Since 2015, cryogenic gas processing and storage equipment maker Chart Industries, Inc. (GTLS 0.04%) has felt the sting of the oil and gas industry downturn. But in recent quarters, the company started turning a corner, returning to profits and sales growth after a major initiative to make its business leaner and more nimble.
In its just-announced first quarter, Chart continued to deliver. Sales were up 37%, while earnings surged to $0.19 per share, after reporting a loss of $0.09 last year. Over the past several quarters, Chart has seen its results improve primarily from four main things: operational improvements from its restructuring efforts; lower taxes following the implementation of new federal tax rates; sales and profits from recent acquisitions; and increased order activity.
LNG exports and imports are driving more sales for Chart. Image source: Getty Images.
Let's take a deeper dive into Chart's results and see how these four things are paying off for the company
Acquisitions and higher demand driving sales and order growth
Chart's sales increased 37% in the first quarter of 2018 versus the year-ago period, driven by both organic sales and the acquisition of Hudson Products in 2017. In the earnings release, the company said revenue was up 15.8% excluding Hudson Products.
Chart also reported that demand continues to be strong. Orders were up 53% year over year to $111.4 million and up 13% from the fourth quarter, the fifth consecutive quarter of sequential order growth. The company saw sequential order growth from all three of its segments: energy and chemicals segment up 24.6% on strong petrochemical and LNG export application demand, distribution and storage up 11.2% on higher packaged gas and LNG vehicle tank demand, and biomedical orders increased 2% sequentially and 10% year over year on strong demand for cryobiological freezers and oxygen-related products.
Sales were down on a sequential basis, but this seasonality is normal, with Chart's strongest sales activity at the end of the year and its weakest to start the next year. With that added context, Chart's year-over-year results included solid double-digit sales and order growth in all three of its segments.
Leaner operations and lower taxes making Chart more profitable
While sales growth -- both organic sales and new sales related to the acquisition of Hudson Products and others -- is playing a big role in Chart's profit growth, the company is also seeing the benefit of a multiyear restructuring effort. The company reported gross margin of 27.6% in the first quarter, up from 27.1% in the fourth quarter of 2017 and 27.3% year over year. While these gains may look modest, it's worth noting that the company generated a higher gross margin percent in the first quarter even though its sales were lower than during the fourth quarter. This is notable since Chart gets less operating leverage in its first quarter than the fourth quarter, when demand and sales are typically higher. In other words, the company should gain even more profits from higher sales in the future.
This is reflected in the company's guidance, which calls for full-year earnings between $1.75 and $2.00 per share on an adjusted basis. This is a significant increase from 2017 adjusted EPS of $0.96. It also indicates that the company expects substantially higher profits in the coming quarters. Its adjusted earnings per share were $0.23 in the first quarter.
Chart is also getting a benefit from the lower federal income tax rates. The company's full-year outlook included guidance for a 27% effective tax rate, which is expected to add about $0.15 per share to Chart's bottom line this year.
Looking ahead
In the past few years, Chart has navigated the oil and gas downturn to solid effect, restructuring the company and making multiple acquisitions to boost the bottom line and make it more competitive and stronger, while also helping it be nimble in responding to changing customer demand from the highly cyclical energy industry. But at the same time, the company has dealt with numerous challenges in its biomedical segment, particularly some of its oxygen-related product lines.
With this likely in mind, management announced it was "conducting a strategic review" of this business, "including an evaluation of a possible divestiture of this business." It's important to note that management was specific in its statement, noting that it was specific products within this segment it was evaluating, as other products within the segment, specifically its cryobiological products, fit very well within Chart's technological expertise and would not make sense to exit. CEO Bill Johnson said that this review is intended to make sure the company is most effectively allocating capital where it is strongest: designing and building cryogenic equipment.
Will Chart be able to meet its guidance for 2018? Only time will tell, but if sales continue to remain strong and its restructuring efforts continue driving better profitability, the company could be on track for its best year since 2014.
