CECO Environmental Corp. — Q2 2021 Form 10-Q Summary
Business context and reporting period
CECO is a global provider of industrial air-quality, emissions-control, fluid-handling, filtration, and engineered environmental solutions. Reported segments are Engineered Systems and Industrial Process Solutions. The filing covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Results are unaudited.
During the first quarter of 2021, CECO realigned its reportable segments and recast prior-period segment information. The company also continued to assess the effects of COVID-19 on demand, operations, suppliers, and end markets.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $78.7 million | $75.2 million | $150.6 million | $155.7 million |
| Gross profit | $25.3 million | $25.8 million | $49.7 million | $54.1 million |
| Gross margin | 32.0% | 34.3% | 33.0% | 34.7% |
| Operating income | $2.1 million | $4.4 million | $5.2 million | $8.6 million |
| Operating margin | 2.7% | 5.9% | 3.5% | 5.5% |
| Net income attributable to CECO | $0.3 million | $3.3 million | $1.5 million | $6.7 million |
| Diluted EPS | $0.01 | $0.09 | $0.04 | $0.19 |
| Non-GAAP operating income | $4.7 million | $7.4 million | $9.7 million | $13.7 million |
| Non-GAAP operating margin | 6.0% | 9.8% | 6.4% | 8.8% |
- Q2 revenue increased 4.7%, driven primarily by the Environmental Integrated Solutions acquisition and recovery in selected industrial air markets.
- Six-month revenue declined 3.3%, reflecting COVID-19-related weakness in cyclone systems, selective catalytic reduction technologies, and sheet-metal fabrication.
- Q2 and six-month gross margins declined because of a less favorable project mix.
- Selling and administrative expense increased in Q2 because 2020 furloughs, wage reductions, travel restrictions, and other temporary cost reductions did not recur. Headcount was 10.0% lower year over year at June 30, 2021.
- Interest expense declined to $0.7 million in Q2 and $1.4 million for the six-month period, primarily because of lower debt balances.
- Orders booked increased 42.5% year over year to $85.5 million in Q2 and increased 31.0% to $177.6 million for the six-month period.
- Backlog was $210.0 million at June 30, 2021, up from $183.1 million at December 31, 2020; substantially all backlog was expected to be delivered within 12 to 18 months.
Segment performance
| Segment | Q2 sales | Q2 prior year | Six-month sales | Six-month prior year | Q2 operating income | Six-month operating income |
|---|---|---|---|---|---|---|
| Engineered Systems | $43.4 million | $49.1 million | $85.4 million | $99.7 million | $5.6 million | $11.8 million |
| Industrial Process Solutions | $35.3 million | $26.1 million | $65.2 million | $55.9 million | $4.4 million | $8.3 million |
Engineered Systems was pressured by lower SCR and cyclone demand. Industrial Process Solutions benefited from EIS VOC-abatement revenue, regenerative thermal oxidizer solutions, and collection and ventilation solutions.
Cash flow, liquidity, debt, and balance sheet
- Six-month operating cash flow was $4.1 million, compared with $2.1 million in the prior-year period.
- Investing cash flow was negative $0.5 million, including $1.0 million of capital expenditures and $0.5 million of asset-sale proceeds. Prior-year investing cash flow was negative $8.1 million, including the EIS acquisition.
- Financing cash flow was negative $6.4 million, reflecting $4.1 million of revolving-credit repayments, $0.8 million of earnout payments, and a $0.1 million noncontrolling-interest distribution.
- Cash, cash equivalents, and restricted cash declined to $34.5 million at June 30, 2021 from $37.8 million at December 31, 2020. Cash and cash equivalents were $32.2 million, including $25.2 million held outside the United States.
- Working capital was $75.3 million, compared with $74.1 million at year-end 2020; the current ratio was 1.72 to 1.00.
- Total Credit Facility borrowings were $67.5 million, net of unamortized debt discount, versus $72.6 million at December 31, 2020. Debt included a $45.0 million term loan and $23.6 million revolving loan.
- Borrowings mature in June 2024. Scheduled principal payments were $1.9 million for the remainder of 2021, $3.7 million in 2022, $4.4 million in 2023, and $58.6 million in 2024.
- Availability based on borrowing limitations was $45.6 million at June 30, 2021. The company was in compliance with its debt covenants.
Outlook, commentary, risks, and unusual items
- The filing does not provide a specific revenue, earnings, or margin guidance range.
- Management reported strong order growth and backlog, particularly in electric-vehicle production, engineered wood, aluminum beverage cans, and power-generation markets.
- COVID-19 continued to affect global demand and created potential risks involving facility operations, suppliers, international activity, workforce health, and future end-market conditions. Management had not experienced significant supply-chain disruption as of the filing.
- The EIS acquisition contributed $5.5 million of Q2 revenue and $8.1 million of six-month revenue. The estimated EIS earnout liability was $1.4 million at June 30, 2021 after a $0.5 million fair-value increase and $0.8 million of payments during 2021.
- CECO reclassified $3.2 million of tradenames from indefinite-lived to finite-lived assets and did not identify a triggering event requiring an interim goodwill or intangible-asset impairment test.
- There were 216 asbestos-related cases pending at June 30, 2021, compared with 200 at year-end 2020. Management believed insurance coverage was adequate and that the cases would not materially affect financial condition, liquidity, or results, but noted uncertainty regarding claim volume, claim nature, and insurer coverage.
- Other risks include fixed-price contract cost overruns, project delays or cancellations, raw-material price volatility, warranty and product-liability claims, debt refinancing, acquisition integration, regulation, cybersecurity, foreign-exchange movements, and catastrophic events.
- A hypothetical 10% change in the weighted-average borrowing rate was estimated to affect annual earnings and cash flows by approximately $0.2 million.
- Management concluded that disclosure controls were effective as of June 30, 2021 and reported no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether the large backlog and order growth convert into revenue without further margin erosion.
- Recovery timing for Engineered Systems demand, particularly SCR and cyclone products affected by COVID-19.
- Whether Industrial Process Solutions growth, including EIS, offsets weaker legacy product lines.
- The sustainability of gross margin and non-GAAP operating margin after temporary 2020 cost reductions ended.
- Liquidity and refinancing capacity ahead of the substantial $58.6 million scheduled debt payment in 2024.
- Potential changes in COVID-19 effects, supply-chain conditions, raw-material costs, and project execution risk.
- Future EIS earnout obligations and the performance assumptions supporting goodwill and intangible-asset carrying values.
- Developments in asbestos litigation, insurance coverage, and other contractual, warranty, and tax contingencies.