Business context and reporting period
Luxfer Holdings plc is a global industrial materials and gas-containment company, reporting through Gas Cylinders and Elektron. This unaudited Form 10-Q covers the 13-week third quarter ended October 1, 2023, and the first nine months of 2023; comparisons are to the periods ended September 25, 2022. Amounts are in U.S. dollars.
Superform, an aluminum forming business, is classified as discontinued operations following the decision to exit non-strategic aluminum product lines. The company expects a sale within 12 months.
Financial and operating results
| Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Net sales | $97.4m | $100.2m | $309.1m | $306.7m |
| Gross profit / margin | $14.6m / 15.0% | $23.2m / 23.2% | $59.9m / 19.4% | $73.1m / 23.8% |
| Operating income / margin | $0.5m / 0.5% | $11.6m / 11.6% | $15.5m / 5.0% | $34.8m / 11.3% |
| Net income (loss), continuing operations | $(1.5)m | $8.5m | $3.9m | $25.8m |
| Net income (loss), total | $(1.3)m | $8.0m | $3.9m | $24.9m |
| Adjusted EBITDA | $6.0m | $16.1m | $31.7m | $49.1m |
| Operating cash flow | — | $10.3m | $(3.2)m |
Q3 diluted EPS was $(0.05); YTD diluted EPS was $0.14. Adjusted diluted EPS was $0.04 in Q3 and $0.51 YTD, versus $0.35 and $1.05, respectively, in 2022. Adjusted measures are non-GAAP.
- Cash and liquidity: Cash and cash equivalents were $1.2m at October 1, down from $12.6m at year-end 2022; restricted cash was $0.3m. Cash, cash equivalents and restricted cash totaled $0.4m at the end of Q3, a $12.5m decrease year to date. The company had $70.6m undrawn under its revolving credit facility.
- Debt: Total debt was $79.9m, compared with $81.2m at year-end 2022. The $25.0m 2023 loan notes were repaid in Q2; the revolving facility balance was $54.4m and the 2026 loan notes were $25.0m. The revolving facility’s average interest rate was 7.60% for the first nine months, versus 3.80% for full-year 2022. The company reported covenant compliance.
- Cash uses: YTD capital expenditures were $7.5m; dividends paid were $10.5m; and share repurchases were $2.2m. Financing activities used $15.5m.
Changes versus the prior comparable period
- Q3 sales declined 2.8%; YTD sales rose 0.8% as reported, but declined 2.9% and 1.4%, respectively, after the company’s stated foreign-exchange adjustments. YTD sales included approximately $18.5m of price increases associated with material-cost inflation.
- Q3 gross margin fell 8.2 percentage points and YTD gross margin fell 4.4 points. The company cited adverse sales mix and material costs rising faster than price recovery.
- Q3 operating income fell 95.7%; YTD operating income fell 55.5%. YTD continuing net income declined 84.9%.
- Elektron was the principal source of weakness: Q3 adjusted EBITDA was $3.2m versus $12.7m, and YTD was $21.5m versus $39.3m. Graphic Arts faced elevated material costs and constrained pass-through, alongside lower demand and competition.
- Gas Cylinders sales rose 3.0% in Q3 and 2.1% YTD. Adjusted EBITDA fell 17.6% in Q3 but increased 4.1% YTD.
- YTD results included an $8.0m defined-benefit pension charge, principally the $9.0m net charge related to transferring the U.S. pension liability to an insurer. Restructuring charges increased to $4.4m from $2.0m and included $2.7m of asset impairments.
Outlook, commentary, risks and unusual items
The filing provides no quantified full-year financial guidance. Management described the outlook as highly uncertain and said cost inflation, material availability, energy costs, and labor and transportation constraints were expected to continue through 2023. It expected sufficient material to meet demand and to pass on cost increases in most cases, while noting certain contracts constrain recovery. The company highlighted cost control, productivity, new products, supply continuity, working capital, cash generation, and completion of rationalization and Graphic Arts turnaround actions as priorities.
Management cited macroeconomic uncertainty, higher interest rates, weaker customer order rates, geopolitical volatility, and lower industrial demand. Reported pressure included reduced photo-engraving plate demand, magnesium powder sales, and SoluMag sales; offsets included stronger defense, first-response and healthcare demand, SCBA cylinders, zirconium products, and flameless ration heaters. Gas Cylinders margin recovery was improving as fixed-price contracts were renegotiated; a long-running contract was not due for renewal until mid-2024.
Other notable items include $2.2m of Q3 and $4.5m of YTD Elektron legal costs, predominantly related to lawsuits arising from a 2018 waste-site explosion. The company disputes liability and does not currently expect a material financial impact. It also disclosed new executive severance and change-in-control agreements effective October 25, 2023. No material subsequent events were reported. Management said disclosure controls were effective and there were no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether Elektron and Graphic Arts margins recover, including the effectiveness and costs of the turnaround and cost-reduction plans.
- Whether price increases can offset materials, energy, labor and transport costs, and how contract renewals affect Gas Cylinders margins.
- Cash generation and liquidity given low reported cash, higher borrowing costs, dividends, and working-capital needs.
- The timing and terms of the proposed Superform sale and the financial effects of discontinued operations.
- Developments in the waste-disposal lawsuits and any related legal expense or contingent liability.
- The treatment and comparability of reported earnings given the pension settlement, impairment and restructuring charges, and non-GAAP adjustments.