The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
Ecology and Environment Inc., (“EEI”) was incorporated in 1970 as a global broad-based environmental consulting firm whose underlying philosophy is to provide professional services worldwide so that
sustainable economic and human development may proceed with acceptable impact on the environment. During the quarter ended November 2, 2019, EEI and its subsidiaries (collectively, the “Company”) included five active wholly-owned and majority-owned
operating subsidiaries located in three countries (the United States of America (the “U.S.”), Brazil and Peru), and one majority-owned equity investment in Chile. The Company’s staff is comprised of individuals representing numerous scientific,
engineering, health, and social disciplines working together in multidisciplinary teams to provide innovative environmental solutions. The majority of 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 Company’s client list includes governments, industries, multinational corporations, organizations,
and private companies.
The Company prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). The financial
statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of such information. All such adjustments are of a normal recurring nature.
Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), including a description of significant accounting policies, have been condensed or omitted pursuant to SEC rules and regulations.
Therefore, these financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2019 filed with the SEC (the
“2019 Annual Report”). Other than new or revised accounting policies resulting from the adoption of new accounting pronouncements described in Note 2 of these condensed consolidated financial statements, the accounting policies followed by the
Company for preparation of the consolidated financial statements included in the 2019 Annual Report were also followed for this quarterly report. The condensed consolidated results of operations for the three months ended November 2, 2019 are not
necessarily indicative of the results for any subsequent period or the entire fiscal year ending July 31, 2020.
The Financial Accounting Standards Board (“FASB”) establishes changes to U.S. GAAP in the form of accounting standards updates (“ASUs”) to the FASB Accounting Standards Codification (“ASC”). The Company
considers the applicability and impact of all ASUs when they are issued by FASB. ASUs listed below were either adopted by the Company during its current fiscal year or will be adopted as each ASU becomes effective during future reporting periods.
ASUs not listed below were assessed to be not applicable to the Company’s operations or are expected to have minimal impact on the Company’s consolidated financial position or results of operations.
Accounting Pronouncements Adopted During the Three Months Ended November 2
In March 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The main difference between previous U.S. GAAP and ASU 2016-02 (together with subsequent ASUs that amended
and clarified the guidance in ASU 2016-02) is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. ASU 2016-02 provides specific guidance for determining whether
a contractual arrangement contains a lease, lease classification by lessees and lessors, initial and subsequent measurement of leases by lessees and lessors, sale and leaseback transactions, transition, and financial statement disclosures. The
Company adopted the provisions of ASU 2016-02 effective August 1, 2019, using the modified retrospective approach under which comparative period information is not restated. The Company elected certain practical expedients allowed in ASU 2016-02
which permit the Company to: (i) not reassess whether existing contracts are or contain leases; (ii) not reassess the lease classification of any existing leases; (iii) not reassess initial direct costs for any existing leases; and (iv) not separate
lease and non-lease components for all classes of underlying assets. The Company also made an accounting policy election to not record leases with an initial term of twelve months or less on the balance sheet for all classes of underlying assets.
On the effective date, the Company recognized new right-of-use assets and corresponding lease liabilities associated with operating leases of approximately $6.2 million. The adoption of ASU 2016-02 did not have a
material impact on the Company’s results of operations or liquidity. Refer to Note 9 of these condensed consolidated financial statements for additional disclosures regarding Leases.
Accounting Pronouncements Not Yet Adopted as of November 2, 2019
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”). The amendments included in this update affect entities holding financial assets, including
trade receivables and investment securities available for sale, that are not accounted for at fair value through net income. ASU 2016-13, as amended by subsequent updates that amended and clarified the guidance in ASU 2016-13, requires a financial
asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments included in this update also provide guidance for measurement of expected credit losses and for
presentation of increases or decreases of expected credit losses on the statement of operations. ASU 2016-13 originally was to be effective for the Company beginning August 1, 2020. In November 2019, FASB issued ASU No. 2019-10, Financial
Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”). ASU 2019-10 revised the effective date of ASU 2016-13 for the Company to August 1, 2023. Management is currently assessing the
provisions of ASU 2016-13 and has not yet estimated its impact on the Company’s consolidated financial statements.
In January 2017, FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). The amendments included in this update simplify
the subsequent measurement of goodwill by revising the steps required during the registrant’s annual goodwill impairment test. ASU 2017-04 originally was to be effective for the Company beginning August 1, 2021, but ASU 2019-10 revised the effective
date of ASU 2017-04 for the Company to August 1, 2023. Management is currently assessing the provisions of ASU 2017-04 and has not yet estimated its impact on the Company’s consolidated financial statements.
On August 28, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with WSP Global Inc., a Canadian corporation (“WSP”), and Everest Acquisition Corp., a New York corporation and an
indirect wholly owned subsidiary of WSP (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”) with the Company continuing as the surviving corporation.
Under the terms of the Merger Agreement, at the Effective Time (as defined in the Merger Agreement), each share of the Company’s Class A common stock, $0.01 par value per share and Class B common stock, $0.01 par value
per share (collectively, the “Company Shares”), issued and outstanding immediately prior to the Effective Time, (other than shares (i) held by the Company (or held in the Company’s treasury), (ii) held by any wholly owned subsidiary of the Company,
(iii) held by WSP, Merger Sub or any other wholly owned subsidiary of WSP or (iv) held by holders of Class B common stock who have made a proper demand for appraisal of the shares in accordance with Section 623 of the New York Business Corporation
Law) but including shares that are, as of the Effective Time, unvested and subject to restrictions, will be converted into the right to receive $15.00 in cash, without interest and subject to any required tax withholding. In addition, the Merger
Agreement provides that record holders of Company Shares as of the close of business on the last business day prior to the Effective Time, including any shares that are then unvested and subject to restrictions, will receive a one-time special
dividend from the Company of up to $0.50 in cash per share to be paid shortly after closing (the “Special Dividend”). The amount of the Special Dividend is subject to pro rata reduction if certain expenses incurred by the Company in connection with
the Merger exceed $3.05 million in the aggregate, as further described in the Merger Agreement.
The consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including: (i) the absence of an order, injunction or law issued by a court or governmental authority of competent
jurisdiction that makes the consummation of the Merger illegal; (ii) the absence of legal proceedings brought by a governmental authority of competent jurisdiction seeking to restrain or prohibit the Merger; (iii) the clearance of the Merger by the
Committee on Foreign Investment in the United States without the imposition of any burdensome conditions, as defined in the Merger Agreement; and (iv) subject to certain materiality qualifications, the continued accuracy of the Company’s
representations and warranties and continued compliance by the Company with covenants and obligations (to be performed at or prior to the closing of the Merger).
If the Merger Agreement is terminated in certain circumstances, the Company may be required to pay WSP a termination fee of $4.0 million or reimburse WSP for certain expenses up to $1.75 million.
The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, which is attached as Exhibit 2.1 to the Company’s
Current Report on Form 8-K filed with the SEC on August 28, 2019. Additional information about the Merger and the Merger Agreement is set forth in the Company’s definitive proxy statement filed with the SEC on October 8, 2019 and the definitive proxy
statement supplement filed with the SEC on November 7, 2019.
On November 20, 2019, the Company held a special meeting of the Company’s stockholders at which a proposal to adopt the Merger Agreement was approved by the requisite vote of the Company’s stockholders, as more fully
described in the Company’s Current Report on Form 8-K/A filed with the SEC on December 4, 2019.
During the quarter ended November 2, 2019, the Company’s U.S. operations recorded approximately $1.5 million of expenses in selling, general and administrative expenses related to the Merger.
Cash, cash equivalents and restricted cash are summarized in the following table.
The Company considers all liquid instruments purchased with a maturity of three months or less to be cash equivalents. Money market funds of $0.2 million and less than $0.1 million were included in cash
and cash equivalents at November 2, 2019 and July 31, 2019, respectively. Restricted cash included in other assets represents collateral for pending litigation matters in Brazil that are not expected to be resolved within one year from the balance
sheet date.
The Company’s financial assets or liabilities are measured using inputs from the three levels of the fair value hierarchy. The Company classifies assets and liabilities within the fair value hierarchy
based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The Company has not elected a fair value
option on any assets or liabilities. The three levels of the hierarchy are as follows:
Level 1 Inputs – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Generally, this includes debt and equity securities that are traded on an active exchange market (e.g., New York Stock Exchange) as well as certain U.S. Treasury and U.S. Government and agency mortgage-backed securities that are highly liquid and are
actively traded in over-the-counter markets.
Level 2 Inputs – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive
markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, credit risks, etc.) or can be corroborated by observable market data.
Level 3 Inputs – Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the
assumptions that market participants would use.
The Company monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or
model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. There were no transfers in or out of
levels 1, 2 or 3 during the three months ended November 2, 2019 or October 27, 2018.
The carrying amount of cash, cash equivalents and restricted cash approximated fair value at November 2, 2019 and July 31, 2019. These assets were classified as level 1 instruments at both dates.
Investment securities of $1.6 million at November 2, 2019 and July 31, 2019 primarily included mutual funds invested in U.S. municipal bonds, which the Company may immediately redeem without prior
notice. These mutual funds are valued at the NAV of shares held by the Company at period end as a practical expedient to estimate fair value. These mutual funds are deemed to be actively traded, are required to publish their daily NAV and are
required to transact at that price.
The Company recorded unrealized investment losses or gains of less than $0.1 million in other income on the consolidated statement of operations during the three months ended November 2, 2019 and October
27, 2018. The Company did not record any sales of investment securities during the three months ended November 2, 2019 and October 27, 2018.
Long-term debt consists of bank loans and capitalized equipment leases. Lines of credit consist of borrowings for working capital requirements. The carrying amount of these liabilities approximated fair
value at November 2, 2019 and July 31, 2019. These liabilities were classified as level 2 instruments at both dates.
Substantially all the Company's revenue is derived from environmental consulting work, which is principally derived from the sale of labor hours. Revenue reflected in the Company's consolidated
statements of operations represent services rendered for which the Company maintains a primary contractual relationship with its customers. Included in revenue are certain services outside the Company's normal operations which the Company has
elected to subcontract to other contractors.
The Company’s consulting work is performed under a mix of time and materials, fixed price and cost-plus contracts.
The Company accounts for time and material contracts over the period of performance, predominately based on labor hours incurred. Under time and materials contracts, there is no predetermined fee.
Instead, the Company negotiates hourly billing rates and charges the clients based upon actual hours expended on a project. In addition, any direct project expenditures are passed through to the client and are typically reimbursed. Time and
materials contracts may contain “not to exceed” provisions that effectively cap the amount of revenue that the Company can bill to the client. In order to record revenue that exceeds the billing cap, the Company must obtain approval from the client
for expanded scope or increased pricing.
The Company accounts for fixed price contracts over time, based on progress determined by the ratio of efforts expended to date in proportion to total efforts expected to be expended over the life of a
contract. This revenue recognition method requires the use of estimates and judgment regarding a project’s expected revenue and the extent of progress towards completion. The Company makes periodic estimates of progress towards project completion by
analyzing efforts expended to date, plus an estimate of the amount of effort expected to be incurred until the completion of the project. Revenue is then calculated on a cumulative basis (project-to-date) as the proportion of efforts-expended. The
revenue for the current period is calculated as cumulative revenue less project revenue already recognized. If an estimate of efforts expended at completion on any contract indicates that a loss will be incurred, the entire estimated loss is charged
to operations in the period the loss becomes evident.
Cost-plus contracts provide for payment of allowable incurred efforts expended, to the extent prescribed in the contract, plus fees that are recorded as revenue. These contracts establish an estimate of
total efforts to be expended and an invoicing ceiling that the contractor may not exceed without the approval of the client. Revenue earned from cost-plus contracts is recognized over the period of performance.
Substantially all the Company's cost-plus contracts are with federal governmental agencies and, as such, are subject to audits after contract completion. Government audits have been completed and final
rates have been negotiated through fiscal year 2017. The Company records an allowance for project disallowances in other accrued liabilities for potential disallowances resulting from government audits. Allowances for project disallowances are
recorded as adjustments to revenue when the amounts are estimable. Resolution of these amounts is dependent upon the results of government audits and other formal contract close-out procedures.
Change orders can occur when changes in scope are made after project work has begun and can be initiated by either the Company or its clients. Claims are amounts in excess of the agreed contract price
which the Company seeks to recover from a client for customer delays and/or errors or unapproved change orders that are in dispute. The Company recognizes costs related to change orders and claims as incurred. Revenue and profit are recognized on
change orders when it is probable that the change order will be approved, and the amount can be reasonably estimated. Revenue is recognized only up to the amount of costs incurred on contract claims when realization is probable, estimable and
reasonable support from the customer exists.
The Company expenses all bid and proposal and other pre-contract costs as incurred. Out of pocket expenses such as travel, meals, field supplies, and other costs billed direct to contracts are included
in both revenue and cost of professional services. Sales and cost of sales within the Company’s South American operations exclude value added tax (VAT) assessments by governmental authorities, which the Company collects from its customers and remits
to governmental authorities.
Billed contract receivables represent amounts billed to clients in accordance with contracted terms but not collected as of the end of the reporting period. Billed contract receivables may include: (i)
amounts billed for revenue from efforts expended and fees that have been earned in accordance with contractual terms; and (ii) progress billings in accordance with contractual terms that include revenue not yet earned as of the end of the reporting
period.
Unbilled contract receivables, which represent an unconditional right to payment subject only to the passage of time, represent amounts billable to
clients in accordance with contracted terms that have not been billed as of the end of the reporting period. Unbilled contract receivables that are not expected to be billed and collected within one year from the balance sheet date are reported in
other assets on the condensed consolidated balance sheets.
The Company reduces contract receivables by recording an allowance for doubtful accounts to account for the estimated impact of collection issues resulting from a client’s inability
or unwillingness to pay valid obligations to the Company. The resulting provision for doubtful accounts is recorded within selling, general and administrative expenses on the condensed consolidated statements of operations.
Contract Receivables, net and Contract Assets
Contract receivables, net are summarized in the following table.
The Company anticipates that substantially all billed contract receivables will be collected over the next twelve months. Billed contract receivables included contractual retainage
balances of $0.8 million at November 2, 2019 and July 31, 2019. Management anticipates that the unbilled contract receivables and retainage balances at November 2, 2019 will be substantially billed and collected within one year.
The Company may record contract assets for the right to receive consideration from customers when that right is conditional based on future performance under a contract. Contract assets are transferred to billed
contract receivables when the right to consideration becomes unconditional. The Company did not record any contract assets at November 2, 2019 or July 31, 2019.
Allowance for Doubtful Accounts
Activity within the allowance for doubtful accounts is summarized in the following table.
Contract Receivable Concentrations
Contract receivables and the allowance for doubtful accounts are summarized in the following table.
The Company’s South American operations have historically maintained a higher level of allowance for doubtful accounts than its U.S. operations, due to uncertain or unstable local economies that adversely
impact certain of our South American clients. The allowance for doubtful accounts for the Company’s South American operations represented 9% of related contract receivables at November 2, 2019 and July 31, 2019, compared with 2% for U.S. operations
at the same dates. Management continues to monitor trends and events that may adversely impact the realizability of recorded receivables from our South American clients.
Disaggregation of Revenues
The following table provides a summary of the Company’s gross revenue, disaggregated by operating segment and contract type.
Customer Deposits
Customer deposits of $4.3 million and $3.6 million at November 2, 2019 and July 31, 2019, respectively, represent cash advances received from customers for future services.
Variable Interest Entities (“VIE”)
The Company’s majority owned subsidiaries are deemed to be VIEs when, on a stand-alone basis, they lack sufficient capital to finance the activities of the VIE. The Company consolidates investments in VIEs if the
Company is the primary beneficiary of the VIE. The Company uses a qualitative approach to determine if the Company is the primary beneficiary of the VIE, which considers factors that indicate the Company has significant influence and control over
the activities that most significantly impact the VIE’s economic performance. These factors include representation on the investee’s board of directors, management representation, authority to make decisions, substantive participating rights of the
minority shareholders and ownership interest.
At November 2, 2019 and July 31, 2019, the Company consolidated one majority owned subsidiary that was deemed to be a VIE. The financial position of this VIE as of November 2, 2019 and July 31, 2019 is summarized in the
following table.
Total gross revenue of the consolidated VIE was $2.7 million and $2.4 million for the three months ended November 2, 2019 and October 28, 2018, respectively. With the exception of restricted cash of $0.2
million included in noncurrent assets at November 2, 2019 and July 31, 2018, all assets of the VIE were available for the general operations of the VIE.
Equity Method Investment
VIEs for which the Company is not the primary beneficiary, and other investee companies over which the Company does not influence or control the activities that most significantly impact the investee company’s economic
performance, are not consolidated and are accounted for under the equity method of accounting. Under the equity method of accounting, an investee company's accounts are not reflected within the Company's consolidated balance sheets and statements of
operations. The Company's share of the earnings of the investee company is reported as earnings from equity method investment in the Company's consolidated statements of operations. The Company's carrying value in an equity method investee is
reported as equity method investment on the Company's consolidated balance sheets. The Company's carrying value in an equity method investee is reduced by the Company’s share of dividends declared by an investee company.
If the Company's carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company's consolidated financial statements unless the Company guaranteed obligations of the
investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
The Company’s equity method investment had a carrying value of $1.7 million at November 2, 2019 and July 31, 2019. The Company’s ownership percentage was 52.48% at both dates. The equity method
investment is included within the Company’s South American operating segment. Activity recorded for the Company’s equity method investment is summarized in the following table.
The financial position of the equity method investee is summarized in the following table.
The equity method investee’s results of operations are summarized in the following table.
Unsecured lines of credit are summarized in the following table.
The Company’s U.S. operations are supported by two line of credit arrangements:
The Company’s South American operations are supported by two line of credit arrangements:
Nature of Leases
The Company's leases are classified as operating leases and consist mostly of real estate leases. For leases with terms greater than twelve months at lease commencement, the Company recognizes a right of
use asset and a corresponding lease liability. The initial right of use asset and corresponding lease liability are recognized at the present value of remaining lease payments over the lease term. Because the Company has elected to not separate
lease and non-lease components, lease payments include variable costs paid to the landlord for common area maintenance, real estate taxes, insurance, and other operating expenses. Leases with an initial term of twelve months or less are not recorded
on the Company's condensed consolidated balance sheet. The Company recognizes lease expense for operating leases on a straight-line basis over the lease term.
The Company's leases have lease terms ranging from one to six years, some of which include options to extend or terminate the lease. The exercise of lease renewal options is at the Company's sole
discretion. When deemed reasonably certain of exercise, the renewal options are included in the determination of the lease term. The Company's lease agreements do not contain material residual value guarantees or any material restrictive covenants.
As of November 2, 2019, the Company does not have any significant additional operating leases that have not yet commenced.
Significant Assumptions of Judgements
The discount rate implicit within each lease is generally not readily determinable, therefore, the Company uses its estimated incremental borrowing rate in determining the present value of lease
payments. The incremental borrowing rate is determined based on the Company’s recent debt issuances, lease term, and the currency in which lease payments are made.
Significant assumptions are provided in the following table.
Amounts Recognized in the Financial Statements
Balance sheet classification of right of use assets and lease liabilities are presented in the following table.
Operating lease expense of $0.6 million for the three months ending November 2, 2019 is included in selling, general and administrative expenses on the condensed consolidated statements operations.
Short-term lease expense, sublease income, and variable lease expenses were not material for the three months ending November 2, 2019.
Maturities of Operating Lease Liabilities
Maturities of operating lease liabilities as of November 2, 2019 are provided in the following table.
During interim reporting periods, the effective tax rate may be impacted by changes in the mix of forecasted income from the U.S. and foreign jurisdictions where the Company operates, by changes in tax rates within those
jurisdictions, or by significant unusual or infrequent items that could change assumptions used in the calculation of the income tax provision.
The Company’s effective tax rate was a benefit of 12.2% and 57.4% for the three months ended November 2, 2019 and October 27, 2018, respectively. The effective tax rate for the three months ended November 2, 2019 was
less than the statutory U.S. federal rate of 21% due mainly to the following factors:
The following table provides a reconciliation of the changes in consolidated shareholders’ equity for the three months ended November 2, 2019.
The following table provides a reconciliation of the changes in consolidated shareholders’ equity for the three months ended October 27, 2018.
Class A and Class B Common Stock
The relative rights, preferences and limitations of the Company's Class A and Class B Common Stock are summarized as follows: Holders of Class A Common Stock are entitled to elect 25% of the Board of
Directors so long as the number of outstanding Class A Common Stock is at least 10% of the combined total number of outstanding Class A and Class B Common Stock. Holders of Class A Common Stock have one-tenth the voting power of Class B Common Stock
with respect to most other matters.
In addition, holders of Class A Common Stock are eligible to receive dividends in excess of (and not less than) those paid to holders of Class B Common Stock. Holders of Class B Common Stock have the
option to convert at any time, each share of Class B Common Stock into one share of Class A Common Stock. Upon sale or transfer, shares of Class B Common Stock will automatically convert into an equal number of shares of Class A Common Stock, except
that sales or transfers of Class B Common Stock to an existing holder of Class B Common Stock or to an immediate family member will not cause such shares to automatically convert into Class A Common Stock.
Restrictive Shareholder Agreement
Messrs. Gerhard J. Neumaier (deceased), Frank B. Silvestro, Ronald L. Frank, and Gerald A. Strobel entered into a Stockholders’ Agreement dated May 12, 1970, as amended January 24, 2011, which governs the sale of certain
shares of EEI common stock (now classified as Class B Common Stock) owned by them, certain children of those individuals and any such shares subsequently transferred to their spouses and/or children outright or in trust for their benefit upon the
demise of a signatory to the Agreement (“Permitted Transferees”). The Agreement provides that prior to accepting a bona fide offer to purchase some or all of their shares of Class B Common Stock governed by the Agreement, that the selling party must
first allow the other signatories to the Agreement (not including any Permitted Transferee) the opportunity to acquire on a pro rata basis, with right of over-allotment, all of such shares covered by the offer on the same terms and conditions
proposed by the offer.
Concurrently with the execution and delivery of the Merger Agreement, Frank B. Silvestro, Ronald L. Frank, Gerald A. Strobel, Marshall A. Heinberg, Michael C. Gross, Michael El-Hillow, the Gerhard J.
Neumaier Testamentary Trust, Justin C. Jacobs and Mill Road Capital II, L.P. (the “Supporting Stockholders”) entered into voting and support agreements with WSP (the “Voting Agreements”) with respect to all Company Shares and other Subject Securities
(as defined in the Voting Agreements) beneficially owned or owned of record by the Supporting Stockholders (the “Voting Agreement Shares”). Upon the closing of the transaction contemplated by the Merger Agreement, the Stockholders’ Agreement and the
Voting Agreements shall terminate.
Cash Dividends
The Company paid $0.9 million of cash dividends during the three months ended November 2, 2019 and October 27, 2018 that were declared and accrued in prior periods.
Stock Repurchase Plan
In August 2010, the Company’s Board of Directors approved a program for repurchase of 200,000 shares of Class A Common Stock (the “Stock Repurchase Program”). As of November 2, 2019, the
Company had repurchased 122,918 shares of Class A Common Stock, and 77,082 shares had yet to be repurchased under the Stock Repurchase Program. The Company did not acquire any Class A shares under the Stock Repurchase Program during the three
months ended November 2, 2019 or October 27, 2018.
Noncontrolling Interests
The Company discloses noncontrolling interests as a separate component of consolidated shareholders’ equity on the accompanying condensed consolidated balance sheets. Earnings and other comprehensive
income (loss) are separately attributed to both the controlling and noncontrolling interests. The Company calculates earnings per share based on net income (loss) attributable to the Company’s controlling interests.
The Company considers acquiring additional interests in majority owned subsidiaries when noncontrolling shareholders express their intent to sell their interests. The Company settles and
records acquisitions of noncontrolling interests at amounts that approximate fair value. Purchases of noncontrolling interests are recorded as reductions of shareholders’ equity on the condensed consolidated statements of shareholders’ equity.
The Company did not acquire additional interest in any of its majority-owned subsidiaries during the three months ended November 2, 2019 or October 27, 2018.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is comprised of $2.3 million and $2.1 million of unrealized net foreign currency translation losses at November 2, 2019 and July 31, 2019, respectively.
Basic and diluted earnings per share (“EPS”) are computed by dividing the net income attributable to EEI common shareholders by the weighted average number of common shares outstanding for the period.
After consideration of all the rights and privileges of the Class A and Class B stockholders (defined in Note 11 of these condensed consolidated financial statements), the Company allocates undistributed earnings between the classes on a one-to-one
basis when computing earnings per share. As a result, basic and fully diluted earnings per Class A and Class B share are equal amounts.
The Company has determined that its unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities.
These securities are included in the computation of earnings per share pursuant to the two-class method. As a result, unvested restricted shares are included in the weighted average shares outstanding calculation.
The computation of earnings per share is included in the following table.
Management generally assesses operating performance and makes strategic decisions based on the geographic regions in which the Company does business. The Company reports separate operating segment
information for its U.S. and South American operations. Gross revenue, net income (loss) attributable to EEI and total assets by operating segment are summarized in the following tables.
Gross revenue from U.S. federal government contracts was $3.5 million and $3.1 million for the three months ended November 2, 2019 and October 27, 2018, respectively.
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 Brazil”), a
majority-owned consolidated subsidiary of EEI. The Notice of Infraction concerned the taking and collecting of wild animal specimens without authorization by the competent authority and imposed a fine of approximately 0.5 million Reals against
E&E Brazil. The Institute also filed Notices of Infraction against four employees of E&E Brazil alleging the same claims and imposed fines against those individuals that, in the aggregate, were equal to the fine imposed against E&E
Brazil. No claim has been made against EEI.
E&E Brazil has filed court claims appealing the administrative decisions of the Institute for E&E Brazil’s employees that: (a) deny the jurisdiction of the Institute; (b) state that the Notice of
Infraction is constitutionally vague; and (c) affirmatively state that E&E Brazil had obtained the necessary permits for the surveys and collections of specimens under applicable Brazilian regulations and that the protected conservation area is
not clearly marked to show its boundaries. The claim of violations against one of the four employees was dismissed. The remaining three employees have fines assessed against them that are being appealed through the federal courts. Violations
against E&E Brazil are pending agency determination. At July 31, 2019, the Company recorded a reserve of approximately $0.4 million in other accrued liabilities related to these claims.
On October 8 and 14, 2019, two complaints challenging the Merger were filed in the United States District Court for the Southern District of New York, captioned Jordan Rosenblatt v. Ecology & Environment, Inc., et
al. and Randall Meidenbauer v. Ecology & Environment Inc. et al., respectively. The Rosenblatt complaint was filed as a putative class action on behalf of the public shareholders of the Company, while the Meidenbauer complaint was filed as an
individual action on behalf of the named plaintiff only. Both complaints name as defendants the Company and the members of the Company’s Board of Directors. The Rosenblatt complaint generally alleges violations of federal securities laws with
respect to purported disclosure deficiencies in the preliminary proxy statement for the Merger that the Company filed with the SEC on September 26, 2019, and the Meidenbauer complaint generally alleges violations of federal securities laws with
respect to purported disclosure deficiencies in the definitive proxy statement for the Merger that the Company filed with the SEC on October 8, 2019 (the “Definitive Proxy Statement”). The complaints seek various forms of relief, including a
preliminary injunction preventing the Company from proceeding with the stockholder meeting or the consummation of the Merger until the alleged material information omitted from the Definitive Proxy Statement is disclosed, rescission of the Merger if
it is consummated, damages, attorneys’ fees and expenses. On October 31, 2019, the Company received a demand letter from an additional stockholder alleging violations of federal securities laws with respect to purported disclosure deficiencies in
the Definitive Proxy Statement and threatening to file a lawsuit unless certain supplemental disclosures were made by the Company regarding the Merger.
On November 7, 2019, E&E filed a supplement to the Definitive Proxy Statement disclosing, among other things, certain additional information in the sections “The Merger—Background of the Merger”, “The Merger— Opinion
of E&E’s Financial Advisor” and “The Merger— Certain Unaudited Prospective Financial Information” (the “Responsive Disclosures”) in response to the two complaints and the demand letter and solely for the purpose of mooting the allegations
contained therein. In light of the Responsive Disclosures, counsel for each of the plaintiffs who had filed the complaints and sent the demand letter informed counsel for the Company that they considered their claims to be moot, and would
voluntarily dismiss their complaints (or, in the case of the plaintiff that submitted a demand letter, would refrain from filing a complaint), subject in each case to the plaintiff’s right to seek a mootness fee. For the avoidance of doubt, the
Company denies the allegations of the two complaints and demand letter, denies any violations of law, and denies any obligation to pay a mootness fee or other compensation in connection with the Responsive Disclosures. The Company believes that the
Definitive Proxy Statement disclosed all material information required to be disclosed therein and denies that the Responsive Disclosures are material or are otherwise required to be disclosed. The Company disclosed the Responsive Disclosures
following discussions with counsel for plaintiffs and the stockholder from whom the Company received the demand letter and solely to avoid the expense and distraction of litigation. Nothing in the Responsive Disclosures shall be deemed an admission
of the legal necessity or materiality under applicable law of any of the Responsive Disclosures.