CECO Environmental Corp. — Q3 2020 Form 10-Q Summary
Business Context and Reporting Period
CECO Environmental Corp. is a global provider of industrial air-quality, emissions-management, energy, fluid-handling, and engineered environmental solutions. The filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Results were materially affected by the COVID-19 pandemic, customer delays, lower backlog, and weakness in refinery, midstream oil and gas, pollution-control, automotive, and other end markets.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $77.4 million | $85.3 million | $233.1 million | $252.5 million |
| Gross profit | $24.8 million | $28.8 million | $78.9 million | $84.1 million |
| Gross margin | 32.0% | 33.8% | 33.8% | 33.3% |
| Operating income | $1.0 million | $4.1 million | $9.7 million | $11.0 million |
| GAAP operating margin | 1.3% | 4.8% | 4.2% | 4.4% |
| Net income attributable to CECO | $(0.2) million | $1.9 million | $6.4 million | $9.3 million |
| Diluted EPS | $(0.01) | $0.05 | $0.18 | $0.26 |
| Non-GAAP operating income | $5.9 million | $7.0 million | $19.6 million | $18.6 million |
| Non-GAAP operating margin | 7.6% | 8.2% | 8.4% | 7.4% |
For the nine months, operating cash flow was $9.1 million, compared with cash used of $0.6 million in the prior-year period. Investing cash outflow was $8.2 million, including $6.1 million of net cash used for the EIS acquisition and $2.9 million of capital expenditures. Financing cash inflow was $7.8 million, primarily reflecting net revolver borrowings.
Cash and cash equivalents were $44.5 million at September 30, 2020, compared with $35.6 million at December 31, 2019. Including restricted cash, liquidity was $46.3 million. Working capital was $74.1 million, and the current ratio was 1.67 to 1.00.
Total borrowings under the Credit Facility were $76.4 million, consisting of a $46.9 million term loan and $31.0 million revolver balance, net of debt discount. Total debt, including the current portion, was $76.4 million versus $65.5 million at year-end 2019. Unused borrowing availability subject to limitations was $75.8 million. The Company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales decreased 9.3%; nine-month sales decreased 7.7%.
- Q3 gross margin declined 180 basis points because of unfavorable product mix; nine-month gross margin improved 50 basis points due to product mix and cost reductions.
- Q3 net loss attributable to CECO was $0.2 million versus $1.9 million of net income in Q3 2019. Nine-month net income declined to $6.4 million from $9.3 million.
- Orders booked declined to $66.8 million in Q3 and $202.4 million for the nine months, versus $115.7 million and $316.0 million, respectively, in 2019.
- Backlog declined to $189.1 million at September 30, 2020, from $216.6 million at December 31, 2019. The Company removed $7.4 million of previously reported backlog because of customer cancellations.
- Energy Solutions Q3 sales increased 1.8% to $49.7 million, while Industrial Solutions sales fell 30.6% to $18.7 million and Fluid Handling Solutions sales fell 4.6% to $9.0 million.
- Cost-reduction actions, including headcount reductions, lower discretionary spending, temporary senior-management salary reductions, travel restrictions, and employee furloughs, reduced selling and administrative expense.
- Interest expense declined to $0.8 million in Q3 and $2.7 million for the nine months, primarily because of lower interest rates and reduced average debt costs.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide formal quantitative revenue or earnings guidance.
- Management stated that COVID-19 caused customer delays, lower backlog, temporary facility and supplier disruptions, and weaker end-market demand. The full effect on operations, liquidity, and future results remained uncertain.
- Management continued cost controls and reported that the Company had not experienced significant supply-chain disruption as of the filing date, while warning that further disruptions were possible.
- On June 4, 2020, CECO acquired Environmental Integrated Solutions for $10.3 million in cash, financed through the revolver. EIS contributed $5.3 million of Q3 revenue and $5.8 million of nine-month revenue.
- On July 31, 2020, CECO formed a joint venture with Mader Holdings. CECO owns 70% economically and holds a 50% voting interest; a $0.98 million noncontrolling interest was recorded.
- Q3 included $1.5 million of executive transition expense related to the CEO succession, $0.9 million of restructuring expense, and $0.4 million of acquisition and integration expense.
- Todd Gleason became Chief Executive Officer on July 6, 2020, succeeding Dennis Sadlowski.
- Goodwill and indefinite-lived intangible assets were not impaired in the third quarter. COVID-19-related assumptions remain subject to uncertainty and will continue to be monitored.
- There were 201 asbestos-related cases pending at September 30, 2020, compared with 209 at December 31, 2019. Management believes insurance coverage is adequate and does not expect the pending cases to have a material adverse effect, but coverage and claim volumes are outside the Company’s control.
- Management expects $1.8 million of pension-plan contributions during the remainder of 2020.
Most Important Facts for Investors to Verify
- Whether order rates, backlog, and customer cancellations recover after the COVID-19 disruption, particularly in Industrial Solutions and refinery-related markets.
- Whether the Company can sustain cost reductions without impairing execution, service levels, or future growth.
- Debt repayment capacity and covenant headroom, including the substantial scheduled debt maturity in 2024.
- Integration performance and earn-out obligations related to EIS and operating results from the Mader joint venture.
- Potential impairment of goodwill and intangible assets if macroeconomic or end-market conditions deteriorate.
- Exposure to asbestos litigation, warranty claims, fixed-price contracts, raw-material costs, foreign exchange, interest rates, and future COVID-19-related disruptions.
- The sustainability of reported non-GAAP operating improvement, given that GAAP operating income and Q3 earnings declined.