Cryogenic gas processing equipment maker Chart Industries (NASDAQ:GTLS) reported second-quarter financial results earlier today, and while the numbers beat Wall Street analyst expectations, they are down across the board, with revenue, profit margins, and earnings all well off last year's levels. The highlights:
- Revenue of $270.3 million, down 12%.
- Earnings per share of $0.56, down 14%.
- Gross margins declined in two of Chart's three business segments.
- Backlog declined 14% to $525 million.
The news isn't all bad -- after all, the company did meet forecasts -- but the release included a downward revision in full-year guidance as well, indicating that the market may not have bottomed out just yet. Let's take a closer look at the key details.
China not looking good
If you've been paying any attention to global financial news over the past few months, you'll know that things aren't pretty in China right now. That's severely impacting a lot of companies, and clearly hurting Chart, which has made big investments in Chinese manufacturing capacity in recent years. Natural gas engine technology company Westport Innovations reported earnings recently, and announced that engine sales at its joint venture with WeiChai fell more than 60% last quarter. Considering that Chart's major focus in China is natural gas cryogenic processing and storage equipment, this is further indication that business could be tough there for some time.
The company specifically mentioned declining industrial activity in China as one of the reasons that sales declined 18% in the Distribution and Storage segment, its largest business unit. Chart also said backlog reductions in China was one of the reasons management was reducing full-year guidance.
Europe, weak dollar dragging on biomedical business
The biomedical business -- which is largely built around sales of respiratory (oxygen therapy) equipment, reported a 11.8% sales decline, and a 100-basis-point drop in gross margin percent, to 32.8%. The company attributed the revenue decline to a combination of weak demand in Europe, foreign exchange impact, and product mix.
Relatively strong demand at home
Despite weakness in its European biomedical business, and the big slowdown in China, things are looking relatively good in the U.S. In the earnings release, Chart said that strong order growth in the U.S. was offset by the removal of $47.6 million in Chinese orders from the backlog. Absent this reduction, net orders would have been up sequentially from last quarter, largely because of the strength of orders in the U.S.
Cheap energy prices are actually helping provide momentum for the U.S. business, especially for equipment related to LNG production and storage. The company announced a major partnership with Australian company LNG Limited, which is building a major LNG export facility in Lake Charles, Louisiana, that Chart is expecting will lead to $80 million in equipment orders by the end of 2015.
Cheap domestic natural gas remains a bright spot for Chart. According to the American Chemistry Council, the chemical manufacturing industry has already committed to more than $145 billion in investments in the U.S. over the next decade that are directly tied to natural gas. As a major player in the equipment that can process, store, and liquefy natural gas, as well as cryogenic processing equipment for other substances, Chart is well positioned to be a major beneficiary.
Unfortunately, the current strength isn't enough to make up for the weakness in China and Europe right now.
As tough as things are right now, Chart is solidly profitable, with a relatively strong balance sheet. Cash and equivalents has fallen about 20% since the start of the year, but that's largely a product of both acquisitions and the expense of closing an underutilized manufacturing plant. The company had $2.5 million in severance and shutdown expenses in the first half of the year, which was part of that decline. Working capital is up $42 million since January, so the cash decline is less of a concern.
Chart does face uncertainty in the short term, because it's unclear how deep China's economic woes really are, or how long it will take before things turn around there. It's also not clear how long the U.S. dollar's strength will hurt Chart's (and a million other companies') business results in Europe, but the good news is that even with the small drop in gross margins in biomedical from a year ago, the business has largely stabilized.
All things considered, Chart's financial strength will see it through the current environment, and the company is in a good position to take advantage of the downturn to strengthen the business for the long term. A good example is the Thermax acquisition it closed on in the quarter. The stock is a long way from those 2013 highs -- largely a product of market exuberance -- but Chart is well run, profitable, and built to withstand downturns like this. Once the market turns, the company should be well positioned to benefit.