CECO Environmental Corp. (CECO) Q3 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the CECO Environmental earnings release conference call. [Operator Instructions] I will now turn today's call over to your host, Shawn Severson of The Blueshirt Group, CECO's Investor Relations firm. Please go ahead sir.

Thank you. Good morning, everyone. Thanks for joining us on CECO Environmental's conference call and webcast to discuss the financial results for the 3 months and 9 months ended September 30, 2014. I'd like to point out that we do have an earnings deck here in this presentation available today. It can be accessed either directly through the -- through a link on the press release or on CECO’s website. And I encourage you to use that, as we move through the quarterly call today. On the call with me are Jeff Lang, CEO and President; and Ed Prajzner, Chief Financial Officer. Jeff and Ed will be reviewing the financial 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 provided 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 these non-GAAP financial measures, and Ed will address differences between GAAP and non-GAAP financial measures in his remarks. Following our prepared remarks, we will open the call to questions. This call is being webcast to be accessed at CECO's website at cecoenviro.com. The webcast will be posted on CECO's website for replay approximately 2 hours following the end of this call. The replay will stay on site for on-demand review over the next several months. Before we begin, I'd 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 Form 10-K for the year ended December 31, 2013. 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 as a result of new information, future events or otherwise. Today's presentation will also include references to certain non-GAAP financial measures. We have reconciled the comparable GAAP and 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, and thank you for joining CECO's Q3 2014 earnings call. I'll touch on a few financial highlights for the quarter, and talk about a few other strategic things we've been working on. Revenues in the quarter were $63.3 million, up 27% year-over-year, and down roughly 5% sequentially. Revenues on an organic basis were essentially flat or down 1.2% versus Q3 2013. Year-to-date revenues were $187 million versus $191 million on a pro forma basis last year. Bookings and backlog. Bookings in the quarter were $69.7 million, up 45% year-over-year, and up 21% sequentially. Year-to-date bookings total of $191 million, up 44% over the prior year and flat on a pro forma basis. Solid backlog growth in the quarter up $10 million to $106 million. EPS for the quarter, on a non-GAAP basis, we delivered $0.28 compared to $0.24 in Q3 '13 and $0.25 in the second quarter. Foreign exchange had a favorable impact on our EPS. And now moving to Slide 6. Non-GAAP gross margin was 33.6%, up 330 basis points over last year and up 130 basis points sequentially. Year-to-date gross margin ironically was exactly 33.6% as well, versus 31.5% last year. And we continue on track with our margin expansion objectives. Non-GAAP operating margin was 12.9%, an increase of 150 basis points over last year, but fell 200 basis points sequentially in the quarter. Specifically, the decline in operating margin in the quarter was due to the lower revenues and a one-time tax consulting expense we paid to pursue R&D tax credits for the quarter, which Ed will talk about more shortly. Year-to-date operating margin of 14.1% for the year, was up 130 basis points, an increase over last year's 12.8%. Adjusted EBITDA for the quarter was 9.5%, up 48%, down 14%, sequentially. Year-to-date adjusted EBITDA was just short of $30 million, up 64% from last year. Now moving to Slide 7. I'd like to talk a little bit about some operational highlights for the quarter. Sales excellence continues to be a very important part of our initiative under the OneCECO initiative. We continue to bring the multiple CECO divisions together to close on projects and bring a broader product solution together to develop end user and create value. Some of the wins we had in the quarter were in companies like AstraZeneca, and those are OneCECO, the Noble Energy Group, Weyerhaeuser, Calgon Carbon, was another one, and there's a host of other projects, such as California Steel, and Aleris, and so forth and so on, that we developed multiple solutions within the CECO groups to provide a broader, better solution, to create end-user value. And that continues to be an important part of the OneCECO. And the energy group as well captured a very nice Middle East energy order, multiple million dollar order, and that was due to the Effox and [indiscernible] OneCECO. So the businesses are coming together collectively to develop better solutions for our end users to drive value, and that is the purpose of what we're trying to do. We had solid performance in the energy group and fluid handling group in the quarter, which was offset by lower order intake from the air pollution control group. So as you go through the slides, and Ed talks a little bit about the sectors, you're going to see one of our challenges is the air pollution control top line growth. And we've been working to improve that, but if I could just characterize the issue. It's basically -- we're not bringing in enough orders, and our sales batting average needs to improve. Simply put, we've lost some orders in the quarter, which drives bookings and revenues. And we're working on that. We characterized the problem as we're in the $27 million a quarter bookings range, and we really need to be in the $30 million to $33 million a quarter booking range. The air pollution control market is solid, the activity is very good. We need to do a better job with sales excellence. That's principally what we're focusing on. We've lost a few orders each month to the competition. We're not overly excited about that, of course, but we need to turn the corner on that. The air pollution control leaders, the general managers, led by [indiscernible] and our sales leaders are very focused on closing more activity. I'm pleased that our sales dashboards are stronger. I'm pleased that the market is solid, but we need to do a better job providing a better solution, and commercially, capturing business. And that's going to be our objectives for the next several quarters, to get the air pollution control revenues and the top line challenge back on track. And I'll be pleased to answer any questions around that in the Q&A session, but that appears to be our #1 challenge right now, order intake for the air pollution control business. The operational excellence and gross margin expansions for the business continue on track, working capital is improving, free cash flow conversion is in good shape. So we're very pleased with how the business is performing. We just need more order intake on the across the board, but principally, in the air pollution control sector. Aftermarket recurring revenue continues to be an investment area for us. We believe we're doing a better job each year driving aftermarket and reoccurring revenues. Long term, we want to get into that 40% to 50% model, where that drives a higher flow of revenues and a higher flow of margins on the aftermarket side. All businesses are investing in aftermarket sales specialists and reoccurring revenue products. CECO China is doing very well. For many years, we've talked about our strategy in China organically and inorganically. Brent Becker, the President of Asia, is leading that business very well. Organic growth is up, and we've implemented 2 strategies -- 2 acquisitions in the quarter: one, we've closed on, SAT Technology, which we'll talk about shortly; and second, we've signed a definitive purchase agreement to acquire Zhongli, a damper diverter business in China, which we've been working on for many years. So I'm very pleased with the progress of our Asian business. As we've messaged over the years, the board and the management works on acquisition, develops a pipeline. We have our M&A criteria, and it just so happened, in the quarter, we closed on 3 transactions, and we have one pending with the China ministry government approval, which we believe to be a very normal process. The acquisition strategy is centered around creating market leading brands and portfolio that customers -- that drives demand, creates value for customers, and is a good strategic fit with the CECO portfolio. Please move to Slide 8. Just a little color around the overall business conditions. We see them as relatively changed from Q2, very solid. Again, I talked a little about CECO's North American APC top line challenge, which we're very focused on improving that. Bookings did pick up in October. We're hoping to have a stronger Q4 in the APC sector. The global and domestic natural gas power markets remain very strong. The energy group activity is -- on the natural gas side, is up north of 20% in the quarter. And we're very excited about that, and the Aarding acquisition from 1.5 years ago is performing very well, with bookings -- setting record bookings. The Aarding-Effox team have formed a single operation, a single focus to drive sales globally. And the Effox business in North America is seeing some flatness, but they're growing in Asia, they're growing in India, and Aarding is helping them do that. So we're excited about our energy business. The fluid handling and filtration business is progressing very well. Jerry D'Alterio is the president of that group and we're making a lot of progress. As you know, at the beginning of the year, we moved -- closed several small plants and moved everything into our Telford, Pennsylvania, main manufacturing campus. And we're very pleased with the growth and the margin expansion taking place under Jerry. Domestic traditional utility remains flat. Our activity is solid, but it is flat. But most of our growth on the Effox side is globally, and they're doing a very good job capturing business in China and India. And with the acquisition of Zhongli, which will be an extension of the Effox business, will drive further growth and synergies between the 2 businesses. The Asian markets are solid, and all the end markets are doing fine. Our activity in Asia is strong. The chemical, petrochemical, power, metal finishing and pharma and automotive are gaining nice traction for CECO China. Page 9. Couple of comments about 2 significant acquisitions that the board and the team have been working on for 4 years. We began working with Emtrol and Zhongli in 2010. These are 2 very good strategic fits, 2 businesses that we understand. We know their customers, and we're very excited to bring those into the CECO organization. They're going to be excellent strategic fits with multiple synergies in many fronts. In a nutshell, with Emtrol, Emtrol is our #1 competitor in the cyclone technology business. We've been competing against them for well over 40 years. They've actually captured some nice business against us this year, and of course, we captured some nice business against them. But the result is going to create the Emtrol-Buell-FKI cyclone business. Probably in the neighborhood of $70 million. With this merger, we will become the world leader in cyclone technology and some critical industries around the world, refinery, petrochemical, and so on and so forth. We're very excited to bring Emtrol into our business. Rob Giuricich [ph]will lead the business, and Tony Schmitz will lead sales. These are first-class talent. It will help CECO grow our business. But the main thing, in putting these businesses together, what you're going to find is we will be able to provide the best design in cyclone technology for our customers. We'll be able to provide a greater value proposition to take care of our customers and provide world-class project management for our customers. So we view this as very exciting. Obviously, you can see the sale price, what we paid for the business. But I think, our customers and our employees are going to be very satisfied over the next few years of what we're going to be able to do with these combined cyclone businesses. Moving on to Zhongli. We started talking to Zhongli in 2010. We've had -- we've talked to Zhongli about fabrication capacity, sales assistance, sales alliances. So we know this business very well. We finally put together a very attractive deal construct, which requires a payment up front and a very back-end loaded earnout strategy that is very fair to CECO and the principals. Zhongli is a great fit. Zhongli is, basically, the Effox of China. And so we're very strong in North America on our Effox business, and we're gaining traction globally, but Zhongli is -- will help us become a true blue Chinese company. And when you put Zhongli together with our CECO China business and our CECO strategy, we could turn the page into 2015 to be a $60 million plus revenue business in 2015. And that's on a trailing 12 months. So we're very excited about the CECO China traction, coupled with what Zhongli will do for us in the Asian energy markets. We're very excited. It's a great fit. And they bring us a strong Chinese customer base, distribution channel and a manufacturing footprint. So we're very excited about this. And by the way, we're only in the definitive purchase agreement stage, and we're waiting on the China Ministry approval to finalize this transaction, hopefully, in mid-December. Moving to Slide 10. We closed on SAT Technology. They're a regenerative thermal oxidizer business in China, very close to our CECO China business in Shanghai. It's an excellent fit. It's an excellent fit with our Adwest Technology RTO that we've been selling in North America and China. So we're very excited about SAT Technology, and more excited about how we can sell, create sales synergies across China with SAT and the CECO China platform. It's a very good name, and we're very excited about what we can do in the next several years to grow that business. And lastly, on the acquisition side. We acquired a company called, HEE Environmental Engineering. It has been a competitor of our Duall thermoplastics rubber business. And coming with that is a strong management team, and we've co-mingled those businesses together and now were operating the HEE and the Duall business has one integrated business, sales and manufacturing, we're very excited about that, adds a lot of end-user value. And as you can see, they're in the $10 million revenue range, and we have aspirations to grow that, significantly. So another good strategic fit all-around. Moving to Slide 11. The last couple of slides, we wanted to share the trailing 12 months revenue, where we've been and where we're going. We're very focused on growing organically and inorganically on the revenue side, but our trailing 12 months revenue puts us at around $333 million in trailing 12 months. So we're very excited about 2015 and 2014, in devising further revenues for our shareholders. And then, moving to Slide 12. Shows we're building the platform, and we're building our earnings potential for our shareholders. With the legacy CECO adjusted EBITDA, coupled with the potential 4 acquisitions, we have in the system and hoping to close on Zhongli in December, we will -- we'll have a trailing 12 months of combined EBITDA of $50.5 million. So that's the kind of base we're building for the future, and we're hoping that will pay out dividends to our shareholders long-term. So with that, I'd like to turn the call over to Ed Prajzner, our Chief Financial Officer.

Thank you, Jeff. Moving on to Slide 14. I'll just bring you through a few more details of the quarter itself. Again, on Page 14, you'll see backlog in bookings trends here for sequential periods. Backlog was very strong, as we ended the third quarter of 2014 at $106 million. As Jeff had said that's up $10 million, 10% sequentially. Our year-to-date bookings of $191 million are up from $132 million in the prior year period. On a pro forma basis, with the acquisitions included, bookings were relatively flat year-over-year. Third quarter 2014 bookings of $69.7 million are up 45% year-over-year, and up 21% on a sequential basis. Moving on to Slide 15. Again, showing you revenue. Sequentially, here the trends in the fourth quarter -- third quarter of 2014, our revenue was $63.3 million, which is up $27 million year-over-year, although down sequentially 5%. Year-to-date revenues are running slightly down on a pro forma basis, just over 1% from last year on a true pro forma basis year-over-year. The acquisitions as Jeff mentioned, Emtrol, SAT Technology and HEE, are expected to add approximately $10 million of revenue in the fourth quarter of 2014. Moving on to Slide 16. You'll see trends of gross margin and operating margin starting with third quarter '14, non-GAAP gross margin at 33.6%, is up 330 basis points year-over-year, as well as 130 basis points, sequentially. On a year-to-date basis, our non-GAAP gross margin is 33.6% versus 31.5% last year. And our operating margin of 12.9%, is up 150 basis points year-over-year, although down 200 basis points, sequentially. On a year-to-date basis, operating margin non-GAAP is 14.1% versus 12.8% last year. And as Jeff had said, the lower margin in the current quarter is due to the lower revenue, as well as a onetime tax charge connected with the R&D tax credits that we recorded in Q3 of 2014. Moving on to Slide 17. Again, you'll see the same rolling sequential trend here of EBITDA and non-GAAP EPS. Adjusted EBITDA was $9.5 million or up 48% year-over-year, although declining sequentially by 13.6% due to the revenue mix, as we discussed. Non-GAAP EPS was $0.28 in the third quarter of 2014, which is up from $0.24 in the third quarter of '13, as well as up from $0.25 last quarter, sequentially. There was a foreign exchange add back in the quarter, which had a favorable $0.04 impact on our non-GAAP EPS for the quarter. And for full year 2014, our EPS aspiration of exceeding $0.01 per diluted share on a non-GAAP basis is intact, including the acquisition of -- or including the impact of the acquisitions. Moving on to Slide 18. We are now providing, as we started earlier in the year, a little more segment information. On this particular slide, Slide 18, you'll see a breakdown of the air pollution control segment, revenue and bookings on a sequential basis for the year. And as Jeff had mentioned, we know there's some challenges here. You'll see with the revenue dipping there $27.7 million for the third quarter of 2014, is down sequentially 16% from the prior quarter. Bookings, likewise, are down to $24.6 million from $26 million, sequentially, 7% decline. Again, as Jeff had alluded to, this is domestic bookings being weak. There are bright spots in China, offsetting some of the weakness domestically. China is growing strong. The aftermarket is growing strong, but this is the challenge here, getting the bookings trajectory back on the APC segment. Moving to the next slide, Slide 19. Again, you'll see the same detail for the energy segment. Revenues were up very strongly to $18 million, which is up 7% sequentially for the quarter. Bookings, likewise, are up very strong to $28.4 million, which is 92% sequentially. And that is the previously announced Middle East job we won on the energy side. Again, energy is expanding in China, with additional resources as well as the aftermarket and retrofit opportunities continue to grow for the energy segment. And then, lastly, Slide 20, the Fluid Handling and Filtration segment. Again, here as with energy, very strong growth. Revenue of $17.6 million, is up 5% sequentially. Bookings as well are up modestly on a sequential basis. The Fluid Handling and Filtration segment remains very solid, with very good margin expansion and operational excellence, as well as sales excellence. Finally, moving to Page 21. We have some balance sheet and cash flow information. As Jeff had said, our cash flow remains very strong. Our free cash conversion ratio has stayed in the upper-90s. Our debt-to-EBITDA ratio remains very modest at 1.6x, as of the end of September. We, of course, maintain our asset-light philosophy with very low CapEx and keeping the asset base down. At the end of September 30, 2014, we had $18 million of cash and cash equivalents and $84 million of long-term debt. On a year-to-date basis, we have repaid $12.2 million of debt. We did sell-off non-core assets for $7 million, and we maintain our quarterly dividend of $0.06 per share. With that, we conclude the prepared section of the presentation. And at this time, we will be turning the call over to you for questions.

[Operator Instructions] And your first question is from the line of Brian with William Blair.

Can you talk a little bit more about these acquisitions, and maybe, in aggregate or just focusing on the larger ones, talk about potential EPS accretion that you'd expect in 2015 from the acquisition?

Yes, sure. I think, the Zhongli will be accretive, of course. They had met all the board's M&A criteria. But given we haven't divulged too much of the terms, we're waiting on the China Ministry to approve that. I'll say, it's going to be within our guidelines for accretion, both on an ROIC and an EPS perspective. It has a very favorable earn out strategy for CECO that we're excited about, but we don't want to talk too much about that. But it is in that $3.5 million EBITDA range, $28 million in revenue, and it's an excellent fit with our Effox business to generate sales synergies, cost synergies, supply-chain synergies. So -- but we think it will be quite average to CECO's accretion model. On the Emtrol side, we're really focused, Brian, around creating the leadership in the cyclone technology, which I think we've done. Now we need to go execute that. But we paid in the 8.5 multiple range, as you certainly can see. And one of the accretion aspects is to move that over the next reasonable time period to a 6.5 multiple range, which we think we know how to do that. We think we're pretty good at that, and that's our challenge. So we want to take that 8.5 and move it to a 6.5 through a host of activities, which we don't have to get into today. But we do see this as accretion accretive to our business. And I think, you have a pretty good feel for the net income, the base net income this business brings, and we issued 400,000 shares. So I think you can see, it's going to be solidly accretive. We haven't published any accretion numbers, but we feel it's going to be pretty solid on the accretion side.

Okay. And I guess, we're about 5 weeks into the quarter here. And I'm wondering if you could give us a sense for the fourth quarter. Are we going to see revenue and operating margin both up sequentially, can we say that for sure?

Well, typically, if you look at our historical numbers, Brian, we -- Q4 is our best quarter, in bookings, rev and operating margins. So our aspiration is to have a very strong Q4. Our business leaders and general managers and sales managers are charged with finishing strong to achieve our operating -- our annual operating plan. So we're characterizing Q4 as very strong. We need a strong Q4. Activity is good. October bookings were solid, but our backlog is almost at an all-time high. So we certainly have -- we certainly have the in-house backlog to process in Q4 to recognize revenue. But typically, we do have a strong Q4, and that is our aspiration for rev and operating margin.

Your next question is from the line of Ajay with FBR Capital Markets.

So just maybe on air pollution control, Jeff, you mentioned some sales execution issues. Maybe, a little color there, is that just a function of integrating with the sales force? Is it a -- as you think about solutions, is it thinking about tweaking the solution offerings? Or perhaps is there a pricing issue in the market? A little more color there would be helpful.

Ajay, good question. We study that, and we talk about that with our sales teams. I think you touched on a lot of the reasoning. I guess, in my view, when we look across our hundreds and hundreds of quotations, maybe thousands, we need to do a better job closing them through sales technique, through commercial aspects, through sales execution. Yes, occasionally, we bump up against some special pricing and special commercial issues that provide some challenges, but we should know how to work through that. The ironic part is, when we provide multiple products within the OneCECO Portfolio, we do a better job on our close rate. So you're comment about integrating or migrating towards that OneCECO sales approach, really needs to take place at a faster rate to help our close rate. Because when we have multiple technologies to provide a customer, they view that as more favorable and that helps our close rate. But I'd say that it does take a little time to integrate to accomplish that. And we're working on that every week. There has been a little bit of pricing pressure in a couple of areas, that to your point, that probably, we stubbed our toe on. But we believe the activity is as strong as it's been in my time with the company, our leadership and our sales leadership needs to zoom in and create a better solution and capture business. And we're really not talking about a ton of business. We're really talking about another $1 million or $2 million a month to get us to that better place on the revenue and bookings. And we believe that is achievable.

That's helpful. And while we're on the topic of integration, maybe just a quick update on where you are on the integration of Met-Pro. And then -- and you, obviously, are dialing up on acquisitions here. Maybe, color on the management bench, bandwidth, what have you. I know with a couple of these, you're getting some of the senior folks over. But just help us think about kind of managing all of those acquisitions, integrating them as you move towards this OneCECO.

Sure. Quite honestly, I can't remember the last time I said the word, Met-Pro. So the Met-Pro and CECO organization has moved down. It's a full integration. The businesses are co-mingled together. The main offices are co-mingled together. And all that integration work has been behind us a long time. In fact, the people around the table have come from CECO and Met-Pro, and they're now all CECO. So I think, the Met-Pro CECO integration has integrated very well. And I'm very pleased with the process and where we are to-date. And I just think of us as CECO. Secondarily, good question on the integration with Emtrol. We had our first Emtrol-Buell-FKI cyclone division integration meeting all day on Tuesday, the day after the close. And having known Emtrol for a long time and knowing some of their processes and some of their supply chain, I think the Emtrol Buell cyclone division should be fully integrated in the next 3 or 4 months or so. Rob Giuricich [ph], in the spirit of answering your question on management, will be leading that cyclone division. Rob is an excellent leader. He grew up in the cyclone technology business. He was the President and Principal of Emtrol. So we're very excited to bring Rob Giuricich into the senior leadership team. He's a very smart, strategic and tactical business leader. So that's exciting. And it's also exciting that the Emtrol-Buell-FKI in our first -- we have a 100-day integration plan, but we're going to move towards the best processes of the business. So some things Emtrol were doing really, really well, some things the Buell-FKI businesses were doing really well. So we want to adopt the best processes of the team. So that we operate as one. HR and benefits and finance are addressing the integration of Emtrol in the next 90 days, and that's moving forward. We have weekly integration -- we'll have weekly integration meetings with the Emtrol-Buell team. So I'm feeling very good about that. We're -- it's underway. The other, SAT Technology and ATE. Those businesses are pretty much already integrated and operating under CECO. So I won't speak too much to that, but that's in process and almost complete. And the Zhongli, we have a good integration plan with them to partner up with the CECO China business in Shanghai. We know that business very well, and once the China Ministry approves that, we will begin moving Zhongli on to the CECO Shanghai operating system, the CECO Shanghai U.S. GAAP Division Controller process and moving forward to integrate and grow those businesses. So I think, we're in pretty good shape. We have some work to do over the next 3 to 4 months to make sure that takes route properly. But I think, the CECO team is good at that, that's a core competency. And I'm excited to integrate those businesses to develop more earnings for our shareholders.

That's very helpful. And one more from me before I pass it on. So based on my math, it could be wrong here. But seems like the EBITDA margins on a combined basis for deals that you announced this morning, they are less than CECO's existing portfolio. So, I guess, the question is what's the opportunity here? You are thinking margins in these businesses improve or is the opportunity more on the top line?

I think, it's both. I think, first off, the Emtrol Buell, FKI Cyclone Division is a merger of growth. It's a merger of growth, being able to provide all the potential end users, refineries, the chemical, petrochemical plants, best designs, best project management. So our aspiration is around growth. These 3 businesses that will be moving together run relatively lean in the dollar, in the $1 million revenue per employee. It's an asset-like model. So we are excited about the growth in the business that it can create. There's always opportunities for some costs out and some coordination efficiency and shop loading opportunities. And we will address those. But we view these as an opportunity to grow the business, grow the margins and do a better job for the end users. So they go -- they have nowhere else to go, but to the Emtrol-Buell-FKI because we're doing a great job in the design in providing of cyclones. I think, the multiples were pretty average for what's going on in the industry in investment banking world today, I think, they're pretty average. Having studied Emtrol and Zhongli for 4 years, we're pretty confident that, that 8 or 8.5 multiple can move to a 6.5 multiple in a reasonable time period. So -- and that was the transaction intersection that we had to come to do the deals. But all in all, we will be creating best-in-class businesses with Emtrol and Zhongli. And that's going to drive more growth for the company. It's going to make us a -- I think within a year or 2, we could have half of our revenues come from outside the U.S.A., so more global business, a less cyclical business, less tied to the U.S. economy. So I think we are going to be in pretty good shape, Ajay.

Your next question is from the line of Chip with Canaccord.

For the acquisitions, maybe, you can talk a little bit more about the recurring revenue profile that's similar to the existing business. And then, whether it's an aggregate or by each business, and then any seasonality we should be thinking about?

Great question. And we focused on that in the acquisition stage and when we seek out strategic partners. My quick answer would be we're in about a third of our business, recurring revenue in nature. And I think, the Emtrol and Zhongli business will be close to that and will be additive to that. But I -- we've uncovered something within the Emtrol business model, quite honestly, that they're doing some things on the aftermarket and reoccurring side better than we were. So that's one of the exciting parts of doing acquisitions, is you pick up great talent, you pick up better practices, sometimes better practices and sometimes better technology, sometimes not. But there's some things that Rob and I are talking about to bolster our reoccurring revenue or aftermarket strategy to drive several more million dollars of reoccurring revenues through the Buell and FKI businesses that perhaps we weren't quite achieving. So growing reoccurring revenue is important. And I think, we're going to see some additive revenues with these acquisitions. And we're now going to be a very stronger player in China where we were a smaller player before. But I'm very excited about the aftermarket question, and where we can go with these businesses.

Great. And anything on seasonality or typical to the most of the rest of the business?

No. I'd say Emtrol and Zhongli, and the other acquisitions are pretty normal to CECO, nothing really to comment one way or the other. Other than, it's typically, the fourth quarter is usually better than the other quarters. So -- but no -- nothing more than that, Chip [ph].

Yes, okay, great. And just lastly, maybe, you could talk about how the balance sheet shakes out, assuming the last deal that closes in December, target capital structure? Do you take them into digest what you have or what sort of dry powder do you have?

That's a good question. And the board and I and Ed talk about that all the time. We're pretty conservative and pretty pragmatic in nature by nature. But through September, we're probably in that 1.6 leverage ratio with $66 million in net debt, roughly $40 million, $41 million, $42 million in EBITDA, trailing 12 months. So we're in a pretty conservative spot there with $1.6 million. Given the Emtrol has closed and given the assumption that Zhongli will close in December, that will probably put us in the $100 million of net debt. And roughly, conservative $50 million in trailing 12 months EBITDA. So there we're still at 2 -- leverage ratio of 2 or below. So we feel pretty comfortable around that. We're very focused on integrating those businesses, driving growth and synthesizing those businesses together for the shareholders. However, if something were to come along that highly accretive, we have some dry powder there on the capacity of debt. You could pick up additional debt, additional EBITDA, and it would still be a conservative balance sheet. And I think, we will be fine. But right now, we're focusing on Emtrol and Zhongli in integrating the other businesses to generate EPS.

Your next question is from the line of Sean with Needham.

Really, quick nice work on the slides. And also, we certainly appreciate some of the frankness in the comments you've provided here this morning. So 2 quick questions to start off with. So first, how did the acquisitions that you've already had under the belt perform year-over-year. Can you talk a little bit about that and differentiate among them? And then, in terms of the -- in terms of the recent deals that you've gone through in detail this morning, it sounds like you're pretty positive, or at least, generally positive that the margins you can ultimately get out of those businesses in terms of synergies, costs you take out, leverage, should at least be supportive of being able to get to your 15%-or-so operating margin range, et cetera?

Yes. First off, I think, when we do our earnings release for Q4, we will put some slides -- specific slides, together to communicate the specific performance of the acquisitions. That we committed doing for full year 2014. Specifically, the [indiscernible] business, which is our natural gas technology provider, is performing better this year than they've performed in the history of their company. Adwest Technologies, the RTO provider, out of Anaheim, California, is performing better this year than they performed in the history of their company. So when we acquire a business, our job is to give it strategy, capital, tactics, so that it'll grow. And those 2 businesses are performing very well. The CECO, Met-Pro acquisition is doing very well. It's a collectiveness the way you view the business. And I think, any operating margin upside you're seeing this year and EPS upside you're seeing this year is a result of bringing the CECO, Met-Pro businesses together. And we could -- we will speak more to that at year end to share with you and the other investor community. Other than that, I do see these businesses that we've acquired and that we have in the queue, I still believe, we can pick up 100 to 150 basis points of operating margin and 100 to 150 basis points of gross margin each year, year-over-year. I believe that with Emtrol, I clearly see that with Zhongli. I know we'll do that with ATE and SAT. And so our expectation is continuing to improve operating margin year-over-year. And we have a lot more to work with now, across the board in all operational areas to generate that gross profit and then operating margin improvement. So I remain consistent on year-over-year margin improvement, Sean.

That's great, Jeff. And then to follow up a little bit around the Emtrol acquisition, I think you've made a comment a little bit earlier, you expect your total cyclone business to be at least $70 million [indiscernible], I just want to fact check that. And then, if you can talk about competitively, how you're positioned now versus other providers because, I think, you were pretty well positioned before, even before the deal. So if you could provide a little bit of color around that, that would be helpful?

Right. Strategically, that's why the management and the board have been pursuing Emtrol since 2010. They are our #1 global cyclone competitor. They are a great company. And we compete against them every week, every month. And so that's why the board was so committed to and so patient to doing the transaction with Emtrol. And so I couldn't be more excited. We were in the global refinery universe, Emtrol and Buell were #1 and #2. And then, FKI and the industrial cyclone gas product recovery is in the top 3 players in North America and expanding rapidly in Asia. FKI has been in Asia 10 years and doing quite well. So in terms of cyclone technology if you were to go and talk to plant engineers around the world, these 3 names would resonate and be shortlisted right away. So right now, we acquired our #1 competitor. That's the short of it. And the synergies that the business is going to bring is, I'm starting -- I'm viewing this from the customer side. We want to provide the customers the best value in the world for cyclone technology across the board, the best design, the best project execution, the best service and the best shop capacity, the best. We now can take on. There are some new refineries going on around the world, and they're going to be need dozens and dozens of cyclones, and they're concerned about who can handle that. And there's major cyclone expansions going on around the world domestically. And they want to know who can handle that from an engineering shop loading perspective. So we're viewing this as: a, bringing the best-in-class value to our customers, #1. And then, expanding our supply chain so that our fabricators and external suppliers get a lot of business, and their shops are full. So we want them to win through this. So we're pretty excited. We're pretty excited about this. And I compliment CECO and the board for being so patient in developing the model that would work here.

Okay, that's very helpful. Last question here. The APC business that drag in the third quarter bookings, you provided, certainly, a good amount of color commentary around that. Just wanted to see if we could get a little bit more of a sense on how to interpret the bookings pickup in October, not sure if that's something I may have missed that you addressed during the call, but how do we interpret some of that pickup in bookings, is that just more natural recovery due to a December quarter type of strength and still disappointing versus where your expectations would be, or is there actually some progress that we're seeing in getting recovery in the bookings and rev rec within that piece of the business?

Yes. Sure. We did a better job booking APC orders in October. And in Q3, we didn't do our best. Our batting average was lower of translating these hundreds of sales quotations and these sales solutions opportunities. Our batting average was below average in converting quotations to orders. That's how I view it. The organization is very focused on every quotation, trying to secure the order, create the right solution so that the end user places their order with us. And the organization is focused on that. We recognize, we have to improve that to get to a better place. And so the President, [indiscernible] the general managers, the sales leaders, every week, we're trying to do a better job with sales execution and the selling process. And I think October, we did a better job with bookings than we did in August or September. So that's really kind of how we're viewing this. The ironic part about it is the market and the activity is rock solid. So now we just need to do a better job with sales talent, sales training and the sales execution piece. We're upgrading talent. We have added sales capacity in Q3, that's you will probably see an uptick in our SG&A as a result of that, which we messaged in Q2. So we need to go do our job and close more business, Sean.

Your next question is from the line of Jeff with Cowen and Company.

Just 2 quick questions. Most of them have been answered at this point, and congratulations on the acquisitions. I want to get a sense of what your perspective was on the -- you highlighted several new refineries, globally? But given the drop in petroleum pricing over the past couple of weeks, I was just -- is there any risk to those build-outs being delayed for either Buell or Emtrol product lines as that deal closes?

No, we haven't seen that. I understand the cyclicality in the oil pricing, et cetera, et cetera. I actually read last night where some of the lower oil prices was driving greater demand. So -- no, we are not. Our FKI, Buell and Emtrol activity is quite strong. And now our focus, Jeff, is to consolidate our sales approach, so that we improve our close rate and bring in more cyclone business, but no impact on the gas price and our sales activity.

Perfect. Good to hear. And the last question for Ed is just on the Fx, given the shifts in Fx late in the quarter in the third quarter. Can you just talk about your expectations for any Fx headwinds, if any in the fourth quarter and just remind us what your predominant currency exposure is?

Sure, definitely. That third quarter effect that you saw was the euro weakening to the dollar. So we have a euro -- significant euro currency balances out there already in particular, that when we measured the dollars was weaker. It's an intercompany loan, and specifically, which caused that noncash Fx loss in Q3 due to the euro weakening versus the dollar. The euro is still low. So to the extent the euro stays low in Q4, that may recur again. Hence, why we put it as a non-GAAP adjustment. Q4 last year it actually went the other way when the euro strengthened. So [indiscernible] to give a period on this intercompany loan that gets remeasured with the P&L noncash, we will pull that number out, so you can see what the distortion will be period-over-period. But at this point, it may continue into Q4 until the euro and dollar come back into parity and stabilize, you will continue to see that volatility.

Your next question is from the line of Rodney with 1492 Capital Management.

Just a general business question. I know you kind of alluded to it a few times. Just an internal execution issue on the incremental sales you need on a quarterly basis. What we're hearing though from other companies that have similar end markets as you -- the end markets are pretty healthy. They're very strong. And so I'm just wondering, if maybe the fall off in sales execution here recently, was it probably due to [indiscernible] -- and just add some color to more specifics of how you can get that extra couple of million dollars of bookings per quarter, your target?

Rodney, you broke up for one second there. Can you just restate the last 2 sentences of your question.

Yes, just if you could give some more color on how you expect to get the incremental couple of million dollars in bookings per quarter on the sales execution?

Sure. Well, each division has hundreds of sales quotations. We view the sales dashboard every Monday. We have added some sales leadership to the businesses. We have added sales engineering capacity. And I think now with the OneCECO capability, we're trying to accelerate that a little faster across the businesses, which takes time, because a number of these businesses operated for half a century independently. And now we're -- the integration on the sales side takes a little time. But when we do -- we do move together and provide a broader product solution with multiple products, our close rate increases. So we're trying to train and develop the sales engineers to do more of that through Webinar training, sales training. And we have added some sales leadership into the businesses. And those businesses are performing well. And it's also management's job to make sure on some of these mid-to-large projects, we're providing the right commercial aspect of the business, the right solution, and getting in front of those customers, providing that technical story from top to bottom, so helping the sales organization. And I also think, the focus is really important in doing that. And that's now very important to the organization, that we don't let any stone go unturned in the sales, engineering, execution process. So we're taking a very tactical approach each day with each project.

Were the acquisitions distraction at all in the quarter, you think on the sales process? And the other thing, the last question I had was just pricing. Was pricing excessively competitive during the recent period?

We did close on several acquisitions and that required a lot of due diligence. I'm not going to blame, we've missed some top line on APC for the acquisitions. But we did work very hard on that. So a few of us were pulled away from that. But now that that's behind us, we'll, certainly, apply all of our focus to fixing the APC top line challenge. On your second question on pricing, there has been a couple of new entries in the market that may have provided some commercial aspects for the project that we might not have seen in the past few years. So maybe, we've had a few of those to contribute to some of that. But we, certainly, know how to compete against that because our end users want high quality, good solutions and have typically paid a pretty solid margin. So, yes, a little bit, I would say, yes.

Okay. I guess, the last thing, I'll just kind of mention and wrap up. Domestically, here, it sounds like from the companies we talk to, things are pretty good, especially relative to Europe and even China. So I guess, focusing on the U.S. is probably something we wouldn't downplay as investors. I think there is a lot of opportunity here in the U.S. industrially.

Yes. No, no. No, that's a great comment. Make no mistake. We continue to invest domestically. Many of our businesses have half a century of history of success here. We're going to keep growing the domestic markets. And we probably added more sales capacity domestically than we have globally. The message here is, we're going to maintain our focus in growth domestically. But at the same time, we want to make sure, we have a global footprint long term. So that half of our business might be domestically, half of our business might be globally. Because we've only been a global player for, maybe, 5 or 7 years. So the [indiscernible] is helping our globalization, CECO China is helping our globalization, a big part of Emtrol's business is global. So we want to be terrific in North America, and we want to be great in Asia as well. And the [indiscernible] and Emtrol are helping us pick up market share in Europe as well. So we want to be very strong domestically, and we have been. We just want to make sure we have a broad regions of the world covered, so we can skate through any type of economic cyclicality. That's the strategy, Rodney.

Your next question is from the line of Scott with Jefferies.

So I just wanted to ask just a couple of quick ones. A lot of my questions have been answered already. Do you guys know the organic orders for the quarter and the organic backlog dollar increase?

Well, actually, we've been blending the CECO and Met-Pro have been merged in together. Are you talking about the recent HEE [indiscernible] being feathered in. They are relatively small at this point. We're not going to be calling those out separately, but the organic at this point, Met-Pro hit its anniversary [indiscernible] clearly passed that. So going forward, Met-Pro will be in the base now that we're past the anniversary date. So we're not separating bookings by acquisition. We have disclosed here the bookings by segment as the better way of sort of sub-sectoring the business going forward by the 3 sectors.

Okay. Just referring to your press release, kind of, which said or talked about pro forma sales. I was just wondering if the...

From that standpoint, if you took last year's pro forma third quarter, a $55 million, that included a $1.5 million of the [indiscernible] business, which has been divested. So if you pull the $1.5 million out of last year's $65 million, you're at $63.5 million this year, which is essentially flat. You're down about 1% less than organically year-over-year.

Got it. That's what I was getting at. The other thing was on the operating income by segment. We can expect that in the queue coming up?

Yes, the queue will be filed later today. You'll have the full segment noted in there with profitability by segment, yes.

Later today. Okay, great. And the last question is on pricing. Can you kind of, maybe, give us an idea of what that was, was that a minus 1, minus 2, and which segment did it hit more, did it hit all 3 of them, sounds like maybe a little bit, but 1 segment, but just a little bit more color on that would be helpful?

1% pricing or the 1% organic decline are you referring to?

No, you alluded to pricing as being -- seeing some pricing pressures. I was just wondering was that a minus 1 in the quarter, was it heavily toward the 1 segment versus the other, so that's all?

Yes, I'd probably say it'd be across-the-board. Scott, when we are positioned well with engineering firms and APC firms, we do a really good job on price realization to maintain and to achieve our gross profit aspirations. Within all sectors, occasionally, throughout the quarter, we will see a few projects that have special pricing competition that we have to address. But overall, I would say, when we're positioned well, pricing is pretty solid. I'd say the APC, probably, saw a handful of pricing pressures in Q3. And the fluid handling filtration business, probably, didn't see much at all. And then, on the energy side, on a few of the big projects globally for the natural gas, turbine projects, pricing technology experiences 2, and then pricing becomes 3. So we do -- we saw some pricing on the energy sector on a couple of Middle East jobs that we had to address.

Okay. Got it. There's also a large pipeline of projects that are kind of lining up for release in petrochem in the next several years. To what extent do you think you have, maybe, some opportunities to monetize some of that?

Good question. The Emtrol-Buell-FKI integration team, actually, was general managers and sales folks on Tuesday, listed numerous projects that are in the petrochemical, chemical and refinery side that are in the engineering stage, that are funded, and those will be 2015. So my expectation is for the cyclone technology business to do quite well domestically and globally next year. And I thought they were pretty average this year. So I'm thinking there's a lot of projects that we're involved in right now. So in listening to our cyclone division, sales engineers and general managers, I think that fits well with what you just said.

Jeff, is that opportunity within the cyclone business, because of relationships with EPCs or with the program, the project owners themselves.

Both, the cyclone division businesses go back to the 30s and 40s and 70s. So we know many of the key players, the plant engineers and the project managers within the refineries in petrochemical plants to position us. But at the same time, we have been working with EPC firms for forever. So the answer would be both. We have to address both in the procurement stage.

Your next question is from the line of Gary with Granahan Investment.

I'm kind of going back to a previous question. You have leading brands, you have cross-selling opportunities, have had the window at the back as previous caller suggested with environmental trends, et cetera. But you don't have any organic growth. And you talked about wanting to build a world-class organization, and I've never seen one that didn't have organic growth. I know, I have asked you this before, but I just -- I don't quite get it in terms of why the organic growth just isn't coming through for your in markets where you clearly have a window at the back?

Well, I think on the energy and fluid handling side, we're seeing that. We're seeing the organic growth. So I think 2/3 -- 2 of our 3 sectors are seeing that. I think, our bookings on the energy side and the fluid handling side will see solid organic growth. The APC group on the top line challenge, you're correct, we do not have organic growth. And I think, we've got -- that's a challenge for us. We tried to be frank on that, that our sales execution is not where it needs to be. There has been some additional pricing -- some pricing pressure and some sales capacity, some sales engineering challenges. So we have to fix that. I tried to address that upfront on the call, and that's something we have to demonstrate, we can do on the APC side. And that's probably, Gary, our #1 challenge going forward is to demonstrate organic growth on the air pollution control group.

I guess, I think the acquisitions are interesting and important. But I think, clearly, until you can demonstrate, you can do organic growth. I'm not sure where your priority should be?

Yes. Well, I think they're both. I think growing organically is important. One of the things with the Emtrol acquisition, Gary, they were our #1 competitor in the cyclone business, which is a big part of our business. We'd win some orders against them. They've won a bunch of orders against us. So I think, that's part of the equation as well, if you can acquire your competitive and then deliver the growth, that's important. And at the same time, we've recognize with the current brands and the current portfolio, we've got to deliver organic growth. And that's our #1 challenge going forward, and you've restated it quite well.

[Operator Instructions] At this time, we have no further audio questions.

Thank you very much for joining the CECO call today. We look forward to talking with you all in the future.

Thank you. This does conclude today's conference call. You may now disconnect.