MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company’s Condensed Consolidated Statements of Income for the three-month and six-month periods ended June 30, 2022 and 2021 reflect the consolidated operations of the Company and its subsidiaries.
CECO Environmental Corp. (“CECO,” “we,” “us,” or the “Company”) is a leading environmentally focused, diversified industrial company whose solutions protect people, the environment, and industrial equipment. We focus on engineering, designing, building, and installing systems that capture, clean and destroy air- and water-borne emissions from industrial facilities as well as fluid handling, gas and water separation, and filtration systems. CECO provides innovative technology and application expertise that helps companies grow their businesses with safe, clean, and more efficient solutions to protect our shared environment.
CECO serves diverse industries globally by working to improve air and water quality, protect customer’s equipment, and provide customized engineered solutions in our customers’ mission critical applications. The industries CECO serves include power generation, petrochemical processing, general industrial, refining, midstream oil & gas, electric vehicle production, poly silicon fabrication, battery recycling, and wastewater treatment, along with a wide range of other industries.
COVID-19
A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. The COVID-19 pandemic persists in geographic areas in which we have operations, suppliers, customers and employees, and has had a significant impact on worldwide economic activity and on macroeconomic conditions and the end markets of our business.
As a key supplier to critical infrastructure projects, CECO has worked to maintain ongoing operations. Within the United States, certain portions of our business have been designated an essential business, and we continue to operate our business in compliance with applicable state and local laws and are observing recommended Centers for Disease Control and Prevention guidelines to minimize the risk of spreading the COVID-19 virus including implementing, where possible, work-from-home procedures and additional sanitization efforts where facilities remain open to provide necessary services. This allows us to continue to serve our customers, however, the COVID-19 pandemic has also disrupted our international operations. Some of our facilities and our suppliers have experienced temporary disruptions as a result of the COVID-19 pandemic, and we continue to work closely with our global supply chain to proactively support customers during this critical time. We cannot predict whether our facilities will experience more significant disruptions in the future or the impact on our suppliers.
The senior management team meets regularly to review and assess the status of the Company's operations and the health and safety of its employees. The senior management team continues to monitor and manage the Company’s ability to operate effectively. We are currently experiencing shortages of raw materials and inflationary pressures for certain materials and labor. We expect these supply chain challenges and cost impacts to continue for the foreseeable future as markets recover. Although we have secured additional raw materials from existing and alternate suppliers and have taken other mitigating actions to mitigate supply disruptions, we cannot guarantee that we can continue to do so in the future. In this event, our business, results and financial condition could be adversely affected. Although vaccines are available in various countries where we operate, health concern risks remain and notwithstanding the Company's continued efforts, it is possible the COVID-19 pandemic could further impact our operations and the operations of our suppliers and venders, particularly in light of newly emerging variant strains of the virus becoming more dominant and the potential resumption of high levels of infection and hospitalization. We cannot predict whether any of our manufacturing, operations or suppliers will be disrupted by these events, or how long such disruptions would last. COVID-19 has had and may have further negative impacts on our operations, customers and supply chain despite the preventative and precautionary measures being taken.
18
Note Regarding Use of Non-GAAP Financial Measures
The Company’s unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These GAAP financial statements include certain charges the Company believes are not indicative of its core ongoing operational performance.
As a result, the Company provides financial information in this Management’s Discussion and Analysis that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides this non-GAAP financial information because the Company’s management utilizes it to evaluate its ongoing financial performance and the Company believes it provides greater transparency to investors as supplemental information to its GAAP results.
The Company has provided the non-GAAP financial measures of non-GAAP operating income and non-GAAP operating margin as a result of items that the Company believes are not indicative of its ongoing operations. These include transactions associated with the Company’s acquisitions, divestitures and the items described below in “Consolidated Results.” The Company believes that evaluation of its financial performance compared with prior and future periods can be enhanced by a presentation of results that exclude the impact of these items. The Company has incurred substantial expense and income associated with the acquisition and divestitures. While the Company cannot predict the exact timing or amounts of such charges, it does expect to treat the financial impact of these transactions as special items in its future presentation of non-GAAP results.
Results of Operations
Consolidated Results
Our Condensed Consolidated Statements of Income for the three-month and six-month periods ended June 30, 2022 and 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
(dollars in millions) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net sales |
|
$ |
105.4 |
|
|
$ |
78.7 |
|
|
$ |
197.8 |
|
|
$ |
150.6 |
|
Cost of sales |
|
|
73.7 |
|
|
|
53.5 |
|
|
|
139.7 |
|
|
|
100.9 |
|
Gross profit |
|
$ |
31.7 |
|
|
$ |
25.2 |
|
|
$ |
58.1 |
|
|
$ |
49.7 |
|
Percent of sales |
|
|
30.1 |
% |
|
|
32.0 |
% |
|
|
29.4 |
% |
|
|
33.0 |
% |
Selling and administrative expenses |
|
|
23.0 |
|
|
|
20.6 |
|
|
|
41.6 |
|
|
|
40.0 |
|
Percent of sales |
|
|
21.8 |
% |
|
|
26.2 |
% |
|
|
21.0 |
% |
|
|
26.6 |
% |
Amortization and earnout expenses |
|
|
1.5 |
|
|
|
2.3 |
|
|
|
2.9 |
|
|
|
4.1 |
|
Restructuring expenses |
|
|
— |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.3 |
|
Acquisition and integration expenses |
|
|
1.5 |
|
|
|
— |
|
|
|
2.5 |
|
|
|
0.1 |
|
Operating income |
|
$ |
5.7 |
|
|
$ |
2.1 |
|
|
$ |
11.0 |
|
|
$ |
5.2 |
|
Operating margin |
|
|
5.4 |
% |
|
|
2.7 |
% |
|
|
5.6 |
% |
|
|
3.5 |
% |
To compare operating performance between the three-month and six-month periods ended June 30, 2022 and 2021, the Company has adjusted GAAP operating income to exclude (1) amortization of intangible assets, earnout and retention expenses, (2) restructuring expenses primarily relating to severance, facility exits, and associated legal expenses, and (3) acquisition and integration expenses, which include legal, accounting, and other expenses.
The following table presents the reconciliation of GAAP operating income and GAAP operating margin to non-GAAP operating income and non-GAAP operating margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
(dollars in millions) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Operating income as reported in accordance with GAAP |
|
$ |
5.7 |
|
|
$ |
2.1 |
|
|
$ |
11.0 |
|
|
$ |
5.2 |
|
Operating margin in accordance with GAAP |
|
|
5.4 |
% |
|
|
2.7 |
% |
|
|
5.6 |
% |
|
|
3.5 |
% |
Amortization and earnout expenses |
|
|
1.5 |
|
|
|
2.3 |
|
|
|
2.9 |
|
|
|
4.1 |
|
Restructuring expenses |
|
|
— |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.3 |
|
Acquisition and integration expenses |
|
|
1.5 |
|
|
|
— |
|
|
|
2.5 |
|
|
|
0.1 |
|
Non-GAAP operating income |
|
$ |
8.7 |
|
|
$ |
4.7 |
|
|
$ |
16.5 |
|
|
$ |
9.7 |
|
Non-GAAP operating margin |
|
|
8.3 |
% |
|
|
6.0 |
% |
|
|
8.3 |
% |
|
|
6.4 |
% |
19
Net sales for the second quarter of 2022 increased $26.7 million, or 33.9%, to $105.4 million compared with $78.7 million in the second quarter of 2021. The increase is primarily attributable to increases of $8.4 million in our thermal acoustics technologies, $5.2 million in our damper and expansion products, $4.2 million in our emissions management technologies, $2.7 million across our entire industrial process solutions platforms, $2.7 million in our engineered cyclone systems, and $2.6 million in our separation and filtration technologies. For the $26.7 million increase in net sales, $22.1 million is attributable to organic growth, while $4.6 million is attributable to current year acquisitions.
Net sales for the first six months of 2022 increased $47.2 million, or 31.4%, to $197.8 million compared with $150.6 million in the first six months of 2021. The increase is primarily attributable to increases of $13.1 million in our emissions management technologies, $11.6 million in our thermal acoustics technologies, $7.5 million in our damper and expansion products, $6.5 million in our engineered cyclone systems, $3.9 million in our industrial air control technologies, and $3.9 million in our duct fabrication products and services. For the $47.2 million increase in net sales, $41.9 million is attributable to organic growth, while $5.3 million is attributable to current year acquisitions.
Gross profit increased $6.5 million, or 25.8%, to $31.7 million in the second quarter of 2022 compared with $25.2 million in the second quarter of 2021. The increase in gross profit is primarily attributable to in the increase in sales volume as described above. Gross profit as a percentage of sales decreased 1.9% to 30.1% in the second quarter of 2022 compared with 32.0% in the second quarter of 2021 due to inflation, supply chain challenges, and lower project margin mix executed during the three-month period ended June 30, 2022, partially offset by price increases.
Gross profit increased $8.4 million, or 16.9%, to $58.1 million in the first six months of 2022 compared with $49.7 million in the first six months of 2021. The increase in gross profit is primarily attributable to in the increase in sales volume as describe above. Gross profit as a percentage of sales decreased to 29.4% in the first six months of 2022 compared with 33.0% in the first six months of 2021 due to inflation, supply chain challenges, and lower project margin mix executed during the six-month period ended June 30, 2022, partially offset by price increases. We continue to experience shortages of raw materials and inflationary pressures for certain materials and labor. We expect these supply chain challenges and cost impacts to continue for the foreseeable future as markets recover. Although we have secured additional raw materials from existing and alternate suppliers and have taken other mitigating actions to mitigate supply disruptions, such as implementing price increases and applying material surcharges. We cannot guarantee that we can continue to do so in the future. In this event, our business, results and financial condition could be adversely affected.
Orders booked increased $28.0 million, or 32.7%, to $113.5 million during the second quarter of 2022 compared with $85.5 million in the second quarter of 2021. The increase is primarily attributable to increases of $34.2 million in our separation and filtration technologies, $5.0 million in our thermal acoustics technologies, $4.9 million in our industrial air control technologies, and $4.2 million in our damper and expansion products partially offset by a decrease of $20.2 million in our emissions management technologies. For the $28.0 million increase in orders, $23.0 million is attributable to organic growth, while $5.0 million is attributable to current year acquisitions.
Orders booked were $274.4 million for the first six months of 2022 compared with $177.6 million during the first six months of 2021, an increase of $96.8 million, or 54.5%. The increase is primarily attributable to increases of $37.2 million in our separation and filtration technologies, $27.9 million in industrial air control technologies, and $27.4 million in our thermal acoustics technologies. For the $96.8 million increase in orders, $90.9 million is attributable to organic growth, while $5.9 million is attributable to current year acquisitions.
Selling and administrative expenses were $23.0 million for the second quarter of 2022 compared with $20.6 million for the second quarter of 2021. The increase is primarily attributable to acquisitions during 2022, as well as inflationary increases for wages and services. Selling and administrative expenses as a percentage of sales was 21.8% in the second quarter of 2022 compared with 26.2% in the second quarter of 2021. The decrease in percentage is primarily attributable to the increase in net sales.
Selling and administrative expenses were $41.6 million for the first six months of 2022 compared with $40.0 million for the first six months of 2021. The increase is primarily attributable to acquisitions during 2022, as well as inflationary increases for wages and services. Selling and administrative expenses decreased as a percentage of sales to 21.0% in the first six months of 2022 compared with 26.6% in the first six months of 2021. The decrease in percentage is primarily attributable to the increase in net sales.
Amortization and earnout expense was $1.4 million for the second quarter of 2022 compared with $2.3 million for the second quarter of 2021. The decrease in expense is attributable to a decrease of $0.6 million in earnout expense and $0.3 million decrease in definite lived asset amortization.
20
Amortization expense was $2.9 million for the first six months of 2022 compared with $4.1 million for the first six months of 2021. The decrease in expense is attributable to a decrease of $0.7 million in earnout expense and $0.5 million decrease in definite lived asset amortization.
Operating income increased $3.6 million to $5.7 million in the second quarter of 2022 compared with $2.1 million during the second quarter of 2021. Operating income increased $5.8 million to $11.0 million in the first six months of 2022 compared with $5.2 million during the first six months of 2021. The increase in operating income for the three- and six-month periods ended June 30, 2022 are primarily attributable to increases in sales.
Non-GAAP operating income was $8.7 million for the second quarter of 2022 compared with $4.7 million for the second quarter of 2021. The increase of $4.0 million in non-GAAP operating income is primarily attributable to the increase in net sales. Non-GAAP operating income as a percentage of sales increased to 8.2% for the second quarter of 2022 from 6.0% for the second quarter of 2021.
Non-GAAP operating income was $16.5 million for the first six months of 2022 compared with $9.7 million for the first six months of 2021. The increase of $6.8 in non-GAAP operating income is primarily attributable to the increase in net sales. Non-GAAP operating income as a percentage of sales increased to 8.3% for the first six months of 2022 from 6.4% for the first six months of 2021.
Interest expense increased to $1.1 million in the second quarter of 2022 and $1.9 million for the first six months of 2022 compared with interest expense of $0.7 million in the second quarter of 2021 and $1.4 million for the first six months of 2021. The increase in interest expense is primarily due to increased debt balances for the three- and six-month periods in 2022 compared to 2021.
Income tax expense was $1.9 million for the second quarter of 2022 and $3.0 million for the first six months of 2022 compared with income tax expense of $0.2 million for the second quarter of 2021 and $0.8 million for the first six months of 2021. The effective income tax rate for the second quarter of 2022 was 28.3% compared with 34.3% for the second quarter of 2021. The effective income tax rate for the first six months of 2022 was 28.3% compared with 30.9% for the first six months of 2021. The effective income tax rate for the three- and six-months ended June 30, 2022 is different than the United States federal statutory rate. Our effective tax rate is affected by certain other permanent differences, including state income taxes, non-deductible incentive stock-based compensation, and differences in tax rates among the jurisdictions in which we operate.
Business Segments
The Company’s operations are organized and reviewed by management along its product lines or end market that the segment serves and are presented in two reportable segments. The results of the segments are reviewed through “Income from operations” on the unaudited Condensed Consolidated Statements of Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net sales (less intra-, inter-segment sales) |
|
|
|
|
|
|
|
|
|
|
|
|
Engineered Systems segment |
|
$ |
67,333 |
|
|
$ |
43,360 |
|
|
$ |
124,308 |
|
|
$ |
85,417 |
|
Industrial Process Solutions segment |
|
|
38,042 |
|
|
|
35,320 |
|
|
|
73,503 |
|
|
|
65,155 |
|
Net sales |
|
$ |
105,375 |
|
|
$ |
78,680 |
|
|
$ |
197,811 |
|
|
$ |
150,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Income from Operations |
|
|
|
|
|
|
|
|
|
|
|
|
Engineered Systems segment |
|
$ |
9,006 |
|
|
$ |
5,634 |
|
|
$ |
15,476 |
|
|
$ |
11,804 |
|
Industrial Process Solutions segment |
|
|
5,482 |
|
|
|
4,441 |
|
|
|
9,621 |
|
|
|
8,263 |
|
Corporate and Other(1) |
|
|
(8,742 |
) |
|
|
(7,930 |
) |
|
|
(14,147 |
) |
|
|
(14,868 |
) |
Income from operations |
|
$ |
5,746 |
|
|
$ |
2,145 |
|
|
$ |
10,950 |
|
|
$ |
5,199 |
|
(1) Includes corporate compensation, professional services, information technology and other general and administrative corporate expenses.
Engineered Systems Segment
Our Engineered Systems segment net sales increased $23.9 million to $67.3 million for the second quarter of 2022 compared with $43.4 million in the second quarter of 2021. The increase is primarily attributable to increases of $8.4 million in our thermal acoustics technologies, $5.2 million in our damper and expansion products, $4.2 million in our emissions management technologies, $2.7 million in our engineered cyclone systems, and $2.6 million in our separation and filtration technologies. For the $23.9 million increase in net sales, $19.3 million is attributable to organic growth, while $4.6 million is attributable to current year acquisitions.
21
Our Engineered Systems segment net sales increased $38.9 million to $124.3 million in the first six months of 2022 compared with $85.4 million in the first six months of 2021. The increase is primarily attributable to increases of $13.1 million in our emissions management technologies, $11.6 million in our thermal acoustics technologies, $7.5 million in our damper and expansion products, and $6.5 million in our engineered cyclone systems. For the $38.9 million increase in net sales, $33.6 million is attributable to organic growth, while $5.3 million is attributable to current year acquisitions.
Operating income for the Engineered Systems segment increased $3.4 million to $9.0 million in the second quarter of 2022 compared with $5.6 million in the second quarter of 2021. The operating income increase is primarily attributable to higher gross profit related to increased sales of $23.9 million.
Operating income for the Engineered Systems segment increased $3.7 million to $15.5 million in the first six months of 2022 compared with $11.8 million in the first six months of 2021. The operating income increase is primarily attributable to higher gross profit related to increased sales of $38.9 million.
Industrial Process Solutions Segment
Our Industrial Process Solutions segment net sales increased $2.7 million to $38.0 million in the second quarter of 2022 compared with $35.3 million in the second quarter of 2021. The increase is primarily attributable to increases across all products serving industrial air end markets. The total increase of $2.7 million in net sales is attributable to organic growth.
Our Industrial Process Solutions segment net sales increased $8.3 million to $73.5 million in the first six months of 2022 compared with $65.2 million in the first six months of 2021. The increase is primarily attributable to increases of $3.9 million in our industrial air control technologies, and $3.9 million in our duct fabrication products and services. The total increase of $8.3 million in net sales is attributable to organic growth.
Operating income for the Industrial Process Solutions segment increased $1.1 million to $5.5 million in the second quarter of 2022 compared with $4.4 million in the second quarter of 2021. The increase is primarily attributable to higher gross profit related to increased sales of $2.7 million, and $0.7 million in lower amortization and earnout expenses.
Operating income for the Industrial Process Solutions segment increased $1.3 million to $9.6 million in the first six months of 2022 compared with $8.3 million in the first six months of 2021. The increase is primarily attributable to higher gross profit related to increased sales of $8.3 million, offset by a $1.5 million increase in selling and administrative expense.
Corporate and Other Segment
Operating expense for the Corporate and Other segment increased $0.8 million to $8.7 million for the second quarter of 2022 compared with $7.9 million for the second quarter of 2021. The increase is attributable to increases in acquisition and integration expenses of $0.9 million.
Operating expense for the Corporate and Other segment decreased $0.8 million to $14.1 million for the first six months of 2022 compared with $14.9 million for the first six months of 2021. The decrease is primarily attributed to a $2.5 million favorable insurance settlement received in the first quarter of 2022, partially offset by inflationary increases for wages and services.
Backlog
Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. Backlog increased to $288.7 million as of June 30, 2022 from $213.9 million as of December 31, 2021. Our customers may have the right to cancel a given order. Historically, cancellations have not been common. Backlog is adjusted on a quarterly basis for adjustments in foreign currency exchange rates. Substantially all backlog is expected to be delivered within 12 to 18 months. Backlog is not defined by GAAP and our methodology for calculating backlog may not be consistent with methodologies used by other companies.
New Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 2 to the unaudited condensed consolidated financial statements within Item 1 of this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
22
When we undertake large jobs, our working capital objective is to make these projects self-funding. We work to achieve this by obtaining initial down payments, progress billing contracts, when possible, utilizing extended payment terms from material suppliers, and paying sub-contractors after payment from our customers, which is an industry practice. Our investment in net working capital is funded by cash flow from operations and by our revolving line of credit under our Credit Facility (as defined below).
At June 30, 2022, the Company had working capital of $74.7 million, compared with $72.3 million at December 31, 2021. The ratio of current assets to current liabilities was 1.52 to 1.00 on June 30, 2022, as compared with a ratio of 1.62 to 1.00 at December 31, 2021.
At June 30, 2022 and December 31, 2021, cash and cash equivalents totaled $34.4 million and $29.9 million, respectively. As of June 30, 2022 and December 31, 2021, $26.5 million and $22.6 million, respectively, of our cash and cash equivalents were held by certain non-United States subsidiaries, as well as being denominated in foreign currencies.
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
(table only in thousands) |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
Outstanding borrowings under the Credit Facility (defined below).
Term loan payable in quarterly principal installments of $0.6 million through September 2023, and $0.8 million through September 2025 and $1.1 million thereafter with balance due upon maturity in September 2026. |
|
|
|
|
|
|
- Term loan |
|
$ |
42,410 |
|
|
$ |
43,511 |
|
- Revolving Credit Loan |
|
|
44,700 |
|
|
|
22,000 |
|
Total outstanding borrowings under the Credit Facility |
|
|
87,110 |
|
|
|
65,511 |
|
Outstanding borrowings under the joint venture term debt |
|
|
10,506 |
|
|
|
— |
|
Unamortized debt discount |
|
|
(1,545 |
) |
|
|
(1,731 |
) |
Total outstanding borrowings |
|
$ |
96,071 |
|
|
$ |
63,780 |
|
Less: current portion |
|
|
(3,303 |
) |
|
|
(2,203 |
) |
Total debt, less current portion |
|
$ |
92,768 |
|
|
$ |
61,577 |
|
Credit Facility
The Company’s outstanding borrowings in the United States consist of a senior secured term loan and a senior secured revolver loan with sub-facilities for letters of credit, swing-line loans and multi-currency loans (collectively, the “Credit Facility”). As of June 30, 2022 and December 31, 2021, the Company was in compliance with all related financial and other restrictive covenants under the Credit Facility.
See Note 7 to the unaudited condensed consolidated financial statements within Item 1 of this Quarterly Report on Form 10-Q for further information on the Company’s debt facilities.
Total unused credit availability under our existing Credit Facility is as follows:
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
Credit Facility, revolving loans |
|
$ |
140.0 |
|
|
$ |
140.0 |
|
Draw down |
|
|
(44.7 |
) |
|
|
(22.0 |
) |
Letters of credit open |
|
|
(20.7 |
) |
|
|
(14.5 |
) |
Total unused credit availability |
|
$ |
74.6 |
|
|
$ |
103.5 |
|
Amount available based on borrowing limitations |
|
$ |
62.4 |
|
|
$ |
45.9 |
|
Overview of Cash Flows and Liquidity
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, |
|
(dollars in thousands) |
|
2022 |
|
|
2021 |
|
Net cash provided by operating activities |
|
$ |
18,691 |
|
|
$ |
4,109 |
|
Net cash used in investing activities |
|
|
(38,797 |
) |
|
|
(463 |
) |
Net cash (used in) provided by financing activities |
|
|
26,655 |
|
|
|
(6,423 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(3,091 |
) |
|
|
(514 |
) |
Net (decrease) increase in cash |
|
$ |
3,458 |
|
|
$ |
(3,291 |
) |
Operating Activities
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For the six months ended June 30, 2022, $18.7 million of cash was provided by operating activities compared with $4.1 million provided by operations in the prior year period, a $14.6 million increase. Cash flow from operating activities in the first six months of 2022 had a favorable impact year-over-year primarily due increase in net income and certain improvements in net working capital.
Investing Activities
For the six months ended June 30, 2022, net cash used in investing activities was $38.8 million compared with $0.5 million used in investing activities in the prior year period. For the six months ended June 30, 2022, the $38.8 million cash used in investing activities was the result of $37.4 million cash used for the acquisitions, see Note 14, and $1.4 million for the acquisition of property and equipment. In the prior year period, cash flow of $0.5 million used in investing activities was the result of $1.0 million used for the acquisition of property and equipment, offset by proceeds from the disposal of assets held for sale of $0.5 million.
Financing Activities
For the six months ended June 30, 2022, $26.7 million was provided by financing activities compared with $6.4 million used in financing activities in the prior year period, an increase of $33.1 million. For the six months ended June 30, 2022, the Company used $4.3 million to repurchase common stock, $0.9 million in non-controlling interest distributions, and received $0.1 million from proceeds from employee stock purchase plan and exercise of stock options. Additionally, for the first six months ended June 30, 2022, the Company used $22.7 million for net borrowings on the Company’s revolving credit lines, primarily used to finance current year acquisitions, and $1.5 million in repayment on long-term debt. In the prior year period, the Company used $4.1 million for repayments on the Company's revolving credit line, $1.3 million in repayments on long-term debt, and $0.8 million to make earnout payments.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s condensed consolidated financial statements. The preparation of these financial statements requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include revenue recognition, the valuation of trade receivables, inventories, goodwill, intangible assets, other long-lived assets, legal contingencies, guarantee obligations and assumptions used in the calculation of income taxes, assumptions used in business combination accounting and related balances, and pension and post-retirement benefits, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. Management monitors economic conditions and other factors and will adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.
Management believes there have been no changes during the six-month period ended June 30, 2022, other than as disclosed in Note 2 to the condensed consolidated financial statements within Item 1 of this quarterly Report on Form 10-Q, to the items that the Company disclosed as its critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, which are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Any statements contained in this Quarterly Report on Form 10-Q, other than statements of historical fact, including statements about management’s beliefs and expectations, are forward-looking statements and should be evaluated as such. These statements are made on the basis of management’s views and assumptions regarding future events and business performance. We use words such as “believe,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” “will,” “plan,” “should” and similar expressions to identify forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Potential risks and uncertainties, among others, that could cause actual results to differ materially are discussed under “Part I – Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and include, but are not limited to:
•the sensitivity of our business to economic and financial market conditions generally and economic conditions in CECO’s service areas;
24
•dependence on fixed price contracts and the risks associated therewith, including actual costs exceeding estimates and method of accounting for revenue;
•the effect of growth on CECO’s infrastructure, resources, and existing sales;
•the ability to expand operations in both new and existing markets;
•the potential for contract delay or cancellation as a result of on-going or worsening supply chain challenges;
•the impact of employee-related cost inflation and labor shortages;
•liabilities arising from faulty services or products that could result in significant professional or product liability, warranty, or other claims;
•changes in or developments with respect to any litigation or investigation;
•failure to meet timely completion or performance standards that could result in higher cost and reduced profits or, in some cases, losses on projects;
•the potential for fluctuations in prices for manufactured components and raw materials, including as a result of tariffs and surcharges;
•the substantial amount of debt incurred in connection with our strategic transactions and our ability to repay or refinance it or incur additional debt in the future;
•the impact of federal, state or local government regulations;
•our ability to repurchase shares of our common stock and the amounts and timing of repurchases, if any;
•economic and political conditions generally;
•our ability to successfully realize the expected benefits of our restructuring program;
•our ability to successfully integrate acquired businesses and realize the synergies from strategic transactions; and
•unpredictability and severity of catastrophic events, including cyber security threats, acts of terrorism or outbreak of war or hostilities or public health crises, such as uncertainties regarding the extent and duration of impacts of matters associated with COVID-19, as well as management’s response to any of the aforementioned factors.
Many of these risks are beyond management’s ability to control or predict. Should one or more of these risks or uncertainties materialize, or should the assumptions prove incorrect, actual results may vary in material aspects from those currently anticipated. Investors are cautioned not to place undue reliance on such forward-looking statements as they speak only to our views as of the date the statement is made. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the Securities and Exchange Commission, we undertake no obligation to update or review any forward-looking statements, whether as a result of new information, future events or otherwise.