<PAGE>
> 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 September 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.
--------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 34-1712937
- ----------------------------- ----------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
5885 Landerbrook Dr., Suite 150, Cleveland, Ohio 44124
--------------------------------------------------------------
(Address of Principal Executive Offices) (ZIP Code)
Registrant's Telephone Number, Including Area Code: (440) 753-1490
Not Applicable
-----------------------------------------------------------------------
(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 N0
---- ----
At September 30, 1999, there were 23,749,945 outstanding shares of the Company's
Common Stock, $0.01 par value per share.
Page 1 of 22 sequentially numbered pages.
1
<PAGE>
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 12 of this Report on Form 10-Q.
2
<PAGE>
CHART INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------------- ----------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 3,011 $ 2,169
Accounts receivable, net 54,443 37,336
Inventories, net 48,550 29,803
Other current assets 29,056 6,803
--------------------- ----------------------
Total Current Assets 135,060 76,111
Property, plant & equipment, net 77,396 40,536
Goodwill, net 178,601 31,568
Other assets, net 27,440 9,990
--------------------- ----------------------
TOTAL ASSETS $418,497 $158,205
===================== ======================
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 23,359 $ 11,540
Customer advances 3,754 13,011
Billings in excess of contract revenue 793 2,194
Accrued expenses and other liabilities 55,175 25,783
Current portion of long-term debt 17,090 431
--------------------- ----------------------
Total Current Liabilities 100,171 52,959
Long-term debt 262,074 10,894
Deferred income taxes 1,159 1,198
Minority interest 947
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 September 30, 1999 and
December 31, 1998, respectively 244 243
Additional paid-in capital 43,796 43,367
Retained earnings 16,048 56,352
Accumulated other comprehensive income 212 (358)
Treasury stock, at cost, 673,982 and 732,452 shares at September 30,
1999, and December 31, 1998, respectively (6,154) (6,450)
--------------------- ----------------------
54,146 93,154
--------------------- ----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $418,497 $158,205
===================== ======================
</TABLE>
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
<PAGE>
CHART INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Sales $84,108 $57,823 $213,422 $170,957
Cost of products sold:
Cost of sales 63,705 38,080 157,985 110,754
Acquired profit in inventory 1,162
Restructuring charge 256 936
-------------- ------------- -------------- ---------------
63,961 38,080 160,083 110,754
Gross profit 20,147 19,743 53,339 60,203
Selling, general & administrative expense 14,420 9,005 36,342 25,233
Goodwill amortization expense 924 232 2,406 593
Restructuring charge 8,562 11,783
Acquired in-process research and development 410 22,010
-------------- ------------- -------------- ---------------
24,316 9,237 72,541 25,826
Operating income (loss) (4,169) 10,506 (19,202) 34,377
Interest expense - net 5,157 353 9,568 746
-------------- ------------- -------------- ---------------
Income (loss) before income taxes,
minority interest and extraordinary item (9,326) 10,153 (28,770) 33,631
Income taxes (476) 3,426 1,132 11,737
-------------- ------------- -------------- ---------------
Income (loss) before minority interest and
extraordinary item (8,850) 6,727 (29,902) 21,894
Minority interest (96) (222)
-------------- ------------- -------------- ---------------
Income (loss) before extraordinary item (8,946) 6,727 (30,124) 21,894
Extraordinary loss on early extinguishment of debt,
net of taxes of $4.7 million (7,809)
-------------- ------------- -------------- ---------------
Net income (loss) ($8,946) $6,727 ($37,933) $ 21,894
============== ============= ============== ===============
Net income (loss) per common share:
Income (loss) before extraordinary item ($ 0.38) $ 0.28 ($ 1.27) $ 0.91
Extraordinary item ( 0.33)
-------------- ------------- -------------- ---------------
Net income (loss) per common share ($ 0.38) $ 0.28 ($ 1.60) $ 0.91
============== ============= ============== ===============
Net income (loss) per common share - assuming dilution:
Income (loss) before extraordinary item ($ 0.38) $ 0.28 ($ 1.27) $ 0.89
Extraordinary item ( 0.33)
-------------- ------------- -------------- ---------------
Net income (loss) per common share - assuming dilution ($ 0.38) $ 0.28 ($ 1.60) $ 0.89
============== ============= ============== ===============
Shares used in per share calculations 23,738 24,087 23,706 24,189
Shares used in per share calculations - assuming dilution 23,738 24,350 23,706 24,541
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
CHART INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income (loss) ($ 8,946) $ 6,727 ($ 37,933) $21,894
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Loss on early extinguishment of debt 12,459
Acquired in-process research and development 410 22,010
Acquired inventory profit 1,162
Restructuring charge 6,923 9,790
Depreciation and amortization 5,167 1,406 11,590 4,787
Minority interest 96 222
Deferred income taxes (203)
Contribution of stock to employee benefit plans 181 297 776 801
Increase (decrease) in cash resulting from changes in
operating assets and liabilities:
Accounts receivable 10,703 (575) 6,837 2,658
Inventory and other current assets 2,192 ( 2,007) ( 3,603) (2,369)
Accounts payable and other current liabilities (3,532) 206 ( 14,228) (4,148)
Billings in excess of contract revenue and customer advances (9,426) 2,905 ( 10,560) (2,141)
----------- ----------- ----------- ------------
Net Cash Provided By(Used In) Operating Activities 3,768 8,959 ( 1,681) 21,482
INVESTING ACTIVITIES
Capital expenditures (1,470) (765) ( 4,582) (7,575)
Acquisition of MVE, net of cash acquired ( 49) ( 78,164)
Acquisition of Northcoast Cryogenics, net of cash acquired ( 2,185)
Acquisition of Chart Marston ( 35,324)
Other investing activities (480) ( 245) (686) (734)
----------- ----------- ----------- ------------
Net Cash Used In Investing Activities ( 1,999) ( 1,010) ( 85,617) ( 43,633)
FINANCING ACTIVITIES
Borrowings on credit facility 18,000 9,250 305,250 27,721
Repayments on credit facility ( 17,000) ( 14,033) ( 48,500) (15,693)
Principal payments on long-term debt (1,529) 117 ( 148,490) ( 404)
Premiums paid on repurchases of debt ( 9,616)
Treasury stock and stock option transactions ( 182) ( 4,135) (719) (5,761)
Deferred financing costs (1,103) ( 7,645)
Dividends paid to shareholders ( 1,207) ( 2,370) (3,630)
----------- ----------- ----------- ------------
Net Cash Provided by (Used In) Financing Activities (1,814) ( 10,008) 87,910 2,233
----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents ( 45) ( 2,059) 612 ( 19,918)
Effect of exchange rate changes on cash ( 964) (228) 230 (181)
Cash and cash equivalents at beginning of period 4,020 4,283 2,169 22,095
----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,011 $ 1,996 $ 3,011 $ 1,996
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 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 three and nine-month periods ended
September 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
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
NOTE B - INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------------------- ----------------------------
(Dollars in thousands)
<S> <C> <C>
Raw materials and supplies $24,650 $14,785
Work in process 15,064 13,955
Finished goods 9,046 1,273
LIFO reserve (210) (210)
-------------------------- ----------------------------
$48,550 $29,803
========================== ============================
</TABLE>
6
<PAGE>
NOTE C - NET INCOME (LOSS) PER SHARE
The calculations of basic and diluted net income or loss per share for the
three-month and nine-month periods ended September 30, 1999 and 1998 are set
forth below. The assumed conversion of the Company's potentially dilutive
securities (employee stock options and warrants) before giving effect to the
extraordinary loss, was not dilutive for the three-month or nine-month periods
ended September 30, 1999. As a result, the calculation of diluted net loss per
share for the three-month and nine-month periods ended September 30, 1999 set
forth below does not reflect any assumed conversion.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------- -------------- -------------- ---------------
(Dollars and shares in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Income (loss)before extraordinary item ($ 8,946) $ 6,727 ($30,124) $21,894
Extraordinary loss 7,809
--------------- -------------- -------------- ---------------
Net income (loss) ($ 8,946) $ 6,727 ($37,933) $21,894
=============== ============== ============== ===============
Weighted-average common shares 23,738 24,087 23,706 24,189
Effect of dilutive securities:
Employee stock options and warrants 263 352
--------------- -------------- -------------- ---------------
Dilutive potential common shares 23,738 24,350 23,706 24,541
=============== ============== ============== ===============
Net income (loss) per common share:
Income (loss)before extraordinary item ($ 0.38) $0.28 ($ 1.27) $0.91
Extraordinary item ( 0.33)
--------------- -------------- -------------- ---------------
Net income (loss) per common share ($ 0.38) $0.28 ($ 1.60) $0.91
=============== ============== ============== ===============
Net income (loss) per common share--assuming
dilution:
Income (loss) before extraordinary item ($ 0.38) $0.28 ($ 1.27) $ 0.89
Extraordinary item ( 0.33)
--------------- -------------- -------------- ---------------
Net income (loss) per common share--assuming ($ 0.38) $0.28 ($ 1.60) $ 0.89
dilution
=============== ============== ============== ===============
</TABLE>
NOTE D - REVENUE RECOGNITION
For the majority of the Company's products, revenue is recognized when products
are shipped. For certain product lines, 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 operations as soon as
such losses are known.
7
<PAGE>
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 MVE's existing debt obligations 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 September 30, 1999 condensed consolidated balance sheet is based upon
management's best estimates and may be subject to further revisions. In
allocating the purchase price to the net assets acquired, $97.0 million was
assigned to net liabilities assumed, $22.0 million was assigned to in-process
research and development ("IPR&D") projects that had not reached technological
feasibility and had no alternative future use, $6.1 million was assigned to
identifiable intangible assets being amortized over five years, and $153.8
million was assigned to goodwill, which is being amortized over 40 years. The
amount assigned to IPR&D 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 nine months ended
September 30, 1999 and 1998, assuming consummation of the acquisition of MVE and
extinguishment of the debt as of January 1, 1998, are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---------------------------- ---------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C>
Net sales $258,239 $327,623
Income (loss) before extraordinary item (32,033 ) 17,453
Income (loss) before extraordinary item per share (1.35 ) 0.72
Income (loss) before extraordinary item per share -
assuming dilution (1.35 ) 0.71
Net income (loss) (39,842 ) 23,208
Net income (loss) per share (1.68 ) 0.96
Net income (loss) per share - assuming dilution (1.68 ) 0.95
</TABLE>
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 September 30, 1999 condensed consolidated balance sheet is based upon
management's best estimates and may be subject to further revisions.
8
<PAGE>
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 September 30, 1999
and 1998 was $(7.8) million and $6.5 million, respectively. Total comprehensive
income (loss) for the nine months ended September 30, 1999 and 1998 was $(37.4)
million and $21.7 million respectively.
NOTE G - RESTRUCTURING PLAN
In the second quarter of 1999, the Company recorded a restructuring charge 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 primarily 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 (primarily related to closing the Cryenco West Plant) and $1.0
million for severance and other employee related costs.
In the third quarter of 1999, the Company made the decision to stop production
of its Cryenco trailer product line, close the Cryenco East Plant where the
trailer product line was manufactured and transfer the remaining Cryenco
production to the West Plant. As a result, the Cryenco West plant will remain
open and certain fixed assets totaling $803,000 included in the second quarter
charge as assets held for disposal will continue in use and, accordingly, have
been reinstated in the third quarter. The total restructuring charge of $9.6
million ($5.5 million or $.23 per basic and diluted share, after tax) recorded
in the third quarter of 1999 includes $6.8 million for the write-off of impaired
goodwill resulting from the Company's decision to discontinue production of
Cryenco trailers, $1.1 million for lease payments and other costs related to
exiting the Cryenco East Plant, $256,000 for the write-off of inventory to be
disposed, which has been classified in cost of sales, $647,000 for the
write-down of fixed assets held for disposal to net realizable value, and
$845,000 for severance and other employee related costs related to the
elimination of 45 employees. The Company expects to have all actions comprising
the restructuring plan completed by the second quarter of fiscal 2000. At
September 30, 1999, the Company's restructuring reserve of $2.9 million is
included in accrued expenses and other liabilities and consists of the following
items:
9
<PAGE>
NOTE G - RESTRUCTURING PLAN - CONTINUED
<TABLE>
<CAPTION>
RESTRUCTURING CHARGES
------------------------------ ACTIVITY
SECOND THIRD RELATED RESERVE
QUARTER QUARTER TO THE SEPTEMBER 30,
1999 1999 CHARGES 1999
--------------------------------------------------------------------------------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Non-cash items:
Inventory $ 680 $ 256 ($ 310) $626
Fixed assets 2,187 647 ( 2,834)
Impaired goodwill 6,823 ( 6,823)
Cash items:
Severance 955 845 ( 547) 1,253
Lease termination costs 1,017 1,017
Other 79 33 ( 87) 25
------------ ------------ -------------- -----------------
$3,901 $9,621 ($10,601) $2,921
============ ============ ============== =================
</TABLE>
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 repurchases 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
$264.0 million outstanding under the Credit Facility at September 30, 1999.
As a result of the Company's second-quarter performance, the Company breached a
financial covenant of the credit agreement related to the Credit Facility. On
August 24, 1999, Chase Manhattan Bank, the Company's agent bank, waived such
breach and amended the Credit Facility. The amendment provides for modified
covenants based upon current performance levels, increased interest rates, and
the suspension of quarterly dividend payments. The Company paid approximately
$1.1 million to amend the Credit Facility.
10
<PAGE>
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, 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 $315.8 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 minority interest, interest expense and income
taxes.
11
<PAGE>
NOTE J - OPERATING SEGMENTS -- CONTINUED
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
Special Head-
PS&E DS&A Products quarters Totals
-------------- ------------ ------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues from external customers $19,896 $ 57,261 $ 6,951 $ 84,108
Operating income (loss) before minority interest,
interest expense and income taxes ( 2,070) ( 1,934) 1,019 ($1,184) ( 4,169)
<CAPTION>
Three Months Ended September 30, 1998
Special Head-
PS&E DS&A Products quarters Totals
-------------- ------------ ------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues from external customers $33,774 $ 13,969 $10,080 $ 57,823
Operating income (loss) before minority interest,
interest expense and income taxes 8,252 1,168 1,829 ($743) 10,506
<CAPTION>
Nine Months Ended September 30, 1999
Special Head-
PS&E DS&A Products quarters Totals
-------------- ------------ ------------ ------------ -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Revenues from external customers $68,472 $123,716 $21,234 $213,422
Operating income (loss) before minority interest,
interest expense and income taxes 1,104 ( 20,619) 2,827 ($2,514) ( 19,202)
<CAPTION>
Nine Months Ended September 30, 1998
Special Head-
PS&E DS&A Products quarters Totals
-------------- ------------ ------------ ------------ -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Revenues from external customers $92,422 $ 47,069 $31,466 $170,957
Operating income (loss) before minority interest,
interest expense and income taxes 24,006 6,766 5,335 ($1,730) 34,377
</TABLE>
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
MARKET OVERVIEW
Third-quarter results were consistent with the Company's acquisition integration
and restructuring plans and current market conditions. The Company has
progressed significantly in its restructuring program, implementing sweeping
manpower reductions, and consolidating and refocusing the organization.
In the Company's Distribution, Storage and Applications ("DS&A") segment orders
were up 28 percent over the second quarter of 1999. This segment is experiencing
strong demand for products that serve end users of industrial gases such as
restaurants, medical and biological applications, and semi-conductor
manufacturers. The Company's products that serve the LNG alternative fuel market
and the Company's cryogenic service centers are also generating orders. The
Company's Special Products segment maintained stable order and sales performance
during this period.
Third-quarter orders remained soft in heat exchangers and cold boxes but it
appears that some improvement in this market may be forthcoming. Customer
inquiry activity is up currently, including projects in Asia. In addition, the
favorable exchange rate of the U.S. dollar with the Japanese yen and relatively
stable and increased energy prices are further evidence that macro-economic
conditions are favorably changing. Recognizing the volatility of the Process
Systems and Equipment ("PS&E") segment, the Company has taken significant steps
to restructure its operations and to lower its operating costs.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Sales for the third quarter of 1999 were $84.1 million versus $57.8 million for
the third quarter of 1998, an increase of $26.3 million, or 45.5 percent. The
acquisition of MVE Holdings, Inc. ("MVE") on April 12, 1999, and the acquisition
of Northcoast Cryogenics ("Northcoast") on March 15, 1999, contributed $41.8
million in incremental sales to the third quarter of 1999. Offsetting these
incremental sales were declines in sales of $13.9 million from the PS&E segment,
and $3.1 million in vacuum equipment sales from the Special Products segment,
compared with the year-ago quarter.
Sales for the nine months ended September 30, 1999 were $213.4 million versus
$171.0 million for the nine months ended September 30, 1998, an increase of
$42.5 million, or 24.8 percent. The acquisitions of MVE and Northcoast
contributed $79.4 million in incremental sales to the nine months ended
September 30, 1999.
Gross profit for the third quarter of 1999 was $20.1 million versus $19.7
million for the third quarter of 1998, an improvement of $404,000, or 2.0
percent. Third-quarter gross profit was reduced by a non-cash charge of $256,000
included in cost of sales for inventory items to be disposed of as part of the
Company's restructuring plan. Gross profit margin for the third quarter of 1999
was 24.0 percent versus 34.1 percent for the third quarter of 1998, reflecting
lower margins in the PS&E segment as demand further weakened. MVE and Northcoast
contributed $12.0 million of gross profit to the third quarter of 1999.
13
<PAGE>
Gross profit for the nine months ended September 30, 1999 was $53.3 million
versus $60.2 million for the nine months ended September 30, 1998, a decline of
$6.9 million, or 11.4 percent. Included in cost of sales for the nine months
ended September 30, 1999 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.
Selling, general and administrative ("SG&A") expense for the third quarter of
1999 increased to $14.4 million from $9.0 million for the third quarter of 1998.
Offsetting the $6.7 million in incremental SG&A costs incurred by MVE and
Northcoast was approximately $1.3 million in cost savings resulting from the
Company's restructuring plan and lower sales commissions. As a percentage of
sales, SG&A expense was 17.1 percent for the third quarter of 1999, up from 15.6
percent for the third quarter of 1998. The increase as a percentage of sales
largely reflects a lower sales base for the pre-MVE acquisition Chart companies.
SG&A expense for the nine months ended September 30, 1999 was $36.3 million
versus $25.2 million for the nine months ended September 30, 1998, an increase
of $11.1 million, or 44.0 percent. MVE and Northcoast contributed $13.6 million
in incremental SG&A expense to the nine months ended September 30, 1999.
Goodwill amortization was $924,000 and $232,000 for the third quarters of 1999
and 1998, respectively, and $2.4 million and $593,000 for the nine months ended
September 30, 1999 and 1998, respectively. The purchase price for MVE and
Northcoast exceeded the fair value of the net assets acquired, resulting in
approximately $156.5 million of goodwill, which is being amortized over 40 and
15 years, respectively. These fair values are based on preliminary estimates and
assumptions and are subject to revision as more information becomes available.
In the second quarter of 1999, the Company recorded a restructuring charge of
$3.9 million. The restructuring charge relates to the creation of a new
organizational structure necessitated primarily 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 (primarily related to closing the Cryenco West
Plant) and $1.0 million for severance and other employee related costs.
The Company recorded a $9.6 million charge during the third quarter of 1999
pursuant to its restructuring plan announced in the second quarter of 1999.
During the third quarter, the Company made the decision to stop production of
its Cryenco trailer product line, close the Cryenco East Plant where the trailer
product line was manufactured and transfer the remaining Cryenco production to
the West Plant. As a result, the Cryenco West Plant will remain open. The total
restructuring charge includes a non-cash charge of $6.8 million for the
write-off of impaired goodwill resulting from the Company's decision to
discontinue production of Cryenco trailers, $1.1 million for lease payments and
other costs related to exiting the Cryenco East plant, $256,000 for the
write-off of inventory to be disposed, $647,000 for the write-down of fixed
assets held for disposal to net realizable value, and $845,000 for severance and
other employee-related costs. This charge was partially offset by $803,000 for
the reinstatement of assets no longer held for disposal. The Company expects to
record additional restructuring charges primarily consisting of severance
payments for additional employees to be terminated in the fourth quarter of
1999.
14
<PAGE>
In the second quarter of 1999, the Company recorded a non-cash charge of $21.6
million for the write-off of acquired in-process research and development
("IPR&D") related to the MVE acquisition. The Company recorded an additional
non-cash charge of $410,000 in the third quarter of 1999 for the additional
write-off of IPR&D, bringing the total write-off for the nine months ended
September 30, 1999 to $22.0 million. This additional third quarter write-off was
based on the final valuation obtained from independent consultants who
determined the amount of the IPR&D write-off by estimating the costs to develop
the technology into commercially viable products, estimating cash flows
resulting from the expected revenues generated by such products, and discounting
the net cash flows back to their present value using a risk-adjusted discount
rate.
Net interest expense was $5.2 million and $353,000 for the third quarters of
1999 and 1998, respectively, and $9.6 million and $746,000 for the nine months
ended September 30, 1999 and 1998, respectively. The increase in interest
expense reflects interest on funds borrowed to finance the MVE acquisition. The
interest rate increases negotiated with the Company's amended Credit Facility
became effective August 24, 1999. At September 30, 1999, the Company had
borrowings outstanding on its Credit Facility of $264.0 million and was in
compliance with all of the related covenants.
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 $8.9 million,
or $.38 per share, for the third quarter of 1999 versus net income of $6.7
million, or $.28 per share, for the third quarter of 1998. The Company reported
a net loss of $37.9 million, or $1.60 per share, for the nine months ended
September 30, 1999 versus net income of $21.9 million, or $.89 per share, for
the nine months ended September 30, 1998. Before non-recurring charges, the
Company incurred a net loss of $185,000, or $.01 per share, for the third
quarter of 1999, and generated net income of $3.4 million, or $.14 per share,
for the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations during the third quarter of 1999 was $3.8 million
compared with $9.0 million for the third quarter of 1998. Cash used by
operations for the nine months ended September 30, 1999 was $1.7 million
compared with cash provided by operations of $21.5 million for the nine months
ended September 30, 1998. The significant decreases in the third-quarter and
nine months operating cash flow are due primarily to decreases in customer
advances.
Capital expenditures for the third quarter of 1999 were $1.5 million compared
with $765,000 for the corresponding quarter in 1998. Capital expenditures for
the nine months ended September 30, 1999 were $4.6 million compared with $7.6
million for the nine months ended September 30, 1998.
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.
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.
15
<PAGE>
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 MVE's debt
obligations 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.
As a result of the Company's second-quarter performance, the Company breached a
financial covenant of the credit agreement related to the Credit Facility. On
August 24, 1999, Chase Manhattan Bank, the Company's agent bank, waived such
breach and amended the Credit Facility. The amendment provides for modified
covenants based upon current performance levels, increased interest rates, and
the suspension of quarterly dividend payments. The Company paid approximately
$1.1 million to amend the Credit Facility.
ORDERS AND BACKLOG
The Company received $74.0 million of orders during the third quarter of 1999,
compared with orders of $61.0 million in the second quarter of 1999. Chart's
consolidated firm order backlog at September 30, 1999, was $69.6 million,
compared with $79.6 million at June 30, 1999.
PS&E orders for the third quarter of 1999 totaled $6.7 million, compared with
$8.8 million for the second quarter of 1999. Backlog at September 30, 1999, was
$18.6 million, down from $31.7 million at June 30, 1999.
DS&A orders for the third quarter of 1999 totaled $60.0 million, compared with
$46.7 million for the second quarter of 1999. Backlog at September 30, 1999, was
$48.3 million versus $45.5 million at June 30, 1999. On a combined basis, MVE
and Northcoast accounted for $40.3 million of the third quarter orders and $20.8
million of the September 30, 1999 backlog.
Special Products orders for the third quarter of 1999 totaled $7.3 million,
compared with $5.5 million for the second quarter of 1999. Backlog at September
30, 1999, totaled $2.7 million, up from $2.4 million at June 30, 1999.
16
<PAGE>
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
has contacted the vendors who provide these embedded chips to determine
compliance. 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 estimates that it has spent less than $1 million to ensure that its
information technology systems are compliant and does not have any additional
planned expenditures for compliance. If additional expenditures are necessary,
however, 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.
17
<PAGE>
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) the Company's 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; (m) disruption of the Company's business or operations
resulting from the Year 2000 Problem; and (n) the ability of the Company to
satisfy covenants under its Credit Facility.
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 risks 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 multiple maturity dates. If interest rates were to increase
200 basis points (2%) from September 30, 1999 rates, and
assuming no changes in debt from the September 30, 1999
levels, the additional annual expense would be approximately
$5.3 million on a pre-tax basis.
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 Euro. Monthly measurement, evaluation and forward
exchange contracts are employed as methods to reduce this
risk.
18
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Limitations on the Payment of Dividends
Under the terms of Amendment No. 1, dated as of August 24,
1999, to the Credit Agreement, dated as of April 12, 1999,
among the Company, the Subsidiary Borrowers, the Subsidiary
Guarantors, the Lenders signatory thereto, The Chase Manhattan
Bank, as Administrative Agent for the Lenders, and National
City Bank, as Documentation Agent ("Amendment No. 1 to the
Credit Agreement"), the Company may pay no cash dividends with
respect to its capital stock until January 1, 2001. Amendment
No. 1 to the Credit Agreement allows the Company, on or after
January 1, 2001, to pay cash dividends with respect to its
capital stock not exceeding $7,200,000 in any fiscal year, if
at the time thereof and immediately after giving effect
thereto there is no event of default under the Credit
Facility.
Recent Sales of Unregistered Securities
On July 6, 1999, the Company issued 402 shares of its
Common Stock, par value $.01 per share, to Fidelity
Management Trust Company as trustee of the Company's
Voluntary Deferred Compensation Plan in consideration of
the amount of $3,814, which had been received by the Plan
as a dividend on the shares of Common Stock held in the
Plan. The transaction was exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities
Default and Waiver Under Credit Agreement
As a result of the Company's performance for the
second-quarter of 1999, the Company breached certain financial
covenants of, and defaulted under, the Credit Agreement, dated
as of April 12, 1999, among the Company, the Subsidiary
Borrowers, the Subsidiary Guarantors, the Lenders signatory
thereto, and The Chase Manhattan Bank, as Administrative Agent
for the Lenders. The Credit Agreement provides for loans to
the Company of up to $300 million. The Company entered into
Amendment No. 1 to the Credit Agreement as of August 24, 1999,
under which the Lenders waived the default.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
See the Exhibit Index on page 22 of this Form 10-Q.
(b) Reports on Form 8-K.
During the quarter ended September 30, 1999, the Company
filed a Current Report on Form 8-K dated August 31,
1999, to report it had entered into the amendment to its
Credit Facility.
20
<PAGE>
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: November 15, 1999 /s/Don A. Baines
-------------------- --------------------------------------
Don A. Baines
Chief Financial Officer and Treasurer
(Duly Authorized and Principal Financial Officer)
21
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Document
-------------- -----------------------
10.1 Amendment No. 1, dated as of August 24, 1999, to the
Credit Agreement, dated as of April 12, 1999, among the
Company, the Subsidiary Borrowers, the Subsidiary
Guarantors, the Lenders signatories thereto, The Chase
Manhattan Bank, as Administrative Agent for the
Lenders, and National City Bank, as Documentation
Agent, which is incorporated by reference to Exhibit
10.1 of the Company's Current Report on Form 8-K, dated
August 31, 1999.
27 Financial Data Schedule
22
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