Cryogenic gas processing and storage equipment manufacturer Chart Industries (NASDAQ:GTLS) released its fourth-quarter financial results on Feb. 24, and it was another "good news, bad news" release. The highlights:
- Earnings per share for the quarter ($0.88) and full year ($2.67) were up from the year-ago period and beat analyst expectations.
- Energy and Chemicals segment reported 40% sales growth in the quarter on strong LNG liquefaction and petrochemical applications.
- Currency exchange and oil price environment are expected to negatively impact 2015.
Overall, the company had a solid quarter to finish on a strong note what had been a challenging year. Chart Industries is expecting 2015 to have some headwinds. Let's take a closer look at the three key takeaways from this earnings report.
2014 results: 1 good; 2 not so good
Chart Industries reports its business in three different segments, and two of the three struggled in 2014, reporting lower sales and gross margins for both the fourth quarter and full year.
Biomedical -- largely providing oxygen equipment for breathing therapy -- really struggled in 2014, due to a combination of issues related to changes in insurance coverages in the U.S. that negatively affected product mix and margins. Total sales declined more than 15% for the year, to $226 million. CEO Sam Thomas made no bones about it on last quarter's earnings call, taking full blame for management doing a "poor job forecasting the market evolution," and being "too optimistic."
Gross margin increased to 43% for the biomedical segment in the quarter, but this was largely due to a $5 million warranty-related settlement from the acquisition of AirSep in 2012, and not any "real" improvement in mix or product margins. Excluding the settlement, gross margin would have declined in the quarter.
Distribution and Storage continues to see poor LNG application sales, with management reporting a decline from last year. On the positive side, the company experienced "strong global results" in industrial gas, and industrial packaged gas sales were strong everywhere, but unfortunately negative currency impact against the strong dollar contributed to a decline in sales, and gross margin fell significantly in the quarter, to 24.7% from 28.8% the year before.
Energy and Chemicals was the only segment to grow in 2014, increasing sales 21% to $388 million. Gross margin increased 140 basis points to 29.4% for the full year, while margins fell in the other two segments. Yet even this good result comes with a concern going forward, as E&C joined the other two segments to report a shrinking backlog heading into 2014. The $294 million backlog is down both from the year before and sequentially, which leads us to the next segment.
Guidance for 2015 not pretty, but management taking actions to address challenges
The company's outlook for next year, for earnings per share between $1.60 and $2.10, is a major decline from the $2.67 per share in earnings just reported for 2014. Revenue guidance is for sales of $1.05 billion to $1.2 billion, a small decline to flat for the year. The biggest two challenges for 2015? Currency exchange rates and cheap oil. Thomas said in the earnings release:
We have implemented cost reduction actions approaching $20 million and a 5% reduction in headcount. We will initiate additional actions as dynamic energy prices and the stronger U.S. dollar impact our business, without jeopardizing our ability to capitalize quickly on opportunities as demand improves. We have demonstrated an ability to execute successfully through prior business cycles. Our focus in 2015 will be to deliver on our industrial gas opportunities and leading industry positions, continue our lean initiatives, and pursue our strategic plan.
While it's not great that the company is reducing head count, if it's truly part of a strategic long-term plan, and not a short-term "fix" to boost earnings, it's a step in the right direction. Furthermore, management needs to continue to address ways to improve declining margins, especially in the biomedical segment. The company is actually expecting growth in both the biomedical and core industrial gas businesses in 2015.
Financial housekeeping: Chart is in good shape
While cash and equivalents dropped from $140 million at the end of September to $103 million at the end of the year, total long-term debt decreased $66 million, as the company paid down its line of credit. This positions the company with $416 million in available liquidity at the beginning of the year. Chart plans to spend $70 million in capital expenditures in 2015 -- $50 million in China alone -- so having a relatively strong capital position will make it easier to invest in what is expected to be a very challenging year.
Factor in the initiatives to drive $20 million in cost out of the business, and Chart looks ready to continue driving forward even in a tough climate.
Keeping the long view
For Chart Industries, the long-term opportunity remains largely tied to the growth in application of natural gas to both industrial and transportation uses. While the currency fluctuations look like they'll hurt in 2015, over time there will probably be years where the opposite happens. All management can do is what they are doing: finding ways to reduce expenses and increase efficiency, while continuing to invest in growth areas.
The stock is still well down -- almost 75% -- from the peak in late 2013, and it's tough to predict what will happen over the next year. But looking out years ahead, Chart is well positioned to benefit from a clear trend in the growth of natural gas usage all over the world. Will that make it a market-beating stock? Only time will answer that question.