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 MARCH 31, 2003
Commission File No. 0-7099
--------------------------
CECO ENVIRONMENTAL CORP.
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(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
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(Address of principal executive offices) (Zip Code)
513-458-2600
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(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 May 2, 2003 - 9,971,973
CECO ENVIRONMENTAL CORP.
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2003
INDEX
Part I - Financial Information:
Item 1. Condensed consolidated balance sheets as of
March 31, 2003 and December 31, 2002 ....................... 2
Condensed consolidated statements of
operations for the three-month periods
ended March 31, 2003 and 2002 .............................. 3
Condensed consolidated statements of cash flows for the
three-month periods ended March 31, 2003 and 2002 .......... 4
Notes to condensed consolidated financial statements ....... 5
Item 2. Management's discussion and analysis of
financial condition and results of operations .............. 9
Item 3. Quantitative and Qualitative Disclosure
about Market Risk .......................................... 13
Item 4. Controls and Procedures .................................... 14
Part II - Other Information
Item 6. Exhibits and reports on Form 8-K ........................... 15
Signature ..................................................................... 16
Certifications
CECO ENVIRONMENTAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except share data
MARCH 31, DECEMBER 31,
2003 2002
-------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 103 $ 194
Accounts receivable, net ............................... 10,916 12,037
Costs and estimated earnings in excess of
billings on uncompleted contracts ................... 4,751 5,287
Inventories ............................................ 2,003 2,055
Prepaid expenses and other current assets .............. 2,353 2,151
-------- --------
Total current assets .............................. 20,126 21,724
Property and equipment, net .................................. 11,859 12,122
Goodwill, net ................................................ 9,527 9,527
Intangibles - finite life, net ............................... 875 894
Intangibles - indefinite life ................................ 1,395 1,395
Deferred charges and other assets ............................ 1,145 1,015
-------- --------
$ 44,927 $ 46,677
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt ................................ $ 8,593 $ 2,120
Accounts payable and accrued expenses .................. 9,411 11,675
Billings in excess of costs and estimated
earnings on uncompleted contracts ................... 1,396 1,652
-------- --------
Total current liabilities ......................... 19,400 15,447
Other liabilities ............................................ 2,179 2,137
Debt, less current portion ................................... 6,597 12,164
Deferred income tax liability ................................ 3,480 3,480
Subordinated notes (related party - $3,698
and $3,634, respectively) ................................. 4,109 4,038
-------- --------
Total liabilities ................................. 35,765 37,266
-------- --------
Shareholders' equity:
Common stock, $0.01 par value; 100,000,000 shares authorized,
10,390,956 shares issued in 2003 and 2002 ................. 104 104
Capital in excess of par value ............................... 16,313 16,313
Accumulated deficit .......................................... (4,586) (4,337)
Accumulated other comprehensive loss ......................... (865) (865)
-------- --------
10,966 11,215
Less treasury stock, at cost, 801,220 shares in 2003 and 2002 (1,804) (1,804)
-------- --------
Total shareholders' equity ....................... 9,162 9,411
-------- --------
$ 44,927 $ 46,677
======== ========
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
MARCH 31,
--------------------------
2003 2002
----------- -----------
Net sales ....................................... $ 15,201 $ 18,879
----------- -----------
Costs and expenses:
Cost of sales, exclusive of
items shown separately below ............... 12,132 15,041
Selling and administrative ................... 2,542 3,082
Depreciation and amortization ................ 403 457
----------- -----------
15,077 18,580
----------- -----------
Income from operations before
interest expense ............................. 124 299
Interest expense (including related party
interest of $197 in both years) .............. (593) (683)
----------- -----------
Income (loss) from operations
before income taxes .......................... (469) (384)
Income tax benefit .............................. (220) (187)
----------- -----------
Net income (loss) ............................... $ (249) $ (197)
=========== ===========
Per share data:
Basic and diluted net income (loss) ............. $ (.03) $ (.02)
=========== ===========
Weighted average number of common
shares outstanding:
Basic and diluted ........................ 9,589,736 9,581,105
=========== ===========
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
THREE MONTHS ENDED
MARCH 31,
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss ................................................. $ (249) $ (197)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization ............................ 403 457
Changes in operating assets and liabilities:
Accounts receivable .................................... 1,121 5,757
Inventories ............................................ 52 (397)
Costs and estimated earnings in excess of
billings on uncompleted contracts ..................... 536 (447)
Prepaid expenses and other current assets .............. (202) (521)
Accounts payable and accrued expenses .................. (2,264) (2,564)
Billings in excess of costs and estimated
earnings on uncompleted contracts .................... (256) 275
Other .................................................... (102) 182
--------- ---------
Net cash (used in) provided by operating activities ........... (961) 2,545
--------- ---------
Net cash used in investing activities ......................... (36) (52)
--------- ---------
Cash flows from financing activities:
Stock repurchases ........................................ -- (114)
Stock issuance expenses .................................. -- (125)
Long-term debt borrowings (payments) ..................... 906 (2,284)
--------- ---------
Net cash provided by (used in) financing activities ........... 906 (2,523)
--------- ---------
Net decrease in cash .......................................... (91) (30)
Cash and cash equivalents at beginning of the period .......... 194 53
--------- ---------
Cash and cash equivalents at end of the period ................ $ 103 $ 23
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest ................................................. $ 501 $ 1,362
========= =========
Income taxes ............................................. $ 41 $ 103
========= =========
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. and subsidiaries (the "Company", "we", "us", or
"our") 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 March 31, 2003 and December 31, 2002 and the results of
operations for the three-month periods ended March 31, 2003 and 2002 and of
cash flows for the three-month periods ended March 31, 2003 and 2002. The
results of operations for the three-month period ended March 31, 2003 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.
We apply Accounting Principles Board Opinion No. 25 and related
interpretations in the accounting for stock option plans. Under such
method, compensation is measured by the quoted market price of the stock at
the measurement date less the amount, if any, that the employee is required
to pay. The measurement date is the first date on which the number of
shares that an individual employee is entitled to receive and the option or
purchase price, if any, are known. We did not incur any compensation
expense in 2003 or 2002 related to our stock option plans. We adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and related pronouncements.
The following table compares 2003 and 2002 as reported to the pro forma
results, considering both options and warrants discussed in Note 11 in our
2002 Annual Report filed on Form 10-K, had we adopted the expense
recognition provision of SFAS No. 123:
Three Months Ended
March 31,
2003 2002
---------- ----------
Net loss as reported ...................... $ (249) $ (197)
Deduct: compensation cost based on fair
value recognition, net of tax ............ (82) (106)
---------- ----------
Pro forma net loss under SFAS No. 123 ..... $ (331) $ (303)
========== ==========
Basic and diluted loss per share:
As reported ............................. $ (0.03) $ (0.02)
Pro forma under SFAS No. 123 ............ $ (0.03) $ (0.03)
Certain amounts in the March 31, 2002 financial statements have been
reclassified to conform to the March 31, 2003 presentation.
5
CECO ENVIRONMENTAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations," requiring that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made.
The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The adoption of this statement on
January 1, 2003 did not have an effect on our financial position or results
of operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." Among other amendments to previous pronouncements,
which have already taken effect, a provision in the Statement requires
certain gains and losses from extinguishment of debt to be reclassified
from extraordinary items. The adoption of this statement on January 1, 2003
did not have an effect on our financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or disposal Activities," which is effective for exit
or disposal activities initiated after December 31, 2002. SFAS No. 146
addresses financial accounting and reporting for costs associated with exit
or disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The adoption of this statement did not have a material
impact on our financial condition or results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation - Transaction and Disclosure" which we adopted
January 1, 2003. The Statement provides alternative methods of transition
for a voluntary change in the fair value method and, at this time, we do
not anticipate making a voluntary change, however we adopted the disclosure
requirements effective December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45")
"Guarantor's Accounting and Disclosure requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates
on the existing disclosure requirements for most guarantees, including loan
guarantees. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations, it assumes under that
guarantee. However, the provisions do not apply to product warranties or to
guarantees accounted for as derivatives. The initial recognition and
initial measurement provisions, which apply on a prospective basis
beginning January 1, 2003, had no effect on our financial statements in the
first quarter of 2003 because there were no guarantees issued or modified
during this period. The disclosure requirements of FIN 45 were adopted
December 31, 2002 and had no effect on our financial statement disclosures
for the first quarter of 2003.
6
CECO ENVIRONMENTAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46")
"Consolidation of Variable Interest Entities". FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns. FIN 46 applies to variable interest entities created after January
31, 2003, and to variable interest entities in which an enterprise obtains
an interest in after that date. The adoption of this interpretation
currently has no effect on our financial condition or results of
operations, as we do not have any variable interest entities.
In November 2002, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF No. 00-21 provided guidance for revenue arrangements
that involve the delivery or performance of multiple products or services
where performance may occur at different points or over different periods
of time. EITF No. 00-21 is effective for revenue arrangements entered into
in fiscal periods beginning after June 15, 2003 (i.e., the Company's fiscal
2004). The Company has not yet completed its assessment of the anticipated
adoption, if any, of EITF Issue No. 00-21.
3. Inventories
Inventories consist of the following:
March 31, December 31,
2003 2002
--------- -----------
Raw materials and subassemblies ........... $ 1,155 $ 1,202
Finished goods ............................ 250 251
Parts for resale .......................... 598 602
--------- -----------
$ 2,003 $ 2,055
========= ===========
4. Business Segment Information
The Company in the second quarter of 2002 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.
7
CECO ENVIRONMENTAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. Earnings Per Share
For the three months ended March 31, 2003 and 2002, both basic weighted
average common shares outstanding and diluted average common shares
outstanding were 9,589,736 and 9,581,105, respectively. We consider
outstanding options and warrants in computing diluted net loss per share
only when they are dilutive. Options and warrants to purchase 3,451,000 and
3,451,000 shares for the three months ended March 31, 2003 and 2002,
respectively, were not included in the computation of diluted earnings per
share due to their having an anti-dilutive effect. There were no
adjustments to net loss for the basic or diluted earnings per share
computations.
6. 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 that matured in November 2002. A reconciliation of
net loss to total comprehensive loss is as follows:
Three Months Ended
March 31,
2003 2002
---------- ----------
Net loss ......................... $ (249) $ (197)
Change in fair value of swap,
net of tax ..................... -- 77
---------- ----------
Total comprehensive loss ......... $ (249) $ (120)
========== ==========
7. Current Portion of Debt
Current portion of debt includes $6,473 of our $8,000 revolving line of
credit that matures in January 2004 as well as term debt of $2,120 which is
due over the next twelve months. We intend to refinance the bank credit
facility in the second half of 2003 under a multi-year agreement. Market
conditions, company performance and collateral will become major factors in
our refinancing efforts. However, on May 7, 2003, we received $1,600 in
gross proceeds from the sale of our Conshohocken, Pennsylvania property.
Approximately, $700 was used to reduce the revolving line of credit and the
balance was used to reduce term debt. Also, in February 2003, we accepted
an offer to sell our property in Cincinnati, Ohio where the buyer has the
option to cancel the agreement through September 30, 2003. If we consummate
the sale of our Cincinnati, Ohio property, the net proceeds from the sale,
will significantly affect the amount of the credit facility required as
well as any other financing obtained in connection with the replacement
facilities. Ultimately, we believe that we will be able to obtain a
suitable refinancing at acceptable rates and terms with collateral and
covenants customary in the industry.
8
CECO ENVIRONMENTAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(unaudited)
Our Critical Accounting Policies are discussed in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations to our
Annual Report on Form 10-K for the year ended December 31, 2002.
Results of Operations
The Company's condensed consolidated statements of operations for the
three-month period ended March 31, 2003 reflect the operations of the Company
consolidated with the operations of its subsidiaries.
Consolidated net sales for the first quarter were $15,201,000, a decrease of
$3,678,000 compared to the same quarter in 2002. The driving factors for this
decline were: a) several large projects included in our December 31, 2001
backlog that were completed in 2002 and b) the continuing weakness in the United
States economy.
Orders booked in the first quarter of 2003 were $14,350,000 compared to
$19,530,000 in the same quarter of 2002. The decline in bookings was due to the
weakness in the economy coupled with several large orders booked in the first
quarter of 2002 that were not replaced with comparably sized orders in 2003.
First quarter 2003 gross profit was $3,069,000. This compares to gross profit of
$3,838,000 during the same period in 2002. Our cost-containment initiatives
implemented in 2002 and lower spending due to reduced revenue were the driving
factors in reducing factory overhead expenses during the current quarter.
Because of the reduced overhead spending as well as strong project management,
we maintained a steady gross margin (20.2%) during 2003 compared with the first
quarter 2002 gross margin in a difficult economic environment.
Selling and administrative expenses decreased by $540,000 or 17.5% to $2,542,000
during the first quarter of 2003 from $3,082,000 in the same period of 2002. In
light of the lower revenue in 2002 and weakness in the economy, we implemented
two cost reduction initiatives (May 2002 and September 2002), which are expected
to generate an annualized operating cost savings of approximately $2,000,000.
These cost savings as well as our cost containment efforts were the principal
reasons for the $540,000 decrease in selling and administrative expenses.
Depreciation and amortization decreased by $54,000 to $403,000 during the three
months ended March 31, 2003 as compared to the same period of 2002.
Interest expense decreased by $90,000 to $593,000 from $683,000 during the first
quarter of 2003. The decrease was due to lower debt during the quarter that was
partially offset by higher interest rates.
9
CECO ENVIRONMENTAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(unaudited)
Federal and state income tax benefit was $220,000 during the first quarter of
2003 and $187,000 during the first quarter of 2002. The federal and state income
tax benefit in the first quarter of 2003 was 47%, which reflects the estimated
effective tax rate for 2003. Our statutory income tax rate is affected by
certain permanent differences including non-deductible interest expense.
Net loss for the quarter ended March 31, 2003 was ($249,000) compared with a net
loss of ($197,000) for the same period in 2002.
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 March
31, 2003 was $13,500,000 compared to $14,600,000 as of December 31, 2002. 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 March 31, 2003 and December 31, 2002, cash and cash equivalents totaled
$103,000 and $194,000, respectively.
Cash used in operating activities for the three-month period ended March 31,
2003 was ($961,000) compared to cash provided by operating activities of
$2,545,000 for the comparable period in 2002. This fluctuation results primarily
from the reduction in accounts receivable of $5,757,000 during three-months
ended March 31, 2002 compared to $1,121,000 during the same period in 2003. This
was partially offset by cash flows from changes in inventories and costs and
estimated earnings in excess of billings on uncompleted contracts.
Total bank and related debt as of March 31, 2003 was $15,190,000 as compared to
$14,284,000 at December 31, 2002, an increase of $906,000, due to net borrowings
under the bank credit facilities. Unused credit availability under our revolving
line of credit at March 31, 2003 was $1,527,000.
The bank credit facility was amended in March 2002 and November 2002 by reducing
the minimum coverage requirements under several financial covenants through
December 31, 2003, raising interest rates by 3%, reducing scheduled principal
payments in 2002 through 2004 and changing the maturity of the revolving line of
credit to January 2004 from April 2003.
10
CECO ENVIRONMENTAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(unaudited)
Current portion of debt includes $6,473,000 of our $8,000,000 revolving line of
credit that matures in January 2004 as well as term debt of $2,120,000 which is
due over the next twelve months. We intend to refinance the bank credit facility
in the second half of 2003 under a multi-year agreement. Market conditions,
company performance and collateral will become major factors in our refinancing
efforts. However, on May 7, 2003, we received $1,600,000 in gross proceeds from
the sale of our Conshohocken, Pennsylvania property. Approximately, $700,000 was
used to reduce the revolving line of credit and the balance was used to reduce
term debt. Also, in February 2003, we accepted an offer to sell our property in
Cincinnati, Ohio where the buyer has the option to cancel the agreement through
September 30, 2003. If we consummate the sale of our Cincinnati, Ohio property,
the net proceeds from the sale, will significantly affect the amount of the
credit facility required as well as any other financing obtained in connection
with the replacement facilities. Ultimately, we believe that we will be able to
obtain a suitable refinancing at acceptable rates and terms with collateral and
covenants customary in the industry.
Net cash used in investing activities related to capital expenditures for
property and equipment was $36,000 for the first three months of 2003 compared
with $52,000 for the same period in 2002. We are managing our capital
expenditure spending in light of the current level of sales. Capital
expenditures for property and equipment are anticipated to be in the range of
$200,000 to $400,000 for 2003 and will be funded by cash from operations and/or
line of credit borrowing. Additional capital expenditures related to the
acquisition of replacement facilities may be incurred pending the successful
completion of the sale of our property in Cincinnati, Ohio.
Financing activities provided cash of $906,000 during the first three months of
2003 compared with cash used of $2,523,000 during the same period of 2002.
Current year financing activities included net borrowings under the bank credit
facility.
In the fourth quarter of 2001, we received gross proceeds of $2,120,000 and
issued 706,668 shares of common stock to a group of accredited investors. Under
the subscription agreement, we were required to issue shares of our common stock
based on an earnings formula (as set forth in the subscription agreement)
computed from fiscal year 2002 results. As a result, we issued approximately
382,000 shares of common stock to these investors during April 2003.
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.
11
CECO ENVIRONMENTAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(unaudited)
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.
12
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 may 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 may use interest rate swap contracts or other interest rate derivatives to
adjust the proportion of our total debt that is subject to variable interest
rates. Our interest rate swap contract matured in 2002 and was not renewed.
Under the swap, we agreed to pay an amount equal to a specified fixed-rate of
interest for a certain notional amount and received in return an amount equal to
a variable-rate. This interest rate swap contract was designated as a cash flow
hedge against changes in the amount of future cash flow associated with our
interest payments on variable-rate debt. When outstanding, interest rate swap
contracts are reflected at fair value in our balance sheets. This swap
effectively changed the interest rate exposure of $9.8 million of our floating
rate debt to a weighted fixed rate of 6.96% plus the applicable spread during
the period in which the interest rate swap was outstanding.
The remaining amount of loans outstanding under the Credit Agreement bear
interest at the floating rates as described in Note 9 to the consolidated
statements contained in the Company's 2002 Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
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
rate 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 not been significant. We do not normally require collateral
or other security to support credit sales.
13
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 ensure 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.
14
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 first quarter of 2003.
15
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: May 8, 2003
16
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 Company as of, and for, the periods presented in this
quarterly report;
4. The Company'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 Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, 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 our 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 Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to our auditors and the audit committee of our
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 our ability to record, process,
summarize and report financial data and have identified for our
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 our internal controls; and
6. The Company'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
May 8, 2003
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 Company as of, and for, the periods presented in this
quarterly report;
4. The Company'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 Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, 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 our 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 Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to our auditors and the audit committee of our
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 our ability to record, process,
summarize and report financial data and have identified for our
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 our internal controls; and
6. The Company'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
May 8, 2003