CECO Environmental(CECO) - 2020 Q1 - Quarterly Report

Part I – Financial Information This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the first quarter of 2020, covering financial performance, liquidity, and internal controls Financial Statements This section presents the unaudited condensed consolidated financial statements for CECO Environmental Corp. as of March 31, 2020, including Balance Sheets, Statements of Income, Comprehensive Income, Shareholders' Equity, and Cash Flows, along with detailed notes on accounting policies, segment performance, debt, and contingencies Condensed Consolidated Balance Sheets As of March 31, 2020, total assets increased to $445.3 million and liabilities to $250.7 million, primarily due to higher cash and long-term debt, while shareholders' equity slightly increased to $194.6 million Balance Sheet Highlights (in thousands) | Balance Sheet Item | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $82,528 | $35,602 | | Total current assets | $218,318 | $179,498 | | Total assets | $445,257 | $408,637 | | Debt, less current portion | $105,481 | $63,001 | | Total liabilities | $250,651 | $215,620 | | Total shareholders' equity | $194,606 | $193,017 | Condensed Consolidated Statements of Income For Q1 2020, net sales decreased to $80.5 million, but net income significantly increased to $3.4 million, or $0.10 per diluted share, primarily due to lower interest and income tax expenses despite stable gross profit Q1 Income Statement Summary (in thousands, except per share data) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net sales | $80,486 | $86,011 | | Gross profit | $28,279 | $28,432 | | Income from operations | $4,239 | $4,890 | | Net income | $3,412 | $1,864 | | Diluted EPS | $0.10 | $0.05 | Condensed Consolidated Statements of Cash Flows In Q1 2020, the company generated $7.0 million in operating cash flow and received $42.3 million from financing activities, leading to a net cash increase of $47.1 million and an ending cash balance of $84.1 million Q1 Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net cash from operating activities | $7,001 | $(13,741) | | Net cash used in investing activities | $(976) | $(423) | | Net cash from financing activities | $42,250 | $(1,816) | | Net increase (decrease) in cash | $47,148 | $(15,533) | | Cash at end of period | $84,106 | $28,905 | - The significant increase in cash from financing activities was driven by $49.5 million in borrowings on revolving credit lines during Q1 2020[20] Notes to Condensed Consolidated Financial Statements The notes detail reporting basis, COVID-19 impact, and specifics on financial statement items, including a goodwill impairment assessment, $108.0 million in outstanding debt, asbestos litigation, and segment performance breakdown - The company considered the impact of COVID-19 and determined there were no material adverse impacts on its results of operations and financial position as of March 31, 2020. However, the full future impact remains uncertain[27][29] - Due to negative macroeconomic indicators from the COVID-19 pandemic, the company performed a qualitative interim impairment assessment for goodwill and indefinite-life intangible assets as of March 31, 2020, and concluded they were not impaired[38] - As of March 31, 2020, the company had $108.0 million in total outstanding borrowings under its Credit Facility, with $71.1 million of unused credit availability. The company was in compliance with all debt covenants[40][41][44] - The company's subsidiary, Met-Pro, had 187 pending asbestos-related cases as of March 31, 2020. Management believes its insurance coverage is adequate and does not expect a material adverse impact from these cases[63][65] Q1 2020 Segment Performance (in thousands) | Segment | Net Sales | Income from Operations | | :--- | :--- | :--- | | Energy Solutions | $50,646 | $8,557 | | Industrial Solutions | $20,356 | $1,473 | | Fluid Handling Solutions | $9,484 | $1,623 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2020 financial results, noting a 6.4% sales decrease to $80.5 million, improved gross margin to 35.2%, proactive COVID-19 cost measures, a $40.0 million credit facility drawdown for liquidity, and a backlog decrease to $208.9 million COVID-19 Impact The company acknowledges the significant macroeconomic impact of COVID-19, implementing cost-reduction measures like salary reductions and furloughs, though the full future impact on operations and liquidity remains uncertain - The company has taken proactive cost reduction measures in response to COVID-19, including temporary salary reductions for the senior management team and a rolling 2-week furlough for U.S.-based employees over a 6-week period starting in April 2020[84] Consolidated Results of Operations Net sales for Q1 2020 decreased by 6.4% to $80.5 million, while gross profit margin improved to 35.2%, and orders booked declined to $75.7 million due to market weakness and COVID-19 impact Q1 Consolidated Results (in millions) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net sales | $80.5 | $86.0 | | Gross profit | $28.3 | $28.4 | | Gross margin | 35.2% | 33.0% | | Operating income | $4.2 | $4.9 | | Non-GAAP operating income | $6.3 | $7.2 | - Orders booked in Q1 2020 were $75.7 million, a decrease from $97.3 million in Q1 2019, primarily due to declines in refinery, midstream oil and gas, and pollution control end markets, as well as the COVID-19 slowdown[93] Business Segments Analysis In Q1 2020, Energy Solutions sales decreased by $4.6 million, Industrial Solutions sales increased by $1.5 million with higher operating income, and Fluid Handling Solutions sales decreased by $2.5 million, impacting its operating income - Energy Solutions: Net sales decreased by $4.6 million, and operating income fell by $0.7 million due to lower sales and higher administrative expenses[102][103] - Industrial Solutions: Net sales increased by $1.5 million, and operating income grew by $0.9 million, driven by higher gross profit and lower selling expenses[104][105] - Fluid Handling Solutions: Net sales decreased by $2.5 million, causing operating income to fall by $0.8 million due to the resulting decline in gross profit[106][107] Backlog The company's backlog, representing expected future sales, decreased from $216.6 million at year-end 2019 to $208.9 million as of March 31, 2020, with most expected to be delivered within 12 to 18 months - Backlog decreased to $208.9 million as of March 31, 2020, from $216.6 million as of December 31, 2019[109] Liquidity and Capital Resources The company's liquidity strengthened in Q1 2020, with working capital increasing to $109.9 million and cash to $82.5 million, primarily due to a proactive $40.0 million credit facility drawdown, resulting in $108.0 million total debt and $71.1 million unused availability - As a proactive measure related to COVID-19, the company drew down $40.0 million from its revolving credit facility in late March 2020 to supplement its cash position[97][114][124] Liquidity Metrics | Metric | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Working Capital | $109.9 million | $64.3 million | | Cash and Cash Equivalents | $82.5 million | $35.6 million | | Total Debt | $108.0 million | $65.5 million | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate changes on variable-rate debt, with a hypothetical 10% rate change impacting annual earnings by $0.4 million, and it does not currently hedge foreign currency exposure - The company's main market risk is from interest rate changes on its variable-rate debt. A hypothetical 10% change in the borrowing rate at March 31, 2020, is estimated to have a $0.4 million annual impact[131] Controls and Procedures Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[134] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[137] Part II – Other Information This section details legal proceedings, key risk factors, particularly those exacerbated by the COVID-19 pandemic, and lists exhibits filed with the report Legal Proceedings This section refers to Note 13 of the financial statements for details on the company's legal proceedings, primarily asbestos-related lawsuits against its subsidiary, Met-Pro - Information regarding legal proceedings is detailed in Note 13 to the unaudited Condensed Consolidated Financial Statements[140] Risk Factors This section supplements previous disclosures, highlighting risks exacerbated by COVID-19, including adverse global economic conditions, project cancellations, oil and gas price volatility, supplier dependence, cybersecurity threats, and the pandemic's uncertain impact on business - The COVID-19 pandemic is highlighted as a significant risk factor that could adversely affect global economic conditions, customer demand, supply chains, and capital markets, with an uncertain future impact on the business[143][181] - The company's backlog of $208.9 million is not guaranteed, as customers may cancel or delay projects due to factors beyond the company's control, including the pandemic, which could affect future sales and profitability[147][148][151] - Dependence on third-party suppliers and subcontractors presents a risk, as they may default on obligations due to economic conditions or operational failures, potentially exacerbated by COVID-19 disruptions[160][161][162] - The company's debt of $109.6 million could make it more vulnerable to economic downturns. The COVID-19 pandemic is expected to negatively impact cash flow and liquidity, potentially affecting the ability to service debt[170][172] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications under Sarbanes-Oxley Act Sections 302 and 906, and XBRL interactive data files - The filing includes certifications by the Chief Executive Officer and Chief Financial Officer under Rule 13(a)/15d-14(a) and 18 U.S. Section 1350, along with XBRL data files[184]