UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

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

For the fiscal year ended July 31, 2015

☐	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)

 

 

716-684-8060

(Registrant's telephone number, including area code)

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

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

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

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined by Rule 12b-2 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 ☑

 

---

 

The aggregate market value of the Class A Common Stock held by non-affiliates as of January 31, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter) was $26,905,484.  This amount is based on the closing price of the registrant’s Class A Common Stock on the National Association of Securities Dealers Automated Quotations (NASDAQ) Stock Market for that date.  Shares of Class A Common Stock held by the executive officers and directors of the registrant are not included in this computation.

As of September 30, 2015, 2,981,768 shares of the registrant's Class A Common Stock, $.01 par value (the "Class A Common Stock") were outstanding, and 1,304,911 shares of the registrant's Class B Common Stock, $.01 par value (the "Class B Common Stock") were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

 

Table of Contents

 

PART 1

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

Organization and Background

EEI was incorporated in February 1970 as a global broad-based environmental consulting firm 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, EEI has direct and indirect ownership in 18 wholly-owned and majority-owned operating subsidiaries in 11 countries.  Our 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.  We have completed thousands of projects for a wide variety of clients including some of the most iconic, high-profile projects in the world.  Our revenues originate from federal, state and local governments, domestic private clients, and private and governmental international clients.

Fiscal Year 2015 Operations Overview

Consolidated net income attributable to Ecology and Environment, Inc. increased to $3.4 million for the fiscal year ended July 31, 2015 from a loss of $1.4 million for the prior fiscal year.  Slightly lower net revenues for the current year were more than offset by significantly lower operating costs.

Net revenue from U.S. operations increased $4.6 million (6%) in fiscal year 2015, as compared with the prior year.    Higher Department of Defense and energy sector project activity were partially offset by lower government and mining sector activity, and by a strategic decision to wind down existing asbestos remediation contracts and forego any new asbestos business.  Net revenue from foreign operations decreased $6.2 million (14%) during the current year, as higher energy sector project activity in Peru was more than offset by lower energy and mining sector activity elsewhere in South America.

Total operating expenses (excluding subcontract costs) decreased $12.3 million (11%) during fiscal year 2015, as compared with the prior year.  As a result of ongoing initiatives to review the Company’s organizational and cost infrastructure which began in fiscal year 2013, management has successfully improved the Company’s operating and cost efficiency and effectiveness.  In addition, the Company reported significantly lower depreciation and amortization expense during fiscal year 2015 as a result of a successful conversion to its new accounting system effective August 1, 2014.

Refer to Item 7 of this Annual Report for additional commentary regarding the Company’s liquidity and results of operations.

Operating Expense Management

Total indirect operating expenses decreased 17% during fiscal year 2015, compared with the previous year, due to managed cost reductions in our U.S. operations and in various foreign subsidiaries.  During fiscal years 2015, 2014 and 2013, we critically reviewed technical and indirect staffing levels, other expenses necessary to support current project work levels and key administrative processes, particularly in our domestic subsidiaries and operations.  As a result of this review, the number of full time employees in various technical and indirect departments of EEI and its U.S. subsidiaries decreased by a combined 6% and 16% during fiscal years 2015 and 2014, respectively, while the number of full time employees in foreign operations declined 13% and 8% during fiscal years 2015 and 2014, respectively.  Utilization of contracted services was also reviewed and reduced at EEI.  Management continues to critically evaluate its organizational and cost structure to identify ways to operate more efficiently and cost effectively.

 

Conversion of Operating Software

In November 2013, management decided to abandon the Company’s previous operating and financial software system and migrate to new system software.  The Company acquired and developed new software during fiscal year 2014, and began utilizing the new software effective August 1, 2014 for its U.S. operations.  The Company continued to utilize the previous software system through July 31, 2014, at which time the previous system was abandoned and completely amortized.  Total software amortization expense decreased to $0.1 million during fiscal year 2015 from $2.6 million for the prior year.

Brazilian Operations

In recent months, our Brazilian operations have been adversely affected by an economic downturn and weakening of the Brazilian Real in relation to the U.S. dollar.  Fiscal year 2015 net revenues from our Brazilian operations declined $4.8 million (40%) from the prior year.  Reductions in direct and indirect operating expenses partially offset the reduction in revenues.

The total scope and duration of the downturn and the ultimate impact that it will have on our Brazilian operations is uncertain.  EEI management is monitoring economic conditions and the business climate in Brazil, and is working closely with management in Brazil to develop a sound strategy to minimize adverse impacts on operations, including plans to further reduce operating costs while achieving improved operating efficiencies.

Sale of Subsidiary

In August 2010, EEI acquired a 60% ownership interest in a newly formed entity, ECSI, LLC (“ECSI”), a Lexington, Kentucky based engineering and environmental consulting services company.  EEI paid $1.0 million for its ownership interest, and the noncontrolling interests contributed cash, other assets and liabilities for their 40% ownership interest. ECSI recorded $0.1 million of goodwill on the transaction date.  ECSI’s total assets were $1.1 million and $1.6 million at July 31, 2015 and 2014, respectively.

In October 2015, EEI sold its 60% interest in ECSI to ECSI’s minority shareholders for $0.3 million.  EEI recognized a loss on its investment in ECSI of approximately $0.4 million in administrative and indirect operating expenses during the fourth quarter of fiscal year 2015.  The sale of ECSI is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows during reporting periods subsequent to July 31, 2015.

Environmental Consulting Services Offered

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

Government START Contract

We provide support services to the United States Environmental Protection Agency (the “EPA”) for response and site assessment activities related to the release and threat of release of oil, petroleum products, hazardous substances, weapons of mass destruction or pollutants or contaminants that pose an actual or potential threat to human health or welfare, or to the environment.

In December 2005, the United States Environmental Protection Agency (the “EPA”) awarded us a contract known as START III to provide continuing support to EPA Region 10, which covers the four state territory of Alaska, Idaho, Washington and Oregon.  This was a combination time and materials/cost plus contract with a base term of three years plus options for an additional four years which were exercised through fiscal year 2013.  In July 2013, we were awarded a renewal of this contract by the EPA, known as START IV, for a base term of three years and two two-year option periods, for a total potential contract term of seven years.

 

This contract contains termination provisions under which the EPA may, without penalty, terminate the contract during the contract term upon written notice to us.  In the event of termination, we would be paid only termination costs in accordance with the contract.  We have never had a contract terminated by the EPA during the contract term.

 

Government Task Order Contracts

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

Energy

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

·

Electric Transmission

Our comprehensive approach to transmission project siting and permitting has developed from experience on over 15,000 miles of transmission line, including underwater and underground DC lines, urban rebuilds, and renewable generation interconnections.  We prepare feasibility studies, evaluate alternative routes, analyze environmental impacts, and acquire needed certificates, approvals, and permits for electric transmission facilities worldwide to bring renewable energy from its source to regional population centers as well as to upgrade aging infrastructure.  Recognizing the increasing need for proactive public involvement, we work closely with our clients to effectively engage stakeholders and identify environmental constraints, community concerns, and permitting requirements early.

·

Pipelines

To date, we have worked on more than 200 projects in the pipeline industry involving more than 50,000 miles of pipeline systems.  Our extensive experience includes route selection, evaluation of alternatives, field surveys, regulatory compliance and permit support, preparation of environmental monitoring and restoration plans, and environmental inspection, including development of quality assurance specifications.

·

Offshore Energy

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

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

 

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

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

·

Wind Energy

We have extensive experience providing strategic environmental consulting services to wind energy developers and are a consulting member of the American Wind Energy Association (“AWEA”).  Our nationwide team has collectively worked on more than 450 wind energy projects in 38 states, helping clients successfully develop wind projects capable of producing more than 6,340 MWs of environmentally safe, renewable electricity.  Our direct experience with wind energy development, from initial siting studies through construction and mitigation monitoring of completed wind energy projects, allows us to anticipate potential project delays and resolve issues to keep client projects on schedule.

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

·

Solar Energy

We have assisted solar developers to permit and build projects powering more than 4,000 MWs of clean, renewable energy in 15 states.  We support all phases of solar energy development, including critical issues analyses, feasibility and siting studies, permitting and due diligence audits, environmental impact assessments, project permitting and construction monitoring and operational compliance. 

·

Nuclear Energy

With continued focus on reduced carbon emissions by federal and state government agencies, nuclear power continues to be an efficient alternative energy source.  We assist our clients through the environmental hurdles of the licensing process by performing siting studies and environmental investigations and preparing environmental reports.

Natural Resource Management and Restoration

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

 

Sustainability, Resiliency, and Climate Adaptation

E & E planning teams are working with communities around the world to develop and implement sustainable approaches for projects as varied as neighborhood-scale urban redevelopment, large-scale green city planning and design, and regional sustainability plans.   We help organizations and government agencies to become more resilient by assisting them to plan for, respond to, and recover from extreme disruptive events that can result in a wide range of cascading emergencies, with emphasis on building more resilient communities.

For example, we led the preparation of five community reconstruction zone plans developed as part of the New York Rising Community Reconstruction Program to help communities recently affected by extreme weather events build more resilient communities to better withstand storms of the future. E & E also worked with the Colorado Resiliency and Recovery Office to prepare the Colorado Resiliency Framework, the state’s first resiliency plan.  The plan represents Colorado’s long-term investment and commitment to a more resilient future following recent natural disasters that have affected the state.  The framework’s development included engaging thousands of local stakeholders, identifying and analyzing risks and vulnerabilities from hazards and changing conditions, and identifying action items for state implementation.

Water Resources

E & E’s water resource management practice includes work in water resources engineering, water studies and planning, and environmental restoration. We have experience working in the world’s most important water systems, including the Florida Everglades, Louisiana Coastline, Great Lakes, Hudson River, Chesapeake Bay, Puget Sound, Amazon River Basin, Yangtze River Basin, and many others. Our engineered solutions take into account a myriad of related needs such as stakeholder concerns, water rights, permitting requirements, ecosystem sustainment, public health, water supply, water quality, and economic development issues.

Planning

·

Environmental Planning and Assessment

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

·

Military Master Planning and Land Use Compatibility Studies

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

 

Hazardous and Radioactive Material Services

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

International

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

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

Regulatory Compliance

The United States Congress has enacted numerous environmental laws governing a wide range of topics. Similarly, most state legislatures have enacted a series of laws to prevent and correct environmental problems.  These laws and their implementing regulations help to create the demand for the multidisciplinary consulting services we offer. Some of the principal federal legislation and corresponding regulatory programs that affect our business are described below:

·

The National Environmental Policy Act (“NEPA”)

 

NEPA generally requires that a detailed environmental impact statement (“EIS”) be prepared for every major federal action significantly affecting the quality of the human environment.  With limited exceptions, all federal agencies are subject to NEPA. Most states have EIS requirements similar to NEPA.  We frequently engage in NEPA related projects (or state equivalent) for both public and private clients. 

 

·

The Comprehensive Environmental Response, Compensation, And Liability Act Of 1980, As Amended (“CERCLA,” “Superfund” or the “Superfund Act”)

CERCLA is a remedial statute which generally authorizes the federal government to order responsible parties to study and clean up inactive hazardous substance disposal sites, or, to itself undertake and fund such activities.  This legislation has four basic provisions: (i) creation of an information gathering and analysis program; (ii) grant of federal authority to respond to emergencies associated with contamination by hazardous substances, and to clean up sites contaminated with hazardous substances; (iii) imposition of joint, several, and strict liability on persons connected with the treatment or disposal of hazardous substances which results in a release or threatened release into the environment; and (iv) creation of a federally managed trust fund to pay for the clean-up and restoration of sites contaminated with hazardous substances when voluntary clean-up by responsible parties cannot be accomplished.  EEI provides a full range of assessment and remediation services that alleviate contamination related to hazardous materials, including radioactive materials.

·

The Resource Conservation and Recovery Act Of 1976 (“RCRA”)

RCRA generally provides “cradle to grave” coverage of hazardous wastes.  It seeks to achieve this goal by imposing performance, testing and record keeping requirements on persons who generate, transport, treat, store, or dispose of hazardous wastes.  We assist hazardous waste generators in the storage, transportation and disposal of wastes; prepare permit applications and engineering designs for treatment, storage and disposal facilities; design and oversee underground storage tank installations and removals; perform corrective measure studies and remedial oversight at RCRA regulated facilities; and perform RCRA compliance audits. 

·

Clean Air Act (“CAA”)

The CAA is the comprehensive federal law that regulates air emissions from stationary and mobile sources. Among other things, this law authorizes EPA to establish National Ambient Air Quality Standards (“NAAQS”) to protect public health and public welfare and to regulate emissions of hazardous air pollutants. One of the goals of the CAA was to set and achieve NAAQS in every state by 1975 in order to address the public health and welfare risks posed by certain widespread air pollutants.  The CAA was amended in 1977 and 1990 primarily to set new goals (dates) for achieving attainment of NAAQS since many areas of the country had failed to meet the deadlines.   The setting of these pollutant standards was coupled with directing the states to develop state implementation plans (“SIPs”) applicable to appropriate industrial sources in the state, in order to achieve these standards.

We help clients to estimate emissions, develop air permitting strategies, and prepare permit applications.  We also prepare the technical studies and engineering documents (e.g., emissions and greenhouse gas estimates, air modeling, risk analysis, design drawings) necessary to support permit applications.

·

Safe Drinking Water Act of 1996 (“SDWA”) And Clean Water Act (“CWA”)

The SDWA and regulatory changes under the CWA work together in order to ensure that the public is provided with safe drinking and recreational waters by utilizing watershed approaches and applying similar principles (Total Maximum Daily Load, National Pollution Discharge Elimination System, Source Water Assessment Program, Storm Water Program).  Thus, they supplement and help one another more effectively reach each other's goals.  We assist public and private clients in developing and establishing pollution prevention programs, assisting clients in monitoring ground, waste and storm water systems, and helping clients with water permitting and compliance issues. 

·

Endangered Species Act, Marine Mammal Protection Act, Migratory Bird Treaty Act and Golden Eagle Protection Acts

 

·

Other

Our operations are also influenced by other federal, state, and international laws, treaties, conventions, and regulations protecting the environment.  In the U.S. market, such regulatory rules and provisions include the Atomic Energy Act (“AEA”) and the Oil Pollution Control Act (“OPA”).  Examples of services provided by us as a result of these laws include the development of spill prevention control and emergency prevention procedures, as well as countermeasure plans for various facilities potentially affecting human health and the environment. Related laws such as the Occupational Safety and Health Act ("OSHA"), which regulates exposures of employees to toxic chemicals and other physical agents in the workplace, also have a significant impact on our operations. An example is the process safety regulation issued by OSHA which requires safety and hazard analysis and accidental release contingency planning activity to be performed if certain chemicals are used in the work place. As another example, the Coastal Zone Management Act requires the protection of U.S. coastal zones from environmentally harmful overdevelopment.  E & E helps clients to design projects to comply with plans and requirements.

Contract Backlog

At any point in time, we have a backlog of uncompleted projects and outstanding indefinite task order contracts that are expected to provide future revenue over a period of 1 to 7 years.  These projects include a substantial amount of work to be performed under contracts which contain termination provisions that may be exercised without penalty at any time by our clients upon written notice to us.  The likelihood of obtaining the full value under these contracts cannot be determined at this time.

The backlog of uncompleted projects and maximum potential revenues from indefinite task order contracts are summarized in the following table.

 

Business Development

Our business development activities take place everywhere we work.  Although we have a dedicated business development group that includes sales, marketing and communications professionals, the technical staff is also active in identifying opportunities and developing business relationships.  Specific business development activities include:

 

·

Meeting with existing and potential clients to understand their needs and anticipate new markets;

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Participating in professional organizations and often speaking at seminars and conferences to enhance our professional knowledge and relationships;

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Attending and participating in trade shows and professional seminars relating to our business;

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Sponsoring a popular seminar series that targets specific markets;

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Monitoring numerous environmental, business and other publications to identify potential clients and their needs;

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Close tracking of government contract procurements;

 

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Monitoring government regulations, environmental and social trends, and other events that may affect our clients and thereby generate new business;

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Responding to requests for proposals, bids, and qualifications, and develop proposals to win new or repeat business; and

·

Providing specialized business development training to our staff.

Competition

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

Management Team and Employees

Our management and staff is comprised of individuals with advanced degrees representing scientific and engineering disciplines working together in multidisciplinary teams to provide innovative solutions.  The members of our executive management team have extensive experience in the environmental consulting industry.  The professional backgrounds of our executive management team are described in Item 10 of this Annual Report.

As of July 31, 2015, including all of our subsidiaries, we had 952 employees (778 full-time) in all of our offices, which included 598 employees (451 full-time) in domestic offices and 354 employees (327 full-time) in foreign offices.  The majority of our employees hold bachelor's and/or advanced degrees in such areas as chemical, civil, mechanical, sanitary, soil, structural and transportation engineering, biology, geology, hydrogeology, ecology, urban and regional planning and oceanography.  The employees at our majority-owned subsidiary in Brazil (100 full time employees as of July 31, 2015) are represented by a labor organization.  We believe that our relationship with the labor organization in Brazil and with all of our employees is good.

Corporate Governance and Security Exchange Rules

Our shares of Class A Common Stock are listed on the National Association of Securities Dealers Automated Quotations (NASDAQ) Stock Market.  NASDAQ requires all of its listing companies to be in compliance with NASDAQ’s standards of corporate governance set forth in the NASDAQ Marketplace Rules (NASDAQ CG Rules).  We have certified to the NASDAQ that we are in compliance with the NASDAQ CG Rules except for those NASDAQ CG Rules relating to the Director Nominations Process, the Compensation of Officers and Board Compensation.   For these items, we relied upon the “controlled company” exception found in the NASDAQ CG Rules.  A “controlled company” is a listing company where more than 50 percent of the voting power of the listing company is in the control of a group.  As of July 31, 2015, a group that holds more than 50 percent of the voting power of our Class A Common Stock, consisting of Messrs. Frank B. Silvestro, Ronald L. Frank, Gerald A. Strobel, Gerard A. Gallagher and Michael C. Gross and members of their families, does exist.  Therefore, we are a “controlled company” for purposes of the NASDAQ CG Rules.

The Board of Directors will consider nominees for Directors recommended by shareholders.  Shareholders wishing to recommend a director candidate for consideration by the Board of Directors can do so by writing to the Secretary of Ecology and Environment, Inc., 368 Pleasant View Drive, Lancaster, New York, 14086; giving the candidate’s name, biographical data and qualifications.  Any such notice of recommendation should be accompanied by a current resume of the individual and a written statement from the individual of his or her consent to be named as a candidate and, if nominated and elected, to serve as a director.  Nominations must be received at least 60 days prior to the annual shareholders meeting.

The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and controller, as well as all other employees and the directors of the Company.  The code of ethics, which the Company calls its Code of Business Conduct and Ethics, was filed as an exhibit to the Company’s annual report on Form 10-K for the fiscal year ended July 31, 2004 and is posted on the Company's website at www.ene.com.  If the Company makes any substantive amendments to, or grants a waiver (including an implicit waiver) from, a provision of its code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, and that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, the Company will disclose the nature of such amendment or waiver in a current report on Form 8-K.

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

Changes in environmental laws and regulations could reduce demand for our services.

Most of our business is driven by laws and regulations related to the protection of the environment. Any relaxation or repeal of these laws, or changes in governmental policies regarding the funding or enforcement of these laws, would have an adverse impact on our revenues.  Also, reduced spending by governments may increase competition within our industry which may directly affect future revenue and profits.

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

We must comply with federal, state, and foreign laws relating to the procurement and administration of government contracts.  Such laws include the Federal Acquisition Regulation (FAR), the Truth in Negotiations Act (TINA), the Cost Accounting Standards (CAS), and the Service Contract Act (SCA). These laws impact how we do business with government clients and can increase the cost of doing business. Government agencies such as EPA and the Defense Contract Audit Agency (DCAA), as well as numerous state agencies routinely audit government contractors and their performance under specific contracts to determine if a contractor’s cost structure is compliant with applicable laws and regulations.  They may question the incurrence of certain costs based on the FAR and CAS and disallow those costs on their contracts.  These audits may occur several years after payment for services has been received.  Historically, we have been able to successfully defend against the disallowance of any significant costs.  However, there is no assurance that future audits will not result in the material disallowances for costs incurred in the future. Such material disallowances could negatively affect revenue, profits and cash flow.

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

Revenues from all municipal, state and federal government contracts represented 27%, 24% and 29% of total revenues for fiscal years 2015, 2014 and 2013, respectively.  Inability to win or renew government contracts could adversely affect our operations and significantly reduce our revenue and profits.

Government contracts are typically awarded through a highly regulated procurement process.  Some government contracts are awarded to multiple competitors, causing increased competition and downward pricing pressure.  If we cannot reduce or control costs associated with these contracts, we may not be able to bid competitively, or unexpected losses on these contracts may occur.

 

Our clients may be acquired by other entities, or may elect to sell their interest in ongoing projects to other entities.  These transactions would subject us to increased risk of contract terminations.

 

If our clients sell their interest in ongoing projects or are acquired by other entities, we may not be able to control or influence decisions made by the acquiring company regarding the ongoing contractual relationships of our client, including decisions to terminate existing contracts or to award future contracts.  Such decisions by acquiring companies to terminate existing contracts, or to exclude us when awarding future contracts, could have an adverse impact on our results of operations.

Current economic uncertainty could affect our public and private sector work.

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

International operations are subject to a number of risks.

Revenues from international operations represented 31%, 36%, and 32% of total revenues for fiscal years 2015, 2014 and 2013, respectively.  International operations are subject to a number of risks, including:

·

greater counterparty risk, leading to longer collection cycles and potentially uncollectible accounts;

·

currency fluctuations;

·

logistical and communication challenges;

·

exposure to liability and sanctions under the Foreign Corrupt Practices Act;

·

exposure to liability and sanctions under laws and regulations established by foreign jurisdictions in which we conduct business;

·

lack of developed legal systems to enforce our contractual rights;

·

general economic and political conditions in foreign markets;

·

civil disturbance, unrest or violence; and

·

difficulties in staffing international operations with appropriately credentialed and trained personnel.

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

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

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

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

 

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

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

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

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

Actual results could differ from the estimates and assumptions used to prepare financial statements, which may reduce or eliminate profits.

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions as of the date of the financial statements, which affect the reported values of assets and liabilities and revenues and expenses and disclosures of contingent assets and liabilities.  Areas requiring significant estimates by management include:

·

the application of the percentage of completion method of accounting and revenue recognition on contracts

·

provisions for uncollectible receivables and contract adjustments

·

provisions for income taxes and related valuation reserves

·

accruals for estimated liabilities, including litigation reserves

·

accruals for uncertain tax positions

·

evaluation of the impairment of goodwill and other long-lived assets

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

We provide professional and technical services that depend on our ability to attract, retain and train our professional employees to conduct our business and perform our obligations to ensure success.  It may be difficult to attract and retain qualified expertise within timeframes demanded by clients.  Senior managements’ experience is essential to the success of any company and our ability to retain such talent is crucial to our profitability.  Further, the loss of key management personnel could adversely affect our ability to develop and pursue our business strategies.

 

Failure to complete a project timely or failure to meet a required performance standard on a project could cause us to incur a loss which may affect overall profitability.

Completion dates and performance standards may be important requirements to a client on a given project.  If we are unable to complete a project within specified deadlines or fail to meet performance criteria set forth by a client, we may incur additional costs or the client may hold us responsible for costs they incur to rectify the problem.  The uncertainty involved in the timing of certain projects could also negatively affect our staff utilization, causing a drop in efficiency and reduced profits.

Failure to effectively manage our information technology environment could be detrimental to our operations.

 

Failure to comply with tax accounting and reporting requirements in all of our markets could have a detrimental impact on our business decision-making and on our financial results.

We operate in numerous tax jurisdictions within the United States and in foreign countries.  Accurate tax accounting and reporting for all jurisdictions is essential for us to continue to operate in our markets.  In addition, understanding the tax impacts of various financial transactions is also essential for us to make sound and informed business decisions.  Therefore, failure to identify, understand, interpret and comply with tax requirements could result in uninformed business decisions and financial reporting errors.

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

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

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

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

We are subject to heightened risk of natural disasters in certain of our markets.  Catastrophic natural disasters in these areas could have a detrimental impact on our operations.

We have offices and projects in coastal regions of the United States and foreign countries where there is heightened risk of natural disasters such as earthquakes and hurricanes.  In addition, we have offices and projects in inland areas of the United States where there is heightened risk of flooding and tornados.  If they occur, catastrophic natural disasters could have a significant detrimental impact on our operations that cannot be anticipated or planned for.  Therefore, if they occur, catastrophic natural disasters could result in reduced revenues, higher expenses, loss of Company assets and loss of key staff and other critical resources for extended periods of time.

None to report.

We own our corporate headquarters (60,000 square feet) in Lancaster, New York, a suburb of Buffalo.  The corporate headquarters building also serves as our Buffalo regional office.  We also lease thirty-six (36) regional offices in the United States and eleven (11) offices in foreign locations.  We also own a warehouse and office facility (35,000 square feet) in Lancaster, New York.

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 concerns the taking and collecting species of wild animal specimens without authorization by the competent authority and imposes a fine of 520,000 Reais, which has a value of approximately $0.2 million at July 31, 2015 and 2014.  No claim has been made against EEI.  The Institute has also filed Notices of Infraction against four employees of E&E Brasil alleging the same claims and has imposed fines against those individuals that, in the aggregate, are equal to the fine imposed against E&E Brasil.  E&E Brasil has filed administrative responses with the Institute for itself and its employees that: (a) 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.  To date, E&E Brasil has attended one meeting where depositions were taken; the claim of violations against one of the four employees was dismissed; two of the four employees have fines assessed against them, which are being appealed; and the remaining one employee and E&E Brasil are awaiting agency determinations.  If fines are assessed against the remaining one employee and/or E&E Brasil, appeals will be filed.  Management believes that these administrative proceedings will not have a material adverse impact on the operations of the Company.

 

Contract Termination Provisions

Certain contracts contain termination provisions under which the customer may, without penalty, terminate the contracts upon written notice to the Company.  In the event of termination, the Company would be paid only termination costs in accordance with the particular contract.  Generally, termination costs include unpaid costs incurred to date, earned fees and any additional costs directly allocable to the termination.  The Company did not experience early termination of any material contracts during fiscal years 2015 or 2014.

Not Applicable.

 

PART II

Principal Market for EEI Common Stock

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

High and Low Stock Prices for Class A Common Stock

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

Holders of Common Stock

As of September 30, 2015, 2,981,768 shares of the Company's Class A Common Stock were outstanding and there were 309 holders of record of the Company's Class A Common Stock.  We estimate that the Company has a significantly greater number of Class A Common Stock shareholders because a substantial number of the Company's shares are held in street name.

As of September 30, 2015, 1,304,911 shares of the Company's Class B Common Stock were outstanding and there were 56 holders of record of the Class B Common Stock.

Dividends

Including the fiscal year ended July 31, 2015, the Company has declared semi-annual dividends for 29 consecutive years.  The Company declared dividends totaling $0.48 per common share during the fiscal years ended July 31, 2015, 2014 and 2013.

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

 

Equity Compensation Plan Information

Equity compensation plan information as of July 31, 2015 is summarized in the following table.

Refer to Note 13 of the Consolidated Financial Statements, included in Item 8 of this Annual Report, for additional information regarding the Company’s stock award plan.

Purchased Equity Securities

In August 2010, the Company’s Board of Directors approved a 200,000 share repurchase program.  The following table summarizes the Company's purchases of its common stock during the fiscal year ended July 31, 2015 under this share repurchase program.

 

Liquidity and Capital Resources

Cash and cash equivalents increased $1.8 million during fiscal year 2015.  Excluding the payment of $2.1 million of cash dividends, which were approved on a discretionary basis by the Company’s Board of Directors, cash generated from operations exceeded cash required to fund investing and financing activities by $4.2 million during the year.  Fiscal year 2015 expenditures for property, building and equipment and for net repayments of lines of credit declined $1.2 million and $4.1million from the prior year, respectively.

Unsecured lines of credit of $32.8 million and $34.4 million were available for working capital and letters of credit at July 31, 2015 and 2014, respectively.  Total amounts used under lines of credit were $1.8 million and $3.5 million at July 31, 2015 and 2014, respectively.  Contractual interest rates ranged from 2.50% to 15.60% at July 31, 2015.  Our lenders have reaffirmed the lines of credit within the past twelve months.

During fiscal year 2014, the Company generated a net operating loss carryforward of $1.7 million for income tax purposes, which was fully utilized through reductions in federal income tax payments during fiscal year 2015.

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

Our foreign subsidiaries typically generate adequate cash flow to fund their operations.  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 Board of Directors of the respective entities.  We would be required to accrue and pay taxes on any amounts repatriated to the U.S. from foreign subsidiaries.

In recent months, our Brazilian subsidiary has been adversely affected by an economic downturn and weakening of the Brazilian Real in relation to the U.S. dollar.  The total scope and duration of the downturn and the ultimate impact that it will have on our Brazilian operations are uncertain.  In the event that our Brazilian subsidiary is unable to generate adequate cash flow to fund its operations, additional funding from EEI, other subsidiaries or lending institutions will be considered.

 

In December 2014, a South American subsidiary of Walsh Environmental Scientists & Engineers, LLC (“Walsh”) declared total dividends to its shareholders of $2.0 million, of which $1.5 million was payable to Walsh.  After local taxes, approximately $1.4 million of cash was repatriated to the U.S. and made available for the Company’s U.S. operations during fiscal year 2015 as a result of this dividend.

Contract Receivables Concentration Risk

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

Combined contract receivables related to projects in the Middle East, Africa and Asia represented 11% and 14% of total contract receivables at July 31, 2015 and 2014, respectively, while the combined allowance for doubtful accounts and contract adjustments related to these projects represented 89% and 74%, respectively, of the total allowance for doubtful accounts and contract adjustments at those same period end dates.  These allowance percentages highlight the Company’s experience of heightened operating risks (i.e., political, regulatory and cultural risks) within these foreign regions in comparison with similar risks in the United States, Canada and South America.  These heightened operating risks have resulted in increased collection risks and the Company expending resources that it may not recover for several months, or at all.  During fiscal years 2014 and 2015, the Company significantly curtailed its operations and projects in these regions in order to focus on more profitable operations in the United States and South America.

During fiscal year 2015, we continued to experience difficulties with settlement and close-out of a specific project in the Middle East.  As a result, management decided to increase the related allowance for contract adjustments by $1.2 million during fiscal year 2015, to $4.9 million as of July 31, 2015.  The related receivable balance is 100% reserved as of July 31, 2015, and no additional reserves are expected to be recorded during future periods.  We continue to maintain open dialogue with this client, and to seek assistance through all possible official channels, in order to ensure a favorable settlement of this contract receivable balance.

 

Results of Operations

Revenue, net

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

Fiscal Year 2015 Versus 2014

The overall decrease in consolidated revenue less subcontract costs for the fiscal year ended July 31, 2015, as compared with the prior fiscal year, resulted from the net impact of the following entity activity:

·

Higher Parent Company and wholly-owned subsidiary revenue (excluding Walsh) resulted from higher Department of Defense and energy sector revenues in the U.S., which was partially offset by lower government and commercial sales volumes in the U.S.

·

Lower Walsh revenue primarily resulted from a strategic decision to wind down existing asbestos remediation contracts and forego any new asbestos business, and from lower sales activity in energy and mining sectors in the U.S., which were partially offset by higher energy sector sales volume from operations in Peru.

·

Lower E&E Brasil revenue was primarily due to lower sales volume in the energy transmission sector, as transmission projects completed during fiscal years 2015 and 2014 were not renewed or replaced.  A weaker Brazilian economy and a weaker Real in relation to the U.S. dollar also contributed to the overall decrease in revenues.

·

Lower GAC revenue was primarily due to lower mining sector revenues, as mining projects completed during fiscal years 2015 and 2014 were not renewed or replaced.

·

Lower ECSI revenue primarily resulted from lower sales volume in the mining sector, as mining projects completed during the prior fiscal year were not renewed or replaced.

Fiscal Year 2014 Versus 2013

The decrease in consolidated revenue less subcontract costs for fiscal year 2014 primarily resulted from the following entity activity:

·

Lower revenue for EEI and its wholly-owned subsidiaries (excluding Walsh) for fiscal year 2014 resulted primarily from the following activity:

o

EEI recorded $3.8 million of gross revenue related to projects in China during fiscal year 2013.  All project activity related to these contracts was suspended during the fourth quarter of fiscal year 2013, and no revenue related to these projects was recorded during fiscal year 2014; and

o

generally lower sales volume, particularly within domestic state and federal government markets, as expired contracts were not renewed or replaced with new work.

·

Higher consolidated Walsh revenue for fiscal year 2014 was primarily due to higher energy sector revenues from Walsh’s South American operations, which was partially offset by lower sales volumes from asbestos inspection, energy and mining sectors in the U.S., as expiring contracts were not renewed or replaced by new work

·

Lower E&E Brasil revenue for fiscal year 2014 was primarily due to lower sales volumes in the energy transmission sector and weakening of the local currency (Real) against the U.S. dollar.

·

Lower GAC revenue for fiscal year 2014 mainly resulted from the following net activity:

o

lower sales volume from the commercial mining market, mainly due to a general decline in the Chilean economy; and

o

a decline in the value of the Chilean Peso against the U.S. dollar throughout the year; which were partially offset by

o

lower utilization of subcontracted labor, which resulted in higher utilization of GAC employees.

·

Lower ECSI revenue during fiscal year 2014 mainly resulted from lower sales volumes in the mining sector, as projects completed during fiscal year 2013 were not renewed or replaced during fiscal year 2014.

Contract Adjustments

Net contract adjustments recorded as a reduction of revenue include adjustments to revenues that are deemed to be unrealizable or that may become unrealizable in the future, as well as adjustments to estimated liabilities for project disallowances that are recorded in other accrued liabilities.  Contract adjustments related to projects in the United States, Canada and South America typically result from cost overruns from current or recently completed projects, or from recoveries of cost overruns recorded as contract adjustments in prior reporting periods.  Contract adjustments related to projects in the Middle East, Africa and Asia typically result from difficulties encountered while attempting to settle claims and issues that may be several years old.

Net contract adjustments recorded as additions to (reductions from) revenue are summarized by region in the following table.

Fiscal Year 2015 Activity

Net contract adjustments recorded for projects in the Middle East and Africa resulted from the following net activity:

·

The Company has experienced ongoing difficulties with settlement and close-out of a specific project in the Middle East.  As a result, management decided to increase the related allowance $1.2 million during fiscal year 2015, to $4.9 million or 100% of the related contract receivable balance as of July 31, 2015.  Management continues to maintain open dialogue with this client, and to seek assistance through all possible official channels, in order to ensure a favorable settlement of this contract receivable balance.

·

The Company also has experienced difficulties with settlement and close-out of various projects completed for a specific client in Africa.  At July 31, 2014, the Company recorded total allowance for contract adjustments of $0.8 million, or 49% of total related contract receivables at that date.  During fiscal year 2015, the Company received settlement for $0.3 million of contract receivables that were previously 100% reserved.  In addition, during the fourth quarter of fiscal year 2015, the Company decided to write-off $0.5 million of contract receivables that were previously 100% reserved.

 

Fiscal Year 2014 Activity

Net contract adjustments recorded for projects in the U.S., Canada and South America includes net adjustments resulting from revenues that are deemed to be unrealizable or that may become unrealizable in the future, as well as adjustments to estimated liabilities for project disallowances that are recorded in other accrued liabilities.  During fiscal year 2014, as a result of a revised estimate of a settlement liability recorded in a prior fiscal year, we recorded a $0.3 million reduction on our reserves for project disallowances recorded in other accrued liabilities.

Net contract adjustments recorded for projects in the Middle East and Africa mainly resulted from a $1.5 million increase in the reserve for contract adjustments associated with a specific project in the Middle East, which was partially offset by $1.0 million of reserve reversals resulting from cash receipts or approvals of task orders related to receivables that had been previously reserved.

Direct Operating Expenses

The cost of professional services and other direct operating expenses on the consolidated statements of operations represents labor and other direct costs of providing services to our clients under our project agreements.  We refer to these expenses as “direct operating expenses.”  These costs, and fluctuations in these costs, generally correlate directly with related project revenues.  The cost of professional services and other direct operating expenses, by business entity, are summarized in the following table.

Fiscal Year 2015 Versus 2014

Direct operating expenses decreased $1.9 million (4%) during fiscal year 2015, as compared with the prior year.  Lower project-related sales volumes and related costs in EEI’s Brazilian and Chilean operations were partially offset by higher project service levels and costs in EEI’s domestic operations and in Walsh’s Peruvian operations.

Fiscal Year 2014 Versus 2013

Direct operating expenses decreased $4.6 million (9%) during fiscal year 2014, as compared with the prior fiscal year.  These net decreases were primarily due to lower consolidated revenues and lower service levels provided during the current year, and managed reductions in technical staff levels in U.S. operations.  Expense reductions in the U.S. were partially offset by a higher volume of project activity and related expenses in certain South American subsidiaries.

		Fiscal Year Ended July 31,
		2015				2014				2013
EEI and its wholly owned subsidiaries (excluding Walsh)		$	30,505,779			$	32,907,360			$	36,239,243
Walsh and EEI’s majority-owned subsidiaries:
Walsh and its majority-owned subsidiaries			9,596,864				12,690,944				12,707,123
E&E Brasil			3,645,257				4,946,171				5,480,397
GAC			1,294,151				1,376,842				1,161,575
ECSI			1,799,545				2,559,021				3,021,712
Total administrative and indirect operating expenses and marketing and related costs		$	46,841,596			$	54,480,338			$	58,610,050

 

Fiscal Year 2015 Versus 2014

EEI and its direct and indirect subsidiaries may, at the discretion of their respective Board of Directors, award incentive compensation to Directors, senior management and other employees in the form of cash bonuses.  Cash bonus expense may vary significantly from year to year depending on company financial performance.  The Company recorded $2.8 million and $1.2 million of incentive compensation expense in indirect operating expenses during fiscal years 2015 and 2014, respectively, as a result of cash bonus awards.

In October 2015, EEI sold its 60% interest in ECSI to ECSI’s minority shareholders for $0.3 million.  EEI recognized a loss on its investment in ECSI of approximately $0.4 million in administrative and indirect operating expenses during the fourth quarter of fiscal year 2015.  Also during fiscal year 2015, management completed an assessment of goodwill recorded on the acquisition date, and recorded $0.1 million of goodwill impairment loss in administrative and indirect operating expenses.

Excluding higher expenses associated with cash bonuses and the sale of ECSI noted above, indirect operating expenses decreased $9.7 million (18%) during fiscal year 2015.  During fiscal year 2015, management continued its critical review of direct and indirect staffing levels and key administrative processes at EEI and all of its significant domestic and foreign subsidiaries, resulting in improved operating efficiency and cost reductions.  The Company also realized a full year benefit of efficiencies and cost reductions initiated in prior fiscal years.

Fiscal Year 2014 Versus 2013

Excluding the impact of cash bonus expenses of $1.2 million and $0.9 million for fiscal years 2014 and 2013, respectively, indirect operating expenses decreased $4.4 million (8%) during fiscal year 2014.  During fiscal years 2014 and 2013, management at EEI and its U.S. subsidiaries critically reviewed key administrative processes, reduced indirect staffing levels, and reduced utilization of contracted services in certain indirect departments.  These cost reductions in the U.S. were partially offset by higher indirect expenses to support growth in certain South American subsidiaries.

Depreciation and Amortization

Fiscal Year 2015 Versus 2014

Depreciation and amortization expense decreased $2.7 million (65%) during fiscal year 2015, primarily due to lower amortization of the Company’s principal operating software.  The Company acquired and developed new operating system software during fiscal year 2014, and began utilizing the new software effective August 1, 2014 for its U.S. operations.  The Company continued to utilize the previous software system through July 31, 2014, at which time the previous system was abandoned.  As a result, amortization of software development costs capitalized for the previous system was accelerated so that the system was completely amortized by July 31, 2014.  Total software amortization expense was $0.1 million and $2.6 million for fiscal years 2015 and 2014, respectively.

 

		Fiscal Year Ended July 31,
		2015				2014				2013
Income tax (benefit) provision from:
Domestic operations		$	2,118,074			$	(802,558	)		$	(782,672	)
Foreign operations			1,650,347				1,145,621				1,036,906	)
Income tax provision, as reported on the consolidated statements of operations		$	3,768,421			$	343,063			$	254,234

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.

		Twelve Months Ended July 31,
		2015				2014				2013
Time and materials		$	61,444,412			$	69,136,988			$	64,522,639
Fixed price			54,912,492				50,077,507				58,244,072
Cost-plus			10,382,817				9,212,381				12,170,180
Total revenue		$	126,739,721			$	128,426,876			$	134,936,891

		Balance at July 31,
Assets		2015				2014
Current assets:
Cash and cash equivalents		$	8,703,347			$	6,889,243
Investment securities available for sale			1,433,732				1,407,277
Contract receivables, net of allowance for doubtful accounts and contract adjustments of $5,537,901 and $6,126,854, respectively			42,866,156				44,431,305
Deferred income taxes			3,878,401				4,534,437
Income tax receivable			297,246				1,107,983
Other current assets			1,330,996				1,422,561
Total current assets			58,509,878				59,792,806
Property, buildings and equipment, net of accumulated depreciation of $23,438,269 and $28,615,915, respectively			7,113,694				7,941,455
Deferred income taxes			933,890				1,865,798
Other assets			1,931,875				2,108,263
Total assets		$	68,489,337			$	71,708,322
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable		$	10,409,656			$	9,874,649
Lines of credit			672,272				1,572,466
Accrued payroll costs			8,687,643				7,650,077
Current portion of long-term debt and capital lease obligations			551,148				420,737
Billings in excess of revenue			2,618,453				5,003,413
Other accrued liabilities			3,931,284				4,235,262
Total current liabilities			26,870,456				28,756,604
Income taxes payable			107,035				107,035
Deferred income taxes			631,889				631,083
Long-term debt and capital lease obligations			395,098				421,769
Commitments and contingencies (Note 19)			-				-
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; 3,023,206 and 2,685,151 shares issued)			30,232				26,851
Class B common stock, par value $.01 per share; (10,000,000 shares authorized; 1,370,519 and 1,708,574 shares issued)			13,706				17,087
Capital in excess of par value			16,575,286				17,124,339
Retained earnings			23,246,483				21,916,575
Accumulated other comprehensive loss			(1,726,339	)			(182,735	)
Treasury stock, at cost (Class A common: 42,245 and 40,553 shares; Class B common: 64,801 shares)			(1,223,899	)			(1,223,899	)
Total Ecology and Environment, Inc. shareholders' equity			36,915,469				37,678,218
Noncontrolling interests			3,569,390				4,113,613
Total shareholders' equity			40,484,859				41,791,831
Total liabilities and shareholders' equity		$	68,489,337			$	71,708,322

		Fiscal Year Ended July 31,
		2015				2014				2013
Revenue, net		$	126,739,721			$	128,426,876			$	134,936,891
Cost of professional services and other direct operating expenses			47,500,171				49,449,221				49,824,962
Subcontract costs			23,326,682				20,828,875				24,971,086
Administrative and indirect operating expenses			35,408,924				41,464,204				44,563,873
Marketing and related costs			11,432,672				13,016,134				14,046,177
Depreciation and amortization			1,467,270				4,175,801				2,428,844
Income (loss) from operations			7,604,002				(507,359	)			(898,051	)
Interest income			84,970				154,441				244,191
Interest expense			(115,885	)			(150,315	)			(303,403	)
Other income (expense)			75,626				67,587				(40,127	)
Gain on sale of assets and investment securities			186,089				13,045				80,415
Net foreign exchange gain (loss)			133,703				(24,789	)			(50,839	)
Income (loss) before income tax provision			7,968,505				(447,390	)			(967,814	)
Income tax provision			3,768,421				343,063				254,234
Net income (loss)		$	4,200,084			$	(790,453	)		$	(1,222,048	)
Net income attributable to the noncontrolling interest			(804,441	)			(592,203	)			(908,386	)
Net income (loss) attributable to Ecology and Environment, Inc.		$	3,395,643			$	(1,382,656	)		$	(2,130,434	)
Net income (loss) per common share: basic and diluted		$	0.79			$	(0.32	)		$	(0.50	)
Weighted average common shares outstanding: basic and diluted			4,287,775				4,283,984				4,247,821

		Fiscal Year Ended July 31,
		2015				2014				2013
Net income (loss) including noncontrolling interests		$	4,200,084			$	(790,453	)		$	(1,222,048	)
Foreign currency translation adjustments			(2,151,970	)			(298,200	)			(883,865	)
Unrealized investment (losses) gains, net			(4,036	)			1,412				(28,675	)
Comprehensive income (loss)			2,044,078				(1,087,241	)			(2,134,588	)
Comprehensive income (loss) attributable to noncontrolling interests			(192,039	)			(457,916	)			(792,215	)
Comprehensive income (loss) attributable to Ecology and Environment, Inc.		$	1,852,039			$	(1,545,157	)		$	(2,926,803	)

		Fiscal Year Ended July 31,
		2015				2014				2013
Cash flows from operating activities:
Net income (loss)		$	4,200,084			$	(790,453	)		$	(1,222,048	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Impairment of long-lived assets			-				-				846,000
Impairment of goodwill			103,547				-				-
Impairment of Investment in ECSI			355,000				-				-
Depreciation and amortization			1,467,270				4,175,801				2,428,844
Deferred income tax provision (benefit)			1,154,118				(817,896	)			203,165
Share based compensation expense			59,189				353,295				507,796
Tax impact of share-based compensation			(91,849	)			(31,695	)			(74,429	)
Gain on sale of assets and investment securities			(186,089	)			(13,045	)			(80,415	)
Net provision for (recovery of) contract adjustments and doubtful accounts			(413,071	)			173,967				6,319,650
Net bad debt (recovery) expense			(326,420	)			90,087				(287,426	)
Decrease (increase) in:
- contract receivables			(934,618	)			1,855,027				7,228,782
- other current assets			(439,775	)			192,013				(97,563	)
- income tax receivable			270,360				3,247,277				(1,832,096	)
- other non-current assets			47,725				29,656				6,951
(Decrease) increase in:
- accounts payable			1,052,195				23,739				(628,189	)
- accrued payroll costs			1,805,254				630,156				(172,087	)
- income taxes payable			132,236				(41,155	)			(69,230	)
- billings in excess of revenue			(1,908,679	)			(1,419,481	)			(1,430,143	)
- other accrued liabilities			201,838				445,505				295,562
Net cash provided by operating activities			6,548,315				8,102,798				11,943,124
Cash flows from investing activities:
Acquisition of noncontrolling interest of subsidiaries			(50,000	)			(689,361	)			(595,556	)
Purchase of property, building and equipment			(734,710	)			(1,964,663	)			(1,845,241	)
Proceeds from sale of property, building and equipment			254,785				-				-
Proceeds from sale of investments			-				-				1,554,425
(Purchase) sale of investment securities			(33,181	)			52,675				(1,671,284	)
Net cash used in investing activities			(563,106	)			(2,601,349	)			(2,557,656	)
Cash flows from financing activities:
Dividends paid			(2,066,142	)			(2,053,506	)			(2,037,323	)
Proceeds from debt and capital lease obligations			384,397				544,027				255,487
Repayment of debt and capital lease obligations			(753,525	)			(710,009	)			(853,127	)
Net repayments under lines of credit			(869,655	)			(4,956,225	)			(5,782,992	)
Distributions to noncontrolling interests			(536,731	)			(664,703	)			(1,532,912	)
Purchase of treasury stock			-				(173,278	)			-
Net cash used in financing activities			(3,841,656	)			(8,013,694	)			(9,950,867	)
Effect of exchange rate changes on cash and cash equivalents			(329,449	)			(43,172	)			(457,711	)
Net increase (decrease) in cash and cash equivalents			1,814,104				(2,555,417	)			(1,023,110	)
Cash and cash equivalents at beginning of period			6,889,243				9,444,660				10,467,770
Cash and cash equivalents at end of period		$	8,703,347			$	6,889,243			$	9,444,660
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest		$	109,587			$	145,880			$	301,154
Income taxes			1,541,755				(2,303,231	)			1,596,760
Supplemental disclosure of non-cash items:
Dividends declared and not paid			1,032,665				1,033,071				1,018,783
Acquistion of noncontrolling interest of subsidiaries (loans and stock)			233,220				1,072,944				212,401
Change in accounts payable due to equipment purchases			-				-				670,678
Proceeds from capital lease obligations			322,231				42,707				256,288

		Balance at July 31, 2015
		Level 1				Level 2				Level 3				Total
Assets
Investment securities available for sale		$	1,433,732			$	---			$	---			$	1,433,732

		Balance at July 31, 2014
		Level 1				Level 2				Level 3				Total
Assets
Investment securities available for sale		$	1,407,277			$	---			$	---			$	1,407,277

		Balance at July 31,
		2015				2014
Contract Receivables:
Billed		$	22,915,726			$	26,863,708
Unbilled			25,488,331				23,694,451
			48,404,057				50,558,159
Allowance for doubtful accounts and contract adjustments			(5,537,901	)			(6,126,854	)
Contract receivables, net		$	42,866,156			$	44,431,305

		Balance at July 31, 2015								Balance at July 31, 2014
Region		Contract Receivables				Allowance for Doubtful Accounts and Contract Adjustments				Contract Receivables				Allowance for Doubtful Accounts and Contract Adjustments
United States, Canada and South America		$	43,212,684			$	626,210			$	43,394,442			$	1,611,068
Middle East and Africa			5,066,789				4,894,453				7,010,225				4,386,240
Asia			124,584				17,238				153,492				129,546
Totals		$	48,404,057			$	5,537,901			$	50,558,159			$	6,126,854

		Balance at July 31,
		2015				2014
Land and land improvements		$	393,051			$	393,051
Buildings and building improvements			10,368,394				12,231,788
Field equipment			2,785,749				3,273,725
Computer equipment			4,685,106				9,128,027
Computer software			6,112,262				5,030,472
Office furniture and equipment			4,076,347				4,095,659
Vehicles			1,438,755				1,658,273
Other			692,299				746,375
			30,551,963				36,557,370
Accumulated depreciation and amortization			(23,438,269	)			(28,615,915	)
Property, buildings and equipment, net		$	7,113,694			$	7,941,455

		Balance at July 31,
		2015				2014
Outstanding cash draws, recorded as lines of credit on the accompanying consolidated balance sheets		$	672,272			$	1,572,466
Outstanding letters of credit to support operations			1,144,031				1,944,994
Total amounts used under lines of credit			1,816,303				3,517,460
Remaining amounts available under lines of credit			30,992,697				30,851,540
Total approved unsecured lines of credit		$	32,809,000			$	34,369,000

		Balance at July 31,
		2015				2014
Various loans and advances (interest rates ranging from 3.25% to 12%)		$	635,598			$	676,874
Capital lease obligations (interest rates ranging from 7.36% to 14%)			310,648				165,632
			946,246				842,506
Current portion of long-term debt and capital lease obligations			(551,148	)			(420,737	)
Long-term debt and capital lease obligations		$	395,098			$	421,769

August 2015 – July 2016		$	551,148
August 2016 – July 2017			215,519
August 2017 – July 2018			148,166
August 2018 – July 2019			12,161
Thereafter			19,252
Total		$	946,246

		Fiscal Year Ended July 31,
		2015				2014				2013
Domestic		$	3,499,841			$	(4,305,768	)		$	(3,055,338	)
Foreign			4,468,664				3,858,378				2,087,524
		$	7,968,505			$	(447,390	)		$	(967,814	)

		Fiscal Year Ended July 31,
		2015				2014				2013
Current:
Federal		$	486,669			$	86,062			$	(985,865	)
State			80,594				62,761				181,434
Foreign			2,047,040				1,012,136				855,500
Total current			2,614,303				1,160,959				51,069
Deferred:
Federal			1,378,509				(975,519	)			200,197
State			172,302				24,138				(178,438	)
Foreign			(396,693	)			133,485				181,406
Total deferred			1,154,118				(817,896	)			203,165
Total income tax provision		$	3,768,421			$	343,063			$	254,234

		Fiscal Year Ended July 31,
		2015				2014				2013
Income tax (benefit) provision at the U.S. federal statutory income tax rate		$	2,709,334			$	(152,113	)		$	(329,057	)
Income from "pass-through" entities taxable to noncontrolling partners			30,604				35,309				(102,933	)
International rate differences			(338,221	)			(143,493	)			(197,217	)
Other foreign taxes, net of federal benefit			160,963				(34,419	)			94,528
Foreign dividend income			508,572				596,631				481,287
State taxes, net of federal benefit			166,168				27,739				3,871
Re-evaluation and settlements of tax contingencies			---				(19,533	)			(58,105	)
Peru non-deductible expenses			166,769				44,077				173,707
Canada valuation allowance			156,492				(83,257	)			130,950
Other permanent differences			207,740				72,122				57,203
Income tax provision, as reported on the consolidated statements of operations		$	3,768,421			$	343,063			$	254,234

		Balance at July 31,
		2015				2014
Allowance for project disallowances		$	2,242,813			$	2,393,351
Other			1,688,471				1,841,911
Total other accrued liabilities		$	3,931,284			$	4,235,262