QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
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 of incorporation or organization)
(I.R.S. Employer Identification No.)
2200 Airport Industrial Drive, Suite 100, Ball Ground, Georgia30107
(Address of principal executive offices) (ZIP Code)
(770) 721-8800
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01
GTLS
New York Stock Exchange
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 for 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. Yesx No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
As of October 24, 2022, there were 36,635,224 outstanding shares of the Company’s common stock, par value $0.01 per share.
Common stock, par value $0.01 per share – 150,000,000 shares authorized, 36,634,383 and 36,548,330 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively
0.4
0.4
Additional paid-in capital
784.3
779.0
Treasury stock; 760,782 shares at both September 30, 2022 and December 31, 2021
(19.3)
(19.3)
Retained earnings
942.6
878.2
Accumulated other comprehensive loss
(90.6)
(21.7)
Total Chart Industries, Inc. Shareholders’ Equity
1,617.4
1,616.6
Noncontrolling interests
8.5
8.6
Total Equity
1,625.9
1,625.2
TOTAL LIABILITIES AND EQUITY
$
3,069.2
$
3,043.8
See accompanying notes to these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in millions)
Nine Months Ended September 30,
2022
2021
OPERATING ACTIVITIES
Net income
$
65.2
$
48.5
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
62.4
59.8
Employee share-based compensation expense
7.9
8.1
Financing costs amortization
2.1
3.5
Unrealized foreign currency transaction gain
(4.2)
(5.8)
Unrealized loss (gain) on investments in equity securities
10.9
(1.2)
Equity in loss (earnings) of unconsolidated affiliates
0.3
(0.1)
Realized gain on equity method investment
(0.3)
—
Other non-cash operating activities
3.4
2.6
Changes in assets and liabilities, net of acquisitions:
Accounts receivable
(46.2)
(31.9)
Inventories
(58.4)
(95.5)
Unbilled contract revenues and other assets
(68.6)
(73.7)
Accounts payable and other liabilities
16.7
1.1
Customer advances and billings in excess of contract revenue
59.1
43.0
Net Cash Provided By (Used In) Operating Activities
50.3
(41.6)
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired
(25.8)
(169.1)
Investments
(4.9)
(103.2)
Capital expenditures
(48.2)
(36.5)
Cash received from settlement of cross-currency swap agreements
9.4
—
Government grants and other
(0.8)
0.4
Net Cash Used In Investing Activities
(70.3)
(308.4)
FINANCING ACTIVITIES
Borrowings on revolving credit facility
503.3
644.1
Repayments on revolving credit facility
(511.2)
(321.6)
Proceeds from exercise of stock options
1.9
7.0
Common stock repurchases from share-based compensation plans
(3.4)
(3.2)
Net Cash (Used in) Provided By Financing Activities
(9.4)
326.3
Effect of exchange rate changes on cash and cash equivalents
(3.5)
0.7
Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents
(32.9)
(23.0)
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period
122.4
126.1
CASH, CASH EQUIVALENTS, RESTRICTED CASH, AND RESTRICTED CASH EQUIVALENTS AT END OF PERIOD (1)
$
89.5
$
103.1
(1)Includes restricted cash and restricted cash equivalents of $0.2 in other current assets as of December 31, 2021 and September 30, 2021 and $1.0 in other assets as of December 31, 2020. For further information regarding restricted cash and restricted cash equivalents balances, refer to Note 8, “Debt and Credit Arrangements.”
See accompanying notes to these unaudited condensed consolidated financial statements.
Cumulative effect of change in accounting principle (1)
—
—
(36.9)
—
10.7
—
—
(26.2)
Other comprehensive loss
—
—
—
—
—
(19.2)
—
(19.2)
Share-based compensation expense
—
—
3.4
—
—
—
—
3.4
Common stock issued from share-based compensation plans
0.18
—
5.6
—
—
—
—
5.6
Common stock repurchases from share-based compensation plans
(0.02)
—
(3.0)
—
—
—
—
(3.0)
Other
—
—
0.1
—
—
—
(0.1)
—
Balance at March 31, 2021
36.35
0.4
750.0
(19.3)
844.7
(16.8)
7.0
1,566.0
Net income
—
—
—
—
6.5
—
0.3
6.8
Other comprehensive income
—
—
—
—
—
7.6
—
7.6
Share-based compensation expense
—
—
2.4
—
—
—
—
2.4
Common stock issued from share-based compensation plans
0.03
—
0.9
—
—
—
—
0.9
Other
—
—
—
—
—
—
0.1
0.1
Balance at June 30, 2021
36.38
0.4
753.3
(19.3)
851.2
(9.2)
7.4
1,583.8
Net income
—
—
—
—
14.9
—
0.7
15.6
Other comprehensive loss
—
—
—
—
—
(11.5)
—
(11.5)
Share-based compensation expense
—
—
2.3
—
—
—
—
2.3
Common stock issued from share-based compensation plans
—
—
0.3
—
—
—
—
0.3
Balance at September 30, 2021
36.38
$
0.4
$
755.9
$
(19.3)
$
866.1
$
(20.7)
$
8.1
$
1,590.5
_______________
(1)Refer to Note 2, “Significant Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2021 for discussion regarding the cumulative effect of change in accounting principle.
See accompanying notes to these unaudited condensed consolidated financial statements.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts)
NOTE 1 — Basis of Preparation
The accompanying unaudited condensed consolidated financial statements of Chart Industries, Inc. and its consolidated subsidiaries (herein referred to as the “Company,” “Chart,” “we,” “us,” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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 U.S. GAAP for annual financial statements. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021. 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 months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
Nature of Operations: We are a leading independent global manufacturer of highly engineered cryogenic equipment servicing multiple applications in the industrial gas and clean energy 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, CO2 Capture and water treatment, among 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 manufacturing locations from the United States to Asia, India and Europe, we maintain accountability and transparency to our team members, suppliers, customers and communities.
Principles of Consolidation: The unaudited condensed consolidated financial statements include the accounts of Chart Industries, Inc. and its subsidiaries. Intercompany accounts and transactions are eliminated in consolidation.
Reclassifications: We reclassified equity in earnings of unconsolidated affiliates, net from selling, general, and administrative expenses to equity in earnings of unconsolidated affiliates, net in the 2021 condensed consolidated statement of income and comprehensive income in order to conform to the 2022 presentation.
Derivative Instruments: We utilize certain derivative financial instruments to enhance our ability to manage foreign currency risk that exists as part of ongoing business operations. We enter into a combination of cross-currency swaps and foreign exchange collars as a net investment hedge of our investments in certain international subsidiaries that use the euro as their functional currency in order to reduce the volatility caused by changes in exchange rates. Our cross-currency swaps and foreign exchange collars are measured at fair value and recorded on the condensed consolidated balance sheets within other assets or other long-term liabilities. Changes in fair value are recorded as foreign currency translation adjustments within accumulated other comprehensive loss. See Note 8, “Debt and Credit Arrangements,” for further information regarding the cross-currency swaps and foreign exchange collars.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. These estimates may also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions, based on a number of factors including the current macroeconomic conditions such as inflation and supply chain disruptions, as well as risks set forth in our Annual Report on Form 10-K.
Recently Issued Accounting Standards (Not Yet Adopted): In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” The amendments in this update clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot recognize and measure a contractual sale restriction and adds additional disclosures for equity securities subject to contractual sale restrictions. The amendments in this update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. We do not expect this ASU to have a material impact on our financial position, results of operations, and disclosures.
In March 2022, the FASB issued ASU 2022-02, “Financial Instruments Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” The amendments in this update require that an entity disclose current-period gross
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
writeoffs by year of origination for financing receivables and net investments in leases within the scope of Accounting Standards Codification (“ASC”) 326. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We do not expect this ASU to have a material impact on our financial position, results of operations, and disclosures.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” and in January 2021, the FASB subsequently issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” ASU 2020-04 and the subsequent modifications are identified as ASC 848 (“ASC 848”). ASC 848 simplifies the accounting for modifying contracts (including those in hedging relationships) that refer to LIBOR and other interbank offered rates that are expected to be discontinued due to reference rate reform. The amendments in ASC 848 are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments in ASC 848 must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We expect application of the amendments to impact accounting for our senior secured revolving credit facility due October 2026. We do not expect this ASU to have a material impact on our financial position, results of operations, and disclosures.
Recently Adopted Accounting Standards: In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.” The amendments in this update require annual disclosures about transactions with a government that are accounted for by applying a grant or contribution model by analogy. The amendments in this update are effective for all entities within their scope for financial statements issued for annual periods beginning after December 15, 2021. Early application of the amendments is permitted. We adopted this guidance effective January 1, 2022. The adoption of this guidance did not have a material impact on our financial position, results of operations or disclosures.
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” The amendments in this update require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We adopted this guidance effective April 1, 2022. The adoption of this guidance did not have a material impact on our financial position, results of operations or disclosures.
NOTE 2 — Reportable Segments
As reported in our Annual Report on Form 10-K for the year ended December 31, 2021, the structure of our internal organization is divided into the following four reportable segments, which are also our operating segments: Cryo Tank Solutions, Heat Transfer Systems, Specialty Products and Repair, Service & Leasing.
Our Cryo Tank Solutions segment supplies bulk, microbulk and mobile equipment used in the storage, distribution, vaporization, and application of industrial gases and certain hydrocarbons. Our Heat Transfer Systems segment supplies mission critical engineered equipment and systems used in the separation, liquefaction, and purification of hydrocarbon and industrial gases that span gas-to-liquid applications. Our Specialty Products segment supplies products used in specialty end-market applications including hydrogen, biofuels, CO2 Capture, food and beverage, space exploration, gas by rail, lasers, cannabis and water treatment, among others. Our Repair, Service & Leasing segment provides installation, service, repair, maintenance, and refurbishment of cryogenic products in addition to providing equipment leasing solutions.
Corporate includes operating expenses for executive management, accounting, tax, treasury, corporate development, human resources, information technology, investor relations, legal, internal audit and risk management. Corporate support functions are not currently allocated to the segments.
We evaluate performance and allocate resources based on operating income as determined in our condensed consolidated statements of income and comprehensive income.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
Segment Financial Information
Three Months Ended September 30, 2022
Cryo Tank Solutions
Heat Transfer Systems
Specialty Products
Repair, Service & Leasing
Intersegment Eliminations
Corporate
Consolidated
Sales
$
126.9
$
132.1
$
108.1
$
49.7
$
(4.7)
$
—
$
412.1
Depreciation and amortization expense
4.0
7.2
4.3
4.2
—
0.5
20.2
Operating income (loss) (1) (2)
12.2
18.3
16.7
12.0
—
(17.5)
41.7
Three Months Ended September 30, 2021
Cryo Tank Solutions
Heat Transfer Systems
Specialty Products
Repair, Service & Leasing
Intersegment Eliminations
Corporate
Consolidated
Sales
$
112.2
$
56.4
$
116.9
$
46.3
$
(3.5)
$
—
$
328.3
Depreciation and amortization expense
3.3
9.5
4.4
2.9
—
0.4
20.5
Operating income (loss) (1) (2)
13.0
(10.0)
26.4
2.2
—
(17.8)
13.8
Nine Months Ended September 30, 2022
Cryo Tank Solutions
Heat Transfer Systems
Specialty Products
Repair, Service & Leasing
Intersegment Eliminations
Corporate
Consolidated
Sales
$
377.9
$
314.3
$
330.9
$
154.4
$
(6.5)
$
—
$
1,171.0
Depreciation and amortization expense
12.2
22.3
13.6
12.7
—
1.6
62.4
Operating income (loss) (1) (2)
36.2
23.8
53.7
32.3
—
(54.6)
91.4
Nine Months Ended September 30, 2021
Cryo Tank Solutions
Heat Transfer Systems
Specialty Products
Repair, Service & Leasing
Intersegment Eliminations
Corporate
Consolidated
Sales
$
313.9
$
190.8
$
301.0
$
142.3
$
(9.2)
$
—
$
938.8
Depreciation and amortization expense
11.0
28.5
10.9
8.2
—
1.2
59.8
Operating income (loss) (1) (2)
42.0
(6.7)
67.7
16.1
—
(51.0)
68.1
_______________
(1)Restructuring (credits)/costs for the:
•three months ended September 30, 2022 were $(1.4) ($(1.3) - Repair, Service & Leasing and $(0.1) - Specialty Products).
•three months ended September 30, 2021 were $1.9 ($0.5 - Heat Transfer Systems and $1.4 - Repair, Service & Leasing).
•nine months ended September 30, 2022 were $(1.1) ($(1.3) - Repair, Service & Leasing, $0.1 - Cryo Tank Solutions and $0.1 Heat Transfer Systems).
•nine months ended September 30, 2021 were $2.9 ($0.3 - Cryo Tank Solutions, $1.2 - Heat Transfer Systems and $1.4 - Repair, Service & Leasing).
(2)Acquisition-related contingent consideration (credits)/charges in our Specialty Products Segment were related to our 2020 acquisitions of Sustainable Energy Solutions, Inc. (“SES”) and BlueInGreen, LLC (“BIG”) and for the:
•three months ended September 30, 2022 were $(1.7).
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
•nine months ended September 30, 2022 were $(2.7).
•nine months ended September 30, 2021 were $2.3.
Sales by Geography
Three Months Ended September 30, 2022
Cryo Tank Solutions
Heat Transfer Systems
Specialty Products
Repair, Service & Leasing
Intersegment Eliminations
Consolidated
North America
$
61.6
$
103.3
$
74.5
$
40.2
$
(2.3)
$
277.3
Europe, Middle East, Africa and India
41.1
12.8
26.0
6.8
(1.5)
85.2
Asia-Pacific
23.5
15.7
7.3
2.5
(0.8)
48.2
Rest of the World
0.7
0.3
0.3
0.2
(0.1)
1.4
Total
$
126.9
$
132.1
$
108.1
$
49.7
$
(4.7)
$
412.1
Three Months Ended September 30, 2021
Cryo Tank Solutions
Heat Transfer Systems
Specialty Products
Repair, Service & Leasing
Intersegment Eliminations
Consolidated
North America
$
49.8
$
38.9
$
59.1
$
29.3
$
(1.7)
$
175.4
Europe, Middle East, Africa and India
31.5
4.4
46.9
6.6
(1.0)
88.4
Asia-Pacific
30.2
13.0
10.4
9.5
(0.7)
62.4
Rest of the World
0.7
0.1
0.5
0.9
(0.1)
2.1
Total
$
112.2
$
56.4
$
116.9
$
46.3
$
(3.5)
$
328.3
Nine Months Ended September 30, 2022
Cryo Tank Solutions
Heat Transfer Systems
Specialty Products
Repair, Service & Leasing
Intersegment Eliminations
Consolidated
North America
$
151.9
$
232.9
$
221.1
$
110.7
$
(3.5)
$
713.1
Europe, Middle East, Africa and India
138.7
48.5
82.5
26.1
(1.8)
294.0
Asia-Pacific
83.2
31.4
26.9
16.4
(1.1)
156.8
Rest of the World
4.1
1.5
0.4
1.2
(0.1)
7.1
Total
$
377.9
$
314.3
$
330.9
$
154.4
$
(6.5)
$
1,171.0
Nine Months Ended September 30, 2021
Cryo Tank Solutions
Heat Transfer Systems
Specialty Products
Repair, Service & Leasing
Intersegment Eliminations
Consolidated
North America
$
125.3
$
127.4
$
128.5
$
87.8
$
(4.4)
$
464.6
Europe, Middle East, Africa and India
101.9
21.0
145.8
26.2
(2.7)
292.2
Asia-Pacific
83.5
41.8
25.6
27.2
(2.0)
176.1
Rest of the World
3.2
0.6
1.1
1.1
(0.1)
5.9
Total
$
313.9
$
190.8
$
301.0
$
142.3
$
(9.2)
$
938.8
Total Assets
Corporate assets mainly include cash and cash equivalents and long-term deferred income taxes as well as certain corporate-specific property, plant and equipment, net and certain investments. Our allocation methodology for property, plant and equipment, net of the reportable segments differs from our allocation method of depreciation expense of a reportable segment and therefore, depreciation expense does not entirely align with the related depreciable assets of the reportable
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
segments. Furthermore, since finite-lived intangible assets are excluded from total assets of reportable segments while amortization expense is allocated to each of our reportable segments, amortization expense by segment inherently does not align with the related amortizable intangible assets of the reportable segments.
September 30, 2022
December 31, 2021
Cryo Tank Solutions
$
479.6
$
407.2
Heat Transfer Systems
256.9
225.8
Specialty Products
369.8
327.5
Repair, Service & Leasing
170.4
186.2
Total assets of reportable segments
1,276.7
1,146.7
Goodwill (1)
977.3
994.6
Identifiable intangible assets, net (1)
535.5
556.1
Corporate
279.7
346.4
Total
$
3,069.2
$
3,043.8
_______________
(1)See Note 6, “Goodwill and Intangible Assets,” for further information related to goodwill and identifiable intangible assets, net.
NOTE 3 — Revenue
Disaggregation of Revenue
The following tables represent a disaggregation of revenue by timing of revenue along with the reportable segment for each category:
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
Nine Months Ended September 30, 2021
Cryo Tank Solutions
Heat Transfer Systems
Specialty Products
Repair, Service & Leasing
Intersegment Eliminations
Consolidated
Point in time
$
286.6
$
15.4
$
217.6
$
93.7
$
(7.5)
$
605.8
Over time
27.3
175.4
83.4
48.6
(1.7)
333.0
Total
$
313.9
$
190.8
$
301.0
$
142.3
$
(9.2)
$
938.8
Refer to Note 2, “Reportable Segments,” for a table of revenue by reportable segment disaggregated by geography.
Contract Balances
The following table represents changes in our contract assets and contract liabilities balances:
September 30, 2022
December 31, 2021
Year-to-date Change ($)
Year-to-date Change (%)
Contract assets
Accounts receivable, net of allowances
$
276.9
$
236.3
$
40.6
17.2
%
Unbilled contract revenue
118.9
93.5
25.4
27.2
%
Contract liabilities
Customer advances and billings in excess of contract revenue
$
197.6
$
148.5
$
49.1
33.1
%
Long-term deferred revenue
0.1
0.4
(0.3)
(75.0)
%
Revenue recognized for the three months ended September 30, 2022 and 2021, that was included in the contract liabilities balance at the beginning of each year was $17.7 and $19.8, respectively. Revenue recognized for the nine months ended September 30, 2022 and 2021 that was included in the contract liabilities balance at the beginning of each year was $114.6 and $97.4, respectively. The amount of revenue recognized during the three and nine months ended September 30, 2022 from performance obligations satisfied or partially satisfied in previous periods as a result of changes in the estimates of variable consideration related to long-term contracts, was not significant.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm signed purchase orders or other written contractual commitments from customers for which work has not been performed, or is partially completed, and excludes unexercised contract options and potential orders. As of September 30, 2022, the estimated revenue expected to be recognized in the future related to remaining performance obligations was $2,254.1. We expect to recognize revenue on approximately 50% to 55% of the remaining performance obligations over the next 12 months and the remaining over the next few years thereafter.
NOTE 4 — Inventories
The following table summarizes the components of inventory:
September 30, 2022
December 31, 2021
Raw materials and supplies
$
211.8
$
178.8
Work in process
63.6
64.4
Finished goods
82.1
78.3
Total inventories, net
$
357.5
$
321.5
The allowance for excess and obsolete inventory balance at September 30, 2022 and December 31, 2021 was $7.6 and $10.9, respectively.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
NOTE5 — Leases
Lessee Accounting
As of September 30, 2022 and December 31, 2021, operating right-of-use (“ROU”) assets and lease liabilities were $21.8 and $21.7 ($5.3 of which was current) and $27.3 and $27.2 ($5.8 of which was current), respectively. The weighted-average remaining term for lease contracts was 3.7 years at September 30, 2022, with maturity dates ranging from September 2022 to June 2031. The weighted-average discount rate was 3.1% at September 30, 2022. ROU assets are classified as property, plant and equipment, net in the condensed consolidated balance sheets.
We incurred $4.7 and $3.0 of rental expense under operating leases for the three months ended September 30, 2022 and 2021, respectively, and $12.3 and $9.0 for the nine months ended September 30, 2022 and 2021, respectively. Certain operating leases contain rent escalation clauses and lease concessions that require additional rental payments in the later years of the term. Rent expense for these types of leases is recognized on a straight-line basis over the minimum lease term. Adjustments for straight-line rental expense for the respective periods was not material and as such, the majority of expense recognized was reflected in cash provided by operating activities for the respective periods. This expense consisted primarily of payments for base rent on building and equipment leases. Payments related to short-term lease costs and taxes and variable service charges on leased properties were immaterial. In addition, we have the right, but no obligation, to renew certain leases for various renewal terms.
The following table summarizes future minimum lease payments for non-cancelable operating leases as of September 30, 2022:
2022
$
1.6
2023
6.3
2024
5.8
2025
4.8
2026
2.7
Thereafter (1)
1.4
Total future minimum lease payments
$
22.6
_______________
(1) As of September 30, 2022, future minimum lease payments for non-cancelable operating leases for the period subsequent to 2026 relate to four leased facilities.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
Lessor Accounting
We lease equipment manufactured by Chart primarily through our Cryo-Lease program as sales-type and operating leases. As of September 30, 2022 and December 31, 2021, our short-term net investment in sales-type leases was $13.0 and $9.3, respectively and is included in other current assets in our condensed consolidated balance sheets. Our long-term net investment in sales type leases was $39.2 and $31.9 as of September 30, 2022 and December 31, 2021, respectively, and is included in other assets in our condensed consolidated balance sheets. For sales type leases, interest income was $0.6 and $0.3 in the condensed consolidated statements of income for the three months ended September 30, 2022 and 2021, respectively, and $1.7 and $0.5 for the nine months ended September 30, 2022 and 2021, respectively.
Operating leases offered by Chart may include early termination options. At the end of a lease, a lessee generally has the option to either extend the lease, purchase the underlying equipment for a fixed price or return it to Chart. The lease agreements clearly define applicable return conditions and remedies for non-compliance to ensure that leased equipment will be in good operating condition upon return.
The following table represents sales from sales-type and operating leases:
Three Months Ended September 30,
2022
2021
Sales-type leases
$
7.3
$
13.0
Operating leases
1.0
0.7
Total sales from leases
$
8.3
$
13.7
Nine Months Ended September 30,
2022
2021
Sales-type leases
$
18.5
$
36.2
Operating leases
3.0
1.7
Total sales from leases
$
21.5
$
37.9
The following table represents scheduled payments for sales-type leases:
September 30, 2022
2022
$
3.4
2023
13.4
2024
13.4
2025
13.4
2026
10.2
Thereafter
6.5
Total
60.3
Less: unearned income
8.1
Total
$
52.2
The following table represents the cost of equipment leased to others:
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
The following table represents payments due for operating leases:
September 30, 2022
2022
$
0.3
2023
0.4
2024
0.1
2025
0.1
2026
0.1
Thereafter
0.1
Total
$
1.1
NOTE 6 — Goodwill and Intangible Assets
Goodwill
The following table represents the changes in goodwill by segment:
Cryo Tank Solutions
Heat Transfer Systems
Specialty Products
Repair, Service & Leasing
Consolidated
Balance at December 31, 2021
$
84.9
$
433.6
$
300.9
$
175.2
$
994.6
Goodwill acquired during the period (1)
—
—
15.3
3.8
19.1
Foreign currency translation adjustments and other
(13.8)
(7.5)
(0.1)
(0.7)
(22.1)
Purchase price adjustments (2)
—
—
(14.3)
—
(14.3)
Balance at September 30, 2022
$
71.1
$
426.1
$
301.8
$
178.3
$
977.3
Accumulated goodwill impairment loss at December 31, 2021
$
23.5
$
49.3
$
35.8
$
20.4
$
129.0
Impairment loss
—
—
—
—
—
Accumulated goodwill impairment loss at September 30, 2022
$
23.5
$
49.3
$
35.8
$
20.4
$
129.0
_______________
(1)Goodwill acquired during the period was $19.1. Goodwill acquired during the period for the Fronti and AdEdge India acquisitions of $14.2 and $1.1, respectively, was allocated to our Specialty Products segment. Goodwill acquired during the period for our CSC acquisition of $3.8 was allocated to our Repair, Service & Leasing segment.
(2)During the first nine months of 2022, we recorded purchase price adjustments that decreased goodwill by $14.3 in our Specialty Products segment related to the Earthly Labs, Inc., L.A. Turbine and AdEdge acquisitions. For further information regarding goodwill acquired and the purchase price adjustments during the period refer to Note 10, “Business Combinations.”
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
Intangible Assets
The following table displays the gross carrying amount and accumulated amortization for finite-lived intangible assets and indefinite-lived intangible assets (exclusive of goodwill) (1):
September 30, 2022
December 31, 2021
Weighted-average Estimated Useful Life
Gross Carrying Amount
Accumulated Amortization
Gross Carrying Amount
Accumulated Amortization
Finite-lived intangible assets:
Customer relationships
13 years
$
307.6
$
(97.4)
$
312.1
$
(82.2)
Unpatented technology
13 years
197.5
(41.2)
184.6
(30.1)
Patents and other
6 years
6.7
(1.8)
7.9
(2.3)
Trademarks and trade names
15 years
2.8
(1.8)
3.5
(1.8)
Land use rights
50 years
10.2
(1.6)
11.4
(1.6)
Total finite-lived intangible assets
14 years
524.8
(143.8)
519.5
(118.0)
Indefinite-lived intangible assets:
Trademarks and trade names (2)
154.5
—
154.6
—
Total intangible assets
$
679.3
$
(143.8)
$
674.1
$
(118.0)
_______________
(1)Amounts include the impact of foreign currency translation. Fully amortized or impaired amounts are written off.
(2)Accumulated indefinite-lived intangible assets impairment loss was $16.0 at both September 30, 2022 and December 31, 2021.
Amortization expense for intangible assets subject to amortization was $10.6 and $10.1 for the three months ended September 30, 2022 and 2021, respectively, and $32.4 and $28.5 for the nine months ended September 30, 2022 and 2021, respectively. We estimate amortization expense to be recognized during the next five years as follows:
For the Year Ending December 31,
2022
$
43.2
2023
42.9
2024
41.7
2025
40.8
2026
40.2
Government Grants
During the fourth quarter of 2021, we were selected by the U.S. Department of Energy (“DOE”) for funding of up to $5.0 million to engineer and build our Cryogenic Carbon CaptureTM system for a cement plant. During the project’s duration, the DOE shall reimburse us in cash for approved expenses we incur. This project began on February 1, 2022, at which point expenses incurred may be submitted for reimbursement. The agreement will be effective until April 30, 2025. We have not yet received any funding for this grant.
We received certain government grants related to land use rights for capacity expansion in China (“China Government Grants”). China Government Grants are generally recorded in other current liabilities and other long-term liabilities in the unaudited condensed consolidated balance sheets and generally recognized into income over the useful life of the associated assets (10 to 50 years).
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
China Government Grants are presented in our unaudited condensed consolidated balance sheets as follows:
September 30, 2022
December 31, 2021
Current
$
0.5
$
0.5
Long-term
6.1
7.0
Total China Government Grants
$
6.6
$
7.5
We also received government grants from certain local jurisdictions within the United States, which are recorded in other assets in the condensed consolidated balance sheets and were not significant for the periods presented.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
NOTE 7 — Investments
Equity Method Investments
The following table represents the activity in equity method investments:
Equity Method Investments(1) (2) (3)
Balance at December 31, 2021
$
99.6
New investments
0.5
Reclassification due to acquisition of investee (4)
(0.8)
Realized gain on equity method investment (4)
0.3
Equity in loss of unconsolidated affiliates
(0.3)
Foreign currency translation adjustments and other
(7.6)
Balance at September 30, 2022
$
91.7
_______________
(1)Cryomotive: Our equity method investment in Cryomotive GmbH (“Cryomotive”) was $4.9 and $7.1 at September 30, 2022 and December 31, 2021, respectively. Equity in loss of unconsolidated affiliates, net of this investment was $0.4 and $0.3 for the three months ended September 30, 2022 and 2021, respectively, and $1.3 and $0.3 for the nine months ended September 30, 2022 and 2021, respectively, and is classified in equity in (loss) earnings of unconsolidated affiliates, net in the condensed consolidated statements of income for the three and nine months ended September 30, 2022 and in selling, general and administrative expenses for the three and nine months ended September 30, 2021.
(2)HTEC: Our equity method investment in HTEC Hydrogen Technology & Energy Corporation (“HTEC”) was $79.6 and $86.4 at September 30, 2022 and December 31, 2021, respectively. The decrease in value for the nine months ended September 30, 2022 was driven by foreign currency translation. We recognized $0.2 in equity in earnings of unconsolidated affiliates, net of this investment for the three months ended September 30, 2022 and $0.3 in equity in loss of unconsolidated affiliates, net for the nine months ended September 30, 2022.
(3)Hudson Products: Also included in our equity method investments is a 50% ownership interest in a joint venture with Hudson Products de Mexico S.A. de CV which totaled $4.0 and $3.3 at September 30, 2022 and December 31, 2021, respectively. This investment is operated and managed by our joint venture partner and as such, we do not have control over the joint venture and therefore it is not consolidated. We recognized equity in earnings of unconsolidated affiliates, net of this investment of $0.3 and $0.1 for the three months ended September 30, 2022 and 2021, respectively, and $0.9 and $0.2 for the nine months ended September 30, 2022 and 2021, respectively.
Liberty LNG: Additionally, we have a 25% ownership interest in Liberty LNG, which totaled $2.8 and $2.4 at September 30, 2022 and December 31, 2021, respectively. We recognized equity in earnings of unconsolidated affiliates, net of this investment of $0.2 and $0.1 for the three months ended September 30, 2022 and 2021, respectively, and $0.4 and $0.2 for the nine months ended September 30, 2022 and 2021, respectively.
We have another immaterial investment in an unconsolidated affiliate of $0.4 for all periods presented.
(4)AdEdge India: In connection with our acquisition of AdEdge Holdings, LLC (“AdEdge”), we recorded a 50% ownership interest in a joint venture in AdEdge India at a fair value of $0.5. On May 4, 2022, we completed the acquisition of the remaining 50% of the shares of our joint venture in AdEdge India. On the acquisition date, we recognized a gain of $0.3 from the remeasurement of our initial 50% of the shares in the joint venture, which is classified as realized gain on equity method investment in the condensed consolidated statements of income for the three and nine months ended September 30, 2022. See Note 10, “Business Combinations” for further information regarding the AdEdge India acquisition.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
Investments in Equity Securities
The following table summarizes the components of our investments in equity securities:
Investment in Equity Securities,
Level 1 (1)
Investment in Equity Securities,
Level 2 (1)
Investments in Equity Securities, All Others (2)
Investments Total
Balance at December 31, 2021
$
31.3
$
6.2
$
40.3
$
77.8
New investments (3)
—
—
4.4
4.4
Change in fair value of investments in equity securities
(16.1)
5.2
—
(10.9)
Foreign currency translation adjustments and other
(3.4)
—
(1.0)
(4.4)
Balance at September 30, 2022
$
11.8
$
11.4
$
43.7
$
66.9
_______________
(1)McPhy: Investment in equity securities Level 1 includes our investment in McPhy (Euronext Paris: MCPHY - ISIN; FR001742329). McPhy’s common stock trades on the Euronext Paris stock exchange and therefore we measure our investment in McPhy using Level 1 fair value inputs. The fair value of our investment in McPhy was $11.8 and $31.3 at September 30, 2022 and December 31, 2021, respectively. We recognized an unrealized loss in our investment in McPhy of $4.1 and $6.0 for the three months ended September 30, 2022 and 2021, respectively, and an unrealized loss of $16.1 and $25.8 for the nine months ended September 30, 2022 and 2021, respectively.
Stabilis: Investment in equity securities Level 2 includes our investment in Stabilis Energy, Inc. (NasdaqCM: SLNG) (“Stabilis”). Stabilis represents an instrument with quoted prices that trades less frequently than certain of our other exchange-traded instruments and therefore we measure our investment in Stabilis using Level 2 fair value inputs. The fair value of our investment in Stabilis was $11.4 and $6.2 at September 30, 2022 and December 31, 2021, respectively. We recognized an unrealized gain of $5.4 and an unrealized loss of $4.3 for the three months ended September 30, 2022 and 2021, respectively, and an unrealized gain of $5.2 and $6.3 for the nine months ended September 30, 2022 and 2021, respectively, in our investment in Stabilis.
(2)Transform: The fair value of our investment in Transform Materials LLC (“Transform Materials”) was $25.1 at both September 30, 2022 and December 31, 2021.
Svante: The fair value of our investment in Svante Inc. (“Svante”) was $15.1 at both September 30, 2022 and December 31, 2021.
(3)Hy24 (f/k/a FiveT Hydrogen Fund and Clean H2 Infra Fund): During the first quarter of 2022, we completed an investment in Hy24. Our investment in Hy24 is measured at fair value using the net asset value (“NAV”) per share practical expedient and is not classified in the fair value hierarchy. The fair value of our investment in the Hy24 was euro 1.5 million (equivalent to $1.5) at September 30, 2022. See “Hy24 (f/k/a FiveT Hydrogen Fund and Clean H2 Infra Fund)” below for further information.
Cemvita Factory Inc., Gold Hydrogen LLC: During the first quarter of 2022, we completed an investment in Gold Hydrogen LLC (“Gold Hydrogen”) in the amount of $1.0. During the third quarter of 2022, we invested an additional $1.0 in Gold Hydrogen. This investment is measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer and is included in the investments in equity securities, all others category in the table above. As of September 30, 2022, the value of the investment was $2.0. Gold Hydrogen is a subsidiary company established by Cemvita Factory, Inc. focused on commercializing viable technologies for the subsurface production of biohydrogen.
Our investments in Transform Materials, Svante and Gold Hydrogen represent equity instruments without a readily determinable fair value.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
Co-Investment Agreement
On September 7, 2021, we entered into a Co-Investment Agreement with I Squared Capital (“ISQ”), an infrastructure-focused private equity firm (the “Co-Investment Agreement”), pursuant to which Chart and ISQ have agreed to the following:
•In the following circumstances, ISQ shall have the right but not the obligation to require Chart to purchase all (and not less than all) of the shares of HTEC common stock acquired as part of ISQ’s investment described above (the “Put Option”):
i.the third anniversary of the Closing Date,
ii.the date Chart undergoes a change of control (subject to certain exceptions),
iii.the date upon which Chart, during the period from the Closing Date through the third anniversary of the Closing Date, has made certain distributions to its shareholders (including cash or other dividends, or via a spin-off transaction), in excess of $900.0,
iv.the date, if any, upon which our leverage ratio exceeds certain thresholds and
v.the date, if any, of a bankruptcy event (including certain insolvency-related actions) involving Chart.
•In the event that ISQ exercises its Put Option, we shall pay to ISQ an amount in cash in exchange for the HTEC common stock then held by ISQ such that ISQ shall realize the greater of (i) an internal rate of return of 10% and (ii) a multiple on ISQ’s invested capital of 1.65x.
•Conversely, at any time after the third anniversary of the Closing Date, we shall have the right to purchase from ISQ up to 20% of the shares of HTEC common stock acquired as part of the ISQ Investment. In exchange for the common stock, we shall pay ISQ the greater of (i) an internal rate of return of 12.5% and (ii) a multiple on ISQ’s invested capital of 1.65x.
•In addition, we shall have (i) a right of first offer: if ISQ desires to transfer any of its HTEC common stock to any third party, we shall have the right to first offer provided that upon notice, we shall have the option to make a first offer to purchase the offered interest in cash exclusively and (ii) a right of first refusal: if ISQ desires to sell its HTEC common stock to any third party pursuant to a definitive agreement therewith, we shall have the right of first refusal provided that the purchase consideration paid by Chart to ISQ upon our exercise of such right of first refusal must be equal to 102% of the purchase consideration agreed to be paid by such third party.
•The Co-Investment Agreement shall terminate automatically upon the consummation of an initial public offering by HTEC of its common stock.
Accounting Treatment of Put and Call Options
We record the Put and Call Options (together “the Options”) at fair value and record any change in fair value through earnings at each reporting period. The fair value of the Options was not material on September 30, 2022.
Hy24 (f/k/a FiveT Hydrogen Fund and Clean H2 Infra Fund)
As previously announced on April 5, 2021, we were admitted as an anchor investor in Hy24 (the “Hydrogen Fund”). Hy24 is a joint venture between Ardian, Europe’s largest private investment house with managed assets of c. $114 billion, and FiveT Hydrogen, a new investment manager specialized purely on clean hydrogen investments. As discussed in the “Investments in Equity Securities” section above, our investment to date is euro 1.5 million, making our unfunded commitment euro 48.5 million.
The fund manager of the Hydrogen Fund (the “Management Company”) has established a Limited Partners Advisory Committee (the “LPAC”), which met for the first time in January 2022, to consult with and help advise the Management Company with respect to certain key decisions governing the fund that the Management Company shall make. The LPAC is expected be comprised by up to fifteen (15) members, the majority of whom shall be chosen by certain industrial investors and who shall be (i) representatives of the anchor investors and (ii) subject to any remaining available seats, representatives of the non-anchor investors selected by the Management Company.
Class A1 Shares, which we hold, are entitled to the return of any associated paid-up capital contributions (excluding any subscription premium or default interest, if any), the Preferred Return calculated thereon as described below, and their share of the Hydrogen Fund’s capital gain beyond the Preferred Return in accordance with the order of distributions set forth in the by-laws of the Hydrogen Fund (in each case to the extent of available funds). The “Preferred Return” equals an annual interest rate of seven percent (7%) if fifteen percent (15%) of the Hydrogen Fund’s aggregate capital commitments from all investors is invested in strategic investments; provided, however, that such seven percent (7%) interest rate shall be reduced in a linear
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
fashion to six and one-half percent (6.5%) if twenty percent (20%) of the Hydrogen Fund’s aggregate capital commitments from all investors is invested in strategic investments. In October 2022, the Management Company closed the Hydrogen Fund at euro 2.0 billion of capital commitments, exceeding initial ambitions.
The Hydrogen Fund shall determine the net asset value of each class of its shares at the end of each quarter (including the Class A1 Shares that we hold), which will be used to record the fair value of our investment.
The Hydrogen Fund will have a term of twelve (12) years, commencing from December 16th, 2021, subject to certain potential extensions. Investors cannot request the redemption of their shares by the Hydrogen Fund at any time prior to the final liquidation of the fund. Capital calls will be made by the Management Company in accordance with investment opportunities and the financing needs of the Hydrogen Fund’s activities.
The Management Company is required to send capital call requests to investors at least ten (10) business days prior to their deadline for payment. In the event that, following any capital call made by the Management Company, an investor of the Hydrogen Fund does not timely fund all or any portion of its capital commitment required thereby, such investor will be charged interest thereon equal to the Preferred Return plus one-half percent (0.5%), and shall not be entitled to receive distributions from the Hydrogen Fund until it is no longer delinquent.
NOTE 8 — Debt and Credit Arrangements
Summary of Outstanding Borrowings
The following table represents the components of our borrowings:
September 30, 2022
December 31, 2021
Senior secured revolving credit facility due October 2026 (1) (2)
$
580.8
$
600.8
Convertible notes due November 2024:
Principal amount
258.8
258.8
Unamortized debt issuance costs
(2.1)
(2.9)
Convertible notes due November 2024, net of unamortized debt issuance costs
256.7
255.9
Total debt, net of unamortized debt issuance costs
837.5
856.7
Less: current maturities (3)
256.7
255.9
Long-term debt
$
580.8
$
600.8
_______________
(1)As of September 30, 2022, there were $580.8 in borrowings outstanding under the senior secured revolving credit facility due October 2026 bearing an interest rate of 3.1% (2.1% as of December 31, 2021) and $75.1 in letters of credit and bank guarantees outstanding supported by the senior secured revolving credit facility due 2026. As of September 30, 2022, the senior secured revolving credit facility due 2026 had availability of $344.1.
(2)A portion of borrowings outstanding under our senior secured revolving credit facility due 2026 are denominated in euros (“EUR Revolver Borrowings”). EUR Revolver Borrowings outstanding were euro 88.0 million (equivalent to $85.8) at September 30, 2022 and euro 78.0 million (equivalent to $88.3) at December 31, 2021. During the three months ended September 30, 2022 and 2021, we recognized an unrealized foreign currency gain of $5.7 and $2.4, respectively, and for the nine months ended September 30, 2022 and 2021 we recognized an unrealized foreign currency gain of $12.3 and $5.4 relative to the translation of the EUR Revolver Borrowings outstanding. This unrealized foreign currency gain is classified within foreign currency (gain) loss in the condensed consolidated statements of income for all periods presented.
(3)Our convertible notes due November 2024, net of unamortized debt issuance costs, are included in current maturities for both periods presented.
Senior Secured Revolving Credit Facility
On October 18, 2021 we entered into the Fifth Amended and Restated Credit Agreement, which provides for a Senior Secured Revolving Credit Facility (the “SSRCF”). The SSRCF matures on October 19, 2026.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
•The SSRCF has a borrowing capacity of $1,000.0 and includes a $100.0 sub limit for letters of credit, a $250.0 sub limit for discretionary letters of credit and a $100.0 sub-limit for swingline loans.
•We may, subject to the satisfaction of certain conditions, request increases in the revolving credit facility commitments in an aggregate principal amount of up to $500.0 or a lesser amount in integral multiples of $25.0 to the extent existing or new lenders agree to provide such increased or additional commitments, as applicable.
•The SSRCF bears interest at a base rate plus an applicable margin determined on a leveraged-based scale which (before giving effect to the sustainability pricing adjustments described below) ranges from 25 to 125 basis points for base rate loans and 125 to 225 basis points for LIBOR loans.
•The applicable margin described above is subject to further adjustments based on the reductions in the ratio between (i) the total greenhouse gas emissions, measured in metric tons CO2e, of Chart and its subsidiaries during such calendar year and (ii) the aggregate revenue, measured in U.S. Dollars, of Chart and its subsidiaries during such calendar year. These additional pricing adjustments range from an addition of 0.05% to a reduction of 0.025% in the applicable margin described above.
•We are required to pay commitment fees on any unused commitments under the SSRCF which, before giving effect to the sustainability fee adjustments (as described below), is determined on a leverage-based sliding scale ranging from 20 to 35 basis points.
•The commitment fees described above are also subject to sustainability fee adjustments based on the aforementioned ratio. The sustainability fee adjustments range from an addition of 0.01% to a reduction of 0.01%.
•Interest and fees are payable on a quarterly basis (or if earlier, at the end of each interest period for LIBOR loans).
Significant financial covenants for the SSRCF include financial maintenance covenants that, as of the last day of any fiscal quarter ending on and after September 30, 2021, (i) require the ratio of the amount of Chart and its subsidiaries’ consolidated total net indebtedness to consolidated EBITDA to be less than specified maximum ratio levels and (ii) require the ratio of the amount of Chart and its subsidiaries’ consolidated EBITDA to consolidated cash interest expense to be greater than a specified minimum ratio level. The SSRCF includes a number of other customary covenants including, but not limited to, restrictions on our ability to incur additional indebtedness, create liens or other encumbrances, sell assets, enter into sale and lease-back transactions, make certain payments, investments, loans, advances or guarantees, make acquisitions and engage in mergers or consolidations and pay dividends or distributions. At September 30, 2022, we were in compliance with all covenants.
The SSRCF also contains customary events of default. If such an event of default occurs, the lenders thereunder would be entitled to take various actions, including the acceleration of amounts due and all actions permitted to be taken by a secured creditor. The SSRCF is guaranteed by Chart and substantially all of its U.S. subsidiaries, and secured by substantially all of the assets of Chart and its U.S. subsidiaries and 65% of the capital stock of our material non-U.S. subsidiaries (as defined by the Fifth Amended and Restated Credit Agreement) that are owned by U.S. subsidiaries.
We recorded $9.1 in deferred debt issuance costs related to the SSRCF, which includes $6.1 in unamortized debt issuance costs from previous credit facilities. Deferred debt issuance costs related to the SSRCF are presented in other assets in the condensed consolidated balance sheets and are being amortized over the five-year term of the SSRCF. At September 30, 2022 and December 31, 2021, unamortized debt issuance costs associated with the SSRCF were $7.4 and $8.7, respectively.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
The following table summarizes interest expense and financing costs amortization related to the 2026 Credit Facilities and our previous senior secured revolving credit facility and term loan due June 2024:
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Interest expense, senior secured revolving credit facility due October 2026
$
6.4
$
—
$
14.7
$
—
Interest expense, term loan due June 2024
—
1.3
—
2.4
Interest expense, senior secured revolving credit facility due June 2024
—
1.6
—
3.6
Total interest expense
$
6.4
$
2.9
$
14.7
$
6.0
Financing costs amortization, senior secured revolving credit facility due October 2026
$
0.5
$
—
$
1.4
$
—
Financing costs amortization, senior secured revolving credit facility and term loan due June 2024
—
1.0
—
2.8
Total financing costs amortization
$
0.5
$
1.0
$
1.4
$
2.8
2024 Convertible Notes
On November 6, 2017, we issued 1.00% Convertible Senior Subordinated Notes due November 2024 (the “2024 Notes”) in the aggregate principal amount of $258.8, pursuant to an Indenture, dated as of such date (the “Indenture”). On December 31, 2020, we entered into the First Supplemental Indenture (the “Supplemental Indenture”) to the Indenture, between Chart and Wells Fargo Bank, National Association, as trustee, governing the 2024 Notes. Pursuant to the Supplemental Indenture, Chart irrevocably elected (i) to eliminate Chart’s option to elect Physical Settlement (as defined in the Indenture) on any conversion of 2024 Notes that occurs on or after the date of the Supplemental Indenture and (ii) that, with respect to any Combination Settlement (as defined in the Indenture) for a conversion of 2024 Notes, the Specified Dollar Amount (as defined in the Indenture) that will be settled in cash per $1,000 principal amount of the Notes shall be no lower than $1,000. The 2024 Notes bear interest at an annual rate of 1.00%, payable on May 15 and November 15 of each year, beginning on May 15, 2018, and will mature on November 15, 2024 unless earlier converted or repurchased.
The 2024 Notes are senior subordinated unsecured obligations of the Company and are not guaranteed by any of our subsidiaries. The 2024 Notes are senior in right of payment to our future subordinated debt, equal in right of payment with the Company’s future senior subordinated debt and are subordinated in right of payment to our existing and future senior indebtedness, including indebtedness under our existing credit agreement.
A conversion of the 2024 Notes may be settled in either (1) cash or (2) cash for the principal amount of the 2024 Notes and any combination of cash and shares for the excess settlement amount above the principal amount of the 2024 Notes, at our election (subject to, and in accordance with, the settlement provisions of the Indenture and Supplemental Indenture).
The initial conversion rate for the 2024 Notes is 17.0285 shares of common stock (subject to adjustment as provided for in the Indenture) per $1,000 principal amount of the 2024 Notes, which is equal to an initial conversion price of approximately $58.725 per share, representing a conversion premium of approximately 35% above the closing price of our common stock of $43.50 per share on October 31, 2017. In addition, following certain corporate events that occur prior to the maturity date as described in the Indenture, we will pay a make-whole premium by increasing the conversion rate for a holder who elects to convert its 2024 Notes in connection with such a corporate event in certain circumstances. For purposes of calculating earnings per share, if the average market price of our common stock exceeds the applicable conversion price during the periods reported, shares contingently issuable under the 2024 Notes will have a dilutive effect with respect to our common stock. Since our closing common stock price of $184.35 at the end of the period exceeded the conversion price of $58.725, the if-converted value exceeded the principal amount of the 2024 Notes by approximately $553.5 at September 30, 2022. As described below, we entered into convertible note hedge transactions, which are expected to reduce the potential dilution with respect to our common stock upon conversion of the 2024 Notes.
Holders of the 2024 Notes may convert their 2024 Notes at their option at any time prior to the close of business on the business day immediately preceding August 15, 2024 only under the following circumstances: (1) during any fiscal quarter commencing after December 31, 2017 (and only during such fiscal quarter), if the last reported sale price of our common stock
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price for the 2024 Notes on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the “trading price” (as defined in the Indenture) per one thousand U.S. dollar principal amount of Notes for each trading day of such measurement period was less than 97% of the product of the last reported sale price of our common stock and the applicable conversion rate for the 2024 Notes on each such trading day; or (3) upon the occurrence of specified corporate events described in the Indenture. On or after August 15, 2024 until the close of business on the second scheduled trading day immediately preceding November 15, 2024, holders may convert their 2024 Notes at the option of the holder regardless of the foregoing circumstances.
As of October 1, 2022, the 2024 Notes continue to be convertible at the option of the shareholders. This conversion right, which will remain available until December 31, 2022, was triggered since the closing price of our common stock was greater than or equal to $76.3425 (130% of the conversion price of the 2024 Notes) for at least 20 trading days during the last 30 trading days ending on September 30, 2022. Since the holders of the 2024 Notes could potentially convert their 2024 Notes at their option during the three month period subsequent to September 30, 2022, the $258.8 principal amount of the 2024 Notes was classified as a current liability in the unaudited condensed consolidated balance sheet at September 30, 2022. As of December 31, 2021, the 2024 Notes were convertible at the option of the holders, and the liability component of the 2024 Notes was classified as a current liability. We will reassess the convertibility of the 2024 Notes and the related balance sheet classification on a quarterly basis. There have been no conversions as of the date of this filing.
The following table summarizes 1.0% contractual interest coupon and financing costs amortization associated with the 2024 Notes:
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
2024 Notes, 1.0% contractual interest coupon
$
0.6
$
0.6
$
1.9
$
1.9
2024 Notes, financing costs amortization (1)
$
0.2
$
0.2
$
0.7
$
0.7
_______________
(1)We amortize debt issuance costs of $6.8 over the term of the 2024 Notes using the effective interest method.
Convertible Note Hedge and Warrant Transactions Associated with the 2024 Notes
In connection with the pricing of the 2024 Notes, we entered into convertible note hedge transactions (the “Note Hedge Transactions”) with certain parties, including the initial purchasers of the 2024 Notes (the “Option Counterparties”). The Note Hedge Transactions are expected generally to reduce the potential dilution upon any future conversion of the 2024 Notes. Payments for the Note Hedge Transactions totaled approximately $59.5 and were recorded as a reduction to additional paid-in capital in the December 31, 2017 consolidated balance sheet.
We also entered into separate, privately negotiated warrant transactions (the “Warrant Transactions”) with the Option Counterparties to acquire up to 4.41 shares of our common stock. Proceeds received from the issuance of the Warrant Transactions totaled approximately $46.0 and were recorded as an addition to additional paid-in capital in the December 31, 2017 consolidated balance sheet. The strike price of the Warrant Transactions will initially be $71.775 per share (subject to adjustment), which is approximately 65% above the last reported sale price of our common stock on October 31, 2017. The Warrant Transactions could have a dilutive effect to our stockholders to the extent that the market price per share of our common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.
The Note Hedge Transactions and Warrant Transactions effectively increased the conversion price of the 2024 Notes. The net cost of the Note Hedge Transactions and Warrant Transactions was approximately $13.5.
Foreign Facilities
In various markets where we do business, we have local credit facilities to meet local working capital demands, fund letters of credit and bank guarantees, and support other short-term cash requirements. The facilities generally have variable interest rates and are denominated in local currency but may, in some cases, facilitate borrowings in multiple currencies. We are permitted to borrow up to USD equivalent $88.9 under certain of our foreign facilities. As of September 30, 2022 and December 31, 2021 there were no borrowings outstanding under these facilities.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
Certain of our foreign facilities allow us to request bank guarantees and letters of credit. None of these facilities allow revolving credit borrowings. We have foreign letters of credit and bank guarantees that totaled USD equivalent $39.1 and $31.2 as of September 30, 2022 and December 31, 2021, respectively.
Letters of Credit
L.A. Turbine, a wholly-owned subsidiary of the Company, had $0.0 and $0.2 in deposits in a bank outside of the SSRCF to secure letters of credit as of September 30, 2022 and December 31, 2021, respectively. The deposits are treated as restricted cash and restricted cash equivalents in the unaudited condensed consolidated balance sheet at December 31, 2021.
Derivatives and Hedging
We utilize a combination of cross-currency swaps and foreign exchange collars (together the “Foreign Exchange Contracts”) as a net investment hedge of a portion of our investments in certain international subsidiaries that use the euro as their functional currency in order to reduce the volatility caused by changes in exchange rates. On April 1, 2022 we entered into a pay-fixed rate, receive-fixed rate cross-currency swap that provided for an exchange of principal on a notional amount of $110.2 swapped to euro 100.0 million on its March 31, 2025 maturity and receipt of U.S. dollar interest from our swap counterparties at a fixed rate of 1.8% per annum. We terminated this cross-currency swap on June 7, 2022, and a total settlement of $3.6 cash was received from the counterparties. The settlement amount, which represents the fair value of the contract at the time of termination, was recorded as a reduction in other assets during the second quarter of 2022 and remains classified in accumulated other comprehensive loss on the condensed consolidated balance sheet.
On June 7, 2022, immediately following the termination of the aforementioned cross-currency swap, we entered into a pay-fixed rate, receive-fixed rate cross-currency swap that provides for an exchange of principal on a notional amount of $106.7 swapped to euro 100.0 million on its May 31, 2025 maturity and receipt of U.S. dollar interest from our swap counterparties at a fixed rate of 1.6% per annum. We terminated this cross-currency swap on July 8, 2022, and a total settlement of $4.0 cash was received from the counterparties. The settlement amount, which represents the fair value of the contract at the time of termination, was recorded as a reduction in other assets during the third quarter of 2022 and remains classified in accumulated other comprehensive loss on the condensed consolidated balance sheet.
On July 8, 2022, immediately following the termination of the aforementioned cross-currency swap, we entered into a pay-fixed rate, receive-fixed rate cross-currency swap that provides for an exchange of principal on a notional amount of $101.6 swapped to euro 100.0 million on its June 30, 2025 maturity and receipt of U.S. dollar interest from our swap counterparties at a fixed rate of 1.8% per annum. We terminated this cross-currency swap on September 16, 2022, and a total settlement of $1.8 cash was received from the counterparties. The settlement amount, which represents the fair value of the contract at the time of termination, was recorded as a reduction in other assets during the third quarter of 2022 and remains classified in accumulated other comprehensive loss on the condensed consolidated balance sheet.
On September 16, 2022, immediately following the termination of the aforementioned cross-currency swap, we entered into a pay-fixed rate, receive-fixed rate cross-currency swap that provides for an exchange of principal on a notional amount of $99.8 swapped to euro 100.0 million on its June 30, 2025 maturity and receipt of U.S. dollar interest from our swap counterparties at a fixed rate of 1.6% per annum (the “September 16 Swap”). Concurrent to entering into the September 16 Swap, we also entered into a separate zero cost foreign exchange collar contract (the “Collar Contract”) with the same counterparties, notional amount and expiration date as the September 16 Swap. Under the Collar Contract, we sold a put option with a lower strike price and purchased a call option with an upper strike price to manage final settlement of the September 16 Swap.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
Our Foreign Exchange Contracts are measured at fair value with changes in fair value recorded as foreign currency translation adjustments within accumulated other comprehensive loss. Our Foreign Exchange Contracts are entered into with major financial institutions in order to reduce credit risk and risk of nonperformance by third parties. We believe the credit risks with respect to the counterparties, and the foreign currency risks that would not be hedged if the counterparties fail to fulfill their obligations under the contract, are not material in view of our understanding of the financial strength of the counterparties. The Foreign Exchange Contracts are not exchange traded instruments and their fair value is determined using the cash flows of the contracts, discount rates to account for the passage of time, implied volatility, current foreign exchange market data and credit risk, which are all based on inputs readily available in public markets and categorized as Level 2 fair value hierarchy measurements.
The following table represents the fair value of asset and liability derivatives and their respective locations on our condensed consolidated balance sheet as of September 30, 2022:
Asset Derivatives
Liability Derivatives
Derivatives designated as net investment hedge
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Foreign Exchange Contracts (1)
Other assets
$
—
Other long-term liabilities
$
0.5
The following table represents the net effect derivative instruments designated in hedging relationships had on accumulated other comprehensive loss on the condensed consolidated statements of income and comprehensive income:
Unrealized gain recognized in accumulated other comprehensive loss on derivatives, net of taxes
Three Months Ended September 30,
Nine Months Ended September 30,
Derivatives designated as net investment hedge
2022
2022
Foreign Exchange Contracts (1) (2)
$
2.9
$
6.7
_______________
(1)Our designated derivative instruments are highly effective. As such, there were no gains or losses recognized immediately in income related to hedge ineffectiveness during the three and nine months ended September 30, 2022.
(2)Represents foreign exchange swaps and foreign exchange options.
The following table represents interest income, included within interest expense, net on the condensed consolidated statements of income related to amounts excluded from the assessment of hedge effectiveness for derivative instruments designated as net investment hedges:
Amount of gain recognized in income on derivative (amount excluded from effectiveness testing)
Three Months Ended September 30,
Nine Months Ended September 30,
Derivatives designated as net investment hedge
2022
2022
Foreign Exchange Contracts (1) (2)
$
0.4
$
0.9
_______________
(1)Represents amount excluded from effectiveness testing. Our Foreign Exchange Contracts are designated with terms based on the spot rate of the euro. Future changes in the components related to the spot change on the notional will be recorded in other comprehensive income and remain there until the hedged subsidiaries are substantially liquidated. All coupon payments are classified in interest expense, net in the condensed consolidated statements of income, and the initial value of excluded components currently recorded in accumulated other comprehensive loss as a foreign currency translation adjustment are amortized to interest expense, net over the remaining term of the Foreign Exchange Contract.
(2)Represents foreign exchange swaps and foreign exchange options.
Fair Value Disclosures
The fair value of the 2024 Notes was approximately 316% and 276% of their par value as of September 30, 2022 and December 31, 2021, respectively. The 2024 Notes are actively quoted instruments and, accordingly, the fair value of the 2024 Notes was determined using Level 1 inputs.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
NOTE 9 — Product Warranties
We provide product warranties with varying terms and durations for the majority of our products. We estimate our warranty reserve by considering historical and projected warranty claims, historical and projected cost-per-claim, and knowledge of specific product issues that are outside our typical experience. We record warranty expense in cost of sales in the unaudited condensed consolidated statements of income and comprehensive income. Product warranty claims not expected to occur within one year are included as part of other long-term liabilities in the unaudited condensed consolidated balance sheets.
The following table represents changes in our consolidated warranty reserve:
Balance at December 31, 2021
$
10.5
Issued – warranty expense
2.4
Warranty usage
(6.1)
Balance at September 30, 2022
$
6.8
NOTE 10 — Business Combinations
Fronti Fabrications, Inc. Acquisition
On May 31, 2022, we acquired 100% of the equity interests of Fronti Fabrications, Inc. (“Fronti”) for approximately $20.6 in cash (subject to certain customary adjustments) or $20.4 net of $0.2 cash acquired. Fronti is a specialist in engineering, machining and welding for the cryogenic and gas industries, and also supplies new build pressure vessels and cold boxes, and performs repairs with certification to American Society of Mechanical Engineers (ASME) code. The preliminary estimated fair value of the total net assets acquired include goodwill, identifiable intangible assets and other net assets at the date of acquisition in the amounts of $14.2, $5.3 and $1.1, respectively.
CSC Cryogenic Service Center AB Acquisition
On May 16, 2022, we acquired 100% of the equity interests of CSC Cryogenic Service Center AB (“CSC”) for approximately $3.8 in cash (subject to certain customary adjustments). CSC brings a strong service footprint in the Nordic region with many overlapping customers to Chart, allowing us to broaden our service and repair presence geographically. Additional information related to the CSC acquisition has not been presented because the impact on our condensed consolidated statements of income and condensed consolidated balance sheets is not significant.
Earthly Labs Inc. Acquisition
On December 14, 2021, we acquired the remaining 85% of Earthly Labs, Inc. (“Earthly Labs).” We previously held a 15% equity investment in Earthly Labs. The acquisition was completed for cash and stock for a previously disclosed estimated preliminary purchase price of $63.1. During the first quarter of 2022, we decreased the value of the stock consideration by $1.2 to reflect the December 13, 2021 closing price of Chart common stock of $160.63 per share, which lowered the preliminary estimated purchase price to $61.9 or $58.4 net of $3.5 cash acquired. In connection with the Earthly Labs acquisition, Chart shall pay to the sellers a royalty on sales of a carbon capture unit for residential use launched for sale to the public by Chart, which has not yet been developed. Refer to the “Contingent Consideration” section below for further discussion. Earthly Labs is a leading provider of small-scale carbon capture systems offering an affordable, small footprint technology platform called “CiCi ®” to capture, recycle, reuse, track and sell CO2. Earthly Labs proprietary approach includes hardware, software and services to address half of all existing carbon dioxide emissions from industrial sources while converting molecules to value.
The preliminary estimated fair value of the total net assets acquired include goodwill, identifiable intangible assets and other net liabilities at the date of acquisition in the amounts of $32.2, $42.9 and $5.1, respectively (as previously reported: $47.2, $27.0 and $11.1, respectively). Amounts previously reported were preliminary and based on provisional fair values. During the first nine months of 2022, we received and analyzed new information about certain assets acquired and subsequently adjusted their fair values accordingly. Intangible assets consists of unpatented technology, trade names, customer relationships and backlog.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
AdEdge Acquisition
On August 27, 2021, we acquired 100% of the equity interests of AdEdge for $37.5 in cash, net of $1.4 of cash acquired and a net working capital settlement of $0.8 finalized during the first quarter of 2022. AdEdge is a water treatment technology and solution provider specializing in the design, development, fabrication and supply of water treatment solutions, specialty medias, legacy and innovative technologies that remove a wide range of contaminants from water. The fair value of the total net assets acquired include goodwill, identifiable intangible assets and other net assets at the date of acquisition in the amounts of $16.4, $19.0 and $3.5, respectively. During the first nine months of 2022, we increased goodwill by $0.5, which mainly included the $0.8 final net working capital adjustment mentioned above, a retention bonus adjustment and an adjustment to the trade name. During the third quarter of 2022 the AdEdge purchase price allocation was finalized.
As discussed in Note 7, “Investments,” we previously held a 50% ownership interest in a joint venture in AdEdge India. On May 4, 2022, we acquired the remaining 50% of the shares for $0.4 in cash (subject to certain customary adjustments) or $0.3 net of $0.1 cash acquired. AdEdge India focuses on water and wastewater treatment and surface water bodies rejuvenation in the South Asian markets.
L.A. Turbine Acquisition
On July 1, 2021, we acquired 100% of the equity interests of L.A. Turbine (“LAT”) for approximately $76.6 in cash (subject to certain customary adjustments), net of $1.4 of cash acquired. LAT is a global leader in turboexpander design, engineering, manufacturing, assembly and testing process for new and aftermarket equipment, with significant in-house engineering expertise.
The estimated useful lives of identifiable finite-lived intangible assets range from less than one year to 15 years. The excess of the purchase price over the fair values is assigned to goodwill. LAT complements our Heat Transfer Systems and Specialty Products segments with the addition of its application-specific, highly engineered turboexpanders which further differentiates Chart’s end market diversity especially in hydrogen and helium liquefaction in addition to industrial gas, natural gas processing, power generation and petrochemical applications. Goodwill was established due to the benefits outlined above, as well as the benefits derived from the synergies of LAT integrating with our Heat Transfer Systems, Specialty Products and Repair, Service & Leasing segments. Goodwill recorded for the LAT acquisition is not expected to be deductible for tax purposes. During the third quarter of 2022 the LAT purchase price allocation was finalized.
The following table summarizes the fair value of the assets acquired in the LAT acquisition at the acquisition date:
Net assets acquired:
Identifiable intangible assets
$
43.7
Goodwill (1)
42.3
Other assets (1)
4.2
Property, plant and equipment
2.6
Cash and cash equivalents
1.4
Liabilities
(16.2)
Net assets acquired
$
78.0
_______________
(1)As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2021, we reported goodwill, other assets and liabilities of $42.1, $4.6 and $16.4, respectively. During the first nine months of 2022, we recorded purchase price adjustments that increased goodwill by $0.2, decreased other assets by $0.4 and decreased liabilities by $0.2.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
Information regarding identifiable intangible assets acquired in the LAT acquisition is presented below:
Weighted-average Estimated Useful Life
Fair Value
Finite-lived intangible assets acquired:
Unpatented technology
14.5 years
$
33.4
Customer relationships
14.5 years
1.5
Backlog
2.5 years
0.7
Other identifiable intangible assets (1)
3.4 years
0.2
Total finite-lived intangible assets acquired
14.2 years
35.8
Indefinite-lived intangible assets acquired:
Trademarks and trade names
7.9
Total intangible assets acquired
$
43.7
_______________
(1)Other identifiable intangible assets is included in “Patents and other” in Note 6, “Goodwill and Intangible Assets.”
Cryogenic Gas Technologies, Inc. Acquisition
On February 16, 2021, we acquired 100% of the equity interests of Cryogenic Gas Technologies, Inc. (“Cryo Technologies”) for approximately $55.0 in cash (subject to certain customary adjustments), net of $0.6 cash acquired. Cryo Technologies is a global leader in custom engineered process systems to separate, purify, refrigerate, liquefy and distribute high value industrial gases such as hydrogen, helium, argon and hydrocarbons with design capabilities for cold boxes for hydrogen and helium use. The distribution systems Cryo Technologies supplies are located within the helium and hydrogen liquefaction facilities and are inclusive of trailer loading systems, which facilitates the first step in product distribution. The fair value of the total net assets acquired include goodwill, identifiable intangible assets and other net assets at the date of acquisition was $34.9, $19.5 and $1.2, respectively. Intangible assets consists of customer relationships, unpatented technology, trademarks and trade names, backlog and non-compete agreements. During the first quarter of 2022 the Cryo Technologies purchase price allocation was finalized.
Preliminary Purchase Price Allocations:
The purchase price allocations of Fronti Fabrications, CSC Cryogenic Service Center and Earthly Labs (the “acquisitions”) are preliminary and are based on provisional fair values and subject to revision as we finalize third-party valuations and other analyses. Final determination of the fair values may result in further adjustments to the value of net assets acquired.
As defined in Note 2, “Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2021, we preliminarily allocated the acquisition consideration to tangible and identifiable intangible assets acquired and liabilities assumed based on their preliminary estimated fair values as of the acquisition date. The preliminary fair value of the acquired tangible and identifiable intangible assets was determined based on inputs that are unobservable and significant to the overall fair value measurement. The preliminary fair value is based on estimates and assumptions made by management at the time of the acquisition. As such, the acquisitions are classified as Level 3 fair value hierarchy measurements and disclosures.
Contingent Consideration
The fair value of contingent consideration was $16.9 for SES and $3.2 for BIG at the date of acquisitions and was valued according to a discounted cash flow approach, which included assumptions regarding the probability of achieving certain targets and a discount rate applied to the potential payments. Potential payments are measured between the period commencing October 1, 2022 and ending on December 31, 2028 based on the attainment of certain earnings targets. The potential payments related to both SES and BIG contingent consideration on a combined basis is between $0.0 and $31.0. The estimated fair value of contingent consideration related to SES decreased by $0.9 and increased by $0.4 for the three months ended September 30, 2022 and 2021, respectively. The estimated fair value of contingent consideration related to SES decreased by $1.7 and
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
increased by $2.4 for the nine months ended September 30, 2022 and 2021, respectively. The estimated fair value of contingent consideration related to BIG decreased by $0.8 and $0.1 for the three months ended September 30, 2022 and 2021, respectively. The estimated fair value of contingent consideration related to BIG decreased by $1.0 and $0.1 for the nine months ended September 30, 2022 and 2021, respectively.
In connection with the Earthly Labs acquisition, Chart will pay to the sellers a royalty on sales of carbon capture units for residential use launched for sale to the public by Chart in an amount equal to 4% of such sales. Potential royalty payments shall be paid to the sellers during the three year period following Chart’s launch of this product. This product has not yet been developed and as such, the fair value of the contingent consideration liability that arises from this arrangement was insignificant as of September 30, 2022 and December 31, 2021.
Valuations are performed using Level 3 inputs as defined in Note 2, “Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2021 and are evaluated on a quarterly basis based on forecasted sales and earnings targets. Contingent consideration liabilities are classified as other current liabilities and other long-term liabilities in the condensed consolidated balance sheets. Changes in fair value of contingent consideration, including accretion, are recorded as selling, general, and administrative expenses in the condensed consolidated statements of income and comprehensive income.
The following table represents the changes to our contingent consideration liabilities:
SES
BIG
Total
Balance at December 31, 2021
$
19.1
$
2.1
$
21.2
Decrease in fair value of contingent consideration liabilities
(1.7)
(1.0)
(2.7)
Balance at September 30, 2022
$
17.4
$
1.1
$
18.5
NOTE 11 — Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
Foreign currency translation adjustments (1)
Pension liability adjustments, net of taxes
Accumulated other comprehensive loss
Balance at June 30, 2022
$
(52.3)
$
(6.3)
$
(58.6)
Other comprehensive loss
(32.1)
—
(32.1)
Amounts reclassified from accumulated other comprehensive loss, net of income taxes
—
0.1
0.1
Net current-period other comprehensive (loss) income, net of taxes
(32.1)
0.1
(32.0)
Balance at September 30, 2022
$
(84.4)
$
(6.2)
$
(90.6)
Foreign currency translation adjustments
Pension liability adjustments, net of taxes
Accumulated other comprehensive loss
Balance at June 30, 2021
$
1.5
$
(10.7)
$
(9.2)
Other comprehensive loss
(11.8)
—
(11.8)
Amounts reclassified from accumulated other comprehensive loss, net of income taxes
—
0.3
0.3
Net current-period other comprehensive (loss) income, net of taxes
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
Foreign currency translation adjustments (1)
Pension liability adjustments, net of taxes
Accumulated other comprehensive loss
Balance at December 31, 2021
$
(15.2)
$
(6.5)
$
(21.7)
Other comprehensive loss
(69.2)
—
(69.2)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes
—
0.3
0.3
Net current-period other comprehensive (loss) income, net of taxes
(69.2)
0.3
(68.9)
Balance at September 30, 2022
$
(84.4)
$
(6.2)
$
(90.6)
Foreign currency translation adjustments
Pension liability adjustments, net of taxes
Accumulated other comprehensive income (loss)
Balance at December 31, 2020
$
13.8
$
(11.4)
$
2.4
Other comprehensive loss
(24.1)
—
(24.1)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes
—
1.0
1.0
Net current-period other comprehensive (loss) income, net of taxes
(24.1)
1.0
(23.1)
Balance at September 30, 2021
$
(10.3)
$
(10.4)
$
(20.7)
_______________
(1)Foreign currency translation adjustments includes translation adjustments and net investment hedge, net of taxes. See Note 8, “Debt and Credit Arrangements,” for further information related to the net investment hedge.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
NOTE 12 — Earnings Per Share
The following table represents calculations of net earnings per share of common stock:
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Net income attributable to Chart Industries, Inc.
$
41.2
$
14.9
$
64.4
$
47.0
Earnings per common share:
Basic
$
1.15
$
0.42
$
1.80
$
1.32
Diluted
$
0.98
$
0.36
$
1.56
$
1.15
Weighted average number of common shares outstanding – basic
35.87
35.62
35.85
35.59
Incremental shares issuable upon assumed conversion and exercise of share-based awards
0.28
0.35
0.26
0.33
Incremental shares issuable due to dilutive effect of convertible notes
3.01
2.90
2.82
2.71
Incremental shares issuable due to dilutive effect of warrants
2.70
2.57
2.47
2.33
Weighted average number of common shares outstanding – diluted
41.86
41.44
41.40
40.96
Diluted earnings per share does not reflect the following potential common shares as the effect would be anti-dilutive:
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Share-based awards
0.03
—
0.07
0.04
Convertible note hedge and capped call transactions (1)
3.01
2.90
2.82
2.71
Warrants
—
—
—
—
Total anti-dilutive securities
3.04
2.90
2.89
2.75
_______________
(1)The convertible note hedge offsets any dilution upon actual conversion of the 2024 Notes up to a common stock price of $71.775 per share. For further information, refer to Note 8, “Debt and Credit Arrangements.”
NOTE 13 — Income Taxes
Income tax expense of $(1.6) and $5.5 for the three months ended September 30, 2022 and 2021, respectively, represents taxes on both U.S. and foreign earnings at a combined effective income tax rate of (4.0)% and 25.9%, respectively. Income tax expense of $4.0 and $9.9 for the nine months ended September 30, 2022 and 2021, respectively, represents taxes on both U.S. and foreign earnings at a combined effective income tax rate of 5.8% and 17.0%, respectively.
The effective income tax rates of (4.0)% and 5.8% for the three and nine months ended September 30, 2022 differed from the U.S. federal statutory rate of 21% primarily due to income earned by our certain foreign entities being taxed at higher rates than the U.S. federal statutory rates more than offset by the release of a valuation allowance on certain foreign entities, excess tax benefits associated with share-based compensation, and global R&D tax credits. The release of the valuation allowance is due to continued improvement of on-going results in certain foreign jurisdictions over the prior three years and the current year resulting in the recognition of deferred tax assets (and the related deferred tax benefit) that were generated in prior years and year to date that had not been previously recognized.
The effective income tax rate of 25.9% for the three months ended September 30, 2021 differed from the U.S. federal statutory rate of 21% primarily due to income earned by our certain foreign entities being taxed at higher rates than the U.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 the U.S.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
The effective income tax rate of 17.0% for the nine months ended September 30, 2021 differed from the U.S. federal statutory rate of 21% primarily due to excess tax benefits associated with share-based compensation and income incurred by certain of our foreign operations with a full valuation allowance, partially offset by income earned by our certain foreign entities being taxed at higher rates than the U.S. federal statutory rate.
NOTE 14 — Share-based Compensation
During the nine months ended September 30, 2022, we granted 0.03 stock options, 0.05 restricted stock units and 0.01 performance units. The total fair value of awards granted to employees during the nine months ended September 30, 2022 was $12.6. In addition, our non-employee directors received stock awards with a total fair value of $0.6. During the nine months ended September 30, 2022, participants in our stock option plans exercised options to purchase 0.03 shares of our common stock.
Stock options generally have a four-year graded vesting period. Restricted stock and restricted stock units generally vest ratably over a three-year period. Performance units generally vest at the end of a three-year performance period based on the attainment of certain pre-determined performance condition targets. During the nine months ended September 30, 2022, 0.06 restricted stock and restricted stock units vested and 0.02 performance units vested.
Share-based compensation expense was $2.3 and $2.3 for the three months ended September 30, 2022 and 2021, respectively and $7.9 and $8.1 for the nine months ended September 30, 2022 and 2021, respectively. Share-based compensation expense is included in selling, general, and administrative expenses in the unaudited condensed consolidated statements of income and comprehensive income. As of September 30, 2022, total share-based compensation of $14.1 is expected to be recognized over the weighted-average period of approximately 2.2 years.
NOTE 15 — Commitments and Contingencies
Environmental
We are subject to federal, state, local, and foreign environmental laws and regulations concerning, among other matters, waste water effluents, air emissions, and handling and disposal of hazardous materials, such as cleaning fluids. We are involved with environmental compliance, investigation, monitoring, and remediation activities at certain of our owned and formerly owned manufacturing facilities and at one owned facility that is leased to a third party, and, except for these continuing remediation efforts, believe we are currently in substantial compliance with all known environmental regulations. At September 30, 2022 and December 31, 2021, we had undiscounted accrued environmental reserves of $0.4 and $0.2, respectively.
Legal Proceedings
Stainless Steel Cryobiological Tank Legal Proceedings
In connection with the October 1, 2020 divestiture of our cryobiological products business, Chart retained certain potential liabilities, including claims in connection with our following litigation. During the second quarter of 2018, Chart was named in lawsuits (including lawsuits filed in the U.S. District Court for the Northern District of California) filed against Chart and other defendants with respect to the alleged failure of a stainless steel cryobiological storage tank (model MVE 808AF-GB) at the Pacific Fertility Center in San Francisco, California. In May and June of 2021, the first five of the federal lawsuits went to trial, and on June 10, 2021, the jury reached a verdict against Chart in favor of the plaintiffs in those lawsuits in the amount of $14.9, of which 90% ($13.5) is attributable to Chart. On August 13, 2021, judgment was entered, and on September 10, 2021, we filed two post-trial motions: a motion for a new trial and a renewed motion for judgment as a matter of law. The motion for new trial or, in the alternative, request for remittitur, sought, among other relief, to have the court grant a new trial because of erroneous evidentiary rulings, a factually unsupported negligence claim, plaintiffs’ attorney misconduct, allocation of fault that was not supported by the record, and excessive noneconomic damages. The renewed motion for judgment as a matter of law sought to have the court direct judgment for Chart on the negligent failure to recall claim because of our contention that plaintiffs failed to present sufficient evidence to prove each element of that claim. On November 5, 2021, the court denied these post-trial motions. Chart filed its notice of appeal on December 1, 2021. On December 7, 2021, the court stayed the remaining federal lawsuits pending resolution of Chart’s appeal.
In the second quarter 2021, we recorded a loss contingency accrual and corresponding charge to net income for $13.5 in the amount of the jury verdict attributable to Chart. The loss contingency accrual is included in other current liabilities in our
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
unaudited condensed consolidated balance sheet at September 30, 2022. Chart expects that any potential loss associated with the verdict will be covered by existing product liability insurance, subject to previously issued reservations of rights by the insurance carriers. Accordingly, we have recorded an offsetting $13.5 loss recovery receivable with a corresponding credit to net income. The loss recovery receivable is included in other current assets in our unaudited condensed consolidated balance sheet at September 30, 2022. Although we continue to vigorously contest the result in this case, we continue to recognize the loss contingency accrual and related loss recovery receivable in our unaudited condensed consolidated balance sheet at September 30, 2022.
Currently there are 164 individual cases (excluding the first five cases from the May/June 2021 trial) with respect to the Pacific Fertility Center incident on the docket in the U.S. District Court for the Northern District of California. In addition to the cases filed in the U.S. District Court for the Northern District of California, Chart is currently a defendant in 53 individual cases in the San Francisco Superior Court.
We have asserted various defenses against the claims in the lawsuits, which remain in various stages of development, including a defense that since manufacture, we were not in any way involved with the installation, ongoing maintenance or monitoring of the tank or related fertility center cryogenic systems at any time since the initial delivery of the tank. We continue to evaluate the merits of such claims for each specific case in light of the information available to date regarding use, maintenance and operation of the tank that was sold to the Pacific Fertility Center. The Company previously initiated negotiations with certain representatives of the plaintiffs to ascertain whether a preliminary settlement framework, acceptable to all constituent parties, for these fertility clinic cases could be reached. Based on the status of these discussions, there remains substantial uncertainty with respect to the potential for a settlement. As such, we have not reached a conclusion that losses in these cases are currently probable. Based on the status of the settlement negotiations, the ongoing status of the various lawsuits, and the consideration of insurance coverage, including the existence of a dispute with one of our insurance providers regarding coverage limits as described below, a current estimate of reasonably possible losses in these cases cannot be made.
On June 13, 2022, Starr Indemnity & Liability Company (“Starr”) filed a complaint for declaratory relief and reimbursement in the U.S. District Court for the Northern District of California seeking a determination of what obligation, if any, Starr has to indemnify Chart in connection with the Pacific Fertility Center actions. On June 14, 2022, Chart filed its own declaratory judgment action against Starr in the U.S. District Court for the Northern District of Georgia seeking a determination that Starr has a duty to indemnify the Company in connection with the Pacific Fertility Center actions.
We are occasionally subject to various legal claims related to performance under contracts, product liability, taxes, employment matters, environmental matters, intellectual property, and other matters incidental to the normal course of our business. Based on our historical experience in litigating these claims, as well as our current assessment of the underlying merits of the claims and applicable insurance, if any, management believes that the final resolution of these matters, including the Pacific Fertility Center cases described above, will not have a material adverse effect on our financial position, liquidity, cash flows, or results of operations, except that our results of operations for any particular reporting period may be adversely affected by any potential or actual loss that is accrued in such period. Future developments may, however, result in resolution of these legal claims in a way that could have a material adverse effect.
NOTE 16 — Restructuring Activities
Restructuring credits of $1.4 and $1.1 for the three and nine months ended September 30, 2022 were primarily related to reversal of prior restructuring accruals for employee retention at our Houston, Texas facility, and offset restructuring related costs in the segment in 2022. Restructuring costs of $1.9 and $2.9 for the three and nine months ended September 30, 2021, respectively, were primarily related to moving and employee severance costs relative to restructuring at our Beasley, Texas, Houston, Texas and Tulsa, Oklahoma facilities. This project was a cost reduction measure within our Heat Transfer Systems segment to continue to structure the business for profitable growth and capacity efficiency.
We are closely monitoring our end markets and order rates and will continue to take appropriate and timely actions as necessary.
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2022
(Dollars and shares in millions, except per share amounts) – Continued
The following table summarizes severance and other restructuring costs, which includes employee-related costs, facility rent and exit costs, relocation, recruiting, travel and other:
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
2022
2021
Severance:
Cost of sales
$
(0.2)
$
0.4
$
—
$
0.4
Selling, general, and administrative expenses
0.1
—
—
0.3
Total severance costs
(0.1)
0.4
—
0.7
Other restructuring:
Cost of sales
(1.2)
1.5
(1.1)
2.2
Selling, general, and administrative expenses
(0.1)
—
—
—
Total other restructuring costs
(1.3)
1.5
(1.1)
2.2
Total restructuring costs
$
(1.4)
$
1.9
$
(1.1)
$
2.9
The following tables summarize our restructuring activities:
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 cryogenic equipment servicing multiple applications in the industrial gas and clean energy 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, CO2 Capture and water treatment, among 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 manufacturing locations from the United States to Asia, India and Europe, we maintain accountability and transparency to our team members, suppliers, customers and communities.
Macroeconomic Impacts
During the third quarter of 2022, we had record backlog, record sales, record gross profit and record operating income as certain supply chain, labor and logistics issues driven by macroeconomic conditions began to level out. The current conflict between Russia and Ukraine and the related sanctions imposed by countries against Russia are creating uncertainty in the global economy. While we do not have operations in Russia or Ukraine, we are unable to predict the impact these actions will have on the global economy or on our business, financial condition and results of operations. Furthermore, uncertainty associated with the coronavirus (Covid-19) pandemic remains. These events did not have a material adverse effect on our reported results for the three months ended September 30, 2022, however we will continue to actively monitor in terms of their potential impact on our results of operations beyond the third quarter of 2022.
Foreign currency rate fluctuations, as determined by comparing current period revenue in USD to current period revenue in local currency converted to USD using the same foreign exchange rates as the third quarter of 2021, had a negative impact on consolidated sales of $17.3 million for the three months ended September 30, 2022, primarily due to the U.S. dollar appreciating versus the euro and the Indian rupee (third quarter 2022 compared to third quarter 2021).
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, among other applications. We also captured as our unique offering for the Nexus of Clean TM 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 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 third Annual Sustainability report with scorecard which was released in April 2022.
•We reported a 0.80 Total Recordable Incident Rate (TRIR), with emphasis on safety as our #1 priority and focus on all team members being empowered and authorized to stop work if they see an unsafe or potentially unsafe situation. At the end of September 2022, we were 0.01 from our record 12-month rolling TRIR set in June of 2022.
•We measure progress through Sustainability Accounting Standards Board (SASB) and Task Force on Climate-Related Financial Disclosures (TCFD) indices, as well as contributing to the Global Reporting Initiative (GRI) and United 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 have a Global ESG Committee, Global Safety Council, and Global Diversity & Inclusion Committee, all comprised of team member volunteers and engagement from our global locations.
•Our Global ESG Committee has five sub-committees focused on energy management, zero waste, electrification, renewable energy and water management.
•We have recently entered into a sustainability-linked banking agreement with covenants tied to our Green 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. In 2021, we made progress towards achieving our target by reducing GHG Intensity by almost 14% 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 2021, Chart reduced Scope 2 emissions by 9.7%.
•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 seven directors (four of our seven directors are female and four of our seven are diverse) and governed with a separate independent Chairwoman and CEO.
•We hold quarterly reviews on ESG with our Board of Directors.
•We link our executives and their direct reports short-term incentive payout (25% of the strategic and operational goals) to a metric driven, percentage-reduction ESG metric, and have done this for two years.
•Our team volunteers in their communities with a focus on supporting children and families, ending hunger and improving health. We offer every team member worldwide one paid day off each year to volunteer in our communities, and we donated over $120,000 to charities in the communities we work in during the 2021 year. In 2021, Chart started matching employee donations up to $250 per employee per year to charitable organizations.
•We have an employee relief fund for our own team members that need assistance.
•Our team members raised over $30,000 in 2021 and $25,000 in 2022 to support women through Dress For Success.
•In 2021, we received the following ESG-oriented recognition:
◦World LNG Award for Energy Transition 2021 Finalist
◦Gastech 2021 Emission Reduction Champion – Organization of the Year Award Winner
◦Gastech 2021 Engineering Partnership of the Year Finalist
◦S&P Global Platts Energy Awards Excellence in LNG Finalist (2021)
◦S&P Global Platts Energy Awards Corporate Social Responsibility (Diversified) Award Finalist (2021)
•In 2022, we received the following ESG-oriented recognition:
◦S&P Global Platts Energy Awards 2022 “Energy Transition– LNG” Finalist
◦S&P Global Platts Energy Awards 2022 “Deal of the Year – Strategic” Finalist
◦2022 Frost & Sullivan Institute Enlightened Growth Leadership Award
◦goBeyondProfit’s 2022 “In Good Company Report – One of the Most Generous Companies in Georgia (USA)”
Third Quarter 2022 Highlights
Strong order activity contributed to record ending total backlog of $2,254.1 million as of September 30, 2022 compared to $1,102.2 million as of September 30, 2021 and $1,953.3 million as of June 30, 2022, representing increases of $1,151.9 million or 104.5% and $300.8 million or 15.4%, respectively, which reflects the broad-based demand we continue to see year-over-year and quarter-over-quarter across our product categories. The increase in backlog was largely driven by strong order activity for the three months ended September 30, 2022 of $729.4 million compared to $350.2 million as of September 30, 2021 representing an increase of $379.2 million or 108.3%. Strong order intake in our Heat Transfer Systems segment of $357.7 million for the three months ended September 30, 2022 compared to $41.1 million for the three months ended September 30, 2021, was mainly driven by increased LNG orders including big and mid-scale LNG, liquefaction systems and cold box projects during the three months ended September 30, 2022. Strong order intake in our Specialty Products segment of $202.9 million for the three months ended September 30, 2022 compared to $131.3 million for the three months ended September 30, 2021, was mainly driven by an order for a large liquefaction system during the three months ended September 30, 2022. Record orders in our Repair, Service & Leasing segment for the three months ended September 30, 2022 of $61.7 million were mainly driven by record order intake in our leasing business. Heat Transfer Systems segment backlog was $1,225.4 million as of September 30, 2022, a record, as compared to $335.1 million and $1,003.8 million as of September 30, 2021 and June 30, 2022, respectively. Specialty Products segment backlog was $666.1 million as of September 30, 2022, also a record, as compared to $381.2 million and $570.4 million as of September 30, 2021 and June 30, 2022, respectively.
Consolidated sales increased to a record $412.1 million in the three months ended September 30, 2022 from $328.3 million in the three months ended September 30, 2021 and $404.8 million in the three months ended June 30, 2022, representing increases of $83.8 million or 25.5% (26.2% organically) and $7.3 million or 1.8% (3.6% organically), respectively, mainly driven by our Heat Transfer Systems segment with record sales in process systems related to big and small-scale LNG liquefactions and favorable sales in air coolers. Sales in our Cryo Tank Solutions segment increased by $14.7 million as compared to the same quarter in 2021 driven by favorable sales in storage equipment and record sales in mobile equipment. The consolidated sales increase was bolstered by sales from acquisitions. Consolidated gross profit increased to a record $104.6 million during the three months ended September 30, 2022, compared to $74.9 million for the three months ended September 30, 2021 and $94.8 million for the three months ended June 30, 2022, representing increases of $29.7 million or 39.7% and $9.8 million or 10.3%, respectively. Gross profit margin for the three months ended September 30, 2022 of 25.4% increased from 22.8% and 23.4% for the three months ended September 30, 2021 and June 30, 2022, respectively, demonstrating our progress in quarterly improvement in our margin profile as we continued to take further pricing and cost reduction actions.
Consolidated SG&A expenses as a percentage of consolidated sales for the three months ended September 30, 2022 decreased by 2.8% as compared to the three months ended September 30, 2021 primarily driven by the effect of cost reduction actions we took in 2021 and 2022.
Outlook
Our outlook for 2022 for sales is in the range of $1.65 billion to $1.70 billion. The change to our prior sales guidance of $1.725 billion to $1.80 billion is driven by currency headwinds and timing of specific project revenue recognition, which is typical in our business. We continue to invest in our automation, process improvement, and productivity activities across Chart, with total anticipated 2022 capital expenditures spend of $62.0 million to $67.0 million.
Our outlook for 2023 for sales is in a range of $2.10 billion to $2.20 billion and is driven by increased confidence due to record backlog, multiple global tailwinds and customers’ forecasts. Our 2023 outlook includes only Big LNG projects that are in backlog as of September 30, 2022. Note that this outlook does not include any new or additional mid-size or large projects that could come into the order book between now and the end of the first half 2023 which we would anticipate having sales associated with them in the year. If one or more mid or large-size project comes into the order book between now and the end of the first quarter 2023, we would anticipate recognizing between $50 to $75 million dollars more of revenue into the full year.
Consolidated Results for the Three Months Ended September 30, 2022 and 2021, and June 30, 2022
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 ended September 30, 2022 and 2021 and June 30, 2022 (dollars in millions). Financial data for the three months ended June 30, 2022 has been included to provide additional information regarding our business trends on a sequential quarter basis.
•September 30, 2021 were an increase in fair value of $0.3.
•June 30, 2022 were a decrease in fair value of $0.2.
(3)Includes deal-related and integration costs of $6.7 and $5.1 for the three months ended September 30, 2022 and June 30, 2022, respectively.
Results of Operations for the Three Months Ended September 30, 2022 and 2021, and June 30, 2022
Sales for the third quarter of 2022 compared to the same quarter in 2021 increased by $83.8 million ($81.9 million organically), from $328.3 million to $412.1 million, or 25.5%. This increase was primarily driven by growth in our Heat Transfer Systems segment on record sales in process systems related to big and small-scale LNG liquefactions and favorable sales in air coolers, as well as gains within our Cryo Tank Solutions segment on favorable sales in storage equipment in the U.S. and record sales in mobile equipment and within our Repair, Service & Leasing segment on favorable sales in parts, repairs, and services, aftermarket fans, aftermarket air cooled heat exchangers and in our lifecycle business.
Gross profit for the third quarter of 2022 compared to the same quarter in 2021 increased by $29.7 million from $74.9 million to $104.6 million, or 39.7%. Gross profit margin of 25.4% for the third quarter of 2022 increased from 22.8% in the third quarter of 2021. The increase in gross profit margin in the current quarter over third quarter of 2021 was primarily driven by product mix and pricing and cost reduction actions we took for all segments overall. Restructuring (credits)/costs recorded to cost of sales were $(1.4) million and $1.9 million for the three months ended September 30, 2022 and 2021, respectively.
Consolidated SG&A expenses increased by $1.3 million or 2.5% during the third quarter of 2022 compared to the same quarter in 2021 driven by higher employee-related costs while consolidated SG&A expenses as a percentage of consolidated sales for the three months ended September 30, 2022 decreased by 2.8% as compared to the three months ended September 30, 2021 primarily driven by the effect of cost reduction actions we took in 2021 and 2022.
Interest Expense, Net and Financing Costs Amortization
Interest expense, net for the three months ended September 30, 2022 and 2021 was $5.7 million and $3.2 million, respectively, representing an increase of $2.5 million. The increase in interest expense, net, is primarily due to higher borrowings outstanding and higher average interest rates during the third quarter of 2022 on our senior secured revolving credit facility due October 2026, as compared to borrowings outstanding and average interest rates on our previous senior secured revolving credit facility and term loan due June 2024 during the third quarter of 2021, partially offset by interest income of $0.4 million from our cross-currency swaps entered into on July 8, 2022 and September 16, 2022 and by capitalization of interest related to property, plant and equipment. Interest expense, net for both the three months ended September 30, 2022 and 2021 included $0.6 million of 1.0% cash interest expense related to our convertible notes due November 2024 and $6.4 million and $2.9 million, respectively, in interest related to borrowings on our current senior secured revolving credit facility due 2026 and previous senior secured revolving credit facility and term loan due 2024. Financing costs amortization was $0.7 million and $1.2 million for the three months ended September 30, 2022 and 2021, respectively. The decrease of $0.5 million was primarily due to the amendment of our credit facilities during the fourth quarter in October 2021, which lowered deferred debt issuance costs.
Unrealized (Gain) Loss On Investments In Equity Securities
During the third quarter of 2022, we recognized an unrealized gain on investments in equity securities of $1.3 million, which was driven by an unrealized loss of $4.1 million on the mark-to-market adjustment of our investment in McPhy and a $5.4 million unrealized gain on the mark-to-market adjustment of our investment in Stabilis. During third quarter of 2021, we recognized an unrealized gain 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.
Foreign Currency (Gain) Loss
For the three months ended September 30, 2022, foreign currency gain was $2.5 million and for the three months ended September 30, 2021 foreign currency gain was $0.8 million. The variance between periods was primarily driven by fluctuations in the U.S dollar as compared to the euro and Chinese yuan.
Income tax expense of $(1.6) million and $5.5 million for the three months ended September 30, 2022 and 2021, respectively, represents taxes on both U.S. and foreign earnings at a combined effective income tax rate of (4.0)% and 25.9%, respectively. The effective income tax rate of (4.0)% for the three months ended September 30, 2022 differed from the U.S. federal statutory rate of 21% primarily due to income earned by our certain foreign entities being taxed at higher rates than the U.S. federal statutory rates more than offset by the release of a valuation allowance on certain foreign entities, excess tax benefits associated with share-based compensation and global R&D tax credits. The release of the valuation allowance is due to continued improvement of on-going results in certain foreign jurisdictions over the prior three years and the current year resulting in the recognition of deferred tax assets (and the related deferred tax benefit) that were generated in prior years and year to date that had not been previously recognized.
The effective income tax rate of 25.9% for the three months ended September 30, 2021 differed from the U.S. federal statutory rate of 21% primarily due to income earned by our certain foreign entities being taxed at higher rates than the U.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 the U.S.
Net Income Attributable to Chart Industries, Inc.
As a result of the foregoing, net income attributable to Chart Industries, Inc. for the three months ended September 30, 2022 and 2021 was $41.2 million and $14.9 million, respectively.
Consolidated Results for the Nine Months Ended September 30, 2022 and 2021
The following table includes key metrics used to evaluate our business and measure our performance and represents selected financial data for our operating segments for the nine months ended September 30, 2022 and 2021 (dollars in millions):
Selected Financial Information
Nine Months Ended
Current Year-to-date vs. Prior Year-to-date Period
Current Year-to-date vs. Prior Year-to-date Period
September 30, 2022
September 30, 2021
Variance ($)
Variance (%)
SG&A Expenses % of Sales
Cryo Tank Solutions
8.3
%
8.6
%
Heat Transfer Systems
5.8
%
11.1
%
Specialty Products
13.1
%
10.8
%
Repair, Service & Leasing
7.4
%
9.6
%
Consolidated
13.6
%
15.5
%
Operating Income (Loss) (1)
Cryo Tank Solutions
$
36.2
$
42.0
$
(5.8)
(13.8)
%
Heat Transfer Systems
23.8
(6.7)
30.5
100.0
%
Specialty Products (2)
53.7
67.7
(14.0)
(20.7)
%
Repair, Service & Leasing
32.3
16.1
16.2
100.6
%
Corporate (3)
(54.6)
(51.0)
(3.6)
7.1
%
Consolidated
$
91.4
$
68.1
$
23.3
34.2
%
Operating Margin
Cryo Tank Solutions
9.6
%
13.4
%
Heat Transfer Systems
7.6
%
(3.5)
%
Specialty Products
16.2
%
22.5
%
Repair, Service & Leasing
20.9
%
11.3
%
Consolidated
7.8
%
7.3
%
_______________
(1)Restructuring (credits)/costs for the nine months ended:
•September 30, 2022 were $(1.1) ($(1.3) - Repair, Service & Leasing, $0.1 - Cryo Tank Solutions and $0.1 - Heat Transfer Systems).
•September 30, 2021 were $2.9 ($0.3 - Cryo Tank Solutions, $1.2 - Heat Transfer Systems and $1.4 - Repair, Service & Leasing).
(2)Includes acquisition-related contingent consideration (credits)/charges of $(2.7) and $2.3 in our Specialty Products segment for the nine months ended September 30, 2022 and 2021, respectively.
(3)Includes deal-related and integration costs of $16.0 for the nine months ended September 30, 2022.
Results of Operations for the Nine Months Ended September 30, 2022 and 2021
Sales for the first nine months of 2022 compared to the same period in 2021 increased by $232.2 million ($196.3 million organically), from $938.8 million to $1,171.0 million, or 24.7%. Similar to the comments in the results of operations for the three months ended September 30, 2022 and 2021 section above, this increase was primarily driven by growth in our Heat Transfer Systems segment on favorable sales in process systems related to big and small-scale LNG liquefactions and air coolers, along with gains within our Cryo Tank Solutions segment on favorable sales in storage equipment and mobile equipment, within our Specialty Products segment on favorable sales in hydrogen and helium applications, water treatment, space applications, food & beverage applications and carbon capture and within our Repair, Service & Leasing segment on
favorable sales in parts, repairs, and services, aftermarket fans, aftermarket air cooled heat exchangers and in our lifecycle business.
Gross profit increased during the first nine months of 2022 compared to the first nine months of 2021 by $41.1 million or 17.0%, while gross profit margin of 24.2% for the first nine months of 2022 decreased from 25.8% in the first nine months of 2021. Similar to the comments in the results of operations for the three months ended September 30, 2022 and 2021 section above, the increase in gross profit for the first nine months of 2022 compared to the same period in 2021 was primarily driven by continued pricing and cost reduction actions we took for all segments overall.
Consolidated SG&A expenses increased by $13.9 million or 9.6% during the first nine months of 2022 compared to the same period in 2021 primarily driven by higher employee-related costs, a ramp up in our Specialty Products business which drove higher SG&A expenses in the segment and SG&A expenses related to recent acquisitions, partially offset by no restructuring costs recorded to consolidated SG&A expenses for the nine months ended September 30, 2022, compared to $0.3 million for the same period in 2021.
Interest Expense, Net and Financing Costs Amortization
Interest expense, net for the nine months ended September 30, 2022 and 2021 was $13.3 million and $7.4 million, respectively, representing an increase of $5.9 million. The increase in interest expense, net, is primarily due to higher borrowings outstanding and higher average interest rates during the first nine months of 2022 on our senior secured revolving credit facility due October 2026, as compared to borrowings outstanding and average interest rates on our previous senior secured revolving credit facility and term loan due June 2024 during the first nine months of 2021, partially offset by interest income of $0.9 million from our cross-currency swaps entered into during the first nine months of 2022 and by capitalization of interest related to property, plant and equipment. Interest expense, net for both the nine months ended September 30, 2022 and 2021 included $1.9 million of 1.0% cash interest expense related to our convertible notes due November 2024 and $14.7 million and $6.0 million, respectively, in interest related to borrowings on our current senior secured revolving credit facility due 2026 and previous senior secured revolving credit facility and term loan due 2024. Financing costs amortization was $2.1 million for the nine months ended September 30, 2022 as compared to $3.5 million for the nine months ended September 30, 2021. The decrease of $1.4 million was primarily due to the amendment of our credit facilities during the fourth quarter in October 2021, which lowered deferred debt issuance costs.
Unrealized (Gain) Loss On Investments In Equity Securities
During the first nine months of 2022, we recognized an unrealized loss on investments in equity securities of $10.9 million, which was driven by an unrealized loss of $16.1 million on the mark-to-market adjustment of our investment in McPhy and a $5.2 million unrealized gain on the mark-to-market adjustment of our investment in Stabilis. During the first nine months of 2021, we recognized an unrealized gain on investments in equity securities of $1.2 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 and a $6.3 million unrealized gain on the mark-to-market adjustment of our investment in Stabilis, partially offset by a $25.8 million unrealized loss on the mark-to-market adjustment of our investment in McPhy.
Foreign Currency (Gain) Loss
For the nine months ended September 30, 2022, foreign currency gain was $2.6 million and for the nine months ended September 30, 2021 foreign currency loss was $0.1 million.
Income Tax Expense
Income tax expense of $4.0 million and $9.9 million for the nine months ended September 30, 2022 and 2021, respectively, represents taxes on both U.S. and foreign earnings at a combined effective income tax rate of 5.8% and 17.0%, respectively. The effective income tax rate of 5.8% for the nine months ended September 30, 2022 differed from the U.S. federal statutory rate of 21% primarily due to income earned by our certain foreign entities being taxed at higher rates than the U.S. federal statutory rate offset by the release of a valuation allowance on certain foreign entities, excess tax benefits associated with share-based compensation and global R&D tax credits. The release of the valuation allowance is due to continued improvement of on-going results in certain foreign jurisdictions over the prior three years and the current year resulting in the recognition of deferred tax assets (and the related deferred tax benefit) that were generated in prior years and year to date that had not been previously recognized.
The effective income tax rate of 17.0% for the nine months ended September 30, 2021 differed from the U.S. federal statutory rate of 21% primarily due to excess tax benefits associated with share-based compensation and income incurred by certain of our foreign operations with a full valuation allowance, partially offset by income earned by our certain foreign entities being taxed at higher rates than the U.S. federal statutory rate.
Net Income Attributable to Chart Industries, Inc.
As a result of the foregoing, net income attributable to Chart Industries, Inc. for the nine months ended September 30, 2022 and 2021 was $64.4 million and $47.0 million, respectively.
Segment Results
Our reportable and operating segments include: Cryo Tank Solutions, Heat Transfer Systems, Specialty Products and Repair, Service & Leasing. Corporate includes operating expenses for executive management, accounting, tax, treasury, corporate development, human resources, information technology, investor relations, legal, internal audit, and risk management. Corporate support functions are not currently allocated to the segments. For further information, refer to Note 2, “Reportable Segments” of our unaudited condensed consolidated financial statements included under Item 1, “Financial Statements” in this report. The following tables include key metrics used to evaluate our business and measure our performance and represent selected financial data for our operating segments for the three and nine months ended September 30, 2022 and 2021 (dollars in millions):
Cryo Tank Solutions — Results of Operations for the Three Months Ended September 30, 2022 and 2021
Three Months Ended
Current Quarter vs. Prior Year Same Quarter
September 30, 2022
September 30, 2021
Variance ($)
Variance (%)
Sales
$
126.9
$
112.2
$
14.7
13.1
%
Gross Profit
22.8
22.6
0.2
0.9
%
Gross Profit Margin
18.0
%
20.1
%
SG&A Expenses
$
9.8
$
9.1
$
0.7
7.7
%
SG&A Expenses (% of Sales)
7.7
%
8.1
%
Operating Income
$
12.2
$
13.0
$
(0.8)
(6.2)
%
Operating Margin
9.6
%
11.6
%
For the third quarter of 2022, Cryo Tank Solutions sales increased by $14.7 million as compared to the same quarter in 2021. As mentioned in the consolidated results above, this increase was mainly driven by favorable sales in storage equipment in the U.S. and record sales in mobile equipment.
During the third quarter of 2022, Cryo Tank Solutions segment gross profit increased by $0.2 million as compared to the same quarter in 2021, while gross profit margin decreased by 210 basis points. The decrease in gross profit margin was mainly driven by higher material prices and higher labor costs due to macroeconomic conditions.
Cryo Tank Solutions segment SG&A expenses increased by $0.7 million during the third quarter of 2022 while SG&A expenses as a percentage of sales improved by 40 basis points. The increase in SG&A expenses was mainly due to higher employee-related costs.
Cryo Tank Solutions — Results of Operations for the Nine Months Ended September 30, 2022 and 2021
Current Year-to-date vs. Prior Year-to-date Period
September 30, 2022
September 30, 2021
Variance ($)
Variance (%)
Sales
$
377.9
$
313.9
$
64.0
20.4
%
Gross Profit
69.8
71.0
(1.2)
(1.7)
%
Gross Profit Margin
18.5
%
22.6
%
SG&A Expenses
$
31.5
$
27.1
$
4.4
16.2
%
SG&A Expenses (% of Sales)
8.3
%
8.6
%
Operating Income
$
36.2
$
42.0
$
(5.8)
(13.8)
%
Operating Margin
9.6
%
13.4
%
For the first nine months of 2022, Cryo Tank Solutions sales increased by $64.0 million as compared to the same period in 2021. As mentioned in the results of operations for the three months ended September 30, 2022 and 2021 comments above, this increase was mainly driven by favorable sales in storage equipment in the U.S. and Europe and mobile equipment in the U.S.
During the first nine months of 2022, Cryo Tank Solutions segment gross profit decreased by $1.2 million as compared to the same period in 2021. The decrease in gross profit and the related margin was mainly driven by higher material prices and higher labor costs due to macroeconomic conditions.
Cryo Tank Solutions segment SG&A expenses increased by $4.4 million during the first nine months of 2022 as compared to the same period in 2021 while SG&A expenses as a percentage of sales improved by 30 basis points. The increase in SG&A expenses was mainly due to higher employee-related costs.
Heat Transfer Systems — Results of Operations for the Three Months Ended September 30, 2022 and 2021
Three Months Ended
Current Quarter vs. Prior Year Same Quarter
September 30, 2022
September 30, 2021
Variance ($)
Variance (%)
Sales
$
132.1
$
56.4
$
75.7
134.2
%
Gross Profit
28.5
2.2
26.3
1,195.5
%
Gross Profit Margin
21.6
%
3.9
%
SG&A Expenses
$
6.5
$
7.4
$
(0.9)
(12.2)
%
SG&A Expenses (% of Sales)
4.9
%
13.1
%
Operating Income (Loss)
$
18.3
$
(10.0)
$
28.3
100.0
%
Operating Margin
13.9
%
(17.7)
%
For the third quarter of 2022, Heat Transfer Systems segment sales increased by $75.7 million as compared to the same quarter in 2021. As discussed in the consolidated results sections above, the increase was primarily driven by record sales in process systems related to big and small-scale LNG liquefactions and favorable sales in air coolers.
During the third quarter of 2022, Heat Transfer Systems segment gross profit increased by $26.3 million as compared to the same quarter in 2021 primarily due to higher volume, and gross profit margin increased by 1,770 basis points. The increase in Heat Transfer Systems segment gross profit margin was primarily due to overall product and project mix.
Heat Transfer Systems segment SG&A expenses decreased during the third quarter of 2022 as compared to the same quarter in 2021 and SG&A expenses as a percentage of sales improved by 820 basis points. The decrease in SG&A expenses was mainly due to lower employee-related costs.
Heat Transfer Systems — Results of Operations for the Nine Months Ended September 30, 2022 and 2021
Current Year-to-date vs. Prior Year-to-date Period
September 30, 2022
September 30, 2021
Variance ($)
Variance (%)
Sales
$
314.3
$
190.8
$
123.5
64.7
%
Gross Profit
53.4
29.2
24.2
82.9
%
Gross Profit Margin
17.0
%
15.3
%
SG&A Expenses
$
18.3
$
21.1
$
(2.8)
(13.3)
%
SG&A Expenses (% of Sales)
5.8
%
11.1
%
Operating Income (Loss)
$
23.8
$
(6.7)
$
30.5
100.0
%
Operating Margin
7.6
%
(3.5)
%
For the first nine months of 2022, Heat Transfer Systems segment sales increased by $123.5 million as compared to the same period in 2021. The increase was primarily driven by sales in process systems related to big and small-scale LNG liquefactions and air coolers.
During the first nine months of 2022, Heat Transfer Systems segment gross profit increased by $24.2 million as compared to the same period in 2021, and gross profit margin increased by 170 basis points. The increase in Heat Transfer Systems segment gross profit was primarily due to overall product and project volume mix.
Heat Transfer Systems segment SG&A expenses decreased during the first nine months of 2022 as compared to the same period in 2021 mainly due to lower employee-related costs.
Specialty Products — Results of Operations for the Three Months Ended September 30, 2022 and 2021
Three Months Ended
Current Quarter vs. Prior Year Same Quarter
September 30, 2022
September 30, 2021
Variance ($)
Variance (%)
Sales
$
108.1
$
116.9
$
(8.8)
(7.5)
%
Gross Profit
34.2
40.7
(6.5)
(16.0)
%
Gross Profit Margin
31.6
%
34.8
%
SG&A Expenses
$
14.7
$
11.8
$
2.9
24.6
%
SG&A Expenses (% of Sales)
13.6
%
10.1
%
Operating Income
$
16.7
$
26.4
$
(9.7)
(36.7)
%
Operating Margin
15.4
%
22.6
%
Specialty Products segment sales decreased by $8.8 million during the third quarter of 2022 as compared to the same quarter in 2021. The decrease in Specialty Products sales was due to project timing shifts, lower HLNG vehicle tank sales driven by higher natural gas prices and our customers’ availability of semiconductors due to macroeconomic conditions, partially offset by favorable sales in hydrogen and helium applications, record sales in space applications and favorable sales in water treatment, each of which had double digit growth during the third quarter of 2022 as compared to the same quarter in 2021.
Specialty Products segment gross profit decreased by $6.5 million during the third quarter of 2022 as compared to the same quarter in 2021, and gross profit margin decreased by 320 basis points. The decrease in gross profit and the related margin was mainly driven by overall product and project volume mix.
Specialty Products segment SG&A expenses increased by $2.9 million during the third quarter of 2022 as compared to the same quarter in 2021 primarily driven by ramp up in the business and acquisition additions.
Specialty Products — Results of Operations for the Nine Months Ended September 30, 2022 and 2021
Nine Months Ended
Current Year-to-date vs. Prior Year-to-date Period
September 30, 2022
September 30, 2021
Variance ($)
Variance (%)
Sales
$
330.9
$
301.0
$
29.9
9.9
%
Gross Profit
106.2
105.6
0.6
0.6
%
Gross Profit Margin
32.1
%
35.1
%
SG&A Expenses
$
43.5
$
32.5
$
11.0
33.8
%
SG&A Expenses (% of Sales)
13.1
%
10.8
%
Operating Income
$
53.7
$
67.7
$
(14.0)
(20.7)
%
Operating Margin
16.2
%
22.5
%
Specialty Products segment sales increased by $29.9 million ($3.5 million organically) during the first nine months of 2022 as compared to the same period in 2021. The increase in Specialty Products sales was primarily driven by favorable sales in hydrogen and helium applications, water treatment, space applications, food & beverage applications and carbon capture, each of which had double digit growth during the first nine months of 2022 as compared to the same period in 2021. The sales increase was partially offset by lower HLNG vehicle tank sales driven by higher natural gas prices and our customers’ availability of semiconductors due to macroeconomic conditions.
Specialty Products segment gross profit increased by $0.6 million during the first nine months of 2022 as compared to the same period in 2021. The increase in gross profit was mainly driven by overall product and project volume mix.
Specialty Products segment SG&A expenses increased by $11.0 million during the first nine months of 2022 as compared to the same period in 2021 primarily driven by ramp up in the business and acquisition additions.
Repair, Service & Leasing — Results of Operations for the Three Months Ended September 30, 2022 and 2021
Three Months Ended
Current Quarter vs. Prior Year Same Quarter
September 30, 2022
September 30, 2021
Variance ($)
Variance (%)
Sales
$
49.7
$
46.3
$
3.4
7.3
%
Gross Profit
19.1
9.4
9.7
103.2
%
Gross Profit Margin
38.4
%
20.3
%
SG&A Expenses
$
3.9
$
4.9
$
(1.0)
(20.4)
%
SG&A Expenses (% of Sales)
7.8
%
10.6
%
Operating Income
$
12.0
$
2.2
$
9.8
445.5
%
Operating Margin
24.1
%
4.8
%
For the third quarter of 2022, Repair, Service & Leasing segment sales increased by $3.4 million as compared to the same quarter in 2021. Similar to the comments previously mentioned in the consolidated results section, the increase was mainly driven by favorable sales in parts, repairs, and services, aftermarket fans, aftermarket air cooled heat exchangers and in our lifecycle business, partially offset by a decrease in our leasing business.
During the third quarter of 2022, Repair, Service & Leasing segment gross profit increased by $9.7 million as compared to the same quarter in 2021, and gross profit margin increased by 1,810 basis points. The increase in gross profit and gross profit margin was driven by more high margin, short-lead time replacement equipment sales during the third quarter of 2022 as compared to the same quarter in 2021. Furthermore, during the third quarter of 2021 we incurred unfavorable material costs relative to our leasing business which we did not incur during the third quarter of 2022.
Repair, Service & Leasing segment SG&A expenses decreased by $1.0 million during the third quarter of 2022, and SG&A expenses as a percentage of sales improved by 280 basis points mainly due to lower employee-related costs.
Repair, Service & Leasing — Results of Operations for the Nine Months Ended September 30, 2022 and 2021
Nine Months Ended
Current Year-to-date vs. Prior Year-to-date Period
September 30, 2022
September 30, 2021
Variance ($)
Variance (%)
Sales
$
154.4
$
142.3
$
12.1
8.5
%
Gross Profit
53.7
36.2
17.5
48.3
%
Gross Profit Margin
34.8
%
25.4
%
SG&A Expenses
$
11.5
$
13.7
$
(2.2)
(16.1)
%
SG&A Expenses (% of Sales)
7.4
%
9.6
%
Operating Income
$
32.3
$
16.1
$
16.2
100.6
%
Operating Margin
20.9
%
11.3
%
For the first nine months of 2022, Repair, Service & Leasing segment sales increased by $12.1 million as compared to the same period in 2021. This increase was mainly driven by favorable sales in parts, repairs, and services, aftermarket fans, aftermarket air cooled heat exchangers and aftermarket L.A. Turbine, partially offset by a decrease in our leasing business.
During the first nine months of 2022, Repair, Service & Leasing segment gross profit increased by $17.5 million as compared to the same period in 2021, and gross profit margin increased by 930 basis points. Similar to the comments in results of operations for the three months ended September 30, 2022 and 2021 above, the increase in gross profit and gross profit margin was driven by more high margin, short-lead time replacement equipment sales during the first nine months of 2022 as compared to the first nine months of 2021. Furthermore, during the first nine months of 2021 we incurred unfavorable material costs relative to our leasing business which we did not incur during first nine months of 2022.
Repair, Service & Leasing segment SG&A expenses decreased by $2.2 million during the first nine months of 2022 as compared to the same period in 2021, and SG&A expenses as a percentage of sales improved by 210 basis points mainly due to lower employee-related costs.
Corporate
Corporate SG&A expenses decreased by $0.4 million during the third quarter of 2022 as compared to the same quarter in 2021 mainly due to lower legal fees and acquisition related expenses. Corporate SG&A expenses increased by $3.5 million in the first nine months of 2022 as compared to the same period in 2021 primarily due to higher employee-related costs.
Liquidity and Capital Resources
Debt Instruments and Related Covenants
Our debt instruments and related covenants are described in Note 8, “Debt and Credit Arrangements” to our unaudited condensed consolidated financial statements included under Item 1, “Financial Statements” in this report.
Sources and Uses of Cash
Our cash and cash equivalents totaled $89.5 million at September 30, 2022, a decrease of $32.7 million from the balance at December 31, 2021. Our foreign subsidiaries held cash of approximately $69.2 million and $91.2 million, at September 30, 2022, and December 31, 2021, respectively, to meet their liquidity needs. No material restrictions exist to accessing cash held by our foreign subsidiaries. We expect to meet our U.S. funding needs without repatriating non-U.S. cash and incurring incremental U.S. taxes. Cash equivalents are primarily invested in money market funds that invest in high quality, short-term instruments, such as U.S. government obligations, certificates of deposit, repurchase obligations, and commercial paper issued by corporations that have been highly rated by at least one nationally recognized rating organization, and in the case of cash equivalents in China, obligations of local banks. We believe that our existing cash and cash equivalents, funds available under our senior secured revolving credit facility due October 2026 or other financing alternatives, and cash provided by operations will be sufficient to meet our normal working capital needs, capital expenditures, and investments for the foreseeable future.
Cash provided by operating activities was $50.3 million for the nine months ended September 30, 2022, an increase of $91.9 million compared to cash used in operating activities of $41.6 million for the nine months ended September 30, 2021 primarily due to an increase in operating cash provided by working capital, particularly within accounts payable and inventory, during the nine months ended September 30, 2022.
Cash used in investing activities was $70.3 million and $308.4 million for the nine months ended September 30, 2022 and 2021, respectively. During the nine months ended September 30, 2022, we used approximately $25.8 million for the acquisitions of Fronti Fabrications, CSC Cryogenic Service Center, 100% of a joint venture in AdEdge India and a working capital settlement related to our 2021 acquisition of AdEdge, $4.9 million for investments in Hy24 and Gold Hydrogen LLC, partially offset by $9.4 million cash received from settlement of our April 1, June 7 and July 8, 2022 cross-currency swaps. During the nine months ended September 30, 2021, we used approximately $169.1 million for the acquisitions of Cryo Technologies, Inc., L.A. Turbine and AdEdge Holdings LLC. We used $103.2 million for investments in Svante Inc., Transform Materials LLC, Cryomotive GmbH, Earthly Labs Inc. and an additional investment in HTEC Hydrogen Technology & Energy Corporation (“HTEC”). During the nine months ended September 30, 2022, we paid approximately $48.2 million for capital expenditures as compared to $36.5 million for the nine months ended September 30, 2021.
Cash used in financing activities was $9.4 million for the nine months ended September 30, 2022 and cash provided by financing activities was $326.3 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, we borrowed $503.3 million on credit facilities and repaid $511.2 million in borrowings on credit facilities, primarily driven by debt positioning related to the rate swap agreements mentioned in Note 8, Debt and Credit Arrangements, to pay down outstanding debt, to fund the acquisitions of Fronti Fabrications, CSC Cryogenic Service Center, and 100% of a joint venture in AdEdge India and investments in Hy24 and Gold Hydrogen LLC. During the nine months ended September 30, 2021, we borrowed $644.1 million on credit facilities and repaid $321.6 million in borrowings on credit facilities primarily to fund the acquisitions and investments mentioned in the paragraph above.
Cash Requirements
We do not currently anticipate any unusual cash requirements for working capital needs for the year ending December 31, 2022. Management anticipates we will be able to satisfy cash requirements for our ongoing business for the foreseeable future with cash generated by operations, existing cash balances and available borrowings under our credit facilities. Capital expenditures for the remaining three months of 2022 is expected to be in the range of $15.0 million to $20.0 million.
Orders and Backlog
We consider orders to be those for which we have received a firm signed purchase order or other written contractual commitments from the customer. Backlog is comprised of the portion of firm signed purchase orders or other written contractual commitments from customers for which work has not been performed, or is partially completed, that we have not recognized as revenue and excludes unexercised contract options and potential orders. Our backlog as of September 30, 2022 was a record $2,254.1 million, compared to $1,102.2 million as of September 30, 2021 and $1,953.3 million as of June 30, 2022.
The tables below represent orders received and backlog by segment for the periods indicated (dollars in millions):
Cryo Tank Solutions segment orders for the three months ended September 30, 2022 were $120.2 million compared to $133.3 million for the three months ended September 30, 2021 and $106.1 million for the three months ended June 30, 2022. The decrease in Cryo Tank Solutions segment orders during the three months ended September 30, 2022 when compared to the same quarter last year and increase when compared to the prior quarter was primarily driven by order intake for mobile equipment. Cryo Tank Solutions segment backlog at September 30, 2022 totaled $355.2 million compared to $345.3 million as of September 30, 2021 and $331.9 million as of June 30, 2022.
Heat Transfer Systems segment orders for the three months ended September 30, 2022 were $357.7 million compared to $41.1 million for the three months ended September 30, 2021 and $470.1 million for the three months ended June 30, 2022. The decrease in orders during the three months ended September 30, 2022 when compared to the prior quarter was mainly due to higher order intake for big LNG during the prior quarter. The increase in orders during the three months ended September 30, 2022 when compared to the same quarter last year was mainly driven by higher order intake for LNG including big and mid-scale LNG, liquefaction systems and cold box projects. Heat Transfer Systems segment backlog at September 30, 2022 totaled a record $1,225.4 million, up 265.7% over the third quarter of 2021 and up 22.1% over the second quarter of 2022.
Specialty Products segment orders for the three months ended September 30, 2022 were $202.9 million compared to $131.3 million for the three months ended September 30, 2021 and $265.7 million for the three months ended June 30, 2022. Comparatively, during the three months ended September 30, 2022, we recorded hydrogen orders of $102.4 million that included one liquefaction system whereas during the three months ended September 30, 2021, we recorded hydrogen equipment-only orders of $43.6 million that included no large hydrogen or helium liquefaction orders, and during the three months ended June 30, 2022, we recorded hydrogen orders of $151.3 million that included multiple hydrogen liquefaction orders. We continue to see lower order intake for HLNG vehicle tanks due to higher natural gas prices. Specialty Products segment backlog totaled a record $666.1 million as of September 30, 2022, compared to $381.2 million as of September 30, 2021 and $570.4 million as of June 30, 2022.
Repair, Service & Leasing segment orders for the three months ended September 30, 2022 were a record $61.7 million compared to $52.9 million for the three months ended September 30, 2021 and $47.4 million for the three months ended June 30, 2022. The increase in orders was mainly driven by record order intake in our leasing business. Repair, Service & Leasing segment backlog totaled $41.6 million as of September 30, 2022, compared to $54.4 million as of September 30, 2021 and $48.5 million as of June 30, 2022.
Application of Critical Accounting Policies
Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. As such, some accounting policies have a significant impact on amounts reported in these unaudited condensed consolidated financial statements. A summary of those significant accounting policies can be found in our Annual Report on Form 10-K for the year ended December 31, 2021. In particular, judgment is used in areas such as revenue from contracts with customers, goodwill, indefinite-lived intangibles, long-lived assets (including finite-lived intangible assets), product warranty costs, and pensions. There have been no significant changes to our critical accounting policies since December 31, 2021.
Forward-Looking Statements
We are 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.” These forward-looking statements include statements concerning the Company’s business plans, including statements regarding completed acquisitions, divestitures and investments, cost synergies and efficiency savings, objectives, future orders, revenues, margins, segment sales mix, earnings or performance, liquidity and cash flow, inventory levels, capital expenditures, supply chain challenges, inflationary pressures including materials costs and pricing increases, business trends, clean energy market
opportunities including addressable markets and projected industry-wide investments, carbon and GHG emission targets, governmental initiatives, including executive orders and other information that is not historical in nature. Forward-looking statements may be identified by terminology such as “may,” “will,” “should,” “could,” “expects,” “anticipates,” “believes,” “projects,” “forecasts,” “outlook,” “guidance,” “continue,” “target,” or the negative of such terms or comparable terminology.
Forward-looking statements contained herein (including future cash contractual obligations, liquidity, cash flow, orders, results of operations, projected revenues, margins, capital expenditures, industry and business trends, cost synergies and savings objectives, clean energy market opportunities and government initiatives, among other matters) or in other statements made by us are made based on management’s expectations and beliefs concerning future events impacting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause the Company’s actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf. These include: the other factors discussed in Item 1A. “Risk Factors” and the factors discussed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021, which should be reviewed carefully; risks relating to the outbreak and continued uncertainty associated with the coronavirus (Covid-19) and the conflict between Russia and Ukraine, including potential energy shortages in Europe and elsewhere; risks relating to derivative instruments and hedging programs; Chart’s ability to successfully integrate recent acquisitions, and achieve the anticipated revenue, earnings, accretion and other benefits from these acquisitions; slower than anticipated growth and market acceptance of new clean energy product offerings; inability to achieve expected pricing increases or continued supply chain challenges including volatility in raw materials cost and supply; estimated segment revenues, future revenue, earnings, cash flows and margin targets and run rates. These factors should not be construed as exhaustive and there may also be other risks that we are unable to predict at this time.
All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report and are expressly qualified in their entirety by the cautionary statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as the same may be updated from time to time. We undertake no obligation to update or revise forward-looking statements which may be made to reflect events or circumstances that arise after the filing date of this document or to reflect the occurrence of unanticipated events, except as otherwise required by law.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, our operations are exposed to fluctuations in interest rates and foreign currency values that can affect the cost of operating and financing. Accordingly, we address a portion of these risks through a program of risk management.
Interest Rate Risk: Our primary interest rate risk exposure results from the various floating rate pricing mechanisms contained in our senior secured revolving credit facility due October 2026. If interest rates were to increase 100 basis points (1 percent) from the weighted-average interest rate of 3.1% at September 30, 2022, and assuming no changes in the $580.8 million of borrowings outstanding under the senior secured revolving credit facility due October 2026 at September 30, 2022, our additional annual expense would be approximately $5.8 million on a pre-tax basis.
Foreign Currency Exchange Rate Risk: We operate in the United States and other foreign countries, which creates exposure to foreign currency exchange fluctuations in the normal course of business, which can impact our financial position, results of operations, cash flows, and competitive position. The financial statements of foreign subsidiaries are translated into their U.S. dollar equivalents at end-of-period exchange rates for assets and liabilities, while income and expenses are translated at average monthly exchange rates. Translation gains and losses are components of other comprehensive income as reported in the unaudited condensed consolidated statements of income and comprehensive income. Translation exposure is primarily with the euro, the Czech koruna, the Chinese yuan, and the Indian rupee. During the third quarter of 2022, the U.S. dollar strengthened in relation to the euro by 7%, the Chinese yuan by 6% and the Czech koruna by 6%. At September 30, 2022, a hypothetical 10% weakening of the U.S. dollar would not materially affect our financial statements.
Transaction Gains and Losses: Chart’s primary transaction exchange rate exposures are with the euro, the Chinese yuan, the Czech koruna, the Indian rupee, the Australian dollar, the British pound, the Canadian dollar and the Japanese yen. Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in the unaudited condensed consolidated statements of income and comprehensive income as a component of foreign currency (gain) loss.
Derivative Instruments: We enter into foreign exchange forward contracts to hedge anticipated and firmly committed foreign currency transactions. At September 30, 2022, a hypothetical 10% weakening of the U.S. dollar would not materially affect our outstanding foreign exchange forward contracts. We enter into a combination of cross-currency swaps and foreign exchange collars as a net investment hedge of our investments in certain international subsidiaries that use the euro as their functional currency in order to reduce the volatility caused by changes in exchange rates. As disclosed in Note 8, “Debt and Credit Arrangements,” we purchased an out-of-the-money protective call while writing a put option with a strike price at which the premium received is equal to the premium of the protective call purchased, which involved no initial capital outlay. The call was structured with a strike price higher than our cost basis in such investments, thereby limiting any foreign exchange losses to approximately $11.4 million on a pre-tax basis.We do not use derivative financial instruments for speculative or trading purposes. The terms of the contracts are generally one to three years.
EUR Revolver Borrowings: Additionally, assuming no changes in the euro $88.0 million in EUR Revolver Borrowings outstanding under the senior secured revolving credit facility due October 2026 and an additional 100 basis points (1 percent) strengthening in the U.S dollar in relation to the euro as of the beginning of 2022, during the three months ended September 30, 2022, our additional unrealized foreign currency gain would be approximately $0.8 million on a pre-tax basis.
Market Price Sensitive Instruments
In connection with the pricing of the 1.00% Convertible Senior Subordinated Notes due November 2024 (the “2024 Notes”), we entered into privately-negotiated convertible note hedge transactions (the “Note Hedge Transactions”) with certain parties, including affiliates of the initial purchasers of the 2024 Notes (the “Option Counterparties”). These Note Hedge Transactions are expected to reduce the potential dilution upon any future conversion of the 2024 Notes.
We also entered into separate, privately-negotiated warrant transactions with the Option Counterparties to acquire up to 4.41 million shares of our common stock. The warrant transactions will have a dilutive effect with respect to our common stock to the extent that the price per share of our common stock exceeds the strike price of the warrants unless we elect, subject to certain conditions, to settle the warrants in cash. The strike price of the warrant transactions related to the 2024 Notes was initially $71.775 per share. Further information is located in Note 8, “Debt and Credit Arrangements” to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) as of September 30, 2022. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2022, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) is accumulated and communicated to our management including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As disclosed in Note 15, “Commitments and Contingencies,” Chart was named in lawsuits (including lawsuits filed in the U.S. District Court for the Northern District of California) filed against Chart and other defendants with respect to the alleged failure of a stainless steel cryobiological storage tank (model MVE 808AF-GB) at the Pacific Fertility Center in San Francisco, California. We hereby incorporate by reference into this Item 1 the disclosure under the headings “Note 15, Commitments and Contingencies – Stainless Steel Cryobiological Tank Legal Proceedings.”
We are occasionally subject to various other legal claims related to performance under contracts, product liability, taxes, employment matters, environmental matters, intellectual property, and other matters incidental to the normal course of our business. Based on our historical experience in litigating these claims, as well as our current assessment of the underlying merits of the claims and applicable insurance, if any, management believes that the final resolution of these matters will not have a material adverse effect on our financial position, liquidity, cash flows, or results of operations. Future developments may, however, result in resolution of these legal claims in a way that could have a material adverse effect.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A. “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2021 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased (1)
Average Price Paid Per Share (1)
Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 - 31, 2022
34
$
148.51
—
$
—
Aug 1 – 31, 2022
—
—
—
—
Sept 1 – 30, 2022
—
—
—
—
Total
34
148.51
—
$
—
_______________
(1)Includes shares of common stock surrendered to us during the third quarter of 2022 by participants under our share-based compensation plans to satisfy tax withholding obligations relating to the vesting or payment of equity awards for an aggregate purchase price of approximately $5,049. The total number of shares repurchased represents the net shares issued to satisfy tax withholdings. All such repurchased shares were subsequently retired during the three months ended September 30, 2022.
* The Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
57
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.
