SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act in 1934
For Quarter Ended January 27, 2001 Commission File #1-9065
ECOLOGY AND ENVIRONMENT, INC.
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(Exact name of registrant as specified in its charter)
New York 16-0971022
---------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
organization)
368 Pleasant View Drive
Lancaster, New York 14086
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 716-684-8060
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 X No
----- -----
At March 2, 2001, 2,401,659 shares of Registrant's Class A Common
Stock (par value $.01) and 1,768,630 shares of Class B Common Stock (par
value $.01 were outstanding.
Ecology and Environment, Inc.
Consolidated Balance Sheet
January 27, July 31,
2001 2000
(Unaudited)
------------ -------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 8,257,033 $ 4,997,771
Investment securities available for sale 3,509,324 3,436,207
Contract receivables, net 19,480,639 24,178,191
Deferred income taxes 1,851,721 1,932,774
Income taxes receivable 470,467 26,081
Other current assets 770,802 1,185,086
------------ ------------
Total current assets 34,339,986 35,756,110
Property, building and equipment, net 16,480,574 15,983,806
Deferred income taxes 152,247 152,247
Other assets 1,438,996 1,556,702
------------- -------------
Total assets $52,411,803 $53,448,865
============= =============
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 3,476,277 $ 4,374,040
Accrued payroll costs 3,309,318 3,570,026
Other accrued liabilities 2,336,204 3,098,321
------------ ------------
Total current liabilities 9,121,799 11,042,387
Income tax payable 157,052 ---
Long-term debt 73,128 58,217
Minority interest 239,672 12,666
Shareholders' equity:
Preferred stock, par value $.01 per share
authorized - 2,000,000 shares; no shares
issued --- ---
Class A common stock, par value $.01 per
share; authorized - 6,000,000 shares;
issued - 2,400,559 and 2,392,709 shares 24,005 23,926
Class B common stock, par value $.01 per
share; authorized - 10,000,000 shares
issued - 1,769,730 and 1,777,580 shares 17,693 17,772
Capital in excess of par value 17,253,828 17,466,436
Retained earnings 26,295,873 25,906,540
Unearned compensation (476,109) ---
Teasury stock - Class A Common, 37,071 and
129,410 shares; Class B common, 26,259
and 26,259 shares, at cost (295,138) (1,079,079)
------------ ------------
Total shareholders' equity 42,820,152 42,335,595
------------ ------------
Total liabilities and shareholders' equity $52,411,803 $53,448,865
============ ============
The accompanying notes are an integral part of these financial statements.
Ecology and Environment, Inc.
Consolidate Statement of Income
(Unaudited)
Three months ended Six months ended
-------------------------- ---------------------------
January 27, January 29, January 27, January 29,
2001 2000 2001 2000
------------ ------------- ------------ ------------
Gross revenues $21,914,841 $20,525,416 $46,208,917 $40,696,732
Less: direct subcontract costs 3,489,045 4,035,542 7,838,804 7,435,855
------------ ------------ ------------ ------------
Net revenues 18,425,796 16,489,874 38,370,113 33,260,877
Operating costs and expenses:
Cost of professional services and
other direct operating expenses 9,883,854 9,771,091 21,121,355 19,454,979
Administrative and indirect operating
expenses 5,712,792 4,089,317 10,998,284 8,300,610
Marketing and related costs 1,708,827 2,104,936 3,732,879 4,234,208
Depreciation 277,604 352,426 642,465 699,669
------------ ------------ ------------ ------------
Total operating costs & expenses 17,583,077 16,317,770 36,494,983 32,689,466
------------ ------------ ------------ ------------
Income from operations 842,719 172,104 1,875,130 571,411
Interest expense (62,411) (15,458) (84,016) (38,493)
Interest income 168,586 102,562 291,250 262,574
Net foreign currency exchange loss (1,007) (9,249) (3,937) (7,847)
------------ ------------ ------------ ------------
Income before income taxes and minority interest 947,887 249,959 2,078,427 787,645
Total income tax provision 336,914 152,664 804,976 367,264
------------ ------------ ------------ ------------
Net income before minority interest 610,973 97,295 1,273,451 420,381
Minority Interest (155,241) (27,119) (227,006) (23,692)
============ ============ ============ ============
Net income $ 455,732 $ 70,176 $ 1,046,445 $ 396,689
============ ============ ============ ============
Net income per common share: Basic and Diluted $ 0.11 $ 0.02 $ $0.25 $0.10
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 4,106,271 3,965,869 4,106,615 3,966,608
============ ============ ============ ============
Diluted 4,106,271 3,965,869 4,106,615 3,966,608
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
Ecology and Environment, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Six months ended
------------------------------
January 27, January 29,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income $ 1,046,445 $ 396,689
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 642,465 699,669
Amortization 95,224 ---
Gain on disposition of property and equipment --- 8,040
Minority interest 227,006 23,692
Provision for contract adjustments 395,352 193,000
(Increase) decrease in:
- contracts receivable, net 4,302,200 (24,139)
- other current assets 414,284 (1,221,927)
- income taxes receivable (363,333) 46,274
- other non-current assets 117,706 (94,827)
Increase (decrease) in:
- accounts payable (897,763) (1,750,654)
- accrued payroll costs (260,708) 179,207
- other accrued liabilities (762,117) (1,090,577)
- income taxes payable 157,052 ---
----------- -----------
Net cash provided by (used in) operating activities 5,113,813 (2,635,553)
----------- -----------
Cash flows used in investing activities:
Purchase of property, building and equipment, net (240,976) (225,234)
Proceeds from sale of assets (898,258) (145,337)
Payment for the purchase of bond (73,117) (95,353)
Proceeds from maturity of notes --- 500,658
Proceeds from sale of investment securities --- 1,175,000
----------- -----------
Net cash provided by (used in)investing activities (1,212,351) 1,209,734
----------- -----------
Cash flows used in financing activities:
Dividends paid (657,111) (634,539)
Proceeds from (repayment of) long-term debt 14,911 (18,750)
----------- -----------
Net decrease in cash and cash equivalents (642,200) (653,289)
----------- -----------
Net increase (decrease) in cash and cash equivalents 3,259,262 (2,079,108)
Cash and cash equivalents at beginning of period 4,997,771 5,209,882
----------- -----------
Cash and cash equivalents at end of period $8,257,033 $3,130,774
=========== ===========
The accompanying notes are an integral part of these financial statements.
ECOLOGY AND ENVIRONMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting principles
a. Consolidation
-------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned and majority owned subsidiaries. Also
reflected in the financial statements are the Company's 66-2/3%
ownership in the assets of a nonoperating subsidiary, Ecology and
Environment of Saudi Arabia Ltd. (EESAL), and a 50% ownership in two
Chinese operating joint ventures, Beijing Yi Yi Ecology and
Engineering Co. Ltd. and The Tianjin Green Engineering Company.
These joint ventures are accounted for under the equity method. All
significant intercompany transactions and balances have been
eliminated. Certain amounts in the prior years' consolidated
financial statements and notes have been reclassified to conform with
the current year presentation. The consolidated balance sheet at
January 27, 2001 and the accompanying consolidated statements of
income and of cash flows are unaudited. In the opinion of management,
all adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted only of
normal recurring items. The accompanying financial statements should
be reviewed in conjunction with the Company's fiscal year ended
July 31, 2000 audited financial statements.
b. Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
c. Revenue Recognition
-------------------
Substantial amounts of the Company's revenues are derived from
cost-plus-fixed fee contracts using the percentage of completion
method based on costs incurred plus the fee earned. The fees under
certain government contracts are determined in accordance with
performance. Such awards are recognized at the time the amounts
can be reasonably determined. Provisions for estimated contract
adjustments relating to cost based contracts have been deducted
from gross revenues in the accompanying consolidated statement of
income. These provisions are estimated and accrued annually based
on goverment sales volume. Such adjustments typically arise
as a result of interpretations of cost allowability under cost
based contracts.
Revenues related to long-term government contracts are subject to
audit by an agency of the United States government. Government
audits have been completed through fiscal year 1993 and are
currently in process for fiscal years 1994 through 1995. The
majority of the balance in the allowance for contract adjustments
accounts represents a reserve against possible adjustments for
fiscal years 1992 through 2000.
d. Income Taxes
------------
The Company follows the asset and liability approach to account for
income taxes. This approach requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences
of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. Although realization is not
assured, management believes it is more likely than not that the
recorded net deferred tax assets will be realized. Since in some
cases management has utilized estimates, the amount of the net
deferred tax asset considered realizable could be reduced in the
near term. No provision has been made for United States income
taxes applicable to undistributed earnings of foreign subsidiaries
as it is the intention of the Company to indefinitely reinvest
those earnings in the operations of those entities.
2. Contract Receivables, Net
-------------------------
Contract receivables are comprised of:
January 27, July 31,
2001 2000
------------ ------------
United States government
Billed $ 3,916,316 $ 6,404,394
Unbilled 3,683,063 4,086,931
------------ ------------
7,599,379 10,491,325
------------ ------------
Industrial customers and state
and municipal governments
Billed 10,968,571 11,179,092
Unbilled 2,862,138 4,166,371
------------ ------------
13,830,709 15,345,463
------------ ------------
Less allowance for contract
adjustments (1,949,449) (1,658,597)
------------ ------------
$19,480,639 $24,178,191
============ ============
United States government receivables arise from long-term U.S.
government prime contracts and subcontracts. Unbilled receivables
result from revenues which have been earned, but are not billed as
of period-end. The above unbilled balances are comprised of
incurred costs plus fees not yet processed and billed; and
differences between year-to-date provisional billings and
year-to-date actual contract costs incurred and fees earned of
approximately ($297,000) at January 27, 2001 and ($403,000) at
July 31, 2000. Unbilled contracts receivable are reduced by billings
in excess of costs incurred of $538,000 at January 27, 2001 and
$920,000 at July 31, 2000. Within the above billed balances are
contractual retainages in the amount of approximately $1,229,000 at
January 27, 2001 and $1,148,000 at July 31, 2000. Included in other
accrued liabilities is an additional allowance for contract adjust-
ments relating to potential cost disallowances on amounts billed and
collected in current and prior years' projects of aproximately
$2,031,000 at January 27, 2001 and $2,031,000 at July 31, 2000. An
allowance for contract adjustments is recorded for contract disputes
and government audits when the amounts are determinable.
3. Earnings Per Share
-------------------
Basic EPS is computed by dividing income available to common
shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that would occur if securities or other contracts to issue
common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the Company.
4. Segment Reporting
-----------------
Ecology and Environment, Inc. has three reportable segments: consulting
services, analytical laboratory services, and aquaculture. The
consulting services segment provides broad based environmental services
encompassing audits and impact assessments, surveys, air and water
quality management, environmental engineering, environmental infrastruc-
ture planning, and industrial hygiene and occupational health studies to
a world wide base of customers. The analytical laboratory provides
analytical testing services to industrial and governmental clients for
the analysis of waste, soil and sediment samples. The shrimp aquaculture
facility, located in Costa Rica, was purchased on July 30, 1999. This
facility produces shrimp grown in a controlled environment for markets
worldwide.
The Company evaluates segment performance and allocates resources based on
operating profit before interest income/expense and income taxes. The
accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Intercompany
sales from the analytical services segment to the consulting segment are
recorded at market selling price, intercompany profits are eliminated.
The Company's reportable segments are separate and distinct business units
that offer different products. Consulting services are sold on the basis
of time charges while analytical services and aquaculture products are
sold on the basis of product unit prices.
Reportable segments for the six months ended January 27, 2001 are as follows:
Consulting Analytical Aquaculture Total
----------- ----------- ----------- -----------
Net revenues from external customers $36,393,632 $ 1,041,228 $ 11,000 $37,445,860
Intersegment net revenues --- 924,253 --- 924,253
----------- ----------- ----------- -----------
Total consolidated net revenues $36,393,632 $1,965,481 $ 11,000 $38,370,113
=========== ========== =========== ===========
Depreciation expense $ 426,883 $ 176,574 $ 39,008 $ 642,465
Segment profit (loss) 2,900,363 (298,071) (523,865) 2,078,427
Segment Assets 40,477,412 6,948,000 4,986,391 52,411,803
Expenditures for long-lived assets 394,240 67,000 724,000 1,185,240
Geographic Information:
Net Long-lived
Revenues (1) Assets
------------- ------------
United States $34,207,113 $35,478,630
Foreign countries 4,163,000 4,989,000
<FN>
<F1>
(1) Net revenues are attributed to countries based on the location of the
customers.
</FN>
Reportable segment data for the six months ended January 29, 2000 are as follows:
Consulting Analytical Aquaculture Total
----------- ----------- ----------- -----------
Net revenues from external customers $30,918,303 $1,357,765 $ 246,926 $32,522,994
Intersegment revenues --- 737,883 --- 737,883
----------- ---------- ----------- -----------
Total consolidated net revenues $30,918,303 $2,095,648 $ 246,926 $33,260,877
=========== =========== =========== ===========
Depreciation expense $ 445,565 $ 188,787 $ 55,317 $ 699,669
Segment profit (loss) 1,104,709 (449,448) (83,850) 571,411
Segment Assets 38,360,489 8,233,000 3,206,314 49,799,803
Expenditures for long-lived assets 411,101 47,780 141,488 221,833
Geographic Information:
Net Long-lived
Revenues (1) Assets
------------ ------------
United States $30,624,877 $33,534,070
Foreign countries $2,636,000 $2,393,000
<FN>
<F1>
(1) Net revenues are attributed to countries based on the location of the
customers.
</FN>
5. Acquisitions
------------
In September 1999 the Company, through it's Chilean subsidiary, acquired
a 50.1% stake in Gestion Ambiental Consultores, (GAC), a Chilean environ-
mental consulting firm for a cash payment of $400,000. GAC has expertise
in mining, steel manufacturing and energy resources. In February 2000,
the Company purchased the remaining 10% interest in its shrimp aquaculture
facility for a purchase price of $263,000.
In June 2000, the Company purchased a 60% share of the assets of Walsh
Environmental Scientists and Engineers LLC, Walsh of Boulder, Calorado
for a purchase price of $700,000 cash and $300,000 in Class A common
stock. An additional $500,000 in cash was contributed by the Company
for working capital. The working capital contribution was used to pay
down short and long term debt and will provide capital for future growth.
Walsh of Boulder provides environmental services to clients in the Rocky
Mountain region as well as Peru, through it's Peruvian subsidiary. These
acquisitions have been accounted for under the purchase method with the
results of operations from the respective acquisition dates. The
aggregate excess of the purchase prices of these acquisitions over the
fair market values of the net assets of the acquired companies is being
amortized over a range of 15-20 years from the acquisition dates using
the straight-line method.
The following information presents the pro forma consolidated results
of operations as if the acquisitions had occurred on August 1, 1999.
The proforma amounts may not be indicative of the results that actually
would have been achieved had the acquisitions occurred as of August 1,
1999 and are not necessarily indicative of future results.
Six months ended
January 29, 2000
(000's of $)
(Unaudited)
-------------------
Net sales $35,426
Income before taxes 880
Net income 454
Net income per share $.11
6. Stock Award Plan
----------------
Effective March 16, 1998, the Company adopted the Ecology and
Environment, Inc. 1998 Stock Award Plan (the "Award Plan") under
which key employees (including officers) of the Company or any of
its present or future subsidiaries may be designated to receive
awards of Class A common stock of the Company as a bonus for
services rendered to the Company or its subsidiaries, without
payment therefore, based upon the fair market value of the common
stock at the time of the award. The Company originally reserved
for issuance as awards under the Award Plan aggregate of 12,000
shares of Class A Common stock of the Company, which shall be
solely treasury shares. Since then, the Company has increased
the number of reserved shares to 112,000.
In the first quarter of fiscal year 2001, the Company issued 92,339
shares at an average fair value of $6.19 per share. In Fiscal Year
2000 no shares were issued. In Fiscal Year 1999, 8,750 shares were
issued at a weighted average fair value of $7.69 per share. In
Fiscal Year 1998, awards for 11,090 shares of Class A common stock
had been granted at a weighted average fair value of $9.81 per share.
The Company estimates that if they elected to measure compensation
cost for employee stock based compensation arrangements under SFAS
No. 123 it would not have caused net income and earnings per share
for the first quarters of fiscal years 2001 and 2000 to be materally
different from their reported amounts.
PART 1 - ITEM 2
- ----------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
- -------------------
At January 27, 2001 the Company had a working capital balance of $25.2
million, a $.5 million increase from the balance at July 31, 2000.
Cash and cash equivalents increased $3.3 million as a result of a $4.7
million decrease in contracts receivable. The decrease in contracts
receivables was a result of increased efforts to speed collections of
outstanding invoices.
The Company maintains an unsecured line of credit of $10.0 million with
a bank at 1/2% below the prevailing prime rate. There are no borrowings
outstanding under this line of credit at January 27, 2001 and none were
required during the second quarter of fiscal year 2001. The Company has
historically financed its activities through cash flows from operations.
Internally generated funds have been adequate to support the demands for
working capital, the purchase of new fixed assets and investment
securities and the payment of dividends. There are no significant
working capital requirements pending at January 27, 2001. The Company's
existing cash along with that generated by future operations and the
existing credit line is expected to be sufficient to meet the Company's
needs for the foreseeable future.
Results of Operations
- ---------------------
Net Revenue
- -----------
Net revenues for the second quarter of fiscal year 2001 were $18.4 million,
up 12% from the $16.4 million reported in fiscal year 2000. The increase
in net revenues was attributable to increased revenues from commercial
customers in the telecommunications-energy sector, the United States
Department of Defense (DOD) and the Company's international clients. In
particular, the Company experienced an 89% increase in net revenues from
various international clients, a 34% increase from DOD clients and a 28%
increase from commercial clients. The increased net revenue from the DOD
was due to continued aggressive marketing of new work under DOD task order
contracts. The consolidation of Walsh Environmental also had a positive
effect on the company's net revenue. Acquired late in fiscal year 2000,
Walsh Environmental added $2.8 million in net revenue through the first
half of fiscal year 2001 or 7% of the total.
Net revenues for the second quarter of fiscal year 2000 were $16.4 million,
up $1.3 million or 9% from the $15.1 million reported for the second
quarter of fiscal year 1999. The increase in net revenues was attributable
to increases in revenues from the Company's contracts with the United States
Department of Defense (DOD) as well as increased net revenues from private
commercial clients.
Income Before Income Taxes and Minority Interest
The Company's income before income taxes and minority interest for the
second quarter of fiscal year 2001 was $948,000, up 279% from the $250,000
reported in the second quarter of fiscal year 2000. Income before income
taxes and minority interest was positively impacted by the company-wide
cost reduction measures which increased both margins and efficiencies and
an increase in both commercial and international sector higher margin work.
This increase in work lead to an increase in staff utilization and a
decrease in the Company's indirect expenses. The ASC's losses decreased
from $449,000 for the first half of fiscal year 2000 to a loss of $298,000
for fiscal year 2001. Although ASC revenues were flat, this improvement
was possible due to continued efforts to reduce costs and improve
efficiencies in the ASC's sample tracking and reporting systems. Walsh
Environmental and E&E do Brasil, two of the Company's subsidiaries, also
had a positive impact on income. For fiscal year 2001, their income
before income taxes and minority interest was $336,000 and $253,000
respectively, compared to $0 and $34,000 for fiscal year 2000. The company
achieved significantly improved results for the first half of the year
despite a net loss of $341,000 from its Costa Rica based shrimp farm
subsidiary. As of January 27, 2001 the Shrimp Farm operation remained in
limited production as additional steps were needed to complete the clean
up of the viral disease that had hit the farm in the fourth quarter of
last year. Controlled tests are continuing to examine the success of this
cleanup process. The farm is scheduled to increase operations again in
late March and should be in full production by summer.
The Company's income before income taxes and minority interest for the
second quarter of fiscal year 2000 was $250,000, up 614% from the $35,000
reported in the second quarter of fiscal year 1999. The increase was due
to improved operating margins and significant improvements in the Company's
ASC operation. The Company's new laboratory information handling system
installed in fiscal year 1999 as well as reduced operating costs in the ASC
have resulted in efficiency gains throughout the ASC. Despite flat revenues,
the ASC operating losses were reduced by more than 50% compared to the prior
year. Interest income declined $80,000 as a result of the Company's
investments in aquaculture and the purchase of a controlling interest in a
Chilean company.
PART II - OTHER INFORMATION
- ---------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of l934,
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, 2001 By: /s/ RONALD L. FRANK
----------------------------
RONALD L. FRANK
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL
ACCOUNTING OFFICER