CECO Environmental(CECO) - 2020 Q3 - Quarterly Report

Part I Financial Statements The unaudited condensed consolidated financial statements show decreased net sales and income, with improved operating cash flow and increased total assets Condensed Consolidated Balance Sheets Total assets increased to $422.1 million by September 30, 2020, driven by acquisitions, while liabilities and equity also saw slight increases Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $44,537 | $35,602 | | Accounts receivable, net | $58,274 | $68,434 | | Goodwill | $161,352 | $152,020 | | Total assets | $422,090 | $408,637 | | Liabilities & Equity | | | | Total current liabilities | $110,035 | $115,188 | | Debt, less current portion | $73,626 | $63,001 | | Total liabilities | $220,494 | $215,620 | | Total shareholders' equity | $201,596 | $193,017 | Condensed Consolidated Statements of Operations The company reported a net loss of $0.2 million in Q3 2020 on $77.4 million net sales, reflecting a decline from the prior year Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $77,425 | $85,266 | $233,081 | $252,456 | | Gross profit | $24,810 | $28,777 | $78,905 | $84,056 | | Income from operations | $1,018 | $4,059 | $9,651 | $10,965 | | Net (loss) income attributable to CECO | $(239) | $1,931 | $6,431 | $9,310 | | Diluted (Loss) earnings per share | $(0.01) | $0.05 | $0.18 | $0.26 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $9.1 million for the nine months ended September 30, 2020, despite increased investing activities Cash Flow Summary (in thousands) | Activity | Nine months ended Sep 30, 2020 | Nine months ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $9,115 | $(633) | | Net cash used in investing activities | $(8,165) | $(3,237) | | Net cash provided by (used in) financing activities | $7,783 | $(9,881) | | Net increase (decrease) in cash | $9,390 | $(14,199) | Notes to Condensed Consolidated Financial Statements Key notes detail the impact of COVID-19, recent acquisitions, debt structure, ongoing legal contingencies, and varied segment performance - The company acquired 100% of Environmental Integrated Solutions (EIS) for $10.3 million in cash on June 4, 2020. This acquisition added $7.0 million in goodwill and $4.8 million in finite-life intangible assets[72][73] - On July 31, 2020, the company entered into a joint venture with Mader Holdings L.P., contributing its Effox-Flextor damper business. CECO holds a 70% equity and 50% voting interest and consolidates the entity. The transaction added $2.0 million in goodwill[75][77] - As of September 30, 2020, 201 asbestos-related cases were pending against the company's subsidiary, Met-Pro. Cumulative settlement payments since 2002 total $3.1 million, with insurers covering $2.9 million. Management believes its insurance coverage is adequate and the cases will not have a material adverse impact[65][66][68] Segment Net Sales (in thousands) | Segment | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Energy Solutions | $49,709 | $48,847 | $149,429 | $154,606 | | Industrial Solutions | $18,716 | $26,983 | $55,736 | $65,920 | | Fluid Handling Solutions | $9,000 | $9,436 | $27,916 | $31,930 | Segment Income from Operations (in thousands) | Segment | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Energy Solutions | $7,276 | $7,633 | $24,479 | $23,275 | | Industrial Solutions | $101 | $2,794 | $1,593 | $3,911 | | Fluid Handling Solutions | $1,438 | $818 | $4,878 | $4,657 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the impact of COVID-19 on sales and profitability, highlighting cost reduction measures, improved liquidity, and a decrease in backlog - The company has taken proactive cost reduction measures in response to COVID-19, including headcount reductions, lower discretionary spending, temporary salary reductions for senior management, and a temporary furlough for U.S. employees[97] - On July 6, 2020, Todd Gleason became the new Chief Executive Officer, succeeding Dennis Sadlowski. The company incurred $1.5 million in executive transition expenses in Q3 2020 related to this change[100][106] Consolidated Results of Operations Consolidated net sales declined in Q3 2020 and the first nine months due to market weakness, impacting gross margin and non-GAAP operating income - Orders booked were $66.8 million in Q3 2020, a significant decrease from $115.7 million in Q3 2019, primarily due to the impact of the COVID-19 pandemic on refinery, midstream oil and gas, and pollution control end markets[110] Reconciliation of GAAP to Non-GAAP Operating Income (in millions) | Metric | Q3 2020 | Q3 2019 | 9 Months 2020 | 9 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Operating income (GAAP) | $1.0 | $4.1 | $9.7 | $11.0 | | Operating margin (GAAP) | 1.3% | 4.8% | 4.2% | 4.4% | | Amortization & earnout | $2.1 | $2.2 | $5.5 | $6.5 | | Restructuring expenses | $0.9 | $0.7 | $1.8 | $1.0 | | Acquisition & integration | $0.4 | $— | $1.1 | $— | | Executive transition | $1.5 | $— | $1.5 | $— | | Non-GAAP operating income | $5.9 | $7.0 | $19.6 | $18.6 | | Non-GAAP operating margin | 7.6% | 8.2% | 8.4% | 7.4% | Business Segments Analysis Segment performance varied in Q3 2020, with Energy Solutions sales up but income down, Industrial Solutions sales and income significantly lower, and Fluid Handling Solutions improving income despite lower sales - Energy Solutions Q3 sales increased due to strength in SCR and acoustical technologies for power generation, offset by a $5.1 million decrease in midstream oil & gas equipment sales[124] - Industrial Solutions Q3 sales decreased primarily due to a $13.7 million drop in air pollution control technologies, partially offset by $5.3 million in sales from the new EIS acquisition[127] - Fluid Handling Solutions Q3 operating income increased by $0.6 million despite lower sales, driven by cost reductions and improved efficiency from capital investments[132] Liquidity and Capital Resources The company's liquidity strengthened with increased working capital and cash, despite higher debt from acquisitions, maintaining compliance with debt covenants - Backlog decreased to $189.1 million as of September 30, 2020, from $216.6 million as of December 31, 2019, reflecting lower order intake and $7.4 million in order cancellations from industrial customers exposed to aerospace end markets[136] - Cash flow from operations improved by $9.7 million year-over-year for the first nine months of 2020, primarily due to better accounts receivable management and collections[149] Total Unused Credit Availability (in millions) | Description | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Credit Facility, revolving loans | $140.0 | $140.0 | | Draw down | $(31.0) | $(18.5) | | Letters of credit open | $(6.9) | $(11.0) | | Amount available based on borrowing limitations | $75.8 | $82.3 | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate exposure on its debt, with a $0.2 million estimated annual impact from a 10% rate change - The company's primary market risk exposure is to interest rate changes on its $77.9 million of debt[156][157] - A hypothetical 10% change in the estimated weighted average borrowing rate at September 30, 2020, would impact earnings and cash flows by an estimated $0.2 million annually[157] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes in internal control over financial reporting - Based on an evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[161] - No changes occurred in the company's internal control over financial reporting during Q3 2020 that materially affected, or are reasonably likely to materially affect, these controls[162] Part II Legal Proceedings The company is involved in legal proceedings, primarily asbestos-related lawsuits, with details referenced in Note 13 of the financial statements - For information regarding legal proceedings, the report refers to Note 13 of the Condensed Consolidated Financial Statements[165] Risk Factors No material changes to the company's risk factors were reported compared to previous filings, including the 2019 Form 10-K - No material changes in risk factors were reported compared to the 2019 Form 10-K and previous 2020 Form 10-Q filings[166] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO agreements and officer certifications - Key exhibits filed include the Separation and Consulting Agreement with former CEO Dennis Sadlowski and the Employment Agreement with new CEO Todd Gleason[174] - Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to SEC rules are included as exhibits[175]