Chart Industries, Inc. (NASDAQ:GTLS) reported third-quarter results on October 27, handily beating profit expectations, even as sales continue to slip in one of the weakest demand cycles in years. And while essentially all of the company's profits came from a one-time $16 million insurance recovery, Chart's operations still delivered solid cash flows, especially as the energy downturn continues to weigh heavily on demand.
Let's take a closer look at Chart's results, as well as how the company is positioned for the rest of 2016 and beyond.
Chart's financial and operating performance
|Metric||Q3 2016||Q3 2015||Change (YOY)|
|Earnings per share||$0.48||$0.15||220%|
As you can see, the $16 million Chart was able to recover related to warranty claims on to its AirSep products lines led to Chart turning a GAAP profit in the quarter. Without that recovery, the company would have reported a loss. However, Chart took $1.5 million in impairment, restructuring, and acquisition-related costs, so adjusting for these non-recurring expenses, the company would have essentially broken even last quarter.
On a cash flow basis, Chart delivered strong results in the quarter. Excluding the impact of non-cash items like depreciation, amortization, asset impairments, and non-cash accretion related to debt, Chart generated $59.8 million in operating cash flows. After capital expenditures and debt repayments, Chart added $54 million to its cash and equivalents in the quarter.
For added context, roughly $29 million of that came from working capital changes, i.e. improvements in current assets such as cash, inventories, and accounts receivables, and reductions in current liabilities, such as accounts payable and other obligations due within 12 months. Of that $29 million, $10.3 million was a reduction in current liabilities, with the balance coming from cash flows that more than offset reductions in inventories and accounts receivables.
To make a long story short, the $16 million insurance recovery may have been essentially all of Chart's GAAP earnings, but cash flows from Chart's actual business generated a lot of the company's operating cash flows. That's a positive.
Here's a look at how Chart's three segments did in the quarter:
- Energy & chemicals revenue of $32.7 million, down 69.8% year over year. Gross margin percent of 7.6%, down from 23.4% YOY.
- Distribution & storage revenue of $126.6 million, down 2.3% YOY. Gross margin percent of 26.4%, up from 23.9% YOY.
- Biomedical revenue of $53.6 million, down 4.5% YOY. Gross margin percent of 64.2%, up from 33.8% YOY.
As you can see, the weakness in the energy industry, particularly tied to upstream natural gas processing and delayed investment in the LNG and petrochemical markets, continues to weigh heavily on the E&C segment. This segment generated an operating loss of $5.7 million in the quarter as the company stays committed to maintaining its current staffing and capacity levels in order to quickly respond when the market inevitably turns.
The D&S segment performed relatively well considering the weakness in Asia. However, management said strong downstream LNG order activity offset weakness in China and the U.S., while last year's restructuring activity played a role in this quarter's stronger margins, along with favorable product mix.
The biomedical segment's results were very much lifted by the insurance recovery. However, excluding the benefits of the recovery, gross margin percent would have been 35.9%. Management credited this improvement to both improved product mix as well as lower warranty expense tied to product improvements at AirSep.
Chart narrowed its guidance for the full year and is now expecting revenue of $850 million to $875 million and earnings per share of $1.20-$1.30, excluding restructuring costs.
On the earnings call, CEO Sam Thomas made it clear that it's too early to say when the E&C business would start to recover. And with Chart's backlog falling slightly and the company capturing $70 million less in new orders than it did the quarter before, it's possible that demand could weaken further before it starts to rebound. But at the same time, low natural gas prices are actually driving some opportunity in downstream LNG, and the company is actively participating in those opportunities.
For now, Chart's biggest focus is on keeping a lean operation. SG&A expenses were down more than 5% in the quarter, further helping the company retain cash. Thomas indicated on the call that, with $267 million in cash and $450 million available on its untapped revolving credit facility, the company is in an excellent position to "to asses some interesting investment options in the pipeline."
So, while the market remains weak, Chart seems to be in a position of relative strength. If management is able to find the right opportunities that it can leverage when the market recovers, it could pay off big for long-term investors.