10-Q
--12-31Q2September 30, 20260000003197false0000003197us-gaap:PensionPlansDefinedBenefitMember2022-04-012022-06-300000003197us-gaap:CustomerListsMember2022-06-300000003197cece:GeneralRubberLlcMember2021-01-012021-06-3000000031972021-01-012021-12-310000003197srt:SubsidiariesMember2021-01-012021-12-310000003197us-gaap:TreasuryStockMember2021-06-300000003197us-gaap:AdditionalPaidInCapitalMember2021-12-310000003197cece:EnergyInterSegmentSalesMember2021-01-012021-06-300000003197us-gaap:OperatingSegmentsMember2021-01-012021-06-300000003197cece:StateAndForeignAuthoritiesMember2022-01-012022-06-300000003197us-gaap:TradeAccountsReceivableMember2022-06-300000003197us-gaap:RevolvingCreditFacilityMembercece:WesternAirDuctsLtdMember2022-06-220000003197us-gaap:CommonStockMember2021-04-012021-06-300000003197cece:CorporateReconcilingItemsAndEliminationsMember2021-01-012021-06-300000003197cece:IndustrialProcessSolutionsMemberus-gaap:IntersubsegmentEliminationsMember2022-04-012022-06-300000003197us-gaap:NoncontrollingInterestMember2022-01-012022-03-310000003197cece:SeniorDebtMember2021-12-310000003197srt:MaximumMemberus-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMember2022-06-300000003197cece:IndustrialInterSegmentSalesMemberus-gaap:IntersegmentEliminationMember2021-04-012021-06-300000003197us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-01-012021-03-310000003197cece:SeniorSecuredTermLoanMember2022-06-300000003197us-gaap:TechnologyBasedIntangibleAssetsMember2021-12-310000003197cece:IndustrialInterSegmentSalesMemberus-gaap:IntersegmentEliminationMember2021-01-012021-06-300000003197us-gaap:AdditionalPaidInCapitalMember2022-03-310000003197us-gaap:TradeNamesMember2022-06-300000003197us-gaap:AdditionalPaidInCapitalMember2022-06-300000003197us-gaap:NoncontrollingInterestMember2021-06-300000003197cece:CreditFacilityMember2022-06-300000003197us-gaap:RetainedEarningsMember2021-01-012021-03-310000003197cece:CorporateReconcilingItemsAndEliminationsMember2022-01-012022-06-300000003197us-gaap:PensionPlansDefinedBenefitMember2021-04-012021-06-300000003197us-gaap:DebtInstrumentRedemptionPeriodTwoMembercece:SeniorSecuredTermLoanMember2022-01-012022-06-3000000031972022-05-100000003197us-gaap:OperatingSegmentsMember2021-04-012021-06-300000003197us-gaap:TradeNamesMember2021-12-310000003197us-gaap:RetainedEarningsMember2021-03-310000003197cece:IndustrialInterSegmentSalesMembercece:EngineeredSystemsMemberus-gaap:IntersegmentEliminationMember2021-04-012021-06-300000003197us-gaap:TreasuryStockMember2022-03-310000003197cece:IndustrialProcessSolutionsMemberus-gaap:OperatingSegmentsMember2022-04-012022-06-300000003197us-gaap:OperatingSegmentsMembercece:EngineeredSystemsMember2021-01-012021-06-300000003197us-gaap:RetainedEarningsMember2022-04-012022-06-3000000031972021-01-012021-03-310000003197us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-04-012022-06-300000003197us-gaap:AdditionalPaidInCapitalMember2021-04-012021-06-300000003197cece:CorporateReconcilingItemsAndEliminationsMember2021-04-012021-06-300000003197cece:IndustrialInterSegmentSalesMembercece:EngineeredSystemsMemberus-gaap:IntersegmentEliminationMember2021-01-012021-06-300000003197us-gaap:NoncontrollingInterestMember2022-06-300000003197cece:EngineeredSystemsMember2022-06-300000003197us-gaap:IntersubsegmentEliminationsMember2021-04-012021-06-300000003197cece:IndustrialProcessSolutionsMember2022-04-012022-06-3000000031972022-01-012022-03-310000003197us-gaap:CommonStockMember2021-03-310000003197us-gaap:NoncontrollingInterestMember2022-04-012022-06-300000003197us-gaap:DebtInstrumentRedemptionPeriodThreeMembercece:SeniorSecuredTermLoanMember2022-01-012022-06-300000003197cece:IndustrialProcessSolutionsMemberus-gaap:IntersubsegmentEliminationsMember2021-04-012021-06-300000003197us-gaap:AdditionalPaidInCapitalMember2021-06-300000003197cece:TermDebtMember2021-12-310000003197us-gaap:AdditionalPaidInCapitalMember2021-01-012021-03-310000003197us-gaap:CommonStockMember2022-06-300000003197us-gaap:AdditionalPaidInCapitalMember2022-04-012022-06-300000003197srt:MaximumMemberus-gaap:BaseRateMember2022-01-012022-06-300000003197us-gaap:CorporateNonSegmentMember2021-04-012021-06-300000003197us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-04-012021-06-300000003197cece:IndustrialProcessSolutionsMember2022-06-300000003197srt:MinimumMembercece:CreditAgreementMemberus-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMember2022-01-012022-06-300000003197us-gaap:RestrictedStockUnitsRSUMember2022-04-012022-06-300000003197srt:DirectorMember2021-01-012021-06-300000003197cece:GeneralRubberLlcMember2021-04-012021-06-300000003197us-gaap:CorporateNonSegmentMember2021-01-012021-06-300000003197us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-01-012022-03-310000003197cece:SeniorSecuredTermLoanMember2022-01-012022-06-300000003197srt:SubsidiariesMember2022-01-012022-06-300000003197cece:CreditAgreementMember2021-12-310000003197cece:GeneralRubberLlcMember2022-03-070000003197us-gaap:CorporateNonSegmentMember2022-06-300000003197cece:EngineeredSystemsMember2022-01-012022-06-300000003197cece:EngineeredSystemsMemberus-gaap:IntersubsegmentEliminationsMember2021-01-012021-06-300000003197us-gaap:IntersubsegmentEliminationsMember2022-01-012022-06-300000003197cece:IndustrialProcessSolutionsMembercece:EnergyInterSegmentSalesMember2021-01-012021-06-300000003197cece:IndustrialInterSegmentSalesMemberus-gaap:IntersegmentEliminationMember2022-01-012022-06-300000003197us-gaap:CorporateNonSegmentMember2021-12-310000003197us-gaap:PensionPlansDefinedBenefitMember2021-01-012021-06-300000003197srt:DirectorMember2022-01-012022-06-300000003197cece:WesternAirDuctsLtdMember2022-06-220000003197cece:JointVentureAgreementMember2022-03-070000003197cece:EnergyInterSegmentSalesMember2021-04-012021-06-3000000031972022-01-012022-06-300000003197us-gaap:NoncontrollingInterestMember2022-03-310000003197us-gaap:IntersubsegmentEliminationsMember2022-04-012022-06-300000003197cece:ForeignCurrencyTranslationAdjustmentMember2022-06-3000000031972022-04-012022-06-300000003197us-gaap:CommonStockMember2021-01-012021-03-310000003197us-gaap:CommonStockMember2022-04-012022-06-300000003197cece:IndustrialProcessSolutionsMemberus-gaap:OperatingSegmentsMember2022-01-012022-06-300000003197us-gaap:RetainedEarningsMember2021-04-012021-06-300000003197us-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMember2022-01-012022-06-300000003197cece:IndustrialProcessSolutionsMemberus-gaap:OperatingSegmentsMember2021-01-012021-06-300000003197us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-06-300000003197cece:EngineeredSystemsMember2021-12-310000003197cece:SeniorDebtMember2022-06-300000003197us-gaap:RetainedEarningsMember2022-03-310000003197cece:JointVentureAgreementMember2022-04-012022-06-300000003197us-gaap:AdditionalPaidInCapitalMember2021-03-310000003197us-gaap:StandbyLettersOfCreditMember2022-06-300000003197cece:CreditAgreementMember2022-06-300000003197us-gaap:NoncontrollingInterestMember2021-01-012021-03-310000003197us-gaap:RetainedEarningsMember2022-01-012022-03-310000003197us-gaap:CommonStockMember2021-06-300000003197us-gaap:NoncontrollingInterestMember2020-12-310000003197us-gaap:DebtInstrumentRedemptionPeriodOneMembercece:SeniorSecuredTermLoanMember2022-01-012022-06-300000003197cece:IndustrialProcessSolutionsMembercece:EnergyInterSegmentSalesMember2021-04-012021-06-300000003197cece:EnergyInterSegmentSalesMember2022-01-012022-06-300000003197cece:IndustrialInterSegmentSalesMembercece:EngineeredSystemsMemberus-gaap:IntersegmentEliminationMember2022-04-012022-06-300000003197us-gaap:TreasuryStockMember2022-06-300000003197cece:IndustrialProcessSolutionsMember2021-12-310000003197us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-03-310000003197us-gaap:CommonStockMember2022-01-012022-03-310000003197us-gaap:AdditionalPaidInCapitalMember2022-01-012022-03-310000003197cece:EngineeredSystemsMemberus-gaap:IntersubsegmentEliminationsMember2022-04-012022-06-300000003197cece:GeneralRubberLlcMember2022-04-012022-06-300000003197us-gaap:RetainedEarningsMember2020-12-310000003197us-gaap:NoncontrollingInterestMember2021-03-310000003197cece:EuroDenominatedBankGuaranteeMembercece:NetherlandsFacilityMember2022-06-300000003197cece:JointVentureAgreementMember2022-06-300000003197us-gaap:TechnologyBasedIntangibleAssetsMember2022-06-300000003197cece:SeniorSecuredTermLoanMember2021-12-310000003197us-gaap:RetainedEarningsMember2021-06-3000000031972021-01-012021-06-300000003197cece:CreditFacilityMember2021-12-310000003197us-gaap:RestrictedStockUnitsRSUMember2021-04-012021-06-300000003197us-gaap:TreasuryStockMember2020-12-310000003197us-gaap:RestrictedStockUnitsRSUMember2022-01-012022-06-3000000031972022-06-300000003197cece:IndustrialProcessSolutionsMemberus-gaap:OperatingSegmentsMember2021-04-012021-06-300000003197us-gaap:IntersubsegmentEliminationsMember2021-01-012021-06-300000003197cece:CompassWaterSolutionsIncMember2022-01-012022-06-300000003197cece:EngineeredSystemsMember2021-04-012021-06-300000003197cece:EffoxFlextorMadderMember2022-06-300000003197cece:IndustrialProcessSolutionsMemberus-gaap:IntersubsegmentEliminationsMember2021-01-012021-06-300000003197us-gaap:CorporateNonSegmentMember2022-01-012022-06-3000000031972022-03-310000003197us-gaap:CustomerListsMember2021-12-310000003197cece:EngineeredSystemsMember2022-04-012022-06-300000003197us-gaap:OperatingSegmentsMembercece:EngineeredSystemsMember2022-01-012022-06-300000003197cece:JointVentureAgreementMember2022-03-012022-03-070000003197cece:FederalFundsRateMember2022-01-012022-06-300000003197us-gaap:RevolvingCreditFacilityMember2022-06-300000003197cece:EngineeredSystemsMember2021-01-012021-06-300000003197us-gaap:TreasuryStockMember2021-03-310000003197cece:IndustrialProcessSolutionsMember2021-01-012021-06-300000003197us-gaap:RestrictedStockUnitsRSUMember2021-01-012021-06-300000003197us-gaap:TreasuryStockMember2021-12-310000003197us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-03-310000003197cece:ForeignCurrencyTranslationAdjustmentMember2021-12-310000003197us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-12-310000003197srt:MinimumMemberus-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMember2022-06-300000003197us-gaap:LineOfCreditMember2022-06-300000003197us-gaap:StandbyLettersOfCreditMember2021-12-310000003197us-gaap:CommonStockMember2022-03-310000003197srt:MinimumMemberus-gaap:BaseRateMember2022-01-012022-06-300000003197cece:EnergyInterSegmentSalesMember2022-04-012022-06-300000003197us-gaap:OperatingSegmentsMember2022-01-012022-06-300000003197srt:MaximumMemberus-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMembercece:CreditAgreementMember2022-01-012022-06-300000003197us-gaap:CommonStockMember2020-12-310000003197cece:IndustrialInterSegmentSalesMemberus-gaap:IntersegmentEliminationMember2022-04-012022-06-300000003197us-gaap:AdditionalPaidInCapitalMember2020-12-310000003197cece:WesternAirDuctsLtdMember2022-01-012022-06-300000003197cece:EngineeredSystemsMemberus-gaap:IntersubsegmentEliminationsMember2022-01-012022-06-300000003197us-gaap:OperatingSegmentsMembercece:EngineeredSystemsMember2021-04-012021-06-3000000031972021-04-012021-06-300000003197us-gaap:RetainedEarningsMember2022-06-300000003197cece:BankGuaranteesMember2022-06-300000003197us-gaap:RetainedEarningsMember2021-12-310000003197us-gaap:OperatingSegmentsMembercece:EngineeredSystemsMember2022-04-012022-06-300000003197cece:EngineeredSystemsMemberus-gaap:IntersubsegmentEliminationsMember2021-04-012021-06-300000003197cece:IndustrialProcessSolutionsMembercece:EnergyInterSegmentSalesMember2022-04-012022-06-300000003197cece:CompassWaterSolutionsIncMember2022-05-030000003197cece:IndustrialProcessSolutionsMember2022-01-012022-06-3000000031972021-06-300000003197us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-06-300000003197us-gaap:CorporateNonSegmentMember2022-04-012022-06-3000000031972021-03-310000003197us-gaap:StandbyLettersOfCreditMembercece:EffoxFlextorMadderMember2022-06-300000003197us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-12-310000003197us-gaap:PensionPlansDefinedBenefitMember2022-01-012022-06-300000003197us-gaap:NoncontrollingInterestMember2021-12-310000003197cece:IndustrialProcessSolutionsMemberus-gaap:IntersubsegmentEliminationsMember2022-01-012022-06-300000003197us-gaap:LineOfCreditMember2021-12-310000003197cece:IndustrialProcessSolutionsMembercece:EnergyInterSegmentSalesMember2022-01-012022-06-300000003197cece:TermDebtMember2022-06-300000003197cece:GeneralRubberLlcMember2022-01-012022-06-300000003197us-gaap:RevolvingCreditFacilityMember2021-12-310000003197us-gaap:DomesticCountryMember2022-01-012022-06-3000000031972020-12-3100000031972021-12-310000003197us-gaap:NoncontrollingInterestMember2021-04-012021-06-300000003197us-gaap:TradeAccountsReceivableMember2021-12-310000003197us-gaap:OperatingSegmentsMember2022-04-012022-06-300000003197cece:IndustrialInterSegmentSalesMembercece:EngineeredSystemsMemberus-gaap:IntersegmentEliminationMember2022-01-012022-06-300000003197cece:CorporateReconcilingItemsAndEliminationsMember2022-04-012022-06-300000003197us-gaap:CommonStockMember2021-12-310000003197cece:IndustrialProcessSolutionsMember2021-04-012021-06-300000003197cece:EffoxFlextorMadderMembercece:CreditAgreementMember2022-03-07xbrli:purexbrli:sharescece:Caseiso4217:USDxbrli:sharesiso4217:USD

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2022

or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File No. 0-07099

 

https://cdn.kscope.io/c0d4f67c9b8c0628f47b89cd7afa956a-img142831690_0.jpg 

CECO ENVIRONMENTAL CORP.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

13-2566064

(State or other jurisdiction of

Incorporation or organization)

 

(IRS Employer

Identification No.)

 

14651 North Dallas Parkway

Suite 500

Dallas, Texas

 

 

 

75254

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (214) 357-6181

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.01 per share

CECE

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

The number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: 34,499,208 shares of common stock, par value $0.01 per share, as of August 1, 2022.

 

 


 

CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended June 30, 2022

Table of Contents

 

Part I –

 

Financial Information

 

2

 

 

 

 

 

 

 

Item 1. Financial Statements

 

2

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three-month and six-month periods ended June 30, 2022 and 2021

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three-month and six-month periods ended June 30, 2022 and 2021

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the three-month and six-month periods ended June 30, 2022 and 2021

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2022 and 2021

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

25

 

 

 

 

 

 

 

Item 4. Controls and Procedures

 

26

 

 

 

 

 

Part II –

 

Other Information

 

27

 

 

 

 

 

 

 

Item 1. Legal Proceedings

 

27

 

 

 

 

 

 

 

Item 1A. Risk Factors

 

27

 

 

 

 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

27

 

 

 

 

 

 

 

Item 3. Defaults Upon Senior Securities

 

27

 

 

 

 

 

 

 

Item 4. Mine Safety Disclosures

 

27

 

 

 

 

 

 

 

Item 5. Other Information

 

27

 

 

 

 

 

 

 

Item 6. Exhibits

 

28

 

 

 

 

 

Signatures

 

29

 

 

 

1


 

CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

(dollars in thousands, except per share data)

 

(unaudited)
June 30, 2022

 

 

December 31, 2021

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,416

 

 

$

29,902

 

Restricted cash

 

 

1,037

 

 

 

2,093

 

Accounts receivable, net

 

 

95,318

 

 

 

74,991

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

 

51,158

 

 

 

51,429

 

Inventories, net

 

 

23,981

 

 

 

17,052

 

Prepaid expenses and other current assets

 

 

11,911

 

 

 

10,760

 

Prepaid income taxes

 

 

893

 

 

 

2,784

 

Total current assets

 

 

218,714

 

 

 

189,011

 

Property, plant and equipment, net

 

 

16,357

 

 

 

15,948

 

Right-of-use assets from operating leases

 

 

12,144

 

 

 

10,893

 

Goodwill

 

 

185,795

 

 

 

161,183

 

Intangible assets – finite life, net

 

 

35,794

 

 

 

25,841

 

Intangible assets – indefinite life

 

 

9,494

 

 

 

9,629

 

Deferred income taxes

 

 

505

 

 

 

505

 

Deferred charges and other assets

 

 

2,926

 

 

 

3,187

 

Total assets

 

$

481,729

 

 

$

416,197

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of debt

 

$

3,303

 

 

$

2,203

 

Accounts payable and accrued expenses

 

 

101,233

 

 

 

84,081

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

35,896

 

 

 

28,908

 

Note payable - current

 

 

500

 

 

 

 

Income taxes payable

 

 

3,092

 

 

 

1,493

 

Total current liabilities

 

 

144,024

 

 

 

116,685

 

Other liabilities

 

 

15,122

 

 

 

14,826

 

Debt, less current portion

 

 

92,768

 

 

 

61,577

 

Deferred income tax liability, net

 

 

9,998

 

 

 

8,390

 

Operating lease liabilities

 

 

9,356

 

 

 

8,762

 

Total liabilities

 

 

271,268

 

 

 

210,240

 

Commitments and contingencies

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Preferred stock, $.01 par value; 10,000 shares authorized, none issued

 

 

 

 

Common stock, $.01 par value; 100,000,000 shares authorized, 34,534,180 and
35,028,197 shares issued and outstanding at June 30, 2022 and
December 31, 2021, respectively

 

 

345

 

 

 

350

 

Capital in excess of par value

 

 

250,262

 

 

 

252,989

 

Accumulated loss

 

 

(29,538

)

 

 

(36,715

)

Accumulated other comprehensive loss

 

 

(15,567

)

 

 

(12,070

)

Total CECO shareholders' equity

 

 

205,502

 

 

 

204,554

 

Non-controlling interest

 

 

4,959

 

 

 

1,403

 

Total shareholders' equity

 

 

210,461

 

 

 

205,957

 

Total liabilities and shareholders' equity

 

$

481,729

 

 

$

416,197

 

 

The notes to the condensed consolidated financial statements are an integral part of the above statements.

2


 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(dollars in thousands, except per share data)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net sales

 

$

105,375

 

 

$

78,680

 

 

$

197,811

 

 

$

150,572

 

Cost of sales

 

 

73,700

 

 

 

53,426

 

 

 

139,708

 

 

 

100,910

 

Gross profit

 

 

31,675

 

 

 

25,254

 

 

 

58,103

 

 

 

49,662

 

Selling and administrative expenses

 

 

22,988

 

 

 

20,510

 

 

 

41,640

 

 

 

39,965

 

Amortization and earnout expenses

 

 

1,450

 

 

 

2,282

 

 

 

2,900

 

 

 

4,072

 

Restructuring expenses

 

 

 

 

 

280

 

 

 

73

 

 

 

280

 

Acquisition and integration expenses

 

 

1,491

 

 

 

37

 

 

 

2,540

 

 

 

146

 

Income from operations

 

 

5,746

 

 

 

2,145

 

 

 

10,950

 

 

 

5,199

 

Other income (expense), net

 

 

1,936

 

 

 

(860

)

 

 

1,478

 

 

 

(1,339

)

Interest expense

 

 

(1,098

)

 

 

(704

)

 

 

(1,920

)

 

 

(1,430

)

Income before income taxes

 

 

6,584

 

 

 

581

 

 

 

10,508

 

 

 

2,430

 

Income tax expense

 

 

1,860

 

 

 

199

 

 

 

2,972

 

 

 

750

 

Net income

 

 

4,724

 

 

 

382

 

 

 

7,536

 

 

 

1,680

 

Non-controlling interest

 

 

339

 

 

 

89

 

 

 

356

 

 

 

206

 

Net income attributable to CECO Environmental Corp.

 

$

4,385

 

 

$

293

 

 

$

7,180

 

 

$

1,474

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

 

$

0.01

 

 

$

0.21

 

 

$

0.04

 

Diluted

 

$

0.13

 

 

$

0.01

 

 

$

0.20

 

 

$

0.04

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

34,873,238

 

 

 

35,491,725

 

 

 

34,961,645

 

 

 

35,444,477

 

Diluted

 

 

35,041,152

 

 

 

35,819,269

 

 

 

35,119,685

 

 

 

35,797,001

 

 

 

The notes to the condensed consolidated financial statements are an integral part of the above statements.

 

3


 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(dollars in thousands)

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income

$

4,724

 

 

$

382

 

 

$

7,536

 

 

$

1,680

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

(2,966

)

 

 

290

 

 

 

(3,497

)

 

 

345

 

Comprehensive income

$

1,758

 

 

$

672

 

 

$

4,039

 

 

$

2,025

 

 

 

The notes to the condensed consolidated financial statements are an integral part of the above statements.

 

4


 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)

 

 

 

 

Common Stock

 

 

Capital in
excess of

 

 

Accumulated

 

 

Accumulated
Other
Comprehensive

 

 

Treasury Stock

 

 

Non-controlling

 

 

Total
Shareholders'

 

 

 

Shares

 

 

Amount

 

 

par value

 

 

Loss

 

 

Loss

 

 

Shares

 

 

Amount

 

 

interest

 

 

Equity

 

Balance December 31, 2020

 

 

35,505

 

 

$

355

 

 

$

255,296

 

 

$

(38,141

)

 

$

(14,496

)

 

 

(138

)

 

$

(356

)

 

$

953

 

 

$

203,611

 

Net income for the three months ended March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

1,181

 

 

 

 

 

 

 

 

 

 

 

 

117

 

 

 

1,298

 

Exercise of stock options

 

 

2

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

Restricted stock units issued

 

 

40

 

 

 

1

 

 

 

(134

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(133

)

Share based compensation earned

 

 

21

 

 

 

 

 

 

807

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

807

 

Translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55

 

 

 

 

 

 

 

 

 

 

 

 

55

 

Balance March 31, 2021

 

 

35,568

 

 

$

356

 

 

$

255,982

 

 

$

(36,960

)

 

$

(14,441

)

 

 

(138

)

 

$

(356

)

 

$

1,070

 

 

$

205,651

 

Net income for the three months ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

293

 

 

 

 

 

 

 

 

 

 

 

 

89

 

 

 

382

 

Restricted stock units issued

 

 

181

 

 

 

1

 

 

 

(271

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(270

)

Share based compensation earned

 

 

 

 

 

 

 

 

887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

887

 

Translation gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

290

 

 

 

 

 

 

 

 

 

 

 

 

290

 

Noncontrolling interest distribution

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(107

)

 

 

(107

)

Balance June 30, 2021

 

 

35,749

 

 

 

357

 

 

 

256,598

 

 

 

(36,667

)

 

 

(14,151

)

 

 

(138

)

 

 

(356

)

 

 

1,052

 

 

 

206,833

 

 

 

 

Common Stock

 

 

Capital in
excess of

 

 

Accumulated

 

 

Accumulated
Other
Comprehensive

 

 

Treasury Stock

 

 

Non-controlling

 

 

Total
Shareholders'

 

 

 

Shares

 

 

Amount

 

 

par value

 

 

Loss

 

 

Loss

 

 

Shares

 

 

Amount

 

 

interest

 

 

Equity

 

Balance December 31, 2021

 

 

35,028

 

 

$

350

 

 

$

252,989

 

 

$

(36,715

)

 

$

(12,070

)

 

 

 

 

$

 

 

$

1,403

 

 

$

205,957

 

Net income for the three months ended March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

2,792

 

 

 

 

 

 

 

 

 

 

 

 

18

 

 

 

2,810

 

Restricted stock units issued

 

 

34

 

 

 

 

 

 

(67

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(67

)

Share based compensation earned

 

 

14

 

 

 

 

 

 

953

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

953

 

Translation gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(531

)

 

 

 

 

 

 

 

 

 

 

 

(531

)

Noncontrolling interest distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(900

)

 

 

(900

)

Fair value of noncontrolling interest equity (see Note 14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

 

 

5,000

 

Balance March 31, 2022

 

 

35,076

 

 

 

350

 

 

 

253,875

 

 

 

(33,923

)

 

 

(12,601

)

 

 

 

 

 

 

 

 

5,521

 

 

 

213,222

 

Net income for the three months ended June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

4,385

 

 

 

 

 

 

 

 

 

 

 

 

339

 

 

 

4,724

 

Restricted stock units issued

 

 

183

 

 

 

2

 

 

 

(211

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(209

)

Share based compensation earned

 

 

 

 

 

 

 

 

915

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

915

 

Common stock repurchase and retirement (see Note 8)

 

 

(725

)

 

 

(7

)

 

 

(4,317

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,324

)

Translation gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,966

)

 

 

 

 

 

 

 

 

 

 

 

(2,966

)

Fair value of noncontrolling interest equity (see Note 14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(901

)

 

 

(901

)

Balance June 30, 2022

 

 

34,534

 

 

$

345

 

 

$

250,262

 

 

$

(29,538

)

 

$

(15,567

)

 

 

 

 

$

 

 

$

4,959

 

 

$

210,461

 

 

 

The notes to the condensed consolidated financial statements are an integral part of the above statements.

 

5


 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

Six months ended June 30,

 

(dollars in thousands)

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

7,536

 

 

$

1,680

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

4,668

 

 

 

4,906

 

Unrealized foreign currency loss

 

 

(5

)

 

 

1,628

 

Fair value adjustment to earnout liabilities

 

 

 

 

 

500

 

Earnout payments

 

 

(1,007

)

 

 

 

Gain on sale of property and equipment

 

 

(7

)

 

 

(67

)

Debt discount amortization

 

 

187

 

 

 

203

 

Share-based compensation expense

 

 

1,792

 

 

 

1,581

 

Bad debt expense

 

 

441

 

 

 

110

 

Inventory reserve expense

 

 

110

 

 

 

209

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Accounts receivable

 

 

(18,582

)

 

 

(2,638

)

Costs and estimated earnings in excess of billings on uncompleted contracts

 

 

597

 

 

 

(1,319

)

Inventories

 

 

(3,393

)

 

 

(409

)

Prepaid expense and other current assets

 

 

637

 

 

 

3,642

 

Deferred charges and other assets

 

 

2,472

 

 

 

(496

)

Accounts payable and accrued expenses

 

 

16,538

 

 

 

(2,784

)

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

7,846

 

 

 

(1,490

)

Income taxes payable

 

 

1,266

 

 

 

(508

)

Other liabilities

 

 

(2,405

)

 

 

(639

)

Net cash provided by operating activities

 

 

18,691

 

 

 

4,109

 

Cash flows from investing activities:

 

 

 

 

 

 

Acquisitions of property and equipment

 

 

(1,432

)

 

 

(997

)

Net proceeds from sale of assets

 

 

7

 

 

 

534

 

Net cash paid for acquisitions

 

 

(37,372

)

 

 

 

Net cash used in investing activities

 

 

(38,797

)

 

 

(463

)

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings on revolving credit lines

 

 

47,600

 

 

 

18,200

 

Repayments on revolving credit lines

 

 

(24,900

)

 

 

(22,300

)

Borrowings on long-term debt

 

 

11,000

 

 

 

 

Repayments of long-term debt

 

 

(1,469

)

 

 

(1,250

)

Deferred financing fees paid

 

 

(130

)

 

 

 

Payments on finance leases and financing liability

 

 

(293

)

 

 

(271

)

Earnout payments

 

 

 

 

 

(823

)

Proceeds from employee stock purchase plan and exercise of stock options

 

 

71

 

 

 

128

 

Noncontrolling interest distributions

 

 

(900

)

 

 

(107

)

Common stock repurchase

 

 

(4,324

)

 

 

 

Net cash provided by (used in) financing activities

 

 

26,655

 

 

 

(6,423

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(3,091

)

 

 

(514

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

3,458

 

 

 

(3,291

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

31,995

 

 

 

37,811

 

Cash, cash equivalents and restricted cash at end of period

 

$

35,453

 

 

$

34,520

 

Cash paid (received) during the period for:

 

 

 

 

 

 

Interest

 

$

1,821

 

 

$

1,122

 

Income taxes

 

$

970

 

 

$

(3,006

)

 

 

 

 

 

 

 

 

 

The notes to the condensed consolidated financial statements are an integral part of the above statements.

 

6


 

CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Reporting for Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements of CECO Environmental Corp. and its subsidiaries (the “Company,” “CECO,” “we,” “us,” or “our”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of June 30, 2022 and the results of operations, cash flows and shareholders’ equity for the three-month and six-month periods ended June 30, 2022 and 2021. The results of operations for the three-month and six-month periods ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year. The balance sheet as of December 31, 2021 has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on March 14, 2022 (the “Form 10-K”).

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

These financial statements and accompanying notes should be read in conjunction with the audited financial statements and the notes thereto included in the Form 10-K.

Unless otherwise indicated, all balances within tables are in thousands, except per share amounts.

COVID-19

A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. As of June 30, 2022, the virus, including new emerging variants, continues to spread and has had a significant impact on worldwide economic activity, on macroeconomic conditions and the end markets of our business.

The outbreak and a continued spread of COVID-19 has resulted in a substantial curtailment of business activities worldwide and has caused weakened economic conditions, both in the United States and abroad. Although vaccines are available in various countries where we operate, it is possible the COVID-19 pandemic may continue to have a negative impact on the Company's ongoing operations and the end markets in which it serves. However, the full impact of the COVID-19 pandemic continues to evolve as of the date of this filing, and as such, it is uncertain as to the full magnitude or lasting impact that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the pandemic on its financial condition, liquidity, operations, suppliers, industry, and workforce.

2. New Financial Accounting Pronouncements

Accounting Standards adopted in Fiscal 2022

None.

Accounting Standards to be Adopted

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which addresses how an acquirer should recognize and measure revenue contracts acquired in a business combination. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position and/or results of operations.

7


 

3. Accounts Receivable

(table only in thousands)

 

June 30, 2022

 

 

December 31, 2021

 

Contract receivables

 

$

75,841

 

 

$

65,932

 

Trade receivables

 

 

23,285

 

 

 

12,537

 

Allowance for doubtful accounts

 

 

(3,808

)

 

 

(3,478

)

Total accounts receivable

 

$

95,318

 

 

$

74,991

 

Balances billed but not paid by customers under retainage provisions in contracts within the Condensed Consolidated Balance Sheets amounted to approximately $1.6 million and $1.8 million at June 30, 2022 and December 31, 2021, respectively. Retainage receivables on contracts in progress are generally collected within a year or two subsequent to contract completion, and are recorded in either accounts receivable, net or deferred charges and other assets within the Condensed Consolidated Balance Sheets depending on timing of expected collection.

Bad debt expense was approximately $0.4 million and $0.1 million for the three-month periods ended June 30, 2022 and 2021, respectively, and $0.4 million and $0.1 million for the six-month periods ended June 30, 2022 and 2021, respectively.

4. Inventories

(table only in thousands)

 

June 30, 2022

 

 

December 31, 2021

 

Raw materials

 

$

17,607

 

 

$

13,405

 

Work in process

 

 

6,738

 

 

 

5,147

 

Finished goods

 

 

2,439

 

 

 

674

 

Obsolescence allowance

 

 

(2,803

)

 

 

(2,174

)

Total inventories

 

$

23,981

 

 

$

17,052

 

Amounts credited to the allowance for obsolete inventory and charged to cost of sales amounted to ($0.1) million and $0.1 million for the three-month periods ended June 30, 2022 and 2021, and $0.1 million and $0.2 million for the six-month periods ended June 30, 2022 and 2021, respectively.

5. Goodwill and Intangible Assets

(table only in thousands)

 

Six months ended June 30, 2022

 

 

Year ended December 31, 2021

 

Goodwill / Tradename

 

Goodwill

 

 

Tradename

 

 

Goodwill

 

 

Tradename

 

Beginning balance

 

$

161,183

 

 

$

9,629

 

 

$

161,820

 

 

$

12,937

 

Acquisitions

 

 

25,680

 

 

 

 

 

 

 

 

 

 

Transfers to finite life classification

 

 

 

 

 

 

 

 

 

 

 

(3,150

)

Foreign currency translation

 

 

(1,068

)

 

 

(135

)

 

 

(637

)

 

 

(158

)

 

 

$

185,795

 

 

$

9,494

 

 

$

161,183

 

 

$

9,629

 

 

(table only in thousands)

 

As of June 30, 2022

 

 

As of December 31, 2021

 

Intangible assets – finite life

 

Cost

 

 

Accum. Amort.

 

 

Cost

 

 

Accum. Amort.

 

Technology

 

$

14,457

 

 

$

14,371

 

 

$

14,457

 

 

$

13,704

 

Customer lists

 

 

85,289

 

 

 

55,658

 

 

 

73,199

 

 

 

53,970

 

Tradename

 

 

10,918

 

 

 

3,179

 

 

 

9,728

 

 

 

2,745

 

Foreign currency adjustments

 

 

(1,895

)

 

 

(233

)

 

 

(2,149

)

 

 

(1,025

)

 

 

$

108,769

 

 

$

72,975

 

 

$

95,235

 

 

$

69,394

 

Activity for the six-months ended June 30, 2022 and 2021 is as follows:

(table only in thousands)

 

2022

 

 

2021

 

Intangible assets – finite life, net at beginning of period

 

$

25,841

 

 

$

29,637

 

Amortization expense

 

 

(2,789

)

 

 

(3,359

)

Transfers from indefinite life classification

 

 

 

 

 

3,150

 

Acquisition

 

 

13,280

 

 

 

 

Foreign currency adjustments

 

 

(538

)

 

 

(59

)

Intangible assets – finite life, net at end of period

 

$

35,794

 

 

$

29,369

 

 

8


 

Amortization expense of finite life intangible assets was $1.5 million and $1.7 million for the three-month periods ended June 30, 2022 and 2021, respectively and $2.8 million and $3.4 million for the six-month periods ended June 30, 2022 and 2021, respectively. Amortization over the next five years for finite life intangibles is expected to be $3.9 million for the remainder of 2022, $6.5 million in 2023, $5.6 million in 2024, $4.5 million in 2025, and $3.2 million in 2026.

The Company completes an annual (or more often if circumstances require) goodwill and indefinite life intangible asset impairment assessment on October 1. As a part of its impairment assessment, the Company first qualitatively assesses whether current events or changes in circumstances lead to a determination that it is more likely than not (defined as a likelihood of more than 50 percent) that the fair value of a reporting unit or indefinite life intangible asset is less than its carrying amount. If there is a qualitative determination that the fair value is more likely than not greater than the carrying value, the Company does not need to quantitatively test for impairment. If this qualitative assessment indicates a more likely than not potential that the asset may be impaired, the estimated fair value is calculated. If the estimated fair value is less than carrying value, an impairment charge is recorded.

As of June 30, 2022, we reviewed our previous forecasts and assumptions based on our current projections, which are subject to various risks and uncertainties, including projected revenue, projected operational profit, terminal growth rates, and the cost of capital. The Company did not identify any triggering events during the three-month period ended June 30, 2022 that would require an interim impairment assessment of goodwill or intangible assets.

The Company’s assumptions about future conditions important to its assessment of potential impairment of its goodwill and indefinite life intangible assets, including the impacts of the COVID-19 pandemic, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analysis accordingly.

6. Accounts Payable and Accrued Expenses

(table only in thousands)

 

June 30, 2022

 

 

December 31, 2021

 

Trade accounts payable, including amounts due to subcontractors

 

$

69,379

 

 

$

56,242

 

Compensation and related benefits

 

 

6,279

 

 

 

6,065

 

Accrued warranty

 

 

3,660

 

 

 

3,074

 

Contract liabilities

 

 

5,966

 

 

 

4,405

 

Short-term lease liability

 

 

3,086

 

 

 

2,414

 

Other

 

 

12,863

 

 

 

11,881

 

Total accounts payable and accrued expenses

 

$

101,233

 

 

$

84,081

 

 

7. Senior Debt

Debt consisted of the following:

(table only in thousands)

 

June 30, 2022

 

 

December 31, 2021

 

Outstanding borrowings under the Credit Facility (defined below).
Term loan payable in
quarterly principal installments of $0.6 million through September 2023, and $0.8 million through September 2025 and $1.1 million thereafter with balance due upon maturity in September 2026.

 

 

 

 

 

 

 - Term loan

 

$

42,410

 

 

$

43,511

 

 - Revolving credit loan

 

 

44,700

 

 

 

22,000

 

 Total outstanding borrowing under the Credit Facility

 

 

87,110

 

 

 

65,511

 

 Outstanding borrowing under the joint venture term debt

 

 

10,506

 

 

 

 

 Unamortized debt discount

 

 

(1,545

)

 

 

(1,731

)

 Total outstanding borrowings

 

 

96,071

 

 

 

63,780

 

 Less: current portion

 

 

(3,303

)

 

 

(2,203

)

 Total debt, less current portion

 

$

92,768

 

 

$

61,577

 

Scheduled principal payments under our Credit Facility and joint venture term debt are $1.6 million remaining in 2022, $3.6 million in 2023, $4.9 million in 2024, $5.2 million in 2025, $78.4 million in 2026, and $3.9 million in 2027.

9


 

Credit Facility

As of June 30, 2022 and December 31, 2021, $20.7 million and $14.5 million of letters of credit were outstanding, respectively. Total unused credit availability under the Company’s senior secured term loan and senior secured revolver loan with sub-facilities for letters of credit, swing-line loans and senior secured multi-currency loans (the "Credit Facility") was $62.4 million and $45.9 million at June 30, 2022 and December 31, 2021, respectively. Revolving loans may be borrowed, repaid and reborrowed until December 17, 2026, at which time all outstanding balances of the Credit Facility must be repaid.

At the Company’s option, revolving loans and the term loans accrue interest at a per annum rate based on either the highest of (a) the federal funds rate plus 0.5%, (b) the Agent’s prime lending rate, (c) Daily Simple SOFR plus the Daily Simple SOFR Adjustment of 0.11448% plus 1.0%, or (d) 1.0%, plus a margin ranging from 1.75% to 2.75% depending on the Company’s Consolidated Leverage Ratio (“Base Rate”), or (d) a one/three/six-month Term SOFR Rate (as defined in the Credit Agreement) plus the Term SOFR Adjustment ranging from 0.11% to 0.43% plus 1.75% to 2.75% depending on the Company’s Consolidated Leverage Ratio. Interest on swing line loans is the Base Rate.


Interest on Base Rate loans is payable quarterly in arrears on the last day of each calendar quarter and at maturity. Interest on Term SOFR rate loans is payable on the last date of each applicable Interest Period (as defined in the agreement), but in no event less than once every three months and at maturity. The weighted average stated interest rate on outstanding borrowings was
3.85% and 2.54% at June 30, 2022 and December 31, 2021, respectively. Under the terms of the Credit Facility, the Company is required to maintain certain financial covenants, including the maintenance of a Consolidated Net Leverage Ratio (as defined in the Credit Facility). Through September 30, 2023, the maximum Consolidated Net Leverage Ratio is 3.75, after which time it will decrease to 3.50 until the end of the term of the Credit Facility.


The Company has granted a security interest in substantially all of its assets to secure its obligations pursuant to the Credit Facility. The Company’s obligations under the Credit Agreement are guaranteed by the Company’s U.S. subsidiaries and such guaranty obligations are secured by a security interest on substantially all the assets of such subsidiaries, including certain real property. The Company’s obligations under the Credit Agreement may also be guaranteed by the Company’s material foreign subsidiaries to the extent no adverse tax consequences would result to the Company.


As of June 30, 2022 and December 31, 2021, the Company was in compliance with all related financial and other restrictive covenants under the Credit Facility.

Joint Venture Debt

On March 7, 2022, our Effox-Flextor-Mader, Inc. joint venture ("EFM JV") entered into a loan agreement secured by the assets of the EFM JV in the aggregate principal amount of $11.0 million for the acquisition of General Rubber, LLC ("GRC"), as further described in Note 14. As of June 30, 2022, $10.5 million was outstanding under the loan. Principal will be paid back to the lender monthly with final installment due by February 27, 2027. Interest is accrued at the per annum rate based on EFM JV's choice of the 1/3/6 month Term SOFR rate plus 3.25%, with a floor rate of 3.75%. Interest is paid monthly on the last day of each month. The interest rate at June 30, 2022 was 3.90%. As of June 30, 2022, the EFM JV was in compliance with all related financial and other restrictive covenants under this loan agreement. This loan balance does not impact the Company’s borrowing capacity or the financial covenants under the Credit Facility.

Foreign Debt

The Company has a number of bank guarantee facilities and bilateral lines of credit in various foreign countries currently supported by cash, letters of credit or pledged assets and collateral under the Credit Facility. The Credit Facility allows letters of credit and bank guarantee issuances of up to $65.0 million from the bilateral lines of credit secured by pledged assets and collateral under the Credit Facility. As of June 30, 2022, $18.6 million in bank guarantees were outstanding. In addition, a subsidiary of the Company located in the Netherlands has a Euro-denominated bank guarantee agreement secured by local assets under which $0.7 million in bank guarantees were outstanding as of June 30, 2022. Additionally, a subsidiary of the Company in China recently entered into a renminbi ("RMB") denominated bank guarantee agreement secured primarily by local assets. As of June 30, 2022, the borrowers of these facilities and agreements were in compliance with all related financial and other restrictive covenants.

 

10


 

8. Earnings per Share

The computational components of basic and diluted earnings per share for the three-month periods ended June 30, are below.

 

 

2022

 

 

2021

 

(table only in thousands)
Numerator
(for basic and diluted earnings per share)

 

 

 

 

 

 

 Net income attributable to CECO Environmental Corp.

 

$

4,385

 

 

$

293

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

Basic weighted-average shares outstanding

 

 

34,873

 

 

 

35,492

 

Common stock equivalents arising from stock options and restricted stock awards

 

 

168

 

 

 

327

 

Diluted weighted-average shares outstanding

 

 

35,041

 

 

 

35,819

 

The computational components of basic and diluted earnings per share for the six-month periods ended June 30, are below.

 

 

2022

 

 

2021

 

(table only in thousands)
Numerator
(for basic and diluted earnings per share)

 

 

 

 

 

 

 Net income attributable to CECO Environmental Corp.

 

$

7,180

 

 

$

1,474

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

Basic weighted-average shares outstanding

 

 

34,962

 

 

 

35,444

 

Common stock equivalents arising from stock options and restricted stock awards

 

 

158

 

 

 

353

 

Diluted weighted-average shares outstanding

 

 

35,120

 

 

 

35,797

 

Options and restricted stock units included in the computation of diluted earnings per share are calculated using the treasury stock method. For both the three-month periods ended June 30, 2022 and 2021, 1.9 million, and for the six-month periods ended June 30, 2022 and 2021, 2.0 million and 1.7 million, respectively, of outstanding options and restricted stock units were excluded from the computation of diluted earnings per share due to their having an anti-dilutive effect.

Once a restricted stock unit vests, it is included in the computation of weighted average shares outstanding for purposes of basic and diluted earnings per share.

Common Stock Repurchase

On May 10, 2022, the Company's Board of Directors authorized a share repurchase program under which CECO may purchase up to $20.0 million of its outstanding shares of common stock through April 30, 2025. The authorization permits the Company to repurchase shares in the open market, through accelerated share repurchases, block trades, 10b5-1 plans or through privately negotiated transactions in accordance with applicable laws, rules and regulations. Through June 30, 2022, the Company has repurchased and retired approximately 725,000 shares of common stock at a cost of $4.3 million.

9. Share-Based Compensation

The Company accounts for share-based compensation in accordance with Accounting Standards Codification (“ASC”) Topic 718, “Compensation – Stock Compensation,” which requires the Company to recognize compensation expense for share-based awards, measured at the fair value of the awards at the grant date. The Company recognized $0.9 million of share-based compensation related expense during the three-month periods ended June 30, 2022 and 2021, respectively, and $1.8 million and $1.6 million during the six-month periods ended June 30, 2022 and 2021, respectively.

The Company granted approximately 104,000 and 460,000 restricted stock units during the three-month periods ended June 30, 2022 and 2021, respectively, and approximately 688,000 and 460,000 restricted stock units during the six-month periods ended June 30, 2022 and 2021, respectively.

There were zero and 2,000 options exercised during the six-months ended June 30, 2022 and 2021, respectively. The Company received zero and $13,000 in cash from employees and a non-employee director exercising options during the six-months ended June 30, 2021. The intrinsic value of options exercised during the six-months ended June 30, 2022 and 2021 was zero and $3,000, respectively.

11


 

10. Pension and Employee Benefit Plans

We sponsor a non-contributory defined benefit pension plan for certain union employees. The plan is funded in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974.

We present the components of net periodic benefit cost (gain) within “Other income (expense), net” on the Condensed Consolidated Statements of Income.

Retirement plan expense is based on valuations performed by plan actuaries as of the beginning of each fiscal year. The components of the expense consisted of the following:

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(table only in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Pension plan:

 

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

$

220

 

 

$

194

 

 

$

439

 

 

$

388

 

Expected return on plan assets

 

 

(390

)

 

 

(378

)

 

 

(780

)

 

 

(756

)

Amortization of net actuarial loss

 

 

65

 

 

 

103

 

 

 

131

 

 

 

206

 

Net periodic benefit (gain) cost

 

$

(105

)

 

$

(81

)

 

$

(210

)

 

$

(162

)

We made no contributions to our defined benefit plan during the six-months ended June 30, 2022 and 2021, respectively. For the remainder of 2022, we do not expect to make any contributions to fund the pension plan. The unfunded liability of the plan of $5.4 million and $5.6 million as of June 30, 2022 and December 31, 2021, respectively, is included in “Other liabilities” on our Condensed Consolidated Balance Sheets.

11. Income Taxes

We file income tax returns in various federal, state and local jurisdictions. Tax years from 2018 forward remain open for examination by Federal authorities. Tax years from 2016 forward remain open for all significant state and foreign authorities.

We account for uncertain tax positions pursuant to ASC Topic 740, “Income Taxes.” As of June 30, 2022 and December 31, 2021, the liability for uncertain tax positions totaled approximately $0.1 million, which is included in “Other liabilities” on our Condensed Consolidated Balance Sheets. We recognize accrued interest related to uncertain tax positions and penalties, if any, in income tax expense within the Condensed Consolidated Statements of Operations.

Certain of the Company’s undistributed earnings of our foreign subsidiaries are not permanently reinvested. Since foreign earnings have already been subject to United States income tax in 2017 as a result of the 2017 Tax Cuts and Jobs Act, we intend to repatriate foreign-held cash as needed. We record deferred income tax attributable to foreign withholding taxes that would become payable should we decide to repatriate cash held in our foreign operations. As of June 30, 2022 and December 31, 2021, we have recorded deferred income taxes of approximately $1.5 million and $1.1 million, respectively, on the undistributed earnings of our foreign subsidiaries.

Income tax expense was $1.9 million for the second quarter of 2022 and $3.0 million for the first six months of 2022 compared with income tax expense of $0.2 million for the second quarter of 2021 and $0.8 million for the first six months of 2021. The effective income tax rate for the second quarter of 2022 was 28.3% compared with 34.3% for the second quarter of 2021. The effective income tax rate for the first six months of 2022 was 28.3% compared with 30.9% for the first six months of 2021. The effective income tax rate for the three and six months ended June 30, 2022 is higher than the United States federal statutory rate. Our effective rate is affected by certain other permanent differences, including state income taxes, non-deductible incentive stock-based compensation and differences in tax rates among jurisdictions in which we operate.

12. Financial Instruments

Our financial instruments consist primarily of investments in cash and cash equivalents, receivables and certain other assets, foreign debt and accounts payable, which approximate fair value at June 30, 2022 and December 31, 2021, due to their short-term nature or variable, market-driven interest rates.

The fair value of the debt issued under the Credit Facility and joint venture term loan was $97.6 million and $65.5 million at June 30, 2022 and December 31, 2021, respectively. The fair value was determined considering market conditions, our credit worthiness and the current terms of our debt, which is considered Level 2 on the fair value hierarchy.

12


 

At June 30, 2022 and December 31, 2021, the Company had cash and cash equivalents of $34.4 million and $29.9 million, respectively, of which $26.5 million and $22.6 million, respectively, was held outside of the United States, principally in the Netherlands, United Kingdom, China, and Canada.

13. Commitments and Contingencies – Legal Matters

Asbestos cases

Our subsidiary, Met-Pro Technologies LLC (“Met-Pro”), beginning in 2002, began to be named in asbestos-related lawsuits filed against a large number of industrial companies including, in particular, those in the pump and fluid handling industries. In management’s opinion, the complaints typically have been vague, general and speculative, alleging that Met-Pro, along with the numerous other defendants, sold unidentified asbestos-containing products and engaged in other related actions which caused injuries (including death) and loss to the plaintiffs. Counsel has advised that more recent cases typically allege more serious claims of mesothelioma. The Company’s insurers have hired attorneys who, together with the Company, are vigorously defending these cases. Many cases have been dismissed after the plaintiff fails to produce evidence of exposure to Met-Pro’s products. In those cases, where evidence has been produced, the Company’s experience has been that the exposure levels are low and the Company’s position has been that its products were not a cause of death, injury or loss. The Company has been dismissed from or settled a large number of these cases. Cumulative settlement payments from 2002 through June 30, 2022 for cases involving asbestos-related claims were $5.7 million, of which, together with all legal fees other than corporate counsel expenses, $5.6 million has been paid by the Company’s insurers. The average cost per settled claim, excluding legal fees, was approximately $44,000.

Based upon the most recent information available to the Company regarding such claims, there were a total of 256 cases pending against the Company as of June 30, 2022 (with Illinois, New York, Pennsylvania and West Virginia having the largest number of cases), as compared with 223 cases that were pending as of December 31, 2021. During the six-months ended June 30, 2022, 79 new cases were filed against the Company, and the Company was dismissed from 36 cases and settled 10 cases. Most of the pending cases have not advanced beyond the early stages of discovery, although a number of cases are on schedules leading to or scheduled for trial. The Company believes that its insurance coverage is adequate for the cases currently pending against the Company and for the foreseeable future, assuming a continuation of the current volume, nature of cases and settlement amounts. However, the Company has no control over the number and nature of cases that are filed against it, nor as to the financial health of its insurers or their position as to coverage. The Company also presently believes that none of the pending cases will have a material adverse impact upon the Company’s results of operations, liquidity or financial condition.

Other

The Company is also a party to routine contract and employment-related litigation matters, warranty claims and routine audits of state and local tax returns arising in the ordinary course of its business.

The final outcome and impact of open matters, and related claims and investigations that may be brought in the future, are subject to many variables, and cannot be predicted. In accordance with ASC 450, “Contingencies,” and related guidance, we record accruals for estimated losses relating to claims and lawsuits when available information indicates that a loss is probable and the amount of the loss, or range of loss, can be reasonably estimated. The Company expenses legal costs as they are incurred.

We are not aware of any pending claims or assessments, other than as described above, which may have a material adverse impact on our liquidity, financial position, results of operations, or cash flows.

14. Acquisitions and Joint Ventures

General Rubber LLC

On March 7, 2022, the Company, through the EFM JV, acquired 100% of the equity interests of General Rubber LLC ("GRC") for $19.7 million in cash, which was financed with a combination of a draw on the Company's revolving credit facility and issuance of term debt by the EFM JV (see Note 7). As additional consideration, the former owners were issued 10% of the equity interest in the EFM JV. The fair value ascribed to the equity interest was approximately $4.1 million. During the three-month period ended June 30, 2022, we recorded an adjustment of $0.9 million to the fair value of the equity interest, as reflected in the Condensed Consolidated Statement of Shareholders' Equity. As of June 30, 2022, there were $13.7 million in current assets, $28.5 million in long-lived assets, and $30.5 million in total liabilities related to the EFM JV included in our Condensed Consolidated Balance Sheets.

13


 

GRC engineers and manufactures non-metallic expansion joints and flow control products including rubber expansion joints, ducting expansion joints, and industrial pinch and duck bill valves, serving the industrial water and wastewater markets. The acquisition diversifies and expands our EFM JV product offerings within our Engineered Systems segment. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of closing.

(table only in thousands)

 

 

 

Current assets (including cash of $137)

 

$

4,963

 

Property and equipment

 

 

459

 

Goodwill

 

 

11,120

 

Intangible - finite life

 

 

8,380

 

Total assets acquired

 

 

24,922

 

Current liabilities assumed

 

 

(714

)

Deferred income tax liability

 

 

(388

)

Net assets acquired

 

$

23,820

 

During the three and six-months ended June 30, 2022, GRC accounted for $3.8 million and $4.5 million in revenue, respectively and $0.5 million and $0.8 million, respectively of net income included in the Company’s results.

Compass Water Solutions, Inc.

On May 3, 2022, the Company acquired 100% of the equity interests of Compass Water Solutions, Inc. ("Compass") for $9.0 million in cash, which was financed with a draw on the Company’s revolving credit facility, and $2.0 million in notes payable over two years. As additional consideration, the former owners are entitled to earn-out payments based upon a multiple of specified financial results through April 30, 2023. Based on projections at the acquisition date, the Company estimated the fair value of the earn-out to be $1.4 million. As of June 30, 2022, the earnout liability recorded in “Accounts payable and accrued expenses” on the Condensed Consolidated Balance Sheets is $1.4 million.

Compass, is a leading global supplier of membrane-based industrial water and wastewater treatment systems that help customers achieve regulatory compliance of water discharge at the lowest lifecycle cost. The acquisition diversifies and expands our industrial water product offerings within our Engineered Systems segment. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of closing.

(table only in thousands)

 

 

 

Current assets (including cash of $334)

 

$

4,796

 

Property and equipment

 

 

101

 

Goodwill

 

 

4,848

 

Intangible - finite life

 

 

4,900

 

Total assets acquired

 

 

14,645

 

Current liabilities assumed

 

 

(623

)

Deferred income tax liability

 

 

(1,627

)

Net assets acquired

 

$

12,395

 

During the three and six-months ended June 30, 2022, Compass accounted for $0.8 million in revenue, and $0.1 million of net loss included in the Company’s results.

Western Air Ducts Ltd.

On June 22, 2022, the Company acquired 100% of the equity interests of Western Air Ducts Limited for $10.7 million in cash, which was financed with a draw on the Company’s revolving credit facility, and deferred cash consideration of $0.8 million payable in one year. The deferred consideration is recorded in “Accounts payable and accrued expenses” on the Condensed Consolidated Balance Sheets.

Western Air Ducts is a leading European supplier of dust and fume extraction solutions, providing consultation, design, manufacturing, installation, and service. The acquisition diversifies and expands our industrial air product offerings within our Industrial Process Solutions segment. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of closing.

14


 

(table only in thousands)

 

 

 

Current assets (including cash of $1,557)

 

$

2,711

 

Property and equipment

 

 

188

 

Goodwill

 

 

9,712

 

Total assets acquired

 

 

12,611

 

Current liabilities assumed

 

 

(1,127

)

Deferred income tax liability

 

 

(34

)

Net assets acquired

 

$

11,450

 

The approximate fair values of the assets acquired and liabilities assumed related to the acquisitions are based on preliminary estimates and assumptions. These preliminary estimates and assumptions could change significantly during the purchase price measurement period as we finalize the valuation of assets acquired and liabilities assumed. These changes could result in material variances between the Company's future financial results, including variances in the estimated purchase price, fair values recorded and expenses associated with these items.

Goodwill recognized represents value the Company expects to be created by combining the various operations of the acquired businesses with the Company’s operations, including the expansion into markets within existing business segments, access to new customers and potential cost savings and synergies. Goodwill related to these acquisitions is not deductible for tax purposes.

Acquisition and integration expenses on the Condensed Consolidated Statements of Income are related to acquisition activities, which include retention, legal, accounting, banking, and other expenses.

The following unaudited pro forma financial information represents the Company’s results of operations as if the GRC, Compass, and Western Air Ducts acquisitions had occurred on January 1, 2021:

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(table in thousands, except per share data)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net sales

 

$

106,995

 

 

$

85,828

 

 

$

204,280

 

 

$

164,979

 

Net income attributable to CECO Environmental Corp.

 

 

4,573

 

 

 

431

 

 

 

7,508

 

 

 

2,415

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

 

$

0.01

 

 

$

0.21

 

 

$

0.07

 

Diluted

 

$

0.13

 

 

$

0.01

 

 

$

0.21

 

 

$

0.07

 

The pro forma results have been prepared for informational purposes only and include adjustments to amortize acquired intangible assets with finite life, reflect additional interest expense on debt used to fund the acquisition, and to record the income tax consequences of the pro forma adjustments. These pro forma results do not purport to be indicative of the results of operations that would have occurred had the purchase been made as of the beginning of the periods presented or of the results of operations that may occur in the future.

15. Business Segment Information

The Company’s operations are organized and reviewed by management along with its solutions or end markets that the segment serves and presented in two reportable segments. The results of the segments are reviewed through the “Income from operations” line on the Condensed Consolidated Statements of Income.

The Company’s reportable segments are organized as groups of similar products and services, as described as follows:

Engineered Systems segment: Our Engineered Systems segment serves the general industrial, power generation, refinery, water/wastewater, midstream oil & gas, and other energy transition markets. We are a key part of helping meet the global demand for environmental and equipment protection through our highly engineered platforms including emissions management, fluid bed cyclones, thermal acoustics, separation & filtration (gas & water), and dampers & expansion joints.

Industrial Process Solutions segment: Our Industrial Process Solutions segment serves the broad industrial air pollution control, beverage can, fluid handling, electric vehicle production, food and beverage, semi-conductor, process filtration, pharmaceutical, petrochemical, wastewater treatment, wood manufacturing, desalination, and aquaculture markets. We protect the air we collectively breathe, maintain clean and safe operations for employees, lower energy consumption, minimize waste

15


 

for customers, and ensure they meet regulatory compliance standards for toxic emissions, fumes, volatile organic compounds and odors through our platforms including duct & installation, industrial air, and fluid handling.

The financial segment information is presented in the following tables:

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(dollars in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net sales (less intra-, inter-segment sales)

 

 

 

 

 

 

 

 

 

 

 

 

Engineered Systems segment

 

$

67,333

 

 

$

43,360

 

 

$

124,308

 

 

$

85,417

 

Industrial Process Solutions segment

 

 

38,042

 

 

 

35,320

 

 

 

73,503

 

 

 

65,155

 

Net sales

 

$

105,375

 

 

$

78,680

 

 

$

197,811

 

 

$

150,572

 

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(dollars in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Income from operations

 

 

 

 

 

 

 

 

 

 

 

 

Engineered Systems segment

 

$

9,006

 

 

$

5,634

 

 

$

15,476

 

 

$

11,804

 

Industrial Process Solutions segment

 

 

5,482

 

 

 

4,441

 

 

 

9,621

 

 

 

8,263

 

Corporate and Other(1)

 

 

(8,742

)

 

 

(7,930

)

 

 

(14,147

)

 

 

(14,868

)

Income from operations

 

$

5,746

 

 

$

2,145

 

 

$

10,950

 

 

$

5,199

 

 

(1)
Includes corporate compensation, professional services, information technology, and other general and administrative corporate expenses.

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(dollars in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Property and equipment additions

 

 

 

 

 

 

 

 

 

 

 

 

Engineered Systems segment

 

$

27

 

 

$

55

 

 

$

32

 

 

$

64

 

Industrial Process Solutions segment

 

 

340

 

 

 

172

 

 

 

412

 

 

 

362

 

Corporate and Other

 

 

400

 

 

 

278

 

 

 

988

 

 

 

571

 

Property and equipment additions

 

$

767

 

 

$

505

 

 

$

1,432

 

 

$

997

 

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(dollars in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

Engineered Systems segment

 

$

960

 

 

$

1,070

 

 

$

1,855

 

 

$

2,137

 

Industrial Process Solutions segment

 

 

1,009

 

 

 

1,073

 

 

 

2,059

 

 

 

2,141

 

Corporate and Other

 

 

410

 

 

 

328

 

 

 

754

 

 

 

628

 

Depreciation and amortization

 

$

2,379

 

 

$

2,471

 

 

$

4,668

 

 

$

4,906

 

 

(dollars in thousands)

 

June 30, 2022

 

 

December 31, 2021

 

Identifiable assets

 

 

 

 

 

 

Engineered Systems segment

 

$

315,743

 

 

$

262,558

 

Industrial Process Solutions segment

 

 

152,689

 

 

 

141,975

 

Corporate and Other(2)

 

 

13,297

 

 

 

11,664

 

Identifiable assets

 

$

481,729

 

 

$

416,197

 

 

(2)
Corporate and Other assets consist primarily of cash and income tax related assets.

 

(dollars in thousands)

 

June 30, 2022

 

 

December 31, 2021

 

Goodwill

 

 

 

 

 

 

Engineered Systems segment

 

$

114,797

 

 

$

99,303

 

Industrial Process Solutions segment

 

 

70,998

 

 

 

61,880

 

Goodwill

 

$

185,795

 

 

$

161,183

 

 

16


 

Intra-segment and Inter-segment Revenues

The Company has multiple divisions that sell to each other within segments (intra-segment sales) and between segments (inter-segment sales) as indicated in the following tables:

 

 

 

Three months ended June 30, 2022

 

 

 

 

 

 

 

 

 

Less Inter-Segment Sales

 

 

(dollars in thousands)

 

Total
Sales

 

 

Intra-
Segment
Sales

 

 

Industrial Process Solutions

 

 

Engineered Systems

 

 

Net Sales to
Outside
Customers

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Engineered Systems segment

 

$

70,754

 

 

$

(3,231

)

 

$

(190

)

 

$

 

 

$

67,333

 

Industrial Process Solutions segment

 

 

39,901

 

 

 

(1,717

)

 

 

 

 

 

(142

)

 

 

38,042

 

Net sales

 

$

110,655

 

 

$

(4,948

)

 

$

(190

)

 

$

(142

)

 

$

105,375

 

 

 

 

Three months ended June 30, 2021

 

 

 

 

 

 

 

 

 

Less Inter-Segment Sales

 

 

(dollars in thousands)

 

Total
Sales

 

 

Intra-
Segment
Sales

 

 

Industrial Process Solutions

 

 

Engineered Systems

 

 

Net Sales to
Outside
Customers

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Engineered Systems segment

 

$

47,069

 

 

$

(3,513

)

 

$

(196

)

 

$

 

 

$

43,360

 

Industrial Process Solutions segment

 

 

41,245

 

 

 

(5,281

)

 

 

 

 

 

(644

)

 

 

35,320

 

Net sales

 

$

88,314

 

 

$

(8,794

)

 

$

(196

)

 

$

(644

)

 

$

78,680

 

 

 

 

Six months ended June 30, 2022

 

 

 

 

 

 

 

 

 

Less Inter-Segment Sales

 

 

(dollars in thousands)

 

Total
Sales

 

 

Intra-
Segment
Sales

 

 

Industrial Process Solutions

 

 

Engineered Systems

 

 

Net Sales to
Outside
Customers

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Engineered Systems segment

 

$

132,354

 

 

$

(7,789

)

 

$

(257

)

 

$

 

 

$

124,308

 

Industrial Process Solutions segment

 

 

77,043

 

 

 

(3,342

)

 

 

 

 

 

(198

)

 

 

73,503

 

Net sales

 

$

209,397

 

 

$

(11,131

)

 

$

(257

)

 

$

(198

)

 

$

197,811

 

 

 

 

Six months ended June 30, 2021

 

 

 

 

 

 

 

 

 

Less Inter-Segment Sales

 

 

(dollars in thousands)

 

Total
Sales

 

 

Intra-
Segment
Sales

 

 

Industrial Process Solutions

 

 

Engineered Systems

 

 

Net Sales to
Outside
Customers

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Engineered Systems segment

 

$

91,545

 

 

$

(5,887

)

 

$

(241

)

 

$

 

 

$

85,417

 

Industrial Process Solutions segment

 

 

74,178

 

 

 

(8,055

)

 

 

 

 

 

(968

)

 

 

65,155

 

Net sales

 

$

165,723

 

 

$

(13,942

)

 

$

(241

)

 

$

(968

)

 

$

150,572

 

 

 

17


 

CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company’s Condensed Consolidated Statements of Income for the three-month and six-month periods ended June 30, 2022 and 2021 reflect the consolidated operations of the Company and its subsidiaries.

CECO Environmental Corp. (“CECO,” “we,” “us,” or the “Company”) is a leading environmentally focused, diversified industrial company whose solutions protect people, the environment, and industrial equipment. We focus on engineering, designing, building, and installing systems that capture, clean and destroy air- and water-borne emissions from industrial facilities as well as fluid handling, gas and water separation, and filtration systems. CECO provides innovative technology and application expertise that helps companies grow their businesses with safe, clean, and more efficient solutions to protect our shared environment.

CECO serves diverse industries globally by working to improve air and water quality, protect customer’s equipment, and provide customized engineered solutions in our customers’ mission critical applications. The industries CECO serves include power generation, petrochemical processing, general industrial, refining, midstream oil & gas, electric vehicle production, poly silicon fabrication, battery recycling, and wastewater treatment, along with a wide range of other industries.

COVID-19

A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. The COVID-19 pandemic persists in geographic areas in which we have operations, suppliers, customers and employees, and has had a significant impact on worldwide economic activity and on macroeconomic conditions and the end markets of our business.

As a key supplier to critical infrastructure projects, CECO has worked to maintain ongoing operations. Within the United States, certain portions of our business have been designated an essential business, and we continue to operate our business in compliance with applicable state and local laws and are observing recommended Centers for Disease Control and Prevention guidelines to minimize the risk of spreading the COVID-19 virus including implementing, where possible, work-from-home procedures and additional sanitization efforts where facilities remain open to provide necessary services. This allows us to continue to serve our customers, however, the COVID-19 pandemic has also disrupted our international operations. Some of our facilities and our suppliers have experienced temporary disruptions as a result of the COVID-19 pandemic, and we continue to work closely with our global supply chain to proactively support customers during this critical time. We cannot predict whether our facilities will experience more significant disruptions in the future or the impact on our suppliers.

The senior management team meets regularly to review and assess the status of the Company's operations and the health and safety of its employees. The senior management team continues to monitor and manage the Company’s ability to operate effectively. We are currently experiencing shortages of raw materials and inflationary pressures for certain materials and labor. We expect these supply chain challenges and cost impacts to continue for the foreseeable future as markets recover. Although we have secured additional raw materials from existing and alternate suppliers and have taken other mitigating actions to mitigate supply disruptions, we cannot guarantee that we can continue to do so in the future. In this event, our business, results and financial condition could be adversely affected. Although vaccines are available in various countries where we operate, health concern risks remain and notwithstanding the Company's continued efforts, it is possible the COVID-19 pandemic could further impact our operations and the operations of our suppliers and venders, particularly in light of newly emerging variant strains of the virus becoming more dominant and the potential resumption of high levels of infection and hospitalization. We cannot predict whether any of our manufacturing, operations or suppliers will be disrupted by these events, or how long such disruptions would last. COVID-19 has had and may have further negative impacts on our operations, customers and supply chain despite the preventative and precautionary measures being taken.

 

18


 

Note Regarding Use of Non-GAAP Financial Measures

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These GAAP financial statements include certain charges the Company believes are not indicative of its core ongoing operational performance.

As a result, the Company provides financial information in this Management’s Discussion and Analysis that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides this non-GAAP financial information because the Company’s management utilizes it to evaluate its ongoing financial performance and the Company believes it provides greater transparency to investors as supplemental information to its GAAP results.

The Company has provided the non-GAAP financial measures of non-GAAP operating income and non-GAAP operating margin as a result of items that the Company believes are not indicative of its ongoing operations. These include transactions associated with the Company’s acquisitions, divestitures and the items described below in “Consolidated Results.” The Company believes that evaluation of its financial performance compared with prior and future periods can be enhanced by a presentation of results that exclude the impact of these items. The Company has incurred substantial expense and income associated with the acquisition and divestitures. While the Company cannot predict the exact timing or amounts of such charges, it does expect to treat the financial impact of these transactions as special items in its future presentation of non-GAAP results.

Results of Operations

Consolidated Results

Our Condensed Consolidated Statements of Income for the three-month and six-month periods ended June 30, 2022 and 2021 are as follows:

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(dollars in millions)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net sales

 

$

105.4

 

 

$

78.7

 

 

$

197.8

 

 

$

150.6

 

Cost of sales

 

 

73.7

 

 

 

53.5

 

 

 

139.7

 

 

 

100.9

 

Gross profit

 

$

31.7

 

 

$

25.2

 

 

$

58.1

 

 

$

49.7

 

Percent of sales

 

 

30.1

%

 

 

32.0

%

 

 

29.4

%

 

 

33.0

%

Selling and administrative expenses

 

 

23.0

 

 

 

20.6

 

 

 

41.6

 

 

 

40.0

 

Percent of sales

 

 

21.8

%

 

 

26.2

%

 

 

21.0

%

 

 

26.6

%

Amortization and earnout expenses

 

 

1.5

 

 

 

2.3

 

 

 

2.9

 

 

 

4.1

 

Restructuring expenses

 

 

 

 

 

0.3

 

 

 

0.1

 

 

 

0.3

 

Acquisition and integration expenses

 

 

1.5

 

 

 

 

 

 

2.5

 

 

 

0.1

 

Operating income

 

$

5.7

 

 

$

2.1

 

 

$

11.0

 

 

$

5.2

 

Operating margin

 

 

5.4

%

 

 

2.7

%

 

 

5.6

%

 

 

3.5

%

To compare operating performance between the three-month and six-month periods ended June 30, 2022 and 2021, the Company has adjusted GAAP operating income to exclude (1) amortization of intangible assets, earnout and retention expenses, (2) restructuring expenses primarily relating to severance, facility exits, and associated legal expenses, and (3) acquisition and integration expenses, which include legal, accounting, and other expenses.

The following table presents the reconciliation of GAAP operating income and GAAP operating margin to non-GAAP operating income and non-GAAP operating margin:

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(dollars in millions)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Operating income as reported in accordance with GAAP

 

$

5.7

 

 

$

2.1

 

 

$

11.0

 

 

$

5.2

 

Operating margin in accordance with GAAP

 

 

5.4

%

 

 

2.7

%

 

 

5.6

%

 

 

3.5

%

Amortization and earnout expenses

 

 

1.5

 

 

 

2.3

 

 

 

2.9

 

 

 

4.1

 

Restructuring expenses

 

 

 

 

 

0.3

 

 

 

0.1

 

 

 

0.3

 

Acquisition and integration expenses

 

 

1.5

 

 

 

 

 

 

2.5

 

 

 

0.1

 

Non-GAAP operating income

 

$

8.7

 

 

$

4.7

 

 

$

16.5

 

 

$

9.7

 

Non-GAAP operating margin

 

 

8.3

%

 

 

6.0

%

 

 

8.3

%

 

 

6.4

%

 

19


 

Net sales for the second quarter of 2022 increased $26.7 million, or 33.9%, to $105.4 million compared with $78.7 million in the second quarter of 2021. The increase is primarily attributable to increases of $8.4 million in our thermal acoustics technologies, $5.2 million in our damper and expansion products, $4.2 million in our emissions management technologies, $2.7 million across our entire industrial process solutions platforms, $2.7 million in our engineered cyclone systems, and $2.6 million in our separation and filtration technologies. For the $26.7 million increase in net sales, $22.1 million is attributable to organic growth, while $4.6 million is attributable to current year acquisitions.

Net sales for the first six months of 2022 increased $47.2 million, or 31.4%, to $197.8 million compared with $150.6 million in the first six months of 2021. The increase is primarily attributable to increases of $13.1 million in our emissions management technologies, $11.6 million in our thermal acoustics technologies, $7.5 million in our damper and expansion products, $6.5 million in our engineered cyclone systems, $3.9 million in our industrial air control technologies, and $3.9 million in our duct fabrication products and services. For the $47.2 million increase in net sales, $41.9 million is attributable to organic growth, while $5.3 million is attributable to current year acquisitions.

Gross profit increased $6.5 million, or 25.8%, to $31.7 million in the second quarter of 2022 compared with $25.2 million in the second quarter of 2021. The increase in gross profit is primarily attributable to in the increase in sales volume as described above. Gross profit as a percentage of sales decreased 1.9% to 30.1% in the second quarter of 2022 compared with 32.0% in the second quarter of 2021 due to inflation, supply chain challenges, and lower project margin mix executed during the three-month period ended June 30, 2022, partially offset by price increases.

Gross profit increased $8.4 million, or 16.9%, to $58.1 million in the first six months of 2022 compared with $49.7 million in the first six months of 2021. The increase in gross profit is primarily attributable to in the increase in sales volume as describe above. Gross profit as a percentage of sales decreased to 29.4% in the first six months of 2022 compared with 33.0% in the first six months of 2021 due to inflation, supply chain challenges, and lower project margin mix executed during the six-month period ended June 30, 2022, partially offset by price increases. We continue to experience shortages of raw materials and inflationary pressures for certain materials and labor. We expect these supply chain challenges and cost impacts to continue for the foreseeable future as markets recover. Although we have secured additional raw materials from existing and alternate suppliers and have taken other mitigating actions to mitigate supply disruptions, such as implementing price increases and applying material surcharges. We cannot guarantee that we can continue to do so in the future. In this event, our business, results and financial condition could be adversely affected.

Orders booked increased $28.0 million, or 32.7%, to $113.5 million during the second quarter of 2022 compared with $85.5 million in the second quarter of 2021. The increase is primarily attributable to increases of $34.2 million in our separation and filtration technologies, $5.0 million in our thermal acoustics technologies, $4.9 million in our industrial air control technologies, and $4.2 million in our damper and expansion products partially offset by a decrease of $20.2 million in our emissions management technologies. For the $28.0 million increase in orders, $23.0 million is attributable to organic growth, while $5.0 million is attributable to current year acquisitions.

Orders booked were $274.4 million for the first six months of 2022 compared with $177.6 million during the first six months of 2021, an increase of $96.8 million, or 54.5%. The increase is primarily attributable to increases of $37.2 million in our separation and filtration technologies, $27.9 million in industrial air control technologies, and $27.4 million in our thermal acoustics technologies. For the $96.8 million increase in orders, $90.9 million is attributable to organic growth, while $5.9 million is attributable to current year acquisitions.

Selling and administrative expenses were $23.0 million for the second quarter of 2022 compared with $20.6 million for the second quarter of 2021. The increase is primarily attributable to acquisitions during 2022, as well as inflationary increases for wages and services. Selling and administrative expenses as a percentage of sales was 21.8% in the second quarter of 2022 compared with 26.2% in the second quarter of 2021. The decrease in percentage is primarily attributable to the increase in net sales.

Selling and administrative expenses were $41.6 million for the first six months of 2022 compared with $40.0 million for the first six months of 2021. The increase is primarily attributable to acquisitions during 2022, as well as inflationary increases for wages and services. Selling and administrative expenses decreased as a percentage of sales to 21.0% in the first six months of 2022 compared with 26.6% in the first six months of 2021. The decrease in percentage is primarily attributable to the increase in net sales.

Amortization and earnout expense was $1.4 million for the second quarter of 2022 compared with $2.3 million for the second quarter of 2021. The decrease in expense is attributable to a decrease of $0.6 million in earnout expense and $0.3 million decrease in definite lived asset amortization.

20


 

Amortization expense was $2.9 million for the first six months of 2022 compared with $4.1 million for the first six months of 2021. The decrease in expense is attributable to a decrease of $0.7 million in earnout expense and $0.5 million decrease in definite lived asset amortization.

Operating income increased $3.6 million to $5.7 million in the second quarter of 2022 compared with $2.1 million during the second quarter of 2021. Operating income increased $5.8 million to $11.0 million in the first six months of 2022 compared with $5.2 million during the first six months of 2021. The increase in operating income for the three- and six-month periods ended June 30, 2022 are primarily attributable to increases in sales.

Non-GAAP operating income was $8.7 million for the second quarter of 2022 compared with $4.7 million for the second quarter of 2021. The increase of $4.0 million in non-GAAP operating income is primarily attributable to the increase in net sales. Non-GAAP operating income as a percentage of sales increased to 8.2% for the second quarter of 2022 from 6.0% for the second quarter of 2021.

Non-GAAP operating income was $16.5 million for the first six months of 2022 compared with $9.7 million for the first six months of 2021. The increase of $6.8 in non-GAAP operating income is primarily attributable to the increase in net sales. Non-GAAP operating income as a percentage of sales increased to 8.3% for the first six months of 2022 from 6.4% for the first six months of 2021.

Interest expense increased to $1.1 million in the second quarter of 2022 and $1.9 million for the first six months of 2022 compared with interest expense of $0.7 million in the second quarter of 2021 and $1.4 million for the first six months of 2021. The increase in interest expense is primarily due to increased debt balances for the three- and six-month periods in 2022 compared to 2021.

Income tax expense was $1.9 million for the second quarter of 2022 and $3.0 million for the first six months of 2022 compared with income tax expense of $0.2 million for the second quarter of 2021 and $0.8 million for the first six months of 2021. The effective income tax rate for the second quarter of 2022 was 28.3% compared with 34.3% for the second quarter of 2021. The effective income tax rate for the first six months of 2022 was 28.3% compared with 30.9% for the first six months of 2021. The effective income tax rate for the three- and six-months ended June 30, 2022 is different than the United States federal statutory rate. Our effective tax rate is affected by certain other permanent differences, including state income taxes, non-deductible incentive stock-based compensation, and differences in tax rates among the jurisdictions in which we operate.

Business Segments

The Company’s operations are organized and reviewed by management along its product lines or end market that the segment serves and are presented in two reportable segments. The results of the segments are reviewed through “Income from operations” on the unaudited Condensed Consolidated Statements of Income.

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(dollars in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net sales (less intra-, inter-segment sales)

 

 

 

 

 

 

 

 

 

 

 

 

Engineered Systems segment

 

$

67,333

 

 

$

43,360

 

 

$

124,308

 

 

$

85,417

 

Industrial Process Solutions segment

 

 

38,042

 

 

 

35,320

 

 

 

73,503

 

 

 

65,155

 

Net sales

 

$

105,375

 

 

$

78,680

 

 

$

197,811

 

 

$

150,572

 

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(dollars in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Income from Operations

 

 

 

 

 

 

 

 

 

 

 

 

Engineered Systems segment

 

$

9,006

 

 

$

5,634

 

 

$

15,476

 

 

$

11,804

 

Industrial Process Solutions segment

 

 

5,482

 

 

 

4,441

 

 

 

9,621

 

 

 

8,263

 

Corporate and Other(1)

 

 

(8,742

)

 

 

(7,930

)

 

 

(14,147

)

 

 

(14,868

)

Income from operations

 

$

5,746

 

 

$

2,145

 

 

$

10,950

 

 

$

5,199

 

(1) Includes corporate compensation, professional services, information technology and other general and administrative corporate expenses.

Engineered Systems Segment

Our Engineered Systems segment net sales increased $23.9 million to $67.3 million for the second quarter of 2022 compared with $43.4 million in the second quarter of 2021. The increase is primarily attributable to increases of $8.4 million in our thermal acoustics technologies, $5.2 million in our damper and expansion products, $4.2 million in our emissions management technologies, $2.7 million in our engineered cyclone systems, and $2.6 million in our separation and filtration technologies. For the $23.9 million increase in net sales, $19.3 million is attributable to organic growth, while $4.6 million is attributable to current year acquisitions.

21


 

Our Engineered Systems segment net sales increased $38.9 million to $124.3 million in the first six months of 2022 compared with $85.4 million in the first six months of 2021. The increase is primarily attributable to increases of $13.1 million in our emissions management technologies, $11.6 million in our thermal acoustics technologies, $7.5 million in our damper and expansion products, and $6.5 million in our engineered cyclone systems. For the $38.9 million increase in net sales, $33.6 million is attributable to organic growth, while $5.3 million is attributable to current year acquisitions.

Operating income for the Engineered Systems segment increased $3.4 million to $9.0 million in the second quarter of 2022 compared with $5.6 million in the second quarter of 2021. The operating income increase is primarily attributable to higher gross profit related to increased sales of $23.9 million.

Operating income for the Engineered Systems segment increased $3.7 million to $15.5 million in the first six months of 2022 compared with $11.8 million in the first six months of 2021. The operating income increase is primarily attributable to higher gross profit related to increased sales of $38.9 million.

Industrial Process Solutions Segment

Our Industrial Process Solutions segment net sales increased $2.7 million to $38.0 million in the second quarter of 2022 compared with $35.3 million in the second quarter of 2021. The increase is primarily attributable to increases across all products serving industrial air end markets. The total increase of $2.7 million in net sales is attributable to organic growth.

Our Industrial Process Solutions segment net sales increased $8.3 million to $73.5 million in the first six months of 2022 compared with $65.2 million in the first six months of 2021. The increase is primarily attributable to increases of $3.9 million in our industrial air control technologies, and $3.9 million in our duct fabrication products and services. The total increase of $8.3 million in net sales is attributable to organic growth.

Operating income for the Industrial Process Solutions segment increased $1.1 million to $5.5 million in the second quarter of 2022 compared with $4.4 million in the second quarter of 2021. The increase is primarily attributable to higher gross profit related to increased sales of $2.7 million, and $0.7 million in lower amortization and earnout expenses.

Operating income for the Industrial Process Solutions segment increased $1.3 million to $9.6 million in the first six months of 2022 compared with $8.3 million in the first six months of 2021. The increase is primarily attributable to higher gross profit related to increased sales of $8.3 million, offset by a $1.5 million increase in selling and administrative expense.

Corporate and Other Segment

Operating expense for the Corporate and Other segment increased $0.8 million to $8.7 million for the second quarter of 2022 compared with $7.9 million for the second quarter of 2021. The increase is attributable to increases in acquisition and integration expenses of $0.9 million.

Operating expense for the Corporate and Other segment decreased $0.8 million to $14.1 million for the first six months of 2022 compared with $14.9 million for the first six months of 2021. The decrease is primarily attributed to a $2.5 million favorable insurance settlement received in the first quarter of 2022, partially offset by inflationary increases for wages and services.

Backlog

Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. Backlog increased to $288.7 million as of June 30, 2022 from $213.9 million as of December 31, 2021. Our customers may have the right to cancel a given order. Historically, cancellations have not been common. Backlog is adjusted on a quarterly basis for adjustments in foreign currency exchange rates. Substantially all backlog is expected to be delivered within 12 to 18 months. Backlog is not defined by GAAP and our methodology for calculating backlog may not be consistent with methodologies used by other companies.

New Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 2 to the unaudited condensed consolidated financial statements within Item 1 of this Quarterly Report on Form 10-Q.

Liquidity and Capital Resources

22


 

When we undertake large jobs, our working capital objective is to make these projects self-funding. We work to achieve this by obtaining initial down payments, progress billing contracts, when possible, utilizing extended payment terms from material suppliers, and paying sub-contractors after payment from our customers, which is an industry practice. Our investment in net working capital is funded by cash flow from operations and by our revolving line of credit under our Credit Facility (as defined below).

At June 30, 2022, the Company had working capital of $74.7 million, compared with $72.3 million at December 31, 2021. The ratio of current assets to current liabilities was 1.52 to 1.00 on June 30, 2022, as compared with a ratio of 1.62 to 1.00 at December 31, 2021.

At June 30, 2022 and December 31, 2021, cash and cash equivalents totaled $34.4 million and $29.9 million, respectively. As of June 30, 2022 and December 31, 2021, $26.5 million and $22.6 million, respectively, of our cash and cash equivalents were held by certain non-United States subsidiaries, as well as being denominated in foreign currencies.

Debt consisted of the following:

(table only in thousands)

 

June 30, 2022

 

 

December 31, 2021

 

Outstanding borrowings under the Credit Facility (defined below).
Term loan payable in quarterly principal installments of $0.6 million through September 2023, and $0.8 million through September 2025 and $1.1 million thereafter with balance due upon maturity in September 2026.

 

 

 

 

 

 

 - Term loan

 

$

42,410

 

 

$

43,511

 

 - Revolving Credit Loan

 

 

44,700

 

 

 

22,000

 

 Total outstanding borrowings under the Credit Facility

 

 

87,110

 

 

 

65,511

 

 Outstanding borrowings under the joint venture term debt

 

 

10,506

 

 

 

 

 Unamortized debt discount

 

 

(1,545

)

 

 

(1,731

)

 Total outstanding borrowings

 

$

96,071

 

 

$

63,780

 

 Less: current portion

 

 

(3,303

)

 

 

(2,203

)

 Total debt, less current portion

 

$

92,768

 

 

$

61,577

 

Credit Facility

The Company’s outstanding borrowings in the United States consist of a senior secured term loan and a senior secured revolver loan with sub-facilities for letters of credit, swing-line loans and multi-currency loans (collectively, the “Credit Facility”). As of June 30, 2022 and December 31, 2021, the Company was in compliance with all related financial and other restrictive covenants under the Credit Facility.

See Note 7 to the unaudited condensed consolidated financial statements within Item 1 of this Quarterly Report on Form 10-Q for further information on the Company’s debt facilities.

Total unused credit availability under our existing Credit Facility is as follows:

(dollars in millions)

 

June 30, 2022

 

 

December 31, 2021

 

Credit Facility, revolving loans

 

$

140.0

 

 

$

140.0

 

Draw down

 

 

(44.7

)

 

 

(22.0

)

Letters of credit open

 

 

(20.7

)

 

 

(14.5

)

Total unused credit availability

 

$

74.6

 

 

$

103.5

 

Amount available based on borrowing limitations

 

$

62.4

 

 

$

45.9

 

Overview of Cash Flows and Liquidity

 

 

For the six months ended June 30,

 

(dollars in thousands)

 

2022

 

 

2021

 

Net cash provided by operating activities

 

$

18,691

 

 

$

4,109

 

Net cash used in investing activities

 

 

(38,797

)

 

 

(463

)

Net cash (used in) provided by financing activities

 

 

26,655

 

 

 

(6,423

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(3,091

)

 

 

(514

)

Net (decrease) increase in cash

 

$

3,458

 

 

$

(3,291

)

Operating Activities

23


 

For the six months ended June 30, 2022, $18.7 million of cash was provided by operating activities compared with $4.1 million provided by operations in the prior year period, a $14.6 million increase. Cash flow from operating activities in the first six months of 2022 had a favorable impact year-over-year primarily due increase in net income and certain improvements in net working capital.

Investing Activities

For the six months ended June 30, 2022, net cash used in investing activities was $38.8 million compared with $0.5 million used in investing activities in the prior year period. For the six months ended June 30, 2022, the $38.8 million cash used in investing activities was the result of $37.4 million cash used for the acquisitions, see Note 14, and $1.4 million for the acquisition of property and equipment. In the prior year period, cash flow of $0.5 million used in investing activities was the result of $1.0 million used for the acquisition of property and equipment, offset by proceeds from the disposal of assets held for sale of $0.5 million.

Financing Activities

For the six months ended June 30, 2022, $26.7 million was provided by financing activities compared with $6.4 million used in financing activities in the prior year period, an increase of $33.1 million. For the six months ended June 30, 2022, the Company used $4.3 million to repurchase common stock, $0.9 million in non-controlling interest distributions, and received $0.1 million from proceeds from employee stock purchase plan and exercise of stock options. Additionally, for the first six months ended June 30, 2022, the Company used $22.7 million for net borrowings on the Company’s revolving credit lines, primarily used to finance current year acquisitions, and $1.5 million in repayment on long-term debt. In the prior year period, the Company used $4.1 million for repayments on the Company's revolving credit line, $1.3 million in repayments on long-term debt, and $0.8 million to make earnout payments.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s condensed consolidated financial statements. The preparation of these financial statements requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include revenue recognition, the valuation of trade receivables, inventories, goodwill, intangible assets, other long-lived assets, legal contingencies, guarantee obligations and assumptions used in the calculation of income taxes, assumptions used in business combination accounting and related balances, and pension and post-retirement benefits, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. Management monitors economic conditions and other factors and will adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

Management believes there have been no changes during the six-month period ended June 30, 2022, other than as disclosed in Note 2 to the condensed consolidated financial statements within Item 1 of this quarterly Report on Form 10-Q, to the items that the Company disclosed as its critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, which are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Any statements contained in this Quarterly Report on Form 10-Q, other than statements of historical fact, including statements about management’s beliefs and expectations, are forward-looking statements and should be evaluated as such. These statements are made on the basis of management’s views and assumptions regarding future events and business performance. We use words such as “believe,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” “will,” “plan,” “should” and similar expressions to identify forward-looking statements. 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 by such statements. Potential risks and uncertainties, among others, that could cause actual results to differ materially are discussed under “Part I – Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and include, but are not limited to:

the sensitivity of our business to economic and financial market conditions generally and economic conditions in CECO’s service areas;

24


 

dependence on fixed price contracts and the risks associated therewith, including actual costs exceeding estimates and method of accounting for revenue;
the effect of growth on CECO’s infrastructure, resources, and existing sales;
the ability to expand operations in both new and existing markets;
the potential for contract delay or cancellation as a result of on-going or worsening supply chain challenges;
the impact of employee-related cost inflation and labor shortages;
liabilities arising from faulty services or products that could result in significant professional or product liability, warranty, or other claims;
changes in or developments with respect to any litigation or investigation;
failure to meet timely completion or performance standards that could result in higher cost and reduced profits or, in some cases, losses on projects;
the potential for fluctuations in prices for manufactured components and raw materials, including as a result of tariffs and surcharges;
the substantial amount of debt incurred in connection with our strategic transactions and our ability to repay or refinance it or incur additional debt in the future;
the impact of federal, state or local government regulations;
our ability to repurchase shares of our common stock and the amounts and timing of repurchases, if any;
economic and political conditions generally;
our ability to successfully realize the expected benefits of our restructuring program;
our ability to successfully integrate acquired businesses and realize the synergies from strategic transactions; and
unpredictability and severity of catastrophic events, including cyber security threats, acts of terrorism or outbreak of war or hostilities or public health crises, such as uncertainties regarding the extent and duration of impacts of matters associated with COVID-19, as well as management’s response to any of the aforementioned factors.

Many of these risks are beyond management’s ability to control or predict. Should one or more of these risks or uncertainties materialize, or should the assumptions prove incorrect, actual results may vary in material aspects from those currently anticipated. Investors are cautioned not to place undue reliance on such forward-looking statements as they speak only to our views as of the date the statement is made. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the Securities and Exchange Commission, we undertake no obligation to update or review any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks, primarily changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. For the Company, these exposures are primarily related to changes in interest rates. We do not currently hold any derivatives or other financial instruments purely for trading or speculative purposes.

The carrying value of the Company’s total long-term debt and current maturities of long-term debt at June 30, 2022 was $97.6 million. Market risk was estimated as the potential decrease (increase) in future earnings and cash flows resulting from a hypothetical 10% increase (decrease) in the Company’s estimated weighted average borrowing rate at June 30, 2022. Most of the interest on the Company’s debt is indexed to SOFR market rates. The estimated annual impact of a hypothetical 10% change in the estimated weighted average borrowing rate at June 30, 2022 is $0.4 million.

The Company has wholly-owned subsidiaries in several countries, including in the Netherlands, Canada, the People’s Republic of China, Mexico, United Kingdom, Singapore, Shanghai, Pune India, Dubai and Chile. In the past, we have not hedged our foreign currency exposure, and fluctuations in exchange rates have not materially affected our operating results. Future changes in exchange rates may positively or negatively impact our revenues, operating expenses and earnings. Since most of our foreign sales are denominated in the local currency, we do not anticipate that exposure to foreign currency rate fluctuations will be material in 2022.

25


 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of June 30, 2022. Management believes that the condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the first six months ended June 30, 2022 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls.

 

26


 

PART II – OTHER INFORMATION

See Note 13 to the unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding legal proceedings in which we are involved.

ITEM 1A. RISK FACTORS

There have been no material changes in the Company’s risk factors that we disclosed in “Part I – Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table provides information about our purchases of our equity securities for the quarter ended June 30, 2022:

 

 

Issuer's Purchases of Equity Securities

 

Period (amounts in thousands, except per share data)

 

Total Number of Shares Purchased 1

 

 

Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs

 

April 1, 2022 - April 30, 2022

 

 

 

 

$

 

 

 

 

 

$

 

May 1, 2022 - May 31, 2022

 

 

575,066

 

 

 

5.86

 

 

 

575,066

 

 

 

16,619

 

June 1, 2022 - June 30, 2022

 

 

149,838

 

 

 

6.29

 

 

 

149,838

 

 

 

15,673

 

Total

 

 

724,904

 

 

$

5.95

 

 

 

724,904

 

 

 

 

(1) On May 10, 2022, the Company publicly announced that its Board of Directors has authorized a $20.0 million share repurchase program. The program expires on April 30, 2025. See Note 8 for additional information.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

 

 

27


 

ITEM 6. EXHIBITS

 

 

 

 

 

 

 

31.1

 

Rule 13(a)/15d-14(a) Certification by Chief Executive Officer

 

 

 

31.2

 

Rule 13(a)/15d-14(a) Certification by Chief Financial Officer

 

 

 

32.1

 

Certification of Chief Executive Officer (18 U.S. Section 1350)

 

 

 

32.2

 

Certification of Chief Financial Officer (18 U.S. Section 1350)

 

 

 

101.INS

 

Inline XBRL Instance Document

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

28


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

CECO Environmental Corp.

 

 

 

 

By:

/s/ Paul M. Gohr

 

Paul M. Gohr

 

Chief Accounting Officer

(principal accounting officer and duly authorized officer)

 

Date: August 8, 2022

 

29


EX-31.1

 

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Todd Gleason, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CECO Environmental Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

/s/ Todd Gleason

Todd Gleason

Chief Executive Officer

 

Date: August 8, 2022

 


EX-31.2

 

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Matthew Eckl, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CECO Environmental Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

/s/ Matthew Eckl

Matthew Eckl

Chief Financial Officer

 

Date: August 8, 2022

 


EX-32.1

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CECO Environmental Corp. (the “Company”) on Form 10-Q for the six-month period ended June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Todd Gleason, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

 

 

/s/ Todd Gleason

Todd Gleason

Chief Executive Officer

 

Date: August 8, 2022

 


EX-32.2

 

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CECO Environmental Corp. (the “Company”) on Form 10-Q for the six-month period ended June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Matthew Eckl, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

 

 

/s/ Matthew Eckl

Matthew Eckl

Chief Financial Officer

 

Date: August 8, 2022