The 43-year partnership between the four founders of Ecology & Environment crumbled this year in a sometimes raucous dispute over the riskiness of some of the Lancaster environmental service firm’s projects, coupled with a plunging stock price that reflected the steep declines in the company’s sales and profits.
“We’ve had a conflict going with the board about the direction the company was going and the downward spiral on a bunch of programs,” said Frank Silvestro, E&E’s chairman, in the first comments by a top E&E executive since a management shake-up three weeks ago. “We had to do something, and we couldn’t come to an agreement.”
That shake-up, announced on Aug. 22, stripped co-founder Gerhard J. Neumaier of his chairman’s post and Neumaier’s son, Kevin, of his position as chief executive officer. Another Neumaier family member, Volker, also was fired as the manager of E&E’s Chinese subsidiary at the end of July.
Gerhard Neumaier on Friday completed his break with the company he helped launch in 1970 and led for most of its history, when he resigned from E&E’s board of directors in a move that Silvestro said took him by surprise. He did not respond to a message left at his home on Friday.
By stepping down from the board, Neumaier severed his final official ties to the company he helped start more than four decades ago and ended a long working relationship with his three other co-founders, including Silvestro, who replaced him as chairman, and Gerald Stroebel, who took over from Kevin Neumaier as chief executive officer. The company’s fourth co-founder, Ronald L. Frank, is one of E&E’s executive vice presidents and serves on its board of directors.
“It was unfortunate, because we had several years of working together,” Silvestro said.
But Silvestro said a split had been building between the Neumaiers and other E&E directors for a couple of years as the company’s performance took a sharp turn for the worse.
The company’s stock price has lost 48 percent of its value since hitting a peak of $22.76 in May 2011, wiping out nearly $22 million in shareholder wealth. The shares closed at $11.75 on Friday, down 1 cent.
That drop coincided with a significant downturn in the company’s business. E&E’s sales, which peaked at $169 million during the fiscal year that ended in July 2011, fell by 8 percent last year and were down another 11 percent during the first three quarters of the most recent fiscal year.
Those weakening revenues hit E&E’s profits even harder. The company’s profits plunged by 89 percent during 2012 and have held stable at that reduced level during the latest fiscal year.
“We had problems with some of the programs that were being done, and the board was unhappy with the results,” Silvestro said. “This had been going on for several years and it came to a head.”
“We had several special meetings that were called,” in the months leading up to the management shake-up, Silvestro said. “The board meetings were quite raucous.”
At the center of those discussions was the company’s efforts to build up its business in China. E&E, by early this year, had spent about $6 million laying the groundwork to be an adviser for a major new Chinese environmental fund. E&E said in January that it has won about $39 million in contracts to consult on the development of eco-cities in China and on the construction of a large health care complex.
Gerhard Neumaier told shareholders during the company’s annual meeting in January that the Chinese environmental fund, which at the time had not been launched by the Chinese government, could become an “unprecedented opportunity” for E&E.
He also told shareholders at the meeting that E&E could have bolstered its profits last year by cutting staff, but resisted that move to keep its work force intact in anticipation of a rebound in its business.
“We did take some risks, and I think we’re going to benefit substantially from what we’ve done,” Neumaier said at the time. “I think we have taken a minimal risk for, potentially, a great gain.”
E&E’s other directors, however, didn’t share Neumaier’s vision. “We just disagreed with some high-risk projects,” Silvestro said.
By the end of April, E&E had done $6.7 million in work on the Chinese contract, but it also was slow to be paid for that work, listing $2 million of those billings – or 30 percent of what it was owed – as being doubtful that it would ever be paid.
So as part of the shake-up, E&E shut down the Chinese venture, eliminating the jobs of about half of the staff involved in the project. In all, E&E has cut “about a dozen” jobs since the shake-up, Silvestro said.
The company also said that its push to expand in the Middle East, Asia and Africa in recent years also had exposed E&E to greater political, regulatory and cultural risks. In addition, E&E has been stung by “slow and inconsistent payments” from its clients in those nations.
As a result, E&E has said it is doubtful that it will collect more than $10 million that it is owed from work that it already has done. The problem is especially severe in Africa and the Middle East, where said it doubts that it will be paid on nearly 35 percent – or more than $7.3 million – of the $21.2 million in work that it has billed its clients in those regions.
Silvestro said the company, which already has said it expects to save $2.5 million to $3 million a year through staffing cuts it has made since last summer and a reduction in the use of subcontractors, is looking for even more ways to cut costs.
“We’re reducing what we consider to be non-productive expenses ... trying to get a little leaner,” he said. “We’re looking at various programs and we’re looking to make changes.”
E&E has about 250 employees at its Lancaster headquarters and about 1,000 staffers worldwide.
Despite the shake-up, Kevin Neumaier, who does not have a seat on the company’s board of directors, retained his post as E&E’s president. The company, in its announcement of the management changes, said Neumaier will “initially preside” over its domestic U.S. operations “at the CEO’s direction.” Silvestro said Neumaier’s role has not changed since then.
“I’m trying to get things organized,” said Silvestro, 76. “We have an obligation to get this company back on track.”
Silvestro said he doesn’t expect to remain as CEO for long.
“I’m going to stay a year, maybe two,” he said. “I hope it’s sooner, rather than later. It’s a challenge I have to address.”