CHART INDUSTRIES, INC. The following discussion of our results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements. Actual results may differ materially from those discussed below. See "Forward-Looking Statements" at the end of this discussion and Item 1A. "Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with this discussion. Overview We are a leading independent global manufacturer of highly engineered equipment servicing multiple applications in theEnergy and Industrial Gas markets. Our unique product portfolio is used in every phase of the liquid gas supply chain, including upfront engineering, service and repair. Being at the forefront of the clean energy transition, Chart is a leading provider of technology, equipment and services related to liquefied natural gas, hydrogen, biogas and CO2 Capture amongst other applications. We are committed to excellence in environmental, social and corporate governance (ESG) issues both for our company as well as our customers. With over 25 global locations fromthe United States toAsia ,Australia ,India ,Europe andSouth America , we maintain accountability and transparency to our team members, suppliers, customers and communities. COVID-19 Update While the recent outbreak and continued uncertainty associated with the coronavirus (COVID-19) did not have a material adverse effect on our reported results for the first nine months of 2020, we continue to actively monitor the impact of the COVID-19 outbreak on our results of operations for the remainder of 2020 and beyond. The extent to which our operations will be impacted by the outbreak will largely depend on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity, or reemergence, of the outbreak and actions by government authorities to contain the outbreak or treat its impact, among other things. Medical oxygen-related orders, generally for use with COVID-19 patients, increased 7.6% in the third quarter of 2020 compared to the second quarter making the third quarter the highest medical oxygen-related order quarter of 2020. We had expected to see a reduction to more typical pre-COVID-19 order levels for these applications, but a heightened need for oxygen equipment inIndia was the primary driver of the increase in this demand. In terms of macro drivers, COVID-19 has sparked an emphasis on health and clean energy transformation, in many cases, accelerating efforts and incenting governments to think through investments in renewable energy sources and storage, including hydrogen, carbon capture, biogas/biomethane and LNG. We continue to expand our footprint in these varied clean energy spaces as highlighted by our recent increased investments in hydrogen-related businesses. Governments have been responding on a massive scale with stimulus packages, many of which are targeted to kick starting or further progressing the transition to clean energy and to achieve their climate targets. Third Quarter 2020 Highlights As previously announced onAugust 25, 2020 , we signed a definitive agreement to divest our cryobiological products business within our Distribution & Storage Western Hemisphere ("D&S West") segment to Cryoport, Inc. ("Buyer"). OnOctober 1, 2020 , we finalized the sale for net cash proceeds of$317.1 million , inclusive of the base purchase price of$320.0 million less estimated closing date adjustments of$2.9 million (the "Divestiture"). The strategic decision to divest of our cryobiological products business reflects our strategy and capital allocation approach to focus on our core capabilities and offerings. Our cryobiological products business asset group, met the criteria to be held for sale. Furthermore, we determined that the assets held for sale qualify for discontinued operations. The financial information presented and discussion of results that follows is presented on a continuing operations basis. We continue to see strengthening demand across the business with the exception of our Energy & Chemicals FinFans ("E&C FinFans") segment where third quarter 2020 orders were down$28.9 million when compared to the third quarter of 2019. Ending backlog as ofSeptember 30, 2020 was$684.9 million compared to$745.2 million as ofSeptember 30, 2019 . Backlog as ofSeptember 30, 2019 included$135 million ofVenture Global's Calcasieu Pass big LNG orders ("Calcasieu Pass "). As of the end of the third quarter 2020, there was$46.4 million ofCalcasieu Pass backlog remaining. Excluding Calcasieu Pass, consolidated backlog increased by$28.3 million or 4.6% in the current quarter compared to the prior year quarter. Our D&S West segment backlog atSeptember 30, 2020 totaled$179.7 million and is the highest in the history of the business; up 54.0% over the third quarter of 2019 and 23.3% over the second quarter of 2020, which was then a record. Furthermore, Distribution and Storage Eastern Hemisphere ("D&S East") segment backlog atSeptember 30, 2020 totaled 33
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$229.0 million and is a record high compared to$203.8 million as ofSeptember 30, 2019 and$218.2 million as ofJune 30, 2020 . Third quarter 2020 gross margin as a percent of sales of 28.8% increased from 27.5% in the third quarter of 2019 and was flat to the 28.8% gross margin as a percent of sales reported in the second quarter of 2020. The increase current quarter over prior year quarter was primarily driven by Venture Global's Calcasieu Pass LNG export terminal project. Selling, general and administrative ("SG&A") expenses as a percentage of sales in the third quarter of 2020 decreased as compared to the third quarter of 2019 in three of our four segments as cost savings from recent restructuring efforts took effect. Outlook Our 2020 full year outlook reflects increased clarity in our markets and economy after the disruption earlier in the year from the onset of the COVID-19 pandemic. We continue to structure the business for profitable growth. SinceJanuary 1, 2020 , we have reduced headcount by 25% (over 1,100 headcount reduction) while investing in the commercial and engineering organizations. OnJuly 17, 2020 , we announced internally our intention to close our E&C FinFans segment's air cooled heat exchanger leased facility inTulsa, Oklahoma and consolidate its operations into ourBeasley, Texas location at which we own 260 acres of land. This closure is a cost reduction measure within E&C FinFans to structure the business for profitable growth in equipment for midstream and upstream energy applications. Total costs related to this closure are expected to be approximately$9 million , of which$1.5 million has been spent year to date, associated with severance, relocation and moving expenses. We expect this project to be completed byJune 30, 2021 . Through September, these changes, along with other cost measures implemented in 2020, are expected to result in annualized savings of approximately$75 million . Given the cost actions and our profitable volume mix, we expect gross margin as a percent of sales to continue to expand throughout the last three months of 2020. Furthermore,Venture Global's Calcasieu Pass project remains on schedule, with$100 million of expected revenue in our Energy & Chemicals Cryogenics ("E&C Cryogenics") segment in 2020. Our capital expenditures are flexible, and we will continue to assess the capital expenditures budget as the year progresses. We continue to anticipate capital expenditures spend will be in the$30 million to$35 million range. 34
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Consolidated Results for the Three Months EndedSeptember 30, 2020 and 2019, andJune 30, 2020 The following table includes key metrics used to evaluate our business and measure our performance and represents selected financial data for our operating segments for the three months endedSeptember 30, 2020 and 2019 andJune 30, 2020 (dollars in millions). Financial data for the three months endedJune 30, 2020 has been included to provide additional information regarding our business trends on a sequential quarter basis. Selected Financial Information Current Quarter vs. Current Quarter vs. Three Months Ended PriorYear Quarter Prior Sequential Quarter September September Variance Variance Variance Variance 30, 2020 30, 2019 June 30, 2020 ($) (%) ($) (%) Sales D&S East$ 85.1 $ 70.4 $ 79.7 $ 14.7 20.9 %$ 5.4 6.8 % D&S West 91.1 93.3 86.0 (2.2) (2.4) % 5.1 5.9 % E&C Cryogenics 64.8 48.9 63.7 15.9 32.5 % 1.1 1.7 % E&C FinFans 40.5 128.6 64.1 (88.1) (68.5) % (23.6) (36.8) % Intersegment eliminations (8.3) (3.2) (3.9) (5.1) 159.4 % (4.4) 112.8 % Consolidated$ 273.2 $ 338.0 $ 289.6 $ (64.8) (19.2) %$ (16.4) (5.7) % Gross Profit D&S East$ 19.6 $ 16.3 $ 15.0 $ 3.3 20.2 %$ 4.6 30.7 % D&S West 28.5 29.2 29.7 (0.7) (2.4) % (1.2) (4.0) % E&C Cryogenics 21.3 7.9 21.4 13.4 169.6 % (0.1) (0.5) % E&C FinFans 9.2 39.8 17.2 (30.6) (76.9) % (8.0) (46.5) % Intersegment eliminations - (0.3) - 0.3 100.0 % - - % Consolidated$ 78.6 $ 92.9 $ 83.3 $ (14.3) (15.4) %$ (4.7) (5.6) % Gross Profit Margin D&S East 23.0 % 23.2 % 18.8 % D&S West 31.3 % 31.3 % 34.5 % E&C Cryogenics 32.9 % 16.2 % 33.6 % E&C FinFans 22.7 % 30.9 % 26.8 % Consolidated 28.8 % 27.5 % 28.8 % SG&A Expenses D&S East$ 8.8 $ 8.8 $ 6.1 $ - - %$ 2.7 44.3 % D&S West 7.7 10.2 8.3 (2.5) (24.5) % (0.6) (7.2) % E&C Cryogenics 4.8 5.1 6.3 (0.3) (5.9) % (1.5) (23.8) % E&C FinFans 4.4 10.7 6.2 (6.3) (58.9) % (1.8) (29.0) % Corporate 15.4 20.9 16.6 (5.5) (26.3) % (1.2) (7.2) % Consolidated$ 41.1 $ 55.7 $ 43.5 $ (14.6) (26.2) %$ (2.4) (5.5) % SG&A Expenses (% of Sales) D&S East 10.3 % 12.5 % 7.7 % D&S West 8.5 % 10.9 % 9.7 % E&C Cryogenics 7.4 % 10.4 % 9.9 % E&C FinFans 10.9 % 8.3 % 9.7 % Consolidated 15.0 % 16.5 % 15.0 % 35
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Current Quarter vs. Current Quarter vs.
Three Months Ended Prior Year Quarter Prior Sequential Quarter
September 30, September 30, Variance Variance Variance Variance
2020 2019 June 30, 2020 ($) (%) ($) (%)
Operating Income (Loss) (1)
D&S East (2) (3) $ 9.9 $ 7.1 $ 8.1 $ 2.8 39.4 % $ 1.8 22.2 %
D&S West 19.7 17.8 20.1 1.9 10.7 % (0.4) (2.0) %
E&C Cryogenics 15.6 3.6 14.3 12.0 333.3 % 1.3 9.1 %
E&C FinFans (3) (1.7) 16.2 (0.2) (17.9) (110.5) % (1.5) 750.0 %
Corporate (3) (4) (15.4) (21.0) (16.6) 5.6 (26.7) % 1.2 (7.2) %
Intersegment eliminations - (0.2) - 0.2 100.0 % - (100.0) %
Consolidated $ 28.1 $ 23.5 $ 25.7 $ 4.6 19.6 % $ 2.4 9.3 %
Operating Margin
D&S East 11.6 % 10.1 % 10.2 %
D&S West 21.6 % 19.1 % 23.4 %
E&C Cryogenics 24.1 % 7.4 % 22.4 %
E&C FinFans (4.2) % 12.6 % (0.3) %
Consolidated 10.3 % 7.0 % 8.9 %
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(1)Restructuring costs for the three months ended:
•September 30, 2020 were $1.9 ($0.1 - D&S East, $0.2 - D&S West, $1.1 - E&C
FinFans, and $0.5 - Corporate).
•September 30, 2019 were $1.5 ($0.3 - D&S East, $0.4 - D&S West, $0.2 - E&C
Cryogenics, and $0.6 - E&C FinFans).
•June 30, 2020 were $5.6 ($0.9 - D&S East, $0.2 - D&S West, $0.4 - E&C
Cryogenics, $2.5 - E&C FinFans, and $1.6 - Corporate).
(2)Includes a $2.6 gain on sale of a facility in China for the second quarter of
2020.
(3)Includes transaction-related costs of $1.4 related to integration activities
for previous acquisitions ($0.2 D&S East, $0.7 - E&C FinFans, and $0.5 -
Corporate).
(4)Includes transaction-related costs of $4.3 for the three months ended
September 30, 2019 .
Results of Operations for the Three Months Ended September 30, 2020 and 2019,
and June 30, 2020
Sales for the third quarter of 2020 compared to the same quarter in 2019
decreased $64.8 million , from $338.0 million to $273.2 million , or 19.2%. The
decrease in sales was primarily driven by the continued softness in demand for
midstream and upstream compression equipment within our E&C FinFans segment,
partially offset by an increase in big LNG sales within our E&C Cryogenics
segment and increased sales of mobile equipment and engineered tanks and systems
within our D&S East segment.
Gross profit decreased during the third quarter of 2020 compared to the third
quarter of 2019 by $14.3 million or 15.4%. This decrease was primarily driven by
lower volumes in our E&C FinFans segment, offset by volume increases in our E&C
Cryogenics segment. Gross profit as a percentage of sales increased quarter over
prior year quarter and decreased from the prior quarter on a consolidated basis.
SG&A expenses decreased by $14.6 million or 26.2% during the third quarter of
2020 compared to the same quarter in 2019 across multiple SG&A categories
primarily as a result of cost reduction initiatives. During the first half of
2020, we implemented certain cost reduction actions across all segments and
corporate to appropriately size our workforce with demand as well as eliminate
redundant work. Costs were primarily related to headcount reductions. These
actions resulted in total restructuring costs of $1.9 million , which were
recorded in cost of sales ($1.2 million ) and SG&A ($0.7 million ) and consisted
of mainly employee severance costs for the three months ended September 30,
2020 . These restructuring actions resulted in cost savings of $1.6 million in
the third quarter of 2020. As previously mentioned, subsequent to the end of the
second quarter 2020, we announced internally our intention to close our E&C
FinFans air cooled heat exchanger leased facility in Tulsa, Oklahoma and
consolidate its operations into our Beasley, Texas location. Total costs related
to this closure are expected to be approximately $9 million associated with
severance, relocation and moving expenses. Annualized cost savings resulting
from this facility consolidation are expected to be $12 million , and we expect
the project to be completed by June 30, 2021 . Through September, these changes,
along with other cost measures implemented in 2020, are expected to result in
annualized savings of approximately $75 million .
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During the third quarter of 2019, we implemented certain cost reduction or avoidance actions, including facility closures and relocations in both our E&C FinFans and D&S West segments. These actions resulted in restructuring costs of$1.5 million , primarily for severance in the third quarter of 2019, which were recorded in cost of sales ($1.0 million ) and SG&A ($0.5 million ). Interest Expense, Net and Financing Costs Amortization Interest expense, net for the three months endedSeptember 30, 2020 and 2019 was$6.5 million and$7.8 million , respectively. The decrease in interest expense, net, is primarily due to lower borrowings outstanding on our senior secured revolving credit facility during the third quarter of 2020 as compared to the third quarter of 2019. Interest expense for the three months endedSeptember 30, 2020 included$0.6 million of 1.0% cash interest and$2.0 million of non-cash interest accretion expense related to the carrying value of the convertible notes due 2024, and$3.8 million in interest related to borrowings on our senior secured revolving credit facility and term loan. Financing costs amortization was$1.1 million for the three months endedSeptember 30, 2020 as compared to$1.0 million for the three months endedSeptember 30, 2019 . Foreign Currency Gain For the three months endedSeptember 30, 2020 foreign currency gain was$0.8 million as compared to foreign currency gain of$1.7 million for the three months endedSeptember 30, 2019 . The variance between periods was primarily driven by fluctuations in theU.S dollar as compared to the euro and Chinese yuan.Unrealized Gain On Investment In Equity Securities During the third quarter of 2019, we made an investment in Stabilis Energy, Inc. ("Stabilis") by converting$7.0 million of a note receivable from Stabilis into an investment in their company stock. For the three months endedSeptember 30, 2020 and 2019 we recognized an unrealized gain on investment in equity securities on investment of$0.7 million and$2.6 million , respectively, from the subsequent mark-to-market. Income Tax Expense Income tax expense of$6.2 million and$5.2 million for the three months endedSeptember 30, 2020 and 2019 and represents taxes on bothU.S. and foreign earnings at a combined effective income tax rate of 28.2% and 27.4%, respectively. The effective income tax rate of 28.2% for the three months endedSeptember 30, 2020 differed from theU.S. federal statutory rate of 21% primarily due to excess tax benefits associated with share-based compensation, which is offset by the effect of income earned by our certain foreign entities being taxed at higher rates than theU.S. federal statutory rate, losses incurred by some of our foreign operations for which no benefit was recorded, and the establishment of an APB 23 deferred tax liability associated with our discontinued operations. The effective income tax rate of 27.4% for the three months endedSeptember 30, 2019 differed from theU.S. federal statutory rate of 21% primarily due to excess tax benefits associated with share-based compensation partially offset by the effect of income earned by certain of our foreign entities being taxed at higher rates than theU.S. federal statutory rate and losses incurred by certain of our Chinese operations for which no benefit was recorded. Net Income from Continuing Operations As a result of the foregoing, net income attributable to Chart for the three months endedSeptember 30, 2020 and 2019 was$15.6 million and$13.8 million , respectively. Discontinued Operations The results from our cryobiological related products business formerly reported in our D&S West segment are reflected in our consolidated financial statements as discontinued operations for all periods presented. For further information, refer to Note 2, "Discontinued Operations" of our unaudited condensed consolidated financial statements included under Item 1, "Financial Statements" in this report. 37
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Consolidated Results for the Nine Months EndedSeptember 30, 2020 and 2019 The following table includes key metrics used to evaluate our business and measure our performance and represents selected financial data for our operating segments for the nine months endedSeptember 30, 2020 and 2019 (dollars in millions): Selected Financial Information Current Year-to-date vs. Nine Months Ended Prior Year-to-date Period September 30, Variance Variance September 30, 2020 2019 ($) (%) Sales D&S East $ 234.8$ 216.8 $ 18.0 8.3 % D&S West 269.5 280.0 (10.5) (3.8) % E&C Cryogenics 190.7 131.3 59.4 45.2 % E&C FinFans 185.3 272.0 (86.7) (31.9) % Intersegment eliminations (15.6) (6.0) (9.6) 160.0 % Consolidated $ 864.7$ 894.1 $ (29.4) (3.3) % Gross Profit D&S East $ 51.7$ 36.7 $ 15.0 40.9 % D&S West 87.8 88.8 (1.0) (1.1) % E&C Cryogenics 58.8 18.3 40.5 221.3 % E&C FinFans 45.9 79.4 (33.5) (42.2) % Intersegment eliminations - (1.0) 1.0 (100.0) % Consolidated $ 244.2$ 222.2 $ 22.0 9.9 % Gross Profit Margin D&S East 22.0 % 16.9 % D&S West 32.6 % 31.7 % E&C Cryogenics 30.8 % 13.9 % E&C FinFans 24.8 % 29.2 % Consolidated 28.2 % 24.9 % SG&A Expenses D&S East $ 24.4$ 26.5 $ (2.1) (7.9) % D&S West 25.6 32.4 (6.8) (21.0) % E&C Cryogenics 17.6 22.6 (5.0) (22.1) % E&C FinFans 17.9 24.6 (6.7) (27.2) % Corporate 51.7 51.3 0.4 0.8 % Consolidated $ 137.2$ 157.4 $ (20.2) (12.8) %
SG&A Expenses (% of Sales)
D&S East 10.4 % 12.2 %
D&S West 9.5 % 11.6 %
E&C Cryogenics 9.2 % 17.2 %
E&C FinFans 9.7 % 9.0 %
Consolidated 15.9 % 17.6 %
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Current Year-to-date vs.
Nine Months Ended Prior Year-to-date Period
Variance Variance
September 30, 2020 September 30, 2019 ($) (%)
Operating Income (Loss) (1)
D&S East (2) $ 24.9 $ 7.1 $ 17.8 250.7 %
D&S West 58.7 52.9 5.8 11.0 %
E&C Cryogenics 38.6 (7.1) 45.7 100.0
E&C FinFans (0.8) 36.0 (36.8) (102.2) %
Corporate (3) (4) (51.7) (51.4) (0.3) 0.6 %
Intersegment eliminations - (0.9) 0.9 (100.0) %
Consolidated $ 69.7 $ 36.6 $ 33.1 90.4 %
Operating Margin
D&S East 10.6 % 3.3 %
D&S West 21.8 % 18.9 %
E&C Cryogenics 20.2 % (5.4) %
E&C FinFans (0.4) % 13.2 %
Consolidated 8.1 % 4.1 %
_______________
(1)Restructuring costs for the nine months ended:
•September 30, 2020 were $12.7 ($2.0 - D&S East, $1.2 - D&S West, $0.8 - E&C
Cryogenics, $6.0 - E&C FinFans, and $2.7 - Corporate).
•September 30, 2019 were $13.3 ($8.1 - D&S East, $0.8 - D&S West, $2.4 - E&C
Cryogenics, $1.8 - E&C FinFans, and $0.2 - Corporate).
(2)Includes a $2.6 gain on sale of a facility in China for the nine months ended
September 30, 2020 .
(3)Includes transaction-related costs of $7.0 for the nine months ended
September 30, 2019 .
(4)Includes transaction-related costs of $2.6 related to integration activities
for previous acquisitions ($0.2 - D&S East, $0.7 - E&C FinFans, and $1.7 -
Corporate) for the nine months ended September 30, 2019 .
Results of Operations for the Nine Months Ended September 30, 2020 and 2019
Sales for the first nine months of 2020 compared to the same period in 2019
decreased $29.4 million , from $894.1 million to $864.7 million , or 3.3%
(decreased 4.9% organically). AXC sales of $71.3 million and $60.1 million are
included in our E&C FinFans segment for the nine months ended September 30, 2020
and 2019, respectively. Excluding the impact of AXC, sales decreased, which was
primarily driven by the softness in demand for midstream and upstream
compression equipment within our E&C FinFans segment, partially offset by an
increase in big LNG sales within our E&C Cryogenics segment.
Gross profit increased during the first nine months of 2020 compared to the same
period of 2019 by $22.0 million or 9.9% (increased 15.5% organically), primarily
driven by volume in our E&C Cryogenics segment. Gross profit as a percentage of
sales increased year-to-date September 30, 2020 compared to the same period in
2019 on a consolidated basis and within three of our four operating segments:
D&S East, D&S West and E&C Cryogenics. Furthermore, in the first nine months of
2020, our E&C FinFans segment's gross profit as a percentage of E&C FinFans
segment sales, excluding AXC's gross profit of $8.0 million , was 33.2% as
compared to 29.1% in the first nine months of 2019, which is an improvement of
4.1 percentage points as compared to the same prior year period and the result
of ongoing cost structure improvements and favorable product mix.
SG&A expenses decreased by $20.2 million ($19.9 million organically), or 12.8%
(13.1% organically), during the first nine months of 2020 compared to the same
period in 2019 across multiple SG&A categories primarily as a result of cost
reduction initiatives. As previously mentioned, during the nine months of 2020,
we implemented certain cost reduction actions across all segments and corporate
to appropriately size our workforce with demand as well as eliminate redundant
work. Costs were primarily related to headcount reductions. These actions
resulted in total restructuring costs of $12.7 million , which were recorded in
cost of sales ($5.1 million ) and SG&A ($7.6 million ) and consisted of mainly
employee severance costs. These restructuring activities were substantially
completed by the end of the first half of 2020 as previously mentioned. As
previously mentioned, subsequent to the end of the second quarter 2020, we
announced internally our intention to close our E&C FinFans air cooled heat
exchanger leased facility in Tulsa, Oklahoma and consolidate its operations into
our Beasley, Texas location. Total costs related to this closure are expected to
be approximately $9 million associated with severance, relocation, asset
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disposals and moving expenses. As previously mentioned, annualized cost savings resulting from this facility consolidation are expected to be$12 million , and we expect the project to be completed byJune 30, 2021 . As also previously mentioned, during the nine months of 2019, we implemented certain cost reduction or avoidance actions, including facility closures and relocations. These actions were primarily related to facility consolidations in E&C Cryogenics, D&S West and E&C FinFans and a streamlining of the commercial activities surrounding our aftermarket services business in E&C Cryogenics, geographic realignment of our manufacturing capacity and a facility closure in D&S East, as well as departmental restructuring, including headcount reductions in each of these segments. These actions resulted in property, plant and equipment disposals and severance costs of$13.3 million in the nine months of 2019, which were recorded in cost of sales ($10.5 million ) and SG&A ($2.8 million ). Interest Expense, Net and Financing Costs Amortization Interest expense, net for the nine months endedSeptember 30, 2020 and 2019 was$21.2 million and$18.5 million , respectively. The increase in interest expense, net is mainly due to the nine months endedSeptember 30, 2020 having a full nine months of term loan interest included whereas the prior comparable period only included three months of term loan interest. This was partially offset by a decrease in our interest expense on our senior secured revolving credit facility during the nine months endedSeptember 30, 2020 . Interest expense for the nine months endedSeptember 30, 2020 included$1.9 million of 1.0% cash interest and$5.9 million of non-cash interest accretion expense related to the carrying value of the convertible notes due 2024, and$13.2 million in interest related to borrowings on our senior secured revolving credit facility and term loan. Financing costs amortization was$3.2 million for first nine months of 2020 as compared to$2.0 million for the first nine months of 2019. Foreign Currency Loss (Gain) For the nine months endedSeptember 30, 2020 foreign currency loss was$0.8 million as compared to foreign currency gain of$1.9 million for the nine months endedSeptember 30, 2019 . The variance between periods was primarily driven by fluctuations in theU.S dollar as compared to the euro and Chinese yuan.Unrealized Loss (Gain) On Investment In Equity Securities As previously mentioned, during the third quarter of 2019, we made an investment in Stabilis by converting$7.0 million of a note receivable from Stabilis into an investment in their company stock. For the nine months endedSeptember 30, 2020 , we recognized an unrealized loss on investment in equity securities of$3.1 million as compared to an unrealized gain of$2.6 million for the nine months endedSeptember 30, 2019 , from the subsequent mark-to-market. Income Tax Expense Income tax expense of$8.9 million and$5.3 million for the nine months endedSeptember 30, 2020 and 2019 and represents taxes on bothU.S. and foreign earnings at a combined effective income tax rate of 21.5% and 25.7%, respectively. The effective income tax rate of 21.5% for the nine months endedSeptember 30, 2020 differed from theU.S. federal statutory rate of 21% primarily due to excess tax benefits associated with share-based compensation, partially offset by the effect of income earned by certain of our foreign entities being taxed at higher rates than theU.S. federal statutory rate and losses incurred by certain of our foreign operations for which no benefit was recorded. The effective income tax rate of 25.7% for the nine months endedSeptember 30, 2019 differed from theU.S. federal statutory rate of 21% primarily due to excess tax benefits associated with share-based compensation partially offset by the effect of income earned by certain of our foreign entities being taxed at higher rates than theU.S. federal statutory rate and losses incurred by certain of our Chinese operations for which no benefit was recorded. Net Income from Continuing Operations As a result of the foregoing, net income attributable to Chart for the nine months endedSeptember 30, 2020 and 2019 was$31.4 million and$15.0 million , respectively. Discontinued Operations The results from our cryobiological related products business formerly reported in our D&S West segment are reflected in our consolidated financial statements as discontinued operations for all periods presented. For further information, refer to Note 2, "Discontinued Operations" of our unaudited condensed consolidated financial statements included under Item 1, "Financial Statements" in this report. 40
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Segment Results Our reportable and operational segments include: D&S East, D&S West, E&C Cryogenics, and E&C FinFans. Corporate includes operating expenses for executive management, accounting, tax, treasury, corporate development, human resources, information technology, investor relations, legal, internal audit, and risk management. Corporate support functions are not currently allocated to the segments. For further information, refer to Note 3, "Reportable Segments" note of our unaudited condensed consolidated financial statements included under Item 1, "Financial Statements" in this report. As a result of the Divestiture onOctober 1, 2020 , we are currently evaluating a change in our organizational structure and how we manage our business, including our segment structure. The following tables include key metrics used to evaluate our business and measure our performance and represents selected financial data for our operating segments for the three and nine months endedSeptember 30, 2020 and 2019 (dollars in millions): D&S East Results for the Three Months EndedSeptember 30, 2020 and 2019 Current Quarter vs. Three Months Ended Prior Year Quarter Variance Variance September 30, 2020 September 30, 2019 ($) (%) Sales $ 85.1 $ 70.4$ 14.7 20.9 % Gross Profit 19.6 16.3 3.3 20.2 % Gross Profit Margin 23.0 % 23.2 % SG&A Expenses $ 8.8 $ 8.8 $ - - % SG&A Expenses (% of Sales) 10.3 % 12.5 % Operating Income $ 9.9 $ 7.1$ 2.8 39.4 % Operating Margin 11.6 % 10.1 % For the third quarter of 2020, D&S East segment sales increased as compared to the same quarter in 2019. Sales of mobile equipment, engineered systems and tanks and HLNG vehicle tanks were favorable during the period. In particular, sales of mobile equipment improved by approximately$7.4 million inAsia as order activity increased in late 2019 and continued in 2020. During the third quarter of 2020, D&S East segment gross profit increased by$3.3 million as compared to the same quarter in 2019, and the related margin percentage decreased by 20 basis points. This increase in gross profit was mainly attributable to favorable volume, particularly inAsia , while the decrease in the related margin percentage was primarily driven by regional mix. D&S East segment SG&A expenses were flat to the same quarter in 2019. D&S East segment SG&A expenses as a percentage of D&S East segment sales improved to 10.3% for the third quarter of 2020 from 12.5% for the third quarter of 2019 mainly as a result of increased sales during the third quarter of 2020. Results for the Nine Months EndedSeptember 30, 2020 and 2019 Current Year-to-date vs. Nine Months Ended Prior Year-to-date Period September 30, Variance Variance September 30, 2020 2019 ($) (%) Sales $ 234.8$ 216.8 $ 18.0 8.3 % Gross Profit 51.7 36.7 15.0 40.9 % Gross Profit Margin 22.0 % 16.9 % SG&A Expenses $ 24.4$ 26.5 $ (2.1) (7.9) % SG&A Expenses (% of Sales) 10.4 % 12.2 % Operating Income $ 24.9$ 7.1 $ 17.8 250.7 % Operating Margin 10.6 % 3.3 % 41
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For the first nine months of 2020, D&S East segment sales increased as compared to the same period in 2019 due to increased sales of mobile equipment and engineered tanks and systems inAsia andEurope . During the first nine months of 2020, D&S East segment gross profit increased by$15.0 million as compared to the same period in 2019, and the related margin percentage increased by 510 basis points. This increase in gross profit was mainly attributable to higher volume, and costs related to the closing of ourChina brazed aluminum heat exchanger and LNG vehicle tank facilities that drove higher restructuring costs in the first nine months of 2019. The increase in the related margin percentage was primarily driven by restructuring costs in the first nine months of 2019 and favorable product mix as the D&S East segment gained better leverage on increased volume. D&S East segment SG&A expenses decreased by$2.1 million during the first nine months of 2020 as compared to the same period in 2019, primarily driven by a$2.6 million gain on sale of a facility inChina during the first nine months of 2020. D&S West Results for the Three Months EndedSeptember 30, 2020 and 2019 Current Quarter vs. Three Months Ended Prior Year Quarter Variance Variance September 30, 2020 September 30, 2019 ($) (%) Sales $ 91.1 $ 93.3$ (2.2) (2.4) % Gross Profit 28.5 29.2 (0.7) (2.4) % Gross Profit Margin 31.3 % 31.3 % SG&A Expenses $ 7.7 $ 10.2$ (2.5) (24.5) % SG&A Expenses (% of Sales) 8.5 % 10.9 % Operating Income $ 19.7 $ 17.8$ 1.9 10.7 % Operating Margin 21.6 % 19.1 % D&S West segment sales decreased during the third quarter of 2020 as compared to the same quarter in 2019. This decrease was primarily driven by a decrease in engineered systems and Microbulk systems sales partially offset by an increase in sales within LNG applications. D&S West segment gross profit decreased during the third quarter of 2020 as compared to the same quarter in 2019 primarily due to lower volume. The related margin decreased driven by product mix. D&S West segment SG&A expenses decreased during the third quarter of 2020 as compared to the same quarter in 2019 primarily driven by lower employee-related expenses and travel and entertainment expenses. Results for the Nine Months EndedSeptember 30, 2020 and 2019 Current Year-to-date vs. Nine Months Ended Prior Year-to-date Period September 30, Variance Variance September 30, 2020 2019 ($) (%) Sales $ 269.5$ 280.0 $ (10.5) (3.8) % Gross Profit 87.8 88.8 (1.0) (1.1) % Gross Profit Margin 32.6 % 31.7 % SG&A Expenses $ 25.6$ 32.4 $ (6.8) (21.0) % SG&A Expenses (% of Sales) 9.5 % 11.6 % Operating Income $ 58.7$ 52.9 $ 5.8 11.0 % Operating Margin 21.8 % 18.9 % D&S West segment sales decreased during the first nine months of 2020 as compared to the same period in 2019 primarily due to a decrease in HLNG vehicle tanks, packaged gas industrial applications and vaporizers. This decrease was partially driven by business disruptions where certain of our large customers shut down production temporarily due to the COVID-19 pandemic earlier in the year. 42
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D&S West segment gross profit decreased during the first nine months of 2020 as compared to the same period in 2019 primarily due to lower volume, while the related margin improvement was primarily driven by improved cost efficiency in industrial gas and HLNG vehicle tanks and warranty and freight across divisions. D&S West segment SG&A expenses decreased during the first nine months of 2020 as compared to the same period in 2019 primarily driven by general reductions across most SG&A categories. E&C Cryogenics Results for the Three Months EndedSeptember 30, 2020 and 2019 Current Quarter vs. Three Months Ended Prior Year Quarter Variance Variance September 30, 2020 September 30, 2019 ($) (%) Sales $ 64.8 $ 48.9$ 15.9 32.5 % Gross Profit 21.3 7.9 13.4 169.6 % Gross Profit Margin 32.9 % 16.2 % SG&A Expenses $ 4.8 $ 5.1$ (0.3) (5.9) % SG&A Expenses (% of Sales) 7.4 % 10.4 % Operating Income $ 15.6 $ 3.6$ 12.0 333.3 % Operating Margin 24.1 % 7.4 % For the third quarter of 2020, E&C Cryogenics segment sales increased as compared to the same quarter in 2019. The increase in sales is primarily related to revenue contributions from the continued execution of our backlog on Venture Global's Calcasieu Pass LNG export terminal project. During the third quarter of 2020, E&C Cryogenics segment gross profit increased by$13.4 million as compared to the same quarter in 2019. The increase in gross profit and the related increase in margin was mainly driven by volume in Venture Global's Calcasieu Pass LNG export terminal project and high margin, short-lead time replacement equipment. E&C Cryogenics segment SG&A expenses decreased during the third quarter of 2020 as compared to the same quarter in 2019 primarily driven by cost reduction efforts across most categories. Results for the Nine Months EndedSeptember 30, 2020 and 2019 Current Year-to-date vs. Nine Months Ended Prior Year-to-date Period September 30, Variance Variance September 30, 2020 2019 ($) (%) Sales $ 190.7$ 131.3 $ 59.4 45.2 % Gross Profit 58.8 18.3 40.5 221.3 % Gross Profit Margin 30.8 % 13.9 % SG&A Expenses $ 17.6$ 22.6 $ (5.0) (22.1) % SG&A Expenses (% of Sales) 9.2 % 17.2 % Operating Income (Loss) $ 38.6$ (7.1) $ 45.7 100.0 % Operating Margin 20.2 % (5.4) % For the first nine months of 2020, E&C Cryogenics segment sales increased as compared to the same period in 2019. The increase in sales is primarily related to revenue contributions from the continued execution of our backlog on big LNG, including Venture Global's Calcasieu Pass LNG export terminal project and other petrochemical applications. For the first nine months of 2020, E&C Cryogenics segment gross profit increased by$40.5 million as compared to the same period in 2019. The increase in gross profit and the related margin was mainly driven by volume in Venture Global's Calcasieu Pass LNG export terminal project and high margin, short-lead time replacement equipment. E&C Cryogenics segment SG&A expenses decreased during the first nine months of 2020 as compared to the same period in 2019 primarily driven by general reductions across most SG&A categories, especially employee-related costs in light of restructuring actions taken during the period. E&C Cryogenics segment restructuring costs were$0.8 million and$2.4 million for the nine months endedSeptember 30, 2020 and 2019, respectively. 43
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E&C FinFans Results for the Three Months EndedSeptember 30, 2020 and 2019 Current Year-to-date vs. Three Months Ended Prior Year-to-date Period September 30, Variance Variance September 30, 2020 2019 ($) (%) Sales $ 40.5$ 128.6 $ (88.1) (68.5) % Gross Profit 9.2 39.8 (30.6) (76.9) % Gross Profit Margin 22.7 % 30.9 % SG&A Expenses $ 4.4$ 10.7 $ (6.3) (58.9) % SG&A Expenses (% of Sales) 10.9 % 8.3 % Operating (Loss) Income $ (1.7)$ 16.2 $ (17.9) (110.5) % Operating Margin (4.2) % 12.6 % For the third quarter of 2020, E&C FinFans segment sales decreased as compared to the same quarter in 2019 primarily due to an industry-wide softness in demand for midstream and upstream compression equipment. As of the beginning of 2020, our previous air cooled heat exchanger facility inTulsa was closed, and its operations were combined with our AXC operations. During the third quarter of 2020, E&C FinFans segment gross profit decreased by$30.6 million as compared to the same quarter in 2019 mainly driven by lower volume and restructuring costs and other one-time costs of$1.6 million . E&C FinFans segment gross profit as a percentage of E&C FinFans segment sales was 22.7% as compared to 30.9% in the third quarter of 2019, which is a decline of 820 basis points on a quarter over prior year quarter basis primarily due to one-time costs incurred and lower volume. E&C FinFans segment SG&A expenses decreased during the third quarter of 2020 as compared to the same quarter in 2019 primarily driven by cost reduction efforts across most categories due to market conditions in 2020. Results for the Nine Months EndedSeptember 30, 2020 and 2019 Current Year-to-date vs. Nine Months Ended Prior Year-to-date Period September 30, Variance Variance September 30, 2020 2019 ($) (%) Sales $ 185.3$ 272.0 $ (86.7) (31.9) % Gross Profit 45.9 79.4 (33.5) (42.2) % Gross Profit Margin 24.8 % 29.2 % SG&A Expenses $ 17.9$ 24.6 $ (6.7) (27.2) % SG&A Expenses (% of Sales) 9.7 % 9.0 % Operating (Loss) Income $ (0.8)$ 36.0 $ (36.8) (102.2) % Operating Margin (0.4) % 13.2 % For the first nine months of 2020, E&C FinFans segment sales decreased as compared to the same period in 2019. Excluding the impact of AXC, sales decreased by$97.9 million , or 46.2%, mainly due to an industry-wide softness in demand for midstream and upstream compression equipment. As noted above in the quarter to date discussion, as of the beginning of 2020, our previous air cooled heat exchanger facility inTulsa was closed, and its operations were combined with our AXC operations. 44
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For the first nine months of 2020, E&C FinFans segment gross profit decreased by$33.5 million (decreased by$23.8 million organically) as compared to the same period in 2019. E&C FinFans segment gross profit as a percentage of E&C FinFans segment sales, excluding AXC's gross profit of$8.0 million , was 33.2% as compared to 29.1% in the first nine months of 2019, which is a decline of 410 basis points on a quarter over prior year quarter basis primarily due to lower volume and higher restructuring costs as further explained below. Restructuring costs for the E&C FinFans segment were$6.0 million ($4.1 million - Cost of sales,$1.9 million - SG&A) for the nine months endedSeptember 30, 2020 as compared to$1.8 million ($1.6 million - Cost of sales,$0.2 million - SG&A) for the nine months endedSeptember 30, 2019 . Restructuring costs for the first nine months of 2020 mainly consisted of severance costs associated with the announced closure of our E&C FinFans air cooled heat exchanger leased facility inTulsa, Oklahoma and consolidation of its operations into ourBeasley, Texas location at which we own 260 acres of land. This closure is a cost reduction measure within E&C FinFans to structure the business for profitable growth in equipment for midstream and upstream energy applications. E&C FinFans segment SG&A expenses decreased during the first nine months of 2020 as compared to the same period in 2019 primarily driven by cost reduction efforts across most categories due to market conditions in 2020, partially offset by higher restructuring costs. Corporate Corporate SG&A expenses decreased in the third quarter of 2020 as compared to the same quarter in 2019 by$5.5 million primarily due to lower transaction-related costs and employee-related costs. Corporate SG&A expenses increased by$0.4 million during the first nine months of 2020 as compared to the same period in 2019 primarily due to higher telecommunications and information technology equipment costs, restructuring costs partially offset by lower transaction-related costs. Liquidity and Capital Resources Debt Instruments and Related Covenants Our debt instruments and related covenants are described in Note 9, "Debt and Credit Arrangements" to our unaudited condensed consolidated financial statements included under Item 1, "Financial Statements" in this report. Sources and Use of Cash Our cash and cash equivalents totaled$120.7 million atSeptember 30, 2020 , an increase of$1.7 million from the balance atDecember 31, 2019 . Our foreign subsidiaries held cash of approximately$107.5 million and$64.2 million , atSeptember 30, 2020 , andDecember 31, 2019 , respectively, to meet their liquidity needs. No material restrictions exist to accessing cash held by our foreign subsidiaries. We expect to meet ourU.S. funding needs without repatriating non-U.S. cash and incurring incrementalU.S. taxes. Cash equivalents are primarily invested in money market funds that invest in high quality, short-term instruments, such asU.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 inChina , obligations of local banks. We believe that our existing cash and cash equivalents, funds available under our senior secured revolving credit facility dueJune 2024 ("SSRCF") or other financing alternatives, and cash provided by operations will be sufficient to meet our normal working capital needs, capital expenditures and prioritize the pay down of debt for the foreseeable future. Cash provided by operating activities was$94.2 million for the nine months endedSeptember 30, 2020 , an increase of$58.4 million compared to cash provided by operating activities of$35.8 million for the nine months endedSeptember 30, 2019 primarily due to higher net income and an increase in operating cash provided by working capital in the first nine months of 2020. Cash used in investing activities was$19.0 million and$632.7 million for the nine months endedSeptember 30, 2020 and 2019, respectively. During the nine months endedSeptember 30, 2020 , we paid approximately$26.9 million for capital expenditures as compared to$26.0 million for the nine months endedSeptember 30, 2019 . During the nine months endedSeptember 30, 2019 , we used approximately$600 million for the acquisition of AXC with proceeds from a common stock offering and borrowings under our SSRCF and term loan dueJune 2024 . Cash used in financing activities was$98.8 million for the nine months endedSeptember 30, 2020 compared to cash provided by financing activities of$547.2 million for the nine months endedSeptember 30, 2019 . During the nine months endedSeptember 30, 2020 , we borrowed$94.5 million on credit facilities and repaid$167.1 million in borrowings on credit facilities. We used$19.3 million to repurchase shares of Chart common stock related to our share purchase program during the 45
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nine months endedSeptember 30, 2020 . We suspended the program onMarch 20, 2020 in light of uncertainty resulting from the COVID-19 pandemic and the desire to conserve cash resources. During the nine months endedSeptember 30, 2019 , we borrowed$202.6 million on our SSRCF to fund working capital needs and to fund a portion of the AXC acquisition and repaid$384.2 million in SSRCF borrowings. We also borrowed$450.0 million under a term loan onJuly 1, 2019 and received proceeds of$295.8 million from the issuance of shares in connection with the closing of the AXC acquisition. Sources and Use of Cash (Subsequent Events) Subsequent to the end of the third quarter of 2020, onOctober 1, 2020 , we closed on the sale of the assets of the cryobiological products business within our D&S West segment to Cryoport, Inc. for net cash proceeds of$317.1 million , inclusive of the base purchase price of$320.0 million less estimated closing date adjustments of$2.9 million . OnOctober 2, 2020 , we used proceeds from the Divestiture and other available cash on hand to pay down$335.7 million of our term loan due 2024. Refer to Note 2, "Discontinued Operations" for further information regarding the Divestiture. OnOctober 13, 2020 , we completed the acquisition of theTheodore, Alabama cryogenic trailer and hydrogen trailer (transport) assets of Worthington Industries, Inc. (NYSE: WOR) for$10 million in cash ("Alabama Trailers"). Alabama Trailers designs, manufactures and sells cryogenic trailers and hydrogen trailers used in industrial gas and energy applications. This acquisition will produce strong synergies by combining Chart's deep knowledge of cryogenics and liquid hydrogen storage and handling with Alabama Trailers' expertise and experience in the packaging and assembly of liquid hydrogen trailers. OnOctober 14, 2020 , McPhy (Euronext Paris: MCPHY - ISIN; FR0011742329), specialized in zero-carbon hydrogen production and distribution equipment, completed a capital increase for the amount of180 million euros . Chart subscribed to 1,276,595 shares for30 million euros (equivalent to$35.3 million ), and we now hold 4.6% of the capital of McPhy post-offering. In conjunction with our strategic investment, Chart and McPhy also executed a commercial Memorandum of Understanding ("MOU"). The MOU between McPhy and Chart is intended to set the pace of commercial collaboration to stimulate new hydrogen demand for the parties' respective equipment and solutions globally. Cash Requirements We do not currently anticipate any unusual cash requirements for working capital needs for the year endingDecember 31, 2020 . 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 2020 is expected to be in the range of$5 million to$10 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 ofSeptember 30, 2020 was$684.9 million , inclusive of$46.4 million of backlog remaining onCalcasieu Pass , compared to$745.2 million , inclusive of$135 million ofCalcasieu Pass orders as ofSeptember 30, 2019 . Excluding Calcasieu Pass, backlog increased by$28.3 million or 4.6% in the current quarter compared to the prior year quarter. The tables below represent orders received and backlog by segment for the periods indicated (dollars in millions): Three Months Ended September 30, September 30, June 30, 2020 2019 2020 Orders D&S East $ 87.1 $ 76.5$ 67.9 D&S West 126.0 91.3 91.7 E&C Cryogenics 34.5 35.1 47.2 E&C FinFans 34.1 63.0 37.6 Intersegment eliminations (19.0) - 0.3 Consolidated$ 262.7 $ 265.9 $ 244.7 46
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As of
September 30, September 30, June 30,
2020 2019 2020
Backlog
D&S East $ 229.0 $ 203.8 $ 218.2
D&S West 179.7 116.7 145.8
E&C Cryogenics 228.8 288.3 257.3
E&C FinFans 62.0 136.4 68.3
Intersegment eliminations (14.6) - (3.8)
Consolidated $ 684.9 $ 745.2 $ 685.8
D&S East segment orders for the three months ended September 30, 2020 were $87.1
million compared to $76.5 million for the three months ended September 30, 2019
and $67.9 million for the three months ended June 30, 2020 . The increase in D&S
East segment orders during the three months ended September 30, 2020 when
compared to the same quarter last year was primarily driven by solid order
intake for mobile equipment in China and India , favorable HLNG in Italy , and
favorable parts and service in Europe ; partially offset by unfavorable orders
for mobile equipment in Europe . The increase from the second quarter of 2020 was
mainly due to strong order volume for mobile equipment in China and India ,
favorable HLNG in Italy , and favorable parts and services in Europe . Orders in
VRV India were negatively impacted in the prior quarter due to COVID-19 shut
downs, but increased this quarter as restrictions eased and demand for medical
oxygen increased in the region. D&S East segment backlog at September 30, 2020
totaled $229.0 million and is a record high compared to $203.8 million as of
September 30, 2019 and $218.2 million as of June 30, 2020 .
D&S West segment orders for the three months ended September 30, 2020 were
$126.0 million compared to $91.3 million for the three months ended September
30, 2019 , and $91.7 million for the three months ended June 30, 2020 . The
increase in D&S West segment orders during the three months ended September 30,
2020 when compared to the same quarter last year was primarily driven by our
leasing business, HLNG vehicle tanks and engineered systems. The increase from
the second quarter of 2020 was mainly due to leasing business and engineered
systems. D&S West segment backlog at September 30, 2020 totaled $179.7 million
and is the highest in the history of the business; up 54.0% over the third
quarter of 2019 and 23.3% over the second quarter of 2020, which was then a
record.
E&C Cryogenics segment orders for the three months ended September 30, 2020 were
$34.5 million compared to $35.1 million for the three months ended September 30,
2019 and $47.2 million for the three months ended June 30, 2020 . Orders in the
third quarter of 2020 were stable as the replacement business continues to be
robust. The decrease from the second quarter of 2020 was mainly due to a small
scale LNG order of $13.3 million that was recorded in the second quarter and
normal fluctuations of timing of larger liquefaction project orders. E&C
Cryogenics segment backlog totaled $228.8 million as of September 30, 2020 ,
compared to $288.3 million as of September 30, 2019 and $257.3 million as of
June 30, 2020 . Excluding Calcasieu Pass backlog, E&C Cryogenics segment backlog
decreased by 1.6% in the current quarter over the prior quarter, but increased
19.0% in the current quarter over the prior year quarter. Included in E&C
Cryogenics segment backlog for all periods presented is approximately $40.0
million related to the previously announced Magnolia LNG order where production
release is delayed until later in 2021.
E&C FinFans segment orders for the three months ended September 30, 2020 were
$34.1 million compared to $63.0 million for the three months ended September 30,
2019 and $37.6 million for the three months ended June 30, 2020 . The decrease in
E&C FinFans segment orders during the three months ended September 30, 2020 when
compared to the same quarter last year was primarily due to softness in demand
for natural gas compression equipment. E&C FinFans segment backlog totaled $62.0
million as of September 30, 2020 , compared to $136.4 million as of September 30,
2019 and $68.3 million as of June 30, 2020 .
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
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Application of Critical Accounting Policies Our unaudited condensed consolidated financial statements have been prepared in accordance withU.S. generally accepted accounting principles. 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 endedDecember 31, 2019 . 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 sinceDecember 31, 2019 . 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 and divestitures, cost synergies and efficiency savings, objectives, future orders, revenues, margins, earnings or performance, liquidity and cash flow, capital expenditures, business trends, 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 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 endedDecember 31, 2019 , which should be reviewed carefully; risks relating to the recent outbreak and continued uncertainty associated with the coronavirus (COVID-19); Chart's ability to successfully integrate recent acquisitions, and achieve the anticipated revenue, earnings, accretion and other benefits from these acquisitions; 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 endedDecember 31, 2019 , 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 SSRCF's various floating rate pricing mechanisms. If interest rates were to increase 200 basis points (2 percent) from the weighted-average interest rate of 2.1% atSeptember 30, 2020 , and assuming no changes in the$54.4 million of borrowings outstanding under the SSRCF atSeptember 30, 2020 , our additional annual expense would be approximately$1.1 million on a pre-tax basis. Foreign Currency Exchange Rate Risk: We operate inthe 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 flow, and competitive position. The financial statements of foreign subsidiaries are translated into theirU.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 2020, theU.S. dollar weakened in relation to the Chinese yuan and the euro by 4%, the Czech koruna by 3%, and the Indian rupee. Additionally, the euro 48
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strengthened in relation to the Czech koruna by 2%. AtSeptember 30, 2020 , a hypothetical 10% weakening of theU.S. dollar would not materially affect our financial statements. Chart's primary transaction exchange rate exposures are with the euro, the Japanese yen, the Czech koruna, the Australian dollar, the British pound, the Indian rupee, and the Chinese yuan. 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. We enter into foreign exchange forward contracts to hedge anticipated and firmly committed foreign currency transactions. We do not use derivative financial instruments for speculative or trading purposes. The terms of the contracts are generally one year or less. AtSeptember 30, 2020 , a hypothetical 10% weakening of theU.S. dollar would not materially affect our outstanding foreign exchange forward contracts. Market Price Sensitive Instruments In connection with the pricing of 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 9, "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 perform an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, President 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"). Based upon that evaluation, such officers concluded that as ofSeptember 30, 2020 , 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 theSecurities 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. 49
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