Luxfer Holdings plc — Q3 2022 Form 10-Q
Reporting period: Third quarter ended September 25, 2022; year-to-date (“YTD”) covers the first nine months of 2022. Amounts are in U.S. dollars unless stated otherwise. Luxfer manufactures engineered industrial materials and products through its Gas Cylinders and Elektron segments. Superform is reported as discontinued operations.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Net sales | $100.2m | $91.2m | $306.7m | $275.4m |
| Gross profit / margin | $23.2m / 23.2% | $21.1m / 23.1% | $73.1m / 23.8% | $72.2m / 26.2% |
| Operating income / margin | $11.6m / 11.6% | $8.1m / 8.9% | $34.8m / 11.3% | $30.7m / 11.1% |
| Net income from continuing operations | $8.5m | $6.0m | $25.8m | $26.5m |
| Total net income | $8.0m | $4.8m | $24.9m | $30.3m |
| Adjusted EBITDA | $16.1m | $13.8m | $49.1m | $48.8m |
- Cash flow: YTD cash used in operating activities was $3.2m, versus $34.1m provided a year earlier. Inventory increased $29.6m and receivables increased $13.6m, principally reflecting working-capital investment and inventory build to protect supply.
- Cash and debt: At September 25, cash was $11.2m (plus $0.3m restricted cash). Total debt was $86.8m, including $25.0m due in 2023 and $37.6m drawn on the revolving facility. The facility had $62.3m undrawn. The company reported compliance with debt covenants.
- Balance sheet: Current assets were $198.3m and current liabilities $110.8m. Inventory rose to $111.6m from $90.5m at year-end 2021. Shareholders’ equity was $195.3m, down from $209.1m.
- Capital returns: YTD dividends paid were $10.6m ($0.385 per share); share repurchases totaled $6.9m, or 350,000 shares. A further $3.6m dividend was declared after quarter-end.
Material changes and operating performance
- Reported sales increased 9.9% in Q3 and 11.4% YTD. Excluding foreign-exchange headwinds, management reported growth of 15.2% and 14.9%, respectively. Price increases to recover material inflation contributed materially to sales growth.
- Q3 operating income rose 43.2% year over year, while YTD operating income rose 13.4%. Q3 continuing-operations net income increased, but YTD continuing-operations net income declined 2.6%, with higher tax expense partly offsetting higher pretax income. YTD effective tax rate was 21.8%, versus 12.0% in 2021; the prior-year rate benefited from a U.K. tax-related deferred tax credit.
- YTD gross margin fell 2.4 percentage points, primarily due to material and labor inflation and supply-chain costs not fully recovered through pricing, particularly in Gas Cylinders. Q3 gross margin was broadly stable, aided by sales mix.
- Gas Cylinders: Q3 sales declined 4.8% to $43.4m and adjusted EBITDA fell 37.0% to $3.4m. YTD sales grew 2.8% to $131.9m, but adjusted EBITDA fell 41.3% to $9.8m. Management cited foreign exchange, lower aluminum and alternative-fuel/SCBA cylinder sales, and delayed pass-through under fixed-price contracts.
- Elektron: Q3 sales increased 24.6% to $56.8m and adjusted EBITDA rose 51.2% to $12.7m. YTD sales increased 18.8% to $174.8m and adjusted EBITDA rose 22.4% to $39.3m. Growth included magnesium powders, zirconium products, and aerospace-related magnesium demand.
- YTD total net income was below 2021 partly because 2021 included a $6.6m gain on disposition of discontinued operations. Discontinued operations recorded a $0.9m YTD loss in 2022.
Outlook, risks, and unusual items
- The filing provides no specific financial guidance. Management expected material availability and cost inflation, energy costs, labor constraints, and transport pressures to continue into 2023. It expected to secure sufficient materials and pass on most cost increases, while noting that the outlook and timing and scale of cost increases remained uncertain.
- Management’s stated priorities included organic growth and new products, securing critical supplies, protecting margins, improving working-capital performance and operating cash generation, and employee safety and ESG initiatives.
- Management said the Ukraine conflict was not expected to have a significant direct impact: the company had no direct operations in the region, and Russia and Ukraine together typically represented less than 1% of revenue. It cited broader effects on raw-material and energy prices and supply.
- Superform’s U.S. business remained classified as discontinued operations and held for sale; management expected its sale in 2022. Q3 and YTD discontinued-operations losses were $0.5m and $0.9m, respectively.
- Restructuring charges were $2.0m YTD, mainly costs related to the closure of Luxfer Gas Cylinders France, with additional costs tied to consolidation in Magnesium Powders operations.
- Luxfer is a defendant in lawsuits related to a 2018 explosion at a third-party waste-treatment site. Management disputes liability and did not expect a material impact. The filing states there were no material subsequent events or material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether pricing and contract resets can recover ongoing input, labor, energy, and logistics inflation, particularly in Gas Cylinders.
- Whether the inventory build converts to sales and cash generation; operating cash flow was negative YTD and working capital absorbed substantial cash.
- Debt maturity and refinancing plans for the $25.0m 2023 notes, alongside interest costs and covenant headroom.
- Progress and final proceeds or costs associated with the planned Superform sale.
- Whether Elektron’s strong growth and margins persist, and whether Gas Cylinders’ profitability recovers.