UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒ |
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2016
or
☐ |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File No. 0-7099
CECO ENVIRONMENTAL CORP.
(Exact name of registrant as specified in its charter)
Delaware |
|
13-2566064 |
(State or other jurisdiction of Incorporation or organization) |
|
(IRS Employer Identification No.) |
4625 Red Bank Road, Cincinnati, Ohio |
|
45227 |
(Address of principal executive offices) |
|
(Zip Code) |
(513) 458-2600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)
Large Accelerated Filer |
☐ |
Accelerated Filer |
☒ |
|
|
|
|
Non-Accelerated Filer |
☐ |
Smaller reporting company |
☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: 34,161,493 shares of common stock, par value $0.01 per share, as of November 3, 2016.
CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
For the quarter ended September 30, 2016
Table of Contents
1
CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data) |
|
(unaudited) SEPTEMBER 30, 2016 |
|
|
DECEMBER 31, 2015 |
|
||
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
41,814 |
|
|
$ |
34,194 |
|
Restricted cash |
|
|
1,427 |
|
|
|
5,319 |
|
Accounts receivable, net |
|
|
83,359 |
|
|
|
97,778 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
38,370 |
|
|
|
43,175 |
|
Inventories, net |
|
|
23,945 |
|
|
|
32,509 |
|
Prepaid expenses and other current assets |
|
|
14,759 |
|
|
|
9,058 |
|
Prepaid income taxes |
|
|
1,595 |
|
|
|
4,724 |
|
Assets held for sale |
|
|
8,086 |
|
|
|
1,699 |
|
Total current assets |
|
|
213,355 |
|
|
|
228,456 |
|
Property, plant and equipment, net |
|
|
28,773 |
|
|
|
44,981 |
|
Goodwill |
|
|
224,531 |
|
|
|
220,163 |
|
Intangible assets-finite life, net |
|
|
63,976 |
|
|
|
74,957 |
|
Intangible assets-indefinite life |
|
|
26,393 |
|
|
|
26,337 |
|
Deferred charges and other assets |
|
|
4,930 |
|
|
|
3,925 |
|
|
|
$ |
561,958 |
|
|
$ |
598,819 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of debt |
|
$ |
10,216 |
|
|
$ |
19,494 |
|
Accounts payable and accrued expenses |
|
|
90,076 |
|
|
|
99,097 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
34,854 |
|
|
|
28,000 |
|
Note payable |
|
|
5,300 |
|
|
|
— |
|
Income taxes payable |
|
|
4,236 |
|
|
|
1,582 |
|
Total current liabilities |
|
|
144,682 |
|
|
|
148,173 |
|
Other liabilities |
|
|
34,165 |
|
|
|
30,072 |
|
Debt, less current portion |
|
|
123,231 |
|
|
|
157,834 |
|
Deferred income tax liability, net |
|
|
15,416 |
|
|
|
17,719 |
|
Total liabilities |
|
|
317,494 |
|
|
|
353,798 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; 10,000 shares authorized, none issued |
|
|
— |
|
|
|
— |
|
Common stock, $.01 par value; 100,000,000 shares authorized, 34,148,585 and 34,055,749 shares issued 2016 and 2015, respectively |
|
|
341 |
|
|
|
340 |
|
Capital in excess of par value |
|
|
244,316 |
|
|
|
243,274 |
|
Accumulated earnings |
|
|
11,688 |
|
|
|
5,472 |
|
Accumulated other comprehensive loss |
|
|
(11,525 |
) |
|
|
(9,577 |
) |
|
|
|
244,820 |
|
|
|
239,509 |
|
Less treasury stock, at cost, 137,920 shares in 2016 and 2015 |
|
|
(356 |
) |
|
|
(356 |
) |
Total CECO shareholders’ equity |
|
|
244,464 |
|
|
|
239,153 |
|
Noncontrolling interest |
|
|
- |
|
|
|
5,868 |
|
Total shareholders’ equity |
|
|
244,464 |
|
|
|
245,021 |
|
|
|
$ |
561,958 |
|
|
$ |
598,819 |
|
The notes to the condensed consolidated financial statements are an integral part of the above statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
THREE MONTHS ENDED SEPTEMBER 30, |
|
|
NINE MONTHS ENDED SEPTEMBER 30, |
|
||||||||||
(dollars in thousands, except per share data) |
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Net sales |
|
$ |
101,596 |
|
|
$ |
98,230 |
|
|
$ |
317,029 |
|
|
$ |
266,176 |
|
Cost of sales |
|
|
67,920 |
|
|
|
67,435 |
|
|
|
217,837 |
|
|
|
187,778 |
|
Gross profit |
|
|
33,676 |
|
|
|
30,795 |
|
|
|
99,192 |
|
|
|
78,398 |
|
Selling and administrative expenses |
|
|
19,549 |
|
|
|
18,054 |
|
|
|
60,625 |
|
|
|
46,158 |
|
Acquisition and integration expenses |
|
|
163 |
|
|
|
5,685 |
|
|
|
524 |
|
|
|
6,978 |
|
Amortization and earn-out expenses |
|
|
3,465 |
|
|
|
9,250 |
|
|
|
13,176 |
|
|
|
19,989 |
|
Income (loss) from operations |
|
|
10,499 |
|
|
|
(2,194 |
) |
|
|
24,867 |
|
|
|
5,273 |
|
Other income (expense), net |
|
|
14 |
|
|
|
(282 |
) |
|
|
395 |
|
|
|
(1,456 |
) |
Interest expense |
|
|
(1,913 |
) |
|
|
(1,711 |
) |
|
|
(5,995 |
) |
|
|
(3,845 |
) |
Income (loss) before income taxes |
|
|
8,600 |
|
|
|
(4,187 |
) |
|
|
19,267 |
|
|
|
(28 |
) |
Income tax expense |
|
|
2,774 |
|
|
|
638 |
|
|
|
6,349 |
|
|
|
2,495 |
|
Net income (loss) |
|
$ |
5,826 |
|
|
$ |
(4,825 |
) |
|
$ |
12,918 |
|
|
$ |
(2,523 |
) |
Net income (loss) attributable to noncontrolling interest |
|
$ |
22 |
|
|
$ |
— |
|
|
$ |
(36 |
) |
|
$ |
— |
|
Net income (loss) attributable to CECO Environmental Corp. |
|
$ |
5,804 |
|
|
$ |
(4,825 |
) |
|
$ |
12,954 |
|
|
$ |
(2,523 |
) |
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.17 |
|
|
$ |
(0.17 |
) |
|
$ |
0.38 |
|
|
$ |
(0.09 |
) |
Diluted |
|
$ |
0.17 |
|
|
$ |
(0.17 |
) |
|
$ |
0.38 |
|
|
$ |
(0.09 |
) |
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
33,983,708 |
|
|
|
28,617,589 |
|
|
|
33,952,768 |
|
|
|
27,066,072 |
|
Diluted |
|
|
34,354,687 |
|
|
|
28,617,589 |
|
|
|
34,211,067 |
|
|
|
27,066,072 |
|
The notes to the condensed consolidated financial statements are an integral part of the above statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
|
|
THREE MONTHS ENDED SEPTEMBER 30, |
|
|
NINE MONTHS ENDED SEPTEMBER 30, |
|
||||||||||
(dollars in thousands) |
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
||||
Net income (loss) |
|
$ |
5,826 |
|
|
$ |
(4,825 |
) |
|
$ |
12,918 |
|
|
$ |
(2,523 |
) |
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
|
201 |
|
|
|
— |
|
|
|
(422 |
) |
|
|
— |
|
Foreign currency translation |
|
|
(73 |
) |
|
|
(1,575 |
) |
|
|
(1,526 |
) |
|
|
(2,104 |
) |
Comprehensive income (loss) |
|
|
5,954 |
|
|
|
(6,400 |
) |
|
|
10,970 |
|
|
|
(4,627 |
) |
Net income (loss) attributable to noncontrolling interest |
|
|
22 |
|
|
|
— |
|
|
|
(36 |
) |
|
|
— |
|
Comprehensive income (loss) attributable to CECO Environmental Corp. |
|
$ |
5,976 |
|
|
$ |
(6,400 |
) |
|
$ |
10,934 |
|
|
$ |
(4,627 |
) |
The notes to the condensed consolidated financial statements are an integral part of the above statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
NINE MONTHS ENDED SEPTEMBER 30, |
|
|||||
(dollars in thousands) |
|
2016 |
|
|
2015 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
12,918 |
|
|
$ |
(2,523 |
) |
Adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
15,017 |
|
|
|
11,217 |
|
Unrealized foreign currency (gain) loss |
|
|
(620 |
) |
|
|
1,689 |
|
Net loss on interest rate swaps |
|
|
342 |
|
|
|
— |
|
Fair value adjustments to earnout liabilities |
|
|
460 |
|
|
|
9,889 |
|
Loss on sale of property and equipment |
|
|
199 |
|
|
|
222 |
|
Non-cash interest expense |
|
|
803 |
|
|
|
791 |
|
Share-based compensation expense |
|
|
1,724 |
|
|
|
1,318 |
|
Bad debt expense |
|
|
324 |
|
|
|
504 |
|
Inventory reserve expense |
|
|
964 |
|
|
|
463 |
|
Deferred income taxes |
|
|
(1,111 |
) |
|
|
(657 |
) |
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
15,221 |
|
|
|
(16,635 |
) |
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
3,449 |
|
|
|
(10,522 |
) |
Inventories |
|
|
7,526 |
|
|
|
170 |
|
Prepaid expense and other current assets |
|
|
(2,907 |
) |
|
|
286 |
|
Deferred charges and other assets |
|
|
1,068 |
|
|
|
201 |
|
Accounts payable and accrued expenses |
|
|
(10,010 |
) |
|
|
2,354 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
6,859 |
|
|
|
(252 |
) |
Income taxes payable |
|
|
2,608 |
|
|
|
274 |
|
Other liabilities |
|
|
(1,955 |
) |
|
|
(7,655 |
) |
Net cash provided by (used in) operating activities |
|
|
52,879 |
|
|
|
(8,866 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisitions of property and equipment |
|
|
(811 |
) |
|
|
(526 |
) |
Proceeds from sale of property and equipment |
|
|
301 |
|
|
|
2,396 |
|
Net cash paid for acquisition |
|
|
— |
|
|
|
(37,130 |
) |
Net cash used in investing activities |
|
|
(510 |
) |
|
|
(35,260 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Decrease in short-term and long-term restricted cash |
|
|
2,853 |
|
|
|
100 |
|
Net repayments on revolving credit lines |
|
|
(13,142 |
) |
|
|
(1,242 |
) |
Borrowings of long-term debt |
|
|
— |
|
|
|
170,000 |
|
Repayments of debt |
|
|
(31,631 |
) |
|
|
(101,966 |
) |
Financing fees paid |
|
|
— |
|
|
|
(2,923 |
) |
Payoff of loans on life insurance policies |
|
|
(987 |
) |
|
|
— |
|
Acquisition earnout payments |
|
|
(9,270 |
) |
|
|
(1,755 |
) |
Proceeds from sale-leaseback transactions |
|
|
14,244 |
|
|
|
— |
|
Payments on capital lease and sale-leaseback financing liability |
|
|
(241 |
) |
|
|
— |
|
Proceeds from employee stock purchase plan and exercise of stock options |
|
|
763 |
|
|
|
298 |
|
Repurchases of common stock |
|
|
(188 |
) |
|
|
— |
|
Dividends paid to common shareholders |
|
|
(6,738 |
) |
|
|
(5,734 |
) |
Net cash provided by (used in) financing activities |
|
|
(44,337 |
) |
|
|
56,778 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(412 |
) |
|
|
(51 |
) |
Net increase in cash and cash equivalents |
|
|
7,620 |
|
|
|
12,601 |
|
Cash and cash equivalents at beginning of period |
|
|
34,194 |
|
|
|
18,162 |
|
Cash and cash equivalents at end of period |
|
$ |
41,814 |
|
|
$ |
30,763 |
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest |
|
$ |
5,375 |
|
|
$ |
2,965 |
|
Income taxes |
|
$ |
2,344 |
|
|
$ |
1,812 |
|
Non-cash transactions |
|
|
|
|
|
|
|
|
Property, plant and equipment acquired under capital leases |
|
$ |
4,385 |
|
|
$ |
— |
|
Common stock issued in business acquisition |
|
$ |
— |
|
|
$ |
72,145 |
|
Noncontrolling interest acquired through an issuance of a note payable (See Note 17) |
|
$ |
5,300 |
|
|
$ |
— |
|
Earnout settled through an exchange of accounts receivable |
|
$ |
3,272 |
|
|
$ |
— |
|
The notes to the condensed consolidated financial statements are an integral part of the above statements.
5
CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. |
Basis of Reporting for Consolidated Financial Statements |
The accompanying unaudited condensed consolidated financial statements of CECO Environmental Corp. and its subsidiaries (the “Company”, “we”, “us”, or “our”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2016 and the results of operations and cash flows for the three-month and nine-month periods ended September 30, 2016 and 2015. The results of operations for the three-month and nine-month periods ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year. The balance sheet as of December 31, 2015 has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the SEC.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
These financial statements and accompanying notes should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.
Unless otherwise indicated, all balances within tables are in thousands, except per share amounts.
On September 3, 2015, the Company completed the acquisition of PMFG, Inc. (“PMFG”). The results of its operations have been consolidated with our results following the acquisition date. For a more complete discussion of the transaction, refer to Note 17.
The Company’s consolidated financial statements include the accounts of all wholly-owned and majority-owned subsidiaries for all periods presented. All significant inter-company accounts and transactions have been eliminated in consolidation. On July 12, 2016, the Company entered into an agreement with the noncontrolling owner of Peerless Propulsys China Holdings LLC (“Peerless Propulsys”) to acquire 100% ownership in the equity and earnings of Peerless Propulsys of their interest (40%). For a more complete discussion of the transaction, refer to Note 17.
2. |
New Financial Accounting Pronouncements |
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. ASU 2016-15 provides guidance on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. ASU 2016-15 will require adoption on a retrospective basis, unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients”, clarifying the implementation guidance on narrow scope improvements and practical expedients related to FASB ASU 2014-09, “Revenue from Contracts with Customers”. The improvements address completed contracts and contract modifications at transition, non-cash consideration, the presentation of sales taxes and other taxes collected from customers, and assessment of collectability when determining whether a transaction represents a valid contract. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing” clarifying the implementation guidance on identifying performance obligations and licensing related to FASB ASU 2014-09, “Revenue from Contracts with Customers”. The amendments reduce the cost and complexity of identifying promised goods or services and improve the guidance for determining whether promises are separately identifiable. These pronouncements have the same effective date as the new revenue standard, which is effective for fiscal years, and interim
6
periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of these standards on the Company’s consolidated financial statements and has not yet determined the method of adoption.
In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is, off-balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise. Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain and track an “APIC pool.” The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows. In addition, ASU 2016-09 elevates the statutory tax withholding threshold to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. ASU 2016-09 provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures when they occur. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the potential impact of the adoption of this standard on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” ASU 2016-05 amends Topic 815 to clarify that novation of a derivative (replacing one of the parties to a derivative instrument with a new party) designated as the hedging instrument would not, in and of itself, be considered a termination of the derivative instrument or a change in critical terms requiring discontinuation of the designated hedging relationship. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the potential impact of the adoption of this standard on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the potential impact of the adoption of ASU 2016-02 on the Company’s consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” ASU 2015-11 requires inventory within the scope of the ASU (e.g., first-in, first-out (“FIFO”) or average cost) to be measured using the lower of cost and net realizable value. Inventory excluded from the scope of the ASU (i.e., last-in, first-out (“LIFO”) or the retail inventory method) will continue to be measured at the lower of cost or market. The ASU also amends some of the other guidance in Topic 330, “Inventory,” to more clearly articulate the requirements for the measurement and disclosure of inventory. However, those amendments are not intended to result in any changes to current practice. ASU 2015-11 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue From Contracts With Customers.” ASU 2014-09 supersedes nearly all existing revenue recognition principles under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration an entity expects to be entitled to for those goods or services using a defined five step process. More judgment and estimates may be required to achieve this principle than under existing GAAP. ASU 2014-09 is effective for annual periods beginning after December 15, 2017, including interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients or (ii) a retrospective approach with the cumulative effect upon initial adoption recognized at the date of adoption, which includes additional footnote disclosures. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on the
7
Company’s consolidated financial statements and has not yet determined the method of adoption. The Company’s current revenue recognition policies are generally consistent with the new revenue recognition standards set forth in ASU 2014-09. Potential adjustments to input measures are not expected to be pervasive to the majority of the Company’s contracts. While no significant impact is expected upon adoption of the new guidance, the Company will not be able to make that determination until the time of adoption based upon outstanding contracts at that time.
3. |
Accounts Receivable |
(Table only in thousands) |
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Trade receivables |
|
$ |
12,068 |
|
|
$ |
12,800 |
|
Contract receivables |
|
|
72,641 |
|
|
|
86,129 |
|
Allowance for doubtful accounts |
|
|
(1,350 |
) |
|
|
(1,151 |
) |
|
|
$ |
83,359 |
|
|
$ |
97,778 |
|
Balances billed but not paid by customers under retainage provisions in contracts amounted to approximately $2.0 million and $2.3 million at September 30, 2016 and December 31, 2015, respectively. Retainage receivables on contracts in progress are generally collected within a year after contract completion.
The provision for doubtful accounts was $30,000 and $0.4 million for the three-month periods ended September 30, 2016 and 2015, respectively, and $0.3 million and $0.5 million for the nine-month periods ended September 30, 2016 and 2015, respectively.
4. |
Costs and Estimated Earnings on Uncompleted Contracts |
Revenues from contracts are primarily recognized on the percentage of completion method, measured by the percentage of contract costs incurred to date compared with estimated total contract costs for each contract. This method is used because management considers contract costs to be the best available measure of progress on these contracts. For contracts where the duration is short, total contract revenue is insignificant, or reasonably dependable estimates cannot be made, revenues are recognized on a completed contract basis, when risk and title passes to the customer, which is generally upon shipment of product. During the second quarter, the Company’s Zhongli division within the Energy segment has recognized revenue on a percentage of completion method compared to the completed contracts method that was utilized in previous quarters. This change was made after determining that the Company had designed and implemented appropriate controls to track project costs and estimates to complete. During the three months and nine months periods ended September 30, 2016, this division recognized $5.2 million and $13.4 million, respectively, in percentage of completion revenue related to open projects as of September 30, 2016.
Our contracts have various lengths to completion ranging from a few days to several months. We anticipate that a majority of our current contracts will be completed within the next twelve months.
(Table only in thousands) |
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Costs incurred on uncompleted contracts |
|
$ |
192,136 |
|
|
$ |
178,356 |
|
Estimated earnings |
|
|
72,516 |
|
|
|
64,957 |
|
|
|
|
264,652 |
|
|
|
243,313 |
|
Less billings to date |
|
|
(261,136 |
) |
|
|
(228,138 |
) |
|
|
$ |
3,516 |
|
|
$ |
15,175 |
|
Included in the accompanying condensed consolidated balance sheets under the following captions: |
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
$ |
38,370 |
|
|
$ |
43,175 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
34,854 |
|
|
|
28,000 |
|
|
|
$ |
3,516 |
|
|
$ |
15,175 |
|
8
Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. 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. A provision of $0.2 million for estimated losses on uncompleted contracts was recognized at September 30, 2016. No provision for estimated losses on uncompleted contracts was required at December 31, 2015.
5. |
Inventories |
(Table only in thousands) |
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Raw materials |
|
$ |
19,444 |
|
|
$ |
24,339 |
|
Work in process |
|
|
4,290 |
|
|
|
6,443 |
|
Finished goods |
|
|
2,077 |
|
|
|
2,717 |
|
Obsolescence allowance |
|
|
(1,866 |
) |
|
|
(990 |
) |
|
|
$ |
23,945 |
|
|
$ |
32,509 |
|
Amounts credited to the allowance for obsolete inventory and charged to cost of sales amounted to $0.1 million and $0.2 million for the three-month periods ended September 30, 2016 and 2015, respectively, and $1.0 million and $0.5 million for the nine-month periods ended September 30, 2016 and 2015, respectively.
6. |
Goodwill and Intangible Assets |
(Table only in thousands) |
|
Nine months ended September 30, 2016 |
|
|
Year ended December 31, 2015 |
|
||||||||||
Goodwill / Tradename |
|
Goodwill |
|
|
Tradename |
|
|
Goodwill |
|
|
Tradename |
|
||||
Beginning balance |
|
$ |
220,163 |
|
|
$ |
26,337 |
|
|
$ |
165,861 |
|
|
$ |
19,766 |
|
Acquisitions and related adjustments |
|
|
4,205 |
|
|
|
— |
|
|
|
55,655 |
|
|
|
10,280 |
|
Impairment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,340 |
) |
Foreign currency translation |
|
|
163 |
|
|
|
56 |
|
|
|
(1,353 |
) |
|
|
(369 |
) |
|
|
$ |
224,531 |
|
|
$ |
26,393 |
|
|
$ |
220,163 |
|
|
$ |
26,337 |
|
(Table only in thousands) |
|
As of September 30, 2016 |
|
|
As of December 31, 2015 |
|
||||||||||
Intangible assets – finite life |
|
Cost |
|
|
Accum. Amort. |
|
|
Cost |
|
|
Accum. Amort. |
|
||||
Patents |
|
$ |
1,439 |
|
|
$ |
1,439 |
|
|
$ |
1,456 |
|
|
$ |
1,456 |
|
Employment agreements |
|
|
733 |
|
|
|
733 |
|
|
|
733 |
|
|
|
677 |
|
Technology |
|
|
15,867 |
|
|
|
5,834 |
|
|
|
15,867 |
|
|
|
4,027 |
|
Customer lists |
|
|
77,497 |
|
|
|
23,929 |
|
|
|
77,497 |
|
|
|
17,756 |
|
Noncompetition agreements |
|
|
1,118 |
|
|
|
423 |
|
|
|
1,118 |
|
|
|
257 |
|
Tradename |
|
|
1,390 |
|
|
|
266 |
|
|
|
1,390 |
|
|
|
162 |
|
Backlog |
|
|
4,270 |
|
|
|
4,270 |
|
|
|
4,270 |
|
|
|
1,423 |
|
Foreign currency adjustments |
|
|
(2,102 |
) |
|
|
(658 |
) |
|
|
(2,309 |
) |
|
|
(693 |
) |
|
|
$ |
100,212 |
|
|
$ |
36,236 |
|
|
$ |
100,022 |
|
|
$ |
25,065 |
|
Activity for the nine months ended September 30, 2016 and 2015 is as follows:
(Table only in thousands) |
|
2016 |
|
|
2015 |
|
||
Intangible assets – finite life, net at beginning of period |
|
$ |
74,957 |
|
|
$ |
58,398 |
|
Amortization expense |
|
|
(11,123 |
) |
|
|
(8,513 |
) |
Acquisitions and purchase accounting adjustments |
|
|
— |
|
|
|
34,900 |
|
Foreign currency adjustments |
|
|
142 |
|
|
|
(810 |
) |
Intangible assets – finite life, net at end of period |
|
$ |
63,976 |
|
|
$ |
83,975 |
|
Amortization expense of finite life intangible assets was $3.5 million and $3.3 million for the three-month periods ended September 30, 2016 and 2015, respectively, and $11.1 million and $8.5 million for the nine-month periods ended September 30, 2016 and 2015, respectively.
9
The Company completes an annual (or more often if circumstances require) impairment assessment of its goodwill and indefinite life intangible assets as of October 1. For 2015, the first step of the two-step goodwill impairment test as described in FASB ASC 350-20-35 was performed for all reporting units, except for the recently acquired PMFG reporting unit, as there were no events or changes in operations since the acquisition date that would indicate possible impairment.
Under the first step, the Company bases its measurement of the fair value of a reporting unit using a weighting of the income method and the market method on a 50/50 basis. In prior years, the Company used the income 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 were determined to be significant assumptions because they are three primary drivers of the projected cash flows in the discounted future cash flow approach. Cost of capital was also determined to be 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 step 1 analysis, the resultant estimated fair value of the reporting units exceeded their carrying value as of October 1, 2015 and no goodwill impairment charges were recorded.
For one of the reporting units tested under the step 1 analysis in 2015, which carried goodwill of $77.9 million, the excess of fair value over their carrying value was only 8%. This reporting unit was acquired in the second half of fiscal 2013, and therefore the Company did not expect the fair value to be significantly in excess of the carrying value. Furthermore, there were no fundamental changes in the business or market that would indicate a significant decline in the fair value since the acquisition date. Management’s projections used to estimate the undiscounted cash flows included increasing sales volumes and operational improvements designed to reduce costs. Changes in any of the significant assumptions used, including if the Company does not successfully achieve its 2016 operating plan, can materially affect the expected cash flows, and such impacts can result in the requirement to proceed to a step 2 test and potentially a material non-cash impairment charge could result. Therefore, the key assumptions most susceptible to change are projected revenue and projected operational profit. We determined that with other assumptions held constant under our weighted income and market method for measuring fair value, a decrease in projected revenue growth rates of approximately 110 basis points or a decrease in projected EBITDA rates of approximately 390 basis points would result in fair value of the reporting unit being equal to its carrying value, which would require us to perform a step 2 test for this reporting unit.
During 2015, the Company also performed a step 1 analysis for all reporting units with indefinite life intangible assets. The Company based its measurement of the fair value of the indefinite life intangible assets utilizing the relief from royalty method. The significant assumptions used under the relief from royalty method are projected revenue, royalty rates, terminal growth rates, and the cost of capital. Projected revenue, royalty rates and terminal growth rates were determined to be significant assumptions because they are three primary drivers of the projected royalty cash flows in the relief from royalty method. Cost of capital was also determined to be a significant assumption as it is the discount rate used to calculate the current fair value of those projected royalty cash flows. Changes in any of the significant assumptions used, including if the Company does not successfully achieve its 2016 operating plan, can materially affect the expected cash flows, and such impacts can result in material non-cash impairment charges. Under this approach, the resultant estimated fair value of the indefinite life intangible assets exceeded their carrying value for all but three reporting units as of October 1, 2015. For three of the reporting units, which carried combined indefinite life intangible assets of $10.0 million, our fair value measurement resulted in the aggregate fair value being 33.4% lower than the aggregate carrying value. Accordingly, we recorded an impairment charge of $3.3 million during the three-month period ended December 31, 2015. These three reporting units were acquired in the second half of fiscal 2013. Management’s projections used to estimate the fair values at the date of acquisition primarily included increasing sales volumes; however, the units have experienced lower sales than originally projected.
The Company did not identify any triggering events during the three-month and nine-month periods ended September 30, 2016 that would require an interim impairment assessment of goodwill or indefinite life intangible assets. There was no impairment of goodwill or indefinite life intangible assets during the three-month and nine-month periods ended September 30, 2016.
Although the Company has not identified any triggering events in 2016 that would require a more frequent test for impairment, the reporting unit with a lower excess fair value over its carrying value (as described above), as determined in the prior year’s annual assessment, is experiencing lower than forecasted results through the first nine months of 2016. This reporting unit has goodwill and tradename intangible assets of $77.9 million and $5.0 million, respectively, as of September 30, 2016. The Company is currently in the process of analyzing internal strategic initiatives to improve operating performance, and forecasting for 2017 and future years as part of its annual impairment assessment, which is performed as of October 1, and will be completed in the fourth quarter. As of the date of this filing, the Company has not yet completed its assessment.
10
7. |
Accounts Payable and Accrued Expenses |
|
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Trade accounts payable, including due to subcontractors |
|
$ |
57,723 |
|
|
$ |
62,199 |
|
Compensation and related benefits |
|
|
6,405 |
|
|
|
7,899 |
|
Current portion of earn-out liability |
|
|
11,258 |
|
|
|
14,757 |
|
Accrued warranty |
|
|
2,696 |
|
|
|
3,080 |
|
Other accrued expenses |
|
|
11,994 |
|
|
|
11,162 |
|
|
|
$ |
90,076 |
|
|
$ |
99,097 |
|
The Company recorded a total of $9.7 million and $17.9 million related to the non-current portion of the earn-out liability in “other liabilities” on the Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015, respectively. In the second quarter of 2016, the Company settled $3.2 million of the earn-out due by exchanging the liability for accounts receivable acquired in conjunction with the acquisition that remained uncollected as of June 30, 2016. This offset was agreed to in the original terms of the Zhongli acquisition agreement.
8. |
Senior debt |
Debt consisted of the following at September 30, 2016 and December 31, 2015:
(Table only in thousands) |
|
September 30, 2016 |
|
|
December 31, 2015 |
|
||
Outstanding borrowings under Credit Facility (defined below). Term loan payable in quarterly principal installments of $2.1 million through September 2017, $2.9 million through September 2018, and $3.6 million thereafter with balance due upon maturity in September 2020. |
|
|
|
|
|
|
|
|
- Term loan |
|
$ |
135,209 |
|
|
$ |
166,813 |
|
- U.S. Dollar revolving loans |
|
|
— |
|
|
|
8,000 |
|
- Unamortized debt discount and debt issuance costs |
|
|
(3,426 |
) |
|
|
(4,229 |
) |
Total outstanding borrowings under Credit Facility |
|
|
131,783 |
|
|
|
170,584 |
|
Outstanding borrowings (U.S. dollar equivalent) under China Facility (defined below) |
|
|
1,355 |
|
|
|
1,391 |
|
Outstanding borrowings (U.S. dollar equivalent) under Aarding Facility (defined below) |
|
|
309 |
|
|
|
5,326 |
|
Outstanding borrowings (U.S. dollar equivalent) under Euro- denominated note payable to a bank, payable in quarterly installments of €25,000, plus interest, at a fixed rate of 3.82%, matured in January 2016. Collateralized by the Heerenveen, Netherlands building. |
|
|
— |
|
|
|
27 |
|
Total outstanding borrowings |
|
|
133,447 |
|
|
|
177,328 |
|
Less: current portion |
|
|
10,216 |
|
|
|
19,494 |
|
Total debt, less current portion |
|
$ |
123,231 |
|
|
$ |
157,834 |
|
During the three-month and nine-month periods ended September 30, 2016, the Company made prepayments of $13.0 million and $23.3 million, respectively, on the outstanding balance of the term loan. These prepayments were applied to future principal payments due under the term loan. Scheduled principal payments under our Credit Facility is $2.1 million for the remainder of 2016, $9.3 million in 2017, $12.1 million in 2018, $14.3 million in 2019 and $97.4 million in 2020.
United States Debt
As of September 30, 2016 and December 31, 2015, $16.9 million and $15.4 million of letters of credit were outstanding, respectively. Total unused credit availability under the Company’s senior secured term loan, senior secured U.S. dollar revolving loans with sub-facilities for letters of credit and swing-line loans and senior secured multi-currency revolving credit
11
facility for U.S. dollar and specific foreign currency loans (collectively, the “Credit Facility”) was $63.1 million and $56.6 million at September 30, 2016 and December 31, 2015, respectively. Revolving loans may be borrowed, repaid and reborrowed until September 3, 2020, at which time all amounts borrowed pursuant to the Credit Facility must be repaid.
The weighted average interest rate on outstanding borrowings was 3.19% and 3.42% at September 30, 2016 and December 31, 2015, respectively.
In accordance with the Credit Facility terms, the Company entered into an interest rate swap on December 30, 2015 to hedge against interest rate exposure related to approximately one-third of the outstanding debt indexed to LIBOR market rates. The fair value of the interest rate swap was a liability totaling $1.2 million and $0.4 million at September 30, 2016 and December 31, 2015, respectively, which is recorded in “Accounts payable and accrued expenses” on the Condensed Consolidated Balance Sheets. The Company did not designate the interest rate swap as an effective hedge until the first quarter of 2016, and accordingly the change in the fair value until the date of designation of $0.5 million was recorded in earnings in “Other income (expense), net” in the Condensed Consolidated Statements of Operations for the nine-month period ended September 30, 2016. From the date of designation, all changes to the fair value of the interest rate swap have been recorded in other comprehensive income (loss) as the hedge is deemed effective.
As of September 30, 2016 and December 31, 2015, the Company was in compliance with all related financial and other restrictive covenants under the Credit Agreement.
Foreign Debt
A subsidiary of the Company located in the Netherlands has a Euro denominated facilities agreement with ING Bank N.V. (“Aarding Facility”) with a total borrowing capacity of $14.6 million. As of September 30, 2016 and December 31, 2015, the borrowers were in compliance with all related financial and other restrictive covenants. As of September 30, 2016, $2.4 million of the bank guarantee and $0.3 million of the overdraft facility are being used by the borrowers. As of December 31, 2015, $6.6 million of the bank guarantee and $5.3 million of the overdraft facility was being used by the Company. There is no stated expiration date on the Aarding Facility.
A subsidiary of the Company located in China has a Chinese Yuan Renminbi denominated short-term loan with Bank of America (“China Facility”) with an amount outstanding of $1.4 million as of September 30, 2016 at an interest rate of 4.79%, which matures in October 2016 and was subsequently renewed on a short term basis.
9. |
Earnings and Dividends per Share |
The computational components of basic and diluted earnings per share for the three-month and nine-month periods ended September 30, 2016 and 2015 are below.
|
|
For the three-month period ended September 30, 2016 |
|
|||||||||
|
|
Numerator (Income) |
|
|
Denominator (Shares) |
|
|
Per Share Amount |
|
|||
Basic net income and income per share |
|
$ |
5,804 |
|
|
|
33,984 |
|
|
$ |
0.17 |
|
Effect of dilutive securities and notes: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents arising from stock options, restricted stock awards, and employee stock purchase plan |
|
|
— |
|
|
|
371 |
|
|
|
— |
|
Diluted earnings and earnings per share |
|
$ |
5,804 |
|
|
|
34,355 |
|
|
$ |
0.17 |
|
|
|
For the three-month period ended September 30, 2015 |
|
|||||||||
|
|
Numerator (Income) |
|
|
Denominator (Shares) |
|
|
Per Share Amount |
|
|||
Basic net loss and loss per share |
|
$ |
(4,825 |
) |
|
|
28,618 |
|
|
$ |
(0.17 |
) |
Effect of dilutive securities and notes: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents arising from stock options, restricted stock awards, and employee stock purchase plan |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Diluted loss and loss per share |
|
$ |
(4,825 |
) |
|
|
28,618 |
|
|
$ |
(0.17 |
) |
12
|
|
For the nine-month period ended September 30, 2016 |
|
|||||||||
|
|