Luxfer Holdings plc — Q3 2021 Form 10-Q
Reporting period: Third quarter ended September 26, 2021; year-to-date results cover the first nine months of 2021. Unaudited U.S. GAAP statements. Luxfer manufactures engineered industrial materials and reports two continuing segments: Gas Cylinders and Elektron. Superform and the U.S. aluminum gas-cylinder business are reported as discontinued operations.
Financial performance
| Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| Net sales | $91.2m | $77.7m | $275.4m | $242.7m |
| Gross profit / margin | $21.1m / 23.1% | $18.9m / 24.3% | $72.2m / 26.2% | $61.0m / 25.1% |
| Operating income / margin | $8.1m / 8.9% | $5.3m / 6.8% | $30.7m / 11.1% | $20.1m / 8.3% |
| Continuing-operations net income | $6.0m | $2.4m | $26.5m | $14.2m |
| Net income, including discontinued operations | $4.8m | $2.6m | $30.3m | $12.9m |
| Diluted EPS, continuing operations | $0.21 | $0.09 | $0.94 | $0.51 |
| Adjusted EBITDA (non-GAAP) | $13.8m | $13.7m | $48.8m | $40.1m |
- Cash flow: YTD operating cash flow was $34.1m, versus $36.7m. Capital expenditures were $5.6m. Investing cash use was $1.2m, including the $19.3m SCI acquisition, offset in part by business-sale proceeds. Financing cash use was $19.3m, including $10.2m of dividends and $2.8m of share repurchases.
- Liquidity and debt: At September 26, cash was $15.1m (plus $0.1m restricted), debt was $49.6m, and net debt was approximately $34.5m using cash and cash equivalents. The $100m revolving facility was undrawn; management reported covenant compliance and no liquidity concerns. Current assets were $166.6m and current liabilities $79.0m.
- Segments, Q3: Gas Cylinders sales rose 41.2% to $45.6m, but adjusted EBITDA fell 23.9% to $5.4m, with margin declining to 11.8%; management attributed the pressure partly to losses at acquired SCI. Elektron sales were broadly flat at $45.6m, while adjusted EBITDA increased 27.3% to $8.4m and margin rose to 18.4%.
Changes and notable items
- Consolidated sales increased 17.4% in Q3 and 13.5% YTD, reflecting recovery from prior-year pandemic weakness, SCI acquisition contributions, higher demand in several product lines, and favorable foreign exchange. Management said like-for-like sales remained around 10% below pre-pandemic 2019 levels.
- YTD gross margin improved 1.1 percentage points, helped by cost reductions; Q3 gross margin declined 1.2 points as inflationary pressures were not fully offset. YTD operating income increased 52.7%; lower restructuring charges also supported the comparison.
- YTD continuing-operations effective tax rate was 12.0%, compared with 28.1%, including a $2.2m deferred-tax credit from the U.K. tax-rate increase enacted for 2023. Management cited an adjusted effective tax rate of 21.2%, versus 22.1%.
- Discontinued operations generated a YTD $3.8m net gain, including a $6.6m net gain on disposals partly offset by operating losses. The U.S. aluminum gas-cylinder business was sold for final proceeds of $20.2m; Superform U.K. was sold for $4.1m, including $0.6m deferred consideration. The Superform U.S. business was still expected to be sold within 12 months.
- Q3 restructuring charges were $0.5m, versus $4.2m a year earlier; YTD charges were $2.1m, versus $7.8m. YTD other charges included a $1.1m settlement of a California labor-code class action; the company expected payment during 2021 with no further income-statement charge.
Outlook, risks, and contingencies
- No specific financial guidance was provided. Management described a continuing recovery but noted uncertainty about 2022 and expected inflation in materials and energy, and labor and transport constraints, to persist at least through Q4 2021.
- Key risks include COVID-19 and future pandemics, input availability and costs, economic and end-market demand, foreign exchange, customer and supplier relationships, competition, acquisitions and integration, product-liability claims, and debt covenant and refinancing requirements. Management said operating facilities were near normal production levels and reported no identified liquidity concerns from covenant stress testing.
- In October 2021, after quarter-end, Luxfer agreed a new five-year $100m revolving credit facility, expected to become effective October 26, 2021, with no material covenant changes, improved other restrictive terms, and an uncommitted $50m accordion. The existing $50m private-placement notes were also to be amended in line with the new terms.
- The filing describes litigation involving a 2014 cylinder rupture and a 2018 third-party waste-site explosion. Management did not expect either matter to have a material financial impact; it said the likelihood of material adverse impact from legal matters overall was remote. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether SCI can improve profitability: Q3 Gas Cylinders adjusted EBITDA margin fell sharply, and the purchase-price allocation remained provisional.
- How much input-cost inflation, supply constraints, and labor and transport costs affect margins and cash generation beyond Q3.
- Timing and proceeds from the expected Superform U.S. sale, and any further discontinued-operation costs or adjustments.
- Effectiveness and final terms of the new revolving credit facility and related note amendments, given the prior facility’s scheduled 2022 expiry.
- Cash conversion and working-capital movements: receivables and inventories increased, while YTD operating cash flow was below the prior year.
- Continuing-operations performance separately from disposal gains, tax-rate effects, and other adjusted or non-recurring items.