CECO Environmental(CECO) - 2022 Q4 - Annual Report

Part I Business A diversified industrial company providing environmental solutions for air, water, and energy transition markets globally - CECO is an environmentally focused, diversified industrial company providing solutions for industrial air, water, and energy transition markets globally[379] - The company's growth is driven by factors including a global focus on the environment, stringent regulations, investment in net-zero technologies, emerging market industrialization, and increased demand for cleaner power generation[384][386] - CECO's strategy focuses on providing leading solutions in niche applications, leveraging technology and application expertise, and pursuing value-added, accretive acquisitions[312][391] - As of December 31, 2022, CECO had approximately 1,000 employees, with 126 US employees being unionized[10] Backlog Information | Date | Backlog (USD) | YoY Change | | :--- | :--- | :--- | | Dec 31, 2022 | $311.7 million | +45.7% | | Dec 31, 2021 | $213.9 million | | Business Segments The company operates through two segments, Engineered Systems and Industrial Process Solutions, serving distinct industrial markets - Engineered Systems Segment: Serves power generation, hydrocarbon processing, water/wastewater treatment, and midstream oil & gas with solutions like emissions control, cyclones, thermal acoustics, and filtration systems[315] - Industrial Process Solutions Segment: Serves broad industrial sectors (e.g., automotive, food & beverage, semiconductor) with solutions for air pollution control, fluid handling, and process filtration[316] Human Capital Management The company focuses on talent development, employee safety with a low incident rate, and diversity and inclusion initiatives - The company has approximately 1,000 employees across nine countries as of December 31, 2022[10] - In 2022, 85% of employees engaged with an online learning platform, spending an average of two hours per month on skill development[11] - The company's domestic Total Recordable Incident Rate (TRIR) for 2022 was 1.1%, compared to the benchmark industry average of 4.1%[56] - CECO is actively working to build a more diverse workforce by expanding job postings to diverse job boards and developing a comprehensive Diversity, Equity, and Inclusion roadmap[58] Risk Factors The company faces risks from fixed-price contracts, supply chain disruptions, raw material costs, cybersecurity, and its debt load - The majority of projects are performed on a fixed-price basis, exposing the company to risks of cost overruns if initial estimates are inaccurate[71] - The company's backlog was $311.7 million at Dec 31, 2022; however, the inability to deliver on this backlog due to material or labor shortages could affect future sales[77] - The company is exposed to price volatility and inflation for raw materials like steel and resin, which may adversely affect profitability[81] - As of December 31, 2022, the company had $112.7 million of indebtedness, which could make it difficult to satisfy obligations and limit growth[146] - Increased global cybersecurity threats pose a risk to the company's systems, networks, and data[177] - Approximately 35% of 2022 revenues were from outside the U.S., exposing the company to risks from currency fluctuations and changes in trade policies[139][227] Properties The company operates 30 principal facilities globally, with its executive offices located in Dallas, Texas Principal Operating Facilities by Segment (as of Dec 31, 2022) | Segment | Owned | Leased | Total | | :--- | :--- | :--- | :--- | | Engineered Systems | 1 | 15 | 16 | | Industrial Process Solutions | 1 | 11 | 12 | | Corporate | 0 | 2 | 2 | | Total | 2 | 28 | 30 | Legal Proceedings The company faces numerous asbestos-related lawsuits but believes its insurance coverage is adequate to prevent material adverse impact - As of December 31, 2022, there were 247 pending asbestos-related cases against the company's subsidiary, Met-Pro, an increase from 223 cases at the end of 2021[189] - Cumulative settlement payments for asbestos-related claims from 2002 through December 31, 2022, were $6.2 million, which have been substantially paid by the company's insurers[131] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq, no dividends were paid, and a share repurchase program is active - The company's common stock is traded on The Nasdaq Global Select Market under the symbol "CECO"[254] - No cash dividends were paid in 2022, 2021, or 2020, as the company intends to retain future earnings to finance operations and growth[255] Share Repurchases (Q4 2022) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Value Remaining in Program | | :--- | :--- | :--- | :--- | | Oct 2022 | 51,257 | $9.79 | $13.0 million | | Nov 2022 | 0 | N/A | $13.0 million | | Dec 2022 | 0 | N/A | $13.0 million | Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales and operating income grew significantly in 2022, driven by organic growth and acquisitions, despite margin pressure from inflation - The company's strategy focuses on operational excellence, margin expansion, and capital deployment towards industrial air, water, and energy transition markets[298][299] - The company is experiencing shortages and inflationary pressures for raw materials and labor, which are being mitigated through alternate sourcing and price increases[300][404] - Orders booked increased by 46% to $526.6 million in 2022, with 86.4% of the growth being organic[405] Key Financial Highlights (2022 vs 2021) | Metric (in millions) | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $422.6 | $324.1 | +30.4% | | Gross Profit | $128.2 | $100.9 | +27.1% | | Operating Income | $22.2 | $9.9 | +124.2% | | Non-GAAP Operating Income | $34.8 | $19.1 | +82.2% | | Net Income | $17.4 | $1.4 | +1142.9% | Business Segments Analysis Both the Engineered Systems and Industrial Process Solutions segments achieved strong sales and operating income growth in 2022 - Engineered Systems segment sales grew by $76.3 million (40.8%) in 2022, with 77.3% of the increase from organic growth[426] - Industrial Process Solutions segment sales grew by $22.2 million (16.2%) in 2022, with 93.2% of the increase from organic growth[428] Segment Net Sales (in thousands) | Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Engineered Systems | $263,224 | $186,926 | $205,494 | | Industrial Process Solutions | $159,403 | $137,214 | $110,517 | | Total | $422,627 | $324,140 | $316,011 | Segment Income from Operations (in thousands) | Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Engineered Systems | $36,200 | $25,770 | $34,170 | | Industrial Process Solutions | $22,705 | $15,054 | $7,220 | | Corporate and Other | ($36,744) | ($30,967) | ($28,044) | | Total | $22,161 | $9,857 | $13,346 | Liquidity and Capital Resources The company maintains a solid liquidity position with sufficient cash and credit availability to fund operations for the next year - In 2022, financing activities included $39.3 million in net borrowings on the revolving credit line and $11.0 million in new joint venture debt, primarily to fund acquisitions[456] Liquidity Position (in millions) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $45.5 | $29.9 | | Working Capital | $94.0 | $72.3 | | Total Debt | $111.2 | $63.8 | | Unused Credit Availability | $59.8 | $45.9 | Cash Flow Summary (in thousands) | Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Cash from Operations | $29,649 | $13,298 | $4,421 | | Cash used in Investing | ($48,257) | ($2,083) | ($9,235) | | Cash from (used in) Financing | $38,176 | ($15,556) | $3,724 | Critical Accounting Policies and Estimates Key accounting policies require significant management judgment, particularly in revenue recognition, impairment testing, and income taxes - A significant portion of revenue is recognized over time for fixed-price contracts using the cost-to-cost method, which requires significant estimates of total project costs[463][541] - Goodwill and indefinite-lived intangible assets are tested for impairment annually on October 1; the 2022 test resulted in no impairment charges[470][472] - The company must assess the realizability of its deferred tax assets; as of December 31, 2022, it had state and local net operating loss carryforwards of $48.3 million[195][477] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks stem from changes in interest rates on its variable-rate debt and foreign currency exchange rates - The company is exposed to interest rate risk as a substantial portion of its $112.7 million debt (as of Dec 31, 2022) is at variable rates[483][484] - A hypothetical 10% change in the estimated weighted average borrowing rate would result in an estimated annual impact of $0.8 million[484] - The company is exposed to foreign currency risk, which resulted in net foreign currency transaction gains of $6.3 million in 2022[485] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and supplementary data for the past three fiscal years Notes to Consolidated Financial Statements The notes detail key accounting policies, acquisitions, debt structure, and legal contingencies like asbestos litigation - In 2022, the company acquired General Rubber LLC, Compass Water Solutions, Inc., Western Air Ducts Limited, and DS21 Co., Ltd[200][206][210][216][273] - The company's Credit Facility includes a $140.0 million senior secured revolving credit commitment maturing in December 2026, with $59.8 million of unused availability at year-end[28][29][372] - Under a May 2022 authorization, the company repurchased and retired approximately 1,032,000 shares for $7.0 million during the year[102] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $504,721 | $416,197 | | Total Liabilities | $286,573 | $210,240 | | Total Shareholders' Equity | $218,148 | $205,957 | Consolidated Statement of Income Highlights (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Sales | $422,627 | $324,140 | $316,011 | | Gross Profit | $128,225 | $100,922 | $105,128 | | Net Income Attributable to CECO | $17,417 | $1,426 | $8,211 | Consolidated Statement of Cash Flows Highlights (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $29,649 | $13,298 | $4,421 | | Net cash used in investing activities | ($48,257) | ($2,083) | ($9,235) | | Net cash provided by (used in) financing activities | $38,176 | ($15,556) | $3,724 | Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal controls were effective as of year-end 2022 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[491] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework (2013)[493] - The independent registered public accounting firm, BDO USA, LLP, issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting[496][500] - There were no material changes in internal control over financial reporting during the fourth quarter of 2022[501] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and governance is incorporated by reference from the 2023 Proxy Statement - The required information for this item is incorporated by reference from the company's 2023 Proxy Statement[511] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2023 Proxy Statement - The required information for this item is incorporated by reference from the company's 2023 Proxy Statement[512] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference, with details on equity compensation plans provided Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Available for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by Security Holders | 1,353,752 | - | 3,267,075 | | Not Approved by Security Holders | 1,262,276 | $10.65 | 0 | | Total | 2,616,028 | | 3,267,075 | Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the 2023 Proxy Statement - The required information for this item is incorporated by reference from the company's 2023 Proxy Statement[516] Principal Accounting Fees and Services Information regarding accounting fees and services is incorporated by reference from the 2023 Proxy Statement - The required information for this item is incorporated by reference from the company's 2023 Proxy Statement[516] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including key corporate and financial agreements - Financial statements are included following the signature page of the report[519] - The exhibit index lists all documents filed with the report, such as the Second Amended and Restated Credit Agreement, various Equity Incentive Plans, and certifications by the CEO and CFO[520][521][522][525]