ITEM 1.FINANCIAL STATEMENTS
The notes to the condensed consolidated financial statements are an integral part of the above statements.
The notes to the condensed consolidated financial statements are an integral part of the above statements.
The notes to the condensed consolidated financial statements are an integral part of the above statements.
The notes to the condensed consolidated financial statements are an integral part of the above statements.
The notes to the condensed consolidated financial statements are an integral part of the above statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
|
Basis of Reporting for Consolidated Financial Statements
|
The accompanying unaudited condensed consolidated financial statements of CECO Environmental Corp. and its subsidiaries (the “Company”, “we”, “us”, or “our”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2020 and the results of operations, cash flows and shareholders’ equity for the three-month and nine-month periods ended September 30, 2020 and 2019. The results of operations for the three-month and nine-month periods ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year. The balance sheet as of December 31, 2019 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, 2019 (the “2019 Form 10-K”) as filed with the SEC.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
These financial statements and accompanying notes should be read in conjunction with the audited financial statements and the notes thereto included in the 2019 Form 10-K.
Unless otherwise indicated, all balances within tables are in thousands, except per share amounts.
COVID-19
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. As of September 30, 2020, the virus continues to spread and has had a significant impact on worldwide economic activity and on macroeconomic conditions and the end markets of our business. No vaccine is currently available. The Company has instituted some and may take additional temporary precautionary measures to comply with government directives and guidelines and minimize business disruption.
The outbreak and a continued spread of COVID-19 has resulted in a substantial curtailment of business activities worldwide and has caused weakened economic conditions, both in the United States and abroad. COVID-19 has had, and may continue to have, a negative impact on the Company's ongoing operations and the end markets in which it serves. However, the full impact of the COVID-19 pandemic continues to evolve as of the date of this filing, and as such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the pandemic on its financial condition, liquidity, operations, suppliers, industry, and workforce.
7
2.
|
New Financial Accounting Pronouncements
|
Accounting Standards Yet to be Adopted
In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans,” that makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The new guidance eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new ones that the FASB considers pertinent. ASU 2018-14 is effective for the Company January 1, 2021. The Company is evaluating the impact of the adoption of ASU 2018-14 on its consolidated financial statements.
3. Accounts Receivable
(table only in thousands)
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Contract receivables
|
|
$
|
49,826
|
|
|
$
|
58,881
|
|
Trade receivables
|
|
|
11,409
|
|
|
|
12,135
|
|
Allowance for doubtful accounts
|
|
|
(2,961
|
)
|
|
|
(2,582
|
)
|
Total accounts receivable
|
|
$
|
58,274
|
|
|
$
|
68,434
|
|
Balances billed but not paid by customers under retainage provisions in contracts within the Condensed Consolidated Balance Sheets amounted to approximately $1.4 million and $0.9 million at September 30, 2020 and December 31, 2019, respectively. Retainage receivables on contracts in progress are generally collected within a year after contract completion.
Bad debt expense was approximately $0.1 million and $0.3 million for the three-month periods ended September 30, 2020 and 2019, respectively, and $0.6 million and $0.7 million for the nine-month periods ended September 30, 2020 and 2019, respectively.
(table only in thousands)
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Raw materials
|
|
$
|
14,544
|
|
|
$
|
15,218
|
|
Work in process
|
|
|
6,688
|
|
|
|
7,328
|
|
Finished goods
|
|
|
437
|
|
|
|
654
|
|
Obsolescence allowance
|
|
|
(3,119
|
)
|
|
|
(2,622
|
)
|
Total inventories
|
|
$
|
18,550
|
|
|
$
|
20,578
|
|
Amounts credited to the allowance for obsolete inventory and charged to cost of sales amounted to $0.2 million and $0.1 million for the three-month periods ended September 30, 2020 and 2019, respectively and $0.5 million for the nine-month periods ended September 30, 2020 and 2019.
5.
|
Goodwill and Intangible Assets
|
(table only in thousands)
|
|
Nine months ended September 30, 2020
|
|
|
Year ended December 31, 2019
|
|
Goodwill / Tradename
|
|
Goodwill
|
|
|
Tradename
|
|
|
Goodwill
|
|
|
Tradename
|
|
Beginning balance
|
|
$
|
152,020
|
|
|
$
|
14,291
|
|
|
$
|
152,156
|
|
|
$
|
18,258
|
|
Transfers to finite life classification
|
|
|
—
|
|
|
|
(700
|
)
|
|
|
—
|
|
|
|
(3,904
|
)
|
Acquisitions
|
|
|
9,017
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Foreign currency translation
|
|
|
315
|
|
|
|
103
|
|
|
|
(136
|
)
|
|
|
(63
|
)
|
|
|
$
|
161,352
|
|
|
$
|
13,694
|
|
|
$
|
152,020
|
|
|
$
|
14,291
|
|
8
(table only in thousands)
|
|
As of September 30, 2020
|
|
|
As of December 31, 2019
|
|
Intangible assets – finite life
|
|
Cost
|
|
|
Accum. Amort.
|
|
|
Cost
|
|
|
Accum. Amort.
|
|
Technology
|
|
$
|
14,457
|
|
|
$
|
12,425
|
|
|
$
|
14,457
|
|
|
$
|
10,686
|
|
Customer lists
|
|
|
73,199
|
|
|
|
47,754
|
|
|
|
68,943
|
|
|
|
44,484
|
|
Tradename
|
|
|
6,578
|
|
|
|
1,582
|
|
|
|
5,294
|
|
|
|
1,154
|
|
Foreign currency adjustments
|
|
|
(2,388
|
)
|
|
|
(1,392
|
)
|
|
|
(1,869
|
)
|
|
|
(782
|
)
|
|
|
$
|
91,846
|
|
|
$
|
60,369
|
|
|
$
|
86,825
|
|
|
$
|
55,542
|
|
Activity for the nine-months ended September 30, 2020 and 2019 is as follows:
(table only in thousands)
|
|
2020
|
|
|
2019
|
|
Intangible assets – finite life, net at beginning of period
|
|
$
|
31,283
|
|
|
$
|
35,959
|
|
Amortization expense
|
|
|
(5,448
|
)
|
|
|
(6,479
|
)
|
Transfers from indefinite life classification
|
|
|
700
|
|
|
|
3,904
|
|
Acquisition
|
|
|
4,840
|
|
|
|
—
|
|
Foreign currency adjustments
|
|
|
102
|
|
|
|
(132
|
)
|
Intangible assets – finite life, net at end of period
|
|
$
|
31,477
|
|
|
$
|
33,252
|
|
Amortization expense of finite life intangible assets was $1.9 million and $2.2 million for the three-month periods ended September 30, 2020 and 2019, respectively and $5.4 million and $6.5 million for the nine-month periods ended September 30, 2020 and 2019, respectively. Amortization over the next five years for finite life intangibles is expected to be $2.0 million for the remainder of 2020, $6.4 million in 2021, $5.5 million in 2022, $4.6 million in 2023, and $3.9 million in 2024.
During the nine-month periods ended September 30, 2020 and 2019, the Company reassessed the useful lives of certain tradenames and determined that $0.7 million and $3.9 million, respectively of their tradenames would have useful lives of 10 years now versus indefinite.
The Company completes an annual (or more often if circumstances require) goodwill and indefinite life intangible asset impairment assessment on October 1. As a part of its impairment assessment, the Company first qualitatively assesses whether current events or changes in circumstances lead to a determination that it is more likely than not (defined as a likelihood of more than 50 percent) that the fair value of a reporting unit or indefinite life intangible asset is less than its carrying amount. If there is a qualitative determination that the fair value is more likely than not greater than carrying value, the Company does not need to quantitatively test for impairment. If this qualitative assessment indicates a more likely than not potential that the asset may be impaired, the estimated fair value is calculated. If the estimated fair value is less than carrying value, an impairment charge is recorded.
In 2019, we performed a quantitative assessment and concluded each of our reporting units and indefinite life intangible assets had excess fair value over their carrying value. We determined negative macroeconomic factors resulting from the COVID-19 pandemic constituted a triggering event as of March 31, 2020 and based on a qualitative assessment determined that our goodwill and indefinite life intangible assets were not impaired. The Company did not identify any triggering events during either of the three month periods ended June 30, 2020 and September 30, 2020 that would require an interim impairment assessment of goodwill or intangible assets. The Company’s assumptions about future conditions important to its assessment of potential impairment of its goodwill and indefinite life intangible assets, including the impacts of the COVID-19 pandemic, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.
6.
|
Accounts Payable and Accrued Expenses
|
(table only in thousands)
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Trade accounts payable, including amounts due to subcontractors
|
|
$
|
54,994
|
|
|
$
|
48,762
|
|
Compensation and related benefits
|
|
|
5,472
|
|
|
|
5,712
|
|
Accrued warranty
|
|
|
4,463
|
|
|
|
4,664
|
|
Contract liabilities
|
|
|
4,937
|
|
|
|
5,666
|
|
Short-term lease liability
|
|
|
2,471
|
|
|
|
2,610
|
|
Other
|
|
|
10,213
|
|
|
|
10,905
|
|
Total accounts payable and accrued expenses
|
|
$
|
82,550
|
|
|
$
|
78,319
|
|
9
Debt consisted of the following:
(table only in thousands)
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Outstanding borrowings under the Credit Facility (defined below).
Term loan payable in quarterly principal installments of $0.6 million
through June 2021, $0.9 million through June 2023, and $1.3 million
thereafter with balance due upon maturity in June 2024.
|
|
|
|
|
|
|
|
|
- Term loan
|
|
$
|
46,875
|
|
|
$
|
48,750
|
|
- Revolving Credit Loan
|
|
|
31,000
|
|
|
|
18,500
|
|
- Unamortized debt discount
|
|
|
(1,437
|
)
|
|
|
(1,749
|
)
|
Total outstanding borrowings under the Credit Facility
|
|
|
76,438
|
|
|
|
65,501
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(2,812
|
)
|
|
|
(2,500
|
)
|
Total debt, less current portion
|
|
$
|
73,626
|
|
|
$
|
63,001
|
|
Scheduled principal payments under our Credit Facility are $0.6 million remaining in 2020, $3.1 million in 2021, $3.7 million in 2022, $4.4 million in 2023, and $66.1 million in 2024.
United States Debt
As of September 30, 2020 and December 31, 2019, $6.9 million and $11.0 million of letters of credit were outstanding, respectively. Total unused credit availability under the Company’s senior secured term loan and senior secured revolver loan with sub-facilities for letters of credit, swing-line loans and senior secured multi-currency loans (collectively, the “Credit Facility”) was $75.8 million and $82.3 million at September 30, 2020 and December 31, 2019, respectively. Revolving loans may be borrowed, repaid and reborrowed until June 11, 2024, at which time all outstanding balances of the Credit Facility must be repaid.
The weighted average stated interest rate on outstanding borrowings was 2.31% and 3.80% at September 30, 2020 and December 31, 2019, respectively.
Under the terms of the Credit Facility, the Company is required to maintain certain financial covenants, including the maintenance of a Consolidated Net Leverage Ratio. Through September 30, 2020, the maximum Consolidated Net Leverage Ratio is 3.75, after which time it will decrease to 3.50 through September 30, 2021. The Consolidated Net Leverage Ratio will then decrease to 3.25 until the end of the term of the Credit Facility.
As of September 30, 2020 and December 31, 2019, the Company was in compliance with all related financial and other restrictive covenants under the Credit Facility.
Foreign Debt
The Company has a number of bank guarantee facilities and bilateral lines in various countries currently supported by cash, letters of credit or pledged assets and collateral under the Credit Facility. The Credit Facility allows letters of credit and bank guarantee issuances of up to $50.0 million from the bilateral lines secured by pledged assets and collateral under the Credit Facility. As of September 30, 2020, $18.0 million in bank guarantees were outstanding. In addition, a subsidiary of the Company located in the Netherlands has a Euro-denominated bank guarantee agreement secured by local assets under which $3.1 million in bank guarantees were outstanding as of September 30, 2020. As of September 30, 2020, the borrowers of these facilities and agreements were in compliance with all related financial and other restrictive covenants.
10
The computational components of basic and diluted earnings per share for the three-month periods ended September 30, are below.
|
|
2020
|
|
|
2019
|
|
(table only in thousands)
Numerator (for basic and diluted earnings per share)
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(239
|
)
|
|
$
|
1,931
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
|
35,359
|
|
|
|
35,070
|
|
Common stock equivalents arising from stock options and restricted stock awards
|
|
|
—
|
|
|
|
555
|
|
Diluted weighted-average shares outstanding
|
|
|
35,359
|
|
|
|
35,625
|
|
The computational components of basic and diluted earnings per share for the nine-month periods ended September 30, are below.
|
|
2020
|
|
|
2019
|
|
(table only in thousands)
Numerator (for basic and diluted earnings per share)
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,431
|
|
|
$
|
9,310
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
|
35,264
|
|
|
|
34,944
|
|
Common stock equivalents arising from stock options and restricted stock awards
|
|
|
208
|
|
|
|
579
|
|
Diluted weighted-average shares outstanding
|
|
|
35,472
|
|
|
|
35,523
|
|
Options and restricted stock units included in the computation of diluted earnings per share are calculated using the treasury stock method. For the three-month periods ended September 30, 2020 and 2019, zero and 0.4 million, respectively, and during each of the nine-month periods ended September 30, 2020 and 2019, 0.9 million and 0.5 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.
9.
|
Share-Based Compensation
|
The Company accounts for share-based compensation in accordance with Accounting Standards Codification (“ASC”) Topic 718, “Compensation – Stock Compensation,” which requires the Company to recognize compensation expense for share-based awards, measured at the fair value of the awards at the grant date. The Company recognized $0.5 million and $1.0 million of share-based compensation related expense during the three-month periods ended September 30, 2020 and 2019, respectively, and $1.2 million and $2.8 million during the nine-month periods ended September 30, 2020 and 2019, respectively.
The Company granted approximately 1.2 million options during the three and nine month periods ended September 30, 2020 and zero options during the three and nine-month periods ended September 30, 2019.
The weighted-average fair value of stock options granted during the three and nine months ended September 30, 2020 was estimated at $1.98 per option, using the Black-Scholes option-pricing model based on the following assumptions:
Expected Volatility: The Company utilizes a volatility factor based on the Company’s historical stock prices for a period of time equal to the expected term of the stock option utilizing weekly price observations. For the three and nine months ended September 30, 2020, the Company utilized a weighted-average volatility factor of 52.5%.
Expected Term: For the three and nine months ended September 30, 2020, the Company utilized a weighted-average expected term factor of 5.0 years.
11
Risk-Free Interest Rate: The risk-free interest rate factor utilized is based upon the implied yields currently available on U.S. Treasury zero-coupon issues over the expected term of the stock options. For the three and nine months ended September 30, 2020, the Company utilized a weighted-average risk-free interest rate factor of 0.3%.
The Company granted approximately 144,000 and zero restricted stock units during the three-month periods ended September 30, 2020 and 2019, respectively, and approximately 648,000 and 464,000 restricted stock units during the nine-month periods ended September 30, 2020 and 2019, respectively. The weighted-average fair value of restricted stock units granted was estimated at $6.35 and $7.49 per unit during the nine-months ended September 30, 2020 and 2019, respectively. The fair value of time-based and 2019 performance-based restricted stock units was determined by using the value of stock in the open market on the date of grant. The fair value of 2020 performance-based restricted stock units was determined by using the Monte Carlo valuation model.
The fair value of the stock-based awards granted is recorded as compensation expense on a straight-line basis over the vesting periods of the awards.
There were zero and approximately 1,000 options exercised during the nine-months ended September 30, 2020 and 2019, respectively. The amount the Company received from employees exercising options and the intrinsic value of options exercised during the nine-months ended September 30, 2020 and 2019 was nominal.
10.
|
Pension and Employee Benefit Plans
|
We sponsor a non-contributory defined benefit pension plan for certain union employees. The plan is funded in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974.
We also sponsor a postretirement health care plan for office employees retired before January 1, 1990. The plan allowed retirees who attained the age of 65 to elect the type of coverage desired.
We present the components of net periodic benefit cost (gain) within “Other income” on the Condensed Consolidated Statements of Operations.
Retirement and health care plan expense is based on valuations performed by plan actuaries as of the beginning of each fiscal year. The components of the expense consisted of the following:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(table only in thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
259
|
|
|
$
|
326
|
|
|
$
|
775
|
|
|
$
|
977
|
|
Expected return on plan assets
|
|
|
(443
|
)
|
|
|
(313
|
)
|
|
|
(1,151
|
)
|
|
|
(940
|
)
|
Amortization of net actuarial loss
|
|
|
67
|
|
|
|
65
|
|
|
|
199
|
|
|
|
198
|
|
Net periodic benefit (gain) cost
|
|
$
|
(117
|
)
|
|
$
|
78
|
|
|
$
|
(177
|
)
|
|
$
|
235
|
|
Health care plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Amortization of loss
|
|
|
2
|
|
|
|
2
|
|
|
|
6
|
|
|
|
6
|
|
Net periodic benefit cost
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
8
|
|
|
$
|
8
|
|
We made contributions to our defined benefit plans of approximately $0.1 million and $0.4 million during the nine-months ended September 30, 2020 and 2019, respectively. For the remainder of 2020, we expect to make contributions totaling $1.8 million. The unfunded liability of the plans of $8.6 million and $8.9 million as of September 30, 2020 and December 31, 2019, respectively, is included in “Other liabilities” on our Condensed Consolidated Balance Sheets.
We file income tax returns in various federal, state and local jurisdictions. Tax years from 2016 forward remain open for examination by federal authorities. Tax years from 2014 forward remain open for all significant state and foreign authorities.
We account for uncertain tax positions pursuant to ASC Topic 740, “Income Taxes.” As of September 30, 2020 and December 31, 2019, the liability for uncertain tax positions totaled approximately $0.1 million and $0.3 million, respectively, which is included in “Other liabilities” on our Condensed Consolidated Balance Sheets. We recognize accrued interest related to
12
uncertain tax positions and penalties, if any, in income tax expense within the Condensed Consolidated Statements of Operations.
Certain of the Company’s undistributed earnings of our foreign subsidiaries are not permanently reinvested. Since foreign earnings have already been subject to United States income tax in 2017 as a result of the 2017 Tax Cuts and Jobs Act, we intend to repatriate foreign-held cash as needed. We record deferred income tax attributable to foreign withholding taxes that would become payable should we decide to repatriate cash held in our foreign operations. As of September 30, 2020, and December 31, 2019, we have recorded deferred income taxes of approximately $0.5 million and $0.7 million, respectively, on the undistributed earnings of our foreign subsidiaries. A significant portion of the previously undistributed earnings to which the deferred income taxes were attributable were repatriated in 2019.
Income tax expense was $0.2 million for the third quarter of 2020 and $1.5 million for the first nine months of 2020 compared with income tax expense (benefit) of $0.7 million for the third quarter of 2019 and $(2.6) million for the first nine months of 2019. The effective income tax rate for the third quarter of 2020 was (468.2)% compared with 27.7% for the third quarter of 2019. The effective income tax rate for the first nine months of 2020 was 19.4% compared with (38.1%) for the first nine months of 2019. Our effective tax rate is affected by certain other permanent differences, including state income taxes, non-deductible incentive stock-based compensation, the Global Intangible Low-Taxed Income inclusion and Foreign-Derived Intangible Income deduction, tax credits, and differences in tax rates among the jurisdictions in which we operate. The effective income tax rate for the nine months ended September 30, 2019 was negative (i.e. income tax benefits), despite pre-tax income, due primarily to a tax benefit of $4.4 million from a tax position related to the 2018 divesture of Jiangyin Zhongli Industrial Technology Co. Ltd.
12.
|
Financial Instruments
|
Our financial instruments consist primarily of investments in cash and cash equivalents, receivables and certain other assets, foreign debt and accounts payable, which approximate fair value at September 30, 2020 and December 31, 2019, due to their short-term nature or variable, market-driven interest rates.
The fair value of the debt issued under the Credit Facility was $77.9 million and $69.4 million at September 30, 2020 and December 31, 2019, respectively.
At September 30, 2020 and December 31, 2019, the Company had cash and cash equivalents of $44.5 million and $35.6 million, respectively, of which $34.1 million and $27.0 million, respectively, was held outside of the United States, principally in the Netherlands, United Kingdom, China, and Canada.
13.
|
Commitments and Contingencies – Legal Matters
|
Asbestos cases
Our subsidiary, Met-Pro Technologies LLC (“Met-Pro”), beginning in 2002, began to be named in asbestos-related lawsuits filed against a large number of industrial companies including, in particular, those in the pump and fluid handling industries. In management’s opinion, the complaints typically have been vague, general and speculative, alleging that Met-Pro, along with the numerous other defendants, sold unidentified asbestos-containing products and engaged in other related actions which caused injuries (including death) and loss to the plaintiffs. Counsel has advised that more recent cases typically allege more serious claims of mesothelioma. The Company’s insurers have hired attorneys who, together with the Company, are vigorously defending these cases. Many cases have been dismissed after the plaintiff fails to produce evidence of exposure to Met-Pro’s products. In those cases, where evidence has been produced, the Company’s experience has been that the exposure levels are low and the Company’s position has been that its products were not a cause of death, injury or loss. The Company has been dismissed from or settled a large number of these cases. Cumulative settlement payments from 2002 through September 30, 2020 for cases involving asbestos-related claims were $3.1 million, of which, together with all legal fees other than corporate counsel expenses, $2.9 million has been paid by the Company’s insurers. The average cost per settled claim, excluding legal fees, was approximately $34,000.
Based upon the most recent information available to the Company regarding such claims, there were a total of 201 cases pending against the Company as of September 30, 2020 (with Illinois, New York, Pennsylvania and West Virginia having the largest number of cases), as compared with 209 cases that were pending as of December 31, 2019. During the nine-months ended September 30, 2020, 61 new cases were filed against the Company, and the Company was dismissed from 65 cases and settled four 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
13
filed against it, nor as to the financial health of its insurers or their position as to coverage. The Company also presently believes that none of the pending cases will have a material adverse impact upon the Company’s results of operations, liquidity or financial condition.
Other
The Company is also a party to routine contract and employment-related litigation matters, warranty claims and routine audits of state and local tax returns arising in the ordinary course of its business.
The final outcome and impact of open matters, and related claims and investigations that may be brought in the future, are subject to many variables, and cannot be predicted. In accordance with ASC 450, “Contingencies”, and related guidance, we record accruals for estimated losses relating to claims and lawsuits when available information indicates that a loss is probable and the amount of the loss, or range of loss, can be reasonably estimated. The Company expenses legal costs as they are incurred.
We are not aware of any pending claims or assessments, other than as described above, which may have a material adverse impact on our liquidity, financial position, results of operations, or cash flows.
14. Acquisitions and Joint Ventures
Environmental Integrated Solutions
On June 4, 2020, the Company acquired 100% of the equity interests of Environmental Integrated Solutions (“EIS”) for $10.3 million in cash, which was financed with an additional draw on our revolving credit facility. As additional consideration, the former owners are entitled to earn-out payments based upon a multiple of specified financial results through December 31, 2021. Based on projections at the acquisition date, the Company estimated the fair value of the earn-out to be $0.6 million; the earn-out liability is recorded in “Accounts payable and accrued expenses” on the Condensed Consolidated Balance Sheets.
EIS engineers products that clean air through a variety of technologies including volatile organic compounds (“VOC”) abatement, odor control, regenerative thermal oxidizers, and other air pollution control solutions, which complements our Industrial Solutions Segment businesses. The following table summarizes the approximate fair values of the assets acquired and liabilities assumed at the date of closing.
(table only in thousands)
|
|
|
|
|
Current assets (including cash of $4,212)
|
|
$
|
6,416
|
|
Property and equipment
|
|
|
26
|
|
Other assets
|
|
|
44
|
|
Goodwill
|
|
|
7,022
|
|
Intangible - finite life
|
|
|
4,840
|
|
Total assets acquired
|
|
|
18,348
|
|
Current liabilities assumed
|
|
|
(6,514
|
)
|
Deferred income tax liability
|
|
|
(920
|
)
|
Net assets acquired
|
|
$
|
10,914
|
|
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.
The Company acquired customer lists and tradename intangible assets valued at $4.2 million and $0.6 million, respectively. These assets were determined to have useful lives of 10 years.
Acquisition and integration expenses on the Condensed Consolidated Statements of Operations are related to acquisition activities, which include retention, legal, accounting, banking, and other expenses. For the three and nine months ended September 30, 2020, EIS accounted for $5.3 and $5.8 million in revenue, respectively and $0.4 million and $0.6 million of net income included in the Company’s results, respectively.
14
Mader
On July 31, 2020, the Company entered into a joint venture agreement (“JV Agreement”) with Mader Holdings L.P. (“Mader”) in which CECO contributed the net assets of its Effox-Flextor damper business and Mader contributed the net assets of their damper business. Under the terms of the JV Agreement, CECO will hold 70% of the equity in the joint venture, and 50% voting interest. We determined CECO was the primary beneficiary of this variable interest entity and therefore the 30% noncontrolling equity interest is in the Condensed Consolidated Balance Sheet. The results of the joint venture are included in our Energy Segment. The fair value of Mader’s net assets contributed was $1.0 million. As of September 30, 2020, there were $6.2 million in current assets, $8.7 million in long-lived assets, and $7.3 million in total liabilities related to the Effox-Mader joint venture included in our Condensed Consolidated Balance Sheets.
The following table summarizes the approximate fair values of the assets acquired and liabilities assumed at the JV agreement date.
(table only in thousands)
|
|
|
|
|
Current assets (including cash of $229)
|
|
$
|
2,040
|
|
Property and equipment
|
|
|
103
|
|
Goodwill
|
|
|
2,000
|
|
Deferred income tax asset
|
|
|
287
|
|
Total assets assumed
|
|
|
4,430
|
|
Current liabilities assumed
|
|
|
(430
|
)
|
Other liabilities
|
|
|
(500
|
)
|
Long term debt
|
|
|
(2,508
|
)
|
Fair value of 30% noncontrolling equity interest in Mader
|
|
$
|
992
|
|
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 joint venture is not deductible for tax purposes.
The approximate fair values of the assets acquired and liabilities assumed related to the above acquisition and joint venture are based on preliminary estimates and assumptions. These preliminary estimates and assumptions could change significantly during the purchase price measurement period as we finalize the valuations of the assets acquired and liabilities assumed. Such changes could result in material variances between the Company’s future financial results, including variances in the estimated purchase price, fair values recorded and expenses associated with these items.
The following unaudited pro forma financial information represents the Company’s results of operations as if the EIS acquisition and the joint venture with Mader had occurred on January 1, 2019:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(table in thousands, except per share data)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net Sales
|
|
$
|
77,943
|
|
|
$
|
91,099
|
|
|
$
|
246,550
|
|
|
$
|
269,982
|
|
Net (loss) income attributable to CECO Environmental Corp.
|
|
|
(222
|
)
|
|
|
2,468
|
|
|
|
7,975
|
|
|
|
10,788
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.07
|
|
|
$
|
0.23
|
|
|
$
|
0.31
|
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.07
|
|
|
$
|
0.22
|
|
|
$
|
0.30
|
|
The pro forma results have been prepared for informational purposes only and include adjustments to amortize acquired intangible assets with finite life, reflect additional interest expense on debt used to fund the acquisition, and to record the income tax consequences of the pro forma adjustments. These pro forma results do not purport to be indicative of the results of operations that would have occurred had the purchase been made as of the beginning of the periods presented or of the results of operations that may occur in the future.
15.
|
Business Segment Information
|
The Company’s operations are organized and reviewed by management along its product lines or end market that the segment serves and are presented in three reportable segments. The results of the segments are reviewed through the “Income from operations” line on the Condensed Consolidated Statements of Operations.
15
The Company’s reportable segments are organized as groups of similar products and services, as described as follows:
Energy Solutions segment: Our Energy Solutions segment serves the Energy market, where we are a key part of helping meet the global demand for Clean Energy through our highly engineered and tailored emissions management, silencers and separation solutions and services. Our offerings improve air quality and solves fluid handling needs with market leading technologies, efficiently designed, and customized solutions for the power generation, oil & gas, and petrochemical industries.
Industrial Solutions segment: Our Industrial Solutions segment serves the Air Pollution Control market where our aim is to address the growing need to protect the air we breathe and help our customers’ desires for sustainability upgrades beyond carbon footprint issues. Our clean air pollution control, collection and ventilation technologies improve air quality with a compelling solution that enable our customers to reduce their carbon footprint, lower energy consumption, minimize waste and meet compliance targets for toxic emissions, fumes, volatile organic compounds, and industrial odors.
Fluid Handling Solutions segment: Our Fluid Handling Solutions segment offers unique pump and filtration solutions that maintain safe and clean operations in some of the most harsh and toxic environments. In this market, we provide solutions for mission-critical applications to a wide variety of industries including, but not limited to, plating and metal finishing, automotive, food and beverage, chemical, petrochemical, pharmaceutical, wastewater treatment, desalination and the aquarium & aquaculture markets.
The financial segment information is presented in the following tables:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net Sales (less intra-, inter-segment sales)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Solutions Segment
|
|
$
|
49,709
|
|
|
$
|
48,847
|
|
|
$
|
149,429
|
|
|
$
|
154,606
|
|
Industrial Solutions Segment
|
|
|
18,716
|
|
|
|
26,983
|
|
|
|
55,736
|
|
|
|
65,920
|
|
Fluid Handling Solutions Segment
|
|
|
9,000
|
|
|
|
9,436
|
|
|
|
27,916
|
|
|
|
31,930
|
|
Net sales
|
|
$
|
77,425
|
|
|
$
|
85,266
|
|
|
$
|
233,081
|
|
|
$
|
252,456
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Income from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Solutions Segment
|
|
$
|
7,276
|
|
|
$
|
7,633
|
|
|
$
|
24,479
|
|
|
$
|
23,275
|
|
Industrial Solutions Segment
|
|
|
101
|
|
|
|
2,794
|
|
|
|
1,593
|
|
|
|
3,911
|
|
Fluid Handling Solutions Segment
|
|
|
1,438
|
|
|
|
818
|
|
|
|
4,878
|
|
|
|
4,657
|
|
Corporate and Other(1)
|
|
|
(7,797
|
)
|
|
|
(7,186
|
)
|
|
|
(21,299
|
)
|
|
|
(20,878
|
)
|
Income from operations
|
|
$
|
1,018
|
|
|
$
|
4,059
|
|
|
$
|
9,651
|
|
|
$
|
10,965
|
|
(1)
|
Includes corporate compensation, professional services, information technology, and other general and administrative corporate expenses.
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Property and Equipment Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Solutions Segment
|
|
$
|
148
|
|
|
$
|
57
|
|
|
$
|
446
|
|
|
$
|
218
|
|
Industrial Solutions Segment
|
|
|
—
|
|
|
|
59
|
|
|
|
215
|
|
|
|
222
|
|
Fluid Handling Solutions Segment
|
|
|
132
|
|
|
|
2,135
|
|
|
|
686
|
|
|
|
2,624
|
|
Corporate and Other
|
|
|
603
|
|
|
|
293
|
|
|
|
1,528
|
|
|
|
682
|
|
Property and equipment additions
|
|
$
|
883
|
|
|
$
|
2,544
|
|
|
$
|
2,875
|
|
|
$
|
3,746
|
|
16
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Solutions Segment
|
|
$
|
1,245
|
|
|
$
|
1,544
|
|
|
$
|
3,690
|
|
|
$
|
4,684
|
|
Industrial Solutions Segment
|
|
|
475
|
|
|
|
327
|
|
|
|
1,123
|
|
|
|
998
|
|
Fluid Handling Solutions Segment
|
|
|
679
|
|
|
|
668
|
|
|
|
1,942
|
|
|
|
2,140
|
|
Corporate and Other
|
|
|
177
|
|
|
|
94
|
|
|
|
469
|
|
|
|
331
|
|
Depreciation and amortization
|
|
$
|
2,576
|
|
|
$
|
2,633
|
|
|
$
|
7,224
|
|
|
$
|
8,153
|
|
(dollars in thousands)
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Identifiable Assets
|
|
|
|
|
|
|
|
|
Energy Solutions Segment
|
|
$
|
265,858
|
|
|
$
|
254,752
|
|
Industrial Solutions Segment
|
|
|
72,931
|
|
|
|
64,725
|
|
Fluid Handling Solutions Segment
|
|
|
67,118
|
|
|
|
71,572
|
|
Corporate and Other(2)
|
|
|
16,183
|
|
|
|
17,588
|
|
Identifiable assets
|
|
$
|
422,090
|
|
|
$
|
408,637
|
|
(2)
|
Corporate and Other assets consist primarily of cash and income tax related assets.
|
(dollars in thousands)
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Goodwill
|
|
|
|
|
|
|
|
|
Energy Solutions Segment
|
|
$
|
99,317
|
|
|
$
|
97,007
|
|
Industrial Solutions Segment
|
|
|
30,458
|
|
|
|
23,436
|
|
Fluid Handling Solutions Segment
|
|
|
31,577
|
|
|
|
31,577
|
|
Goodwill
|
|
$
|
161,352
|
|
|
$
|
152,020
|
|
Intra-segment and Inter-segment Revenues
The Company has multiple divisions that sell to each other within segments (intra-segment sales) and between segments (inter-segment sales) as indicated in the following tables:
|
|
Three months ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Inter-Segment Sales
|
|
|
|
(dollars in thousands)
|
|
Total
Sales
|
|
|
|
|
Intra-
Segment
Sales
|
|
|
|
|
Industrial
|
|
|
|
|
Energy
|
|
|
|
|
Fluid
|
|
|
Net Sales to
Outside
Customers
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Solutions Segment
|
|
$
|
51,203
|
|
|
|
|
$
|
(1,071
|
)
|
|
|
|
$
|
(217
|
)
|
|
|
|
$
|
—
|
|
|
|
|
$
|
(206
|
)
|
|
$
|
49,709
|
|
Industrial Solutions Segment
|
|
|
21,741
|
|
|
|
|
|
(2,914
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(111
|
)
|
|
|
|
|
—
|
|
|
|
18,716
|
|
Fluid Handling Solutions Segment
|
|
|
9,203
|
|
|
|
|
|
(185
|
)
|
|
|
|
|
(18
|
)
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
9,000
|
|
Net Sales
|
|
$
|
82,147
|
|
|
|
|
$
|
(4,170
|
)
|
|
|
|
$
|
(235
|
)
|
|
|
|
$
|
(111
|
)
|
|
|
|
$
|
(206
|
)
|
|
$
|
77,425
|
|
|
|
Three months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Inter-Segment Sales
|
|
|
|
(dollars in thousands)
|
|
Total
Sales
|
|
|
|
|
Intra-
Segment
Sales
|
|
|
|
|
Industrial
|
|
|
|
|
Energy
|
|
|
|
|
Fluid
|
|
|
Net Sales to
Outside
Customers
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Solutions Segment
|
|
$
|
51,083
|
|
|
|
|
$
|
(2,134
|
)
|
|
|
|
$
|
(102
|
)
|
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
$
|
48,847
|
|
Industrial Solutions Segment
|
|
|
29,269
|
|
|
|
|
|
(2,227
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
—
|
|
|
|
26,983
|
|
Fluid Handling Solutions Segment
|
|
|
9,823
|
|
|
|
|
|
(362
|
)
|
|
|
|
|
(25
|
)
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
9,436
|
|
Net Sales
|
|
$
|
90,175
|
|
|
|
|
$
|
(4,723
|
)
|
|
|
|
$
|
(127
|
)
|
|
|
|
$
|
(59
|
)
|
|
|
|
$
|
—
|
|
|
$
|
85,266
|
|
17
|
|
Nine months ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Inter-Segment Sales
|
|
|
|
(dollars in thousands)
|
|
Total
Sales
|
|
|
|
|
Intra-
Segment
Sales
|
|
|
|
|
Industrial
|
|
|
|
|
Energy
|
|
|
|
|
Fluid
|
|
|
Net Sales to
Outside
Customers
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Solutions Segment
|
|
$
|
159,181
|
|
|
|
|
$
|
(8,861
|
)
|
|
|
|
$
|
(446
|
)
|
|
|
|
$
|
—
|
|
|
|
|
$
|
(445
|
)
|
|
$
|
149,429
|
|
Industrial Solutions Segment
|
|
|
66,691
|
|
|
|
|
|
(10,038
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(902
|
)
|
|
|
|
|
(15
|
)
|
|
|
55,736
|
|
Fluid Handling Solutions Segment
|
|
|
28,581
|
|
|
|
|
|
(633
|
)
|
|
|
|
|
(32
|
)
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
27,916
|
|
Net Sales
|
|
$
|
254,453
|
|
|
|
|
$
|
(19,532
|
)
|
|
|
|
$
|
(478
|
)
|
|
|
|
$
|
(902
|
)
|
|
|
|
$
|
(460
|
)
|
|
$
|
233,081
|
|
|
|
Nine months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Inter-Segment Sales
|
|
|
|
(dollars in thousands)
|
|
Total
Sales
|
|
|
|
|
Intra-
Segment
Sales
|
|
|
|
|
Industrial
|
|
|
|
|
Energy
|
|
|
|
|
Fluid
|
|
|
Net Sales to
Outside
Customers
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Solutions Segment
|
|
$
|
158,888
|
|
|
|
|
$
|
(3,998
|
)
|
|
|
|
$
|
(272
|
)
|
|
|
|
$
|
—
|
|
|
|
|
$
|
(12
|
)
|
|
$
|
154,606
|
|
Industrial Solutions Segment
|
|
|
73,794
|
|
|
|
|
|
(6,204
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(1,617
|
)
|
|
|
|
|
(53
|
)
|
|
|
65,920
|
|
Fluid Handling Solutions Segment
|
|
|
33,189
|
|
|
|
|
|
(1,096
|
)
|
|
|
|
|
(163
|
)
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
31,930
|
|
Net Sales
|
|
$
|
265,871
|
|
|
|
|
$
|
(11,298
|
)
|
|
|
|
$
|
(435
|
)
|
|
|
|
$
|
(1,617
|
)
|
|
|
|
$
|
(65
|
)
|
|
$
|
252,456
|
|
18
CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES