# Ceco Environmental Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [Ceco Environmental Corp](/companies/ceco.md) (CIK 3197)
- Form: 10-Q
- Filed: 2023-11-07
- Accepted by EDGAR: Nov 7, 2023, 12:03 ET
- Period: 2023-09-30
- Accession: 0000950170-23-059754
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/3197/000095017023059754/ceco-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/3197/000095017023059754/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $149.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $391.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $106.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $273.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $43.1m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $117.8m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $30.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $86.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $7.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $21.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $3.3m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $9.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $585.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $1.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $3.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $9.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.09 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.26 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.10 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.26 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 35,301,429 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 35,215,843 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $29.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $5.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $47.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $285.4m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $600.1m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $203.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $369.9m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $135.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-09-30 | $4.7m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $225.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 31,995 characters.

The Company’s Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022 reflect the consolidated operations of the Company and its subsidiaries.

CECO Environmental Corp. (“CECO,” “we,” “us,” or the “Company”) is a leading environmentally focused, diversified industrial company, serving the broad landscape of industrial air, industrial water and energy transition markets globally providing innovative technology and application expertise. CECO helps companies grow their business with safe, clean, and more efficient solutions that help protect people, the environment and industrial equipment. CECO solutions improve air and water quality, optimize emissions management, and increase the energy and process efficiency for highly engineered applications in power generation, midstream and downstream hydrocarbon processing and transport, chemical processing, electric vehicle production, polysilicon fabrication, semiconductor and electronics production, battery production and recycling, specialty metals, aluminum and steel production, beverage can manufacturing, and industrial and produced water and wastewater treatment, and a wide range of other industrial end markets.

### Market Pressures

The senior management team monitors and manages the Company’s ability to operate effectively as the result of market pressures. In particular, we are currently experiencing challenges in obtaining certain raw materials and labor on a timely basis at a reasonable cost. We expect these supply chain challenges and cost impacts to continue for the foreseeable future. Although we have taken mitigating actions, including securing additional raw materials from existing and alternate suppliers, to minimize supply chain disruptions, we cannot guarantee that these efforts will continue to be successful. In this event, our business, results and financial condition could be adversely affected.

### Note Regarding Use of Non-GAAP Financial Measures

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

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

The Company has provided the non-GAAP financial measures of non-GAAP operating income and non-GAAP operating margin as a result of items that the Company believes are not indicative of its ongoing operations. These include transactions associated with the Company’s acquisitions 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. 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 and nine months ended September 30, 2023 and 2022 are as follows:

*(in millions, except ratios)*

|  | Three months ended September 30, 2023 | 2022 | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $149.4 | $108.4 | $391.1 | $306.2 |
| Cost of sales | 106.3 | 76.0 | 273.3 | 215.7 |
| Gross profit | $43.1 | $32.4 | $117.8 | $90.5 |
| Percent of sales | 28.8% | 29.9% | 30.1% | 29.6% |
| Selling and administrative expenses | 30.3 | 25.1 | 86.1 | 66.8 |
| Percent of sales | 20.3% | 23.2% | 22.0% | 21.8% |
| Amortization and earnout expenses | 2.0 | 2.0 | 6.0 | 4.9 |
| Acquisition and integration expenses | 1.4 | 1.3 | 2.2 | 3.8 |
| Executive transition expenses | 1.3 | 1.2 | 1.4 | 1.2 |
| Restructuring expenses | 0.2 | — | 0.2 | 0.1 |
| Operating income | $7.9 | $2.8 | $21.9 | $13.7 |
| Operating margin | 5.3% | 2.6% | 5.6% | 4.5% |

To compare operating performance between the three and nine months ended September 30, 2023 and 2022, the Company has adjusted GAAP operating income to exclude (1) amortization of intangible assets, earnout and retention expenses, (2) acquisition and integration expenses, which include legal, accounting, and other expenses, (3) executive transition expenses, including fees and expenses incurred in the search for and hiring of new executives and (4) restructuring expenses primarily relating to severance, facility exits, and associated legal expenses.

The following table presents the reconciliation of GAAP operating income and GAAP operating margin to non-GAAP operating income and non-GAAP operating margin:

*(in millions, except ratios)*

|  | Three months ended September 30, 2023 | 2022 | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Operating income as reported in accordance with GAAP | $7.9 | $2.8 | $21.9 | $13.7 |
| Operating margin in accordance with GAAP | 5.3% | 2.6% | 5.6% | 4.5% |
| Amortization and earnout expenses | 2.0 | 2.0 | 6.0 | 4.9 |
| Acquisition and integration expenses | 1.4 | 1.3 | 2.2 | 3.8 |
| Executive transition expenses | 1.3 | 1.2 | 1.4 | 1.2 |
| Restructuring expenses | 0.2 | — | 0.2 | 0.1 |
| Non-GAAP operating income | $12.8 | $7.3 | $31.7 | $23.7 |
| Non-GAAP operating margin | 8.6% | 6.7% | 8.1% | 7.7% |

Orders booked increased $43.8 million, or 43.1%, to $145.5 million during the three months ended September 30, 2023 compared with $101.7 million in the three months ended September 30, 2022. The increase is led by an increase of $22.4 million in our thermal acoustics business and $14.5 million in our separation, filtration and industrial water businesses. Of the $145.5 million in orders booked during the three months ended September 30, 2023, $17.1 million is attributable to acquisitions that have occurred during the preceding twelve month period.

Orders booked increased $78.2 million, or 21%, to $454.4 million during the nine months ended September 30, 2023 compared with $376.2 million in the nine months ended September 30, 2022. The increase is led by increases of $25.7 million in our thermal acoustics business, $23.5 million in our separation, filtration and industrial water businesses and $21.8 million in our emissions management business. Of the $454.4 million in orders booked during the nine months ended September 30, 2023, $29.7 million is attributable to acquisitions that have occurred during the preceding twelve month period.

Net sales for the three months ended September 30, 2023 increased $41.0 million, or 37.8%, to $149.4 million compared with $108.4 million for the three months ended September 30, 2022. The increase is broad-based, led by an increase of $26.3 million in our separation, filtration and industrial water businesses. Approximately 89%, or $133.6 million, of net sales for the three months ended September 30, 2023 is attributable to organic revenue, defined as revenue recorded subsequent to the twelve month period post-acquisition date.

Net sales for the nine months ended September 30, 2023 increased $84.9 million, or 27.7%, to $391.1 million compared with $306.2 million for the nine months ended September 30, 2022. The increase is broad-based, led by increases of $54.1 million in separation, filtration, and industrial water businesses, and $14.9 million in our thermal acoustics business. Approximately 91% or $354.8 million, of net sales for the nine months ended September 30, 2023 is attributable to organic revenue.

Gross profit increased $10.7 million, or 33.0%, to $43.1 million in the three months ended September 30, 2023 compared with $32.4 million in the three months ended September 30, 2022. The increase in gross profit is primarily attributable to higher organic sales as described above, operating performance and acquisitions of businesses with favorable margins. Gross profit as a percentage of sales decreased by 100 basis points to 28.8% in the three months ended September 30, 2023 compared with 29.9% in the three months ended September 30, 2022.

Gross profit increased $27.3 million, or 30.2%, to $117.8 million in the nine months ended September 30, 2023 compared with $90.5 million in the nine months ended September 30, 2022. The increase in gross profit is primarily attributable to higher organic sales as described above, favorable project margin mix and acquisitions of businesses with favorable margins. Gross profit as a percentage of sales increased by 60 basis points to 30.2% in the nine months ended September 30, 2023 compared with 29.6% in the nine months ended September 30, 2022.

Selling and administrative expenses were $30.3 million for the three months ended September 30, 2023 compared with $25.1 million for the three months ended September 30, 2022. The increase is primarily attributable to acquisitions during the prior and current year, and increased sales and engineering headcount to support our growth, execute against our backlog, and expand our global footprint.

Selling and administrative expenses were $86.1 million for the nine months ended September 30, 2023 compared with $66.8 million for the nine months ended September 30, 2022. The increase is primarily attributable to acquisitions during the prior and current year, a $2.5 million favorable insurance settlement in the prior year, and increased investments to support our growth and expand our global footprint.

Amortization and earnout expense was $2.0 million for each of the three months ended September 30, 2023 and September 30, 2022.

Amortization and earnout expense was $6.0 million for the nine months ended September 30, 2023 compared with $4.9 million for the nine months ended September 30, 2022. The increase in expense is attributable to an increase of $0.7 million in earnout expense and an increase of $0.4 million in definite lived asset amortization due to increased intangible assets attributable to current and prior year acquisitions.

Operating income increased $5.1 million to $7.9 million for the three months ended September 30, 2023 compared with operating income of $2.8 million for the three months ended September 30, 2022. The increase in operating income is primarily attributable to higher organic sales.

Operating income increased $8.2 million to $21.9 million for the nine months ended September 30, 2023 compared with operating income of $13.7 million for the nine months ended September 30, 2022. The increase in operating income is primarily attributable to higher organic sales.

Non-GAAP operating income was $12.8 million for the three months ended September 30, 2023 compared with $7.3 million for the three months ended September 30, 2022. Non-GAAP operating income as a percentage of sales increased 190 basis points to 8.6% for the three months ended September 30, 2023 from 6.7% for the three months ended September 30, 2022.

Non-GAAP operating income was $31.7 million for the nine months ended September 30, 2023 compared with $23.7 million for the nine months ended September 30, 2022. Non-GAAP operating income as a percentage of sales increased 40 basis points to 8.1% for the three months ended September 30, 2023 from 7.7% for the nine months ended September 30, 2022.

Interest expense increased to $3.3 million in the three months ended September 30, 2023 compared with interest expense of $1.6 million for the three months ended September 30, 2022. The increase in interest expense is primarily due to increased debt balances and rising interest rates.

Interest expense increased to $9.5 million in the nine months ended September 30, 2023 compared with interest expense of $3.5 million for the nine months ended September 30, 2022. The increase in interest expense is primarily due to increased debt balances and rising interest rates.

Income tax expense was $0.6 million for the three months ended September 30, 2023 compared with income tax expense of $0.3 million for the three months ended September 30, 2022. Income tax expense was $1.6 million for the nine months ended

September 30, 2023 compared with income tax expense of $3.3 million for the nine months ended September 30, 2022. The effective income tax rate for the three months ended September 30, 2023 was 13.6% compared with 12.7% for the three months ended September 30, 2022. The effective income tax rate for the nine months ended September 30, 2023 was 13.4% compared with 25.3% for the nine months ended September 30, 2022. The effective income tax rates for the three and nine months ended September 30, 2023 differ from the United States federal statutory rate. Our effective tax rate is affected by certain other permanent differences, including state income taxes, non-deductible incentive stock-based compensation, and differences in tax rates among the jurisdictions in which we operate.

### Business Segments

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

*(in thousands)*

| Net Sales (less intra- and inter-segment sales) | Three months ended September 30, 2023 | 2022 | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Engineered Systems segment | $105,540 | $65,630 | $267,516 | $189,938 |
| Industrial Process Solutions segment | 43,850 | 42,784 | 123,618 | 116,287 |
| Total net sales | $149,390 | $108,414 | $391,134 | $306,225 |

*(in thousands)*

| Income from Operations | Three months ended September 30, 2023 | 2022 | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Engineered Systems segment | $15,759 | $8,991 | $39,601 | $24,467 |
| Industrial Process Solutions segment | 5,586 | 5,226 | 15,769 | 14,847 |
| Corporate and Other(1) | (13,492) | (11,444) | (33,453) | (25,591) |
| Total income from operations | $7,853 | $2,773 | $21,917 | $13,723 |

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

#### Engineered Systems Segment

Our Engineered Systems segment net sales increased $39.9 million to $105.5 million for the three months ended September 30, 2023 compared with $65.6 million for the three months ended September 30, 2022. The increase is led by an increase of $26.3 million in separation, filtration, and industrial water businesses. Approximately 86%, or $90.2 million, of net sales for the three months ended September 30, 2023 is attributable to organic revenue.

Our Engineered Systems segment net sales increased $77.6 million to $267.5 million for the nine months ended September 30, 2023 compared with $189.9 million for the nine months ended September 30, 2022. The increase is led by an increase of $54.1 million in separation, filtration, and industrial water businesses. Approximately 87%, or $233.6 million, of net sales for the nine months ended September 30, 2023 is attributable to organic revenue.

Operating income for the Engineered Systems segment increased $6.8 million to $15.8 million for the three months ended September 30, 2023 compared with $9.0 million for the three months ended September 30, 2022. The increase is primarily attributable to increased organic sales, partially offset by an increase in direct costs.

Operating income for the Engineered Systems segment increased $15.1 million to $39.6 million for the nine months ended September 30, 2023 compared with $24.5 million for the nine months ended September 30, 2022. The increase is primarily attributable to increased organic sales, partially offset by an increase in direct costs.

#### Industrial Process Solutions Segment

Our Industrial Process Solutions segment net sales increased $1.1 million to $43.9 million for the three months ended September 30, 2023 compared with $42.8 million for the three months ended September 30, 2022. The entirety of the increase represents organic growth.

Our Industrial Process Solutions segment net sales increased $7.3 million to $123.6 million for the nine months ended September 30, 2023 compared with $116.3 million for the nine months ended September 30, 2022. The increase is primarily attributable to an increase of $4.8 million in our fluid handling business. Approximately 98%, or $121.1 million, of net sales for the nine months ended September 30, 2023 is attributable to organic revenue.

Operating income for the Industrial Process Solutions segment increased $0.4 million to $5.6 million for the three months ended September 30, 2023 compared with $5.2 million for the three months ended September 30, 2022. The increase is primarily attributable to increased sales, partially offset by an increase in direct costs.

Operating income for the Industrial Process Solutions segment increased $1.0 million to $15.8 million for the nine months ended September 30, 2023 compared with $14.8 million for the nine months ended September 30, 2022. The increase is primarily attributable to increased sales, partially offset by an increase in direct costs.

#### Corporate and Other Segment

Operating expense for the Corporate and Other segment increased $2.1 million to $13.5 million for the three months ended September 30, 2023 compared with $11.4 million for the three months ended September 30, 2022. The increase is primarily attributable to investments made to support growth inclusive of acquisition and integration expenses, and inflationary increases for wages and services.

Operating expense for the Corporate and Other segment increased $7.9 million to $33.5 million for the nine months ended September 30, 2023 compared with $25.6 million for the nine months ended September 30, 2022. The increase is primarily attributable to investments made to support growth inclusive of acquisition and integration expenses, inflationary increases for wages and services, and a favorable insurance settlement of $2.5 million in the prior year period.

### Backlog

Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. Backlog increased to $394.0 million as of September 30, 2023 from $311.7 million as of December 31, 2022, with $57.2 million, or 69.5%, due to organic growth. Our customers may have the right to cancel a given order. Historically, cancellations have not been common. Backlog is adjusted on a quarterly basis for adjustments in foreign currency exchange rates. Substantially all backlog is expected to be delivered within 12 to 18 months. Backlog is not defined by GAAP and our methodology for calculating backlog may not be consistent with methodologies used by other companies.

### New Accounting Pronouncements

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

### Liquidity and Capital Resources

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

At September 30, 2023, the Company had working capital of $82.1 million, compared with $94.0 million at December 31, 2022. The ratio of current assets to current liabilities was 1.40 to 1.00 on September 30, 2023, as compared with a ratio of 1.64 to 1.00 on December 31, 2022. The decrease in the ratio was driven by timing of cash receipts and payments to suppliers.

At September 30, 2023 and December 31, 2022, cash and cash equivalents totaled $47.6 million and $45.5 million, respectively. As of September 30, 2023 and December 31, 2022, $37.0 million and $31.7 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:

*(in thousands)*

| Outstanding borrowings under the Credit Facility (as defined below) Term loan payable in quarterly principal installments of $550 through September 2023, $825 through September 2025 and $1,100 thereafter with balance due upon maturity in December 2026 | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Term loan | $39,656 | $41,309 |
| Revolving credit facility | 92,300 | 61,300 |
| Total outstanding borrowings under the Credit Facility | 131,956 | 102,609 |
| Outstanding borrowings under the joint venture term debt | 9,132 | 10,083 |
| Unamortized debt discount | (1,089) | (1,488) |
| Total outstanding borrowings | 139,999 | 111,204 |
| Less: current portion | (4,726) | (3,579) |
| Total debt, less current portion | $135,273 | $107,625 |

#### Credit Facility

The Company’s outstanding borrowings in the United States consist of a senior secured term loan and a senior secured revolver loan with sub-facilities for letters of credit, swing-line loans and multi-currency loans (collectively, the “Credit Facility”). As of September 30, 2023 and December 31, 2022, the Company was in compliance with all related financial and other restrictive covenants under the Credit Facility.

See Note 8 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:

*(in millions)*

|  | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Credit Facility, revolving loans | $140.0 | $140.0 |
| Draw down | (92.3) | (61.3) |
| Letters of credit open | (21.0) | (18.9) |
| Total unused credit availability | $26.7 | $59.8 |
| Amount available based on borrowing limitations | $26.7 | $59.8 |

### Overview of Cash Flows and Liquidity

*(in thousands)*

|  | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $29,491 | $19,696 |
| Net cash used in investing activities | (53,613) | (47,260) |
| Net cash provided by financing activities | 25,170 | 38,242 |
| Effect of exchange rate changes on cash and cash equivalents | 703 | (6,459) |
| Net increase in cash | $1,751 | $4,219 |

### Operating Activities

For the nine months ended September 30, 2023, $29.5 million of cash was provided by operating activities compared with $19.7 million provided by operations in the prior year period, representing $9.8 million additional cash generated. Cash flow from operating activities in the first nine months of 2023 increased year-over-year primarily due to timing of costs and billings on uncompleted contracts, improved management of payments to suppliers, and the increase in net income compared to the prior year period.

### Investing Activities

For the nine months ended September 30, 2023, net cash used in investing activities was $53.6 million compared with $47.3 million used in investing activities in the prior year period. For the nine months ended September 30, 2023, the $53.6 million cash used in investing activities was the result of $48.1 million cash used for acquisitions as described in Note 15 to the unaudited condensed consolidated financial statements, and $5.5 million for the acquisition of property and equipment. In the prior year period, the $47.3 million cash used in investing activities was the result of $44.9 million used for acquisitions as described in Note 15 and $2.4 million for the acquisition of property and equipment.

### Financing Activities

For the nine months ended September 30, 2023, $25.2 million was provided by financing activities compared with $38.2 million provided by financing activities in the prior year period, for a decrease of $13.0 million. For the nine months ended September 30, 2023, the Company used $31.0 million for net borrowings on the Company’s revolving credit lines, primarily used to finance current year acquisitions, $2.5 million in repayment on long-term debt, $1.2 million on deferred payments for acquisitions, $1.5 million on earnout payments, and $1.4 million on distributions to the noncontrolling interest. The Company also received $1.4 million of proceeds from the exercise of stock options and the employee stock purchase plan. In the prior year period, the Company used $37.7 million for net borrowings on the Company’s revolving credit lines and $8.7 million for net borrowings on long-term debt, primarily used to finance acquisitions, as well as $6.6 million on common stock repurchases and $1.2 million on distributions to the noncontrolling interest.

### Critical Accounting Policies and Estimates

Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s condensed consolidated financial statements. The preparation of these financial statements requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include revenue recognition, the valuation of trade receivables, inventories, goodwill, intangible assets, other long-lived assets, legal contingencies, guarantee obligations and assumptions used in the calculation of income taxes, assumptions used in business combination accounting and related balances, and pension and post-retirement benefits, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. Management monitors economic conditions and other factors and will adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

Management believes there have been no changes during the nine months ended September 30, 2023 to the items that the Company disclosed as its critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

### Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, which are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Any statements contained in this Quarterly Report on Form 10-Q, other than statements of historical fact, including statements about management’s beliefs and expectations, are forward-looking statements and should be evaluated as such. These statements are made on the basis of management’s views and assumptions regarding future events and business performance. We use words such as “believe,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” “will,” “plan,” “should” and similar expressions to identify forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Potential risks and uncertainties, among others, that could cause actual results to differ materially are discussed under “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, 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 as a result of on-going or worsening supply chain challenges;
- 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, and rising energy costs;
- inflationary pressures relating to rising raw material costs and the cost of labor;
- the substantial amount of debt incurred in connection with our strategic transactions and our ability to repay or refinance it or incur additional debt in the future;
- the impact of federal, state or local government regulations;
- our ability to repurchase shares of our common stock and the amounts and timing of repurchases, if any;
- our ability to successfully realize the expected benefits of our restructuring program;
- economic and political conditions generally;
- our ability to successfully integrate acquired businesses and realize the synergies from strategic transactions;
- unpredictability and severity of catastrophic events, including cybersecurity threats, acts of terrorism or outbreak of war or hostilities or public health crises, as well as management’s response to any of the aforementioned factors; and
- our ability to remediate our material weaknesses, or any other material weakness that we may identify in the future that could result in material misstatements in our financial statements.

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 any related 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, the forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the Securities and Exchange Commission (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.

## Market risk

As filed, 1,837 characters.

We are exposed to certain market risks, primarily changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. For the Company, these exposures are primarily related to changes in interest rates. We do not currently hold any derivatives or other financial instruments purely for trading or speculative purposes.

The carrying value of the Company’s total long-term debt and current maturities of long-term debt at September 30, 2023 was $141.1 million. Market risk was estimated as the potential decrease (increase) in future earnings and cash flows resulting from a hypothetical 10% increase (decrease) in the Company’s estimated weighted average borrowing rate at September 30, 2023. Most of the interest on the Company’s debt is indexed to SOFR market rates. The estimated annual impact of a hypothetical 10% change in the estimated weighted average borrowing rate at September 30, 2023 is $1.1 million.

The Company has wholly-owned subsidiaries in several countries, including in the Netherlands, Canada, the People’s Republic of China, Mexico, United Kingdom, Singapore, India, United Arab Emirates and South Korea. In the past, we have not hedged our foreign currency exposure, and fluctuations in exchange rates have not materially affected our operating results. Future changes in exchange rates may positively or negatively impact our revenues, operating expenses and earnings. Transaction (losses) gains included in “Other (expense) income, net” line of the Condensed Consolidated Statements of Income were $(0.6) million and $(3.6) million for the three months ended September 30, 2023 and 2022, respectively, and $0.2 million and $(4.9) million for the nine months ended September 30, 2023 and 2022, respectively.

## Controls and procedures

As filed, 5,685 characters.

### Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of September 30, 2023, as the result of the material weaknesses in our internal control over financial reporting discussed below, which are currently being remediated.

Notwithstanding these material weaknesses, management believes that the condensed consolidated financial statements included in this report present fairly, in all material respects, the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report in conformity with accounting principles generally accepted in the United States of America.

### Material Weaknesses in Internal Control over Financial Reporting

#### Revenue Recognition

As previously reported, we identified a material weakness in internal control over financial reporting for the first quarter ended March 31, 2023 relating to management’s review of its revenue recognition for contracts recognized over time isolated to our Engineered Systems segment. Specifically, for the quarter ended March 31, 2023, management did not retain appropriate documentation supporting the review of over time revenue recognition for customer contracts within the Engineered Systems segment.

#### Balance Sheet Reconciliations

In connection with our evaluation as of September 30, 2023, we identified a material weakness in internal control over financial reporting relating to management’s review of balance sheet reconciliations for certain divisions within our Engineered Systems segment. Specifically, management did not review the reconciliations prepared for balance sheet accounts for certain divisions within the Engineered Systems segment as required by Company policy.

These material weaknesses did not result in any material misstatement in our interim financial statements or disclosures, and there were no changes required to any of our previously released interim or audited consolidated financial statements.

### Remediation Efforts to Address Material Weaknesses

Management is committed to maintaining a strong internal control environment. In response to the identified material weakness, management, with the oversight of the Audit Committee of the Board of Directors, has taken actions toward the remediation of the material weaknesses in internal control over financial reporting, including reinforcing the importance of adherence to Company policies regarding control performance and related documentation with control owners, strengthening existing training programs for control owners, and developing monitoring activities to validate the performance of controls by control owners. As of September 30, 2023, these remediation efforts are ongoing.

The Company anticipates the actions described above and resulting improvements in controls will strengthen the Company’s processes, procedures and controls related to management’s review of over time revenue recognition and balance sheet reconciliations and will address the related material weaknesses. However, the material weaknesses cannot be considered remediated until the applicable control has operated for a sufficient period of time, and management has concluded, through testing, that the control is operating effectively.

### Changes in Internal Control Over Financial Reporting

Other than the material weaknesses described above and the ongoing remediation of such material weaknesses, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended

September 30, 2023 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

### Limitations on the Effectiveness of Controls

Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls.

## Risk factors

As filed, 3,804 characters.

The risk factors that were disclosed in “Part I – Item 1A. Risk Factors” of the Company's Annual Report on Form 10-K for the year ended December 31, 2022 are hereby supplemented to include the following:

***We have identified material weaknesses in our internal control over financial reporting. If we are unable to develop and maintain adequate internal controls, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and materially and adversely affect our business.***

Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in each of our Annual Reports on Form 10-K a report containing our management’s assessment of the effectiveness of our internal control over financial reporting and an attestation report of our independent auditor. These laws, rules and regulations continue to evolve and could become increasingly stringent in the future. We have undertaken actions to enhance our ability to comply with the requirements of the Sarbanes-Oxley Act of 2002, including, but not limited to, the engagement of consultants, the documentation of existing controls and the implementation of new controls or modification of existing controls as deemed appropriate.

We continue to devote substantial time and resources to the documentation and testing of our controls, and to plan for and the implementation of remedial efforts in those instances where remediation is indicated.

As disclosed in Item 4. “Controls and Procedures” in this Quarterly Report on Form 10-Q, we have material weaknesses in our control environment with regard to management’s review of revenue recognition for contracts and balance sheet reconciliations. These material weaknesses could result in a misstatement of account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.

To address these material weaknesses, we have developed a remediation plan that includes reinforcing the importance of adherence to Company policies regarding control performance and related documentation with control owners, strengthening existing training programs for control owners, and developing monitoring activities to validate the performance of controls by control owners. As of September 30, 2023, these remediation efforts are ongoing.

The actions that we are taking are subject to ongoing senior management review, as well as Audit Committee oversight. We will not be able to conclude whether the steps we are taking will fully remediate the material weaknesses in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. Until these material weaknesses are remediated, we plan to continue to perform additional analyses and other procedures to ensure that our consolidated financial statements are prepared in accordance with GAAP.

If we continue to have material weaknesses in our internal controls, or, if we fail to develop and maintain adequate internal controls in the future, including remediating any material weaknesses or deficiencies in our internal controls, we could be subject to regulatory actions, civil or criminal penalties or stockholder litigation. In addition, failure to maintain adequate internal controls could result in financial statements that do not accurately reflect our financial condition, results of operations and cash flows. We believe that the out-of-pocket costs, the diversion of management’s attention from running our day-to-day operations and operational changes caused by the need to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 will continue to be significant.

Filed Nov 7, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-059754. Last ingested by Listed: Oct 24, 2026, 14:51 ET. No prices; not investment advice.