Business context and reporting period
Luxfer Holdings plc filed this Form 20-F on March 19, 2018, covering the fiscal year ended December 31, 2017. The company is a global materials technology manufacturer, organized into Elektron (magnesium- and zirconium-based specialty materials) and Gas Cylinders (aluminum, titanium, and composite cylinders and formed components). Financial statements are prepared under IFRS as issued by the IASB and presented in U.S. dollars. This is an annual report, not a stand-alone fourth-quarter filing.
Financial results and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $441.3 million | $414.8 million | +6.4%; +$20.1 million excluding favorable currency translation |
| Gross profit / margin | $108.6 million / 24.6% | $93.4 million / 22.5% | Margin improved 2.1 percentage points |
| Trading profit / margin (non-IFRS measure) | $40.5 million / 9.2% | $35.3 million / 8.5% | Profit +14.7% |
| Operating profit / margin | $19.3 million / 4.4% | $35.8 million / 8.6% | −46.1% |
| Net income / basic EPS | $11.5 million / $0.43 | $21.9 million / $0.83 | Net income −47.5% |
| Adjusted EBITDA (non-IFRS) / margin | $61.8 million / 14.0% | $55.3 million / 13.3% | +11.8% |
| Operating cash flow | $45.2 million | $29.2 million | +$16.0 million |
Elektron revenue was $221.1 million and trading profit $31.8 million; Gas Cylinders revenue was $220.2 million and trading profit $8.7 million. Elektron generated most of the Group’s trading profit. Total assets were $402.6 million and equity $162.3 million at year-end.
Gross debt was $111.3 million; IFRS-reported bank and other loans were $108.8 million after unamortized issue costs. Net debt, as defined by the company, was $100.4 million, including $4.2 million of overdrafts and $0.7 million restricted cash. Cash and cash equivalents were $13.3 million before overdrafts and $9.1 million net of overdrafts. The $150 million revolving facility had $128.7 million available; the company reported compliance with debt covenants through year-end. A $15 million note maturity was due in 2018. Dividends paid totaled $13.3 million, or $0.50 per share for the year.
Material changes versus the prior comparable period
- Revenue increased, led by Elektron’s underlying growth of $27.2 million, including stronger flameless ration heater, SoluMag, military powders, graphic arts, and zirconium sales. Favorable currency translation added $6.4 million to reported revenue.
- Gas Cylinders underlying revenue declined $7.1 million. Lower alternative-fuel cylinder sales followed the loss of a major customer; SCBA cylinder sales and Superform tooling sales also fell.
- Trading profit rose, but operating profit and net income declined sharply because restructuring and other expense increased to $21.6 million from $2.2 million. This included rationalization, asset impairments, litigation costs, and direct-listing costs.
- Operating cash flow improved, supported by a $5.6 million working-capital inflow versus a $7.6 million outflow in 2016. Investing cash outflow was $18.1 million, including the ESM Specialty Metals acquisition; financing cash outflow was $33.6 million, including dividends and debt repayments.
- Net debt declined from $107.4 million to $100.4 million. The defined-benefit pension deficit fell to $55.3 million from $66.5 million.
Outlook, commentary, risks, contingencies, and unusual items
The filing provides no quantified earnings or revenue guidance. Management described a strategy focused on higher-margin products, product development, operating efficiency, and selected growth markets. The company expected potential transactional currency benefit as less favorable legacy hedges expired. Its 2018 executive incentive metrics emphasize management EBITA and cash conversion, with long-term incentives linked to total shareholder return and adjusted EPS; these are compensation targets, not company guidance.
- Unusual items: The $21.6 million restructuring and other charge included $12.1 million of rationalization, $3.7 million of non-current asset impairments, $3.5 million of competitor patent-litigation costs, and $2.3 million of direct-listing costs. A $1.2 million bargain-purchase gain arose from the ESM Specialty Metals acquisition; $5.6 million net cash was used for business purchases.
- Tax: The $0.4 million tax expense included a $6.0 million non-cash deferred-tax benefit from U.S. tax reform, which reduced the U.S. federal corporate tax rate from 35% to 21%.
- Litigation: In February 2018, Luxfer settled patent-infringement litigation for an amount equivalent to $1.6 million; the amount was accrued at December 31, 2017.
- Operations: After year-end, the company announced closure of its Brigham City, Utah and Findlay, Ohio plants, with operations planned to move to Canada and Madison, Illinois, respectively.
- Pensions: The U.K. plan had a $43.4 million accounting deficit, and other plans had $11.9 million of deficits. Required U.K. deficit contributions include a £3.8 million annual minimum plus earnings-linked amounts; a wind-up could create substantially larger liabilities.
- Market and operating risks: Key exposures include cyclical end markets, major customers and suppliers, aluminum and other raw-material prices, foreign exchange, competition, and the ability to pass cost increases through. Five end markets accounted for 70% of 2017 revenue; the top ten customers accounted for 25%. Rio Tinto Alcan supplied 73% of Gas Cylinders’ aluminum.
- Other risks and commitments: Risks include Brexit-related uncertainty, product-liability claims, environmental remediation, facility interruption, cybersecurity and regulatory compliance. The filing reports $34.4 million of operating-lease commitments and $0.6 million of capital commitments. Management stated no other off-balance-sheet arrangements were expected to have a material effect.
- Accounting and controls: The auditor issued an unqualified opinion on the IFRS financial statements and internal control over financial reporting; management also concluded controls were effective. IFRS 16 was expected to bring operating leases onto the balance sheet from 2019.
Most important facts for investors to verify
- Whether Elektron’s recovery can offset ongoing weakness in Gas Cylinders, particularly after the loss of a major alternative-fuel customer.
- The recurring versus non-recurring components of the $21.6 million unusual charge, and the expected cash costs and savings from plant closures and rationalization.
- Debt repayment or refinancing plans for the $15 million note due in 2018, covenant headroom, and the availability of the revolving facility.
- Cash generation and working-capital sustainability, given the favorable 2017 payables movement and higher receivables.
- Pension funding requirements, future actuarial changes, and the potential impact of the U.K. plan’s deficit-recovery schedule.
- Exposure to aluminum and currency volatility, including the effectiveness and timing of hedges and the ability to recover cost increases through pricing.
- Progress integrating the ESM acquisition, realizing expected synergies, and addressing its environmental provision; also monitor the Sub161 investment impairment and joint-venture funding exposure.
- Whether the post-year-end litigation settlement, plant closures, and transition from foreign private issuer status create additional costs or reporting obligations.