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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
 
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended July 31, 2017

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, NY
 
14086
(Address of principal executive offices)
 
(Zip code)

716-684-8060
(Registrant's telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Class A Common Stock par value $.01 per share
NASDAQ Stock Exchange

Securities registered pursuant to section 12(g) of the Act:

 
 None
 
(Title of class)
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐   No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ☐   No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.  ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer
Accelerated filer
Non-accelerated filer  (Do not check if a smaller reporting company)
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐   No
 


Exhibit Index on Page 67.

The aggregate market value of the Class A Common Stock held by non-affiliates as of January 31, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter) was $29,925,693.  This amount is based on the closing price of the registrant’s Class A Common Stock on the National Association of Securities Dealers Automated Quotations (NASDAQ) Stock Market for that date.  Shares of Class A Common Stock held by the executive officers and directors of the registrant are not included in this computation.

As of September 29, 2017, 3,008,458 shares of the registrant's Class A Common Stock, $.01 par value (the "Class A Common Stock") were outstanding, and 1,293,146 shares of the registrant's Class B Common Stock, $.01 par value (the "Class B Common Stock") were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Registration Statement on Form S-1, as amended by Amendment Nos. 1 and 2 (Registration No. 33-11543), portions of the Company's Form 10-K for fiscal years ended July 31, 2002, 2003, 2004, 2010, 2011 and 2016, portions of the Company’s Definitive Proxy Statement (Schedule 14A) dated December 13, 2011, portions of the Company’s Definitive Proxy Statement (Schedule 14A) dated January 21, 2017, and the Company’s Current Reports on Form 8-K dated August 21, 2013 and June 1, 2017 are incorporated by reference in Part IV of this Form 10-K.
 
2

Table of Contents
 
PART I
 
Page
     
Item 1.
4
Item 1A.
12
Item 1B.
15
Item 2.
15
Item 3.
15
Item 4.
16
     
PART II
   
     
Item 5.
17
Item 6.
19
Item 7.
19
Item 8.
30
Item 9.
57
Item 9A.
57
Item 9B.
59
     
PART III
   
     
Item 10.
60
Item 11.
63
Item 12.
66
Item 13.
68
Item 14.
68
     
PART IV
   
     
Item 15.
70
 
PART I

Item 1.      Business

References in this Annual Report on Form 10-K (the “Annual Report”) to “EEI” refer to Ecology and Environment, Inc., a New York corporation.  References to “the Company,” “we,” “us,” “our,” or similar terms refer to EEI together with its consolidated subsidiaries.

Organization and Background

EEI was incorporated in February 1970 as a global broad-based environmental consulting firm with an underlying philosophy to provide professional services worldwide so that sustainable economic and human development may proceed with acceptable impact on the environment.  Together with its subsidiaries, EEI has direct and indirect ownership in 8 active wholly-owned and majority-owned operating subsidiaries in 5 countries.  Our staff is comprised of individuals representing numerous scientific, engineering, health, and social disciplines working together in multidisciplinary teams to provide innovative environmental solutions.  Our consolidated group of companies have completed thousands of projects for a wide variety of clients including some of the most iconic, high-profile projects in the world.  Our revenues originate from federal, state and local governments in the United States, domestic private clients in the United States, and private and governmental international clients.

Fiscal Year 2017 Operations Overview

Consolidated net income attributable to EEI (“net income”) was $3.0 million for the fiscal year ended July 31, 2017, a more than threefold increase from $0.9 million in the prior fiscal year.  Earnings per share increased to $0.70 for fiscal year 2017, from $0.21 for the prior year.  Selected financial information by business segment is summarized in the following table.

   
Fiscal Year Ended July 31,
 
   
2017
   
2016
   
2015
 
   
(in thousands)
 
EEI and its subsidiaries located in the United States:
                 
Revenue, net
 
$
82,094
   
$
83,095
   
$
88,715
 
Net revenue less subcontract costs (1)
   
69,104
     
69,724
     
73,264
 
Direct operating expenses (2)
   
29,579
     
30,363
     
32,278
 
Indirect operating expenses (3)
   
32,021
     
34,130
     
35,602
 
Income before income tax provision
   
5,831
     
4,652
     
4,592
 
Net income attributable to EEI
   
3,803
     
2,026
     
1,039
 
 
                       
Subsidiaries located in South America:
                       
Revenue, net
   
22,408
     
22,722
     
38,220
 
Net revenue less subcontract costs
   
17,019
     
17,543
     
30,344
 
Direct operating expenses
   
8,755
     
8,549
     
15,214
 
Indirect operating expenses
   
8,785
     
8,845
     
10,288
 
Income (loss) before income tax provision
   
(391
)
   
(189
)
   
4,444
 
Net income (loss) attributable to EEI
   
(773
)
   
(1,081
)
   
2,988
 
 
                       
Other foreign subsidiaries:
                       
Revenue, net
   
---
     
---
     
---
 
Net revenue less subcontract costs
   
---
     
---
     
---
 
Direct operating expenses
   
---
     
---
     
8
 
Indirect operating expenses
   
15
     
95
     
1,147
 
Income (loss) before income tax provision
   
(15
   
(96
)
   
(1,067
)
Net income (loss) attributable to EEI
   
(15
)    
(59
)
   
(631
)
 
(1)
Net revenue less subcontract costs represents the net of revenue, net, and subcontract costs from the consolidated statements of operations.
(2)
Direct operating expenses consist of cost of professional services and other direct operating expenses from the consolidated statements of operations.
(3)
Indirect operating expenses consist of administrative and indirect operating expenses and marketing and related costs from the consolidated statements of operations.
 
U.S. Operations

Net income from U.S. operations nearly doubled to $1.8 million during fiscal year 2017, as lower revenues were more than offset by lower direct and indirect operating expenses. Competitive pricing pressure continued to have an impact on our ability to win new work in many of our domestic market sectors.  In addition, for the second straight year, we experienced a higher proportion of revenues from federal, state and local government projects, which are generally billed at lower rates than our commercial work.

Indirect operating expenses decreased 6% during fiscal year 2017.  We continue to improve operating efficiency within our domestic operations and operate under an expense management strategy that has resulted in significant reductions in indirect operating expenses over the past three fiscal years.

South American Operations

An economic downturn that adversely affected our Brazilian operations during previous fiscal years appeared to stabilize during fiscal year 2017, resulting in additional business development opportunities and higher revenues in Brazil.  Although improving, economic conditions continue to be challenging for certain of our clients in Brazil, resulting in continued high levels of collection risk and receivable reserves.

Global economic trends in oil, gas and commodity prices continued to have a severe negative impact on revenues and net income in Peru during fiscal year 2017.  Significant energy sector project work completed in Peru during fiscal years 2016 and 2017 has not been replaced.

Reduced volumes of work on power generation and transmission projects resulted in lower revenues and net income in Chile during fiscal year 2017.  Government and private investments in mining projects in Chile have steadily decreased since 2013.

Environmental Consulting Services Offered

We offer consulting services to commercial and government clients in a variety of service sectors, which include the following:

Government START Contract

We provide support services to the United States Environmental Protection Agency (the “EPA”) for response and site assessment activities related to the release and threat of release of oil, petroleum products, hazardous substances, weapons of mass destruction or pollutants or contaminants that pose an actual or potential threat to human health or welfare, or to the environment.  We have supported the EPA under more than 40 contracts with a total award value exceeding $1 billion spanning nearly 40 years.

In July 2013, the EPA awarded us with renewal of a contract known as START IV to provide continuing support to EPA Region 10, which covers the four state territory of Alaska, Idaho, Washington and Oregon.  This is a combination time and materials/cost plus contract with a base term of three years and two two-year option periods, for a total potential contract term of seven years.  During fiscal year 2016, the EPA awarded the first of the option periods to EEI.  This contract contains termination provisions under which the EPA may, without penalty, terminate the contract during the contract term upon written notice to us.  In the event of termination, we would be paid only termination costs in accordance with the contract.  We have never had a contract terminated during the contract term by the EPA.
 
Government Task Order Contracts

We have numerous task order contracts with state and federal governmental agencies which contain indefinite order quantities and/or option periods ranging from one to seven years.  Services provided under these contracts include numerous environmental assessment projects with the U.S. Navy, engineering and oversight of pollution remediation, and other hazardous waste remediation activities for various state entities.  We also prepare environmental impact assessment documents for federal land management agencies such as the Bureau of Land Management.

Energy

New technology and increasing demand for less carbon intensive and more sustainable use of resources presents complex challenges to energy developers and providers.  To keep pace with growing energy needs worldwide, we provide services to all phases of energy development by conducting critical feature/fatal flaw analyses, social and health impact assessments, feasibility and siting studies, field surveys, permitting, construction inspection and compliance monitoring.  As public participation has become increasingly important, EEI has developed specialized tools and techniques for successful stakeholder engagement.

·
Electric Transmission

Our comprehensive approach to transmission project siting and permitting has developed from experience on over 16,000 miles of transmission line, including underwater and underground DC lines, urban rebuilds, and renewable generation interconnections.  We prepare feasibility studies, evaluate alternative routes, analyze environmental impacts, and acquire needed certificates, approvals, and permits for electric transmission facilities worldwide to bring renewable energy from its source to regional population centers as well as to upgrade aging infrastructure.  Recognizing the increasing need for proactive public involvement, we work closely with our clients to effectively engage stakeholders and identify environmental constraints, community concerns, and permitting requirements early.

·
Pipelines

To date, we have worked on more than 250 projects in the pipeline industry involving more than 50,000 miles of pipeline systems.  Our extensive experience includes route selection, evaluation of alternatives, field surveys, regulatory compliance and permit support, preparation of environmental monitoring and restoration plans, and environmental inspection, including development of quality assurance specifications.

·
Offshore Energy

Global demand for renewable energy has stimulated the development of new technologies for generating energy from ocean currents, tides, waves, and thermal resources.  The rising demand for fossil fuels, particularly natural gas, has expanded the exploration and production of offshore oil and gas reserves and global trade of liquefied natural gas (“LNG”).

The LNG industry in the United States has seen dramatic changes in the last few years. The rapid development of shale gas resources has advanced the U.S. from having to import natural gas to now producing natural gas in excess of domestic needs. This has transformed the U.S. LNG marketplace from one where LNG import terminals were being permitted and constructed to one where LNG export terminals are now being permitted and constructed. E & E has worked with clients to develop offshore and onshore LNG import and export terminals and associated pipelines.

We have extensive experience conducting siting, environmental analyses, and permitting for offshore energy projects worldwide, including wind farms, wave energy converters, deep water ports, floating production storage and offloading facilities (“FPSOs”), and subsea pipeline and electrical transmission cables.  We guide clients in developing successful permitting strategies and provide comprehensive environmental and regulatory support for offshore energy projects.

We prepare third-party Environmental Impact Statements (“EISs”) and Environmental Impact Assessments (“EIAs”), Deepwater Port Applications, and Federal Energy Regulation Commission (“FERC”) Environmental Reports (“ERs”).  We also perform siting/feasibility studies, plankton surveys, marine mammal acoustic impact modeling, dredging impact studies, coastal zone consistency evaluations, risk assessments, and marine vessel traffic studies, and develop and implement comprehensive plans for stakeholder engagement/outreach.
 
·
Wind Energy

We have extensive experience providing strategic environmental consulting services to wind energy developers and are a consulting member of the American Wind Energy Association (“AWEA”).  Our nationwide team has collectively worked on more than 475 wind energy projects in 38 states, helping clients successfully develop wind projects capable of producing more than 7,000 megawatts (“MWs”) of environmentally safe, renewable electricity.  Our direct experience with wind energy development, from initial siting studies through construction and mitigation monitoring of completed wind energy projects, allows us to anticipate potential project delays and resolve issues to keep client projects on schedule.

We provide strategic consulting in all facets of environmental permitting and compliance, environmental evaluation, threatened and endangered species, avian and bat surveys, and land use studies.  Our civil engineering support services include design of structure foundations and roadways and coordination for gathering line placement, substation, and transmission line requirements.  In addition, we recognize that public outreach efforts are an important component of any wind power project and, therefore, maintain in-house public relations experts and graphic artists, who work as an integrated team to design outreach programs geared toward landowners and officials.

·
Solar Energy

We have assisted solar developers to permit and build projects powering more than 6,540 MWs of clean, renewable energy in 31 states.  We have worked on more than 150 solar assignments, supporting all phases of solar energy development, including critical issues analyses, feasibility and siting studies, permitting and due diligence audits, environmental impact assessments, project permitting and construction monitoring and operational compliance. 

Natural Resource Management and Restoration

Our approach to restoration design focuses on mimicking natural systems in form, function, and process—developing practical strategies for sustainable design and uplift.  We conceive and design environmental restoration projects that restore affected habitat through the efficient and innovative integration of biological and engineering solutions.  We assist our clients in meeting their goals by applying restoration measures to mine reclamation, contaminated sediment remediation, land development strategies, recreational planning, comprehensive watershed planning, and threatened and endangered species protection.  Current work also includes helping clients such as the US Army Corps of Engineers address invasive species such as hydrilla and algal blooms in the Great Lakes watershed.  Through our work with The Nature Conservancy, we are also helping to restore areas on the Gulf Coast.

Sustainability, Resiliency, and Climate Adaptation

E & E planning teams are working with communities around the world to develop and implement sustainable approaches for projects as varied as neighborhood-scale urban redevelopment, large-scale green city planning and design, and regional sustainability plans.   We help organizations and government agencies to become more resilient by assisting them to plan for, respond to, and recover from extreme disruptive events that can result in a wide range of cascading emergencies, with emphasis on building more resilient communities.  We are a founding corporate sponsor of the International Sea Level Institute, and are working with clients to understand the short- and long-term effects of sea level rise on their businesses and communities.
 
Water Resources

Water supply, water quality and watershed management issues are becoming increasingly intertwined as communities face mounting difficulties securing future resources.  Water resource planning and management projects present diverse challenges ranging from understanding complex hydrologic systems to highly charged political issues and solutions must address stakeholder concerns, water rights, permitting requirements, ecosystem sustainability, public health, water supply, water quality, and economic feasibility. EEI’s water resource management practice includes work in water resources engineering, water studies and planning, and environmental restoration.  We have experience working in the world’s most important water systems, including the Florida Everglades, Louisiana Coastline, Sacramento-San Francisco Bay Delta, Great Lakes, Hudson River, Chesapeake Bay, Puget Sound, Amazon River Basin, Yangtze River Basin, and many others.

Planning

·
Environmental Planning and Assessment

Environmental impact assessment is at the core of our business.  Since EEI’s inception, this work has included numerous major EIS and ER projects, initial studies and EAs, and has mitigated negative declarations in accordance with the National Environmental Policy Act (“NEPA”) and various state requirements.  We also prepare similar documents under state laws, such as the California Environmental Quality Act.

·
Military Master Planning and Land Use Compatibility Studies

In response to the advances seen in military master planning under taken by the Department of Defense (“DOD”) over the past few years, we have developed a team of experienced professionals in the areas of real property master planning, military programming, geospatial data and systems support, database management, and water resources planning.  Through our experience with modern military facility planning, we develop technologically advanced military master planning tools by leveraging the latest in Geographic Information System (“GIS”) and information technology.  We assist DOD installations to incorporate renewable energy and reduce their environmental footprint while sustaining mission requirements and maintaining positive relationships with the surrounding communities. 

Emergency Planning and Management

Events around the world involving terrorism, bioterrorism, and natural disasters continue to raise concerns for public health and safety as well as environmental protection.  We provide logistical support, emergency response/management services, and comprehensive planning to businesses and state, county, and municipal governments in all phases of incident management, including preparedness, mitigation, response, and recovery.  In providing these multifaceted services, we determine local vulnerabilities and hazards and the in-place resources/assets to address those hazards in the context of applicable state and federal laws and regulations and community desires to become more resilient.

Hazardous and Radioactive Material Services

We have conducted thousands of hazardous waste site evaluations throughout the United States, providing site investigation, engineering design, and operation and maintenance for a wide range of industrial and governmental clients.  We inventory and collect sample materials on site and then evaluate waste management practices, potential off-site impacts, and liability concerns.  We then design, implement, and monitor associated cleanup programs. Our field investigation services primarily involve the development of work plans, health and safety plans, and quality assurance/quality control plans to govern and conduct field investigations to define the nature and extent of contaminants at a site.  After field investigation services have been completed and the necessary approvals obtained, our engineering specialists develop plans and specifications for remedial cleanup activities.  This work includes development of methods and standard operating procedures to assess contamination problems; and to identify, develop, and design appropriate pollution-control schemes.  Alternative cleanup strategies are evaluated and conceptual engineering approaches are formulated.  We also supervise actual cleanup or remedial construction work performed by other contractors.
 
International

Since EEI’s incorporation in 1970, we have completed more than 50,000 environmental assignments in more than 120 countries worldwide.  Many of the services provided for our global clients are similar to the services we provide in the U.S. and help our clients to meet local expectations and regulatory requirements.  With an understanding of cultural, political, economic, operational, and legal factors that influence the solution to a given environmental problem, we aid international governments and lending institutions in their efforts to advance institutional systems for environmental management.  We have completed assignments involving environmental assessment; management and financial planning; institutional strengthening and standards development; water supply and development; wastewater treatment; and solid waste project construction supervision.  More recently, issues of public health, sustainability, and social and economic development have been added to that portfolio.

As modernizing economies continue to develop, demand for global environmental services has also grown.  Most countries now have environmental laws to protect and regulate development of natural resources.  Many countries are also investing in infrastructure-related projects like bridges, roads, hydroelectric dams, mines, water supply, power generation and transmission, communications networks, and ports, all of which present opportunities for us to provide environmental services. Our international offices are also providing services for the development of renewable energy.  Frequent and dramatic natural disasters in recent years have spurred many governments around the world to address disaster response and prevention strategies and the impacts of climate change, such as sea-level rise and storm intensity and frequency. Through our U.S. and South American operations, we believe that we are well-positioned to benefit from these growth opportunities.

Regulatory Compliance

The federal governments of the U.S. and other countries where we operate have enacted numerous environmental laws governing a wide range of topics. Similarly, most U.S. state legislatures have enacted laws to prevent and correct environmental problems.  Our operations are also influenced by international laws, treaties, conventions, and regulations designed to protect the environment.  These laws and regulations help to create the demand for the multidisciplinary consulting services we offer.  The principal U.S. federal legislation that affects our business include:

·
National Environmental Policy Act
·
Comprehensive Environmental Response, Compensation, and Liability Act of 1980, As Amended
·
Resource Conservation and Recovery Act of 1976
·
Clean Air Act
·
Safe Drinking Water Act of 1996
·
Clean Water Act
·
Endangered Species Act
·
Marine Mammal Protection Act
·
Migratory Bird Treaty Act
·
Golden Eagle Protection Act
·
Atomic Energy Act
·
Oil Pollution Control Act
·
Occupational Safety and Health Act
·
Coastal Zone Management Act

Contract Backlog

At any point in time, we have a backlog of uncompleted projects and outstanding indefinite task order contracts that are expected to provide future revenue over a period of 1 to 7 years.  These projects include a substantial amount of work to be performed under contracts which contain termination provisions that may be exercised without penalty at any time by our clients upon written notice to us.  Changes in economic or market conditions or other extraordinary events, such as terrorist acts or natural disasters, could lead to delays in our ability to recognize revenue, or to us not realizing all of the potential revenue under these contracts. The likelihood of obtaining the full value under these contracts cannot be determined at this time.
 
The backlog of uncompleted projects and maximum potential revenues from indefinite task order contracts, by business segment, are summarized in the following table.

   
Amount as of July 31,
 
 
2017
   
2016
 
   
(in thousands)
 
         
Total firm backlog of uncompleted contracts:
           
EEI and its subsidiaries located in the United States
 
$
77,355
   
$
75,146
 
Subsidiaries located in South America
   
20,744
     
17,237
 
Consolidated totals
 
$
98,099
   
$
92,383
 
                 
Anticipated completion of firm backlog in next twelve months:
               
EEI and its subsidiaries located in the United States
 
$
55,571
   
$
49,851
 
Subsidiaries located in South America
   
14,660
     
8,580
 
Consolidated totals
 
$
70,231
   
$
58,431
 
                 
Maximum potential revenue from task order contracts:
               
EEI and its subsidiaries located in the United States
 
$
205,402
   
$
219,695
 
Consolidated totals
 
$
205,402
   
$
219,695
 
 
Business Development

Our business development activities take place everywhere we work.  Although we have a dedicated business development group that includes sales, marketing and communications professionals, our technical staff is also active in identifying opportunities and developing business relationships.  Specific business development activities include:
 
·
Meeting with existing and potential clients to understand their needs and anticipate new markets;
·
Participating in professional organizations and speaking at seminars and conferences to enhance our professional knowledge and relationships;
·
Attending and participating in trade shows and professional seminars relating to our business;
·
Sponsoring a popular seminar series that targets specific markets;
·
Monitoring numerous environmental, business and other publications to identify potential clients and their needs;
·
Close tracking of government contract procurements;
·
Monitoring government regulations, environmental and social trends, and other events that may affect our clients and thereby generate new business;
·
Responding to requests for proposals, bids, and qualifications, and developing proposals to win new or repeat business; and
·
Providing specialized business development training to our staff.

Competition

We are subject to competition with respect to each of the services that we provide.  No single entity currently dominates the environmental services industry or has the capability to serve the entire market.  Some of our competitors are larger than us, have greater financial and other resources than we do, or may be more specialized in certain disciplines or locations.  Others have special status as small businesses.  We compete primarily on the basis of our reputation, quality of service, expertise, responsiveness and price.
 
Management Team and Employees

Our management and staff is comprised of individuals with advanced degrees representing scientific and engineering disciplines working together in multidisciplinary teams to provide innovative solutions.  The members of our executive management team have extensive experience in the environmental consulting industry.

As of July 31, 2017 we had 876 employees (705 full-time) in all of our offices, which included 552 employees (416 full-time) in domestic offices and 324 employees (289 full-time) in foreign offices.  The majority of our employees hold bachelor's and/or advanced degrees in such areas as chemical, civil, mechanical, sanitary, soil, structural and transportation engineering, biology, geology, hydrogeology, ecology, urban and regional planning and oceanography.  The employees at our majority-owned subsidiary in Brazil (116 full time employees as of July 31, 2017) are represented by a labor organization.  We believe that our relationship with the labor organization in Brazil and with all of our employees is good.

Corporate Governance and Security Exchange Rules

Our shares of Class A Common Stock are listed on the National Association of Securities Dealers Automated Quotations (NASDAQ) Stock Market.  NASDAQ requires all of its listing companies to be in compliance with NASDAQ’s standards of corporate governance set forth in the NASDAQ Marketplace Rules (NASDAQ CG Rules).  We have certified to the NASDAQ that we are in compliance with the NASDAQ CG Rules except for those NASDAQ CG Rules relating to the Director Nominations Process, the Compensation of Officers and Board Compensation.   For these items, we relied upon the “controlled company” exception found in the NASDAQ CG Rules.  A “controlled company” is a listing company where more than 50 percent of the voting power of the listing company is in the control of a group.  As of July 31, 2017, a group that holds more than 50 percent of the voting power of our Common Stock, consisting of Messrs. Frank B. Silvestro, Ronald L. Frank, Gerald A. Strobel, Gerard A. Gallagher Jr. and Michael C. Gross and members of their families, does exist.  Therefore, we are a “controlled company” for purposes of the NASDAQ CG Rules.

The Board of Directors will consider nominees for Directors recommended by shareholders.  Shareholders wishing to recommend a director candidate for consideration by the Board of Directors can do so by writing to the Secretary of Ecology and Environment, Inc., 368 Pleasant View Drive, Lancaster, New York, 14086.  Nominations must be received not later than the close of business on the 120th day prior to the first anniversary of the previous year’s annual shareholders meeting and not earlier than the close of business on the 180th day prior to the first anniversary of the preceding year’s annual shareholders meeting. In no event shall any adjournment or postponement of an annual meeting or the announcement thereof commence a new time period for the giving of a shareholder’s notice as described above.  Nominations must meet the requirements of Article II, Section 4.A.1. of the Company’s Re-stated By-Laws dated February 25, 2016.

In evaluating candidates, the Board considers the entirety of each candidate’s credentials to ensure that the Board consists of individuals who collectively provide meaningful counsel to management.  The Board does not maintain a specific diversity policy.  It believes that diversity is an expansive attribute that includes differing points of view, professional experience and expertise, and education, as well as more traditional diversity concepts.  The Board considers the candidates’ character, integrity, experience, understanding of strategy and policy-setting, and reputation for working well with others.  If candidates are recommended by our shareholders, then such candidates will be evaluated using the same criteria.  With respect to nomination of continuing directors for re-election, the individual’s past contributions to the Board are also considered.

The Company has revised its code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and controller, as well as all other employees, directors, officers, subsidiaries, affiliates, consultants, representatives and agents of the Company.  The revised code of ethics, which the Company calls its Code of Conduct, was approved by the Board of Directors on June 1, 2017 and was filed as an exhibit to the Company’s current report on Form 8-K which was filed on June 6, 2017 and is posted on the Company's website at www.ene.com.  If the Company makes any substantive amendments to, or grants a waiver (including an implicit waiver) from, a provision of its code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, and that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, the Company will disclose the nature of such amendment or waiver in a current report on Form 8-K.
 
Item 1A. Risk Factors

In addition to other information referenced in this report, we are subject to a number of specific risks, which are outlined below. If any of these events occur, our business, financial condition, profitability and the market price of our Class A Common Stock could be materially affected.

Risks Factors Related to Our Markets and Clients

Changes in environmental laws and regulations, or fundamental changes in the operations of government agencies, could reduce demand or impact the timing for our services.

Most of our business is driven by laws and regulations related to the protection of the environment. Any relaxation or repeal of these laws, or changes in governmental policies regarding the funding or enforcement of these laws, may have an adverse impact on our revenues.  Fundamental changes in the operations of government agencies, including significant staffing reductions or changes in processes for awarding contracts, also could reduce or impact the timing of our revenues.  Also, reduced spending by governments may increase competition within our industry which may directly affect future revenue and profits.

As a government contractor, we are subject to a number of procurement laws and regulations and government agency audits.  Any violation of these laws could result in economic harm to our operations.

We must comply with federal, state, and foreign laws relating to the procurement and administration of government contracts.  Such laws include the Federal Acquisition Regulation (FAR), the Truth in Negotiations Act (TINA), the Cost Accounting Standards (CAS), and the Service Contract Act (SCA).  These laws impact how we do business with government clients and can increase the cost of doing business.  In addition, in recent years, government agencies have mandated that their primary contractors utilize a higher portion of small and disadvantaged businesses as subcontractors.

Government agencies such as EPA and the Defense Contract Audit Agency (DCAA), as well as numerous state agencies routinely audit government contractors and their performance under specific contracts to determine if a contractor’s cost structure is compliant with applicable laws and regulations.  They may question the incurrence of certain costs based on the FAR and CAS and disallow those costs on their contracts.  These audits may occur several years after payment for services has been received.  Historically, we have been able to successfully defend against the disallowance of any significant costs.  However, future audits may uncover instances of noncompliance and result in material disallowances for costs incurred in the future.  Such material disallowances could negatively affect revenue, profits and cash flow.

We depend on municipal, state and federal government work for a significant portion of our revenues.  Inability to win or renew government contracts during procurement cycles could significantly reduce our revenue and profits.

Revenues from all municipal, state and federal government contracts represented 33%, 36% and 27% of total revenues for fiscal years 2017, 2016 and 2015, respectively.

Government contracts are typically awarded through a highly regulated procurement process.  Some government contracts are awarded to multiple competitors, causing increased competition and downward pricing pressure.  Inability to win or renew government contracts could adversely affect our operations and significantly reduce our revenue and profits.  In addition, if we cannot reduce or control costs associated with these contracts, we may not be able to bid competitively, or unexpected losses on these contracts may occur.

Our clients may be acquired by other entities, or may elect to sell their interest in ongoing projects to other entities.  These transactions would subject us to increased risk of contract terminations or renegotiations.
 
If our clients sell their interest in ongoing projects or are acquired by other entities, we may not be able to control or influence decisions made by the acquiring company regarding the ongoing contractual relationships of our client, including decisions to terminate existing contracts or to award future contracts.  Such decisions by acquiring companies to terminate existing contracts, or to exclude us when awarding future contracts, could have an adverse impact on our revenues and results of operations.
 
Economic uncertainty could affect our public and private sector work.

Poor global and domestic economic conditions could impact the availability of funding for certain private environmental projects.  In addition, governmental budget cuts or delays in governmental spending could defer or halt work on public environmental programs.  These economic uncertainties could adversely affect our operations and significantly reduce our profits.

Risk Factors Related to Our Management of Project Activity

We must be able to accurately estimate and control contract costs to prevent losses on contracts.

We have three basic types of contracts with our clients: time and materials, fixed price and cost-plus.  The percentage of our revenues associated with these contract types are summarized in the following table.

   
Fiscal Year Ended July 31,
 
   
2017
   
2016
   
2015
 
                   
Time and materials
   
47
%
   
50
%
   
49
%
Fixed price
   
37
     
39
     
43
 
Cost-plus
   
16
     
11
     
8
 
Total revenue
   
100
%
   
100
%
   
100
%

We must control direct contract costs in order to maintain acceptable profit margins.  Under cost-plus contracts, which may be subject to various types of ceilings, we are reimbursed for allowable costs plus a negotiated profit.  If costs exceed ceilings or are otherwise deemed unallowable under provisions of the contract or regulations, we may not be reimbursed for all of our costs.  Under fixed price contracts, we are paid a fixed price regardless of the actual costs incurred. Consequently, a profit is realized on fixed price contracts only if we are able to control costs and avoid overruns.  Under time and material contracts, we are paid for our direct labor hours at fixed rates plus reimbursement of allocable other direct costs.  Profitability is dependent on a consistently high utilization of staff and our ability to control our overhead costs.

The use of the percentage of completion method of accounting could result in a reduction or reversal of previously recorded revenues and profits.

A portion of our revenues and profit margins are measured and recognized using the percentage of completion method of accounting which is discussed further in Note 3 of the Consolidated Financial Statements. The use of this method results in the recognition of revenues and profit margins ratably over the life of a contract. The effect of revisions to revenues and estimated costs is recorded when the amounts are known or can be reasonably estimated. Such revisions could occur in subsequent periods and their effects could be material. Although we have historically been able to make reasonably accurate estimates of work progress, the uncertainties inherent in the estimation process make it possible for actual costs to vary from estimates in a material amount, including reductions or reversals of previously recorded revenues and profits.

Subcontractor performance and pricing could expose us to loss of reputation and additional financial or performance obligations that could result in reduced profits or losses.

We often hire subcontractors for our projects.  The success of these projects depends, in varying degrees, on the satisfactory performance of our subcontractors and our ability to successfully manage subcontractor costs and pass them through to our customers.  If our subcontractors do not meet their obligations or we are unable to manage or pass through costs, we may be unable to profitably perform and deliver our contracted services.  Under these circumstances, we may be required to make additional investments and expend additional resources to ensure the adequate performance and delivery of the contracted services.  In addition, the inability of our subcontractors to adequately perform or our inability to manage subcontractor costs on certain projects could hurt our competitive reputation and ability to obtain future projects.
 
Risk Factors Related to Our Operations

International operations are subject to a number of risks.

Revenues from international operations represented 21%, 21% and 30% of total revenues for fiscal years 2017, 2016 and 2015, respectively.  International operations are subject to a number of risks, including:

·
greater counterparty risk, leading to longer collection cycles and potentially uncollectible accounts;
·
currency fluctuations;
·
logistical and language challenges that affect our ability to effectively communicate with and manage foreign employees;
·
exposure to liability and sanctions under the Foreign Corrupt Practices Act;
·
exposure to liability and sanctions under laws and regulations established by foreign jurisdictions in which we conduct business;
·
lack of developed legal systems to enforce our contractual rights;
·
volatility in economic and political conditions, particularly in our South American markets;
·
civil disturbance, unrest or violence; and
·
difficulties in staffing international operations with appropriately credentialed and trained personnel.

Failure to manage these risks effectively may result in harm to our overall operations and significantly reduce our future revenues, earnings and available liquidity.

Failure to attract and retain key employees could impair our ability to provide quality service to clients.

We provide professional and technical services that depend on our ability to attract, retain and train our professional employees to conduct our business and perform our obligations to ensure success.  The experience of our senior management team and other key employees is essential to the success of any company and our ability to retain such talent is crucial to our profitability.  Failure to effectively develop staff and complete succession planning for key senior management roles could adversely affect customer relationships, the quality of work that we complete for our clients and business development efforts.

Our services could expose us to significant liability not covered by insurance.

The services we provide expose us to significant risks of professional and other liabilities.  Our contracts generally require us to maintain certain insurance coverages and to indemnify our clients for claims, damages or losses for personal injury or property damage relating to performance of our duties unless such injury or damage is the result of the client's negligence or willful acts.  Currently, we are able to obtain insurance coverage to meet the requirements of our contracts, subject to certain pollution exclusions.  Additionally, we have an errors and omissions insurance policy that covers our environmental consulting services, including legal liability for pollution conditions resulting therefrom.  Where possible, we require that our clients cross-indemnify us for asserted claims.  There can be no assurance, however, that any such cross-indemnification agreements, together with our general liability insurance and errors and omissions coverage, will be sufficient to protect us against any asserted claim.

We are unable to predict the total amount of all potential liabilities that could arise under contracts with our clients.  While we believe that we hold an appropriate level of coverage, insurance may be inadequate or unavailable in the future to protect us for such liabilities and risks.

Extraordinary events, including natural disasters and terrorist actions, could negatively impact the economies in which we operate or disrupt our operations.

The geographic area of our operations includes regions that have experienced hurricanes, earthquakes and forest fires.  The occurrence of extraordinary events such as these, as well as other natural disasters or terrorist actions, could cause the delay or cancellation of projects, closure of offices, and the evacuation or loss of personnel.  Such events could limit or disrupt markets and our operations, which could have a negative impact on our business, financial condition, and results of operations or cash flows.
 
Failure to establish and maintain effective internal controls over financial reporting could result in material misstatements in our financial statements.

Our management is responsible for establishing and maintaining adequate internal controls over financial reporting. As reported in Item 9A of this Annual Report, management identified control deficiencies as of July 31, 2017 related to accounting for income taxes and to management’s review controls over the financial statement close process.  Although the deficiencies did not result in a material misstatement of the Company’s financial statements, management concluded that there was a reasonable possibility that, if any material misstatement had occurred, it would not have been prevented or detected on a timely basis. Therefore, management reported that material weaknesses in our internal controls over financial reporting existed as of July 31, 2017.
 
If the remedial measures that are designed to address these material weaknesses are insufficient to address the deficiencies, or if additional material weaknesses or significant deficiencies in our internal controls are discovered or occur in the future, our consolidated financial statements may contain material errors and misstatements, and we could be required to restate financial results reported in prior periods.
 
Risk Factors Related to Our Ownership and Corporate Governance

Management's voting rights could block or discourage a change in control.

Three of EEI’s current directors, one of which is also an executive officer, owned or controlled approximately 54% of the outstanding shares of Class B Common Stock as of September 29, 2017, which has one vote per share while the Class A Common Stock has one-tenth of a vote per share.  In addition, since the Company qualifies for the NASDAQ “controlled company exception” (refer to the section entitled “Corporate Governance and Security Exchange Rules” included in Part I of this Annual Report), there exists a group of holders of Class B Common Stock, composed principally of certain of the Company’s current directors and executive officers and members of their families (the “CCE Group”), that controls greater than 50% of the votes that may be cast for any proposal at a shareholders meeting.  This concentration of voting control by the CCE Group may effectively prevent any influence by the holders of Class A Common Stock over matters submitted to a vote by all shareholders.

The Company may receive change in control offers by third parties. Such change in control offers may be declined by the Company’s Board of Directors after taking into consideration its obligations to the Company and its shareholders under applicable law.  Alternatively, such offers may be taken to a vote by shareholders, the results of which could be heavily influenced by members of the CCE Group, which could adversely affect the value of outstanding common stock.

Item 1B.   Unresolved Staff Comments

None to report.

Item 2.      Properties

Our corporate headquarters (60,000 square feet) is located in Lancaster, New York, a suburb of Buffalo.  The corporate headquarters building also serves as our Buffalo regional office.  We also lease twenty-nine (29) regional offices in the United States and six (6) offices in foreign locations.

Item 3.      Legal Proceedings

Legal Proceedings

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

On February 4, 2011, the Chico Mendes Institute of Biodiversity Conservation of Brazil (the “Institute”) issued a Notice of Infraction to E&E Brasil, a majority-owned subsidiary of EEI.  The Notice of Infraction concerned the taking and collecting of wild animal specimens without authorization by the competent authority and imposed a fine of 520,000 Brazilian Reais ($0.2 million as of July 31, 2017) against E&E Brazil.  The Institute also filed Notices of Infraction against four employees of E&E Brasil alleging the same claims and imposed fines against those individuals that, in the aggregate, were equal to the fine imposed against E&E Brasil.  No claim has been made against EEI.
 
E&E Brasil has filed court claims appealing the administrative decisions of the Institute for E & E Brasil’s employees that: (a) deny the jurisdiction of the Institute; (b) state that the Notice of Infraction is constitutionally vague; and (c) affirmatively state that E&E 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.  The claim of violations against one of the four employees was dismissed.  The remaining three employees have fines assessed against them that are being appealed through the federal courts. Violations against E&E Brasil are pending agency determination.  As of July 31, 2017, the Company recorded a reserve of approximately $0.4 million in other accrued liabilities related to these claims.

Contract Termination Provisions

Certain contracts contain termination provisions under which the customer may, without penalty, terminate the contracts upon written notice to the Company.  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.  The Company did not experience early termination of any material contracts during fiscal years 2017 or 2016.

Item 4.      Mine Safety Disclosures

Not Applicable.
 
PART II

Item 5.      Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Principal Market for EEI Common Stock

The Company’s Class A Common Stock is listed on NASDAQ.  There is no separate market for the Company’s Class B Common Stock.

High and Low Stock Prices for Class A Common Stock

Quarterly high and low prices for the Company's Class A Common Stock, as reported by NASDAQ, are summarized in the following table.

   
High
Share
Price
   
Low
Share
Price
 
Fiscal Year Ended July 31, 2017:
           
First Quarter
 
$
10.44
   
$
9.25
 
Second Quarter
   
10.70
     
8.75
 
Third Quarter
   
11.10
     
9.45
 
Fourth Quarter
   
13.06
     
10.25
 
                 
Fiscal Year Ended July 31, 2016:
               
First Quarter
 
$
11.99
   
$
10.25
 
Second Quarter
   
11.53
     
8.51
 
Third Quarter
   
11.19
     
9.21
 
Fourth Quarter
   
11.20
     
9.70
 

Holders of Common Stock

As of September 29, 2017, 3,008,458 shares of the Company's Class A Common Stock were outstanding and there were 279 holders of record of the Company's Class A Common Stock.  We estimate that the Company has a significantly greater number of Class A Common Stock shareholders because a substantial number of the Company's shares are held in street name.

As of September 29, 2017, 1,293,146 shares of the Company's Class B Common Stock were outstanding and there were 52 holders of record of the Class B Common Stock.

Dividends

Including fiscal year 2017, the Company has declared semi-annual dividends for 31 consecutive years.  The Company declared dividends totaling $0.40, $0.44 and $0.48 per common share during fiscal years 2017, 2016 and 2015, respectively.

The Company's Certificate of Incorporation provides that any cash or property dividend paid on Class A Common Stock must be at least equal to the cash or property dividend paid on Class B Common Stock on a per share basis.
 
The amount, if any, of future dividends remains within the discretion of the Company's Board of Directors and will depend upon the Company's future earnings, financial condition, liquidity requirements and other factors as determined by the Board of Directors.
 
Equity Compensation Plan Information

EEI adopted the 1998 Stock Award Plan effective March 16, 1998.  This plan, together with supplemental plans that were subsequently adopted by the Company’s Board of Directors, is referred to as the “Stock Award Plan”.  Equity compensation plan information as of July 31, 2017 is summarized in the following table.
 
Plan category
 
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
 
Weighted Average
Exercise Price of Outstanding
Options,
Warrants and
Rights
 
Number of
Securities
Remaining
Available for
Future Issuance
             
Equity compensation plans approved by security holders:
           
Stock Award Plan
 
---
 
---
 
192,498
Total
 
---
 
---
 
192,498
 
Refer to Note 14 of the Consolidated Financial Statements, included in Item 8 of this Annual Report, for additional information regarding the Stock Award Plan.

Purchased Equity Securities

In August 2010, the Company’s Board of Directors approved a 200,000 share repurchase program.  The following table summarizes the Company's purchases of its common stock during fiscal year 2017 under this share repurchase program.

Fiscal Year
2017
Reporting
Month
 
Total
Number
of Shares
Purchased
   
Average
Price
Paid Per
Share
   
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
   
Maximum
Number
of Shares That
May Yet Be
Purchased
Under the Plans
or Programs
 
                         
August
   
---
     
---
     
---
     
77,082
 
September
   
---
     
---
     
---
     
77,082
 
October
   
---
     
---
     
---
     
77,082
 
November
   
---
     
---
     
---
     
77,082
 
December
   
---
     
---
     
---
     
77,082
 
January
   
---
     
---
     
---
     
77,082
 
February
   
---
     
---
     
---
     
77,082
 
March
   
---
     
---
     
---
     
77,082
 
April
   
---
     
---
     
---
     
77,082
 
May
   
---
     
---
     
---
     
77,082
 
June
   
---
     
---
     
---
     
77,082
 
July
   
---
     
---
     
---
     
77,082
 
 
Item 6.      Selected Consolidated Financial Data

   
Fiscal Year Ended July 31,
 
   
2017
   
2016
   
2015
   
2014
   
2013
 
   
(In thousands, except per share amounts)
 
Operating data:
                             
Revenues, net
 
$
104,502
   
$
105,817
   
$
126,935
   
$
128,427
   
$
134,937
 
Income (loss) from operations
 
$
5,928
   
$
4,142
   
$
7,604
   
$
(507
)
 
$
(898
)
Income (loss) before income tax provision
 
$
5,425
   
$
4,367
   
$
7,969
   
$
(447
)
 
$
(968
)
Net income (loss) attributable to Ecology and Environment, Inc.
 
$
3,015
   
$
886
   
$
3,396
   
$
(1,383
)
 
$
(2,130
)
Net income (loss) per common share - basic and diluted
 
$
0.70
   
$
0.21
   
$
0.79
   
$
(0.32
)
 
$
(0.50
)
Cash dividends declared per common share
 
$
0.40
   
$
0.44
   
$
0.48
   
$
0.48
   
$
0.48
 
Weighted average common shares outstanding - basic and diluted
   
4,294,501
     
4,289,993
     
4,287,775
     
4,283,984
     
4,247,821
 

   
Balance at July 31,
 
   
2017
   
2016
   
2015
   
2014
   
2013
 
   
(In thousands, except per share amounts)
 
Balance sheet data:
                             
Working capital
 
$
32,491
   
$
28,241
   
$
27,761
   
$
26,502
   
$
33,582
 
Total assets
 
$
60,777
   
$
59,512
   
$
68,489
   
$
71,708
   
$
81,682
 
Outstanding advances under lines of credit
 
$
581
   
$
312
   
$
672
   
$
1,572
   
$
6,529
 
Total long-term debt and capital lease obligations
 
$
448
   
$
457
   
$
946
   
$
842
   
$
451
 
Ecology and Environment, Inc. shareholders’ equity
 
$
38,106
   
$
35,572
   
$
36,915
   
$
37,678
   
$
43,544
 
Book value per share
 
$
8.87
   
$
8.29
   
$
8.61
   
$
8.80
   
$
10.25
 

Item 7.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

Cash, cash equivalents and restricted cash increased $3.2 million during fiscal year 2017.  Excluding the payment of $1.7 million of cash dividends, which were approved on a discretionary basis by the Company’s Board of Directors, cash generated from operations exceeded cash required to fund investing and financing activities by $4.7 million during the year, which includes $1.5 million received from the sale of land, a vacant building, related building improvements and fixtures and warehouse space to a non-affiliated third party.

Unsecured lines of credit of $39.5 million and $39.0 million were available for working capital and letters of credit at July 31, 2017 and 2016, respectively, of which $3.3 million and $2.5 million were used at July 31, 2017 and 2016, respectively.  Contractual interest rates ranged from 3.25% to 9.75% at July 31, 2017.  Our lenders have reaffirmed the lines of credit within the past twelve months.

We believe that available cash balances in our domestic companies, anticipated cash flows from U.S. operations, and our available lines of credit will be sufficient to cover working capital requirements of our U.S. operations during the next twelve months and the foreseeable future.

Historically, our foreign subsidiaries have generated adequate cash flow to fund their operations.  During fiscal years 2016 and 2017, our South American operations have been affected by adverse economic conditions.  The total scope and duration of the economic downturn and the ultimate impact that it will have on our South American operations are uncertain.  In the event that these subsidiaries are unable to generate adequate cash flow to fund their operations, additional funding from EEI or lending institutions will be considered.

We intend to reinvest net cash generated from undistributed foreign earnings into operations and business expansion opportunities outside the U.S.  Excess cash accumulated by any foreign subsidiary, beyond that necessary to fund operations or business expansion, may be repatriated to the U.S. at the discretion of the Boards of Directors of the respective entities.  The Company is required to accrue and pay taxes on any amounts repatriated to the U.S. from foreign subsidiaries.  During fiscal year 2017, one of the Company’s majority owned subsidiaries in South America declared a total of $1.5 million of dividends to its shareholders, of which $0.2 million was paid to minority shareholders and $0.2 million was repatriated to the U.S. during fiscal year 2017.
 
Contract Receivable Concentrations

Significant concentrations of contract receivables and the allowance for doubtful accounts and contract adjustments are summarized in the following table.

   
Balance at July 31, 2017
   
Balance at July 31, 2016
 
Region
 
Contract
Receivables
   
Allowance for
Doubtful
Accounts and
Contract
Adjustments
   
Contract
Receivables
   
Allowance for
Doubtful
Accounts and
Contract
Adjustments
 
   
(in thousands)
 
                         
EEI and its subsidiaries located in the U.S.
 
$
25,528
   
$
797
   
$
29,027
   
$
5,809
 
Subsidiaries located in South America
   
11,704
     
1,328
     
11,659
     
983
 
Other foreign subsidiaries
   
---
     
---
     
425
     
---
 
Totals
 
$
37,232
   
$
2,125
   
$
41,111
   
$
6,792
 
 
Contract adjustments related to projects in the United States, Canada and South America typically result from cost overruns related to current or recently completed projects, or from recoveries of cost overruns recorded as contract adjustments in prior reporting periods.  Contract adjustments related to projects in the Middle East, Africa and Asia typically result from difficulties encountered while attempting to settle and close-out claims that may be several years old.

During fiscal year 2017, the Company wrote-off $4.9 million of aged and fully reserved contract receivable balances at EEI related to a specific project in the Middle East, based on management’s assessment that the client is unlikely to approve payment.

The allowance for doubtful accounts and contract adjustments as a percentage of contract receivables at the Company’s subsidiaries located in South America was 11% and 8% at July 31, 2017 and 2016, respectively.  During fiscal year 2017, challenging economic conditions in Brazil, Peru and Chile continued to adversely impact the operations and liquidity of certain of our local clients, resulting in increased collection risk and the risk that the Company will expend resources that it may not recover for several months, or at all.  Management is monitoring any adverse trends or events that may impact the realizability of recorded receivables from our South American clients.

Allowance for Doubtful Accounts and Contract Adjustments

Activity within the allowance for doubtful accounts and contract adjustments is summarized in the following table.

   
Fiscal Year Ended July 31,
 
   
2017
   
2016
   
2015
 
   
(in thousands)
 
                   
Balance at beginning of period
 
$
6,792
   
$
6,817
   
$
7,371
 
Net increase (decrease) due to adjustments in the allowance for:
                       
Contract adjustments
   
(4,941
)
   
(577
)
   
(263
)
Doubtful accounts
   
274
     
552
     
(291
)
Balance at end of period
 
$
2,125
   
$
6,792
   
$
6,817
 

The decrease in the allowance for contract adjustments during fiscal year 2017 was primarily the result of the $4.9 million write-off of receivables related to a project in the Middle East, as described above.
 
Results of Operations

We report segment information based on the geographic location of EEI and its principal operating subsidiaries.  Management generally assesses operating performance and makes strategic decisions for the following groups of entities, each of which is deemed to be a business segment for financial reporting purposes:
 
·
EEI and its subsidiaries located in the U.S.;
·
Subsidiaries located in South America; and
·
Other foreign subsidiaries

The following tables and commentary address our results of operations within these three business segments.

Revenue, net

Revenue, net and revenue, net less subcontract costs, by business entity, are summarized in the following table.

   
Fiscal Year Ended July 31,
 
   
2017
   
2016
   
2015
 
   
(in thousands)
 
                   
Revenue, net, by business segment:
                 
EEI and its subsidiaries located in the U.S.
 
$
82,094
   
$
83,095
   
$
88,715
 
                         
Subsidiaries located in South America:
                       
Walsh Peru, S.A. Ingenieros y Cientificos Consultores (“Walsh Peru”)
   
6,253
     
9,718
     
22,797
 
Gestion Ambiental Consultores S.A. (“GAC”)
   
7,666
     
7,530
     
6,545
 
E&E Brasil
   
8,241
     
5,009
     
8,010
 
Other
   
248
     
465
     
868
 
     
22,408
     
22,722
     
38,220
 
Total
 
$
104,502
   
$
105,817
   
$
126,935
 
Revenue, net less subcontract costs, by business segment:
                       
EEI and its subsidiaries located in the U.S.
 
$
69,104
   
$
69,724
   
$
73,264
 
                         
Subsidiaries located in South America:
                       
Walsh Peru
   
4,321
     
6,675
     
16,447
 
GAC
   
5,907
     
6,237
     
5,849
 
E&E Brasil
   
6,581
     
4,235
     
7,353
 
Other
   
210
     
396
     
695
 
     
17,019
     
17,543
     
30,344
 
Total
 
$
86,123
   
$
87,267
   
$
103,608
 

Revenue, net represents gross revenue recognized for the services provided to our clients, adjusted for the impacts of cost overruns or settlements recorded upon completion and close out of a project.  Revenue, net less subcontract costs is a key metric utilized by management for operational monitoring and decision-making.  References to “revenues” in the following commentary refer to revenue, net less subcontract costs from the table above.

Fiscal Year 2017 Versus 2016
 
The Company records an allowance for project disallowances in other accrued liabilities for potential disallowances resulting from government audits.  During fiscal year 2017, as a result of final settlements of allowances originally recorded in prior years, the Company reduced its allowance for project disallowances by $1.1 million, which was recorded as an addition to revenue, net on the consolidated statement of operations.

During fiscal year 2017, the Company completed a review of historical project activity recorded in certain subsidiaries that have been dormant for several years.  During fiscal year 2017, as a result of this review, the Company reversed $0.7 million of amounts previously recorded as reserves against contract receivables.  The resulting increases to revenue, net for fiscal year 2017 were corrections of amounts recorded prior to the fiscal years presented in the accompanying financial statements.

During fiscal year 2017, the Company reversed $0.6 million of amounts previously recorded as liabilities to subcontractors that were no longer deemed to be necessary to record on the Company’s consolidated balance sheet.  These amounts were associated with fully-reserved contract receivable balances that were written-off during fiscal year 2017.  This adjustment was recorded as a $0.6 million decrease to subcontract costs on the consolidated statement of operations for the fiscal year ended July 31, 2017.

Excluding the above adjustments, which did not result from normal, recurring operations, fiscal year 2017 revenues from EEI and its U.S. subsidiaries decreased 4% from the prior year, primarily due to a lower average selling rate per hour of service charged to our clients.  General competitive pricing pressure continues to have a negative impact on revenues for many of our domestic market sectors.  To a lesser degree, a reduction in the volume of hours charged to clients, particularly in the energy and mining market sectors, also contributed to the overall decrease in revenues.
 
During fiscal year 2016, we recorded $0.5 million of revenues from our Kentucky-based subsidiary that was sold during the first quarter of fiscal year 2016, which also contributed to comparatively lower revenues from U.S. subsidiaries during the current fiscal year.
 
Fiscal year 2017 revenues from our Brazilian operations increased 55% from the prior year, mainly due to increased project activity in the energy transmission sector.  An economic downturn that adversely affected our Brazilian operations during recent fiscal years appears to have stabilized, resulting in additional business development opportunities for E&E Brasil.

Fiscal year 2017 revenues from our Peruvian operations decreased 35% from the prior year, due to lower project activity within the energy sector.  Global economic trends in oil, gas and commodity prices continued to have a severe negative impact on revenues from energy and mining sectors in Peru.

EEI management continues to work closely with management in Brazil and Peru to implement business development strategies that are responsive to current economic conditions while also reducing operating costs and improving operating efficiency.

Fiscal year 2017 revenues from our Chilean operations decreased 5% from the prior year, due to reduced levels of work on power generation and transmission projects.  Government and private investments in mining projects in Chile have steadily decreased since 2013, which has had a stifling effect on business development opportunities in the mining sector.

Fiscal Year 2016 Versus 2015

Fiscal year 2016 revenues from EEI and its U.S. subsidiaries decreased 5% from the prior year.  As described earlier in this Annual Report, EEI sold its investment in a majority owned Kentucky-based subsidiary in October 2015, which led to a $1.8 million reduction in revenue during fiscal year 2016.  A lower selling rate per hour of service provided to our clients also contributed to lower revenue during fiscal year 2016, as EEI experienced a distinct shift of direct labor hours from commercial projects for which selling rates are openly negotiated from project to project, to government projects for which selling rates tend to be lower than commercial rates.  In addition, competitive pricing pressure continues to have a negative impact on revenues for many of EEI’s market sectors.

Global economic factors, such a depressed oil and commodities prices, had a negative impact on our Peruvian operations during fiscal year 2016.  Fiscal year 2016 revenues from our Peruvian operations decreased 59% due mainly to significantly reduced energy sector sales volume, as mining projects completed during fiscal year 2015 and early in fiscal year 2016 were not renewed or replaced.  Peruvian results were also negatively impacted by a 10% decline in the average exchange rate for the Peruvian Sol in relation to the U.S. dollar.

Fiscal year 2016 revenues from our Chilean operations increased 7% from the prior year, as higher transmission and renewable energy sector revenues were partially offset by a 12% decline in the average exchange rate for the Chilean Peso in relation to the U.S. dollar.

A broad economic downturn in Brazil had a negative impact on our Brazilian operations and earnings in fiscal year 2016.  Fiscal year 2016 revenues from our Brazilian operations decreased 42% from the prior year, mainly due to generally lower energy transmission sector revenues and a 31% decline in the average exchange rate for the Brazilian Real in relation to the U.S. dollar.

Direct Operating Expenses

The cost of professional services and other direct operating expenses represents labor and other direct costs of providing services to our clients under our project agreements.  We refer to these expenses as “direct operating expenses.”  These costs, and fluctuations in these costs, generally correlate directly with related project work volumes and revenues.  Direct operating expenses, by business entity, are summarized in the following table.
 
   
Fiscal Year Ended July 31,
 
   
2017
   
2016
   
2015
 
   
(in thousands)
 
                   
EEI and its subsidiaries located in the U.S.
 
$
29,579
   
$
30,363
   
$
32,278
 
                         
Subsidiaries located in South America:
                       
Walsh Peru
   
1,405
     
2,829
     
6,921
 
GAC
   
2,837
     
2,739
     
3,820
 
E&E Brasil
   
4,361
     
2,772
     
4,037
 
Other
   
152
     
209
     
436
 
     
8,755
     
8,549
     
15,214
 
                         
Other foreign subsidiaries
   
---
     
---
     
8
 
Total direct operating expenses
 
$
38,334
   
$
38,912
   
$
47,500
 
 
Fiscal Year 2017 Versus 2016

Total direct operating expenses for fiscal year 2017 decreased 1% from the prior year.  Comparative increases and/or decreases within business segments were generally consistent with corresponding changes in segment revenues.

Fiscal Year 2016 Versus 2015

Total direct operating expenses for fiscal year 2016 decreased 18% from the prior year.  Lower direct expenses generally resulted from lower project revenue for each of our business segments.  Our consolidated project revenue and related costs were generally lower in all of our business segments during fiscal year 2016.  The sale of the Company’s majority investment in a Kentucky-based subsidiary during the first quarter of fiscal year 2016 also contributed to lower direct operating expenses during fiscal year 2016.

Indirect Operating Expenses

Administrative and indirect operating expenses and marketing and related costs represent administrative and other operating costs not directly associated with the generation of revenue.  We refer to these costs as “indirect operating expenses.”  Indirect operating expenses by business entity are summarized in the following table.

   
Fiscal Year Ended July 31,
 
   
2017
   
2016
   
2015
 
   
(in thousands)
 
                   
EEI and its subsidiaries located in the U.S.
 
$
32,021
   
$
34,130
   
$
35,602
 
                         
Subsidiaries located in South America:
                       
Walsh Peru
   
3,308
     
3,505
     
4,896
 
GAC
   
2,601
     
2,247
     
1,294
 
E&E Brasil
   
2,522
     
2,923
     
3,841
 
Other
   
354
     
170
     
257
 
     
8,785
     
8,845
     
10,288
 
                         
Other foreign subsidiaries
   
15
     
95
     
1,147
 
Total indirect operating expenses
 
$
40,821
   
$
43,070
   
$
47,037
 

EEI and its subsidiaries may, at the discretion of their respective Board of Directors, award incentive compensation to senior management and other employees in the form of cash bonuses.  Cash bonuses to EEI’s Directors were also considered at the discretion of EEI’s Board of Directors prior to fiscal year 2017. During fiscal year 2017, the Board of Directors decided to discontinue cash bonuses to Directors.  Cash bonus expense may vary significantly from year to year depending on company financial performance.  The Company recorded $0.9 million, $1.0 million and $2.8 million of incentive compensation expense in indirect operating expenses during fiscal years 2017, 2016 and 2015, respectively, as a result of cash bonus awards.
 
In October 2015, EEI sold its majority interest in a Kentucky-based subsidiary.  Indirect operating expenses were $0.3 million lower during fiscal year 2017 as a result of sale of this subsidiary during the prior year.  EEI recognized a loss on its investment in this subsidiary of approximately $0.4 million in administrative and indirect operating expenses during the fourth quarter of fiscal year 2015.  Also during fiscal year 2015, management completed an assessment of goodwill recorded on the acquisition date of this subsidiary, and recorded $0.1 million of goodwill impairment loss in administrative and indirect operating expenses.

Fiscal Year 2017 Versus 2016

Excluding the impact of bonuses and the sale of a subsidiary noted above, total indirect operating expenses from U.S. operations decreased 6% during fiscal year 2017.  The Company’s U.S. operations continue to improve operating efficiency and operate under an expense management strategy that has resulted in significant reductions in indirect operating expenses over the past three fiscal years.

Indirect operating expenses generally decreased within our South American business segment during fiscal year 2017, as management within our foreign subsidiaries continued with their critical review of indirect staffing levels and key administrative processes, resulting in improved operating efficiency and cost reductions.  These operations also realized a full year benefit of efficiencies and cost reductions initiated in the prior fiscal year.  The increase in indirect expenses at GAC was primarily the result of higher bad debt expense.

Fiscal Year 2016 Versus 2015

Excluding the effects of bonuses and sale of a subsidiary noted above, total indirect operating expenses for fiscal year 2016 decreased 6% from the prior year, as compared with the prior fiscal year.  With the exception of our Chilean operations in South America, indirect operating expenses generally decreased within all of our operating segments.  During fiscal year 2016, management continued its critical review of indirect staffing levels and key administrative processes at EEI and all of its significant domestic and foreign subsidiaries, resulting in improved operating efficiency and cost reductions.  The Company also realized a full year benefit of efficiencies and cost reductions initiated in prior fiscal years.

Income Taxes

The income tax provision resulting from domestic and foreign operations is summarized in the following table.

   
Fiscal Year Ended July 31,
 
   
2017
   
2016
   
2015
 
   
($ in thousands)
 
Income tax provision from:
                 
Domestic operations
 
$
2,276
   
$
2,158
   
$
2,119
 
Foreign operations
   
196
     
1,601
     
1,650
 
Consolidated operations
 
$
2,472
   
$
3,759
   
$
3,769
 
                         
Consolidated effective tax rate from:
                       
Domestic operations
   
41.8
%
   
46.4
%
   
67.8
%
Foreign operations
   
*
%
   
*
%
   
31.3
%
Consolidated operations
   
45.6
%
   
86.1
%
   
47.3
%

* percentage based on minimal pre-tax income not meaningful.

Fiscal Year 2017 Versus 2016

The consolidated effective tax rate decreased to 45.6% for fiscal year 2017 from 86.1% for the prior year, primarily due to a higher tax rate for our South American operations in fiscal 2016.

The effective tax rate fiscal year 2017 includes the incremental tax impact of the Company’s portion of dividends declared by its majority owned subsidiary in Chile, which was greater than the dividends anticipated at July 31, 2016, and the write-off of a deferred tax asset previously maintained by the Company’s majority owned subsidiary in Peru.
 
The effective tax rate for fiscal year 2016 includes a valuation allowance of $0.9 million recorded as a reduction of deferred tax assets maintained by the Company’s majority owned subsidiary in Brazil, and the impact of $0.7 million of taxable dividends repatriated to the U.S. from foreign subsidiaries.

Fiscal Year 2016 Versus 2015

The consolidated effective tax rate increased to 86.1% for fiscal year 2016 from 47.3% for the prior year, primarily due to a higher tax rate for our South American operations.  Despite a fiscal year 2016 operating loss, E&E Brasil recorded a significant tax provision for the year due to a valuation allowance of $0.9 million recorded as a reduction of deferred tax assets on the consolidated balance sheets and as an addition to income tax expense on the consolidated statements of operations.  In addition, operating losses were incurred by E&E Brazil during fiscal year 2016 for which no tax benefit was recognized in the Company’s consolidated tax provision.  During the previous year, the Company realized a tax benefit for operating losses in Brazil.

Other discrete tax provision items recorded by Walsh Peru and GAC were offset by lower dividends repatriated to the U.S. from South American operations during fiscal year 2016.

Recent Accounting Pronouncements

A summary of recent accounting pronouncements is provided in the consolidated financial statements included in Item 8 of this Annual Report.

Critical Accounting Policies

The preceding discussion and analysis of financial condition and results of operating results are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States.  The significant accounting policies used in the preparation of our consolidated financial statements are more fully described in the consolidated financial statements included in Item 8 of this Annual Report.

Many of our significant accounting policies require complex judgments to estimate values of assets and liabilities.  In making these judgments, management must make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  Because changes in such estimates and assumptions could significantly affect our reported financial position and results of operations, detailed policies and control procedures have been established to ensure that valuation methods, including judgments made as part of such methods, are well controlled, independently reviewed, and are applied consistently from period to period.

On an on-going basis, we evaluate our estimates to ensure that they are based on assumptions that we believe to be reasonable under current circumstances.  Our actual results may differ from these estimates and assumptions.

Of the significant policies used to prepare our consolidated financial statements, the items discussed below require critical accounting estimates involving a high degree of judgment and complexity.  For all of these critical policies, we caution that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment.  This information should be read in conjunction with our consolidated financial statements included herein.

Revenue Recognition

Substantially all of the Company's revenue is derived from environmental consulting work, which is principally derived from the sale of labor hours.  Revenues reflected in the Company's consolidated statements of operations represent services rendered for which the Company maintains a primary contractual relationship with its customers.  Included in revenues are certain services outside the Company's normal operations which the Company has elected to subcontract to other contractors.  Sales and cost of sales at our South American subsidiaries exclude tax assessments by governmental authorities, which are collected from clients and then remitted to governmental authorities.
 
The consulting work is performed under a mix of time and materials, fixed price and cost-plus, and contracts.  Contracts are required from all customers.  Revenue is recognized as follows:

Contract Type
Work Type
Revenue Recognition Policy
     
Time and materials
Consulting
As incurred at contract rates.
     
Fixed price
Consulting
Percentage of completion, approximating the ratio of either total costs or Level of Effort (LOE) hours incurred to date to total estimated costs or LOE hours.
     
Cost-plus
Consulting
Costs as incurred plus fees.  Fees are recognized as revenue using percentage of completion determined by the percentage of LOE hours incurred to total LOE hours in the respective contracts.

Revenue, net associated with these contract types is summarized in the following table.

   
Fiscal Year Ended July 31,
 
   
2017
   
2016
   
2015
 
   
(in thousands)
 
                   
Time and materials
 
$
49,008
   
$
52,741
   
$
61,444
 
Fixed price
   
38,423
     
40,951
     
55,108
 
Cost-plus
   
17,071
     
12,125
     
10,383
 
Total revenue
 
$
104,502
   
$
105,817
   
$
126,935
 

The Company accounts for time and material contracts over the period of performance, in proportion to the costs of performance, predominately based on labor hours incurred.  Time and materials contracts generally represent the time spent by our professional staff at stated or negotiated billing rates, plus materials used during project work.  Many time and materials contracts contain “not to exceed” provisions that effectively cap the amount of revenue that we can bill to the client.  In order to record revenue that exceeds the billing cap, we must obtain written approval from the client for expanded scope or increased pricing.

The Company accounts for fixed price contracts using the percentage-of-completion method, wherein revenue is recognized as project progress occurs.  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 provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus fees that we record as revenue.  These contracts establish an estimate of total cost and an invoicing ceiling that the contractor may not exceed without the approval of the client.  Cost-plus contracts present a lower risk, but generally provide lower returns and often include more onerous terms and conditions.

Our project management teams continuously monitor the budgets, costs to date and estimated costs to complete project work.  If the estimated cost at completion for any contract indicates that a loss will be incurred, the entire estimated loss is charged to operations as a reduction of revenue in the period the loss becomes evident.

The percentage of completion revenue recognition method requires the use of estimates and judgment regarding a project’s expected revenues, costs and the extent of progress towards completion.  We have a history of making dependable estimates of the extent of progress towards completion, contract revenue and contract completion costs.  However, due to uncertainties inherent in the estimation process, actual completion costs may occasionally vary significantly 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 a variety of estimates which can be difficult to accurately determine until a project is significantly underway.
 
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.

Our 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 our 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.

We maintain an allowance for project disallowances in other accrued liabilities for potential cost disallowances resulting from government audits and project close-outs.  Government audits have been completed and final rates have been negotiated for fiscal years through 2014.  We have estimated our exposure based on completed audits, historical experience and discussions with the government auditors.  If these estimates or their related assumptions change, we may be required to adjust our recorded allowance for project disallowances.

Allowance for Doubtful Accounts and Contract Adjustments

We reduce our contract receivables by recording an allowance for doubtful accounts for estimated credit losses resulting from a client’s inability or unwillingness to pay valid obligations to us.  The resulting provision for bad debts is recorded within administrative and indirect operating expenses on the consolidated statements of operations.  The likelihood that the client will pay is based on the judgment of those closest to the related project and the client.  At a minimum, management considers the following factors to determine the collectability of contract receivables for any specific project:

·
client acknowledgment of amount owed to us;
·
client liquidity/ability to pay;
·
historical experience with collections from the client;
·
amount of time elapsed since last payment; and
·
economic, geopolitical and cultural considerations for the home country of the client.

We recognize that there is a high degree of subjectivity and imprecision inherent in the process of estimating future credit losses that are based on historical trends and client data.  As a result, actual credit losses can differ from these estimates.

We also reduce contract receivables by establishing an allowance for contract adjustments related to revenues that are deemed to be unrealizable, or that may become unrealizable in the future.  Management reviews contract receivables and determines allowances amounts based on:
 
·
our operating performance related to the adequacy of the services performed under the contract;
·
the status of change orders and claims;
·
our historical experience with the client for settling change orders and claims; and
·
economic, geopolitical and cultural considerations for the home country of the client.

Because of the high degree of subjectivity and imprecision inherent in the process of estimating allowances that are based on historical trends and client data, actual contract losses can differ from these estimates.

Goodwill

We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.

Based on the annual impairment assessment completed at July 31, 2017, management concluded that goodwill was not impaired at July 31, 2017.  As of July 31, 2017, the calculated fair values of the reporting units to which goodwill is assigned exceeded the book values of the respective reporting units by a minimum of 28%.  The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Should future earnings and projected cash flows of our reporting units decline and/or should general economic factors deteriorate, future impairment charges to goodwill may be required.

Income Taxes

We operate within multiple tax jurisdictions in the United States and in foreign countries.  The calculations of income tax expense or benefit and related balance sheet amounts involve a high degree of management judgment regarding estimates of the timing and probability of recognition of revenue and deductions.  The interpretation of tax laws involves uncertainty, since tax authorities may interpret laws differently than we do.  We are subject to audit in all of our tax jurisdictions, which may involve complex issues and may require an extended period of time to resolve.  Ultimate resolution of tax matters may result in favorable or unfavorable impacts to our net income and/or cash flows.  In management’s opinion, adequate reserves have been recorded for any future taxes that may be owed as a result of examination by any taxing authority.

A tax position is a position in a previously filed tax filing 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 when, in management’s judgement, it is “more likely than not” (as defined under U.S. GAAP) that the position will be sustained.  Tax positions that meet the “more likely than not” definition shall be measured at the largest amount of tax impact that is likely to be realized upon settlement.  We recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in administrative and indirect operating expenses.  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 had approximately $0.3 million, $0.1 million and $0.1 million of uncertain tax positions at July 31, 2017, 2016 and 2015, respectively.
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using enacted tax rates expected to be in effect for the year in which the temporary differences are expected to reverse.  Our policy is to establish a valuation allowance if it is “more likely than not” that the related tax benefits will not be realized.  At July 31, 2017 and 2016, we determined based on available evidence, including historical financial results for the last three years and forecasts of future results, that it is “more likely than not” that a portion of these items may not be recoverable in the future.  Accordingly, we maintain total valuation allowances of $2.0 million and $2.3 million as a reduction of deferred tax assets at July 31, 2017 and 2016, respectively.

The valuation allowance related to deferred tax assets is considered to be a critical estimate because, in assessing the likelihood of realization of deferred tax assets, management considers taxable income trends and forecasts.  Actual income taxes expensed and/or paid could vary from estimated amounts due to the impacts of various factors, including:

·
changes to tax laws enacted by taxing authorities;
·
final review of filed tax returns by taxing authorities; and
·
actual financial condition and results of operations for future periods that could differ from forecasted amounts.

Inflation

During fiscal years 2017, 2016 and 2015, inflation did not have a material impact on our business because a significant amount of our contracts are either cost based or contain commercial rates for services that are adjusted annually.

Off-Balance Sheet Arrangements

We had outstanding letters of credit drawn under our lines of credit to support operations of $2.5 million and $2.2 million at July 31, 2017 and 2016, respectively.  Other than these letters of credit, we did not have any off-balance sheet arrangements as of July 31, 2017 or 2016.
 
Item 8.      Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Ecology and Environment, Inc.

We have audited the accompanying consolidated balance sheets of Ecology and Environment, Inc. as of July 31, 2017, and 2016, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the years ended July 31, 2017 and 2016.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ecology and Environment, Inc. at July 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for years ended July 31, 2017 and 2016, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP
Buffalo, New York
November 14, 2017
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Ecology and Environment, Inc.

We have audited the accompanying consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the year ended July 31, 2015 of Ecology and Environment, Inc. and its subsidiaries (collectively, the Company).  The 2015 financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2015 consolidated statements of operations, changes in shareholders’ equity and cash flows, present fairly, in all material respects, the results of its operations and its cash flows for the year ended July 31, 2015 in conformity with accounting principles generally accepted in the United States of America.

/s/ Schneider Downs & Co., Inc.

Pittsburgh, Pennsylvania
October 29, 2015
 
Ecology and Environment, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share data)

   
Balance at July 31,
 
   
2017
   
2016
 
             
Assets
           
             
Current assets:
           
Cash, cash equivalents and restricted cash
 
$
13,343
   
$
10,161
 
Investment securities available for sale
   
1,498
     
1,499
 
Contract receivables, net of allowance for doubtful accounts and contract adjustments of $2,125 and $6,792, respectively
   
35,107
     
34,319
 
Income tax receivable
   
1,293
     
916
 
Other current assets
   
2,119
     
2,104
 
                 
Total current assets
   
53,360
     
48,999
 
                 
Property, buildings and equipment, net of accumulated depreciation of $16,994 and $18,324, respectively
   
4,428
     
6,094
 
Deferred income taxes
   
1,203
     
2,650
 
Other assets
   
1,786
     
1,769
 
                 
Total assets
 
$
60,777
   
$
59,512
 
                 
Liabilities and Shareholders' Equity
               
                 
Current liabilities:
               
Accounts payable
 
$
8,073
   
$
6,874
 
Lines of credit
   
581
     
312
 
Accrued payroll costs
   
6,338
     
6,590
 
Current portion of long-term debt and capital lease obligations
   
382
     
240
 
Billings in excess of revenue
   
2,850
     
3,297
 
Other accrued liabilities
   
2,645
     
3,445
 
                 
Total current liabilities
   
20,869
     
20,758
 
                 
Income taxes payable
   
31
     
107
 
Deferred income taxes
   
3
     
525
 
Long-term debt and capital lease obligations
   
66
     
217
 
Commitments and contingencies (Note 20)
   
-
     
-
 
                 
Shareholders' equity:
               
Preferred stock, par value $.01 per share (2,000,000 shares authorized; no shares issued)
   
-
     
-
 
Class A common stock, par value $.01 per share (6,000,000 shares authorized; 3,035,778 shares issued)
   
30
     
30
 
Class B common stock, par value $.01 per share; (10,000,000 shares authorized; 1,357,947 shares issued)
   
14
     
14
 
Capital in excess of par value
   
17,608
     
16,606
 
Retained earnings
   
23,509
     
22,237
 
Accumulated other comprehensive loss
   
(2,018
)
   
(2,143
)
Treasury stock, at cost (Class A common: 27,320 and 39,272 shares; Class B common: 64,801 shares)
   
(1,037
)
   
(1,172
)
                 
Total Ecology and Environment, Inc. shareholders' equity
   
38,106
     
35,572
 
Noncontrolling interests
   
1,702
     
2,333
 
                 
Total shareholders' equity
   
39,808
     
37,905
 
                 
Total liabilities and shareholders' equity
 
$
60,777
   
$
59,512
 

The accompanying notes are an integral part of these consolidated financial statements.
 
Ecology and Environment, Inc.
Consolidated Statements of Operations
(amounts in thousands, except share data)

   
Fiscal Year Ended July 31,
 
   
2017
   
2016
   
2015
 
                   
Revenue, net
 
$
104,502
   
$
105,817
   
$
126,935
 
                         
Cost of professional services and other direct operating expenses
   
38,334
     
38,912
     
47,500
 
Subcontract costs
   
18,379
     
18,550
     
23,327
 
Administrative and indirect operating expenses
   
30,576
     
31,769
     
35,604
 
Marketing and related costs
   
10,245
     
11,301
     
11,433
 
Depreciation and amortization
   
1,040
     
1,143
     
1,467
 
                         
Income from operations
   
5,928
     
4,142
     
7,604
 
Interest income (expense)
   
17
     
(73
)
   
(31
)
Proxy contest costs, net
   
(375
)
   
-
     
-
 
Net foreign exchange (loss) gain
   
(91
)
   
44
     
134
 
Other (expense) income
   
(54
)
   
(104
)
   
262
 
Gain on insurance settement
   
-
     
358
     
-
 
                         
Income before income tax provision
   
5,425
     
4,367
     
7,969
 
Income tax provision
   
2,472
     
3,759
     
3,769
 
                         
Net income
 
$
2,953
   
$
608
   
$
4,200
 
                         
Net loss (income) attributable to the noncontrolling interest
   
62
     
278
     
(804
)
                         
Net income attributable to Ecology and Environment, Inc.
 
$
3,015
   
$
886
   
$
3,396
 
                         
Net income per common share: basic and diluted
 
$
0.70
   
$
0.21
   
$
0.79
 
                         
Weighted average common shares outstanding: basic and diluted
   
4,294,501
     
4,289,993
     
4,287,775
 

The accompanying notes are an integral part of these consolidated financial statements.
 
Ecology and Environment, Inc.
Consolidated Statements of Comprehensive Income
(amounts in thousands)

   
Fiscal Year Ended July 31,
 
   
2017
   
2016
   
2015
 
                   
Net income including noncontrolling interests
 
$
2,953
   
$
608
   
$
4,200
 
Foreign currency translation adjustments
   
230
     
(557
)
   
(2,152
)
Unrealized investment (losses) gains, net
   
(18
)
   
21
     
(4
)
                         
Comprehensive income
   
3,165
     
72
     
2,044
 
Comprehensive (income) loss attributable to noncontrolling interests
   
(25
)    
397
     
(192
)
                         
Comprehensive income attributable to Ecology and Environment, Inc.
 
$
3,140
   
$
469
   
$
1,852
 

The accompanying notes are an integral part of these consolidated financial statements.
 
Ecology and Environment, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)

   
Fiscal Year Ended July 31,
 
   
2017
   
2016
   
2015
 
Cash flows from operating activities:
                 
Net income
 
$
2,953
   
$
608
   
$
4,200
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Impairment of long-lived assets
   
-
     
375
     
-
 
Impairment of goodwill
   
-
     
-
     
104
 
Impairment of Investment in ECSI
   
-
     
-
     
355
 
Depreciation and amortization
   
1,040
     
1,143
     
1,467
 
Provision for deferred income taxes
   
1,924
     
1,697
     
1,154
 
Share based compensation expense
   
69
     
37
     
59
 
Tax impact of share-based compensation
   
(6
)
   
-
     
(92
)
(Gain) loss on sale of assets and investment securities
   
(81
)
   
135
     
(186
)
Net recovery of contract adjustments and project disallowance reserves
   
(1,178
)
   
(910
)
   
(413
)
Net bad debt expense (recovery)
   
244
     
453
     
(326
)
Changes in:
                       
- contract receivables
   
(686
)
   
7,394
     
(934
)
- other current assets
   
(39
)
   
(400
)
   
(440
)
- income tax receivable
   
(376
)
   
(329
)
   
270
 
- other non-current assets
   
(14
)
   
42
     
48
 
- accounts payable
   
1,160
     
(3,157
)
   
1,052
 
- accrued payroll costs
   
(295
)
   
(1,909
)
   
1,805
 
- income taxes payable
   
(89
)
   
40
     
132
 
- billings in excess of revenue
   
(498
)
   
607
     
(1,909
)
- other accrued liabilities
   
269
     
(29
)
   
202
 
Net cash provided by operating activities
   
4,397
     
5,797
     
6,548
 
                         
Cash flows from investing activities:
                       
Acquisition of noncontrolling interest of subsidiaries
   
-
     
-
     
(50
)
Proceeds from sale of subsidiaries
   
75
     
150
     
-
 
Purchase of property, building and equipment
   
(721
)
   
(722
)
   
(735
)
Proceeds from sale of building and equipment
   
1,495
     
5
     
255
 
Proceeds from maturity of investments
   
-
     
26
     
-
 
Purchase of investment securities
   
(29
)
   
(55
)
   
(33
)
Net cash provided by (used in) investing activities
   
820
     
(596
)
   
(563
)
                         
Cash flows from financing activities:
                       
Dividends paid
   
(1,720
)
   
(2,066
)
   
(2,066
)
Proceeds from debt
   
200
     
6
     
384
 
Repayment of debt
   
(241
)
   
(547
)
   
(753
)
Net borrowings (repayment) of lines of credit
   
246
     
(380
)
   
(870
)
Distributions to noncontrolling interests
   
(680
)
   
(530
)
   
(537
)
Net cash used in financing activities
   
(2,195
)
   
(3,517
)
   
(3,842
)
                         
Effect of exchange rate changes on cash and cash equivalents
   
160
     
(226
)
   
(329
)
                         
Net increase in cash, cash equivalents and restricted cash
   
3,182
     
1,458
     
1,814
 
Cash, cash equivalents and restricted cash at beginning of period
   
10,161
     
8,703
     
6,889
 
                         
Cash, cash equivalents and restricted cash at end of period
 
$
13,343
   
$
10,161
   
$
8,703
 
                         
Supplemental disclosure of cash flow information:
                       
Cash paid during the period for:
                       
Interest
 
$
151
   
$
151
   
$
110
 
Income taxes
   
792
     
2,742
     
1,542
 
Supplemental disclosure of non-cash items:
                       
Dividends declared and not paid
   
860
     
861
     
1,033
 
Proceeds from capital lease obligations
   
29
     
69
     
322
 
Sale of subsidiary (loans receivable)
   
-
     
75
     
-
 
Acquistion of noncontrolling interest of subsidiaries (loans receivable and stock)
   
-
     
-
     
233
 

The accompanying notes are an integral part of these consolidated financial statements.
 
Ecology and Environment, Inc.
Consolidated Statements of Shareholders’ Equity
(amounts in thousands, except share data)

   
Class A
Common
Stock
Shares
   
Class A
Common
Stock
Amount
   
Class B
Common
Stock
Shares
   
Class B
Common
Stock
Amount
   
Capital in
Excess of Par
Value
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Treasury
Stock
Shares
   
Treasury
Stock
Amount
   
Noncontrolling
Interest
 
                                                             
Balance at July 31, 2014
   
2,685,151
   
$
27
     
1,708,574
   
$
17
   
$
17,124
   
$
21,917
   
$
(183
)
   
105,354
   
$
(1,224
)
 
$
4,114
 
                                                                                 
Net income
   
-
     
-
     
-
     
-
     
-
     
3,396
     
-
     
-
     
-
     
804
 
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
-
     
-
     
(1,540
)
   
-
     
-
     
(611
)
Cash dividends declared ($0.48 per share)
   
-
     
-
     
-
     
-
     
-
     
(2,067
)
   
-
     
-
     
-
     
-
 
Unrealized investment loss, net
   
-
     
-
     
-
     
-
     
-
     
-
     
(3
)
   
-
     
-
     
-
 
Conversion of Class B common stock to Class A common stock
   
338,055
     
3
     
(338,055
)
   
(3
)
   
-
     
-
     
-
     
-
     
-
     
-
 
Share-based compensation expense
   
-
     
-
     
-
     
-
     
59
     
-
     
-
     
-
     
-
     
-
 
Tax impact of share based compensation
   
-
     
-
     
-
     
-
     
(92
)
   
-
     
-
     
-
     
-
     
-
 
Tax impact of noncontrolling interests
   
-
     
-
     
-
     
-
     
(428
)
   
-
     
-
     
-
     
-
     
-
 
Distributions to noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(537
)
Purchase of additional noncontrolling interests
   
-
     
-
     
-
     
-
     
(88
)
   
-
     
-
     
-
     
-
     
(200
)
Stock award plan forfeitures
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
1,692
     
-
     
-
 
                                                                                 
Balance at July 31, 2015
   
3,023,206
   
$
30
     
1,370,519
   
$
14
   
$
16,575
   
$
23,246
   
$
(1,726
)
   
107,046
   
$
(1,224
)
 
$
3,570
 
                                                                                 
Net income (loss)
   
-
     
-
     
-
     
-
     
-
     
886
     
-
     
-
     
-
     
(278
)
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
-
     
-
     
(438
)
   
-
     
-
     
(119
)
Cash dividends declared ($0.44 per share)
   
-
     
-
     
-
     
-
     
-
     
(1,895
)
   
-
     
-
     
-
     
-
 
Unrealized investment gains, net
   
-
     
-
     
-
     
-
     
-
     
-
     
21
     
-
     
-
     
-
 
Conversion of Class B common stock to Class A common stock
   
12,572
     
-
     
(12,572
)
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Issuance of stock under stock award plan
   
-
     
-
     
-
     
-
     
(6
)
   
-
     
-
     
(4,533
)
   
52
     
-
 
Share-based compensation expense
   
-
     
-
     
-
     
-
     
37
     
-
     
-
     
-
     
-
     
-
 
Distributions to noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(530
)
Sale of majority-owned subsidiary
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(310
)
Stock award plan forfeitures
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
1,560
     
-
     
-
 
                                                                                 
Balance at July 31, 2016
   
3,035,778
   
$
30
     
1,357,947
   
$
14
   
$
16,606
   
$
22,237
   
$
(2,143
)
   
104,073
   
$
(1,172
)
 
$
2,333
 
                                                                                 
Net income (loss)
   
-
     
-
     
-
     
-
     
-
     
3,015
     
-
     
-
     
-
     
(62
)
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
-
     
-
     
143
     
-
     
-
     
87