ECOLOGY & ENVIRONMENT INC - FORM 10-Q

Attached files

file	filename
EX-32.2 - ECOLOGY & ENVIRONMENT INC	ex32_2.htm
EX-31.2 - ECOLOGY & ENVIRONMENT INC	ex31_2.htm
EX-32.1 - ECOLOGY & ENVIRONMENT INC	ex32_1.htm
EX-31.1 - ECOLOGY & ENVIRONMENT INC	ex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 31, 2012

o 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)

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 þ No o

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 o No þ

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	o		Accelerated filer	o
Non-accelerated filer (Do not check if a smaller reporting company)	o		Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

At December 1, 2012, 2,600,144 shares of Registrant's Class A Common Stock (par value $.01) and 1,643,773 shares of Class B Common Stock (par value $.01) were outstanding.

Ecology and Environment, Inc.
Consolidated Balance Sheets

	Unaudited			Audited
Assets	October 31, 2012			July 31, 2012

Current assets:
Cash and cash equivalents	$	10,121,580		$	10,467,770
Investment securities, available for sale		3,037,806			1,404,582
Contract receivables, net		60,653,268			61,568,443
Deferred income taxes		4,732,761			4,799,724
Income tax receivable		2,761,815			2,502,431
Other current assets		3,028,495			1,802,843

Total current assets		84,335,725			82,545,793

Property, building and equipment, net of accumulated depreciation, $23,199,528 and $22,584,958, respectively		12,139,007			12,112,078
Deferred income taxes		861,123			860,499
Other assets		1,985,567			1,993,785

Total assets	$	99,321,422		$	97,512,155


Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable	$	10,104,224		$	11,492,602
Line of credit		14,502,034			12,309,335
Accrued payroll costs		9,526,442			7,529,728
Current portion of long-term debt and capital lease obligations		453,611			488,460
Billings in excess of revenue		7,214,991			8,281,919
Other accrued liabilities		3,829,673			3,932,588

Total current liabilities		45,630,975			44,034,632

Income taxes payable		194,023			194,023
Deferred income taxes		423,324			423,324
Long-term debt and capital lease obligations		87,245			102,635
Commitments and contingencies (see note #13)		-			-

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 - 2,685,151 shares		26,851			26,851
Class B common stock, par value $.01 per share; authorized - 10,000,000 shares; issued - 1,708,574 shares		17,087			17,087
Capital in excess of par value		19,876,191			19,751,992
Retained earnings		29,777,310			29,534,783
Accumulated other comprehensive income		874,622			711,842
Treasury stock - Class A common, 85,007 and 125,923 shares; Class B common, 64,801 shares, at cost		(1,897,032	)		(1,897,032	)

Total Ecology and Environment, Inc. shareholders' equity		48,675,029			48,145,523
Noncontrolling interests		4,310,826			4,612,018

Total shareholders' equity		52,985,855			52,757,541

Total liabilities and shareholders' equity	$	99,321,422		$	97,512,155

The accompanying notes are an integral part of these consolidated financial statements.

Ecology and Environment, Inc.
Consolidated Statements of Income
Unaudited

	Three months ended October 31, 2012			Three months ended October 29, 2011

Revenue	$	36,821,768		$	42,311,806

Cost of professional services and other direct operating expenses		13,308,000			15,577,703
Subcontract costs		7,015,358			9,112,140
Administrative and indirect operating expenses		11,066,514			11,199,254
Marketing and related costs		3,874,155			3,942,280
Depreciation and amortization		583,288			440,837

Income from operations		974,453			2,039,592
Interest expense		(83,750	)		(80,300	)
Interest income		58,420			11,682
Other income (expense)		(6,242	)		109,278
Net foreign exchange gain (loss)		(45,170	)		3,332

Income before income tax provision		897,711			2,083,584
Income tax provision		354,615			678,317

Net income	$	543,096		$	1,405,267

Net income attributable to noncontrolling interests		(300,569	)		(245,490	)

Net income attributable to Ecology and Environment, Inc.	$	242,527		$	1,159,777

Net income per common share: basic and diluted	$	0.06		$	0.28

Weighted average common shares outstanding: basic and diluted		4,244,010			4,203,445

The accompanying notes are an integral part of these consolidated financial statements.

Ecology and Environment, Inc.
Consolidated Statements of Cash Flows
Unaudited

	Three months ended October 31, 2012			Three months ended October 29, 2011

Cash flows from operating activities:
Net income	$	543,096		$	1,405,267
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization expense		583,288			440,837
Benefit for deferred income taxes		66,339			(197,076	)
Share based compensation expense		127,992			182,896
Tax impact of share-based compensation		-			105,988
Provision for contract adjustments		1,083,109			187,209
(Increase) decrease in:
- contract receivables		(43,886	)		(832,932	)
- other current assets		(1,213,383	)		(583,483	)
- income tax receivable		(259,384	)		-
- other non-current assets		9,951			7,958
Increase (decrease) in:
- accounts payable		219,286			(1,121,380	)
- accrued payroll costs		1,967,917			(826,593	)
- income taxes payable		(536	)		(162,297	)
- billings in excess of revenue		(1,093,281	)		621,753
- other accrued liabilities		(119,221	)		(557,108	)

Net cash provided by (used in) operating activities		1,871,287			(1,328,961	)

Cash flows provided by (used in) investing activities:
Acquistion of noncontrolling interest of subsidiaries		(30,002	)		(61,750	)
Purchase of property, building and equipment		(549,926	)		(975,657	)
Change in accounts payable due to purchase of equipment		(610,192	)		10,392
Sale (purchase) of investment securities, net		(1,599,636	)		(434	)

Net cash used in investing activities		(2,789,756	)		(1,027,449	)

Cash flows provided by (used in) financing activities:
Dividends paid		(1,018,783	)		(1,028,881	)
Proceeds from debt		-			251,427
Repayment of debt and capital lease obligations		(106,673	)		(57,011	)
Net proceeds from line of credit		2,200,000			2,500,000
Distributions to noncontrolling interests		(566,587	)		(110,754	)
Proceeds from sale of subsidiary shares to noncontrolling interests		-			41,634
Purchase of treasury stock		-			(363,050	)

Net cash provided by financing activities		507,957			1,233,365

Effect of exchange rate changes on cash and cash equivalents		64,322			177,526

Net decrease in cash and cash equivalents		(346,190	)		(945,519	)
Cash and cash equivalents at beginning of period		10,467,770			8,529,842

Cash and cash equivalents at end of period	$	10,121,580		$	7,584,323

The accompanying notes are an integral part of these consolidated financial statements.

Ecology and Environment, Inc.
Consolidated Statements of Changes in Shareholders' Equity
Unaudited


	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			Accumulated Other Comprehensive Income (Loss)			Treasury Stock Shares			Treasury Stock Amount			Noncontrolling Interest

Balance at July 31, 2011		2,685,151	$	26,851		1,708,574	$	17,087	$	19,983,029		$	30,797,763		$	1,527,189			190,724		$	(2,317,515	)	$	3,923,429

Net income		-		-		-		-		-			773,579			-			-			-			2,266,171
Foreign currency translation adjustment		-		-		-		-		-			-			(871,476	)		-			-			124,455
Cash dividends paid ($.48 per share)		-		-		-		-		-			(2,036,559	)		-			-			-			-
Unrealized investment gain, net		-		-		-		-		-			-			17,597			-			-			-
Repurchase of Class A common stock		-		-		-		-		-			-			-			22,825			(363,050	)		-
Issuance of stock under stock award plan		-		-		-		-		(716,662	)		-			-			(62,099	)		716,662			-
Share-based compensation expense		-		-		-		-		731,583			-			-			-			-			-
Tax impact of share based compensation		-		-		-		-		105,988			-			-			-			-			-
Sale of subsidiary shares to noncontrolling interests		-		-		-		-		-			-			-			-			-			41,634
Distributions to noncontrolling interests		-		-		-		-		-			-			-			-			-			(1,123,896	)
Purchase of additional noncontrolling interests		-		-		-		-		(351,946	)		-			38,532			(5,208	)		66,871			(619,775	)
Stock award plan forfeitures		-		-		-		-		-			-			-			3,289			-			-

Balance at July 31, 2012		2,685,151	$	26,851		1,708,574	$	17,087	$	19,751,992		$	29,534,783		$	711,842			149,531		$	(1,897,032	)	$	4,612,018

Net income		-		-		-		-		-			242,527			-			-			-			300,569
Foreign currency translation adjustment		-		-		-		-		-			-			132,736			-			-			(15,744	)
Unrealized investment gain, net		-		-		-		-		-			-			30,044			-			-			10,572
Share-based compensation expense		-		-		-		-		127,992			-			-			-			-			-
Distributions to noncontrolling interests		-		-		-		-		-			-			-			-			-			(566,587	)
Purchase of additional noncontrolling interests		-		-		-		-		(3,793	)		-			-			-			-			(30,002	)
Stock award plan forfeitures		-		-		-		-		-			-			-			277			-			-

Balance at October 31, 2012		2,685,151	$	26,851		1,708,574	$	17,087	$	19,876,191		$	29,777,310		$	874,622			149,808		$	(1,897,032	)	$	4,310,826

The accompanying notes are an integral part of these consolidated financial statements.

Ecology and Environment, Inc.
Consolidated Statements of Comprehensive Income
Unaudited


	Three months ended October 31, 2012			Three months ended October 29, 2011

Comprehensive income (loss):
Net income including noncontrolling interests	$	543,096		$	1,405,267
Foreign currency translation adjustments		116,992			(188,583	)
Unrealized investment gain (loss), net		40,616			(222	)
Purchase of additional noncontrolling interests		-			2,289

Comprehensive income		700,704			1,218,751
Comprehensive income attributable to noncontrolling interests		(295,397	)		(245,637	)

Comprehensive income attributable to Ecology and Environment, Inc.	$	405,307		$	973,114

Ecology and Environment, Inc.

Notes to Consolidated Financial Statements

Summary of Operations and Basis of Presentation

The consolidated financial statements included herein have been prepared by Ecology and Environment, Inc. ("E&E" or the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information. All such adjustments are of a normal recurring nature. The Company follows the same accounting policies in preparation of interim reports. Although E&E believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in E&E's 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The consolidated results of operations for the three months ended October 31, 2012 are not necessarily indicative of the results for any subsequent period or the entire fiscal year ending July 31, 2013.

1.	Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. Also reflected in the consolidated financial statements is the 50% ownership in the Chinese operating joint venture, The Tianjin Green Engineering Company. This joint venture is accounted for under the equity method. All intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions as of the date of the financial statements, which affect the reported values of assets and liabilities and revenues and expenses and disclosures of contingent assets and liabilities. Actual results may differ from those estimates.

Revenue Recognition

Substantially all of the Company's revenue is derived from environmental consulting work. The consulting revenue is principally derived from the sale of labor hours. The consulting work is performed under a mix of fixed price, cost-type, and time and material contracts. Contracts are required from all customers. Revenue is recognized as follows:

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-Type	Consulting	Costs as incurred. Fixed fee portion is recognized using percentage of completion determined by the percentage of LOE hours incurred to total LOE hours in the respective contracts.

Substantially all of the Company's cost-type work is with federal governmental agencies and, as such, is subject to audits after contract completion. Under these cost-type contracts, provisions for adjustments to accrued revenue are recognized on a quarterly basis and based on past audit settlement history. Government audits have been completed and final rates have been negotiated through fiscal year 2005. The Company records an allowance for contract adjustments which is recorded in other accrued liabilities principally represents a reserve for contract adjustments for the fiscal years 1996-2013.

We reduce our contract receivables and costs and estimated earnings in excess of billings on contracts in process by establishing an allowance for amounts that, in the future, may become uncollectible or unrealizable, respectively. We determine our estimated allowance for uncollectible amounts based on management’s judgments regarding our operating performance related to the adequacy of the services performed, the status of change orders and claims, our experience settling change orders and claims and the financial condition of our clients, which may be dependent on the type of client and current economic conditions that the client may be subject to.

Change orders can occur when changes in scope are made after project work has begun, and can be initiated by either the Company or its clients. Claims are amounts in excess of the agreed contract price which the Company seeks to recover from a client for customer delays and / or errors or unapproved change orders that are in dispute. Costs related to change orders and claims are recognized as incurred. Revenues and profit are recognized on change orders when it is probable that the change order will be approved and the amount can be reasonably estimated. Revenues are recognized only up to the amount of costs incurred on contract claims when realization is probable, estimatable and reasonable support from the customer exists.

All bid and proposal and other pre-contract costs are expensed as incurred. Out of pocket expenses such as travel, meals, field supplies, and other costs billed direct to contracts are included in both revenues and cost of professional services. Sales and cost of sales at the Company’s South American subsidiaries exclude tax assessments by governmental authorities, which are collected by the Company from its customers and then remitted to governmental authorities.

Investment securities

Investment securities have been classified as available for sale and are stated at fair value. Unrealized gains or losses related to investment securities available for sale are reflected in accumulated other comprehensive income, net of applicable income taxes in the consolidated balance sheets and statements of changes in shareholders' equity. The cost basis of securities sold is based on the specific identification method. The Company had gross unrealized gains of approximately $83,000 and $42,000 at October 31, 2012 and July 31, 2012, respectively.

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 asset’s or liability’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The Company has not elected a fair value option on any assets or liabilities.

The three levels of the hierarchy are as follows:

Level 1 Inputs – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Generally this includes debt and equity securities and derivative contracts that are traded on an active exchange market (e.g., New York Stock Exchange) as well as certain U.S. Treasury and U.S. Government and agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets. The Company’s investment securities classified as Level 1 are comprised of mutual funds.

Level 2 Inputs – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, credit risks, etc.) or can be corroborated by observable market data. The Company’s investment securities classified as Level 2 are comprised of international and domestic corporate and municipal bonds.

Level 3 Inputs – Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.

The following table presents the level within the fair value hierarchy at which the Company’s financial assets are measured on a recurring basis.

Financial assets as of October 31, 2012:
	Level 1		Level 2		Level 3		Total
Assets
Investment securities available for sale	$	1,445,042	$	1,592,764	$	---	$	3,037,806


Financial assets as of July 31, 2012:
	Level 1		Level 2		Level 3		Total
Assets
Investment securities available for sale	$	1,353,365	$	51,217	$	---	$	1,404,582

The carrying amount of cash and cash equivalents at October 31, 2012 and July 31, 2012 were classified as level 1 and approximate fair value. Long-term debt consists of bank loans and capitalized equipment leases. The demand loan payable consists of borrowings against the Company’s line of credit for working capital requirements. Based on the Company's assessment of the current financial market and corresponding risks associated with the debt and line of credit borrowings, management believes that the carrying amount of the liabilities at October 31, 2012 and July 31, 2012 were classified as level 2 and approximates fair value. There were no financial instruments classified as level 3.

The availability of observable market data is monitored to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. The Company evaluated the significance of transfers between levels based upon the nature of the financial instrument. For the three months ended October 31, 2012 and fiscal year ended July 31, 2012 there were no transfers in or out of levels 1, 2 or 3, respectively.

Foreign Currencies

The financial statements of foreign subsidiaries where the local currency is the functional currency are translated into U.S. dollars using exchange rates in effect at period end for assets and liabilities and average exchange rates during each reporting period for results of operations. Translation adjustments are deferred in accumulated other comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. The Company recorded foreign currency transaction gains/(losses) of approximately $(45,000) and $3,000 for the three months ended October 31, 2012 and October 29, 2011, respectively.

The financial statements of foreign subsidiaries located in highly inflationary economies are remeasured as if the functional currency were the U.S. dollar. The remeasurement of local currencies into U.S. dollars creates transaction adjustments which are included in net income. There were no highly inflationary economy translation adjustments for fiscal year 2012 and through the first quarter of fiscal year 2013.

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.

Income tax expense includes U.S. and international income taxes, determined using the applicable statutory rates. A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences and net operating loss carryforwards.

The Company has significant deferred tax assets, resulting principally from contract reserves and accrued expenses. The Company periodically evaluates the likelihood of realization of deferred tax assets, and provides for a valuation allowance when necessary.

Additionally, the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic Income Taxes prescribes a recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. A tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions shall be recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position will be sustained. Tax positions that meet the more likely than not threshold should be measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a tax position, is a matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in administrative and indirect operating expenses.

Earnings Per Share (EPS)

Basic and diluted EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. The Company allocates undistributed earnings between the classes on a one-to-one basis when computing earnings per share. As a result, basic and fully diluted earnings per Class A and Class B shares are equal amounts. See Note 11 to Consolidated Financial Statements for additional information.

Comprehensive Income

Comprehensive income is defined as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources." The term "comprehensive income" is used to describe the total net earnings plus other comprehensive income. Other comprehensive income includes currency translation adjustments on foreign subsidiaries and unrealized gains or losses on available-for-sale securities.

Impairment of Long-Lived Assets

The Company assesses recoverability of the carrying value of long-lived assets by estimating the future net cash flows (undiscounted) expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value. The Company identified no events or changes in circumstances that necessitated an evaluation for an impairment of long lived assets.

Goodwill

The total goodwill of approximately $1.2 million is subject to an annual assessment for impairment. The Company’s most recent annual impairment assessment for goodwill was completed during the fourth quarter of fiscal year 2012. The results of this assessment showed that the fair values of the reporting units, using a discounted cash flow method, to which goodwill is assigned was in excess of the book values of the respective reporting units, resulting in the identification of no goodwill impairment. Goodwill is also assessed for impairment between annual assessments whenever events or circumstances make it more likely than not that an impairment may have occurred. The Company identified no events or changes in circumstances during the year that necessitated an evaluation for an impairment of goodwill.

2. Cash and Cash Equivalents

The Company's policy is to invest cash in excess of operating requirements in income-producing short-term investments. At October 31, 2012 and July 31, 2012, short-term investments consisting of money market funds are reflected in the accompanying consolidated balance sheets and statements of cash flows in cash and cash equivalents which amounted to approximately $2.4 million and $2.2 million, respectively.

3. Contract Receivables, net

	October 31, 2012			July 31, 2012


Billed	$	40,781,996		$	42,977,016
Unbilled		31,193,272			28,829,818
		71,975,268			71,806,834

Allowance for doubtful accounts and contract adjustments		(11,322,000	)		(10,238,391	)

	$	60,653,268		$	61,568,443

Unbilled receivables result from revenues which have been earned, but are not billed as of period-end. The above unbilled balances are comprised of incurred costs plus fees not yet processed and billed; and differences between year-to-date provisional billings and year-to-date actual contract costs incurred. Management anticipates that the October 31, 2012 unbilled receivables will be substantially billed and collected within one year. Within the above billed balances are contractual retainages in the amount of approximately $246,000 and $248,000 at October 31, 2012 and July 31, 2012. Management anticipates that the July 31, 2012 retainage balance will be substantially collected within one year. For the three months ended October 31, 2012 and October 29, 2011, the quarter provision for allowance for doubtful accounts and contract adjustments was approximately $1.1 million and $.2 million, respectively.

Included in the balance of receivables are receivables due under the contracts with organizations in Kuwait of $14.5 million at October 31, 2012 and July 31, 2012. Of the outstanding balances due from Kuwait, approximately $1.7 million and $1.9 million were included in billings in excess of revenue as of October 31, 2012 and July 31, 2012, respectively. Included in the balance of unbilled receivables are receivables due under certain contracts with organizations in China of $4.7 million and $2.8 million at October 31, 2012 and July 31, 2012, respectively.

4.	Lines of Credit

The Company maintains unsecured lines of credit available for working capital and letters of credit of $32.5 million at the parent company with interest rates ranging from 2.5% to 3% at July 31, 2012 and an additional $1.6 million in lines of credit at the Company’s subsidiaries with interest rates ranging from 4.5% to 5% at July 31, 2012. The Company guarantees the lines of credit of Walsh Environmental Scientists and Engineers, LLC (Walsh). Its lenders have reaffirmed the Company’s lines of credit within the past twelve months. At October 31, 2012 and July 31, 2012, the Company had letters of credit and amounts outstanding under the lines of credit totaling approximately $16.1 million and $14.9 million, which is inclusive of outstanding letters of credit of $1.5 million and $4.1 million, respectively. After letters of credit and amounts outstanding under the lines of credit, there was $18.0 million of availability under the lines of credit at October 31, 2012.

5.	Debt and Capital Lease Obligations

Debt inclusive of capital lease obligations consists of the following:

	October 31, 2012			July 31, 2012

Various bank loans and advances at interest rates ranging from 5% to 14%	$	324,296		$	372,744
Capital lease obligations at varying interest rates averaging 11%		216,560			218,351
		540,856			591,095

Current portion of long-term debt and capital lease obligations		(453,611	)		(488,460	)

Long-term debt and capital lease obligations	$	87,245		$	102,635

The aggregate maturities of long-term debt and capital lease obligations at October 31, 2012 are as follows:

	Amount

November 2012 – October 2013	$	453,611
November 2013 – October 2014		69,945
November 2014 – October 2015		17,300
November 2015 – October 2016		---
November 2016 – October 2017		---
Thereafter		---
	$	540,856

6.	Income Taxes

The estimated effective tax rate for the three months ended October 31, 2012 and October 29, 2011 was 39.5% and 32.6% respectively. The increase is mainly a result of decreased income from foreign entities in countries with a lower effective tax rate than in the U.S, decreased income from U.S. partnerships, recognition of nondeductible expenses in a foreign jurisdiction and additional foreign taxes.

7.	Other Accrued Liabilities

	October 31, 2012		July 31, 2012

Allowance for contract adjustments	$	2,723,974	$	2,724,474
Other		1,105,699		1,208,114

	$	3,829,673	$	3,932,588

Included in other accrued liabilities is an allowance for contract adjustments relating to potential cost disallowances on amounts billed and collected in current and prior years' projects. The allowance for contract adjustments is recorded for contract disputes and government audits when the amounts are estimatable.

8.	Stock Award Plan

Ecology and Environment, Inc. has adopted a 1998 Stock Award Plan effective March 16, 1998 (1998 Plan). To supplement the 1998 Plan, a 2003 Stock Award Plan (2003 Plan) was approved by the shareholders at the Annual Meeting held in January 2004 and a 2007 Stock Award Plan (2007 Plan) was approved by the shareholders at the Annual Meeting held in January of 2008 (the 1998 Plan, 2003 Plan and the 2007 Plan collectively referred to as the Award Plan). The 2003 Plan was approved retroactive to October 16, 2003 and terminated on October 15, 2008 and the 2007 Plan was approved retroactive to October 18, 2007 and terminated on October 17, 2012.

The Company awarded 62,099 shares valued at approximately $.9 million in October 2011 pursuant to the Award Plan. These awards issued have a three year vesting period. The "pool" of excess tax benefits accumulated in Capital in Excess of Par Value was $330,000 at October 31, 2012 and July 31, 2012. Total gross compensation expense is recognized over the vesting period. Unrecognized compensation expense was approximately $.7 million and $.8 million at October 31, 2012 and July 31, 2012, respectively.

9.	Shareholders' Equity

Class A and Class B common stock

The relative rights, preferences and limitations of the Company's Class A and Class B common stock can be summarized as follows: Holders of Class A shares are entitled to elect 25% of the Board of Directors so long as the number of outstanding Class A shares is at least 10% of the combined total number of outstanding Class A and Class B common shares. Holders of Class A common shares have one-tenth the voting power of Class B common shares with respect to most other matters.

In addition, Class A shares are eligible to receive dividends in excess of (and not less than) those paid to holders of Class B shares. Holders of Class B shares have the option to convert at any time, each share of Class B common stock into one share

of Class A common stock. Upon sale or transfer, shares of Class B common stock will automatically convert into an equal number of shares of Class A common stock, except that sales or transfers of Class B common stock to an existing holder of Class B common stock or to an immediate family member will not cause such shares to automatically convert into Class A common stock.

Cash Dividend

The Company declared cash dividends of approximately $2.0 million in fiscal year 2012. No cash dividends have been declared as of October 31, 2012. Within accounts payable, the Company recorded outstanding dividend payables at July 31, 2012 of approximately $1.0 million which was paid in August 2012.

Stock Repurchase

The Company’s Board of Directors approved a 200,000 share repurchase program in August 2010 in which 93,173 shares remain available for repurchase.

Noncontrolling Interest

The Company’s noncontrolling interest is disclosed as a separate component of the Company’s consolidated equity on the balance sheets. Earnings and other comprehensive income are separately attributed to both the controlling and noncontrolling interests. Earnings per share is calculated based on net income attributable to the Company’s controlling interest.

There was a purchase of noncontrolling interest in the three months ending October 31, 2012 for which the Company paid cash of approximately $30,000.

On January 4, 2012, the Company purchased an additional 1.3% of Walsh from noncontrolling shareholders for approximately $254,000. Two thirds of the purchase price was paid in cash while the remaining one third was paid for with E&E stock. On December 14, 2011, the Company purchased an additional 4.0% of Ecology and Environment do Brasil LTDA from noncontrolling shareholders for approximately $180,000. The entire purchase price was paid in cash. On November 18, 2011, the Company purchased an additional 3.9% of Walsh Peru from noncontrolling shareholders for approximately $432,000. The entire purchase price was paid in cash. There were three additional purchases of noncontrolling interest in fiscal year 2012 for which the Company paid cash of approximately $128,000.

Most transactions with noncontrolling shareholders for the three months ended October 31, 2012 and fiscal year ended July 31, 2012 were made at book value, which management believes approximates fair value. The purchase of the Walsh Peru and E&E Brasil shares, were at a calculated value in excess of book value which management believes approximated the fair value.

Effects of changes in E&E’s ownership interest in its subsidiaries on E&E’s equity:

	Three months ended October 31, 2012			Fiscal year ended July 31, 2012
Transfers to noncontrolling interest:
Sale of 600 Gustavson common shares	$	---		$	41,634
Total transfers to noncontrolling interest		---			41,634

Transfers from noncontrolling interest:
Purchase of 152 Walsh common shares		---			(73,748	)
Purchase of 496 Walsh common shares		---			(269,064	)
Purchase of 5,389 Brazil common shares		---			77,539
Purchase of 26,482 Walsh Peru common shares		---			(213,917	)
Purchase of 166 Walsh common shares		---			(94,601	)
Purchase of 25 Gestion Ambiental Consultores common shares		---			(7,452	)
Purchase of 75 Lowham common shares		(30,002	)		---
Total transfers from noncontrolling interest		(30,002	)		(581,243	)

Transfers to (from) noncontrolling interest	$	(30,002	)	$	(539,609	)

10.	Shareholders' Equity - Restrictive Agreement

Messrs. Gerhard J. Neumaier, Silvestro, Frank, and Strobel entered into a Stockholders’ Agreement dated May 12, 1970, as amended January 24, 2011, which governs the sale of certain shares of common stock owned by them and the children of those individuals. The Agreement provides that prior to accepting a bona fide offer to purchase the certain covered part of their shares, each party must first allow the other members to the Agreement the opportunity to acquire on a pro rata basis, with right of over-allotment, all of such shares covered by the offer on the same terms and conditions proposed by the offer.

11.	Earnings Per Share

The computation of basic earnings per share reconciled to diluted earnings per share follows:

	Three months ended
	October 31, 2012		October 29, 2011

Total income available to common stockholders	$	242,527	$	1,159,777
Dividend declared		---		---
Undistributed earnings		242,527		1,159,777

Weighted-average common shares outstanding (basic)		4,244,010		4,203,445

Distributed earnings per share	$	---	$	---
Undistributed earnings per share		.06		.28
Total earnings per share	$	.06	$	.28

After consideration of all the rights and privileges of the Class A and Class B stockholders discussed in Note 9, in particular the right of the holders of the Class B common stock to elect no less than 75% of the Board of Directors making it highly unlikely that the Company will pay a dividend on Class A common stock in excess of Class B common stock, the Company allocates undistributed earnings between the classes on a one-to-one basis when computing earnings per share. As a result, basic and fully diluted earnings per Class A and Class B share are equal amounts.

The Company has determined that its unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities. These securities shall be included in the computation of earnings per share pursuant to the two-class method. The resulting impact was to include unvested restricted shares in the basic weighted average shares outstanding calculation.

12.	Segment Reporting

Segment information as of October 31, 2012 approximates the following:

Geographic information:

	Revenue		Gross Long- Lived Assets

United States	$	24,810,000	$	29,899,000
Foreign countries		12,012,000		5,440,000

(1) Revenue is attributed to countries based on the location of the customers. Revenues in the most significant foreign countries include $3.5 million in Peru, $4.1 million in Brazil and $2.5 million in Chile.

Segment information as of October 29, 2011 approximates the following:

Geographic information:

	Revenue		Gross Long- Lived Assets

United States	$	28,430,000	$	26,470,000
Foreign countries		13,882,000		5,187,000

(1) Revenue is attributed to countries based on the location of the customers. Revenues in the most significant foreign countries include $3.6 million in Peru, $4.1 million in Brazil and $2.5 million in Chile.

13.	Commitments and Contingencies

From time to time, the Company is a named defendant in legal actions arising out of the normal course of business. The Company is not a party to any pending legal proceeding the resolution of which the management of the Company believes will have a material adverse effect on the Company’s results of operations, financial condition, cash flows, or to any other pending legal proceedings other than ordinary, routine litigation incidental to its business. The Company maintains liability insurance against risks arising out of the normal course of business.

Certain contracts contain termination provisions under which the customer may, without penalty, terminate the contracts upon written notice to the Company. In the event of termination, the Company would be paid only termination costs in accordance with the particular contract. Generally, termination costs include unpaid costs incurred to date, earned fees and any additional costs directly allocable to the termination.

On September 21, 2012 the Colorado Department of Public Health and Environment (the “Department”) issued a proposed Compliance Order on Consent (the “Consent Order”) to the City and County of Denver (“Denver”) and to Walsh. Walsh is a majority-owned subsidiary of Ecology and Environment, Inc. The proposed Consent Order concerns construction improvement activities of certain property owned by Denver which was the subject of asbestos remediation. Denver had entered into a contract with Walsh for Walsh to provide certain environmental consulting services (asbestos monitoring services) in connection with the asbestos containment and/or removal performed by other contractors at Denver’s real property. The Consent Order, among other provisions, proposes a violation penalty of $216,000, jointly and severally to be paid by Denver and Walsh. Under Walsh’s environmental consulting contract with Denver, Walsh has agreed to indemnify Denver for certain liabilities which would include the imposition of this proposed penalty. Walsh has put its professional liability carrier on notice of this claimed penalty. At this time, neither Walsh nor Denver has filed a response to the September 21, 2012 draft Consent Order. It is the position of Walsh that it has fully complied with all applicable Colorado laws, regulations and statutes in connection with its role as an environmental consultant to Denver and the claimed violations are not applicable to the activities of Walsh in connection with its environmental consulting contract with Denver. The Company believes that this administrative proceeding involving Walsh will not have an adverse material effect upon the operations of the Company.

On February 4, 2011 the Chico Mendes Institute of Biodiversity Conservation of Brazil (the “Institute”) issued a Notice of Infraction to E & E Brasil. E & E Brasil is a majority-owned subsidiary of Ecology and Environment, Inc. The Notice of Infraction concerns the taking and collecting species of wild animal specimens without authorization by the competent authority and imposes a fine of 520,000 Reais, which has a value of approximately $256,000 at October 31, 2012. No claim has been made against Ecology and Environment, Inc. The Institute has also filed Notices of Infraction against four employees of E & E Brasil alleging the same claims and has imposed fines against those individuals that, in the aggregate, are equal to the fine imposed against E & E Brasil. E & E Brasil has filed administrative responses with the Institute for itself and its employees that: (a) denies the jurisdiction of the Institute, (b) states that the Notice of Infraction is constitutionally vague and (c) affirmatively stated that E & E Brasil had obtained the necessary permits for the surveys and collections of specimens under applicable Brazilian regulations and that the protected conservation area is not clearly marked to show its boundaries. At this time, E & E Brasil has attended one meeting where depositions were taken. The Company believes that these administrative proceedings in Brazil will not have an adverse material effect upon the operations of the Company.

14.	Supplemental Cash Flow Information Disclosure

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. Cash paid for interest amounted to approximately $82,000 and $73,000 for the three months ended October 31, 2012 and October 29, 2011, respectively. Cash paid for income taxes amounted to approximately $.6 million and $.9 million for the three months ended October 31, 2012 and October 29, 2011, respectively. The $1.0 million in dividends paid by the Company for the three months ended October 31, 2012 was accrued in accounts payable as of July 31, 2012 and paid in August 2012. The $1.0 million in dividends paid by the Company for the three months ended October 29, 2011 was accrued in accounts payable as of July 31, 2011 and paid in August 2011.

15.	Recent Accounting Pronouncements

The FASB and the International Accounting Standards Board (IASB) have issued common disclosure requirements related to offsetting arrangements. Specifically, the FASB issued Accounting Standards Update (ASU) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company has not yet assessed the impact that these provisions will have on its consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05 Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 increases the prominence of other comprehensive income in financial statements. Under ASU 2011-05, companies will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. ASU 2011-05 eliminates the option to present other comprehensive income in the statement of changes in equity and is applied retrospectively. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU provides a consistent definition of fair value to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. This standard changes certain fair value measurement principles and enhances the disclosure requirements. ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and should be applied prospectively. The Company early adopted this ASU and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

16.	Subsequent Event

The Company’s majority owned subsidiary Walsh Environmental Scientists and Engineers, LLC (Walsh), at its most recent board meeting approved purchasing an additional 7% of its majority owned subsidiary Gustavson Associates, LLC (Gustavson) from a minority shareholder. The share purchase with take place prior to December 31, 2012, and with this purchase Walsh will increase its ownership percentage of Gustavson to 78%.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

Operating activities provided cash flow of $1.9 million during the three months ended October 31, 2012. This was mainly attributable to net income of $.5 million, a $2.0 million increase in accrued payroll costs and a $.9 million decrease in net contract receivables. Accrued payroll costs increased during the period due mainly to an additional week of payroll accrued at Ecology and Environment, Inc. (Parent Company). Net contract receivables decreased overall due to the reduction in revenue associated with the overall uncertainty of global economic conditions impacting the Company. Offsetting these was an increase in other current assets and a decrease in billings in excess of revenue. Other current assets increased $1.2 million during the three months ended October 31, 2012 mainly due to an increase in prepaid insurance at the Parent Company. Billings in excess of revenue decreased $1.1 million during the first three months of fiscal year 2013 mainly attributable to work performed on contracts at the Company’s majority owned subsidiaries Gestion Ambiental Consultores (GAC) and Ecology and Environment do Brasil LTDA (E&E Brasil).

Investment activities consumed $2.8 million of cash during the three months ended October 31, 2012 mainly attributable to the purchase of $1.6 million of investment securities and the Company’s purchases of property, building and equipment of $1.2 million.

Financing activities provided $.5 million of cash during the three months ended October 31, 2012 mainly from net debt proceeds of $2.1 million less dividend payments of $1.0 million and distributions to non-controlling interests of $.6 million. Short term debt has increased this year due mainly to the delinquency of the receivables in the Middle East and China.

Ecology and Environment, Inc. (Company) maintains unsecured lines of credit available for working capital and letters of credit of $32.5 million at the parent company with interest rates ranging from 2.5% to 3% at July 31, 2012 and an additional $1.6 million in lines of credit at the Company’s subsidiaries with interest rates ranging from 4.5% to 5% at July 31, 2012. The Company guarantees the lines of credit of Walsh. Its lenders have reaffirmed the Company’s lines of credit within the past twelve months. At October 31, 2012 and July 31, 2012, the Company had letters of credit and amounts outstanding under lines of credit totaling approximately $16.1 million and $14.9 million, which is inclusive of outstanding letters of credit of $1.5 million and $4.1 million, respectively. After letters of credit and amounts outstanding under lines of credit, there was $18.0 million of availability under the lines of credit at October 31, 2012. The Company maintained a cash balance of $10.1 million at October 31, 2012, however borrowings of $1.2 million against the Company’s line of credit were necessary during the fiscal year due to the cash requirements at Ecology and Environment (Parent Company). The Company believes that cash flows from operations and borrowings against the lines of credit will be sufficient to cover all working capital requirements for at least the next twelve months and the foreseeable future.

Results of Operations

Revenue

First Quarter 2013 vs 2012

Revenue for the first quarter of fiscal year 2013 was $36.8 million, a decrease of $5.5 million or 13% from the $42.3 million reported for the first quarter of fiscal year 2012. The Company’s majority owned subsidiary Walsh Environmental (Walsh) reported revenue of $7.7 million for the first quarter of fiscal year 2013, a decrease of $3.4 million or 31% from the $11.1 million reported in the prior year due to decrease in overall sales volume. Revenue at the Parent Company was $20.8 million, a decrease of $1.9 million or 8% due mainly to decreases in the Company’s federal, international and domestic energy markets. This decrease was partially offset by an increase in revenue at E&E do Brasil E&E do Brasil reported revenue of $4.1 million during the first quarter of fiscal year 2013, an increase of $.8 million over the prior year due to work in the transmission and energy markets.

Income Before Income Taxes

First Quarter 2013 vs 2012

The Company’s income before income taxes was $.9 million for the first quarter of fiscal year 2013, a decrease of $1.2 million or 57% from the $2.1 million reported in the first quarter of fiscal year 2012 due mainly to the reduced revenue. Revenue less subcontract costs were $29.8 million, a decrease of $3.4 million from the $33.2 million reported in the first quarter of the prior year, mainly due to the decrease in revenue in the Parent Company. Gross profits (revenue less cost of professional services, other direct operating expenses and subcontract costs) decreased $1.1 million during the first quarter of fiscal year 2013. Indirect costs for the first quarter of fiscal year 2013 were $14.9 million, down slightly from the $15.1 reported in the first quarter of prior year. The Parent Company was adversely impacted by excess staffing levels due to delays in resolving issues on several contracts in China. Foreign exchange losses were $45,000 for the quarter mainly due to fluctuations in the exchange rates on receivables carried in Kuwaiti Dinar translated to US dollars.

Income Taxes

The estimated effective tax rate for the three months ended October 31, 2012 and October 29, 2011 was 39.5% and 32.6%, respectively. The increase is mainly a result of decreased income from foreign entities in countries with a lower effective tax rate than in the U.S, decreased income from U.S. partnerships, recognition of nondeductible expenses in a foreign jurisdiction and additional foreign taxes.

Critical Accounting Policies and Use of Estimates

Management's discussion and analysis of financial condition and results of operations discuss the Company's consolidated financial statements, which 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, income taxes, impairment of long-lived assets and contingencies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be 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.

Recent Accounting Pronouncements

An accounting standard related to the presentation of other comprehensive income was issued to increase the prominence of items reported in other comprehensive income. The amended standard requires the components of net income and the components of other comprehensive income to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, and other disclosures. Among the new provisions of this standard was a requirement for entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements); however, a subsequent accounting standard update was issued, which indefinitely deferred the reclassification requirement. Further deliberations on this topic by the FASB are expected at a future date. Excluding the deferred reclassification requirement, the remaining portion of the standard was effective for us beginning with our first quarter of fiscal year 2012; however, we have historically presented the components of net income and the components of other comprehensive income in two separate, but consecutive, statements.

An accounting standard update regarding fair value measurement was issued to conform the definition of fair value and common requirements for measurement of and disclosure about fair value under U.S. GAAP and International Financial Reporting Standards. The amended standard also clarifies the application of existing fair value measurement requirements and expands the disclosure requirements for fair value measurements that are estimated using significant unobservable Level 3 inputs. The standard update was effective for us beginning with our first interim period of fiscal year 2012. The adoption of the standard did not have a material impact on our consolidated financial statements.

An accounting standard update related to new disclosures about balance sheet offsetting and related arrangements was issued. For derivatives and financial assets and liabilities, the amendments require the disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to the offsetting requirements but not offset on the balance sheet. The standard update is effective for us beginning with our first interim period in fiscal year 2013. This standard does not amend the existing guidance on when it is appropriate to offset. The adoption of the standard did not have a material impact on our consolidated financial statements.

Revenue Recognition

The Company’s revenues are derived primarily from the professional and technical services performed by its employees or, in certain cases, by subcontractors engaged to perform on under contracts entered into with our clients. The revenues recognized, therefore, are derived from our ability to charge clients for those services under the contracts. Sales and cost of sales at the Company’s South American subsidiaries exclude tax assessments by governmental authorities, which are collected by the Company from its customers and then remitted to governmental authorities.

The Company employs three major types of contracts: “cost-plus contracts,” “fixed-price contracts” and “time-and-materials contracts.” Within each of the major contract types are variations on the basic contract mechanism. Fixed-price contracts generally present the highest level of financial and performance risk, but often also provide the highest potential financial returns. Cost-plus contracts present a lower risk, but generally provide lower returns and often include more onerous terms and conditions. Time-and-materials contracts generally represent the time spent by our professional staff at stated or negotiated billing rates.

Fixed price contracts are accounted for on the “percentage-of-completion” method, wherein revenue is recognized as project progress occurs. Time and material contracts are accounted for over the period of performance, in proportion to the costs of performance, predominately based on labor hours incurred. If an estimate of costs at completion on any contract indicates that a loss will be incurred, the entire estimated loss is charged to operations in the period the loss becomes evident.

The use of the percentage of completion revenue recognition method requires the use of estimates and judgment regarding the project’s expected revenues, costs and the extent of progress towards completion. The Company has a history of making reasonably dependable estimates of the extent of progress towards completion, contract revenue and contract completion costs.

However, due to uncertainties inherent in the estimation process, it is possible that completion costs may vary from estimates.

Most of our percentage-of-completion projects follow a method which approximates the “cost-to-cost” method of determining the percentage of completion. Under the cost-to-cost method, we make periodic estimates of our progress towards project completion by analyzing costs incurred to date, plus an estimate of the amount of costs that we expect to incur until the completion of the project. Revenue is then calculated on a cumulative basis (project-to-date) as the total contract value multiplied by the current percentage-of-completion. The revenue for the current period is calculated as cumulative revenues less project revenues already recognized. The recognition of revenues and profit is dependent upon the accuracy of a variety of estimates. Such estimates are based on various judgments we make with respect to those factors and are difficult to accurately determine until the project is significantly underway.

For some contracts, using the cost-to-cost method in estimating percentage-of-completion may overstate the progress on the project. For projects where the cost-to-cost method does not appropriately reflect the progress on the projects, we use alternative methods such as actual labor hours, for measuring progress on the project and recognize revenue accordingly. For instance, in a project where a large amount of equipment is purchased or an extensive amount of mobilization is involved, including these costs in calculating the percentage-of-completion may overstate the actual progress on the project. For these types of projects, actual labor hours spent on the project may be a more appropriate measure of the progress on the project.

The Company’s contracts with the U.S. government contain provisions requiring compliance with the Federal Acquisition Regulation (FAR), and the Cost Accounting Standards (CAS). These regulations are generally applicable to all of the Company’s federal government contracts and are partially or fully incorporated in many local and state agency contracts. They limit the recovery of certain specified indirect costs on contracts subject to the FAR. Cost-plus contracts covered by the FAR provide for upward or downward adjustments if actual recoverable costs differ from the estimate billed. Most of our federal government contracts are subject to termination at the convenience of the client. Contracts typically provide for reimbursement of costs incurred and payment of fees earned through the date of such termination.

Federal government contracts are subject to the FAR and some state and local governmental agencies require audits, which are performed for the most part by the Defense Contract Audit Agency (DCAA). The DCAA audits overhead rates, cost proposals, incurred government contract costs, and internal control systems. During the course of its audits, the DCAA may question incurred costs if it believes we have accounted for such costs in a manner inconsistent with the requirements of the FAR or CAS and recommend that our U.S. government financial administrative contracting officer disallow such costs. Historically, we have not experienced significant disallowed costs as a result of such audits. However, we can provide no assurance that such audits will not result in material disallowances of incurred costs in the future.

The Company maintains reserves for cost disallowances on its cost based contracts as a result of government audits. Government audits have been completed and final rates have been negotiated through fiscal year 2005. The Company has estimated its exposure based on completed audits, historical experience and discussions with the government auditors. If these estimates or their related assumptions change, the Company may be required to record additional charges for disallowed costs on its government contracts.

Allowance for Doubtful Accounts and Contract Adjustments

We reduce our contract receivables and costs and estimated earnings in excess of billings on contracts in process by establishing an allowance for amounts that, in the future, may become uncollectible or unrealizable, respectively. We determine our estimated allowance for uncollectible amounts and allowance for contract adjustments based on management’s judgments regarding our operating performance related to the adequacy of the services performed, the status of change orders and claims, our experience settling change orders and claims and the financial condition of our clients, which may be dependent on the type of client and current economic conditions.

Deferred Income Taxes

We use the asset and liability approach for financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances based on our judgments and estimates are established when necessary to reduce deferred tax assets to the amount expected to be realized in future operating results. Management believes that realization of deferred tax assets in excess of the valuation allowance is more likely than not. Our estimates are based on facts and circumstances in existence as well as interpretations of existing tax regulations and laws applied to the facts and circumstances, with the help of professional tax advisors. Therefore, we estimate and provide for amounts of additional income taxes that may be assessed by the various taxing authorities.

Uncertain Tax Positions

A tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions shall be recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position will be sustained. Tax positions that meet the more likely than not threshold should be measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a tax position, is a matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in administrative and indirect operating expenses.

Changes in Corporate Entities

On January 4, 2012, the Company purchased an additional 1.3% of Walsh from noncontrolling shareholders for approximately $254,000. Two thirds of the purchase price was paid in cash while the remaining one third was paid for with E&E stock. With this purchase E&E’s ownership share in Walsh increased to approximately 86% of that company.

On December 14, 2011, the Company increased its capital investment in its Brazilian subsidiary (Ecology and Environment do Brasil, LTDA.) by $1.5 million, which increased the Company’s ownership in the entity to 68%. The Company also purchased an additional 4% of the entity from its president for approximately $180,000, which increased the Company’s ownership in the entity to 72%. The Brazilian company has experienced increased revenue growth and the additional $1.5 million investment will be used for working capital needs in the country.

On November 18, 2011, the Company purchased an additional 3.9% of Walsh Peru from noncontrolling shareholders for approximately $432,000. The entire purchase price was paid in cash.

Inflation

Inflation has not had a material impact on the Company’s business because a significant amount of the Company’s contracts are either cost based or contain commercial rates for services that are adjusted annually.

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 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 chief executive officer and 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 chief executive officer and our chief financial officer concluded that 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 chief executive officer and 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

During the first quarter of fiscal year 2013, the Company implemented a new Enterprise Resource Planning (ERP) system at the majority owned subsidiary E & E Brasil. This system went online at all of the Company's domestic operations on January 1, 2012. Other than the changes related to the implementation of this new system at E & E Brasil, no other significant 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 quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

On September 21, 2012 the Colorado Department of Public Health and Environment (the “Department”) issued a proposed Compliance Order on Consent (the “Consent Order”) to the City and County of Denver (“Denver”) and to Walsh Environmental Scientists & Engineers LLC (“Walsh Environmental”). Walsh Environmental is a majority-owned subsidiary of Ecology and Environment, Inc. The proposed Consent Order concerns construction improvement activities of certain property owned by Denver which was the subject of asbestos remediation. Denver had entered into a contract with Walsh Environmental for Walsh Environmental to provide certain environmental consulting services (asbestos monitoring services) in connection with the asbestos containment and/or removal performed by other contractors at Denver’s real property. The Consent Order, among other provisions, proposes a violation penalty of $216,000, jointly and severally to be paid by Denver and Walsh Environmental. Under Walsh’s Environmental consulting contract with Denver, Walsh Environmental has agreed to indemnify Denver for certain liabilities which would include the imposition of this proposed penalty. Walsh Environmental has put its professional liability carrier on notice of this claimed penalty. At this time, neither Walsh nor Denver has filed a response to the September 21, 2012 draft Consent Order. It is the position of Walsh Environmental that it has fully complied with all applicable Colorado laws, regulations and statutes in connection with its role as an environmental consultant to Denver and the claimed violations are not applicable to the activities of Walsh in connection with its environmental consulting contract with Denver. The Company believes that this administrative proceeding involving Walsh Environmental will not have an adverse material effect upon the operations of the Company.

On February 4, 2011 the Chico Mendes Institute of Biodiversity Conservation of Brazil (the “Institute”) issued a Notice of Infraction to Ecology and Environment do Brasil LTDA (“E & E Brasil”). E & E Brasil is a majority-owned subsidiary of Ecology and Environment, Inc. The Notice of Infraction concerns the taking and collecting species of wild animal specimens without authorization by the competent authority and imposes a fine of 520,000 Reais, which has a value of approximately $256,000 at October 31, 2012. No claim has been made against Ecology and Environment, Inc. The Institute has also filed Notices of Infraction against four employees of E & E Brasil alleging the same claims and has imposed fines against those individuals that, in the aggregate, are equal to the fine imposed against E & E Brasil. E & E Brasil has filed administrative responses with the Institute for itself and its employees that: (a) denies the jurisdiction of the Institute, (b) states that the Notice of Infraction is constitutionally vague and (c) affirmatively stated that E & E Brasil had obtained the necessary permits for the surveys and collections of specimens under applicable Brazilian regulations and that the protected conservation area is not clearly marked to show its boundaries. At this time, E & E Brasil has attended one meeting where depositions were taken. The Company believes that these administrative proceedings in Brazil will not have an adverse material effect upon the operations of the Company.

Item 2. Changes in Securities and Use of Proceeds

(e) Purchased Equity Securities. The following table summarizes the Company’s purchases of its common stock during the three month period ended October 31, 2012:

Period		Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
August 1, 2012 – October 31, 2012		---		$---		---		93,173

Item 3. Defaults Upon Senior Securities

The Registrant has no information for Item 3 that is required to be presented.

Item 4. Submission of Matters to a Vote of Security Holders

The Registrant has no information for Item 4 that is required to be presented.

Item 5. Other Information

The Registrant has no information for Item 5 that is required to be presented.

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.

(b)

Registrant did not file a Form 8-K during the three months ended October 31, 2012.

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: December 19, 2012	By:	/s/ H. John Mye III
		H. John Mye III
		Vice President, Treasurer and Chief Financial Officer – Principal Financial and Accounting Officer

ECOLOGY & ENVIRONMENT INC - FORM 10-Q - December 19, 2012

Attached files

ECOLOGY & ENVIRONMENT INC Reports