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EEI > SEC Filings for EEI > Form 10-Q on 23-Jun-2014All Recent SEC Filings

Show all filings for ECOLOGY & ENVIRONMENT INC

Form 10-Q for ECOLOGY & ENVIRONMENT INC


23-Jun-2014

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 third quarter of fiscal year 2014, our income before income tax provision was $0.2 million, which represented a $0.2 million increase from the slight loss for the same period in the previous fiscal year. For the first nine months of fiscal 2014, our net loss before income tax provision was $0.1 million, which was $4.2 million less than net income 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 $1.1 million (4%) for the third quarter of fiscal year 2014 and $9.8 million (11%) for the first nine months of fiscal year 2014 due mainly to two factors:
lower revenue from certain 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 market sectors within our domestic and certain of our foreign markets.

In November 2013, after an extensive assessment process, management decided to abandon the Company's existing operating and financial software system and migrate to new system software. The Company has acquired and is currently developing 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. Total depreciation and amortization expense increased $1.3 million during the first nine months of 2014, primarily 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 nine months ended April 30, 2014 were partially offset by lower direct project expenses and lower indirect expenses due to lower project work volumes and to managed reductions in staff levels.

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. In November 2013, the EPA agreed to reevaluate the proposals for the EPA Region 9 START contract, and to extend our current contract pending completion of this review process. In April 2014, the EPA reaffirmed its original decision not to award the contract to us. Our current EPA Region 9 START contract will terminate in November 2014. We recognized $3.8 million of revenue under this contract during the nine months ended April 30, 2014.

During the nine months ended April 30, 2014 and 2013, we collected $2.8 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 April 30, 2014, $4.8 million of contract receivables remained outstanding from this client, against which we recorded an allowance for doubtful accounts and contract adjustments of $2.9 million.

Liquidity and Capital Resources

Cash and cash equivalents decreased $2.5 million during the first nine months of 2014, primarily due to non-operating expenditures of $2.1 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. Excluding these discretionary cash outflows, net cash generated from operations of $7.7 million during the first nine 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 $5.5 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.

                                                 Nine Months Ended April 30,
                                                    2014               2013
Cash provided by (used in):
Operating activities                           $     7,682,921     $ 13,236,147
Investing activities                                (1,816,776 )     (2,223,243 )
Financing activities                                (8,323,287 )     (9,649,315 )
Effect of exchange rate changes on cash and
cash equivalents                                       (16,793 )        127,405
Net (decrease) increase in cash and cash
equivalents                                    $    (2,473,935 )   $  1,490,994

Cash and cash equivalents, by location:
U.S. operations                                $     5,228,915     $  6,377,304
Foreign operations                                   1,741,810        5,581,460
Total cash and cash equivalents                $     6,970,725     $ 11,958,764

For the nine months ended April 30, 2014, cash provided by operations resulted mainly from the following activity:
Net income (after adjustment for non-cash items) provided $2.8 million of operating cash;

Net collections of contract receivables provided $3.5 million of operating cash; and

A federal tax refund received during the third quarter of fiscal year 2014 provided $1.5 million of operating cash; and

Other working capital activity resulted in a $0.1 million net use of cash.

Net cash used in investment activities during the nine months ended April 30, 2014 resulted mainly from the following activity:
Purchases of property, building and equipment resulted in a $1.2 million use of cash, $0.8 million of which related to software acquisition costs; 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 nine months ended April 30, 2014 resulted mainly from the following activity:
Dividend payments to common shareholders resulted in a $2.1 million use of cash;

Net repayment of borrowings against our lines of credit resulted in a $5.5 million use of cash;

Proceeds from debt resulted provided $0.6 million of cash;

Repayment of debt and capital lease obligations resulted in a $0.7 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 have unsecured lines of credit available to provide cash and letters of credit for operations. Contractual interest rates ranged from 2.50% to 4.25% at April 30, 2014 and 2.50% to 5.00% at 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.

                                                             Balance at
                                                 April 30, 2014       July 31, 2013

 Outstanding cash draws, recorded as lines of
 credit on the accompanying condensed
 consolidated balance sheets                    $      1,002,366     $     6,528,691
 Outstanding letters of credit to support
 operations                                            2,830,320           3,080,938
 Total amounts used under lines of credit              3,832,686           9,609,629
 Remaining amounts available under lines of
 credit                                               30,536,314          24,759,371
 Total approved unsecured lines of credit       $     34,369,000     $    34,369,000

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