CECO Environmental Corp. Acquisition Summary
Business Context and Reporting Period
Date of Report: December 7, 1999
Company: CECO Environmental Corp.
Event: Acquisition of The Kirk & Blum Manufacturing Company ("K&B") and kbd/Technic, Inc. (collectively, the "Companies").
Target Profile: K&B is a leading provider of turnkey engineering, design, manufacturing, and installation services in the air pollution control industry, headquartered in Cincinnati, Ohio. In 1998, it was ranked the largest specialty sheet metal contractor in the U.S. by Engineering News Record.
Key Financial Metrics and Transaction Details
Purchase Price: Approximately $25 million in cash plus the assumption of $5 million in existing indebtedness.
Financing Structure:
- Bank Loan Facility: $25 million in term loans and a $10 million revolving credit facility provided by PNC Bank, Fifth Third Bank, and Bank One, N.A.
- Term Loan Maturities: $14.5 million (Nov 2004), $8.5 million (May 2006), and $2 million (90 days).
- Subordinated Debt: $5 million placed as a condition of bank financing ($4 million from Green Diamond Oil Corp., $500k from ICS Trustee Services, $500k from Harvey Sandler).
- Subordinated Debt Terms: 12% annual interest; warrants issued for 1,000,000 shares at $2.25/share.
Target Financials (K&B - Year Ended Dec 31, 1998):
| Metric | 1998 | 1997 |
|---|---|---|
| Net Sales | $69,443,929 | $63,420,741 |
| Gross Profit | $12,651,611 | $11,468,874 |
| Income from Operations | $3,797,118 | $3,104,504 |
| Net Income | $3,609,353 | $3,354,971 |
| Total Assets | $25,050,820 | $26,380,656 |
| Shareholders' Equity | $13,478,149 | $17,689,570 |
Note: Financial data for kbd/Technic, Inc. is not provided as it is considered financially insignificant.
Material Changes and Compensation Arrangements
Employment Agreements: Five-year agreements executed with Richard J. Blum, Lawrence J. Blum, and David D. Blum.
- Salaries: $206,000 (Richard), $100,000 (Lawrence), $154,000 (David).
- Stock Warrants: Grants totaling 999,000 shares exercisable at $2.9375 (closing price Dec 7, 1999), vesting 25% annually over four years.
- Performance Bonus: Eligible for 25% of CECO's net income before interest and taxes in excess of $4,000,000 annually (2000-2004). Bonus payments are subordinated to bank financing and accrue 8% interest if deferred due to default.
Corporate Structure: CECO Group, Inc. created as a wholly-owned subsidiary to hold the acquired companies. Richard J. Blum appointed President and CEO of CECO Group, Inc.
Outlook, Risks, and Contingencies
Integration: CECO intends to integrate the acquired companies with existing businesses without changing their core operations.
Regulatory Compliance: kbd/Technic, Inc. stock is held in a voting trust with Richard J. Blum as trustee to satisfy Ohio state law requirements for engineering licensure (majority ownership by a licensed engineer).
Financial Risks:
- Leverage: Significant new debt load ($30M bank facility + $5M subordinated debt) secured by a lien on substantially all assets of CECO and subsidiaries.
- Covenants: Bonus payments and financing are subject to strict covenants; default triggers interest accrual on unpaid bonuses and potential financing issues.
- Related Party Transactions: $4 million of subordinated debt provided by Green Diamond Oil Corp., owned 50% by CECO's Chairman/CEO (Phillip DeZwirek) and his son.
Investor Verification Checklist
- Verify the pro forma financial information (to be filed by Feb 18, 2000) to assess the impact of the $30M debt load on CECO's leverage ratios.
- Confirm the status of the $2 million term loan due 90 days post-closing and the execution of the life insurance policy loan strategy.
- Review the subordination agreement details regarding the $5 million subordinated debt and the 12% interest rate impact on future earnings.
- Monitor the performance of the acquired entities against the $4 million net income threshold required to trigger executive bonuses.
- Assess the concentration risk of the top 50 customers (54% of K&B's 1998 revenue) and the impact of union labor contracts expiring at various dates.