Exposure to multiple industries, including the biomedical industry, has helped Chart ride out the energy downturn. Image source: Chart Industries.
Chart Industries, Inc. (GTLS 0.05%) has a lot of exposure to the energy industry, and over the past couple of years that's weighed heavily on the company, which manufactures equipment used to handle, process, and store cryogenic gases. But at the same time, its experienced management team understands that industrial cycles ebb and flow, and has taken steps since the start of 2015 to better position the company to ride out the current downturn.
And if this quarter's results are any indication, those steps are paying off, with Chart reporting a 23% increase in profits, even with sales slipping another 9%. Let's take a closer look at Chart's second-quarter earnings report, and what management is saying about the company's future.
Financial results
| Metric | Q2 2016 | Q2 2015 | Change |
|---|---|---|---|
| Revenue | $247.1 | $270.3 |
(8.6%) |
| Net income | $21.2 | $17.2 | 23.3% |
| Earnings per share | $0.68 | $0.56 | 21.4% |
Revenue and net income in millions. Data source: Chart Industries.
Keys to the strong earnings growth
Here's a breakdown of key operating and expense metrics:
- Sales, general, & administrative expenses were actually 7.2% higher than the year-ago quarter, up $3.3 million to $48.9 million.
- Gross margin was 35.2%, a huge jump from 27.7% a year ago.
- Cost of sales fell 19%.
- The energy and chemicals (E&C) segment saw sales fall 33% to $61.2 million, but gross margin was a remarkable 52.1% in this segment, driven by short-lead-time shipments and contract expiration fees.
- Distribution and storage sales increased 6.4% to $129.6 million, and gross margin improved from 23.4% to 25.6% due to lower costs and improved volume.
- BioMedical sales fell 1.4%, but gross margin improved from 32.8% to 38.8% due to improved product mix and lower warranty costs.
In short, two key things drove the company's improved earnings:
- More high-margin revenue from the E&C segment, primarily short-lead-time replacement equipment sales and high-margin contract expiration fees, generated $31 million in gross profit.
- The company's efforts to lower its manufacturing costs over the past year-plus are paying off, driving down cost of sales.
What management had to say
Last fall, Chart launched its Lifecycle Products and Services group within the E&C segment, specifically targeted at supporting its existing customers' installed equipment. This initiative is already paying big dividends, as this past quarter's E&C gross margins demonstrated. CEO Sam Thomas said on the earnings call:
These projects were executed very successfully, aided by our newly established short Lifecycle aftermarket business. While providing customer equipment to meet customer replacement needs is something we've done for years, Chart Lifecycle brings additional skills and resources to fulfilling the time-sensitive and challenging equipment needs of our customers' demanding operational context. We continue to see interest from our customers in a wide variety of service plans offered by that group.
Thomas also addressed the ongoing slowdown in the energy industry, and how the recovery in demand for the segment Chart supplies is looking:
As oil prices remain low and new capacity comes online, global oversupply of LNG, petrochemical feedstocks, and natural gas liquids are hindering our E&C business as customers defer capital spending in the near term. Although there are a number of large plants in the bidding pipeline, the timing of those are difficult to predict, with the curve estimates projecting a late 2017 or early 2018 timeframe.
Thomas also addressed China, where the company has invested millions in new capacity, only to see demand grind to a halt:
Until government policy is defined and capacity overhangs are absorbed, we continue to struggle in China in terms of LNG adoption for vehicle fueling. Our managing team in China has done an excellent job focusing on cost reduction and working capital initiatives. ... Although we continue to face a constricted energy environment and macroeconomic challenges in China, our industry and regional diversification help offset the impact.
Looking at the rest of 2016 and beyond
Management lowered revenue guidance for the full year -- from $900 million to $1 billion, down to $850 million to $900 million -- due to continued weakness in the energy industry, as well as a delay beyond this year in the large Magnolia LNG project. At the same time, the company narrowed its adjusted earnings guidance and increased the low end from $0.50 per share to $0.75 per share, while bringing the top end down slightly from $1.00 to $0.95 per share.
But there seems to be some opportunity, particularly with the Lifecycle business, with industrial customers. Thomas specifically mentioned the petrochemicals industry, which has run at a very high capacity in recent years, as a great opportunity to generate more -- and more predictable -- revenue from aftermarket support and maintenance. He also made it clear that the second quarter's strong results aren't guaranteed to repeat every quarter, due to the unpredictability of short-lead-time equipment replacement orders.
Chart also isn't standing pat with its recent efforts to improve its cost structure, appointing a new president and Chief Operating Officer, Bill Johnson, in July. On the earnings call, Johnson said that his primary focus would be to "further increase operating efficiencies, improve working capital, and develop growth strategies," with a goal of short-term improvements and another of better positioning Chart for the eventual recovery in the energy industry.
It's likely to be another year or so before Chart sees growth again, as the prolonged turndown in energy prices continues to weigh on capital spending in the industry. In the interim, the company is likely to keep working on its cost structure, while making sure it's ready for the recovery when it starts.
