Luxfer Holdings plc — Q2 2020 Form 10-Q
Business context and period. Luxfer manufactures engineered materials, components and high-pressure gas cylinders for industrial, transportation, defense and emergency response, and healthcare markets. The second quarter was the 13 weeks ended June 28, 2020; year-to-date (YTD) covers 26 weeks. Results are unaudited and stated in U.S. dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Net sales | $89.5m | $116.5m | $193.3m | $236.9m |
| Gross profit / margin | $18.8m / 21.0% | $31.0m / 26.6% | $43.3m / 22.4% | $61.1m / 25.8% |
| Operating income | $5.3m | $5.2m | $13.3m | $4.1m |
| Net income / (loss) | $4.1m | $3.5m | $10.3m | $(0.3)m |
| Diluted EPS | $0.15 | $0.13 | $0.37 | $(0.01) |
| Adjusted EBITDA | $10.4m | $20.2m | $25.5m | $38.7m |
Q2 sales declined 23.2% year over year and YTD sales fell 18.4%. Q2 adjusted EBITDA margin was 11.6%, versus 17.3% a year earlier; YTD margin was 13.2%, versus 16.3%. Despite lower revenue, Q2 operating income edged higher, primarily as restructuring charges fell substantially from the prior-year quarter. YTD operating income improved from $4.1m to $13.3m, also reflecting much lower restructuring expense and prior-year acquisition/disposal costs.
- Segments: Q2 Gas Cylinders sales were $50.4m, down 13.3%, and adjusted EBITDA was $5.1m, down 28.2%. Elektron sales were $39.1m, down 33.0%, and adjusted EBITDA was $5.3m, down 59.5%.
- Cash flow: YTD operating cash flow was $9.5m, compared with cash usage of $15.6m in 2019. Capital expenditures were $4.4m; investing cash outflow was $4.4m. Financing cash outflow was $6.9m, including $6.8m of dividends. Cash, cash equivalents and restricted cash ended at $8.2m, down from $10.3m at year-end 2019.
- Balance sheet and liquidity: Debt was $90.5m, compared with $91.4m at year-end; cash was $8.1m and net debt was reported by management at 1.5x EBITDA. The $150m committed credit facility had $16.3m drawn and $133.7m undrawn. Current assets were $168.3m and current liabilities $63.9m.
- Other metrics: YTD effective tax rate was 21.2%; the prior-year 116.7% rate reflected non-deductible aborted-acquisition and restructuring costs. YTD restructuring charges were $3.6m, versus $21.7m.
Material changes and management commentary
Management attributed the sales and profitability decline principally to COVID-19 disruption and weaker demand, particularly in industrial and transportation markets. Q2 gross margin contracted 5.6 percentage points, with adverse product mix—including lower SoluMag alloy and zirconium catalysis sales—partly offset by productivity improvements following the French Gas Cylinders facility closure. The company also cited lower Superform sales and photo-engraving plate sales. Medical oxygen cylinder growth partly offset declines. Czech-business divestiture reduced sales by $3.1m in Q2 and $7.5m YTD.
All facilities were operating at quarter-end, following earlier temporary closures, but certain sites had reduced capacity and partial furloughs. The company implemented cost-saving actions, including headcount reductions, and said further operational reductions could be made if warranted. Management cited no liquidity or covenant concerns following stress testing. It expected 2020 capital expenditures of approximately $10m; the filing provides no earnings or revenue guidance.
Risks, contingencies and unusual items
- COVID-19 uncertainty: Demand, supply availability and operations remain exposed to the pandemic and related restrictions. Management said future effects could not yet be fully determined. Goodwill and intangible-asset impairment assessments, including a July reforecast, identified no impairment or marginal outcomes.
- Internal controls: Disclosure controls were deemed ineffective at June 28 because a previously disclosed material weakness in internal control over financial reporting had not been fully remediated. Remediation efforts were ongoing; management said additional procedures supported fair presentation of the reported statements.
- Restructuring and prior-year comparability: Q2 2020 included $0.8m of restructuring costs, mainly related to the French closure and pandemic cost reductions. Q2 2019 included $12.7m of restructuring charges and a $2.9m gain on the Czech business disposal.
- Subsequent event: The sale of Luxfer’s 51% interest in its India joint venture for INR 137.4m (approximately $1.8m) completed July 9, 2020.
- Contingencies: A product-liability claim relating to a 2014 cylinder rupture was not expected by the company to materially affect its financial position or results. The filing reports no other material pending legal proceedings.
Key facts for investors to verify
- Whether demand and segment margins recover as COVID-19 effects evolve, especially in industrial and transportation end markets.
- Whether cash generation, working capital and the $133.7m of undrawn facility capacity remain adequate under stress, and whether debt covenants continue to be met.
- Progress in remediating the material weakness in financial reporting controls.
- Execution and costs of restructuring, including the French closure, and delivery of the approximately $10m 2020 capital-expenditure plan.
- Completion and proceeds of the India joint-venture sale, and developments in the disclosed product-liability claim.