TMCnet News
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION(Edgar Glimpses Via Acquire Media NewsEdge) AND RESULTS OF OPERATIONS ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company's condensed consolidated statements of income (loss) for the three-month and nine-month periods ended September 30, 2014 and 2013 reflect the consolidated operations of the Company and its subsidiaries. We are a leading global environmental technology company focused on critical solutions in the energy, air pollution control, fluid handling and filtration segments. Through our well-known brands, including the "Effox-Flextor," "Kirk & Blum," "KB Duct," "Fisher-Klosterman," "FKI," "Buell," "AVC," "Busch International," "CECO Filters," "Adwest," "Aarding," "Duall," "Flex-Kleen," "Bio-Reaction," "Dean Pump," "Fybroc," "Sethco," "Mefiag Filtration," "Keystone Filter," "HEE Environmental Engineering," and "Strobic Air" tradenames, we provide a wide spectrum of products and services including dampers & diverters, cyclonic technology, thermal oxidizers, filtration systems, scrubbers, exhaust systems, fluid handling equipment and plant engineered services and engineered design build fabrication. These products play a vital role in helping companies achieve exacting production standards, meeting increasing plant needs and stringent emissions control regulations around the globe. We globally serve the broadest range of markets and industries including power, municipalities, chemical, industrial manufacturing, refining, petrochemical, metals, minerals & mining, hospitals and universities. Therefore, our business is not concentrated in a single industry or customer. Demand for our products and services is created by increasingly strict U.S. Environmental Protection Agency mandated industry Maximum Achievable Control Technology standards and Occupational Safety and Health Administration established Threshold Limit Values, as well as existing pollution control and energy legislation within the United States at the local, state and national levels, as well as the international equivalents. We believe 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 natural gas and 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. We believe our Chinese operations are positioned to benefit from 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. 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, purchasing, safety, employee development, and customer service excellence. The presidents work closely with our 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 excellent organizational focus from headquarters throughout our divisional businesses with clarity and minimal duplicative work streams. We are structured for growth and will do future bolt-on acquisitions. Our three operating segments are: the Air Pollution Control Segment ("APC"), the Energy Segment ("Energy"), and the Fluid Handling Filtration Segment ("FHF"). By combining the efforts of some or all of these groups, we are able to offer complete turnkey systems for our customers and leverage the operational efficiencies between our family of companies. 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, which creates demand for maintenance and renovation work that can be done at no other time. 21-------------------------------------------------------------------------------- Table of Contents Note Regarding Use of Non-GAAP Financial Measures The Company's unaudited Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These GAAP financial statements include certain charges the Company believes are not indicative of its ongoing operational performance. As a result, the Company provides financial information in this MD&A that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides this supplemental non-GAAP financial information because the Company's management utilizes it to evaluate its ongoing financial performance and the Company believes it provides greater transparency to investors as supplemental information to its GAAP results. The Company has provided the non-GAAP financial measures of non-GAAP operating income and non-GAAP operating margin as a result of items that the Company believes are not indicative of its ongoing operations. These include charges associated with the Company's acquisition and integration of Aarding Thermal Acoustics B.V. ("Aarding"), Met-Pro Corporation ("Met-Pro"), HEE Environmental Engineering, LLC ("HEE") and SAT Technology, Inc. ("SAT"), and the items described below in "Consolidated Results." The Company believes that evaluation of its financial performance compared with prior and future periods can be enhanced by a presentation of results that exclude the impact of these items. As a result of the Company's acquisition of Aarding, Met-Pro, HEE, and SAT, the Company has incurred substantial charges associated with the acquisition and integration of these companies. See Note 16 to the unaudited condensed consolidated financial statements for further information on these acquisitions. Results of Operations Consolidated Results Our condensed consolidated statements of income (loss) for the three-month and nine-month periods ended September 30, 2014 and 2013 are as follows: Three Months Ended September 30, Nine Months Ended September 30, (dollars in millions) 2014 2013 2014 2013 Net sales $ 63.3 $ 49.8 $ 187.1 $ 128.6 Cost of sales 42.2 35.2 124.9 88.6 Gross profit $ 21.1 $ 14.6 $ 62.2 $ 40.0 Percent of sales 33.3 % 29.3 % 33.3 % 31.1 % Selling and administrative expenses $ 13.0 $ 9.3 $ 36.4 $ 24.0 Percent of sales 20.6 % 18.7 % 19.5 % 18.7 % Acquisition and integration expenses $ 0.1 $ 4.0 $ 0.3 $ 6.6 Percent of sales 0.2 % 8.0 % 0.2 % 5.1 % Amortization and earn out expenses $ 2.4 $ 2.0 $ 7.3 $ 3.6 Percent of sales 3.8 % 4.0 % 3.9 % 2.8 % Legal reserves $ 0.3 $ 2.5 $ 0.3 $ 2.5 Percent of sales 0.5 % 5.0 % 0.2 % 1.9 % Operating income (loss) $ 5.2 $ (3.4 ) $ 17.9 $ 3.3 Operating margin 8.3 % (6.8 )% 9.6 % 2.6 % To compare operating performance between the three-month and nine-month periods ended September 30, 2014 and 2013, the Company has adjusted GAAP operating income to exclude expenses related to acquisition activities, which include retention, earn out arrangements, amortization, legal, accounting, banking and other expenses. See "Note Regarding Use of Non-GAAP Financial Measures" above. The following table presents the reconciliation of GAAP operating income and GAAP operating margin to non-GAAP operating income and non-GAAP operating margin: Three Months Ended September 30, Nine Months Ended September 30, (dollars in millions) 2014 2013 2014 2013 Operating income (loss) as reported in accordance with GAAP $ 5.2 $ (3.4 ) $ 17.9 $ 3.3 Operating margin in accordance with GAAP 8.3 % (6.8 )% 9.6 % 2.6 % Inventory valuation adjustment - 0.4 - 0.4 Plant, property and equipment valuation adjustment 0.2 0.1 0.5 0.1 Acquisition and integration expenses 0.1 4.0 0.3 6.6 Amortization and earn out expenses 2.4 2.0 7.3 3.6 Legal reserves 0.3 2.5 0.3 2.5 Non-GAAP operating income $ 8.2 $ 5.6 $ 26.3 $ 16.5 Non-GAAP operating margin 12.9 % 11.4 % 14.1 % 12.8 % 22 -------------------------------------------------------------------------------- Table of Contents Consolidated sales for the third quarter of 2014 increased $13.5 million, or 27.1%, to $63.3 million compared with $49.8 million in the third quarter of 2013. The increase is primarily attributable to Met-Pro, acquired in August 2013, which contributed $21.6 million in sales for the third quarter of 2014 compared to $7.3 million in sales for the third quarter of 2013. Consolidated sales for the first nine months of 2014 increased $58.5 million, or 45.5%, to $187.1 million compared with $128.6 million in the first nine months of 2013. The increase is primarily attributable to Met-Pro, which contributed $63.9 million in sales for the first nine months of 2014 compared to $7.3 million in sales for the first nine months of 2013. Gross profit increased $6.5 million, or 44.5%, to $21.1 million in the third quarter of 2014 compared with $14.6 million in the same period of 2013. The increase is primarily attributable to Met-Pro, which contributed an additional $6.3 million in gross profit for the third quarter of 2014 compared to the third quarter of 2013. Gross profit as a percentage of sales was 33.3% in the third quarter 2014 compared with 29.3% in the third quarter of 2013. The lower gross profit in the third quarter of 2013 was primarily due to a decrease at the Effox-Flextor business. Gross profit increased $22.2 million, or 55.5%, to $62.2 million in the first nine months of 2014 compared with $40.0 million in the first nine months of 2013. Met-Pro contributed an additional $21.8 million in gross profit for the first nine months of 2014 compared to the first nine months of 2013. Gross profit as a percentage of sales was 33.3% in the first nine months of 2014 compared with 31.1% in the first nine months of 2013. Orders booked were $69.9 million during the third quarter of 2014 and $191.2 million for the first nine months of 2014, as compared to $48.0 million during the third quarter of 2013 and $132.4 million in the first nine months of 2013. The increases in 2014 periods were primarily due to the Met-Pro acquisition. Selling and administrative expenses increased $3.7 million to $13.0 million for the third quarter of 2014 compared with $9.3 million for the third quarter of 2013. The increase is attributable to incremental selling and administrative expenses from Met-Pro. Selling and administrative expenses increased $12.4 million to $36.4 million for the first nine months of 2014 compared with $24.0 million for the first nine months of 2013. The increase is primarily attributable to incremental selling and administrative expenses from Met-Pro and Aarding. Acquisition and integration expenses were $0.1 million and $4.0 million during the third quarter of 2014 and 2013, respectively, and were $0.3 million and $6.6 million during the first nine months of 2014 and 2013, respectively. Such expenses are related to the Met-Pro, HEE, and SAT transactions and include legal, accounting, banking and other expenses. Amortization and earn out expense was $2.4 million for the third quarter of 2014 compared with $2.0 million for the third quarter of 2013. The increase was the result of our acquisitions of Met-Pro and Aarding. Amortization and earn out expense was $7.3 million for the first nine months of 2014 compared with $3.6 million for the first nine months of 2013. The increase was the result of our acquisitions of Met-Pro and Aarding. Operating income increased $8.6 million to $5.2 million in the third quarter of 2014 compared with a loss of $3.4 million during the same quarter of 2013. The acquisition of Met-Pro in August 2013 contributed an additional $3.6 million of operating income during the third quarter of 2014 as compared to the third quarter of 2013. Additionally, lower operating income in the third quarter of 2013 is attributable to the acquisition and integration costs described above, and $2.5 million in legal reserves. On a non-GAAP basis as adjusted for the non-GAAP items discussed above, non-GAAP operating income was $8.2 million for the third quarter of 2014 compared with $5.6 million for the third quarter of 2013. The increase is primarily due to the acquisition of Met-Pro in August 2013 and legal reserves recorded in 2013. Non-GAAP operating income as a percentage of sales increased from 11.4% for the third quarter of 2013 to 12.9% for the third quarter of 2014. 23-------------------------------------------------------------------------------- Table of Contents Operating income increased $14.6 million to $17.9 million in the first nine months of 2014 compared with $3.3 million during the same period of 2013. The acquisition of Met-Pro in August 2013 contributed an additional $7.7 million of operating income during the first nine months of 2014 compared to the first nine months of 2013. Additionally, lower operating income in the third quarter of 2013 is attributable to the acquisition and integration costs described above, and $2.5 million in legal reserves. On a non-GAAP basis as adjusted for the non-GAAP items discussed above, non-GAAP operating income was $26.3 million for the first nine months of 2014 compared with $16.5 million for the same period of 2013. The increase is primarily due to the acquisition of Met-Pro in August 2013 partially offset by the reduction in the Energy segment. Non-GAAP operating income as a percentage of sales increased from 12.8% for the first nine months of 2013 to 14.1% for the first nine months of 2014. Improved gross margins, changes in product mix, and manufacturing improvements were the primary factors for this increase. Other income/expense was $1.5 million net expense in the third quarter of 2014 compared with $0.1 million net income in the third quarter of 2013. Other income/expense was $1.7 million net expense for the first nine months of 2014 compared with $0.2 million net income for the first nine months of 2013. The change was due the effect of the weakening of the Euro on an intercompany loan with a foreign subsidiary. The dollar impact was $1.7 million during the third quarter of 2014, and $1.9 million for the first nine months of 2014. Interest expense increased to $0.8 million in the third quarter of 2014 from $0.5 million in the third quarter of 2013, and to $2.3 million for the first nine months of 2014 from $0.7 million for the first nine months of 2013. The increase is due to borrowings incurred in connection with the Met-Pro acquisition in August 2013. Income tax expense (benefit) was $(0.7) million for the third quarter of 2014 compared with $(2.3) million for the same quarter of 2013. The effective income tax rate for the third quarter of 2014 was (22.7)% compared with 60.7% for the comparable period of 2013. Income tax expense (benefit) was $2.8 million for the first nine months of 2014 compared with $(1.0) million for the same period of 2013. The effective income tax rate for the first nine months of 2014 was 19.8% compared with (38.0)% for the comparable period of 2013. Income tax expense for the third quarter of 2014 included a $1.5 million tax benefit, net of related uncertain tax position reserves, recognized for research and development income tax credits earned during 2013. Income tax expense for the third quarter 2013 included a tax benefit for research and development income tax credits similar to those previously described, which included credits for multiple years. Our effective tax rate is also affected by certain permanent differences, including non-deductible incentive stock-based compensation and acquisition related expenses, certain income tax reserves/deferrals, impact of foreign rate differences and tax holidays from foreign 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 (loss) from operations" line on the unaudited condensed consolidated statements of income (loss). Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions) 2014 2013 2014 2013 Net Sales (less intra-, inter-segment sales) Air Pollution Control Segment $ 27,709 $ 23,441 $ 87,396 $ 68,030 Energy Segment 17,977 19,243 50,093 50,262 Fluid Handling Filtration Segment 17,584 6,895 49,729 9,785 Corporate and Other(a) 30 217 (107 ) 513 Net sales $ 63,300 $ 49,796 $ 187,111 $ 128,590 (a) Includes adjustment for revenue on intercompany jobs. Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions) 2014 2013 2014 2013 Income (Loss) from Operations Air Pollution Control Segment $ 3,315 $ 2,661 $ 12,057 $ 9,811 Energy Segment 1,850 1,885 5,833 6,855 Fluid Handling Filtration Segment 4,347 630 10,087 1,071 Corporate and Other(b) (3,944 ) (7,893 ) (8,900 ) (13,602 ) Eliminations (323 ) (639 ) (1,152 ) (846 ) Net operating income (loss) $ 5,245 $ (3,356 ) $ 17,925 $ 3,289 (b) Includes corporate compensation, professional services, information technology, and other general and administrative corporate expenses. 24 -------------------------------------------------------------------------------- Table of Contents Air Pollution Control Segment Our APC Segment net sales increased $4.3 million to $27.7 million in the third quarter of 2014 compared with $23.4 million in the same quarter of 2013. This increase was primarily due to $5.0 million of additional net sales attributable to Met-Pro in the third quarter 2014 compared with the third quarter 2013, and an increase of $0.8 million for our Adwest business, partially offset by a decrease of $2.0 million for our domestic FKI business. Our APC Segment net sales increased $19.4 million to $87.4 million in the first nine months of 2014 compared with $68.0 million in the same period of 2013. This increase was primarily due to $18.1 million of additional net sales attributable to Met-Pro in the first nine months of 2014 compared with the first nine months of 2013, combined with increases of $4.9 million for our Adwest business and $3.7 million for our China operations, partially offset by decreases of $5.5 million for our domestic FKI business and $1.5 million for our Busch business. Operating income from APC increased $0.6 million to $3.3 million in the third quarter of 2014 from $2.7 million in the same period of 2013. This increase was primarily due to the Met-Pro acquisition, which contributed $1.0 million in operating income, combined with an increase of $0.6 million for our China operations, partially offset by a $1.0 million decrease for our domestic FKI business. Operating income from APC increased $2.3 million to $12.1 million in the first nine months of 2014 from $9.8 million in the same period of 2013. This increase was primarily due to the Met-Pro acquisition, which contributed $2.9 million in operating income, combined with increases of $1.6 million for our Adwest business and $1.3 million for our China operations, partially offset by a $2.5 million decrease for our domestic FKI business, and a $1.3 million decrease in our Kirk and Blum business. Energy Segment Our Energy Segment net sales decreased $1.2 million to $18.0 million in the third quarter of 2014 compared with $19.2 million in the third quarter of 2013. The decrease was primarily the result of reductions of $1.6 million in Effox-Flextor revenues. Our Energy Segment net sales decreased $0.2 million to $50.1 million in the first nine months of 2014 compared with $50.3 million in the same period of 2013. The change was primarily the result of a $2.3 million increase in Aarding revenues, offset by a $2.6 million reduction in Effox-Flextor revenues. Operating income for the Energy Segment was $1.9 million in the third quarter of 2014 compared with $1.9 million in the third quarter of 2013. There was a $0.4 million decrease in Effox-Flextor operating income, offset by a $0.4 million increase in Aarding operating income. Operating income for the Energy Segment was $5.8 million in the first nine months of 2014 compared with $6.9 million in the first nine months of 2013. The reduction is primarily due to a $0.4 million decrease in Aarding operating income and a $0.5 million decrease in Effox-Flextor operating income. Fluid Handling Filtration Segment Our FHF Segment net sales increased $10.7 million to $17.6 million in the third quarter of 2014 compared with $6.9 million in the third quarter of 2013. FHF net sales increased $39.9 million to $49.7 million in the first nine months of 2014 compared with $9.8 million in the first nine months of 2013. The increases were due to the acquisition of Met-Pro in August 2013. Operating income for FHF was $4.3 million in the third quarter of 2014 compared with $0.6 million in the third quarter of 2013. Operating income for FHF was $10.1 million in the first nine months of 2014 compared with $1.1 million for the first nine months of 2013. These increases were also due to the acquisition of Met-Pro in August 2013. Backlog Backlog is a representation of the amount of revenue expected from complete performance of firm fixed-price contracts that have not been completed for products and services we expect to substantially deliver within the next twelve-month period. Our customers may have the right to cancel a given order, although historically cancellations have been rare. Our backlog as of September 30, 2014, was $106.2 million compared with $98.5 million as of December 31, 2013. Backlog is not defined by GAAP and our methodology for calculating backlog may not be consistent with methodologies used by other companies. 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. 25 -------------------------------------------------------------------------------- Table of Contents New Accounting Pronouncements For information regarding recent accounting pronouncements, see Note 2 to the unaudited condensed consolidated financial statements within Item 1 of this Quarterly Report on Form 10-Q. 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 principal and interest on our outstanding debt, dividends, working capital and other corporate requirements, including acquisitions. At September 30, 2014 and December 31, 2013, cash and cash equivalents totaled $18.0 million and $22.7 million, respectively. As of September 30, 2014 and December 31, 2013, $12.0 million and $17.6 million, respectively, of our cash and cash equivalents were held by certain non-U.S. subsidiaries, as well as being denominated in foreign currencies. On March 31, 2014, Aarding entered into a one-month foreign exchange forward contract to manage exposure to foreign currency fluctuations on a U.S. dollar-denominated transaction totaling $5.5 million. The contract expired prior to September 30, 2014 and there were no such outstanding contracts as of September 30, 2014. Debt consisted of the following at September 30, 2014 and December 31, 2013: September 30, December 31, 2014 2013 Outstanding borrowings under Credit Facility. Term loan payable in quarterly principal installments of $1.2 million through September 2016, $1.5 million through September 2017, and $1.9 million thereafter with balance due upon maturity in August 2018 - Term loan $ 57,263 $ 63,781 - U.S. Dollar revolving loans 25,000 22,000 - Multi-currency revolving loans - - - Unamortized debt discount (1,610 ) (1,918 ) Total outstanding borrowings under Credit Facility 80,653 83,863 Outstanding borrowings under Canadian dollar-denominated Flextor Facility - - Outstanding borrowings (U.S. dollar equivalent) under Aarding Facility 3,466 4,909 Outstanding borrowings (U.S. dollar equivalent) under Euro-denominated note payable to a bank, payable in quarterly installments of €25 ($32 as of September 30, 2014), plus interest, at a fixed rate of 3.82%, maturing January 2016. Collateralized by the Heerenveen, Netherlands building 191 310 Total outstanding borrowings $ 84,310 $ 89,082 Less: current portion 8,236 9,922 Total debt, less current portion $ 76,074 $ 79,160 On August 27, 2013, the Company entered into a credit agreement (the "Credit Agreement") with various lenders (the "Lenders") and letter of credit issuers (each, an "L/C Issuer"), and Bank of America, N.A., as Administrative Agent (the "Agent"), swing line lender and an L/C Issuer, providing for various senior secured credit facilities (collectively, the "Credit Facility") comprised of a $65.0 26 -------------------------------------------------------------------------------- Table of Contents million senior secured term loan, a $70.5 million senior secured U.S. dollar revolving credit facility for U.S. dollar revolving loans with sub-facilities for letters of credit and swing-line loans, and a $19.5 million senior secured multi-currency revolving credit facility for U.S. dollar and specific foreign currency loans. The Company has the option to obtain additional commitments for either the U.S. dollar revolving credit facility or the term loan facility in an aggregate principal amount not to exceed $30.0 million. As of September 30, 2014 and December 31, 2013, $1.2 million and $1.3 million of letters of credit were outstanding, respectively. Total unused credit availability under the Credit Facility was $63.8 million and $66.7 million at September 30, 2014 and December 31, 2013, respectively. Revolving loans may be borrowed, repaid and reborrowed until August 27, 2018, at which time all amounts borrowed pursuant to the Credit Facility must be repaid. The Company has granted a security interest in substantially all of its assets to secure its obligations pursuant to the Credit Agreement. The Credit Agreement is guaranteed by the Company's U.S. subsidiaries and such guaranty obligations are secured by a security interest on substantially all of the assets of such subsidiaries, including certain real property. The Credit Agreement may also be guaranteed by the Company's material foreign subsidiaries to the extent no adverse tax consequences would result to the Company. The Credit Agreement contains customary affirmative and negative covenants, including the requirement to maintain compliance with a consolidated leverage ratio of less than 2.75 and a consolidated fixed charge coverage ratio of more than 1.25. The Credit Agreement also includes customary events of default and the occurrence of an event of default could result in an increased interest rate equal to 2.0% above the applicable interest rate for loans, the acceleration of the Company's obligations pursuant to the Credit Agreement and an obligation of the subsidiary guarantors to repay the full amount of the Company's borrowings pursuant to the Credit Agreement. As of September 30, 2014 and December 31, 2013, the Company was in compliance with all related financial and other restrictive covenants under our Credit Agreement. Total unused credit availability under our existing Credit Agreement and other non-U.S. credit facilities and agreements, exclusive of any potential asset base limitations, is as follows: September 30, December 31, ($'s in millions) 2014 2013 Credit Agreement, U.S Dollar revolving loans $ 70.5 $ 70.5 Draw down (25.0 ) (22.0 ) Letters of credit open (1.2 ) (1.3 ) Credit Agreement, Multi-currency revolving facilities 19.5 19.5 Netherlands facilities (€10.5 million at September 30, 2014, and €7.0 million at December 31, 2013, in U.S. Dollar equivalent) 13.3 9.5 Draw down (3.5 ) - Letters of credit open (6.6 ) (8.4 ) Canadian credit agreement (Canadian Dollar 5.5 million at December 31, 2013, in U.S. Dollar equivalent) - 5.1 Total unused credit availability $ 67.0 $ 72.9 Overview of Cash Flows and Liquidity For the nine months ended September 30, ($'s in thousands) 2014 2013 Net cash provided by operating activities $ 6,297 $ 10,373 Net cash used in investing activities (1,540 ) (104,965 ) Net cash (used in) provided by financing activities (9,379 ) 85,184 Net decrease in cash $ (4,622 ) $ (9,408 ) For the nine months ended September 30, 2014, $6.3 million of cash was provided by operating activities compared with $10.4 million provided by operating activities for the same period in 2013. Cash flows from increased profits primarily associated with the acquisition of Met-Pro in August 2013 were more than offset by $2.5 million in cash paid for legal settlements, earn out payments of €1.1 million ($1.5 million) during the first nine months of 2014 and $6.1 million in reductions resulting from fluctuations in other working capital accounts during the first nine months of 2014 compared to the same period in the prior year. For the nine months ended September 30, 2014, net cash used in investing activities was $1.5 million compared with net cash used in investing activities of $105.0 million in the prior year period. Cash used in investing activities was the result of proceeds from sales of 27-------------------------------------------------------------------------------- Table of Contents property and equipment, including assets held for sale, totaling $7.5 million, offset by cash used for acquisitions of HEE and SAT of $8.2 million and additions to property and equipment of $0.8 million. In the prior year period, the acquisition of Aarding and Met-Pro used cash of $104.4 million. For the nine months ended September 30, 2014, financing activities used cash of $9.4 million compared with net cash provided by financing activities of $85.2 million in the prior year period. Net debt repayments totaled $5.1 million during the first nine months of 2014 compared with net borrowings of $92.0 million associated with the Met-Pro acquisition during the first nine months of 2013. Additionally, dividends paid were $4.4 million for the first nine months of 2014 compared with $3.0 million for the same period in the prior year. Our dividend policy and the payment of cash dividends under that policy are subject to the Board of Directors' continuing determination that the dividend policy and the declaration of dividends are in the best interest of the Company's stockholders. Future dividends and the dividend policy may be changed or cancelled at the Company's discretion at any time. Payment of dividends is also subject to the continuing consent of our lender under our Credit Facility. When we undertake large jobs, our working capital objective is to make these projects self-funding. We work to achieve this by obtaining initial down payments, progress billing contracts, when possible, utilizing extended payment terms from material suppliers, and paying sub-contractors after payment from our customers, which is an industry practice. Our investment in net working capital is funded by cash flow from operations and by our revolving line of credit. In connection with the Met-Pro acquisition, we took on significant additional debt to fund the transaction. We believe that cash flows from operating activities, together with our existing cash and borrowings available under our Credit Facility, will be sufficient for at least the next twelve months to fund our current anticipated uses of cash. After that, our ability to fund these expected uses of cash and to comply with the financial covenants under our debt agreements will depend on the results of future operations, performance and cash flow. Our ability to fund these expected uses from the results of future operations will be subject to prevailing economic conditions and to financial, business, regulatory, legislative and other factors, many of which are beyond our control. Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects or future results of operations or financial position made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as "believe," "expect," "anticipate," "intends," "estimate," "forecast," "project," "will," "plan," "should" and similar expressions to identify forward-looking statements. Forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties, many of which are beyond our control, which may cause actual results, performance or trends to differ materially from those expressed in the forward-looking statements. Potential risks, among others, that could cause actual results to differ materially are discussed under "Item 1A. Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and include, but are not limited to: factors related to our business, including economic and financial market conditions generally and economic conditions in our service areas; dependence on fixed price contracts and the risks associated therewith, including actual costs exceeding estimates and method of accounting for contract revenue; fluctuations in operating results from period to period due to seasonality of the business; the effect of growth on our infrastructure, resources, and existing sales; the ability to expand operations in both new and existing markets; the potential for contract delay or cancellation; changes in or developments with respect to any litigation or investigation; the potential for fluctuations in prices for manufactured components and raw materials; the substantial amount of debt in connection with the Met-Pro acquisition and our ability to repay or refinance it or incur additional debt in the future; the impact of federal, state or local government regulations; economic and political conditions generally; and the effect of competition in the air pollution control and industrial ventilation industry. Many of these risks are beyond management's ability to control or predict. Should one or more of these risks or uncertainties materialize, or should the assumptions prove incorrect, actual results may vary in material aspects from those currently anticipated. Investors are 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. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the Securities and Exchange Commission, we undertake no obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise. 28-------------------------------------------------------------------------------- Table of Contents |