CECO Environmental Corp. — FY2020 Form 10-K Summary
Business context and reporting period
CECO Environmental Corp. is a global provider of industrial air-quality, emissions-control, fluid-handling and filtration solutions. It serves energy, industrial, refining, oil and gas, petrochemical, power-generation, electric-vehicle, semiconductor, battery-recycling and wastewater markets through three reportable segments: Energy Solutions, Industrial Solutions and Fluid Handling Solutions.
This annual report covers the fiscal year ended December 31, 2020, with comparisons to fiscal 2019 and 2018. COVID-19 affected customer demand, project activity, supply chains and operations beginning in the first quarter. CECO remained operational because portions of its business supported critical infrastructure. Todd Gleason became Chief Executive Officer on July 6, 2020.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $316.0 million | $341.9 million | Down 7.6% |
| Gross profit | $105.1 million | $114.1 million | Down 7.9% |
| Gross margin | 33.3% | 33.4% | Down 0.1 percentage point |
| Operating income | $13.3 million | $18.0 million | Down 25.8% |
| GAAP operating margin | 4.2% | 5.3% | Down 1.1 percentage points |
| Net income attributable to CECO | $8.2 million | $17.7 million | Down 53.6% |
| Diluted EPS | $0.23 | $0.50 | Down $0.27 |
| Operating cash flow | $4.4 million | $10.2 million | Down $5.8 million |
Non-GAAP operating income was $28.2 million in both years, while non-GAAP operating margin increased to 8.9% from 8.2%. Non-GAAP net income declined to $19.5 million from $20.9 million. Management’s adjustments excluded amortization and earnout expense, restructuring, acquisition and integration costs, executive transition costs, impairment and certain tax and foreign-currency items.
Cash and cash equivalents were $36.0 million at year-end, including $1.8 million of restricted cash. Working capital was $74.1 million, compared with $64.3 million in 2019, and the current ratio improved to 1.68 from 1.56.
Segments and material changes
| Segment | 2020 sales | 2019 sales | 2020 operating income | 2019 operating income |
|---|---|---|---|---|
| Energy Solutions | $205.5 million | $210.3 million | $34.2 million | $33.9 million |
| Industrial Solutions | $74.7 million | $91.3 million | $2.2 million | $5.7 million |
| Fluid Handling Solutions | $35.8 million | $40.2 million | $5.0 million | $5.6 million |
- Sales declined primarily because of lower Industrial Solutions air-pollution-control revenue, lower refinery FCC cyclone-system sales and reduced filtration and pump volumes.
- Energy Solutions sales decreased modestly, but operating income increased because of cost reductions and lower amortization, partly offset by lower refinery sales and unfavorable mix.
- Industrial Solutions sales and operating income fell materially, despite $8.1 million of revenue from the EIS acquisition.
- Fluid Handling Solutions was pressured by lower oil-and-gas and automotive demand and recorded a $0.9 million tradename impairment.
- Orders booked declined to $279.6 million from $383.7 million. Backlog was $183.1 million at year-end versus $216.6 million, including $9.2 million of prior backlog removed because of customer cancellations related to aerospace exposure.
Debt, liquidity and cash flow
Total debt under the Credit Facility was $72.6 million before unamortized debt discount, compared with $65.5 million in 2019. Reported total debt, including current and long-term portions, was approximately $74.0 million at December 31, 2020. The balance comprised a $46.3 million term loan and $27.7 million revolving borrowing. The weighted-average stated interest rate was 2.25%, versus 3.80% in 2019.
Available credit based on borrowing limitations was $60.8 million, compared with $82.3 million in 2019. CECO was in compliance with its debt covenants at year-end. Scheduled principal payments are $3.1 million in 2021, $3.7 million in 2022, $4.4 million in 2023 and $62.8 million in 2024, creating a significant 2024 refinancing or repayment requirement.
- Investing cash usage was $9.2 million, including $5.9 million for acquisitions and $3.9 million for property and equipment.
- Financing activities provided $3.7 million, primarily reflecting net revolving borrowings used partly to fund the EIS acquisition.
- Management stated that operating cash flow, cash on hand and available borrowings should fund anticipated uses for at least the next twelve months.
- The company had no off-balance-sheet arrangements and did not repurchase shares in 2020.
Acquisitions, unusual items and outlook
- CECO acquired Environmental Integrated Solutions on June 4, 2020, for $10.3 million in cash. EIS contributed $8.1 million of 2020 revenue and a $0.8 million pretax loss, including earnout effects. The estimated earnout liability increased to $1.7 million at year-end.
- In July 2020, CECO formed a 70%-owned, 50%-voting-interest joint venture with Mader Holding involving damper businesses. The joint venture contributed $7.7 million of revenue and a $0.2 million pretax loss after formation.
- Reported operating income included $2.3 million of restructuring expense, $1.4 million of acquisition and integration expense, $1.5 million of executive transition expense and $0.9 million of intangible-asset impairment.
- Management emphasized cost reduction, operational excellence, margin expansion, aftermarket revenue growth, international expansion and selective acquisitions. The filing does not provide formal 2021 revenue or earnings guidance.
- The company expects increased environmental regulation to support long-term demand, but near-term performance remains exposed to COVID-19, customer capital spending, project timing and energy-market conditions.
Principal risks and contingencies
- COVID-19 may continue to disrupt demand, customer projects, suppliers, subcontractors, manufacturing, liquidity and global operations.
- Fixed-price contracts and cost-to-cost revenue recognition require estimates of completion costs; revisions could materially change revenue, gross profit and earnings.
- Backlog may be delayed, cancelled or not converted into revenue as expected.
- Raw-material, subcontract, transportation and labor-cost inflation could compress margins if price increases lag costs.
- Approximately 35% of 2020 revenue was derived from customers outside the United States, exposing CECO to currency, political, regulatory, tariff and international operating risks.
- Goodwill and indefinite-lived intangible assets totaled approximately $174.8 million, or 41.7% of total assets. The Fluid Handling Solutions reporting unit’s fair value exceeded carrying value by only 7%, making it sensitive to changes in projected revenue and profitability.
- The company has asbestos-related litigation involving 200 pending cases at year-end. Management believes insurance coverage is adequate and does not currently expect a material impact, but outcomes and insurer capacity are uncertain.
- The defined-benefit pension plan was underfunded by $9.7 million, and multiemployer plans could create future withdrawal liabilities.
- The company does not currently pay dividends; payments have been suspended since 2017.
Important facts for investors to verify
- Whether order intake and backlog stabilize or recover after the 2020 COVID-19 decline.
- Progress in converting EIS and Mader contributions into sustainable revenue and earnings, including the final purchase-accounting adjustments.
- Ability to generate sufficient cash flow to reduce debt and address the large 2024 maturity while maintaining covenant compliance.
- Whether Industrial Solutions and Fluid Handling Solutions margins recover and whether the Fluid Handling reporting unit avoids additional impairment.
- Actual effects of COVID-19, customer cancellations, supply-chain constraints, commodity inflation and energy-market volatility on 2021 results.
- Future asbestos settlements, insurance coverage and potential pension or multiemployer-plan funding requirements.
- The filing’s audited financial statements and internal-control report received unqualified opinions; investors should nevertheless review the critical audit matter concerning over-time revenue recognition and estimated project costs.