Business Context and Reporting Period
CECO Environmental Corp. is a diversified industrial and environmental solutions provider serving air-pollution control, water and wastewater treatment, fluid handling, separation and filtration, thermal acoustics, and related markets. The unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Operations are reported through Engineered Systems and Industrial Process Solutions. The company completed four acquisitions during 2022, expanding its water, wastewater, industrial air, expansion-joint, and treatment offerings.
Financial Performance and Liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $108.4 million | $80.0 million | $306.2 million | $230.6 million |
| Gross profit | $32.4 million | $22.7 million | $90.5 million | $72.4 million |
| Gross margin | 29.9% | 28.4% | 29.6% | 31.4% |
| Operating income | $2.8 million | $(0.6) million | $13.7 million | $4.6 million |
| Operating margin | 2.6% | (0.8)% | 4.5% | 2.0% |
| Net income attributable to CECO | $1.9 million | $(1.2) million | $9.1 million | $0.2 million |
| Diluted EPS | $0.06 | $(0.04) | $0.26 | $0.01 |
- Non-GAAP operating income was $7.3 million in Q3, or 6.7% of sales, versus $1.8 million and 2.3% in the prior-year quarter. For nine months, non-GAAP operating income was $23.7 million, or 7.7% of sales, versus $11.5 million and 5.0%.
- Orders booked increased 9.8% year over year to $101.7 million in Q3 and increased 39.2% to $376.2 million for nine months. Backlog was $277.7 million at September 30, 2022, up from $213.9 million at December 31, 2021.
- Cash provided by operating activities was $19.7 million for nine months, compared with $10.2 million in 2021. Cash used in investing was $47.3 million, including $44.9 million for acquisitions and $2.4 million for capital expenditures.
- Financing activities provided $38.2 million, primarily reflecting net revolving-credit borrowings used to fund acquisitions, partly offset by $6.6 million of share repurchases.
- Cash, cash equivalents and restricted cash totaled $36.2 million at September 30, 2022, including $35.2 million of cash and cash equivalents. Working capital was $82.9 million, with a current ratio of 1.59 to 1.00.
- Total debt was $110.3 million, net of debt discount, compared with $63.8 million at December 31, 2021. The weighted-average stated borrowing rate increased to 5.44% from 2.54%. Unused credit availability based on borrowing limitations was $60.9 million.
Material Changes Versus the Prior Comparable Period
- Q3 sales increased 35.5%, while nine-month sales increased 32.8%. Management attributed approximately 80% of Q3 growth and 85% of nine-month growth to organic revenue; the balance came from acquisitions.
- Engineered Systems sales increased 46.6% in Q3 and 45.9% for nine months. Industrial Process Solutions sales increased 21.5% in Q3 and 15.9% for nine months.
- Q3 gross margin improved because of price increases and project mix, although nine-month gross margin declined because of inflation, supply-chain challenges, and lower project-margin mix.
- Selling and administrative expense increased in dollars because of acquisitions and higher headcount, but declined as a percentage of sales because of operating leverage.
- Interest expense increased to $1.6 million in Q3 and $3.5 million for nine months, primarily because of higher debt balances and borrowing rates.
- CECO acquired General Rubber, Compass Water Solutions, Western Air Ducts, and DS21 during 2022. These transactions contributed goodwill and intangible assets and increased leverage.
- The company repurchased and retired approximately 981,000 shares for $6.5 million through September 30, 2022 under a $20.0 million authorization expiring April 30, 2025.
- Foreign-currency translation losses reduced other comprehensive income by $5.9 million in Q3 and $9.4 million for nine months.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific quantitative revenue, earnings, or margin guidance. Management expects supply-chain challenges and inflationary pressures affecting raw materials and labor to continue for the foreseeable future. The company has implemented price increases, material surcharges, and alternative sourcing, but states that future disruptions could adversely affect operations, financial condition, and results.
- COVID-19 continues to create potential risks to facilities, suppliers, customers, workforce, and international operations.
- Most debt bears variable interest rates indexed to SOFR. Management estimates that a hypothetical 10% change in the weighted-average borrowing rate would affect annual earnings and cash flows by approximately $0.6 million.
- Debt increased substantially to finance acquisitions; $93.5 million of scheduled principal payments are shown for 2026. The company remained in compliance with its credit-facility and joint-venture debt covenants at September 30, 2022.
- Goodwill and intangible assets totaled approximately $227.8 million, making impairment assumptions regarding revenue, operating profit, terminal growth, and cost of capital significant. No triggering event requiring an interim impairment test was identified during Q3.
- Q3 included $1.3 million of acquisition and integration expense and $1.2 million of executive transition expense. Nine-month results included $3.8 million and $1.2 million, respectively, for these items, plus $0.1 million of restructuring expense.
- Asbestos litigation involved 259 pending cases at September 30, 2022, compared with 223 at year-end 2021. Management believes insurance coverage is adequate and that pending cases will not materially affect results, liquidity, or financial condition, but acknowledges uncertainty regarding future claims and insurer coverage.
- The company reports that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether organic growth, backlog conversion, and order trends continue after the 2022 acquisition contribution.
- Whether pricing actions offset raw-material, labor, freight, and other inflationary pressures and support recovery of nine-month gross margin.
- The pace of debt repayment, variable-rate exposure, covenant headroom, and the ability to refinance or repay significant 2026 maturities.
- Integration performance, purchase-price accounting updates, earnout obligations, and impairment risk associated with the four acquisitions.
- Working-capital requirements, particularly accounts receivable, contract assets, inventories, and cash conversion.
- Developments in asbestos litigation, insurance coverage, product and warranty claims, and other contingencies.
- The effect of foreign-currency movements and continued COVID-19, supply-chain, labor, and macroeconomic disruptions.