CECO Environmental Corp. — Form 10-Q Summary
Business context and reporting period
CECO is a global provider of industrial air-quality, emissions-management, energy, acoustical, pump, filtration and fluid-handling solutions. Reported segments are Energy Solutions, Industrial Solutions and Fluid Handling Solutions. This unaudited filing covers the three and six months ended June 30, 2020, with comparisons to the same 2019 periods.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $75.2 million | $81.2 million | $155.7 million | $167.2 million |
| Gross profit | $25.8 million | $26.8 million | $54.1 million | $55.3 million |
| Gross margin | 34.3% | 33.0% | 34.7% | 33.1% |
| Operating income | $4.4 million | $2.0 million | $8.6 million | $6.9 million |
| Operating margin | 5.9% | 2.5% | 5.5% | 4.1% |
| Net income | $3.3 million | $5.5 million | $6.7 million | $7.4 million |
| Diluted EPS | $0.09 | $0.15 | $0.19 | $0.21 |
Non-GAAP operating income was $7.4 million in Q2 and $13.7 million for the six-month period, compared with $4.4 million and $11.5 million, respectively, in the prior-year periods. Non-GAAP operating margins were 9.8% and 8.8%, compared with 5.4% and 6.9%.
Cash and cash equivalents were $41.5 million at June 30, 2020, compared with $35.6 million at December 31, 2019. Working capital was $74.0 million, versus $64.3 million at year-end, and the current ratio was 1.70 versus 1.56.
Operating cash flow was $2.1 million for the first six months of 2020, compared with negative $11.3 million in 2019. Investing cash flow was negative $8.1 million, including $6.1 million for the EIS acquisition and $2.0 million of capital expenditures. Financing cash flow was $12.0 million, primarily reflecting net revolving-credit borrowings.
Total outstanding borrowings under the Credit Facility were $78.0 million, including a $47.5 million term loan and a $32.0 million revolver balance, net of debt discount. The current portion was $2.5 million. Borrowing availability was $100.2 million before borrowing limitations and $88.5 million based on those limitations. The weighted-average stated interest rate was 2.36%, and the Company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Q2 sales declined 7.4% and six-month sales declined 6.9%, primarily due to lower refinery, midstream oil and gas, pollution-control, filtration and pump activity.
- Orders booked fell to $60.0 million in Q2 and $135.6 million year-to-date, from $100.3 million and $200.3 million, respectively, reflecting COVID-19-related customer slowdowns.
- Gross margins improved due to product mix and cost-reduction actions, despite lower revenue.
- Selling and administrative expenses declined to $18.4 million in Q2 and $40.4 million year-to-date, aided by temporary salary reductions, furloughs, lower corporate costs and travel restrictions.
- Net income declined despite higher operating income because the 2019 periods benefited from a $4.4 million tax benefit related to a prior divestiture; 2020 included tax expense of $0.6 million in Q2 and $1.3 million year-to-date.
- Backlog decreased to $204.6 million at June 30, 2020 from $216.6 million at December 31, 2019; $8.8 million of backlog was acquired with EIS.
Segments and transactions
| Segment | Q2 2020 sales | Q2 2020 operating income | Six-month sales | Six-month operating income |
|---|---|---|---|---|
| Energy Solutions | $49.1 million | $8.6 million | $99.7 million | $17.2 million |
| Industrial Solutions | $16.7 million | $0.0 million | $37.0 million | $1.5 million |
| Fluid Handling Solutions | $9.4 million | $1.8 million | $18.9 million | $3.4 million |
On June 4, 2020, CECO acquired Environmental Integrated Solutions for $10.3 million in cash, financed with an additional revolver draw. EIS contributed $0.5 million of Q2 revenue and $0.2 million of net income. The transaction added approximately $7.0 million of goodwill and $4.8 million of finite-lived intangible assets, subject to preliminary purchase accounting.
On July 6, 2020, Todd Gleason became Chief Executive Officer, succeeding Dennis Sadlowski. On July 31, 2020, CECO entered a damper-business joint venture with Mader Machine Co.; CECO will hold 70% of the equity and 50% of the voting interest.
Guidance, outlook, risks and unusual items
The filing provides no quantitative 2020 revenue or earnings guidance. Management stated that it could not estimate the full-year financial impact of COVID-19. The pandemic caused customer demand reductions, temporary facility and supplier disruptions, and heightened risks of work stoppages. CECO implemented furloughs, salary reductions, lower corporate spending and other cost controls.
Key risks include prolonged COVID-19 effects, economic weakness in energy and industrial end markets, order delays or cancellations, fixed-price contract cost overruns, supply-chain and raw-material volatility, acquisition integration, substantial debt, covenant compliance, warranty and product-liability claims, foreign exchange, regulatory requirements and impairment of goodwill or intangible assets. Management identified COVID-19 as a March 31 triggering event but concluded goodwill and indefinite-lived intangibles were not impaired; no additional Q2 triggering event was identified.
There were 194 asbestos-related cases pending at June 30, 2020, compared with 209 at year-end. The Company believes insurance coverage is adequate and does not expect the matters to have a material adverse effect, but coverage and claim volume remain uncertain. Pension and retiree health-plan contributions were deferred until January 2021, with an unfunded liability of approximately $8.7 million.
Important facts for investors to verify
- Whether COVID-19 continues to reduce orders, backlog conversion, customer activity and operating cash flow.
- The sustainability of margin improvement from furloughs and other temporary cost reductions.
- Revolver usage, debt maturities, interest-rate exposure and compliance with leverage covenants.
- Final purchase accounting, earn-out obligations and integration results for EIS.
- Progress of the Mader joint venture and the effect of the CEO transition.
- Potential goodwill or intangible-asset impairment if pandemic-related assumptions worsen.
- Developments in asbestos litigation, insurance coverage and other contingencies.