Chart Industries, Inc. (NASDAQ:GTLS) released first-quarter 2019 results on April 18 that were more or less in line with what investors were expecting. However, management updated its full-year guidance on the strength of two big catalysts that are set to drive big results for the company in the years to come.
Let's take a closer look at how Chart started 2019 and how the growth in demand for liquefied natural gas (LNG) around the world (and for several applications) is primed to pay off big for Chart going forward.
Sales growth continues, but one-time charges take a bite out of operating results
Here's a look at some key financial and operating metrics in the first quarter:
|Metric||Q1 2019||Q1 2018||Year-Over-Year Change|
|Earnings per share (EPS)||$0.03||$0.18||(83.3%)|
|Gross margin||23.2%||27.4%||(420 basis points)|
Starting at the top line, growth is coming throughout the business. Chart reported at least 17% revenue growth from all three of its business segments. However, as we dive below the revenue line, Chart's gross margin and operating metrics went backwards in the quarter. Gross margin percentage fell sharply, and operating expenses increased 20%.
Here's the good news. On the earnings call, CFO Jeff Lass said that both metrics worsened in part because of $7.4 million in non-recurring charges related to expanded restructuring expense. This single $7.4 million expense is expected to improve annual operating income by $6.5 million starting in the second quarter.
Of that $7.4 million, Chart said $1.9 million was higher selling, general, and administrative (SG&A) expense, and the remaining $5.5 million was in cost of goods sold, which explained the big decline in gross margin. When adjusting for these charges, adjusted gross margin was 26.4%, up from 26.1% against the sequential adjusted result.
Order growth is staggering
Chart's first quarter was solid, but it's looking like 2019 -- and likely several years beyond -- are setting up to be potentially huge. The company reported a massive $461.2 million in booked orders in the first quarter, up 60% from last year -- up 51% excluding orders from recent acquisitions -- as demand for LNG processing and storage equipment kicks into high gear.
Some of Chart's notable deals in the quarter include a single $135 million order for a single LNG liquefaction and export terminal, a $20 million order for equipment for a floating LNG vessel for Golar LNG, along with three other orders for LNG or natural gas processing equipment totaling more than $23 million.
The company finished the first quarter with $734 million on its order backlog. That's up 54% over the past year, up 29% since the end of 2018, and Chart's biggest backlog of committed orders in nearly five years.
Here's the rub: It's very unusual for a business like Chart to see sales and orders increase sequentially from the fourth quarter of one year to the first quarter of the next. In each of the three years prior to 2018/2019, sales declined 26%, 6%, and 9% from the fourth to the first quarters.
Chart looks like it's really heating up
Forgive the pun, but there's no ignoring the fact that demand for equipment to super-cool natural gas is getting to be red hot. According to FERC, the Federal Energy Regulatory Commission, there are more than a dozen LNG processing export facilities already approved and in some state of planning or construction today. These facilities cost many billions of dollars to build and require hundreds of millions of dollars' worth of the kind of components Chart manufactures and services.
Those more than a dozen facilities alone represent multiple billions of dollars worth of possible sales, and that's just in the United States. And that doesn't even include the 18 additional facilities that have either already been proposed to FERC or are in pre-filing. Add it all up, and just on the U.S. LNG export side of the business, Chart is likely to see billions in sales over the next decade.
The company also manufactures storage and processing equipment for transportation applications where LNG is used as a fuel. This demand is also growing quickly, as Chart announced two long-term extensions of supply agreements with two of North America's biggest heavy-duty truck makers, with "double-digit growth anticipated in each year." Considering that LNG fueling systems sales increased 68% year over year and 63% sequentially in the first quarter, double-digit growth has already started.
Between the big order growth Chart saw in the first quarter and the anticipation that several LNG export facilities will begin construction this year, Chart raised its full-year revenue guidance from $1.26 billion-$1.31 billion to $1.29 billion-$1.34 billion. It also raised adjusted earnings guidance to a range of $2.70-$3.05 per share, up from the prior range of $2.50-$2.85 per share.
However, depending on the timing of final investment decisions on major LNG export facilities, the current guidance could end up being on the conservative side. Management significantly increased its "big LNG" order pipeline expectations from $400 million-$500 million at the start of the year to $600 million-$800 million as more projects move closer to getting the green light.
But even with those high expectations, investors should remain firmly grounded. These projects take multiple years to complete, and today's big LNG orders may not hit the revenue line before 2020 or even after. With that caveat, the company's efforts to improve its cost structure and position itself for big profits when demand returns look set to pay off.