Exposure to multiple industries, including the biomedical industry, has helped Chart ride out the energy downturn. Image source: Chart Industries.
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Chart Industries, Inc.(NASDAQ: GTLS) has a lot of exposure to the energy industry, and over the past couple of yearsthat's weighed heavily on the company, which manufactures equipment used to handle, process, and store cryogenic gases. But at the same time, its experienced management team understands that industrial cycles ebb and flow, and has taken steps since the start of 2015 to better position the company to ride out the current downturn.
And if this quarter's results are any indication, those steps are paying off, with Chart reporting a 23% increase in profits, even with sales slipping another 9%. Let's take a closer look at Chart's second-quarter earnings report, and what management is saying about the company's future.
Revenue and net income in millions. Data source: Chart Industries.
Keys to the strong earnings growth
Here's a breakdown of key operating and expense metrics:
- Sales, general, & administrative expenses were actually 7.2% higher than the year-ago quarter, up $3.3 million to $48.9 million.
- Gross margin was 35.2%, a huge jump from 27.7% a year ago.
- Cost of sales fell 19%.
- The energy and chemicals (E&C) segment saw sales fall 33% to $61.2 million, but gross margin was a remarkable 52.1% in this segment, driven by short-lead-time shipments and contract expiration fees.
- Distributionand storagesales increased 6.4% to $129.6 million, and gross margin improved from 23.4% to 25.6% due to lower costs and improved volume.
- BioMedical sales fell 1.4%, but gross margin improved from 32.8% to 38.8% due to improved product mix and lower warranty costs.
In short, two key things drove the company's improved earnings:
- More high-margin revenue from the E&C segment, primarily short-lead-time replacement equipment sales and high-margin contract expiration fees, generated $31 million in gross profit.
- The company's efforts to lower its manufacturing costs over the past year-plus are paying off, driving down cost of sales.
What management had to say
Last fall, Chart launched its Lifecycle Products and Services group within the E&C segment, specifically targeted at supporting its existing customers' installed equipment. This initiative is already paying big dividends, as this past quarter's E&C gross margins demonstrated. CEO Sam Thomas said on the earnings call:
Thomas also addressed the ongoing slowdown in the energy industry, and how the recovery in demand for the segment Chart supplies is looking:
Thomas also addressed China, where the company has invested millions in new capacity, only to see demand grind to a halt:
Looking at the rest of 2016 and beyond
Management lowered revenue guidance for the full year -- from $900 million to $1 billion, down to $850 million to $900 million -- due to continued weakness in the energy industry, as well as a delaybeyond this yearin the large Magnolia LNG project. At the same time, the company narrowed its adjusted earnings guidance and increased the low end from $0.50 per share to $0.75 per share, while bringing the top end down slightly from $1.00 to $0.95 per share.
But there seems to be some opportunity, particularly with the Lifecycle business, with industrial customers. Thomas specifically mentioned the petrochemicals industry, which has run at a very high capacity in recent years, as a great opportunity to generate more -- and more predictable -- revenue from aftermarket support and maintenance. He also made it clear that the second quarter's strong results aren't guaranteed to repeat every quarter, due to the unpredictability of short-lead-time equipment replacement orders.
Chart also isn't standing pat with its recent efforts to improve its cost structure, appointing a new president and Chief Operating Officer, Bill Johnson, in July. On the earnings call, Johnson said that his primary focus would be to "further increase operating efficiencies, improve working capital, and develop growth strategies," with a goal of short-term improvements and another of better positioning Chart for the eventual recovery in the energy industry.
It's likely to be another year or so before Chart sees growth again, as the prolonged turndown in energy prices continues to weigh on capital spending in the industry. In the interim, the company is likely to keep working on its cost structure, while making sure it's ready for the recovery when it starts.
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Jason Hall owns shares of Chart Industries. The Motley Fool owns shares of and recommends Chart Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.