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CECO Environmental (CECE) Q4 2019 Earnings Call Transcript

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CECE earnings call for the period ending December 31, 2019.

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CECO Environmental (CECE -0.98%)
Q4 2019 Earnings Call
Mar 04, 2020, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning. And welcome to the CECO Environmental earnings conference Call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Matt Eckl, chief financial officer of CECO Environmental.

Please go ahead.

Matt Eckl -- Chief Financial Officer

Thank you for joining us on the CECO Environmental fourth-quarter 2019 conference call. On the call today is Dennis Sadlowski, chief executive officer; and myself, Matt Eckl, chief financial officer. Before we begin, I would like to note that we have provided a slide presentation to help guide our discussion. The call will be webcast along with our earnings presentation on our website at

The presentation materials can be accessed through the investor relations section of the website. I would also like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical facts 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 on Form 10-K for the year ended December 31, 2019. 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 reconciled the comparable GAAP and non-GAAP numbers in today's press release, as well as supplemental tables in the back of the slide deck. And with that, I will turn the call over to Dennis.

Dennis Sadlowski -- Chief Executive Officer

Good morning, everyone. And thank you for joining today's call. We're pleased that you could join us for this update on our 2019 fourth-quarter and full-year results. As in past calls, I will be reviewing our results and discussing the outlook of our markets with a few added comments on how they could be influenced by the global coronavirus pandemic.

With Matt, following me with the financial details. I will then summarize our progress and plans before leading us into the Q&A session where we will address your questions. As we jump in, I want to underscore that we're confident in our ability to accelerate growth, remain committed to delivering top-tier returns to our investors and are steadfast in pursuing our environmentally driven business strategy. Let me start with a brief look back and have you turn to Slide 3.

It highlights our four-three-three operating strategy that we launched in late 2017 to guide our priorities, investments and execution. It's proven to be a successful blueprint for transforming CECO Environmental into a vibrant growth company. In the past couple of years, we've upgraded the leadership team, expanded our international footprint, made investments in new product innovation, streamlined our operations and substantially improved the capital structure. In reinforcing our organizational and operating foundation, we transformed our execution toward customer focused, culturally aligned in delivering excellence.

Execution is what makes us even stronger and more resilient than the sum of our organizational parts. Moving to Slide 4, you can see the results of the team's exceptional execution around our blueprint four-three-three strategy since it was implemented two years ago. I can sum up those results in two words: solid progress. In executing against this strategy, I stated that we were aiming to generate organic growth.

And in two years' time, we've delivered 29% growth in organic orders, an increase of $85 million. The left-hand chart on Slide 4 depicts the excellent trajectory for increasing orders, a key to our progress. Revenue development, as shown in the center chart, also increased over the period by 10%. And equally important, we maintain consistently robust gross margins across the mix of new OE and aftermarket business even in the face of inflation and competitive pressures.

Finally, the chart on the right highlights an improvement in our EBITDA of 10%, which came while also making a much needed reinvestment in CECO's future growth potential. The four-three-three operating strategy will continue to guide our execution into 2020. And as I will discuss, after Matt's financial report, we're revitalizing our set of strategic actions to accelerate our growth. Turning to Slide 5.

I will share some highlights and thoughts on our performance during Q4 and throughout 2019. Let's begin with the fourth-quarter results. At $89 million, revenue was up 5% sequentially. And with gross margins holding at 33.6%, we generated an 11.3% EBITDA rate in the fourth quarter.

In addition, we produced $9 million of free cash flow in the quarter, a 90% conversion of our EBITDA. All of these results demonstrate the progress that the CECO team is making as we execute our plans. Across the board, our key P&L metrics are improving as we exit the year. Only in new orders that we fall short as our streak of steadily increasing results was interrupted.

So a robust quarter on the key financials gets an asterisk. At $68 million in new orders for Q4, we were off the pace of 2019 and down 7% year over year. Unfortunately, our energy segment saw very few project order closings in the quarter, which contributes the lion's share of the drop off. But this won't deter us from marching forward.

The team is working hard to start the next streak of growing orders and the sales pipeline remains healthy. At asterisk on Q4 did not prevent us from achieving full-year organic orders growth of 7% in 2019 at the upper end of our target range. And the increasing backlog helped to produce solid progress as we hit our stride in the second half. We ended the year with backlog up $35 million.

Revenue picked up in the second half, resulting in full-year sales of $342 million, up 4% for 2019. Strong contributions to the revenue growth were delivered by our industrial solutions segment along with some terrific execution across the board. EBITDA also positively followed the revenue trend as we closed 2019 at $33 million, which reflected a 7% increase year over year even with our ongoing reinvestment for the future. For the full year, we generated $5 million of free cash flow, well below our capability.

But what's notable is that after a less than stellar start, we roared back in the second half, generating $17 million of free cash flow in the final two quarters of 2019. As I mentioned before, we believe that cash flow is both the strength of our asset-light business model and one of the keys to generating top-tier returns. We intend to keep the pressure on. Finally, our capital structure continues to improve.

Matt will give you the details, but there's a lot to like. The actions taken and ongoing performance in 2019 puts us in a position with greater flexibility, more capacity and reduce leverage. This capital structure enables us to seize investment opportunities to accelerate our growth and compound returns for our investors. Before moving on, I will paraphrase from an old saying from my soccer days, you are what your results say you are.

And with that in mind, we believe that our 2019 results say that CECO has transformed itself into a vibrant growth company with capabilities, capacity and market position to deliver top-tier returns. Now turning to Slide 6. We highlight the vast array of products and services that help us compete in the growing low-carbon economy. In a nutshell, CECO is providing solutions for a cleaner, safer world, with a broad portfolio of application-specific product solutions that range from reduced emissions of chemicals in particulate matter to productive fluid handling and process water treatment designs.

Our biggest target remains clean air. We've developed and are building a reputation for not only providing sustainable solutions but also for doing so when others can't, through our technical capabilities and innovative products. To shine a light on our products, services and technical capabilities, I wanted to share two unique technical project wins from the fourth quarter. One is an exciting new order that demonstrates the ingenuity of our applications team and the value of our solutions.

The other highlights are capability and capacity to take on challenging customer needs. Together, these two projects demonstrate our value proposition, offer superior product solution capability that makes our customers' operations more efficient and safe, while protecting the environment. Let's now turn to Slide 7, which depicts our recent energy segment project win. This win involves a new industrial customer that operates a petrochemical facility in the Philippines, producing ethylene, which is a key component in plastics, resins, adhesives and synthetic products used in every aspect of modern life.

Facility's ownership devised a plan to generate electricity and process heat by using a gas byproduct as the fuel source. This represents an essentially free fuel source and generate significant added benefits via the integrated process heating. Despite a sizable capital investment, it will drive major efficiencies for this facility and have a payback of less than two years. CECO and our Aarding team members were called in when the customer and their APC stalled on developing an efficient design for the exhaust system that would allow the customer to use the exhaust for process heating.

The CECO-Aarding team was able to provide an elegant solution with significant cost savings by using a smaller and more efficient equipment lab. The CECO solution resulted in reduced capital and installation cost and will make future maintenance easier and safer to perform. It's an example of us turning our applications expertise in gas turbine exhaust systems into significant economic benefits to our customer. The fact that the system helps protect the environment by reducing the amount of fossil fuel used in the facility makes it another win, win, win for CECO, our customer and the environment.

Turning to Slide 8, you will see a schematic of a product solution that makes CECO standout in our competitive markets. This win was from a long time customer, involving the R&D center of a large semiconductor manufacturer. Located in the Pacific Northwest, the customer is looking to significantly expand their production of computer chips for testing with some challenging design, installation and delivery requirements. When silicon wafers for computer chips are produced, the process submissions contain hazardous air pollutants, or HAPS, which must be treated to comply with air quality and safety standards.

CECO's HEE-Duall team took this one home because in this instance, we were the only company that could perform on the entire project scope, the ultimate competitive advantage. As a result of our long-standing relationship and the trust built through the years, CECO was initially hired into a consultants role to help write the project specifications. Subsequently, our HEE-Duall team win the order to design a high-volume scrubber to fit a small footprint in a complex manufacturing environment. The requirements included aggressive schedule for delivery and installation, but what made this effort noteworthy was the innovation required to stretch this equipment to its performance limits inside of a reduced operating footprint.

Many of our competitors simply don't have the capability or capacity for such a lift, but we do. It's a win, win, win for CECO, the customer and the environment. And we further strengthened our reputation, which helps us with the next win. Moving to Slide 9, I will review the outlook of our served end markets.

Before digging in, I want to emphasize three points. First, you will notice that our end market exposures have been updated to reflect the overall 2019 revenue mix of the company. In short, strong industrial and midstream oil and gas revenue in 2019 have shifted our end market mix away from the gas power gen segment, which has been in a protracted downturn since late in 2016. Second, the overall CECO end-market outlook remains generally positive and the CECO sales pipeline is relatively robust.

I say this despite the speed bump in the energy segment orders and some softness in the fluid handling segment. And third, like every company with a global footprint, our markets are being influenced by the spread of the coronavirus. There's no way of predicting the magnitude and duration of a global pandemic. So our outlook cannot fully account for the uncertainty this infectious disease poses.

But I can provide some context in terms of what we are seeing and doing. Our first concern is for our people, especially the 85 associates we have in China. Our people have been following the government protocols, limiting travel, while doing as much as they can to support our customers. Our people are in Shanghai, Xinjiang and Guangzhou and have no signs of the virus.

We have regular dialogue and are taking precautions to ensure their good health. China represents about 5% of our ongoing revenue and much of the activity has slowed. So we will likely see some push out across the market. Our second priority is for our customers.

We have little direct supply from China to other parts of the world, but with the virus spreading into other regions of the world, we are seeing issues arise that may force localized temporary closing of manufacturing facilities or delays in shipping. We are working to ensure we remain current with our customers. And at the same time, new global capex and maintenance project decisions may be swayed by the uncertainty associated with the magnitude and duration of a global pandemic. Right now, we are seeing some modest delays, but overall market still reflect buoyant activity.

With that in mind, let's move to the pie chart and our served end-market outlook. I will begin at the top with the refinery slice of our energy solutions market and then move counterclockwise. The refinery market remains steady. And while Q4 project activity was down from a year ago, our leading technology position and market share keep us connected with the global activity in the market.

As with most of the energy markets, this segment is project-based, capital-intensive sector with extensive planning horizons. This gives us some visibility, but project schedules can and do sometimes shift forward or back. Looking forward, every indication points to a market that is stable with an active pipeline of projects, and we have no intention of relinquishing our strong No. 1 market share position.

Moving counter clockwise, the midstream oil and gas market segment continued to show buoyancy. In 2019, CECO orders were up 44%, and we continue to widen the funnel of activity with valuable solutions for critical applications across the segment. Our strength in the past year comes from key wins in gas pipeline, gas separation and LNG applications, as well as the gains we've made in processed water. And we've also extended our reach with new technologies and talent to enable further growth in this segment.

Continuing along to gas power gen, our revenue mix has shifted downward in 2019. The backlog is strong. Project activity in Q4 and early 2020 has been sparse but the 12-month outlook from our sales pipeline suggests demand is increasing. We've improved our competitive position in this end market so we expect to benefit from the uptick.

Next, at the bottom of the pie chart is Solid Fuel Power Gen. Here, we include our damper business that was formerly all coal power projects. While a small portion of the company, we had two consecutive strong quarters with increases of 23% and 67% in order sequentially. Some of that strength comes from the sales team adapting their effort to adjacencies that are not strictly coal power, such as application wins in the mining industry.

Our team will continue to focus on successfully supporting the installed base through aftermarket offerings and demonstrate resilience by opening up new applications. Moving counterclockwise, industrial fluid handling is up next. Team faced a challenging 2019 and our results suffered. Our outlook suggests that the aquaculture segment is improving, while we expect demand generated from the auto sector to remain sluggish.

Our fluid handling segment has seen the largest percentage pickup and outlook based on our 12-month sales pipeline with a few big projects on the horizon for 2020. You can be sure that we will be going all out to capture those projects. This moves us to industrial solutions. This segment serves the air quality improvement needs across a range of production environments.

For industrial solutions, 2019 started strong and finished strong. Market itself, on the other hand, has been quite difficult, suggesting a considerable share gain by CECO in 2019. Signals are mixed, and we are sensing more discipline as it pertains to capex spend, and we've seen a few projects deferred. On the other hand, CECO's pipeline is still healthy with several potential awards being pursued.

ISM PMI did tick above 50 in January and February, signaling expansion for the first time in several months, but the spread of the virus is likely to dampen that from becoming a trend in the short term, and our plans are not just counting on the market. We've been active with people and product and innovation investments to keep our growth trajectory moving. In closing, I will emphasize three points. 2019 was a year of clear progress for CECO with strong second-half results, and we're committed and positioned to deliver top-tier returns.

Our four-three-three operating strategy has transformed how we do business and is driving our progress toward our 2021 goals. Finally, our served markets are large, diverse and active and we're determined to win share. And with that, I will turn things over to Matt. Matt, take it away.

Matt Eckl -- Chief Financial Officer

Thanks, Dennis. Before digging in, I want to emphasize that I will be discussing the detailed financial results and how we've strengthened our capability and capacity to accelerate growth. Let's start with Slide 11, which shows that although our trend in orders growth was snapped, a sequential increase in revenue drove profitability higher. Orders were down $48 million sequentially and 7% year over year.

Starting from the top of the stack bar chart, on a sequential basis, fluid orders declined slightly, reflecting the continued softness in their end markets. MRO spending slowed throughout 2019, especially in oil and gas markets, putting fluid handling down 12% organically for the total year. We are not pleased with the performance and are making changes to course correct in 2020. On the other hand, our pipeline for new aquarium opportunities has grown significantly, and we're optimistic in our ability to win with our market-leading Fybroc brand.

And as Dennis mentioned, there are some sizable projects on the horizon, and we will be in on the hunt. Moving down the stack bar, industrial orders were healthy, up 11% sequentially and 22% year over year at $21 million. It's a tough market, and I'm pleased to say that our results suggest we're gaining share on the competition. While there's some mixed signals in this market, we feel good about our very healthy pipeline heading into 2020.

By far, the most significant factor in our fourth-quarter orders results came from our energy segment. After a steady increase in orders through Q3, this project-based segment and this team-up with project-timing awards leading to less than desired results, meaning some orders were pushed out, especially in the refinery segment where fewer than $5 million of projects were awarded globally in Q4. Our gas power gen segment has been stabilizing and the sales pipeline remains active. We had a few solid wins in Q3, although not many projects reached the award phase during this last quarter.

Each of the big three gas turbine OEMS, GE, Siemens and Mitsubishi, have reported their recent quarterly results and all of them have noted a stabilization in the market from a steep downturn in late 2016. We continue to take share in 2019, building our market-leading position and have that mindset as 2020 begins. The chart on the right shows that revenue was up sequentially nearly 5% and down slightly year over year by the same percentage. I'm pleased to see the backlog conversion in the second half as our team has been executing the customer requests.

Growing our backlog and executing project revenue at healthy margins is key to achieving future operating leverage. And speaking of backlog, I will now turn to Slide 12, which shows the it's, equivalent of bank revenue, at $216.6 million. In 2019, we built backlog of $35 million, contributing to an excellent starting position for the coming year, even with the decline in Q4 of 9%. I will note that while orders were lower than we desired, Q4 has typically been slow for CECO with the last four years averaging approximately $70 million.

The majority of CECO's order pipeline consists of original equipment business for which we have leading brands and market positions. Again, to the long cycle nature of our business, trailing 12-month indicators are a good overall measure of our orders performance. TTM tends to smooth out the lumpiness in a single quarter while still providing the direction of future revenue. Looking at 2019, our backlog grew $35 million, an increase of 19%, and our book-to-bill was greater than 1.1 times.

The increase demonstrates we're winning share and growing two times our aggregate markets. Now I will turn to Slide 13, which shows that the combination of execution and sequential growth moved EBITDA in to double-digit margins. Our gross margins remained healthy at 33.6%, while flat sequentially, was up two points year over year and is driven by improved project margins and productivity, as well as cost savings in our fluid handling plants. Our non-GAAP operating income was up 37% sequentially and 14% year over year on improved project margins with lower SG&A and stock compensation.

Adjusted EBITDA was up sequentially by 20% and essentially flat year over year on volume, project margins and lower SG&A. Turning to Slide 14. Our detailed financials for the fourth quarter of 2019 show that we had solid operating performance on several profitability metrics. I've already discussed revenue and orders, so I will take some time there to highlight a few other metrics.

On a GAAP basis, both operating income and earnings per share were up year over year $1.2 million and $0.21, respectively, led by higher gross margins, lower SG&A, including stock comp expense and decreased tax and interest expense. On a non-GAAP basis, we delivered $10.1 million in adjusted EBITDA, hitting 11.3% in the quarter, an emphatic demonstration of operating leverage as we grow our top line. Earnings per share grew $0.19 year over year to $0.27 in the quarter on improved project margins, lower SG&A, lower interest and tax expense. Turning to Slide 15.

We have the same performance metrics, but this time, reflecting the total-year 2019. I want to emphasize that the chart shows that we hit our stride in 2019 with significant progress, especially during the second half, when we achieved outstanding results. On a GAAP basis, our operating income was up $8 million and earnings per share improved to $0.70 year over year as a result of improved volume and margin, coupled with a non-repeat of the prior-year writedown of Zhongli assets associated with the divestiture that took place in October of 2018. On a non-GAAP basis, our earnings per share jumped 111% year over year or $0.30 per share on volume, operating leverage and lower interest and tax expenses.

Our 2019 non-GAAP effective tax rate came in exactly on our estimate of 25%. Flipping to Slide 16. We delivered more good news by generating $17 million in free cash flow during the second half of 2019. The chart on the left shows our trade working capital grew 5% sequentially on AR, in line with our revenue increase.

Our project WIP, however, is at a fantastic 0.1% of sales. This is a compelling testament to our asset-light operating model. Sliding to the right, we generated $9 million of free cash flow in Q4, driven by $10.9 million of operating cash flow, offset with $1.9 million of capex, primarily driven by machinery upgrades and an ERP implementation in our pumps business. And 90% of our free cash flow to EBITDA conversion was a good performance.

On a full-year basis, we got off to a weak start, and then, as predicted, came back strong during the second half of the year. Our capability is better than the total-year results, and we continue to make investments to improve our operational excellence. Earlier, Dennis highlighted the success of our four-three-three operating strategy, and I thought it would be interesting to provide a quick update for our simplification efforts. As a reminder, in 2017, CECO had 67 legal entities and 13 ERPs.

I'm pleased to announce that closing 2019, we have 6 ERPs and 41 legal entities. This past quarter, we made great strides with two big ERP moves. I mentioned both of these last quarter. I want to touch on them again because they're in place and improving our operating results.

The first is Microsoft's cloud-based D365 platform in our pumps business. We went live in November and it's already providing our team with advanced costing and inventory management capability. The platform is making us more productive in a soft fluid handling market and stronger competitively as the market begins to strengthen. Going forward, D365 also allows us to compete online, which was unsupported in the 2009 version of our ERP.

With this change, we can serve our OEM customers and distribution partners that want to get quotations online and along with visibility to lead times. Second, we've upgraded our energy segment to an Epicor 10 version, a cloud-based version that offers enhanced project management, billing and service modules that were not available to us in our previous version. ERP Go-Live are not to be played apart. They require change management, team work, long hours and a dedication to delivery to the customer even if your system is down.

Several of our team members shined. In particular, I want to mention Stacy Sebanski, Derek Hank and Alex Powell in operations, and Bill Kind and Owen Veron in our IT team for their extraordinary efforts. Just as importantly, I want to thank their families for the time that your loved ones devoted to CECO, getting us live. In short, I'm pleased with the systemic change we're enabling at CECO.

It's improving cash earnings and strategically positioning us to accelerate our growth. Next up on Slide 17, it's clear that we've built a healthy balance sheet, which is a big component in accelerating our growth. During the fourth quarter, free cash flows further reduced our debt of $67 million. Our net leverage ratio is sufficiently below one turn of EBITDA, and CECO has over $100 million of untapped capacity in our current facility.

An impressive capability to seize investment opportunities consistent with our new financial criteria and enduring environmental mission. In the home stretch of my comments today, I will turn to Slide 18, which addresses our progress toward our 2021 financial targets that we've committed to meeting, if not exceeding. The results we've achieved this past year, especially during the second half, is the measure of our progress toward delivering top-tier returns. Starting in the upper left quadrant, our goal is to organically outgrow our markets two times over time.

And as you can see, we're doing just that. TTM revenue at 4% growth is also performing right at our targeted green zone. Our robust backlog will favorably come into play with this target, and we're operating in active end markets with a competitive edge to our innovative products and high-caliber engineering expertise. The two project wins that Dennis shared earlier, are good examples of competitive edge, which is essential to growing organic revenue.

Moving to the right, our EBITDA rate is largely driven by revenue and the operating leverage achieved our growth. With revenue ticking upward, our EBITDA rate improved to 11.3% in the quarter. We still have some work to do on the growth side to move our TTM EBITDA rate into the target range of 12% to 14%. This will require us to consistently generate growth, as well as reduce G&A to fuel our sales and marketing investments.

Next is achieving a superior return on tangible capital, which continues to reflect our asset-light operating model. With working capital going down and earnings improving, we have improved ROTC for a sixth consecutive quarter and exceeding the target zone at 59%. We're confident that there's still room for improvement, and we're focused on accomplishing that. Finally, on the lower left-hand side is our free cash flow conversion rate, which at 90% in Q4, was above the target range.

On a TTM basis, free cash flow conversion was 14%, as we continue to work off a tough first-half 2019 on working capital. We remain valid in our Project WIP as a driver of further free cash flow improvement, and we're working hard at it. To wrap up, I'm really pleased with the progress that we made in 2019, especially during the second half. Over the past couple of years, we've transformed our operations and built a healthy balance sheet.

I'm confident that we're up to the challenge of continuing to achieve organic growth. All that leads to top tier returns, and that's what we're committed to. With all that, I will hand it back to Dennis.

Dennis Sadlowski -- Chief Executive Officer

Thanks, Matt. Nice job, as always. In closing, I want to touch on our transformation, progress and steps toward accelerating growth. The entire organization is proud of what we're achieving and remains confident and determined to achieve even more.

The four-three-three operating strategy has been a blueprint for transforming how we do business and driving growth throughout the organization. It required tough decisions and sustained actions and a commitment to achieving our 2021 financial goals. Our organizational and operational foundation have been reinforced to become a much more agile, resilient and capable organization that can and does beat the competition and adapt to changing market conditions with an attractive value proposition. Importantly, we substantially improved our capital structure to give us greater flexibility, more capacity and less leverage.

That's already paying off, and we will continue to do so as we accelerate our growth. CECO has a talented and highly focused team that has been exceptional in executing the four-three-three operating strategy. Over the past couple of years, we've transformed ourselves into an engine of organic growth. Organic orders have increased 29%, revenue up 10% and backlog closed $35 million higher than two years ago.

In the process, we've expanded our EBITDA margins and our ROTC closed at a record high of 59%. One of the keys to those impressive results is our team's ability to bring home exciting project wins, it drives growth and produce solid financial returns. In looking at these wins, I see two things that point to CECO's transformation. First, our investments in an expansion of technical sales coverage are paying off in both new projects and the aftermarket.

Second, we've developed a competitive one-two punch that's becoming tougher and tougher to beat, offering superior products and capabilities to protect the environment and improving the customers' operations to be more efficient and safe. That's all very good news, and we're rightfully proud, but we're absolutely not setting the company on cruise control. Rather propelled by our momentum and fueled by our untapped potential, we're going to shift CECO in a higher gear. So turning to Slide 19.

I'm excited that we're revitalizing our set of strategic actions with the aim of accelerating our growth and doing so with the following guidepost. First is to keep our eye on the ball by executing for every customer and aggressively competing in our large and attractive end markets. And I speak for everyone at CECO Environmental when I say that we will do so with passion and discipline. Second, to focus on the sustainable solutions that are demanded by our customers in this growing low-carbon economy.

It's the concept and need for sustainability that will be inspiring, influencing and guiding our strategic actions going forward. And third, focus our actions on accelerating growth to be positioned to win with market expansion into adjacent industries in growth regions, new product innovation and recurring revenue models and targeted M&A. In closing, we're on a path to delivering top-tier returns. I'm confident that we can continue to win share organically and generate value as we push to accelerate our growth.

And now, we'd welcome your questions. Operator?

Questions & Answers:


[Operator instructions] The first question today comes from Chris Van Horn of B. Riley FBR. Please go ahead.

Chris Van Horn -- B. Riley FBR -- Analyst

Good morning. Thanks for taking my questions.

Matt Eckl -- Chief Financial Officer

Good morning, Chris.

Dennis Sadlowski -- Chief Executive Officer

Good morning, Chris.

Chris Van Horn -- B. Riley FBR -- Analyst

So just to talk about the order headwinds during the quarter? It sounds like most of those were deferred. Could you give us a little more color on maybe the timing and what you see around those orders coming back?

Dennis Sadlowski -- Chief Executive Officer

Yeah. Yeah, Chris. Orders were short of our target that we thought would happen in the fourth quarter, even as we anticipated fewer closings. And so at the same time, as we see that, you can tell, we remain committed to growth.

Orders are important. We don't shy away from that. It's a key indicator, and we weren't completely pleased with the results. Having said that, the key variables in us continuing to do what we need to do is regular customer interaction, including adding people in new segments and new territories.

And then our hit rate on projects. And both of these are still in great shape. So while we didn't keep the trend of increasing orders going, the pipeline is still very large, very active and most of what we see is still moving forward. In our pipeline in energy segment alone over for closings over the next 12 months is over $1 billion in the date and all three of our segments has continued to grow.

And the only thing that really puts a question mark out in the current period, it's the coronavirus. It's absolutely changing activity in a number of regions of the world. I mentioned China already this morning. But we are seeing other activities in and around the world where there are slowing travel that's causing slower decision making, that's affecting both orders and, in some cases, slowing down inspections and things like that related to project execution and revenue.

Chris Van Horn -- B. Riley FBR -- Analyst

OK, great. Thanks for that color. And then you continue to execute well on the margin line. And when you look out through 2020 and into 2021, do you still have additional operational levers to pull? Is most of it volume-driven? And then how do you see kind of that margin trajectory getting to that 12% to 14%?

Dennis Sadlowski -- Chief Executive Officer

Yeah. I will make a few comments on the gross margin. But I think you're referring mostly to the operating margins and how we move forward. At the gross margin line, the team has done a fantastic job, I think, of really transitioning to sell value, especially in our custom and engineered product scope where a lot of people can get into the habit of doing a cost-plus modeling as to how they view the market.

And that, in conjunction with aftermarket sales and follow-on and service revenues, have continued to help us keep a nice, solid blended gross margin even as we grow the mix of type and area of projects and sales activity. So at the gross margin line, we've been very pleased that the ability that we're getting out of a whole mix of activities and a whole mix of different market conditions.

Matt Eckl -- Chief Financial Officer

Yeah. Over the longer period, Chris, I would suggest 32% to 34% on gross margin. And if you look at the last three years, our SG&A has actually declined as we've taken cost out of G&A and increased sales. So we get a decent flow through in operating revenue.

It's all about growth for us to maintaining that gross margin.

Chris Van Horn -- B. Riley FBR -- Analyst

Got it. All right, great. And then last for me. Obviously, despite Q4, you still had a really good backlog growth for the year.

And just want to know, I think the answer is probably a mix of both, but maybe some detail around that? Is it macro driven? Are you seeing a little bit more push from your customers to sustainable projects and, as well as some competitive factors? And maybe you could highlight each of those. Thanks.

Dennis Sadlowski -- Chief Executive Officer

Yeah. I'm not sure I followed your question precisely, but we were pleased, throughout the year, to be growing backlog and ended the year $35 million above where we ended the prior year. And so find ourselves again in good shape with the backlog. Our markets are very large, they're growing in importance of sustainability all around the world, and we're executing our plan to drive the CECO growth engine.

So I think we're, long term, medium term, in a good place to be. There is a question mark right now over the short term as this virus does change some of the activity and the pace that people are moving to close.

Chris Van Horn -- B. Riley FBR -- Analyst

OK, great. Thank you so much for the time.


The next question today comes from Jim Ricchiuti of Needham & Company. Please go ahead.

Jim Ricchiuti -- Needham and Company -- Analyst

Thanks. good morning, Matt and Dennis. Dennis, just to follow up on some of the commentary that you just provided. It sounds like you are seeing a little bit more foot dragging in the last couple of weeks, I guess, as we're seeing more of an impact outside of China from the COVID-19 outbreak.

Is that fair to say?

Dennis Sadlowski -- Chief Executive Officer

I have to say, yes, unfortunately. So China, for sure, we saw immediate impact. Everybody was asked to stay out for an extra week after the Chinese New Year, and there's been quite a bit of government disruption. We're trying to stagger and have a lot of our people work from home.

But beyond that, we started to see other elements that are slowing down, not changing long term or anything, but for example, we have a large project, wants to be fast tracked. It's in the Middle East, and it has an influence from an EPC in Asia. As a part of the process, even on a fast track, they need to audit all the major facilities, including our headquarters, and they have curtailed travel in order to get that done. So they have pressure on a fast track product from their end customer.

And at the same time, we're not able to take care of some of the small issues, if I might, to execute along the way. And as a similar example where we're producing a large order also on a fast track with a tight timetable in Northern Italy. And at the moment, everybody is showing up to work, progress is being made. But it looks like there will be delays around people flying in for normal inspections that always take place on projects like these.

And so those are the elements that are driving more uncertainty in the short run. Haven't seen anything affect longer term at this point.

Jim Ricchiuti -- Needham and Company -- Analyst

So I'm wondering how we should be thinking about this near term. Is there the potential that this potentially could impact your revenue short term or just causes folks to maybe delay on some of the projects and has some fallout for the near-term booking visibility?

Matt Eckl -- Chief Financial Officer

Yeah. Jim, this is Matt. I will start with revenue and tell you that we do think that Q1 will be tough, but we will make it up later in the year. I will remind you that we're ending the year with the largest backlog from a year-end perspective in the history of the company at $217 million.

So that's nice as we head into 2020. The long-term prognostications of what's happening with COVID-19 are still to be determined, but our pipeline is strong, and we're seeing a lot of order activity. So I feel pretty good about the order side and revenue for full year, Q1 will be tough.

Jim Ricchiuti -- Needham and Company -- Analyst

OK, that's helpful. And if I may, just a question on selling and administrative expense that was surprisingly low. It looks like lowest level we've seen in a couple of years. How should we think about that going forward? I assume that there may be some normalization of that as we look out to Q1 and into the balance of the year.

Was that an unusually low number?

Matt Eckl -- Chief Financial Officer

It was, to the extent of roughly about $1 million. So CECO's SG&A includes sales, new product innovation, application engineering, project management and then the support functions like finance, IT, HR. And if you look at reported SG&A, it also includes stock comp and depreciation. And so SG&A was lower in Q4 as we trued up our future stock compensation accrual and there's about $1 million benefit in there.

As we look to future stock awards and analysis, we concluded that we were over accrued. So that's a onetime event that you would have seen in Q4.

Jim Ricchiuti -- Needham and Company -- Analyst

OK, that's helpful. Thanks for that. And just with the final question for me, and I will jump back in the queue. Interested in that, the slide that you showed about expanding into adjacent markets.

And I'm wondering, Dennis, if there's anything you might be able to say about that, whether that's something that you think you're going to be in a position to accomplish organically or if inorganic is going to be the main way that you look at some of these opportunities? And just in general, how does the M&A pipeline look?

Matt Eckl -- Chief Financial Officer

Before the answer to that question, real quick, Jim, I wanted to add one little point on the SG&A guide. I might've mentioned to you, doesn't impact EBITDA. That's kind of something I know, but everyone knows that I wanted to make sure that I pointed out to you, it only impacts operating income and GAAP SG&A. So go ahead, Dennis.

Dennis Sadlowski -- Chief Executive Officer

All right. So your question was, as we look out forward in what we're executing on and buying, we have made a number of investments over the last year, two years, both to put people in regions that we think we can get traction. For example, in our industrial business, has been predominantly North American, probably good at a time like this where the crisis hasn't really hit the U.S. as much.

But we've deployed people in Europe, in India, in China and are getting good traction on there. So the point being we're not counting exclusively on the market, and we continue to make selective adds in ways that we think can generate good new orders mix. We've also, as you've heard, made some investments in new product innovation. A number of those wins are finding their way into the market and getting some traction.

So they're too, not just counting on the market, but controlling those things that we can do to drive organic growth in these large markets, in these attractive markets and over the sustained longer term. We have been active in the M&A market, assessing targets and candidates, kicking tires, looking at opportunities. We expect to continue to do that. We think that's a part of how we build value.

We think it's a great place to be with the growing importance on sustainability and so the kinds of solutions that we execute on, and we will continue to do so.

Jim Ricchiuti -- Needham and Company -- Analyst

Got it. Thank you.

Matt Eckl -- Chief Financial Officer

Yup. Thanks, Jim.


The next question today comes from Sameer Joshi of H.C. Wainwright. Please go ahead.

Sameer Joshi -- H.C. Wainwright -- Analyst

Thanks, Dennis, thanks, Matt, for taking my questions. Just following up on the theme of the energy market order flow. For the midstream oil and gas, you are showing promising, like optimistic growth next year, what gives you that confidence?

Dennis Sadlowski -- Chief Executive Officer

Yeah. So how do we look at and report an outlook of our external markets, say number of factors, direct dialogue with customers and what we're hearing and seeing from them, industry reports and projections to a lesser degree. And then what's really in our active sales pipeline. Our sales pipeline that we are referring to is a project or sales opportunity that one of our people has actually touched, reviewed with a customer, it has a value, and it has an anticipated a onetime award timetable and everything in that next 12 months.

And so we've continued to see over the last year and even early into this year, slowing but modest growth in that overall sales pipeline. So that's again, the number of awards in dollarized value going out into the future. I think I mentioned our energy segment alone has over $1 billion in that rolling 12-month pipeline and growing modestly. And so it's that that gives us the confidence that things are moving, things are being placed.

Our reputation continues to grow. We've extended into a number of new applications, and we think that there's still a lot of opportunity in all kinds of regions around the world. And that's largely where we built quite a bit of success in the last year on the order side.

Sameer Joshi -- H.C. Wainwright -- Analyst

OK. Thanks for that. You may have touched upon this, but just a clarification. Are you seeing more of a competitive pressure in addition to the weakness in the industry that has caused this Q4 and then Q1 expected weakness?

Dennis Sadlowski -- Chief Executive Officer

Let me see if I heard your question. What were you asking about competitive pressure in the industrial arena?

Sameer Joshi -- H.C. Wainwright -- Analyst

In the energy.

Dennis Sadlowski -- Chief Executive Officer

In the energy segment. I think we've seen that, in particular, when the Power Gen market went into a dive, the market last year were probably about half of what they were in 2016 when they were very robust. And so the growth that we've generated over the last three years comes at a time when we still had what was our largest served end-market segment at about half. That half is stable, it's growing.

We've lost a few competitors along the way. And so it's still intensely competitive, but we really believe that we have the best team, the best product, the technical capability, and if things pick up, we are also one that can move very swiftly to address opportunities as they come.

Sameer Joshi -- H.C. Wainwright -- Analyst

OK. One last one. Are you forcing further reduction in debt? And what is the optimal level that you're targeting?

Matt Eckl -- Chief Financial Officer

For further reductions in what?

Sameer Joshi -- H.C. Wainwright -- Analyst

In the debt.

Matt Eckl -- Chief Financial Officer

Oh, in the debt, OK. We've actually done a really nice job of paying down debt over last few years, as you can tell. I think our net leverage ratio is hitting sub one, which in today's market, I think, is a benefit for us. We have a very healthy balance sheet.

We will continue to pay down debt opportunistically. We have very low interest rate. So it's really about how do we take our capital and apply it to value creation ideas, which is M&A target, as well as investments. So we will continue to pay it down as we have cash sitting on the balance sheet.

But I think at less than one times net basis and 1.5 times on a gross basis, we're in a very good position.

Sameer Joshi -- H.C. Wainwright -- Analyst

Great. Thanks for taking my questions.

Matt Eckl -- Chief Financial Officer

You bet. Thanks a lot.

Dennis Sadlowski -- Chief Executive Officer

Thanks, Sameer.


[Operator instructions] The next question today comes from Gerry Sweeney of R Capital. Please go ahead.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Hey, good morning, Dennis and Matt. How are you doing?

Dennis Sadlowski -- Chief Executive Officer

Good morning, Gerry.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Obviously, I mean, I think you've done a really nice job over the last couple of years with the four-three-three strategy, streamline ops, take out the friction, the balance sheet, all that. But I want to take a little bit of a step back and maybe if you that could stretch your vision per se a little bit. I mean, if you look out the next two to three years, what's the biggest opportunity? What gets you excited? What do you want to sort of be this next big step forward for CECO?

Dennis Sadlowski -- Chief Executive Officer

Yeah. I think it's easy to be excited right now because sustainability continues to take on a larger and larger theme all around the world, in business, with our customers, with our power generation, with our energy customers. You see it more and more as a key topic in and around business. And that's exactly the kinds of solutions that we address.

So we address sustainability needs that come with industrial progress. And that's what we're all about. That's what we've been all about. And so for that, I think, it's a great place to be because we continue to anticipate we will see a tailwind around those kind of sustainability solutions that we offer.

Having said that, we build a growth engine. We leaned into that. We're doing a lot better at translating unmet customer needs into new product and more active, as we said, in looking at ways to add to the portfolio through targeted M&A that also address this growing trend on sustainability.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

On the M&A part, and that's really, I think, an area of interest. I mean, in particular, for me, if you can sort of start building out this industrial platform a little bit. If we see some short-term or even short- to medium-term dislocations in the market because of corona, it feels as though you're in a position to be opportunistic and go after some opportunities. Is that sort of a fair assessment?

Dennis Sadlowski -- Chief Executive Officer

Yeah, there's no doubt that the improvements we've made in the balance sheet right now -- to Sameer's last question, right now, we have a very flexible debt structure that allows us to pay down debt at any time. We don't have new ideas in front of us to invest in, but it also allows us to flex pretty quickly to attack and seize opportunities that we might come out and find in the market. And we've been active. We know the areas that I mentioned around sustainable solutions that we like.

We're a technology company. And so we continue to seek technologies and enhance the way we do things and the way we impact customers. So absolutely, we like the positioning we have the company in right now.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Got it. And then going to the granular level a little bit. Just for the backlog, I mean, on a year-over-year basis, that's the way generally to take a look at it, it's very good. But any rumblings in the backlog or any projects that have potentially shifted because of the coronavirus from -- solidly in the backlog to question mark or things like that?

Dennis Sadlowski -- Chief Executive Officer

So if the question -- first off, I would say our backlog is solid. It's active. It's moving, has been for the last year and even as we've grown, continues to be solid, growing and active. And so the backlog is, as best I could say, no risk, except for delays right now that we see, when I say no risk.

Interestingly enough, I would say the orders profile today has the same profile. So the sales pipeline is also getting some push out but I don't see anything that suggests anybody is putting their hands back in their pocket or rethinking major investments at this point. Everyday, there's new data. And so in both cases, we like the long-term prospects of what we have.

At the same time, I think I mentioned at least one project where there's likely to be production delays due to people not wanting to travel to regions that are showing signs of the virus growing in certain regions in Northern Italy, but we are doing other major bid work even in China via video conference on projects that are wanting to have a fast track but have a lot of technical complexity where we would love to be face to face because we are very clear who the technical leaders are at CECO Environmental, and we're trying to move those things through. But it's more around shortage-term delay right now than anything we're seeing that would change any of our long-term views.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Got it. And then one final question. This is probably more for Matt. $35 million of cash.

I think 75% give or take a little bit overseas, I think, the rest U.S. We've talked in the past, some of that cash gets caught up in some of the legal entities, etc. What can you get that down to over the course of the next year? As what would be a good carrying amount? And then two, at 75% overseas, is that stuck there? Are you just keeping it there for operational opportunities to better -- where can you bring some of that back, just take off some of the cash off the balance sheet?

Matt Eckl -- Chief Financial Officer

Yeah. The international cash, the only, call it, bar for bringing it back home is really withholding taxes that are local to the country, which that cash resides, probably doesn't make sense to send it back. On the domestic side, we can move cash within U.S. and Canada, no problem.

In fact, if I can make that zero, I would. Because I can get in and out of revolvers fast as I want. We can run this pretty efficiently. Do I think we can bring more back from the international? Absolutely, we're working those levers right now.

The only thing that's working against us is that we're actually generating pretty good cash flow internationally. So we will keep bringing it back as we can and the number I would say that's optimum for us, Gerry, in the future, means something sub-10 internationally. So I think we will get there in the near future, maybe two to three years, but we don't necessarily need big cash right now because of our liquidity and our credit facility.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Got it. So suffice to say, if you wanted that cash or other investment opportunities overseas, you could bring it back, you just got to --

Matt Eckl -- Chief Financial Officer

Oh, yeah, the only place that -- because we have larger projects and it moving around a lot, I don't want our revolvers all over the world. It's nice to have cash available to match terms with our vendors and payer, collect from our customers as need be. The only place that's somewhat primitive that we've been very successful in, is China where we brought $5 million back year to date in 2019, that's the only place that's a little bit harder to get the cash out of it, but we have a good plan and consolidations of legal entities is really helping move that forward.

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Got it. Perfect. I appreciate it. Thanks, guys, and nice working with you for 2019, so.

Matt Eckl -- Chief Financial Officer

Thanks, Gerry. Appreciate it, Gerry.


The next question comes from Tate Sullivan of Maxim Group. Please go ahead.

Tate Sullivan -- Maxim Group -- Analyst

Hey, thank you. Good morning. Just a couple of follow-ups from me. Matt, I think you mentioned -- so revenue in 1Q '20 -- and thanks for all the comments on temporary or hopefully temporary impacts from coronavirus.

On 1Q '20, did you comment revenue weak compared to the prior year or prior quarter? Can you follow-up that comment, please?

Matt Eckl -- Chief Financial Officer

Oh, I think that we will have comparable challenges in both Q1 -- sorry, in Q1 against the prior year and sequentially. Again, I want to reiterate, strongest backlog, leaving any year for CECO ever at $217 million. We do not see any risk of, at this point in time, of backlog canceling, it's more of delays later into the year. And so Q1 will be a little bit tough, but we are very confident about the full year.

Tate Sullivan -- Maxim Group -- Analyst

OK, thank you. And then with the unchanged EBITDA margin target, did you say earlier -- it continue to guide gross profit margin of 32% to 33%?

Matt Eckl -- Chief Financial Officer

Yeah. I mean, we don't provide quarterly or annual guidance, as you know, but we've had said that for the most part, 32% to 34% is a range that's out there that typically works. If you look at our last four-year history, it falls right into that range.

Tate Sullivan -- Maxim Group -- Analyst

Oh, 32% to 34% range.

Matt Eckl -- Chief Financial Officer


Tate Sullivan -- Maxim Group -- Analyst

OK. All right. Thank you very much for the follow-ups and for the presentation.

Matt Eckl -- Chief Financial Officer

Appreciate it. Thanks, Tate.


The next question comes from Bill Baldwin of Baldwin Anthony Securities. Please go ahead.

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

Yeah, good morning, and thanks for fitting me in here, Dennis and Matt.

Matt Eckl -- Chief Financial Officer

Good morning, Bill.

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

Just wanted to get your comments and insights that, Dennis and Matt, on what's going on in terms of your focus on your installed base, your aftermarket business? And how do you see that coming along? And how much of a priority is that for you looking at longer term?

Dennis Sadlowski -- Chief Executive Officer

Yeah. So Bill, thanks for asking because aftermarket has been and continues to be an important element of the overall sales mix. A lot of the project based businesses, that we sell into are on a mix of greenfield and brownfield projects, extensions. And then quite a few of -- a lot of our equipment, custom equipment on the OE side, has a 10-plus-year operating lifetime.

And with all of that, we continue to mine opportunities for brake fix type parts, services, service contracts and, as well as consumables and spares and the like. So aftermarket remains instrumental to CECO in achieving those three-year targets and growing two times in the market. We've made a number of investments to continuing to mine and harness the opportunities for our aftermarket. And we're also looking at ways to design products that not only help customers with the new equipment but also help us and help them with aftermarket capabilities to build stickiness for us and build value and efficiency for them.

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

OK. So it sounds like you've got good initiatives going on there. I imagine the addition of your technical sales personnel has helped you quite a bit in that market also, hadn't it Dennis? Or do you expect it to?

Dennis Sadlowski -- Chief Executive Officer

Absolutely. We've added technical salespeople in various regions of the world and in U.S. and still have a very focused group exclusively working the aftermarket opportunities with inside sales, outside sales and a growing service team.

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

Thank you very much.

Dennis Sadlowski -- Chief Executive Officer

Thanks, Bill.


This concludes our question-and-answer session. I would like to now turn the conference over to Dennis Sadlowski for any closing remarks.

Dennis Sadlowski -- Chief Executive Officer

OK. Well, thanks again for joining us. I think 2019 was another year of progress for CECO Environmental. We're executing to our blueprint for organic growth.

We're pleased with the fourth-quarter profitability, and we continue to work toward accelerating our successes going forward. So thank you, all.


[Operator signoff]

Duration: 65 minutes

Call participants:

Matt Eckl -- Chief Financial Officer

Dennis Sadlowski -- Chief Executive Officer

Chris Van Horn -- B. Riley FBR -- Analyst

Jim Ricchiuti -- Needham and Company -- Analyst

Sameer Joshi -- H.C. Wainwright -- Analyst

Gerry Sweeney -- ROTH Capital Partners -- Analyst

Tate Sullivan -- Maxim Group -- Analyst

Bill Baldwin -- Baldwin Anthony Securities -- Analyst

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