Chart Industries: Order Activity, Profitability Accelerating

Chart Industries (GTLS) manufactures cryogenic equipment, which is used for producing, storing, and dispensing liquefied gases. The company’s customers include natural and industrial gas companies as well as biomedical firms.

GTLS operates in three business segments. The Energy and Chemicals (E&C) segment generated 35% of sales for the first nine months of 2007. Products include air cooled and brazed aluminum heat exchangers that are built into cryogenic systems. They cool and liquefy gases so that they can be separated into their pure forms. This segment also makes vacuum-insulated pipes used for transporting liquefied natural gas [LNG].

The Distribution and Storage (D&S) segment produced 51% of sales. It makes cryogenic bulk storage systems that have capacities of 500 to 180,000 gallons. This segment also makes packaged gas systems that hold 160 to 2,000 liters.

These systems can store liquefied gases at temperatures ranging from -100 degrees Fahrenheit to almost absolute zero Kelvin. The D&S segment also sells LNG refueling systems, beverage liquid CO2 systems, and a variety of other cryogenic systems and components used to store and transport industrial and natural gases.

The BioMedical segment accounted for 14% of sales. It makes liquid oxygen systems prescribed for in-home use, vacuum-insulated containment vessels for storing biological materials, and cryostats for MRI equipment. Rising demand for both energy and industrial gases have contributed to GTLS’s rapid growth in recent years. E&C and D&S segment sales grew 22.2% and 27.6%, respectively, for the first nine months of 2007. BioMedical sales gained 10.5%. Net sales in Q3 increased 14.6% year-over-year to $163.7 million. E&C sales rose 7.3%. Higher pricing and increased volumes helped D&S sales jump 25.2%. But BioMedical segment sales fell 1.4%. Despite the impact of two large ongoing lower margin contracts, the gross profit margin actually improved 12 basis points from a year ago to 27.73% thanks to strong sales of higher margin products.

Lower amortization expenses helped the operating profit margin expand 127 basis points to 13.08%. GTLS used the proceeds of a secondary stock offering to prepay $40 million of debt. As a result, interest expense fell 16% to $5.1 million and net income jumped 74.7% to $12.1 million or 42 cents per share.

Significant investment risks include fluctuating prices for raw materials, particularly aluminum and stainless steel. Also, slower-than-expected growth or an unexpected decline in demand from the energy, industrial gas, or biomedical sectors would negatively impact the company’s business.

Nonetheless, recent order activity is encouraging and affirms the continued strength in the global hydrocarbon and industrial gas processing markets. GTLS booked $175 million in orders in Q3. Backlog climbed to $426 million from $415 million in Q2. Included in the backlog is a $100 million LNG order in Southeast Asia. Based in part on this healthy backlog, management raised the range for 2007 sales guidance to $645-655 million from $620-650 million. This translates into 12-19% growth in Q4. The range for full year earnings guidance was also raised to $1.59-1.63 per share from $1.45-1.56 per share. Further along, profitability should accelerate as lower margin contracts wind down and sales volumes grow.