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Ceco Environmental Corp – ‘10-Q’ for 9/30/19

On:  Wednesday, 11/6/19, at 7:01am ET   ·   For:  9/30/19   ·   Accession #:  1564590-19-40655   ·   File #:  0-07099

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

11/06/19  Ceco Environmental Corp           10-Q        9/30/19   83:10M                                    ActiveDisclosure/FA

Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    675K 
 2: EX-31.1     Certification -- §302 - SOA'02                      HTML     32K 
 3: EX-31.2     Certification -- §302 - SOA'02                      HTML     32K 
 4: EX-32.1     Certification -- §906 - SOA'02                      HTML     26K 
 5: EX-32.2     Certification -- §906 - SOA'02                      HTML     26K 
42: R1          Document and Entity Information                     HTML     80K 
72: R2          Condensed Consolidated Balance Sheets               HTML    138K 
62: R3          Condensed Consolidated Balance Sheets               HTML     44K 
                (Parenthetical)                                                  
15: R4          Condensed Consolidated Statements of Operations     HTML     84K 
                (Unaudited)                                                      
40: R5          Condensed Consolidated Statements of Comprehensive  HTML     43K 
                Income (Loss) (Unaudited)                                        
70: R6          Condensed Consolidated Statements of Shareholders'  HTML     72K 
                Equity (Unaudited)                                               
60: R7          Condensed Consolidated Statements of Cash Flows     HTML    143K 
                (Unaudited)                                                      
12: R8          Basis of Reporting for Consolidated Financial       HTML     32K 
                Statements                                                       
43: R9          New Financial Accounting Pronouncements             HTML     33K 
79: R10         Accounts Receivable                                 HTML     46K 
52: R11         Costs and Estimated Earnings on Uncompleted         HTML     64K 
                Contracts                                                        
23: R12         Inventories                                         HTML     48K 
31: R13         Goodwill and Intangible Assets                      HTML    139K 
80: R14         Accounts Payable and Accrued Expenses               HTML     54K 
53: R15         Senior Debt                                         HTML     68K 
24: R16         Earnings per Share                                  HTML     86K 
32: R17         Share-Based Compensation                            HTML     31K 
78: R18         Pension and Employee Benefit Plans                  HTML     96K 
54: R19         Leases                                              HTML    157K 
20: R20         Income Taxes                                        HTML     31K 
48: R21         Financial Instruments                               HTML     29K 
74: R22         Commitments and Contingencies - Legal Matters       HTML     34K 
64: R23         Business Segment Information                        HTML    596K 
21: R24         Divestitures                                        HTML     33K 
49: R25         New Financial Accounting Pronouncements (Policies)  HTML     33K 
75: R26         Accounts Receivable (Tables)                        HTML     43K 
65: R27         Costs and Estimated Earnings on Uncompleted         HTML     61K 
                Contracts (Tables)                                               
22: R28         Inventories (Tables)                                HTML     48K 
47: R29         Goodwill and Intangible Assets (Tables)             HTML    141K 
34: R30         Accounts Payable and Accrued Expenses (Tables)      HTML     53K 
27: R31         Senior Debt (Tables)                                HTML     57K 
51: R32         Earnings per Share (Tables)                         HTML     84K 
77: R33         Pension and Employee Benefit Plans (Tables)         HTML     92K 
33: R34         Leases (Tables)                                     HTML    163K 
26: R35         Business Segment Information (Tables)               HTML    600K 
50: R36         New Financial Accounting Pronouncements -           HTML     32K 
                Additional Information (Detail)                                  
76: R37         Accounts Receivable - Summary of Accounts           HTML     38K 
                Receivable (Detail)                                              
35: R38         Accounts Receivable - Additional Information        HTML     32K 
                (Detail)                                                         
25: R39         Costs and Estimated Earnings on Uncompleted         HTML     44K 
                Contracts - Costs and Estimated Earnings on                      
                Uncompleted Contracts (Detail)                                   
41: R40         Costs and Estimated Earnings on Uncompleted         HTML     27K 
                Contracts - Additional Information (Detail)                      
16: R41         Inventories - Summary of Inventories (Detail)       HTML     38K 
63: R42         Inventories - Additional Information (Detail)       HTML     27K 
73: R43         Goodwill and Intangible Assets - Goodwill /         HTML     40K 
                Tradename (Detail)                                               
39: R44         Goodwill and Intangible Assets - Intangible Assets  HTML     42K 
                - Finite Life (Detail)                                           
14: R45         Goodwill and Intangible Assets - Finite Lived       HTML     37K 
                Intangible Assets Amortization Expense (Detail)                  
61: R46         Goodwill and Intangible Assets - Additional         HTML     50K 
                Information (Detail)                                             
71: R47         Accounts Payable and Accrued Expenses - Summary of  HTML     43K 
                Accounts Payable and Accrued Expenses (Detail)                   
44: R48         Senior Debt - Summary of Debt (Detail)              HTML     46K 
13: R49         Senior Debt - Summary of Debt (Parenthetical)       HTML     39K 
                (Detail)                                                         
28: R50         Senior Debt - Additional Information (Detail)       HTML    103K 
37: R51         Earnings per Share - Number of Shares Outstanding   HTML     40K 
                for Calculation of Earnings Per Share (Detail)                   
82: R52         Earnings per Share - Additional Information         HTML     27K 
                (Detail)                                                         
55: R53         Share-Based Compensation - Additional Information   HTML     48K 
                (Detail)                                                         
29: R54         Pension and Employee Benefit Plans - Components of  HTML     45K 
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38: R55         Pension and Employee Benefit Plans - Additional     HTML     39K 
                Information (Detail)                                             
83: R56         Leases - Schedule of components of lease expense    HTML     38K 
                (Detail)                                                         
56: R57         Leases - Summary of Supplemental Cash Flow          HTML     35K 
                Information Related to Leases (Detail)                           
30: R58         Leases - Summary of Supplemental Balance Sheet      HTML     53K 
                Information Related to Leases (Detail)                           
36: R59         Leases - Schedule of Lease Terms and Discount Rate  HTML     36K 
                (Detail)                                                         
68: R60         Leases - Schedule of Maturities of Lease            HTML     66K 
                Liabilities (Detail)                                             
57: R61         Leases - Schedule of Future Minimum Lease Payments  HTML     44K 
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                Additional Information (Detail)                                  
58: R65         Business Segment Information - Net Sales and        HTML     43K 
                Income from Operation by Business Segment (Detail)               
19: R66         Business Segment Information - Property and         HTML     47K 
                Equipment Additions, Depreciation and Amortization               
                and Identifiable Assets (Detail)                                 
46: R67         Business Segment Information - Goodwill (Detail)    HTML     34K 
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‘10-Q’   —   Quarterly Report
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Financial Information
"Item 1. Financial Statements
"Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 201
"Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2019 and 2018
"Condensed Consolidated Statements of Comprehensive Income (Loss) for the three-month and nine-month periods ended September 30, 2019 and 201
"Condensed Consolidated Statements of Shareholders' Equity for the nine-month periods ended September 30, 2019 and 2018
"Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2019 and 201
"Notes to Condensed Consolidated Financial Statements
"Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 3. Quantitative and Qualitative Disclosures about Market Risk
"Item 4. Controls and Procedures
"Other Information
"Item 1. Legal Proceedings
"Item 1A. Risk Factors
"Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
"Item 3. Defaults Upon Senior Securities
"Item 4. Mine Safety Disclosures
"Item 6. Exhibits
"Signatures

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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 September 30, 2019

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. 0-7099

 

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 files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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: 35,243,663 shares of common stock, par value $0.01 per share, as of October 31, 2019.

 

 


 

CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended September 30, 2019

Table of Contents

 

Part I –

 

Financial Information

 

2

 

 

 

 

 

 

 

Item 1. Financial Statements

 

2

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2019 and 2018

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three-month and nine-month periods ended September 30, 2019 and 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the nine-month periods ended September 30, 2019 and 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2019 and 2018

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

 

 

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

 

20

 

 

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

27

 

 

 

 

 

 

 

Item 4. Controls and Procedures

 

27

 

 

 

 

 

Part II –

 

Other Information

 

28

 

 

 

 

 

 

 

Item 1. Legal Proceedings

 

28

 

 

 

 

 

 

 

Item 1A. Risk Factors

 

28

 

 

 

 

 

 

 

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

 

28

 

 

 

 

 

 

 

Item 3. Defaults Upon Senior Securities

 

28

 

 

 

 

 

 

 

Item 4. Mine Safety Disclosures

 

28

 

 

 

 

 

 

 

Item 5. Other Information

 

28

 

 

 

 

 

 

 

Item 6. Exhibits

 

29

 

 

 

 

 

Signatures

 

30

 

 

 

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)

SEPTEMBER 30, 2019

 

 

DECEMBER 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,963

 

 

$

43,676

 

Restricted cash

 

 

1,276

 

 

 

762

 

Accounts receivable, net

 

 

58,091

 

 

 

53,225

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

 

34,409

 

 

 

29,694

 

Inventories, net

 

 

19,659

 

 

 

20,817

 

Prepaid expenses and other current assets

 

 

12,879

 

 

 

10,117

 

Prepaid income taxes

 

 

2,419

 

 

 

1,388

 

Assets held for sale

 

 

589

 

 

 

1,186

 

Total current assets

 

 

158,285

 

 

 

160,865

 

Property, plant and equipment, net

 

 

13,857

 

 

 

22,200

 

Right-of-use assets from operating leases (Note 12)

 

 

13,810

 

 

 

 

Goodwill

 

 

151,969

 

 

 

152,156

 

Intangible assets – finite life, net

 

 

33,252

 

 

 

35,959

 

Intangible assets – indefinite life

 

 

14,280

 

 

 

18,258

 

Deferred charges and other assets

 

 

4,187

 

 

 

3,144

 

Total assets

 

$

389,640

 

 

$

392,582

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of debt

 

$

2,500

 

 

$

 

Accounts payable and accrued expenses

 

 

78,264

 

 

 

80,229

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

23,013

 

 

 

20,144

 

Note payable

 

 

 

 

 

1,700

 

Income taxes payable

 

 

 

 

 

1,813

 

Total current liabilities

 

 

103,777

 

 

 

103,886

 

Other liabilities

 

 

18,649

 

 

 

26,925

 

Debt, less current portion

 

 

64,995

 

 

 

74,456

 

Deferred income tax liability, net

 

 

6,717

 

 

 

8,755

 

Operating lease liabilities (Note 12)

 

 

11,328

 

 

 

 

Total liabilities

 

 

205,466

 

 

 

214,022

 

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, 35,243,663

and 34,953,825 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

353

 

 

 

349

 

Capital in excess of par value

 

 

253,757

 

 

 

251,409

 

Accumulated loss

 

 

(54,736

)

 

 

(59,427

)

Accumulated other comprehensive loss

 

 

(14,844

)

 

 

(13,415

)

 

 

 

184,530

 

 

 

178,916

 

Less treasury stock, at cost, 137,920 shares at September 30, 2019 and

December 31, 2018

 

 

(356

)

 

 

(356

)

Total shareholders’ equity

 

 

184,174

 

 

 

178,560

 

Total liabilities and shareholders' equity

 

$

389,640

 

 

$

392,582

 

 

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

2


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

(dollars in thousands, except per share data)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net sales

 

$

85,266

 

 

$

88,256

 

 

$

252,456

 

 

$

243,485

 

Cost of sales

 

 

56,489

 

 

 

59,582

 

 

 

168,400

 

 

 

161,725

 

Gross profit

 

 

28,777

 

 

 

28,674

 

 

 

84,056

 

 

 

81,760

 

Selling and administrative expenses

 

 

21,823

 

 

 

22,216

 

 

 

65,573

 

 

 

66,147

 

Amortization and earnout expenses

 

 

2,166

 

 

 

1,998

 

 

 

6,480

 

 

 

7,394

 

Loss on divestitures, net of selling costs

 

 

 

 

 

15,074

 

 

 

70

 

 

 

3,970

 

Restructuring expenses (income), net

 

 

729

 

 

 

(173

)

 

 

968

 

 

 

(23

)

Income (loss) from operations

 

 

4,059

 

 

 

(10,441

)

 

 

10,965

 

 

 

4,272

 

Other (expense) income, net

 

 

(73

)

 

 

592

 

 

 

95

 

 

 

(119

)

Interest expense

 

 

(1,316

)

 

 

(1,729

)

 

 

(4,319

)

 

 

(5,442

)

Income (loss) before income taxes

 

 

2,670

 

 

 

(11,578

)

 

 

6,741

 

 

 

(1,289

)

Income tax expense (benefit)

 

 

739

 

 

 

1,337

 

 

 

(2,569

)

 

 

6,764

 

Net income (loss)

 

$

1,931

 

 

$

(12,915

)

 

$

9,310

 

 

$

(8,053

)

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

 

$

(0.37

)

 

$

0.27

 

 

$

(0.23

)

Diluted

 

$

0.05

 

 

$

(0.37

)

 

$

0.26

 

 

$

(0.23

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,070,449

 

 

 

34,779,125

 

 

 

34,944,056

 

 

 

34,681,262

 

Diluted

 

 

35,624,590

 

 

 

34,779,125

 

 

 

35,522,568

 

 

 

34,681,262

 

 

 

 

 

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

 


3


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income (loss)

 

$

1,931

 

 

$

(12,915

)

 

$

9,310

 

 

$

(8,053

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

 

 

 

 

(26

)

 

 

(506

)

 

 

222

 

Foreign currency translation

 

 

(1,169

)

 

 

(1,779

)

 

 

(935

)

 

 

(3,060

)

Comprehensive income (loss)

 

$

762

 

 

$

(14,720

)

 

$

7,869

 

 

$

(10,891

)

 

 

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

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

par value

 

 

Loss

 

 

Loss

 

 

Shares

 

 

Amount

 

 

Equity

 

Balance December 31, 2017

 

 

34,708

 

 

$

347

 

 

$

248,170

 

 

$

(52,673

)

 

$

(8,919

)

 

 

(138

)

 

$

(356

)

 

$

186,569

 

Net loss for the nine-months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,053

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,053

)

Cumulative effect adjustment upon adoption of new accounting standards (ASU 2018-02) and (ASU 2014-09)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

415

 

 

 

(1,067

)

 

 

 

 

 

 

 

 

 

 

(652

)

Exercise of stock options

 

 

16

 

 

 

 

 

 

89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

89

 

Restricted stock units issued

 

 

51

 

 

 

2

 

 

 

(174

)

 

 

(43

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(215

)

Share based compensation earned

 

 

38

 

 

 

 

 

 

2,508

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,508

 

Adjustment for interest rate swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

222

 

 

 

 

 

 

 

 

 

 

 

222

 

Translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,060

)

 

 

 

 

 

 

 

 

 

 

(3,060

)

Balance September 30, 2018

 

 

34,813

 

 

$

349

 

 

$

250,593

 

 

$

(60,354

)

 

$

(12,824

)

 

 

(138

)

 

$

(356

)

 

$

177,408

 

 

 

 

 

Common Stock

 

 

Capital in

excess of

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Treasury Stock

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

par value

 

 

Loss

 

 

Loss

 

 

Shares

 

 

Amount

 

 

Equity

 

Balance December 31, 2018

 

 

34,954

 

 

$

349

 

 

$

251,409

 

 

$

(59,427

)

 

$

(13,415

)

 

 

(138

)

 

$

(356

)

 

$

178,560

 

Net income for the nine-months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,310

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,310

 

Cumulative effect adjustment upon adoption of new accounting standards (ASU 2017-12) and (ASU 2016-02)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,602

)

 

 

12

 

 

 

 

 

 

 

 

 

 

 

(4,590

)

Restricted stock units issued

 

 

255

 

 

 

4

 

 

 

(425

)

 

 

(17

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(438

)

Share based compensation earned

 

 

35

 

 

 

 

 

 

2,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,773

 

Adjustment for interest rate swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(506

)

 

 

 

 

 

 

 

 

 

 

(506

)

Translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(935

)

 

 

 

 

 

 

 

 

 

 

(935

)

Balance September 30, 2019

 

 

35,244

 

 

$

353

 

 

$

253,757

 

 

$

(54,736

)

 

$

(14,844

)

 

 

(138

)

 

$

(356

)

 

$

184,174

 

 

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

 

 

5


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

Nine months ended September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

9,310

 

 

$

(8,053

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,153

 

 

 

10,097

 

Unrealized foreign currency loss

 

 

496

 

 

 

763

 

Net gain on interest rate swaps

 

 

(248

)

 

 

(130

)

Fair value adjustments to earnout liabilities

 

 

 

 

 

(330

)

Earnout payments

 

 

 

 

 

(2,862

)

Loss (gain) on sale of property and equipment

 

 

58

 

 

 

(214

)

Loss on divestitures

 

 

70

 

 

 

3,970

 

Debt discount amortization

 

 

928

 

 

 

862

 

Share-based compensation expense

 

 

2,684

 

 

 

2,342

 

Bad debt expense

 

 

710

 

 

 

1,225

 

Inventory reserve expense

 

 

454

 

 

 

554

 

Deferred income tax benefit

 

 

(595

)

 

 

(1,079

)

Changes in operating assets and liabilities, net of divestitures:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(6,090

)

 

 

(20,056

)

Costs and estimated earnings in excess of billings on uncompleted contracts

 

 

(5,196

)

 

 

(4,446

)

Inventories

 

 

527

 

 

 

(3,161

)

Prepaid expense and other current assets

 

 

(3,853

)

 

 

(1,584

)

Deferred charges and other assets

 

 

(1,628

)

 

 

(736

)

Accounts payable and accrued expenses

 

 

(4,217

)

 

 

19,183

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

2,879

 

 

 

8,355

 

Income taxes payable

 

 

(1,679

)

 

 

(23

)

Other liabilities

 

 

(3,396

)

 

 

(1,035

)

Net cash (used in) provided by operating activities

 

 

(633

)

 

 

3,642

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisitions of property and equipment

 

 

(3,746

)

 

 

(1,897

)

Net cash proceeds from divestitures

 

 

 

 

 

33,064

 

Proceeds from sale of property and equipment

 

 

509

 

 

 

6,311

 

Net cash (used in) provided by investing activities

 

 

(3,237

)

 

 

37,478

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net repayments on revolving credit lines

 

 

(6,147

)

 

 

(3,754

)

Repayments of debt

 

 

(2,325

)

 

 

(34,256

)

Deferred financing fees paid

 

 

(1,117

)

 

 

 

Proceeds from lease financing transaction

 

 

 

 

 

800

 

Payments on finance leases and financing liability

 

 

(368

)

 

 

(508

)

Proceeds from employee stock purchase plan and exercise of stock options

 

 

76

 

 

 

82

 

Net cash used in financing activities

 

 

(9,881

)

 

 

(37,636

)

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

 

 

(448

)

 

 

(1,433

)

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

 

 

(14,199

)

 

 

2,051

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

44,438

 

 

 

30,659

 

Cash, cash equivalents and restricted cash at end of period

 

$

30,239

 

 

$

32,710

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

2,651

 

 

$

4,288

 

Income taxes

 

$

5,234

 

 

$

8,567

 

 

 

 

 

 

 

 

 

 

 

 

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”, “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 annual financial statements 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 September 30, 2019 and the results of operations, cash flows and shareholders’ equity for the three-month and nine-month periods ended September 30, 2019 and 2018. The results of operations for the three-month and nine-month periods ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year. The balance sheet as of December 31, 2018 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, 2018 as filed with the SEC.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC.

 

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

 

 

2.

New Financial Accounting Pronouncements

 

Accounting Standards adopted in Fiscal 2019

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases,” which, together with its related clarifying ASUs, provides revised guidance for lease accounting and related disclosure requirements and establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Under the guidance, leases are classified as either finance or operating, with classification affecting the pattern of expense recognition. We adopted ASU 2016-02 effective January 1, 2019, using the modified retrospective method which was applied to leases that existed or were entered into on or after January 1, 2019.  The Company elected to utilize the package of practical expedients that allows us to 1) not reassess whether any expired or existing contracts are or contain leases, 2) retain the existing classification of lease contracts as of the date of adoption, and 3) not reassess initial direct costs for any existing leases. We also elected to not separate lease and non-lease components, for all leases. The adoption of this standard had a material impact on our consolidated balance sheet due to the recognition of ROU assets and liabilities for our operating leases totaling $13.3 million, as well as an adjustment to beginning equity of $4.6 million, net of tax, related to a prior sales lease back transaction. The adoption of the standard did not have a material impact on our statement of operations or liquidity. See Note 12 – Leases for disclosures related to the amended guidance.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” This guidance expands an entity’s ability to apply hedge accounting for nonfinancial and financial risk components and allows for a simplified approach for fair value hedging of interest rate risk. Additionally, this ASU eliminates the need to separately measure and report hedge ineffectiveness and generally requires the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The Company adopted this ASU on January 1, 2019 and applied the modified retrospective approach through a cumulative-effect adjustment from accumulated other comprehensive income to retained earnings as of the effective date. The impact of the adoption of this ASU was not material.

  


7


Accounting Standards Yet to be Adopted

In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans,” that makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The new guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new ones that the FASB considers pertinent. ASU 2018-14 is effective for the Company January 1, 2021. The Company is evaluating the impact of the adoption of ASU 2018-14 on its consolidated financial statements.

 

 

3.

Accounts Receivable

 

(table only in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Contract receivables

 

$

49,925

 

 

$

48,826

 

Trade receivables

 

 

10,877

 

 

 

7,296

 

Allowance for doubtful accounts

 

 

(2,711

)

 

 

(2,897

)

Total accounts receivable

 

$

58,091

 

 

$

53,225

 

 

Balances billed but not paid by customers under retainage provisions in contracts within the Condensed Consolidated Balance Sheets amounted to approximately $1.4 million and $0.9 million at September 30, 2019 and December 31, 2018, respectively. Retainage receivables on contracts in progress are generally collected within a year after contract completion.

 

Bad debt expense was $0.3 million and $0.6 million for the three-month periods ended September 30, 2019 and 2018, respectively, and $0.7 million and $1.2 million for the nine-month periods ended September 30, 2019 and 2018, respectively.

 

 

4.

Costs and Estimated Earnings on Uncompleted Contracts

 

Our contracts have various lengths to completion ranging from a few days to several months. We anticipate that a majority of our current contracts will be completed within the next twelve to eighteen months. A significant amount of our revenue within the Energy Solutions and Industrial Solutions segments is recognized over a period of time as we perform under the contract because control of the work in process transfers continuously to the customer. The assets and liabilities recognized in association with these contracts are as follows:

 

(table only in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Costs incurred on uncompleted contracts

 

$

220,631

 

 

$

174,168

 

Estimated earnings

 

 

83,186

 

 

 

67,427

 

Total costs and estimated earnings on uncompleted contracts, gross

 

 

303,817

 

 

 

241,595

 

Less billings to date

 

 

(292,421

)

 

 

(232,045

)

Total costs and estimated earnings on uncompleted contracts, net

 

$

11,396

 

 

$

9,550

 

Included in the accompanying condensed consolidated

   balance sheets under the following captions:

 

 

 

 

 

 

 

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

$

34,409

 

 

$

29,694

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

(23,013

)

 

 

(20,144

)

Total costs and estimated earnings on uncompleted contracts, net

 

$

11,396

 

 

$

9,550

 

 

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes to job performance, job conditions, and estimated profitability may result in revisions to contract revenue and costs, and are recognized in the period in which the revisions are made.  No provision for estimated losses on uncompleted contracts was required as of September 30, 2019 or December 31, 2018.

 


8


 

5.

Inventories

 

(table only in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Raw materials

 

$

15,794

 

 

$

15,819

 

Work in process

 

 

5,983

 

 

 

6,098

 

Finished goods

 

 

574

 

 

 

807

 

Obsolescence allowance

 

 

(2,692

)

 

 

(1,907

)

Total inventories

 

$

19,659

 

 

$

20,817

 

 

Amounts credited to the allowance for obsolete inventory and charged to cost of sales amounted to $0.1 million for the three-month periods ended September 30, 2019 and 2018 and $0.5 million and $0.6 million for the nine-month periods ended September 30, 2019 and 2018, respectively.

 

 

6.

Goodwill and Intangible Assets

 

(table only in thousands)

 

Nine months ended September 30, 2019

 

 

Year ended December 31, 2018

 

Goodwill / Tradename

 

Goodwill

 

 

Tradename

 

 

Goodwill

 

 

Tradename

 

Beginning balance

 

$

152,156

 

 

$

18,258

 

 

$

166,951

 

 

$

19,691

 

Transfers to finite life classification

 

 

 

 

 

(3,904

)

 

 

 

 

 

 

Divestitures

 

 

 

 

 

 

 

 

(14,317

)

 

 

(1,340

)

Foreign currency translation

 

 

(187

)

 

 

(74

)

 

 

(478

)

 

 

(93

)

 

 

$

151,969

 

 

$

14,280

 

 

$

152,156

 

 

$

18,258

 

 

(table only in thousands)

 

As of September 30, 2019

 

 

As of December 31, 2018

 

Intangible assets – finite life

 

Cost

 

 

Accum. Amort.

 

 

Cost

 

 

Accum. Amort.

 

Technology

 

$

14,457

 

 

$

10,352

 

 

$

14,457

 

 

$

9,414

 

Customer lists

 

 

68,943

 

 

 

42,795

 

 

 

68,943

 

 

 

37,873

 

Noncompetition agreements

 

 

910

 

 

 

875

 

 

 

910

 

 

 

762

 

Tradename

 

 

5,294

 

 

 

996

 

 

 

1,390

 

 

 

579

 

Foreign currency adjustments

 

 

(1,961

)

 

 

(627

)

 

 

(1,520

)

 

 

(407

)

 

 

$

87,643

 

 

$

54,391

 

 

$

84,180

 

 

$

48,221

 

 

 

Activity for the nine-months ended September 30, 2019 and 2018 is as follows:

 

(table only in thousands)

 

2019

 

 

2018

 

Intangible assets – finite life, net at beginning of period

 

$

35,959

 

 

$

49,956

 

Amortization expense

 

 

(6,479

)

 

 

(7,355

)

Divestitures

 

 

 

 

 

(4,083

)

Transfers from indefinite life classification

 

 

3,904

 

 

 

 

Foreign currency adjustments

 

 

(132

)

 

 

30

 

Intangible assets – finite life, net at end of period

 

$

33,252

 

 

$

38,548

 

 

 

Amortization expense of finite life intangible assets was $2.2 million and $2.3 million for the three-month periods ended September 30, 2019 and 2018, respectively, and $6.5 million and $7.4 million for each of the nine-month periods ended September 30, 2019 and 2018. Amortization over the next five years for finite life intangibles is expected to be $1.9 million for the remainder of 2019, $6.8 million in 2020, $5.7 million in 2021, $4.8 million in 2022, and $4.0 million in 2023.

During the nine-month period ended September 30, 2019, the Company reassessed the useful lives of certain tradenames and determined that $3.9 million of their tradenames would have useful lives of 10 years now versus indefinite. The Company did not identify any triggering events during the three-month period ended September 30, 2019 that would require an interim impairment assessment of goodwill or intangible assets.

9


7.

Accounts Payable and Accrued Expenses

 

(table only in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Trade accounts payable, including due to subcontractors

 

$

51,249

 

 

$

51,984

 

Compensation and related benefits

 

 

5,882

 

 

 

7,578

 

Short-term lease liabilities

 

 

3,112

 

 

 

 

Accrued warranty

 

 

4,225

 

 

 

3,384

 

Contract liabilities

 

 

4,032

 

 

 

6,541

 

Other accrued expenses

 

 

9,764

 

 

 

10,742

 

Total accounts payable and accrued expenses

 

$

78,264

 

 

$

80,229

 

 

8.

Senior debt

Debt consisted of the following at September 30, 2019 and December 31, 2018:

 

(table only in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Outstanding borrowings under the Credit Facility (defined below).

Term loan payable in quarterly principal installments of $0.6 million

through June 2021, $0.9 million through June 2023, and $1.3 million

thereafter with balance due upon maturity in June 2024.

 

 

 

 

 

 

 

 

- Term loan

 

$

49,375

 

 

$

76,147

 

- Revolving Credit Loan

 

 

20,000

 

 

 

 

- Unamortized debt discount

 

 

(1,880

)

 

 

(1,691

)

Total outstanding borrowings under the Credit Facility

 

 

67,495

 

 

 

74,456

 

 

 

 

 

 

 

 

 

 

Less: current portion

 

 

(2,500

)

 

 

 

Total debt, less current portion

 

$

64,995

 

 

$

74,456

 

 

 

Scheduled principal payments under our Credit Facility are $0.6 million remaining in 2019, $2.5 million in 2020, $3.1 million in 2021, $3.8 million in 2022, $4.4 million in 2023, and $35.0 million in 2024.

United States Debt

On June 11, 2019, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Facility”). The Credit Facility amended and restated the Company’s credit agreement, dated September 3, 2015. Pursuant to the Credit Facility, the lenders provided a term loan in the aggregate principal amount of $50.0 million and the lenders increased their senior secured revolving credit commitments to the aggregate principal amount of $140.0 million. This revolving credit commitment allows the Company the ability to borrow loans denominated in different currencies. Additionally, the Credit Facility extended the maturity date to June 11, 2024, reduced interest rates, and redefined certain financial covenants.

As of September 30, 2019 and December 31, 2018, $11.5 million and $29.3 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 was $108.5 million and $50.7 million at September 30, 2019 and December 31, 2018, respectively. Revolving loans may be borrowed, repaid and reborrowed until June 11, 2024, at which time all outstanding balances of the Credit Facility must be repaid.

The weighted average stated interest rate on outstanding borrowings was 4.04% and 5.27% at September 30, 2019 and December 31, 2018, respectively.

In connection with the Credit Facility, the Company terminated its existing interest rate swap agreement. The fair value of the interest rate swap was zero and an asset of $0.5 million as of September 30, 2019 and December 31, 2018, respectively, and is classified within the “Deferred charges and other assets” on the Condensed Consolidated Balance Sheets. The Company designated the interest rate swap as an effective hedge until the date of termination; therefore, the changes to the fair value of the interest rate swap were recorded in other comprehensive income, until the date of termination. Upon termination of the swap agreement, zero and $0.2 million previously recognized in other comprehensive income was recognized into income during the

10


three-month and nine-month periods ended September 30, 2019, respectively, and is classified within “Other income (expense), net” on the Condensed Consolidated Statements of Operations.

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.  Through September 30, 2020, the maximum Consolidated Net Leverage Ratio is 3.75, after which time it will decrease to 3.50 through September 30, 2021. The Consolidated Net Leverage Ratio will then decrease to 3.25 until the end of the term of the Credit Facility.

As of September 30, 2019 and December 31, 2018, the Company was in compliance with all related financial and other restrictive covenants under the Credit Facility.

In connection with the Credit Facility, the Company paid $1.1 million in customary closing fees during the nine-month period ended September 30, 2019 that were deferred and classified as a debt discount. Additionally, during the nine-month period ended September 30, 2019, $0.4 million of the existing debt discount was expensed, and classified as interest expense, as a result of the debt modification.

Foreign Debt

The Company has a number of bank guarantee facilities and bilateral lines in various 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 $50.0 million from the bilateral lines secured by pledged assets and collateral under the Credit Facility. As of September 30, 2019, $11.0 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 $3.4 million in bank guarantees were outstanding as of September 30, 2019.  As of September 30, 2019, the borrowers of these facilities and agreements were in compliance with all related financial and other restrictive covenants.        

 

9.

Earnings per Share

The computational components of basic and diluted earnings (loss) per share for the three-month and nine-month periods ended September 30, 2019 and 2018 are below.

 

 

 

For the three-month period ended September 30,

 

 

 

2019

 

 

2018

 

(table only in thousands)

Numerator (for basic and diluted earnings (loss) per share)

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,931

 

 

$

(12,915

)

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

Basic weighted-average shares outstanding

 

 

35,070

 

 

 

34,779

 

Common stock equivalents arising from stock options and restricted stock awards

 

 

555

 

 

 

 

Diluted weighted-average shares outstanding

 

 

35,625

 

 

 

34,779

 

 

 

 

For the nine-month period ended September 30,

 

 

 

2019

 

 

2018

 

(table only in thousands)

Numerator (for basic and diluted earnings (loss) per share)

 

 

 

 

 

 

 

 

Net income (loss)

 

$

9,310

 

 

$

(8,053

)

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

Basic weighted-average shares outstanding

 

 

34,944

 

 

 

34,681

 

Common stock equivalents arising from stock options and restricted stock awards

 

 

579

 

 

 

 

Diluted weighted-average shares outstanding

 

 

35,523

 

 

 

34,681

 

 

Options and restricted stock units included in the computation of diluted earnings per share are calculated using the treasury stock method. For the three-month periods ended September 30, 2019 and 2018, 0.4 million and 0.9 million, respectively, and during the nine-month periods ended September 30, 2019 and 2018, 0.5 million and 0.8 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.

 

11


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.

 

10.

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 $1.0 million and $0.9 million of share-based compensation related expense during the three-month periods ended September 30, 2019 and 2018, respectively, and $2.8 million and $2.3 million during the nine-month periods ended September 30, 2019 and 2018, respectively.

The Company granted zero options during the three-month and nine-month periods ended September 30, 2019 and 2018.

The Company granted zero and approximately 33,000 restricted stock units during the three-month periods ended September 30, 2019 and 2018, respectively and approximately 464,000 and 963,000 restricted stock units during the nine-month periods ended September 30, 2019 and 2018.  The weighted-average fair value of restricted stock units was estimated at $7.49 and $5.21 per unit granted during the nine-months ended September 30, 2019 and 2018, respectively.  The fair value of the restricted stock units was determined by using the value of stock in the open market on the date of grant.  

The fair value of the stock-based awards granted is recorded as compensation expense on a straight-line basis over the vesting periods of the awards.

There were 1,000 and approximately 16,000 options exercised during the nine-months ended September 30, 2019 and 2018, respectively.  The Company received $7,000 and $82,000 in cash from employees exercising options during the nine-months ended September 30, 2019 and 2018. The intrinsic value of options exercised during the nine-months ended September 30, 2019 and 2018 was $1,000 and approximately $89,000, respectively.

 

11.

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 also sponsor a postretirement health care plan for office employees retired before January 1, 1990. The plan allowed retirees who attained the age of 65 to elect the type of coverage desired.

We present service cost within cost of sales and selling and administrative expenses depending on where the relevant employees compensation costs are recorded, and we present other components of net periodic benefit cost (gain) within “Other income (expense), net” on the Condensed Consolidated Statements of Operations.

Retirement and health care 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 September 30,

 

 

Nine months ended September 30,

 

(table only in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Pension plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

$

326

 

 

$

298

 

 

$

977

 

 

$

893

 

Expected return on plan assets

 

 

(313

)

 

 

(378

)

 

 

(940

)

 

 

(1,134

)

Amortization of net actuarial loss

 

 

65

 

 

 

59

 

 

 

198

 

 

 

178

 

Net periodic benefit cost (gain)

 

$

78

 

 

$

(21

)

 

$

235

 

 

$

(63

)

Health care plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

$

1

 

 

$

1

 

 

$

2

 

 

$

2

 

Amortization of loss

 

 

2

 

 

 

2

 

 

 

6

 

 

 

7

 

Net periodic benefit cost

 

$

3

 

 

$

3

 

 

$

8

 

 

$

9

 

 

 

We made contributions to our defined benefit plans during the nine-months ended September 30, 2019 and 2018 totaling $0.4 million and $0.6 million, respectively. We anticipate $0.3 million and $24,000 of further contributions to fund the pension plan and the retiree health care plan, respectively, during the remainder of 2019. The unfunded liability of the plans of $8.7 million and $8.8 million as of September 30, 2019 and December 31, 2018, respectively, is included in “Other liabilities” on our Condensed Consolidated Balance Sheets.

12


 

 

12.

Leases

 

Our leasing activity is primarily related to buildings used for manufacturing, warehousing, sales, and administrative activities.  We determine if an arrangement is a lease at inception. Many of our lease agreements contain renewal options; however, we do not recognize ROU assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception or when a triggering event occurs. Some of our lease agreements contain rent escalation clauses, free-rent periods, or other lease concessions. We recognize our minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement. Variable lease costs represent amounts that are not fixed in nature and are not tied to an index or rate, and are recognized as incurred. Our variable lease costs are not material.

 

In determining our ROU assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASU 2016-02 requires us to use the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. When we cannot readily determine the discount rate implicit in the lease agreement, we utilize our incremental borrowing rate. To estimate our specific incremental borrowing rates we consider, among other factors, interest rates on our existing credit facilities, risk-free rates, the types of assets being leased, and the term of the leases.

 

The components of lease expense were as follows:

 

(table only in thousands)

 

For the three months ended September 30, 2019

 

 

For the nine months ended September 30, 2019

 

Operating lease cost (a)

 

$

889

 

 

$

2,728

 

Finance lease cost:

 

 

 

 

 

 

 

 

   Amortization of right-of-use assets

 

 

78

 

 

 

232

 

   Interest on lease liability

 

 

89

 

 

 

272

 

Total finance lease cost

 

 

167

 

 

 

504

 

Total lease cost

 

$

1,056

 

 

$

3,232

 

(a) includes variable lease costs which are immaterial

 

 

 

 

 

 

 

 

 

Supplemental cash flow information related to leases was as follows:

(table only in thousands)

 

For the nine months ended September 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

   Operating cash flows from operating leases

 

$

2,604

 

   Operating cash flows from finance leases

 

$

272

 

   Financing cash flows from finance leases

 

$

368

 

Right of use assets obtained in exchange for lease obligations

 

 

 

 

   Operating leases

 

$

3,045

 

 

Supplemental balance sheet information related to leases was as follows:

 

(table only in thousands)

 

September 30, 2019

 

Operating leases

 

 

 

 

   Right-of-use assets from operating leases

 

$

13,810

 

 

 

 

 

 

   Accounts payable and accrued expenses

 

$

2,606

 

   Operating lease liabilities

 

 

11,328

 

     Total operating lease liabilities

 

$

13,934

 

 

 

 

 

 

Finance leases

 

 

 

 

   Property, plant and equipment, net

 

$

3,333

 

 

 

 

 

 

   Accounts payable and accrued expenses

 

$

506

 

   Other liabilities

 

 

7,473

 

     Total finance lease liabilities

 

$

7,979

 

 

13


 

 

 

 

Weighted-average remaining lease term

 

 

 

 

   Operating leases

 

9 years

 

   Finance leases

 

12 years

 

Weighted-average discount rate

 

 

 

 

   Operating leases

 

5.3%

 

   Finance leases

 

4.5%

 

 

As of September 30, 2019, maturities of lease liabilities were as follows:

 

(table only in thousands)

 

Operating Leases

 

 

Finance Leases

 

2019

 

$

730

 

 

$

207

 

2020

 

 

3,041

 

 

 

855

 

2021

 

 

2,633

 

 

 

872

 

2022

 

 

1,984

 

 

 

889

 

2023

 

 

1,857

 

 

 

907

 

Thereafter

 

 

6,506

 

 

 

6,409

 

Total minimum lease payments

 

$

16,751

 

 

$

10,139

 

Less imputed interest

 

 

(2,817

)

 

 

(2,160

)

Lease liability

 

$

13,934

 

 

$

7,979

 

 

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 and under previous lease accounting standards, future minimum lease payments for operating leases having initial or remaining noncancelable lease terms in excess of one year would have been as follows:

 

(table only in thousands)

 

December 31, 2018

 

2019

 

$

2,745

 

2020

 

 

1,880

 

2021

 

 

1,454

 

2022

 

 

931

 

2023

 

 

851

 

Thereafter

 

 

2,278

 

Total

 

$

10,139

 

 

 

 

13.

Income Taxes

We file income tax returns in various federal, state and local jurisdictions. Tax years from 2014 forward remain open for examination by Federal authorities. Tax years from 2014 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 September 30, 2019 and December 31, 2018, the liability for uncertain tax positions totaled approximately $0.5 and $0.9 million, respectively, 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 U.S. 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 September 30, 2019 and December 31, 2018, we have recorded deferred income taxes of approximately zero and $0.6 million, respectively, on the undistributed earnings of our foreign subsidiaries. A significant portion of the previously undistributed earnings to which the deferred income taxes were attributable were repatriated in 2019.

14


Income tax expense (benefit) was $0.7 million for the third quarter of 2019 and $(2.6) million for the first nine months of 2019, compared with income tax expense of $1.3 million for the third quarter of 2018 and $6.8 million for the first nine months of 2018. The effective income tax rate for the third quarter of 2019 was 27.7% compared with (11.5)% for third quarter of 2018.  The effective income tax rate was (38.1)% for the first nine months of 2019, compared with (524.7)% for the first nine months of 2018. The effective income tax rate for the nine months ended September 30, 2019 was negative (i.e. income tax benefits), despite pre-tax income, due primarily to a tax benefit of $4.4 million upon finalization of a tax position related to the 2018 divestiture of Jiangyin Zhongli Industrial Technology Co. Ltd (“Zhongli”). That benefit was recorded as a discrete item in the second quarter of 2019. Our effective tax rate is affected by certain other permanent differences, including state income taxes, non-deductible incentive stock-based compensation, the Global Intangible Low-Taxed Income inclusion and Foreign-Derived Intangible Income deduction, tax credits, return-to-provision adjustments, and differences in tax rates among the jurisdictions in which we operate.

 

 

14.

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 September 30, 2019 and December 31, 2018, due to their short-term nature or variable, market-driven interest rates.

The fair value of the debt issued under the Credit Facility was $69.4 million and $76.1 million at September 30, 2019 and December 31, 2018, respectively.  The fair value of the note payable was $1.7 million at December 31, 2018.

At September 30, 2019 and December 31, 2018, the Company had cash and cash equivalents of $29.0 million and $43.7 million, respectively, of which $21.5 million and $23.3 million, respectively, was held outside of the United States, principally in the Netherlands, United Kingdom, China, and Canada.

 

15.

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 September 30, 2019 for cases involving asbestos-related claims were $3.0 million, of which, together with all legal fees other than corporate counsel expenses, $2.8 million has been paid by the Company’s insurers. The average cost per settled claim, excluding legal fees, was approximately $35,000.

Based upon the most recent information available to the Company regarding such claims, there were a total of 206 cases pending against the Company as of September 30, 2019 (with Illinois, New York, Pennsylvania and West Virginia having the largest number of cases), as compared with 208 cases that were pending as of December 31, 2018. During the nine-months ended September 30, 2019, 51 new cases were filed against the Company, and the Company was dismissed from 45 cases and settled eight 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.

Summary

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.

15


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.

 

 

16.

Business Segment Information

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 three reportable segments. The results of the segments are reviewed through the “Income (loss) from operations” line on the Consolidated Statements of Operations.

During the first quarter of 2019, as a result of further evaluating the Company’s operating structure, management determined that a minor realignment of the Company’s segments would help maximize growth and improve customer experience. As a result of this minor realignment, the operating results of the reportable segments Fluid Handling Solutions and Industrial Solutions have been reclassified to have their results align for the three-month and nine-month periods ended September 30, 2019 and 2018.

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

 

Energy Solutions segment:  Our Energy Solutions segment serves the Energy market, where we are a key part of helping meet the global demand for Clean Energy with products and services that support our customers with efficient solutions and technologies to keep the world clean and safe. Our offerings improve air quality and solves fluid handling needs with market leading, highly engineered, and customized solutions for the power generation, oil & gas, and petrochemical industries.

 

Industrial Solutions segment:  Our Industrial Solutions segment serves the Industrial Pollution Control market where our aim is to address the growing need to protect the air we breathe and help our customers’ desires for sustainability upgrades beyond carbon footprint issues.  Our offerings improve air quality with a compelling solution set of air pollution control technologies that enable our customers to reduce their carbon footprint, lower energy consumption, minimize waste and meet compliance targets for toxic emissions, fumes, volatile organic compounds, and industrial odors.

 

Fluid Handling Solutions segment:  Our Fluid Handling Solutions segment offers unique pump and filtration solutions that maintain safe and clean operations in some of the most harsh and toxic environments. In this market, we provide solutions for mission-critical applications to a wide variety of industries including, but not limited to, plating and metal finishing, automotive, food and beverage, chemical, petrochemical, pharmaceutical, wastewater treatment, desalination and the aquarium & aquaculture markets.

The financial segment information is presented in the following tables:

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Solutions Segment

 

$

48,847

 

 

$

56,552

 

 

$

154,606

 

 

$

147,661

 

Industrial Solutions Segment

 

 

26,983

 

 

 

21,868

 

 

 

65,920

 

 

 

59,833

 

Fluid Handling Solutions Segment

 

 

9,436

 

 

 

9,836

 

 

 

31,930

 

 

 

35,991

 

Net sales

 

$

85,266

 

 

$

88,256

 

 

$

252,456

 

 

$

243,485

 

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Income (loss) from Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Solutions Segment

 

$

7,633

 

 

$

8,157

 

 

$

23,275

 

 

$

17,682

 

Industrial Solutions Segment

 

 

2,794

 

 

 

2,091

 

 

 

3,911

 

 

 

4,769

 

Fluid Handling Solutions Segment

 

 

818

 

 

 

1,388

 

 

 

4,657

 

 

 

6,744

 

Corporate and Other(1)

 

 

(7,186

)

 

 

(22,666

)

 

 

(20,878

)

 

 

(24,691

)

Eliminations

 

 

 

 

 

589

 

 

 

 

 

 

(232

)

Income (loss) from operations

 

$

4,059

 

 

$

(10,441

)

 

$

10,965

 

 

$

4,272

 

16


 

(1)

Includes gain (loss) on divestitures, net of selling costs (see Note 17 – Divestitures), corporate compensation, professional services, information technology, and other general and administrative corporate expenses.  This figure excludes earnout expenses, which are recorded in the segment in which the expense occurs.  

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Property and Equipment Additions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Solutions Segment

 

$

57

 

 

$

6

 

 

$

218

 

 

$

38

 

Industrial Solutions Segment

 

 

59

 

 

 

533

 

 

 

222

 

 

 

697

 

Fluid Handling Solutions Segment

 

 

2,135

 

 

 

767

 

 

 

2,624

 

 

 

1,051

 

Corporate and Other

 

 

293

 

 

 

 

 

 

682

 

 

 

111

 

Property and equipment additions

 

$

2,544

 

 

$

1,306

 

 

$

3,746

 

 

$

1,897

 

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Depreciation and Amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Solutions Segment

 

$

1,544

 

 

$

2,379

 

 

$

4,684

 

 

$

6,286

 

Industrial Solutions Segment

 

 

327

 

 

 

361

 

 

 

998

 

 

 

803

 

Fluid Handling Solutions Segment

 

 

668

 

 

 

1,168

 

 

 

2,140

 

 

 

2,675

 

Corporate and Other

 

 

94

 

 

 

29

 

 

 

331

 

 

 

333

 

Depreciation and amortization

 

$

2,633

 

 

$

3,937

 

 

$

8,153

 

 

$

10,097

 

 

 

(dollars in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Identifiable Assets

 

 

 

 

 

 

 

 

Energy Solutions Segment

 

$

246,630

 

 

$

245,842

 

Industrial Solutions Segment

 

 

58,250

 

 

 

55,582

 

Fluid Handling Solutions Segment

 

 

71,778

 

 

 

72,507

 

Corporate and Other(2)

 

 

12,982

 

 

 

18,651

 

Identifiable assets

 

$

389,640

 

 

$

392,582

 

 

(2)

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

 

 

(dollars in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Goodwill

 

 

 

 

 

 

 

 

Energy Solutions Segment

 

$

96,956

 

 

$

97,143

 

Industrial Solutions Segment

 

 

23,436

 

 

 

23,436

 

Fluid Handling Solutions Segment

 

 

31,577

 

 

 

31,577

 

Goodwill

 

$

151,969

 

 

$

152,156

 

 

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 September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Inter-Segment Sales

 

 

 

(dollars in thousands)

 

Total

Sales

 

 

 

 

Intra-

Segment

Sales

 

 

 

 

Industrial

 

 

 

 

Energy

 

 

 

 

Fluid

 

 

Net Sales to

Outside

Customers

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Solutions Segment

 

$

51,083

 

 

 

 

$

(2,134

)

 

 

 

$

(102

)

 

 

 

$

 

 

 

 

$

 

 

$

48,847

 

Industrial Solutions Segment

 

 

29,269

 

 

 

 

 

(2,227

)

 

 

 

 

 

 

 

 

 

(59

)

 

 

 

 

 

 

 

26,983

 

Fluid Handling Solutions Segment

 

 

9,823

 

 

 

 

 

(362

)

 

 

 

 

(25

)

 

 

 

 

 

 

 

 

 

 

 

 

9,436

 

Net Sales

 

$

90,175

 

 

 

 

$

(4,723

)

 

 

 

$

(127

)

 

 

 

$

(59

)

 

 

 

$

 

 

$

85,266

 

 

17


 

 

Three months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Inter-Segment Sales

 

 

 

(dollars in thousands)

 

Total

Sales

 

 

 

 

Intra-

Segment

Sales

 

 

 

 

Industrial

 

 

 

 

Energy

 

 

 

 

Fluid

 

 

Net Sales to

Outside

Customers

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Solutions Segment

 

$

58,561

 

 

 

 

$

(1,453

)

 

 

 

$

(556

)

 

 

 

$

 

 

 

 

$

 

 

$

56,552

 

Industrial Solutions Segment

 

 

22,409

 

 

 

 

 

(573

)

 

 

 

 

 

 

 

 

 

73

 

 

 

 

 

(41

)

 

 

21,868

 

Fluid Handling Solutions Segment

 

 

10,226

 

 

 

 

 

(399

)

 

 

 

 

16

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

9,836

 

Net Sales

 

$

91,196

 

 

 

 

$

(2,425

)

 

 

 

$

(540

)

 

 

 

$

66

 

 

 

 

$

(41

)

 

$

88,256

 

 

 

 

Nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Inter-Segment Sales

 

 

 

(dollars in thousands)

 

Total

Sales

 

 

 

 

Intra-

Segment

Sales

 

 

 

 

Industrial

 

 

 

 

Energy

 

 

 

 

Fluid

 

 

Net Sales to

Outside

Customers

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Solutions Segment

 

$

158,888

 

 

 

 

$

(3,998

)

 

 

 

$

(272

)

 

 

 

$

 

 

 

 

$

(12

)

 

$

154,606

 

Industrial Solutions Segment

 

 

73,794

 

 

 

 

 

(6,204

)

 

 

 

 

 

 

 

 

 

(1,617

)

 

 

 

 

(53

)

 

 

65,920

 

Fluid Handling Solutions Segment

 

 

33,189

 

 

 

 

 

(1,096

)

 

 

 

 

(163

)

 

 

 

 

 

 

 

 

 

 

 

 

31,930

 

Net Sales

 

$

265,871

 

 

 

 

$

(11,298

)

 

 

 

$

(435

)

 

 

 

$

(1,617

)

 

 

 

$

(65

)

 

$

252,456

 

 

 

 

Nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Inter-Segment Sales

 

 

 

(dollars in thousands)

 

Total

Sales

 

 

 

 

Intra-

Segment

Sales

 

 

 

 

Industrial

 

 

 

 

Energy

 

 

 

 

Fluid

 

 

Net Sales to

Outside

Customers

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Solutions Segment

 

$

155,011

 

 

 

 

$

(5,851

)

 

 

 

$

(1,494

)

 

 

 

$

 

 

 

 

$

(5

)

 

$

147,661

 

Industrial Solutions Segment

 

 

62,652

 

 

 

 

 

(2,178

)

 

 

 

 

 

 

 

 

 

(600

)

 

 

 

 

(41

)

 

$

59,833

 

Fluid Handling Solutions Segment

 

 

37,557

 

 

 

 

 

(1,208

)

 

 

 

 

(351

)

 

 

 

 

(7

)

 

 

 

 

 

 

$

35,991

 

Net Sales

 

$

255,220

 

 

 

 

$

(9,237

)

 

 

 

$

(1,845

)

 

 

 

$

(607

)

 

 

 

$

(46

)

 

$

243,485

 

 

17.

Divestitures

 

Strobic Air Corporation

On March 30, 2018, the Company completed the sale of Strobic Air Corporation (“Strobic”) as part of its strategic decision to exit brands that do not align with the CECO portfolio to increase focus on better serving the energy and industrial solutions and fluid handling markets.  The sales price was $28.5 million, subject to post-closing purchase price adjustments. The disposition resulted in a gain of $6.9 million recorded in the first quarter of 2018, comprised of $27.9 million of net proceeds received as consideration after estimated post-closing purchase price adjustments less net assets disposed of $18.8 million and transaction costs of $2.2 million.  The net assets disposed were primarily comprised of $13.0 million of goodwill, $2.3 million of definite-lived intangible assets and $1.2 million of indefinite-lived intangible assets allocated to the Strobic business. In the first quarter of 2018, Strobic reported $4.2 million in net sales and $1.1 million in income from operations.  Strobic results through the date of disposition are included within income before income taxes in the Condensed Consolidated Statements of Operations and are reported within the Fluid Handling Solutions segment. The sale of Strobic did not constitute a significant strategic shift that will have a material impact on the Company’s ongoing operations and financial results.

 

Keystone Filter

On February 28, 2018, the Company completed the sale of the Keystone Filter brand (“Keystone”). The sales price was $7.5 million, subject to post-closing purchase price adjustments. The disposition resulted in a gain of $4.3 million recorded in the first quarter of 2018, comprised of $7.2 million of net proceeds received as consideration after estimated post-closing purchase price adjustments less net assets disposed of $2.7 million and transaction costs of $0.2 million.  Keystone’s results are reported within the Fluid Handling Solutions segment through the date of disposition.

 

Zhongli

On November 27, 2018, the Company completed the sale of Zhongli, a business in our Energy Solutions segment operating in China, for a price of $3.6 million.  In the third quarter of 2018, we classified the assets and liabilities of Zhongli as held-for-sale.  In connection with classifying this business as held-for-sale, GAAP required us to assess impairment by comparing the

18


estimated selling price, less cost to sell to our carrying value in Zhongli.  Based on this analysis, we recorded a $15.1 million estimated loss. The disposal of this business does not constitute a significant strategic shift that will have a material impact on the Company’s ongoing operations and financial results.  During the three-month and nine-month periods ended September 30, 2018, Zhongli reported net sales of $1.6 million and $4.5 million, respectively.  Zhongli’s results are reported within the Energy Solutions segment through the date of disposition.

 

19


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 Operations for the three-month and nine-month periods ended September 30, 2019 and 2018 reflect the consolidated operations of the Company and its subsidiaries.

CECO is a global leader in industrial air quality and fluid handling serving the energy, industrial and other niche markets through an attractive asset-light business model.  CECO provides innovative technology and application expertise that helps companies grow their businesses with safe, clean, and more efficient solutions to help protect our shared environment.  

CECO serves diverse industries globally by working to improve air quality, optimize the energy value chain, and provide customized engineered solutions in our customer’s mission critical applications. The secular growth industries CECO serves include oil & gas, power generation, water and wastewater, battery production, poly silicon fabrication, and chemical and petrochemical processing, along with a wide range of other industries.

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 (“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 supplemental 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 Operations for the three-month and nine-month periods ended September 30, 2019 and 2018 are as follows:

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

(dollars in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net sales

 

$

85.3

 

 

$

88.3

 

 

$

252.5

 

 

$

243.5

 

Cost of sales

 

 

56.5

 

 

 

59.6

 

 

 

168.4

 

 

 

161.7

 

Gross profit

 

$

28.8

 

 

$

28.7

 

 

$

84.1

 

 

$

81.8

 

Percent of sales

 

 

33.8

%

 

 

32.5

%

 

 

33.3

%

 

 

33.6

%

Selling and administrative expenses

 

 

21.8

 

 

 

22.2

 

 

 

65.5

 

 

 

66.1

 

Percent of sales

 

 

25.6

%

 

 

25.1

%

 

 

25.9

%

 

 

27.1

%

Amortization and earnout expenses

 

 

2.2

 

 

 

2.0

 

 

 

6.5

 

 

 

7.4

 

Loss on divestitures, net of selling costs

 

 

 

 

 

15.1

 

 

 

0.1

 

 

 

4.0

 

Restructuring expense (income), net

 

 

0.7

 

 

 

(0.2

)

 

 

1.0

 

 

 

 

Operating income (loss)

 

$

4.1

 

 

$

(10.4

)

 

$

11.0

 

 

$

4.3

 

Operating margin

 

 

4.8

%

 

 

(11.8)

%

 

 

4.4

%

 

 

1.8

%

20


 

To compare operating performance between the three-month and nine-month periods ended September 30, 2019 and 2018, the Company has adjusted GAAP operating income to exclude (1) loss on divestitures, net of selling costs necessary to complete the divestiture such as legal, accounting and compliance, (2) amortization and contingent acquisition expenses, including amortization of acquisition related intangibles, retention, severance, and earnout expenses, and (3) restructuring expense (income), net.  See “Note Regarding Use of Non-GAAP Financial Measures” above. 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 September 30,

 

 

Nine months ended September 30,

 

(dollars in millions)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Operating income as reported in accordance with GAAP

 

$

4.1

 

 

$

(10.4

)

 

$

11.0

 

 

$

4.3

 

Operating margin in accordance with GAAP

 

 

4.8

%

 

 

(11.8

)%

 

 

4.4

%

 

 

1.8

%

Amortization and earnout expenses

 

 

2.2

 

 

 

2.0

 

 

 

6.5

 

 

 

7.4

 

Loss on divestitures, net of selling costs

 

 

 

 

 

15.1

 

 

 

0.1

 

 

 

4.0

 

Restructuring expense (income), net

 

 

0.7

 

 

 

(0.2

)

 

 

1.0

 

 

 

 

Non-GAAP operating income

 

$

7.0

 

 

$

6.5

 

 

$

18.6

 

 

$

15.7

 

Non-GAAP operating margin

 

 

8.2

%

 

 

7.4

%

 

 

7.4

%

 

 

6.4

%

 

In 2018, we divested three non-core businesses; Keystone filter brand (“Keystone”) and Strobic Air Corporation (“Strobic”) in the first quarter and Jiangyin Zhongli Industrial Technology Co. Ltd. (“Zhongli”) in the fourth quarter (collectively, the “Divestitures”).  The exclusion of the operating results of the Divestitures subsequent to their disposition impacts the comparability of our consolidated and segment operating results.

 

Consolidated sales for the third quarter of 2019 decreased $3.0 million, or 3.4%, to $85.3 million compared with $88.3 million in the third quarter of 2018. The decrease is primarily attributable to the impact of the divested Zhongli business. Excluding the impact of Zhongli, sales decreased $1.4 million, or 1.6% due to a decrease in the Company’s selective catalytic reduction (“SCR”) solutions.

Consolidated sales for the first nine months of 2019 increased $9.0 million, or 3.7%, to $252.5 million compared with $243.5 million in the first nine months of 2018. The increase is primarily attributable to volume growth for the Company’s refinery-related products, industrial air pollution products, power generated natural gas and midstream oil & gas products, partially offset by the impact of the Divestitures. Excluding the impact of 2018 Divestitures, sales grew organically by $18.2 million, or 7.8%.

Gross profit increased $0.1 million, or 0.3%, to $28.8 million in the third quarter of 2019 compared with $28.7 million in the same period of 2018.  Gross profit as a percentage of sales increased to 33.8% in the third quarter of 2019 compared with 32.5% in the third quarter of 2018 due to product mix.

Gross profit increased $2.3 million, or 2.8%, to $84.1 million in the first nine months of 2019 compared with $81.8 million in the same period of 2018.  The increase in gross profit is primarily attributable to sales volume increases period over period. Gross profit as a percentage of sales decreased to 33.3% in the first nine months of 2019 compared with 33.6% in the first nine months of 2018. The decrease is primarily attributable to product mix.

Orders booked were $115.7 million during the third quarter of 2019 and $316.0 million during the first nine months of 2019 as compared with $97.5 million during the third quarter of 2018 and $292.9 million during the first nine months of 2018.  Excluding the impact of 2018 Divestitures, bookings grew organically by $18.6 million and $29.5 million during the third quarter of 2019 and the first nine months of 2019, respectively.

Selling and administrative expenses were $21.8 million for the third quarter of 2019 compared with $22.2 million for the third quarter of 2018. The decrease in administrative expenses is primarily attributable to the impact of the divested businesses in 2018. Selling and administrative expenses increased as a percentage of sales to 25.6% in the third quarter of 2019 compared with 25.1% in the third quarter of 2018.

Selling and administrative expenses were $65.5 million for the first nine months of 2019 compared with $66.1 million for the first nine months of 2018. Selling and administrative expenses decreased as a percentage of sales to 25.9% in the first nine months of 2019 compared with 27.1% in the first nine months of 2018.  The decrease in selling and administrative expenses as a percentage of sales is primarily attributable to the increase in sales.

Amortization and earnout expense was $2.2 million for the third quarter of 2019 compared with $2.0 million for the third quarter of 2018. The increase in expense is primarily attributable to earnout income of $0.3 million in the third quarter 2018, which did not recur in 2019.

21


Amortization and earnout expense was $6.5 million for the first nine months of 2019 compared with $7.4 million for the first nine months of 2018. The decrease in expense is attributable to $0.9 million decrease in definite-lived asset amortization.  

Operating income increased $14.5 million to $4.1 million in the third quarter of 2019 compared with operating loss of $(10.4) million during the third quarter of 2018.  Operating loss in the third quarter 2018 included a $15.1 million non-cash impairment charge related to the divested businesses. This loss is included in the loss on divestiture, net of selling costs on the Condensed Consolidated Statement of Operations. Operating income increased $6.7 million to $11.0 million in the first nine months of 2019 compared with $4.3 million during the first nine months of 2018. The increase is due primarily to the net loss on divested businesses in the first nine months of 2018 outlined in Note 17 to the unaudited condensed consolidated financial statements within Item 1 of this Quarterly Report on Form 10-Q, as well as the factors described above.

Non-GAAP operating income was $7.0 million for the third quarter of 2019 compared with $6.5 million for the third quarter of 2018. The increase in non-GAAP operating income is primarily attributable to higher gross margins and lower administration expenses. Non-GAAP operating income as a percentage of sales increased to 8.2% for the third quarter of 2019 from 7.4% for the third quarter of 2018.

Non-GAAP operating income was $18.6 million for the first nine months of 2019 compared with $15.7 million for the first nine months of 2018. The increase in non-GAAP operating income is primarily attributable to higher sales, which led to an increase in gross profit. Non-GAAP operating income as a percentage of sales increased to 7.4% for the first nine months of 2019 from 6.4% for the first nine months of 2018.

Interest expense decreased to $1.3 million in the third quarter of 2019 and $4.3 million for the first nine months of 2019 compared with $1.7 million in the third quarter of 2019 and $5.4 million for the first nine months of 2018. The decrease is primarily due to a reduced debt balance in 2019 in comparison to 2018, resulting in lower interest expense incurred.

Income tax expense (benefit) was $0.7 million for the third quarter of 2019 and $(2.6) million for the first nine months of 2019, compared with income tax expense of $1.3 million for the third quarter of 2018 and $6.8 million for the first nine months of 2018. The effective income tax rate for the third quarter of 2019 was 27.7% compared with (11.5)% for third quarter of 2018.  The effective income tax rate was (38.1)% for the first nine months of 2019, compared with (524.7)% for the first nine months of 2018. The effective income tax rate for the nine months ended September 30, 2019 was negative (i.e., income tax benefits), despite pre-tax income, due primarily to a tax benefit of $4.4 million upon finalization of a tax position related to the 2018 divestiture of Zhongli. That benefit was recorded as a discrete item in the second quarter of 2019. Our effective tax rate is affected by certain other permanent differences, including state income taxes, non-deductible incentive stock-based compensation, the Global Intangible Low-Taxed Income inclusion and Foreign-Derived Intangible Income deduction, tax credits, return-to-provision adjustments, 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 three reportable segments. The results of the segments are reviewed through “Income from operations” on the unaudited Condensed Consolidated Statements of Operations. 

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net Sales (less intra- and inter-segment sales)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Solutions Segment

 

$

48,847

 

 

$

56,552

 

 

$

154,606

 

 

$

147,661

 

Industrial Solutions Segment

 

 

26,983

 

 

 

21,868

 

 

 

65,920

 

 

 

59,833

 

Fluid Handling Solutions Segment

 

 

9,436

 

 

 

9,836

 

 

 

31,930

 

 

 

35,991

 

Net sales

 

$

85,266

 

 

$

88,256

 

 

$

252,456

 

 

$

243,485

 

 

22


 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Income from Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Solutions Segment

 

$

7,633

 

 

$

8,157

 

 

$

23,275

 

 

$

17,682

 

Industrial Solutions Segment

 

 

2,794

 

 

 

2,091

 

 

 

3,911

 

 

 

4,769

 

Fluid Handling Solutions Segment

 

 

818

 

 

 

1,388

 

 

 

4,657

 

 

 

6,744

 

Corporate and Other(1)

 

 

(7,186

)

 

 

(22,666

)

 

 

(20,878

)

 

 

(24,691

)

Eliminations

 

 

 

 

 

589

 

 

 

 

 

 

(232

)

Income from operations

 

$

4,059

 

 

$

(10,441

)

 

$

10,965

 

 

$

4,272

 

(1) 

Includes (loss) gain on divestitures, net of selling costs, corporate compensation, professional services, information technology and other general and administrative corporate expenses.  This amount excludes earnout adjustments, which are recorded in the segment in which the adjustment occurs.  

Energy Solutions Segment

Our Energy Solutions segment net sales decreased $7.8 million to $48.8 million in the third quarter of 2019 compared with $56.6 million in the same period of 2018. Excluding the divested division Zhongli, net sales decreased $6.2 million in the third quarter 2019 from $55.0 million in the same period of 2018. The decrease is primarily attributable to volume decreases in the Company’s SCR solutions and related services period over period that serves the power generation markets.

Our Energy Solutions segment net sales increased $6.9 million to $154.6 million in the first nine months of 2019 compared with $147.7 million in the same period of 2018. Excluding the divested division Zhongli, net sales increased $11.4 million in the first nine months of 2019. The increase is due primarily to volume increases for the Company’s refinery related products and separation equipment serving the midstream oil & gas markets offset by volume decreases in the SCR solutions serving power generation markets.

Operating income for the Energy Solutions segment decreased $0.6 million to $7.6 million in the third quarter of 2019 compared with $8.2 million in the same period of 2018. The change is primarily attributable to a $0.4 million decrease in gross profit driven by lowered sales and an increase of $0.5 million in restructuring expense offset by a decrease of $0.6 million in administrative expenses related to divested businesses.

Operating income for the Energy Solutions segment increased $5.6 million to $23.3 million in the first nine months of 2019 compared with $17.7 million in the same period of 2018. The increase is primarily attributable to increased sales in the first nine months of 2019 related to products and markets described above offset by a $0.5 million increase in restructuring expense and $0.3 million in earnout income in 2018, which did not recur in 2019.

Industrial Solutions Segment

Our Industrial Solutions segment net sales increased $5.1 million to $27.0 million in the third quarter of 2019 compared with $21.9 million in the third quarter of 2018. The increase is primarily attributable to increased sales for the Company’s clean air pollution control technologies.

Our Industrial Solutions segment net sales increased $6.1 million to $65.9 million in the first nine months of 2019 compared with $59.8 million in the same period of 2018. The increase is primarily attributable to volume increases for the Company’s clean air pollution control technologies.

Operating income for the Industrial Solutions segment increased $0.7 million to $2.8 million in the third quarter of 2019 compared with $2.1 million in the third quarter of 2018. The increase is primarily attributable to increased sales offset by $0.4 million increase in selling expenses related to the investment in sales & marketing personnel and customer focused product innovation.

Operating income for the Industrial Solutions segment decreased $0.9 million to $3.9 million in the first nine months of 2019 compared with $4.8 million in the first nine months of 2018. The decrease is attributable to $1.4 million increase in selling expenses related to the investment in sales & marketing personnel and customer focused product innovation offset by a $0.6 million increase in gross profit due to favorable product sales volume.

Fluid Handling Solutions Segment

Our Fluid Handling Solutions segment net sales decreased $0.4 million to $9.4 million in the third quarter of 2019 compared with $9.8 million in the third quarter of 2018. The decrease is primarily attributable to volume decreases in the Company’s filtration and pump solutions.

23


Our Fluid Handling Solutions segment net sales decreased $4.1 million to $31.9 million in the first nine months of 2019 compared with $36.0 million in the first nine months of 2018. The sales decrease was primarily attributable to $4.8 million of revenue in the same period of 2018 from the Keystone and Strobic divested businesses, which did not recur in the first nine months of 2019. Excluding the divested Keystone and Strobic businesses, segment sales increased $0.7 million.

Operating income for the Fluid Handling Solutions segment decreased $0.6 million to $0.8 million in the third quarter of 2019 compared with $1.4 million in the third quarter of 2018. The decrease is primarily attributable to a $0.5 million decrease in gross profit due to product mix and an increase in plant investment expense.

Operating income for the Fluid Handling Solutions segment decreased $2.0 million to $4.7 million in the first nine months of 2019 compared with $6.7 million in the first nine months of 2018. The decrease is attributable to the decrease in sales and operating income of $1.2 million from the divestitures of Keystone and Strobic. Excluding the divested Keystone and Strobic businesses, segment operating income decreased by $0.8 million due to volume and plant investments.

Corporate and Other Segment

Operating expense for the Corporate and Other segment decreased $15.5 million to $7.2 million in the third quarter of 2019 compared with $22.7 million in the third quarter of 2018. The decrease is primarily attributable to a $15.1 million impairment loss related to the Zhongli business in the third quarter of 2018, which did not recur in 2019.

Operating expense for the Corporate and Other segment was $20.9 million in the first nine months of 2019 compared with $24.7 million in the first nine months of 2018.  The decrease in operating expenses is primarily attributable to the net loss of $4.0 million on divested businesses in the first nine months of 2018 outlined in Note 17 to the unaudited condensed consolidated financial statements within Item 1 of this Quarterly Report on Form 10-Q, which did not recur in 2019.

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.  Our customers may have the right to cancel a given order. Our backlog as of September 30, 2019, was $237.8 million compared with $182.1 million as of December 31, 2018.  During the first nine months of 2019, the Company removed $6.7 million of orders that were previously disclosed as backlog in prior quarters, due to cancellations by customers.  Backlog is adjusted on a quarterly basis for adjustments in foreign currency exchange rates. Backlog is not defined by GAAP and our methodology for calculating backlog may not be consistent with methodologies used by other companies. There can be no assurances that backlog will be replicated, increased or translated into higher revenues in the future. The success of our business depends on a multitude of factors related to our backlog and the orders secured during the subsequent periods. Certain contracts are highly dependent on the work of contractors and other subcontractors participating in a project, over which we have no or limited control, and their performance on such project could have an adverse effect on the profitability of our contracts. Delays resulting from these contractors and subcontractors, changes in the scope of the project, weather, and labor availability also can have an effect on a contract’s profitability.

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

Our principal sources of liquidity are cash flow from operations and available borrowings under our Credit Facility (as defined below). Our principal uses of cash are operating costs, payment of principal and interest on our outstanding debt, working capital and other corporate requirements.

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, utilizing extended payment terms from material suppliers when possible, 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.

At September 30, 2019, the Company had working capital of $54.5 million, compared with $57.0 million at December 31, 2018.  The ratio of current assets to current liabilities was 1.53 to 1 on September 30, 2019, as compared with a ratio of 1.55 to 1 at December 31, 2018.

24


At September 30, 2019 and December 31, 2018, cash and cash equivalents totaled $29.0 million and $43.7 million, respectively. As of September 30, 2019 and December 31, 2018, $21.5 million and $23.3 million, respectively, of our cash and cash equivalents were held by certain non-U.S. subsidiaries, as well as being denominated in foreign currencies.

Debt consisted of the following at September 30, 2019 and December 31, 2018:

 

(table only in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Outstanding borrowings under the Credit Facility (defined below).

Term loan payable in quarterly principal installments of $0.6 million

through June 2021, $0.9 million through June 2023, and $1.3 million

thereafter with balance due upon maturity in June 2024.

 

 

 

 

 

 

 

 

- Term loan

 

$

49,375

 

 

$

76,147

 

- Revolving Credit Loan

 

$

20,000

 

 

 

 

- Unamortized debt discount

 

$

(1,880

)

 

 

(1,691

)

Total outstanding borrowings under the Credit Facility

 

 

67,495

 

 

 

74,456

 

 

 

 

 

 

 

 

 

 

Less: current portion

 

 

(2,500

)

 

 

 

Total debt, less current portion

 

$

64,995

 

 

$

74,456

 

Credit Facility

The Company’s outstanding borrowings in the United States consist of 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 September 30, 2019 and December 31, 2018, the Company was in compliance with all related financial and other restrictive covenants under the Credit Facility.

See Note 8 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)

 

September 30, 2019

 

 

December 31, 2018

 

Credit Facility, revolving loans

 

$

140.0

 

 

$

80.0

 

Draw down

 

 

(20.0

)

 

 

 

Letters of credit open

 

 

(11.5

)

 

 

(29.3

)

Total unused credit availability

 

$

108.5

 

 

$

50.7

 

Amount available based on borrowing limitations

 

$

70.0

 

 

$

50.7

 

Overview of Cash Flows and Liquidity

 

 

 

For the nine months ended September 30,

 

(dollars in thousands)

 

2019

 

 

2018

 

Net cash (used in) provided by operating activities

 

$

(633

)

 

$

3,642

 

Net cash (used in) provided by investing activities

 

 

(3,237

)

 

 

37,478

 

Net cash used in financing activities

 

 

(9,881

)

 

 

(37,636

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(448

)

 

 

(1,433

)

Net increase (decrease) in cash

 

$

(14,199

)

 

$

2,051

 

 

Operating Activities

For the nine months ended September 30, 2019, $0.6 million of cash was used in operating activities compared with $3.6 million provided by operating activities in the prior year period, a $4.2 million decrease. Net earnings adjusted for non-cash items increased $14.9 million primarily due to a favorable $9.3 million change in income tax provision and $2.3 million increase in gross profit. Cash flow from operating activities in the first nine months of 2019 was negative primarily due to certain increases and decreases in net working capital items such as increases in accounts receivable and prepaids and decreases in accounts payable and accrued expenses as reflected in the Condensed Consolidated Statements of Cash Flows.  


25


Investing Activities

For the nine months ended September 30, 2019, net cash used in investing activities was $3.2 million compared with net cash provided by investing activities of $37.5 million in the prior year period.  In the first nine months of 2019, cash used in investing activities was primarily the result of cash used for the acquisitions of property and equipment totaling $3.7 million and cash provided by proceeds from the sale of property and equipment totaling $0.5 million. In the prior year period, cash provided by investing activities was the result of cash proceeds from divestitures totaling $33.1 million, cash proceeds from the sale of property and equipment totaling $6.3 million and cash used for the acquisitions of property and equipment totaling $1.9 million.

 

Financing Activities

 

For the nine months ended September 30, 2019, net cash used in financing activities was $9.9 million due principally to note payable repayments of $1.7 million, payment of financing fees related to the refinancing of our Credit Facility of $1.1 million, payment on our loan of $0.6 million and payment of our revolving credit loan of $7.0 million offset by net borrowings under the Credit Facility of $0.8 million. For the nine months ended September 30, 2018, net cash used in financing activities was $37.6 million due principally to net term loan repayments of $34.3 million and $3.8 million in net revolving credit line repayments and term loan repayments.

 

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, earnout liabilities, 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 the 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 nine-month period ended September 30, 2019, other than 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, 2018.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects or future results of operations or financial position made in this Quarterly Report on Form 10-Q are forward-looking. 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, 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, 2018 and include, but are not limited to: our ability to successfully realize the expected benefits of our restructuring program; our ability to successfully integrate acquired businesses and realize the synergies from acquisitions, as well as a number of factors related to our business, including economic and financial market conditions generally and economic conditions in CECO’s service areas; dependence on fixed price contracts and the risks associated therewith, including actual costs exceeding estimates; fluctuations in operating results from period to period due to cyclicality or seasonality of the business; 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; 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 acquisitions and our ability to repay or refinance it or incur additional debt in the future; the impact of federal, state or local government regulations; economic and political conditions generally; and the effect of competition in the Industrial Solutions segment, Energy Solutions segment and Fluid Handling Solutions segment industries. 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

26


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 SEC, 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 long-term debt and current maturities of long-term debt was $69.4 million at September 30, 2019. 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 September 30, 2019. Most of the interest on the Company’s debt is indexed to either the LIBOR or EURIBOR market rates. The estimated impact of a hypothetical 10% change in the estimated weighted average borrowing rate at September 30, 2019 is $0.3 million on an annual basis.

 

The Company has wholly-owned subsidiaries located in the Netherlands, Canada, the People’s Republic of China, Mexico, United Kingdom, Singapore, 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.

 

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 September 30, 2019.  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 fiscal quarter ended September 30, 2019, 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.

27


PART II – OTHER INFORMATION

 

 

ITEM 1.

LEGAL PROCEEDINGS

Information with respect to legal proceedings can be found in Note 15 “Commitments and Contingencies – Legal Matters” to the unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

 

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, 2018.

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

 

ITEM  3.

DEFAULTS UPON SENIOR SECURITIES

None.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

 

ITEM  5.

OTHER INFORMATION

None.

 

 

28


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

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

29


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/    Matthew Eckl

 

Matthew Eckl

 

Chief Financial Officer

 

Date: November 6, 2019

 

30


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
6/11/24
9/30/21
1/1/21
9/30/20
Filed on:11/6/198-K
10/31/19
For Period end:9/30/19
6/11/198-K
1/1/19
12/31/1810-K,  SD
11/27/18
9/30/1810-Q
3/30/188-K
2/28/18
12/31/1710-K,  SD
9/3/158-K,  8-K/A,  S-8
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