Luxfer Holdings PLC — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; U.S. GAAP, reported in U.S. dollars. This is an annual filing, with separate unaudited quarterly data. Luxfer makes engineered materials and products through its Elektron and Gas Cylinders segments, serving transportation, defense and emergency response, healthcare, and general industrial markets.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $487.9 million | $441.3 million |
| Gross profit / margin | $122.1 million / 25.0% | $108.6 million / 24.6% |
| Operating income / margin | $30.0 million / 6.1% | $21.9 million / 5.0% |
| Net income | $25.0 million | $16.6 million |
| Diluted EPS | $0.90 | $0.62 |
| Cash from operating activities | $63.2 million | $38.8 million |
| Capital expenditures | $13.9 million | $10.5 million |
| Cash and cash equivalents at year-end | $13.8 million | $12.6 million |
| Total debt, including overdraft | $77.1 million | $113.8 million |
2018 free cash flow, calculated as operating cash flow less capital expenditures, was approximately $49.3 million. The company had $150 million of committed revolving credit availability and no revolver borrowings at year-end; a $3.5 million bank overdraft remained. Total current assets were $181.1 million and current liabilities $87.7 million. Long-term debt was $73.6 million. Quarterly dividends were $0.125 per share, totaling $13.4 million for the year.
Material changes versus 2017
- Sales increased 10.6%; operating income rose 37.0% and net income rose 50.6%. Gross margin expanded 0.4 percentage points, while SG&A fell to 12.5% of sales from 15.4%, primarily reflecting transformation-plan savings.
- Elektron sales increased 13.0% to $249.8 million and adjusted EBITDA rose to $56.2 million from $42.3 million. Gas Cylinders sales increased 8.1% to $238.1 million and adjusted EBITDA rose to $23.4 million from $17.0 million.
- Operating cash flow increased by $24.4 million, while inventories rose $11.4 million to $93.6 million, using cash. Financing cash outflow was $51.9 million, including net debt repayments and dividends.
- Debt declined, including repayment of $15 million of notes due 2018 and repayment of the $21.3 million revolver balance. Remaining senior notes total $75 million, due in 2021, 2023 and 2026.
- Fourth-quarter sales were $110.9 million versus $116.1 million; the quarter recorded an operating loss of $13.1 million and net loss of $8.5 million, compared with losses of $3.1 million and $1.0 million, respectively, in Q4 2017.
Outlook, risks and unusual items
- Management expects restructuring and cost-reduction measures to support further margin growth in 2019, with priorities including productivity, lean manufacturing, product innovation and talent development. Planned 2019 capital expenditures were approximately $20 million.
- 2018 included $13.4 million of restructuring charges, $7.2 million of impairment charges and $4.3 million of acquisition-related costs. Fourth-quarter results included $11.3 million of restructuring charges, $7.2 million of impairment charges and $4.3 million of acquisition costs.
- The announced $612 million proposed acquisition of Neo Performance Materials was terminated on March 10, 2019. Luxfer agreed to pay up to $3.5 million toward Neo’s costs.
- Luxfer proposed closing its Gerzat, France gas-cylinder facility and consolidating production in the U.K. and U.S.; further costs were expected in 2019. The Czech magnesium-recycling business was classified as held for sale and an offer was accepted in February 2019; a $3.4 million impairment was recorded in 2018.
- Key exposures include cyclical end-markets, raw-material and energy inflation, customer and supplier concentration, foreign exchange, Brexit-related disruption, product liability, regulatory and environmental requirements, and pension funding. The U.K. defined-benefit plan had a $31.8 million accounting deficit; the estimated buy-out deficit was £145 million as of April 2018. Agreed deficit-reduction contributions were £4.1 million annually, subject to review.
- The company reported compliance with debt covenants and effective disclosure controls and internal control over financial reporting. It became a U.S. domestic issuer on January 1, 2019, with expected additional reporting and compliance costs. No material pending legal proceedings were reported; a claim concerning a 2014 cylinder rupture was not expected by management to have a material impact.
Important facts for investors to verify
- Whether transformation savings and the planned French-site consolidation deliver the projected 2019 margin improvement, and what additional restructuring costs arise.
- How underlying earnings compare with reported results after the significant restructuring, impairment, acquisition-related and pension items; adjusted EPS was $1.69 versus GAAP diluted EPS of $0.90.
- Whether working-capital needs, especially inventory, and planned capital spending affect cash generation, dividend capacity or borrowing.
- The final proceeds, timing and costs of the Czech business sale, and the amount ultimately paid following termination of the Neo transaction.
- Progress in reducing pension deficits, compliance with debt covenants, and exposure to raw-material prices, foreign exchange and Brexit-related trade disruption.