CECE CECO Environmental Corporation

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K/A

(Amendment No. 1)

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): September 3, 2015

 

 

CECO Environmental Corp.

(Exact Name of registrant as specified in its charter)

 

 

 

Delaware		000-7099		13-2566064
(State or other jurisdiction of incorporation)		(Commission File Number)		(IRS Employer Identification No.)

 

4625 Red Bank Road, Cincinnati, OH		45227
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 513-458-2600

Not applicable

(Former Name or Former Address, if Changed Since Last Report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)

 

 

 

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EXPLANATORY NOTE

CECO Environmental Corp. (the “Company”) filed a current report on Form 8-K on September 3, 2015 (the “Original 8-K”) to report, among other things, the completion of its acquisition of PMFG, Inc. (“PMFG”). This Current Report on Form 8-K/A amends and restates in its entirety Item 9.01 of the Original Form 8-K to include the required financial statements and to present certain unaudited pro forma financial information in connection with the acquisition, which are filed as exhibits 99.1 hereto. The information previously reported in the Original 8-K is not hereby amended and is hereby incorporated by reference into this Form 8-K/A.

Item 9.01 Financial Statements and Exhibits.

(a) Financial statements of businesses acquired.

The audited consolidated financial statements of PMFG as of and for the years ended June 27, 2015 and June 28, 2014 contained in pages 41 through 71 of PMFG’s Annual Report on Form 10-K for the year ended June 27, 2015 (SEC File No. 1-34156).

(b) Pro forma financial information.

The unaudited pro forma condensed combined financial information relating to the Company’s acquisition of PMFG is filed as Exhibit 99.1 to this Current Report on Form 8-K/A and is incorporated herein by reference.

(d) Exhibits.

 

Exhibit No.		Description
23.1		Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm.
99.1		Unaudited Pro Forma Condensed Combined Financial Information.

 

 

Signatures

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 hereunto duly authorized.

 

Date: November 17, 2015				CECO Environmental Corp.
				By:		/s/ Edward J. Prajzner
						Edward J. Prajzner
						Chief Financial Officer and Secretary

 

 

EXHIBIT INDEX

 

Exhibit No.		Description
23.1		Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm.
99.1		Unaudited Pro Forma Condensed Combined Financial Information.

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our reports dated August 31, 2015 with respect to the consolidated financial statements and internal control over financial reporting of PMFG, Inc. and subsidiaries incorporated by reference in this Current Report of CECO Environmental Corp. on Form 8-K. We hereby consent to the incorporation by reference of said reports in the Registration Statements of CECO Environmental Corp. on Forms S-3 (File No. 333-130294, File No. 333-142052, and File No. 333-183275), on Forms S-8 (File No. 333-33270, File No. 333-143527, File No. 333-159948, File No. 333-200000, and File No. 333-206743), and on Forms S-4 (File No. 333-204816 and File No. 333-188797).

/s/ GRANT THORNTON LLP

Dallas, Texas

November 17, 2015

Exhibit 99.1

CECO Environmental Corp. and Subsidiaries

Unaudited Pro Forma Condensed Combined Financial Information

In thousands, except share data

On September 3, 2015, the Company completed its acquisition of PMFG, Inc., a Delaware corporation (“PMFG”). Pursuant to an Agreement and Plan of Merger, dated as of May 3, 2015 (the “Merger Agreement”), among the Company, Top Gear Acquisition Inc., a Delaware corporation and a direct wholly owned subsidiary of the Company (“Merger Sub I”), Top Gear Acquisition II LLC, a Delaware limited liability company and a direct wholly owned subsidiary of the Company (“Merger Sub II”), and PMFG, Merger Sub I merged with and into PMFG (the “First Merger”), with PMFG as the surviving corporation, and subsequently, also on September 3, 2015, the surviving corporation of the First Merger merged with and into Merger Sub II (the “Second Merger” and, together with the First Merger, the “Mergers”), with Merger Sub II surviving as a wholly owned subsidiary of the Company under the name “PMFG Acquisition LLC.”

In the First Merger, PMFG’s shareholders had the option to elect to exchange each share of PMFG common stock for either (i) $6.85 in cash, without interest (the “Cash Consideration”), or (ii) shares of the Company’s common stock valued at $6.85 (the “Stock Consideration”), based on the volume weighted average trading price of the Company’s common stock for the 15-trading day period ending on September 2, 2015, the last trading day before the closing of the First Merger (the “Company Trading Price”), subject to a collar so that there was a maximum exchange ratio of 0.6456 shares of Company common stock for each share of PMFG common stock and a minimum exchange ratio of 0.5282 shares of Company common stock for each share of PMFG common stock. Overall elections were subject to proration so that in the aggregate approximately 45% of the PMFG shares were exchanged for cash and 55% for shares of Company common stock.

At the effective time of the First Merger, approximately 44.5% of the shares of PMFG common stock converted into the right to receive the $6.85 per share Cash Consideration, for an approximate total of $64.6 million in aggregate Cash Consideration. The Company Trading Price was $9.6655. As a result, each of the remaining shares of PMFG common stock converted into the right to receive 0.6456 shares of Company common stock, or an approximate total of 7,602,328 shares of Company common stock in aggregate Stock Consideration. Accordingly, the fair value of the common stock issued has been determined to be $72.1 million, which reflects the estimated fair value of the shares based on the closing price of CECO’s common stock on the acquisition date. Following the issuance of these additional shares, there were approximately 33,962,292 shares of Company common stock issued and outstanding.

In accordance with the proration and reallocation provisions of the Merger Agreement, because the $6.85 per share Cash Consideration was oversubscribed by PMFG shareholders prior to the election deadline on September 1, 2015 at 5:00 p.m. Eastern time (the “Election Deadline”), (a) each PMFG share for which a valid stock election was made or for which no valid cash or stock election was made prior to the Election Deadline was automatically cancelled and converted into the right to receive the Stock Consideration and (b) each PMFG shareholder of record that made a valid cash election prior to the Election Deadline will receive (i) the Cash Consideration for approximately 58.05% of such holder’s PMFG shares for which a valid cash election was made and (ii) the Stock Consideration for approximately 41.95% of such holder’s PMFG Shares for which a valid cash election was made.

No fractional shares of Company common stock were issued to any PMFG shareholder in the First Merger. Each PMFG shareholder who would otherwise have been entitled to receive a fraction of a share of Company common stock in the First Merger received cash in an amount equal to the product obtained by multiplying (i) the fractional share interest which such holder would otherwise be entitled to receive by (ii) $9.6655 (which represents the Company Trading Price).

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In addition, holders of outstanding PMFG options and restricted stock units received an aggregate amount of cash equal to approximately $1.6 million as consideration for the cancellation of the options and restricted stock units held by them immediately prior to the effective time of the First Merger.

The following unaudited pro forma condensed combined financial information of CECO reflects the pro forma impact of three transactions: The Emtrol Transaction (which term is defined below) that was completed in November 2014; the CCA Transaction (which term is defined below) that was completed in March 2014; and the Mergers that were completed in September 2015.

The unaudited pro forma condensed combined statements of income assume that the Emtrol Transaction, the CCA Transaction and the Mergers were consummated on January 1, 2014. The unaudited pro forma condensed combined statements of income should be read in conjunction with (a) CECO’s Annual Report on Form 10-K for the year ended December 31, 2014, (b) CECO’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015, (c) PMFG’s Annual Report on Form 10-K for the year ended June 27, 2015, (d) CECO’s Current Report on Form 8-K/A filed with the SEC on January 20, 2015, (e) PMFG’s Current Report on Form 8-K/A filed with the SEC on June 13, 2014, and (f) PMFG’s Quarterly Reports on Form 10-Q for the quarterly periods ended December 28, 2013 and December 27, 2014. The unaudited condensed combined balance sheet as of September 30, 2015 reflects the impact of the Mergers, and is included in CECO’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015.

The unaudited pro forma condensed combined financial information is provided for illustrative purposes only and is not necessarily indicative of the financial results that would have occurred if the Emtrol Transaction, the CCA Transaction and/or the Mergers had been consummated on the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future operating results of CECO. No effect has been given in the unaudited pro forma condensed combined financial information for the cost of any integration activities or benefits that may result from synergies that may be derived from any integration activities. The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting as required by the accounting guidance for business combinations. The detailed valuation studies necessary to arrive at the required fair market value of the PMFG assets to be acquired and the liabilities to be assumed and the related allocations of the purchase price have not been completed as of the date of this filing. The purchase price has been allocated to the assets acquired and liabilities assumed based upon management’s preliminary estimate of their respective fair values as of the date of acquisition. Therefore, the actual amounts recorded as of the completion of the analysis might differ materially from the information presented in the unaudited pro forma condensed combined financial statements. The pro forma adjustments, as described in the accompanying notes, are based upon available information and certain assumptions that are believed to be reasonable as of the date of this document.

Emtrol Transaction

On November 3, 2014, CECO, through its subsidiary Fisherman-Klosterman, Inc., acquired 100% of the membership interests of Emtrol LLC, a New York limited liability company (“Emtrol”), pursuant to a membership interest purchase agreement among CECO and each of the members of Emtrol (the “Emtrol Transaction”). Emtrol and its subsidiaries are engaged in the business of designing and manufacturing fluid catalytic cracking and industrial cyclone technology for the refinery, petrochemical and chemical sectors.

CECO paid cash at closing of $31.9 million, which was financed with additional debt. CECO also issued 453,858 shares of CECO’s common stock with an agreed upon value of $6.0 million computed based on the average closing price of CECO’s common stock for the thirty trading days immediately preceding the acquisition date. The shares of common stock issued to the former members of Emtrol contain restrictions on sale or transfer for periods ranging from one to two years from the acquisition date. Accordingly, the fair value of the common stock issued has been determined to be $5.8 million, which reflects the estimated fair value of the shares based on the closing price of CECO’s common stock on the acquisition date and a discount related to the sale and transfer restrictions.

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CCA Transaction

On March 28, 2014, PMFG, through its subsidiary Peerless Mfg. Co. (“Peerless”), completed the acquisition of substantially all the assets of Combustion Components Associates, Inc. (“CCA”), other than cash and the stock of a CCA subsidiary, pursuant to an asset purchase agreement among PMFG, CCA and the sole shareholder of CCA (the “CCA Transaction”). CCA is a leading provider of in-furnace and post-combustion control technologies. CCA technology is used to improve efficiency and reduce emissions at utility power plants, pulp and paper mills, chemical plants, oil refineries and other industrial facilities.

The purchase price was approximately $8.6 million in cash. Of the purchase price, $1.5 million is in escrow to secure the indemnification obligations of CCA and its sole shareholder.

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CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

FOR THE YEAR ENDED DECEMBER 31, 2014

 

		Historical CECO				Historical Emtrol						Pro forma Adjustments Emtrol				Pro forma Condensed Combined CECO				Historical PMFG(1)				Historical CCA						Pro forma Adjustments CCA				Pro forma Condensed Combined PMFG						Pro forma Adjustments PMFG				Pro forma Condensed Combined
		(In thousands, except per share data)
Net sales		$	263,217			$	33,152									$	296,369			$	158,145			$	2,700									$	160,845									$	457,214
Cost of sales			178,394				27,479										205,873				112,453				1,755										114,208			H		$	925				321,138
																																						I			132
Gross profit			84,823				5,673					$	—				90,496				45,692				945					$	—				46,637						(1,057	)			136,076
Selling and administrative expenses			51,440				3,929										55,369				50,149				702										50,851										106,220
Acquisitions and integration expenses			1,269				—			A			(343	)			926				576				—			A			(576	)			—			A			(926	)			—
Amortization and earnout expenses			10,151				—			B			1,830				11,981				787				—			G			23				810			J			8,933				21,724
Impairment of intangible assets			—				—										—				26,631				—										26,631										26,631
Legal reserves			300				—										300				—				—										—										300
Income (loss) from operations			21,663				1,744						(1,487	)			21,920				(32,451	)			243						553				(31,655	)					(9,064	)			(18,799	)
Other (expense) income, net			(2,311	)			103										(2,208	)			122				—										122			K			(29	)			(2,115	)
Interest expense			(3,138	)			—			C			(60	)			(3,792	)			(1,779	)			—										(1,779	)		L			(1,778	)			(7,934	)
										D			(594	)																								M			(585	)
Income (loss) before taxes			16,214				1,847						(2,141	)			15,920				(34,108	)			243						553				(33,312	)					(11,456	)			(28,848	)
Income tax expense (benefits)			3,137				267			E			(728	)			2,947				(1,053	)			85			E			188				(780	)		E			(3,895	)			(1,728	)
										F			271
Net income attributable to noncontrolling interest			—				—														167														167										167
Net income (loss)		$	13,077			$	1,580					$	(1,684	)		$	12,973			$	(33,222	)		$	158					$	365			$	(32,699	)				$	(7,561	)		$	(27,287	)
Per share data:
Basic net income (loss) per share		$	0.51													$	0.50																											$	(0.81	)
Diluted net income (loss) per share		$	0.50													$	0.49																											$	(0.80	)
Weighted average number of common shares outstanding:
Basic			25,751										380				26,131																					N			7,602				33,733
Diluted			26,197										380				26,577																					N			7,602				34,179

 

(1)	Statement of income information for PMFG, Inc. is for the period from December 29, 2013 to December 27, 2014.

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements

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CECO ENVIRONMENTAL CORP. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2015

 

		Historical CECO				Historical PMFG(1)						Pro forma Adjustments				Pro forma Condensed Combined
		(In thousands, except per share data)
Net sales		$	167,946			$	72,464									$	240,410
Cost of sales			120,343				54,498			I		$	66				174,907
Gross profit			47,603				17,966						(66	)			65,503
Selling and administrative expenses			28,104				25,590										53,694
Acquisitions and integration expenses			1,293				—			A			(1,293	)			—
Amortization and earnout expenses			10,739				334			J			1,478				12,551
Impairment of intangible assets			—				406						—				406
Income (loss) from operations			7,467				(8,364	)					(251	)			(1,148	)
Other (expense) income, net			(1,174	)			371			K			(14	)			(817	)
Interest (expense) income			(2,134	)			(885	)		L			(889	)			(4,200	)
										M			(292	)
Income (loss) before taxes			4,159				(8,878	)					(1,446	)			(6,165	)
Income tax expense (benefit)			1,857				111			E			(492	)			1,476
Net income attributable to noncontrolling interest			—				49										49
Net income (loss)		$	2,302			$	(9,038	)				$	(954	)		$	(7,690	)
Per share data:
Basic net income (loss) per share		$	0.09													$	(0.23	)
Diluted net income (loss) per share		$	0.09													$	(0.22	)
Weighted average number of common shares outstanding:
Basic			26,278							N			7,602				33,880
Diluted			26,644							N			7,602				34,246

 

(1)	Statement of income information for PMFG, Inc. is for the period from December 28, 2014 to June 27, 2015.

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements

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Notes to Unaudited Pro Forma Condensed Combined Financial Information

(amounts in thousands, except share data)

1. Description of Transaction

On September 3, 2015, the Company completed its acquisition of PMFG, Inc., a Delaware corporation (“PMFG”). Pursuant to an Agreement and Plan of Merger, dated as of May 3, 2015 (the “Merger Agreement”), among the Company, Top Gear Acquisition Inc., a Delaware corporation and a direct wholly owned subsidiary of the Company (“Merger Sub I”), Top Gear Acquisition II LLC, a Delaware limited liability company and a direct wholly owned subsidiary of the Company (“Merger Sub II”), and PMFG, Merger Sub I merged with and into PMFG (the “First Merger”), with PMFG as the surviving corporation, and subsequently, also on September 3, 2015, the surviving corporation of the First Merger merged with and into Merger Sub II (the “Second Merger” and, together with the First Merger, the “Mergers”), with Merger Sub II surviving as a wholly owned subsidiary of the Company under the name “PMFG Acquisition LLC.”

In the First Merger, PMFG’s shareholders had the option to elect to exchange each share of PMFG common stock for either (i) $6.85 in cash, without interest (the “Cash Consideration”), or (ii) shares of the Company’s common stock valued at $6.85 (the “Stock Consideration”), based on the volume weighted average trading price of the Company’s common stock for the 15-trading day period ending on September 2, 2015, the last trading day before the closing of the First Merger (the “Company Trading Price”), subject to a collar so that there was a maximum exchange ratio of 0.6456 shares of Company common stock for each share of PMFG common stock and a minimum exchange ratio of 0.5282 shares of Company common stock for each share of PMFG common stock. Overall elections were subject to proration so that in the aggregate approximately 45% of the PMFG shares were exchanged for cash and 55% for shares of Company common stock.

At the effective time of the First Merger, approximately 44.5% of the shares of PMFG common stock converted into the right to receive the $6.85 per share Cash Consideration, for an approximate total of $64.6 million in aggregate Cash Consideration. The Company Trading Price was $9.6655. As a result, each of the remaining shares of PMFG common stock converted into the right to receive 0.6456 shares of Company common stock, or an approximate total of 7,602,328 shares of Company common stock in aggregate Stock Consideration. Accordingly, the fair value of the common stock issued has been determined to be $72.1 million, which reflects the estimated fair value of the shares based on the closing price of CECO’s common stock on the acquisition date. Following the issuance of these additional shares, there were approximately 33,962,292 shares of Company common stock issued and outstanding.

In accordance with the proration and reallocation provisions of the Merger Agreement, because the $6.85 per share Cash Consideration was oversubscribed by PMFG shareholders prior to the election deadline on September 1, 2015 at 5:00 p.m. Eastern time (the “Election Deadline”), (a) each PMFG share for which a valid stock election was made or for which no valid cash or stock election was made prior to the Election Deadline was automatically cancelled and converted into the right to receive the Stock Consideration and (b) each PMFG shareholder of record that made a valid cash election prior to the Election Deadline will receive (i) the Cash Consideration for approximately 58.05% of such holder’s PMFG shares for which a valid cash election was made and (ii) the Stock Consideration for approximately 41.95% of such holder’s PMFG Shares for which a valid cash election was made.

No fractional shares of Company common stock were issued to any PMFG shareholder in the First Merger. Each PMFG shareholder who would otherwise have been entitled to receive a fraction of a share of Company common stock in the First Merger received cash in an amount equal to the product obtained by multiplying (i) the fractional share interest which such holder would otherwise be entitled to receive by (ii) $9.6655 (which represents the Company Trading Price).

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In addition, holders of outstanding PMFG options and restricted stock units received an aggregate amount of cash equal to approximately $1.6 million as consideration for the cancellation of the options and restricted stock units held by them immediately prior to the effective time of the First Merger.

As a result of the First Merger, shares of PMFG common stock have ceased trading on the NASDAQ Global Select Market Exchange and have been delisted.

2. Basis of Presentation

The following unaudited pro forma condensed combined financial information of CECO reflects the pro forma impact of three transactions: The Emtrol Transaction (which term is defined below) that was completed in November 2014; the CCA Transaction (which term is defined below) that was completed in March 2014; the Mergers that were completed in September 2015.

The unaudited pro forma condensed combined statements of income assume that the Emtrol Transaction, the CCA Transaction and the Mergers were consummated on January 1, 2014. The unaudited pro forma condensed combined statements of income should be read in conjunction with (a) CECO’s Annual Report on Form 10-K for the year ended December 31, 2014, (b) CECO’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015, (c) PMFG’s Annual Report on Form 10-K for the year ended June 27, 2015, (d) CECO’s Current Report on Form 8-K/A filed with the SEC on January 20, 2015, (e) PMFG’s Current Report on Form 8-K/A filed with the SEC on June 13, 2014, and (f) PMFG’s Quarterly Reports on Form 10-Q for the quarterly periods ended December 28, 2013 and December 27, 2014. The unaudited condensed combined balance sheet as of September 30, 2015 reflects the impact of the Mergers, and is included in CECO’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015.

CECO’s most recent fiscal year end was December 31, 2014, and PMFG’s most recent fiscal year end for which financial information was available was June 27, 2015. In order to provide more comparable information, and for the purpose of preparing unaudited pro forma information, CECO has computed certain financial information for PMFG as if PMFG’s most recent fiscal year end was December 31, 2014. This information is unaudited and derived from PMFG’s audited financial statements as of June 28, 2014 and its unaudited financial statements as of December 27, 2014 and December 28, 2013. Management of CECO believes this presentation provides better information given the presentation of comparable results for equal twelve-month periods.

The unaudited pro forma condensed combined financial information is provided for illustrative purposes only and is not necessarily indicative of the financial results that would have occurred if the Emtrol Transaction, the CCA Transaction and/or the Mergers had been consummated on the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future operating results of CECO. No effect has been given in the unaudited pro forma condensed combined financial information for the cost of any integration activities or benefits that may result from synergies that may be derived from any integration activities. The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting as required by the accounting guidance for business combinations. The detailed valuation studies necessary to arrive at the required fair market value of the PMFG assets to be acquired and the liabilities to be assumed and the related allocations of the purchase price have not been completed as of the date of this filing. The purchase price has been allocated to the assets acquired and liabilities assumed based upon management’s preliminary estimate of their respective fair values as of the date of acquisition. Therefore, the actual amounts recorded as of the completion of the analysis might differ materially from the information presented in the unaudited pro forma condensed combined financial statements. The pro forma adjustments, as described in the accompanying notes, are based upon available information and certain assumptions that are believed to be reasonable as of the date of this document.

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Emtrol Transaction

On November 3, 2014, CECO, through its subsidiary Fisherman-Klosterman, Inc., acquired 100% of the membership interests of Emtrol LLC, a New York limited liability company (“Emtrol”), pursuant to a membership interest purchase agreement among CECO and each of the members of Emtrol (the “Emtrol Transaction”). Emtrol and its subsidiaries are engaged in the business of designing and manufacturing fluid catalytic cracking and industrial cyclone technology for the refinery, petrochemical and chemical sectors.

CECO paid cash at closing of $31.9 million, which was financed with additional debt. CECO also issued 453,858 shares of CECO’s common stock with an agreed upon value of $6.0 million computed based on the average closing price of CECO’s common stock for the thirty trading days immediately preceding the acquisition date. The shares of common stock issued to the former members of Emtrol contain restrictions on sale or transfer for periods ranging from one to two years from the acquisition date. Accordingly, the fair value of the common stock issued has been determined to be $5.8 million, which reflects the estimated fair value of the shares based on the closing price of CECO’s common stock on the acquisition date and a discount related to the sale and transfer restrictions.

CCA Transaction

On March 28, 2014, PMFG, through its subsidiary Peerless Mfg. Co. (“Peerless”), completed the acquisition of substantially all the assets of Combustion Components Associates, Inc. (“CCA”), other than cash and the stock of a CCA subsidiary, pursuant to an asset purchase agreement among PMFG, CCA and the sole shareholder of CCA (the “CCA Transaction”). CCA is a leading provider of in-furnace and post-combustion control technologies. CCA technology is used to improve efficiency and reduce emissions at utility power plants, pulp and paper mills, chemical plants, oil refineries and other industrial facilities.

The purchase price was approximately $8.6 million in cash. Of the purchase price, $1.5 million is in escrow to secure the indemnification obligations of CCA and its sole shareholder.

Acquisition-related transaction costs are not included as a component of consideration transferred but are accounted for as expenses in the periods in which such costs are incurred. The unaudited pro forma condensed combined statements of income do not include Emtrol, CCA, or PMFG acquisition-related transaction costs.

3. Assets Acquired and Liabilities Assumed

A summary of the total purchase price consideration to be allocated by CECO in the acquisition of PMFG is provided below.

 

Cash payments at closing		$	64,580
Value of common stock transferred			72,146
Total purchase price consideration to be allocated		$	136,726

The preliminary estimated assets acquired and liabilities assumed by CECO in the acquisition of PMFG, reconciled to the consideration transferred, are provided below and are presented as if the acquisition had occurred on June 30, 2015.

 

Book value of net assets acquired		$	87,612
Less noncontrolling interest(1)			(6,000	)
Adjustment for elimination of historical goodwill			(15,799	)
Adjustment for elimination of historical intangible			(10,441	)

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Adjusted book value of net tangible assets acquired			55,372
Adjustments to:
Fair Market Value Tangible Assets			2,475
Goodwill			46,604
Intangible assets—finite life			34,900
Intangible assets—indefinite life			10,750
Deferred tax liability			(13,375	)
Total purchase price consideration to be allocated		$	136,726

 

(1)	The book value of the non-controlling interest approximates its fair value.

4. Pro Forma Adjustments

This note should be read in conjunction with Note 1. Description of Transaction; Note 2. Basis of Presentation; and Note 3. Assets Acquired and Liabilities Assumed.

Adjustments under the heading “Pro Forma Adjustments” represent the following:

 

A.

To eliminate acquisition expenses recorded by CECO and PMFG. Such acquisition expenses consist of legal, investment banking, accounting and other transaction-related expenses associated with the Mergers and past acquisitions.

 

B.

To record the incremental amortization expense related intangible assets acquired in the Emtrol Transaction. The following is a summary of the acquired intangible asset categories, fair value and average amortization periods:

 

		Fair Value				Average Amortization Period		Estimated Annual Amortization Expense
Intangible assets—finite life Customer relationships		$	10,740			Cash flow		$	1,908
Intangible assets—finite life Tradename		$	1,390			10 years		$	139
Intangible assets—finite life Noncompetition agreements		$	760			5 year		$	152
Total		$	12,890					$	2,199

 

C.

To record amortization of $370 of debt issuance costs paid in connection with the Emtrol Transaction.

 

D.

To record interest on the additional $32,000 term loan facility in connection with the Emtrol Transaction at Eurocurrency (as defined in the credit agreement) rate plus 200 basis points (2.25%, which is the market rate as of the date of this filing).

 

E.

To record tax consequences of the pro forma adjustments at the current statutory rate of 34%.

 

F.

To record U.S. Federal and New York State taxes at a combined rate of 36%, as the U.S. Emtrol entity is now taxed as a C-Corp.

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G.

To record the incremental amortization expense related intangible assets acquired in the CCA Transaction. The following is a summary of the acquired intangible asset categories, fair value and average amortization periods:

 

		Fair Value				Average Amortization Period		Estimated Annual Amortization Expense
Intangible assets—indefinite life Design guidelines		$	1,350			Indefinite		$	—
Intangible assets—finite life Customer relationships		$	900			10 years		$	90
Intangible assets—indefinite life Tradenames		$	450			Indefinite		$	—
Intangible assets—finite life Backlog		$	60			0.5 years		$	60
Total		$	2,760					$	150

 

H.

To record step up to fair value on acquired work in progress and finished goods inventory of $925, which is expected to turnover within one year.

 

I.

To record step up on acquired personal and real property of $1,550 and the associated depreciation expense. The personal property is to be depreciated over an average of 8 years, and the real property over an average of 40 years, for incremental depreciation of $132 annually.

 

J.

To record the incremental amortization expense related intangible assets acquired in the Mergers. CECO engaged a third party valuation specialist to assist management. Based on the preliminary assessment, the acquired intangible asset categories, fair value and average amortization periods are as follows:

 

		Fair Value				Average Amortization Period		Estimated Annual Amortization Expense
Intangible assets—finite life customer relationships and other		$	21,160			Cash flow		$	2,328
Intangible assets—finite life technology			7,620			Cash flow			1,295
Intangible assets—finite life backlog			6,120			1 year			6,120
Intangible assets—indefinite life tradenames			10,750			Indefinite			—
Total		$	45,650					$	9,743

The preliminary estimated fair value of customer relationships and backlog is based upon estimated discounted cash flows associated with existing customers and projects using historical and market participant data. The preliminary estimated fair value of the tradename and technology is based on the “relief from royalty” method under which fair value is estimated to be the present value of royalties saved because CECO owns the tradename and technology and, therefore, does not have to pay a royalty for its use.

 

K.

To adjust for foregone interest income on cash paid for the acquisition of $11,494. The estimated amount of foregone interest is based on an estimated 0.25% yield based on average available short-term interest rates during such time.

 

L.

To record interest expense on the revolving credit facility and term loan facility of $53,086 under CECO’s credit facilities in connection with the PMFG acquisition at 90 Day LIBOR plus 300 bps (3.35%).

 

M.

To record expense on approximately $2,925 of deferred charges related to debt issuance costs and commitment fees associated with the amended debt facilities in connection with the Mergers and record the expense of $585 annually. For more information on the amended debt facilities, see CECO’s Form 8-K filed with the SEC on September 3, 2015.

 

N.

To record the issuance of an estimated 7.6 million shares of CECO common stock with an estimated value of $72,146.