ITEM 2. Management discussion and analysis of financial condition and results of
operations

The Company's consolidated statements of income for the three-month periods ended March 31, 2012 and 2011 reflect the consolidated operations of the Company and its subsidiaries.

We are one of the leading global providers of air-pollution control technology products and services. These products, technology, and services are marketed under the "Kirk & Blum," "CECO Filters," "Busch International," "CECO Abatement Systems," "KB Duct," "Effox," "Fisher-Klosterman," "Buell," "Flextor," and "A.V.C." trade names. Our revenues are generated by our services of engineering and designing as well as building equipment, and installing systems that capture, clean and destroy airborne contaminants from industrial facilities and equipment that controls emissions from such facilities. We have a diversified base of more than 3,500 active customers among a myriad of industries including aerospace, brick, cement, steel, ceramics, metal working, ethanol, printing, paper, food, foundry, power, refining, mining, metal plating, woodworking, chemicals, tobacco, glass, automotive, and pharmaceuticals. Therefore, our business is not concentrated in a single industry or customer. Demand for our products and services is created by increasingly strict EPA mandated industry Maximum Achievable Control Technology standards and OSHA established Threshold Limit Values, as well as existing pollution control and energy legislation.

We believe that as economic conditions continue to improve, there will be an increase in the level of pollution control capital expenditures driven by an elevated focus on environmental issues such as global warming and energy-saving alternatives as well as a U.S. Government supported effort to reduce our dependence on foreign oil through the use of bio-fuels like ethanol and electrical energy generated by our abundant domestic supply of coal. We also feel that similar opportunities will continue to develop outside the United States. Much of our business is driven by various regulatory standards and guidelines governing air quality in and outside factories. Our Chinese operation is experiencing significant expansion due to the tightening of air pollution standards by China's Ministry of Environmental Protection.

We continue to focus on increasing revenues and profitability globally while continuing to strengthen and expand our presence domestically. Our operating strategy has historically involved horizontally expanding our scope of technology, products, and services through selective acquisitions and the formation of new business units that are then vertically integrated into our growing group of turnkey system providers. By employing this strategy, we have expanded our business and increased our revenues by adding CECO Abatement Systems, KB Duct, CECO Environmental India, Effox, Fisher-Klosterman, Buell, Flextor and A.V.C. At the same time, we have been able to consolidate these new entities into our existing lean corporate structure without increasing costs proportionally. Our continuing focus will be on global growth, market coverage, and specifically expansion of our China and India operations. Operational excellence, margin expansion, after-market growth, and safety leadership are also critical to our growth strategy.

Operations Overview

We operate under a "hub and spoke" business model in which executive management, finance, administrative and marketing staff serves as the hub while the sales channels serve as spokes. We use this model throughout our operations. This has provided us with certain efficiencies over a more decentralized model. The Company's division presidents and general managers are responsible for successfully running their operations, that is, sales, gross margins, manufacturing, pricing, safety, employee development, and customer service excellence. The managers work closely with the CEO on global growth strategies, operational excellence, and employee development. The headquarters (hub) focuses on enabling the core back-office key functions for scale and efficiency, that is, accounting, payroll, human resources/benefits, IT, safety support, audit controls, and administration. We have organizational focus from headquarters throughout our divisional businesses with minimal duplicative work streams. We are structured for growth and will do smart future bolt-on acquisitions with a full integration strategy.

Our three operating segments are: the Engineered Equipment Technology and Parts Group ("EET&P"), which produces various types of air pollution control equipment, the Contracting / Services Group ("C/S"), which produces air pollution control and industrial ventilation systems and the Component Parts Group ("CP"), which manufactures products used by us and other air pollution control companies and contractors. It is through combining the efforts of some or all of these groups that we are able to offer complete turnkey systems to our customers and leverage the operational efficiencies between our family of companies. Due to the relative size of our former Engineering Group, our reportable segment disclosures in our financial statements include this group's results with our corporate and other disclosures. In November 2011, we sold kbd/Technic, which comprised our small Engineering Group. kbd/Technic provided industrial ventilation engineering and source emission testing services.

Our contracts are obtained either through competitive bidding or as a result of negotiations with our customers. Contract terms offered by us are generally dependent on the complexity and risk of the project as well as the resources that will be required to complete the project. For example, a contract that can be performed primarily by subcontractors and that does not require us to use our fabrication and assembly facilities can be quoted at a lower gross margin than a more typical contract that will require additional factory overhead and administrative expenses. Our focus is on increasing our operating margins as well as our gross margin percentage which translates into higher net income. Our sales typically peak in the fourth quarter due to a tendency of customers to want to fully utilize annual capital budgets and due to the fact that many industrial facilities shut down for the holiday season and that creates demand for maintenance and renovation work that can be done at no other time.

Results of Operations

Consolidated Results

Our consolidated statements of income for the three months periods ended
March 31, 2012 and 2011 are as follows:



                                           For the three months ended March 31,
   ($'s in millions)                           2012                     2011
   Net sales                             $           33.0         $           36.0
   Cost of sales                                     22.8                     27.5

   Gross profit                          $           10.2         $            8.5
   Percent of sales                                  30.8 %                   23.6 %
   Selling and administrative expenses   $            6.3         $            5.9
   Percent of sales                                  19.2 %                   16.4 %
   Operating income                      $            3.7         $            2.4
   Percent of sales                                  11.3 %                    6.7 %

Consolidated sales for the first quarter were $33.0 million compared to $36.0 million in 2011. The decrease in sales was primarily due to the 12.5% sales decrease in our Engineering Equipment Technology and Parts Group primarily due to project delays requested by customers. The increased demand for our products and services created by certain industrial sectors, such as small independent contractors that purchase component parts, created a 17.5% increase in our Component Parts Group sales, offset by a decrease in Contracting/Services Group sales of 4.4%. The decrease in Contracting / Services sales is primarily due to the continued targeting of higher margin projects. Sales and bookings have decreased due to portfolio changes, product pruning, and divestitures made over the past two years to achieve higher operating margins.

Gross profit increased by $1.7 million, or 20.2% to $10.2 million in the first quarter of 2012 compared with $8.5 million in the same period of 2011. Gross profit as a percentage of sales was 30.8% in 2012 compared to 23.6% in 2011. The net increase in gross profit was primarily due to a shift to higher margin work in the Engineered Equipment Technology and Parts Group, and higher margin work in the Contracting / Services Group.

Orders booked in the first quarter of 2012 were $30.7 million compared to $33.3 million during the first quarter of 2011, a decrease of $2.6 million or 7.8%. We continue to experience an active level of customer inquiry and quoting activities.

Selling and administrative expenses were $6.3 million during the first quarter of 2012 compared to $5.9 million during the first quarter of 2011. The increase was primarily due to increases in certain accruals based on increased levels of profitability in 2012.

Amortization expense was $96,000 for the first quarter of 2012 and $111,000 in the first quarter of 2011. The decrease in amortization expense was the result of certain finite life intangibles related to earlier acquisitions becoming fully amortized.

Operating income increased $1.3 million to $3.7 million in the first quarter of 2012 compared to $2.4 million during the same quarter of 2011. All groups contributed to this increase in operating income with our Engineered

Equipment Technology and Parts Group showing an increase of $1.2 million, or 56.6% from the first quarter 2011. Improved margins, changes in product mix, and manufacturing improvements were the primary factors for the increases in operating income and operating margin percentages.

Interest expense decreased to $271,000 in the first quarter of 2012 from $290,000 in the first quarter of 2011. The decrease is due to the conversion of $1.2 million of our subordinated debt into equity since the first quarter of 2011.

Federal and state income tax expense was $1.4 million during the first quarter of 2012 compared to $0.8 million during the same quarter of 2011. The effective income tax rate for the first quarters of 2012 and 2011 was 40.0%. Our effective tax rate is affected by certain permanent differences including non-deductible incentive stock based compensation, reversals of certain income tax reserves/deferrals, and tax holidays from foreign operations.