10-Q 1 form10q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. -20549

FORM 10-Q

☑ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended January 27, 2018
☐
☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________

Commission File Number 1-9065

ECOLOGY AND ENVIRONMENT, INC.
(Exact name of registrant as specified in its charter)
 
New York
 
16-0971022
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)
 
368 Pleasant View Drive
 
 
Lancaster, New York
 
14086
(Address of principal executive offices)
 
(Zip code)
 
(716)  684-8060
(Registrant's telephone number, including area code)

Not Applicable
   (Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☑ No ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2). (Check one):

Large accelerated filer
☐
 
Accelerated filer
☐
Non-accelerated filer (Do not check if a smaller reporting company)
☐
 
Smaller reporting company
☑ 
   
 
Emerging growth company
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

At February 28, 2018, 3,008,829 shares of Registrant's Class A Common Stock (par value $.01) and 1,292,775 shares of Registrant’s Class B Common Stock (par value $.01) were outstanding.
 
PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements

Ecology and Environment, Inc.
Condensed Consolidated Balance Sheets
Unaudited
(amounts in thousands, except share data)

   
Balance at
  
   
January 27, 2018
    
July 31, 2017
  
Assets
            
             
Current assets:
            
Cash, cash equivalents and restricted cash
  
$
17,707
    
$
13,343
  
Investment securities available for sale
    
1,486
      
1,498
  
Contract receivables, net of allowance for doubtful accounts and contract adjustments of $1,957 and $2,125, respectively
    
28,365
      
35,107
  
Income tax receivable
    
750
      
1,293
  
Other current assets
    
2,427
      
2,119
  
                 
Total current assets
    
50,735
      
53,360
  
                 
Property, buildings and equipment, net of accumulated depreciation of $17,500 and $16,994, respectively
    
4,361
      
4,428
  
Deferred income taxes
    
733
      
1,203
  
Other assets
    
1,729
      
1,786
  
                 
Total assets
  
$
57,558
    
$
60,777
  
                 
Liabilities and Shareholders' Equity
                
                 
Current liabilities:
                
Accounts payable
  
$
5,245
    
$
8,073
  
Lines of credit
    
435
      
581
  
Accrued payroll costs
    
5,727
      
6,338
  
Current portion of long-term debt and capital lease obligations
    
61
      
382
  
Billings in excess of revenue
    
3,363
      
2,850
  
Other accrued liabilities
    
2,488
      
2,645
  
                 
Total current liabilities
    
17,319
      
20,869
  
                 
Income taxes payable
    
329
      
31
  
Deferred income taxes
    
3
      
3
  
Long-term debt and capital lease obligations
    
61
      
66
  
Commitments and contingencies (Note 15)
    
-
      
-
  
                 
Shareholders' equity:
                
Preferred stock, par value $.01 per share (2,000,000 shares authorized; no shares issued)
    
-
      
-
  
Class A common stock, par value $.01 per share (6,000,000 shares authorized; 3,036,149 and 3,035,778 shares issued)
    
30
      
30
  
Class B common stock, par value $.01 per share; (10,000,000 shares authorized; 1,357,576 and 1,357,947 shares issued)
    
14
      
14
  
Capital in excess of par value
    
17,608
      
17,608
  
Retained earnings
    
23,274
      
23,509
  
Accumulated other comprehensive loss
    
(1,946
)
    
(2,018
)
Treasury stock, at cost (Class A common: 27,320 shares; Class B common: 64,801 shares)
    
(1,037
)
    
(1,037
)
 
                
Total Ecology and Environment, Inc. shareholders' equity
    
37,943
      
38,106
  
Noncontrolling interests
    
1,903
      
1,702
  
                 
Total shareholders' equity
    
39,846
      
39,808
  
                 
Total liabilities and shareholders' equity
  
$
57,558
    
$
60,777
  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
Page 2 of 29
Ecology and Environment, Inc.
Condensed Consolidated Statements of Operations
Unaudited
(amounts in thousands, except share data)

   
Three Months Ended
    
Six Months Ended
  
   
January 27, 2018
    
January 28, 2017
    
January 27, 2018
    
January 28, 2017
  
                         
Revenue, net
  
$
25,083
    
$
24,726
    
$
52,165
    
$
50,041
  
                                 
Cost of professional services and other direct operating expenses
    
9,078
      
9,030
      
18,559
      
18,440
  
Subcontract costs
    
5,769
      
5,347
      
11,498
      
9,358
  
Administrative and indirect operating expenses
    
7,290
      
7,478
      
14,748
      
14,860
  
Marketing and related costs
    
2,938
      
2,344
      
5,989
      
5,209
  
Depreciation and amortization
    
268
      
282
      
537
      
516
  
                                 
(Loss) income from operations
    
(260
)
    
245
      
834
      
1,658
  
Net interest expense
    
(9
)
    
(14
)
    
(13
)
    
(12
)
Net foreign exchange loss
    
(29
)
    
(60
)
    
(26
)
    
(72
)
Other income (expense)
    
12
      
(6
)
    
11
      
10
  
                                 
(Loss) income before income tax provision
    
(286
)
    
165
      
806
      
1,584
  
Income tax provision
    
311
      
504
      
755
      
1,073
  
                                 
Net (loss) income
    
(597
)
    
(339
)
    
51
      
511
  
                                 
Net (income) loss attributable to noncontrolling interests
    
(171
)
    
21
      
(286
)
    
59
  
                                 
Net (loss) income attributable to Ecology and Environment, Inc.
  
$
(768
)
  
$
(318
)
  
$
(235
)
  
$
570
  
                                 
Net (loss) income per common share: basic and diluted
  
$
(0.18
)
  
$
(0.07
)
  
$
(0.05
)
  
$
0.13
  
                                 
Weighted average common shares outstanding: basic and diluted
    
4,301,604
      
4,294,102
      
4,301,604
      
4,293,417
  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
Page 3 of 29
Ecology and Environment, Inc.
Condensed Consolidated Statements of Comprehensive Income
Unaudited
(amounts in thousands)

   
Three Months Ended
    
Six Months Ended
  
   
January 27, 2018
    
January 28, 2017
    
January 27, 2018
    
January 28, 2017
  
                         
Net (loss) income including noncontrolling interests
  
$
(597
)
  
$
(339
)
  
$
51
    
$
511
  
Foreign currency translation adjustments
    
166
      
70
      
195
      
124
  
Unrealized investment losses, net
    
(13
)
    
(20
)
    
(16
)
    
(31
)
                                 
Comprehensive (loss) income
    
(444
)
    
(289
)
    
230
      
604
  
Comprehensive (income) loss attributable to noncontrolling interests
    
(264
)
    
4
      
(393
)
    
(5
)
                                 
Comprehensive (loss) income attributable to Ecology and Environment, Inc.
  
$
(708
)
  
$
(285
)
  
$
(163
)
  
$
599
  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
Page 4 of 29
Ecology and Environment, Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited
(amounts in thousands)

   
Six Months Ended
  
   
January 27, 2018
    
January 28, 2017
  
Cash flows from operating activities:
            
Net income
  
$
51
    
$
511
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization
    
537
      
516
  
Deferred income tax benefit
    
436
      
2,351
  
Tax impact of share-based compensation
    
-
      
(6
)
Gain on sale of assets and investment securities
    
(1
)
    
(3
)
Net recovery of contract adjustments and doubtful accounts
    
(35
)
    
(1,154
)
Net bad debt (recovery) expense
    
(130
)
    
167
  
Changes in:
                
- contract receivables
    
7,248
      
3,108
  
- other current assets
    
(300
)
    
(392
)
- income tax receivable
    
543
      
(2,098
)
- other non-current assets
    
60
      
(25
)
- accounts payable
    
(1,996
)
    
(149
)
- accrued payroll costs
    
(640
)
    
(971
)
- income taxes payable
    
294
      
(3
)
- billings in excess of revenue
    
506
      
942
  
- other accrued liabilities
    
(250
)
    
352
  
Net cash provided by operating activities
    
6,323
      
3,146
  
                 
Cash flows from investing activities:
                
Proceeds from sale of subsidiaries
    
-
      
75
  
Purchase of property, buildings and equipment
    
(425
)
    
(183
)
Proceeds from sale of equipment
    
1
      
9
  
Purchase of investment securities
    
7
      
(15
)
Net cash used in investing activities
    
(417
)
    
(114
)
                 
Cash flows from financing activities:
                
Dividends paid
    
(860
)
    
(861
)
Repayment of debt
    
(358
)
    
(159
)
Net (repayments) borrowings under lines of credit
    
(152
)
    
286
  
Distributions to noncontrolling interests
    
(192
)
    
(673
)
Net cash used in financing activities
    
(1,562
)
    
(1,407
)
                 
Effect of exchange rate changes on cash and cash equivalents
    
20
      
74
  
                 
Net increase in cash, cash equivalents and restricted cash
    
4,364
      
1,699
  
Cash, cash equivalents and restricted cash at beginning of period
    
13,343
      
10,161
  
             
Cash, cash equivalents and restricted cash at end of period
  
$
17,707
    
$
11,860
  
                 
Supplemental disclosure of cash flow information:
                
Cash paid during the period for:
                
Interest
  
$
42
    
$
77
  
Income taxes
    
78
      
315
  
Supplemental disclosure of non-cash items:
                
Dividends declared and not paid
    
-
      
859
  
Proceeds from capital lease obligations
    
33
      
-
  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
Page 5 of 29
Ecology and Environment, Inc.
Condensed Consolidated Statements of Shareholders’ Equity
 (amounts in thousands, except share data)

   
Class A
Common
Stock
Shares
    
Class A
Common
Stock
Amount
    
Class B
Common
Stock
Shares
    
Class B
Common
Stock
Amount
    
Capital in
Excess of
Par Value
    
Retained
Earnings
    
Accumulat
ed Other
Comprehe
nsive
Income
(Loss)
    
Treasury
Stock
Shares
    
Treasury
Stock
Amount
    
Noncontrol
ling
Interest
  
                                                             
Balance at July 31, 2016 (audited)
    
3,035,778
    
$
30
      
1,357,947
    
$
14
    
$
16,606
    
$
22,237
    
$
(2,143
)
    
104,073
    
$
(1,172
)
  
$
2,333
  
                                                                                 
Net income (loss)
    
-
      
-
      
-
      
-
      
-
      
3,015
      
-
      
-
      
-
      
(62
)
Foreign currency translation adjustment
    
-
      
-
      
-
      
-
      
-
      
-
      
143
      
-
      
-
      
87
  
Cash dividends declared ($0.40 per share)
    
-
      
-
      
-
      
-
      
-
      
(1,719
)
    
-
      
-
      
-
      
-
  
Unrealized investment losses, net
    
-
      
-
      
-
      
-
      
-
      
-
      
(18
)
    
-
      
-
      
-
  
Issuance of stock under stock award plan
    
-
      
-
      
-
      
-
      
4
      
-
      
-
      
(11,952
)
    
135
      
-
  
Tax impact of share based compensation
    
-
      
-
      
-
      
-
      
(6
)
    
-
      
-
      
-
      
-
      
-
  
Tax impact of noncontrolling interests
    
-
      
-
      
-
      
-
      
-
      
(24
)
    
-
      
-
      
-
      
24
  
Distributions to noncontrolling interests
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(680
)
Adjustment to deferred income taxes related to acquisition of noncontrolling interests in prior years
    
-
      
-
      
-
      
-
      
1,004
      
-
      
-
      
-
      
-
      
-
  
                                                                                 
Balance at July 31, 2017 (audited)
    
3,035,778
    
$
30
      
1,357,947
    
$
14
    
$
17,608
    
$
23,509
    
$
(2,018
)
    
92,121
    
$
(1,037
)
  
$
1,702
  
 
                                                                                
Net (loss) income
    
-
      
-
      
-
      
-
      
-
      
(235
)
    
-
      
-
      
-
      
286
  
Foreign currency translation adjustment
    
-
      
-
      
-
      
-
      
-
      
-
      
88
      
-
      
-
      
107
  
Unrealized investment losses, net
    
-
      
-
      
-
      
-
      
-
      
-
      
(16
)
    
-
      
-
      
-
  
Conversion of Class B common stock to Class A common stock
    
371
      
-
      
(371
)
    
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Distributions to noncontrolling interests
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(192
)
                                                                                 
Balance at January 27, 2018 (unaudited)
    
3,036,149
    
$
30
      
1,357,576
    
$
14
    
$
17,608
    
$
23,274
    
$
(1,946
)
    
92,121
    
$
(1,037
)
  
$
1,903
  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
Page 6 of 29
Ecology and Environment, Inc.
Notes to Condensed Consolidated Financial Statements

1.
Organization and Basis of Presentation

Ecology and Environment, Inc., (“EEI”) was incorporated in 1970 as a global broad-based environmental consulting firm whose underlying philosophy is to provide professional services worldwide so that sustainable economic and human development may proceed with acceptable impact on the environment.  Together with its subsidiaries (collectively, the “Company”), EEI has direct and indirect ownership in 8 active wholly owned and majority owned operating subsidiaries in 5 countries.  The Company’s staff is comprised of individuals representing more than 80 scientific, engineering, health, and social disciplines working together in multidisciplinary teams to provide innovative environmental solutions.  The Company has completed more than 50,000 projects for a wide variety of clients in more than 120 countries, providing environmental solutions in nearly every ecosystem on the planet.  

The Company prepared the condensed consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of such information.  All such adjustments are of a normal recurring nature. 

Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), including a description of significant accounting policies, have been condensed or omitted pursuant to SEC rules and regulations.  Therefore, these financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2017 filed with the Securities and Exchange Commission (the “2017 Annual Report”).  The accounting policies followed by the Company for preparation of the consolidated financial statements included in the 2017 Annual Report were also followed for this interim report.  The condensed consolidated results of operations for the three and six months ended January 27, 2018 are not necessarily indicative of the results for any subsequent period or the entire fiscal year ending July 31, 2018.

2.
Recent Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) establishes changes to U.S. GAAP in the form of accounting standards updates (“ASUs”) to the FASB Accounting Standards Codification.  The Company considers the applicability and impact of all ASUs when they are issued by FASB.  ASUs listed below were either adopted by the Company during its current fiscal year, or will be adopted as each ASU becomes effective during future reporting periods.  ASUs not listed below were assessed to be not applicable to the Company’s operations or are expected to have minimal impact on the Company’s consolidated financial position or results of operations.

Accounting Pronouncements Adopted During the Six Months Ended January 27, 2018

The Company did not adopt any ASUs during the six months ended January 27, 2018 that had, or are expected to have, a material impact on its consolidated financial position or results of operations.

Accounting Pronouncements Not Yet Adopted as of January 27, 2018

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).  ASU 2014-09 is the result of a joint project of FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for use in the U.S and internationally.  ASU 2014-09 supersedes the revenue recognition requirements in Topic 605 of FASB’s Accounting Standards Codification (the “Codification”) and most industry-specific guidance throughout the Industry Topics of the Codification.  ASU 2014-09 enhances comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, reduces the number of requirements an entity must consider for recognizing revenue, and requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.

ASU 2014-09 was to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within the annual reporting period.  In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date (“ASU 2015-14”).  The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year.
 
Page 7 of 29
Subsequent to the issuance of ASU 2014-09, FASB issued additional ASUs that provide clarification for specific aspects of ASU 2014-09. The effective dates and transition requirements for these ASUs are the same as the effective dates and transition requirements included in ASU 2014-09 and ASU 2015-14.

ASU 2014-09 requires retrospective application by either restating each prior period presented in the financial statements, or by recording the cumulative effect on prior reporting periods to beginning retained earnings in the year that the standard becomes effective (the “modified retrospective approach”), and includes a number of optional practical expedients that entities may elect to apply. The Company expects to adopt the revenue recognition guidance using the modified retrospective approach.

ASU 2014-09 will be effective for the Company beginning August 1, 2018. The Company is comparing historical accounting policies and practices to the new standard, has made substantial progress on its detailed review of contracts for its operations in the United States, and has begun the evaluation at all of its foreign subsidiaries. Management continues to assess the impact of ASU 2014-09.

In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”).  The amendments included in this update provide guidance regarding eight specific cash flow classification issues that are not specifically addressed in previous U.S. GAAP.  This accounting standard update will be effective for the Company beginning August 1, 2018.  Management is currently assessing the provisions of ASU 2016-15 and has not yet estimated its impact on the Company’s consolidated financial statements.

In March 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”).  The main difference between previous U.S. GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP.  ASU 2016-02 provides specific guidance for determining whether a contractual arrangement contains a lease, lease classification by lessees and lessors, initial and subsequent measurement of leases by lessees and lessors, sale and leaseback transactions, transition, and financial statement disclosures.  ASU 2016-02 requires entities to use a modified retrospective approach to apply its guidance, and includes a number of optional practical expedients that entities may elect to apply.  ASU 2016-02 will be effective for the Company beginning August 1, 2019.  Early adoption is permitted.  Management is currently assessing the provisions of ASU 2016-02.  The Company anticipates that adoption of ASU 2016-02 will result in the addition of material right-of-use assets and lease liabilities to the Company’s consolidated balance sheet in addition to expanding required disclosures.  Management has not yet estimated the impact of ASU 2016-02 on the Company’s consolidated statements of operations and cash flows.

In June 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”).  The amendments included in this update affect entities holding financial assets, including trade receivables and investment securities available for sale, that are not accounted for at fair value through net income.  ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.  The amendments included in this update also provide guidance for measurement of expected credit losses and for presentation of increases or decreases of expected credit losses on the statement of operations.  ASU No. 2016-13 will be effective for the Company beginning August 1, 2020.  Early adoption is permitted for the Company beginning August 1, 2019.  Management is currently assessing the provisions of ASU 2016-13 and has not yet estimated its impact on the Company’s consolidated financial statements.
 
In January 2017, FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment (“ASU 2017-04”).  The amendments included in this update simplify the subsequent measurement of goodwill by revising the steps required during the registrant’s annual goodwill impairment test.  This accounting standard update will be effective for the Company beginning August 1, 2021.  Management is currently assessing the provisions of ASU 2017-04 and has not yet estimated its impact on the Company’s consolidated financial statements.

3.
U.S. Tax Reform

On December 22, 2017, the U.S. government enacted comprehensive tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revised U.S. corporate income tax regulations including, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system.
 

Page 8 of 29
The changes included in the Tax Act are broad and complex.  The tax provision recorded for the three and six months ended January 27, 2018 reflects management’s estimates of the Tax Act’s impacts.  The SEC has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize and record the related tax impacts. Management intends to finalize and record any adjustments related to implementation of Tax Act provisions by the end of the Company’s fiscal year ending July 31, 2018.  The final transition impacts of the Tax Act may differ from current estimates due to, among other things, changes in interpretations of the Tax Act, subsequent legislative action to further revise the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or updates or changes to the Company’s estimates utilized to calculate the transition impacts.

Specific impacts of the Tax Act are summarized in Note 9 of these condensed consolidated financial statements.

4.
Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash are summarized in the following table.
 
 
Balance at
  
 
January 27,
2018
    
July 31,
2017
  
 
(in thousands)
  
Cash and cash equivalents
  
$
17,412
    
$
13,029
  
Restricted cash
    
295
      
314
  
Total cash, cash equivalents and restricted cash 
  
$
17,707
    
$
13,343
  

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.  The Company invests cash in excess of operating requirements in income-producing short-term investments.  Money market funds of $0.4 million and $0.2 million were included in cash and cash equivalents in the table above at January 27, 2018 and July 31, 2017, respectively.

The Company is required to maintain restricted cash on deposit in Brazil as collateral for pending litigation matters.

5.
Fair Value of Financial Instruments

The Company’s financial assets or liabilities are measured using inputs from the three levels of the fair value hierarchy.  The Company classifies assets and liabilities within the fair value hierarchy based on the lowest level of any input that is significant to the fair value measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  The Company has not elected a fair value option on any assets or liabilities. The three levels of the hierarchy are as follows:
 
Level 1 Inputs – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Generally, this includes debt and equity securities and derivative contracts that are traded on an active exchange market (e.g., New York Stock Exchange) as well as certain U.S. Treasury and U.S. Government and agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.  

Level 2 Inputs – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, credit risks, etc.) or can be corroborated by observable market data.  

Level 3 Inputs – Valuations based on models where significant inputs are not observable.  The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.
 
The Company monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy.  Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another.  In such instances, the Company reports the transfer as of the beginning of the reporting period.  The Company evaluated the significance of transfers between levels based upon the nature of the financial instrument.  There were no transfers in or out of levels 1, 2 or 3, respectively during the six months ended January 27, 2018 or the fiscal year ended July 31, 2017.

The carrying amount of cash, cash equivalents and restricted cash approximated fair value at January 27, 2018 and July 31, 2017.  These assets were classified as level 1 instruments at both dates.
 
Page 9 of 29
Investment securities available for sale of $1.5 million at January 27, 2018 and July 31, 2017 primarily included mutual funds invested in U.S. municipal bonds, which the Company may immediately redeem without prior notice.  These mutual funds are valued at the net asset value (“NAV”) of shares held by the Company at period end as a practical expedient to estimate fair value.  These mutual funds are deemed to be actively traded, are required to publish their daily NAV and are required to transact at that price.

Unrealized gains or losses related to investment securities available for sale are recorded in accumulated other comprehensive income, net of applicable income taxes in the accompanying condensed consolidated balance sheets and condensed consolidated statements of changes in shareholders' equity.  The cost basis of securities sold is based on the specific identification method.  The Company had unrealized losses of less than $0.1 million recorded in accumulated other comprehensive income during the six months ended January 27, 2018 and January 28, 2017.  Reclassification adjustments out of accumulated other comprehensive income are included within gain on sale of assets on the accompanying condensed consolidated statements of operations.  The Company did not record any sales of investment securities during the six months ended January 27, 2018 and January 28, 2017.

Long-term debt consists of bank loans and capitalized equipment leases.  Lines of credit consist of borrowings for working capital requirements.  Based on the Company's assessment of the current financial market and corresponding risks associated with the debt and line of credit borrowings, management believes that the carrying amount of these liabilities approximated fair value at January 27, 2018 and July 31, 2017.  These liabilities were classified as level 2 instruments at both dates.  

There were no financial instruments classified as level 3 at January 27, 2018 or July 31, 2017.

6.
Revenue and Contract Receivables, net

Revenue Recognition

The Company derives substantially all of its revenue from environmental consulting work, principally from the sale of labor hours.  The consulting work is performed under a mix of fixed price, cost-type, and time and material contracts.  Contracts are required from all customers.  The Company recognizes revenue as follows:
 
Contract Type
 
Work Type
 
Revenue Recognition Policy
 
 
 
 
 
Time and materials
 
Consulting
 
As incurred at contract rates.
         
Fixed price
 
Consulting
 
Percentage of completion, approximating the ratio of either total costs or Level of Effort (LOE) hours incurred to date to total estimated costs or LOE hours.
         
Cost-plus
 
Consulting
 
Costs as incurred plus fees.  Fees are recognized as revenue using percentage of completion determined by the percentage of LOE hours incurred to total LOE hours in the respective contracts.

Revenues reflected in the Company's condensed consolidated statements of operations represent services rendered for which the Company maintains a primary contractual relationship with its customers.  Included in revenues are certain services that the Company has elected to subcontract to other contractors.

The Company accounts for time and material contracts over the period of performance, in proportion to the costs of performance, predominately based on labor hours incurred.  Revenue earned from fixed price and cost-plus contracts is recognized using the “percentage-of-completion” method, wherein revenue is recognized as project progress occurs.  If an estimate of costs at completion on any contract indicates that a loss will be incurred, the entire estimated loss is charged to operations in the period the loss becomes evident.

Substantially all of the Company's cost-type work is with federal governmental agencies and, as such, is subject to audits after contract completion.  Under these cost-type contracts, provisions for adjustments to accrued revenue are recognized on a quarterly basis and based on past audit settlement history.  Government audits have been completed and final rates have been negotiated through fiscal year 2014.  The Company records an allowance for project disallowances in other accrued liabilities for potential disallowances resulting from government audits (refer to Note 10 of these condensed consolidated financial statements).  Allowances for project disallowances are recorded as adjustments to revenue when the amounts are estimable.  Resolution of these amounts is dependent upon the results of government audits and other formal contract close-out procedures.
 
Page 10 of 29
Change orders can occur when changes in scope are made after project work has begun, and can be initiated by either the Company or its clients.  Claims are amounts in excess of the agreed contract price which the Company seeks to recover from a client for customer delays and /or errors or unapproved change orders that are in dispute.  The Company recognizes costs related to change orders and claims as incurred.  Revenues and profit are recognized on change orders when it is probable that the change order will be approved and the amount can be reasonably estimated.  Revenues are recognized only up to the amount of costs incurred on contract claims when realization is probable, estimable and reasonable support from the customer exists.

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

Billed contract receivables represent amounts billed to clients in accordance with contracted terms but not collected as of the end of the reporting period.  Billed contract receivables may include: (i) amounts billed for revenues from incurred costs and fees that have been earned in accordance with contractual terms; and (ii) progress billings in accordance with contractual terms that include revenue not yet earned as of the end of the reporting period.

Unbilled contract receivables result from: (i) revenues from incurred costs and fees which have been earned, but are not billed as of period-end; and (ii) differences between year-to-date provisional billings and year-to-date actual contract costs incurred.  

The Company reduces contract receivables by establishing an allowance for contract adjustments related to revenues that are deemed to be unrealizable, or that may become unrealizable in the future.  Management reviews contract receivables and determines allowance amounts based on the adequacy of the Company’s performance under the contract, the status of change orders and claims, historical experience with the client for settling change orders and claims, and economic, geopolitical and cultural considerations for the home country of the client.  The Company records such contract adjustments as direct adjustments to revenue in the consolidated statements of operations.

The Company also reduces contract receivables by recording an allowance for doubtful accounts to account for the estimated impact of collection issues resulting from a client’s inability or unwillingness to pay valid obligations to the Company.  The resulting provision for bad debts is recorded within administrative and indirect operating expenses on the consolidated statements of operations.

Contract Receivables, Net

Contract receivables, net are summarized in the following table.

 
Balance at
  
 
January 27,
2018
  
July 31,
2017
  
 
(in thousands)
  
Contract Receivables: 
        
Billed
  
$
14,858
    
$
16,033
  
Unbilled
    
15,464
      
21,199
  
 
    
30,322
      
37,232
  
Allowance for doubtful accounts and contract adjustments
    
(1,957
)
    
(2,125
)
Contract receivables, net 
  
$
28,365
    
$
35,107
  

Billed contract receivables included contractual retainage balances of $1.2 million and $1.1 million at January 27, 2018 and July 31, 2017, respectively.  Management anticipates that the Company will substantially bill and collect the unbilled receivables and retainage balances outstanding at January 27, 2018 within one year.  

Contract Receivable Concentrations

Significant concentrations of contract receivables and the allowance for doubtful accounts and contract adjustments are summarized in the following table.
 
Page 11 of 29
 
Balance at January 27, 2018
    
Balance at July 31, 2017
  
 
 
Total
Billed and
Unbilled
Contract
Receivables
    
Allowance for
Doubtful
Accounts and
Contract
Adjustments
    
Total
Billed and
Unbilled
Contract
Receivables
    
Allowance for
Doubtful
Accounts and
Contract
Adjustments
  
 
(in thousands)
  
                         
EEI and its subsidiaries located in the U.S.
  
$
17,375
    
$
595
    
$
25,528
    
$
797
  
Subsidiaries located in South America
    
12,947
      
1,362
      
11,704
      
1,328
  
Totals
  
$
30,322
    
$
1,957
    
$
37,232
    
$
2,125
  
 
Contract adjustments related to projects in the United States, Canada and South America typically result from cost overruns related to current or recently completed projects, or from recoveries of cost overruns recorded as contract adjustments in prior reporting periods.

The allowance for doubtful accounts and contract adjustments as a percentage of contract receivables at the Company’s subsidiaries located in South America was 11% at January 27, 2018 and July 31, 2017.  During the first six months of fiscal year 2018, unstable local economies continued to adversely impact certain of the Company’s South American clients, resulting in increased collection risks and the Company incurring project costs that it may not recover for several months.  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.
 
   
Three Months Ended
    
Six Months Ended
  
   
January 27,
2018
    
January 28,
2017
    
January 27,
2018
    
January 28,
2017
  
   
(in thousands)
  
Balance at beginning of period
  
$
2,127
    
$
6,882
    
$
2,125
    
$
6,792
  
Net increase (decrease) due to adjustments in the allowance for:
                                
Contract adjustments (1)
    
(35
)
    
(4,895
)
    
(35
)
    
(4,940
)
Doubtful accounts (2)
    
(135
)
    
60
      
(133
)
    
195
  
Balance at end of period
  
$
1,957
    
$
2,047
    
$
1,957
    
$
2,047
  
 
(1)
Increases (decreases) to the allowance for contract adjustments on the condensed consolidated balance sheets are recorded as (decreases) increases to revenue, net on the condensed consolidated statements of operations.
(2)
Increases (decreases) to the allowance for doubtful accounts on the condensed consolidated balance sheets are recorded as increases (decreases) to administrative and other indirect operating expenses on the condensed consolidated statements of operations.

During the three months ended January 28, 2017, the Company wrote-off $4.9 million of aged and fully reserved contract receivable balances related to a specific project in the Middle East, based on management’s assessment that cash collections were not likely.

7.
Lines of Credit

Unsecured lines of credit are summarized in the following table.

   
Balance at
  
 
  
January 27,
2018
    
July 31,
2017
  
   
(in thousands)
  
Outstanding cash draws, recorded as lines of credit on the accompanying condensed consolidated balance sheets
  
$
435
    
$
581
  
Short-term loans issued under lines of credit
    
---
      
200
  
Outstanding letters of credit to support operations
    
1,908
      
2,511
  
Total amounts used under lines of credit 
    
2,343
      
3,292
  
Remaining amounts available under lines of credit
    
37,783
      
36,529
  
Total approved unsecured lines of credit  
  
$
40,126
    
$
39,821
  
 
Page 12 of 29
As of January 27, 2018, contractual interest rates for lines of credit ranged from 3.37% to 4.12% for the Company’s U.S. operations and 9.12% to 13.42% for the Company’s South American operations.  The Company’s lenders have reaffirmed the lines of credit within the past twelve months.

8.
Debt and Capital Lease Obligations

Debt and capital lease obligations are summarized in the following table.
 
   
Balance at
  
 
  
January 27,
2018
    
July 31,
2017
  
   
(in thousands)
  
 
            
Bank loan (interest rate 2.94% at January 27, 2018)
  
$
39
    
$
328
  
Capital lease obligations (interest rates ranging from 7.36% to 15.09% at January 27, 2018)
    
83
      
120
  
 
    
122
      
448
  
Current portion of long-term debt and capital lease obligations
    
(61
)
    
(382
)
Long-term debt and capital lease obligations
  
$
61
    
$
66
  
 
The aggregate maturities of long-term debt and capital lease obligations as of January 27, 2018 are summarized in the following table.
 
Twelve Months Ended
January 27,
  
Amount
  
 
(in thousands)
  
       
2019
  
$
61
  
2020
    
37
  
2021
    
24
  
Total
  
$
122
  
 
9.
Income Taxes

The estimated effective tax rate was 93.7% and 67.7% for the six months ended January 27, 2018 and January 28, 2017, respectively.  During interim reporting periods, the effective tax rate may be impacted by changes in the mix of forecasted income from the U.S. and foreign jurisdictions where the Company operates, by changes in tax rates within those jurisdictions, or by significant unusual or infrequent items that could change assumptions used in the calculation of the income tax provision.

The Tax Act (refer to Note 3 of these condensed consolidated financial statements) lowered the Company’s statutory federal tax rate from 34% (effective through December 31, 2017) to 21% (effective January 1, 2018).  As the Company has a July 31 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in an average statutory federal tax rate of approximately 26% for the fiscal year ending July 31, 2018, and 21% for subsequent fiscal years.  Due to the Company’s minimal loss from U.S. operations, the reduction in the statutory federal tax rate did not have a material impact on the income tax provision related to pre-tax income during the three months ended January 27, 2018.

The reduction of the statutory federal tax rate also resulted in revaluation of the Company’s U.S. deferred tax assets and liabilities.  Revaluation is based on the tax rates at which the deferred tax assets and liabilities are expected to reverse in the future, which is generally 21%.  The Company recorded an estimated net deferred tax expense of $0.3 million during the three months ended January 27, 2018 as a result of revaluation of deferred tax assets and liabilities.

The Tax Act includes provisions for a territorial federal tax system that:
·
imposes a U.S. federal tax on historical cumulative earnings of foreign subsidiaries, replacing the previous system of taxing the earnings of foreign subsidiaries only as they were repatriated to the U.S. in the form of dividends;
·
eliminates or reduces the ability to utilize certain foreign tax credits that existed prior to enactment of the Tax Act; and
·
provides for a deduction for dividends received from foreign subsidiaries.

The Company recorded net estimated federal tax expense of $0.1 million related to these territorial tax provisions during the three months ended January 27, 2018, representing the net of a one-time transition tax of $0.3 million on cumulative earnings of foreign subsidiaries, offset by $0.2 million of benefit from outstanding unpaid dividends from a foreign subsidiary.  As of January 27, 2018, the Company recorded the $0.3 million transition tax as a non-current income tax liability, which management expects to pay over an eight year period allowed in the Tax Act.
 
Page 13 of 29
There are other transitional impacts of the Tax Act, certain of which were estimated to have an immaterial impact on the income tax provision for the three and six months ended January 27, 2018, and certain of which will become effective during future fiscal years.

The effective tax rate for the six months ended January 28, 2017 includes the tax impact of the Company’s portion of dividends declared by its majority owned subsidiary in Chile and reversal of a deferred tax asset previously maintained by the Company’s majority owned subsidiary in Peru.

10.
Other Accrued Liabilities

Other accrued liabilities are summarized in the following table.

 
  
Balance at
  
 
  
January 27,
2018
    
July 31,
2017
  
 
  
(in thousands)
  
             
Allowance for project disallowances
  
$
687
    
$
687
  
Dividends payable to noncontrolling shareholders of majority-owned subsidiaries
    
557
      
517
  
Other accrued expenses
    
1,244
      
1,441
  
Total other accrued liabilities
  
$
2,488
    
$
2,645
  

The allowance for project disallowances represents potential disallowances of amounts billed and collected resulting from contract close-outs and government audits.  Allowances for project disallowances are recorded when the amounts are estimable, and may be revised during subsequent reporting periods when estimates of settlement amounts become more certain, or when actual settlements are finalized.  Activity within the allowance for project disallowances is summarized in the following table.
 
   
Three Months Ended
    
Six Months Ended
  
   
January 27,
2018
    
January 28,
2017
    
January 27,
2018
    
January 28,
2017
  
   
(in thousands)
  
Balance at beginning of period
  
$
687
    
$
1,173
    
$
687
    
$
1,819
  
Reduction of settlement estimate recorded in prior periods
    
---
      
(462
)
    
---
      
(1,108
)
Balance at end of period
  
$
687
    
$
711
    
$
687
    
$
711
  

Settlements of certain contracts completed during prior fiscal years were finalized during the six months ended January 28, 2017, resulting in no cash received or paid during the period.

Dividends payable to noncontrolling shareholders of majority-owned subsidiaries includes dividends declared by a subsidiary in South America during the first half of fiscal year 2017.  As of January 28, 2018, management anticipates that these dividends payable will be paid within one year.

11.
Stock Award Plan

EEI adopted the 1998 Stock Award Plan effective March 16, 1998.  This plan, together with supplemental plans that were subsequently adopted by the Company’s Board of Directors, are referred to as the “Stock Award Plan”.  The Stock Award Plan is not a qualified plan under Section 401(a) of the Internal Revenue Code.  Under the Stock Award Plan, directors, officers and other key employees of EEI or any of its subsidiaries may be awarded Class A Common Stock as a bonus for services rendered to the Company or its subsidiaries, based upon the fair market value of the common stock at the time of the award.  The Stock Award Plan authorizes the Company’s Board of Directors to determine the vesting period and the circumstances under which the awards may be forfeited.

In October 2016, the Company’s Board of Directors adopted the current supplemental plan (the “2016 Stock Award Plan”).  The 2016 Stock Award Plan permits awards of up to 200,000 shares of Class A Common Stock for a period of up to five years until its termination in October 2021.  As of January 27, 2018, the Company issued a total of 7,502 Class A shares under the 2016 Stock Award Plan, valued at less than $0.1 million, to four directors as a portion of their annual compensation.  These shares will fully vest in April 2018 upon expiration of certain restrictions regarding transfer of the shares.
 
Page 14 of 29
EEI recorded non-cash compensation expense of less than $0.1 million during the six months ended January 27, 2018 and January 28, 2017.

12.
Shareholders' Equity

Class A and Class B Common Stock

The relative rights, preferences and limitations of the Company's Class A and Class B Common Stock are summarized as follows: Holders of Class A shares are entitled to elect 25% of the Board of Directors so long as the number of outstanding Class A shares is at least 10% of the combined total number of outstanding Class A and Class B common shares. Holders of Class A common shares have one-tenth the voting power of Class B common shares with respect to most other matters.
 
In addition, Class A shares are eligible to receive dividends in excess of (and not less than) those paid to holders of Class B shares. Holders of Class B shares have the option to convert at any time, each share of Class B Common Stock into one share of Class A Common Stock. Upon sale or transfer, shares of Class B Common Stock will automatically convert into an equal number of shares of Class A Common Stock, except that sales or transfers of Class B Common Stock to an existing holder of Class B Common Stock or to an immediate family member will not cause such shares to automatically convert into Class A Common Stock.
 
Restrictive Shareholder Agreement

Messrs. Gerhard J. Neumaier (deceased), Frank B. Silvestro, Ronald L. Frank, and Gerald A. Strobel entered into a Stockholders’ Agreement dated May 12, 1970, as amended January 24, 2011, which governs the sale of certain shares of Ecology and Environment, Inc. common stock (now classified as Class B Common Stock) owned by them, certain children of those individuals and any such shares subsequently transferred to their spouses and/or children outright or in trust for their benefit upon the demise of a signatory to the Agreement (“Permitted Transferees”).  The Agreement provides that prior to accepting a bona fide offer to purchase some or all of their shares of Class B Common Stock governed by the Agreement, that the selling party must first allow the other signatories to the Agreement (not including any Permitted Transferee) the opportunity to acquire on a pro rata basis, with right of over-allotment, all of such shares covered by the offer on the same terms and conditions proposed by the offer.

Cash Dividends

The Company declared and accrued $0.9 million of cash dividends in January 2017, which were paid in February 2017. The Company paid dividends of $0.9 million in August 2017 and 2016 that were declared and accrued in prior periods.

The Company declared and paid $0.9 million of cash dividends in February 2018.

Stock Repurchase Plan

In August 2010, the Company’s Board of Directors approved a program for repurchase of 200,000 shares of Class A common stock (the “Stock Repurchase Program”).  As of January 27, 2018, the Company repurchased 122,918 shares of Class A stock, and 77,082 shares had yet to be repurchased under the Stock Repurchase Program.  The Company did not acquire any Class A shares under the Stock Repurchase Program during the six months ended January 27, 2018 or January 28, 2017.

Noncontrolling Interests

The Company discloses noncontrolling interests as a separate component of consolidated shareholders’ equity on the accompanying condensed consolidated balance sheets.  Earnings and other comprehensive income (loss) are separately attributed to both the controlling and noncontrolling interests.  The Company calculates earnings per share based on net income (loss) attributable to the Company’s controlling interests.

The Company considers acquiring additional interests in majority owned subsidiaries when noncontrolling shareholders express their intent to sell their interests.  The Company settles and records acquisitions of noncontrolling interests at amounts that approximate fair value.  Purchases of noncontrolling interests are recorded as reductions of shareholders’ equity on the condensed consolidated statements of shareholders’ equity.  The Company did not acquire additional interest in any of its majority-owned subsidiaries during the six months ended January 27, 2018 or January 28, 2017.
 
Page 15 of 29
Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are summarized in the following table.

 
  
Balance at
  
 
  
January 27,
2018
    
July 31,
2017
  
 
  
(in thousands)
  
             
Unrealized net foreign currency translation losses
  
$
(1,945
)
  
$
(2,033
)
Unrealized net investment (losses) gains on available for sale investments
    
(1
)
    
15
  
Total accumulated other comprehensive loss
  
$
(1,946
)
  
$
(2,018
)

13.
Earnings Per Share

The Company calculates basic and diluted earnings per share by dividing the net income attributable to Ecology and Environment, Inc. common shareholders by the weighted average number of common shares outstanding for the period.  After consideration of all the rights and privileges of the Class A and Class B stockholders summarized in Note 12, in particular the right of the holders of the Class B common stock to elect no less than 75% of the Board of Directors making it highly unlikely that the Company will pay a dividend on Class A common stock in excess of Class B common stock, the Company allocates undistributed earnings between the two classes of stock on a one-to-one basis when computing earnings per share.  As a result, basic and fully diluted earnings per Class A and Class B share are equal amounts.

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

The computation of earnings per share is included in the following table.
 
   
Three Months Ended
    
Six Months Ended
  
   
January 27,
2018
    
January 28,
2017
    
January 27,
2018
    
January 28,
2017
  
   
(in thousands, except share and per share amounts)
  
                   
Net (loss) income attributable to Ecology and Environment, Inc.
  
$
(768
)
  
$
(318
)
  
$
(235
)
  
$
570
  
Dividends declared
    
---
      
(859
)
    
---
      
(859
)
Balance at end of period
  
$
(768
)
  
$
(1,177
)
  
$
(235
)
  
$
(289
)
                                 
Weighted-average common shares outstanding - basic and diluted
    
4,301,604
      
4,294,102
      
4,301,604
      
4,293,417
  
                                 
Distributed earnings per share - basic and diluted
  
$
---
    
$
0.20
    
$
---
    
$
0.20
  
Undistributed earnings (distributions in excess of earnings) per share - basic and diluted
    
(0.18
)
    
(0.27
)
    
(0.05
)
    
(0.07
)
Net income per common share - basic and diluted
  
$
(0.18
)
  
$
(0.07
)
  
$
(0.05
)
  
$
0.13
  
 
14.
Segment Reporting

The Company reports segment information based on the geographic location of EEI and its direct and indirect subsidiaries (for revenues) and the location of its offices (for long-lived assets).  Revenue, net by business segment is summarized in the following table.
 
Page 16 of 29
   
Three Months Ended
    
Six Months Ended
  
   
January 27,
2018
    
January 28,
2017
    
January 27,
2018
    
January 28,
2017
  
   
(in thousands)
  
                         
EEI and its subsidiaries located in the U.S.
  
$
17,050
    
$
18,950
    
$
36,748
    
$
39,265
  
                                 
Subsidiaries located in South America:
                                
Peru
    
2,690
      
1,675
      
5,689
      
2,737
  
Chile
    
3,128
      
2,096
      
5,242
      
4,057
  
Brazil
    
2,145
      
1,931
      
4,395
      
3,838
  
Other
    
70
      
74
      
91
      
144
  
     
8,033
      
5,776
      
15,417
      
10,776
  
                                 
Total revenue, net
  
$
25,083
    
$
24,726
    
$
52,165
    
$
50,041
  

Long-lived assets by business segment are summarized in the following table.

   
Balance at
  
 
  
January 27,
2018
    
July 31,
2017
  
   
(in thousands)
  
           
EEI and its subsidiaries located in the United States
  
$
3,095
    
$
3,293
  
Subsidiaries located in South America
    
1,266
      
1,135
  
 
15.
Commitments and Contingencies

Legal Proceedings

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

On February 4, 2011, the Chico Mendes Institute of Biodiversity Conservation of Brazil (the “Institute”) issued a Notice of Infraction to ecology and environment do Brasil Ltda. ("E&E Brasil"), a majority-owned subsidiary of EEI.  The Notice of Infraction concerned the taking and collecting wild animal specimens without authorization by the competent authority and imposed a fine of 520,000 Reais against E&E Brasil.   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.  At January 27, 2018, the Company maintained 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 the six months ended January 27, 2018 or during the fiscal year ended July 31, 2017.
 
Page 17 of 29
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
References in this Quarterly Report on Form 10-Q (the “Quarterly Report”) to “EEI” refer to Ecology and Environment, Inc., a New York corporation.  References to “the Company,” “we,” “us,” “our,” or similar terms refer to EEI together with its consolidated subsidiaries.

Executive Overview

The Company reported a consolidated loss of $0.18 per share for the three months ended January 27, 2018, $0.11 lower than the loss of $0.07 per share reported for the same quarter last year.  A consolidated loss of $0.05 per share for the six months ended January 27, 2018 was $0.18 lower than income of $0.13 per share reported for the prior year.  Lower net income before income tax provision during the second quarter and first half of fiscal year 2018 primarily resulted from lower revenues from our U.S. operations, which were partially offset by significant improvement in South American revenues and net income.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revised U.S. corporate income tax regulations including, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system.  Enactment of the Tax Act resulted in net adjustments that increased our income tax provision by approximately $0.4 million, and effectively reduced earnings by $0.10 per share during the current quarter.  Specific impacts of the Tax Act are summarized below in the income taxes commentary.

We manage our operations through distinct reporting segments that are based on the geographic location of our parent company and subsidiary operations.  The following tables include selected financial information by business segment for the three and six months ended January 27, 2018 and January 28, 2017.  Refer to “Results of Operations” below for further commentary regarding the Company’s revenues and expenses for the three and six months ended January 27, 2018.
 
   
Three Months Ended
  
   
January 27,
2018
    
January 28,
2017
    
$
Change
    
%
Change
  
   
($ in thousands)
  
                         
EEI and subsidiaries located in the United States:
                        
Revenue, net
  
$
17,050
    
$
18,950
    
$
(1,900
)
    
(10
)%
Revenue, net less subcontract costs (1)
    
13,634
      
15,240
      
(1,606
)
    
(11
)%
Direct operating expenses (2)
    
6,395
      
6,939
      
(544
)
    
(8
)%
Indirect operating expenses (3)
    
7,745
      
7,782
      
(37
)
    
---
%
(Loss) income before income tax provision
    
(782
)
    
236
      
(1,018
)
    
(431
)%
Net (loss) attributable to EEI
    
(950
)
    
(5
)
    
(945
)
    
---
(4)
                                 
Subsidiaries located in South America:
                                
Revenue, net
  
$
8,033
    
$
5,776
    
$
2,257
      
39
%
Revenue, net less subcontract costs (1)
    
5,680
      
4,139
      
1,541
      
37
%
Direct operating expenses (2)
    
2,683
      
2,091
      
592
      
28
%
Indirect operating expenses (3)
    
2,483
      
2,040
      
443
      
22
%
Income (loss) before income tax provision
    
496
      
(71
)
    
567
      
---
(4)
Net income (loss) attributable to EEI
    
182
      
(313
)
    
495
      
---
(4)
                                 
Consolidated totals:
                                
Revenue, net
  
$
25,083
    
$
24,726
    
$
357
      
1
%
Revenue, net less subcontract costs (1)
    
19,314
      
19,379
      
(65
)
    
---
%
Direct operating expenses (2)
    
9,078
      
9,030
      
48
      
1
%
Indirect operating expenses (3)
    
10,228
      
9,822
      
406
      
4
%
(Loss) income before income tax provision
    
(286
)
    
165
      
(451
)
    
(273
)%
Net (loss) attributable to EEI
    
(768
)
    
(318
)
    
(450
)
    
---
(4)
 
(1)
Revenue, net less subcontract costs, which is a key operating metric for our company, represents revenue, net less subcontract costs from the condensed consolidated statements of operations.
(2)
Direct operating expenses consist of cost of professional services and other direct operating expenses from the condensed consolidated statements of operations.
(3)
Indirect operating expenses consist of administrative and indirect operating expenses and marketing and related costs from the condensed consolidated statements of operations.
(4)
Percent change is not relevant because the prior year amount is negative.
 
Page 18 of 29
   
Six Months Ended
  
   
January 27,
2018
    
January 28,
2017
    
$
Change
    
%
Change
  
   
($ in thousands)
  
                         
EEI and subsidiaries located in the United States:
                        
Revenue, net
  
$
36,748
    
$
39,265
    
$
(2,517
)
    
(6
)%
Revenue, net less subcontract costs (1)
    
29,767
      
32,917
      
(3,150
)
    
(10
)%
Direct operating expenses (2)
    
13,413
      
14,345
      
(932
)
    
(6
)%
Indirect operating expenses (3)
    
16,056
      
16,010
      
46
      
---
%
(Loss) income before income tax provision
    
(275
)
    
1,891
      
(2,166
)
    
(115
)%
Net (loss) income attributable to EEI
    
(719
)
    
1,101
      
(1,820
)
    
(165
)%
                                 
Subsidiaries located in South America:
                                
Revenue, net
  
$
15,417
    
$
10,776
    
$
4,641
      
43
%
Revenue, net less subcontract costs (1)
    
10,900
      
7,766
      
3,134
      
40
%
Direct operating expenses (2)
    
5,146
      
4,095
      
1,051
      
26
%
Indirect operating expenses (3)
    
4,681
      
4,059
      
622
      
15
%
Income (loss) before income tax provision
    
1,081
      
(307
)
    
1,388
      
---
(4)
Net income (loss) attributable to EEI
    
484
      
(531
)
    
1,015
      
---
(4)
                                 
Consolidated totals:
                                
Revenue, net
  
$
52,165
    
$
50,041
    
$
2,124
      
4
%
Revenue, net less subcontract costs (1)
    
40,667
      
40,683
      
(16
)
    
---
%
Direct operating expenses (2)
    
18,559
      
18,440
      
119
      
1
%
Indirect operating expenses (3)
    
20,737
      
20,069
      
668
      
3
%
Income before income tax provision
    
806
      
1,584
      
(778
)
    
(49
)%
Net income attributable to EEI
    
(235
)
    
570
      
(805
)
    
(141
)%
 
(1)
Revenue, net less subcontract costs, which is a key operating metric for our company, represents revenue, net less subcontract costs from the condensed consolidated statements of operations.
(2)
Direct operating expenses consist of cost of professional services and other direct operating expenses from the condensed consolidated statements of operations.
(3)
Indirect operating expenses consist of administrative and indirect operating expenses and marketing and related costs from the condensed consolidated statements of operations.
(4)
Percent change is not relevant because the prior year amount is negative.

Liquidity and Capital Resources

Cash, cash equivalents and restricted cash increased $4.3 million during the first six months of fiscal year 2018.  Excluding payment of $0.9 million of dividends to shareholders that was approved on a discretionary basis by the Company’s Board of Directors, cash generated from operations exceeded cash required to fund investing and financing activities by $5.2 million during the period.

We maintain $40.1 million of unsecured lines of credit available for working capital and letters of credit as of January 27, 2018 at contractual interest rates ranging from 3.37% to 4.12% in the U.S. and 9.12% to 13.42% in South America.  Cash advances of $0.4 million and letters of credit of $1.9 million were outstanding under our lines of credit as of January 27, 2018.  Our lenders have reaffirmed the lines of credit within the past twelve months.

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

Historically, our foreign subsidiaries have generated adequate cash flow to fund their operations.  During fiscal years 2016 and 2017, our South American operations had been adversely affected by unstable economic conditions.  Although there are indications of economic recovery in certain countries, the total scope and duration of the economic downturn, and the ultimate impact that it will have on our Brazilian, Peruvian and Chilean operations, are uncertain.  In the event that 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 repatriated $0.4 million of dividends from foreign subsidiaries, net of local taxes, during the six months ended January 27, 2018.

During fiscal year 2017, one of the Company’s majority owned subsidiaries in South America declared a total of $1.5 million of dividends to its shareholders, of which $0.2 million was paid to minority shareholders and $0.2 million was repatriated to the U.S., net of local taxes, as of January 27, 2018.  As of January 27, 2018, management anticipates that these dividends payable will be paid within one year.
 
Page 19 of 29
The Tax Act resulted in a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries of approximately $0.3 million which will be paid, without incurring interest, over a period of up to eight years.

Contract Receivable Concentration Risk

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

 
  
Balance at January 27, 2018
    
Balance at July 31, 2017
  
   
Total
Billed and
Unbilled
Contract
Receivables
    
Allowance for
Doubtful
Accounts and
Contract
Adjustments
    
Total
Billed and
Unbilled
Contract
Receivables
    
Allowance for
Doubtful
Accounts and
Contract
Adjustments
  
   
(in thousands)
  
                         
EEI and its subsidiaries located in the U.S.
  
$
17,375
    
$
595
    
$
25,528
    
$
797
  
Subsidiaries located in South America
    
12,947
      
1,362
      
11,704
      
1,328
  
Totals
  
$
30,322
    
$
1,957
    
$
37,232
    
$
2,125
  
 
Contract adjustments related to projects in the United States, Canada and South America typically result from cost overruns related to current or recently completed projects, or from recoveries of cost overruns recorded as contract adjustments in prior reporting periods.

The allowance for doubtful accounts and contract adjustments as a percentage of contract receivables at the Company’s subsidiaries located in South America was 11% at January 27, 2018 and July 31, 2017.  During the first quarter of fiscal year 2018, unstable local economies continued to adversely impact certain of our South American clients, resulting in increased collection risks and the Company incurring project costs that it may not recover for several months.  Although there are indications of economic recovery in certain countries, management is monitoring any adverse trends or events that may impact the realizability of recorded receivables from our South American clients.

Contract Backlog

At any point in time, we have a firm backlog of uncompleted projects that are expected to provide future revenue over a period of 1 to 2 years.  These projects include a substantial amount of work to be performed under contracts that contain termination provisions that may be exercised without penalty at any time by our clients upon written notice to us.  Changes in economic or market conditions or other extraordinary events, such as natural disasters, could lead to delays in our ability to recognize revenue, or to us not realizing all of the potential revenue under these contracts.  The likelihood of obtaining the full value under these contracts cannot be determined at this time.

Our firm backlog of uncompleted projects is summarized by business segment in the following table.

   
Amount as of
  
   
January 27,
2018
    
July 31,
2017
    
January 28,
2017
  
   
(in thousands)
  
                   
Total firm backlog of uncompleted contracts:
                  
EEI and its subsidiaries located in the United States
  
$
66,613
    
$
71,642
    
$
62,023
  
Subsidiaries located in South America
    
21,123
      
20,744
      
21,939
  
Consolidated totals
  
$
87,736
    
$
92,386
    
$
83,962
  
                         
Anticipated completion of firm backlog in next twelve months:
                        
EEI and its subsidiaries located in the United States
  
$
35,888
    
$
38,814
    
$
37,525
  
Subsidiaries located in South America
    
14,782
      
14,660
      
15,663
  
Consolidated totals
  
$
50,670
    
$
53,474
    
$
53,188
  
 
Page 20 of 29
Results of Operations

Revenue, net

Substantially all of the Company's revenue is derived from environmental consulting work, which is principally derived from the sale of labor hours.  Revenues reflected in the Company's condensed consolidated statements of operations represent services rendered for which the Company maintains a primary contractual relationship with its customers.  Included in revenues are certain services that the Company has elected to subcontract to other contractors.  Sales and cost of sales at our South American subsidiaries exclude tax assessments by governmental authorities, which are collected from clients and then remitted to governmental authorities.

The consulting work is performed under a mix of time and materials, fixed price and cost-plus, and contracts.  Contracts are required from all customers.  Revenue is recognized as follows:
 
Contract 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 are summarized in the following table.
 
   
Three Months Ended
    
Six Months Ended
  
   
January 27,
2018
    
January 28,
2017
    
January 27,
2018
    
January 28,
2017
  
 
(in thousands)
  
Time and materials
  
$
9,337
    
$
10,587
    
$
19,195
    
$
22,646
  
Fixed price
    
11,013
      
10,005
      
21,810
      
19,308
  
Cost-plus
    
4,733
      
4,134
      
11,160
      
8,087
  
Total revenue, net
  
$
25,083
    
$
24,726
    
$
52,165
    
$
50,041
  
 
Revenue, net and revenue less subcontract costs, by business entity, are summarized in the following tables.
 
Page 21 of 29
   
Three Months Ended
  
   
January 27,
2018
    
January 28,
2017
    
$
Change
    
%
Change
  
   
($ in thousands)
  
Revenue, net by business segment:
                        
EEI and subsidiaries located in the U.S.
  
$
17,050
    
$
18,950
    
$
(1,900
)
    
(10
)%
                                 
Subsidiaries located in South America:
                                
Peru
    
2,690
      
1,675
      
1,015
      
61
%
Chile
    
3,128
      
2,096
      
1,032
      
49
%
Brazil
    
2,145
      
1,931
      
214
      
11
%
Other
    
70
      
74
      
(4
)
    
---
(1)
     
8,033
      
5,776
      
2,257
      
39
%
                                 
Total revenue, net
  
$
25,083
    
$
24,726
    
$
357
      
1
%
 
Revenue, net less subcontract costs, by business segment:
                        
EEI and subsidiaries located in the U.S.
  
$
13,634
    
$
15,240
    
$
(1,606
)
    
(11
)%
                                 
Subsidiaries located in South America:
                                
Peru
    
1,506
      
1,008
      
498
      
49
%
Chile
    
2,397
      
1,473
      
924
      
63
%
Brazil
    
1,747
      
1,593
      
154
      
10
%
Other
    
30
      
65
      
(35
)
    
---
(1)
     
5,680
      
4,139
      
1,541
      
37
%
                                 
Total revenue, net less subcontract costs
  
$
19,314
    
$
19,379
    
$
(65
)
    
---
%

   
Six Months Ended
  
   
January 27,
2018
    
January 28,
2017
    
$
Change
    
%
Change
  
   
($ in thousands)
  
Revenue, net by business segment:
                        
EEI and subsidiaries located in the U.S.
  
$
36,748
    
$
39,265
    
$
(2,517
)
    
(6
)%
                                 
Subsidiaries located in South America:
                                
Peru
    
5,689
      
2,737
      
2,952
      
108
%
Chile
    
5,242
      
4,057
      
1,185
      
29
%
Brazil
    
4,395
      
3,838
      
557
      
15
%
Other
    
91
      
144
      
(53
)
    
---
(1)
     
15,417
      
10,776
      
4,641
      
43
%
                                 
Total revenue, net
  
$
52,165
    
$
50,041
    
$
2,124
      
4
%

Revenue, net less subcontract costs, by business segment:
                        
EEI and subsidiaries located in the U.S.
  
$
29,767
    
$
32,917
    
$
(3,150
)
    
(10
)%
                                 
Subsidiaries located in South America:
                                
Peru
    
3,254
      
1,651
      
1,603
      
97
%
Chile
    
4,051
      
3,017
      
1,034
      
34
%
Brazil
    
3,552
      
2,972
      
580
      
20
%
Other
    
43
      
126
      
(83
)
    
---
(1)
     
10,900
      
7,766
      
3,134
      
40
%
                                 
Total revenue, net less subcontract costs
  
$
40,667
    
$
40,683
    
$
(16
)
    
---
%

(1)
Percent change is not relevant because of the relatively immaterial amounts for all periods presented.

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

Consolidated revenues decreased slightly during the current quarter and the first half of fiscal year 2018, as lower revenues from U.S. operations were offset by significantly higher revenues from subsidiary operations in South America.
 
Page 22 of 29
EEI and Subsidiaries Located in the U.S.

The Company records an allowance for project disallowances in other accrued liabilities for potential disallowances resulting from government audits.  During the quarter and six months ended January 28, 2017, as a result of final settlements of projects completed in prior years, the Company reduced its allowance for project disallowances by $0.5 million and $1.1 million, respectively, which was recorded as an addition to revenue, net on the consolidated statement of operations.  We did not record any similar adjustments during the quarter or six months ended January 27, 2018.

Excluding the above settlement adjustments, revenues from U.S. operations decreased 8% during the current quarter and decreased 4% during the first half of fiscal year 2018, compared with the same periods of the prior year.  Lower revenues were primarily due to lower project activity resulting from the following factors:
·
We have experienced a trend of longer periods being required by various prospective commercial and federal clients to make contract award decisions;
·
We have also experienced a trend of longer periods being required by certain current clients to fund projects, define project scopes and schedule project work; and
·
Weather related delays also impacted work delivery schedules for certain federal and state projects.

Subsidiaries Located in South America

Higher revenues from our Brazilian operations resulted from increased project activity in the energy transmission and wind sectors.  An economic downturn that adversely affected our Brazilian operations for several previous reporting periods stabilized during fiscal year 2017 and the first half of fiscal year 2018, resulting in additional business development opportunities.  The mix of contract work along with changes in our pricing strategy generated a higher average selling rate for the first half of this year, as compared to the same period last year.

Higher revenues from our Peruvian operations resulted from increased project activity within the energy sector.  Increases in mineral prices, gas demand and private and public investments in energy projects each contributed to strong revenue growth in Peru.

Higher revenues from our Chilean operations were due to increased project activity within the transmission, industrial and mining sectors.  Improved mineral prices continued to result in additional project opportunities during fiscal year 2018.

EEI and local subsidiary management continue to develop business development strategies that are responsive to local economic conditions while also providing synergies with the Company’s overall market development strategies.

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 result directly from related project work volumes and revenues.  Direct operating expenses, by business segment, are summarized in the following tables.

   
Three Months Ended
  
   
January 27,
2018
    
January 28,
2017
    
$
Change
    
%
Change
  
   
($ in thousands)
  
                         
EEI and subsidiaries located in the U.S.
  
$
6,395
    
$
6,939
    
$
(544
)
    
(8
) %
                                 
Subsidiaries located in South America:
                                
Peru
    
540
      
303
      
237
      
78
%
Chile
    
1,113
      
734
      
379
      
52
%
Brazil
    
1,006
      
1,028
      
(22
)
    
(2
)%
Other
    
24
      
26
      
(2
)
    
---
(1)
     
2,683
      
2,091
      
592
      
28
%
                                 
Total direct operating expenses
  
$
9,078
    
$
9,030
    
$
48
      
1
%
 
Page 23 of 29
   
Six Months Ended
  
   
January 27,
2018
    
January 28,
2017
    
$
Change
    
%
Change
  
   
($ in thousands)
  
                         
EEI and subsidiaries located in the U.S.
  
$
13,413
    
$
14,345
    
$
(932
)
    
(6
) %
                                 
Subsidiaries located in South America:
                                
Peru
    
1,088
      
523
      
565
      
108
%
Chile
    
1,975
      
1,424
      
551
      
39
%
Brazil
    
2,055
      
2,073
      
(18
)
    
(1
) %
Other
    
28
      
75
      
(47
)
    
---
(1)
     
5,146
      
4,095
      
1,051
      
26
%
                                 
Total direct operating expenses
  
$
18,559
    
$
18,440
    
$
119
      
1
%

(1)
Percent change is not relevant because of the relatively immaterial amounts for all periods presented.

Consolidated direct operating expenses were slightly higher during the current quarter and first half of fiscal year 2018, as compared with the same periods last year.  Higher direct costs in our South American operations were materially offset by lower costs in the U.S.  These fluctuations in direct operating expenses generally correspond with increases or decreases in project revenues.

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 segment are summarized in the following tables.

   
Three Months Ended
  
   
January 27,
2018
    
January 28,
2017
    
$
Change
    
%
Change
  
   
($ in thousands)
  
                         
EEI and subsidiaries located in the U.S.
  
$
7,745
    
$
7,782
    
$
(37
)
    
---
%
                                 
Subsidiaries located in South America:
                                
Peru
    
857
      
947
      
(90
)
    
(10
)%
Chile
    
745
      
448
      
297
      
66
%
Brazil
    
861
      
576
      
285
      
49
%
Other
    
20
      
69
      
(49
)
    
---
(1)
     
2,483
      
2,040
      
443
      
22
%
                                 
Total indirect operating expenses
  
$
10,228
    
$
9,822
    
$
406
      
4
%

   
Six Months Ended
  
   
January 27,
2018
    
January 28,
2017
    
$
Change
    
%
Change
  
   
($ in thousands)
  
                         
EEI and subsidiaries located in the U.S.
  
$
16,056
    
$
16,010
    
$
46
      
---
%
                                 
Subsidiaries located in South America:
                                
Peru
    
1,660
      
1,747
      
(87
)
    
(5
)%
Chile
    
1,473
      
1,115
      
358
      
32
%
Brazil
    
1,507
      
1,118
      
389
      
35
%
Other
    
41
      
79
      
(38
)
    
---
(1)
     
4,681
      
4,059
      
622
      
15
%
                                 
Total indirect operating expenses
  
$
20,737
    
$
20,069
    
$
668
      
3
%

(1)
Percent change is not relevant because of the relatively immaterial amounts for all periods presented.
 
Page 24 of 29
Subsidiaries Located in the U.S.

Indirect operating expenses in our U.S operations remained relatively unchanged during the second quarter and first half of fiscal year 2018, as compared with the same periods last year.  Business development related expenses were significantly higher throughout the first half of fiscal year 2018 due to focus on specific expanded marketing initiatives and proposal activity.  Higher business development related expenses were partially offset by:
·
Lower bad debt expenses, primarily due to reversal of specific reserves that had been recorded during the prior fiscal year; and
·
Lower cash bonus expense resulting from lower 2018 year-to-date earnings.

Subsidiaries Located in South America

Indirect operating expenses in our South American operations were 22% and 15% higher during the second quarter and first half of fiscal year 2018, respectively, as compared with the same periods last year.  Business development related expenses were significantly higher during fiscal year 2018, mainly during the second quarter, as improved economic conditions within our South American markets have led to increased investment in environmental projects and increased opportunities for our subsidiaries to obtain new work.  We also recorded higher cash bonus expense accruals during the first half of fiscal year 2018 due to improved earnings.  Higher business development and bonus expenses were partially offset by lower bad debt and staff severance expenses, which reflect improved economic conditions and expanded workforces necessary to provide services for new projects.

Income Taxes

Our estimated effective tax rate was 93.7% and 67.7% for the six months ended January 27, 2018 and January 28, 2017, respectively.  The effective tax rate may be impacted by changes in tax rates and other tax regulations in U.S. and foreign jurisdictions where the Company operates, changes in the mix of forecasted income from those jurisdictions, or by significant unusual or infrequent items that could change assumptions used in the calculation of the income tax provision.

The Tax Act lowered the Company’s statutory federal tax rate from 34% (effective through December 31, 2017) to 21% (effective January 1, 2018).  As the Company has a July 31 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in an average statutory federal tax rate of approximately 26% for the fiscal year ending July 31, 2018, and 21% for subsequent fiscal years.  Due to the Company’s minimal loss from U.S. operations, the reduction in the statutory federal tax rate did not have a material impact on the income tax provision related to pre-tax income during the three months ended January 27, 2018.

The reduction of the statutory federal tax rate also resulted in revaluation of the Company’s U.S. deferred tax assets and liabilities.  Revaluation is based on the tax rates at which the deferred tax assets and liabilities are expected to reverse in the future, which is generally 21%.  The Company recorded an estimated net deferred tax expense of $0.3 million during the three months ended January 27, 2018 as a result of revaluation of deferred tax assets and liabilities.

The Tax Act includes provisions for a territorial federal tax system that:
·
imposes a U.S. federal tax on historical cumulative earnings of foreign subsidiaries, replacing the previous system of taxing the earnings of foreign subsidiaries only as they were repatriated to the U.S. in the form of dividends;
·
eliminates or reduces the ability to utilize certain foreign tax credits that existed prior to enactment of the Tax Act; and
·
provides for a deduction for dividends received from foreign subsidiaries.

The Company recorded net estimated federal tax expense of $0.1 million related to these territorial tax provisions during the three months ended January 27, 2018, representing the net of a one-time transition tax of $0.3 million on cumulative earnings of foreign subsidiaries, offset by $0.2 million of benefit from outstanding unpaid dividends from a foreign subsidiary.  As of January 27, 2018, the Company recorded the $0.3 million transition tax as a non-current income tax liability, which management expects to pay over an eight year period allowed in the Tax Act.

There are other transitional impacts of the Tax Act, certain of which were estimated to have an immaterial impact on our income tax provision for the three and six months ended January 27, 2018, and certain of which will become effective during future fiscal years.

The changes included in the Tax Act are broad and complex.  The tax provision recorded for the three and six months ended January 27, 2018 reflects management’s estimates of the Tax Act’s impacts.  The Securities and Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize and record the related tax impacts. Management currently anticipates finalizing and recording any resulting adjustments by the end of the Company’s fiscal year ending July 31, 2018.  The final transition impacts of the Tax Act may differ from these estimates due to, among other things, changes in interpretations of the Tax Act, subsequent legislative action to further revise the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to our estimates utilized to calculate the transition impacts.
 
Page 25 of 29
The effective tax rate for the six months ended January 28, 2017 includes the tax impact of the Company’s portion of dividends declared by its majority owned subsidiary in Chile and reversal of a deferred tax asset previously maintained by the Company’s majority owned subsidiary in Peru.

Critical Accounting Policies and Use of Estimates

The Company's condensed consolidated financial statements presented in Item 1 of this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts and contract adjustments, income taxes, impairment of long-lived assets and contingencies.  Management bases its estimates and judgments on historical experience and other factors that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2017 for a description of our critical accounting policies.

Inflation

Inflation did not have a material impact on our business during the six months ended January 27, 2018 or January 28, 2017 because a significant amount of our contracts are either cost based or contain commercial rates for services that are adjusted annually.

Off-Balance Sheet Arrangements

We had outstanding letters of credit drawn under our lines of credit to support operations of $1.9 million and $2.5 million at January 27, 2018 and July 31, 2017, respectively.  Other than these letters of credit, we did not have any off-balance sheet arrangements as of January 27, 2018 or July 31, 2017.
 
Item 4.
Controls and Procedures

Disclosure Controls and Procedures
 
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2017, management concluded that the Company’s internal control over financial reporting was not effective as of July 31, 2017 due to the fact that there were material weaknesses. in the Company’s internal control over financial reporting.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements would not be prevented or detected on a timely basis.

Specifically, management identified control deficiencies related to the Company’s accounting for income taxes and management’s review controls over the financial statement close process, particularly controls related to certain non-routine and estimation processes (i.e., the goodwill impairment assessment model) and review controls related to the Company’s intercompany and consolidation process.  Although the deficiencies did not result in a material misstatement of the Company’s financial statements for any of the periods presented in this Form 10-K, management concluded that there was a reasonable possibility that, if any material misstatement had occurred, it would not have been prevented or detected on a timely basis.
 
Page 26 of 29
Management has developed a remediation plan to address the material weaknesses noted above.  Specifically, the following controls have been established or will be established during the fiscal year ending July 31, 2018:
·
Enhancing management review controls over the financial statement close process to ensure appropriate cutoff for purposes of recording revenues and expenses, and appropriate review of the consolidation process, including intercompany elimination entries;
·
Expanding the roles of third-party tax experts for preparation and review of income tax provisions, and development of specific procedures for management to monitor and review the work of third-party tax experts; and
·
Developing a process for periodic review of specific key factors and assumptions utilized in the goodwill impairment assessment model to identify changes that potentially could result in goodwill impairment.

Management has developed a detailed plan and timetable for the implementation of the foregoing remediation efforts.  Under the direction of the Audit Committee, management will monitor the implementation plan and continue to review and make necessary changes to the plan to improve the overall design of the Company’s internal control environment.

As of the end of the period covered by this report, our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Exchange Act.  Based upon this evaluation, our chief executive officer and our chief financial officer concluded that, excluding the control deficiencies that resulted in the material weakness described above, our disclosure controls and procedures were: (1) designed to ensure that material information relating to our Company is accumulated and made known to our management, including our chief executive officer and chief financial officer, in a timely manner, particularly during the period in which this report was being prepared; and (2) effective, in that they provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a Company have been detected.
 
Internal Controls

Other than certain controls added or improved to address the material weakness described above, no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended January 27, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Page 27 of 29
 PART II — OTHER INFORMATION

Item 1.
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.  The Company’s legal proceedings are disclosed in Note 15 of the condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

Item 2.
Changes in Securities and Use of Proceeds

(e)  Purchased Equity Securities.  In August 2010, the Company’s Board of Directors approved a 200,000 share repurchase program.  The following table summarizes the Company’s purchases of its common stock during the six months ended January 27, 2018 under this share repurchase program:
 
Fiscal Year 2018
Reporting Month
 
Total Number
of Shares
Purchased
 
Average
Price Paid 
Per Share
 
Total Number of
Shares Purchased 
as Part of 
Publicly Announced
Plans or Programs
 
Maximum Number
of Shares That May
Yet Be Purchased
Under the Plans or
Programs
                 
August 2017
  
---
  
---
  
---
  
77,082
September 2017
  
---
  
---
  
---
  
77,082
October 2017
  
---
  
---
  
---
  
77,082
November 2017
  
---
  
---
  
---
  
77,082
December 2017
  
---
   ---  
---
  
77,082
January 2018
  
---
  
---
  
---
  
77,082

Item 3.
Defaults Upon Senior Securities
 
None.

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

None.

Item 5.
Other Information
 
None.

Item 6.
Exhibits and Reports on Form 8-K
 
(a)
31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
32.1 Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
32.2 Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
(b)
The Company filed a Current Report on Form 8-K on October 18, 2017 to announce Mr. H. John Mye III’s intention to retire from his position as Chief Financial Officer of Ecology and Environment, Inc., effective six months from the announcement date.
 
Page 28 of 29
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Ecology and Environment, Inc.
 
 
 
Date:     March 13, 2018
By:
/s/ H. John Mye III
 
 
H. John Mye III
 
 
Chief Financial Officer and Treasurer
Principal Financial and Accounting Officer
 
 
Page 29 of 29