CHART INDUSTRIES INC - FORM 10-Q - July 31, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________
FORM 10-Q
_____________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 1-11442
_____________________________________  
CHART INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
_____________________________________
Delaware
34-1712937
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
One Infinity Corporate Centre Drive, Suite 300, Garfield Heights, Ohio 44125
(Address of Principal Executive Offices) (ZIP Code)
Registrant’s Telephone Number, Including Area Code: (440) 753-1490
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
_____________________________________
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
At July 29, 2014, there were 30,475,362 outstanding shares of the Company’s Common Stock, par value $0.01 per share.


CHART INDUSTRIES, INC.
INDEX
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements
CHART INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
June 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
142,674

 
$
137,345

Accounts receivable, less allowances of $6,119 and $5,654
199,478

 
224,114

Inventories, net
226,956

 
213,004

Unbilled contract revenue
40,692

 
31,976

Prepaid expenses
11,859

 
12,257

Deferred income taxes
17,642

 
14,675

Other current assets
14,060

 
16,072

Total Current Assets
653,361

 
649,443

Property, plant and equipment, net
238,772

 
224,205

Goodwill
407,360

 
398,905

Identifiable intangible assets, net
164,443

 
172,142

Other assets
24,057

 
16,935

TOTAL ASSETS
$
1,487,993

 
$
1,461,630

LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
109,699

 
$
101,805

Customer advances and billings in excess of contract revenue
89,548

 
102,048

Accrued salaries, wages and benefits
32,826

 
39,961

Current portion of warranty reserve
15,910

 
19,567

Short-term debt
7,898

 
3,280

Current convertible notes
—

 
193,437

Current portion of long-term debt
4,687

 
3,750

Other current liabilities
33,666

 
35,456

Total Current Liabilities
294,234

 
499,304

Long-term debt
260,538

 
64,688

Long-term deferred tax liabilities
51,705

 
47,716

Long-term portion of warranty reserve
12,350

 
14,260

Accrued pension liabilities
6,782

 
7,719

Other long-term liabilities
9,480

 
9,360

Total Liabilities
635,089

 
643,047

 
 
 
 
Convertible notes conversion feature
—

 
56,563

Equity
 
 
 
Common stock, par value $.01 per share – 150,000,000 shares authorized, 30,473,772 and 30,378,502 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
305

 
304

Additional paid-in capital
373,478

 
311,972

Retained earnings
461,253

 
429,187

Accumulated other comprehensive income
11,325

 
13,322

Total Chart Industries, Inc. Shareholders’ Equity
846,361

 
754,785

Noncontrolling interests
6,543

 
7,235

Total Equity
852,904

 
762,020

TOTAL LIABILITIES AND EQUITY
$
1,487,993

 
$
1,461,630

The balance sheet at December 31, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements.

See accompanying notes to these unaudited condensed consolidated financial statements.

3

CHART INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(Dollars and shares in thousands, except per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Sales
$
306,810

 
$
298,266

 
$
573,050

 
$
571,914

Cost of sales
214,629

 
208,460

 
403,323

 
402,658

Gross profit
92,181

 
89,806

 
169,727

 
169,256

Selling, general and administrative expenses
53,662

 
51,905

 
104,573

 
99,109

Amortization expense
4,475

 
4,922

 
8,964

 
9,817

Operating expenses
58,137

 
56,827

 
113,537

 
108,926

Operating income
34,044

 
32,979

 
56,190

 
60,330

Other expenses:
 
 
 
 
 
 
 
Interest expense, net
4,137

 
3,977

 
8,286

 
7,968

Financing costs amortization
327

 
327

 
653

 
653

Foreign currency loss
391

 
91

 
509

 
437

Other expenses, net
4,855

 
4,395

 
9,448

 
9,058

Income before income taxes
29,189

 
28,584

 
46,742

 
51,272

Income tax expense
8,818

 
7,981

 
14,032

 
14,561

Net income
20,371

 
20,603

 
32,710

 
36,711

Noncontrolling interests, net of taxes
302

 
603

 
644

 
1,176

Net income attributable to Chart Industries, Inc.
$
20,069

 
$
20,000

 
$
32,066

 
$
35,535

Net income attributable to Chart Industries, Inc. per common share:
 
 
 
 
 
 
 
Basic
$
0.66

 
$
0.66

 
$
1.06

 
$
1.18

Diluted
$
0.65

 
$
0.64

 
$
1.03

 
$
1.15

Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
30,389

 
30,249

 
30,368

 
30,143

Diluted
30,978

 
31,428

 
31,170

 
31,000

 
 
 
 
 
 
 
 
Comprehensive income, net of taxes
$
20,269

 
$
20,939

 
$
30,583

 
$
36,034

Less: Comprehensive income attributable to noncontrolling interests, net of taxes
318

 
608

 
514

 
1,200

Comprehensive income attributable to Chart Industries, Inc., net of taxes
$
19,951

 
$
20,331

 
$
30,069

 
$
34,834


See accompanying notes to these unaudited condensed consolidated financial statements.

4

CHART INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
 
Six Months Ended June 30,
 
2014
 
2013
OPERATING ACTIVITIES
 
 
 
Net income
$
32,710

 
$
36,711

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
20,360

 
19,963

Interest accretion of convertible notes discount
5,226

 
4,830

Employee share-based compensation expense
5,883

 
5,075

Financing costs amortization
653

 
653

Unrealized foreign currency transaction (gain) loss
(561
)
 
80

Other non-cash operating activities
(361
)
 
3,555

Changes in asset and liabilities, net of acquisitions:
 
 
 
Accounts receivable
23,528

 
(20,757
)
Inventory
(16,824
)
 
(15,963
)
Unbilled contract revenues and other assets
(13,261
)
 
(29,308
)
Accounts payable and other liabilities
(2,850
)
 
(1,179
)
Customer advances and billings in excess of contract revenue
(12,160
)
 
6,722

Net Cash Provided By Operating Activities
42,343

 
10,382

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(25,665
)
 
(29,226
)
Proceeds from sale of assets
1,691

 
—

Acquisition of businesses, net of cash acquired
(11,943
)
 
(3,032
)
Net Cash Used In Investing Activities
(35,917
)
 
(32,258
)
FINANCING ACTIVITIES
 
 
 
Borrowings on revolving credit facilities
7,884

 
100,231

Repayments on revolving credit facilities
(3,252
)
 
(97,011
)
Principal payments on long-term debt
(1,875
)
 
(1,876
)
Proceeds from exercise of stock options
624

 
4,462

Excess tax benefit from share-based compensation
1,727

 
4,472

Payment of contingent consideration
(741
)
 
—

Common stock repurchases
(3,291
)
 
(1,903
)
Dividend distribution to noncontrolling interest
(1,206
)
 
(1,369
)
Net Cash (Used In) Provided By Financing Activities
(130
)
 
7,006

Effect of exchange rate changes on cash
(967
)
 
(846
)
Net increase (decrease) in cash and cash equivalents
5,329

 
(15,716
)
Cash and cash equivalents at beginning of period
137,345

 
141,498

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
142,674

 
$
125,782

See accompanying notes to these unaudited condensed consolidated financial statements.

5
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements – June 30, 2014
(Dollars and shares in thousands, except per share amounts)


NOTE 1 — Basis of Preparation
The accompanying unaudited condensed consolidated financial statements of Chart Industries, Inc. and its consolidated subsidiaries (the “Company” or “Chart”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for annual financial statements. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
Nature of Operations: The Company is a leading global manufacturer of standard and custom-engineered products and systems serving a wide variety of low-temperature and cryogenic applications. The Company has developed an expertise in medical respiratory equipment and 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 end-use of industrial gases and hydrocarbons. The Company has domestic operations located across the United States, including principal executive offices located in Ohio, and an international presence in Asia, Australia and Europe.
Principles of Consolidation: The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They may also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
Recently Issued Accounting Standards: In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The amendments require entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. The ASU allows full retrospective or modified retrospective adoption. Early adoption is not permitted. The Company is currently assessing the transition method and effect that the ASU will have on the Company’s financial position, results of operations and cash flows.
 
NOTE 2 — Inventories
The following table summarizes the components of inventory:
 
June 30,
2014
 
December 31,
2013
Raw materials and supplies
$
95,021

 
$
93,014

Work in process
43,078

 
42,996

Finished goods
88,857

 
76,994

Total inventories, net
$
226,956

 
$
213,004

The allowance for excess and obsolete inventory was $5,595 and $6,556 at June 30, 2014 and December 31, 2013, respectively.

6
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements – June 30, 2014
(Dollars and shares in thousands, except per share amounts) – Continued

NOTE 3 — Goodwill and Intangible Assets
Goodwill
The following table represents the changes in goodwill by segment:
 
Energy &
Chemicals
 
Distribution & Storage
 
BioMedical
 
Total
Balance at December 31, 2013
$
83,215

 
$
160,054

 
$
155,636

 
$
398,905

Foreign currency translation adjustments and other
—

 
(108
)
 
—

 
(108
)
Goodwill acquired during the year
8,563

 
—

 
—

 
8,563

Balance at June 30, 2014
$
91,778

 
$
159,946

 
$
155,636

 
$
407,360

Intangible Assets
The following table displays the gross carrying amount and accumulated amortization for finite-lived intangible assets and indefinite-lived intangible assets (exclusive of goodwill)(1):
 
June 30, 2014
 
December 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Finite-lived intangible assets:
 
 
 
 
 
 
 
Unpatented technology
$
36,296

 
$
(6,040
)
 
$
43,133

 
$
(11,776
)
Patents
7,866

 
(5,868
)
 
7,904

 
(5,397
)
Product names
9,104

 
(5,369
)
 
9,244

 
(4,525
)
Non-compete agreements
415

 
(3
)
 
—

 
—

Customer relations
159,014

 
(78,841
)
 
159,143

 
(73,460
)
Total finite-lived intangible assets
$
212,695

 
$
(96,121
)
 
$
219,424

 
$
(95,158
)
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
Trademarks and trade names
$
47,869

 
 
 
$
47,876

 
 
_______________
(1)
Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.
Amortization expense for intangible assets subject to amortization was $4,475 and $4,922 for the three months ended June 30, 2014 and 2013, respectively. Amortization expense for intangible assets subject to amortization was $8,964 and $9,817 for the six months ended June 30, 2014 and 2013, respectively. The Company estimates amortization expense to be recognized during the next five years as follows:
For the Year Ending December 31,
 
2014
$
17,900

2015
16,300

2016
14,400

2017
13,500

2018
12,800


7
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements – June 30, 2014
(Dollars and shares in thousands, except per share amounts) – Continued

NOTE 4 — Debt and Credit Arrangements
Convertible Notes
The outstanding aggregate principal amount of the Company’s 2.0% Convertible Senior Subordinated Notes due 2018 (the “Convertible Notes”) is $250,000. The Convertible Notes bear interest at a fixed rate of 2.0% per year, payable semiannually in arrears on February 1 and August 1 of each year, and will mature on August 1, 2018. The effective interest rate at issuance was 7.9%.
The Convertible Notes are senior subordinated unsecured obligations of the Company and are not guaranteed by any of the Company’s subsidiaries. The Convertible Notes are senior in right of payment to the Company’s future subordinated debt, equal in right of payment with the Company’s future senior subordinated debt and are subordinated in right of payment to the Company’s existing and future senior indebtedness, including indebtedness under the Company’s existing credit agreement.
In connection with the issuance of the Convertible Notes, the Company entered into privately-negotiated convertible note hedge and capped call transactions with affiliates of certain of the underwriters (the “Option Counterparties”). The convertible note hedge and capped call transactions relate to, collectively, 3,622 shares, which represents the number of shares of the Company’s common stock underlying the Convertible Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes. These convertible note hedge and capped call transactions are expected to reduce the potential dilution with respect to the Company’s common stock upon conversion of the Convertible Notes and/or reduce the Company’s exposure to potential cash or stock payments that may be required upon conversion of the Convertible Notes, except, in the case of the capped call transactions, to the extent that the market price per share of the Company’s common stock exceeds the cap price of the capped call transactions. The Company also entered into separate warrant transactions with the Option Counterparties initially relating to the number of shares of the Company’s common stock underlying the convertible note hedge transactions, subject to customary anti-dilution adjustments. The warrant transactions will have a dilutive effect with respect to the Company’s common stock to the extent that the price per share of the Company common stock exceeds the strike price of the warrants unless the Company elects, subject to certain conditions, to settle the warrants in cash. These warrants were exercisable as of the issuance date of the Convertible Notes. The cap price of the capped call transactions and the strike price of the warrant transactions was initially $84.96 per share. Proceeds received from the issuance of the warrants totaled approximately $48,848 and were recorded as an addition to additional paid-in-capital. The net cost of the convertible note hedge and capped call transactions, taking into account the proceeds from the issuance of the warrants, was approximately $17,638.
In accordance with Accounting Standards Codification (“ASC”) 815, contracts are initially classified as equity if (1) the contract requires physical settlement or net-share settlement, or (2) the contract gives the entity a choice of net-cash settlement in its own shares (physical settlement or net-share settlement). The Company concluded that the settlement terms of the convertible note hedge, capped call and warrant transactions permit net-share settlement. As such, the convertible note hedge, capped call and warrant transactions were recorded in equity.
Upon issuance of the Convertible Notes, the Company bifurcated the $250,000 principal balance of the Convertible Notes into a liability component of $170,885, which was recorded as long-term debt, and an equity component of $79,115, which was initially recorded as additional paid-in-capital. The liability component was recognized at the present value of its associated cash flows using a 7.9% straight-debt rate which represented the Company’s interest rate for similar debt instruments at that time without a conversion feature and is being accreted to interest expense over the term of the Convertible Notes. At June 30, 2014 and December 31, 2013, the carrying amount of the liability component was $198,663 and $193,437, respectively, and the unamortized debt discount of the Convertible Notes was $51,337 and $56,563, respectively.
For the three months ended June 30, 2014 and 2013, interest expense for the Convertible Notes was $3,889 and $3,689, respectively, which included $2,639 and $2,439 of non-cash interest accretion expense related to the carrying amount of the Convertible Notes, respectively, and $1,250 of 2.0% cash interest for both periods. For the six months ended June 30, 2014 and 2013, interest expense for the Convertible Notes was $7,726 and $7,330, respectively, which included $5,226 and $4,830 of non-cash interest accretion expense related to the carrying amount of the Convertible Notes, respectively, and $2,500 of 2.0% cash interest for both periods. In accordance with ASC 470-20, which requires issuers to separately account for the liability and equity components of convertible debt instruments that may be settled in cash upon conversion, the Company allocated debt issuance costs to the liability and equity components in proportion to their allocated value. Debt issuance costs were $7,277, with $2,303 recorded as a reduction in additional paid-in-capital. The remaining balance of $4,974 is being amortized over the term of the Convertible Notes. For the three months ended June 30, 2014 and 2013, total expense associated with the

8
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements – June 30, 2014
(Dollars and shares in thousands, except per share amounts) – Continued

amortization of these debt issuance costs was $177 for both periods. For the six months ended June 30, 2014 and 2013, total expense associated with the amortization of these debt issuance costs was $355 for both periods.
Prior to May 1, 2018, the Convertible Notes will be convertible at the option of the holders thereof only under the following circumstances: (1) during any fiscal quarter commencing after September 30, 2011 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price (currently $69.03) for the Convertible Notes on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “Measurement Period”) in which, as determined following a request by a holder of Convertible Notes as provided in the bond indenture (the “Indenture”), the trading price per $1,000 principal amount of Convertible Notes for each trading day of such Measurement Period was less than 97% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate for the Convertible Notes on each such trading day; or (3) upon the occurrence of specified corporate events pursuant to the terms of the Indenture. On or after May 1, 2018, until the close of business on the second scheduled trading day immediately preceding the maturity date of the Convertible Notes, holders of the Convertible Notes may convert their Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. It is the Company’s intention to settle any excess conversion value in shares of the Company’s common stock. Since the Company’s closing common stock price of $82.73 at the end of the period exceeded the conversion price of $69.03, the if-converted value exceeded the principal amount of the Convertible Notes by approximately $49,616 at June 30, 2014. As described above, the convertible note hedge and capped call transactions are expected to reduce the potential dilution with respect to the Company’s common stock upon conversion of the Convertible Notes.
The conversion rate on the Convertible Notes will be subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest. In addition, following the occurrence of a make-whole fundamental change, the Company will, in certain circumstances, increase the conversion rate for a holder that converts its Convertible Notes in connection with such make-whole fundamental change. The Company may not redeem the Convertible Notes prior to maturity. If the Company undergoes a fundamental change, subject to certain conditions, holders may require the Company to purchase the Convertible Notes in whole or in part for cash at a fundamental change purchase price equal to 100% of the principal amount of the Convertible Notes to be purchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date. For purposes of calculating earnings per share, if the market price of the Company’s common stock exceeds the applicable conversion price, as was the case at June 30, 2014, shares contingently issuable under the Convertible Notes will have a dilutive effect with respect to the Company’s common stock.
The Company reassesses the convertibility of the Convertible Notes and the related balance sheet classification on a quarterly basis. As of December 31, 2013, the notes were convertible, thus, the liability component of the Convertible Notes was classified as a current liability, and the equity component was classified as temporary equity in the condensed consolidated balance sheet. As of June 30, 2014, the notes are not convertible, thus, the liability component of the Convertible Notes was classified as long-term debt, and the $51,337 equity component was classified as permanent equity in the condensed consolidated balance sheet. At July 1, 2014, the Convertible Notes were not convertible at the option of the holders. There have been no conversions as of the date of this filing.
Senior Credit Facility
The Company has an outstanding five-year $375,000 senior secured credit facility (“Senior Credit Facility”), which consists of a $75,000 term loan (“Term Loan”) and a $300,000 revolving credit facility (“Revolving Credit Facility”). The Senior Credit Facility has a maturity date of April 25, 2017. The Revolving Credit Facility includes a $25,000 sub-limit for the issuance of swingline loans and a $100,000 sub-limit to be used for letters of credit. There is a foreign currency limit of $50,000 under the Revolving Credit Facility which could be used for foreign currency denominated letters of credit and borrowings in a foreign currency, in each case in currencies agreed upon with the lenders. In addition, the facility permits borrowings up to $50,000 under the Revolving Credit Facility made by the Company’s wholly-owned subsidiary, Chart Industries Luxembourg S.à r.l.
The Company recorded $1,445 in deferred financing costs related to the Senior Credit Facility which are being amortized over the five-year term of the loan. For the three months ended June 30, 2014 and 2013, financing costs amortization

9
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements – June 30, 2014
(Dollars and shares in thousands, except per share amounts) – Continued

associated with the Senior Credit Facility was $150 for both periods. For the six months ended June 30, 2014 and 2013, financing costs amortization associated with the Senior Credit Facility was $298 for both periods. The Senior Credit Facility also includes an expansion option permitting the Company to add up to an aggregate of $150,000 in term loans or revolving credit commitments from its existing and potential new lenders.
Loans under the Senior Credit Facility bear interest, at the applicable Borrower’s election, at either LIBOR or the greatest of (a) the JPMorgan prime rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1% or (c) the Adjusted LIBOR Rate (as defined in the Senior Credit Facility) for a one month interest period on such day (or if such day is not a business day, the immediately preceding business day) plus 1%, plus a margin that varies with the Company’s leverage ratio. In addition, the Company is required to pay a commitment fee of between 0.25% and 0.40% of the unused Revolver balance and a letter of credit participation fee equal to the daily aggregate letter of credit exposure at the rate per annum equal to the Applicable Margin for Eurocurrency Revolving Facility Borrowings (ranging from 1.5% to 3.0%, depending on the leverage ratio calculated at each fiscal quarter end). A fronting fee must be paid on each letter of credit that is issued equal to 0.125% per annum of the stated dollar amount of the letter of credit. Under the terms of the Senior Credit Facility, 5% of the $75,000 Term Loan is payable annually in quarterly installments over the first three years, 10% is payable annually in quarterly installments over the final two years, and the remaining balance is due on April 25, 2017.
The Senior Credit Facility contains a number of customary covenants, including but not limited to restrictions on the Company’s ability to incur additional indebtedness, create liens or other encumbrances, sell assets, enter into sale and lease-back transactions, make certain payments, investments, loans, advances or guarantees, make acquisitions and engage in mergers or consolidations, pay dividends or distributions, and make capital expenditures. Significant financial covenants for the Senior Credit Facility include a leverage ratio and an interest ratio. At June 30, 2014, the Company was in compliance with all covenants.
At June 30, 2014, there was $66,563 outstanding under the Term Loan and $29,141 in letters of credit issued. At June 30, 2014, availability under the Revolving Credit Facility was $270,859. The obligations under the Senior Credit Facility are guaranteed by the Company and substantially all of its U.S. subsidiaries and secured by substantially all of the assets of the Company and its U.S. subsidiaries and 65% of the capital stock of the Company’s material non-U.S. subsidiaries (as defined by the Senior Credit Facility) that are owned by U.S. subsidiaries.
Foreign Facilities – China
Chart Cryogenic Engineering Systems (Changzhou) Company Limited (“CCESC”), a wholly-owned subsidiary of the Company, and Chart Cryogenic Distribution Equipment (Changzhou) Company Limited (“CCDEC”), a joint venture of the Company, maintain joint banking facilities (the “China D&S Facilities”) which include a revolving line with 50.0 million Chinese yuan (equivalent to $8,059) in borrowing capacity, a bonding/guarantee facility with up to 30.0 million Chinese yuan (equivalent to $4,835) in borrowing capacity, and an overdraft facility with 10.0 million Chinese yuan (equivalent to $1,612) in borrowing capacity. Any drawings made by CCESC and CCDEC under the China D&S Facilities are guaranteed by the Company. At June 30, 2014, there was 39.0 million Chinese yuan (equivalent to $6,286) outstanding under the revolving line, bearing interest at 5.9% on a weighted-average basis.
CCDEC also maintains a facility with Bank of China with capacity of up to 10.0 million Chinese yuan (equivalent to $1,612). At June 30, 2014, there was 10.0 million Chinese yuan (equivalent to $1,612) outstanding under this facility, bearing interest at 6.6%. The facility matures on April 3, 2015.
As of June 30, 2014, CCESC and CCDEC had 6.1 million Chinese yuan (equivalent to $989) and 1.1 million Chinese yuan (equivalent to $170) in bank guarantees, respectively.
Foreign Facilities – Europe
Chart Ferox, a.s. (“Ferox”), a wholly-owned subsidiary of the Company, maintains two secured credit facilities with capacity of up to 175.0 million Czech koruna (equivalent to $8,730). Both of the facilities allow Ferox to request issuance of bank guarantees and letters of credit. Neither of the facilities allows revolving credit borrowings, including overdraft protection. Under both facilities, Ferox must pay letter of credit and guarantee fees equal to 0.70% p.a. on the face amount of each guarantee or letter of credit. Ferox’s land, buildings and accounts receivable secure the credit facilities. As of June 30, 2014, there were bank guarantees of 79.6 million Czech koruna (equivalent to $3,972) supported by the Ferox credit facilities.
Chart Industries Luxembourg S.à r.l. (“Chart Luxembourg”), a wholly-owned subsidiary of the Company, maintains an overdraft facility with $5,000 in borrowing capacity. There were no borrowings under the Chart Luxembourg facility as of June 30, 2014.

10
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements – June 30, 2014
(Dollars and shares in thousands, except per share amounts) – Continued

Fair Value Disclosures
The fair value of the term loan portion of the Company’s Senior Credit Facility was estimated based on the present value of the underlying cash flows discounted using market interest rates. Under this method, the fair value of the Company’s Term Loan approximated its carrying amount as of June 30, 2014 and December 31, 2013. The Company’s Term Loan was valued using observable inputs and, accordingly, the valuation is performed using Level 2 inputs as defined in Note 8.
The fair value of the Convertible Notes was approximately 139% of their par value as of June 30, 2014 and approximately 154% of their par value as of December 31, 2013. The Convertible Notes are actively quoted instruments and, accordingly, the valuation is performed using Level 1 inputs as defined in Note 8.
NOTE 5 — Derivative Financial Instruments
The Company utilizes certain derivative financial instruments to enhance its ability to manage foreign currency risk that exists as part of its 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 instruments. 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 U.S. dollar, the euro, the Japanese yen, the Czech koruna, and the Chinese yuan. The Company’s foreign currency forward contracts do not qualify as hedges as defined by accounting guidance. Foreign currency forward contracts are measured at fair value and recorded on the condensed consolidated balance sheets as other current liabilities or assets. Changes in their fair value are recorded in the condensed consolidated statements of income and comprehensive income as foreign currency gains or losses. The Company's foreign currency forward contracts are not exchange traded instruments and, accordingly, the valuation is performed using Level 2 inputs as defined in Note 8. Gains or losses on settled or expired contracts are recorded in the condensed consolidated statements of income and comprehensive income as foreign currency gains or losses.
The changes in fair value with respect to the Company’s foreign currency forward contracts generated a net gain of $179 and a net loss of $598 for the three months ended June 30, 2014 and 2013, respectively. The changes in fair value with respect to the Company’s foreign currency forward contracts generated net gains of $54 and $603 for the six months ended June 30, 2014 and 2013, respectively.
NOTE 6 — Product Warranties
The Company provides product warranties with varying terms and durations for the majority of its products. The Company estimates its warranty reserve by considering historical and projected warranty claims, historical and projected cost-per-claim and knowledge of specific product issues that are outside its typical experience. The Company records warranty expense in cost of sales. Product warranty claims not expected to occur within one year are recorded in the long-term portion of the warranty reserve in the condensed consolidated balance sheets.
The following table represents changes in the Company’s consolidated warranty reserve:
Balance at December 31, 2013
$
33,827

Warranty expense
7,485

Warranty usage
(13,052
)
Balance at June 30, 2014
$
28,260

NOTE 7 — Business Combinations
Wuxi Acquisition
On May 27, 2014, Chart Asia Investment Company Limited (“Chart Asia”), a wholly-owned subsidiary of the Company, finalized the acquisition of 100% of the equity of Wuxi Zhongbo Gas and Air Equipment Manufacturing Co. Ltd., which changed its name to Chart Energy & Chemicals Wuxi Co., Ltd. (“Wuxi”), for an aggregate cash purchase price of 73.3 million Chinese yuan (equivalent to $11,943), net of cash acquired. The fair value of the net assets acquired and goodwill at the date of acquisition was 20.2 million Chinese yuan and 53.1 million Chinese yuan, respectively. Wuxi, located in Wuxi, Jiangsu

11
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements – June 30, 2014
(Dollars and shares in thousands, except per share amounts) – Continued

Province, China, designs, manufactures and sells low-pressure brazed aluminum heat exchangers. In addition, cold box fabrication operations are being relocated from Changzhou, China to the new facility. Wuxi’s results are included in the Company’s Energy & Chemicals business segment as of the date of acquisition.
Xinye Acquisition
On June 8, 2013, Chart Asia, acquired 80% of the equity of Nanjing Xinye Electric Engineering Co., Ltd. (“Xinye”) for an aggregate cash purchase price of 18.3 million Chinese yuan (equivalent to $2,965), net of cash acquired. The remaining 20% was retained by one of the original shareholders. The fair value of the net assets acquired and goodwill at the date of acquisition was 16.4 million Chinese yuan and 1.9 million Chinese yuan, respectively. Xinye, located in Nanjing, Jiangsu Province, China, designs, manufactures and sells control systems and dispensers for liquefied natural gas, compressed natural gas, and industrial gas applications. It also engages in the design and production of integrated circuit card systems and remote monitoring systems for natural gas mobile equipment. Xinye provides the Company localized dispensing and control technology and increases its penetration into the high growth natural gas markets in the Asian region. Xinye’s results are included in the Company’s Distribution & Storage business segment as of the date of acquisition.

Contingent Consideration
The estimated fair value of total contingent consideration relating to a prior acquisition was valued using a discounted cash flow approach, which includes assumptions for the probabilities of achieving gross sales targets and the discount rate applied to the projected payments. The valuation is performed using Level 3 inputs as defined in Note 8. Changes in fair value of contingent consideration are recorded as selling, general and administrative expenses in the condensed consolidated statements of income and comprehensive income.
Potential payments may be paid between July 1, 2014 and March 31, 2016 based on the attainment of certain revenue targets. The remaining maximum potential payout related to total contingent consideration is $2,259.
 
BioMedical
Balance at December 31, 2013
$
2,289

Increase in fair value of contingent consideration liabilities
124

Payment of contingent consideration
(741
)
Balance at June 30, 2014
$
1,672

For the three months ended June 30, 2014 and 2013, the fair value of contingent consideration related to the BioMedical segment increased by $61 and $77, respectively. For the six months ended June 30, 2014 and 2013, the fair value of contingent consideration related to the BioMedical segment increased by $124 and $135, respectively.
NOTE 8 — Fair Value Measurements
The Company measures its financial assets and liabilities at fair value on a recurring basis using a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies. The three levels of inputs used to measure fair value are as follows:
Level 1 — Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2 — Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

12
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements – June 30, 2014
(Dollars and shares in thousands, except per share amounts) – Continued

Financial assets and liabilities measured at fair value on a recurring basis and presented in the Company’s condensed consolidated balance sheets are as follows:
 
June 30, 2014
 
Total
 
Level 2
 
Level 3
 
 
 
 
 
 
Foreign currency forward contracts
$
20

 
$
20

 
$
—

Contingent consideration liabilities
1,672

 
—

 
1,672

Total financial liabilities
$
1,692

 
$
20

 
$
1,672


 
December 31, 2013
 
Total
 
Level 2
 
Level 3
 
 
 
 
 
 
Foreign currency forward contracts
$
13

 
$
13

 
$
—

Total financial assets
$
13

 
$
13

 
$
—

 
 
 
 
 
 
Foreign currency forward contracts
$
394

 
$
394

 
$
—

Contingent consideration liabilities
2,289

 
—

 
2,289

Total financial liabilities
$
2,683

 
$
394

 
$
2,289

Refer to Note 5 for further information regarding derivative financial instruments and Note 7 for further information regarding contingent consideration liabilities.
NOTE 9 — Equity
Accumulated Other Comprehensive Income
The following tables represent changes in accumulated other comprehensive income by component:
 
Foreign currency translation adjustments
 
Pension liability adjustments, net of taxes
 
Accumulated other comprehensive income (loss)
Balance at March 31, 2014
$
16,495

 
$
(5,052
)
 
$
11,443

Other comprehensive loss
(169
)
 
—

 
(169
)
Actuarial losses reclassified from accumulated other comprehensive income, net of income taxes of $29 (1)
—

 
51

 
51

Net current-period other comprehensive (loss) income, net of taxes
(169
)
 
51

 
(118
)
Balance at June 30, 2014
$
16,326

 
$
(5,001
)
 
$
11,325

 
Foreign currency translation adjustments
 
Pension liability adjustments, net of taxes
 
Accumulated other comprehensive income (loss)
Balance at March 31, 2013
$
12,962

 
$
(12,353
)
 
$
609

Other comprehensive income
118

 
—

 
118

Actuarial losses reclassified from accumulated other comprehensive income, net of income taxes of $124 (1)
—

 
213

 
213

Net current-period other comprehensive income, net of taxes
118

 
213

 
331

Balance at June 30, 2013
$
13,080

 
$
(12,140
)
 
$
940


13
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements – June 30, 2014
(Dollars and shares in thousands, except per share amounts) – Continued

 
Foreign currency translation adjustments
 
Pension liability adjustments, net of taxes
 
Accumulated other comprehensive income (loss)
Balance at December 31, 2013
$
18,425

 
$
(5,103
)
 
$
13,322

Other comprehensive loss
(2,099
)
 
—

 
(2,099
)
Actuarial losses reclassified from accumulated other comprehensive income, net of income taxes of $58 (2)
—

 
102

 
102

Net current-period other comprehensive (loss) income, net of taxes
(2,099
)
 
102

 
(1,997
)
Balance at June 30, 2014
$
16,326

 
$
(5,001
)
 
$
11,325

 
Foreign currency translation adjustments
 
Pension liability adjustments, net of taxes
 
Accumulated other comprehensive income (loss)
Balance at December 31, 2012
$
14,207

 
$
(12,566
)
 
$
1,641

Other comprehensive loss
(1,127
)
 
—

 
(1,127
)
Actuarial losses reclassified from accumulated other comprehensive income, net of income taxes of $248 (2)
—

 
426

 
426

Net current-period other comprehensive (loss) income, net of taxes
(1,127
)
 
426

 
(701
)
Balance at June 30, 2013
$
13,080

 
$
(12,140
)
 
$
940

_______________
(1) 
Amounts reclassified from accumulated other comprehensive income were expensed and included in cost of sales ($31 and $133 for the three months ended June 30, 2014 and 2013, respectively) and selling, general and administrative expenses ($49 and $204 for the three months ended June 30, 2014 and 2013, respectively) in the condensed consolidated statements of income and comprehensive income. The components in accumulated other comprehensive income are included in the computation of net periodic pension (income) cost as reported in Note 11.
(2) 
Amounts reclassified from accumulated other comprehensive income were expensed and included in cost of sales ($62 and $266 for the six months ended June 30, 2014 and 2013, respectively) and selling, general and administrative expenses ($98 and $408 for the six months ended June 30, 2014 and 2013, respectively) in the condensed consolidated statements of income and comprehensive income. The components in accumulated other comprehensive income are included in the computation of net periodic pension (income) cost as reported in Note 11.

14
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements – June 30, 2014
(Dollars and shares in thousands, except per share amounts) – Continued

Earnings Per Share
The following table presents calculations of net income per share of common stock:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net income attributable to Chart Industries, Inc.
$
20,069

 
$
20,000

 
$
32,066

 
$
35,535

Net income attributable to Chart Industries, Inc. per common share:
 
 
 
 
 
 
 
Basic
$
0.66

 
$
0.66

 
$
1.06

 
$
1.18

Diluted
$
0.65

 
$
0.64

 
$
1.03

 
$
1.15

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding — basic
30,389

 
30,249

 
30,368

 
30,143

Incremental shares issuable upon assumed conversion and exercise of share-based awards
269

 
315

 
273

 
378

Incremental shares issuable due to dilutive effect of the Convertible Notes
320

 
762

 
529

 
479

Incremental shares issuable due to dilutive effect of warrants
—

 
102

 
—

 
—

Weighted average number of common shares outstanding — diluted
30,978

 
31,428

 
31,170

 
31,000

Diluted earnings per share does not reflect the following potential common shares as the effect would be anti-dilutive:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Share-based awards
29

 
82

 
26

 
82

Convertible note hedge and capped call transactions (1)
320

 
755

 
529

 
479

Warrants
3,368

 
—

 
3,368

 
3,368

Total anti-dilutive securities
3,717

 
837

 
3,923

 
3,929

_______________
(1) 
The convertible note hedge and capped call transactions offset any dilution upon actual conversion of the Convertible Notes up to a common stock price of $84.96. See Note 4 for further information.
NOTE 10 — Income Taxes
The effective income tax rate of 30.2% and 30.0% for the three and six months ended June 30, 2014, respectively, differed from the U.S. federal statutory rate of 35% primarily due to the effect of income earned by certain of the Company’s foreign entities being taxed at lower rates than the U.S. federal statutory rate. The effective income tax rate of 27.9% and 28.4% for the three and six months ended June 30, 2013, respectively, differed from the U.S. federal statutory rate of 35% primarily due to the effect of income earned by certain of the Company's foreign entities being taxed at lower rates than the federal statutory rate and the positive effect of the domestic production activities deduction. Strong operating performance in China during 2013 facilitated the recognition of certain net operating losses and other deferred tax assets.
As of June 30, 2014, the Company has recorded a $941 liability for gross unrecognized tax benefits. This amount includes $514 of unrecognized tax benefits which, if ultimately recognized, will reduce the Company’s annual effective income tax rate. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2014, the Company had accrued approximately $105 for the payment of interest and penalties.

15
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements – June 30, 2014
(Dollars and shares in thousands, except per share amounts) – Continued

NOTE 11 — Employee Benefit Plans
The Company has a defined benefit pension plan which is frozen, that covers certain U.S. hourly and salaried employees. The defined benefit plan provides benefits based primarily on the participants’ years of service and compensation. The following table represents the components of net periodic pension (income) cost:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014

2013
 
2014
 
2013
Interest cost
$
590

 
$
528

 
$
1,180

 
$
1,056

Expected return on plan assets
(776
)
 
(676
)
 
(1,552
)
 
(1,352
)
Amortization of net loss
80

 
337

 
160

 
674

Total net periodic pension (income) cost
$
(106
)
 
$
189

 
$
(212
)
 
$
378

NOTE 12 — Share-based Compensation
During the six months ended June 30, 2014, the Company granted 74 stock options, 37 shares of restricted stock and restricted stock units, 16 performance units and 19 leveraged restricted share units. Non-employee directors received 3 stock awards with a fair value of $247. During the six months ended June 30, 2014, participants in the Company’s stock option plans exercised options to purchase 16 shares of the Company’s common stock while 4 stock options were forfeited.
Stock options generally have a four-year graded vesting period. Restricted stock and restricted stock units generally vest ratably over a three-year period, and performance units and leveraged restricted share units generally vest at the end of a three-year performance period based on the achievement of certain performance conditions. During the six months ended June 30, 2014, 42 restricted stock and restricted stock units vested while 1 shares of restricted stock were forfeited. Also, during the six months ended June 30, 2014, 51 performance units vested while 1 performance units were forfeited.
Share-based compensation expense was $1,926 and $2,511 for the three months ended June 30, 2014 and 2013, respectively, and $5,883 and $5,075 for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, total share-based compensation of $13,264 is expected to be recognized over the weighted-average period of approximately 2.2 years.
NOTE 13 — Contingencies
In November 2012, Chart Energy & Chemicals, Inc. (“CEC”), a subsidiary of the Company, filed a declaratory judgment action in the United States District Court for the Western District of Oklahoma (the “Federal Court”) seeking a judgment that certain claims for damages alleged by Enogex Holdings LLC, Enogex Gathering & Processing, LLC and affiliated companies with respect to a December 2010 fire at the Enogex natural gas processing plant in Cox City, Oklahoma were barred based on multiple defenses, including Oklahoma's statute of repose. This action was precipitated by the receipt of a letter from Enogex alleging that CEC was responsible for damages in excess of $75,000 with respect to the fire as a result of the alleged failure of CEC's equipment that was a component of the unit involved in the fire. Subsequent to the filing of CEC's declaratory judgment action, in December 2012, Enogex filed suit in the District Court of Tulsa County, State of Oklahoma (the “State Court”) against the Company, CEC and its predecessors, a former employee of a predecessor of CEC, as well as other entities and an individual not affiliated with the Company, formalizing the allegations and claims contained in the November demand letter. Each party filed one or more motions to dismiss the other's lawsuit. Enogex's motion to dismiss initially was denied by the Federal Court in February 2013, but Enogex moved for rehearing on its motion to dismiss, which the Federal Court granted on May 17, 2013 based on a lack of jurisdictional diversity. The Company's and CEC's motions to dismiss were denied by the State Court on April 10, 2013. Accordingly, litigation continues in the State Court, and Enogex has asserted damages of approximately $105,000, including investigation and repair costs and business interruption losses, some of which may be offset by Enogex's saved costs and mitigation efforts. The Company continues to believe that the allegations against the Company, CEC and their affiliates lack merit. The Company believes that it, CEC and their affiliates have strong factual and legal defenses to Enogex's claims and intends to vigorously assert such defenses. Accordingly, an accrual related to any damages that may result from the lawsuit has not been recorded because a potential loss is not currently probable. Furthermore, the Company believes that its existing product liability insurance is adequate for potential losses associated with these claims. While the Company cannot predict with certainty the ultimate result of these proceedings, the Company does not believe that the final outcome of these proceedings will have a material adverse effect on the Company's financial position, results of operations, or cash flows.

16
CHART INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements – June 30, 2014
(Dollars and shares in thousands, except per share amounts) – Continued

NOTE 14 — Reportable Segments
The structure of the Company’s internal organization is divided into the following reportable segments, which are also the Company’s operating segments: Energy & Chemicals (“E&C”), Distribution & Storage (“D&S”) and BioMedical. Corporate includes operating expenses for executive management, accounting, tax, treasury, human resources, information technology, legal, internal audit, risk management and share-based compensation expenses that are not allocated to the reportable segments.
The following table represents information for the Company’s reportable segments and its corporate function:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Sales
 
 
 
 
 
 
 
Energy & Chemicals
$
92,954

 
$
78,716

 
$
179,100

 
$
159,577

Distribution & Storage
149,105

 
147,156

 
278,627

 
275,889

BioMedical
64,751

 
72,394

 
115,323

 
136,448

Consolidated
$
306,810

 
$
298,266

 
$
573,050

 
$
571,914

Operating Income (Loss)
 
 
 
 
 
 
 
Energy & Chemicals
$
16,042

 
$
14,914

 
$
32,649

 
$
27,733

Distribution & Storage
24,222

 
23,393

 
42,309

 
42,682

BioMedical
7,424

 
8,752

 
9,819

 
15,505

Corporate
(13,644
)
 
(14,080
)
 
(28,587
)
 
(25,590
)
Consolidated
$
34,044

 
$
32,979

 
$
56,190

 
$
60,330



17

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Chart Industries, Inc. (the “Company,” “Chart,” or “we”) is a leading independent global manufacturer of highly engineered equipment used in the production, storage and end-use of hydrocarbon and industrial gases. The largest portion of end-use applications for our products is energy-related. We are a leading manufacturer of standard and engineered equipment primarily used for low-temperature and cryogenic applications. We have developed an expertise in medical respiratory equipment and cryogenic systems equipment, which operate at low temperatures sometimes approaching absolute zero (0 kelvin; -273° Centigrade; -459° Fahrenheit). The majority of our products, including vacuum insulated containment vessels, heat exchangers, cold boxes, other cryogenic components, and respiratory therapy products, are used throughout the liquid gas supply chain for the purification, liquefaction, distribution, storage and end-use of hydrocarbon and industrial gases.
Sales for the six months ended June 30, 2014 were $573.1 million compared to sales of $571.9 million for the six months ended June 30, 2013, reflecting an increase of $1.2 million, or 0.2%. This increase was mainly attributable to volume increases in our process systems and air cooled heat exchanger product lines within our E&C segment offset by a decrease in respiratory oxygen therapy products and commercial oxygen generation system sales in our BioMedical segment. Furthermore, sales of LNG-related equipment within our D&S segment increased in the U.S. and Europe, but were offset by lower sales in China due to customer delays. Gross profit for the six months ended June 30, 2014 was $169.7 million, or 29.6% of sales, as compared to $169.3 million, or 29.6% of sales, for the six months ended June 30, 2013. The gross profit percentage remained unchanged during the period as a result of improved volume of LNG equipment, mainly in the U.S. and Europe, offset by lower sales volume and higher warranty costs in our BioMedical segment. Operating income for the six months ended June 30, 2014 was $56.2 million compared to $60.3 million for the six months ended June 30, 2013.


18

The following table represents selected financial data for our operating segments for the three and six months ended June 30, 2014 and 2013 (dollars in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Sales
 
 
 
 
 
 
 
Energy & Chemicals
$
92,954

 
$
78,716

 
$
179,100

 
$
159,577

Distribution & Storage
149,105

 
147,156

 
278,627

 
275,889

BioMedical
64,751

 
72,394

 
115,323

 
136,448

Consolidated
$
306,810

 
$
298,266

 
$
573,050

 
$
571,914

Gross Profit
 
 
 
 
 
 
 
Energy & Chemicals
$
24,613

 
$
22,854

 
$
49,336

 
$
43,781

Distribution & Storage
45,684

 
41,855

 
82,026

 
78,357

BioMedical
21,884

 
25,097

 
38,365

 
47,118

Consolidated
$
92,181

 
$
89,806

 
$
169,727

 
$
169,256

Gross Profit Margin
 
 
 
 
 
 
 
Energy & Chemicals
26.5
%
 
29.0
%
 
27.5
%
 
27.4
%
Distribution & Storage
30.6
%
 
28.4
%
 
29.4
%
 
28.4
%
BioMedical
33.8
%
 
34.7
%
 
33.3
%
 
34.5
%
Consolidated
30.0
%
 
30.1
%
 
29.6
%
 
29.6
%
SG&A Expenses
 
 
 
 
 
 
 
Energy & Chemicals
$
7,955

 
$
7,124

 
$
15,465

 
$
14,410

Distribution & Storage
20,179

 
17,212

 
37,130

 
33,215

BioMedical
11,884

 
13,489

 
23,391

 
25,894

Corporate
13,644

 
14,080

 
28,587

 
25,590

Consolidated
$
53,662

 
$
51,905

 
$
104,573

 
$
99,109

SG&A Expenses (% of Sales)
 
 
 
 
 
 
 
Energy & Chemicals
8.6
%
 
9.1
%
 
8.6
%
 
9.0
%
Distribution & Storage
13.5
%
 
11.7
%
 
13.3
%
 
12.0
%
BioMedical
18.4
%
 
18.6
%
 
20.3
%
 
19.0
%
Consolidated
17.5
%
 
17.4
%
 
18.2
%
 
17.3
%
Operating Income
 
 
 
 
 
 
 
Energy & Chemicals
$
16,042

 
$
14,914

 
$
32,649

 
$
27,733

Distribution & Storage
24,222

 
23,393

 
42,309

 
42,682

BioMedical
7,424

 
8,752

 
9,819

 
15,505

Corporate
(13,644
)
 
(14,080
)
 
(28,587
)
 
(25,590
)
Consolidated
$
34,044

 
$
32,979

 
$
56,190

 
$
60,330

Operating Margin
 
 
 
 
 
 
 
Energy & Chemicals
17.3
%
 
18.9
%
 
18.2
%
 
17.4
%
Distribution & Storage
16.2
%
 
15.9
%
 
15.2
%
 
15.5
%
BioMedical
11.5
%
 
12.1
%
 
8.5
%
 
11.4
%
Consolidated
11.1
%
 
11.1
%
 
9.8
%
 
10.5
%


19

Results of Operations for the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013
Sales
Sales for the three months ended June 30, 2014 were $306.8 million compared to $298.3 million for the three months ended June 30, 2013, reflecting an increase of $8.5 million, or 2.9%. E&C segment sales increased by $14.2 million, or 18.1%, compared to the prior year quarter. This increase in E&C segment sales was primarily due to improved volume in process systems due to the timing of completion of small to mid-scale LNG projects. D&S segment sales increased by $1.9 million, or 1.3%, compared to the prior year quarter. This increase in D&S segment sales was mainly attributable to higher volume related to LNG equipment, largely in Europe and the U.S. This was partially offset by decreased volume in packaged gas and LNG products in Asia. BioMedical segment sales decreased by $7.6 million, or 10.6%, compared to the prior year quarter. This decrease in BioMedical segment sales was mainly due to lower sales of commercial oxygen generation systems.
Gross Profit and Margin
Gross profit for the three months ended June 30, 2014 was $92.2 million, or 30.0% of sales, versus $89.8 million, or 30.1% of sales, for the three months ended June 30, 2013, which reflected an increase of $2.4 million, while the related margin decreased by 0.1 percentage points. E&C segment gross profit increased by $1.8 million while the related margin decreased by 2.5 percentage points. The increase in gross profit for the E&C segment was primarily due to project mix while the decrease in the related margin percentage was mainly due to lower margins on large-scale, lower margin projects and brazed aluminum heat exchangers related to industrial gas applications, in addition to startup costs associated with the newly expanded brazed aluminum heat exchanger facility in LaCrosse, Wisconsin. Gross profit for the D&S segment increased by $3.8 million while margin increased by 2.2 percentage points. The increase in gross profit and the related margin was mainly due to higher volume in LNG equipment and improved product mix in the U.S. and Europe, including a favorable impact in resolving an LNG contract from a major oil company customer, which was partially cancelled during the quarter. BioMedical segment gross profit decreased by $3.2 million as margin decreased by 0.9 percentage points compared to the prior year quarter. The decrease in BioMedical gross profit and related margin percentage was primarily due to higher warranty costs and decreased volume in commercial oxygen generation systems. The BioMedical segment’s warranty expense as a percent of sales was 4.3% during the three months ended June 30, 2014 compared to 2.0% in the prior year quarter.
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses for the three months ended June 30, 2014 were $53.7 million, or 17.5% of sales, compared to $51.9 million, or 17.4% of sales, for the three months ended June 30, 2013 representing an increase of $1.8 million. SG&A expenses for the E&C segment increased by $0.8 million compared to the prior year quarter mainly due to startup costs associated with the Chart Energy and Chemicals Wuxi Co., Ltd. (“Wuxi”) acquisition. D&S segment SG&A expenses increased by $3.0 million compared to the prior year quarter mainly due to higher employee-related costs as we continue to invest in growth opportunities. SG&A expenses for the BioMedical segment decreased by $1.6 million compared to the prior year quarter mainly due to lower acquisition-related costs and lower commissions due to the overall sales decline partially offset by higher research and development costs. Corporate SG&A expenses decreased by $0.4 million compared to the prior year quarter.
Amortization Expense
Amortization expense for the three months ended June 30, 2014 was $4.5 million, or 1.5% of sales compared to $4.9 million, or 1.7% of sales, for the three months ended June 30, 2013.
Operating Income
As a result of the foregoing, operating income for the three months ended June 30, 2014 was $34.0 million, or 11.1% of sales, an increase of $1.0 million compared to operating income of $33.0 million, or 11.1% of sales, for the same period in 2013.
Interest Expense, Net and Financing Costs Amortization
Net interest expense for the three months ended June 30, 2014 and 2013 was $4.1 million and $4.0 million, respectively. Interest expense for the three months ended June 30, 2014 included $1.3 million of 2.0% cash interest and $2.6 million of non-cash interest accretion expense related to the carrying value of the Convertible Notes. For the three months ended June 30, 2014 and 2013, financing costs amortization was $0.3 million for both periods.

20

Foreign Currency Loss
For the three months ended June 30, 2014 and 2013, foreign currency losses were $0.4 million and $0.1 million, respectively. Losses increased by $0.3 million during the three months ended June 30, 2014 due to exchange rate volatility, especially with respect to the euro and Chinese yuan, and settlements and mark-to market adjustments related to foreign currency forward contracts.
Income Tax Expense
Income tax expense of $8.8 million and $8.0 million for the three months ended June 30, 2014 and 2013, respectively, represents taxes on both U.S. and foreign earnings at a combined effective income tax rate of 30.2% and 27.9%, respectively. The increase in the effective income tax rate was primarily due to the expiration of the Research & Development credit at December 31, 2013 and a higher mix of U.S. vs. foreign earnings, which are taxed at a higher rate.
Net Income
As a result of the foregoing, net income attributable to the Company for the three months ended June 30, 2014 and 2013 was $20.1 million and $20.0 million, respectively.
Results of Operations for the Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013
Sales
Sales for the six months ended June 30, 2014 were $573.1 million compared to $571.9 million for the six months ended June 30, 2013, reflecting an increase of $1.2 million, or 0.2%. E&C segment sales increased by $19.6 million, or 12.2%, compared to the prior year period. This increase in E&C segment sales was primarily due to improved project mix in process systems and improved volume in air cooled heat exchangers. D&S segment sales increased by $2.7 million, or 1.0%, compared to the prior year period. This increase in D&S segment sales was mainly attributable to higher volume related to LNG equipment, largely in Europe and the U.S. This was partially offset by decreased volume in LNG products in Asia. BioMedical segment sales decreased by $21.1 million, or 15.5%, compared to the prior year period. This decrease in BioMedical segment sales was mainly due to lower sales of respiratory therapy equipment in the U.S. due to market restructuring driven by Medicare competitive bidding and lower sales of commercial oxygen generation systems. This decrease was partially offset by an increase in sales of cryobiological systems.
Gross Profit and Margin
Gross profit for the six months ended June 30, 2014 was $169.7 million, or 29.6% of sales, versus $169.3 million, or 29.6% of sales, for the six months ended June 30, 2013, which reflected an increase of $0.4 million, while the related margin percentage remained unchanged. E&C segment gross profit increased by $5.5 million while the related margin increased by 0.1 percentage points. The increase in gross profit and the related margin percentage for the E&C segment was primarily due to project mix. Gross profit for the D&S segment increased by $3.7 million while margin increased by 1.0 percentage points mainly due to improved volume related to LNG equipment, largely in the U.S. and Europe. BioMedical segment gross profit decreased by $8.8 million and margin decreased by 1.2 percentage points compared to the prior year period. The decrease in BioMedical gross profit was primarily due to lower volume in respiratory oxygen therapy equipment and commercial oxygen generation systems while the decline in the related margin percentage was mainly attributable to higher warranty costs. In the first quarter of 2014, we experienced a higher rate of warranty claims in our BioMedical segment within the AirSep product lines. The increased claims and revisions to the estimated cost of warranty claims resulted in an adjustment to our estimated warranty reserve in the first quarter. This led to an increase in the BioMedical segment’s warranty expense as a percent of sales to 3.9% compared to 2.2% in the prior year period. See the critical accounting policy disclosure for further information regarding the warranty accruals.
SG&A Expenses
SG&A expenses for the six months ended June 30, 2014 were $104.6 million, or 18.2% of sales, compared to $99.1 million, or 17.3% of sales, for the six months ended June 30, 2013 representing an increase of $5.5 million. SG&A expenses for the E&C segment increased by $1.1 million compared to the prior year period mainly due to startup costs associated with the Wuxi acquisition. D&S segment SG&A expenses increased by $3.9 million compared to the prior year period mainly due to higher employee-related costs as we continue to invest in growth opportunities partially offset by lower commissions. SG&A expenses for the BioMedical segment decreased by $2.5 million compared to the prior year period mainly due to lower acquisition-related costs and lower commissions due to the overall sales decline partially offset by higher research and

21

development costs. Corporate SG&A expenses increased by $3.0 million compared to the prior year period primarily due to higher share-based compensation expense and workers’ compensation expense.
Amortization Expense
Amortization expense for the six months ended June 30, 2014 was $9.0 million, or 1.6% of sales compared to $9.8 million, or 1.7% of sales, for the six months ended June 30, 2013.
Operating Income
As a result of the foregoing, operating income for the six months ended June 30, 2014 was $56.2 million, or 9.8% of sales, a decrease of $4.1 million compared to operating income of $60.3 million, or 10.5% of sales, for the same period in 2013.
Interest Expense, Net and Financing Costs Amortization
Net interest expense for the six months ended June 30, 2014 and 2013 was $8.3 million and $8.0 million, respectively. Interest expense for the six months ended June 30, 2014 included $2.5 million of 2.0% cash interest and $5.2 million of non-cash interest accretion expense related to the carrying value of the Convertible Notes. For the six months ended June 30, 2014 and 2013, financing costs amortization was $0.7 million for both periods.
Foreign Currency Loss
For the six months ended June 30, 2014 and 2013, foreign currency losses were $0.5 million and $0.4 million, respectively. Losses increased by $0.1 million during the six months ended June 30, 2014 due to exchange rate volatility, especially with respect to the euro and Chinese yuan, and settlements and mark-to market adjustments related to foreign currency forward contracts.
Income Tax Expense
Income tax expense of $14.0 million and $14.6 million for the six months ended June 30, 2014 and 2013, respectively, represents taxes on both U.S. and foreign earnings at a combined effective income tax rate of 30.0% and 28.4%, respectively. The increase in the effective income tax rate was primarily due to the expiration of the Research & Development credit at December 31, 2013 and a higher mix of U.S. vs. foreign earnings which are taxed at a higher rate.
Net Income
As a result of the foregoing, net income attributable to the Company for the six months ended June 30, 2014 and 2013 was $32.1 million and $35.5 million, respectively.
Liquidity and Capital Resources
Debt Instruments and Related Covenants
Convertible Notes: The outstanding aggregate principal amount of the Company's Convertible Notes is $250.0 million. The Convertible Notes bear interest at a fixed rate of 2.0% per year, payable semiannually in arrears on February 1 and August 1 of each year, and will mature on August 1, 2018. The effective interest rate at issuance, under generally accepted accounting principles, was 7.9%. Upon conversion, holders of the Convertible Notes will receive cash up to the principal amount of the Convertible Notes, and it is the Company's intention to settle any excess conversion value in shares of the Company's common stock. However, the Company may elect to settle, at its discretion, any such excess value in cash, shares of the Company's common stock or a combination of cash and shares. The initial conversion price of $69.03 per share represents a conversion premium of 30% over the last reported sale price of the Company's common stock on July 28, 2011, the date of the Convertible Notes offering, which was $53.10 per share. At the end of the second quarter of 2014, events for early conversion were not met, and thus the Convertible Notes were not convertible as of, and for the fiscal quarter beginning July 1, 2014. There have been no conversions as of the date of this filing. In the event that holders of Convertible Notes elect to convert, the Company expects to fund any cash settlement of any such conversion from cash balances or borrowings under the Senior Credit Facility (as described below).
Senior Credit Facility: The Company has an outstanding five-year $375.0 million senior secured credit facility (“Senior Credit Facility”), which consists of a $75.0 million term loan (the “Term Loan”) and a $300.0 million revolving credit facility (the “Revolving Credit Facility”). The Senior Credit Facility has a maturity date of April 25, 2017. The Senior Credit Facility also includes an expansion option permitting the Company to add up to an aggregate $150.0 million in term loans or revolving

22

credit commitments from its existing and potential new lenders. Under the terms of the Senior Credit Facility, 5% of the $75.0 million Term Loan is payable annually in quarterly installments over the first three years, 10% is payable annually in quarterly installments over the final two years, and the remaining balance is due on April 25, 2017. Significant financial covenants for the Senior Credit Facility include a leverage ratio and an interest ratio. At June 30, 2014, there was $66.6 million in borrowings outstanding under the Term Loan. The Company also had $29.1 million in letters of credit and bank guarantees supported by the Revolving Credit Facility, which had availability of $270.9 million at June 30, 2014. The Company was in compliance with all covenants, including its financial covenants, at June 30, 2014.
Foreign Facilities – China: Chart Cryogenic Engineering Systems (Changzhou) Company Limited (“CCESC”), a wholly-owned subsidiary of the Company, and Chart Cryogenic Distribution Equipment (Changzhou) Company Limited (“CCDEC”), a joint venture of the Company, maintain joint banking facilities (the “China D&S Facilities”), which include a revolving line with 50.0 million Chinese yuan (equivalent to $8.1 million) in borrowing capacity, a bonding/guarantee facility with up to 30.0 million Chinese yuan (equivalent to $4.8 million) in borrowing capacity, and an overdraft facility with 10.0 million Chinese yuan (equivalent to $1.6 million) in borrowing capacity. Any drawings made by CCESC and CCDEC under the China D&S Facilities are guaranteed by the Company. At June 30, 2014, there was 39.0 million Chinese yuan (equivalent to $6.3 million) outstanding under the revolving line, bearing interest at 5.9% on a weighted-average basis.
CCDEC also maintains a facility with Bank of China with capacity of up to 10.0 million Chinese yuan (equivalent to $1.6 million). At June 30, 2014, there was 10.0 million Chinese yuan (equivalent to $1.6 million) outstanding under this facility, bearing interest at 6.6%. The facility matures on April 3, 2015.
As of June 30, 2014, CCESC and CCDEC had 6.1 million Chinese yuan (equivalent to $1.0 million) and 1.1 million Chinese yuan (equivalent to $0.2 million) in bank guarantees, respectively.
Foreign Facilities – Europe: Chart Ferox, a.s. (“Ferox”), a wholly-owned subsidiary of the Company, maintains two secured revolving credit facilities with capacity of up to 175.0 million Czech koruna (equivalent to $8.7 million). Both of the facilities allow Ferox to request issuance of bank guarantees and letters of credit. Neither of the facilities allows revolving credit borrowings, including overdraft protection. Under both facilities, Ferox must pay letter of credit and guarantee fees equal to 0.70% p.a. on the face amount of each guarantee or letter of credit. Ferox’s land, buildings and accounts receivable secure the credit facilities. At June 30, 2014, there were 79.6 million Czech koruna (equivalent to $4.0 million) of bank guarantees supported by such facilities.
Chart Industries Luxembourg S.à r.l. (“Chart Luxembourg”), a wholly-owned subsidiary of the Company, maintains an overdraft facility with $5.0 million in borrowing capacity. There were no borrowings under the Chart Luxembourg facility as of June 30, 2014.
Our debt and related covenants are further described in the Debt and Credit Arrangements note (Note 4) to our condensed consolidated financial statements included elsewhere in this report.
Sources and Use of Cash
Our cash and cash equivalents totaled $142.7 million at June 30, 2014, an increase of $5.3 million from the balance at December 31, 2013. Our foreign subsidiaries held cash of approximately $96.1 million and $97.1 million at June 30, 2014 and December 31, 2013, respectively, to meet their liquidity needs. No material restrictions exist in accessing cash held by our foreign subsidiaries and we expect to meet our U.S. funding needs without repatriating non-U.S. cash and incurring incremental U.S. taxes. Cash equivalents are invested in money market funds that invest in high quality, short-term instruments, such as U.S. government obligations, certificates of deposit, repurchase obligations and commercial paper issued by corporations that have been highly rated by at least one nationally recognized rating organization. We believe that our existing cash and cash equivalents, funds available under our debt facilities and cash provided by operations will be sufficient to finance our normal working capital needs, and investments in properties, facilities and equipment for the foreseeable future.
Cash provided by operating activities was $42.3 million and $10.4 million for the six months ended June 30, 2014 and 2013, respectively. The increase of $31.9 million in cash provided by operations was primarily due to cash collections in accounts receivable.
Cash used in investing activities was $35.9 million and $32.3 million for the six months ended June 30, 2014 and 2013, respectively. Capital expenditures were $25.7 million for the six months ended June 30, 2014, primarily for expansion projects in the E&C segment for additional brazed aluminum heat exchanger capacity. Also during the six months ended June 30, 2014, we used $11.9 million of cash (net of cash acquired) to fund the Wuxi acquisition.
Cash used in financing activities for the six months ended June 30, 2014 was $0.1 million compared to $7.0 million of cash provided by financing activities for the six months ended June 30, 2013 primarily as a result of reduced stock option

23

exercise activity compared to the prior year period. During the six months ended June 30, 2014, the Company made $1.9 million in scheduled quarterly principal payments on the term loan portion of the Senior Credit Facility. We borrowed $7.9 million and repaid $3.3 million on our foreign facilities. Excess tax benefits from share-based compensation were $1.7 million. We received $0.6 million in proceeds from stock option exercises. We also used $3.3 million for the purchase of common stock which was surrendered to cover tax withholding elections. Other uses of cash during the six months ended June 30, 2014 included a $0.7 million contingent consideration payment related to a prior BioMedical segment acquisition and a $1.2 million distribution to one of our joint venture noncontrolling interests.
Cash Requirements
The Company does not currently anticipate any unusual cash requirements for working capital needs for the year ending December 31, 2014. Management anticipates the Company will be able to satisfy cash requirements for its ongoing business for the foreseeable future with cash generated by operations, existing cash balances and available borrowings under our credit facilities. We expect capital expenditures for the remaining six months of 2014 to be in the range of $35.0 to $65.0 million, primarily for capital expansion and improvement projects across our D&S and E&C segments, which includes an ongoing project to increase our capacity in China for both LNG and industrial gas applications and additional equipment for the brazed aluminum heat exchanger facility in La Crosse, Wisconsin.
For the remaining six months of 2014, the Company is forecasting to use approximately $3.3 million for scheduled interest payments under the Senior Credit Facility and Convertible Notes. We are also required to make quarterly principal payments under the Senior Credit Facility of approximately $0.9 million during the remaining six months of 2014. In addition, our forecasts for the remaining six months of 2014 contemplate the use of approximately $20.0 to $23.0 million of cash to pay U.S. and foreign income taxes.
Orders and Backlog
We consider orders to be those for which we have received a firm signed purchase order or other written contractual commitment from the customer. Backlog is comprised of the portion of firm signed purchase orders or other written contractual commitments received from customers that we have not recognized as revenue upon shipment or under the percentage of completion method. Backlog can be significantly affected by the timing of orders for large projects, particularly in the E&C segment, and is not necessarily indicative of future backlog levels or the rate at which backlog will be recognized as sales. Orders included in our backlog may include customary cancellation provisions under which the customer could cancel part or all of the order, potentially subject to the payment of certain costs and/or fees. Our backlog as of June 30, 2014 was $695.0 million compared to $721.9 million as of March 31, 2014.
The table below represents orders and backlog by segment for the periods indicated (dollar amounts in thousands):
 
Three Months Ended
 
June 30,
2014
 
March 31,
2014
Orders
 
 
 
Energy & Chemicals
$
56,580

 
$
65,041

Distribution & Storage
163,338

 
142,528

BioMedical
60,656

 
55,005

Total
$
280,574

 
$
262,574

Backlog
 
 
 
Energy & Chemicals
$
285,181

 
$
321,468

Distribution & Storage
385,207

 
372,368

BioMedical
24,601

 
28,022

Total
$
694,989

 
$
721,858

E&C orders for the three months ended June 30, 2014 were $56.6 million compared to $65.0 million for the three months ended March 31, 2014. E&C backlog totaled $285.2 million at June 30, 2014, compared to $321.5 million as of March 31, 2014. Order flow in the E&C segment is historically volatile due to project size and it is not unusual to see order intake change significantly quarter to quarter.
D&S orders (net of cancellations) for the three months ended June 30, 2014 were $163.3 million compared to $142.5 million for the three months ended March 31, 2014. D&S backlog totaled $385.2 million at June 30, 2014 compared to $372.4

24

million as of March 31, 2014. During the three months ended June 30, 2014, a major oil company partially cancelled certain LNG infrastructure projects for an order previously awarded to our D&S business during 2013. The result of this action was reflected as a reduction in orders of approximately $8 million during the quarter.
BioMedical orders for the three months ended June 30, 2014 were $60.7 million compared to $55.0 million for the three months ended March 31, 2014. BioMedical orders were up across all product lines. BioMedical backlog at June 30, 2014 totaled $24.6 million compared to $28.0 million as of March 31, 2014.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Application of Critical Accounting Policies
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. As such, some accounting policies have a significant impact on amounts reported in these unaudited condensed consolidated financial statements. A summary of those significant accounting policies can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In particular, judgment is used in areas such as revenue recognition for long-term contracts, determining the allowance for doubtful accounts, goodwill, indefinite-lived intangibles, product warranty costs, pensions and share-based compensation. The product warranty costs critical accounting policy has been updated and expanded as follows:

Product Warranty Costs:  We provide product warranties with varying terms and durations for the majority of our products. We estimate product warranty costs and accrue for these costs as products are sold with a charge to cost of sales. Factors considered in estimating warranty costs include historical and projected warranty claims, historical and projected cost-per-claim and knowledge of specific product issues that are outside of our typical experience. Warranty accruals are evaluated and adjusted as necessary based on actual claims experience and changes in future claim and cost estimates.
As a result of our BioMedical segment’s acquisition of AirSep in August 2012, we recorded a warranty reserve of $37.0 million in purchase accounting, which included a significant estimate of claims associated with one of its product lines. This product line has experienced a significantly higher than normal level of failures due to compressors and other components. To calculate the reserve associated with this product line, we isolated the specific units which were being returned with identified warranty issues at significantly higher rates than normal. The entire population of these units was excluded from the typical warranty accrual process and the reserve was estimated by considering the identified population less units already returned, to estimate potential units that will be returned. These expected future claims were multiplied by the estimated cost to repair the unit in order to establish the warranty reserve associated with this product line. We have experienced and expect a significant number of claims as this product line runs through its warranty period. Usage of the acquired warranty reserve occurs as this product line progresses through its warranty period (expected completion in 2016). We have made various product improvements, revisions to the warranty claim process and a reduction in repair costs since the 2012 acquisition to mitigate the costs associated with this issue. Usage of the acquired warranty reserve has exceeded warranty expense since the acquisition. We do not expect our ongoing warranty expense to be as significant based on revisions to the product line as well as our process to satisfy the warranty claims.
Due to the uncertainty and potential volatility of these warranty estimates, changes in assumptions including expected warranty claims and costs to satisfy those claims or specifically identified issues could materially affect our financial position and net income in future periods.
There have been no significant changes to the remaining critical accounting policies since December 31, 2013.
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 Quarterly Report on Form 10-Q includes “forward-looking statements.” These forward-looking statements include statements relating to our business. In some cases, forward-looking statements may be identified by terminology such as “may,” “should,” “expects,” “anticipates,” “believes,” “projects,” “forecasts,” “continue” or the negative of such terms or comparable terminology. Forward-looking statements contained herein (including future cash contractual obligations, liquidity, cash flow, orders, results of operations, projected revenues, and trends, among other matters) or in other statements made by us are made based on management’s expectations and beliefs concerning future events impacting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed or implied by forward-looking statements. We believe that the following factors, among others (including those described under Item 1A– “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013), could affect our

25

future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf:
•the cyclicality of the markets which we serve and the vulnerability of those markets to economic downturns;
•
the loss of, or a significant reduction or delay in purchases by, our largest customers;
•
the fluctuations in energy prices;
•
the potential for negative developments in the natural gas industry related to hydraulic fracturing;
•
competition in our markets;
•
governmental energy policies could change, or expected changes could fail to materialize;
•
our ability to successfully manage our planned operational expansions;
•
economic downturns and deteriorating financial conditions;
•
our ability to manage our fixed-price contract exposure;
•
our reliance on the availability of key supplies and services;
•
degradation of our backlog as a result of modification or termination of orders;
•
our ability to successfully acquire or integrate companies that provide complementary products or technologies;
•
changes in government health care regulations and reimbursement policies;
•
general economic, political, business and market risks associated with our global operations;
•
litigation and disputes involving us, including the extent of product liability, warranty, contract, employment, intellectual property and environmental claims asserted against us;
•
our warranty reserves may not adequately cover our warranty obligations;
•
the loss of key employees;
•
fluctuations in foreign currency exchange rates and interest rates;
•
financial distress of third parties;
•
United States Food and Drug Administration and comparable foreign regulation of our products;
•
the pricing and availability of raw materials;
•
our ability to control our costs while maintaining customer relationships and core business resources;
•
our ability to protect our intellectual property and know-how;
•
the impairment of our goodwill or other intangible assets;
•
the cost of compliance with environmental, health and safety laws and responding to potential liabilities under these laws;
•
technological security threats and our reliance on information systems;
•
claims that our products or processes infringe intellectual property rights of others;
•
additional liabilities related to taxes;
•
our ability to continue our technical innovation in our product lines;
•
labor costs and disputes and the deterioration of our relations with our employees;
•
increased government regulation;
•
the underfunded status of our pension plan;
•
the risk of potential violations of the Foreign Corrupt Practices Act;
•
disruptions in our operations due to severe weather;
•
regulations governing the export of our products and other regulations applicable to us as a supplier of products to the U.S. government;
•
risks associated with our indebtedness, leverage, debt service and liquidity;
•
potential dilution to existing holders of our common stock as a result of the conversion of our Convertible Notes, and the need to utilize our cash balances and/or credit facility to fund any cash settlement related to such conversions;
•
fluctuations in the price of our stock; and
•
other factors described herein.
There may be other factors that may cause our actual results to differ materially from the forward-looking statements.
All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report and are expressly qualified in their entirety by the cautionary statements included in our Annual Report on

26

Form 10-K for the fiscal year ended December 31, 2013, as the same may be updated from time to time. We undertake no obligation to update or revise forward-looking statements which may be made to reflect events or circumstances that arise after the filing date of this document or to reflect the occurrence of unanticipated events.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the Company’s operations are exposed to 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.
Interest Rate Risk: The Company’s primary interest rate risk exposure results from the Senior Credit Facility’s various floating rate pricing mechanisms. If interest rates were to increase 200 basis points (2 percent) from June 30, 2014 rates, and assuming no changes in debt from the June 30, 2014 levels, our additional annual expense would be approximately $1.3 million on a pre-tax basis.
Foreign Currency Exchange Rate Risk: The Company has assets, liabilities and cash flows in foreign currencies creating exposure to foreign currency exchange fluctuations in the normal course of business. Chart’s primary exchange rate exposures are with the euro, the Chinese yuan, the Czech koruna, and the Japanese yen. Monthly measurement, revaluation and forward exchange rate 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. Chart does not use derivative financial instruments for speculative or trading purposes. The terms of the contracts are generally one year or less. At June 30, 2014, a hypothetical 10% weakening of the U.S. dollar would not materially affect the Company’s financial statements.
Market Price Sensitive Instruments
In connection with the issuance of the Convertible Notes, the Company entered into privately-negotiated convertible note hedge and capped call transactions with affiliates of certain of the underwriters (the “Option Counterparties”). The convertible note hedge and capped call transactions relate to, collectively, 3.6 million shares, which represents the number of shares of the Company’s common stock underlying the Convertible Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes. These convertible note hedge and capped call transactions are expected to reduce the potential dilution with respect to the Company’s common stock upon conversion of the Convertible Notes and/or reduce the Company’s exposure to potential cash or stock payments that may be required upon conversion of the Convertible Notes, except, in the case of the capped call transactions, to the extent that the market price per share of the Company’s common stock exceeds the cap price of the capped call transactions.
The Company also entered into separate warrant transactions with the Option Counterparties initially relating to the number of shares of the Company’s common stock underlying the convertible note hedge transactions, subject to customary anti-dilution adjustments. The warrant transactions will have a dilutive effect with respect to the Company’s common stock to the extent that the price per share of the Company’s common stock exceeds the strike price of the warrants unless the Company elects, subject to certain conditions, to settle the warrants in cash. The cap price of the capped call transactions and the strike price of the warrant transactions was initially $84.96 per share. Further information is located in the Debt and Credit Arrangements note to the Company’s condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Item 4.
Controls and Procedures
As of June 30, 2014, an evaluation was performed, under the supervision and with the participation of the Company’s management including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, such officers concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act (1) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) is accumulated and communicated to the Company’s management including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

27

PART II. OTHER INFORMATION
Item 1A.
Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
a.)
None.
b.)
None.
c.)
During the second quarter of 2014, 1,426 shares of common stock were surrendered to us by participants under our share-based compensation plans to satisfy tax withholding obligations relating to the vesting or payment of equity awards for an aggregate purchase price of approximately $116,600. The total number of shares repurchased represents the net shares issued to satisfy tax withholding. All such repurchased shares were subsequently retired during the three months ended June 30, 2014.
 
 
Issuer Purchases of Equity Securities
Period
Total
Number
of
Shares
Purchased
 
Average Price
Paid Per
Share
 
Total Number of
Shares Purchased
As Part of Publicly
Announced Plans
or Programs
 
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs
April 1 – 30, 2014
141

 
$
78.20

 
—

 
$
—

May 1 – 31, 2014
168

 
74.15

 
—

 
—

June 1 – 30, 2014
1,117

 
83.36

 
—

 
—

Total
1,426

 
$
81.76

 
—

 
$
—


Item 4. Mine Safety Disclosures
Not applicable.

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Item 6.
Exhibits
The following exhibits are included with this report:
10.1
Chart Industries, Inc. Cash Incentive Plan (incorporated by reference to Appendix A to the Company’s definitive proxy statement filed with the SEC on April 8, 2014 (File No. 001-11442)).
31.1
Rule 13a-14(a) Certification of Chief Executive Officer (x)
31.2
Rule 13a-14(a) Certification of Chief Financial Officer (x)
32.1
Section 1350 Certification of Chief Executive Officer (xx)
32.2
Section 1350 Certification of Chief Financial Officer (xx)
101.INS
XBRL Instance Document (xxx)
101.SCH
XBRL Taxonomy Extension Schema Document (xxx)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (xxx)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (xxx)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (xxx)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (xxx)
_______________
(x)
Filed herewith.
(xx)
Furnished herewith.
(xxx)
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.


29

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Chart Industries, Inc.
(Registrant)
 
Date:
July 31, 2014
By:
/s/ Michael F. Biehl
 
 
 
Michael F. Biehl
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 
 
(Duly Authorized Officer)


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