CHART INDUSTRIES, INC. The following discussion of our results of operations and financial condition should be read in conjunction with the "Selected Financial Data" section and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. 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 diversified global manufacturer of highly engineered equipment servicing multiple market applications in energy and industrial gas. Our equipment and engineered systems are primarily used for low-temperature and cryogenic applications utilizing our expertise in cryogenic systems and equipment which operate at low temperatures sometimes approaching absolute zero (0 Kelvin; -273° Centigrade; -459° Fahrenheit). Strategic Update OnJuly 1, 2019 , we completed the acquisition of AXC pursuant to the previously disclosed Asset Purchase Agreement datedMay 8, 2019 (the "AXC acquisition"). AXC is a leading supplier of custom-engineered and ACHX for the natural gas compression and processing industry and refining and petrochemical industry inthe United States . The ACHX offered by AXC is used in conditioning natural gas during recovery, compression and transportation from underground reserves through major pipeline distribution channels. In addition to natural gas compression and processing, AXC's products are also used in the turbine lube oil cooling, landfill gas compression and liquids cooling industries. AXC's end markets include process industries, power generation and refineries. The acquisition of AXC reinforces our strategic focus on core cryogenic engineering and products for the industrial gas and energy spaces. We expect the acquisition of AXC to result in significant annual cost synergies. During our first six months of ownership, we have completed projects, which will achieve over$20 million of cost synergies. Furthermore, we have identified another$9 million of target cost synergies, which will be achieved in addition to the$20 million achieved in the first year. The AXC acquisition is further described in Note 13, "Business Combinations," to our consolidated financial statements included under Item 15, "Exhibits and Financial Statement Schedules" of this Annual Report on Form 10-K. The purchase price for AXC was$599.7 million , including post-closing purchase price adjustments with respect to working capital. We paid$592.0 million of the purchase price at closing and the final working capital adjustment of$7.7 million was paid during the third quarter of 2019. We incurred$5.4 million in transaction related costs related to the AXC acquisition which were recorded in selling, general and administrative expenses on the consolidated statement of income. We funded the purchase price for the AXC acquisition with proceeds from the Chart common stock public offering (the "2019 Equity Offering") and borrowings under the Fourth Amended and Restated Credit Agreement, which includes a senior secured revolving credit facility (the "SSRCF") and a term loan (together, the "2019 Credit Facilities") as further discussed in Liquidity and Capital Resources. Upon closing of our acquisition of AXC, effectiveJuly 1, 2019 , we changed our reportable segments from three segments to four segments: D&S East, D&S West, E&C Cryogenics and E&C FinFans. AXC was combined with Chart's Hudson Products and Cooler Service businesses from the prior E&C segment to create a new segment called E&C FinFans. The E&C FinFans segment is focused on our unique and broad product offering and capabilities in ACHX and fans. E&C Cryogenics 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. The financial information presented and discussion of results that follows is presented on a continuing operations basis. All prior period amounts presented below have been reclassified based on our current reportable segments. 2019 Highlights Broad based global LNG infrastructure build-out, specialty markets and significant synergies from the combination of Chart, VRV and AXC contributed to our order strength and further margin expansion. Orders in 2019 of$1,412.9 million , a record for Chart, increased 23.7% compared to 2018 (10.8% organically) with each segments' orders increasing year-over-year. Sales in 2019 of$1,299.1 million increased 19.8% compared to 2018 (2.0% organically), with increases across all segments including double-digit increases in our D&S East, E&C Cryogenics and E&C FinFans segments. Sales for AXC, included in the E&C FinFans segment results since theJuly 1, 2019 acquisition date, were$103.1 million for the year endedDecember 31, 2019 . Sales for VRV, included in both the E&C Cryogenics and D&S East segment results since theNovember 15, 2018 acquisition date, were$104.0 million and$14.1 million for the years endedDecember 31, 2019 and 2018, respectively. 31 --------------------------------------------------------------------------------
Outlook
Our 2020 full year outlook reflects a record backlog heading into 2020, which includes LNG infrastructure orders already booked. We continue to expect orders between$700 million and$1 billion related to additional large-scale LNG projects in 2020, in particular, Tellurian Inc.'s Driftwood LNG, previously announced, and Cheniere Energy Inc.'s Corpus Christi Stage Three LNG export terminal. A majority of upcoming projects forU.S. LNG export have transitioned from utilizing traditional single train baseload plants to multi-train mid-scale projects, with a modular approach to achieve baseload capacities. This is important to us because multi-train mid-scale projects, such as Driftwood LNG, may use Chart's patented IPSMR® technology as well as our brazed aluminum heat exchangers and cold boxes as the main liquefaction heat exchanger technology. We continue to invest in our automation, process improvement, and productivity activities across Chart, with total anticipated 2020 capital investment of$35.0 million to$40.0 million . The total anticipated 2020 capital spend is inclusive of investment in expanding ourIndia manufacturing capabilities and completing the LNG vehicle tank line inItaly . Operating Results The following table sets forth the percentage relationship that each line item in our consolidated statements of income represents to sales for the years endedDecember 31, 2019 , 2018 and 2017 (dollars in millions): 2019 2018 2017 Sales 100.0 % 100.0 % 100.0 % Cost of sales (1) (2) 74.1 72.7 72.5 Gross profit 25.9 27.3 27.5 Selling, general and administrative expenses (3) - (8) 16.6 16.8 21.5 Amortization expense 3.1 2.0 1.4 Operating income (9) 6.2 8.5 4.6 Interest expense, net (10) (11) 1.9 2.0
2.1
Loss on extinguishment of debt (12) - -
0.6
Financing costs amortization 0.2 0.1
0.2
Foreign currency loss - -
0.5
Income tax expense (benefit), net (9) 0.5 1.2 (2.0 ) Net income from continuing operations 3.6 5.1
3.3
Income from discontinued operations, net of tax - 3.2
0.2
Net income 3.6 8.3
3.5
Income attributable to noncontrolling interests, net of taxes - 0.2
0.2
Net income attributable toChart Industries , Inc. 3.6 8.1 3.3 _______________
(1) Cost of sales includes restructuring costs of
years ended
(2) Includes an expense of
estimated costs of the aluminum cryobiological tank recall for the year
ended
(3) Selling, general and administrative expenses includes restructuring costs of
respectively.
(4) Includes transaction-related costs of $5.4 for the year ended December 31 ,2019, which were mainly related to the AXC acquisition. Includes integration
costs of
2019.
(5) Includes transaction-related costs of $2.1 for the year ended December 31 ,2018, which were mainly related to the VRV acquisition. Includes integration
costs of
(6) Includes transaction-related costs of
2017.
(7) During the year ended
realignment of our segment structure, which includes
severance costs partially offset by a
compensation forfeitures for 2018. Includes net severance costs of
related to the departure of our former CEO, which includes
severance costs partially offset by a
compensation forfeitures for 2018.
32--------------------------------------------------------------------------------
(8) Includes share-based compensation expense of
representing 0.7%, 0.5% and 1.3% of sales, for the years ended
2019, 2018 and 2017, respectively.
(9) Includes a one-time
the fourth quarter of 2017, which resulted from the enactment of the Tax
Cuts and Jobs Act. This benefit mainly consisted of a one-time, provisional
benefit of
liabilities using the lower
partially offset by (i) a one-time, provisional charge of
the deemed repatriation transition tax, which is a tax on previously untaxed
accumulated earnings and profits of certain of our foreign subsidiaries, and
(ii) a one-time tax expense and tax benefit of
related to our intent to amend pre-acquisition Hudson
returns. We have completed our analysis to determine the effect of the Tax
Cuts and Jobs Act, and as such, we have recorded an additional tax benefit
of
(10) Includes
the carrying amount of the 1.00% Convertible Senior Subordinated Notes due
the years ended
(11) Includes
the carrying amount of the 2.00% Convertible Senior Subordinated Notes due
the years ended
(12) During the year ended
extinguishment of debt associated with the repurchase of
amount of our 2018 Notes and refinance of our senior secured revolving
credit facility.
33-------------------------------------------------------------------------------- Consolidated Results for the Years EndedDecember 31, 2019 , 2018 and 2017 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 years endedDecember 31, 2019 , 2018 and 2017 (dollars in millions). Further detailed information regarding our operating segments is presented in Note 4, "Segment and Geographic Information," of the consolidated financial statements included under Item 15 "Exhibits and Financial Statement Schedules" of this Annual Report on Form 10-K. Selected Segment Financial Information Year Ended December 31, 2019 2018 2017 Sales D&S East$ 293.4 $ 246.3 $ 232.3 D&S West 461.7 455.5 400.6 E&C Cryogenics 190.2 136.9 125.5 E&C FinFans 361.7 253.6 100.1 Intersegment eliminations (7.9 ) (8.0 ) (15.6 ) Consolidated$ 1,299.1 $ 1,084.3 $ 842.9 Gross Profit D&S East$ 45.2 $ 52.4 $ 48.3 D&S West (1) 157.9 156.8 141.8 E&C Cryogenics 33.5 28.6 23.6 E&C FinFans 102.5 60.6 21.5 Intersegment eliminations (2.3 ) (2.5 ) (3.6 ) Consolidated$ 336.8 $ 295.9 $ 231.6 Gross Profit Margin D&S East 15.4 % 21.3 % 20.8 % D&S West 34.2 % 34.4 % 35.4 % E&C Cryogenics 17.6 % 20.9 % 18.8 % E&C FinFans 28.3 % 23.9 % 21.5 % Consolidated 25.9 % 27.3 % 27.5 % SG&A Expenses D&S East$ 34.7 $ 31.6 $ 33.0 D&S West 48.7 51.0 52.0 E&C Cryogenics 28.7 23.3 23.4 E&C FinFans 33.6 24.8 10.9 Corporate 70.4 51.2 61.6 Consolidated$ 216.1 $ 181.9 $ 180.9 SG&A Expenses (% of Sales) D&S East 11.8 % 12.8 % 14.2 % D&S West 10.5 % 11.2 % 13.0 % E&C Cryogenics 15.1 % 17.0 % 18.6 % E&C FinFans 9.3 % 9.8 % 10.9 % Consolidated 16.6 % 16.8 % 21.5 % Operating Income (Loss) (1) (2) D&S East$ 6.9 $ 19.3 $ 14.2 D&S West 104.5 101.2 85.2 E&C Cryogenics 1.6 1.8 (2.1 ) E&C FinFans 40.6 23.7 7.2 Corporate (3) (4) (5) (6) (70.4 ) (51.4 ) (62.4 ) Intersegment eliminations (2.3 ) (2.5 ) (3.6 ) Consolidated$ 80.9 $ 92.1 $ 38.5 Operating Margin D&S East 2.4 % 7.8 % 6.1 % D&S West 22.6 % 22.2 % 21.3 % E&C Cryogenics 0.8 % 1.3 % (1.7 )% E&C FinFans 11.2 % 9.3 % 7.2 % Consolidated 6.2 % 8.5 % 4.6 % 34
--------------------------------------------------------------------------------
_______________
(1) Includes an expense of
the estimated costs of the aluminum cryobiological tank recall for the year
ended
(2) Restructuring costs for the years ended:
•
Cryogenics,
•
- E&C FinFans, and
•
Cryogenics,
(3) Includes transaction-related costs of
December 31, 2019 , which were mainly related to the AXC acquisition. Includes integration costs of$1.6 in Corporate related to the AXC acquisition for the year endedDecember 31, 2019 .
(4) Includes transaction-related costs of
Includes integration costs of
acquisition for the years ended
(5) Includes transaction-related costs of
2017.
(6) During the year ended
the strategic realignment of our segment structure, which includes
payroll severance costs partially offset by a
share-based compensation forfeitures for 2018. Includes net severance costs
of
includes
due to related share-based compensation forfeitures for 2018.
Results of Operations for the Years EndedDecember 31, 2019 and 2018 Sales in 2019 increased$214.8 million from$1,084.3 million to$1,299.1 million , or 19.8% (2.0% organically), with increases across all segments as compared to 2018. AXC sales of$103.1 million are included in the E&C FinFans segment results since theJuly 1, 2019 acquisition date. Sales for VRV in 2019, included in both the D&S East and E&C Cryogenics segment results since theNovember 15, 2018 acquisition date were$104.0 million (D&S East:$57.1 million , E&C Cryogenics:$46.9 million ) as compared to$14.1 million (D&S East:$10.3 million , E&C Cryogenics:$3.8 million ) in 2018. Excluding the impact of AXC and VRV, sales growth was primarily driven by axial flow fans sales in our E&C FinFans segment and an increase in sales within our D&S West segment related to systems and cryobiological storage products, which was partially offset by a decline in packaged gas. Gross profit in 2019 increased$40.9 million or 13.8% (1.4% organically) compared to 2018. AXC gross profit of$29.2 million is included in 2019, and gross profit for VRV was$8.5 million and$1.0 million in 2019 and 2018, respectively. Excluding AXC and VRV, gross profit increased by$4.2 million . Gross profit included restructuring costs of$12.2 million and$0.8 million for the year endedDecember 31, 2019 and 2018, respectively, which during 2019 were related to cost reduction or avoidance actions, including facility consolidations in D&S West, E&C Cryogenics and E&C FinFans and a streamlining of the commercial activities surrounding our after market 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. We anticipate these restructuring actions will result in incremental annualized savings of$14.3 million . Excluding the impact of the AXC and VRV acquisitions and restructuring costs, gross profit increased by$15.6 million primarily driven by higher volume of axial flow fans sales within our E&C FinFans segment. Gross margin as a percent of sales was 25.9% for the year endedDecember 31, 2019 which decreased from 27.3% in 2018. Excluding the impact of the AXC and VRV acquisitions and restructuring costs, gross margin as a percent of sales was 28.5% for the year endedDecember 31, 2019 which increased from 27.6% in the same period in 2018. SG&A expenses increased by$34.2 million ($11.5 million organically), or 18.8% (6.4% organically), in 2019 compared to 2018, AXC SG&A expenses of$7.8 million is included in 2019, and VRV SG&A expenses of$16.9 million and$2.0 million for 2019 and 2018, respectively. Furthermore, restructuring costs related to the acquisitions of AXC and VRV were$3.4 million for the year endedDecember 31, 2019 . Excluding the impact of restructuring costs, SG&A expenses were 16.4% of sales for the year endedDecember 31, 2019 compared to 16.4% for the year endedDecember 31, 2018 . 35 -------------------------------------------------------------------------------- Interest Expense, Net and Financing Costs Amortization Net interest expense for the year endedDecember 31, 2019 and 2018 was$25.3 million and$21.4 million , respectively. Interest expense for the year endedDecember 31, 2019 included$2.6 million of 1.0% cash interest and$7.6 million of non-cash interest accretion expense related to the carrying value of the convertible notes due 2024, and$15.9 million in interest related to borrowings on our previous and current senior secured revolving credit facility and term loan. For 2019 and 2018, financing costs amortization was$3.0 million and$1.3 million , respectively. The increase of$1.7 million was primarily due to higher financing costs amortization as a result of debt restructuring actions in 2019. Foreign Currency (Gain) Loss For 2019 foreign currency gains were$0.2 million as compared to foreign currency losses of$0.4 million for 2018. Gains increased by$0.6 million during 2019 due to exchange rate volatility, especially with respect to the euro and Chinese yuan. Income Tax Expense Income tax expense of$6.0 million and$13.4 million for the years endedDecember 31, 2019 and 2018 represents taxes on bothU.S. and foreign earnings at a combined effective income tax rate of 11.4% and 19.4%, respectively. The effective income tax rate of 11.4% for the year endedDecember 31, 2019 differed from theU.S. federal statutory rate of 21% primarily due to tax benefits associated with share-based compensation and a reduction in our state tax rate partially offset by the effect of income earned by certain of our foreign entities being taxed at higher rates than the federal statutory rate as well as losses incurred by certain of our Chinese operations for which no benefit was recorded. The effective income tax rate of 19.4% for the year endedDecember 31, 2018 differed from theU.S. federal statutory rate of 21% primarily due to tax benefits related to certain share-based compensation, partially offset by the effect of income earned by certain of our foreign entities being taxed at higher rates than the federal statutory rate as well as 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 from continuing operations attributable to Chart was$46.4 million and$53.6 million for 2019 and 2018, respectively. Results of Operations for the Years EndedDecember 31, 2018 and 2017 Sales in 2018 increased by$241.4 million or 28.6% compared to 2017. Driving the sales growth were positive trends in both our E&C Cryogenics and E&C FinFans segments, especially in our air cooled heat exchangers product offering, as well as stronger sales in D&S West. Sales forHudson , included in the E&C FinFans segment results since theSeptember 20, 2017 acquisition date, were$180.3 million and$58.0 million for the years endedDecember 31, 2018 and 2017, respectively. Sales for VRV, included in both the D&S East and E&C Cryogenics segment results since theNovember 15, 2018 acquisition date, were$14.1 million for the year endedDecember 31, 2018 . Gross profit increased while the related margin decreased slightly during 2018 compared to 2017. Excluding gross profit added from theHudson acquisition (2018:$49.5 million , 2017:$15.4 million ) and the VRV acquisition (2018:$1.0 million ), gross profit increased organically by$29.2 million as a result of higher volume in our D&S East and D&S West segments and project mix in both our E&C Cryogenics and E&C FinFans segments. Gross margin as a percent of sales of 27.3% for 2018 was impacted by an expense of$4.0 million recorded to cost of sales related to the estimated costs of the aluminum cryobiological tank recall for 2018, which negatively impacted consolidated gross margin as a percent of consolidated sales by 0.4 percentage points. Restructuring costs of$4.4 million for 2018 were recorded in cost of sales ($0.8 million ) and SG&A ($3.6 million ), which were related to certain cost reduction or avoidance actions, primarily related to departmental restructuring, including our strategic realignment of our segment structure, and including headcount reductions resulting in associated severance costs. Restructuring costs of$11.2 million for 2017 were recorded in cost of sales ($2.7 million ) and SG&A ($8.5 million ), which were related to costs to relocate the corporate office fromGarfield Heights, Ohio toBall Ground, Georgia and consolidation of certain facilities inChina . Interest Expense, Net and Financing Costs Amortization Net interest expense for 2018 and 2017 was$21.4 million and$17.3 million , respectively. Interest expense for 2018 included$1.0 million of 2.0% cash interest and$1.9 million of non-cash interest accretion expense related to the carrying value of the 2018 Notes and$2.6 million of 1.0% cash interest and$7.2 million of non-cash interest accretion expense related to the carrying value 36 -------------------------------------------------------------------------------- of the 2024 Notes. Interest expense also included$11.8 million and$2.7 million in interest related to borrowings on our senior secured revolving credit facility for 2018 and 2017, respectively. For 2018 and 2017, financing costs amortization was$1.3 million for both periods. Foreign Currency Loss Foreign currency losses were$0.4 million and$3.9 million for 2018 and 2017, respectively. Losses decreased by$3.5 million during 2018 due to exchange rate volatility, especially with respect to the euro and Chinese yuan. Income Tax (Benefit) Expense Income tax expense for 2018 was$13.4 million compared to income tax benefit of$16.6 million for 2017 and represents taxes on bothU.S. and foreign earnings at a combined effective income tax rate of 19.4% and (149.5)%, respectively. The effective income tax rate of 19.4% for 2018 differed from theU.S. federal statutory rate of 21% primarily due to tax benefits related to certain share-based compensation, partially offset by the effect of income earned by certain of our foreign entities being taxed at higher rates than the federal statutory rate as well as losses incurred by certain of our Chinese operations for which no benefit was recorded. Income tax benefit in 2017 was mainly driven by a one-time$22.5 million net favorable tax benefit that was recorded during the fourth quarter of 2017, which resulted from the enactment of the Tax Cuts and Jobs Act. This benefit mainly consisted of a one-time, provisional benefit of$26.9 million related to the remeasurement of certain of our deferred tax liabilities using the lowerU.S. federal corporate tax rate of 21%. This was partially offset by (i) a one-time, provisional charge of$8.7 million related to the deemed repatriation transition tax, which is a tax on previously untaxed accumulated earnings and profits of certain of our foreign subsidiaries, and (ii) a one-time tax expense and tax benefit of$4.5 million and$8.7 million , respectively, related to our intent to amend pre-acquisition HudsonU.S. federal tax returns. The 2017 effective income tax rate was also impacted by transaction costs incurred with the acquisition ofHudson , a portion of which were non-deductible forU.S. federal income tax purposes. We have completed our analysis to determine the effect of the Tax Cuts and Jobs Act, and as such, we have recorded an additional tax benefit of$1.8 million . Net Income from Continuing Operations As a result of the foregoing, net income from continuing operations attributable to Chart was$53.6 million and$26.2 million for 2018 and 2017, respectively. 37
-------------------------------------------------------------------------------- Segment Results for the Years EndedDecember 31, 2019 , 2018 and 2017 Our reportable and operational segments include: D&S East, D&S West, E&C Cryogenics and E&C FinFans. Corporate includes operating expenses for executive management, accounting, tax, treasury, corporate development, human resources, information technology, investor relations, legal, internal audit, and risk management. Corporate support functions are not currently allocated to the segments. For further information, refer to Note 4, "Segment and Geographic Information." of our consolidated financial statements included under Item 15, "Exhibits and Financial Statement Schedules" of this Annual Report on Form 10-K. The following tables include key metrics used to evaluate our business and measure our performance and represents selected financial data for our operating segments for the years endedDecember 31, 2019 , 2018 and 2017 (dollars in millions): D&S East Results of Operations for the Years EndedDecember 31, 2019 and 2018 Year Ended December 31, 2019 vs. 2018 Variance Variance 2019 2018 ($) (%) Sales$ 293.4 $ 246.3 $ 47.1 19.1 % Gross Profit 45.2 52.4 (7.2 ) (13.7 )% Gross Profit Margin 15.4 % 21.3 % SG&A Expenses$ 34.7 $ 31.6 $ 3.1 9.8 % SG&A Expenses (% of Sales) 11.8 % 12.8 % Operating Income$ 6.9 $ 19.3 $ (12.4 ) (64.2 )% Operating Margin 2.4 % 7.8 % For the year 2019, D&S East segment sales increased$47.1 million as compared to 2018. Sales for VRV, included in the D&S East segment results since the acquisition date,November 15, 2018 , were$57.1 million and$10.3 million for the years endedDecember 31, 2019 and 2018, respectively. Excluding the impact of VRV, sales increased across all product applications inEurope partially offset by lower sales inChina largely relative to a decline in LNG and bulk products. For the year 2019, D&S East segment gross profit and the related margin percentage decreased by$7.2 million (decreased by$7.8 million , organically) as compared to 2018. Excluding restructuring charges of$7.8 million and$0.5 million in 2019 and 2018 respectively, gross profit increased by$0.1 million as compared to 2018. The restructuring charges that negatively impacted the D&S East gross profit and the related margin percentage were primarily due to the closing of two production lines inChina . D&S East segment SG&A expenses increased during the year 2019 as compared to 2018 primarily driven by the$9.8 million related to VRV included in 2019 compared to$1.3 million since the acquisition date,November 15, 2018 . Excluding the impact of the VRV acquisition, SG&A expenses decreased by$5.4 million or 17.8%, mainly driven by lower employee-related costs inChina due to workforce reductions. Results of Operations for the Years EndedDecember 31, 2018 and 2017 Year Ended December 31, 2018 vs. 2017 Variance Variance 2018 2017 ($) (%) Sales$ 246.3 $ 232.3 $ 14.0 6.0 % Gross Profit 52.4 48.3 4.1 8.5 % Gross Profit Margin 21.3 % 20.8 % SG&A Expenses$ 31.6 $ 33.0 $ (1.4 ) (4.2 )% SG&A Expenses (% of Sales) 12.8 % 14.2 % Operating Income$ 19.3 $ 14.2 $ 5.1 35.9 % Operating Margin 7.8 % 6.1 % For the full year 2018, D&S East segment sales increased$14.0 million compared to 2017, which was primarily driven by the inclusion of VRV sales of$10.3 million for the six weeks of ownership, and the remaining increase driven by strength across all product applications. 38 -------------------------------------------------------------------------------- During the full year 2018, D&S East segment gross profit increased$4.1 million as compared to 2017 primarily due to the increase in volume, and the related margin increased mainly due to favorable product mix, primarily inChina , which was operating income positive for the first time since 2014. D&S East segment SG&A expenses decreased during the year 2018 as compared to 2017 by$1.4 million primarily due to the inclusion of additional commissions expense as a result of a litigation award inChina , which are reflected in 2017 results. D&S West Results of Operations for the Years EndedDecember 31, 2019 and 2018 Year Ended December 31, 2019 vs. 2018 Variance Variance 2019 2018 ($) (%) Sales$ 461.7 $ 455.5 $ 6.2 1.4 % Gross Profit 157.9 156.8 1.1 0.7 % Gross Profit Margin 34.2 % 34.4 % SG&A Expenses$ 48.7 $ 51.0 $ (2.3 ) (4.5 )% SG&A Expenses (% of Sales) 10.5 % 11.2 % Operating Income$ 104.5 $ 101.2 $ 3.3 3.3 % Operating Margin 22.6 % 22.2 % D&S West segment sales increased$6.2 million during the full year 2019 as compared to 2018 primarily due to an increase in sales related to systems and cryobiological storage products which was partially offset by a decline in packaged gas sales. D&S West segment gross profit increased$1.1 million during the full year as compared to 2018 mainly driven by higher volume in cryobiological storage tanks while the related margin percentage decreased by 0.2 percentage points primarily driven by lower margins in industrial gas and systems partially offset by higher margin within cryobiological systems. D&S West segment SG&A expenses decreased$2.3 million during the year 2019 as compared to 2018 primarily due to lower employee related expenses. Results of Operations for the Years EndedDecember 31, 2018 and 2017 Year Ended December 31, 2018 vs. 2017 Variance Variance 2018 2017 ($) (%) Sales$ 455.5 $ 400.6 $ 54.9 13.7 % Gross Profit 156.8 141.8 15.0 10.6 % Gross Profit Margin 34.4 % 35.4 % SG&A Expenses$ 51.0 $ 52.0 $ (1.0 ) (1.9 )% SG&A Expenses (% of Sales) 11.2 % 13.0 % Operating Income$ 101.2 $ 85.2 $ 16.0 18.8 % Operating Margin 22.2 % 21.3 % D&S West segment sales increased during the full year 2018 as compared to 2017 primarily due to an increase in sales within packaged gas industrial applications. D&S West segment gross profit increased during the full year 2018 as compared to 2017 mainly driven by higher volume in both packaged gas industrial applications and cryobiological storage. The 2018 year-to-date gross margin percentage was negatively impacted 0.9 percentage points due to the estimated costs of the aluminum cryobiological tank recall of$4.0 million recorded in cost of sales during 2018. D&S West segment SG&A expenses decreased during the full year 2018 as compared to 2017 mainly due to cost based saving measures taken during the period as well as share-based compensation forfeiture credits related to the strategic realignment of our segment structure. All severance costs related to the strategic realignment of our segment structure were recorded in restructuring within SG&A at Corporate. Additionally, the full year of 2017 included a reduction in a contingent consideration liability associated with a prior acquisition, which partially offset the decrease in D&S West segment SG&A expenses. 39 -------------------------------------------------------------------------------- Energy & Chemicals Cryogenics Results of Operations for the Years EndedDecember 31, 2019 and 2018 Year Ended December 31, 2019 vs. 2018 Variance Variance 2019 2018 ($) (%) Sales$ 190.2 $ 136.9 $ 53.3 38.9 % Gross Profit 33.5 28.6 4.9 17.1 % Gross Profit Margin 17.6 % 20.9 % SG&A Expenses$ 28.7 $ 23.3 $ 5.4 23.2 % SG&A Expenses (% of Sales) 15.1 % 17.0 % Operating Income$ 1.6 $ 1.8 $ (0.2 ) (11.1 )% Operating Margin 0.8 % 1.3 % For the year 2019, E&C Cryogenics segment sales increased$53.3 million as compared to 2018. Sales for VRV, included in the E&C Cryogenics segment results since the acquisition date,November 15, 2018 , were$46.9 million and$3.8 million for the years endedDecember 31, 2019 and 2018, respectively. Excluding the impact of VRV, sales increased mainly due to higher volume in brazed aluminum heat exchangers and cold box projects partially offset by lower sales relative to field services work. For the year 2019, E&C Cryogenics segment gross profit increased by$4.9 million (decreased by$2.0 million , organically) as compared to 2018. The increase in gross profit was primarily due to VRV sales included in 2019 as compared to 2018. The decrease in organic gross profit was primarily due to the less favorable brazed aluminum heat exchangers product mix. The related margin decreased 3.3 percentage points (2.9 percentage points organically), primarily due to higher volume in high margin short lead-time replacement equipment in 2018 as compared to 2019. E&C Cryogenics segment SG&A expenses increased during the year 2019 as compared to 2018 primarily driven by SG&A expenses of$7.1 million and$0.7 million related to the VRV acquisition for the years endedDecember 31, 2019 and 2018, respectively. Excluding VRV costs, SG&A expenses decreased as a percent of sales by 1.9 percent. Results of Operations for the Years EndedDecember 31, 2018 and 2017 Year Ended December 31, 2018 vs. 2017 Variance Variance 2018 2017 ($) (%) Sales$ 136.9 $ 125.5 $ 11.4 9.1 % Gross Profit 28.6 23.6 5.0 21.2 % Gross Profit Margin 20.9 % 18.8 % SG&A Expenses$ 23.3 $ 23.4 $ (0.1 ) (0.4 )% SG&A Expenses (% of Sales) 17.0 % 18.6 % Operating Income$ 1.8 $ (2.1 ) $ 3.9 (185.7 )% Operating Margin 1.3 % (1.7 )% For the year 2018, E&C Cryogenics segment sales increased as compared to 2017. Sales for VRV included in E&C Cryogenics segment results since theNovember 15, 2018 acquisition date were$3.8 million for the year endedDecember 31, 2018 . Excluding the impact from VRV, sales increased by$7.6 million , which was driven primarily by increased sales in brazed aluminum heat exchangers offset by a decrease in sales associated with our previousLifecycle business. Excluding the impact of the VRV acquisition, E&C Cryogenics segment gross profit increased by$6.0 million mainly driven by increased sales volume in NGL and petrochemical applications. The related margin increased 2.1 percentage points (3.4 percentage points organically), primarily due to an increase in high margin short lead-time replacement equipment. E&C Cryogenics segment SG&A expenses for 2018 as compared to 2017 were relatively flat. Excluding the impact of the VRV acquisition, SG&A expenses decreased$0.8 million during 2018. 40 -------------------------------------------------------------------------------- Energy & Chemicals FinFans Results of Operations for the Years EndedDecember 31, 2019 and 2018 Year Ended December 31, 2019 vs. 2018 Variance Variance 2019 2018 ($) (%) Sales$ 361.7 $ 253.6 $ 108.1 42.6 % Gross Profit 102.5 60.6 41.9 69.1 % Gross Profit Margin 28.3 % 23.9 % SG&A Expenses$ 33.6 $ 24.8 $ 8.8 35.5 % SG&A Expenses (% of Sales) 9.3 % 9.8 % Operating Income$ 40.6 $ 23.7 $ 16.9 71.3 % Operating Margin 11.2 % 9.3 % For the year 2019, E&C FinFans segment sales increased$108.1 million as compared to 2018. Sales for AXC, included in the E&C FinFans segment results since the acquisition date,July 1, 2019 , were$103.1 million for the year endedDecember 31, 2019 . Excluding the impact of AXC, sales increased by$5.0 million mainly due to higher axial flow fan sales partially offset by lower sales of air cooled heat exchangers from our Cooler Service andSmithco businesses. For the year 2019, E&C FinFans segment gross profit increased by$41.9 million (increased by$12.7 million , organically) as compared to 2018. Gross profit increased primarily due to higher volume for axial flow fans and the related margin increased mainly due to product mix. E&C FinFans segment SG&A expenses increased by$8.8 million during the year 2019 as compared to 2018 mainly due to acquisition of AXC. Results of Operations for the Years EndedDecember 31, 2018 and 2017 Year Ended December 31, 2018 vs. 2017 Variance Variance 2018 2017 ($) (%) Sales$ 253.6 $ 100.1 $ 153.5 153.3 % Gross Profit 60.6 21.5 39.1 181.9 % Gross Profit Margin 23.9 % 21.5 % SG&A Expenses$ 24.8 $ 10.9 $ 13.9 127.5 % SG&A Expenses (% of Sales) 9.8 % 10.9 % Operating Income$ 23.7 $ 7.2 $ 16.5 229.2 % Operating Margin 9.3 % 7.2 % For the year 2018, E&C FinFans segment sales increased as compared to 2017. Sales forHudson , included in the E&C FinFans segment results since theSeptember 20, 2017 acquisition date were$180.3 million and$58.0 million for 2018 and 2017, respectively. Excluding the impact fromHudson , sales increased by$31.2 million , which was driven primarily by growth in air cooled heat exchangers within NGL and petrochemical applications. Excluding the impact of theHudson acquisition, E&C FinFans segment gross profit increased by$5.0 million during 2018 as compared to 2017, mainly due to improved productivity driven by increased sales volume in NGL and petrochemical applications. The related margin increased 2.4 percentage points (0.6 percentage points organically), primarily due to favorable product mix. E&C FinFans segment SG&A expenses increased during 2018 as compared to 2017 primarily driven by theHudson acquisition, which added$12.8 million in incremental SG&A expenses during the year (2018:$18.5 million , 2017:$5.7 million ). Excluding the impact of theHudson acquisition, SG&A expenses increased by$1.0 million during 2018. 41 --------------------------------------------------------------------------------
Corporate
Corporate SG&A expenses increased by$19.2 million during 2019 as compared to 2018 primarily due to$7.3 million in transaction-related costs,$4.3 million in integration costs related to the VRV and AXC acquisitions and an increase in share-based compensation, which were partially offset by a decrease in employee-related costs. Corporate SG&A expenses decreased by$10.4 million during 2018 as compared to 2017 primarily due to prior restructuring activities and lower transaction-related costs. Corporate SG&A expenses in 2018 included transaction-related costs of$2.1 million for the year endedDecember 31, 2018 , which were mainly related to the VRV acquisition. This compares favorably to transaction-related costs of$10.1 million in 2017 driven by theHudson acquisition. Orders and Backlog We consider orders to be those for which we have received a firm signed purchase order or other written contractual commitment 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. Backlog can be significantly affected by the timing of orders for large projects, particularly in the E&C segment, and is not necessarily indicative of future backlog levels or the rate at which backlog will be recognized as sales. Orders included in our backlog may include customary cancellation provisions under which the customer could cancel part or all of the order, potentially subject to the payment of certain costs and/or fees. Backlog may be negatively impacted by the ability or likelihood of customers to fulfill their obligations. Our backlog as ofDecember 31, 2019 , 2018 and 2017 was$762.3 million ,$568.2 million and$446.4 million , respectively. The tables below represent orders received and backlog by segment for the periods indicated (dollar amounts in millions): Year Ended December 31, 2019 2018 2017 Orders D&S East$ 330.3 $ 277.0 $ 210.8 D&S West 479.9 477.4 407.1 E&C Cryogenics 333.8 119.9 146.5 E&C FinFans 268.9 268.1 97.1 Consolidated$ 1,412.9 $ 1,142.4 $ 861.5 As of December 31, 2019 2018 2017 Backlog D&S East$ 224.0 $ 185.4 $ 116.9 D&S West 147.1 129.8 118.6 E&C Cryogenics 285.3 139.7 108.9 E&C FinFans 105.9 113.3 102.0 Consolidated$ 762.3 $ 568.2 $ 446.4 Orders and Backlog for the Year Ended and As ofDecember 31, 2019 Compared to the Year Ended and As ofDecember 31, 2018 Orders for 2019 were$1,412.9 million compared to$1,142.4 million for 2018, representing an increase of$270.5 million , or 23.7% (10.8% organically), and set multiple annual order records. Consolidated orders include$52.2 million in orders related to AXC for the year endedDecember 31, 2019 . Consolidated backlog includes$31.5 million in backlog related to AXC as ofDecember 31, 2019 . D&S East segment orders for 2019 were$330.3 million compared to$277.0 million for 2018, an increase of$53.3 million . D&S East segment orders include$54.7 million and$8.7 million in orders related to VRV for 2019 and 2018, respectively. The increase in D&S East segment orders over the prior year was mainly driven by increases in bulk standard tanks within bulk industrial gas applications and cryogenic trailers, primarily inEurope as demand for LNG fueling stations inEurope is increasing and key customers continue to order trailers and LNG fuel systems for over the road trucking. D&S East segment backlog totaled$224.0 million atDecember 31, 2019 , compared to$185.4 million as ofDecember 31, 2018 , an increase of$38.6 million . D&S East segment backlog for 2019 and 2018 includes$40.4 million and$42.3 million related to VRV, respectively. 42 -------------------------------------------------------------------------------- D&S West segment orders for 2019 were$479.9 million compared to$477.4 million for 2018, an increase of$2.5 million driven by an increase in systems, offset by lower orders in industrial gas. D&S West segment backlog totaled$147.1 million atDecember 31, 2019 compared to$129.8 million as ofDecember 31, 2018 , an increase of$17.3 million mainly driven by a$21.0 million LNG by rail order, the first of its magnitude for our Gas By Rail ("GBR") unique offering. E&C Cryogenics segment orders for 2019 were$333.8 million compared to$119.9 million for 2018, an increase of$213.9 million . E&C Cryogenics segment orders include$53.1 million and$2.5 million in orders related to VRV for 2019 and 2018, respectively. E&C Cryogenics segment orders in 2019 include a$23 million order for a propane dehydrogenation plant. E&C Cryogenics segment backlog totaled$285.3 million as ofDecember 31, 2019 , compared to$139.7 million as ofDecember 31, 2018 , an increase of$145.6 million . E&C Cryogenics segment backlog for 2019 and 2018 includes$47.0 million and$39.3 million related to VRV, respectively. Excluding VRV, the increase in backlog from 2019 as compared to 2018 was primarily driven by Venture Global's Calcasieu Pass LNG export terminal project and petrochemical and natural gas processing applications. Included in E&C Cryogenics segment's backlog for 2019 and 2018 is approximately$40 million related to the previously announcedMagnolia LNG order where production release is delayed until 2020. Order flow in the E&C Cryogenics segment is historically volatile due to project size and it is not unusual to see order intake change significantly year over year. E&C FinFans segment orders for 2019 were$268.9 million compared to$268.1 million for 2018, an increase of$0.8 million . E&C FinFans segment orders include$52.2 million in orders related to AXC for the year endedDecember 31, 2019 . Excluding AXC, orders decreased by$51.4 million . Included in 2018 orders was a$28 million order for our Hudson Products air cooled heat exchangers on a large LNG project. E&C Fin Fans segment backlog totaled$105.9 million atDecember 31, 2019 , compared to$113.3 million as ofDecember 31, 2018 , a decrease of$7.4 million . E&C FinFans segment backlog as ofDecember 31, 2019 includes$31.5 million for AXC. Order flow in the E&C FinFans segment is driven by customer demand for energy related expenditures and it is not unusual for order intake to fluctuate year over year. Orders and Backlog for the Year Ended and As ofDecember 31, 2018 Compared to the Year Ended and As ofDecember 31, 2017 Orders for 2018 were$1,142.4 million compared to$861.5 million for 2017, representing an increase of$280.9 million , or 32.6% (11.7% organically). Consolidated orders include$11.2 million in orders related to VRV (D&S East:$8.7 million , E&C Cryogenics:$2.5 million ) for the year endedDecember 31, 2018 . Consolidated backlog includes$81.6 million related to VRV (D&S East:$42.3 million , E&C Cryogenics:$39.3 million ) as ofDecember 31, 2018 . D&S East segment orders for 2018 were$277.0 million compared to$210.8 million for 2017, an increase of$66.2 million or 31.4%. The increase in D&S East segment orders was mainly driven by increases in bulk standard tanks within bulk industrial gas applications and cryogenic trailers, primarily inEurope . Orders also increased inAsia , especially engineered tanks within bulk industrial gas applications. D&S East segment backlog totaled$185.4 million atDecember 31, 2018 , compared to$116.9 million as ofDecember 31, 2017 . D&S West segment orders for 2018 were$477.4 million compared to$407.1 million for 2017, an increase of$70.3 million , or 17.3%. The increase in D&S West segment orders over the prior year was driven by increases across all product applications, especially LNG vehicle tanks within packaged gas industrial applications. D&S West segment backlog totaled$129.8 million atDecember 31, 2018 compared to$118.6 million as ofDecember 31, 2017 . E&C Cryogenics segment orders for 2018 were$119.9 million compared to$146.5 million for 2017, a decrease of$26.6 million . E&C Cryogenics segment backlog totaled$139.7 million atDecember 31, 2018 , compared to$108.9 million as ofDecember 31, 2017 , an increase of$30.8 million . E&C Cryogenics segment orders included$2.5 million in orders related to VRV for the year endedDecember 31, 2018 . Excluding VRV orders, E&C Cryogenics orders decreased by$29.1 million . The decrease was primarily driven by inclusion of large equipment orders within both our Systems business and our previousLifecycle business related to work for a large plant, which were reflected in 2017 E&C Cryogenics segment orders. Order flow in the E&C Cryogenics segment is historically volatile due to project size and it is not unusual to see order intake change significantly year over year. E&C FinFans segment orders for 2018 were$268.1 million compared to$97.1 million for 2017, an increase of$171.0 million . E&C FinFans segment backlog totaled$113.3 million atDecember 31, 2018 , compared to$102.0 million as ofDecember 31, 2017 , an increase of$11.3 million . E&C FinFans segment orders includes$203.7 million and$31.3 million in orders related toHudson for the years endedDecember 31, 2018 and 2017, respectively. As discussed above, included in 2018 orders was a$28 million order for our Hudson Products air cooled heat exchangers on a large LNG project. This order shipped partially in 2018, and the remainder shipped in 2019. ExcludingHudson orders, E&C FinFans orders decreased by$1.4 million . 43 -------------------------------------------------------------------------------- Liquidity and Capital Resources Our debt and related covenants are further described in Note 10, "Debt and Credit Arrangements," of our consolidated financial statements included under Item 15, "Exhibits and Financial Statement Schedules" of this Annual Report on Form 10-K. Sources and Uses of Cash Our cash and cash equivalents totaled$119.0 million as ofDecember 31, 2019 , an increase of$0.9 million from the balance atDecember 31, 2018 . Our foreign subsidiaries held cash of approximately$75.9 million and$71.4 million atDecember 31, 2019 andDecember 31, 2018 , 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 SSRCF or other financing alternatives, and cash provided by operations will be sufficient to meet our normal working capital needs and investments in properties, facilities, and equipment for the foreseeable future. Years EndedDecember 31, 2019 and 2018 Cash provided by operating activities during 2019 was$133.9 million , an increase of$14.9 million from 2018, mainly due to lower inventory levels. Cash used in investing activities during 2019 and 2018 was$642.7 million and$260.6 million , respectively. During 2019, we used$603.9 million of cash primarily for the acquisition of AXC with proceeds from a common stock offering and borrowings under our SSRCF and term loan dueNovember 2024 and paid$36.2 million for capital expenditures mainly related to maintenance capital spending at VRV, investment in the LNG fuel systems production line inEurope , and automation projects in ourNew Prague, Minnesota facility. See below for discussion regarding the composition of cash used in investing activities during 2018. Cash provided by financing activities during 2019 and 2018 was$511.6 million and$38.2 million , respectively. During 2019, we borrowed$450.0 million under the term loan and received proceeds of$295.8 million from the 2019 Equity Offering to fund the AXC acquisition. During 2019, we borrowed$235.8 million on our SSRCF to fund working capital needs and to fund a portion of the AXC acquisition and repaid$451.1 million in SSRCF borrowings. We received$9.4 million in proceeds from stock option exercises and used$2.0 million for the purchase of common stock which was surrendered to cover tax withholding elections during the year. See below for discussion regarding the composition of cash provided by financing activities during 2018. Years EndedDecember 31, 2018 and 2017 Cash provided by operating activities during 2018 was$119.0 million , an increase of$74.7 million from 2017, largely due to higher net income. Cash used in investing activities was$260.6 million and$477.8 million during 2018 and 2017, respectively. During 2018, we used$225.8 million of cash for the VRV and Skaff acquisitions (euro 188.7 million or$213.3 million equivalent and$12.5 , respectively) and$35.6 million for capital expenditures mainly related to the capacity expansion of the brazed aluminum heat exchanger facility inLa Crosse, Wisconsin and the capacity increase inBall Ground, Georgia , to support demand for LNG vehicle tanks. Cash used in investing activities in 2017 was primarily for acquisitions including$419.5 million used for theHudson acquisition. Cash provided by financing activities during 2018 and 2017 was$38.2 million and$275.2 million , respectively. During 2018, we borrowed$405.4 million on our previous senior secured revolving credit facility (euro 140.0 million or$160.3 million equivalent plus$245.1 million ) mainly to fund the VRV and Skaff acquisitions, the settlement of the 2018 Notes and working capital needs. We repaid$315.1 million in borrowings on our previous senior secured revolving credit facility during 2018 (euro 55.0 million or$63.0 million equivalent plus$252.1 million ). We also borrowed 40.0 million Chinese yuan (equivalent to$6.3 million ) and repaid 11.5 million Chinese yuan (equivalent to$1.7 million ) on certain of ourChina facilities. We repaid 40.0 million Chinese yuan (equivalent to$5.9 million ) on certain of ourChina term loans. We received$10.8 million in proceeds from stock option exercises and used$2.7 million for the purchase of common stock which was surrendered to cover tax withholding elections during 2018. Cash provided by financing activities in 2017 mainly included borrowings on our previous senior secured revolving credit facility, proceeds from the issuance of convertible notes partially offset by the majority repurchase of our 2018 Notes. 44 -------------------------------------------------------------------------------- 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. We expect capital expenditures for 2020 to be in the range of$35.0 million to$40.0 million . Contractual Obligations Our known contractual obligations as ofDecember 31, 2019 and cash requirements resulting from those obligations are as follows (all dollar amounts in millions): Payments Due
by Period
Total Less Than 1 Year 1 - 3 Years 3 - 5 Years More Than 5 Years
Gross debt (1) $ 829.4 $ 15.7 $ 39.3 $ 774.4 $ -
Contractual convertible
notes interest 12.5 2.6 5.2 4.7 -
Operating leases 39.1 7.8 12.5 10.9 7.9
Pension obligations (2) 4.5 0.6 1.7 2.2 -
Total contractual cash
obligations $ 887.7 $ 27.0 $ 59.2 $ 792.7 $ 8.8
_______________
(1) The
(2) The planned funding of the pension obligations is based upon actuarial and
management estimates taking into consideration the current status of the
plan.
Our commercial commitments as ofDecember 31, 2019 , which include standby letters of credit and bank guarantees, represent potential cash requirements resulting from contingent events that require performance by us or our subsidiaries pursuant to funding commitments, and are as follows (all dollar amounts in millions): Total Expiring in 2020 Expiring in 2021 and beyond Standby letters of credit$ 56.3 $ 4.5 $ 51.8 Bank guarantees 27.8 0.9 26.9 Total commercial commitments$ 84.1 $ 5.4 $
78.7
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contingencies
We are involved with environmental compliance, investigation, monitoring, and
remediation activities at certain of our operating facilities or formerly owned
manufacturing facilities and accrue for these activities when commitments or
remediation plans have been developed and when costs are probable and can be
reasonably estimated. Historical annual cash expenditures for these activities
have been charged against the related environmental reserves. Future
expenditures relating to these environmental remediation efforts are expected to
be made over the next 7 years as ongoing costs of remediation programs.
Management believes that any additional liability in excess of amounts accrued,
which may result from the resolution of such matters, should not have a material
adverse effect on our financial position, liquidity, cash flows or results of
operations.
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, several of which claims assert
substantial damages, in the ordinary 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, we believe the resolution of these legal claims 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. See Item 1A.
"Risk Factors" and Item 3, "Legal Proceedings" for further information.
45
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Foreign Operations
During 2019, we had operations in Asia , Australia , Europe , and Latin America ,
which accounted for approximately 47% of consolidated sales and 31% of total
assets at December 31, 2019 . Functional currencies used by these operations
include the U.S. dollar, Chinese yuan, the euro, the British pound, the Japanese
yen and the Indian rupee. We are exposed to foreign currency exchange risk as a
result of transactions by these subsidiaries in currencies other than their
functional currencies, and from transactions by our domestic operations in
currencies other than the U.S. dollar. The majority of these functional
currencies and the other currencies in which we record transactions are fairly
stable, although we experienced variability in the current year as more fully
discussed in Item 7A. The use of these currencies, combined with the use of
foreign currency forward purchase and sale contracts, has enabled us to be
sheltered from significant gains or losses resulting from foreign currency
transactions. This situation could change if these currencies experience
significant fluctuations or the volume of forward contracts changes.
Application of Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles and are based on the selection and
application of significant accounting policies, which require management to make
estimates and assumptions about future events that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
materially from those estimates. Management believes the following are the more
critical judgmental areas in the application of its accounting policies that
affect its financial position and results of operations.
Goodwill and Indefinite-Lived Intangible Assets. We evaluate goodwill and
indefinite-lived intangible assets for impairment on an annual basis, as of
October 1 or whenever events or changes in circumstances indicate that an
evaluation should be completed. A significant amount of judgment is involved in
determining if an indicator of impairment has occurred. Such indicators may
include deterioration in general economic conditions, negative developments in
equity and credit markets, a decline in stock price and market capitalization,
adverse changes in the markets in which we operate, and a trend of negative or
declining cash flows over multiple periods. The fair value that could be
realized in an actual transaction may differ from that used to evaluate the
impairment of goodwill.
Goodwill is analyzed on a reporting unit basis. The reporting units are the same
as our operating and reportable segments: D&S East, D&S West, E&C Cryogenics,
and E&C FinFans. We first evaluate qualitative factors, such as macroeconomic
conditions and our overall financial performance to determine whether it is more
likely than not that the fair value of a reporting unit is less than its
carrying amount, including goodwill. We then evaluate how significant each of
the identified factors could be to the fair value or carrying amount of a
reporting unit and weigh these factors in totality in forming a conclusion of
whether or not it is more likely than not that the fair value of a reporting
unit is less than its carrying amount (the "Step 0 Test"). If we determine that
it is not more likely than not that the fair value of a reporting unit is less
than its carrying amount, the first step of the goodwill impairment test is not
necessary. Otherwise, we would proceed to the first step of the goodwill
impairment test.
Alternatively, we may also bypass the Step 0 Test and proceed directly to the
first step of the goodwill impairment test. Under the first step ("Step 1"), we
estimate the fair value of our reporting units by considering income and market
approaches to develop fair value estimates, which are weighted to arrive at a
fair value estimate for each reporting unit. With respect to the income
approach, a model has been developed to estimate the fair value of each
reporting unit. This fair value model incorporates estimates of future cash
flows, estimates of allocations of certain assets and cash flows among reporting
units, estimates of future growth rates, and management's judgment regarding the
applicable discount rates to use to discount such estimates of cash flows. With
respect to the market approach, a guideline company method is employed whereby
pricing multiples are derived from companies with similar assets or businesses
to estimate fair value of each reporting unit. If the fair value of the
reporting unit exceeds the carrying amount of the net assets assigned to that
reporting unit, then goodwill is not impaired, and no further testing is
required. However, if the fair value of the reporting unit is less than its
carrying amount, the impairment charge is based on the excess of a reporting
unit's carrying amount over its fair value (i.e., we would measure the charge
based on the result from Step 1).
In order to assess the reasonableness of the calculated fair values of our
reporting units, we also compare the sum of the reporting units' fair values to
our market capitalization and calculate an implied control premium (the excess
of the sum of the reporting units' fair values over the market capitalization).
We evaluate the control premium by comparing it to control premiums of recent
comparable transactions. If the implied control premium is not reasonable in
light of this assessment, we reevaluate our fair value estimates of the
reporting units by adjusting the discount rates and other assumptions as
necessary.
Changes to the assumptions and estimates used throughout the steps described
above may result in a significantly different estimate of the fair value of the
reporting units, which could result in a different assessment of the
recoverability of goodwill and result in future impairment charges.
46
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With respect to indefinite-lived intangible assets, we first evaluate relevant
events and circumstances to determine whether it is more likely than not that
the fair value of an indefinite-lived intangible asset is less than its carrying
amount. If, in weighing all relevant events and circumstances in totality, we
determine that it is not more likely than not that an indefinite-lived
intangible asset is impaired, no further action is necessary. Otherwise, we
would determine the fair value of indefinite-lived intangible assets and perform
a quantitative impairment assessment by comparing the indefinite-lived
intangible asset's fair value to its carrying amount. We may bypass such a
qualitative assessment and proceed directly to the quantitative assessment. We
estimate the fair value of our indefinite-lived assets using the income
approach. This may include the relief from royalty method or use of a model
similar to the one described above related to goodwill which estimates the
future cash flows attributed to the indefinite-lived intangible asset and then
discounting these cash flows back to a present value. Under the relief from
royalty method, fair value is estimated by discounting the royalty savings, as
well as any tax benefits related to ownership to a present value. The fair value
from either approach is compared to the carrying value and an impairment is
recorded if the fair value is determined to be less than the carrying value.
2019 and 2018 Goodwill and Indefinite-Lived Intangible Assets Impairment
Assessments
As of October 1, 2019 and 2018 ("annual assessment dates") we elected to bypass
the Step 0 test and based on our Step 1 test, we determined that the fair value
of each of our reporting units was greater than its respective carrying value at
each annual assessment date and, therefore, no further action was necessary.
Furthermore, as of the annual assessment dates, we also elected to bypass the
qualitative assessment for the indefinite-lived intangible assets and based on
our quantitative assessments, we determined that the fair value of each of the
indefinite-lived intangible assets was greater than its respective carrying
value, therefore, no further action was necessary.
Goodwill at December 31, 2019 and 2018 was $844.9 million and $520.7 million ,
respectively, attributed to the segments as follows:
•D&S East: 2019: $117.0 million (2018: $73.6 million );
•D&S West: 2019: $152.1 million and (2018: $151.3 million );
•E&C Cryogenics: 2019: $176.2 million ; and
•E&C FinFans: 2019: $399.6 million
Note: Goodwill at December 31, 2018 included $295.8 million attributable to our
prior E&C segment.
Long-Lived Assets. We monitor our property, plant and equipment, and
finite-lived intangible assets for impairment indicators on an ongoing basis. If
impairment indicators exist, assets are grouped and tested at the lowest level
for which identifiable cash flows are available and we perform the required
analysis and record impairment charges if applicable. In conducting its
analysis, we compare the undiscounted cash flows expected to be generated from
the long-lived assets to the related net book values. If the undiscounted cash
flows exceed the net book value, the long-lived assets are considered not to be
impaired. If the net book value exceeds the undiscounted cash flows, an
impairment loss is measured and recognized. An impairment loss is measured as
the difference between the net book value and the fair value of the long-lived
assets. Fair value is estimated from discounted future net cash flows (for
assets held for use) or net realizable value (for assets held for sale). In
assessing the recoverability of our long-lived assets, a significant amount of
judgment is involved in estimating the future cash flows, discount rates and
other factors necessary to determine the fair value of the respective assets. If
these estimates or the related assumptions change in the future, we may be
required to record impairment charges for these assets in the period such
determination was made. We amortize intangible assets that have finite lives
over their estimated useful lives. We had no long-lived asset impairments in the
last three years.
Convertible Debt. We determined that the conversion option within our 1.00%
Convertible Senior Subordinated Notes due November 2024 (the "2024 Notes") was
not clearly and closely related to the debt instrument host, however, the
conversion option met a scope exception to derivative instrument accounting
since the conversion feature is indexed to our common stock and meets equity
classification criteria. Convertible debt instruments exempt from derivative
accounting and subject to cash settlement of the conversion option are
recognized by bifurcating the principal balance into a liability component and
an equity component where the fair value of the liability component is estimated
by calculating the present value of its cash flows discounted at an interest
rate that we would have received for similar debt instruments that have no
conversion rights (the "straight-debt rate"), and the equity component is the
residual amount, net of tax, which creates a discount on the 2024 Notes. We
recognize non-cash interest accretion expense related to the carrying amount of
the 2024 Notes which is accreted back to its principal amount over the expected
life of the debt, which is also the stated life of the debt.
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Business Combinations. We account for business combinations in accordance with
Accounting Standards Codification ("ASC") 805, "Business Combinations." We
recognize and measure identifiable assets acquired and liabilities assumed based
on their estimated fair values. The excess of the consideration transferred over
the fair value of the net assets acquired, including identifiable intangible
assets, is assigned to goodwill. As additional information becomes available, we
may further revise the preliminary acquisition consideration allocation during
the remainder of the measurement period, which shall not exceed twelve months
from the closing of the acquisition.
Identifiable finite-lived intangible assets generally consist of customer
relationships, unpatented technology, patents and trademarks and trade names and
are amortized over their estimate useful lives which generally range from 2 to
15 years. Identifiable indefinite-lived intangible assets generally consist of
trademarks and trade names and are subject to impairment testing on at least an
annual basis. We estimate the fair value of identifiable intangible assets under
income approaches where the fair value models incorporate estimates of future
cash flows, estimates of allocations of certain assets and cash flows, estimates
of future growth rates, and management's judgment regarding the applicable
discount rates to use to discount such estimates of cash flows.
We expense transaction-related costs, including legal, consulting, accounting
and other costs, in the periods in which the costs are incurred.
Revenue Recognition: Revenue is recognized when (or as) we satisfy performance
obligations by transferring a promised good or service, an asset, to a customer.
An asset is transferred to a customer when, or as, the customer obtains control
over that asset. In most contracts, the transaction price includes both fixed
and variable consideration. The variable consideration contained within our
contracts with customers includes discounts, rebates, refunds, credits, price
concessions, incentives, performance bonuses, penalties and other similar items.
When a contract includes variable consideration, we evaluate the estimate of the
variable consideration to determine whether the estimate needs to be
constrained; therefore, we include the variable consideration in the transaction
price only to the extent that it is probable that a significant reversal of the
amount of cumulative revenue recognized will not occur when the uncertainty
associated with the variable consideration is subsequently resolved. Variable
consideration estimates are updated at each reporting date. When a contract
includes multiple performance obligations, the contract price is allocated among
the performance obligations based upon the stand alone selling prices. When the
period between when we transfer a promised good or service to a customer and
when the customer pays for that good or service is expected, at contract
inception, to be one year or less, we do not adjust for the effects of a
significant financing component.
For brazed aluminum heat exchangers, air cooled heat exchangers, cold boxes,
liquefied natural gas fueling stations, engineered tanks, and repair services,
most contracts contain language that transfers control to the customer over
time. For these contracts, revenue is recognized as we satisfy the performance
obligations by an allocation of the transaction price to the accounting period
computed using input methods such as costs incurred. Input methods recognize
revenue on the basis of the entity's efforts or inputs to the satisfaction of a
performance obligation relative to the total expected inputs to the satisfaction
of that performance obligation. The costs incurred input method measures
progress toward the satisfaction of the performance obligation by multiplying
the transaction price of the performance obligation by the percentage of
incurred costs as of the balance sheet date to the total estimated costs at
completion after giving effect to the most current estimates. Timing of amounts
billed on contracts varies from contract to contract and could cause significant
variation in working capital needs. Revisions to estimated cost to complete that
result from inefficiencies in our performance that were not expected in the
pricing of the contract are expensed in the period in which these inefficiencies
become known. Contract modifications can change a contract's scope, price, or
both. Approved contract modifications are accounted for as either a separate
contract or as part of the existing contract depending on the nature of the
modification.
For standard industrial gas and LNG tanks and some products identified in the
prior paragraph with contract language that does not meet the over time
recognition requirements, the contract with the customer contains language that
transfers control to the customer at a point in time. For these contracts,
revenue is recognized when we satisfy our performance obligation to the
customer. Timing of amounts billed on contracts varies from contract to
contract. The specific point in time when control transfers depends on the
contract with the customer, contract terms that provide for a present obligation
to pay, physical possession, legal title, risk and rewards of ownership,
acceptance of the asset, and bill-and-hold arrangements may impact the point in
time when control transfers to the customer. We recognize revenue under
bill-and-hold arrangements when control transfers and the reason for the
arrangement is substantive, the product is separately identified as belonging to
the customer, the product is ready for physical transfer and we do not have the
ability to use the product or direct it to another customer.
Incremental contract costs are expensed when incurred when the amortization
period of the asset that would have been recognized is one year or less;
otherwise, incremental contract costs are recognized as an asset and amortized
over time as promised goods and services are transferred to a customer. When
losses are expected to be incurred on a contract, we recognize the entire
anticipated loss in the accounting period when the loss becomes evident. The
loss is recognized when the current estimate of the consideration we expect to
receive, modified to include unconstrained variable consideration instead of
constrained variable consideration, is less than the current estimate of total
costs for the contract.
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Taxes assessed by a governmental authority that are both imposed on and
concurrent with a specific revenue-producing transaction, that are collected by
us from a customer, are excluded from revenue.
Shipping and handling fee revenues and the related expenses are reported as
fulfillment revenues and expenses for all customers because we have adopted the
practical expedient contained in ASC 606-10-25-18B. Therefore, all shipping and
handling costs associated with outbound freight are accounted for as a
fulfillment costs and are included in cost of sales.
Income Taxes. The Company and its U.S. subsidiaries file a consolidated federal
income tax return. Deferred income taxes are provided for temporary differences
between financial reporting and the consolidated tax return in accordance with
the liability method. A valuation allowance is provided against net deferred tax
assets when conditions indicate that it is more likely than not that the benefit
related to such assets will not be realized. In assessing the need for a
valuation allowance against deferred tax assets, we consider all available
evidence, including past operating results, estimates of future taxable income,
and the feasibility of tax planning strategies. In the event that we change our
determination as to the amount of deferred tax assets that can be realized, the
valuation allowance will be adjusted with a corresponding impact to the
provision for income taxes in the period in which such determination is made.
We utilize a two-step approach for the recognition and measurement of uncertain
tax positions. The first step is to evaluate the tax position and determine
whether it is more likely than not that the position will be sustained upon
examination by tax authorities. The second step is to measure the tax benefit as
the largest amount that is more likely than not of being realized upon
settlement.
Interest and penalties related to income taxes are accounted for as income tax
expense (benefit), net on the consolidated statements of income.
We have accounted for the tax effects of the Tax Cuts and Jobs Act ("Tax Act"),
which was signed into law on December 22, 2017 . The Tax Act, among other things,
reduced the U.S. federal corporate tax rate from 35% to 21%, requires companies
to pay a one-time transition tax on certain unrepatriated earnings of foreign
subsidiaries, requires a current inclusion in U.S. federal taxable income of
certain earnings of foreign corporations, and creates a new limitation on
deductible interest expense. In 2017, we accounted for the tax effects of the
Tax Cuts and Jobs Act under the guidance of SAB 118, on a provisional basis. In
2018, we finalized our analyses under SAB 118. For further information, see Note
16, "Income Taxes" included under Item 15, "Exhibits and Financial Statement
Schedules" of this Annual Report on Form 10-K. We are subjected to a tax on
Global Intangible Low Taxed Income ("GILTI"), which we record as a period cost
as incurred.
Recent Accounting Standards
For disclosures regarding recent accounting standards, refer to Note 2,
"Significant Accounting Policies," of our consolidated financial statements
included under Item 15, "Exhibits and Financial Statement Schedules" of this
Annual Report on Form 10-K.
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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 Annual
Report includes "forward-looking statements." These forward-looking statements
include statements relating to our business, including statements regarding
revenues, cost synergies, accretion and earnings related to our recently
completed acquisitions. In some cases, forward-looking statements may be
identified by terminology such as "may," "will", "should," "expects,"
"anticipates," "believes," "projects," "forecasts," "outlook," "guidance,"
"target," "continue" 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 our actual results to differ materially from those
matters expressed or implied by forward-looking statements.
The risk 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," among others, could affect our future performance and
liquidity and value of our securities and could cause our actual results to
differ materially from those expressed or implied by forward-looking statements
made by us or on our behalf. 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 included in this Annual Report are expressly
qualified in their entirety by these cautionary statements.
All forward-looking statements attributable to us or persons acting on our
behalf apply only as of the date of this Annual Report and are expressly
qualified in their entirety by the cautionary statements included in this Annual
Report. 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.
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