CECO Environmental(CECO) - 2023 Q4 - Annual Results

Executive Summary & Financial Highlights Q4 2023 Financial Highlights CECO Environmental reported strong fourth-quarter 2023 results, with significant year-over-year growth in revenue, non-GAAP net income, Adjusted EBITDA, and free cash flow, alongside a substantial increase in backlog - Backlog increased by 19% to $370.9 million[18] - Orders for the quarter were $128.3 million[11] | Metric | Q4 2023 (Millions) | Q4 2022 (Millions) | Change (%) | | :---------------------- | :----------------- | :----------------- | :--------- | | Revenue | $153.7 | $116.4 | +32 | | Net Income (GAAP) | $3.9 | $8.3 | -53 | | Net Income (Non-GAAP) | $10.1 | $7.4 | +36 | | Adjusted EBITDA | $19.4 | $13.0 | +49 | | Free Cash Flow | $12.2 | $9.0 | +36 | | GAAP EPS (Diluted) | $0.11 | $0.24 | -54.17 | | Non-GAAP EPS (Diluted) | $0.28 | $0.21 | +33.33 | Full Year 2023 Financial Highlights For the full year 2023, CECO Environmental achieved record revenues, strong growth in Adjusted EBITDA and free cash flow, and increased orders, reflecting successful operational execution and strategic initiatives - Full year orders increased by 11% to $582.8 million[11] | Metric | FY 2023 (Millions) | FY 2022 (Millions) | Change (%) | | :---------------------- | :----------------- | :----------------- | :--------- | | Revenue | $544.8 | $422.6 | +29 | | Net Income (GAAP) | $12.9 | $17.4 | -26 | | Net Income (Non-GAAP) | $26.6 | $25.9 | +3 | | Adjusted EBITDA | $57.7 | $42.2 | +37 | | Free Cash Flow | $36.2 | $27.2 | +33 | | GAAP EPS (Diluted) | $0.37 | $0.50 | -26 | | Non-GAAP EPS (Diluted) | $0.75 | $0.74 | +1.35 | CEO Commentary CEO Todd Gleason highlighted the company's successful transformation, record financial performance driven by a balanced portfolio, and sustained growth from organic sales and strategic M&A, along with global expansion - CECO is transforming its portfolio into a leader across industrial air, industrial water, and energy transition markets[2] - Three acquisitions completed in 2023 are delivering outstanding results[2] - The operating model produced record-breaking revenues, gross profits, and adjusted EBITDA, along with strong free cash flow[11] - Growth is sustained by double-digit organic sales increases, supported by accretive M&A execution[11] - Sustained investment in global footprint and capabilities has improved international sales mix and opened new geographic markets[12] Company Overview Business Description CECO Environmental is a leading environmentally focused industrial company providing innovative solutions globally across industrial air, industrial water, and energy transition markets - CECO Environmental is a leading environmentally focused, diversified industrial company[4][10] - Serves industrial air, industrial water, and energy transition markets globally, offering innovative solutions and application expertise[4] - Solutions improve air and water quality, optimize emissions management, and increase energy efficiency for highly-engineered applications in various industrial end markets[4] - Key end markets include power generation, hydrocarbon processing, electric vehicle production, polysilicon fabrication, semiconductor and electronics, battery production and recycling, specialty metals and steel production, beverage can, and water/wastewater treatment[4] - CECO is listed on Nasdaq under the ticker symbol 'CECO,' incorporated in 1966, with global headquarters in Dallas, Texas[4] Strategic Initiatives CECO is actively transforming its portfolio and expanding its global presence through strategic acquisitions and investments to strengthen its leadership in key environmental and industrial markets - CECO is mindfully transforming its portfolio to be a well-positioned leader across industrial air, industrial water, and the energy transition[2] - Completed three acquisitions in 2023, which are delivering outstanding results in strategically focused niche markets[2] - Sustained investment to expand global footprint and capabilities has improved international sales mix and opened new geographic markets[12] Financial Statements Consolidated Balance Sheets The consolidated balance sheets provide a snapshot of CECO Environmental's financial position at December 31, 2023, compared to December 31, 2022, detailing assets, liabilities, and shareholders' equity | (dollars in thousands) | 2023 | 2022 | | :----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | :------ | :------ | | ASSETS | | | | Cash and cash equivalents | $54,779 | $45,522 | | Accounts receivable, net | 112,733 | 83,086 | | Total current assets | 281,437 | 240,658 | | Goodwill | 211,326 | 183,197 | | Total assets | $600,291| $504,721| | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Current portion of debt | $10,488 | $3,579 | | Accounts payable | 87,691 | 73,407 | | Total current liabilities | 203,106 | 146,700 | | Debt, less current portion | 126,795 | 107,625 | | Total liabilities | 362,800 | 286,573 | | Total shareholders' equity | 237,491 | 218,148 | | Total liabilities and shareholders' equity | $600,291| $504,721| Consolidated Statements of Income The consolidated statements of income present CECO Environmental's financial performance for the three months and year ended December 31, 2023, compared to the prior year, highlighting revenue, gross profit, operating income, and net income | (in thousands, except share and per share data) | Three months ended December 31, 2023 | Three months ended December 31, 2022 | Year ended December 31, 2023 | Year ended December 31, 2022 | | :---------------------------------------------- | :----------------------------------- | :----------------------------------- | :--------------------------- | :--------------------------- | | Net sales | $153,711 | $116,402 | $544,845 | $422,627 | | Cost of sales | 100,526 | 78,706 | 373,829 | 294,402 | | Gross profit | 53,185 | 37,696 | 171,016 | 128,225 | | Selling and administrative expenses | 36,862 | 26,667 | 122,944 | 93,473 | | Income from operations | 12,652 | 8,438 | 34,569 | 22,161 | | Interest expense | (3,918) | (1,930) | (13,416) | (5,419) | | Income before income taxes | 9,776 | 10,701 | 21,525 | 23,689 | | Income tax expense | 5,447 | 2,139 | 7,024 | 5,426 | | Net income | 4,329 | 8,562 | 14,501 | 18,263 | | Net income attributable to CECO Environmental Corp. | $3,879 | $8,295 | $12,911 | $17,417 | | Diluted EPS | $0.11 | $0.24 | $0.37 | $0.50 | Consolidated Statements of Cash Flows The consolidated statements of cash flows detail the cash generated and used by CECO Environmental's operating, investing, and financing activities for the years ended December 31, 2023 and 2022 | (dollars in thousands) | Year ended December 31, 2023 | Year ended December 31, 2022 | | :----------------------------------------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $44,647 | $29,649 | | Net cash used in investing activities | $(56,486) | $(48,257) | | Net cash provided by (used in) financing activities | $21,144 | $38,176 | | Effect of exchange rate changes on cash and cash equivalents | $(442) | $(4,978) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $8,863 | $14,590 | | Cash, cash equivalents and restricted cash at end of year | $55,448 | $46,585 | | Cash paid for Interest | $12,098 | $5,007 | | Cash paid for Income taxes | $9,916 | $5,378 | Non-GAAP Financial Measures Definition and Purpose CECO Environmental uses non-GAAP financial measures to provide a clearer view of its core operations by excluding certain non-recurring or non-operational items, aiding in period-over-period comparisons - Non-GAAP measures exclude items such as amortization expenses for acquisition-related intangible assets, contingent retention and earnout expenses, restructuring expenses, acquisition and integration expenses, foreign currency remeasurement, and other nonrecurring or infrequent items[8] - Management believes these exclusions provide additional information for better comparison of the Company's results over multiple periods and for evaluating ongoing financial performance[8] - These figures are considered helpful in allowing individuals to better assess the ongoing nature of CECO's core operations[25] Reconciliation of GAAP to Non-GAAP Measures Reconciliations are provided for key non-GAAP metrics, including free cash flow, non-GAAP net income, Adjusted EBITDA, and non-GAAP operating income, to their most directly comparable GAAP financial measures for both quarterly and full-year periods Free Cash Flow Reconciliation (in millions) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :------------------------------------------ | :------ | :------ | :------ | :------ | | Net cash provided by operating activities | $15.1 | $10.0 | $44.6 | $29.6 | | Acquisitions of property and equipment | (2.9) | (1.0) | (8.4) | (3.4) | | Free cash flow | $12.2 | $9.0 | $36.2 | $27.2 | Non-GAAP Net Income and Adjusted EBITDA Reconciliation (in millions) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :------------------------------------------ | :------ | :------ | :------ | :------ | | Net income (GAAP) | $3.9 | $8.3 | $12.9 | $17.4 | | Amortization and earnout expenses | 2.2 | 1.9 | 8.2 | 6.8 | | Acquisition and integration expenses | 0.3 | 0.7 | 2.5 | 4.5 | | Restructuring expenses | 1.1 | — | 1.3 | 0.1 | | Tax benefit (expense) of adjustments | 3.6 | 0.3 | 1.2 | (2.8) | | Non-GAAP net income | $10.1 | $7.4 | $26.6 | $25.9 | | Adjusted EBITDA | $19.4 | $13.0 | $57.7 | $42.2 | Non-GAAP Operating Income Reconciliation (in millions) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :------------------------------------------ | :------ | :------ | :------ | :------ | | Operating income (GAAP) | $12.7 | $8.4 | $34.6 | $22.2 | | Amortization and earnout expenses | 2.2 | 1.9 | 8.2 | 6.8 | | Acquisition and integration expenses | 0.3 | 0.7 | 2.5 | 4.5 | | Restructuring expenses | 1.1 | — | 1.3 | 0.1 | | Non-GAAP operating income | $16.3 | $11.0 | $48.1 | $34.8 | Limitations of Non-GAAP Measures CECO emphasizes that non-GAAP financial measures are supplemental, not substitutes for GAAP, and may not fully reflect all business costs or be comparable to other companies' metrics. Forward-looking non-GAAP measures are not reconciled to GAAP due to inherent unpredictability - Non-GAAP financial measures are not calculated in accordance with GAAP and should be considered supplemental, not as a substitute for or superior to GAAP measures[35] - These measures have limitations as they do not reflect all costs associated with the operations of the business as determined in accordance with GAAP[35] - Non-GAAP financial measures used by CECO may not be comparable to similarly titled measures of other companies[35] - Forward-looking non-GAAP measures are not reconciled to comparable GAAP financial measures due to the inability to predict certain impacting items with reasonable certainty without unreasonable efforts[9] Financial Outlook & Guidance 2024 Full Year Guidance CECO Environmental has raised its full-year 2024 guidance for revenue and Adjusted EBITDA, while reaffirming its free cash flow outlook, driven by a strong backlog and operational excellence Updated 2024 Full Year Guidance | Metric | Previous Guidance (Millions) | Updated Guidance (Millions) | YoY Growth (Midpoint) | | :-------------- | :--------------------------- | :-------------------------- | :-------------------- | | Revenue | $575 to $600 | $590 to $610 | ~10% | | Adjusted EBITDA | $65 to $70 | $67 to $70 | ~19% | | Free Cash Flow | 50% to 70% of Adjusted EBITDA | 50% to 70% of Adjusted EBITDA | Reaffirmed | - The updated outlook reflects expectations based on a tremendous backlog, commercial and operational excellence programs, which are expected to drive robust organic growth and further operating margin expansion[20] - A healthy balance sheet provides optionality for internal growth programs and potential accretive M&A opportunities to advance leadership positions[20] Investor Information Earnings Conference Call Details Details for the conference call to discuss fourth quarter and full year 2023 financial results, including access information and replay availability - A conference call was scheduled for March 5, 2024, at 8:30 a.m. ET to discuss the financial results[13] - The call can be accessed via webcast on the Investor Relations portion of the company's website (https://investors.cecoenviro.com) or directly at https://edge.media-server.com/mmc/p/7wfof7nx[13](index=13&type=chunk) - A replay of the conference call will be available on the Company's website for one year[30] Investor Relations Contact Contact information for CECO Environmental's Chief Financial and Strategy Officer and external Investor Relations representatives - Company Contact: Peter Johansson, Chief Financial and Strategy Officer, 888-990-6670, investor.relations@onececo.com[4] - Investor Relations Contact: Steven Hooser and Jean Marie Young, Three Part Advisors, LLC, 214-872-2710, investor.relations@onececo.com[14] Forward-Looking Statements & Safe Harbor Forward-Looking Statements & Risk Factors This section outlines the nature of forward-looking statements within the report, emphasizing that actual results may differ materially due to various risks and uncertainties, and cautions investors against undue reliance - Statements in the press release, other than historical facts, are forward-looking statements, identified by words such as 'believe,' 'expect,' 'anticipate,' 'intends,' 'estimate,' 'forecast,' 'project,' 'will,' 'plan,' 'should' and similar expressions[27] - Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from any future results, performance, or achievements expressed or implied[27] - Potential risks include sensitivity to economic and financial market conditions, dependence on fixed price contracts, effects of growth, ability to expand operations, contract delays or cancellations due to supply chain issues, liabilities from faulty services/products, litigation, fluctuations in material prices, inflationary pressures, debt, government regulations, share repurchases, restructuring program success, M&A integration, and catastrophic events[27] - Investors are cautioned not to place undue reliance on such forward-looking statements, and the company undertakes no obligation to update or review them, except as required by federal securities laws[27]