Convertibles players focus on earnings; Chart Industries expands on hedge; Arris, jumps

By Rebecca Melvin

New York, Oct. 31 - Earnings reports were in focus and moving a few things around in the convertible debt market on Thursday as trimming and adding to positions in month-end window dressing also occupied some market players' attention. Volume was curtailed compared to Wednesday.

Some market players said they were "super quiet" during the Halloween trading session and others said they were "pretty busy."

Chart Industries Inc.'s convertibles were active and traded well, a New York-based trader said. The paper expanded on a dollar-neutral, or hedged, basis after the Garfield, Ohio-based engineering, procurement and construction company reported quarterly results that missed estimates and guided its outlook lower. Chart shares fell 11%.

Arris Enterprises Inc. was trading some after the Suwanee, Ga.-based communications technology company beat earnings estimates and reported revenue in line with expectations, while guiding fourth-quarter revenue estimates higher. Shares moved up 8%.

Microchip Technology Inc.'s convertibles also saw action as the underlying shares gained 8% on the Chandler, Ariz.-based semiconductor maker's earnings.

Other active names were Archer-Daniels-Midland Co.'s 0.875% convertibles due in February and EMC Corp.'s 1.5% convertibles due in December.

"There was nothing out of the ordinary. I think guys are sitting tight for the most part. Earnings were not great for the majority of convert names last night, so I think we are seeing some delta trading, rather than bond trading," a New York-based trader said.

The U.S. primary market remained quiet for the fourth day this week.

Equities were lower on the day but notched gains for the month. The S&P 500 stock index lost 6.77 points, or 0.4%, to 15,545.75 for Thursday, but for the month the S&P gained 4.5%. The Dow Jones industrial average fell 73.01 points, or 0.5%, to 15,545.75 for the day, but gained 2.8% for the month. The Nasdaq stock market slipped 10.914 points, or 0.3%, to 3,919.706 for the day, but added 3.9% for the month.

A year ago the Dow ended at 13,096.46, the Nasdaq was at 2,977.23 and the S&P 500 was at 1,412.16.

Chart expands after earnings

Chart Industries' 2% convertibles due 2018 were 171.5 bid, 172 offered toward the end of the session versus an underlying share price of $110.5, a New York-based trader said.

Chart shares closed down $13.10, or 11%, at $107.47.

The bonds were said to add about 0.375 point to 0.5 point on a dollar-neutral basis. The bonds were typically held on a delta hedge of 90%.

"They traded extremely well," the trader said, adding that coming into the day the bonds were held on a 92% delta.

"The median between the high delta and the lowest was about 90%," the trader said.

The day's trading volume was driven by "catalysts like this," the trader said.

Chart missed estimates on both earnings and revenue and also lowered guidance. Net income for the third quarter was $24.4 million, 74 cents per share, which compared with net income of $18.5 million, or 61 cents per share, for the year-earlier quarter. Excluding items, earnings would have been 82 cents per share.

Gross profit was $88.6 million.

Looking ahead, the company lowered its earnings and sales guidance based on third-quarter results, the current order backlog and business expectations. Sales for full-year 2013 are now expected to be in the range of $1.175 billion to $1.225 billion, compared to previous sales guidance of $1.2 billion to $1.3 billion. Earnings are now expected to be $2.90 to $3.00 per share, compared to the previous earnings guidance of $3.10 to $3.40 per share.

The latest earnings guidance excludes the impact of 19 cents per share primarily due to anticipated AirSep acquisition costs and any dilution impact resulting from the notes. Year-earlier earnings guidance excluded 15 cents per share in anticipated AirSep acquisition costs.

Arris adds outright

Arris' 2% convertibles due 2026, which are currently convertible as well as callable and putable Nov. 15, traded up to 105.25 bid, 105.875 offered in the early going and then up to about 110 as shares continued to climb, up from a 103 ish level on Wednesday.

Arris shares rose $1.36, or 8%, to $17.84.

Arris reported net income for the third quarter of $18 million, or 13 cents per share, compared with $17.9 million, or 15 cents per share in the year-earlier quarter. Excluding items, earnings came to 36 cents a share, which was better than at least one estimate of 28 cents per share. Revenue was $1.08 billion, which was in line with estimates.

Looking ahead, fourth-quarter revenue is expected to be $1.15 billion to $1.18 billion, which was above the $1.134 billion consensus estimate. Fourth-quarter earnings will likely range between breakeven to 4 cents. Excluding items, earnings are projected to be 42 cents to 46 cents per share. The midpoint of the adjusted earnings was a penny above estimates.

Mentioned in this article:

Archer-Daniels-Midland Co. NYSE: ADM

Arris Industries Inc. Nasdaq: ARRS

Chart Industries Inc. Nasdaq: GTLS

EMC Corp. NYSE: EMC

Microchip Technology Inc. Nasdaq: MCHP

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