CECO Environmental Corp. — FY2023 Form 10-K Summary
Business context and reporting period
CECO Environmental Corp. is a global industrial company providing engineered solutions for industrial air treatment, industrial water treatment and energy transition applications. Its two reportable segments are Engineered Systems and Industrial Process Solutions. The filing covers the fiscal year ended December 31, 2023, with comparative results for 2022 and 2021. The filing is an annual report, not a standalone fourth-quarter report.
CECO operated approximately 30 principal facilities across 12 states and nine countries and had approximately 1,200 employees at year-end. Approximately 33% of 2023 revenue was generated outside the United States. No customer represented 10% or more of consolidated revenue in 2023, 2022 or 2021.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net sales | $544.8 million | $422.6 million | +28.9% |
| Gross profit | $171.0 million | $128.2 million | +33.4% |
| Gross margin | 31.4% | 30.3% | +110 bps |
| Operating income | $34.6 million | $22.2 million | +56.0% |
| Operating margin | 6.4% | 5.3% | +110 bps |
| Net income attributable to CECO | $12.9 million | $17.4 million | -25.9% |
| Diluted EPS | $0.37 | $0.50 | Declined |
| Non-GAAP operating income | $48.1 million | $34.8 million | +38.2% |
| Non-GAAP operating margin | 8.8% | 8.2% | +60 bps |
| Non-GAAP net income | $26.6 million | $25.9 million | +2.7% |
Net income declined despite higher operating income because interest expense increased to $13.4 million from $5.4 million, other income declined to $0.4 million from $6.9 million, and the effective tax rate increased to 32.6% from 22.9%. Non-GAAP measures exclude acquisition-related amortization and earnout expense, acquisition and integration costs, executive transition costs and restructuring costs, among other adjustments.
Segment performance and operating trends
| Segment | 2023 revenue | 2022 revenue | 2023 operating income | 2022 operating income |
|---|---|---|---|---|
| Engineered Systems | $380.1 million | $263.2 million | $59.8 million | $36.2 million |
| Industrial Process Solutions | $164.7 million | $159.4 million | $21.6 million | $22.7 million |
- Engineered Systems revenue increased 44.4%, driven primarily by separation, filtration, industrial water and thermal acoustics businesses. Approximately $50.7 million of the increase came from acquisitions and $66.2 million from organic growth.
- Industrial Process Solutions revenue increased 3.3%, while operating income declined, primarily due to restructuring expenses.
- Orders booked increased to $582.8 million from $526.6 million.
- Backlog increased 19.0% to $370.9 million from $311.7 million. Substantially all backlog is expected to be delivered within 18 months, but backlog is not a GAAP measure and may be affected by delays or cancellations.
- Approximately 70% of annual revenue was recognized over time using cost-to-cost progress measures, making estimated costs to complete a critical accounting judgment.
Cash flow, liquidity and debt
| Metric | 2023 | 2022 |
|---|---|---|
| Cash flow from operating activities | $44.6 million | $29.6 million |
| Cash used in investing activities | $(56.5) million | $(48.3) million |
| Cash used for acquisitions | $48.1 million | $44.9 million |
| Capital expenditures | $8.4 million | $3.4 million |
| Cash and cash equivalents | $54.8 million | $45.5 million |
| Total debt, before current portion adjustment | $137.3 million | $111.2 million |
| Debt including current and long-term amounts at fair value | $138.6 million | $112.7 million |
| Working capital | $78.3 million | $94.0 million |
Debt increased primarily to fund acquisitions. At December 31, 2023, the company had $112.4 million outstanding under its term loan, $17.3 million under its revolver and $8.9 million of joint venture debt. The weighted-average stated borrowing rate was 8.29%, compared with 6.75% in 2022, and most debt is indexed to SOFR or other variable rates.
Unused credit availability was $109.4 million, or $99.8 million after borrowing limitations. The company was in compliance with its debt covenants at year-end. The maximum consolidated net leverage ratio was temporarily raised to 4.00 through June 30, 2024, after which it is scheduled to decline to 3.50. Scheduled principal payments include $10.5 million in 2024 and $113.0 million in 2026.
Management stated that operating cash flow, existing cash and available borrowing capacity should be sufficient to fund anticipated needs for at least the next twelve months. No cash dividends were paid, and no shares were repurchased in 2023; $13.0 million remained available under the $20.0 million repurchase authorization.
Material changes versus the prior comparable period
- Revenue, gross profit, operating income and operating margins improved substantially, supported by organic growth, acquisitions, pricing and operating leverage.
- GAAP net income and EPS declined because of higher interest expense, lower other income and a higher tax rate.
- Debt increased by approximately $26.1 million, while cash increased by approximately $9.3 million.
- Accounts receivable increased to $112.7 million from $83.1 million, and the allowance for credit losses increased to $6.5 million from $4.2 million.
- Goodwill increased to $211.3 million from $183.2 million, primarily from acquisitions. Goodwill and indefinite-lived intangible assets totaled approximately $220.9 million, or 36.8% of total assets.
- CECO acquired Kemco Systems, Transcend Solutions and Wakefield during 2023 for aggregate cash consideration described in the filing. These acquisitions expanded water treatment, filtration, hydrocarbon processing and acoustical solution offerings.
- Restructuring expense increased to approximately $1.4 million, primarily related to exiting certain operations in China.
Guidance, outlook, commentary and risks
The filing does not provide specific quantitative revenue, earnings or margin guidance. Management expects demand to benefit from environmental regulation, infrastructure investment, reshoring, water scarcity, energy transition spending, semiconductor and electronics manufacturing, natural gas infrastructure and industrial capital expenditures. The strategy emphasizes acquisitions, margin expansion, recurring aftermarket revenue, cash generation and growth in industrial air, industrial water and energy transition markets.
- Supply-chain shortages and inflation in materials and labor continued in 2023. CECO used price increases, surcharges and alternate suppliers, but stated that these measures may not fully offset future cost increases or disruptions.
- Most projects are fixed-price contracts. Cost overruns, delays, change orders, subcontractor performance or inaccurate cost-to-complete estimates could reduce margins or cause losses.
- Approximately 33% of revenue was international, exposing the company to currency, political, trade, tariff, tax, regulatory and foreign-exchange risks.
- Interest-rate risk is material because a substantial portion of borrowings carries variable rates. A hypothetical 10% change in the weighted-average borrowing rate was estimated to affect annual earnings and cash flows by approximately $1.2 million.
- CECO had 313 asbestos-related cases pending at December 31, 2023, compared with 247 at December 31, 2022. Management believes insurance coverage is adequate and does not currently expect a material adverse effect, but outcomes and insurer coverage cannot be assured.
- Management identified material weaknesses in internal control over financial reporting involving review documentation for over-time revenue recognition and balance-sheet reconciliations in certain Engineered Systems operations. Remediation was ongoing at year-end.
- The independent auditor issued an adverse opinion on internal control over financial reporting, while issuing an unqualified opinion on the consolidated financial statements.
- Cybersecurity threats, supplier failures, customer credit risk, goodwill impairment, pension obligations, labor disruptions, litigation and acquisition integration remain material risk areas.
Most important facts for investors to verify
- Whether revenue-recognition and balance-sheet-reconciliation control weaknesses are fully remediated in subsequent filings.
- Whether organic growth, project margins and backlog conversion continue after acquisition-related growth is normalized.
- Debt reduction, interest expense and compliance with the 2026 maturity and leverage-covenant requirements.
- Cash conversion, accounts receivable collection, contract assets and liabilities, and working-capital requirements as revenue expands.
- The final purchase-accounting valuations for 2023 acquisitions and the potential effect of earnouts, amortization and goodwill.
- Exposure to fixed-price project losses, supply-chain inflation, foreign exchange and variable-rate borrowing costs.
- Developments in asbestos litigation, warranty claims, multiemployer pension obligations and other contingencies.
- Whether management’s expected environmental and energy-transition demand translates into recurring revenue and sustained margin expansion.