CECO Environmental Corp. — Q3 2018 Form 10-Q Summary
Business context and reporting period
CECO Environmental is a global provider of air-quality, energy, industrial, and fluid-handling solutions. The filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Reportable segments are Energy Solutions, Industrial Solutions, and Fluid Handling Solutions.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $88.3 million | $85.0 million | $243.5 million | $271.5 million |
| Gross profit | $28.7 million | $27.1 million | $81.8 million | $87.5 million |
| Gross margin | 32.5% | 31.9% | 33.6% | 32.2% |
| Operating income (loss) | $(10.4) million | $5.6 million | $4.3 million | $16.2 million |
| Operating margin | (11.8)% | 6.6% | 1.8% | 6.0% |
| Net income (loss) | $(12.9) million | $3.0 million | $(8.1) million | $8.6 million |
| Diluted EPS | $(0.37) | $0.09 | $(0.23) | $0.25 |
- Non-GAAP operating income was $6.5 million, or 7.4% of sales, in Q3 2018 versus $5.3 million, or 6.2%, in Q3 2017. For the first nine months, non-GAAP operating income was $15.7 million, or 6.4%, versus $24.8 million, or 9.1%.
- Orders booked were $97.5 million in Q3 and $292.9 million for the first nine months, compared with $71.0 million and $242.2 million, respectively, in the prior-year periods.
- Backlog was $211.4 million at September 30, 2018, compared with $168.9 million at December 31, 2017; $7.4 million related to Zhongli.
- Operating cash flow was $3.7 million for the first nine months, versus $(1.1) million in 2017. Investing cash flow was $37.5 million, primarily reflecting $33.1 million of divestiture proceeds. Financing cash flow was $(37.7) million, principally from $32.8 million of term-loan repayments.
- Cash and cash equivalents were $30.7 million, or $32.7 million including restricted cash, at September 30, 2018. Working capital was $59.2 million, with a current ratio of 1.53 to 1.
- Total debt was $79.2 million, down from $114.8 million at December 31, 2017. The term loan had no additional scheduled principal payments before its $81.1 million maturity payment in September 2020.
- Unused credit availability was $70.5 million, although availability subject to borrowing limitations was $34.1 million. The company was in compliance with its credit-facility covenants.
- Dividends remained suspended. The company paid $44 thousand of dividends during the first nine months of 2018, compared with $7.8 million in the prior-year period.
Material changes versus the prior comparable period
- Third-quarter sales increased 3.9%, led by Energy Solutions, while nine-month sales decreased 10.3%, primarily because Keystone and Strobic were divested and Industrial Solutions experienced lower volume.
- Energy Solutions Q3 sales increased to $56.6 million from $44.3 million, while nine-month sales declined modestly to $147.7 million from $150.5 million.
- Industrial Solutions sales declined to $20.3 million in Q3 and $56.4 million for the first nine months, versus $21.6 million and $67.7 million, respectively.
- Fluid Handling Solutions sales declined to $11.4 million in Q3 and $39.4 million for the first nine months, primarily due to the Keystone and Strobic divestitures and lower pump volume.
- Gross margins improved in both comparative periods, but operating results were reduced by higher amortization and earnout expense and by the Zhongli divestiture impairment.
Outlook, unusual items, risks, and contingencies
- CECO recorded a $15.1 million third-quarter loss on the planned divestiture of Zhongli, a Chinese Energy Solutions business classified as held for sale. On October 24, 2018, CECO agreed to sell Zhongli for $3.6 million, subject to closing conditions and regulatory approval.
- CECO completed the sales of Strobic and Keystone in the first quarter of 2018, recording estimated gains of $6.9 million and $4.3 million, respectively. The divestitures generated $33.1 million of net cash proceeds during the first nine months.
- No formal financial guidance is provided in the filing. Management cited stronger refinery-related and NOx-control orders, benefits from the 2017 restructuring program, and continued strategic focus on core businesses.
- Key risks include fixed-price contract cost overruns, project delays or cancellations, warranty and product-liability claims, raw-material price increases and tariffs, debt refinancing or repayment, interest-rate and foreign-currency exposure, competition, regulatory changes, and execution of divestitures and restructuring initiatives.
- There were 197 asbestos-related cases pending at September 30, 2018. Management believes insurance coverage is adequate and that the cases are not expected to materially affect operations, liquidity, or financial condition, but outcomes and insurer coverage remain uncertain.
- The company adopted the new revenue-recognition standard in 2018 without a material opening retained-earnings adjustment. It expected the 2019 lease standard to materially increase balance-sheet assets and liabilities, without a material effect on operations or liquidity.
- Income tax expense was $1.3 million in Q3 despite a pretax loss, primarily because the Zhongli impairment was nondeductible. The company’s accounting for certain Tax Cuts and Jobs Act effects remained provisional through the filing date.
Important facts for investors to verify
- Whether the Zhongli sale closed on expected terms and whether additional losses or cash proceeds were recognized.
- Conversion of the $211.4 million backlog into revenue and cash flow, including the $7.4 million Zhongli component.
- Progress in restoring nine-month sales and non-GAAP operating margins after divestitures and volume declines.
- Compliance with leverage covenants and the company’s ability to refinance or repay the $81.1 million term-loan maturity due in September 2020.
- Working-capital trends, particularly accounts receivable, contract assets and liabilities, and operating cash conversion.
- Developments in asbestos litigation, warranty claims, fixed-price contracts, and other contingencies.