CECO Environmental Corp. — Q1 2018 Form 10-Q Summary
Business context and reporting period
CECO Environmental Corp. is a global provider of air-quality, fluid-handling, and engineered industrial solutions. Its reportable segments are Energy Solutions, Industrial Solutions, and Fluid Handling Solutions. This unaudited quarterly report covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $74.1 million | $92.7 million |
| Gross profit | $25.6 million | $31.9 million |
| Gross margin | 34.5% | 34.5% |
| Operating income | $12.2 million | $1.4 million |
| GAAP operating margin | 16.5% | 1.5% |
| Non-GAAP operating income | $4.0 million | $10.2 million |
| Non-GAAP operating margin | 5.4% | 11.0% |
| Net income | $5.8 million | $0.04 million |
| Diluted EPS | $0.17 | $0.00 |
| Cash flow from operations | $3.2 million | $4.7 million |
- Cash and cash equivalents were $33.1 million at March 31, 2018, compared with $29.9 million at December 31, 2017; total cash, cash equivalents, and restricted cash were $34.0 million.
- Working capital was $73.9 million, with a current ratio of 1.71 to 1.
- Total debt was $84.7 million, down from $114.8 million at December 31, 2017. The company prepaid $26.6 million of term debt and made total debt repayments of approximately $30.5 million during the quarter.
- The term loan has no scheduled current maturities following the prepayments; the remaining principal is due in September 2020. A separate $5.3 million note payable is expected to become due in 2018.
- Total unused credit availability was $71.8 million, although availability based on borrowing limitations was $6.6 million. Letters of credit outstanding totaled $23.1 million.
- Backlog was $182.1 million at March 31, 2018, compared with $168.9 million at December 31, 2017, after transferring $7.7 million of divested orders.
Material changes versus the prior comparable period
- Sales decreased 20.1%, primarily because of lower volumes in natural-gas turbine exhaust systems, refinery-related products, and duct-work installation and fabrication.
- Gross margin was unchanged, but selling and administrative expenses increased to 29.1% of sales from 25.1% because of the lower revenue base.
- Reported operating income benefited from an $11.2 million net gain on divestitures and lower amortization and earnout expenses. Excluding these and other special items, non-GAAP operating income declined 61%.
- Energy Solutions sales declined to $40.0 million from $53.7 million, and operating income declined to $3.6 million from $3.8 million.
- Industrial Solutions sales declined to $17.8 million from $23.3 million, and operating income declined to $1.4 million from $2.9 million.
- Fluid Handling Solutions sales increased modestly to $16.2 million from $15.8 million, while operating income decreased slightly to $3.2 million from $3.3 million.
- Orders booked increased to $95.0 million from $84.0 million, primarily due to higher refinery-related orders.
- Operating cash flow decreased despite higher net income, reflecting the divestiture gain, working-capital movements, and other noncash adjustments.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide quantified full-year revenue, earnings, or cash-flow guidance.
- Management cited increased refinery-related customer capital expenditures and higher first-quarter bookings, but cautioned that backlog may not translate into future revenue because of cancellations, project delays, contractor performance, scope changes, weather, and labor availability.
- CECO sold Strobic Air for approximately $28.5 million and Keystone Filter for approximately $7.5 million. The transactions generated estimated pretax gains of $6.9 million and $4.3 million, respectively, and were intended to focus the portfolio on core markets.
- The company suspended dividend payments beginning after the November 2017 board review; no dividends were paid in Q1 2018.
- The company adopted the new revenue-recognition standard on January 1, 2018; the opening retained-earnings effect was not material. It also adopted guidance affecting restricted cash and certain tax effects in accumulated other comprehensive income.
- Income tax expense was $4.1 million, producing a 41.6% effective tax rate. The rate was elevated by a permanent book-tax difference related to a divestiture. Accounting for the Tax Cuts and Jobs Act remains provisional, with completion expected in the fourth quarter of 2018.
- CECO remained in compliance with its debt covenants at March 31, 2018. The company is exposed to variable interest rates and uses an interest-rate swap; a hypothetical 10% change in the weighted-average borrowing rate was estimated to affect annual earnings and cash flows by approximately $0.2 million.
- There were 180 pending asbestos-related cases at March 31, 2018. Management believes insurance coverage is adequate and does not expect the matters to have a material adverse effect, but outcomes depend on claim volume, case characteristics, and insurer coverage.
- Management identified no goodwill or indefinite-lived intangible impairment in the quarter. The company expects the forthcoming lease standard to materially increase recognized balance-sheet assets and liabilities, without a material income-statement or liquidity effect.
- Management reported effective disclosure controls as of March 31, 2018 and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the higher order intake and $182.1 million backlog convert into revenue and improved organic operating performance.
- The sustainability of results excluding the $11.2 million divestiture gain and the reduction in prior-period earnout expenses.
- Liquidity under the company’s borrowing limitations, particularly the $6.6 million of availability based on those limitations versus $71.8 million of stated unused capacity.
- The ability to refinance or repay the $84.7 million term-loan balance due in September 2020 and the $5.3 million note payable expected in 2018.
- Final Tax Cuts and Jobs Act accounting, including the treatment of GILTI and any changes to provisional tax amounts.
- Developments in asbestos litigation, fixed-price contract profitability, customer and contractor delays, and potential warranty or product-liability claims.