Notes to Condensed Consolidated Financial Statements
1.
|
Organization and Basis of Presentation
|
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 six months ended January 26, 2019, EEI
and its subsidiaries (collectively, the “Company”) included six active wholly-owned and majority-owned operating subsidiaries located in four countries (the United States of America (the “U.S.”), Brazil, Peru, and Ecuador), 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, 2018 filed with the SEC (the “2018 Annual Report”). Other than new or revised accounting policies resulting from the adoption of new accounting pronouncements
described in Note 3 of these condensed consolidated financial statements, the accounting policies followed by the Company for preparation of the consolidated financial statements included in the 2018 Annual Report were also followed for this
quarterly report. The condensed consolidated results of operations for the three and six months ended January 26, 2019 are not necessarily indicative of the results for any subsequent period or the entire fiscal year ending July 31, 2019.
2.
|
Restatement of Unaudited Condensed
Consolidated Financial Statements
|
As previously disclosed in the Current Report on Form
8-K filed by the Company with the SEC on December 12, 2018, the Audit Committee of the Board of Directors (the “Audit Committee”) determined
that the Company
’
s
previously issued financial statements for quarterly periods prior to July 31, 2018 can no longer be relied upon due to errors related to accounting for EEI
’
s
investment in Gestion Ambiental Consultores S.A. (
“
GAC
”
) since 1999. The Company
intends to prospectively amend financial statements for the quarters ended October 28, 2017, January 27, 2018 and April 28, 2018 when it files its Quarterly Reports on Form 10-Q for the corresponding quarters during the fiscal year ending July
31, 2019. As a result, the accompanying unaudited condensed consolidated financial statements include restated unaudited condensed consolidated statements of operations, comprehensive income, cash flows and shareholders
’
equity for the fiscal quarter and six months ended January 27, 2018.
The Company had previously included GAC
’
s
financial statements in consolidated financial statements filed with the SEC prior to July 31, 2018. In December 2018, the Company determined that, although it had a majority ownership interest in GAC, it did not have a controlling interest in
GAC
’
s operations due to lack of continuous control over the activities of GAC
’
s board
of directors and senior management team. As a result, the Company
’
s net investment in GAC should have been accounted for using the equity method of accounting.
Collectively, the adjustments necessary to deconsolidate GAC
’
s unaudited financial statements and correctly account for the Company
’
s investment in GAC under the equity method of accounting are referred
to as the
“
GAC Deconsolidation Adjustments
.”
For the three months ended January 27,
2018, the GAC Deconsolidation Adjustments resulted in decreases of $3.2 million and $0.3 million in consolidated gross revenue and income before income tax provision, respectively, and had no impact on net income attributable to EEI. For the six
months ended January 27, 2018, the GAC Deconsolidation Adjustments resulted in decreases of $5.3 million and $0.4 million in consolidated gross revenue and income before income tax provision, and had no impact on net income attributable to EEI.
In addition to the GAC Deconsolidation Adjustments, previously filed financial statements for the quarter and six months ended
October 28, 2017 were also adjusted for correction of other errors in the financial statements and disclosures that were deemed to be immaterial on an individual basis and in the aggregate for those reporting periods (the
“
Out of Period Adjustments
”
). For the three months ended January 27, 2018, the Out of Period Adjustments
resulted in decreases of $0.6 million and less than $0.1 million of consolidated gross revenue and income before income tax provision, respectively, and an increase of $0.2 million of net income attributable to EEI. For the six months ended
January 27, 2018, the Out of Period Adjustments resulted in increases of $0.5 million, less than $0.1 million and $0.3 million of consolidated gross revenue, income before income tax provision and net income attributable to EEI, respectively
.
The “As Previously Reported” amounts in the tables below represent the amounts reported in the Company’s
Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2018, filed with the SEC on March 13, 2018.
Ecology and Environment Inc.
Condensed Consolidated Statements of Operations
(amounts in thousands, except share data)
|
|
Three Months Ended January 27, 2018
|
|
|
|
As
Previously
Reported
|
|
|
GAC
Deconsolidation
Adjustments
|
|
|
Out of Period
Adjustments
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
25,083
|
|
|
$
|
(3,154
|
)
|
|
$
|
(640
|
)
|
|
$
|
21,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of professional services and other direct operating expenses
|
|
|
9,078
|
|
|
|
(1,112
|
)
|
|
|
-
|
|
|
|
7,966
|
|
Subcontract costs
|
|
|
5,769
|
|
|
|
(731
|
)
|
|
|
(609
|
)
|
|
|
4,429
|
|
Selling, general and administrative expenses
|
|
|
10,228
|
|
|
|
(745
|
)
|
|
|
-
|
|
|
|
9,483
|
|
Depreciation and amortization
|
|
|
268
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(260
|
)
|
|
|
(557
|
)
|
|
|
(31
|
)
|
|
|
(848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity method investment
|
|
|
-
|
|
|
|
221
|
|
|
|
-
|
|
|
|
221
|
|
Net interest income (expense)
|
|
|
(9
|
)
|
|
|
5
|
|
|
|
-
|
|
|
|
(4
|
)
|
Net foreign exchange (loss) gain
|
|
|
(29
|
)
|
|
|
4
|
|
|
|
-
|
|
|
|
(25
|
)
|
Other income (expense)
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
(286
|
)
|
|
|
(327
|
)
|
|
|
(31
|
)
|
|
|
(644
|
)
|
Income tax provision
|
|
|
311
|
|
|
|
(148
|
)
|
|
|
(279
|
)
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(597
|
)
|
|
|
(179
|
)
|
|
|
248
|
|
|
|
(528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss attributable to noncontrolling interests
|
|
|
(171
|
)
|
|
|
179
|
|
|
|
1
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Ecology and Environment Inc.
|
|
$
|
(768
|
)
|
|
$
|
-
|
|
|
$
|
249
|
|
|
$
|
(519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share: basic and diluted
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outatanding: basic and diluted
|
|
|
4,301,604
|
|
|
|
|
|
|
|
|
|
|
|
4,301,604
|
|
|
|
Six Months Ended January 27, 2018
|
|
|
|
As
Previously
Reported
|
|
|
GAC
Deconsolidation
Adjustments
|
|
|
Out of Period
Adjustments
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
52,165
|
|
|
$
|
(5,266
|
)
|
|
$
|
495
|
|
|
$
|
47,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of professional services and other direct operating expenses
|
|
|
18,559
|
|
|
|
(1,975
|
)
|
|
|
-
|
|
|
|
16,584
|
|
Subcontract costs
|
|
|
11,498
|
|
|
|
(1,190
|
)
|
|
|
470
|
|
|
|
10,778
|
|
Selling, general and administrative expenses
|
|
|
20,737
|
|
|
|
(1,472
|
)
|
|
|
-
|
|
|
|
19,265
|
|
Depreciation and amortization
|
|
|
537
|
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
834
|
|
|
|
(611
|
)
|
|
|
25
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity method investment
|
|
|
-
|
|
|
|
239
|
|
|
|
-
|
|
|
|
239
|
|
Net interest income (expense)
|
|
|
(14
|
)
|
|
|
12
|
|
|
|
-
|
|
|
|
(2
|
)
|
Net foreign exchange (loss) gain
|
|
|
(26
|
)
|
|
|
6
|
|
|
|
-
|
|
|
|
(20
|
)
|
Other income (expense)
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
806
|
|
|
|
(354
|
)
|
|
|
25
|
|
|
|
477
|
|
Income tax provision
|
|
|
755
|
|
|
|
(160
|
)
|
|
|
(278
|
)
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
51
|
|
|
|
(194
|
)
|
|
|
303
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss attributable to noncontrolling interests
|
|
|
(286
|
)
|
|
|
194
|
|
|
|
1
|
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Ecology and Environment Inc.
|
|
$
|
(235
|
)
|
|
$
|
-
|
|
|
$
|
304
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share: basic and diluted
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outatanding: basic and diluted
|
|
|
4,301,604
|
|
|
|
|
|
|
|
|
|
|
|
4,301,604
|
|
Ecology and Environment Inc.
Condensed Consolidated Statements of Comprehensive Income
(amounts in thousands)
|
|
Three Months Ended January 27, 2018
|
|
|
|
As
Previously
Reported
|
|
|
GAC
Deconsolidation
Adjustments
|
|
|
Out of Period
Adjustments
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income including noncontrolling interests
|
|
$
|
(597
|
)
|
|
$
|
(179
|
)
|
|
$
|
248
|
|
|
$
|
(528
|
)
|
Foreign currency translation adjustments
|
|
|
166
|
|
|
|
(115
|
)
|
|
|
-
|
|
|
|
51
|
|
Unrealized investment (losses) gains, net
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
(444
|
)
|
|
|
(294
|
)
|
|
|
248
|
|
|
|
(490
|
)
|
Comprehensive (income) loss attributable to noncontrolling interests
|
|
|
(264
|
)
|
|
|
235
|
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to EEI
|
|
$
|
(708
|
)
|
|
$
|
(59
|
)
|
|
$
|
248
|
|
|
$
|
(519
|
)
|
|
|
Six Months Ended January 27, 2018
|
|
|
|
As
Previously
Reported
|
|
|
GAC
Deconsolidation
Adjustments
|
|
|
Out of Period
Adjustments
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income including noncontrolling interests
|
|
$
|
51
|
|
|
$
|
(194
|
)
|
|
$
|
303
|
|
|
$
|
160
|
|
Foreign currency translation adjustments
|
|
|
195
|
|
|
|
(158
|
)
|
|
|
-
|
|
|
|
37
|
|
Unrealized investment (losses) gains, net
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
230
|
|
|
|
(352
|
)
|
|
|
303
|
|
|
|
181
|
|
Comprehensive (income) loss attributable to noncontrolling interests
|
|
|
(393
|
)
|
|
|
270
|
|
|
|
-
|
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to EEI
|
|
$
|
(163
|
)
|
|
$
|
(82
|
)
|
|
$
|
303
|
|
|
$
|
58
|
|
Ecology and Environment Inc.
Condensed Consolidated Statement of Cash Flows
(amounts in thousands)
|
|
Six Months Ended January 27, 2018
|
|
|
|
As
Previously
Reported
|
|
|
Impact of
GAC
Deconsolidation
|
|
|
Other
Adjustments
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
51
|
|
|
$
|
(194
|
)
|
|
$
|
303
|
|
|
$
|
160
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
537
|
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
519
|
|
Provision for deferred income taxes
|
|
|
436
|
|
|
|
(266
|
)
|
|
|
(262
|
)
|
|
|
(92
|
)
|
Share based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
70
|
|
|
|
70
|
|
(Gain) loss on sale of assets and investment securities
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
Net recovery of contract adjustments
|
|
|
(35
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(35
|
)
|
Net bad debt (recovery) expense
|
|
|
(130
|
)
|
|
|
32
|
|
|
|
-
|
|
|
|
(98
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- contract receivables
|
|
|
7,248
|
|
|
|
261
|
|
|
|
(686
|
)
|
|
|
6,823
|
|
- other current assets
|
|
|
(300
|
)
|
|
|
5
|
|
|
|
145
|
|
|
|
(150
|
)
|
- income tax receivable
|
|
|
543
|
|
|
|
142
|
|
|
|
(17
|
)
|
|
|
668
|
|
- equity method investment
|
|
|
-
|
|
|
|
(239
|
)
|
|
|
-
|
|
|
|
(239
|
)
|
- other non-current assets
|
|
|
60
|
|
|
|
(13
|
)
|
|
|
(11
|
)
|
|
|
36
|
|
- accounts payable
|
|
|
(1,996
|
)
|
|
|
69
|
|
|
|
442
|
|
|
|
(1,485
|
)
|
- accrued payroll costs
|
|
|
(640
|
)
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
(740
|
)
|
- income taxes payable
|
|
|
294
|
|
|
|
8
|
|
|
|
-
|
|
|
|
302
|
|
-
customer
deposits
|
|
|
506
|
|
|
|
52
|
|
|
|
-
|
|
|
|
558
|
|
- other accrued liabilities
|
|
|
(250
|
)
|
|
|
34
|
|
|
|
-
|
|
|
|
(216
|
)
|
Net cash provided by (used in) operating activities
|
|
|
6,323
|
|
|
|
(227
|
)
|
|
|
(16
|
)
|
|
|
6,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, building and equipment
|
|
|
(425
|
)
|
|
|
10
|
|
|
|
-
|
|
|
|
(415
|
)
|
Proceeds from sale of building and equipment
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Purchase of investment securities
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
Net cash (used in) provided by investing activities
|
|
|
(417
|
)
|
|
|
10
|
|
|
|
-
|
|
|
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(860
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(860
|
)
|
Repayment of debt
|
|
|
(358
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(358
|
)
|
Net borrowings (repayment) of lines of credit
|
|
|
(152
|
)
|
|
|
218
|
|
|
|
-
|
|
|
|
66
|
|
Distributions to noncontrolling interests
|
|
|
(192
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(192
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(1,562
|
)
|
|
|
218
|
|
|
|
-
|
|
|
|
(1,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
20
|
|
|
|
(24
|
)
|
|
|
9
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
|
4,364
|
|
|
|
(23
|
)
|
|
|
(7
|
)
|
|
|
4,334
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
|
13,343
|
|
|
|
(208
|
)
|
|
|
-
|
|
|
|
13,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
17,707
|
|
|
$
|
(231
|
)
|
|
$
|
(7
|
)
|
|
$
|
17,469
|
|
3.
|
Recent Accounting Pronouncements
|
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 Six Months Ended January 26, 2019
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU
2014-09”). ASU 2014-09, as amended by subsequent ASUs that amended and clarified the guidance in ASU 2014-09, forms the basis for FASB ASC Topic 606 (“ASC Topic 606”), which superseded previous authoritative U.S. GAAP guidance regarding revenue
recognition. The Company adopted ASC Topic 606 effective August 1, 2018. Refer to Note 6 of these condensed consolidated financial statements for additional disclosures regarding the Company’s adoption of ASC Topic 606.
In January 2016, FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) –
Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The amendments in ASU 2016-01 address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In February
2018, FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities, which clarified certain aspects of the
guidance issued in ASU 2016-01. Under the new guidance, entities are no longer able to classify equity investments as either trading or available for sale (“AFS”), and may no longer recognize unrealized holding gains and losses in other
comprehensive income on equity securities that were classified as AFS under previous U.S. GAAP. The Company adopted the applicable provisions of ASU 2016-01 effective August 1, 2018 by recording a cumulative effect adjustment of less than $0.1
million to beginning retained earnings and beginning accumulated other comprehensive income on the condensed consolidated balance sheets. The cumulative effect adjustment is also separately reported on the condensed consolidated statements of
shareholders’ equity.
In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) – Classification of
Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The amendments included in this update provide guidance regarding eight specific cash flow classification issues that are not specifically addressed in previous U.S. GAAP, only one of
which was deemed applicable to the Company’s cash flow reporting. Issue 6 of ASU 2016-15 requires that reporting entities elect an accounting policy to classify distributions received from equity method investees using one of two possible
approaches:
|
•
|
the “cumulative earnings approach,” under which, subject to
certain limitations, distributions received from equity investees are considered returns on investment and classified as cash inflows from operating activities; or
|
|
•
|
the “nature of the distribution approach,” under which
distributions received from equity investees should be classified on the basis of the nature of the activity or activities of the investee that generated the distribution as either a return on investment (classified as a cash inflow
from operating activities) or a return of investment (classified as a cash inflow from investing activities).
|
The Company adopted the provisions of ASU 2016-15 effective August 1, 2018 and elected the “cumulative
earnings approach.”
The Company received $0.2 million of dividends from its equity method investee during the six months ended
January 26, 2019 that are included in cash flows from operating activities.
Accounting Pronouncements Not Yet Adopted as of January 26, 2019
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, as amended by subsequent ASUs, 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. ASU 2016-02 requires entities to use a modified retrospective approach to apply its guidance, and includes a number of optional practical expedients that entities may elect to apply. ASU 2016-02 will be
effective for the Company beginning August 1, 2019. Management is currently assessing the provisions of ASU 2016-02. The Company anticipates that adoption of ASU 2016-02 will result in the addition of material right-of-use assets and lease
liabilities to the Company’s consolidated balance sheet in addition to expanding required disclosures. Management has not yet estimated the impact of ASU 2016-02 on the Company’s consolidated statements of operations and cash flows.
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
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 No. 2016-13 will be effective for the Company beginning August 1, 2020. Early adoption is permitted for the Company
beginning August 1, 2019. 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. This accounting standard update
will be effective for the Company beginning August 1, 2021. Management is currently assessing the provisions of ASU 2017-04 and has not yet estimated its impact on the Company’s consolidated financial statements.
4.
|
Cash, Cash Equivalents and Restricted Cash
|
Cash, cash equivalents and restricted cash are summarized in the following table.
|
|
Balance at
|
|
|
|
January 26,
2019
|
|
|
July 31,
2018
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
11,017
|
|
|
$
|
13,496
|
|
Restricted cash included in other assets
|
|
|
252
|
|
|
|
250
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
11,269
|
|
|
$
|
13,746
|
|
The Company considers all liquid instruments purchased with a maturity of three months or less to be cash
equivalents. Money market funds of less than $0.1 million and $0.4 million were included in cash and cash equivalents at January 26, 2019 and July 31, 2018, 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.
5.
|
Fair Value of Financial Instruments
|
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 and derivative contracts 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 Company
reports the transfer as of the beginning of the reporting period. The Company evaluated the significance of transfers between levels based upon the nature of the financial instrument. There were no transfers in or out of levels 1, 2 or 3,
respectively during the six months ended January 27, 2018 or the fiscal year ended July 31, 2017.
The carrying amount of cash, cash equivalents and restricted cash approximated fair value at January 26,
2019 and July 31, 2018. These assets were classified as level 1 instruments at both dates.
Investment securities available for sale of $1.5 million at January 26, 2019 and July 31, 2018
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 net asset value (“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.
Prior to August 1, 2018, unrealized gains or losses related to investment securities available for sale
were recorded in the consolidated balance sheets and statements of comprehensive income. Subsequent to adoption of ASU 2016-01 effective August 1, 2018 (refer to Note 3 of these condensed consolidated financial statements), unrealized gains or
losses related to investment securities available for sale are recorded in the consolidated statements of operations. The cost basis of securities sold is based on the specific identification method. The Company did not record any sales of
investment securities during the six months ended January 26, 2019 and January 27, 2018.
Long-term debt consists of bank loans and capitalized equipment leases. Lines of credit consist of
borrowings for working capital requirements. Based on the relative immateriality of consolidated debt and line of credit borrowings, management believes that the carrying amount of these liabilities approximated fair value at January 26, 2019
and July 31, 2018. These liabilities were classified as level 2 instruments at both dates.
There were no financial instruments classified as level 3 at January 26, 2019 and January 27, 2018.
6.
|
Revenue and Contract Receivables, net
|
Adoption of ASC Topic 606
The Company adopted ASC Topic 606 effective August 1, 2019.
Gross revenue for reporting periods beginning after July 31, 2018 is recognized under ASC Topic 606. Gross revenue for previous reporting periods was recognized in accordance with historic accounting under
U.S. GAAP, as summarized in revenue recognition policies included in the Company’s 2018 Annual Report.
The Company adopted ASC Topic 606 using the modified retrospective method. As a practical expedient allowed under ASC Topic
606, the Company applied the new guidance only to contracts that were not completed as of the date of initial application. The Company did not record any cumulative effect adjustment to retained earnings as of August 1, 2019, and
did not record any material adjustment to gross revenue for the three or six months ended January 26, 2019 as a result of applying the guidance in ASC Topic
606.
Revenue Recognition under ASC Topic 606
The Company recognizes substantially all of its revenue from the sale of labor hours under environmental
consulting contracts. Revenue reflected in the Company's consolidated statements of operations represents 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 that the Company has elected to subcontract to other contractors.
In accordance with ASC Topic 606, the Company identifies a contract with a customer, identifies the
performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenue when (or as) the Company satisfies a performance obligation. The
Company recognizes the vast majority of its contractual revenue over time, as services are rendered and performance obligations are satisfied, because of the continuous transfer of control to the customer, and because the Company generally
maintains the right to remuneration for efforts already expended under its contracts even if a customer terminates the contract. The Company's contracts with customers generally include payment terms that range from 30-90 days from the billing
date.
A performance obligation is a promise in a contract to transfer a distinct good or service to the
customer, and is the unit of account for revenue recognition. The Company allocates a contract’s transaction price to each distinct performance obligation and recognizes revenue when, or as, the performance obligation is satisfied.
Predominantly, the Company’s contracts have a single performance obligation because the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts.
The Company performs its consulting work 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 these types of 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 recognizes revenue under fixed price contracts using the proportional performance
method, under which progress is determined based on the ratio of efforts expended to date in proportion to total efforts expected to be expended over the life of a contract. The proportional performance 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 efforts to expend that we expect to incur 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 costs, to the extent prescribed in the
contract, plus fees that we record as revenue. These contracts establish an estimate of total cost 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 of 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 2014. The Company recorded an allowance for potential disallowances resulting from
government audits of $0.7 million in other accrued liabilities at January 26, 2019 and July 31, 2018. Adjustments to 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 closeout procedures.
Contract modifications are common in the performance the Company’s contracts, and typically result
from changes in scope, specifications, design, performance, sites, or period of completion. In most cases, contract modifications are for services that are not distinct, and, therefore, are accounted for as part of the existing contract.
Revenue is recognized on contract modifications when it is probable that the modification will be approved and the amount can be reasonably estimated.
Cost of professional
services and other direct operating expenses, which includes employee labor and fringe expenses and out of pocket expenses such as travel, meals and field supplies, represent
costs incurred in connection with revenue recognized
under client contracts.
Sales and cost of sales recognized by 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.
The Company expenses all bid and proposal and other pre-contract costs as incurred.
Contract Receivables, net and Contract Assets
Contract receivables, net are summarized in the following table.
|
|
January 26,
2019
|
|
|
July 31,
2018
|
|
|
|
(in thousands)
|
|
Contract Receivables:
|
|
|
|
|
|
|
Billed
|
|
$
|
12,578
|
|
|
$
|
12,905
|
|
Unbilled
|
|
|
14,602
|
|
|
|
13,994
|
|
Total contract receivables
|
|
|
27,180
|
|
|
|
26,899
|
|
Allowance for doubtful accounts
|
|
|
(1,234
|
)
|
|
|
(1,284
|
)
|
Contract receivables, net
|
|
$
|
25,946
|
|
|
$
|
25,615
|
|
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 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.
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 and
$1.4 million at January 26, 2019 and July 31, 2018, respectively.
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.
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 January 26, 2019 or July 31,
2018.
At January 26, 2019 and July 31, 2018, management identified $0.3 million and $0.5 million,
respectively, of contract receivables, net of related allowance for doubtful accounts, which are not expected to be collected within one year. These receivable balances are included in other assets on the accompanying condensed consolidated
balance sheets.
Allowance for Doubtful Accounts
Activity within the allowance for doubtful accounts is summarized in the following table.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
January 26,
2019
|
|
|
January 27,
2018
(Restated)
|
|
|
January 26,
2019
|
|
|
January 27,
2018
(Restated)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
1,300
|
|
|
$
|
2,033
|
|
|
$
|
1,284
|
|
|
|
2,044
|
|
Provision for doubtful accounts during the period
|
|
|
54
|
|
|
|
59
|
|
|
|
70
|
|
|
|
92
|
|
Write-offs and recoveries of allowance recorded in prior periods
|
|
|
(120
|
)
|
|
|
(190
|
)
|
|
|
(120
|
)
|
|
|
(234
|
)
|
Balance at end of period
|
|
$
|
1,234
|
|
|
$
|
1,902
|
|
|
$
|
1,234
|
|
|
|
1,902
|
|
Contract Receivable Concentrations
Contract receivables and the allowance for doubtful accounts are summarized in the following table.
|
|
January 26, 2019
|
|
|
July 31, 2018
|
|
|
|
Total Billed
and Unbilled
Contract
Receivables
|
|
|
Allowance
for Doubtful
Accounts
|
|
|
Total Billed
and Unbilled
Contract
Receivables
|
|
|
Allowance
for Doubtful
Accounts
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
22,171
|
|
|
$
|
539
|
|
|
$
|
21,580
|
|
|
$
|
569
|
|
South American operations
|
|
|
5,009
|
|
|
|
695
|
|
|
|
5,319
|
|
|
|
715
|
|
Totals
|
|
$
|
27,180
|
|
|
$
|
1,234
|
|
|
$
|
26,899
|
|
|
$
|
1,284
|
|
The allowance for doubtful accounts for the Company’s South American operations represented 14% of related
contract receivables at January 26, 2019 compared to 2% for the Company’s U.S. operations. Unstable local economies that adversely impacted certain of our South American clients in recent years demonstrated signs of stabilizing during fiscal
year 2018. 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.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
January 26,
2019
|
|
|
January 27, 2018
(Restated)
|
|
|
January 26,
2019
|
|
|
January 27, 2018
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue from time and materials
contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
9,732
|
|
|
$
|
8,837
|
|
|
$
|
18,988
|
|
|
$
|
18,788
|
|
South American operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total gross revenue from time and materials contracts
|
|
$
|
9,732
|
|
|
$
|
8,837
|
|
|
$
|
18,988
|
|
|
$
|
18,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue from fixed price contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
5,803
|
|
|
$
|
2,758
|
|
|
$
|
9,415
|
|
|
$
|
7,088
|
|
South American operations
|
|
|
1,091
|
|
|
|
4,905
|
|
|
|
4,832
|
|
|
|
10,175
|
|
Total gross revenue from fixed price contracts
|
|
$
|
6,894
|
|
|
$
|
7,663
|
|
|
$
|
14,247
|
|
|
$
|
17,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue from cost-plus contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
3,626
|
|
|
$
|
4,789
|
|
|
$
|
8,768
|
|
|
$
|
11,343
|
|
South American operations
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Total gross revenue from cost-plus contracts
|
|
$
|
3,626
|
|
|
$
|
4,789
|
|
|
$
|
8,769
|
|
|
$
|
11,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue from all contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
19,161
|
|
|
$
|
16,384
|
|
|
$
|
37,171
|
|
|
$
|
37,219
|
|
South American operations
|
|
|
1,091
|
|
|
|
4,905
|
|
|
|
4,833
|
|
|
|
10,175
|
|
Consolidated gross revenue
|
|
$
|
20,252
|
|
|
$
|
21,289
|
|
|
$
|
42,004
|
|
|
$
|
47,394
|
|
Customer Deposits
Customer deposits represent cash advances received from customers to be applied to future services.