CECO ENVIRONMENTAL CORP.
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
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
OnJanuary 30, 2020 , the WHO announced a global health emergency because of a new strain of coronavirus ("COVID-19") originating inWuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. OnMarch 11, 2020 , the WHO characterized COVID-19 as a pandemic. As ofJune 30, 2020 , the virus continues to spread and has had a significant impact on worldwide economic activity and on macroeconomic conditions and the end markets of our business. No vaccine is currently available. Several countries, includingthe 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. OnMarch 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. Withinthe 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 COVID-19 pandemic 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 recommendedCDC 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. InApril 2020 , the CECO senior management team agreed to a temporary salary reduction, certain corporate-level costs have been eliminated or reduced, and CECO has instituted a rolling 2-week furlough ofUnited States -based employees during the 6-week period beginning the week ofApril 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.
18
--------------------------------------------------------------------------------
CEO Succession
Appointment of Chief Executive Officer
OnJuly 6, 2020 , the Company also announced that, effectiveJuly 6, 2020 , Mr.Todd Gleason commenced serving as Chief Executive Officer and as a member of the Board of Directors of the Company, succeedingDennis Sadlowski .Mr. Gleason , age 49, most recently served, fromApril 2015 toJuly 2020 , as President and Chief Executive Officer ofScientific Analytics Inc. , a predictive analytic technologies and services company. Prior to that position,Mr. Gleason served fromJune 2007 toMarch 2015 in a number of senior officer and executive positions for Pentair plc, a water treatment company. During his tenure with Pentair,Mr. Gleason served as Senior Vice President and Corporate Officer fromJanuary 2013 toMarch 2015 , President, Integration and Standardization fromJanuary 2010 toJanuary 2013 , and Vice President, Global Growth and Investor Relations fromJune 2007 toJanuary 2010 . Before joining Pentair,Mr. Gleason served as Vice President, Strategy and Investor Relations forAmerican Standard Companies Inc. (later renamed toTrane Inc. prior to its acquisition byIngersoll-Rand Company Limited ), a global, diversified manufacturing company, and in a number of different roles (including as Chief Financial Officer, Honeywell Process Solutions) at Honeywell International Inc., a diversified technology and manufacturing company.Mr. Gleason's qualifications to sit on the Board include his financial and business background, as well as his extensive executive and leadership experience. As the Company's new Chief Executive Officer,Mr. Gleason will provide the Board with insight on the day-to-day operations of the Company and the issues it faces.
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 inthe United States ("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 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 and
six-month periods ended
Three months ended June 30, Six months ended June 30,
(dollars in millions) 2020 2019 2020 2019
Net sales $ 75.2 $ 81.2 $ 155.7 $ 167.2
Cost of sales 49.4 54.4 101.6 111.9
Gross profit $ 25.8 $ 26.8 $ 54.1 $ 55.3
Percent of sales 34.3 % 33.0 % 34.7 % 33.1 %
Selling and administrative expenses 18.4 22.4 40.4 43.8
Percent of sales 24.5 % 27.6 % 25.9 % 26.2 %
Amortization expenses 1.8 2.2 3.5 4.3
Restructuring expenses 0.5 0.2 0.9 0.2
Acquisition and integration expenses 0.7 - 0.7 -
Loss on divestitures, net of selling costs - - - 0.1
Operating income $ 4.4 $ 2.0 $ 8.6 $ 6.9
Operating margin 5.9 % 2.5 % 5.5 % 4.1 %
19
-------------------------------------------------------------------------------- To compare operating performance between the three-month and six-month periods endedJune 30, 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, facility exits, and legal expenses, (3) acquisition and integration expenses, which include legal, accounting, and other expenses, and (4) 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 June 30, Six months ended June 30, (dollars in millions) 2020 2019 2020 2019 Operating income as reported in accordance with GAAP $ 4.4 $ 2.0 $ 8.6$ 6.9 Operating margin in accordance with GAAP 5.9 % 2.5 % 5.5 % 4.1 % Amortization expenses 1.8 2.2 3.5 4.3 Restructuring expenses 0.5 0.2 0.9 0.2 Acquisition and integration expenses 0.7 - 0.7 - Loss on divestitures, net of selling costs - - - 0.1 Non-GAAP operating income $ 7.4 $ 4.4$ 13.7 $ 11.5 Non-GAAP operating margin 9.8 % 5.4 % 8.8 % 6.9 % Net sales for the second quarter of 2020 decreased$6.0 million , or 7.4%, to$75.2 million compared with$81.2 million in the second quarter of 2019. The decrease is primarily attributable to decreases of$6.1 million in custom-designed FCC cyclone systems,$1.6 million in Industrial scrubber solutions, and$1.3 million in clean air pollution technologies, partially offset by increases of$2.2 million of our turbine exhaust and silencers systems and$0.5 million in VOC abatement solutions from the Environmental Integrated Solutions ("EIS") acquisition. Net sales for the first six months of 2020 decreased$11.5 million , or 6.9%, to$155.7 million compared with$167.2 million in the first six months of 2019. The decrease is primarily attributable to decreases of$11.2 million in custom-designed FCC cyclone systems,$3.6 million in filtration and pump solutions and$2.2 million in clean air pollution technologies, partially offset by increases of$4.2 million in our custom acoustical technologies and selective catalytic reduction ("SCR") technologies and$0.5 million in VOC abatement solutions from the EIS acquisition. Gross profit decreased$1.0 million , or 3.7%, to$25.8 million in the second quarter of 2020 compared with$26.8 million in the second quarter of 2019. The decrease in gross profit is primarily due to decrease in sales as noted above, partially offset by favorable product mix and cost reduction actions. Gross profit as a percentage of sales increased to 34.3% in the second quarter of 2020 compared with 33.0% in the second quarter of 2019 due to product mix and cost reduction actions. Gross profit decreased$1.2 million , or 2.2%, to$54.1 million in the first six months of 2020 compared with$55.3 million in the first six months of 2019. The decrease in gross profit is primarily due to decrease in sales as noted above, partially offset by product mix and cost reduction actions. Gross profit as a percentage of sales increased to 34.7% in the first six months of 2020 compared with 33.1% in the first six months of 2019 due to product mix and cost actions including an employee furlough. Orders booked were$60.0 million during the second quarter of 2020 and$135.6 million for the first six months of 2020 as compared with$100.3 million during the second quarter of 2019 and$200.3 million during the first six months of 2019. The decrease is primarily attributable to decreases in the refinery, midstream oil and gas and pollution control end markets, primarily due to the COVID-19 slowdown impacting our customers starting inMarch 2020 . Selling and administrative expenses were$18.4 million for the second quarter of 2020 compared with$22.4 million for the second quarter of 2019. The decrease is primarily attributable to proactive cost reduction measures taken in response to the COVID-19 pandemic including: the senior management team's temporary salary reduction, elimination or reduction of certain corporate-level costs, a 2-week furlough ofUnited States -based employees, and travel restrictions across all segments. Selling and administrative expenses decreased as a percentage of sales to 24.5% in the second quarter of 2020 compared with 27.6% in the second quarter of 2019. The decrease in selling and administrative expenses as a percentage of sales is primarily attributable to cost reduction measures. Selling and administrative expenses were$40.4 million for the first six months of 2020 compared with$43.8 million for the first six months of 2019. The decrease is primarily attributable to proactive cost reduction measures taken in response to the COVID-19 pandemic including: the senior management team's temporary salary reduction, elimination or reduction of certain corporate-level costs, a 2-week furlough ofUnited States -based employees, and travel restrictions across all segments. These costs reductions were partially offset by investments in sales personnel and the final settlement of a commercial dispute in the first quarter. Selling and administrative expenses decreased as a percentage of sales to 25.9% in the first six months of 2020 compared with 26.2% in the first 20
--------------------------------------------------------------------------------
six months of 2019. The decrease in selling and administrative expenses as a percentage of sales is primarily attributable to the items described above.
Amortization expense was$1.8 million for the second quarter of 2020 compared with$2.2 million for the second quarter of 2019. The decrease in expense is attributable to a$0.4 million decrease in definite lived asset amortization. Amortization expense was$3.5 million for the first six months of 2020 compared with$4.3 million for the first six months of 2019. The decrease in expense is attributable to a$0.7 million decrease in definite lived asset amortization. Operating income increased$2.4 million to$4.4 million in the second quarter of 2020 compared with$2.0 million during the second quarter of 2019. Operating income increased$1.7 million to$8.6 million in the first six months of 2020 compared with$6.9 million during the first six months of 2019. The increase is attributable to cost reductions as described above. Non-GAAP operating income was$7.4 million for the second quarter of 2020 compared with$4.4 million for the second quarter of 2019. The increase in non-GAAP operating income is primarily attributable to the decrease in selling and administrative expenses, as a result of proactive cost reduction measures taken in response to the COVID-19 pandemic, partially offset by decrease in gross profit. Non-GAAP operating income as a percentage of sales increased to 9.8% for the second quarter of 2020 from 5.4% for the second quarter of 2019. Non-GAAP operating income was$13.7 million for the first six months of 2020 compared with$11.5 million for the first six months of 2019. The increase in non-GAAP operating income is primarily attributable to the decrease in selling and administrative expenses, as a result of proactive cost reduction measures taken in response to the COVID-19 pandemic, partially offset by decrease in gross profit. Non-GAAP operating income as a percentage of sales increased to 8.8% for the first six months of 2020 from 6.9% for the first six months of 2019. Interest expense decreased to$0.9 million in the second quarter of 2020 and$2.0 million for the first six months of 2020 compared with$1.5 million in the second quarter of 2019 and$3.0 million for the first six months of 2019. The decrease in interest expense is primarily due to lower interest rates, and a reduced debt balance compared to 2019. During the first six months of 2020 the Company had net borrowings of$13.5 million on it's revolving credit facility, of which$10.3 million was used to fund the EIS acquisition onJune 4, 2020 . Income tax expense was$0.6 million for the second quarter of 2020 and$1.3 million for the first six months of 2020 compared with income tax benefit of$4.2 million for the second quarter of 2019 and$3.3 million for the first six months of 2019. The effective income tax rate for the second quarter of 2020 was 14.8% compared with (303.7%) for the second quarter of 2019. The effective income tax rate for the first six months of 2020 was 16.8% compared with (81.3%) for the first six months of 2019. The effective income tax rate for the second quarter and first six months of 2020 is lower thanthe 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. The effective income tax rates for the three and six months endedJune 30, 2019 were negative (i.e. income tax benefits), despite pre-tax income, due primarily to a tax benefit of$4.4 million from a tax position related to the 2018 divesture ofJiangyin Zhongli Industrial Technology Co. Ltd.
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 June 30, Six months ended June 30,
(dollars in thousands) 2020 2019 2020 2019
Net Sales (less intra- and
inter-segment sales)
Energy Solutions Segment $ 49,074 $ 50,572 $ 99,720 $ 105,760
Industrial Solutions Segment 16,664 20,083 37,020 38,936
Fluid Handling Solutions Segment 9,432 10,524 18,916 22,494
Net sales $ 75,170 $ 81,179 $ 155,656 $ 167,190
21
--------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
(dollars in thousands) 2020 2019 2020 2019
Income from Operations
Energy Solutions Segment $ 8,646 $ 6,351 $ 17,203 $ 15,642
Industrial Solutions Segment 19 515 1,492 1,117
Fluid Handling Solutions Segment 1,817 1,481 3,440 3,839
Corporate and Other(1) (6,087 ) (6,329 ) (13,502 ) (13,691 )
Income from operations $ 4,395 $ 2,018 $ 8,633 $ 6,907 (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$1.5 million to$49.1 million for the second quarter of 2020 compared with$50.6 million in the same period of 2019. The decrease is primarily attributable to decreases of$6.1 million in the Company's custom-designed FCC cyclone systems that serve the refinery markets period over period and$0.8 million in midstream end markets and custom damper technologies, partially offset by increases of$3.8 million in SCR technologies and$2.3 million increase in custom acoustical technologies that serve the natural gas and power generation markets. Our Energy Solutions segment net sales decreased$6.1 million to$99.7 million in the first six months of 2020 compared with$105.8 million in the same period of 2019. The decrease is primarily attributable to decreases of$11.2 million in the Company's custom-designed cyclone systems that serve the refinery markets period over period partially offset by project increases of$4.2 million in the Company's custom acoustical technologies and SCR technologies that serve the natural gas power generation markets. Operating income for the Energy Solutions segment increased$2.2 million to$8.6 million in the second quarter of 2020 compared with$6.4 million in the same period of 2019. The operating income increase is primarily attributable to a decrease of$2.3 million in selling and administrative expenses related to cost reductions as described above. Operating income for the Energy Solutions segment increased$1.6 million to$17.2 million in the first six months of 2020 compared with$15.6 million in the same period of 2019. The operating income increase is primarily attributable to the decrease of$1.3 million in selling and administrative expenses related to the cost reductions as described above.
Industrial Solutions Segment
Our Industrial Solutions segment net sales decreased$3.4 million to$16.7 million in the second quarter of 2020 compared with$20.1 million in the second quarter of 2019. The decrease is primarily attributable to decreases of$1.6 million in scrubber solutions,$1.3 million in clean air pollution control technologies, and$1.1 million in the Company's fume collection technologies, partially offset by$0.5 million in net sales from the EIS acquisition. Our Industrial Solutions segment net sales decreased$1.9 million to$37.0 million in the first six months of 2020 compared with$38.9 million in the first six months of 2019. The decrease is primarily attributable to decreases of$2.2 million in clean air pollution control technologies and$1.0 million in fume collection technologies, partially offset by a$0.9 million increase in customed-designed air pollution control solutions and$0.5 million in net sales from the EIS acquisition. Operating income for the Industrial Solutions segment decreased$0.5 million to breakeven in the second quarter of 2020 compared with$0.5 million in the second quarter of 2019. The decrease is primarily attributable to a$0.7 million decrease in gross profit driven by decreased sales and a$0.6 million increase in acquisition and restructuring expenses, partially offset by$0.8 million decrease in selling and administration related to cost reductions described above. Operating income for the Industrial Solutions segment increased$0.4 million to$1.5 million in the first six months of 2020 compared with$1.1 million in the first six months of 2019. The increase is primarily attributable to a decrease of$1.3 million in selling and administration expenses related to cost reductions described above, partially offset by increases of$0.7 million in acquisition and restructuring expenses and a decrease of$0.3 million in gross profit driven by decreased sales. 22
--------------------------------------------------------------------------------
Fluid Handling Solutions Segment
Our Fluid Handling Solutions segment net sales decreased$1.1 million to$9.4 million in the second quarter of 2020 compared with$10.5 million in the second quarter of 2019. Net sales decreased$3.6 million to$18.9 million in the first six months of 2020 compared with$22.5 million in the first six months of 2019. The decrease is primarily attributable to volume decreases in the Company's filtration and pump solutions sales driven by oil & gas and automotive end market softness. Operating income for the Fluid Handling Solutions segment increased$0.3 million to$1.8 million in the second quarter of 2020 compared with$1.5 million in the second quarter of 2019. The increase is primarily attributable to a$0.4 million decrease in selling and administration expenses related to domestic furloughs, headcount reductions, and travel restrictions and$0.1 million decrease in amortization expense, partially offset by a$0.2 million decrease in gross profit due to decrease in sales. Operating income for the Fluid Handling Solutions segment decreased$0.4 million to$3.4 million in the first six months of 2020 compared with$3.8 million in the first six months of 2019. The decrease is primarily attributable to a$1.2 million decrease in gross profit due to decrease in sales, partially offset by a$0.8 million decrease in selling and administration expenses primarily related to domestic furloughs, headcount reductions, and travel restrictions.
Corporate and Other Segment
Operating expense for the Corporate and Other segment decreased$0.2 million to$6.1 million for the second quarter of 2020 compared with$6.3 million for the second quarter of 2019. The decrease is primarily attributable to a$0.4 million decrease in selling and administration expenses related to domestic furloughs, headcount reductions and travel restrictions offset by increases of$0.1 million in restructuring expense and$0.1 million in acquisition and integration expenses. Operating expense for the Corporate and Other segment decreased$0.2 million to$13.5 million for the first six months of 2020 compared with$13.7 million for the first six months of 2019. The decrease is primarily attributable to a$0.6 million decrease in selling and administration expenses related to domestic furloughs, headcount reductions, and travel restrictions offset by increases of$0.3 million in restructuring expense and$0.1 million in acquisition and integration expenses.
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$204.6 million as ofJune 30, 2020 from$216.6 million as ofDecember 31, 2019 ,$8.8 million of backlog was acquired from the EIS acquisition. 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 byUnited States generally accepted accounting principles ("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
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. AtJune 30, 2020 , the Company had working capital of$74.0 million , compared with$64.3 million atDecember 31, 2019 . The ratio of current assets to current liabilities was 1.70 to 1.00 onJune 30, 2020 , as compared with a ratio of 1.56 to 1.00 atDecember 31, 2019 . The increase to the Company's working capital is primarily attributable to increased cash and cash equivalents balance of$5.9 million and decrease of$6.3 million in billings in excess of costs and estimated earnings on uncompleted contracts. 23 -------------------------------------------------------------------------------- AtJune 30, 2020 andDecember 31, 2019 , cash and cash equivalents totaled$41.5 million and$35.6 million , respectively. As ofJune 30, 2020 andDecember 31, 2019 ,$31.2 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) June 30, 2020 December 31, 2019 Outstanding borrowings under the Credit Facility (defined below). Term loan payable in quarterly principal installments of$0.6 million throughJune 2021 ,$0.9 million throughJune 2023 , and$1.3 million thereafter with balance due upon maturity inJune 2024 . - Term loan$ 47,500 $ 48,750 - Revolving Credit Loan 32,000 18,500 - Unamortized debt discount (1,540 ) (1,749 ) Total outstanding borrowings under Credit Facility$ 77,960 $
65,501
Less: current portion (2,500 ) (2,500 ) Total debt, less current portion$ 75,460 $ 63,001 Credit Facility The Company's outstanding borrowings inthe 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 ofJune 30, 2020 andDecember 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) June 30, 2020 December 31, 2019 Credit Facility, revolving loans $ 140.0 $ 140.0 Draw down (32.0 ) (18.5 ) Letters of credit open (7.8 ) (11.0 ) Total unused credit availability $ 100.2 $ 110.5
Amount available based on borrowing limitations $ 88.5 $
82.3
Overview of Cash Flows and Liquidity
For the six months ended June 30,
(dollars in thousands) 2020 2019
Net cash provided by (used in) operating
activities $ 2,108 $ (11,297 )
Net cash used in investing activities (8,116 ) (1,201 )
Net cash provided by (used in) financing
activities 12,047 (2,121 )
Effect of exchange rate changes on cash and cash
equivalents 141 136
Net increase (decrease) in cash $ 6,180 $ (14,483 )
Operating Activities
For the six-months ended June 30, 2020 , $2.1 million of cash was provided by
operating activities compared with $(11.3) million used in operating activities
in the prior year period, a $13.4 million increase. Cash flow from operating
activities in the first six months 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 decreases in billings in excess of costs and
estimated earnings on uncompleted contracts as reflected in the Condensed
Consolidated Statements of Cash Flows.
Investing Activities
24
--------------------------------------------------------------------------------
For the six-months ended June 30, 2020 , net cash used in investing activities
was $8.1 million compared with $1.2 million in the prior year period. The $6.9
million increase in cash used in investing activities, was primarily related to
$6.1 million , net of cash acquired, for the EIS acquisition and $2.0 million for
the acquisition of property and equipment. In the prior year period, cash flow
used in investing activities was the result of $1.2 million for the acquisition
of property and equipment.
Financing Activities
For the six-months ended June 30, 2020 , $12.0 million was provided by financing
activities compared with $(2.1) million used in financing activities in the
previous year period, an increase of $14.1 million . During the first six months
of 2020, the Company had net borrowings of $13.5 million on its revolving credit
facility, of which $10.3 million was used to fund the EIS acquisition on June 4,
2020 , compared with net borrowings of $0.8 million the previous year period.
Additionally, for the first six-months ended June 30, 2020 , $(1.3) 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
six-months of 2019. Further, in the first six months of 2019, the company paid
financing fees related to the new Credit Facility of $1.1 million .
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 six-month period endedJune 30, 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 endedDecember 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 "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 endedDecember 31, 2019 and "Part II - Item 1.A. Risk Factors" of the Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 and of this Quarterly Report on Form 10-Q for the quarter endedJune 30, 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 25
--------------------------------------------------------------------------------
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
