CECO Environmental(CECO) - 2020 Q2 - Quarterly Report

Part I – Financial Information Item 1. Financial Statements This section presents CECO Environmental Corp.'s unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flows, highlighting asset growth, sales decrease, and improved operating cash flow Condensed Consolidated Balance Sheets Total assets increased to $418.4 million by June 30, 2020, driven by cash and goodwill, while liabilities and shareholders' equity also saw slight increases Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 (unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $180,096 | $179,498 | | Goodwill | $159,107 | $152,020 | | Total assets | $418,392 | $408,637 | | Total current liabilities | $106,099 | $115,188 | | Debt, less current portion | $75,460 | $63,001 | | Total liabilities | $219,350 | $215,620 | | Total shareholders' equity | $199,042 | $193,017 | Condensed Consolidated Statements of Income Q2 2020 net sales decreased to $75.2 million, yet operating income more than doubled to $4.4 million due to reduced expenses, despite lower net income Statement of Income Summary (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $75,170 | $81,179 | $155,656 | $167,190 | | Gross profit | $25,816 | $26,846 | $54,095 | $55,279 | | Income from operations | $4,395 | $2,018 | $8,633 | $6,907 | | Net income | $3,258 | $5,515 | $6,670 | $7,379 | | Diluted EPS | $0.09 | $0.15 | $0.19 | $0.21 | Condensed Consolidated Statements of Comprehensive Income Q2 2020 comprehensive income remained stable at $4.4 million, while the six-month period saw a decrease to $5.6 million due to foreign currency translation losses Comprehensive Income (in thousands) | Period | 2020 | 2019 | | :--- | :--- | :--- | | Three months ended June 30 | | | | Net income | $3,258 | $5,515 | | Comprehensive income | $4,433 | $4,478 | | Six months ended June 30 | | | | Net income | $6,670 | $7,379 | | Comprehensive income | $5,577 | $7,107 | Condensed Consolidated Statements of Shareholders' Equity Total shareholders' equity increased to $199.0 million by June 30, 2020, primarily driven by net income, despite foreign currency translation losses - Total shareholders' equity grew to $199,042 thousand at June 30, 2020, up from $193,017 thousand at December 31, 2019[18] Condensed Consolidated Statements of Cash Flows Net cash from operating activities significantly improved to $2.1 million for the first six months of 2020, with investing activities using $8.1 million and financing providing $12.0 million Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $2,108 | $(11,297) | | Net cash used in investing activities | $(8,116) | $(1,201) | | Net cash provided by (used in) financing activities | $12,047 | $(2,121) | | Net increase (decrease) in cash | $6,180 | $(14,483) | Notes to Condensed Consolidated Financial Statements Notes detail reporting basis, COVID-19 impact, and financial specifics, including the $10.3 million EIS acquisition, 194 asbestos lawsuits, and a subsequent joint venture agreement - On June 4, 2020, the Company acquired 100% of Environmental Integrated Solutions (EIS) for $10.3 million in cash, financed by a draw on its revolving credit facility[73] - Goodwill increased by $7.0 million during the first six months of 2020 due to acquisitions[36] - As of June 30, 2020, the company's subsidiary Met-Pro had 194 pending asbestos-related cases[67] - Cumulative settlement payments since 2002 total $3.1 million, with insurers covering $2.9 million[68] - On July 31, 2020, the company entered into a joint venture agreement with Mader Machine Co., contributing its Effox-Flextor damper business[87] - CECO will hold a 70% equity interest and 50% voting interest in the joint venture[87] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2020 financial results, noting a 7.4% sales decrease to $75.2 million due to COVID-19, offset by increased operating income from cost reductions, alongside CEO succession and liquidity analysis - On July 6, 2020, Todd Gleason commenced serving as the new Chief Executive Officer, succeeding Dennis Sadlowski[98] - The company implemented proactive cost reduction measures in response to COVID-19, including temporary senior management salary reductions and a 2-week furlough for U.S.-based employees[95] GAAP to Non-GAAP Operating Income Reconciliation (Q2, in millions) | Metric | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | GAAP Operating Income | $4.4 | $2.0 | | GAAP Operating Margin | 5.9% | 2.5% | | Non-GAAP Operating Income | $7.4 | $4.4 | | Non-GAAP Operating Margin | 9.8% | 5.4% | Results of Operations Q2 2020 net sales decreased 7.4% to $75.2 million, while gross profit margin improved to 34.3% and selling and administrative expenses fell due to cost-cutting, with orders booked significantly declining - Orders booked were $60.0 million during Q2 2020, compared to $100.3 million in Q2 2019, a decrease attributed to the COVID-19 slowdown impacting customers[108] - Selling and administrative expenses decreased to $18.4 million in Q2 2020 from $22.4 million in Q2 2019, primarily due to cost reduction measures taken in response to the COVID-19 pandemic[109] - Interest expense decreased to $0.9 million in Q2 2020 from $1.5 million in Q2 2019 due to lower interest rates and a reduced debt balance[117] Business Segments Q2 2020 saw Energy Solutions operating income grow to $8.6 million, while Industrial Solutions' operating income declined, and Fluid Handling Solutions' operating income increased to $1.8 million despite sales decreases Segment Operating Income (Q2, in thousands) | Segment | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Energy Solutions | $8,646 | $6,351 | | Industrial Solutions | $19 | $515 | | Fluid Handling Solutions | $1,817 | $1,481 | Backlog Company backlog decreased to $204.6 million by June 30, 2020, from $216.6 million at year-end 2019, including $8.8 million from the EIS acquisition - Backlog decreased from $216.6 million at year-end 2019 to $204.6 million at June 30, 2020[134] Liquidity and Capital Resources Liquidity improved with working capital at $74.0 million and cash from operations at $2.1 million, with $88.5 million available under the credit facility despite increased debt for acquisitions - Cash provided by operating activities for the first six months of 2020 was $2.1 million, a significant improvement from the $11.3 million used in the same period of 2019[146] Credit Facility Availability (in millions) | Metric | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total unused credit availability | $100.2 | $110.5 | | Amount available based on borrowing limitations | $88.5 | $82.3 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from interest rate fluctuations on variable-rate debt, with a 10% rate change impacting annual earnings by $0.2 million, and considers foreign currency exposure immaterial - The estimated impact of a hypothetical 10% change in the weighted average borrowing rate at June 30, 2020 is $0.2 million on an annual basis[156] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[159] - No changes in internal control over financial reporting occurred during the six months ended June 30, 2020, that materially affected, or are reasonably likely to materially affect, the company's internal control[160] Part II – Other Information Item 1. Legal Proceedings This section refers to Note 13 for details on legal proceedings, primarily focusing on asbestos-related lawsuits against Met-Pro Technologies LLC - For information on legal proceedings, the report refers to Note 13 of the unaudited Condensed Consolidated Financial Statements[165] Item 1A. Risk Factors This section supplements existing risk factors, emphasizing the significant adverse impact of the COVID-19 pandemic on the company's business, operations, and financial condition - The company faces risks related to health epidemics, including the COVID-19 pandemic, which may adversely affect its business, results of operations, and financial condition[167][168] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[171] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[171] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[172] Item 5. Other Information The company reported no other information for this item - None[172] Item 6. Exhibits This section lists exhibits filed with the quarterly report, including the 2020 Employee Stock Purchase Plan, CEO/CFO certifications, and Inline XBRL data - Exhibits filed include the 2020 Employee Stock Purchase Plan, CEO/CFO certifications, and Inline XBRL data[173][175]