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 SeptemberJune 30, 2017 2023
or
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period fromto
Commission File No. 0-70990-07099
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) |
(513) 458-2600
(Registrant’s telephone number, including area code)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 | CECO | 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large | ☐ | Accelerated | ☒ |
| ☐ | Smaller reporting company |
|
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐�� No ☒
The number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: 34,707,64934,765,230 shares of common stock, par value $0.01 per share, as of November 2, 2017.August 1, 2023.
1
CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
For the quarter ended SeptemberJune 30, 20172023
Table of Contents
21
CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) |
| (unaudited) |
|
| December 31, 2022 |
| ||
ASSETS |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 47,617 |
|
| $ | 45,522 |
|
Restricted cash |
|
| 935 |
|
|
| 1,063 |
|
Accounts receivable, net |
|
| 126,663 |
|
|
| 83,086 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
| 61,905 |
|
|
| 71,016 |
|
Inventories, net |
|
| 31,828 |
|
|
| 26,526 |
|
Prepaid expenses and other current assets |
|
| 15,634 |
|
|
| 12,174 |
|
Prepaid income taxes |
|
| 6,456 |
|
|
| 1,271 |
|
Total current assets |
|
| 291,038 |
|
|
| 240,658 |
|
Property, plant and equipment, net |
|
| 24,194 |
|
|
| 20,828 |
|
Right-of-use assets from operating leases |
|
| 11,530 |
|
|
| 11,373 |
|
Goodwill |
|
| 199,736 |
|
|
| 183,197 |
|
Intangible assets – finite life, net |
|
| 42,899 |
|
|
| 35,251 |
|
Intangible assets – indefinite life |
|
| 9,559 |
|
|
| 9,508 |
|
Deferred income taxes |
|
| 816 |
|
|
| 829 |
|
Deferred charges and other assets |
|
| 2,846 |
|
|
| 3,077 |
|
Total assets |
| $ | 582,618 |
|
| $ | 504,721 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
| ||
Current portion of debt |
| $ | 4,313 |
|
| $ | 3,579 |
|
Accounts payable and accrued expenses |
|
| 116,254 |
|
|
| 107,198 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
| 61,365 |
|
|
| 32,716 |
|
Notes payable |
|
| 2,500 |
|
| — |
| |
Income taxes payable |
|
| 3,788 |
|
|
| 3,207 |
|
Total current liabilities |
|
| 188,220 |
|
|
| 146,700 |
|
Other liabilities |
|
| 13,611 |
|
|
| 15,129 |
|
Debt, less current portion |
|
| 137,322 |
|
|
| 107,625 |
|
Deferred income tax liability, net |
|
| 7,991 |
|
|
| 8,666 |
|
Operating lease liabilities |
|
| 8,326 |
|
|
| 8,453 |
|
Total liabilities |
|
| 355,470 |
|
|
| 286,573 |
|
Commitments and contingencies |
|
|
|
|
|
| ||
Shareholders’ equity: |
|
|
|
|
|
| ||
Preferred stock, $.01 par value; 10,000 shares authorized, none issued |
|
| — |
|
| — |
| |
Common stock, $.01 par value; 100,000,000 shares authorized, 34,738,126 and |
|
| 347 |
|
|
| 344 |
|
Capital in excess of par value |
|
| 252,406 |
|
|
| 250,174 |
|
Accumulated loss |
|
| (13,596 | ) |
|
| (19,298 | ) |
Accumulated other comprehensive loss |
|
| (17,091 | ) |
|
| (17,996 | ) |
Total CECO shareholders' equity |
|
| 222,066 |
|
|
| 213,224 |
|
Noncontrolling interest |
|
| 5,082 |
|
|
| 4,924 |
|
Total shareholders' equity |
|
| 227,148 |
|
|
| 218,148 |
|
Total liabilities and shareholders' equity |
| $ | 582,618 |
|
| $ | 504,721 |
|
(dollars in thousands, except per share data) |
| (unaudited) SEPTEMBER 30, 2017 |
|
| DECEMBER 31, 2016 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 24,567 |
|
| $ | 45,824 |
|
Restricted cash |
|
| 873 |
|
|
| 1,498 |
|
Accounts receivable, net |
|
| 70,504 |
|
|
| 83,062 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
| 39,964 |
|
|
| 38,123 |
|
Inventories, net |
|
| 21,750 |
|
|
| 21,487 |
|
Prepaid expenses and other current assets |
|
| 12,984 |
|
|
| 13,560 |
|
Prepaid income taxes |
|
| 1,300 |
|
|
| 1,590 |
|
Assets held for sale |
|
| 8,001 |
|
|
| 7,834 |
|
Total current assets |
|
| 179,943 |
|
|
| 212,978 |
|
Property, plant and equipment, net |
|
| 24,667 |
|
|
| 27,270 |
|
Goodwill |
|
| 171,239 |
|
|
| 170,153 |
|
Intangible assets-finite life, net |
|
| 52,749 |
|
|
| 60,728 |
|
Intangible assets-indefinite life |
|
| 22,381 |
|
|
| 22,042 |
|
Deferred charges and other assets |
|
| 4,564 |
|
|
| 5,463 |
|
|
| $ | 455,543 |
|
| $ | 498,634 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of debt |
| $ | 9,645 |
|
| $ | 8,827 |
|
Accounts payable and accrued expenses |
|
| 77,655 |
|
|
| 95,610 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
| 21,038 |
|
|
| 35,085 |
|
Note payable |
|
| 5,300 |
|
|
| 5,300 |
|
Income taxes payable |
|
| 924 |
|
|
| 1,536 |
|
Total current liabilities |
|
| 114,562 |
|
|
| 146,358 |
|
Other liabilities |
|
| 23,873 |
|
|
| 34,864 |
|
Debt, less current portion |
|
| 107,287 |
|
|
| 114,366 |
|
Deferred income tax liability, net |
|
| 12,754 |
|
|
| 12,964 |
|
Total liabilities |
|
| 258,476 |
|
|
| 308,552 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; 10,000 shares authorized, none issued |
|
| — |
|
|
| — |
|
Common stock, $.01 par value; 100,000,000 shares authorized, 34,699,316 and 34,300,209 shares issued at September 30, 2017 and December 31, 2016, respectively |
|
| 347 |
|
|
| 343 |
|
Capital in excess of par value |
|
| 247,601 |
|
|
| 244,878 |
|
Accumulated loss |
|
| (41,079 | ) |
|
| (41,741 | ) |
Accumulated other comprehensive loss |
|
| (9,446 | ) |
|
| (13,042 | ) |
|
|
| 197,423 |
|
|
| 190,438 |
|
Less treasury stock, at cost, 137,920 shares at September 30, 2017 and December 31, 2016 |
|
| (356 | ) |
|
| (356 | ) |
Total shareholders’ equity |
|
| 197,067 |
|
|
| 190,082 |
|
|
| $ | 455,543 |
|
| $ | 498,634 |
|
The notes to the condensed consolidated financial statements are an integral part of the above statements.
32
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
|
| THREE MONTHS ENDED SEPTEMBER 30, |
|
| NINE MONTHS ENDED SEPTEMBER 30, |
| ||||||||||
(dollars in thousands, except per share data) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net sales |
| $ | 84,987 |
|
| $ | 101,596 |
|
| $ | 271,508 |
|
| $ | 317,029 |
|
Cost of sales |
|
| 57,854 |
|
|
| 67,920 |
|
|
| 183,960 |
|
|
| 217,837 |
|
Gross profit |
|
| 27,133 |
|
|
| 33,676 |
|
|
| 87,548 |
|
|
| 99,192 |
|
Selling and administrative expenses |
|
| 21,958 |
|
|
| 19,549 |
|
|
| 66,690 |
|
|
| 60,625 |
|
Acquisition and integration expenses |
|
| — |
|
|
| 163 |
|
|
| — |
|
|
| 524 |
|
Amortization and earn-out (income) expenses, net |
|
| (455 | ) |
|
| 3,465 |
|
|
| 4,623 |
|
|
| 13,176 |
|
Income from operations |
|
| 5,630 |
|
|
| 10,499 |
|
|
| 16,235 |
|
|
| 24,867 |
|
Other (expense) income, net |
|
| (110 | ) |
|
| 14 |
|
|
| 141 |
|
|
| 395 |
|
Interest expense |
|
| (1,595 | ) |
|
| (1,913 | ) |
|
| (4,951 | ) |
|
| (5,995 | ) |
Income before income taxes |
|
| 3,925 |
|
|
| 8,600 |
|
|
| 11,425 |
|
|
| 19,267 |
|
Income tax expense |
|
| 889 |
|
|
| 2,774 |
|
|
| 2,865 |
|
|
| 6,349 |
|
Net income |
| $ | 3,036 |
|
| $ | 5,826 |
|
| $ | 8,560 |
|
| $ | 12,918 |
|
Net income (loss) attributable to noncontrolling interest |
| $ | — |
|
| $ | 22 |
|
| $ | — |
|
| $ | (36 | ) |
Net income attributable to CECO Environmental Corp. |
| $ | 3,036 |
|
| $ | 5,804 |
|
| $ | 8,560 |
|
| $ | 12,954 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.09 |
|
| $ | 0.17 |
|
| $ | 0.25 |
|
| $ | 0.38 |
|
Diluted |
| $ | 0.09 |
|
| $ | 0.17 |
|
| $ | 0.25 |
|
| $ | 0.38 |
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 34,518,622 |
|
|
| 33,983,708 |
|
|
| 34,403,720 |
|
|
| 33,952,768 |
|
Diluted |
|
| 34,621,883 |
|
|
| 34,354,687 |
|
|
| 34,665,053 |
|
|
| 34,211,067 |
|
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
(in thousands, except per share data) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net sales |
| $ | 129,181 |
|
| $ | 105,375 |
|
| $ | 241,744 |
|
| $ | 197,811 |
|
Cost of sales |
|
| 89,364 |
|
|
| 73,700 |
|
|
| 167,034 |
|
|
| 139,708 |
|
Gross profit |
|
| 39,817 |
|
|
| 31,675 |
|
|
| 74,710 |
|
|
| 58,103 |
|
Selling and administrative expenses |
|
| 28,451 |
|
|
| 22,988 |
|
|
| 55,644 |
|
|
| 41,640 |
|
Amortization and earnout expenses |
|
| 2,273 |
|
|
| 1,450 |
|
|
| 4,020 |
|
|
| 2,900 |
|
Acquisition and integration expenses |
|
| 332 |
|
|
| 1,491 |
|
|
| 824 |
|
|
| 2,540 |
|
Executive transition expenses |
|
| 158 |
|
|
| — |
|
|
| 158 |
|
|
| — |
|
Restructuring expenses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 73 |
|
Income from operations |
|
| 8,603 |
|
|
| 5,746 |
|
|
| 14,064 |
|
|
| 10,950 |
|
Other income (expense), net |
|
| 121 |
|
|
| 1,936 |
|
|
| (453 | ) |
|
| 1,478 |
|
Interest expense |
|
| (3,750 | ) |
|
| (1,098 | ) |
|
| (6,158 | ) |
|
| (1,920 | ) |
Income before income taxes |
|
| 4,974 |
|
|
| 6,584 |
|
|
| 7,453 |
|
|
| 10,508 |
|
Income tax expense |
|
| 984 |
|
|
| 1,860 |
|
|
| 993 |
|
|
| 2,972 |
|
Net income |
|
| 3,990 |
|
|
| 4,724 |
|
|
| 6,460 |
|
|
| 7,536 |
|
Noncontrolling interest |
|
| 266 |
|
|
| 339 |
|
|
| 759 |
|
|
| 356 |
|
Net income attributable to CECO Environmental Corp. |
| $ | 3,724 |
|
| $ | 4,385 |
|
| $ | 5,701 |
|
| $ | 7,180 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 0.11 |
|
| $ | 0.13 |
|
| $ | 0.17 |
|
| $ | 0.21 |
|
Diluted |
| $ | 0.11 |
|
| $ | 0.13 |
|
| $ | 0.16 |
|
| $ | 0.20 |
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 34,619,216 |
|
|
| 34,873,238 |
|
|
| 34,531,050 |
|
|
| 34,961,645 |
|
Diluted |
|
| 35,143,782 |
|
|
| 35,041,152 |
|
|
| 35,171,727 |
|
|
| 35,119,685 |
|
The notes to the condensed consolidated financial statements are an integral part of the above statements.
43
CONDENSED CONSOLIDATED STATEMENTSSTATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
|
| THREE MONTHS ENDED SEPTEMBER 30, |
|
| NINE MONTHS ENDED SEPTEMBER 30, |
| ||||||||||
(dollars in thousands) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net income |
| $ | 3,036 |
|
| $ | 5,826 |
|
| $ | 8,560 |
|
| $ | 12,918 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
| 3 |
|
|
| 201 |
|
|
| 31 |
|
|
| (422 | ) |
Foreign currency translation |
|
| 1,396 |
|
|
| (73 | ) |
|
| 3,565 |
|
|
| (1,526 | ) |
Comprehensive income |
|
| 4,435 |
|
|
| 5,954 |
|
|
| 12,156 |
|
|
| 10,970 |
|
Net income (loss) attributable to noncontrolling interest |
|
| — |
|
|
| 22 |
|
|
| — |
|
|
| (36 | ) |
Comprehensive income attributable to CECO Environmental Corp. |
| $ | 4,435 |
|
| $ | 5,976 |
|
| $ | 12,156 |
|
| $ | 10,934 |
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
(in thousands) | 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net income | $ | 3,990 |
|
| $ | 4,724 |
|
| $ | 6,460 |
|
| $ | 7,536 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation gain (loss) |
| 139 |
|
|
| (2,966 | ) |
|
| 905 |
|
|
| (3,497 | ) |
Comprehensive income | $ | 4,129 |
|
| $ | 1,758 |
|
| $ | 7,365 |
|
| $ | 4,039 |
|
The notes to the condensed consolidated financial statements are an integral part of the above statements.
54
CONDENSED CONSOLIDATED STATEMENTSSTATEMENTS OF CASH FLOWSSHAREHOLDERS’ EQUITY
(unaudited)
|
| NINE MONTHS ENDED SEPTEMBER 30, |
| |||||
(dollars in thousands) |
| 2017 |
|
| 2016 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
| $ | 8,560 |
|
| $ | 12,918 |
|
Adjustment to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 12,105 |
|
|
| 15,017 |
|
Unrealized foreign currency gain |
|
| (2,030 | ) |
|
| (620 | ) |
Net (gain) loss on interest rate swaps |
|
| (186 | ) |
|
| 342 |
|
Fair value adjustments to earnout liabilities |
|
| (5,689 | ) |
|
| 460 |
|
Earnout payments |
|
| (7,797 | ) |
|
| — |
|
Loss on sale of property and equipment |
|
| 87 |
|
|
| 199 |
|
Debt discount amortization |
|
| 753 |
|
|
| 803 |
|
Share-based compensation expense |
|
| 1,179 |
|
|
| 1,724 |
|
Bad debt expense |
|
| 2,184 |
|
|
| 324 |
|
Inventory reserve expense |
|
| 829 |
|
|
| 964 |
|
Deferred income taxes |
|
| (164 | ) |
|
| (1,111 | ) |
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 12,718 |
|
|
| 15,221 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
| (183 | ) |
|
| 3,449 |
|
Inventories |
|
| (606 | ) |
|
| 7,526 |
|
Prepaid expense and other current assets |
|
| 1,720 |
|
|
| (2,907 | ) |
Deferred charges and other assets |
|
| 1,414 |
|
|
| 1,068 |
|
Accounts payable and accrued expenses |
|
| (9,072 | ) |
|
| (10,010 | ) |
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
| (14,526 | ) |
|
| 6,859 |
|
Income taxes payable |
|
| (857 | ) |
|
| 2,608 |
|
Other liabilities |
|
| (1,528 | ) |
|
| (1,955 | ) |
Net cash (used in) provided by operating activities |
|
| (1,089 | ) |
|
| 52,879 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisitions of property and equipment |
|
| (806 | ) |
|
| (811 | ) |
Proceeds from sale of property and equipment |
|
| 367 |
|
|
| 301 |
|
Net cash used in investing activities |
|
| (439 | ) |
|
| (510 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Decrease in short-term and long-term restricted cash |
|
| 878 |
|
|
| 2,853 |
|
Net borrowings (repayments) on revolving credit lines |
|
| 2,197 |
|
|
| (13,142 | ) |
Repayments of debt |
|
| (9,161 | ) |
|
| (31,631 | ) |
Deferred financing fees paid |
|
| (171 | ) |
|
| — |
|
Payoff of loans on life insurance policies |
|
| — |
|
|
| (987 | ) |
Earnout payments |
|
| (7,396 | ) |
|
| (9,270 | ) |
Proceeds from sale-leaseback transactions |
|
| — |
|
|
| 14,244 |
|
Payments on capital lease and sale-leaseback financing liability |
|
| (542 | ) |
|
| (241 | ) |
Proceeds from employee stock purchase plan, exercise of stock options, and dividend reinvestment plan |
|
| 1,372 |
|
|
| 763 |
|
Repurchases of common stock |
|
| — |
|
|
| (188 | ) |
Dividends paid to common shareholders |
|
| (7,787 | ) |
|
| (6,738 | ) |
Net cash used in financing activities |
|
| (20,610 | ) |
|
| (44,337 | ) |
Effect of exchange rate changes on cash and cash equivalents |
|
| 881 |
|
|
| (412 | ) |
Net (decrease) increase in cash and cash equivalents |
|
| (21,257 | ) |
|
| 7,620 |
|
Cash and cash equivalents at beginning of period |
|
| 45,824 |
|
|
| 34,194 |
|
Cash and cash equivalents at end of period |
| $ | 24,567 |
|
| $ | 41,814 |
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest |
| $ | 4,176 |
|
| $ | 5,375 |
|
Income taxes |
| $ | 3,328 |
|
| $ | 2,344 |
|
Non-cash transactions |
|
|
|
|
|
|
|
|
Property, plant and equipment acquired under capital leases |
| $ | — |
|
| $ | 4,385 |
|
Noncontrolling interest acquired through an issuance of a note payable (See Note 17) |
| $ | — |
|
| $ | 5,300 |
|
Earnout settled through an exchange of accounts receivable |
| $ | — |
|
| $ | 3,272 |
|
|
| Common Stock |
|
| Capital in |
|
| Accumulated |
|
| Accumulated |
|
| Non-controlling |
|
| Total |
| ||||||||||
|
| Shares |
|
| Amount |
|
| par value |
|
| Loss |
|
| Loss |
|
| interest |
|
| Equity |
| |||||||
Balance December 31, 2022 |
|
| 34,382 |
|
| $ | 344 |
|
| $ | 250,174 |
|
| $ | (19,298 | ) |
| $ | (17,996 | ) |
| $ | 4,924 |
|
| $ | 218,148 |
|
Net income for the three months ended March 31, 2023 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,978 |
|
|
| — |
|
|
| 491 |
|
|
| 2,469 |
|
Exercise of stock options |
|
| 52 |
|
|
| 1 |
|
|
| 611 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 612 |
|
Restricted stock units issued |
|
| 123 |
|
|
| 1 |
|
|
| (622 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (621 | ) |
Share based compensation earned |
|
| — |
|
|
| — |
|
|
| 808 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 808 |
|
Translation gain |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 766 |
|
|
| — |
|
|
| 766 |
|
Balance March 31, 2023 |
|
| 34,557 |
|
| $ | 346 |
|
| $ | 250,971 |
|
| $ | (17,320 | ) |
| $ | (17,230 | ) |
| $ | 5,415 |
|
| $ | 222,182 |
|
Net income for the three months ended June 30, 2023 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,724 |
|
|
| — |
|
|
| 266 |
|
|
| 3,990 |
|
Exercise of stock options |
|
| 25 |
|
|
| — |
|
|
| 317 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 317 |
|
Restricted stock units issued |
|
| 132 |
|
|
| 1 |
|
|
| (271 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (270 | ) |
Share based compensation earned |
|
| 24 |
|
|
| — |
|
|
| 1,389 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,389 |
|
Translation gain |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 139 |
|
|
| — |
|
|
| 139 |
|
Noncontrolling interest distributions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (599 | ) |
|
| (599 | ) |
Balance June 30, 2023 |
|
| 34,738 |
|
| $ | 347 |
|
| $ | 252,406 |
|
| $ | (13,596 | ) |
| $ | (17,091 | ) |
| $ | 5,082 |
|
| $ | 227,148 |
|
|
| Common Stock |
|
| Capital in |
|
| Accumulated |
|
| Accumulated |
|
| Non-controlling |
|
| Total |
| ||||||||||
|
| Shares |
|
| Amount |
|
| par value |
|
| Loss |
|
| Loss |
|
| interest |
|
| Equity |
| |||||||
Balance December 31, 2021 |
|
| 35,028 |
|
| $ | 350 |
|
| $ | 252,989 |
|
| $ | (36,715 | ) |
| $ | (12,070 | ) |
| $ | 1,403 |
|
| $ | 205,957 |
|
Net income for the three months ended March 31, 2022 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,792 |
|
|
| — |
|
|
| 18 |
|
|
| 2,810 |
|
Restricted stock units issued |
|
| 34 |
|
|
| — |
|
|
| (67 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (67 | ) |
Share based compensation earned |
|
| 14 |
|
|
| — |
|
|
| 953 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 953 |
|
Translation loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (531 | ) |
|
| — |
|
|
| (531 | ) |
Noncontrolling interest distributions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (900 | ) |
|
| (900 | ) |
Fair value of noncontrolling interest equity issued (see Note 14) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,000 |
|
|
| 5,000 |
|
Balance March 31, 2022 |
|
| 35,076 |
|
| $ | 350 |
|
| $ | 253,875 |
|
| $ | (33,923 | ) |
| $ | (12,601 | ) |
| $ | 5,521 |
|
| $ | 213,222 |
|
Net income for the three months ended March 31, 2022 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,385 |
|
|
| — |
|
|
| 339 |
|
|
| 4,724 |
|
Restricted stock units issued |
|
| 183 |
|
|
| 2 |
|
|
| (211 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (209 | ) |
Share based compensation earned |
|
| — |
|
|
| — |
|
|
| 915 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 915 |
|
Common stock repurchase and retirement |
|
| (725 | ) |
|
| (7 | ) |
|
| (4,317 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,324 | ) |
Translation loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,966 | ) |
|
| — |
|
|
| (2,966 | ) |
Fair value of noncontrolling interest equity issued (see Note 14) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (901 | ) |
|
| (901 | ) |
Balance June 30, 2022 |
|
| 34,534 |
|
| $ | 345 |
|
| $ | 250,262 |
|
| $ | (29,538 | ) |
| $ | (15,567 | ) |
| $ | 4,959 |
|
| $ | 210,461 |
|
The notes to the condensed consolidated financial statements are an integral part of the above statements.
6
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
| Six months ended June 30, |
| |||||
(in thousands) |
| 2023 |
|
| 2022 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net income |
| $ | 6,460 |
|
| $ | 7,536 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 5,650 |
|
|
| 4,668 |
|
Unrealized foreign currency gain |
|
| (863 | ) |
|
| (5 | ) |
Fair value adjustment to earnout liabilities |
|
| 296 |
|
|
| — |
|
Earnout payments |
|
| — |
|
|
| (1,007 | ) |
Gain (loss) on sale of property and equipment |
|
| 78 |
|
|
| (7 | ) |
Debt discount amortization |
|
| 182 |
|
|
| 187 |
|
Share-based compensation expense |
|
| 1,967 |
|
|
| 1,792 |
|
Bad debt (recoveries) expense |
|
| (23 | ) |
|
| 441 |
|
Inventory reserve expense |
|
| 551 |
|
|
| 110 |
|
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
| ||
Accounts receivable |
|
| (39,181 | ) |
|
| (18,582 | ) |
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
| 9,596 |
|
|
| 597 |
|
Inventories |
|
| (4,081 | ) |
|
| (3,393 | ) |
Prepaid expense and other current assets |
|
| (8,319 | ) |
|
| 637 |
|
Deferred charges and other assets |
|
| (306 | ) |
|
| 2,472 |
|
Accounts payable and accrued expenses |
|
| 3,902 |
|
|
| 16,538 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
| 26,005 |
|
|
| 7,846 |
|
Income taxes payable |
|
| 601 |
|
|
| 1,266 |
|
Other liabilities |
|
| (3,126 | ) |
|
| (2,405 | ) |
Net cash (used in) provided by operating activities |
|
| (611 | ) |
|
| 18,691 |
|
Cash flows from investing activities: |
|
|
|
|
|
| ||
Acquisitions of property and equipment |
|
| (3,919 | ) |
|
| (1,432 | ) |
Net proceeds from sale of assets |
|
| — |
|
|
| 7 |
|
Net cash paid for acquisitions |
|
| (24,142 | ) |
|
| (37,372 | ) |
Net cash used in investing activities |
|
| (28,061 | ) |
|
| (38,797 | ) |
Cash flows from financing activities: |
|
|
|
|
|
| ||
Borrowings on revolving credit lines |
|
| 65,300 |
|
|
| 47,600 |
|
Repayments on revolving credit lines |
|
| (33,400 | ) |
|
| (24,900 | ) |
Borrowing on long-term debt |
|
| — |
|
|
| 11,000 |
|
Repayments of long-term debt |
|
| (1,652 | ) |
|
| (1,469 | ) |
Deferred financing fees paid |
|
| — |
|
|
| (130 | ) |
Deferred consideration paid for acquisitions |
|
| (857 | ) |
|
| — |
|
Payments on finance leases and financing liability |
|
| (450 | ) |
|
| (293 | ) |
Proceeds from employee stock purchase plan and exercise of stock options |
|
| 1,156 |
|
|
| 71 |
|
Noncontrolling interest distributions |
|
| (599 | ) |
|
| (900 | ) |
Common stock repurchase |
|
| — |
|
|
| (4,324 | ) |
Net cash provided by financing activities |
|
| 29,498 |
|
|
| 26,655 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
| 1,141 |
|
|
| (3,091 | ) |
Net increase in cash, cash equivalents and restricted cash |
|
| 1,967 |
|
|
| 3,458 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
| 46,585 |
|
|
| 31,995 |
|
Cash, cash equivalents and restricted cash at end of period |
| $ | 48,552 |
|
| $ | 35,453 |
|
Cash paid during the period for: |
|
|
|
|
|
| ||
Interest |
| $ | 5,380 |
|
| $ | 1,821 |
|
Income taxes |
| $ | 7,605 |
|
| $ | 970 |
|
The notes to the condensed consolidated financial statements are an integral part of the above statements.
6
CECO ENVIRONMENTAL CORP.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”,“Company,” “CECO,” “we,” “us,” or “our”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of SeptemberJune 30, 20172023 and the results of operations, and cash flows and shareholders’ equity for the three-monththree and nine-month periodssix months ended SeptemberJune 30, 20172023 and 2016.2022. The results of operations for the three-monththree and nine-month periodssix months ended SeptemberJune 30, 20172023 are not necessarily indicative of the results to be expected for the full year. The balance sheet as of December 31, 20162022 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, 20162022 as filed with the SEC.SEC on March 6, 2023 (the “Form 10-K”).
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)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, 2016 filed with the SEC.10-K.
Unless otherwise indicated, all balances within tables are in thousands, except per share amounts.
The Company’s consolidated financial statements include the accounts of all wholly-owned and majority-owned subsidiaries for all periods presented. All significant inter-company accounts and transactions have been eliminated in consolidation. On July 12, 2016, the Company entered into an agreement with the noncontrolling owner of Peerless Propulsys China Holdings LLC (“Peerless Propulsys”) and acquired 100% ownership in the equity and earnings of Peerless Propulsys by acquiring the remaining 40% interest.
2. New Financial Accounting Pronouncements
|
|
Accounting Standards Adopted in Fiscal 20172023
InOn January 2017,1, 2023, the Financial Accounting Standards Board (“FASB”) issuedbeginning of the Company's fiscal year, the Company adopted Accounting Standards Update (“ASU”("ASU") 2017-04, “Intangibles – Goodwill2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates Step 2 of the former goodwill impairment test alongContract Liabilities from Contracts with amending other parts of the goodwill impairment test. Under this ASU,Customers, which addresses how an entity should perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, andacquirer should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company has adopted ASU 2017-04 effective as of January 1, 2017. The provisions of ASU 2017-04 did not havemeasure revenue contracts acquired in a material effect on the Company’s financial condition, results of operations, or cash flows.
In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” which changes the accounting for certain aspects of share-based payments to employees. The new guidance requires, among its other provisions, that excess tax benefits (which represent the excess of actual tax benefits received at the date of vesting or settlement over the benefits recognized over the vesting period or upon issuance of share-based payments) and tax deficiencies (which represent the amount by which actual tax benefits received at the date of vesting or settlement is lower than the benefits recognized over the vesting period or upon issuance of share-based payments) be recorded in the income statement as an increase or decrease in income taxes when the awards vest or are settled. This is in comparison to the prior requirement that these excess tax benefits be recognized in additional paid-in capital and these tax deficiencies be recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement. The new guidance also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows rather than, as previously required, a financing activity. The new guidance allows companies to elect a change to an
7
accounting policy to account for forfeitures as they occur. The new guidance is effective for the first quarter of our fiscal year ending December 31, 2017, with early adoption permitted.
We have adopted ASU 2016-09 effective January 1, 2017 on a prospective basis where permitted by the new standard. As a result of this adoption:
• We recognized discrete tax benefits of $0.4 million in the income tax expense line item of our Condensed Consolidated Statement of Income for the nine months ended September 30, 2017 related to excess tax benefits upon vesting or settlement in that period.
• We elected to adopt the cash flow presentation of the excess tax benefits prospectively, commencing with our Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2017, where these benefits are classified along with other income tax cash flows as an operating activity.
• We have elected to change our accounting policy to account for forfeitures as they occur. This change was applied on a modified retrospective basis with a cumulative effect adjustment to reduce retained earnings by $0.1 million as of January 1, 2017.
• We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the three and nine month periods ended September 30, 2017.
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” ASU 2016-05 amends Topic 815 to clarify that novation of a derivative (replacing one of the parties to a derivative instrument with a new party) designated as the hedging instrument would not, in and of itself, be considered a termination of the derivative instrument or a change in critical terms requiring discontinuation of the designated hedging relationship. ASU 2016-05 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has adopted ASU 2016-05 on a prospective basis. The provisions of ASU 2016-05 had no effect on the Company’s financial condition, results of operations, or cash flows.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” ASU 2015-11 requires inventory within the scope of the ASU (i.e., first-in, first-out (“FIFO”) or average cost) to be measured using the lower of cost and net realizable value. Inventory excluded from the scope of the ASU (i.e., last-in, first-out (“LIFO”) or the retail inventory method) will continue to be measured at the lower of cost or market. The ASU also amends some of the other guidance in Topic 330, “Inventory,” to more clearly articulate the requirements for the measurement and disclosure of inventory. ASU 2015-11 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company has adopted ASU 2015-11 on a prospective basis. The provisions of ASU 2015-11 did not have a material effect on the Company’s financial condition, results of operations, or cash flows.
In December 2016, the FASB issued ASU 2016-19, “Technical Corrections and Improvements.” The amendments cover a wide range of topics in the Accounting Standards Codification, guidance clarification, reference corrections, simplification, and minor improvements.business combination. The adoption of ASU 2016-19 is effective for annual periods, including interim periods, within those annual periods, beginning after December 15, 2016. The Company has adopted ASU 2016-19 on a prospective basis. The provisions of ASU 2016-192021-08 did not have a material effect on the Company’s financial condition, results of operations, or cash flows.
Accounting Standards Yet to be Adopted
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 expands an entity’s ability to apply hedge accounting for nonfinancial and financial risk components and allow for a simplified approach for fair value hedging of interest rate risk. ASU 2017-12 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. Additionally, ASU 2017-12 simplifies the hedge documentation and effectiveness assessment under the previous guidance. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. We plan to adopt the standard on January 1, 2019. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as a modification. Under ASU 2017-09, an entity will not apply modification accounting to a
8
share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We plan to adopt the standard on January 1, 2018. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” Under existing GAAP, an entity is required to present all components of net periodic pension cost and net periodic postretirement benefit cost aggregated as a net amount in the income statement, and this net amount may be capitalized as part of an asset where appropriate. ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, and requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. The amendments in ASU 2017-07 shall be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. ASU 2017-07 becomes effective for the Company on January 1, 2018. Early adoption is permitted. We plan to adopt this standard on January 1, 2018. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The adoption of ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments should be applied prospectively on or after the effective dates. The Company is evaluating the effect of this standard on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016-18 will require a change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that year. The Company is currently in the process of evaluating the impact of ASU 2016-18 on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides guidance on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. ASU 2016-15 will require adoption on a retrospective basis, unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. We plan to adopt this standard on January 1, 2018. The Company is currently in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 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. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company believes that the new standard will have a material impact on its consolidated balance sheet due to the recognition of ROU assets and liabilities for the Company’s operating leases but it will not have a material impact on its liquidity. The Company is continuing to evaluate potential impacts to its consolidatedthe Company's financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue From Contracts With Customers.” ASU 2014-09 supersedes nearly all existing revenue recognition principles under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration an entity expectsAccounting Standards to be entitled to for those goods or services using a defined five-step process. More judgment and estimates may be required to achieve this principle than under existing GAAP. In 2016, the FASB issued accounting standards updates to addressAdopted
9None.
implementation issues and to clarify the guidance for identifying performance obligations, licenses and determining if a company is the principal or agent in a revenue arrangement. ASU 2014-09 and its clarifying amendments are effective for annual periods beginning after December 15, 2017, including interim periods therein, using either3. Accounts Receivable
Accounts receivable consisted of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients or (ii) a modified retrospective approach with the cumulative effect upon initial adoption recognized at the date of adoption, which includes additional footnote disclosures. We currently expect to adopt ASU 2014-09 as of January 1, 2018, under the modified retrospective method where the cumulative effect is recognized at the date of initial application. following:
The Company’s assessment efforts to date have included reviewing current accounting policies, processes, and system requirements, as well as assigning internal resources and engaging third-party consultants to assist in the process. Additionally, the Company has begun to review historical contracts and other arrangements to identify potential differences that could arise from the adoption of ASU 2014-09. Most notably, the Company is evaluating its current conclusions with respect to the timing of revenue recognition for certain contract arrangements where revenue is recognized over time, to determine whether the application of ASU 2014-09 necessitates changes to such reporting whereby revenue would be recognized at a point in time. The Company will continue to evaluate our business processes, systems and controls, and potential differences, if any, in the timing and method of revenue recognition. However, the Company will not be able to make a complete determination about the impact of the standard on its consolidated financial statements until the time of adoption based upon outstanding contracts at that time.
|
|
(in thousands) |
| June 30, 2023 |
|
| December 31, 2022 |
| ||
Accounts receivable |
| $ | 130,919 |
|
| $ | 87,306 |
|
Allowance for doubtful accounts |
|
| (4,256 | ) |
|
| (4,220 | ) |
Total accounts receivable, net |
| $ | 126,663 |
|
| $ | 83,086 |
|
(Table only in thousands) |
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Trade receivables |
| $ | 13,211 |
|
| $ | 11,976 |
|
Contract receivables |
|
| 60,176 |
|
|
| 72,835 |
|
Allowance for doubtful accounts |
|
| (2,883 | ) |
|
| (1,749 | ) |
|
| $ | 70,504 |
|
| $ | 83,062 |
|
Balances billed but not paid by customers under retainage provisions in contracts within the Condensed Consolidated Balance Sheets amounted to approximately $2.6$1.4 million and $3.2$1.6 million at SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively. Retainage receivables on contracts in progress are generally collected within a year afteror two subsequent to contract completion.completion, and are recorded in either "Accounts receivable, net" or "Deferred charges and other assets" within the Condensed Consolidated Balance Sheets depending on timing of expected collection.
The amounts charged to the provisionProvision for doubtful accounts were $1.2credit losses was $(0.1) million and $30,000 for the three-month periods ended September 30, 2017 and 2016, respectively, and $2.2 million and $0.3$0.4 million for the nine-month periodsthree months ended SeptemberJune 30, 20172023 and 2016, respectively.
|
|
Revenues from contracts are primarily recognized on the percentage of completion method, measured by the percentage of contract costs incurred to date compared with estimated total contract costs for each contract. This method is used because management considers contract costs to be the best available measure of progress on these contracts. For contracts where the duration is short, total contract revenue is insignificant, or reasonably dependable estimates cannot be made, revenues are recognized on a completed contract basis, when risk2022, respectively, and title passes to the customer, which is generally upon shipment of product.
10
Our contracts have various lengths to completion ranging from a few days to a year. We anticipate that a majority of our current contracts will be completed within the next twelve months.
(Table only in thousands) |
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Costs incurred on uncompleted contracts |
| $ | 187,646 |
|
| $ | 186,609 |
|
Estimated earnings |
|
| 67,533 |
|
|
| 77,709 |
|
|
|
| 255,179 |
|
|
| 264,318 |
|
Less billings to date |
|
| (236,253 | ) |
|
| (261,280 | ) |
|
| $ | 18,926 |
|
| $ | 3,038 |
|
Included in the accompanying condensed consolidated balance sheets under the following captions: |
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
| $ | 39,964 |
|
| $ | 38,123 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
| 21,038 |
|
|
| 35,085 |
|
|
| $ | 18,926 |
|
| $ | 3,038 |
|
Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes to job performance, job conditions,zero and estimated profitability may result in revisions to contract revenue and costs and are recognized in the period in which the revisions are made. A provision of $0.1$0.4 million for estimated losses on uncompleted contracts was recognized at Septemberthe six months ended June 30, 2017. No provision for estimated losses on uncompleted contracts was required at December 31, 2016. 2023 and 2022, respectively.
7
|
|
4. Inventories
Inventories consisted of the following:
(in thousands) |
| June 30, 2023 |
|
| December 31, 2022 |
| ||
Raw materials |
| $ | 22,833 |
|
| $ | 19,774 |
|
Work in process |
|
| 10,086 |
|
|
| 7,183 |
|
Finished goods |
|
| 2,235 |
|
|
| 2,436 |
|
Obsolescence allowance |
|
| (3,326 | ) |
|
| (2,867 | ) |
Total inventories |
| $ | 31,828 |
|
| $ | 26,526 |
|
(Table only in thousands) |
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Raw materials |
| $ | 19,750 |
|
| $ | 17,889 |
|
Work in process |
|
| 3,310 |
|
|
| 3,986 |
|
Finished goods |
|
| 1,261 |
|
|
| 1,508 |
|
Obsolescence allowance |
|
| (2,571 | ) |
|
| (1,896 | ) |
|
| $ | 21,750 |
|
| $ | 21,487 |
|
Amounts credited to the allowance for obsolete inventory and charged to cost of sales amounted to $0.5$0.4 million and $0.1$(0.1) million for the three-month periodsthree months ended SeptemberJune 30, 20172023 and 2016,2022, respectively, and $0.8$0.6 million and $1.0$0.1 million for the nine-month periodssix months ended SeptemberJune 30, 20172023 and 2016,2022, respectively.
5. Goodwill and Intangible Assets
|
|
(Table only in thousands) |
| Nine months ended September 30, 2017 |
|
| Year ended December 31, 2016 |
| ||||||||||
Goodwill / Indefinite Life Tradenames |
| Goodwill |
|
| Tradenames |
|
| Goodwill |
|
| Tradenames |
| ||||
Beginning balance |
| $ | 170,153 |
|
| $ | 22,042 |
|
| $ | 220,163 |
|
| $ | 26,337 |
|
Acquisitions and related adjustments |
|
| — |
|
|
| — |
|
|
| 4,205 |
|
|
| — |
|
Impairment |
|
| — |
|
|
| — |
|
|
| (53,762 | ) |
|
| (4,161 | ) |
Foreign currency translation |
|
| 1,086 |
|
|
| 339 |
|
|
| (453 | ) |
|
| (134 | ) |
|
| $ | 171,239 |
|
| $ | 22,381 |
|
| $ | 170,153 |
|
| $ | 22,042 |
|
11
(Table only in thousands) |
| As of September 30, 2017 |
|
| As of December 31, 2016 |
| ||||||||||
Intangible assets – finite life |
| Cost |
|
| Accum. Amort. |
|
| Cost |
|
| Accum. Amort. |
| ||||
Technology |
| $ | 15,867 |
|
| $ | 8,040 |
|
| $ | 15,867 |
|
| $ | 6,360 |
|
Customer lists |
|
| 77,497 |
|
|
| 32,758 |
|
|
| 77,497 |
|
|
| 26,041 |
|
Noncompetition agreements |
|
| 1,118 |
|
|
| 643 |
|
|
| 1,118 |
|
|
| 478 |
|
Tradename |
|
| 1,390 |
|
|
| 405 |
|
|
| 1,390 |
|
|
| 301 |
|
Foreign currency adjustments |
|
| (1,453 | ) |
|
| (176 | ) |
|
| (2,964 | ) |
|
| (1,000 | ) |
|
| $ | 94,419 |
|
| $ | 41,670 |
|
| $ | 92,908 |
|
| $ | 32,180 |
|
ActivityGoodwill activity for the ninesix months ended SeptemberJune 30, 20172023 and 2016 isthe year ended December 31, 2022 was as follows:
(in thousands) |
| Six months ended June 30, 2023 |
|
| Year ended December 31, 2022 |
| ||||||||||
Goodwill / Tradename |
| Goodwill |
|
| Tradename |
|
| Goodwill |
|
| Tradename |
| ||||
Balance at beginning of period |
| $ | 183,197 |
|
| $ | 9,508 |
|
| $ | 161,183 |
|
| $ | 9,629 |
|
Acquisitions |
|
| 15,450 |
|
|
| — |
|
|
| 23,312 |
|
|
| — |
|
Foreign currency translation |
|
| 1,089 |
|
|
| 51 |
|
|
| (1,298 | ) |
|
| (121 | ) |
Balance at end of period |
| $ | 199,736 |
|
| $ | 9,559 |
|
| $ | 183,197 |
|
| $ | 9,508 |
|
Finite life intangible assets consisted of the following:
|
| June 30, 2023 |
|
| December 31, 2022 |
| ||||||||||
(in thousands) |
| Cost |
|
| Accum. Amort. |
|
| Cost |
|
| Accum. Amort. |
| ||||
Technology |
| $ | 15,087 |
|
| $ | 13,869 |
|
| $ | 14,457 |
|
| $ | 13,729 |
|
Customer lists |
|
| 94,751 |
|
|
| 60,255 |
|
|
| 85,719 |
|
|
| 57,540 |
|
Tradenames |
|
| 12,634 |
|
|
| 4,344 |
|
|
| 11,604 |
|
|
| 3,768 |
|
Foreign currency adjustments |
|
| (1,099 | ) |
|
| 6 |
|
|
| (1,864 | ) |
|
| (372 | ) |
Total intangible assets – finite life |
| $ | 121,373 |
|
| $ | 78,474 |
|
| $ | 109,916 |
|
| $ | 74,665 |
|
Finite life intangible asset activity for the six months ended June 30, 2023 and 2022 was as follows:
(Table only in thousands) |
| 2017 |
|
| 2016 |
| ||||||||||
(in thousands) |
| 2023 |
|
| 2022 |
| ||||||||||
Intangible assets – finite life, net at beginning of period |
| $ | 60,728 |
|
| $ | 74,957 |
|
| $ | 35,251 |
|
| $ | 25,841 |
|
Amortization expense |
|
| (8,666 | ) |
|
| (11,123 | ) |
|
| (3,430 | ) |
|
| (2,789 | ) |
Acquisitions |
|
| 10,708 |
|
|
| 13,280 |
| ||||||||
Foreign currency adjustments |
|
| 687 |
|
|
| 142 |
|
|
| 370 |
|
|
| (538 | ) |
Intangible assets – finite life, net at end of period |
| $ | 52,749 |
|
| $ | 63,976 |
|
| $ | 42,899 |
|
| $ | 35,794 |
|
Amortization expense of finite life intangible assets was $2.9$1.7 million and $3.5$1.5 million for the three-month periodsthree months ended SeptemberJune 30, 20172023 and 2016,2022, respectively, and $8.7$3.4 million and $11.1$2.8 million for the nine-month periodssix months ended SeptemberJune 30, 20172023 and 2016,2022, respectively. Amortization over the next five years for finite life intangibles is expected to be $3.7 million for the remainder of 2023, $7.1 million in 2024, $6.1 million in 2025, $4.8 million in 2026, and $4.7 million in 2027.
The Company completes its goodwill and indefinite life intangible asset impairment assessment annually in the fourth quarter, or more often if circumstances require. As a part of its impairment assessment, the Company first qualitatively assesses whether current events or changes in circumstances lead to a determination that it is more likely than not, defined as a likelihood of more than 50 percent, that the fair value of a reporting unit or indefinite life intangible asset is less than its carrying amount. If there is a qualitative determination that the fair value is more likely than not greater than the carrying value, the Company does not quantitatively test for impairment. If this qualitative assessment indicates a more likely than not potential that the asset may be impaired, the estimated fair value is calculated. If the estimated fair value is less than carrying value, an impairment charge is recorded.
8
As of June 30, 2023, the Company reviewed its previous forecasts and assumptions based on its current projections, which are subject to various risks and uncertainties, including projected revenue, projected operational profit, terminal growth rates, and the cost of capital. The Company did not identify any triggering events during the three-month and nine-month periodsthree or six months ended SeptemberJune 30, 20172023 that would require an interim impairment assessment of goodwill finite lifeor intangible assets, or indefinite life intangible assets. Therefore, there was no
The Company’s assumptions about future conditions important to its assessment of potential impairment of its goodwill finite life intangible assets, orand indefinite life intangible assets duringare subject to uncertainty, and the three-monthCompany will continue to monitor these conditions in future periods as new information becomes available, and nine-month periods ended September 30, 2017.will update its analysis accordingly.
6. Accounts Payable and Accrued Expenses
|
|
Accounts payable and accrued expenses consisted of the following:
(in thousands) |
| June 30, 2023 |
|
| December 31, 2022 |
| ||
Trade accounts payable, including amounts due to subcontractors |
| $ | 80,492 |
|
| $ | 73,407 |
|
Compensation and related benefits |
|
| 6,353 |
|
|
| 9,577 |
|
Accrued warranty |
|
| 3,958 |
|
|
| 3,691 |
|
Contract liability |
|
| 6,729 |
|
|
| 4,516 |
|
Short-term operating lease liability |
|
| 3,520 |
|
|
| 3,228 |
|
Other |
|
| 15,202 |
|
|
| 12,779 |
|
Total accounts payable and accrued expenses |
| $ | 116,254 |
|
| $ | 107,198 |
|
(Table only in thousands) |
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Trade accounts payable, including due to subcontractors |
| $ | 54,091 |
|
| $ | 58,985 |
|
Compensation and related benefits |
|
| 4,528 |
|
|
| 8,232 |
|
Current portion of earn-out liability |
|
| 3,514 |
|
|
| 13,527 |
|
Accrued warranty |
|
| 4,244 |
|
|
| 2,684 |
|
Other accrued expenses |
|
| 11,278 |
|
|
| 12,182 |
|
|
| $ | 77,655 |
|
| $ | 95,610 |
|
The activity in the Company’s current portion of earn-out liability and long-term portion of earn-out liability was as follows for the nine months ended September 30, 2017 and 2016:
7. Senior Debt
(Table only in thousands) |
| Energy Segment |
|
| Environmental Segment |
|
| Total(1) |
| |||
Balance of earn-out at December 31, 2016 |
| $ | 24,214 |
|
| $ | — |
|
| $ | 24,214 |
|
Fair value adjustment |
|
| (5,689 | ) |
|
| — |
|
|
| (5,689 | ) |
Compensation expense adjustment |
|
| 918 |
|
|
| — |
|
|
| 918 |
|
Foreign currency translation adjustment |
|
| 729 |
|
|
| — |
|
|
| 729 |
|
Payment |
|
| (15,193 | ) |
|
| — |
|
|
| (15,193 | ) |
Total earn-out liability as of September 30, 2017 |
| $ | 4,979 |
|
| $ | — |
|
| $ | 4,979 |
|
Less: current portion of earn-out |
|
| (3,514 | ) |
|
| — |
|
|
| (3,514 | ) |
Balance of long term portion of earn-out recorded in Other liabilities at September 30, 2017 |
| $ | 1,465 |
|
| $ | — |
|
| $ | 1,465 |
|
12
| Energy Segment |
|
| Environmental Segment |
|
| Total(1) |
| ||||
Balance of earn-out at December 31, 2015 |
| $ | 29,304 |
|
| $ | 3,367 |
|
| $ | 32,671 |
|
Fair value adjustment |
|
| 960 |
|
|
| (500 | ) |
|
| 460 |
|
Compensation expense adjustment |
|
| 923 |
|
|
| — |
|
|
| 923 |
|
Foreign currency translation adjustment |
|
| (539 | ) |
|
| — |
|
|
| (539 | ) |
Settlement through an exchange of accounts receivable |
|
| (3,272 | ) |
|
| — |
|
|
| (3,272 | ) |
Payment |
|
| (8,170 | ) |
|
| (1,100 | ) |
|
| (9,270 | ) |
Total earn-out liability as of September 30, 2016 |
| $ | 19,206 |
|
| $ | 1,767 |
|
| $ | 20,973 |
|
Less: current portion of earn-out |
|
| (9,991 | ) |
|
| (1,267 | ) |
|
| (11,258 | ) |
Balance of long term portion of earn-out recorded in Other liabilities at September 30, 2016 |
| $ | 9,215 |
|
| $ | 500 |
|
| $ | 9,715 |
|
|
|
|
|
Debt consisted of the following at September 30, 2017 and December 31, 2016:following:
(Table only in thousands) |
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Outstanding borrowings under the Credit Facility (defined below). Term loan payable in quarterly principal installments of $2.0 million through September 2018, $2.5 million thereafter with balance due upon maturity in September 2020. |
|
|
|
|
|
|
|
|
- Term loan |
| $ | 115,911 |
|
| $ | 125,072 |
|
- U.S. Dollar revolving loans |
|
| 2,000 |
|
|
| — |
|
- Unamortized debt discount and debt issuance costs |
|
| (2,593 | ) |
|
| (3,175 | ) |
Total outstanding borrowings under the Credit Facility |
|
| 115,318 |
|
|
| 121,897 |
|
Outstanding borrowings (U.S. dollar equivalent) under the China Facility (defined below) |
|
| — |
|
|
| 1,296 |
|
Outstanding borrowings (U.S. dollar equivalent) under the Aarding Facility (defined below) |
|
| 1,614 |
|
|
| — |
|
Total outstanding borrowings |
|
| 116,932 |
|
|
| 123,193 |
|
Less: current portion |
|
| 9,645 |
|
|
| 8,827 |
|
Total debt, less current portion |
| $ | 107,287 |
|
| $ | 114,366 |
|
(in thousands) |
| June 30, 2023 |
|
| December 31, 2022 |
| ||
Outstanding borrowings under the Credit Facility (as defined below) |
|
|
|
|
|
| ||
Term loan |
| $ | 40,207 |
|
| $ | 41,309 |
|
Revolving credit facility |
|
| 93,200 |
|
|
| 61,300 |
|
Total outstanding borrowings under the Credit Facility |
|
| 133,407 |
|
|
| 102,609 |
|
Outstanding borrowings under the joint venture term debt |
|
| 9,406 |
|
|
| 10,083 |
|
Unamortized debt discount |
|
| (1,178 | ) |
|
| (1,488 | ) |
Total outstanding borrowings |
|
| 141,635 |
|
|
| 111,204 |
|
Less: current portion |
|
| (4,313 | ) |
|
| (3,579 | ) |
Total debt, less current portion |
| $ | 137,322 |
|
| $ | 107,625 |
|
During the nine-month period ended September 30, 2017, the Company made prepayments of $4.3 million on the outstanding balance of the term loan. These prepayments were applied to future principal payments due under the term loan. Scheduled principal payments under ourthe Credit Facility and joint venture term debt are $2.0$2.5 million for the remainder of 2017, $8.5remaining in 2023, $4.9 million in 2018, $10.02024, $5.2 million in 2019, and $97.42025, $126.3 million in 2020.2026, and $3.9 million in 2027.
United States DebtCredit Facility
As of SeptemberJune 30, 20172023 and December 31, 2016, $20.82022, $20.4 million and $18.0$18.9 million of letters of credit were outstanding, respectively. Total unused credit availability, in consideration of borrowing limitations, under the Company’s senior secured term loan and senior secured U.S. dollar revolving loansrevolver loan with sub-facilities for letters of credit, and swing-line loans and senior secured multi-currency revolving credit facility for U.S. dollar and specific foreign currency loans (collectively, the “Credit Facility”(the "Credit Facility") was $57.2$26.4 million and $62.0$59.8 million at SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively. Revolving loans may be borrowed, repaid and reborrowed until September 3, 2020,December 17, 2026, at which time all amounts borrowed pursuant tooutstanding balances of the Credit Facility must be repaid.
At the Company’s option, revolving loans and the term loans accrue interest at a per annum rate based on either the highest of (a) the federal funds rate plus 0.5%, (b) the Agent’s prime lending rate, (c) Daily Simple SOFR plus the Daily Simple SOFR Adjustment of 0.11448% plus 1.0%, or (d) 1.0%, plus a margin ranging from 1.75% to 2.75% depending on the Company’s Consolidated Leverage Ratio (“Base Rate”), or (d) a one/three/six-month Term SOFR Rate (as defined in the Credit Facility) plus the Term SOFR Adjustment ranging from 0.11% to 0.43% plus 1.75% to 2.75% depending on the Company’s Consolidated Leverage Ratio. Interest on swing line loans is the Base Rate.
9
Interest on Base Rate loans is payable quarterly in arrears on the last day of each calendar quarter and at maturity. Interest on Term SOFR rate loans is payable on the last date of each applicable Interest Period (as defined in the agreement), but in no event less than once every three months and at maturity. The weighted average stated interest rate on outstanding borrowings was 3.60%8.06% and 3.26%6.75% at SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively.
13
In accordance withUnder the terms of the Credit Facility, terms, the Company entered into an interest rate swap on December 30, 2015is required to hedge against interest rate exposure related to approximately one-thirdmaintain certain financial covenants, including the maintenance of a Consolidated Net Leverage Ratio (as defined in the outstanding debt indexed to LIBOR market rates. The fair value of the interest rate swap had no impact on the Condensed Consolidated Balance Sheet as ofCredit Facility). Through September 30, 2017. The fair value of2023, the interest rate swap was a liability totaling $0.2 million at December 31, 2016, which is recorded in “Accounts payable and accrued expenses” on the Condensedmaximum Consolidated Balance Sheets. The Company did not designate the interest rate swap as an effective hedge until the first quarter of 2016, and accordingly the change in the fair value until the date of designation of $0.5 million was recorded in earnings in “Other income (expense), net” in the Condensed Consolidated Statements of Income for the nine-month period ended September 30, 2016. From the date of designation, a significant portion of the changes to the fair value of the interest rate swap have been recorded in other comprehensive income (loss) as the hedge is deemed effective.
The Company amended the Credit Facility as of June 9, 2017. The Credit Facility was amended to, among other things, (a) modify the calculation of Consolidated EBITDA and Consolidated Fixed Charges to exclude certain pro forma adjustments related to certain acquisitions and other transactions and (b) modify the ConsolidatedNet Leverage Ratio covenant.
The Company amended the Credit Facility as of October 31, 2017. The Credit Facility was amended to, among other things, (a) modify the calculation of Consolidated EBITDA and Consolidated Fixed Charges to exclude certain adjustments related to certain transactions (b) modify the Consolidated Leverage Ratio covenant and (c) add a covenant restricting the amount of capital expenditures we may make in fiscal years 2018 and 2019. As a result of the amendment to the Credit Facilityis 3.75, the maximum consolidated leverage ratio increased from 3.25 to 3.75 andafter which time it will remain constant at this ratio through March 31, 2019, when it is set to decrease to 3.50 through September 30, 2019. The Consolidated Leverage Ratio will then decrease to 3.25 where it will remain until the end of the term of the Credit Facility.
The Company has granted a security interest in substantially all of its assets to secure its obligations pursuant to the Credit Facility. The Company’s obligations under the Credit Facility. are guaranteed by the Company’s domestic subsidiaries and such guaranty obligations are secured by a security interest on substantially all the assets of such subsidiaries, including certain real property. The Company’s obligations under the Credit Facility may also be guaranteed by the Company’s material foreign subsidiaries to the extent no adverse tax consequences would result to the Company.
As of SeptemberJune 30, 20172023 and December 31, 2016,2022, the Company was in compliance with all related financial and other restrictive covenants under the Credit Facility.Facility.
Joint Venture Debt
On March 7, 2022, the Company's Effox-Flextor-Mader, Inc. joint venture ("EFM JV") entered into a loan agreement secured by the assets of the EFM JV in the aggregate principal amount of $11.0 million for the acquisition of General Rubber, LLC ("GRC"). As of June 30, 2023 and December 31, 2022, $9.4 million and $10.0 million was outstanding under the loan, respectively. Principal will be paid back to the lender monthly with the final installment due by February 27, 2027. Interest is accrued at the per annum rate based on EFM JV's choice of the 1/3/6 month Term SOFR rate plus 3.25%, with a floor rate of 3.75%. Interest is paid monthly on the last day of each month. The interest rate at June 30, 2023 and December 31, 2022 was 8.40% and 6.60%, respectively. As of June 30, 2023 and December 31, 2022, the EFM JV was in compliance with all related financial and other restrictive covenants under this loan agreement. This loan balance does not impact the Company’s borrowing capacity or the financial covenants under the Credit Facility.
Foreign Debt
AThe Company has a number of bank guarantee facilities and bilateral lines of credit in various foreign countries currently supported by cash, letters of credit or pledged assets and collateral under the Credit Facility. In March 2023, the Company amended the Credit Facility, allowing letters of credit and bank guarantee issuances of up to $80.0 million from the bilateral lines of credit secured through pledged assets and collateral under the Credit Facility. As of June 30, 2023 and December 31, 2022, $38.5 million and $30.4 million in bank guarantees were outstanding, respectively. In addition, a subsidiary of the Company located in the Netherlands has a Euro denominated facilitiesEuro-denominated bank guarantee agreement with ING Bank N.V. (“Aarding Facility”) with a total borrowing capacitysecured by local assets under which $2.5 million and $0.6 million in bank guarantees were outstanding as of $15.4 million. As of SeptemberJune 30, 20172023 and December 31, 2016, the borrowers were in compliance with all related financial and other restrictive covenants. As of September 30, 2017, $4.6 million of the bank guarantee and $1.6 million of the overdraft facility are being used by the Company. As of December 31, 2016, $5.3 million of the bank guarantee and none of the overdraft facility was being used by the Company. There is no stated expiration date on the Aarding Facility.2022, respectively.
A subsidiary of the Company located in China has a Chinese Yuan Renminbi denominated short-term loan with Bank of America (“China Facility”) with an amount outstanding of $1.3 million as of December 31, 2016 at an interest rate of 4.79%. This loan was paid down in full during the nine months ended September 30, 2017. The total amount available for borrowing under the China Facility was $4.5 million and $4.3 million as of September 30, 2017 and December 31, 2016, respectively.8. Earnings per Share
As a result of the PMFG, Inc. (“PMFG”) acquisition in September 2015, the Company acquired a 60% equity investment in Peerless Propulsys that entitled the Company to 80% of Peerless Propulsys’s earnings. In prior periods, the noncontrolling interest of Peerless Propulsys was reported as a separate component on the Consolidated Balance Sheets. During July 2016, the Company entered into an agreement with the noncontrolling owner of Peerless Propulsys and issued a promissory note in the amount of $5.3 million due on July 11, 2019 in exchange for the remaining interest in Peerless Propulysys, which increased the Company’s ownership to 100% in the equity and earnings of Peerless Propulsys. The interest rate on the note payable is 1.50%, which approximates the market rate given the short-term duration of the note payable. The note payable is guaranteed by the Company. As of September 30, 2017 and December 31, 2016, $5.3 million of the principal amount of the note payable was outstanding. The note is payable at the earlier of July 11, 2019 or 30 days subsequent to the sale of building and land that the Company owns in China. As the Company intends to sell this building and land within one year of September 30, 2017, this note payable is currently classified as a current liability in the Consolidated Balance Sheets as of September 30, 2017.
14
The computational components of basic and diluted earnings per share for the three-monththree months ended June 30, 2023 and nine-month periods2022 are as follows:
(in thousands) |
| 2023 |
|
| 2022 |
| ||
Numerator (for basic and diluted earnings per share) |
|
|
|
|
|
| ||
Net income attributable to CECO Environmental Corp. |
| $ | 3,724 |
|
| $ | 4,385 |
|
|
|
|
|
|
|
| ||
Denominator |
|
|
|
|
|
| ||
Basic weighted-average shares outstanding |
|
| 34,619 |
|
|
| 34,873 |
|
Common stock equivalents arising from stock options and restricted stock awards |
|
| 525 |
|
|
| 168 |
|
Diluted weighted-average shares outstanding |
|
| 35,144 |
|
|
| 35,041 |
|
The computational components of basic and diluted earnings per share for the six months ended SeptemberJune 30, 20172023 and 20162022 are below.as follows:
10
|
| For the three-month period ended September 30, 2017 |
| |||||||||
|
| Numerator (Income) |
|
| Denominator (Shares) |
|
| Per Share Amount |
| |||
Basic net income and earnings per share |
| $ | 3,036 |
|
|
| 34,519 |
|
| $ | 0.09 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents arising from stock options, restricted stock awards, and employee stock purchase plan |
|
| — |
|
|
| 103 |
|
|
| — |
|
| ||||||||||||
Diluted earnings and earnings per share |
| $ | 3,036 |
|
|
| 34,622 |
|
| $ | 0.09 |
|
(in thousands) |
| 2023 |
|
| 2022 |
| ||
Numerator (for basic and diluted earnings per share) |
|
|
|
|
|
| ||
Net income attributable to CECO Environmental Corp. |
| $ | 5,701 |
|
| $ | 7,180 |
|
|
|
|
|
|
|
| ||
Denominator |
|
|
|
|
|
| ||
Basic weighted-average shares outstanding |
|
| 34,531 |
|
|
| 34,962 |
|
Common stock equivalents arising from stock options and restricted stock awards |
|
| 641 |
|
|
| 158 |
|
Diluted weighted-average shares outstanding |
|
| 35,172 |
|
|
| 35,120 |
|
|
| For the three-month period ended September 30, 2016 |
| |||||||||
|
| Numerator (Income) |
|
| Denominator (Shares) |
|
| Per Share Amount |
| |||
Basic net income and earnings per share |
| $ | 5,804 |
|
|
| 33,984 |
|
| $ | 0.17 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents arising from stock options, restricted stock awards, and employee stock purchase plan |
|
| — |
|
|
| 371 |
|
|
| — |
|
Diluted earnings and earnings per share |
| $ | 5,804 |
|
|
| 34,355 |
|
| $ | 0.17 |
|
|
| For the nine-month period ended September 30, 2017 |
| |||||||||
|
| Numerator (Income) |
|
| Denominator (Shares) |
|
| Per Share Amount |
| |||
Basic net income and earnings per share |
| $ | 8,560 |
|
|
| 34,404 |
|
| $ | 0.25 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents arising from stock options, restricted stock awards, and employee stock purchase plan |
|
| — |
|
|
| 261 |
|
|
| — |
|
Diluted earnings and earnings per share |
| $ | 8,560 |
|
|
| 34,665 |
|
| $ | 0.25 |
|
|
| For the nine-month period ended September 30, 2016 |
| |||||||||
|
| Numerator (Income) |
|
| Denominator (Shares) |
|
| Per Share Amount |
| |||
Basic net income and earnings per share |
| $ | 12,954 |
|
|
| 33,953 |
|
| $ | 0.38 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents arising from stock options, restricted stock awards, and employee stock purchase plan |
|
| — |
|
|
| 258 |
|
|
| — |
|
Diluted earnings and earnings per share |
| $ | 12,954 |
|
|
| 34,211 |
|
| $ | 0.38 |
|
Options and restricted stock units and warrants included in the computation of diluted earnings per share are calculated using the treasury stock method. For the three-month periodsthree months ended SeptemberJune 30, 20172023 and 2016, 0.8 million2022, 1.3 and 1.11.9 million, respectively, and for the six months ended June 30, 2023 and 2022, 0.7 million and 1.42.0 million, during the nine-month periods ended September 30, 2017 and 2016, respectively, of outstanding options and warrantsrestricted stock units were excluded from the computation of diluted earnings per share due to their having an anti-dilutive effect.
Once a restricted stock unit vests, it is included in the computation of weighted average shares outstanding for purposes of basic and diluted earnings per share.
On August 7, 2017,May 10, 2022, the Company declared and, on September 29, 2017, paid to common stockholders a quarterly dividend of $0.075 per share. The dividend policy and the payment of cash dividends under that policy are subject to the Board of Directors’ continuing determination that the dividend policy and the declaration of dividends are in the best interest of the Company’s
15
stockholders. On November 6, 2017, theCompany's Board of Directors reviewedauthorized a share repurchase program under which the Company’s dividend policy and determined that it would beCompany may purchase up to $20.0 million of its outstanding shares of common stock through April 30, 2025. The authorization permits the Company to repurchase shares in the best interest of the stockholders to discontinue dividend payments. Future dividends and the dividend policy may be changedopen market, through accelerated share repurchases, block trades, Rule 10b5-1 trading plans or cancelled at the Company’s discretion at any time. Payment of dividends is also subject to the continuing compliance with our financial covenants under our Credit Facility.
|
|
The Company’s 2017 Equity and Incentive Compensation Plan (the “2017 Plan”) was approved by the Company’s stockholders on May 16, 2017. The 2017 Plan permits the granting of stock options, which are granted with an exercise price equal to or greater than the fair market value of the Company’s common stock at the date of the grant, and other stock-based awards, including appreciation rights, restricted stock, restricted stock unit, performance shares and dividend equivalents. As of May 16, 2017, no further grants will be made under the Company’s 2007 Equity Incentive Plan (the “2007 Plan”), but outstanding awards under the 2007 Plan prior to such date will continue to be unaffectedthrough privately negotiated transactions in accordance with their terms. applicable laws, rules and regulations. Under the program, the Company repurchased zero and 725,000 shares at a cost of zero and $4.3 million during the three and six months ended June 30, 2023 and 2022, respectively.
9. Share-Based Compensation
The Company accounts for stock-basedshare-based compensation in accordance with ASCAccounting Standards Codification (“ASC”) Topic 718, “Compensation – Stock Compensation,” which requires the Company to recognize compensation expense for stock-basedshare-based awards, measured at the fair value of the awards at the grant date. The Company recognized expense of $0.5$1.2 million and $0.6$0.9 million of share-based compensation related expense during the three-month periodsthree months ended SeptemberJune 30, 20172023 and 2016,2022, respectively, and $1.2$2.0 million and $1.7$1.8 million of share-based compensation related expense during the nine-month periodssix months ended SeptemberJune 30, 20172023 and 2016,2022, respectively. Share based compensation expense was lower in 2017 primarily due to a large amount of forfeitures related to the former Chief Executive Officer’s departure from the Company.
The Company granted no options during the three-month periods ended September 30, 2017 and 2016, respectively. The Company granted approximately 128,00050,000 and 100,000 options during the nine-month periods ended September 30, 2017 and 2016, respectively. The weighted-average fair value of stock options granted during the nine months ended September 30, 2017 and 2016 was determined to be $2.68 and $2.07 per option, respectively, using the Black-Scholes option-pricing model based on the following assumptions:
Expected Volatility: The Company utilizes a volatility factor based on the Company’s historical stock prices for a period of time equal to the expected term of the stock option utilizing weekly price observations. For the nine months ended September 30, 2017 and 2016, the Company utilized a weighted-average volatility factor of 39%.
Expected Term: For the nine months ended September 30, 2017 and 2016, the Company utilized a weighted-average expected term factor of 6.3 years and 6.5 years, respectively.
Risk-Free Interest Rate: The risk-free interest rate factor utilized is based upon the implied yields currently available on U.S. Treasury zero-coupon issues over the expected term of the stock options. For the nine months ended September 30, 2017 and 2016, the Company utilized a weighted-average risk-free interest rate factor of 2.1%.
Expected Dividends: The Company utilized a weighted average expected dividend rate of 3.3% and 3.6% to value options granted during the nine months ended September 30, 2017 and 2016, respectively.
The Company granted no104,000 restricted stock units during the three-month periodthree months ended SeptemberJune 30, 20172023 and 2022, respectively, and approximately 165,000390,000 and 688,000 restricted stock units during the three-month period ended September 30, 2016. The Company granted approximately 405,000 and 270,000 restricted stock units during the nine-month periods ended September 30, 2017 and 2016, respectively. The weighted-average fair value of restricted stock units granted during the ninesix months ended SeptemberJune 30, 20172023 and 2016 was determined to be $9.87 and $9.77 per unit, respectively, using the value of stock in the open market on the date of grant.2022, respectively.
On June 10, 2017, the Company granted 700,000 performance units to our Chief Executive Officer whose total value was determined to be $175,000 and will be expensed over the vesting period. The maximum shares of common stock that the participant could receive upon his performance units vesting is 77,778 shares. The performance units are earned based upon the Company’s stock price during 30 consecutive trading days within a specified date range of approximately two years. The performance units are settled in the Company’s common stock subsequent to this specified date range and vest approximately three years from the date of the grant. The estimated grant date fair value and compensation expense of each performance share is determined on the date of grant by using the Monte Carlo valuation model.
The fair value of the stock-based awards, including the performance units, granted is recorded as compensation expense on a straight-line basis over the vesting periods of the awards.
There were approximately 287,000 and 74,0000.1 million options exercised during the ninethree and six months ended SeptemberJune 30, 2017 and 2016, respectively.2023. The Company received $1.1$0.3 million and $0.5$0.9 million in cash from employees and directors exercising options during the ninethree and six months ended SeptemberJune 30, 2017 and 2016,2023, respectively. The intrinsic value of options exercised was $0.1 million and $0.2 million for the three and six months ended June 30, 2023, respectively. There were zero options exercised during the nine monthsthree and six month periods ended SeptemberJune 30, 20172022.
10. Pension and 2016 was $1.9 million and $0.2 million, respectively. Employee Benefit Plans
|
|
We sponsorThe Company sponsors 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 attainedCompany presents the agecomponents of 65 to electnet periodic benefit cost (gain) within “Other income (expense), net” on the typeCondensed Consolidated Statements of coverage desired.Income.
11
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 pension plan expense consisted of the following:
(Table only in thousands) |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Pension plan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | 101 |
|
| $ | 112 |
|
| $ | 315 |
|
| $ | 335 |
|
Interest cost |
|
| 329 |
|
|
| 356 |
|
|
| 986 |
|
|
| 1,069 |
|
Expected return on plan assets |
|
| (431 | ) |
|
| (457 | ) |
|
| (1,292 | ) |
|
| (1,371 | ) |
Amortization of net actuarial loss |
|
| 57 |
|
|
| 53 |
|
|
| 170 |
|
|
| 159 |
|
Net periodic benefit cost |
| $ | 56 |
|
| $ | 64 |
|
| $ | 179 |
|
| $ | 192 |
|
Health care plan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
| $ | 1 |
|
| $ | 1 |
|
| $ | 2 |
|
| $ | 3 |
|
Amortization of loss |
|
| 2 |
|
|
| 3 |
|
|
| 6 |
|
|
| 8 |
|
Net periodic benefit cost |
| $ | 3 |
|
| $ | 4 |
|
| $ | 8 |
|
| $ | 11 |
|
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
(in thousands) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Interest cost |
| $ | 318 |
|
| $ | 220 |
|
| $ | 637 |
|
| $ | 439 |
|
Expected return on plan assets |
|
| (285 | ) |
|
| (390 | ) |
|
| (571 | ) |
|
| (780 | ) |
Amortization of net actuarial loss |
|
| 74 |
|
|
| 65 |
|
|
| 148 |
|
|
| 131 |
|
Net periodic benefit cost (gain) |
| $ | 107 |
|
| $ | (105 | ) |
| $ | 214 |
|
| $ | (210 | ) |
WeThe Company madeno contributions to ourits defined benefit plansplan during the ninesix months ended SeptemberJune 30, 20172023 and 2016 totaling $1.6 million and $29,000, respectively. We anticipate $0.3 million and $25,0002022. For the remainder of further2023, the Company does not expect to make any contributions to fund the pension plans and the retiree health care plan, respectively, during the remainder of 2017.plan. The unfunded liability of the plansplan of $9.6$5.7 million and $11.1$5.5 million as of SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively, is included in Other liabilities“Other liabilities” on our unauditedthe Condensed Consolidated Balance Sheets.
11. Income Taxes
|
|
The Company files income tax returns in various federal, state and local jurisdictions. Tax years from 2014 and onward2018 forward remain open for examination by federalFederal authorities. Tax years from 2012 and onward2017 forward remain open for all significant state and foreign authorities.
The Company accounts for uncertain tax positions pursuant to ASC Topic 740, “Income Taxes.” As of SeptemberJune 30, 20172023 and December 31, 2016,2022, the liability for uncertain tax positions totaled approximately $0.4$0.1 million, which is included in Other liabilities“Other liabilities” on our unauditedthe Condensed Consolidated Balance Sheets. The Company recognizes accrued interest accrued related to uncertain tax positions in interest expense and penalties, if any, in income tax expense.expense within the Condensed Consolidated Statements of Income.
Certain of the Company’s undistributed earnings of our foreign subsidiaries are not permanently reinvested. Since foreign earnings have already been subject to United States income tax in 2017 as a result of the 2017 Tax Cuts and Jobs Act, the Company intends to repatriate foreign-held cash as needed. The Company has notrecords deferred income tax attributable to foreign withholding taxes that would become payable should it decide to repatriate cash held in our foreign operations. As of June 30, 2023 and December 31, 2022, the Company recorded deferred income taxes of approximately $0.8 million and $1.3 million, respectively, on the undistributed earnings of its foreign subsidiaries because of management’s intent to indefinitely reinvest such earnings.subsidiaries.
Income tax expense was $1.0 million and $1.9 million for the three months ended June 30, 2023 and 2022, respectively, and $1.0 million and $3.0 million for the six months ended June 30, 2023 and 2022, respectively. The effective income tax rate for the three months ended June 30, 2023 was 19.8% compared with 28.3% for the three months ended June 30, 2022, and the effective income tax rate for the six months ended June 30, 2023 was 13.3% compared with 28.3% for the six months ended June 30, 2022. The effective income tax rates for the three and six months ended June 30, 2023 and 2022 differ from the United States federal statutory rate. The Company's effective rate is affected by certain other permanent differences, including state income taxes, non-deductible incentive stock-based compensation and differences in tax rates among jurisdictions in which it operates.
12. Financial Instruments
|
|
OurThe Company's 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 SeptemberJune 30, 20172023 and December 31, 2016,2022, due to their short-term nature or variable, market-driven interest rates.
The fair value of the debt issued under the Credit Facility and joint venture term loan was $117.9$142.8 million and $125.1$112.7 million at SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively. The fair value was determined considering market conditions, the Company's credit worthiness and the current terms of our debt, which is considered Level 2 on the note payable was $5.3 million at Septemberfair value hierarchy.
At June 30, 20172023 and December 31, 2016, respectively.
In accordance with2022, the terms of the Credit Facility, the Company entered into an interest rate swap on December 30, 2015 to hedge against interest rate exposure related to a portion of the outstanding debt indexed to LIBOR market rates. See Note 8 for further information regarding the interest rate swap.
17
At September 30, 2017 and December 31, 2016, we had cash and cash equivalents of $24.6$47.6 million and $45.8$45.5 million, respectively, of which $17.0$35.6 million and $25.6$31.7 million, respectively, was held outside of the United States, principally in the Netherlands, United Kingdom, China,United Arab Emirates and Canada. China.
12
13. Commitments and Contingencies
Restricted cash is held by the Company to collateralize letters of credit issued in foreign jurisdictions to support Company operations. The Company occasionally enters into letters of credit with durations in excess of one year.
|
|
Asbestos cases
OurThe Company's subsidiary, Met-Pro Technologies LLC (“Met-Pro”), beginning in 2002, began to behas been 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 SeptemberJune 30, 20172023 for cases involving asbestos-related claims were $1.2$6.2 million of which together with all legal fees other than corporate counsel expenses; $1.1 millionexpenses have substantially been paid by the Company’s insurers. The average cost per settled claim, excluding legal fees, was approximately $27,000.$38,000.
Based upon the most recent information available to the Company regarding such claims, there were a total of 223261 cases pending against the Company as of SeptemberJune 30, 2017 (with Connecticut,2023 with Illinois, New York, Pennsylvania and West Virginia having the largest number of cases),cases, as compared with 229247 cases that were pending as of December 31, 2016.2022. During the ninesix months ended SeptemberJune 30, 2017, 392023, 71 new cases were filed against the Company, and the Company was dismissed from 4046 cases and settled five11 cases. Most of the pending cases have not advanced beyond the discovery stageearly stages of litigation,discovery, although a number of cases are on schedules leading to or are 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.
ValeroOther
One of our subsidiaries, Fisher-Klosterman, Inc. (“FKI”), was a defendant in a products liability lawsuit filed in Harris County, Texas on August 23, 2010 by three Valero refining companies. The plaintiffs claimed that FKI (and its co-Defendants) used an allegedly defective refractory material included in cyclones it supplied to Valero that caused damages to refineries they own and operate. Plaintiffs claimed to have suffered property damages, including catalyst loss, regenerator repair costs, replacement part costs, damage to other property and business interruption loss. During 2014, the Company reached a settlement with the plaintiffs for $0.5 million and, accordingly, recorded a corresponding charge to operations. In addition, the Company reached an agreement with a supplier to recover $0.2 million related to this matter. The recovery was also recorded during 2014. The Company’s insurer, Valley Forge Insurance Company (“Valley Forge”), who had paid for the legal defense in this matter, initiated a new case in the Southern District of Ohio against the Company in October 2014 seeking, among other things, recoupment of past legal costs paid. Valley Forge claims that it did not have an obligation to defend FKI and is entitled to recoup all amounts paid to defend FKI. The Court rejected Valley Forge’s position on the duty to defend as contrary to Ohio law. The Court found that if Valley Forge could prove that FKI breached its duty to cooperate in defending the Valero Suit, Valley Forge may be relieved of its duty to defend to some extent. Valley Forge moved for reconsideration of the Court’s opinion in May 2016, which the court ruled against. The Court ruled in 2017 that Valley Forge could amend its complaint. The Company is vigorously disputing this claim, and is seeking to pursue counterclaims against the insurer.
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.
18
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 reservesthe Company records 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 areThe Company is not aware of any pending claims or assessments, other than as described above, which may have a material adverse impact on ourits liquidity, financial position, results of operations, or cash flows.
14. Acquisitions and Joint Ventures
Malvar Engineering Limited
On January 10, 2023, the Company acquired 100% of the equity interests of Malvar Engineering Limited, including its subsidiaries Arkanum Management Limited and Wakefield Acoustics Limited (collectively, "Wakefield"), for $4.1 million in cash, which was financed with a draw on the Company’s revolving credit facility, and $0.4 million of deferred cash consideration. As additional consideration, the former owners are entitled to earn-out payments based upon specified financial results through July 31, 2023. Based on projections at the acquisition date, the Company estimated the fair value of the earn-out to be $0.6 million. As of June 30, 2023, the earnout liability recorded in “Accounts payable and accrued expenses” on the Condensed Consolidated Balance Sheets is $0.6 million. Wakefield is a producer of industrial engineered noise control solutions, including custom acoustical gen-set packages, ambient air baffles, acoustical louvres, and skid enclosures, primarily serving server farms for data centers, standby and emergency power generation, oil and gas, petrochemical, commercial construction, infrastructure, and general manufacturing industries. This acquisition advances the Company's position within the industrial silencing and noise attenuation market by adding a range of solutions and access to new geographic markets within
13
the Engineered Systems segment. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of closing.
|
|
(in thousands) |
|
|
| |
Current assets |
| $ | 3,240 |
|
Property and equipment |
|
| 635 |
|
Intangible - finite life |
|
| 1,778 |
|
Goodwill |
|
| 4,779 |
|
Total assets acquired |
|
| 10,432 |
|
Current liabilities assumed |
|
| (4,860 | ) |
Deferred income tax liability |
|
| (444 | ) |
Net assets acquired |
| $ | 5,128 |
|
The Company acquired customer lists and tradename intangible assets valued at $1.5 million and $0.3 million, respectively. These assets were determined to have useful lives of 10 years.
During the three and six months ended June 30, 2023, Wakefield accounted for $3.0 million and $5.5 million in revenue, respectively, and $0.2 million and $0.3 million of net income, respectively, included in the Company’s results.
Transcend Solutions
On March 31, 2023, the Company acquired 100% of the equity interests of Transcend Solutions, LLC ("Transcend") for $22.4 million, including $20.0 million in cash, which was financed with a draw on the Company’s revolving credit facility, $2.4 million of deferred cash consideration, consisting of $0.4 million of holdback payable within one year and $2.0 million of notes payable due in equal installments over two years. Transcend is a process filtration solution design and manufacturing company with applications in hydrocarbon and chemical processing. This acquisition improves the Company's short-cycle and long-cycle mix and expands the Company's reach into midstream oil and gas, liquified natural gas, hydrocarbon processing, and chemical processing applications within the Engineered Systems segment. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of closing.
(in thousands) |
|
|
| |
Current assets (including cash of $52) |
| $ | 2,614 |
|
Property and equipment |
|
| 1,153 |
|
Intangible - finite life |
|
| 8,930 |
|
Goodwill |
|
| 10,671 |
|
Other assets |
|
| 231 |
|
Total assets acquired |
|
| 23,599 |
|
Current liabilities assumed |
|
| (1,203 | ) |
Net assets acquired |
| $ | 22,396 |
|
The Company acquired technology, customer lists and tradename intangible assets valued at $0.6 million, $7.6 million and $0.7 million, respectively. These assets were determined to have useful lives of 7, 10 and 10 years, respectively.
During the three and six months ended June 30, 2023, Transcend accounted for $2.5 million in revenue and $0.5 million of net income included in the Company’s results.
General Rubber LLC
On March 7, 2022, the Company, through the EFM JV, acquired 100% of the equity interests of General Rubber LLC ("GRC") for $19.7 million in cash, which was financed with a combination of a draw on the Company's revolving credit facility and issuance of term debt by the EFM JV. As additional consideration, the former owners of GRC were issued 10% of the equity interest in the EFM JV, resulting in the Company holding 63% of the equity in the joint venture. The fair value ascribed to the equity interest of the former owners of GRC was approximately $4.1 million. As of June 30, 2023, there were $15.5 million in current assets, $27.2 million in long-lived assets, and $31.5 million in total liabilities related to the EFM JV included in the Condensed Consolidated Balance Sheets. For the three months and six months ended June 30, 2023, the EFM JV accounted for $9.9 million and $19.3 million, respectively, in revenue included in the Company's results.
14
GRC engineers and manufactures non-metallic expansion joints and flow control products including rubber expansion joints, ducting expansion joints, and industrial pinch and duck bill valves, serving the industrial water and wastewater markets. The acquisition diversifies and expands the EFM JV product offerings within the Engineered Systems segment. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of closing.
(in thousands) |
|
|
| |
Current assets (including cash of $137) |
| $ | 4,963 |
|
Property and equipment |
|
| 459 |
|
Goodwill |
|
| 11,120 |
|
Intangible - finite life |
|
| 8,380 |
|
Total assets acquired |
|
| 24,922 |
|
Current liabilities assumed |
|
| (714 | ) |
Deferred income tax liability |
|
| (388 | ) |
Net assets acquired |
| $ | 23,820 |
|
|
|
|
|
The Company acquired customer lists and tradename intangible assets valued at $7.7 million and $0.7 million, respectively. These assets were determined to have useful lives of 10 years.
During the three and six months ended June 30, 2022, GRC accounted for $3.8 million and $4.5 million in revenue, respectively, and $0.5 million and $0.8 million, respectively, of net income included in the Company’s results.
Compass Water Solutions, Inc.
On May 3, 2022, the Company acquired 100% of the equity interests of Compass Water Solutions, Inc. ("Compass") for $9.0 million in cash, which was financed with a draw on the Company’s revolving credit facility, and $2.0 million in notes payable to the former owners over two years. As additional consideration, the former owners are entitled to earn-out payments based upon a multiple of specified financial results through April 30, 2023. Based on projections at the acquisition date, the Company estimated the fair value of the earn-out to be $1.4 million. As of June 30, 2023, the earnout liability recorded in “Accounts payable and accrued expenses” on the Condensed Consolidated Balance Sheets is $1.4 million.
Compass is a leading global supplier of membrane-based industrial water and wastewater treatment systems that help customers achieve regulatory compliance of water discharge at the lowest lifecycle cost. The acquisition diversifies and expands the Company's industrial water product offerings within the Engineered Systems segment. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of closing.
(in thousands) |
|
|
| |
Current assets (including cash of $334) |
| $ | 4,796 |
|
Property and equipment |
|
| 101 |
|
Goodwill |
|
| 4,848 |
|
Intangible - finite life |
|
| 4,900 |
|
Total assets acquired |
|
| 14,645 |
|
Current liabilities assumed |
|
| (623 | ) |
Deferred income tax liability |
|
| (1,627 | ) |
Net assets acquired |
| $ | 12,395 |
|
|
|
|
|
The Company acquired customer lists and tradename intangible assets valued at $4.4 million and $0.5 million, respectively. These assets were determined to have useful lives of 10 years.
During the three and six months ended June 30, 2022, Compass accounted for $0.8 million in revenue and $0.1 million of net loss included in the Company’s results.
Western Air Ducts Limited
On June 22, 2022, the Company acquired 100% of the equity interests of Western Air Ducts Limited ("Western Air Ducts") for $10.7 million in cash, which was financed with a draw on the Company’s revolving credit facility, and deferred cash consideration of $0.8 million paid one year from the date of closing.
15
Western Air Ducts is a leading European supplier of dust and fume extraction solutions, providing consultation, design, manufacturing, installation, and service. The acquisition diversifies and expands the Company's industrial air product offerings within the Industrial Process Solutions segment. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of closing.
(in thousands) |
|
|
| |
Current assets (including cash of $1,557) |
| $ | 2,711 |
|
Property and equipment |
|
| 188 |
|
Goodwill |
|
| 7,344 |
|
Intangible - finite life |
|
| 3,158 |
|
Total assets acquired |
|
| 13,401 |
|
Current liabilities assumed |
|
| (1,127 | ) |
Deferred income tax liability |
|
| (824 | ) |
Net assets acquired |
| $ | 11,450 |
|
|
|
|
|
The Company acquired customer lists and tradename intangible assets valued at $2.8 million and $0.4 million, respectively. These assets were determined to have useful lives of 10 years.
DS21 Co., Ltd.
On September 19, 2022, the Company acquired 100% of the equity interests of DS21 Co., Ltd. ("DS21") for $9.2 million, including $8.9 million in cash, which was financed with a draw on the Company’s revolving credit facility, and deferred cash consideration of $0.3 million payable in one year.
DS21 is a South Korean-based design and manufacturing firm specializing in innovative water and wastewater treatment solutions. The addition of DS21 advances the Company's leadership position in niche oily water and produced water treatment, demineralization water treatment and ultra-pure water supply applications within the Company's Engineered Systems segment. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of closing.
(in thousands) |
|
|
| |
Current assets (including cash of $1,453) |
| $ | 5,099 |
|
Property and equipment |
|
| 4,112 |
|
Intangible - finite life |
|
| 422 |
|
Deferred income taxes |
|
| 557 |
|
Other assets |
|
| 169 |
|
Total assets acquired |
|
| 10,359 |
|
Current liabilities assumed |
|
| (1,008 | ) |
Other liabilities |
|
| (113 | ) |
Net assets acquired |
| $ | 9,238 |
|
|
|
|
|
The Company acquired customer lists and tradename intangible assets valued at $0.1 million and $0.3 million, respectively. These assets were determined to have useful lives of 10 years.
The Company has finalized the valuation of assets acquired and liabilities assumed related to the acquisitions of GRC, Compass, and Western Air Ducts. The approximate fair values of the assets acquired and liabilities assumed related to the remaining acquisitions are based on preliminary estimates and assumptions. These preliminary estimates and assumptions could change significantly during the purchase price measurement period as the Company finalizes the valuation of assets acquired and liabilities assumed. These changes could result in material variances between the Company's future financial results, including variances in the estimated purchase price, fair values recorded and expenses associated with these items.
Goodwill recognized represents value the Company expects to be created by combining the various operations of the acquired businesses with the Company’s operations, including the expansion into markets within existing business segments, access to new customers and potential cost savings and synergies. Goodwill related to this acquisition is not deductible for tax purposes.
Acquisition and integration expenses on the Condensed Consolidated Statements of Income are related to acquisition activities, which include retention, legal, accounting, banking, and other expenses.
16
The following unaudited pro forma financial information represents the Company’s results of operations as if these acquisitions had occurred at the beginning of the fiscal year prior to the acquisition:
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
(in thousands, except per share data) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net sales |
| $ | 129,181 |
|
|
| 113,063 |
|
| $ | 245,297 |
|
| $ | 216,077 |
|
Net income attributable to CECO Environmental Corp. |
|
| 3,724 |
|
|
| 4,271 |
|
|
| 5,462 |
|
|
| 6,853 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 0.11 |
|
| $ | 0.12 |
|
| $ | 0.16 |
|
| $ | 0.20 |
|
Diluted |
| $ | 0.11 |
|
| $ | 0.12 |
|
| $ | 0.16 |
|
| $ | 0.20 |
|
The pro forma results have been prepared for informational purposes only and include adjustments to amortize acquired intangible assets with finite life, reflect additional interest expense on debt used to fund the acquisition, and to record the income tax consequences of the pro forma adjustments. These pro forma results do not purport to be indicative of the results of operations that would have occurred had the purchase been made as of the beginning of the periods presented or of the results of operations that may occur in the future.
15. Business Segment Information
The Company’s operations are organized and reviewed by management along with its product linessolutions or end marketmarkets that the segment serves and presented in threetwo reportable segments.
Energy Segment
Our Energy segment provides customized solutions for the power generation and petrochemical industry. This includes natural gas turbine exhaust systems, dampers and diverters, gas and liquid separation and filtration equipment, selective catalytic reduction (“SCR”) and selective non-catalytic reduction (“SNCR”) systems, acoustical components and silencers, secondary separators (nuclear plant reactor vessels) and expansion joints, the design and manufacture of technologies for flue gas and diverter dampers, non-metallic expansion joints, and silencer and precipitator applications, primarily for natural gas and coal-fired power plants, refining, oil production and petrochemical processing, as well as a variety of other industries.
Environmental Segment
Our Environmental segment provides the 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, process and industrial odors. These products and solutions include chemical and biological scrubbers, fabric filters and cartridge collectors, thermal and catalytic oxidation systems, cyclones, separators, gas absorbers and industrial ventilation systems. In addition, this segment designs and manufactures fluid catalytic cracking unit cyclones used in the petroleum and petrochemical refining process. This segment also provides component parts for industrial air systems and provides cost effective alternatives to traditional duct components, as well as custom metal engineered fabrication services. These products and services are applicable to a wide variety of industries.
Fluid Handling and Filtration Segment
Our Fluid Handling and Filtration segment provides the design and manufacture of high quality pump, filtration and fume exhaust solutions. This includes centrifugal pumps for corrosive, abrasive and high temperature liquids, filter products for air and liquid filtration, precious metal recovery systems, carbonate precipitators, and technologically advanced air movement and exhaust systems. These products are applicable to a wide variety of industries, particularly the aquarium/aquaculture, plating and metal finishing, food and beverage, chemical/petrochemical, wastewater treatment, desalination and pharmaceutical markets.
The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC. Interest income and expense are not included in the measure of segment profit reviewed by management. Income taxes are also not included in the measure of segment operating profit reviewed by management. The operating results of the segments are reviewed through to the “Income from operations” line on the Condensed Consolidated Statements of Income.Income.
19The Company’s reportable segments are organized as groups of similar products and services, as described as follows:
Engineered Systems segment: The Engineered Systems segment serves the power generation, hydrocarbon processing, water/wastewater treatment, oily water separation and treatment, marine and naval vessels, and midstream oil & gas sectors. The Company addresses the global demand for environmental and equipment protection solutions with its highly engineered platforms including emissions management, fluid bed cyclones, thermal acoustics, separation & filtration, and dampers & expansion joints.
Industrial Process Solutions segment: The Industrial Process Solutions segment serves the broad industrial sector with solutions for air pollution and contamination control, fluid handling, and process filtration in applications such as aluminum beverage can production, automobile production, food and beverage processing, semiconductor fabrication, electronics production, steel and aluminum mill processing, wood manufacturing, desalination, and aquaculture markets. For Industrial Air applications, the Company assists companies in maintaining clean and safe operations for employees, reducing energy consumption, minimizing waste for customers, and meeting regulatory standards for toxic emissions, fumes, volatile organic compounds and odor elimination through its platforms including duct fabrication & installation, industrial air, and fluid handling.
The financial segment information is presented in the following tables:as follows:
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
(in thousands) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net sales (less intra-, inter-segment sales) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Engineered Systems segment |
| $ | 87,522 |
|
| $ | 67,333 |
|
| $ | 161,977 |
|
| $ | 124,308 |
|
Industrial Process Solutions segment |
|
| 41,659 |
|
|
| 38,042 |
|
|
| 79,767 |
|
|
| 73,503 |
|
Total net sales |
| $ | 129,181 |
|
| $ | 105,375 |
|
| $ | 241,744 |
|
| $ | 197,811 |
|
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
(in thousands) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Engineered Systems segment |
| $ | 14,089 |
|
| $ | 9,006 |
|
| $ | 23,894 |
|
| $ | 15,476 |
|
Industrial Process Solutions segment |
|
| 4,586 |
|
|
| 5,482 |
|
|
| 10,131 |
|
|
| 9,621 |
|
Corporate and Other(1) |
|
| (10,072 | ) |
|
| (8,742 | ) |
|
| (19,961 | ) |
|
| (14,147 | ) |
Total income from operations |
| $ | 8,603 |
|
| $ | 5,746 |
|
| $ | 14,064 |
|
| $ | 10,950 |
|
17
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in thousands) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net Sales (less intra-, inter-segment sales) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Segment |
| $ | 36,182 |
|
| $ | 50,259 |
|
| $ | 114,681 |
|
| $ | 151,058 |
|
Environmental Segment |
|
| 29,735 |
|
|
| 36,606 |
|
|
| 103,543 |
|
|
| 119,939 |
|
Fluid Handling and Filtration Segment |
|
| 20,105 |
|
|
| 14,866 |
|
|
| 54,269 |
|
|
| 46,874 |
|
Corporate and Other(1) |
|
| (1,035 | ) |
|
| (135 | ) |
|
| (985 | ) |
|
| (842 | ) |
Net sales |
| $ | 84,987 |
|
| $ | 101,596 |
|
| $ | 271,508 |
|
| $ | 317,029 |
|
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
(in thousands) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Property and equipment additions |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Engineered Systems segment |
| $ | 444 |
|
| $ | 27 |
|
| $ | 688 |
|
| $ | 32 |
|
Industrial Process Solutions segment |
|
| 312 |
|
|
| 340 |
|
|
| 1,711 |
|
|
| 412 |
|
Corporate and Other |
|
| 1,406 |
|
|
| 400 |
|
|
| 1,520 |
|
|
| 988 |
|
Total property and equipment additions |
| $ | 2,162 |
|
| $ | 767 |
|
| $ | 3,919 |
|
| $ | 1,432 |
|
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
(in thousands) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Engineered Systems segment |
| $ | 1,274 |
|
| $ | 960 |
|
| $ | 2,486 |
|
| $ | 1,855 |
|
Industrial Process Solutions segment |
|
| 949 |
|
|
| 1,009 |
|
|
| 2,107 |
|
|
| 2,059 |
|
Corporate and Other |
|
| 542 |
|
|
| 410 |
|
|
| 1,057 |
|
|
| 754 |
|
Total depreciation and amortization |
| $ | 2,765 |
|
| $ | 2,379 |
|
| $ | 5,650 |
|
| $ | 4,668 |
|
(in thousands) |
| June 30, 2023 |
|
| December 31, 2022 |
| ||
Identifiable assets |
|
|
|
|
|
| ||
Engineered Systems segment |
| $ | 406,289 |
|
| $ | 332,820 |
|
Industrial Process Solutions segment |
|
| 154,610 |
|
|
| 150,458 |
|
Corporate and Other(2) |
|
| 21,719 |
|
|
| 21,443 |
|
Total identifiable assets |
| $ | 582,618 |
|
| $ | 504,721 |
|
|
|
(in thousands) |
| June 30, 2023 |
|
| December 31, 2022 |
| ||
Goodwill |
|
|
|
|
|
| ||
Engineered Systems segment |
| $ | 130,572 |
|
| $ | 114,746 |
|
Industrial Process Solutions segment |
|
| 69,164 |
|
|
| 68,451 |
|
Total goodwill |
| $ | 199,736 |
|
| $ | 183,197 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in thousands) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Income from Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Segment |
| $ | 5,287 |
|
| $ | 8,502 |
|
| $ | 14,428 |
|
| $ | 20,065 |
|
Environmental Segment |
|
| 2,157 |
|
|
| 5,459 |
|
|
| 12,043 |
|
|
| 16,324 |
|
Fluid Handling and Filtration Segment |
|
| 4,299 |
|
|
| 3,109 |
|
|
| 11,756 |
|
|
| 9,507 |
|
Corporate and Other(2) |
|
| (5,404 | ) |
|
| (6,520 | ) |
|
| (20,184 | ) |
|
| (20,058 | ) |
Eliminations |
|
| (709 | ) |
|
| (51 | ) |
|
| (1,808 | ) |
|
| (971 | ) |
Income from operations |
| $ | 5,630 |
|
| $ | 10,499 |
|
| $ | 16,235 |
|
| $ | 24,867 |
|
|
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in thousands) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Property and Equipment Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Segment |
| $ | 69 |
|
| $ | 4 |
|
| $ | 419 |
|
| $ | 232 |
|
Environmental Segment |
|
| 68 |
|
|
| 225 |
|
|
| 110 |
|
|
| 529 |
|
Fluid Handling and Filtration Segment(3) |
|
| 17 |
|
|
| 1,118 |
|
|
| 236 |
|
|
| 4,428 |
|
Corporate and Other |
|
| 11 |
|
|
| 1 |
|
|
| 41 |
|
|
| 7 |
|
Property and equipment additions |
| $ | 165 |
|
| $ | 1,348 |
|
| $ | 806 |
|
| $ | 5,196 |
|
|
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in thousands) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Depreciation and Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Segment |
| $ | 1,927 |
|
| $ | 2,341 |
|
| $ | 5,957 |
|
| $ | 8,082 |
|
Environmental Segment |
|
| 813 |
|
|
| 994 |
|
|
| 2,500 |
|
|
| 2,868 |
|
Fluid Handling and Filtration Segment |
|
| 1,168 |
|
|
| 1,321 |
|
|
| 3,563 |
|
|
| 3,969 |
|
Corporate and Other |
|
| 29 |
|
|
| 33 |
|
|
| 85 |
|
|
| 98 |
|
Depreciation and Amortization |
| $ | 3,937 |
|
| $ | 4,689 |
|
| $ | 12,105 |
|
| $ | 15,017 |
|
20
(dollars in thousands) |
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Identifiable Assets |
|
|
|
|
|
|
|
|
Energy Segment |
| $ | 234,575 |
|
| $ | 257,566 |
|
Environmental Segment |
|
| 106,373 |
|
|
| 118,680 |
|
Fluid Handling and Filtration Segment |
|
| 102,485 |
|
|
| 104,294 |
|
Corporate and Other(4) |
|
| 12,110 |
|
|
| 18,094 |
|
Identifiable Assets |
| $ | 455,543 |
|
| $ | 498,634 |
|
|
|
(dollars in thousands) |
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Goodwill |
|
|
|
|
|
|
|
|
Energy Segment |
| $ | 76,913 |
|
| $ | 75,827 |
|
Environmental Segment |
|
| 48,203 |
|
|
| 48,203 |
|
Fluid Handling and Filtration Segment |
|
| 46,123 |
|
|
| 46,123 |
|
Goodwill |
| $ | 171,239 |
|
| $ | 170,153 |
|
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:follows:
|
| Three months ended June 30, 2023 |
| |||||||||||||||||
|
|
|
|
|
|
|
| Less Inter-Segment Sales |
|
| ||||||||||
(in thousands) |
| Total |
|
| Intra- |
|
| Industrial Process Solutions |
|
| Engineered Systems |
|
| Net Sales to |
| |||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Engineered Systems segment |
| $ | 95,880 |
|
| $ | (7,995 | ) |
| $ | (363 | ) |
| $ | — |
|
| $ | 87,522 |
|
Industrial Process Solutions segment |
|
| 44,641 |
|
|
| (2,806 | ) |
|
| - |
|
|
| (176 | ) |
|
| 41,659 |
|
Total net sales |
| $ | 140,521 |
|
| $ | (10,801 | ) |
| $ | (363 | ) |
| $ | (176 | ) |
| $ | 129,181 |
|
|
| Three months ended June 30, 2022 |
| |||||||||||||||||
|
|
|
|
|
|
|
| Less Inter-Segment Sales |
|
| ||||||||||
(in thousands) |
| Total |
|
| Intra- |
|
| Industrial Process Solutions |
|
| Engineered Systems |
|
| Net Sales to |
| |||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Engineered Systems segment |
| $ | 70,754 |
|
| $ | (3,231 | ) |
| $ | (190 | ) |
| $ | — |
|
| $ | 67,333 |
|
Industrial Process Solutions segment |
|
| 39,901 |
|
|
| (1,717 | ) |
|
| — |
|
|
| (142 | ) |
|
| 38,042 |
|
Total net sales |
| $ | 110,655 |
|
| $ | (4,948 | ) |
| $ | (190 | ) |
| $ | (142 | ) |
| $ | 105,375 |
|
|
| Three Months Ended September 30, 2017 |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Less Inter-Segment Sales |
|
|
|
|
| |||||||||||||
(dollars in thousands) |
| Total Sales |
|
| Intra- Segment Sales |
|
| Environmental |
|
| Energy |
|
| FHF |
|
| Corp and Other |
|
| Net Sales to Outside Customers |
| |||||||
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Segment |
| $ | 37,290 |
|
| $ | (1,102 | ) |
| $ | (6 | ) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 36,182 |
|
Environmental Segment |
|
| 30,138 |
|
|
| (396 | ) |
|
| — |
|
|
| (1 | ) |
|
| (6 | ) |
|
| — |
|
|
| 29,735 |
|
Fluid Handling and Filtration Segment |
|
| 20,768 |
|
|
| (570 | ) |
|
| (55 | ) |
|
| (38 | ) |
|
| — |
|
|
| — |
|
|
| 20,105 |
|
Corporate and Other(5) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,035 | ) |
|
| (1,035 | ) |
Net Sales |
| $ | 88,196 |
|
| $ | (2,068 | ) |
| $ | (61 | ) |
| $ | (39 | ) |
| $ | (6 | ) |
| $ | (1,035 | ) |
| $ | 84,987 |
|
|
| Three Months Ended September 30, 2016 |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Less Inter-Segment Sales |
|
|
|
|
| |||||||||||||
(dollars in thousands) |
| Total Sales |
|
| Intra- Segment Sales |
|
| Environmental |
|
| Energy |
|
| FHF |
|
| Corp and Other |
|
| Net Sales to Outside Customers |
| |||||||
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Segment |
| $ | 51,155 |
|
| $ | (874 | ) |
| $ | (22 | ) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 50,259 |
|
Environmental Segment |
|
| 38,454 |
|
|
| (941 | ) |
|
| — |
|
|
| (878 | ) |
|
| (29 | ) |
|
| — |
|
|
| 36,606 |
|
Fluid Handling and Filtration Segment |
|
| 15,451 |
|
|
| (313 | ) |
|
| (88 | ) |
|
| (184 | ) |
|
| — |
|
|
| — |
|
|
| 14,866 |
|
Corporate and Other(5) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| �� | (135 | ) |
|
| (135 | ) |
Net Sales |
| $ | 105,060 |
|
| $ | (2,128 | ) |
| $ | (110 | ) |
| $ | (1,062 | ) |
| $ | (29 | ) |
| $ | (135 | ) |
| $ | 101,596 |
|
|
| Nine Months Ended September 30, 2017 |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Less Inter-Segment Sales |
|
|
|
|
| |||||||||||||
(dollars in thousands) |
| Total Sales |
|
| Intra- Segment Sales |
|
| Environmental |
|
| Energy |
|
| FHF |
|
| Corp and Other |
|
| Net Sales to Outside Customers |
| |||||||
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Segment |
| $ | 120,958 |
|
| $ | (6,249 | ) |
| $ | (28 | ) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 114,681 |
|
Environmental Segment |
|
| 106,404 |
|
|
| (2,086 | ) |
|
| — |
|
|
| (730 | ) |
|
| (45 | ) |
|
| — |
|
|
| 103,543 |
|
Fluid Handling and Filtration Segment |
|
| 56,620 |
|
|
| (1,727 | ) |
|
| (477 | ) |
|
| (147 | ) |
|
| — |
|
|
| — |
|
|
| 54,269 |
|
Corporate and Other(5) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (985 | ) |
|
| (985 | ) |
Net Sales |
| $ | 283,982 |
|
| $ | (10,062 | ) |
| $ | (505 | ) |
| $ | (877 | ) |
| $ | (45 | ) |
| $ | (985 | ) |
| $ | 271,508 |
|
|
| Nine Months Ended September 30, 2016 |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Less Inter-Segment Sales |
|
|
|
|
| |||||||||||||
(dollars in thousands) |
| Total Sales |
|
| Intra- Segment Sales |
|
| Environmental |
|
| Energy |
|
| FHF |
|
| Corp and Other |
|
| Net Sales to Outside Customers |
| |||||||
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Segment |
| $ | 153,476 |
|
| $ | (2,019 | ) |
| $ | (399 | ) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 151,058 |
|
Environmental Segment |
|
| 126,029 |
|
|
| (3,539 | ) |
|
| — |
|
|
| (2,345 | ) |
|
| (206 | ) |
|
| — |
|
|
| 119,939 |
|
Fluid Handling and Filtration Segment |
|
| 48,508 |
|
|
| (1,168 | ) |
|
| (282 | ) |
|
| (184 | ) |
|
| — |
|
|
| — |
|
|
| 46,874 |
|
Corporate and Other(5) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (842 | ) |
|
| (842 | ) |
Net Sales |
| $ | 328,013 |
|
| $ | (6,726 | ) |
| $ | (681 | ) |
| $ | (2,529 | ) |
| $ | (206 | ) |
| $ | (842 | ) |
| $ | 317,029 |
|
|
|
2218
|
| Six months ended June 30, 2023 |
| |||||||||||||||||
|
|
|
|
|
|
|
| Less Inter-Segment Sales |
|
| ||||||||||
(in thousands) |
| Total |
|
| Intra- |
|
| Industrial Process Solutions |
|
| Engineered Systems |
|
| Net Sales to |
| |||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Engineered Systems segment |
| $ | 171,970 |
|
| $ | (9,533 | ) |
| $ | (460 | ) |
| $ | — |
|
| $ | 161,977 |
|
Industrial Process Solutions segment |
|
| 83,682 |
|
|
| (3,641 | ) |
|
| — |
|
|
| (274 | ) |
|
| 79,767 |
|
Total net sales |
| $ | 255,652 |
|
| $ | (13,174 | ) |
| $ | (460 | ) |
| $ | (274 | ) |
| $ | 241,744 |
|
|
| Six months ended June 30, 2022 |
| |||||||||||||||||
|
|
|
|
|
|
|
| Less Inter-Segment Sales |
|
| ||||||||||
(in thousands) |
| Total |
|
| Intra- |
|
| Industrial Process Solutions |
|
| Engineered Systems |
|
| Net Sales to |
| |||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Engineered Systems segment |
| $ | 132,354 |
|
| $ | (7,789 | ) |
| $ | (257 | ) |
| $ | — |
|
| $ | 124,308 |
|
Industrial Process Solutions segment |
|
| 77,043 |
|
|
| (3,342 | ) |
|
| — |
|
|
| (198 | ) |
|
| 73,503 |
|
Total net sales |
| $ | 209,397 |
|
| $ | (11,131 | ) |
| $ | (257 | ) |
| $ | (198 | ) |
| $ | 197,811 |
|
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 Income for the three-monththree and nine-month periodssix months ended SeptemberJune 30, 20172023 and 20162022 reflect the consolidated operations of the Company and its subsidiaries.
CECO Environmental Corp. (“CECO,” “we,” “us,” or the “Company”) is a global leader inleading environmentally focused, diversified industrial company, serving the broad landscape of industrial air, qualityindustrial water and fluid handling serving the energy industrial and other nichetransition markets through an attractive asset-light business model. CECO providesglobally providing innovative technology and application expertise thatexpertise. CECO helps companies grow their businessesbusiness with safe, clean, and more efficient solutions tothat help protect our shared environment.people, the environment and industrial equipment. CECO serves both established and emerging industries in regions around the world working tosolutions improve air and water quality, optimize emissions management, and increase the energy value chain, and provide customizedprocess efficiency for highly engineered solutionsapplications in multiple applications that include oil and gas, power generation, midstream and downstream hydrocarbon processing and transport, chemical processing, electric vehicle production, polysilicon fabrication, semiconductor and electronics production, battery production and recycling, specialty metals, aluminum and steel production, beverage can manufacturing, and industrial and produced water and wastewater battery production, poly silicon fabrication, chemicaltreatment, and petrochem processing, along with a wide range of others.other industrial end markets.
Market Pressures
The senior management team monitors and manages the Company’s ability to operate effectively as the result of market pressures. In particular, we are currently experiencing challenges in obtaining certain raw materials and labor on a timely basis at a reasonable cost. We are a global corporation with worldwide operations. As a global business, our operations are affected by worldwide, regionalexpect these supply chain challenges and industry-specific economic factors, wherevercost impacts to continue for the foreseeable future. Although we operate orhave secured additional raw materials from existing and alternate suppliers and have taken other mitigating actions to mitigate supply disruptions, we cannot guarantee that we can continue to do business. Our geographic and industry diversity, andso in the breadth of our product and services portfolios, have helped mitigate the impact of any one industry or the economy of any single country on our consolidated operating results.
We believe growth for our products and services is driven by the increasing demand for energy consumption and a shift towards cleaner sources such as natural gas, nuclear, and renewable sources. We believe these trends should stimulate investment in new power generation facilities, pipeline expansion and related infrastructure, and in upgrading existing facilities.
With a shift to cleaner, more environmentally responsible power generation, power providers and industrial power consumers are building new facilities that use cleaner fuels.future. In developed markets, natural gas is increasingly becoming one of the energy sources of choice. We supply product offerings throughout the entire natural gas infrastructure value chain and believe expansion will drive growth within our Energy segment for our pressure products and SCR systems for natural-gas-fired power plants. Increased global natural gas production as a percent of total energy consumption, miles of new pipeline being added globally, and an increase in liquification capacity all stand to drive the need for our products.
We also believe there is a trend in both developed and emerging markets to control and reduce emissions of harsher fuel sources for which our air pollution control equipment is required. In emerging markets, including China, India, and South East Asia,this event, our business, is positioned to benefit from tightening of air pollution standards. In developed markets, growth of industrialization will drive greater output of emissions requiring our air pollution control technologyresults and equipment as well. In both markets, we expect capital expenditures for our equipment to increase and the need for our aftermarket services to grow as companies seek to meet new standards.financial condition could be adversely affected.
We continue to focus on increasing revenues and profitability globally while continuing to strengthen and expand our presence domestically. Our operating strategy has historically involved horizontally expanding our scope of technology, products, and services through selective acquisitions and the formation of new business units that are then vertically integrated into our growing group of turnkey system providers. Our continuing focus will be on global growth, market coverage, and expansion of our Asia operations. Operational excellence, margin expansion, after-market recurring revenue growth, and safety leadership are also critical to our growth strategy.
Operations Overview
The Company concluded its strategic plan assessment and made several decisions to transform the business to win market share and create value. The Company will implement a restructuring program during the fourth quarter to reduce costs by approximately $5 million to $7 million per annum and refocus the Company’s portfolio including exiting non-core and low critical mass products. The Company recently modified the debt covenants within the debt agreement to allow for covenant flexibility to invest in a tough market cycle. Additionally, the Company’s Board of Directors agreed to suspend the current quarterly dividend so that cash can be used towards investment for growth in people, systems and customer focused product innovation.
We operate under a “hub and spoke” business model in which executive management, finance, administrative and marketing staff serves as the hub while the sales channels serve as spokes. We use this model throughout our operations. This has provided us with certain efficiencies over a more decentralized model. The Company’s segment presidents manage our division managers who are responsible for successfully running their operations, that is, sales, gross margins, manufacturing, pricing, purchasing, safety, employee development and customer service excellence. The segment presidents work closely with our Chief Executive Officer on
23
global growth strategies, operational excellence, and employee development. The headquarters (hub) focuses on enabling the core back-office key functions for scale and efficiency, that is, accounting, payroll, human resources/benefits, information technology, safety support, internal control over financial reporting, and administration. We have excellent organizational focus from headquarters throughout our divisional businesses with clarity and minimal duplicative work streams.
Our three reportable segments are: the Energy segment, which produces customized solutions for the power and petrochemical industry; the Environmental segment, which provides a variety of air pollution control and catalytic product recovery technologies; and the Fluid Handling and Filtration segment, which produces high quality pump, filtration and fume exhaust solutions. It is through combining the efforts of some or all of these groups that we are able to offer complete turnkey systems to our customers and leverage operational efficiencies.
Our contracts are obtained either through competitive bidding or as a result of negotiations with our customers. Contract terms offered by us are generally dependent on the complexity and risk of the project as well as the resources that will be required to complete the project. Our focus is on increasing our operating margins as well as our gross margin percentage, which translates into higher net income.
Our cost of sales is principally driven by a number of factors, including material prices and labor cost and availability. Changes in these factors may have a material impact on our overall gross profit margins.
We break down costs of sales into five categories. They are:
Subcontracts—Electrical work, concrete work and other subcontracts necessary to produce our products;
Labor—Our direct labor both in the shop and in the field;
Material—Raw material that we buy to build our products;
Equipment—Fans, motors, control panels and other equipment necessary for turnkey systems; and
Factory overhead—Costs of facilities and supervision wages necessary to produce our products.
In general, subcontracts provide us the most flexibility in margin followed by labor, material, and equipment. Across our various product lines, the relative relationships of these factors change and cause variations in gross margin percentage. Material costs have also increased faster than labor costs, which also reduces gross margin percentage. As material cost inflation occurs, the Company seeks to pass this cost onto our customers as price increases.
Selling and administrative expense principally includes sales payroll and related fringes, advertising and marketing expenditures as well as all corporate and administrative functions and other costs that support our operations. The majority of these expenses are fixed. We expect to leverage our fixed operating structure as we continue to grow our revenue.
Note Regarding Use of Non-GAAP Financial Measures
The Company’s unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These GAAP financial statements include certain charges the Company believes are not indicative of its core ongoing operational performance.
As a result, the Company provides financial information in this MD&AManagement’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 measuremeasures 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 chargestransactions associated with the Company’s acquisition and integration of acquisitions 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. As a result of the Company’s completed acquisitions, theThe Company has incurred chargessubstantial expense and income associated with the acquisition and integration of these companies.acquisitions. While the Company cannot predict the exact timing or amounts of such charges, it does expect to treat the financial impact of these chargestransactions as special items in its future presentation of non-GAAP results.
2420
Results of Operations
Consolidated Results
Our Condensed Consolidated Statements of Income for the three-monththree and nine-month periodssix months ended SeptemberJune 30, 20172023 and 20162022 are as follows:
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
(in millions, except ratios) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net sales |
| $ | 129.2 |
|
| $ | 105.4 |
|
| $ | 241.7 |
|
| $ | 197.8 |
|
Cost of sales |
|
| 89.4 |
|
|
| 73.7 |
|
|
| 167.0 |
|
|
| 139.7 |
|
Gross profit |
| $ | 39.8 |
|
| $ | 31.7 |
|
| $ | 74.7 |
|
| $ | 58.1 |
|
Percent of sales |
|
| 30.8 | % |
|
| 30.1 | % |
|
| 30.9 | % |
|
| 29.4 | % |
Selling and administrative expenses |
|
| 28.4 |
|
|
| 23.0 |
|
|
| 55.6 |
|
|
| 41.6 |
|
Percent of sales |
|
| 22.0 | % |
|
| 21.8 | % |
|
| 23.0 | % |
|
| 21.0 | % |
Amortization and earnout expenses |
|
| 2.3 |
|
|
| 1.5 |
|
|
| 4.0 |
|
|
| 2.9 |
|
Acquisition and integration expenses |
|
| 0.3 |
|
|
| 1.5 |
|
|
| 0.8 |
|
|
| 2.5 |
|
Executive transition expenses |
|
| 0.2 |
|
|
| — |
|
|
| 0.2 |
|
|
| — |
|
Restructuring expenses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
Operating income |
| $ | 8.6 |
|
| $ | 5.7 |
|
| $ | 14.1 |
|
| $ | 11.0 |
|
Operating margin |
|
| 6.7 | % |
|
| 5.4 | % |
|
| 5.8 | % |
|
| 5.6 | % |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net sales |
| $ | 85.0 |
|
| $ | 101.6 |
|
| $ | 271.5 |
|
| $ | 317.0 |
|
Cost of sales |
|
| 57.9 |
|
|
| 67.9 |
|
|
| 184.0 |
|
|
| 217.8 |
|
Gross profit |
| $ | 27.1 |
|
| $ | 33.7 |
|
| $ | 87.5 |
|
| $ | 99.2 |
|
Percent of sales |
|
| 31.9 | % |
|
| 33.2 | % |
|
| 32.2 | % |
|
| 31.3 | % |
Selling and administrative expenses |
| $ | 22.0 |
|
| $ | 19.5 |
|
| $ | 66.7 |
|
| $ | 60.6 |
|
Percent of sales |
|
| 25.9 | % |
|
| 19.2 | % |
|
| 24.6 | % |
|
| 19.1 | % |
Acquisition and integration expenses |
| $ | — |
|
| $ | 0.2 |
|
| $ | — |
|
| $ | 0.5 |
|
Percent of sales |
|
| — |
|
|
| 0.2 | % |
|
| — |
|
|
| 0.2 | % |
Amortization and earn-out (income) expenses, net |
| $ | (0.5 | ) |
| $ | 3.5 |
|
| $ | 4.6 |
|
| $ | 13.2 |
|
Percent of sales |
|
| (0.6 | )% |
|
| 3.4 | % |
|
| 1.7 | % |
|
| 4.2 | % |
Operating income |
| $ | 5.6 |
|
| $ | 10.5 |
|
| $ | 16.2 |
|
| $ | 24.9 |
|
Operating margin |
|
| 6.6 | % |
|
| 10.3 | % |
|
| 6.0 | % |
|
| 7.9 | % |
To compare operating performance between the three-monththree and nine-month periodssix months ended SeptemberJune 30, 20172023 and 2016,2022, the Company has adjusted GAAP operating income to exclude (1) amortization of intangible assets, earnout and retention expenses, (2) acquisition and integration expenses, which include legal, accounting, and other expenses, (3) executive transition expenses, including severance for its former Chief Executive Officer, fees and expenses incurred in the search, for aand hiring, of new Chief Executive Officer,executives and (4) restructuring expenses primarily relating to severance, facility exits, and associated with hiring a new Chief Financial Officer, (2) acquisition and integration related expenses, including legal accounting, and banking expenses, (3) amortization and contingent acquisition expenses, including amortization of acquisition related intangibles, retention, severance, and earn-out expenses, (4) gain on insurance settlement, (5) facility exit expenses associated with the closure of certain leased facilities, (6) legacy design repair expenses related to costs to rectify issues on products that are no longer in production and (7) inventory valuation and plant, property and equipment valuation adjustments related to acquisitions. See “Note Regarding Use of Non-GAAP Financial Measures” above. expenses.
The following table presents the reconciliation of GAAP operating income and GAAP operating margin to non-GAAP operating income and non-GAAP operating margin:
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
(in millions, except ratios) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Operating income as reported in accordance with GAAP |
| $ | 8.6 |
|
| $ | 5.7 |
|
| $ | 14.1 |
|
| $ | 11.0 |
|
Operating margin in accordance with GAAP |
|
| 6.7 | % |
|
| 5.4 | % |
|
| 5.8 | % |
|
| 5.6 | % |
Amortization and earnout expenses |
|
| 2.3 |
|
|
| 1.5 |
|
|
| 4.0 |
|
|
| 2.9 |
|
Acquisition and integration expenses |
|
| 0.3 |
|
|
| 1.5 |
|
|
| 0.8 |
|
|
| 2.5 |
|
Executive transition expenses |
|
| 0.2 |
|
|
| — |
|
|
| 0.2 |
|
|
| — |
|
Restructuring expenses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
Non-GAAP operating income |
| $ | 11.4 |
|
| $ | 8.7 |
|
| $ | 19.1 |
|
| $ | 16.5 |
|
Non-GAAP operating margin |
|
| 8.8 | % |
|
| 8.3 | % |
|
| 7.9 | % |
|
| 8.3 | % |
Orders bookedincreased $49.4 million, or 43.5%, to $162.9 million during the three months ended June 30, 2023 compared with $113.5 million in the three months ended June 30, 2022. The increase is led by an increase of $49.4 million in our emissions management technologies, partially offset by a decrease of $12.4 million in separation, filtration, and industrial water technologies. Of the $162.9 million in orders booked during the three months ended June 30, 2023, $15.1 million is attributable to acquisitions that have occurred during the preceding twelve month period.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in millions) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Operating income as reported in accordance with GAAP |
| $ | 5.6 |
|
| $ | 10.5 |
|
| $ | 16.2 |
|
| $ | 24.9 |
|
Operating margin in accordance with GAAP |
|
| 6.6 | % |
|
| 10.3 | % |
|
| 6.0 | % |
|
| 7.9 | % |
Legacy design repairs |
|
| — |
|
|
| — |
|
|
| 2.0 |
|
|
| — |
|
Inventory valuation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
Plant, property and equipment valuation adjustment |
|
| 0.2 |
|
|
| 0.2 |
|
|
| 0.5 |
|
|
| 0.5 |
|
Gain on insurance settlement |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1.0 | ) |
Acquisition and integration expenses |
|
| — |
|
|
| 0.2 |
|
|
| — |
|
|
| 0.5 |
|
Amortization and earn-out (income) expenses, net |
|
| (0.5 | ) |
|
| 3.5 |
|
|
| 4.6 |
|
|
| 13.2 |
|
Executive transition expenses |
|
| — |
|
|
| — |
|
|
| 1.3 |
|
|
| — |
|
Facility exit expenses |
|
| — |
|
|
| — |
|
|
| 0.2 |
|
|
| — |
|
Non-GAAP operating income |
| $ | 5.3 |
|
| $ | 14.4 |
|
| $ | 24.8 |
|
| $ | 38.2 |
|
Non-GAAP operating margin |
|
| 6.2 | % |
|
| 14.2 | % |
|
| 9.1 | % |
|
| 12.1 | % |
Orders bookedincreased $34.6 million, or 12.6%, to $309.0 million during the six months ended June 30, 2023 compared with $274.4 million in the six months ended June 30, 2022. The increase is led by increases of $17.7 million in our emissions management technologies and $15.4 million in our engineered cyclone systems. Of the $309.0 million in orders booked during the six months ended June 30, 2023, $39.3 million is attributable to acquisitions that have occurred during the preceding twelve month period.
ConsolidatedNet sales for the three months ended June 30, 2023 increased $23.8 million, or 22.6%, to $129.2 million compared with $105.4 million for the three months ended June 30, 2022. The increase is broad-based, led by increases of $15.2 million in separation, filtration, and industrial water technologies and $5.4 million in our emissions management technologies. Approximately 95%, or $121.3 million, of net sales for the third quarter of 2017 decreased $16.6three months ended June 30, 2023 is attributable to organic revenue.
Net sales for the six months ended June 30, 2023 increased $43.9 million, or 16.3%22.2%, to $85.0$241.7 million compared with $101.6$197.8 million for the six months ended June 30, 2022. The increase is broad-based, led by increases of $27.8 million in separation, filtration, and industrial water technologies, $9.4 million in our thermal acoustics technologies, and $5.5 million in products serving the industrial air
21
end markets. Approximately 90%, or $221.2 million, of net sales for the six months ended June 30, 2023 is attributable to organic revenue.
Gross profit increased $8.1 million, or 25.6%, to $39.8 million in the third quarter of 2016.three months ended June 30, 2023 compared with $31.7 million in the three months ended June 30, 2022. The decreaseincrease in gross profit is primarily attributable to a declinethe increase in demand for solid fuel power generationorganic sales as described above, operating leverage and natural gas turbine exhaust systems within the Company’s Energy segment and a decline in demand for ventilation duct work and related equipment, and refinery related products within the Company’s Environmental segment. These declines were partially offset by increased sales in the Company’s Fluid Handling & Filtration segment.
Consolidated net sales for the first nine monthsacquisitions of 2017 decreased $45.5 million, or 14.4%, to $271.5 million comparedbusinesses with $317.0 million in the first nine months of 2016. The decrease is primarily attributable to a decline in demand for solid fuel power generation and natural gas turbine exhaust systems within the Company’s Energy segment and a decline in demand for ventilation duct work and
25
related equipment, and refinery related products within the Company’s Environmental segment. These declines were partially offset by increased sales in the Company’s Fluid Handling & Filtration segment.
Gross profit decreased $6.6 million, or 19.6%, to $27.1 million in the third quarter of 2017 compared with $33.7 million in the third quarter of 2016. The lower gross profit was primarily attributable to a sales volume decline period over period.favorable margins. Gross profit as a percentage of sales was 31.9%increased to 30.8% in the third quarter of 2017three months ended June 30, 2023 compared with 33.2%30.1% in the third quarter of 2016. three months ended June 30, 2022.
Gross profit decreased $11.7increased $16.6 million, or 11.8%28.6%, to $87.5$74.7 million in the first ninesix months of 2017ended June 30, 2023 compared with $99.2$58.1 million in the first ninesix months of 2016.ended June 30, 2022. The lowerincrease in gross profit wasis primarily attributable to athe increase in sales volume decline period over period.as described above, higher project margin mix and acquisitions of businesses with favorable margins. Gross profit as a percentage of sales was 32.2%increased to 30.9% in the first ninesix months of 2017ended June 30, 2023 compared with 31.3%29.4% in the first ninesix months of 2016. The higher gross profit margin in the first nine months of 2017 was primarily due to a more favorable project mix during this period. This increase was partially offset by the Company incurring $2.5 million in warranty expense and $2.0 million in legacy design repairs during the first nine months of 2017, compared with warranty expense of $0.4 million during the first nine months of 2016. The increase in warranty expense is primarily attributable to a superseded product design issue. The increase in legacy design repairs is primarily attributable to specific issues on certain pre-acquisition projects. ended June 30, 2022.
Orders booked were $71.0 million during the third quarter of 2017 and $242.2 million during the first nine months of 2017 as compared with $96.2 million during the third quarter of 2016 and $325.1 million during the first nine months of 2016. The decrease is primarily attributable to lower bookings by the Energy and Environmental Segment due to lower near term demand for natural gas turbine exhaust systems and solid fuel power generation equipment in China, as well as a reduction in refinery related capital expenditures impacting the Company’s bookings related to cyclone products.
Selling and administrative expenses increased $2.5 million to $22.0were $28.4 million for the third quarter of 2017three months ended June 30, 2023 compared with $19.5$23.0 million for the third quarter of 2016. Additionally, selling and administrative expenses increased as a percentage of sales from 19.2% in the third quarter of 2016 compared to 25.9% in the third quarter of 2017.three months ended June 30, 2022. The increase is primarily attributable to increases of $1.1 million of bad debt expense and $1.2 million of selling personnel costsacquisitions during the third quarter of 2017 when compared with the third quarter of 2016. Additionally, the increase is partially attributableprior and current year, and increased headcount to the Company recording a gain of $0.6 million during the third quarter of 2016 relatedsupport our growth and efforts to a warranty settlement received from an external service provider of the Company.expand our global footprint.
Selling and administrative expenses increased $6.1 million to $66.7were $55.6 million for the first ninesix months of 2017ended June 30, 2023 compared with $60.6$41.6 million for the first ninesix months of 2016. Additionally, selling and administrative expenses increased as a percentage of sales from 19.1% in the first nine months of 2016 compared to 24.6% in the first nine months of 2017.ended June 30, 2022. The increase is primarily attributable to executive transition expenses related toacquisitions during the Company’s transitionprior and search forcurrent year, a new Chief Executive Officer and expenses associated with the hiring of a new Chief Financial Officer of $1.3$2.5 million favorable insurance settlement in the first nineprior year, and increased headcount to support our growth and efforts to expand our global footprint.
Amortization and earnout expense was $2.3 million for the three months of 2017,ended June 30, 2023 compared with $1.5 million for the three months ended June 30, 2022. The increase in expense is attributable to an increase of $1.9$0.5 million in earnout expense and an increase of bad debt$0.3 million in definite lived asset amortization due to increased intangible assets attributable to current and prior year acquisitions.
Amortization and earnout expense duringwas $4.0 million for the first ninesix months of 2017ended June 30, 2023 compared with $2.9 million for the first ninesix months of 2016, and additional investments in selling and finance personnel which occurred in the first nine months of 2017. Other factors leading to theended June 30, 2022. The increase in selling and administrative expenses consisted of the Company recording a gain onexpense is attributable to an insurance settlement of $1.0 million and a gain on a warranty settlementincrease of $0.6 million during the first nine monthsin earnout expense and an increase of 2016, which did not recur in 2017.
Acquisition and integration expenses were zero and $0.2 million during the third quarter of 2017 and 2016, respectively, and zero and $0.5 million during the first nine months of 2017in definite lived asset amortization due to increased intangible assets attributable to current and 2016, respectively. The acquisition and integration expenses in 2016 were relatedprior year acquisitions.
Operating income increased $2.9 million to the PMFG acquisition, which occurred during the third quarter of 2015.
Amortization and earn-out expense/income was $0.5$8.6 million of income for the third quarter of 2017three months ended June 30, 2023 compared with $3.5 million of expense for the third quarter of 2016. The income was primarily attributable to earn-out adjustments resulting in income of $3.9 million in the third quarter of 2017 related to the acquisition of Zhongli Industrial Technology Co. Ltd. (“Zhongli Acquisition”) in the fourth quarter of 2014 due to lower than expected operational profit in 2017. This income was partially offset by amortization expense of $2.9 million in the third quarter of 2017.
Amortization and earn-out expense/income was $4.6 million of expense for the first nine months of 2017 compared with $13.2 million of expense for the first nine months of 2016. The decrease in expense was primarily attributable to earn-out adjustments resulting inoperating income of $5.7 million in the first nine months of 2017 for the Zhongli Acquisition due to lower than expected operational profitthree months ended June 30, 2022. The increase in 2017. Included in the first nine months of 2016 expense was $1.0 million related to the fair value adjustment of the Zhongli Acquisition earn-out during this period due to higher than expected operational profit at Zhongli after the acquisition. The decrease was also partially attributable to decreased amortization expense of $2.5 million period over period due to certain intangible assets becoming fully amortized.
Operatingoperating income decreased $4.9 million to $5.6 million in the third quarter of 2017 compared with $10.5 million of income during the third quarter of 2016. The decrease is primarily attributable to lower gross profit and increased selling and administrativeincreases in net sales.
26
expenses partially offset by a decrease in acquisition, integration, amortization and earn-out expense/income during the third quarter of 2017.
Operating income decreased $8.7increased $3.1 million to $16.2$14.1 million infor the first ninesix months of 2017ended June 30, 2023 compared with $24.9operating income of $11.0 million duringfor the first ninesix months of 2016.ended June 30, 2022. The decreaseincrease in operating income is primarily attributable to lower gross profit and increased selling and administrative expenses partially offset by a decreaseincreases in acquisition, integration, amortization, and earn-out expense/income during the first nine months of 2017.net sales.
Non-GAAP operating income was $5.3$11.4 million for the third quarter of 2017three months ended June 30, 2023 compared with $14.4$8.7 million for the third quarter of 2016. The decrease is primarily due to a decrease in gross profit and increased selling and administrative expenses as described above.three months ended June 30, 2022. Non-GAAP operating income as a percentage of sales decreasedincreased to 6.2%8.8% for the third quarter of 2017three months ended June 30, 2023 from 14.2%8.3% for the third quarter of 2016.three months ended June 30, 2022.
Non-GAAP operating income was $24.8$19.1 million for the first ninesix months of 2017ended June 30, 2023 compared with $38.2$16.5 million for the first ninesix months of 2016. The decrease is primarily due to a decrease in gross profit and increased selling and administrative expenses as described above.ended June 30, 2022. Non-GAAP operating income as a percentage of sales decreased to 9.1%was 7.9% for the first ninethree months of 2017 from 12.1%ended June 30, 2023 compared to 8.3% for the first ninesix months of 2016.ended June 30, 2022.
Other income/expense, net was $0.1 million of expense in the third quarter of 2017 compared with less than $0.1 million of income in the third quarter of 2016. During the third quarter of 2017, the net amount was due to $0.5 million of income from the impact of the strengthening of the Euro on an intercompany loan with a foreign subsidiary, offset by net foreign currency exchange losses from normal business operations of $0.6 million. During the third quarter of 2016, the less than $0.1 million of income was due primarily to $0.2 million of income from the impact of the strengthening of the Euro on an intercompany loan with a foreign subsidiary, which was offset by net foreign currency exchange losses from normal business operations of $0.2 million.
Other income/expense, net was $0.1 million of income in the first nine months of 2017 compared with $0.4 million of income in the first nine months of 2016. During the first nine months of 2017, the net $0.1 million of income was due to $2.0 million of income from the impact of the strengthening of the Euro on an intercompany loan with a foreign subsidiary, offset by net foreign currency exchange losses from normal business operations of $1.9 million. During the first nine months of 2016, the net $0.4 million of income was due to $0.6 million of income from the effect of the strengthening of the Euro on an intercompany loan with a foreign subsidiary, and net foreign currency exchange gains from normal business operations of $0.3 million, partially offset by a $0.5 million loss on our interest rate swap prior to being designated as an effective hedge.
Interest expense decreasedincreased to $1.6$3.8 million in the third quarterthree months ended June 30, 2023 compared with interest expense of 2017 from $1.9$1.1million for the three months ended June 30, 2022. The increase in interest expense is primarily due to increased debt balances and rising interest rates.
Interest expense increased to $6.2 million in the third quartersix months ended June 30, 2023 compared with interest expense of 2016.$1.9million for the six months ended June 30, 2022. The decreaseincrease in interest expense is primarily due to increased debt repayments made throughout 2016balances and 2017 that decreased the amount of outstanding debt throughout 2017.rising interest rates.
Interest expense decreased to $5.0 million in the first nine months of 2017 from $6.0 million in the first nine months of 2016. The decrease is due to debt repayments made throughout 2016 and 2017 that decreased the amount of outstanding debt throughout 2017.
Income tax expense was $0.9$1.0 million for the third quarter of 2017three months ended June 30, 2023 compared with $2.8income tax expense of $1.9 million for the same quarterthree months ended June 30, 2022. Income tax expense was $1.0 million for the six months ended June 30, 2023 compared with income tax expense of 2016.$3.0 million for the six months ended June 30, 2022. The effective income tax rate for the third quarter of 2017three months ended June 30, 2023 was 22.6%19.8% compared with 32.3%28.3% for the comparable period of 2016. Income tax expense was $2.9 million for the first ninethree months of 2017 compared with $6.3 million for the first nine months of 2016.ended June 30, 2022. The effective income tax rate for the first ninesix months of 2017ended June 30, 2023 was 25.1%13.3% compared with 33.0%28.3% for the comparable period of 2016. This rate change six months ended June 30, 2022. The effective income tax rates
22
for the three and nine month periods is due primarily to changes in income before taxes, discrete tax benefits of $0.3 million insix months ended June 30, 2023 differ from the first nine months of 2017 related to stock compensation, and a decrease in permanent differences related to non-deductible acquisition and earn-out expenses.United States federal statutory rate. Our effective tax rate is affected by certain other permanent differences, including state income taxes, non-deductible incentive stock-based compensation, and earn-out expenses, and decreaseddifferences in tax rates among the jurisdictions in certain foreign jurisdictions.which we operate.
27
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 threetwo reportable segments. The results of the segments are reviewed through to the “Income from operations” line on the unaudited Condensed Consolidated Statements of Operations.Income.
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
(in thousands) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net Sales (less intra- and inter-segment sales) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Engineered Systems segment |
| $ | 87,522 |
|
| $ | 67,333 |
|
| $ | 161,977 |
|
| $ | 124,308 |
|
Industrial Process Solutions segment |
|
| 41,659 |
|
|
| 38,042 |
|
|
| 79,767 |
|
|
| 73,503 |
|
Total net sales |
| $ | 129,181 |
|
| $ | 105,375 |
|
| $ | 241,744 |
|
| $ | 197,811 |
|
|
| Three months ended June 30, |
|
| Six months ended June 30, |
| ||||||||||
(in thousands) |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Income from Operations |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Engineered Systems segment |
| $ | 14,089 |
|
| $ | 9,006 |
|
| $ | 23,894 |
|
| $ | 15,476 |
|
Industrial Process Solutions segment |
|
| 4,586 |
|
|
| 5,482 |
|
|
| 10,131 |
|
|
| 9,621 |
|
Corporate and Other(1) |
|
| (10,072 | ) |
|
| (8,742 | ) |
|
| (19,961 | ) |
|
| (14,147 | ) |
Total income from operations |
| $ | 8,603 |
|
| $ | 5,746 |
|
| $ | 14,064 |
|
| $ | 10,950 |
|
(1) Includes corporate compensation, professional services, information technology and other general and administrative corporate expenses.
Engineered Systems Segment
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in thousands) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net Sales (less intra-, inter-segment sales) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Segment |
| $ | 36,182 |
|
| $ | 50,259 |
|
| $ | 114,681 |
|
| $ | 151,058 |
|
Environmental Segment |
|
| 29,735 |
|
|
| 36,606 |
|
|
| 103,543 |
|
|
| 119,939 |
|
Fluid Handling and Filtration Segment |
|
| 20,105 |
|
|
| 14,866 |
|
|
| 54,269 |
|
|
| 46,874 |
|
Corporate and Other(1) |
|
| (1,035 | ) |
|
| (135 | ) |
|
| (985 | ) |
|
| (842 | ) |
Net sales |
| $ | 84,987 |
|
| $ | 101,596 |
|
| $ | 271,508 |
|
| $ | 317,029 |
|
|
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(dollars in thousands) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Income from Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Segment |
| $ | 5,287 |
|
| $ | 8,502 |
|
| $ | 14,428 |
|
| $ | 20,065 |
|
Environmental Segment |
|
| 2,157 |
|
|
| 5,459 |
|
|
| 12,043 |
|
|
| 16,324 |
|
Fluid Handling and Filtration Segment |
|
| 4,299 |
|
|
| 3,109 |
|
|
| 11,756 |
|
|
| 9,507 |
|
Corporate and Other(2) |
|
| (5,404 | ) |
|
| (6,520 | ) |
|
| (20,184 | ) |
|
| (20,058 | ) |
Eliminations |
|
| (709 | ) |
|
| (51 | ) |
|
| (1,808 | ) |
|
| (971 | ) |
Income from operations |
| $ | 5,630 |
|
| $ | 10,499 |
|
| $ | 16,235 |
|
| $ | 24,867 |
|
|
|
Energy Segment
Our Energy Segment net sales decreasedincreased $20.2 million to $87.5 million for the three months ended June 30, 2023 compared with $67.3 million for the three months ended June 30, 2022. The increase is led by increases of $15.2 million in separation, filtration, and industrial water technologies and $5.4 million in our emissions management technologies. Approximately 90%, or $80.5 million, of net sales for the three months ended June 30, 2023 is attributable to organic revenue.
Our Engineered Systems segment net sales increased $37.7 million to $162.0 million for the six months ended June 30, 2023 compared with $124.3 million for the six months ended June 30, 2022. The increase is led by increases of $27.8 million in separation, filtration, and industrial water technologies and $9.4 million in our thermal acoustics technologies. Approximately 90%, or $143.4 million, of net sales for the six months ended June 30, 2023 is attributable to organic revenue.
Operating income for the Engineered Systems segment increased $5.1 million to $14.1 million for the three months ended June 30, 2023 compared with $9.0 million for the three months ended June 30, 2022. The increase is primarily attributable to $36.2increased sales, partially offset by an increase in direct costs.
Operating income for the Engineered Systems segment increased $8.4 million to $23.9 million for the six months ended June 30, 2023 compared with $15.5 million for the six months ended June 30, 2022. The increase is primarily attributable to increased sales, partially offset by an increase in direct costs.
Industrial Process Solutions Segment
Our Industrial Process Solutions segment net sales increased $3.7 million to $41.7 million for the three months ended June 30, 2023 compared with $38.0 million for the three months ended June 30, 2022. The increase is primarily attributable to increases across all products serving industrial air end markets. Approximately 98%, or $40.7 million, of net sales for the three months ended June 30, 2023 is attributable to organic revenue.
Our Industrial Process Solutions segment net sales increased $6.3 million to $79.8 million for the six months ended June 30, 2023 compared with $73.5 million for the six months ended June 30, 2022. The increase is primarily attributable to increases across all products serving industrial air end markets. Approximately 98%, or $77.8 million, of net sales for the six months ended June 30, 2023 is attributable to organic revenue.
23
Operating income for the Industrial Process Solutions segment decreased $0.9 million to $4.6 million for the three months ended June 30, 2023 compared with $5.5 million for the three months ended June 30, 2022. The decrease is primarily attributable to an increase in costs related to materials and labor, partially offset by increased sales.
Operating income for the Industrial Process Solutions segment increased $0.5 million to $10.1 million for the six months ended June 30, 2023 compared with $9.6 million for the six months ended June 30, 2022. The increase is primarily attributable to increased sales, offset by an increase costs related to materials and labor.
Corporate and Other Segment
Operating expense for the Corporate and Other segment increased $1.4 million to $10.1 million for the three months ended June 30, 2023 compared with $8.7 million for the three months ended June 30, 2022. The increase is primarily attributable to investments made to support growth, and inflationary increases for wages and services.
Operating expense for the Corporate and Other segment increased $5.9 million to $20.0 million for the six months ended June 30, 2023 compared with $14.1 million for the six months ended June 30, 2022. The increase is primarily attributable to investments made to support growth, inflationary increases for wages and services, and a favorable insurance settlement of $2.5 million in the third quarter of 2017 compared with $50.3 million inprior year period.
Backlog
Backlog (i.e., unfulfilled or remaining performance obligations) represents the third quarter of 2016. The decrease is due primarilysales we expect to sales volume decreasesrecognize for our products and services within Europe and Asia primarilyfor which control has not yet transferred to the customer. Backlog increased to $391.0 million as of June 30, 2023 from $311.7 million as of December 31, 2022, with $49.9 million, or 63%, of the increase due to a decline in the Company’s natural gas turbine exhaust systems related products and services and solid fuel power generation period over period, which is primarily attributable to a temporary weakening of the solid fuel power generation market in China and a temporary weakening in the gas turbine powered market due to over-capacity.
Our Energy Segment net sales decreased $36.4 million to $114.7 million in the first nine months of 2017 compared with $151.1 million in the first nine months of 2016. The decrease is due primarily to sales volume decreases for our products and services within Europe and Asia primarily due to a decline in the Company’s natural gas turbine exhaust systems related products and services and solid fuel power generation period over period, which is primarily attributable to a temporary weakening of the solid fuel power generation market in China and a temporary weakening in the gas turbine powered market due to over-capacity.
Operating income for the Energy Segment decreased $3.2 million to $5.3 million in the third quarter of 2017 compared with $8.5 million of income in the third quarter of 2016. Operating income in the third quarter 2017 included $3.9 million of income related to the fair value adjustment of the Zhongli Acquisition earn-out due to significant changes in operational profit from amounts previously forecasted. The decrease in operating income excluding the earn-out adjustment was primarily due to the Energy Segment achieving lower gross profit on decreased sales as well as increases in selling and administrative expenses during the third quarter of 2017.
28
Operating income for the Energy Segment decreased $5.7 million to $14.4 million in the first nine months of 2017 compared with $20.1 million in operating income in the first nine months of 2016.Operating income in the first nine months of 2017 and 2016 included $5.7 million of income and $1.0 million of expense, respectively, related to the fair value adjustment of the Zhongli earn-out. The decrease in operating income excluding the earn-out adjustment was primarily due to the Energy Segment achieving lower gross profit on decreased sales as well as increases in selling and administrative expenses during the third quarter of 2017.The decrease in operating income was also partially attributable to the Company incurring $2.4 million in warranty expense and $2.0 million in legacy design repairs during the first nine months of 2017, compared to warranty expense of $0.2 million during the first nine months of 2016. The increase in warranty expense is primarily attributable to a superseded product design issue. The increase in legacy design repairs is primarily attributable to specific issues on certain pre-acquisition projects.
Environmental Segment
Our Environmental Segment net sales decreased $6.9 million to $29.7 million in the third quarter of 2017 compared with $36.6 million in the third quarter of 2016. The decrease is due primarily to volume decreases for the Company’s refinery related products and services as well as decreases in volume related to the installation and fabrication of ventilation duct work and related equipment period over period, which is primarily attributable to a cyclical deferral of maintenance and capital expenditures by the Company’s customers in refinery related end markets.
Our Environmental Segment net sales decreased $16.4 million to $103.5 million in the first nine months of 2017 compared with $119.9 million in the first nine months of 2016. The decrease is due primarily to volume decreases for the Company’s refinery related products and services as well as decreases in the volume related to the installation and fabrication of ventilation duct work and related equipment period over period, which is primarily attributable to a cyclical deferral of maintenance and capital expenditures by the Company’s customers in refinery related end markets.
Operating income for the Environmental Segment decreased $3.3 million to $2.2 million in the third quarter of 2017 from $5.5 million in the third quarter of 2016. This decrease was primarily due to the Environmental Segment achieving lower gross profit on decreased sales volumes as well as increases in selling and administrative expenses during the third quarter of 2017.
Operating income for the Environmental Segment decreased $4.3 million to $12.0 million in the first nine months of 2017 from $16.3 million in the first nine months of 2016. This decrease was primarily due to the Environmental Segment achieving lower gross profit on decreased sales volumes as well as increases in selling and administrative expenses during the first nine months of 2017.
Fluid Handling and Filtration Segment
Our FHF Segment net sales increased $5.2 million to $20.1 million in the third quarter of 2017 compared with $14.9 million in the third quarter of 2016. The increase is attributable to increased international demand for the Company’s products and a strengthening of the FHF Segment’s North American Industrial Market in the third quarter of 2017.
Our FHF Segment net sales increased $7.4 million to $54.3 million in the first nine months of 2017 compared with $46.9 million in the first nine months of 2016. The increase is due to increased international demand for the Company’s products and a strengthening of the FHF Segment’s North American Industrial Market in the first nine months of 2017.
Operating income for FHF increased $1.2 million to $4.3 million in the third quarter of 2017 compared with $3.1 million in the third quarter of 2016. The increase is due primarily to higher sales volume.
Operating income for FHF increased $2.3 million to $11.8 million in the first nine months of 2017 compared with $9.5 million in the first nine months of 2016. The increase is due primarily to higher sales volume.
Corporate and Other Segment
Operating expense for Corporate and Other Segment decreased $1.1 million to $5.4 million in the third quarter of 2017 compared with $6.5 million in the third quarter of 2016. The decrease in operating expense is primarily attributable to incentive compensation income of $0.6 million being recorded in the third quarter of 2017 due to lower than anticipated operating performance.
Operating expense for Corporate and Other Segment increased $0.1 million to a $20.2 million loss in the first nine months of 2017 compared with a $20.1 million loss in the first nine months of 2016. The increase in the operating expense period over period is primarily attributable to the increase in executive transition expenses of $1.3 million during the first nine months of 2017 partially offset by the Company recording a gain on an insurance settlement of $1.0 million during the first nine months of 2016, which did not recur in 2017.
29
Backlog is a representation of the amount of revenue expected from complete performance of firm fixed-price contracts that have not been completed for products and services we expect to substantially deliver within the next twelve-month to eighteen-month period.organic growth. Our customers may have the right to cancel a given order. OurHistorically, cancellations have not been common. Backlog is adjusted on a quarterly basis for adjustments in foreign currency exchange rates. Substantially all backlog as of September 30, 2017 was $153.9 million compared with $197.0 million as of December 31, 2016. During 2017, the Company removed $9.7 million of orders that were previously disclosed as backlog in prior quarters, which were idle dueis expected to inactivity by the customer.be delivered within 12 to 18 months. Backlog is not defined by GAAP and our methodology for calculating backlog may not be consistent with methodologies used by other companies. 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, dividends, working capital and other corporate requirements, including acquisitions and any related earnouts.
The Company considers its level of cash on hand, borrowing capacity, current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and its historical levels of net cash flows from operating activities to be the most important measures.
At September 30, 2017, the Company had working capital of $65.4 million, compared with $66.6 million at December 31, 2016. The ratio of current assets to current liabilities was 1.57 to 1 as compared with a ratio of 1.46 to 1 at December 31, 2016. The $1.2 million decrease in working capital from December 31, 2016 to September 30, 2017 was primarily related to the net effect of decreased cash and cash equivalents ($21.3 million), a decrease in accounts receivable ($12.6 million) and an increase in the current portion of debt ($0.8 million), offset by a decrease in billing in excess of costs and estimated earnings on uncompleted contracts ($14.0 million), a decrease in accounts payable and accrued expenses ($18.0 million), and an increase in costs and estimated earnings in excess of billings on uncompleted contracts ($1.8 million). During the nine months ended September 30, 2017, the Company made prepayments of $4.3 million on the outstanding balance of the term loan, of which $3.0 million was applied to the long-term portion of the debt balance, which caused a reduction in working capital. Total repayments of term loan debt during the nine months ended September 30, 2017 was $9.2 million.
At September 30, 2017 and December 31, 2016, cash and cash equivalents totaled $24.6 million and $45.8 million, respectively. As of September 30, 2017 and December 31, 2016, $17.0 million and $25.6 million, respectively, of our cash and cash equivalents were held by certain non-U.S. subsidiaries, as well as being denominated in foreign currencies.
30
Debt consisted of the following at September 30, 2017 and December 31, 2016:
Credit Facility
The Company’s outstanding borrowings in the United States consist of senior secured term loan, senior secured US. Dollar revolving loans with sub-facilities for letters of credit and swing-line loans and senior secured multi-currency revolving credit facility for U.S. dollar and specific foreign currency loans (collectively, the “Credit Facility”). As of September 30, 2017 and December 31, 2016, the Company was in compliance with all related financial and other restrictive covenants under the Credit Facility.
See Note 8 to the condensed consolidated financial statements for further information regarding the Company’s outstanding debt.
Total unused credit availability under our existing Credit Facility and other non-U.S. credit facilities and agreements, exclusive of any potential asset base limitations, is as follows:
(dollars in millions) |
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Credit Facility, U.S. Dollar revolving loans |
| $ | 60.5 |
|
| $ | 60.5 |
|
Draw down |
|
| (2.0 | ) |
|
| — |
|
Letters of credit open |
|
| (20.8 | ) |
|
| (18.0 | ) |
Credit Facility, Multi-currency revolving facilities |
|
| 19.5 |
|
|
| 19.5 |
|
Draw down |
|
| — |
|
|
| — |
|
Netherlands facilities (€13.0 million at September 30, 2017 and December 31, 2016 in U.S. Dollar equivalent) |
|
| 15.4 |
|
|
| 13.7 |
|
Draw down |
|
| (1.6 | ) |
|
| — |
|
Letters of credit open |
|
| (4.6 | ) |
|
| (5.3 | ) |
China facility |
|
| 4.5 |
|
|
| 4.3 |
|
Draw down |
|
| — |
|
|
| (1.3 | ) |
Total unused credit availability |
| $ | 70.9 |
|
| $ | 73.4 |
|
Amount available based on borrowing limitations |
| $ | 34.3 |
|
| $ | 71.1 |
|
Overview of Cash Flows and Liquidity
|
| For the nine months ended September 30, |
| |||||
(dollars in thousands) |
| 2017 |
|
| 2016 |
| ||
Net cash (used in) provided by operating activities |
| $ | (1,089 | ) |
| $ | 52,879 |
|
Net cash used in investing activities |
|
| (439 | ) |
|
| (510 | ) |
Net cash used in financing activities |
|
| (20,610 | ) |
|
| (44,337 | ) |
Effect of exchange rate changes on cash and cash equivalents |
|
| 881 |
|
|
| (412 | ) |
Net (decrease) increase in cash |
| $ | (21,257 | ) |
| $ | 7,620 |
|
31
For the nine months ended September 30, 2017, $1.1 million of cash was used in operating activities compared with $52.9 million provided by operating activities in the prior-year period. The $54.0 million decrease in cash flow from operating activities was partially due to a decrease in net income of $4.4 million, a decrease in expense of the fair value adjustments to earnout liabilities of $6.1 million, and a decrease in cash flow due to payments of earnouts classified as operating activities of $7.8 million. Additionally, there were unfavorable net working capital items in the first nine months of 2017 compared with the first nine months of 2016. The incremental cash used was comprised of $8.1 million in inventories, $21.4 million in billings in excess of costs and estimated earnings on uncompleted contracts, $3.6 million in costs and estimated earnings in excess of billings on uncompleted contracts, and $2.5 million in accounts receivable. These unfavorable decreases in cash were partially offset by the incremental cash provided from $0.9 million in accounts payable and accrued expenses, and $4.6 million in prepaid expenses and other current assets.
For the nine months ended September 30, 2017, net cash used in investing activities was $0.4 million compared with net cash used in investing activities of $0.5 million in the prior-year period. In the current year period, cash used in investing activities was primarily the result of cash used for the acquisitions of property and equipment totaling $0.8 million offset by the proceeds from sales of property and equipment, including assets held for sale, totaling $0.4 million. In the prior-year period, cash used in investing activities was primarily the result of cash used for additions to property and equipment of $0.8 million offset by the proceeds from sales of property and equipment, including assets held for sale, totaling $0.3 million.
For the nine months ended September 30, 2017, net cash used in financing activities was $20.6 million due principally to net term loan repayments of $9.2 million, earn-out payments classified as financing activities of $7.4 million, and $7.8 million in dividends paid to common stockholders, which was partially offset by the net borrowings on revolving credit facilities of $2.2 million and proceeds from the employee stock purchase plan, exercise of stock options and dividend reinvestment plan of $1.4 million. In the prior-year period, net cash used in financing activities was $44.3 million due principally to term loan repayments of $31.6 million, net payments on revolving credit facilities of $13.1 million, earnout payments classified as operating activities of $9.3 million and $6.7 million in dividends paid to common stockholders, which was partially offset by proceeds from sale-leaseback transactions of $14.2 million.
Our dividend policy and the payment of cash dividends under that policy are subject to the Board of Directors’ continuing determination that the dividend policy and the declaration of dividends are in the best interest of the Company’s stockholders. Future dividends and the dividend policy may be changed or cancelled at the Company’s discretion at any time. Payment of dividends is also subject to the continuing compliance with the financial covenants under our Credit Facility.
When we undertake large jobs, our working capital objective is to make these projects self-funding. We work to achieve this by obtaining initial down payments, progress billing contracts, when possible, utilizing extended payment terms from material suppliers, and paying sub-contractors after payment from our customers, which is an industry practice. Our investment in net working capital is funded by cash flow from operations and by our revolving line of credit.credit under our Credit Facility (as defined below).
At June 30, 2023, the Company had working capital of $102.8 million, compared with $94.0 million at December 31, 2022. The ratio of current assets to current liabilities was 1.55 to 1.00 on June 30, 2023, as compared with a ratio of 1.64 to 1.00 on December 31, 2022.
At June 30, 2023 and December 31, 2022, cash and cash equivalents totaled $47.6 million and $45.5 million, respectively. As of June 30, 2023 and December 31, 2022, $35.6 million and $31.7 million, respectively, of our cash and cash equivalents were held by certain non-United States subsidiaries, as well as being denominated in foreign currencies.
24
Debt consisted of the following:
(in thousands) |
| June 30, 2023 |
|
| December 31, 2022 |
| ||
Outstanding borrowings under the Credit Facility (as defined below) |
|
|
|
|
|
| ||
Term loan |
| $ | 40,207 |
|
| $ | 41,309 |
|
Revolving credit facility |
|
| 93,200 |
|
|
| 61,300 |
|
Total outstanding borrowings under the Credit Facility |
|
| 133,407 |
|
|
| 102,609 |
|
Outstanding borrowings under the joint venture term debt |
|
| 9,406 |
|
|
| 10,083 |
|
Unamortized debt discount |
|
| (1,178 | ) |
|
| (1,488 | ) |
Total outstanding borrowings |
|
| 141,635 |
|
|
| 111,204 |
|
Less: current portion |
|
| (4,313 | ) |
|
| (3,579 | ) |
Total debt, less current portion |
| $ | 137,322 |
|
| $ | 107,625 |
|
Credit Facility
The Company’s outstanding borrowings in the United States consist of a senior secured term loan and a senior secured revolver loan with sub-facilities for letters of credit, swing-line loans and multi-currency loans (collectively, the “Credit Facility”). As of June 30, 2023 and December 31, 2022, the Company was in compliance with all related financial and other restrictive covenants under the Credit Facility.
See Note 7 to the unaudited condensed consolidated financial statements within Item 1 of this Quarterly Report on Form 10-Q for further information on the Company’s debt facilities.
Total unused credit availability under our existing Credit Facility is as follows:
(in millions) |
| June 30, 2023 |
|
| December 31, 2022 |
| ||
Credit Facility, revolving loans |
| $ | 140.0 |
|
| $ | 140.0 |
|
Draw down |
|
| (93.2 | ) |
|
| (61.3 | ) |
Letters of credit open |
|
| 20.4 |
|
|
| (18.9 | ) |
Total unused credit availability |
| $ | 67.2 |
|
| $ | 59.8 |
|
Amount available based on borrowing limitations |
| $ | 26.4 |
|
| $ | 59.8 |
|
Overview of Cash Flows and Liquidity
|
| Six months ended June 30, |
| |||||
(in thousands) |
| 2023 |
|
| 2022 |
| ||
Net cash (used in) provided by operating activities |
| $ | (611 | ) |
| $ | 18,691 |
|
Net cash used in investing activities |
|
| (28,061 | ) |
|
| (38,797 | ) |
Net cash provided by financing activities |
|
| 29,498 |
|
|
| 26,655 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| 1,141 |
|
|
| (3,091 | ) |
Net decrease in cash |
| $ | 1,967 |
|
| $ | 3,458 |
|
Operating Activities
For the six months ended June 30, 2023, $0.6 million of cash was used in operating activities compared with $18.7 million provided by operations in the prior year period, representing a $19.3 million additional use of cash. Cash flow from operating activities in the first six months of 2023 had an unfavorable impact year-over-year primarily due to timing of receipt of outstanding receivables and payments to suppliers, as well as the decrease in net income compared to the prior year period.
Investing Activities
For the six months ended June 30, 2023, net cash used in investing activities was $28.1 million compared with $38.8 million used in investing activities in the prior year period. For the six months ended June 30, 2023, the $28.1 million cash used in investing activities was the result of $24.2 million cash used for acquisitions as described in Note 14 to the unaudited condensed consolidated financial statements, and $3.9 million for the acquisition of property and equipment. In the prior year period, the $38.8 million cash used in
25
investing activities was the result of $37.4 million used for acquisitions as described in Note 14 and $1.4 million for the acquisition of property and equipment.
Financing Activities
For the six months ended June 30, 2023, $29.5 million was provided by financing activities compared with $26.7 million provided by financing activities in the prior year period, for an increase of $2.8 million. For the six months ended June 30, 2023, the Company used $31.9 million for net borrowings on the Company’s revolving credit lines, primarily used to finance current year acquisitions, $1.7 million in repayment on long-term debt, $0.9 million on deferred payments for acquisitions, and $0.6 million on distributions to the noncontrolling interest. The Company also received $1.2 million of proceeds from the exercise of stock options and the employee stock purchase plan. In the prior year period, the Company used $22.7 million for net borrowings on the Company’s revolving credit lines and $9.5 million for net borrowings on long-term debt, primarily used to finance acquisitions, as well as $4.3 million on common stock repurchases and $0.9 million on distributions to the noncontrolling interest.
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 significant changes during the three-month and nine-month periodssix months ended SeptemberJune 30, 20172023 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, 2016.2022.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, which are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. AllAny statements contained in this Quarterly Report on Form 10-Q, other than statements of historical fact, including statements about management’s beliefs and expectations, are forward-looking statements and should be evaluated as such. These statements are made on the basis of management’s views and assumptions regarding industry prospects or future results of operations or financial position made in this Quarterly Report on Form 10-Q are forward-looking.events and business performance. We use words such as “believe,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” “will,” “plan,” “should” and similar expressions to identify forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ
32
materially from any future results, performance or achievements expressed or implied by such statements. Potential risks and uncertainties, among others, that could cause actual results to differ materially are discussed under “Part I – Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20162022, and include, but are not limited to: our ability to successfully realize
26
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 theany related assumptions prove incorrect, actual results may vary in material aspects from those currently anticipated. Investors are cautioned not to place undue reliance on such forward-looking statements as they speak only to our views as of the date the statement is made. Furthermore, the 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,Securities and Exchange Commission (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. However, we do have an interest rate swap in place as of September 30, 2017 to hedge against a portion of our interest rate exposure related to debt indexed to LIBOR market rates. See Note 8 to the condensed consolidated financial statements for further information on this interest rate swap.
The carrying value of the Company’s total long-term debt and current maturities of long-term debt at June 30, 2023 was $116.9 million at September 30, 2017.$142.8 million. Market risk was estimated as the potential decrease (increase) in future earnings and cash flows resulting from a hypothetical 10% increase (decrease) in the Company’s estimated weighted average borrowing rate at SeptemberJune 30, 2017.2023. Most of the interest on the Company’s debt is indexed to either the LIBOR or EURIBORSOFR market rates. The estimated annual impact of a hypothetical 10% change in the estimated weighted average borrowing rate excluding the portion of debt which has an interest rate fixed by the interest rate swap described above, at SeptemberJune 30, 20172023 is $0.3 million on an annual basis.$1.2 million.
The Company has wholly-owned subsidiaries locatedin several countries, including in the Netherlands, Canada, the People’s Republic of China, Mexico, United Kingdom, Singapore, India, United Arab Emirates and Chile.South Korea. 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. Transaction gains (losses) included in “Other income (expense), net” line of the Condensed Consolidated Statements of Income were $0.3 million and $(1.6) million for the three months ended June 30, 2023 and 2022, respectively, and $0.8 million and $(1.3) million for the six months ended June 30, 2023 and 2022, respectively.
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
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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 not effective as of SeptemberJune 30, 2017. Management2023, as the result of the material weakness in our internal control over financial reporting discussed below, which is currently being remediated.
Notwithstanding the material weakness, management believes that the condensed consolidated financial statements included in this report present 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.report in conformity with accounting principles generally accepted in the United States of America.
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Material Weakness in Internal Control over Financial Reporting
In connection with our evaluation for the period ended June 30, 2023, we identified a material weakness in internal control over financial reporting for the first quarter ended March 31, 2023 relating to management’s review of its revenue recognition for contracts recognized over time isolated to our Engineered Systems segment. Specifically, for the quarter ended March 31, 2023, management did not retain appropriate documentation supporting the review of over time revenue recognition for customer contracts within the Engineered Systems segment.
The material weakness did not result in any material misstatement in our interim financial statements or disclosures, and there were no changes required to any of our previously released interim or audited consolidated financial statements
Remediation Efforts to Address Material Weakness
Management is committed to maintaining a strong internal control environment. In response to the identified material weakness, management, with the oversight of the Audit Committee of the Board of Directors, has taken actions toward the remediation of the material weakness in internal control over financial reporting, including reinforcing the importance of adherence to Company policies regarding control performance and related documentation with control owners, strengthening existing training programs for control owners, and developing monitoring activities to validate the performance of controls by control owners.
The Company anticipates the actions described above and resulting improvements in controls will strengthen the Company’s processes, procedures and controls related to management’s review of over time revenue recognition and will address the related material weakness. However, the material weakness cannot be considered remediated until the applicable control has operated for a sufficient period of time, and management has concluded, through testing, that the control is operating effectively.
Changes in Internal Control Over Financial Reporting
There
Other than the material weakness described above and the ongoing remediation of such material weakness, 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 SeptemberJune 30, 2017,2023 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.
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PART II – OTHEROTHER INFORMATION
Information with respectITEM 1. LEGAL PROCEEDINGS
See Note 13 to legal proceedings can be found in Note 14 “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.10-Q for information regarding legal proceedings in which the Company is involved.
ITEM 1A. RISK FACTORS
There have been no material changes in the Company’s risk factors that wewere disclosed in “Part I – Item 1A. Risk Factors” of ourthe Company's Annual Report on Form 10-K for the year ended December 31, 2016.2022.
None.ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about our purchases of the Company's equity securities for the three months ended June 30, 2023:
|
| Issuer's Purchases of Equity Securities |
| |||||||||||||
(in thousands, except per share data) |
| Total Number of Shares Purchased 1 |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
| ||||
April 1, 2023 - April 30, 2023 |
| — |
|
|
| — |
|
| — |
|
| $ | 13,000 |
| ||
May 1, 2023 - May 31, 2023 |
| — |
|
|
| — |
|
| — |
|
|
| 13,000 |
| ||
June 1, 2023 - June 30, 2023 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 13,000 |
|
Total |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
(1) On May 10, 2022, the Board of Directors authorized a $20.0 million share repurchase program as described within Note 8. The program expires on April 30, 2025.
|
None.ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
35
| ||
| ||
| Rule 13(a)/15d-14(a) Certification by Chief Executive Officer | |
31.2 | Rule 13(a)/15d-14(a) Certification by Chief Financial Officer | |
32.1 | Certification of Chief Executive Officer (18 U.S. Section 1350) | |
32.2 | Certification of Chief Financial Officer (18 U.S. Section 1350) | |
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| Cover Page Interactive Data File (formatted as Inline XBRL |
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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/ |
| |
Chief (principal accounting officer and duly authorized officer) |
Date: NovemberAugust 8, 20172023
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