ECOLOGY & ENVIRONMENT, INC. References in this Quarterly Report on Form 10-Q (the "Quarterly Report") to "EEI" refer toEcology and Environment Inc. , aNew York corporation. References to "the Company," "we," "us," "our," or similar terms refer to EEI together with its consolidated subsidiaries.
Agreement and Plan of Merger
OnAugust 28, 2019 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with WSP Global Inc., a Canadian corporation ("WSP"), andEverest Acquisition Corp. , aNew 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 theCommittee on Foreign Investment inthe 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 theSecurities and Exchange Commission (the "SEC") onAugust 28, 2019 . Additional information about the Merger and the Merger Agreement is set forth in the Company's definitive proxy statement filed with theSEC onOctober 8, 2019 and the proxy supplement filed onNovember 7, 2019 . OnNovember 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 theSEC onDecember 4, 2019 .
During the quarter ended
Executive Overview
EEI was incorporated inFebruary 1970 as a global broad-based environmental consulting firm with an underlying philosophy of providing professional services in the regions it serves so that sustainable economic and human development may proceed with acceptable impact on the environment. Our management generally assesses operating performance and makes strategic decisions based on the geographic regions in which we do business. During the quarter endedNovember 2, 2019 , EEI had direct and indirect ownership in four significant active wholly owned and majority-owned operating subsidiaries in three countries (the United States of America ,Brazil andPeru ), and one majority-owned equity investment inChile . We report separate operating segment information for ourU.S. and South American operations. Page 19 of 27
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Our significant active subsidiaries as ofNovember 2, 2019 are listed in the following table. Percentage of Subsidiary Capital Stock Owned by the Operating Name Company Segment Consolidated Subsidiaries: Ecology & Environment Engineering, United States Inc. 100.00 % Walsh Environmental, LLC 100.00 % United States Gustavson Associates, LLC 83.60 % United States Walsh Peru, S.A. Ingenieros y South America Cientificos Consultores ("Walsh Peru") 74.78 % ecology and environment do brasil South America Ltda. ("E&E Brazil") 72.00 %Majority-Owned Equity Investment (a): Gestión Ambiental Consultores S.A. % South America ("GAC") 52.48 EEI's equity investment in GAC is reported as an "equity method investment" on the condensed consolidated balance sheets. EEI's share of GAC's earnings is reported as "income from equity method investment" on the condensed consolidated statements of operations, and as a component of the South American operating segment. The following table includes selected financial information by operating segment for the three months endedNovember 2, 2019 andOctober 27, 2018 (the first quarters of fiscal years 2020 and 2019, respectively). Refer to "Results of Operations" below for additional commentary regarding the Company's revenues and expenses for these reporting periods. Three Months Ended November 2, October 27, $ % 2019 2018 Change Change ($ in thousands) U.S. operations: Gross revenue$ 17,778 $ 18,011 $ (233 ) (1 )% Gross revenue less subcontract costs 15,096 14,200 896 6 % Direct cost of professional services and other direct operating expenses 7,553 6,496 1,057 16 % Gross margin 7,543 7,704 (161 ) (2 )% Selling, general and administrative expenses 9,197 7,836 1,361 17 % Net income (loss) attributable to (a) EEI (1,669 ) (107 ) (1,562 ) % South American operations: Gross revenue$ 4,435 $ 3,741 $ 694 19 % Gross revenue less subcontract costs 3,645 2,978 667 22 % Direct cost of professional services and other direct operating expenses 1,990 1,638 352 21 % Gross margin 1,655 1,340 315 24 % Selling, general and administrative expenses 1,518 1,364 154 11 % Income from equity method investment 79 60 19 32 % Net income (loss) attributable to (a) EEI 142 (13 ) 155 % Consolidated totals: Gross revenue$ 22,213 $ 21,752 $ 461 2 % Gross revenue less subcontract costs 18,741 17,178 1,563 9 % Direct cost of professional services and other direct operating expenses 9,543 8,134 1,409 17 % Gross margin 9,198 9,044 154 2 % Selling, general and administrative expenses 10,715 9,200 1,515 16 % Income from equity method investment 79 60 19 32 % Net income (loss) attributable to (a) EEI (1,527 ) (120 ) (1,407 ) %
(a) percentage change not relevant due to relatively immaterial amounts reported
for three months ended
Gross margin represents gross revenue less subcontract costs and direct cost of services. As a percentage of gross revenue, the consolidated gross margin percentage of 41.4% for the first quarter of fiscal year 2020 decreased slightly from the first quarter of the prior year. The current period increase in project related expenses (as a percentage of prior year project related expenses) exceeded the increase in gross revenue less subcontract costs in ourU.S. operating segment. Page 20 of 27
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Results of Operations
Gross Revenue and Gross Revenue less Subcontract Costs
Gross revenue for our operating segments is summarized by contract type in the
following table.
Three Months Ended
November 2, October 27,
2019 2018
Gross revenue from time and
materials contracts:
U.S. operations $ 9,965 $ 9,257
South American operations 40 -
Total gross revenue from time and
materials contracts $ 10,005 $ 9,257
Gross revenue from fixed price
contracts:
U.S. operations $ 3,650 $ 3,612
South American operations 4,395 3,741
Total gross revenue from fixed price
contracts $ 8,045 $ 7,353
Gross revenue from cost-plus
contracts:
U.S. operations $ 4,163 $ 5,142
South American operations - -
Total gross revenue from cost-plus
contracts $ 4,163 $ 5,142
Gross revenue from all contracts:
U.S. operations $ 17,778 $ 18,011
South American operations 4,435 3,741
Consolidated gross revenue $ 22,213 $ 21,752
Gross revenue less subcontract costs is a key metric utilized by management for
operational monitoring and decision-making. References to "revenue" in the
following commentary refer to gross revenue less subcontract costs, which is
summarized by operating segment in the following table.
Three Months Ended
November 2, October 27, $ %
Operating Segment 2019 2018 Change Change
U.S. operations $ 15,096 $ 14,200 $ 896 6 %
South American operations:
Peru 1,167 912 255 28 %
Brazil 2,478 2,028 450 22 %
Other --- 38 (38 ) --- (a)
Total South American operations 3,645 2,978 667 22 %
Consolidated gross revenue less %
subcontract costs $ 18,741 $ 17,178 $ 1,563 9
(a) Percent change is not relevant because of the relatively immaterial amounts
for all periods presented.
Revenue from ourU.S. operations increased 6% during the first quarter of fiscal year 2020, as compared with the first quarter of the prior year, as slightly lower gross revenues were more than offset by 30% reduction in subcontract expenses on our projects. During the current quarter, we recorded increased project activity and revenue in our transmission, resiliency and federal site assessment and remediation sectors, while activity in our pipeline, renewables and restoration sectors was consistent with the prior year. These positive factors were partially offset by lower project activity and revenue in our liquified natural gas and federal water and lands sectors. Page 21 of 27
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South American Operations
Revenue from our Peruvian operations increased 28% during the first quarter of fiscal year 2020 compared with the first quarter of the prior year, due to higher project volumes with commercial clients in within mining and resilience planning markets. Revenue from our Brazilian operations increased 22% during the first quarter of fiscal year 2020 compared with the first quarter of the prior year. In local currency, revenue from our Brazilian operations increased 21% due mainly to increased project volumes with commercial clients in the transmission, energy and mining sectors.
Cost of Professional Services and Other Direct Operating Expenses
Cost of professional services and other direct operating expenses represents
labor and other direct costs of providing services to our clients under our
project agreements. These costs, and fluctuations in these costs, generally
correlate directly with related project work volumes and revenues. Cost of
professional services and other direct operating expenses by operating segment
is summarized in the following table.
Three Months Ended
November 2, October 27, $ %
Operating Segment 2019 2018 Change Change
($ in thousands)
U.S. operations $ 7,553 $ 6,496 $ 1,057 16 %
South American operations:
Peru 410 400 10 3 %
Brazil 1,580 1,225 355 29 %
Other --- 13 (13 ) --- (a)
Total South American operations 1,990 1,638 352 21 %
Consolidated cost of professional
services and other direct operating %
expenses $ 9,543 $ 8,134 $ 1,409 17
(a) Percent change is not relevant because of the relatively immaterial amounts
for all periods presented.
Consolidated cost of professional services and other direct operating expenses increased 17% during the current quarter compared with the same period last year. Higher direct costs in ourU.S. and Brazilian operations were due mainly to higher project revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses represent operating costs not
directly associated with the generation of revenue. Selling, general and
administrative expenses by operating segment are summarized in the following
table.
Three Months Ended
November 2, October 27, $ %
Operating Segment 2019 2018 Change Change
($ in thousands)
U.S. operations $ 9,197 $ 7,836 $ 1,361 17 %
South American operations:
Peru 660 665 (5 ) (1 )%
Brazil 858 669 189 28 %
Other --- 30 (30 ) --- (a)
Total South American
operations 1,518 1,364 154 11 %
Consolidated selling, general
and administrative expenses $ 10,715 $ 9,200 $ 1,515 16 %
(a) Percent change is not relevant because of the relatively immaterial amounts
for all periods presented.
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Selling, general and administrative expenses increased 17% during the first quarter of fiscal year 2020 compared with the same quarter last year. During the quarter endedNovember 2, 2019 , ourU.S. operations recorded approximately$1.5 million of expenses related to the Merger.
South American Operations
Selling, general and administrative expenses in our Brazilian operations increased 28% during the first quarter of fiscal year 2020 compared with the same quarter last year. In local currency, staff and other costs increased 26% due to increased project proposal activity and increased general and administrative costs to support higher project volumes and expanded operations.
Income from
The Company's equity method investment in GAC had a carrying value of$1.7 million and$2.1 million atNovember 2, 2019 andJuly 31, 2018 , respectively. The Company's ownership percentage was 52.48% at both dates. The equity method investment in GAC is included within the Company'sU.S. operations operating segment. Activity recorded for the Company's equity method investment is summarized in the following table. Three Months Ended November 2, October 27, 2019 2018 (in thousands) Equity investment carrying value at beginning of period$ 1,658 $ 2,058 GAC net income attributable to EEI 79 60 EEI's portion of other comprehensive income recorded by GAC (53 ) --- Equity investment carrying value at end of period$ 1,684 $ 2,118
The results of GAC's operations for the quarters ended
Three Months Ended
November 2, October 27,
2019 2018
(in thousands)
Gross revenue $ 2,892 $ 2,852
Direct cost of services and subcontract costs 1,829 1,974
Income from operations 229 157
Net income 151 109
Net income attributable to EEI 79 60
Income Taxes
During interim reporting periods, our effective tax rate may be impacted by
changes in the mix of forecasted income from the U.S. and foreign jurisdictions
where we operate, 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:
• Continued application of unfavorable permanent tax adjustments pertaining to
global low-taxed intangible income in the
legislation enacted during fiscal year 2018; and
• Income from operations in
to a valuation allowance recorded against deferred tax assets.
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• Taxable income from operations in
is higher that the
Liquidity and Capital Resources
Cash, cash equivalents and restricted cash decreased
• We paid
that were declared during the prior quarter. Our Board of Directors considers
the approval dividends to our shareholders on a discretionary basis based on
various operating parameters, including available cash balances, results of
current operations and projections of future operating results and cash flows.
• During the first quarter of fiscal year 2019, our
paid approximately
• A decline in revenue and profits from our
2019 had a detrimental impact on cash generated from operating activities
during the first quarter of fiscal year 2020.
• Higher revenue from our Peruvian operations during the first quarter of fiscal
year 2020 required initial resource outlays on new projects that have not yet
been billed to and collected from our clients.
OurU.S. operations had$32.5 million of unsecured lines of credit available to fund working capital requirements. There were no cash advances and less than$0.1 million of letters of credit outstanding under these lines of credit as ofNovember 2, 2019 . Our lenders have reaffirmed the lines of credit within the past twelve months. We believe that available cash balances, anticipated cash flows and our available lines of credit will be sufficient to cover working capital requirements of ourU.S. operations during the next twelve months and the foreseeable future. Our South American operations had$3.3 million of unsecured lines of credit available to fund working capital requirements. There were$0.2 million of cash advances and$1.3 million of letters of credit outstanding under these lines of credit as ofNovember 2, 2019 . Our lenders have reaffirmed the lines of credit within the past twelve months. Our South American operations are located in countries where local economies have historically had volatile reactions to changing global and local economic conditions. There is continual risk that economic uncertainty will have an impact on our operations and liquidity position inSouth America . Although we currently believe that available cash balances, anticipated cash flows, and available lines of credit will be sufficient to cover working capital requirements of our South American operations in the near future, economic uncertainty and volatility may challenge our liquidity position in the longer term. In the event that these subsidiaries are unable to generate adequate cash flow to fund their operations, additional funding from EEI or lending institutions will be considered. Excess cash accumulated by any foreign subsidiary, beyond that necessary to fund operations or business expansion, may be repatriated to theU.S. at the discretion of the Boards of Directors of the respective entities. The Company repatriated$0.2 million of dividends from foreign subsidiaries, net of local taxes, during the first quarter of fiscal year 2020.
Contract Backlog
Firm backlog represents an estimate of gross revenue that will be recognized over the remaining life of the projects under contracts that are awarded, funded and in progress. These projects include 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, in which case the client would only be obligated to pay us for services provided through the termination date. A significant portion of our revenue is generated through projects awarded under Master Service Agreements with our clients. In these instances, only the current unfinished projects are included in our backlog.
Firm backlog by operating segment is summarized in the following table.
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