Description

Chart Industries is a post-bankruptcy, high free cash flow story with several catalysts for growth including LNG and trades at a mere 8.7X 2006 PE. Prior to emergence in late 2003, the company had $250mm in net debt and now the company has $70mm in net debt. It’s current market cap and EV are $286mm and $356mm respectively. For 2005, EBITDA should come in at $62.2mm and fully diluted EPS will be about $5.12/share, with 20% earning growth in 2006. You are buying the company for just 6X EV/2005 EBITDA and 10.4X 2005 PE (Comparables are at 8X and 16X respectively). It has very high insider ownership and is a beneficiary of growth markets such as Liquefied Natural Gas (LNG), healthcare, biotechnology, and China.

Company Description
Chart manufactures a broad line of cryogenic products for the purification, liquefaction, distribution, storage and application of gases such as helium, nitrogen, argon, oxygen, carbon dioxide, natural gas and other hydrocarbons for final use in a multitude of industrial, commercial and scientific applications. These applications serve many selected markets including biomedical, food, entertainment, aerospace, thermal testing, alternative fuels, vacuum systems and many other industrial end users.

Full descriptions of Chart’s business segments can be found in their filings but below I have briefly summarized them. The Company's operations are organized within three segments: Distribution and Storage, Energy and Chemicals, and Biomedical.

Distribution and Storage- Chart is a leading supplier of cryogenic equipment to the global bulk and packaged industrial and hydrocarbon gas markets. Demand for the products supplied by this segment is driven primarily by the significant installed base of users of cryogenic liquids as well as new applications and distribution technologies for cryogenic liquids. This segment accounted for 53% of sales in 2004. In this segment, Chart supplies cryogenic bulk tanks and packaged gas systems used in storing industrial and hydrocarbon gases including LNG. Its customers include major industrial gas and chemical producers, and industrial gas distributors. Customers include Praxair, Air Liquide, Air Products and AirGas. This market is driven primarily by worldwide industrial production in such places as U.S, China and Europe. The primary competition comes from Harsco’s (HSC-NYSE) Taylor Wharton division.

Energy and Chemicals- The Chart’s principal products within the Energy and Chemicals segment, which accounted for 23 percent of sales in 2004, are focused on process equipment, primarily heat exchangers, cold boxes, LNG fuel systems, and LNG Vacuum Insulated Pipe (VIP), used by major natural gas, petrochemical processing and industrial gas companies. A key area for future growth is in heat exchangers which are used in LNG, and Gas-to-Liquids plants. A heat exchanger used in an LNG plant sells for up to $20mm and there many more plants being planned for construction over the next several years. Another key area of growth is LNG VIP, which is used to transport LNG within export and import terminals. Recently they were selected to provide several miles of VIP to the Freeport LNG project in Texas. Chart has also recently expanded capacity to support growing demand for LNG related equipment. Citigroup (12/04 Analyst D. Johnson et al.) states that LNG expenditures may be $45-50 billion over the next five years and the same again between 2010 and 2015. This does not include LNG receiving terminals. Chart Industries is securely poised to capture a good share of the LNG opportunity. They have installed heat exchangers in some of earliest LNG projects and have a significant track record. Chart’s industrial gas customers in this segment include Air Liquide, Air Products, MG Industries and Praxair. In the hydrocarbon processing market, major customers include Exxon/Mobil, Chevron/Texaco, Conoco/Phillips and contractors such as Bechtel and KBR. The Company’s principal competitors for heat exchangers are Linde, Sumitomo, Kobe and Nordon.

Biomedical- The Biomedical segment, which accounted for 24 percent of the Company’s sales in 2004, consists of various product lines built around the Company’s core competencies in cryogenics but with a focus on the medical and biological end users of the liquids and gases instead of the large producers and distributors of cryogenic liquids. Chart supplies medical respiratory products, including liquid oxygen systems, ambulatory oxygen systems and oxygen concentrators, all of which are used for the in-home supplemental oxygen treatment of patients with chronic obstructive pulmonary diseases, such as bronchitis, emphysema and asthma. The aging population increases the need for in-home treatment. Chart’s liquid oxygen systems are lightweight and designed for active patients undergoing oxygen therapy. Chart also supplies cryogenic storage vessels that are used to store biological materials such as tissue and sperm. And in addition, they also supply various cryogenic components used in MRI equipment. The Company’s primary competitor in the medical products line is Puritan-Bennett, a division of Tyco International, Ltd. Respiratory therapy to the home is growing at 9% according to Airgas in their November Investor Presentation on page 56. Praxair, another customer of Chart is also focusing on the growth in home respiratory therapy. An additional plus for Chart is that the use of Liquid Oxygen (LOX) is taking the place of oxygen concentrators to these markets (see Airgas Nov. presentation page 57). Chart supplies the LOX systems and containers for these markets. The Biomedical segment grew over 10% in 2004 and we expect it to continue to grow at that pace for the foreseeable future.

Background and Bankruptcy
Chart’s troubles became clearly evident in late 2000 and 2001 as industrial gas producers curtailed their investment in bulk tanks and packaged gas systems primarily due to industry consolidation and weakness in the economy. Industrial gas companies sharply curtailed purchases of cryogenic equipment. Sales in the Distribution and Storage segment dropped from 192mm in 2000, to 180mm in 2001, to 135mm in 2002, and 128mm in 2003. The company had plenty of capacity for what the market needed in 2000, and way too much capacity in 2003. The company was laden with debt from past acquisitions and was not able to restructure quick enough to reduce costs in order to achieve profitability at the lower volume levels. The company was forced to declare bankruptcy. Despite the distraction of going through bankruptcy in 2003, the other segments held their own during the 2000-2003 timeframe. The Biomedical segment was actually able to grow revenues from 53mm in 2000 to 66mm in 2003, and the Energy and Chemicals division did 79mm in revenues in 2000 but dropped to just 71mm in 2003 mainly because no one wanted to give them large orders while they were still in bankruptcy.

Chart emerged from bankruptcy in September of 2003. $256mm of senior debt was converted into a $120mm term loan and 95% equity ownership effectively wiping out 136mm in debt. The remaining 5% went to equity holders. While in bankruptcy, the company did a great job in communicating to its customers and made sure products were delivered with the highest quality and on time. This allowed them to emerge from bankruptcy within missing much of a beat.

Segment Revenue

Year 2004 2005 2006
Distribution and Storage 162.5 178.0 183.0
Energy and Chemicals 69.6 99.5 120.0
Biomedical 73.5 81.0 90.0
Total Revenues 305.6 358.5 393.0

Income Statement
Year 2004 2005 2006
Revenue 305.6 358.5 393.5
Gross Profit 93.8 108.1 120.4
SGA* 53.4 57.5 60.0
Operating Income** 40.4 50.6 60.4
Interest Expense 4.8 3.5 3.0
Pre-Tax** 35.6 47.1 57.4
Taxes*** 10.1 17.9 21.8
Net Income 25.5 29.2 35.6
Diluted Shares 5.6 5.7 5.8
EPS 4.55 5.12 6.13

D&A 8.5 9.2 10.0
Intangible write down 1.4
Non-Cash benefits 2.4 2.4 2.0

Adjusted EBITDA 52.7 62.2 72.4

*SG&A for 2004-2006 includes non-cash compensation expense in the amount of $2.4mm which is the result of issuing stock and options to management upon emerging from bankruptcy. 2007 will not have this expense as stock awards/options will have vested. 2004 SG&A also included $1.4mm in an intangible write down.

**Operating income and pre-tax does not include employee separation and plant closure charges which amounted to $3.2mm in 2004, and $600k so far in 2005. It also doesn’t include one-time and currency gains/losses which are roughly a wash.

***The effective tax rate in 2004 was low at 30%, the tax rate for 2005 and 2006 is 38%.


Q1 2005 Results

Q1 2005 saw a strong growth in sales (24%), orders (16%) and backlog (97%) however gross margins were lower due to sales mix, higher material costs and transition costs related to consolidating manufacturing in the Biomedical segment. Biomedical margins dropped 400 basis points and Biomedical sales were only up 6% due to the manufacturing consolidation. Had sales and margins been at normal levels you would have seen another $1mm in Gross Profit and .11 in EPS. Management has also addressed higher material prices through recent price increases which they had done successfully all of last year.

Quarter Ending 3/31/05 3/31/04
Revenue 85.2 68.8
Gross Profit 24.6 21.8
SGA* 14.4 13.0
Operating Income** 10.2 8.8
Interest Expense 1.0 1.3
Pre-Tax** 9.2 7.5
Taxes*** 3.1 2.4
Net Income 6.1 5.1
Diluted Shares 5.6 5.4
EPS 1.08 .94

D&A 1.9 2.2
Non-Cash benefits .6 .5
Adjusted EBITDA 12.7 11.5

Orders 117.6 101.1
Backlog 160.1 81.1



Explanation of Estimates

Revenue-For 2005, we estimate that revenue will increase 17.3% YOY, followed by a 9.7% growth in 2006. In the first quarter sales were up 24%, orders were up 17% and backlog was up 97% year-over-year. While this trend is strong, it is more conservative to choose a lower growth rate for the remainder of the year. The strongest growth comes from Energy and Chemicals which is driven by LNG-related orders which will grow 43%. For 2006, we assume that total revenues will grow just $35mm. Most of this growth comes from a $20mm increase in revenues from the Energy and Chemicals Division. This is a reasonable assumption for 2006 since one LNG heat exchanger or VIP can run $20mm. The activity level for LNG projects is extremely high right now. The balance of the growth comes from Biomedical which is projected to grow 10% consistent with last year and secular trends. Distribution and Storage is assumed to grow only 2.8%, which may prove conservative as well since China is growing so rapidly.

EBITDA-For 2005 we are estimating EBITDA to come in at $62.2mm and EBITDA margin to come in at 17.3%. For 2006, we are estimating EBITDA to come in at $72.4mm and EBITDA margin to come in at 18.4%. EBITDA margins will be flat to slightly up from 2004 to 2005 due to the manufacturing consolidation and product mix as mentioned above, but will improve as sales continue to grow in 2006.



Valuation Analysis

Capitalization
Stock Price 53.5
F.D. Shares 6.0
Equity Cap 321
Cash (3/30)* 8.7
Debt (3/30) 78.7
Current Net Debt 70
Option/Warrant Cash (17)
Adjusted Net Debt 53
EV 374
*Cash balance was unusually low in Q1. There was a use of working capital of about $12mm in Q1 due to a build in inventory and unbilled revenue. Management expects working capital to improve during the remaining 9 months.

Metrics
Year 2005 2006
EBITDA 62.2 72.4
Maintenance Capex 4.0 4.0
Growth Capex 9.0 9.0
Taxes 17.9 21.8
Interest 3.5 3.0
FCF after maint. capex 36.8 43.6
FCF after all capex 27.8 34.6
Diluted EPS 5.12 6.13

Multiples
Year 2005 2006
EV/EBITDA 6.0 5.2
PE 10.4 8.7
P/FCF after maint. Capex 8.7 7.4
P/FCF after all Capex 11.5 9.3
ROA 9.3%
ROE 22.7%

Comparables

The comparables consist of small-cap manufacturers serving the industrial, biomedical and energy industries. All of the 4 companies below have market caps around $1bln or less.

GDI- $37/share; 16.5X and 14.4X 2005 and 2006 PE multiples respectively, 8.0X EV/2006 EBITDA
TII-Acquired by GDI for $447mm; 8.1X EV/2005 EBITDA and 27X PE
CIR-$23.8/share; 16.4X and 14.4X 2005 and 2006 PE multiples respectively, 7.4X and 6.7X EBITDA multiples
RBN-23/share; 29X and 14.8X 2005 and 2006 PE multiples respectively, 8.7X and 6.7X EBITDA multiples.

Chart Industries trades at a discount to all the comparables and has higher EBITDA margins and stronger organic growth.

Another possible comp if you were to look at companies with LNG exposure would be Chicago Bridge and Iron (CBI). CBI is an engineering and construction company that specializes in building LNG import terminals among other energy-related projects. CBI has seen its backlog rise over 118% year over year similar to Chart’s 97% growth. It trades at 24X and 20X 2005 and 2006 earnings, and 12X and 10.3X 2006 EBITDA. Here again, Chart has higher margins.

Ownership
Chart is controlled by Oaktree Capital who own nearly 50% of the company. The second largest holder is Audax Management who own about 19%. The rest of the holders consist of loan funds that have held equity since emergence. Management owns about 8% of the fully diluted shares outstanding.

Catalysts/Investment Points

· Chart is cheap versus comparables. Chart trades for 10.4 and 8.7 2005 and 2006 PE multiples versus 16 and 14 multiples for the comps. Chart would trade at 82-85 at similar PE multiples. Chart trades at 6.0 and 5.2 2005 and 2006 EBITDA multiples versus 8.0 and 6.7 multiples for the comps. Chart would trade at 72-74 at similar EBITDA multiples. It can be argued that Chart should trade at higher multiples than comps due to stronger organic growth and higher margins.
· Multi-year growth from LNG projects. According to Citigroup (12/04): With a typical LNG production facility costing around US$ 1.5 Billion, the industry may be looking at expenditure of US$45-US$50 billion over the next five years, and the same again between 2010 and 2015. This does not include the requirement for import facilities. Chart has strong track record of providing heat exchangers for current LNG plants (e.g. Atlantic LNG in Trinidad) and Chart’s recent $20mm win at the Freeport LNG Terminal shows that they can successfully win large opportunities in receiving terminals. Growth can be explosive in this segment of their business.
· Good visibility of earnings and revenues. Backlog has risen over the last 3 quarters from $92.4mm to $129.3 to the current $160.1mm.
· Biomedical Growth. The aging of the population is necessitating more home respiratory therapy. Chart’s high margin LOX products serve this growing market.
· China Strategy. Chart already has manufacturing operations in China and has recently acquired another company to secure their foothold in this growth market.
· Diversified industry exposure. While Chart’s expertise is in cryogenic equipment and products, its end customers are diverse; industrial gas, home healthcare, biomedical, and natural gas. In addition its customers are geographically dispersed throughout the world.
· Leaner company. The company has been consolidating manufacturing operations since its emergence from bankruptcy. If a significant slowdown does occur again, Chart is in a much better position to handle it
· Chart is the leader in their respective markets. Technical know-how, patents and long track record of products make new entry into Chart’s markets difficult.
· Future investor relations and liquidity would improve valuation.



Risks/Downsides

· Low Liquidity. The stock has a low float, is traded on the bulletin board and trades irregularly.
· The Energy and Chemicals division is a lumpy business with sales and margins that can fluctuate as to the timing and delivery of orders.
· Raw material prices may affect margins in the future. Although the company has successfully passed on price increases in the past (all of 2004), it may not be able to do so in the future.
· The Distribution and Storage segment is driven by industrial production both in the US, Europe and China. A slowdown in the global economy may affect this business.
· Management is not promotional and does not do investor road shows, conference calls etc. They may never develop investor relations.

Catalyst

-Cheap at 10.4 and 8.7 2005 and 2006 PE, and 6X and 5.2X 2005 and 2006 EV/EBITDA.
-Acceleration in already strong orders related to LNG and Biomedical products.
-Greater investor awareness and future listing on NASDAQ.
-Accretive acquisition by multinational industrial company.