1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2024
or
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File No. 0-07099
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.)
5080 Spectrum Drive
Suite 800E
Addison, Texas
75001
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (214) 357-6181
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.01 per share
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: 34,979,018 shares of common stock, par value $0.01 per share, as of October 17, 2024.
CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
For the quarter ended September 30, 2024
Table of Contents
Part I –
Financial Information
2
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2024 and 2023
3
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2024 and 2023
4
Condensed Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2024 and 2023
5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023
7
Notes to Condensed Consolidated Financial Statements
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3. Quantitative and Qualitative Disclosures about Market Risk
31
Item 4. Controls and Procedures
Part II –
Other Information
33
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
34
Signatures
35
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)September 30, 2024
December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents
$
38,700
54,779
Restricted cash
226
669
Accounts receivable, net of allowances of $7,214 and $6,460
100,111
112,733
Costs and estimated earnings in excess of billings on uncompleted contracts
68,500
66,574
Inventories, net
37,760
34,089
Prepaid expenses and other current assets
27,143
11,769
Prepaid income taxes
3,826
824
Total current assets
276,266
281,437
Property, plant and equipment, net
32,306
26,237
Right-of-use assets from operating leases
24,690
16,256
Goodwill
220,026
211,326
Intangible assets – finite life, net
51,547
50,461
Intangible assets – indefinite life
9,598
9,570
Deferred income taxes
287
304
Deferred charges and other assets
6,792
4,700
Total assets
621,512
600,291
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of debt
10,580
10,488
Accounts payable
92,316
87,691
Accrued expenses
43,762
44,301
Billings in excess of costs and estimated earnings on uncompleted contracts
64,801
56,899
Notes payable
1,700
2,500
Income taxes payable
—
1,227
Total current liabilities
213,159
203,106
Other liabilities
10,336
12,644
Debt, less current portion
122,818
126,795
Deferred income tax liability, net
9,622
8,838
Operating lease liabilities
19,696
11,417
Total liabilities
375,631
362,800
Commitments and contingencies (See Note 14)
Shareholders’ equity:
Preferred stock, $.01 par value; 10,000 shares authorized, none issued
Common stock, $.01 par value; 100,000,000 shares authorized, 34,979,018 and34,835,293 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively
349
348
Capital in excess of par value
253,590
254,956
Retained earnings (accumulated loss)
1,692
(6,387
)
Accumulated other comprehensive loss
(14,374
(16,274
Total CECO shareholders' equity
241,257
232,643
Noncontrolling interest
4,624
4,848
Total shareholders' equity
245,881
237,491
Total liabilities and shareholders' equity
The notes to the condensed consolidated financial statements are an integral part of the above statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended September 30,
Nine months ended September 30,
(in thousands, except share and per share data)
2024
2023
Net sales
135,513
149,390
399,367
391,134
Cost of sales
90,247
106,269
259,921
273,303
Gross profit
45,266
43,121
139,446
117,831
Selling and administrative expenses
34,262
30,439
105,636
86,082
Amortization and earnout expenses
2,617
1,968
7,036
5,988
Acquisition and integration expenses
1,210
1,386
1,876
2,210
Executive transition expenses
1,258
1,417
Restructuring expenses
(10
217
544
Asbestos litigation expenses
225
Income from operations
7,187
7,853
24,129
21,917
Other expense, net
(398
(216
(2,589
(670
Interest expense
(2,648
(3,340
(9,315
(9,498
Income before income taxes
4,141
4,297
12,225
11,749
Income tax expense
1,602
585
2,664
1,577
Net income
2,539
3,712
9,561
10,172
(453
(382
(1,482
(1,140
Net income attributable to CECO Environmental Corp.
2,086
3,330
8,079
9,032
Earnings per share:
Basic
0.06
0.10
0.23
0.26
Diluted
0.09
0.22
Weighted average number of common shares outstanding:
34,966,625
34,771,742
34,910,165
34,612,163
36,488,788
35,301,429
36,322,690
35,215,843
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Other comprehensive income, net of tax:
Foreign currency translation gain (loss)
2,102
(1,160
1,900
(255
Comprehensive income
4,641
2,552
11,461
9,917
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Common Stock
Capital inexcess of
Retained Earnings(Accumulated
Accumulated OtherComprehensive
Non-controlling
Total Shareholders'
Shares
Amount
par value
Loss)
Loss
interest
Equity
Balance December 31, 2023
34,835
Net income for the three months ended March 31, 2024
1,508
2,093
Exercise of stock options
10
113
Restricted stock units issued
195
(2,204
(2,202
Share based compensation earned
12
1,808
Common stock repurchase and retirement
(144
(1
(3,000
(3,001
Translation gain
654
Noncontrolling interest distributions
(804
Balance March 31, 2024
34,908
251,673
(4,879
(15,620
4,629
236,152
Net income for the three months ended June 30, 2024
4,485
445
4,930
161
92
(466
(465
2,191
(86
(1,999
(2,000
Translation loss
(856
(301
Balance June 30, 2024
34,924
251,560
(394
(16,476
4,773
239,812
Net income for the three months ended September 30, 2024
453
94
27
(340
20
2,276
(602
Balance September 30, 2024
34,979
Accumulated
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
52
611
612
123
(622
(621
808
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
25
317
132
(271
(270
24
1,389
139
(599
Balance June 30, 2023
34,738
347
252,406
(13,596
(17,091
5,082
227,148
Net income for the three months ended September 30, 2023
382
281
48
(203
1,129
(765
Balance September 30, 2023
34,811
253,613
(10,266
(18,251
4,699
230,142
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
10,536
8,769
Unrealized foreign currency gain (loss)
201
(138
Fair value adjustment to earnout liabilities
400
296
Gain on sale of property and equipment
135
43
Debt discount amortization
357
271
Share-based compensation expense
5,790
3,096
Bad debt expense
404
154
Inventory reserve expense
850
526
Other
77
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
9,653
(25,961
(1,498
6,006
Inventories
(4,305
(10,395
Prepaid expense and other current assets
(18,059
(8,228
(2,755
(268
15,387
21,162
(550
7,868
7,286
19,330
261
(9,330
(3,473
Net cash provided by operating activities
23,000
29,491
Cash flows from investing activities:
Acquisitions of property and equipment
(11,237
(5,511
Net cash paid for acquisitions
(14,954
(48,102
Net cash used in investing activities
(26,191
(53,613
Cash flows from financing activities:
Borrowings on revolving credit lines
58,400
94,200
Repayments on revolving credit lines
(54,800
(63,200
Repayments of long-term debt
(7,843
(2,478
Payments on finance leases and financing liability
(692
(680
Deferred consideration paid for acquisitions
(2,050
(1,247
Earnout payments
(1,672
(1,496
Proceeds from employee stock purchase plan and exercise of stock options
846
1,435
(1,707
(1,364
Common stock repurchased
(5,000
Net cash (used in) provided by financing activities
(14,518
25,170
Effect of exchange rate changes on cash, cash equivalents and restricted cash
1,187
703
Net (decrease) increase in cash, cash equivalents and restricted cash
(16,522
1,751
Cash, cash equivalents and restricted cash at beginning of period
55,448
46,585
Cash, cash equivalents and restricted cash at end of period
38,926
48,336
Cash paid during the period for:
Interest
9,714
8,531
Income taxes
6,779
8,633
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Reporting for Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements of CECO Environmental Corp. and its subsidiaries (the “Company,” “CECO,” “we,” “us,” or “our”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2024 and the results of operations, cash flows and shareholders’ equity for the three and nine months ended September 30, 2024 and 2023. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the full year. The balance sheet as of December 31, 2023 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, 2023 as filed with the SEC on March 5, 2024 (the “Form 10-K”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
These financial statements and accompanying notes should be read in conjunction with the audited financial statements and the notes thereto included in the Form 10-K.
Unless otherwise indicated, all balances within tables are in thousands, except per share amounts.
2. New Financial Accounting Pronouncements
Accounting Standards Adopted in Fiscal 2024
None.
Accounting Standards to be Adopted
In December 2023, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which addresses income tax disclosure requirements, primarily around the disclosure of the rate reconciliation and income taxes paid. The ASU is effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which addresses segment disclosure requirements, primarily the disclosure of significant segment expenses. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods beginning after December 15, 2024. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s consolidated financial statements.
3. Accounts Receivable
Accounts receivable as of September 30, 2024 and December 31, 2023 consisted of the following:
September 30, 2024
107,325
119,193
Provision for credit losses
(7,214
(6,460
Total accounts receivable, net
Accounts receivable, net as of the beginning of the prior year period, or January 1, 2023, were $83.1 million.
Balances billed but not paid by customers under retainage provisions in contracts within the Condensed Consolidated Balance Sheets amounted to approximately $5.3 million and $3.2 million as of September 30, 2024 and December 31, 2023, respectively. Retainage receivables on contracts in progress are generally collected within a year or two subsequent to contract completion, and are recorded in either "Accounts receivable, net" or "Deferred charges and other assets" within the Condensed Consolidated Balance Sheets depending on timing of expected collection.
Amounts charged to the provision for credit losses was $0.1 million and $0.2 million for the three months ended September 30, 2024 and 2023, respectively, and $0.4 million and $0.2 for the nine months ended September 30, 2024 and 2023, respectively.
4. Contract Assets and Liabilities
Contract assets and liabilities as of September 30, 2024 and December 31, 2023 consisted of the following:
As of the beginning of the prior year period, or January 1, 2023, costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts were $71.0 million and $32.7 million, respectively. The contract liabilities recorded in “Accrued expenses” on the Condensed Consolidated Balance Sheets were $8.3 million, $7.9 million and $4.5 million as of September 30, 2024, December 31, 2023 and January 1, 2023, respectively. Approximately 80% of the Company's contract liabilities as of December 31, 2023 were recognized as revenue in the nine months ended September 30, 2024.
5. Inventories
Inventories as of September 30, 2024 and December 31, 2023 consisted of the following:
Raw materials
27,871
25,819
Work in process
11,041
9,710
Finished goods
2,855
2,368
Obsolescence allowance
(4,007
(3,808
Total inventories
Amounts credited to the allowance for obsolete inventory and charged to cost of sales amounted to $0.2 million and zero for the three months ended September 30, 2024 and 2023, respectively, and $0.8 million and $0.5 million for the nine months ended September 30, 2024 and 2023, respectively.
9
6. Goodwill and Intangible Assets
Goodwill activity for the nine months ended September 30, 2024 and the year ended December 31, 2023 was as follows:
Nine months ended September 30, 2024
Year ended December 31, 2023
Goodwill / Tradename
Tradename
Balance at beginning of period
183,197
9,508
Acquisitions
7,689
27,152
Foreign currency translation
1,011
28
977
62
Balance at end of period
During the first quarter of 2024, the Company recorded measurement period adjustments related to the acquisition of Kemco Systems Co., LLC ("Kemco"), as discussed in Note 15, resulting in an increase to goodwill of $0.1 million. During the third quarter of 2024, the Company completed its acquisition of EnviroCare International, as discussed in Note 15, resulting in goodwill of $7.6 million.
Finite life intangible assets as of September 30, 2024 and December 31, 2023 consisted of the following:
Cost
Accum. Amort.
Technology
17,248
14,552
16,517
14,061
Customer lists
109,151
68,380
103,471
63,420
Tradenames
14,914
6,030
14,094
5,001
Foreign currency adjustments
(1,396
(592
(1,083
56
Total intangible assets – finite life
139,917
88,370
132,999
82,538
Finite life intangible asset activity for the nine months ended September 30, 2024 and 2023 was as follows:
Intangible assets – finite life, net at beginning of period
35,251
Amortization expense
(6,478
(5,306
7,250
22,318
314
Intangible assets – finite life, net at end of period
52,340
Amortization expense of finite life intangible assets was $2.2 million and $1.9 million for the three months ended September 30, 2024 and 2023, respectively, and $6.5 million and $5.3 million for the nine months ended September 30, 2024 and 2023, respectively. Amortization over the next five years for finite life intangibles is expected to be $2.2 million for the remainder of 2024, $8.4 million in 2025, $7.3 million in 2026, $7.1 million in 2027, and $6.7 million in 2028.
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.
As of September 30, 2024, 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 or nine months ended September 30, 2024 that would require an interim impairment assessment of goodwill or intangible assets.
The Company’s assumptions about future conditions important to its assessment of potential impairment of its goodwill and indefinite life intangible assets are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analysis accordingly.
7. Accrued Expenses
Accrued expenses as of September 30, 2024 and December 31, 2023 consisted of the following:
Compensation and related benefits
10,829
11,278
Accrued warranty
5,224
5,105
Contract liability
8,313
7,875
Short-term operating lease liability
4,402
4,278
14,994
15,765
Total accrued expenses
8. Senior Debt
Debt as of September 30, 2024 and December 31, 2023 consisted of the following:
Outstanding borrowings under Credit Facility (defined below) Term loan payable in quarterly principal installments of $550 through September 2023, $2,232 through September 2025 and $2,977 thereafter with balance due upon maturity in December 2026
Term loan
105,727
112,424
Revolving credit facility
20,900
17,300
Total outstanding borrowings under the Credit Facility
126,627
129,724
Outstanding borrowings under the joint venture term debt
7,710
8,855
Unamortized debt discount
(939
(1,296
Total outstanding borrowings
133,398
137,283
Less: current portion
(10,580
(10,488
Total debt, less current portion
Scheduled principal payments under the Credit Facility and joint venture term debt are $2.6 million for the remainder of 2024, $11.3 million in 2025, $116.5 million in 2026, $3.9 million in 2027, and zero in 2028.
Credit Facility
As of September 30, 2024 and December 31, 2023, $13.8 million and $13.3 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 revolver loan with sub-facilities for letters of credit, swing-line loans and senior secured multi-currency loans (the "Credit Facility") was $82.7 million and $109.4 million at September 30, 2024 and December 31, 2023, respectively. Revolving loans may be borrowed, repaid and reborrowed until December 17, 2026, at which time all outstanding balances of the Credit Facility must be repaid.
At the Company’s option, revolving loans and the term loans accrue interest at a per annum rate based on (a) either the highest of (i) the federal funds rate plus 0.5%, or (ii) the prime lending rate of the Agent (as defined in the Credit Facility), (b) Daily Simple SOFR plus the Daily Simple SOFR Adjustment of 0.11% plus 1.0%, (c) 1.0%, plus a margin ranging from 1.75% to 3.25% depending on the Company’s Consolidated Leverage Ratio, 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 3.25% depending on the Company’s Consolidated Leverage Ratio. Interest on swing line loans is the Base Rate.
Interest on Base Rate loans is payable quarterly in arrears on the last day of each calendar quarter and at maturity. Interest on Term SOFR rate loans is payable on the last date of each applicable Interest Period (as defined in the agreement), but in no event less than once every three months and at maturity. The weighted average stated interest rate on outstanding borrowings was 7.33% and 8.29% at September 30, 2024 and December 31, 2023, respectively. The effective interest rate was 8.09% and 7.70% at September 30, 2024 and December 31, 2023, respectively.
11
Under the terms of the Credit Facility, the Company is required to maintain certain financial covenants, including the maintenance of a Consolidated Net Leverage Ratio (as defined in the Credit Facility). In the third quarter of 2023, the Company entered into an Elevated Ratio Period resulting in a maximum Consolidated Net Leverage Ratio of 4.00 through June 30, 2024, after which time it decreased to 3.50 until the end of the term of the Credit Facility.The Company has granted a security interest in substantially all of its assets to secure its obligations pursuant to the Credit Facility. The Company’s obligations under the Credit 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 September 30, 2024 and December 31, 2023, the Company was in compliance with all related financial and other restrictive covenants under the Credit Facility.
On October 7, 2024, the Company entered into the Third Amended and Restated Credit Agreement which amends and restates in its entirety the Company’s Credit Facility. The amended credit agreement provides for a senior secured revolving credit facility in an initial aggregate principal amount of up to $400.0 million. See Note 17 for further information.
Joint Venture Debt
On March 7, 2022, the Company's Effox-Flextor-Mader, Inc. joint venture ("EFM JV"), for which the Company holds 63% of the equity, 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 September 30, 2024 and December 31, 2023, $7.7 million and $8.9 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 September 30, 2024 and December 31, 2023 was 7.96% and 8.70%, respectively. As of September 30, 2024 and December 31, 2023, 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. As of September 30, 2024, there were $16.9 million in current assets, $25.8 million in long-lived assets, and $31.3 million in total liabilities related to the EFM JV included in the Condensed Consolidated Balance Sheets. As of December 31, 2023, there were $14.5 million in current assets, $26.7 million in long-lived assets, and $12.5 million in total liabilities related to the EFM JV included in the Consolidated Balance Sheets. For the three months ended September 30, 2024 and 2023, the EFM JV accounted for $10.7 million and $9.0 million in revenue, respectively, included in the Company's results. For the nine months ended September 30, 2024 and 2023, the EFM JV accounted for $34.6 million and $28.3 million in revenue, respectively, included in the Company's results. For the three months ended September 30, 2024 and 2023, the EFM JV accounted for $1.2 million and $1.0 million in net income, respectively, included in the Company's results. For the nine months ended September 30, 2024 and 2023, the EFM JV accounted for $3.9 million and $3.0 million in net income, respectively, included in the Company's results.
Foreign Debt
The Company has a number of bank guarantee facilities and bilateral lines of credit in various foreign countries currently supported by cash, letters of credit or pledged assets and collateral under the Credit Facility. 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 September 30, 2024 and December 31, 2023, $46.3 million and $45.8 million in bank guarantees were outstanding, respectively, inclusive of $1.7 million and $1.3 million in outstanding bank guarantees as of September 30, 2024 and December 31, 2023, respectively, under a Euro-denominated bank guarantee agreement held by a subsidiary of the Company located in the Netherlands and secured by local assets, as well as $2.4 million and $2.3 million in outstanding bank guarantees as of September 30, 2024 and December 31, 2023, respectively, under Yuan-denominated bank guarantee agreements held by a subsidiary of the Company located in China and secured by local assets.
9. Earnings per Share
The computational components of basic and diluted earnings per share for the three months ended September 30, 2024 and 2023 are as follows:
Numerator (for basic and diluted earnings per share)
Denominator
Basic weighted-average shares outstanding
34,967
34,772
Common stock equivalents arising from stock options and restricted stock awards
1,522
529
Diluted weighted-average shares outstanding
36,489
35,301
The computational components of basic and diluted earnings per share for the nine months ended September 30, 2024 and 2023 are as follows:
34,910
34,612
1,413
604
36,323
35,216
Options and restricted stock units included in the computation of diluted earnings per share are calculated using the treasury stock method. For the three months ended September 30, 2024 and 2023, zero and zero, respectively, and for the nine months ended September 30, 2024 and 2023, 0.1 million and 0.7 million, respectively, of outstanding options and restricted stock units were excluded from the computation of diluted earnings per share due to their having an anti-dilutive effect.
Once a restricted stock unit vests, it is included in the computation of weighted average shares outstanding for purposes of basic and diluted earnings per share.
Common Stock Repurchase
On May 10, 2022, the Company's Board of Directors authorized a share repurchase program under which the Company may purchase up to $20.0 million of its outstanding shares of common stock through April 30, 2025. The authorization permits the Company to repurchase shares in the open market, through accelerated share repurchases, block trades, Rule 10b5-1 trading plans or through privately negotiated transactions in accordance with applicable laws, rules and regulations. During the three and nine months ended September 30, 2024, the Company repurchased approximately zero and 230,000 shares under the program, respectively, for a cost of zero and $5.0 million, respectively. There were no shares repurchased under the program during the three or nine months ended September 30, 2023.
10. Share-Based Compensation
The Company accounts for share-based compensation in accordance with Accounting Standards Codification (“ASC”) Topic 718, “Compensation – Stock Compensation,” which requires the Company to recognize compensation expense for share-based awards, measured at the fair value of the awards at the grant date. The Company recognized $1.9 million and $1.2 million of share-based compensation related expense during the three months ended September 30, 2024 and 2023, respectively, and $5.8 million and $3.1 million of share-based compensation related expense during the nine months ended September 30, 2024 and 2023, respectively.
The Company granted approximately zero and 345,000 restricted stock units during the three months ended September 30, 2024 and 2023, respectively, and approximately 341,000 and 733,000 restricted stock units during the nine months ended September 30, 2024 and 2023, respectively. In addition, the Company granted approximately 25,000 and zero stock options
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during the nine months ended September 30, 2024 and 2023, respectively. No stock options were granted during the three months ended September 30, 2024 and 2023.
There were approximately 8,000 and 25,000 options exercised during the three months ended September 30, 2024 and 2023, respectively, for which the Company received $0.1 million and $0.3 million in cash, respectively, from employees and directors. The intrinsic value of options exercised was $0.1 million for each of the three months ended September 30, 2024 and 2023. There were approximately 28,000 and 101,000 options exercised during the nine months ended September 30, 2024 and 2023, respectively, for which the Company received $0.4 million and $1.2 million in cash, respectively, from employees and directors. The intrinsic value of options exercised was $0.3 million and $0.1 million for the nine months ended September 30, 2024 and 2023, respectively.
11. Pension and Employee Benefit Plans
The 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.
The Company presents the components of net periodic benefit cost within “Other expense, net” on the Condensed Consolidated Statements of Income.
Retirement plan expense is based on valuations performed by plan actuaries as of the beginning of each fiscal year. The components of the pension plan expense consisted of the following:
Interest cost
318
912
955
Expected return on plan assets
(308
(285
(915
Amortization of net actuarial loss
57
74
169
223
Net periodic benefit cost
53
107
166
322
The Company made contributions to its defined benefit plan of $0.9 million and $1.1 during the three and nine months ended September 30, 2024, respectively. No contributions were made to the plan during the three and nine months ended September 30, 2023. No additional contributions are expected for the remainder of 2024. The unfunded liability of the plan of $3.0 million and $4.1 million as of September 30, 2024 and December 31, 2023, respectively, is included in “Other liabilities” on the Condensed Consolidated Balance Sheets.
12. Income Taxes
The Company files income tax returns in various federal, state and local jurisdictions. Tax years from 2018 forward remain open for examination by Federal authorities. Tax years from 2017 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 September 30, 2024 and December 31, 2023, the liability for uncertain tax positions totaled approximately $0.2 million, which is included in “Other liabilities” on the Condensed Consolidated Balance Sheets. The Company recognizes accrued interest related to uncertain tax positions and penalties, if any, in income tax 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 records 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 September 30, 2024 and December 31, 2023, the Company recorded deferred income taxes of approximately $0.9 million and $0.7 million, respectively, on the undistributed earnings of its foreign subsidiaries.
Income tax expense was $1.6 million and $0.6 million for the three months ended September 30, 2024 and 2023, respectively, and $2.7 million and $1.6 million for the nine months ended September 30, 2024 and 2023, respectively. The effective income tax rate for the three months ended September 30, 2024 was 38.7% compared with 13.6% for the three months ended September 30, 2023, and the effective income tax rate for the nine months ended September 30, 2024 was 21.8% compared with 13.4% for the nine months ended September 30, 2023. The effective income tax rates for the three and nine months ended September 30, 2024 and 2023 differ from the United States federal statutory rate. The Company's effective rate is affected by
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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. Additionally, the Company received a tax indemnification payment of $0.5 million, related to a prior year acquisition, in the second quarter of 2024.
The Organization for Economic Co-operation and Development/G20 Inclusive Framework on Base Erosion and Profit Shifting published the Pillar Two model rules designed to address the tax challenges arising from the digitalization of the global economy which introduces a 15% global minimum corporate tax for companies with revenues above €750 million calculated on a country-by-country basis. On February 1, 2023, the FASB indicated that it believes the minimum tax imposed under Pillar Two is an alternative minimum tax, and, accordingly, deferred tax assets and liabilities associated with the minimum tax would not be recognized or adjusted for the estimated future effects of the minimum tax but would be recognized in the period incurred. Aspects of Pillar Two legislation have been enacted in certain jurisdictions in which the Company operates effective for accounting periods commencing on or after January 1, 2024. However, based on the current revenue threshold, the Company is currently not subject to Pillar Two taxes.
13. Financial Instruments
The Company's financial instruments consist primarily of investments in cash and cash equivalents, receivables and certain other assets, notes payable, foreign debt and accounts payable, which approximate fair value at September 30, 2024 and December 31, 2023, 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 $134.3 million and $138.6 million at September 30, 2024 and December 31, 2023, 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 fair value hierarchy.
At September 30, 2024 and December 31, 2023, the Company had cash and cash equivalents of $38.7 million and $54.8 million, respectively, of which $25.3 million and $38.5 million, respectively, was held outside of the United States, principally in the Netherlands, India, United Kingdom, and China.
14. Commitments and Contingencies
Asbestos cases
The Company's subsidiary, Met-Pro Technologies LLC (“Met-Pro”), beginning in 2002, has 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 September 30, 2024 for cases involving asbestos-related claims were $7.0 million which together with all legal fees other than corporate counsel expenses have substantially been paid by the Company’s insurers. The average cost per settled claim, excluding legal fees, was approximately $33,000. As of September 30, 2024 and December 31, 2023, the amount recorded within "Accrued expenses" on the Condensed Consolidated Balance Sheets was $0.2 million and zero, respectively, related to asbestos litigation.
Based upon the most recent information available to the Company regarding such claims, there were a total of 343 cases pending against the Company as of September 30, 2024 with Illinois, New York, Pennsylvania and West Virginia having the largest number of cases, as compared with 313 cases that were pending as of December 31, 2023. During the nine months ended September 30, 2024, 136 new cases were filed against the Company, and the Company was dismissed from 71 cases and settled 35 cases. Most of the pending cases have not advanced beyond the early stages of discovery, although a number of cases are on schedules leading to or scheduled for trial. The Company believes that its insurance coverage is adequate for the cases currently pending against the Company and for the foreseeable future, assuming a continuation of the current volume, nature of cases and settlement amounts. However, the Company has no control over the number and nature of cases that are filed against it, nor as to the financial health of its insurers or their position as to coverage. The Company also presently believes that none of the pending cases will have a material adverse impact upon the Company’s results of operations, liquidity or financial condition.
15
The Company is also a party to routine contract and employment-related litigation matters, warranty claims and routine audits of state and local tax returns arising in the ordinary course of its business.
The final outcome and impact of open matters, and related claims and investigations that may be brought in the future, are subject to many variables, and cannot be predicted. The 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.
The Company is not aware of any pending claims or assessments, other than as described above, which may have a material adverse impact on its liquidity, financial position, results of operations, or cash flows.
15. Acquisitions
EnviroCare International LLC
On July 29, 2024, the Company completed its acquisition of EnviroCare International LLC (“EnviroCare"), based in American Canyon, California. EnviroCare is an international designer and provider of industrial exhaust air contamination treatment and control systems, solutions and services across a wide range of industrial and municipal applications. The estimated purchase price was approximately $13.0 million consisting of $15.7 million paid at closing and a seller promissory note of $1.7 million, partially offset by an estimated working capital adjustment of $4.4 million. The acquisition was financed using a combination of cash on the balance sheet and borrowings under the Company’s existing Credit Facility. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of closing.
Current assets (including cash of $374 and accounts receivable of $405)
3,111
Property and equipment
17
Intangible - finite life
7,579
Total assets acquired
17,957
Current liabilities assumed
(4,949
Net assets acquired
13,008
The Company acquired technology, customer lists and tradename intangible assets valued at $0.8 million, $0.8 million and $5.7 million, respectively. These assets were determined to have useful lives of 7, 10 and 10 years, respectively.
During each of the three and nine months ended September 30, 2024, EnviroCare accounted for $2.4 million in revenue and $0.3 million of net income in the Company's results.
Kemco Systems Co., LLC
On August 23, 2023, the Company acquired 100% of the equity interests of Kemco for $24.0 million in cash, which was financed with a draw on the Company’s revolving credit facility. During the three months ended March 31, 2024, the Company received $0.4 million from the former owners of Kemco as a working capital adjustment, reducing the purchase price to $23.6 million. As additional consideration, the former owners of Kemco are entitled to earnout payments up to $4.0 million based upon specified financial results through August 31, 2026, of which $1.7 million was paid during the second quarter of 2024. Based on projections at the acquisition date, the Company estimated the fair value of the earnout to be $2.2 million, which was subsequently adjusted to $2.7 million in the first quarter of 2024. This fair value measurement is based on inputs not observable in the market, which is considered Level 3 on the fair value hierarchy. As of September 30, 2024, the earnout liability recorded in “Accrued expenses” on the Condensed Consolidated Balance Sheets is $1.5 million which reflects a fair value adjustment of $0.4 million during the third quarter of 2024. Kemco designs and manufactures energy and water conservation systems and equipment for applications regarding wastewater reuse and recycle, heat recovery, water heating, and vapor energy. This acquisition advances the Company's position within the North American water and wastewater treatment market within the Engineered Systems segment. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of closing.
16
Current assets (including accounts receivable of $2,328)
8,902
341
11,610
11,115
Other assets
33,586
(6,853
Other liabilities assumed
(404
26,329
The Company acquired technology, customer lists and tradename intangible assets valued at $1.4 million, $8.7 million and $1.5 million, respectively. These assets were determined to have useful lives of 7, 10 and 10 years, respectively.
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 paid within one year and $2.0 million of notes payable due in equal installments over two years, of which $1.0 million was paid during the first quarter of 2024. 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.
Current assets (including cash of $52 and accounts receivable of $1,493)
2,614
1,153
8,930
10,839
231
23,767
(1,203
Deferred tax liability
(168
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.
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. A payment of $0.6 million, representing the fully earned amount, was made in the fourth quarter of 2023. 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 the Engineered Systems segment. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of closing.
Current assets (including accounts receivable of $2,467)
3,240
635
1,778
5,296
10,949
(4,860
Deferred income tax liability
(961
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.
The Company has finalized the valuation of assets acquired and liabilities assumed related to the acquisitions of Kemco, Wakefield and Transcend. The purchase accounting related to the EnviroCare acquisition is subject to final adjustment, primarily for the final determination of post-close adjustment for net working capital. The 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 and finalizes the post-close adjustment amount. These changes could result in material variances in 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.
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:
136,533
156,503
406,507
420,078
2,838
4,257
9,910
11,881
0.08
0.12
0.28
0.34
0.27
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.
16. Business Segment Information
The Company’s operations are organized and reviewed by management along with its solutions or end markets that the segment serves and presented in two reportable segments. The results of the segments are reviewed through the “Income from operations” line on the Condensed Consolidated Statements of Income.
The Company’s reportable segments are organized as groups of similar products and services, as described as follows:
Engineered Systems segment: 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 and gas sectors. The Company seeks to address the global demand for environmental and equipment protection solutions with its highly engineered platforms including emissions management, fluid bed cyclones, thermal acoustics, separation and filtration, and dampers and expansion joints.
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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. The Company assists customers 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 and installation, industrial air, and fluid handling.
The financial segment information is as follows:
Net sales (less intra-, inter-segment sales)
Engineered Systems segment
91,277
105,540
278,018
267,516
Industrial Process Solutions segment
44,236
43,850
121,349
123,618
Total net sales
15,837
15,759
51,444
39,601
8,065
5,586
20,834
15,769
Corporate and Other(1)
(16,715
(13,492
(48,149
(33,453
Total income from operations
Property and equipment additions
645
392
2,672
1,081
690
570
1,725
2,281
Corporate and Other
2,669
629
6,840
2,149
Total property and equipment additions
4,004
1,591
11,237
5,511
1,817
1,462
5,416
3,948
1,148
1,109
3,398
3,217
598
548
1,722
1,604
Total depreciation and amortization
3,563
3,119
Identifiable assets
413,069
432,098
166,933
147,740
Corporate and Other(2)
41,509
20,453
Total identifiable assets
142,616
142,229
77,410
69,097
Total goodwill
19
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 follows:
Three months ended September 30, 2024
Less Inter-Segment Sales
TotalSales
Intra-SegmentSales
Industrial Process Solutions
Engineered Systems
Net Sales toOutsideCustomers
98,527
(6,952
(298
51,379
(6,918
(225
149,906
(13,870
Three months ended September 30, 2023
114,605
(8,639
(426
49,264
(5,231
(183
163,869
293,186
(14,587
(581
135,631
(13,893
(389
428,817
(28,480
Nine months ended September 30, 2023
286,575
(18,173
(886
132,946
(8,871
(457
419,521
(27,044
17. Subsequent Events
On October 29, 2024, the Company announced that it has entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire for cash all of the shares of Profire Energy, Inc. (Nasdaq: PFIE) ("Profire"), with the transaction expected to be completed in first quarter of 2025. Profire is a leader in burner management technology and combustion control systems that provide mission-critical combustion automation and control solutions and services to improve environmental efficiency, safety and reliability for industrial thermal applications globally. Profire is headquartered in Lindon, Utah and has locations in Texas, Pennsylvania, Colorado, Ohio and Alberta, Canada.
Under the terms of the Merger Agreement, a subsidiary of the Company will commence a tender offer to acquire all issued and outstanding shares of Profire’s common stock at a price of $2.55 per share, in cash, without interest and subject to applicable withholding tax. The tender offer will initially remain open for 20 business days from the date of commencement of the tender offer, subject to extension under certain circumstances. The transaction implies an equity value of
approximately $125 million and a total enterprise value for Profire of approximately $108 million. The tender offer is subject to customary closing conditions, including that at least a majority of the outstanding shares of Profire’s common stock are tendered and not withdrawn in the tender offer and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Upon completion of the transaction, Profire will become a wholly-owned subsidiary of CECO and shares of Profire’s common stock will no longer be listed on any public market.
The impact of this pending transaction is not included in the Company's financial results for the three or nine months ended September 30, 2024 and is not expected to impact financial results for the fourth quarter of 2024.
On October 2, 2024, the Company completed the acquisition of WK Germany KG, GmbH and WK Asia-Pacific Pte. Ltd. (collectively, "WK Group"). WK Group, with locations in Germany, Singapore, China and India, designs and engineers a broad range of cutting-edge technical equipment and systems for process and environmental and surface technology applications, as well as innovative sustainable solutions. This acquisition advances the Company's footprint and capabilities within the industrial processing solutions segment. The purchase price paid at closing was €10.8 million, inclusive of net cash at close, (approximately $11.9 million), financed using borrowings under the Company's existing Credit Facility. There is also an earnout arrangement based on the achievement of specified financial targets through September 30, 2025, as defined in the purchase agreement. The impact of this acquisition is not included in the Company's results for the three or nine months ended September 30, 2024. The initial accounting for the acquisition was not complete at the time the financial statements were issued due to the timing of the acquisition and filing of this Quarterly Report on Form 10-Q. As a result, complete disclosures as required under ASC 805, Business Combinations cannot be made at this time.
On October 7, 2024, the Company entered into the Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”), among the Company, its subsidiaries from time to time party thereto, the lenders from time to time party thereto (the “Lenders”) and Bank of America, N.A., as administrative agent (the “Agent”), which amended and restated in its entirety the Company’s Second Amended and Restated Credit Agreement, dated as of June 11, 2019, among the Company, its subsidiaries from time to time party thereto, the lenders from time to time party thereto and the Agent. The Amended Credit Agreement provides for a senior secured revolving credit facility in an initial aggregate principal amount of up to $400.0 million (the “Amended Credit Facility”). At the Company’s option, the Company may increase the aggregate principal amount of the Amended Credit Facility from time to time by an additional aggregate principal amount of up to (a) $125.0 million plus (b) such additional amount, if any, as would not cause the Consolidated Secured Net Leverage Ratio (as defined in the Amended Credit Agreement) to exceed 3.00 to 1.00 after giving pro forma effect to such increased amount, in additional revolving credit and/or one or more tranches of term loans, subject to certain conditions, including the consent of the Agent and any increasing or additional lenders.
The Amended Credit Facility will mature on October 7, 2029. The Credit Facility will accrue interest (a) with respect to base rate loans, at an annual rate equal to an applicable rate of between 0.75% and 2.25% (fluctuating based on the Company’s Consolidated Net Leverage Ratio), plus a rate equal to the highest of (1) the Agent’s prime rate, (2) the federal funds rate plus one-half of 1.00%, (3) Daily Simple SOFR (as defined in the Credit Agreement) plus 1.00% and (4) 1.00%, (b) for all other loans, at an annual rate equal to an applicable rate of between 1.75% and 3.25% (fluctuating based on the Company’s Consolidated Net Leverage Ratio), plus a rate determined based on the denominated currency and, as applicable pursuant to the Amended Credit Agreement, whether the Company has elected for interest on such loans to accrue at a daily rate or a term rate: (a) for term rate loans, if denominated (1) in U.S. Dollars, Term SOFR (as defined in the Amended Credit Agreement inclusive of a 0.10% per annum adjustment), (2) in euros, EURIBOR, (3) in Canadian dollars, the Term CORRA Rate (as defined in the Credit Agreement) plus 0.29547% for a one-month interest period and 0.32138% for a three-month interest period or (4) in a currency other than (1)-(3), the rate per annum as designated with respect to such currency at the time such currency was approved by the Agent and the other Lenders or, if such rate is unavailable on any date of determination for any reason, a comparable or successor rate approved by the Agent, and (b) for daily rate loans, if denominated (1) in U.S. dollars, Daily Simple SOFR (as defined in the Credit Agreement inclusive of a 0.10% per annum adjustment), (2) in pounds sterling, a rate per annum equal to SONIA (as defined in the Credit Agreement) plus 0.0326% per annum or (3) in a currency other than (1) or (2), the rate per annum as designated with respect to such currency at the time such currency was approved by the Agent and the other Lenders or, if such rate is unavailable on any date of determination for any reason, a comparable or successor rate approved by the Agent.
The Amended Credit Facility contains covenants and representations and warranties that are usual and customary for similar transactions. With respect to financial covenants, the Company is required to maintain a Consolidated Net Leverage Ratio not greater than 4.00 to 1.00 and a Consolidated Secured Net Leverage Ratio (as defined in the Credit Agreement) not greater than 3.00 to 1.00, in each case as of the last day of each fiscal quarter of the Company. At the election of the Company and subject to certain restrictions contained in the Amended Credit Agreement, following the occurrence of a Permitted Acquisition (as defined in the Credit Agreement) involving aggregate consideration of $15.0 million or more, such maximum
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Consolidated Net Leverage Ratio and Consolidated Secured Net Leverage Ratio may be increased to 4.50 to 1.00 and 3.50 to 1.00, respectively, for the fiscal quarter in which such Permitted Acquisition is consummated and the subsequent three fiscal quarters of the Company. The Company is also required to maintain a Consolidated Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) as of the last day of each fiscal quarter of the Company of not less than 1.25 to 1.00.
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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 and nine months ended September 30, 2024 and 2023 reflect the consolidated operations of the Company and its subsidiaries.
CECO Environmental Corp. (“CECO,” “we,” “us,” or the “Company”) is a leading environmentally focused, diversified industrial company, serving the broad landscape of industrial air, industrial water and energy transition markets globally providing innovative technology and application expertise. CECO helps companies grow their business with safe, clean, and more efficient solutions that help protect people, the environment and industrial equipment. CECO solutions improve air and water quality, optimize emissions management, and increase the energy and process efficiency for highly engineered applications in 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 treatment, and a wide range of 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. We are monitoring key materials market indexes and trends and adjusting our material procurement strategies accordingly. We have secured raw materials from existing and alternate suppliers and have taken other mitigating actions to mitigate supply disruptions; however, we cannot guarantee that we will be able to continue to do so in the future. If we are unable to mitigate the effects of supply disruptions, our business, results and financial condition could be adversely affected.
Note Regarding Use of Non-GAAP Financial Measures
The Company’s unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These GAAP financial statements include certain charges the Company believes are not indicative of its core ongoing operational performance.
As a result, the Company provides financial information in this Management’s Discussion and Analysis that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides this non-GAAP financial information because the Company’s management utilizes it to evaluate its ongoing financial performance and the Company believes it provides greater transparency to investors as supplemental information to its GAAP results.
The Company has provided the non-GAAP financial measures of non-GAAP operating income and non-GAAP operating margin as a result of items that the Company believes are not indicative of its ongoing operations. These include transactions associated with the Company’s acquisitions and the items described below in “Consolidated Results.” The Company believes that evaluation of its financial performance compared with prior and future periods can be enhanced by a presentation of results that exclude the impact of these items. The Company has incurred substantial expense and income associated with acquisitions. While the Company cannot predict the exact timing or amounts of such charges, it does expect to treat the financial impact of these transactions as special items in its future presentation of non-GAAP results.
Results of Operations
Consolidated Results
Our Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2024 and 2023 are as follows:
(in millions, except ratios)
135.5
149.4
399.4
391.1
90.2
106.3
259.9
273.3
45.3
43.1
139.5
117.8
Percent of sales
33.4
%
28.8
34.9
30.1
34.3
30.3
105.7
86.1
25.3
20.3
26.5
22.0
2.6
2.0
7.1
6.0
1.2
1.4
1.9
2.2
0.2
0.5
1.3
Operating income
7.2
7.9
24.1
21.9
Operating margin
5.3
5.6
(0.4
(0.2
(2.5
(0.7
(2.6
(3.3
(9.3
(9.5
4.2
4.4
12.3
11.7
1.6
0.6
2.7
3.8
9.6
10.1
(0.5
(1.5
(1.1
2.1
3.4
8.1
9.0
To compare operating performance between the three and nine months ended September 30, 2024 and 2023, the Company has adjusted GAAP operating income to exclude (1) amortization of intangible assets, and earnout expenses, (2) acquisition and integration expenses, which include legal, accounting, and other expenses, (3) executive transition expenses, including fees and expenses incurred in the search for and hiring of new executives, (4) restructuring expenses primarily relating to severance, facility exits, and associated legal expenses, and (5) asbestos litigation expenses, related to expected future settlement payments.
The following table presents the reconciliation of GAAP operating income and GAAP operating margin to non-GAAP operating income and non-GAAP operating margin:
Operating income as reported in accordance with GAAP
Operating margin in accordance with GAAP
Non-GAAP operating income
11.0
12.8
33.8
31.7
Non-GAAP operating margin
8.6
8.5
Orders booked increased $16.8 million, or 11.5%, to $162.3 million during the three months ended September 30, 2024 compared with $145.5 million in the three months ended September 30, 2023. The increase is broad-based with year-over-year growth in both the Engineered Systems and Industrial Process Solutions segments. Notable technologies attributing to the broad-based increase include emissions management and industrial ducting. Of the $162.3 million in orders booked during the three months ended September 30, 2024, $4.6 million is attributable to acquisitions that occurred during the preceding twelve month period.
Orders booked decreased $6.1 million, or 1%, to $448.3 million during the nine months ended September 30, 2024 compared with $454.4 million in the nine months ended September 30, 2023. The decrease is primarily related to two unique industrial air bookings
from the first half of 2023 that were not expected to repeat. Of the $448.3 million in orders booked during the nine months ended September 30, 2024, $25.6 million is attributable to acquisitions that occurred during the preceding twelve month period.
Net sales for the three months ended September 30, 2024 decreased $13.9 million, or 9.3%, to $135.5 million compared with $149.4 million for the three months ended September 30, 2023. The decrease is entirely attributable to the Engineered Systems segment, notably driven by variability in timing of large order bookings. On a trailing twelve-month basis, Engineered Systems revenue has increased $49.8 million, or 14.6%. Approximately 94%, or $127.6 million, of net sales for the three months ended September 30, 2024 is attributable to organic revenue, defined as revenue recorded subsequent to the twelve month period post-acquisition date.
Net sales for the nine months ended September 30, 2024 increased $8.3 million, or 2.1%, to $399.4 million compared with $391.1 million for the nine months ended September 30, 2023. The increase is broad-based, led by an increase of $10.5 million across multiple technologies within the Engineered Systems segment. Approximately 94% or $376.8 million, of net sales for the nine months ended September 30, 2024 is attributable to organic revenue.
Gross profit increased $2.2 million, or 5.1%, to $45.3 million in the three months ended September 30, 2024 compared with $43.1 million in the three months ended September 30, 2023. The increase in gross profit is primarily attributable to sales mix, project execution and flow through from higher booked margins, as well as continued benefits from sourcing and value engineering. Gross profit as a percentage of sales increased to 33.4% in the three months ended September 30, 2024 compared with 28.8% in the three months ended September 30, 2023.
Gross profit increased $21.7 million, or 18.4%, to $139.5 million in the nine months ended September 30, 2024 compared with $117.8 million in the nine months ended September 30, 2023. The increase in gross profit is primarily attributable to sales mix, project execution and flow through from higher booked margins, as well as continued benefits from sourcing and value engineering. Gross profit as a percentage of sales increased to 34.9% in the nine months ended September 30, 2024 compared with 30.1% in the nine months ended September 30, 2023.
Selling and administrative expenses were $34.3 million for the three months ended September 30, 2024 compared with $30.3 million for the three months ended September 30, 2023. The increase is primarily attributable to workforce merit and other annual compensation adjustments, and investments in functional support for sourcing and manufacturing benefits.
Selling and administrative expenses were $105.7 million for the nine months ended September 30, 2024 compared with $86.1 million for the nine months ended September 30, 2023. The increase is primarily attributable to workforce merit and other annual compensation adjustments, and investments in functional support for sourcing and manufacturing benefits.
Amortization and earnout expense was $2.6 million for the three months ended September 30, 2024, compared with $2.0 million for the three months ended September 30, 2023.
Amortization and earnout expense was $7.1 million for the nine months ended September 30, 2024 compared with $6.0 million for the nine months ended September 30, 2023. The increase in expense is attributable to an increase of $0.4 million in earnout expense and increases in definite lived asset amortization due to increased intangible assets attributable to current and prior year acquisitions.
Operating income decreased $0.7 million to $7.2 million for the three months ended September 30, 2024 compared with operating income of $7.9 million for the three months ended September 30, 2023. The decrease in operating income is primarily attributable to the increase in selling and administrative expenses, partially offset by the increased gross profit.
Operating income increased $2.2 million to $24.1 million for the nine months ended September 30, 2024 compared with operating income of $21.9 million for the nine months ended September 30, 2023. The increase in operating income is primarily attributable to the increase in net sales.
Non-GAAP operating income was $11.0 million for the three months ended September 30, 2024 compared with $12.8 million for the three months ended September 30, 2023. Non-GAAP operating income as a percentage of sales decreased to 8.1% for the three months ended September 30, 2024 from 8.6% for the three months ended September 30, 2023.
Non-GAAP operating income was $33.8 million for the nine months ended September 30, 2024 compared with $31.7 million for the nine months ended September 30, 2023. Non-GAAP operating income as a percentage of sales increased to 8.5% for the three months ended September 30, 2024 from 8.1% for the nine months ended September 30, 2023.
Interest expense decreased to $2.6 million in the three months ended September 30, 2024 compared with interest expense of $3.3 million for the three months ended September 30, 2023. The decrease in interest expense is primarily due to reduction of the debt balance.
Interest expense decreased to $9.3 million in the nine months ended September 30, 2024 compared with interest expense of $9.5 million for the nine months ended September 30, 2023. The decrease in interest expense is primarily due to reduction of the debt balance.
Income tax expense was $1.6 million for the three months ended September 30, 2024 compared with income tax expense of $0.6 million for the three months ended September 30, 2023. Income tax expense was $2.7 million for the nine months ended September 30, 2024 compared with income tax expense of $1.6 million for the nine months ended September 30, 2023. The effective income tax rate for the three months ended September 30, 2024 was 38.7% compared with 13.6% for the three months ended September 30, 2023. The effective income tax rate for the nine months ended September 30, 2024 was 21.8% compared with 13.4% for the nine months ended September 30, 2023. The effective income tax rates for the three and nine months ended September 30, 2024 differ from the United States federal statutory rate. Our effective tax rate is affected by certain other permanent differences, including state income taxes, non-deductible incentive stock-based compensation, and differences in tax rates among the jurisdictions in which we operate. Additionally, we received a tax indemnification payment of $0.5 million, related to a prior year acquisition, in the second quarter of 2024.
Business Segments
The Company’s operations are organized and reviewed by management along its product lines or end market that the segment serves and are presented in two reportable segments. The results of the segments are reviewed through “Income from operations” on the unaudited Condensed Consolidated Statements of Income.
Net Sales (less intra- and inter-segment sales)
Income from Operations
(1) Includes corporate compensation, professional services, information technology and other general and administrative corporate expenses.
Engineered Systems Segment
Our Engineered Systems segment orders booked increased $13.2 million, or 12.1%, to $122.1 million during the three months ended September 30, 2024 compared with $108.9 million in the three months ended September 30, 2023. The increase is primarily driven by power end market bookings at emissions management, partially offset by a decrease in bookings at acoustics technologies. Of the $122.1 million in orders booked during the three months ended September 30, 2024, $4.0 million is attributable to an acquisition that occurred during the preceding twelve month period.
Our Engineered Systems segment orders booked were $322.8 million during the nine months ended September 30, 2024 compared with $309.4 million in the nine months ended September 30, 2023. The increase is primarily attributable to growth in water and wastewater treatment technologies. Of the $322.8 million in orders booked during the nine months ended September 30, 2024, $22.0 million is attributable to acquisitions that occurred during the preceding twelve month period.
Our Engineered Systems segment net sales decreased $14.2 million to $91.3 million for the three months ended September 30, 2024 compared with $105.5 million for the three months ended September 30, 2023. The decrease is entirely attributable to the variability in timing of large order bookings. On a trailing twelve-month basis, Engineered Systems revenue has increased $49.8 million, or
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14.6%. Approximately 94%, or $85.8 million, of net sales for the three months ended September 30, 2024 is attributable to organic revenue.
Our Engineered Systems segment net sales increased $10.5 million to $278.0 million for the nine months ended September 30, 2024 compared with $267.5 million for the nine months ended September 30, 2023. The increase is led by growth in our separation, filtration, and industrial water technologies, partially offset by power end market revenue. Approximately 93%, or $257.9 million, of net sales for the nine months ended September 30, 2024 is attributable to organic revenue.
Operating income for the Engineered Systems segment is flat at $15.8 million for the three months ended September 30, 2024 compared with $15.8 million for the three months ended September 30, 2023. The increase is primarily attributable to increased net sales, partially offset by an increase in direct costs.
Operating income for the Engineered Systems segment increased $11.8 million to $51.4 million for the nine months ended September 30, 2024 compared with $39.6 million for the nine months ended September 30, 2023. The increase is primarily attributable to increased net sales, partially offset by an increase in direct costs.
Industrial Process Solutions Segment
Our Industrial Process Solutions segment orders booked increased $3.6 million, or 9.8%, to $40.1 million during the three months ended September 30, 2024 compared with $36.5 million in the three months ended September 30, 2023. The increase is wholly driven by an increase in our industrial ducting business. Of the $40.1 million in orders booked during the three months ended September 30, 2024, $0.6 million is attributable to an acquisition that occurred during the preceding twelve month period.
Our Industrial Process Solutions segment orders booked decreased $19.4 million, or 13.4%, to $125.6 million during the nine months ended September 30, 2024 compared with $145.0 million in the nine months ended September 30, 2023. The decrease is primarily related to two unique industrial air bookings from the first half of 2023 that were not expected to repeat. Of the $125.6 million in orders booked during the nine months ended September 30, 2024, $0.6 million is attributable to an acquisition that occurred during the preceding twelve month period.
Our Industrial Process Solutions segment net sales were $44.2 million for the three months ended September 30, 2024 compared with $43.9 million for the three months ended September 30, 2023. Approximately 95%, or $41.8 million, of net sales for the three months ended September 30, 2024 is attributable to organic revenue.
Our Industrial Process Solutions segment net sales were $121.3 million for the nine months ended September 30, 2024 compared with $123.6 million for the nine months ended September 30, 2023. Approximately 98%, or $118.9 million, of net sales for the nine months ended September 30, 2024 is attributable to organic revenue.
Operating income for the Industrial Process Solutions segment increased $2.5 million to $8.1 million for the three months ended September 30, 2024 compared with $5.6 million for the three months ended September 30, 2023. The increase is primarily attributable to a decrease in direct costs, partially offset by a decrease in net sales.
Operating income for the Industrial Process Solutions segment increased $5.0 million to $20.8 million for the nine months ended September 30, 2024 compared with $15.8 million for the nine months ended September 30, 2023. The increase is primarily attributable to increased sales, partially offset by an increase in direct costs.
Corporate and Other Segment
Operating expense for the Corporate and Other segment increased $3.2 million to $16.7 million for the three months ended September 30, 2024 compared with $13.5 million for the three months ended September 30, 2023. The increase is primarily attributable to investments made to support growth inclusive of acquisition and integration expenses, and inflationary increases for wages and services.
Operating expense for the Corporate and Other segment increased $14.6 million to $48.1 million for the nine months ended September 30, 2024 compared with $33.5 million for the nine months ended September 30, 2023. The increase is primarily attributable to investments made to support growth inclusive of acquisition and integration expenses, and inflationary increases for wages and services.
Backlog
Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. Backlog increased to $437.5 million as of September 30, 2024 from $370.9 million as of December 31, 2023. Our customers may have the right to cancel a given order. Historically, cancellations have not been common. Backlog is adjusted on a quarterly basis for adjustments in foreign currency exchange rates. Substantially all backlog is expected to be delivered within 12 to 18 months. Backlog is not defined by GAAP and our methodology for calculating backlog may not be consistent with methodologies used by other companies.
New Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 2 to the unaudited condensed consolidated financial statements within Item 1 of this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
When we undertake large jobs, our working capital objective is to make these projects self-funding. We work to achieve this by obtaining customer down payments, progress billing contracts, when possible, utilizing extended payment terms from material suppliers, and paying sub-contractors after payment from our customers, which is an industry practice. Our investment in net working capital is funded by cash flow from operations and by our revolving line of credit under our Credit Facility (as defined below).
At September 30, 2024, the Company had working capital of $63.1 million, compared with $78.3 million at December 31, 2023. The ratio of current assets to current liabilities was 1.30 to 1.00 on September 30, 2024, as compared with a ratio of 1.39 to 1.00 on December 31, 2023. The decrease in the ratio was driven by timing of cash receipts and payments to suppliers.
At September 30, 2024 and December 31, 2023, cash and cash equivalents totaled $38.7 million and $54.8 million, respectively. As of September 30, 2024 and December 31, 2023, $25.3 million and $38.5 million, respectively, of our cash and cash equivalents were held by certain non-United States subsidiaries, as well as being denominated in foreign currencies.
Debt consisted of the following:
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 September 30, 2024 and December 31, 2023, the Company was in compliance with all related financial and other restrictive covenants under the Credit Facility.
See Note 8 to the unaudited condensed consolidated financial statements within Item 1 of this Quarterly Report on Form 10-Q for further information on the Company’s debt facilities.
Total unused credit availability under our existing Credit Facility is as follows:
(in millions)
Credit Facility, revolving loans
140.0
Draw down
(20.9
(17.3
Letters of credit open
(13.8
(13.3
Total unused credit availability
105.3
109.4
Amount available based on borrowing limitations
82.7
99.8
Overview of Cash Flows and Liquidity
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash
Operating Activities
For the nine months ended September 30, 2024, $23.0 million of cash was provided by operating activities compared with $29.5 million provided by operations in the prior year period, representing $6.5 million decline in cash generated. Cash flow from operating activities in the first nine months of 2024 decreased year-over-year primarily due to timing of costs and billings on uncompleted contracts and payments of prepaid expenses, partially offset by decreases in accounts receivable.
Investing Activities
For the nine months ended September 30, 2024, net cash used in investing activities was $26.2 million compared with $53.6 million used in investing activities in the prior year period. For the nine months ended September 30, 2024, the $26.2 million cash used in investing activities was primarily the result of $15.0 million used for acquisitions as described in Note 15 and $11.2 million for acquisitions of property and equipment. In the prior year period, the $53.6 million cash used in investing activities was the result of $48.1 million used for acquisitions as described in Note 15 and $5.5 million for the acquisition of property and equipment.
Financing Activities
For the nine months ended September 30, 2024, $14.5 million was used in financing activities compared with $25.2 million provided by financing activities in the prior year period, for a decrease of $10.7 million. For the nine months ended September 30, 2024, the primary uses of cash for financing activities were $7.8 million to repay long-term debt, $5.0 million to repurchase common stock, $2.1 million of deferred consideration paid for acquisitions, $1.7 million for earnout payments and $1.7 million on distributions to the noncontrolling interest, partially offset by net borrowings on the Company's revolving credit lines of $3.6 million. In the prior year period, the Company used $31.0 million for net borrowings on the Company’s revolving credit lines, primarily used to finance acquisitions, $2.5 million in repayment on long-term debt, $1.2 million on deferred payments for acquisitions, and $1.4 million on distributions to the noncontrolling interest. The Company also received $1.4 million of proceeds from the exercise of stock options and the employee stock purchase plan.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s condensed consolidated financial statements. The preparation of these financial statements requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include revenue recognition, the valuation of trade receivables, inventories, goodwill, intangible assets, other long-lived assets, legal contingencies, guarantee obligations and assumptions used in the calculation of income taxes, assumptions used in business combination accounting and related balances, and pension and post-retirement benefits, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. Management monitors economic conditions and other factors and will adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.
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Management believes there have been no changes during the nine months ended September 30, 2024 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, 2023.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, which are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Any statements contained in this Quarterly Report on Form 10-Q, other than statements of historical fact, including statements about management’s beliefs and expectations, are forward-looking statements and should be evaluated as such. These statements are made on the basis of management’s views and assumptions regarding future events and business performance. We use words such as “believe,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” “will,” “plan,” “should” and similar expressions to identify forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Potential risks and uncertainties, among others, that could cause actual results to differ materially are discussed under “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, and include, but are not limited to:
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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 any 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 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.
The carrying value of the Company’s total long-term debt and current maturities of long-term debt at September 30, 2024 was $134.3 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 September 30, 2024. Most of the interest on the Company’s debt is indexed to SOFR market rates. The estimated annual impact of a hypothetical 10% change in the estimated weighted average borrowing rate at September 30, 2024 is $1.0 million.
The Company has wholly-owned subsidiaries in several countries, including in the Netherlands, Canada, the People’s Republic of China, Mexico, United Kingdom, Singapore, India, United Arab Emirates and 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 expense, net” line of the Condensed Consolidated Statements of Income were $0.3 million and $(0.6) million for the three months ended September 30, 2024 and 2023, respectively, and $1.9 million and $0.2 million for the nine months ended September 30, 2024 and 2023, 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 submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 30, 2024.
Management believes that the condensed consolidated financial statements included in this report present fairly, in all material respects, the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report in conformity with accounting principles generally accepted in the United States of America.
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 quarter ended September 30, 2024 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.
32
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 14 to the unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding legal proceedings in which the Company is involved.
ITEM 1A. RISK FACTORS
There have been no material changes in the Company’s risk factors that were disclosed in “Part I – Item 1A. Risk Factors” of the Company's Annual Report on Form 10-K for the year ended December 31, 2023.
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 September 30, 2024:
Issuer's Purchases of Equity Securities
(in thousands, except per share data)Period
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
July 1, 2024 - July 31, 2024
8,000
August 1, 2024 - August 31, 2024
September 1, 2024 - September 30, 2024
Total
(1) On May 10, 2022, the Board of Directors authorized a $20.0 million share repurchase program as described within Note 9 to the unaudited Condensed Consolidated Financial Statements. The program expires on April 30, 2025.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
(c)
Rule 10b5-1 Trading Plans
During the three months ended September 30, 2024, no director or Section 16 officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement,” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
ITEM 6. EXHIBITS
3.1
Certificate of Amendment to the Certificate of Incorporation of CECO Environmental Corp. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 22, 2024)
Third Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on October 11, 2024)
31.1
Rule 13(a)/15d-14(a) Certification by Chief Executive Officer
31.2
Rule 13(a)/15d-14(a) Certification by Chief Financial Officer
32.1
Certification of Chief Executive Officer (18 U.S. Section 1350)
32.2
Certification of Chief Financial Officer (18 U.S. Section 1350)
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document with Embedded Linkbase Documents
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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/ Kiril Kovachev
Kiril Kovachev
Chief Accounting Officer
(principal accounting officer and duly authorized officer)
Date: October 29, 2024