Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 1-11442
Chart Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 34-1712937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5885 Landerbrook Drive, Suite 150, Cleveland, Ohio 44124
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (440) 753-1490
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each classon which registered
Common Stock,New York Stock Exchange
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 28, 2002, the registrant had 24,875,288 shares of Common
Stock outstanding. As of that date, the aggregate market value of the Common
Stock of the registrant held by non-affiliates was $38,467,195 (based upon the
closing price of $2.25 per share of Common Stock on the New York Stock Exchange
on February 28, 2002). For purposes of this calculation, the registrant deems
the 7,778,757 shares of Common Stock held by all of its Directors and executive
officers as of such date to be the shares of Common Stock held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be used in
connection with its Annual Meeting of Stockholders to be held on June 6, 2002
are incorporated by reference into Part III of this Form 10-K.
Except as otherwise stated, the information contained in this Form 10-K
is as of December 31, 2001.
1
PART I
ITEM 1. BUSINESS; AND ITEM 2. PROPERTIES
THE COMPANY
Chart Industries, Inc. (the "Company" or "Chart") was organized in June
1992 as a Delaware corporation to serve as a holding company for the operations
described herein. As used herein, the terms "Company" or "Chart" mean Chart
Industries, Inc., its subsidiaries and its predecessors, unless the context
otherwise indicates. The Company's executive offices are located at 5885
Landerbrook Drive, Suite 150, Cleveland, Ohio 44124, and its telephone number
is (440) 753-1490.
The Company's sales for the year ended December 31, 2001 reached $328.0
million, a slight increase over sales of $325.7 million in 2000. The Company's
net loss in 2001 was $5.2 million compared with net income of $2.2 million in
2000.
Management anticipates that demand for the Company's products will increase
over the next several years. The Company has initiatives to pursue multiple new
products focused on the end-user equipment markets for low-temperature and
cryogenic liquids. The use of liquid natural gas ("LNG") as a vehicle fuel and
power generating feedstock, the migration from high pressure cylinders to micro
bulk distribution and telemetry to improve distribution logistics each in their
own right offer significant market potential. In addition, the Company plans to
continue to focus on its worldwide presence as global industrialization and
heightened environmental standards are expected to result in higher demand for
high purity industrial gases, which are generally produced, stored and
distributed in a cryogenic state. The recent mergers of several industrial gas
producers and distributors have temporarily reduced the demand for new process
and distribution equipment that the Company offers to industrial markets. The
pressures for increased efficiency in the industry, however, are expected to
result in renewed demand for newer equipment and increased service of existing
equipment. The Company is well positioned to benefit from both of these
developments. In the hydrocarbon processing market, management expects strong
domestic and international growth, stemming in part from increased global
natural gas and ethylene production. Oil producing countries are newly committed
to capturing and marketing flared methane that previously was a waste product of
the crude oil production process. This increased availability of economically
priced hydrocarbons is expected to result in greater demand for equipment to
liquefy, process and transport these gases.
BUSINESS
GENERAL
The Company manufactures standard and custom-built industrial process
equipment primarily used for low-temperature and cryogenic applications. The
Company has developed an expertise in cryogenic systems and equipment, which
operate at low temperatures sometimes approaching absolute zero (0(degrees)
Kelvin; -273(degrees) Centigrade; -459(degrees) Fahrenheit). The majority of the
Company's products, including vacuum-insulated containment vessels, heat
exchangers, cold boxes and other cryogenic components, are used throughout the
liquid-gas supply chain for the purification, liquefaction, distribution,
storage and use of industrial gases and hydrocarbons.
SEGMENTS AND PRODUCTS
The Company's operations are organized within three segments: Applied
Technologies, Distribution and Storage Equipment and Process Systems and
Equipment. Further information about these segments is found at Note K to the
Company's consolidated financial statements included at Item 8 of this Annual
Report on Form 10-K.
APPLIED TECHNOLOGIES SEGMENT
The Applied Technologies segment, which accounted for 43 percent of the
Company's sales in 2001, consists of various product lines built around the
Company's core competencies in cryogenics but with a focus on the end users of
the liquids and gases instead of the large producers and distributors. The
Company's products in the Applied Technologies segment include the following:
LNG Alternative Fuel Systems
This product line consists of vacuum-insulated containers for LNG storage,
cryogenic pumps and liquid dispensers for vehicle fueling systems and LNG and
liquid/compressed natural gas ("CNG") refueling systems for centrally fueled
fleets of vehicles powered by LNG and CNG, such as fleets operated by
metropolitan transportation authorities, refuse haulers and heavy-duty truck
fleets. Competition for LNG fueling and storage systems is based primarily on
product design, customer support and service, dependability and price. Although
there are alternatives to LNG as a fuel, the Company is not aware of any viable
alternatives to vacuum-insulated containers for LNG fueling and storage
systems. The Company pursues this opportunity through its NexGen Fueling(r)
("NexGen") business unit.
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Telemetry Products
The Company has developed this product line as a new business model which
focuses primarily on providing distribution routing data to distributors of
home health care oxygen and beverage carbon dioxide ("CO/2/"). The Company
expects that this business will expand into other areas of liquid distribution,
such as micro-bulk industrial gases, as the product gains acceptance. This
routing data is expected to lower distribution costs and make the supply of
liquid oxygen and liquid CO2 more competitive than the existing modes of supply
to each of these markets. The Company pursues this opportunity through its
CoolTel(r) ("CoolTel") business unit. CoolTel entered into agreements with its
first commercial customers in the fourth quarter of 2001.
Medical Products
The medical oxygen product lines include a limited range of 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.
Individuals for whom supplemental oxygen is prescribed generally purchase
or rent an oxygen system from a home healthcare provider or medical equipment
dealer. The provider/dealer or physician usually selects which type of oxygen
system to recommend to its customers: liquid oxygen systems, oxygen
concentrators or high pressure oxygen cylinders. Liquid systems are currently
believed to have more therapeutic value due to the higher quality oxygen,
comfort and mobility they provide.
The Company believes that competition for liquid oxygen systems is based
primarily upon product performance, reliability, ease-of-service and price and
focuses its marketing strategies on these considerations.
Biological Storage Systems
This product line consists of vacuum-insulated containment vessels used
by the beef and dairy cattle breeding industry to transport frozen semen and
embryos and vacuum-insulated containment vessels used by hospitals, medical
laboratories and research facilities to transport and store human organs,
tissue samples and other temperature-sensitive biological matter.
These products are sold through laboratory product original equipment
manufacturers, laboratory product distributors, industrial gas distributors and
breeding service providers. Many of these distributors provide a single source
for many different types of products to hospitals, medical laboratories and
research facilities.
The Company's competitors for biological storage systems include only a
few companies inside and outside the United States, including Harsco.
Competition for biological storage systems is based primarily on product
design, reliability and price. Alternatives to vacuum-insulated containment
vessels include mechanical, electrically powered refrigeration for storage of
biological matter.
Magnetic Resonance Imaging ("MRI") Cryostat Components
The basis of the MRI technique is the magnetic properties of certain nuclei
of the human body which can be detected, measured and converted into images for
analysis. MRI equipment uses high-strength magnetic fields, applied radio waves
and high-speed computers to obtain cross-sectional images of the body. The major
components of the MRI assembly are a series of concentric thermal shields and a
supercooled magnet immersed in a liquid helium vessel (a "cryostat") that
maintains a constant, extremely low temperature (4[degree] Kelvin; -452[degree]
Fahrenheit) to achieve superconductivity. The Company manufactures large
cryostats, various cryogenic interfaces, electrical feed-throughs and various
other MRI components that are used to transfer power and/or cryogenic fluids
from the exterior of the MRI unit to the various layers of the cryostat and
superconducting magnet.
The Company currently sells all of its MRI cryostats to General Electric
Company ("GE") and is the exclusive supplier of GE's cryostats. GE is the
leading worldwide manufacturer of MRI equipment.
Cryogenic Systems and Components
The Company's line of cryogenic components, including vacuum-insulated
pipe, high-pressure cryogenic pumps, valves and specialty components, are
recognized in the market for their reliability, quality and performance. These
products are sold to the Company's heat exchanger and cold box customers in the
industrial gas and hydrocarbon processing industries, as well as to a diverse
group of customers in those and other industries. The Company competes with a
number of suppliers of cryogenic components, including Cryogenic Industries,
CCI and Acme Cryogenics.
Bulk Liquid CO2 Systems
This product line consists primarily of vacuum-insulated, bulk liquid CO2
containers used for beverage carbonation in restaurants, convenience stores and
cinemas. The Company also manufactures and markets non-insulated, bulk flavored
syrup containers for side-by-side installation with its CO2 systems. The
Company's beverage systems are sold to food franchisers, soft drink companies
and CO2 distributors.
The Company's primary competitors for its bulk liquid CO2 beverage
delivery systems are producers of high pressure gaseous CO2 systems and sellers
of bulk liquid CO2 beverage systems. The Company believes that competition for
bulk liquid CO2 beverage systems is based primarily on service and price.
3
Stainless Steel Tubing
The Company produces small diameter stainless steel tubing for sale to
distributors to satisfy their customers' requirements for quick delivery. The
Company's manufacturing strategy is to focus on custom sizes and smaller
production runs, which management believes gives the Company a competitive
advantage in providing a superior quality product while meeting customer
demands for dependable, fast delivery. With its production and marketing
efforts directed principally to customers relying on prompt delivery, the
Company is able to compete primarily on the basis of service rather than price.
Numerous manufacturers of stainless steel tubing are able to compete with the
Company in this market.
DISTRIBUTION AND STORAGE EQUIPMENT SEGMENT ("DISTRIBUTION AND STORAGE")
Representing 40 percent of the Company's sales in 2001, the products
supplied by the Distribution and Storage segment are driven primarily by the
large and growing installed base of users of cryogenic liquids as well as new
applications and distribution technologies for cryogenic liquids. The Company's
products span the entire spectrum of the industrial gas market from small
customers requiring cryogenic packaged gases to large users requiring custom
engineered cryogenic storage systems and include the following:
Cryogenic Bulk Storage Systems
The Company is a leading supplier of cryogenic bulk storage systems of
various sizes ranging up to 100,000 gallons. Using sophisticated vacuum
insulation systems placed between inner and outer vessels, these bulk storage
systems are able to store and transport liquefied industrial gases and
hydrocarbon gases at temperatures nearing absolute zero. The Company has
experienced growth in its bulk storage systems sales as the demand for
liquefied industrial gases and liquefied hydrocarbon gases has increased.
Customers for the Company's cryogenic storage tanks include industrial gas
producers, chemical producers, manufacturers of electrical components and
businesses in the oil and natural gas industries. Prices for the Company's
cryogenic bulk storage systems range from $20,000 to $500,000. Principal
customers for the Company's cryogenic bulk storage systems are AGA, Air
Liquide, Air Products, BOC and Praxair. The Company competes chiefly with
Harsco in this area.
Cryogenic Packaged Gas Systems
The Company is a leading supplier of cryogenic packaged gas systems of
various sizes ranging from 50 gallons to 1,000 gallons. Cryogenic liquid
cylinders are used extensively in the packaged gas industry to allow smaller
quantities of liquid to be easily delivered to the customers of the industrial
gas distributors on a full-for-empty basis. Principal customers for the
Company's liquid cylinders are AGA, Air Liquide, Air Products, BOC and Praxair.
The Company competes chiefly with Harsco in this area. The Company has
developed two new technologies in the packaged gas product area: ORCA(r)
Micro-Bulk systems and Tri-fecta(r) Laser Gas assist systems. ORCA(r)
Micro-Bulk systems bring the ease of use and distribution economics of bulk gas
supply to customers formerly supplied by high pressure or cryogenic liquid
cylinders. The ORCA(r) Micro-Bulk system growth has exceeded Company
expectations and is the substantial market leader in this growing segment. The
Tri-fecta(r) Laser Gas assist system was developed to meet the performance
requirements for new high powered lasers being used in the metal fabrication
industry. Growth of this product has also exceeded Company expectations, and
the Company has no knowledge of a similar competitive product.
Cryogenic Services
The Company operates four locations providing installation, service and
maintenance of cryogenic products including storage tanks, liquid cylinders,
cryogenic trailers, cryogenic pumps and vacuum-insulated pipe. The Company's
national service network is unique in the industry, and the Company believes
this network provides a significant competitive edge. The Company anticipates
the demand for full service, national, qualified maintenance of cryogenic
products and installations will increase. The Company's cryogenic services
business results primarily from its March 1999 acquisition of a group of
privately held companies, collectively known as Northcoast Cryogenics
("Northcoast"), and its December 1999 acquisition of the operational assets and
personnel of Air Liquide America's cryogenic repair center located in Houston,
Texas.
PROCESS SYSTEMS AND EQUIPMENT SEGMENT ("PROCESS SYSTEMS")
The Company's principal products within the Process Systems segment, which
accounted for 17 percent of sales in 2001, are focused on the process
equipment, primarily heat exchangers and coldboxes, used by the major natural
gas, petrochemical processing and industrial gas companies in the production of
their products.
The Company is the leading designer and manufacturer of cryogenic heat
exchangers. Using technology pioneered by the Company, heat exchangers are
incorporated into systems such as cold boxes to facilitate the progressive
cooling and liquefaction of air or hydrocarbon mixtures for the subsequent
recovery or purification of component gases. In hydrocarbon processing
industries, heat exchangers allow producers to obtain purified hydrocarbon
by-products, such as methane, ethane, propane and ethylene, which are
commercially marketable for various industrial or residential uses. In the
industrial gas market, heat exchangers are used to obtain high purity
atmospheric gases, such as oxygen, nitrogen and argon, which have numerous
diverse industrial applications. Heat exchangers are customized to the
customer's order and range in price from approximately $30,000 for a relatively
simple unit to as high as $10 million for a major project.
Management anticipates the return of demand for its heat exchangers in the
second half of 2002, resulting substantially from increased activity in the
petrochemical and natural gas segments of the hydrocarbon processing market. In
particular, management believes that continuing efforts by petroleum producing
countries to make better use of previously flared methane and to broaden
4
their industrial base present a promising source of demand for the Company's
heat exchangers. Demand for heat exchangers in developed countries is expected
to continue as firms upgrade their facilities for greater efficiency and
regulatory compliance. Historic demand for heat exchangers has cycled to very
low levels and typically recovered to new peak requirements. To ensure adequate
capacity for anticipated growth in demand for heat exchangers, the Company
operates two facilities, the larger being in the United States with a smaller
capacity facility in the United Kingdom.
The Company's principal competitors for heat exchangers are Linde,
Sumitomo, Kobe and Nordon. Management believes that the Company is the only
producer of large brazed aluminum heat exchangers in the United States and,
with the second facility in the United Kingdom, is the leader in the global
heat exchanger market. Major customers for the Company's heat exchangers in the
industrial gas market include Air Liquide, Air Products, BOC, MG Industries and
Praxair. In the hydrocarbon processing market, major customers include BP
AMOCO, EXXON/MOBIL and contractors such as ABB Lummus, Bechtel and Kellogg,
Brown and Root.
The Company is a leading designer and fabricator of cold boxes. Cold
boxes are highly engineered systems used to significantly reduce the
temperature of gas mixtures to the point where component gases liquefy and can
be separated and purified for further use in multiple industrial, scientific
and commercial applications. In the industrial gas market, cold boxes are used
to separate air into its major atmospheric components, including nitrogen,
oxygen and argon, where the gases are used in a diverse range of applications
such as the quick-freezing of food, wastewater treatment and industrial
welding. In the hydrocarbon processing market, the Company's cold box systems
are used in natural gas processing and in the petrochemical industry. The
construction of a cold box generally consists of one or more heat exchangers
and other equipment packaged in a "box" consisting of metal framing and a
complex system of piping and valves. Cold boxes, which are designed and
fabricated to order, sell in the price range of $500,000 to $10 million, with
the majority of cold boxes priced between $1 million and $2 million.
The Company has a number of competitors for fabrication of cold boxes,
including E.S. Fox and Ivor J. Lee. Principal customers for the Company's cold
boxes include Air Liquide, ABB Lummus, BP AMOCO, Bechtel, Stone & Webster,
Kellogg, Brown and Root, and Lurgi.
MARKET OVERVIEW
The Company serves a wide variety of markets through its emphasis on
providing equipment for end-users of cryogenic liquids. These markets include
beverage bottling and dispensing, alternative transportation fuels, biomedical
research, medical test equipment, home-healthcare and electronics testing, to
name just a few. With such a wide variety of markets, the Company has reduced
the effect that fluctuations in the overall industrial gas and hydrocarbon
markets have on its profitability.
Despite its cyclicality, management believes that the global expansion of
the industrial gas and hydrocarbon processing markets presents attractive
opportunities for growth. To date, the sources of the Company's international
business principally have been its large domestic-based customers, who are
aggressively expanding into international markets, and large foreign-based
companies with significant U.S. operations. In 2001, approximately 34 percent
of the Company's sales were destined for use at job sites outside the United
States compared to 33 percent in 2000 and 34 percent in 1999.
The industrial gas market is the largest market served by the Company.
The top world producers of industrial gases have been among the Company's
largest customers for each of the last three years. Producers of industrial
gases separate atmospheric air into its component gases using cryogenic
processes. The resultant liquid gases are then stored and transported for
ultimate use by a wide variety of customers in the petrochemical, electronics,
glass, paper, metals, food, fertilizer, welding, enhanced oil recovery and
medical industries. Industrial gas producers use heat exchangers and cold boxes
to produce liquid gases. Cryogenic tanks and components, including pumps,
valves and piping, are also used to store, transport and distribute liquid
gases to end users.
The hydrocarbon processing market consists of petrochemical and natural
gas processors. Natural gas processing involves the separation and purification
of natural gas for the production of liquid gas end products such as methane,
ethane, propane and butane, and by-products such as helium, which have numerous
commercial and industrial applications. In the petrochemical industry,
cryogenic separation and purification processes are required to produce
ethylene (the basic building block of plastics), propylene and numerous other
primary hydrocarbons having industrial uses. Like the industrial gas market,
the hydrocarbon processing market uses all of the categories of the Company's
cryogenic products in the gas separation and purification processes and the
subsequent storage and distribution of liquid gases. Major customers for the
Company's products in the hydrocarbon processing markets are large
multinational firms in the oil and gas industry, and large engineering and
construction concerns.
ENGINEERING AND PRODUCT DEVELOPMENT
The Company's engineering and product development activities are focused
on developing new and improved solutions and equipment for the users of
cryogenic liquids. The Company's engineering, technical and marketing employees
actively assist customers in specifying their needs and in determining
appropriate products to meet those needs. Portions of the Company's engineering
expenditures typically are charged to customers, either as separate items or as
components of product cost.
5
COMPETITION
Management believes the Company can compete effectively around the world
and that it is a leading competitor in its markets. Competition is based
primarily on performance and the ability to provide the design, engineering and
manufacturing capabilities required in a timely and cost-efficient manner.
Contracts are usually awarded on a competitive bid basis. Quality, technical
expertise and timeliness of delivery are the principal competitive factors
within the industry. Price and terms of sale are also important competitive
factors. Because reliable market share data is not available, it is difficult
to estimate the Company's exact position in its markets, although the Company
believes it ranks among the leaders in each of the markets it serves.
MARKETING
The Company's principal operating units currently market products and
services in North America primarily through 172 direct sales personnel, and
supplement these direct sales through independent sales representatives and
distributors. The technical and custom design nature of the Company's products
requires a professional, highly trained sales force. While each salesperson is
expected to develop a highly specialized knowledge of one product or group of
products within a segment of the Company, each salesperson is now able to sell
many products from different segments to a single market.
The Company uses independent sales representatives to conduct its sales in
certain foreign countries that the Company serves. These independent sales
representatives supplement the Company's direct sales force in dealing with
language and cultural matters. The Company's domestic and foreign independent
sales representatives earn commissions on sales, which vary by product type.
ORDERS AND BACKLOG
The Company considers orders to be those for which the Company has
received a signed purchase order or other written contract from the customer.
Such orders are included in backlog until recognized as revenue or cancelled.
The table below sets forth orders and backlog by segment for the last three
fiscal years.
Years Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Orders
Applied Technologies (A) $ 142,527 $ 142,656 $ 98,941
Distribution and Storage Equipment 122,433 154,756 96,722
Process Systems and Equipment 46,728 78,149 32,087
---------- ---------- ----------
Total $ 311,688 $ 375,561 $ 227,750
========== ========== ==========
Backlog
Applied Technologies (A) $ 13,782 $ 15,961 $ 12,456
Distribution and Storage Equipment 26,635 39,227 26,372
Process Systems and Equipment 24,395 33,686 8,165
---------- ---------- ----------
Total $ 64,812 $ 88,874 $ 46,993
========== ========== ==========
(A) Applied Technologies backlog and orders have been restated for all periods
presented to show the MRI cryostat business to have no backlog; thus,
orders in all periods for this business equal sales. This is consistent
with the current treatment of purchase orders by the customer for this
business.
During 2001, the Applied Technologies segment continued with very strong
order performance in each of its product lines. This segment would have shown
significant growth if it had not been for the slowdown in cryogenic systems
mainly for the electronics industry. The Distribution and Storage segment
experienced a reduction in orders across its product portfolio in 2001 compared
with 2000 due to the worldwide slowdown experienced by the manufacturing
sectors of the industrialized world. The Process Systems segment returned to a
cyclical order low in 2001 after being buoyed in 2000 by several orders related
to the Trinidad LNG project.
The Company experienced a significant increase in orders in the Process
Systems segment in 2000. This increase was primarily due to one significant LNG
project in the natural gas processing market. The increase in the Applied
Technologies segment orders in 2000 compared with 1999 was largely driven by the
inclusion of certain MVE Holdings, Inc. ("MVE") products for the full year,
while 1999 only included orders for these products subsequent to the Company's
April 12, 1999 acquisition of MVE. Additionally, MRI cryostat, LNG systems and
medical oxygen products all showed significant order improvements in 2000
compared with 1999. Like Applied Technologies, the Distribution and Storage
segment benefited significantly in 2000 from the inclusion of MVE for the full
year. In addition, the packaged gas and ORCA(R) Micro-Bulk delivery systems
demonstrated significantly improved orders due to several new long term supply
agreements with large industrial gas suppliers. The Company's Czech Republic
operations also increased market share in Europe in 2000 as they demonstrated
improved quality.
6
Almost all of the December 31, 2001 backlog is scheduled to be recognized
as sales during 2002. The Company's backlog fluctuates from time to time, and
the amounts set forth above are not necessarily indicative of future backlog
levels or the rate at which backlog will be recognized as sales. The increased
focus within the Company on the Distribution and Storage and Applied
Technologies segments will generally reduce backlog, as products within these
segments tend to have shorter lead times than those in the Process Systems
segment.
CUSTOMERS
Ten customers accounted for 40 percent of consolidated sales in 2001. The
Company's sales to particular customers fluctuate from period to period. In
2001, approximately 34 percent of sales were destined to be used in foreign
countries. The Company's customers are spread across the industrial gas,
hydrocarbon and chemical processing industries in several countries. The
Company's management has established certain credit requirements that its
customers must meet before sales credit is extended. The Company monitors the
financial condition of its customers to help ensure collections and to minimize
losses. For certain domestic and foreign customers, the Company requires
customer advances, letters of credit and other such guarantees of payment. For
certain foreign customers, the Company also purchases credit and political risk
insurance. The Company believes its relationships with its customers are good.
PATENTS AND TRADEMARKS
Although the Company has a number of patents, trademarks and licenses
related to its business, no one of them or related group of them is considered
by the Company to be of such importance that its expiration or termination
would have a material adverse effect on the Company's business. In general, the
Company depends upon technological capabilities, manufacturing quality control
and application of know-how, rather than patents or other proprietary rights,
in the conduct of its business.
RAW MATERIALS AND SUPPLIERS
The Company manufactures most of the products it sells. The raw materials
used in manufacturing include aluminum sheets, bars, plate and piping,
stainless steel strip, heads, plate and piping, palladium oxide, carbon steel
heads and plate and 9 percent nickel steel heads and plate. Most raw materials
are available from multiple sources of supply. In March 2002, the United States
Government instituted various levels of tariffs on certain imported steel
products. These tariffs will have the impact of increasing the manufactured
cost of certain of the Company's Distribution and Storage segment bulk storage
tanks by between 8 percent and 18 percent. The Company has announced a
surcharge related to these bulk storage tanks in order to pass the tariff costs
on to its customers.
Commodity metals used by the Company have experienced fluctuations in
price. The Company has generally been able to recover the costs of price
increases through its contracts with customers. The Company foresees no acute
shortages of any raw materials which would have a material adverse effect on
its operations.
EMPLOYEES
As of December 31, 2001, the Company had 2,137 employees, including 1,479
domestic employees and 658 international employees. These employees consisted
of 665 salaried, 435 union hourly and 1,037 non-union hourly employees. The
salaried employees included 112 engineers and draft-persons and 553 other
professional, technical and clerical personnel.
The Company is a party to three collective bargaining agreements through
its operating subsidiaries. The agreement with the International Association of
Machinists and Aerospace Workers covering 107 employees at the Company's La
Crosse, Wisconsin heat exchanger facility expires February 3, 2004. The
agreement with the International Brotherhood of Boilermakers, Iron Ship
Builders, Blacksmiths, Forgers and Helpers covering 69 employees at the
Company's Plaistow, New Hampshire facility expires August 30, 2002. The
agreement with the United Steel Workers covering 259 employees at the Company's
New Prague, Minnesota facility expired January 15, 2002, and a new agreement
continues to be negotiated. No work stoppage is currently anticipated at this
facility. Since the acquisition of each of its operating units, the Company has
not had any work stoppages or strikes. The Company believes its employee
relations are good.
FACILITIES
The Company occupies 22 principal locations totaling approximately 2.1
million square feet, with the majority devoted to manufacturing, assembly and
storage. Of these manufacturing facilities, approximately 1.6 million square
feet are owned and 0.5 million square feet are occupied under operating leases.
The Company considers its manufacturing facilities sufficient to meet its
current and planned operational needs. The Company leases approximately 11,400
square feet for its executive offices in Cleveland, Ohio. The Company's owned
facilities in the United States are subject to mortgages securing the Company's
consolidated credit and revolving loan facility.
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The following table sets forth certain information about the Company's
facilities:
Location Segment Sq. Ft. Ownership Use
-------- ------- ------- --------- ---
Columbus, Ohio Applied Technologies 46,200 Leased Manufacturing/Office
5,000 Leased Warehouse
Costa Mesa, California Applied Technologies 42,000 Leased Manufacturing/Office
Burnsville, Minnesota Applied Technologies 91,700 Owned Manufacturing/Office
Canton, Georgia Applied Technologies 138,000 Owned Manufacturing/Office
Lonsdale, Minnesota Applied Technologies 13,500 Leased Manufacturing
Clarksville, Arkansas Applied Technologies 85,300 Owned Manufacturing/Office
Greenville, Pennsylvania Applied Technologies 2,100 Leased Office
Solingen, Germany Applied Technologies 2,600 Leased Office/Warehouse
Yennora, Australia Applied Technologies 7,000 Leased Office/Warehouse
Plaistow, New Hampshire Distribution & Storage 164,400 Owned Manufacturing/Office
Denver, Colorado Distribution & Storage 124,300 Leased Manufacturing/Office
103,800 Owned Manufacturing/Office
Houston, Texas Distribution & Storage 22,000 Leased Manufacturing
Holly Springs, Georgia Distribution & Storage 6,000 Leased Manufacturing
New Prague, Minnesota Distribution & Storage 200,000 Owned Manufacturing
15,000 Leased Manufacturing
6,000 Owned Manufacturing
16,000 Leased Office
8,000 Owned Manufacturing
Decin, Czech Republic Distribution & Storage 493,000 Owned Manufacturing/Office
Zhangiajang, China Distribution & Storage 30,000 Leased Manufacturing
Changzhou, China Distribution & Storage 21,500 Leased Manufacturing/Office
La Crosse, Wisconsin Process Systems 149,000 Owned Manufacturing/Office
Westborough, Massachusetts Process Systems 18,500 Leased Office
New Iberia, Louisiana* Process Systems 62,400 Leased Manufacturing
Wolverhampton, England Process Systems 190,200 Owned Manufacturing/Office
Cleveland, Ohio Corporate Headquarters 11,400 Leased Office
*Leased by a joint venture in which the Company has a 50 percent interest.
ENVIRONMENTAL MATTERS
The Company's operations involve and have involved the handling and use of
substances, such as various cleaning fluids used to remove grease from metal,
that are subject to federal, state and local environmental laws and
regulations. These regulations impose limitations on the discharge of
pollutants into the soil, air and water, and establish standards for their
handling, management, use, storage and disposal. The Company monitors and
reviews its procedures and policies for compliance with environmental laws and
regulations. The Company's management is familiar with these regulations, and
supports an ongoing capital investment program to maintain the Company's
adherence to required standards.
The Company is involved with environmental compliance, investigation,
monitoring and remediation activities at certain of its operating facilities,
and, except for these continuing remediation efforts, believes it is currently
in substantial compliance with all known material and applicable environmental
regulations. The Company accrues for certain environmental remediation-related
activities for which commitments or remediation plans have been developed and
for which costs can be reasonably estimated. These estimates are determined
based upon currently available facts regarding each facility. Actual costs
incurred may vary from these estimates due to the inherent uncertainties
involved. Future expenditures relating to these environmental remediation
efforts are expected to be made over the next ten years as ongoing costs of
remediation programs. Although the Company believes it has adequately provided
for the cost of all known environmental conditions, the applicable regulatory
agencies could insist upon different and more costly remediative measures than
those the Company believes are adequate or required by existing law. The
Company believes that any additional liability in excess of amounts accrued
which may result from the resolution of such matters will not have a material
adverse effect on the Company's financial position, liquidity, cash flows or
results of operations.
8
ITEM 3. LEGAL PROCEEDINGS
The Company's Applied Technologies business ("Applied Technologies") has
been named as a defendant in several similar cases pending in the Court of
Common Pleas, Montgomery County, Ohio, related to an accident occurring on
December 7, 2000, at the IHS at Carriage by the Lake nursing home outside
Dayton, Ohio. A nitrogen tank was connected to the nursing home's oxygen system
resulting in the death of five elderly patients and injuries to five additional
patients from inhaling nitrogen. The cases filed to date include: Tomlin, et
----------
al. v. IHS at Carriage by the Lake, et al., Waldspurger v. BOC Gases, et al.,
-----------------------------------------------------------------------------
Leslie v. IHS at Carriage by the Lake, et al., Williams, et al., v. IHS at
--------------------------------------------------------------------------
Carriage by the Lake, et al., Reynolds, et. al. v. IHS at Carriage by the Lake,
-------------------------------------------------------------------------------
et. al., and Van Etten v. IHS at Carriage by the Lake, et. al. The cases were
-------- -------------------------------------------------
filed on various dates between December 13, 2000 and December 31, 2001. The
claims against the Company in these cases include negligence, strict product
liability, failure to warn, negligence per se, breach of warranty, punitive
damages, wrongful death, loss of consortium (spousal and maternal) and negligent
infliction of emotional distress. The allegations underlying the claims include
defective or deficient manufacture, construction, design, labeling, formulation
and warnings with regard to a cylinder. Defendants named in these cases include
the nursing home and its parent company, Applied Technologies, BOC Gases of
Dayton, The BOC Group, Inc., and a "John Doe" manufacturer and supplier. The
plaintiffs in these cases are seeking, in total, $28.5 million in compensatory
damages, $30.0 million in punitive damages, $2.0 million for loss of consortium
damages, pre-judgment and post-judgment interest and costs and fees from the
Company and other defendants named in the claims. The Company is vigorously
defending all of these cases and has filed its answer, denied all liability and
cross-claimed for contribution from certain co-defendants. Certain co-defendants
have filed cross-claims against the Company claiming contribution. Certain of
these cases have been settled with the other defendants, and others are
scheduled to be mediated. The Company is not involved in any of the mediation or
settlement negotiations, in part because the Company has not received any
settlement demands. Additionally, the Company believes that the claims made
against it are the most tenuous of any defendant and that the plaintiffs will be
unable to articulate a plausible negligence claim based on product liability. Of
further significance is the fact that some of the co-defendants have been
criminally indicted in this matter. The Company, however, has not been so
indicted. The court has granted stays in all of these cases pending the outcome
of the criminal charges. All of these cases have been assigned to one judge and
will most likely be consolidated for trial. The trial in these matters has
tentatively been set for June 3, 2002. The trial in the criminal matter is
scheduled for May 20, 2002.
The Company is a party to other legal proceedings incidental to the normal
course of its business. Management believes that the final resolution of these
matters will not have a material adverse affect on the Company's financial
position, liquidity, cash flows or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information as of December 31, 2001 regarding each of the
Company's executive officers is set forth below:
Name Age Position
---- --- --------
Arthur S. Holmes 60 Chairman, Chief Executive Officer and a Director
James R. Sadowski 60 President and Chief Operating Officer
Michael F. Biehl 46 Chief Financial Officer and Treasurer
John T. Romain 37 Controller, Chief Accounting Officer and Assistant
Treasurer
Arthur S. Holmes has been Chairman and Chief Executive Officer of the
Company since its formation in June 1992, and was President until December
1993. Mr. Holmes served as President of ALTEC International, Inc. from 1985
through 1989. From 1978 through 1985, he served in a variety of managerial
capacities for Koch Process Systems, Inc., the predecessor of Process Systems
International, Inc., an operating unit of the Company, most recently as Vice
President-Manager of the Gas Processing Division. Mr. Holmes is the co-inventor
of the Company's patented Ryan/Holmes technology. Mr. Holmes holds a BS and an
MS in Chemical Engineering from the Pennsylvania State University and an MBA
from Northeastern University.
James R. Sadowski has been President and Chief Operating Officer of the
Company since December 1993. Prior to joining the Company, Mr. Sadowski served
as Group Vice President of Parker Hannifin Corporation's Bertea Aerospace Group
("Bertea") from 1991 to 1993. Prior to his service at Bertea he served in
various managerial capacities at Parker Hannifin Corporation and TRW Inc. Mr.
Sadowski holds a BS in Engineering/Science from Case Institute of Technology
and an MS degree from the same institution in Mechanical Engineering.
9
Michael F. Biehl has been the Chief Financial Officer and Treasurer of the
Company since July 2001. Prior to joining the Company, Mr. Biehl served as Vice
President, Finance and Treasurer at Oglebay Norton Company, a publicly held
Cleveland-based company that provides industrial minerals to a broad range of
industries. He joined Oglebay Norton in 1992 as Corporate Controller, was
promoted to Treasurer and Director of Finance in 1994 and promoted to Vice
President, Finance in 1998. Prior to joining Oglebay Norton, he worked in the
audit practice of Ernst & Young, LLP in Cleveland, Ohio. Mr. Biehl is a
Certified Public Accountant and holds a BBA in Accounting from Ohio University
and an MBA from Northwestern University's Kellogg Graduate School of Management.
John T. Romain has been the Chief Accounting Officer since May 1999 and
has served as the Company's Controller since July 1993. Prior to joining the
Company, Mr. Romain worked in the audit practice of Ernst & Young, LLP in
Cleveland, Ohio. Mr. Romain is a Certified Public Accountant and holds a BA in
Accounting and Computer Systems from Grove City College, Grove City,
Pennsylvania.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
QUARTERLY STOCK PRICES AND DIVIDENDS
The high and low sales prices for the Company's Common Stock reported on
the New York Stock Exchange for each quarterly period within the most recent
two years are set forth in the table below:
Quarter
-------------
2001 High Low
---- ---
1st $ 5.88 $ 4.00
2nd 5.15 3.15
3rd 4.00 2.76
4th 3.00 1.84
Quarter
-------------
2000 High Low
---- ---
1st $ 4.75 $ 2.94
2nd 5.12 2.62
3rd 6.38 4.25
4th 6.00 4.00
The Company did not pay any dividends in 2001 or 2000.
LIMITATIONS ON THE PAYMENT OF DIVIDENDS
The Company is permitted to pay cash dividends not exceeding $7.2 million
in any fiscal year after January 1, 2001, but only if at both the time of
payment of the dividend and immediately thereafter there is no event of default
under the Credit Facility.
RELATED STOCKHOLDER MATTERS
Chart Industries Common Stock is traded on the New York Stock Exchange
under the symbol "CTI."
Shareholders of record on February 28, 2002 numbered 1,847. The Company
estimates that an additional 5,000 shareholders own stock held for their
accounts at brokerage firms and financial institutions.
10
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
each of the five years during the period ended December 31, 2001. The data was
derived from the annual audited consolidated financial statements of the
Company for the relevant years and includes the operations of acquired
businesses after their date of acquisition, including for periods after April
12, 1999, the operations of MVE. Further information about the Company's
acquisitions is found at Note D to the Company's consolidated financial
statements included at Item 8 of this Annual Report on Form 10-K.
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Years Ended December 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Income Statement Data:
Sales $ 327,990 $ 325,700 $ 292,937 $ 229,423 $ 192,249
Gross profit 86,361 96,029 77,381 77,657 61,240
Employee separation and plant closure costs
(income) 2,375 ( 614) 11,982
Operating income (loss) 19,366 30,919 ( 11,736) 44,155 35,034
Interest expense - net (21,589) ( 26,676) ( 15,854) ( 901) ( 350)
Net income (loss) ( 5,158) 2,155 ( 36,280) 28,215 22,627
Earnings per Common Share:
Net income (loss) $ ( 0.21) $ 0.09 $ ( 1.53) $ 1.17 $ 1.01
Net income (loss)-- assuming dilution $ ( 0.21) $ 0.09 $ ( 1.53) $ 1.16 $ 0.99
Other Financial Data:
EBITDA (A) $ 39,928 $ 48,169 $ 17,155 $ 51,181 $ 38,545
Depreciation and amortization 18,187 17,864 16,909 7,026 3,511
Cash provided by (used in) operating
activities 13,273 14,646 ( 5,514) 30,934 22,713
Cash used in investing activities (6,494) ( 427) ( 82,194) ( 45,270) ( 27,073)
Cash provided by (used in) financing
activities 504 ( 9,759) 87,019 ( 5,484) ( 17,047)
Dividends 2,370 4,821 3,858
Dividends per share $ 0.10 $ 0.20 $ 0.17
Balance Sheet Data:
Cash and cash equivalents $ 11,801 $ 4,921 $ 2,314 $ 2,169 $ 22,095
Working capital 56,276 42,524 50,087 25,326 39,476
Total assets 408,980 429,843 424,570 158,205 128,919
Total debt 272,083 269,870 278,672 11,325 4,468
Shareholders' equity 49,340 54,844 55,512 93,154 76,457
(A) The Company defines EBITDA as net income (loss) before gain on sale of
assets, net interest expense, derivative contracts valuation expense,
income tax expense (benefit), minority interest expense, cumulative
effect of change in accounting principle, extraordinary items,
depreciation and amortization expense and employee separation and plant
closure costs (income). The Company's definition of EBITDA may not be
comparable to similarly titled measures reported by other companies.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
During 2001, the Company continued its focus on developing products that
are expected to continue the growth trend Chart has demonstrated since its
initial public offering in 1992. The Company is growing through organic
development of new products, extension of products worldwide and acquisitions.
The Company has grown from $92 million in sales in 1992 to $328 million in
sales in 2001. The Company has also moved from being concentrated in the
Process Systems segment to offering a wider array of products, many of which
are more focused on the end usage of cryogenic liquids than on the production
of these liquids.
The migration of the Company's business, from products primarily employed
in the production of cryogenic liquids to a broader array of products used
throughout the cryogenic liquid-gas supply chain, is demonstrated by the
historical growth of the Applied Technologies and Distribution and Storage
segments. In 2001, the Company's Applied Technologies segment represented
$142.5 million, or 43 percent, of its sales and $49.6 million, or 57 percent,
of its gross profit. In 1992, the Company's equivalent segment had sales of
$15.8 million, representing 15 percent of the Company's 1992 sales. Likewise,
the Distribution and Storage segment generated sales of $129.5 million, or 40
percent, of consolidated sales in 2001. In 1992, this segment had $22.8 million
in sales, representing 22 percent of the Company's sales for that year. In
2001, the Process Systems segment represented 17 percent of consolidated
revenue. In 1992 this segment represented 63 percent of consolidated revenue.
In 2001, the Company experienced the effects of the general economic
slowdown affecting the United States manufacturing sector. These effects were
complicated by the events of September 11th and the subsequent uncertainty in
the economy. Based upon national leading economic indicators, the Company's
current outlook for 2002 is positive, with an expected recovery of certain
depressed markets in the second half of the year.
OPERATING RESULTS
The following table sets forth the percentage relationship that each line
item in the Company's consolidated statements of operations represents to sales
in the last three fiscal years.
Years Ended December 31,
---------------------------------------
2001 2000 1999
------------ ----------- -----------
Sales 100.0% 100.0% 100.0%
Cost of sales 73.7 70.5 73.6
Gross profit 26.3 29.5 26.4
Selling, general and administrative expense 18.3 18.7 17.6
Goodwill amortization expense 1.5 1.5 1.2
Employee separation and plant closure costs
(income) 0.7 ( 0.2) 4.1
Equity income in joint venture ( 0.1)
Acquired in-process research and development 7.5
Operating income (loss) 5.9 9.5 ( 4.0)
Gain on sale of assets 0.2 0.3 0.8
Interest expense, net ( 6.6) ( 8.2) ( 5.4)
Derivative contracts valuation expense ( 0.9)
Income tax expense 0.1 0.9 1.1
Income (loss) before cumulative effect of change in
accounting principle and extraordinary item ( 1.5) 0.7 ( 9.7)
Cumulative effect of change in accounting
principle, net of taxes ( 0.1)
Extraordinary item, net of taxes ( 2.7)
Net income (loss) ( 1.6) 0.7 ( 12.4)
12
SEGMENT INFORMATION
The following table sets forth sales, gross profit and gross profit margin
for the Company's three operating segments for the last three fiscal years.
Years Ended December 31,
------------------------------------------
2001 2000 1999
------------ ------------ --------------
(Dollars in thousands)
Sales
Applied Technologies $142,491 $136,952 $105,323
Distribution and Storage Equipment 129,473 137,929 105,529
Process Systems and Equipment 56,026 50,819 82,085
------------ ------------ --------------
Total $327,990 $325,700 $292,937
============ ============ ==============
Gross Profit
Applied Technologies $ 49,577 $ 54,449 $ 35,521
Distribution and Storage Equipment 27,030 29,311 25,313
Process Systems and Equipment 9,754 12,269 16,547
------------ ------------ --------------
Total $ 86,361 $ 96,029 $ 77,381
============ ============ ==============
Gross Profit Margin
Applied Technologies 34.8% 39.8% 33.7%
Distribution and Storage Equipment 20.9% 21.3% 24.0%
Process Systems and Equipment 17.4% 24.1% 20.2%
Total 26.3% 29.5% 26.4%
YEARS ENDED DECEMBER 31, 2001 AND 2000
Sales for 2001 were $328.0 million versus $325.7 million for 2000, an
increase of $2.3 million, or 0.7 percent. With minimal price changes in 2001,
the increase in sales was primarily volume driven and resulted from sales
growth in the Applied Technologies and Process Systems segments of $5.5 million
and $5.2 million, respectively, offset by a $8.5 million decrease in
Distribution and Storage segment sales.
The Applied Technologies segment sales increase was largely driven by a
$7.3 million increase in medical oxygen product shipments as well as increased
shipments of $3.8 million in biological storage systems and $4.1 million in LNG
alternative fuel systems. Offsetting these increases were reductions of $5.8
million in cryogenic systems and components and $3.7 million in MRI cryostat
components. Sales by the Distribution and Storage segment were significantly
impacted by the general economic slowdown in the second half of 2001. Declines
of $4.3 million and $8.4 million in standard tanks and packaged gas liquid
cylinders, respectively, more than offset the increased number of ORCA((r))
Micro-Bulk delivery systems and other mobile equipment sold. The Process
Systems segment sales, while improving slightly in 2001, still reflect the
significant and extended downturn in new production equipment for the
industrial gas market. The Company expects to see an upturn in 2002 in the
various markets this segment serves, especially natural gas processing and
ethylene production equipment.
Gross profit for 2001 was $86.4 million versus $96.0 million for 2000.
Gross profit was negatively impacted by non-cash inventory valuation charges
included in cost of sales of $1.9 million in the Applied Technologies segment
and $0.7 million in the Distribution and Storage segment related to the
Company's decisions to exit a product line and close certain cryogenic services
business sites. Gross profit margin for 2001 was 26.3 percent versus 29.5
percent for 2000. The Applied Technologies segment 2001 gross profit margin
decreased five points compared with 2000 as its sales mix was concentrated in
lower margin products such as LNG alternative fuel systems rather than higher
margin cryogenic systems. The Process Systems segment experienced declining
margins in 2001 due to the lower prices on highly competitive projects, which
were only partially offset by the $2.2 million positive impact of increased
volume. Gross profit margin in the Distribution and Storage segment in 2001
declined when compared with 2000 primarily due to lower manufacturing volume in
the bulk and packaged gas areas.
In March 2002, the United States Government instituted various levels of
tariffs on certain imported steel products. These tariffs will have the impact
of increasing the manufactured cost of certain of the Company's Distribution
and Storage segment bulk storage tanks by between 8 percent and 18 percent. The
Company has announced a surcharge related to these bulk storage tanks in order
to pass the tariff costs on to its customers. The Company does not know at this
time what effect, if any, these steel tariffs will have on the future sales and
gross margin of the Distribution and Storage segment.
13
Selling, general and administrative ("SG&A") expense for 2001 was $60.1
million versus $60.8 million for 2000, a decrease of $0.7 million, or 1.2
percent. As a percentage of sales, SG&A expense was 18.3 percent for 2001, down
from 18.7 percent for 2000. The decreases in both total SG&A expense and SG&A
expense as a percentage of sales largely reflect the headcount reduction
efforts of the Company during the year.
Goodwill amortization expense for 2001 was $5.0 million compared with $4.9
million for 2000. Goodwill comprised 41.1 percent and 40.3 percent of total
assets at December 31, 2001 and 2000, respectively, and arose primarily from
the Company's acquisition of MVE in 1999. The Company will apply the new rules
on accounting for goodwill and other intangible assets under Statement of
Financial Accounting Standards ("SFAS") No. 141 "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1,
2002. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to impairment
tests in accordance with SFAS No. 142. Application of the non-amortization
provisions of SFAS No. 142 is expected to result in an annual increase in net
income of approximately $5.0 million, or $0.20 per share, assuming dilution.
The Company does not expect to identify any indefinite lived intangible assets.
The Company plans to complete step one of the transitional impairment tests of
goodwill by June 30, 2002. The Company has not yet determined the effect, if
any, such tests will have on the financial statements of the Company.
During 2001, the Company recorded employee separation and plant closure
costs of $2.4 million. The charges included $1.6 million related to the closure
of the Ottawa Lake, Michigan facility and two smaller sites within the
cryogenic services business of the Distribution and Storage segment, $0.4
million for terminating 25 employees at the Company's Wolverhampton, United
Kingdom, heat exchangers business facility of the Process Systems segment and
$0.4 million for terminating 45 other employees throughout the Company. The
Ottawa Lake business was moved to New Prague, Minnesota, and the two smaller
repair operations were consolidated into Holly Springs, Georgia and Chart's
newest service center in Costa Mesa, California. The cryogenic services
business charges of $1.6 million included $0.5 million for lease termination
and facility closure-related costs, $0.6 million for writing off certain
leasehold improvements and fixed assets, $0.1 million for terminating 32
employees, and $0.4 million for moving costs and other charges. At December 31,
2001, the Company had a reserve of $0.5 million remaining, primarily for lease
termination costs. The Company does not expect to incur any additional costs
related to the shutdown of the cryogenic services business sites.
In the first quarter of 2002, the Company will record a charge related to
its decision to close its Distribution and Storage segment plant in Denver,
Colorado. The various mobile equipment products manufactured in this plant will
be manufactured in other Company facilities. The charge related to the closure
of this site is still being finalized, but is expected to approximate $2.0
million. The charge will include lease termination costs, severance for
terminated employees, write-offs of inventory and fixed assets and moving costs
incurred for items consolidated into other facilities. The Company expects to
complete the shutdown of this plant in the second quarter of 2002.
In late 2001, the Company engaged consultants to perform an operations
review of all of its domestic and foreign operating facilities. Although the
study is not yet finalized, preliminary discussions with the consultants
indicate they will propose different rationalization scenarios. The Company is
committed to reviewing these scenarios and implementing the changes, if any,
that the Company believes will increase shareholder value. It is probable that
the Company will incur additional charges in 2002 related to these
rationalization efforts.
The Company recorded $0.5 million of equity income in its Coastal
Fabrication joint venture in 2001, compared with equity income of $0.04 million
in 2000. The joint venture has not made any cash distributions to the Company
or the other joint venture partner.
In 2001, the Company recorded a $0.5 million gain on the sale of its
minority investment in Restaurant Technologies, Inc. for cash proceeds of $2.4
million.
Net interest expense for 2001 was $21.6 million compared with $26.7
million for 2000, reflecting lower interest rates due to decreases by the
Federal Reserve in base interest rates. The Company manages its interest rate
exposure through the use of interest rate collars on approximately 50 percent
of the term debt and to a lesser extent by varying LIBOR maturities in the
entire Credit Facility. The Company's interest rate collars do not qualify as
hedges under the provisions of SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The Statement requires such collars to be
recorded in the consolidated balance sheet at fair value. Changes in their fair
value must be recorded in the consolidated statement of operations.
Accordingly, the Company recorded a charge to operations as of January 1, 2001
as a cumulative effect of a change in accounting principle, net of income
taxes. As a result of the significant interest rate decreases and an
expectation that the forward interest rate yield curve will remain flat, the
Company was required to record non-cash charges of $2.9 million in 2001 related
to an estimated decline in fair value of the Company's interest rate collars.
These charges should be offset in the future by lower actual interest rates on
outstanding loans. There were no comparable non-cash charges in 2000. The fair
value of the interest rate collars is determined by the expectation of future
interest rates and is, therefore, difficult to predict. The liability relating
to the collars of $2.3 million is recorded by the Company in accrued interest
in the consolidated balance sheet at December 31, 2001, and represents the
estimated payments to be made over the life of the collars. An interest rate
collar covering $76.0 million of the Company's debt expires on June 30, 2002.
The remaining interest rate collar covering $33.4 million of debt expires on
March 31, 2006.
14
The effective income tax rate for 2001 reflects the interaction of a book
loss and taxable income, which is primarily the result of non-deductible
goodwill amortization. The Company has net deferred tax assets of $15.1 million
at December 31, 2001. Management has determined, based on the Company's history
of prior earnings and its expectations for the future, that taxable income of
the Company will more likely than not be sufficient to fully realize the tax
benefit of the net deferred tax assets.
As a result of the foregoing, the Company incurred a net loss of $5.2
million in 2001, compared with net income of $2.2 million in 2000.
YEARS ENDED DECEMBER 31, 2000 AND 1999
Sales for 2000 were $325.7 million versus $292.9 million for 1999, an
increase of $32.8 million, or 11.2 percent. The increase in sales was primarily
volume driven and was the result of growth in sales for the Applied
Technologies and Distribution and Storage segments of $31.6 million and $32.4
million, respectively, offset by a $31.3 million decrease in Process Systems
sales.
The Applied Technologies segment increase in sales in 2000 was largely
driven by the inclusion of certain product lines of MVE totaling $70.3 million
for the full year, while 1999 only included sales subsequent to April 12 and
totaled $53.7 million. Additionally, MRI cryostat components showed a $6.1
million improvement over 1999.
Similar to Applied Technologies, sales by the Distribution and Storage
segment benefited significantly in 2000 from the inclusion of MVE for the full
year. MVE product lines contributed $97.8 million of sales toward the
Distribution and Storage segment in 2000, compared with $62.1 million of sales
in 1999. The packaged gas and ORCA((R)) Micro-Bulk delivery systems
demonstrated significantly improved sales due to several new long term supply
agreements with the large industrial gas suppliers. The Company's Czech
Republic operations also continued to increase market share in Europe as it
demonstrated improved quality.
The Process Systems segment sales in 2000 reflected the significant and
extended downturn in the industrial gas market for new production equipment.
This market had been cyclical in the past as demonstrated by the Company's poor
performance in 1993 and 1994.
Gross profit for 2000 was $96.0 million versus $77.4 million for 1999.
Gross profit in 1999 was reduced by $1.2 million for acquired profit in
inventory related to the MVE acquisition and $0.9 million for inventory related
employee separation and plant closure costs, both of which were included in
cost of sales. Gross profit margin for 2000 was 29.5 percent versus 26.4
percent for 1999. The Applied Technologies segment gross profit margin improved
in 2000 compared with 1999 as its sales growth was concentrated in higher
margin products, driven largely by providing system solutions instead of
components. The Process Systems segment also experienced improved margins in
2000 compared with 1999, largely due to the improved volumes as the result of
the Trinidad LNG project as well as several other higher margin hydrocarbon
processing projects. Gross profit margin in the Distribution and Storage
segment declined nearly three percentage points in 2000 compared with 1999, due
to poor performance in the cryogenic services business.
SG&A expense for 2000 was $60.8 million versus $51.5 million for 1999, an
increase of $9.3 million, or 18.2 percent. As a percentage of sales, SG&A
expense was 18.7 percent for 2000, up from 17.6 percent for 1999. The increase
as a percentage of sales largely reflected the higher marketing costs incurred
in 2000 inherent in the pursuit of sales in the Applied Technologies segment,
and increased medical and other employee benefit costs.
Goodwill amortization expense for 2000 was $4.9 million compared with $3.7
million for 1999. The $1.2 million increase was entirely attributable to
incremental amortization expense resulting from the MVE and Northcoast
acquisitions being included for the full year.
The Company recorded net employee separation and plant closure costs of
$12.9 million in 1999 to reorganize its operations as a result of the MVE
acquisition. The charge included a non-cash portion of $9.8 million to
write-off impaired inventory, fixed assets and goodwill, and a cash portion of
$3.1 million for severance and other costs related to closing a manufacturing
facility. The Company terminated 188 employees in 1999 under this plan. During
2000, the Company reversed $0.7 million of the reserve due to reoccupying a
leased facility previously vacated, and utilized $0.6 million of the reserve
for the payment of severance benefits and lease costs for an exited facility.
The Company's 1999 financial results were negatively impacted by a
non-cash charge of $22.0 million for the write-off of acquired in-process
research and development ("IPR&D" ) related to the MVE acquisition that had no
alternative future use at the date of acquisition. This total amount was
determined by independent consultants who estimated the costs to develop the
technology into commercially viable products, estimated cash flows resulting
from the expected revenues generated by such products, and discounted the net
cash flows back to their present value using a risk-adjusted discount rate.
15
In 2000, the Company recorded a $1.0 million gain on the sale of certain
fixed assets, primarily its Westborough, Massachusetts building, on proceeds of
$5.0 million in cash.
Net interest expense for 2000 was $26.7 million compared with $15.9
million for 1999, reflecting higher interest rates and interest for the full
year on funds borrowed to finance the MVE acquisition.
The change in the effective income tax rate between 2000 and 1999 was
primarily due to the non-deductible IPR&D expense incurred in 1999. The Company
had net deferred tax assets of $11.9 million at December 31, 2000.
In 1999, the Company recorded an extraordinary charge of $12.5 million,
$7.8 million net of tax, related to the early extinguishment of MVE 12.5
percent senior secured notes which had a maturity date in 2002.
As a result of the foregoing, the Company earned net income of $2.2
million in 2000, compared with a net loss of $36.3 million in 1999. Excluding
non-recurring items resulting from the MVE acquisition and related
reorganization, the Company had net income of $4.2 million in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations in 2001 was $13.3 million compared with $14.6
million in 2000 and cash used in operations of $5.5 million in 1999. In 2001
the Company generated cash from positive cash earnings as well as reductions in
both inventory and accounts receivable. In 2000, the Company increased
inventory in several of its short lead time items to service increasing sales
volumes and to reduce orders lost due to backorders. The significant decrease
in operating cash flow in 1999 was due primarily to the large decrease in
operating income from the Process Systems segment and decreases in customer
advances. As orders recover in the Process Systems segment and grow in the
other segments as expected by the Company, there could be large fluctuations in
cash flows depending on negotiated payment terms with customers.
Capital expenditures in 2001, 2000 and 1999 were $8.1 million, $5.6
million and $7.0 million, respectively. The Company's capital expenditures
relate primarily to the Distribution and Storage segment, where new equipment
was necessary as a result of the Company's reorganization plan initiated in
1999. The Company expects capital expenditures in 2002 to be similar in
magnitude to the 2001 amount.
On December 15, 1999, the Company acquired certain assets relating to the
cryogenic repair business operated by Air Liquide America Corporation ("Air
Liquide") for $1.0 million in cash and $2.6 million in rebate credits to be
given to Air Liquide on future sales. These rebate credits have been fully
utilized as of December 31, 2001.
On April 12, 1999, the Company acquired the common stock of MVE for
approximately $9.2 million in cash ($2.2 million net of cash acquired) and
redeemed the preferred stock of MVE for approximately $74.6 million. In
addition, the Company paid approximately $156.1 million to retire MVE's
existing debt obligations and complete the tender offer and consent
solicitation for the 12.5 percent senior secured notes due 2002 issued by MVE,
Inc., a subsidiary of MVE.
On March 15, 1999, the Company acquired Northcoast for approximately $2.3
million in cash ($2.2 million net of cash acquired) and $0.7 million in the
Company's Common Stock.
In order to finance the acquisition of MVE, in March 1999 the Company
negotiated a consolidated credit and revolving loan facility (the "Credit
Facility"), which originally provided for term loans of up to $250.0 million
and a revolving credit line of $50.0 million, which may also be used for the
issuance of letters of credit. The Company paid fees of $6.5 million in 1999 to
establish the Credit Facility. The Credit Facility provides the agent bank with
a secured interest in substantially all of the assets of the Company. The
Company entered into the Series 1 Incremental Revolving Credit Facility in
November 2000 and the Series 2 Incremental Revolving Credit Facility in April
2001 (collectively, the "Incremental Credit Facility"), providing a revolving
credit line of $10.0 million in addition to the credit line available under the
Credit Facility. Borrowings on the Incremental Credit Facility are secured by
the same collateral as the Credit Facility. At December 31, 2001, the Company
had borrowings of $218.2 million outstanding under the term loan portion of the
Credit Facility, borrowings of $34.4 million outstanding under the revolving
credit portion of the Credit Facility, borrowings of $9.0 million outstanding
under the Incremental Credit Facility and letters of credit outstanding and
bank guarantees totaling $15.0 million supported by the Credit Facility.
The Credit Facility was amended in August 1999, October 2000, October 2001
and December 2001 at costs to the Company of $1.2 million, $1.0 million and $0.8
million, in 1999, 2000 and 2001, respectively. The Credit Facility and
Incremental Credit Facility were subsequently amended in March 2002 (the "March
2002 Amendments") at a cost of approximately $1.9 million to modify certain
covenants until March 31, 2003, to defer $25.7 million of Term A and Term B
amortization payments from scheduled payment dates in 2002 to 2005 and to extend
the Incremental Credit Facility to March 31, 2003. The March 2002 Amendments
resulted in an increase in interest rates of 0.25 percent, the addition of one
financial covenant and scheduled reductions in the commitment amounts of the
revolving credit lines of the Credit Facility and the Incremental Credit
Facility. The March 2002 Amendments provide for the Company to prepay borrowings
under the Credit Facility and Incremental Credit Facility in an aggregate amount
of at least $75.0 million ("Minimum
16
Prepayment Amount") from the net proceeds of an equity investment, sale of
assets and other sources of new capital. If the Minimum Prepayment Amount is not
made by September 30, 2002, the Company's interest rates will increase by
another 0.25 percent, and will increase again by 0.25 percent each quarter
thereafter. If the Minimum Prepayment Amount is achieved, these additional
interest rate increases will be eliminated. The March 2002 Amendments also
provide for the issuance of market-priced warrants to the lenders for the
purchase of two percent of the Company's Common Stock at June 28, 2002. If the
Minimum Prepayment Amount is not made by September 30 or December 31, 2002, the
lenders will be issued market-priced warrants for the purchase of an additional
five percent and three percent, respectively, of the Company's Common Stock. If
at least $50.0 million of the Minimum Prepayment Amount is made from the net
proceeds of an equity investment by September 30 or December 31, 2002, no
warrants will be required to be issued to the lenders on those dates.
Earlier in 2001, the Company was initially pursuing subordinated debt
refinancing as a method of reducing the Company's leverage ratio specific to
the lenders participating in the Credit Facility. Although the Company believes
subordinated debt is still one option it could pursue, the Company is
continuing to pursue other potential sources of capital. Discussions are
ongoing between the Company and an investor group regarding a potential junior
capital investment in the Company. Proceeds from either of these transactions
would be used by the Company to pay down debt obligations on its Credit
Facility.
The Credit Facility, as modified by the March 2002 Amendments, contains
certain covenants and conditions which impose limitations on the Company and its
operating units, including meeting certain financial tests and the quarterly
maintenance of certain financial ratios on a consolidated basis such as: minimum
net worth, maximum leverage, minimum pre-tax interest coverage ratio, minimum
fixed charge coverage ratio and minimum earnings before interest, taxes,
depreciation, amortization and restructuring charges. The Company is permitted
to pay cash dividends not exceeding $7.2 million in any fiscal year after
January 1, 2001, but only if at both the time of payment of the dividend and
immediately thereafter there is no event of default under the Credit Facility.
As of December 31, 2001, the Company was not in default with the covenants and
conditions of the Credit Facility due to amendments made in the fourth quarter
of 2001 and the March 2002 Amendments.
In November 1996, the Board of Directors authorized a program to
repurchase 2,250,000 shares of the Company's Common Stock. The amount and
timing of share purchases will depend on market conditions, share price and
other factors. The Company reserves the right to discontinue the repurchase
program at any time. In 2001, 2000 and 1999, 50,000, 37,200, and 104,000
shares, respectively, were acquired under the program. As of December 31, 2001,
257,467 shares remain available for repurchase under the program.
As a result of the modifications made by the March 2002 Amendments, the
Company currently believes that cash forecasted to be generated by operations
and access to capital markets will be sufficient to satisfy its working capital,
capital expenditure and debt repayment requirements for the current fiscal year.
The Company did not pay any dividends in 2001 or 2000. Dividends totaling
$2.4 million, or $0.10 per share, were paid by the Company in 1999. Any future
declarations of dividends are at the sole discretion of the Company's Board of
Directors, subject to the conditions of the Credit Facility. No assurance can
be given as to whether dividends will be declared in the future, and if
declared, the amount and timing of such dividends.
The Company has chosen to present EBITDA, an alternative measure of
performance, in "Item 6. Selected Financial Data" because the Company believes
EBITDA is an indicator of the recurring amount of cash available to service
principal and interest related to the Company's debt obligations. The Company
defines EBITDA as net income (loss) before gain on sale of assets, net interest
expense, derivative contracts valuation expense, income tax expense (benefit),
minority interest expense, cumulative effect of change in accounting principle,
extraordinary items, depreciation and amortization expense and employee
separation and plant closure costs (income). The Company's definition of EBITDA
may not be comparable to similarly titled measures reported by other companies.
Many of the financial covenants related to the Credit Facility use a similar
definition of EBITDA.
CONTINGENCIES
The Company is involved with environmental compliance, investigation,
monitoring and remediation activities at certain of its operating facilities,
and accrues for these activities when commitments or remediation plans have
been developed and when costs can be reasonably estimated. Historical annual
expenditures for these activities have been less than $0.5 million, and have
been charged against the related environmental reserves. Future expenditures
relating to these environmental remediation efforts are expected to be made
over the next ten years as ongoing costs of remediation programs. The Company
believes that any additional liability in excess of amounts accrued which may
result from the resolution of such matters will not have a material adverse
effect on the Company's financial position, liquidity, cash flows or results of
operations.
The Company has been named as a defendant in several similar cases pending
related to an accident occurring on December 7, 2000 at a nursing home outside
Dayton, Ohio. This litigation is more fully described in "Item 3. Legal
Proceedings."
The Company is a party to other legal proceedings incidental to the normal
course of its business. Management believes that the final resolution of these
matters will not have a material adverse affect on the Company's financial
position, liquidity, cash flows or results of operations.
17
FOREIGN OPERATIONS
During 2001, the Company had operations in Australia, China, the Czech
Republic, Germany and the United Kingdom, which accounted for 16 percent of
consolidated revenues and 17 percent of total assets at December 31, 2001.
Functional currencies used by these operations include the Australian Dollar,
the Chinese Renminbi Yuan, the Czech Koruna, the Euro and the British Pound.
The Company's German operations changed their functional currency from the Mark
to the Euro effective September 30, 2001 in anticipation of the January 1, 2002
mandatory conversion. The Company is 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 the Company's domestic
operations in currencies other than the U.S. Dollar. The majority of these
functional currencies and the other currencies in which the Company records
transactions are fairly stable. The use of these currencies, combined with the
use of foreign currency forward purchase and sale contracts, has enabled the
Company to be sheltered from significant gains or losses resulting from foreign
currency transactions. This situation could change if these currencies
experience significant fluctuations in their value as compared to the U.S.
Dollar.
CRITICAL ACCOUNTING POLICIES
Allowance for Doubtful Accounts: The Company evaluates the collectibility
of accounts receivable based on a combination of factors. In circumstances
where the Company is aware of a specific customer's inability to meet its
financial obligations (e.g., bankruptcy filings, substantial downgrading of
credit scores), a specific reserve is recorded to reduce the receivable to the
amount the Company believes will be collected. For all other customers, the
Company records allowances for doubtful accounts based on the length of time
the receivables are past due and historical experience. If circumstances change
(e.g., higher-than-expected defaults or an unexpected material adverse change
in a customer's ability to meet its financial obligations), the Company's
estimates of the collectibility of amounts due could be reduced by a material
amount.
Inventory Valuation Reserves: The Company values its inventory based on a
combination of factors. In circumstances where the Company is aware of a
specific problem in the valuation of a certain item, a specific reserve is
recorded to reduce the item to its net realizable value. For all other
inventory, the Company recognizes reserves based on the actual usage in recent
history and projected usage in the near-term. If circumstances change (e.g.,
lower-than-expected usage), estimates of the net realizable value could be
reduced by a material amount.
Revenue Recognition-- Long-Term Contracts: The Company recognizes revenue
and profit as work on long-term contracts progresses using the percentage of
completion method of accounting, which relies on estimates of total expected
contract revenues and costs. The Company follows this method since reasonably
dependable estimates of the revenue and costs applicable to various stages of a
contract can be made. Since the financial reporting of these contracts depends
on estimates, which are assessed continually during the term of the contract,
recognized revenues and profit are subject to revisions as the contract
progresses toward completion. Revisions in profit estimates are reflected in
the period in which the facts that give rise to the revision become known.
Accordingly, favorable changes in estimates result in additional profit
recognition, and unfavorable changes in estimates result in the reversal of
previously recognized revenue and profits. When estimates indicate a loss is
expected to be incurred under a contract, cost of sales is charged with a
provision for such loss. As work progresses under a loss contract, revenue and
cost of sales continue to be recognized in equal amounts, and the excess of
costs over revenues is charged to the contract loss reserve.
Derivatives: The Company holds derivative financial instruments to manage
a variety of risk exposures including interest rate risks associated with
long-term debt, foreign currency fluctuations for transactions with customers,
and purchase commitments for certain raw materials used in production
processes. Changes in the fair value of derivatives used by the Company are
reflected in earnings.
To manage foreign currency and commodity risks, the Company uses
exchange-traded futures contracts. The fair values of these instruments are
determined from market quotes. In addition, some over-the-counter forward
contracts are used to manage these risks. These forward contracts are valued in
a manner similar to that used by the market to value exchange-traded contracts;
that is, using standard valuation formulas with assumptions about future
foreign currency exchange rates or commodity prices derived from existing
exchange rates, commodity prices and interest rates observed in the market. To
manage interest rate risk, two interest rate collars are used in which the
Company is subject to a floor and ceiling in the calculation of its variable
interest rate. The interest rate collars are valued using the market standard
methodology of discounting the expected future cash payments based on an
expectation of future interest rates derived from observed market interest rate
curves. The Company has not changed its methods of calculating these fair
values or developing the underlying assumptions. The values of these
derivatives will change over time as cash receipts and payments are made and as
market conditions change. The Company's derivative instruments are not subject
to multiples or leverage on the underlying commodity or price index.
Information about the fair values, notional amounts, and contractual terms of
these instruments can be found in Note A to the consolidated financial
statements and in "Item 7A. Quantitative and Qualitative Disclosures About
Market Risk."
The Company does not believe it is exposed to more than a nominal amount
of credit risk in interest rate and foreign currency hedges as the
counterparties are established, well capitalized financial institutions.
18
Debt Covenants: The Company's Credit Facility requires it to maintain
certain financial ratios and a minimum level of net worth as discussed in
Liquidity and Capital Resources and in Note C to the consolidated financial
statements. The Company's results of operations for the year ended December 31,
2001 would not have been in compliance with certain of the financial covenants
of the Credit Facility. Accordingly, the Company negotiated amendments in the
fourth quarter of 2001 and the March 2002 Amendments to its Credit Facility and
Incremental Credit Facility, which enabled compliance. If results of operations
erode further and the Company is unable to obtain future amendments or waivers
from its lenders, debt under these facilities would be in default and callable
by the lenders. The Company believes its results of operations will improve for
the year ending December 31, 2002 and thereafter and the likelihood of
defaulting on debt covenants during 2002 is unlikely, absent any material
negative event affecting the United States economy as a whole. Expectations of
future operating results and continued compliance with debt covenants cannot be
assured and the lenders' actions are not under the control of the Company. If
projections of future operating results are not achieved and debt is placed in
default, the Company would experience a material adverse impact on its reported
financial position and results of operations.
Pensions: The Company accounts for its defined benefit pension plans in
accordance with SFAS No. 87, "Employers' Accounting for Pensions," which
requires that amounts recognized in financial statements be determined on an
actuarial basis. The Company's funding policy is to contribute at least the
minimum funding amounts required by law. SFAS No. 87 and the policies used by
the Company, notably the use of a calculated value of plan assets (which is
further described below), generally reduce the volatility of pension expense
from changes in pension liability discount rates and the performance of the
pension plans' assets.
The most significant element in determining the Company's pension expense
in accordance with SFAS No. 87 is the expected return on plan assets. The
Company has assumed that the expected long-term rate of return on plan assets
will be 9.25 percent for the United States plans and 7.5 percent for the United
Kingdom plan. Over the long term, the investment strategy employed with the
Company's pension plan assets has earned in excess of such rates; therefore,
the Company believes its assumptions are reasonable. The assumed long-term rate
of return on assets is applied to the market value of plan assets. This
produces the expected return on plan assets that is included in pension
expense. The difference between this expected return and the actual return on
plan assets is deferred. The net deferral of past asset gains or losses affects
the calculated value of plan assets and, ultimately, future pension expense.
The plan assets have earned a rate of return substantially less than the
assumed rates in the last two years. Should this trend continue, future pension
expense would likely increase.
At the end of each year, the Company determines the rate to be used to
discount plan liabilities. The discount rate reflects the current rate at which
the pension liabilities could be effectively settled at the end of the year. In
estimating this rate, the Company looks to rates of return on high quality,
fixed-income investments that receive one of the two highest ratings given by a
recognized rating agency. At December 31, 2001, the Company determined this
rate to be 7.5 percent for the United States plans and 6.0 percent for the
United Kingdom plan. Changes in discount rates over the past three years have
not materially affected pension expense, and the net effect of changes in the
discount rate, as well as the net effect of other changes in actuarial
assumptions and experience, have been deferred as allowed by SFAS No. 87.
At December 31, 2001, the Company's consolidated net pension liability
recognized was $3.2 million, down from $4.1 million at December 31, 2000. The
decrease was principally due to $1.7 million of pension contributions made by
the Company in 2001. For the year ended December 31, 2001, the Company
recognized consolidated pretax pension expense of $0.9 million, up from $0.7
million in 2000. The Company currently expects that consolidated pension
expense for 2002 will not be materially different from 2001.
Deferred Tax Assets: As of December 31, 2001, the Company has
approximately $15.1 million of net deferred tax assets related principally to
various accruals and reserves and loss carryforwards. The realization of these
assets is based upon estimates of future taxable income. In preparing estimates
of future taxable income, the Company has used the same assumptions and
projections utilized in its internal five-year forecasts. Based on these
projections, the Company estimates that the domestic loss carryforwards will be
fully utilized prior to their expiration. The Company is uncertain whether the
foreign loss carryforwards will be utilized and, accordingly, has recorded a
valuation allowance of $2.8 million. Estimates of future earnings are based on
management's expectations and beliefs concerning future events and are subject
to uncertainties and factors relating to the Company's operations and business
environment, all of which are difficult to predict and many of which are beyond
the control of the Company. Should the Company not generate taxable income in
the future, increases in the valuation allowance would be required.
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" which amends SFAS No. 19, "Financial Accounting and
Reporting by Oil and Gas Producing Companies," and is effective for all
companies. The Statement addresses the financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. In October 2001, the FASB issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
and is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company does
19
not expect these Statements to have a material impact on the Company's financial
position, liquidity, cash flows or results of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Annual Report on Form 10-K, the
following factors could cause results to differ materially from those
anticipated or otherwise expressed or implied by forward-looking statements made
in this Annual Report on Form 10-K and presented elsewhere by the Company's
management from time to time.
Availability of Additional Sources of Financing and Capital: The Company
must raise equity or other sources of capital in order to prevent certain events
from occurring under its Credit Facility, including interest rate pricing
increases and the issuance of warrants to its lenders. While the Company is
currently engaged in discussions with an investor group regarding a potential
junior capital investment in Chart, there can be no assurance that the Company
will be able to consummate a capital investment from the investment group or
obtain additional capital from other sources on reasonable terms or at all.
Satisfying Debt Covenants and Paying Down Debt Under the Credit Facility:
The Company's Credit Facility requires it to maintain certain financial ratios
and a minimum level of net worth as discussed in Liquidity and Capital Resources
and Note C to the consolidated financial statements. The Company's results of
operations for the year ended December 31, 2001 would not have been in
compliance with certain of the financial covenants of the Credit Facility.
Accordingly, the Company negotiated amendments in the fourth quarter of 2001 and
the March 2002 Amendments which enabled compliance and will be effective to
March 31, 2003. While the Company believes its results of operations will
improve for the year ending December 31, 2002 and thereafter, expectations of
future operating results, continued compliance with debt covenants and making
required payments cannot be assured and the lenders' actions are not under the
control of the Company as to granting the Company further covenant and other
relief in the future.
Recovery of Core Businesses and Current Economic Conditions: Certain of the
Company's core businesses have been underperforming over the past few years.
While the Company expects to see an upturn in 2002 in the various markets its
underperforming core businesses serve, there can be no assurance that such an
upturn will occur or that the businesses' performance will be markedly improved
in 2002. Moreover, current world economic and political conditions, including
the events of September 11(th), may reduce the willingness of the Company's
customers and prospective customers to commit funds to purchase its products and
services.
FORWARD-LOOKING STATEMENTS
The Company is making this statement in order to satisfy the "safe harbor"
provisions contained in the Private Securities Litigation Reform Act of 1995.
This Annual Report on Form 10-K includes forward-looking statements relating to
the business of the Company. In some cases, forward-looking statements may be
identified by terminology such as "may," "will," "should," "expects,"
"anticipates," "believes," "projects," "forecasts," "continue" or the negative
of such terms or comparable terminology. Forward-looking statements contained
herein or in other statements made by the Company are made based on
management's expectations and beliefs concerning future events impacting the
Company and are subject to uncertainties and factors relating to the Company's
operations and business environment, all of which are difficult to predict and
many of which are beyond the control of the Company, that could cause actual
results of the Company to differ materially from those matters expressed or
implied by forward-looking statements. The Company believes that the following
factors, among others, could affect its future performance and cause actual
results of the Company to differ materially from those expressed or implied by
forward-looking statements made by or on behalf of the Company: (a) general
economic, political, business and market conditions and foreign currency
fluctuations; (b) competition; (c) decreases in spending by its industrial
customers; (d) the loss of a major customer or customers; (e) the effectiveness
of operational changes expected to increase efficiency and productivity; (f)
the ability of the Company to manage its fixed-price contract exposure; (g) the
ability of the Company to pass on increases in raw material prices, including
as a result of tariffs; (h) the Company's relations with its employees; (i) the
extent of product liability claims asserted against the Company; (j)
variability in the Company's operating results; (k) the ability of the Company
to attract and retain key personnel; (l) the costs of compliance with
environmental matters; (m) the ability of the Company to protect its
proprietary information; (n) the ability of the Company to access additional
sources of capital; (o) the ability of the Company to satisfy debt covenants,
pay down its debt and restructure its debt arrangements; and (p) the threat of
terrorism and the impact of responses to that threat.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company's operations are exposed to
continuing fluctuations in foreign currency values and interest rates that can
affect the cost of operating and financing. Accordingly, the Company addresses
a portion of these risks through a program of risk management.
The Company's primary interest rate risk exposure results from the Credit
Facility's various floating rate pricing mechanisms. This interest rate
exposure is managed by the use of interest rate collars on approximately 50
percent of the term debt and to a lesser extent by varying LIBOR maturities in
the entire Credit Facility. The fair value of the contracts related to the
20
collars at December 31, 2001 is a liability of $2.3 million. If interest rates
were to increase 200 basis points (2 percent) from December 31, 2001 rates, and
assuming no changes in debt from the December 31, 2001 levels, the additional
annual expense would be approximately $5.2 million on a pre-tax basis.
The Company has assets, liabilities and cash flows in foreign currencies
creating foreign exchange risk, the primary foreign currencies being the
British Pound, the Czech Koruna and the Euro. Monthly measurement, evaluation
and forward exchange contracts are employed as methods to reduce this risk. The
Company enters into foreign exchange forward contracts to hedge anticipated and
firmly committed foreign currency transactions. The Company does not hedge
foreign currency translation or foreign currency net assets or liabilities. The
terms of the derivatives are one year or less. If the value of the U.S. dollar
were to strengthen 10 percent relative to the currencies in which the Company
has foreign exchange forward contracts at December 31, 2001, the result would
be a loss in fair value of approximately $0.2 million.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Chart Industries, Inc.
We have audited the accompanying consolidated balance sheets of Chart
Industries, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Chart
Industries, Inc. and subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note A to the consolidated financial statements, on
January 1, 2001 the Company changed its method of accounting for derivative
financial instruments.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 31, 2002
22
CHART INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
2001 2000
------------- -------------
(Dollars in thousands,
except per share amounts)
ASSETS
Current Assets
Cash and cash equivalents $ 11,801 $ 4,921
Accounts receivable, net of allowances of $1,401 and $2,087 45,427 53,917
Inventories, net 56,490 66,987
Unbilled contract revenue 7,391 13,415
Deferred income taxes 10,170 10,084
Prepaid expenses 1,735 1,350
Other current assets 6,766 5,460
------------- ------------
Total Current Assets 139,780 156,134
Property, plant and equipment, net 62,070 63,382
Goodwill, net of accumulated amortization of $14,583 and $9,586 168,282 173,128
Other assets, net 38,848 37,199
------------- ------------
TOTAL ASSETS $ 408,980 $429,843
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 25,634 $ 36,265
Customer advances and billings in excess of contract revenue 9,290 4,420
Accrued salaries, wages and benefits 12,353 16,453
Warranty reserves 3,492 6,150
Other current liabilities 19,772 24,838
Current portion of long-term debt 12,963 25,484
------------- -----------
Total Current Liabilities 83,504 113,610
Long-term debt 259,120 244,386
Other long-term liabilities 17,016 17,003
Shareholders' Equity
Preferred stock, 1,000,000 shares authorized, none issued or outstanding
Common stock, par value $.01 per share -- 60,000,000 shares authorized and
24,917,187 shares issued at December 31, 2001; 30,000,000 shares
authorized and 24,559,512 shares issued at December 31, 2000 249 245
Additional paid-in capital 42,832 42,140
Retained earnings 14,699 19,857
Accumulated other comprehensive loss ( 7,670) ( 5,724)
Treasury stock, at cost, 109,437 and 206,959 shares at December 31, 2001
and 2000, respectively ( 770) ( 1,674)
------------- -----------
49,340 54,844
------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 408,980 $429,843
============= ===========
The accompanying notes are an integral part of these consolidated
financial statements.
23
CHART INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
---------------------------------------------------
2001 2000 1999
------------ ------------- --------------
(Dollars and shares in thousands,
except per share amounts)
Sales $327,990 $ 325,700 $ 292,937
Cost of sales 241,629 229,671 215,556
------------ ------------- --------------
Gross profit 86,361 96,029 77,381
Selling, general and administrative expense 60,128 60,838 51,455
Goodwill amortization expense 5,017 4,921 3,670
Employee separation and plant closure costs (income) 2,375 ( 614) 11,982
Equity income in joint venture ( 525) ( 35)
Acquired in-process research and development 22,010
------------ ------------- --------------
66,995 65,110 89,117
------------ ------------- --------------
Operating income (loss) 19,366 30,919 (11,736)
Other income (expense):
Gain on sale of assets 538 1,041 2,505
Interest expense, net (21,589) (26,676) (15,854)
Derivative contracts valuation expense ( 2,876)
------------ ------------- --------------
(23,927) (25,635) (13,349)
------------ ------------- --------------
Income (loss) before income taxes, minority interest, cumulative
effect of change in accounting principle and extraordinary item ( 4,561) 5,284 (25,085)
Income tax expense (benefit):
Current 1,034 985 4,325
Deferred ( 636) 2,027 ( 1,110)
------------ ------------- --------------
398 3,012 3,215
------------ ------------- --------------
Income (loss) before minority interest, cumulative effect of change
in accounting principle and extraordinary item ( 4,959) 2,272 (28,300)
Minority interest, net of taxes ( 111) ( 117) ( 171)
------------ ------------- --------------
Income (loss) before cumulative effect of change in accounting
principle and extraordinary item ( 5,070) 2,155 (28,471)
Cumulative effect of change in accounting principle, net of taxes ( 88)
------------ ------------- --------------
Income (loss) before extraordinary item ( 5,158) 2,155 (28,471)
Extraordinary loss on early extinguishment of debt, net of taxes
of $4,650 ( 7,809)
------------ ------------- --------------
Net income (loss) $( 5,158) $ 2,155 $ (36,280)
============ ============= ==============
Net income (loss) per common share:
Income (loss) before cumulative effect of change in accounting
principle and extraordinary item $( 0.21) $ 0.09 $ ( 1.20)
Cumulative effect of change in accounting principle, net of taxes ( 0.00)
Extraordinary item, net of taxes ( 0.33)
------------ ------------- --------------
Net income (loss) per common share $( 0.21) $ 0.09 $ ( 1.53)
============ ============= ==============
Net income (loss) per common share - assuming dilution:
Income (loss) before cumulative effect of change in accounting
principle and extraordinary item $( 0.21) $ 0.09 $ ( 1.20)
Cumulative effect of change in accounting principle, net of taxes ( 0.00)
Extraordinary item, net of taxes ( 0.33)
------------ ------------- --------------
Net income (loss) per common share - assuming dilution $( 0.21) $ 0.09 $ ( 1.53)
============ ============= ==============
Shares used in per share calculations 24,573 24,110 23,660
============ ============= ==============
Shares used in per share calculations - assuming dilution 24,573 24,326 23,660
============ ============= ==============
The accompanying notes are an integral part of these consolidated
financial statements.
24
CHART INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Accumulated
---------------------- Additional Other
Shares Paid-in Retained Comprehensive Treasury
Outstanding Amount Capital Earnings Loss Stock
----------------------------------------------------------------------------
(Dollars and shares in thousands, except per share amounts)
Balance at January 1, 1999 23,566 $ 243 $ 43,367 $ 56,352 $ ( 358) $ ( 6,450)
Net loss (36,280)
Other comprehensive loss:
Foreign currency translation adjustment ( 303)
Comprehensive loss
Dividends ($0.10 per share) ( 2,370)
Treasury stock acquisitions ( 104) ( 728)
Stock options, including tax benefit 4 ( 23) 31
Contribution of stock to employee benefit plans 249 ( 847) 2,155
Other 102 1 722
----------------------------------------------------------------------------
Balance at December 31, 1999 23,817 244 43,219 17,702 ( 661) ( 4,992)
Net income 2,155
Other comprehensive loss:
Foreign currency translation adjustment ( 5,063)
Comprehensive loss
Treasury stock acquisitions ( 37) ( 156)
Stock options, including tax benefit 50 ( 259) 398
Contribution of stock to employee benefit plans 523 1 ( 794) 3,076
Other ( 26)
----------------------------------------------------------------------------
Balance at December 31, 2000 24,353 245 42,140 19,857 ( 5,724) ( 1,674)
Net loss ( 5,158)
Other comprehensive loss:
Foreign currency translation adjustment ( 768)
Minimum pension liability adjustment, net of
taxes of $737 ( 1,178)
Comprehensive loss
Treasury stock acquisitions ( 50) ( 181)
Stock options, including tax benefit 17 1 50
Contribution of stock to employee benefit plans 488 3 620 1,085
Other 22
----------------------------------------------------------------------------
Balance at December 31, 2001 24,808 $ 249 $ 42,832 $ 14,699 $ ( 7,670) $ ( 770)
============================================================================
Total
Shareholders'
Equity
-------------
Balance at January 1, 1999 $ 93,154
Net loss (36,280)
Other comprehensive loss:
Foreign currency translation adjustment ( 303)
--------------
Comprehensive loss (36,583)
Dividends ($0.10 per share) ( 2,370)
Treasury stock acquisitions ( 728)
Stock options, including tax benefit 8
Contribution of stock to employee benefit plans 1,308
Other 723
-------------
Balance at December 31, 1999 55,512
Net income 2,155
Other comprehensive loss:
Foreign currency translation adjustment ( 5,063)
-------------
Comprehensive loss ( 2,908)
Treasury stock acquisitions ( 156)
Stock options, including tax benefit 139
Contribution of stock to employee benefit plans 2,283
Other ( 26)
-------------
Balance at December 31, 2000 54,844
Net loss ( 5,158)
Other comprehensive loss:
Foreign currency translation adjustment ( 768)
Minimum pension liability adjustment, net of
taxes of $737 ( 1,178)
--------------
Comprehensive loss ( 7,104)
Treasury stock acquisitions ( 181)
Stock options, including tax benefit 51
Contribution of stock to employee benefit plans 1,708
Other 22
-------------
Balance at December 31, 2001 $ 49,340
=============
The accompanying notes are an integral part of these consolidated
financial statements.
25
CHART INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
--------------------------------------------
2001 2000 1999
----------- ------------ ------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income (loss) $( 5,158) $2,155 $( 36,280)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Cumulative effect of change in accounting principle 88
Loss on early extinguishment of debt 12,459
Acquired in-process research and development 22,010
Acquired profit in inventory 1,162
Employee separation and plant closure costs (income) 1,403 ( 704) 9,790
Gain on sale of assets (538) ( 1,041) ( 2,505)
Depreciation and amortization 18,187 17,864 16,909
Equity income from joint venture (525) ( 35)
Foreign currency transaction loss (gain) 148 ( 233) ( 232)
Minority interest 182 190 280
Deferred income tax expense (benefit) (636) 2,027 ( 5,449)
Contribution of stock to employee benefit plans 1,708 2,283 1,308
Increase (decrease) in cash resulting from changes in
operating assets and liabilities:
Accounts receivable 7,151 5,577 ( 462)
Inventory and other current assets 13,268 ( 26,322) 1,618
Accounts payable and other current liabilities ( 26,766) 11,487 ( 14,110)
Billings in excess of contract revenue and customer advances 4,761 1,398 ( 12,012)
------------ ----------- ------------
Net Cash Provided By (Used In) Operating Activities 13,273 14,646 ( 5,514)
INVESTING ACTIVITIES
Capital expenditures (8,145) ( 5,581) ( 7,047)
Acquisitions, net of cash acquired ( 4,410)
Redemption of preferred stock ( 74,642)
Proceeds from sale of assets 2,365 5,000 3,300
Other investing activities (714) 154 605
------------ ----------- ------------
Net Cash Used In Investing Activities ( 6,494) ( 427) ( 82,194)
FINANCING ACTIVITIES
Borrowings on revolving credit facilities 106,740 112,254 96,305
Repayments on revolving credit facilities ( 89,945) (102,693) ( 87,082)
Borrowings for acquisitions 250,000
Principal payments on long-term debt ( 15,313) ( 18,288) (148,957)
Premiums on repurchase of long-term debt ( 12,459)
Deferred financing costs (848) ( 1,015) ( 7,698)
Purchases of treasury stock (181) ( 156) ( 728)
Stock options exercised 51 139 8
Dividends paid to shareholders ( 2,370)
------------ ----------- ------------
Net Cash Provided By (Used In) Financing Activities 504 ( 9,759) 87,019
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents 7,283 4,460 ( 689)
Effect of exchange rate changes on cash (403) ( 1,853) 834
Cash and cash equivalents at beginning of year 4,921 2,314 2,169
------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,801 $4,921 $ 2,314
============ =========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
26
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE A--NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Chart Industries, Inc. (the "Company") manufactures
standard and custom-built industrial process equipment primarily used for
low-temperature and cryogenic applications. The Company has developed an
expertise in cryogenic systems and equipment, which operate at low temperatures
sometimes approaching absolute zero. The majority of the Company's products,
including vacuum-insulated containment vessels, heat exchangers, cold boxes and
other cryogenic components, are used throughout the liquid-gas supply chain for
the purification, liquefaction, distribution, storage and use of industrial
gases and hydrocarbons. Headquartered in Cleveland, Ohio, the Company has
domestic operations located in 12 states and international operations located
in Australia, China, the Czech Republic, Germany and the United Kingdom.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its subsidiaries. Intercompany accounts
and transactions are eliminated in consolidation. Investments in affiliates
where the Company's ownership is between 20 percent and 50 percent, or where
the Company does not have control but has the ability to exercise significant
influence over operations or financial policy, are accounted for under the
equity method.
Reclassifications: Certain prior year amounts have been reclassified to
conform to current year presentation.
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates.
Concentrations of Credit Risks: Financial instruments that potentially
subject the Company to concentrations of credit risks primarily consist of
temporary cash investments and trade receivables. The Company places its
temporary cash investments with high credit quality financial institutions and
limits the amount of credit exposure to any one financial institution. The
concentration of trade receivable credit risk is generally limited due to the
Company's customers being spread across the industrial gas, hydrocarbon and
chemical processing industries in several countries. The Company's management
has established certain credit requirements that its customers must meet before
sales credit is extended. The Company monitors the financial condition of its
customers to help ensure collections and to minimize losses. For certain
domestic and foreign customers, the Company requires customer advances, letters
of credit and other such guarantees of payment. For certain foreign customers,
the Company also purchases credit and political risk insurance.
Cash and Cash Equivalents: The Company considers all investments with an
initial maturity of three months or less when purchased to be cash equivalents.
The December 31, 2001 and 2000 balances include money market investments and
cash.
Inventories: Inventories are stated at the lower of cost or market with
cost being determined by both the last-in, first-out ("LIFO") method
(approximately 13 percent of total inventory at December 31, 2001 and 2000,
respectively), and the first-in, first-out ("FIFO") method. The components of
inventory are as follows:
December 31,
---------------------------
2001 2000
---------- ----------
Raw materials and supplies $ 31,004 $ 35,931
Work in process 14,639 17,998
Finished goods 10,997 13,362
LIFO reserve ( 150) ( 304)
---------- ----------
$ 56,490 $ 66,987
========== ==========
Property, Plant and Equipment: Property, plant and equipment are stated
on the basis of cost. Expenditures for maintenance, repairs and renewals are
charged to expense as incurred, whereas major betterments are capitalized. The
cost of applicable assets is depreciated over their estimated useful lives.
Depreciation is computed using the straight-line method for financial reporting
purposes and accelerated methods for income tax purposes. Depreciation expense
was $9,722, $9,796 and $10,781 in 2001, 2000 and 1999, respectively. The
following table shows original costs and the estimated useful lives by
classification of assets:
December 31,
---------------------------------
Classification Expected Useful Life 2001 2000
-------------- -------------------- ------------- --------------
Land and buildings 20-35 years (buildings) $ 39,010 $ 36,017
Machinery and equipment 3-12 years 50,612 48,768
Furniture and fixtures 3-5 years 9,523 7,777
Construction in process 3,279 1,279
------------- --------------
102,424 93,841
Less accumulated depreciation 40,354 30,459
------------- --------------
Total property, plant and equipment, net $ 62,070 $ 63,382
============= ==============
27
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE A -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
Property, plant and equipment and intangible assets are periodically
evaluated for impairment. The Company assesses impairment for each of its
operating units by measuring future cash flows against the carrying value of
these long-lived assets. If the future undiscounted cash flows are less than
the carrying value of the assets, an impairment reserve is recorded in the
period identified. Measurement of impairment is based upon discounted cash
flows, asset appraisals or market values of similar assets.
Goodwill and Other Intangible Assets: All intangible assets are carried
at cost less applicable amortization. Goodwill represents the excess of
purchase price over the fair value of net assets acquired in purchase business
combinations. Goodwill is amortized using the straight-line method over the
periods of expected benefit, but not in excess of 40 years. Total amortization
expense of all intangibles was $8,465, $8,068, and $6,128 in 2001, 2000 and
1999, respectively. Accumulated amortization for all intangibles was $23,684
and $15,787 at December 31, 2001 and 2000, respectively.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to impairment tests in accordance with
SFAS No. 142. Other intangible assets will continue to be amortized over their
useful lives. The Company will apply the new rules on accounting for goodwill
and other intangible assets effective January 1, 2002. Application of the
non-amortization provisions of SFAS No. 142 is expected to result in an annual
increase in the Company's net income of approximately $5.0 million, or $0.20
per share, assuming dilution. The Company does not expect to identify any
indefinite lived intangible assets. The Company plans to complete step one of
the transitional impairment tests of goodwill by June 30, 2002. The Company has
not yet determined the effect, if any, such tests will have on the financial
statements of the Company.
Financial Instruments: The fair values of cash equivalents, accounts
receivable and short-term bank debt approximate their carrying amount because
of the short maturity of these instruments. The fair value of long-term debt is
estimated based on the present value of the underlying cash flows discounted at
the Company's estimated borrowing rate. At December 31, 2001 and 2000, the fair
value of the Company's long-term debt approximated its carrying value.
Derivative Instruments: Effective January 1, 2001, the Company adopted
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended by SFAS No. 138. The standard requires that all derivative
instruments be recorded on the balance sheet at fair value and establishes
criteria for designation and effectiveness of the hedging relationships.
The Company utilizes certain derivative financial instruments to enhance
its ability to manage risk, including interest rate and foreign currency
exposures which exist as part of ongoing business operations. Derivative
instruments are entered into for periods consistent with related underlying
exposures and do not constitute positions independent of those exposures. The
Company does not enter into contracts for speculative purposes, nor is it a
party to any leveraged derivative instrument.
The Company's primary interest rate risk exposure results from the Credit
Facility's various floating rate pricing mechanisms. The Company has entered
into two interest rate derivative contracts to manage this interest rate
exposure relative to the Term A and Term B portions of the Credit Facility.
These contracts had an original notional value of $125,000 and amortize
following the Company's amortization schedule for its term borrowings under the
Credit Facility. These agreements are generally described as collars and result
in putting a cap on the base LIBOR interest rate at approximately 7.0 percent
and a floor at approximately 5.0 percent for approximately half the Company's
floating rate term debt. The Company's interest rate collars do not qualify as
hedges under the provisions of SFAS No. 133. The Statement requires such
collars to be recorded in the consolidated balance sheet at fair value. Changes
in their fair value must be recorded in the consolidated statement of
operations. Accordingly, the Company recorded a cumulative effect of a change
in accounting principle, net of income taxes, as an adjustment to operations as
of January 1, 2001. The fair value of the Company's interest rate collars at
December 31, 2001 of $2,278 is recorded in accrued interest, and the change in
their fair value during 2001 of $2,876 is recorded in derivative contracts
valuation expense.
The Company is exposed to foreign currency exchange risk as a result of
transactions in currencies other than the functional currency of certain
subsidiaries. The Company utilizes foreign currency forward purchase and sale
contracts to manage the volatility associated with foreign currency purchases
and certain intercompany transactions in the normal course of business.
Contracts typically have maturities of less than one year. Principal currencies
include the Euro, British Pound and Czech Koruna.
The Company's foreign currency forward contracts do not qualify as hedges
under the provisions of SFAS No. 133. Accordingly, the Company recorded a
cumulative effect of a change in accounting principle, net of income taxes, as
an adjustment to net income as of January 1, 2001. The change in fair value of
the foreign currency forward contracts during 2001 was not material.
28
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE A -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
The Company held foreign exchange forward contracts for notional amounts
as follows:
December 31, December 31,
----------------- -----------------------
2001 2000
----------------- -----------------------
Sell Buy Sell
----------------- -----------------------
French Francs $ 221
German Deutschmarks $ 2,409
United States Dollars $ 500 320
Euros 1,358 120 272
----------------- -----------------------
$ 1,858 $ 341 $ 3,001
----------------- -----------------------
Fair Value $ 1,865 $ 339 $ 2,956
================= =======================
Shareholders' Equity: The Company reports comprehensive income (loss) in
its consolidated statement of shareholders' equity. The components of
accumulated other comprehensive loss are as follows:
December 31,
----------------------------------------
2001 2000
--------------- ---------------
Foreign currency translation adjustments $ 6,492 $ 5,724
Minimum pension liability adjustments, net of
taxes of $737 1,178
--------------- ---------------
$ 7,670 $ 5,724
=============== ===============
Revenue Recognition: For the majority of the Company's products, revenue
is recognized when products are shipped, title has transferred and collection
is reasonably assured. For these products, there is also persuasive evidence of
an arrangement and the selling price to the buyer is fixed or determinable. For
product lines in the Process Systems and Equipment segment, engineered tanks,
and liquefied natural gas fueling stations, the Company uses the percentage of
completion method of accounting. Earned revenue is based on the percentage that
incurred costs to date bear to total estimated costs at completion after giving
effect to the most current estimates. Earned revenue on contracts in process at
December 31 totaled $39,344, $33,815 and $27,157 in 2001, 2000 and 1999,
respectively. Timing of amounts billed on contracts varies from contract to
contract causing significant variation in working capital needs. Amounts billed
on percentage of completion contracts in process at December 31 totaled
$38,407, $25,045 and $23,232 in 2001, 2000 and 1999, respectively. The
cumulative impact of revisions in total cost estimates during the progress of
work is reflected in the period in which these changes become known. Earned
revenue reflects the original contract price adjusted for agreed upon claims
and change orders, if any. Losses expected to be incurred on contracts in
process, after consideration of estimated minimum recoveries from claims and
change orders, are charged to operations as soon as such losses are known.
Advertising Costs: The Company incurred advertising costs of $2,678,
$3,108 and $3,366 in 2001, 2000 and 1999, respectively. These costs are
expensed as incurred.
Research and Development Costs: The Company incurred research and
development costs of $4,101, $3,671 and $3,469 in 2001, 2000 and 1999,
respectively. These costs are expensed as incurred.
Foreign Currency Translation: The functional currency for the majority of
the Company's foreign operations is the applicable local currency. The
translation from the applicable foreign currencies to U.S. dollars is performed
for balance sheet accounts using exchange rates in effect at the balance sheet
date and for revenue and expense accounts using a weighted average exchange
rate during the period. The resulting translation adjustments are recorded as a
component of shareholders' equity. Gains or losses resulting from foreign
currency transactions are charged to income as incurred.
Deferred Income Taxes: The Company and its 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.
Employee Stock Options: The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations in accounting for its employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, compensation expense is not recognized. The Company is accounting for
the 400,000 performance related options issued as part of the 2000 Executive
Incentive Stock Option Plan as a variable plan. The Company has not recognized
any compensation expense under this plan as the market value of the Company's
stock was less than the option exercise price when the performance criteria
were met.
29
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE A -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
CONTINUED
Earnings Per Share: The following table sets forth the computation of
basic and diluted earnings per share. The assumed conversion of the Company's
potentially dilutive securities (employee stock options and warrants), before
giving effect to the cumulative effect of a change in accounting principle and
extraordinary item, was anti-dilutive for 2001 and 1999, respectively. As a
result, the calculation of diluted net loss per share for 2001 and 1999 set
forth below does not reflect any assumed conversion. The amount of potentially
dilutive securities is presented in the table for all years, however, to give
an indication of the potential dilution that may occur in future years.
Years Ended December 31,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
(Shares in thousands)
Income (loss) before cumulative effect of change in accounting
principle and extraordinary item $ ( 5,070) $ 2,155 $ ( 28,471)
Cumulative effect of change in accounting principle, net of taxes ( 88)
Extraordinary item, net of taxes ( 7,809)
--------------- --------------- ----------------
Net income (loss) $ ( 5,158) $ 2,155 $ ( 36,280)
=============== =============== ================
Weighted-average common shares 24,573 24,110 23,660
Effect of dilutive securities:
Employee stock options and warrants 141 216 240
--------------- --------------- ----------------
Dilutive potential common shares 24,714 24,326 23,900
=============== =============== ================
Net income (loss) per common share:
Income (loss) before cumulative effect of change in accounting
principle and extraordinary item $ ( 0.21) $ 0.09 $ ( 1.20)
Cumulative effect of change in accounting principle, net of taxes ( 0.00)
Extraordinary item, net of taxes ( 0.33)
--------------- --------------- ----------------
Net income (loss) per common share $ ( 0.21) $ 0.09 $ ( 1.53)
=============== =============== ================
Net income (loss) per common share - assuming dilution:
Income (loss) before cumulative effect of change in accounting
principle and extraordinary item $ ( 0.21) $ 0.09 $ ( 1.20)
Cumulative effect of change in accounting principle, net of taxes ( 0.00)
Extraordinary item, net of taxes ( 0.33)
--------------- --------------- ----------------
Net income (loss) per common share - assuming dilution $ ( 0.21) $ 0.09 $ ( 1.53)
=============== =============== ================
Recently Issued Accounting Standards: In August 2001, the FASB issued
SFAS No. 143, "Accounting for Asset Retirement Obligations" which amends SFAS
No. 19, "Financial Accounting and Reporting by Oil and Gas Producing
Companies," and is effective for all companies. This statement addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002. The Company does not expect this statement to have a material impact on
the Company's financial position, liquidity, cash flows or results of
operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS No. 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets and is effective for fiscal
years beginning after December 15, 2001, and interim periods within those
fiscal years. The Company does not expect this statement to have a material
impact on the Company's financial position, liquidity, cash flows or results of
operations.
30
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE B -- BALANCE SHEET COMPONENTS
December 31,
------------------------------
2001 2000
-------------- --------------
Other current assets:
Deposits $ 511 $ 259
Investment in leases 518 391
Other investments 977
Other receivables 5,737 3,833
-------------- --------------
$ 6,766 $ 5,460
============== ==============
Other assets, net:
Deferred financing costs, net $ 7,253 $ 7,991
Existing technologies, net 4,041 5,389
Patents, trademarks and intellectual
property, net 5,397 5,969
Equity investment in Coastal
Fabrication joint venture 1,295 770
Investment in Restaurant Technologies,
Inc. 1,626
Investment in leases 883 1,181
Cash value life insurance 1,881 1,068
Prepaid pension cost 1,330 1,587
Deferred income taxes 14,624 11,324
Other 2,144 294
-------------- --------------
$ 38,848 $ 37,199
============== ==============
Other current liabilities:
Accrued interest $ 5,108 $ 5,577
Accrued income taxes 2,371 4,362
Accrued other taxes 1,713 1,990
Accrued rebates 1,852 2,899
Accrued employee separation and plant
closure costs 486
Deferred income taxes 3,307 2,671
Accrued other 4,935 7,339
-------------- --------------
$ 19,772 $ 24,838
============== ==============
Other long-term liabilities:
Deferred income taxes $ 6,412 $ 6,823
Accrued environmental 3,189 3,298
Accrued pension cost 6,480 5,658
Minority interest 858 1,094
Other 77 130
-------------- --------------
$ 17,016 $ 17,003
============== ==============
NOTE C -- DEBT AND CREDIT ARRANGEMENTS
The following table shows the components of the Company's borrowings at
December 31, 2001 and 2000, respectively.
December 31,
------------------------------
2001 2000
-------------- --------------
Term loan A, due March 2005, quarterly
principal payments, average interest
rate of 5.49% at December 31, 2001 $ 100,000 $ 112,500
Term loan B, due March 2006, quarterly
principal payments, average interest
rate of 5.94% at December 31, 2001 118,191 119,095
Revolving Credit Facility, due March 2005,
average interest rate of 5.11% at
December 31, 2001 34,400 28,000
Series 1 and Series 2 Incremental Revolving
Credit Facilities, due March 2003, average
interest rate of 10.25% at December 31, 2001 9,000
Industrial Development Revenue Bonds, due June
2006, semi-annual principal payments, average
interest rate of 1.95% at December 31, 2001 1,980 2,420
Revolving foreign credit facility 4,042 2,351
Several notes payable with varying principal
and interest payments 4,470 5,504
-------------- --------------
Total debt 272,083 269,870
Less: current maturities 12,963 25,484
-------------- --------------
Long-term debt $ 259,120 $ 244,386
============== ==============
31
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE C -- DEBT AND CREDIT ARRANGEMENTS - CONTINUED
In order to finance the acquisition of MVE Holdings, Inc. ("MVE"), in March
1999 the Company negotiated a consolidated credit and revolving loan facility
(the "Credit Facility"), which originally provided for term loans of up to
$250,000 and a revolving credit line of $50,000, which may also be used for the
issuance of letters of credit. The Company paid fees of $6,542 in 1999 to
establish the Credit Facility. The Credit Facility provides the agent bank
with a secured interest in substantially all of the assets of the Company.
The Company entered into the Series 1 Incremental Revolving Credit Facility
in November 2000 and the Series 2 Incremental Revolving Credit Facility in
April 2001 (collectively, the "Incremental Credit Facility"), providing a
revolving credit line of $10,000 in addition to the credit line available under
the Credit Facility. Borrowings on the Incremental Credit Facility are secured
by the same collateral as the Credit Facility and bear interest, at the
Company's option, at rates equal to the prime rate (4.75 percent at December
31, 2001) plus 2.5 percent or LIBOR plus 3.5 percent. The Company is also
required to pay a commitment fee of 0.75 percent per annum on the average daily
unused amount.
The Credit Facility was amended in August 1999, October 2000, October 2001
and December 2001 at costs to the Company of $1,156, $1,015 and $848 in 1999,
2000 and 2001, respectively. The Credit Facility and Incremental Credit
Facility were subsequently amended in March 2002 (the "March 2002 Amendments")
at a cost of approximately $1,900 to modify certain covenants until March 31,
2003, to defer $25,747 of Term A and Term B amortization payments from
scheduled payment dates in 2002 to 2005 and to extend the Incremental Credit
Facility to March 31, 2003. The March 2002 Amendments resulted in an increase in
interest rates of 0.25 percent, the addition of one financial covenant and
scheduled reductions in the commitment amounts of the revolving credit lines of
the Credit Facility and the Incremental Credit Facility.
The March 2002 Amendments call for the Company to prepay borrowings under
the Credit Facility and Incremental Credit Facility in an aggregate amount of
at least $75,000 ("Minimum Prepayment Amount") from the net proceeds of an
equity investment, sale of assets and other sources of new capital. If the
Minimum Prepayment Amount is not made by September 30, 2002, the Company's
interest rates will increase by another 0.25 percent, and will increase again
by 0.25 percent each quarter thereafter. If the Minimum Prepayment Amount
is achieved, these additional interest rate increases will be eliminated. The
March 2002 Amendments also provide for the issuance of market-priced warrants to
the lenders for the purchase of two percent of the Company's Common Stock at
June 28, 2002. If the Minimum Prepayment Amount is not made by September 30 or
December 31, 2002, the lenders will be issued market-priced warrants for the
purchase of an additional five percent and three percent, respectively, of the
Company's Common Stock. If at least $50,000 of the Minimum Prepayment Amount is
made from the net proceeds of an equity investment by September 30 or December
31, 2002, no warrants will be required to be issued to the lenders on those
dates.
Under the terms of the Credit Facility, as modified by the March 2002
Amendments, term loans and revolving credit bear interest, at the Company's
option, at rates equal to the prime rate plus incremental margins or LIBOR plus
incremental margins. The incremental margins vary based on the Company's
financial position and currently range from 2.0 percent to 4.75 percent. The
Company has entered into two interest rate derivative contracts to manage
interest rate risk exposure relative to the Term A and Term B portions of the
Credit Facility. The Company is also required to pay a commitment fee of 0.5
percent per annum on the unused amount of the revolving portion of the Credit
Facility. The Company has letters of credit outstanding and bank guarantees
totaling $14,982 supported by the Credit Facility.
The Credit Facility, as modified by the March 2002 Amendments, contains
certain covenants and conditions which impose limitations on the Company and its
operating units, including meeting certain financial tests and the quarterly
maintenance of certain financial ratios on a consolidated basis such as: minimum
net worth, maximum leverage, minimum pre-tax interest coverage ratio, minimum
fixed charge coverage ratio and minimum earnings before interest, taxes,
depreciation, amortization and restructuring charges. The Company is permitted
to pay cash dividends not exceeding $7,200 in any fiscal year after January 1,
2001, but only if at both the time of payment of the dividend and immediately
thereafter there is no event of default under the Credit Facility. As of
December 31, 2001, the Company was not in default with the covenants and
conditions of the Credit Facility due to the amendments made in the fourth
quarter of 2001 and the March 2002 Amendments.
Borrowings of the Credit Facility and Incremental Credit Facility
outstanding at December 31, 2001 are classified in accordance with the terms of
the March 2002 Amendments. The scheduled annual maturities of debt and credit
arrangements at December 31, 2001, are as follows:
Year Amount
------- ----------------
2002 $ 12,963
2003 39,828
2004 35,436
2005 155,372
2006 28,484
----------------
$ 272,083
================
Interest paid was $23,996, $25,859 and $11,332 in 2001, 2000 and 1999
respectively.
32
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE D -- ACQUISITIONS
The following acquisitions were accounted for using the purchase method of
accounting and, accordingly, the related purchase price was allocated to assets
acquired and liabilities assumed based on their estimated fair values. Results
of operations for these acquisitions have been included in the consolidated
results of operations since the date of acquisition.
On December 15, 1999, the Company acquired certain assets relating to the
cryogenic repair business previously operated by Air Liquide for $1,000 in cash
and $2,600 in rebate credits to be given to Air Liquide on sales after December
15, 1999.
On April 12, 1999, the Company acquired the common stock of MVE for $9,196
in cash ($2,225 net of cash acquired) and redeemed the preferred stock of MVE
for $74,642. In addition, the Company paid $156,137 to retire MVE's existing
debt obligations and complete the tender offer and consent solicitation for the
12.5 percent senior secured notes due 2002 issued by MVE Inc., a subsidiary of
MVE. In allocating the purchase price, $172,353 was allocated to net liabilities
assumed, including minority interests in certain consolidated subsidiaries of
MVE, $22,010 was allocated to in-process research and development ("IPR&D")
projects that had not reached technological feasibility and had no alternative
future use, $7,690 was allocated to identifiable intangible assets which are
being amortized over five years, and $151,849 was allocated to goodwill, which
was being amortized over 40 years through December 31, 2001. The amount
allocated to IPR&D was determined by independent consultants who estimated the
costs to develop the technology into commercially viable products, estimated
cash flows resulting from the expected revenues generated from such products and
discounted the net cash flows back to their present value using a risk-adjusted
discount rate. This amount was recognized as a non-cash expense without tax
benefit at the date of acquisition.
On March 15, 1999, the Company acquired a group of privately held
companies, collectively known as Northcoast Cryogenics, for approximately
$2,337 in cash ($2,185 net of cash acquired) and $723 in the Company's common
stock. In allocating the purchase price, $374 was allocated to net assets
acquired and $2,686 was allocated to goodwill, which was being amortized over
15 years through December 31, 2001.
The Company's pro-forma unaudited results of operations for 1999, assuming
consummation of the acquisition of MVE and extinguishment of the related debt
as of January 1, 1999, are as follows:
Net sales $ 337,754
Income (loss) before extraordinary item ( 30,412)
Income (loss) before extraordinary item per share ( 1.28)
Income (loss) before extraordinary item per
share - assuming dilution ( 1.28)
Net income (loss) ( 38,221)
Net income (loss) per share ( 1.61)
Net income (loss) per share - assuming dilution ( 1.61)
NOTE E--EMPLOYEE SEPARATION AND PLANT CLOSURE COSTS
During 2001, the Company recorded employee separation and plant closure
costs of $2,375. These costs included $1,566 related to the closure of the
Ottawa Lake, Michigan facility and two smaller sites within the cryogenic
services business of the Distribution and Storage segment, $363 for terminating
25 employees at the Company's Wolverhampton, United Kingdom heat exchangers
business facility of the Process Systems and Equipment segment and $446 for
terminating 45 other employees throughout the Company. The cryogenic services
business charges of $1,566 included $556 for lease termination and facility
closure-related costs, $566 for writing off certain leasehold improvements and
fixed assets, $62 for terminating 32 employees, and $382 for moving costs and
other charges. At December 31, 2001, the Company had a reserve of $486
remaining, primarily for lease termination costs.
During 1999, the Company recorded net employee separation and plant closure
costs of $12,918. The charges consisted of $2,031 for the write-off of fixed
assets made redundant by the acquisition of MVE, $6,823 for the write-off of
impaired goodwill related to operations within the Company's Distribution and
Storage segment, $1,216 for lease payments and other costs related to exiting
certain facilities, $936 for the write-off of inventory to be disposed, which
was classified in cost of sales, and $1,912 for severance and other costs
related to the elimination of 188 positions throughout the Company. The
Company utilized $11,580 of the reserve in 1999. During 2000, the Company
reversed $704 of the reserve due to reoccupying a leased facility previously
vacated, and utilized $346 and $288 of the reserve for the payment of severance
benefits to terminated employees and the payment of lease costs for an exited
facility, respectively. As of December 31, 2000, the employee separation and
plant closure costs reserve was fully utilized.
33
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE F -- INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 2001,
the Company had deferred tax assets, associated with domestic net operating
loss carryforwards, of $5,709 which expire in years 2003 through 2020 and
foreign tax credits, research and developmental credits and other credits of
$887 which expire in years 2004 through 2020. Additionally, the Company had
deferred tax assets associated with foreign net operating loss carryforwards of
$2,766 at December 31, 2001 which have an indefinite carryforward period.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
December 31,
------------------------
2001 2000
-------- ---------
Deferred tax assets:
Accruals and reserves $16,175 $ 15,759
Net operating loss and credit carryforwards 9,362 6,405
Pensions 1,209
Other - net 16 387
-------- ---------
26,762 22,551
Valuation allowance ( 2,766) ( 1,692)
-------- ---------
Total deferred tax assets 23,996 20,859
-------- ---------
Deferred tax liabilities:
Property, plant and equipment 5,832 4,209
Intangibles 2,222 2,651
Inventory 835 1,298
Pensions 359
Other - net 32 428
-------- ---------
Total deferred tax liabilities 8,921 8,945
-------- ---------
Net deferred taxes $15,075 $ 11,914
======== =========
The valuation allowance of $2,766 and $1,692 at December 31, 2001 and 2000,
respectively, relates to foreign net operating loss carryforwards and foreign
tax credit carryforwards. The Company is uncertain whether these deferred tax
assets will be realized and, accordingly, has established a valuation allowance
against them. Management has determined, based on the Company's history of
prior earnings and its expectations for the future, that taxable income of the
Company will more likely than not be sufficient to fully realize the tax
benefit of the remaining net deferred tax assets.
The Company has not provided for U.S. federal income taxes on approximately
$7,357 of foreign subsidiaries' undistributed earnings as of December 31, 2001
because such earnings are intended to be reinvested indefinitely. The amount
of U.S. federal income tax that would result had such earnings been repatriated
would approximate $2,575.
34
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE F -- Income Taxes - Continued
Income (loss) before income taxes, minority interest, cumulative effect of
change in accounting principle and extraordinary item consists of the following:
Years ended December 31,
--------------------------------------------
2001 2000 1999
------------ --------- -----------
United States $ ( 6,618) $ 1,517 $ (24,550)
Foreign 2,057 3,767 ( 535)
------------ --------- -----------
$ ( 4,561) $ 5,284 $ (25,085)
============ ========= ===========
Significant components of the provision for income taxes are as follows:
Years Ended December 31,
---------------------------------------------
2001 2000 1999
------------ --------- -----------
Current:
Federal $ 3,699
State $ 100 $ 40 624
Foreign 934 945 2
------------ --------- -----------
1,034 985 4,325
------------ --------- -----------
Deferred:
Federal ( 1,120) 1,612 (1,630)
State ( 142) ( 389)
Foreign 484 557 909
------------ --------- -----------
( 636) 2,027 (1,110)
------------ --------- -----------
$ 398 $ 3,012 $ 3,215
============ ========= ===========
The reconciliation of income taxes computed at the U.S. federal statutory tax
rates to income tax expense is as follows:
Years Ended December 31,
---------------------------------------------
2001 2000 1999
------------ --------- -----------
Tax at U.S.
statutory rates $ ( 1,596) $ 1,849 $ ( 8,780)
State income taxes,
net of federal
tax benefit 65 ( 67) 153
Effective tax rate
differential of
earnings outside
of U.S. ( 386) ( 16) 183
Federal tax benefit
of Foreign Sales ( 310) ( 388) ( 291)
Non-deductible
goodwill 1,506 1,451 11,157
Valuation allowance 1,074 393 1,299
Other - net 45 ( 210) ( 506)
------------ --------- -----------
$ 398 $ 3,012 $ 3,215
============ ========= ===========
The Company paid income taxes of $2,272 and $2,246 in 2001 and 1999,
respectively, and received a net income tax refund of $1,693 in 2000.
NOTE G - EMPLOYEE BENEFIT PLANS
The Company has five defined benefit pension plans covering certain hourly
and salary employees. The defined benefit plans provide benefits based
primarily on the participants' years of service and compensation. The
Company's funding policy is to contribute at least the minimum funding amounts
required by law. Plan assets consist primarily of listed common stocks and
bonds. The United States plans held 250,549 shares of the Company's Common
Stock with fair values of $589 and $1,081 at December 31, 2001 and 2000,
respectively.
The actuarially computed combined pension cost included the following
components:
Years Ended December 31,
-------------------------------------------
2001 2000 1999
------------ --------- -----------
Service cost $ 1,716 $ 1,659 $ 2,194
Interest cost 2,829 2,625 2,169
Expected return
on plan assets ( 3,515) (3,310) (5,666)
Net amortization
and deferrals ( 153) ( 241) 3,282
------------ --------- -----------
Total pension cost $ 877 $ 733 $ 1,979
============ ========= ===========
35
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE G -- EMPLOYEE BENEFIT PLANS - CONTINUED
The following table sets forth changes in the benefit obligation, plan
assets, funded status of the plans and amounts recognized in the consolidated
balance sheets as of December 31:
2001 2000
------------------------------- -------------------------------
U.S. Plans U.K. Plan U.S. Plans U.K. Plan
------------- ------------- -------------- -------------
Change in benefit obligation:
January 1 benefit obligation $ 22,552 $ 17,076 $ 18,753 $ 18,941
Exchange rate changes ( 458) ( 1,458)
Service cost 1,078 638 883 776
Interest cost 1,828 1,001 1,571 1,054
Benefits paid ( 700) ( 811) ( 526) ( 478)
Actuarial losses (gains) and plan changes 2,353 1,795 1,871 ( 1,759)
------------- ------------- -------------- -------------
December 31 benefit obligation $ 27,111 $ 19,241 $ 22,552 $ 17,076
============= ============= ============== =============
Change in plan assets:
Fair value at January 1 $ 19,321 $ 23,021 $ 18,351 $ 22,982
Exchange rate changes ( 528) ( 1,798)
Actual return ( 1,670) ( 2,836) 329 2,153
Employer contributions 1,714 4 1,167 80
Employee contributions 52 82
Benefits paid ( 700) ( 811) ( 526) ( 478)
------------- ------------- -------------- -------------
Fair value at December 31 $ 18,665 $ 18,902 $ 19,321 $ 23,021
============= ============= ============== =============
Net amount recognized:
Funded status of the plans $ ( 8,446) $ ( 339) $ ( 3,231) $ 5,944
Unrecognized actuarial loss (gain) 3,881 524 ( 1,975) ( 6,059)
Unrecognized prior service cost 1,145 1,250
------------- ------------- -------------- -------------
Net pension (liability) asset recognized $ ( 3,420) $ 185 $ ( 3,956) $ ( 115)
============= ============= ============== =============
Prepaid benefit cost $ 1,145 $ 185 $ 1,587
Accrued benefit liability ( 6,480) ( 5,543) $ ( 115)
Minimum pension liability 1,915
------------- ------------- -------------- -------------
Net pension (liability) asset recognized $ ( 3,420) $ 185 $ ( 3,956) $ ( 115)
============= ============= ============== =============
A minimum pension liability adjustment is required when the actuarial
present value of projected benefit obligations exceeds plan assets and accrued
pension liabilities.
The assumptions used in determining pension cost and funded status
information for the years ended December 31, 2001 and 2000 are as follows:
2001 2000
------ ------
United States Plans
Discount rate 7.50% 8.00%
Weighted average rate of increase in compensation 3.50% 4.00%
Expected long-term weighted average rate of
return on plan assets 9.25% 9.25%
United Kingdom Plan
Discount rate 6.00% 6.00%
Weighted average rate of increase in compensation 3.90% 4.00%
Expected long-term weighted average rate of
return on plan assets 7.50% 7.50%
36
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE G -- EMPLOYEE BENEFIT PLANS - CONTINUED
At December 31, 2001, the Company's four United States plans all had
benefit obligations in excess of plan assets. At December 31, 2000, however,
while on an overall basis benefit obligations exceeded plan assets for these
four plans, one of these plans had plan assets in excess of its benefit
obligation. This excess totaled $141 on benefit obligations of $3,785 at
December 31, 2000.
The Company presently makes contributions to two union supported
multi-employer pension plans resulting in expense of $227, $206 and $269 in
2001, 2000 and 1999, respectively.
The Company has defined contribution savings plans that cover most of its
employees. Company contributions to the plans are based on employee
contributions and the level of Company match and discretionary contributions.
Expenses under the plans totaled $2,009, $2,184 and $1,792 for the years 2001,
2000 and 1999, respectively.
NOTE H -- STOCK OPTION PLANS
In July 1992, the Company adopted a Key Employee Stock Option Plan (the
"Key Employee Plan"), which, as amended, allows for the issuance of 1,383,750
shares of Common Stock. In May 1997, shareholders approved the Company's 1997
Stock Option and Incentive Plan (the "1997 Plan"). In May 2001, shareholders
approved an amendment to the 1997 plan to increase the number of shares
available for issuance under this plan by 600,000, increasing the maximum
number of shares available for award to 1,462,500 shares of Common Stock. Each
of these plans provides for the granting of options to purchase shares of
Common Stock to certain key employees of the Company. These nonqualified stock
options vest in equal annual installments over a five year period from the date
of grant and are exercisable for up to 10 years at an option price determined
by the Compensation Subcommittee of the Board of Directors.
In May 2000, shareholders approved an amendment to the 1996 Stock Option
Plan for Outside Directors to increase the number of shares available for
issuance under this plan by 210,000, supplementing the previously authorized
1995 and 1994 Stock Option Plans for Outside Directors (collectively, the
"Directors Plan"). The amendment increases the maximum number of shares
available for awards under the Directors Plan to a total of 446,250 shares. The
option price for options granted under the Directors Plan will be equal to the
fair market value of a share of Common Stock on the date of grant. These
nonqualified stock options become fully vested and exercisable on the first
anniversary of the date of grant and are exercisable for a period of ten years.
In May 2000, shareholders approved the 2000 Executive Incentive Stock
Option Plan (the "Executive Plan"), which provides for the granting of options
to purchase up to 600,000 shares of Common Stock to executive employees of the
Company. These nonqualified stock options are exercisable for a period of ten
years and have two different vesting schedules: 200,000 options vest in equal
annual installments over a five-year period and 400,000 options vest in equal
annual installments over a five year period based upon the achievement of
specific operating performance goals in that five year period as determined by
the Compensation Subcommittee of the Board of Directors. The Company is
accounting for these 400,000 performance related options as a variable plan. The
operating performance goal for the year ended December 31, 2000 was met, and
80,000 options vested. The Company did not recognize any compensation expense
under the Executive Plan, as the market value of the Company's stock was less
than the exercise price when the performance criteria were met. The operating
performance goal for the year ended December 31, 2001 was not met, and the
related options were canceled in the first quarter of 2002.
Certain information for 2001, 2000 and 1999 relative to the Company's
stock option plans is summarized below:
2001 2000 1999
------------------------ -------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of shares Price of Shares Price
------------ --------- --------------- --------- --------------- ------------
Outstanding at beginning of year 2,106,855 $5.62 1,397,475 $6.26 1,118,937 $6.14
Granted 206,250 2.78 843,250 4.52 315,000 6.88
Exercised ( 16,875) 2.44 ( 49,625) 2.05 ( 3,500) 1.87
Expired or canceled ( 146,711) 5.10 ( 84,245) 7.30 ( 32,962) 8.31
------------ --------- --------------- --------- --------------- ------------
Outstanding at end of year 2,149,519 $5.41 2,106,855 $5.62 1,397,475 $6.26
============ ========= =============== ========= =============== ============
Exercisable at end of year 1,162,933 826,760 663,895
============ =============== ===============
Weighted-average fair value of options
granted during the year $1.73 $2.93 $4.31
========= ========= ============
Participants at end of year 88 93 93
============ =============== ===============
Available for future grant at end of year 892,931 356,720 294,475
============ =============== ===============
37
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE H -- STOCK OPTION PLANS - CONTINUED
Exercise prices for options outstanding as of December 31, 2001 ranged
from $0.08 to $21.74. The weighted-average remaining contractual life of such
options is 6.8 years. Certain information for ranges of exercise prices is
summarized below:
Outstanding Exercisable
-------------------------------- ---------------------
Weighted Weighted
Average Average
Number Exercise Contractual Number Exercise
Exercise Price of Shares Price Life of Shares Price
--------- --------- ---------- --------- ---------
Less than $2.50 297,750 $ 2.24 4.7 191,500 $ 2.32
$2.50 to less than $5.00 849,374 4.04 7.7 313,773 3.77
$5.00 to less than $7.50 481,500 5.85 6.5 304,750 6.08
$7.50 to less than $10.00 473,918 8.22 6.7 305,433 8.28
Equal to or greater than $10.00 47,477 17.41 6.1 47,477 17.41
--------- ---------
2,149,519 1,162,933
--------- ---------
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, "Accounting for Stock-Based Compensation," which also
requires that the information be determined as if the Company had accounted for
its employee stock options granted subsequent to December 31, 1994 under the
fair value method of SFAS No. 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 2001, 2000 and 1999:
2001 2000 1999
-------- -------- --------
Risk free interest rate 4.2% 5.2% 6.5%
Dividend yield 0.0% 0.0% 0.0%
Market price volatility factor 58.3% 57.8% 54.2%
Expected life of key employee options 7 years 7 years 7 years
Expected life of directors options 7 years 5 years 5 years
Expected life of executive options 7 years 7 years --
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's Key Employee Plan, 1997 Plan, Directors Plan
and Executive Plan stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of these stock options.
The Company's pro forma disclosures showing the estimated fair value of
the options, amortized to expense over the options' vesting periods, are as
follows:
2001 2000 1999
---------- -------- ----------
Pro forma net income (loss) $ ( 5,989) $ 1,073 $(37,332)
Pro forma net income (loss) per share ( 0.24) 0.04 ( 1.58)
Pro forma net income (loss) per share -
assuming dilution ( 0.24) 0.04 ( 1.58)
NOTE I - LEASE COMMITMENTS
The Company incurred $5,657, $3,702 and $2,266 of rental expense under
operating leases in 2001, 2000 and 1999, respectively. At December 31, 2001,
future minimum lease payments for non-cancelable operating leases for the next
five years total $10,415 and are payable as follows: 2002--$2,986; 2003--$2,556;
2004--$2,226; 2005--$1,756; and 2006--$891.
NOTE J -- CONTINGENCIES
The Company's operating units are parties, in the ordinary course of
their businesses, to various legal actions related to performance under
contracts, product liability and other matters, several of which actions claim
substantial damages. The Company believes these legal actions will not have a
material adverse effect on the Company's financial position or liquidity. The
Company is subject to federal, state and local environmental laws and
regulations concerning, among other matters, waste water effluents, air
emissions and handling and disposal of hazardous materials such as cleaning
fluids.
38
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE J -- Contingencies - Continued
The Company has been named as a defendant in several similar civil cases
pending related to an accident occurring on December 7, 2000 at a nursing home
outside Dayton, Ohio. A nitrogen tank was connected to the nursing home's oxygen
system resulting in the death of five elderly patients and injuries to five
additional patients from inhaling the nitrogen. The claims against the Company
in these cases include negligence, strict product liability, failure to warn,
negligence per se, breach of warranty, punitive damages, loss of consortium and
negligent infliction of emotional distress. The allegations underlying the
claims include defective or deficient manufacture, construction, design,
labeling, formulation and warnings with regard to a cylinder. The plaintiffs in
these cases are seeking, in total, $28,500 in compensatory damages, $30,000 in
punitive damages, $2,000 for loss of consortium damages, prejudgment and
post-judgment interest and costs and fees from the Company and other defendants
named in the claims. The Company is vigorously defending all of these cases and
has filed its answer, denied all liability and cross-claimed for contribution
from certain co-defendants. Certain co-defendants have filed cross-claims
against the Company claiming contribution. Certain of these cases have been
settled with the other defendants, and others are scheduled to be mediated. The
Company is not involved in any of the mediation or settlement negotiations, in
part because the Company has not received any settlement demands. Additionally,
the Company believes that the claims made against it are the most tenuous of any
defendant and that the plaintiffs will be unable to articulate a plausible
negligence claim based on product liability. Of further significance is the fact
that some of the co-defendants have been criminally indicted in this matter. The
Company, however, has not been so indicted. The court has granted stays in all
of these cases pending the outcome of the criminal charges.
The Company is involved with environmental compliance, investigation,
monitoring and remediation activities at certain of its operating facilities,
and, except for these continuing remediation efforts, believes it is currently
in substantial compliance with all known material and applicable environmental
regulations. The Company accrues for certain environmental remediation-related
activities for which commitments or remediation plans have been developed and
for which costs can be reasonably estimated. These estimates are determined
based upon currently available facts regarding each facility. Actual costs
incurred may vary from these estimates due to the inherent uncertainties
involved. The Company had accruals for environmental-related activities of
$3,189 and $3,298 included in other long-term liabilities at December 31, 2001
and 2000, respectively. All accrued amounts are recorded on an undiscounted
basis. Expected future expenditures relating to these environmental remediation
accruals are expected to be made over the next ten years as ongoing costs of
remediation programs. Although the Company believes it has adequately provided
for the cost of all known environmental conditions, the applicable regulatory
agencies could insist upon different and more costly remediative measures than
those the Company believes are adequate or required by existing law. The
Company believes that any additional liability in excess of amounts accrued
which may result from the resolution of such matters will not have a material
adverse effect on the Company's financial position, liquidity, cash flows or
results of operations.
NOTE K -- Operating Segments
The Company has the following three reportable segments: applied
technologies ("Applied Technologies"), distribution and storage equipment
("Distribution and Storage") and process systems and equipment ("Process
Systems"). The Company's reportable segments are business units that offer
different products. The reportable segments are each managed separately because
they manufacture and distribute distinct products with different production
processes and sales and marketing approaches. The Applied Technologies segment
sells products including liquefied natural gas ("LNG") alternative fuel systems,
telemetry products, magnetic resonance imaging ("MRI") cryostat components, bulk
liquid CO2 systems, medical products, biological storage systems, cryogenic
systems and components and stainless steel tubing. The Distribution and Storage
segment sells cryogenic bulk storage systems, cryogenic packaged gas systems and
cryogenic services to various companies for the storage and transportation of
both industrial and natural gases. The Process Systems segment sells heat
exchangers and coldboxes to natural gas, petrochemical processing and industrial
gas companies who use them for the liquefaction and separation of natural and
industrial gases. Due to the nature of the products that each operating segment
sells, there are no intersegment sales.
The Company evaluates performance and allocates resources based on profit
or loss from operations before gain on sale of assets, net interest expense,
derivative contracts valuation expense, income taxes, minority interest and
cumulative effect of change in accounting principle. The accounting policies of
the reportable segments are the same as those described in the summary of
significant accounting policies.
39
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE K -- Operating Segments - Continued
Information for the Company's three reportable segments and its corporate
headquarters, and product and geographic information for the Company, is
presented below:
2001
-------------------------------------------------------------
Reportable Segments
-------------------------------------
Applied Distribution Process
Technologies and Storage Systems Corporate Total
------------ ------------ -------- ---------- -------
Revenues from external customers $ 142,491 $ 129,473 $ 56,026 $ 327,990
Depreciation and amortization expense 6,339 6,313 3,068 $ 2,467 18,187
Equity income in joint venture 525 525
Operating income (loss) (A) 17,603 4,855 ( 81) ( 3,011) 19,366
Total assets (B) 177,943 140,893 46,927 43,217 408,980
Capital expenditures 3,299 3,775 295 776 8,145
2000
---------------------------------------------------------------
Reportable Segments
---------------------------------------
Applied Distribution Process
Technologies and Storage Systems Corporate Total
------------- -------------- ---------- --------- -------
Revenues from external customers $ 136,952 $ 137,929 $ 50,819 $ 325,700
Depreciation and amortization expense 5,414 6,364 4,109 $ 1,977 17,864
Equity income in joint venture 35 35
Operating income (loss) (A) 23,386 11,832 1,338 ( 5,637) 30,919
Total assets (B) 171,096 168,941 56,353 33,453 429,843
Capital expenditures 2,166 2,596 258 561 5,581
1999
---------------------------------------------------------------
Reportable Segments
---------------------------------------
Applied Distribution Process
Technologies and Storage Systems Corporate Total
------------- ------------- ----------- ----------- ----------
Revenues from external customers $ 105,323 $ 105,529 $ 82,085 $ 292,937
Depreciation and amortization expense 5,953 4,982 4,489 $ 1,485 16,909
Operating income (loss) (A)(C) 9,579 4,923 (300) (25,938) ( 11,736)
Total assets (B) 185,983 149,869 61,934 26,784 424,570
Capital expenditures 2,633 1,761 1,072 1,581 7,047
(A) The Company defines operating income (loss) for segment measurement and
reporting purposes to be profit or loss from operations before gain on
sale of assets, net interest expense, derivative contracts valuation
expense, income taxes, minority interest and cumulative effect of change
in accounting principle.
(B) Corporate assets consist primarily of deferred income taxes, deferred
financing costs and cash and cash equivalents.
(C) Corporate operating loss in 1999 includes an in-process research and
development charge of $22,010 recognized by the Company upon its
acquisition of MVE.
40
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE K -- OPERATING SEGMENTS - CONTINUED
Years Ended December 31,
---------------------------------------------
Product Revenue Information: 2001 2000 1999
--------------------------- ----------- ----------- ----------
Applied Technologies Segment
LNG alternative fuel systems $ 11,513 $ 6,533 $ 6,438
Telemetry products 8
Medical products, biological storage systems and MRI
cryostat components 61,680 54,308 34,753
Cryogenic systems, components and stainless steel tubing 69,290 76,111 64,132
----------- ----------- -----------
142,491 136,952 105,323
----------- ----------- -----------
Distribution and Storage Segment
Cryogenic bulk storage systems 86,139 86,351 76,853
Cryogenic packaged gas systems 32,157 40,578 21,628
Cryogenic services 11,177 11,000 7,048
----------- ----------- -----------
129,473 137,929 105,529
----------- ----------- -----------
Process Systems Segment 56,026 50,819 82,085
----------- ----------- -----------
$ 327,990 $ 325,700 $ 292,937
=========== =========== ===========
Geographic Information: 2001 2000 1999
----------------------- --------------------- ---------------------- ---------------------
Long-Lived Long-Lived Long-Lived
Revenues Assets Revenues Assets Revenues Assets
--------- ----------- --------- ----------- --------- ------------
United States $ 274,410 $ 232,987 $ 279,449 $ 237,072 $ 241,228 $ 240,313
Non U.S. countries 53,580 36,213 46,251 36,637 51,709 40,907
--------- ----------- --------- ----------- --------- ------------
Total $ 327,990 $ 269,200 $ 325,700 $ 273,709 $ 292,937 $ 281,220
========= =========== ========= =========== ======== ============
NOTE L -- EXTRAORDINARY ITEM
In the second quarter of 1999, the Company borrowed funds under its Credit
Facility and retired prior to maturity certain debt assumed as part of the MVE
acquisition with a fair value of $119.2 million. The debt extinguishment
resulted in an extraordinary loss of $12,459, ($7,809 net of tax) or $0.33 per
diluted share.
41
CHART INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE M -- QUARTERLY DATA (UNAUDITED)
Selected quarterly data for the years ended December 31, 2001 and 2000
are as follows:
Year Ended December 31, 2001
---------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- ---------- --------- --------- ----------
Sales $ 89,032 $ 84,797 $ 80,595 $ 73,566 $ 327,990
Gross profit 27,069 21,531 21,180 16,581 86,361
Employee separation and plant closure costs ( 1,539) ( 198) ( 638) ( 2,375)
Operating income (loss) 8,213 5,994 5,733 ( 574) 19,366
Net income (loss) 405 ( 424) ( 1,170) ( 3,969) ( 5,158)
Net income (loss) per share 0.02 ( 0.02) ( 0.05) ( 0.16) ( 0.21)
Net income (loss) per share - assuming dilution 0.02 ( 0.02) ( 0.05) ( 0.16) ( 0.21)
In the second quarter of 2001, the Company recorded a non-cash inventory
valuation charge included in cost of sales of $745 ($447 net of taxes) for the
write-off of inventory at cryogenic services business sites closed by the
Company.
In the fourth quarter of 2001, the Company recorded a non-cash inventory
valuation charge included in cost of sales of $1,874 ($1,153 net of taxes) for
the write-down to fair value of inventory related to a product line that was
sold by the Company.
Year Ended December 31, 2000
---------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- ---------- --------- --------- ----------
Sales $ 68,992 $ 78,924 $ 88,012 $ 89,772 $ 325,700
Gross profit 19,760 23,653 26,951 25,665 96,029
Operating income 5,087 7,135 9,506 9,191 30,919
Net income (loss) ( 385) 291 1,038 1,211 2,155
Net income (loss) per share ( 0.02) 0.01 0.04 0.05 0.09
Net income (loss) per share - assuming dilution ( 0.02) 0.01 0.04 0.05 0.09
In the fourth quarter of 2000, the Company recorded a non-cash inventory
valuation charge included in cost of sales of $1,392 ($509 net of taxes).
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing under the captions "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
registrant's definitive Proxy Statement to be used in connection with the
Annual Meeting of Stockholders to be held on June 6, 2002 (the "2002 Proxy
Statement") is incorporated herein by reference. Information regarding
executive officers of the registrant is set forth in Part I of this Annual
Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the captions "Election of Directors"
and "Executive Compensation" (other than the Compensation Subcommittee Report
on Executive Compensation) in the 2002 Proxy Statement is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Stock Ownership of
Principal Holders and Management" in the 2002 Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the caption "Other Matters" in the
2002 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Report of Independent Auditors.................................... 22
Consolidated Balance Sheets at December 31, 2001 and 2000......... 23
Consolidated Statements of Operations for the Years ended December
31, 2001, 2000 and 1999 ........................................ 24
Consolidated Statements of Shareholders' Equity for the Years
ended December 31, 2001, 2000 and 1999.......................... 25
Consolidated Statements of Cash Flows for the Years ended December
31,2001, 2000 and 1999.......................................... 26
Notes to Consolidated Financial Statements........................ 27
(a)(2) Financial Statement Schedules.
No financial statement schedules required.
(a)(3) Exhibits
See the Exhibit Index at page 45 of this Annual Report on Form
10-K.
(b) Reports on Form 8-K.
During the quarter ended December 31, 2001, the Company filed one
Current Report on Form 8-K. A Current Report on Form 8-K, dated
October 29, 2001, furnished a press release pursuant to Regulation
FD.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CHART INDUSTRIES, INC.
By: /s/ ARTHUR S. HOLMES
----------------------------------
Arthur S. Holmes,
Chairman & Chief Executive Officer
Date: April 1, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ ARTHUR S. HOLMES Chairman, Chief Executive Officer and a Director April 1, 2002
---------------- (Principal Executive Officer)
Arthur S. Holmes
/s/ MICHAEL F. BIEHL Chief Financial Officer and Treasurer April 1, 2002
---------------- (Principal Financial Officer)
Michael F. Biehl
/s/ JOHN T. ROMAIN Controller, Chief Accounting Officer and Assistant April 1, 2002
-------------- Treasurer (Principal Accounting Officer)
John T. Romain
/s/ RICHARD J. CAMPBELL Director April 1, 2002
-------------------
Richard J. Campbell
/s/ THOMAS F. MCKEE Director April 1, 2002
---------------
Thomas F. McKee
/s/ LAZZARO G. MODIGLIANI Director April 1, 2002
---------------------
Lazzaro G. Modigliani
/s/ ROBERT G. TURNER, JR. Director April 1, 2002
---------------------
Robert G. Turner, Jr.
44
EXHIBIT INDEX
Exhibit
No. Description
---- -----------
2.1 Plan and Agreement of Merger, dated April 30, 1997, by and among the Company, Greenville
Tube Corporation, Chart Acquisition Company, Inc. and Cryenco Sciences, Inc.................. (E)
2.2 Agreement for the Sale and Purchase of the Industrial Heat Exchanger Group, dated March 5,
1998, by and among the Company, IMI Kynoch Limited, IMI Marston Limited, IMI plc and
Chart Marston Limited........................................................................ (F)
2.3 Agreement and Plan of Merger, dated as of February 16, 1999, by and among the Company,
Chart Acquisition Company and MVE Holdings, Inc.............................................. (I)
2.4 Agreement and Plan of Merger, dated as of February 25, 1999, by and among the Company,
Chart Acquisition Company and MVE Investors, LLC............................................. (I)
3.1 Amended and Restated Certificate of Incorporation of the Company, as filed with the
Secretary of State of Delaware on December 3, 1992........................................... (A)
3.1.1 Certificate of Designation of Series A Junior Participating Preferred Stock of the Company..... (N)
3.1.2 Certificate of Amendment, amending the Amended and Restated Certificate of Incorporation
of the Company............................................................................... (O)
3.2 Amended and Restated By-Laws of the Company, effective May 3, 2001............................. (O)
4.1 Specimen certificate of the Common Stock of the Company........................................ (N)
4.2 Form of Warrant Agreements of various dates by and between Cryenco Sciences, Inc. and
various warrant holders...................................................................... (E)
4.3 Form of Amendment No. 1 to Warrant Agreement by and among the Company, Cryenco
Sciences, Inc. and various warrant holders................................................... (E)
4.4 Form of Warrant Certificate.................................................................... (E)
4.5 Rights Agreement, dated as of May 1, 1998, by and between the Company and National City
Bank, as Rights Agent........................................................................ (G)
4.6 Amendment No. 1 to Rights Agreement, dated as of February 8, 2001, by and between the
Company and National City Bank, as Rights Agent.............................................. (N)
10.1 Form of Indemnity Agreement.................................................................... (B)
*10.2 Key Employees Stock Option Plan................................................................ (B)
*10.2.1 Amendment No. 1 to Key Employees Stock Option Plan ............................................
*10.2.2 Amendment No. 2 to Key Employees Stock Option Plan ............................................
*10.3 1994 Stock Option Plan for Outside Directors................................................... (C)
*10.3.1 1995 Stock Option Plan for Outside Directors................................................... (N)
*10.3.2 1996 Stock Option Plan for Outside Directors ..................................................
*10.3.3 Amendment No. 1 to the 1996 Stock Option Plan for Outside Directors............................ (K)
*10.4 Second Amended and Restated 1997 Stock Option and Incentive Plan............................... (O)
*10.5 1997 Stock Bonus Plan.......................................................................... (D)
*10.6 Trust Agreement by and between Chart Industries, Inc. and Fidelity Management Trust
Company relating to the Deferred Compensation Plan........................................... (H)
*10.7 2000 Executive Incentive Stock Option Plan..................................................... (K)
*10.7.1 Form of Stock Option Agreement under the 2000 Executive Incentive Stock Option Plan (K)
10.8 License Agreement, dated August 30, 1991, by and between Koch Industries, Inc. and PSI
relating to the Ryan/Holmes Technology....................................................... (B)
10.9 Permitted User Agreement, dated as of March 27, 1998, by and between Chart Marston Limited
and IMI Marston Limited...................................................................... (F)
10.10 IAM Agreement 2001-2004, effective February 4, 2001, by and between Chart Heat
Exchangers, L.P. and Local Lodge 2191 of District Lodge 66 of the International Association
of Machinists and Aerospace Workers, AFL-CIO................................................. (O)
10.11 Agreement, effective August 30, 1999 through August 30, 2002, by and between Process
Engineering and The International Brotherhood of Boilermakers, Iron Ship Builders,
Blacksmiths, Forgers & Help ers Local Lodge No. 752 of the AFL-CIO........................... (N)
10.12 Agreement, effective January 10, 2000 through January 15, 2002, by and between the Company
and the United Steel Workers ................................................................ (N)
*10.13 Employment Agreement, dated as of November 13, 2001, by and between the Company and
Arthur S. Holmes ............................................................................
*10.14 Employment Agreement, dated as of January 24, 2001, by and between the Company and
James R. Sadowski............................................................................ (N)
*10.14.1 Amendment No. 1 to Employment Agreement, dated as of February 15, 2002, by and between
the Company and James R. Sadowski ...........................................................
*10.15 Letter Agreement, dated July 25, 2001, by and between the Company and Michael F. Biehl......... (Q)
*10.16 Salary Continuation Agreement, dated May 12, 1996, by and between the Company and
John T. Romain............................................................................... (C)
*10.16.1 Amendment No. 1 to Salary Continuation Agreement, dated December 4, 1998, by and
between the Company and John T. Romain....................................................... (C)
45
10.17 Credit Agreement, dated as of April 12, 1999, by and among the Company, the Subsidiary
Borrowers, the Subsidiary Guarantors, the Lenders (all as defined therein), The Chase
Manhattan Bank, as Administrative Agent, and National City Bank, as Documentation
Agent....................................................................................... (I)
10.17.1 Amendment No. 1, dated as of August 24, 1999, to the Credit Agreement, dated as of April 12,
1999, by and among the Company, the Subsidiary Borrowers, the Subsidiary Guarantors, the
Lenders signatory thereto (all as defined therein), The Chase Manhattan Bank, as
Administrative Agent, and National City Bank, as Documentation Agent........................ (J)
10.17.2 Amendment No. 2, dated as of October 10, 2000, to the Credit Agreement, dated as of April 12,
1999, by and among the Company, the Subsidiary Borrowers, the Subsidiary Guarantors, the
Lenders signatory thereto (all as defined therein), The Chase Manhattan Bank, as
Administrative Agent, and National City Bank, as Documentation Agent........................ (L)
10.17.3 Series 1 Incremental Revolving Credit Agreement, dated as of November 29, 2000, by and
among the Company, the Subsidiary Borrowers, the Subsidiary Guarantors, the Series 1
Lenders signatory thereto (all as defined therein), and The Chase Manhattan Bank, as
Administrative Agent........................................................................ (M)
10.17.4 Series 2 Incremental Revolving Credit Agreement, dated as of April 17, 2001, by and among
the Company, the Subsidiary Borrowers, the Subsidiary Guarantors, the Series 2 Lenders
signatory thereto (all as defined therein), and The Chase Manhattan Bank, as Administrative
Agent....................................................................................... (P)
10.17.5 Amendment No. 3, dated as of October 12, 2001, to the Credit Agreement, dated as of April 12,
1999, by and among the Company, the Subsidiary Borrowers, the Subsidiary Guarantors, the
Lenders signatory thereto (all as defined therein), The Chase Manhattan Bank, as
Administrative Agent, and National City Bank, as Documentation Agent...... ................. (Q)
10.17.6 Amendment No. 1, dated as of October 12, 2001, to the Series 1 Incremental Revolving Credit
Agreement, dated as of November 29, 2000, by and among the Company, the Subsidiary
Borrowers, the Subsidiary Guarantors, the Series 1 Lenders signatory thereto (all as defined
therein), and The Chase Manhattan Bank, as Administrative Agent .............................
10.17.7 Amendment No. 1, dated as of October 12, 2001, to the Series 2 Incremental Revolving Credit
Agreement, dated as of April 17, 2001, by and among the Company, the Subsidiary
Borrowers, the Subsidiary Guarantors, the Series 2 Lenders signatory thereto (all as defined
therein), and The Chase Manhattan Bank, as Administrative Agent .............................
10.17.8 Amendment No. 2, dated as of December 18, 2001, to the Series 1 Incremental Revolving Credit
Agreement, dated as of November 29, 2000, by and among the Company, the Subsidiary
Borrowers, the Subsidiary Guarantors, the Series 1 Lenders signatory thereto (all as defined
therein), and JPMorgan Chase Bank, as Administrative Agent.................................. (R)
10.17.9 Amendment No. 2, dated as of December 18, 2001, to the Series 2 Incremental Revolving Credit
Agreement, dated as of April 17, 2001, by and among the Company, the Subsidiary
Borrowers, the Subsidiary Guarantors, the Series 2 Lenders signatory thereto (all as defined
therein), and JPMorgan Chase Bank, as Administrative Agent.................................. (R)
10.17.10 Amendment No. 4, dated as of December 31, 2001, to the Credit Agreement, dated as of
April 12, 1999, by and among the Company, the Subsidiary Borrowers, the Subsidiary
Guarantors, the Lenders signatory thereto (all as defined therein), JPMorgan Chase Bank, as
Administrative Agent, and National City Bank, as Documentation Agent........................ (R)
10.17.11 Amendment No. 5, dated as of March 15, 2002, to the Credit Agreement, dated as of April 12,
1999, by and among the Company, the Subsidiary Borrowers, the Subsidiary Guarantors, the
Lenders signatory thereto (all as defined therein), JPMorgan Chase Bank, as Administrative
Agent, and National City Bank, as Documentation Agent ......................................
10.17.12 Amendment No. 3, dated as of March 15, 2002, to the Series 1 Incremental Revolving Credit
Agreement, dated as of November 29, 2000, by and among the Company, the Subsidiary
Borrowers, the Subsidiary Guarantors, the Series 1 Lenders signatory thereto (all as defined
therein), and JPMorgan Chase Bank, as Administrative Agent .................................
10.17.13 Amendment No. 3, dated as of March 15, 2002, to the Series 2 Incremental Revolving Credit
Agreement, dated as of April 17, 2001, by and among the Company, the Subsidiary
Borrowers, the Subsidiary Guarantors, the Series 2 Lenders signatory thereto (all as defined
therein), and JPMorgan Chase Bank, as Administrative Agent .................................
10.18 Indemnification and Warrant Purchase Agreement, dated as of April 12, 1999, by and among
the Company, MVE Holdings, Inc. and each of the former members of MVE Investors, LLC
listed on the signature pages thereto....................................................... (I)
10.19 Form of Promissory Note....................................................................... (I)
10.20 Form of Mortgage, Assignment of Rents, Security Agreement and Fixture Filing.................. (I)
10.21 Warrant Agreement, dated as of April 12, 1999, between the Company and each of the persons
listed on the signature pages thereto....................................................... (I)
46
10.22 Escrow Agreement, dated as of April 12, 1999, by and among the Company, MVE Holdings,
Inc., Chart Acquisition Company, ACI Capital I, LLC, in its own capacity and, with respect
to the Class B Escrow Amount (as defined therein), as agent and attorney-in-fact for each of
the former members of MVE Investors, LLC listed therein, and Firstar Bank of Minnesota,
N.A......................................................................................... (I)
21.1 Subsidiaries of the Registrant ...............................................................
23.1 Consent of Ernst & Young LLP .................................................................
47
* Management contract or compensatory plan or arrangement identified
pursuant to Item 14(a)(3) of this Annual Report on Form 10-K.
(A) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form S-3 (Reg. No. 333-35321).
(B) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form S-1 (Reg. No. 33-52754).
(C) Incorporated herein by reference to the appropriate exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
(D) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form S-8 (Reg. No. 333-32535).
(E) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report on Form 8-K, dated July 31, 1997.
(F) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report on Form 8-K, dated March 27, 1998.
(G) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form 8-A, filed June 3, 1998.
(H) Incorporated herein by reference to the appropriate exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
(I) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report on Form 8-K, dated April 12, 1999.
(J) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report on Form 8-K, dated August 24, 1999.
(K) Incorporated herein by reference to the appropriate exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.
(L) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report on Form 8-K, dated October 10, 2000.
(M) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report on Form 8-K, dated November 29, 2000.
(N) Incorporated herein by reference to the appropriate exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
(O) Incorporated herein by reference to the appropriate exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2001.
(P) Incorporated herein by reference to the appropriate exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.
(Q) Incorporated herein by reference to the appropriate exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 2001.
(R) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report on Form 8-K, dated December 31, 2001.
48