Ecuador), and one majority-owned
equity investment in Chile. The Company’s staff is comprised of individuals representing numerous scientific, engineering, health, and social disciplines working together in multidisciplinary teams to provide innovative environmental solutions.
The majority of employees hold bachelor’s and/or advanced degrees in such areas as chemical, civil, mechanical, sanitary, soil, structural and transportation engineering, biology, geology, hydrogeology, ecology, urban and regional planning and
oceanography. The Company’s client list includes governments, industries, multinational corporations, organizations, and private companies.
The Company prepared the accompanying unaudited condensed consolidated financial statements pursuant to
the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). 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.
Although the Company believes that the disclosures are adequate to make the information presented not
misleading, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), including a description of
significant accounting policies, have been condensed or omitted pursuant to SEC rules and regulations. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included
in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2018 filed with the SEC (the “2018 Annual Report”). Other than new or revised accounting policies resulting from the adoption of new accounting pronouncements
described in Note 3 of these condensed consolidated financial statements, the accounting policies followed by the Company for preparation of the consolidated financial statements included in the 2018 Annual Report were also followed for this
quarterly report. The condensed consolidated results of operations for the three months ended October 27, 2018 are not necessarily indicative of the results for any subsequent period or the entire fiscal year ending July 31, 2019.
2.
|
Restatement of Unaudited Condensed Consolidated Financial Statements
|
As previously disclosed in the Current Report on Form 8-K filed by the
“Company with the SEC on December 12, 2018, the Audit Committee of the Board of Directors (the “Audit Committee”) determined
that the Company
’
s previously issued financial
statements for quarterly periods prior to July 31, 2018 can no longer be relied upon due to errors related to accounting for EEI
’
s investment in Gestion Ambiental Consultores S.A. (
“
GAC
”
) since 1999. The Company intends to prospectively amend financial statements for the quarters ended October 28, 2017,
January 27, 2018 and April 28, 2018 when it files its Quarterly Reports on Form 10-Q for the corresponding quarters during the fiscal year ending July 31, 2019. As a result, the accompanying unaudited condensed consolidated financial statements
include restated unaudited condensed consolidated statements of operations, comprehensive income, cash flows and shareholders
’
equity for the fiscal quarter ended October 28, 2017.
The Company had previously included GAC
’
s financial statements
in consolidated financial statements filed with the SEC prior to July 31, 2018. In December 2018, the Company determined that, although it had a majority ownership interest in GAC, it did not have a controlling interest in GAC
’
s operations due to lack of continuous control over the activities of GAC
’
s board of directors and senior management team.
As a result, the Company
’
s net investment in GAC should have been accounted for using the equity method of accounting.
Collectively, the adjustments necessary to deconsolidate GAC
’
s
unaudited financial statements and correctly account for the Company
’
s investment in GAC under the equity method of accounting are referred to as the
“
GAC Deconsolidation Adjustments
.”
For the quarter ended October 28, 2017, the GAC Deconsolidation Adjustments resulted in decreases of $2.1
million and less than $0.1 million in consolidated gross revenue and income before income tax provision, and had no impact on net income attributable to EEI.
In addition to the GAC Deconsolidation Adjustments, previously filed financial statements for the quarter ended October 28,
2017 were also adjusted for correction of other errors in the financial statements and disclosures that were deemed to be immaterial on an individual basis and in the aggregate for the quarter (the
“
Out of Period Adjustments
”
). For the quarter ended October 28, 2017, the Out of Period Adjustments resulted in increases of $1.1 million of consolidated gross
revenue and $0.1 million of consolidated income before income tax provision and net income attributable to EEI.
The “As Previously Reported” amounts in the tables below represent the amounts reported in the Company’s
Quarterly Report on Form 10-Q for the quarter year ended October 28, 2017, filed with the SEC on December 12, 2017.
Ecology and Environment Inc.
Condensed Consolidated Statement of Operations
(amounts in thousands, except share data)
|
|
Three Months Ended October 28, 2017
|
|
|
|
As
Previously
Reported
|
|
|
GAC
Deconsolidation
Adjustments
|
|
|
Out of Period
Adjustments
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
27,082
|
|
|
$
|
(2,112
|
)
|
|
$
|
1,135
|
|
|
$
|
26,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services
|
|
|
9,480
|
|
|
|
(862
|
)
|
|
|
-
|
|
|
|
8,618
|
|
Subcontract costs
|
|
|
5,729
|
|
|
|
(459
|
)
|
|
|
1,079
|
|
|
|
6,349
|
|
Selling, general and administrative expenses
|
|
|
10,509
|
|
|
|
(727
|
)
|
|
|
-
|
|
|
|
9,782
|
|
Depreciation and amortization
|
|
|
270
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,094
|
|
|
|
(54
|
)
|
|
|
56
|
|
|
|
1,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity method investment
|
|
|
-
|
|
|
|
18
|
|
|
|
-
|
|
|
|
18
|
|
Net interest income (expense)
|
|
|
(5
|
)
|
|
|
7
|
|
|
|
-
|
|
|
|
2
|
|
Net foreign exchange (loss) gain
|
|
|
3
|
|
|
|
2
|
|
|
|
-
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
1,092
|
|
|
|
(27
|
)
|
|
|
56
|
|
|
|
1,121
|
|
Income tax provision
|
|
|
444
|
|
|
|
(12
|
)
|
|
|
1
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
648
|
|
|
|
(15
|
)
|
|
|
55
|
|
|
|
688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss attributable to noncontrolling interests
|
|
|
(115
|
)
|
|
|
15
|
|
|
|
-
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Ecology and Environment, Inc.
|
|
$
|
533
|
|
|
$
|
-
|
|
|
$
|
55
|
|
|
$
|
588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: basic and diluted
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weignted average common shares outstanding:basic and diluted
|
|
|
4,301,604
|
|
|
|
|
|
|
|
|
|
|
|
4,301,604
|
|
Ecology and Environment Inc.
Condensed Consolidated Statement of Comprehensive Income
(amounts in thousands)
|
|
Three Months Ended October 28, 2017
|
|
|
|
As
Previously
Reported
|
|
|
GAC
Deconsolidation
Adjustments
|
|
|
Out of Period
Adjustments
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income including noncontrolling interests
|
|
$
|
648
|
|
|
$
|
(15
|
)
|
|
$
|
55
|
|
|
$
|
688
|
|
Foreign currency translation adjustments
|
|
|
29
|
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
(14
|
)
|
Unrealized investment (losses) gains, net
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
674
|
|
|
|
(58
|
)
|
|
|
55
|
|
|
|
671
|
|
Comprehensive (income) loss attributable to noncontrolling
interests
|
|
|
(129
|
)
|
|
|
35
|
|
|
|
-
|
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to EEI
|
|
$
|
545
|
|
|
$
|
(23
|
)
|
|
$
|
55
|
|
|
$
|
577
|
|
Ecology and Environment Inc.
Condensed Consolidated Statement of Cash Flows
(amounts in thousands)
|
|
Three Months Ended October 28, 2017
|
|
|
|
As
Previously
Reported
|
|
|
Impact of
GAC
Deconsolidation
|
|
|
Other
Adjustments
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
648
|
|
|
$
|
(15
|
)
|
|
$
|
55
|
|
|
$
|
688
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
270
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
260
|
|
Provision for deferred income taxes
|
|
|
(21
|
)
|
|
|
(269
|
)
|
|
|
12
|
|
|
|
(278
|
)
|
Share based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
47
|
|
|
|
47
|
|
Net bad debt expense (recovery)
|
|
|
39
|
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
28
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- contract receivables
|
|
|
4,470
|
|
|
|
(489
|
)
|
|
|
(1,315
|
)
|
|
|
2,666
|
|
- other current assets
|
|
|
(692
|
)
|
|
|
16
|
|
|
|
168
|
|
|
|
(508
|
)
|
- income tax receivable
|
|
|
969
|
|
|
|
286
|
|
|
|
(11
|
)
|
|
|
1,244
|
|
- equity method investment
|
|
|
-
|
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
(18
|
)
|
- other non-current assets
|
|
|
20
|
|
|
|
(9
|
)
|
|
|
3
|
|
|
|
14
|
|
- accounts payable
|
|
|
(1,298
|
)
|
|
|
(8
|
)
|
|
|
1,138
|
|
|
|
(168
|
)
|
- accrued payroll costs
|
|
|
(776
|
)
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
(784
|
)
|
- income taxes payable
|
|
|
(7
|
)
|
|
|
2
|
|
|
|
-
|
|
|
|
(5
|
)
|
- customer deposits
|
|
|
836
|
|
|
|
166
|
|
|
|
-
|
|
|
|
1,002
|
|
- other accrued liabilities
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
Net cash provided by (used in) operating activities
|
|
|
4,493
|
|
|
|
(367
|
)
|
|
|
97
|
|
|
|
4,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, building and equipment
|
|
|
(104
|
)
|
|
|
4
|
|
|
|
-
|
|
|
|
(100
|
)
|
Purchase of investment securities
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(112
|
)
|
|
|
4
|
|
|
|
-
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(860
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(860
|
)
|
Repayment of debt
|
|
|
(239
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(239
|
)
|
Net borrowings (repayment) of lines of credit
|
|
|
(377
|
)
|
|
|
215
|
|
|
|
-
|
|
|
|
(162
|
)
|
Distributions to noncontrolling interests
|
|
|
(49
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(49
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(1,525
|
)
|
|
|
215
|
|
|
|
-
|
|
|
|
(1,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
22
|
|
|
|
(10
|
)
|
|
|
(2
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash, cash equivalents and restricted
cash
|
|
|
2,878
|
|
|
|
(158
|
)
|
|
|
95
|
|
|
|
2,815
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
|
13,343
|
|
|
|
(208
|
)
|
|
|
-
|
|
|
|
13,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
16,221
|
|
|
$
|
(366
|
)
|
|
$
|
95
|
|
|
$
|
15,950
|
|
3.
|
Recent Accounting Pronouncements
|
The Financial Accounting Standards Board (“FASB”) establishes changes to U.S. GAAP in the form of
accounting standards updates (“ASUs”) to the FASB Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs when they are issued by FASB. ASUs listed below were either adopted by the Company
during its current fiscal year, or will be adopted as each ASU becomes effective during future reporting periods. ASUs not listed below were assessed to be not applicable to the Company’s operations or are expected to have minimal impact on the
Company’s consolidated financial position or results of operations.
Accounting Pronouncements Adopted During the Three Months Ended October 27, 2018
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU
2014-09”). ASU 2014-09, as amended by subsequent ASUs that amended and clarified the guidance in ASU 2014-09, forms the basis for FASB ASC Topic 606 (“ASC Topic 606”), which superseded previous authoritative U.S. GAAP guidance regarding revenue
recognition. The Company adopted ASC Topic 606 effective August 1, 2018. Refer to Note 6 of these condensed consolidated financial statements for additional disclosures regarding the Company’s adoption of ASC Topic 606.
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 in ASU 2016-01 address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In February
2018, FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities, which clarified certain aspects of the
guidance issued in ASU 2016-01. Under the new guidance, entities are no longer able to classify equity investments as either trading or available for sale (“AFS”) and may no longer recognize unrealized holding gains and losses in other
comprehensive income on equity securities that were classified as AFS under previous U.S. GAAP. The Company adopted the applicable provisions of ASU 2016-01 effective August 1, 2018 by recording a cumulative effect adjustment of less than $0.1
million to beginning retained earnings and beginning accumulated other comprehensive income on the condensed consolidated balance sheets. The cumulative effect adjustment is also separately reported on the condensed consolidated statements of
shareholders’ equity.
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, only one of
which was deemed applicable to the Company’s cash flow reporting. Issue 6 of ASU 2016-15 requires that reporting entities elect an accounting policy to classify distributions received from equity method investees using one of two possible
approaches:
|
•
|
the “cumulative earnings approach,” under which, subject to certain limitations, distributions
received from equity investees are considered returns on investment and classified as cash inflows from operating activities; or
|
|
•
|
the “nature of the distribution approach,” under which distributions received from equity investees
should be classified on the basis of the nature of the activity or activities of the investee that generated the distribution as either a return on investment (classified as a cash inflow from operating activities) or a return of
investment (classified as a cash inflow from investing activities).
|
The Company adopted the provisions of ASU 2016-15 effective August 1, 2018 and elected the “cumulative
earnings approach”. The Company received $0.2 million of dividends from its equity method investee during the three months ended October 27, 2018 that are included in cash flows from operating activities.
Accounting Pronouncements Not Yet Adopted as of October 27, 2018
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, as amended by subsequent ASUs, 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. 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 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 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.
4.
|
Cash, Cash Equivalents and Restricted Cash
|
Cash, cash equivalents and restricted cash are summarized in the following table.
|
|
October 27,
2018
|
|
|
July 31,
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,628
|
|
|
$
|
13,496
|
|
Restricted cash included in other assets
|
|
|
247
|
|
|
|
250
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
12,875
|
|
|
$
|
13,746
|
|
The Company considers all liquid instruments purchased with a maturity of three months or less to be cash
equivalents. Money market funds of $0.6 million and $0.4 million were included in cash and cash equivalents at October 27, 2018 and July 31, 2018, respectively. Restricted cash included in other assets represents collateral for pending
litigation matters in Brazil that are not expected to be resolved within one year from the balance sheet date.
5.
|
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 and derivative contracts that are traded on an active exchange market (e.g., New York
Stock Exchange) as well as certain U.S. Treasury and U.S. Government and agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2 Inputs
– Quoted
prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield
curves, credit risks, etc.) or can be corroborated by observable market data.
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 Company
reports the transfer as of the beginning of the reporting period. There were no transfers in or out of levels 1, 2 or 3, respectively during the three months ended October 27, 2018 or the fiscal year ended July 31, 2018.
The carrying amount of cash, cash equivalents and restricted cash approximated fair value at October 27,
2018 and July 31, 2018. These assets were classified as level 1 instruments at both dates.
Investment securities available for sale of $1.5 million at October 27, 2018 and July 31, 2018
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 net asset value (“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.
Prior to August 1, 2018, unrealized gains or losses related to investment securities available for sale
were recorded in the consolidated balance sheets and statements of comprehensive income. Subsequent to adoption of ASU 2016-01 effective August 1, 2018 (refer to Note 3 of these condensed consolidated financial statements), unrealized gains or
losses related to investment securities available for sale are recorded in the consolidated statements of operations. The cost basis of securities sold is based on the specific identification method. The Company did not record any sales of
investment securities during the six months ended January 26, 2019 and January 27, 2018.
Long-term debt consists of bank loans and capitalized equipment leases. Lines of credit consist of
borrowings for working capital requirements. Based on the relative immateriality of consolidated debt and line of credit borrowings, management believes that the carrying amount of these liabilities approximated fair value at October 27, 2018
and July 31, 2018. These liabilities were classified as level 2 instruments at both dates.
There were no financial instruments classified as level 3 at October 27, 2018 and July 31, 2018.
6.
|
Revenue and Contract Receivables, net
|
Adoption of ASC Topic 606
The Company adopted ASC Topic 606 effective August 1, 2019.
Gross revenue for reporting periods beginning after July 31, 2018 is recognized under ASC Topic 606. Gross revenue for previous reporting periods was recognized in accordance with historic accounting under U.S. GAAP, as
summarized in revenue recognition policies included in the Company’s 2018 Annual Report.
The Company adopted ASC Topic 606 using the modified retrospective method. As a practical expedient allowed under ASC Topic
606, the Company applied the new guidance only to contracts that were not completed as of the date of initial application. The Company did not record any cumulative effect adjustment to retained earnings as of August 1, 2019 and
did not record any material adjustment to gross revenue for the three months ended October 27, 2018 as a result of applying the guidance in ASC Topic 606.
Revenue Recognition under ASC Topic 606
The Company recognizes substantially all of its revenue from the sale of labor hours under environmental
consulting contracts. Revenue reflected in the Company's consolidated statements of operations represents services rendered for which the Company maintains a primary contractual relationship with its customers. Included in revenue are certain
services outside the Company's normal operations that the Company has elected to subcontract to other contractors.
In accordance with ASC Topic 606, the Company identifies a contract with a customer, identifies the
performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenue when (or as) the Company satisfies a performance obligation. The
Company recognizes the vast majority of its contractual revenue over time, as services are rendered and performance obligations are satisfied, because of the continuous transfer of control to the customer, and because the Company generally
maintains the right to remuneration for efforts already expended under its contracts even if a customer terminates the contract. The Company's contracts with customers generally include payment terms that range from 30-90 days from the billing
date.
A performance obligation is a promise in a contract to transfer a distinct good or service to the
customer and is the unit of account for revenue recognition. The Company allocates a contract’s transaction price to each distinct performance obligation and recognizes revenue when, or as, the performance obligation is satisfied.
Predominantly, the Company’s contracts have a single performance obligation because the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts.
The Company performs its consulting work under a mix of time and materials, fixed price and cost-plus
contracts. The Company accounts for time and material contracts over the period of performance, predominately based on labor hours incurred. Under these types of contracts, there is no predetermined fee. Instead, the Company negotiates
hourly billing rates and charges the clients based upon actual hours expended on a project. In addition, any direct project expenditures are passed through to the client and are typically reimbursed. Time and materials contracts may contain
“not to exceed” provisions that effectively cap the amount of revenue that the Company can bill to the client. In order to record revenue that exceeds the billing cap, the Company must obtain approval from the client for expanded scope or
increased pricing.
The Company recognizes revenue under fixed price contracts using the proportional performance method,
under which progress is determined based on the ratio of efforts expended to date in proportion to total efforts expected to be expended over the life of a contract. The proportional performance method requires the use of estimates and
judgment regarding a project’s expected revenue and the extent of progress towards completion. The Company makes periodic estimates of progress towards project completion by analyzing efforts expended to date, plus an estimate of the amount
of efforts to expend that we expect to incur until the completion of the project. Revenue is then calculated on a cumulative basis (project-to-date) as the proportion of efforts-expended. The revenue for the current period is calculated as
cumulative revenue less project revenue already recognized. If an estimate of efforts expended 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.
Cost-plus contracts provide for payment of allowable incurred costs, to the extent prescribed in the
contract, plus fees that we record as revenue. These contracts establish an estimate of total cost and an invoicing ceiling that the contractor may not exceed without the approval of the client. Revenue earned from cost-plus contracts is
recognized over the period of performance.
Substantially all of the Company's cost-plus contracts are with federal governmental agencies and, as
such, are subject to audits after contract completion. Government audits have been completed and final rates have been negotiated through fiscal year 2014. The Company recorded an allowance for potential disallowances resulting from
government audits of $0.7 million in other accrued liabilities at October 27, 2018 and July 31, 2018. Adjustments to 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 closeout procedures.
Contract modifications are common in the performance the Company’s contracts, and typically result
from changes in scope, specifications, design, performance, sites, or period of completion. In most cases, contract modifications are for services that are not distinct, and, therefore, are accounted for as part of the existing contract.
Revenue is recognized on contract modifications when it is probable that the modification will be approved and the amount can be reasonably estimated.
Cost of professional services and other direct
operating expenses, which includes employee labor and fringe expenses and out of pocket expenses such as travel, meals and field supplies, represent
costs incurred in connection with revenue recognized under client contracts.
Sales and cost of sales recognized by the Company’s South American operations exclude value added tax (VAT) assessments by governmental authorities, which the Company
collects from its customers and remits to governmental authorities.
The Company expenses all bid and proposal and other pre-contract costs as incurred.
Contract Receivables, net and Contract Assets
Contract receivables, net are summarized in the following table.
|
October 27,
2018
|
|
July 31,
2018
|
|
|
(in thousands)
|
|
Contract Receivables:
|
|
|
|
|
Billed
|
|
$
|
12,068
|
|
|
$
|
12,905
|
|
Unbilled
|
|
|
15,973
|
|
|
|
13,994
|
|
Total contract receivables
|
|
|
28,041
|
|
|
|
26,899
|
|
Allowance for doubtful accounts
|
|
|
(1,300
|
)
|
|
|
(1,284
|
)
|
Contract receivables, net
|
|
$
|
26,741
|
|
|
$
|
25,615
|
|
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 revenue from efforts expended 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.
The Company anticipates that substantially all billed contract
receivables will be collected over the next twelve months.
Billed contract receivables included contractual retainage balances of $0.8 million and $1.4 million at
October 27, 2018 and July 31, 2018, respectively.
Unbilled contract receivables,
which
represent an unconditional right to payment subject only to the passage of time,
represent amounts billable to clients in accordance with contracted terms that have not
been billed as of the end of the reporting period. Unbilled contract receivables that are not expected to be billed and collected within one year from the balance sheet date are reported in other assets on the condensed consolidated balance
sheets.
The Company reduces contract receivables by
recording an
allowance for doubtful accounts to account for the estimated impact of collection issues resulting from a client’s inability or unwillingness to pay valid obligations to the Company. The resulting provision for doubtful
accounts is recorded within selling, general and administrative expenses on the condensed consolidated statements of operations.
The Company may record contract assets for the right to receive consideration from customers when that right is conditional
based on future performance under a contract. Contract assets are transferred to billed contract receivables when the right to consideration becomes unconditional. The Company did not record any contract assets at October 27, 2018 or July 31,
2018.
At October 27, 2018 and July 31, 2018, management identified $0.4 million and $0.5 million, respectively,
of contract receivables, net of related allowance for doubtful accounts, which are not expected to be collected within one year. These receivable balances are included in other assets on the accompanying consolidated balance sheets.
Allowance for Doubtful Accounts
Activity within the allowance for doubtful accounts is summarized in the following table.
|
|
Three Months Ended
|
|
|
|
October 27,
2018
|
|
|
October 28,
2017
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
1,284
|
|
|
$
|
2,044
|
|
Provision for doubtful accounts during the period
|
|
|
27
|
|
|
|
33
|
|
Write-offs and recoveries of allowance recorded in prior periods
|
|
|
(11
|
)
|
|
|
(44
|
)
|
Balance at end of period
|
|
$
|
1,300
|
|
|
$
|
2,033
|
|
Contract Receivable Concentrations
Contract receivables and the allowance for doubtful accounts are summarized in the following table.
|
October 27, 2018
|
|
|
July 31, 2018
|
|
|
Total Billed
and Unbilled
Contract
Receivables
|
|
|
Allowance for
Doubtful
Accounts
|
|
|
Total Billed
and Unbilled
Contract
Receivables
|
|
|
Allowance for
Doubtful
Accounts
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
22,915
|
|
|
$
|
581
|
|
|
$
|
21,580
|
|
|
$
|
569
|
|
South American operations
|
|
|
5,126
|
|
|
|
719
|
|
|
|
5,319
|
|
|
|
715
|
|
Totals
|
|
$
|
28,041
|
|
|
$
|
1,300
|
|
|
$
|
26,899
|
|
|
$
|
1,284
|
|
The allowance for doubtful accounts for the Company’s South American operations represented 14% and 13% of
related contract receivables at October 27, 2018 and July 31, 2018, respectively, compared to 3% at both dates for the Company’s U.S. operations. Unstable local economies that adversely impacted certain of our South American clients in recent
years demonstrated signs of stabilizing during fiscal year 2018. Management continues to monitor trends and events that may adversely impact the realizability of recorded receivables from our South American clients.
Disaggregation of Revenues
The following table provides a summary of the Company’s gross revenue, disaggregated by operating segment
and contract type.
|
|
Three Months Ended
|
|
|
|
October 27,
2018
|
|
|
October 28,
2017
(Restated)
|
|
Gross revenue from time and materials contracts:
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
9,257
|
|
|
$
|
9,951
|
|
South American operations
|
|
|
---
|
|
|
|
---
|
|
Total
|
|
$
|
9,267
|
|
|
$
|
9,951
|
|
|
|
|
|
|
|
|
|
|
Gross revenue from fixed price contracts:
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
3,612
|
|
|
$
|
4,330
|
|
South American operations
|
|
|
3,741
|
|
|
|
5,270
|
|
Total
|
|
$
|
7,353
|
|
|
$
|
9,600
|
|
|
|
|
|
|
|
|
|
|
Gross revenue from cost-plus contracts:
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
5,142
|
|
|
$
|
6,554
|
|
South American operations
|
|
|
---
|
|
|
|
---
|
|
Total
|
|
$
|
5,142
|
|
|
$
|
6,554
|
|
|
|
|
|
|
|
|
|
|
Gross revenue from all contracts:
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
18,011
|
|
|
$
|
20,835
|
|
South American operations
|
|
|
3,741
|
|
|
|
5,270
|
|
Consolidated gross revenue
|
|
$
|
21,752
|
|
|
$
|
26,105
|
|
Customer Deposits
Customer deposits represent cash advances received from customers to be applied to future services.
Remaining Performance Obligations
The Company’s remaining performance obligations under its current contracts, also known as firm backlog, represent a measure of
the total dollar value of work be performed on contracts that are awarded, funded and in progress. The Company had approximately $67.6 million in remaining performance obligations as of October 27, 2018, of which it expects to recognize $56.0
million (83%) within the next twelve months.
The projects included in firm backlog are subject to cancellations, scope adjustments, foreign exchange
fluctuations and project deferrals that may affect the volume or expected timing of revenue recognition. A significant portion of the Company’s revenue is generated from projects awarded under master service agreements with clients. In these
instances, only the current unfinished projects are included in our backlog.
7.
|
Variable Interest Entities and Equity Method Investment
|
Variable Interest Entities (“VIE”)
The Company’s majority owned subsidiaries are deemed to be VIEs when, on a stand-alone basis, they lack sufficient capital to
finance the activities of the VIE. The Company consolidates investments in VIEs if the Company is the primary beneficiary of the VIE. The Company uses a qualitative approach to determine if the Company is the primary beneficiary of the VIE,
which considers factors that indicate the Company has significant influence and control over the activities that most significantly impact the VIE’s economic performance. These factors include representation on the investee’s board of directors,
management representation, authority to make decisions, substantive participating rights of the minority shareholders and ownership interest.
As of October 27, 2018 and July 31, 2018, the Company consolidated one majority owned subsidiary that was deemed to be a VIE.
The financial position of this VIE as of October 27, 2018 and July 31, 2018 is summarized in the following table.
|
|
October 27,
2018
|
|
|
July 31,
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Ecology and Environment Inc. shareholder’s equity
|
|
|
|
|
|
|
|
|
Noncontrolling interests shareholders’ equity
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
Total gross revenue of the consolidated VIE was $2.4 million for the three months ended October 27, 2018
and October 28, 2017. With the exception of restricted cash of $0.2 million and $0.3 million included in noncurrent assets at October 27, 2018 and July 31, 2018, respectively (refer to Note 4), all assets of the VIE were available for the
general operations of the VIE.
Equity Method Investment
VIEs for which the Company is not the primary beneficiary, and other investee companies over which the Company does not
influence or control the activities that most significantly impact the investee company’s economic performance, are not consolidated and are accounted for under the equity method of accounting. Under the equity method of accounting, an investee
company's accounts are not reflected within the Company's consolidated balance sheets and statements of operations. The Company's share of the earnings of the investee company is reported as earnings from equity method investment in the
Company's consolidated statements of operations. The Company's carrying value in an equity method investee is reported as equity method investment on the Company's consolidated balance sheets. The Company's carrying value in an equity method
investee is reduced by the Company’s share of dividends declared by an investee company.
If the Company's carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the
Company's consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of
such income until it equals the amount of its share of losses not previously recognized.
The Company’s equity method investment in GAC had a carrying value of $2.1 million at October 27, 2018 and
July 31, 2018. The Company’s ownership percentage was 55.1% at both dates. The equity method investment in GAC is included within the Company’s South American operating segment. Activity recorded for the Company’s equity method investment
during the three months ended October 27, 2018 and October 28, 2017 is summarized in the following table.
|
Three Months Ended
|
|
|
October 27,
2018
|
|
|
October 28,
2017
(Restated)
|
|
|
(in thousands)
|
|
Equity investment carrying value at beginning of period
|
|
$
|
2,058
|
|
|
$
|
1,464
|
|
GAC net income attributable to EEI
|
|
|
60
|
|
|
|
18
|
|
Equity investment carrying value at end of period
|
|
$
|
2,118
|
|
|
$
|
1,482
|
|
GAC’s financial position as of October 27, 2018 and July 31, 2018 is summarized in the following table.
|
|
October 27,
2018
|
|
|
July 31,
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Ecology and Environment Inc. shareholder’s equity
|
|
|
|
|
|
|
|
|
Noncontrolling interests shareholders’ equity
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
The results of GAC’s operations for the three months ended October 27, 2018 and October 28, 2017 are
summarized in the following table.
|
|
Three Months Ended
|
|
|
|
October 27,
2018
|
|
|
October 28,
2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of services and subcontract costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to EEI
|
|
|
|
|
|
|
|
|
Unsecured lines of credit are summarized in the following table.
|
|
October 27,
2018
|
|
|
July 31,
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Outstanding letters of credit
|
|
$
|
1,482
|
|
|
$
|
1,668
|
|
Remaining amounts available under lines of credit
|
|
|
34,118
|
|
|
|
36,832
|
|
Total approved unsecured lines of credit
|
|
$
|
35,600
|
|
|
$
|
38,500
|
|
The Company’s U.S. operations are supported by two line of credit arrangements:
|
•
|
$19.0 million available line of credit at October 27, 2018; no outstanding cash advances as of October 27, 2018 or July 31, 2018; letters of credit of less
than $0.1 million were outstanding at October 27, 2018 and July 31, 2018; interest rate on cash advances is based on LIBOR plus 275 basis points; and
|
|
•
|
$13.5 million available line of credit at October 27, 2018; no outstanding cash advances as of October 27, 2018 or July 31, 2018; letters of credit of less
than $0.1 million were outstanding at October 27, 2018 and July 31, 2018; interest rate on cash advances is based on LIBOR plus 200 basis points.
|
The Company’s South American operations are supported by two line of credit arrangements:
|
•
|
$2.0 million available line of credit to support operations in Peru; no outstanding cash advances as of October 27, 2018 or July 31, 2018; letters of credit
of $0.8 million and $1.0 million were outstanding at October 27, 2018 and July 31, 2018, respectively; interest rate on cash advances is affirmed or negotiated annually; and
|
|
•
|
$1.1 million available line of credit to support operations in Brazil; no outstanding cash advances as of October 27, 2018 or July 31, 2018, respectively;
letters of credit of $0.6 million were outstanding at October 27, 2018 and July 31, 2018; interest rate on cash advances is based on a Brazilian government economic index.
|
During interim reporting periods, the effective tax rate may be impacted by changes in the mix of forecasted income from the
U.S. and foreign jurisdictions where the Company operates, by changes in tax rates within those jurisdictions, or by significant unusual or infrequent items that could change assumptions used in the calculation of the income tax provision.
The estimated effective tax rate was 57.4% and 38.6% for the three months ended
October 27, 2018
and
October 28, 2017
, respectively.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revised U.S. corporate income tax regulations
including, among other things, lowering U.S. corporate income tax rates (from 34% for the three months ended October 28, 2017 to 21% for the three months ended October 27, 2018) and implementing a territorial tax system. As a result, pretax
income from U.S. operations for the three months ended October 27, 2018 was taxed at that reduced rate. However, the pretax income from the Company’s foreign operations, mainly in South America, are now taxed at a rate higher than the U.S.
statutory rate, which increased the overall effective tax rate. Additionally, with the small amount of worldwide pretax income for the three months ended October 27, 2018, permanent tax adjustments from foreign operations resulted in a
significant increase in the estimated effective tax rate.
The following table provides a reconciliation of the changes in consolidated shareholders’ equity for the
three months ended October 27, 2018.
|
|
Three Months Ended October 27, 2018
|
|
|
|
Class A
Common
Stock
|
|
|
Class B
Common
Stock
|
|
|
Capital in
Excess of Par
Value
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Accumulated
Income (Loss)
|
|
|
Treasury
Stock
|
|
|
Noncontrolling
Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2018
|
|
$
|
30
|
|
|
$
|
14
|
|
|
$
|
17,558
|
|
|
$
|
20,973
|
|
|
$
|
(1,885
|
)
|
|
$
|
(907
|
)
|
|
$
|
664
|
|
Cumulative effect of adoption of ASU 2016-01
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
Balance at July 31, 2018 (Adjusted)
|
|
|
30
|
|
|
|
14
|
|
|
|
17,558
|
|
|
|
20,968
|
|
|
|
(1,880
|
)
|
|
|
(907
|
)
|
|
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(120
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(67
|
)
|
|
|
-
|
|
|
|
(60
|
)
|
Conversion of Class B common stock to Class A common stock
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of stock under stock award plan
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Distributions to noncontrolling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 27, 2018
|
|
$
|
31
|
|
|
$
|
13
|
|
|
$
|
17,595
|
|
|
$
|
20,848
|
|
|
$
|
(1,947
|
)
|
|
$
|
(884
|
)
|
|
$
|
605
|
|
The following table provides a reconciliation of the changes in consolidated shareholders’ equity, as
restated for the GAC Deconsolidation Adjustments and Out of Period Adjustments described in Note 2, for the three months ended October 28, 2017.
|
|
Three Months Ended October 28, 2017
|
|
|
|
Class A
Common
Stock
|
|
|
Class B
Common
Stock
|
|
|
Capital in
Excess of Par
Value
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Accumulated
Income (Loss)
|
|
|
Treasury
Stock
|
|
|
Noncontrolling
Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2017 (Restated)
|
|
$
|
30
|
|
|
$
|
14
|
|
|
$
|
17,570
|
|
|
$
|
23,005
|
|
|
$
|
(1,795
|
)
|
|
$
|
(1,037
|
)
|
|
$
|
947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
588
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
(6
|
)
|
Unrealized investment losses, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
Share-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
47
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Distributions to noncontrolling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 28, 2017 (Restated)
|
|
$
|
30
|
|
|
$
|
14
|
|
|
$
|
17,617
|
|
|
$
|
23,593
|
|
|
$
|
(1,806
|
)
|
|
$
|
(1,037
|
)
|
|
$
|
992
|
|
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 EEI.s 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 paid $0.9 million of cash dividends during the three months ended October 27, 2018 and October 28, 2017 that were
declared and accrued in prior periods.
Stock Repurchase Plan
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
October 27, 2018
, 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 the three months ended
October 27
, 2018 or
October 28
, 2017.
Noncontrolling Interests
The Company discloses noncontrolling interests as a separate component of consolidated shareholders’
equity on the accompanying condensed consolidated balance sheets. Earnings and other comprehensive income (loss) are separately attributed to both the controlling and noncontrolling interests. The Company calculates earnings per share based on
net income (loss) attributable to the Company’s controlling interests.
The Company considers acquiring additional
interests in majority owned subsidiaries when noncontrolling shareholders express their intent to sell their interests. The Company settles and records acquisitions of noncontrolling interests at amounts that approximate fair value. Purchases
of noncontrolling interests are recorded as reductions of shareholders’ equity on the condensed consolidated statements of shareholders’ equity. The Company did not acquire additional interest in any of its majority-owned subsidiaries during
the three months ended
October 27
, 2018 or
October 28
, 2017.
As of July 31, 2018, the Company held an 87.88% ownership interest in Lowham-Walsh Engineering &
Environment Services, LLC (“Lowham”). In November 2018, the Company purchased all remaining noncontrolling interest in Lowham for less than $0.1 million, thereby increasing its ownership interest in Lowham to 100%.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are summarized in the following table.
|
|
October 27,
2018
|
|
|
July 31,
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Unrealized net foreign currency translation losses
|
|
|
|
|
|
|
|
|
Unrealized net investment (losses) gains on available for sale investments
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
The Company calculates basic and diluted earnings per share 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 summarized in Note 10, 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 two classes of stock 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. The computation of earnings per share is included in the following table.
|
|
Three Months Ended
|
|
|
|
October 27,
2018
|
|
|
October 28,
2017
(Restated)
|
|
|
|
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
Net income attributable to Ecology and Environment Inc.
|
|
$
|
(120
|
)
|
|
$
|
588
|
|
|
|
|
---
|
|
|
|
---
|
|
Balance at end of period
|
|
$
|
(120
|
)
|
|
$
|
588
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic and diluted
|
|
|
4,313,930
|
|
|
|
4,301,604
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings per share - basic and diluted
|
|
$
|
---
|
|
|
$
|
---
|
|
Undistributed (losses) earnings per share - basic and diluted
|
|
|
(0.03
|
)
|
|
|
0.14
|
|
Net income per common share - basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.14
|
|
Management generally assesses operating performance and makes strategic decisions based on the geographic
regions in which the Company does business. The Company reports separate operating segment information for its U.S. and South American operations. Gross revenue, net income (loss) attributable to EEI and total assets by operating segment are
summarized in the following tables.
|
|
Three Months Ended
|
|
|
|
October 27,
2018
|
|
|
October 28,
2017
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Gross revenue:
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
18,011
|
|
|
$
|
20,835
|
|
South American operations
|
|
|
3,741
|
|
|
|
5,270
|
|
Total
|
|
$
|
21,752
|
|
|
$
|
26,105
|
|
Net income (loss) attributable to EEI:
|
|
|
|
|
|
|
U.S. operations
(a)
|
|
$
|
(107
|
)
|
|
$
|
306
|
|
South American operations
(b)
|
|
|
(13
|
)
|
|
|
282
|
|
Total
|
|
$
|
(120
|
)
|
|
$
|
588
|
|
|
(a)
|
Includes depreciation and amortization expense of $0.2 million for the three months ended October 27, 2018 and October 28, 2017.
|
|
(b)
|
Includes depreciation and amortization expense of $0.1 million for the three months ended October 27, 2018 and October 28, 2017.
|
|
|
October 27,
2018
|
|
|
July 31,
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South American operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue from U.S. federal government contracts was $3.1 million and $4.0 million for the quarters
ended October 27, 2018 and October 28, 2017, respectively.
13.
|
Commitments and Contingencies
|
Legal Proceedings
From time to time, the Company is a named defendant in legal actions arising out of the normal course of
business. The Company is not a party to any pending legal proceeding, the resolution of which the management believes will have a material adverse effect on the Company’s results of operations, financial condition or cash flows, or to any other
pending legal proceedings other than ordinary, routine litigation incidental to its business. The Company maintains liability insurance against risks arising out of the normal course of business.
On February 4, 2011, the Chico Mendes Institute of Biodiversity Conservation of Brazil (the “Institute”)
issued a Notice of Infraction to ecology and environment do brasil Ltda. (“E&E Brazil”), a majority-owned consolidated subsidiary of EEI. The Notice of Infraction concerned the taking and collecting of wild animal specimens without
authorization by the competent authority and imposed a fine of approximately 0.5 million Reais against E&E Brazil. The Institute also filed Notices of Infraction against four employees of E&E Brazil alleging the same claims and imposed
fines against those individuals that, in the aggregate, were equal to the fine imposed against E&E Brazil. No claim has been made against EEI.
E&E Brazil has filed court claims appealing the administrative decisions of the Institute for E&E
Brazil’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 Brazil 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 Brazil are pending agency determination. At October 27, 2018, the Company recorded a reserve of approximately $0.4 million
in other accrued liabilities related to these claims.
Staff Reduction Programs
In December 2018, the Company began to notify affected employees of a voluntary retirement program. In February 2019, the
Company began to notify affected employees of an involuntary separation program. These programs (collectively, the “Staff Reduction Programs”) are being implemented in connection with a corporate restructuring plan. Company management
anticipates that the combined effect of the Staff Reduction Programs and other expense reduction initiatives will result in annual pre-tax cost savings of greater than $6.0 million. These activities are expected to result in pre-tax charges and
cash expenditures of approximately $1.0 million during the fiscal year ending July 31, 2019, consisting primarily of employee severance and termination benefits. These initiatives were substantially completed by April 30, 2019 and are expected
to be completed by July 31, 2019.
Sale of Majority Owned Subsidiary
In February 2019, the Company consummated the sale of its majority interest in a consolidated subsidiary located in Ecuador. The cash
proceeds and loss from the sale to noncontrolling shareholders, both recorded in February 2019, were less than $0.1 million and $0.1 million, respectively. The sold subsidiary did not represent a material portion of the Company’s consolidated
assets, shareholders’ equity, gross revenue or net income attributable to EEI for any previously reported period, and management does not expect that the sale of this subsidiary will have a material impact on the Company’s results of operations,
financial position or cash flows for future reporting periods.