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 periods ended March 31, 2020 and 2019 reflect the consolidated operations of the Company and its subsidiaries.

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

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

COVID-19

On January 30, 2020, the 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 characterized COVID-19 as a pandemic. As of March 31, 2020, the COVID-19 pandemic has had a significant impact on macroeconomic conditions and the end markets of our business. Several countries, including the United States, have taken steps to restrict travel, temporarily close businesses and issue quarantine orders, and it remains unclear how long such measures will remain in place or whether efforts to contain the spread of COVID-19 will continue to intensify.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. It is currently unclear if and how the Company will benefit from the CARES Act in the future, but we continue to examine the impacts the CARES Act may have on our business, results of operations, financial condition or liquidity.

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. This allows us to continue to serve our customers, however, the COVID-19 pandemic has also disrupted our global operations. The outbreak of COVID-19 has heightened the risk of work stoppages at our facilities or those of our suppliers. Certain of our facilities and our suppliers have experienced temporary disruptions as a result of the COVID-19 pandemic, and we cannot predict whether our facilities will experience more significant disruptions in the future or the impact on our suppliers.

CECO has undertaken necessary measures in compliance with government directives to remain open across its business and continues to work closely with its global supply chain to proactively support customers during this critical time. As a key supplier to critical infrastructure projects, CECO has worked to maintain ongoing essential operations while observing recommended CDC 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. Additionally, CECO has taken several proactive cost reduction measures in response to the economic pressures brought on by the COVID-19 pandemic. The CECO senior management team has agreed to a temporary salary reduction, certain corporate-level costs have been eliminated or reduced, and CECO has instituted a rolling 2-week furlough of United States-based employees during the 6-week period beginning the week of April 6, 2020.

The impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot currently predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted.

Note Regarding Use of Non-GAAP Financial Measures

The Company's unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These GAAP financial statements include certain charges the Company believes are not indicative of its core ongoing operational performance.



                                       16

--------------------------------------------------------------------------------

As a result, the Company provides financial information in this Management's Discussion and Analysis that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides this supplemental non-GAAP financial information because the Company's management utilizes it to evaluate its ongoing financial performance and the Company believes it provides greater transparency to investors as supplemental information to its GAAP results.

The Company has provided the non-GAAP financial measures of non-GAAP operating income and non-GAAP operating margin as a result of items that the Company believes are not indicative of its ongoing operations. These include transactions associated with the Company's acquisitions, divestitures and the items described below in "Consolidated Results." The Company believes that evaluation of its financial performance compared with prior and future periods can be enhanced by a presentation of results that exclude the impact of these items. The Company has incurred substantial expense and income associated with the acquisition and divestitures. While the Company cannot predict the exact timing or amounts of such charges, it does expect to treat the financial impact of these transactions as special items in its future presentation of non-GAAP results.



Results of Operations

Consolidated Results

Our Condensed Consolidated Statements of Income for the three-month periods ended March 31, 2020 and 2019 are as follows:





                                                 Three months ended March 31,
(dollars in millions)                             2020                   2019
Net sales                                    $         80.5         $         86.0
Cost of sales                                $         52.2         $         57.6
Gross profit                                 $         28.3         $         28.4
Percent of sales                                       35.2 %                 33.0 %
Selling and administrative expenses                    22.0                   21.2
Percent of sales                                       27.3 %                 24.7 %
Amortization expenses                                   1.7                    2.2
Restructuring expenses                                  0.4                      -
Loss on divestitures, net of selling costs                -                    0.1
Operating income                             $          4.2         $          4.9
Operating margin                                        5.2 %                  5.7 %

To compare operating performance between the three-month periods ended March 31, 2020 and 2019, the Company has adjusted GAAP operating income to exclude (1) amortization expenses for acquisition related intangible assets, (2) restructuring expenses primarily relating to severance and legal expenses, and (3) loss on divestitures, net of selling costs necessary to complete the divestiture such as legal, accounting and compliance. See "Note Regarding Use of Non-GAAP Financial Measures" above. The following table presents the reconciliation of GAAP operating income and GAAP operating margin to non-GAAP operating income and non-GAAP operating margin:





                                                            Three months ended March 31,
(dollars in millions)                                       2020                    2019
Operating income as reported in accordance with GAAP   $           4.2         $           4.9
Operating margin in accordance with GAAP                           5.2 %                   5.7 %
Amortization expenses                                              1.7                     2.2
Restructuring expenses                                             0.4                       -
Loss on divestitures, net of selling costs                           -                     0.1
Non-GAAP operating income                              $           6.3         $           7.2
Non-GAAP operating margin                                          7.8 %                   8.4 %

Net sales for the first quarter of 2020 decreased $5.5 million, or 6.4%, to $80.5 million compared with $86.0 million in the first quarter of 2019. The decrease is primarily attributable to decreases of $5.1 million in custom-designed cyclone systems and $2.5 million in filtration and pump solutions, partially offset by increases of $1.9 million of our turbine exhaust and silencers systems and $0.7 million in clean air pollution control and ventilation technologies.



                                       17

--------------------------------------------------------------------------------

Gross profit decreased $0.1 million, or 0.4%, to $28.3 million in the first quarter of 2020 compared with $28.4 million in the same period of 2019. Gross profit as a percentage of sales increased to 35.2% in the first quarter of 2020 compared with 33.0% in the first quarter of 2019 due to product mix.

Orders booked were $75.7 million during the first quarter of 2020 as compared with $97.3 million during the first quarter of 2019. The decrease is primarily attributable to decreases in the refinery, midstream oil and gas, and pollution control end markets, and the COVID-19 slowdown impacting our customers in March 2020.

Selling and administrative expenses were $22.0 million for the first quarter of 2020 compared with $21.2 million for the first quarter of 2019. The increase is primarily attributable to investments in sales personnel and the final settlement of a commercial dispute. Selling and administrative expenses increased as a percentage of sales to 27.3% in the first quarter of 2020 compared with 24.7% in the first quarter of 2019. The increase in selling and administrative expenses as a percentage of sales is primarily attributable to sales volume decreases year over year.

Amortization expense was $1.7 million for the first quarter of 2020 compared with $2.2 million for the first quarter of 2019. The decrease in expense is attributable $0.5 million decrease in definite lived asset amortization.

Operating income decreased $0.7 million to $4.2 million in the first quarter of 2020 compared with $4.9 million during the first quarter of 2019. The decrease is attributable to the factors described above.

Non-GAAP operating income was $6.3 million for the first quarter of 2020 compared with $7.2 million for the first quarter of 2019. The decrease in non-GAAP operating income is primarily attributable to the decline in sales and increase in selling and administrative expenses, partially offset by the improvements in gross margin, as described above. Non-GAAP operating income as a percentage of sales decreased to 7.8% for the first quarter of 2020 from 8.4% for the first quarter of 2019.

Interest expense decreased to $1.0 million in the first quarter of 2020 compared with $1.5 million in the first quarter of 2019. The decrease in interest expense is primarily due to lower interest rates on a negotiated credit agreement which was executed in June of 2019, and a reduced debt balance for the majority of three-month period in 2020 compared to 2019. As a proactive measure related to COVID-19, the Company elected to drawdown $40.0 million from its revolving credit facility, in late March 2020, which supplements the Company's already strong cash position.

Income tax expense was $0.8 million for the first quarter of 2020 and 2019. The effective income tax rate for the first quarter of 2020 was 18.6% compared with 31.1% for first quarter of 2019. The effective income tax rate for the first quarter of 2020 is lower 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, 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.

Business Segments

The Company's operations are organized and reviewed by management along its product lines or end market that the segment serves and are presented in three reportable segments. The results of the segments are reviewed through "Income from operations" on the unaudited Condensed Consolidated Statements of Income.



                                                     Three months ended March 31,
(dollars in thousands)                                 2020                 2019
Net Sales (less intra- and inter-segment sales)
Energy Solutions Segment                          $       50,646       $       55,188
Industrial Solutions Segment                              20,356               18,853
Fluid Handling Solutions Segment                           9,484               11,970
Net sales                                         $       80,486       $       86,011







                                       18

--------------------------------------------------------------------------------


                                      Three months ended March 31,
(dollars in thousands)                  2020                 2019
Income from Operations
Energy Solutions Segment           $        8,557       $        9,291
Industrial Solutions Segment                1,473                  602
Fluid Handling Solutions Segment            1,623                2,358
Corporate and Other(1)                     (7,414 )             (7,361 )
Income from operations             $        4,239       $        4,890

(1) Includes corporate compensation, professional services, information technology and other general and administrative corporate expenses.

Energy Solutions Segment

Our Energy Solutions segment net sales decreased $4.6 million to $50.6 million in the first quarter of 2020 compared with $55.2 million in the same period of 2019. The decrease is primarily attributable to decreases of $5.1 million in the Company's custom-designed cyclone systems that serve the refinery markets period over period.

Operating income for the Energy Solutions segment decreased $0.7 million to $8.6 million in the first quarter of 2020 compared with $9.3 million in the same period of 2019. The change is primarily attributable to decrease in sales of $4.6 million and an increase of $1.0 million in administrative expenses related to investments in sales personnel, partially offset by a decrease in costs of sales of $4.5 million and a decrease of $0.3 million in amortization expense.

Industrial Solutions Segment

Our Industrial Solutions segment net sales increased $1.5 million to $20.4 million in the first quarter of 2020 compared with $18.9 million in the first quarter of 2019. The increase is primarily attributable to increased sales in the Company's clean air pollution control and ventilation technologies.

Operating income for the Industrial Solutions segment increased $0.9 million to $1.5 million in the first quarter of 2020 compared with $0.6 million in the first quarter of 2019. The increase is primarily attributable to a $0.5 million increase in gross profit driven by increased sales and a $0.5 million decrease in selling and marketing expenses.

Fluid Handling Solutions Segment

Our Fluid Handling Solutions segment net sales decreased $2.5 million to $9.5 million in the first quarter of 2020 compared with $12.0 million in the first quarter of 2019. The decrease is primarily attributable to decreases in the Company's filtration and pump solutions.

Operating income for the Fluid Handling Solutions segment decreased $0.8 million to $1.6 million in the first quarter of 2020 compared with $2.4 million in the first quarter of 2019. The decrease is primarily attributable to a $1.0 million decrease in gross profit due to decrease in sales, partially offset by $0.1 million decrease in amortization expense.

Corporate and Other Segment

Operating expense for the Corporate and Other segment remained flat period over period at $7.4 million in the first quarter of 2020 and 2019, respectively.

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 decreased to $208.9 million as of March 31, 2020 from $216.6 million as of December 31, 2019. 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 United States generally accepted accounting principles ("GAAP") and our methodology for calculating backlog may not be consistent with methodologies used by other companies.



                                       19

--------------------------------------------------------------------------------

New Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 2 to the unaudited condensed consolidated financial statements within Item 1 of this Quarterly Report on Form 10-Q.

Liquidity and Capital Resources

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

When we undertake large jobs, our working capital objective is to make these projects self-funding. We work to achieve this by obtaining initial down payments, progress billing contracts, utilizing extended payment terms from material suppliers when possible, and paying sub-contractors after payment from our customers, which is an industry practice. Our investment in net working capital is funded by cash flow from operations and by our revolving line of credit.

At March 31, 2020, the Company had working capital of $109.9 million, compared with $64.3 million at December 31, 2019. The ratio of current assets to current liabilities was 2.01 to 1.00 on March 31, 2020, as compared with a ratio of 1.56 to 1.00 at December 31, 2019. The increase to the Company's working capital is primarily attributable to the drawdown of $40.0 million from its revolving credit facility, a proactive measure related to COVID-19, which supplements the Company's already strong cash position.

At March 31, 2020 and December 31, 2019, cash and cash equivalents totaled $82.5 million and $35.6 million, respectively. As of March 31, 2020 and December 31, 2019, $29.8 million and $27.0 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)                             March 31, 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                                          $         48,125     $            48,750
- Revolving Credit Loan                                        61,500                  18,500
- Unamortized debt discount                                    (1,644 )                (1,749 )
Total outstanding borrowings under Credit Facility   $        107,981     $            65,501

Less: current portion                                          (2,500 )                (2,500 )
Total debt, less current portion                     $        105,481     $            63,001

Credit Facility

The Company's outstanding borrowings in the United States consist of senior secured term loan and a senior secured revolver loan with sub-facilities for letters of credit, swing-line loans and multi-currency loans (collectively, the "Credit Facility"). As of March 31, 2020 and December 31, 2019, 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)                                 March 31, 2020       December 31, 2019
Credit Facility, revolving loans                     $          140.0     $             140.0
Draw down                                                       (61.5 )                 (18.5 )
Letters of credit open                                           (7.4 )                 (11.0 )
Total unused credit availability                     $           71.1     $             110.5
Amount available based on borrowing limitations      $           71.1     $              82.3


                                       20

--------------------------------------------------------------------------------

Overview of Cash Flows and Liquidity





                                                         For the three months ended March 31,
(dollars in thousands)                                     2020                       2019
Net cash provided by (used in) operating
activities                                           $           7,001         $           (13,741 )
Net cash used in investing activities                             (976 )                      (423 )
Net cash provided by (used in) financing
activities                                                      42,250                      (1,816 )
Effect of exchange rate changes on cash and cash
equivalents                                                     (1,127 )                       447
Net increase (decrease) in cash                      $          47,148         $           (15,533 )




Operating Activities

For the three-months ended March 31, 2020, $7.0 million of cash was provided by operating activities compared with $(13.7) million used in operating activities in the prior year period, a $20.7 million increase. Cash flow from operating activities in the first quarter of 2020 had a favorable impact year-over-year primarily due to certain decreases in net working capital items such accounts receivable and inventory offset by increases in prepaid expenses and costs and estimated earnings in excess of billings as reflected in the Condensed Consolidated Statements of Cash Flows.

Investing Activities

For the three-months ended March 31, 2020, net cash used in investing activities, attributed to the acquisition of property and equipment, was $1.0 million compared with $0.4 million in the prior year period.





Financing Activities

For the three-months ended March 31, 2020, $42.3 million was provided by financing activities compared with $(1.8) million used in financing activities in the period year period, an increase of $44.1 million. As a proactive measure, related to COVID-19, the Company elected to drawdown $40.0 million from its revolving credit facility, which supplements the Company's already strong cash position. Additionally, for the first three-months ended March 31, 2020, $(0.6) million was used in financing activities for repayments on the Company's Term loan compared with $(1.7) million for repayments on the Company's note payable in the first three-months of 2019.

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 the economic conditions and other factors and will adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

Management believes there have been no changes during the three-month period ended March 31, 2020, other than disclosed in Note 2 to the condensed consolidated financial statements within Item 1 of this quarterly Report on Form 10-Q, to the items that the Company disclosed as its critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") 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 other than statements of historical fact, including statements regarding industry prospects or future results of operations or financial position made in this Quarterly Report on Form 10-Q are forward-looking 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



                                       21

--------------------------------------------------------------------------------

"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, 2019 and "Part II - Item 1.A. Risk Factors" of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, 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; 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; liabilities arising from faulty services or products that could result in significant professional or product liability, warranty, or other claims; changes in or developments with respect to any litigation or investigation; failure to meet timely completion or performance standards that could result in higher cost and reduced profits or, in some cases, losses on projects; the potential for fluctuations in prices for manufactured components and raw materials, including as a result of tariffs and surcharges; the substantial amount of debt incurred in connection with our acquisitions and our ability to repay or refinance it or incur additional debt in the future; the impact of federal, state or local government regulations; economic and political conditions generally; our ability to successfully realize the expected benefits of our restructuring program; our ability to successfully integrate acquired businesses and realize the synergies from acquisitions; 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 the novel coronavirus ("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 SEC, we undertake no obligation to update or review any forward-looking statements, whether as a result of new information, future events or otherwise.

© Edgar Online, source Glimpses