CECO Environmental Corp. 2021 Q1 Form 10-Q Summary
Business Context and Reporting Period
CECO Environmental Corp. is a global provider of industrial air-quality, emissions-management, fluid-handling, filtration, and environmental protection systems serving energy, industrial, infrastructure, and other niche markets. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The company reported two segments: Engineered Systems and Industrial Process Solutions.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $71.9 million | $80.5 million | Down 10.7% |
| Gross profit | $24.4 million | $28.3 million | Down 13.7% |
| Gross margin | 33.9% | 35.2% | Down 130 bps |
| Operating income | $3.1 million | $4.2 million | Down $1.1 million |
| Operating margin | 4.3% | 5.2% | Down 90 bps |
| Non-GAAP operating income | $5.0 million | $6.3 million | Down $1.3 million |
| Non-GAAP operating margin | 7.0% | 7.8% | Down 80 bps |
| Net income attributable to CECO | $1.2 million | $3.4 million | Down $2.2 million |
| Diluted EPS | $0.03 | $0.10 | Down $0.07 |
| Cash flow from operations | $9.9 million | $7.0 million | Up $2.9 million |
Cash, cash equivalents, and restricted cash totaled $43.3 million at March 31, 2021, including $40.9 million of unrestricted cash and cash equivalents. Working capital was $75.4 million, with a current ratio of 1.71 to 1.00.
Total debt under the Credit Facility was $69.4 million, consisting of a $45.6 million term loan and $25.0 million of revolving borrowings, net of unamortized debt discount. The company reported $65.0 million of debt net of the current portion. The weighted-average stated interest rate was 2.20%. Total unused capacity was $107.1 million before borrowing limitations, while availability based on borrowing limitations was $52.8 million. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of COVID-19-related reductions in global demand, including lower revenue from custom-designed sheet-metal fabrication, cyclone systems, selective catalytic reduction technologies, and De-Nox and emissions-management systems.
- Engineered Systems sales fell to $42.1 million from $50.6 million, and segment operating income fell to $6.2 million from $8.6 million.
- Industrial Process Solutions sales were essentially unchanged at $29.8 million. Segment operating income increased to $3.8 million from $3.1 million, aided by cost reductions and contributions from the Environmental Integrated Solutions acquisition.
- Orders booked increased to $92.1 million from $75.7 million, driven primarily by electric-vehicle production, engineered wood, refinery, and power-generation markets.
- Backlog increased to $203.1 million at March 31, 2021 from $183.1 million at December 31, 2020; substantially all backlog was expected to be delivered within 12 to 18 months. Customers may have cancellation rights.
- Selling and administrative expense declined to $19.5 million from $22.0 million following cost-reduction measures implemented during 2020.
- Interest expense declined to $0.7 million from $1.0 million as debt balances decreased. The effective tax rate increased to 29.8% from 18.6%.
- Operating cash flow improved despite lower earnings, primarily because of favorable changes in net working capital. Financing cash flow shifted to a use of $4.2 million from a source of $42.3 million in the prior year, when the company drew $40.0 million from its revolving facility as a COVID-19 precaution.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal full-year revenue, earnings, or margin guidance. Management stated that COVID-19 continued to affect global economic activity, customer end markets, international operations, and portions of the supply chain. CECO had not experienced significant supply-chain disruption as of the filing date, but warned that future facility, supplier, vaccine-distribution, or virus-variant developments could adversely affect operations, liquidity, financial condition, and cash flows.
The company completed a reporting-segment realignment, combining the former Industrial Solutions and Fluid Handling Solutions segments into Industrial Process Solutions and renaming Energy Solutions as Engineered Systems. Prior-period segment information was recast.
During the quarter, CECO reclassified $3.2 million of tradename assets from indefinite-lived to finite-lived assets after reassessing their useful lives. No goodwill or indefinite-lived intangible-asset impairment trigger was identified. Amortization and earnout expense was $1.8 million, and acquisition and integration expense was $0.1 million. The company paid $0.8 million of earnouts during the quarter.
CECO reported 203 pending asbestos-related cases at March 31, 2021, compared with 200 at December 31, 2020. Management believes insurance coverage is adequate and that pending cases will not have a material adverse effect, but noted uncertainty regarding claim volume, claim characteristics, insurers' financial condition, and coverage positions. The company also faces ordinary-course contract, employment, warranty, and tax matters.
Other principal risks include fixed-price contract execution, project delays or cancellations, cost overruns, raw-material price volatility, debt repayment and refinancing, regulatory changes, acquisition integration, cybersecurity, foreign-exchange exposure, and broader economic or public-health events. A hypothetical 10% change in the weighted-average borrowing rate was estimated to affect annual earnings and cash flows by approximately $0.2 million.
Important Facts for Investors to Verify
- Whether higher orders and backlog convert into revenue and cash flow, particularly given customer cancellation rights and the expected 12-to-18-month delivery period.
- The pace of recovery in Engineered Systems end markets affected by COVID-19 and the sustainability of Industrial Process Solutions' improved operating performance.
- Debt repayment requirements, including $2.5 million remaining in 2021, $3.7 million in 2022, $4.4 million in 2023, and $60.0 million in 2024, along with covenant compliance and borrowing availability.
- The effect of COVID-19, supply-chain conditions, raw-material costs, inflation, and potential project delays on gross margins and working capital.
- The valuation of goodwill and intangible assets, including assumptions affected by COVID-19 and the $3.2 million tradename life reassessment.
- The development and insurance coverage of the 203 asbestos-related cases and any additional legal or warranty exposures.
- Whether the company maintains effective disclosure controls; management concluded that controls were effective as of March 31, 2021 and reported no material changes in internal control over financial reporting.