Chart Industries, Inc. Breaks the Freeze, Returns to Profits

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Chart Industries, Inc. (NASDAQ: GTLS) reported second-quarter financial results on July 27. And while it wasn't exactly a stellar quarter, as sales continued to trend lower from the peak a few years back, Chart returned to profitability as restructuring efforts drove down expenses and better positioned the company to operate in the current demand environment. 

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While sales were down from the year-ago quarter, revenue and orders both increased sequentially, indicating that end-market demand is showing signs of improvement. Let's take a closer look at Chart's results, as well as what management had to say about the outlook ahead.

Sales were still down, but the trend is looking up

Chart's second-quarter results:

Metric

Q2 2017 Q2 2016 Change (YoY)
Revenue  $238.2  $247.1  (3.6%)
Net income   $3.3  $19.6  (83.0%)
Earnings per share  $0.09  $0.68

 (86.8%)

Year over year, Chart's sales and profits were down. However, the results improved from the first quarter, as a combination of lower expenses and higher revenues helped the company return to profitability after reporting a $2.9 million loss in the first quarter. 

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Chart reported sequential sales growth in all of its segments, as well as order growth, which increased its backlog $19 million, to $367 million. Energy and chemicals (E&C) increased 70% sequentially, while distribution and storage (D&S) orders increased 12%. Order growth for both segments was driven by increased demand from natural gas and petrochemicals markets. Furthermore, the company "anticipates the order and sales trend to continue for the balance of the year."

A few key metrics are also trending better

Over the past few years, Chart has taken steps multiple times to improve costs and better position the company to both ride out the energy downturn and be ready when it recovers. And it appears that the most recent round of restructuring, announced last quarter, is paying off. 

Selling, general, and administrative (SG&A) expenses were $50.2 million in the quarter. That was up $1.3 million year over year, but down $2.2 million from the first quarter of the year. At the same time, Chart spent $9.7 million on restructuring in the first half of 2017 compared to $6 million in the same 2016 period.

Even with this big increase in this non-recurring spending, operating expenses were up only $4 million. Furthermore, management expects SG&A and other operating expenses to continue improving, saying in the earnings release that restructuring activities are "ahead of schedule."

This also is starting to pay off with better margins in the biomedical segment following consolidation of the company's facilities to Georgia. Gross margin increased from 32.7% in the first quarter to 37.2% in the second quarter, even with $500,000 in restructuring charges. Gross margins fell in both D&S and E&C, due to several unexpected -- and big -- short-lead orders received that generated significant profits last year. And while margins declined, operating expenses also fell in these more energy-related segments, as well, both sequentially and year over year. 

Looking ahead

Over the past few years, Chart has had to take steps to cut costs and refine its operations multiple times as the energy-industry downturn has persisted. And while much of the latest round of action has cost a lot of money -- Chart has taken $9.6 million in restructuring expense this year -- it's already paying off with lower expenses in some segments and higher margins in others. 

While management held firm on its full-year guidance of revenue between $875 million to $925 million, it narrowed the range for earnings from $0.60-$1.00 per share to $0.65-$0.80 per share on a non-GAAP basis, before accounting for any effects related to the $410 million acquisition of Hudson Products Corporation, which is expected to close in the third quarter. Management expects the Hudson acquisition will be accretive to earnings in the first year after acquisition, but until the deal closes, it's probably smart not to project its impact in 2017. 

The energy downturn continues to weigh on Chart, but management keeps adapting. Eventually, those moves should pay off when the oil-and-gas cycle turns. The question that's unanswerable is how much longer that will take to happen.

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Jason Hall owns shares of Chart Industries. The Motley Fool owns shares of and recommends Chart Industries. The Motley Fool has a disclosure policy.