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EEI > SEC Filings for EEI > Form 10-Q on 17-Mar-2014All Recent SEC Filings

Show all filings for ECOLOGY & ENVIRONMENT INC



Quarterly Report

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

For the second quarter of fiscal year 2014, our loss before income tax benefit was $1.3 million, which represented a $4.6 million decrease from income of $3.3 million for the same period in the previous fiscal year. For the first six months of fiscal 2014, our net loss before income tax benefit was $0.2 million, which was $4.3 million less than net income before income tax provision of $4.1 million for the same period in the prior fiscal year.

Revenue less subcontract costs, which is a key performance measurement for our business, decreased $6.7 million (22%) for the second quarter of fiscal year 2014 and $8.7 million (14%) for the first half of fiscal year 2014 due mainly to two factors:

Lower revenue from projects in the Middle East and China for which the Company has not had any project activity during fiscal year 2014; and

lower project work volumes during fiscal year 2014 in government, energy, mining and asbestos inspection sectors within our domestic and certain of our foreign markets.

In November 2013, after an extensive assessment process, management decided to abandon its existing operating and financial software system and migrate to new system software. The Company plans to acquire and develop the new software during fiscal year 2014, with a target go-live date of August 1, 2014. The Company will continue to utilize the current software system until the new system go-live date, at which time the current system will be abandoned. Unamortized software development costs for the current system of $2.7 million as of July 31, 2013 will be completely amortized by July 31, 2014. Depreciation and amortization expense increased $0.9 million (78%) during the first six months of 2014 as a result of accelerated amortization of our existing software system.

Lower revenue less subcontract costs and higher depreciation and amortization expense during the three and six months ended January 31, 2014 more than offset:

lower professional service costs and other direct project expenses due to lower project work volumes and other managed reductions in technical staff levels; and

lower indirect expenses due to managed reductions of staff levels in various administrative, marketing and other indirect departments.

Recent Developments

In May 2008, the United States Environmental Protection Agency (the "EPA") awarded us a START contract to provide technical support to EPA Region 9 which covers the four state area of California, Nevada, Arizona, Hawaii, and U.S. territories in the Pacific. This was a combination time and materials/cost plus contract with a two year base period and two 18 month option periods which were exercised through 2013. This contract was extended for an additional 6 month period beyond the original contract term, which expired on November 15, 2013. In September 2013, as a result of a competitive bid and proposal process, we were notified by the EPA that we were not selected for renewal of the START contract for EPA Region 9. In October 2013, we filed a protest with the U.S. Government Accountability Office (the "GAO") requesting reconsideration of the award process and conclusion. Although we cannot predict the outcome of the protest process, the EPA has extended our previous START 9 contract through November 2014 to allow adequate time for the GAO to complete its review. We recognized $2.6 million of revenue under this contract during the six months ended January 31, 2014.

During the six months ended January 31, 2014 and 2013, we collected $2.4 million and $7.1 million, respectively, of cash related to aged accounts receivable from a client in the Middle East for project work that we performed in years prior to fiscal year 2013. As of January 31, 2014 $5.2 million of contract receivables remained outstanding from this client, against which we recorded an allowance for contract adjustments of $2.7 million. In February, 2014, we received an additional $0.4 million of cash from this client.

Liquidity and Capital Resources

Cash and cash equivalents decreased $1.4 million during the first half of 2014, primarily due to non-operating expenditures of $1.0 million for dividend payments to shareholders and $0.2 million for purchases of treasury stock, both of which were approved on a discretionary basis by the Board of Directors. Net cash generated from operations of $6.3 million during the first six months of fiscal year 2014 was adequate to fund investing and financing activities required to maintain our current operations and to reduce our outstanding lines of credit by $4.5 million during the period.

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We believe that cash flows from U.S. operations, available cash and cash equivalent balances in our domestic subsidiaries and remaining amounts available under 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 generate adequate cash flow to fund their operations. We intend to reinvest net cash generated from undistributed foreign earnings into opportunities outside the U.S. If the foreign cash and cash equivalents were needed to fund domestic operations, we would be required to accrue and pay taxes on any amounts repatriated.

Cash and cash equivalents activity and balances are summarized in the following table.

                                                 Six Months Ended January 31,
                                                    2014                2012
Cash provided by (used in):
Operating activities                           $     6,381,668      $ 11,271,380
Investing activities                                (1,513,635 )      (3,450,403 )
Financing activities                                (6,199,265 )      (8,619,297 )
Effect of exchange rate changes on cash and
cash equivalents                                        19,196           194,040
Net (decrease) increase in cash and cash
equivalents                                    $    (1,312,036 )    $   (604,280 )

Cash and cash equivalents, by location:
U.S. operations                                $     5,769,539      $  5,450,048
Foreign operations                                   2,363,085         4,413,442
Total cash and cash equivalents                $     8,132,624      $  9,863,490

For the six months ended January 31, 2014, cash provided by operations resulted from the following net activity:

Net income (after adjustment for non-cash items) provided $1.7 million of operating cash;

Net collections of contract receivables provided $5.7 million of operating cash; and

Other working capital activity resulted in a net use of $1.0 million of operating cash, due primarily to lower project work volume and to general reductions of current liabilities as a result of an improved liquidity position at the Parent Company.

Net cash used in investment activities during the six months ended January 31, 2014 resulted mainly from the following activity:

Purchases of property, building and equipment resulted in a $0.9 million use of cash; and

Acquisitions of noncontrolling interests in Walsh Environmental Scientists & Engineers, LLC ("Walsh") by EEI resulted in a $0.6 million use of cash.

Net cash used in financing activities during the quarter ended January 31, 2014 resulted from the following net activity:

Dividend payments to common shareholders resulted in a $1.0 million use of cash;

Net repayment of borrowings against our lines of credit resulted in a $4.5 million use of cash;

Proceeds from debt resulted in a $0.5 million source of cash;

Repayment of debt and capital lease obligations resulted in a $0.6 million use of cash;

Distributions to non-controlling interests resulted in a $0.4 million use of cash; and

Purchases of treasury stock resulted in a $0.2 million use of cash.

We maintain unsecured lines of credit available for working capital and letters of credit. Contractual interest rates ranged from 2.5% to 5% at January 31, 2014 and July 31, 2013. Our lenders have reaffirmed the lines of credit within the past twelve months. Our lines of credit are summarized in the following table.

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