CECO Environmental Corp. — Q2 2022 Form 10-Q Summary
Business context and reporting period
CECO Environmental Corp. is a diversified industrial company providing engineered air-pollution control, water and wastewater treatment, fluid handling, filtration, separation, emissions management, and related environmental solutions. Operations are reported through Engineered Systems and Industrial Process Solutions.
This unaudited Form 10-Q covers the three- and six-month periods ended June 30, 2022, with comparisons to the corresponding 2021 periods. The company reported 34.5 million common shares outstanding as of August 1, 2022.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $105.4 million | $78.7 million | $197.8 million | $150.6 million |
| Gross profit | $31.7 million | $25.3 million | $58.1 million | $49.7 million |
| Gross margin | 30.1% | 32.0% | 29.4% | 33.0% |
| Operating income | $5.7 million | $2.1 million | $11.0 million | $5.2 million |
| GAAP operating margin | 5.4% | 2.7% | 5.6% | 3.5% |
| Net income attributable to CECO | $4.4 million | $0.3 million | $7.2 million | $1.5 million |
| Diluted EPS | $0.13 | $0.01 | $0.20 | $0.04 |
- Non-GAAP operating income was $8.7 million in Q2 and $16.5 million for the first six months, compared with $4.7 million and $9.7 million, respectively, in the prior-year periods. Non-GAAP operating margin was 8.3% for both Q2 and the six-month period in 2022.
- Cash provided by operating activities was $18.7 million for the first six months, versus $4.1 million in 2021. Accounts receivable increased to $95.3 million from $75.0 million at December 31, 2021, while inventories increased to $24.0 million from $17.1 million.
- Cash and cash equivalents were $34.4 million at June 30, 2022, or $35.5 million including restricted cash. Working capital was $74.7 million, and the current ratio was 1.52 to 1.00.
- Total debt was $96.1 million, compared with $63.8 million at December 31, 2021. Debt included $44.7 million drawn on the revolving facility, $42.4 million of term debt, and $10.5 million of joint venture term debt. The weighted-average stated interest rate was 3.85%.
- Unused credit availability subject to borrowing limitations was $62.4 million. The company was in compliance with its debt covenants at June 30, 2022.
Material changes versus the prior comparable periods
- Q2 sales increased 33.9%, and first-half sales increased 31.4%. Management attributed the increases primarily to higher volumes across thermal acoustics, dampers and expansion products, emissions management, cyclone systems, separation and filtration, industrial air control, and duct fabrication.
- Management characterized $22.1 million of the Q2 sales increase and $41.9 million of the first-half increase as organic growth; current-year acquisitions contributed $4.6 million and $5.3 million, respectively.
- Engineered Systems sales increased 55.3% in Q2 and 45.6% for the first six months. Industrial Process Solutions sales increased 7.7% and 12.8%, respectively.
- Gross margin declined because of inflation, supply-chain challenges, and lower project-margin mix, partially offset by customer price increases. Selling and administrative expense increased in dollars but declined as a percentage of sales.
- Orders booked increased 32.7% in Q2 to $113.5 million and 54.5% for the first six months to $274.4 million. Backlog increased to $288.7 million at June 30, 2022 from $213.9 million at December 31, 2021; substantially all backlog was expected to be delivered within 12 to 18 months.
- The company acquired General Rubber LLC, Compass Water Solutions, Inc., and Western Air Ducts Ltd. during the period. Total cash paid for acquisitions was $37.4 million. The acquisitions increased goodwill by $25.7 million and added acquisition-related debt and integration expenses.
- Investing cash outflows were $38.8 million, principally reflecting acquisitions. Financing cash inflows were $26.7 million, including net revolver borrowings, partially offset by $4.3 million of share repurchases.
Outlook, commentary, risks, and unusual items
- No quantitative revenue or earnings guidance was provided in the filing.
- Management expects supply-chain constraints, raw-material shortages, and inflationary pressures affecting materials and labor to continue for the foreseeable future. The company has pursued alternate suppliers, price increases, and material surcharges, but stated that mitigation may not continue to be effective.
- COVID-19 continued to affect global economic conditions, operations, suppliers, customers, and international facilities. The full magnitude and duration of its effects remained uncertain.
- Key risks include fixed-price contract cost overruns, project delays or cancellations, labor shortages, commodity and component price increases, acquisition integration and synergy realization, substantial debt and variable interest rates, foreign exchange exposure, warranty and product-liability claims, regulatory changes, cybersecurity and geopolitical events, and broader economic conditions.
- The company reported 256 pending asbestos-related cases at June 30, 2022, compared with 223 at year-end 2021. Management believes insurance coverage is adequate and that the matters will not have a material adverse effect, but coverage and claim volume remain uncertain.
- The company authorized a share repurchase program of up to $20.0 million through April 30, 2025 and had repurchased approximately 725,000 shares for $4.3 million through June 30, 2022.
- Foreign currency translation losses reduced comprehensive income by $3.0 million in Q2 and $3.5 million for the first six months. No goodwill or indefinite-lived intangible impairment triggering event was identified during Q2.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether gross-margin pressure from inflation, supply constraints, project mix, and labor costs improves or persists.
- Conversion of the $288.7 million backlog and the sustainability of the reported organic order and revenue growth.
- Integration performance and final purchase-price accounting for the three 2022 acquisitions.
- Debt reduction capacity, covenant headroom, refinancing requirements, and sensitivity to SOFR-linked interest rates.
- Cash collection and working-capital trends, particularly the increase in accounts receivable and inventories.
- Exposure to asbestos claims, warranty matters, fixed-price contracts, and other contingencies.
- Future effects of COVID-19, supply-chain disruptions, inflation, labor shortages, foreign exchange movements, and potential economic deterioration.