CECO Environmental Corp. — Q1 2019 Form 10-Q Summary
Business context and reporting period
CECO Environmental Corp. is a global provider of industrial air-quality, energy-value-chain, and fluid-handling technologies serving energy, industrial, water, oil and gas, power-generation, chemical, petrochemical, and other niche markets. This report covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. Results are unaudited.
Reportable segments were Energy Solutions, Industrial Solutions, and Fluid Handling Solutions. Management realigned segment presentation during the quarter and reclassified the comparable 2018 results accordingly.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $86.0 million | $74.1 million | Up 16.0% |
| Gross profit | $28.4 million | $25.6 million | Up 10.9% |
| Gross margin | 33.0% | 34.5% | Down 150 bps |
| GAAP operating income | $4.9 million | $12.2 million | Down $7.3 million |
| GAAP operating margin | 5.7% | 16.5% | Down 1,080 bps |
| Non-GAAP operating income | $7.2 million | $4.0 million | Up $3.2 million |
| Non-GAAP operating margin | 8.4% | 5.4% | Up 300 bps |
| Net income | $1.9 million | $5.8 million | Down 67.7% |
| Diluted EPS | $0.05 | $0.17 | Down $0.12 |
| Interest expense | $1.5 million | $1.9 million | Down $0.4 million |
| Income tax expense | $0.8 million | $4.1 million | Down $3.3 million |
| Effective tax rate | 31.1% | 41.6% | Down 10.5 percentage points |
Orders booked were $97.3 million, compared with $95.0 million in the prior-year quarter. Backlog was $193.8 million at March 31, 2019, compared with $182.1 million at December 31, 2018.
Segment performance
| Segment | Q1 2019 sales | Q1 2018 sales | Q1 2019 operating income | Q1 2018 operating income |
|---|---|---|---|---|
| Energy Solutions | $55.2 million | $40.0 million | $9.3 million | $3.6 million |
| Industrial Solutions | $18.9 million | $18.4 million | $0.6 million | $1.2 million |
| Fluid Handling Solutions | $12.0 million | $15.6 million | $2.4 million | $3.4 million |
Energy Solutions benefited from higher refinery-related and midstream oil and gas volumes. Industrial Solutions sales increased modestly, but profit declined because of product mix and higher operating expenses. Fluid Handling Solutions was affected by the absence of $4.8 million of first-quarter 2018 revenue from divested businesses; excluding those divestitures, segment sales and operating income increased.
Cash flow, liquidity, debt, and balance sheet
- Operating cash flow was negative $13.7 million, compared with positive $3.2 million in Q1 2018. The primary adverse factor was a $19.6 million increase in accounts receivable.
- Investing cash flow was negative $0.4 million, primarily for capital expenditures, compared with positive $30.3 million in Q1 2018 from divestiture proceeds.
- Financing cash flow was negative $1.8 million, principally from $1.7 million of note repayments.
- Cash, cash equivalents, and restricted cash declined to $28.9 million from $44.4 million at December 31, 2018. Cash and cash equivalents alone were $28.2 million.
- Working capital was $61.0 million, with a current ratio of 1.59 to 1.
- Debt was $74.7 million net of unamortized discount, consisting primarily of a $76.1 million term loan due at maturity in September 2020. No term-loan principal payments were required during the quarter.
- Unused credit availability was $52.6 million, including the effect of $27.4 million of outstanding letters of credit. The company was in compliance with its debt covenants at March 31, 2019.
- The weighted-average interest rate on outstanding borrowings was 5.25%. An interest-rate swap hedged a portion of LIBOR exposure.
Material changes, unusual items, and accounting matters
- GAAP operating income and net income declined primarily because Q1 2018 included an $11.2 million net gain on divestitures. Q1 2019 included a $0.1 million loss on divestitures.
- Excluding divestiture, amortization, earnout, and restructuring items, non-GAAP operating income improved to $7.2 million from $4.0 million.
- The company adopted the new lease standard effective January 1, 2019, recording $13.3 million of operating lease right-of-use assets and liabilities and a $4.6 million after-tax reduction to beginning equity. Management stated that adoption did not materially affect income or liquidity.
- The company reassessed certain tradenames and transferred $3.9 million from indefinite-lived to finite-lived intangible assets, with 10-year useful lives. No interim goodwill or intangible-asset impairment trigger was identified.
- Foreign-currency translation increased comprehensive income by $1.0 million, while the interest-rate swap reduced it by $0.2 million.
Outlook, risks, contingencies, and management commentary
The filing does not provide specific full-year revenue, earnings, or cash-flow guidance. Management cited volume growth in refinery-related products, midstream oil and gas, scrubbers, and modular duct technologies, while noting that backlog is not a GAAP measure and may not translate into future revenue.
- Working-capital requirements and collections are important liquidity drivers; the quarter’s operating cash outflow was heavily affected by receivables growth.
- The term loan’s $76.1 million maturity in September 2020 creates a refinancing or repayment requirement.
- Risks include fixed-price contract cost overruns, project delays or cancellations, subcontractor and labor issues, raw-material price fluctuations and tariffs, cyclicality, competition, regulatory changes, foreign-exchange movements, product and warranty claims, and acquisition or restructuring execution.
- There were 191 asbestos-related cases pending at March 31, 2019, versus 208 at December 31, 2018. Management believes insurance coverage is adequate and that the cases will not materially affect financial condition, liquidity, or results, but coverage and future claim activity remain uncertain.
- The company reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective as of March 31, 2019.
Important facts for investors to verify
- Whether the increase in revenue and backlog converts into sustained operating cash flow and margin improvement.
- The collectability and timing of the $73.0 million accounts-receivable balance and the causes of the $19.6 million quarterly receivables increase.
- Progress toward refinancing or repaying the $76.1 million term loan due in September 2020.
- The durability of Energy Solutions growth and the margin trajectory of Industrial Solutions and Fluid Handling Solutions.
- The impact of divestitures, lease accounting, tradename reclassification, and other non-GAAP adjustments on comparability.
- Future asbestos claims, insurance coverage, contract losses, warranty exposure, and other contingencies.