Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CECE > SEC Filings for CECE > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for CECO ENVIRONMENTAL CORP

Form 10-Q for CECO ENVIRONMENTAL CORP


8-Nov-2012

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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

The Company's consolidated statements of income for the three-month and nine-month periods ended September 30, 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 domestically as well as globally.

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. 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 through-out 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 Group"), which produces various types of air pollution control equipment, the Contracting / Services Group ("C/S Group"), which produces air pollution control and industrial ventilation systems and the Component Parts Group ("CP Group"), 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.


Table of Contents

CECO ENVIRONMENTAL CORP.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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 month and nine-month periods
ended September 30, 2012 and 2011 are as follows:



                                          Three Months Ended           Nine Months Ended
                                            September  30,               September  30,
  (dollars in millions)                   2012            2011         2012          2011
  Net sales                             $    33.1        $ 32.9      $   100.7      $ 101.4
  Cost of sales                              22.6          23.2           69.5         74.6

  Gross profit                          $    10.5        $  9.7      $    31.2      $  26.9
  Percent of sales                           31.7 %        29.5 %         31.0 %       26.5 %
  Selling and administrative expenses   $     6.2        $  6.3      $    18.7      $  18.0
  Percent of sales                           18.7 %        19.1 %         18.6 %       17.8 %
  Operating income                      $     4.3        $  3.3      $    12.3      $   8.6
  Percent of sales                           12.8 %        10.0 %         12.2 %        8.5 %

Consolidated sales for the third quarter increased $0.2 million to $33.1 million from $32.9 million in 2011. The increase in sales was primarily due to a $1.1 million sales increase in the EET&P Group offset by a $1.0 million decrease in the C/S Group.

Consolidated sales for the first nine months of 2012 were $100.7 million compared to $101.4 million in 2011, a decrease of $0.7 million. The decrease in sales was primarily due to decreases of $1.2 million and $1.1 million in the EET&P Group and the C/S Group, respectively, offset by an increase of $2.4 million in the CP Group. The sales decrease of 1.8% in our EET&P Group is primarily due to project delays requested by customers, while the decrease of 5.5% in the C/S Group is primarily due to the continued targeting of higher margin projects. The increased demand for our products and services created by certain industrial sectors, such as small independent contractors that purchase component parts created the 17.6% increase in our CP Group sales.

Gross profit increased by $0.8 million, or 8.2%, to $10.5 million in the third quarter of 2012 compared with $9.7 million in the same period of 2011. Gross profit as a percentage of sales was 31.7% in 2012 compared to 29.5% in 2011. The increase in gross profit was primarily due to a shift to higher margin work in both the EET&P Group and the C/S Group.

For the first nine months of 2012, gross profit increased by $4.3 million, or 16.0% to $31.2 million compared with $26.9 million in the same period of 2011. Gross profit as a percentage of sales was 31.0% in 2012 compared to 26.5% in 2011. The net increase in gross profit was primarily due to a shift to higher margin work in both the EET&P Group and the C/S Group.

Orders booked were $41.8 million during the third quarter of 2012 and $113.4 million for the first nine months of 2012, as compared to $35.6 million during the third quarter of 2011 and $102.4 million in the first nine months of 2011. We continue to experience an active level of customer inquiry and quoting activities and have realized increased bookings at our Effox and Flextor divisions.


Table of Contents

CECO ENVIRONMENTAL CORP.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Selling and administrative expenses were $6.2 million during the third quarter of 2012 compared to $6.3 million during the third quarter of 2011. During the first nine months of 2012, selling and administrative expenses were $18.7 million compared to $18.0 million in the first nine months of 2011. The increase for the nine month period in 2012 was primarily due to increases in certain accruals based on increased levels of profitability in 2012.

Amortization expense decreased by $38,000 to $80,000 during the third quarter of 2012 from $118,000 in the same period of 2011, and decreased by $89,000 to $252,000 in the first nine months of 2012 from $341,000 in the same period of 2011. The decrease in amortization expense was the result of certain finite life intangibles related to earlier acquisitions becoming fully amortized.

Operating income was $4.3 million in the third quarter of 2012, an increase of $1.0 million compared to $3.3 million during the same quarter of 2011. Operating income as a percent of sales in the third quarter of 2012 was 12.8% compared to 10.0% for the same period in 2011.

Operating income for the first nine months of 2012 increased by $3.7 million to $12.3 million from $8.6 million during the same period of 2011. Operating income as a percent of sales for the nine months ended September 30, 2012 was 12.2% compared to 8.5% for the same period in 2011.

Interest expense was $291,000 and $296,000 for the third quarter of 2012 and 2011, respectively, and $828,000 and $870,000 for the first nine months of 2012 and 2011, respectively. The decrease for the three month and nine months ended September 30, 2012 is due to the conversion of $1.3 million of our subordinated debt into equity during the twelve months from October 1, 2011 to September 30, 2012.

Federal and state income tax expense was $623,000 during the third quarter of 2012 compared to $798,000 during the same quarter of 2011. Federal and state income tax expense was $3.5 million for the first nine months of 2012 compared to $2.6 million in 2011. The effective tax rate was 16.0% and 31.1% for the three and nine months ended September 30, 2012, respectively, and 25.6% and 32.0% for the comparable 2011 periods. Included in the income tax provision calculation for the three months ended September 30, 2012 is a $708,000 tax benefit, net of related uncertain tax position reserves, for research and development income tax credits earned during 2011. This credit was not contemplated in the 2011 tax provision because it was not identified or quantified until 2012. The Company is in the process of calculating this credit related to the additional open years of 2009 and 2010, which is expected to be completed in the fourth quarter of 2012 and may result in additional tax benefit to be recorded in the fourth quarter of 2012. Along with the tax benefit of research and development income tax credits, our effective tax rate is additionally affected by certain permanent differences including non-deductible incentive stock based compensation, reversals of certain income tax reserves/deferrals, and tax holidays in foreign jurisdictions.

The Company accounts for uncertain tax positions pursuant to ASC Topic 740, "Income Taxes." As of September 30, 2012 and December 31, 2011, the liability for uncertain tax positions totaled approximately $128,000 and $52,000, respectively. The Company recognizes interest accrued related to uncertain tax positions in interest expense and penalties in income tax expense.

The Company files income tax returns in various federal, state and local jurisdictions. The Company is no longer subject to federal, state and local income tax examinations by tax authorities for years before 2008.


Table of Contents

CECO ENVIRONMENTAL CORP.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Business Segments

The Company's operations are organized and reviewed by management along its product lines and presented in three reportable segments. The results of the segments are reviewed through to the "Income from operations" line on the Statements of Income. The amounts presented in the Net Sales table below and in the following comments regarding our net sales at the reportable business segment level exclude both intra-segment and inter-segment net sales. The Income
(loss) from Operations table and corresponding comments regarding operating income at the reportable segment level include both intra-segment and inter-segment operating income.

                                                      Three Months Ended              Nine Months Ended
                                                        September 30,                   September 30,
(dollars in thousands)                               2012            2011           2012            2011
Net Sales (less intra-, inter-segment sales)
Engineered Equipment Technology and Parts Group
United States                                      $  18,425       $ 17,125       $  55,889       $  53,930
Canada                                                 1,855          1,490           5,883           5,852
China                                                  1,787          1,534           3,289           4,677
Brazil                                                    -             864             121           1,851
India                                                    173            104             173             229

Subtotal                                              22,240         21,117          65,355          66,539
Contracting / Services Group                           5,644          6,685          19,472          20,616
Component Parts Group                                  5,238          4,958          15,854          13,487
Corporate and other                                      (20 )          187              39             798

Net sales                                          $  33,102       $ 32,947       $ 100,720       $ 101,440


                                                      Three Months Ended              Nine Months Ended
                                                        September 30,                   September 30,
(dollars in thousands)                               2012            2011           2012            2011
Income (loss) from Operations
Engineered Equipment Technology and Parts Group    $   3,946       $  3,294       $  11,110       $   8,303
Contracting / Services Group                             836            903           2,520           2,281
Component Parts Group                                    966            820           3,378           2,674
Corporate and other (a)                               (1,455 )       (1,613 )        (4,667 )        (4,555 )
Eliminations                                             (42 )          (94 )           (58 )          (133 )

Income from operations                             $   4,251       $  3,310       $  12,283       $   8,570

(a) Includes corporate compensation, professional services, information technology, and other general and administrative corporate expenses. Also included are the operations of our Engineering Group, which is not significant to the overall operations of the Company and were sold in November 2011.

Engineered Equipment Technology and Parts Group

Our EET&P Group net sales for the third quarter of 2012 increased $1.1 million to $22.2 million from $21.1 million in the same period in 2011. Net sales for the nine months ended September 30, 2012 were $65.4 million compared to $66.5 million in 2011. The increase in the third quarter of 2012 is primarily due to an increase of $2.2 million of net sales at our Effox and Flextor divisions, offset by a decrease of $1.5 million in revenues in our Fisher-Klosterman division during the quarter. The decrease for the nine months ended September 30, 2012 was primarily due to decreased revenues of $4.2 million at Fisher-Klosterman and $1.5 million at CECO Abatement, offset by increases of $3.1 million at our Effox and Flextor divisions and $3.0 million at our Busch division. The decrease in revenues is due to certain large projects not being replaced at our Fisher-Klosterman division, and a decrease of ethanol industry orders.


Table of Contents

CECO ENVIRONMENTAL CORP.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Operating income from our EET&P Group increased 19.8% to $3.9 million in the third quarter of 2012 from $3.3 million in the same period of 2011. The increase was due to an increase of $1.2 million of combined operating income at our Effox and Flextor divisions, offset by operating income decreases at the other EET&P Group divisions. The increase at Effox and Flextor was due to increased margins on projects. Revenue volume decreases negatively impacted the results of the other EET&P Group divisions.

Operating income during the nine months ended September 30, 2012 increased by $2.8 million to $11.1 million, compared to $8.3 million for the same period in 2011. The increase for the nine months ended September 30, 2012 was primarily due to the increase of combined operating income of $4.0 million at our Effox and Flextor divisons, offset by a decrease of $1.1 million at Fisher-Klosterman.

Contracting / Services Group

Our C/S Group net sales for the third quarter of 2012 were $5.6 million compared to $6.7 million in the same period in 2011. Net sales for the nine months ended September 30, 2012 were $19.5 million compared to $20.6 million in 2011. The C/S Group is continuing to target higher margin design, build, end user customer segments, which resulted in the net sales decrease for the three and nine months periods.

Operating income for C/S Group was $0.8 million in the third quarter of 2012 compared to $0.9 million in the third quarter of 2011. Operating income for the nine months ended September 30, 2012 increased $0.2 million to $2.5 million from $2.3 million in 2011. This increase is primarily due to a strategic shift in customer segments and reduced operating costs in 2012 from facility consolidations and streamlining efforts, effective project management, and improved pricing strategies.

Component Parts Group

Our CP Group net sales for the third quarter of 2012 increased $0.2 million to $5.2 million from $5.0 million in the same period in 2011. Net sales for the nine months ended September 30, 2012 increased $2.4 million to $15.9 million from $13.5 million in 2011. This increase is primarily due to increased demand for our component parts and clamp together duct products, which is the result of many smaller contractors buying these products instead of making them in-house.

Operating income for CP Group increased $0.2 million to $1.0 million from $0.8 million during the third quarter of 2012 from 2011, and increased $0.7 million to $3.4 million for the nine month period ended September 30, 2012 from $2.7 million in 2011. These increases are primarily due to increased revenues as described above and better strategic pricing strategies.

Backlog

Our backlog consists of the amount of revenue we expect from complete performance of uncompleted, signed, firm fixed price contracts that have not been completed for products and services we expect to substantially deliver within the next 12 months. Our backlog as of September 30, 2012, was $67.6 million compared to $54.9 million as of December 31, 2011. There can be no assurances that backlog will be replicated, increased or translated into higher revenues in the future. The success of our business depends on a multitude of factors related to our backlog and the orders secured during the subsequent periods. Certain contracts are highly dependent on the work of contractors and other subcontractors participating in a project, over which we have no or limited control, and their performance on such project could have an adverse effect on the profitability of our contracts. Delays resulting from these contractors and subcontractors, changes in the scope of the project, weather, and labor availability also can have an effect on a contract's profitability.

New Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 2 to the unaudited consolidated financial statements within Item 1 of this report.


Table of Contents

CECO ENVIRONMENTAL CORP.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Financial Condition, Liquidity and Capital Resources

Our principal sources of liquidity are cash flow from operations and available borrowings under our revolving credit facility. Our principal uses of cash are operating costs, payment of interest on our Investor Notes, working capital and other general corporate requirements.

At September 30, 2012 and December 31, 2011, cash and cash equivalents totaled $24.5 million and $12.7 million, respectively. Cash balances may fluctuate from time to time due to collected funds not being immediately swept against the credit line balance; however, we had no outstanding borrowings under this line as of September 30, 2012.

Terms of our Bank Facility, as amended, include a revolving line of credit for up to $20.0 million (with a $10.0 million letters of credit sublimit) a termination date of April 1, 2014 and financial covenants that require compliance at each quarter-end through March 31, 2013. The maximum capital expenditures financial covenant is $2.5 million per year. The minimum Fixed Charge Coverage Ratio is 1.25:1.0. The maximum funded debt to EBITDA covenant is 3.0 to 1. Our Bank Facility also contains cross-default provisions with respect to our subordinated debt. Also, if we fail to pay (after grace periods) any other debt or lease that, individually or in the aggregate involves indebtedness in excess of $100,000, and such default gives any creditor or lessor the right to accelerate the maturity of any such indebtedness or lease payments, then absent a waiver from the lender, it would result in a default under our Bank Facility and the acceleration of the maturity of outstanding debt under our Bank Facility. As of September 30, 2012, we were in compliance with all related financial and other restrictive covenants, and expect continued compliance. In the future, if we cannot comply with the terms of the Bank Facility covenants it will be necessary for us to obtain a waiver or renegotiate our loan covenants, and there can be no assurance that such negotiations would be successful. In the event that we are not successful in obtaining a waiver or an amendment, we would be declared in default, which could cause all amounts owed to be immediately due and payable. We have no outstanding borrowings under the line of credit as of September 30, 2012 and December 31, 2011. Borrowings are subject to a borrowing base limitation, including reducing the borrowing base by the amount of outstanding letters of credit, and at September 30, 2012, $10.8 million could be borrowed at an interest rate of LIBOR plus 3.5%. As of September 30, 2012, the Company has $2.0 million in outstanding trade letters of credit. Our property and equipment, accounts receivable, investments and inventory serve as collateral for our bank debt.

On November 26, 2009, the Company issued $10.8 million principal amount of subordinated convertible promissory notes to a group of investors (the "Investor Notes") which includes related parties: Icarus Investment Corp., which is controlled by Phillip DeZwirek, our Chairman and former Chief Executive Officer, and Jason DeZwirek, a director and Secretary ($2.2 million), JMP Fam Holdings, Inc., which is controlled by Jonathan Pollack, a Company Director ($150,000), Jason DeZwirek ($800,000), and Harvey Sandler Revocable Trust ($800,000), which trust owns over 10% of our outstanding common stock. Interest accrues under the Investor Notes at the annual rate of 6% and is payable as of the end of each calendar quarter. Interest paid on the Investor Notes for the three and nine month periods was $136,000 and $417,000, respectively, and $159,000 and $475,000, respectively, for the same periods in 2011. We used the proceeds of the Investor Notes to repay all of our previously existing subordinated debt in the amount of approximately $4.5 million, which debt was accruing interest at rates between 11-12%. The balance of the proceeds was available to be used for general working capital. Fees of $320,000 were paid for the issuance of this debt and are being amortized over the term of the Investor Notes.

The Investor Notes are due on November 26, 2014 and are not repayable prior to maturity except upon a change of control, or upon the consent of the holder. The outstanding principal amount of the Investor Notes or any portion thereof, but not the interest, is convertible at the holder's option, at any time at a conversion price of $4.00 per share, such price being greater than the Company's share price at the date of issuance of the Investor Notes. Following three years . . .

  Add CECE to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CECE - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.