Business Context and Reporting Period
CECO Environmental Corp. is a diversified industrial company providing industrial air, water, emissions-management, filtration, fluid-handling, and energy-transition solutions. Its two reportable segments are Engineered Systems and Industrial Process Solutions. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $112.6 million | $92.4 million | 21.9% increase |
| Gross profit | $34.9 million | $26.4 million | 32.2% increase |
| Gross margin | 31.0% | 28.6% | 240 basis-point increase |
| Operating income | $5.5 million | $5.2 million | $0.3 million increase |
| GAAP operating margin | 4.9% | 5.6% | 70 basis-point decrease |
| Non-GAAP operating income | $7.7 million | $7.8 million | Decrease |
| Non-GAAP operating margin | 6.8% | 8.4% | 160 basis-point decrease |
| Net income attributable to CECO | $2.0 million | $2.8 million | Decrease |
| Diluted EPS | $0.06 | $0.08 | Decrease |
| Net cash used in operating activities | $12.0 million | $0.2 million | Greater use of cash |
Interest expense increased to $2.4 million from $0.8 million, primarily because of higher debt balances and rising interest rates. Income tax expense declined to $0.01 million from $1.1 million, producing effective tax rates of 0.4% and 28.3%, respectively.
At March 31, 2023, cash and cash equivalents were $41.2 million, restricted cash was $1.0 million, working capital was $103.9 million, and total assets were $567.6 million. Total debt was $145.3 million, compared with $111.2 million at December 31, 2022. Borrowings under the revolving credit facility increased to $96.1 million from $61.3 million. Borrowing availability was $22.5 million after borrowing limitations and letters of credit.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven by separation, filtration and industrial water technologies and thermal acoustics. Approximately $8.3 million of the $20.2 million sales increase was organic and $11.9 million came from acquisitions.
- Engineered Systems sales increased to $74.5 million from $57.0 million, while segment operating income increased to $9.8 million from $6.5 million.
- Industrial Process Solutions sales increased to $38.1 million from $35.5 million, while segment operating income increased to $5.5 million from $4.1 million.
- Corporate and other operating expense increased to $9.9 million from $5.4 million, partly because the prior-year period included a favorable $2.5 million insurance settlement.
- Orders booked declined 9.2% to $146.1 million from $160.9 million. Backlog increased to $356.1 million at March 31, 2023, from $311.7 million at December 31, 2022; substantially all backlog was expected to be delivered within 12 to 18 months.
- Operating cash flow was pressured by the timing of collections, supplier payments, and increases in accounts receivable and contract assets.
- CECO acquired Wakefield for $4.1 million in cash plus deferred consideration and acquired Transcend for $20.0 million in cash plus deferred consideration. These acquisitions added approximately $24.4 million of goodwill and expanded the Engineered Systems portfolio.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide quantitative revenue, earnings, or cash-flow guidance. Management expects supply-chain constraints and labor and raw-material cost pressures to continue for the foreseeable future. The company has taken mitigation measures, including using additional and alternate suppliers, but stated that future disruptions could adversely affect results.
- Debt is predominantly variable-rate and indexed to SOFR. Management estimated that a hypothetical 10% change in the weighted-average borrowing rate would affect annual earnings and cash flows by approximately $1.1 million.
- The Credit Facility matures in December 2026. The company was in compliance with its covenants at March 31, 2023; the maximum consolidated net leverage ratio was 3.75 through September 30, 2023 and declines to 3.50 thereafter.
- Asbestos-related litigation included 268 pending cases at March 31, 2023, compared with 247 at December 31, 2022. Management believes insurance coverage is adequate and that pending cases will not materially affect results, liquidity, or financial condition, but coverage and claim volume are outside the company’s control.
- Goodwill and indefinite-lived intangible assets totaled approximately $217.3 million. No triggering events requiring an interim impairment assessment were identified, although valuation depends on forecasts, growth rates, operating performance, and cost of capital.
- The company repurchased no shares during the quarter. The remaining authorization under its $20.0 million repurchase program was $13.0 million at March 31, 2023.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether organic growth, order intake, and backlog conversion remain strong after the 9.2% year-over-year decline in orders.
- Whether working-capital requirements, particularly receivables and contract assets, improve enough to restore positive operating cash flow.
- Debt paydown, variable-rate interest costs, covenant headroom, and available revolver capacity through the 2026 maturity.
- Integration results and profitability contributions from Wakefield and Transcend, including the finalization of preliminary purchase-accounting estimates.
- The sustainability of the 31.0% gross margin and the lower 6.8% non-GAAP operating margin.
- Developments in asbestos litigation, insurance coverage, supply-chain constraints, labor availability, and raw-material pricing.
- The unusually low 0.4% effective tax rate and whether it is representative of future periods.