CECO Environmental(CECO) - 2019 Q2 - Quarterly Report

Part I – Financial Information Financial Statements The company's H1 2019 financial statements reflect stable assets, increased equity, flat Q2 sales, significant net income growth from a tax benefit, and negative operating cash flow Condensed Consolidated Balance Sheets As of June 30, 2019, total assets remained stable at $391.7 million, liabilities slightly decreased, and shareholders' equity increased, with new lease accounting impacting the balance sheet Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 (unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $28,828 | $43,676 | | Total current assets | $160,514 | $160,865 | | Goodwill | $152,199 | $152,156 | | Total assets | $391,726 | $392,582 | | Total current liabilities | $99,599 | $103,886 | | Debt, less current portion | $72,539 | $74,456 | | Total liabilities | $209,157 | $214,022 | | Total shareholders' equity | $182,569 | $178,560 | - The company adopted a new lease accounting standard (ASU 2016-02) on January 1, 2019, resulting in the recognition of $13.3 million in Right-of-Use (ROU) assets and lease liabilities on the balance sheet[26] Condensed Consolidated Statements of Operations Q2 2019 net sales were flat at $81.2 million, but net income surged to $5.5 million due to a tax benefit, while six-month net sales grew 7.7% to $167.2 million with increased net income Statement of Operations Highlights (in thousands, except per share data) | Metric | Q2 2019 | Q2 2018 | 6 Months 2019 | 6 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $81,179 | $81,089 | $167,190 | $155,229 | | Gross Profit | $26,846 | $27,152 | $55,279 | $53,086 | | Income from Operations | $2,018 | $2,581 | $6,907 | $14,712 | | Net Income (Loss) | $5,515 | $(901) | $7,379 | $4,862 | | Diluted EPS | $0.15 | $(0.03) | $0.21 | $0.14 | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities for H1 2019 was $11.3 million, a significant decrease from the prior year, primarily due to working capital changes and non-recurring divestiture gains Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(11,297) | $9,835 | | Net cash (used in) provided by investing activities | $(1,201) | $30,213 | | Net cash used in financing activities | $(2,121) | $(34,074) | | Net (decrease) increase in cash | $(14,483) | $5,181 | - The decrease in operating cash flow was primarily driven by a $12.1 million decrease in net earnings adjusted for non-cash items, largely due to an $11.1 million gain on divestitures in 2018 which did not recur[150] Notes to Condensed Consolidated Financial Statements The notes detail significant accounting policies, new credit facility debt, segment performance, 2018 divestitures, and updates on legal contingencies, including asbestos-related lawsuits - In June 2019, the company entered into a new Credit Facility, providing a $50.0 million term loan and increasing the revolving credit commitment to $140.0 million, extending the maturity to 2024 and reducing interest rates[40] - A significant income tax benefit of $4.4 million was recognized in Q2 2019 upon finalizing a tax position related to the 2018 divestiture of its Zhongli business[74] - As of June 30, 2019, the company was a defendant in 198 pending asbestos-related lawsuits. Management believes its insurance coverage is adequate and the cases will not have a material adverse impact[79][81] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2019 flat sales but six-month growth, strong Energy Solutions performance, Industrial Solutions' operating income decline, increased backlog, and liquidity maintained despite decreased operating cash flow Reconciliation of GAAP to Non-GAAP Operating Income (in millions) | Metric | Q2 2019 | Q2 2018 | 6 Months 2019 | 6 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | GAAP Operating Income | $2.0 | $2.6 | $6.9 | $14.7 | | GAAP Operating Margin | 2.5% | 3.2% | 4.1% | 9.5% | | Adjustments (Amortization, Divestitures, etc.) | $2.4 | $2.6 | $4.6 | $(5.5) | | Non-GAAP Operating Income | $4.4 | $5.2 | $11.5 | $9.2 | | Non-GAAP Operating Margin | 5.4% | 6.4% | 6.9% | 5.9% | - Orders booked were $103.0 million in Q2 2019 and $200.3 million for the first six months of 2019, an increase from $100.4 million and $195.4 million in the respective prior-year periods[111] - Company backlog increased to $208.8 million as of June 30, 2019, compared to $182.1 million at December 31, 2018[138] Business Segments Analysis Energy Solutions saw strong sales and operating income growth, Industrial Solutions' operating income declined due to investments, and Fluid Handling Solutions' sales decreased due to prior-year divestitures - Energy Solutions: Six-month net sales increased by $14.7 million to $105.8 million, and operating income rose by $6.1 million to $15.6 million, driven by refinery products and midstream oil & gas equipment[124][126] - Industrial Solutions: Six-month operating income decreased by $1.6 million to $1.1 million, mainly due to a $0.8 million increase in selling expenses for sales & marketing personnel and product innovation[130] - Fluid Handling Solutions: The six-month sales decrease of $3.7 million was primarily caused by $4.8 million in revenue from the divested Keystone and Strobic businesses in the prior year period[132] Liquidity and Capital Resources Liquidity is maintained through operations and an amended credit facility, despite decreased cash and a significant year-over-year drop in operating cash flow due to working capital changes Credit Facility Availability (in millions) | Description | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Credit Facility, revolving loans | $140.0 | $80.0 | | Draw down | $(27.0) | — | | Letters of credit open | $(15.7) | $(29.3) | | Total unused credit availability | $97.3 | $50.7 | - For the six months ended June 30, 2019, cash used in operating activities was $11.3 million, a $21.1 million decrease from the $9.8 million provided in the prior year period, primarily due to working capital changes and the non-recurrence of a gain on divestitures[150] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate changes on its debt, with a hypothetical 10% rate change impacting annual earnings by $0.3 million, and it does not hedge foreign currency risk - The company's main market risk is interest rate changes on its $77.0 million of debt. A hypothetical 10% change in the average borrowing rate would have an estimated annual impact of $0.3 million[159] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting - Based on an evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[162] Part II – Other Information Legal Proceedings Legal proceedings, detailed in Note 15, primarily involve 198 pending asbestos-related lawsuits against the company's subsidiary as of June 30, 2019 - Information regarding legal proceedings is detailed in Note 15, which discusses the ongoing asbestos-related lawsuits against the company's subsidiary[166] Risk Factors No material changes were reported in the company's risk factors from those disclosed in its 2018 Annual Report on Form 10-K - No material changes were reported in the Company's risk factors from those disclosed in the 2018 Annual Report on Form 10-K[167] Other Information The company decided to hold an annual advisory vote on named executive officer compensation, aligning with stockholder recommendations from the 2019 Annual Meeting - The company has decided to hold an advisory vote on named executive officer compensation annually, based on a stockholder recommendation at the 2019 Annual Meeting[171]