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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549





FORM 10-Q







|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

For the quarterly period ended September 30, 2010

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File No. 000-07099





CECO ENVIRONMENTAL CORP.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 13-2566064                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)

3120 Forrer Street, Cincinnati,
Ohio 45209

(Address of principal executive offices) (Zip Code)

513-458-2600

(Registrants telephone number, including area code)





Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90
days.    x  Yes     ̈  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232, 405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).     ̈  Yes     ̈  No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (check one):



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large Accelerated Filer |  |  ̈ |  | Accelerated Filer         |  |  ̈
|                        |  |   | 
|Non-Accelerated Filer   |  |  ̈ |  | Smaller Reporting Company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):     ̈  Yes    x  No

Indicate the number of shares outstanding of each of the issuers classes of common stock as of latest practical date.

Class: Common, par value $.01 per share outstanding at November 3, 2010  14,318,739









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##### Table of Contents



CECO ENVIRONMENTAL CORP.

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE
ACT OF 1934

SEPTEMBER 30, 2010

TABLE OF CONTENTS



|                                |  |                                                                                                                               |    |  |    | 
|------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- | -- |  | -- | 
|Part I - Financial Information: |  |                                                                                                                               |    | 
|                                |  |                                                                                                                              
|Item 1.                         |  | Condensed Consolidated balance sheets as of September 30, 2010 and December 31, 2009                                          |    |  | 2  | 
|                                |  |                                                                                                                              
|                                |  | Condensed Consolidated statements of operations for the three-month and nine-month periods ended 
September 30, 2010 and 2009 |    |  | 3  | 
|                                |  |                                                                                                                              
|                                |  | Condensed Consolidated statements of cash flows for the nine-month periods ended September 30, 2010 and 2009                  |    |  | 4  | 
|                                |  |                                                                                                                              
|                                |  | Notes to consolidated financial statements                                                                                    |    |  | 5  | 
|                                |  |                                                                                                                              
|Item 2.                         |  | Managements discussion and analysis of financial condition and results of
operations                                         |    |  | 14 | 
|                                |  |                                                                                                                              
|Item 4T.                        |  | Controls and Procedures                                                                                                       |    |  | 21 | 
|                                | 
|Part II - Other Information     |  |                                                                                                                               |    | 
|                                |  |                                                                                                                              
|Item 6.                         |  | Exhibits                                                                                                                      |    |  | 22 | 
|                                | 
|Signature                       |  |                                                                                                                               | 23 | 



1



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CECO ENVIRONMENTAL
CORP.

PART I. FINANCIAL INFORMATION



|ITEM 1. | Financial Statements
|------- | --------------------

CONDENSED CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except per share data



|                                                                                                                                     |  |                   |        |   |                  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                                                     |  | September 30,2010 |        |   | December 31,2009 |  
|                                                                                                                                     |  | (unaudited)       |        |   |                  |  
|ASSETS                                                                                                                               |  |                   |        |   |                  |   |        |  
|Current assets:                                                                                                                      |  |                   |        |   |                  |   |        |  
|Cash and cash equivalents                                                                                                            |  | $                 | 4,185  |   |                  | $ | 1,393  |  
|Accounts receivable, net                                                                                                             |  |                   | 20,565 |   |                  |   | 23,751 |  
|Costs and estimated earnings in excess of billings on uncompleted contracts (Note 4)                                                 |  |                   | 9,587  |   |                  |   | 10,681 |  
|Inventories, net (Note 3)                                                                                                            |  |                   | 4,698  |   |                  |   | 4,877  |  
|Prepaid expenses and other current assets                                                                                            |  |                   | 3,070  |   |                  |   | 2,969  |  
|Current assets of discontinued operations (Note 15)                                                                                  |  |                   | 281    |   |                  |   | 1,877  |  
|                                                                                                                                     |  |                   |        |   |                  |   |        |  
|Total current assets                                                                                                                 |  |                   | 42,386 |   |                  |   | 45,548 |  
|                                                                                                                                     |  |                  
|Property and equipment, net                                                                                                          |  |                   | 5,955  |   |                  |   | 11,362 |  
|Property and equipment held for sale, net (Note 16)                                                                                  |  |                   | 4,471  |   |                  |   |       |  
|Goodwill, net (Note 5)                                                                                                               |  |                   | 14,637 |   |                  |   | 14,591 |  
|Intangibles  finite life, net (Note 5)                                                                                              |  |                   | 1,095  |   |                  |   | 1,470  |  
|Intangibles  indefinite life (Note 5)                                                                                               |  |                   | 3,215  |   |                  |   | 3,209  |  
|Deferred income tax asset, net                                                                                                       |  |                   | 348    |   |                  |   | 348    |  
|Deferred charges and other assets                                                                                                    |  |                   | 952    |   |                  |   | 930    |  
|Non-current assets of discontinued operations (Note 15)                                                                              |  |                   |       |   |                  |   | 57     |  
|                                                                                                                                     |  |                   |        |   |                  |   |        |  
|                                                                                                                                     |  | $                 | 73,059 |   |                  | $ | 77,515 |  
|                                                                                                                                     |  |                   |        |   |                  |   |        |  
|                                                                                                                                     |  |                  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                 |  |                   |        |   |                  |   |        |  
|Current liabilities:                                                                                                                 |  |                   |        |   |                  |   |        |  
|Current portion of debt (Note 8)                                                                                                     |  | $                 | 1,470  |   |                  | $ | 836    |  
|Accounts payable and accrued expenses                                                                                                |  |                   | 14,799 |   |                  |   | 18,622 |  
|Billings in excess of costs and estimated earnings on uncompleted contracts (Note 4)                                                 |  |                   | 7,265  |   |                  |   | 10,373 |  
|Accrued income taxes                                                                                                                 |  |                   | 314    |   |                  |   |       |  
|Current liabilities of discontinued operations (Note 15)                                                                             |  |                   | 7      |   |                  |   | 648    |  
|                                                                                                                                     |  |                   |        |   |                  |   |        |  
|Total current liabilities                                                                                                            |  |                   | 23,855 |   |                  |   | 30,479 |  
|Other liabilities                                                                                                                    |  |                   | 2,779  |   |                  |   | 2,605  |  
|Debt, less current portion (Note 8)                                                                                                  |  |                   | 1,629  |   |                  |   | 1,871  |  
|Convertible subordinated notes (including related parties notes of $3,800) (Note 8)                                                  |  |                   | 10,800 |   |                  |   | 10,800 |  
|                                                                                                                                     |  |                   |        |   |                  |   |        |  
|Total liabilities                                                                                                                    |  |                   | 39,063 |   |                  |   | 45,755 |  
|                                                                                                                                     |  |                   |        |   |                  |   |        |  
|                                                                                                                                     |  |                  
|Shareholders equity:                                                                                                                |  |                   |        |   |                  |   |        |  
|Common stock, $0.01 par value; 100,000,000 shares authorized, 14,456,659 and 14,427,251 shares issued in 2010 and 2009,
respectively |  |                   | 144    |   |                  |   | 144    |  
|Capital in excess of par value                                                                                                       |  |                   | 43,142 |   |                  |   | 42,341 |  
|Accumulated deficit                                                                                                                  |  |                   | (6,986 | ) |                  |   | (8,348 | )
|Accumulated other comprehensive loss                                                                                                 |  |                   | (1,948 | ) |                  |   | (2,021 | )
|                                                                                                                                     |  |                   |        |   |                  |   |        |  
|                                                                                                                                     |  |                   | 34,352 |   |                  |   | 32,116 |  
|Less treasury stock, at cost, 137,920 shares in 2010 and 2009                                                                        |  |                   | (356   | ) |                  |   | (356   | )
|                                                                                                                                     |  |                   |        |   |                  |   |        |  
|Total shareholders equity                                                                                                           |  |                   | 33,996 |   |                  |   | 31,760 |  
|                                                                                                                                     |  |                   |        |   |                  |   |        |  
|                                                                                                                                     |  | $                 | 73,059 |   |                  | $ | 77,515 |  
|                                                                                                                                     |  |                   |        |   |                  |   |        |  

The notes to condensed consolidated financial statements are an integral part of the above statements.



2



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CECO ENVIRONMENTAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

Dollars in thousands, except per share data



|                                                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                |  | THREE MONTHS ENDEDSEPTEMBER 30, |            |   | NINE MONTHS ENDEDSEPTEMBER 30, |  
|                                                                                                                |  | 2010                            |            |   | 2009                           |   |            | 2010 |  |   | 2009       |  
|Net sales                                                                                                       |  | $                               | 33,860     |   |                                | $ | 31,964     |      |  | $ | 103,657    |   |  | $ | 102,396    |  
|Cost of sales                                                                                                   |  |                                 | 26,132     |   |                                |   | 25,090     |      |  |   | 79,513     |   |  |   | 79,299     |  
|                                                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Gross profit                                                                                                    |  |                                 | 7,728      |   |                                |   | 6,874      |      |  |   | 24,144     |   |  |   | 23,097     |  
|Selling and administrative                                                                                      |  |                                 | 6,648      |   |                                |   | 7,034      |      |  |   | 20,786     |   |  |   | 21,793     |  
|Amortization                                                                                                    |  |                                 | 118        |   |                                |   | 139        |      |  |   | 378        |   |  |   | 618        |  
|Gain on sale of operating equipment                                                                             |  |                                 | (608       | ) |                                |   |           |      |  |   | (608       | ) |  |   |           |  
|                                                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from continuing operations                                                                        |  |                                 | 1,570      |   |                                |   | (299       | )    |  |   | 3,588      |   |  |   | 686        |  
|Other income (expense), net                                                                                     |  |                                 | (68        | ) |                                |   | (374       | )    |  |   | (121       | ) |  |   | (546       | )
|Interest expense (including related parties interest of $58 and $122, and $171 and $309, respectively) (Note 8) |  |                                 | (341       | ) |                                |   | (326       | )    |  |   | (942       | ) |  |   | (1,035     | )
|                                                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from continuing operations before income taxes                                                    |  |                                 | 1,161      |   |                                |   | (999       | )    |  |   | 2,525      |   |  |   | (895       | )
|Income tax expense (benefit)                                                                                    |  |                                 | 488        |   |                                |   | (350       | )    |  |   | 1,008      |   |  |   | (313       | )
|                                                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from continuing operations                                                                        |  |                                 | 673        |   |                                |   | (649       | )    |  |   | 1,517      |   |  |   | (582       | )
|Net income (loss) from discontinued operations, net of tax (Note 15)                                            |  |                                 | 10         |   |                                |   | (29        | )    |  |   | (155       | ) |  |   | (366       | )
|                                                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                                                                                |  |                                 |            |  
|Net income (loss)                                                                                               |  | $                               | 683        |   |                                | $ | (678       | )    |  | $ | 1,362      |   |  | $ | (948       | )
|                                                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                                                                                |  |                                 |            |  
|Earnings (loss) per share (Note 7):                                                                             |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic net income (loss) from continuing operations                                                              |  | $                               | .05        |   |                                | $ | (.05       | )    |  | $ | .11        |   |  | $ | (.04       | )
|Basic net income (loss) from discontinued operations                                                            |  |                                 | .00        |   |                                |   | (.00       | )    |  |   | (.01       | ) |  |   | (.03       | )
|                                                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                                                                                |  |                                 |            |  
|Basic net income (loss)                                                                                         |  | $                               | .05        |   |                                | $ | (.05       | )    |  | $ | .10        |   |  | $ | (.07       | )
|                                                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                                                                                |  |                                 |            |  
|Diluted net income (loss) from continuing operations                                                            |  | $                               | .05        |   |                                | $ | (.05       | )    |  | $ | .10        |   |  | $ | (.04       | )
|Diluted net income (loss) from discontinued operations                                                          |  |                                 | .00        |   |                                |   | (.00       | )    |  |   | (.01       | ) |  |   | (.03       | )
|                                                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                                                                                |  |                                 |            |  
|Diluted net income (loss)                                                                                       |  | $                               | .05        |   |                                | $ | (.05       | )    |  | $ | .09        |   |  | $ | (.07       | )
|                                                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                                                                                |  |                                 |            |  
|Weighted average number of common shares outstanding:                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                                                                           |  |                                 | 14,320,188 |   |                                |   | 14,241,594 |      |  |   | 14,304,554 |   |  |   | 14,214,065 |  
|                                                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                                                                                         |  |                                 | 17,128,215 |   |                                |   | 14,241,594 |      |  |   | 14,396,965 |   |  |   | 14,214,065 |  
|                                                                                                                |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  

The notes to condensed consolidated financial statements are an integral part of the above statements.



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CECO ENVIRONMENTAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Dollars in thousands



|                                                                                         |  |                                |        |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------- | -
|                                                                                         |  | NINE MONTHS ENDEDSEPTEMBER 30, |       
|                                                                                         |  | 2010                           |        |   | 2009 |  
|Cash flows from operating activities:                                                    |  |                                |        |   |      |   |         |  
|Net income (loss)                                                                        |  | $                              | 1,362  |   |      | $ | (948    | )
|Net loss from discontinued operations                                                    |  |                                | (155   | ) |      |   | (366    | )
|                                                                                         |  |                                |        |   |      |   |         |  
|Net income (loss) from continuing operations                                             |  |                                | 1,517  |   |      |   | (582    | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                |        |   |      |   |         |  
|Depreciation and amortization                                                            |  |                                | 1,322  |   |      |   | 1,886   |  
|Non cash interest expense included in net income (loss)                                  |  |                                | 86     |   |      |   | 20      |  
|Non cash loss on remeasurement of subordinated debt                                      |  |                                |       |   |      |   | 340     |  
|Gain from disposal of fixed assets                                                       |  |                                | (608   | ) |      |   |        |  
|Share based compensation expense                                                         |  |                                | 694    |   |      |   | 711     |  
|Employee stock purchase plan expense                                                     |  |                                | 96     |   |      |   |        |  
|Bad debt expense                                                                         |  |                                | 163    |   |      |   | 392     |  
|Inventory reserve                                                                        |  |                                | 100    |   |      |   |        |  
|Changes in operating assets and liabilities:                                             |  |                                |        |   |      |   |         |  
|Accounts receivable                                                                      |  |                                | 3,023  |   |      |   | 16,772  |  
|Inventories                                                                              |  |                                | (309   | ) |      |   | 1,075   |  
|Costs and estimated earnings in excess of billings on uncompleted contracts              |  |                                | 1,094  |   |      |   | 2,737   |  
|Prepaid expenses and other current assets                                                |  |                                | (101   | ) |      |   | (890    | )
|Deferred charges and other assets                                                        |  |                                | 239    |   |      |   | (101    | )
|Accounts payable and accrued expenses                                                    |  |                                | (3,847 | ) |      |   | (9,423  | )
|Billings in excess of costs and estimated earnings on uncompleted contracts              |  |                                | (3,108 | ) |      |   | (51     | )
|Accrued income taxes                                                                     |  |                                | 314    |   |      |   | (2,402  | )
|Other liabilities                                                                        |  |                                | 193    |   |      |   | 344     |  
|                                                                                         |  |                                |        |   |      |   |         |  
|Net cash provided by continuing operating activities                                     |  |                                | 868    |   |      |   | 10,828  |  
|Net cash provided by discontinued operating activities                                   |  |                                | 857    |   |      |   | 2,540   |  
|                                                                                         |  |                                |        |   |      |   |         |  
|Net cash provided by operating activities                                                |  |                                | 1,725  |   |      |   | 13,368  |  
|                                                                                         |  |                                |        |   |      |   |         |  
|Cash flows from investing activities:                                                    |  |                                |        |   |      |   |         |  
|Acquisitions of property and equipment                                                   |  |                                | (400   | ) |      |   | (997    | )
|Proceeds from sale of equipment                                                          |  |                                | 1,411  |   |      |   |        |  
|                                                                                         |  |                                |        |   |      |   |         |  
|Net cash provided by (used in) investing activities                                      |  |                                | 1,011  |   |      |   | (997    | )
|                                                                                         |  |                                |        |   |      |   |         |  
|Cash flows from financing activities:                                                    |  |                                |        |   |      |   |         |  
|Net borrowings (repayments) on revolving credit lines                                    |  |                                | 690    |   |      |   | (10,926 | )
|Proceeds from exercise of stock options                                                  |  |                                | 11     |   |      |   |        |  
|Subordinated debt borrowings                                                             |  |                                |       |   |      |   | 3,000   |  
|Subordinated debt repayments                                                             |  |                                |       |   |      |   | (3,000  | )
|Cash paid for deferred financing costs                                                   |  |                                | (347   | ) |      |   |        |  
|Repayment of term debt                                                                   |  |                                | (298   | ) |      |   | (1,750  | )
|                                                                                         |  |                                |        |   |      |   |         |  
|Net cash provided by (used in) financing activities                                      |  |                                | 56     |   |      |   | (12,676 | )
|                                                                                         |  |                                |        |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                     |  |                                | 2,792  |   |      |   | (305    | )
|Cash and cash equivalents at beginning of the period                                     |  |                                | 1,393  |   |      |   | 1,147   |  
|                                                                                         |  |                                |        |   |      |   |         |  
|Cash and cash equivalents at end of the period                                           |  | $                              | 4,185  |   |      | $ | 842     |  
|                                                                                         |  |                                |        |   |      |   |         |  
|                                                                                         |  |                               
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                        |  |                                |        |   |      |   |         |  
|Cash paid (refunded) during the period for:                                              |  |                                |        |   |      |   |         |  
|Interest                                                                                 |  | $                              | 1,261  |   |      | $ | 1,230   |  
|                                                                                         |  |                                |        |   |      |   |         |  
|                                                                                         |  |                               
|Income taxes                                                                             |  | $                              | (234   | ) |      | $ | 2,407   |  
|                                                                                         |  |                                |        |   |      |   |         |  

The notes to condensed consolidated financial statements are an integral part of the above statements.



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CECO ENVIRONMENTAL CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of reporting for condensed consolidated financial statements and significant accounting policies.

The accompanying unaudited condensed consolidated financial statements of CECO Environmental Corp. and subsidiaries (the
Company, we, us, or our) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual
financial statements have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, the accompanying unaudited, condensed consolidated financial statements of the Company contain all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2010 and December 31, 2009 and the results of operations for the three-month and nine-month periods ended September 30, 2010
and 2009 and of cash flows for the nine-month periods ended September 30, 2010 and 2009. The results of operations for the three-month and nine-month periods ended September 30, 2010 are not necessarily indicative of the results to be
expected for the full year. The balance sheet as of December 31, 2009 has been derived from the audited consolidated financial statements included in the Companys annual report on Form 10-K for the year ended December 31, 2009 filed
with the Securities and Exchange Commission.

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

During 2009, the Company discontinued the operations of its subsidiary, H.M. White, Inc. (H.M. White). In accordance with the provisions of FASB ASC Subtopic 205-20, the results of H.M. White
are presented as discontinued operations for all periods in the consolidated financial statements. See Footnote 15 for additional details.

These financial statements and accompanying notes should be read in conjunction with the audited financial statements and the notes thereto included in the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2009 filed with the Securities and Exchange Commission.

2. New Accounting Pronouncements

Recently Issued Accounting Pronouncements

Accounting Standards Codification (ASC) 605-25In October 2009, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU) No. 2009-13 for updated revenue recognition guidance under the provisions of ASC 605-25, Multiple-Element Arrangements. The previous guidance has been retained
for criteria to determine when delivered items in a multiple-deliverable arrangements should be considered separate units of accounting, however the updated guidance removes the previous separation criterion that objective and reliable evidence of
fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. This guidance is effective for fiscal years beginning on or after June 15, 2010. The Company does not
expect that the adoption of this guidance will have a material effect on the Companys consolidated results of operations, financial position or cash flows.

ASC 820In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures About Fair Value Measurements. This guidance
amends Subtopic 820-10 to require new disclosures and clarify existing disclosures. This guidance requires new disclosures of amounts and reasons for significant transfers between Level 1 and Level 2 fair value measurements. Additionally, in the
reconciliation for fair value measurements using significant unobservable inputs (Level 3), separate presentation of information about purchases, sales, issuances and settlements is required. The guidance clarifies that fair value measurement
disclosures for each class of assets and liabilities may constitute a subset of assets and liabilities within a line item on a reporting entitys balance sheet. The guidance also clarifies disclosure requirements about inputs and valuation
techniques for both recurring and nonrecurring fair value measurements (Level 2 or Level 3). The ASU also amends guidance on employers disclosures about postretirement benefit plan assets under ASC 715 to require that disclosures be provided
by classes of assets instead of by major categories of assets. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances and settlements in the roll forward of activity for Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, including interim periods within those
fiscal years. The Company has not had and does not expect that the adoption of this remaining guidance will have a material effect on the Companys consolidated results of operations, financial position or cash flows.



5



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##### Table of Contents

CECO ENVIRONMENTAL CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)





ASC
815In March 2010, the FASB issued ASU 2010-11, Scope Exception Related to Embedded Credit Derivatives to address questions that have been raised in practice about the intended breadth of the embedded credit derivative scope
exception in paragraphs 815-15-15-8 through 815-15-15-9 of ASC 815, Derivatives and Hedging. The amended guidance clarifies that the scope exception applies to contracts that contain an embedded credit derivative that is only in the form
of subordination of one financial instrument to another. This guidance is effective on July 1, 2010 for the Company. The adoption of this guidance did not have a material impact on the Companys consolidated financial position, results of
operations or cash flows.

3. Inventories



|                                |  |                   |       |   |                  |   |       |  
|------------------------------- |  | ----------------- | ----- | - | ---------------- | - | ----- | -
|$ in thousands                  |  | September 30,2010 |       |   | December 31,2009 |  
|Raw materials and subassemblies |  | $                 | 3,438 |   |                  | $ | 3,322 |  
|Finished goods                  |  |                   | 1,046 |   |                  |   | 1,044 |  
|Parts for resale                |  |                   | 623   |   |                  |   | 566   |  
|Obsolescence allowance          |  |                   | (409  | ) |                  |   | (55   | )
|                                |  |                   |       |   |                  |   |       |  
|                                |  | $                 | 4,698 |   |                  | $ | 4,877 |  
|                                |  |                   |       |   |                  |   |       |  

Amounts credited to the allowance for obsolete inventory and charged to cost of sales amounted to $131 and
$109 for the three month period ended September 30, 2010 and 2009, and $354 and $184 for the nine month period ended September 30, 2010 and 2009, respectively.

4. Costs and Estimated Earnings on Uncompleted Contracts



|                                                                                       |  |                   |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|$ in thousands                                                                         |  | September 30,2010 |         |   | December 31,2009 |  
|Costs incurred on uncompleted contracts                                                |  | $                 | 74,433  |   |                  | $ | 74,908  |  
|Estimated earnings                                                                     |  |                   | 15,175  |   |                  |   | 16,897  |  
|                                                                                       |  |                   |         |   |                  |   |         |  
|                                                                                       |  |                   | 89,608  |   |                  |   | 91,805  |  
|Less billings to date                                                                  |  |                   | (87,286 | ) |                  |   | (91,497 | )
|                                                                                       |  |                   |         |   |                  |   |         |  
|                                                                                       |  | $                 | 2,322   |   |                  | $ | 308     |  
|                                                                                       |  |                   |         |   |                  |   |         |  
|                                                                                       |  |                  
|Included in the accompanying consolidated balance sheets under the following captions: |  |                   |         |   |                  |   |         |  
|Costs and estimated earnings in excess of billings on uncompleted contracts            |  | $                 | 9,587   |   |                  | $ | 10,681  |  
|Billings in excess of costs and estimated earnings on uncompleted contracts            |  |                   | (7,265  | ) |                  |   | (10,373 | )
|                                                                                       |  |                   |         |   |                  |   |         |  
|                                                                                       |  | $                 | 2,322   |   |                  | $ | 308     |  
|                                                                                       |  |                   |         |   |                  |   |         |  



6



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##### Table of Contents

CECO ENVIRONMENTAL CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)





Revenues from
contracts, representing the majority of our revenues, are recognized on the percentage of completion method, measured by the percentage of contract costs incurred to date compared to estimated total contract costs for each contract. This method is
used because management considers contract costs to be the best available measure of progress on these contracts.

Our
remaining revenues are recognized when risk and title passes to the customer, which is generally upon shipment of product. Our contracts have various lengths to completion ranging from a few days to several months. We anticipate that a majority of
our current contracts will be completed within the next twelve months.

5. Goodwill and Intangible Assets



|                                |  |                                     |        |  |                             |   |       |          |  |   |             |   |  |   |       | 
|------------------------------- |  | ----------------------------------- | ------ |  | --------------------------- | - | ----- | -------- |  | - | ----------- | - |  | - | ----- | 
|$ in thousands                  |  | Nine months endedSeptember 30, 2010 |        |  | Year endedDecember 31, 2009 |  
|Goodwill / Tradename            |  | Goodwill                            |        |  | Tradename                   |   |       | Goodwill |  |   | Tradename   |  
|                                |  |                                     |        | 
|Beginning balance               |  | $                                   | 14,591 |  |                             | $ | 3,209 |          |  | $ | 31,116      |   |  | $ | 3,165 | 
|                                |  |                                     |        | 
|Impairment                      |  |                                     |       |  |                             |   |      |          |  |   | (17,110     | ) |  |   |      | 
|                                |  |                                     |        | 
|Foreign currency adjustments    |  |                                     | 46     |  |                             |   | 6     |          |  |   | 585         |   |  |   | 44    | 
|                                |  |                                     |        |  |                             |   |       |          |  |   |             |   |  |   |       | 
|                                |  | $                                   | 14,637 |  |                             | $ | 3,215 |          |  | $ | 14,591      |   |  | $ | 3,209 | 
|                                |  |                                     |        |  |                             |   |       |          |  |   |             |   |  |   |       | 
|                                |  |                                    
|                                |  | September 30, 2010                  |        |  | December 31, 2009           |  
|Intangible assets  finite life |  | Cost                                |        |  | Accum.Amort.                |   |       | Cost     |  |   | Accum.Amort |  
|                                |  |                                     |        | 
|Patents                         |  | $                                   | 1,414  |  |                             | $ | 1,089 |          |  | $ | 1,412       |   |  | $ | 1,024 | 
|                                |  |                                     |        | 
|Customer lists                  |  |                                     | 1,644  |  |                             |   | 928   |          |  |   | 1,644       |   |  |   | 685   | 
|                                |  |                                     |        | 
|Employment contracts            |  |                                     | 420    |  |                             |   | 376   |          |  |   | 420         |   |  |   | 305   | 
|                                |  |                                     |        | 
|Other                           |  |                                     | 132    |  |                             |   | 122   |          |  |   | 130         |   |  |   | 122   | 
|                                |  |                                     |        |  |                             |   |       |          |  |   |             |   |  |   |       | 
|                                |  | $                                   | 3,610  |  |                             | $ | 2,515 |          |  | $ | 3,606       |   |  | $ | 2,136 | 
|                                |  |                                     |        |  |                             |   |       |          |  |   |             |   |  |   |       | 

We complete an annual (or more often if circumstances require) impairment test for our indefinite life
intangible assets. In performing these assessments, the carrying value of the asset is considered impaired if the fair value is less than the carrying value of the asset. If this occurs, an impairment charge is recorded for the amount by which the
carrying value of the asset exceeds its fair value.

Also as required by current accounting rules, we complete an annual (or
more often if circumstances require) impairment test for our goodwill. In performing these assessments, the carrying value of the reporting unit is compared to its estimated fair value, as calculated by the discounted present value of cash flow
method. If the estimated fair value of the reporting unit is less than its carrying value, an impairment charge is recorded for the amount by which the carrying value of the goodwill exceeds its calculated implied fair value. The Companys
fourth quarter 2009 annual evaluation for goodwill impairment indicated an impairment of the goodwill for four of the Companys reporting units. As a result, the Company estimated the implied fair value of the goodwill of these reporting units
compared to carrying amounts and recorded total impairment charges of $17.1 million at December 31, 2009 to impair a portion of the goodwill recorded on these reporting units. The decrease in the fair value of the reporting units was due to
deteriorating market conditions resulting from the global economic downturn. No impairment of goodwill was identified related to the Companys other reporting units. No additional impairment was recorded in the nine month period ended
September 30, 2010.



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##### Table of Contents

CECO ENVIRONMENTAL CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)





Major factors that
influence our cash flow analyses are our estimates for future revenue and expenses associated with the reporting units. This is the most sensitive of our estimates related to our fair value calculations. Other factors considered in our fair value
calculations include assumptions as to the business climate, industry and economic conditions. These assumptions are subjective and different estimates could have a significant impact on the results of our analyses.

Finite life intangible assets are comprised of patents, customer lists and employment contracts. For all amortizable intangible assets, if
any events or changes in circumstances occur that indicate possible impairment, our impairment review is based on an undiscounted cash flow analysis. Impairment occurs when the carrying value of the assets exceeds the future undiscounted cash flows.
When impairment is indicated, the estimated future cash flows are then discounted to determine the estimated fair value of the asset and an impairment charge is recorded for the difference between the carrying value and the net present value of
estimated future cash flows. The Company also evaluates the remaining useful life each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of an intangible
assets remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life.

Amortization of finite life intangibles is on a straight line basis and amortization expense for the three months ended September 30, 2010 and 2009 was $117,000 and $139,000 respectively and for the
nine months ended September 30, 2010 and 2009 was $377,000 and $618,000 respectively. Over the next five years amortization expense for these finite life intangible assets will be $117,000 for the remainder of 2010, $424,000 in 2011, $316,000
in 2012, $130,000 in 2013 and $69,000 in 2014.

6. Business Segment Information

Our structure and operational integration results in one reportable 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, the consolidated financial statements herein reflect the operating results of the
reportable segment.

7. Earnings Per Share

For the three and nine months ended September 30, 2010, basic weighted average common shares outstanding were 14,320,188 and 14,304,554, respectively and for the three and nine months ended
September 30, 2009, basic weighted average common shares outstanding were 14,241,594 and 14,214,065, respectively. For the three and nine months ended September 30, 2010, diluted common shares outstanding were 17,128,215 and 14,396,965,
respectively and for the three and nine months ended September 30, 2009, diluted common shares outstanding were 14,241,594 and 14,214,065, respectively.

Effective January 1, 2009, the Company adopted ASC 260-10-65-2, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. Non-vested shares
with non-forfeitable dividend rights are considered participating securities and, thus, subject to the two-class method pursuant to ASC Topic 260, Earnings per Share, when computing basic and diluted EPS. Losses are only allocable to
participating securities if the holder has the contractual obligation to share in the losses of the Company.

Holders of our
restricted stock awards participate in nonforfeitable dividend rights on a one-for-one basis with holders of common stock. Holders of these awards are not obligated to share in losses of the Company. Therefore, these share awards are included in the
computation of basic earnings (loss) per share during periods of net income using the two-class method, but are excluded from such computation in periods of net loss. Should the Company declare a dividend on its common stock, the related dividend on
shares of unvested restricted stock that are not expected to vest would be recorded as additional compensation expense and therefore excluded from the two-class method computations; however, no such dividends have been declared to date.
Undistributed earnings included in the two-class method computations are allocated equally to each share of common stock outstanding, including all shares of unvested restricted common shares. For the three month and nine month periods ended
September 30, 2010 the weighted average number of non-vested restricted share awards which were included in the basic weighted average common shares outstanding totaled 1,449 and 28,468 respectively. For the three month and nine months periods
ended September 30, 2009, 46,085 and 83,171 non-vested restricted share awards were excluded from the computation of basic and diluted weighted average common shares outstanding due to the reported net loss for the periods.



8



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##### Table of Contents

CECO ENVIRONMENTAL CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)





We consider
outstanding options and warrants in computing diluted net income per share only when they are dilutive. For the three and nine month periods ended September 30, 2010, 480,000 and 599,000, respectively, outstanding options and warrants were
excluded from the computation of diluted weighted average common shares outstanding as their effect would have been anti-dilutive. For each of the three and nine month periods ended September 30, 2009, 1,283,105 outstanding options and warrants
were excluded from the computation of diluted weighted average common shares outstanding as their effect would have been anti-dilutive. Additionally, pursuant to the if-converted method, net income used for purposes of computing diluted earnings per
share is adjusted for the net impact of interest and other items related to the Convertible Subdebt Note and Convertible Investor Notes (see Note 8) unless the effect is anti-dilutive. The net impact of interest and other items related to the
Convertible Subdebt Note and Investor Notes for the three and nine month periods ended September 30, 2010 was expense of approximately $97,000 and $296,000 respectively. Net income was adjusted by this net impact for the three month period
ended September 30, 2010 and 2,700,000 shares were included in the computation of diluted weighted average common shares outstanding. Because of an anti-dilutive effect, net income (loss) was not adjusted for this net impact for the nine month
period ended September 30, 2010 and 2,700,000 shares were excluded from the computation of diluted weighted average common shares outstanding. The net impact of interest and other items related to the Convertible Subdebt Note for the three and
nine month periods ended September 30, 2009 was expense of approximately $203,000 and $294,000, respectively. Because of an anti-dilutive effect, the net loss was not adjusted for this net impact for the three and nine month periods ended
September 30, 2009.

8. Debt

Total bank debt was $3.1 million at September 30, 2010 and $2.7 million at December 31, 2009. The bank debt at September 30, 2010 consists of $1.1 million due on the revolving lines of
credit and a term note totaling $2.0 million. Our current credit facility with Fifth Third Bank (the Bank Facility), as amended, includes a revolving line of credit of up to $20 million, including letters of credit, limited to a
borrowing base amount computed as 70% of eligible accounts receivable, 50% of unbilled revenues up to $2.0 million, plus 50% of eligible inventories up to $7.5 million. Unused credit availability under our $20.0 million revolving line of credit at
September 30, 2010 was $8.0 million. Interest on the outstanding borrowings is charged at the daily LIBOR rate plus 4.0% or the tranche LIBOR rate plus 3.5% for the revolver and the daily LIBOR rate plus 4.25% or the tranche LIBOR rate plus
3.75% for the term note. The weighted average interest rate under the Bank Facility as of September 30, 2010 and September 30, 2009 was 4.07% and 3.44%, respectively.

We entered into our current Bank Facility on December 29, 2005 with Fifth Third Bank. The Bank Facility was amended on various dates and fees paid for these amendments were deferred and are being
amortized over the remaining term of the Bank Facility.

On August 6, 2010, the Company entered into an amended and
restated credit agreement effective as of June 30, 2010, which amends and restates in its entirety the Bank Facility and extends the termination date of the Line of Credit to April 1, 2013 and the term loan to April 1, 2014. The
amendment and restatement also increases the limit on letters of credit from $5.0 million to $10.0 million, resets the pricing grid to level one which temporarily increases our interest rates by 0.5% until the next pricing grid determination date of
December 31, 2010, at which time the pricing level will be re-determined based on the Companys trailing twelve month fixed charge ratio. Fees of $23,000 were paid for this amendment.

Terms of the Bank Facility, as amended, include financial covenants which require compliance at June 30, 2010 and each quarter
through March 31, 2013. The maximum capital expenditures financial covenant is $2,500,000 per year. The minimum Fixed Charge Coverage Ratio is 2.5:1.0 for each quarter through the quarter ended June 30, 2010 and 1.25:1.0 thereafter. 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, 2010, 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.



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##### Table of Contents

CECO ENVIRONMENTAL CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)





On August 14,
2008, the Company issued a Subordinated Convertible Promissory Note (the Convertible Subdebt Note) in the amount of Canadian $5.0 million to Icarus Investment Corp. (Icarus), which is controlled by Phillip DeZwirek, our
Chairman and former CEO, and Jason DeZwirek, our Secretary and one of our Directors. The Convertible Subdebt Note provided for interest to accrue at the rate of 10% per annum in 2008, 11% per annum in 2009, and 12% per annum
commencing January 1, 2010 until paid. The outstanding principal and accrued interest under the Convertible Subdebt Note was convertible at any time into common stock of the Company at a per share price of $4.75 which was the closing price
immediately preceding its issuance. We repaid Canadian $3.7 million under the Convertible Subdebt Note on March 31, 2009 and fully repaid the outstanding balance of $1.2 million on November 26, 2009.

On May 15, 2009, the Company issued a Promissory Note (Note) to Icarus in the amount of $3.0 million. The Note, which was
subordinated to the Companys Bank Facility, bore interest at 12% per annum with interest payable monthly. The maturity date of the note was the earlier of May 15, 2012 or six months after repayment of the Bank Facility. At the option
of Icarus, the note was repayable in Canadian funds with a stated conversion rate of 1.1789, or CAD $3.5 million, representing the conversion rate at the issuance date of the Note. In accordance with ASC 815 Derivatives and Hedging, this
option was been bifurcated and recorded at fair value. Gains and losses resulting from the revaluation of this liability were included in other income (expense) in the consolidated statements of operations. The Note and accrued interest was fully
repaid on November 26, 2009 in the amount of $3.3 million.

On November 26, 2009, the Company issued $10.8 million
principal amount subordinated convertible promissory notes to a group of investors (the Investor Notes) which includes related parties: Icarus ($2,200,000), 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 for the three and nine month periods was $163,000 and
$485,000 respectively. 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 will 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 after the issuance of the Investor Notes 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 from the date of the Investor Notes, if the closing price of the common stock of the Company is greater than $8.00 for five consecutive days, the Company can cause
conversion of the Investor Notes.

9. Employee Benefit Plans

We sponsor a non-contributory defined benefit pension plan for certain union employees. The plan is funded in accordance with the funding requirements of the Employee Retirement Income Security Act of
1974.

We also sponsor a post retirement health care plan for office employees retiring before January 1, 1990. The plan
allows retirees who have attained the age of 65 to elect the type of coverage desired.

Retirement and health care plan expense
is based on valuations performed by plan actuaries as of the beginning of each fiscal year. The components of the expense consisted of the following:



|                                   |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |      |  
|---------------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                                   |  | Three Months EndedSeptember 30, |     |   | Nine Months EndedSeptember 30, |  
|$ in thousands                     |  | 2010                            |     |   | 2009                           |   |     | 2010 |  |   | 2009 |  
|Retirement plan:                   |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |      |  
|Service cost                       |  | $                               | 54  |   |                                | $ | 44  |      |  | $ | 162  |   |  | $ | 132  |  
|Interest cost                      |  |                                 | 94  |   |                                |   | 95  |      |  |   | 282  |   |  |   | 285  |  
|Expected return on plan assets     |  |                                 | (94 | ) |                                |   | (80 | )    |  |   | (282 | ) |  |   | (240 | )
|Amortization of prior service cost |  |                                 | 2   |   |                                |   | 2   |      |  |   | 6    |   |  |   | 6    |  
|Amortization of net actuarial loss |  |                                 | 54  |   |                                |   | 61  |      |  |   | 162  |   |  |   | 183  |  
|                                   |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |      |  
|                                   |  |                                 |     |  
|Net periodic benefit cost          |  | $                               | 110 |   |                                | $ | 122 |      |  | $ | 330  |   |  | $ | 366  |  
|                                   |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |      |  



10



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##### Table of Contents

CECO ENVIRONMENTAL CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)







|                          |  |                                 |    |   |                                |   |    |      |  |   |      |   |  |   |    |  
|------------------------- |  | ------------------------------- | -- | - | ------------------------------ | - | -- | ---- |  | - | ---- | - |  | - | -- | -
|                          |  | Three Months EndedSeptember 30, |    |   | Nine Months EndedSeptember 30, |  
|$ in thousands            |  | 2010                            |    |   | 2009                           |   |    | 2010 |  |   | 2009 |  
|                          |  |                                 |    |  
|Health care plan:         |  |                                 |    |   |                                |   |    |      |  |   |      |   |  |   |    |  
|Interest cost             |  | $                               | 4  |   |                                | $ | 4  |      |  | $ | 12   |   |  | $ | 12 |  
|Amortization of gain      |  |                                 | (1 | ) |                                |   | (1 | )    |  |   | (3   | ) |  |   | (3 | )
|                          |  |                                 |    |   |                                |   |    |      |  |   |      |   |  |   |    |  
|                          |  |                                 |    |  
|Net periodic benefit cost |  | $                               | 3  |   |                                | $ | 3  |      |  | $ | 9    |   |  | $ | 9  |  
|                          |  |                                 |    |   |                                |   |    |      |  |   |      |   |  |   |    |  

As of September 30, 2010 we have made contributions to our defined benefit plans totaling $169,000. We
anticipate contributing $58,000 to fund the pension plan during the remainder of fiscal 2010.

The funded status of our
post-retirement health care plan is calculated on the projected postretirement obligation.

10. Stock-Based Compensation

The Company recognizes compensation expense for stock-based awards, measured at the fair value of the awards at the grant date. The
Company recognized expense of approximately $228,000 and $239,000 during the quarters ended September 30, 2010 and 2009, respectively, and $694,000 and $711,000 for the nine months ended September 30, 2010 and 2009, respectively.

11. Income Taxes

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 2006.

As of September 30, 2010 and December 31, 2009, the liability for uncertain tax benefits totaled
approximately $387,000. Included in these balances is a $148,000 tax position for which the ultimate outcome is highly certain. The Company included interest and penalties in the unrecognized tax benefit as of September 30, 2010 and
December 31, 2009.

12. Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss), changes in the pension liability that do not directly impact net earnings, if any during the period, and translation gains and losses for foreign
operations.

Comprehensive income of $769,000 included net income of $683,000 and a translation gain of $86,000 for the three
month period ended September 30, 2010, and comprehensive (loss) of $(263,000) for the three month period ended September 30, 2009 included net (loss) of $(678,000) and a translation gain of $415,000.

Comprehensive income of $1,435,000 included net income of $1,362,000 and a translation gain of $73,000 for the nine month period ended
September 30, 2010, and comprehensive (loss) of $(173,000) for the nine month period ended September 30, 2009 included net (loss) of $(948,000) and a translation gain of $775,000.

13. Product Warranties

The Companys warranty reserve is to cover the
products sold and is principally at our Effox subsidiary. The warranty accrual is based on historical claims information. The warranty reserve is reviewed and adjusted as necessary on a quarterly basis. Warranty accrual is not significant at the
Companys other operations due to the nature of the work which includes installation and testing. The change in accrued warranty expense is summarized in the following table:



|                  |  |                                 |     |   |                                |   |      |      |  |   |      |   |  |   |      |  
|----------------- |  | ------------------------------- | --- | - | ------------------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                  |  | Three Months EndedSeptember 30, |     |   | Nine Months EndedSeptember 30, |  
|$ in thousands    |  | 2010                            |     |   | 2009                           |   |      | 2010 |  |   | 2009 |  
|Beginning balance |  | $                               | 472 |   |                                | $ | 511  |      |  | $ | 498  |   |  | $ | 574  |  
|Provision         |  |                                 | 35  |   |                                |   | 138  |      |  |   | 235  |   |  |   | 219  |  
|Payments          |  |                                 | (52 | ) |                                |   | (158 | )    |  |   | (278 | ) |  |   | (302 | )
|                  |  |                                 |     |   |                                |   |      |      |  |   |      |   |  |   |      |  
|Ending balance    |  | $                               | 455 |   |                                | $ | 491  |      |  | $ | 455  |   |  | $ | 491  |  
|                  |  |                                 |     |   |                                |   |      |      |  |   |      |   |  |   |      |  



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CECO ENVIRONMENTAL CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)





14. Financial Instruments

Our financial instruments consist primarily of investments in cash and cash equivalents, receivables and certain other
assets, such as cash surrender life insurance, as well as obligations under accounts payable, long-term debt and subordinated notes. The carrying values of these financial instruments approximate fair value at September 30, 2010 and
December 31, 2009.

Most of the debt obligations approximate their reported carrying amounts based on future payments
discounted at current interest rates for similar obligations or interest rates which fluctuate with the market.

Concentrations of credit risk:

Financial instruments that potentially subject us to credit risk consist principally of cash and accounts receivable. We maintain cash and cash equivalents with various major financial institutions.

We perform periodic evaluations of the financial institutions in which our cash is invested. Concentrations of credit risk
with respect to trade and contract receivables are limited due to the large number of customers and various geographic areas. Additionally, we perform ongoing credit evaluations of our customers financial condition.

15. Discontinued Operations

During 2009, the Company discontinued the operations of H.M. White. The Company terminated its facility lease in Detroit, Michigan and all property and equipment held by H.M. White was sold at net book
value to its former owner. Accordingly, there was no gain or loss associated with the sale of H.M. Whites assets.

The
results of H.M. White are presented as discontinued operations for all periods in the consolidated financial statements. The Company did not allocate general corporate interest expense to H.M. White.

Operating results of discontinued operations are as follows:



|                                                              |  |                                 |    |  |                                |   |       |      |  |   |      |   |  |   |       |  
|------------------------------------------------------------- |  | ------------------------------- | -- |  | ------------------------------ | - | ----- | ---- |  | - | ---- | - |  | - | ----- | -
|                                                              |  | Three Months EndedSeptember 30, |    |  | Nine Months EndedSeptember 30, |  
|$ in thousands                                                |  | 2010                            |    |  | 2009                           |   |       | 2010 |  |   | 2009 |  
|Net sales                                                     |  | $                               | 14 |  |                                | $ | 1,238 |      |  | $ | 447  |   |  | $ | 4,105 |  
|                                                              |  |                                 |    |  |                                |   |       |      |  |   |      |   |  |   |       |  
|Income (loss) from discontinued operations, before income tax |  | $                               | 16 |  |                                | $ | (45   | )    |  | $ | (249 | ) |  | $ | (563  | )
|Income tax expense (benefit)                                  |  |                                 | 6  |  |                                |   | (16   | )    |  |   | (94  | ) |  |   | (197  | )
|                                                              |  |                                 |    |  |                                |   |       |      |  |   |      |   |  |   |       |  
|Income (loss) from discontinued operations                    |  | $                               | 10 |  |                                | $ | (29   | )    |  | $ | (155 | ) |  | $ | (366  | )
|                                                              |  |                                 |    |  |                                |   |       |      |  |   |      |   |  |   |       |  

Assets and liabilities related to discontinued operations consisted of the following:



|                                                                            |  |                   |     |  |                  |   |       | 
|--------------------------------------------------------------------------- |  | ----------------- | --- |  | ---------------- | - | ----- | 
|$ in thousands                                                              |  | September 30,2010 |     |  | December 31,2009 |  
|Assets                                                                      |  |                   |     |  |                  |   |       | 
|Accounts receivable                                                         |  | $                 | 103 |  |                  | $ | 1,356 | 
|Inventories                                                                 |  |                   |    |  |                  |   | 37    | 
|Costs and estimated earnings in excess of billings on uncompleted contracts |  |                   | 33  |  |                  |   | 299   | 
|Prepaid expenses and other                                                  |  |                   | 145 |  |                  |   | 185   | 
|                                                                            |  |                   |     |  |                  |   |       | 
|Total current assets of discontinued operation                              |  |                   | 281 |  |                  |   | 1,877 | 
|Property and equipment, net                                                 |  |                   |    |  |                  |   | 57    | 
|                                                                            |  |                   |     |  |                  |   |       | 
|Total assets of discontinued operation                                      |  | $                 | 281 |  |                  | $ | 1,934 | 
|                                                                            |  |                   |     |  |                  |   |       | 
|Liabilities                                                                 |  |                   |     |  |                  |   |       | 
|                                                                            |  |                  
|Accounts payable and accrued expenses                                       |  | $                 | 7   |  |                  | $ | 533   | 
|Billings in excess of costs and estimated earnings on uncompleted contracts |  |                   |    |  |                  |   | 115   | 
|                                                                            |  |                   |     |  |                  |   |       | 
|                                                                            |  |                  
|Total current liabilities of discontinued operations                        |  | $                 | 7   |  |                  | $ | 648   | 
|                                                                            |  |                   |     |  |                  |   |       | 



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CECO ENVIRONMENTAL CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)





16. Property and Equipment Held
for Sale

In order to operate at a higher utilization rate and to increase operational efficiency, the Company determined
to shift production it its North American facilities by scaling down the Kirk & Blum Contracting Services and Fabrication production at its plants in Cincinnati, Ohio, Indianapolis, Indiana and Lexington, Kentucky and migrating such
production to its facilities in Louisville, Kentucky; Columbia, Tennessee; Greensboro, North Carolina and Canton, Mississippi. The Company is currently negotiating the sale of the Cincinnati, Indianapolis and Lexington plants and believes that the
buildings and land will be sold within a one year period.



|                                     |  |                    |       |  |              |   |     |           |  |   |       |  |  |   |       | 
|------------------------------------ |  | ------------------ | ----- |  | ------------ | - | --- | --------- |  | - | ----- |  |  | - | ----- | 
|                                     |  | September 30, 2010 |      
|$ in thousands                       |  | Cincinnati         |       |  | Indianapolis |   |     | Lexington |  |   | total | 
|Land                                 |  | $                  | 825   |  |              | $ | 320 |           |  | $ | 240   |  |  | $ | 1,385 | 
|Building and improvements, net       |  |                    | 1,861 |  |              |   | 530 |           |  |   | 695   |  |  |   | 3,086 | 
|                                     |  |                    |       |  |              |   |     |           |  |   |       |  |  |   |       | 
|Property and equipment held for sale |  | $                  | 2,686 |  |              | $ | 850 |           |  | $ | 935   |  |  | $ | 4,471 | 
|                                     |  |                    |       |  |              |   |     |           |  |   |       |  |  |   |       | 



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##### Table of Contents



CECO ENVIRONMENTAL
CORP.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS



|ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Our consolidated statements of operations for the three-month and nine-month periods ended September 30, 2010 and 2009 reflect our operations consolidated with the operations of our subsidiaries.

We are one of the leading providers of air-pollution control products and services. 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
3,000 active customers among a myriad of industries including aerospace, brick, cement, ceramics, metalworking, 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.

On February 15, 2010, we appointed
Jeffrey Lang as our Chief Executive Officer. Mr. Lang has more than thirty years of executive operating management experience including Executive Vice President, Chief Operating Officer at McJunkin Red Man Corp. and twenty five years at
Ingersol Rand including leading their Industrial Air Solutions sales, service and operations for North America. Management has been closely monitoring the current economic conditions especially as some of our customers have announced that they are
facing financial distress which may adversely affect our revenues and accounts receivable. In a weak economy customers tend to lengthen the time between inquiry and order or may defer purchasing our products and services until the economy recovers.

In light of this reduction in demand and the new management expertise of Jeff Lang, we have focused on reducing costs throughout the company,
including plant rationalizations and reductions in overhead and general and administrative expenses.

Early in the third quarter of 2010, we
decided to shift production from our North American facilities by scaling down the Kirk & Blum Contracting Services and Fabrication production at our plants in Cincinnati, Ohio, Indianapolis, Indiana and Lexington, Kentucky and migrating
such production to its facilities in Louisville, Kentucky; Columbia, Tennessee; Greensboro, North Carolina and Canton, Mississippi. We are currently negotiating the sale of the Cincinnati, Indianapolis and Lexington plants and believe that the
buildings and land will be sold within a one year period, although there can be no assurance that all or any such sales will occur by such time.

Operations Overview

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.

How We Manage our Business

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.

Although we discuss four principal product lines, our operating units function as internal customers and suppliers of
each others products and services and as such, products and services are intermingled in one major project. As a result, it is not reasonably possible to segregate revenues to external customers, operating profits or identifiable assets by
product line.

During 2009, we discontinued the operations of our subsidiary, H.M. White, Inc. We terminated our facility lease in Detroit,
Michigan and all property and equipment held by H.M. White was sold at net book value to its former owner.

The results of H.M. White are
presented as discontinued operations for the periods presented.



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##### Table of Contents

CECO ENVIRONMENTAL CORP.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS





Our condensed consolidated
statements of operations for the three-month and nine-month periods ended September 30, 2010 and 2009 are as follows:



|                                                               |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  
|-------------------------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                               |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|($s in millions)                                              |  | 2010                            |      |   | 2009                           |   |      | 2010 |  |   | 2009  |  
|Net sales from continuing operations                           |  | $                               | 33.9 |   |                                | $ | 32.0 |      |  | $ | 103.7 |   |  | $ | 102.4 |  
|Cost of sales from continuing operations                       |  |                                 | 26.1 |   |                                |   | 25.1 |      |  |   | 79.5  |   |  |   | 79.3  |  
|                                                               |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |       |  
|Gross profit from continuing operations                        |  | $                               | 7.8  |   |                                | $ | 6.9  |      |  | $ | 24.2  |   |  | $ | 23.1  |  
|Percent of sales                                               |  |                                 | 23.0 | % |                                |   | 21.6 | %    |  |   | 23.3  | % |  |   | 22.6  | %
|                                                               |  |                                 |      |  
|Selling and administrative expenses from continuing operations |  | $                               | 6.6  |   |                                | $ | 7.0  |      |  | $ | 20.8  |   |  | $ | 21.8  |  
|Percent of sales                                               |  |                                 | 19.5 | % |                                |   | 21.9 | %    |  |   | 20.1  | % |  |   | 21.3  | %
|                                                               |  |                                 |      |  
|Operating income (loss) from continuing operations             |  | $                               | 1.6  |   |                                | $ | (0.3 | )    |  | $ | 3.6   |   |  | $ | 0.7   |  
|Percent of sales                                               |  |                                 | 4.7  | % |                                |   | (0.9 | )%   |  |   | 3.5   | % |  |   | 0.7   | %

Consolidated net sales from continuing
operations for the third quarter increased 5.9% or $1.9 million to $33.9 million in 2010 compared to $32.0 million in 2009. Consolidated net sales from continuing operations for the first nine months of 2010 were $103.7 million, an increase of $1.3
million or 1.3% compared to $102.4 million in 2009. The overall increase in revenues for the three months ended September 30, 2010 was primarily the result of a 25% increase in parts group sales coupled with a 4% increase in contracting
revenues and a small decrease in equipment revenues. The parts group sales have increased significantly due to smaller contractors buying components parts instead of producing them in house. The comparative nine month increase in net sales was also
attributable to significant increases in the parts group revenues which increased 29%, plus a 5% increase in equipment sales offset by a 23% decline in contracting sales.

New orders booked from continuing operations were $35.1 million during the third quarter of 2010 and $93.5 million for the first nine months of 2010, as compared to $25.3 million during the third quarter
of 2009 and $92.4 million in the first nine months of 2009. The increase in bookings for the quarter was due to increased demand for our products in the current improving economy.

Third quarter 2010 gross profit from continuing operations increased by $0.9 million or 13% to $7.8 million compared to a gross profit from continuing operations of $6.9 million during the same period in
2009. Gross profit for the quarter as a percentage of sales increased to 23.0% from 21.6%. This increase was primarily the result of an increase in the proportion of sales of higher margin component parts sales to total sales and improving margins
in the contracting group. The parts group sales, before intercompany eliminations, were 13% of total sales for the three months of 2010 compared to 10% of total sales for the same period in 2009 and the equipment group sales, before intercompany
eliminations, were 61% of total sales for the third quarter of 2010 compared to 63% sales for the third quarter of 2009. The contracting group revenues as a percent of total sales increased slightly in 2010.

For the first nine months of 2010, gross profit increased by $1.1 million or 4.8% to $24.2 million compared to $23.1 million for the same period in 2009.
Gross profit as a percentage of sales for the nine month period increased by 0.7 percentage points to 23.3% from 22.6% in 2009. This increase was primarily the result of an increase in the proportion of sales of higher margin component parts and
equipment sales to total sales and improving margins in the contracting group. The parts group sales, before intercompany eliminations, were 12% of total sales for the first nine months of 2010 compared to 9% of total sales for the same period in
2009 and the equipment group sales, before intercompany eliminations, were 62% of total sales for the third quarter of 2010 compared to 58% sales for the third quarter of 2009. The contracting group revenues as a percent of total sales declined from
32% in 2009 to 25% in 2010.

Selling and administrative expenses decreased by $0.4 million, or 5.7%, from $7.0 million to $6.6 million during
the third quarter and decreased by $1.0 million, or 4.6%, from $21.8 million to $20.8 million during the first nine months of 2010 compared to 2009. The three and nine month periods ended September 30, 2010 reflect significant reductions in
wages and related fringes due to staff reductions made as part of our streamlining and consolidation efforts. Selling and administrative expense as a percentage of sales decreased from 21.9% to 19.5% for the quarter ended September 30, 2010 and
decreased from 21.3% to 20.1% for the nine months ended September 30, 2010. The decrease in selling and administrative expenses as a percentage of sales is primarily due to reduced expenses as discussed above.

Amortization expense remained constant at $0.1 million during the third quarter of 2010 compared to the same period in 2009 and decreased by $0.2 million
to $0.4 million in the first nine months of 2010 compared to $0.6 million in the same period of 2009. These decreases were the result of certain definite life intangibles related to earlier acquisitions becoming fully amortized.



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##### Table of Contents

CECO ENVIRONMENTAL CORP.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS





We continue to optimize our
factory footprint to eliminate excess capacity. As part of this process we have recently closed our contracting group manufacturing facilities in Lexington, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio. The gain from the sale at auction of
operating machinery and equipment related to these closures was $0.3 million during the third quarter of 2010. Additionally, we realized a gain of approximately $0.3 from the sale of our Buell-Classifier Division which was sold in its entirety to
another company. The results of operations for this division were not significant to the Company. We do not anticipate any future losses or restructuring charges from these closures as the remaining machinery and equipment has been transferred to
other facilities and the anticipated selling prices of the properties is expected to be in excess of the net book value of the remaining assets. We have shifted production to our other more productive and cost effective facilities and we believe
these moves will save us approximately $2.0 million in annualized expenses going forward which will lower our cost of goods sold and continue to improve our gross margins.

Operating income increased by approximately $1.9 million to $1.6 million in the third quarter of 2010 compared to an operating loss of $0.3 million during the same quarter of 2009. The impact of higher
revenues and higher margins due to changing product mix in the third quarter as well as reduced selling and administrative costs were the primary factors for the increase in operating income. This increase in operating income was also due to a
$600,000 gain on equipment from the sale of one small division and sales of machinery and equipment related to the closed contracting facilities. Operating income for the first nine months of 2010 increased by $2.9 million to $3.6 million compared
to operating income of $0.7 million during the same period of 2009. This increase in operating income for the nine months was also due to the $600,000 gain on equipment discussed above as well as a $200,000 decrease in amortization expense which
also increased operating income. This increase was also due to the impact of increased revenues and higher margins due to changing product mix as well as reduced selling and administrative costs.

Other expense of $0.1 million for the three months ended September 30, 2010 consists primarily of losses on foreign currency transactions compared
to $0.4 million in 2009. For the nine months ended September 30, 2010, other expense of $0.1 also consisted primarily of foreign currency transaction losses compared to $0.5 million for the same period in 2009, which was primarily the result of
unrealized foreign currency losses related to our recently retired subordinated debt which was denominated in Canadian currency.

Interest
expense for the three months ended September 30, 2010 remained constant at $0.3 million compared to September 30, 2009. Interest expense for the nine months ended September 30, 2010 decreased slightly to $0.9 million from $1.0 million for
the first nine months of 2010.

Federal and state income tax expense was $0.5 million during the third quarter of 2010 compared to a tax
benefit of $0.4 million during the third quarter of 2009. Federal and state income tax expense was $1.0 million for the first nine months of 2010 compared to a tax benefit of $0.3 million in 2009.

The federal and state income tax expense for the three months ended September 30, 2010 was 42% of income from continuing operations and 40% for the
nine months ended September 30, 2010. Our effective income tax rate is affected by certain permanent timing differences including non-deductible compensation expense related to the issuance of incentive stock options and tax shortfalls related
to restricted stock vesting at prices lower than the date granted as well as foreign income which is taxed at a lower rate. The federal and state income tax benefit for the three months ended September 30, 2009 was 35% of income from operations
before income taxes.

Net income from continuing operations for the quarter ended September 30, 2010 was $0.7 million compared with a net
loss from continuing operations of $0.6 million for the same period in 2009. Net income from continuing operations for the nine months ended September 30, 2010 was $1.5 million compared with a net loss of $0.6 million for the same period in
2009.

Net income for the quarter ended September 30, 2010 was $0.7 million compared with a net loss from continuing operations of $0.7
million for the same period in 2009. Net income for the nine months ended September 30, 2010 was $1.4 million compared with a net loss of $0.9 million for the same period in 2009.

This increase in net income for the quarter and for the nine months ended September 30, 2010 was the result of the previously discussed factors.

Backlog

Our backlog consists of the
amount of revenues we expect from full performance of orders we have received that have not been completed for products and services we expect to substantially ship and deliver within the next 12 months. There can be no assurances that backlog will
be replicated, increased or translated into higher revenues in the future.



16



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##### Table of Contents

CECO ENVIRONMENTAL CORP.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS





Our backlog from continuing
operations, as of September 30, 2010 was $56.3 million compared to $66.5 million as of December 31, 2009 and $56.1 million as of September 30, 2009. The success of our business depends on a multitude of factors related to our backlog
and the orders secured during the subsequent period(s). 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 projects, weather, and labor availability also can have an affect on a
contracts profitability.

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, debt service, payment of interest on our outstanding senior debt, and convertible subordinated debt plus working capital and other general corporate requirements.

At September 30, 2010 and December 31, 2009, cash and cash equivalents totaled $4.2 million and $1.4 million respectively. Generally, we do not carry significant cash and cash equivalent
balances because excess amounts are used to pay down our revolving line of credit. Cash balances may fluctuate from time to time due to uncollected funds not being immediately swept against the credit line balance.

Total bank debt at September 30, 2010 was $3.1 million and $2.7 million at December 31, 2009. The bank debt at September 30, 2010 consists
of $1.1 million due on the revolving lines of credit and a term note totaling $2.0 million. Our current credit facility with Fifth Third Bank (the Bank Facility), as amended, includes a revolving line of credit of up to $20 million,
including letters of credit, limited to a borrowing base amount computed as 70% of eligible accounts receivable, 50% of unbilled revenues up to $2.0 million, plus 50% of eligible inventories up to $7.5 million. Unused credit availability under our
$20.0 million revolving line of credit at September 30, 2010 was $8.0 million. Interest on the outstanding borrowings is charged at the daily LIBOR rate plus 4.0% or the tranche LIBOR rate plus 3.5% for the revolver and the daily LIBOR rate
plus 4.25% or the tranche LIBOR rate plus 3.75% for the term note. The weighted average interest rate under the Bank Facility as of September 30, 2010 and September 30, 2009 was 4.07% and 3.44%, respectively.

We entered into our current Bank Facility on December 29, 2005 with Fifth Third Bank. The Bank Facility was amended on various dates and fees paid
for these amendments were deferred and are being amortized over the remaining term of the Bank Facility.

On August 6, 2010, the Company
entered into an amended and restated credit agreement effective as of June 30, 2010, which amends and restates in its entirety the Bank Facility and extends the termination date of the Line of Credit to April 1, 2013 and the term loan to
April 1, 2014. The amendment and restatement also increases the limit on letters of credit from $5.0 million to $10.0 million, resets the pricing grid to level one which temporarily increases our interest rates by 0.5% until the next pricing
grid determination date of December 31, 2010, at which time the pricing level will be re-determined based on the Companys trailing twelve month fixed charge ratio. Fees of $23,000 were paid for this amendment.

Terms of the Bank Facility, as amended, include financial covenants which require compliance at June 30, 2010 and each quarter through
March 31, 2013. The maximum capital expenditures financial covenant is $2,500,000 per year. The minimum Fixed Charge Coverage Ratio is 2.5:1.0 for each quarter through the quarter ended June 30, 2010 and 1.25:1.0 thereafter. 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, 2010, 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.

On August 14, 2008, the Company issued a Subordinated Convertible Promissory Note (the Convertible Subdebt Note) in the amount of Canadian $5.0 million to Icarus Investment Corp.
(Icarus), which is controlled by Phillip DeZwirek, our Chairman and former CEO, and Jason DeZwirek, our Secretary and one of our Directors. The Convertible Subdebt Note provided for interest to accrue at the rate of 10% per annum in
2008, 11% per annum in 2009, and 12% per annum commencing January 1, 2010 until paid. The outstanding principal and accrued interest under the Convertible Subdebt Note was convertible at any time into common stock of the Company at a
per share price of $4.75 which was the closing price immediately preceding its issuance. We repaid Canadian $3.7 million under the Convertible Subdebt Note on March 31, 2009 and fully repaid the outstanding balance of $1.2 million on
November 26, 2009.



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##### Table of Contents

CECO ENVIRONMENTAL CORP.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS





On May 15, 2009, the Company
issued a Promissory Note (Note) to Icarus in the amount of $3.0 million. The Note, which was subordinated to the Companys Bank Facility, bore interest at 12% per annum with interest payable monthly. The maturity date of the
note was the earlier of May 15, 2012 or six months after repayment of the Bank Facility. At the option of Icarus, the note was repayable in Canadian funds with a stated conversion rate of 1.1789, or CAD $3.5 million, representing the conversion
rate at the issuance date of the Note. In accordance with ASC 815 Derivatives and Hedging, this option was been bifurcated and recorded at fair value. Gains and losses resulting from the revaluation of this liability were included in
other income (expense) in the consolidated statements of operations. The Note and accrued interest was fully repaid on November 26, 2009 in the amount of $3.3 million.

On November 26, 2009, the Company issued $10.8 million principal amount subordinated convertible promissory notes to a group of investors (the Investor Notes) which includes related
parties: Icarus ($2,200,000), 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 for the three and nine month periods was $163,000 and $485,000 respectively. 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 will 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 after the issuance of the Investor Notes 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 from the date of the Investor Notes, if the closing price of the common stock of
the Company is greater than $8.00 for five consecutive days, the Company can cause conversion of the Investor Notes.

Overview of Cash
Flows and Liquidity



|                                                     |  |                                         |       |  |      |   |         |  
|---------------------------------------------------- |  | --------------------------------------- | ----- |  | ---- | - | ------- | -
|                                                     |  | For the nine months ended September 30, |      
|($s in thousands)                                   |  | 2010                                    |       |  | 2009 |  
|Net cash provided by continuing operations           |  | $                                       | 868   |  |      | $ | 10,828  |  
|                                                     |  |                                        
|Net cash provided by discontinued operations         |  |                                         | 857   |  |      |   | 2,540   |  
|                                                     |  |                                        
|Net cash provided by (used in) investing activities  |  |                                         | 1,011 |  |      |   | (997    | )
|Net cash provided by (used in) financing activities  |  |                                         | 56    |  |      |   | (12,676 | )
|                                                     |  |                                         |       |  |      |   |         |  
|Net increase (decrease) in cash and cash equivalents |  | $                                       | 2,792 |  |      | $ | (305    | )
|                                                     |  |                                         |       |  |      |   |         |  

For the nine months ended September 30, 2010, $0.9 million of cash was provided by continuing operating activities
compared to $10.8 million provided by continuing operating activities for the same period in 2009. The $9.9 million decrease in cash flows from operating activities was primarily due to a net $9.6 million decrease in cash provided by working capital
changes. That net decrease was largely due to a $13.7 million decrease in cash provided by the change in accounts receivable in the 2010 nine month period as compared to the 2009 nine month period, primarily due to lower revenues. Cash used to repay
accounts payable and accrued expenses decreased from $9.4 million in 2009 to $3.8 million in 2010. Additionally, the 2010 nine month change in uncompleted contract balances reflects cash provided of $1.1 million while the 2009 nine month change
reflects cash provided of $2.7 million. This decrease is primarily due to lower advance billings to customers. These working capital changes were offset by a $2.4 million use of cash in the first nine months of 2009 to pay income taxes that was not
repeated in the first nine months of 2010. The changes in working capital elements were mainly the result of continuing weak economic activity.



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CECO ENVIRONMENTAL CORP.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS





Depreciation and amortization
amounted to $1.3 million in for the nine months ended September 30, 2010 compared to $1.9 million for depreciation and amortization in the same period in 2009. This decrease in depreciation and amortization was due to decreased amortization of
definite life intangibles from recent acquisitions which are now fully amortized and decreased depreciation expense on now fully depreciated machinery and equipment. Our net investment in working capital (excluding cash and cash equivalents, current
portion of debt and working capital from discontinued operations) at September 30, 2010 was $15.5 million as compared to $13.3 million at December 31, 2009. We believe that our working capital needs will remain constant unless we
experience a significant increase or decrease in sales and operating income.

For the nine months ended September 30, 2010, net cash used
in investing activities related to capital expenditures for property and equipment were $0.4 million compared with $1.0 million for the same period in 2009 and cash of $1.5 million was provided by the sale of equipment related to closed facilities.
We are managing our capital expenditures in light of the current level of sales.

For the nine months ended September 30, 2010, financing
activities, which consisted of net borrowings from our bank, provided cash of $56,000 compared with cash used of $12.7 million during the same period of 2009 primarily related to net payment of debt.

When we undertake large jobs, our working capital objective is to make these projects self-funding. We try 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. Inventory remains relatively constant from quarter to quarter. Accordingly, changes in inventory do not constitute a significant part of our investment in working capital.



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CECO ENVIRONMENTAL CORP.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS





Based on our historical results,
managements experience, our current business strategy and current cash flows, we believe that our existing cash resources will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next 12
months. Nevertheless, if we generate insufficient cash flows from operations or are unable to draw the amounts needed from our Bank Facility to meet our short-term liquidity needs, we may borrow additional funds. Although management believes that we
will be able to fund our operations from current resources, there is no guarantee that we will be able to do so, however, alternative sources of funding are potentially available in the form of additional term debt to be provided by our lender,
which may be collateralized by our real estate and equipment, as well as subordinated debt to be provided by a related party. However, we cannot provide any assurances that such financing will be available to us on favorable terms or at all.

Forward-Looking Statements

This 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 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, 2009 and include, but are not limited to: our dependence on fixed price contracts and the risks associated therewith, including actual costs exceeding our estimates and our method of accounting for contract revenue; our
history of losses and possibility of further losses; fluctuations in operating results from period to period due to seasonality of our business; the effect of growth on our infrastructure, resources, and existing sales; our ability to expand our
operations in both new and existing markets; the potential for contract delay or cancellation; the potential for fluctuations in prices for manufactured components and raw materials; our ability to raise capital and the availability of capital
resources; our ability to fully utilize and retain executives; the impact of federal, state or local government regulations; labor shortages or increases in labor costs; economic and political conditions generally; and the effect of competition in
the air pollution control and industrial ventilation industry.

We 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. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise.



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CECO ENVIRONMENTAL
CORP.



|ITEM 4T. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures (as such term is defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act
of 1934, as amended (the Exchange Act)) as of the end of the period covered by this quarterly report. Based on this evaluation, such officers have concluded that these controls and procedures are effective as of the end of the period
covered by this quarterly report on Form 10-Q in ensuring that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Companys internal control over financial reporting during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.



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CECO ENVIRONMENTAL CORP.





PART II - OTHER INFORMATION



|ITEM 6. | EXHIBITS
|------- | --------



|     |  |                                                                                                                                                                                                                  
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Amended and Restated Credit Agreement entered into August 17, 2010, effective date June 30, 2010 (Incorporated by reference from Exhibit 10.1 of the Companys Current
Report on Form 8-K filed August 19, 2010).
|     | 
|10.2 |  | Sixth Amended and Restated Revolving Credit Promissory Note, effective date June 30, 2010 (Incorporated by reference from Exhibit 10.2 of the Companys Current Report on Form
8-K filed August 19, 2010).       
|     | 
|10.3 |  | Amended and Restated Term Promissory Note, effective date June 30, 2010 (Incorporated by reference from Exhibit 10.1 of the Companys Current Report on Form 8-K filed August
19, 2010).                         
|     | 
|10.4 |  | Purchase Agreement dated August 19, 2010                                                                                                                                                                         
|     | 
|31.1 |  | Rule 13(a)/15d-14(a) Certification by Chief Executive Officer                                                                                                                                                    
|     | 
|31.2 |  | Rule 13(a)/15d-14(a) Certification by Chief Financial Officer                                                                                                                                                    
|     | 
|32.1 |  | Certification of Chief Executive Officer (18 U.S. Section 1350)                                                                                                                                                  
|     | 
|32.2 |  | Certification of Chief Financial Officer (18 U.S. Section 1350)                                                                                                                                                  



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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/    DENNIS W.
BLAZERDennis W. BlazerV.P. - Finance and Administration and Chief Financial Officer


Date: November 15, 2010



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