SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________to_______________________
Commission File Number 1-11442
CHART INDUSTRIES, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 34-1712937
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
5885 Landerbrook Dr., Suite 150, Cleveland, Ohio 44124
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(Address of Principal Executive Offices) (ZIP Code)
Registrant's Telephone Number, Including Area Code: (440) 753-1490
NOT APPLICABLE
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No____
At June 30, 1998, there were 23,745,675 outstanding shares of the Company's
Common Stock, $0.01 par value per share.
Page 1 of 20 sequentially numbered pages.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The information required by Rule 10-01 of Regulation S-X is
set forth on pages 3 through 11 of this Report on Form 10-Q.
2
CHART INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
June 30, December 31,
1999 1998
----------------------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 4,020 $ 2,169
Accounts receivable, net 64,808 37,336
Inventories, net 61,350 29,803
Other current assets 19,975 6,803
----------------------------
Total Current Assets 150,153 76,111
Property, plant & equipment, net 77,448 40,536
Goodwill, net 193,734 31,568
Other assets, net 22,022 9,990
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TOTAL ASSETS $443,357 $158,205
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LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 24,625 $ 11,540
Customer advances 12,781 13,011
Billings in excess of contract revenue 1,085 2,194
Accrued expenses and other liabilities 61,447 25,783
Current portion of long-term debt 9,420 431
Credit facility 263,000
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Total Current Liabilities 372,358 52,959
Long-term debt 6,623 10,894
Deferred income taxes 1,159 1,198
Minority interest 1,288
Shareholders' Equity
Preferred stock, 1,000,000 shares authorized, none
issued or outstanding
Common stock, par value $.01 per share -
30,000,000 shares authorized, 24,423,927 and 24,321,917 shares
issued at June 30, 1999 and December 31, 1998, respectively 244 243
Additional paid-in capital 43,888 43,367
Retained earnings 24,995 56,352
Accumulated other comprehensive income (969) (358)
Treasury stock, at cost, 678,252 and 732,452 shares at June 30, 1999, and
December 31, 1998, respectively (6,229) (6,450)
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61,929 93,154
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $443,357 $158,205
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The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
CHART INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------------------------- ----------------------------
Sales $ 84,726 $ 57,030 $ 129,314 $ 113,134
Cost of products sold:
Cost of sales 62,009 37,618 94,280 73,162
Acquired profit in inventory 1,162 1,162
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63,171 37,618 95,442 73,162
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Gross Profit 21,555 19,412 33,872 39,972
Selling, general & administrative expense 14,565 7,530 21,922 15,740
Goodwill amortization expense 1,247 230 1,482 361
Restructuring charge 3,901 3,901
Acquired in-process research and development 21,600 21,600
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41,313 7,760 48,905 16,101
Operating income (loss) (19,758) 11,652 (15,033) 23,871
Interest expense - net 4,083 583 4,411 393
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Income (loss) before income taxes, minority
interest and extraordinary item (23,841) 11,069 (19,444) 23,478
Income taxes 113 3,844 1,608 8,311
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Income (loss) before minority interest and
extraordinary item (23,954) 7,225 (21,052) 15,167
Minority interest (126) (126)
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Income (loss) before extraordinary item (24,080) 7,225 (21,178) 15,167
Extraordinary loss on early extinguishment of debt,
net of taxes of $4.7 million (7,809) (7,809)
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Net income (loss) $ (31,889) $ 7,225 $ (28,987) $ 15,167
-------------------------- ----------------------------
-------------------------- ----------------------------
Net income (loss) per common share:
Income (loss) before extraordinary item $ (1.01) $ .30 $ (.89) $ .63
Extraordinary item (.33) (.33)
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Net income (loss) per common share $ (1.34) $ .30 $ (1.22) $ .63
-------------------------- ----------------------------
-------------------------- ----------------------------
Net income (loss) per common share - assuming dilution:
Income (loss) before extraordinary item $ (1.01) $ .29 $ (.89) $ .62
Extraordinary item (.33) (.33)
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Net income (loss) per common share - assuming dilution $ (1.34) $ .29 $ (1.22) $ .62
-------------------------- ----------------------------
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Shares used in per share calculations 23,736 24,240 23,690 24,236
Shares used in per share calculations - assuming dilution 23,736 24,650 23,690 24,643
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CHART INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
1999 1998 1999 1998
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OPERATING ACTIVITIES
Net income (loss) $(31,889) $7,225 $(28,987) $ 15,167
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Loss on early extinguishment of debt 12,459 12,459
Acquired in-process research and development 21,600 21,600
Acquired inventory profit 1,162 1,162
Restructuring charge 2,867 2,867
Depreciation and amortization 4,485 2,084 6,423 3,381
Minority interest 126 126
Deferred income taxes (203)
Contribution of stock to employee benefit plans 228 222 595 504
Increase (decrease) in cash resulting from changes in operating
assets and liabilities:
Accounts receivable (2,568) 3,461 (3,866) 3,233
Inventory and other current assets (3,134) (171) (5,795) (362)
Accounts payable and other current liabilities (9,088) (5,055) (10,696) (4,354)
Billings in excess of contract revenue and customer advances (4,377) (2,863) (1,134) (5,046)
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Net Cash Provided By (Used In) Operating Activities (8,129) 4,903 (5,449) 12,523
INVESTING ACTIVITIES
Capital expenditures (1,324) (1,978) (3,112) (6,810)
Acquisition of MVE, net of cash acquired (77,958) (78,115)
Acquisition of Northcoast Cryogenics, net of cash acquired (2,185)
Acquisition of Chart Marston (35,324)
Other investing activities 340 (501) (206) (489)
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Net Cash Used In Investing Activities (78,942) (2,479) (83,618) (42,623)
FINANCING ACTIVITIES
Borrowings on credit facility 287,250 18,471
264,000
Repayments on credit facility (13,000) (1,660) (31,500) (1,660)
Principal payments on long-term debt (145,881) (420) (146,961) (521)
Premiums paid on repurchases of debt (9,616) (9,616)
Treasury stock and stock option transactions (183) (823) (537) (1,626)
Deferred financing costs (6,238) (6,542)
Dividends paid to shareholders (1,187) (1,211) (2,370) (2,423)
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Net Cash Provided by (Used In) Financing Activities 87,895 (4,114) 89,724 12,241
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Net increase (decrease) in cash and cash equivalents 824 (1,690) 657 (17,859)
Effect of exchange rate changes on cash 703 47 1,194 47
Cash and cash equivalents at beginning of period 2,493 5,926 2,169 22,095
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,020 $4,283 $ 4,020 $ 4,283
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 1999
NOTE A - BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements of Chart
Industries, Inc. and subsidiaries ("Chart" or the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Chart Industries,
Inc. and Subsidiaries' Annual Report on Form 10-K for the year ended December
31, 1998.
NOTE B - INVENTORIES
The components of inventory consist of the following:
June 30, December 31,
1999 1998
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(Dollars in thousands)
Raw materials and supplies $ 26,656 $ 14,785
Work in process 23,790 13,955
Finished goods 11,114 1,273
LIFO reserve (210) (210)
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$ 61,350 $ 29,803
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6
NOTE C - NET INCOME (LOSS) PER SHARE
The calculations of basic and diluted net income or loss per share for the
three-month and six-month periods ended June 30, 1999 and 1998 are set forth
below. The assumed conversion of the Company's potentially dilutive securities
(employee stock options and warrants) before giving effect to the extraordinary
loss, was not dilutive for the three-month or six-month periods ended June 30,
1999. As a result, the calculation of diluted net loss per share for the
three-month and six-month periods ended June 30, 1999 set forth below does not
reflect any assumed conversion.
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------- -------------- ------------ -----------
(Dollars and shares in thousands, except
per share amounts)
Income (loss) before extraordinary item $(24,080) $ 7,225 $(21,178) $15,167
Extraordinary loss (7,809) (7,809)
-------------- -------------- ----------- ------------
Net income (loss) $(31,889) $ 7,225 $(28,987) $15,167
-------------- -------------- ----------- ------------
-------------- -------------- ----------- ------------
Weighted-average common shares 23,736 24,240 23,690 24,236
Effect of dilutive securities:
Employee stock options and warrants 410 407
-------------- -------------- ----------- ------------
Dilutive potential common shares 23,736 24,650 23,690 24,643
-------------- -------------- ----------- ------------
-------------- -------------- ----------- ------------
Net income (loss) per common share:
Income (loss) before extraordinary item $ (1.01) $ .30 $ (.89) $ .63
Extraordinary item (.33) (.33)
-------------- -------------- ----------- ------------
Net income (loss) per common share $ (1.34) $ .30 $ (1.22) $ .63
-------------- -------------- ----------- ------------
-------------- -------------- ----------- ------------
Net income (loss) per common share - assuming dilution:
Income (loss) before extraordinary item $ (1.01) $ .29 $ (.89) $ .62
Extraordinary item (.33) (.33)
-------------- -------------- ----------- ------------
Net income (loss) per common share - assuming dilution $ (1.34) $ .29 $ (1.22) $ .62
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NOTE D - REVENUE RECOGNITION
For the majority of the Company's contracts, revenue is recognized when products
are completed or shipped. For certain significant contracts, the Company uses
the percentage of completion method of accounting. Earned revenue is based on
the percentage that incurred costs to date bear to total estimated costs at
completion after giving effect to the most current estimates. The cumulative
impact of revisions in total cost estimates during the progress of work is
reflected in the period in which these changes become known. Earned revenue
reflects the original contract price adjusted for agreed upon claims and change
orders, if any. Losses expected to be incurred on contracts in process, after
consideration of estimated minimum recoveries from claims and change orders, are
charged to income as soon as such losses are known.
7
NOTE E - ACQUISITIONS
On April 12, 1999, the Company acquired the common and preferred stock of MVE
Holdings, Inc. ("MVE") for approximately $84.9 million in cash ($78.1 million
net of cash acquired). Additionally, the Company paid approximately $150.1
million to pay off existing debt instruments and complete the tender offer and
consent solicitation for the 12.5 percent senior secured notes due
2002 issued by MVE, Inc. The preliminary allocation of the purchase price
included in the June 30, 1999 condensed consolidated balance sheet is based upon
management's best estimates and preliminary appraisals and is subject to
further revisions. In-process research and development projects that had not
reached technological feasibility and had no alternative future use totaled
$21.6 million of the purchase price. This amount was determined by
independent consultants, who estimated the costs to develop the technology
into commercially viable products, estimated cash flows resulting from the
expected revenues generated from such products, and discounted the net cash
flows back to their present value using a risk-adjusted discount rate. This
amount was recognized as a non-cash expense with no tax benefit at the date
of acquisition.
The pro-forma unaudited results of operations for the six months ended June 30,
1999 and 1998, assuming consummation of the acquisition and extinguishment of
the debt as of January 1, 1998, are as follows:
Six Months Ended June 30,
1999 1998
---- ----
(Dollars in thousands, except per share amounts)
Net sales $174,131 $218,313
Income (loss) before extraordinary item (22,949) 13,315
Income (loss) before extraordinary item per share (.97) .55
Income (loss) before extraordinary item per share -
assuming dilution (.97) .55
Net income (loss) (30,758) 19,433
Net income (loss) per share (1.30) .80
Net income (loss) per share - assuming dilution (1.30) .79
On March 15, 1999, the Company acquired a group of privately held companies,
collectively known as Northcoast Cryogenics, for approximately $2.3 million in
cash ($2.2 million net of cash acquired) and $720,000 in Chart Common Stock.
Additional contingent consideration will be issued in an amount equal to three
percent of the net sales of Northcoast Cryogenics, as defined in the purchase
agreement, with respect to each fiscal year or partial fiscal year during the
three-year period beginning March 15, 1999, subject to possible extension for
one additional year. The preliminary allocation of the purchase price included
in the June 30, 1999 condensed consolidated balance sheet is based upon
management's best estimates and preliminary appraisals and is subject to
further revisions.
8
NOTE E - ACQUISITIONS - CONTINUED
On March 27, 1998, the Company, through its wholly-owned subsidiary Chart
Marston Limited ("Chart Marston"), acquired the net assets of the industrial
heat exchanger division of IMI Marston Limited, a wholly-owned subsidiary of IMI
plc., for 21 million Pounds Sterling (approximately U.S. $35.3 million). The
Company borrowed 11 million Pounds Sterling (approximately U.S. $18.5 million)
to fund the acquisition.
NOTE F - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income." Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of Statement 130 had no impact on the
Company's net income or shareholders' equity. Statement 130 requires foreign
currency translation adjustments to be included in other comprehensive income.
Total comprehensive income (loss) for the three months ended June 30, 1999 and
1998 was $(31.9) million and $7.2 million, respectively. Total comprehensive
income (loss) for the six months ended June 30, 1999 and 1998 was $(29.6)
million and $15.2 million, respectively.
NOTE G - RESTRUCTURING CHARGE
In the second quarter of 1999, the Company recorded a restructuring charge,
including related asset write-downs, of $3.9 million ($2.4 million or $.10
per basic and diluted share, after-tax). The restructuring charge relates to
the creation of a new organizational structure necessitated by the
acquisition of MVE and includes a non-cash charge of $2.9 million for the
write-down of certain assets made redundant by the acquisition and $1.0
million for severance and other employee related costs.
NOTE H - EXTRAORDINARY ITEM
In the second quarter of 1999, the Company retired prior to maturity certain
debt assumed as part of the MVE acquisition with a face value of $119.2 million.
The debt pre-payments resulted in an extraordinary loss of $12.5 million, $7.8
million net of tax.
NOTE I - FINANCING ARRANGEMENTS
In order to finance the acquisition of MVE, the Company negotiated a
consolidated multi-currency credit and revolving loan facility (the "Credit
Facility") which provides for loans of up to $300 million. The Company paid
approximately $6.5 million in fees to establish the Credit Facility. The Credit
Facility provides the bank with a secured interest in substantially all of the
property, plant and equipment of the Company. The Company had borrowings of
$263.0 million outstanding under the Credit Facility at June 30, 1999.
9
NOTE I - FINANCING ARRANGEMENTS - CONTINUED
As a result of the Company's second-quarter performance, the Company breached
two financial covenants of the credit agreement related to the Credit
Facility and a financial covenant of an industrial revenue bond ("IRB"). The
Company is currently engaged in discussions with Chase Manhattan Bank, its
agent bank, to obtain waivers of such breaches and to amend the credit
agreement. Management believes that the waivers and amendment will be
forthcoming in the near term. Until the amendment to the credit agreement is
obtained, however, the borrowings of $263.0 million under the Credit Facility
and the borrowings of $3.4 million under the IRB will be classified as
current liabilities. The Company expects that the amendment will require the
Company to pay a higher interest rate and to suspend its quarterly cash
dividend.
NOTE J - OPERATING SEGMENTS
The Company has three reportable segments: Process Systems and Equipment
("PS&E"), Distribution, Storage and Applications ("DS&A") and Special Products.
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because they
manufacture and distribute distinct products with different production
processes. The PS&E segment consists of three operating units that sell brazed
aluminum heat exchangers and coldboxes to industrial gas, natural gas and
petrochemical processing companies who use them for the liquefaction and
separation of industrial and natural gases. The DS&A segment consists of six
operating units that sell cryogenic tanks, trailers, intermodal containers,
railcars, cylinders, pumps, valves, repair services and vacuum jacketed piping
systems to various companies for the storage and transportation of both
industrial and natural gases. The operations of MVE are included in the DS&A
segment. As a result, total assets for this segment have now increased to $328.0
million. The Special Products segment consists of two operating units that sell
thermal vacuum systems, space simulation systems used to test satellites and
large vacuum chambers for telescope mirror aluminizing to the aerospace
industry, government agencies, universities and national research facilities,
and one operating unit that sells small diameter stainless steel tubing to
distributors requiring quick delivery. Due to the nature of the products that
each operating segment sells, there are no intersegment revenues.
The Company evaluates performance and allocates resources based on profit or
loss from operations before interest expense and income taxes.
THREE MONTHS ENDED JUNE 30, 1999
------------ ---------- ------------- ----------------- -----------
SPECIAL
PS&E DS&A PRODUCTS HEADQUARTERS TOTALS
------------ ---------- ------------- ----------------- -----------
(DOLLARS IN THOUSANDS)
Revenues from external customers. . . . . . . . . . . . $23,212 $54,215 $7,299 $84,726
Operating income (loss) before interest expense and
income taxes. . . . . . . . . . . . . . . . . . . . (86) (19,518) 763 $(917) (19,758)
THREE MONTHS ENDED JUNE 30, 1998
------------ ---------- ------------- ----------------- -----------
SPECIAL
PS&E DS&A PRODUCTS HEADQUARTERS TOTALS
------------ ---------- ------------- ----------------- -----------
(DOLLARS IN THOUSANDS)
Revenues from external customers. . . $30,335 $16,346 $10,349 $57,030
Operating income (loss) before interest expense and
income taxes. . . . . . . . . . . . . . . . . . . 7,614 2,498 1,822 $(282) 11,652
10
NOTE J - OPERATING SEGMENTS - CONTINUED
SIX MONTHS ENDED JUNE 30, 1999
------------ ---------- ------------- ----------------- -----------
SPECIAL
PS&E DS&A PRODUCTS HEADQUARTERS TOTALS
------------ ---------- ------------- ----------------- -----------
(DOLLARS IN THOUSANDS)
Revenues from external customers. . . . . . . . . . . . $48,576 $66,455 $14,283 $129,314
Operating income (loss) before interest expense and
income taxes. . . . . . . . . . . . . . . . . . . 3,174 (18,685) 1,808 $(1,330) (15,033)
SIX MONTHS ENDED JUNE 30, 1998
------------ ---------- ------------- ----------------- -----------
SPECIAL
PS&E DS&A PRODUCTS HEADQUARTERS TOTALS
------------ ---------- ------------- ----------------- -----------
(DOLLARS IN THOUSANDS)
Revenues from external customers. . . $58,648 $33,100 $21,386 $113,134
Operating income (loss) before interest expense and
income taxes. . . . . . . . . . . . . . . . . . . 15,754 5,598 3,506 $(987) 23,871
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
MARKET OVERVIEW
During the second quarter of 1999, the industrial gas and hydrocarbon markets
for process systems and equipment deteriorated further from previous low levels.
The industrial gas market has been in a downward trend for 18 months and
continues to be weak. This market decline was expected, but the decline has
lasted longer and is deeper than past cycles. The consolidation of the
industrial gas market -- as evidenced by the proposed acquisition of BOC by Air
Products and Air Liquide and certain other anticipated transactions -- has
further complicated the situation. Given the magnitude of the industrial gas
market decline and the uncertainty created by industry consolidation, management
is unable to predict when recovery in the industrial gas market will occur.
The hydrocarbon processing market has continued to experience delays in major
projects being placed. While most of these projects are not being cancelled, the
expected award dates for many contracts are being delayed, in some cases
indefinitely. Sluggish demand in Asia and from other international areas is
pushing down prices for Chart's systems and equipment. Management expects these
market conditions to continue through the end of the fiscal year.
Chart has initiated a complete reorganization of the Company into operating
divisions that eliminate overlapping activities and focus product lines on
serving customer needs. The Company is on plan in reorganizing to lower overall
operating costs and shift the business from the volatile process systems and
equipment segment to the more stable distribution, storage, and applications
segment, represented by the MVE acquisition. These reorganization efforts should
position Chart for profitable and sustainable growth in many more stable and
growth-oriented markets.
The DS&A segment is experiencing active demand for the Company's products which
serve ultimate end users such as restaurants, medical applications, space
installations, and semi-conductor manufacturers. Management believes that recent
new product releases and the introduction of Chart Leasing, Inc. during this
quarter present excellent growth opportunities for Chart.
11
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Sales for the second quarter of 1999 were $84.7 million versus $57.0 million for
the second quarter of 1998, an increase of $27.7 million, or 48.6 percent. The
acquisition of MVE on April 12, 1999 and the acquisition of Northcoast
Cryogenics on March 15, 1999 contributed $37.6 million in incremental sales to
the second quarter of 1999. Principally offsetting these incremental sales was a
decline in sales from the PS&E segment of $7.1 million, or 23.4 percent,
compared with the year-ago quarter.
Gross profit for the second quarter of 1999 was $21.6 million versus $19.4
million for the second quarter of 1998, an improvement of $2.2 million, or 11.0
percent. However, gross profit margin for the second quarter of 1999 was 25.4
percent versus 34.0 percent for the second quarter of 1998, reflecting lower
margins in the PS&E segment as demand weakened further.
Included in the second-quarter 1999 cost of sales is a non-cash charge of $1.2
million for acquired profit on work-in-process and finished goods inventory
related to the MVE acquisition. Excluding this item, gross profit margin in the
second quarter of 1999 was 26.8 percent. MVE and Northcoast Cryogenics
contributed $10.9 million of gross margin to the second quarter of 1999,
offsetting the $7.5 million decrease in gross margin from the PS&E segment.
Selling, general and administrative (SG&A) expense for the second quarter of
1999 increased to $14.6 million from $7.5 million for the second quarter of
1998. As a percentage of sales, SG&A expense was 17.2 percent for the second
quarter of 1999, up from 13.2 percent for the second quarter of 1998. The
increase as a percentage of sales reflects the decline in sales for the pre-MVE
acquisition Chart companies and the slightly higher SG&A cost base of MVE.
Goodwill amortization for the second quarter of 1999 was $1.2 million compared
to $230,000 for the second quarter of 1998. The purchase price for MVE and
Northcoast Cryogenics exceeded the estimated fair values of the net assets
acquired, resulting in approximately $164.4 million of goodwill, which is being
amortized over 35 and 15 years, respectively. These fair values are based on
preliminary estimates and assumptions and are subject to further revisions as
more information becomes available.
The Company recorded a $3.9 million charge during the second quarter of 1999 to
restructure its operations. The charge relates to the creation of a new
organizational structure necessitated by the acquisition of MVE and includes a
non-cash charge of $2.9 million for the write-down of certain assets made
redundant by the acquisition and $1.0 million for severance and other employee
related costs.
The Company also recorded a non-cash charge of $21.6 million in the second
quarter of 1999 for the write-off of acquired in-process research and
development. This amount was determined by independent consultants who estimated
the costs to develop the technology into commercially viable products, estimated
cash flows resulting from the expected revenues generated from such products,
and discounted the net cash flows back to their present value using a
risk-adjusted discount rate.
12
Net interest expense for the second quarter of 1999 was $4.1 million versus
$583,000 for the second quarter of 1998, reflecting interest on funds borrowed
to finance the MVE acquisition. The Company's borrowings outstanding on its
Credit Facility were $263.0 million at June 30, 1999.
In the second quarter of 1999, the Company recorded an extraordinary charge of
$12.5 million, $7.8 million net of tax, related to the early extinguishment of
the MVE 12.5 percent senior secured notes due 2002.
As a result of the foregoing, the Company reported a net loss of $31.9 million,
or $1.34 per share, for the second quarter of 1999 versus net income of $7.2
million, or $.29 per share, for the second quarter of 1998. On a pro-forma basis
before non-recurring charges, the Company's second quarter net income was
$685,000, or $.03 per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations during the second quarter of 1999 was $8.1 million
compared with cash provided by operations of $4.9 million for the second quarter
of 1998. The significant decrease in operating cash flow is due to increases in
accounts receivable and inventory and decreases in customer advances.
Capital expenditures for the second quarter of 1999 were $1.3 million compared
with $2.0 million for the corresponding quarter in 1998.
On April 12, 1999, the Company completed its acquisition of MVE. Under the terms
of the merger agreement, a wholly owned Chart subsidiary paid approximately
$84.9 million in cash ($78.1 million net of cash acquired) to purchase all of
MVE's common and preferred stock, and $150.1 million to pay off existing debt
instruments and complete the tender offer and consent solicitation for the
outstanding 12.5 percent senior secured notes due 2002 issued by MVE, Inc. In
order to finance the acquisition, the Company negotiated the Credit Facility
which provides for loans of up to $300 million. The Company paid approximately
$6.5 million in fees to establish the Credit Facility.
Subject to obtaining an amendment to the Credit Facility, the Company forecasts
sufficient cash flow from operations and available borrowings to fund principal
and interest payments and capital expenditures for the next 12 months. See
"Credit Facility Amendment."
ORDERS AND BACKLOG
The Company received $61.0 million of orders during the second quarter of 1999,
compared with orders of $34.9 million in the first quarter of 1999. Chart's
consolidated firm order backlog at June 30, 1999 was $79.6 million, a decrease
of $8.1 million from $87.7 million at March 31, 1999. Two orders totaling $6.5
million were cancelled out of backlog during the second quarter.
PS&E orders for the second quarter of 1999 totaled $8.8 million, compared with
$12.3 million for the first quarter of 1999. Backlog at June 30, 1999 was $31.7
million, down from $50.6 million at March 31, 1999. Part of the decline in
backlog was due to the cancellation of a $4.5 million heat exchanger for a
Malaysian ethylene plant that has been indefinitely delayed.
13
DS&A orders for the second quarter of 1999 totaled $46.7 million compared with
$16.7 million for the first quarter of 1999. Backlog at June 30, 1999 was $45.5
million versus $30.8 million at March 31, 1999. On a combined basis, MVE and
Northcoast accounted for $37.1 million of the second-quarter 1999 orders and
$22.9 million of the June 30, 1999 backlog.
Special Products orders for the second quarter of 1999 totaled $5.5 million,
compared with $5.9 million for the first quarter of 1999. Backlog at June 30,
1999 totaled $2.4 million, down from $6.2 million at March 31, 1999. Backlog was
reduced due to the cancellation of a $2.0 million vacuum equipment order for use
in India due to the U.S. government's cancellation of various product export
licenses to India.
REORGANIZATION
As part of the acquisition of MVE, the Company has reorganized to meet its
growth and profit objectives and to position Chart for continued leadership in
the three segments of the global cryogenic marketplace that it serves: Process
Systems & Equipment, Distribution, Storage & Applications, and Special Products.
Major changes are as follows:
PS&E Segment
- - Heat Exchanger Division -- a consolidation of Chart's ALTEC International
Limited Partnership and Chart Marston Limited subsidiaries
- - Process Systems Division -- formerly Chart's Process Systems International,
Inc. subsidiary
DS&A Segment
- - Cryogenic Storage Systems Division -- a consolidation of Chart's Cryenco
and Process Engineering subsidiaries and the industrial tank businesses of
MVE
- - Applied Technologies Division -- a consolidation of Chart's LNG/alternative
fuels business with the applications businesses of MVE
- - Cryogenic Components Division -- a consolidation of Chart's CVI subsidiary
with the industrial pipe business of MVE
- - Cryogenic Services Division -- formerly Chart's Northcoast Cryogenics
subsidiary; a consolidation of all of Chart's repair, rehabilitation and
service businesses
- - European Operations -- MVE's European operation in Solingen, Germany and
MVE's Ferox subsidiary in the Czech Republic remain in place
CREDIT FACILITY AMENDMENT
As a result of the Company's second-quarter performance, the Company breached
two financial covenants of the credit agreement related to the Credit
Facility and a financial covenant of an IRB. The Company is currently engaged
in discussions with Chase Manhattan Bank, its agent bank, to obtain waivers
of such breaches and to amend the credit agreement. Management believes that
the waivers and amendment will be forthcoming in the near term. Until the
amendment to the credit agreement is obtained, however, the borrowings of
$263.0 million under the Credit Facility and the borrowings of $3.4 million
under the IRB will be classified as current liabilities. The Company expects
that the amendment will require the Company to pay a higher interest rate and
to suspend its quarterly cash dividend.
14
YEAR 2000 READINESS DISCLOSURE
The Year 2000 Problem is the result of the inability of hardware, software and
control systems to properly recognize and process two-digit references to
specific years, beginning with the year 2000. The Year 2000 problem could result
in system failures or miscalculations causing disruptions of the operations of
the Company, its suppliers and its customers.
In 1997, the Company completed a preliminary assessment of its critical software
systems and determined that all of these systems could be made compliant. In
June 1998, the Company initiated a formal assessment plan for all non-critical
software systems by identifying a lead person at each of its locations to be
responsible for ensuring that the location will be compliant. The first phase of
the formal assessment plan, which was completed in the third quarter of 1998,
included an inventory of all information technology systems and control systems
with embedded chip technology. Results of the inventory indicated that all
information technology systems are or should be compliant by the year 2000,
primarily because none of these systems involve internally developed software
and compliant versions are readily available. The Company produces a limited
number of products utilizing control systems with embedded chip technology, and
is contacting the vendors who provide these embedded chips to determine
compliance. This project will be completed in the third quarter of 1999. Based
upon the Company's review of systems using embedded chip technology within its
existing facilities, the Company is reasonably sure that its facilities are
materially year 2000 compliant. The Company believes that the third parties
whose Year 2000 Problems pose the greatest risks for the Company include its
banks that maintain depository accounts, its payroll processing company, its
suppliers of the major materials used in production processes, its utility
providers and its providers of freight services. The Company has communicated
with these third parties to determine if they have an effective plan in place to
address the Year 2000 Problem, and has received positive responses from the
majority of these third parties. However, the Company provides no assurance that
these third parties will be year 2000 compliant or that their noncompliance will
not have a material adverse effect on the Company.
The Company currently estimates that it will spend less than $1 million to
ensure that its information technology systems are compliant, of which nearly
all has been committed or spent through June 30, 1999. Accordingly, the Company
expects cash flow from operations and available borrowings to be sufficient to
fund these expenditures.
Based upon the results of year 2000 compliance efforts underway, the Company
believes that all critical information technology systems and control systems
with embedded chip technology will be compliant and will allow the Company to
continue to operate beyond the year 2000 without a material adverse effect on
its results of operations or financial position. However, unanticipated problems
which may be identified in the ongoing year 2000 preparation program could
result in an undetermined financial risk. Based upon the Company's assessment of
its year 2000 compliance and the indicated compliance of the third parties it
has contacted to date, the Company is developing contingency plans as deemed
necessary.
15
FORWARD-LOOKING STATEMENTS
The Company is making this statement in order to satisfy the "safe harbor"
provisions contained in the Private Securities Litigation Reform Act of 1995.
This Quarterly Report on Form 10-Q includes forward-looking statements relating
to the business of the Company. Forward-looking statements contained herein or
in other statements made by the Company are made based on management's
expectations and beliefs concerning future events impacting the Company and are
subject to uncertainties and factors relating to the Company's operations and
business environment, all of which are difficult to predict and many of which
are beyond the control of the Company, that could cause actual results of the
Company to differ materially from those matters expressed or implied by
forward-looking statements. The Company believes that the following factors,
among others, could affect its future performance and cause actual results of
the Company to differ materially from those expressed or implied by
forward-looking statements made by or on behalf of the Company: (a) general
economic, business and market conditions; (b) competition; (c) decreases in
spending by its industrial customers; (d) the loss of a major customer or
customers; (e) ability of the Company to identify, consummate and integrate the
operations of suitable acquisition targets; (f) ability of the Company to manage
its fixed-price contract exposure; (g) its relations with its employees; (h) the
extent of product liability claims asserted against the Company; (i) variability
in the Company's operating results; (j) the ability of the Company to attract
and retain key personnel; (k) the costs of compliance with environmental
matters; and (l) the ability of the Company to protect its proprietary
information.
16
PART II. OTHER INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, operations of the Company
are exposed to continuing fluctuations in foreign currency
values and interest rates that can affect the cost of
operating and financing. Accordingly, the Company addresses a
portion of these risk through a program of risk management.
The Company's primary interest rate risk exposure results from
the Credit Facility's various floating rate pricing
mechanisms. This interest rate exposure is managed by the use
of certain interest rate derivative products which place
both a ceiling and a floor on the base rate used in the
calculation of the Company's rate. If interest rates were
to increase 200 basis points (2%) from June 30, 1999 rates,
and assuming no changes in debt from the June 30, 1999
levels, the additional annual expense would be
approximately $5.3 million on a pre-tax basis. Any increase
above this level, however, would be mitigated by the
derivative products.
The Company has assets, liabilities and cash flows in foreign
currencies creating foreign exchange risk, the primary foreign
currencies being the British Pound Sterling, the Czech Koruna,
and the German Mark. Monthly measurement, evaluation and
forward exchange contracts are employed as methods to reduce
this risk.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of the Company was held on
May 6, 1999. The following matters were voted on at the
meeting:
1. Election of Arthur S. Holmes and Richard J. Campbell
for a term of three years. The nominees were elected
as Directors with the following votes:
Arthur S. Holmes
For 21,014,806
Withheld 1,228,482
Richard J. Campbell
For 21,012,726
Withheld 1,230,563
17
PART II. OTHER INFORMATION - CONTINUED
2. Proposal to approve and adopt the Amended and
Restated Chart Industries, Inc. 1997 Stock Option and
Incentive Plan. The proposal was approved with the
following votes:
For 17,310,205
Against 3,890,090
Abstain 1,042,992
For a description of the bases used in tabulating the
above-referenced votes, see the Company's definitive
Proxy Statement used in connection with the
solicitation of proxies for the Annual Meeting of
Stockholders on May 6, 1999.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
See the Exhibit Index on page 21 of this Form 10-Q.
(b) Reports on Form 8-K.
During the quarter ended June 30, 1999, the Company
filed a Current Report on Form 8-K dated April 27, 1999,
which was subsequently amended on Form 8-K/A dated June
24, 1999, to file financial statements of the business
acquired and pro forma financial information related to
the Company's acquisition of MVE Holdings, Inc.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Chart Industries, Inc.
-------------------------------------------------
(Registrant)
Date: AUGUST 16, 1999 /s/Don A. Baines
-------------------- -------------------------------------------------
Don A. Baines
Chief Financial Officer and Treasurer
(Duly Authorized and Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
27 Financial Data Schedule
20