CECO ENVIRONMENTAL CORP.
Management's discussion and analysis ("MD&A") should be read in conjunction with
the consolidated financial statements and accompanying notes included in Item 8
of this Annual Report on Form 10-K, which include additional information about
our accounting policies, practices and the transactions underlying our financial
results. The preparation of our consolidated financial statements in conformity
with GAAP requires us to make estimates and assumptions that affect the reported
amounts in our consolidated financial statements and the accompanying notes
including various claims and contingencies related to lawsuits, taxes,
environmental and other matters arising during the normal course of business. We
apply our best judgment, our knowledge of existing facts and circumstances and
actions that we may undertake in the future in determining the estimates that
affect our consolidated financial statements. We evaluate our estimates on an
ongoing basis using our historical experience, as well as other factors we
believe appropriate under the circumstances, such as current economic
conditions, and adjust or revise our estimates as circumstances change. As
future events and their effects cannot be determined with precision, actual
results may differ from these estimates.
Overview
Business Overview
CECO 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 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.
25
--------------------------------------------------------------------------------Industry Trends and Corporate Strategy
We are a global corporation with worldwide operations. As a global business, our
operations are affected by worldwide, regional and industry-specific economic
factors, wherever we operate or do business. Our geographic and industry
diversity, and the breadth of our product and services portfolio, have helped
mitigate the impact of any one industry or the economy of any single country on
our consolidated operating results.
We believe growth for our products and services is driven by the increase in
demand for air quality and water treatment solutions, the energy transition, a
shift towards cleaner sources of fuel such as natural gas, hydrogen, nuclear,
and renewable sources, and increased awareness of our customer's corporate
social responsibility to procure sustainable equipment that protects employees,
the environment and their industrial equipment.
With a shift to cleaner, more environmentally responsible power generation,
power providers and industrial power consumers are building new facilities that
use cleaner fuels. In developed markets, natural gas is the largest source of
electricity generation. We supply product offerings throughout the entire
natural gas infrastructure value chain and believe expansion will drive growth
within our Engineered Systems segment for our gas separation & filtration,
pressure products, acoustical equipment , water treatment solutions and DeNOx
SCR systems for natural-gas-fired power plants. Increased global natural gas
production as a percent of total energy consumption, miles of new pipeline,
including future CO2 and hydrogen pipelines, being added globally, and an
increase in liquified natural gas ("LNG") capacity all stand to drive the need
for our products.
We also believe there is a growing trend to control and reduce air and water
emissions for which our pollution control equipment will serve. In 2021, the US
Congress passed the Infrastructure Investment and Jobs Act with $550 billion of
new federal spending aimed at rebuilding roads and bridges, climate resilience,
and other environmental initiatives. As industrial capital expenditures grow,
corporations are seeking to do so with a smaller environmental impact. This
regulatory and economic tailwind coupled with shareholders pressure on companies
to improve their sustainability footprint serve as dual benefits to our
opportunities for our portfolio of solutions.
We continue to focus on increasing revenues and profitability in emerging
markets, where environmental standards are increasing, while continuing to
strengthen and expand our product offerings and channels domestically. Our
enterprise strategy consists of both an operational strategy and capital
allocation strategy. Our operational strategy is driven by our technology
platforms which are based on applications, customers and end markets served.
Emphasis is placed on sales and operational excellence, margin expansion,
after-market recurring revenue growth, cash flow generation, product management,
and project management execution, all of which are critical to our operational
strategy. Our capital allocation strategy is to significantly increase the size
of CECO and transform the mix of businesses. We will focus our capital on
building out our leading air quality and water treatment positions, while also
shifting our portfolio mix towards businesses with more recurring revenue and
more predictable cash flows, in end markets with strong secular growth trends
and less in our traditionally cyclical, energy-centric end markets. Our combined
enterprise strategy intends to transform CECO into an environmentally focused,
diversified industrial organization.
Operations Overview
We operate our technology platforms serving their respective niche end markets.
Our platforms are structured to win in their target markets with a core focus on
understanding customer needs. Our business model requires scalable efficiencies
enabling us to serve our customers with a variety of products that we typically
classify into three categories: make-to-order, configure-to-order, and
engineer-to-order. For our project-based platforms, we use an asset light
business model leveraging third-party subcontract fabricators to execute for our
customers world-wide. These platforms are focused on application engineering,
project management, and supply chain execution for our customers.
The Company's operations management team has distinct industry expertise coupled
with strong leadership skills resulting in a customer-first mindset across the
business. The operations management team works closely with our Chief Executive
Officer on global growth strategies, operational excellence, and employee
development.
Within our segments we have monthly business reviews to ensure we are serving
customers, achieving our operating plan, and executing on strategic growth
initiatives. These reviews include, but are not limited to quotation reviews,
project management reviews, financial and KPI analysis, financial and
manufacturing scorecards, safety, and customer feedback. In these reviews we
focus on metrics such as quality, customer satisfaction, on-time-delivery,
lead-times, price, inflation, project margins, backlog, and above all, safety.
The headquarters focuses on enabling the core back-office functions for scale,
efficiency, and compliance. These key functions include: accounting, payroll,
human resources/benefits, legal, information technology, marketing,
environmental, health and safety,
26
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internal control over financial reporting, and administration. We have excellent
collaboration between our operational platforms and our central service
functions ensuring optimal efficiency and alignment on growth initiatives at the
lowest possible cost structure.
Our reportable segments are:
•
Engineered Systems segment: Our Engineered Systems segment, formerly known as the Energy Solutions segment, serves the power generation, refinery, water/wastewater and midstream oil & gas markets. We are a key part of helping meet the global demand for environmental and equipment protection through our highly engineered platforms including emissions management, fluid bed cyclones, thermal acoustics, separation & filtration, and dampers & expansion joints.
•
Industrial Solutions segment: Our Industrial Process Solutions segment is the combination of the segments formerly known as our Industrial Solutions segment and our Fluid Handling Solutions segment, which serves the broad industrial air pollution control, beverage can, fluid handling, electric vehicle production, food and beverage, semi-conductor, process filtration, pharmaceutical, petrochemical, wastewater treatment, wood manufacturing, desalination, and aquaculture markets. We protect the air we collectively breathe, maintain clean and safe operations for employees, lower energy consumption, minimize waste for customers, and ensure they meet regulatory compliance standards for toxic emissions, fumes, volatile organic compounds and odors through our platforms including duct & installation, industrial air, and fluid handling. Our contracts are obtained either through competitive bidding or as a result of negotiations with our customers. Contract terms offered by us are generally dependent on the complexity and risk of the project as well as the resources that will be required to complete the project. Our focus is on increasing our operating margins as well as our gross margin percentage, which translates into stronger operating results.
Our cost of sales is principally driven by a number of factors, including material and subcontract prices and labor cost and availability. Changes in these factors may have a material impact on our overall gross profit margins.
We break down costs of sales into five categories. They are:
•
Subcontracts-Electrical work, concrete work, subcomponents and other subcontracts necessary to produce our products;
•
Labor-Our direct labor both in the shop and in the field;
•
Material-Raw material that we buy to build our products;
•
Equipment-Fans, motors, control panels and other equipment necessary for turnkey systems; and
•
Factory overhead-Costs of facilities and supervision wages necessary to produce our products.
In general, subcontracts are the highest percentage of costs and also the most flexible followed by labor, material, and equipment. Due to the project nature and global orientation of several of our platforms, leveraging subcontract fabrication partners close to our customers increases our ability to meet customer delivery expectations at market competitive pricing. In periods where orders are infrequent, we do not have to maintain the fixed cost of a manufacturing plant. Across our various product lines, the relative relationships of these cost categories change and cause variations in gross margin percentage. Material and labor costs can increase fast, which also reduces gross margin percentage. As material cost inflation occurs, the Company seeks to pass this cost onto our customers as price increases. Selling and administrative expense principally includes sales and engineering payroll and related fringes, advertising and marketing expenditures as well as all corporate and administrative functions and other costs that support our operations. The majority of these expenses are fixed. An advantage of our asset light model is that as revenue grows, we have significant operating leverage on our fixed selling and administrative cost structure.
Note Regarding Use of Non-GAAP Financial Measures
The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). These GAAP financial statements include certain charges the Company believes are not indicative of its ongoing operational performance. As a result, the Company provides financial information in this MD&A 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 27 --------------------------------------------------------------------------------
non-GAAP financial information, which the Company's management utilizes to evaluate its ongoing financial performance, and which the Company believes provides greater transparency to investors as supplemental information to its GAAP results.
The Company has provided the non-GAAP financial measures including non-GAAP operating income, non-GAAP operating margin, and non-GAAP net income as a result of the adjustment for items that the Company believes are not indicative of its ongoing operations. These items include charges 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 acquisitions and divestitures. While the Company cannot predict the exact timing or amounts of such charges, it does expect to treat these charges as special items in its future presentation of non-GAAP results. Results of Operations Consolidated Results
Our consolidated statements of income for the years ended
Year ended December 31,
(dollars in millions) 2021 2020 2019
Net sales $ 324.1 $ 316.0 $ 341.9
Cost of goods sold 223.2 210.9 227.8
Gross profit $ 100.9 $ 105.1 $ 114.1
Percent of sales 31.1 % 33.3 % 33.4 %
Selling and administrative expenses $ 81.8 $ 76.9 $ 85.9
Percent of sales 25.2 % 24.3 % 25.1 %
Amortization and earnout expenses 7.8 8.8 8.5
Restructuring expenses 0.6 2.3
1.1
Acquisition and integration expenses 0.8 1.4
0.5
Executive transition expenses - 1.5 - Loss on divestitures, net of selling costs - - 0.1 Intangible asset impairment - 0.9 - Operating income$ 9.9 $ 13.3 $ 18.0 Percent of sales 3.1 % 4.2 % 5.3 % Non-GAAP Measures To compare operating performance between the years endedDecember 31, 2021 , 2020 and 2019, 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, (3) acquisition and integration expenses, which include legal, accounting, and other expenses, (4) executive transition expenses, including severance for its former Chief Executive Officer, fees and expenses incurred in the search, for and hiring, of a new Chief Executive Officer, (5) loss on divestitures, net of selling costs necessary to complete the divestiture such as legal, accounting and compliance and (6) intangible asset impairment. See "Note Regarding Use of Non-GAAP Financial Measures" above. The following tables present the reconciliation of GAAP operating income and GAAP operating margin to non-GAAP operating income and non-GAAP operating margin, and GAAP net income to non-GAAP net income. Year Ended December 31, (dollars in millions) 2021 2020
2019
Operating income as reported in accordance with GAAP
3.1 % 4.2 % 5.3 %
Amortization and earnout expenses 7.8 8.8 8.5
Restructuring expenses 0.6 2.3 1.1
Acquisition and integration expenses 0.8 1.4 0.5
Executive transition expenses - 1.5 -
Loss on divestitures, net of selling costs - - 0.1
Intangible asset impairment - 0.9 -
Non-GAAP operating income $ 19.1 $ 28.2 $ 28.2
Non-GAAP operating margin 5.9 % 8.9 % 8.2 %
28--------------------------------------------------------------------------------
Year Ended December 31,
(dollars in millions) 2021 2020 2019
Net income as reported in accordance with GAAP
7.8 8.8 8.5
Restructuring expenses 0.6 2.3
1.1
Acquisition and integration expenses 0.8 1.4
0.5
Executive transition expenses - 1.5
-
Loss on divestitures, net of selling costs - -
0.1
Intangible asset impairment - 0.9
-
Deferred financing fee adjustment - -
0.4
Foreign currency remeasurement 2.0 0.3 (0.5 ) Tax (benefit) expense of adjustments (2.8 ) (3.9 ) (2.5 ) Zhongli tax benefit - - (4.4 ) Non-GAAP net income$ 9.8 $ 19.5 $ 20.9 Non-GAAP net income as a percentage of sales 3.0 % 6.2 %
6.1 %
Comparison of the years ended
Consolidated net sales in 2021 were$324.1 million compared with$316.0 million in 2020, an increase of$8.1 million . The increase is attributable to increases of$11.8 million in volatile organic compounds ("VOC") abatement solutions from the Environmental Integrated Solutions ("EIS") business,$8.0 million in our Regenerative Thermal Oxidizer ("RTO") solutions,$5.8 million in our industrial dampers and expansion joint products,$2.9 million in our pump products, and$2.3 million in our custom-designed dust collection and ventilation solutions. These increases were partially offset by the effects of the Covid-19 pandemic on global demand for certain products in 2021, which includes decreases of$16.7 million in our gas and water separation & filtration products serving the midstream oil & gas end markets, and$6.3 million in our custom-engineered fluid bed cyclone systems serving refinery markets. Gross profit decreased by$4.2 million , or 4.0%, to$100.9 million in 2021 compared with$105.1 million in 2020. The decrease in gross profit is primarily related to inflation, supply chain challenges, and lower margin mix of projects awarded in 2020 and executed during 2021. Gross profit as a percentage of sales decreased to 31.1% in 2021 compared with 33.3% in 2020, respectively. As described, 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, such as implementing price increases and material surcharges that are passed along to customers. 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 were$360.8 million in 2021 compared with$279.6 million in 2020. The increase is primarily attributable to increases in the electrical vehicle production, engineered wood, aluminum beverage can, refinery and power generation end markets. Selling and administrative expenses were$81.8 million in 2021 compared with$76.9 million in 2020. The increase is primarily attributed to cost reduction measures related to the COVID-19 pandemic implemented in 2020, that did not recur in 2021, such as furloughs and one-time reductions including wage reductions and travel restrictions. Selling and administrative expenses as a percentage of sales were 25.2% in 2021 compared with 24.3% in 2020. Amortization and earnout expense was$7.8 million in 2021 and$8.8 million in 2020. The decrease in expense is primarily attributable to$0.7 million decrease indefinite lived asset amortization and$0.3 million in lower earnout expenses. See Note 7 to the Consolidated Financial Statements for further discussion on earnout expenses. Acquisitions and integration expenses related to various merger and acquisition diligence activities (including EIS and Mader acquisitions), which include legal, accounting and banking expenses were$0.8 million in 2021, as compared with$1.4 million in 2020. Operating income for 2021 was$9.9 million , a decrease of$3.4 million from$13.3 million in 2020. Operating income as a percentage of sales for 2021 was 3.1% compared with 4.2% for 2020. The decrease in operating income is primarily attributable to lower margin mix of products sold during the year, the discontinuance of certain COVID-19 cost reduction measures discussed above, partially offset by lower amortization and earnout expenses, restructuring expenses, acquisition and integration expenses, and executive transition expenses. 29 -------------------------------------------------------------------------------- Non-GAAP operating income was$19.1 million in 2021 and$28.2 million in 2020. The decrease in non-GAAP operating income is primarily attributable to the lower gross profit and the discontinuance of certain COVID-19 cost reduction measures discussed above. Non-GAAP operating income as a percentage of sales for 2021 was 5.9% compared with 8.9% for 2020. Interest expense decreased to$3.0 million in 2021 from$3.5 million in 2020. The decrease is due to lower interest rates and lower average debt balances in 2021 compared to 2020.
Income tax expense was
Income tax expense and the effective tax rate for 2021 were affected by certain permanent differences, including state income taxes, non-deductible incentive stock-based compensation, tax credits, and differences in tax rates among the jurisdictions in which we operate.
Comparison of the years ended
See the Management Discussion and Analysis section of our Annual Report on Form 10-K for the year endedDecember 31, 2020 for a discussion of our consolidated results of operations for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The results of operations for our business segments for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 has been recast below to give effect to the segment realignment in the first quarter of 2021. Business Segments During the first quarter of 2021, management determined that a realignment of the Company's segments was necessary to better reflect the solutions we provide, and the end markets we serve. As a result of this realignment, we combined the operating results of the prior Industrial Solutions segment and Fluid Handling Solutions segment into a single reportable segment named the Industrial Process Solutions segment. Additionally, the Energy Solutions segment was renamed the Engineered Systems segment. The results of the segments for the prior year periods have been re-cast to reflect this re-alignment. See note 16 to the consolidated financial statements included in this report. The Company's operations are organized and reviewed by management along its product lines and end markets that the segment serves and are presented in two reportable segments. The results of the segments are reviewed through the "Income from operations" line on the Consolidated Statements of Income. The amounts presented in the Net Sales table below and in the following comments regarding our net sales at the reportable business segment level exclude both intra-segment and inter-segment net sales. The Income from Operations table and corresponding comments regarding operating income (loss) at the reportable segment level include both intra-segment and inter-segment operating income. The exclusion of the Divestitures' operating results subsequent to their disposition impacts the comparability of our segment operating results. 2021 2020
2019
Net Sales (less intra-, inter-segment sales) (table only in thousands) Engineered Systems Segment$ 186,926 $ 205,494 $ 210,319 Industrial Process Solutions Segment 137,214 110,517 131,550 Net sales$ 324,140 $ 316,011 $ 341,869 2021 2020 2019 Income from Operations (table only in thousands) Engineered Systems segment$ 25,770 $ 34,170 $ 33,886 Industrial Process Solutions segment 15,054 7,220 11,237 Corporate and Other (1) (30,967 ) (28,044 ) (27,133 ) Income from operations$ 9,857 $ 13,346 $ 17,990 (1) Includes corporate compensation, professional services, information technology, other general and administrative corporate expenses and loss on divestitures, net of selling costs. This figure excludes earnout expenses / income, which are recorded in the segment in which the expense / income occurs. 30 --------------------------------------------------------------------------------
Comparison of the years ended
Engineered Systems segment
Our Engineered Systems segment net sales decreased$18.6 million to$186.9 million in 2021 compared with$205.5 million in 2020, a decrease of 9.1%. The decrease is primarily attributable to the effect of COVID-19 on global demand for certain products which included decreases of$16.7 million in our gas separation & filtration products serving the midstream oil & gas end markets, and$6.3 million in our custom-engineered fluid bed cyclone systems serving refinery markets, partially offset by an increase of$5.8 million in our industrial dampers and expansion joint products. Operating income for the Engineered Systems segment decreased$8.4 million to$25.8 million for 2021 compared with$34.2 million in 2020, a decrease of 24.6%. The decrease in operating income in 2021 is primarily attributable to the decrease in gross profit of$9.2 million due to decrease in net sales, inflation, supply chain challenges and lower margin mix of projects awarded in 2020 and executed during 2021.
Industrial Process Solutions segment
Our Industrial Process Solutions segment net sales increased$26.7 million to$137.2 million in 2021 compared with$110.5 million in 2020, an increase of 24.2%. The increase is primarily attributable to increases of$11.8 million in volatile organic compounds ("VOC") abatement solutions from the Environmental Integrated Solutions ("EIS") business serving the aluminum beverage can market,$8.0 million in our Regenerative Thermal Oxidizer ("RTO") solutions serving the electric vehicle and general industrial markets,$2.9 million in our pump products, and$2.3 million in our custom-designed dust collection and ventilation solutions serving the general industrial markets. Operating income increased$7.9 million to$15.1 million for 2021 compared with$7.2 million in 2020. The increase is primarily attributable to an increase of$5.0 million in gross profit driven by increased net sales, a decrease of$1.1 million in restructuring expenses related to the EIS acquisition, a decrease of$0.9 million related to impairment charges in the prior year, a decrease in selling, general and administrative expenses of$0.5 million and a decrease in earnout expenses of$0.3million .
Corporate and Other segment
Operating expense for the Corporate and Other segment increased$3.0 million to$31.0 million for 2021 compared with$28.0 million for 2020. The increase is primarily attributable to a$5.4 million increase in selling, general and administrative expense related to the discontinuation of certain cost reduction measures in response to the COVID-19 pandemic, such as furloughs and one-time reductions including wage reductions and travel restrictions, partially offset by lower executive transition expense of$1.5 million , lower acquisition and integration expenses of$0.6 million , and lower restructuring expenses of$0.4 million .
Comparison of the years ended
Engineered Systems segment
Our Engineered Systems segment net sales decreased$4.8 million to$205.5 million in 2020 compared with$210.3 million in 2019, a decrease of 2.3%. The decrease is primarily attributable to decreases of$18.2 million in custom-engineered fluid bed cyclone systems that serve the refinery market offset by increases of$10.1 million in the Company's custom acoustical technologies that serve the natural gas power generation markets and$3.3 million in volume increases in our emissions management and water filtration solutions technologies. Operating income increased$0.3 million to$34.2 million for 2020 compared with$33.9 million in 2019, an increase of 0.8%. The increase in operating income in 2020 is primarily attributable to the decrease of$2.6 million in selling and administrative expenses related to the cost reductions as described above and the decrease in amortization expenses of$1.1 million partially offset by a decrease in gross profit of$3.1 million due to lower net sales and unfavorable product mix and an increase of$0.3 million in restructuring expense. 31 --------------------------------------------------------------------------------
Industrial Process Solutions segment
Our Industrial Process Solutions segment net sales decreased$21.0 million in 2020 to$110.5 million compared with$131.5 million in 2019, a decrease of 16.0%. The decrease is primarily related to decreases of$24.5 million in our air pollution control technologies,$4.4 million attributable to volume decreases in the Company's liquid filtration and pump solutions product line driven by lower demand from oil & gas, hospitality and desalination end market customers, partially offset by$8.1 million increase in VOC abatement solutions from the EIS acquisition. Operating income decreased$4.0 million to$7.2 million for 2020 compared with$11.2 million in 2019, a decrease of 35.7%. The decrease is primarily attributable to$6.2 million decrease in gross profit due to lower net sales, an increase of$1.5 million in amortization and earnout expenses primarily due to the EIS acquisition,$0.9 million impairment charges and$0.7 million in restructuring costs. These costs were partially offset by$5.0 million reduction in selling, general and administrative expenses related to cost reductions described above.
Corporate and Other segment
Operating expense for the Corporate and Other segment increased$0.9 million to$28.0 million for 2020 compared with$27.1 million for 2019. The increase is primarily attributable to a$1.5 million increase in executive transition expenses,$0.9 million increase in acquisition and integration expenses, partially offset by$1.5 million decrease in selling and administration expenses related to cost reductions described above.
Liquidity and Capital Resources
When we undertake large jobs, our working capital objective is to make these projects self-funding. We work to achieve this by obtaining 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. AtDecember 31, 2021 , the Company had working capital of$72.3 million , compared with$74.1 million atDecember 31, 2020 . The ratio of current assets to current liabilities was 1.62 to 1.00 atDecember 31, 2021 as compared with a ratio of 1.68 to 1.00 atDecember 31, 2020 . AtDecember 31, 2021 and 2020, cash and cash equivalents totaled$29.9 million and$36.0 million , respectively. As ofDecember 31, 2021 and 2020,$22.6 million and$28.0 million , respectively, of our cash and cash equivalents were held by non-U.S. subsidiaries, as well as being denominated in foreign currencies.
Debt consisted of the following:
December 31,
(table only in thousands) 2021
2020
Outstanding borrowings under Credit Facility
Term loan payable in quarterly principal installments of$0.6 million throughSeptember 2023 ,$0.8 million throughSeptember 2025 and$1.1 million thereafter with balance due upon maturity inSeptember 2026 . - Term loan$ 43,511 $ 46,250 - Revolving Credit Loan 22,000 27,700 - Unamortized debt discount (1,731 ) (1,334 ) Total outstanding borrowings under Credit Facility 63,780
72,616
Less: current portion (2,203 ) (3,125 ) Total debt, less current portion$ 61,577 $
69,491
In 2021, the Company made repayments of
Under the terms of the Credit Facility, the Company is required to maintain certain financial covenants, including the maintenance of a Consolidated Net Leverage Ratio (as defined in the Credit Facility). ThroughSeptember 30, 2023 , the maximum Consolidated Net Leverage Ratio is 3.75, after which time it will decrease to 3.50 until the end of the term of the Credit Facility.
As of
32
--------------------------------------------------------------------------------Foreign Debt
In addition, the Company has a number of bank guarantee facilities and bilateral lines of credit in various foreign countries currently supported by cash, letters of credit or pledged assets and collateral under the Credit Facility. The Credit Facility allows letters of credit and bank guarantee issuances of up to$65.0 million from the bilateral lines of credit secured by pledged assets and collateral under the Credit Facility.
See Note 8 to the Consolidated Financial Statements for further information on the Company's foreign debt.
Total unused credit availability under our Credit Facility and other non-U.S. credit facilities and agreements, exclusive of any potential asset base limitations, is as follows: December 31, 2021 2020 (dollars in millions) Credit Facility, revolving loans$ 140.0 $ 140.0 Draw down (22.0 ) (27.7 ) Letters of credit open (14.5 ) (7.6 ) Total unused credit availability$ 103.5 $ 104.7
Amount available based on borrowing limitations
Overview of Cash Flows and Liquidity
For the year ended December 31,
(dollars in thousands) 2021 2020 2019
Total operating cash flow provided by operating activities$ 13,298 $ 4,421 $ 10,227 Net cash (used in) provided by investing activities (2,083 ) (9,235 ) (5,146 ) Net cash provided by (used in) financing activities (15,556 ) 3,724 (12,116 ) Effect of exchange rate changes on cash and cash equivalents (1,475 ) 1,943 (445 ) Net increase (decrease) in cash, cash equivalents and restricted cash$ (5,816 ) $ 853 $ (7,480 ) Operating Activities In 2021,$13.2 million of cash was provided by operating activities compared with$4.4 million in 2020, an increase of$8.8 million . Cash flow from operating activities in 2021 had a favorable impact year-over-year primarily due to certain improvements in net working capital, partially offset by decreases in net earnings. In 2020,$4.4 million of cash was provided by operating activities compared with$10.2 million in 2019, a decrease of$5.8 million . Cash flow from operating activities in 2020 had an unfavorable impact year-over-year primarily due to decreases in net earnings and certain changes in net working capital.
Investing Activities
In 2021,$2.1 million of cash was used in investing activities, which consisted of$2.6 million of acquisition of property and equipment, offset by$0.5 million of proceeds from the disposal of assets held for sale. In 2020,$9.2 million of cash was used in investing activities, which consisted of$5.9 million for acquisitions,$3.9 million of acquisition of property and equipment, offset by$0.6 million of proceeds from the disposal of assets held for sale. Financing Activities Financing activities in 2021 used cash of$15.6 million , which consisted primarily of$5.7 million net payments on our revolving credit line,$2.7 million paydown of our term debt,$5.0 million for the repurchase and retirement of our common stock,$0.8 million in deferred financing fees paid,$0.8 million in earnout payments, and$0.6 million in payments on our capital leases. Financing activities in 2020 provided cash of$3.7 million , which consisted primarily of$9.2 million in net borrowings from our revolving credit lines of which$10.3 million was used to fund the EIS acquisition onJune 4, 2020 . This was offset by$2.5 million of payments on our term loan,$2.6 million used to pay term debt assumed in connection with the Mader joint venture onJuly 31, 2020 , and$0.5 million in payments on capital leases. 33 -------------------------------------------------------------------------------- Our primary sources of liquidity are cash generated from operations and borrowing availability under the Credit Facility. We believe that cash flows from operating activities, together with our existing cash and borrowings available under our Credit Facility, will be sufficient for at least the next twelve months to fund our current anticipated uses of cash. After that, our ability to fund these expected uses of cash and to comply with the financial covenants under our debt agreements will depend on the results of future operations, performance and cash flow. Our ability to fund these expected uses from the results of future operations will be subject to prevailing economic conditions and to financial, business, regulatory, legislative and other factors, many of which are beyond our control. Our material cash requirements included (i) debt repayments under with respect to our Term Loan and Revolving Credit Loan, (ii) interest expense, (iii) purchase obligations for costs associated with uncompleted sales contracts, (iv) operating and capital lease obligations and (v) contingent liabilities related to acquisitions, including earnout liabilities and retention payments. We are party to many contractual obligations involving commitments to make payments to third parties, and such commitments require a material amount of cash. The following table summarizes the Company's material cash requirements from known contractual obligations as ofDecember 31, 2021 : Payments Due by
Period
Less than 1 More than
(dollars in thousands) Total year 1-3 years 3-5 years 5 years
Term Loan Debt $ 43,511 $ 2,203 $ 5,781 $ 35,527 $ -
Revolving Credit Loan 22,000 - - 22,000 -
Interest expense (estimated) 6,765 1,629 3,064 2,071 -
Purchase obligations (1) 75,346 75,346 - - -
Operating lease obligations 12,981 2,922 4,666 2,982 2,411
Capital lease obligations 8,205 889 1,832 1,905 3,579
Contingent liabilities related
to acquisitions (2) 1,597 1,597 - - -
Totals $ 170,405 $ 84,586 $ 15,343 $ 64,485 $ 5,990
(1)
Primarily consists of purchase obligations for costs associated with uncompleted
sales contracts.
(2)
Includes expected earnout liability and retention payment.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity with GAAP. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We believe that, of our significant accounting policies, the following accounting policies involve a higher degree of judgments, estimates, and complexity.
Use of Estimates
Preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and related contingent liabilities. On an on-going basis, we evaluate our estimates, including those related to revenues, bad debts, warranties, share based compensation, income taxes, goodwill and intangible asset valuation, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
A substantial portion of our revenue is derived from fixed-price contracts. We account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
We recognize revenue as performance obligations are satisfied and the customer
obtains control of the products and services. A significant amount of our
revenue is recognized over a period of time as we perform under the contract
because control of the work in process transfers continuously to the customer.
For performance obligations to deliver products with continuous transfer of
control to the customer, revenue is recognized based on the extent of progress
towards completion of the performance obligation. Progress is measured based on
the ratio of costs incurred to date to the total estimated costs to complete the
performance obligation. For these contracts, the cost-to-cost measure best
depicts the continuous transfer of goods or services to the customer.
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The judgments and estimates involved include management's ability to accurately
estimate the contracts' progress to completion at each financial reporting
period. In addition, certain contracts are highly dependent on the work of
contractors and other subcontractors participating in a project, over which we
have no or limited control, and their performance on such project could have an
adverse effect on the profitability of our contracts. Delays resulting from
these contractors and subcontractors, changes in the scope of the project,
weather, and labor availability also can have an effect on a contract's
profitability. Changes to job performance, job conditions, and estimated
profitability may result in revisions to contract revenue and costs and are
recognized in the period in which the revisions are made.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. No provision for estimated losses on
uncompleted contracts was needed at
Inventories
The Company's inventories are valued at the lower of cost or net realizable value using the first-in, first-out inventory costing method. Inventory quantities are regularly reviewed and provisions for excess or obsolete inventory are recorded primarily based on the Company's forecast of future demand and market conditions. Significant unanticipated changes to the Company's forecasts could require a change in the provision for excess or obsolete inventory.
Long-lived assets
Property, plant and equipment and finite life intangible assets are reviewed whenever events or changes in circumstances occur that indicate possible impairment. If events or changes in circumstances occur that indicate possible impairment, our impairment review is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of our assets and liabilities. This analysis requires management judgment with respect to changes in technology, the continued success of product lines, and future volume, revenue and expense growth rates. We conduct annual reviews for idle and underutilized equipment, and review business plans for possible impairment. Impairment occurs when the carrying value of the assets exceeds the future undiscounted cash flows expected to be earned by the use of the asset or asset group. When impairment is indicated, the estimated future cash flows are then discounted to determine the estimated fair value of the asset or asset group and an impairment charge is recorded for the difference between the carrying value and the estimated fair value.
Additionally, we also evaluate the remaining useful life each reporting period to determine whether events and circumstances warrant a revision to the remaining period of depreciation or amortization. If the estimate of a long-lived asset's remaining useful life is changed, the remaining carrying amount of the asset is amortized prospectively over that revised remaining useful life.
The Company completes an annual (or more often if circumstances require) impairment assessment of its indefinite life intangible assets. As a part of its annual assessment, typically, 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 an asset is less than its carrying amount. If there is a qualitative determination that the fair value of a particular asset is more likely than not greater than its carrying value, we do not need to proceed to the quantitative estimated fair value test for that asset. If this qualitative assessment indicates a more likely than not potential that the asset may be impaired, the estimated fair value is determined by the relief from royalty method. If the estimated fair value of an asset is less than its carrying value, an impairment charge is recorded for the amount by which the carrying value of the asset exceeds its estimated fair value. During 2021 and 2020, our annual impairment test indicated that zero and one, respectively, of our indefinite-lived tradenames was impaired. Accordingly, we recognized impairment charges in our financial results of zero and$0.9 million for the years endedDecember 31, 2021 and 2020, respectively. For additional information on impairment testing results, see Note 6 to the Consolidated Financial Statements.
The Company completes an annual (or more often if circumstances require) goodwill impairment assessment onOctober 1 on a reporting unit level, at or below the operating segment level. As a part of its annual 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 is less than its carrying amount. If there is a qualitative determination that the fair value of a particular reporting unit is more likely than not greater than its carrying value, the Company does not need to quantitatively test for goodwill impairment for that reporting unit. If this qualitative assessment indicates a more likely than not potential that the asset may be impaired, the estimated fair value is calculated using a weighting of the income method and the market method. If the estimated fair value of a reporting unit is less than its carrying value, an impairment charge is recorded. 35 -------------------------------------------------------------------------------- The Company bases its measurement of the fair value of a reporting unit using a 50/50 weighting of the income method and the market method. The income method is based on a discounted future cash flow approach that uses the significant assumptions of projected revenue, projected operational profit, terminal growth rates, and the cost of capital. Projected revenue, projected operational profit and terminal growth rates are significant assumptions because they are three primary drivers of the projected cash flows in the discounted future cash flow approach. Cost of capital is a significant assumption as it is the discount rate used to calculate the current fair value of those projected cash flows. The market method is based on financial multiples of comparable companies and applies a control premium. Significant estimates in the market approach include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating income multiples in estimating the fair value of a reporting unit. Based on the analysis, the resultant estimated fair value of all of the reporting units exceeded their carrying value as ofDecember 31, 2021 . For additional information on goodwill impairment testing results, see Note 6 to the Consolidated Financial Statements.
Income Taxes
Income taxes are determined using the asset and liability method of accounting for income taxes in accordance withFinancial Accounting Standards Board ("FASB"), Accounting Standards Codification ("ASC") Topic 740, "Income Taxes". Income tax expense includes federal, state and foreign income taxes. Deferred income taxes are provided using the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases and are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Tax credits and other incentives reduce income tax expense in the year the credits are claimed. Management must assess the need to accrue or disclose uncertain tax positions for proposed potential adjustments from various federal, state and foreign tax authoritieswho regularly audit the Company in the normal course of business. In making these assessments, management must often analyze complex tax laws of multiple jurisdictions, including many foreign jurisdictions. The accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company records the related interest expense and penalties, if any, as tax expense in the tax provision. Management must assess the realizability of the Company's deferred tax assets. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carry forward periods), projected future taxable income, and tax-planning strategies in making this assessment. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The Company has made an accounting policy election to record theU.S. income tax effect of future global intangible low-taxed income ("GILTI") inclusions in the period in which they arise, rather than establishing deferred taxes with respect to the expected future tax liabilities associated with future GILTI inclusion. Certain of the Company's undistributed earnings of its foreign subsidiaries are not permanently reinvested. A liability has been recorded for the deferred taxes on such undistributed foreign earnings. The amount is attributable primarily to the foreign withholding taxes that would become payable should the Company repatriate cash held in its foreign operations.
Other significant accounting policies
Other significant accounting policies, not involving the same level of uncertainties as those discussed above, are nevertheless important to an understanding of our financial statements. See Note 1 to the Consolidated Financial Statements, Summary of Significant Accounting Policies, which discusses accounting policies that must be selected by us when there are acceptable alternatives.
New Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 1 to the Consolidated Financial Statements included in this annual report on Form 10-K.
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