Chart Industries, Inc. has reported results for the third quarter ended September 30, 2015.
• Magnolia LNG mid-scale liquefaction equipment order in excess of $40 million finalized
• Signs Floating LNG (FLNG) Technology Agreement with Bechtel
Net income for the third quarter of 2015 was $4.8 million, or $0.15 per diluted share. Third quarter 2015 earnings would have been $0.26 per diluted share excluding $4.9 million, or $0.11 per diluted share, of facility shutdown and severance costs recorded in the quarter. This compares with net income of $22.9 million, or $0.74 per diluted share, for the third quarter of 2014. Third quarter 2014 earnings would have been $0.77 per share excluding $1.4 million, or $0.03 per diluted share, of acquisition-related severance and retention costs in that period.
Net sales for the third quarter of 2015 decreased 10% to $264.0 million from $293.8 million in the comparable period a year ago. Gross profit for the third quarter of 2015 was $68.3 million, or 25.9% of sales, versus $91.2 million, or 31.0% of sales, in the comparable quarter of 2014. Third quarter of 2015 cost of sales included approximately $1.0 million of the facility shutdown and severance costs noted above.
“Our third quarter results reflect the significant headwinds we continue to face in many parts of our business both from the strength of the US Dollar and instability in international energy markets as low oil prices impact capital spending. Declining forecasts of global economic growth continue to create uncertainty in the timing of energy price recovery, causing further delays in investment decisions,” stated Sam Thomas, Chart’s Chairman, President and Chief Executive Officer. “At the same time, we continue to see LNG opportunities where Chart has competitive advantage. The award for the first two trains of the Magnolia LNG liquefaction project in Lake Charles, Louisiana demonstrates continued interest in North American LNG export. In addition, the signing of a Technology Agreement with Bechtel to jointly pursue floating LNG opportunities utilizing Chart’s IPSMR® process represents yet another endorsement of Chart’s mid-scale LNG technology,” continued Mr. Thomas.
Mr. Thomas added, “With continued uncertainty in timing for the recovery of energy prices and China growth, we are shifting our primary focus to cost control and solid operational execution to position the Company to return to growth when the cycle turns. The diversity of our businesses beyond energy into industrial, biomedical and other applications globally gives us significant strength to navigate cyclic energy and China demand. We remain steadfastly committed to our strategic plan of delivering long term profitable growth.”
Orders received in the third quarter of 2015 were $252.8 million, an increase of $21.7 million over orders received during the second quarter of 2015, largely due to the Magnolia LNG award. Backlog at September 30, 2015 was $416.6 million, down 21% from the June 30, 2015 level of $524.7 million. Backlog was reduced in the third quarter of 2015 by $93.4 million for the removal of Distribution and Storage (“D&S”) orders received prior to the third quarter, primarily in China. While D&S customers did not cancel these orders, these orders have exceeded the expected time of performance and current circumstances suggest that our customers are not likely to take delivery in the future. We believe this is primarily due to the impact of lower oil prices and the continued economic slowdown in China. We are still working very closely with our customers and as economic conditions improve we may see some of these older orders, which have been removed from backlog, recorded as new orders in future periods. Backlog in the second quarter of 2015 was reduced by $47.6 million for similar reasons.
Selling, general and administrative (“SG&A”) expenses for the third quarter of 2015 increased $1.7 million compared with the same period in 2014 to $48.1 million, or 18.2% of sales. Third quarter 2015 SG&A included $3.9 million in facility shutdown and severance costs associated with cost reduction initiatives. Third quarter 2014 SG&A included acquisition-related retention and severance costs of $1.2 million. Excluding those restructuring related costs, SG&A was lower in the third quarter of 2015 due to the impact of cost reduction initiatives.
Income tax expense was $6.1 million for the third quarter of 2015 and represented an effective tax rate of 58.8% compared with $12.1 million in the prior year quarter, or an effective tax rate of 34.4%. The unusually high effective tax rate for the quarter was largely driven by a reserve against certain of our accumulated tax loss balances which represented 15 percentage points of the effective tax rate in the quarter. In addition, the losses incurred by certain of the Company’s international entities operating in lower taxed jurisdictions increased the rate for the quarter.
Net interest expense was $4.1 million for the third quarter of 2015, which included $2.9 million of non-cash accretion expense associated with the Company’s Convertible Notes. Net cash interest was $1.2 million.
Energy and Chemicals (“E&C”) segment sales decreased 20.6% to $78.4 million for the third quarter of 2015 compared with $98.8 million for the same quarter in the prior year. The decline was due to lower sales volume in brazed aluminum heat exchangers within natural gas processing and petrochemical applications. E&C gross profit margins were 23.4% in the 2015 quarter compared with 31.7% in the same quarter of 2014. Highly competitive market conditions and the impact from excess capacity, as a result of lower operating levels, impacted margins. In addition, favorable project change orders in the prior year quarter improved prior period margins approximately 5%.
D&S segment sales decreased 7.6% to $129.6 million for the third quarter of 2015 compared with $140.2 million for the same quarter in the prior year. Lower LNG sales volume driven by low oil prices, reduced China industrial activity and the strength of the U.S. dollar contributed to the decline. D&S gross profit margins were 23.9% compared with 29.0% in the prior year quarter. Lower volume, inventory reserves, and restructuring costs associated with the Owatonna, Minnesota shutdown led to the margin decline. Restructuring costs and inventory reserves lowered the D&S gross margin by approximately 2.0%.
BioMedical segment sales increased 2.2% to $56.1 million for the third quarter of 2015 compared with $54.9 million for the same quarter in the prior year. The increase is primarily due to higher respiratory sales volume in Europe and the U.S., partially offset by currency impact due to the strength of the U.S. dollar. BioMedical gross profit margin declined to 33.8% in the quarter compared with 35.1% for the same period in 2014 primarily due to product mix.
Based on year to date results and order trends, including further expected weakness in China and continued delays in global LNG projects, the Company is lowering its previously announced 2015 guidance range. Sales are now expected to be approximately $1.0 billion, and diluted earnings per share are now expected to be in a range of $1.00 to $1.10 per diluted share, on approximately 30.7 million weighted average shares outstanding. This excludes the impact from any restructuring costs and assumes a revised effective annual tax rate of approximately 37%. This revised guidance compares with previous sales guidance of $1.0 billion to $1.1 billion and earnings of $1.40 to $1.60 per diluted share, which also excluded restructuring costs.