CECO Environmental Corp (CECO) 2013 Q3 法說會逐字稿

Good morning. My name is Tamika and I will be your conference operator today. At this time, I would like to welcome everyone to the CECO Environmental Corp. Third Quarter 2013 Earnings Call. (Operator Instructions) Thank you. I would now like to turn the call over to your host, Mr. Shawn Severson of Blue Shirt Group, CECO investor relations firm. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for joining us on CECO Environmental's conference call and webcast to discuss the financial results for the three-month and nine-month periods ended September 30, 2013. On the call with me today are Jeff Lang, President and CEO, and Neal Murphy, Chief Financial Officer. Jeff and Neal will be reviewing the quarter and year-to-date results and will also provide an update on the Company's strategy and outlook. Please note that in addition to traditional reported GAAP earnings, we will provide non-GAAP financial measures in our press release today to enable better assessment of the ongoing nature of CECO's core operations. Jeff Lang's comments will primarily focus on non-GAAP financial measures, and Neal will address differences between GAAP and non-GAAP measures in his remarks.

Following our prepared remarks, we will open the call to questions. The call is being webcast and be--and can be accessed at CECO's website at cecoenviro.com. The webcast will be posted on CECO's website for replay approximately two hours following the end of this call. The replay will stay on the site for on-demand review over the next several months.

Before we begin, I would like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings, including our annual report on the Form 10-K for the year-ended December 31, 2012. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today whether a result of new information, future events, or otherwise.

Today's presentation will also include reference to certain non-GAAP financial measures. We have reconciled the comparable GAAP to non-GAAP numbers in today's press release.

And now, I'd like to turn the call over to Jeff to begin the discussion.

Thank you, Shawn. Good morning, everyone. It has been a very exciting quarter for CECO highlighted by the closing and integration of the Met-Pro Corporation, coupled with the Adwest and the Aarding acquisitions earlier this year, has resulted in a tremendous transformation of CECO's business platform during 2013, resulting in even a stronger, more global diverse business. The Company is positioned very well for global growth and margin expansion.

I'll provide some financial review. Neal Murphy, our new Chief Financial Officer who joined us from Met-Pro, will discuss financial results in more detail. I'll then close with an update on the business, a Met-Pro progress, integration, and some other strategic highlights for the quarter.

Let's begin with a few highlights--financial highlights for the quarter. Revenue in the quarter increased $16.7 million to almost $50 million, or 50% better than last year's third quarter. Recent acquisitions at Aarding, Adwest, and Met-Pro contributed $16 million to the quarter.

In regards to bookings in the quarter, we experienced an increase of year-over-year from the same period last year. Bookings were $48 million for the quarter versus $41.8 million last year, an increase of roughly 15%. Year-to-date bookings were $132 million versus $113 million last year, an increase of 16.8%.

Our backlog is growing, reaching $100 million in Q3, up from $78 million in Q2 and $67 million a year ago. Year-to-date revenues reached $128 million versus $101 million in 2012. We're very excited about building a larger business and we're trending in the right direction.

Non-GAAP gross profit increased to $15.1 million as the percentage of revenues decreased from 30.1% to 31.7% last year. Note year-to-date gross profit is up slightly compared to last year and our expectation is that non-GAAP gross profits will continue to improve solidly in Q4 within the full quarter inclusion of Met-Pro, and we expect continued steady improvement in this key metric as we move through 2014.

Non-GAAP operating income increased to $5.6 million, up from $4.3 million in the same period last year. Operating margins were 11.4%, as compared to 12.8% last year.

Non-GAAP income increased to almost $5 million, compared with $3.3 million last year, and non-GAAP net income per diluted increased to $0.24 in 2013, compared to $0.19 last year, a 26% increase. Just a couple highlights on the year-to-date financial metrics that we track. Non-GAAP year-to-date EPS was $0.72, up 53% from last year, which was $0.47. Again, revenues reached $128 million, up 27%. Non-GAAP operating income was up to $16.4 million, roughly 12.8% of sales, and trending in the right direction versus 12.4% last year.

Year-to-date gross profit was a relatively flat 31% and relatively consistent, but we're looking for a nice increase in gross profit in Q4 of next year.

And just as a footnote, we only had Met-Pro in one month of Q3, the month of September, so we're looking forward to getting a full quarter of Met-Pro next quarter and next year.

And lastly, the integration of Met-Pro is well ahead of plan. And we'll provide more details around that later on the call.

In summary, despite some challenges in the market in which Q3 business activity can be described as slow, we continue to show solid year-over-year progress in our key financial metrics while positioning the Company for forward growth. Q3 had some solid quarter-over-quarter bookings growth, so we're looking for that to continue in Q4. We had several order delays in Q4--or Q3, which impacted some organic revenue growth. But we expect some pick up in that going forward in revenues and bookings and with increased operating income and operating leverage.

As a footnote, September and October bookings have already matched Q3 bookings in total at around $46 million to $48 million. So that's to give you a feel for the intake of bookings, how they ebb and flow, and that's a nice indicator of Q4.

I will now turn the call over to Neal for a more detailed review of the financial results for the quarter.

Great. Thank you, Jeff, and good morning, everyone. As mentioned earlier, I will highlight both GAAP and non-GAAP performance for the quarter. Non-GAAP adjustments include acquisition and integration expenses, the impact of acquisition asset valuation adjustments on the income statement, which results in higher levels of depreciation and amortization, and earn out payments to the principals of Aarding.

A $2.5 million legal reserve has also been established during the quarter with regard to legacy legal matters and has been excluded in calculating non-GAAP income. Our non-GAAP financial presentation is intended to provide better trend analysis and assessment of core business performance.

Let's now turn to Q3. Revenue in the quarter was $49.8 million, a $16.7 million or 50.4% improvement from the same period last year. Recent acquisitions of Adwest, Aarding, and Met-Pro, contributed $16 million of revenue for the quarter. Organic revenue was essentially flat in the quarter as there's been a bit of slowness for CECO and many industrial companies in Q3.

Pro forma revenue for the quarter, assuming inclusion of Met-Pro for the full quarter, was $65.1 million. And as Jeff mentioned, we expect to see some quarter-over-quarter revenue pickup in Q4. Typically, Q4 has been sequentially better than Q3. Gross margin decreased [from] 29.3% from 31.7% last year. Non-GAAP gross margin adjusted for inventory valuation and plant property and equipment valuation costs decreased to 30.1% from 31.7% last year. The decline in gross margin was attributable to product mix, a few products--projects we took on to gain a stronger foothold in certain markets, and a couple of other projects that did not reach our normal gross profit aspirations.

We expect gross profits for the CECO business to be more in line with recent historical levels in Q4, with overall gross margins further enhanced by a full quarter of Met-Pro included in fourth quarter gross margins. Met-Pro's business has been--historically been in the 34% gross profit range.

Selling and administrative expenses, excluding deal costs, earn out, legal reserves, and other non-GAAP expenses set forth in our press release today, increased $3.1 million to $9.3 million and remained constant at 7--18.7%.

Met-Pro's SG&A levels were historically in the 24% range and we are rapidly moving to the CECO SG&A model in this regard. And Jeff will speak more about the Met-Pro integration in his closing comments.

Operating margin was negative 6.8% in the quarter, down from 12.8% last year. Non-GAAP operating margin adjusted for the items mentioned in my comments regarding gross profit and SG&A was 11.4%. We see operating margins improving going forward giving our--given our operational excellence and consolidation initiatives.

Net loss per diluted share was $0.07 compared to net income per diluted share of $0.19 in 2012. Non-GAAP net income per diluted share adjusted as previously noted increased to $0.24 in 2013 compared to $0.19 in 2012.

Let's turn now to year-to-date performance. For the first nine months of 2013, revenue increased $27.9 million, or 27.6%, to $128.6 million compared to $100.7 million in the prior year. Acquisitions contributed approximately $30.4 million in revenue for the first nine months of 2013. Year-to-date net income was $3.8 million as compared to $7.8 million for the first nine months of the prior year. Excluding acquisition integration expenses, the impact of asset valuation adjustments on the income statement, earn out expenses, and legal reserves, non-GAAP earnings increased 70% to $13.6 million as compared to $8 million for the first nine months of 2012. Non-GAAP diluted earnings per share increased 53.2% to $0.72, compared with $0.47 per diluted share in the prior year period.

Backlog was also up nicely. At September 30, 2013, it was $100.4 million, up from $77.9 million as of June 30, and $67.6 million as of September 30 of last year. Acquisitions contributed approximately $30 million to the backlog. Bookings in the third quarter were up to $48 million as compared to $41.8 million in the prior period.

And now, let's turn to balance sheet and cash flows. Cash and cash equivalents at September 30 was $13.6 million compared with $23 million at December 31, 2012.

The Company had outstanding borrowings under the lines of credit and term loans of $91.6 million, which was primarily used for the acquisition of Met-Pro. Capital expenditures in the third quarter were minimal at $300,000. And note that during the year we used $24.4 million of cash to acquire Aarding and also $10 million was used in September to pay down acquisition debt on the Met-Pro acquisition.

And with that, I'll turn the call back to Jeff before we open it up to questions.

Thanks, Neal. Despite some challenges in a capital spending environment, which impacted organic revenue growth in the third quarter and for the year, our business platform and management team at CECO are positioned very well and expect revenue and bookings to improve in Q4 and 2014.

Let me close with some strategic highlights for the quarter and an update as the--on the Met-Pro integration. Then we will open up for any questions you may have.

We completed the Met-Pro acquisition on August 27 and I am happy to report that the integration of the Met-Pro business into CECO Environmental is progressing ahead of schedule. Our leadership team is in place. We're doing very well. We're operating as one excellent team and now our focus is on growing.

We've consolidated the three manufacturing facilities into one large and more efficient operation as we talked about earlier in the year when we announced the acquisition. We streamlined CECO and Met-Pro operations into one group and we instituted an exciting One CECO sales initiative for our various air pollution control segment technologies to sell and operate as one. We have already gained four orders from this One CECO initiative since the Met-Pro acquisition and we would not have experienced these type of businesses without the acquisition. Also, we have launched Met-Pro Solutions into China. The Flex-Kleen dust collection technology, along with the Duall scrubber product technologies, are being launched into CECO China to drive revenue growth.

Overall, CECO is very focused on sales excellence to spur organic growth across the Company. Our two main corporate offices have been consolidated and streamlined and we are operating as one leaner main office within our defined SG&A model. One of our main office facilities is currently being sold as a result of the consolidation efforts. Those proceeds will be used to pay down debt. We're all on our way to growing.

One of our--Met-Pro not only expands and leverages key segments such as the petrochemical refining and industrial manufacturing. It also provides us with access to new markets, including the food processing, semiconductor, municipalities, and pharmaceutical sectors. Our goal is to build the global technology platform within our product recovery, air pollution control, and fluid handling filtration sectors.

Let's now turn to some other strategic highlights. Overall, we are implementing our strategies and more importantly we're building a great foundation for 2014, '15, and beyond. We now have a broader, stronger, portfolio today than we had a year ago. Met-Pro, Aarding, and Adwest has given us significant future earnings growth opportunities with exciting relative accretive technologies to deliver more in the future for our shareholders. 2013 was clearly a transformative year for CECO.

More broadly, we continue to execute on global growth and operational strategies to ensure that our premier technology continues to expand in all end markets.

Looking ahead, we remain confident in our global growth strategy. We're seeing improvement in quotation activity. And we expect market conditions will improve in the coming months. We will continue to focus on our key initiatives, including capturing cost out savings from the acquisitions, sales excellence to spur growth, core operational excellence initiatives, leveraging our $3 billion of install base, continuing to grow our reoccurring revenues, and expanding our presence in Asia.

We are taking the necessary internal actions to position ourselves to fully capture value for our shareholders at such time as market conditions improve. And we would certainly appreciate some tail--some GDP tailwinds in the form of increased global GDP growth to accelerate some top line--additional top line growth.

Lastly, as part of the Met-Pro integration, we'll be simplifying and streamlining our business along three key strategic segments. One, power generation, two, air pollution control, and three, fluid handling filtration, to better align our operations with strategic end markets and our stated goal of building the global technology platform in these segments. Please note future growth, expansions, investments, and strategic M&A will align very well with these three core global business segments and technologies.

We will be reviewing our operations along these lines going forward. We expect to begin reporting out in these three segments in fiscal 2014, as we believe it better represents our combined business and operational strategy. We will be providing more details during the fourth quarter earnings call, but we wanted to keep you apprised of how we're currently running the business. And the strategic framework is already in place.

We're all very excited about our future growth plans and our core aspirations to drive shareholder value. And we look forward to answering any questions you may have. So, Operator, can we open it up for questions?

Certainly. (Operator Instructions) Your first question comes from the line of Rob Stone of Cowen and Company.

Hello. Thanks for taking my question. I wonder if you could just elaborate a little bit more, Jeff, on are there particular geographic areas or industry segments where you are seeing softness, or is this a general comment.

Hey, good morning, Rob. I'd say general market conditions have been a little slow. Our parts business is strong. Our contract services business is picking up bookings. Our Cyclone business into refineries and petrochemical businesses has been very good. The softness we're seeing is we expected more natural gas plants to be built around the world. So our natural gas bookings activity is slow. We're seeing a lot of activity being pushed off to 2014. I think if you look at the GE, the Siemens, and the Mitsubishis, the gas turbine power plant manufacturers, their bookings represent a little sluggishness as well. But we're hearing a lot of that will be--has been delayed to 2014.

The metals aluminum sector has had several delays. We have expected several bookings in the past three or four months from aluminum and the metals markets that were delayed as well. We see those potentially booking in Q4 or Q1.

So that's kind of some sound bytes as to where we see some softness and where we see some upside.

Okay. And a follow-up, if I may, to the comments about level of operating expenses and your integration. Can you give us a sense perhaps of the range in dollars where you see expenses in the fourth quarter with a full quarter of Met-Pro included?

Yes. We're tracking year-to-date around 18% to 19% SG&A as a percent of sales. That's where we're heading. 2014 will be between 18% and 19%. The Met-Pro acquisition is going from 24% to 25% of sales to 18% to 19% of sales. And in the quarter they're going to be going through that journey from point A to point B. So I would suspect the Met-Pro piece of business, whatever that value is, $25 million, $27 million of business in the quarter, will be at somewhere between 24% and 18%. So you'll have to do some calculation there, Rob, but maybe 20%, 21% of sales. And then, the full year 2014, all our business will be in that 18% to 19% SG&A range.

And a final question maybe Neal can answer. On your non-GAAP tax rate, that was a little lower than I was thinking. Do you have a sense of where that will come out in the fourth quarter?

Yes. I think going forward, 30% is a good forward rate for taxes. The--there were some R&D credits and a few other one-timers in the third quarter.

Okay. Thank you. I'll hop back in the queue.

Yes.

Thanks.

Thanks, Rob.

Your next question comes from the line of Sean Hannan of Needham and Company.

Yes. Thanks. Thanks for taking my question this morning. So I just wanted to follow-up on this softness topic. So when I look at the sequential revenue decline within the business, and I'm talking on an ex-Met-Pro basis, it seems that this may simply have been the push out that you were just alluding to. Is that correct, Jeff, or is there anything else that maybe we should take into consideration?

I think the last couple of months bookings have been pretty solid. As I mentioned, September, October bookings have already equaled Q3 bookings. So we're seeing a little bit of uptick in Q4 that we're optimistic about. But I think this year we've seen some flatness in the bookings in the general market. We see that potentially changing in Q4 and definitely in 2014. So just a general softness for 2013 is how I characterize that.

Yes. I think I mentioned in my comments that on a pro forma basis, if we put a full quarter of Met-Pro in there, our run rate for the third quarter was right around $65 million. And we see that improving nicely in Q4.

Okay. All right. And then, just to reconcile, we've heard some of the topics or the comments you've made around what you've seen, a softness around orders. You've also talked about some of the encouraging activity you've got in terms of bookings. I'm just trying to reconcile all of this, because even if I back out the acquisitions, backlog is down 4% year-over-year. I guess that the--through October perhaps maybe some of that organic number has come up a little bit. I just want to see if I can appropriately level set the softness comments, as well as the encouraging comments. And really, what is this environment that we're currently in at present? I'm not sure if I fully comprehend all the messages I'm hearing.

Well, first thing, we see our backlog growing to $100 million and we see that as being flat. The organic backlog is flat, but we see the growth in the backlog coming from the acquisition. So we're going from $78 million backlog in Q2 to $100 million in Q3. That was due to the Met-Pro acquisition. So we're characterizing our backlog as flat, not down or not up. We're encouraged. Our RFQ activity is strong. Many of our businesses are working diligently to keep up with our RFQ activity. I'd say there's been several orders that have been delayed in Q3 that are being pushed out to Q4. And right now we're seeing organic--our organic quarter and year-to-date bookings as flat. That's how we're characterizing that. But given the RFQ activity in the last couple months, we think Q4 is going to be better than Q3.

Okay. That's helpful. And then--I'm sorry. Did you have another comment, Neal?

No.

Okay. And then, when you look at the mix of the orders that you took on during the quarter, how do you view the associated margin of that business versus what's been coming through your P&L in recent quarters? Any viewpoints around that, as well as the additional bookings that we've had since the close of the quarter? Thanks.

We're very focused on margin expansion. And we're tracking ahead of last year on gross profit, roughly 31% year-to-date and a little bit lower than that last year, maybe we're up a couple tenths of a point. But we see Q4 improving for a couple of reasons. We took a couple of jobs in Q3 that might have been a little bit below our expectations in gross profit. One of them--a couple of global orders to get in--get a foothold and a couple of customer opportunities that we wanted to be aggressive on. And we had a couple of projects that didn't reach our normal gross profit aspiration. But going into Q4, you're going to see CECO normalized or maybe an uptick versus Q3, plus we're going to pick up Met-Pro, which is typically a 33%, 34% gross profit business. So you're going to see some accretion to that. So the way we're thinking of it, we're going to be a 30%, 32%, 33% gross profit business in Q4 and 2014, and apply an 18% to 19% SG&A operating cost over that. And you'll be able to look at the modeling for '14 and '15 for margins.

Okay, thanks. And then, lastly, just an accounting question. Just to validate for all of us now post-deal, can you give an expectation for the net interest expense next quarter, whereas your--as well as your shares outstanding inclusive of what may have also come through from stock options, et cetera? Thanks.

You bet, Sean. Neal will take that one.

The interest expense run rate, we've got some upfront financing costs being amortized through there. But the quarterly interest rate run rate, it's mostly floating rate debt, but it will be in that $600,000 per quarter for interest. Our shares, obviously the options will--diluted options will vary with share price, but we're in that 26.5 million to 27 million range on fully diluted shares in Q4.

Great. Thanks so much for answering my questions.

Yes.

Thank you.

Thanks, Sean.

Your next question comes from the line of Larry Schnurmacher of Morgan Stanley.

Yes. Hi, guys. Good job. I just--I was going to ask about the share count. I think you just did it. 26 million to 27 million fully diluted?

Yes.

Yes. 26.5 million to 27 million, correct.

These are fully diluted and primary?

The primary will be 26.5 million. The fully diluted will roll with the share price in that 27 million type range.

Thank you.

You're welcome. Thank you.

Your next question comes from the line of Ajay Kejriwal with FBR.

'Morning.

Good morning, Ajay.

Hey. Good morning, Ajay.

So my apologies if this question was already asked. I joined late. But maybe if you can help provide an update on the SG&A, the work that you're doing with Met-Pro. So maybe just an update on what's been done and what your expectations are into next year on the SG&A side.

Yes. Hey, Ajay, we'll be in the 18% to 19% SG&A going forward. Year-to-date we're at 18% to 19%. In 2014, we'll be at 18% to 19%. That's our working model and we're very disciplined about that as we grow revenues and grow gross profit. We're very meticulous about maintaining that 18% to 19%. As I mentioned a little earlier, the Met-Pro division has been in the 24% to 25% SG&A range. They're in the process of moving--that piece of business is in the process of moving to 18% to 19%. So they'll probably end up in Q4 somewhere between 24% and 18%. But clearly, going into next year we'll get that 18%, 19%.

Yes. And just to add just one thing to that. We had previously mentioned that we were looking for $9 million of cost synergies from the Met-Pro acquisition. And we're well--very well along in that. And we'll see about a third of that coming through the gross profit line and two-thirds of it coming through SG&A. And you should really see that in the 2014 run rate almost from the very beginning. Q3 is a bit of a transition quarter, so you won't see all of that. But we fully expect that to be in 2014 results.

Good. That's helpful. And then, maybe talk a little bit about China. I know you were--you talked about softness in markets. But maybe color by geography, specifically what you saw in China, and then maybe an update on the work that you're doing to introduce Met-Pro's products through your network in China.

Sure. Ajay, China and Asia is a significant growth platform for CECO. We've been--we're going on our ninth year there. We continue to add sales engineering capacity, product engineering, and we continue to introduce products into CECO China. We're very excited about the future there. As you know, they have a lot of air pollution control and product recovery applications that we want to participate in. We recently launched the Flex-Kleen dust collector technology into China. Earlier in Q2, we launched the regenerative thermal oxidizer technology from Adwest. And we're also going to be launching the Duall scrubber technology from Met-Pro. So we continue to gear up into China. It's a slow organic growth. Our bookings year-over-year in China are up and we're also working diligently to study smart accretive bolt-on acquisitions that would fit ideally into CECO's portfolio, expand our channel, expand our customer base, and additional capacity all around. So we're very focused on growing China.

Great. Thank you.

Yes. Thanks, Ajay.

Your next question comes from the line of Peter Skibitski with Drexel Hamilton.

Hey, Jeff. I just wanted to ask you, you gave some color about some of your end markets. I wanted to ask you about the traditional utilities business as well. It kind of seems like that's weakish out there in the broad market. Are you experiencing weakness in that industry as well? And is the revenue there kind of trending downward?

Hey. Good morning, Pete. We have two battleship businesses that chase and grow the power business. One is Aarding that chases the natural gas business globally, and the other is Effox, which has been a mainstay in the North American utility market. The first thing I'll say is they're having a very good year. They had a tremendous year last year. Their bookings this year are not quite up to where they were last year. With a strong Q4, they might be able to get close to that. I was just talking to the Effox leadership team yesterday. So the utility--the main utility players continue to invest and upgrade their plants. I'd say we probably are flat to last--we'll probably end the year flat to last year, but our operating income will be up versus last year, given some of the backlog we worked through and some of the nice business we're getting this year. But all in all, I'd say the North American utility market is not spending what they were last year. However, with some regulatory enhancements, we think 2014 and 2015 could be exciting for both Effox, our traditional utility business, and Aarding, our global natural gas business. But we've got a terrific team with Aarding and Effox and we're going to see some nice growth in the next few years.

Okay, great. Just a couple more questions. Just in terms of fourth quarter organic revenue, it sounds like orders are coming in pretty nicely so far. Should we expect organic revenue in the fourth quarter to be up year-over-year or kind of flat or maybe one more quarter of softness? Any directional color you can give us there?

Yes, Pete. We've been studying that quite a bit here lately and we're stepping on the accelerator in every way we can to grow our business properly, organically and within the excellent acquisitions we've made. Typically--Q4 is our strongest quarter typically. So we're looking for a nice uptick in Q4 given our normal trending. With $100 million of backlog, we want to harvest some of that and get it through the manufacturing process, shipped, and invoiced. But, yes, we're going to pickup some normal organic pickup in Q4. So, yes, my answer is yes. And secondarily, again, we only had one month of Met-Pro, which was $7 million, $8 million. So we're expecting a full quarter of Met-Pro of whatever the math works out to be - $25 million, $27 million. So we're excited about Q4 and next year.

Excellent. Yes, I mean, I guess on the--to follow-up on that, just kind of target-wise, in this kind of global macro environment, do you still think you can hit $300 million next year?

I tell you what, that's a great question. And we wake up early every morning trying to hit that $300 million and $1 EPS to prepare for next year. That would be a great aspiration for us - $300 million and $1 EPS. So that's an aspiration. We'll have to think about how we can achieve that through organic growth. But we'll have to respond back to you maybe in Q4. But that would be a great aspiration for us to achieve that.

Understood. If I could just sneak in one last one, I promise I'll be done. But--and maybe this one's for Neal. Neal, can you give us a sense of kind of what the short term purchase accounting adjustments are going to be over the next couple of the quarters, and any incremental transaction costs that are still out there?

Sure. The lion's share of the transaction costs are behind us. We'll probably see a few hundred thousand in Q4 and that will be behind us. The--we're still finalizing the purchase accounting. But between Aarding earn out adjustments and the amortization of the various deals, the annual what I'll call non-cash amortization will be in that $9.5 million, $10 million a year range.

Okay. And that kind of--that--for 2014, does that run off quickly or kind of run off slowly over a number of years?

It will runoff over about five years, but it will decline. I think our peak point will be 2014 and it will gradually decline from there with most of it being gone after five years. So I think EBITDA will be a focus for us because most of this is non-cash purchase amortization.

Understood. Okay, great. Thanks very much, guys.

Thanks, Pete.

(Operator Instructions) Your next question is a follow-up from the line of Rob Stone of Cowen and Company.

I had a follow-up on the plans to dispose of excess real estate. I think you have an item on the balance sheet of assets held for sale, about $8.7 million. Do you have a sense of how much cash you might generate from disposing of excess assets?

Yes, that's a good question. We're working on that now. Some of that could take shape in Q4, but probably the most of it would be in 2014. There's three or four unutilized assets that we're planning to sell in the form of facilities. We'll probably have to think about that a little bit and maybe give you a clearer answer in Q4. But it could be in that $15 million range to $18 million range over the next 24 months, Rob.

Okay. So it's more than the items on the balance--?

--Add a bit to that. So that category on the balance sheet represents real estate and--that is currently on the market and that represents the approximate fair value of that real estate. But there are--as Jeff alluded to, there's other plans that have not been fully solidified yet. But I think that $8.7 million represents the estimated fair value of the real estate that is on the market.

Okay, great. And you mentioned some legacy legal stuff for which you're setting aside some funds. Any color on what that's about?

Yes. That's a legacy union issue that we're debating, we're going into arbitration over--probably seven years or eight years ago regarding--we worked with a company in Michigan and we worked with them, and then we exited. And the business continued on. So there's a pension issue that we're debating, and it's all wrapped around that. And we're discussing that with the union arbitrators. We hope to have that resolved by the end of the year.

Okay. But you don't have any--within your current organization any labor-related issues?

No, we do not.

Great. Thank you.

Yes. Thank you, Rob.

(Operator Instructions) There are no callers in queue at this time.

Thank you. Tamika. And thank you, everybody, for joining CECO's Q3 earnings call. And we look forward to talking to you in the future. Thank you very much.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.