CECO ENVIRONMENTAL CORP annual report, FY2021

CECO Environmental Corp. 2021 Form 10-K Summary

Business context and reporting period

CECO Environmental Corp. is a global environmental and diversified industrial company providing air-quality, water-treatment, fluid-handling, gas-separation, filtration, emissions-control, and engineered systems. Its customers operate in power generation, oil and gas, refining, petrochemicals, general industrial, electric-vehicle production, semiconductor, battery recycling, and wastewater markets.

This annual report covers the fiscal year ended December 31, 2021, and was filed March 14, 2022. During the first quarter of 2021, CECO realigned its reporting structure into the Engineered Systems and Industrial Process Solutions segments. Prior periods were recast for comparison.

Financial performance and key metrics

Metric	2021	2020	Change
Net sales	$324.1 million	$316.0 million	+2.6%
Gross profit	$100.9 million	$105.1 million	-4.0%
Gross margin	31.1%	33.3%	-220 bps
Operating income	$9.9 million	$13.3 million	-25.6%
Operating margin	3.1%	4.2%	-110 bps
Net income attributable to CECO	$1.4 million	$8.2 million	-$6.8 million
Diluted EPS	$0.04	$0.23	Declined
Operating cash flow	$13.3 million	$4.4 million	+$8.9 million

Non-GAAP operating income was $19.1 million, or 5.9% of sales, compared with $28.2 million, or 8.9%, in 2020. Non-GAAP net income was $9.8 million, or 3.0% of sales, compared with $19.5 million, or 6.2%, in 2020. These measures exclude items including amortization, earnout, restructuring, acquisition and integration expenses, and other specified items.

Engineered Systems sales were $186.9 million, down 9.1%, and segment operating income was $25.8 million, down 24.6%.
Industrial Process Solutions sales were $137.2 million, up 24.2%, and segment operating income was $15.1 million, up from $7.2 million.
Orders booked increased to $360.8 million from $279.6 million.
Backlog increased to $213.9 million at year-end from $183.1 million. Substantially all backlog was expected to be delivered within 12 to 18 months.
Interest expense decreased to $3.0 million from $3.5 million, while the effective tax rate increased to 57.6% from 30.1%.

Liquidity, debt, and capital allocation

Cash and cash equivalents were $29.9 million at December 31, 2021, compared with $36.0 million in 2020. Including restricted cash, total cash was $32.0 million.
Working capital was $72.3 million, compared with $74.1 million, and the current ratio was 1.62 to 1.00, compared with 1.68 to 1.00.
Total debt under the Credit Facility was $63.8 million, net of debt discount, compared with $72.6 million. Reported total long-term debt, including current maturities and based on fair value information, was approximately $65.5 million.
Debt included a $43.5 million term loan and a $22.0 million revolving loan. The Credit Facility was amended in December 2021, extended to December 17, 2026, and transitioned U.S. dollar reference rates from LIBOR to SOFR.
Unused credit availability was $103.5 million before borrowing limitations and $45.9 million based on borrowing limitations. The Company was in compliance with its debt covenants at year-end.
Cash used in financing activities was $15.6 million, including $8.4 million of debt repayments, $5.0 million of share repurchases, financing fees, earnout payments, and lease payments.
Capital expenditures were $2.6 million, and cash used in investing activities was $2.1 million.
CECO repurchased and retired 698,693 shares for approximately $5.0 million during 2021. It paid no cash dividend and intends to retain earnings for operations and growth.

Material changes versus the prior comparable period

Revenue grew modestly, but gross profit and operating income declined because of material and labor inflation, supply-chain constraints, and lower-margin projects awarded in 2020 and executed in 2021.
Engineered Systems was adversely affected by lower demand for gas separation and filtration products serving midstream oil and gas markets and fluid-bed cyclone systems serving refineries.
Industrial Process Solutions benefited from stronger demand for volatile organic compound abatement, regenerative thermal oxidizer, pump, dust-collection, and ventilation solutions, including contributions from the EIS business.
Selling and administrative expenses increased to $81.8 million from $76.9 million as temporary COVID-19 cost reductions, including furloughs, wage reductions, and travel restrictions, did not recur.
Net income attributable to CECO fell primarily because of lower operating income, an unfavorable foreign-currency remeasurement impact included in other expense, and a higher effective tax rate.
Operating cash flow improved substantially, despite increased accounts receivable and contract assets, due primarily to favorable changes in working capital.
The Company completed no acquisitions during 2021, but its EIS acquisition and Effox-Mader joint venture contributed for the full year.

Outlook, management commentary, risks, and unusual items

Management expects demand to benefit from stricter environmental regulations, sustainability initiatives, infrastructure spending, the energy transition, natural-gas and hydrogen infrastructure, and growth in water-treatment and industrial pollution-control markets. The filing does not provide formal quantitative revenue or earnings guidance.

COVID-19 continued to affect demand, international operations, suppliers, labor availability, and logistics. Management expected supply-chain challenges and cost pressures to continue for the foreseeable future.
CECO is attempting to offset inflation through customer price increases and material surcharges, but timing and recovery of cost increases are uncertain.
The majority of projects are fixed-price contracts. Cost-to-cost revenue recognition requires estimates of remaining labor, material, subcontract, and other project costs; revisions could materially affect revenue and profit. This was the auditor’s critical audit matter.
Backlog may be delayed, cancelled, or converted to revenue later than expected. It is not a GAAP measure and may not be comparable with other companies’ calculations.
Goodwill and indefinite-lived intangible assets totaled approximately $170.8 million, or 41.0% of total assets. No goodwill or indefinite-lived intangible impairment was recorded in 2021, but impairment remains sensitive to forecasts, discount rates, market multiples, and business conditions.
CECO reported 223 pending asbestos-related cases involving its Met-Pro subsidiary at year-end, compared with 200 cases in 2020. Management believes insurance coverage is adequate and does not expect a material impact, but future case volume, settlement amounts, and insurer coverage remain uncertain.
The Company had a pension deficit of $5.6 million and projected pension cash obligations of approximately $2.2 million annually from 2022 through 2026.
Approximately 38% of 2021 revenue was derived from outside the United States, creating foreign-exchange, political, regulatory, tariff, tax, and geopolitical exposure.
On March 7, 2022, after year-end, the Effox-Flextor-Mader joint venture acquired General Rubber, LLC for approximately $24.0 million, financed with debt, cash, and equity. The transaction was not included in 2021 results, and purchase accounting was incomplete when the filing was issued.
Management and BDO USA, LLP concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021. The financial statement and internal-control audit opinions were unqualified.

Important facts for investors to verify

Whether backlog converts to revenue on schedule and at margins sufficient to restore gross and operating margins.
The persistence of raw-material, labor, freight, and subcontractor inflation and CECO’s ability to recover those costs through pricing.
Fixed-price contract estimates, cost-to-complete revisions, claims, change orders, and potential project losses.
Liquidity and covenant headroom under the amended Credit Facility, particularly given variable-rate debt and the large 2026 maturity profile.
Cash conversion, accounts receivable, contract assets, retainage, and customer credit quality.
Potential impairment of the substantial goodwill and intangible-asset balances.
Developments in asbestos litigation, warranty claims, pension obligations, and multiemployer-plan withdrawal exposure.
The financial contribution, purchase accounting, and financing impact of the post-year-end General Rubber acquisition.
Whether the strategic shift toward recurring aftermarket revenue and less energy-centric end markets produces measurable improvement in growth, margins, and cash flow.