Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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 (I.R.S. Employer
incorporation or organization) Identification No.)
3120 Forrer Street, Cincinnati, Ohio 45209
----------------------------------------------------
(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 and (2) has been subject to such filing requirements for
the past 90 days.
X Yes No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of latest practical date.
Class: Common, par value $.01 per share outstanding at November 12, 2002 -
9,589,736
CECO ENVIRONMENTAL CORP.
------------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
INDEX
-----
Part I - Financial Information:
Item 1. Condensed consolidated balance sheets as of
September 30, 2002 and December 31, 2001 .................. 2
Condensed consolidated statements of operations
for the three-month and nine-month periods ended
September 30, 2002 and 2001 ............................... 3
Condensed consolidated statements of cash flows for the
nine-month periods ended September 30, 2002 and 2001 ...... 4
Notes to condensed consolidated financial statements ...... 5
Item 2. Management's discussion and analysis of
financial condition and results of operations ............. 8
Item 3. Quantitative and Qualitative Disclosure
about Market Risk ......................................... 12
Item 4. Controls and Procedures ................................... 13
Part II - Other Information
Item 6. Exhibits and reports on Form 8-K .......................... 14
Signature ................................................................... 15
Certifications
CECO ENVIRONMENTAL CORP.
------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Dollars in thousands, except share data
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 116 $ 53
Accounts receivable, net ....................................... 12,686 17,000
Costs and estimated earnings in excess of
billings on uncompleted contracts ............................ 5,599 5,572
Inventories .................................................... 2,553 2,157
Prepaid expenses and other current assets ...................... 2,573 1,805
------- -------
Total current assets ....................................... 23,527 26,587
Property and equipment, net ......................................... 12,424 13,136
Goodwill, net ....................................................... 9,527 9,527
Intangibles - finite life, net ...................................... 914 1,072
Intangibles - indefinite life ....................................... 1,395 1,395
Deferred charges and other assets ................................... 1,190 1,313
------- -------
$48,977 $53,030
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt ........................................ $ 2,120 $ 2,826
Accounts payable and accrued expenses .......................... 10,422 13,103
Billings in excess of costs and estimated
earnings on uncompleted contracts ............................ 2,274 2,595
------- -------
Total current liabilities .................................. 14,816 18,524
Other liabilities ................................................... 1,533 2,032
Debt, less current portion .......................................... 14,897 14,838
Deferred income tax liability ....................................... 4,203 4,065
Subordinated notes (related party - $3,176 and $3,000, respectively) 3,970 3,750
------- -------
Total liabilities .......................................... 39,419 43,209
------- -------
Shareholders' equity:
Common stock, $0.01 par value; 100,000,000 shares authorized,
10,383,203 shares issued in 2002 and 10,378,007 in 2001 ........... 104 104
Capital in excess of par value ...................................... 16,313 16,304
Accumulated deficit ................................................. (4,555) (4,214)
Accumulated other comprehensive loss ................................ (500) (687)
------- -------
11,362 11,507
Less treasury stock, at cost, 801,220 and 763,920 shares
in 2002 and 2001, respectively .................................... (1,804) (1,686)
------- -------
Total shareholders' equity ................................. 9,558 9,821
------- -------
$48,977 $53,030
======= =======
The notes to condensed consolidated financial statements
are an integral part of the above statements.
2
CECO ENVIRONMENTAL CORP.
------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
- --------------------------------------------------------------------------------
Dollars in thousands, except per share data
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales ....................................... $ 19,581 $ 24,316 $ 57,046 $ 67,159
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales, exclusive of
items shown separately below ................ 15,790 19,130 45,780 54,364
Selling and administrative .................... 2,867 3,343 9,002 9,379
Depreciation and amortization ................. 406 548 1,316 1,684
---------- ---------- ---------- ----------
19,063 23,021 56,098 65,427
---------- ---------- ---------- ----------
Income from operations before other
income and interest expense ................... 518 1,295 948 1,732
Other (expense) income .......................... - (4) 204 397
Interest expense (including related party
interest of $175 and $179, and
$525 and $531, respectively) .................. (703) (879) (2,056) (2,719)
---------- ---------- ---------- ----------
Income (loss) from operations
before income taxes ........................... (185) 412 (904) (590)
Income tax (benefit) provision .................. (246) 222 (563) (322)
---------- ---------- ---------- ----------
Net income (loss) ............................... $ 61 $ 190 $ (341) $ (268)
========== ========== ========== ==========
Per share data:
Basic net income (loss) ......................... $ .01 $ .02 $ (.04) $ (.03)
========== ========== ========== ==========
Diluted net income (loss) ....................... $ .01 $ .02 $ (.04) $ (.03)
========== ========== ========== ==========
Weighted average number of
common shares outstanding:
Basic ....................................... 9,581,983 7,898,403 9,580,686 7,891,058
========== ========== ========== ==========
Diluted ..................................... 9,723,595 8,040,486 9,580,686 7,891,058
========== ========== ========== ==========
The notes to condensed consolidated financial statements are
an integral part of the above statements.
3
CECO ENVIRONMENTAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
- --------------------------------------------------------------------------------
Dollars in thousands
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
---- ----
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net loss ............................................................... $ (341) $ (268)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization .......................................... 1,316 1,684
Gain on sales of marketable securities, trading ........................ -- (391)
Changes in operating assets and liabilities:
Marketable securities ................................................ -- 1,386
Accounts receivable .................................................. 4,313 2,920
Inventories .......................................................... (396) (383)
Costs and estimated earnings in excess of
billings on uncompleted contracts .................................. (27) (356)
Prepaid expenses and other current assets ............................ (767) (675)
Accounts payable and accrued expenses ................................ (2,577) 205
Billings in excess of costs and estimated
earnings on uncompleted contracts .................................. (322) 50
Other .................................................................. (14) (228)
------- -------
Net cash provided by operating activities ................................... 1,185 3,944
------- -------
Net cash used in investing activities ....................................... (241) (542)
------- -------
Cash flows from financing activities:
Stock repurchases ...................................................... (118) --
Proceeds from employee stock purchase plan ............................. 9 --
Stock issuance expenses ................................................ (125) --
Long-term debt payments ................................................ (647) (3,674)
------- -------
Net cash used in financing activities ....................................... (881) (3,674)
------- -------
Net increase (decrease) in cash ............................................. 63 (272)
Cash and cash equivalents at beginning of the period ........................ 53 664
------- -------
Cash and cash equivalents at end of the period .............................. $ 116 $ 392
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest ............................................................... $ 2,211 $ 2,237
======= =======
Income taxes ........................................................... $ 168 $ 455
======= =======
The notes to condensed consolidated financial statements are
an integral part of the above statements.
4
CECO ENVIRONMENTAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
(Dollars in thousands)
1. Basis of reporting for condensed consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements of
CECO Environmental Corp. (the "Company") and subsidiaries have been
prepared in accordance with accounting principles generally accepted in the
United States of America. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements of the Company
contain all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial position as of September 30, 2002
and 2001 and the results of operations for the three-month and nine-month
periods ended September 30, 2002 and 2001 and of cash flows for the
nine-month periods ended September 30, 2002 and 2001. The results of
operations for the three-month and nine-month periods ended September 30,
2002 are not necessarily indicative of the results to be expected for the
full year.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
Certain amounts in the December 31, 2001 financial statements have been
reclassified to conform with the September 30, 2002 presentation.
2. New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations". SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and
that certain acquired intangible assets in a business combination be
recognized as assets apart from goodwill. Upon adoption of SFAS No. 141, on
January 1, 2002, the Company's intangible asset of $1,395 related to the
workforce was reclassified to goodwill under the criteria of that standard
and is no longer considered a separate intangible asset.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 requires that ratable amortization of
goodwill and intangible assets with indefinite lives be replaced with
annual tests for impairment and that intangible assets with finite lives
should continue to be amortized over their useful lives. The Company
adopted SFAS No. 142 as of January 1, 2002. In accordance with SFAS
No. 142, the Company ceased amortization of goodwill and intangible assets
with indefinite lives as of December 31, 2001. The ceasing of the
amortization of such assets resulted in a reduction of $119 of amortization
expense in the three-month period ended September 30, 2002 and $357 in the
nine-month period ended September 30, 2002. Additionally, the Company has
evaluated the fair value of intangible assets with indefinite lives and
determined that the fair value was in excess of the carrying value of such
assets. During the second quarter, the Company completed its testing of
impairment of goodwill and determined that the fair value of the net assets
was in excess of the carrying value of such assets.
5
CECO ENVIRONMENTAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which superseded SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of". The primary difference is that goodwill
has been removed from the scope of SFAS No. 144. It also broadens the
presentation of discontinued operations to include a component of an entity
rather than a segment of a business. A component of an entity comprises
operations and cash flows that can clearly be distinguished operationally
and for financial accounting purposes from the rest of the entity. SFAS No.
144 was adopted as of January 1, 2002. There was no adjustment required
upon adoption.
3. Inventories
Inventories consist of the following:
September 30, December 31,
2002 2001
------------- ------------
Raw materials and subassemblies ..... $ 1,454 $ 1,279
Finished goods ...................... 310 156
Parts for resale .................... 789 722
------------ ------------
$ 2,553 $ 2,157
============ ============
4. Business Segment Information
The Company in the second quarter re-evaluated its presentation of segment
data resulting from changes in its management structure and the operational
integration of its business units during the first quarter. This change in
structure and operational integration results in one segment that focuses
on engineering, designing, building and installing systems that remove
airborne contaminants from industrial facilities, as well as equipment that
controls emissions from such facilities. Accordingly, related financial
information is no longer considered necessary as the condensed consolidated
financial statements herein reflect the operating results of the segment,
since the Company maintains one single business segment.
5. Other Income
Other income during the nine-month period of 2002 is the result of a fair
market value adjustment to a liability recorded in connection with
detachable stock warrants to purchase 353,334 shares of common stock at an
initial exercise price of $3.60 per share. These warrants were issued along
with the Company's stock issuance of 706,668 shares of
6
CECO ENVIRONMENTAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- --------------------------------------------------------------------------------
common stock on December 31, 2001 to a group of private investors. This
liability is accounted for at fair market value and adjustments in future
quarters could result in an increase to the liability and a corresponding
charge to income. There was no change in value for these detachable stock
warrants in the three months ending September 30, 2002, therefore, no
income (loss) has been recognized. The Company no longer holds shares of
Peerless Manufacturing Company ("Peerless") common stock which made up the
majority of the other income earned during the first quarter and first half
of 2001.
6. Earnings Per Share
The following table reconciles basic weighted average shares outstanding to
diluted weighted average shares outstanding for the three months ended
September 30, 2002 and 2001. There were no adjustments to net income for
the basic or diluted earnings per share (EPS) computations.
Three Months ended September 30,
2002 2001
-------------- --------------
Basic weighted average number of
common shares outstanding 9,581,983 7,898,403
Effect of Dilutive Securities 141,612 142,083
-------------- --------------
Diluted weighted average number
of common shares outstanding 9,723,595 8,040,486
============== ==============
Options and warrants to purchase 2,488,500 and 3,428,500 shares for the
three-month periods ended September 30, 2002 and 2001, and options and
warrants to purchase 3,488,500 and 4,428,500 shares for the nine-month
periods ended September 30, 2002 and 2001, were not included in the
computation of diluted earnings per share because the option prices of
these options and warrants were greater than the average market price of
the common shares or because inclusion would have been anti-dilutive.
7. Comprehensive Loss
The Company currently records as other comprehensive loss the changes in
the additional minimum pension liability, and the change in fair value of
the interest rate swap. A reconciliation of net loss to total comprehensive
loss is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------ ------ ------ ------
Net income (loss) $ 61 $ 190 $(341) $(268)
Change in fair value of swap,
net of tax 66 (67) 187 (279)
---- ----- ----- -----
Total comprehensive income (loss) $127 $ 123 $(154) $(547)
==== ===== ===== =====
7
CECO ENVIRONMENTAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(unaudited)
- --------------------------------------------------------------------------------
Results of Operations
The Company's condensed consolidated statements of operations for the
three-month and nine-month periods ended September 30, 2002 and September 30,
2001 reflect the operations of the Company consolidated with the
operations of its subsidiaries.
Consolidated net sales for the three-months ended September 30, 2002 were $19.6
million, a decrease of $4.7 million compared to the same period in 2001.
Consolidated net sales for the first nine months of 2002 were $57.0 million, a
decrease of $10.1 million compared to the same period in 2001. The decrease in
sales was principally due to (i.)lower customer demand resulting from the
general weakness in the U.S. economy, (ii.)decreased sales associated with
businesses sold totaling $0.7 million and $1.5 million during the third quarter
and nine months ended September 30, 2002, and (iii.)$2.1 million and $3.4
million in the third quarter and nine months ended September 30, 2002 from the
discontinuance of the specialty piping division in the third quarter of 2001.
This decline was partially offset by sales from the Company's newly established
subsidiary, CECO Abatement Systems and K&B's new division, K&B Duct, totaling
$1.6 million and $4.2 million in the third quarter and nine months ending
September 30, 2002. Net sales include a gain of $0.2 million from the sale of
Air Purator Corporation's assets during the third quarter of 2002.
The Company booked orders of $20.5 million during the third quarter of 2002 and
$58.1 million for the first nine months of 2002, as compared to $27.2 million
during the third quarter of 2001 and $74.9 million in the nine months of 2001.
The decrease in bookings is partially attributable to the inclusion of a large
specialty piping division contract booked in the first quarter of 2001. The
piping division was discontinued during the third quarter of 2001. The Company
has experienced an increase in sales quoting during the third quarter of 2002
compared with the first and second quarters of 2002. While there can be no
assurances of future revenues, this increased level of activity may be a trend
that is indicative of potentially higher levels of bookings later in 2002 and
into 2003.
Gross profit was $3.8 million for the three-month period ended September 30,
2002, a decrease of $1.4 million compared to the same period in 2001. Gross
profit as a percentage of revenues for the three-month period ended September
30, 2002 was 19.4% compared with 21.4% for the comparable period in 2001. Gross
profit was $11.3 million for the first nine months of 2002, a decrease of $1.5
million compared to the same period in 2001. Gross profit as a percentage of
revenues for the first nine months of 2002 was 19.8% compared with 19.0% for the
comparable period in 2001. The increase in 2002 is attributable to an increased
focus at all levels on project cost management yielding higher margins for
Kirk & Blum and CECO Filters.
Selling and administrative expenses decreased $0.5 million during the three
months ended September 30, 2002 as compared to the same period in 2001. The
decrease is attributed to the Company's cost control and a reduction in its work
force. Selling and administrative expenses were $9.0 million for the first nine
months of 2002, a decrease of $0.4 million compared to the same period in 2001.
The Company reduced its workforce in May 2002 and again in September 2002
reflecting the consolidation of certain functions and efficiencies
8
CECO ENVIRONMENTAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(unaudited)
- --------------------------------------------------------------------------------
gained. On an annualized basis, the impact is expected to result in a savings of
approximately $2.0 million, which began to be realized during the third quarter
of 2002. The 2001 period included adjustments for the reversal of a contingency
reserve held in connection with a customer bankruptcy ($0.2 million), and the
reversal of a reserve held in conjunction with the operations discontinued in
1999 ($0.2 million).
Depreciation and amortization decreased by $0.1 million during the three months
ended September 30, 2002 as compared to the same period of 2001. Depreciation
and amortization decreased $0.4 million to $1.3 million in the first nine months
of 2002 primarily resulting from the implementation of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
SFAS No. 142 requires that ratable amortization of goodwill and intangible
assets with indefinite lives be replaced with annual tests for impairment and
that intangible assets with finite lives should continue to be amortized over
their useful lives. The implementation of SFAS 142 resulted in a favorable
impact to results of operations of $0.4 million during the first nine months of
2002 as compared with the same period in 2001.
Other income for the first nine months of 2002 was $0.2 million compared with
income of $0.4 million during the same period in 2001. The other income during
the nine-month period of 2002 is the result of a fair market value adjustment
during the second quarter to a liability recorded in connection with detachable
stock warrants to purchase 353,334 shares of common stock at an initial exercise
price of $3.60 per share. These warrants were issued along with the Company's
stock issuance of 706,668 shares of common stock on December 31, 2001 to a group
of private investors. This liability is accounted for at fair market value and
adjustments in future quarters could result in an increase to the liability and
a corresponding charge to income. The Company no longer holds shares of Peerless
stock which made up the majority of the other income earned during 2001.
Interest expense decreased by $0.2 million to $0.7 million from $0.9 million
during the third quarter of 2002. Interest expense decreased $0.7 million to
$2.1 million during the first nine months of 2002 compared to the same period of
2001. The decrease is principally due to lower borrowing levels and decreased
rates under the bank credit facility.
Federal and state income tax benefit was $0.2 million during the third quarter
of 2002 compared with a tax provision of $0.2 million for the same period in
2001. The federal and state income tax benefit in the third quarter of 2002 was
adjusted to reflect the Company's effective tax rate for 2002. The federal and
state income tax benefit was $0.6 million for the first nine months of 2002, an
increase of $0.2 million from the comparable period in 2001. The effective
income tax rate for the nine months of 2002 was 62% compared with 55% in the
same period of 2001. The effective tax rate during 2002 is affected by certain
permanent differences including non-deductible interest expense. The effective
income tax rate during 2001 was affected by non-deductible goodwill amortization
and interest expense.
Net income for the quarter ended September 30, 2002 was $61,000 compared with a
net income of $190,000 for the same period in 2001. Net loss for the nine months
ended September 30, 2002 and 2001 was ($341,000) and ($268,000), respectively.
9
CECO ENVIRONMENTAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(unaudited)
- --------------------------------------------------------------------------------
Backlog
Our backlog consists of orders we have received for products and services
we expect to ship and deliver within the next 12 months. Our backlog, as
of September 30, 2002 was $19.8 million compared to $18.6 million as of
December 31, 2001. There can be no assurances that backlog will be replicated
or increased or translated into higher revenues in the future. The success of
our business depends on a multitude of factors that are out of our control.
Our operating results can be affected by the introduction of new products,
new manufacturing technologies, rapid change of the demand for its products,
decrease in average selling prices over the life of the product as competition
increases and our dependence to some degree on efforts of intermediaries to
sell a portion of our product.
Financial Condition, Liquidity and Capital Resources
At September 30, 2002 and December 31, 2001 cash and cash equivalents totaled
$116,000 and $53,000, respectively.
Cash provided by operating activities for the nine-month period ended September
30, 2002 was $1.2 million compared to $3.9 million for the comparable period in
2001.
Total bank and related debt as of September 30, 2002 was $17.0 million as
compared to $17.7 million at December 31, 2001, a decrease of $0.7 million, due
to net repayments under the bank credit facilities. Unused credit availability
at September 30, 2002, was $1.9 million under the bank line of credit.
The senior secured credit facility was amended in November 2002: by reducing
scheduled principal payments under the Term A loan, reducing coverage
requirements under the financial covenants from September 2002 through December
2003, by requiring a principal payment of $1.0 million against the Term B loan
and extending the maturity date of the revolving line of credit to January 2004.
The amendment also includes a provision for the reduction in the current
interest rate margins based on the achievement of certain coverage levels under
the financial covenant for leverage.
Investing activities used cash of $0.2 million during the first nine months of
2002 compared with cash used of $0.5 million for the same period in 2001.
Capital expenditures for property and equipment, and leasehold improvements were
$0.2 million for the first nine months of 2002 and were primarily for
manufacturing and engineering equipment. Capital expenditures for property and
equipment are anticipated to be in the range of $0.5 million to $0.7 million for
2002 and will be funded by cash from operations and/or line of credit borrowing.
On December 31, 2001, the Company issued a number of shares of common stock
based upon the Company meeting a certain operating performance target. The
number of shares are subject to adjustment in the event the targeted operating
performance is not met. The Company does not believe it will meet the targeted
operating performance. However, the number of shares will be determined as of
December 31, 2002.
10
CECO ENVIRONMENTAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(unaudited)
- --------------------------------------------------------------------------------
Financing activities used cash of $0.9 million during the first nine months of
2002 compared with cash used of $3.7 million during the same period of 2001.
Current year financing activities included net payments under bank credit
facilities.
Forward-Looking Statements
We desire to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and are making this cautionary
statement in connection with such safe harbor legislation. This Form 10-Q, the
Annual Report to Shareholders, Form 10-K or Form 8-K of the Company or any other
written or oral statements made by or on our behalf may include forward-looking
statements which reflect our current views with respect to future events and
financial performance. The words "believe," "expect," "anticipate," "intends,"
"estimate," "forecast," "project," "should" and similar expressions are intended
to identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All forecasts and projections in this
Form 10-Q are "forward-looking statements," and are based on management's
current expectations of our near-term results, based on current information
available pertaining to us.
We wish to caution investors that any forward-looking statements made by or on
our behalf are subject to uncertainties and other factors that could cause
actual results to differ materially from such statements. These uncertainties
and other risk factors include, but are not limited to: changing economic and
political conditions in the United States and in other countries, war, changes
in governmental spending and budgetary policies, governmental laws and
regulations surrounding various matters such as environmental remediation,
contract pricing, and international trading restrictions, customer product
acceptance, continued access to capital markets, and foreign currency risks. We
wish to caution investors that other factors might, in the future, prove to be
important in affecting our results of operations. New factors emerge from time
to time and it is not possible for management to predict all such factors, nor
can it assess the impact of each such factor on the business or the extent to
which any factor, or a combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Investors are further 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. We undertake no obligation to publicly update or revise any
forward-looking statements, whether because of new information, future events
or otherwise.
11
CECO ENVIRONMENTAL CORP.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Risk Management Activities
We are exposed to market risk including changes in interest and commodity
prices. We use derivative instruments to manage our interest rate exposures. We
do not use derivative instruments for speculative or trading purposes.
Generally, we enter into hedging relationships such that changes in the fair
values of cash flows of items and transactions being hedged are expected to be
offset by corresponding changes in the values of the derivatives.
Interest Rate Management
We enter into interest rate swap agreements to manage interest costs and risks
associated with changing interest rates. The differential to be paid or received
under these agreements is accrued and recognized as adjustments to interest
expense. The fair value of the swap agreements and changes in the fair value as
a result of changes in market interest rates are recognized in Accumulated other
comprehensive income (loss) in our consolidated balance sheets. At September 30,
2002, the Company had interest rate swap agreements outstanding with a
commercial bank having a notional principal amount of $8.7 million. This swap
effectively changed the interest rate exposure of $8.7 million of our floating
debt to a weighted fixed rate of 6.96% plus the applicable spread.
The remaining amount of loans outstanding under the Credit Agreement bear
interest at the floating rates as described in Note 11 to the consolidated
statements contained in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
Accordingly, the combined effect of a 1% increase in an applicable index rates
would result in additional interest expense of approximately $.1 million
annually, assuming no change in the level of borrowings. At September 30, 2002,
the Company had unrealized net losses under an interest rate swap agreement of
$.1 million, which has been recorded net of tax in Accumulated other
comprehensive income (loss) in the consolidated balance sheet.
We do not hold collateral for these instruments and therefore are exposed to
credit loss in the event of nonperformance by the other party to the interest
swap agreement. However, we do not anticipate any such nonperformance.
Credit Risk
As part of our ongoing control procedures, we monitor concentrations of credit
risk associated with financial institutions with which it conducts business.
Credit risk is minimal as credit exposure is limited with any single high
quality financial institution to avoid concentration. We also monitor the
creditworthiness of our customers to which we grant credit terms in the normal
course of business. Concentrations of credit associated with these trade
receivables are considered minimal due to our geographically diverse customer
base. Bad debts have been minimal. We do not normally require collateral or
other security to support credit sales.
12
CECO ENVIRONMENTAL CORP.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
Within ninety days prior to the filing of this Report, the Company's Chief
Executive Officer and Chief Financial Officer evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures, which
are designed to insure that the Company records, processes, summarizes and
reports in a timely and effective manner the information required to be
disclosed in the reports filed with or submitted to the Securities and Exchange
Commission. Based upon this evaluation, they concluded that, as of the date of
the evaluation, the Company's disclosure controls are effective. Since the date
of this evaluation, there have been no significant changes in the Company's
internal controls or in other factors that could significantly affect those
controls.
13
CECO ENVIRONMENTAL CORP.
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
-------------------
The Company did not file any Form 8-K during the third quarter of
2002.
14
CECO ENVIRONMENTAL CORP.
SIGNATURE
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CECO ENVIRONMENTAL CORP.
/s/ Marshall J. Morris
------------------------------------
Marshall J. Morris
V.P.-Finance and Administration
and Chief Financial Officer
Date: November 14, 2002
15
Certification
I, Phillip DeZwirek, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CECO Environmental
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Phillip DeZwirek
Phillip DeZwirek
Chairman of the Board and
Chief Executive Officer
November 14, 2002
Certification
I, Marshall J. Morris, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CECO Environmental
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Marshall J. Morris
Marshall J. Morris
V.P. - Finance and Administration and
Chief Financial Officer
November 14, 2002