CECO Environmental(CECO) - 2024 Q2 - Quarterly Report

Part I – Financial Information Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for CECO Environmental Corp. and its subsidiaries, including the balance sheets, statements of income, comprehensive income, shareholders' equity, and cash flows, along with detailed notes explaining the basis of reporting, significant accounting policies, and specific financial line items Condensed Consolidated Balance Sheets The Condensed Consolidated Balance Sheets show a slight decrease in total assets and liabilities from December 31, 2023, to June 30, 2024, with cash and cash equivalents decreasing significantly while accounts receivable and inventories increased. Total shareholders' equity saw a modest increase Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------------------- | :------------ | :------------------ | | Cash and cash equivalents | $36,523 | $54,779 | | Accounts receivable, net | $126,974 | $112,733 | | Inventories, net | $38,475 | $34,089 | | Total current assets | $281,370 | $281,437 | | Total assets | $598,133 | $600,291 | | Total current liabilities | $207,323 | $203,106 | | Total liabilities | $358,321 | $362,800 | | Total shareholders' equity | $239,812 | $237,491 | Condensed Consolidated Statements of Income For the three and six months ended June 30, 2024, the company reported increased net sales and gross profit compared to the prior year periods. Net income attributable to CECO Environmental Corp. also increased, with diluted EPS rising for the three-month period Condensed Consolidated Statements of Income Highlights (in thousands, except per share data) | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $137,522 | $129,181 | $263,854 | $241,744 | | Gross profit | $49,047 | $39,817 | $94,179 | $74,710 | | Income from operations | $9,257 | $8,603 | $16,943 | $14,064 | | Net income attributable to CECO | $4,485 | $3,724 | $5,993 | $5,701 | | Diluted EPS | $0.12 | $0.11 | $0.17 | $0.16 | Condensed Consolidated Statements of Comprehensive Income Comprehensive income for the three months ended June 30, 2024, decreased slightly year-over-year due to a foreign currency translation loss, while for the six months, it also decreased despite higher net income, primarily due to a smaller foreign currency translation gain compared to the prior year Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $4,930 | $3,990 | $7,022 | $6,460 | | Foreign currency translation (loss) gain | $(856) | $139 | $(202) | $905 | | Comprehensive income | $4,074 | $4,129 | $6,820 | $7,365 | Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity increased from $237.5 million at December 31, 2023, to $239.8 million at June 30, 2024. Key changes included net income contributions, share-based compensation, and common stock repurchases, partially offset by noncontrolling interest distributions and translation losses Shareholders' Equity Changes (in thousands) | Metric | Six months ended June 30, 2024 | | :----------------------------------- | :----------------------------- | | Balance December 31, 2023 | $237,491 | | Net income | $5,993 | | Share based compensation earned | $3,999 | | Common stock repurchase and retirement | $(5,001) | | Translation (loss) gain | $(202) | | Noncontrolling interest distributions | $(1,105) | | Balance June 30, 2024 | $239,812 | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2024, the company generated $7.9 million in cash from operating activities, a significant improvement from a cash outflow in the prior year. Investing activities used less cash due to fewer acquisitions, while financing activities used cash primarily for debt repayments and share repurchases Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $7,891 | $(611) | | Net cash used in investing activities | $(6,811) | $(28,061) | | Net cash (used in) provided by financing activities | $(16,565) | $29,498 | | Net (decrease) increase in cash | $(18,534) | $1,967 | | Cash, cash equivalents and restricted cash at end of period | $36,914 | $48,552 | Notes to Condensed Consolidated Financial Statements The notes provide detailed explanations of the company's financial reporting, including accounting policies, specific asset and liability breakdowns, debt structures, share-based compensation, income taxes, commitments, and recent acquisitions, offering crucial context to the condensed financial statements 1. Basis of Reporting for Consolidated Financial Statements The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules and GAAP, including normal recurring adjustments. Management's estimates and assumptions are used, and the statements should be read with the Annual Report on Form 10-K - Financial statements are unaudited and prepared under SEC rules and GAAP, incorporating management's estimates and assumptions[187][188] 2. New Financial Accounting Pronouncements The company has not adopted any new accounting standards in fiscal 2024. It is currently evaluating the impact of ASU 2023-09 (Income Taxes) and ASU 2023-07 (Segment Reporting), both effective for fiscal years beginning after December 15, 2024, and 2023 respectively, with interim periods for segment reporting after December 15, 2024 - No new accounting standards adopted in fiscal 2024[191] - Evaluating impact of ASU 2023-09 (Income Taxes) and ASU 2023-07 (Segment Reporting), effective for fiscal years beginning after December 15, 2024 and 2023 respectively[192][193] 3. Accounts Receivable Accounts receivable, net, increased to $127.0 million at June 30, 2024, from $112.7 million at December 31, 2023. The provision for credit losses also increased, and retainage receivables on contracts in progress amounted to $3.9 million Accounts Receivable (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------- | :------------ | :------------------ | | Accounts receivable | $133,556 | $119,193 | | Provision for credit losses | $(6,582) | $(6,460) | | Total accounts receivable, net | $126,974 | $112,733 | - Retainage receivables on contracts in progress were approximately $3.9 million as of June 30, 2024[196] 4. Contract Assets and Liabilities Contract assets (costs and estimated earnings in excess of billings) decreased to $55.4 million at June 30, 2024, from $66.6 million at December 31, 2023. Contract liabilities (billings in excess of costs and estimated earnings) increased to $59.9 million from $56.9 million over the same period. Approximately 70% of contract liabilities from December 31, 2023, were recognized as revenue in the first six months of 2024 Contract Assets and Liabilities (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :---------------------------------------------------------------- | :------------ | :------------------ | | Costs and estimated earnings in excess of billings on uncompleted contracts | $55,378 | $66,574 | | Billings in excess of costs and estimated earnings on uncompleted contracts | $59,851 | $56,899 | - Approximately 70% of contract liabilities as of December 31, 2023, were recognized as revenue in the six months ended June 30, 2024[198] 5. Inventories Total inventories increased to $38.5 million at June 30, 2024, from $34.1 million at December 31, 2023, driven by increases in raw materials and work in process. The obsolescence allowance also increased slightly Inventories (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :------------------- | :------------ | :------------------ | | Raw materials | $27,869 | $25,819 | | Work in process | $11,732 | $9,710 | | Finished goods | $2,905 | $2,368 | | Obsolescence allowance | $(4,031) | $(3,808) | | Total inventories | $38,475 | $34,089 | 6. Goodwill and Intangible Assets Goodwill remained relatively stable at $211.1 million as of June 30, 2024, with minor adjustments from acquisitions and foreign currency translation. Finite life intangible assets, net, decreased to $46.1 million from $50.5 million, primarily due to amortization expense. The company performs annual impairment assessments in the fourth quarter and found no triggering events for interim impairment as of June 30, 2024 Goodwill and Intangible Assets (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------------------- | :------------ | :------------------ | | Goodwill | $211,144 | $211,326 | | Tradename (Indefinite life intangible) | $9,522 | $9,570 | | Total intangible assets – finite life | $132,676 (Cost) / $86,590 (Accum. Amort.) | $132,999 (Cost) / $82,538 (Accum. Amort.) | | Intangible assets – finite life, net | $46,086 | $50,461 | - Amortization expense for finite life intangible assets was $4.3 million for the six months ended June 30, 2024, and is projected to be $4.3 million for the remainder of 2024, $7.6 million in 2025, $6.2 million in 2026, $6.0 million in 2027, and $5.6 million in 2028[1] - No triggering events were identified during the three or six months ended June 30, 2024, that would require an interim impairment assessment of goodwill or intangible assets[3] 7. Accrued Expenses Total accrued expenses increased slightly to $44.7 million at June 30, 2024, from $44.3 million at December 31, 2023. This was primarily driven by increases in contract liability and other accrued expenses, partially offset by a decrease in compensation and related benefits Accrued Expenses (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------------- | :------------ | :------------------ | | Compensation and related benefits | $8,854 | $11,278 | | Accrued warranty | $5,478 | $5,105 | | Contract liability | $9,197 | $7,875 | | Short-term operating lease liability | $3,950 | $4,278 | | Other | $17,257 | $15,765 | | Total accrued expenses | $44,736 | $44,301 | 8. Senior Debt Total outstanding borrowings decreased to $130.8 million at June 30, 2024, from $137.3 million at December 31, 2023. The company maintains a Credit Facility with $111.0 million in unused credit availability and was in compliance with all financial covenants. Joint venture debt and foreign bank guarantees also saw minor changes Senior Debt (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :--------------------------------------------------- | :------------ | :------------------ | | Term loan | $107,959 | $112,424 | | Revolving credit facility | $15,800 | $17,300 | | Total outstanding borrowings under the Credit Facility | $123,759 | $129,724 | | Outstanding borrowings under the joint venture term debt | $8,123 | $8,855 | | Total outstanding borrowings | $130,826 | $137,283 | | Total debt, less current portion | $120,246 | $126,795 | - Total unused credit availability under the Credit Facility was $111.0 million at June 30, 2024, up from $109.4 million at December 31, 2023[8] - The weighted average stated interest rate on outstanding borrowings decreased to 7.88% at June 30, 2024, from 8.29% at December 31, 2023[10] - The company was in compliance with all financial and other restrictive covenants under the Credit Facility as of June 30, 2024[14] Credit Facility The Credit Facility includes a senior secured term loan and revolver, with $13.2 million in outstanding letters of credit and $111.0 million in unused credit availability as of June 30, 2024. Interest rates are variable, tied to federal funds, prime, SOFR, or Term SOFR, with a weighted average stated rate of 7.88% at June 30, 2024. The company was in compliance with all covenants, including a Consolidated Net Leverage Ratio of 4.00 through June 30, 2024, decreasing to 3.50 thereafter - Total unused credit availability under the Credit Facility was $111.0 million at June 30, 2024[8] - Weighted average stated interest rate on outstanding borrowings was 7.88% at June 30, 2024, down from 8.29% at December 31, 2023[10] - The company was in compliance with all financial covenants, including a Consolidated Net Leverage Ratio of 4.00 through June 30, 2024, which decreased to 3.50 thereafter[12][14] Joint Venture Debt The EFM JV, 63% owned by the company, had $8.1 million outstanding under a loan agreement as of June 30, 2024, down from $8.9 million at December 31, 2023. The loan, secured by EFM JV assets, accrues interest at Term SOFR plus 3.25% (floor 3.75%), with an interest rate of 8.52% at June 30, 2024. The EFM JV contributed $13.2 million in revenue for the three months and $23.9 million for the six months ended June 30, 2024 - EFM JV loan outstanding: $8.1 million (June 30, 2024) vs. $8.9 million (December 31, 2023)[15] - Interest rate at June 30, 2024, was 8.52%[15] - EFM JV revenue contribution: $13.2 million (Q2 2024) and $23.9 million (H1 2024)[15] Foreign Debt The company has various foreign bank guarantee facilities and bilateral lines of credit, with $48.3 million in outstanding bank guarantees as of June 30, 2024, an increase from $45.8 million at December 31, 2023. This includes Euro-denominated and Yuan-denominated guarantees secured by local assets - Outstanding bank guarantees: $48.3 million (June 30, 2024) vs. $45.8 million (December 31, 2023)[16] - Includes $1.9 million Euro-denominated and $2.8 million Yuan-denominated outstanding bank guarantees at June 30, 2024[16] 9. Earnings per Share Diluted EPS increased to $0.12 for the three months ended June 30, 2024, from $0.11 in the prior year, and remained stable at $0.17 for the six months. The company repurchased 86,000 shares for $2.0 million in Q2 2024 and 230,000 shares for $5.0 million in H1 2024 under its $20.0 million share repurchase program Earnings per Share (in thousands, except per share data) | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :---------------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income attributable to CECO Environmental Corp. | $4,485 | $3,724 | $5,993 | $5,701 | | Basic weighted-average shares outstanding | 34,918 | 34,619 | 34,882 | 34,531 | | Diluted weighted-average shares outstanding | 36,303 | 35,144 | 36,239 | 35,172 | | Basic EPS | $0.13 | $0.11 | $0.17 | $0.17 | | Diluted EPS | $0.12 | $0.11 | $0.17 | $0.16 | - The company repurchased approximately 86,000 shares for $2.0 million during the three months ended June 30, 2024, and 230,000 shares for $5.0 million during the six months ended June 30, 2024, under its $20.0 million share repurchase program[20] 10. Share-Based Compensation Share-based compensation expense increased to $2.2 million for the three months ended June 30, 2024, from $1.2 million in the prior year, and to $3.8 million for the six months from $2.0 million. The company granted approximately 57,000 restricted stock units in Q2 2024 and 341,000 in H1 2024, along with 25,000 stock options in H1 2024 Share-Based Compensation Expense (in thousands) | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Share-based compensation expense | $2,200 | $1,200 | $3,800 | $2,000 | - Granted approximately 57,000 restricted stock units in Q2 2024 and 341,000 in H1 2024[22] - Granted approximately 25,000 stock options during the six months ended June 30, 2024[22][24] 11. Pension and Employee Benefit Plans Net periodic benefit cost for the defined benefit pension plan decreased to $57 thousand for the three months ended June 30, 2024, from $107 thousand in the prior year, and to $113 thousand for the six months from $214 thousand. The company made $0.2 million in contributions in H1 2024 and expects to contribute $0.9 million for the remainder of 2024. The unfunded liability was $4.0 million at June 30, 2024 Pension Plan Expense (in thousands) | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :--------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest cost | $304 | $318 | $608 | $637 | | Expected return on plan assets | $(304) | $(285) | $(608) | $(571) | | Amortization of net actuarial loss | $57 | $74 | $113 | $148 | | Net periodic benefit cost | $57 | $107 | $113 | $214 | - The company made contributions of $0.2 million to its defined benefit plan during the three and six months ended June 30, 2024[27] - The unfunded liability of the plan was $4.0 million as of June 30, 2024[27] 12. Income Taxes Income tax expense decreased to $0.4 million for the three months ended June 30, 2024, from $1.0 million in the prior year, with the effective tax rate falling to 7.4% from 19.8%. For the six months, expense was $1.1 million with a 13.1% effective rate. The company recorded $0.8 million in deferred income taxes on undistributed foreign earnings and is currently not subject to Pillar Two global minimum taxes Income Tax Expense and Effective Rate | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax expense | $0.4 million | $1.0 million | $1.1 million | $1.0 million | | Effective income tax rate | 7.4% | 19.8% | 13.1% | 13.3% | - Deferred income taxes of approximately $0.8 million were recorded on undistributed earnings of foreign subsidiaries as of June 30, 2024[29] - The company is currently not subject to Pillar Two global minimum taxes based on its current revenue threshold[31] 13. Financial Instruments The company's financial instruments, including cash, receivables, notes payable, and accounts payable, approximate fair value due to their short-term nature or variable interest rates. The fair value of debt under the Credit Facility and joint venture term loan was $131.9 million at June 30, 2024, determined using Level 2 inputs - Financial instruments approximate fair value due to short-term nature or variable, market-driven interest rates[32] - Fair value of debt under Credit Facility and joint venture term loan was $131.9 million at June 30, 2024 (Level 2 on fair value hierarchy)[38] 14. Commitments and Contingencies The company is involved in asbestos-related lawsuits, with 333 cases pending as of June 30, 2024, an increase from 313 cases at December 31, 2023. Cumulative settlement payments since 2002 totaled $6.8 million, largely covered by insurers. The company believes its insurance coverage is adequate and that pending cases will not have a material adverse impact on its financial condition - 333 cases pending against the company as of June 30, 2024, up from 313 cases at December 31, 2023[40] - Cumulative settlement payments for asbestos claims from 2002 through June 30, 2024, were $6.8 million, substantially paid by insurers[39] - The company believes its insurance coverage is adequate and that pending cases will not have a material adverse impact on its results of operations, liquidity, or financial condition[40] 15. Acquisitions The company completed three acquisitions: Kemco Systems Co., LLC (August 2023), Transcend Solutions, LLC (March 2023), and Malvar Engineering Limited (Wakefield) (January 2023). These acquisitions expanded the company's market position in water/wastewater treatment, hydrocarbon processing, and industrial noise control, respectively. The purchase accounting for Kemco is still subject to final adjustments - Acquired Kemco Systems Co., LLC for $23.6 million cash (adjusted) plus earnout payments, enhancing its position in North American water and wastewater treatment[44] - Acquired Transcend Solutions, LLC for $22.4 million (cash and deferred consideration), expanding into midstream oil and gas, LNG, and chemical processing[46] - Acquired Malvar Engineering Limited (Wakefield) for $4.1 million cash plus deferred consideration, strengthening its industrial silencing and noise attenuation market position[49] - Purchase accounting for Kemco acquisition is subject to final adjustment, primarily for intangible asset valuation and tax balances[51] 16. Business Segment Information The company operates in two reportable segments: Engineered Systems and Industrial Process Solutions. The Engineered Systems segment showed strong growth in net sales and operating income for both the three and six months ended June 30, 2024, while the Industrial Process Solutions segment experienced a slight decrease in net sales but an increase in operating income for the three-month period Segment Net Sales (in thousands) | Segment | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Engineered Systems segment | $97,392 | $87,522 | $186,741 | $161,977 | | Industrial Process Solutions segment | $40,130 | $41,659 | $77,113 | $79,767 | | Total net sales | $137,522 | $129,181 | $263,854 | $241,744 | Segment Income from Operations (in thousands) | Segment | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Engineered Systems segment | $19,330 | $14,089 | $35,607 | $23,894 | | Industrial Process Solutions segment | $5,669 | $4,586 | $12,769 | $10,131 | | Corporate and Other | $(15,742) | $(10,072) | $(31,433) | $(19,961) | | Total income from operations | $9,257 | $8,603 | $16,943 | $14,064 | - Engineered Systems segment net sales increased by $9.9 million (11.3%) for the three months and $24.7 million (15.2%) for the six months ended June 30, 2024, primarily driven by separation, filtration, and industrial water technologies[96][97] - Industrial Process Solutions segment net sales decreased slightly for both periods, but operating income increased due to a decrease in direct costs[102][161] 17. Subsequent Events On July 29, 2024, the company acquired EnviroCare International for approximately $17 million, financed by cash and existing credit. This acquisition is expected to strengthen the Industrial Process Solutions segment by adding industrial exhaust air contamination treatment solutions and expanding market access - Acquired EnviroCare International on July 29, 2024, for approximately $17 million[66] - Acquisition financed using a combination of cash and borrowings under the existing Credit Facility[66] - EnviroCare specializes in industrial exhaust air contamination treatment, enhancing the Industrial Process Solutions segment[66] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, including consolidated results, segment performance, liquidity, and capital resources. It highlights increased net sales and gross profit, improved operating cash flow, and ongoing efforts to manage market pressures and integrate acquisitions Company Overview CECO Environmental Corp. is a diversified industrial company focused on environmental solutions for industrial air, water, and energy transition markets globally. It provides technologies and expertise to improve air and water quality, optimize emissions, and enhance energy efficiency across various industrial sectors - CECO is an environmentally focused, diversified industrial company serving global industrial air, water, and energy transition markets[73] - Solutions include improving air/water quality, optimizing emissions, and increasing energy/process efficiency for highly engineered applications[73] Note Regarding Use of Non-GAAP Financial Measures The company provides non-GAAP financial measures, such as non-GAAP operating income and margin, to offer greater transparency into its ongoing operational performance by excluding items like amortization, earnout, acquisition, restructuring, executive transition, and asbestos litigation expenses, which management believes are not indicative of core operations - Non-GAAP financial measures (non-GAAP operating income and margin) are provided to exclude items not indicative of ongoing operations[70][74] - Excluded items include amortization and earnout expenses, acquisition and integration expenses, executive transition expenses, restructuring expenses, and asbestos litigation expenses[154] Market Pressures The company actively monitors key materials market indexes and trends, adjusting procurement strategies and securing raw materials from diverse suppliers to mitigate supply disruptions. However, it cannot guarantee continued mitigation, and unmitigated disruptions could adversely affect business and financial results - Monitoring key materials market indexes and trends, adjusting procurement strategies[68] - Secured raw materials from existing and alternate suppliers to mitigate supply disruptions[68] - Inability to mitigate supply disruptions could adversely affect business, results, and financial condition[68] Consolidated Results Consolidated net sales increased by 6.4% for the three months and 9.2% for the six months ended June 30, 2024, driven by separation, filtration, and industrial water technologies. Gross profit margins improved significantly due to sales mix, project execution, and sourcing benefits. Operating income and non-GAAP operating income also increased, while interest expense decreased in Q2 but increased in H1 due to rising rates Consolidated Financial Performance (in millions, except ratios) | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $137.5 | $129.2 | $263.9 | $241.7 | | Gross profit | $49.0 | $39.8 | $94.2 | $74.7 | | Gross profit % of sales | 35.6% | 30.8% | 35.7% | 30.9% | | Operating income | $9.3 | $8.6 | $16.9 | $14.1 | | Operating margin | 6.8% | 6.7% | 6.4% | 5.8% | | Non-GAAP operating income | $12.6 | $11.4 | $22.8 | $19.1 | | Non-GAAP operating margin | 9.2% | 8.8% | 8.6% | 7.9% | | Net income attributable to CECO | $4.5 | $3.7 | $5.9 | $5.6 | - Net sales increased 6.4% (Q2) and 9.2% (H1) year-over-year, primarily from separation, filtration, and industrial water technologies[79][80] - Gross profit margin improved to 35.6% (Q2) and 35.7% (H1) due to sales mix, project execution, and sourcing benefits[81][82] - Orders booked decreased by 13.6% in Q2 and 7% in H1, mainly due to emissions management, partially offset by separation, filtration, and industrial water technologies[76][77][155] Business Segments The Engineered Systems segment saw net sales increase by 11.3% in Q2 and 15.2% in H1, with operating income rising significantly due to increased sales. The Industrial Process Solutions segment experienced a slight net sales decrease but an increase in operating income, driven by a decrease in direct costs. Corporate and Other operating expenses increased due to growth investments and inflationary pressures Segment Net Sales (in thousands) | Segment | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Engineered Systems segment | $97,392 | $87,522 | $186,741 | $161,977 | | Industrial Process Solutions segment | $40,130 | $41,659 | $77,113 | $79,767 | Segment Income from Operations (in thousands) | Segment | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Engineered Systems segment | $19,330 | $14,089 | $35,607 | $23,894 | | Industrial Process Solutions segment | $5,669 | $4,586 | $12,769 | $10,131 | | Corporate and Other | $(15,742) | $(10,072) | $(31,433) | $(19,961) | - Engineered Systems segment operating income increased by $5.2 million (Q2) and $11.7 million (H1) due to increased net sales[99][160] - Industrial Process Solutions segment operating income increased by $1.1 million (Q2) and $2.7 million (H1), despite a slight net sales decrease, primarily due to decreased direct costs[103][161] Backlog Backlog, representing unfulfilled performance obligations, increased to $390.9 million as of June 30, 2024, from $370.9 million at December 31, 2023. Substantially all backlog is expected to be delivered within 12 to 18 months, and historically, cancellations have not been common - Backlog increased to $390.9 million as of June 30, 2024, from $370.9 million as of December 31, 2023[162] - Substantially all backlog is expected to be delivered within 12 to 18 months[162] Liquidity and Capital Resources The company's working capital decreased slightly to $74.1 million at June 30, 2024, from $78.3 million at December 31, 2023, with cash and cash equivalents decreasing to $36.5 million. Operating activities generated $7.9 million in cash for H1 2024, a significant improvement, while financing activities used $16.6 million primarily for debt repayment and share repurchases - Working capital was $74.1 million at June 30, 2024, down from $78.3 million at December 31, 2023[114] - Cash and cash equivalents totaled $36.5 million at June 30, 2024, down from $54.8 million at December 31, 2023[109] - Net cash provided by operating activities was $7.9 million for the six months ended June 30, 2024, compared to $0.6 million used in the prior year[117] - Net cash used in financing activities was $16.6 million for H1 2024, primarily for long-term debt repayment ($6.7 million) and common stock repurchases ($5.0 million)[118] Critical Accounting Policies and Estimates Management's financial reporting relies on estimates and assumptions for revenue recognition, asset valuations (receivables, inventories, goodwill, intangibles), legal contingencies, and income taxes. These estimates are based on historical experience and ongoing monitoring of economic conditions, with no material changes identified in critical accounting policies during the six months ended June 30, 2024 - Financial statements rely on management's estimates and assumptions for various items, including revenue recognition, asset valuations, and income taxes[119] - No material changes to critical accounting policies and estimates were identified during the six months ended June 30, 2024[120] Forward-Looking Statements This section contains forward-looking statements subject to various risks and uncertainties that could cause actual results to differ materially. Key risks include economic conditions, dependence on fixed-price contracts, supply chain challenges, litigation, fluctuations in material prices, debt levels, regulatory changes, and the ability to integrate acquisitions - Forward-looking statements are based on management's views and assumptions, subject to risks and uncertainties[122] - Potential risks include economic conditions, fixed-price contract dependence, supply chain issues, litigation, material price fluctuations, debt, regulatory impact, and acquisition integration[122] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is primarily exposed to market risks from changes in interest rates and foreign currency exchange rates. A hypothetical 10% increase in the weighted average borrowing rate would impact annual earnings and cash flows by $1.0 million. Foreign currency fluctuations have not materially affected operating results historically, but future changes could have an impact - Primary market risks are changes in interest rates and foreign currency exchange rates[124] - A hypothetical 10% increase in the weighted average borrowing rate would result in an estimated annual impact of $1.0 million[126] - Foreign currency fluctuations have not materially affected operating results in the past, but future changes may impact revenues, operating expenses, and earnings[127] Item 4. Controls and Procedures The company's disclosure controls and procedures were effective as of June 30, 2024, following the remediation of previously reported material weaknesses in internal control over financial reporting related to revenue recognition and balance sheet reconciliations. Management reinforced policies and implemented monitoring activities to strengthen the control environment - Disclosure controls and procedures were effective as of June 30, 2024[129] - Previously reported material weaknesses in internal control over financial reporting related to revenue recognition and balance sheet reconciliations have been remediated[131][132][134] - Remediation efforts included reinforcing adherence to company policies, strengthening training programs, and developing monitoring activities[134] Part II – Other Information Item 1. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 14 to the unaudited Condensed Consolidated Financial Statements - Legal proceedings information is detailed in Note 14 of the financial statements[138] Item 1A. Risk Factors There have been no material changes to the company's risk factors as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023 - No material changes to risk factors since the Annual Report on Form 10-K for fiscal year 2023[139] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended June 30, 2024, the company repurchased 86,353 shares of common stock at an average price of $23.16 per share, totaling approximately $2.0 million, under its $20.0 million share repurchase program. Approximately $8.0 million remains available under the program Purchases of Equity Securities (Three months ended June 30, 2024) | Period | Total Number of Shares Purchased | Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Value of Shares That May Yet Be Purchased Under the Plans or Programs | | :----------------------------------- | :------------------------------- | :---------------------- | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------------ | | April 1, 2024 - April 30, 2024 | — | — | — | $10,000 | | May 1, 2024 - May 31, 2024 | 48,102 | $23.09 | 48,102 | $8,889 | | June 1, 2024 - June 30, 2024 | 38,251 | $23.25 | 38,251 | $8,000 | | Total | 86,353 | $23.16 | 86,353 | | - The share repurchase program, authorized on May 10, 2022, allows for up to $20.0 million in repurchases through April 30, 2025[143] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities[144] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[145] Item 5. Other Information No director or Section 16 officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2024 - No director or Section 16 officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q2 2024[146] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications by the CEO and CFO, and Inline XBRL documents - Exhibits include CEO and CFO certifications (Rule 13(a)/15d-14(a) and 18 U.S. Section 1350) and Inline XBRL documents[142][147] SIGNATURES The report was duly signed on behalf of CECO Environmental Corp. by Kiril Kovachev, Chief Accounting Officer, on July 30, 2024 - Report signed by Kiril Kovachev, Chief Accounting Officer, on July 30, 2024[151]