The following discussion of our results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements. Actual results may differ materially from those discussed below. See "Forward-Looking Statements" at the end of this discussion and Item 1A. "Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with this discussion. Overview We are a leading independent global manufacturer of highly engineered equipment servicing multiple applications in the energy and industrial gas markets. Our unique product portfolio is used in every phase of the liquid gas supply chain, including upfront engineering, service and repair. Being at the forefront of the clean energy transition, Chart is a leading provider of technology, equipment and services related to liquefied natural gas, hydrogen, biogas and CO2 Capture amongst other applications. We are committed to excellence in environmental, social and corporate governance (ESG) issues both for our company as well as our customers. With over 25 global locations fromthe United States toAsia ,Australia ,India ,Europe andSouth America , we maintain accountability and transparency to our team members, suppliers, customers and communities. Macroeconomic Impacts Despite strong order and backlog growth, supply chain, labor and logistics issues weighed on business in the third quarter 2021, in particular on the gross margin line as our price increases were not able to completely keep pace with rapidly accelerating material costs, freight and gas price increases and backlog timing. Furthermore, the uncertainty associated with the coronavirus (Covid-19) pandemic remains, which we continue to actively monitor in terms of its impact on our results of operations for the remainder of 2021 and beyond. The extent to which our operations will be impacted by the outbreak will largely depend on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity, or reemergence, of the outbreak and actions by government authorities to contain the outbreak or treat its impact, among other things. We previously indicated that we anticipated that in the third quarter 2021 we would need to monitor whether material costs and availability were improving or getting worse and then respond quickly. Things did get worse in the quarter, with additional challenges including material costs that rapidly increased in the third quarter 2021, Force Majeure issued to industrial customers (including us) from our industrial gas supplier on nitrogen and argon allocations due to Covid-19 oxygen needs, increases from the end of the second quarter 2021 to the end of the third quarter 2021 on container cost and road freight costs coupled with the lack of availability of drivers, trucks, packaging and port congestion combined with unusual weather events and availability and cost of labor, including Covid-19 labor impacts. While we did respond quickly with surcharges, additional price increases and operational cost reductions, none of our in-quarter actions were immediately impactful to margins within the quarter itself. We have seen specific improvements in some of the challenges we faced last quarter and are currently projecting certain further tempering of specific headwinds in the coming quarter with more normalization of the macro difficulties later in 2022. We continue to have confidence in our double-digit forecasted organic growth and associated margin increases across the coming years. Environmental, Social, Governance Chart is proud to be at the forefront of the clean energy transition as a leading provider of technology, equipment and services related to liquefied natural gas, hydrogen, biogas, carbon capture and water treatment, amongst other applications. We also captured as our unique offering for the "nexus of clean" clean power, clean water, clean food and clean industrials. This leadership position is possible not only because we have the broadest offering of clean innovative solutions for the various end markets we serve, but also because we are committed to global responsibility. Reporting our Environmental, Social, Governance ("ESG") performance is one of the ways we demonstrate accountability and transparency to our team members, suppliers, customers, shareholders and communities. Below are some highlights of our ESG efforts, and further information can be found in our second Annual Sustainability report with scorecard which was released inApril 2021 . •With safety as our highest priority, Chart team members achieved our lowest Total Recordable Incident Rate (TRIR) in our history in 2020. •We measure progress throughSustainability Accounting Standards Board (SASB) andTask Force on Climate-Related Financial Disclosures (TCFD) indices, as well as contributing to theGlobal Reporting Initiative (GRI) andUnited Nations Sustainable Development Goals (SDGs). •We utilize Riskmethods analytics to proactively monitor our supply chain for proper governance in our supplier network including their climate targets and other ESG activities. •We formed a Global ESG Committee,Global Safety Council , andGlobal Diversity & Inclusion Committee . 39
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•We released our second Annual Sustainability report with scorecard inApril 2021 . •We have recently entered into a cutting-edge sustainability-linked banking agreement with covenants tied to ourGreen House Gas ("GHG") emission reductions' actual performance. •We have set a target to reduce our carbon intensity 30% by 2030 and have specific initiatives in place to help us meet this goal. Last year, we made progress towards achieving our target by reducing GHG Intensity by almost 6.0% year-over-year. •In terms of lowering our own emissions, we made plant improvements including energy efficient upgrades for various equipment, replacing diesel powered equipment with electric and installing LED lighting in office spaces. In 2020, Chart reduced Scope 1 and Scope 2 emissions by 8.5% and 8.9%, respectively, while reducing total energy consumption by almost 16.0%. •We are our helping customers to achieve their own sustainability targets in a number of different ways whether that's through reducing the amount of plastic used in packaging to lowering greenhouse gas emissions by enabling the transition towards cleaner fuels. •We have an independent Board of Directors that is comprised of nine directors (four of our nine directors are female and five of our nine are diverse) and governed with a separate Chairman and CEO. •We hold regular meetings on the topic and reviews with our Board or Directors. •We link our executives and their direct reports short-term incentive payout (25% of the strategic and operational goals) to an ESG metric. •Our team volunteers in their communities with a focus on supporting children and families, ending hunger and improving health. In 2020, we donated over 4,000 masks in addition to medical oxygen equipment to respond to the Covid-19 pandemic. We offer every team member worldwide one paid day off each year to volunteer in our communities. •We were named Emissions Reductions Champion - Organization of the Year at Gastech 2021 inDubai . We were also named as a finalist inS&P Global Platts' Corporate Social Responsibility Award. Third Quarter 2021 Highlights Strong order activity contributed to our fourth consecutive quarter of record ending total backlog as ofSeptember 30, 2021 of$1,102.2 million compared to$684.9 million as ofSeptember 30, 2020 and$1,083.9 million as ofJune 30, 2021 (then a record), representing increases of$417.3 million or 60.9% and$18.3 million or 1.7%, respectively, which reflects the broad-based demand we continue to see quarter-over-quarter across our end markets. These increases were largely driven by strong albeit tempered orders in our Cryo Tank Solutions and Specialty Products segments (as compared to the second quarter of 2021) mainly driven by orders in storage equipment, mobile equipment, hydrogen and helium equipment, HLNG vehicle tanks, lasers, LNG regasification and water treatment applications as we continue to see broad based demand including the continuing recovery in certain end markets, continued demand for our clean products supporting the strongest current macroeconomic trend of sustainability, and the combination of larger liquefaction orders for LNG, hydrogen and helium. Cryo Tank Solutions segment backlog was$345.3 million as ofSeptember 30, 2021 , a record, as compared to$208.7 million and$327.1 million as ofSeptember 30, 2020 andJune 30, 2021 , respectively. Specialty Products segment backlog was$381.2 million as ofSeptember 30, 2021 , also a record, as compared to$158.8 million and$374.0 million as ofSeptember 30, 2020 andJune 30, 2021 , respectively. Consolidated sales increased to$328.3 million in the third quarter 2021 from$273.2 million in the third quarter 2020 and$322.0 million in the second quarter of 2021, which was mainly driven by our Specialty Products, Cryo Tank Solutions and Repair, Service & Leasing segments, each of which had double digit growth on a prior year same quarter comparative basis. This increase was partially offset by lower sales in our Heat Transfer Systems segment mainly due to industry-wide softness in demand for midstream and upstream compression equipment. However, we believe we are seeing the signs of a slight recovery in market conditions as indicated by an increase in customer order activity and inquiry. Sales during the quarter, although higher on a year-over-year and sequential basis, were somewhat lower than anticipated, given timing shifts that delayed certain expected sales into the fourth quarter. Third quarter 2021 Specialty Products segment sales of$116.9 million and gross profit of$40.7 million , which improved by$10.1 million (9.5%) and$4.0 million (10.9%), respectively, as compared to the second quarter of 2021, included record sales for hydrogen and helium and water treatment equipment. We are also starting to see an increase in inquires and orders around upstream oil and gas activities. On a consolidated basis, gross profit decreased during the third quarter of 2021 compared to the third quarter of 2020 by$3.7 million or 4.7%, and third quarter 2021 gross margin as a percent of sales of 22.8% decreased from 28.8% in the third quarter of 2020. The decrease in margin as a percent of sales in the current quarter over third quarter of 2020 was primarily driven by higher material prices due to market conditions for all segments overall as discussed in the macroeconomic impacts section above andVenture Global's Calcasieu Pass LNG export terminal project ("Calcasieu Pass ") volume mix which drove higher margins in the third quarter of 2020 in our Heat Transfer Systems segment. 40
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Outlook
Our 2021 and 2022 full year outlooks reflect execution on the clean energy transition including growth in small scale LNG opportunities and our Specialty Products business, especially in water treatment, over the road trucking, hydrogen and helium applications driven by strength in year-to-date 2021 orders and backlog, including specific liquefaction projects and commercial opportunities increasing from our inorganic investments, acquisitions completed in the past twelve months and the slight recovery in our air cooled heat exchangers business relative to traditional midstream and upstream energy applications. We expect the third quarter 2021 was the bottom in terms of the negative margin impact from lagging pricing to cost increases, and subsequent quarters (including the fourth quarter 2021) are sequentially improved, in particular as the result of the specific projects with margin visibility that will have material revenue recognized in the fourth quarter 2021, the pricing and surcharges beginning to show in margins and generally higher volumes to assist in labor absorption. We anticipate the first half of 2022 will include a continued margin drag from the macroeconomic challenges but increasingly offset in each of the first two quarters of 2022 by the positive impact from actions we have taken to date. There is no additional Big LNG revenue included in our outlook although we strongly believe that there is the opportunity for up to three Big LNG projects with our equipment and/or IPSMR® to move to Final Investment Decision ("FID") in the first half of 2022. We continue to invest in our automation, process improvement, and productivity activities across Chart, with total anticipated 2021 capital expenditures spend of$40.0 million to$45.0 million . Consolidated Results for the Three Months EndedSeptember 30, 2021 and 2020, andJune 30, 2021 The following table includes key metrics used to evaluate our business and measure our performance and represents selected financial data for our operating segments for the three months endedSeptember 30, 2021 and 2020 andJune 30, 2021 (dollars in millions). Financial data for the three months endedJune 30, 2021 has been included to provide additional information regarding our business trends on a sequential quarter basis. Selected Financial Information Current Quarter vs. Current Quarter vs. Three Months Ended Prior Year Same Quarter Prior Sequential Quarter September September Variance Variance Variance Variance 30, 2021 30, 2020 June 30, 2021 ($) (%) ($) (%) Sales Cryo Tank Solutions$ 112.2 $ 102.0 $ 97.8 $ 10.2 10.0 %$ 14.4 14.7 % Heat Transfer Systems 56.4 80.7 65.2 (24.3) (30.1) % (8.8) (13.5) % Specialty Products 116.9 56.0 106.8 60.9 108.8 % 10.1 9.5 % Repair, Service & Leasing 46.3 36.5 54.6 9.8 26.8 % (8.3) (15.2) % Intersegment eliminations (3.5) (2.0) (2.4) (1.5) 75.0 % (1.1) 45.8 % Consolidated$ 328.3 $ 273.2 $ 322.0 $ 55.1 20.2 %$ 6.3 2.0 % Gross Profit Cryo Tank Solutions$ 22.6 $ 25.6 $ 23.2 $ (3.0) (11.7) %$ (0.6) (2.6) % Heat Transfer Systems 2.2 21.3 11.2 (19.1) (89.7) % (9.0) (80.4) % Specialty Products 40.7 20.5 36.7 20.2 98.5 % 4.0 10.9 % Repair, Service & Leasing 9.4 11.2 12.1 (1.8) (16.1) % (2.7) (22.3) % Consolidated$ 74.9 $ 78.6 $ 83.2 $ (3.7) (4.7) %$ (8.3) (10.0) % Gross Profit Margin Cryo Tank Solutions 20.1 % 25.1 % 23.7 % Heat Transfer Systems 3.9 % 26.4 % 17.2 % Specialty Products 34.8 % 36.6 % 34.4 % Repair, Service & Leasing 20.3 % 30.7 % 22.2 % Consolidated 22.8 % 28.8 % 25.8 % 41
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Table of Contents SG&A Expenses Cryo Tank Solutions$ 9.1 $ 10.5 $ 9.1 $ (1.4) (13.3) % $ - - % Heat Transfer Systems 7.3 7.2 6.6 0.1 1.4 % 0.7 10.6 % Specialty Products 11.8 4.7 11.6 7.1 151.1 % 0.2 1.7 % Repair, Service & Leasing 4.9 3.3 4.4 1.6 48.5 % 0.5 11.4 % Corporate 18.0 15.4 16.3 2.6 16.9 % 1.7 10.4 % Consolidated$ 51.1 $ 41.1 $ 48.0 $ 10.0 24.3 %$ 3.1 6.5 % SG&A Expenses (% of Sales) Cryo Tank Solutions 8.1 % 10.3 % 9.3 % Heat Transfer Systems 12.9 % 8.9 % 10.1 % Specialty Products 10.1 % 8.4 % 10.9 % Repair, Service & Leasing 10.6 % 9.0 % 8.1 % Consolidated 15.6 % 15.0 % 14.9 % Current Quarter vs. Current Quarter vs. Three Months Ended Prior Year Same Quarter Prior Sequential Quarter September 30, September 30, Variance Variance Variance Variance 2021 2020 June 30, 2021 ($) (%) ($) (%) Operating Income (Loss) (1) Cryo Tank Solutions$ 13.0 $ 13.8 $ 13.4 $ (0.8) (5.8) %$ (0.4) (3.0) % Heat Transfer Systems (9.9) 8.4 (0.5) (18.3) (217.9) % (9.4) 1,880.0 % Specialty Products (2) 26.4 15.3 23.4 11.1 72.5 % 3.0 12.8 % Repair, Service & Leasing 2.2 6.0 5.6 (3.8) (63.3) % (3.4) (60.7) % Corporate (3) (18.0) (15.4) (16.3) (2.6) 16.9 % (1.7) 10.4 % Consolidated$ 13.7 $ 28.1 $ 25.6 $ (14.4) (51.2) %$ (11.9) (46.5) % Operating Margin Cryo Tank Solutions 11.6 % 13.5 % 13.7 % Heat Transfer Systems (17.6) % 10.4 % (0.8) % Specialty Products 22.6 % 27.3 % 21.9 % Repair, Service & Leasing 4.8 % 16.4 % 10.3 % Consolidated 4.2 % 10.3 % 8.0 % _______________ (1)Restructuring costs for the three months ended: •September 30, 2021 were$1.9 ($0.5 - Heat Transfer Systems,$1.4 - Repair, Service & Leasing). •September 30, 2020 were$1.9 ($0.3 - Cryo Tank Solutions,$1.1 - Heat Transfer Systems,$0.1 - Repair, Service & Leasing and$0.4 - Corporate). •June 30, 2021 were$0.3 ($0.3 - Heat Transfer Systems). (2)Acquisition-related contingent consideration adjustments in our Specialty Products segment for the three months ended: •September 30, 2021 were$0.3 . •June 30, 2021 were$1.2 . (3)Includes transaction-related costs of$0.7 for the three months endedSeptember 30, 2021 related to recent acquisitions. Results of Operations for the Three Months EndedSeptember 30, 2021 and 2020, andJune 30, 2021 Sales for the third quarter of 2021 compared to the same quarter in 2020 increased by$55.1 million , from$273.2 million to$328.3 million , or 20.2%. The increase in sales on a prior year same quarter comparative basis was primarily driven by growth in our Specialty Products segment on favorable sales in hydrogen, HLNG vehicle tanks, laser and food & beverage applications, and water treatment equipment sales, in our Cryo Tank Solutions segment on favorable sales in engineered systems and mobile equipment, and in our Repair, Service & Leasing segment on favorable sales in our Cryo-Lease business. 42
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This increase was partially offset by the continued softness in demand for midstream and upstream compression equipment and timing of sales recognized relative toCalcasieu Pass within our Heat Transfer Systems segment. Gross profit decreased during the third quarter of 2021 compared to the third quarter of 2020 by$3.7 million or 4.7%, and third quarter 2021 gross margin as a percent of sales of 22.8% decreased from 28.8% in the third quarter of 2020. The decrease in margin as a percent of sales in the current quarter over third quarter of 2020 was primarily driven by macroeconomic conditions as our price increases lagged the more than anticipated rapidly accelerating material prices, freight costs and gas price increases for all segments overall andCalcasieu Pass volume mix which drove higher margins in the third quarter of 2020 in our Heat Transfer Systems segment. Restructuring costs recorded to cost of sales were$1.9 million and$1.2 million for the three months endedSeptember 30, 2021 and 2020, respectively. Consolidated SG&A expenses increased by$10.0 million or 24.3% during the third quarter of 2021 compared to the same quarter in 2020 primarily driven by ramp up in our Specialty Products business and SG&A expenses related to recent acquisitions. Interest Expense, Net and Financing Costs Amortization Interest expense, net for the three months endedSeptember 30, 2021 and 2020 was$3.2 million and$6.5 million , respectively, representing a decrease of$3.3 million . The decrease in interest expense, net, is primarily due to lower borrowings outstanding on our term loan dueJune 2024 during the third quarter of 2021 as compared to the third quarter of 2020. Furthermore, we no longer recognize interest accretion of convertible notes discount due to a change in accounting principle adopted at the beginning of fiscal year 2021 whereas we recognized$2.0 million in interest accretion expense in the third quarter of 2020. For further information regarding the change in accounting principle, refer to Note 1, "Basis of Preparation" to our unaudited condensed consolidated financial statements included under Item 1, "Financial Statements" in this report. Interest expense, net for both the three months endedSeptember 30, 2021 and 2020 included$0.6 million of 1.0% cash interest expense related to our convertible notes dueNovember 2024 and$2.9 million and$3.8 million , respectively, in interest related to borrowings on our senior secured revolving credit facility and term loan due 2024. Financing costs amortization was$1.2 million and$1.1 million for the three months endedSeptember 30, 2021 and 2020, respectively.Unrealized Gain On Investments In Equity Securities During the third quarter of 2021, we recognized an unrealized gain on investments in equity securities of$10.4 million , which was driven by an unrealized gain of$20.7 million upon remeasurement of the initial HTEC investment due to an observable price change in an orderly transaction for similar instruments of the same issuer, partially offset by a$6.0 million unrealized loss on the mark-to-market adjustment of our investment in McPhy and a$4.3 million unrealized loss on the mark-to-market adjustment of our investment in Stabilis. During third quarter of 2020, we recognized an unrealized gain of$0.7 million on the mark-to-market adjustment of our investment in Stabilis. Foreign Currency Gain and Other For the three months endedSeptember 30, 2021 and 2020, foreign currency gain and other was$1.4 million and$0.8 million , respectively. The variance between periods was primarily driven by fluctuations in theU.S dollar as compared to the euro and Chinese yuan. Income Tax Expense Income tax expense of$5.5 million and$6.2 million for the three months endedSeptember 30, 2021 and 2020, respectively, represents taxes on bothU.S. and foreign earnings at a combined effective income tax rate of 26.1% and 28.2%, respectively. The effective income tax rate of 26.1% for the three months endedSeptember 30, 2021 differed from theU.S. federal statutory rate of 21% primarily due to income earned by our certain foreign entities being taxed at higher rates than theU.S. federal statutory rate combined with a reduction of our foreign-derived intangible income deduction (FDII) as a result of lower forecasted taxable income in theU.S. The effective income tax rate of 28.2% for the three months endedSeptember 30, 2020 differed from theU.S. federal statutory rate of 21% primarily due to excess tax benefits associated with share-based compensation, which was offset by the effect of income earned by our certain foreign entities being taxed at higher rates than theU.S. federal statutory rate, losses incurred by some of our foreign operations for which no benefit was recorded, and the establishment of an APB 23 deferred tax liability associated with our discontinued operations. 43
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Net Income Attributable toChart Industries, Inc. From Continuing Operations As a result of the foregoing, net income attributable toChart Industries, Inc. from continuing operations for the three months endedSeptember 30, 2021 and 2020 was$14.9 million and$15.6 million , respectively. Discontinued Operations The results from our cryobiological related products business formerly reported in our Distribution & Storage Western Hemisphere segment are reflected in our condensed consolidated financial statements as discontinued operations for the three months endedSeptember 30, 2020 . For further information, refer to Note 2, "Discontinued Operations" of our unaudited condensed consolidated financial statements included under Item 1, "Financial Statements" in this report. 44
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Consolidated Results for the nine months endedSeptember 30, 2021 and 2020 The following table includes key metrics used to evaluate our business and measure our performance and represents selected financial data for our operating segments for the nine months endedSeptember 30, 2021 and 2020 (dollars in millions): Selected Financial Information Current Year-to-date vs. Prior Nine Months Ended Year-to-date Period September 30, September 30, 2021 2020 Variance ($) Variance (%) Sales Cryo Tank Solutions $ 313.9$ 305.3 $ 8.6 2.8 % Heat Transfer Systems 190.8 290.9 (100.1) (34.4) % Specialty Products 301.0 157.5 143.5 91.1 % Repair, Service & Leasing 142.3 117.3 25.0 21.3 % Intersegment eliminations (9.2) (6.3) (2.9) 46.0 % Consolidated $ 938.8$ 864.7 $ 74.1 8.6 % Gross Profit Cryo Tank Solutions $ 71.0$ 75.5 $ (4.5) (6.0) % Heat Transfer Systems 29.2 74.2 (45.0) (60.6) % Specialty Products 105.6 57.8 47.8 82.7 % Repair, Service & Leasing 36.2 36.7 (0.5) (1.4) % Consolidated $ 242.0$ 244.2 $ (2.2) (0.9) % Gross Profit Margin Cryo Tank Solutions 22.6 % 24.7 % Heat Transfer Systems 15.3 % 25.5 % Specialty Products 35.1 % 36.7 % Repair, Service & Leasing 25.4 % 31.3 % Consolidated 25.8 % 28.2 % SG&A Expenses Cryo Tank Solutions $ 27.1$ 30.1 $ (3.0) (10.0) % Heat Transfer Systems 20.9 28.4 (7.5) (26.4) % Specialty Products 32.5 15.8 16.7 105.7 % Repair, Service & Leasing 13.7 11.2 2.5 22.3 % Corporate 51.1 51.7 (0.6) (1.2) % Consolidated $ 145.3$ 137.2 $ 8.1 5.9 % SG&A Expenses % of Sales Cryo Tank Solutions 8.6 % 9.9 % Heat Transfer Systems 11.0 % 9.8 % Specialty Products 10.8 % 10.0 % Repair, Service & Leasing 9.6 % 9.5 % Consolidated 15.5 % 15.9 % 45
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