UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. -20549
FORM 10-Q
☑ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended January 27, 201826, 2019
☐
☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 1-9065
ECOLOGY AND ENVIRONMENT INC.
(Exact name of registrant as specified in its charter)
New York | | 16-0971022 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification Number) |
| | |
368 Pleasant View Drive | | |
Lancaster, New York | | 14086 |
(Address of principal executive offices) | | (Zip code) |
(716) 684-8060
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock par value $.01 per share | EEI | Nasdaq Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2). (Check one):
| Large accelerated filer | ☐ | | Accelerated filer | ☐ |
| Non-accelerated filer (Do not check if a smaller reporting company) | ☐ | | Smaller reporting company | ☑ |
| |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
At February 28, 2018, 3,008,829April 30, 2019, 3,110,130 shares of Registrant's Class A Common Stock (par value $.01) and 1,292,7751,205,005 shares of Registrant’s Class B Common Stock (par value $.01) were outstanding.
EXPLANATORY NOTE REGARDING RESTATEMENTS
As previously disclosed in the Current Report on Form 8-K filed by Ecology and Environment Inc. (“EEI” or the “Company”) with the Securities and Exchange Commission (the “SEC”) on December 12, 2018, the Audit Committee of the Board of Directors (the “Audit Committee”) concluded that the Company’s consolidated financial statements and related reports filed with the SEC for periods ended prior to July 31, 2018 should 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 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.
The financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2018 included a restated consolidated balance sheet at July 31, 2017, and restated consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for the fiscal years ended July 31, 2017 and 2016. This Quarterly Report on Form 10-Q includes restated unaudited condensed consolidated statements of operations, comprehensive income and cash flows for the three and six months ended January 27, 2018. In addition, tables related to revenues, operating expenses and income taxes for the three and six months ended January 27, 2018 included in Item 2 of this Quarterly Report on Form 10-Q have also been restated.
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.” 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”). Specific impacts of the GAC Deconsolidation Adjustments and Out of Period Adjustments on various financial statement line items are summarized in Note 2 of the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
Internal Controls and Disclosure Controls Considerations
In connection with control deficiencies related to the errors outlined above, and other control deficiencies identified by management, our Acting Principal Executive Officer (the “Acting PEO”) and Acting Chief Financial Officer (the “Acting CFO”) determined that there were deficiencies in our internal control over financial reporting that, in the aggregate, represented material weaknesses at July 31, 2018. Accordingly, our Acting PEO and Acting CFO have concluded that the Company’s disclosure controls and procedures and internal control over financial reporting were not effective at July 31, 2018. Refer to Part I, Item 4 of this Quarterly Report on Form 10-Q for a description of the control deficiencies identified by management and management’s plan to remediate those deficiencies.
PART I – FINANCIAL INFORMATION
Item 1. | Financial Statements |
Ecology and Environment Inc.
Condensed Consolidated Balance Sheets
Unaudited
(amounts in thousands, except share data)
| | Balance at | | | January 26, 2019 | | | July 31, 2018 | |
| | January 27, 2018 | | | July 31, 2017 | | | | | | | |
Assets | | | | | | | | | | | | |
| | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash, cash equivalents and restricted cash | | $ | 17,707 | | | $ | 13,343 | | |
Cash and cash equivalents | | | $ | 11,017 | | | $ | 13,496 | |
Investment securities available for sale | | | 1,486 | | | | 1,498 | | | | 1,512 | | | | 1,497 | |
Contract receivables, net of allowance for doubtful accounts and contract adjustments of $1,957 and $2,125, respectively | | | 28,365 | | | | 35,107 | | |
Contract receivables, net | | | | 25,946 | | | | 25,615 | |
Income tax receivable | | | 750 | | | | 1,293 | | | | 1,627 | | | | 1,230 | |
Other current assets | | | 2,427 | | | | 2,119 | | | | 2,539 | | | | 1,752 | |
| | | | | | | | | | | | | | | | |
Total current assets | | | 50,735 | | | | 53,360 | | | | 42,641 | | | | 43,590 | |
| | | | | | | | | | | | | | | | |
Property, buildings and equipment, net of accumulated depreciation of $17,500 and $16,994, respectively | | | 4,361 | | | | 4,428 | | |
Property, buildings and equipment, net of accumulated depreciation of $17,250 and $16,799, respectively | | | | 3,589 | | | | 3,870 | |
Deferred income taxes | | | 733 | | | | 1,203 | | | | 788 | | | | 789 | |
Equity method investment | | | | 2,289 | | | | 2,058 | |
Other assets | | | 1,729 | | | | 1,786 | | | | 2,222 | | | | 2,522 | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 57,558 | | | $ | 60,777 | | | $ | 51,529 | | | $ | 52,829 | |
| | | | | | | | | | | | | | | | |
Liabilities and Shareholders' Equity | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Current liabilities: | | | | �� | | | | | | | | | | | | |
Accounts payable | | $ | 5,245 | | | $ | 8,073 | | | $ | 6,108 | | | $ | 5,635 | |
Lines of credit | | | 435 | | | | 581 | | | | 222 | | | | - | |
Accrued payroll costs | | | 5,727 | | | | 6,338 | | | | 4,915 | | | | 6,066 | |
Current portion of long-term debt and capital lease obligations | | | 61 | | | | 382 | | | | 45 | | | | 54 | |
Billings in excess of revenue | | | 3,363 | | | | 2,850 | | |
Customer deposits
| | | | 2,851 | | | | 3,191 | |
Other accrued liabilities | | | 2,488 | | | | 2,645 | | | | 1,435 | | | | 1,382 | |
| | | | | | | | | | | | | | | | |
Total current liabilities | | | 17,319 | | | | 20,869 | | | | 15,576 | | | | 16,328 | |
| | | | | | | | | | | | | | | | |
Income taxes payable | | | 329 | | | | 31 | | | | - | | | | - | |
Deferred income taxes | | | 3 | | | | 3 | | | | - | | | | - | |
Long-term debt and capital lease obligations | | | 61 | | | | 66 | | | | 34 | | | | 54 | |
Commitments and contingencies (Note 15) | | | - | | | | - | | |
Commitments and contingencies (Note 13) | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Shareholders' equity: | | | | | | | | | | | | | | | | |
Preferred stock, par value $.01 per share (2,000,000 shares authorized; no shares issued) | | | - | | | | - | | | | - | | | | - | |
Class A common stock, par value $.01 per share (6,000,000 shares authorized; 3,036,149 and 3,035,778 shares issued) | | | 30 | | | | 30 | | |
Class B common stock, par value $.01 per share; (10,000,000 shares authorized; 1,357,576 and 1,357,947 shares issued) | | | 14 | | | | 14 | | |
Class A common stock, par value $.01 per share (6,000,000 shares authorized; 3,102,654 and 3,041,911 shares issued, respectively) | | | | 31 | | | | 30 | |
Class B common stock, par value $.01 per share; (10,000,000 shares authorized; 1,291,071 and 1,351,814 shares issued, respectively) | | | | 13 | | | | 14 | |
Capital in excess of par value | | | 17,608 | | | | 17,608 | | | | 17,629 | | | | 17,558 | |
Retained earnings | | | 23,274 | | | | 23,509 | | | | 20,539 | | | | 20,973 | |
Accumulated other comprehensive loss | | | (1,946 | ) | | | (2,018 | ) | | | (1,893 | ) | | | (1,885 | ) |
Treasury stock, at cost (Class A common: 27,320 shares; Class B common: 64,801 shares) | | | (1,037 | ) | | | (1,037 | ) | |
Treasury stock, at cost (Class A common: 13,789 and 15,789 shares, respectively; Class B common: 64,801 shares at both dates) | | | | (884 | ) | | | (907 | ) |
| | | | | | | | | | | | | | | | |
Total Ecology and Environment, Inc. shareholders' equity | | | 37,943 | | | | 38,106 | | | | 35,435 | | | | 35,783 | |
Noncontrolling interests | | | 1,903 | | | | 1,702 | | | | 484 | | | | 664 | |
| | | | | | | | | | | | | | | | |
Total shareholders' equity | | | 39,846 | | | | 39,808 | | | | 35,919 | | | | 36,447 | |
| | | | | | | | | | | | | | | | |
Total liabilities and shareholders' equity | | $ | 57,558 | | | $ | 60,777 | | | $ | 51,529 | | | $ | 52,829 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Ecology and Environment Inc.
Condensed Consolidated Statements of Operations
Unaudited
(amounts in thousands, except share data)
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Six Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | January 27, 2018 | | | January 28, 2017 | | | January 26, 2019 | | | January 27, 2018 (Restated) | | | January 26, 2019 | | | January 27, 2018 (Restated) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenue, net | | $ | 25,083 | | | $ | 24,726 | | | $ | 52,165 | | | $ | 50,041 | | |
Gross revenue | | | $ | 20,252 | | | $ | 21,289 | | | $ | 42,004 | | | $ | 47,394 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of professional services and other direct operating expenses | | | 9,078 | | | | 9,030 | | | | 18,559 | | | | 18,440 | | | | 7,774 | | | | 7,966 | | | | 15,908 | | | | 16,584 | |
Subcontract costs | | | 5,769 | | | | 5,347 | | | | 11,498 | | | | 9,358 | | | | 3,619 | | | | 4,429 | | | | 8,193 | | | | 10,778 | |
Administrative and indirect operating expenses | | | 7,290 | | | | 7,478 | | | | 14,748 | | | | 14,860 | | |
Marketing and related costs | | | 2,938 | | | | 2,344 | | | | 5,989 | | | | 5,209 | | |
Selling, general and administrative expenses | | | | 9,452 | | | | 9,483 | | | | 18,652 | | | | 19,265 | |
Depreciation and amortization | | | 268 | | | | 282 | | | | 537 | | | | 516 | | | | 264 | | | | 259 | | | | 541 | | | | 519 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) income from operations | | | (260 | ) | | | 245 | | | | 834 | | | | 1,658 | | | | (857 | ) | | | (848 | ) | | | (1,290 | ) | | | 248 | |
Net interest expense | | | (9 | ) | | | (14 | ) | | | (13 | ) | | | (12 | ) | |
Net foreign exchange loss | | | (29 | ) | | | (60 | ) | | | (26 | ) | | | (72 | ) | |
| | | | | | | | | | | | | | | | | |
Income from equity method investment | | | | 171 | | | | 221 | | | | 231 | | | | 239 | |
Net interest income (expense) | | | | 45 | | | | (4 | ) | | | 98 | | | | (2 | ) |
Net foreign exchange gain (loss) | | | | (15 | ) | | | (25 | ) | | | 8 | | | | (20 | ) |
Other income (expense) | | | 12 | | | | (6 | ) | | | 11 | | | | 10 | | | | (19 | ) | | | 12 | | | | 9 | | | | 12 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) income before income tax provision | | | (286 | ) | | | 165 | | | | 806 | | | | 1,584 | | | | (675 | ) | | | (644 | ) | | | (944 | ) | | | 477 | |
Income tax provision | | | 311 | | | | 504 | | | | 755 | | | | 1,073 | | |
Income tax (benefit) provision | | | | (365 | ) | | | (116 | ) | | | (519 | ) | | | 317 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | | (597 | ) | | | (339 | ) | | | 51 | | | | 511 | | | | (310 | ) | | | (528 | ) | | | (425 | ) | | | 160 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (income) loss attributable to noncontrolling interests | | | (171 | ) | | | 21 | | | | (286 | ) | | | 59 | | |
Net loss (income) attributable to noncontrolling interests | | | | 1 | | | | 9 | | | | (4 | ) | | | (91 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income attributable to Ecology and Environment, Inc. | | $ | (768 | ) | | $ | (318 | ) | | $ | (235 | ) | | $ | 570 | | |
Net (loss) income attributable to Ecology and Environment Inc. | | | $ | (309 | ) | | $ | (519 | ) | | $ | (429 | ) | | $ | 69 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income per common share: basic and diluted | | $ | (0.18 | ) | | $ | (0.07 | ) | | $ | (0.05 | ) | | $ | 0.13 | | | $ | (0.07 | ) | | $ | (0.12 | ) | | $ | (0.10 | ) | | $ | 0.02 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding: basic and diluted | | | 4,301,604 | | | | 4,294,102 | | | | 4,301,604 | | | | 4,293,417 | | | | 4,315,135 | | | | 4,301,604 | | | | 4,314,543 | | | | 4,301,604 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Ecology and Environment Inc.
Condensed Consolidated Statements of Comprehensive Income
Unaudited
(amounts in thousands)
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Six Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | January 27, 2018 | | | January 28, 2017 | | | January 26, 2019 | | | January 27, 2018 (Restated) | | | January 26, 2019 | | | January 27, 2018 (Restated) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income including noncontrolling interests | | $ | (597 | ) | | $ | (339 | ) | | $ | 51 | | | $ | 511 | | | $ | (310 | ) | | $ | (528 | ) | | $ | (425 | ) | | $ | 160 | |
Foreign currency translation adjustments | | | 166 | | | | 70 | | | | 195 | | | | 124 | | | | 47 | | | | 51 | | | | (80 | ) | | | 37 | |
Unrealized investment losses, net | | | (13 | ) | | | (20 | ) | | | (16 | ) | | | (31 | ) | | | - | | | | (13 | ) | | | - | | | | (16 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive (loss) income | | | (444 | ) | | | (289 | ) | | | 230 | | | | 604 | | | | (263 | ) | | | (490 | ) | | | (505 | ) | | | 181 | |
| | | | | | | | | | | | | | | | | |
Comprehensive (income) loss attributable to noncontrolling interests | | | (264 | ) | | | 4 | | | | (393 | ) | | | (5 | ) | | | 8 | | | | (29 | ) | | | 63 | | | | (123 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive (loss) income attributable to Ecology and Environment, Inc. | | $ | (708 | ) | | $ | (285 | ) | | $ | (163 | ) | | $ | 599 | | | $ | (255 | ) | | $ | (519 | ) | | $ | (442 | ) | | $ | 58 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Ecology and Environment Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited
(amounts in thousands)
| | Six Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | |
Cash flows from operating activities: | | | | | | |
Net income | | $ | 51 | | | $ | 511 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 537 | | | | 516 | |
Deferred income tax benefit | | | 436 | | | | 2,351 | |
Tax impact of share-based compensation | | | - | | | | (6 | ) |
Gain on sale of assets and investment securities | | | (1 | ) | | | (3 | ) |
Net recovery of contract adjustments and doubtful accounts | | | (35 | ) | | | (1,154 | ) |
Net bad debt (recovery) expense | | | (130 | ) | | | 167 | |
Changes in: | | | | | | | | |
- contract receivables | | | 7,248 | | | | 3,108 | |
- other current assets | | | (300 | ) | | | (392 | ) |
- income tax receivable | | | 543 | | | | (2,098 | ) |
- other non-current assets | | | 60 | | | | (25 | ) |
- accounts payable | | | (1,996 | ) | | | (149 | ) |
- accrued payroll costs | | | (640 | ) | | | (971 | ) |
- income taxes payable | | | 294 | | | | (3 | ) |
- billings in excess of revenue | | | 506 | | | | 942 | |
- other accrued liabilities | | | (250 | ) | | | 352 | |
Net cash provided by operating activities | | | 6,323 | | | | 3,146 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Proceeds from sale of subsidiaries | | | - | | | | 75 | |
Purchase of property, buildings and equipment | | | (425 | ) | | | (183 | ) |
Proceeds from sale of equipment | | | 1 | | | | 9 | |
Purchase of investment securities | | | 7 | | | | (15 | ) |
Net cash used in investing activities | | | (417 | ) | | | (114 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Dividends paid | | | (860 | ) | | | (861 | ) |
Repayment of debt | | | (358 | ) | | | (159 | ) |
Net (repayments) borrowings under lines of credit | | | (152 | ) | | | 286 | |
Distributions to noncontrolling interests | | | (192 | ) | | | (673 | ) |
Net cash used in financing activities | | | (1,562 | ) | | | (1,407 | ) |
| | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | 20 | | | | 74 | |
| | | | | | | | |
Net increase in cash, cash equivalents and restricted cash | | | 4,364 | | | | 1,699 | |
Cash, cash equivalents and restricted cash at beginning of period | | | 13,343 | | | | 10,161 | |
| | | | | | | | |
Cash, cash equivalents and restricted cash at end of period | | $ | 17,707 | | | $ | 11,860 | |
| | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest | | $ | 42 | | | $ | 77 | |
Income taxes | | | 78 | | | | 315 | |
Supplemental disclosure of non-cash items: | | | | | | | | |
Dividends declared and not paid | | | - | | | | 859 | |
Proceeds from capital lease obligations | | | 33 | | | | - | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Ecology and Environment, Inc.
Condensed Consolidated Statements of Shareholders’ Equity
(amounts in thousands, except share data)
| | Class A Common Stock Shares | | | Class A Common Stock Amount | | | Class B Common Stock Shares | | | Class B Common Stock Amount | | | Capital in Excess of Par Value | | | Retained Earnings | | | Accumulat ed Other Comprehe nsive Income (Loss) | | | Treasury Stock Shares | | | Treasury Stock Amount | | | Noncontrol ling Interest | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at July 31, 2016 (audited) | | | 3,035,778 | | | $ | 30 | | | | 1,357,947 | | | $ | 14 | | | $ | 16,606 | | | $ | 22,237 | | | $ | (2,143 | ) | | | 104,073 | | | $ | (1,172 | ) | | $ | 2,333 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,015 | | | | - | | | | - | | | | - | | | | (62 | ) |
Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 143 | | | | - | | | | - | | | | 87 | |
Cash dividends declared ($0.40 per share) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,719 | ) | | | - | | | | - | | | | - | | | | - | |
Unrealized investment losses, net | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (18 | ) | | | - | | | | - | | | | - | |
Issuance of stock under stock award plan | | | - | | | | - | | | | - | | | | - | | | | 4 | | | | - | | | | - | | | | (11,952 | ) | | | 135 | | | | - | |
Tax impact of share based compensation | | | - | | | | - | | | | - | | | | - | | | | (6 | ) | | | - | | | | - | | | | - | | | | - | | | | - | |
Tax impact of noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | (24 | ) | | | - | | | | - | | | | - | | | | 24 | |
Distributions to noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (680 | ) |
Adjustment to deferred income taxes related to acquisition of noncontrolling interests in prior years | | | - | | | | - | | | | - | | | | - | | | | 1,004 | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at July 31, 2017 (audited) | | | 3,035,778 | | | $ | 30 | | | | 1,357,947 | | | $ | 14 | | | $ | 17,608 | | | $ | 23,509 | | | $ | (2,018 | ) | | | 92,121 | | | $ | (1,037 | ) | | $ | 1,702 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | | - | | | | - | | | | - | | | | - | | | | - | | | | (235 | ) | | | - | | | | - | | | | - | | | | 286 | |
Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 88 | | | | - | | | | - | | | | 107 | |
Unrealized investment losses, net | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (16 | ) | | | - | | | | - | | | | - | |
Conversion of Class B common stock to Class A common stock | | | 371 | | | | - | | | | (371 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Distributions to noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (192 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 27, 2018 (unaudited) | | | 3,036,149 | | | $ | 30 | | | | 1,357,576 | | | $ | 14 | | | $ | 17,608 | | | $ | 23,274 | | | $ | (1,946 | ) | | | 92,121 | | | $ | (1,037 | ) | | $ | 1,903 | |
| | Six Months Ended | |
| | January 26, 2019 | | | January 27, 2018 (Restated) | |
Cash flows from operating activities: | | | | | | |
Net (loss) income | | $ | (425 | ) | | $ | 160 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 541 | | | | 519 | |
Provision for deferred income taxes | | | (6 | ) | | | (92 | ) |
Share based compensation expense | | | 127 | | | | 70 | |
Gain on sale of assets and investment securities | | | (2 | ) | | | (1 | ) |
Net provision for (recovery of) contract adjustments | | | 137 | | | | (35 | ) |
Net bad debt (recovery) expense | | | (187 | ) | | | (98 | ) |
Changes in: | | | | | | | | |
- contract receivables | | | (247 | ) | | | 6,823 | |
- other current assets | | | (916 | ) | | | (150 | ) |
- income tax receivable | | | (381 | ) | | | 668 | |
- equity method investment | | | (231 | ) | | | (239 | ) |
- other non-current assets | | | 277 | | | | 36 | |
- accounts payable | | | 1,322 | | | | (1,485 | ) |
- accrued payroll costs | | | (1,162 | ) | | | (740 | ) |
- income taxes payable | | | - | | | | 302 | |
- customer deposits | | | (345 | ) | | | 558 | |
- other accrued liabilities | | | 43 | | | | (216 | ) |
Net cash (used in) provided by operating activities | | | (1,455 | ) | | | 6,080 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Purchase of property, buildings and equipment | | | (259 | ) | | | (415 | ) |
Proceeds from sale of equipment | | | 2 | | | | 1 | |
(Purchase) sale of investment securities | | | (16 | ) | | | 7 | |
Net cash used in investing activities | | | (273 | ) | | | (407 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Dividends paid | | | (863 | ) | | | (860 | ) |
Repayment of debt | | | (29 | ) | | | (358 | ) |
Net borrowings under lines of credit | | | 210 | | | | 66 | |
Distributions to noncontrolling interests | | | (116 | ) | | | (192 | ) |
Net cash used in financing activities | | | (798 | ) | | | (1,344 | ) |
| | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | 49 | | | | 5 | |
| | | | | | | | |
Net (decrease) increase in cash, cash equivalents and restricted cash | | | (2,477 | ) | | | 4,334 | |
Cash, cash equivalents and restricted cash at beginning of period | | | 13,746 | | | | 13,135 | |
| | | | | | | | |
Cash, cash equivalents and restricted cash at end of period | | $ | 11,269 | | | $ | 17,469 | |
| | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest | | $ | 8 | | | $ | 31 | |
Income taxes | | | 300 | | | | 12 | |
Supplemental disclosure of non-cash items: | | | | | | | | |
Proceeds from capital lease obligations | | | - | | | | 33 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Ecology and Environment Inc.
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. Together withDuring the six months ended January 26, 2019, EEI and its subsidiaries (collectively, the “Company”), EEI has direct included six active wholly-owned and indirect ownership in 8 active wholly owned and majority ownedmajority-owned operating subsidiaries located in 5 countries.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 more than 80numerous scientific, engineering, health, and social disciplines working together in multidisciplinary teams to provide innovative environmental solutions. The Company has completed more than 50,000 projects for a wide varietymajority of clientsemployees hold bachelor’s and/or advanced degrees in more than 120 countries, providing environmental solutions in nearly every ecosystem on the planet. 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 included herein, without audit, 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, 20172018 filed with the Securities and Exchange CommissionSEC (the “2017“2018 Annual Report”). TheOther 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 20172018 Annual Report were also followed for this interimquarterly report. The condensed consolidated results of operations for the three and six months ended January 27, 201826, 2019 are not necessarily indicative of the results for any subsequent period or the entire fiscal year ending July 31, 2018.2019.
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 and six months ended January 27, 2018.
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 three months ended January 27, 2018, the GAC Deconsolidation Adjustments resulted in decreases of $3.2 million and $0.3 million in consolidated gross revenue and income before income tax provision, respectively, and had no impact on net income attributable to EEI. For the six months ended January 27, 2018, the GAC Deconsolidation Adjustments resulted in decreases of $5.3 million and $0.4 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 and six months 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 those reporting periods (the “Out of Period Adjustments”). For the three months ended January 27, 2018, the Out of Period Adjustments resulted in decreases of $0.6 million and less than $0.1 million of consolidated gross revenue and income before income tax provision, respectively, and an increase of $0.2 million of net income attributable to EEI. For the six months ended January 27, 2018, the Out of Period Adjustments resulted in increases of $0.5 million, less than $0.1 million and $0.3 million of consolidated gross revenue, income before income tax provision and net income attributable to EEI, respectively.
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 quarterly period ended January 26, 2018, filed with the SEC on March 13, 2018.
Ecology and Environment Inc.
Condensed Consolidated Statements of Operations
(amounts in thousands, except share data)
| | Three Months Ended January 27, 2018 | |
| | As Previously Reported | | | GAC Deconsolidation Adjustments | | | Out of Period Adjustments | | | Restated | |
| | | | | | | | | | | | |
Gross revenue | | $ | 25,083 | | | $ | (3,154 | ) | | $ | (640 | ) | | $ | 21,289 | |
| | | | | | | | | | | | | | | | |
Direct cost of professional services and other direct operating expenses | | | 9,078 | | | | (1,112 | ) | | | - | | | | 7,966 | |
Subcontract costs | | | 5,769 | | | | (731 | ) | | | (609 | ) | | | 4,429 | |
Selling, general and administrative expenses | | | 10,228 | | | | (745 | ) | | | - | | | | 9,483 | |
Depreciation and amortization | | | 268 | | | | (9 | ) | | | - | | | | 259 | |
| | | | | | | | | | | | | | | | |
Income (loss) from operations | | | (260 | ) | | | (557 | ) | | | (31 | ) | | | (848 | ) |
| | | | | | | | | | | | | | | | |
Income from equity method investment | | | - | | | | 221 | | | | - | | | | 221 | |
Net interest income (expense) | | | (9 | ) | | | 5 | | | | - | | | | (4 | ) |
Net foreign exchange (loss) gain | | | (29 | ) | | | 4 | | | | - | | | | (25 | ) |
Other income (expense) | | | 12 | | | | - | | | | - | | | | 12 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income tax provision | | | (286 | ) | | | (327 | ) | | | (31 | ) | | | (644 | ) |
Income tax provision | | | 311 | | | | (148 | ) | | | (279 | ) | | | (116 | ) |
| | | | | | | | | | | | | | | | |
Net (loss) income | | | (597 | ) | | | (179 | ) | | | 248 | | | | (528 | ) |
| | | | | | | | | | | | | | | | |
(Income) loss attributable to noncontrolling interests | | | (171 | ) | | | 179 | | | | 1 | | | | 9 | |
| | | | | | | | | | | | | | | | |
Net (loss) income attributable to Ecology and Environment Inc. | | $ | (768 | ) | | $ | - | | | $ | 249 | | | $ | (519 | ) |
| | | | | | | | | | | | | | | | |
Net (loss) income per common share: basic and diluted | | $ | (0.18 | ) | | | | | | | | | | $ | (0.12 | ) |
| | | | | | | | | | | | | | | | |
Weighted average common shares outatanding: basic and diluted | | | 4,301,604 | | | | | | | | | | | | 4,301,604 | |
| | Six Months Ended January 27, 2018 | |
| | As Previously Reported | | | GAC Deconsolidation Adjustments | | | Out of Period Adjustments | | | Restated | |
| | | | | | | | | | | | |
Gross revenue | | $ | 52,165 | | | $ | (5,266 | ) | | $ | 495 | | | $ | 47,394 | |
| | | | | | | | | | | | | | | | |
Direct cost of professional services and other direct operating expenses | | | 18,559 | | | | (1,975 | )
| | | - | | | | 16,584 | |
Subcontract costs | | | 11,498 | | | | (1,190 | )
| | | 470 | | | | 10,778 | |
Selling, general and administrative expenses | | | 20,737 | | | | (1,472 | )
| | | - | | | | 19,265 | |
Depreciation and amortization | | | 537 | | | | (18 | )
| | | - | | | | 519 | |
| | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 834 | | | | (611 | ) | | | 25 | | | | 248 | |
| | | | | | | | | | | | | | | | |
Income from equity method investment | | | - | | | | 239 | | | | - | | | | 239 | |
Net interest income (expense) | | | (14 | ) | | | 12 | | | | - | | | | (2 | ) |
Net foreign exchange (loss) gain | | | (26 | ) | | | 6 | | | | - | | | | (20 | ) |
Other income (expense) | | | 12 | | | | - | | | | - | | | | 12 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income tax provision | | | 806 | | | | (354 | ) | | | 25 | | | | 477 | |
Income tax provision | | | 755 | | | | (160 | ) | | | (278 | ) | | | 317 | |
| | | | | | | | | | | | | | | | |
Net (loss) income | | | 51 | | | | (194 | ) | | | 303 | | | | 160 | |
| | | | | | | | | | | | | | | | |
(Income) loss attributable to noncontrolling interests | | | (286 | ) | | | 194 | | | | 1 | | | | (91 | ) |
| | | | | | | | | | | | | | | | |
Net (loss) income attributable to Ecology and Environment Inc. | | $ | (235 | ) | | $ | - | | | $ | 304 | | | $ | 69 | |
| | | | | | | | | | | | | | | | |
Net (loss) income per common share: basic and diluted | | $ | (0.05 | ) | | | | | | | | | | $ | 0.02 | |
| | | | | | | | | | | | | | | | |
Weighted average common shares outatanding: basic and diluted | | | 4,301,604 | | | | | | | | | | | | 4,301,604 | |
Ecology and Environment Inc.
Condensed Consolidated Statements of Comprehensive Income
(amounts in thousands)
| | Three Months Ended January 27, 2018 | |
| | As Previously Reported | | | GAC Deconsolidation Adjustments | | | Out of Period Adjustments | | | Restated | |
| | | | | | | | | | | | |
Net income including noncontrolling interests | | $ | (597 | ) | | $ | (179 | ) | | $ | 248 | | | $ | (528 | ) |
Foreign currency translation adjustments | | | 166 | | | | (115 | ) | | | - | | | | 51 | |
Unrealized investment (losses) gains, net | | | (13 | ) | | | - | | | | - | | | | (13 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive income | | | (444 | ) | | | (294 | ) | | | 248 | | | | (490 | ) |
Comprehensive (income) loss attributable to noncontrolling interests | | | (264 | ) | | | 235 | | | | - | | | | (29 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive income attributable to EEI | | $ | (708 | ) | | $ | (59 | ) | | $ | 248 | | | $ | (519 | ) |
| | Six Months Ended January 27, 2018 | |
| | As Previously Reported | | | GAC Deconsolidation Adjustments | | | Out of Period Adjustments | | | Restated | |
| | | | | | | | | | | | |
Net income including noncontrolling interests | | $ | 51 | | | $ | (194 | ) | | $ | 303 | | | $ | 160 | |
Foreign currency translation adjustments | | | 195 | | | | (158 | ) | | | - | | | | 37 | |
Unrealized investment (losses) gains, net | | | (16 | ) | | | - | | | | - | | | | (16 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive income | | | 230 | | | | (352 | ) | | | 303 | | | | 181 | |
Comprehensive (income) loss attributable to noncontrolling interests | | | (393 | ) | | | 270 | | | | - | | | | (123 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive income attributable to EEI | | $ | (163 | ) | | $ | (82 | ) | | $ | 303 | | | $ | 58 | |
Ecology and Environment Inc.
Condensed Consolidated Statement of Cash Flows
(amounts in thousands)
| | Six Months Ended January 27, 2018 | |
| | As Previously Reported | | | Impact of GAC Deconsolidation | | | Other Adjustments | | | Restated | |
| | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 51 | | | $ | (194 | ) | | $ | 303 | | | $ | 160 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 537 | | | | (18 | ) | | | - | | | | 519 | |
Provision for deferred income taxes | | | 436 | | | | (266 | ) | | | (262 | ) | | | (92 | ) |
Share based compensation expense | | | - | | | | - | | | | 70 | | | | 70 | |
(Gain) loss on sale of assets and investment securities | | | (1 | ) | | | - | | | | - | | | | (1 | ) |
Net recovery of contract adjustments | | | (35 | ) | | | - | | | | - | | | | (35 | ) |
Net bad debt (recovery) expense | | | (130 | ) | | | 32 | | | | - | | | | (98 | ) |
Changes in: | | | | | | | | | | | | | | | | |
- contract receivables | | | 7,248 | | | | 261 | | | | (686 | ) | | | 6,823 | |
- other current assets | | | (300 | ) | | | 5 | | | | 145 | | | | (150 | ) |
- income tax receivable | | | 543 | | | | 142 | | | | (17 | ) | | | 668 | |
- equity method investment | | | - | | | | (239 | ) | | | - | | | | (239 | ) |
- other non-current assets | | | 60 | | | | (13 | ) | | | (11 | ) | | | 36 | |
- accounts payable | | | (1,996 | ) | | | 69 | | | | 442 | | | | (1,485 | ) |
- accrued payroll costs | | | (640 | ) | | | (100 | ) | | | - | | | | (740 | ) |
- income taxes payable | | | 294 | | | | 8 | | | | - | | | | 302 | |
- customer deposits | | | 506 | | | | 52 | | | | - | | | | 558 | |
- other accrued liabilities | | | (250 | ) | | | 34 | | | | - | | | | (216 | ) |
Net cash provided by (used in) operating activities | | | 6,323 | | | | (227 | ) | | | (16 | ) | | | 6,080 | |
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Purchase of property, building and equipment | | | (425 | ) | | | 10 | | | | - | | | | (415 | ) |
Proceeds from sale of building and equipment | | | 1 | | | | - | | | | - | | | | 1 | |
Purchase of investment securities | | | 7 | | | | - | | | | - | | | | 7 | |
Net cash (used in) provided by investing activities | | | (417 | ) | | | 10 | | | | - | | | | (407 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Dividends paid | | | (860 | ) | | | - | | | | - | | | | (860 | ) |
Repayment of debt | | | (358 | ) | | | - | | | | - | | | | (358 | ) |
Net borrowings (repayment) of lines of credit | | | (152 | ) | | | 218 | | | | - | | | | 66 | |
Distributions to noncontrolling interests | | | (192 | ) | | | - | | | | - | | | | (192 | ) |
Net cash (used in) provided by financing activities | | | (1,562 | ) | | | 218 | | | | - | | | | (1,344 | ) |
| | | | | | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | 20 | | | | (24 | ) | | | 9 | | | | 5 | |
| | | | | | | | | | | | | | | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | | 4,364 | | | | (23 | ) | | | (7 | ) | | | 4,334 | |
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 | | $ | 17,707 | | | $ | (231 | ) | | $ | (7 | ) | | $ | 17,469 | |
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.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 Six Months Ended January 27, 2018
The Company did not adopt any ASUs during the six months ended January 27, 2018 that had, or are expected to have, a material impact on its consolidated financial position or results of operations.
Accounting Pronouncements Not Yet Adopted as of January 27, 201826, 2019
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09, isas amended by subsequent ASUs that amended and clarified the result of a joint project of FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for useguidance in the U.S and internationally. ASU 2014-09, supersedesforms the basis for FASB ASC Topic 606 (“ASC Topic 606”), which superseded previous authoritative U.S. GAAP guidance regarding revenue recognition requirements inrecognition. The Company adopted ASC Topic 605606 effective August 1, 2018. Refer to Note 6 of FASB’s Accounting Standards Codification (the “Codification”) and most industry-specific guidance throughout the Industry Topics of the Codification. ASU 2014-09 enhances comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, reduces the number of requirements an entity must consider for recognizing revenue, and requires improved disclosures to help users ofthese condensed consolidated financial statements better understandfor additional disclosures regarding the nature, amount, timing, and uncertaintyCompany’s adoption of revenue that is recognized.ASC Topic 606.
ASU 2014-09 was to be effective for annual reporting periods beginning after December 15,In January 2016, including interim periods within the annual reporting period. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of the Effective DateFinancial Assets and Financial Liabilities (“ASU 2015-14”2016-01”). The amendments in ASU 2015-14 defer2016-01 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 effective dateguidance 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 2014-09 for all entities by one year.
Subsequent to the issuance of ASU 2014-09, FASB issued additional ASUs that provide clarification for specific aspects of ASU 2014-09. The2016-01 effective dates and transition requirements for these ASUs are the same as the effective dates and transition requirements included in ASU 2014-09 and ASU 2015-14.
ASU 2014-09 requires retrospective application by either restating each prior period presented in the financial statements, orAugust 1, 2018 by recording thea cumulative effect on prior reporting periodsadjustment of less than $0.1 million to beginning retained earnings inand beginning accumulated other comprehensive income on the year thatcondensed consolidated balance sheets. The cumulative effect adjustment is also separately reported on the standard becomes effective (the “modified retrospective approach”), and includes a numbercondensed consolidated statements of optional practical expedients that entities may elect to apply. The Company expects to adopt the revenue recognition guidance using the modified retrospective approach.
ASU 2014-09 will be effective for the Company beginning August 1, 2018. The Company is comparing historical accounting policies and practices to the new standard, has made substantial progress on its detailed review of contracts for its operations in the United States, and has begun the evaluation at all of its foreign subsidiaries. Management continues to assess the impact of ASU 2014-09.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. ThisGAAP, 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 standard update willpolicy 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 effective forclassified 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 beginning August 1, 2018. Management is currently assessingadopted the provisions of ASU 2016-15 effective August 1, 2018 and has not yet estimatedelected the “cumulative earnings approach.”
The Company received $0.2 million of dividends from its impact onequity method investee during the Company’s consolidated financial statements.six months ended January 26, 2019 that are included in cash flows from operating activities.
Accounting Pronouncements Not Yet Adopted as of January 26, 2019
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. Early adoption is permitted. Management is currently assessing the provisions of ASU 2016-02. The Company anticipates that adoption of ASU 2016-02 will result in the addition of material right-of-use assets and lease liabilities to the Company’s consolidated balance sheet in addition to expanding required disclosures. Management has not yet estimated the impact of ASU 2016-02 on the Company’s consolidated statements of operations and cash flows.
In 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.
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 and implementing a territorial tax system.
The changes included in the Tax Act are broad and complex. The tax provision recorded for the three and six months ended January 27, 2018 reflects management’s estimates of the Tax Act’s impacts. The SEC has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize and record the related tax impacts. Management intends to finalize and record any adjustments related to implementation of Tax Act provisions by the end of the Company’s fiscal year ending July 31, 2018. The final transition impacts of the Tax Act may differ from current estimates due to, among other things, changes in interpretations of the Tax Act, subsequent legislative action to further revise the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or updates or changes to the Company’s estimates utilized to calculate the transition impacts.
Specific impacts of the Tax Act are summarized in Note 9 of these condensed consolidated financial statements.
4. | Cash, Cash Equivalents and Restricted Cash |
Cash, cash equivalents and restricted cash are summarized in the following table.
| | Balance at | | | Balance at | |
| | January 27, 2018 | | | July 31, 2017 | | | January 26, 2019 | | | July 31, 2018 | |
| (in thousands) | | | (in thousands) | |
Cash and cash equivalents | | $ | 17,412 | | | $ | 13,029 | | | $ | 11,017 | | | $ | 13,496 | |
Restricted cash | | | 295 | | | | 314 | | |
Restricted cash included in other assets | | | | 252 | | | | 250 | |
Total cash, cash equivalents and restricted cash | | $ | 17,707 | | | $ | 13,343 | | | $ | 11,269 | | | $ | 13,746 | |
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company invests cash in excess of operating requirements in income-producing short-term investments. Money market funds of $0.4less than $0.1 million and $0.2$0.4 million were included in cash and cash equivalents in the table above at January 27, 201826, 2019 and July 31, 2017,2018, respectively.
The Company is required to maintain restricted Restricted cash on depositincluded in Brazil asother assets represents collateral for pending litigation matters.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. The Company evaluated the significance of transfers between levels based upon the nature of the financial instrument. There were no transfers in or out of levels 1, 2 or 3, respectively during the six months ended January 27, 2018 or the fiscal year ended July 31, 2017.
The carrying amount of cash, cash equivalents and restricted cash approximated fair value at January 27, 201826, 2019 and July 31, 2017.2018. These assets were classified as level 1 instruments at both dates.
Investment securities available for sale of $1.5 million at January 27, 201826, 2019 and July 31, 20172018 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 accumulated other comprehensive income, net of applicable income taxes in the accompanying condensed consolidated balance sheets and condensed consolidated statements of changes in shareholders' equity.operations. The cost basis of securities sold is based on the specific identification method. The Company had unrealized losses of less than $0.1 million recorded in accumulated other comprehensive income during the six months ended January 27, 2018 and January 28, 2017. Reclassification adjustments out of accumulated other comprehensive income are included within gain on sale of assets on the accompanying condensed consolidated statements of operations. The Company did not record any sales of investment securities during the six months ended January 27, 201826, 2019 and January 28, 2017.27, 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 Company's assessmentrelative immateriality of the current financial market and corresponding risks associated with theconsolidated debt and line of credit borrowings, management believes that the carrying amount of these liabilities approximated fair value at January 27, 201826, 2019 and July 31, 2017.2018. These liabilities were classified as level 2 instruments at both dates.
There were no financial instruments classified as level 3 at January 26, 2019 and January 27, 2018 or July 31, 2017.2018.
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 or six months ended January 26, 2019 as a result of applying the guidance in ASC Topic 606.
Revenue Recognition under ASC Topic 606
The Company derivesrecognizes substantially all of its revenue from environmental consulting work, principally from the sale of labor hours. Thehours under environmental consulting work is performed under a mix of fixed price, cost-type, and time and material contracts. Contracts are required from all customers. The Company recognizes revenue as follows:
Contract Type | | Work Type | | Revenue Recognition Policy |
| | | | |
Time and materials | | Consulting | | As incurred at contract rates. |
| | | | |
Fixed price | | Consulting | | Percentage of completion, approximating the ratio of either total costs or Level of Effort (LOE) hours incurred to date to total estimated costs or LOE hours. |
| | | | |
Cost-plus | | Consulting | | Costs as incurred plus fees. Fees are recognized as revenue using percentage of completion determined by the percentage of LOE hours incurred to total LOE hours in the respective contracts. |
Revenues reflected in the Company's condensed consolidated statements of operations representrepresents services rendered for which the Company maintains a primary contractual relationship with its customers. Included in revenuesrevenue 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, in proportion to the costs of performance, predominately based on labor hours incurred. Revenue earnedUnder 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 and cost-plus contracts is recognized using the “percentage-of-completion”proportional performance method, whereinunder 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 recognizedthen 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 progress occurs.revenue already recognized. If an estimate of costsefforts 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-type work iscost-plus contracts are with federal governmental agencies and, as such, isare subject to audits after contract completion. Under these cost-type contracts, provisions for adjustments to accrued revenue are recognized on a quarterly basis and based on past audit settlement history. Government audits have been completed and final rates have been negotiated through fiscal year 2014. The Company recordsrecorded an allowance for project disallowances in other accrued liabilities for potential disallowances resulting from government audits (referof $0.7 million in other accrued liabilities at January 26, 2019 and July 31, 2018. Adjustments to Note 10 of these condensed consolidated financial statements). Allowancesallowances for project disallowances are recorded as adjustments to revenue when the amounts are estimable. Resolution of these amounts is dependent upon the results of government audits and other formal contract close-outcloseout procedures.
Change orders can occur whenContract 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 made after project work has begun,for services that are not distinct, and, can be initiated by either the Company or its clients. Claimstherefore, are amounts in excessaccounted for as part of the agreed contract price which the Company seeks to recover from a client for customer delays and /or errors or unapproved change orders that are in dispute. The Company recognizes costs related to change orders and claims as incurred. Revenues and profit areexisting contract. Revenue is recognized on change orderscontract modifications when it is probable that the change ordermodification will be approved and the amount can be reasonably estimated. Revenues are recognized only up to the amount of costs incurred on contract claims when realization is probable, estimable and reasonable support from the customer exists.
The Company expenses all bid and proposalCost of professional services and other pre-contract costs as incurred. Outdirect operating expenses, which includes employee labor and fringe expenses and out of pocket expenses such as travel, meals and field supplies, and other represent costs billed direct to contracts are includedincurred in both revenues and cost of professional services. connection with revenue recognized under client contracts. Sales and cost of sales atrecognized by the Company’s South American subsidiariesoperations 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.
| | January 26, 2019 | | | July 31, 2018 | |
| | (in thousands) | |
Contract Receivables: | | | | | | |
Billed | | $ | 12,578 | | | $ | 12,905 | |
Unbilled | | | 14,602 | | | | 13,994 | |
Total contract receivables | | | 27,180 | | | | 26,899 | |
Allowance for doubtful accounts | | | (1,234 | ) | | | (1,284 | ) |
Contract receivables, net | | $ | 25,946 | | | $ | 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 revenuesrevenue from incurred costsefforts 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 January 26, 2019 and July 31, 2018, respectively.
Unbilled contract receivables, result from: (i) revenues from incurred costs and fees 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 earned, but are not billed as of period-end;the end of the reporting period. Unbilled contract receivables that are not expected to be billed and (ii) differences between year-to-date provisional billings and year-to-date actual contract costs incurred. 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 establishing an allowance for contract adjustments related to revenues that are deemed to be unrealizable, or that may become unrealizable in the future. Management reviews contract receivables and determines allowance amounts based on the adequacy of the Company’s performance under the contract, the status of change orders and claims, historical experience with the client for settling change orders and claims, and economic, geopolitical and cultural considerations for the home country of the client. The Company records such contract adjustments as direct adjustments to revenue in the consolidated statements of operations.
The Company also reduces contract receivables by recording an allowance for doubtful accounts to account for the estimated impact of collection issues resulting from a client’s inability or unwillingness to pay valid obligations to the Company. The resulting provision for bad debtsdoubtful accounts is recorded within administrativeselling, general and indirect operatingadministrative 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 Receivables, Netassets are transferred to billed contract receivables when the right to consideration becomes unconditional. The Company did not record any contract assets at January 26, 2019 or July 31, 2018.
At January 26, 2019 and July 31, 2018, management identified $0.3 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 condensed consolidated balance sheets.
Allowance for Doubtful Accounts
Activity within the allowance for doubtful accounts is summarized in the following table.
| | Three Months Ended | | | Six Months Ended | |
| | January 26, 2019 | | | January 27, 2018 (Restated) | | | January 26, 2019 | | | January 27, 2018 (Restated) | |
| | (in thousands) | |
| | | | | | | | | | | | |
Balance at beginning of period | | $ | 1,300 | | | $ | 2,033 | | | $ | 1,284 | | | | 2,044 | |
Provision for doubtful accounts during the period | | | 54 | | | | 59 | | | | 70 | | | | 92 | |
Write-offs and recoveries of allowance recorded in prior periods | | | (120 | ) | | | (190 | ) | | | (120 | ) | | | (234 | ) |
Balance at end of period | | $ | 1,234 | | | $ | 1,902 | | | $ | 1,234 | | | | 1,902 | |
Contract Receivable Concentrations
Contract receivables netand the allowance for doubtful accounts are summarized in the following table.
| | Balance at | |
| | January 27, 2018 | | July 31, 2017 | |
| (in thousands) | |
Contract Receivables: | | | | |
Billed | | $ | 14,858 | | | $ | 16,033 | |
Unbilled | | | 15,464 | | | | 21,199 | |
| | | 30,322 | | | | 37,232 | |
Allowance for doubtful accounts and contract adjustments | | | (1,957 | ) | | | (2,125 | ) |
Contract receivables, net | | $ | 28,365 | | | $ | 35,107 | |
Billed contract receivables included contractual retainage balances of $1.2 million and $1.1 million at January 27, 2018 and July 31, 2017, respectively. Management anticipates that the Company will substantially bill and collect the unbilled receivables and retainage balances outstanding at January 27, 2018 within one year.
Contract Receivable Concentrations
Significant concentrations of contract receivables and the allowance for doubtful accounts and contract adjustments are summarized in the following table.
| Balance at January 27, 2018 | | | Balance at July 31, 2017 | |
| | Total Billed and Unbilled Contract Receivables | | | Allowance for Doubtful Accounts and Contract Adjustments | | | Total Billed and Unbilled Contract Receivables | | | Allowance for Doubtful Accounts and Contract Adjustments | |
| (in thousands) | |
| | | | | | | | | | | | |
EEI and its subsidiaries located in the U.S. | | $ | 17,375 | | | $ | 595 | | | $ | 25,528 | | | $ | 797 | |
Subsidiaries located in South America | | | 12,947 | | | | 1,362 | | | | 11,704 | | | | 1,328 | |
Totals | | $ | 30,322 | | | $ | 1,957 | | | $ | 37,232 | | | $ | 2,125 | |
Contract adjustments related to projects in the United States, Canada and South America typically result from cost overruns related to current or recently completed projects, or from recoveries of cost overruns recorded as contract adjustments in prior reporting periods. | | January 26, 2019 | | | 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 | | $ | 22,171 | | | $ | 539 | | | $ | 21,580 | | | $ | 569 | |
South American operations | | | 5,009 | | | | 695 | | | | 5,319 | | | | 715 | |
Totals | | $ | 27,180 | | | $ | 1,234 | | | $ | 26,899 | | | $ | 1,284 | |
The allowance for doubtful accounts and contract adjustments as a percentage of contract receivables at the Company’s subsidiaries located in South America was 11% at January 27, 2018 and July 31, 2017. During the first six months of fiscal year 2018, unstable local economies continued to adversely impact certain offor the Company’s South American operations represented 14% of related contract receivables at January 26, 2019 compared to 2% for the Company’s U.S. operations. Unstable local economies that adversely impacted certain of our South American clients resulting in increased collection risksrecent years demonstrated signs of stabilizing during fiscal year 2018. Management continues to monitor trends and the Company incurring project costs that it may not recover for several months. Management is monitoring any adverse trends or events that may adversely impact the realizability of recorded receivables from our South American clients.
Allowance for Doubtful Accounts and Contract Adjustments
Disaggregation of Revenues
ActivityThe following table provides a summary of the Company’s gross revenue, disaggregated by operating segment and contract type.
| | Three Months Ended | | | Six Months Ended | |
| | January 26, 2019 | | | January 27, 2018 (Restated) | | | January 26, 2019 | | | January 27, 2018 (Restated) | |
| | | | | | | | | | | | |
Gross revenue from time and materials contracts: | | | | | | | | | | | | | |
U.S. operations | | $ | 9,732 | | | $ | 8,837 | | | $ | 18,988 | | | $ | 18,788 | |
South American operations | | | - | | | | - | | | | - | | | | - | |
Total gross revenue from time and materials contracts | | $ | 9,732 | | | $ | 8,837 | | | $ | 18,988 | | | $ | 18,788 | |
| | | | | | | | | | | | | | | | |
Gross revenue from fixed price contracts: | | | | | | | | | | | | | | | | |
U.S. operations | | $ | 5,803 | | | $ | 2,758 | | | $ | 9,415 | | | $ | 7,088 | |
South American operations | | | 1,091 | | | | 4,905 | | | | 4,832 | | | | 10,175 | |
Total gross revenue from fixed price contracts | | $ | 6,894 | | | $ | 7,663 | | | $ | 14,247 | | | $ | 17,263 | |
| | | | | | | | | | | | | | | | |
Gross revenue from cost-plus contracts: | | | | | | | | | | | | | | | | |
U.S. operations | | $ | 3,626 | | | $ | 4,789 | | | $ | 8,768 | | | $ | 11,343 | |
South American operations | | | - | | | | - | | | | 1 | | | | - | |
Total gross revenue from cost-plus contracts | | $ | 3,626 | | | $ | 4,789 | | | $ | 8,769 | | | $ | 11,343 | |
| | | | | | | | | | | | | | | | |
Gross revenue from all contracts: | | | | | | | | | | | | | | | | |
U.S. operations | | $ | 19,161 | | | $ | 16,384 | | | $ | 37,171 | | | $ | 37,219 | |
South American operations | | | 1,091 | | | | 4,905 | | | | 4,833 | | | | 10,175 | |
Consolidated gross revenue | | $ | 20,252 | | | $ | 21,289 | | | $ | 42,004 | | | $ | 47,394 | |
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 $66.5 million in remaining performance obligations as of January 26, 2019, of which it expects to recognize $52.6 million (79%) within the allowance for doubtful accountsnext twelve months.
The projects included in firm backlog are subject to cancellations, scope adjustments, foreign exchange fluctuations and contract adjustmentsproject 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 January 26, 2019 and July 31, 2018, the Company consolidated one majority owned subsidiary that was deemed to be VIE. The financial position of this VIE as of January 26, 2019 and July 31, 2018 is summarized in the following table.
| | Three Months Ended | | | Six Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | January 27, 2018 | | | January 28, 2017 | |
| | (in thousands) | |
Balance at beginning of period | | $ | 2,127 | | | $ | 6,882 | | | $ | 2,125 | | | $ | 6,792 | |
Net increase (decrease) due to adjustments in the allowance for: | | | | | | | | | | | | | | | | |
Contract adjustments (1) | | | (35 | ) | | | (4,895 | ) | | | (35 | ) | | | (4,940 | ) |
Doubtful accounts (2) | | | (135 | ) | | | 60 | | | | (133 | ) | | | 195 | |
Balance at end of period | | $ | 1,957 | | | $ | 2,047 | | | $ | 1,957 | | | $ | 2,047 | |
| (1) | Increases (decreases) to the allowance for contract adjustments on the condensed consolidated balance sheets are recorded as (decreases) increases to revenue, net on the condensed consolidated statements of operations. |
| (2) | Increases (decreases) to the allowance for doubtful accounts on the condensed consolidated balance sheets are recorded as increases (decreases) to administrative and other indirect operating expenses on the condensed consolidated statements of operations. |
| | January 26, 2019 | | | July 31, 2018 | |
| | (in thousands) | |
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Total Ecology and Environment Inc. shareholder’s equity | | | | | | | | |
Noncontrolling interests shareholders’ equity | | | | | | | | |
Total shareholders’ equity | | | | | | | | |
Total liabilities and shareholders’ equity | | | | | | | | |
DuringTotal gross revenue of the threeconsolidated VIE was $5.0 million and $4.6 million for the six months ended January 28, 2017,26, 2019 and January 27, 2018, respectively. With the exception of restricted cash of $0.3 million included in noncurrent assets at January 26, 2019 and July 31, 2018 (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 wrote-off $4.9 millionis 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 agedaccounting. Under the equity method of accounting, an investee company's accounts are not reflected within the Company's consolidated balance sheets and fully reserved contract receivable balances related to a specific projectstatements of operations. The Company's share of the earnings of the investee company is reported as earnings from equity method investment in the Middle East, basedCompany's consolidated statements of operations. The Company's carrying value in an equity method investee is reported as equity method investment on management’s assessment that cash collections were not likely.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 $2.3 million and $2.1 million at January 26, 2019 and July 31, 2018, respectively. 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 six months ended January 26, 2019 and January 27, 2018 is summarized in the following table.
| | Six Months Ended | |
| | January 26, 2019 | | | January 27, 2018 (Restated) | |
| | (in thousands) | |
| | | |
Equity investment carrying value at beginning of period | | $ | 2,058 | | | $ | 1,464 | |
GAC net income attributable to EEI | | | 231 | | | | 239 | |
Equity investment carrying value at end of period | | $ | 2,289 | | | $ | 1,703 | |
GAC’s financial position as of January 26, 2019 and July 31, 2018 is summarized in the following table.
| | January 26, 2019 | | | 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 six months ended January 26, 2019 and January 27, 2018 are summarized in the following table.
| | Six Months Ended | |
| | January 26, 2019 | | | January 27, 2018 | |
| | (in thousands) | |
| | | | | | |
| | | | | | | | |
Direct cost of services and subcontract costs | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net income attributable to EEI | | | | | | | | |
Unsecured lines of credit are summarized in the following table.
| | Balance at | | | January 26, 2019 | | | July 31, 2018 | |
| | January 27, 2018 | | | July 31, 2017 | | | (in thousands) | |
| | (in thousands) | | | | | | | |
Outstanding cash draws, recorded as lines of credit on the accompanying condensed consolidated balance sheets | | $ | 435 | | | $ | 581 | | |
Short-term loans issued under lines of credit | | | --- | | | | 200 | | |
Outstanding letters of credit to support operations | | | 1,908 | | | | 2,511 | | |
Outstanding cash advances | | | $ | 222 | | | $ | --- | |
Outstanding letters of credit | | | | 1,697 | | | | 1,668 | |
Total amounts used under lines of credit | | | 2,343 | | | | 3,292 | | | | 1,919 | | | | 1,668 | |
Remaining amounts available under lines of credit | | | 37,783 | | | | 36,529 | | | | 33,988 | | | | 36,832 | |
Total approved unsecured lines of credit | | $ | 40,126 | | | $ | 39,821 | | | $ | 35,907 | | | $ | 38,500 | |
The Company’s U.S. operations are supported by two line of credit arrangements:
Page 12$19.0 million available line of 29credit at October 27, 2018; no outstanding cash advances as of January 26, 2019 or July 31, 2018; letters of credit of less than $0.1 million were outstanding at January 26, 2019 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 January 26. 2019; no outstanding cash advances as of January 26, 2019 or July 31, 2018; letters of credit of less than $0.1 million were outstanding at January 26, 2019 and July 31, 2018, respectively; 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 January 26, 2019 or July 31, 2018; letters of credit of $1.1 million and $1.0 million were outstanding at January 26, 2019 and July 31, 2018, respectively; interest rate on cash advances is affirmed or negotiated annually; and
$1.4 million available line of credit to support operations in Brazil; $0.2 million of cash advances were outstanding as of January 26. 2019; letters of credit of $0.6 million were outstanding at January 26, 2019 and July 31, 2018; interest rate on cash advances is based on a Brazilian government economic index.
As of January 27, 2018, contractual interest rates for lines of credit ranged from 3.37% to 4.12% for the Company’s U.S. operations and 9.12% to 13.42% for the Company’s South American operations. The Company’s lenders have reaffirmed the lines of credit within the past twelve months.
8.9. | Debt and Capital Lease ObligationsIncome Taxes
|
Debt and capital lease obligations are summarized in the following table.
| | Balance at | |
| | January 27, 2018 | | | July 31, 2017 | |
| | (in thousands) | |
| | | | | | |
Bank loan (interest rate 2.94% at January 27, 2018) | | $ | 39 | | | $ | 328 | |
Capital lease obligations (interest rates ranging from 7.36% to 15.09% at January 27, 2018) | | | 83 | | | | 120 | |
| | | 122 | | | | 448 | |
Current portion of long-term debt and capital lease obligations | | | (61 | ) | | | (382 | ) |
Long-term debt and capital lease obligations | | $ | 61 | | | $ | 66 | |
The aggregate maturities of long-term debt and capital lease obligations as of January 27, 2018 are summarized in the following table.
Twelve Months Ended January 27, | | Amount | |
| | (in thousands) | |
| | | |
2019 | | $ | 61 | |
2020 | | | 37 | |
2021 | | | 24 | |
Total | | $ | 122 | |
The estimated effective tax rate was 93.7% and 67.7% for the six months ended January 27, 2018 and January 28, 2017, respectively. 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 decreased to 55.0% for the six months ended January 26, 2019 from 66.5% for the six months ended January 27, 2018. The decrease in the estimated effective tax rate resulted mainly from changes in U.S. corporate income tax regulations included in the Tax Cuts and Jobs Act (refer to Note 3 of these condensed consolidated financial statements) loweredenacted in December 2017 (the “Tax Act”), which included:
A reduction in the Company’s statutory federal tax rate from 34% (effective through December 31, 2017) to 21% (effective January 1, 2018). As the Company has a July 31 fiscal year-end, the lowerU.S. corporate income tax rate will be phased in, resulting in an average statutory federal taxto 21% for the six months ended January 26, 2019, compared with a blended rate of approximately 26% for the fiscal year ending July 31, 2018,six months ended January 27, 2018.
Certain one-time tax items, including revaluation of deferred tax assets and 21% for subsequent fiscal years. Due toliabilities and the effect of a new territorial tax system, that increased the Company’s minimal loss from U.S. operations,federal income tax expense by a combined $0.4 million for the reduction in the statutory federal tax ratesix-months ended January 27, 2018. The Company did not have a material impact on therecord any similar or other unusual adjustments to federal income tax provision related to pre-tax incomeexpense during the six months ended January 26, 2019.
The following tables provide reconciliations of changes in consolidated shareholders’ equity for the three months ended January 26, 2019 and January 27, 2018.
The reduction of the statutory federal tax rate also resulted in revaluation of the Company’s U.S. deferred tax assets and liabilities. Revaluation is based on the tax rates at which the deferred tax assets and liabilities are expected to reverse in the future, which is generally 21%. The Company recorded an estimated net deferred tax expense of $0.3 million during Amounts for the three months ended January 27, 2018 as a resulthave been restated for the GAC Deconsolidation Adjustments and Out of revaluation of deferred tax assets and liabilities.Period Adjustments described in Note 2.
| | Three Months Ended January 26, 2019 | |
| | 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 October 27, 2018 | | $ | 31 | | | $ | 13 | | | $ | 17,595 | | | $ | 20,848 | | | $ | (1,947 | ) | | $ | (884 | ) | | $ | 605 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | (309 | ) | | | - | | | | - | | | | (1 | ) |
Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | 54 | | | | - | | | | (7 | ) |
Share-based compensation expense | | | - | | | | - | | | | 34 | | | | - | | | | - | | | | - | | | | - | |
Distributions to noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (112 | ) |
Purchase of additional noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 26, 2019 | | $ | 31 | | | $ | 13 | | | $ | 17,629 | | | $ | 20,539 | | | $ | (1,893 | ) | | $ | (884 | ) | | $ | 484 | |
| | Three Months Ended January 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 October 28, 2017 (Restated) | | $ | 30 | | | $ | 14 | | | $ | 17,617 | | | $ | 23,593 | | | $ | (1,806 | ) | | $ | (1,037 | ) | | $ | 992 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (519 | ) | | | - | | | | - | | | | (9 | ) |
Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | 13 | | | | - | | | | 38 | |
Unrealized investment losses, net | | | - | | | | - | | | | - | | | | - | | | | (13 | ) | | | - | | | | - | |
Share-based compensation expense | | | - | | | | - | | | | 24 | | | | - | | | | - | | | | - | | | | - | |
Distributions to noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (143 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 27, 2018 (Restated) | | $ | 30 | | | $ | 14 | | | $ | 17,641 | | | $ | 23,074 | | | $ | (1,806 | ) | | $ | (1,037 | ) | | $ | 878 | |
The Tax Act includes provisions for a territorial federal tax system that:
| · | imposes a U.S. federal tax on historical cumulative earnings of foreign subsidiaries, replacing the previous system of taxing the earnings of foreign subsidiaries only as they were repatriated to the U.S. in the form of dividends; |
| · | eliminates or reduces the ability to utilize certain foreign tax credits that existed prior to enactment of the Tax Act; and |
| · | provides for a deduction for dividends received from foreign subsidiaries. |
The Company recorded net estimated federal tax expensefollowing tables provide reconciliations of $0.1 million related to these territorial tax provisions during the three months ended January 27, 2018, representing the net of a one-time transition tax of $0.3 million on cumulative earnings of foreign subsidiaries, offset by $0.2 million of benefit from outstanding unpaid dividends from a foreign subsidiary. As of January 27, 2018, the Company recorded the $0.3 million transition tax as a non-current income tax liability, which management expects to pay over an eight year period allowedchanges in the Tax Act.
There are other transitional impacts of the Tax Act, certain of which were estimated to have an immaterial impact on the income tax provision for the three and six months ended January 27, 2018, and certain of which will become effective during future fiscal years.
The effective tax rateconsolidated shareholders’ equity for the six months ended January 28, 2017 includes the tax impact of the Company’s portion of dividends declared by its majority owned subsidiary in Chile26, 2019 and reversal of a deferred tax asset previously maintained by the Company’s majority owned subsidiary in Peru.
10. | Other Accrued Liabilities
|
Other accrued liabilities are summarized in the following table.
| | Balance at | |
| | January 27, 2018 | | | July 31, 2017 | |
| | (in thousands) | |
| | | | | | |
Allowance for project disallowances | | $ | 687 | | | $ | 687 | |
Dividends payable to noncontrolling shareholders of majority-owned subsidiaries | | | 557 | | | | 517 | |
Other accrued expenses | | | 1,244 | | | | 1,441 | |
Total other accrued liabilities | | $ | 2,488 | | | $ | 2,645 | |
The allowance for project disallowances represents potential disallowances of amounts billed and collected resulting from contract close-outs and government audits. Allowances for project disallowances are recorded when the amounts are estimable, and may be revised during subsequent reporting periods when estimates of settlement amounts become more certain, or when actual settlements are finalized. Activity within the allowance for project disallowances is summarized in the following table.
| | Three Months Ended | | | Six Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | January 27, 2018 | | | January 28, 2017 | |
| | (in thousands) | |
Balance at beginning of period | | $ | 687 | | | $ | 1,173 | | | $ | 687 | | | $ | 1,819 | |
Reduction of settlement estimate recorded in prior periods | | | --- | | | | (462 | ) | | | --- | | | | (1,108 | ) |
Balance at end of period | | $ | 687 | | | $ | 711 | | | $ | 687 | | | $ | 711 | |
Settlements of certain contracts completed during prior fiscal years were finalized during the six months ended January 28, 2017, resulting in no cash received or paid during the period.
Dividends payable to noncontrolling shareholders of majority-owned subsidiaries includes dividends declared by a subsidiary in South America during the first half of fiscal year 2017. As of January 28, 2018, management anticipates that these dividends payable will be paid within one year.
EEI adopted the 1998 Stock Award Plan effective March 16, 1998. This plan, together with supplemental plans that were subsequently adopted by the Company’s Board of Directors, are referred to as the “Stock Award Plan”. The Stock Award Plan is not a qualified plan under Section 401(a) of the Internal Revenue Code. Under the Stock Award Plan, directors, officers and other key employees of EEI or any of its subsidiaries may be awarded Class A Common Stock as a bonus for services rendered to the Company or its subsidiaries, based upon the fair market value of the common stock at the time of the award. The Stock Award Plan authorizes the Company’s Board of Directors to determine the vesting period and the circumstances under which the awards may be forfeited.
In October 2016, the Company’s Board of Directors adopted the current supplemental plan (the “2016 Stock Award Plan”). The 2016 Stock Award Plan permits awards of up to 200,000 shares of Class A Common Stock for a period of up to five years until its termination in October 2021. As of January 27, 2018, the Company issued a total of 7,502 Class A shares under the 2016 Stock Award Plan, valued at less than $0.1 million, to four directors as a portion of their annual compensation. These shares will fully vest in April 2018 upon expiration of certain restrictions regarding transfer of the shares.
EEI recorded non-cash compensation expense of less than $0.1 million during2018. Amounts for the six months ended January 27, 2018 have been restated for the GAC Deconsolidation Adjustments and January 28, 2017.Out of Period Adjustments described in Note 2.
| | Six Months Ended January 26, 2019 | |
| | 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 income | | | - | | | | - | | | | - | | | | (429 | ) | | | - | | | | - | | | | 4 | |
Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | (13 | ) | | | - | | | | (67 | ) |
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 | | | - | | | | - | | | | 67 | | | | - | | | | - | | | | - | | | | - | |
Distributions to noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (116 | ) |
Purchase of additional noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 26, 2019 | | $ | 31 | | | $ | 13 | | | $ | 17,629 | | | $ | 20,539 | | | $ | (1,893 | ) | | $ | (884 | ) | | $ | 484 | |
| | Six Months Ended January 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, 2017 (Restated) | | $ | 30 | | | $ | 14 | | | $ | 17,570 | | | $ | 23,005 | | | $ | (1,795 | ) | | $ | (1,037 | ) | | $ | 947 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | 69 | | | | - | | | | - | | | | 91 | |
Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | 5 | | | | - | | | | 32 | |
Unrealized investment losses, net | | | - | | | | - | | | | - | | | | - | | | | (16 | ) | | | - | | | | - | |
Share-based compensation expense | | | - | | | | - | | | | 71 | | | | - | | | | - | | | | - | | | | - | |
Distributions to noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (192 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 27, 2018 (Restated) | | $ | 30 | | | $ | 14 | | | $ | 17,641 | | | $ | 23,074 | | | $ | (1,806 | ) | | $ | (1,037 | ) | | $ | 878 | |
Class A and Class B Common Stock
The relative rights, preferences and limitations of the Company's Class A and Class B Common Stock are summarized as follows: Holders of Class A shares are entitled to elect 25% of the Board of Directors so long as the number of outstanding Class A shares is at least 10% of the combined total number of outstanding Class A and Class B common shares. Holders of Class A common shares have one-tenth the voting power of Class B common shares with respect to most other matters.
In addition, Class A shares are eligible to receive dividends in excess of (and not less than) those paid to holders of Class B shares. Holders of Class B shares have the option to convert at any time, each share of Class B Common Stock into one share of Class A Common Stock. Upon sale or transfer, shares of Class B Common Stock will automatically convert into an equal number of shares of Class A Common Stock, except that sales or transfers of Class B Common Stock to an existing holder of Class B Common Stock or to an immediate family member will not cause such shares to automatically convert into Class A Common Stock.
Restrictive Shareholder Agreement
Messrs. Gerhard J. Neumaier (deceased), Frank B. Silvestro, Ronald L. Frank, and Gerald A. Strobel entered into a Stockholders’ Agreement dated May 12, 1970, as amended January 24, 2011, which governs the sale of certain shares of Ecology and Environment, Inc.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 declared and accruedpaid $0.9 million of cash dividends induring the six months ended January 2017, which were paid in February 2017. The Company paid dividends of $0.9 million in August 201726, 2019 and 2016January 27, 2018 that were declared and accrued in prior periods.
The Company declared and paid $0.9 million of cash dividends in February 2018.
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 January 27,April 28, 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 sixthree months ended JanuaryOctober 27, 2018 or JanuaryOctober 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
As of July 31, 2018, the Company did not acquire additionalheld an 87.88% ownership interest in any ofLowham-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 majority-owned subsidiaries during the six months ended January 27, 2018 or January 28, 2017.ownership interest in Lowham to 100%.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are summarized in the following table.
| | Balance at | | |
| | January 27, 2018 | | | July 31, 2017 | | | January 26, 2019 | | | July 31, 2018 | |
| | (in thousands) | | | (in thousands) | |
| | | | | | | | | | | | |
Unrealized net foreign currency translation losses | | $ | (1,945 | ) | | $ | (2,033 | ) | | | | | | | | |
Unrealized net investment (losses) gains on available for sale investments | | | (1 | ) | | | 15 | | | | | | | | | |
Total accumulated other comprehensive loss | | $ | (1,946 | ) | | $ | (2,018 | ) | | | | | | | | |
The Company calculates basic and diluted earnings per share by dividing the net income attributable to Ecology and Environment, Inc.EEI’s 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 12,11, 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 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 weighted average shares outstanding calculation.
The computation of earnings per share is included in the following table.
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Six Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | January 27, 2018 | | | January 28, 2017 | | | January 26, 2019 | | | January 27, 2018 (Restated) | | | January 26, 2019 | | | January 27, 2018 (Restated) | |
| | (in thousands, except share and per share amounts) | | | (in thousands, except share and per share amounts) | |
| | | | | | | | | | | | |
Net (loss) income attributable to Ecology and Environment, Inc. | | $ | (768 | ) | | $ | (318 | ) | | $ | (235 | ) | | $ | 570 | | |
Net (loss) income attributable to Ecology and Environment Inc. | | | $ | (309 | ) | | $ | (519 | ) | | $ | (429 | ) | | $ | 69 | |
Dividends declared | | | --- | | | | (859 | ) | | | --- | | | | (859 | ) | | | --- | | | | --- | | | | --- | | | | --- | |
Balance at end of period | | $ | (768 | ) | | $ | (1,177 | ) | | $ | (235 | ) | | $ | (289 | ) | | $ | (309 | ) | | $ | (519 | ) | | $ | (429 | ) | | $ | 69 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average common shares outstanding - basic and diluted | | | 4,301,604 | | | | 4,294,102 | | | | 4,301,604 | | | | 4,293,417 | | | | 4,315,135 | | | | 4,301,604 | | | | 4,314,543 | | | | 4,301,604 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Distributed earnings per share - basic and diluted | | $ | --- | | | $ | 0.20 | | | $ | --- | | | $ | 0.20 | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | |
Undistributed earnings (distributions in excess of earnings) per share - basic and diluted | | | (0.18 | ) | | | (0.27 | ) | | | (0.05 | ) | | | (0.07 | ) | |
Net income per common share - basic and diluted | | $ | (0.18 | ) | | $ | (0.07 | ) | | $ | (0.05 | ) | | $ | 0.13 | | |
Undistributed losses per share - basic and diluted | | | | (0.07 | ) | | | (0.12 | ) | | | (0.10 | ) | | | 0.02 | |
Net loss per common share - basic and diluted | | | $ | (0.07 | ) | | $ | (0.12 | ) | | $ | (0.10 | ) | | $ | 0.02 | |
The Company reports segment informationManagement generally assesses operating performance and makes strategic decisions based on the geographic location ofregions 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 its direct and indirect subsidiaries (for revenues) and the location of its offices (for long-lived assets). Revenue, net by business segment is summarized in the following table.
| | Three Months Ended | | | Six Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | January 27, 2018 | | | January 28, 2017 | |
| | (in thousands) | |
| | | | | | | | | | | | |
EEI and its subsidiaries located in the U.S. | | $ | 17,050 | | | $ | 18,950 | | | $ | 36,748 | | | $ | 39,265 | |
| | | | | | | | | | | | | | | | |
Subsidiaries located in South America: | | | | | | | | | | | | | | | | |
Peru | | | 2,690 | | | | 1,675 | | | | 5,689 | | | | 2,737 | |
Chile | | | 3,128 | | | | 2,096 | | | | 5,242 | | | | 4,057 | |
Brazil | | | 2,145 | | | | 1,931 | | | | 4,395 | | | | 3,838 | |
Other | | | 70 | | | | 74 | | | | 91 | | | | 144 | |
| | | 8,033 | | | | 5,776 | | | | 15,417 | | | | 10,776 | |
| | | | | | | | | | | | | | | | |
Total revenue, net | | $ | 25,083 | | | $ | 24,726 | | | $ | 52,165 | | | $ | 50,041 | |
Long-livedtotal assets by businessoperating segment are summarized in the following table.tables.
| | Balance at | |
| | January 27, 2018 | | | July 31, 2017 | |
| | (in thousands) | |
| | | | | |
EEI and its subsidiaries located in the United States | | $ | 3,095 | | | $ | 3,293 | |
Subsidiaries located in South America | | | 1,266 | | | | 1,135 | |
| | Three Months Ended | | | Six Months Ended | |
| | January 26, 2019 | | | January 27, 2018 (Restated) | | | January 26, 2019 | | | January 27, 2018 (Restated) | |
| | (in thousands) | |
| | | | | | | | | | | | |
Gross revenue: | | | | | | | | | | | | |
U.S. operations | | $ | 16,303 | | | $ | 16,384 | | | $ | 34,313 | | | $ | 37,219 | |
South American operations | | | 3,949 | | | | 4,905 | | | | 7,691 | | | | 10,175 | |
Total | | $ | 20,252 | | | $ | 21,289 | | | $ | 42,004 | | | $ | 47,394 | |
Gross revenue from U.S. federal government contracts was $2.9 million and $4.4 million for the three months ended January 26, 2019 and January 27, 2018, respectively, and $6.0 million and $8.0 million for the six months ended January 26, 2019 and January 27, 2018, respectively.
| | Three Months Ended | | | Six Months Ended | |
| | January 26, 2019 | | | January 27, 2018 (Restated) | | | January 26, 2019 | | | January 27, 2018 (Restated) | |
| | (in thousands) | |
| | | | | | | | | | | | |
Net income (loss) attributable to EEI: | | | | | | | | | | | | |
U.S. operations (a) | | $ | (294 | ) | | $ | (480 | ) | | $ | (402 | ) | | $ | (176 | ) |
South American operations (b) | | | (15 | ) | | | (39 | ) | | | (27 | ) | | | 245 | |
Total | | $ | (309 | ) | | $ | (519 | ) | | $ | (429 | ) | | $ | 69 | |
15.
| (a) | Includes depreciation and amortization expense of $0.2 million for the three months ended January 26, 2019 and January 27, 2018, and $0.4 million for the six months ended January 26, 2019 and January 27, 2018. |
| (b) | Includes depreciation and amortization expense of $0.1 million three months ended January 26, 2019 and January 27, 2018, and $0.2 million and $0.1million for the six months ended January 26, 2019 and January 27, 2018, respectively. |
| | January 26, 2019 | | | July 31, 2018 | |
| | (in thousands) | |
| | | | | | |
| | | | |
| | | | | | | | |
South American operations | | | | | | | | |
| | | | | | | | |
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 Brasilbrasil Ltda. ("(“E&E Brasil"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 520,000approximately 0.5 million Reais against E&E Brasil.Brazil. The Institute also filed Notices of Infraction against four employees of E&E BrasilBrazil alleging the same claims and imposed fines against those individuals that, in the aggregate, were equal to the fine imposed against E&E Brasil.Brazil. No claim has been made against EEI.
E&E BrasilBrazil has filed court claims appealing the administrative decisions of the Institute for E & E Brasil’s&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 BrasilBrazil 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 BrasilBrazil are pending agency determination. At January 27, 2018,26, 2019, the Company maintainedrecorded a reserve of approximately $0.4 million in other accrued liabilities related to these claims.
Contract Termination Provisions
Certain contracts contain termination provisions under which the customer may, without penalty, terminate the contracts upon written notice to the Company. Staff Reduction Programs
In the event of termination,December 2018, the Company would be paid only termination costsbegan 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 accordanceconnection with a corporate restructuring plan. Company management anticipates that the particular contract. Generally, termination costs include unpaid costs incurredcombined 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 date, earned feesresult in pre-tax charges and any additional costs directly allocable to the termination. The Company did not experience early terminationcash expenditures of any material contracts during the six months ended January 27, 2018 orapproximately $1.0 million during the fiscal year endedending July 31, 2017.2019, 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.
Page 17
Sale of 29Majority 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.
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
References in this Quarterly Report on Form 10-Q (the “Quarterly Report”) to “EEI” refer to Ecology and Environment Inc., a New York corporation. References to “the Company,” “we,” “us,” “our,” or similar terms refer to EEI together with its consolidated subsidiaries.
Executive Overview
The Company reported a consolidated loss of $0.18 per share for the three months ended January 27, 2018, $0.11 lower than the loss of $0.07 per share reported for the same quarter last year. A consolidated loss of $0.05 per share for the six months ended January 27, 2018 was $0.18 lower than income of $0.13 per share reported for the prior year. Lower net income before income tax provision during the second quarterManagement generally assesses operating performance and first half of fiscal year 2018 primarily resulted from lower revenues from our U.S. operations, which were partially offset by significant improvement in South American revenues and net income.
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 and implementing a territorial tax system. Enactment of the Tax Act resulted in net adjustments that increased our income tax provision by approximately $0.4 million, and effectively reduced earnings by $0.10 per share during the current quarter. Specific impacts of the Tax Act are summarized below in the income taxes commentary.
We manage our operations through distinct reporting segments that aremakes strategic decisions based on the geographic location ofregions in which we do business. We report separate operating segment information for our parent companyUnited States (“U.S.”) and subsidiary operations. The following tables include selected financial information by business segment for the three and six months ended January 27, 2018 and January 28, 2017. Refer to “Results of Operations” below for further commentary regarding the Company’s revenues and expenses for the three and six months ended January 27, 2018.
| | Three Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | $ Change | | | % Change | |
| | ($ in thousands) | |
| | | | | | | | | | | | |
EEI and subsidiaries located in the United States: | | | | | | | | | | | | |
Revenue, net | | $ | 17,050 | | | $ | 18,950 | | | $ | (1,900 | ) | | | (10 | )% |
Revenue, net less subcontract costs (1) | | | 13,634 | | | | 15,240 | | | | (1,606 | ) | | | (11 | )% |
Direct operating expenses (2) | | | 6,395 | | | | 6,939 | | | | (544 | ) | | | (8 | )% |
Indirect operating expenses (3) | | | 7,745 | | | | 7,782 | | | | (37 | ) | | | --- | % |
(Loss) income before income tax provision | | | (782 | ) | | | 236 | | | | (1,018 | ) | | | (431 | )% |
Net (loss) attributable to EEI | | | (950 | ) | | | (5 | ) | | | (945 | ) | | | --- | (4) |
| | | | | | | | | | | | | | | | |
Subsidiaries located in South America: | | | | | | | | | | | | | | | | |
Revenue, net | | $ | 8,033 | | | $ | 5,776 | | | $ | 2,257 | | | | 39 | % |
Revenue, net less subcontract costs (1) | | | 5,680 | | | | 4,139 | | | | 1,541 | | | | 37 | % |
Direct operating expenses (2) | | | 2,683 | | | | 2,091 | | | | 592 | | | | 28 | % |
Indirect operating expenses (3) | | | 2,483 | | | | 2,040 | | | | 443 | | | | 22 | % |
Income (loss) before income tax provision | | | 496 | | | | (71 | ) | | | 567 | | | | --- | (4) |
Net income (loss) attributable to EEI | | | 182 | | | | (313 | ) | | | 495 | | | | --- | (4) |
| | | | | | | | | | | | | | | | |
Consolidated totals: | | | | | | | | | | | | | | | | |
Revenue, net | | $ | 25,083 | | | $ | 24,726 | | | $ | 357 | | | | 1 | % |
Revenue, net less subcontract costs (1) | | | 19,314 | | | | 19,379 | | | | (65 | ) | | | --- | % |
Direct operating expenses (2) | | | 9,078 | | | | 9,030 | | | | 48 | | | | 1 | % |
Indirect operating expenses (3) | | | 10,228 | | | | 9,822 | | | | 406 | | | | 4 | % |
(Loss) income before income tax provision | | | (286 | ) | | | 165 | | | | (451 | ) | | | (273 | )% |
Net (loss) attributable to EEI | | | (768 | ) | | | (318 | ) | | | (450 | ) | | | --- | (4) |
| (1) | Revenue, net less subcontract costs, which is a key operating metric for our company, represents revenue, net less subcontract costs from the condensed consolidated statements of operations. |
| (2) | Direct operating expenses consist of cost of professional services and other direct operating expenses from the condensed consolidated statements of operations. |
| (3) | Indirect operating expenses consist of administrative and indirect operating expenses and marketing and related costs from the condensed consolidated statements of operations. |
| (4) | Percent change is not relevant because the prior year amount is negative. |
| | Six Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | $ Change | | | % Change | |
| | ($ in thousands) | |
| | | | | | | | | | | | |
EEI and subsidiaries located in the United States: | | | | | | | | | | | | |
Revenue, net | | $ | 36,748 | | | $ | 39,265 | | | $ | (2,517 | ) | | | (6 | )% |
Revenue, net less subcontract costs (1) | | | 29,767 | | | | 32,917 | | | | (3,150 | ) | | | (10 | )% |
Direct operating expenses (2) | | | 13,413 | | | | 14,345 | | | | (932 | ) | | | (6 | )% |
Indirect operating expenses (3) | | | 16,056 | | | | 16,010 | | | | 46 | | | | --- | % |
(Loss) income before income tax provision | | | (275 | ) | | | 1,891 | | | | (2,166 | ) | | | (115 | )% |
Net (loss) income attributable to EEI | | | (719 | ) | | | 1,101 | | | | (1,820 | ) | | | (165 | )% |
| | | | | | | | | | | | | | | | |
Subsidiaries located in South America: | | | | | | | | | | | | | | | | |
Revenue, net | | $ | 15,417 | | | $ | 10,776 | | | $ | 4,641 | | | | 43 | % |
Revenue, net less subcontract costs (1) | | | 10,900 | | | | 7,766 | | | | 3,134 | | | | 40 | % |
Direct operating expenses (2) | | | 5,146 | | | | 4,095 | | | | 1,051 | | | | 26 | % |
Indirect operating expenses (3) | | | 4,681 | | | | 4,059 | | | | 622 | | | | 15 | % |
Income (loss) before income tax provision | | | 1,081 | | | | (307 | ) | | | 1,388 | | | | --- | (4) |
Net income (loss) attributable to EEI | | | 484 | | | | (531 | ) | | | 1,015 | | | | --- | (4) |
| | | | | | | | | | | | | | | | |
Consolidated totals: | | | | | | | | | | | | | | | | |
Revenue, net | | $ | 52,165 | | | $ | 50,041 | | | $ | 2,124 | | | | 4 | % |
Revenue, net less subcontract costs (1) | | | 40,667 | | | | 40,683 | | | | (16 | ) | | | --- | % |
Direct operating expenses (2) | | | 18,559 | | | | 18,440 | | | | 119 | | | | 1 | % |
Indirect operating expenses (3) | | | 20,737 | | | | 20,069 | | | | 668 | | | | 3 | % |
Income before income tax provision | | | 806 | | | | 1,584 | | | | (778 | ) | | | (49 | )% |
Net income attributable to EEI | | | (235 | ) | | | 570 | | | | (805 | ) | | | (141 | )% |
| (1) | Revenue, net less subcontract costs, which is a key operating metric for our company, represents revenue, net less subcontract costs from the condensed consolidated statements of operations. |
| (2) | Direct operating expenses consist of cost of professional services and other direct operating expenses from the condensed consolidated statements of operations. |
| (3) | Indirect operating expenses consist of administrative and indirect operating expenses and marketing and related costs from the condensed consolidated statements of operations. |
| (4) | Percent change is not relevant because the prior year amount is negative. |
Liquidity and Capital Resources
Cash, cash equivalents and restricted cash increased $4.3 million during the first six months of fiscal year 2018. Excluding payment of $0.9 million of dividends to shareholders that was approved on a discretionary basis by the Company’s Board of Directors, cash generated from operations exceeded cash required to fund investing and financing activities by $5.2 million during the period.
We maintain $40.1 million of unsecured lines of credit available for working capital and letters of credit as of January 27, 2018 at contractual interest rates ranging from 3.37% to 4.12% in the U.S. and 9.12% to 13.42% in South America. Cash advances of $0.4 million and letters of credit of $1.9 million were outstanding under our lines of credit as of January 27, 2018. Our lenders have reaffirmed the lines of credit within the past twelve months.
We believe that available cash balances, anticipated cash flows and our available lines of credit will be sufficient to cover working capital and operating requirements of our U.S. operations during the next twelve months and the foreseeable future.
Historically, our foreign subsidiaries have generated adequate cash flow to fund their operations. During fiscal years 2016 and 2017, our South American operations had been adversely affected by unstable economic conditions. Although there are indications of economic recovery in certain countries, the total scope and duration of the economic downturn, and the ultimate impact that it will have on our Brazilian, Peruvian and Chilean operations, are uncertain. In the event that theseoperations. Our active subsidiaries are unable to generate adequate cash flow to fund their operations, additional funding from EEI or lending institutions will be considered.
We intend to reinvest net cash generated from undistributed foreign earnings into operations and business expansion opportunities outside the U.S. Excess cash accumulated by any foreign subsidiary, beyond that necessary to fund operations or business expansion, may be repatriated to the U.S. at the discretion of the Boards of Directors of the respective entities. The Company repatriated $0.4 million of dividends from foreign subsidiaries, net of local taxes, during the six months ended January 27, 2018.
During fiscal year 2017, one of the Company’s majority owned subsidiaries in South America declared a total of $1.5 million of dividends to its shareholders, of which $0.2 million was paid to minority shareholders and $0.2 million was repatriated to the U.S., net of local taxes, as of January 27, 2018. As of January 27, 2018, management anticipates that these dividends payable will be paid within one year.
The Tax Act resulted in a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries of approximately $0.3 million which will be paid, without incurring interest, over a period of up to eight years.
Contract Receivable Concentration Risk
Significant concentrations of contract receivables and the allowance for doubtful accounts and contract adjustments26, 2019 are summarizedlisted in the following table.
| | Balance at January 27, 2018 | | | Balance at July 31, 2017 | |
| | Total Billed and Unbilled Contract Receivables | | | Allowance for Doubtful Accounts and Contract Adjustments | | | Total Billed and Unbilled Contract Receivables | | | Allowance for Doubtful Accounts and Contract Adjustments | |
| | (in thousands) | |
| | | | | | | | | | | | |
EEI and its subsidiaries located in the U.S. | | $ | 17,375 | | | $ | 595 | | | $ | 25,528 | | | $ | 797 | |
Subsidiaries located in South America | | | 12,947 | | | | 1,362 | | | | 11,704 | | | | 1,328 | |
Totals | | $ | 30,322 | | | $ | 1,957 | | | $ | 37,232 | | | $ | 2,125 | |
Contract adjustments related to projects in the United States, Canada and South America typically result from cost overruns related to current or recently completed projects, or from recoveries of cost overruns recorded as contract adjustments in prior reporting periods.
The allowance for doubtful accounts and contract adjustments as a percentage of contract receivables at the Company’s subsidiaries located in South America was 11% at January 27, 2018 and July 31, 2017. During the first quarter of fiscal year 2018, unstable local economies continued to adversely impact certain of our South American clients, resulting in increased collection risks and the Company incurring project costs that it may not recover for several months. Although there are indications of economic recovery in certain countries, management is monitoring any adverse trends or events that may impact the realizability of recorded receivables from our South American clients.
Contract Backlog
At any point in time, we have a firm backlog of uncompleted projects that are expected to provide future revenue over a period of 1 to 2 years. These projects include a substantial amount of work to be performed under contracts that contain termination provisions that may be exercised without penalty at any time by our clients upon written notice to us. Changes in economic or market conditions or other extraordinary events, such as natural disasters, could lead to delays in our ability to recognize revenue, or to us not realizing all of the potential revenue under these contracts. The likelihood of obtaining the full value under these contracts cannot be determined at this time.
Our firm backlog of uncompleted projects is summarized by business segment in the following table.
| | Amount as of | |
| | January 27, 2018 | | | July 31, 2017 | | | January 28, 2017 | |
| | (in thousands) | |
| | | | | | | | | |
Total firm backlog of uncompleted contracts: | | | | | | | | | |
EEI and its subsidiaries located in the United States | | $ | 66,613 | | | $ | 71,642 | | | $ | 62,023 | |
Subsidiaries located in South America | | | 21,123 | | | | 20,744 | | | | 21,939 | |
Consolidated totals | | $ | 87,736 | | | $ | 92,386 | | | $ | 83,962 | |
| | | | | | | | | | | | |
Anticipated completion of firm backlog in next twelve months: | | | | | | | | | | | | |
EEI and its subsidiaries located in the United States | | $ | 35,888 | | | $ | 38,814 | | | $ | 37,525 | |
Subsidiaries located in South America | | | 14,782 | | | | 14,660 | | | | 15,663 | |
Consolidated totals | | $ | 50,670 | | | $ | 53,474 | | | $ | 53,188 | |
Results of Operations
Revenue, net
Substantially all of the Company's revenue is derived from environmental consulting work, which is principally derived from the sale of labor hours. Revenues reflected in the Company's condensed consolidated statements of operations represent services rendered for which the Company maintains a primary contractual relationship with its customers. Included in revenues are certain services that the Company has elected to subcontract to other contractors. Sales and cost of sales at our South American subsidiaries exclude tax assessments by governmental authorities, which are collected from clients and then remitted to governmental authorities.
The consulting work is performed under a mix of time and materials, fixed price and cost-plus, and contracts. Contracts are required from all customers. Revenue is recognized as follows:
Contract TypeName | | Work TypePercentage of Subsidiary Capital Stock Owned by the Company | | Revenue Recognition PolicyOperating Segment |
| | | | |
Time and materialsConsolidated Subsidiaries: | | Consulting | | As incurred at contract rates. |
Ecology & Environment Engineering, Inc. | | 100.00% | | United States |
Walsh Environmental, LLC | | 100.00% | | United States |
Gustavson Associates, LLC | | 83.60% | | United States |
Walsh Peru, S.A. Ingenieros y Cientificos Consultores (“Walsh Peru”) | | 74.78% | | South America |
ecology and environment do brasil Ltda. (“E&E Brazil”) | | 72.00% | | South America |
Servicios Ambientales Walsh, S.A. (“Walsh Ecuador”) (a) | | 51.00% | | South America |
| | | | |
Fixed price | | Consulting | | Percentage of completion, approximating the ratio of either total costs or Level of Effort (LOE) hours incurred to date to total estimated costs or LOE hours. |
Majority-Owned Equity Investment: | | | | |
Cost-plusGestión Ambiental Consultores S.A. (“GAC”) (b) | | Consulting55.10% | | Costs as incurred plus fees. Fees are recognized as revenue using percentage of completion determined by the percentage of LOE hours incurred to total LOE hours in the respective contracts.South America |
| (a) | The Company’s investment in Walsh Ecuador was sold to minority shareholders effective February 1, 2019 |
| (b) | EEI’s equity investment in GAC is reported as an “equity method investment” on the consolidated balance sheets, and as a component of the South American operating segment. EEI’s share of GAC’s earnings is reported as “income from equity method investment” on the consolidated statements of operations. |
The following table includes selected financial information by operating segment for the three months ended October 27, 2018 and October 28, 2017 (the first quarters of fiscal years 2019 and 2018, respectively). Refer to “Results of Operations” below for additional commentary regarding the Company’s revenues and expenses for these reporting periods.
| | Three Months Ended | |
| | January 26, 2019 | | | January 27, 2018 (Restated) | | | $ Change | | | % Change | |
| | ($ in thousands) | |
U.S. operations: | | | | | | | | | | | | |
Gross revenue | | $ | 16,303 | | | $ | 16,384 | | | $ | (81 | ) | | | --- | % |
Gross revenue less subcontract costs | | | 13,400 | | | | 13,577 | | | | (177 | ) | | | (1 | )% |
Cost of professional services and other direct operating expenses | | | 6,145 | | | | 6,396 | | | | (251 | ) | | | (4 | )% |
Gross margin | | | 7,255 | | | | 7,181 | | | | 74 | | | | 1 | % |
Selling, general and administrative expenses | | | 7,835 | | | | 7,745 | | | | 89 | | | | 1 | % |
| | | | | | | | | | | | | | | | |
South American operations: | | | | | | | | | | | | | | | | |
Gross revenue | | $ | 3,949 | | | $ | 4,905 | | | $ | (956 | ) | | | (19 | )% |
Gross revenue less subcontract costs | | | 3,233 | | | | 3,283 | | | | (50 | ) | | | (2 | )% |
Cost of professional services and other direct operating expenses | | | 1,629 | | | | 1,570 | | | | 59 | | | | 4 | % |
Gross margin | | | 1,604 | | | | 1,713 | | | | (109 | ) | | | (6 | )% |
Selling, general and administrative expenses | | | 1,617 | | | | 1,738 | | | | (121 | ) | | | (7 | )% |
Income from equity method investment | | | 171 | | | | 221 | | | | (50 | ) | | | (23 | )% |
| | | | | | | | | | | | | | | | |
Consolidated totals: | | | | | | | | | | | | | | | �� | |
Gross revenue | | $ | 20,252 | | | $ | 21,289 | | | $ | (1,037 | ) | | | (5 | )% |
Gross revenue less subcontract costs | | | 16,633 | | | | 16,860 | | | | (227 | ) | | | (1 | )% |
Cost of professional services and other direct operating expenses | | | 7,774 | | | | 7,966 | | | | (192 | ) | | | (2 | )% |
Gross margin | | | 8,859 | | | | 8,894 | | | | (35 | ) | | | --- | % |
Selling, general and administrative expenses | | | 9,452 | | | | 9,483 | | | | (32 | ) | | | --- | % |
Income from equity method investment | | | 171 | | | | 221 | | | | (50 | ) | | | (23 | )% |
| | Six Months Ended | |
| | January 26, 2019 | | | January 27, 2018 (Restated) | | | $ Change | | | % Change | |
| | ($ in thousands) | |
| | | | | | | | | | | | |
U.S. operations: | | | | | | | | | | | | |
Gross revenue | | $ | 34,313 | | | $ | 37,219 | | | $ | (2,906 | ) | | | (8 | )% |
Gross revenue less subcontract costs | | | 27,599 | | | | 29,767 | | | | (2,168 | ) | | | (7 | )% |
Cost of professional services and other direct operating expenses | | | 12,641 | | | | 13,413 | | | | (772 | ) | | | (6 | )% |
Gross margin | | | 14,958 | | | | 16,354 | | | | (1,396 | ) | | | (9 | )% |
Selling, general and administrative expenses | | | 15,673 | | | | 16,057 | | | | (384 | ) | | | (2 | )% |
| | | | | | | | | | | | | | | | |
South American operations: | | | | | | | | | | | | | | | | |
Gross revenue | | $ | 7,691 | | | $ | 10,175 | | | $ | (2,484 | ) | | | (24 | )% |
Gross revenue less subcontract costs | | | 6,212 | | | | 6,849 | | | | (637 | ) | | | (9 | )% |
Cost of professional services and other direct operating expenses | | | 3,267 | | | | 3,171 | | | | 96 | | | | 3 | % |
Gross margin | | | 2,945 | | | | 3,678 | | | | (733 | ) | | | (20 | )% |
Selling, general and administrative expenses | | | 2,979 | | | | 3,208 | | | | (229 | ) | | | (7 | )% |
Income from equity method investment | | | 231 | | | | 239 | | | | (8 | ) | | | (3 | )% |
| | | | | | | | | | | | | | | | |
Consolidated totals: | | | | | | | | | | | | | | | | |
Gross revenue | | $ | 42,004 | | | $ | 47,394 | | | $ | (5,390 | ) | | | (11 | )% |
Gross revenue less subcontract costs | | | 33,811 | | | | 36,616 | | | | (2,805 | ) | | | (8 | )% |
Cost of professional services and other direct operating expenses | | | 15,908 | | | | 16,584 | | | | (676 | ) | | | (4 | )% |
Gross margin | | | 17,903 | | | | 20,032 | | | | (2,129 | ) | | | (11 | )% |
Selling, general and administrative expenses | | | 18,652 | | | | 19,265 | | | | (613 | ) | | | (3 | )% |
Income from equity method investment | | | 231 | | | | 239 | | | | (8 | ) | | | (3 | )% |
We reported a consolidated net associatedloss of $0.3 million ($0.07 per share) for the quarter ended January 26, 2019, compared with these contract types area consolidated net loss of $0.5 million ($0.12 per share) for the second quarter of the prior fiscal year. For the six months ended January 26, 2019 and January 27, 2018, we reported a consolidated net loss of $0.4 million ($0.10 per share) and consolidated net income of $0.1 million, respectively. Net (loss) income by operating segment is summarized in the following table.
| | Three Months Ended | | | Six Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | January 27, 2018 | | | January 28, 2017 | |
| (in thousands) | |
Time and materials | | $ | 9,337 | | | $ | 10,587 | | | $ | 19,195 | | | $ | 22,646 | |
Fixed price | | | 11,013 | | | | 10,005 | | | | 21,810 | | | | 19,308 | |
Cost-plus | | | 4,733 | | | | 4,134 | | | | 11,160 | | | | 8,087 | |
Total revenue, net | | $ | 25,083 | | | $ | 24,726 | | | $ | 52,165 | | | $ | 50,041 | |
| | Three Months Ended | | | Six Months Ended | |
| | January 26, 2019 | | | January 27, 2018 (Restated) | | | January 26, 2019 | | | January 27, 2018 (Restated) | |
| | (in thousands) | |
| | | | | | | | | | | | |
Net (loss) income attributable to EEI: | | | | | | | | | | | | |
U.S. operations (a) | | $ | (294 | ) | | $ | (480 | ) | | $ | (402 | ) | | $ | (176 | ) |
South American operations (b) | | | (15 | ) | | | (39 | ) | | | (27 | ) | | | 245 | |
Total | | $ | (309 | ) | | $ | (519 | ) | | $ | (429 | ) | | $ | 69 | |
Revenue, net andGross margin represents gross revenue less subcontract costs and cost of professional services and other direct operating expenses. The Company generally earns a higher gross margin from its U.S. operations than gross margin earned from its South American operations. As a percentage of gross revenue, the consolidated gross margin percentage of 43.7% and 42.6% for the quarter and six months ended January 26, 2019, respectively, increased slightly from the same periods of the prior fiscal year, due mainly to a higher percentage of consolidated gross revenue being generated from U.S. operations.
Results of Operations
Gross Revenue and Gross Revenue less Subcontract Costs
Gross revenue by business entity, arecontract type is summarized in the following tables.table.
| | Three Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | $ Change | | | % Change | |
| | ($ in thousands) | |
Revenue, net by business segment: | | | | | | | | | | | | |
EEI and subsidiaries located in the U.S. | | $ | 17,050 | | | $ | 18,950 | | | $ | (1,900 | ) | | | (10 | )% |
| | | | | | | | | | | | | | | | |
Subsidiaries located in South America: | | | | | | | | | | | | | | | | |
Peru | | | 2,690 | | | | 1,675 | | | | 1,015 | | | | 61 | % |
Chile | | | 3,128 | | | | 2,096 | | | | 1,032 | | | | 49 | % |
Brazil | | | 2,145 | | | | 1,931 | | | | 214 | | | | 11 | % |
Other | | | 70 | | | | 74 | | | | (4 | ) | | | --- | (1) |
| | | 8,033 | | | | 5,776 | | | | 2,257 | | | | 39 | % |
| | | | | | | | | | | | | | | | |
Total revenue, net | | $ | 25,083 | | | $ | 24,726 | | | $ | 357 | | | | 1 | % |
| | Three Months Ended | | | Six Months Ended | |
| | January 26, 2019 | | | January 27, 2018 (Restated) | | | January 26, 2019 | | | January 27, 2018 (Restated) | |
| | (in thousands) | |
| | | | | | | | | | | | |
Time and materials | | $ | 9,629 | | | $ | 8,833 | | | $ | 18,897 | | | $ | 18,765 | |
Fixed price | | | 6,997 | | | | 7,667 | | | | 14,339 | | | | 17,286 | |
Cost-plus | | | 3,626 | | | | 4,789 | | | | 8,768 | | | | 11,343 | |
Consolidated gross revenue | | $ | 20,252 | | | $ | 21,289 | | | $ | 42,004 | | | $ | 47,394 | |
Revenue, net less subcontract costs, by business segment: | | | | | | | | | | | | |
EEI and subsidiaries located in the U.S. | | $ | 13,634 | | | $ | 15,240 | | | $ | (1,606 | ) | | | (11 | )% |
| | | | | | | | | | | | | | | | |
Subsidiaries located in South America: | | | | | | | | | | | | | | | | |
Peru | | | 1,506 | | | | 1,008 | | | | 498 | | | | 49 | % |
Chile | | | 2,397 | | | | 1,473 | | | | 924 | | | | 63 | % |
Brazil | | | 1,747 | | | | 1,593 | | | | 154 | | | | 10 | % |
Other | | | 30 | | | | 65 | | | | (35 | ) | | | --- | (1) |
| | | 5,680 | | | | 4,139 | | | | 1,541 | | | | 37 | % |
| | | | | | | | | | | | | | | | |
Total revenue, net less subcontract costs | | $ | 19,314 | | | $ | 19,379 | | | $ | (65 | ) | | | --- | % |
| | Six Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | $ Change | | | % Change | |
| | ($ in thousands) | |
Revenue, net by business segment: | | | | | | | | | | | | |
EEI and subsidiaries located in the U.S. | | $ | 36,748 | | | $ | 39,265 | | | $ | (2,517 | ) | | | (6 | )% |
| | | | | | | | | | | | | | | | |
Subsidiaries located in South America: | | | | | | | | | | | | | | | | |
Peru | | | 5,689 | | | | 2,737 | | | | 2,952 | | | | 108 | % |
Chile | | | 5,242 | | | | 4,057 | | | | 1,185 | | | | 29 | % |
Brazil | | | 4,395 | | | | 3,838 | | | | 557 | | | | 15 | % |
Other | | | 91 | | | | 144 | | | | (53 | ) | | | --- | (1) |
| | | 15,417 | | | | 10,776 | | | | 4,641 | | | | 43 | % |
| | | | | | | | | | | | | | | | |
Total revenue, net | | $ | 52,165 | | | $ | 50,041 | | | $ | 2,124 | | | | 4 | % |
Gross revenue less subcontract costs is a key metric utilized by management for operational monitoring and decision-making. References to “revenue” in the following commentary refer to gross revenue less subcontract costs, which is summarized by operating segment in the following tables.
Revenue, net less subcontract costs, by business segment: | | | | | | | | | | | | |
EEI and subsidiaries located in the U.S. | | $ | 29,767 | | | $ | 32,917 | | | $ | (3,150 | ) | | | (10 | )% |
| | | | | | | | | | | | | | | | |
Subsidiaries located in South America: | | | | | | | | | | | | | | | | |
Peru | | | 3,254 | | | | 1,651 | | | | 1,603 | | | | 97 | % |
Chile | | | 4,051 | | | | 3,017 | | | | 1,034 | | | | 34 | % |
Brazil | | | 3,552 | | | | 2,972 | | | | 580 | | | | 20 | % |
Other | | | 43 | | | | 126 | | | | (83 | ) | | | --- | (1) |
| | | 10,900 | | | | 7,766 | | | | 3,134 | | | | 40 | % |
| | | | | | | | | | | | | | | | |
Total revenue, net less subcontract costs | | $ | 40,667 | | | $ | 40,683 | | | $ | (16 | ) | | | --- | % |
| | Three Months Ended | |
Operating Segment | | January 26, 2019 | | | January 27, 2018 (Restated) | | | $ Change | | | % Change | |
| | ($ in thousands) | |
| | | |
U.S. operations | | $ | 13,400 | | | $ | 13,577 | | | $ | (177 | ) | | | (1 | |
| | | | | | | | | | | | | | | | |
South American operations: | | | | | | | | | | | | | | | | |
Chile | | | 1,082 | | | | 1,506 | | | | (424 | ) | | | (28 | |
Brazil | | | 2,197 | | | | 1,747 | | | | 450 | | | | 26 | % |
Other | | | (46 | ) | | | 30 | | | | (76 | ) | | | --- | |
Total South American operations | | | 3,233 | | | | 3,283 | | | | (50 | ) | | | (2 | |
| | | | | | | | | | | | | | | | |
Consolidated gross revenue less subcontract costs | | $ | 16,633 | | | $ | 16,860 | | | $ | (227 | ) | | | (1 | |
| | Six Months Ended | |
Operating Segment | | January 26, 2019 | | | January 27, 2018 (Restated) | | | $ Change | | | % Change | |
| | ($ in thousands) | |
| | | |
U.S. operations | | $ | 27,599 | | | $ | 29,767 | | | $ | (2,168 | ) | | | (7 | |
| | | | | | | | | | | | | | | | |
South American operations: | | | | | | | | | | | | | | | | |
Peru | | | 1,995 | | | | 3,254 | | | | (1,259 | ) | | | (39 | |
Brazil | | | 4,225 | | | | 3,552 | | | | 673 | | | | 19 | % |
Other | | | (8 | ) | | | 43 | | | | (51 | ) | | | --- | (a) |
Total South American operations | | | 6,212 | | | | 6,849 | | | | (637 | ) | | | (9 | |
| | | | | | | | | | | | | | | | |
Consolidated gross revenue less subcontract costs | | $ | 33,811 | | | $ | 36,616 | | | $ | (2,805 | ) | | | (8 | |
| (1)(a) | Percent change is not relevant because of the relatively immaterial amounts for all periods presented. |
Revenue, net represents gross revenue recognized for the services provided to our clients, adjusted for the impacts of cost overruns or settlements recorded upon completion and close out of a project. Revenue, net less subcontract costs is a key metric utilized by management for operational monitoring and decision-making. References to “revenues” in the following commentary refer to revenue, net less subcontract costs from the table above.
Consolidated revenues decreased slightly during the current quarter and the first half of fiscal year 2018, as lower revenues from U.S. operations were offset by significantly higher revenues from subsidiary operations in South America.
EEI and Subsidiaries Located in the U.S. Operations
The Company records an allowance for project disallowances in other accrued liabilities for potential disallowances resulting from government audits. During the quarter and six months ended January 28, 2017, as a result of final settlements of projects completed in prior years, the Company reduced its allowance for project disallowances by $0.5 million and $1.1 million, respectively, which was recorded as an addition to revenue, net on the consolidated statement of operations. We did not record any similar adjustments during the quarter or six months ended January 27, 2018.
Excluding the above settlement adjustments, revenuesRevenue from U.S. operations decreased 8%1% during the currentsecond quarter and decreased 4%7% during the first halfsix months of fiscal year 2019 compared with the same periods of the prior fiscal year.
During the second quarter and first six months of 2019, the Company recognized revenue growth from survey, impact assessment, planning and data management services provided to clients in the LNG, offshore resources and resilient communities markets. However, this revenue growth was more than offset by decreases in revenue from the pipeline, onshore renewables, armed services and site assessment and remediation markets, as projects completed during fiscal year 2018 and the first quarter of fiscal year 2019 were not replaced with new work of comparable size. In addition, the federal government shutdown that occurred during the second quarter of fiscal year 2019 delayed new work authorizations, affected ongoing project schedules and postponed revenue delivery on various federal government contracts.
South American Operations
Revenue from our Brazilian operations increased 26% and 19% during the second quarter and first six months of fiscal year 2019, respectively, compared with the same periods of the prior year. Lower revenues were primarilyIn local currency, revenue from our Brazilian operations increased 30% due mainly to increased project volumes with commercial clients in the transmission, energy and mining sectors. Strengthening of the U.S. dollar compared to the Brazilian Real significantly offset the positive impact of higher project volumes.
Revenue from our Peruvian operations decreased 28% and 39% during the second quarter and first six months of fiscal year 2019, respectively, compared with the same periods of the prior year, due to lower project activity resulting from the following factors:
| · | We have experienced a trend of longer periods being required by various prospectivevolumes with commercial and federal clients to make contract award decisions; |
| · | We have also experienced a trend of longer periods being required by certain current clients to fund projects, define project scopes and schedule project work; and |
| · | Weather related delays also impacted work delivery schedules for certain federal and state projects. |
Subsidiaries Located in South America
Higher revenues from our Brazilian operations resulted from increased project activity in the energy transmission and wind sectors. An economic downturn that adversely affected our Brazilian operations for several previous reporting periods stabilized during fiscal year 2017 and the first half of fiscal year 2018, resulting in additional business development opportunities. The mix of contract work along with changes in our pricing strategy generated a higher average selling rate for the first half of this year, as compared to the same period last year.sector.
Higher revenues from our Peruvian operations resulted from increased project activity within the energy sector. Increases in mineral prices, gas demandCost of Professional Services and private and public investments in energy projects each contributed to strong revenue growth in Peru.
Higher revenues from our Chilean operations were due to increased project activity within the transmission, industrial and mining sectors. Improved mineral prices continued to result in additional project opportunities during fiscal year 2018.
EEI and local subsidiary management continue to develop business development strategies that are responsive to local economic conditions while also providing synergies with the Company’s overall market development strategies.
Other Direct Operating Expenses
The costCost of professional services and other direct operating expenses represents labor and other direct costs of providing services to our clients under our project agreements. We refer to these expenses as “direct operating expenses.” These costs, and fluctuations in these costs, generally resultcorrelate directly fromwith related project work volumes and revenues. DirectCost of professional services and other direct operating expenses by businessoperating segment are summarized in the following tables.
| | Three Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | $ Change | | | % Change | |
| | ($ in thousands) | |
| | | | | | | | | | | | |
EEI and subsidiaries located in the U.S. | | $ | 6,395 | | | $ | 6,939 | | | $ | (544 | ) | | | (8 | ) % |
| | | | | | | | | | | | | | | | |
Subsidiaries located in South America: | | | | | | | | | | | | | | | | |
Peru | | | 540 | | | | 303 | | | | 237 | | | | 78 | % |
Chile | | | 1,113 | | | | 734 | | | | 379 | | | | 52 | % |
Brazil | | | 1,006 | | | | 1,028 | | | | (22 | ) | | | (2 | )% |
Other | | | 24 | | | | 26 | | | | (2 | ) | | | --- | (1) |
| | | 2,683 | | | | 2,091 | | | | 592 | | | | 28 | % |
| | | | | | | | | | | | | | | | |
Total direct operating expenses | | $ | 9,078 | | | $ | 9,030 | | | $ | 48 | | | | 1 | % |
| | Three Months Ended | |
Operating Segment | | January 26, 2019 | | | January 27, 2018 (Restated) | | | $ Change | | | % Change | |
| | ($ in thousands) | |
| | | | | | | | | | | | |
U.S. operations | | $ | 6,145 | | | $ | 6,396 | | | $ | (251 | ) | | | (4 | |
| | | | | | | | | | | | | | | | |
South American operations: | | | | | | | | | | | | | | | | |
Peru | | | 319 | | | | 540 | | | | (221 | ) | | | (41 | |
Brazil | | | 1,302 | | | | 1,006 | | | | 296 | | | | 29 | % |
Other | | | 8 | | | | 24 | | | | (16 | ) | | | --- | (a) |
Total South American operations | | | 1,629 | | | | 1,570 | | | | 59 | | | | 4 | % |
| | | | | | | | | | | | | | | | |
Consolidated cost of professional services and other direct operating expenses | | $ | 7,774 | | | $ | 7,966 | | | $ | (192 | ) | | | 2 | % |
| | Six Months Ended | |
Operating Segment | | January 26, 2019 | | | January 27, 2018 (Restated) | | | $ Change | | | % Change | |
| | ($ in thousands) | |
| | | | | | | | | | | | |
U.S. operations | | $ | 12,641 | | | $ | 13,413 | | | $ | (772 | ) | | | (6 | |
| | | | | | | | | | | | | | | | |
South American operations: | | | | | | | | | | | | | | | | |
Peru | | | 720 | | | | 1,088 | | | | (368 | ) | | | (34 | |
Brazil | | | 2,526 | | | | 2,055 | | | | 471 | | | | 23 | % |
Other | | | 21 | | | | 28 | | | | (7 | ) | | | --- | (a) |
Total South American operations | | | 3,267 | | | | 3,171 | | | | 96 | | | | 3 | % |
| | | | | | | | | | | | | | | | |
Consolidated cost of professional services and other direct operating expenses | | $ | 15,908 | | | $ | 16,584 | | | $ | (676 | ) | | | (4 | |
Page 23
| (a) | Percent change is not relevant because of the relatively immaterial amounts for all periods presented. |
Consolidated Cost of 29professional services and other direct operating expenses increased 2% and decreased 4% during the second quarter and first six months of fiscal year 2019, respectively, compared with the same periods of the prior year. Higher direct costs in our Brazilian operations were more than offset by lower costs in the U.S. and Peru. These fluctuations in direct operating expenses generally correspond with increases or decreases in project revenue.
| | Six Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | $ Change | | | % Change | |
| | ($ in thousands) | |
| | | | | | | | | | | | |
EEI and subsidiaries located in the U.S. | | $ | 13,413 | | | $ | 14,345 | | | $ | (932 | ) | | | (6 | ) % |
| | | | | | | | | | | | | | | | |
Subsidiaries located in South America: | | | | | | | | | | | | | | | | |
Peru | | | 1,088 | | | | 523 | | | | 565 | | | | 108 | % |
Chile | | | 1,975 | | | | 1,424 | | | | 551 | | | | 39 | % |
Brazil | | | 2,055 | | | | 2,073 | | | | (18 | ) | | | (1 | ) % |
Other | | | 28 | | | | 75 | | | | (47 | ) | | | --- | (1) |
| | | 5,146 | | | | 4,095 | | | | 1,051 | | | | 26 | % |
| | | | | | | | | | | | | | | | |
Total direct operating expenses | | $ | 18,559 | | | $ | 18,440 | | | $ | 119 | | | | 1 | % |
Selling, General and Administrative Expenses
Selling, general and administrative expenses represent operating costs not directly associated with the generation of revenue. Selling, general and administrative expenses by operating segment are summarized in the following tables.
| | Three Months Ended | |
Operating Segment | | January 26, 2019 | | | January 27, 2018 (Restated) | | | $ Change | | | % Change | |
| | ($ in thousands) | |
| | | | | | | | | | | | |
U.S. operations | | $ | 7,835 | | | $ | 7,745 | | | $ | 89 | | | | 1 | % |
| | | | | | | | | | | | | | | | |
South American operations: | | | | | | | | | | | | | | | | |
Peru | | | 728 | | | | 857 | | | | (129 | ) | | | (15 | |
Brazil | | | 841 | | | | 861 | | | | (20 | ) | | | (2 | |
Other | | | 48 | | | | 20 | | | | 28 | | | | --- | (a) |
Total South American operations | | | 1,617 | | | | 1,738 | | | | (121 | ) | | | (7 | |
| | | | | | | | | | | | | | | | |
Consolidated selling, general and administrative expenses | | $ | 9,452 | | | $ | 9,483 | | | $ | (32 | ) | | | --- | % |
| | Six Months Ended | |
Operating Segment | | January 26, 2019 | | | January 27, 2018 (Restated) | | | $ Change | | | % Change | |
| | ($ in thousands) | |
| | | | | | | | | | | | |
U.S. operations | | $ | 15,673 | | | $ | 16,057 | | | $ | (384 | ) | | | (2 | |
| | | | | | | | | | | | | | | | |
South American operations: | | | | | | | | | | | | | | | | |
Peru | | | 1,393 | | | | 1,660 | | | | (267 | ) | | | (16 | |
Brazil | | | 1,509 | | | | 1,507 | | | | 2 | | | | --- | % |
Other | | | 77 | | | | 41 | | | | 36 | | | | --- | (a) |
Total South American operations | | | 2,979 | | | | 3,208 | | | | (229 | ) | | | (7 | |
| | | | | | | | | | | | | | | | |
Consolidated selling, general and administrative expenses | | $ | 18,652 | | | $ | 19,265 | | | $ | (613 | ) | | | (3 | |
| (1)(a) | Percent change is not relevant because of the relatively immaterial amounts for all periods presented. |
Consolidated direct operating expenses were slightly higher during the current quarter and first half of fiscal year 2018, as compared with the same periods last year. Higher direct costs in our South American operations were materially offset by lower costs in the U.S. These fluctuations in direct operating expenses generally correspond with increases or decreases in project revenues.Operations
Indirect Operating Expenses
AdministrativeSelling, general and indirect operatingadministrative expenses increased 1% and marketing and related costs represent administrative and other operating costs not directly associated with the generation of revenue. We refer to these costs as “indirect operating expenses.” Indirect operating expenses by business segment are summarized in the following tables.
| | Three Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | $ Change | | | % Change | |
| | ($ in thousands) | |
| | | | | | | | | | | | |
EEI and subsidiaries located in the U.S. | | $ | 7,745 | | | $ | 7,782 | | | $ | (37 | ) | | | --- | % |
| | | | | | | | | | | | | | | | |
Subsidiaries located in South America: | | | | | | | | | | | | | | | | |
Peru | | | 857 | | | | 947 | | | | (90 | ) | | | (10 | )% |
Chile | | | 745 | | | | 448 | | | | 297 | | | | 66 | % |
Brazil | | | 861 | | | | 576 | | | | 285 | | | | 49 | % |
Other | | | 20 | | | | 69 | | | | (49 | ) | | | --- | (1) |
| | | 2,483 | | | | 2,040 | | | | 443 | | | | 22 | % |
| | | | | | | | | | | | | | | | |
Total indirect operating expenses | | $ | 10,228 | | | $ | 9,822 | | | $ | 406 | | | | 4 | % |
| | Six Months Ended | |
| | January 27, 2018 | | | January 28, 2017 | | | $ Change | | | % Change | |
| | ($ in thousands) | |
| | | | | | | | | | | | |
EEI and subsidiaries located in the U.S. | | $ | 16,056 | | | $ | 16,010 | | | $ | 46 | | | | --- | % |
| | | | | | | | | | | | | | | | |
Subsidiaries located in South America: | | | | | | | | | | | | | | | | |
Peru | | | 1,660 | | | | 1,747 | | | | (87 | ) | | | (5 | )% |
Chile | | | 1,473 | | | | 1,115 | | | | 358 | | | | 32 | % |
Brazil | | | 1,507 | | | | 1,118 | | | | 389 | | | | 35 | % |
Other | | | 41 | | | | 79 | | | | (38 | ) | | | --- | (1) |
| | | 4,681 | | | | 4,059 | | | | 622 | | | | 15 | % |
| | | | | | | | | | | | | | | | |
Total indirect operating expenses | | $ | 20,737 | | | $ | 20,069 | | | $ | 668 | | | | 3 | % |
| (1) | Percent change is not relevant because of the relatively immaterial amounts for all periods presented. |
decreased 2% Page 24 of 29
Subsidiaries Located in the U.S.
Indirect operating expenses in our U.S operations remained relatively unchanged during the second quarter and first halfsix months of fiscal year 2018, as2019, respectively, compared with the same periods lastof the prior year. Business development related expenses were significantly higher throughout In response to the firsttrend of lack of revenue growth and erosion of profits during recent fiscal years, management implemented a restructuring plan that includes a reduction in workforce and other expense reductions during the second half of fiscal year 2018 due2019. Refer to focus on specific expanded marketing initiatives“Corporate Reorganization and proposal activity. Higher business development related expenses were partially offset by:
| · | Lower bad debt expenses, primarily due to reversal of specific reserves that had been recorded during the prior fiscal year; and |
| · | Lower cash bonus expense resulting from lower 2018 year-to-date earnings. |
Staff Reduction Programs Initiated in Fiscal Year 2019” below for additional commentary.
Subsidiaries Located in South AmericaAmerican Operations
Indirect operatingSelling, general and administrative expenses in our South AmericanPeruvian operations were 22%decreased 15% and 15% higher during the 16% second quarter and first halfsix months of fiscal year 2018,2019, respectively, as compared with the same periods last year. Business development relatedof the prior year. Management implemented targeted cost reductions in response to lower project volumes and lower expectations for future work.
Selling, general and administrative expenses were significantly higher during fiscal year 2018, mainlyin our Brazilian operations decreased 2% during the second quarter as improved economic conditions within our South American markets have led to increased investment in environmental projectsof fiscal year 2019 and increased opportunities for our subsidiaries to obtain new work. We also recorded higher cash bonus expense accrualswas relatively unchanged during the first halfsix months of fiscal year 20182019, compared with the same periods of the prior year. In local currency, staff and other costs increased 28% due to improved earnings. Higher business developmentincreased project proposal activity and bonus expenses were partially offset by lower bad debtincreased general and staff severance expenses, which reflect improved economic conditionsadministrative costs to support higher project volumes and expanded workforces necessaryoperations. Strengthening of the U.S. dollar compared to provide services for new projects.the Brazilian Real significantly offset the increases in expenses due to expanded operations.
Income Taxesfrom Equity Method Investment
Our estimated effective tax rateThe Company’s equity method investment in GAC had a carrying value of $2.3 million and $2.1 million at January 26, 2019 and July 31, 2018, respectively. The Company’s ownership percentage was 93.7%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 six months ended January 26, 2019 and 67.7%January 27, 2018 is summarized in the following table.
| | Six Months Ended | |
| | January 26, 2019 | | | January 27, 2018 (Restated) | |
| | (in thousands) | |
| | | |
Equity investment carrying value at beginning of period | | $ | 2,058 | | | $ | 1,464 | |
GAC net income attributable to EEI | | | 231 | | | | 239 | |
Equity investment carrying value at end of period | | $ | 2,289 | | | $ | 1,703 | |
The results of GAC’s operations for the six months ended January 26, 2019 and January 27, 2018 and January 28, 2017, respectively. Theare summarized in the following table.
| | Six Months Ended | |
| | January 26, 2019 | | | January 27, 2018 | |
| | (in thousands) | |
| | | | | | |
| | | | | | | | |
Direct cost of services and subcontract costs | | | | | | | | |
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Net income attributable to EEI | | | | | | | | |
Income Taxes
During interim reporting periods, the effective tax rate may be impacted by changes in tax rates and other tax regulations inthe mix of forecasted income from the U.S. and foreign jurisdictions where the Company operates, by changes in the mix of forecasted income fromtax 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 Tax Act lowered the Company’s statutory federalestimated effective tax rate decreased to 55.0% for the six months ended January 26, 2019 from 34% (effective through66.5% for the six months ended January 27, 2018. The decrease in the estimated effective tax rate resulted mainly from changes in U.S. corporate income tax regulations included in the Tax Cuts and Jobs Act enacted in December 31, 2017) to 21% (effective January 1, 2018). As2017 (the “Tax Act”), which included:
A reduction our in the Company has a July 31 fiscal year-end, the lowerU.S. corporate income tax rate will be phased in, resulting in an average statutory federal taxto 21% for the six months ended January 26, 2019, compared with a blended rate of approximately 26% for the fiscal year ending July 31, 2018, and 21% for subsequent fiscal years. Due to the Company’s minimal loss from U.S. operations, the reduction in the statutory federal tax rate did not have a material impact on the income tax provision related to pre-tax income during the threesix months ended January 27, 2018.
The reduction of the statutory federalCertain one-time tax rate also resulted in revaluation of the Company’s U.S. deferred tax assets and liabilities. Revaluation is based on the tax rates at which the deferred tax assets and liabilities are expected to reverse in the future, which is generally 21%. The Company recorded an estimated net deferred tax expense of $0.3 million during the three months ended January 27, 2018 as a result ofitems, including revaluation of deferred tax assets and liabilities.liabilities and the effect of a new territorial tax system, that increased our federal income tax expense by a combined $0.4 million for the six-months ended January 27, 2018. We did not record any similar or other unusual adjustments to federal income tax expense during the six months ended January 26, 2019.
Corporate Reorganization and Staff Reduction Programs Initiated in Fiscal Year 2019
In response to a lack of revenue growth and erosion of profits during recent fiscal years, we implemented a restructuring plan for our U.S. operations during the quarter ended January 31, 2019, with the overall objective of achieving profitable growth (the “Corporate Restructuring Plan”). The Corporate Restructuring Plan includes work streams to address the following broad objectives for U.S. operations:
Simplifying the business organizational structure;
Improving the efficiency of the technical organization and delivery model;
Developing an improved marketing and sales strategy; and
Reducing operating expenses.
In December 2018, we began a process for notifying affected employees of voluntary retirement and involuntary separation programs (collectively, the “Staff Reduction Programs”) being implemented in connection with the Corporate Restructuring Plan. We expect to reduce our U.S. operations workforce by more than 10% by July 31, 2019 as a direct result of the Staff Reduction Programs, resulting in approximately $6 million of anticipated annual reduction of salary and fringe expenses. We also expect these actions to result in approximately $1.0 million of pre-tax charges and cash expenditures recorded during the second half of fiscal year 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.
Liquidity and Capital Resources
Cash, cash equivalents and restricted cash decreased $2.5 million during the first six months of fiscal year 2019. Historically, cash generated from our operating activities has exceeded cash required for investing and financing activities. However, recent declines in revenue and profits from our U.S. and Peruvian operations have had a detrimental impact on cash generated from operating activities. In addition, higher revenue from our Brazilian operations during recent reporting periods represented initial resource outlays on new projects that have not yet been billed to and collected from our clients. After initial outlays of cash for employee severance and termination benefits, the Corporate Restructuring Plan and Staff Reduction Programs described above are expected to have a significant positive impact on our cash and liquidity position during the fourth quarter of fiscal year 2019 and future reporting periods.
Our Board of Directors considers the approval dividends to our shareholders based on various operating parameters, including available cash balances, results of current operations and projections of future operating results and cash flows. Excluding the payment of $0.9 million of dividends to shareholders that our Board of Directors approved on a discretionary basis, cash decreased $1.6 million during the period.
Our U.S. operations had $32.5 million of unsecured lines of credit available to fund working capital requirements. There were no cash advances and less than $0.1 million of letters of credit outstanding under these lines of credit at January 26, 2019. Our lenders have reaffirmed the lines of credit within the past twelve months. We believe that available cash balances, anticipated cash flows and our available lines of credit will be sufficient to cover working capital requirements of our U.S. operations during the next twelve months and the foreseeable future.
Our South American operations had $3.4 million of unsecured lines of credit available to fund working capital requirements. There were $0.2 million of cash advances and $1.7 million of letters of credit outstanding under these lines of credit at January 26, 2019. Our lenders have reaffirmed the lines of credit within the past twelve months. Our South American operations are located in countries where local economies have historically had volatile reactions to changing global and local economic conditions. There is continual risk that economic uncertainty will have an impact on our operations and liquidity position in South America. Although we currently believe that available cash balances, anticipated cash flows, and available lines of credit will be sufficient to cover working capital requirements of our South American operations in the near future, economic uncertainty and volatility may challenge our liquidity position in the longer term. In the event that these subsidiaries are unable to generate adequate cash flow to fund their operations, additional funding from EEI or lending institutions will be considered.
Excess cash accumulated by any foreign subsidiary, beyond that necessary to fund operations or business expansion, may be repatriated to the U.S. at the discretion of the Boards of Directors of the respective entities. The Company repatriated $0.2 million of dividends from foreign subsidiaries, net of local taxes, during the first quarter of fiscal year 2019.
The Tax Act includes provisions for a territorial federal tax system that:
| · | imposes a U.S. federal tax on historical cumulative earnings of foreign subsidiaries, replacing the previous system of taxing the earnings of foreign subsidiaries only as they were repatriated to the U.S.resulted in the form of dividends; |
| · | eliminates or reduces the ability to utilize certain foreign tax credits that existed prior to enactment of the Tax Act; and |
| · | provides for a deduction for dividends received from foreign subsidiaries. |
The Company recorded net estimated federal tax expense of $0.1 million related to these territorial tax provisions during the three months ended January 27, 2018, representing the net of a one-time transition tax on deemed repatriation of $0.3 million on cumulativehistorical earnings of foreign subsidiaries offsetof approximately $0.5 million, which will be paid, without incurring interest, by $0.2 millionJuly 31, 2019.
Contract Backlog
Firm backlog represents an estimate of benefit from outstanding unpaid dividends from a foreign subsidiary. Asgross revenue that will be recognized over the remaining life of January 27, 2018, the Company recordedprojects under contracts that are awarded, funded and in progress. These projects include work to be performed under contracts which contain termination provisions that may be exercised without penalty at any time by our clients upon written notice to us, in which case the $0.3 million transition tax as a non-current income tax liability, which management expectsclient would only be obligated to pay over an eight year period allowedus for services provided through the termination date. A significant portion of our revenue is generated through projects awarded under Master Service Agreements with our clients. In these instances, only the current unfinished projects are included in the Tax Act.our backlog.
There are other transitional impacts of the Tax Act, certain of which were estimated to have an immaterial impact on our income tax provision for the three and six months ended January 27, 2018, and certain of which will become effective during future fiscal years.
The changes included in the Tax Act are broad and complex. The tax provision recorded for the three and six months ended January 27, 2018 reflects management’s estimates of the Tax Act’s impacts. The Securities and Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize and record the related tax impacts. Management currently anticipates finalizing and recording any resulting adjustments by the end of the Company’s fiscal year ending July Page 31 2018. The final transition impacts of the Tax Act may differ from these estimates due to, among other things, changes in interpretations of the Tax Act, subsequent legislative action to further revise the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to our estimates utilized to calculate the transition impacts. |
The effective tax rate forFirm backlog by operating segment is summarized in the following table.
| | January 26, 2019 | | | July 31, 2018 | |
| | (in thousands) | |
Total firm backlog of uncompleted contracts: | | | | | | |
U.S. operations | | $ | 51,744 | | | $ | 49,081 | |
South American operations | | | 14,721 | | | | 9,465 | |
Consolidated totals | | | | | | | | |
| | | | | | | | |
Anticipated completion of firm backlog in next twelve months: | | | | | | | | |
U.S. operations | | $ | 43,716 | | | $ | 42,991 | |
South American operations | | | 8,909 | | | | 8,325 | |
Consolidated totals | | | | | | | | |
For our U.S. operations, new orders reported as additions to firm backlog kept pace with work delivered on projects during the first six months ended January 28, 2017 includesof fiscal year 2019. The increase in firm backlog for our South American operations during the tax impactsame period was the result of significant new orders that outpaced completion of projects.
In addition to the firm backlog summarized in the table above, we also have been awarded contracts that are partially or entirely unfunded, but which are expected to be partially or entirely funded during the remaining life of the Company’s portionassociated projects. Total unfunded backlog approximated $24.0 million and $23.0 million at January 31, 2019 and July 31, 2018, respectively. Until these projects are funded, we cannot be certain regarding the value of dividends declared by its majority owned subsidiary in Chile and reversal of a deferred tax asset previously maintained by the Company’s majority owned subsidiary in Peru.gross revenue that we will recognize under these contracts.
Backlog is not a measure defined by generally accepted accounting principles in the United States (“U.S. GAAP”) and is not a measure of profitability. Our method for calculating backlog may not be comparable to methodologies used by other companies.
Critical Accounting Policies and Use of Estimates
The Company's condensed consolidated financial statements presented in Item 1 of this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts and contract adjustments, income taxes, impairment of long-lived assets and contingencies. Management bases its estimates and judgments on historical experience and other factors that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Refer to the
The Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2017 for a description2018 includes descriptions of our critical accounting policies.policies related to revenue recognition, allowance for doubtful accounts, goodwill and income taxes.
InflationThe 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.
Update to Revenue Recognition Accounting Policy
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 Notes 3 and 6 of the condensed consolidated financial statements included in Item 1 of this Form 10-Q for additional disclosures regarding the adoption of ASU 2014-09 and our revenue recognition accounting policy.
Inflation
Inflation did not have a material impact on our business during the six months ended January 27, 201826, 2019 or January 28, 201727, 2018 because a significant amount of our contracts are either cost based or contain commercial rates for services that are adjusted annually.
Off-Balance Sheet Arrangements
We had outstanding letters of credit drawn under our lines of credit to support operations of $1.9 million and $2.5$1.7 million at January 27, 201826, 2019 and July 31, 2017, respectively.2018. Other than these letters of credit, we did not have any off-balance sheet arrangements as of January 27, 201826, 2019 or July 31, 2017.2018.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange“Securities Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, our management, with the participation of our Acting Principal Executive Officer and Acting Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Exchange Act. As a consequence of the material weaknesses discussed below, our Acting Principal Executive Officer and Acting Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective at January 26, 2018.
As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2017,2018, management concluded that the Company’s internal control over financial reporting was not effective as of July 31, 2017 due to the fact that there were2018 because of material weaknesses.weaknesses in the Company’s internal control over financial reporting.reporting as described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements would not be prevented or detected on a timely basis. The material weaknesses arise from deficiencies relating to:
Specifically, management identified control deficienciesdetermining the appropriate application of accounting standards when assessing whether the Company’s investments in subsidiaries should be consolidated or accounted for under the equity method of accounting;
ascertaining and disclosing the appropriate accounting policies, including the effects of non-standard provisions, for revenue recognition related to the Company’s fixed-price service contracts;
establishing appropriate cutoff procedures for appropriate revenue and expense recognition.
As described in Note 2 of the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, management determined that an error in accounting for income taxes and management’s review controls over the financial statement close process, particularly controls related to certain non-routine and estimation processes (i.e., the goodwill impairment assessment model) and review controls related to the Company’s intercompany and consolidation process. Although the deficiencies did not resultEEI’s investment in GAC resulted in a material misstatement of the Company’s consolidated financial statements reported prior to July 31, 2018. Management identified deficiencies related to determining the appropriate application of accounting when assessing whether the Company’s investments in subsidiaries should be consolidated or accounted for under the equity method of accounting. Specifically, the deficiencies relate to its process to review all factors necessary to assess its influence and control over the operations of its subsidiaries, and to assess the proper accounting for its investments in subsidiaries. The financial statements for any of the periods presented in this Form 10-K, management concluded that there was a reasonable possibility that, if any material misstatement had occurred, it would notthree and six months ended January 27, 2018 have been prevented or detected on a timely basis.
Page 26 of 29restated to correct this error.
Management hasWith input from the Audit Committee, management developed, and is in the process of implementing, a remediation plan to address the material weaknesses as of July 31, 2018 noted above. Specifically, the following controls have been established orand procedures will be established duringor strengthened to address the fiscal year ending July 31, 2018:material weaknesses.
We will assess our current accounting staff and identify the need to train existing staff resources regarding technical accounting topics and related disclosure requirements that are pertinent to the Company’s operations, including those relating to consolidation, equity method and revenue recognition standards. We will also consider adding new staff resources and/or engaging third-party advisors that have adequate expertise and experience with pertinent U.S. GAAP requirements.
We will assess our policies and processes to determine controls required to appropriately address technical accounting topics and establish cutoff for recognition of revenues and expenses. Once determined, we will implement any needed enhancements and/or additional procedures and controls.
| · | Expanding the roles of third-party tax experts for preparation and review of income tax provisions, and development of specific procedures for management to monitor and review the work of third-party tax experts; and |
| · | Developing a process for periodic review of specific key factors and assumptions utilized in the goodwill impairment assessment model to identify changes that potentially could result in goodwill impairment. |
Management has developed a detailed planThe design and timetable for the implementationexecution of the foregoing remediation efforts. Under the direction of the Audit Committee, managementany new or enhanced controls noted above will monitor the implementation plan and continue to review and make necessary changes to the plan to improve the overall design ofbe periodically tested by the Company’s internal control environment.Internal Auditor.
As of the end of the period covered by this report, our management, with the participation of our chiefacting principal executive officer and acting chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Exchange Act. Based upon this evaluation, our chiefacting principal executive officer and our acting chief financial officer concluded that, excluding the control deficiencies that resulted in the material weakness described above, our disclosure controls and procedures were: (1) designed to ensure that material information relating to our Company is accumulated and made known to our management, including our chiefacting principal executive officer and acting chief financial officer, in a timely manner, particularly during the period in which this report was being prepared; and (2) effective, in that they provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a Company have been detected.
Internal Controls
Other than certain controls added or improved to address the material weaknessweaknesses described above, no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended January 27, 201826, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
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. The Company’s legal proceedings are disclosed in Note 1513 of the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 2. | Changes in Securities and Use of Proceeds |
(e) Purchased Equity Securities. In August 2010, the Company’s Board of Directors approved a 200,000 share repurchase program. The following table summarizes the Company’s purchases of its common stock during the six months ended January 27, 201826, 2019 under this share repurchase program:
Fiscal Year 2018 Reporting Month | | Total Number of Shares Purchased
| | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs |
| | | | | | | | |
August 20172018 | | --- | | --- | | --- | | 77,082 |
September 20172018 | | --- | | --- | | --- | | 77,082 |
October 20172018 | | --- | | --- | | --- | | 77,082 |
November 20172018 | | --- | | --- | | --- | | 77,082 |
December 20172018 | | --- | | --- | | --- | | 77,082 |
January 20182019 | | --- | | --- | | --- | | 77,082 |
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
None.
Item 6. | Exhibits and Reports on Form 8-K |
| (a) | 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | 31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | 32.1 Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | 32.2 Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| (o) | The Company filed a Current Report on Form 8-K on May 20, 2019 to announce that, in response to the May 13, 2019 formal determination letter received from Nasdaq, the Company timely submitted a request for a hearing before the Nasdaq hearings panel, including an additional request for a stay of delisting pending the hearing. Also on May 20, 2019 the company received a letter from Nasdaq notifying the Company that the Nasdaq hearings panel has scheduled the Company’s hearing for June 27, 2019, and that any delisting action that may be taken by Nasdaq against the Company has been stayed for 15 calendar days, or until June 4, 2019. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Ecology and Environment Inc. |
| | |
Date: March 13, 2018 | May 31, 2019 | By: | /s/ H. John Mye IIIPeter F. Sorci |
| | H. John Mye III | Peter F. Sorci |
| | | Acting Chief Financial Officer and Treasurer |
Principal Financial and Accounting Officer